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

Saturday, January 21, 2012

week ending Jan 21

Fed Balance Sheet Grows To $2.92 Trillion In Latest Week - The Fed's asset holdings in the week ended Jan. 18 climbed to $2.922 trillion, from $2.902 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities climbed slightly to $1.652 trillion on Wednesday from $1.651 trillion. The central bank's holdings of mortgage-backed securities increased to $847.43 billion from $840.27 billion. 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 maturities declined. Meanwhile, Thursday's report showed total borrowing from the Fed's discount lending window was $8.60 billion Wednesday, down from $8.63 billion a week earlier. Commercial banks borrowed $2 million from the discount window, down from $8 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts (table 1a) was $3.403 trillion, up from $3.390 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts climbed to $2.677 trillion from $2.663 trillion in the previous week. Holdings of agency securities fell to $726.56 billion from the prior week's $ 726.83 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--January 19, 2012

Fed to Weigh Further Easing Amid Doubts About RecoveryFederal Reserve officials are seriously considering giving the US economy—and especially the housing market—an added jolt with more quantitative easing. Fed officials are likely to discuss such a move at their Jan. 24-25 meeting, when the central bank will issue its first quarterly forecast on interest rates under the new communication policy. Two of the new voting members this year on the Federal Open Market Committee , which sets interest-rate policy, have recently suggested they would support more assets purchases. San Francisco Fed President John Williams said that sustained high levels of unemployment, as forecast by many Fed members, "does make an argument that we should have more stimulus." Another new voter, Cleveland Fed President Sandra Pianalto, said in a recent speech that economic models indicate the Fed "should be even more accommodative than it is today." They join other members, including New York Fed President Bill Dudley and several Fed governors, who have openly suggested they would support more QE . As part of an normal rotation of presidents, the makeup of the FOMC will become more dovish this year. Three hawkish members are losing their FOMC vote—Richard Fisher of Dallas, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia—along with only one dovish member, Charles Evans of Chicago.

Fed Statements Make More Treasury Purchases Less Likely - St. Louis Federal Reserve Bank President James Bullard and Richmond Fed President Jeffrey Lacker are two Federal Reserve Bank officials that have said the Fed should halt (temporarily at least) purchases of U.S. Treasury securities because of a strengthening economy. This is in contrast to comments last week from other Fed officials, including Chicago Fed President Charles Evans and New York Fed President William Dudley, who called for continued liquidity support of the economy with the bond purchase process commonly referred to as quantitative easing (QE). According to an article by Mark Felsenthal (Reuters) the pronouncements by Bullard, who is considered a policy centrist, and the hawkish Lacker make it more likely that the Fed will put more bond purchases on hold.

Fed's Latest Easing Could Cost $1 Trillion: Economists - The Federal Reserve is likely to step in with $1 trillion worth of easing that could be announced as soon as this month, according to a growing consensus of economists who see the recent uptick in economic growth as unsustainable. With the Fed’s Open Market Committee set to meet next week, expectations are rising that the languishing housing market will drive the central bank to buy up mortgage-backed securities. The goal of the purchases will be to drive down interest rates even further from current record-low levels, and, less obviously, to spur confidence that more monetary tools remain to stimulate the economy. Of course, the announcement also could push stock prices higher, as did the Fed's last balance sheet expansion begun in November 2010. Just a few months ago, market observers speculated that another round of quantitative easing — QE3, in this case — would be politically infeasible and probably unnecessary given hopes for better growth in 2012.

Fed Holds Off for Now on Bond Buys - Federal Reserve officials are waiting to see how the economy performs before deciding whether to launch another bond-buying program. The Fed meets again next Tuesday and Wednesday, and officials are preparing to roll out a new communications strategy that is on track to include two key elements: their interest-rate projections and a statement explaining their objectives for inflation and employment. Clarifying the central bank's objectives could make easier the tasks of deciding whether to buy more bonds and explaining their reasons. Enlarge Image Close.The Fed has purchased more than $2 trillion of securities since the crisis began, part of an effort to spur investment, spending and economic growth to reduce unemployment. Unemployment is high but has fallen during recent months, a sign that the recovery may be gaining traction. Some Fed officials are open to more bond buying if the economy doesn't continue to improve, or if inflation falls much below their objective of about 2%, but they believe the outlook is too murky to move now, and views vary on the costs and benefits. When they have publicly discussed the subject of asset purchases recently, many Fed officials have tended to hedge, suggesting that they aren't ready to make the leap.

Fed releases templates for FOMC Fed Funds rate projections - From the Federal Reserve: Federal Reserve releases templates for reporting FOMC participants' projections of the appropriate target federal funds rate The Federal Reserve on Friday released blank templates showing the format of the two charts it will use on January 25 to report Federal Open Market Committee (FOMC) participants' projections of the appropriate target federal funds rate. It also released a draft of an explanatory note that will accompany the projections. The first chart, which will have shaded bars when released on January 25, will show FOMC participants’ projections for the timing of the initial increase in the target federal funds rate. The second chart, which will have dots representing policymakers’ individual projections when released on January 25, will show participants’ views of the appropriate path of the federal funds rate over the next several years and in the longer run. From Luca Di Leo and Jon Hilsenrath at the WSJ: Fed Details How It Will Release Rate Forecasts One of the new charts is a bar chart showing in which year officials expect to see the first short-term interest rate increase, with options ranging from 2012 all the way out to 2016. ... It was striking that the Fed charts go all the way out to 2016 — suggesting that some officials don’t see rate hikes for many more years.

Number of the Week: When Will Fed Raise Rates? -- 37: The number of months the Federal Reserve has kept rates near zero. The Federal Reserve gives its latest signal next week on when it plans to raise rates from historic lows. The only thing we know for sure is that it won’t be any time soon. The central bank first dropped its key interest rate to a 0-to-0.25 range in December 2008 in response to the financial crisis. Though the recession officially ended six months later, the recovery has been slow and the Fed has maintained low rates in order to spur markets and the economy. Following its meeting on Wednesday, the Fed will for the first time offer its own projections for when it expects the economy will be strong enough for interest rates to begin rising. The rate-setting Federal Open Market Committee already has indicated in its postmeeting statements that officials don’t expect to raise rates at least through mid-2013. Markets and most economists surveyed by the Wall Street Journal expect it will be even later. The following charts are based on templates the Fed plans to use next week. They show when economists expect the central bank to increase rates, and where economists expect interest rates to be at the end of each year. (Read more about the Fed’s plans here.)

Four banks set to bid for mortgage securities - Four Wall Street banks were on Tuesday finalising bids for $7bn of mortgage-related securities that used to belong to AIG and are due to be auctioned later this week by the Federal Reserve Bank of New York. Goldman Sachs, Barclays Capital, Bank of America and Credit Suisse will bid on the debt, which was acquired by the New York Fed as part of the bail-out of AIG in 2008. The auction is scheduled to take place on Thursday, with BlackRock Solutions managing the sale, according to people familiar with the matter. The four banks and the New York Fed declined to comment. The securities, which have a notional value of $7bn, are part of a $20bn portfolio housed in a special purpose vehicle called Maiden Lane II. The Fed last spring began efforts to sell the entire portfolio on the open market, but officials suspended the auction during the summer after drawing lacklustre demand, causing the market for subprime and other risky mortgage debt to fall. This time, the sale will involve just the four banks, who will bid based on the appetite of their investor clients. The banks and investors were required to sign confidentiality agreements so they could scrutinise the portfolio and calculate prices.  The Fed is expected to sell the whole $7bn in securities to one of the dealers or not sell it at all, if it finds the bids unattractive.

Fed Back To Its Secretive Ways, Sells $7 Billion In Maiden Lane Assets Directly To Credit Suisse Without Public Auction -Instead of opting for a publicly transparent BWIC in the disposition of its Maiden Lane II assets, the Fed has once again gone opaque - long a critique of the Fed's practices which have required repeated FOIAs in the past to get some clarity on its secret bailouts and transactions - and proceeded with a private sale, without any clarity on the deal terms, in which it sold $7 billion in face amount of Maiden Lane II assets direct to Credit Suisse. The alternative of course would be the same snarling of the MBS and broadly fixed income market that we saw in June of last year. In other words, the Fed looked at the options: transparency and risk of grinding credit demand to a halt, or doing what it does best, which is to transact in the shadows, and avoid capital markets risk. It opted for the latter. As to why the Fed decided to go ahead with a deal shrouded in secrecy? "The New York Fed decided to move forward with the transaction only after determining that the winning bid represented good value for the public." "I am pleased with the strength of the bids and the level of market interest in these assets," said William C. Dudley, President of the New York Fed.

The influence of MIT on macroeconomic policy - At MIT, King, 63, and then-professor Ben S. Bernanke, 58, had adjoining offices in 1983, spending the early days of their academic careers in an environment where economics was viewed as a tool to set policy. Earlier, Bernanke and European Central Bank President Mario Draghi, 64, earned their doctorates from the university in the late 1970s, Draghi with a thesis entitled “Essays on Economic Theory and Applications.” Fischer, 68, advised Bernanke’s thesis on “Long-Term Commitments, Dynamic Optimization and the Business Cycle,” and taught Draghi. Greek Prime Minister and former ECB vice president Lucas Papademos and Olivier Blanchard, now chief economist for the International Monetary Fund in Washington, earned their doctorates from MIT at about the same time.Other monetary policy makers who have passed through MIT’s doors include Athanasios Orphanides, head of the Central Bank of Cyprus, Duvvuri Subbarao, governor of the Reserve Bank of India and Charles Bean, King’s deputy in the U.K.

Graphical Representations of Bernanke's Effort to Stimulate Bank Lending - Bernanke is trying every way he can to get banks to lend (printing coupled with a multitude of lending facilities and Fed programs). It's easy enough to prove the printing: Base money supply is up about $1.8 trillion since the start of the recession. The Money Multiplier Theory (an incorrect theory) suggests this money would be lent out 10 times over causing rampant price-inflation and GDP growth. Alternate (Correct) Bank Lending Theory:

  1. Banks do not lend simply because they have the money
  2. Banks lend as long as they have credit-worthy customers provided the banks are not capital impaired
  3. Reserves are not an issue. Lending comes first, reserves follow if needed.
With some charts below created by my friend "BC" let's take a look at Bernanke's efforts to stimulate lending.

James Pethokoukis on NGDP Targeting - James Pethokoukis has a new article in Commentary that examines nominal GDP (NGDP) targeting and its potential to spark a recovery.  The piece starts out fine, but then gets gets confused because it fails to distinguish between a NGDP growth rate target and a NGDP level target.  A NGDP growth rate target, like an inflation target, let bygones be bygones.  A NGDP level target, on the other hand, corrects for past mistakes.  Under a NGDP level target a central bank would commit to reigning in aggregate nominal spending if it overshot and  vice versa.  Such a rule would therefore actually anchor long-run inflation expectations while allowing for aggressive catch-up growth (or contraction) in aggregate nominal spending so that NGDP returned to its trend path.  The following figure illustrates these important differences:Note that with a NGDP growth rate target (the blue line) NGDP can be growing on target and yet the big collapse in aggregate demand that precedes it is never corrected.  With those points made, let's turn to Pethokoukis' piece:

How Did the Fed Get Things So Wrong? - The public’s faith in the Fed’s ability to protect the economy from economic problems has been shaken by the Fed’s failures before and during the Great Recession. The recent release of the transcripts from 2006 monetary policy meetings where Federal Reserve policymakers discuss and ridicule the suggestion that the economy is threatened by a dangerous housing bubble has undermined its reputation even further. How did the Fed get things so wrong? How can policy be improved?  The first step in the policy process is for policymakers to be aware that there’s a problem in the economy, and access to reliable, timely, and informative data is critical. Unfortunately, there are substantial lags in the availability of data that indicate where the economy is headed, and it can be six months or longer before key variables such as GDP are known.  The fact that these data are not very timely, and are often revised substantially after they are released is not the Fed’s fault. But that doesn’t mean that the Fed can’t do more on its own. The Fed needs to do a much better job than it did before the crisis of using the data at its disposal to construct stress indices, measures of network reliability, price-rent ratios, credit measures, and so on to figure out what is happening in financial markets.

When Did The Fed Screw Up? - I've pasted above a chart that shows two things. The blue line measures market expectations of inflation over a ten year horizon. The red line shows the change in fixed private residential investment. You can see that the red line enters negative territory in the last quarter of 2005. Then it stays negative all four quarters of 2006, and during all this time the FOMC members are makign statements about how the economy should survive the housing bust. Then it's negative for four more quarters throughout 2007. And then for the first two quarters of 2008. It's only in the second half of 2008 that the monetary situation goes haywire, inflation expectations plunge, and the whole economy goes to crap. It then takes a looooong time for expectations to get back to the usual level and when they do so instead of delivering us a spurt of "catch-up" inflation the Fed lets them drop again. More recently, we've been back to a more-or-less stable level but with no catch-up. In my view, it's all that stuff that constitutes the screw-up that the Fed should be lambasted for. The damning transcripts are the ones from late 2008 and all of 2009. We haven't seen those transcripts yet because the Fed loves its secrecy and lack of accountability and Congress doesn't want to know the truth. But I'm not sure Ben Bernanke, Tim Geithner, and the others were in fact making any major mistakes in 2006 beyond underestimating how inept they would be in the fall of 2008 and the winter of 2008-9.

Did Fed Policy Matter to Housing Prices? - Kenneth Kuttner has a new paper that reexamines the relationship between the Fed's interest rates and house prices during the housing boom.  The paper is receiving some attention because it claims that the existing literature on this topic collectively shows only a small role for interest rates on the housing prices.  Here is Kuttner: All available evidence — existing studies, plus the new findings presented above — points to a rather small effect of interest rates on housing prices. VAR-based estimates of the effect of a 25 basis point expansionary monetary policy shock range from 0.3% to 0.9%, both in the U.S. and in other industrialized countries....they are too small to explain the previous decade’s tremendous real estate boom in the U.S. and elsewhere. Looking back it is clear that there were other developments that contributed to the housing boom like financial innovation, global demand for safe assets, poor governance, industry structure, housing policy, and misaligned creditor incentives.   Contrary to the Kuttner's claim, however, this does not mean that the contribution of the Fed's low interest rates were trivial. Here are the reasons why.

The Federal Reserve Knew About the Housing Bubble in 2004…The data — both anecdotal and otherwise — was out there, and the Fed even discussed it internally. Let’s not let it off the hook. I noticed something odd about the recent release of the 2006 Federal Reserve Open Market Committee transcripts. Binyamin Appelbaum has a characteristically good article about the inept chatter at the FOMC meetings that year, where the various participants missed the housing bubble completely. And there has been suitable mockery of the Fed. What I’m finding, though, is a bit of an apologia for these folks in the form of “no one knew.” This is just not true. I remember in 2002-2003 I heard crazy stories about housing, where people would list their home and get 15 bids in 24 hours. It’s why I didn’t consider buying a home. It wasn’t just anecdotal, but the data was out there. And it’s clear, from going into earlier transcripts of FOMC meetings, that the Fed actually knew there was a housing bubble as early as 2004. Or rather, it had the data, both anecdotal and quantitative, and even discussed the possibility of a bubble internally. Ryan Grim and Calculated Risk picked this up in 2010.

A selection of comments from Federal Open Market Committee meetings which resulted in laughter - IN AN effort to boost transparency, the Federal Reserve now releases full transcripts of its Federal Open Market Committee meetings. In an effort to limit transparency, however, it does so on a lag. As of today, therefore, we are able to look back and see what was said in Fed meetings in 2006. In commemoration of this moment, Free exchange now presents: A selection of comments from Federal Open Market Committee meetings which resulted in laughter.

Chart of the day, FOMC laughter edition - I was hoping someone would do this — and now The Daily Stag Hunt has come to the rescue. All I can say is, thank you. It turns out that if you’re on the FOMC, then being in a credit bubble is really funny!

Laughter: The New Financial Instability Index - Phil Izzo of the Wall Street Journal points us to the invaluable work of the people at The Daily Stag Hunt, who tallied the number of times that laughter appears in the transcripts of the Fed’s FOMC meetings.  Peak laughter, as The Daily Stag points out, corresponds nicely with the height of the housing bubble: If there weren’t a six-year delay on the release of these transcripts, this could be a useful tool for measuring systemic risk.

 The Fed needs better data - Mark Thoma in The Fiscal Times wrote an interesting post on how the Fed can prevent the next financial crisis. What caught my attention was not his conclusion that the Fed could prevent the next financial crisis, but rather what he considered the critical first step. The first step in the policy process is for policymakers to be aware that there’s a problem in the economy, and access to reliable, timely, and informative data is critical. Unfortunately, there are substantial lags in the availability of data that indicate where the economy is headed, and it can be six months or longer before key variables such as GDP are known. This is a problem that doesn’t get enough attention, and in the information age we ought to be able to do better. His point about the critical need to have access to reliable, timely, and informative data and that in the information age we ought to be able to provide this data is one your humble blogger has been making since before the beginning of the credit crisis.

The Role of Safe Assets in a Financial System - "The Safe-Asset Share," is one of those rare academic papers with a basic empirical finding that shakes up your mental landscape,  at the annual meetings of the Allied Social Science Associations a couple of weeks ago in Chicago. Here is their opening: "Over the past sixty years, the total amount of assets in the United States economy has exploded, growing from approximately four times GDP in 1952 to more than ten times GDP at the end of 2010. Yet within this rapid increase in total assets lies a remarkable fact: the percentage of all assets that can be considered “safe” has remained very stable over time. Specifically, the percentage of all assets represented by the sum of U.S. government debt and by the safe component of private financial debt, which we call the “safe-asset share”, has remained close to 33 percent in every year since 1952." The dynamics of the safe-asset share are important for economists, policymakers, and regulators to understand because “safe” debt plays a major role in facilitating trade. ... To the extent that debt is information-insensitive, it can be used efficiently as collateral in financial transactions, a role in finance that is analogous to the role of money in commerce. Thus, information-insensitive or “safe” debt is socially valuable.

Cleveland Federal Reserve: Ten-Year Expected Inflation is Only 1.39%, the Lowest in 30 Years - "The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.39 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade (see chart above). The Cleveland Fed’s estimate of inflation expectations is based on a model that combines information from a number of sources to address the shortcomings of other, commonly used measures, such as the "break-even" rate derived from Treasury inflation protected securities (TIPS) or survey-based estimates. The Cleveland Fed model can produce estimates for many time horizons, and it isolates not only inflation expectations, but several other interesting variables, such as the real interest rate and the inflation risk premium."  Inflation expectations are currently close to the lowest level in at least 30 years (see chart above).

Key Measures of Inflation moderate in December - Earlier today the BLS reportedThe Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in December on a seasonally adjusted basis ... The index for all items less food and energy increased 0.1 percent in December after rising 0.2 percent in November.  The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:the median Consumer Price Index rose 0.2% (2.9% annualized rate) in December. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.5% annualized rate) during the month....The CPI less food and energy increased 0.1% (1.8% annualized rate) on a seasonally adjusted basis.  Over the last 12 months, the median CPI rose 2.3%, the trimmed-mean CPI rose 2.5%, the CPI rose 3.0%, and the CPI less food and energy rose 2.2%. This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.3%, the trimmed-mean CPI rose 2.5%, and core CPI rose 2.2%. Core PCE is for November and increased 1.7% year-over-year. On a monthly basis, the median Consumer Price Index increased 2.9% at an annualized rate, the 16% trimmed-mean Consumer Price Index increased 1.5% annualized, and core CPI increased 1.8% annualized.

Michael Kinsley And The Phantom Menace - Krugman - Kevin Drum sends us to Michael Kinsley, who is still worried about inflation despite its failure to explode the way he thought it would. Kevin points out that Kinsley makes a claim that is just false: that economists have started saying that a little more inflation would be good are making excuses for a loss of control.  Heck, I first made that case almost 14 years ago! And this false claim is the heart of Kinsley’s current argument. But let me focus on something else Kinsley doesn’t seem to get: he protests that I offer no criteria for when it’s time to worry about debt again: Another reason I remain worried about inflation is that for two years I have been waiting for Paul Krugman to tell us when we should reverse course. Krugman’s basic analysis of the situation is persuasive. He thinks President Barack Obama’s $800 billion stimulus package in 2009 was much too small to have the desired Keynesian effect of kick-starting the economy. And then somehow we wasted all of last year arguing about how to reduce the budget deficit, instead of realizing that reducing the deficit – - however you do it — amounts to reducing the stimulus, when we ought to be increasing it. When the economy is robust again, it will be time to start paying down the debt. Hello? Right there he concedes that I have given an answer: when the economy is robust again.

Consumer Price Index vs. Personal Consumption Expenditures Index - Consumer Price Index (CPI) from the Bureau of Labor Statistics is the measure of inflation that gets the most attention, both from the media and in most intro econ classrooms. But I'm thinking that the Personal Consumption Expenditures (PCE) index measure of inflation should start to get equal or perhaps even greater attention.  For starters, I hadn't known--although I probably should have known--that when the Federal Reserve looks at rates of inflation, it focuses more on PCE than on CPI. The announcement of this policy change was buried in a footnote in the Fed's  Monetary Policy Report to the Congress. There's some jargon in the quotation, which I'll unpack in a minute, but here's the comment: The chain-type price index for PCE draws extensively on data from the consumer price index but, while not entirely free of measurement problems, has several advantages relative to the CPI. The PCE chain-type index is constructed from a formula that reflects the changing composition of spending and thereby avoids some of the upward bias associated with the fixed-weight nature of the CPI. In addition, the weights are based on a more comprehensive measure of expenditures. Finally, historical data used in the PCE price index can be revised to account for newly available information and for improvements in measurement techniques

How Stories about Economic Fundamentals Drive Financial Markets - Fund managers cannot possibly know what the future will bring, yet they have to commit today to holding assets that promise a return tomorrow. Such a commitment requires confidence -- confidence that is hard to find in the face of uncertainty. To cope with the uncertainty, fund managers rely on gut feelings and invent stories that justify their decisions. In the end, it is stories and emotions that drive financial markets. That is, in a nutshell, the theory of asset pricing developed by David Tuckett. Some unconventional advice to monetary policy follows. Central banks, Tuckett says in this interview with INET Executive Director Robert Johnson, should create stories themselves. This is not to call for central bankers to tell fairy tales. No, what central banks can do is create their own stories -- stories that are anchored in meticulous observation and forensic analysis of new markets and new business opportunities.

Paul Davidson: What Makes Economists So Sure of Themselves, Anyway? - In a recent interview I asked the US’s leading post-Keynesian economist and founder of the Journal of Post-Keynesian Economics, Paul Davidson to discuss what is known as the ‘ergodic axiom’ in economics. This is a particularly important axiom as it allows mainstream economists (including left-wing Keynesians like Paul Krugman and Joseph Stiglitz) to claim that they can essentially know the future in a very tangible way. It does this by assuming that the future can be known by examining the past. Without this axiom the whole edifice of mainstream theory rests on very shaky grounds. Yet, it should be clear to anyone that given that the theory is supposed to explain human behaviour it is unlikely that the future will correlate with the past because people and institutions tend to change and evolve over a given period of time.  Yes, often past behaviour will help us understand future behaviour – apply this in a simple psychological way to anyone you know and you will find it to be true – however, it should be quite clear that all future behaviour cannot be wholly explained by past behaviour. Clearly it should be quite obvious that the same should apply when we consider large aggregates of individuals and yet mainstream economics steadfastly refuses to accept this.

JOLTS Data and Theories of the Great Recession - The JOLTS data provide three major challenges to any disruptions hypothesis of the Great Recession. That is, any hypothesis that says the United States was engaged in some form of economic production that was disrupted by event X and that led to a huge recession until we could get back on our feet. This includes the vast majority of structural theories. The first problem is that job destruction fell dramatically during the Great Recession. Second, Job Hires are typically very close to separations. However, in late 2008 the two broke apart. Even still the gap, though enormous up to 700K was still small in comparison to the low point in hires 3600K. What’s more is that third, if you look closely at the pattern of separations and hires, it looks like what happened was that separations stalled in late 2008 while hires continued its downward trajectory.

The Fed’s Pyrrhic Victory - Recent data suggest that the mini revival in domestic economic fortunes is largely attributable to an increase in household outlays. This would be good news if the increase was due to household income growth. But, the increase is instead the result of households spending more out of the same income. This questions the durability of the expansion, as declines in savings are hardly a sound foundation on which to build income growth. The economy’s ongoing dependence on consumer outlays also puts a focus on the policy objectives of those on the Federal Open Market Committee, like Federal Reserve Bank of New York President William Dudley, who wish to use the threat of accelerating inflation to increase household spending. The U.S. will never be able to transform itself from a consumption-dependent, net importer as long as the penalization of savings remains the preferred mechanism to generate short-term growth. The economy has received a spate of good news recently, raising hopes that growth will meaningfully dent the chronic unemployment problem. The economy added 200,000 net jobs in December and the narrow and broad unemployment rates fell to 8.5% and 15.2%, respectively. Many economists anticipate that the economy expanded at an annualized rate of more than 3%, due in part to the 1.5% of GDP liquidation of inventories in the third quarter. Even if final demand remains unchanged, the inventory rebuild will likely add more than one point to GDP in the fourth quarter.

GDP Revisions - This is just a short post to illustrate the magnitude of GDP revisions. I downloaded quarterly GDP data from BEA in June 2011. I went back to BEA this morning to update the file. Forgetting about GDP revisions, I thought I'd be adding 2 or three more quarters of data, but discovered that all the numbers since Q2 2003 had been revised. Prior values are unchanged. Plotted below is the difference between the June, 2011 numbers and what I found this morning. The depth of the trough in Q3 2009 was $194 Billion worse than we thought just a few months ago. I was surprised to see the revisions go back a full 9 years. Tyler Cowan got one thing right. We are poorer than we think we are.

Monthly GDP Declined 0.8% in November - Macroadvisers - Monthly GDP declined 0.8% in November, partially reversing a 1.3% increase in October. The November decline was more than accounted for by inventory investment and net exports; domestic final sales posted a decent gain. The level of monthly GDP averaged over October and November was 3.2% above the third-quarter average at an annual rate. Our latest tracking forecast of 3.0% annualized growth of GDP in the fourth quarter assumes a 0.3% increase in monthly GDP in December. This is from a commentary that was published on January 17, 2012.

The Fed, Paul Krugman & The Economic Bullshit Artistry In Election Year 2012 - One of the problems our insolvent industrial economics has, and it’s only one, is quantitatively aggregating value, GDP is the easiest example, then saying this provides a clear picture of what’s happening in the economy. Unfortunately, the fact is all dollars are not equal, for example a dollar spent on potatoes feeding a family of four, has a lot more value than a dollar spent on landscaping a home in Bel-Air, just don’t tell an economist this. It’s why they can interminably bleat American economy is no longer as reliant on oil, and when the price of oil goes up, it’s no harm to the economy, “After all, we now only spend “x”% of GDP on oil.” Nonetheless, the price of oil goes up, the economy slows. Who you going to believe, your lying eyes or a Nobel Laureate? Which gets us to a little report by the Fed, a truly corporate global institution, on how the tit-titting about industry moving to China is much ado about nothing, after all it only adds up to 2.5% of GDP–well, actually the Fed estimates it as “personal consumption data.” Mr. Krugman, who owes his whole career to being a shill for corporate globalization, and in particular selling it to liberals, jumps right in to show how smart the Fed is–and of course, this globalization thing has always been overrated in its impact on the US economy. This by the way is the same guy who has written repeatedly in the august pages of the NYT that the key to revitalizing the American economy is for the Renminbi to appreciate. So, who you gonna believe, a Nobel Lauraete, taking on his election year hack role as a Democrat, or your lying eyes, looking at miles and miles of abandoned manufacturing areas across the midwest and northeast, and shuttered main streets across the country where Wal-Mart, packed with Chinese manufactures, monopolizing a good chunk of “personal consumption” in those communities?

Is The Yield Curve Still A Reliable Signal Of Recession Risk? - In the current debate about recession risk, some commentators have rolled out the yield curve argument or variations thereof. On first glance, this line of analysis looks like a slam-dunk refutation of the forecast by some that another economic contraction is now fate. But such arguments based heavily (or exclusively) on the yield curve risk overplaying their hand. It’s true that the yield curve has been a reliable predictor of recessions for half a century, as many studies assert. But in the dark art of developing macro forecasts, one can never assume that a predictor’s track record—even one as strong as the yield curve’s—seals its fate for repeat performances. It'd be wonderful if we could point to one indicator as a dependable predictor, but macro's just not that simple. But let’s back up for a minute and recognize the yield curve’s allure. It’s well known that when short rates rise above long rates, that’s been a strong signal that the economy was headed for a recession in the near term. This track record is quite clear by reviewing the yield spread for, say, the 10-year Treasury less the 3-month T-bill. For additional clarity, this signal can be transformed with a probit model so that the spread is converted into a probability estimate of future recession risk.

On Predicting the Future - I’ve long admired ECRI for their timely and accurate forecasts, and their willingness to stick by their models when things don’t seem to be immediately going their way.  I have also appreciated their lack of willingness to divulge their model elements; my thoughts were, “Hey, it’s probably a simple model that no one has ever thought of.  Would I reveal the model if I were in their shoes.  No.” But I’m not in their shoes, and I know one of the ECRI pair, so I asked for some insight into the models, which he coldly refused.  Okay, fair enough, I’m not a paying subscriber, but we had had good conversations in the past, so I thought I might have some relational capital, but no. Tonight, I bring you my kludge that should be close to the ECRI Weekly leading index.  I am not saying that I reverse-engineered it because in econometrics there may be many fits with equal probability that explain the dependent variable well.  But here we go.

Industrial Production Confirming Changes To LEI - For the last several months I have been scratching my head about the Leading Economic Indicator Index (LEI), as published by the Conference Board, due to the divergence between it and other leading indicators that we watch. The LEI has risen sharply while real indications of the economy such as changes to employment, industrial production, incomes and personal consumption expenditures have not. Furthermore, the sharp rise in the index from recessionary lows without the confirming rise of economic growth to new highs, as witnessed post every previous recessionary trough, has been a perplexing mystery given the fact ECRI's Weekly Leading Index and others have been showing leading indications of economic weakness. So, what does industrial production have to do with this? The release of industrial production today showed a 0.4% advance over the last month. On the surface this sounds positive, but in reality it goes further to confirm the LEI conundrum. While the LEI has soared off to the moon, industrial production has not only failed to attain a new high in this post-recessionary recovery, but it has peaked and begun to decline.

Insight: Recovery at risk as Americans raid savings  (Reuters) - More than four years after the United States fell into recession, many Americans have resorted to raiding their savings to get them through the stop-start economic recovery. In an ominous sign for America's economic growth prospects, workers are paring back contributions to college funds and growing numbers are borrowing from their retirement accounts. Some policymakers worry that a recent spike in credit card usage could mean that people, many of whom are struggling on incomes that have lagged inflation, are taking out new debt just to meet the costs of day-to-day living. American households "have been spending recently in a way that did not seem in line with income growth. So somehow they've been doing that through perhaps additional credit card usage," Chicago Federal Reserve President Charles Evans said on Friday. "If they saw future income and employment increasing strongly then that would be reasonable. But I don't see that. So I've been puzzled by this," he said. After a few years of relative frugality, the amount of money that Americans are saving has fallen back to its lowest level since December 2007 when the recession began. The personal saving rate dipped in November to 3.5 percent, down from 5.1 percent a year earlier, according to the U.S. Commerce Department.

How high oil prices could squelch the recovery - As my colleague Steven Mufson reports today, tensions with Iran are putting upward pressure on crude prices — and oil was already at a record high in 2011. Analysts are now fretting that oil could kneecap the fragile recovery. So is there a good way of estimating the effects of pricier oil? According to a U.S. Energy Information Administration analysis, a $20 increase in the cost of a barrel of oil — roughly what we saw last year — is estimated to shave roughly 0.4 points off GDP growth in the first year alone and boost unemployment by 0.1 percentage points. So if Iran threatens to close the Strait of Hormuz (through which about 20 percent of the world’s oil flows) and prices start screaming upward from $107 per barrel to $120 or beyond, that would put a very noticeable dent in growth. What’s more, oil shocks tend to have long-lingering effects. The EIA estimates that a $20 price increase continues biting into the economy for at last another year thereafter. James Hamilton, an economist at the University of California, San Diego, has suggested that the consequences of a price spike can persist for several quarters, as the resulting slowdown in consumer spending takes some time to ripple through the economy. That’s true even if the spike is only temporary and recedes quickly.

Credit Stress Indicators: Little Spillover to US from Europe - As we've discussed, there are several possible channels of contagion from the European financial crisis. The most obvious is the trade channel. The recession in Europe appears to already be negatively impacting U.S. exports. The most recent trade report showed exports to eurozone countries declined 6.9% in November. A more significant channel would be tightening of U.S. credit conditions in response to the European crisis. . Since the most significant channel will probably be credit stress, here are a few indicators of credit stress:

  • • The three month LIBOR has decreased:  Data from the British Bankers' Association showed the three-month dollar London Interbank Offered Rate, or Libor, was fixed at 0.56230%, down from 0.56490% Monday.
  • • The TED spread is at 0.537. The TED spread is the difference between the three month T-bill and the LIBOR interest rate. This peaked in December at 0.581 and has declined slightly since then. Here is a screen shot of the TED spread from Bloomberg.
  • • The A2P2 spread as at 0.39. This spread is mostly moving sideways, and is far below the peak of the financial crisis of 5.86. This is the spread between high and low quality 30 day nonfinancial commercial paper.
  • • The two year swap spread screen shot from Bloomberg. This spread has declined to 34.3.

Too Many Par Claims versus Sub-Par Assets: The world is a maze of debt. Debts layered on debts. The Earth and its productivity is roughly the same or better than prior years. What is the problem with the economy then? The problem is this: there are entities that made bad loans in the past that expect to be paid back in full. They assumed the future would be far better than it turned out to be. There is no way that the loans will be paid back in full. The solution is paying back at a discount, whether through compromise or insolvency. Wait. Many of the lenders are leveraged as well, and can’t take significant losses. Paying back at a discount will bankrupt a number of banks, which will in turn bollix the economy. So, we have to go slow? Does this bring us back to the problem of how one eats an elephant? “One bite at a time.” That is the method of Japan, leaving an over-indebted government, and reasonably indebted private sector. But it took two decades.

Habituating to Contraction - For the past 67 years, Americans have been conditioned to expect expansion and more of everything: more income, more stuff, more opportunity, more benefits, more medical care, more government entitlements, and so on. As a result, Americans have habituated to permanent expansion. The concept that contraction--less of everything--is the new normal simply doesn't register; it is rejected, denied, or decried as a great tragedy. The notion that it is simply reality does not compute with a populace habituated to permanent "growth" that is at worst interrupted by brief recessions.  The voting public's demand for "permanent good news" promising permanent expansion has spawned a feedback loop of officially sanctioned manipulated statistics and media spin (a.k.a. propaganda) that expands with every administration, even as the real economy visibly weakens. Though the Obama Administration has perfected the techniques of presenting "permanent good news," the divergence of the real economy and the official "story" that "we've returned to permanent expansion" is widening. The real story is the "expansion" has cost the taxpayers trillions of dollars in new debt and trillions of dollars of backstops, shadow purchases and money-printing by the Federal Reserve. Roughly speaking, $6 trillion in additional Federal borrowing has been blown to simply keep the Status Quo from imploding, and around $13 trillion in guarantees, backstops, asset purchases, and losses made good have been issued to keep the Status Quo's financial sector afloat and in charge.

Global Deleveraging - You Are (Not) Here - In most countries, deleveraging is only in its early stages. In a report today, McKinsey notes that total debt to GDP has declined in only three countries since the 2008-09 crisis (US, South Korea, and Australia) as total debt has actually grown in the world's ten largest mature economies (due mainly to rising government debt - Keynesian style?). Greatly concerned that the UK and Spain are slow to delever, they do note that the US is more closely following the two phase deleveraging process that 1990s Finland and Sweden followed but point to the household segment as leading the way with 15% reduction in debt to disposable income (driven unsurprisingly in major part by mortgage defaults). The bottom line is US (households) are at best one-third of the way through their deleveraging and the UK (financials) and Spain (non-financials) face much more significant pressures (which will inevitably impact aggregate demand given governmental borrowing pressures) as their deleveraging has only just begun. Historically, deleveraging has begun in the private sector and government has stepped up to borrow and fill the aggregate Keynesian hole left behind. McKinsey points out deleveraging normally takes 4-6 years which we suspect will remain an anchor for demand and growth in the mean-time.

Debt And Transfiguration - Krugman - Ryan Avent points out an important fact: if you look at total debt, public and private, the United States is doing better at deleveraging than countries that talk much more about the evils of debt than we do. I thought I would redo the calculation for the US so that I understood it. I focus on nonfinancial debt — that’s because money that banks owe to each other is more a reflection of the structure of the financial system than of the degree of overborrowing more broadly. So here’s nonfinancial debt, public plus private, as a percentage of GDP: What you see here is a gradual decline in overall debt — not at all what you hear in the public debate. Now, the composition of that debt is changing: rising public debt, falling private debt. But that’s exactly what you need to deal with the aftermath of a Minsky moment: you need to reduce the debt of balance-sheet-constrained players, so that the drag on the economy is reduced over time, eventually getting us to the point where deficit spending is no longer needed to sustain the economy. It’s a crime that we aren’t doing more, that unemployment is as high as it is — and sustained high unemployment is itself taking a toll on our future as well as our present. But as far as debt is concerned, America’s situation is getting better, not worse.

U.S. Takes Steps to Avoid Debt Ceiling The U.S. government curtailed its investment in a federal retirement fund Tuesday as it looks to stay under the legal debt limit while awaiting a congressional vote on raising the federal spending ceiling. Even if the Republican-controlled House rejects the increase, a measure of disapproval is unlikely to make it through the Senate, where Democrats hold a majority. The White House informed Congress last week that the government was close to its $15.194 trillion borrowing limit, setting in motion procedures that would likely raise the cap by $1.2 trillion later this month. The White House notification gives Congress 15 days to try to block the increase, though President Barack Obama can veto such a measure. The political theater—the House is expected to vote Wednesday—is a result of last summer's compromise to raise the debt ceiling in stages.

Treasury dips into pension funds to avoid debt - The Treasury on Tuesday started dipping into federal pension funds in order to give the Obama administration more credit to pay government bills. "I will be unable to invest fully" the federal employees retirement system fund beginning Tuesday, Treasury Secretary Timothy Geithner said in a letter to Democratic and Republican leaders in Congress. The House of Representatives is expected to vote on Wednesday on the Obama administration's request to raise the country's legal debt limit to $16.394 trillion.However, unless the lower chamber and the Senate are able to shore up enough votes to block the White House request, the debt limit will be increased by $1.2 trillion next Friday and a repeat of last year's debt ceiling debacle will be averted.

U.S. could hit debt ceiling again around election (Reuters) - The latest $1.2 trillion increase in the U.S. debt limit may not last through November's election and could provide fresh ammunition for Republicans to attack President Barack Obama on what they see as a particularly vulnerable point - spending. Based on current deficit rates and borrowing estimates, some analysts say the United States could reach the debt ceiling again before the November 6 vote. This would force the U.S. Treasury to turn once more to accounting maneuvers to avoid the unthinkable: asking Congress for another increase as the presidential election campaign reaches its crescendo. But any moves by the Treasury would likely not stop the issue from becoming fodder for Republican attack ads. Estimates on when the United States will reach its debt limit vary, but they leave little room for the Treasury to cope with an economic shock, such as a global slowdown triggered by a worsening of Europe's debt crisis, which could shrink U.S. revenues and boost spending on unemployment aid. "If the debt ceiling were to breached before the election, it would be possibly nuclear," said Ethan Siegal, who advises institutional investors on Washington politics. A full replay of last summer's debt limit battle, which brought the United States to the brink of default and prompted a U.S. credit rating downgrade from Standard & Poor's, would rattle markets and put Obama at the mercy of Republicans in the House of Representatives bent on slashing spending.

US inflation bond sale fetches negative yield (Reuters) - Investors scooped up a record offering of U.S. government debt that promises inflation protection on Thursday, even though there are no signs that food and energy prices are running out of control. They bought $15 billion worth of 10-year Treasury Inflation-Protected Securities at a negative yield at an auction for the first time in the 15 years since TIPS were introduced. These latest 10-year TIPS cleared at a yield of minus 0.046 percent, lower than what traders had expected. This meant investors essentially paid the U.S. government to own 10-year TIPS at a time when some of them have been hoarding Treasuries including TIPS due to fears about Europe's debt crisis spiraling out of control. "It's a safe-haven play. It's all about the return of capital rather than the return on capital," said Richard Schlanger, a portfolio manager at Pioneer Investments USA in Boston. The yield on U.S. 10-year Treasury Inflation-Protected Securities has set a series of record lows in negative territory in recent days on this intense safe-haven demand. Even tame December readings on the government's Consumer Price Index, which TIPS principal and interest payments adjust against, did not cool the bidding for these pricey securities. The total accepted bids for the 10-year TIPS issue to the amount offered came in a ratio of nearly 3-1, which is the strongest since an auction last March.

2012 Budget Debate: Like "The Hangover, Part II" - The 2012 budget debate in Washington is going to be vastly different from the one that took place in 2011. This doesn’t mean the long-term deficit is no longer an issue. It also doesn’t mean there won’t be the usual noise when it comes to spending and revenues. Multiple rounds of finger pointing, recriminations and constantly repeated nonsensical statements should be expected. There also will be the standard complaints that no one outside the Beltway will really care about regarding missed deadlines and the need to use some vote to send a message to (choose all that apply) the American people, Wall Street, the House, the Senate, the Democratic Party, the Republican Party, the leadership, etc. And the phrase “dead on arrival” will be used so often this year that those involved in the budget debate will seem more like medical examiners than legislators with fiscal policy responsibilities.

New Year, New Government Showdown Brewing - With Congress set to return to town this week, staff-level bipartisan discussions are underway over how to pay for extensions of the payroll tax cut, unemployment insurance and the so-called Medicare “doc fix” beyond the end of February, when they’re set to expire. The private meetings are a continuation of the December showdown, which ended with two-month extensions of the three provisions and a guarantee that the House and Senate would negotiate a year-long measure.But many of the factors that made the two month bill so contentious remain in place, and threaten a new brinkmanship at the very beginning of this session of Congress. The political chemistry will be familiar to those who closely followed the highly reactive dynamics on Capitol Hill in 2011. Both parties agree that all three items need to be extended, and Democrats have accepted that they ought to be paid for. The question is how to fund them. And for some Republicans, it’s whether to extend them at all without demanding unrelated, partisan policy concessions from Democrats in return.

Congress Is Back, and So Are Its Battles Over Tax and Budget Policy - The least popular Congress in memory is back. Tax policy will be at the center of much of the partisan squabbling, but it is hard to imagine Congress achieving more than a temporary truce in its ongoing battle over last year’s unfinished business. That skirmishing starts with the 2011 payroll tax cut which, after a bruising battle last December, Congress extended only to the end of February. It also includes about four dozen other temporary tax cuts that expired last December 31. On the spending side, lawmakers must resolve controversies over extended unemployment benefits and Medicare physician payments—the so-called “doc fix”– that also must be addressed by March.   But all that will just be a warm up for what promises to be an awful year-end when lame-duck lawmakers will face their own version of an ugly triple witching hour. They’ll have to decide what to do about the expiring Bush-era tax cuts that were extended at the end of 2010 by President Obama and a Democratic Congress, as well as several of Obama’s own temporary tax cuts. And they need to extend the “patch” that protects 25 million households from the Alternative Minimum Tax. There’s more: They’ll also have to figure out what to do about the automatic across-the-board spending cuts that are supposed to be the price of Congress’ failure last year to cut the deficit by $1.2 trillion. And Congress will have to vote yet again on a debt limit extension. All of this will likely happen in a lame-duck Congress that must negotiate with Obama, who either will have been reelected or will himself be on the way out the door.

St. Louis Fed Says CBO Doesn’t Forecast Deficits Well - Congress’s long history of underestimating future budget deficits suggests the current outlook for the nation’s finances may be even grimmer than many now expect. A new paper by the Federal Reserve Bank of St. Louis argues the Congressional Budget Office has for some time consistently underestimated how much the government would need to borrow. According to bank researchers Kevin Kliesen and Daniel Thornton, “if past behavior is a guide to the future, our analysis suggests that projected future deficits will likely be larger than those currently projected.” If they’re right, the already difficult politics surrounding the future of the nation’s finances could become even more fraught. The CBO projected late last summer the deficit would represent 6.2% of the gross domestic product this year, falling to 3.2% in 2013, and then averaging 1.2% between 2014 to 2021. The baseline forecast projects $3.5 trillion in borrowing between 2012 and 2021. Those aren’t great numbers — if they’re worse, the choices before Congress and the administration become even starker than they are now.

Washington is Spending Too Much - In the Wall Street Journal, former Chairman of the Council of Economic Advisers, argues that the real budgetary problems are (much further) down the road: The deficit shot up in basically equal measure from taxes falling and spending rising. Spending rose to 25% of GDP from 20.5% in the recession and soon it will fall back down. Taxes fell to 14.5% of GDP from 18.5% and will also return to more normal levels. The true fiscal challenge is 10, 20 and 30 years down the road. An aging population and rising health-care costs mean that spending will rise again and imply a larger size of government than we have ever had but with all the growth coming from entitlements—while projected federal revenues as a percentage of GDP after the rate cuts of the 2000s will likely remain below even historic levels of 18%… Iowa showed us a series of candidates trying to outdo one another with condemnation for the short-term rise in spending while simultaneously proposing tax policies that would add trillions to the long-term deficit. Goolsbee argues that the Obama Administration’s record on fiscal policy is sound. According to him, high levels of spending (and low levels of taxation) during the past several years were justified as responses to the recession. The real challenge lies instead in managing fiscal headwinds going forward, and political candidates ought to be judged on that basis.

The Least Refuse Of A Squirrel - Krugman - People have been asking me about Steve Rattner’s op-ed, which does seem to be aimed at me. My initial reaction was sheer bafflement: Rattner first attacks a view that, as far as I know, nobody holds, then makes his case by saying in as many ways as he can think of that the debt is huge, huge I tell you. What’s going on here? Luckily, Dean Baker seems to have figured it out. As Dean says, the key piece is here: Here’s the theory, in its most extreme configuration: To the extent that the government sells its debt to Americans (as opposed to foreigners), those obligations will disappear as aging folks who buy those Treasuries die off. Maybe there’s someone in America who believes this; it’s a big country. But what makes Rattner think that anyone with influence on the policy debate believes this? Here’s what I think happened. Rattner read my article, saw that I was denying that debt imposes the kind of burden on the next generation that people say, and immediately threw down the paper and began composing an indignant reply to what he assumed I must have been saying.

Deficit Doves and Owls: How to Worry About Healthcare Costs - You may not agree with Alan Blinder when he writes in the Wall Street Journal that the budget deficit should be an issue in the 2012 campaign.  But it certainly will be.  And Blinder deserves kudos for pointing out that there are no immediate or near-term economic problems stemming from US deficit and debt levels: “Myth No. 2 is that America’s deficit problem is so acute that government spending must be cut right now, despite the struggling economy. And any fiscal stimulus, even the payroll-tax extension, must be “paid for” immediately. Wrong. Strange as it may seem with trillion-dollar-plus deficits, the U.S. government doesn’t have a short-run borrowing problem at all. On the contrary, investors all over the world are clamoring to lend us money at negative real interest rates. In purchasing-power terms, they are paying the U.S. government to borrow their money!” Blinder also points out that if you accept the CBO’s long-term budget forecasts (James Galbraith notes some problems with the projections here), then the issue is entirely one of healthcare costs.  Deficit doves and deficit owls (proponents of “functional finance”) will dispute the optimal or sustainable level of long-term deficits, but if you care about the long-term deficit, then you care about government healthcare costs.  And growth of government healthcare costs is largely a function of cost inflation in the private market.  So if you have any interest in the long-term deficit, then you have to have a plan for controlling long-term healthcare costs system-wide.  If you don’t have such a plan, you’re engaged in some other type of project.

Four Deficit Myths and a Frightening Fact - Try to ignore the current shallowness in American politics, if you can, and assume that the federal budget deficit will be among the major issues of the 2012 campaign.  I'd like to explode four myths now masquerading as facts.

  • • Myth No. 1 is that the American people now demand deficit reduction as never before. Don't believe it. Yes, if you ask Americans about the deficit, they'll tell you they hate it—as they always have. But opinion polls show that the budget deficit is nowhere close to being Economic Public Enemy No 1. People care far more about high unemployment, the weak economy and the like.
  • • Myth No. 2 is that America's deficit problem is so acute that government spending must be cut right now, despite the struggling economy. And any fiscal stimulus, even the payroll-tax extension, must be "paid for" immediately.
  • • Myth No. 3: For several years now, our political system has focused exclusively on the 10-year cumulative budget deficit.  In truth, however, what happens over the next decade barely matters. Our deficit problem—and it is a whopper—is much longer-term than that.
  • • Myth No. 4 is that America has a generalized problem of runaway spending, one that requires cuts across the board. No. The truth is that we have a huge problem of exploding health-care costs, part of which shows up in Medicare and Medicaid spending.

Filling a hole or priming the pump? - Who knew that neoclassical economists had something perspicacious to add to the stimulus debate? Steve Williamson sends me to this AEA talk by Jim Bullard of the St. Louis Fed. The presentation is mostly a rebuttal of the common liquidity-trap arguments for stimulus, but at the end, there was this one really interesting slide: An alternative theory

    • An alternative theory is much less studied but closer to the rhetoric on fiscal policy effectiveness.
    • Suppose two regimes exist, one involving high growth and the other involving low growth.
    • Heavy government borrowing might signal that the high growth regime is likely; this might then influence private sector expectations and private sector decisions.
    • The high growth equilibrium could be encouraged as a self-fulfilling prophecy.
    • However, if government spending is viewed as wasteful, the private sector could coordinate on low growth.

Williamson adds: As Bullard states, the type of coordination failure that some Keynesians appear to have in mind - self-fulfilling beliefs about the future driven by fiscal policy - has not really been formally studied.

The Pros and Cons of Obama's Reorganization Plan - On Friday, President Obama announced plans to consolidate a number of federal agencies related to business and trade into a single agency in order to improve efficiency and the international competitiveness of American companies. The agencies to be combined are the Department of Commerce, the Small Business Administration, the Export-Import Bank, the Overseas Private Investment Corporation, the Trade and Development Agency, and the Office of the Trade Representative. A 2010 report from the Congressional Research Service provides a good overview of the functions of these organizations.This is not a new idea. In 1983, President Reagan asked Congress for a similar reorganization. According to a New York Times article, the purpose of the new agency was to create an American version of Japan’s powerful Ministry of International Trade and Industry. At the time, Japan was widely viewed the same way China is today: as our greatest economic competitor and potentially a national security threat as well. Economists now discourage developing nations from adopting Japanese-style industrial policies. Nevertheless, the Obama administration appears enamored with exactly the sort of industrial policy that Japan rejected.

Say's Law For Thee But Not For Me - Krugman - In correspondence, Mark Thoma notes a double standard in the conservative outcry over the Keystone XL decision. As he notes, when it comes to the question of whether government spending can create jobs, the usual suspects claim that it’s logically impossible: income has to be spent somewhere, so all the government can do is divert funds from other uses. But when it’s a private investment, somehow that logic no longer applies. The truth is that the logic is wrong in all cases — spending isn’t fixed. But it’s still interesting to note this double standard; it’s more evidence of lack of good faith.

How Austerity Could Fail Its Way Into US Hearts and Minds - Marshall Auerback compares the job numbers in the US to those in Europe and asks why the US is doing so much better (or failing less miserably).  One of the differences he highlights is the zealous dedication to fiscal austerity in Europe, compared to the relatively half-hearted, passive observance of doctrine in the US. For people operating on the basis of loose stereotypes about the differences between the US and Europe, this has perhaps turned out to be surprising.  You might have assumed that Europe’s more expansive social welfare systems would be accompanied by more progressive approaches to fiscal or monetary policy.  But as Matt Yglesias observes, Europe is awash in some pretty conservative ideas about macroeconomic policy:… the American right has lately fallen out of love with both J.M. Keynes’ fiscal stimulus ideas and Milton Friedman’s monetary stimulus ideas. Tussle between these two has dominated practical policymaking for decades in the United States, but if conservatives were to cast their eyes toward Europe they’ll find a continent where these ideas about demand-side management get short shrift.

How the Wall Street Journal Misleads About Federal Jobs, by Jeff Sachs: The editorial board of Rupert Murdoch's Wall Street Journal has a simple game. They want to cut taxes for the rich and government services for the rest, and end regulations of banks and the environment. They support taxpayer-financed bailouts of Wall Street when needed. They will twist any facts in the service of these goals. Today's lead editorial, with its graph of "Obama's Growing Payroll," is a perfect example... The gist of the editorial is that Obama is presiding over a massive increase of government, exemplified by the surge of civilian employees. The graph shows a striking rise of federal employment from around 1.875 million in 2008 to 2.1 million in 2011. (I reproduce this as Figure 1 below). The Journal neglects the fact that today's 2.1 million workers is actually identical to the number of Federal employees in 1981 at the start of the Reagan Administration, 1989 at the end of the Reagan Administration, and 1993 at the end of the Bush Sr. Administration. The numbers went down slightly after that ... with a decline in Defense Department civilian employees, a decline that was probably offset by the rise of private defense contractors (not included in the OMB tables). There is no long-term trend at all. (I show this as Figure 2 below).

Would A President Romney Increase The U.S. Deficit And Debt? - Interesting column in yesterday's The New York Times by Jesse Eisinger of ProPublica about the budget strategy the U.S. might be following if it were a private equity firm, that is, if it were run as if it were Bain Capital, Mitt Romney's former employer.Eisinger's conclusion: Given the current incredibly low interest rates, the management of a private equity firm would be rushing to borrow more to finance its activities rather than to be repeatedly demanding that it deleverage and do less. In other words, running the U.S. as a business as Romney says if elected he could/would/will do, would actually get him to do the opposite of what he and others running for president and Congress are insisting needs to be done: They would be increasing the deficit and borrowing more rather than reducing it and shrinking federal activities. This is hardly the first time someone has suggested that a very low interest rate environment means that the federal government should be borrowing more rather than less. But given the hyper rhetorical Dark Ages state of the current budget debate in Washington when facts and substance take a back seat to pseudo religious economic and finance beliefs, it's the first time in a while that it's been talked about prominently in a mainstream publication.

Department of “Duh” - The Times has a story out today: Surprise, all the Republican candidates’ tax plans increase the national deficit! The numbers (reduction in 2015 tax revenues, from the Tax Policy Center):

  • Romney: $600 billion
  • Gingrich: $1.3 trillion
  • (Late lamented) Perry: $1.0 trillion
  • Santorum: $1.3 trillion

I guess that makes Romney the “fiscally responsible” choice, at least among the Republicans. But President Obama’s tax proposals would only reduce 2015 tax revenues by $222 billion. (That’s $385 billion in Table S-4 less $163 billion in Table S-3.) Second surprise: The big winners in all of these tax plans are the rich! (That’s not just in dollars, but in percentage increase in after-tax income.)

Ruth (Marcus): Romney Reforms More Ruthless Than (Even) Ryan’s - The Washington Post’s Ruth Marcus points out that if Mitt Romney really cares about the poor, he has a funny way of showing it–in this case, regarding his ideas for fiscal policy reforms: “I’m concerned about the poor in this country,” Mitt Romney said the other day. “We have to make sure the safety net is strong and able to help those who can’t help themselves.” I perked up at those words, because they were something of a departure from his usual stump speech and because they happened to come on a day when I had written about the dire implications of Romney’s proposals for the social safety net. I don’t question his sincerity. The problem: This fine sentiment doesn’t square with his actual policies… The impact of Romney’s approach on the safety net would go far beyond Medicaid. The brutal arithmetic of his stated plan to cap spending at 20 percent of gross domestic product — while, unlike Ryan, increasing defense funding — is that safety-net programs would have to be chopped significantly beyond where even Ryan would take them. Romney’s tax plan would exacerbate the unfairness. He would continue the Bush tax cuts for the wealthiest Americans and provide extra breaks that would primarily help the rich… At the same time, Romney would do away with recent increases in the child tax credit and the earned-income tax credit — provisions that help low-income families…

What difference will it make if Obama or Romney wins? - Karl has requested that, along with a few other people, I answer this question: What are the significant differences that you think we could actually see come to pass from a Romney Presidency versus an Obama Presidency? Here are Tyler Cowen, Kevin Drum, and Matt Yglesias. They all say a lot of believable things. I’m probably my least useful in this type of speculation, but here goes anyway. One thing I’m pretty confident in is that if we’ve arrived at Obama vs Romney, and I think we have, then we’ve already dodged the biggest bullets (you know who I mean). If we’ve passed through the better part of the recession by the time the election is over, one could imagine attention will turn to tax reform. I can see either supporting something like Simpson Bowles, but Romney relying somewhat more on changes in the social security formula and removing exemptions, where Obama would lean somewhat more on increases in top marginal tax rates and some new taxes. I don’t think that the differences here would be huge overall, especially given the range of what could be done, but small differences can be pretty consequential in terms of welfare when you are talking about a multi-trillion dollar economy, so I don’t want to overly minimize these differences.

Obama's tax dilemma: $1M or $250k? -President Obama faces a difficult choice in his upcoming budget: Stick with his policy of raising taxes on families making more than $250,000 annually or boost that threshold to $1 million. The president’s decision has major political ramifications, as Democrats and Republicans are expected to clash repeatedly this election year over taxes. Following historic Republican gains in the 2010 election, many congressional Democrats embraced the $1 million figure over fears that the GOP had gained the upper hand by criticizing the $250,000 mark. Democrats like Sen. Charles Schumer of New York have suggested that many families making $250,000 are not rich. He has acknowledged that Republicans scored political points by arguing that raising taxes on individual income above $200,000 and couples making more than $250,000 would hit a fair amount of small businesses.

Santorum’s Tax Plan Doesn’t Add Up -The good news is that much of Santorum’s plan is centered on lowering taxes. The bad news is that much of his tax relief is either welfare in disguise or social engineering. After weighing the plusses and minuses, the conservative Tax Foundation gave his plan a D+. That score might be generous.His individual income-tax plan has just two rates — 10 and 28 percent. He does not specify at what point those rates begin, but it is safe to assume that no one will experience a tax increase. His plan calls for the elimination of the alternative minimum tax and the estate tax.  All that has much to recommend it, but Santorum would also triple the personal exemption for dependent children while maintaining the earned-income tax credit and the child tax credit. This move would radically reduce the percentage of taxpayers paying any federal income tax whatsoever. Since he would retain most of the other major individual tax deductions, complexity would not be reduced, but revenue would be radically lower. I will return to this in a moment.

GOP Candidates' Tax Cuts for the Rich Are Up to 270 Times Larger Than Their Tax Cuts for the Middle Class -The 2012 Republican candidates are largely in lockstep when it comes to economic policy, wanting to give huge tax cuts to the rich and corporations while doing next to nothing to boost consumer demand or help the middle class and the unemployed who have been battered by the Great Recession. In fact, according to an analysis by Citizens for Tax Justice, the average tax cuts received by the richest 1 percent of Americans under the Republican plans would be 270 times as large as the cut received by the middle class: The share of tax cuts going to the richest one percent of Americans under these plans would range from over a third to almost half. The average tax cuts received by the richest one percent would be up to 270 times as large as the average tax cut received by middle-income Americans. Click here to view larger. Perry wins the award with a tax cut for the richest 1 percent that is 270 times larger than his middle class tax cut, while Gingrich’s is 190 times larger. Santorum and Romney pull up the rear with tax cuts for the rich that are 100 times larger than the cuts for the middle class, while CTJ did not analyze Jon Huntsman or Ron Paul’s plans.

Romney's Tax Plan Helps the 1%, Hurts the Bottom 40% - Linda Beale - It's perhaps an appropriate time to bring out the Urban Institute/Tax Policy Center's analysis of the Romney 59-point tax plan. They have produced a table (T12-0004) showing "Mitt Romney's Tax Plan Baseline: Current Policy Distribution of Federal Tax Change by Cash Income Percentile, 2015." The table looks at individual and corporate income, payroll (Medicare and Social Security) and estate taxes to determine the change in the total federal taxes for the various quintiles under Romney.Who would have federal tax increases under Romney? Not the rich who have captured more and more of the income over the last decades. Treating corporate shareholders as the payers of the corporate income tax, the table shows that the top one percent would get an average federal tax cut of $86,535 under Romney's plan, while the top one-tenth of one percent would get an average tax cut of $432,940.  But guess what, the bottom two quintiles--made up of the poorest Americans who are struggling to make ends meet and who can be pushed off kilter by a single illness or other unexpected expenditure--will be the ONLY ones in the distribution who will pay more federal taxes under Romney's plan than under the current policy baseline. About 18% in that lowest quintile will pay almost a thousand more in taxes. About 13% in the lowest quintile will pay about $125 less in taxes. Similarly, in the second lowest quintile, about 18% will pay almost a thousand more; however, at least for this quintile about a third will pay almost $500 less, so that the overall increase averaged across these groups is less.

You can’t measure tax progressivity while ignoring income trends - Mark Thoma does a terrific job explaining why the purported measure of tax progressivity favored by many conservatives doesn’t measure tax progressivity. Former Bush Press Secretary Ari Fleischer, the inspiration behind Thoma’s post, insinuated that those lucky duckies at the bottom and middle of the earnings distribution should be paying more because their share of federal taxes paid has been falling while that of the top earnings quintile has risen substantially since 1979. As Thoma elucidates, Fleischer’s captious reading of the Congressional Budget Office’s series on average federal taxes by income group ignores the heavily skewed income trends of the last 30+ years. This State of Working America chart depicts just how lopsided those gains have been: The top 10 percent have captured 64 percent of economy wide income gains, while the bottom 60 percent of earners received only 11 percent of income gains.

Why Americans Think the Tax Rate Is High, and Why They’re Wrong —When people heard that Mitt Romney1’s federal income tax rate was about 15 percent, the immediate reaction of many was to assume that their own rate was higher. The top marginal rate is 35 percent, after all, and the marginal rate on a couple with $70,000 in taxable income is 25 percent. The truth is that most households probably pay a lower rate than Mr. Romney. It is impossible to know for sure, given that he has yet to release his tax return. What is clear, though, is that a large majority of American households — about two out of three — pays less than 15 percent2 of income to the federal government, through either income taxes or payroll taxes. This disconnect between what we pay and what we think we pay is nothing less than one of the country’s biggest economic problems. Many Americans see themselves3 as struggling under the weight of a heavy tax burden (partly for the understandable reason that wage growth has been so weak). Yet taxes in the United States are quite low today, compared with past years or those in other countries. Most important, American taxes are not sufficient to pay for the programs that many people want, like Medicare4, Social Security5, road construction and education subsidies. What does this combination create? An enormous long-term budget deficit6.

Romney Reveals His Tax Rate Is 'Probably Closer to 15 Percent - At a press conference following the GOP debate last night, GOP presumed favored candidate Mitt Romney acknowledged for the first time that his effective tax rate is around 15%.  That's a lot lower rate than middle class taxpayers typically pay. Romney isn't releasing his full return--at least not yet.  He says maybe he'll release just the 2011 return in April.  But not any back returns. (That'd tell us more about his gains at Bain Capital than he probably wants us to know.) What are his sources of income?  Romney acknowledges that during the last 10 years, his income comes "overwhelmingly" from some investments made in the past.  Other sources include a "little bit" from his book and "not very much" from speaker fees.  ("Not very much" is obviously a relative term.  Romney's financial disclosure report released in August indicated that he was paid more than $370,000 in speaker fees for that filing period.  That's considerably more than any middle class taxpayer makes---but doesn't amount to "very much" for Romney, who is worth somewhere around $250 million or so.) So for 10 years, Romney admits, he hasn't labored much, but has nonetheless made considerable investment income that gets preferentially taxed.  That of course is a core problem with the preferential rate for capital income--it merely makes the festering wound of hugely unequal distribution of income (and wealth) worse.

Mitt Romney admits: I pay 15% tax on $200m personal fortune - Republican frontrunner Mitt Romney highlighted the gap between himself and average Americans on Tuesday when he maintained he did not make "very much" from speaking fees, even though the $370,000 earned in a single year would be considered a fortune by many middle-class Americans. His comments came at a press conference while out campaigning in South Carolina ahead of its potentially decisive primary on Saturday. Romney is the favourite to win in South Carolina, enjoying a double-digit poll lead over his nearest rival, former speaker Newt Gingrich. At the press conference in Florence, he disclosed that he pays a tax rate of only 15% in spite of having an estimated wealth of $200m. Romney has so far resisted offering details about his financial dealings but, during the presidential debate in Myrtle Beach on Monday night, he finally bowed to pressure and said he would "probably" release his tax returns in April. He told reporters: "What's the effective rate I've been paying? It's probably closer to the 15% rate than anything."

White House seizes on Romney’s tax admission - The White House pounced on Mitt Romney’s revelation that he has been paying an effective tax rate of roughly 15 per cent as evidence of the need for a so-called “Buffett rule” to prevent millionaires from paying lower tax rates than middle class Americans.  “The president feels very strongly that everybody needs to pay their fair share and that everybody, therefore, gets a fair shot at the American dream,” said Jay Carney, the White House press secretary, on Tuesday.  “That includes millionaires who might be paying an effective tax rate of 15 per cent when folks making $50,000 or $75,000 or $100,000 a year are paying much more,” Mr Carney added, though he had not specifically spoken to Barack Obama about Mr Romney’s remarks. The Obama administration hopes that Mr Romney’s comments will bolster its efforts to impose higher taxes on the wealthiest Americans which have so far failed in the face of staunch Republican opposition in Congress. But most crucially, Mr Obama’s political advisers might be calculating that his re-election could hinge on successfully depicting Mr Romney as out of touch with the struggles of ordinary Americans – and the former Bain Capital executive’s low tax rate will be another arrow in their quiver.

We Still Need To See Those Returns - Krugman - Aha. Romney concedes that the estimates people have been making about his taxes are basically right: At an event in Florence, SC, Mitt Romney told reporters that his effective tax rate is probably close to 15% because most of his income comes from investments, reports Bloomberg’s Julie Davis. And an immediate question is, do you agree that unearned income should be taxed at a rate so much lower than earned income? Besides, he’s still fudging: how much of that is true investment income, and how much is carried interest, which is actually earned income that for reasons unclear manages to get taxed like investment income (making nonsense of the claim that investment income should face low taxes because it has already been taxed once)? Oh, and don’t give me the argument that private equity is special because it’s a risky business, in which you put in a lot of effort for an uncertain return. So is any kind of small business venture; and so, as it happens, is textbook writing. Yet small businessmen and textbook authors pay normal tax rates.

Robert Reich (The Romney Tax Loophole) -After refusing for weeks to release his taxes, Mitt Romney now says he’ll do so — by tax day, April 15. But the real news is what Romney has now admitted about his taxes. It’s not how much Romney earns. Everyone knows he’s comfortably in the top one-tenth of one percent. It’s how much he pays of it in taxes. Romney says he pays a tax rate of “about 15 percent.” That’s lower than the tax rate most of America’s middle class face and far lower than the 35 percent top rate after the Bush tax cut. (To put this in perspective, recall that the top income tax rate under Dwight Eisenhower was 91 percent.) Newt Gingrich immediately pounced on Mitt’s admission as evidence that Newt’s proposed flat 15 percent tax is ideal, and wants to call it the “Romney tax.” Newt’s flat tax is a fraud. It would dramatically lower the taxes of most of the top 1 percenters and increase the taxes of most of the rest of us. The real smoking gun is how Romney manages to pay only 15 percent on what’s been his money-gusher of compensation from Bain Capital. Romney hasn’t released his tax returns yet, but the most obvious answer is he treats his Bain income as capital gains — subject to the current capital gains rate of only 15 percent.

Romney’s tax plan would cut his own taxes by nearly half, new analysis finds - The revelation that Mitt Romney pays a tax rate of around 15 percent opens the door to another question: How much would his own taxes fall under the tax plan he would pass if elected president? Here’s the answer, according to a new analysis by Citizens for Tax Justice that was provided to me this morning. Under his plan, Romney in 2013 would see his taxes cut by nearly half of what they would be if you use current law as a baseline.  Another way to put this: If Romney, whose wealth is estimated at as much as $250 million, is elected president and gets his way on tax policy, he would pay barely more than half as much in taxes than he would if Obama is reelected and gets his way — and the Bush tax cuts on the wealthy expire and an additional Medicare tax as part of the Affordable Care Act kicks in. Here’s how Citizens for Tax Justice, which is liberal leaning but nonpartisan, calculated this finding. It’s based on Romney’s 2011 financial disclosure form for the year 2010, which reported that Romney made an annual income that year of between $6.6 million and $40 million.

Taxes at the Top, by Paul Krugman - I’m actually enjoying the spectacle of Mitt Romney doing the Dance of the Seven Veils — partly out of voyeurism, of course, but also because it’s about time that we had this discussion. The theme of his dance, for those who haven’t been paying attention, is taxes — his own taxes. Although disclosure of tax returns is standard practice for political candidates, Mr. Romney has never done so, and, at first, he tried to stonewall the issue even in a presidential race. Then he said that he probably pays only about 15 percent of his income in taxes, and he hinted that he might release his 2011 return. Even then, however, he will face pressure to release previous returns, too — like his father, who released 12 years of returns back when he made his presidential run. (The elder Romney, by the way, paid 37 percent of his income in taxes). And the public has a right to see the back years: By 2011, with the campaign looming, Mr. Romney may have rearranged his portfolio to minimize awkward issues like his accounts in the Cayman Islands or his use of the justly reviled “carried interest” tax break. But the larger question isn’t what Mitt Romney’s tax returns have to say about Mitt Romney; it’s what they have to say about U.S. tax policy. Is there a good reason why the rich should bear a startlingly light tax burden?

More on Romney's Tax Rate (and Everyone Else's) To my news analysis explaining that most households actually pay a lower federal tax rate than 15 percent — the rate Mitt Romney, the Republican presidential candidate, says that he pays — there are two postscripts worth adding: First, I focused on direct taxes. If you also include indirect taxes — mainly corporate taxes, effectively paid by stockholders — Mr. Romney’s rate rises higher. On average, the top 1 percent of earners pay about 10 percent of their income in corporate taxes, according to the Congressional Budget Office. Companies officially pay these taxes. But by reducing the after-tax earnings of the company, the taxes ultimately come out of the pockets of the company’s owners. Economists, with good reason, like to apportion all taxes to people, rather than to an entity like a corporation.Second, most of the article focused on federal taxes, not state or local taxes (for which the data is thinner). Because Mr. Romney’s income is so high, he pays relatively little of it in state and local taxes. A middle-class or poor family would pay a greater proportion.These two factors obviously point in different directions. So if you widened the lens beyond direct federal taxes — to all taxes, including indirect, state and local taxes — the conclusion would likely be similar. Mr. Romney does not pay a lower tax rate than most Americans. He also doesn’t pay a much higher tax rate, despite being much more affluent.

Romney: Questions about Wall Street and inequality are driven by `envy’ - The Plum Line - Mitt Romney had a remarkable exchange on NBC this morning that may not be as attention-grabbing about his “fire people” gaffe — but may actually be just as revealing and significant. And I hope it gets some attention. In it, Romney suggested that concerns about Wall Street conduct and inequality are driven by “envy,” and even said we needn’t have a public debate about inequitable wealth distribution in this country. Oh, sure, Romney has said before that Obama’s populist rhetoric is about the politics of envy. But in this particular case, Romney was pressed specifically — twice — on the question of whether any concerns about Wall Street, inequality, and economic unfairness are legitimate and are about something more than “envy.” His answer:

The History Of Capital Gains Taxes - Krugman- Here’s how Romney’s low taxes will be defended by smarter conservatives (the less smart ones will just shout “class warfare”): they’ll claim that there are compelling reasons to have low taxes on capital gains, and that there is therefore nothing wrong with having very high-income people paying lower tax rates than the middle class. David Frum offers a good example. But Frum slips a fast one by us — and probably by himself, since he’s usually pretty honest in his reasoning. He declares that The lower tax rate for capital gains is good policy—a policy that the US has followed almost from the inception of the income tax, a policy followed by almost every other advanced economy on earth (including some that don’t tax capital gains at all). This conveys the impression that the current very low rates of capital gains taxation are the way it has always been. But that’s not at all true. Here’s the reality: Source. The current very low rates didn’t happen until 2003; in fact, long-term capital gains were taxed at close to 30 percent from 1986 through 1997, when Clinton cut a deal with Republicans to get an expanded earned-income tax credit. And dividend income also only started receiving privileged status in 2003.

Why Keep the Capital Gains Tax Break? - Mitt Romney's ultra-low tax rate on his ultra-high income is reviving questions about the breaks and perks that the wealthiest of the 1% receive from the rest of us. One of these is a special low tax rate for investments -- as if anyone needed special tax incentives to induce them to make a bundle.How much does Romney make? We won't know until we get a chance to see his tax returns -- if we do -- but Romney described his $374,328 income from speaking fees last year as "not very much." If $374K is "not very much" of his income ... well ... at least we can understand why he feels he can casually make $10,000 bets as if he was just pulling a dime from his pocket. In his post What Mitt's Taxes Could've Paid For (If Not For Those Cushy Tax Breaks), Richard Eskow writes,  1,470 households made more than a million dollars and yet paid nothing -- zero, zip, nada -- in Federal income tax in 2009....The top 25 hedge fund managers in the U.S. made $22 billion in 2010. Mitt Romney's admission that he probably pays a 15 percent tax rate shows us what is going on. For you or me, when our taxable income passes about $35,000, we start paying a 25 percent rate, much higher than Mitt pays on his millions on income.

Check Out Their Low, Low Taxes - Krugman - Source. As Ezra Klein says, the real issue raised by Romney’s maybe-revelation — are we sure that his tax rate is even as high as 15 percent? How much is shielded in tax havens? We need the returns — is the way our system allows those with very high income to pay substantially lower taxes than the upper middle class. If capital gains and other investment income didn’t receive special treatment, we’d be getting substantially more revenue. Why does our political elite talk only about cuts to social insurance, and not at all about raising more revenue from the upper tail of the income distribution?

Capital Gains: Romney and the 1% - Few aspects of the division between the 1 percent and the 99 percent have proven so divisive as the fact that the rich often pay a lower tax rate than everybody else. That is because the top federal tax rate on capital gains income is 15 percent, compared with a top marginal tax rate of 35 percent on other taxable income, like wages and salaries, that exceeds $380,000 a year. Mitt Romney, the Republican presidential candidate, who has declined to release his tax returns, acknowledged on Tuesday that his own tax rate was “probably closer to the 15 percent rate,” because much of what he earns is from investments. The rich earn far more from capital gains than everyone else. The percentages fluctuate from year to year, but in 2007, the top 1 percent of earners received 20 percent of their income from capital gains, while everyone else received, on average, 2 percent of their income from capital gains. In 2011, according to estimates by the nonpartisan Tax Policy Center, the top 1 percent paid 70 percent of the total federal tax on capital gains. The center also estimates that the top 1 percent, of which Mr. Romney is a member, pays an effective income tax rate of 18.5 percent, compared to 9.5 percent for the population as a whole. But when it comes to payroll taxes, the rich pay a far lower effective rate than everyone else – 1.7 percent compared to 7 percent – because the income subject to payroll taxes is capped at $107,000.

For God So Loved the 1 Percent ... IN recent weeks Mitt Romney has become the poster child for unchecked capitalism, a role he seems to embrace with relish. Concerns about economic equality, he told Matt Lauer of NBC, were really about class warfare. “When you have a president encouraging the idea of dividing America based on the 99 percent versus 1 percent,” he said, “you have opened up a whole new wave of approach in this country which is entirely inconsistent with the concept of one nation under God.” Mr. Romney was on to something, though perhaps not what he intended. The concept of “one nation under God” has a noble lineage, originating in Abraham Lincoln’s hope at Gettysburg that “this nation, under God, shall not perish from the earth.” After Lincoln, however, the phrase disappeared from political discourse for decades. But it re-emerged in the mid-20th century, under a much different guise: corporate leaders and conservative clergymen deployed it to discredit Franklin D. Roosevelt’s New Deal.

Romney’s Rate Confusion

  - Mr. Romney, who commonly touts his background in business and knowledge of the economy, sought to explain the importance of the recent European debt downgrades to a sparsely attended rally. “I hope you understand what it means when they downgrade debt,” Mr. Romney said. Then he went on to offer an explanation of how the Federal Reserve manipulates interest rates. “When our economy gets really hot when inflation starts going up and people get frightened that they’re going to lose their savings because inflation is so high, what the Federal Reserve does to try and slow down the economy is to raise our interest rates. Just put ‘em up a little bit,” Mr. Romney said. “It slows down the economy and usually puts us into a recession. A small change in interest rates is used to cause our country and other countries to go into recession.” Mr. Romney then returned to the debt downgrade, saying, “if we talk about what’s happening in Europe by virtue of their having spent too much and borrowed too much, interest rates are going to go up by this downgrade. It will cause their economy to be in trouble. That’s where we’re headed if we stay on this road of borrowing massively more than we take in.”

Among the Wealthiest One Percent, Many Variations - A few months ago, Mr. Katz was just a successful businessman with five children, an $8 million home, a family real estate company in Manhattan and his passion, 10-year-old Talon Air. Now, the colossal gap between the very rich and everyone else — the 1 percent versus the 99 percent — has become a rallying point in this election season. As President Obama positions himself as a defender of the middle class, and Mitt Romney, the wealthiest of the Republican presidential candidates, decries such talk as “the bitter politics of envy,” Mr. Katz has found himself on the wrong end of a new paradigm. As a member of the 1 percent, he is part of a club whose name conjures images of Wall Street bosses who are chauffeured from manse to Manhattan and fat cats who have armies of lobbyists at the ready. But in reality it is a far larger and more varied group, one that includes podiatrists and actuaries, executives and entrepreneurs, the self-made and the silver spoon set. They are clustered not just in New York and Los Angeles, but also in Denver and Dallas. The range of wealth in the 1 percent is vast — from households that bring in $380,000 a year, according to census data, up to billionaires like Warren E. Buffett and Bill Gates.

But The Top 0.1 Percent Isn't Diverse - Krugman - The Times has a piece today showing, correctly, that the top 1 percent of the income distribution is a fairly diverse group. But what that mainly reflects is the fact that the slogan “we are the 99 percent” sets the cut too low. A large part of the rising share of the top 1 — about 60 percent, according to the Piketty-Saez data — is actually attributable to the top 0.1 percent. And that’s not a diverse group at all, according to Heim et al (pdf): If you add together nonfinance executives, “financial professions”, real estate, and lawyers, you’ve got more than 70 percent of the total; plus some of the other categories are probably essentially business executives too. Basically, the top 0.1 percent is the corporate suits, with a few token sports and film stars thrown in. Real wealth in America isn’t nuanced at all.

Measuring the Top 1% by Wealth, Not Income -- After our demographic profile of the 1 percent appeared on Sunday, there were a lot of questions from readers about the top 1 percent by wealth, rather than the measure we used, the top 1 percent by income. We used income because the Census measures income, not wealth, and the Census contains the most timely data along with a large sample size. But we also examined wealth through the Federal Reserve’s 2007 Survey of Consumer Finances. This survey is much smaller in scope, and somewhat outdated.  But an analysis of the Fed data is still revealing in that it shows the wealth gap, as measured by net worth, is much more extreme than the chasm as measured by income.The Times had estimated the threshold for being in the top 1 percent in household income at about $380,000, 7.5 times median household income, using census data from 2008 through 2010. But for net worth, the 1 percent threshold for net worth in the Fed data was nearly $8.4 million, or 69 times the median household’s net holdings of $121,000. Some readers wondered if the 1 percent by wealth weren’t an entirely different group of people from the 1 percent by income. But there is substantial overlap: the Fed data suggests that about half of the top 1 percent of earners are also among the top 1 percent in the net worth category.

How the media lost the plot on US taxation - The media doesn't seem to understand the basics about budgets – and the inescapable relationship between aggregate revenues, aggregate spending and total deficits. Either that, or reporters just choose to play dumb. The end result is the same, however: journalists don't probe deeply – or they probe when it is too late to matter – into budget proposals and their real-world consequences. They are also generally unaware of easily obtainable historical data and historical trends, and how these predict the likely outcome of current fiscal policy choices. The point is this: we will always have big deficits as long as tax policy is radically different from the post-second world war average until about 1981. And Republicans now want to cut taxes, mainly on the wealthy, even further. So the GOP's moaning about the deficit has no credibility whatever to anyone who knows budgets. But most people, and most reporters, don't know that during the Eisenhower administration, the top marginal rate was 91%, and that it was 70% for the following two decades or so, and that capital gains (which accrue overwhelmingly to the rich) were usually taxed as ordinary income. That lack of perspective distorts a whole range of popular assumptions about social equity now versus, say, the 1950s.

A corporate tax code for a different century - Big business is lobbying for a major cut in the corporate income tax rate, and both President Barack Obama and key congressional leaders are on their side. But the evidence that a rate cut will boost the economy is weak. What’s needed is comprehensive reform that includes a simpler, fairer and more transparent corporate tax code. But more on that later. Consider what President George W. Bush‘s Treasury Department said in a report in 2007: big countries, such as the United States, receive far less economic benefit from lower corporate tax rates than smaller countries do. For large countries, cutting corporate tax rates “would result partly in increased capital inflow and partly in lower world interest rates.”While other large countries have cut their corporate tax rates since then, lowering the U.S. rate would just encourage other countries to go even lower. Since we are cutting spending in the very areas that build wealth – education, infrastructure and research – a corporate tax rate cut would increase the pressure for further cuts in those areas, making us poorer.

Corporate Taxes And The .01 Percent - Krugman - Some readers have asked whether the picture of very low taxes on the very rich changes once you take taxes on corporate profits into account, and impute them to stockholders. The answer is that yes, it does, somewhat — but there are a number of implications of such an imputation, and if I were a conservative, I really wouldn’t want to go there. On the question of how profits taxation plays into tax burdens, the CBO has already done those calculations. In particular, it did a special version of its usual tax shares analysis that looked inside the top 0.01 percent, taking the data up through 2005 (pdf). According to this analysis, in 2005 the top .01 percent paid only 17 percent of income in income taxes — but they faced an overall federal tax rate of 31.5 percent, with almost all the difference being imputed corporate taxes. But I thought corporations were people — by which Romney meant not that they eat and sleep, but that they employ people, and by being nice to corporations we’re being nice to workers. If you say instead that corporate profits benefit only the stockholders so much for the warm and fuzzy feelings. More than that, however, if we do the imputation, the historical story becomes one of a simply huge reduction in tax progressivity over time. Piketty and Saez (pdf) tell the tale:

Why Do U.S. Investment Funds Operate in Tax Havens? - Mitt Romney’s holdings in the Cayman Islands have generated lots of interest in investment funds that are managed from the U.S. but incorporated in foreign jurisdictions. But taxable U.S. investors like Romney don’t get much benefit from such funds. The real winners are U.S. tax-exempt entities, such as charities, pension funds, university endowments, and IRAs, as well as foreign investors. And investment fund managers can benefit too. Here’s why: When tax-exempt investors make money that is separate from their tax-exempt purpose, they are subject to a special tax, known as the “UBIT” or the unrelated business income tax. A special rule also deems all debt-financed income to be unrelated business income. Because deals put together by private equity firms are often heavily leveraged (as are investments by hedge funds), debt-financed income often is generated. If a tax-exempt entity were a partner in one of these deals, it would be taxed as if it earned the income that was earned by the partnership and, thus, be subject to the UBIT. But tax-exempts (including individuals who invest through their IRAs) can avoid this tax by investing in a corporation which, in turn, invests in the partnership (or invests directly in the deal).

Offshored Assets still in IRS cross-hairs but new disclosure program available - As most who follow the issues are aware, the IRS has been focusing for some time on the foreign bank accounts of US taxpayers.  The big break came when the IRS was able to get some data from UBS, including information about particular bankers and mechanisms that US taxpayers were using to sequester significant amounts abroad to avoid paying US taxes on the income.   This has allowed the IRS to pursue leads and draw connections from bankers to accounts to taxpayers, and to pursue criminal prosecutions for international tax evasion in some cases. There have been two "voluntary programs" for declaring offshore accounts and avoiding potential criminal prosecution with the payment of a set penalty--the first in 2009 and the second in 2011.  The penalty in the second program was stiffer than the penalty in the first program, so that those who delayed had to pony up more to get clear.   The programs have been enormously successful, bringing in more than $4.4 billion dollars, according to an IRS release announcing a reopening of the offshore voluntary disclosure program.  See IR-2012-5. Under the new program, some taxpayers may be eligible for the 5 or 12.5% penalties but the stiffest penalty will be higher than under earlier versions: 27.5% of the highest aggregate balance in foreign bank accounts during the 8 years prior to disclosure, up from 25% in  the 2011 program.

Libertarian Illusions - Jeffrey Sachs - In a recent column my friend Bob Reich wrote convincingly that Ron Paul is attracting the support of many youth because several of his messages are correct, even if wrapped in a misguided overall ideology. As Reich noted, Ron Paul is the only Republican candidate calling for the end of America's horrendously wasteful wars, a worthy position. Paul also rightly emphasizes the massive corruption that has overtaken Washington.  Yet Ron Paul's appeal goes beyond these specific positions. His libertarianism itself is beguiling. Like many extreme ideologies, libertarianism gives a single answer to a complicated world. It seems to cut through the fog and get to the heart of solutions; illusions, alas, but powerful ones nonetheless.  Libertarianism is the single-minded defense of liberty.  They also like the moral freedom that libertarianism seems to offer: it's okay to follow one's one desires, even to embrace selfishness and self-interest, as long as it doesn't directly harm someone else.  Yet the error of libertarianism lies not in championing liberty, but in championing liberty to the exclusion of all other values.  Compassion, justice, civic responsibility, honesty, decency, humility, respect, and even survival of the poor, weak, and vulnerable -- all are to take a back seat.

Ron Paul Debate Flushes Out Gender-Baiting Right Wing Opportunists Masquerading as Progressives -- Yves Smith - The intense debate precipitated by a post on this site, “How Ron Paul Challenges Liberals,” and follow up posts by Glenn Greenwald and here serve to prove their simple yet frequently misrepresented thesis: that Ron Paul’s anti-war, anti-Fed positions expose fault lines among those traveling under the “liberal” banner.  Anyone who read comments on NC prior to this debate would have noticed some sympathy for Paul, ranging from the more common “he’s batshit and I’d never vote for him, but his opposition to our Middle East adventurism and the lack of accountability at the Fed is refreshing” to some making a stronger case for him. That shouldn’t be surprising given the point often made here and in the few lonely “progressive” outposts on the blogosphere (“progressive” is in the process of being co-opted in the same way “liberal” has been): that the Democratic party has been so deeply penetrated by the neoliberal/Robert Rubin/Hamilton Project types that it isn’t that different from the right on economic issues.  It should not be controversial to point out that the Democratic party uses identity politics as a cover for its policy of selling out the middle class to banks and big corporate interests, just on a slower and stealthier basis than the right. And we’ve seen the identity card used in a remarkably dishonest manner in this Ron Paul contretemps.  The strategy used is shameless straw manning in combination with gender baiting. Both Katha Pollitt (in “Progressive Man Crushes on Ron Paul“) and Megan Carpentier (“Ron Paul’s useful idiots on the left“) grossly misrepresent Glenn Greenwald’s posts on Paul, in which he says repeatedly that he is talking about broad policy issues, and not standing behind any candidate:

Dear Andrew Sullivan: Why Focus on Obama’s Dumbest Critics? - After reading Andrew Sullivan's Newsweek essay about President Obama, his critics, and his re-election bid, I implore him to ponder just one question. How would you have reacted in 2008 if any Republican ran promising to do the following?  (1) Codify indefinite detention into law; (2) draw up a secret kill list of people, including American citizens, to assassinate without due process; (3) proceed with warrantless spying on American citizens; (4) prosecute Bush-era whistleblowers for violating state secrets; (5) reinterpret the War Powers Resolution such that entering a war of choice without a Congressional declaration is permissible; (6) enter and prosecute such a war; (7) institutionalize naked scanners and intrusive full body pat-downs in major American airports; (8) oversee a planned expansion of TSA so that its agents are already beginning to patrol American highways, train stations, and bus depots; (9) wage an undeclared drone war on numerous Muslim countries that delegates to the CIA the final call about some strikes that put civilians in jeopardy; (10) invoke the state-secrets privilege to dismiss lawsuits brought by civil-liberties organizations on dubious technicalities rather than litigating them on the merits; (11) preside over federal raids on medical marijuana dispensaries; (12) attempt to negotiate an extension of American troops in Iraq beyond 2011 (an effort that thankfully failed); (14) reauthorize the Patriot Act; (13) and select an economic team mostly made up of former and future financial executives from Wall Street firms that played major roles in the financial crisis.

Sucking up to power, Timothy Geithner edition - You have probably heard a lot of noise about what was said about the housing bubble at Federal Reserve meetings in 2006. The Federal Reserve Board recently released the transcripts from its 2006 Open Market Committee (FOMC) meetings with the mandatory five-year lag and it turns out the Fed was pretty clueless. Dean Baker does a pretty good job of getting to the meat of the issue in his aptly titled post Alan Greenspan’s ship of fools. Baker concentrates on the housing substance but also offers up a quote from Timothy Geithner, then the NY Fed chief, that I think is quite revealing. Geithner remarks in addressing outgoing FOMC chair Greenspan: "I’d like the record to show that I think you’re pretty terrific, too. And thinking in terms of probabilities, I think the risk that we decide in the future that you’re even better than we think is higher than the alternative." Who says stuff like that? Seriously. We’re not talking about high school here. This is a Federal Reserve transcript.I don’t have anything else to say except that Geithner is now Treasury Secretary and has outlasted every major figure on President Obama’s economic team. You needed to read that statement because it tells you how, behind the scenes, the American financial system actually works.

Obama, Sarkozy and Taxing Wall Street - With US media obsessing on the fight here at home among conservatives vying to become president, most of them missed some big news about France, which already has a conservative president. This week, French President Nicolas Sarkozy announced that he would take the lead - even go it alone within Europe, if need be - in introducing and pushing a financial transaction tax in his country. That's right - the CONSERVATIVE president of France wants to tax the financial traders and speculators. Referring to the tax as a "moral issue" and blaming deregulation and speculation for the global economic meltdown, Sarkozy has said that traders must "repay for the damage they have caused." What does it tell us about US politics that the conservative president of France - on this issue and others - is way to the left of President Obama? The US president has not publicly promoted a Wall Street transaction tax (even though Wall Streeters, not the French, were largely responsible for the global financial crisis).

Free Enterprise on Trial - Robert Reich  - Mitt Romney is casting the 2012 campaign as “free enterprise on trial” – defining free enterprise as achieving success through “hard work and risking-taking.” Tea-Party favorite Senator Jim DeMint of South Carolina says he’s supporting Romney because “we really need someone who understands how risk, taking risk … is the way we create jobs, create choices, expand freedom.” Chamber of Commerce President Tom Donahue, defending Romney, explains “this economy is about risk. If you don’t take risk, you can’t have success.” Wait a minute. Who do they think are bearing the risks? Their blather about free enterprise risk-taking has it upside down. The higher you go in the economy, the easier it is to make money without taking any personal financial risk at all. The lower you go, the bigger the risks. Wall Street has become the center of riskless free enterprise. Bankers risk other peoples’ money. If deals turn bad, they collect their fees in any event. The entire hedge-fund industry is designed to hedge bets so big investors can make money whether the price of assets they bet on rises or falls. And if the worst happens, the biggest bankers and investors now know they’ll be bailed out by taxpayers because they’re too big to fail.But the worst examples of riskless free enteprise are the CEOs who rake in millions after they screw up royally.

Vulture capitalism on trial - If you had asked me at the beginning of the Republican nomination fight what candidates like Newt Gingrich and Rick Perry would say to win, I would have said just about anything. What I couldn’t possibly imagine was that one of the things they might start saying would actually be the unvarnished, unblinking, stand-up-and-clap-for-it truth. With their eyes set on Bain’s bane and Mitt Romney’s career, Perry and Gingrich have been astonishingly and appropriately brutal. “There’s a real difference between venture capitalism and vulture capitalism,” Perry told Fox and Friends last week. “I don’t believe that capitalism is making a buck under any circumstances.” Couldn’t have said it better myself.

Why Are Republicans Attacking 'Vulture Capitalism'? -The anti-capitalist rhetoric of certain Republican candidates sounds like it was ripped from the pages of The Nation. Rick Perry’s lurid description of “vulture capitalism” could have been cribbed from Alexander Cockburn or any number of other lefty writers. Newt Gingrich, likewise, denounces “crony capitalism” and asks, “Is capitalism really about the ability of a handful of rich people to manipulate the lives of thousands of people and then walk off with the money?” Right on, the left shouts. Newt sounds like one of those liberal professors poisoning young minds at elite universities.The opportunistic cross-dressing by conservatives amounts to a battlefield conversion. Just as it’s said there are no atheists in a foxhole, there are no candidates in this year’s politics witless enough to stand up and defend the most bloodthirsty tactics of rapacious capitalism. Except one. Mitt Romney, the man the GOP will likely nominate for president. He is the “vulture capitalist” Rick Perry has in mind. Rivals cannot resist attacking Romney’s very profitable years running Bain Capital, a private-equity giant that specializes in creative destruction, eliminating jobs and sometimes whole companies to reward investors.

Adam Davidson, the 1%’s Lord Haw-Haw, Fellates Wall Street - Yves Smith -Although I endeavor to treat high dudgeon as an art form, it is difficult to find words adequate to convey the level of ridicule and opprobrium that Adam Davidson’s latest New York Times piece, “What Does Wall Street Do for You?” deserves. I had the vast misfortune to come across it late last week, and have gotten an unusually large volume of incredulous reader e-mails about it. Ms. G’s e-mail headline “NYT – Not a Parody” was typical:  This one is so bad, even for NYT, I’m wondering if the paper wasn’t secretly sold to Murdoch, Bloomberg & the Fed Reserve sometime in the past few days. The problem with the piece isn’t that it’s propaganda. The majority of what you read in the mainstream media these days is propaganda. It’s that it’s shameless, blundering, obviously false propaganda. Things have now gotten so bad that we now need official propaganda ratings, maybe on a crowd sourced or an Intrade model. I never thought the day would come when I would hold up Andrew Ross Sorkin or Baghdad Bob Ezra Klein as models, but what they write has a tangential connection to reality and sounds plausible if you are not terribly well informed. By contrast, Davidson is all bumptious presumption, evidently hoping that if he sallies forth with enough vigor and enthusiasm, he will overcome any resistance.

One Way to Look at Private Equity - Mr. Levy has been dismayed that the industry’s heavyweights have not sought to publicly defend their industry in recent days. Private equity came under attack when Mitt Romney’s political rivals put his career at Bain Capital in the spotlight as part of the Republican primary. “There’s a tinge of McCarthyism here,” Mr. Levy said in an interview. “I think it’s a pretty honorable industry, and I don’t know why people aren’t stepping up and defending the careers that define their lives. That’s a sad thing. What do they fear it will cost them?” Mr. Levy, who voted for President Obama in 2008, is right. Virtually none of the big names in private equity have spoken up to defend the industry. Over the past several weeks, anytime my colleagues or I have sought comment about attacks on the industry, private equity’s kingpins have declined. (The industry’s lobbying group, the Private Equity Growth Capital Council, has been working behind the scenes to shore up support and plans a more public campaign in the coming weeks, but with none of the leading private equity executives playing a significant role.)

Holman Jenkins' Support for Job Destruction at Bain Capital Doesn't Hold Up - Linda Beale - Holman Jenkins Jr. writes an op-ed for the Wall Street Journal: "The Truth about Bain and Jobs,"   His first paragraph makes his bias in favor of "private equity" clear.  He says any debate about private equity's role in either job creation or job destruction is "fruitless" because neither voters no politicians believe that jobs should ever be destroyed.  (The implication--made clear later on in the editorial--is that Jenkins thinks job destruction is just fine and dandy in all cases.)  That doesn't mean no jobs can be destroyed, but that job destruction should occur when jobs become "obsolete" because of innovation--not when good jobs are destroyed in this country so that they can be handed to workers in other countries at much lower wages or destroyed in this country as union jobs so that they can be handed to nonunionized workers in this country at much lower wages. The latter kind of job-destroying, union-busting activity is frequently undertaken by private equity funds--and that appears to be truly destructive of the economy, since the gainers are the well-to-do investors in private equity funds while the losers are ordinary working folks.  So when "free trade" and "free markets" are really stand-in phrases covering a fundamental facilitation of the unfettered ability of high-net-worth investors to cannibalize the livlihoods of ordinary Americans in order to reap an even greater share of GDP (and keep all the gains to themselves rather than sharing them with labor), that is a kind of destruction of jobs that is destructive to the economy as a whole.

Coldheart, Crafty and Robber* Loot Doomed inc - Doomed Incorporated is an insolvent corporation whose CEO and board of directors won't face facts enter Chapter 11 and let a bankruptcy court liquidate the firm (or is that chapter 7 ?). I will assume that the debt is in the form of bonds not bank loans. Coldheart, Crafty and Robber (hence CCR but not to be confused with any centers for constitutional rights) is a closely held private equity partnership dedicated to finding the outer limits of the law. Doomed is a profit opportunity, because its shares are very cheap. So CCR can buy the firm without issuing new debt. CCR also sets up a firm controlled by CCR called "The Sack" and sells the assets of Doomed to The Sack for below market prices. Even at market prices, Doomed assets aren't enough to pay interest and principle on its bonds, but even at these low prices, the proceeds of putting Doomed's assets in The Sack are enough to pay coupons and pay off the face value of mature bonds for a while.  At the end of this while, CCR declares The Sack bankrupt and bond holders get roughly zero cents on the dollar. A huge amount of money has been made by taking money from bondholders by minimizing the recovery ratio (cents on the dollar).

How would Mitt Romney prevent the next financial crisis? It’s not clear. - Last night, Kelly Evans managed to sneak in the GOP presidential debate’s only question about the euro zone crisis, asking Romney what would happen if the United States faced another financial catastrophe as a result. “This is not some imaginary event,” said Evans, a Wall Street Journal economics writer and one of the debate’s moderators. “How far would you be willing to go to keep the financial system functioning?” Romney replied that “we’ve learned some lessons” in the aftermath of the last financial crisis: namely, to reject government bailouts, let troubled banks go bankrupt and make sure that government regulations don’t get in the way of the private market. “What we have to do is to recognize that — that bankruptcy can be a process, reorganization for banks, as well as other institutions, that allow them to get rid of their excess costs, to re-establish a sound foundation and to emerge stronger,” Romney responded. “The right course for us is not to think we have to go run over to Europe to try and save their banking system or to try and pump money into the banks here in this country.” Ultimately, Romney suggested, the biggest threat to the U.S. was not the euro zone but an overreaction to the euro zone by way of overregulation at home.

Is Banking Bad? — When I spoke at Swarthmore College recently, I was startled by one question: Is it immoral for students to seek banking jobs? The corollary question, with Mitt Romney’s business career under attack even by staunch Republicans, is this: Is it unethical to make millions in private equity? My answer to both questions: no. I’ve been sympathetic to the Occupy Wall Street movement, but, look, finance is not evil. Banking has contributed immensely to modern civilization. By allocating capital to more efficient uses, banking laid the groundwork for the industrial revolution and the information revolution. Likewise, the attacks on private equity seem over the top. Private equity firms like Bain Capital, where Romney worked, aren’t about destroying companies and picking over the carcasses. Rather, the aim is to acquire poorly managed companies, make them more efficient (sometimes by firing people but often by rejiggering the business model) and then resell them at a profit. That’s the merciless, rugged nature of capitalism.

The crisis raises legitimate questions about capitalism - Mohamed El-Erian - Coming from very different perspectives, the columns in the FT ‘Crisis in Capitalism’ series have each provided insights and identified steps that, in their opinion, could make things better. But, is there a way to reach a clear overall conclusion? I think the answer is yes, although the implications are disconcerting. The majority of writers agree that the crisis in capitalism is caused by two distinct failures: the inability of the system to deliver sustained prosperity through economic growth and jobs; and the perception that it is grossly unfair and socially unjust. To fail on one count is a problem. Yet many would have probably glossed over that, especially those who – erroneously in my view – believe that there are rigid trade-offs between efficiency and equity. However, to fail on both counts, and to do so in such a spectacular manner, is indeed a “crisis.” It raises legitimate questions about the model itself.

Should We Trust Paid Experts on the Volcker Rule? - The Volcker Rule was passed as part of the Dodd-Frank financial reform legislation (it is Section 619), and regulators are currently requesting comments on their proposed draft rules to carry it out. Part of the current issue is contentions by some members of the financial services industry that the Volcker Rule will restrict liquidity in markets, pushing up interest rates on corporate debt in particular and slowing economic growth. This assertion rests in part on a report produced by Oliver Wyman, a financial consulting company. Oliver Wyman has a strong technical reputation and is definitely capable of producing high-quality analysis, but its work on this issue is not convincing, for three reasons. (The points below are adapted from my written testimony and verbal exchanges at the hearing.) The report, “The Volcker Rule: Implications for the U.S. Corporate Bond Market,” was commissioned by the Securities Industry and Financial Markets Association, or Sifma, and is available on the Sifma Web page that contains its comment letters to regulators. On Page 36 of the report, the disclaimer begins, “This report sets forth the information required by the terms of Oliver Wyman’s engagement by Sifma and is prepared in the form expressly required thereby.”

Is The Government's Financial Watchdog All Bark And No Bite…In the wake of the economic chaos brought on by the 2008 financial crisis, there have been widespread demands for accountability. And just last month, the Securities and Exchange Commission (SEC) declared that it had taken a bold step to hold certain individuals involved in the meltdown responsible for their actions. On Friday, December 16, the SEC charged six former executives of Fannie Mae and Freddie Mac with securities fraud, accusing them of misleading investors by understating the extent of their exposure to risky subprime mortgage loans. The action was remarkable because so many past SEC enforcement actions have consisted of a “no admit, no deny” settlement with a financial institution, where, without going to trial, the firm agrees to pay a fine—but also avoids either admitting or denying any legal wrongdoing. The SEC’s Director of Enforcement, Robert Khuzami, stated clearly that “all individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country’s investors.” This declaration seemed like a direct response to critics of the agency, who have alleged that it has let the worst of Wall Street’s corporate leaders off the hook. But the SEC’s action, while a welcome development, is probably not the bold move that Khuzami’s statement would suggest—and it’s no indication that personal accountability for the 2008 meltdown has finally arrived.

#Occupy the SEC Submits Letter on Volcker Rule to House Financial Services Committee Hearing (#OWS) - Yves Smith - For those who are fond of depicting Occupy Wall Street as a bunch of hippies with no point of view, counterevidence comes in the letter submitted by the Occupy the SEC subcommittee for a joint subcommittee hearing tomorrow, January 18, of the House Financial Services Committee on the Volcker Rule. The title of the hearing broadcasts that financial professionals are ganging up against the provision: “Examining the Impact of the Volcker Rule on Markets, Businesses, Investors and Job Creation.” The supposed “business” representatives are firm defenders of the financial services uber alles orthodoxy, and there is a noteworthy absence of economists or independent commentators on the broader economic effects. The one non-regulator opponent to the effort to curb the Volcker Rule is Walter Turbeville of Americans for Financial Reform. However, they made the fatal mistake of accepting the banksters’ framing about financial markets liquidity and merely disputed the data submitted.  The letter is well documented and well argued. It goes directly after the financial services industry claim that implementation of a ban on proprietary trading will cause damage by hurting vaunted and mystical “liquidity.” An illustrative extract: Moreover, much of the so-called “liquidity” that the banks have engineered, especially in opaque OTC markets, can be most appropriately termed “artificial liquidity.” As one commentator notes, the “very belief that the proliferation of financial derivatives and securitization techniques has enhanced global liquidity has been [the] core illusion driving the sub-prime bubble in the USA. Occupy Wall Street Volcker Rule Letter to House Financial Services Committee

How’s it going with the Volcker Rule? - Glad you asked. Recall that Occupy the SEC is currently drafting a letter of public comment of the Volcker Rule for the SEC (for background on the Volcker Rule itself, see my previous post). I was invited to join them on a call with the SEC last week and I will talk further about that below, but first I want to give you more recent news.Yves Smith at Naked Capitalism wrote this post a couple of days ago talking about a House Financial Services Committee meeting, which happened Wednesday. Specifically, the House Financial Services Committee was considering a study done by Oliver Wyman which warned of reduced liquidity if the Volcker Rule goes into effect. Just to be clear, Oliver Wyman was paid by a collection of financial institutions (SIFMA) who would suffer under the Volcker Rule to study whether the Volcker Rule is a good idea. In her post, Yves was discussed the meeting as well as Occupy the SEC’s letter to that Committee which refuted the findings of Oliver Wyman’s study.Simon Johnson, who was somehow on the panel even though it was more or less stuffed with people who wouldn’t argue, had some things to say about how much it makes sense to listen to people who are paid to write studies in his New York Times column published yesterday. He also made lots of good arguments against the content of the study, namely about the assumptions going into it and how reasonable they are.

Why You Should Care About the Volcker Rule  - The dense, complex Dodd-Frank provision gets at larger issues of government intervention and systemic risk. All eyes in the financial world turned to Capitol Hill Wednesday to watch lawmakers wrangle over n market-making, BASEL III, proprietary trading and liquidity management. The discussion, involving two subcommittees of the House Financial Services Committee, discussed the Volcker Rule, a proposal that is part of the Dodd-Frank Financial Reform Bill. While the particulars are convoluted and the terminology is dense, Americans outside the realm of high-frequency traders and hedge fund owners have a stake in Wednesday's hearing. Simply put, the Volcker Rule would prevent FDIC-backed financial institutions from engaging in proprietary trading. To simplify it even more, that would limit large, insured banks from making risky investments and potentially threatening the broader financial system.

Why it's time to break up the 'too big to fail' banks – Sheila Bair - America is downsizing. Whether it's the food we eat, the cars we drive, or the houses we live in, Americans are concluding that smaller is better. So what about banks? It would surely be in the government's interest to downsize megabanks. Sen. Sherrod Brown (D-Ohio) continues to push his bill to split apart the largest institutions. Yet with gridlock in Washington, don't count on politicians for a solution. Shareholders, however, have an interest in demanding that big banks split apart. Comparing the valuation for the supersize banks (Citigroup (C), Bank of America (BAC), and J.P. Morgan Chase (JPM)) with their simpler, leaner competitors isn't pretty. Price/earnings per share for the supersizers averages 5.8, compared with 8.1 for smaller, more focused Wells Fargo (WFC) and 8.1 for the bigger regional banks like U.S. Bancorp (USB) and PNC (PNC). More telling is the ratio of share price to tangible book value. For the supersizers, the average is 72% of book, compared with 165% for Wells and 142% for the big regionals.Even though Wells' assets exceed $1 trillion, it has pretty much stuck to its basic business of taking deposits and making loans, and in the process has consistently delivered solid returns.

Too Big to Fail undermines the free market faith - Competition between different ways of organising societies has continued since the end of the cold war. Socialism still suffers from the fatal blow dealt by its past collapse. As a consequence it is seen mainly in grassroots protests such as the Occupy movement. How this might be achieved remains totally unclear – the movement encompasses a variety of issues with one dominant element: an attack on the finance industry. Looking at the evolution of the financial market crisis, the only surprise is that it took so long before a serious movement materialised. The crisis has provided strong arguments for opponents of the financial system. Interventions to avoid its collapse have severely undermined not only confidence in financial markets but also in the market economy as a whole. Once a financial institution has become so big or interconnected that its insolvency threatens the stability of the system, politicians must intervene. The problem of “too big to fail” has made society – more precisely, the taxpayer – hostage to the survival of individual financial institutions. As a result, the basis of free markets has been shaken.

In Citi appeal, who will speak for Rakoff? - In November, as you'll surely recall, Rakoff blocked a negotiated $285 million settlement between the Securities and Exchange Commission and Citigroup over mortgage-linked securities. To say Rakoff had harsh words for the parties would be the understatement of the year. He railed against the bank and regulators and called the SEC's practice of allowing companies to settle cases without admitting or denying wrongdoing far outside the public interest. For good measure, the judge also accused the SEC of being out for a "quick headline" and called the settlement amount "pocket change." The SEC wasn't happy, either: In December the agency appealed Rakoff's order to the U.S. Court of Appeals for the Second Circuit; the appeals court hasn't ruled yet on the threshold question of whether the ruling is even appealable at this juncture. Rakoff himself has said he doesn't think the issue is ripe for appeal and in December declined to issue a stay in the case, which is scheduled for trial in July. Motions are due today to the Second Circuit on the SEC's request for a stay. But when the argument on the merits of Rakoff's opinion goes to the Second Circuit -- and it is sure to go there eventually -- an essential question remains: Will we hear Rakoff's voice, either in the flesh or in spirit? By proxy or in person? Remember, without the judge's involvement, the case is basically an appeal without an adversary. The two parties to the suit, the SEC and Citi, consented to the settlement and both want the Second Circuit to override Rakoff and approve their deal. Their "adversary" -- Rakoff -- is not a party to the case and does not have any enshrined rights as an advocate in the litigation.

Bloomberg News Joins the “Inside Job” Team, Objects to Economics’ Inadequate Conflict of Interest Standards - Yves Smith - It’s surprising and refreshing to see Bloomberg News, via an editorial, take on the way the economics profession has failed to clean up its act not simply in the wake of a massive intellectual failure but after the movie Inside Job highlighted some examples of corruption in the ranks of Famous Economists.  As the Bloomberg piece notes, the American Economics Association has responded to criticism about conflicts of interest, but the remedy is insufficient. The AEA will now require economist making public pronouncements or presenting papers to disclose any funding they received. That’s better than nothing, but short of what is necessary. First, an economist may have a past client that he would very much like to be a future client. So he might be disinclined to ruffle their feathers and might blunt some research findings so as to keep the door open.  Second, the conflicts don’t merely lie with those writing papers, but with those selecting papers for publication and presentation at conferences

Our Morally Bankrupt Government, Justice Part II: Defending the Rule of Law - My last post detailed how the Justice Department abandoned the principle of equality before the law in its Financial Meltdown enforcement efforts. This post focuses on Justice’s efforts–and lack thereof–to defend our legal system and the rule of law it relies on. A couple of housekeeping notes, repeated from part 1: Many at Justice and in the FBI are ethical and moral people who try very hard to do right by the American people. So even though I use the word “Justice” as in Justice Department throughout, my critique does not apply to the people below the very top. Fundamentally only Attorney General Eric Holder and President Obama are responsible our Department of Justice’s enforcement priorities. Attorney General Holder runs the show, but President Obama gave him the job, and can fire him at any time. Holder’s enforcement priorities and strategies therefore must reflect Obama’s priorities.  I don’t care how much who knew about what, how decisions are or were in fact made, or any other framing or excusing of AG Holder & President Obama’s responsibility for our criminal justice priorities. In our democracy the only political control We, the People have on our national criminal enforcement priorities is our vote for President. And an incumbent President’s strongest advertisement of his enforcement priorities is his Attorney General and his record. The buck stops with them, period.

More Evidence that JP Morgan Stuck the Knife in MF Global - 01/19/2012 - Yves Smith - The death of MF Global and JP Morgan’s role in its demise is starting to look like a beauty contest between Cinderalla’s ugly sisters. As much as most market savvy observers are convinced that there is no explanation for how MF Global made $1.2 billion in customer funds went poof that could exculpate the firm, JP Morgan’s conduct isn’t looking too pretty either. Reader Michael C sent a link to a Reuters investigative piece on the MF Global collapse, and it’s a doozy. While in proper journalistic form it is careful about reaching firm conclusions on a post mortem that is still underway, the pattern it has uncovered is not surprising to those of us who are onto JP Morgan. As many, including this blogger, have pointed out, it was JP Morgan that did in the doomed Lehman by withhold $7 billion of cash and collateral. And we’ve written how it used one of its best private clients, billionaire investor and industrialist Len Blavatnik, as a stuffee for toxic subprime debt in summer 2007, when every financial firm was desperate to offload US housing dreck.  The short form of the Reuters story is that JP Morgan, by virtue of being both a lender to MF Global as well as clearing its trades, has a big information advantage and could see how distressed the firm was. MF Global drew down the full amount of a newly-syndicated $1.3 billion credit facility, a huge warning sign.  The Reuters story makes clear that JP Morgan went into “possession is 9/10ths of the law” mode, calling for full compliance with transaction procedures when normal business practice was to be more forgiving. The New York bank offers up the excuse that it lost money to MF Global, but that is not the issue. Any creditor to a bankrupt company will lose money. The issue is whether JP Morgan did anything irregular or impermissible to cut its losses, which in this case appears to have come in no small measure out of the hides of customers.

Mozilo Tied to Loan to Top Lawmaker -- Countrywide Financial Corp. co-founder Angelo Mozilo may have directed the lender to extend preferential treatment on a 1998 loan to Republican Rep. Howard McKeon of California, according to a letter released Tuesday by a senior House Democrat. The letter from Rep. Elijah Cummings (D., Md.) said that Countrywide records obtained as part of a congressional investigation of its VIP loan program indicate that Mr. McKeon was given "a significant discount on his VIP loan as a direct result of personal intervention" by Mr. Mozilo, who ran the mortgage giant at the time. Mr. McKeon is currently chairman of the House Armed Services Committee. Mr. Cummings is the ranking Democrat on the House Oversight and Government Reform

Analysis: The great hedge fund humbling of 2011  - Excuses, excuses and more excuses. Some of the best-known hedge fund managers have offered lots of excuses for underperforming the major stock market indexes last year, with many large funds posting double-digit losses.In letters to investors, managers pointed to things like Europe's debt crisis, a slower-than-expected economic recovery in the United States and unforeseen events like Japan's1 nuclear disaster all coming together to create a tricky trading environment that was characterized by big and often unpredictable swings in stock prices. The result was a humbling year for the $1.7 trillion hedge fund industry, with the average fund dropping 4.8 percent and some stock-focused funds suffering an average 19 percent decline, according to research compiled by Hedge Fund Research and Bank of America2 Merrill Lynch analysts. Investors who sidestepped hedge funds and instead chose mutual funds fared much better. For example, the Vanguard 500 Index fund gained 2 percent, and Pimco's StocksPLUS Long Duration Fund, 2011's best-performing mutual fund, enjoyed a 21.2 percent return.

Where Has All The Money Gone, Pt I, Corporate Profits - Introduction:

1) Rethug Speaker of the House John Boehner says that as a nation, "we're broke"; Rethug presidential candidate Ron Paul claims America "should declare bankruptcy."  I say these two are liars, and at least one of them is crazy.
2) Tyler Cowan says "we are poorer than we think we are," due to mis-measurement of value, which might be true.  I believe his prescription for recovery is generally very bad, though.
3) In comments to my previous Angry Bear post, Bob McManus directed us to the writings of Michael Hudson, where we find his post Democracy and Debt.  This is must reading.  The relevant point here is that the increasing capture of wealth, as rents, by a creditor class impoverishes society in general, and this eventually leads to severe repression, major social upheaval, or both.  I whole-heartedly agree.
4) Jon Hammond's guest post at Angry Bear shows that a more-or-less continuous decrease in real investment has occurred during the post WW II era.
In this series of posts, I intend to show that we are a wealthy nation, but that our wealth  has been increasingly captured by elite creditors, who, in my opinion, are strangling the economy by 1) extracting excessive rents and 2) diverting this wealth to financial tail chasing, rather than real investment.

Who Are the Big Winners in the Great Recession? (Yes, They Exist) - The recent recession has been the most brutal since the Great Depression and has caused enormous hardship for many American families, as well as immense financial problems for governments around the world. As a result, it’s hard to see the downturn that began at the end of 2007 as anything but a catastrophe. With household incomes generally lower and poverty rates significantly higher than they were 10 years ago, it’s easy to feel that everything is falling apart. But amid the wreckage, there are some success stories that are vitally important for the recovery and the future prosperity of America. The big winners of the recent Great Recession have been the largest U.S. corporations. This isn’t simply because they are greedy and rapacious, or because they can steamroller everything in their path. Rather, it reflects the fact that they are in a position to use the recession as a positive opportunity to restructure and become more efficient, while government, small businesses and most American households are forced by circumstances to play defense.

Is Facebook a Central Bank, Too? -  Everything started quietly, in 2009, with the experimental launch of Facebook Credits, billed as “the safe and easy way to buy things on Facebook.” Anyone who chipped in $5 from a Paypal account, Visa card or the like, could do the equivalent of changing money on an overseas trip. Voila! — $5 turned into 50 Facebook Credits. Initially, the Credits-based economy was confined to the virtual world’s trifles. Credits could be spent to buy imaginary gold bars for aficionados of Mafia Wars, or bouquets of virtual flowers for birthday postings on friends’ Facebook accounts. This new form of digital money was cute but essentially useless for mainstream activities. Lately Credits have become more intriguing. Warner Brothers this summer offered movie-goers a chance to watch “Harry Potter” and “The Dark Knight” for 30 Credits apiece. Miramax and Paramount countered with film-viewing offers, too. In a provocative post this week on Inside Facebook, guest blogger Peter Vogel argues that Credits in the next few years will become more of a true currency. Facebook’s 800 million worldwide users represent a lot of buying power. He figures Credits could evolve into commercial mainstays for digital movies and music.

Clearing Houses: The Next Casualty of the Crisis? - Clearing houses—the plumbers of high finance—could become the next casualties of the crisis as regulators insist that banks run their riskiest and private trades through them. At the moment banks conduct over-the-counter trades between themselves: one to one dealings often involving multimillion-euro bets on differences in interest or other rates, the scale and complexity of which can be difficult to track. But with the financial crisis still raging and banks, hedge funds and governments alike faced with unforeseen levels of debt, regulators are now forcing this shadowy, $600-trillion industry into the light. The question being asked by industry insiders is whether the clearing houses, also known as central counterparties (CCPs), are any more secure. "What happens if they go bust? I can tell you the simple answer: mayhem. As bad as, conceivably worse than, the failure of large and complex banks," Paul Tucker, deputy governor of the Bank of England, said in October.

The Rise Of Dark Inventory In Housing And Oil -- I'd like to try a little intellectual exercise. There were two pieces in my mailbox this week that concerned posts at Naked Capitalism. Though their topics have at first glance little to do with one another, there is a term that is pivotal to both. Inventory. When it comes to real estate, it's popularly called "shadow inventory". With regards to commodities, the term "dark inventory" has been coined. While there are plenty of differences in the way the terms are applied, I'm for now intrigued more by - potential - similarities between them. Not that I have the illusion that I can treat this in a way that could even border on comprehensive, don't get me wrong. I want to lift only part of the veil that hides from view what underlies how and why the financial system that rules our economies is going to the dogs: market manipulation. In particular, I'm interested in how both shadow and dark inventory phenomena pervert their respective markets, as well as the entire free market system as a whole, where everyone is supposed to have "full access to information". Something both dark and shadow inventories make impossible. Something the 99% general public are not aware of. At all.

Credit Raters Must Face California Suit - Standard and Poor’s and Moody’s must face charges brought by the California Public Employees Retirement System (Calpers) that seeks compensation for ratings the two companies gave to structured investment vehicles such as mortgage backed securities (MBS). The ruling by California state court judge Richard Kramer in San Francisco rejected arguments that the ratings issued were a protected form of free speech because Calpers presented sufficient evidence that the agencies had made representations “without reasonable grounds to believe they were telling the truth.” Follow up: In the suit which was originated in 2009, Calpers claims they suffered losses that resulted from the rating agencies “wildly inaccurate” of investment vehicles known as SIVs (special investment vehicles). Specified in the suit were specific SIVs that were assembled in 2006 containing primarily subprime mortgages. These investments were given AAA ratings in spite of the fact that they contained mortgages likely to default. According to a legal expert quoted by Bloomberg, the ruling was not on the merits of the case. It apparently was simply denial of a motion to dismiss. However, a third rating agency, Fitch, settled the suit by Calpers in August 2011 and has agreed to provide the plaintiff with documents related to the case.

Payday Loans are First Target of New Consumer Protection Chief - Richard Cordray’s first CFPB hearing will be held today and will focus on the practices of payday lenders. Seventeen states and the District of Columbia already outlaw payday loans, but in all of the others, lenders can and do charge 400% interest or more, on loans against consumers' next paycheck. Under terms of the 2010 Dodd-Frank Act, the CFPB could not regulate payday lenders or other nonbank entities that provide financial products until its director was in place. As Republican senators were blocking Cordray's confirmation, President Barack Obama used a recess appointment to install him last month. Cordray's first order of business was to launch the bureau's nonbank supervision program, from which today's hearing springs. Consumer advocates are very hopeful that the CFPB will use its authority to scrutinize industry loan records and marketing materials and gauge their compliance with federal laws. According to Jean Ann Fox of the Consumer Federation of America, consumer groups also hope that the CFPB will develop new rules regarding industry practices deemed unfair, deceptive and abusive.

ATM charge of the day, Holiday Inn edition - Paul Volcker likes to say that the only worthwhile financial innovation of the past 20 years has been the ATM. So I suppose it was only a matter of time before that, too, was rendered evil. Here, courtesy of Peter Eavis, is how the ATM at the Holiday Inn in Orlando now works — it doesn’t just charge $3 per withdrawal, but rather the higher of $3 or 3%.I’ve never heard of anything like this before, although a bit of Googling turns up one page, aimed at ATM owners, saying that “Adult Entertainment clubs” frequently charge a percentage at their ATMs, and that although anybody going down this path “risks losing some transactions”, on the other hand it’s superior to simply capping the maximum withdrawal amount at some low level.

Trust no one with your money is the tragic legacy of the crisis - The first casualty of war is said to be the truth but, in financial crises, it is trust that dies. While the after-effects of the recent crisis are constantly debated, this deeper issue remains unaddressed. Paul Seabright, a professor at the Toulouse School of Economics, has identified traits that underpin social systems such as money: the capacity to weigh up the costs and benefits of trusting others and the instinct to return favours in kind or seek revenge when trust is betrayed. When it is working well, the system enables strangers to safely deal with each other. But this fragile system, on which the global economy depends, is now at risk of failing.  Money, a mechanism of exchange and a store of value, galvanised modern economies. Debasement of currencies through quantitative easing and artificially low interest rates undermine these functions. This is encouraging interest in alternative paper money, such as the Bavarian Chiemgauer, the Lewes Pound or the BerkShares programme in Massachusetts. The rising value of gold is also evidence of these concerns. Wealthy savers are switching from financial instruments to alternative assets – farmland, fine arts and other collectibles – to preserve the value of their savings. But these savings are locked in unproductive investments and cannot circulate freely.

New Normal on Wall Street: Smaller and Restrained - With firms like Goldman and Morgan Stanley reporting weak results for last year, Wall Street is having to confront doubts about itself. Is this a temporary slump? Or will the moneymakers never get to go back to their high-rolling ways? Many on Wall Street had hoped 2011 would be a year when the investment banks showed that they could still make solid profits in the more sober financial environment that has followed the 2008 crisis. Instead, Goldman Sachs’s earnings fell 67 percent last year; Bank of America’s investment banking operation, which includes Merrill Lynch, suffered a 53 percent decline in net income; and Morgan Stanley’s earnings were down by 42 percent. Some of the forces that weighed on earnings last year — like Europe’s government debt crisis and a sluggish United States economy — could go away. Yet Wall Street still faces permanent pressures on profitability, particularly stricter regulations aimed at making the financial system safer. For instance, Wall Street firms cannot borrow such large amounts of money and make bets with it. With much less of this kind of leverage, the game is changed — perhaps forever.

We’re in the dark about Wall Street pay - It’s bonus season on Wall Street and Goldman’s employees are about to learn their “number,” the annual object of obsession that makes up the bonus portion of their compensation. Depending on the number of zeros attached to that number, Wall Streeters will rejoice, buy big homes or quit in a huff. In turn, many of us will be instantly disgusted by Wall Street’s pay. There’s a problem, though, with anger about Wall Streeters’ paychecks: we know almost nothing useful about the way the industry rewards its employees. A battery of studies have linked Wall Street’s pay practices to skewed incentives, outsized risks and short-termism. Beyond that, though, talking about Wall Street pay becomes an exercise in gossip. Here’s a sample of recent reports: Bloomberg, relying on bank sources and pay experts, reports junior bankers won’t see annual guaranteed salary increases this year. The NYT reports executive compensation experts charge $11,000 for an annual report which helps banks determine how much to pay top traders. Andrew Ross Sorkin posited that pay on the Street will actually be higher this year if you compare it to revenue. . The WSJ declares: “Average pay at Goldman Sachs: $367,057”. It’s a figure that nearly every news organization bandies about, often without caveats.

Morgan Stanley caps cash bonus at $125,000 - Morgan Stanley will limit upfront cash bonuses to $125,000 this year, spreading the bulk of compensation over more than two years in the latest sign of the lower levels and changed structure of Wall Street pay. People familiar with the matter said the most cash bankers could expect in their bonus cheque in February would be $125,000, while chief executive James Gorman and other members of the operating committee would receive no immediate cash. Morgan Stanley declined to comment. Bankers at Morgan Stanley, as with most of their peers, are paid a base salary and a cash bonus as well as deferred cash and stock units. The ceiling on cash payments means that a higher percentage of bonuses will be deferred, though the absolute number is expected to be significantly lower at Morgan Stanley and other banks after a disappointing 2011. Other than the immediate cash, which remains at relatively modest levels compared with the heights of Wall Street pay in the run-up to the 2008 crisis, compensation will be deferred. Half of cash bonuses will be paid in December 2012 and the remainder at the end of 2013, with “claw back” provisions that can theoretically be activated if, for example, a trader’s short-term gains turn into long-term problems. Meanwhile, stock pay-outs will vest over three years.

The Dawn of Lower Pay on Wall St - This week, the venerable investment bank Morgan Stanley stunned a generation of Wall Street bankers and traders by announcing that it was capping cash bonuses for 2011 at $125,000. Its top executives, including the chief executive, James P. Gorman, and his management team, will receive zero cash. For most people, $125,000 is a lot of money, and for people on Wall Street, the cash bonus comes on top of base pay that has increased in recent years. The average base pay for managing directors at Morgan Stanley has risen to $400,000 and to $600,000 at Goldman Sachs. Employees also earn large parts of their bonuses in deferred cash and stock.  But $125,000 is a pittance by Wall Street standards. Citigroup paid Andrew Hall, a star commodities trader, a bonus of $98 million in 2008, the year of the financial crisis. As recently as 2010, many traders and investment bankers were arguing over whether their yearly bonuses should be eight figures rather than seven. Compensation at the 25 largest firms hit a record $135 billion that year, according to an analysis by The Wall Street Journal.

Moody’s: Here are the U.S. Banks Most Exposed to Euro Crisis - The chats between Greece and its creditors in the private sector over the size and scope of its debt haircut broke down Friday, though negotiations will probably resume Wednesday. Probably. But the back-and-forth is not especially reassuring, especially as March 20 draws near. That’s when Greece has to make a 14.4 billion euro bond payment. For a bit of context, RBC Captial Markets’ Gustavo Bagattini writes that a payment of that size equates to about 6.6% of Greece’s GDP. Put simply, Greece won’t have the money unless its European benefactors give it to them. And it gets tougher and tougher to keep handing over billions to Greece, if they fail to deliver on the promises they’ve made to get their finances in order. All of this, brings up the prospect that Greece might not make that payment on March 20. That would be a pretty disorderly default. Nobody knows exactly how it would play out. Will it render any large European bank insolvent? A default like that would trigger payments on credit default swaps. Who wrote them? Is there any one important institution that wrote too many of them to pay? (That would be sort of like what happened to AIG during the financial crisis.) To try to clear up some of the murk around the financial system related to debt of troubled European nations, the SEC recently asked U.S. banks to offer more understandable statements on their holdings of peripheral European debt.

Unofficial Problem Bank List and Quarterly Transition Matrix - Here is the unofficial problem bank list for Jan 13, 2012. (table is sortable by assets, state, etc.) Minor changes were made to the Unofficial Problem Bank List this week. There were two removals and one addition, which leave the list with 969 institutions and assets of $391.2 billion. A year ago, there were 933 institutions with assets of $410.4 billion on the list.With the conclusion of the fourth quarter of 2011, it is time to update the Unofficial Problem Bank List transition matrix. The list debuted on August 7, 2009 with 389 institutions with assets of $276.3 billion (see table). Over the past 29 months, about 57 percent or 222 institutions have been removed from the original list with 136 from failure, 66 from action termination, 19 from unassisted merger, and one from voluntary liquidation. About 35 percent of the 389 institutions on the original list have failed, which is substantially higher than the 12 percent figure usually cited by the media as the failure rate for institutions on the FDIC Problem Bank List. Since the publication of the original list, another 1,089 institutions have been added. However, only 803 of those 1,089 additions remain on the current list as 286 institutions have been removed in the interim. Of the 286 inter-period removals, 165 were from failure, 66 were from an unassisted merger, 51 from action termination, and four from voluntary liquidation.

AIA: Architecture Billings Index increased in December - Note: This index is a leading indicator for new Commercial Real Estate (CRE) investment.  From AIA: Architecture Billings Index Positive for Second Straight Month - After showing struggling business conditions for most of 2011, the Architecture Billings Index (ABI) has now reached positive terrain in consecutive months. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the December ABI score was 52.0, following the exact same mark in November. This score reflects an overall increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 64.0, down just a point from a reading of 65.0 the previous month. . This graph shows the Architecture Billings Index since 1996. The index was unchanged at 52.0 in December. Anything above 50 indicates expansion in demand for architects' services. Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

Government Cuts Pay for Next Fannie, Freddie CEOs - Future chief executives of Fannie Mae and Freddie Mac, the government-run housing finance companies, will receive pay packages worth substantially less than the multi-million-dollar deals granted the current CEOs, the chief regulator for the agencies said on Tuesday. The chief executives of both companies are set to depart sometime this year. Their 2011 annual compensation, which could approach $7 million, has drawn criticism from U.S. lawmakers. The Federal Housing Finance Agency, the regulator for the two mortgage finance firms, in consultation with the U.S. Treasury, has the final say on executive pay at the companies, which have been propped up by $169 billion in taxpayer aid. "FHFA anticipates a substantial decrease in CEO compensation when the new CEOs are hired," said Corinne Russell, an FHFA spokesperson. The pay packages for the CEOs of Fannie and Freddie, which the FHFA approved in consultation with the Treasury Department, have followed the same pattern over the last few years. The pay structure was set in 2009. Currently, both chief executives earn annual base salaries of $900,000. In addition, they each could take home about another $6 million once deferred pay and bonuses are factored in.

Class Action Lawsuit Alleges JP Morgan Engaged in Systematic Document Fabrication to Move Mortgage Losses from Its Books into Mortgage Backed Securities - Yves Smith - To our knowledge, the suit filed by Ernest Michael Bakenie against JP Morgan is the first to accuse a major bank of widespread, systematic residential mortgage documentation and fraud. I don’t have a copy of the filing and am relying on the summary in Courtroom News Service but it is a doozy. (The case is described as a class action, but has yet to obtain class certification by the court). We’ve reported repeatedly of widespread evidence of grotesque procedural abuses as servicers and foreclosure mill lawyers try to cover up for the fact that in many cases, mortgage notes were not transferred properly to securitization trusts, and the rigid way these deals were structured makes it impossible to remedy those failures at this juncture. Absent creating a time machine, the only fix is to fabricate documents that make it appear than things were done correctly. We’ve seen (as in in person) obvious forgeries submitted to the court (signatures obviously Photoshop shrunk to fit) and servicer personnel caught perjuring themselves, yet judges are remarkably unwilling to issue a ruling that hinges on finding that the plaintiff filed phony documents. If this case moves forward, that reticence may change. Remember that filing for bankruptcy puts a “stay” or hold, on all creditor claims. They all go wait while the court determines which creditors get what from the under water borrower. A “motion for relief of stay” by a mortgage lender is tantamount to saying, “Judge, let me grab the house.” The other critical document discussed in this case is a “proof of claim”. Bankruptcy court is all about establishing whether the parties that want a pound of flesh from the borrower are really entitled to it. They are required to submit a “proof of claim” to substantiate their demand.

Who Invests in Agency Mortgage-Backed Securities?  [pie graph via NY Fed]

U.S., Banks Near 'Robo-Signing' Settlement  -  A pending settlement of an investigation into U.S. banks' foreclosure-processing problems would benefit about one million families with cuts in the amount they owe on their home loans, Housing and Urban Development Secretary Shaun Donovan said Wednesday. Administration officials and attorneys general are "very close" to a settlement with major banks of the so-called robo-signing issues after about a year of negotiations, Donovan said at a conference of U.S. mayors meeting in Washington. The reductions in borrowers' principal balances contained in the settlement, Mr. Donovan said, will be "far and away the largest principal reduction of the [housing] crisis" ... For months, officials have said that a settlement is close, only to be frustrated by new hurdles. ... Meanwhile, regional banks are also preparing for an agreement. U.S. Bancorp Inc. said Wednesday that it took a $130 million fourth-quarter charge tied to matters that involve collecting mortgage payments and foreclosing on delinquent home owners.

Insight: Top Justice officials connected to mortgage banks (Reuters) - U.S. Attorney General Eric Holder and Lanny Breuer, head of the Justice Department's criminal division, were partners for years at a Washington law firm that represented a Who's Who of big banks and other companies at the center of alleged foreclosure fraud, a Reuters inquiry shows. Reuters reported in December that under Holder and Breuer, the Justice Department hasn't brought any criminal cases against big banks or other companies involved in mortgage servicing, even though copious evidence has surfaced of apparent criminal violations in foreclosure cases. The evidence, including records from federal and state courts and local clerks' offices around the country, shows widespread forgery, perjury, obstruction of justice, and illegal foreclosures on the homes of thousands of active-duty military personnel. In recent weeks the Justice Department has come under renewed pressure from members of Congress, state and local officials and homeowners' lawyers to open a wide-ranging criminal investigation of mortgage servicers, the biggest of which have been Covington clients. So far Justice officials haven't responded publicly to any of the requests. While Holder and Breuer were partners at Covington, the firm's clients included the four largest U.S. banks - Bank of America, Citigroup, JP Morgan Chase and Wells Fargo & Co - as well as at least one other bank that is among the 10 largest mortgage servicers.

Bending the Rule of Law to Help the Banks: Effort to Draft a National Foreclosure Statue Underway - - Yves Smith - There is a slow moving but nevertheless troubling effort underway to change foreclosure laws across the US. The Uniform Law Commission, the same body that created the Uniform Commercial Code, a model set of laws that sought to harmonize commercial laws in all 50 states, has had two full day public but not well publicized meeting of a “study group” on mortgage foreclosure. Note that it took over a decade to draft the first version of the UCC and a protracted period for it to be implemented by states (most states have adopted the updated version of the UCC, although certain articles of the new version have not been implemented in any states). Given its august history, one would think the ULC would be above political influences. That would appear to be a naive assumption these days. The study committee’s public meetings meetings to solicit opinion from “stakeholders” on “problems” with foreclosures. Curiously enough, these “stakeholder” meetings had no representation of investors and effectively no input from homeowners or consumer advocates (none at the first meeting, and only, at the second, in Washington last week). I got reports from three people who attended the latest session, in Washington, last week, na all were disheartening. Tom Cox, the Maine attorney who broke the robosigning scandal, provided a memorandum that argues that the commission has effectively assumed that the “problems” require a legislative solution:

Call Your Attorney General Today to Oppose Big Obama Push to Get Mortgage Settlement Deal Done -  Yves Smith - We put up a few more stories on the mortgage mess tonight for a reason. It isn’t that we had a sudden explosion of new information on mortgage abuses. It is instead to remind readers that we could turn this blog entirely over to covering mortgage chicanery and not even scratch the surface. And the latest bit of corrupt behavior is that the Obama administration has a full court press on to push the heinous “multi-state” settlement deal over the line. We’ve pooh poohed previous reports from Iowa state attorney general Tom Miller that a deal is just around the corner, since he’s been doing his variant on a Chicken Little act for a full year. But it appears the President wants a talking point, ideally for the State of the Union address or as shortly thereafter as possible.  So this time is different: the administration is putting far more pressure on the dissident and skeptical Democratic attorneys general. And precisely because Tom Miller’s efforts have appeared to be going nowhere, particularly after California AG Kamala Harris left the talks, the grass roots effort to oppose the talks has slackened off. The lack of active opposition leave the AGs feeling more exposed, particularly in light of often misleading press stories. Similarly, the Administration is ramping up “a deal is almost cinched” reports with Obamabot news outlets like NPR. This is a classic deal/salesmans’ tactic: to create the impression of momentum when there is fact is often none.The Democratic attorneys general have been invited to meet in Chicago on Monday, and Shaun Donovan of HUD and a member of the Department of Justice will be putting the heat on. The Republican AGs are getting the same documents the Democrat AGs will receive and will confer by phone.  The attorneys general really need your support. It helps them to hear that their constituents appreciate them standing up to the banks and the Obama administration. PLEASE call them TODAY. Here is a list of phone numbers. If you can’t get through, send an e-mail.

Foreclosure Auctions Show Raw Form of Capitalism - To the unknowing, the few dozen people milling around the picnic tables in front of the Maricopa County courthouse here every day could be jurors on break or scofflaws finally coming to pay a ticket. They tug on cigarettes, sip from big cups of coffee and fidget with their cellphones, often speaking in whispers.  But instead of waiting to meet a judge, they are preparing to bid on the hundreds of foreclosed properties auctioned each week in one of the country’s more colorful public clearinghouses. During the housing boom, when mortgages were being given out with no money down and prices soared, the auctions were a sleepy sideshow. But in the years since, the auctions have grown into a scruffy economic circus where bargain hunters from around the world have scooped up houses often sold for less than half of the value of the mortgage. The auctions look more like a low-end poker game than the floor of the New York Stock Exchange. The bidders and auctioneers, most of them men in their 20s and 30s, are on a clubby first-name basis, and their banter can border on sophomoric. But their trading serves a critical if somewhat heartless function: to find new buyers for houses so they can be fixed up and sold to more stable owners.

Is the “It Takes Forever to Foreclose” Meme a Big Bank Flattering Exaggeration? - - Yves Smith - A story that has increasingly become a fixture in the mainstream media is “It takes X [surprisingly large seeming number] days to foreclose.” The implications of X being a really big sounding number is of course that it is taken to mean that Deadbeats Are Living Rent Free For An Ungodly Amount of Time. This in turn incenses the respectable sorts that are offended at the idea that irresponsible neighbors are getting a break to which they are not entitled.  The premise behind this reaction is wrong. The assumption is that a combination of overloaded courts plus Bad Borrowers Gaming the System is responsible for the length of the process. The reality is more complicated. First, in judicial foreclosure states, and even in a lot of non-judicial states, foreclosure is not a speedy process even in normal times. Second, the assumption is that borrowers are not paying while foreclosures are grinding forward. As many victims of HAMP mods can attest (see here for one example), borrowers in HAMP trial mods were almost without exception told to ignore foreclosure related notices. In fact, as the servicer was processing the trial mod, it was also moving ahead with the foreclosure (and remember, quite a few people were falsely told they had to be delinquent to qualify for a HAMP mod). Unbeknownst to most HAMP participants, if they did not get a “permanent” mod, their lowered trial mod payments would be deemed to be delinquent, and they would be expected to make up the shortfall plus late fees. Thus these borrowers would be treated as having defaulted when they had been making payments and got trapped by the program’s design. Similarly, Adam Levitin and Tara Twomey wrote:….servicers are not incentivized to maximize the net present value of a loan, but are instead incentivized to drag out defaults until the point that the cost of advances exceeds the servicer‘s default income. In other words, servicers are incentivized to keep defaulted homeowners in a fee sweatbox, rather than moving to immediately foreclose on the loan.

Obama to Try Better Smoke and Mirrors to Address Housing Market Woes -- Yves Smith  - If I had Onion-level parody skills, I’d treat the latest story in The Hill on Team Obama’s latest housing headfake masquerading as an initiative by riffing on one of its planned new program. Call it HUMP, Homeowners Upward Mobility Program. In true Ministry of Truth style, mortgage borrowers facing foreclosure would be moved, discreetly, into tent cities that would do Potemkin proud, with names like “Country Club Lane” and “Lake Shore Drive” and painted facades in front of their tents and shanties. Local merchants would praise the new subdivision and the inhabitants would say how nice it was to now be living in a McMansion, even if it was only really a couple of inches deep. But instead you get my normal shtick. The Administration is so far from having a plan that it is only talking about having a plan: “White House signals more aggressive stance to protect homeowners.” It’s a little late to be talking about doing something in January of an election year, particularly when you’ve spent over a year (starting in November 2010 with the coverup known as the Foreclosure Task Force, which dovetailed nicely with the administration basically taking over the attorney general “settlement” talks, but letting Iowa AG Tom Miller get a lot of media profile so as to disguise who was running the show. Now the only thing the Administration could conceivably do is a really big refi program by Fannie and Freddie. Oh, but the Administration already has that happening, sort of. We talked about their new scheme last October:

Occupy the Neighborhood: How Counties Can Use Land Banks and Eminent Domain -  John O'Brien is register of deeds for Southern Essex County, Massachusetts. He is mad as hell and he isn't going to take it anymore. He calls his land registry a "crime scene." A formal forensic audit of the properties for which he is responsible found that:

  • Only 16 percent of the mortgage assignments were valid.
  • Twenty-seven percent of the invalid assignments were fraudulent, 35 percent were "robo-signed" and 10 percent violated the Massachusetts Mortgage Fraud Statute.
  • The identity of financial institutions that are current owners of the mortgages could be determined for only 287 out of 473 (60 percent).
  • There were 683 missing assignments for the 287 traced mortgages, representing approximately $180,000 in lost recording fees per 1,000 mortgages whose current ownership could be traced.

An electronic database called MERS (Mortgage Electronic Registration Systems) has created defects in the chain of title to over half the homes in America. Counties have been cheated out of millions of dollars in recording fees, and their title records are in hopeless disarray. Meanwhile, foreclosed and abandoned homes are blighting neighborhoods. Straightening out the records and restoring the homes to occupancy is clearly in the public interest, and the burden is on local government to do it. But how? New legal developments are presenting some innovative alternatives.

MERS, the law, and the State - The current version of Harpers  has a terrific article by Christopher Ketcham on the MERS mess, which NC has done so much to bring to the attention of the public. I’m going to excerpt and contextualize two portions of the article. First, Ketcham interviews foreclosure activist Vermont Trotter of Coeur D’Arlene, Idaho on the “clouded title” problem. I’m a connoisseur of the worst case scenario, and this is a doozy: Trotter told me that the “true horror” of MERS was what it could do to homeowners who were current on their mortgage payments: The “good” homeowners who still had a job and weren’t facing foreclosure. If there was no legal record of which bank owned their debt [see below if you haven't been following NC on MERS], and the MERS-mortgaged homeowners had been making payments, then who exactly was the homeowner paying? The checks, clearly, were going out every month, cashed by a bank that claimed to own the note. But without the legal record to certify the owner of the note, it followed that the bank could not legally issue the homeowner a clear title to the home. In effect, a homeowner with MERS on his mortgage could spend thirty years paying a lender that wasn’t the owner of the note. …. “[Y]ou’d always be looking over your shoulder,” said Trotter. “Some other lender could come and say ‘No, we owned that note. You paid the wrong guy.” “WIth MERS”, he said, “nobody owns anything. You’re only paying rent.” That’s not a bug. It’s a feature. At least for a rentier, although not necessarily for Trotter.

Time to Concede Home "Ownership" is a Fraud; Fixing the "Un-Real Estate Mess" - Every week someone sends me an idea on how to fix various housing problems.  Many want home prices to stop falling and many others want to bail out homeowners because banks were bailed out (as if two wrongs make a right). Others want to stop foreclosures even though the very best thing for most of the people in trouble would be to shed the albatross by walking away. The one thing they all have in common is a misguided proposal to bailout someone at the expense of someone else. I have long-stated the best thing to do is nothing. Indeed if nothing is done, home prices will drop low enough that investors will want to buy them. Delays in foreclosures only serve to delay the housing recovery. Last week I received a different kind of proposal that merits a much closer look than all of the various bailout proposals I have seen to date. My friend "BC" writes ... The only long-term durable solution to the unreal estate mess is to cease further securitization by agencies and shut them down. It's time to concede that "homeownership" is a fraud. When there is $16 trillion in mortgage and consumer debt outstanding and an estimated $16 trillion in residential unreal estate value, with the risk of another 20% decline in prices, there is no "ownership"  Rather, virtually everyone with a mortgage is renting debt-money from a lender and leasing the land from a local taxing authority. The mortgagees have a "dead pledge" in the value of the debt owed, not an "asset". The lenders and taxing authorities are the "owners" of a lien (a bond or constraint on the real property), which entitles them to income in the form of compounding interest and tax receipts in perpetuity.

MBA: Mortgage Refinance Applications increase sharply - From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey:The Refinance Index increased 26.4 percent from the previous week to its highest level since August 8, 2011. The seasonally adjusted Purchase Index increased 10.3 percent from one week earlier to its highest level since December 12, 2011.  "Interest rates dropped last week due to continuing anxieties regarding the fragile economic situation in Europe," , "With mortgage rates reaching new lows, refinance volume jumped and MBA's refinance index reached its highest level in the last six months. Purchase activity also increased as buyers returned to the market after the holiday season." The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 4.06 percent from 4.11 percent ... The purchase index increased last week, and the 4-week average also increased. This index has mostly been sideways for the last 2 years - and even with the recent increase, this is at about the same level as in 1997.

FNC and Zillow House Price Indexes for November - Note: The Case-Shiller House Price index for November will be released Tuesday, Jan 31st. CoreLogic has already reported that prices declined 1.4% in November (NSA, including foreclosures).
• Today from FNC: November Home Prices Decline 0.4% Based on the latest data on non-distressed home sales (existing and new homes) through November, FNC’s national RPI shows that single-family home prices fell in November to a seasonally unadjusted rate of 0.4%. All three RPI composites (the National, 30-MSA, and 10-MSA indices) show month-to-month declines in November, ranging from -0.4% at the national level to -0.9% across the nation’s top 10 housing markets. ... The FNC index tables for three composite indexes and 30 cities are here.
• Last week From Zillow: U.S. Home Values Unchanged in November The Zillow Real Estate Market Reports, released today, show home values remained essentially flat from October to November falling only 0.1 percent to $147,800, representing a 4.6 percent decline on a year-over-year basis. ... Home values are back to late 2003 levels and mortgage rates are still below 4 percent for a 30-year fixed rate mortgage.

In nominal terms, Case-Shiller and CoreLogic show prices are back to 2003 levels too. In real terms (and as a price-to-rent ratio), prices are back to 2000 levels. Even though there are some differences between the indexes, on a year-over-year basis they are fairly close with CoreLogic down 4.3%, FNC down 4.9%, and Zillow down 4.6%.

Bartiromo: JPMorgan's Jamie Dimon sees housing at bottom - This year kicked off with some improving economic data on jobs, on retail spending and even a rally in the stock market. So does the good news suggest the economic recovery is finally taking hold and 2012 will be a positive new day for job seekers? For some answers, I caught up with Jamie Dimon, who heads the USA's largest bank with $2.2 trillion in assets and operations in more than 60 countries. In a series of interviews during his firm's health care conference last week, the CEO of JPMorgan Chase was optimistic and said the troubled housing market has bottomed. He pointed to innovation in health care as a testament to America's strength and heft. Our interview follows, edited for clarity and length.

From Bottom Up, Signs of Housing Recovery -  Across Westchester, the number of buyers in contract to buy homes priced less than $500,000 at the end of 2011 rose by nearly 40% compared to a year earlier, according to a market report issued by the broker Houlihan Lawrence. Sales weakened at higher price points.  Analysts have noted a similar pattern in New Jersey. Sales have picked up due to buyers of properties priced less than $400,000, according to data compiled by the Otteau Valuation Group. The number of such contracts signed during the fourth quarter rose by 11.3% compared to the same period a year earlier.  Analysts said housing-market recoveries often begin at the bottom.  "It is nice when you get the high end of the market doing well," , "but in our experience the strong markets get healthy from the bottom up."

Follow The Bread Crumb Trail As Deflated Wall Street Bonuses Crush NYC Residential Real Estate - Roughly a year ago, I explained to those who subscribe to BoomBustBlog that NYC real estate ever finished correcting. As a matter of fact, it has some ways to go, as does DC real estate. The reason why NYC and DC markets levitated was because the Fed pumped trillions into Wall Street to reflate the bubble which was (and still is) the zombie banking system. DC saw federal spending attempt to replicate organic economic growth. Are any of these methodologies sustainable or practical. Do bulldogs have pleasant breath? Bloomberg reports The Riskiest Bank on the Street and it goes a little something like this: Morgan Stanley Said to Limit Cash Bonuses, Increase Deferrals: Morgan Stanley (MS), owner of the world’s biggest brokerage, is capping immediate cash bonuses at $125,000 as the firm curtails pay and defers more compensation for senior executives, according to a person briefed on the plans.

Existing Home Sales in December: 4.61 million SAAR, 6.2 months of supply - The NAR reports: December Existing-Home Sales Show Uptrend The latest monthly data shows total existing-home sales rose 5.0 percent to a seasonally adjusted annual rate of 4.61 million in December from a downwardly revised 4.39 million in November, and are 3.6 percent higher than the 4.45 million-unit level in December 2010. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in December 2011 (4.61 million SAAR) were 5.0% higher than last month, and were 3.6% above the December 2010 rate. The second graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 2.38 million in December from 2.62 million in November. This is the lowest level of inventory since March 2005. The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Inventory decreased 21.2% year-over-year in December from December 2010. This is the tenth consecutive month with a YoY decrease in inventory. Months of supply decreased to 6.2 months in December, down from 7.2 months in November. 

U.S. home sales rise for third month - Sales of previously owned homes in the United States surged five percent in December from November, industry data showed Friday, in a report that pointed to recovery in the housing market. Sales of so-called “existing” homes rose to an annual rate of 4.61 million from a downwardly revised 4.39 million in November, theNational Association of Realtors said. The NAR number topped analysts’ average estimate of 4.55 million. “The pattern of home sales in recent months demonstrates a market in recovery,” said Lawrence Yun, the NAR’s chief economist. “Record low mortgage interest rates, job growth and bargain home prices are giving more consumers the confidence they need to enter the market.” It was the third consecutive month-on-month gain, and the December sales pace was up 3.6 percent from December 2010.

Existing Home Sales: Inventory and NSA Sales Graph - The NAR reported inventory fell to 2.38 million in December. This is down 21.2% from December 2010, and this is about 16% below the inventory level in December 2005 (2005 was when inventory started increasing sharply). Inventory is about 7% above the level in December 2004. This decline in inventory was a significant story in 2011. The following graph shows inventory by month since 2004. In 2004 (black line), inventory was fairly flat and declined at the end of the year. In 2005 (dark blue line), inventory kept rising all year - and that was a clear sign that the housing bubble was ending. This year (dark red) inventory is at the lowest level since 2004. The following graph shows existing home sales Not Seasonally Adjusted (NSA). The red columns are for 2011.  Sales NSA are slightly above December 2009 and December 2010, but sales are far below the bubble years of 2005 and 2006. The level of sales is still elevated due to investor buying. The NAR noted:  All-cash sales accounted for 31 percent of purchases in December, up from 28 percent in November and 29 percent in December 2010. Investors account for the bulk of cash transactions. Investors purchased 21 percent of homes in December, up from 19 percent in November and 20 percent in December 2010.

Housing Starts decline in December - From the Census Bureau: Permits, Starts and Completions: Privately-owned housing starts in December were at a seasonally adjusted annual rate of 657,000. This is 4.1 percent below the revised November estimate of 685,000, but is 24.9 percent (±18.3%) above the December 2010 rate of 526,000. Single-family housing starts in December were at a rate of 470,000; this is 4.4 percent above the revised November figure of 450,000. Privately-owned housing units authorized by building permits in December were at a seasonally adjusted annual rate of 679,000. This is 0.1 percent below the revised November rate of 680,000, but is 7.8 percent above the December 2010 estimate of 630,000. The decline in December was related to the volatile multifamily sector. Most of the increase this year has been for multi-family starts, but single family starts have been increasing recently too. Single-family starts increased 4.4% to 470 thousand in December - the highest level in 2011, and the highest since the expiration of the tax credit. The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that total housing starts have been increasing a little lately, but have mostly moved sideways for about two years and a half years.. Multi-family starts increased in 2011 - although from a very low level. Single family starts appear to be increasing lately, but are still mostly "moving sideways".

December Housing Starts MISS Expectations In A Big Way - Housing starts fell 4.1% in December, to 657K on an annualized basis.  Analysts were predicting that they would fall from 685K to 680K. That would have amounted to a drop of 0.7% from November. Last month, housing starts smashed expectations, jumping 9.3% month over month. We've seen a slew of positive housing data recently, and this negative number could be a sign that the positive trend has been overblown. Or not. From the Census Bureau: Privately owned housing starts in December were at a seasonally adjusted annual rate of 657,000. This is 4.1 percent (±11.6%)* below the revised November estimate of 685,000, but is 24.9 percent (±18.3%) above the December 2010 rate of 526,000. Single-family housing starts in December were at a rate of 470,000; this is 4.4 percent (±11.3%)* above the revised November figure of 450,000. The December rate for units in buildings with five units or more was 164,000.

Housing starts fell in December, capping a grim year for housing - U.S. housing starts fell in December as groundbreaking on rental properties posted a big decline, splashing some cold water on hopes the still-weak housing sector could boost economic growth this year. The Commerce Department said Thursday housing starts fell 4.1 percent last month to a seasonally adjusted annual rate of 657,000 units. Economists polled by Reuters had forecast housing starts edging down to a 680,000-unit rate in December. A decline in housing starts last month contributed to the depressed number of homes started last year and offered a stark reminder that a housing recovery is a long way off. 2011 with a third straight year of dismal home building and the worst on record for single-family home construction. Builders started just 606,900 homes last year. That is only slightly better than the previous two years, and it is roughly half the 1.2 million that economists equate with healthy housing markets. Last year was also the worst for single-family home construction on records dating back a half-century. Builders started just 428,600. In a good economy, builders break ground on about 840,000.

Comparing New Home Sales and Housing Starts - A frequently asked question is how do new home sales compare to single family housing starts (both series are from the Census Bureau). This graph below shows the two series - although they track each other, the two series cannot be directly compared. For starts of single family structures, the Census Bureau includes owner built units and units built for rent that are not included in the new home sales report. Comparing New Home Sales and New Residential Construction: We categorize new residential construction into four intents, or purposes:
Built for sale (or speculatively built): the builder is offering the house and the developed lot for sale as one transaction this includes houses where ownership of the entire property including the land is acquired ("fee simple") as well as houses sold for cooperative or condominium ownership. These are the units measured in the New Residential Sales series.
Contractor-built (or custom-built): the house is built for the landowner by a general contractor, or the land and the house are purchased in separate transactions.
Owner-built: the house is built entirely by the landowner or by the landowner acting as his/her own general contractor.
Built for rent: the house is built with the intent that it be placed on the rental market when it is completed.

Housing: Record Low Total Completions in 2011 - Multifamily starts were up 60% in 2011 over 2010 - from 104,300 in 2010 to 167,400 in 2011. This will probably increase further in 2012 since 167 thousand is still a fairly low level of starts. Single family starts were down 9% in 2011 to 428,600. This is the lowest level of single family starts since the Census Bureau started tracking starts in 1959!  Since it typically takes over a year to complete a multifamily building, and since multifamily starts were are record lows in 2009 (and close in 2010), there were a near record low number of multifamily completions in 2011. The following graph shows the lag between multi-family starts and completions using a 12 month rolling total. The blue line is for multifamily starts and the red line is for multifamily completions.  The rolling 12 month total for starts (blue line) increased all year. Multifamily starts were at 167.4 thousand units in 2011. Completions (red line) appear to have bottomed. This is probably because builders rushed some projects to completion because of the strong demand for rental units. Total completions were at a record low in 2011 (as were single family completions), and the U.S. added the fewest net housing units to the housing stock since the Census Bureau started tracking completions in the '60s. Below is a table of net housing units added to the housing stock since 1990. Note: Demolitions / scrappage estimated.

Residential Remodeling Index declines seasonally in November -- The BuildFax Residential Remodeling Index was at 137.9 in November, down from 147.6 in October, but up 33.5% from November 2010. This is based on the number of properties pulling residential construction permits in a given month. From BuildFax Remodeling Index: The Residential BuildFax Remodeling Index rose 33.5% year-over-year in November--for the twenty-fifth straight month of growth--to 137.9. However, this also marked the first month-over-month drop since February, likely due to seasonal factors. Residential remodels in November were down month-over-month 9.7 points (6.6%) from the October value of 147.6, and up year-over-year 34.6 points from the November 2010 value of 103.3. ... " Although the index declined in November, this is the highest level for a November since the index started in 2004, even above the levels from 2004 through 2006 during the home equity ("home ATM") withdrawal boom. Note: Permits are not adjusted by value, so this doesn't mean there is more money being spent, just more permit activity. Also some smaller remodeling projects are done without permits and the index will miss that activity. Since there is a strong seasonal pattern for remodeling, the second graph shows the year-over-year change from the same month of the previous year. The remodeling index is up 33.5% from November 2010.

Home-Builder Sentiment Hits Highest Level Since Mid-2007 - U.S. home builders’ sentiment rose in January to the highest level in 4 1/2 years, the latest in a series of signs that the housing market is finally beginning to recover after a prolonged bust. The National Association of Home Builders said Wednesday its housing market index rose to 25 from 21 in December, reaching its highest point since June 2007. It was the fourth-straight monthly increase. The results were better than expected, as economists polled by Dow Jones Newswires had forecast a reading of 22. Some analysts see the results, combined with other recent data, as a sign that the U.S. housing market is gradually emerging from a 5 1/2-year bust that helped thrust the economy into the worst recession in decades. “This is not another false dawn; it’s the real deal,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics. With mortgage rates hovering near the lowest recorded levels and the job market improving, “people clearly are more willing to take the plunge into housing,” he said, Still, despite the recent trend of increases, confidence is low from a historical perspective. A reading above 50 in the NAHB index would mean more builders view conditions as good rather than poor. The gauge hasn’t been in positive territory since April 2006.

NAHB Builder Confidence index increases in January - The National Association of Home Builders (NAHB) reports the housing market index (HMI) increased in January to 25 from 21 in December. Any number under 50 indicates that more builders view sales conditions as poor than good. From the NAHB: Builder Confidence Rises Fourth Consecutive Time in January Builder confidence in the market for newly built, single-family homes continued to climb for a fourth consecutive month in January, rising four points to 25 on the NAHB/Wells Fargo Housing Market Index (HMI), released today. This is the highest level the index has attained since June of 2007.  This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the January release for the HMI and the November data for starts (December housing starts will be released tomorrow). Both confidence and housing starts had been moving sideways at a very depressed level for several years - but confidence has been moving up.

Saving and Investment: My (Keynesian) Take - I think I am articulating a model that is in the spirit of Keynes, which probably puts me on the Brad DeLong and Paul Krugman side of the debate.  The basic idea is this: On the one hand, if I stop going to Chinese restaurants and start going to Mexican restaurants, we know that workers laid off by the Chinese restaurants can be hired by the Mexican restaurants. Not a problem. But on the other hand, if I stop going to Chinese restaurants because I want to save more, how does my saving get translated into specific demand for future goods? Perhaps nobody knows what I want to consume in the future, so that my saving does not create effective demand. I do not want to take the Nick Rowe route, which is to say that I hold my savings as money, and since nobody produces money, that reduces demand. I have never liked that story. Similarly, I don't like Krugman's babysitting co-op model.  Instead, I am going to put together a story that has no financial assets or banks at all. It is my version of "what Keynes really meant." The rest below the fold.

Saving Equals ... Inventory? - I’ve noticed that many others, like me, are puzzled by the mechanics of the Saving=Investment accounting identity. How do household savings get instantly and perfectly intermediated, in a period, into investment spending — the purchase/creation of long-term productive fixed assets? An Aha! for me: According to Krugman’s textbook, they don’t. If people spend less than producers expect in a given year, the producers create too much product, and it builds up their inventories. That’s easy to understand. (It’s easier if you think about the producers instead of the car-dealer intermediaries that Krugman talks about.)

Credit card debt drops 11% -- Consumers whacked down credit card debt by 11% last year, and average debt loads dropped in every state. The average credit card balance for 2011 was $6,576, down from $7,404 the previous year, according to a report from credit tracking and financial education website, based on data from more than 300,000 of its users. The decline came as weak consumer confidence kept spending in check and banks continued to tighten their lending and slash credit limits for many existing customers, said Ken Lin, CEO of Credit Karma. Credit card debt had eased in 2010 as well, slipping 7% during the year.  The positive trend may not last for long, however. As the economy continues to rebound, Lin said debt is likely to rebound with it, adding that banks have recently started loosening credit requirements again. "I believe we are just about at the bottom of the debt trend," said Lin.

Drop in retail sales forecast -- U.S. retail industry sales growth will shrink to 3.4 percent this year, hampered by the lingering housing slump, a trade group forecast. Sales will total $2.53 trillion in 2012 after inflation helped boost growth to a greater-than-projected 4.7 percent last year, the Washington, D.C.-based National Retail Federation said today. The 10-year average annual growth rate was 3.1 percent, said Ellen Davis, a spokeswoman for the trade group. This year's expansion will be "incremental, modest," NRF chief executive Matthew Shay said in an interview today at the trade group's annual convention in New York City. The housing slump is the "biggest drag" on the U.S., he said. "The economy is not growing at the pace we would hope," Mr. Shay said. "Consumers are finding a way to get out there and spend. But the consumers are different today. They are much more focused on value. They are much more informed than they ever were." Holiday sales grew a greater-than-predicted 4.1 percent last year, the NRF reported last week. Retailers, including J.C. Penney Co. and Williams-Sonoma Inc., have reduced profit forecasts for the fourth quarter because of the promotions they used to drive those sales.

Spend, Spend, Spend. It’s the American Way. - GRIDLOCK in Congress implies that there won’t be any collective decision to spend more as a nation to get out of our slump. Increases in deficit spending seem unlikely, and so does the balanced-budget stimulus I’ve been advocating in this column. For now, we must pin our hopes for a robust recovery on the willingness of millions of consumers to spend substantially more.  But what really drives consumer spending? Economists are reasonably good at divining how consumers tend to react to changes in government policy, but in the absence of such policy, and when the economy is in the doldrums, they aren’t very good at predicting spending shifts. A new book, “Beyond Our Means: Why America Spends While the World Saves” (Princeton University Press), offers some insights. Professor Garon says that our willingness to spend is driven most prominently by our reaction to major events in our collective memory, including wars and depressions, and that it also depends on national character, which differs across countries and through time.  The United States, however, is something of an exception. More than any other country, Professor Garon argues, it elevates consumer spending to a virtue, sometimes minimizing saving. There is even an idea here that it is patriotic to spend, rather than to save.

Online Shoppers Are Rooting for the Little Guy - Harold Pollack used to spend $1,000 a year on Amazon, but this fall started buying from small online retailers instead. The prices are higher, but Dr. Pollack says he now has a clear conscience.  “I don’t feel they behave in a way that I want to support with my consumer dollars,” Giant e-commerce companies like Amazon are acting increasingly like their big-box brethren as they extinguish small competitors with discounted prices, free shipping and easy-to-use apps. Big online retailers had a 19 percent jump in revenue over the holidays versus 2010, while at smaller online retailers growth was just 7 percent.  The little sites are fighting back with some tactics of their own, like preventing price comparisons or offering freebies that an anonymous large site can’t. And in a new twist, they are also exploiting the sympathies of shoppers like Dr. Pollack by encouraging customers to think of them as the digital version of a mom-and-pop shop facing off against Walmart: If you can’t shop close to home, at least shop small.

 Not So Global - Krugman - Barry Ritholtz sends us to a San Francisco Fed paper from last summer that makes a point on which many people seem confused: despite globalization and all that, the bulk of a consumer dollar spent in America falls on American-produced goods and services. The reason this matters — or at least one reason it matters — is for discussion of austerity, stimulus, and all that. I often get comments along the lines of “Well, maybe stimulus worked back in the old days, but now it just means spending more on stuff from China”. In reality, that’s nowhere near true. Why? For one thing, most consumer spending is on services, few of which are really tradable. For another, even if the thing you buy in WalMart says “Made in China”, the price includes a lot of US value-added in the form of transportation and retailing costs. Here’s the paper’s estimates of the share of personal consumption expenditure (PCE) spent on imports in general and imports from China:

LA area Port Traffic increases slightly year-over-year in December - The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).  Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported - and possible hints about the trade report for November. LA area ports handle about 40% of the nation's container port traffic. To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average.  On a rolling 12 month basis, inbound traffic is up 0.2% from November, and outbound traffic is up 0.1%.  On a rolling 12 month basis, outbound traffic is moving "sideways" for the last couple of months, and it appears inbound traffic has halted the recent decline. The 2nd graph is the monthly data (with a strong seasonal pattern for imports).  For the month of December, loaded inbound traffic was up 2% compared to December 2010, and loaded outbound traffic was up 1% compared to December 2010.  Exports have been increasing, although the rate of increase has slowed.  Imports have been somewhat soft - this is the first month with a year-over-year increase since May 2011.

US Intermodal Traffic Surges 7.4 Percent - Intermodal volume hauled by major U.S. railroads surged 7.4 percent year-over-year in the week ending Jan. 14 and skyrocketed 18.2 percent from the week prior, suggesting American companies see strong demand this year. Carload traffic rose 5.5 percent year-over-year and 8.2 percent from the prior week, a sign manufacturers have a similar confidence degree of confidence, according to the Association of American Railroads. The strong carload suggests the 0.4 percent ramp up in U.S. industrial production in December will carry through into January. Seventeen of the 20 carload commodity groups reported year-over-year increases, with crushed, stone, sand and gravel traffic up 32.3 percent; and motor vehicle and equipment shipments up 31.5 percent. Grain shipments fell 10.1 percent in the same period.

Americans cut consumption in face of record gasoline prices - Today, the U.S. average price for a gallon of regular gasoline is 28.5 cents a gallon higher than it was a year ago, according to the AAA Fuel Gauge Report. In California today, prices are 34.1 cents a gallon higher than those of last year. But if the Martin Luther King is any guide, the fuel bite today won't be any worse on American wallets than it was last year. The reason is that U.S. drivers will burn about 36 million fewer gallons of gasoline today than they did last year, when they were bought about 370 million gallons, according to the Oil Price Information Service (OPIS) in New Jersey. Today's consumption mark is even further below the pre-recession threshold of 391 million gallons a day set in January of 2008.

Vital Signs: Gas Prices Moving Back Up -- Gasoline prices have been climbing. The average price of a gallon of gasoline in the U.S. rose to $3.45 this week, increasing for the fourth straight week. Prices slipped to $3.29 a gallon in December, but have been on the rise since then along with the price of oil. Gasoline prices are still much lower than the $4.018 seen in May, when oil prices spiked amid the Arab Spring uprisings.

Gas prices may get close to $5 in some spots - The new year has greeted Americans with the highest January gas prices ever, and some analysts say prices could get close to $5 a gallon in some areas during the warm-weather driving season. The average price for a gallon of regular unleaded gasoline in the United States on Monday was $3.39, according to motorist group AAA. That's nearly 30 cents higher than a year ago. The national average reached a peak of $4.114 in July 2008. Experts say there are a variety of factors placing upward pressure on prices at the pump. For one thing, the U.S. economy appears to be in a modest recovery1, heralding a likely uptick in gasoline demand. For another, the possibility of conflict with Iran2 over its threat to close the Strait of Hormuz has driven a rally in crude oil prices3 over the past few weeks, increasing input costs for refineries.

CPI: Inflation remains in check —-- Inflation overall held steady last month, as declining gas prices balanced out higher prices for other items. The government's key measure of inflation, the Consumer Price Index, showed prices were virtually unchanged from November to December. It marked the second month in a row CPI has barely moved. In the past 12 months, prices rose 3%, a slowdown from a 3.4% annual inflation rate in November. The numbers are seasonally adjusted. Gas prices were a key driver, falling 2% during the month. That was enough to make up for slight price hikes on food, medical services and rents. Food prices rose 0.2% in December. Medical care costs rose 0.4% and rents rose 0.3%. But relief at the gas pump may prove only temporary. While gas prices did fall in December, they have since gone up in January1 amid stronger U.S. economic data and tension with Iran.

CPI FLAT IN DECEMBER: Below Economist Expectations: Consumer prices were flat for the month of December, but rose at the greatest pace on a yearly basis since 2007, the Bureau of Labor Statistics said this morning. Excluding volatile categories like food and energy, the index gained 0.1%, in line with expectations. "Similar to last month, the energy index declined in December and offset increases in other indexes," the BLS said in its statement. "The gasoline index declined for the third month in a row and the household energy index declined as well. The food index rose in December, with the index for food at home turning up after declining last month. Services were one of the few categories that increased in December, with costs for shelter, transportation and medical care up 0.2%, 0.1%, and 0.4%, respectively. Over the course of the year, prices for food accelerated, gaining 4.7% in 2011 against a 1.5% increase in 2010. Gasoline rate growth slowed over the same period, but still jumped nearly 10%.

Are falling prices good news? - INFLATION, we're led to believe from an early age, is bad. And sometimes it is. Reckless monetary expansion when an economy is close to potential simply leads to accelerating price increases which can cause anything from moderate economic pain to total economic disaster. But it is widely accepted that a low and stable rate of inflation is a good thing, both because it provides a cushion against deflation in the face of a recession and because it facilitates real wage adjustments in the presence of downward nominal wage rigidities. Further, it isn't clear that a low and stable inflation rate of 5% is really any more problematic than a low and stable inflation rate of 2%.Several important economies have been reporting new inflation figures this week, and coverage tends to orient itself around the narrative with which we're all familiar and comfortable. Officials in Britain are greeting continued signs of falling inflation with sighs of relief. Annual inflation in the British economy peaked at 5.2% in September and has since fallen steadily, resting now at a 4.2% annual pace. In America, annual consumer-price inflation has fallen from 3.9% in September to 3.0% in December. Annual core inflation seems to have leveled off at 2.2%.

Low Natural Gas Prices Help Families, Businesses - "The market has been overwhelmed with gas," says Anthony Yuen, a commodities analyst at Citibank. He and other analysts expect the price to average near $3 for all 2012. If the weather stays mild, the price could even dip below $2, a level not seen since 2002. Cheap natural gas is mainly a good thing for the economy:

  • • More than half of U.S. households use natural gas for heat, and a quarter of the nation's electricity is made from it. Falling heating and electric costs are offsetting the impact of high gasoline prices and enabling families and small businesses to spend on other things. Residential gas and electric customers are saving roughly $200 a year, according to a study by Navigant Consulting.
  • • For companies that make plastics, fertilizer and other chemicals derived from natural gas, falling prices are a windfall. The same goes for makers of products from steel to bricks to beer. All use a lot of natural gas to heat their furnaces. U.S. manufacturers are becoming more competitive globally as a result of the country's cheap natural gas, industry officials say."

The GOP’s Efficiency Deficit -Since 1989 the U.S. Federal reserve has calculated capacity utilization rates. The data are startling. Since 1990 the average total industry capacity utilization rate rests at 79.7% and since the beginning of the recession, 75.4%. The nadir occurred in 2009 with an average annual rate of 69.2%. What does this all mean? And why should it matter? This obscure measurement of capacity, and therefore productivity, suggests that nearly 25% of fixed assets (raw materials) and factory machinery is collecting dust at a time when 15.2% of the working population –23 million Americans—is without work. (According to the Bureau of Labor Statistics, “the U-6 unemployment rate counts and describes not only people without work seeking full-time employment, but also counts marginally attached workers and those working part-time for economic reasons. Note that some of these part-time workers counted as employed by U-3 could be working as little as an hour a week. And the marginally attached workers include those who have gotten discouraged and stopped looking, but still want to work.”) Such dispiriting examples of inefficiency, of course, also occur against the backcloth of corporate protectionism of profits. According to the U.S. Federal Reserve, American businesses are currently sitting on at least $1.9 trillion in profits, or surplus. This is the highest figure recorded since the government began keeping data in 1959.

Industrial Production increased 0.4% in December, Capacity Utilization increased -  From the Fed: Industrial production and Capacity Utilization Industrial production increased 0.4 percent in December after having fallen 0.3 percent in November. For the fourth quarter as a whole, industrial production rose at an annual rate of 3.1 percent, its 10th consecutive quarterly gain. In the manufacturing sector, output advanced 0.9 percent in December with similarly sized gains for both durables and nondurables. The output of utilities fell 2.7 percent, as unseasonably warm weather reduced the demand for heating; the output of mines moved up 0.3 percent. At 95.3 percent of its 2007 average, total industrial production in December was 2.9 percent above its level of a year earlier. The capacity utilization rate for total industry rose to 78.1 percent, a rate 2.3 percentage points below its long-run (1972--2010) average.  This graph shows Capacity Utilization. This series is up 10.8 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 78.1% is still 2.3 percentage points below its average from 1972 to 2010 and below the pre-recession levels of 81.3% in December 2007. The second graph shows industrial production since 1967. Industrial production increased in December to 95.3, and previous months were revised up slightly.

U.S. factory output soars in December - U.S. factory output surged in December by the most in year. Stronger demand for business equipment, vehicles and energy offered the most visible evidence that manufacturing has roared back from the depths of the recession. TheFederalReserve1 said Wednesday that manufacturing increased 0.9 per cent in December, the biggest gain since December 2010. And the overall output of the nation's factories, mines and utilities grew 0.4 per cent in December. Warm weather dampened demand for energy produced by utilities. Industrial output is less than 5 per cent below its pre-recession peak, reached in September 2007. It has increased more than 14 per cent since hitting a recession low in June 2009. Manufacturing activity remains nearly 8 per cent below its pre-recession peak in July 2007. Yet it has increased almost 15 per cent from its recession low. The recession hit manufacturing harder than the overall industry, so its path to recovery has been a little slower. Factories benefited in the second half of 2011 from a number of trends. Consumers bought more cars. Businesses boosted spending on industrial machinery and computers. And companies are restocking their warehouses again after cutting inventories over the summer.

NY Fed Survey: Manufacturing activity expanded at a faster pace in January - From the NY Fed: Empire State Manufacturing Survey The Empire State Manufacturing Survey indicates that manufacturing activity expanded in New York State in January. The general business conditions index climbed five points to 13.5. The new orders index rose eight points to 13.7 and the shipments index inched up to 21.7. ... Future indexes conveyed a high degree of optimism about the six-month outlook, with the future general business conditions index rising nine points to 54.9, its highest level since January 2011. On employment: Employment indexes were positive and higher, pointing to higher employment levels [12.1 up from 2.3] and a longer average workweek [6.6 up from -2.3]. ... On a series of supplementary survey questions, 51 percent of respondents indicated that they expect their workforces to increase over the next six to twelve months, while just 9 percent predicted declines in the total number of workers—results noticeably more positive than in the June 2011 survey. This was slightly above the consensus forecast of a reading of 10.5 (above 0 is expansion). The future indexes and employment readings were especially encouraging.

Vital Signs: Early Signals of Manufacturing Strength - Manufacturing in the New York area is showing strength. The Empire State Manufacturing Survey’s business conditions index, based on a poll of manufacturing executives, rose five points to 13.5 this month, indicating expansion. It was the fourth consecutive monthly increase and the highest reading since April. New orders, employment and shipments also jumped, setting up expectations for a boost in production in coming months.

GM Retakes Title of Top-Selling Global Automaker - General Motors Co. has retaken the title of world’s top-selling automaker, selling just over 9 million cars and trucks across the globe. The company said Thursday that it sold 9.03 million vehicles worldwide last year, up 7.6 percent from 2010. That’s more than 1 million better than Japan’s Toyota Motor Corp., which took the title away from GM in 2008. GM had held the global sales crown for more than seven decades before losing it to Toyota, as GM’s sales tanked while it headed toward financial ruin. In 2009, GM filed for bankruptcy protection, needing a U.S. government bailout to survive. Now GM is profitable again and its vehicles are selling well across the globe. The company reported net income of $7.1 billion for the first three quarters of last year, and it is expected to add to that number when it reports fourth-quarter and full-year results in February. In 2011, Germany’s fast-growing Volkswagen AG took second place behind GM with record global sales of 8.16 million, up 14 percent from the year before. The French-Japanese alliance of Renault and Nissan was third, selling 8.03 million vehicles. Toyota ended up finishing fourth in 2011 with 7.9 million vehicles sold. Its sales were hurt last year because the March earthquake in Japan slowed its factories, and dealers ran short of cars to sell.

U.S. Unemployment at 8.3% in Mid-January - U.S. unemployment, as measured by Gallup without seasonal adjustment, is 8.3% in mid-January -- a slight improvement from 8.5% in December, and down from 9.9% in January a year ago. Gallup's mid-month unemployment reading, based on telephone interviews of a random sample of 18,500 adults in the 30 days ending Jan. 15, serves as a preliminary estimate of the U.S. government report, and suggests the BLS will likely report on the first Friday of February that its seasonally adjusted unemployment rate declined once again in January.Underemployment, a measure that combines the percentage of workers who are unemployed with the percentage working part time but wanting full-time work, is 18.1% in mid-January. This is a slight improvement from the 18.3% of December and down from the 19.0% of a year ago. The U.S. government's January unemployment rate that it will report in early February will be based on mid-month conditions. Therefore, Gallup's mid-month unemployment reading, based on data collected through the 15th of the month, normally provides a good estimate of the government's unadjusted unemployment rate for the month. Because of employer layoffs after the holidays, unadjusted unemployment rates normally increase at this time of year, and the government seasonally adjusts for these layoffs. So it seems likely that the government will report another decline in its seasonally adjusted U.S. unemployment rate for January.

New Jobless Claims Drop Sharply - The folks expecting a new recession have a new statistical challenge today. Initial jobless claims fell sharply last week, dropping 50,000 to a seasonally adjusted 352,000. The last time new filings for unemployment benefits were this low was nearly four years ago—April 2008. Last week’s large 50,000 tumble is impressive as well relative to history. Indeed, we just saw the largest weekly drop in more than three years.  The good news might be a temporary bout of statistical noise if the latest decline was an isolated event. But as I’ve been discussing recently (here and here, for instance), it appears that new claims have entered a virtuous cycle and today's update strengthens that argument rather forcefully. You can't trust any one indicator for judging the business cycle, even a generally reliable leading indicator like weekly jobless claims. But it's getting increasingly awkward for arguing that the economy's headed for an imminent recession when claims are dropping persistently and substantially.  This much is clear: either we're due to see a major stumble in the value of new claims as a leading indicator—or the analysts who say there's a fresh downturn afoot will be forced to revise their prediction. One way or another, there's a volte-face out there somewhere.

Job Market Takes Baby Steps Toward Recovery - You have to crawl before you can walk. Since late summer, U.S. labor markets have been mending. The U.S. may be entering the needed virtuous-cycle stage of recovery: Better demand is generating more jobs that add more income to finance more demand. The improvement also suggests the U.S. recovery is decoupling from the euro-zone debt crisis. That is not to sound the “all’s clear” signal. The U.S. economy has 13 million unemployed workers, many out of work for more than a year. Another 10 million are underemployed or too discouraged to look. Wages are still rising below even the mild pace of inflation. But the labor markets have to climb out of their deep hole before payrolls move into expansion. The latest baby step was news that new filings for state unemployment benefits plunged 50,000 last week, in the biggest weekly drop since September 2005. Jobless claims swing wildly around year-end because of the holidays and winter storms. But even if volatility accounted for half of the drop, claims would still be hovering around 375,000, well below the 425,000-plus level posted in September.

Warm Weather Probably Making Data Look Better Than Reality - Seasonal adjustments to economic data account for weather patterns. When the weather doesn’t follow normal trends, though, the adjusted data can misrepresent true activity. That’s the case now: warm temperatures in December and so far in January are boosting activity. The end result is that recent economic reports are probably looking better than reality. That doesn’t mean the recovery isn’t firming, just that some payback should be expected in the spring. According to weather consulting firm Planalytics, last month was the warmest December in five years and the driest in a decade. So far January is also shaping up to be unusually balmy, although snow has fallen in parts of the West and Midwest. One measure of December’s mildness is that only 127,000 workers couldn’t get to their jobs because of bad weather. Compared to other Decembers, that’s the lowest number since 2004 and well below the 10-year average of 179,000. Overall mild winter weather is a plus for economic activity, but it can skew individual sector’s performances.

More older Americans on job than ever - Amid the wreckage of the economic downturn, something curious happened to older Americans. More of them are working. Though the recession has thinned the ranks of other generations in the workforce, more people older than 55 are employed than ever before, according to the latest figures from the U.S. Bureau of Labor Statistics. The reasons for the surge of older workers are complex, experts said, but one of the primary economic forces behind it is the growing fear among older Americans that they lack the means to support their retirement needs. The phenomenon is closely linked to the broad shift in the United States that began in the 1980s away from reliance on company pensions toward the adoption of 401(k) plans and other personal savings. That shift in retirement financing, combined with the recession, has dramatically increased the incentives to work into old age and appears to be reshaping how Americans ride out the latter part of their lives. Like it or not, millions of graying Americans, some past 75 years old, are rejoining the workforce or staying in it longer than once might have been expected.

Job Leakage and Local Regulation: Evidence from the Dirty Movie Industry - Los Angeles has some leading industries.  We have tourism, Kobe Bryant and our Universities (I'm including health care at the hospitals there) and dirty movie production.    We are about to run a natural experiment concerning the unintended consequences of unilateral regulation.  Los Angeles has mandated condom use in its "adult films".   I applaud public health efforts but I wonder whether this regulation will be effective or whether production will move to a "pollution haven"?  A "pollution haven" would be another location that has not past and doesn't plan to pass such regulation.   The interesting part here is that activists here are aware of this possibility.  To quote the piece: "Mr. Weinstein (the president of the AIDS Healthcare Foundation) said the argument that the pornographic film industry would move out of Los Angeles is a “big lie.” “They cannot just pick up their stakes and move to another state,” he said. “They’d hardly be welcomed in West Virginia or Utah or Mississippi, or even a place like Nevada, where legal prostitution is highly regulated and condoms are required. And we will follow them wherever they go.”  "

Obama's Jobs Panel Pushes Corporate Tax, Energy Reforms - President Barack Obama's jobs council called on Tuesday for a corporate tax overhaul, expanded domestic drilling and new regulatory reforms, a set of proposals unlikely to provide a quick fix for high unemployment or gain much traction in an election year. A panel of business leaders advising Obama — whose re-election chances could hinge on whether he can boost the fragile U.S. economy — offered its latest job-creation prescriptions at a meeting with him at the White House.  Obama's Council on Jobs and Competitiveness has generated dozens of ideas, many of them modest in scope, since it was created last February.  The president has acted on many of them through his use of executive powers, but some of the larger recommendations have lagged and the overall benefits remain uncertain.  "This has not been a show council. This has been a work council," Obama said as the meeting got under way. "It will pay off in terms of solidifying this recovery and allow us to move forward in a way where it actually translates into jobs."  General Electric Chief Executive Jeffrey Immelt, who chairs the non-partisan panel, acknowledged the tough challenges that remained, saying, "None of us believes there is one silver bullet on competitiveness and job creation."

A Federally-Funded Jobs Program? Lessons from the WPA - Lambert here: This post is an important contribution to the debate, because the history of the WPA gives the lie to the oft-heard claim that “the government can’t create jobs.” It can and it has. In the current debates surrounding various job guarantee programs (in association with the Chartalist or Modern Money perspectives), it might prove helpful to review some aspects of the Works Progress Administration (renamed in 1939 as Work Projects Administration). While the WPA was not a “job guarantee” program, it nevertheless points to a number of issues that are under current discussion, including those of the nature of the projects undertaken, impact on the larger economy, concerns surrounding bureaucratic impediments, etc. Let’s begin with an introductory statement pertaining to the political and economic orientation of Franklin Delano Roosevelt (and his Administration).

Towards a 21-hour working week? - Chris Bertram at Crookedtimber posted on a conference he attended on the idea of working time reduction in response to keeping unemployment lower. The comments are worth a post to summarize, but at least this pointer is a start. Last Wednesday I attended an event at LSE (under the auspices of the New Economics Foundation) exploring the idea of working-time reduction with an eventual goal of moving to a normal working week of 21 hours. Various people asked me to write up the event, so that’s what I’m doing, though I claim no special expertise in the surrounding economics and social science. The lectures were filmed, so I expect that they’ll be up somewhere to watch soon, which will make my comments superfluous. Tom Walker of Ecological Headstand was also present, so I wouldn’t be surprised to see some remarks from him there soon.

Can “education as signaling” models explain recent changes in labor markets? - Acemoglu and Autor present a few non-controversial stylized facts about labor markets, including falling wages of low-skill workers, flattening of the wage premium for workers with less education than college completion, non-monotone shifts in inequality, polarization of employment in advanced economies, and skill-replacing technologies (and don’t forget the new Brynjolfsson and MacAfee book; it is important). The simplest model is that, because of information technology, employers demand more skills.  The job market responds accordingly, and eventually the education system responds too.  The major shifts are driven by changing productivities of human capital, and that is one reason why the human capital model of labor markets has proven so robust.  It accounts (mostly) for the big changes in labor market returns. What would a signalling model predict as the results of skill-biased technical change?  I am never sure.  Those models are tricky with comparative statics predictions for at least three reasons:

Do Unions Kill Prosperity? Not So Much, It Seems. Actually, QTC. - You hear from lots of people — including lots of economists — that they do. Because they’re monopolistic price-fixers, they distort economic decisions and make us all worse off. The theory makes sense, as far as it goes. But if it were really true you’d expect to see it in the data. This got me curious... Compare percent union representation to GDP/capita by state: The correlation is actually pretty strongly positive — .56. More union representation, more prosperity. (Or the other way around…) It’s also worth noticing: Lower-left, red states. Upper right, blue states. Go figger. Union density: State GDP/capita:

Great Stagnation or Great Vacation? - Keynesians have long mocked their critics as people who believe that the Great Depression was really a "Great Vacation."  Charles Murray's new book makes a decent case that working class men have indeed taken a Great Vacation over the last couple of decades.  He approvingly quotes Aguiar and Hurst: between 1985 and 2005... [M]en who had not completed high school increased their leisure time by eight hours per week, while men who had completed college decreased their leisure time by six hours per week. Murray remarks: [T]he worst results were found among men without jobs.  In 2003-5, men who were not employed spent less time on job search, education, and training, and doing useful things around the house than they had in 1985.  They spent less time on civic and religious activities.  They didn't even spend their leisure time on active pastimes such as exercise, sports, hobbies, or reading... How did they spend that extra leisure time? Sleeping and watching television.  The increase in television viewing was especially large - from 27.7 hours per week in 1985 to 36.7 hours in 2003-5... Murray concludes that working class males have simply become less industrious.  Quite plausible, though he neglects a strong alternative explanation.  Female income has greatly increased, and men with low status jobs are "inferior goods" in the mating market. 

Things We're Supposed To Be Quiet About - Paul Krugman - Apologists for rising inequality often argue that since most Americans’ income has risen despite rising inequality, there’s no reason to complain about inequality other than envy. So it’s worth remembering that we used to expect economic growth to deliver large increases in real income, not just a bit of a rise that’s accomplished in large part through longer working hours; and that a major reason so many have seen such small gains is that a large part of growth has been siphoned off to the very high end. Lane Kenworthy had a nice chart illustrating both points, comparing median family income with real GDP per family (for those worried about the fine points, it was nominal GDP divided by the CPI, avoiding some technical issues): You see the contrast: a doubling of family incomes in the post war generation compared with maybe 20 percent since, and family incomes growing in line with GDP before, lagging far behind since, with the difference basically being the rising share of the 1 percent.This is real stuff, not some trivial envy-driven concern.

The Great Gatsby Curve - Krugman - Alan Krueger, the chairman of the Council of Economic Advisers gave a very informative speech on inequality last week that should have received more press than it did. Much of it was stuff that inequality mavens already know, but he had one striking result that was what I suspected but hadn’t seen demonstrated: a clear negative relationship between inequality at a point in time and intergenerational social mobility. Below is what he dubs the Great Gatsby Curve. On the horizontal axis is the Gini coefficient, a measure of inequality. On the vertical axis is the intergenerational elasticity of income — how much a 1 percent rise in your father’s income affects your expected income; the higher this number, the lower is social mobility. As he shows, America is both especially unequal and has especially low mobility. But he also argues that because we are even more unequal now than we were a generation ago, we should expect even less social mobility going forward.

Is the middle class shrinking? - Krueger’s claim of a shrinking middle class relies on the same peculiar definition. Specifically, “middle class” is defined as having a household income at least half of median income but no more than 1.5 times the median. I re-ran the numbers using the same definition and data source as Krueger and found that the entire reason the middle class has “shrunk” is that more households today have incomes that put them above middle class. That’s right, the share of households with income that puts them in the middle class or higher was 76 percent in 1970 and 75 percent in 2010—two figures that are statistically indistinguishable. For that matter, I am not discovering fire here; Third Way made the same point in early 2007 (page 7). A shrinking middle class is only a problem if it reflects fewer people reaching the middle class. The post is excellent throughout and it contains many more points of interest.

American Exceptionalism #238: Opportunity (Not) - I don’t usually link to Paul Krugman because he everyone reads him anyway, right? He doesn’t need my google juice. But I have to make an exception here because he adds to my trove of graphs demonstrating how America today — after thirty years of Reaganomics policies that were supposed to be all about freedom, liberty, and economic opportunity for all (yeah, and I have a bridge for sale), is at the bottom of the heap when it comes to economic opportunity. The shining city on the hill keeps getting smaller and richer, and the slopes leading up to it steeper, rougher, and slicker. That opportunity is best displayed through intergenerational mobility — what my friend Steve calls “convection.” What are the odds that a child will be in a different economic stratum from his parents? As you can see, it’s only getting worse. My explanation is here.

Op-ed: Political Opportunity (Not) - The link at the end of Steve Roth’s post yesterday, “American Exceptionalism #238: Opportunity (Not),” is to a post on Sunday by Paul Krugman on his NYT blog, in which he discusses Alan Krueger’s speech last week.  Krugman’s blog entry says: “Alan Krueger, the chairman of the Council of Economic Advisers … gave a very informative speech on inequality last week that should have received more press than it did. Much of it was stuff that inequality mavens already know, but he had one striking result that was what I suspected but hadn’t seen demonstrated: a clear negative relationship between inequality at a point in time and intergenerational social mobility. As everyone who discusses politics with me knows,  huge pet peeves of mine are Obama’s refusal to discuss specific facts, including statistics, in speeches to the public—and his failure even to speak to the public at all on substantive issues.  Exceptions are ridiculously rare.  But the campaign is about to start, and—who knows?—he might actually deign to occasionally speak in specifics and cite facts (including statistics) in order to refute the Republican mantras of anti-Keynesianism and anti-progressive tax codes.  Assuming, of course, that he agrees with his own Council of Economic Advisers chairman about the importance of the statistics, and recognizes the salience of those statistics with the public. 

How Today’s Income Inequality Kills Tomorrow’s Economic Mobility - America is supposedly a land of opportunity, but increasingly the data shows that we are a country where parents’ earnings are paramount in determining their children’s future earnings. This sort of class-stratified society is exactly what most of us think America is not (or at least should not be). Plus, this kind of class calcification is bad for economic growth. The relationship between today’s inequality and tomorrow’s economic mobility was a key theme of a speech by Alan Krueger, Chair of the President’s Council of Economic Advisers, at the Center for American Progress last week. To show how class has become calcified in America, he showed this chart, which he called the “Great Gatsby Curve”:In the chart, the Gini coefficient, one of the most-commonly used measures of income inequality, is on the x-axis. The higher the Gini, the more unequal a nation is. Notably, for 1985, the United States was more unequal than any of the other nine advanced economies shown. A measure of economic mobility is on the y-axis. This measure, the “intergeneration earnings elasticity” measures how important a parent’s earnings are to predicting their child’s future earnings

The Economics of the Great Gatsby Curve, by Miles Corak: In an article on the Brookings Institution website that was originally posted by the National Review, Scott Winship questions the idea that greater inequality at a point in time is associated with less generational mobility over time — what the Chairman of the Council of Economic Advisors, Alan Krueger, called the “Great Gatsby Curve” in a speech given on January 12th. Winship’s article does a disservice to a well-established literature on generational mobility by suggesting that the basic information Krueger used is in some sense invalid. Krueger’s Great Gatsby Curve is in fact well-rooted in the labour economics literature, and debate would be better placed addressing the policy implications he draws than to suggest that President Obama’s top economist feels compelled to create his own facts.  So in the spirit of moving evidence-based public policy forward here is a quick review of the underpinning of the Great Gatsby Curve in both theory and practice. ...[continue reading point by point defense]...

The Economics of the Great Gatsby Curve: a picture is worth a thousand words «- A quick post to thank Scott Winship for this response to my feedback on his original article. His comments are now on the National Review web site. But I am afraid they do not advance the discussion. I addressed all of the technical issues in my original paper (see the appendix). The internationally comparable estimates I offered accounts for these concerns. But let me repeat the picture of the Great Gatsby Curve using the most recent information on the largest available set of countries. Does anything said in this debate overturn the positive relationship? Is the suggestion really that this relationship would be reversed? I don’t think so. We might argue about the exact slope but so what: the fact that this relationship is also found when other measures of generational mobility are used—like the correlation in years of education where there are less concerns about measurement issues—suggests it is robust.

Why economic mobility measures are overrated - By mobility I mean whether people are crossing into different income quintiles or deciles than the ones they were born into, or the ones they enjoyed at an earlier period of life.

  • 1. If the general standard of living is rising (and I am more than willing to admit problems in this area for the United States), mobility takes care of itself over time.  I find
  • 2. Measured mobility in the United States does not seem to be falling, or at least not falling much, as shown by Scott Winship.
  • 3. For a given level of income, if some are moving up others are moving down.  Do you take theories of wage rigidity seriously?  If so, you might favor less relative mobility, other things remaining equal. 
  • 4. Why do many European nations have higher mobility?  Putting ethnic and demographic issues aside, here is one mechanism.  Lots of smart Europeans decide to be not so ambitious, to enjoy their public goods, to work for the government, to avoid high marginal tax rates, to travel a lot, and so on.  That approach makes more sense in a lot of Europe than here. 
  • 5. How much of immobility is due to “inherited talent plus diminishing role for random circumstance”?

Income Mobility Means Some People Have to Lose Everything - Like Ross Douthat, I've been following the recent blog conversation about income inequality and income mobility.  I'm not going to summarize the arguments about how closely they're connected--you should read Ross's excellent post for a good overview.  And I'm certainly not going to insert myself into an argument between two very smart economists who spend a lot of time studying this question.  I'm not sure whether the problem can be solved or not.  What I am very sure of is that we do not want to solve it, and that for that reason, we are very probably not going to.  I've said before that I don't care about income inequality per se, and that focusing on it seems more like institutionalized envy than sound policy.  I care about the absolute condition of the poor--do they have the basics of a decent life?  And I care about whether income inequality itself produces some sort of structural advantage in the political system.  (I'm skeptical).  But I don't care whether Bill Gates lives in a giant robot house that cost eighteen-squintillion dollars.  What I care about is whether some kid is growing up in a roach infested shack with no heat--something that has basically nothing to do with the size of Gates' fortune. On the other hand, income mobility is a very important issue.  Regardless of how far the top is from the bottom, children born in America should have an equal chance to move from the latter to the former. 

Higher Income Inequality and Mobility - A lot of our political debate boils down to questions about equality of outcomes versus equality of opportunity. But it turns out that they’re pretty closely related. Take a look at the chart below, which is from a terrific recent speech (with charts!) by Alan Krueger: The horizontal axis shows the Gini coefficient, which is a summary of the degree of income inequality for each country. I think of this as a measure of inequality of outcomes. The United States sits out there on the right, which says that we have high inequality, which I bet that doesn’t surprise you. The vertical axis shows a measure of intergenerational mobility, which summarizes the relationship between your income and your parents. A score of zero means that we have equality of opportunity — the kids of rich people earn as much as the kids of the poor. A high number means that the rich parents have rich kids and poor parents have poor kids. The U.S. has a score of 0.4 which means that, on average, you pass on 40% of your economic advantage to your kids: if I earn $100,000 more than you, then on average, my kids will earn $40,000 more than your kids. So I think of this as a measure of inequality of opportunity. You’ll notice that the U.S. also scores high on this measure. Americans are often surprised to learn that in the land of opportunity, your life outcomes are largely determined by your parents.

Scott Winship fails to show that Alan Krueger is a liar - Ever since Council of Economic Advisors chair Alan Krueger gave a speech on inequality, conservative media have been hard at work trying to debunk his claims. Increasingly, the go-to numbers guy on the right is Scott Winship of the Brookings Institute, who has written a series of articles at the National Review. Several of these articles have recently been linked and praised by Tyler Cowen. Cowen's most effusive accolades were reserved for this piece, about which Cowen says "The post is excellent throughout and it contains many more points of interest." So I thought I'd take a look at this "excellent" Winship post and see what it had to offer. What I found, disappointingly, was a mix of insults, value judgments masquerading as refutations, dubious logic and concern trolling. So I thought I'd do my usual thing...go through the piece point by point, so readers can see why I reached the conclusions I reached...

Income Inequality went Up 12 Percent under Clinton, Zero under Bush - It is a good rule to question every study on income inequality by asking, "Why those years?"   The latest version is from the Congressional Research Service (CRS), and the author concludes: "Changes in income from capital gains and dividends were the single largest contributor to rising income inequality between 1996 and 2006. Changes in tax policy also made a significant contribution to the increase in income inequality, but even in the absence of tax policy changes income inequality would likely have increased."And about those years:"The years 1996 and 2006 are examined for several reasons.  First, both years were at approximately similar points of the business-cycle with moderate inflation (about 3%), a modest unemployment rate (about 5%), and moderate economic growth (3.7% in 1996 and 2.7% in 2006).  Second, 2006 was the year before the August 2007 liquidity crunch and the onset of the severe 2007-2009 recession.  Third, there were major tax policy changes between these two years.  Fourth, both 1996 and 2006 were three years after the enactment of tax legislation that affected tax rates and are unlikely to be affected by short-run behavioral responses to these changes."

How Fares the Dream?, by Paul Krugman -  Yet if King could see America now, I believe that he would be disappointed, and feel that his work was nowhere near done. He dreamed of a nation in which his children “will not be judged by the color of their skin but by the content of their character.” But what we actually became is a nation that judges people not by the color of their skin — or at least not as much as in the past — but by the size of their paychecks. And in America, more than in most other wealthy nations, the size of your paycheck is strongly correlated with the size of your father’s paycheck.  Goodbye Jim Crow, hello class system.  Economic inequality isn’t inherently a racial issue, and rising inequality would be disturbing even if there weren’t a racial dimension. But American society being what it is, there are racial implications to the way our incomes have been pulling apart. And in any case, King — who was campaigning for higher wages when he was assassinated — would surely have considered soaring inequality an evil to be opposed.

What Does One Jobless Youth Cost Taxpayers? $14,000 a Year - America's youth are suffering their worst employment drought since World War II. It doesn't take a great leap of the imagination to understand why this is a crisis. The young and jobless earn less later in life. They lose the chance to build crucial career skills. They rely on government support. They're more likely to commit crimes.  And according to a new report, the worst off are sapping roughly $40,000 a year from the economy while costing the government $14,000 in taxes. The White House Council for Community Solutions report, compiled by researchers from Columbia University and the City University of New York, profiles the economic lives of the roughly 6.7 million Americans between the ages of 16 and 24 who are neither working nor in school. Among that group of lost youth -- the paper optimistically refers to them as "opportunity youth" -- 3.4 million haven't held a job or been to class since the age of 16. These are the "chronic" cases. Another 3.3 million have some additional schooling or marginal work experience, but no college or stable employment. The cohort is disproportionately black and Hispanic, although white youth still account for almost half of the group, which is evenly divided between men and women.

Unemployed, Out-Of-School Youth Costing American Taxpayers Nearly $14,000 Per Year, Report Finds - A sizable minority of America's youth aren't in school or attached to the labor force. And it's costing taxpayers big. About 17 percent of America's young people are "opportunity youth" -- or people ages 16-24 who aren't attached to the labor force -- according to a report prepared by researchers for the Corporation for National and Community Service and the White House Council for Community Solutions (h/t Think Progress). Each one of these 6.7 million young people is costing taxpayers $13,900 per year and it doesn't stop there. After 25 years old, they'll cost taxpayers $170,740 over their lifetime, the report found.  That means that in total, those currently classified as so-called opportunity youth will cost taxpayers $1.56 trillion in present value terms over their whole lifetime.  "Both taxpayers and society lose out when the potential of these youth is not realized," the report said. With the unemployment rate at elevated levels for months, young people have been feeling the consequences. Mike Konczal found in November that youth joblessness in America was in line with levels of youth unemployment during the Arab Spring. Teenage job-seekers are having an especially tough time as older, more experienced workers snap up part-time positions usually reserved for teens in a better economy. The unemployment rate for Americans ages 16-19 was 25 percent in 2011 -- nearly three times the jobless rate of the overall labor force. During the summer, a time of typically high employment for youth, the unemployment rate for Americans aged 16 to 24 was twice as high as the national jobless rate.

Get used to living with Mom and Dad - It’s a growing trend: More and more adults are living with their parents. According to the Census Bureau, the number of 25- to 34-year-old adults in the U.S. living at home rose from 14 percent in 2005 to 19 percent in 2011. The trend is present in other developed countries across the globe too: In Italy, 37 percent of men 30 years of age and older have never left home; in Japan, men living under their parents’ care are pushing their 40s. Such individuals are easily disparaged as lazy, overgrown babies, content to mooch off their aging parents rather than strike it out on their own. (Remember all those biting jokes Archie Bunker would throw to his “meathead” of a son-in-law.) But are they really? Katherine Newman, a sociologist and dean of the school of arts and sciences at Johns Hopkins University, looks at the dynamics of the boomerang generation – a phenomenon she has dubbed the “accordion family.” Part economic analysis, part ethnography, Newman interviews hundreds of individuals in six different countries (in southern Europe, the Nordic states, Japan and the U.S.), to better understand the international dynamics at work. The major reasons driving adult children back to the nest are economic, she finds: Globalization and the recession are making it harder for new workers to enter the labor force, and the cost of housing is climbing. But other social and psychological factors are at play too. The result is a sometimes rocky, sometimes serendipitous experience for these families as they struggle to redefine adulthood and familial roles in the face of overwhelming global economic forces.

An Inside Look At Homelessness In Atlantic City  Last week, I spent the night in a homeless shelter in Atlantic City. (After writing about inequality, checking out a homeless Tent City in New Jersey, and hanging out with a young homeless couple in the Upper West Side — this seemed the next logical step.) New York City wouldn't let me anywhere near its shelters (what are they hiding?).  The Atlantic City Mission, however, allowed me to be homeless for a night. Checking in and finding a bed was quite an experience, which I've described in detail here. To see what the shelter looked like the following day, when the several hundred residents were out on the streets, check out the following slides.

Report on Poverty Reveals Troubling Numbers - A report out Tuesday offers some troubling numbers on poverty rates among children in the commonwealth. Now the group behind that report is urging state lawmakers to try and help. The report from Voices for Virginia's Children says more than 30,000 children fell below the poverty line in the last few years, but there are ways to help. Voices for Virginia's Children Executive Director John Morgan said, "There are many, many families struggling, and in fact the child poverty rate continues to rise even though the recession has officially ended." Morgan presented a new poverty report to state lawmakers Tuesday. The report shows since the economic downturn began around 2008, 33,000 more Virginia children have fallen below the poverty line, bringing the total up to 265,000. "Think of the fact that in some Virginia communities, 4 in 10 children are growing up in poverty. That's an astounding number," stated Morgan.

Race, Poverty and Abortion - How are the number of annual abortions in the United States distributed by race? And how does that compare to the distribution of the potential child-bearing (Age 15-44) population of the United States by race? Or for that matter, how does that compare to the racial distribution of the poor in the United States, as measured by enrollment of the non-elderly in Medicaid?  Our chart below provides the demographic snapshot of what we found in answering each question asked above, for the years spanning 2008 through 2010:

Race and Chapter 13 - As Adam noted in his kind post, the New York Times today featured our study, "Race, Attorney Influence, and Bankruptcy Chapter Choice."  And, we all express many thanks to the NYT reporter, Tara Siegel Bernard, who spent a lot of time slogging through the statistics and legal intricacies in our study. In a nutshell, the study reports real-world data from the Consumer Bankruptcy Project showing that, among bankrupcy filers, blacks file chapter 13 at higher rates than all other races. The effect is large -- for example, blacks even had a higher chapter 13 rate (54.6%) than homeowners (47.1%). The second part of the study showed that, in a random sample, bankruptcy attorneys were more likely to recommend chapter 13 for a hypothetical couple named "Reggie & Latisha" who went to the African Methodist Episcopal Church as compared to "Todd & Allison" who went to the United Methodist Church. Also, attorneys were more likely to see "Reggie & Latisha" as having good values and being more competent when they expressed a preference for chapter 13.

Incarceration and Unemployment: U.S. and Europe - Ever since Bryan offered this bet on future unemployment rates in the U.S. and Europe, I’ve been wondering: how do incarceration rates affect those numbers? Europe has consistently higher unemployment than the U.S., but the U.S. has far and away the highest incarceration rate in the world — .75% of the population. (World Prison Population List [PDF], compiled since 1992 by Roy Walmsley of the International Centre for Prison Studies.) Only Russia comes even close, at .63%. (Canada: .12%. Australia: .13%. China .18%. Germany .09%.) Our rate is four to eight times that of most other countries. Prisoners aren’t part of the unemployment calculation. They’re not counted as part of the work force, and they’re not counted as unemployed. There are various arguments about whether that makes sense (feel free to comment), but if we include them in the calculations, what do unemployment rates look like? In particular, Bryan’s bet makes me curious: How does U.S. unemployment compare to the EU15?* Here are the numbers for 2008. Calculations based on labor force and unemployment figures from Eurostat. In 2008, all of the difference between EU15 and U.S. unemployment rates is accounted for by the prison population. The cynical view would say that we just imprison our unemployed, which doesn’t strike me as the most economically efficient arrangement.

For too many African-Americans, prison is a legacy passed from father to son - Prison, for the Gambles, is as common a destination as university might be for a middle-class family. His two brothers are both in jail. Ricky, who was convicted for burglary and assault with a firearm under the three strikes law, is in for 110 years to life. Mike got life without parole for the murder of a local councillor. His father was in jail for a series of alcohol-related offences. His son, Khalif, has also been in jail for dealing drugs and possession."It's not just that we didn't fear jail," says Jeffrey, who now uses his experience to warn youngsters away from gangs and prison. "It was like a rite of passage. You needed to go to jail so you could have that badge of honour." Three generations of African-American men enmeshed in the criminal justice system. A legacy of incarceration passed from father to son. A cycle that just won't break. When Martin Luther King, whose birthday is marked across the United States on Monday with a national holiday, adopted Mahatma Gandhi's call to "fill the jails" 50 years ago, he didn't mean this. Back then, the aim was to delegitimise the prevailing power structure by removing the stigma from protesting against unjust laws. Today, imprisonment is not an act of resistance but a fact of life. It is both the product and cause of social collapse in many black communities, where full jails do not challenge racial inequalities but sustain them.

Florida Senate pushes to privatize prisons in 18 counties - The Florida Senate Rules Committee has proposed a bill that would require the state’s Department of Corrections to privatize all prisons and other correctional facilities in 18 counties, according to the News Service of Florida. The state legislature passed nearly the same measure last year, but the law was ruled unconstitutional in court because it didn’t go through the committee process, violating the Florida Constitution. The second largest private prison company in the world, GEO Group, has donated $822,000 to political campaigns in Florida, according to the nonpartisan National Institute on Money in Politics. The company also spent $25,000 for Florida Gov. Rick Scott’s (R) inauguration party.“We’ve been saying all along that these proposed prison closures are about turning Florida’s prisons over to for-profit corporations,” Ken Wood, Acting President of Teamsters Local 2011, said. “This is payback to the powerful prison corporations that spend millions on lobbyists and political donations.”

Private Prisons Don’t Save Money in Arizona - Arizona sure loves it some privatization.  Facing extreme budget shortfalls, the state attempted to sell off and then re-lease its state house in 2009 to earn some extra money, along with privatizing its entire prison system.  But while that plan failed, the state’s thirst for privatization never waned.  Though it already had multiple private prisons holding prisoners from other states and the federal government, a prominent republican in the state legislature introduced and helped pass SB1070, the now-infamous “Breathing While Brown” law.  This law, as pointed out in an investigative report by NPR, was written by ALEC, a conservative legislation front group that has longed worked with the major players in the private prison industry and promoted privatization across the board.  They’re also the ones behind attacks on global warming, voting rights, and unions, but that’s a different story. So, the state basically gave a handout to private prison operators, who would undoubtedly benefit from stronger enforcement of federal immigration laws and increased detention.  This came after the industry donated heavily in the 2010 election cycle, to candidates, political parties, and ballot initiatives favored by republicans.  Then, even after 3 prisoners escaped from a private prison found to have numerous security deficiencies and went on a murderous rampage, state officials still pushed for more private prisons.  They re-initiated a request for proposals from private companies to construct 5,000 prison beds.

USA land of the free jails one in 100 American adults - YouTube: America has 2.3 million people in prison -- more than any other country. More than one in 100 adults are in jail. No society in history has imprisoned more of its citizens. 1 in 9 black men aged between 20 and 34 is behind bars. There are more 17-year-old black American males in jail than in college. Ameriacan has five percent of the world's population but 25% of its prisoners. And prison labour is now a huge industry, producing an enormous range of goods, not least for the US military. It is in effect a revival of the slave trade.

Food Stamp Use Up 270 Percent, State Considers Staggering Payment Dates -- The State Department of Health and Welfare reported Monday that the number of Idahoans using food stamps has sky-rocketed by 270 percent from 2007. That means about one in six people in the state need government assistance to buy food. As of November, there were 235,000 Idahoans on food stamps, compared with 80,000 five years ago. "And of course it's the economy that's fueling it basically," said Health and Welfare public information officer Tom Shanahan. He said the numbers have started to slow down in recent months, but, "I mean it's still growing, and still setting records pretty much every month, but it is slowing," Shanahan said. But that doesn't mean Idaho's receipt is any smaller. The federal government will pay $380 million, just to Idaho, to foot the food bill this year alone. "I think just this last recession, even those (people) that were kind of being self-sufficient were having trouble feeding the family, but now they're coming in," Shanahan said about the increase in applicants. The state's statistics are now near the national average, when previously Idaho would have come in lower, Shanahan said.

Supervalu-Led Stores Chasing $55 Billion in Food Stamps: Retail - Supermarkets that had been adding Starbucks Corp. cafes and olive bars to draw wealthy shoppers are now catering to a different audience: food-stamp recipients. Stores are moving their opening hours, adding products and revamping merchandise assortments as persistent joblessness pushes more shoppers to government support in buying groceries. Distributions from the federal Supplemental Nutrition Assistance Program rose 11 percent to a record $71.8 billion in fiscal 2011, according to a U.S. Department of Agriculture report.

Campaign Renews Scrutiny of Growing Food-Stamp Program - Newt Gingrich’s labeling of President Barack Obama as the “best food stamp president in American history” drew a sharp rebuke from the White House, underscoring how the federal food assistance program has again become a political flashpoint. Mr. Gingrich, a Republican presidential candidate, has made similar comments repeatedly during the campaign — including at the GOP debate in Myrtle Beach, S.C. Monday — referring to the unprecedented expansion of the food stamp program during the Obama administration. White House spokesman Jay Carney on Tuesday dismissed Mr. Gingrich’s accusations as “crazy,” saying Republican policies resulted in the recession and are the reason so many people need food assistance. The exchange has renewed scrutiny of a program that is now used by one in seven Americans. About 44.7 million Americans on average were enrolled in the Supplemental Nutrition Assistance Program, known as food stamps, in fiscal 2011, the year that ended Sept. 30. That’s up from 28.2 million people in fiscal 2008. Benefits paid through the program more than doubled during the period, to $71.8 billion in 2011 from $34.6 billion in 2008. Click for an interactive map showing the increase in food stamp use, by state.

Five Things You Probably Don’t Know About Food Stamps - The Supplemental Nutrition Assistance Program (SNAP), formerly known as the Food Stamp Program, is in the news these days because of comments made by some Republican presidential candidates. Below are five things you probably don’t know about the program.

  1. A large and growing share of SNAP households are working households (see chart). In 2010, more than three times as many SNAP households worked as relied solely on welfare benefits for their income.
  2. SNAP responded quickly and effectively to the recession. SNAP spending rose considerably when the recession hit. That’s precisely what SNAP was designed to do: respond quickly to help more low-income families during economic downturns as poverty rises, unemployment mounts, and more people need assistance.
  3. Today’s large SNAP caseloads mostly reflect the extraordinarily deep and prolonged recession and the weak recovery. Long-term unemployment hit record levels in 2010 and has remained extremely high. Today, 43 percent of all unemployed workers have been out of work for more than half a year; the previous post-World War II high was 26 percent in 1983.
  4. SNAP has one of the most rigorous quality control systems of any public benefit program. Each year states pull a representative sample (totaling about 50,000 cases nationally) and thoroughly review the accuracy of their eligibility and benefit decisions. Federal officials re-review a subsample of the cases to ensure accuracy in the error rates. States are subject to fiscal penalties if their error rates are persistently higher than the national average.
  5. SNAP’s recent growth is temporary. CBO predicts that SNAP spending will fall as a share of the economy as the economy recovers and the Recovery Act benefit increases expire (see chart). By 2021, SNAP is expected to return nearly to pre-recession levels as a share of the economy.

Illinois' backlog of unpaid bills nears $8.5 billion - The Illinois comptroller's office is sitting on nearly $4.3 billion in overdue bills and other departments are behind on their bills because the state doesn't have the money to make good on its debts, Comptroller Judy Baar Topinka said Wednesday. The total backlog of Illinois' unpaid obligations comes to about $8.5 billion, according to the latest report from Topinka's office. That means organizations that provide services for the state - from businesses to hospitals to charity groups - must wait months to be paid for their work. Topinka's office is still paying bills that date back to Sept. 1. The quarterly report from the Republican comptroller predicts the backlog will continue at roughly the same level, despite spending cuts and tax increases approved last year. On the bright side, the cash crunch is significantly better than it was at the same point in the two previous years.

Bill would OK secret privatization, outsourcing of Florida agency functions - A Senate committee will consider a bill that would allow lawmakers to secretly privatize or outsource state agency functions. That includes privatizing the state’s prisons. The Senate rules committee will take up the bill (PCB 7170) at today’s afternoon meeting. The bill essentially means that an agency would not have to report its privatization of a program or service until after the contract is signed.Open government advocates say the bill would keep the public in the dark about the costs of outsourcing government services. But proponents counter that the measure requires any privatization deal to first offer “a substantial savings” to the state.Also being considered is a related bill (PCB 7172) on the privatization of correctional facilities.

Mayors report: US cities remain mired in slump - Less than 10 percent of US metropolitan areas have seen the job market recover to pre-recession levels, and nearly one quarter of these urban areas will not see such a recovery for at least five years, according to a report released Wednesday by the US Conference of Mayors. Those areas facing the most protracted recovery (or, more likely, a renewed downward plunge) include most of the metropolitan areas in California, Arizona, Nevada and Florida, the centers of the housing market collapse, and the industrial states of Michigan and Ohio. Among the biggest metropolitan areas, Atlanta showed the poorest recovery, regaining only 19.5 percent of the jobs lost since the 2008 financial crash, with Detroit second worst at 20.4 percent. This was followed by Los Angeles at 20.7 percent and the San Francisco Bay Area at 26.7 percent. Phoenix recovered 29.1 percent of the jobs lost since 2008, Chicago 29.7 percent, Miami 30.7 percent, Philadelphia 40.8 percent, Seattle 49.3 percent, New York City and Minneapolis-St. Paul 54.2 percent each, and Boston 92.1 percent. Dallas, Houston and Washington DC were the only metropolitan areas among the 15 largest to report employment higher today than in 2008.

Video: Long-Term Unemployment Plaguing Small Towns - WSJ’s Cameron McWhirter looks at Roswell, Georgia, an example of a town hampered by long-term unemployment. The once prosperous Atlanta suburb now sees long-term joblessness having a ripple effect on the town’s economy.

Philly Taxpayers Lost $331M on Swaps: Report - Philadelphia and its school district have lost a combined $331 million on interest-rate derivatives known as swaps, and the city stands to lose $244 million more, the Pennsylvania Budget and Policy Center said in a report. Losses came in the form of net interest payments and cancellation fees related to derivatives negotiated with banks that included Wells Fargo & Co., Morgan Stanley and Goldman Sachs Group Inc. (GS), the Harrisburg-based nonprofit organization said today in the report. It examined financial audits, bond documents, and historical interest rates of variable benchmarks. Cancellations and payments from the school system, the eighth-largest in the U.S., show losses of $161 million, while the city, the nation’s fifth-largest by population, lost $170 million through July 2011, according to the report. The district closed a $629 million current-year budget gap by cutting teachers and programs. The group said banks that profited from the swaps should help schoolchildren and taxpayers. “Paying back termination fees to the school district as an act of goodwill could put students back in music and gifted programs,” the organization said in the report.

Activists push Philadelphia to recoup losses on interest-rate swaps - Philadelphia should demand that Wall Street banks refund half a billion dollars lost or owed by city agencies on interest-rate swap contracts that were supposed to cut city borrowing costs but instead swelled budget deficits at the worst possible time, a Harrisburg-based advocacy group and its labor-union allies say. The Pennsylvania Budget and Policy Center and the labor-backed Fight for Philly organization collected data on swaps losses from dozens of city financial filings and presented them Tuesday at a City Hall meeting attended by laid-off school employees and public-school parent activists.Swaps and other complex financial arrangements used to be off-limits to local governments. But in the late 1990s, "the financial-services industry lobbied Washington to deregulate these instruments," center executive director Sharon Ward said. "Then they came to Harrisburg and lobbied in 2003 for legislation that removed the ban."

Oakland gives layoff notices to 2,500 city workers —Oakland officials are sending layoff notices to nearly 2,500 employees as the city moves to cut costs to try to make up for the loss of redevelopment money. The city announced Wednesday that with the state cutting redevelopment funds across California, it won't have the money to pay the salaries of 1,464 full-time and more than 1,000 part-time or temporary employees. City spokeswoman Karen Boyd says because the city is required to give a 10-day notice if a job is eliminated by the Jan. 31, not every employee who receives a layoff notice will be out a job. Police and fire staff are exempt from layoffs due to a clause in their contracts.

Long Beach to declare fiscal emergency - Long Beach's newly appointed city manager, Jack Schnirman, and the new five-member City Council are poised to pass a resolution Tuesday night to declare a fiscal emergency, which would give Schnirman more authority to tighten and veto spending. "We will scrutinize and sign everything by hand," he said. "We are not shy about sending things back for more information, more documentation or just plain saying no." Long Beach owes $48.3 million in general obligation debt and last month was downgraded five investment rating levels by Moody's Investors Services to Baa3, the lowest investment-grade rating that Moody's issues.Schnirman said the extent of the city's financial crisis becomes more apparent each day. One recent report, for example, showed nine departments already had exceeded their overtime budgets only halfway through the fiscal year.

Detroit teeters on the brink despite autos comeback -- Detroit automakers are back on their feet, showing their best profits in years. But the city of Detroit's finances are worse than ever. The city won't have enough money to pay its bills by April, unless Mayor Dave Bing can get the council and municipal unions to agree to steep spending cuts he's announced. By the end of its fiscal year in June, that shortfall will hit $45 million. There is also the possibility that the state may take over the city, which would open the door for Detroit to file for bankruptcy. That would make it the largest U.S. city ever to suffer that fate. "The financial situation in the city is quite complicated and there are no easy answers,"

Troubled RI city in receivership loses democracy -  When the state stepped in to take over financially struggling Central Falls in 2010, Rhode Island's smallest city lost something fundamental: its democratic government. Mayor Charles Moreau would be forced to give back his key to City Hall, and the City Council was relegated to advisory status — unsure for months whether it was even allowed to convene. "They're being governed without elected representation," state Sen. Elizabeth Crowley said of Central Falls' 19,000 residents. "That flies in the face of the democratic principle that our country is founded on, not only our little city. Maybe we should have a tea party and dump some tea in the Blackstone" River. Crowley, a Democrat and lifelong Central Falls resident, uses a twist on Abraham Lincoln's Gettysburg Address to describe government there, under a state-appointed receiver, these days: "of the receiver, by the receiver and for the receiver." That receiver, former state Supreme Court Justice Robert G. Flanders Jr., is often criticized for sweeping like a dictator into a city he doesn't know, where he doesn't live and where, with the state's blessing, he unilaterally decides matters that go far beyond the fiscal.

The case for the $6 parking meter - The search for a parking space on the streets of downtown Boston can warp a person’s world. Fire hydrants become symbols of thwarted hope. Other drivers become bitter enemies. Signs assume the properties of Talmudic texts, calling out for interpretation and bedeviling us with their complexity. As we drive in circles, sweating and honking hopelessly, our eyes dart around and the clock ticks. Happiness is the sight of red taillights coming on as someone prepares to leave; temptation is a taunting yellow placard offering garage space for $15 an hour. In dense, urban areas like Boston, as many as 30 percent of cars on the street are cruising for parking at any given time. What if finding a spot became as routine a procedure as turning a key, or putting on pants in the morning? According to a growing number of urban planners, transportation experts, and economists, that fantastical scenario is within reach. At the head of the seemingly utopian movement is a man named Donald Shoup, an urban planning professor at UCLA who has spent years studying the problem of parking in cities. The cornerstone of Shoup’s plan: make downtown street parking more expensive. Or, as he would prefer to put it, make the most desirable spots cost what they’re really worth.

Vacant Foreclosures Saddle Local Communities With High Costs - A recent study from the Government Accountability Office (GAO) found that non-seasonal vacant properties across the United States rose 51 percent over the span of a decade, from nearly 7 million in 2000 to 10 million in April 2010. Ten states saw vacancies go up by 70 percent or more, largely as a result of high foreclosure rates. Those with the largest increases over the last decade were Nevada (126 percent), Minnesota (100 percent), New Hampshire (99 percent), Arizona (92 percent), and Florida (90 percent). Georgia, Michigan, Colorado, Rhode Island, and Massachusetts also experienced increases above 70 percent. The elevated number of vacant homes carries with it a hefty price tag for lenders that must resume ownership after foreclosure. GAO found that in 2010, Fannie Mae and Freddie Mac reimbursed servicers and vendors over $953 million for property maintenance costs. However, it’s local governments, many of which are already dealing with depleted funds, that are feeling “significant” pressures from the rise in home vacancies, according to GAO. The agency notes that other studies have concluded vacant foreclosed properties may reduce prices of nearby homes by as much as $17,000 per property. As a result, municipalities report being out millions of dollars in lost tax revenues. GAO’s full report on home vacancies and their impact on local communities is available online.

Climate change skepticism seeps into science classrooms; states have introduced education standards requiring teachers to defend the denial of man-made global warming. A flash point has emerged in American science education that echoes the battle over evolution, as scientists and educators report mounting resistance to the study of man-made climate change in middle and high schools. Although scientific evidence increasingly shows that fossil fuel consumption has caused the climate to change rapidly, the issue has grown so politicized that skepticism of the broad scientific consensus has seeped into classrooms. Texas and Louisiana have introduced education standards that require educators to teach climate change denial as a valid scientific position. South Dakota and Utah passed resolutions denying climate change. Tennessee and Oklahoma also have introduced legislation to give climate change skeptics a place in the classroom.

America's Dangerously Removed Elite - Boasberg, you see, refuses to live in the district that he governs. Though having no background in education administration, this longtime telecom executive used his connections to get appointed Denver superintendent, and he now acts like a king. From the confines of his distant castle in Boulder, he issues edicts to his low-income fiefdom - decrees demonizing teachers, shutting down neighborhood schools over community objections and promoting privately administered charter schools. Meanwhile, he makes sure his own royal family is insulated in a wealthy district that doesn't experience his destructive policies.  No doubt this is but a microcosmic story in a country whose patrician overlords are regularly conjuring the feudalism of Europe circa the Middle Ages. Today, our mayors deploy police against homeless people and protesters; our governors demand crushing budget cuts from the confines of their taxpayer-funded mansions; our Congress exempts itself from insider-trading laws and provides itself healthcare benefits denied to others; and our nation's capital has become one of the world's wealthiest cities, despite the recession.

Maine's Tea Party Governor: 'Slash Health and Human Services or I'll Close Schools' - Republican Governor of Maine and Tea Party favorite, Paul LePage, angered many residents of the northeast state Thursday when he said that if the legislature did not pass his proposed cuts to the Department of Health and Human Services' budget, he would order a statewide closure of public schools on May 1 of this year.The Portland Press Herald reports: The governor on Thursday held a town hall meeting in Lewiston after a day touring the region as part of his 12th Capitol for a Day event. The Sun Journal reports that LePage, describing the DHHS budget gap as a "runaway train," told the audience that if the Legislature didn't ratify his proposed budget he would be forced to close the state's schools. It's unclear what authority he has to take such a measure. Many of the questions posed by meeting participants had to do with LePage's proposed Medicaid cuts. Lee Myles, CEO of St. Mary's Regional Medical Center, said the governor's proposed reductions in Medicaid were a "nuke approach" that would leave thousands of Mainers without health insurance. The Sun Journal reports that Myles said the resulting increased emergency room visits would have a $6 million impact on St. Mary's. Here's video:

Powers recommends maximum tuition increase - President William Powers, Jr. asked the UT System Board of Regents for the largest tuition increase the UT System will allow over the next two academic years. The regents will meet in February or March to finalize tuition costs for 2012-2013 and 2013-2014, UT System spokesman Matt Flores said. Powers sent his recommendation to the System on Dec. 15. If the regents follow the recommendations, in-state undergraduates will pay $127 more each semester during semesters in the 2012-13 academic year and $131 more each semester during the 2013-14 year — a 2.6 percent increase each year. Out-of-state students would face a 3.6 percent tuition increase, which would mean an increase of between $560 and $642 more each semester during 2012-13 and between $580 and $665 more each semester in 2013-14. All graduate students would also pay 3.6 percent more in tuition.

Illinois college savings plan is $560 million short - With the revelation that its prepaid tuition program is dreadfully underfunded, Illinois joined a long list of states that have struggled with similar plans. College Illinois, one of two types of savings plans offered by the state, is $560 million short of its projected obligations to nearly 54,000 current and future students, according to a recent audit. The program allows parents to lock in today's tuition rates, boosting their ability to pay for college. But after promising more than it can deliver, the plan — like many across the country — has been closed to new investors while lawmakers and plan managers decide how to save it. Gov. Pat Quinn has named a new chairwoman to oversee the Illinois Student Assistance Commission, which controls the fund. The Legislature set up a task force to examine it. And there are calls for greater transparency, with critics questioning investment strategies. "We've stopped the bleeding at this point,"

UNC-system president stands by 10-percent parameters for tuition increase proposals -  UNC-system President Thomas Ross said he will stand by the tuition increase parameters he set last week despite dissenting opinions from some students and administrators. Ross, who plans to recommend tuition increase proposals to members of the system’s Board of Governors by the end of the month, reiterated at a press conference Friday that he does not support tuition and fee increases that exceed 10 percent.  UNC-CH’s tuition increase proposal, which was authored by Carney, would have raised tuition by $2,800, or 40 percent, during the next five years. At the Board of Governors meeting Thursday, Ross also said he would not support any tuition proposals that applied to more than two years.  UNC-system President Thomas Ross said he will stand by the tuition increase parameters he set last week despite dissenting opinions from some students and administrators. Ross, who plans to recommend tuition increase proposals to members of the system’s Board of Governors by the end of the month, reiterated at a press conference Friday that he does not support tuition and fee increases that exceed 10 percent.

$422,320 for a College Degree? With Tuition Skyrocketing, It is Time to Rethink Higher Education - $422,320. That's what The Daily, News Corp. and Apple's daily news outlet for the iPad, calculated a college education could cost members of the class of 2034—children born this year, for the most part—if they attend one of the nation's priciest schools. But even an average public university will cost $81,000 for four years if tuition hikes continue at current rates—which are increasing much faster than inflation. As tuition continues to go up, and even the president calls for solutions, some are looking at radical possibilities for keeping tuition down—or even eliminating it. The Daily found that tuition has been increasing even faster at public schools than private—4.5 percent a year for public universities and only 3.5 percent for private. According to Jane Wellman of the Delta Project, which studies the cost of higher education, public schools have been relying on tuition rather than endowments to make up for state education budget cuts.. That last statement shouldn't be surprising—with the Age of Austerity upon us, cuts have been coming fast and hard to state university budgets. Last year, the University of California system saw a $500 million reduction in the support it gets from Sacramento, a 16.4 percent drop.

What the Top 1% of Earners Majored In - We got an interesting question from an academic adviser at a Texas university: could we tell what the top 1 percent of earners majored in? The writer, sly dog, was probably trying to make a point, because he wrote from a biology department, and it turns out that biology majors make up nearly 7 percent of college graduates who live in households in the top 1 percent.According to the Census Bureau’s 2010 American Community Survey, the majors that give you the best chance of reaching the 1 percent are pre-med, economics, biochemistry, zoology and, yes, biology, in that order. Below is a chart showing the majors most likely to get into the 1 percent (excluding majors held by fewer than 50,000 people in 2010 census data). The third column shows the percentage of degree holders with that major who make it into the 1 percent. The fourth column shows the percent of the 1 percent (among college grads) that hold that major. In other words, more than one in 10 people with a pre-med degree make it into the 1 percent, and about 1 in 100 of the 1 percenters with degrees majored in pre-med.

Change academic publishing - My last number theory paper just came out. I received it last week, so that makes it about 5 years since I submitted it – I know this since I haven’t even done number theory for 5 years. Actually I had already submitted it to a journal, and they took more than a year to reject it, so it’s been at least 6 years since I finished writing it. One of the reasons I left academics was the painfully slow pace of being published, plus the feeling I got that, even when my papers did come out, nobody read them. I felt that way because I never read any papers, or at least I rarely read the new papers out of the new journals. I did read some older papers, ones that were recommended to me.

Pensions: Heads I win, tails you pay - STATE pensions in American are in trouble. Just how underfunded they are depends on how you calculate their assets and liabilities. Some estimates suggest the unfunded liability is several times larger than all outstanding municipal debt. Many states assume that their investments will generate about an 8% annual return. States justify this assumption based on the fact that most of their assets, about 70%, are invested in equity. But whether or not stocks will return 8% is uncertain. If you invested in a well diversified equity fund over the last ten years you’d have been lucky to average 2% annually. And so some critics argue that 8% is almost certainly too high. I am not convinced 8% is necessarily so terrible, however. What does bother me about the 8% assumption, however, is that states don’t adequately account for risk. Average equity returns may well be 8%, but that comes with about a 20% standard deviation. Riskier portfolios do typically pay higher returns, but with the obvious downside of higher risk. What’s outrageous is that states use their expected return as the discount rate when they calculate their liabilities. The discount rate you apply to a series of liabilities is supposed to reflect the likelihood that the payment will be made. It forces you to account for the fact that you still may still have to make payments when markets are down and capital is dear.

Calpers Downsizes Housing Portfolio -Calpers, the giant California pension fund, is dumping one of its last major housing investments at a big loss. In a major step toward winding down a two-decade program as the pension world's biggest player in the U.S. housing market, Calpers is selling a portfolio of 28 housing communities to a partnership between San Diego-based developer Newland Real Estate Group LLC and an affiliate of Japan's largest home-building company, Sekisui House Ltd. The portfolio, which includes 16,300 unbuilt home sites and thousands of acres of additional undeveloped land in 11 states, represents about one-fifth of Calpers' residential land portfolio.

Congress’s Six-Figure Benefits Add to $674 Billion Pension Gap - Almost 15,000 federal retirees, including former leaders of Congress, a university president and a banker, are receiving six-figure pensions from a system that faces a $674.2 billion shortfall. About one of every 125 retired federal civilian workers collects more than $100,000 in benefits annually. They include physicians, postal workers and presidential candidate Newt Gingrich, according to data obtained by Bloomberg News under the federal Freedom of Information Act. “We don’t want to bash federal employees,” said Jim Kessler, vice president for policy at Third Way, a Washington- based research organization. “Still, when you have today’s economy, public sector jobs look better and better. And there are some pensions that make you question the system as a whole.” About half of all private-sector workers have no retirement plan other than Social Security, according to figures from the Employee Benefit Research Institute, a Washington-based nonprofit that studies pensions. About 16 percent are in plans similar to the federal system, which guarantees payouts based on workers’ earnings. Some private employers offer so-called defined-contribution plans, including 401(k) plans, in which benefits depend on employees’ contributions and how they’re invested.

New CBO report – Lower (not increase) the early retirement age!  - At one point or another, all the big name politicians have indicated they would support changing the minimum Early Eligibility Age (EEA) rules for Social Security. Obama has said it, so has Boehner. Even guys who love Social Security, like Sen. Harry Reid, thought it might be okay. Many economists have publicly opined that raising the EEA for benefits is good economics, as the average life expectancy is higher than it was forty years ago. I think that all of these deep thinkers are wrong. In fact, a good case can be made for lowering the minimum retirement age from 62 to 60. From the Congressional Budget Office report on the consequences of increasing the Early Eligibility Age (EEA): The budgetary effects of a rise in the EEA in the short term would be different from those over a longer period. Federal outlays would decline in the short term because people would have to wait until they were older to apply for Social Security benefits. Over time, higher subsequent monthly benefits would offset an increasing share of the savings from delayed eligibility. How is it possible that all of the folks pushing for an increase in the EEA could be wrong on this issue? Intuitively it makes sense. Why doesn’t it work? The answer is that increasing the EEA won't improve the finances of Social Security (or the country as a whole). SS discounts the amount payable if early retirement is opted for. It is calculated so that SS is “expense neutral” if benefits are taken at today’s EEA of 62 years versus the higher benefits available by waiting until 64 years.

Time Is on Our Side: The Survival of Social Security - Dean Baker -- As we approach budget time we can look forward to another burst of hand wringing by the Washington elites, who will once again tell us about the need to cut Social Security and Medicare. News stories and opinion columns will be filled with solemn pronouncements about how these programs must be curtailed before they drive the nation to bankruptcy. We can look forward to that famously deceptive graph showing how the cost of Social Security, Medicare and Medicaid are projected to soar as a share of the economy over the next two or three decades. Those with good eyes will notice that it is the cost of Medicare and Medicaid that are soaring, not Social Security.  That would lead honest people to focus on the need to get U.S. health care costs in line with costs in every other country in the world, but no one ever said that the Washington elites were honest. But this is old hat. We know that the elites tell stories to advance their agenda. What is worth noting -- and celebrating -- is that thus far they have failed. They have been pushing this line for the last twenty years, yet during this period there have been no substantial cuts to either Social Security or Medicare. This fact is truly an impressive accomplishment. It is not only the Republicans who want to cut these programs; top leaders in the Democratic Party have repeatedly indicated their willingness to cut these programs.

Social Security and Brain Damage - Liberals Destroy Social Security While Claiming Victory. Republicans Cry “Please Not the Briar Patch, Br’er ‘Bama, please, please!” Robert Kuttner,  tells us that Obama has won a great victory by getting the Republicans to extend the payroll tax cut; SS “will be made whole from transfers from general government revenues. So far, so good.” So far so bad. The great glory of Social Security has been that it does not depend on “general government revenues.” It is not a welfare program. The workers pay for it themselves. Therefore it contributes absolutely nothing to “The Deficit.” Since “liberals” frequently defend Social Security by pointing this out, you’d think that they could remember it long enough to avoid destroying the very foundation of Social Security. But Kuttner tells us “there is no good reason why Social Security has to be funded entirely by payroll taxes.” No reason, indeed, except that that is what Social Security IS. Fund it from the general fund and it stops being Social Security. It becomes welfare as we knew it. You can keep calling it Social Security but you will be fooling yourself. Then Kuttner tells us, “the payroll one of our most regressive taxes...” Except that it’s not a tax, and it’s not regressive. A tax is a “required payment FOR THE SUPPORT OF A GOVERNMENT.” The payroll “tax” does not support any government; it is used to support the person who pays the tax.

Nearly Half of U.S Lives in Household Receiving Government Benefits - The pool of Americans relying on government benefits rose to record highs last year as an increasing share of families tapped aid in a weak economy. Some 48.6% of the population lived in a household receiving some type of government benefit in the second quarter of 2010, up a notch from 48.5% in the first quarter, according to Census data. Expanding government programs combined with the worst downturn since the Great Depression have led to an explosion in the share of Americans relying on outside help. To combat prolonged economic weakness, Congress extended unemployment benefits to a record 99 weeks (up from the normal 26-weeks offered in most states). The food stamp program was tweaked so it was more generous. Americans flocked to Social Security disability, a last bastion of support for some of the long-term unemployed. Experts predict recipient rolls will decline as the economy grows healthier, but the rising federal deficit has brought government spending, and particularly benefits programs, under closer scrutiny. House Republicans, for example, have proposed block-granting Medicaid (the federal-state health care program for the poor) in order to cut costs. The shift would put more of the responsibility on the states for both designing and paying for their health care programs.

Half of U.S. Households Took Government Benefits in 2010 (Graph) A record-high 49% of the population lived in a household receiving some type of government benefit in the second quarter of 2010, according to Census data reported by the Wall Street Journal. Most of this group received so-called "means tested" benefits like food stamps, subsidized housing or Medicaid. Many are also benefiting from unemployment insurance spending, which has quadrupled since the downturn. This is the sort of figure I call a Rorschach Statistic, because (a) it's guaranteed to provoke a passionate reaction and (b) that reaction will say a lot about your politics. Liberals are more likely to see this as a symptom of a very sick labor force begging for help. Conservatives are more likely to see it as a symptom of a very sick government that is drowning in bloat and addicted to redistribution. Both sides have a case. The labor force is indeed quite sick, with a dismal share of working-age adults participating in the economy. But even most liberals would agree that the projected growth of Medicare and Medicaid scream out for a major reform, or at least a tax hike, in the next few years.

Supreme Court holds the fate of Medicaid - Two cases before the Supreme Court have the potential to effectively do what Republican lawmakers have tried and failed: transform Medicaid into a block grant program for states with few enforceable federal rules about how they provide health coverage for the poor. That outcome may not be the most likely scenario. But legal experts say no one can predict what the high court will do — particularly because many were surprised that the Supreme Court agreed to consider the Medicaid portion of the big multistate challenge to President Barack Obama’s health reform law in the first place. Should the courts rule against the Obama administration and back the states’ contention that Medicaid expansion under the health reform law is unconstitutional, it would severely limit Washington’s ability to tell the states: If you want the federal Medicaid funds, you have to follow the federal Medicaid rules. And that outcome — federal money but few federal strings attached — would be much like the block grant approach that Republicans have periodically attempted, most recently in last year’s House budget.

Testing for Need -- One myth about the surge in federal government spending over the last four years is that it was an automatic response to the recession. But the “tests” that beneficiaries of various government safety-net programs are required to pass before they can participate have gotten easier since 2007. The government safety net is intended to help people in need. Because a lot of people don’t need the government’s help, a variety of tests have been designed to distinguish the needy from everybody else. These include employment tests, asset tests, income tests, earnings tests, retirement tests and age tests. Two of the largest government programs are Social Security and Medicare. They administer essentially one test, for age. Once a person reaches age 65 (sometimes earlier), he or she can receive benefits from these programs regardless of income, assets or employment status.

The Avg 12-Yr-Old is Taller Than the Avg 6-Yr-Old.The Post Gets Desperate in Making the Case Against an Inequality Problem - Dean Baker - The Washington Post has consistently used both its news and opinion pages to try to convince readers that the main threat to their well-being and that of their children came from older people getting fat Social Security checks and generous Medicare benefits. This position has become harder to maintain, both because the economic collapse has made these benefits more important than ever to middle and lower income families and also because the fact that rich are making off with the bulk of the benefits of economic growth is becoming increasingly apparent. Still, the Post labors on.Today, the paper featured a column by political consultant Bill Knapp arguing that we should all be happy because the economy has created jobs over the last 40 years and also because people at most points along the income distribution have seen some gains in income.This is known as "the 12-year-olds are taller than 6-year-olds" argument in reference to the claim that poor nutrition might be stunting growth. The Bill Knapps of the world would get out their yardstick and measure a representative sample of 12-year-olds and do the same for 6-year-olds. After careful analysis of the data they would find that the 12-year-olds are taller. They would then write up their findings and get a column in the Washington Post telling readers that bad nutrition is not affecting growth.

CBO Report: Medicare Pilot Programs Don't Control Health-Care Costs - I was always skeptical of the projections that ObamaCare would reduce the budget.   In fact, I made some counter-predictions of my own. The cuts needed were very deep, and likely to be politically difficult; the benefits claimed in terms of actual improving health or even personal finances had been far too large.  So far, events have borne me out.  About half the projected deficit reduction has now evaporated, because programs added to the bill in order to raise revenue, like the moronic provision requiring everyone to give 1099s to all their vendors, and the fiscally unsustainable CLASS Act long-term care program, had to be axed.  The reimbursement cuts to providers and the excise tax on "cadillac" insurance plans that cost too much won't go into effect for a while, but I still think it likely that they, too, will be (expensively) modified in the face of political and administrative realities.  Medicare's chief actuary thinks so too, so this is not exactly a crazy belief.

The median wage figure and the health care costs figure -- The U.S. median wage for 2010 was $26,363. The average health care insurance premium today is over $15,000 and by 2021 it may be headed to $32,000 or so (admittedly that estimate is based on extrapolation). Therein lies the problem. To oversimplify a bit, treat the wage as the economic value produced by the median individual.  This will be most on target for individuals who do not receive health care benefits through their current jobs. Again to oversimplify, treat the health care costs as the economic value needed to produce or maintain the modern individual.  (Or rather as part of those costs.)   Another relevant comparison is “median income for those who do not have employer-supplied coverage” vs. “future insurance costs for those same individuals.” In any case, we will have increasing numbers of individuals for whom the economic value needed to maintain them exceeds the economic value they produce.  I don’t mean elderly people on life support, I mean able-bodied, working-age individuals.  This will make it increasingly hard to implement “health care egalitarianism.”

Is U.S. Health Spending Finally Under Control? - “Growth in U.S. health spending remains slow in 2010” was the headline of a news release on Jan. 9 by the Centers for Medicare and Medicaid Services, part of the Department of Health and Human Services. At an increase of 3.9 percent over national health spending in 2009, “the rates of health spending growth in 2009 and 2010 marked the lowest rate in the 51-year history of the National Health Expenditure Accounts,” the release said. The news was quickly picked up and disseminated by news organizations, including The New York Times. What is one to make of this development? Is it evidence that we have finally “broken the back of the health care inflation monster,” as former Secretary of Health and Human Services Margaret Heckler famously put it in 1984. The charts below provide a longer-run perspective on health spending in the United States. They are all based on the rich data tables released annually by the Office of the Actuary of the Centers for Medicare and Medicare Services. Charts 1 and 2 show the growth of health spending from 1965 to 2010, broken down by source of payment. Chart 1 exhibits the time path of actual health spending, not adjusted for inflation. Chart 2 exhibits the percentage of total national health spending contributed by the various sources in the chart.

Can Mitt Romney Really Repeal Obamacare? - Tyler Cowen isn't so sure that Mitt Romney will repeal Obamacare if he's elected president: I expect Romney to claim he has repealed ACA, but in fact he will change five aspects of the law and cement the rest of it in place, albeit in a less progressive manner and with lower Medicaid expenditures. (Outright repeal actually would not be easy, not to mention filibuster issues.) He knows he doesn’t have any other “right-wing health care plan” in his back pocket, won’t be willing to restore the status quo ex ante, and he will be willing to take the “Tea Party knock on the chin” very early on in his term, hoping to repair the fence later. Ultimately letting the issue fester doesn’t help him, and he is smart enough to realize that. I'm not so sure about this. The question isn't so much what Romney truly wants to do, it's what a Republican Congress wants to do and whether Romney would actively oppose them. My guess is that a Republican Congress will be pretty single-minded about repealing as much of Obamacare as they possibly can and that Romney won't stand in their way.

You Can't Fool Mother Nature For Long: Mainstream Media: If there is any America "industry" ripe for widespread discrediting, it is the U.S. Corporate Media--the six corporations that own most of the media outlets the conventional American sees, hears and reads. This week's theme is You Can't Fool Mother Nature For Long, and this is how it plays out in MediaLand: when the disconnect between the actual economy and what the American people are told is factual and true about the U.S. economy and its Financial Elites by their Corporate Media widens to surrealism, then the conventional American who has passively accepted propaganda in place of reality will finally abandon belief in the "fairness and integrity" of the Mainstream Media, and see it for what it is: a corporate house of prostitution, where everything is for sale to the highest bidder. Ask yourself how many hard-hitting, high-visibility series on the underbelly of American sickcare have been issued by any Mainstream Media outlet. Then look at how many of these outlets live off the revenues of adverts for pharmaceutical products, health insurance, fast foods and packaged foods-- all industries that are profiteering from the current sickcare system.

The cruel consequences of moral hazard in health care - Our health care system devotes too many resources to prolonging life, and too few to improving its quality. A case described by Lisa Sanders vividly illustrates what I have in mind: A couple of years earlier she started “walking like a drunk,” [the patient] told the slender, middle-aged doctor. Her legs were weak and her feet were numb.  A few months ago she started falling. She broke her ankle in a particularly bad fall; the ankle got better, but she didn’t. Now she was in a wheelchair.Her internists referred her to a neurologist, who sent her to the hospital for an M.R.I. After the test she was so weak that the doctors were reluctant to send her home, and she was admitted to the hospital. After tests and more tests, one observant doctor hit upon the right diagnosis: the patient's dentures didn't fit properly. To keep the dentures in place, she had been using a tube of denture adhesive a day. But her brand contained zinc, which led to zinc poisoning, nerve damage, and a host of other medical problems.The treatment? The patient was told to buy a different brand of denture adhesive, and sent on her way. Why is there so much money available for high tech diagnostic services, when a few hundred (or thousand) dollars for a properly fitting set of dentures would have avoided the need for those services in the first place?

Misery-inducing Norovirus Can Survive for Months — Perhaps Years — in Drinking Water - If there is a central circle of hell, I now know what’s there: endless glasses of water spiked with norovirus that you must drink for eternity. Brave souls, I salute you. Because what these people helped discover is nothing short of spine-tingling: norovirus can survive at least 61 days in well water. Considering it takes only the number of virus particles that you can count on two hands to  make you wish for death for about 24-48 hours, this is not good news.  OK, so many of you are no doubt wondering: What the heck is norovirus? Norovirus is Norwalk Virus, named for the Ohio town which in 1968 was home to the virus’s first identified outbreak and which no doubt do not include this information in its Chamber of Commerce literature. Often called “stomach flu” or “24-hour flu”, this awful malady has no relation to influenza virus, but has gained a reputation no less sinister in recent years. It is the agent responsible for innumerable cruise-ship “gastroenteritis” outbreaks and outbreaks at camps, state fairs, nursing homes, schools, and yes, even NBA locker rooms.Anyone who’s experienced it can tell you it’s a bit like having all of your intestines’ pain receptors activated at once, with uncontrollable nausea and/or diarrhea added as a special bonus.

A sausage a day increases risk of deadly pancreatic cancer -  Eating 50g of processed meat every day - the equivalent to one sausage or two rashers of bacon - increases the risk by 19% compared to people who do not eat processed meat at all. For people consuming double this amount of processed meat (100g), the increased risk jumps to 38 per cent, and is 57 per cent for those eating 150g a day. But experts cautioned that the overall risk of pancreatic cancer was relatively low - in the UK, the lifetime risk of developing the disease is one in 77 for men and one in 79 for women. Nevertheless, the disease is deadly - it is frequently diagnosed at an advanced stage and kills 80% of people in under a year. Only 5% of patients are still alive five years after diagnosis.

DHS' X-ray scanners could be cancer risk to border crossers Privacy Inc. - CNET News: Internal Homeland Security documents describing specifications for border-crossing scanners, which emit gamma or X-ray radiation to probe vehicles and their occupants, are raising new health and privacy concerns, CNET has learned. Even though a public outcry has prompted Homeland Security to move away from adding X-ray machines to airports--it purchased 300 body scanners last year that used alternative technology instead--it appears to be embracing them at U.S.-Mexico land border crossings as an efficient way to detect drugs, currency, and explosives. The Z Portal scanner in use at the San Ysidro, Calif., border crossing uses high energy X-ray radiation to probe the interior of vehicles. Homeland Security says it's safe for humans, but some biophysicists disagreeA 63-page set of specifications (PDF), heavily redacted, obtained by the Electronic Privacy Information Center through the Freedom of Information Act, says the scanners must "be based on X-Ray or gamma technology," which use potentially dangerous ionizing radiation at high energies, and "shall be capable of scanning cars, SUVs, motorcycles and busses." "Society will pay a huge price in cancer because of this," John Sedat, professor of biochemistry and biophysics at the University of California at San Francisco, told CNET. Sedat has raised concerns about the health risks of X-ray scanners, and the European Commission in November prohibited their use in European airports.

TSA to test its airport scanner operators for radiation exposure -  Critics of the TSA support the idea of testing TSA workers. But they continue to call on the TSA to perform independent studies of the full-body scanners to ensure that airline passengers are not being exposed to dangerous levels of radiation.

It should be illegal..but it’s not. - The anti-choice idiots at OperationRescue have always released WANTED posters on Doctors that perform the legal medical procedure known as abortion. Those posters included the Doctors photos, full names, address, phone numbers, etc. Too many of those Doctors have been murdered or maimed as a result,(Dr. George Tiller was shot in both arms years before one of their wingnuts finally murdered him) yet our government considered them perfectly legal until there was a law passed in Congress to protect them and their clinics.OpRescue has now also organized under the name of Pro-Life Nation and compiled and released a nationwide database of all the doctors in the U.S. that provide this legal medical procedure, called which they refer to as -The Largest Collection of Data on America’s Abortion Cartel . From an anti-choice website that is giddy about this latest news:

When Penicillin Pays: Why China Loves Antibiotics a Little Too Much - Ling, like millions of other Chinese, heads instead to her local hospital for a dose of IV antibiotics. "When the coughing gets annoying, I just go to the clinic two or three days in a row and take a drip" she says, Last month, the country's Ministry of Health revealed that on average each Chinese person consumes 138 grams of antibiotics per year — ten times the amount consumed per capita in the U.S. Meanwhile, three times as many Chinese people are prescribed Penicillin compared to the international standard. The Ministry also pointed out that 70 per cent of inpatients at Chinese hospitals received antibiotics; the World Health Organization recommends a maximum of 30 per cent. (Read "China's New Healthcare Could Cover Millions More.") China's thirst for antibiotics has serious consequences. The WHO says the effectiveness of antibiotics is under threat from overuse in China, as diseases mutate to develop immunity. It estimates that 6.8 per cent of Tuberculosis cases in China are multi-drug resistant, compared just 2 per cent in developed countries. Experts believe that diseases as diverse as syphilis and the hospital super-bug MRSA are thriving as they adapt to China's antibiotic-heavy environment." We are now on the brink of losing this precious arsenal of medicines,"

One in 10 Canadians cannot afford prescription meds - One in 10 Canadians have problems affording their prescription medication, often because they don't have insurance to help pay the costs, a new study has found. The study, which appears in the Canadian Medical Association Journal, found that for Canadians without drug plans through work or private drug insurance, one in four cannot afford their medications. The findings come from a review of a 2007 Statistics Canada survey, called the Canada Community Health Survey. Researchers from the University of British Columbia and the University of Toronto found that among the 5,700 respondents who said they had been given a prescription for a medication, 9.6 per cent had either not filled the prescription for cost reasons, or deliberately skipped doses to save money.

You may soon be fired for being fat. If you’re 40 or over and your waist line exceeds 33.5 inches, you’ve broken the law in Japan. In April 2008, the Japanese government passed legislation requiring all citizens over the age of 40 to have their waists measured annually. If a man’s waist is more than 33.5 inches and a woman’s more than 35.5 inches, they’re outlaws, referred to counseling and close government supervision, and placed on a government-regulated diet. In Japan they call it the “metabolic syndrome”, or “metabo law,” for short; the term refers to a combination of health risks — stomach flab, high blood pressure and high cholesterol — all leading to cardiovascular disease and diabetes. “Nobody will want to be singled out as metabo,” Kimiko Shigeno, a company nurse, said of the campaign. “It’ll have the same effect as non-smoking campaigns where smokers are now looked at disapprovingly.” Japanese companies are penalized with fines if they don’t reduce the number of overweight employees. At Matsushita, which makes Panasonic products, the new law requires the company to measure the waistlines of not only its employees but also of their families and retirees, and they must get 10 percent of those deemed metabolic to lose weight by 2012, and 25 percent of them to lose weight by 2015.

La Nina ‘may abet’ flu pandemics - La Nina events may make flu pandemics more likely, research suggests. US-based scientists found that the last four pandemics all occurred after La Nina events, which bring cool waters to the surface of the eastern Pacific. In Proceedings of the National Academy of Sciences (PNAS), they say that flu-carrying birds may change migratory patterns during La Nina conditions.  However, many other La Nina events have not seen novel flu strains spread around the world, they caution. So while the climatic phenomenon may make a pandemic more likely, they say, it is not sufficient on its own - and may not be necessary either. La Nina is the cold cousin of El Nino - the two collectively making up the El Nino Southern Oscillation (ENSO)."Certainly ENSO affects weather and precipitation and humidity around the world," said Jeffrey Shaman from Columbia University in New York."But the effects are very varied around the world - there's no coherent picture." Nevertheless, the last four pandemics - the Spanish Flu that began in 1918, the Asian Flu of 1957, the Hong Kong Flu of 1958 and the swine flu of 2009 - were all preceded by periods of La Nina conditions.

Killer flu doctors: US censorship is a danger to science - America should not be allowed to dominate the debate over who controls sensitive scientific information that could be misused in biowarfare terrorism, say the scientists who created a highly dangerous form of bird-flu virus in a study that has been partially censored by the US government. Ron Fouchier and Ab Osterhaus of Erasmus Medical Centre in Rotterdam accept recommendations by the US government's National Science Advisory Board for Biosecurity, which said key details of their US-funded research should not be published because bioterrorists may use the information to cause a bird-flu pandemic. "But we do question whether it is appropriate to have one country dominate a discussion that has an impact on scientists and public-health officials worldwide," Fouchier and Osterhaus write in the journal Nature."It is not clear whether an international discussion would lead to different recommendations ... We don't know the worldwide opinion until a group of experts from all parts of the globe is formed. An issue this big should not be decided by one country, but all of us," they say.

China seeks to unlock secrets of herbs, roots (Reuters) - Chinese legends have long extolled the benefits of the Tian Shan Xue Lian, a rare white flower found in snowcapped mountains that is revered as a panacea, an elixir so powerful it can supposedly bring the dead back to life. But in laboratories in Shanghai and Hong Kong, scientists are poring over this cusped, wrinkly flower the size of an avocado, from which they hope to develop a new drug to treat irregular heartbeat, or atrial fibrillation, a serious disease that raises the risk of stroke. In the quest for better and newer drugs, scientists in China are re-examining traditional Chinese medicines TCM.L -- roots and herbs that have been used for thousands of years -- to find and reproduce the active ingredients so they may be made into drugs that can be easily manufactured and consumed. But unlike many Chinese drugmakers who already sell TCMs in powders and capsules, scientists are going a step further by putting these experimental medicines through rigorous clinical tests so that they may find wider acceptance globally.

Breakthrough in Saving Lives in Rural Africa - She carries a backpack with diagnostics, oral rehydration solution and zinc, oral antibiotics, flip charts, and a handbook. Her mobile phone is already at hand, to call the ambulance or clinic, or to text the expert server to get information on dosages and other recommendations.  Rokia is a proud and capable member of the new generation of community health workers (or CHWs) who are increasingly on the frontlines of disease control in rural Africa. Doctors and nurses are still few and far between. The United States, Western Europe, and the Middle East are giant vacuum cleaners that suck up Africa's doctors and nurses (and skilled health workers from other low-income regions) with enticements of vastly higher salaries. Africa loses twice by this brain drain, incurring a chronic shortage of doctors and nurses while also incurring the financial loss of all of the training the government has invested in them.  CHWs are different. They come from within the rural communities, typically young people with around eight to twelve years of schooling. They don't qualify for medical positions abroad and are therefore not subject to the brain drain. Yet when properly trained and supported as part of an organized local primary health system, CHWs save lives on par with the doctors and nurses.

Scientists Grow Meat in Labs - "In vitro or cultured meat is not imitation meat -- like all those vegetable-protein products that don't taste anything like beef or chicken. In vitro or lab-grown meat is animal flesh, except it never was part of a living animal." There are at least 30 projects under development worldwide to come up with more of these cultures. NASA scientists have already proved the process possible. And a lot of companies want to invest in these products because they see potential windfall in selling cruelty-free meat to vegs worldwide. The rub? Researchers need to make sure that man-made meat is commercially viable. Many are now scrambling to do so because People for the Ethical Treatment of Animals has promised $1 million to the researcher who can develop "lab-grown chicken with the same taste and texture as real chicken meat, and sell at least 2,000 pounds of the in vitro product in 10 states by early 2016."

Indian food energy production and consumption: an export land model analysis - Past series (starting here and here) have defined the units and terms used here, explain how I derive food energy contents for the various food items reported by the FAO, and, how these aggregated data can be used to estimate overall food energy production, consumption and export/import rates for individual countries, regions, or the entire world. Although India’s food production and consumption trends bear similarities to China as you will see, unlike China, India is not presently, nor in the past, a large importer or exporter of food. Throughout, where pertinent, I will point out similarities and differences as compared to China’s or the USA’s food energy product, consumption and exports/imports, the details of which are presented previously here and here, respectively.

Why biofuels are not a good idea  - Last year, I was engaged in a public debate on energy with a high level senior official of the Italian government - a "technocrat" if you like to use this term. When I expressed strong doubts about biofuels as a source of energy, his reaction was aggressive. He attacked me personally, hinting that I was on the payroll of the oil industry, since it is obvious that they don't like biofuels.  If you want to survive this kind of attacks, you must be very well prepared on the subject. For this purpose, you may find a lot of help in the recent book "The Biofuel Delusion" by Mario Giampietro and Kozo Mayumi. If you are unsure about why exactly biofuels are the disaster that they are, this book will explain to you that on the basis of a rigorous analysis and plenty of data.  The main point of their analysis is based on fundamental physics: the efficiency of photosynthesis is low and the result is that the areas needed for cultivation are large. If we are thinking of amounts of biofuels comparable to the present needs for transportation, the task is simply unthinkable: there would be no space left for food production. As the authors flatly state at page 128 of the book, "Full substitution of fossil energy with agro-biofuels is impossible."

Genetically Engineered Stomach Microbe Converts Seaweed into Ethanol - Seaweed may well be an ideal plant to turn into biofuel. It grows in much of the two thirds of the planet that is underwater, so it wouldn't crowd out food crops the way corn for ethanol does. Because it draws its own nutrients and water from the sea, it requires no fertilizer or irrigation. Most importantly for would-be biofuel-makers, it contains no lignin—a strong strand of complex sugars that stiffens plant stalks and poses a big obstacle to turning land-based plants such as switchgrass into biofuel. Researchers at Bio Architecture Lab, Inc., (BAL) and the University of Washington in Seattle have now taken the first step to exploit the natural advantages of seaweed. They have built a microbe capable of digesting it and converting it into ethanol or other fuels or chemicals. Synthetic biologist Yasuo Yoshikuni, a co-founder of BAL, and his colleagues took Escherichia coli, a gut bacterium most famous as a food contaminant, and made some genetic modifications that give it the ability to turn the sugars in an edible kelp called kombu into fuel. They report their findings in the January 20 issue of the journal Science.

USDA Ignores Pesticide Ravaging Bee Population, Threatening Global Environment - It has recently been reported that certain research was suppressed concerning the bee decline which has been occurring over the past few years. It seems that the large sum of money raked in by Bayer, a maker of pesticides, was enough to kick research under the carpet that linked the company’s pesticide to the massive bee decline. There has been a great deal of cover up and secrecy regarding the ongoing bee deaths, enraging environmentalists and activists alike. About one year ago I reported on how the USDA and EPA knew why a series of ‘mysterious’ downfalls were occurring with crops, birds, and bees. Although technological products like cell phone towers and cell phones are hurting the bee population, it was actually the pesticide brought to you by Bayer which was causing the damage, and the USDA knew of it all along.

Nearly 7 million bats may have died from white-nose fungus, officials say - More than five years since the deadly white-nose fungus was first detected in a New York cave where bats hibernate, up to 6.7 million of the animals are estimated to have died in 16 states and Canada, the U.S. Fish and Wildlife Service announced Tuesday. The estimate, drawn from surveys by wildlife officials mostly in Northeastern states where the disease thrives, confirmed the worst fears of biologists who have been counting dead bats covered in the powdery fungus in mines and caves every winter and worrying whether the little brown bat, the northern long-eared bat and the tricolored bat will survive. “We’re watching a potential extinction event on the order of what we experienced with bison and passenger pigeons for this group of mammals,” said Mylea Bayless, conservation programs manager for Bat Conservation International in Austin, Tex. “The difference is we may be seeing the regional extinction of multiple species,” Bayless said. “Unlike some of the extinction events or population depletion events we’ve seen in the past, we’re looking at a whole group of animals here, not just one species. We don’t know what that means, but it could be catastrophic.”

EPA’s Toxics Release Inventory Doesn't Offer Full Picture of Pollution- The U.S. Environmental Protection Agency has unveiled its analysis of the 2010 Toxics Release Inventory, a database containing information on the disposal or release of 650 potentially dangerous chemicals used by almost 21,000 facilities. Though there were some increases between 2009 and 2010, it found that releases of these chemicals have generally decreased, with the total down 30 percent since 2001. But, as the EPA acknowledged, the database provides only a snapshot of the pollution produced by American industry. “Users of TRI data should be aware that…it does not cover all toxic chemicals or all sectors of the U.S. economy,” the analysis warned. “Furthermore, the quantities of chemicals reported to TRI are self-reported by facilities and are often estimates.” These estimates in some cases dramatically understate the extent of pollution, as the Center for Public Integrity and NPR reported in the Poisoned Places series, an investigation of lax Clean Air Act enforcement.

Cold winters tied to Arctic summers, study says - Remember New York City's 2011 blizzard? Or Florida's 2010 hard freeze? Blame them on the summer. According to a new study, those are the type of extreme cold events in the northern hemisphere's winter that appear tied to warmer Arctic summers. It's certainly counterintuitive, the authors acknowledge, and that could be why climate models haven't picked up on the trend identified in the study: The warmer Arctic, along with melting sea ice, create more moisture in the Arctic and that typically leads to more snowfall across northern Eurasia in October -- a key factor in this entire dynamic. That extra snowfall, in turn, alters what's known as the Arctic Oscillation, sending cold blasts down south.

Video: NASA says Canada ‘hot spot’ of ecological change - A new NASA study predicts massive ecological changes for Canada's Prairies and boreal regions by the year 2100. Those areas are in "hot spots" highly vulnerable to massive environmental changes this century due to global warming, the study states. Much of Alberta, Saskatchewan, and Manitoba is predicted to see major shifts northward of plant and animal species. "By about 2100, the climate change projections that we have today would suggest that there would be pressure on that grassland so prevalent in [the Canadian Prairies] to move further northward — and at the expense of the forest moving further northward as well," said NASA climate scientist Duane Walliser, who spoke with CBC News from the Jet Propulsion Laboratory in Pasadena, Calif.Walliser said that all across the globe, whole ecological zones such as deserts and tundra will be on the move because of "unprecedented" warming at a pace faster than at any time in 10,000 years. But Western Canada will be among the areas hardest hit.

Russia warming at alarming pace - Temperatures in Russia in the past century rose at twice the rate of warming in the rest of the world, the emergencies ministry said. “Despite ongoing discussions in the scientific community about the nature and long-term outlook for global climate change, the fact of global warming itself is uncontroversial,” the ministry said in its forecast of emergency situations in 2012. “Average warming in Russia in the past 100 years was 1.5 to two times higher than overall global warming,” the forecast read.

Southern India Shivers: 7 die in AP; Karnataka Coldest in 100 Years : The unprecedented cold wave sweeping across southern India has claimed seven lives so far in Andhra Pradesh and broken century-old temperature records at several places in neighbouring Karnataka.  Chilly winds blew across coastal and north Telangana districts, claiming the lives of four elderly persons at Gudipudi village near Sattenapalle in Guntur district on Monday. Two women each died in Bapatla and Visakhapatnam.

Climate and the statistics of extremes: -- Remember the 2003 heat wave? According to the standard weather models, it was impossible. Mathematicians from EPFL’s Chair of Statistics, however, say that there was a five in ten thousand chance for the event to occur. That’s a pretty slight chance, but not completely negligible. To reach this result, they developed a model that specifically deals with extreme weather events. Thanks to this tool, which takes into account various parameters such as climate change, the researchers are already able to more precisely predict the risk of extreme phenomena for the upcoming decades. Swiss mathematicians have shown that the risk of extreme climate events is largely underestimated. They are developing a model for better understanding the impact of climate change.

2011: The 9th hottest year on record - If anyone tells you the Earth isn’t warming up…… tell them they’re full of it. 2011 was the ninth hottest year on record, and those records go back 130 years. And then they might say, well, sure, but that could be coincidence. Then you look them straight in the eye, and you say: Nine of the ten hottest years on record have been since 2000.

Obama: Moving NOAA corrects a Nixon mistake - President Obama said Friday that his plan to move the National Oceanic and Atmospheric Administration into the Interior Department would correct a mistake that dates back four decades. Obama announced the plan to take NOAA away from the Commerce Department as part of a broader proposal to merge various trade and commerce agencies. Here’s Obama on Friday on why NOAA is housed at Commerce to begin with:If you’re wondering what the genesis of this was, apparently, it had something to do with President Nixon being unhappy with his Interior Secretary for criticizing him about the Vietnam War. And so he decided not to put NOAA in what would have been a more sensible place. But some environmentalists are dismayed by the proposed move to Interior, which handles offshore oil-and-gas leasing and regulation. Natural Resources Defense Council President Frances Beinecke said her group is “extremely troubled” by the plan. “The move could erode the capabilities and mute the voice of the government’s primary agency for protecting our oceans and the ecosystems and economies that depend on them,” she said in a statement.

Arctic methane outgassing on the East Siberian Arctic Shelf. Part 1. The background - Reports of extensive areas of methane - a powerful greenhouse gas - bubbling up through the shallow waters of the East Siberian Arctic Shelf (ESAS) have been doing the rounds in the media recently, with some articles taking the apocalyptic approach and others the opposite. So what IS going on in the far North? In this two-part post we will first examine the data available to date and then in part two we go on to discuss the findings of 2011 with the research team who have been doing the work on the ground.

An online model of methane in the atmosphere - I’ve put together an easy-to-play-with online model of methane in the atmosphere. I’m going to use it for teaching along with the rest of the Understanding the Forecast webmodels, but it was designed to be relevant to the issue of abrupt new methane burps as we’ve been ruminating about lately on Realclimate.  The model runs in three stages: a pre-anthropogenic steady state which ends in the model year -50, addition of a new chronic source for 50 years (from human activity),then a spike beginning at model year 0 (supposed to be today) and running for 100 years into the model future. Here are results from the “worst case scenario” in the last post (whether you believe it is the true worst case or not): 200 Gton C over 100 years.  The lifetime of methane in the atmosphere, used to calculate the methane sink in any time step, is parameterized as a function of concentration following Schmidt and Shindell (2003).

Latest methane measurements for December 2011 - December map of arctic methane

From Idiot Tracker: Methane: a worse worst-case scenario - Real Climate has weighed in on the Arctic methane question, and, as always, their contribution is cogent, well-considered, and reasonable: But the methane worst case does not suddenly spell the extinction of human life on Earth. It does not lead to a runaway greenhouse. The worst-case methane scenario stands comparable to what CO2 can do. What CO2 will do, under business-as-usual, not in a wild blow-the-doors-off unpleasant surprise, but just in the absence of any pleasant surprises (like emission controls). At worst comparable to CO2 except that CO2 lasts essentially forever. It's comical (which I suppose is the point) the degree to which Randall Munroe captured this perspective in this 2010 cartoon: "The worst-case scenario is what's happening now." Indeed it is. And we shouldn't allow ourselves to be distracted from the certain disaster of BAU CO2 emissions by the possible disaster of the rapid release of methyl hydrates. With the radiative forcing of seven doublings of CO2, total warming quickly exceeds +15 C (on its way to +20 C), rendering most of the earth's surface uninhabitable:

They Tried To Teach My Baby Science!  - It's bad enough that humans are trashing the Earth, and in the process, making it doubtful that our astonishing Blue-Green Planet will be habitable by large, big-brained, bipedal primates by the year 2100. No, these humans must also deny that they are trashing this singular, precious planet, which strongly indicates that those big brains are malfunctioning in a most distressing way.This brings up the related question of why those big brains evolved in the first place—no other animal acquired this trait during the 543 million years of the Phanerozoic Eon—but that's not my subject today. Viewed this way, Homo sapiens is an anomaly.Wired tells us about malfunctioning big brains in The New Science Classroom Battleground: Climate Change:The National Center for Science Education has been defending the teaching of evolution since before Edwards vs. Aguillard, the 1987 Supreme Court decision that declared the teaching of creationism an unconstitutional promotion of religion. Although its primary focus is on supporting teachers and students by helping them handle public controversies caused by science education, the organization played a critical role in the Dover case, which blocked the teaching of creationism’s descendent, intelligent design.

Returning to Simplicity (Whether We Want To or Not) - The modern world depends on economic growth to function properly. And throughout the living memory of every human on earth today, technology has continually developed to extract more and more raw material from the environment to power that growth. This has produced a faithful belief among the public that has helped to blur the lines between human innovation and limited natural resources. Technology does not create resources, though it does embody our ability to access resources. When the two are operating smoothly in tandem, society mistakes one for the other. This has created a new and very modern problem -- a misplaced trust in technology to consistently fulfill our economic needs. What happens once key resources become so dilute that technology, by itself, can no longer meet our growth needs?  We may be about to find out.

Why Wind Power Doesn’t Live up to its Environmental Promises - The heavily funded and admittedly effective U.S. industrial wind lobby portrays its product as descending from old-world windmills. Close your eyes and you’ll surely imagine these magnificent machines gently turning in the breeze … each kilowatt arriving at your reading lamp courtesy of a rosy–cheeked Hummel child. Existing solely to save the planet by generating clean, affordable and environmentally friendly electricity, you can be sure that any addition to the plant owner’s bank account is purely accidental. Hogwash! In reality, the U.S. industrial wind business was rescued by Ken Lay and Enron with quick, low-risk profit as its core goal. As Gabriel Alonso, chief executive of Horizon Wind Energy LLC – one of America’s biggest wind developers, often reminds his employees … their goal isn’t to stage a renewable-energy revolution … “This is about making money!”

Scotland Well on the Way to Achieving 100% Renewable Energy by 2020 - Back in 2010 Scotland’s First Minister, Alex Salmon, proclaimed that by 2025 all of Scotland would be powered by 100% renewable energy, with an interim target of 31% by 2011. In the past four years the Scottish Government approved 42 renewable energy projects, and in 2009 27.4% of electricity demand came from renewables. Scotland was well on its way to achieving their ambitious targets, despite the doubts from sceptics. 2011 has been and gone and Scotland easily exceeded the goal of 31% causing Minister Salmon to return with a new target; 100% by 2020. Whilst renewable energy is the sector, the Scots are focussing their efforts on offshore wind farms. This will be hugely helped by the recently declared partnership with Masdar, the Abu Dhabi clean energy company. The pooled resources of both institutions will be used to research and advance clean technology development. Salmond acknowledged that "the costs of offshore wind will have to be reduced by 20% to be competitive,” as will the costs of efficiently transporting electricity over long distances. But the aim is clear; the commercialisation of offshore wind farms. It is the big prize, and will give Scotland a strong foothold in one of the most promising industries of the future; which could reportedly be worth $30 billion. Needless to say, Scotland’s hopes are as high as their ambitions.

Geothermal's Potential as a Serious Energy Source - The Earth started its existence as a red-hot rock, and has been cooling ever since. It’s still quite toasty in the core, and will remain so for billions of years, yet. Cooling implies a flow of heat, and where heat flows, the possibility exists of capturing useful energy. Geysers and volcanoes are obvious manifestations of geothermal energy, but what role can it play toward satisfying our current global demand? Following the recent theme of Do the Math, we will put geothermal in one of three boxes labeled abundant, potent, or niche (puny). Thermal energy is surprisingly hefty. Consider that putting a room-temperature rock into boiling water transfers to it an equivalent amount of energy as would hurling it to a super-sonic speed! We characterize the amount of heat an object can hold by its specific heat capacity, in Joules per kilogram per degree Celsius (or Kelvin, since one degree of change is the same in either system). Tying some energy concepts together, the definition of a kilocalorie (4184 J) is the amount of energy it takes to raise 1 kg (1 liter) of water 1°C. So we can read the specific heat capacity straight away as 4184 J/kg/K. This is a rather large heat capacity, on the scale of things. Rocks—relevant for geothermal energy—range from about 700–1100 J/kg/K, and although I would be happy enough to use the convenient 1000 J/kg/K for crude analysis, I will be somewhat more refined and use 900 J/kg/K for rock in this post.

Project to Pour Water Into Volcano to Make Power - Geothermal energy developers plan to pump 24 million gallons of water into the side of a dormant volcano in Central Oregon this summer to demonstrate new technology they hope will give a boost to a green energy sector that has yet to live up to its promise. They hope the water comes back to the surface fast enough and hot enough to create cheap, clean electricity that isn't dependent on sunny skies or stiff breezes — without shaking the earth and rattling the nerves of nearby residents. Renewable energy has been held back by cheap natural gas, weak demand for power and waning political concern over global warming. Efforts to use the earth's heat to generate power, known as geothermal energy, have been further hampered by technical problems and worries that tapping it can cause earthquakes. Even so, the federal government, Google and other investors are interested enough to bet $43 million on the Oregon project.

Panel Challenges Japan’s Account of Nuclear Disaster - A powerful and independent panel of specialists appointed by Japan1’s Parliament is challenging the government’s account of the accident at a Fukushima Daiichi nuclear power plant, and will start its own investigation into the disaster — including an inquiry into how much the March earthquake may have damaged the plant’s reactors even before the tsunami. The bipartisan panel with powers of subpoena is part of Japan’s efforts to investigate the nuclear calamity, which has displaced more than 100,000 people, rendered wide swaths of land unusable for decades and spurred public criticism that the government has been more interested in protecting vested industry interests than in discovering how three reactors were allowed to melt down and release huge amounts of radiation.

Radioactive Concrete Is Latest Scare for Fukushima Survivors - The Japanese government is investigating how radioactive concrete ended up in a new apartment complex in the Fukushima Prefecture, housing evacuees from a town near the crippled nuclear plant. The contamination was first discovered when dosimeter readings of children in the city of Nihonmatsu, roughly 40 miles from the reactors at Fuksuhima Dai-ichi, revealed a high school student had been exposed to 1.62 millisieverts in a span of three months, well above the annual 1 millisievert limit the government has established for safety reasons. Further investigation traced the radiation back to the student’s three-story apartment building, where officials detected radioactive cesium inside the concrete. Radiation levels at the 6-month-old apartment were higher inside the building than outside. A dozen families live in the new apartment complex. The gravel used in the cement came from a quarry in the town of Namie, located just miles from the Fukushima plant. While Namie sits inside the government mandated 12-mile “no-go” zone because of radiation concerns, it wasn’t completely closed off until the end of April, meaning the gravel was exposed to radiation spewing from the Fukushima plant during that time.

Aftershocking: Frontline’s Fukushima Doc a Lazy Apologia for the Nuclear Industry - There is much to say about this week’s Frontline documentary, “Nuclear Aftershocks,” and some of it would even be good. For the casual follower of nuclear news in the ten months since an earthquake and tsunami triggered the massive and ongoing disaster at Japan’s Fukushima Daiichi nuclear power station, it is illuminating to see the wreckage that once was a trio of active nuclear reactors, and the devastation and desolation that has replaced town after town inside the 20-kilometer evacuation zone. And it is eye-opening to experience at ground level the inadequacy of the Indian Point nuclear plant evacuation plan. It is also helpful to learn that citizens in Japan and Germany have seen enough and are demanding their countries phase out nuclear energy. But if you are only a casual observer of this particular segment of the news, then the Frontline broadcast also left you with a mountain of misinformation and big bowl-full of unquestioned bias. Take, for example, Frontline correspondent Miles O’Brien’s cavalier treatment of the potential increase in Japanese cancer deaths, courtesy of the former property of the Tokyo Electric Power Company (TEPCO):

Siemens Says Germany Nuclear Phase Out to Cost Trillions - The energy wing of German company Siemens estimates that phasing out nuclear power as planned will cost the country between €1.4 trillion and €1.7 trillion (US $2.17 trillion) by 2030. As reported by Reuters, the company believes investments in renewable energy, natural gas, and other replacements for nukes will far exceed previous estimates. In the wake of the Fukushima disaster, Germany was the first among a number of countries that announced plans to shut down nuclear reactors and cancel construction of new nuclear facilities. Germany currently gets about one quarter of its electric power from nuclear reactors, and replacing that output is clearly going to be costly. Siemens' estimate, though, far outstrips other guesses on just how much: According to Reuters, the country's second biggest utility company put the number at around €300 billion (though without a time frame). In September, the state-owned investment bank KfW said the switch would cost about €250 billion by 2020. Among the other countries opting out of nuclear power are Belgium, Switzerland, and Mexico. The costs of these plans vary: In Switzerland, for example, about 40 percent of the country's power comes from five nuclear reactors. Analysis by a think tank called Schweizerische Energie-Stiftung suggested that replacing the reactors would cost 100 billion Swiss francs ($105 billion). Other observers predict that related increases in electricity prices will yield overall drops in the country's GDP.

Saudi Arabia, China Ink Nuke Cooperation Deal - The world's biggest oil exporter, Saudi Arabia has signed an agreement with China for cooperation in the development and use of atomic energy for peaceful purposes, which will help to meet the Kingdom's increasing demand for energy and cut its growing dependence on depleting oil resources. The deal was signed in the Saudi capital Riyadh on Sunday in the presence of King Abdullah and visiting Chinese Prime Minister Wen Jiabao. The agreement seeks to establish a legal framework to strengthen scientific, technological and economic cooperation between Riyadh and Beijing, while the two sides reaffirmed their desire to place the highest priority on nuclear safety and environmental protection, the Arab News reported quoting officials. Another agreement to expand cooperation in the field of academics and library affairs was signed by the Riyadh-based King Abdulaziz Public Library (KAPL) and Beijing University. The pact will broaden the scope of cooperation between the two premier institutions and allow KAPL to open its branch in the Chinese capital.

Wealth And Energy Consumption Are Inseparable - Today we will briefly explore the work of atmospheric sciences researcher Tim Garrett. I first wrote about his work in my study Economic Growth And Climate Change — No Way Out? I concluded that there is no way out —you can't have economic growth and mitigate anthropogenic climate change by reducing CO2 emissions. If we make reasonable assumptions about the future, you can do one or the other (XOR, exclusive or). This conclusion is contrary to the commonly accepted "wisdom" that we can have our cake (economic growth) and eat it too (reduce emissions). I must confess that this discussion is becoming more and more academic because there is overwhelming evidence telling us that humankind is not going to do anything about global warming in any case, i.e. humans will not substantially change their behavior. See my posts What Will The Humans Do?For Humans, The Economy Is Everything and How To Think About The Future. Economic growth, if it is achievable, will always be the preferred path. In addition to his work in the Aerosol-Cloud-Climate-Systems Group at the University of Utah, Tim has also done some groundbreaking work in helping us to understand the link between the global economy and energy consumption. Using reasonable assumptions—for example, we can not build the equivalent of about one new nuclear power plant per day as we de-carbonize—Garrett had arrived at the same conclusion (exclusivity) about economic growth and mitigating climate change, which is why I originally cited his work.

What is Clean, Abundant, Affordable and the Best Alternative Energy Source We Have? -  If you answered natural gas, have a cigar. Natural gas, for the simple reason that it is one of the quickest ways to achieve a future in which an oil importing nation is no longer held hostage by foreign oil and carbon and other harmful emissions are sharply curtailed. With 2010 Total Energy Production of 1.2% and 0.1% of wind and solar, respectively, the impact of renewable energy is a long way off. In fact, there are signs that the industry maybe softening in the U.S.  Natural gas is the cleanest burning fossil fuel. The combustion of natural gas emits significantly lower levels of carbon dioxide (CO2), nitrogen oxides, and sulfur dioxide than does the combustion of coal or oil. When used in efficient combined-cycle power plants, natural gas combustion can emit less than half as much CO2 as coal combustion, per unit of electricity output. Are there "issues" with the extraction of natural gas from shale plays? Most certainly. Can the issues be managed? Again the answer is "Yes."

Natural Gas Prices Are Plummeting - Despite the across the board rally in commodities, natural gas for February 2012 delivery is off a staggering 7.26%. At $2.46 a million British thermal units (Btu), well off its 52-week high of $5.28 a million Btu. Mild weather patterns across the U.S. this year have restricted natural gas use, stemming from lower heating demand. Moreover, the EIA natural gas report released last week showed that production totaled 3.377 trillion cubic feet, and was 17% higher than the 5-year average. A combination of high production and lower demand has contributed to a fall in natural gas futures. Natural gas futures are at their lowest in nearly a decade. Here's a look at how some nat gas stocks are shaping up today, and a chart showing the sharp decline in nat gas futures since mid-2008: Update: Natural gas prices have settled at their lowest level since 2002.

Natural Gas Goes Down In Flames - I received a scratchy and barely audible call from my buddy out in the Barnet natural gas fields just outside of Fort Worth, Texas the other day. With the price for CH4 decisively breaking through $3/MBTU yesterday, traders were now resigned to seeing a new ten year low in the near future, possibly as low as $2. The men on the rigs were getting restless, fearing layoffs in their future. Did I have any insights? Natural gas has been your worst nightmare of a commodity since its peak at $14 in 2008, then riding on crude’s coattails in its infamous run to $149/barrel. Since then, natural gas has cratered 80%, and is down 37% from its 2011 top. You can blame the new “fracking” technology, which in the last four years has unlocked a 100 year supply of natural gas in shale fields, that until recently, were considered unproductive. Hard bitten roustabouts with a line of crude permanently under their fingernails have been driving their RV’s to previously unknown destinations, like Pennsylvania, Alabama, West Virginia, North Dakota, and even California. There is probably a second 100 year supply out there, but with prices so low, what is the point in looking. Europe and China have as much untapped “unconventional gas” under their feet, since their geology is similar, if they could only figure out the technology.

Natural gas plunges to lowest since 2002 - Natural-gas futures plummeted Tuesday as expectations of warmer weather have undercut demand expectations for the fuel amid ongoing production growth. Natural gas for February delivery declined 18 cents, or 6.8%, to settle at $2.49 per million British thermal units, the lowest since March 2002. Supplies have accumulated due to the warmer weather trend in most of the U.S. and "you are running out of time" to use it off by the time winter is over, said Subash Chandra, a managing director at Jefferies & Company in New York. Prices are likely to end below $2 per million Btus by late February and early March, he added.

Electric Power Plants Shift From Coal To Natural Gas - The huge, belching smokestacks of electric power plants have long symbolized air pollution woes. But a shift is under way: More and more electric plants around the nation are being fueled by natural gas, which is far cleaner than coal, the traditional fuel. The most optimistic projections describe an abundant domestic energy source that will create enormous numbers of jobs and lead to cleaner skies. Nationwide, the electricity generated by gas-fired plants has risen by more than 50 percent over the last decade, while coal-fired generation has declined slightly. The gas plants generated about 600 billion kilowatt hours of electricity in 2000 and 981 billion hours in 2010, according to the U.S. Energy Information Agency. During the same period coal generation declined from 1,966 billion hours to 1,850 billion hours, while hydroelectric and nuclear generation stayed about the same. The figures include electricity use by consumers and industry.

The Natural Gas Glut is Reshaping Electricity Markets - Over at Bloomberg, Julie Johnsson and Mark Chediak document how low natural gas prices are reshaping electricity markets. Wind, nuclear, and coal all look expensive compared to natural gas generation: With abundant new supplies of gas making it the cheapest option for new power generation, the largest U.S. wind-energy producer, NextEra Energy Inc. (NEE), has shelved plans for new U.S. wind projects next year and Exelon Corp. (EXC) called off plans to expand two nuclear plants. Michigan utility CMS Energy Corp. (CMS) canceled a $2 billion coal plant after deciding it wasn’t financially viable in a time of “low natural-gas prices linked to expanded shale-gas supplies,” according to a company statement. Mirroring the gas market, wholesale electricity prices have dropped more than 50 percent on average since 2008, and about 10 percent during the fourth quarter of 2011, The hard question, of course, is whether low natural gas prices will persist, particularly if everyone decides to rush into gas-fired generation.

Electricity Declines 50% as Shale Spurs Natural Gas Glut: Energy - A shale-driven glut of natural gas has cut electricity prices for the U.S. power industry by 50 percent and reduced investment in costlier sources of energy. With abundant new supplies of gas making it the cheapest option for new power generation, the largest U.S. wind-energy producer, NextEra Energy Inc. (NEE), has shelved plans for new U.S. wind projects next year and Exelon Corp. (EXC) called off plans to expand two nuclear plants. Michigan utility CMS Energy Corp. (CMS) canceled a $2 billion coal plant after deciding it wasn’t financially viable in a time of “low natural-gas prices linked to expanded shale-gas supplies,” according to a company statement. Mirroring the gas market, wholesale electricity prices have dropped more than 50 percent on average since 2008, and about 10 percent during the fourth quarter of 2011,Prices in the west hub of PJM Interconnection LLC, the largest wholesale market in the U.S., declined to about $39 per megawatt hour by December 2011 from $87 in the first quarter of 2008. Power producers’ profits are deflated by cheap gas because electricity pricing historically has been linked to the gas market. As profit margins shrink from falling prices, more generators are expected to postpone or abandon coal, nuclear and wind projects, decisions that may slow the shift to cleaner forms of energy and shape the industry for decades to come

Unlocking the Secrets Behind Hydraulic Fracturing - Starting Feb. 1, drilling operators in Texas will have to report many of the chemicals used in the process known as hydraulic fracturing. Environmentalists and landowners are looking forward to learning what acids, hydroxides and other materials have gone into a given well.  But a less-publicized part of the new regulation is what some experts are most interested in: the mandatory disclosure of the amount of water needed to “frack” each well. Experts call this an invaluable tool as they evaluate how fracking affects water supplies in the drought-prone state.  Hydraulic fracturing involves injecting water, sand and chemicals into underground shale formations at enormous pressure to extract oil1 and natural gas2. Under the new rule, Texans will be able to check a Web site, fracfocus.org3, to view the chemical and water disclosures.  Most fracked wells use 1 million to 5 million gallons of water over three to five days, said Justin Furnace, president of the Texas Independent Producers & Royalty Owners Association.  A June study4 prepared for the Texas Water Development Board suggested that less than 1 percent of the water used statewide went into fracking. Oil and natural gas groups say such numbers show their usage lags well behind that of cities.

Fracking Would Emit Large Quantities of Greenhouse Gases - Add methane emissions to the growing list of environmental risks posed by fracking. Opposition to the hydraulic fracturing of deep shales to release natural gas rose sharply last year over worries that the large volumes of chemical-laden water used in the operations could contaminate drinking water. Then, in early January, earthquakes in Ohio were blamed on the disposal of that water in deep underground structures. Yesterday, two Cornell University professors said at a press conference that fracking releases large amounts of natural gas, which consists mostly of methane, directly into the atmosphere—much more than previously thought. Molecule for molecule, methane traps 20 to 25 times more heat in the atmosphere than does carbon dioxide. The effect dissipates faster, however: airborne methane remains in the atmosphere for about 12 years before being scrubbed out by ongoing chemical reactions, whereas CO2 lasts 30 to 95 years. Nevertheless, recent data from the two Cornell scientists and others indicate that within the next 20 years, methane will contribute 44 percent of the greenhouse gas load produced by the U.S. Of that portion, 17 percent will come from all natural gas operations. ...

Cornell Study Links Fracking Wastewater with Mortality in Farm Animals - A recently completed study by two Cornell University researchers indicates the process of hydraulic fracturing deep shale to release natural gas may be linked to shortened lifespan and reduced or mutated reproduction in cattle—and maybe humans... Without knowing exactly what chemicals are being used, and in what quantities, it is difficult to perform laboratory-style experiments on, say lab rats. But farm animals are captive, surrounded by electric and barbed wire fences. And when fracking wastewater is spilled across their pasture and into their drinking water, and they start dying and birthing dead calves, one can become suspicious that there is a connection. Which is what the Cornell researchers found during a year-long study of farm animals, based primarily on interviews with animal owners and veterinarians in six states: Colorado, Louisiana, New York, Ohio, Pennsylvania and Texas...

EPA Sees Risks to Water, Workers in New York Fracking Rules - New York's emerging plan to regulate natural gas drilling in the gas-rich Marcellus Shale needs to go further to safeguard drinking water, environmentally sensitive areas and gas industry workers, the U.S. Environmental Protection Agency has informed state officials. The EPA's comments, in a series of letters this week to the state's Department of Environmental Conservation, are significant because they suggest the agency will be watching closely as states in the Northeast and Midwest embrace new drilling technologies to tap vast reserves of shale gas. New York is in the forefront of the shale gas boom and has been working on regulations for more than three years. Judith Enck, the EPA regional administrator who issued the agency comments, noted that New York "will help set the pace for improved safeguards across the country." The EPA's comments are among 20,000 the state has received on its proposed plan to regulate the environmental effects of drilling. Many of the EPA's comments focus on how the state DEC will handle the chemically tainted wastewater from the drilling process known as hydraulic fracturing, or fracking.

Pa. Town With Tainted Wells Getting New EPA Water - The U.S. Environmental Protection Agency announced Thursday that it will deliver fresh water to four homes in a northeastern Pennsylvania village where residential water wells were tainted by a gas driller. The agency also said it will begin testing the water supplies of dozens more homes as it ramps up its investigation more than three years after homeowners say the water supply was ruined. Capping a tumultuous two weeks in which EPA first promised the residents a tanker of water — and then quickly backed away, saying more study was needed — federal environmental regulators said they have concluded that contaminant levels in four of the homes pose a health hazard and require emergency action. Some of the water samples, the agency said, were found to be polluted with cancer-causing arsenic and synthetic chemicals typically found in drilling fluids.

72 Percent of Ohioans Want A Fracking Moratorium, Citing Need For More Study -  The unconventional gas industry's latest rush in the United States will land it in the state of Ohio, but a recent poll shows that the state's residents are not rolling out the red carpet for an industry famous for threatening drinking water supplies, causing earthquakes, noise and air pollution and trying to proliferate global addiction to fossil fuels. Results from a Quinnipiac University poll released today shows that 59 percent of those polled have heard of or read about hydraulic fracturing, or "fracking," the complex and risky process that enables unconventional gas drilling. A whopping 72 percent of Ohioans familiar with fracking support a moratorium on the process until it is studied further. The other 41-percent of citizens are likely to follow suit once they discover what is headed their way, and how little this industry will help them from a financial point of view in the long run. Ohio recently found itself with the fracking shakes, as magnitude 4.0-level earthquakes struck near Youngstown on New Year's Eve. Scientists suspect the earthquakes resulted from a wastewater injection well disposing of fracking brine from Pennsylvania. The Christian Science Monitor explained in a story that the "quake triggered shaking reportedly felt as as far away as Buffalo, N.Y., and Toronto."

Fracking Quakes Shake the Shale Gas Industry - Geophysicists are increasingly certain that expanding production of shale gas is responsible for a spate of minor earthquakes that have upset some communities and prompted authorities in Arkansas, Ohio, Oklahoma, and the U.K. to shut down some natural-gas operations. The question now, say the experts, is whether the underground operations causing the trouble should be scaled back or more closely monitored to minimize future quakes—and whether the relatively small quakes may yet have the potential to trigger truly destructive ones.At least one shale gas producer is already talking change: U.K.-based Cuadrilla Resources, whose first project set off quakes near Blackpool last year. Shale gas operations generate microseismicity in two ways. One is through hydraulic fracturing, or "fracking," the underground blasts of water, sand, and chemicals used to release the natural gas trapped within shale deposits. Fracking is how Cuadrilla caused a quake that measured 2.3 on the Richter scale last April, according to an analysis by the firm's geophysical consultants. Similarly, a fracking operation that injected 2.4 million gallons of fluid into an Oklahoma well over six days last January is a likely cause of the 43 earthquakes that followed, according to a state geologist's report. The 1.0 to 2.8 magnitude quakes began on the second day of injection, and most were centered within 3.5 kilometers of the well. These small quakes were felt on the surface and disturbed nearby residents, but they caused no structural damage.

Study needed on shale gas effects on health: group - The public health effects of shale gas development need to be rigorously studied as production rapidly spreads in the United States, public health professionals and advocates said on Monday. Advances in the hydraulic fracturing, or fracking, drilling technique have revolutionized the natural gas industry, but researchers said more must be done to evaluate what the shale boom means for the those living near wells. Health groups have concerns including possible air and water pollution from fracking, especially since some operations take place very close to homes and schools. "We are leaping before we are looking," said Jerome Paulson, of the Mid-Atlantic Center for Children's Health and the Environment, at a conference focused on shale gas and public health."Those who are drilling and extracting ... have not done the human health research and ecological studies to assure that the process and chemicals they use are the least hazardous possible," Paulson said.

China begins Fracking  -- China’s biggest offshore energy producer, started drilling at its first shale-gas project in the country, joining rivals including China Petroleum & Chemical Corp. (600028)in the search for unconventional natural gas. Exploration started Dec. 29 in the eastern Anhui province, China National Offshore Oil Corp., Cnooc’s parent, said in a statement on its website yesterday. The shale-gas project is also the Hong Kong-listed unit’s first onshore venture, it said. China, estimated to hold more natural gas trapped in shale than the U.S., has yet to produce the fuel commercially. Chinese energy explorers have been seeking shale technology and expertise by buying stakes in overseas fields, including acquisitions of Chesapeake Energy Corp. assets by Cnooc.

The Limits to Growth at forty: Is collapse now inevitable? -Forty years ago, a group of Scientists investigated what the world would look like if we continued on our path of exponential economic growth, with a continued growth in population, pollution and industry. The study resulted in the publishing of the eye opening book, The Limits to Growth, which would surely cause discomfort to even the most ardent of believers in the might of our growth dependent economic system. The team of scientists inputted various sets of data, based on differing predictions relating to population, pollution and economic growth into the World 3 computer model, which made calculations about the future trajectory of economic growth, in relation to any potential limits to such growth and the consequences of surpassing these limits. In almost all models, where growth continued exponentially, population and industry went into sharp decline following peak. The most revealing aspect of these models was that where growth continued, it eventually hit the natural and ecological limits to growth, where after it would undergo a steep rather than gentle and gradual decline, otherwise called a collapse. Collapse resulted even in models where an account was made for a potentially greatly increased use of renewable and nuclear energies, aswell as higher farm yields or greater birth control. The underlying cause of this resultant collapse was the system of inter related feedbacks between the various aspects of the globalised system.

A New World Energy Map is Emerging. Exhibit A: Natural Gas Glut in America Fuels An Export Debate - Natural gas futures contracts for February closed at $2.67 (per million BTUs) in trading Friday on the NYMEX (see chart above).  That's the lowest closing price since March of 2002, almost ten years ago, and that's not adjusted for inflation.  In real terms, it's the lowest price since 1999.   As this Houston Chronicle article points out, natural gas is selling for as much as $12 per million BTUs in Europe (see chart) and as high as $18 in some Asian markets (that's "off the chart" above!).  Andrew Ware, a spokesman for Houston-based Cheniere Energy, is quoted in the article saying  "We have so much natural gas coming up that we don't know what to do with it." Well, it seems like a natural solution to our "glut" would be to export America's cheap, abundant American natural gas to Europe and Asia and allow U.S. companies to take advantage of the huge price difference, but that's generating some controversy as the article points out:"Debate is brewing over whether to keep the nation's glut of natural gas at home for cheap energy or export it at five times the price, possibly creating jobs and boosting the domestic economy. Businesses that purchase natural gas for industrial and residential use have rallied against proposals to liquefy and export the fossil fuel to Asian and European nations willing to pay much higher prices.

ND seeing increase in radioactive oil waste - The state Health Department says municipal landfills in western North Dakota increasingly are rejecting oil field waste because of elevated lead and radiation levels. Health officials say there is no risk to the public.  Scott Radig, the state's director of waste management, says landfill operators are required to check refuge with radiation detectors. He says oil field waste such as old pipes, tanks and filters can have elevated lead and radiation levels. Waste that registers beyond acceptable levels must be disposed at approved facilities out of state.

Oil and Gas Jobs Increase by 75,000 Under Obama — 69,000 More Than Would Be Created By Keystone XL - Approximately 75,000 jobs were created in the oil and gas sector under the Obama Administration between 2009 to 2011, according to analysis of data from the Bureau of Labor Statistics. That’s roughly 69,000 more jobs than would be created by construction of the Keystone XL tar sands pipeline.  The figures, reviewed by the Center for American Progress, show that overall employment in oil and gas (extraction, field support, pipeline construction and transportation, and petroleum refineries) increased by 13% in the last two years. The figures do not include categories such as gasoline stations, fuel dealers, asphalt paving, or lubrication production. This strong increase in American fossil fuel jobs contradicts the arguments made by supporters of the Keystone XL tar sands pipeline, who have attacked the Obama Administration for denying the initial permit for the pipeline due to environmental concerns.

Few Keystone XL Jobs Would Go to Residents on Pipeline Route - The proposed Keystone XL pipeline has been publicized as a major jobs creator, but recent unemployment figures indicate that few of those jobs will go to people who live along the project's route.According to the latest data from the U.S. Bureau of Labor Statistics, the 57 counties in the pipeline's path have some of the nation's lowest unemployment rates. And since most of the construction jobs will go to skilled union laborers, only a fraction of the local people who are looking for work would likely qualify for those positions. If approved, the crude oil pipeline would cross six states—Montana, South Dakota, Nebraska, Kansas, Oklahoma and Texas—on its way from the tar sands mines of Alberta, Canada to refineries on the U.S. Gulf Coast. According to November data from the Bureau of Labor Statistics, unemployment rates in the majority of the counties along the route were between 2.0 and 5.7 percent, much lower than the national rate of 8.7 percent. (The lowest national unemployment rate in the past 20 years was 4.0 percent in 2000.) Only six of the Keystone XL counties had unemployment rates at or above the national rate of 8.7 percent.

Obama administration to deny Keystone XL permit - The Obama administration has decided that it will not issue a permit before Feb. 21 for the controversial Keystone XL oil pipeline from Canada, according to people with knowledge of the decision. The announcement, which could come as early as Wednesday, comes in response to a 60-day deadline Congress imposed in late December on the decision-making process for the permit as part of a deal to extend a payroll-tax break and unemployment benefits for two months.   Today’s decision, expected from the State Department, would make official what the administration has said from the outset: that under current law, it cannot accelerate the permitting process, especially in light of the need for additional environmental reviews of a new path for the pipeline through Nebraska. Nebraska hasn't identified possible alternate routes that would allow the pipeline to circumvent a key aquifer.  "It's a fallacy to suggest that the president should sign into law something when there isn't even an alternate route identified in Nebraska and when the review process is" not yet done, White House spokesman Jay Carney said Tuesday. "There was an attempt to short-circuit the review process in a way that does not allow the kind of careful consideration of all the competing criteria here that needs to be done."

Obama Administration Rejects Keystone XL Pipeline - The Obama Administration is rejecting the proposed route of a pipeline that would bring oil from Canada’s oil shale region to refineries and ports in the Southern United States: — The State Department was expected to announce later Wednesday that it cannot recommend going forward with the proposed Keystone XL oil pipeline within the 60-day deadline set by Congress, putting the politically charged project on hold indefinitely, administration officials said. The administration has until Feb. 21 to decide the fate of the 1,700-mile pipeline to carry heavy crude oil from formations in Alberta, Canada, to refineries on the Gulf Coast. Officials are expected to announce that they cannot meet that deadline and that they are looking for ways to complete a thorough environmental review before making a final decision on the project. The action for now means the permit for the pipeline is rejected although the pipeline company will be allowed to submit a new proposal with an altered route. The Obama administration had sought a year’s delay to find a new route for the pipeline. But Republicans in Congress demanded that the administration accelerate the schedule and make a decision by mid-February, and included that provision in the payroll tax bill passed last month.

Obama administration rejects Keystone oil pipeline - The Obama administration on Wednesday rejected the Keystone crude oil pipeline project, a decision welcomed by environmental groups but blasted by the domestic energy industry. U.S. President Barack Obama said TransCanada's application for the 1,700-mile (2,740-km) pipeline was denied because the State Department did not have enough time to complete the review process. "This announcement is not a judgment on the merits of the pipeline, but the arbitrary nature of a deadline that prevented the State Department from gathering the information necessary to approve the project and protect the American people," Obama said in a statement. With environmental groups concerned about carbon emissions from oil sands production, the administration in November delayed a decision on a presidential permit for the project until 2013. But lawmakers that support the project attached a measure to a tax-cut law passed at the end of last year that set a February deadline for a decision.

Keystone XL Is Dead—Again - For the second time in as many months, the Obama administration has rejected the Keystone XL pipeline—a hugely controversial project that would traverse the length of the country from Nebraska to the Gulf of Mexico, carrying heavy and dirty tar sands oil from deep in Canada. You’ll recall that, following a summer of protests and civil disobedience, the administration announced in November that it was delaying the project for at least a year, until a less disruptive route around a key aquifer in Nebraska could be studied and proposed. (Many believe this delay would kill the project entirely). But Republicans successfully revived the project during the end-of-year negotiations on the payroll tax cut and unemployment insurance. Democrats desperately wanted these measures, and the final bill included a provision that would force the State Department to issue a decision on Keystone within two months. Today—less than even one month since the payroll tax cut bill was passed—the State Department announced they were denying the permit. In a statement, President Obama endorsed that decision: “As the State Department made clear last month, the rushed and arbitrary deadline insisted on by Congressional Republicans prevented a full assessment of the pipeline’s impact, especially the health and safety of the American people, as well as our environment.”

After Keystone pipeline, Canada's other oil project - Prime Minister Stephen Harper has lashed out at American groups opposed to a pipeline that would allow oil from Alberta’s tar sands to be shipped to Asian and US markets. Harper capped a week-long attack on US environmentalists with a nationally televised interview Monday night, essentially telling American opponents of the proposed pipeline to butt out of Canada’s affairs. The 731-mile Northern Gateway pipeline would run west from the massive oil sands deposits of northern Alberta — across pristine wilderness and more than 700 rivers and streams — to a proposed supertanker port on the Pacific coast of British Columbia. Harper accused American groups of hijacking public hearings by a federal regulatory agency, which is assessing the environmental impact of the $6.6 billion pipeline project. Decisions on the development of Alberta’s oil sands should be left to Canadians, he said. In an interview with the CBC, Canada’s publicly funded broadcaster, Harper ridiculed US environmentalists: “Certain people in the United States would like to see Canada be one giant national park for the northern half of North America,” he said.

Our addiction to oil makes Keystone a must - Congressional Republicans thought they trapped President Barack Obama by forcing him to make a quick decision on the controversial Keystone XL pipeline that would carry Canadian tar sands crude oil to U.S. refineries. But the president called it what it was: a political trap. And he can play that game, too. The administration had wanted to put off until after the election a decision on the application from TransCanada to build a 1,700-mile pipeline from Canada to refineries in Oklahoma and Texas. But Republicans made a decision on the pipeline by Feb. 21 a condition of Obama getting an extension of the payroll tax cut. Backed into a corner, the president in effect said, “You want an immediate answer? The answer is ‘No’.”

Why the Keystone XL Rejection Won't Stop Tar Sands Development: The Obama administration's decision Wednesday to reject a pipeline that would have carried crude from Canada's tar sands deposits to Texas oil refineries isn't likely to end investment in the carbon-rich fuel, industry analysts say. In killing the controversial Keystone XL pipeline, President Obama blamed congressional Republicans, who he said "forced this decision" by requiring an expedited 60-day review of the pipeline as a provision of the recent payroll tax extension. Obama also reaffirmed his support for domestic oil and gas exploration and expanding fossil fuel infrastructure. "In the months ahead, we will continue to look for new ways to partner with the oil and gas industry to increase our energy security," he said. But industry analysts question this rationale. "If your objective is improving our energy security, then Keystone should have been built," . Environmentalists have reason to temper their excitement over the pipeline's defeat. They opposed pipeline builder TransCanada's project because of fears about spills and the climate-change implications of refining tar sands, which give off more carbon dixoide than traditional crude oil. But Obama threw his support behind additional U.S. drilling. And analysts say production of tar sands in Canada will continue.

Stopping Keystone XL won’t save the planet - Oil from Canada offers the United States energy security into the indefinite future. The proposed Keystone XL pipeline from Alberta to refineries on the Gulf of Mexico coast offered the immediate promise of 20,000 American construction jobs and many more jobs in oil refining and distribution. Yet this week, the Obama administration delayed approval of the Keystone pipeline into 2013 — a delay that may well kill the project altogether, at great financial loss. Why? The true locus of opposition to the pipeline is not Nebraska, but California, where big liberal environmentalist donors have seized on the pipeline as a talismanic cause. These California environmentalists do not want to redirect the pipeline. They want to stop it altogether, so as to leverage an end to further Canadian oilsands development. What will curtailing oilsands accomplish for the environment? Nothing. This is a big planet full of oil, and if the United States does not buy its oil from Canada, it will buy its oil from somebody else.

Gulf oil-spill responders say they’re still fighting for payments - Companies that responded to the BP oil catastrophe say they are still fighting for payments due from the time the Deepwater Horizon oil well exploded in the Gulf of Mexico in April 2010.  Several contractors told the Sun Herald their businesses have suffered because of failure by O'Brien's Resources Management, BP's prime contractor, to pay for a percentage of their work. O'Brien's representatives declined to comment on the situation, while BP spokesman Ray Melick said the oil company's contractors, O'Brien's and United States Environmental Services in this case, are expected to honor their obligations.

Major Oil Refinery to Close in U.S. Virgin Islands - One of the world’s largest oil refineries will close next month, the company announced Wednesday, stunning nearly 2,000 workers and threatening to upend the reeling economy of the U.S. Virgin Islands. Industry analysts said the closure is unlikely to have a major effect on the global oil market, but Gov. John de Jongh described the loss of the territory’s largest private employer as “a complete body blow” for the U.S. territory of about 108,000 people.He said Hovensa generated a minimum of $60 million a year in revenue for the government, which recently laid of hundreds of public workers due to a budget crisis.“Given what we’re going through right now, this is the last bit of news that I wanted to hear,” he said in a teleconference with reporters. Losses at Hovensa, a joint venture of U.S.-based Hess Corp. and Venezuela’s state-owned oil company, have totaled $1.3 billion over the past three years and were projected to continue due to reduced demand caused by the global economic slowdown and increased refining capacity in emerging markets.

Dems propose 'Reasonable Profits Board' to regulate oil company profits - Six House Democrats, led by Rep. Dennis Kucinich (D-Ohio), want to set up a "Reasonable Profits Board" to control gas profits. The Democrats, worried about higher gas prices, want to set up a board that would apply a "windfall profit tax" as high as 100 percent on the sale of oil and gas, according to their legislation. The bill provides no specific guidance for how the board would determine what constitutes a reasonable profit. The Gas Price Spike Act, H.R. 3784, would apply a windfall tax on the sale of oil and gas that ranges from 50 percent to 100 percent on all surplus earnings exceeding "a reasonable profit." It would set up a Reasonable Profits Board made up of three presidential nominees that will serve three-year terms. Unlike other bills setting up advisory boards, the Reasonable Profits Board would not be made up of any nominees from Congress. The bill would also seem to exclude industry representatives from the board, as it says members "shall have no financial interests in any of the businesses for which reasonable profits are determined by the Board."

Drilled, Baby, Drilled: The Strange Battle To Keep Big Oil From Cheating - "We're no longer doing business as usual," he said. "There's a new sheriff in town." Ken Salazar, Barack Obama's newly minted Secretary of the Interior, delivered his remarks with hardly a shiver or a smile. As far as anyone could tell, he was completely serious. During his confirmation hearing days earlier, still-Senator Salazar vowed to restore public confidence in the Department of the Interior, a troubled fiefdom that controls one-fifth of the land mass of the United States and a million square miles of ocean known as the Outer Continental Shelf. And he chose to kick off his reform campaign at the Denver Federal Center offices of the Minerals Management Service — the most dysfunctional, ethically challenged and scandal-rocked agency in the entire DOI. Until a few months before Salazar arrived in Lakewood, few people had ever heard of MMS. Responsible for collecting royalties on oil, gas and mineral leases on federal lands, Indian reservations and offshore waters, MMS was small in size but huge in its impact on federal revenues, bringing in between $10 billion and $20 billion a year. It was an obscure yet extremely important bit of government business.

Norway sees oil output down, gas up Reuters: (Reuters) - Norway's oil production will decline despite major discoveries made last year, while gas production will continue to rise, Norwegian authorities said on Monday. The oil prospects of Norway, the world's eighth-largest oil exporter and the second-largest for gas, have brightened up over the past year as a giant oil find was made in the North Sea and three major ones were made in the Norwegian Arctic. Norway will produce 1.6 million barrels of oil per day (bpd) in 2012, compared with 1.7 million bpd in 2011, falling further to 1.5 million in 2016, due to depleting reserves in mature fields, estimated the agency, which manages Norway's oil and gas resources. It is expected to produce 106.7 billion cubic metres of gas in 2012, compared with 101.3 billion sold last year, rising to 112.1 billion in 2016, as the share of gas in Norway's remaining reserves rises to 50 percent in 2016 from 46 percent in 2011. In 2011 Norway sold five billion cubic metres of gas less than expected. Statoil, the top oil and gas producer, said it deferred some of last year's gas sales to this year as it expected higher prices in 2012. 

Oil Grab in Falkland Islands Seen Tripling U.K. Reserves - Thirty years after Margaret Thatcher fought a 74-day war with Argentina over the Falkland Islands, the prospect of an oil boom is reviving tensions.  Oil explorers are targeting 8.3 billion barrels in the waters around the islands this year, three times the U.K.’s reserves. Borders & Southern Petroleum Plc (BOR) will drill the Stebbing prospect next month, one of three Falkland wells that Morgan Stanley ranks among the world’s top 15 offshore prospects this year. Meanwhile, Rockhopper Exploration Plc (RKH) is seeking $2 billion from a larger oil company to develop the Sea Lion field, the islands’ first economically viable oil find.  “The area is underexplored and highly prospective,” “These could be like the high-impact wells in Ghana and Brazil a few years ago that opened up a whole host of basins.”  A major drilling success will further raise the political temperature as Argentina maintains its claim over the U.K’s South Atlantic territory, 300 miles (483 kilometers) from the Latin American coast. President Cristina Fernandez de Kirchner said Britain is taking her country’s resources, while Thatcher’s successor David Cameron yesterday accused Argentina of a “colonialist” attitude that didn’t account for islanders’ rights.

Saudi Arabia wants oil around $100/bbl - oil min (Reuters) - Saudi Arabia, the world's top oil exporter, said on Monday it favours an oil price of $100 per barrel, identifying an ideal oil price for the first time in more than three years. In an interview with CNN the Kingdom's oil minister also said the country could raise production quickly if necessary. "Our wish and hope is we can stabilise this oil price and keep it at a level around $100," Dow Jones Newswires quoted Saudi Oil Minister Ali al-Naimi as telling CNN in an interview. The Saudi oil chief said Riyadh could increase production by about 2 million barrels per day (bpd) "almost immediately". "We can easily get up to 11.4, 11.8 (million barrels a day) almost immediately, in a few days," Naimi told the news channel -- up from just under 10 million bpd now. Saudi Arabia has promised repeatedly to fill any supply gap left if output from Iran or any other major producer is disrupted. But "to get to the next (700,000 barrels a day) or so, we probably need about 90 days", he said. 

Saudi Arabia targets $100 crude price - Saudi Arabia is aiming to keep oil prices at about $100 a barrel, a third above its previous public target, in a sign that Riyadh needs higher oil revenues to sustain a big rise in public spending.  Ali Naimi, the Saudi oil minister, on Monday for the first time said the world’s largest oil producer aimed to keep oil prices at the triple-digit level.  “Our wish and hope is we can stabilise this oil price and keep it at a level around $100 [a barrel],” Mr Naimi told CNN. “If we were able as producers and consumers to average $100 I think the world economy would be in better shape.” Brent crude oil prices rose 56 cents on Monday to $111 a barrel amid rising tension between western nations and Iran over Tehran’s nuclear programme. The new favoured price – a de facto target – is a third higher than the $75-a-barrel level that King Abdullah said was a “fair price” in November 2008. Riyadh is traditionally seen as a price moderate within the Opec oil cartel. But Mr Naimi’s comments put the kingdom in line with price hawks such as Venezuela.  The revised target is in part a reflection of rising public spending in the wake of the Arab spring. “The Saudis need to spend more money to keep their citizens quiet and prevent protests,” said Carsten Fritsch, oil analyst at Commerzbank.

Oil Rises to Three-Day High as Saudi Arabia Is Seen Targeting $100 Crude - Oil rose to the highest level in three days on speculation that China will intensify monetary stimulus, supporting fuel demand, and as France pushed for a ban on Iranian imports. France wants a European Union embargo delayed by no more than three months as members seek alternative supplies, an official with knowledge of the matter said yesterday. China’s economy expanded at the slowest pace in 10 quarters, sustaining pressure on Premier Wen Jiabao to ease monetary policy. Saudi Arabia aims to stabilize the average of crude prices worldwide at $100 a barrel in 2012, Oil Minister Ali al-Naimi said in an interview with CNN yesterday. “Everything is rising because of China,”

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

OPEC: Oil Production Still Rising - Global oil production rose by about a half million barrels/day in December according to OPEC.  So fears over Iran, Nigeria, Kazakhstan remain largely just fears - not that something couldn't happen, but so far global liquid fuel production is still rising.  The IEA will come out with their numbers on Wednesday and I will update all my monthly graphs at that time. According to OPEC (based on "secondary sources") Saudi production was pretty much flat over the November level: 9.763mbd in December versus 9.783 in November.  Still no sign of the 10mbd Mr Al-Naimi was claiming.

OPEC pumps 30.83 million barrels of crude oil per day in December - The biggest single increase came from Libya, whose efforts to restore production toward pre-uprising levels saw output rise to 800,000 b/d from 550,000 b/d in November, the survey showed. "The increase in production last month was all about Libya, with only minor changes from other OPEC members," said John Kingston, Platts global director of news. "Libyan output is still only halfway back to where it was before last year's uprising, but total OPEC supply is already 830,000 b/d greater than the group's new output production ceiling, which only came into force at the start of this month." Other increases came from Saudi Arabia, whose output climbed by 100,000 b/d to 9.8 million b/d in November, and the United Arab Emirates (UAE), where production rose to 2.55 million b/d from 2.51 million b/d in November. The Platts survey estimated output drops totalling 160,000 b/d from Angola, Iran, Iraq, Nigeria andVenezuela.

OPEC oil production rises to 3-year high -The Organization of the Petroleum Exporting Countries (OPEC) in December raised its total oil output to the highest level since October 2008, as Libya revamped its production, the group said Monday. OPEC countries produced 30.82 million barrels per day (bpd) in December, 171,000 bpd more than in the previous month, the Vienna-based group said in its monthly market report. Most of the 12 members of the cartel pumped less oil, while Libya boosted its output to 773,000 bpd, around half of the level before the civil war. OPEC kept its forecast for growth of global oil demand steady at 1.1 million bpd for 2012. The report did not comment on Iran's threat to close the Strait of Hormuz in reaction to sanctions over its nuclear programme, except for noting that oil prices have been supported in recent weeks by 'geopolitical concerns in the Middle East.' The strait is a key shipping route for Arab and Iranian oil. 

The Significance of the Al-Naimi Price Comment - Recently, Saudi oil minister Ali al-Naimi made some interesting comments to CNN about Saudi spare capacity: I believe we can easily get up to 11.4, 11.8 (million barrels a day) almost immediately, in a few days, because all we need is to turn valves," Saudi Oil Minister Ali al-Naimi told CNN's John Defterios. "Now to get to the next 700 or so, we probably need about 90 days." When asked about whether Saudi Arabia could make up for Iran's exports of 2.2 million barrels a day, al-Naimi said the country has a spare capacity "to respond to emergencies worldwide, to respond to our customer demand, and that is really the focus. and oil prices: "Our wish and hope is we can stabilize this oil price and keep it at a level around $100" for the average barrel of crude, al-Naimi said. A good deal of attention has been paid to the second comment since previously the Saudis had said they were comfortable with an oil price of around $75. Kevin Drum is sceptical of Mr al-Naimi: This is a bit of a pet peeve of mine, so I'd like to offer an alternative explanation. Here it is: Neither the Saudis, nor anyone else, control the price of oil anymore. Saudi Arabia has very little spare capacity to speak of, and couldn't open the taps to bring the price of oil down even if it wanted to. So no matter what the price of oil is, that's approximately the price the Saudis say is fair. That way they don't have to admit that they no longer have the ability to seriously affect oil price movements.

OPEC: Downside risk to oil demand from euro crisis (Reuters) - A worsening of the euro zone debt crisis would reduce Europe's already slowing oil demand and could impact consumption in emerging economies, which are driving the increase in global fuel use, OPEC said on Monday. In a monthly report, the Organization of the Petroleum Exporting Countries also said its oil output rose to a three-year high in December as Libyan supplies recovered and was far above the group's new target of 30 million barrels per day (bpd). OPEC said oil use in European members of the Organisation for Economic Co-operation and Development (OECD) would fall by 160,000 bpd in 2012 and would drop further if the euro zone crisis deteriorates. "If the situation were to worsen, the effect on the oil market could be seen not only through a further decline in oil demand in Europe but also with spillover effects on oil demand in the emerging economies, amid an adequately supplied market," the report said. 

Oil demand falls for first time since 2009 - Oil demand has fallen for the first time since the 2008-09 global financial crisis, a result of the weakening economy, a mild winter and high crude prices, according to new estimates from the International Energy Agency. The industrialised nations’ watchdog said oil demand dropped by 300,000 barrels a day year-on-year in the final quarter of 2011. While still forecasting overall growth in demand for 2012, the agency revised down its outlook for this year to growth of 1.1m barrels a day, from 1.3m b/d, and said further downgrades were possible. Global oil demand in 2011 was 89.5m b/d. David Fyfe, head of the IEA’s oil industry and markets division, said the drop in demand late last year reflected the mild winter, which was in sharp contrast to the cold winter of 2010-11. But it was still surprising. “It is quite rare” to see an absolute contraction, he said. “We’re flagging that there are clearly downside risks to the global economy and to oil demand.” The price of crude has been relatively stable since last spring, within a range of $100 to $120 a barrel. But it jumped $4-$5 a barrel at the new year as the European Union prepared to impose a ban on Iranian oil imports and Tehran threatened to close the Strait of Hormuz, a crucial conduit for oil exports from the Gulf.

Oil hawks living in cloud cuckoo land - The contest seems to be an annual event. Will we hear the first cuckoo of spring before an oil market hawk projects that prices will soon reach $200 a barrel? This year the cuckoo lost, with Capital Economics forecasting – with remarkable precision – that oil prices will hit $210 when the Iranians mine the Strait of Hormuz. Maybe. In the energy market it is unwise to say never. Open conflict may be averted. If so, the market will start to examine fundamentals that suggest a different risk – that oil prices will decline this year and are more likely to average $80 than $200. Of course, there are many risks.  Many previous attempts at dialogue have failed. A third of the world’s traded oil – about 15m barrels a day – passes through Hormuz daily. And there are other pinch points. The Suez Canal carries large volumes of oil and gas – including half of the UK’s daily gas imports. The conflict in Nigeria could explode and cut off supplies. The new wave of terrorism in Iraq following the US withdrawal could reach the oilfields of the south. On balance, however, the main worry for the world’s oil producers is that prices will fall. Three factors support this view – supply, demand and politics. Oil supplies are plentiful. Surplus capacity is now running at more than 4mb/d and, according to the International Energy Agency, is set to rise to 8mb/d by 2016. High prices over the past five years have encouraged new developments across the world and given new life to established fields. Libya has now restored almost all its production and new fields should come on stream this year in Brazil, Canada, Angola and the Gulf of Mexico

Iran masks signs of Brent weakness - The headline price for Brent crude, the global benchmark for high quality crude oil, of roughly $110 a barrel points to a strong market amid the crisis in the Middle East. But a closer look at the structure of the Brent oil market reveals growing signs of weakness which the standoff between Iran and the west is masking. If anything, the physical and financial Brent market suggest that oil prices could fall, not rise.  The most crucial signal of weakness is an abrupt change in the so-called shape of the oil curve – the price difference between contracts for immediate delivery and those with a longer delivery date. For the last year, the curve has shown a downward slope, known in the industry as “backwardation”, with contracts for immediate delivery trading at a significant premium to forward contracts. The backwardation was particularly extreme last October when the difference between the price of the Brent contract for immediate delivery and that of the following month escalated to nearly $3 per barrel due to lack of supplies from Libya. But since then the backwardation has melted away. On Friday, the price difference between the February and March contracts was just nine cents. In the physical Brent crude market, several indicators such as the so-called contracts-for-difference – a type of derivative product akin to spread betting – also suggest a shift away from backwardation.

Oil prices, Iran are increasingly sources of concern - The price of crude oil and growing tensions with Iran are bubbling to the top of economists’ and policymakers’ worry lists for 2012, as U.S. and European Union sanctions threaten to reduce the sales of Iranian oil and put pressure on one of the world’s largest petroleum exporters. “It’s been in the background for quite some time,” said Edward Yardeni, a leading investment strategist. “I’ve characterized it as one of the four horsemen of the apocalypse for 2012. Now it’s come from behind to be at the head of the pack.” The push for tighter sanctions on Iranian oil exports comes at a time when oil prices are already high. Last year was a record-shattering year for oil prices, which averaged $107 a barrel, about 14 percent more than in the previous record year of 2008, according to figures from the Organization of Petroleum Exporting Countries. The U.S. oil import bill — for crude and refined products — jumped about $125 billion from 2010 to 2011.

Iranian oil embargo - The most likely outcome of an embargo on oil purchased from Iran is that the countries participating in the embargo buy less oil from Iran while other countries not participating in the embargo by more oil from Iran ([1], [2]). While this would produce some dislocations, if total world oil production doesn't change, it would have little effect on either Iran or oil-consuming countries, and would basically be a symbolic gesture. If instead the embargo is successful in reducing the total amount of oil sold by Iran, then the shortfall for global consumers would have to be met by some combination of increased production elsewhere and oil price increases sufficient to bring down global petroleum demand. As for the first possibility, there appears to be only a limited amount of excess oil-producing capacity at the moment, and certainly far short of the 4.3 million barrels per day that Iran produced in the first three quarters of 2011. And for the second possibility, it is useful to draw a comparison with previous episodes in which geopolitical events led to production shortfalls from key producing areas. The figure below summarizes world oil production (first column) and oil prices (second column) following 4 dramatic events: the embargo following the Arab-Israeli War in September 1973, the Iranian Revolution beginning in November 1978, the Iran-Iraq War beginning in September 1980, and the First Persian Gulf War beginning in August 1990.

Iran warns on output rise after sanctions - Iran has warned Saudi Arabia and other members of the Opec cartel not to boost their oil production to make up for any shortfall created by western sanctions against Tehran. The warning comes after senior policymakers from the UK to Japan flocked to Riyadh to ask Saudi Arabia, the world’s largest oil exporter, for guarantees it would boost its oil production to offset the impact of the US and the European Union sanctions against Iran. Mohammad Ali Khatibi, Iran’s Opec representative, said Tehran would consider any output increase as “unfriendly”, further inflaming the tensions in the oil-rich Middle East that have pushed the cost of Brent, the global oil benchmark, above $110 a barrel. “Should Iran’s southern neighbours collaborate with the adventurous countries [the US and European Union] to replace their oil [production] for that of Iran… such countries will be held as main culprits,” . “Such moves are not considered friendly [by Iran],” he said, adding the “consequences” of Saudi Arabia and other Opec members raising production could not be predicted.

Brent rises above $111 as Iran warns Gulf exporters (Reuters) - Brent crude rose above $111 on Monday on worries over supply disruptions after Iran warned Gulf Arab neighbours of consequences if they raised oil output to replace Iranian barrels facing international sanctions. The latest threat comes as leaders of top Asian buyers of Iranian oil -- China, Japan and South Korea -- tour alternative Middle East suppliers while the United States pressures nations to stop importing oil from the Islamic Republic. Yet gains were capped on demand concerns after Standard & Poor's cut sovereign debt ratings of nine of the euro zone's 17 countries. Brent crude traded 96 cents higher at $111.40 a barrel by 0732 GMT, after rising as much as $111.45. The contract, which expires later in the day, posted a weekly loss of 2.36 percent. U.S. crude rose 54 cents to $99.24 a barrel, after settling down 2.82 percent for the week. "The United States is trying to persuade buyers to stop importing oil from Iran, while each country is studying its options, its situation," "This situation will continue with high tension."

Tensions rise between Iran, Arab states over possible oil embargo - The deepening economic and diplomatic pressure against Iran is sharpening tensions between Tehran and oil-producing Arab states that have long relied on the West to counter Iran's nuclear program and its regional ambitions. Iran's growing isolation has agitated sectarian mistrust in the Persian Gulf between Tehran's Shiite Muslim-run government and Sunni-controlled states including Saudi Arabia and Bahrain. In a provocative move over the weekend, Iran warned Arab regimes not to join a possible Western-backed oil embargo to further weaken its economy. "If our southern neighbors collaborate with the adventurous states [the U.S. and Europe] by substituting their oil for Iran's oil, these countries will be considered as accomplices in future events," Mohammad Ali Khatibi, Iran's OPEC governor, said Sunday. Such a move would be regarded as an "unfriendly gesture," he said. The comments came as Chinese Premier Wen Jiabao visited oil giant Saudi Arabia. Beijing and other Asian capitals have energy ties to Tehran but are being urged by Western nations to reduce their imports of Iranian oil amid international sanctions targeting Iran's nuclear program. The West says Iran is intent on developing a nuclear bomb; Tehran says its aim is to produce energy for civilian purposes.

Not that again - THE political situation with Iran has grown much more tense in recent weeks, and especially since the apparent assassination of an Iranian nuclear scientist. Some rich countries are now proposing tightened sanctions against Iran, and Iran continues to threaten to close the Strait of Hormuz, through which some 20% of world oil production passes. James Hamilton provides analysis of the potential impact: Iran's production capacity represents about 5% of the world total. Mr Hamilton notes that supply disruptions of that magnitude in the past were associated with oil price increases of between 25% and 70%—and with American recessions. The American economy may have become slightly less sensitive to oil price shocks in recent years as consumers reduced their exposure after being burned by the spike in 2008. In general, demand for petroleum would seem to still be fairly price inelastic. And as Mr Hamilton notes, supply is very constrained in the short term. So one interesting thing to note is that Iran could potentially send America into recession all by itself, simply by halting its oil production for a few months. That wouldn't be good for the Iranian economy, of course, but perhaps that's a small price to pay for the smiting of one's enemies, and so forth. America couldn't easily respond with force as it would in response to, say, a nuclear attack. Closing the Strait of Hormuz would be a different geopolitical animal but would, if successful, bring the global economy to its knees.

Sinking the Petrodollar in the Persian Gulf - Let's start with red lines. Here it is, Washington’s ultimate red line, straight from the lion’s mouth.  Only last week Secretary of Defense Leon Panetta said of the Iranians, “Are they trying to develop a nuclear weapon? No. But we know that they're trying to develop a nuclear capability. And that's what concerns us. And our red line to Iran is do not develop a nuclear weapon. That's a red line for us.” How strange, the way those red lines continue to retreat.  Once upon a time, the red line for Washington was “enrichment” of uranium. Now, it’s evidently an actual nuclear weapon that can be brandished. Keep in mind that, since 2005, Iranian Supreme Leader Ayatollah Khamenei has stressed that his country is not seeking to build a nuclear weapon. The most recent National Intelligence Estimate on Iran from the U.S. Intelligence Community has similarly stressed that Iran is not, in fact, developing a nuclear weapon (as opposed to the breakout capacity to build one someday). What if, however, there is no “red line,” but something completely different? Call it the petrodollar line.

The US-GCC fatal attraction: There's no way to understand the larger-than-life United States-Iran psychodrama, the Western push for regime change in both Syria and Iran, and the trials and tribulations of the Arab Spring(s) - now mired in perpetual winter - without a close look at the fatal attraction between Washington and the GCC. [1] GCC stands for Gulf Cooperation Council, the club of six wealthy Persian Gulf monarchies (Saudi Arabia, Qatar, Oman, Kuwait, Bahrain and the United Arab Emirates - UAE), founded in 1981 and which in no time configured as the prime strategic US backyard for the invasions of Afghanistan in 2001 and Iraq in 2003, for the long-drawn battle in the New Great Game in Eurasia, and also as the headquarters for "containing" Iran. The US Fifth Fleet is stationed in Bahrain and Central Command's forward headquarters is based in Qatar; Centcom polices no less than 27 countries from the Horn of Africa to Central Asia - what the Pentagon until recently defined as "the arc of instability". In sum: the GCC is like a US aircraft carrier in the Gulf magnified to Star Trek proportions. I prefer to refer to the GCC as the Gulf Counter-revolution Club - due to its sterling performance in suppressing democracy in the Arab world, even before Mohammed Bouazizi set himself on fire in Tunisia over a year ago.

The Navy Is Depending on Dolphins to Keep the Strait of Hormuz Open - If Iran closes the Strait of Hormuz, the U.S. Navy has a backup plan to save one-fifth of the world's daily oil trade: send in the dolphins.  The threat of Iran closing the strait has reached a fever pitch, reports today's New York Times, with U.S. officials warning Iran's supreme leader that such moves would cross a "red line" provoking a U.S. response. Iran could block the strait with any assortment of mines, armed speed boats or anti-ship cruise missiles but according to Michael Connell at the Center for Naval Analysis, “The immediate issue [for the U.S. military] is to get the mines.” To solve that problem, the Navy has a solution that isn't heavily-advertised but has a time-tested success rate: mine-detecting dolphins. "We've got dolphins," said retired Adm. Tim Keating in a Wednesday interview with NPR. Keating commanded the U.S. 5th Fleet in Bahrain during the run-up to the Iraq war. He sounded uncomfortable with elaborating on the Navy's use of the lovable mammals but said in a situation like the standoff in Hormuz, Navy-trained dolphins would come in handy

Closing Strait of Hormuz Is an Option: Iran -- Iran’s ambassador to the United Nations said closing the Strait of Hormuz, the passageway for about a fifth of the world’s oil trade, is an option if his country’s security is endangered. “There is no decision to block and close the Strait of Hormuz unless Iran is threatened seriously and somebody wants to tighten the noose,” Ambassador Mohammad Khazaee said on the Charlie Rose show, according to a transcript of the interview. “All the options are or would be on the table.” U.S. and European efforts to tighten economic sanctions on Iran to deter its nuclear program have roiled oil markets and prompted concern a reduction in supply could hurt the global economy. Iran’s Vice President Mohammad Reza Rahimi said Dec. 27 that his nation, the second-biggest producer in the Organization of Petroleum Exporting Countries after Saudi Arabia, may close the strait in response to a stricter embargo. “We believe that the Strait of Hormuz should be the strait of peace and stability,” Khazaee said. “But if foreign powers want to create trouble in the Persian Gulf, of course it would be the right of Iran as well as the rest of the countries in the region to try to defend themselves.”

Closure of Hormuz Strait: An Actual Threat or Diplomacy? - Closing the Straight, albeit temporarily, is their way of signaling that there are some bargaining chips that it cannot tolerate being deprived of. Since there is no ongoing dialogue between the US and Iran, the threat to close the Straight of Hormuz should be seen as an act of subtle diplomacy in the absence of ambassadors and embassies. It is not a desire to disrupt global energy markets, which would destroy any support Iran has from other countries (such as Russia and China) opposed to sanctions. Thus, it is a rhetorical device, a warning rather than a promise. It is a massage to remind the US and Europe that Iran plays a major role in global oil security and energy markets, and also to counter the convenient idea that Saudi spare capacity would simply replace Iranian oil and leave markets in tact. These warnings should not be seen as 'bluster' by an irrational regime, but as an expression of Iran's rubric of national security.

All You Need To Know About Iran, $200 Oil, and $6.00 Gas Prices - If you’re unsettled by the thought of gasoline at $4.00 a gallon, brace yourself.  With tensions between Iran and the West quickly escalating, we could see gas jump to $6.00 a gallon at the pump in a matter of months. Make no mistake about it: If Iran were to follow through on its threats to close the Strait of Hormuz, oil prices would surge as high as $200 a barrel in matter of days.But that’s just the beginning… A wider Iranian war could throw the entire region into chaos — making $100 oil seem like a bargain. None of this is hyperbole. In fact, these dangers are likely according to of one of world’s leading energy analysts, Dr. Kent Moors. Dr. Moors is an advisor to six of the world’s top 10 oil companies, including natural gas producers throughout Russia, the Caspian Basin, the Persian Gulf and North Africa. He also consults for high-level officials from the U.S., Russian, Kazakh, Bahamian, Iraqi and Kurdish governments on all things energy related. In the interview that follows you’ll learn what you really need to know about Iran, the global oil market, and most importantly, what you can do to profit…

As Further Sanctions Loom, Plunge in Currency’s Value Unsettles Iran - Iran1’s currency, the rial, tumbled in value to its lowest level ever against the dollar on Tuesday in panic selling caused in part by the country’s increased economic isolation from international sanctions, an unbridled inflation problem and worries that government officials there are ideologically incapable of devising a workable solution.  The rial’s value has been weakening for months, but the traumatic drop on Tuesday reflected what Iranian economists called a new level of economic anxiety in the country, exacerbated by conflicting information coming out of the Tehran hierarchy that reinforced a sense of indecision and confusion.  A report in Iran’s state-run news media that the government had decided to suspend trading relations with the United Arab Emirates in retaliation for that country’s support of American sanctions on Iran — denied later by Iran’s vice president — apparently contributed to a rush by Iranian merchants and trading companies to sell their rials for other currencies. The United Arab Emirates is a major gateway for Iran’s exports.  “This is the most serious financial crisis they’ve faced, with multiple things coming to a head,” . “I have the feeling that really nobody is in charge of economic policy, nobody who can quickly think on their feet.”

Petrol, tax, and the downward sloping demand curve. - Nearly every country has a tax on petrol, although the amount varies widely. And given that the landed price of petrol is quite similar (see the graph below), it can be seen what effect the tax has on quantity demanded. The results are very much in line what economic theory would predict and there are also clear implications for countries that want to reduce petrol consumption. The first graph shows the price of petrol in OECD countries and then the component of taxation levied per litre. Notable is the very low level of tax in the world’s biggest consumer of petrol - the USA. The second graph shows the price per litre plotted against consumption per person. While there is a definite cluster of points, countries with a relatively low tax per litre give the curve a clear downwards slope.

Petrol taxes won't hurt the poor - Higher petrol taxes don't hurt the poor but the use of fossil fuels should be made a crime against humanity as the world has only 50 years in which to mitigate the effects of climate change, says Thomas Sterner, a professor of environmental economics at Sweden's Gothenburg University. Sterner who presented a workshop at the University of Cape Town this week has been advocating the use of taxes on fuel to force consumers and companies to use less petrol and fossil fuels to slow if not stop the warming of the earth's atmosphere. "International research predicts that the earth's average temperature will rise by two degrees Celsius over the next 50 years. However, this will not be uniform as in some areas it will rise by between five degrees and 10 degrees," he said. Sterner said that in some of these hotter areas such as India, which are already heavily populated, such a rise would lead to water and food shortages and then to increased social strife. He believes that the world economy is still heavily dependent on the use of fossil fuels and this will not lessen in the coming half centaury.

Iran: Oil embargo is "economic suicide" for EU - Iran's OPEC governor said Tuesday a European Union embargo on Iranian oil would be "economic suicide" for Europe, the latest stiff statement reflecting Iranian concern about the prospect of deeper sanctions over its nuclear program. Iran is OPEC's second largest oil producer, and oil exports account for 80 percent of Iran's foreign currency income. Iran sells about 20 percent of its oil exports to Europe. European nations are considering whether to go along with new U.S. legislation outlawing transactions with Iran's central bank, indirectly limiting Iranian oil shipments by making it harder for customers to pay for them. The law takes effect later this year.

History Suggests Europe’s Iran Oil Ban Could Fail - U.K. Foreign Secretary William Hague reportedly confirmed over the weekend that the European Union will slam an oil embargo on Iran when it meets later this month. U.K. Foreign Secretary William Hague reportedly confirmed over the weekend that the European Union will slam an oil embargo on Iran when it meets later this month. But in a freshly released report, Chatham House, the U.K.’s most authoritative foreign affairs think-tank, begs to differ. “Oil embargoes simply do not work,” it said. Its conclusion is based largely on a previous embargo against Iran—when foreign powers banned Iranian exports after Prime Minister Mohammad Mossadegh nationalized the country’s oil industry.">report, Chatham House, the U.K.’s most authoritative foreign affairs think-tank, begs to differ. “Oil embargoes simply do not work,” it said. Its conclusion is based largely on a previous embargo against Iran—when foreign powers banned Iranian exports after Prime Minister Mohammad Mossadegh nationalized the country’s oil industry.

FT Alphaville » This crude old eurozone crisis - Bank of America Merrill Lynch’s commodities analysts have picked up that Brent crude — when priced in euros — is uncomfortably close to its July 2008 peak. And they’ve added some interesting points: Germany is paying for Europe’s oil bill at present  On our estimates, energy as a share of European GDP is already near levels witnessed in 2008, suggesting there is limited room for oil prices in EUR to keep appreciating in the short-run. Moreover, continued sovereign credit downgrades may limit the ability of certain countries to keep financing their trade deficit. For now Germany’s large manufactured goods export surplus has financed the rest of the Eurozone’s oil deficit. Still, the potential for an Iranian oil supply disruption is a major risk for troubled sovereigns such as Greece, Italy, and Spain, all major importers of Iranian oil, as it would curtail their physical oil sources and further deepen their large current account deficits. In short, higher oil prices in EUR coupled with a EU embargo on Iranian oil could deepen Europe’s recession and hit oil demand hard.

US presses Seoul to cut Iranian oil - A senior U.S. official urged Korea to reduce its crude oil imports from Iran, Tuesday, as part of a U.S.-led sanctions campaign over Tehran’s alleged nuclear weapons program, saying Washington would work closely to minimize adverse effects on the local economy. The stance was relayed by Robert Einhorn, U.S. special adviser for nonproliferation and arms control, during talks with foreign ministry officials here. Seoul responded in a statement that it would cooperate but that “more discussions with the U.S. were needed." Einhorn’s three-day visit, which ends today, came amid growing tensions in the Middle East after President Barack Obama last month signed a bill imposing tough penalties on financial institutions dealing with Iran’s central bank. “We are urging all of our partners to help us, work with us to increase pressure on the government of Iran to negotiate,” Einhorn said during the talks. "We are urging them to reduce their purchases of crude oil from Iran and to unwind their financial dealings with the central bank of Iran.”

Obama Administration Finds Few Asian Takers for Oil Sanctions Against Iran - Some of the most trenchant criticism of Washington’s most recent action has come from Moscow, which few people remember is in fact an Asian power. Russia Federation Deputy Foreign Minister Gennadi Gatilov bluntly noted during an interview, "We take the position that, in view of earlier resolutions of the UN Security Council that put restrictions on military cooperation with that country, UN Security Council sanctions have completely exhausted their potential as a way of putting pressure on Iran. Recently there has been an obvious trend for the situation surrounding the issue of Iran to exacerbate. The unilateral sanctions of Western states, which go beyond the limits of decisions of the UN Security Council, are exercising a negative effect on the Iranian population and economy. This line undermines the efforts of the international community to solve the Iranian nuclear problem. Whatever may be proposed for approval by the Security Council and goes outside the framework set by those resolutions will have nothing to do with the objective of strengthening the regime of nuclear nonproliferation."

UAE waives $5.8 billion of Iraq debt - The UAE has decided to waive Iraq's debt of $5.8 billion (Dh21.29 billion) and backs holding the next Arab summit in Baghdad, Foreign Minister Shaikh Abdullah Bin Zayed Al Nahyan announced.  "An agreement will be signed soon to lay out the legal framework for waiving old Iraqi debt of $5.8 billion," Shaikh Abdullah told a joint news conference with his Iraqi counterpart Hoshyar Zebari.  On holding the next Arab summit in Baghdad, Shaikh Abdullah said there was a decision by Arab leaders to this effect. "The question is when this summit can be held in Iraq, so that that summit will be successful. We Arabs want to make sure the next summit will be a step forward and at the same time keep Iraq's right to host the summit."

China weighs 'right side of history' in Gulf - Rebuff the United States' entreaties regarding sanctions against Iran, then nonchalantly cross the Sunni-Shi'ite divide in the Persian Gulf while sidestepping the Arab Spring altogether and vaguely greeting Islamism, and all this as solo acts - Chinese diplomacy is on a roll in the Middle East. Premier Wen Jiabao's current six-day visit to Saudi Arabia, the United Arab Emirates (UAE) and Qatar is a display of masterly diplomacy. China is probably the only big power today among the permanent members of the United Nations Security Council that can claim a strong partnership with Syria and Iran on the one hand and Saudi Arabia and Qatar on the other.

A picture tells a thousand words, Chinese steel edition -  Presenting, just another Wednesday working afternoon at a Chinese 5,800 cubic metre blast furnace factory: Note the empty car park.

China’s thirst for water transfer -  Water diversion is back in the news in China thanks to the announcement of the 20-billion yuan (US$3.2 billion) Qiandao Lake project in Hangzhou, which has sparked controversy. Due to break ground during the next five years – the 12th Five Year Plan (FYP) period – the scheme aims to bring water from Qiandao Lake in Chun’an county to Xianlin, closer to downtown Hangzhou, the capital of eastern China’s Zhejiang province. Projects like this are not rare in China, but as Hangzhou is renowned for its rivers, lakes and beauty, this story has attracted particular attention. Such schemes, which can easily cost 10 billion yuan (and often cost more), have helped create the conditions for rapid GDP growth. But the negative effects of these intensive and large-scale engineering projects have meanwhile been ignored. China still has a raging thirst for water-transfer, and even bigger plans are in the works.  There are good reasons for the Qiandao Lake project. Hangzhou relies on just one water source – the Qiantang River – for 80% of its drinking water. Industrial pollution along that river has worsened in recent years, and a serious incident could threaten the safety of drinking water for eight million Hangzhou residents.

China: A Country Where No One is Secure - What is the most common feeling in China today? I think many people would say disappointment. This feeling comes from the insufficient improvement in their lives that people are achieving amid rapid economic growth. It also comes from the contrast between the degree to which individual social status is rising and the idea of the "rise of a great and powerful nation." One phenomenon is a good example of such disappointment: A group of young college graduates "escaping and returning" to Beijing, Shanghai and Guangzhou. Their reasons for "fleeing" are not difficult to imagine. Work pressure in these extremely large cities is high, competition is intense and the cost of living is high. So the young people chose to move to small and medium-sized cities to start their careers. The reason they returned to the big cities was that in many small and medium-sized cities ability, knowledge or even a diploma are not what open doors. Instead, what are required are networks of relationships. Family background also makes it difficult for young people from common families to better their lives, and they do not see a way out. The disappointment of being unable to extricate oneself from difficulty is, of course, not restricted to college graduates. In opportunities for education, employment, promotions and overall improvement of their lives, people are discovering that society's resources and opportunities are increasingly concentrated in the hands of a few. People in the middle and lower strata of society are becoming increasingly marginalized and are finding that improving their lives is getting harder.

Majority of Chinese now live in cities - More people in China are living in cities than in the countryside for the first time in the nation's history, a government agency said Tuesday. Urban dwellers accounted for 51.27 percent of China's 1.34 billion people at the end of last year, according to the National Bureau of Statistics. That was an increase of 1.32 percentage points over 2010. The total figure includes 252.78 million migrant workers, although it wasn't clear how those were classified.

China housing market to hit wider economy: SocGen - Societe Generale analysts cautioned Wednesday of "shockwaves" in the Chinese economy stemming from the unfolding correction in the nation's housing market, where weakening home prices are gaining breadth and accelerating to the downside. SocGen economist Yao Wei said nationwide housing-price data released by the National Bureau of Statistics on Wednesday were consistent with other recent statistics on sales, construction starts and investments that point to "unambiguously deteriorating trends." Data released by the NBS Wednesday morning showed average housing prices fell in December in 53 of 70 cities tracked, while only two cities showed a small increase. "The data just turned from bad to worse," Yao said in the note. "The economy as a whole has not felt much chill yet, but the first half of 2012 is going to be difficult for not just property developers." She said that weaker housing sales and falling investment in real estate projects will "send shockwaves along the industry chain" that supplies the housing sector.

Mainland property market in crisis - The mainland property market is in meltdown and the damage is spreading, not only to consumers but across the mainland's economy and, perhaps, internationally as well.  Since last year, Beijing has sought to burst what it saw as a dangerous bubble, which was pushing home prices beyond the reach of the middle class. It did so by initiating a series of tough measures to restrict bank lending and a crackdown on speculation.  As a result, sales have slumped by as much as 70 per cent, triggering a mainland-wide price war among major developers desperate to raise cash amid a credit crunch. Many are not expected to survive the shakeout. With property developments stalled, many mainland and international suppliers of cement, steel, copper and other construction materials are starting to feel the pinch. Meanwhile, falling property prices have pushed land values down, crippling the ability of local governments to raise money since land is a major source of their income.  Thousands of homebuyers who bought flats at peak prices have been hit by the downturn: some have gone bankrupt, while others are stuck with negative equity.

China’s property sector goes from bad to worse… Remember all that stuff we’ve been saying about Chinese property? How it’s really, really important? We’re hardly the only ones, either. Bloomberg View’s Michael McDonough has done another of his handy charts on the latest city-by-city sales price data. The green is nearly all gone in December: Of course that’s just one slice of data, and doesn’t tell us various important things such as sales volumes or the numbers offered for sale, which could be particularly revealing regarding whether those who already own investment apartments are beginning to sell. Or how fast the central government’s much-touted social housing expansion might be progressing. A whole stack of official data has taken care of (most of) that, however.

China's foreign reserves not so hot - China’s first quarterly decline in its forex reserves since 1998 has been described as a result of “hot money” leaving China. But there are a few other reasons — probably bigger ones.Firstly, though, the scale of this reversal versus the usual trend was smaller than it appeared, according to Jens Nordvig at Nomura. And some of it was a response to exchange rates: It is important, however, whether the drop was driven by valuation effects or a negative flow of (new) reserves. In the event, headline reserves dropped by $21bn to 3182bn. Valuation effects accounted for the bulk of the decline (mainly because of the Euro’s drop from 1.34 to 1.30 during the quarter). But there was still a negative flow effect in the order $5bn, a clear departure from the strong positive underlying trend which has been in place for years. There is also the matter of exporters and importers, whom SocGen’s Wei Yao says have amplified the effect of the narrowing trade surpluses: Chinese exporters and importers’ FX transaction behaviour amplified the impact of narrowing trade surpluses, which at USD155bn for 2011 marked a near halving since the peak in 2008.  A marginal shift in the FX settlement of China’s annual trade volume of USD 3.6tn could easily alter the path of the yuan. Lately, Chinese exports have been less willing to convert their FX receipts into the yuan, while imports more willing to convert their yuan into other currencies (see Chart 2).

China's economic growth slows - -- China's economic growth slowed at the end of last year, as exports slumped and government restraints took some steam out of the booming real estate market. The Chinese economy grew at an annual pace of 8.9% in the fourth quarter, the National Bureau of Statistics said Tuesday, marking a slowdown from a 9.1% growth rate in the prior quarter1.While that remains a remarkably fast pace compared to the United States, it's slow by Chinese standards.  Though the U.S. economy is still the largest in the world, it grew at a mere 1.8% in the third quarter2 (fourth quarter figures haven't been released yet).  China, the world's second largest economy, has grown at an average annual rate of about 10% for the last 30 years. Last year, taming rapidly rising prices was one of the Chinese government's top priorities. Officials tightened credit in the country's financial system, and tried to take some of the steam out of a domestic housing boom. But China's economic engine has also begun to lose momentum, as the country's exporters are being hit by weaker demand amid slowing world economic growth.

The Chinese Growth Story - This came in overnight via the FT. China’s economy expanded 8.9 per cent in the fourth quarter of last year, extending a slowdown that began at the start of 2011 and is expected to continue into 2012.That’s a full percentage lower than Q1 2011. So clearly the Chinese economy has slowed in reaction to both global slowing and the Chinese authorities’ attempts to cool asset and price inflation. Here’s the thing though: The gradual slowdown led most analysts to conclude that Beijing has managed to engineer a “soft landing”, as price increases have fallen back from a peak of 6.5 per cent in July to 4.1 per cent in December. Is that the right analysis? And why?  Many other analysts are also predicting a sharper slowdown in the coming months. “We expect GDP growth to slow more markedly in the first quarter due to the sharp investment slowdown under way,” economists at Citi said in a note. JPMorgan expects economic growth to slow to 7.6 per cent from a year earlier in the first quarter of 2012, driven down in part by declining exports to the EU and Japan. But a deceleration has long been expected – the question has been whether it will be gradual or a hard landing. Jim O’Neill is saying Chinese GDP numbers are “a blow for the hard landing guys” whereas analysts like Patrick Chovanec are taking the other side.

China fourth-quarter GDP up 8.9% -- China's gross domestic product accelerated at a faster pace than expected in the fourth quarter, belying fears of a slowdown in the country's growth momentum because of economic weakness in Europe. The country's GDP in the October to December period rose 8.9% from the year-ago quarter, weaker than the 9.1% expansion recorded in the three months to Sept. 30, but faster than the 8.6% growth tipped in a Dow Jones Newswires poll of economists. Other monthly economic indicators also beat expectations, with December retail sales climbing 18.1% from a year-earlier, while industrial output during the month rose 12.8%. China's Shanghai Composite gave up most of its early gains and was little changed at 2,206.01 after the data.

China’s Slowest GDP Growth in 2 1/2-Years Boosts Scope for Easing: Economy - China’s economy expanded at the slowest pace in 10 quarters as Europe’s debt crisis curbed export demand and the property market weakened, sustaining pressure on Premier Wen Jiabao to ease monetary policy.  Gross domestic product rose 8.9 percent in the fourth quarter from a year earlier, the statistics bureau said in Beijing today. Growth exceeded the 8.7 percent median of 26 estimates in a Bloomberg survey, staying above the 8 percent that signals a “soft landing” for China, according to SinoPac Financial Holdings Co., which correctly predicted the GDP number.  Asian stocks rose on speculation policy makers will ease lending curbs and increase fiscal spending to bolster the world’s second-biggest economy. Liang Wengen, China’s richest man and chairman of Sany Heavy Industry Co., told Wen this month that construction-machinery demand is weak and called for more infrastructure investment.

China’s GDP: How Bad Was It Really? --China reported that GDP growth slowed substantially in 2011 to 9.2%, compared to 2010’s 10.4%. But maybe it slowed more – a lot more. That’s the suspicion voiced by China analyst Derek Scissors of the Heritage Foundation in Washington DC, who has long maintained that Chinese stats are about as reliable as the Boston Red Sox during a pennant run. “China’s economic statistics are usually inconsistent, occasionally wildly inconsistent, and do not seem to be improving in quality,” Mr. Scissors writes. He says in 2011, Chinese authorities are “very likely exaggerating growth.” His evidence: Growth in auto sales plunged . Orders for news ships, a big export item, fell even harder. Meanwhile, oil imports increased just 6%, compared to 17.5% in 2010. Add to that a fall in foreign exchange reserves in the fourth quarter of 2011, which, he says, suggests that Chinese investors find a “sluggish world economy being more attractive than China’s own.”

The China Syndrome: A Hard Landing Coming Soon? - As captivating as the drama is in Europe, and it is quite worthy of all our attention, there are more and more signs from China that its own economic troubles are mounting. The chief concern for those in the West regards the flow, or rather recycling, of China’s reserve monies gained through their trade surplus. Those funds constitute a crucial factor that has allowed the western OECD countries to continue borrowing well beyond their means. The mechanism was simple enough: Chinese manufacturers would export their goods and receive various currencies in return. Dollars, euros, and yen would be then be exchanged for local yuan, and the People’s Bank of China would have to do something with all those foreign currencies. Over the past decade, what the People’s Bank of China chose to do was to use those currencies to buy foreign debt, an act which prevented the yuan from rising in value in relation to all the currencies in question. Thus the cycle could repeat and repeat again, as a low yuan encouraged higher exports and therefore higher domestic employment. Everyone was happy. Western consumers got cheap goods. China got to keep busy. The only downside was that the West could not really afford all those goods and bought most of them on credit, resulting in debts which China now holds.

China Manufacturing Boosts Case for Easing - A Chinese purchasing managers’ index signaled manufacturing may contract for a third month as a slowing economy boosts the case for the government to further loosen credit controls. The preliminary January reading of 48.8 for the gauge, released by HSBC Holdings Plc and Markit Economics today, compares with a final 48.7 number for December. The dividing line between contraction and expansion is 50.  China’s central bank last month reduced banks’ reserve requirements for the first time in three years to encourage lending and Premier Wen Jiabao this month reiterated a pledge to “fine-tune” policies as needed to support growth.The nation’s central bank is allowing the five biggest lenders to increase first-quarter credit by a maximum of about 5 percent from a year earlier, said two people at state lenders who have knowledge of the matter. Separately, the banking regulator is weighing a plan to relax capital requirements, according to four people with knowledge of the matter.  China’s gross domestic product increased 8.9 percent in the last three months of 2011 from a year earlier, the fourth straight quarterly slowdown and the weakest pace in 10 quarters. Growth may drop to below 8 percent this quarter, according to estimates from UBS AG, Nomura Holdings Inc. and Societe Generale SA, as export demand cools further and the government maintains its campaign to rein in housing costs.

Chinese Dragon To Unshackle Renminbi? - With the Year of the Dragon around the corner, will the renminbi be unshackled? Will there be a surge in domestic consumption, or will a housing bust weigh on the economy, dragging down global economic growth? To understand how dynamics may play out in China, try to put yourself into the shoes of the proverbial Chinese consumer. Better yet, put yourself into hundreds of millions of such shoes… First, let’s put the Chinese housing market into perspective. High-net-worth individuals own, on average, an astounding 3.3 housing units per person. Many of these “investment properties” have recently been developed and are not occupied. Rents are so low compared to the value of homes that it isn’t even worth looking for tenants. In 2010, about 5.1% of total national employment was in the construction industry, up from 3.8% in 2006. In Spain, known for its colossal housing bust, employment in the construction industry peaked around 2007, at 13.5% of the total workforce (about half those jobs have since been lost). In the U.S., residential construction supported 4.2% of the total workforce in the mid 1990’s and grew to over 5% in 2005, before dropping to around 3% in 2008. While China does not appear to have Spanish excesses, these metrics suggest China may still be vulnerable, given the recent U.S. experience.

U.S. Exports to China Have Increased by 21% per Year Since 2005, Twice the 11% Growth in Imports - As much as we continually hear about China's currency manipulation to artificially increase its exports to the U.S., the chart above shows something very interesting. When: a) monthly U.S. exports to China, and b) monthly imports from China, are both normalized to equal 100 in January 2005, we can see that U.S. exports to China have actually grown much faster (about 21% per year) than imports from China (about 11% per year). Over the 7-year period from January 2005 to November 2011, U.S. exports to China have increased almost four times while imports from China have only doubled. Another way to describe the trend: in 2005, there were about $6 of imports from China for every $1 of exports to China, and by 2011 the ratio of Chinese imports-to-U.S. exports to China had fallen to less than 4.  Conversely, the ratio of U.S. exports-to-Chinese imports has risen from 17% to 26% since 2005.   Although we still have a trade deficit with China, its relative size (in relation to the total volume of trade with China) has been shrinking over time.  As disposable incomes increase in China and as more Chinese enter the new middle class there, their purchases of American goods have increased at a faster rate than our purchases of their products.  That's a trend that we can expect to continue.   

Vital Signs: Shipping Prices Are Falling - Bulk shipping prices are falling. The Baltic Exchange’s Baltic Dry Index, which tracks the cost of shipping coal, grain, iron ore and other raw materials across oceans, settled at 1013 Monday and has fallen 41.7% since the end of December. The index was as high as 2173 In October.

"Beggar-thy-neighbor" versus "beggar-thyself" - Dani Rodrik -There is an important difference between domestic economic policies that create benefits by imposing costs on other nations ("beggar-thy-neighbor policies") and those whose economic costs are borne primarily at home though they might affect others as well ("beggar-thyself policies"). Beggar-thy-neighbor policies need to be regulated at the international level because a nation, left to its own devices, has the incentive to pursue zero-sum policies at the expense of others. This is the strongest argument for subjecting China’s currency policies or large macroeconomic imbalances like Germany’s trade surplus to greater global discipline than currently exists. However, “beggar thyself” policies are not the consequence of a failure of international cooperation.  They reflect either a deliberate domestic decision to sacrifice economic efficiency to a competing social value, or, in the worst case, a failure of domestic politics.Consider, for example, agricultural subsidies, bans on genetically modified organisms, or lax financial regulation. While these policies might impose costs on other countries, they are deployed not to extract advantages from them, but because other domestic-policy motives – such as distributional, administrative, or public-health concerns – prevail over the objective of economic efficiency.

Japan Revisited, by Tim Duy: I haven't had a chance to comment on the recent debate regarding Japan's lost decades, so I am coming to the party a bit late. A view is forming that the situation is not as dire as many believe. Paul Krugman notes: This picture suggests that the Japanese economy was indeed depressed for about 16 years, and deeply so after the slump of the late 1990s. But it may have returned to more or less potential output on the eve of the current crisis. Just to be clear, this is not a picture of policy success; it is, in fact, a picture of enormous waste. But the condition wasn’t permanent. Yes, the lost years surely indicate a policy failure. But arguably there is some success. On one hand, we can see this as vindication of massive deficit spending. But is this really success? Because on the other hand, there is no end in sight of such deficit spending. On Japan's 2012 budget, via the FT: Even by current grim international fiscal standards, Japan’s budget for the year from April 1 makes scary reading. For the fourth year in a row, government revenue from bond issuance is set to exceed that from all taxes. Outstanding government debt is expected to hit an extraordinary Y937tn.

Japan's Prime Minister Seeks Doubling National Sales Tax - Prime Minister Yoshihiko Noda said containing Japan’s public debt load, the world’s largest, is critical after Standard & Poor’s downgraded credit ratings on France, Austria and seven other European nations. Europe’s fiscal situation “isn’t a house burning on the other side of the river,” Noda said on TV Tokyo Holdings Corp.’s program on Jan. 14. “We must have a great sense of crisis.” Noda reshuffled his cabinet last week, aiming to win support for doubling Japan’s 5 percent national sales tax by 2015 to trim the soaring debt. S&P said in November Noda’s administration hadn’t made progress in tackling the public debt burden, an indication the credit-rating company may be preparing to lower the nation’s sovereign grade. Japan’s government, which has enjoyed borrowing costs that are around 1 percent, wouldn’t be able to manage its finances if bond yields surged to 3 percent, Noda said last week. The country risks seeing a spike in government bond yields unless it controls a debt load set to approach 230 percent of gross domestic product in 2013, the Organization for Economic Cooperation and Development said on Nov. 28.

What Threat Does Europe Pose to Asian Growth? - Not much according to the Asian Development Bank (ADB). Despite the ongoing--how should I describe them--gyrations in the Eurozone, the Asia-Pacific is expected to do well. Actually, the ADB has already downgraded its prediction for Asian growth in light of the various Western foibles--from 7.5% to 7.2% [yawn]. As I said, there is not much of a threat predicted. The worst case scenario is of simultaneous US/EU combustion. Here is the press blurb: Economic growth in emerging East Asia will continue to moderate into 2012 as growing sovereign debt problems in Europe and an anaemic US economy raise the spectre of a deep global economic downturn, says the Asian Development Bank’s latest Asia Economic Monitor [you can download the whole report here]. In the event that both the eurozone and the US economies contract sharply, the impact on emerging East Asia would be serious yet manageable, the report says. “The turmoil emanating from Europe poses a growing danger to trade and finance within emerging East Asia; so the region’s policymakers must be prepared to act promptly, decisively, and collectively to counter what could be an extended global economic slowdown,”

Hammer Falls on Housing Auctions in Australia -A year ago, when Sydney property agent Peter Green’s clients decided to sell, half opted for auctions, betting competition among buyers would deliver them the best price. Today, less than one in five take that chance.  “The vendors don’t want to embark on the potential of failure,” . “In the last three months, the number of people visiting open houses has been cut by half. And buyers may show up to auctions, but they don’t bid.”  Homes sold via auctions in Sydney, Australia’s most populous city, fell to 12.8 percent of total sales in the three months ended November, from a peak of 15.7 percent in the quarter to Nov. 30, 2010, according to real estate researcher Australian Property Monitors. Half of the homes that went to auction in December failed to sell, APM said.  Unlike the U.S., where auctions are used to sell distressed properties such as those in foreclosure, their use in Australia is a barometer of the market’s strength, with newspapers devoting sections to sale results. The declining use of auctions after home prices fell the most in at least 12 years in 2011 may foreshadow another year of prices going down.

Global growth: Falling beneath the threshold - THE first two weeks of 2012 have been less newsy than the first fortnight of 2011. The impression of growing stress across much of the world economy is nonetheless inescapable. Trouble is brewing. It's been brewing; it's spilling over the brewpot, for god's sake won't someone stop this damned brewing. The World Bank provides a big picture take on the shaky world economy today, with the release of its Global Economic Prospects report. Global growth is expected to slow slightly in 2012, and the euro-zone economy is forecast to shrink 0.3% for the year. The chart at right gives a sense of how much darker the global picture has grown over the past 7 months. The outlook for the euro zone has deteriorated most rapidly, but diminishing optimism is quite widespread. It's quite difficult to read the World Bank report and not conclude that more downward revisions of expectations are likely to occur. It's chock full of looming risks. The euro area is obviously the point of greatest concern, but other regions are vulnerable and may succumb to crisis pressure. Many emerging markets, the report notes, have less fiscal room to battle a slowdown than was true in 2007. Many will also need to finance plenty of their own debt this year, and could find themselves in significant trouble if ongoing euro problems suck more capital back to the continent.

The FP Survey: Follow the Money - Foreign Policy  - What's wrong with the world economy? We asked top experts to fill in the blanks -- and they had a lot to tell us.

'Uncertainty and danger': World Bank warns of downturn worse than 2008   — The World Bank warned Wednesday of a possible slump in global economic growth and urged developing countries to prepare for shocks that could be more severe than the 2008 crisis.  For the United States, the bank cut this year's growth forecast to 2.2 percent from 2.9 percent and for 2013 to 2.4 percent from 2.7 percent.  As reasons, it cited the anticipated global slowdown and the on-going fight in Washington over spending and taxes. The bank also cut its growth forecast for developing countries this year to 5.4 percent from 6.2 percent and for developed countries to 1.4 percent from 2.7 percent.  For the 17 countries that use the euro currency, it forecast a contraction, cutting their growth outlook to -0.3 percent from 1.8 percent.

Twenty Two Signs Pointing To A Devastating Global Recession - 2012 is shaping up to be a very tough year for the global economy. All over the world there are signs that economic activity is significantly slowing down. Many of these signs are detailed later on in this article. But most people don’t understand what is happening because they don’t put all of the pieces together. If you just look at one or two pieces of data, it may not seem that impressive. But when you examine all of the pieces of evidence that we are on the verge of a devastating global recession all at once, it paints a very frightening picture. Asia is slowing down, Europe is slowing down and there are lots of trouble signs for the U.S. economy. It has gotten to a point where the global debt crisis is almost ready to boil over, and nobody is quite sure what is going to happen next. The last global recession was absolutely nightmarish, and we should all hope that we don’t see another one like that any time soon. Unfortunately, things do not look good at this point. The following are 22 signs that we are on the verge of a devastating global recession.

UN forecasts drop in global wealth - The global economy will grow by only 0.5 per cent in 2012, effectively shrinking on a per capita basis, unless there is rapid action to create jobs, prevent sovereign debt distress and shore up fragile banks, a United Nations study said today. The annual UN World Economic Situation and Prospects report forecast average economic growth of 2.6 per cent in 2012 and 3.2 per cent in 2013, assuming what it said were benign conditions in a "make-or-break year" for economic recovery. The assumptions included a 50 per cent cut in Greek sovereign debt, a minor US economic stimulus in the short term and a realisation of economic policy commitments taken by the G20 group of nations at Cannes in November. The report said these would at least allow developed economies to "muddle through" but there was a high risk that these assumptions would be overly optimistic.

World Bank warns emerging nations  Developing countries should take steps to plan for a global economic meltdown on a par with 2008-09 if the European sovereign debt crisis escalates, the World Bank warned on Wednesday in its latest economic forecasts.  Predicting significantly slower global growth in 2012 than it expected last summer even if the eurozone muddles through its crisis, World Bank economists said that if financial markets deny funds to eurozone economies, global growth would be about 4 percentage points lower than even these figures, with poorer economies far from immune.  Andrew Burns, head of macroeconomics at the Bank, told journalists in London: “Developing countries should hope for the best and prepare for the worst.”  Stressing the importance of contingency planning, he added: “An escalation of the crisis would spare no one. Developed and developing-country growth rates could fall by as much or more than in 2008-09.”  The world economy would find it much more difficult to grow out of a new economic crisis, the World Bank warned, because rich countries had little monetary or fiscal ammunition available to stem any vicious circle and poorer countries now have “much less abundant capital, less vibrant trade opportunities and weaker financial support for both private and public activity [than in 2009]”.

World Bank Warns of Global Slowdown — The World Bank warned Wednesday of a possible slump in global economic growth and urged developing countries to prepare for shocks that could be more severe than the 2008 crisis. The bank cut its growth forecast for developing countries this year to 5.4 percent from 6.2 percent and for developed countries to 1.4 percent from 2.7 percent. For the 17 countries that use the euro currency, it forecast a contraction, cutting their growth outlook to -0.3 percent from 1.8 percent. (See more on China's slowing economic growth.) Global growth could be hurt by a recession in Europe and a slowdown in India, Brazil and other developing countries, the Washington-based bank said. It said conditions might worsen if more European countries are unable to raise money in financial markets. "The global economy is entering into a new phase of uncertainty and danger," said the bank's chief economist, Justin Yifu Lin. "The risks of a global freezing up of capital markets as well as a global crisis similar to what happened in September 2008 are real."

World Bank; Warning Signs That We Should Prepare For The Worst - The warning signs are all around us.  All we have to do is open up our eyes and look at them.  Almost every single day there are more prominent voices in the financial world telling us that a massive economic crisis is coming and that we need to prepare for the worst.  On Wednesday, it was the World Bank itself that issued a very chilling warning.  In an absolutely startling report, the World Bank revised GDP growth estimates for 2012 downward very sharply, warned that Europe could be on the verge of a devastating financial crisis, and declared that the rest of the world better “prepare for the worst.”  You would expect to hear this kind of thing on The Economic Collapse Blog, but this is not the kind of language that you would normally expect to hear from the stuffed suits at the World Bank.  Obviously things have gotten bad enough that nobody is even really trying to deny it anymore.  Andrew Burns, the lead author of the report, said that if the sovereign debt crisis gets even worse we could be looking at an economic crisis that could be even worse than the last one: “An escalation of the crisis would spare no-one. Developed- and developing-country growth rates could fall by as much or more than in 2008/09.”  Burns also stated that the “importance of contingency planning cannot be stressed enough.”  In other words, Burns is saying that it is time to prepare for the worst.  So are you ready?

A real market economy ensures that greed is good - Sixty years of division of the Korean peninsula has created two states with very different standards of living in one country. The Korean example is pathological. The division of Germany resulted in two states, both functional in economic terms, but one far richer. The less noticed comparison between the modern economic histories of Finland and Estonia had the same outcome.  Hard though it is to believe today, in the 1960s many serious commentators on left and right believed that Russian economic progress threatened western hegemony. Those on the left were naively credulous and those on the right victims of paranoid fantasies. A perhaps apocryphal story tells of a Russian visitor, impressed by the laden shelves in US supermarkets. He asked: “So who is in charge of the supply of bread to New York?” The market economy’s answer – that not only is no one in charge, but it is a criminal offence for anyone to seek that position – is surprising. In the words of the economists Kenneth Arrow and Frank Hahn, “the immediate common sense answer to the question ‘what will an economy motivated by individual greed and controlled by a very large number of different agents look like?’ is probably ‘there will be chaos’.” Our intuition is that a centrally planned allocation of resources will be more efficient than an uncoordinated one. In a market economy, that error constantly leads us to overestimate the economic advantages, and longevity, of large companies.

The Resource Curse of Land Ownership -In India, 50 or 100 years ago, land was a defining feature of wealth. The stock of land generated a flow of income. The landless were low-paid agricultural labour. The landed gentry of rural India were the kings of their heap. They had power, prestige, position, prosperity. In the eyes of many, the initial conditions of high inequality of land ownership were a key barrier that held India back. It was argued that a one-time bout of bloodshed was essential, to expropriate the rich, and to transfer land ownership into a more equitable distribution. In India, this capacity for State-inflicted bloodshed was present in some places only. In much of India, the unequal distribution of land ownership found in 1947 was left intact. Fast forwarding into the present, there has been a sea change in the fortunes of the owners of agricultural land. Particularly after we escaped from the Hindu rate of growth (3.5%) in 1979, the share of agriculture in GDP has dropped sharply. In relative terms, the wealth created through firms in industry and services has dwarfed the wealth of the landed gentry. The richest man in India today is born of one who started out with no land. Government interventions continued to stifle agriculture, but shifted to a greater laissez faire approach in industry and services; this helped accelerate the decline of agriculture.

The Swiss Franc is the most overvalued currency in the world, and the Indian Rupee most undervalued - That’s what the Economist’s Big Mac Index tells us. According to this index, the Swiss Franc and the Norwegian Krone are both more than 60 percent overvalued compared to the US dollar. Much further down are Sweden with over 40% overvaluation and Brazil which shows more than 30%. The flip side comes with the Indian Rupee, which had been hitting record lows last year. Here, we’re talking about a 60% undervaluation. Ukraine, Hong Kong and Malaysia come close at over 40% undervaluation. If you wondering China’s Yuan is the 5th most undervalued currency using this statistic, also more than 40% undervalued vis-a-vis the US dollar.  Note, of the 10 most undervalued currencies, 8 are Asian. In the overvaluation department, South America and Europe rule the roost with 4 currencies in Europe and 4 in South America amongst the ten national currencies showing the most extreme levels of overvaluation Canada and Australia are the other two. The chart is below (click to enlarge)

Fitch cuts Russia outlook due to political risk - The Fitch rating agency on Monday downgraded the outlook on Russia's debt, citing political uncertainty. Fitch said in a statement Monday it had changed its outlook from positive to stable, meaning it was less likely to upgrade the country, which has been relatively unaffected by the European debt crisis and recently enjoyed profits from rising oil prices. The rating agency cited the potential impact of weakening global growth and domestic political uncertainty as key reasons for the move. Allegations for fraud surrounding recent parliamentary elections sparked popular protests across the country, including rallies of tens of thousands of people in Moscow that were the largest protests of Russia's post-Soviet era. The agency said that, although there is little doubt Prime Minister Vladimir Putin would win March's presidential election, it is unclear how he would respond to the protests. Fitch said recent events "highlighted the limitations and risks associated with Russia's political model." Russia's gross domestic product rose by 4.2 percent last year and the country has been running budget surpluses for the past several years.

The five stages of economic grief - The paradigm shift of which I speak is not some new crisis in Europe. Nor is it the US’ emergence from an older crisis. Neither is Australia facing some temporary shift away from its debt-driven growth of yesteryear. It’s not even China and its massive investment model that has driven the mining boom. The shift is that yesterday’s demand driven economy, that relied upon debt to inflate assets and drive private balance sheet growth as well as consumption, has ended. It is finished permanently (or for so long that it might as well be permanent). The global growth of the future will be driven by the forces of investment, production and intensified competition for limited demand. This is nothing new of course. In 2009, PIMCO described it in an investment sense as the “new normal”. But the big leap one must make – of imagination and logic – is to conclude that this is a permanent change, not a passing crisis. It is easy to lose sight of this when engaged with the hysteria of daily market moves.If you accept, as I do, that this paradigm shift has taken place, then the European “crisis” is nothing more than the latest expression of the underlying reality that countries will now need to compete successfully to grow.

Eurocrisis is a Global Crisis - Real News Network video

S&P Credit FAQ: Factors Behind Our Rating Actions On Eurozone Sovereign Governments - Standard & Poor's Ratings Services today completed its review of its ratings on 16 eurozone sovereigns, resulting in downgrades for nine eurozone sovereigns and affirmations of the ratings on seven others. We have lowered the long-term ratings on Cyprus, Italy, Portugal, and Spain by two notches; lowered the long-term ratings on Austria, France, Malta, the Slovak Republic, and Slovenia, by one notch; and affirmed the long-term ratings on Belgium, Estonia, Finland, Germany, Ireland, Luxembourg, and the Netherlands. All ratings on the 16 sovereigns have been removed from CreditWatch where they were placed with negative implications on Dec. 5, 2011 (except for Cyprus, which was first placed on CreditWatch on Aug. 12, 2011).The outlooks on our long-term ratings on all but two of the 16 eurozone sovereigns are negative; the outlooks on the long-term ratings on Germany and Slovakia are stable. See "Standard & Poor's Takes Various Rating Actions On 16 Eurozone Sovereign Governments," published today for full details.This report addresses questions that we anticipate market participants might ask in connection with our rating actions today.

Cracks in the Facade - The S&P downgraded nine eurozone countries on Friday, announcing the following actions: the lowering of long-term ratings on Cyprus, Italy, Portugal and Spain by two notches, and the lowering of long-term ratings on Austria, France, Malta, Slovakia and Slovenia by one notch. It affirmed the long-term ratings on Belgium, Estonia, Finland, Germany, Ireland, Luxembourg and the Netherlands. According to S&P, Friday’s ratings actions were “primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone... S&P also released a FAQ explaining its action, including this gem: “We believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues.” This emphasis on austerity is already producing predictable results. For example, in Spain, unemployment increased by a full two percent in a single quarter (Q4 Spanish Unemployment Soars By Most Since Lehman, Hits “Astronomical” 23.3%)

The Irrelevance Of Bond Ratings - It was front page news today, top story in WaPo, that S&P downgraded France and Austria from AAA status. Eeeeek! Except that their bond yields fell in the wake of this. The same thing happened after the US downgrade. And Japan has been downgraded 13 times, only to have the world's lowest bond yields. Really.

S&P is right about Europe - As I am sure you are aware by now Standard and Poor’s rating services added some downside risk to Europe over the weekend: Given the performance of the rating agencies in the lead up to the GFC, and the corresponding fall out, it would be easy to set aside this news as yet another overzealous attempt by the industry to compensate for their poor performance during that period. I expect some market players to do just that, however in my opinion in this case that would be a mistake. As Macrobusiness readers will know, my long running assessment of the European financial crisis is that the competiveness imbalance between the core and periphery is the major issue and, although some of the current policies being implemented are stated to be aimed at addressing this, the reality is that they are actually making the problem worse.  The latest Spanish employment figures are once again a reminder that austerity policy aimed at already deflating economies in order to make them more competitive are in fact counter-productive. What we have seen and continue to see from the periphery nations is a not growth at all, but a reduction in industrial production and a rise in employment, and therefore a renewed burden on the government sector meaning its attempts to deleverage fail while the private sector weakens further.

Euro-zone policies have fallen short - Standard & Poor’s credit analysts said Saturday that Euro-zone policy makers have failed to address the “broadening and deepening” financial crisis the region now faces, leading the agency to issue long-term downgrades on nine countries, including Cyprus, Italy, Portugal, Spain, Austria, France, Malta, Slovakia and Slovenia.  Perhaps most notably among the cuts late Friday, S&P downgraded France and Austria to AA+ from AAA, leaving only Germany, Netherlands, Finland and Luxembourg left as AAA-rated countries in the currency group. Portugal and Cyprus were downgraded to junk-bond status. During a conference call Saturday morning, S&P credit analyst Moritz Kraemer said policymakers have yet to come up with solutions to the “systemic stresses” that plague Euro-zone nations during its debt crisis. Among these problems, he said, are tightening credit conditions; weakening prospects for economic growth in the region; and continued disagreement among government officials over how the situation should be addressed.

S&P On Europe - Paul Krugman - S&P’s downgrade of a bunch of European sovereigns was no surprise. What was somewhat surprising — and which went unmentioned in almost all the news stories I’ve read — was why S&P has gotten so pessimistic. From their FAQs: We also believe that the agreement [the latest euro rescue plan] is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the EMU’s core and the so-called “periphery”. As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues. And today we read about the response:German chancellor Angela Merkel has called on eurozone governments speedily to implement tough new fiscal rules after Standard & Poor’s downgraded the credit ratings of France and Austria and seven other second-tier sovereigns. Still barreling down the road to nowhere.

The Massendowngrade Effect - Well, that was the week that was, wasn’t it? It started with a cheerful, upbeat market response to both the impact of the ECB’s 3 year LTRO and the growing impression that Hungary was going to make some sort of “one-off” deal with the IMF, and ended near the depths of despair as S&P’s announced the downgrade of 9 Euro Area countries, while the EU Commission worked hard to reinforce the impression that it was about to launch legal proceedings that could even lead to the temporary suspension of Hungary from the EU.  It was a time of bitter sweet experiences, which started with Tamás Fellegi (that’s him smiling in the photo below) heading off for his scheduled interview with Christine Lagarde. Then we learnt that the German economy had grown by a brisk 3% in 2011, only to have our hopes dashed by the clarification that most of the growth was in the first 9 months of the year, and in fact the country probably entered recession in the last quarter.

Ratings Matter for the Euro Area -  Rebecca Wilder - As you all have heard, Friday was (again) S&P’s day in the limelight. The rating agency downgraded over half of the 16 Euro area countries put on credit watch negative in December 2011. A quick look at my feed shows several takes on S&P’s action: the Economist’s Free Exchange comments on the now soft-core country, France; Michael Schuman hammers out the implications of the EA policy makers’ ‘misguided’ approach; Bruce Crumley (h/t Schuman) sees problems for Sarkozy; and as always, one of my favorite authors, Edward Hugh, eloquently characterizes the downgrades in the context of the real economy. However, there’s one curt take on the downgrade that I disagree with. Barkley Rosser at EconoSpeak (h/t Angry Bear) compares the downgrade of France and Austria from AAA to AA+ as the same as a downgrade to the US or Japan. Furthermore, his title implies that these downgrades are irrelevant. I wholly disagree. There is one simple reason for this: France and Austria are subject to high rollover risk, while the US and Japan are not. Why? Because France and Austria do not have monetary autonomy over the currency in which their debt is issued (euros, to which the ECB holds the right to supply), so all debt issued can be treated as foreign-currency debt. Debt issued by the US and Japan is primarily local-currency debt.

Ratings downgrade: Average common denominator - THE decision by Standard & Poor’s (S&P) to lower the AAA ratings of France and Austria, and to downgrade seven other countries, Italy and Spain among them, earned a string of “Friday the 13th” headlines this weekend. In truth, there is no new information in the downgrades. Do not look to S&P for contrarian thinking: the rationale for demoting France and the rest is both cogent and unsurprising (read more here). But the moves do capture the shifting relationship between euro-zone states. The table below shows a snapshot of S&P ratings for euro-zone members at five-yearly intervals since 1995 (ie, before they became members and after). They broadly tell a story of upward mobility until the middle of the last decade, by which time all of the 17 current members of the single currency enjoyed ratings of A or above. All rich-world countries were being buoyed at this time by an apparently benign economic environment, of course, but the ratings also reflected narrowing gaps in the perceived creditworthiness of euro-area countries. This was part of the so-called “convergence play”.

Pimco’s Gross Says Greece Heading for Default as S&P Cuts European Ratings - Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said Greece is heading for default.  The downgrade of European ratings by Standard & Poor’s last week shows countries can fail to meet their debt obligations, Gross said in a Twitter posting. Greece will prove to be the latest example, Gross wrote.  Greek officials will meet with lenders on Jan. 18 after discussions stalled last week over the size of investor losses in a proposed debt swap, raising the threat of default. European officials and creditors plan a 50 percent cut in the face value of Greek debt by voluntarily exchanging outstanding bonds for new securities, though the two sides haven’t been able to agree on the coupon and maturity of the new debt.  France and Austria lost their top rankings in a series of downgrades Jan. 13 that left Germany with the euro area’s only stable AAA grade, as S&P warned that efforts to address Europe’s financial problems are falling short. The region’s leaders are struggling to tame a crisis now in its third year and convince investors they can restore budget order.

What S&P’s Downgrades Mean for the Euro’s Future - Credit rating agency Standard & Poor’s dropped another market-rattling bombshell on Friday when it downgraded the long-term rating of nine – yes, nine – euro zone countries. France and Austria lost their coveted AAA status (just like the U.S. last year),  while Portugal was sent into junk territory. And S&P isn’t done yet. Its outlook on 14 nations remains negative, which, as a statement from the agency said, indicates “that we believe that there is at least a one-in-three chance that the rating will be lowered in 2012 or 2013.” We all knew this was coming. S&P telegraphed this decision in early December, and, after the big U.S. downgrade last year, it seems inevitable that France and others would be stripped of their top rating as well… But just because you see a punch coming doesn’t mean it won’t hurt when it lands. S&P gave the euro zone a fat lip on Friday, calling out its political leadership for its tepid response to the mounting crisis, and warning that the situation could get much worse. Perhaps the downgrades will prove a positive by heightening the urgency of euro zone reform. But maybe not. S&P’s decision tells us something even greater about what’s happening in Europe. It exposes the seriousness of the sacrifices the nations of the euro zone must make to keep the common currency alive. And in that way, the downgrades could be as much an impediment as a cause for euro zone reform.

Tyler Durden and Paul Krugman agree! – The EU is toast! - A rare occurrence in journalism happened today. Tyler Durden of Zero Hedge is in agreement with – hold on – Paul Krugman of the NY Times.  Both writers point readers to the FAQ from S&P on the downgrades in Europe on Friday. Both hone in on one particular section. I’ll repeat it:  We believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues. There is absolutely no way to achieve economic growth while pursuing fiscal austerity. It just doesn’t work like that. The only other possibility is for Italy and Spain to re-establish their legacy currencies. That is S&P's unwritten, but clear message.

Roubini : No Eurozone break-up in 2012 (video) The economic and financial conditions of the Eurozone are very severe. Germany and France cannot impose their will on all the other countries because the decision of the Eurozone had been taken by consensus. The trouble with the Eurozone right now is that you have severe stock imbalances, large stocks of public debt, liabilities of their financial system and flow problems. There has been the loss of competitiveness at the periphery of the Eurozone. There are large external imbalances and all the policies that the Europeans are pursuing right now, fiscal austerity are going to make the recession in the Eurozone worse. Not just Greece, but a number of other countries over the next couple of years will have to restructure their public debt and private ones in a coercive way. I also expect that one or more members of the Eurozone will eventually exit the Eurozone. If it is a small Greece exiting, that can be managed. If eventually it were an Italy or Spain having to exit, that would effectively be a break up of the Eurozone. So of all the sources of systemic risk in the global economy, certainly the problems of the Eurozone are the most severe.

What Gives - So, everybody and his uncle over in Europe got a sovereign debt downgrade and now the math changes for all the pretend bail-outs and back-stops that had been so exquisitely rigged through the long, nauseating autumn. Math is an annoying representation of reality, but hard to argue with. Bail-outs and back-stops finally became unaffordable even as poetic constructs.  Thus, we also approach the dreaded inflection point for the credit default swaps. Nobody believes that this Mount Everest of jive bond "insurance" can actually pay out, since the first instance of any attempt will bankrupt everybody. And yet there are the holders of all that paper who will object to, say, an 80 percent haircut on their Greek (and other) bonds. Surely some of them will try to invoke their CDS contracts. What then? Three possibilities that I see: 1) all parties and counter-parties go down the drain faster than you can say Benedict Cumberbatch; 2) all parties declare in unison that CDS were a prank that should now just be ignored, as if the cast of Downton Abbey showed up naked at the dinner table; and 3) every sort of loan on God's Green Earth is instantly re-priced and the entire world turns into a flea market. How will America do with its stock of slightly pre-owned Dunkin' Donuts stores, a million-odd Elvis lunch-boxes, and all those old videos of Friends? Don't you wish you'd invested in some hand tools?

European Leaders Use Debt Downgrades to Argue for Austerity, and for Stimulus — European leaders sought to limit damage from a ratings agency’s downgrade of nine countries on Friday1, or even turn the news to their advantage, saying that it showed the need to impose more austerity or else do more to stimulate growth.  Germany’s chancellor, Angela Merkel, said Saturday that the downgrade by Standard & Poor’s meant the euro2 area must speed up measures to create a more centralized currency union.  “We are now challenged to implement the fiscal pact quickly,” Mrs. Merkel said in a statement Saturday, a day after S.& P. downgraded France, Austria and seven other countries — but not Germany. She added that leaders should not water down the agreement and instead quickly pass other measures they have agreed to, like limits on debt.  In Italy, Prime Minister Mario Monti3 used the downgrades to bolster his argument that austerity alone would not solve the euro crisis. Europe needs to support “national efforts in favor of growth and employment,”

Euro Leaders Race to Salvage Rescue Plans - European leaders will this week try to rescue under-fire efforts to deliver new fiscal rules and cut Greece’s debt burden as investors ignore Standard & Poor’s euro- region downgrades. Greek officials will reconvene with creditors on Jan. 18 after discussions stalled last week and governments elsewhere are preparing for a Jan. 30 summit as the European Central Bank warns against “watering down” a revamp of budget laws. With France’s 10-year bond yield little changed today, investors will now focus on its sale of as much as 8.7 billion euros ($11 billion) at 3 p.m. in Paris. The talks on Greece and budgets may serve as tougher tests of the tentative recovery in investor sentiment than S&P’s decision to cut the ratings of nine euro-region nations, including France. History suggests fallout from the downgrades may be limited. JPMorgan Chase & Co research shows that 10-year yields for the nine sovereigns that lost their AAA status between 1998 and last year’s U.S. downgrade rose an average of two basis points the next week. Efforts to toughen budget laws and make Greek debt more sustainable “deserve far more attention than these rating changes, which as usual are lagging fundamental developments,”

Van Rompuy Says Progress Being Made to Reshape Euro Area - Real “progress” is being made to reshape the euro region, which must now focus on economic growth and job creation after agreeing on new rules to ensure budget discipline, European Union President Herman Van Rompuy said. “Market players or rating agencies sometimes consider our response as incomplete or insufficient,” Van Rompuy said at a press conference in Rome today after meeting with Italian Prime Minister Mario Monti. “Yet real progress has been made in reshaping the euro area in order to build on its fundamentals, which are on average sound.” While EU leaders are set to sign an agreement on a fiscal compact “in early March” to ensure budget rigor across the bloc, Europe must make jobs and growth its “foremost concern,” Van Rompuy said, warning that a weakening economy could add to the region’s 23 million unemployed.

Euro Decoupling as Draghi Rate Cuts Fail to Restore Correlation Confidence - The euro is losing the relationship with riskier assets that underpinned the currency in 2011 as the deepening sovereign debt crisis reduces the creditworthiness of even the biggest economies in the region.  The 17-nation currency has fallen 8.6 percent against the dollar since October, while the Standard & Poor’s 500 Index has gained 2.4 percent, and the correlation between the two dropped to 58 percent from a record 91 percent in November, according to data compiled by Bloomberg. The euro had moved almost in lockstep with investments linked to growth, including stocks and the Australian dollar, since January 2011.  This decoupling is taking place as European Central Bank President Mario Draghi cuts interest rates and promises banks unlimited cash for three years to rein in soaring borrowing costs for governments ranging from Italy to Spain to France, which lost its AAA credit rating last week. The infusion drove the euro to a 20-month low of $1.2624 last week. UBS AG, which in mid-August advised selling the currency when it was at about $1.45, says fair value ranges from $1.15 to $1.20.

Europe’s The Road to Nowhere, Part II – Roadblocks Ahead - Over the next few months, the Euro-Zone faces a number of challenges including: the implementation of the new arrangements, possible further downgrading of a number of nations, refinancing maturing debt and meeting required economic targets. There will also be complex political and social pressures. Implementation of the new fiscal compact may not be a fait accompli. The lack of agreement by Britain makes the change more complex. A number of treaties and protocols need to be amended. There are also doubts as to whether the “work around” will be legally effective. At least four governments have indicated that agreement to the changes is contingent on the precise legal text. One key area of concern is the precise form and extent of powers granted to the EU to police national budgets. Another relates to the structure of the ESM, where a qualified majority of 85% will have the power to make emergency decisions. Finland is currently opposed to the ESM act by super majority instead of unanimity. Others are also reluctant to pay in capital, which can be placed at risk without the right to a veto. Given issues of national sovereignty, it is possible that there will delays in implementation. Changes cannot also be ruled out.

Huge Financial Bombs Just Got Dropped All Over Europe - The European debt crisis has just gone to an entirely new level. Just when it seemed like things may be stabilizing somewhat, we get news of huge financial bombs being dropped all over Europe. Very shortly after U.S. financial markets closed on Friday, S&P announced credit downgrades for nine European nations. This included both France and Austria losing their cherished AAA credit ratings. When the credit rating of a country gets slashed, that is a signal to investors that they should start demanding higher interest rates when they invest in the debt of that nation. Over the past year it has become significantly more expensive for many European nations to borrow money, and these new credit downgrades certainly are certainly not going to help matters. Quite a few financially troubled nations in Europe are very dependent on the ability to borrow huge piles of cheap money, and as debt becomes more expensive that is going to push many of them over the edge. Yesterday I wrote about 22 signs that we are on the verge of a devastating global recession, and unfortunately that list just got a whole lot longer.

France Downgrade Creates Pressure for Merkel - Following the decision by rating agency Standard & Poor's to downgrade the ratings for nine euro-zone countries, pressure is likely to increase on Germany, the country long viewed as a model during the crisis, but also the one that holds much of the money that is needed to solve it. In its decision on Friday, S&P stated that Germany's rating is in excellent condition, but experts in the country fear that Berlin's contributions to the euro bailout will have to be considerably greater than initially planned. And Chancellor Angela Merkel of the conservative Christian Democratic Union (CDU) said the downgrade of the nine countries will increase pressure for all the euro-zone countries to solve their budget and debt problems. Frank Schäffler, the finance policy spokesman for the Free Democratic Party (FDP), Merkel's junior coalition partner, said he felt his criticism of Germany's participation in the European Financial Stability Facility (EFSF), the current euro bailout fund, had been indirectly confirmed by S&P. He said the downgrading was likely to have direct consequences for Berlin. The downgraded rating for Austria alone, he told the financial daily Handelsblatt, would mean that "Germany would no longer just have to carry 40 percent, but close to 75 percent (of the burden) to ensure the euro bailout fund EFSF retained its AAA rating."

Linde CEO says Germany should mull euro exit - Germany should consider leaving the euro if efforts to impose fiscal discipline upon indebted euro zone countries fail, the head of industrial gases firm Linde told German weekly paper Der Spiegel. "If we do not succeed in disciplining crisis countries, Germany needs to exit," said Reitzle who was previously a board member at carmaker BMW and head of Jaguar and Land Rover. Asking Germans to pay more than 50 percent taxes to help fund other euro zone countries will erode the will of the German electorate to support rescue measures, Reitzle said. Of course it would lead the new currency - Deutschmark, North-euro or whatever it is called - to appreciate in value. But it would be by a lesser amount than feared," Reitzle said. "In the medium term Greece needs to exit. And the writedowns on Greek debt will not be between 50 to 70 percent, but in the end will be written down by 100 percent," Reitzle said.

Merkel vows faster eurozone reforms.- European leaders promised on Saturday to speed up plans to strengthen spending rules and get a permanent bailout fund up and running as soon as possible, a day after U.S. agency S&P cut the ratings of several euro zone countries' creditworthiness. It also warned that France, which suffered a downgrade to AA+ from the top-notch AAA, was at risk of further cuts if a recession further inflates its debt and budget deficit. Leaders including Merkel have urged countries to tighten their belts with higher taxes and deep spending cuts to rein in massive budget deficits. But that has heightened market concern about their ability to grow their way back to health, pushing borrowing costs even higher for heavily indebted governments. S&P said it was not working on the assumption of a euro zone break up, although it blamed its leaders for focusing too much on cutting debts and not sufficiently on competititveness."We think that the diagnosis of policymakers regarding the crisis is only partially recognising the origin of the crisis," said Kraemer, mentioning the focus on budget austerity.

Merkel's Coalition Partner on the Road to Collapse - Germany's Free Democrats have been in freefall for months. But on Friday, the party, Chancellor Angela Merkel's junior coalition partner, hit a new low. Inner-party bickering led to the collapse of a state government and a new poll found that just 2 percent of Germans would vote for the FDP today. Some 83 percent of those asked said that the FDP has not delivered on its promises. A further 72 percent say that it isn't clear where the party stands when it comes to the euro crisis. Just 15 percent of Germans think the party is credible. It is a situation which has not made things easier for Chancellor Merkel. The FDP's periodic hand-wringing over Germany's outsized role in bailing out struggling euro-zone countries has occasionally led to speculation that her coalition could collapse prematurely. Furthermore, she has periodically provided some legislative concessions in an attempt to breathe some life into the moribund party.Mostly, though, it is a situation that seems to indicate that Germany's party landscape no longer has room for the FDP. After all, even the Pirate Party, which focuses almost exclusively on Internet privacy issues, is doing better than the once mighty FDP. The Pirates managed 6 percent in Friday's poll -- numbers that the current FDP could only dream of.

MERKEL TO GREECE: Painful Austerity First, Economic Growth Second: German Chancellor Angela Merkel is insisting that structural reforms can help Greece return to economic growth following a painful austerity drive. Merkel acknowledged in an interview with Deutschlandfunk radio broadcast Sunday that spending cuts "indeed generally lead to the economy not being able to grow so much." However, she said there are plenty of examples of countries where International Monetary Fund programs have been implemented and "very strong phases of growth come after a certain phase of recession." Merkel said that is down to structural reforms which "never have immediate effects but need a certain time before their effects are felt — and they must of course be implemented vehemently." Germany, Europe's biggest economy and the largest contributor to rescue packages for Greece and other strugglers, has led the push for austerity drives to get countries' budget deficits under control, and for painful reforms. German Foreign Minister Guido Westerwelle is to meet top officials in Greece on Sunday, carrying what his ministry calls a message of "encouragement and expectation" regarding Greece's reform efforts. Athens has pledged to sell off state assets and try to improve its economy's competitiveness.

How's That Austerity Working? - From a Wall Street Journal article on the collapse of the Greek debt talks: The negotiations have been tortuous. After first insisting no default by any euro-zone country would be possible, leaders agreed in July to seek a deal to cut about 10% from the face value of Greece's bonds in private hands. By October, Greece's prospects had deteriorated, and euro-zone governments and the IIF agreed to pursue a deal to cut the face value in half. Since October, Greece's economy, which is entering its fifth year of recession, has weakened further, worsening the state of its government finances. That means a bigger gap in Greece's budget that must be filled either by more debt relief or more new lending from official creditors. How can this downward spiral end with anything other than a technical default? It can't, which is why the debt talks collapsed. The cuts necessary to bring Greek debt down to anything even remotely sustainable is much greater than the supposed 50% haircut agreed to last October. . Via the FT:Charles Dallara, the IIF’s managing director, told the Financial Times on Sunday that he believed an agreement in principle needed to be completed by the end of this week if the restructuring deal was to be finalised in time for a €14.4bn Greek bond redemption due on March 20. Though he said Greek officials were negotiating in good faith, he was critical of other eurozone negotiators, saying they were not living up to the outlines of the haircut deal reached at a tense October EU summit. “[Ms Merkel and Mr Sarkozy] and all the European heads of state said they wanted a deal with a 50 per cent [haircut] and a voluntary agreement,”

Feldstein: How to Create a Depression - Martin Feldstein has a warning about European plans for further austerity: European political leaders may be about to agree to a fiscal plan which, if implemented, could push Europe into a major depression. ... The European Union’s summit in Brussels ... agreed to cap annual “structural” budget deficits at 0.5% of GDP, with penalties imposed on countries whose total fiscal deficits exceeded 3% of GDP – a limit that would include both structural and cyclical deficits, thus effectively limiting cyclical deficits to 3% of GDP. ... The most frightening recent development is a formal complaint by the European Central Bank that the proposed rules are not tough enough. Jorg Asmussen, a key member of the ECB’s executive board, wrote to the negotiators that countries should be allowed to exceed the 0.5%-of-GDP limit for deficits only in times of “natural catastrophes and serious emergency situations” outside the control of governments.If this language were adopted, it would eliminate automatic cyclical fiscal adjustments, which could easily lead to a downward spiral of demand and a serious depression.

Greece’s creditors seek end to deadlock - Greece’s international creditors are considering an appeal to the French and German leaders to break a deadlock in negotiations over the size of the losses to be taken by banks and other bondholders as part of a €100bn deal seen as crucial to bringing the country’s debt under control.  The move to involve German chancellor Angela Merkel and French president Nicolas Sarkozy comes after restructuring talks with official investors broke down on Friday raising concerns that Greece was moving closer to becoming the first developed country in nearly 60 years to default on its debt.  In a sign of urgency, Guido Westerwelle, German foreign minister, flew to Athens on Sunday for talks about the so-called private sector involvement (PSI) negotiations with Greek premier Lucas Papademos.

Greece to Resume Debt Talks —Greece will resume talks with its private-sector creditors next week on a massive debt restructuring plan, with an aim to reach the outlines of a deal in time for a Feb. 23 meeting of euro-zone finance ministers.  In remarks to fellow socialist party members, Finance Minister Evangelos Venizelos insisted the talks will resume in the coming days despite breaking down Friday amid disagreements over the future interest rate Greece will pay.  "Our counterparts from the Institute for International Finance will return on Wednesday and our goal is to have a general outline agreed before the next euro-group meeting on Jan. 23," Mr. Venizelos said in a speech late Saturday.  The IIF, a Washington-based lobby group representing the world's largest banks, agreed in October that it would negotiate a "voluntary" debt write-down deal with Greece aimed at a 50% cut in the face value of bonds held by the private sector. 

Lucas Papademos: Two Deals But No Drachma Ahead - In his first and only interview since taking office, Greek Prime Minister Lucas Papademos took straight aim at those who suggest Greece should abandon the euro and return to the drachma as a way to solve the country’s fiscal crisis: “This is really not an option.” Papademos also expressed complete confidence in his country’s ability to get through what is likely to be a harrowing two months as it approaches a 14.5 billion euro debt repayment in March. (Click here for full interview transcript.) Two different financial deals must be negotiated before then. Without both, his country is likely to default—which would make it the first in the euro zone to do so, not to mention the largest sovereign default in history. Greece is at the epicenter of the European financial crisis and how Papademos handles the situation is being closely watched by market participants around the world. Failure on his part and on the part of the Greek government to manage their debt crisis is an orderly way, would have economic consequences across the European Union. But Papademos is unperturbed. And he thinks the country is well on the way to avoiding a March default.

Hedge Funds the Winners if Greek Bailout Arrives —— Could Greece’s next rescue payout go straight into the pockets of London hedge funds? That, more or less, is the bet that a growing number of investors are making now as they load up on Greek government securities that mature in March — just when Athens is hoping to receive a lifeline of as much as €30 billion, or $38 billion, from the European Union and the International Monetary Fund. Conditional on Greece making good on its promises to overhaul its economic foundations, this is in many ways a make-or-break payment for an effectively bankrupt Greece. The new prime minister, Lucas D. Papademos, has warned that without it, Greece might well default and have to leave the euro1. With stakes so high, investors are betting that Europe will go the extra mile to keep debt-strained Greece afloat. And if the price to do that means that taxpayer funds end up bolstering the returns of a few hardy speculators — then, as far as they are concerned, all the better. Such a trade-off, however, carries ramifications that go well beyond the profit motives of its participants.

Increased Greek Debt ‘Haircut’ to Hurt Banks, Moody’s Says (Bloomberg) -- An increase in the losses, or the size of the “haircut,” to be taken by Greek sovereign-debt holders would hurt banks in the nation, Moody’s Investor’s Service said in its Weekly Credit outlook. The level of losses may be more than the 50 percent initially planned by European officials, the report said. “A disorderly default would probably set off a deposit run, triggering the likely imposition of a moratorium on deposit withdrawals by the Greek authorities” according to the report. “A disorderly default could also be followed by an exit from the euro area, accompanied by a return to a deeply devalued national currency.” 

S&P expects Greece to default soon - Greece will default shortly on its debt obligations, a senior Standard & Poor's official told Bloomberg Television on Monday. "Greece will default very shortly. Whether there will be a solution at the end of the current rocky negotiations I cannot say," said Moritz Kraemer, the head of the agency's European sovereign ratings unit. "There is a lot of brinksmanship on and a disorderly default will have ramifications on other countries but I believe policymakers will want to avoid that ... The game is still on."

Greece Is Insolvent, Will Default on Its Debt, Fitch Says - Greece is insolvent and probably won’t be able to honor a bond payment in March as the country negotiates with creditors to cut its debt burden, Fitch Ratings Managing Director Edward Parker said. The euro area’s most indebted country is unlikely to be able to honor a March 20 bond payment of 14.5 billion euros ($18 billion), Parker said today in an interview in Stockholm. Efforts to arrange a private sector deal on how to handle Greece’s obligations would constitute a default, he said. Prime Minister Lucas Papademos is scheduled to meet tomorrow with a group representing private bondholders after a five-day break to hold talks on forgiving at least 50 percent of the nation’s debt in the euro area’s first sovereign restructuring. Greece’s official creditors begin talks Jan. 20 on spending curbs and budget cuts that will determine whether to disburse additional aid. “The so-called private sector involvement, for us, would count as a default, it clearly is a default in our book,”

Greece dispatches officials to U.S., default fears grow (Reuters) - Greece must urgently break a deadlock in debt swap talks triggered by "unreasonable" demands from its partners, the head of a group of representing its private sector warned on Monday, as Athens raced against the clock to prevent an unruly default. Barely a month after an injection of bailout funds helped to avert bankruptcy, Greece is back at the centre of the euro zone crisis as fears of a default and a subsequent euro zone exit overshadow a mass credit downgrade of euro zone countries. Cash-strapped Athens needs a deal with the private sector within days to avoid going bankrupt when 14.5 billion euros of bond redemptions fall due in late March. But talks with its creditor banks broke down on Friday over the interest rate on new bonds Greece will offer and a plan to enforce investor losses. Negotiations were suspended until Wednesday, and Athens sent senior officials to Washington to consult with the International Monetary Fund. With a growing number of experts -- including a senior Standard & Poor's official -- warning a Greek default was on the cards, the country's creditors expressed alarm. "There is an urgent need for agreement to inject an element of stability," Charles Dallara, head of the Institute of International Finance who represents Greece's private creditors, told Reuters. He said banks were "very surprised" at "completely unreasonable" interest rates offered to them.

Bankruptcy, Backwards - Credit Slips Own Anna Gelpern has a great new article in the Yale Law Journal that very much deserves a plug. It's called "Bankruptcy, Backwards:  The Problem of Quasi-Sovereign Debt." The article deals with the problems of financial distress for quasi-sovereigns, like US states or even to some degree EU member states. As Anna points out, bankruptcy seems to mean all things to all people, and as a result framing discussions of how to deal with quasi-sovereign debt---where there is no bankruptcy regime of any sort--quickly devolves into debates about existing bankruptcy systems, like US Chapter 9, rather than starting from the unique problems of quasi-sovereign debtors and then figuring out what sort of financial restructuring system might make sense. I highly recommend the article, particularly for those of us who don't regularly deal with sovereign debt issues. There's a strange divide in practice and scholarship between domestic bankruptcy and sovereign debt restructuring. A few people have written in both areas, but they remain pretty separate fields. Anna's insights from the sovereign debt field are very useful for domestic bankruptcy scholars, as they help us step back and see the larger picture of what is going on. 

As Reforms Flag in Greece, Europe Aims to Limit Damage - As Greece and its lenders prepare for another week of tense negotiations, European officials now say that the task is less to help the country through its troubles than to avoid the sort of uncontrolled default that many experts fear could threaten the global financial system.  Officials from the so-called troika of foreign lenders to Greece — the European Central Bank2, European Union3 and International Monetary Fund4 — have come to believe that the country has neither the ability nor the will to carry out the broad economic reforms it has promised in exchange for aid, people familiar with the talks say, and they say they are even prepared to withhold the next installment of aid in March. Adding to the anxieties in financial markets, talks broke down Friday between the Greek government and private lenders over a plan to reduce Greece’s debt by $130 billion, a “voluntary” default that the troika has demanded before extending more aid. Those negotiations, aimed at forcing hedge funds and other private holders of Greek debt to accept large losses in order to make the country’s debt load more manageable, will resume Wednesday amid rising concerns about the consequences of failure. The markets have taken into account a voluntary default by Greece, most experts say. But financial experts fear the possibility of an “involuntary” default if the negotiators are unable to reach an agreement. That could unleash violent market reactions that could conceivably produce another market cataclysm like the 2008 bankruptcy of Lehman Brothers and throw the world into another recession.

Portuguese Yields Rise After Rating Cut To Junk -- Portuguese borrowing costs rose sharply Monday as some investors were forced to sell their government bond holdings after Standard and Poor's Corp. downgraded the country to junk status late Friday. Portugal is now rated as non-investment grade by all three major rating companies. Moody's rates the country at Ba2, Fitch at BB+ and Standard and Poor's at BB. Non-investment, or junk, bonds have an increased risk of default and pay a higher yield than investment grade bonds to compensate investors for holding the extra risk. The yield on the two-year and five-year government bonds rose in excess of two percentage points Monday to yield 13.49% and 16.80%, respectively, while the 10- year benchmark rose by just over one and a half percentage points to yield 13.55%, according to data from Tradeweb. "Now that Portugal is rated as junk by all three agencies, there is forced selling by investors as it [Portugal] is removed from various bond indices and funds,"

Portugal's Bond Yields Rise Sharply After Rating Cut To Junk - Portuguese borrowing costs rose sharply Monday as some investors were forced to sell their government bond holdings after Standard and Poor's Corp. downgraded the country to junk status late Friday. Portugal is now rated as non-investment grade by all three major rating companies. Moody's rates the country at Ba2, Fitch at BB+ and Standard and Poor's at BB. Non-investment, or junk, bonds have an increased risk of default and pay a higher yield than investment grade bonds to compensate investors for holding the extra risk. The yield on the two-year and five-year government bonds rose in excess of two percentage points Monday to yield 13.49% and 16.80%, respectively, while the 10-year benchmark rose by just over one and a half percentage points to yield 13.55%, according to data from Tradeweb. "Now that Portugal is rated as junk by all three agencies, there is forced selling by investors as it [Portugal] is removed from various bond indices and funds," noted one trader familiar with the matter. "It doesn't help that the markets are thin due to the U.S. holiday which makes price movements even more erratic."

S&P Downgrades Europe Rescue Fund - Yves Smith - This site and many others deemed the European rescue fund, the European Financial Stability Fund, to be unworkable (among other things, the device of having troubled countries on the hook to finance their own rescues seemed absurd). But it’s one thing to have informed critics view this contraption with skepticism, quite another for a ratings agency to ding it formally. US investors can still treat the EFSF as AAA based on Moody’s and Fitch AAA ratings. But who with an operating brain cell would buy bonds that are so clearly exposed to downgrade risk? This means that the ECB will have to monetize periphery country debt in a more direct manner that it has been willing to heretofore to keep them afloat.  The Wall Street Journal has just released a news alert, there is no accompanying story yet on its site: Standard and Poor’s downgraded its credit rating on Europe’s rescue fund one notch to double-A-plus from triple-A, following its decision last Friday to lower ratings on a number of euro-zone states.

S&P Downgrades Euro Zone Rescue Fund by One Notch - Rating agency Standard & Poor's said Monday it has downgraded the creditworthiness of the euro zone's rescue fund by one notch to AA+, putting the fund's ability to raise cheap bailout money at risk. The downgrade follows ratings cuts for triple-A-rated France and Austria, whose financial guarantees were key to the creditworthiness of the European Financial Stability Facility . "The downgrade to 'AA+' by only one credit agency will not reduce (the) EFSF's lending capacity of 440 billion euros," Klaus Regling, the fund's chief executive officer, said in a statement. S&P had warned in December that it would cut the rating of the 440 billion-euro EFSF in line with the downgrades of any triple-A country. Moody's and Fitch, the other big two rating agencies, still have the EFSF at triple-A, meaning that it would count as a top-notch investment for most funds. But analysts warn that further downgrades are likely soon. Once another big agency cuts the EFSF's rating, the euro zone faces a stark choice. Either the fund starts issuing lower-rated bonds — and accepts higher borrowing costs — or its remaining triple-A contributors increase their guarantees.

Is Europe About to Unravel?, by Tim Duy: Even the illusion of political unity in Europe appears to be dissolving before our eyes. The key problem always was the internal imbalances, a problem for which European policymakers have never offered a credible solution. They simply don't have such a solution in the context of a system of fixed exchange rates. I believe that currency devaluation is the only option that will change relative competitiveness in any reasonable timeframe and restore internal balance. Lacking currency devaluation as a tool to resolve imbalances, European policymakers turned to fiscal austerity. That plan has failed, pushing nation after nation into ever deepening recession. With Greece going on its fifth year of recession, I imagine by now that Portugal, Spain, and even Italy now see the writing on the wall for themselves. Sadly, however, the alternative is exiting the Euro, which almost certainly means financial chaos for the Continent as a whole.The Eurozone is like a roach motel. You can get in, but you can't get out.  Still, peripheral nations can only accept so much pain before the costs of being in the Euro outweigh the costs of leaving. And Italy is now sending Berlin a clear warning that such an endgame is approaching. Via the Financial Times: Italy’s prime minister has pleaded for Germany and other creditor countries to do more to help lower his country’s borrowing costs, warning there would be a “powerful backlash” among voters in the eurozone’s struggling periphery if they did not...

Euro Officials Say EFSF Has Enough Funds - European officials said the euro region’s temporary bailout facility has enough funds to deal with the sovereign debt crisis after losing its top credit rating at Standard & Poor’s.  “The EFSF has sufficient means to fulfil its commitments under current and potential future adjustment programs,” said Klaus Regling, chief executive officer of the European Financial Stability Facility, said in an e-mail late yesterday. S&P cut its rating on the EFSF to AA+ from AAA. The first test of the cut will come at 12 p.m. in Brussels when the EFSF sells bills.  The EFSF, designed to fund rescue packages for Greece, Ireland and Portugal partially with bond sales, owed its AAA rating to guarantees from its sponsoring nations. Two of those sovereigns, France and Austria, were cut on Jan. 13 to AA+ from AAA by S&P, which also downgraded seven other euro countries.  “The EFSF’s obligations are no longer fully supported either by guarantees from EFSF members rated AAA by S&P, or by AAA rated securities,” S&P said. “Credit enhancements sufficient to offset what we view as the reduced creditworthiness of guarantors are currently not in place.”

Spain’s Borrowing Costs Fall at First Auction Since S&P Rating Downgrade - Spanish borrowing costs plunged at an auction as investors ignored downgrades by Standard & Poor’s to snap up bonds across Europe amid evidence that the economic outlook may be improving. Spain paid an average 2.049 percent to sell 12-month debt today compared with 4.05 percent on Dec. 13. It sold 18-month paper at 2.399 percent, down from 4.226 percent last month. The euro region’s bailout fund also sold bonds, with investors bidding for 3.1 times the amount available. Europe’s debt crisis has stabilized for now even after S&P cut the ratings on nine euro-region members Jan. 13, stripping France of its AAA grade and lowering Spain by two levels to A. Bond yields have since slipped in a situation reminiscent of the rally in U.S. Treasuries after S&P downgraded the world’s largest economy in August.

S&P versus ECB - Last night we saw the first salvo in a long war between the rating agencies and the ECB’s emergency action to prevent total European financial melt-down. The ECB came out on top, with France selling 1.9 billion euros of one-year notes today at a yield of 0.406 percent, down from 0.454 percent. Although the market appears to have taken the downgrade of France in its stride, the junking of Portugal is a different matter. The Portuguese 10yr yield jumped 15.6% overnight. This result isn’t an immediate issue given the fact that the country is already on life support, but the result is likely to be yet another hit to the banking sector, specifically German and Spanish banks from the looks of recent data: It would appear that Portugal is slowly slipping in the direction of Greece. The latest report from the country’s central bank certainly isn’t happy reading: 2012 should register a 3.1% contraction from the 2.2% forecast just three months ago. The scenario is described in the Bank of Portugal’s winter bulletin released today as ”an unprecedented contraction of the Portuguese economic activity“, brought on by austerity measures and the growing uncertainty surrounding the crisis in the eurozone.The Portuguese central bank forecasts a 3.1% contraction in 2012 and a virtual stagnation in 2013, when the country’s economy should grow just 0.3%. However, the forecasts for 2011 were revised slightly upward, to 1.6% from last October’s forecast of a 1.9% fall.

ECB Says Banks’ Overnight Deposits Rise to New Record High -- The European Central Bank said overnight deposits from commercial banks surged to a record high, as the reserve maintenance period comes to an end. Euro-area banks placed 493.3 billion euros ($625 billion) with the Frankfurt-based ECB, up from 489.9 billion the previous day. That’s the highest level since the euro was introduced in 1999. The ECB’s reserve maintenance period, during which banks are required to hold a certain amount of reserves on average, is drawing to a close tomorrow. That can provoke fluctuations in deposits as lenders, who tend to front-load ECB borrowing, seek to balance their accounts. The ECB decided last month to temporarily suspend holding fine-tuning refinancing operations, and to cut in half banks’ reserve ratio to 1 percent. That may increase excess liquidity in the banking system and further boost deposits.

ECB steps up bond purchases to euro 3.8 billion — The European Central Bank stepped up its purchases of government bonds to euro3.8 billion ($4.85 billion) last week, increasing use of a tool that has helped keep indebted eurozone governments from financial collapse. The purchases announced Monday compared to euro1.1 billion the week before. The purchases help contain elevated borrowing costs for heavily indebted countries such as Spain and Italy. They do that by driving down the interest yield on bonds in the secondary market, reducing the rates paid when countries borrow. Fears of default have led to higher interest costs that magnify default fears in a vicious circle. Greece, Ireland and Portugal have already needed bailouts for that reason.

Overnight Deposits at ECB Top Half a Trillion Euros - Commercial banks parked over half a trillion euros at the European Central Bank, the highest on record, as the mix of debt crisis worries and a recent giant injection of ECB cash left banks awash with money but too scared to lend it. Overnight deposits at the ECB have been hitting new records even since last month's first ever offering of three-year loans from the ECB pumped 490 billion euros ($620 billion) into the banking system. ECB data on Tuesday showed deposits topped the half a trillion mark for the first time ever, as banks parked a staggering 502 billion euros, up from the 493 billion euros the previous day. It is likely to mark at least a temporary peak in the level of hoarding. The end of the ECB's monthly reserves cycle - the point when banks have fulfilled their ECB targets and have few options to juggle their funding - ends on Tuesday. Deposits traditionally drop when the new reserves cycle begins and banks have more funding freedom. Changes to the ECB's reserves rules, which will mean banks have to keep less of a cash buffer at the ECB, will also kick in on Wednesday.

The ECB is Engaging in Massive QE -- So the ratings agencies have finally followed through on the big threat and downgraded a number of the eurozone’s credit ratings, including France and Austria, both of which have now lost their coveted Triple AAA status. What does this mean and why does it matter? Investors (often badly informed) use ratings agencies like Fitch, Moody’s and S&P as an indicator of default risk of a country. Countries that receive lower credit ratings are at a disadvantage when they sell bonds because buyers will not pay as much for bonds from a country perceived to be at risk. In effect, ratings agencies are able to bully countries into adopting policies that are friendly to the ratings agencies’ investors. A compliant government often reacts like Pavlov’s dog to the threat or implementation of a downgrade, putting aside the interests of its citizens and starting to introduce discretionary contractions in its net spending, which it does by either raising taxes or cutting spending. My take is that the ratings downgrade causes a vicious cycle in which countries will end up adopting policies that will put their economies even more at risk than they were already. The reason for this is that in Europe, you’ve got a flawed financial structure that can’t be fixed by austerity measures because it is incapable of dealing with huge external shocks to the demand for goods and services on the part of consumers.

65% of Italians Think Euro Made Things Worse for Italy's Economy -- CNBC has some interesting figures on a recent poll in Italy: Majority of Italians No Longer Trust the Euro:

  • 65% of those polled thought the introduction of the euro has been more damaging than beneficial for the Italian economy
  • 55% percent of Italians have lost confidence in the euro single currency
  • Confidence in the European Union stood at 51%, the lowest level in many years
  • 31% said they would prefer a return to the lira

The euro is pushing Italy into depression -- Italy is being pushed into depression by monetary union Here is the latest money supply chart from the Banca d'Italia. . Just look at M3. Horrendous. See page 7 of this report. This speaks for itself. There is no clearer indictment of the dysfunctional nature of monetary union. Italy is being pushed into depression. Criminal. Obviously, Italy and Germany can no longer share the same monetary policy. Ergo, Germany should leave EMU, pronto. The Banca said Italy's economy contracted by 0.5pc in the last quarter of 2011. It will shrink by a further 1.5pc this year, with no growth in 2013. This is a direct result of the misguided pro-cyclical austerity polices imposed by Angela Merkel and the ECB – the infamous Trichet letter – without offsetting monetary and exchange stimulus. This will of course play havoc with Italy's debt trajectory.

As French Vote Nears, Sarkozy Is Haunted by Grim Economy - As French President Nicolas Sarkozy1 contemplates his race for re-election, with the first round of voting 100 days away, he is confronted with an economy reeling from the euro crisis and nearly zero growth. France2 has just lost its AAA credit rating and must cut government spending when the unemployment rate is 9.9 percent, a 12-year high, and rising.  The loss of the treasured AAA rating, while expected, was a blow to France’s status in Europe, making it seem less like a power than a problem. The downgrade makes it harder for France to pretend to be Germany’s equal in leading the European Union, which the Franco-German partnership has traditionally dominated. That, in turn, will make it harder for France, Italy and Spain to challenge the German recipe of austerity and to press harder for more liberal, pro-growth policies from the European Central Bank. The downgrade was also a major political blow to Mr. Sarkozy and his prospects in the upcoming election, where polls show the main concerns of voters are clear: the size of the French debt, the cost of living, unemployment and general economic insecurity. Mr. Sarkozy’s rivals, fairly or not, leave little doubt where to place the blame.

Rajoy Says He’ll ‘Rescue’ Regions, Stick to Spain Austerity -- Spain’s central government will provide a credit line and other liquidity measures to ease pressure on cash-strapped regions while demanding tighter deficits in return, Budget Minister Cristobal Montoro said. The central government in the coming weeks will pay the regions an 8 billion-euro ($10 billion) transfer that had initially been scheduled for July, Montoro told radio station Cadena Ser in an interview today. It will also offer loans via the Official Credit Institute to help regions settle bills for suppliers in a couple of months, he said. “We are submitting these mechanisms on the condition that the regions present fiscally viable plans,” said Montoro. He first announced the measures yesterday after meeting with regional finance chiefs following a pledge by Prime Minister Mariano Rajoy to “rescue” regions with liquidity problems. The 17 semi-autonomous regions control more than a third of Spain’s public spending, including health and education, and caused the nation to miss its budget-deficit target last year. The liquidity measures are designed not to affect the deficit, skirting a law forbidding direct bailouts.

Hungary risks bankruptcy in EU treaty fight - THE European Commission has begun legal action against Hungary's government for violating European Union treaty law and eroding democracy, marking an escalation in the war of words with the EU's enfant terrible. Hungary's defiant Prime Minister, Viktor Orban, has no hope of securing vital funding from the EU and the International Monetary Fund until the dispute is resolved, leaving him to bow to EU demands or let his country slide into bankruptcy. Yields on Hungary's two-year debt jumped to 9.17 per cent on Tuesday, an unsustainable level for an economy in recession and public debt of nearly 80 per cent of gross domestic product. Hungary's debt was cut to junk status by rating agencies last week.

Portugal moves into default territory - Portugal is trading in default territory after investors offloaded the country’s bonds this week amid rising fears of contagion, hurting a government debt auction on Wednesday. Worries are mounting that the private sector and Greece will fail to agree a restructuring package for Athens’ debt. Portuguese 10-year bond yields, which have an inverse relationship with prices, jumped to a new euro-era high of 14.40 per cent in London on Wednesday. Before the S&P two-notch downgrade late on Friday, yields were trading at 12.45 per cent. Portugal on Wednesday sold €1.25bn of 11-month bills, €754m of six-month notes and €496m of three-month notes, lower than the €2bn to €2.5bn targeted by the government debt agency. Portugal does not have a bond maturing until June, when €10bn is due for repayment. Its borrowing needs are also modest at €17.5bn. However, investors worry about Portugal’s painfully slow growth, which could impact on its ability to service its debts. Many investors were forced to sell Portuguese bonds after Standard & Poor’s downgraded the country to junk on Friday. Other funds sold Portuguese debt after Lisbon was removed from Citigroup’s European Bond Index, which these investors track, because of its fall to junk status.

Portugal Credit Default Swaps Hit Record High on Default Fear - Fears that Portugal could be the next Eurozone member to restructure its debt drove up yields on the country's sovereign bonds Wednesday as the cost of insuring them rose to a record high. Credit default swap contracts on Portugal climbed 62 basis points to 1,240, signalling a 64 percent probability of default within the next five years, according to the financial information firm Markit. Yields on Portugal's 2-year notes climbed 9 basis points to 15.24%, while its 10-year bond yields rose 5 basis points to 14.30%. Portugal's debt rating was cut two notches last week by Standard & Poor's, removing its last investment grade rating among the three major rating agencies. That forced investment funds not permitted to hold junk-rated bonds to liquidate their Portuguese holdings. Analysts said the continuing deterioration this week has stemmed from worries that a disorderly Greek default could leave Portugal exposed as the next most vulnerable EMU country.

Fitch May Cut Six EU Countries on Review by 1 or 2 Levels -- Fitch Ratings may cut six euro-area countries currently on review by one or two levels by the end of this month, Managing Director Edward Parker said. “We would expect the review will lead to downgrades of one to two notches for all the countries under review,”  Fitch placed Spain, Italy, Ireland, Cyprus, Belgium and Slovenia on review in December for possible downgrades, citing Europe’s failure to find a “comprehensive solution” to the region’s debt crisis. Fitch also lowered the outlook on France’s AAA rating at the same time, though executives this month said France’s rating would not likely be cut this year. Parker said the risk of a breakup of the euro region was “very small” and that Fitch didn’t expect Italy to default on its 1.9 trillion-euro ($2.4 trillion) debt. The country is too big to be allowed to fail, he said. Prime Minister Mario Monti, who came to power in November, has been helping restore confidence in Italy, he said.

Gross Says Euro Debt Downgrades May Force Selling -- Pacific Investment Management Co.'s Bill Gross said credit-rating cuts of euro-area debt may trigger some forced selling by investors who are require to hold only the highest quality securities in their portfolios. "There are those that say the downgrades don't matter," Gross, manager of the world's biggest bond fund, said in a radio interview on "Bloomberg Surveillance" with Tom Keene and Ken Prewitt. "In fact they don't for the most part. But there are regulatory issues in the case of structures that are dependent on certain types of ratings and to the extent that various countries get downgraded, then those positions have to be reduced if only because of regulation." Standard & Poor's announced after financial markets closed on Jan. 13 that it was downgrading the debt of several European nations included France, Italy, Portugal and Spain, while Germany was affirmed at AAA. France was cut to AA+ from AAA and the rating was assigned a negative outlook. S&P warned that crisis-fighting efforts of euro area leaders were falling short. Spanish and Italian bonds rose for a second day as borrowing costs fell at sales of government bills from Belgium to Greece, damping concern that credit downgrades would drive Europe's debt yields higher.

IMF, EU May Need to Spend More to Avoid East Europe Crunch -- Eastern Europe may require funds from the International Monetary Fund and other international lenders to pre-empt a banking crisis and a shortage of credit in the region's economies as western banks pare assets. The IMF, the European Bank for Reconstruction and Development, the World Bank and the European Investment Bank, who spent $42 billion after the collapse of Lehman Brothers Holding Inc., should “stand ready to provide external assistance and financial support to banks,” the Vienna Initiative group of regulators and policy makers said in a statement after a meeting in the Austrian capital on Jan. 16. The risk of “excessive and disorderly deleveraging as well as a credit crunch” looms over the region, they said. “There is a very strong impact from this -- a potentially strong impact,” “You have the headquarters making decisions on assets that are very small when you look at the total balance sheet, but when you look at the subsidiaries in eastern Europe they are systemic in the countries where they operate.”

IMF Seeks to Raise Lending Power by Up to $500 Billion Amid Europe Crisis - The International Monetary Fund is proposing to raise its lending capacity by as much as $500 billion to insulate the global economy against any worsening of Europe’s debt crisis.  The Washington-based lender is aiming to increase its resources after identifying a potential need for $1 trillion in financing in coming years, an IMF spokesman said in a statement. The IMF is studying options and will not comment further until it has consulted its members, the fund said. To incorporate a cash buffer, the lender is seeking a total $600 billion.  IMF Managing Director Christine Lagarde said yesterday her staff are looking at ways to expand the fund’s war-chest, which currently has about $385 billion available. While euro-region nations have already pledged to contribute 150 billion euros ($192 billion), the U.S. has said it has no plans to make new bilateral loans and leaders of Group of 20 nations ended last year at odds over the issue.  “The biggest challenge is to respond to the crisis in an adequate manner and many executive directors stressed the necessity and urgency of collective efforts to contain the debt crisis in the euro area and protect economies around the world,” Lagarde said

IMF explores $1 trillion lending boost -- The International Monetary Fund is exploring ways to expand its lending fund to a total of $1 trillion, according to a Bloomberg report Wednesday, citing an unnamed official from a Group of 20 nation. Bloomberg reported that the boost to the Washington-based lender's bailout facility would be sought by tapping contributions from China, Brazil, Russia, India and Japan. The massive expansion in the IMF's funding firepower would act to "safeguard the global economy against any worsening of Europe's debt crisis," Bloomberg reported. On Tuesday, Christine Lagarde, the IMF's managing director, said the agency was studying ways to increase its funding war chest.

IMF Proposes Trillion Dollar Lending Expansion - Here's a dead on arrival proposal: IMF Proposes Trillion Dollar Lending Expansion Most European stocks rose, erasing earlier losses, as the International Monetary Fund was said to propose a $1 trillion expansion of its lending resources. Asian shares and U.S. index futures advanced.  The IMF is proposing an expansion of its lending resources to safeguard the global economy against any worsening of Europe’s debt crisis, according to an official at a Group of 20 nation. The lender is pushing China, Brazil, Russia, India, Japan and oil-exporting nations to be the top contributors, according to the official, who spoke on condition of anonymity because the talks are private.  For starters, China already rejected bailout requests by Europe. China's vice foreign minister has ruled out using the country's vast foreign exchange reserves to bail out Europe, as the debt-laden continent tries to stave off the risk of a massive default. "The argument that China should rescue Europe does not stand,"

Decoding the IMF’s Statement About Its Resources - The International Monetary Fund’s executive board met today to discuss the adequacy of its resources. The result, IMF managing director Christine Lagarde said in a statement, is that “management and staff will explore options for increasing the fund’s firepower, subject to adequate safeguards.” Those aren’t exactly words investors should get excited about just yet. But they suggest a bit more potential for IMF action as the global economy faces the risk of a meltdown emanating from Europe. The word choices — “explore options” and “adequate safeguards” — also suggest a lot more debate ahead before the IMF gets a lot more money, if that even happens. Reading IMF announcements can be like reading Federal Reserve policy statements. Both are carefully worded to capture different views around the table, and both sometimes require a decoder ring to understand. For the Fed, it’s 12 voting policymakers with a variety of views about what should be done. For the IMF, it’s 24 executive board members representing the views of 187 member nations, many of which have competing interests.

IMF Says 2 Year "Funding Gap" Hits $1 Trillion - First we learn the LTRO may be €1 trillion, then €10 trillion, now the IMF tells us it has misplaced $1 trillion. The world may be going totally broke but at least it does in style - in perfectly round 12 digit numbers. In other words, even after it "miraculously" procures this money, the IMF will still be half a trill short. But, with everyone broke, just who will "fund" the IMF shortfall? Hm, could the fact that stocks are rising indicate that the ultimate buyer will be none other than the global central banking cartel. In other news, with every passing day we learn just how correct our thesis has been for the past 3 years: the it is not a liquidity crisis, it is all about solvency. Or rather insolvency. Global insolvency.

So Why Has the IMF Asked for $500 Billion That it Probably Won’t Get? - Yves Smith - An odd development today was that Christine Lagarde, the head of the IMF, put forward the idea of having members pony up $500 billion for rescue loans, since the agency said it foresees demand of $1 trillion over the next two years and it has only $387 billion uncommitted. It goes without saying that the most of the anticipated need is in Europe.  There are two puzzling aspects of this story. One is that the IMF got a serious and predictable smackdown from the US, since any funding would be a fiscal outlay, which requires Congressional approval, which is just not happening with Washington embracing the new religion of deficit reduction. Even though Eurobanks are really big lenders in the US (they are the providers of cheap corporate loans) and they did get really sick from eating toxic US mortgage instruments, the message from the Administration was tart. Per the Financial Times: “The IMF cannot substitute for a robust euro area firewall,” the US Treasury said in a statement. “We have told our international partners that we have no intention to seek additional resources for the IMF.” The UK wasn’t too keen either.  Since the objective was presumably to get some funds into Europe, that means the logical suspects are emerging economies. India and Brazil made positive noises, but advanced economies are cool on getting funding from China and the feeling is likely mutual.

Fears rise over Commerzbank and MPS - European regulators are convinced that two of the continent’s banks will fail to produce credible plans to plug capital deficits by Friday’s deadline, exposing both to the risk of full or partial nationalisation. Officials said that it looked “almost inevitable” that a fresh injection of state funds would be needed at Italy’s Monte dei Paschi di Siena and Germany’s Commerzbank. “These are the big cases,” said one. MPS was shown to have a €3.3bn capital shortfall in December stress tests conducted by the European Banking Authority. Commerzbank had a €5.3bn shortfall. Both banks declined to comment on the prospect they might have to take state funding, though they insisted in private that they could make up the gap through commercial means. Insiders at Commerzbank believe that its plan to raise the funds without state help is credible. Last month Eric Strutz, finance director, said: “We stand by our intention not to make use of additional public funds.” Commerzbank is expected to announce as soon as Thursday that it has already narrowed the capital gap by about €3bn, more than analysts expect. The EBA tests, which modelled for market-based “haircuts” on the value of banks’ European sovereign bond holdings, found that 31 banks out of 70 tested needed to raise an aggregate €115bn of additional capital. The regulator gave banks until June to do so, with a deadline of Friday to submit a clear plan.

Does Austerity Promote Economic Growth?, by Robert J. Shiller - Harvard economist Alberto Alesina recently summarized evidence concerning whether government deficit reduction – that is, expenditure cuts and/or tax increases – always induces such negative effects: “The answer to this question is a loud no.” Sometimes, even often, economies prosper nicely after the government’s deficit is sharply reduced. Sometimes, just maybe, the austerity program boosts confidence in such a way as to ignite a recovery. We have to examine the issue with some care, understanding that the issue that Mandeville raised is really a statistical one: the outcome of government deficit reduction is never entirely predictable, so we can ask only how likely such a plan is to succeed in restoring economic prosperity. And the biggest problem here is accounting for possible reverse causality. For example, if evidence of future economic strength makes a government worry about economic overheating and inflation, it might try to cool domestic demand by raising taxes and lowering government spending. If the government is only partly successful in preventing economic overheating, it might nonetheless appear to casual observers that austerity actually strengthened the economy.

Austerity is a pain. So is tight money - AUSTERITY in the euro zone has been under attack ever since the first economist representing the troika (IMF, ECB, EU) set foot on Greek soil. Actually, the troika may become more of a duoika (?), according to Athens News (via Tim Duy), because the one-sided emphasis on austerity is enervating the IMF.I think this is as good a time as any to review why austerity could harm the economy, and whether there is a difference between regional austerity, and euro-zone-wide austerity. After all, some readers may wonder: should a highly indebted country stop saving? The main argument for why austerity hurts the economy is that in times of insufficient aggregate demand, a further cut in government spending takes away the only player willing to borrow and spend instead of hoarding cash. However, the central bank has a big say in how much cash people want to hold and how much they are willing to borrow and spend. A recent IMF study on austerity confirms that monetary policy plays a large role in whether austerity hurts the economy or not. What follows in most economic theories (see Mankiw and Weinzierl or Woodford for recent treatments) is that government spending changes have only minor effects as long as central banks are unconstrained. Are they?

After the downgrades comes the downward spiral - At the end of a briefly euphoric week, reality caught up.On one level, Friday’s news was not really surprising. The French rating downgrade was a shock foretold. As was the breakdown in talks between private investors and the Greek government about a voluntary participation in a debt writedown. A proposition that was unrealistic to start with has been rejected. We should not feign surprise. And yet both events are important because they show us the mechanism behind this year’s likely unfolding of events. The eurozone has fallen into a spiral of downgrades, falling economic output, rising debt and further downgrades. A recession has just started. Greece is now likely to default on most of its debts and may even have to leave the eurozone. When that happens, the spotlight will fall immediately on Portugal, and the next contagious round of downgrades will begin. Europe’s insufficient rescue fund, the European Financial Stability Facility, now also faces a downgrade because it had borrowed its ratings from its members. The way the EFSF is constructed means that its effective lending capacity will thus be reduced. Even though the French downgrade did not come as a surprise, the eurozone member states have no plan B for this, just a few stopgap emergency scenarios. They may decide to run the EFSF and its permanent successor concurrently. They may also provide the latter with a full immediate allotment of its capital. But this will create gaps in national budgets in a bad year. By downgrading France and Austria but not Germany and the Netherlands, Standard & Poor’s also managed to shape expectations of the economic geography of an eventual break-up. A downgrading of all triple A rated members would have been much easier to deal with politically. Germany is now the only large country left with a triple A rating. The decision will make it harder for Germany to accept eurozone bonds. The ratings wedge between France and Germany will make the relationship even more unbalanced.

Greece homeless crisis escalates (Video)

Available for rent: The Acropolis of Athens - In a move bound to leave many Greeks and scholars aghast, Greece's culture ministry said Tuesday it will open up some of the debt-stricken country's most-cherished archaeological sites to advertising firms and other ventures. The ministry says the move is a common-sense way of helping "facilitate" access to the country's ancient Greek ruins, and money generated would fund the upkeep and monitoring of sites. The first site to be opened would be the Acropolis. Archaeologists, however, have for decades slammed such an initiative as sacrilege. The culture ministry said any renting of ancient Greek sites would be subject to strict conditions. According to a ministerial briefing dating from the end of December, a commercial firm could rent the Acropolis for a professional photographic shoot for as little as 1,600 euros a day ($2,046). Demonstrators could also rent the ancient landmark.

Greek bond talks edge closer to deal - Talks broke down last week with holders of close to €200bn of Greek debt after some eurozone officials called for a sharply lower coupon, or interest payment, on new bonds. The latest proposal called for a step-up coupon starting at about 3 per cent and rising to 4.5 per cent as the bond approached maturity, one banker said. Another said the average interest paid during the life of the bond would be 4.25 per cent, a rate “that the banks would be happy with”.The deal would amount to a 68 per cent loss for bondholders in net present value terms, according to people familiar with the talks.

Greek Bond Talks Edge Toward 68% Haircut Deal; Will the Deal Be Accepted? - Former ECB president Jean Claude Trichet said there would be no haircuts. There were. The first Greek haircut was 21% and it was insufficient. The second Greek haircut deal was 50% and that too was insufficient. On each failed attempt, the ECB and EMU poured more money into Greece. There is now about €200bn of Greek debt held by banks, hedge funds and other investors up from about €50bn a couple years ago. A third renegotiation is now underway, rumored to be a 68% haircut. Clearly there would have been far fewer ramification on banks if Greece would have defaulted long ago. Such is the stubborn arrogance of ECB, and EMU officials. Unless another haircut is approved Greece, and still more money is poured into Greece, it will default on March 20 when a €14.5 billion bond repayment is due.

Greek Premier Says Creditors May Be Forced to Take Losses - Taking direct aim at hedge funds and other private holders of Greece’s debt, Prime Minister Lucas Papademos says he will consider legislation forcing the creditors to take losses on their holdings if no agreement can be reached in critical negotiations scheduled to resume Wednesday. In a wide-ranging, 90-minute conversation on Monday night, his first with a newspaper since he came to office in November, Mr. Papademos also called on Greek politicians to pass the economic measures demanded by Greece’s foreign lenders in exchange for bailout aid, saying vested interests with political ties had helped to block the changes needed to revive the country’s rigid and moribund economy. But he added that European leaders did not act swiftly enough to tackle the debt problem when it first arose in early 2010. And he said Greece’s foreign lenders should have introduced growth measures earlier in its program for the austerity-squeezed country, whose economy is expected to shrink by 6 percent this year and where unemployment is 18 percent and rising. Mr. Papademos’s most pointed remarks appeared aimed at the private bondholders who have increasingly more sway over Greece’s fate than do its politicians or even the prime minister.

Greece Running Out of Time as Debt Talks Stumble - Greece is running out of time to avoid becoming the first euro nation to default after talks with lenders stalled ahead of a March 20 bond payment that will cost 14.5 billion euros ($18 billion) the country doesn't have. Prime Minister Lucas Papademos is due to meet with a group representing private Greek bondholders after a five-day break to discuss forgiving at least half of the nation's debt in the euro area's first sovereign restructuring. Greece's official creditors begin talks Jan. 20 on spending curbs and budget cuts that will determine whether to disburse additional aid. Edward Parker, a managing director at Fitch Ratings in London, said today Greece is unlikely to make next month's bond payment. "The next few weeks will be the most difficult in the Greek program," said Athanasios Vamvakidis, a foreign-exchange strategist at Bank of America Corp. in London. "All this needs to be completed by mid-March to avoid a disorderly default. Not an impossible task, but clearly very challenging with very much at stake."

Greece Poised to Default - Another melee won by the ECB overnight with the LTRO once again pushing sub 3 year sovereign auctions into a “happy place”. Spain sold 12-month debt with a yield of 2.049% against a previous 4.05% in December along with 18-month paper at 2.399 percent, previously 4.226% Greece sold 1.625 billion euros of 91-day bills in an auction that saw a decline in yield to 4.64% compared with 4.68% at a slightly lower bid to cover. Belgium was also in the action selling 1.76 bln euro worth of 3 month T-bills cover 2.24 vs 2.13 , yield 0.429% vs 0.264 % an Eur 1.2 bln of 12 mth t-bills cover 2.06 vs 2.21 , yield 1.162% vs 2.167 %. The EFSF was also in on the action with 1.501 bln of new 6 month bills and managed a yield 0.2664%, bid to cover 3.1. So all good news. The last information on car registrations presents the growing imbalances of Europe nicely and matches much of what we have seen in the recent PMI data: The European car market fell by 1.4% to 13.6 million vehicles in 2011, marking the fourth-consecutive annual decline, and the outlook for this year looks bleak as tough austerity measures are expected to eat into demand.

Greece’s endgame looms - The big deadline in Greece is March 20 — that’s when the country has a €14.4 billion bond maturing that it can’t afford to repay. So Greece and its creditors are playing chicken with each other right now. Both want to do a deal, which would involve a cash payment of about 15 cents on the euro being paid out by a rescue committee comprising the EU, the IMF, and the ECB. Existing bondholders would get shepherded into new debt which would be worth less than the old debt but at least would remain current, while Greece would avoid the parade of horribles associated with a “hard default”, with its banks retaining access to funding from the international community in general and the ECB in particular. The logical outcome, then, is that a deal gets done — probably along the lines that Marathon Asset Management CEO Bruce Richards sketched out to Peter Coy today. Richards’s math is a bit hard to follow: The new bonds will probably pay annual interest of 4 percent to 5 percent and have a maturity of 20 years to 30 years, Richards said. They may trade for about half of their face value, he predicted. Altogether, the net present value of the deal for the bondholders will be about 32 cents on the euro, he estimated.

Fitch Says Greece Will Default By March 20 Bond Payment - It's all over but the crying at least as far as Greece is concerned. First, it was S&P's Kraemer telling Bloomberg yesterday the country is finished, now today for dramatic impact, we get Fitch's repeating the doom and gloom, stating that the country will likely default before its March 20 payment. From Bloomberg: "Greece is insolvent and will default on its debts, Fitch Ratings Managing Director Edward Parker said. The euro area’s most indebted country is unlikely to be able to honor a March 20 bond payment of 14.5 billion euros ($18 billion), Parker said in an interview in Stockholm today. Efforts to arrange a private sector deal on how to handle Greece’s obligations would constitute a default at Fitch, he said. “The so called private sector involvement, for us, would count as a default, it clearly is a default in our book,” Parker said. “So it won’t be a surprise when the Greek default actually happens and we expect it one way or the other to be relatively soon." Europe’s debt crisis is likely to be “long and drawn out,” Parker said." And here we go again, with official attempts to make what appeared apocalyptic as recently as a month ago, seem trite, boring and perfectly anticipated. In other words, the fact that this like every other piece of bad news that should be priced in, is priced in, is priced in. And so on, at least according to the kleptocrats, until we finally learn that nothing is priced in but endless market stupidity.

Greece’s game plan - Greek prime minister Lucas Papademos gave an important interview to the NYT on Monday night. Think for a minute about the natural fractiousness of bondholders, and then read this: Mr. Papademos said that if Greece did not receive 100 percent participation in a program in which bondholders would voluntarily write down $130 billion from Greece’s unwieldy $450 billion debt, the country would consider passing a law to require holdouts to take losses. “It is something that has to be considered in the light of expectations about the degree of the participation to be achieved,” Mr. Papademos said. “It cannot be excluded. It is contingent on the percentage.” This is a pretty clear message: if the bondholders don’t agree to Greece’s terms, then Greece can simply force them to join the exchange. Greece’s bonds are issued under Greek law, and Greece can change its own domestic law any time it wants. My guess is that this is exactly what’s going to end up happening.

Hedge Funds May Sue Greece if It Tries to Force Loss - Hedge funds have been known to use hardball tactics to make money. Now they have come up with a new one: suing Greece in a human rights court to make good on its bond payments. The novel approach would have the funds arguing in the European Court of Human Rights that Greece had violated bondholder rights, though that could be a multiyear project with no guarantee of a payoff. And it would not be likely to produce sympathy for these funds, which many blame for the lack of progress so far in the negotiations over restructuring Greece’s debts. The tactic has emerged in conversations with lawyers and hedge funds as it became clear that Greece was considering passing legislation to force all private bondholders to take losses, while exempting the European Central Bank, which is the largest institutional holder of Greek bonds with 50 billion euros or so. Legal experts suggest that the investors may have a case because if Greece changes the terms of its bonds so that investors receive less than they are owed, that could be viewed as a property rights violation — and in Europe, property rights are human rights.

Greek rescue blocked by hedge fund greed - A group of hedge funds is threatening to block a last-ditch attempt to save Greece from defaulting on its huge debt pile, unless they are guaranteed a significant payout. There will be a final attempt today – when a group representing Greece's private sector bondholders meets senior ministers in Athens – to negotiate a writedown of the value of the country's debt ahead of a crucial bond repayment deadline next month. Sources familiar with the talks, which collapsed at the end of last week, have said that a number of hedge funds are holding up the restructuring deal to ensure that they make a fat profit, after snapping up Greek bonds at distressed prices. Greece's official backers – European governments and the International Monetary Fund – have said they will not deliver the next tranche of bailout funds that Athens needs to redeem €14.4bn (£12bn) in maturing bonds on 20 March unless a deal to cut Greece's €355bn debt pile by €100bn is concluded by the end of the month. Without those bailout funds, Athens will be forced into a disorderly default, which could plunge the eurozone into further financial chaos and possibly prompt Greece's exit from the single currency.

Vampire Hedge Funds Are Sucking Greece Dry Economy -: Who are the real villains on Wall Street? When it comes to institutionalized greed and corruption, nothing tops the too-big-to-fail banks like JP Morgan Chase, Bank of America and Goldman Sachs. But these financial giants form only one part of the financial oligarchy. Lurking in the shadows are aggressive hedge funds that are just as lethal to our economic well being. If Goldman Sachs is a vampire squid, as Matt Taibbi so aptly named it, then hedge funds are like schools of piranhas or sharks, eager to strip the financial carcass to the bone. The sharks at this very moment are circling Greece, waiting to devour that nation’s resources. To understand this attack we need to enter into the rotting innards of our financial system.

Greece Inches Toward a Deal With Its Bondholders - Greece and its private-sector creditors inched closer late Thursday to a completed deal over how much of a loss investors should take on just over 200 billion euros in Greek government bonds The long-running — and at times contentious talks — resumed in Athens on Wednesday between Charles Dallara of the Institute of International Finance, who represents bondholders, and the Greek political leadership, after having broken up last week because of a disagreement over the coupon rates the new Greek bonds would carry. Now, a compromise seems to be at hand, with the Greeks close to locking in an interest rate just below 4 percent on the new bonds, according to officials involved in the negotiations. A coupon below 4 percent represents a significant breakthrough for Greece, as creditors have long pushed for a rate above 4 percent, which they say would compensate them for the 50 percent haircut they would receive on their new securities. A lower rate, creditors have argued, would punish investors too much and could not be described as voluntary, thus setting off credit default swaps on Greek debt — an outcome that Europe fears would lead to another round of market assaults on the debt of other vulnerable countries like Portugal.

Greece, Creditors Move Closer to Deal in Race Against Time - Greece and its private bondholders resume debt swap talks on Friday amid signs they are inching closer to a long-awaited deal...Cash-strapped Greece is fast running out of time as it pushes to wrap up an agreement by Monday paving the way for a fresh injection of aid before 14.5 billion euros ($18.5 billion) of bond redemptions fall due in March.After a breakdown in talks last week over the coupon, or interest payment, that Greece must offer on its new bonds raised fears of a disastrous bankruptcy, the two sides appeared to be moving to overcome their differences.  A large chunk of the bond swap must be agreed by noon on Friday and formalized before Monday's meeting of euro zone finance ministers, [Finance Minister Evangelos Venizelos] has said. Adding to the pressure, officials from the "troika" of foreign lenders are due to begin meetings with the Greek government on Friday to discuss reforms and plans to finalize that bailout package. "Now is the crucial moment in the final battle for the debt swap and the crucial moment in the final and definitive battle for the new bailout," Venizelos told parliament.

Greek PSI Here We Come? Be Careful What You Wish For  - So it looks like we should get an announcement sometime today about the proposed Greek PSI deal. Yes, proposed, not finalized. Asides from the obvious fact that there will be limited or no documentation for the deal, we still have no clue who has agreed to what. As far as I can tell, no one has given the IIF negotiators any binding power. Obviously some of the institutions that the IIF negotiators are associated would have trouble not approving the "deal", but how many bonds do they really represent?  The carrot and stick that the EU and ECB can use with other holders and the desire to maximize profits (or minimize losses) on the other side. So far, this news seems to be acting inversely to the "downgrades" price action, as early front-running is meeting sell the news. If the terms of the deal being leaked are true, it will be extremely interesting to see what other countries do. Not only will Greece receive a 50% notional reduction (except from the ECB and other "public" holders), but they will get very long dated money at very low rates. Who woundn't want that? Why should Spain both going through semi-legitimate auctions when Greece can get longer dated money at lower rates? Why should Portugal or Hungary bother with painful steps to reduce debt when the alternative is spend more, reduce debt via restructuring, and get lower rates on that reduced debt?

Roubini: we will see a Greece credit event, regardless of deal - Nouriel Roubini and Ian Bremmer spoke to Bloomberg Television’s Margaret Brennan about the state of the global economy. Roubini said that the "probability of a recession in the United States is lower than 60 percent right now." Here’s what Bloomberg writes about the interview:Roubini on Greece: "Even if they reach an agreement there are going to be so many holdouts that then they’ll have a problem. They’ll either pay the holdouts and that becomes expensive, or if they don’t pay them you’ll have a series of defaults, because they’re going to stop paying them. Or the way to avoid the holdouts from being holdouts is then to change domestic legislation, to cram down the terms of the majority on the holdouts. But if that happens then the CDS will trigger and that becomes a credit event. So either way you’re going to get a credit event."

Münchau: We are fighting the wrong crisis - Wolfgang Münchau wrote a piece that was carried online today at Der Spiegel. I haven’t seen an English language version so I thought I would say a few words about the piece I saw in German. Münchau says that Standard and Poors was right – not necessarily about the ratings downgrades, but rather that Europe was fixated on the wrong problem, budget deficits. in his view – and mine- this is only going to make things worse. Austerity has already led to a worsening outlook for Europe with even Germany now expecting 0.7% growth for all of 2012. In Münchau’s view, the reason for the downgrades was that Europe is fighting the wrong battle. S&P even said in their message on the downgrades that an austerity-centered approach would make matters worse. Wolfgang noticed that German Chancellor Merkel and her Finance Minister Schäuble responded to this message by exhorting Europe to push through their austerity packages more quickly. Clearly they don’t get it. Wolfgang goes on to say that the problem is not in the public sector but in the private sector, where high debt, deleveraging and then recession caused a gaping hole to open up in the public sectors’ balance sheets. Moreover, in what Münchau calls the single currency "strait jacket", the economies of Euroland have diverged rather than converged and that has meant current account imbalances and private debt accumulation in the periphery.

Irish legal threat to European fiscal treaty - The Irish government is likely to face a court challenge if it decides not to hold a referendum on a new European fiscal treaty, potentially plunging the country and Europe into months of legal uncertainty. Sinn Féin, the fourth largest party in Ireland’s parliament, told The Financial Times on Thursday that the party had sought legal advice on the issue and was “seriously and actively considering” making a challenge to the Irish Supreme Court.  “We think the fiscal compact should be put to the people because of the draconian austerity that this will mean for years to come,” said Pádraig Mac Lochlainn, Sinn Féin’s foreign affairs spokesman.

EU treaty revisions make Irish vote less likely - The Irish Times - EU OFFICIALS have spurned German pressure for constitutional limits on debt and deficits in Europe’s new fiscal treaty, a development which could make it easier for Dublin to avoid a referendum. Germany pushed forcefully in the past week to incorporate a demand for constitutional provisions in the treaty. However, a new draft leaves it open to the Government to enshrine a “golden rule” on debt and deficits in secondary legislation. There would be no automatic requirement for a referendum in that event, although it remains to be seen whether German chancellor Angela Merkel insists on constitutional measures in the final text. Also in question is whether any other treaty provisions lead to a public vote, something the Government does not want as it fears defeat. Taoiseach Enda Kenny has said that the Government cannot decide on that until the final text is agreed.

Chickens Come Home to Roost in Croatia - Thanks to massive propaganda, Croatia is foolishly about to join the EU. Chicken farmers (Croatians in general) are about to pay a steep price. The New York Times reports As European Union Beckons, Allure Fades for Wary Croatia Zoran Sluga has a small family farm here on the border with Slovenia, his 300-year-old barn filled with thousands of squawking chickens.  But if Croatians vote to join the European Union next Sunday, Mr. Sluga’s simple business will become a lot more complicated. The cages he keeps his hens in will not meet the group’s rules, requiring expensive upgrades. Italian egg producers, given access to Croatian markets, are likely to undercut his prices. Mr. Sluga believes that his very way of life is a stake. And for what? he asks. “See what happened to Greece,” he said. “They got billions from the E.U. and it did not work out.”

Austrian Central Bank – Bribery, Kickbacks, Money Laundering - Two central bank governors in Europe have gotten into hot water recently: Philipp Hildebrand, as chairman of the Swiss National Bank (SNB); and Ewald Nowotny, as governor of the Austrian Central Bank (OeNB) and member of the ECB’s governing council. Hildebrand resigned after he tried to brush off an insider-trading scandal that is still making headlines in Switzerland; Nowotny is clinging to his jobs though he is tangled up in a criminal bribery, kickback, and money-laundering scandal involving Syria and Azerbaijan. But finally a major politician—though possibly the wrong one—called for his resignation. The scandal has been brewing for months. On November 28, the office of the state prosecutor in Vienna announced that the criminal prosecution had been expanded to over 20 suspects, including six current directors of the OeNB, among them Governor Ewald Nowotny, Vice Governor Wolfgang Duchatczek, and Director Peter Zöllner. Four people had already been arrested. At the center is a subsidiary of the OeNB, the Oesterreichische Banknoten- und Sicherheitsdruck GmbH (OeBS). It prints money, literally. And it has been soliciting bank-note deals from foreign governments since 2000. According to the prosecution, OeBS paid €17 million in bribes to Syrian officials to obtain orders from the Syrian government. Payments were routed to offshore outfits, such as the Panamanian mailbox company Venkoy, whose representatives were in Switzerland. The prosecutor is further investigating €1.7 million in kickbacks that made their way back to Austria. Similar arrangements with Azerbaijan are also being investigated.

Portugal to need "debt haircut" as economy tips into Grecian downward spiral - Portugal's borrowing costs have jumped to record highs and are tracking the moves seen in the culminating phase of Greece's debt crisis, dashing hopes that the country will be able to stave off contagion by embracing drastic austerity. Yields on Portugal's 10-year bonds climbed to 14.39pc on Thursday. Credit default swaps measuring bond risk have reached 1270 points, pricing a two-thirds chance of default over the next five years. While some of the latest damage reflects forced selling of Portuguese debt after Standard & Poor's cut the country's credit rating to junk status last Friday, there are deeper worries that sharp fiscal cuts by the free-market government of Pedro Passos Coelho may prove self-defeating. Mr Passos Coelho has been praised by EU leaders and the International Monetary Fund for delivering on austerity, but the risk is that severe tightening - without offsetting monetary and exchange stimulus - will push Portugal into the same downward spiral that has already engulfed Greece.

Has Portugal's debt default clock begun to tick? (Reuters) - Portugal clinched a deal on ambitious labor market reforms this week and carried out its biggest debt sale since seeking a 78-billion-euro bailout, but the challenges for the second-most risky country in the euro zone may be shifting up a gear. Undermining the glow of Lisbon's achievements is the rapidly rising market concern that Portugal is the next potential candidate to default in the euro zone after Greece -- a point that is fast becoming clear as Athens approaches the end of its debt restructuring talks. "Portugal is obviously the next in the line of fire," said Michael Cirami, a portfolio manager at U.S. investment managers Eaton Vance. "Portugal is unlikely to go unnoticed whether they strike a deal or not (on Greek debt restructuring)." The concerns were clearly borne out this week as Portugal's bond yields rose virtually without interruption, to all-time highs, despite the issuance of 2.5 billion euros of short-term treasury bills on Wednesday at slightly lower yields.

Juncker Says Euro Zone On Brink Of Recession - The European single-currency area is on the verge of recession, Jean-Claude Juncker, president of the euro-zone finance ministers said Wednesday. "In the euro zone, we are on the brink of a recession, albeit a technical one, " Juncker told reporters after a meeting with recently appointed Belgian Prime Minister Elio di Rupo. "I think there's no alternative to budget consolidation." The two leaders were meeting in Luxembourg, where Juncker is Prime Minister, as part of an official tour by di Rupo following the formation of his government after 541 days of political deadlock. Di Rupo said measures to tackle the crisis shouldn't just involve cutting spending. "We mainly discussed European questions," he said. "Economic growth and job creation must go alongside budgetary restraint." Juncker said leaders would discuss raising the ceiling of the euro-zone bailout fund in March, although he didn't give details of how much this could be increased.

Checking in on Europe - REGULAR readers know that my view of the likely outcome of the crisis in Europe is a gloomy one. This hasn't changed. Given a number of positive developments in the euro zone—like fairly successful debt auctions for Spain and Italy, and corresponding drops in bond yields—it's worth keeping a close eye on the situation to make sure that something important and positive hasn't actually happened. The European Central Bank's introduction of its long-term refinancing operations late last year has had several significant effects on the dynamic in the euro zone. First, it had an immediate impact on the liquidity crunch that threatened to bring down the euro-area banking system. Banks that were having an increasingly difficult time rolling over the short-term financing they need to survive were given the opportunity to borrow huge amounts of money from the ECB at very low rates and fairly long—3 year—durations. Boy did they seize it. the first LTRO provided some €489 billion to European banks. The next round, to take place in February, may involve even more lending. For now, that seems to have removed a major, immediate threat to the euro zone.

Bonds Show Return of Crisis Once ECB Loans Expire - European Central Bank President Mario Draghi’s unlimited three-year loans to euro-region banks may give Italy and Spain only temporary respite from the region’s debt crisis. Two-year Italian and Spanish notes rallied since the ECB said Dec. 8 that it planned to offer as much liquidity as banks wanted in exchange for eligible collateral. The gain on the short end of the market outpaced longer-dated debt on concern the nations’ austerity plans won’t plug deficits and reduce Europe’s largest debt load. Yields on Italian two-year notes fell to the least relative to 10-year bonds in 21 months. “This is about buying time,” said John Davies, a fixed- income strategist at WestLB AG in London. “It’s only when the market believes Italy and Spain have returned to sustainable debt levels that you can say the crisis has truly ended.” Investor demand at sales of government bills and short-term debt has increased across the euro region since the ECB injected 489 billion euros ($632 billion) of three-year loans into the financial system on Dec. 21. The loans were offered at the benchmark rate, currently 1 percent, enabling financial institutions to profit by lending the cash at higher rates, including to governments. The banks that borrowed the cash may also use the funds to finance their own maturing debt

At One Think Tank, Two Opposing Views on the Euro-Zone Outlook - It’s easy to feel unsettled by the European debt crisis as policymakers inch toward a solution. There are plenty of good reasons to fear a financial catastrophe, given the scale of the euro zone’s troubles. But there are also reasons to see a path out, given the political and economic costs of failure. Whichever camp you’re in, the Peterson Institute for International Economics has arguments to support your view. In presentations today, four economists at the Washington think tank – two on each side – debated opposing scenarios for how the crisis will play out. In one corner are Peter Boone and Simon Johnson, who are bracing for a spectacularly ugly outcome. With a $211 trillion market for interest-rate swaps in Europe under pressure, the euro faces the risk of a serious breakdown, they say. High default risks in some euro-zone nations are leading to capital flight, which leads to recessions and high unemployment. They cite numerous triggers for a euro-area collapse and maintain that Europe has failed to restore confidence. In the other corner are Fred Bergsten and Jacob Kirkegaard, who expect more turbulence ahead but remain optimistic about the ultimate outcome. Europeans are committed to European integration, they say, and the largest euro-zone member — Germany – will protect its economic interests by keeping the currency bloc intact.

Zombie Europe - One of the major themes that I have been discussing in Europe for a long period of time is the simple failure of logic in which the European periphery is being instructed to push deflationary policy onto their economies, yet at the same time expected to meet their existing, and growing, debt obligations. In the most extreme case this has led to what you now see in Greece, but I don’t think Portugal or Spain are far behind. This failing policy is leading to the ‘zombification’ of nations, in which they can’t grow out off their debts yet aren’t being allowed to fail on them either. Kept alive by an ever-growing lifeline of foreign aid when the real solution is to let the beast die and re-build from the ashes. I think if we compare Iceland to Ireland we are beginning to get a clear picture of the benefits of writing off the debts and starting anew. As I have also spoken about over the last month or so, what is happening in the real economies of Europe is being replicated in the banking system. This is most apparent in the interbank market, as I said: Although the LTRO does seem to have done some good for short term sovereign debt via supporting direct purchases, or at least the perception of them, it doesn’t appear to be helping in the area that central bank operations actually target. That is, interbank market stability.

No need to deleverage gross debt  - The McKinsey Global Institute has produced a new report with the title "Debt and deleveraging: Uneven progress on the path to growth". The report discusses the challenge for advanced economies to reduce high level of debt and the potential consequences for growth. It is an interesting topic and, as it always the case with the MGI reports, it produces a detailed analysis of international data. There is, however, an methodological approach in the report that I do not share and that can be misleading. The report starts with a few charts of debt trends in the last decades. As an example, here is exhibit 1 from their report.Among all economies we see an upward trend with increasing levels of debt, measured as % of GDP. The reading of this chart tends to be one of economies "living beyond their means", where spending outpaces income and where an adjustment is needed (deleveraging). This is not correct. As I discussed in an earlier post about government debt, the debt of one individual (or government) is the asset of someone else. Looking at gross debt (as done in the chart above), can be very misleading. What matters for countries is their net wealth and not their level of gross debt.

Germany Refuses To Boost EU Rescue Fund Contribution (RTTNews) - Germany confirmed Monday that it will not consider boosting its contributions to the European Union's rescue fund, the European Financial Stability Facility (EFSF), despite the recent downgrading of nine euro-zone counties by Standard & Poor's Ratings Services. German Chancellor Angela Merkel's spokesman, Steffen Seibert told reporters at a regular press briefing on Monday that the German government does not believe that the volume of guarantees that the EFSF has at present "would not be sufficient to fulfill its current obligations." Seibert also noted that European leaders have already agreed to move forward to establish the European Stability Mechanism by mid-2012, one year earlier than planned earlier. The ESM is planned to have a cash component of 80 billion euros, which will be provided gradually by eurozone nations. Because of the cash component in its structure, the ESM will be less affected by such credit downgrading of the member states.

Bank deposits at ECB climb to new record high (Reuters) - Commercial banks parked over half a trillion euros at the European Central Bank for the second day in a row, as the mix of debt crisis worries and a recent giant injection of ECB cash left banks awash with money but too scared to lend it. Overnight deposits at the ECB have been hitting new records even since last month's first ever offering of three-year loans from the ECB pumped 490 billion euros ($620 billion) into the banking system. ECB data on Wednesday showed deposits hit an all-time high of 528 billion euros, up from 502 billion the previous day. It is likely to mark at least a temporary peak in the level of hoarding. The end of the ECB's monthly reserves cycle - the point when banks have fulfilled their ECB targets and have few options to juggle their funding - ended on Tuesday. Deposits traditionally drop early in the new reserves cycle. Changes to the ECB's reserves rules, which will mean banks have to keep less of a cash buffer at the ECB, will also kick in on Wednesday. The move will cut banks' reserves ratio requirements to 1 percent from 2 percent and is set to save banks 100 billion euros according to the ECB.

ECB Lends 14 Banks $5.9 Billion for 7 Days in Regular Operation - The European Central Bank said it will lend $5.9 billion to euro-area banks for seven days. The Frankfurt-based central bank said it will provide the funds tomorrow to 14 banks at a fixed rate of 0.59 percent. Last week banks borrowed $5.7 billion. The ECB doesn’t disclose the identity of the banks it lends to. Demand for dollars from European banks surged last month after the ECB coordinated with the Federal Reserve to cut in half the cost of borrowing in the currency, as part of a global effort to mitigate a credit shortage worsened by the euro region’s sovereign debt crisis. The cost for European banks to borrow dollars in the market fell to the lowest in more than four months today. The three- month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 79 basis points below the euro interbank offered rate at 8:26 a.m. in London. That’s the lowest cost since Aug. 30 and compares with minus 83 yesterday. European banks need dollars to fund their own lending in the U.S. as well as to clients elsewhere doing business in the world’s leading reserve currency.

Moody's warns it will likely cut big bank ratings (Reuters) - Moody's Investors Service, the credit rating agency of Moody's Corp (MCO.N), warned on Thursday that it is likely to make further cuts in credit ratings of many European banks and global investment banks. The New York-based agency said in a statement that it is likely to act because of deteriorating financial strength of governments, particularly in Europe, increased economic uncertainty and weakness in capital markets where banks will need to refinance large amounts of debt coming due. "The expected decline of bank ratings reflects the acceleration of interrelated pressures on the banking sector since the second half of 2011," Greg Bauer, Moody's managing director of global banking said in the statement. "These pressures most immediately affect global capital markets intermediaries and European banks," Bauer said. Moody's said it expects to put "a number of banks" under review for downgrade by the end of March. "Ratings for many European banks will decline," the statement said.

European banks prepare to shrink - Although the headlines are quiet at the moment there is still quite a bit occurring behind the scenes in Europe. Obviously everyone is still waiting for a resolution of the Greek situation and that story is changing by the hour. The latest is that there is some sort of deal, but it won’t be available until noon Friday ( Greek time ) and it is supposed to be tabled at the European summit on Monday. I have no idea if this is the case as it is about the 50th time I have read the same thing so we will all just have to wait and see. As I have been reporting over the last few weeks there is mounting pressure on the European banks re-capitalise as to meet the requirement of core tier 1 capital ratio of 9 percent over risk weighted assets by June 30, 2012.  This is now coming to a head with banks required to deliver a “credible” plan to European banking authority as to how this is to be achieved by Friday. Banks have several options to find the capital required. They can retain earnings, shrink their loan book, convert hybrid debt into equity, buy back their own debt, sell assets, cut expenses (including staff salaries ) and/or cut dividend payments to shareholders.

ECB’s Weidmann: Unlimited Bond Buys Not in Line With EU Treaty - European Central Bank Governing Council member Jens Weidmann took a strong stance Wednesday against exactly the sort of crisis remedy that many experts and politicians are demanding from the ECB, namely the unlimited purchase of euro-zone government bonds. Weidmann, who also heads the Deutsche Bundesbank, unveiled a litany of reasons against such a move in the text of a speech to be delivered near Stuttgart. “First, such an approach would not be in line with the existing EU treaty, which forbids monetary financing of states,” he said. “Can one overcome a crisis of confidence by ignoring law?” he asked rhetorically, asking further how one could thus generate confidence in future deals.

ECB mulling alternatives to bond-buy plan: Nowotny - (Reuters) - The European Central Bank is exploring alternatives to its controversial bond-purchase program but has yet to decide on any replacement policy tool, ECB Governing Council member Ewald Nowotny told a German website in comments published on Tuesday.  Nowotny, who is also Austria’s national central bank chief, said there was skepticism on the policymaking Council about the bond-buy program "because we fear the market imperfections that we want to correct with this could emerge in another area." "We are discussing possible alternatives. But this discussion is not so far developed that we can dispense with the SMP (bond-buying program)," Nowotny told the Wall Street Journal’s German website

The ECB creates artificial life - The credit team at Citi came out with a note on Friday entitled “Artificial life and Dolly the Sheep”. It contained this rather eye-catching analogy: It’s been the dream of Sci-Fi fans for decades. 18 months ago US scientists announced they had created a living cell controlled entirely by synthetic DNA. Arguably, the ECB can now claim a similar achievement, having revived markets from the brink through its massive liquidity injections. At least to our minds, the rally is entirely artificial – but that’s not to say it won’t have legs. Artificial though this rally it may be, don’t doubt it’s ability to feed on itself, especially given low inventory levels: The ECB’s LTROs have succeeded in breaking the negative spiral of rising risk aversion, poor asset performance and forced selling. Money is cheap, and every day, confidence is building little by little, prompting buying. The resulting asset performance in turn raises confidence further. The lack of street inventory implies small shifts in demand have a much bigger impact on spreads than in the past. But pssst! the fundamentals just aren’t that good:

Central Bank Becomes an Unlikely Hero in Euro Crisis -Throughout the month, countries caught in the eye of the European financial storm, including Italy, Spain and France, have repeatedly defied expectations, selling big batches of bonds to the public at interest rates significantly lower than investors demanded at the height of the euro1 crisis late last year.  The surprisingly successful auctions owe little to improving economic data around the region. On the contrary, many of the countries that use the euro as their currency appear to be confronting a renewed recession2, and pessimism about their growth prospects remains abundant. Just last week, Standard & Poor’s stripped France of its coveted AAA rating3 for the first time in recent history and downgraded eight others.  Instead, most of the credit seems to go to the European Central Bank4, which in late December under its new president, Mario Draghi, quietly began providing emergency loans to European banks — hundreds of billions of dollars of almost interest-free capital that the banks have used to come to the rescue of their national governments.  The central bank, based in Frankfurt, used typically understated and technical language to describe its actions, but it appears to have done what its leadership said throughout 2011 that it would not do: namely, flood the financial markets with euros in a Hail Mary attempt to make sure that the region’s sovereign debt crisis5 does not lead to a major financial shock.

Weren’t We Facing A Systemic Collapse a Few Months Ago... What's Changed Since Then? -If you’ll recall, the entire European banking system nearly imploded just 8 weeks ago. Things were so dire that we even had a coordinated Central Bank intervention among other measures to try and prop things up over there. The Powers That Be have since launched the Long-Term Refinancing Operation or LTRO: essentially a program through which European banks can borrow from the ECB at just 1% for up to a year. The whole thing is essentially just another liquidity handout and it’s telling that those firms which do borrow from the LTRO are parking almost all the borrowed cash at the ECB soon after. And while the LTRO has been beneficial in terms of some liquidity concerns, it’s done nothing to address Europe’s solvency issues. Case in point, European banks in general are leveraged at 26 to 1. At that level even a 4% drop in asset prices wipes out all equity. In this environment, the ability to borrow more money doesn’t accomplish anything from a balance sheet perspective. It’s simply a matter of common sense: you cannot solve a debt problem with more debt.

Collateral squeeze as strong as ever, Icap says - Oh dear. So much for the big Draghi LTRO helping out the Eurozone collateral crunch. According to Icap’s latest repo makret report — and remember they only cover the electronic flow through their Brokertec platform — the collateral crunch hasn’t eased at all. As they noted on Friday: The collateral squeeze in Eurozone repo markets continues. Repo trading volumes have dropped sharply across the board. This is not a seasonal dip but a genuine large-scale slide in repo market liquidity which appears to be driven by a sharp squeeze in available collateral. Overall repo volumes transacted on the leading Repo system, Brokertec, have fallen around 30% from mid-Q4. Notably, the initial slide in volumes was focused on the German govt repo market, seemingly related to escalating levels of risk aversion depressing secondary govt bond market activity and encouraging buy and hold strategies. German GC rates have pushed close to zero and traded negative on occasion for non-standard settlement or credit sensitive names. The drop in Euro repo volumes over the past month has been spread across all major Eurozone repo markets. Here’s that plunge in volumes in chart form, meanwhile:

Just Say Nein - Bundesbank On European QE: "Abandon The Idea Once And For All" - While it will hardly come as a surprise to many that after making it abundantly clear that Germany is in total disagreement with ECB monetary policies, culminating in the departure of Jurgen Stark from the European central printing authority, Germany will not permit irresponsible, Bernanke-esque monetary policies, it probably should be noted that even following the most recent escalation of adverse developments in Europe, which are now on the verge of unwinding the entire Eurozone and with it the affiliated fake currency, that the German central bank just said that any European QE could only come over its dead body. Today channeling the inscription to the gates of hell from Dante's inferno is none other than yet another Bundesbank board member, Carl-Ludwig Thiele, who said that "Europe must abandon the idea that printing money, or quantitative easing, can be used to address the euro zone debt crisis...One idea should be brushed aside once and for all - namely the idea of printing the required money. Because that would threaten the most important foundation for a stable currency: the independence of a price stability orientated central bank."

Lagarde Joins Warning on Fiscal Cuts Before Davos - International Monetary Fund Managing Director Christine Lagarde joined world financial and trade organization chiefs in warning policy makers gathering in Davos, Switzerland next week against fiscal cuts that jeopardize growth. “The world faces significant and urgent challenges that weigh heavily on prospects for future growth,” Lagarde and members of the Global Issues Group of the World Economic Forum said in a statement. “We worry about decelerating global growth and rising uncertainty, high unemployment” and a potential shift to protectionist policies, they said. While governments need to stem contagion in Europe and restore confidence in financial institutions to end the sovereign-debt crisis and spur expansion, they should manage fiscal consolidation to promote rather than reduce growth prospects, the group said. Its members also include World Bank President Robert Zoellick, World Trade Organization Director- General Pascal Lamy and the heads of eight other multilateral and regional institutions. Policy makers and business leaders will meet at the World Economic Forum starting on Jan. 25 after the World Bank cut its global growth forecast this month by the most in three years, saying that a recession in the euro region threatens to exacerbate a slowdown in emerging markets. The IMF proposed this week to raise its lending capacity by as much as $500 billion to insulate the world against any worsening of Europe’s debt crisis.

IMF estimates two years of recession for Italy - Deep red for the Italian economy in the next two years. Against the background of a global recovery stalled, slowed by the crisis in the eurozone in particular, Italy is preparing to reach out to two years of recession in 2012 and 2013. The cold shower comes from the International Monetary Fund put in hand as usual to their predictions gave a general scissor kick to the estimates of growth around the world. Last update at the World Economic Outlook that the Ansa news agency is able to anticipate its spread before the official next Tuesday, the IMF finds in the euro area's main patient who staggers a little and infects all international economies. "The global recovery is threatened by the growing tensions in the euro area," considered the "main reason" the deterioration of economic prospects.  And it is complemented and intertwined "the financial fragility elsewhere." The Fund therefore warns that the downside risks have escalated. So economists in Washington have been forced to make a clean break with all the statistics and this in large part because "it is expected that the euro area economy will end up in a mild recession in 2012."

IMF: European outlook grim; high global risks -- The economic outlook for Europe is grim and the risks for the global economy are high amid the escalating euro-area crisis, posing challenges for Asia, International Monetary Fund First Deputy Managing Director David Lipton said Monday. The IMF is planning to lower its global economic growth forecast for this year, Lipton said at a forum in Hong Kong. Lipton said a rise in liquidity would help banks and sovereigns deal with the crisis, and called for more fiscal consolidation, though not at the expense of short-term growth, and more integration to ensure the viability and stability of the monetary union. "The stakes are high. Without bold action, Europe could be swept into a downward spiral of collapsing confidence, stagnant growth and fewer jobs," Lipton warned, adding no region would be immune from such a catastrophe. Lipton said this is especially true to Asia as the region is vulnerable to the contagion via financial channels. "Deleveraging by European banks could have a significant impact on credit supply and asset prices in several Asian economies, as European banks have substantial claims on these economies,"

IMF delivers harsh truth from Planet Earth - FT - There are two things everyone knows, or thinks they do, about the International Monetary Fund. One, it is in the pockets of investment banks; two, it crashes into stricken countries and imposes a long list of harsh do-this-or-else conditions in return for help. This was always at best a caricature, and recently it has become an absurdity. In the case of Greece – a slow-motion economic catastrophe coming ever closer to the inevitable – almost the exact opposite is the case. The IMF has mainly adopted the role of a bearer of inconvenient arithmetic, or in other words an emissary to the eurozone authorities and to Greece’s bondholders from Planet Earth. That the negotiations between Greece and its sovereign debtholders broke down last week is unsurprising.  From the beginning the creditors have been in denial about the size of the writedown Greece will require even to have a good stab at growing its way out of its debt burden. Meanwhile, eurozone governments have swung back and forth on how much of a reduction is required, with the European Central Bank firmly taking the side of the private banks.With Greece’s growth and tax revenue having underperformed the over-optimistic assumptions underpinning the negotiations, both sides are facing the horrid reality that at least one is going to have to pay more than they want to. In recent days the message seems finally to be sinking in, with Germany having swung firmly back into the big-writedown camp. Chancellor Angela Merkel’s mind has no doubt been concentrated by the downgrade of France and Austria on Friday, which further diminishes the chances of the eurozone governments expanding their contribution to the bail-out.

UK taxpayer may have to pour in billions more to prop up euro as European stability fund is downgraded - Europe's bailout fund suffered a humiliating downgrade last night – raising the prospect that Britain may have to pour in billions more to prop up the Eurozone’s struggling economies. In a major blow to the single currency, ratings agency Standard & Poor’s stripped the £360billion European Financial Stability Facility of its triple-A status. Experts warned the new AA+ rating would make it harder for the fund to borrow money, effectively slashing its value by up to two-thirds. The move came as the International Monetary Fund urged Europe’s leaders to tackle the debt crisis and prevent a ‘downward spiral’ that would drag the global economy into ‘catastrophe’. Chancellor George Osborne said the UK was ready to hand billions more to the IMF as it bids to beef up its resources to deal with potential meltdown in the Eurozone.

Renminbi deal aims to boost City trade - George Osborne signed a deal on Monday with Hong Kong aimed at helping turn the City into an offshore trading centre for the renminbi, in what the chancellor sees as a vote of confidence in London.Mr Osborne believes the talks are proof that China sees London as a significant financial centre and gateway to the European single market, in spite of Britain’s isolation at a Brussels summit last month. The chancellor has agreed technical measures with Norman Chan, chief executive of the Hong Kong Monetary Authority, to help London play an important role in increasing the renminbi’s standing as a big global ­currency.The two men will set up a forum investigating synergies between the UK and Hong Kong, including looking at clearing and settlement systems, market liquidity and development of new renminbi-denominated products. Explaining the deal on Monday, Mr Osborne said there was “a very specific opportunity for Britain” to benefit as the Chinese economy grows. “At the moment [the renminbi] is mainly being traded in and around China and Hong Kong and what I’m working on is making sure that London is the western trading centre for the Chinese currency... that’s good for Britain, good for British jobs and also good for China,” he told the BBC.

Inflation Slows to Six-Month Low of 4.2% as Fuel, Clothing Prices Abate - U.K. inflation slowed in December to its weakest pace in six months as stores discounted clothing to boost sales and petrol prices fell, easing pressure on consumers amid concern the economy may already be back in recession.  Consumer prices rose an annual 4.2 percent compared with 4.8 percent in November and a peak of 5.2 percent in September, the Office for National Statistics said today in London. It was the biggest drop in the inflation rate since April 2009, the depth of the last recession. Prices rose 0.4 percent on the month.  The Bank of England forecasts inflation will slow sharply this year, providing relief to consumers as the European sovereign debt crisis and rising unemployment weigh on the recovery. Ernst & Young said yesterday a second recession may already be under way. The Bank of England will expand its 275 billion-pound ($423 billion) bond-buying program next month, economists at Citigroup Inc. and Nomura International predict.

Every adult is £600 poorer after drop in living standards - Living standards in Britain have plummeted by £38 billion in the last year leaving every adult more than £600 worse off, experts said today. The full scale of the squeeze on family budgets emerged as inflation finally started to fall. High street price wars triggered a sharp drop in inflation last month. Although prices are still surging at 4.2 per cent - more than double the rate of pay increases - economists predicted more falls this year. "Despite the fall in inflation, millions of UK families have seen their standard of living fall dramatically," said Chris Evans, chief executive of financial specialists MGM Advantage which published the analysis showing every adult on average £611 worse off than 12 months ago. He added: "It does however, offer a ray of hope for these families." The fall in inflation, from 4.8 per cent in November, was the biggest for three years. However, food prices kept rising by 1.4 per cent, despite hopes that supermarket discounting started in October would cut the cost of a weekly shop. Although family budgets are still falling in real terms for millions, lower inflation means that ultra-low interest rates of 0.5 per cent can be kept for longer, economists said.

Over 70,000 jobs set for the chop in Scotland - Unions warned today that more than 70,000 Scottish public-sector jobs could be lost to Con-Dem budget cuts over the next five years. It makes Scotland the fourth-hardest hit area, with the 70,225 posts set to go accounting for 2.8 per cent of all jobs in the country. The TUC said much of this is down to job cuts at councils, schools, the NHS and the Civil Service announced by George Osborne in November, which "will have a devastating impact."

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