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

Saturday, March 10, 2012

week ending Mar 10

Fed Balance Sheet Down To $2.887 Trillion - The balance sheet of the U.S. Federal Reserve fell over the last week as the central bank continued with a plan to adjust its portfolio and stimulate an economy it expects to grow only modestly this year. The Fed's asset holdings in the week ended March 7 were $2.887 trillion, down from $2.928 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities fell to $1.659 trillion from $ 1.662 trillion a week earlier. The central bank's holdings of mortgage-backed securities held steady at $840.80 billion, where it had been the previous week. Thursday's report showed total borrowing from the Fed's discount lending window was $7.43 billion on Wednesday, down from $7.58 billion a week earlier. Commercial banks borrowed $9 million from the discount window. They borrowed $ 15 million in the previous week. U.S. government securities held in custody on behalf of foreign official accounts held steady at $3.460 trillion, where it had been in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts rose to $2.720 trillion from $2.719 trillion in the previous week. Holdings of federal agency securities fell to $739.21 billion from the prior week's $740.80 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances -- March 8, 2012

The Fed and QE3 - Right now the Fed seems uncertain about QE3, and the decision remains data dependent (as always) ... from Hilsenrath at the WSJ: Fed Takes a Break To Weigh Outlook Fed officials meeting next week are unlikely to take any new actions to spur the recovery, and they are likely to emerge with a slightly more upbeat—but still very guarded—assessment of the economy's performance. A big question is whether the Fed will launch a new bond-buying program in an effort to push down already low long-term interest rates.  Mr. Bernanke signaled to Congress last week that he had doubts about the sustainability of the employment gains. Fed officials aren't inclined to move while they try to solve the puzzle.  Several economists still expect QE3 to be announced at one of the two day meetings in April or June - or maybe in Q3. Goldman Sachs economists wrote on Friday:  We expect that the Fed will ultimately announce a return to balance sheet expansion sometime in the first half of 2012, likely including purchases of mortgage backed securities (MBS). And Merrill Lynch noted last week:  In our view, it is wishful thinking to believe the Fed will do QE when the data flow is healthy. We expect renewed QE only after Operation Twist ends in June ... only if the economy is slowing ... Under our growth forecast ... QE3 comes in September.

Richard Fisher: QE3 would be like 'medical malpractice'- Talking to the Dallas Regional Chamber of Commerce, Fisher blasted investors for calling for a third round of quantitative easing, or QE3, by the Fed. "I am personally perplexed by the continued preoccupation, bordering upon fetish, that Wall Street exhibits regarding the potential for further monetary accommodation—the so-called QE3, or third round of quantitative easing," he said, adding that "trillions of dollars are lying fallow, not being employed in the real economy." If that weren't enough, Fisher went on to compare investors to sick patients addicted to pain medication. "Financial market operators keep looking and hoping for more. Why? I think it may be because they have become hooked on the monetary morphine we provided when we performed massive reconstructive surgery, rescuing the economy from the Financial Panic of 2008–09, and then kept the medication in the financial bloodstream to ensure recovery. I personally see no need to administer additional doses unless the patient goes into postoperative decline." And he didn't stop there. "I believe adding to the accommodative doses we have applied rather than beginning to wean the patient might be the equivalent of medical malpractice."

We Live in Perplexing Times - President Fisher is confused. From Reuters:Dallas Fed President Richard Fisher, an outspoken policy hawk, added that he was perplexed by Wall Street’s continued preoccupation with the possibility that the Fed could engage in a third round of large-scale buying of assets, known as quantitative easing, or QE3. This is quite the co-incidence.As it happens, just this morning I was perplexed at how in the face of massive on-going policy failure by virtually any standard whatsoever anyone at the Fed could even consider retracting monetary accommodation or signaling a more contractionary stance.  Fortunately, the Regional President cleared that up for me "(I)f the data continue to improve, however gradually, the markets should begin preparing themselves for the good Dr. Fed to wean them from their dependency rather than administer further dosage," Fisher said, using a familiar metaphor. Now I understand. The President is saying that because markets are pricing in a zero real interest rate, he himself now has absolutely no concern for how long it takes to alleviate the suffering of millions of people under the Fed’s charge. Time, you see, is of no value. His devotion to market signals is extraordinary.

Try overshooting for once - I HAVE been giving the Federal Reserve the benefit of the doubt for the past couple of months. I felt that the move toward an explicit inflation target and the change in communications strategy recently adopted represented a step toward a more accommodative policy with room for a bit of catch up inflation. As I wrote last week, it's difficult to understand why the Fed included new language concerning its outlook for low rates if it wasn't hoping to engineer mroe inflation; otherwise it's just wasted ink. Perhaps I've been too kind. Here is the Wall Street Journal's Job Hilsenrath:The Federal Reserve is pausing after a six-month campaign to boost growth, while policy makers assess a puzzling economic outlook..."I am comfortable with the current stance of monetary policy," Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, said in a speech last week. "Doing more at this time could create too much inflation risk, and doing less could risk weakening an already slow expansion and causing an unwelcome disinflation."  Some on the committee worry a great deal about inflation and aren't inclined to act more, while others worry more about unemployment, and her view gives a sense of where the center of the committee stands.

Morgan Stanley Still Expect QE3 This Year - Morgan Stanley continues to think the Federal Reserve will provide more stimulus via bond buying this year, even as improving economic data have led many in the market to think the sun may be setting on that particular strategy. “For some time, our call has been that the Federal Reserve will undertake additional balance-sheet action in the first half of 2012,” writes Vincent Reinhart, an economist with the bank and a former top-level Fed staffer.

A New Twist for the Fed? - As the June 30 expiry nears for the Federal Reserve‘s so-called Operation Twist stimulus plan, Credit Suisse says extending this program in the face of improving economic data may be the easiest move for policymakers. “A Twist extension would likely fly under the political radar while continuing to support long-term Treasurys, allowing the Fed to continue to assess economic progress,” firm says. With about $150 billion in short-dated Treasurys left in the sellable range, the Fed can extend the program to year-end by allowing itself to sell four-year notes as well.

Fed mulling sterilized bond purchases: report (Reuters) - Federal Reserve officials are considering a novel approach to bond buying aimed at countering some of the worry that another round of asset purchases by the central bank could fuel inflation, according to the Wall Street Journal. Citing people familiar with the matter, the newspaper reported on Wednesday that should the Fed decide to buy more bonds to boost growth, it could borrow back the money it used to buy those bonds for short periods of time at low interest rates. Doing so would take that money out of circulation, or sterilize it. Many analysts believe the Fed will resort to a renewal of such measures, known as quantitative easing, later this year as higher oil prices and Europe's economic problems weigh on the United States. Fed officials are considering different options should they decide to embark on another round of asset purchases, the report said.

The Fed's latest plan to boost the economy - The economy is recovering and the Fed has policy on hold for the moment, but if further action is needed in coming months the central bank is discussing what to do. One thing that is clear from the latest discussion is that some members of the Fed are very worried about inflation. This is evident in the design of the bond purchase plan which mimics a key feature of the Fed's $400 billion Operation Twist policy. Under Operation Twist, the Fed essentially removes long-term securities from the private sector and replaces them with short-term securities of equal value. Thus, this operation does not change the money supply, and hence does not change inflationary pressure. The difference between Operation Twist and what the Fed is discussing now, a policy known as a sterilization, is a bit technical but the essence is easy to grasp. Under Operation Twist, the Fed sells short-term assets off of its balance sheet and then uses the cash it raises from the sale to buy long-term assets. Under the present proposal, the Fed would borrow the money from the private sector in what is known as a reverse repo, and then use the money it borrows to purchase long-term assets. The loans from the private sector are short-term, and the Fed continues to roll them over until the longer term assets mature (or it can sell the long-term assets back to the private sector before they mature). Notice that, once again, the money supply doesn't change and hence the inflation risk is avoided.

Chart of the Day: Monetary Transmission Mechanisms - Here’s a nice chart courtesy of Richard Koo via the folks at FT Alphaville. It shows how central banks ballooned the monetary base (reserves) after the Lehman bankruptcy. Here’s the thing though, money supply flatlined as the money multiplier plummeted. See the lines at the bottom? What gives? Koo says that liquidity does not always translate to increased bank lending and suggests that this is because we are in a "liquidity trap". I like the first part of his analysis but not the second part. I mentioned this last May, writing: Koo is pointing to the money multiplier fallacy that comes from the concept that banks are reserve constrained. Of course, none of this is true. Banks are never reserve constrained in our non-convertible floating exchange rate monetary system; They are capital constrained.

About the Twisted USA Monetary System - The US monetary system is set up to perpetuate the rich getting richer and the poor getting poorer. This will never end until we remove most members of Congress who continue to support this system because it works for them. That is fact. Overall, this means stop voting for Democrats or Republicans. Realize that they are merely two heads of the same counterfeit coin. Most of us know by now that the way money is created is by extending credit. The government and banks are the ones endowed with the power to create money. The rich don’t need credit. They can afford to pay for whatever they want. It’s the poor who need credit/money. However, you can only get credit if you have assets to post as collateral. But you only have assets if you are rich. Therefore, the rich get cheap money (loans at low interest rates) while the poor, when they can obtain a loan, often pay in interest many times the value of the loan. In other words, those who can least afford it pay the most. It would make much more business sense, not only for the poor, but for all of us, if the wealthy paid higher interest rates for their loans and the poor paid lower rates.

How To Understand The Monetary System - The reason the global monetary system survives is largely thanks to the public’s blissful ignorance of exactly how it works. To paraphrase one familiar analogy, if you knew how sausage was made, would you still eat it? It’s probably safe to say that the vast majority of the world’s citizens have no clue that the integrity of the currency they work for, save and use as a medium of exchange every day rests on nothing more tangible than their respective governments’ authority to and solemn promise to tax them in the future. “It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” --Ford Motor Co. Founder Henry Ford. The first thing you need to understand about our modern global monetary system is that all currencies in the world today are fiat currencies, and all fiat currencies are designed to lose value.

"What Would Friedman Say?" Whack-A-Mole Game - Over the past few years, many writers have made the claim that Milton Friedman would roll over in his grave if he knew what Ben Bernanke was doing at the Fed. These observers claim that both the ad-hoc nature and scale of monetary policy intervention would never be sanctioned by Milton Friedman. I and others have responded many times that except for the former point, this critique is wrong. Just look at Milton Friedman's own words to see why. Nevertheless, this "What would Milton Friedman Say?" critique against Bernanke's Fed keeps reappearing in prominent media outlets like a never-ending whack-a-mole game. The most recent contribution comes from Amity Shlaes (ht James Picerno). Writing for the Bloomberg View, she takes Ben Bernanke to task for not living up to Milton Friedman's counsel: [T]he Fed chairman is abusing his old connection to the monetary master, Friedman, as a cover for a policy that Friedman might not endorse. That policy is doing anything Bernanke feels like -- dumping money in the economy, or simply scaremongering -- with the defense that doing so is honoring Friedman’s desire to avoid that deflation, that recession or that Depression. It is time to call Bernanke’s Friedman bluff... Bernanke is operating with a license Milton never gave him. Actually, it is Shlaes who is operating without a license here, at least when it comes to writing on Milton Friedman's views on large scale asset purchases. Her claim that Friedman would not endorse QE2 or Operation Twist overlooks some important facts.

House Democrats Request Hearing on Altering Fed Mandate - Democratic lawmakers on the U.S. House Financial Services Committee asked Wednesday to hold a hearing focused on a proposed change to the Federal Reserve‘s mandate that would strip the central bank of its focus on employment. In a letter sent to the committee’s chairman, Rep. Spencer Bachus (R., Ala.), all 27 Democrats on the committee said they didn’t support changing the Fed’s dual mandate to support both price stability and maximum employment. However, they urged Bachus to schedule a full committee hearing on the topic to foster “a full public discussion of this vital issue.”

0.2% Interest? You Bet We’ll Complain - STOP your bellyaching. That was the message delivered last Thursday to Americans who today make almost nothing on the savings in their bank accounts. It came from Sarah Bloom Raskin, an insider at the Federal Reserve. Ms. Raskin, one of the governors on the Fed board, made the usual disclaimer that her comments reflected her own thinking. But Fed watchers said her remarks probably mirrored views inside the central bank. The issue — as anyone looking for income-producing investments knows — is that the Fed drove down interest rates to almost zero to shore up big banks and an economy that those banks helped drive off a cliff. Now savers, who did nothing to create the financial crisis, are being punished. This is one of the more troubling paradoxes of the Fed’s rescue of the financial system. And, according to Ms. Raskin, it is likely to continue for some time. So suck it up, America: If it’s good for the financial system, it’s good for you. Yes, Ms. Raskin, who delivered her message during a speech in Westport, Conn., nodded at how low rates put pressure on savers. But she quickly extolled the advantages that rock-bottom rates offer to ordinary Americans.

John Galt Wants Price Support - Krugman - Lots of people have been having fun with the latest Max Abelson piece on whiny Wall Streeters. One thing Mike Konczal points out is that this is in part the whine of rentiers, angry that their wealth isn’t yielding the return they want: While they aren’t asking for sympathy, “at their level, in a different way but in the same way, the rug got pulled out,” said Sonnenfeldt, 56. “For many people of wealth, they’ve had a crushing setback as well.”He described a feeling of “malaise” and a “paralysis that does not allow one to believe that generally things are going to get better,” listing geopolitical hot spots such as Iran and low interest rates that have been “artificially manipulated” by the Federal Reserve. People like these are almost always scornful when, say, blue-collar workers complain about declining real wages — hey, it’s just supply and demand, deal with it. And they are contemptuous about claims of price manipulation. But when prices that matter to them — say, interest rates — fall, it’s an outrage. It must be artificial! Because hey, it’s not as if there has been a rise in saving and a fall in investment demand that might be causing low interest rates:

What is market monetarism? - People have asked me for a summary of market monetarist ideas.  Or a “model” of some sort.  Not every market monetarist agrees with all these ideas, but most agree with most.  I’ll start with policy, then cover the more difficult theory aspects:

  • 1.  We favor NGDP targeting.
  • 2.  Most of us favor level targeting.
  • 3.  Most favor targeting the forecast.  Either the Fed’s internal forecast (Lars Svensson) or a market forecast of NGDP (myself and several others.)Andy Harless and Lars Christensen pointed out that there’s no logical reason why a market monetarist would have to favor NGDP targeting.  I agree.  Bill Woolsey thinks level targeting is more important, and I’m inclined to agree.  There are lots of proposals that seem in the spirit of NGDP level targeting, but differ slightly: Bennett McCallum’s NGDP growth rate targeting, George Selgin’s productivity norm, Earl Thompson’s wage index target.  I would never suggest that market monetarism is some sort of fixed category, rather it’s a constantly evolving set of ideas that individual economists are sympathetic to in varying degrees.

Now for the theory part:

Do Fed TIPS Purchases Affect Market Liquidity? - FRBSF Economic Letter - The second round of Federal Reserve large-scale asset purchases, from November 2010 to June 2011, included regular purchases of Treasury inflation-protected securities, or TIPS. An analysis of liquidity premiums indicates that the functioning of the TIPS market and the related inflation swap market improved both on the days the Fed purchased TIPS and over the course of the LSAP program. Thus, TIPS purchases had liquidity benefits beyond the effect they may have had in reducing Treasury yields.

Oil Implications And Fed Policy - Oil is battling hard with Greece to top the tail-risk-du-jour in financial markets recently. As Credit Suisse notes, the US economy so far seems to have shrugged it off as 'gasoline-sensitive' economic data for Feb have ignored the price rise for now. The extreme (warm) weather may be shielding the economy from the effect of these higher energy costs, as are consumers habituation with relatively high prices, and while CS remains more sanguine than us on energy's negative impulse they set forth some useful implications (rules-of-thumb) for what oil means for gas prices, headline inflation, real disposable income, and GDP growth pointing to $150 Brent as a critical threshold for the economy (or equivalently $4.50 retail gasoline prices). Of course, Fed policy precedents and implications are necessarily situational as the hope for this being a 'temporary' situation but the circular reaction to the consequences of any growth drag will merely exacerbate the situation. Was Bernanke's recent less unconditional dovishness an implicit effort to 'tighten' expectations and manage the war-premium out of oil prices?

Oil prices and the U.S. economy - Here's why I believe that the current high price of oil is not enough to derail the U.S. economic recovery. Quick charts: 1 Month | 3 Month | 6 Month | 9 Month | 1 Year | 18 month | 2 Years | 3 Years | 4 Years | 5 Years | 6 Years. Although the prices of oil and gasoline have risen significantly from their values in October, they are still not back to the levels we saw last spring or in the summer of 2008. There is a good deal of statistical evidence (for example, [1],[2]) that an oil price increase that does no more than reverse an earlier decline has a much more limited effect on the economy than if the price of oil surges to a new all-time high. One reason for this is that much of the impact on the economy of an increase in oil prices comes from abrupt changes in the patterns of consumer spending. For example, one thing we often observe when oil prices spike up is that U.S. consumers suddenly stop buying the less fuel-efficient vehicles that tend to be manufactured in North America. That drop in income for the domestic auto sector is one factor aggravating the overall economic consequences. But if consumers have recently seen even higher prices than they're paying at the moment, their spending plans and firms' production plans are likely already to have incorporated that reality.

Cause, Effect And The Fallacy Of Returning To Normalcy - I hear the term de-leveraging relentlessly from the mainstream media. The storyline that the American consumer has been denying themselves and paying down debt is completely 100% false. The proliferation of this Big Lie has been spread by Wall Street and their mouthpieces in the corporate media. The purpose is to convince the ignorant masses they have deprived themselves long enough and deserve to start spending again. The propaganda being spouted by those who depend on Americans to go further into debt is relentless. The “fantastic” automaker recovery is being driven by 0% financing for seven years peddled to subprime (aka deadbeats) borrowers for mammoth SUVs and pickup trucks that get 15 mpg as gas prices surge past $4.00 a gallon. What could possibly go wrong in that scenario? Furniture merchants are offering no interest, no payment deals for four years on their product lines. Of course, the interest rate from your friends at GE Capital reverts retroactively to 29.99% at the end of four years after the average dolt forgot to save enough to pay off the balance. I’m again receiving two to three credit card offers per day in the mail. According to the Wall Street vampire squids that continue to suck the life blood from what’s left of the American economy, this is a return to normalcy.

Chart of the Day: Growth! -- The chart below tracks the economy of the United States and selected European economies, demonstrating the varying impact of the financial crisis there. March 2007 is the reference point where Real GDP is re-based at 100. You can see from the chart, that the US had the sharpest fall in GDP through March 2009 when the policy response finally kicked in and the economy began to grow again. After that time, Greece, Ireland and Italy were the worst performers, with Greece showing the most marked deterioration from April 2010. Switzerland, the Netherlands and Germany have performed the best.

Warm Winter May Have Cooked Economic Data - Make no mistake, the economy is getting better, but we shouldn't be misled by the seasonally adjusted data the government reports. Why? Normally economic activity is constrained in the winter months by cold weather, which limits outdoor work and at times prevent people from getting to work—think construction and office closings. The government's statisticians adjust the data to reflect this very real phenomenon. However, the National Oceanics and Atmospheric Administration just reported that we experienced the fourth warmest winter in history. Compared to last year, this winter has been absolutely balmy with the national average temperatures six degrees and five degrees warmer than last January and February, respectively. All of a sudden the seasonal adjustment factors which are looking for winter weakness don't work the way they are supposed to as the unusually warm weather makes it look like the economy is going into over-drive. Most folks in the Midwest and Northeast have to brave sub-freezing weather and snow just to get out of the house, much less go to an automobile dealer. But with mild weather, it is far easier to think about buying a new car in February rather than wait until April.

This is Really Why the Economy Is Looking Up(Snarky) I remember some folks telling me that the Lehman bankruptcy would be no biggie. Whaaaat that’s how capitalism works, they said. Seems they are right. You declare bankruptcy and badabing-badaboom a little over three years later everything is cleared up. Easy peasy. From CNBC One-time financial powerhouse Lehman Brothers emerged from bankruptcy on Tuesday and is now a liquidating company whose main business in the coming years will be paying back its creditors and investors. Lehman, whose September 2008 collapse is often regarded as the height of the financial crisis, will start distributing what it expects to be a total of about $65 billion to creditors on April 17, it said in a statement. That first group of payments to creditors, many of whom lost money in its collapse 3-1/2 years ago, will be at least $10 billion, Lehman has said previously. We always said that after the storm had passed the seas would be calm, and here you go.

Jobs Data Improve, but Growth Picture Darkens - Just hours after another strong employment report, rain is hitting the parade. The latest U.S. trade data, released alongside the jobs numbers, are triggering a raft of downgrades to first-quarter growth estimates. That could be a sign of trouble ahead later in the year. Economists at Goldman Sachs and Macroeconomic Advisers lowered their tracking estimates for first-quarter GDP growth to 1.8% from 2%, partly due to expectations for lower net exports during the period (due to a jump in imports). J.P. Morgan Chase economists lowered their overall projection for first-quarter GDP to 1.5% from 2%. They also cite downside risk to their current estimate that growth would accelerate to 2.5% in the second quarter, partly because the first-quarter data suggest higher business inventories heading into the second quarter. With growth estimates for 3% in the third quarter and 2% in the fourth quarter, they put full 2012 growth at just 2.2%. “The contrast between the solid employment and the weak GDP data is striking,” The explanation: weak productivity. Nonfarm business output growth is near the pace of GDP growth (1.5%), while a measure of private hours worked follows a 3.5% growth pace, he says. “Not only would the -2.0% implied productivity growth be very weak, but it would come on the heels of a year in which productivity advanced only 0.3%."

Goldman Cuts Q1 GDP Forecast To 1.8% On Trade Deficit Surge- Moments ago we tweeted that today's surge in the trade deficit will force banks to start cutting GDP forecasts. Sure enough, Goldman as usual, is the first to set the tone, by cutting its ultra real time GDP forecast from 2.0% to 1.8%. BOTTOM LINE: Q1 GDP growth tracking +1.8% after trade, employment and wholesale inventory reports

  • 1. This morning’s data had a modest negative impact on our tracking estimate of Q1 GDP growth. On net, we revised down our estimate to +1.8% from +2.0% previously.
  • 2. First, imports increased more than expected, and because this occurred early in the quarter it had an outsized impact on the quarterly average growth rate. On its own, the upward revision to our imports estimate would have taken our forecast for Q1 growth from 2.0% to 1.3%. However, the larger drag fromimports was partially offset by a few other positives.

In Person: Former Reagan aide Stockman fears another collapse - David Stockman, former wunderkind of the Reagan revolution, is now an advocate for higher taxes, a critic of the work that made him rich and a scared investor who doesn't own a single stock for fear of another financial crisis.  He was an architect of one of the biggest tax cuts in U.S. history. He spent much of his career after politics using borrowed money to take over companies. He targeted the riskiest ones that most investors shunned — car-parts makers, textile mills. That is one image of David Stockman, the former White House budget director who, after resigning in protest over deficit spending, made a fortune in corporate buyouts. But spend time with him and you discover this former wunderkind of the Reagan revolution is many other things now — an advocate for higher taxes, a critic of the work that made him rich, and a scared investor who doesn't own a single stock for fear of another financial crisis. Stockman suggests you'd be a fool to hold anything but cash now, and maybe a few bars of gold. He thinks the Federal Reserve's efforts to ease the pain from the collapse of our "national leveraged buyout" — his term for decades of reckless, debt-fueled spending by government, families and companies — is pumping stock and bond markets to dangerous heights.

The United States Is Living On Borrowed Time - I last quoted former Reagan budget director David Stockman on January 24 in The State Of The Union. At that time he was interviewed by Bill Moyers, but now he's back in the public eye and he's got plenty more to say. I could end this post prematurely by quoting this exchange at the end of his interview with the Associated Press (AP). AP — Are you hopeful? Stockman —  No Me neither! But the fun part is letting Stockman explain why he's not hopeful. AP — Why are you so down on the U.S. economy? Stockman — It's become super-saturated with debt.  Typically the private and public sectors would borrow $1.50 or $1.60 each year for every $1 of GDP growth. That was the golden constant. It had been at that ratio for 100 years save for some minor squiggles during the bottom of the Depression. By the time we got to the mid-'90s, we were borrowing $3 for every $1 of GDP growth. And by the time we got to the peak in 2006 or 2007, we were actually taking on $6 of new debt to grind out $1 of new GDP.People were taking $25,000, $50,000 out of their home for the fourth refinancing. That's what was keeping the economy going, creating jobs in restaurants, creating jobs in retail, creating jobs as gardeners, creating jobs as Pilates instructors that were not supportable with organic earnings and income. It wasn't real consumption or real income. It was bubble economics.

Austerity Recovery, Continued - Krugman - I’ve looked at government purchases in two recoveries, the one that began in November 1982 and the one that began in June 2009. Here’s government employment: Notice the brief blip associated with the Census, which got seized on by the right as evidence of a bloated expansion. But the reality is that around 1.3 million more people would be working for government right now if employment had followed the track of the Reagan recovery. PS: For those who think I’m cherry picking, it’s worth noting that even if you don’t focus solely on government purchases and employment — even if you just look at total government spending, including unemployment insurance — the Reagan years generally saw faster spending growth than the Obama years, and never saw anything like the recent squeeze:

States of Depression, by Paul Krugman -The economic news is looking better lately. But after previous false starts — remember “green shoots”? — it would be foolish to assume that all is well. And in any case, it’s still a very slow economic recovery by historical standards. There are several reasons for this slowness, with the most important being the overhang of household debt that is a legacy of the housing bubble. But one significant factor in our continuing economic weakness is the fact that government in America is doing exactly what both theory and history say it shouldn’t: slashing spending in the face of a depressed economy.  In fact, if it weren’t for this destructive fiscal austerity, our unemployment rate would almost certainly be lower now than it was at a comparable stage of the “Morning in America” recovery during the Reagan era.  Start with government employment (which is mainly at the state and local level, with about half the jobs in education). By this stage in the Reagan recovery, government employment had risen by 3.1 percent; this time around, it’s down by 2.7 percent.  Next, look at government purchases of goods and services (as distinct from transfers to individuals, like unemployment benefits). Adjusted for inflation, by this stage of the Reagan recovery, such purchases had risen by 11.6 percent; this time, they’re down by 2.6 percent.

The Fed's Reagan recovery - PAUL KRUGMAN has been hammering home the point that government spending and employment trends have been highly anomalous during the present American recovery (see this, this, this, this, and this). Real federal government spending has mostly tracked that in a typical recovery. State and local government spending have plummeted in recovery, however, where normally they rise strongly. You can see the net effect in the table below, from a recent paper...Government spending grew by 5.7% on average during the 10 quarters after the recessions of 1975 and 1982. This time, there was a decline of 2.7%. I'm not going to suggest that this was a good thing. If one assumes that a structural fiscal adjustment was necessary, it still seems very unwise to crowd that adjustment into the two years immediately after a deep recession. There was no good reason for allowing the fiscal contraction America experienced at the state and local level, where highly procyclical budgeting is often necessitated by law. Better policy would have, at a minimum, provided more cushion to state and local governments and less of a government contraction overall.

Extraordinary Popular Delusions and the Madness of Crowding Out - Krugman - Just a note: I keep seeing, both in comments here and in the broader discussion, assertions to the effect that government spending can’t create demand or jobs — basically, the claim that there must always be 100 percent crowding out. What I wonder is how this belief manages to persist, indeed be regarded as unquestionable truth, given the world we’ve been living in for the past few years. After all, if there’s 100 percent crowding out, there must also be 100 percent crowding in — slashing government spending must lead to an offsetting rise in private spending. So, have you looked at Greece or Ireland lately? The totally evident negative effect of austerity policies on growth and employment is a clear demonstration that all claims about the irrelevance of government spending to job creation are wrong. I understand why people don’t want to believe this; but how can they not at least feel some doubt about their faith when they look at the world?

Stimulus Denial, Part N - Paul Krugman - Mark Thoma posts about another Cochrane rant, and about what John Taylor really said. Go read. I thought I should point out something else about Taylor’s claim (pdf) that aid to state and local governments had no effect, because they would simply have borrowed the money. Christina Romer (pdf) has already answered this, in devastating fashion: Cogan and Taylor (2011) present a different view. They show that states had been borrowing heavily before the Recovery Act, and then borrowed less after the receipt of the state fiscal relief. From this, they conclude that the state fiscal relief in the Recovery Act had no net benefit—it just replaced state spending financed by borrowing with state spending financed by Federal aid. Cogan and Taylor’s analysis shows the importance of specifying the counterfactual. Most states have balanced budget requirements. The requirements leave some room for deficit financing of current spending for a year or two, by running down rainy-day funds or the use of various accounting devices, especially if the deficit is the result of a downturn that was not expected when the budget was passed. But states didn’t have the option of continuing the pace of borrowing they had done in the 2008 and 2009 fiscal years. Absent the Recovery Act, states would have been forced to contract spending greatly. Therefore, relative to the plausible baseline, state spending was substantially higher following the receipt of the Recovery Act funds.

China hedging its bets on U.S. government debt, data show — China's massive holdings of U.S. government debt have bolstered the American economy by keeping interest rates low. Now signs are emerging that Uncle Sam's banker is hedging its bets. China's holdings of U.S. Treasuries accounted for 54% of its foreign-exchange reserves as of June 30, according to a U.S. Treasury survey released this week. That's down from 65% in 2010 and a record 74% in 2006. Beijing continues to buy loads of U.S. debt. As of June 30 it held $1.73 trillion in U.S. securities, up 7% from June 30, 2010. Still, other federal data show it was a net seller of U.S. treasuries in the second half of 2011. The slowing accumulation of U.S. debt suggests China is trying to diversify its holdings and is looking for other places to stockpile its trove of foreign exchange. Experts have long warned about a rise in U.S. interest rates and resulting damage to the economy if China abruptly tightened the credit spigot. But there appears little threat of that at present. 

Safe keeping -- THE purpose of all financial systems is to match savers who crave safety with investors who take risk. When savers discover the assets they thought were safe are in fact risky, crisis ensues. We all know what happened when the instruments meant to disperse American mortgage risk broke down. The most acute phase of Europe’s sovereign-debt crisis can be traced to the insistence of politicians at Germany’s behest that private-sector investors would henceforth have to take losses on the debt of any bailed-out country, not just Greece. The flight from the assets formerly known as safe is only one side of the coin; the other side is what happens to those remaining assets still deemed safe. The Free exchange column in this week’s print edition explores how this phenomenon affects the most widely held safe asset, American Treasury debt. It notes: [D]emand for American government debt is driven by much more than a hunger for returns. Financial-market participants use Treasury bonds and bills as collateral to secure lending, for instance. And for risk-averse investors such as foreign central banks, money-market funds and retirees, America’s debt is uniquely suited to storing savings without much due diligence. In short, its government debt is a lot like money.

Greg Ip on Safe Assets as Money - Greg Ip has a new article in The Economist where he discusses how U.S. treasuries and other safe assets can serve as medium of exchange: [D]emand for American government debt is driven by much more than a hunger for returns. Financial-market participants use Treasury bonds and bills as collateral to secure lending, for instance. And for risk-averse investors such as foreign central banks, money-market funds and retirees, America’s debt is uniquely suited to storing savings without much due diligence. In short, its government debt is a lot like money. I agree with the central premise of the article, but would add a few points. First, I would frame the discussion in this way: there are retail money assets and institutional money assets. Institutional money assets go beyond M2 and includes treasuries, commercial paper, repos, GSEs, and other safe assets used to facilitate exchange in the shadow banking system. Second, institutional money assets include both privately-produced and publicly-produced safe assets. If the Fed is doing its job and and providing sufficient aggregate demand to keep the economy at full employment, then there should be plenty of privately-produced safe assets. Only if the Fed allows nominal spending to crash, which would reduce privately-produced safe assets, is there a need for the government to step in and create safe assets. Third, the broader context for this discussion is that there is currently a shortage of safe assets for the global economy.

US Budget Deficit Hits All Time High In February - For a global economy that is "improving" we sure are getting a whole lot of records in the won't direction in the last two days. Yesterday it was Japan which printed a record current account deficit (yes, the most indebted country in the world was once upon a time supposed to export its way out of debt). Today, we learn that in February the US will report its largest budget deficit in history, as the Keynesian floodgates open full bore, and as Zero Hedge has noted repeatedly, tax revenues just refuse to come in at anything close to the pace of accelerated spending, forcing the US to borrow 54 cents for every dollar it spends (not the often cited 42 cent number which does not take into account tax refunds - see here). We would comment more on this, but frankly the chart speaks for itself. And now that the US has to fund an additional $100 billion due to the taxcut extension this means that things are only going to get worse, fast.

When debt is cheap, more debt is okay - We are in an unusal period now in which the federal government can borrow at extraordinarily cheap rates.  Usually when you can borrow cheaply, it pays to refinance your old, more expensive debt with new cheap debt.  It also makes sense to borrow for investments you need to make--especially if those investments will reward you richly with important returns.  Given the gigantic backlog of infrastructure investments in this country, increasing our debt load cheaply would make a lot of sense.  Just imagine if there were $10 billion that could be invested in the 20 or so largest cities in this country in inter-and intra-city rail, demolition of unsafe housing stock, and reconstruction of public parks, gardens, waterfronts, and other amenities.  The projects would have to hire all their workforce from the unemployed or underworked residents in the region.  Detroit, for one, could move its slow rejuvenation forward at a much faster clip.  Every billion would be returned back into the economy as workers spent their pay on necessities, supporting mom and pop grocery stores, apparel stores and restaurants.  Tax revenues would increase, paying off the debt even faster.

Is Obama Still on the Austerity Train? - This Real News Network interview with William Crotty provides a useful overview of the current Obama stance on the Federal budget. Crotty does an adept job of delineating the gap between the President’s rhetoric and his policy stance.

Deficits don’t reflect a crisis of American character, by Ezra Klein: There are many good points in David Brooks’s encomium to the life and work of James Q. Wilson, but permit me a quick quibble. ”Every generation has an incentive to spend on itself, but none ran up huge deficits until the current one,” Brooks writes. His point is that the growing federal debt is superficially attributable to higher spending and, more profoundly, is a reflection of changes in the national character. But that’s not what the numbers show. Rather, they show that the growing federal debt is attributable to tax cuts that began in the 1980s and, in the future, to the aging of the population and the ceaseless advance of medical technology. Current deficits reflect the aftermath of a generational financial crisis. They show an economy saving itself, not a generation spending on itself. ... For the last two decades, debt has been around what it was in the immediate run-up to the crisis. So there’s been no major change to structural deficits in the last 20 years, and thus, no evident change in the national character. ... So perhaps a more accurate way to make Brooks’s point is that every generation has an incentive to cut taxes on itself, but none ran up huge deficits doing so until Ronald Reagan. But that was a previous generation. Then this generation did the same thing under George W. Bush

Is the Economy Really Taking Off Enough to Pivot to Deficit Reduction?  -- Steven Pearlstein is concerned there’s too much emphasis on getting unemployment down and not enough on pivoting to deficit reduction in the states. Krugman has a good response; I want to focus on two specific parts of Pearlstein’s post.  The first: There are some on the left who also cling to the view that the economy is stuck in a depression — lest it undermine their critique about the woeful inadequacy of fiscal stimulus and the desperate need for more. Let’s start with some basic facts:  Monthly job growth was over 250,000 jobs created in just over half, 51%, of the months during Bill Clinton’s presidency.  In the other half, the slow months, the average job growth was around 154,000 per month. Knowing that is what healthy job growth looks like, the meek jobs numbers we are seeing – last month’s was 243,000, and 250,000-300,000 at the high-end of this month – looks like it may be approaching a period of solid growth.   The second: too much of their gloomy analysis is based on a misguided assumption that it’s possible to put the nation on a sustainable growth path without making the painful but necessary structural adjustments.  This “structural adjustments” part is frustrating because it isn’t clear what he is talking about. Is the issue the idea that the capital markets think the debt is out of control?  Workers can’t be retrained?  Hysteresis?

Not Again With The Pivot - Krugman - Steve Pearlstein is a good guy; that’s why the piece he posted on Ezra’s blog fills me with such despair. What Steve says is that there are a lot of indications that the economy is getting stronger, which is true (although not everything is rosy). So, he says, no more stimulus — in fact, let’s have more cuts in state and locals spending to get things in line with long-run revenues. Also, stimulus would get in the way of needed structural adjustment. First of all, we’ve been here before — in early 2010. Maybe this time is different, and Lucy won’t snatch away the recovery football again — but why act before we’re sure? Second, even if recovery is solid this time, our economy is likely to stay depressed for quite a while. Use the Atlanta Fed Jobs Calculator; to reach an unemployment rate of 5.5% within four years — four years! — we would need 179,000 jobs a month. Are you sure we’ll do that well? Third, Steve’s rhetorical question — why postpone needed fiscal adjustments? — has a very good answer: because we’re in a liquidity trap, and the Fed can’t offset the economic downside. This is a very bad time for austerity.

Deficits and Virtue - Paul Krugman - Ezra Klein and Mark Thoma both weigh in on the utterly bizarre claim that the large budget deficits we’re currently running are the result of a loss of self-control — as opposed to the result of the worst financial crisis since the 1930s, which has both savaged revenue and required a large rise in safety-net spending. Moreover, as Ezra points out, these deficits actually serve a useful purpose! Without the automatic stabilizers that led to rising deficits as the economy plunged, we might well be living in a full remake of the Great Depression. Let me add one more item: implicit or explicit in all the nonsense moralizing here is the notion that behind the deficits lies a vast expansion of government spending. And that’s just not true. Let’s look at the growth of real government spending — all levels, federal, state and local — before and after the crisis. All data are from FRED. I present spending with and without unemployment benefits, to give you the picture once you exclude the biggest piece of safety-net spending: So even with unemployment benefits included, spending grew no faster after 2007, as deficits soared, than before. Take out UI, and there was a noticeable slowdown, which would be even bigger if we also took out other safety-net programs such as food stamps.

The Secret Austerity Society: Bipartisan Group Works on Grand Bargain - Here we go again. Intransigence from Republicans basically kept us out of a grand bargain last year. Plenty of Democrats were willing to do it, the White House was more than willing to do it, and even John Boehner was willing to do it, at least on a conceptual level. But House Republicans wouldn’t betray their tax pledge and so it didn’t happen. There are some different dynamics to the next round of the grand bargain. There are still enough Democrats willing to deal, led by House Minority Whip Steny Hoyer. The White House has de-emphasized a deficit deal, but their budget still shows a blueprint for one, and if they get revenue in exchange, they’ve stated openly that they would make cuts to Medicare and other social programs. So is there a new willingness on the Republican side? According to The Hill, Republicans have joined a bipartisan working group that is preparing a document on deficit reduction. A small, bipartisan group of lawmakers in both the House and Senate are secretly drafting deficit grand bargain legislation that cuts entitlements and raises new revenue. Sources said that the task of actually writing the bills is well underway, but core participants in the regular meetings do not yet know when the bills can be unveiled..

Not So Fast About This New "Grand Bargain" - Over at the Capital Hill newspaper The Hill, Erik Wasson reported over the weekend that a bi-partisan group of 100 members of Congress has been working behind the scenes on a new big deficit reduction plan. The effort supposedly is so far along that some of the negotiations have gone beyond discussions and now include the drafting of legislation that , if enacted, would make the tax and spending changes a reality.  No details were provided about what's in this plan, but the basic definition of "grand bargain" is a deal that includes substantial reductions in mandatory programs -- especially Medicare, Medicaid, and Social Security -- and increases in revenues with the total deficit reduction being around $4 trillion over 10 years. The Hill makes it sound as if this is going to happen, but there are two big reasons why it's hard to see how this can succeed this year. The first is the process. This can't happen without reconciliation, the procedure Congress uses to enforce a budget resolution that among other things prevents filibusters in the Senate. But...and it's a BIG but...there's virtually no chance that a budget resolution conference report can/will be adopted this year.  No budget resolution means no reconciliation and that means that there's no way for a grand bargain to be considered. The second is politics.

Want Action On The Budget? Not Next Year - But even though it’s only the beginning of March and the budget process is just getting under way, “wait till next year” has already become the phrase of choice among budget watchers (calling them “fans” somehow just seems wrong) who want everyone — including themselves — to believe that next year will be the one when it all comes together. Unfortunately, it’s starting to look as if next year’s budget debate may not be any better either. That little will happen on the budget this year seems to be increasingly possible even at this very early date. As probably was intended by the White House, the president’s budget proposal has already almost completely disappeared from view, even though it was released only three weeks ago. Senate Majority Leader Harry Reid (D-Nev.) has already made it clear that he has no intention of having his chamber consider a fiscal 2013 budget resolution because, he said, the appropriations levels were set when the Budget Control Act was enacted last August. Even if Reid changes his mind, and although Senate Budget Chairman Kent Conrad (D-N.D.) seems determined to try to get a budget resolution approved, it’s unclear whether the votes exist in that committee to get one adopted.

The political failure that worsened the crisis -The compromise was clean and obvious: Investments and tax cuts now, coupled with a much-larger deficit reduction package that would kick in once unemployment fell below, say, 7 percent. No matter what theory of recovery you believed, this package would satisfy it. Stimulus? Check. Long-term investments in competitiveness? Check. Business confidence stemming from a certainty about the path of future budgets? Check. And then there’s the very real policy uncertainty it would have prevented, including the August debt-ceiling debacle, and the coming dual-trigger nightmare. What doomed this package wasn’t a theoretical divide. I spoke with many freshwater economists who thought a package like this would be sensible. Rather, it was politics wot done it. Policymakers couldn’t agree on a package. The basic divide was that Democrats wouldn’t permit a major deficit-reduction plan that didn’t include taxes, and Republicans wouldn’t permit one that did. But it wasn’t just that. Republicans began arguing that payroll tax cuts -- which they had supported both in January of 2009 and in December of 2010 -- were ineffective and, unlike other tax cuts, needed to be paid for. Infrastructure, which could have been a point of bipartisan compromise, instead got wrapped into the GOP’s efforts to greenlight the Keystone XL pipeline.

Boehner Caving on Highway Bill, Would Accept Senate Version as an Option - While Democrats and Republicans had an interest in passing a surface transportation bill that would at least keep construction workers employed on infrastructure projects, and perhaps provide additional opportunities for home district visits to cut blue ribbons on projects “I fought for in Congress,” the bill has not come together. The House has scrapped any movement on a bill entirely until after the next recess, and the Senate cannot seem to get their bill off the floor. Just today the bill failed a key cloture vote, with Republicans holding up the measure. With all the delays, the looming deadline for any surface transportation funding at the end of March now comes into play. On the surface, the delay in the Senate regards amendments: Republicans want more of them, and on unrelated topics. Democrats would rather limit that. McConnell offered to cap the amendments at 30, and Reid rejected that. But there is some belief that Republicans may have been stalling for time, to see what John Boehner would do on the House side. They may have their answer. Speaker John Boehner said Tuesday he’s willing to have the House vote on the Senate’s highway bill, despite complaints from rank-and-file Republicans that it’s deeply flawed and would signal a defeat for leadership.

Democrats Look To Add Natural Gas Subsidies To Transportation Bill - A growing alliance between Democratic leaders and the natural gas industry looks like it's bearing fruit for both sides, with Democrats backing a measure that could mean billions in profits for their industry. The partnership is the result of years of effort by tycoon T. Boone Pickens to shed a well-earned partisan image and work productively with Senate Majority Leader Harry Reid (D-Nev.). The measure, which has been submitted as an amendment to the $109 billion transportation bill before the Senate this week, could produce billions in subsidies for natural gas companies, according to people on and off the Hill working on the legislation. A cloture vote on the larger transportation bill failed Tuesday, but aides said a deal to advance the bill could be cut soon. A cloture vote requires 60 votes to move legislation to a floor debate. Democrats, with 53 members of the Senate, need Republican support to break a filibuster.

Get ready for chaos if Congress can’t agree on a highway bill - In the beginning, House Republicans wanted a six-year transportation bill for highways, bridges and transit. Something long-term. Something to end Congress’s addiction to short-term spending bills that leave states unable to plan. (Congress has passed eight such stopgaps since 2009.) But that didn’t work out so well. The House GOP’s original six-year highway bill would have cut overall spending levels on roads — in part because it relied solely on shrinking gas-tax revenue. So the GOP went back and expanded the bill using money from hypothetical future drilling exploits. That also caused much unhappiness. So now John Boehner is suggesting that the House may throw up its hands and vote on the two-year extension the Senate’s now considering. And if that doesn’t work, then Congress can always just pass yet another two-month extension before all highway funding runs out March 31. So how much chaos are these stopgap bills causing? Quite a bit. Transportation experts have long argued that Congress’s barrage of stopgap and short-term bills since 2009 have made it harder for states to do any sort of rational planning. “States are required by the federal government to develop long-term transportation plans,” . “Yet we are potentially looking at much shorter-duration authorization bills.”

House Republicans Go After SEC Regulation and Fed Stimulus - When it comes to goosing the lagging economy, the White House has largely focused in recent months on executive branch actions—something they dub the “we can’t wait” campaign. The motivation is obvious: with Republicans controlling the House of Representatives and able to wield a filibuster in the Senate, it’s really all the administration can do. It has implemented policy changes, like allowing underwater homeowners to refinance at current rates, and also taken steps to increase regulation of dangerous Wall Street practices—see, for example, Obama’s recess appointment of Richard Cordray to head the Consumer Financial Protection Bureau. Republicans in Congress, however, are not going to stay on the sidelines. In particular, the House Financial Services Committee has taken aggressive steps in the past two weeks to both weaken enforcement of Wall Street and slow down federal actions to decrease unemployment.A popular way to stop regulation already on the books is to underfund the enforcement agencies—the big Republican push to “reform” the CFPB included a proposal to let Congress set the agency’s funding levels. Having failed in that effort, the GOP is seeking to maintain completely inadequate funding for the Securities and Exchange Commission.

House GOP calls for turning macroeconomic policy over to a cabal of unelected bankers, with instructions to ignore the jobless - Every time Romney opens his mouth he seems to drive even more of those less well-educated, populist, culturally conservative Republicans into Santorum camp. How can the GOP win those voters back in the fall? The House Republicans have concocted a brilliant idea: The bill, which will be formally introduced later this week by Congressman Brady, would eliminate the employment leg of the dual mandate, requiring the Federal Reserve to focus only on price stability. The legislation would also restructure the Federal Open Market Committee (FOMC). The bill would give permanent seats on the committee to the twelve regional Federal Reserve bank presidents, who are chosen by regional Federal Reserve Bank directors. Those boards are composed of private citizens. Voila; you’ve pissed off unemployed Youngstown steelworkers and Ron Paul audit the Fed nuts in one grand gesture. But at least it would lock up the conservative, hard money, small town banker vote for the GOP.

What’s in a Name: “JOBS Act” Set to Pass Today - The House of Representatives will pass something they’re calling a jobs bill today. They accomplish this by giving it a nice acronym: the Jumpstarting Our Business Startups, or JOBS, Act. Now, jump-starting should be a hyphenated word so it really should be the J-SOBS Act, but we’ll let that slide. The really egregious things about this are: A) it has nothing to do with jobs, and B) it’s based on Democratic legislation that already passed, simply repackaged by the House GOP and called a jobs bill. The proposal called the JOBS Act, short for “Jump-starting Our Business Startups,” comprises of six measures aimed at removing barriers to small business investment [...] “We’ve been very explicit about the opportunity to move forward on some aspects of” the JOBS proposal, Carney said. Most of the JOBS Act measures have already passed the House with bipartisan support. The main legislation in this bill, which passed almost unanimously last year, basically removes some regulations on initial public offerings and capital generation for small businesses. You don’t necessarily have to stretch so much to call this a financial market deregulation bill, as David Waldman does. This is what we’re touting as a great job creator in Congress, with broad bipartisan support.

What passes for a jobs bill in the House - It's hard not to like the name of the bill easily approved by the House today: the "JOBS Act." With high unemployment, the legislation seemingly addresses the nation's most pressing need. Alas, it really isn't worth getting too excited about. The House Thursday afternoon overwhelmingly approved legislation aimed at easing the rules for capital formation for small companies, which Republicans hailed as a major job-creation bill but Democrats said is just a minor fix for the economy. Members approved the Jumpstart Our Business Startups (JOBS) act in a 390-23 vote that saw 158 Democrats join every voting Republican in support of the bill. All "no" votes were Democrats. The bill stands a reasonably good shot in the Senate, and President Obama will sign it if it reaches his desk. The provisions range from addressing the number of shareholders allowed to invest in community banks to thresholds for SEC registration to shareholder registration requirements.What's wrong with taking these steps? Nothing, in particular. But to characterize this as a meaningful effort to lower unemployment is kind of silly. I don't doubt Republican leaders will be patting themselves on the back this afternoon, passing a bipartisan bill with the word "jobs" in the title, but no one should be fooled.

Real Austerity -- The Hill reports, Members of the Senate Tea Party Caucus on Thursday announed a plan to balance the budget in five years, cutting spending by nearly $11 trillion compared to President Obama's budget. The plan was proposed by Senators DeMint, Lee and Paul. The lawmakers said they would turn Medicare into a premium support plan that would give seniors the same healthcare plan as members of Congress. They say this would save an estimated $1 trillion over 10 years. ...The trio would curb Social Security spending by increasing the retirement age over time and indexing benefits to individual incomes. High-income earners would see slower growth in their benefits while low-income workers would see increased benefits. ...It would freeze foreign aid spending at $5 billion a year and eliminate the departments of Commerce, Education, Housing and Urban Development and Energy and privatize the Transportation Security Administration.Now, that's what I call austerity.

Hey, didn't the GOP say it cared about deficits? - Linda Beale - Just when you think those on the radical right had gone about as far as they could go without recognizing their own zaniness, those in Congress have revived their version of a tax "reform" for businesses. It was first proposed in 2009--as an alternative to real stimulus spending on infrastructure . And yes, it is yet another tax cut. An even zanier one than the rest that they've come up with while at the same time whining of deficits and suggesting that longstanding social programs like Social Security and Medicare must be cut back. Eric Cantor, in a memo last month to fellow Republicans, announced that the House would be putting this proposal forward--let every business with 500 employees or fewer deduct off the top 20% of their income. And they want to pass this rot by the filing deadline--on the pretense that it will help ordinary folk. See Hedge Fund Tax Break May Come in Republican Small Business Plan, Now, folks, there are some mighty BIG businesses with fewer than 500 employees. Like just about every hedge fund and leveraged buyout fund. (The latter, of course, like to call themselves "private equity" these days--let's people overlook the fact that they have destroyed many a stable, profitable business by loading them up with debt and sucking out all the cash while firing employees or making the business focus on paying back the debt and not on doing business). Why would the GOP want to reward those funds with even more tax breaks than they already grab for themselves? Because that is what they are all about--making sure the richest people in the country get all the breaks.

Congress’ potential faulty tax logic - With President Barack Obama and leaders in both parties favoring lower corporate tax rates, Washington seems poised to enact change next year. They need only resolve details like how much the rates should be cut, which tax avoidance strategies should be barred and whether to give manufactures a discounted rate. If the corporate tax rate is cut, should the rates for dividends and long-term capital gains be increased? That issue was inadvertently put on the table by a leading free market organization, the American Enterprise Institute. The AEI, as part of its support for cutting the corporate tax, promoted the idea last month that workers, not investors, bear the burden of that tax. In taking that line, however, the AEI has undercut its own argument for tax relief for investors. Indeed, it shifts the debate toward higher taxes on capital gains and dividends and lower taxes on wages. We’ll follow that logic later. But first, who bears the burden of the corporate tax? Is it the owners of a corporation, through a lower return on their investments, or is it workers, through lower wages? This question is endlessly debated by economists.

Greed isn’t good for the government - Among the most insulting memes in the national debate about government are those about leadership — in particular, the three-pronged notion that assumes that 1) running a public institution requires no public-sector experience at all, 2) public sector experience is something inherently bad, and 3) a public institution will actually benefit from an infiltration of business executives, because those bare-knuckled suits will “run government like a business.” Bizarre as it sounds in the post-financial-meltdown era — how can anyone want a Wall Street executive running anything? — the idea persists, and with few real challenges to its fundamental premises. Indeed, the leading candidate for the Republican nomination, Mitt Romney, is a guy with just four years of experience in government (far less than even President Barack Obama had when he ran for president) — a guy whose entire candidacy is predicated on the notion that only the ruthlessness and know-how of a private equity barbarian can get the government to start doing what needs to be done. The unasked question, of course, is whether there is any truth to those assumptions. That question raises other uncomfortable ones, such as: What actually happens when corporate executives with zero relevant experience run public institutions? And what do those institutions do when said executives run them “like private businesses”?

Billionaire Rankings: Bloomberg Launches Daily List of the World’s Richest People - Now, thanks to Bloomberg News, you can add billionaires’ net worth to the list of statistics you can look up day to day. Bloomberg News launched its Bloomberg Billionaires Index yesterday, a daily ranking of the world’s 20 wealthiest people. The list will be updated daily based on “market and economic changes and Bloomberg News reporting.”

Where's the High Point on the Laffer Curve? And Where Are We? - Anti-taxers love to haul out the legendary napkin-inscribed Laffer curve to demonstrate that lower taxes would yield more government revenue. But this ploy only works because they assume that we’re at or past the high point — that higher taxes would move us down the right slope. (Note the cross-marks-the-spot in the image here?) But where are we really, relative to that high point? James Kwak gives us an answer, based on a great recent paper by Christina and David Romer:…an [income] elasticity of 0.19 [from the Romer paper] implies that tax revenues would be maximized with a tax rate of 84 percent; that is, you could raise taxes up to 84 percent before people’s reduced incentives to make money would compensate for the higher tax rates. This is obviously not to say that we should be taxing at that level — only that Laffer-curve arguments are ridiculous because we’re nowhere near the high point. Kwak adds another key insight about the paper: Second, remember that this is a study of the super-rich: not the top 1%, but the top 0.05%. These are the people whom one would expect to have the highest income elasticity, precisely because they don’t need the marginal dollar. Takeaway: …when you raise taxes on the rich, they don’t stop trying to make money: they just pay their lawyers and accountants more to avoid paying taxes.

Invisible Handouts and Anti-Government Conservatives - Ezra Klein wrote a column for Bloomberg discussing research by political scientist Suzanne Mettler and some of her collaborators. Mettler studies what she calls the “submerged state”—the growing tendency of government programs to provide benefits in ways that mask the fact that they come from the government—and its implications for perceptions of government and ultimately for democracy. There are several important lessons to draw from Mettler’s work. The most obvious, which was highlighted by Bruce Bartlett a year ago (and that I wrote about here), is that Americans are hypocrites: many people benefit from government programs, ranging from the mortgage interest deduction to Medicare, yet deny receiving help from any “government social programs.”* Klein focuses on a different point. For him, the main problem with invisible benefit programs is that they are politically difficult to eliminate. He writes, “If Americans who either rent or own their homes outright were asked to accept a tax increase of $150 billion in order to subsidize the mortgage payments of their indebted friends, it seems unlikely they would find that appealing.”  I’m not entirely convinced by this. First of all, every tax expenditure was passed at some point by some elected legislature. This particular deduction isn’t hidden in the sense that no one knows about it; it’s hidden in the sense that people think of it as a natural feature of the income tax that they are entitled to, not as a government spending program.

The Merits of a Corporate Tax Overhaul - Laura D’Andrea Tyson - Corporate tax reform is not usually a major issue in a presidential campaign, but it may be this year. President Obama has introduced a bold framework for a business tax overhaul. His framework is already under attack from both the left and the right, indicating that the president has found a sensible middle position from which to start the debate — a debate worth having. Corporate taxes are a significant determinant of investment, innovation, job opportunities and growth. When Japan cuts its corporate tax rate this year, the United States will have the highest statutory corporate tax rate of the developed countries. Even after incorporating various deductions, credits and other tax-reducing provisions in the tax code, the effective marginal corporate tax rate in the United States — the one that corporations actually pay on new investments — remains one of the highest in the world. In a world of mobile capital, corporate tax rates matter.As a result of globalization and technological change, corporate decisions about where to place investments are responsive to national differences in taxes and have become more sensitive over time. The high corporate tax rate in the United States encourages American companies to invest in production in foreign countries and discourages foreign companies from investing in production in the United States.

Capital Gains vs. Ordinary Income - Greg Mankiw - WHAT is carried interest? And why does it get the tax treatment it does?  These arcane questions are usually reserved for the green-eyeshade crowd. And for good reason: they can be so bewildering that they seem to be taken from an I.Q. test written just for accountants. But because they concern a few very high-income individuals, including the presidential candidate Mitt Romney, for whom I am an adviser, they have been getting broader attention lately. So let’s examine the issue.  Throughout almost the entire history of the United States income tax, the tax rate on capital gains has been lower than that on ordinary income. Today, the top rate is 15 percent for capital gains and 35 percent for ordinary income. There are good reasons for this — including, for example, the fact that capital gains are not indexed for inflation. But put that aside. If we are going to tax capital gains at a lower rate, one question necessarily arises: What is a capital gain, and how can we distinguish it from ordinary income?  The answer seems simple. If you have a job, the money you are paid for your work is ordinary income. If you buy an asset at one time and sell it later for a higher price, the profit you made from holding it is a capital gain. But is it really that easy? Consider five examples, and see if you can identify what is ordinary income and what is a capital gain:

Greg Mankiw attempting to justify carried interest - Linda Beale - Greg Mankiw wrote an op-ed in the Sunday Times Money section: Capital Gains, Ordinary Income and Shades of Gray. Mankiw notes the historical trend in the US to differentiate between capital gains and ordinary income regarding tax rates (though we have had notable experiements, both in the regular tax and in the AMT, to the contrary). He asserts that there are "good reasons" for the preference for capital gains income--offering only the standard idea of lack of indexation for inflation/deflation as an example. The purpose of the piece is to justify the carried interest treatment of money managers' gains from dealing with other people's money as equivalent to a carpenter who fixes up a dilapidated house and gets capital gains on the sale of the home, though the gains are really paying off the carpenter's sweat equity. Since the carpenter gets capital gains under our system, he says, why shouldn't the money manager who does an analogous activity. The problem with making these analogies, especially in the area of capital gains, is that the idea of capital gains is problematic to start with. We'd be much better off with a code that made no such distinction, since there are certainly instances where the distinction is an arbitrary one. Since the line drawing isn't easy (and it isn't), then the distinction shouldn't exist at all in the tax code. That would be the right solution overall.

Mankiw swings and misses - A couple days ago, Harvard economist Gregory Mankiw tried his best to defend the carried interest tax loophole by blowing smoke at the debate and hoping no one would notice. The carried interest loophole allows hedge fund and private equity managers to reclassify their compensation for management services—a hefty slice of the return on their investors’ capital—as capital gains, which are taxed at a preferential 15 percent rate instead of the top marginal income tax rate of 35 percent. Mankiw is an economic adviser to former Massachusetts Gov. Mitt Romney, who inadvertently thrust the carried interest loophole into the spotlight with his 13.9 percent effective tax rate. But no amount of smoke or sand can cover up Romney’s tax return or a tax code that throws fairness out the window for the millionaires and billionaires in high finance. Rather than defending carried interest outright, Mankiw muddies the water by leading readers through five examples of varying business arrangements and their respective tax treatment, attempting to illustrate that the line between labor and capital income is often blurred. Fair point. Inadvertently, Mankiw is making a strong case for again equalizing the tax treatment of income derived from wealth and income derived from labor (as was done under the Tax Reform Act of 1986). After all, why should the tax code incentivize one compensation arrangement over another?

Greg Mankiw’s Contorted Defense of Mitt Romney - It’s really hard to defend the carried interest exemption (the one that allows private equity and venture capital partners to pay tax on their share of fund profits at capital gains rather than ordinary income rates). You have to give Greg Mankiw a hand: he sure gave it a good shot in the Times this weekend. Mankiw’s general point makes a lot of sense. He argues that it’s sometimes hard to distinguish returns from labor and returns from investment, using five examples of people who buy a house for $800,000 and later sell it for $1,000,000. For example: “Carl is a real estate investor and a carpenter. He buys a dilapidated house for $800,000. After spending his weekends fixing it up, he sells it a couple of years later for $1 million. Once again, the profit is $200,000.”In this case, although some of Carl’s profit is due to his labor, all of it gets treated as capital gains by the tax code. In a perfect theoretical tax world, you would divide Carl into two people, the investor and the carpenter, and the investor would pay the carpenter some amount for his labor; the carpenter would pay ordinary income tax on that amount (and the investor would deduct it from his taxable profits). But that’s not how we do things.

A Manifesto for Psychopaths - Ayn Rand’s ideas have become the Marxism of the new right. It has a fair claim to be the ugliest philosophy the post-war world has produced. Selfishness, it contends, is good, altruism evil, empathy and compassion are irrational and destructive. The poor deserve to die; the rich deserve unmediated power. It has already been tested, and has failed spectacularly and catastrophically. Yet the belief system constructed by Ayn Rand, who died 30 years ago today, has never been more popular or influential. Through her novels (such as Atlas Shrugged) and her non-fiction (such as The Virtue of Selfishness(1)) she explained a philosophy she called Objectivism. This holds that the only moral course is pure self-interest. We owe nothing, she insists, to anyone, even to members of our own families. She described the poor and weak as “refuse” and “parasites”, and excoriated anyone seeking to assist them. Apart from the police, the courts and the armed forces, there should be no role for government: no social security, no public health or education, no public infrastructure or transport, no fire service, no regulations, no income tax.

London Calling: Why the Libor Affair Matters to You - Stories about the London Interbank Offered Rate (Libor) typically don’t set one’s heart aflutter. This one should: Investigators in the U.S. Canada, Japan, the U.K., and the European Union are trying to figure out if a handful of brokers and traders manipulated a key benchmark rate that affects the price of $350 trillion worth of securities and loans around the world. That may include your car loan or even your home mortgage. No banks or individuals have been charged with any wrongdoing. Yet even if the case fizzles out, there is something weird about an internationally recognized benchmark interest rate set by a small group of financial professionals with little transparency or regulatory oversight. Libor is the rough equivalent of the federal funds rate—that is, the interest rate that banks charge each other. These rates, set by a 16-bank panel and published daily by the British Bankers Association, cover a variety of currencies and time durations, from overnight to 12 months. A variety of U.S. mortgage products are directly influenced by these market rates. The typical American adjustable rate mortgage is indexed to the six-month Libor, plus a 2 percent to 3 percent premium, according to Investopedia. Also, when the credit markets are in turmoil, as they were in 2008, a soaring Libor rate raises funding costs for global banks. Lenders in turn typically pass those higher borrowing costs to Main Street.

U.S. sees Vatican as potential money laundering hub - The US State Department for the first time listed the Vatican as potentially vulnerable to money laundering, along with 67 other countries.The department’s annual International Narcotics Control Strategy report listed the Vatican as a “jurisdiction of concern” along with countries like Albania, the Czech Republic, Egypt, South Korea, Malaysia, Vietnam and Yemen.It said the Holy See appears for the “first time” in the annual report.

Credit-default swaps: How Wall Street is gaming the Greek bailout. - Slate Magazine - A funny thing happened on the way to the Greek bailout: Credit-default swaps involving Greek debt—the same kind of financial instruments that triggered the 2008 fiscal cataclysm—were set aside, once again protecting big financial institutions from their own irresponsibility. As the negotiations over the write-down of Greek debt unfolded, one of the critical questions that seemed to be hovering over the markets was: Who bought credit-default swaps on Greek debt, and who would owe big sums to cover the CDS obligations if there were a default. Remember that back in the housing crisis of 2008, it was largely the inability of AIG to make payment on the credit-default swaps it had sold that triggered the cascade of incipient failures that required enormous government intervention. Remember the $182 billion investment taxpayers made in AIG—$12.9 billion of which went straight to Goldman Sachs? In Greece, any such problem was magicked away. A special committee that governs credit-default swaps got together and said: The Greek bailout—a write down of 50 percent of the value of Greek debt—is voluntary and thus does not trigger the contractual terms of credit-default swaps. That means the companies that sold the CDSes will not have to cover the losses they had insured—the decline in value of the Greek bonds. Who votes on this committee? This will shock you: the very banks that issue, and often purchase, the CDS’s at issue: Goldman, JPMorgan Chase, Citibank, UBS. No government entity at all. Just the same players who have an enormous interest in whether or not the CDS obligations are enforced. And this special committee votes in secret, with no public accountability.

How all CDS are at risk of not paying out - My wonky post last week on how Greece’s default could kill the sovereign CDS market turns out to have been surprisingly popular, especially among policymakers who are worried about whether there’s a serious flaw in the CDS architecture. So today I had a fascinating chat with David Geen, ISDA’s general counsel, to double-check whether there was something I was missing. And it turns out that I was wrong: I wasn’t pessimistic enough. The problem I identified with Greece’s default isn’t just a problem for sovereign CDS: it’s a problem for all CDS. At heart, the problem is what happens when an issuer swaps out all of its bonds for some new bonds. There’s no reason at all why the new bonds should trade at a massive discount to par — indeed, issuers often like it when their new bonds trade at or near 100 cents on the dollar. But if the CDS auction happens after the bond exchange, and if all of the old bonds are exchanged, then holders of the new bonds are forced to tender new bonds into the exchange, even if they’re trading at 100 cents on the dollar. Which means that holders of old bonds could suffer a huge haircut in the value of their bonds, but still get no payout from their CDS.

The Great Debate©: Will Dodd-Frank be Effective? - The question of whether the 2010 Dodd-Frank Act will be effective in reducing systemic risk in the financial sector was brought into new focus by a a featured article written by Gabriel Sherman last month in The New York Times.  Sherman discussed ways in which the legislation is having impact on banking and the financial system.  That article prompted thoughts about some of the yet unanswered questions about Dodd-Frank implementation by three contributors to Global Economic Intersection.  The three essays are a natural combination for presenting additional sides of this multidimensional question.  The articles presented here in this Great Debate© are:

  • “The Big Banks Just Keep on Growing” by Elliott Morss
  • “Dodd-Frank and the Size and Scope of Financial Institutions” by Bradley G. Lewis
  • “Dodd-Frank:  Incoherent Analytics Produces Incoherent Reform” by William K. Black

CEOs Say Change Volcker Rule, Other Pending Fed Regulations - A group of chief executives on Wednesday called for major changes in Washington, including modifying parts of the Dodd-Frank financial overhaul bill and balancing the federal budget. Such action will spark job creation and economic growth that has remained tepid during the recovery, said members of the Business Roundtable, an organization of more than 100 U.S. chief executive officers. The group said it is delivering its plan to grow jobs and the economy to the White House and members of Congress this week. “If Washington and business can once again find the ability to get aligned on fundamental priorities, American business will once again unleash America’s economic potential,” said Boeing Co. CEO and Roundtable Chairman Jim McNerney. As part of the plan, the CEO group said the government must modify or eliminate seven proposed or pending regulations, including the Volcker Rule of the Dodd-Frank law.

Oh No! "This Will Force Banks to Change"! - Surprise, surprise, Larry Tabb, the founder and chief executive of Tabb Group, is complaining about regulation of the financial sector. He starts off strong: Mea Culpa? Yes, the banks did wrong. They became overlevered; hopped-up on greed, they took on more credit than a loan shark would have extended. When the bets turned sour, they went cap in hand to the taxpayer. Once bailed out, the banks threw petrol on the fire by not being contrite, hoovering up cheap cash, paying bonuses as if there were no tomorrow and refusing to develop a set of even the least offensive business restrictions. But quickly changes course: So what did legislators and regulators do? They did what they normally do in a crisis: they legislated and regulated. While the new rules may or may not preclude another crisis, they will certainly punish the banks and may inadvertently punish the taxpayer. Why, as he notes elsewhere, it's a literal "legislative tsunami"! "This will force banks to change"! We will "inadvertently punish the taxpayer" and "we’ll all be affected"! You know the jobs argument is coming. Ah, here it is: As borrowing costs increase, governments, corporations and people will pay more to borrow, reducing investments, leverage, purchases and subsequently jobs. I think that it's his job, or rather his compensation, that he's really worried about. But you knew that.

U.S. Regulators ‘Paralyzed’ by Cost-Benefit Suits, Chilton Says - Wall Street banks are using the threat of lawsuits to prevent regulators from writing rules mandated by the Dodd-Frank Act, said Bart Chilton, a Democrat on the U.S. Commodity Futures Trading Commission. “Some regulators live in constant fear and are virtually paralyzed by the threat” that they will face “spuriously” filed suits alleging that the costs and benefits of their rules weren’t adequately considered, Chilton said in a speech prepared for the Trade Tech 2012 conference today in New York. “It is a bastardization of the conduct and use of cost-benefit analyses in regulatory rulemaking.” The CFTC is defending against a challenge filed last year in federal court that the agency overstepped its authority under the Dodd-Frank Act and inadequately assessed the costs of new limits on speculation in oil, natural gas and other commodities. The lawsuit was filed by the International Swaps and Derivatives Association Inc. and the Securities Industry and Financial Markets Association. The lawsuit is one of the financial industry’s highest profile efforts to challenge Dodd-Frank, the regulatory overhaul enacted in 2010. The associations represent JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS), among other derivatives dealers. A judgment is pending.

The banks’ anti-regulation fantasy - The March 5 Wall Street Journal reported that as the Federal Reserve prepares to release the results of the latest round of stress tests, evaluating how banks would respond in the event of another severe financial crisis, “Bankers are pressing the Fed to limit its release of information — expected as early as next week — to what was published after the first test of big banks in 2009.” Three years ago, as the financial crisis was abating, the Fed published potential loan losses and how much capital each institution would need to raise to absorb them. This time around, the Fed has pledged to release a wider array of information, including annual revenue and net income under a so-called stress scenario in which the economy would contract and unemployment would rise sharply.” The banks cite competitive concerns, but regulators “view full disclosure as critical to assuaging investor concerns about banks’ capacity to withstand a market shock or economic setback.” Add to the mix the banks’ fear of further government interference – when it’s of the nonbailout variety, that is – and continued resistance to the new rules imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act. In any case, they’re being assured by the Fed that it won’t release data “that rivals could mine for future acquisitions or other moves,” such as quarterly breakouts of projected losses.

Banks drag heels on living wills - The world’s largest banks are a long way from completing the “living wills” that spell out how they can be stabilised or shut down in a crisis before a June deadline. Japanese and continental European banks are well behind.  Independent research showed only one bank out of 29 globally considered itself to have finished a draft recovery and resolution plan, according to a survey by Ernst & Young.  Under an agreement reached by the leaders of the Group of 20 nations in November the 29 most significant banks worldwide must submit draft recovery and resolution plans by June and complete them by the end of the year. All three participating US banks and three of four UK banks said they had completed the recovery element of the plans, which spells out which assets could be sold and which business lines could be closed if the bank ran into serious trouble. But six of the nine European banks and all three Japanese banks in the survey were less than halfway through. On the resolution side, which details how the institution could be broken up or shut down entirely, one-third of the banks – including all the Japanese banks – have not even started writing their plans.

Lenders Stress Over Test Results - Some very large banks are clashing with the Federal Reserve over how much detail the central bank will reveal about them when it releases the results of its latest stress test. The 19 biggest U.S. banks in January submitted reams of data in response to regulators' questions, outlining how they would perform in a severe downturn. Now, citing competitive concerns, bankers are pressing the Fed to limit its release of information—expected as early as next week—to what was published after the first test of big banks in 2009.  Three years ago, as the financial crisis was abating, the Fed published potential loan losses and how much capital each institution would need to raise to absorb them. This time around, the Fed has pledged to release a wider array of information, including annual revenue and net income under a so-called stress scenario in which the economy would contract and unemployment would rise sharply. The Clearing House Association, a lobbying group owned by units of companies such as J.P. Morgan Chase & Co., Bank of America Corp. and Wells Fargo & Co., warned in a letter this month to the Fed that making the additional information public "could have unanticipated and potentially unwarranted and negative consequences to covered companies and U.S. financial markets."

Fed Said to Balk at Bank Payouts Over Loan-Loss Estimates - The Federal Reserve is pushing back against some banks’ proposals to pay dividends and repurchase shares, after concluding that the lenders are underestimating the potential for losses on consumer debt in a severe economic slump, according to two people with knowledge of the situation. Executives and Fed examiners have been wrangling in recent weeks over the central bank’s stress-test process as the March 15 deadline for results approaches. The Fed hasn’t yet given banks a ruling on their proposed payouts or told firms how much higher its estimates are for losses on mortgage loans and credit cards, the people said. Examiners are still fine-tuning calculations, which may change. “If the Fed fights back and disagrees and is more aggressive in their stance on cards and mortgages, it would mean banks wouldn’t be able to pay out as much,” missing investors’expectations, said Glenn Schorr, a senior bank analyst for Nomura Securities in New York. Investors expect banks will pay out 50 percent to 60 percent of earnings this year, he said.

Why Liquidity is No Longer Enough - Since Lehman's failure in 2008, the name of the game has been to paper over deeply-rooted solvency issues in large institutions/countries with cheap liquidity. What helped keep markets afloat more than the liquidity itself, though, was the perception by the wealthiest segments of society that their solvency issues were being mitigated or resolved with a combination of loose fiscal/monetary policy and time. That perception was a more powerful and addicitng drug than the actual liquidity or promises of liquidity in the future. Now, most big money managers are being forced to confront the fact that solvency issues are simply not going to disappear. That's what the Greek PSI debt restructuring scheduled for Thursday, the "success" of which still remains very uncertain, reflects more than anything else. It is the fact that a relatively large debtor is on the verge of default no matter what the PSI outcome is, and also that creditors will be forced into losses through collective action clauses if the uptake of Greece's offer is anything less than ubiquitous. Although the direct losses from Greek bond holdings may be rather trivial at this point, the Greek government is just one within a long, inter-connected line of institutions that are utterly insolvent. It's default is something that most of the wealthy money shifters are not at all used to or prepared for. That is because the so-called "economic recovery" period of mid-2009 to early 2011 was only a recovery for those who have been concentrating wealth at the top for decades.

Fed Shrugged Off Warnings, Let Banks Pay Shareholders Billions - In early November 2010, as the Federal Reserve began to weigh whether the nation’s biggest financial firms were healthy enough to return money to their shareholders, a top regulator bluntly warned: Don’t let them.  “We remain concerned over their ability to withstand stress in an uncertain economic environment,” wrote Sheila Bair, the head of the Federal Deposit Insurance Corp., in a previously unreported letter obtained by ProPublica.  The letter came as the Fed was launching a “stress test” to decide whether the biggest U.S. financial firms could pay out dividends and buy back their shares instead of putting aside that money as capital. Four months later, the Federal Reserve rejected Bair’s appeal. In March 2011, the Federal Reserve green-lighted most of the top 19 financial institutions to deliver tens of billions of dollars to shareholders, including many of their own top executives. That $33 billion is money that the banks don’t have to cushion themselves — and the broader financial system — should the euro crisis cause a new recession, tensions with Iran flare into war and disrupt the oil supply, or another crisis emerge. This is the first in-depth account of the Fed’s momentous decision and the fractious battles that led to it. It is based on dozens of interviews, most with people who spoke on condition of anonymity, and on documents, some of which have never been made public. By examining the decision, this account also sheds light on the inner workings of one of the most powerful but secretive economic institutions in the world.

The Effect of TARP on Bank Risk-Taking - Fed Research - One of the largest responses of the U.S. government to the recent financial crisis was the Troubled Asset Relief Program (TARP). TARP was originally intended to stabilize the financial sector through the increased capitalization of banks. However, recipients of TARP funds were then encouraged to make additional loans despite increased borrower risk. In this paper, we consider the effect of the TARP capital injections on bank risk taking by analyzing the risk ratings of banks’ commercial loan originations during the crisis. The results indicate that, relative to non-TARP banks, the risk of loan originations increased at large TARP banks but decreased at small TARP banks. Interest spreads and loan levels also moved in different directions for large and small banks. For large banks, the increase in risk-taking without an increase in lending is suggestive of moral hazard due to government ownership. These results may also be due to the conflicting goals of the TARP program for bank capitalization and bank lending. Full paper (666 KB PDF)

GAO: Almost Half of Bailed Banks Repaid the Government With Money “From Other Federal Programs” - The Government Accountability Office continues its subtle war on the talking point used by Treasury that “TARP made money”. Here’s the GAO, with a report out today. As of January 31, 2012, 341 institutions had exited CPP, almost half by repaying CPP with funds from other federal programs. Institutions continue to exit CPP, but the number of institutions missing scheduled dividend or interest payments has increased. Much of the government-supplied TARP funding (to small banks) was replaced by the Small Business Lending Fund passed in 2010, which Republicans called “TARP 2.0″. The larger banks, however, where much of the bank-based credit creation in the economy takes place, didn’t use this program. Instead, they got an implicit subsidy of between $6B and $300B a year from the widespread belief that the government will not let their bondholders lose money. Officials can claim that TARP made money, but it’s becoming increasingly clear that this is a way of avoiding a description of the actual policy framework.

Some Problem Banks May Never Exit Federal Bailout - More banks are missing dividend, interest and other repayments to the Treasury Department and some may never exit from a federal financial-system bailout program, a government watchdog said Thursday. More than three years after the launch of the Troubled Asset Relief Program, the U.S. government still owns stakes in about 366 banks. While the biggest institutions, such as Citigroup Inc. and Bank of America Corp., have long since paid back their bailouts, many smaller banks have struggled to repay the government.“Institutions that continue to miss payments and problem institutions may have difficulty ever fully repaying their [Capital Purchase Program] investments,” the Government Accountability Office, the investigative arm of Congress, said in a report. TARP’s Capital Purchase Program, or CPP, was the main federal effort to help stabilize financial markets. Treasury provided capital to banks through the purchase of shares or debt.

The Failure of the Current Banking Model and the Calculated Mispricing of Risk - This enlightening essay excerpted below is remarkable because the author strikes right to the heart of the matter, rather than endlessly talking around technical details of how to 'fix' things, adjusting this and that, which is what people close to, if not caught up in, the financial problem are often wont to do. And such a tinkering discussion of it is a trap. The patient does not require a pill or a poultice, a better diet or dental health regime, but surgery, and the sooner the better. The Volker Rule is a dulled knife, but directionally correct. And the banks fear it, and hate it, as they do all meaningful reform. Theirs is the art of privileged deception, and it is the common cause they find with their political systems. And of course and unfortunately it is the same with their central banks and the corporations that have grown up around them, who are upholding the exorbitant privilege, and danger, of the dollar reserve currency, which is to their benefit, by the massive mispricing of risk every day in the bond and currency, metal and derivatives markets. And the interval between major interventions is decreasing, such is the decay of their position. The ongoing and conscious mispricing of risk is going to cause a second financial crisis that will be much worse than the first, which was also due to the conscientious mispricing of risk with the intent to take advantageous profit, which is a euphemism for fraud.

Gillian Tett Exhibits Undue Faith in Data and Models - Yves Smith - I hate beating up on Gillian Tett, because even a writer is clever as she is is ultimately no better than her sources, and she seems to be spending too much time with the wrong sort of technocrats. Her latest piece correctly decries the fact that no one has the foggiest idea of what might have happened if Greece defaulted (note that we are likely to revisit this issue in the not-too-distant future). But she makes the mistake of assuming the problem could have been solved (in the mathematical sense, that the outcome could have been predicted with some precision) by having better data. That is a considerable and unwarranted logical leap: Today banks and other financial institutions are filing far more detailed reports on those repo and credit derivatives trades, and regulators are exchanging that information between themselves. Meanwhile, in Washington a new body has been established to monitor those data flows and in July US regulators will take another important step forward when they start receiving detailed, timely trading data from hedge funds, for the first time. But Since important information about the last crisis has been given short shrift, it’s a given that more data won’t necessarily yield a commensurate increase in understanding. We’ve lamented how, for instance, a critically important BIS paper debunking the role of the saving glut in the crisis and the use of the “natural” rate of interest in economic models, has been largely been ignored. Similarly, from what we can tell, there is perilous little understanding of how heavily synthetic and synthetic CDOs turned a US housing bubble that would have died a natural death in 2005 into a global financial crisis.

MF Global Still Set to Pay Executive Bonuses- Three top executives of MF Global Holdings Ltd. when it collapsed could get bonuses of as much as several hundred thousand dollars each under a plan by a trustee overseeing the securities firm's bankruptcy case, people familiar with the matter said. Louis Freeh, the former Federal Bureau of Investigation director now in charge of unwinding what is left of the New York company, is expected to ask a bankruptcy-court judge as soon as this month to approve performance-related payouts for the chief operating officer, finance chief and general counsel at MF Global, these people said.

MF Global Customers Call Trustee’s Demands ‘Unwarranted’ - MF Global’s trustee asked futures customers to release claims on the defunct brokerage in return for money they are owed, demanding an “unwarranted”transfer of legal rights, a group of customers said. The customers, including William Fleckenstein, Thomas Wacker and Summit Trust Co., said in a court filing yesterday that they were notifying the judge supervising the firm’s liquidation of their “concern” in case he wasn’t aware that trustee James Giddens had mailed his demands to some customers along with his determination of their claims. One of Giddens’s demands may require customers to release claims made in class-action lawsuits, they said. “It may be interpreted to release claims being asserted in the numerous class action lawsuits filed by aggrieved customers,” the customers said in the filing. “It could also potentially be asserted as a bar to recovery by some or all of the defendants joined in these lawsuits, including claims in the suits against parties alleged to be responsible for the misappropriation of customer funds.”

Wall Street’s Broken Windows - Bill Black - James Q. Wilson was a political scientist who often studied the government response to blue collar crime. The public knows him best for his theory called “broken windows.” The metaphor was what happens to a vacant building when broken windows are not promptly repaired. Soon, most of the windows in the abandoned building are broken. The criminals feel little compunction against petty destruction because the building’s owners evince no concern for the integrity of their building. . He argued that as community broke down fewer honest citizens were active in monitoring and policing behavior. The breakdown in community was criminogenic – it led to widespread serious blue collar crime.   New York City’s police strategy embraced “broken windows.” The police increased the priority with which they responded to even minor offenses that upset the community – “squeegee men,” graffiti, and street prostitution. Reported blue collar crime fell in New York City. It also fell sharply in most other cities, which did not implement “broken windows” programs, but Wilson and the NYPD got the credit and popular fame for the sharp fall in reported blue collar crime in New York City. Wilson became one of the most famous blue collar criminologists in the world. Wilson’s broken window theory remains controversial among many blue collar criminologists. As a celebration of his life and research I offer this discussion of applying “broken windows” theory and policies to elite white-collar crime.

Bill Black: US Exports Flawed Economic Dogma; the Results are Disastrous - Bonnie Faulkner interviews former bank regulator, William K. Black. There is more to this 1-hour interview than what is contained in these notes. Audio of the interview is available following this text. On banks' traditional role as middleman: Some banks do very useful things for the world. According to economic theory, banks act as a middleman. Banks take savings, accumulate money, make loans to companies to invest productively... Middlemen serve a very useful purpose, but should not be very big and should not make a lot of money... based on the efficiency principal. On what has happened to our elite financial institutions: In the world we live in, finance has become the dog instead of the tail. In the USA, 30% to 40% of all profits in business come from the financial sector. They have become a parasite... They weaken the economy. Overall, finance has lost its way - in an immensely destructive way. Why is it that our most elite institutions are our worst institutions? Why are our most elite institutions the ones that time after time violate the law and cause recurrent intensifying crises? Why the crisis has not abated in Europe: Europe does not have its own currency. It makes the crisis far worse for them. In Europe it has become a core vs. periphery issue. The core is becoming increasingly furious with the periphery. But the core largely caused the crisis. The victims are being blamed.

An Industry’s Failure to Verify, After Trusting - As the financial crisis intensified in mid-2008, the largest of the monoline insurance companies that had guaranteed payments on complicated securities retained an investment bank to evaluate the risks it had taken on in a small part of its portfolio — a group of 15 collateralized debt obligations. The report commissioned by MBIA came back days before that investment bank, Lehman Brothers, itself failed in September 2008. Lehman concluded that MBIA stood to lose more than $7.7 billion on those 15 securities. That was about three times the loss reserves the company had established for all of its policies. If accurate, it raised serious questions about the company’s solvency. About 10 weeks later, on Dec. 5, MBIA asked the New York Insurance Department, now part of New York’s Department of Financial Services, for permission to split into two units. One would have just the dubious business — known as structured finance — including securities backed by home mortgages and the even riskier C.D.O.’s that are backed by securities that in turn are backed by mortgages. The other unit would be responsible for MBIA’s traditional business of insuring municipal bonds. It presented to the department financial projections showing both companies would be well capitalized.

Two Points on the Bloomberg Article on Wall Street Bonuses: Rentiers and Bonus Culture  - I think everyone has commented on this Bloomberg article, Wall Street Bonus Withdrawal Means Trading Aspen for Coupons.  People making six figures take a 20% hit to their bonus and all hell breaks loose. Example: “People who don’t have money don’t understand the stress,”  “Could you imagine what it’s like to say I got three kids in private school, I have to think about pulling them out? How do you do that?”   Two things stand out.

  • 1.  Subtle rentier logic in the background.  Like Josh Mason, I was flabbergasted that Carmen Reinhart told Institutional Investor that “Financial repression is manifesting itself right now” alongside the notion that financial repression is like “the rape and plunder of pension funds.”  The idea that owners of financial capital are lovely savers who deserve low inflation, high interest rates and predictable, passive income regardless of there being 8%+ unemployment is beyond me. 
  • 2.  Bonus culture.  Notice how people both feel that they (a) deserve their bonus and (b) budget their fixed expenses and lifestyle as if they are going to get their bonus.  Is there any wonder you see so many people not report problems or actively “race to the bottom” in terms of ethics?  Their salary is managed in such a way that they can’t leave easily, and that there’s always a not-so-subtle mechanism for pulling away a full year’s compensation at a moments notice.  There’s a lot written on how the bonus culture caused fraud and problems at the front-lines of the securitization channels – I’d like to see more about how it functions among the financial 1%.

Foreclose the Banks - This spring, the Occupy movement plans to take on Bank of America in a protracted, multi-pronged campaign exposing the predatory nature of the giant lending institution’s common practices. For the last three years Bank of America has been borrowing billions of dollars a day in “emergency lending” from the Federal Reserve at interest rates close to zero. All told, it has taken at least $2 trillion in rolling “emergency” loans since 2008. What does B of A do with that money? Lend it back to US taxpayers at 5 percent interest rates for mortgages and 20 percent or even 25 percent interest rates for credit cards. That’s how Bank of America makes its profits—it lends your money back to you at interest. Moreover, BoA is facing more than one dozen class-action lawsuits for wrongfully foreclosing on thousands of homeowners across the country. That’s why March 15, April 15 and May 15 will see concerted move our money actions, in which self-organized groups of individuals, community groups, organizations and congregations move their savings and checking accounts out of the big banks, specifically Bank of America, JPMorgan Chase and Wells Fargo into credit unions and regional lending institutions. It’s an easy way to take a stand against rapacious capitalism. Get more info and tell all your friends.

'End bank payday lending now,' consumer groups urge -- Some of the nation's biggest banks are offering short-term loans with sky-high fees that consumer groups say are just as predatory as payday loans. Wells Fargo, U.S. Bank, Regions, Guaranty Bank and Fifth Third Bank are among the banks offering these loans through direct deposit checking accounts, marketing them under such names as Checking Account Advance and Ready Advance loans. Consumer advocates say these advance loans are just as bad as payday loans because they carry steep fees that borrowers often can't afford to pay back by the time the loan is due, a date that typically coincides with the delivery of their next paycheck or government benefit payment. Like payday loans, the banks' advance loans are typically made for two weeks or a month. But instead of using a post-dated check or accessing a consumer's banking information to retrieve payments like payday lenders do, the bank pays itself back directly from the customer's checking account when they receive their next recurring direct deposit.

CFPB to Share Information with Attorneys General - Carter Dougherty of Bloomberg reports this morning that  the Consumer Financial Protection Bureau is entering into an  information-sharing agreement with state attorneys general, that will help states enforce consumer protection laws. The agreement will “establish a general framework to share data on consumer financial protection issues,” according to an advance copy of a speech Cordray will give to the National Association of State Attorneys General later today in Washington. Cordray will also collaborate with state AGs offices on a “national strategic plan” to address abuses in various areas, but debt collection, an area regulated on both state and federal levels,  was specifically mentioned.  I can think of a couple of other areas where such collaboration would also be useful, but this is a good start. 

OCC Servicer Review Firm Also “Scrubs” Loan Files, Fabricates Documents - Yves Smith - Reader Lisa N. pointed me to a troubling October 2010 press release by SolomonEdwardsGroup, a company that describes itself as a “national financial services consulting and staffing firm” about its remediation services for “significant loan documentation problems.” Alert readers will recognize that this is shortly after the robosiging scandal broke. Here are the key parts of the press release: SEG’s teams can also be rapidly deployed across the U.S., to help banks and servicers “scrub” files and determine which foreclosures may have been tainted by incorrect loan documentation and processing issues such as robo-signing…. For instance on a recent engagement, SEG quickly deployed a 25-person team to review a single-family loan portfolio containing 5,000 loans and within six weeks brought the portfolio into compliance with investor guidelines. During another recent engagement, SEG successfully completed the same type of project involving 20,000 single-family loans tainted by fraud allegations. Needless to say, this sounds consistent to the charges we’ve heard from borrower attorneys and have even seen at trial: that of “tah dah” documents appearing suddenly in court that solved all the problems with the evidence presented. A not that unusual case occurred last week, in Kings County, New York, where in HSBC v. Sene, when the lawyers for the bank tried submitting two notes (borrower IOUs), the second attempting to remedy problems raised by the first one, each presented as the original. The judge not only ruled against the foreclosure but referred the case to the district attorney and the state attorney general.

Whistleblower says BofA defrauded HAMP(Reuters) - Bank of America NA prevented homeowners from receiving mortgage-loan modifications under a federal program in order to avoid millions of dollars in losses while benefitting from financial incentives for participating in the program, according to a complaint unsealed in federal court Wednesday. The suit is the second whistleblower complaint unsealed so far with apparent ties to the $1 billion False Claims Act settlement announced by Bank of America and the U.S. Attorney's Office for the Eastern District of New York on February 9. The Bank of America settlement is also part of the sweeping $25 billion agreement reached between state and federal authorities. Final settlement documents have yet to be filed in the BoA settlement, which the U.S. Attorney's Office said was the largest ever False Claims Act payout related to mortgage fraud. The settlement resolved claims that Bank of America's Countywide Financial subsidiaries defrauded the Federal Housing Administration by inflating appraisals used for government-insured home loans, as well as claims involving the Home Affordable Modification Program, a federal program to help American homeowners facing foreclosure. The complaint unsealed Wednesday was filed by whistleblower Gregory Mackler, a Colorado resident who said he worked alongside Bank of America executives while an employee at Urban Lending Solutions, a company to which Bank of America contracted some of its HAMP work.

Houston’s County Joins Texas Suit Seeking $10 Billion From MERS, Banks - Harris County Texas, which includes the city of Houston, won a bid to join a group lawsuit seeking damages from the Mortgage Electronic Registration Systems Inc.,Bank of America Corp. and Stewart Title Co. U.S. District Judge Reed C. O’Connor allowed Harris and nearby Brazoria County (66583MF) to enter the case that could result in payouts of a much as $10 billion for all Texas counties, according to court papers filed by the plaintiffs. The counties accuse MERS, which runs an electronic registry of mortgages, and members of the mortgage banking industry including Bank of America of filing false lien claims in the real property records of Texas counties. The suit also alleges the defendants failed “to record subsequent assignments ofmortgage loans and pay the attendant filing fees.” Dallas sued in state court in September and the defendants won a change of the case to federal court in October. The U.S. Judicial Panel on Multidistrict Litigation in February denied an attempt by the defendants to join the case with a lawsuit brought against Merscorp by homeowners in Arizona.

Anecdotes of Mortgage Fraud - In the last couple of weeks I’ve been pushing foreclosure fraud. Well, not pushing the fraud but rather arguing that foreclosure is fraud. It has to be. If a mortgage was registered at MERS, then the chain of title was broken. Broken chains mean the bank cannot foreclose. But that was MERS’s business model, and so most mortgages are “infected”. Still, there’s a lot more to it than that. I’ve been arguing since early on in the crisis that the entire real estate food chain is like Shrek’s onion—as you peel back every layer you find fraud. From the appraiser to the broker, from the lender to the securitizer, from the recording of the mortgage sales to the securitization’s trustees, from the accounting firms that signed off on everything to the ratings agencies that rated everything AAA, from the investment banks that created CDOs to the hedge fund managers who bet against the synthetics Goldman sold to its own customers, and from the bank lawyers to the judges that help banks steal homes. The whole damned onion is fraud. And most of it, today, is to cover up the chain of fraud that dates back to the early 2000s. It has been all fraud, all the time, since 2000.As is widely noted, the FBI warned of an epidemic of fraud in 2004. The Fed’s FOMC discussed rising fraud even before that. While anecdotal evidence, alone, should not be enough to convince one, there is certainly plenty of it. Today I want to talk briefly about a couple more examples of the fraud that led up to the crisis.

How Many Borrowers Might Qualify for Principal Reduction Under the Mortgage Settlement? - Brookings Institution: The much publicized $25 billion settlement agreement announced in February between the state attorneys general and the five largest mortgage servicers called for at least $10 billion to be dedicated to reducing the principal of underwater borrowers. But only certain types of underwater loans are eligible. Below I attempt a back-of-the-envelope calculation of the number of eligible loans, with the numbers depicted in the figure at the bottom. The calculation is a rough one, since I rely on different data sources, and since I need to resort to some simplifying assumptions. For example, if 40 percent of underwater borrowers meet one criterion for eligibility and 20 percent of underwater borrowers meet another criterion, then I assume that 8 percent (40 percent times 20 percent) meet both criteria. First, the borrower must be underwater, meaning owing more in mortgage debt than the house is worth. According to CoreLogic, there are 11.1 million underwater borrowers. Second, loans backed by Fannie Mae or Freddie Mac are not eligible for the principal reduction. According to analysis by the Federal Reserve of data from LPS Applied Analytics and CoreLogic, as of December, 14.1 percent of Freddie Mae loans were underwater and 11.3 percent of Fannie Mae loans were underwater. Third, the agreement is with the five largest mortgage servicing banks. According to Inside Mortgage Finance, the five banks service 55 percent of all loans, bringing us to 1.2 million remaining borrowers. Fourth, only owner-occupied homes are eligible. According to CoreLogic, 82 percent of underwater borrowers are owner occupied, bringing us to 1 million remaining borrowers.

Brookings Estimate: Foreclosure Fraud Settlement Could Only Help Half as Many Borrowers as Promised - One thing that I’ve been pointing out is that the best estimate by HUD and other federal and state boosters of the foreclosure fraud settlement is that it will help 1 million underwater borrowers get principal reductions. But what if HUD’s estimates are too high? What if only half as many borrowers as HUD claims will see relief? That’s the opinion of Ted Gayer of the Brookings Institution, which he came to by running the numbers. First, the borrower must be underwater, meaning owing more in mortgage debt than the house is worth. According to CoreLogic, there are 11.1 million underwater borrowers. Second, loans backed by Fannie Mae or Freddie Mac are not eligible for the principal reduction. According to analysis by the Federal Reserve of data from LPS Applied Analytics and CoreLogic, as of December, 14.1 percent of Freddie Mae loans were underwater and 11.3 percent of Fannie Mae loans were underwater. Taking the midpoint, and assuming there are 26 million Fannie or Freddie loans (about half of the number of existing loans), then there are approximately 3.3 million Fannie and Freddie underwater loans, bringing us to 7.8 million remaining borrowers eligible for the principal reduction.  Third, the agreement is with the five largest mortgage servicing banks. According to Inside Mortgage Finance, the five banks service 55 percent of all loans, bringing us to 1.2 million remaining borrowers. Fourth, only owner-occupied homes are eligible. According to CoreLogic, 82 percent of underwater borrowers are owner occupied, bringing us to 1 million remaining borrowers

Lowering our expectations for foreclosure settlement - The federal government's response to the home mortgage crisis always has been an exercise in living down to one's lowest expectations. The $25-billion settlement with five big banks over foreclosure abuses that U.S. housing officials and 49 state attorneys general announced last month was supposed to be an exception. Here, at last, was real compensation from those who played key roles in the disaster. But with every passing day, the shortcomings of this deal appear to proliferate. That is, as far as we know, because the specific terms of the settlement are still not public, nearly one month after it was unveiled in Washington with the sort of fanfare formerly associated with the splashdown of a space capsule. The latest explanation for the secrecy is that the parties are waiting until the settlement is filed with a federal court in Washington, which could happen this week or next. But the explanation only evades the question of why the deal wasn't filed in court before or simultaneously with the big dog-and-pony show, as is customary with high-profile legal settlements.

Bank of America Reaches Deal on Housing - Bank of America will provide deeper-than-anticipated principal reductions for about 200,000 homeowners under newly-disclosed terms of last month’s foreclosure settlement with state and federal authorities. The cuts for homeowners who owe more than their homes are worth could total more than $100,000 each under the deal with the government, according to Dan Frahm, a spokesman for Bank of America. Bank of America hopes it will be able to reduce what it owes in penalties under the settlement by up to $850 million. The $26 billion settlement was announced last month by 49 state attorneys general, as well as officials from the Department of Housing and Urban Development, the Department of Justice and other federal agencies. The principal reductions for the affected Bank of America customers will likely be deeper than the broader group of distressed homeowners covered by the settlement.

No Mortgage Deal but Banks get Free Pass - The national mortgage settlement among federal and state regulators and major banks, announced with much fanfare on February 8, still has not produced an actual written settlement agreement, judging by the dead link on the settlement web page. That hasn't stopped the Treasury Department from announcing that Chase and BankofAmerica will receive millions in HAMP payments previously being withheld because the banks were not complying with promises they made in their contracts with Treasury to modify loans. The announcement does not say the banks are now in compliance. This is a bit ironic, given that the point of the settlement was supposed to include improving mortgage servicer performance in preventing foreclosures. It does not bode particularly well for enforcement of any future promises made by the banks in the someday-to-be-released settlement.  Kudos to Arthur Delaney at HuffPo for reading the press release, with the anodine tag line "Obama Administration Releases February Housing Scorecard," all the way through.

Boom-Era Property Speculators to Get Foreclosure Aid - The Obama administration will extend mortgage assistance for the first time to investors who bought multiple homes before the market imploded, helping some speculators who drove up prices and inflated the housing bubble. Landlords can qualify for up to four federally-subsidized loan workouts starting around May, as long as they rent out each house or have plans to fill them, under the revamped Home Affordable Modification Program, also known as HAMP, according to Timothy Massad, the Treasury’s assistant secretary for financial stability. The program pays banks to reduce monthly payments by cutting interest rates, stretching terms, and forgiving principal. The government’s need to protect neighborhoods from blight and renters from eviction by keeping the current owners in place is outweighing concern that taxpayers will end up bailing out real-estate investors. The program is being enlarged after less than 1 million borrowers modified loans through HAMP, compared with the administration’s stated goal in 2009 of helping 3 million to 4 million homeowners. “When we started the program we focused on owner-occupied houses because the need was so great and we wanted to target the efforts to that group,”

The Pernicious “Foreclosures are Good” Meme - The New York Times editorial board has an appropriate take today on the barrage of housing-related spin coming from all corners lately. If you follow these issues, you would have to be willfully blind not to notice a concerted effort to paint the housing recovery as just around the corner, the bottom reached, the best yet to come. But the NYT, to their credit, doesn’t buy the spin. In the last quarter of 2011, national home prices fell 4 percent, putting prices back to levels last seen in mid-2002, according to the Standard & Poor’s/Case-Shiller price index. Moody’s Analytics estimates that 3.3 million homes are in or near foreclosure and another 11.5 million underwater homeowners are at risk of foreclosure if the economy or their finances weaken. And you can add to that the fact that foreclosure starts and sales have ramped up again, as the regulators eased off the pressure by agreeing to the foreclosure fraud settlement. Some would buy the bank-friendly argument that these foreclosures are necessary, that they “let the market clear.” I’m surprised any economist still tries this line of argument. A foreclosure drops property values, increases state and local government costs in the case of blight, and wrecks entire communities. One foreclosure causes $250,000 of damage to the larger economy. And a good deal of them are unnecessary, and could be avoided simply with the time-honored process of renegotiating contracts in a way that works financially for the borrower and lender.

Obama unveils new foreclosure measures to resuscitate housing market - President Obama has begun embracing housing policies that administration officials earlier thought unwise or unworkable as he embarks on his most aggressive push to address the nation’s foreclosure crisis and depressed real estate market since the first months of his tenure. Obama has unveiled more than half a dozen plans in recent months to help millions more Americans refinance their mortgages at low rates, to reduce the debts owed by struggling homeowners and to expand existing programs to broaden the pool of borrowers eligible for government aid. The latest initiatives, announced this week, seek to help members of the military and Americans who have government-insured mortgages. The administration had previously rejected some of these efforts on the grounds that they were wrong on the merits, risky for taxpayers or could not be done. For instance, administration officials in the past had said they didn’t want to bail out speculators or people who had taken on far too much debt. Now, under certain circumstances, the administration is willing to do both.

White House unveils mortgage-relief plan - The White House on Tuesday announced it was cutting the mortgage fees charged by the Federal Housing Administration’s refinancing program in another effort to help the languishing housing market recover. President Barack Obama will announce the move at an afternoon press conference, his first since November. An estimated 2 million to 3 million FHA borrowers will be eligible to benefit from the revamped program, the White House said in a statement. The measures to be announced by Obama this afternoon do not need Congressional approval. Under the revised FHA streamlined refinancing program for loans originated prior to June 2009, borrowers refinancing existing FHA loans would pay an up-front mortgage insurance premium of 0.01%, down from 1.0%. The annual premiums will be cut in half to 0.55%. The reductions could save the typical FHA borrower about a thousand dollars per year, the White House said

White House trims some FHA refinancing costs - The White House on Tuesday said it was cutting the costs of some government-insured mortgages in a move that could open the door to cheaper loans for as many as three million borrowers. The fresh round of changes from the administration affects loans the Federal Housing Administration insures and would reduce fees on those mortgages for borrowers previously unable to borrow at lower rates. Those using the so-called "streamline" refinance program allows FHA borrowers to win new FHA-backed loans without going through some of the more stringent guidelines that make locking into new loan terms more challenging. The Obama administration said it will lower the costs on up-front mortgage insurance premiums to 0.01 percent for streamlined refinancings of FHA loans. The White House also said it will cut the annual fee for these refinancings in half to 0.55 percent. The eligible borrowers for the streamline refinance program must have taken out those FHA loans before June 1, 2009.

Another Failed Housing Program: Hardest Hit Fund Pays Out Just 2% in 16 Months - One of the responses you often get from official sources about the failed HAMP program is that it was but one of a string of programs implemented using TARP funds to help homeowners. So just because HAMP has used barely $3 billion of the $50 billion in available funds, that’s not a full picture, because some of that money was cleaved off to other programs. Among the biggest was the Hardest Hit Fund, a $7.6 billion program from Treasury designed to help unemployed borrowers in the hardest-hit states. The states would have some discretion into how the program money would be used, but by and large they would either use forbearance or principal reductions to save the homes of the suddenly unemployed until they got back on their feet. Only thing is, the Hardest Hit Fund apparently has the same kind of miserable success rate as HAMP. A $7.6-billion federal program to help unemployed homeowners stave off foreclosure has provided little relief two years after being unveiled, with less than $218 million of the money paid out to needy borrowers as of Jan. 1. California, which was allocated nearly $2 billion from the Hardest Hit Fund, provided less than $38.6 million in assistance for 4,357 borrowers by the end of last year, according to the state’s latest report to the Treasury Department. That amounted to less than 2% of the federal funds available to the state’s Keep Your Home California program.

Hope Now: Mortgage mods in January down 27% from year ago - An estimated 74,000 homeowners received mortgage modifications in January, down 27% from a year earlier, when 101,000 borrowers successfully completed trials. The data, released Monday by Hope Now, show mortgage servicers completed about 56,000 proprietary loan modifications for homeowners and almost 18,000 Home Affordable Modification Program modifications, as reported by the Treasury Department. Hope Now said proprietary loan modifications in January “continued to show characteristics of sustainability, which the majority having lower principal and interest monthly payments as well as fixed interest rates of five years or more.” This is consistent with data from prior months. The data also show foreclosure sales slightly overtook loan modifications for the first time since October 2009. In January, there were about 79,000 completed foreclosure sales. The number of foreclosures sales last January was about 73,000, which was outpaced by the number of loan modifications.  Delinquencies of more than 60 days stayed flat with a year ago at about 2.77 million or about 6% of all loans.

Latest Borrower Trap? Trial Mod Offers With No Permanent Mod Terms - Yves Smith - We’ve been focusing on the bigger picture scams in mortgage land, and realized it might be helpful to also provide occasional examples of what is happening on the ground level. Despite the fact that the Treasury-sponsored mortgage modification program known as HAMP has been roundly decried as a disaster. Not only were too few mods done but banks also lied about program features, including that many borrowers were assured foreclosure efforts were not moving ahead when they were, with the result that quite a few program participants wound up losing their homes. Given the program’s sorry history, struggling borrowers have good reason to be wary. Lisa Epstein of Foreclosure Hamlet, points out a new wrinkle that she worries may be a harbinger of bad things to come, namely, that HAMP trial mod offers, which once described in some detail what the permanent mod would look like if the borrower made all the trial mod payments and was approved, have suddenly gone silent on the back end terms. One of Lisa’s contacts has graciously allowed her to upload an example. Lisa says there are many she’s seen or heard of like this, it may not be the new normal, but it has become common awfully fast.

LPS: Foreclosure Starts and Sales increase Sharply in January - LPS released their Mortgage Monitor report for January today.  According to LPS, 7.97% of mortgages were delinquent in January, down from 8.15% in December, and down from 8.90% in January 2011.  LPS reports that 4.15% of mortgages were in the foreclosure process, up from 4.11% in December, and down slightly from 4.16% in January 2011.  This gives a total of 12.13% delinquent or in foreclosure. It breaks down as:
• 2.23 million loans less than 90 days delinquent.
• 1.77 million loans 90+ days delinquent.
• 2.08 million loans in foreclosure process.
For a total of 6.08 million loans delinquent or in foreclosure in January. This graph shows the total delinquent and in-foreclosure rates since 1995. The total delinquent rate has fallen to 7.97% from the peak in January 2010 of 10.97%, but the decline has halted. A normal rate is probably in the 4% to 5% range, so there is a long ways to go. The in-foreclosure rate was at 4.15%, down from the record high in October 2011 of 4.29%. There are still a large number of loans in this category (about 2.08 million).   This graph provided by LPS Applied Analytics shows foreclosure starts and sales.

Banks foreclosing on US churches in record numbers (Reuters) - Banks are foreclosing on America's churches in record numbers as lenders increasingly lose patience with religious facilities that have defaulted on their mortgages, according to new data. The surge in church foreclosures represents a new wave of distressed property seizures triggered by the 2008 financial crash, analysts say, with many banks no longer willing to grant struggling religious organizations forbearance. Since 2010, 270 churches have been sold after defaulting on their loans, with 90 percent of those sales coming after a lender-triggered foreclosure, according to the real estate information company CoStar Group. In 2011, 138 churches were sold by banks, an annual record, with no sign that these religious foreclosures are abating, according to CoStar. That compares to just 24 sales in 2008 and only a handful in the decade before. The church foreclosures have hit all denominations across America, black and white, but with small to medium size houses of worship the worst. "Churches are among the final institutions to get foreclosed upon because banks have not wanted to look like they are being heavy handed with the churches,"

Undocumented Foreclosure Victim Deported After Protesting Illegal Foreclosure - The foreclosure defense group of Occupy Los Angeles brings us the story of Blanca Cardenas. Cardenas is undocumented with two US-born children and a US citizen husband, and has been in the country for over 15 years. She took out a mortgage eight years ago on a home in North Hollywood. For the past year, Cardenas has been fighting a foreclosure by Bank of America that she and other activists deemed illegal, due to fraudulent paperwork, as well as an imminent federal bankruptcy, which is supposed to forestall eviction. But the foreclosure went to auction, and Cardenas faced eviction. Two weeks ago, Cardenas and some Occupy movement members protested the eviction with a direct action on her front lawn. Farahmand allegedly initiated a citizens arrest, prompting the LAPD to take Cardenas into custody (Occupy LA alleges that LAPD didn’t even have jurisdiction over an eviction of this type; the LA County Sheriff’s Department does). Then, they traced back Cardenas’ immigration status, and turned her over to Immigration and Customs Enforcement.  Despite there being a standing order not to deport any undocumented immigrant who doesn’t have a criminal record, a week later, ICE deported Cardenas to Mexico, separating her from her two children, one of whom is 17 months old.

Lenders increasingly allow the foreclosed to stay - Forced by the harsh realities of the real estate market, lenders are increasingly likely to allow defaulting owners to remain in their homes — a change in attitude and strategy that is helping to buoy some neighborhoods while further slowing the nation’s foreclosure process. Some lenders are now willing to make deals with owners to let them stay after defaulting, offering to pay home insurance, for example, while the resident pays for utilities. Other lenders simply look the other way, quietly putting off foreclosure sale dates, knowing that the costs of the ordeal probably exceed the diminishing value of the properties. The evolution in thinking was perhaps inevitable, experts say. Across the country, more than 644,458 properties were lingering in bank ownership at the end of January, but even more — some 710,725 — were coming down the foreclosure pipeline, according to RealtyTrac, a real estate and foreclosure analysis firm. In addition, states and municipalities have grown more aggressive in the last few months in trying to force banks to maintain foreclosed properties, which have become blights on neighborhoods from coast to coast.. “Under normal circumstances, the banks would be able to cover the cost of maintenance, upkeep and property taxes by just reselling the property, but these are desperate times, and banks are resorting to somewhat desperate measures in some cases,” 

Lawler: Maryland and Foreclosures: Living for Free in the Free State? - Yesterday the Washington Post carried two stories on foreclosures that are definitely worth reading. One is entitled “We don’t believe in living for free: Md. couple fight foreclosure on million-dollar home for years without ever making a payment”. It basically chronicles how a Maryland couple (who were real-estate speculators) were (amazingly) able to buy a million dollar plus home with no money down in 2006 (getting a million dollar first mortgage from a now defunct Mississippi lender and a second mortgage from another lender) for their primary residence, and who have not made a mortgage payment in five years. They’ve been able to do this by “using every tactic in the book” to hold off foreclosure. It is a good but disturbing article, and can be read at A million-dollar mortgage goes unpaid for years while couple fights foreclosure. You will probably be amazed that the couple, one of whom was convicted of bankruptcy fraud (related to real estate transactions) in 2000, agreed to be interviewed for the article. These people bought the house with no money down and never made a single mortgage payment. It would NOT be a tragedy if they lost "their" house. Prior to the Depression, people usually put 50% down and financed their homes for 5 years with a balloon payment. During the Depression they couldn't refinance even if they could make their payment. Losing their homes WAS a tragedy. There is no comparison to this couple in Maryland.

Freddie Mac: REO inventory declines 16% in 2011 - This morning Freddie Mac reported results for Q4 and all of 2011. Freddie reported that they acquired 98,631 REO in 2011 (Real Estate Owned via foreclosure or deed-in-lieu), down from a record 128,238 in 2010. Fannie disposed of a record 110,175 REO, up from 101,206 in 2010. Since Freddie disposed of more REO than they acquired, Freddie's REO inventory fell 16% in 2011. Here is a table for the last two years: The following graph shows REO inventory for Fannie, Freddie and the FHA. REO inventory for Freddie increased slightly in Q4, but declined 16% in 2011. The combined REO inventory for Fannie, Freddie and the FHA declined 28.5% in 2011. A few comments from Freddie: Our single-family REO acquisitions in 2011 were most significant in the states of California, Michigan, Georgia, Florida, and Arizona, which collectively represented 43% of total REO acquisitions based on the number of properties. These states collectively represented 48% of total REO acquisitions in 2010. The states with the most properties in our REO inventory as of December 31, 2011 were Michigan and California. At December 31, 2011, our REO inventory in Michigan and California comprised 12% and 10%, respectively, of total REO property inventory, based on the number of properties.

The New Growth Business: Becoming a Landlord - After years of losses and disappointments, those hoping to make a buck in U.S. real estate are back. Investors from Warren Buffett to mega financiers like GTIS Partners to small-time wholesalers are looking to cash in on the U.S. housing market. Though home prices have continued to fall in most parts of the country, a rapidly improving rental market has prompted many investors to become landlords. 2011 was a banner year for rentals because of improving demand, slow growth in new apartment construction, and low interest rates, according to a January report from real estate research firm Green Street Advisors. U.S. Labor Department data show that rents rose 2.5 percent last year. For 2012, Green Street predicts growth in monthly rents of 3 to 7 percent, depending on the local market. That plus lower prices have made distressed properties look much more appealing this year, say real estate insiders. The median price that investors paid in 2011 for a house was $95,000, almost 11 percent less than in 2009, according to numbers from the National Association of Realtors (NAR). With prices down and rents up, buy-and-hold investors—those who purchase, fix up, and then rent out houses—are more likely to see positive cash flow.

Housing: Year over Year change in Asking Prices - Earlier today I noted that existing home inventory, according to HousingTracker, is down 20.5% year-over-year in early March.  I mentioned that HousingTracker / DeptofNumbers also report asking prices for 54 markets, including the median, the 25th percentile, and the 75th percentile. Note: NDD at the Bonddad blog has been watching asking prices since last year. According to housingtracker, median asking prices are up 3.9% year-over-year in early March. We can't read too much into this increase because these are just asking prices, and median prices can be distorted by the mix. As an example, the median asking price might have increased just because there are fewer low priced foreclosures listed for sale. But with those caveats, here is a graph of asking prices compared to the year-over-year change in the Case-Shiller composite 20 index.The Case-Shiller index is in red. The brief period in 2010 with a year-over-year increase in the repeat sales index was related to the housing tax credit (notice that asking prices showed a small year-over-year declines before Case-Shiller increased since Case-Shiller is for closed transactions). Also note that the 25th percentile took the biggest hit (that was probably the flood of low end foreclosures on the market).

CoreLogic: House Price Index declined 1.0% in January to new post-bubble low - Notes: This CoreLogic House Price Index report is for January. The Case-Shiller index released last week was for December. Case-Shiller is currently the most followed house price index, however CoreLogic is used by the Federal Reserve and is followed by many analysts. The CoreLogic HPI is a three month weighted average of the last three months and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic® January Home Price Index Shows Sixth Consecutive Monthly Decline [CoreLogic January Home Price Index (HPI®) report] shows national home prices, including distressed sales, declined on a year-over-year basis by 3.1 percent in January 2012 and by 1.0 percent compared to December 2011, the sixth consecutive monthly decline. Excluding distressed sales, year-over-year prices declined by 0.9 percent in January 2012 compared to January 2011, but that same metric posted a month-over-month gain, rising 0.7 percent in January. This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index is off 34% from the peak - and is now at a new post-bubble low. The second graph is from CoreLogic. As Mark Fleming noted, the year-over-year declines are getting smaller. Some of this decline was seasonal (the CoreLogic index is NSA) and month-to-month price changes will probably remain negative through March 2012. Last year prices fell about 2.5% from January 2011 to March 2011, and there will probably be a similar decline this year.

LPS: House Price Index declined 1.0% in December - The timing of different house prices indexes can be a little confusing. LPS uses December closings - other indexes usually report sales recorded in a month, and there is frequently a lag between closings and recording - so this is closer to what other indexes report for January (without the weighting of several months). From LPS: LPS HPI Shows U.S. Home Prices Accelerated Decline to 1.0 Percent in Dec.; Early Data Suggests 1.2 Percent Drop in Jan. Likely, The LPS HPI national average home price for transactions during December 2011 reached a price level not seen since September 2002. This is the sixth consecutive month of price decreases. ... Price changes were largely consistent across the country during December, increasing in only 8.0 percent of the ZIP codes in the LPS HPI. Of the 411 MSAs the LPS HPI covers, average prices declined for all of the MSAs (374) in 44 states. In addition, while average prices did not decline for all MSAs in the remaining states, prices fell in a total of 402 MSAs out of the LPS HPI 411. This is a 3.9% year-over-year change for this index, and LPS expects that the year-over-year change in January will be smaller (around 3.6%) Click on graph for larger image. This graph from LPS shows the HPI since January 1995. The index was down 1.0% in December, and is down 3.9% over the last year. The index is off 31% from the peak - and is now at a new post-bubble low.

LPS Home Price Index Shows U.S. Home Prices Accelerated Decline; Psychology Change and Demographics Suggests Bubble Mentality Shattered for Decades to Come - U.S. home prices declines to a new low for the move and are back to a level last seen in September-October 2002 according to a LPS News Release. The LPS HPI national average home price for transactions during December 2011 reached a price level not seen since September 2002. This is the sixth consecutive month of price decreases. Price changes were largely consistent across the country during December, increasing in only 8.0 percent of the ZIP codes in the LPS HPI. Price changes were also consistent across price tiers with a uniform decline of 1.0 percent. “Despite the broad picture of home price declines following the bubble, prices have not been consistently declining for all MSAs in the country. About one-fifth (89) of all the MSAs that LPS covers has seen average home prices increase since December 2008,” commented Dosaj. “For 90 percent of these MSAs, prices rose only if the lowest-priced homes in their markets rose. This correlation did not necessarily hold for higher-priced homes in those areas.

Lawler: 31% of FHA loans in negative equity - In CoreLogic’s “Negative Equity Report” for December 2011, the company estimated that properties backing a conventional mortgage that were in a negative equity position had an average mortgage balance of $269,000 and were “underwater” on average by $70,000. For properties backing FHA-insured mortgages that were in a negative equity position, the average mortgage balance was $169,000 and the average negative equity amount was $26,000. What the press release didn’t say, however, is what percent of properties backing FHA-insured mortgages in its database were in a negative equity position (it gave the number, but its database does not include all mortgages). CL was nice enough to give me that figure – according to CL, 31% of the properties in its database backing FHA-insured mortgages were in a negative equity position in December. That compares to 21.8% for properties backing non-FHA mortgages.

Fitch: Home Prices to Fall Another 9.1% Before Reaching Sustainability -Home prices across much of the country are still overvalued, but the gap is narrowing, according to Fitch Ratings’ latest quarterly market update. The agency has revised its Sustainable Home Price (SHP) model, and the results show that residential property values are now on track to fall an additional 9.1 percent nationally before arriving at a level that is supported by market fundamentals. The rating agency’s expectations have improved since it forecast a further decline of 13.1 percent last quarter. When considering the impact of inflation, the projected drop in home prices shrinks to roughly 6 percent, Fitch explained. The reason for the improved projection? Fitch sees evidence of the market’s ongoing self-correction in home prices, as well as stronger macro indicators such as unemployment and GDP growth. That said, Fitch stresses that it’s still a long and difficult road ahead to get back to pre-recession levels. Though home prices are falling nationally, price movement in some regional markets is still quite volatile due to the volume and pace of distressed sales being processed. Housing markets in Arizona, Nevada, and Michigan are experiencing steeper corrections, which are driving higher home price volatility, Fitch explained. Other markets, including much of the Northeast, continue to see a more gradual decline due to foreclosure delays and fewer distressed liquidations. The pace of liquidations will continue to be a key driver of the timing of declines across markets, according to the rating agency.

Existing Home Inventory declines 21% year-over-year in early March - I've been using inventory numbers from HousingTracker / DeptofNumbers to track changes in inventory. Tom Lawler mentioned this last year.According to the for monthly inventory (54 metro areas), is off 20.5% compared to the same week last year. Unfortunately the deptofnumbers only started tracking inventory in April 2006. This graph shows the NAR estimate of existing home inventory through January (left axis) and the HousingTracker data for the 54 metro areas through early March. Since the NAR released their revisions for sales and inventory, the NAR and HousingTracker inventory numbers have tracked pretty well. Seasonally housing inventory usually bottoms in December and January and then starts to increase again through mid to late summer. So inventory should increase over the next 6 months. The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker. HousingTracker reported that the early March listings - for the 54 metro areas - declined 20.5% from the same period last year. The year-over-year decline will probably start to slow since listed inventory is getting close to normal levels. Also if there is an increase in foreclosures (as expected), this will give some boost to listed inventory. This is just inventory listed for sale, sometimes referred to as "visible inventory".

Some more comments on Housing Inventory - Jon Lansner at the O.C. Register has some comments from Orange County broker Steve Thomas on inventory: Fewest O.C. homes for sale since 2005 "Turn back the clocks to August 2005 to find a lower inventory. At the very beginning of the year, the active listing inventory stood at 8,114 homes. It was a good beginning compared to 2011 with nearly 1,900 fewer listings on the market. There was a subtle sense that something was different right after bringing in the New Year. Since then, the market has shed 925 homes and now stands at 7,189, 33% fewer than last year. To shed homes during this time of year is totally unprecedented during this downturn. It is much more of what we would see during a hot, appreciating market, reminiscent of 2004 and 2005. The sharp decline in inventory is happening just about everywhere. Some of this is because there are fewer foreclosures listed for sale, and some is probably because many potential sellers are "waiting for a better market". Last month I posted a few reasons for the decline: Comments on Existing Home Inventory. I concluded: "The bottom line is the decline in listed inventory is a big deal, and will lead to less downward pressure on prices. Just like last year, inventory will be something to watch closely all year."

How ‘Shadow Inventory’ Is Killing the Housing Market - Recently, there have been lots of positive signs coming out of the real estate market. Foreclosure rates are down, housing starts are up, and homes have appreciated in value in some markets for the first time since 2006. Even so, two reports surfaced last week indicating that, for the nation as a whole, home prices dropped by 3.5% to 5% in 2011. And one factor hurting the prices of homes that are for sale is the enormous number of homes that aren’t for sale — but that should be. The Case-Shiller housing index was released last week, stating that home prices had dropped 3.7% in 2011, compared with the previous year. CoreLogic, a real estate research firm, also recently released a report estimating that prices had dropped in 2011 — by 5%. Most housing experts agree: prices won’t rise until all distressed inventory (a.k.a. foreclosures and short sales) is moved through the market. Distressed sales keep prices low because banks want to get rid of such properties asap, and they’re willing to sell at a loss so long as the homes are out of their hands.

Gasoline prices didn’t cause the housing crash - Calling for the United States to aggressively tap domestic energy sources, Rick Santorum said Monday that the nation’s economic crisis four years ago was caused by high gas prices. “We went into a recession in 2008 because of gasoline prices. The bubble burst in housing because people couldn’t pay their mortgages because we’re looking at $4 a gallon gasoline,” he said. “And look at what happened: economic decline.” Any self-respecting economist, upon seeing this kind of logic, should and would run very far in the opposite direction. Unless, of course, that economist’s name is Steve Sexton. Santorum’s remarks “may sound far-fetched”, he writes, “but it is precisely the theory that I and a pair of coauthors presented in a working paper released five days before Santorum’s remarks.” Oh dear. Both the paper and Sexton’s blog post are titled “How High Gas Prices Triggered the Housing Crisis”, and both are very silly. Sexton actually articulates the Santorum Strategy in his blog post: While the prevalence of risky loans made the housing market susceptible to collapse, had home prices kept rising in 2007, instead of turning down, rising home equity could have been used to renegotiate risky loans, thereby concealing and even resolving the market weaknesses.

Remember the Housing Bubble? - While paging through some CoreLogic data on negative home equity—that, of course, is what you’re left with when you owe more on your home than what it is worth—I was reminded of the extent to which this still, after all these years, remains a factor weighing on both people’s economic security and the recovery. Aggregating across the nation, about 23% of mortgages are underwater, according to CoreLogic, but as the figure shows, there’s great variation across states, from 61% in Nevada to about 6% in NY. (Btw, “near negative equity” refers to mortgages within 5% of negative equity.) Yet, we still hear people claiming that it’s the unions who tanked the economy, or regulation, or taxes, or the deficit, or resentment of rich people. That’s all complete bunk and I can prove it… Suppose you compare changes in state unemployment rates, 2007-2010, against the negative equity shares in the graph (it might be better to use changes in home prices by state, but the states with the most negative equity are the states where home prices fell the most). As shown in the figure, you actually get a tight fit. The coefficient on negative equity has a t-statistic of 6.3 (highly significant) and that one variable explains 49% of the variation in unemployment rates across states.

Fed's Flow of Funds: Household Real Estate Value declined $213 billion in Q4 - The Federal Reserve released the Q4 2011 Flow of Funds report today: According to the Fed, household net worth peaked at $66.8 trillion in Q2 2007, and then net worth fell to $50.4 trillion in Q1 2009 (a loss of $16.4 trillion). Household net worth was at $58.5 trillion in Q4 2011 (up $8.0 trillion from the trough, but still down $8.4 trillion from the peak). The Fed estimated that the value of household real estate fell $213 billion to $15.96 trillion in Q4 2011. The value of household real estate has fallen $6.75 trillion from the peak - and was still falling at the end of 2011. This is the Households and Nonprofit net worth as a percent of GDP. This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). This graph shows homeowner percent equity since 1952. Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008. In Q4 2011, household percent equity (of household real estate) was at 38.4% - down slightly from Q3, and only up slightly from the all time low of 37.2% in Q1 2009. The third graph shows household real estate assets and mortgage debt as a percent of GDP. Mortgage debt declined by $42 billion in Q4. Mortgage debt has now declined by $777 billion from the peak. Studies suggest most of the decline in debt has been because of foreclosures (or short sales), but some of the decline is from homeowners paying down debt (sometimes so they can refinance at better rates).

Household Net Worth: The ''Real'' Story - A quick glance at the complete quarterly data series in linear chart suggests a bubble in net worth that peaked in Q2 2007 with a trough in Q1 2009, the same quarter that the markets bottomed. The latest Fed balance sheet shows a total net worth that is 15.9% above the 2009 trough but still 12.5% below the 2007 peak. The positive news in the Q4 balance sheet is that real total net worth has increased 2.1% from Q3 of 2011, although the year-over-year number is a fractional decline of 0.6%. But there are problems with this analysis. Over the six decades of this data series, total net worth has grown by 5000%. A linear vertical scale on the chart above is misleading in its failure to provide an accurate visual illustration of growth over time. It also gives an exaggerated dimension to the bubble that began in 2002. But there is another problem, one that has to do with the data itself rather than the method of display. Over the same time frame that net worth grew 5000%, the value of the 1951 dollar shrank to about 10.5 cents. The Federal Reserve gives us the nominal value of total net worth, which is significantly skewed by money illusion. Here is my own log scale chart adjusted for inflation using the Consumer Price Index. Let's now zoom in for a closer look at the period since 1980. I've added some callouts to highlight where we are currently with regard to the all-time peak and 2009 trough.

Canceled credit card debts come back to haunt taxpayers - Billions of dollars in credit card debt that was charged off during the Great Recession— some of it decades old — is coming back to haunt borrowers in the form of unexpected tax bills. Debt that is canceled or forgiven is considered taxable income, something many borrowers don't realize until they receive a 1099-C tax form from their lender. The IRS projects that creditors will send taxpayers 6.4 million 1099-Cs in 2012, up from 3.9 million in 2010. The increase likely reflects the rise in credit card defaults during the economic downturn, says Gerri Detweiler, personal finance expert for Moody's Investor Service estimates that the nation's six largest credit card companies wrote off more than $75 billion in uncollectible balances in 2009 and 2010. Taxpayers who receive a 1099-C, which is also submitted to the IRS, are liable for the tax bill unless they can prove that the debt was discharged in bankruptcy or that they were insolvent when the debt was canceled, says Jennifer MacMillan, an enrolled agent in Santa Barbara, Calif.

Personal Saving Rate and Income less Transfer Payments - By request, a couple more graphs based on the January Personal Income and Outlays report. The first graph shows real personal income less transfer payments in 2005 dollars. This has been slow to recover - real personal income less transfer payments increased 0.2% in January. This remains 3.9% below the previous peak in early 2008. Personal current transfer receipts decreased $3.6 billion in January, in contrast to an increase of $13.8 billion in December. The January change reflected 3.6-percent cost-of-living adjustments (COLAs) to social security benefits and to several other federal transfer payment programs. Together, these COLAs added $30.2 billion to the January increase in government social benefits to person  The second graph is for the personal saving rate.  The saving rate decreased to 4.6% in January. Personal saving -- DPI less personal outlays -- was $540.6 billion in January, compared with $552.1 billion in December. The personal saving rate -- personal saving as a percentage of disposable income -- was 4.6 percent in January, compared with 4.7 percent in December. This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the January Personal Income report.  After increasing sharply during the recession, the saving rate has been moving down for the last two to three years - so spending growth has increased a little faster than income growth.

Where Personal Income Comes From - A little breakdown on Personal Income growth. The top redline is our primary line of interest. This is wage and salary disbursements of private industries. As we can see they are now growing smartly and indeed are well above their pre-recession peak, 5670B vs. 5484B for growth of 186B Small business income in blue, completed most of its bounce back about 18 months ago – somewhat startling to me it was the first to recover. However, growth since then has been slow, though growth before the recession was slow as well. The peak month for small business income was December 2006. This is likely because so many small businesses are construction firms. I have looked at the breakdown but I am guessing small business income is split between restaurants and contractors. If that’s true it would be consistent with the notion that resterauntuers are doing well but the contractors haven’t recovered from the bust in 2005. The light green line is government transfers. This is providing the strongest contraction in personal income. Government transfer payments peaked on December 2010 declining by about 30B to November 2011, though there was a bounce back in December 2011. Wages and salaries for government employees peaked in May of 2010 and have declined about 10B since then. The biggest story of the period is in rental income. Rental income hit its nadir in February of 2007 at 120B and has staged and astounding roar back. Its been growing pretty much non-stop since then hitting 437B for a total growth of 317B. Of course, that’s over a fairly long period.

Vital Signs: Incomes Adjusted for Inflation - Americans had a little less money to spend in January. Inflation-adjusted per capita personal disposable income, which is measured after taxes, edged down a bit in January from December, the Commerce Department said. Income growth has been modest in the past year, while consumer prices, including gasoline costs, are running higher recently. That is restraining consumer spending, which rose slightly in January.

Finally, Proof (Real Proof, not Just Data) of What Inflation has done to Our Economy - Anyone who has ever risked blogging about inflation knows there are two kinds of commenters out there. First, there are those who are sure that inflation, although quiet lately, is poised for a big breakout that will destroy the economy. Second, there are those who are sure inflation has already done so, and that anyone who believes government data to the contrary is a real sucker. This post is for the benefit of the second group. I’ve based it on material from a wonderful website,, that I ran across by chance while doing research for the national accounts chapter of my econ textbook. The site archives full-color, page-by-page images of dozens of old mail order catalogs from as far back as the 1930s. Here is my data-free test for what inflation has really done to us: If you could choose between shopping on line today at today’s prices, or buying from a mail order catalog of the past at past prices, what items, if any, would you buy from the past? If the past looks like a shopper’s fantasyland to you, then you are right, inflation has ruined our country. If not, then maybe the good old days weren’t quite as good as we remember them.

The VMT Puzzle - Matt Yglesias has a bit more on the VMT puzzle and offers the ecommerce hypothesis and caveat. Virtually 100 percent of the rebound in retail sales has come from online shopping, meaning that a certain amount of pre-recession car trips have been permanently replaced by the Internet. On the other hand, delivery trucks count as vehicle miles traveled so I’m not sure how far this line of thinking gets us. My thoughts are:

  • 1) A miles-per-dollar of retail argument is not hard to make because it seems highly likely that on average a delivery truck is stocked with a higher value of merchandise than a household vehicle out for shopping. That’s the key stat you need – what the average inventory value of the moving vehicle. It seems pretty clear that a deliver trucks wins on this measure.
  • 2) The unanswered question though is whether or not total vehicle miles traveled per GDP declines in the steady state. Or, is the increase in delivery truck effeciency offset by a decline in household effeciency.

Consumer Most Upbeat Since Fall 2008, RBC Survey Says - U.S. consumers in March are the most upbeat since September 2008, according to a survey released Thursday. The Royal Bank of Canada said its consumer outlook index this month increased to 47.5 from 45.1 in February. The latest reading was the highest since September 2008, just as the U.S. was falling into the financial crisis. The RBC current conditions index advanced to 37.7 from 34.1. The labor market was one reason for the better reading on the current economy. The Jobs Index jumped to 57.0 from 52.1 in February. RBC said it was the highest job index since December 2007, the start of the last recession. Consumers, however, were more downbeat about the future. The expectations index fell to 55.7 in March from 58.0 last month. With gasoline prices rising, consumers also see more pricing pressures. The inflation index surged to 78.3 in March from 74.2 last month. In a series of special questions, RBC asked about tax refunds and homeownership. The survey found 61% of respondents expect some type of tax refund this year. Of those expecting refunds, 24% plan to spend the money while 26% expect to save it. The rest expect to do a little of both.

Consumer borrowing nearly at pre-recession levels -- Consumer borrowing rose by $17.8 billion in January, the Federal Reserve said Wednesday. That followed similar gains in December and November. The gains for those three months were the largest in a decade and helped consumer borrowing climb to a seasonally adjusted $2.5 trillion. That nearly matches the pre-recession borrowing level. The January increase was driven by a $20.7 billion increase in a category that mostly measures demand for auto and student loans. It was the biggest increase for that category since November 2001. Borrowing on credit cards fell $2.9 billion in January after four months of gains. Many economists believe the rise in borrowing is a sign that consumers are feeling more confident about the economy. But consumers are also borrowing more at a time when their wages have not kept pace with inflation.

Household debt rises for first time in 3-1/2 years - (Reuters) - Household debt rose for the first time in three and a half years during the fourth quarter, suggesting Americans were more comfortable borrowing money and potentially laying the groundwork for higher consumer spending. The data released on Thursday by the Federal Reserve also showed household wealth increasing by $1.2 trillion, which could also support spending. The report showed the ratio of U.S. household debt to after-tax income fell in the fourth quarter to the lowest level since 2004. Total household liabilities were 117.5 percent of disposable income during the October-December period, down from 118.2 percent in the previous quarter, according to Reuters' calculations based on the Fed's "Flow of Funds" report. Consumer credit swelled by 6.9 percent during the October-December period. Households continued to shed mortgage debt, which makes up the majority of their liabilities and declined at a 1.5 percent annual rate. The pace of the decline in mortgage debt was the slowest in two years.

Surging Student Debt Pushes Up Overall Consumer Credit - U.S. consumer credit expanded in January, driven largely by a surge in federal student loans. Consumer credit outstanding expanded by $17.78 billion to $2.512 trillion, Federal Reserve data showed Wednesday. The rise followed big gains in November and December. Economists surveyed by Dow Jones Newswires had forecast an $11.00 billion increase. Nonrevolving credit–which includes student loans–was up $20.72 billion, to $1.711 trillion, the biggest dollar increase since November 2001. Federal student credit outstanding rose to $453 billion in January from $425 billion in December. The figure is up more than four-fold from 2008–a sign high joblessness in the U.S. has prompted many people to go back to school. Revolving credit, which includes credit-card debt, decreased in January by $2.95 billion, to $800.85 billion. December revolving credit rose a revised $3.65 billion. The consumer-credit report doesn’t include numbers on home mortgages and other real-estate secured loans. But the Fed data are important for the clues to behavior by consumers, whose spending helps propel the economy.

January Consumer Credit Surges As Government Blows Student Debt Bubble To Epic Proportions - One look at the just released consumer credit data would make one believe that the US consumer is getting back into it and the velocity of money is finally starting to ramp up: after all the headline January number came at a whopping +$17.8 billion on expectations of +10.5 billion. Nothing could be further from the truth. As the first chart below demonstrates, January revolving credit, as in that used on one's credit card, actually declined by $2.9 billion compared to December, and was back to $800.9 billion: the first decline in 4 months as consumers spend less following an already weak holiday season. Yet offsetting this was an absolutely massive surge in Non-revolving credit, i.e., mostly student debt, which soared by $20.7 billion in the month, the highest sequential jump in this category in history, leading to a very misleading print of a major increase in credit. For earlier observations on the soaring student loan bubble see here. And it gets worse: when spread by sources of credit, the only place where credit came from was the US government, which funded a near record $28 billion, all of it going into student loans, even as every other source of credit declined in the month! If this is not the most blatant gaming of headlines, we don't know what is. But yes, America's lucky students get ever deeper into debt slavery, only to realize upon graduation that there are no jobs that pay high enough to allow them to pay off this debt. Thank you uncle Sam - may we have another bubble.

The crisis of solvency – peak debt, peak food stamp usage, and massive financial deception by media. The faux economy of solving a solvency issue with more debt. Job postings up but hiring flat. The economy is largely running on a solid amount of debt, Orwellian news, and selective perception. Take for example the absolute lack of coverage on our peak debt situation. The media simply assumes that going over the $15 trillion mark on national debt was somehow a story not worth reporting. The total amount we have taken on in borrowing is larger than our annual GDP yet countries around the world are being chastised for this exact problem. Or what about the peak number of Americans now on food stamps? One out of every seven men, women, and children is now on food assistance at well over 46,000,000. You get food assistance when you are economically scraping by. Yet the media is largely absent on this story. We are living in a crisis of solvency and much of the recent recovery is simply a choice of ignoring glaring issues of solvency.

3 Charts On The US Consumption Crash Dead-Ahead - Average US gas prices are over 13% higher since late December 2011, back at June 2011 levels, and do not look set to drop any time soon. The anecdotal impact of this rise in a significant segment of the real US consumer's spending habits is unmistakable, as we discussed earlier, but it is more important to note where we have come from when considering the macro impact. Q4 macro data was 'juiced' by the significant drop in the price of energy as the 4-5pt drop in Energy-and-Utilities spend enabled 'visible' consumption to rise during that time (obviously helped by government handouts also). Just as occurred in the latter part of 2008, as the consumer was forced to spend more on Energy, so the visible consumption dropped notably and given the significance of the current data 'drop' in energy spending, when the current gas prices filter into this data, we would expect, as Credit Suisse points out, consumption on more discretionary spending will drop significantly.

In a slippery spot over pump prices - One of Barack Obama’s finest moments in the long campaign of 2008 was when he mocked Hillary Clinton and John McCain’s call for a “gas tax holiday” to curb rising petrol prices. “It’s a stunt,” Mr Obama said before the primaries in North Carolina and Indiana, where Mrs Clinton was making her final stand. “It’s what Washington does.” Four years later, America faces the prospect of another summer of rising prices and an election that could hinge on how far they go. The world oil price has risen by almost 30 per cent since October. A further jump of 20 per cent would take it above $150 a barrel, which would endanger America’s recovery. In the past few days US pump prices have been inching towards $4 a gallon – a traditional panic threshold for consumers and therefore also politicians. How big a menace does this pose to the president’s re-election prospects? And what, if anything, can he do about it? The threat to Mr Obama is political and economic. On the politics, voters have recently started to complain. Last week, two-thirds of those polled told CBS that their finances had been hit by recent price increases, of which almost 40 per cent reported their hardship was “serious”. More ominously for Mr Obama, a large majority said the president has the power to do “something significant” about it – in Mr Obama’s dreams, one imagines.

Weekly Gasoline Update: Premium Now Above Four Dollars - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data with an overlay of West Texas Crude (WTIC). Gasoline prices at the pump, both regular and premium, increased 7 cents over the past week, continuing their steady increase since mid-December. Regular is up 56 cents and premium 54 cents from the interim weekly low in the December 19th EIA report. In fact, the US average for premium is now above $4.00. WTIC closed today at 107.04. It is 6.0% off its 2011 interim high, which dates from early May 2011. As I write this, shows three states, Hawaii, Alaska and California, with the average price of gasoline above $4 and another 6 states with the price above $3.90. The next chart is an overlay of WTIC, Brent Crude and unleaded gasoline (GASO). During much of last year there was a growing spread between WTIC and Brent Crude, but over the last quarter that spread has shrunk considerably.

Vital Signs: Upward Trend in Gas Prices - Drivers are paying more at the pump than they were just a few days ago. The U.S. government reported that the average price of a gallon of regular gasoline rose more than seven cents to $3.79 during the past week. The price has climbed nearly 50 cents since Jan. 2. Some analysts worry that rising energy prices could undermine the economic recovery.

Gas Prices Spiked By Speculators, Congressmen Claim - Excessive speculation in the oil futures market may be costing you 15 percent or more at the gas pump and playing a "significant" role in rising gasoline prices, according to a joint letter from 68 members of Congress that ABC News has obtained.  The joint letter, which cites a recently updated report by the St. Louis Federal Reserve titled "Speculation in the Oil Market," urges immediate action by the Commodity Futures Trading Commission to install caps on the biggest traders on Wall Street, preventing them from controlling unusually large positions in the oil futures trading market.  The Reserve's report called "Speculation in the oil market," which was just updated in February 2012, concluded there are two main factors for large price swings at the gas pump.  It says "global demand shocks," such as those caused by turmoil in the Middle East, "account for the largest share of oil price fluctuations."  The report also concludes "speculation played a significant role in the oil price increase between 2004 and 2008 and its subsequent collapse. Our results support the view that the financialization process of commodity markets explains part of the recent increase in oil prices."  Sen. Bernie Sanders, an Independent from Vermont, has pushed for reform on Wall Street for years. He says the Federal Reserve report is significant.

Reasons Why Gasoline Prices are so High - Here in northern California gasoline is now retailing for $4.20 a gallon. Prices haven’t been this high since mid-2008. Forecasts for $5 per gallon gas in the US this summer are now commonplace. What’s driving prices up? Most analysts focus mostly on two factors: worries about Iran and increased demand from a perceived global economic recovery. However, as we will see, there are also often-overlooked systemic factors in the oil industry that almost guarantee us less-affordable oil. Costs of production are rising inexorably—and fairly rapidly—as a result of replacement of conventional crude with oil produced from horizontal drilling and hydro-fracturing, ultra deep-water drilling, and tar sands. Only a decade ago, a world oil price of $20 per barrel evidently provided plenty of incentive for the industry to develop new supply sources, as total global production continued to increase year after year. Today, most new projects look uneconomic if oil prices are anything shy of $85. Ironically, pundits often depict this shift as a miraculous new development that promises oil aplenty till kingdom come..

What Most Economists Get Wrong About The Rise In Gas Prices: Experience has always been the best teacher if life, love and money. Those that tend to disregard what experience has tried to teach them are often doomed to repeat the same mistakes over and over again. Yet, when it comes to economists, analysts and investors, past experience is something that is readily set aside when it disagrees with the overwhelming power of greed. For example, over the past couple of weeks there have been numerous articles posted about how the recent rise in oil and gas prices either haven't, or won't, affect the economy "this time". What is generally wrong with the analysis is the context from which the assumptions are made. What experience teaches us is that there is a lag effect between the consumer and higher oil and gasoline prices. Unfortunately, most economists, analysts, and investors fall victim to the "immediacy trap". The trap is assuming that just because an uptick in oil and gas prices doesn't create an immediate downtick in retail spending - "this time must be different." In reality, what experience teaches us, is that there is lag effect between the direction of oil and gas prices and retail spending.

Magic number for gas prices $5.30 a gallon, poll finds - The recent spike in gas prices has caused plenty of griping about pain at the pump, but a new survey finds that it’s going to take a much bigger jump before many people start rethinking their spending habits. A Gallup poll released Thursday found that, on average, gas prices would have to hit $5.30 before people would be forced to make significant cutbacks in other types of spending. The survey, conducted just a few days ago, also found that, on average, Americans said they would be forced to make significant changes in how they lived their life only if gas hit $5.35 a gallon. Still, that means about half of Americans would have to start making significant changes in their spending or other habits long before we hit $5-a-gallon gas.

Factors That Could Make $5 A Gallon Gas The Norm - It is hard to miss the recent rise in gasoline (gas) prices in the United States, and the rumblings that it has generated in the national press. Today they have risen for the 23nd straight day with prices about $0.30 above what they were a month ago. The Administration does not seem, however, concerned. Even though the economy is somewhat stronger than it was a year ago, the demand for gas is still down around 400 kbd. (8.746 against 9.101 mbd). In a more conventional market decreasing demand, against constant supply would lead to a fall in prices. That is not likely to happen, and in part this is because the USA only provides a part of the global market where the demand from the developing countries (as Stuart Staniford has noted) is steadily increasing. China, for example, is growing its oil demand at slightly more than 5% p.a. (0.51 mbd y-o-y for December growth) and has reached a total consumption of 9.3 mbd. It is also slowly starting to build its own reserve of oil and has been buying additional oil for that reason. How long that will continue this year is one of those questions to which there is no clear answer, although, since it is apparently buying heavier and higher sulphur crude and it may be acquiring those crudes that Saudi Arabia has previously had problems selling.

U.S. gasoline demand down 6.5 pct yr/yr -MasterCard (Reuters) - U.S. retail gasoline demand fell 1.5 percent last week and was also down 6.5 percent compared with the same week last year, as prices at the pump shot up, MasterCard said in its weekly SpendingPulse report on Tuesday. A gallon of gasoline on average sold in the week to March 2 for $3.75 across service stations in the country, 15 cents higher than in the previous week and 9.3 percent more expensive than a year ago. The four-week moving average demand dipped for the 50th straight week, down 6.3 percent from a year ago. MasterCard Advisors, a unit of MasterCard Inc, estimates retail gasoline demand based on aggregate sales in the MasterCard payments system coupled with estimates for other payment forms including cash and checks.

Another Plunge in 3-Month Rolling Average of Petroleum and Gasoline Usage - The following chart shows U.S. petroleum and gasoline usage for December-February compared with the same three months in prior years. Chart is courtesy of reader Tim Wallace. Note that petroleum usage is back to December 1995 thru February 1996 levels. Gasoline usage is back to December 2001 thru February 2002 levels. All data derived directly from the Data 10 section of the EIA download. The daily average of each week in the listed month adds to the monthly total. Some months have four weeks others five, but over three months this tends to average out. Contrary to popular belief, the decline in gasoline usage has little or nothing to do with cash-for clunkers or improved gas mileage in cars unless one fantasizes that gas mileage improvements started precisely in 2007. Wallace comments "If this trend lasts for the rest of the year, Obama's stated goal of a 15% reduction in greenhouse gases based off 2005 numbers may be met this year instead of his 2015 goal." Should that happen, I wonder how many will be happy with the economic result.Gasoline Prices and the Unemployment Rate - A story in two pictures, covering January 1976 (the earliest year for which we have average inflation-adjusted monthly retail motor gasoline prices in the U.S.) through February 2012:  Now the exact same data, but this time, with the data for average inflation-adjusted monthly retail motor gasoline prices shifted two years forward in time (to the right):

Oil, Cars and Recession - Jim Hamilton does the patterns. I try to tell the stories. There is of course the energy expenditure story, which I have tried to tell. In this way higher energy prices lead to recessions because energy income doesn’t easily recycle into the economy. Because energy income is largely from very long term investments and from access to natural resources there is no way for energy investors to funnel the money they receive easily back into the economy. So they park it in T-Bills. However, the T-Bill rate is set by the Fed. So, that means unless the Fed recognizes this is happening and offsets it with looser policy, you wind up with a passive monetary contraction. Of course, you can make matters even worse with an active monetary contraction to offset the rising prices. Modern Monetary folks will get this instantly. Market Monerists can think of it as energy firms holding their sudden flood of money in Hume’s Lockbox. Because, they do so little day-to-day transacting there is no hot-potato effect. Mainstream economists can think of it as a contraction in the IS curve. Yet, there is another channel through which this can work and that is simply by changing the dynamics of the car market.

Has America Lost It's Drive? - Pt. 4 -- In Part 3 of this series, I wondered a couple of things. - With the vehicle/1000 people number in the range of 825 to 845 since 2004, is the market near saturation? - Is the January sales number of 14.2 SAAR (seasonally adjusted at annual rate) enough to maintain the vehicle/1000 people number? For the first question, I have to again credit Roger Chittum for pointing me to this 2007 paper, Vehicle Ownership and Income Growth, Worldwide: 1960-2030, (32 page pdf.) There's a lot to this paper, including projections into the future for vehicle sales and fuel consumption, worldwide. My immediate interest is in their use of a Gompertz function to estimate vehicle market saturation as a function of per-capita income. Here is one of their graphs.Their model indicates flattening above about $30K per year, and leads to a saturation point in the U.S. of about 852 vehicles per 1000 population. Saturation points for various countries also depend on urbanization and population density. See the paper for details and background. This indicates that the U.S market is about 97% saturated, give or take a point. What does that suggest for vehicle sales going forward?

GM's sitting on a lot of trucks - Most of the automakers had a huge February. Chrysler's U.S. sales were up 40%. Ford sales rose 14%. Even Toyota, still recovering from last year's Japanese tsunami, saw sales grow 8%. But General Motors barely eked out a 1.1% increase. And that was good news -- analysts were expecting a drop by as much as 6% as GM pulled back on the incentives it offered to customers.  But are the company's inventory levels a concern? The company's own sales statement shows that dealer inventories have soared to 667,000 vehicles. That's up 29% from a year ago and 59% from two years ago. (See this chart from ZeroHedge for a better view.) The Wall Street Journal says that this is the wrong inventory, too. If you look at just the pick-up trucks waiting to be sold, GM has 116 selling days of supply. That's a lot of trucks sitting around when gas prices are skyrocketing. And inventory is climbing. At the end of January, GM said its overall dealer inventory was at 619,455 vehicles.  If gas prices keep rising, though, GM may have to look at more incentives to clear out those trucks.

US Trade Deficit Hits $52.6 Billion in January — The U.S. trade deficit surged to the widest imbalance in more than three years in January as imports hit an all-time high, reflecting big demand for foreign-made cars, computers and food products. U.S. exports to Europe fell, raising concerns that the debt crisis in that region could dampen U.S. economic growth. The January trade deficit widened to $52.6 billion, the biggest gap since October 2008, the Commerce Department reported Friday. Imports rose 2.1 percent to a record $233.4 billion. Exports were up a smaller 1.4 percent to $180.8 billion. Exports to Europe fell 7.5 percent. Economists are looking for the deficit this year to widen from last year’s $560 billion imbalance, reflecting in part the economic woes in Europe, which represents about 20 percent of America’s export market. A wider deficit can depress economic growth because it usually means fewer export-related jobs. A National Association for Business Economics forecasting panel has projected that the deficit for 2012 will narrow by 4.1 percent to $535.4 billion and will edge down further to $525 billion in 2013 as growth in exports keeps pace with import increases.

Trade Deficit increased in January to $52.6 Billion - The Department of Commerce reports: Total January exports of $180.8 billion and imports of $233.4 billion resulted in a goods and services deficit of $52.6 billion, up from $50.4 billion in December, revised. January exports were $2.6 billion more thanDecember exports of $178.2 billion. January imports were $4.7 billion more than December imports of $228.7 billion.The trade deficit was above the consensus forecast of $49 billion. The first graph shows the monthly U.S. exports and imports in dollars through January 2012. Both exports and imports increased in January. Exports are well above the pre-recession peak and up 8% compared to January 2011; imports just passed the pre-recession high and imports are up about 8% compared to January 2011. The second graph shows the U.S. trade deficit, with and without petroleum, through December. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. Oil averaged $103.81 per barrel in January, down slightly from December. Both exports and imports to the European Union were up year-over-year in January, with imports increasing faster.

U.S. Trade Deficit Surged to 3-Year High in January - The January trade deficit widened to $52.6 billion, the Commerce Department reported Friday. That is an increase from a revised $50.4 billion in December and the biggest gap since October 2008. Rising oil prices helped drive imports to a record high, as did stronger demand for foreign-made cars, computers and food products. And exports to Europe fell, a sign that the region’s debt crisis could temporarily weaken growth in the United States just as the job market was strengthening. Imports rose 2.1 percent to a record $233.4 billion. Exports were up a smaller 1.4 percent to $180.8 billion. Exports to Europe fell 7.5 percent. “There is little good news in January’s trade figures,” He said much of the increase was tied to higher oil prices, which drove oil imports up 3.3 percent. The wider deficit, he said, was likely to slow growth in the January-March quarter to an annual rate of 1 percent. A separate Commerce Department report showed that wholesale companies kept building their stockpiles in January. Sales, however, dipped for the first time since May.

US Trade Balance Worst In 39 Months With Largest 3 Month Drop In 20 Years - While NFP dominated the headlines, the US Trade Balance (deficit) limped out and dropped far more than expected. At a $52.565bn Deficit, this is the worst trade balance since October 2008. Perhaps more shocking is the fact that the 3 month drop (rise in deficit) is the largest ever on record, dropping $9.4bn in that period. Unsurprisingly, the bulk of this drop is in the 'Petroleum' trade balance which has accelerated the most in the last 3 months (coincidentally dropping the most since last March and we know how that ended).

Yanks Never Learn: US Imports Hit Record High - For all the hot air about "global rebalancing," the Yanks seem to be repeating the Bushite formula for Guaranteed Economic Disaster, with PIGs' pork seasoning for added flavouring to keep things current. We already know that after having run massive fiscal deficits which did not nothing other than make things ripe for a crisis, the US have upped the ante by running trillion dollar budget deficits for four straight years with no end in sight. Others said, "well at least the current account deficit is getting under control." Which, unfortunately, is not really happening. The trouble with these people is that they do the same thing over and over again and expect different results. Just as a consumption binge was driving US "growth" in the run-up to the crisis, so we have another one going on now. The evidence is a return to skull-crushing external deficits to accompany the budgetary one. They don't call them twin deficits for nothing as US imports hit all-time highs: The trade gap swelled more than 4 percent to $52.6 billion, the highest since October 2008. The department also raised its estimate of the December trade deficit to $50.4 billion, from its previous figure of $48.8 billion.Imports rose 2.1 percent to a record $233.4 billion. China accounted for a big share of the gain, with imports from that country rising 4.7 percent to $34.4 billion.

Spending and Factory Reports Indicate a Slowdown (Reuters) — Manufacturing slowed in February and consumer spending was flat for a third straight month in January, new economic data showed on Thursday, suggesting the economy lost more momentum than expected early this year. Other reports on Thursday were more upbeat, with new claims for jobless benefits last week hovering near four-year lows and retailers and automakers reporting brisker February sales.  Nevertheless, the spending and factory data cut into the optimism generated by a recent decline in the unemployment rate, and suggested rising energy prices were taking a toll.  The Commerce Department said inflation and taxes reduced income gains in January, and inflation-adjusted spending was unchanged for the third consecutive month.  Consumer spending is off to a pretty weak start,” . Mr. Hembre said the data painted “a pretty weak picture for first-quarter G.D.P. despite the strong jobs numbers.”  Consumer spending and the restocking of company shelves lifted economic growth to a 3 percent annual rate in the last three months of 2011, its quickest rate in more than a year.  Economists think growth slowed early this year, and TD Securities lowered its first-quarter forecast to a 1.5 percent rate from 1.9 percent, citing the data on consumer spending.

New Math Will Drive a U.S. Manufacturing Comeback - Making the United States an even more attractive location for factories and investments is critical for the health of our nation. More domestic factories would help create more balanced trade flows and a more stable global economy. But company decisions on what and where to place production facilities, while influenced by many factors, ultimately depend on the math.  Thankfully, the math these days is starting to work in America's favor again.  Our research last year suggested to us that changing conditions in China would bring home some of the manufacturing work that migrated overseas during the past decade. We originally saw this "insourcing" phenomenon, as the White House now refers to it, starting around 2015.  We were deliberately conservative in our estimates and made clear that the coming manufacturing renaissance would benefit some industries more than others, with seven sectors benefitting the most: vehicles and auto parts, appliances and electrical equipment, furniture, plastic and rubber products, machinery, fabricated metal products, and computers and electronics. These seven sectors currently account for nearly two-thirds of the more than $325 billion the U.S. imports from China.

American manufacturers importing workers -- U.S. manufacturers, frustrated by a shortage of skilled American factory workers, are going abroad to find them. Business for factories has surged recently, creating a huge demand for machinists, tool and die makers, computer-controlled machine programmers and operators. "These jobs are the backbone of manufacturing," . "These are good quality middle-class jobs that Americans should be training for." The United States is experiencing a shrinking pipeline of manufacturing talent. "It's been in the making for years," he said. Factories didn't feel the labor pinch as much when manufacturing was in a slump. But the latest "Made in USA" resurgence has them scrambling. Wall said some manufacturers have been relying on foreign workers to fill the gaps through H-1B visas. The popular H-1B program allows high-skilled foreign workers to be employed in the United States for a maximum duration of six years. Each year, the government issues a quota of new H-1B work visa applications, and all industries compete against the quota. Last year's cap was set at 65,000. High-tech companies tend to submit the most applications for H-1B visas. A total of 39,551 foreign workers for manufacturing positions were certified by the Labor Department in 2011 for H-1B visas. A $100K factory job. What's uncool about that?

ISM Non-Manufacturing Index indicates faster expansion in February - The February ISM Non-manufacturing index was at 57.3%, up from 56.8% in January. The employment index decreased in February to 55.7%, down from 57.4% in January. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: December 2011 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in February for the 26th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®. "The NMI registered 57.3 percent in February, 0.5 percentage point higher than the 56.8 percent registered in January, and indicating continued growth at a faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 62.6 percent, which is 3.1 percentage points higher than the 59.5 percent reported in January, reflecting growth for the 31st consecutive month. The New Orders Index increased by 1.8 percentage points to 61.2 percent, and the Employment Index decreased by 1.7 percentage points to 55.7 percent, indicating continued growth in employment, but at a slower rate.  This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

Fastest service sector growth in a year (Reuters) - The services sector expanded at its fastest pace in a year in February, helped by a gain in new orders and as the housing market shows signs of stabilizing. The Institute for Supply Management said its services index rose to 57.3 in February last month from 56.8 in January, in sharp contrast to economists' expectations for a drop to 56.1. It was the index's highest level since February 2011. The services sector accounts for about two-thirds of U.S. economic activity. A reading above 50 indicates expansion. . "At this level of ISM, this is not really changing our view that you're still looking at around a 2.0 percent year in terms of GDP (growth), but it is holding up, and this is certainly what you want to see." Separate data showed a decline in new orders for factory goods was not as steep as expected in January, while December's gain was revised higher. Monday's data prompted investment bank Goldman Sachs (GS.N) to raise its outlook for first-quarter economic growth to 2.0 percent annualized from 1.9 percent. Growth in the first three months of the year is seen backing off from the 3 percent rate in the fourth quarter of 2011, though a string of recent positive data has suggested underlying resiliency. Expectations range from 1.9 percent to 2.5 percent.

U.S. Service Firms Grow at Fastest Pace in a Year - U.S. service companies expanded in February at the fastest pace in a year, helped by a rise in new orders and job growth. The Institute for Supply Management said Monday that its index of non-manufacturing activity rose to 57.3, up from January’s 56.8 and the third straight increase. Any reading above 50 indicates expansion. Expansion in the service sector coincides with the lowest unemployment in three years, five straight months of solid to strong job growth and rising consumer confidence. The trade group of purchasing managers surveys roughly 90 percent of U.S. companies in all sectors outside of manufacturing. That includes retail, construction, financial services, health care, and hotels. Fourteen of the 18 industries that the survey tracks expanded in February. Real estate, rental and leasing, transportation and warehousing, construction, hotels and restaurants and information technology firms were among those that reported growth.

Vital Signs: Slowing Services Hiring - U.S. services businesses slowed their pace of hiring in February from January. The Institute for Supply Management’s seasonally adjusted Services Employment Index was 55.7 in February, down 1.7 points from the previous month. Readings above 50 indicate expansion. February’s slight decline comes after the index jumped in January to 57.4 from 49.8. Employment gains also slowed among U.S. factories in February.

Report: Small Businesses added 45,000 jobs in February - From Reuters: 45,000 Jobs Added By Small Businesses in US U.S. small businesses added 45,000 employees in February and offered workers more money even as working hours were little changed ... payrolls processing firm Intuit said. January's small business employment had previously been reported to have increased 50,000. The Intuit survey is based on responses from about 72,000 small businesses with fewer than 20 employees that use the Intuit Online Payroll system. Graphs for the Intuit Small Business index are here. Note: This is based on Intuit users, however, as Intuit notes: "Employment for Intuit Online Payroll customers is growing much faster than employment at the average small business." Another small business report, the monthly NFIB survey, has shown much slower growth for small businesses. But the NFIB survey has a very large percentage of real estate related small businesses - and that probably accounts for a large portion of the difference.

Small Business Job Growth Slows In February, Intuit Reports - This week brings updates on three employment reports, and the first one arrived yesterday. The Intuit Small Business Index rose in February, the payrolls firm Intuit advises. "Job creation among small businesses continued in February, albeit slowly," the firm says in a press release. "This slow growth was accompanied by a small uptick in compensation and a slight decrease in hours worked." Does the Intuit index offer clues about tomorrow's ADP Employment Report or Friday's U.S. payrolls update from the Labor Department? If so, this clue isn't particularly encouraging for expecting a substantial acceleration in job growth. Then again, there's nothing in Intuit's report that suggests that the modest growth in payrolls is set to fade either.  What we do know is that the Intuit benchmark posted another month of employment growth, although the pace continues to slow. February's rise was the fourth straight month of decelerating growth and the slowest percentage increase over the previous month since March 2011. Meanwhile, the annual increase for the Intuit index was unchanged in February, advancing by 3.66% over the year-earlier month.

Yahoo! to cut thousands of jobs: report - Yahoo! is preparing to lay off thousands of workers in a sweeping restructuring being launched less than three months after CEO Scott Thompson took control, according to a report Monday. The Dow Jones website All Things Digital said the shakeup of the struggling Internet giant could come as early as the end of March and could target Yahoo’s public relations and marketing division, research, and region-focused and other marginal businesses. The layoffs “are likely to number in the thousands,” the website said, citing “multiple sources” inside and outside the company.

CFOs Expect to Boost Hiring - U.S. finance chiefs expect to expand their work forces on average by slightly more than 2%, adding to signs of an improving jobs market, according a recent quarterly survey. The survey for the period ended March 1 was conducted by Duke University and CFO Magazine and included CFOs from a broad range of global public and private companies. Asian chief financial officers also were more optimistic about the hiring outlook, while European CFOs expected 2012 would show improvement from a difficult 2011. The latest U.S. view is an improvement from the 1.5% growth predicted in the prior quarter. “It indicates that national unemployment should fall below 8 percent in 2012,” Sullivan said. In the U.S., more than two thirds of finance chiefs said they were trying to fill vacant positions, with nearly half of them indicating difficulty in filling some positions. The U.S. CFO Optimism Index rose to 59 from 53 sequentially, returning to the index’s long-term average. “This rebound is encouraging because increases in CFO optimism have historically preceded improvements in the overall economy,”

Three Measures of a Healthy Labor Market: A Cyclical View - pdf - Looking at the data more carefully, we see several demographic trends that are also exerting downward pressure on the unemployment rate and these have several long-run implications. First, the participation rate has declined and this is consistent with the aging demographic of the baby boom. Second, a lower female participation rate is a significant turnabout from the historical trend since WWII. Lower participation rates suggest fewer labor inputs to production and, thereby, a reduction in the potential growth rate of the U.S. economy over time. This slower growth rate will put additional pressure on local, state and federal budgets that already are dealing with reduced employment and income gains in the short run. This intermingling of cyclical and secular forces require the most careful strategic choices by decision makers going forward.

Exports Make Up 10% of Economic Activity in Largest Metro Areas - Exports, which have been a bright spot throughout the economic recovery, account for about 1/10th of economic activity from the top 100 U.S. metro areas on average, according to this study by the Brookings Institution. The shares vary widely, from as low as 4.0% from Cape Coral, Florida, whose economic base is comprised of retail, construction and tourism jobs, to Wichita, Kansas, a hub of aircraft manufacturing, where one of every five dollars of economic activity is an export. The Brookings paper endeavors to measure U.S. exports in each of the nation’s 100 largest metro areas, but unlike the government’s measure of exports, the Brookings tally measures exports where they’re produced. The discrepancies aren’t all that significant for large, coastal metro areas like New York and Los Angeles, the nation’s two largest metropolitan areas and among the top exporters by any measure. But it removes places like McAllen, Texas, a border town that moves a lot of exports to Mexico but doesn’t produce all that much.

Looking for a Labor Force Comeback - How big should the American labor force be? It seems like an arcane academic question. But it is at the heart of whether the unemployment rate will fall in the February jobs report to be released Friday morning and, more important, whether it will keep on dropping throughout the year. Here is the issue: During the recession and the sluggish start to the recovery, companies laid off workers and froze hiring, driving the unemployment rate up. Hundreds of thousands of workers chose not to enter the job market or, discouraged, abandoned it. Older workers figured they might as well retire. Newly minted college graduates decided to get additional degrees rather than fight for low-wage jobs and live in their parents’ basements. Workers who exhausted their 99 weeks of jobless benefits just gave up looking. Thus, the labor force participation rate – the percentage of Americans working or looking to work – has declined to its lowest level since the 1980s. The strengthening recovery has reignited a long-running debate about how many of those workers will come back – making the participation rate and the overall number of people in the labor force interesting numbers to keep an eye on in the next few jobs reports.

Economists Expect More Than 200,000 Jobs Created Last Month - For those going through jobs-report withdrawal, take heart: The much-anticipated report should arrive this Friday. Because of February’s brevity, the Labor Department often delays reporting that month’s data until the second Friday of March instead of the usual first Friday release. This time around, economists think the report will be worth the wait. The median forecast of economists surveyed by Dow Jones Newswires calls for a solid 213,000 gain in February payrolls. If so, that would be the third consecutive hiring increase above the 200,000 mark. If sustained, that pace will continue to draw down the unemployment rate, which is forecast to stay at 8.3% in February after falling rapidly since August. Before the jobs report, the Labor Department will revise fourth-quarter productivity and labor costs Wednesday. Economists expect a small upward revision to growth in output per hour, to an annual rate of 0.9% from 0.7% reported earlier. Unit labor costs are projected to be unchanged, with growth at 1.2%.

Jobless Claims Rose Again Last Week - New jobless claims jumped 8,000 last week to a seasonally adjusted 362,000, the Labor Department reports. That's the third weekly increase in a row and the biggest weekly gain since late-January. In addition, the four-week moving claims average inched higher for the first time in two months. Are those reasons to worry? Well, yes. You (still) can't take anything for granted in macro these days, least of all the idea that a recovery is destiny. Having said that, now's a good time to roll out the standard caveat that weekly claims are a volatile series and to the extent that we can draw any conclusions here it arises from the trend. On that front, fortunately, the news is still encouraging. As the chart below shows, new claims have been trending down for nearly a year. This is a robust signal that job growth will continue. So far, so good. The drop in new claims is interrupted at times by temporary pops, and now may very well be one of those times. But in the last leg down, which began last spring, the high points have been lower and (more importantly) so have the lows. Indeed, the strongest case for remaining optimistic on the macro view is bound up closely with job growth these days. Without this factor on our side, the cycle is far more likely to succumb to the dark forces.

Unemployment Applications Rise Slightly; Overall Levels Remain Low - Slightly more people applied for U.S. unemployment benefits last week. But the overall level stayed low enough to suggest the job market is strengthening. The Labor Department said Thursday that weekly applications increased by 8,000 to a seasonally adjusted 362,000, the highest level since January. The four-week average, which smooths week-to-week fluctuations, ticked up to 355,000. That’s roughly in line with the previous week’s figure, which was the lowest in nearly four years. Applications have fallen 14 percent since October. When applications fall below 375,000, that generally signals hiring is strong enough to reduce the unemployment rate. The steady decline has coincided with three months of big hiring gains. The economy has added an average of 200,000 net jobs per month from November through January. That has helped lower the unemployment rate for five straight months to 8.3 percent. Economists predict that more than 200,000 net jobs were added in February, too.

Vital Signs: Jobless Claims on Lower Trend - The number of Americans filing new claims for unemployment benefits rose by 8,000 to a seasonally adjusted 362,000 last week. While claims have edged higher recently, the average for the past four weeks — a less-volatile measure –was largely unchanged, at near four-year lows. That suggests that employers are slowing the pace of layoffs.

ADP Reports Faster Job Growth In February - Job growth in the private sector accelerated in February, according to the ADP Employment report. Employment rose 216, 000 last month, up from January’s 173,000 gain. "This does suggest we are moving in the right direction," Beth Ann Bovino, senior U.S. economist at Standard & Poor's Ratings Services, tells Reuters. "It supports the expectations of another 200,000-plus in Friday's payroll report [from the U.S. Labor Department]. The jobs numbers are looking healthier." Good thing, too, since the deceleration in personal income and spending still looks worrisome. If there’s a cure for this slowdown, stronger job growth is on the short list of possibilities. January's employment report was certainly helpful, although some pundits questioned if it was statistical smoke and mirrors due to seasonal adjustments. "The last three monthly gains in employment shown in the ADP National Employment Report have averaged 223,000, compared to 156,000 per month over all of 2011," says Joel Prakken, chairman of Macroeconomic Advisers. "This pick-up is consistent with the recent acceleration of the nation's gross domestic product which, in the fourth quarter, grew at the fastest pace (3.0 percent) since second quarter of 2010."

ADP: Private Employment increased 216,000 in February - ADP reports: Employment in the U.S. nonfarm private business sector increased by 216,000 from January to February on a seasonally adjusted basis. The estimated advance in employment from December to January was revised slightly upwards to 173,000 from the initially reported 170,000. Employment in the private, service-providing sector rose 170,000 in February, and employment in the private, goods-producing sector increased 46,000 in February. Manufacturing employment increased 21,000. This was slightly above the consensus forecast of an increase of 200,000 private sector jobs in February. Government payrolls have been shrinking, so the ADP report suggests close to 200,000 nonfarm payroll jobs added in January. Note: ADP hasn't been very useful in predicting the BLS report.

ADP Reports 216K Private Payrolls Added, On Top Of 215K Expectation - The traditionally C-grade, and very noisy ADP number, has printed at a 216K private payrolls added, on expectations of 215K, or precisely in line, even as the January print was revised modestly higher from 170K to 173K. Of course, since the track record of the ADP as a NFP predictor is absolutely atrocious, and when one adds that the ADP had its annual revision take place today, this number is all about seasonal adjustments as was the BLS January print. What was amusing is that not only were finance jobs added (+14k), but so were manufacturing (+14K) and construction (+16K) jobs.

U.S. Unemployment Up in February - Gallup - U.S. unemployment, as measured by Gallup without seasonal adjustment, increased to 9.1% in February from 8.6% in January and 8.5% in December. The 0.5-percentage-point increase in February compared with January is the largest such month-to-month change Gallup has recorded in its not-seasonally adjusted measure since December 2010, when the rate rose 0.8 points to 9.6% from 8.8% in November. A year ago, Gallup recorded a February increase of 0.4 percentage points, to 10.3% from 9.9% in January 2011. In addition to the 9.1% of U.S. workers who are unemployed, 10.0% are working part time but want full-time work. This percentage is similar to the 10.1% in January, but is higher than the 9.6% of February 2011. As a result, Gallup's U.S. underemployment measure, which combines the percentage of workers who are unemployed and the percentage working part time but wanting full-time work, increased to 19.1% in February from 18.7% in January. This is an improvement from the 19.9% of February 2011.

Gallup Finds February US Unemployment Jumps Most Since 2010, Third Consecutive Monthly Increase - When it comes to economic data, there is the BLS's seasonally-adjusted, Birth/Death-ed, Arima-factored, goal-seeked, election year propaganda, or there is real time polling such as that conducted every month by Gallup. And while there is no doubt tomorrow's NFP number will be just better than expected (after all it is an election year for the Derpartment of Truth), the reality is that in February unemployment, that measured by the impartial polling agency Gallup, soared by 0.5%, the most since late 2010, from 8.6% to 9.1%, and back to August 2011 levels. As for the U-6 BLS equivalent, Gallup's underemployment metric rose to 19.1% from 18.7% in January, and a 18% low in mid 2011. The good news, it is just modestly better than the 19.9% in February 2011. Gallup's conclusion, which should be pretty obvious: "Regardless of what the government reports, Gallup's unemployment and underemployment measures show a substantial deterioration since mid-January. In this context, the increase in unemployment as measured by Gallup may, at least partly, reflect growth in the workforce, as more Americans who had given up looking for work become slightly more optimistic and start looking for work again.

NFP Prints At 227K On Expectations Of 210,000, Unemployment Rate At 8.3% Boosted By Temp Jobs N- FP 227,000 on expectations of 210,000; Previous revised from 243K to 284K; Unemployment Rate (U-3%) at 8.3%, U-6 at 14.9%. While for the first time in a long time those not in the labor force declined (from 87,874 to 87,564) and the participation rate rose as a result from 63.7% to 63.9%, here is what the market is focusing on currently: "Professional and business services added 82,000 jobs in February. Just over half of the increase occurred in temporary help services (+45,000)." Also, that Birth Death added 91K is also taking away from the lustre of the headline which is diamtetrically opposite of what Gallup found yesterday. The market reaction is one indicative of the realization that QE3 may have been delayed once again, and this time substantially.

February Employment Report: 227,000 Jobs, 8.3% Unemployment Rate - From the BLS: Nonfarm payroll employment rose by 227,000 in February, and the unemployment rate was unchanged at 8.3 percent, the U.S. Bureau of Labor Statistics reported today. ... Both the labor force and employment rose in February. The civilian labor force participation rate, at 63.9 percent, and the employment-population ratio, at 58.6 percent, edged up over the month....The change in total nonfarm payroll employment for December was revised from +203,000 to +223,000, and the change for January was revised from +243,000 to +284,000. This graph shows the jobs added or lost per month (excluding temporary Census jobs) since the beginning of 2008. . Job growth started picking up early last year, but then the economy was hit by a series of shocks (oil price increase, tsunami in Japan, debt ceiling debate) - and now it appears job growth is picking up again.The second graph shows the employment population ratio, the participation rate, and the unemployment rate. The unemployment rate was unchanged at 8.3% (red line). The Labor Force Participation Rate increased to 63.9% in February (blue line). This is the percentage of the working age population in the labor force. The Employment-Population ratio increased to 58.6% in February (black line). The third graph shows the job losses from the start of the employment recession, in percentage terms.

Employment Rate Steady at 8.3% on 227K New Jobs - Here is the lead paragraph from the Employment Situation Summary released this morning by the Bureau of Labor Statistics:Nonfarm payroll employment rose by 227,000 in February, and the unemployment rate was unchanged at 8.3 percent, the U.S. Bureau of Labor Statistics reported today. Employment rose in professional and businesses services, health care and social assistance, leisure and hospitality, manufacturing, and mining. Today's numbers numbers are slightly better than the consensus, which was for 220K new nonfarm jobs but below's own estimate of 275K nonfarm jobs. The unemployment peak for the current cycle was 10.0% in October 2009. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948. Note the increasing peaks in unemployment in 1971, 1975 and 1982. The second chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. The January number is 3.6% — unchanged from last month. This measure gives an alternative perspective on the relative severity of economic conditions. The next chart is an overlay of the unemployment rate and the employment-population ratio. This is the ratio of the number of employed people to the total civilian population age 16 and over.

Economy Adds 227K Jobs, Unemployment Rate Stays Unchanged — U.S. employers added 227,000 jobs in February to complete three of the best months of hiring since the recession began. The unemployment rate was unchanged, largely because more people streamed into the work force. The Labor Department said Friday that the unemployment rate stayed at 8.3 percent last month, the lowest in three years. And hiring in January and December was better than first thought. The government revised those figures to show 61,000 an additional jobs. The economy has now generated an average of 245,000 jobs in the past three months. The only stretch better since the recession began was in early 2010. Governments at all levels cut only 6,000 jobs in February and 1,000 in January, after a revision. That’s a welcome change from the heavy layoffs by cash-strapped states and cities over the past two years. Last year alone they cut an average of 22,000 jobs per month. Nearly a half-million people began looking for work last month, and most found jobs, the report said. That’s a sign of growing optimism in the job market, as many people who had given up on looking for work came off the sidelines to search for jobs. That also counters a troubling trend: a key reason why the unemployment rate has dropped since last year is that many out-of-work people have stopped looking for work. Only people without jobs who are actively seeking one are counted as unemployed.

Video: Dissecting the Jobs Report - WSJ - The U.S. added 227,000 jobs in February, providing the economy with one of its best stretches of the recovery, Sudeep Reddy and Phil Izzo report on the News Hub.

Nonfarm Payroll +227,000 ; Unemployment Rate Steady 8.3%; BLS vs. Gallup - Quick Notes About the Unemployment Rate

  • In the last year, the civilian population rose by 3,584,000. Yet the labor force only rose by 1,569,000. Those not in the labor force rose by 2,014,000.
  • In February, the Civilian Labor Force rose by 476,000.
  • In February, those "Not in Labor Force" decreased by 310,000. If you are not in the labor force, you are not counted as unemployed.
  • Participation Rate rose .2 to 63.9%
  • Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.
Over the past several years people have dropped out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low. Some of this was due to major revisions last month on account of the 2010 census finally factored in. However, most of it is simply economic weakness.

February Delivered Another Respectable Month Of Job Growth - Today’s employment report from the Labor Department showed that job growth slowed in February, but not enough to raise serious doubts that the economy is doomed to stumble in the immediate future. Private-sector payrolls rose 233,000 last month. That’s down from January’s 285,000 gain, but it’s strong enough to keep hope alive that growth generally will prevail for the foreseeable future. If we strip away the monthly variation, the year-over-year percentage change in private job growth looks quite a bit better with a 2.07% annual advance, or just a hair below January’s 2.10% gain over the year-earlier month. By that standard, we haven’t seen private sector payrolls rising at recent levels (2.1% a year) since 2006. Admittedly, payrolls aren’t a reliable early warning indicator of new recessions. But if there’s a new downturn lurking, as some analysts insist, we should see confirmation soon in the payrolls data. For the moment, expecting cyclical darkness based on the trend in jobs growth is a stretch.

February jobs report: Unemployment holds amid solid hiring - Hiring remained strong in February, fueling optimism about the recovery. Employers added 227,000 jobs in February, the Labor Department reported Friday. While that's a pinch slower than in January, hiring was still better than economists had expected. Three straight months of job growth over 200,000 is considered a strong sign for the recovery going forward. Economists called the report "encouraging," "robust," and even claimed the job market "has turned a corner." Good news also came from revisions to prior data, which show employers added 61,000 more jobs than the Labor Department had originally reported in January and December. The unemployment rate remained at 8.3%, as employers created just enough jobs to make up for new entrants to the labor force. Private businesses continue to be the main driver of job growth, adding 233,000 jobs in February. The private sector has added jobs every month since March 2010.

Jobs Figures Keep Improving - One often overlooked way to evaluate the job market is to look at the trend in revisions. Upward changes are good news. That is because of the way the figures are calculated, based on responses from employers to a survey. The slow responders are not picked up until one or two months after the first number. Yet the first number is often the only one most people notice. In the latest report, the December figure was revised up by 20,000 and the January number was increased by 41,000. Every month from June 2011 on has ended up higher than it was first reported to be, by an average of 38,000 jobs. Here’s the chart:

February Jobs Report: Slow But Steady Employment Growth - The February jobs reports wasn’t quite as good as January, when we saw some of the strongest job growth since the recession ended while the unemployment rate dropped to its lowest level since early in 2009, but it was still fairly good news nonetheless: The slow melt-up in employment continued during February as the economy added 227,000 new jobs while the unemployment rate held flat at 8.3 percent. With warm weather helping to spur activity and as the European sovereign debt crisis [cnbc explains] receded into the background, the American economic engine continued its slow but steady drive toward recovery. Economists had expected 210,000 net new jobs and the unemployment rate [cnbc explains] to hold steady at 8.3 percent. Private payrolls in February grew by 233,000. Manufacturing added 31,000 jobs and services 203,000. Government subtracted 6,000 jobs from the total. Professional and business services added 82,000, though more than half were temp jobs. Health care gained 61,000, while hospitality — primarily bars and restaurants — contributed 41,000 for the month, while the industry has added a total of 531,000 jobs over the past two years.Though the construction trade was expected to benefit most from the unseasonably warm weather, employment in the industry actually was flat for the month.

The employment recovery is real - I can’t remember the last time there was this much excitement and anticipation surrounding a payrolls number — and it’s another solid report. There were 227,000 new jobs created in March, and the already-excellent numbers from the previous two months being revised upwards: the figure for last month is now officially 284,000, a truly excellent number. The really good news here is that this isn’t even really good news, at least from a market perspective. For a while there, the recent spate of upbeat jobs reports only served to raise worries that the other shoe would soon drop and we’d run into big downward revisions or monthly mean-reversion. Increasingly, however, this is looking like a real trend: the recovery in the American jobs market is going as well as anybody could reasonably expect. It’s still not enough to get the unemployment rate down to an acceptable level in the near term, of course: there’s still a jobs crisis in this country. But we’re moving in the right direction.

Morning in America? - IT HAS been no easy road getting here, and the path ahead looks rocky, but a real recovery seems to be developing for America's long-suffering workers. This morning, the Bureau of Labour Statistics released new data on American employment, which showed a third consecutive month of robust job growth. Where previous reports contained a hint of weakness here or there, the fundamentals of this report look almost uniformly strong. Payroll employment rose by 227,000 jobs in February. That marked a third consecutive month with job growth over 200,000, and it capped a 12-month period in which employment jumped by just over 2m—the best performance since January of 2007. Private-sector employment did even better. Private businesses have added over 750,000 jobs in just the last three months and 2.2m in the past year. February's report may actually be better than it looks. The latest release revised up job gains over the previous two months by 61,000, a common occurrence of late. Private employment is 2.8m jobs above the level at the end of the recession while government employment is nearly 600,000 jobs less than the level in June of 2009. The drag from government job losses continues, but at a much slower pace than was the case in 2009 through 2011.

Best U.S. employment growth in 12 years - The U.S. jobs market has been on a tear for the past six months, ever since near-disastrous showdown over the debt ceiling. By almost every measure, the employment picture has brightened considerably since those dark days. For instance, the Bureau of Labor Statistics reported Friday that the number of Americans who had jobs jumped by 428,000 in February following a 847,000 gain in January. That’s according to a survey of about 60,000 households. Maybe those numbers are a fluke, a one- or two-month aberration? Over the past six months, the number of people who are employed has risen by 2.3 million — an average of 385,000 per month. That’s the best growth since early 2000, when the dot-com bubble was in full flower. Since August, the unemployment rate has fallen by 0.8 of a percentage points, to 8.3%. For adults over 25, the jobless rate has fallen to 7%. While some critics say that the unemployment rate is down only because people have given up on finding a job, that’s simply not so. Over the past six months, the labor force has increased by 1.2 million, while the number of people counted as unemployed has fallen by 1.1 million. As measured by the household survey, employment growth has accelerated to an average of 388,000 a month. Millions of people have re-entered the labor force or begun looking for a job for the first time.

Our "Let's Pretend" Economy: Let's Pretend "Job Growth Is Best Since 2006": The Ministry of Propaganda and its media minions are announcing that"job growth is on a tear" and the "best growth since 2006." How about welook under the hood of the employment euphoria? Here is an exampleof the Ministry's work:Best U.S. employment growth in 12 yearsAlmost all the data agree — labor market’s on a tear. Over the past six months, the number of people who are employed has risen by 2.3 million — an average of 385,000 per month. That’s the best growth since early 2000, when the dot-com bubble was in full flower. Since August, the unemployment rate has fallen by 0.8 of a percentage points, to 8.3%. For adults over 25, the jobless rate has fallen to 7%. In other words, people who generally work full time so they don't have to sharea bunk in a flop house or live in their parents' basement are almost fully employed,as 'full employment" typically generates an unemployment rate of 5% just due to churn. Best since 2000. Oh really? Let's look at the data as presented by the St. Louis Federal Reserve (FRED). Let's start with a measure of the workforce, what theFeds politely call the non-institutional population. Note that it rose by 33 millionsince 2000:

The February Employment Release -I'm sure there's a way to spin the February employment release in a negative way -- see for instance JEC Republican vice-chair Brady's take here -- but I think it looks pretty good for a recovery after a combination financial crisis/housing bust/recession. [1] Figure 1: Log nonfarm payroll employment (dark blue), and log household employment series adjusted to conform to nonfarm payroll employment (red), seasonally adjusted, rescaled to 2007M12=0. Note that were civilian employment to be included, it would exhibit a similar trend to the red line. In other words, the household survey is signalling more rapid recovery than the establishment survey. Figure 2 shows that aggregate hours in the private sector have recovered, now more so than employment.

Quick Thoughts on Payroll and a GDP-Less Recovery - We had a nice gain of 223K but the big news is in the revisions especially January which was taken up to 284K. That’s a big deal because it breaks – what feels like to many economists – an intuitive barrier on job creation. Practically speaking the economy behaves as if it has a lot of inertia, particular in job creation. Its hard to see numbers like that and not think the underlying momentum is moving forward. A couple of things I want to say
1) Quick glance over the internals seems to suggest we are still loosing construction jobs and government jobs. In addition, non-durables have been which is of no surprise.
However, especially government and construction light a clear path to how this could be sustained and by my estimates would accelerate if oil prices and the Fed played along.
2) Brad Delong notes how this is not consistent with Okun’s Law.
3) It should not shock anyone to see labor productivity go into decline over the next year. Not just low number, but robustly negative numbers.

Another Positive Employment Report. by Tim Duy: It is increasingly difficult if not impossible to deny the real improvements in labor markets in recent months. First, the ongoing declines in initial jobless claims clearly suggested the recovery was gaining depth and sustainability: Then comes the February employment report along with upward revisions to the December and January numbers: Nonfarm payroll gains are averaging a solid 245K per month over the last three months. Does this mean the Federal Reserve can pull back on the throttle? No, although I am sure you will hear the more hawkish policymakers using this report as evidence that policy reversal will happen sooner than markets anticipate. To be sure, that may still turn out to be true, but this data still reveals the depth of the hole left behind by the recession. But he majority of the FOMC will notice the stagnant unemployment rate (8.3%), a consequence of a small gain in labor force participation. If labor force participation rates begin to rebound, the improvement in the unemployment rate will stall, and the Fed could find itself willing to ease again later this year as suggested in this week's well documented Wall Street Journal article. Moreover, note that wage gains remain anemic, both for all workers: and for non supervisory and production workers: The lack of substantial wage gains, combined with relatively low labor force participation rates suggests that we still have a long way to go before labor markets normalize:

The Precarious Jobs Recovery - Robert Reich - February’s 227,000 net new jobs – the third month in a row of job gains well in excess of 200,000 – is good news for President Obama and bad news for Mitt Romney. . But jobs aren’t coming back fast enough to significantly reduce the nation’s backlog of 10 million jobs. That backlog consists of 5.3 million lost during the recession and another 4.7 million that needed to have been added just to keep up with the growth of the working-age population since the recession began. If the American economy continues to produce jobs at the good rate it’s maintained over the last three months, averaging 245,000 per month, the backlog won’t be whittled down for another five years — long after Barack Obama finishes his second term, should voters grant him another. But whether even that good rate continues depends largely on whether consumer demand can be revived. Spending by American consumers is 70 percent of U.S. economic activity. But so far, spending is anemic. American consumers have replaced worn-out cars and appliances, but little else. They haven’t had the dough. Their wages are still falling, adjusted for inflation. The value of their homes – most consumers’ single biggest asset – continues to drop.

The Kick, Okun’s Law and the GDP-Less Recovery - My best read of the situation is that the economy still hasn’t quite “kicked” that is entered into a position where – as long as monetary policy co-operates – the general trend will be to close in on full employment. If the auto-sales continue to grow from their Fed pace of 15.1M SAAR then we are a good bit there. However, housing is not quite over the bridge. I should be clear that I don’t mean the single family owner occupied housing market is repaired, foreclosures have ended and families are no longer underwater. I don’t think this is likely to happen for some time. However, I also don’t think its necessary for a full recovery. Instead, what I am looking for are rental vaccancies so tight that builders will begin to step up the pace of multi-family starts even above what they have now. I am looking for rents to start increasing at somewhere in the neighborhood of a 4% annual rate. Given current long term interest rates this will make new apartment construction a no-brainer even if you don’t believe that a full recovery is coming. However, a booming construction industry will provide jobs and income for unemployed workers. This in turn will spur more household formation which in turn will spur even more multi-family construction.

Employment situation - It is a little late for analysis of the employment report, so I'll just post a couple of charts I had prepared to add this morning. If you go back to old days before the great moderation, when everyone worked on the premise of a four year economic cycle one of the points we all accepted was that Presidents wanted to have their recession in the first year of their term so that it would be forgotten by the time they stood for reelection. The exceptions to this rule were Carter and Bush Sr. and they both lost their reelection bids. But if you look at the Obama record with this analysis in mind his performance has not been out of line with other Presidents. The other chart is of the unemployment rate by education and should be self explanatory.

It’s That Time of The Month, Employment Data Leads To Investment Mood Syndrome- Every month the gummit’s Bureau of Liar Statistics (BLS) dutifully reports reams and reams of data on the employment situation in the US. Some of it is actually useful. The rest is reported by the mainstream financial news media.The BLS reports both seasonally adjusted (SA) data and not seasonally adjusted (NSA) data. The NSA data is the actual number collected via the monthly surveys. The SA number is the massaged, wishful thinking. It’s a kind of abstract impressionism, where an idealized view of reality may or may not represent actual reality.I like to look at the real numbers, the NSA data. It’s easy to compare it with the same month from prior years to see if the momentum of growth is positive or negative. Sometimes, the real numbers actually confirm the abstract impressionism of the SA numbers. I’m usually prepared to rant and rave about how misleading the SA numbers are each month, but this month I can’t do that. The raw, actual numbers were, surprisingly, pretty good. The cheerleaders looking at total SA nonfarm payrolls as a beat of the consensus were sort of on the right page. It’s purely random that that happened, but it is what it is. Employment grew in February. The growth was consistent with the 1% or so real growth in wage tax collections for the month, which I track in my weekly Treasury market updates

227,000 New Jobs Is Good. But Has the Economy Reached Escape Velocity? - Economy watchers talk often about economic recoveries requiring a “virtuous circle.” In such a scenario, job growth leads to higher wages and increased consumer demand, which in turn leads to more job growth. Tepid employment growth in the summer and fall of 2011 was barely enough to keep up with population growth, but the Labor Department’s announcement that this morning that the U.S. economy added 227,000 jobs last month, coupled with upward revisions of the two months prior, may mean that we finally have found our place in the “virtuous circle.” A deeper look into the numbers provides even more reason to be optimistic:

  • The labor participation rate, or the ratio of workers in the labor force to the total working age population, increased by 0.2%, allowing the unemployment rate to hold steady at 8.3% even though more people piled back into the labor force.
  • Average hourly earnings for all employees rose by 3 cents, or 0.1%. A modest increase surely, but any growth in wages will have a positive effect on consumer demand.
  • Government has stopped jettisoning jobs. One of the biggest drags on the recovery has been the fact that austerity on the state and local level has caused a huge decrease in the total number of government workers – 500,000 since President Obama took office. That trend slowed significantly this month, with government cutting just 7,000 jobs in all, down significantly from previous months.

Seven Lean Years - Krugman - OK, definitely a better jobs report than we have become used to. And terrific news for Obama; another six months of news like this and he’ll be in very good shape for reelection. But still, this was just equivalent to an average month during the Clinton years. And we’re still a long way from full employment. Let’s use the Atlanta Fed Jobs calculator: I get roughly 31 months to a reasonable definition of full employment at this rate. Since the recession began in December 2007, that would be almost 7 years of a depressed economy. Better than forever, but still an immense, disastrous, cruel failure of economic policy.

One Measure Puts February Job Creation at 879,000 - America’s jobs recovery has been one of the year’s biggest surprises, yet economists and Wall Streeters still seem unwilling to entertain the idea that we’ve turned a corner. Get this: According to one wonky measure, the economy added a staggering 879,000 jobs last month — roughly four times as many as Friday’s official government figure of 227,000. That’s right, 879,000.. It’s calculated from the “household” survey the Labor Department uses to churn out the unemployment rate — which is different from its “establishment” survey, which is what’s behind the monthly nonfarm jobs figures we’re all familiar with. According to Labor, tried to calculate the establishment figure using the results from the household survey, it would translate into 879,000 jobs in February. Each survey has advantages. The “household” gauge has a smaller sample size and isn’t revered like its “establishment” cousin. However, some economists believe it may better track changes in the U.S. business world — especially at times when we’re near a turning point, like now. (If you want more on the two surveys, check out Justin Lahart’s blog post last month.)

Why Didn’t Unemployment Rate Drop? - The U.S. unemployment rate stayed at 8.3% in February, but a broader measure dropped to 14.9% from 15.1% the prior month, indicating that the labor market is strengthening. Last year, a portion of the drop in the unemployment rate was due to people leaving the labor force, but that trend was clearly reversed this month. In fact, the headline jobless number was elevated due to a rising labor force, which may have been the result of the unemployed returning to the job market. The unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. In February, the household survey showed the number of people employed rose by 428,000, but the population only increased by 166,000 over the month. The number of unemployed was up just 48,000. The only reason that the unemployment rate didn’t decline is that the labor force jumped by 476,000. The labor force has dropped dramatically over the course of recession and recovery, and concerns have been raised it was due to discouraged workers. When those workers return to the labor force, it could put upward pressure on the unemployment rate. Meanwhile, the broader unemployment rate, known as the “U-6″ for its data classification by the Labor Department, dropped by 0.2 percentage point last month and has declined by a full percentage point in the past year.

February Jobs Market Report Shows Across the Board Strength - The latest report from the BLS shows across the board strength in the U.S. jobs market. Data on payroll jobs, unemployment rates, and labor force participation all showed a gradually strengthening economy. The headline increase of 227,000 new payroll jobs (233,000 in the private sector) was down a little from the January report. However, that slight decrease was more than offset by strong upward revisions to previous reports. Job growth for December, first reported at 200,000, has now been revised upward to 223,000. January’s number was raised from 243,000 to 284,000, which makes that month’s gain the strongest since May 2010. A recent backgrounder on the methodology of jobs data by Jeffrey Miller explains some of the reasons the job data is subject to extensive revision. Miller, who believes that the BLS is honest and does a good job, cautions against placing too much emphasis on the first numbers released for each month, which are based on an incomplete data set. Anyone looking for signs of a stronger economy can take heart from the fact that recent revisions have systematically been in the upward direction, as shown in this chart: Both goods-producing and service sectors showed job gains for the month, although services were stronger. Employment services, including temporary help services, health care, and leisure sectors led the growth of service jobs. Government jobs continued to decrease at both the federal and state levels. The one bright spot was local government education, which showed a gain of 5,200 jobs.

NFP: Is It As Good As The CNBSers Claim? in [Market-Ticker]: The NFP report is out this morning, and is: Nonfarm payroll employment rose by 227,000 in February, and the unemployment rate was unchanged at 8.3 percent, the U.S. Bureau of Labor Statistics reported today. Employment rose in professional and businesses services, health care and social assistance, leisure and hospitality, manufacturing, and mining. The Bureau of Lies and Scams claims that private employment rose by 233,000, with government decrementing the number by 6,000. The also claim that all of the employment gain in manufacturing came from durables, while the durable goods report was extremely negative last month. Hmmm... Let's look at the household data, which is (at least allgedly) actual counts. That looks pretty good, especially the red line. Hmmmm..... where did it come from? Oh there it is! Not-in-labor-force dropped like a stone, and that accounts for the move. It is also why the unemployment rate didn't move. Now the question is, did we get material improvement in the labor participation rate? Meh. 57.8 to 58.0, not even back to where it was in December (58.5). In fact, it's pretty much following the pattern of last year; March of 2011 was 58.1%, last February 57.8%.

Employment Summary and Discussion - This was a solid report, especially considering the upward revisions to payrolls for December and January. The better than normal weather helped, and there is still a long ways to go for a healthy labor market with solid wage gains. The participation rate increased to 63.9% (from 63.7%) and the employment population ratio increased slightly to 58.6%. The change in December payroll employment was revised up from +203,000 to +223,000, and January was revised up from +243,000 to +284,000. The average workweek was unchanged at 34.5 hours, and average hourly earnings increased 0.1%. This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at maximum job losses. The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was essentially unchanged at 8.1 million in February. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job. The number of part time workers decreased slightly in February and is still very high. These workers are included in the alternate measure of labor underutilization (U-6) that declined to 14.9% in February from 15.1% in January. Unemployed over 26 Weeks This graph shows the number of workers unemployed for 27 weeks or more. According to the BLS, there are 5.426 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 5.518 million in January. This is very high, but this is the lowest number since January 2009.

Unemployment by Job Category - The national unemployment rate held steady at 8.3 percent in February, mainly because more people started — or resumed — looking for work. But depending on the industry, unemployment rates are all over the map. Despite continuing layoffs at all levels of government, the unemployment rate among government workers was just 3.9 percent in February, down from 4.2 percent a year ago, not adjusted for seasonal factors. At the other end of the spectrum, agricultural workers suffer from an unemployment rate of 19.5 percent, compared with 18.4 percent a year earlier. Construction is another dismal spot: unemployment among construction workers remains high at 17.1 percent, although that has come down from 21.8 percent in February of last year. Unemployment in education and health services is 5.4 percent, and the Labor Department reported that unemployment in financial activities is 5.3 percent. Unemployment in professional and business services, meanwhile, is still high at 10.3 percent. In fact, that’s higher than the rate a year ago, when it was 10.1 percent. And while the unemployment rate in the wholesale and retail trade sector is 8.9 percent, there are more unemployed workers from those industries — 1.8 million — than any other industry.

The Part-Time Economy (Redux) While not shocking to most, the jump in temporary workers that we cited earlier is perhaps the biggest indicator of job 'quality' gains. As we discussed here last month, the US market economy remains mired in a low quality (“first-fired, first-hired categories rather than the type of core hiring that would build a stronger foundation for income growth,” as FTN's Jim Vogel describes it) recovery. About 160k of private jobs added in Feb are 'low-paying work' which left average hourly earnings up only 0.1%: Finally, and most, importantly, we hope that this analysis has proven that while the BLS may play around with various numerators, denominators, seasonal adjustments, and other irrelevant gimmicks which are only fit for popular consumption particularly by those who have never used excel in their lives, a deeper analysis confirms our concerns, that not only is America slipping ever further into a state of permanent "temp job" status, but that a "quality analysis" of the jobs created shows that the US job formation machinery is badly hurt, and just like the marginal utility of debt now hitting a critical inflection point, so the "marginal utility" of incremental jobs is now negative

Where Will 2012 Jobs Growth Come From? - The government reported broad-based gains in jobs for February, but which industries will be adding to payrolls over the coming year? The information-technology sector is set to add jobs, while more financial-services firms and the government will be cutting back, according to a survey of more than 2,000 executives by Corporate Executive Board, a research firm.The survey, which questions executives world-wide but is heavily weighted in North America, found that 64% in the IT sector — which includes computer hardware, software and services firms — aim to add to their headcount in 2012. The February payrolls report noted computer-systems design as one of the strongest sectors, adding 10,000 positions last month. By contrast just 27% of financial services executives, which include banking, insurance and real estate employee, plan to add staff this year, and 42% expect to reduce their headcount. In the payrolls report, financial activities managed to add 6,000 positions in February, but that has come on top of recent cuts in the sector.

Why Job Growth Is Likely to Slow - If you looked only at the monthly jobs report, you could start getting pretty optimistic about the American economy. The largest, broadest survey of employment — a survey of businesses — shows the best job growth in more than five years over the last 12 months, with the pace mostly accelerating in recent months. But the jobs report isn’t the only measure of economic activity, and another major measure — of gross domestic product — doesn’t look quite so cheerful. Macroeconomic Advisers, one of the most closely watched forecasting firms, reduced its estimate of economic growth in the current quarter to an annual rate of 1.8 percent, from 2 percent. And 1.8 percent growth does not generally lead to very strong job growth. In the fourth quarter of last year, by comparison, the economy grew 3 percent. Beyond the current quarter, forecasters expect the economy will grow at an annual rate of 2 to 2.5 percent for the rest of the year, according to Bloomberg. Based solely on the gross domestic product numbers, the obvious conclusion is that job growth will slow in coming months. Sure enough, most forecasters do expect job growth to slow. Barclays Capital expects 200,000 jobs a month for the rest of the year. IHS Global Insight forecasts a slowdown to 180,000 jobs a month. Macroeconomic Advisers says it will slow to 140,000 jobs a month in the final three quarters of this year.

Comparing Recessions and Recoveries: Job Changes - The United States recovery continued to show more fruits in the workplace in February, with the Labor Department reporting a net gain of 227,000 jobs for the month. It was the third-straight month of gains exceeding 200,000 — and in fact, the job growth for the previous two months was revised upward by a total of 61,000.The results provided new political fodder for President Obama in the presidential campaign — but again illustrated just how deep a hole was left by the recession. Four years after employment peaked, scarcely one-third of the net loss in jobs has been reversed. To put it another way, by the Labor Department’s count, after shedding some 8.8 million jobs in about two years, the economy has generated about 3.45 million in the ensuing two years.

Study: older workers are exiting fast, shrinking the labor force — New research challenges the conventional wisdom that the unemployment rate is falling because workers have given up looking for a job and have exited the labor force, and the rate likely will climb again once these discouraged Americans renew their search for a job. In a March 1 report titled "Dispelling an Urban Legend," economist Dean Maki at Barclays Capital, part of the British financial giant Barclays, argued that the size of the U.S. workforce is shrinking as aging baby boomers hit retirement age amid a sluggish economy. This — not the so-called missing workers from the labor force — may be knocking down the jobless rate faster than expected. "Based on our reading of the evidence, the conventional view that in recoveries the unemployment rate will stop falling and even start to rise because of surging labor force participation rates amounts to something of an urban legend," Maki and his colleagues concluded. "Such an event has not happened in the past and we do not believe it will this time either." A key private-sector gauge of employment, the ADP National Employment Report, was released Wednesday and showed a better than expected 216,000 private-sector jobs added last month. Historically, the ADP has been a good gauge of what the government's report will show days later.

Drop in unemployment tied to aging labor force - New research challenges the conventional wisdom that the unemployment rate is falling because workers have given up looking for a job and have exited the labor force, and the rate likely will climb again once these discouraged Americans renew their search for a job. In a March 1 report titled "Dispelling an Urban Legend," economist Dean Maki at Barclays Capital, part of the British financial giant Barclays, argued that the size of the U.S. workforce is shrinking as aging baby boomers hit retirement age amid a sluggish economy. This — not the so-called missing workers from the labor force — may be knocking down the jobless rate faster than expected.

Fastest growing occupations - BLS - Table 1.3: Fastest growing occupations, 2010 and projected 2020 - This table also can be found in the article, "Occupational Employment Projections to 2020," published in the January 2012 Monthly Labor Review.

Leaving the nest - ONE more thought on this morning's job report. I noted this morning that: The construction sector is still very weak; residential builders took on just 1,700 new workers in February. A better labour market overall, however, will raise housing demand and translate, eventually, into more of a recovery there. One big factor holding back housing demand has been the decline in household formation through the recession and weak recovery. Last week, a piece in the print edition noted of the housing market: A Goldman Sachs analysis reckons that growth in new households has been some 50% short of trend since the recession began, with over half of the shortfall coming from those aged 18-34. Goldman reckons the worst is over, and that the young should soon add to new housing demand. As Jed Kolko of Trulia points out, this morning's report included good news on that front: In February, the unemployment rate for 25-34 year-olds dropped to 8.7% from 9.0% in January and is at its lowest level in three years. The unemployment rate for all adults stayed steady at 8.3%. The recession hit this age group especially hard: their unemployment rate peaked at 10.6%, compared to 10.0% for all adults, but this gap is now closing. Here's a look at the numbers above:

A Lost Decade for Young American Workers - Whether they were college grads or just out of high school, wages for entry-level American workers fell between 2000 and 2011, according to a new study from the Economic Policy Institute. The left-leaning think tank has dubbed the aughts a "lost decade" for young workers, and it's a fairly apt description. College-educated men and women entering the workforce saw their inflation-adjusted earnings fall 5.2 percent and 4.4 percent, respectively. Wages slumped 8 percent for high school-educated men, and 3.1 percent for women. This isn't just a story about the Great Recession, although the downturn certainly helped force earnings down further and faster than they might otherwise have dropped. As the chart above shows, both education groups saw their pay consistently decline from the highs of the late 1990s. For high school grads, it was the resumption of a trend that began in the 1970s, as low-paid service employment began replacing manufacturing work. Their earning power has essentially been in recession since the Nixon administration, with a brief reprieve during the early web boom.

VitalSigns: Rising Labor Costs - Labor costs for non-farm businesses rose at an annual rate of 2.8% in the fourth quarter of 2011 from the previous quarter. Although the quarterly increase wasn’t as high as ones earlier in the year, this is a sign that labor costs are rising as the economy gathers steam. Higher labor costs could mean the strengthening jobs market is letting workers push for higher salaries.

Labor Costs Becoming Challenge to Fed, Companies - Wednesday brought a fuller picture of the U.S. labor markets: more jobs, slower productivity, and a bigger cost squeeze. Payroll giant ADP said private businesses continue to add workers at a strong clip, with 216,000 jobs added in February. A little later, the Labor Department said productivity for all of 2011 grew only 0.3%, well below productivity’s long-run trend of about 2.0%. Labor also revised up unit labor costs. For just the fourth quarter, unit costs grew at an annual rate of 2.8%, more than double the 1.2% reported a month ago. The large upward refiguring of unit labor costs, now rising at the fastest pace since late 2008, came from an upward revision to compensation. The data highlight a challenge in the outlook: Adding new [usually less experienced] workers tends to lower overall productivity and raise unit labor costs. Left unchecked, rising unit costs will push up inflation pressures and cut into profit margins, creating headaches for the Federal Reserve and U.S. companies alike.

Not So Encouraging- According to the conventional wisdom, data released this morning should be taken as an encouraging sign for the labor market."US Worker Productivity Growth Slowed in Q4, Which Could Signal More Hiring in Coming Months" - (AP) U.S. companies will have to keep hiring steadily to meet their customers’ rising demand. That’s the message that emerged Wednesday from a report that employers are finding it harder to squeeze more output from their existing staff. Worker productivity rose at an annual rate of 0.9 percent in the October-December quarter, the Labor Department said. While that’s a slight upward revision from last month’s preliminary estimate, it’s half the pace from the July-September quarter. A slowdown is bad for corporate profits. But it can be a good sign for future hiring. It may mean that companies have reached the limits of what they can get out of their existing work force and must add more workers if they want to grow. Unfortunately, history suggests that's not quite correct. As the following chart shows, a relatively sharp deceleration in the rate of productivity growth -- like we've seen recently -- has, except on two occasions over the past five decades, preceded or been associated with a slowdown in the pace of hiring.

Romney Waffles On Minimum Wage - Back in January, GOP presidential hopeful Mitt Romney was asked at a campaign event in New Hampshire whether he supported the idea of raising the minimum wage. "My view has been to allow the minimum wage to rise with the [Consumer Price Index] or with another index so that it adjusts automatically over time," Romney responded, according to a video shot by a staffer at the National Employment Law Project, which advocates for a higher minimum wage. "I already indicated that when I was governor of Massachusetts, and that’s my view." Romney tried to temper that statement while talking with Larry Kudlow on CNBC this week. On Monday the business show host pressed Romney on the minimum wage issue, saying that "a lot of conservatives, led by the Wall Street Journal editorial page, were horrified when you said you want to index the minimum wage for inflation ... Why do you want to raise the minimum wage?" First Romney responded by saying that he had vetoed a proposed boost to the minimum wage while governor of Massachusetts. Explaining his comments about pegging the minimum wage to inflation, Romney said, "The level of inflation is something you should look at, and you should identify what's the right way to keep America competitive."

Free Trade Or Democracy, Can't Have Both »  Recent stories about the conditions of Apple's contractors in China have opened many people's eyes about where our jobs, factories, industries and economy have been going, and why. The stories exposed that workers live 6-to-12-to-a-room in dormitories, get rousted at midnight to work surprise 12-hour shifts, get paid very little, use toxic chemicals, suffer extreme pollution of the environment, etc. Is this "trade?" Or is it something else? "Trade" means to exchange, to buy and sell, you buy from me and I buy from you. I have something you want and you have something I want, and we exchange. We both end up better off than where we started. Is it "trade" to close a factory here and move it to a country where people don't have a say? It is "trade" to just move all of the machines from a factory here to a factory there, send the same parts and raw materials over there, and then bring bring back whatever it was the factory used to make and sell it in the same places here? Is that really "trade?" Or would another word be more appropriate?  When people have a say we insist on good wages, benefits, safe working conditions, and a clean environment. We even go so far as to say we want good public schools, parks and opportunities for our smaller businesses. When We, the People have a say we get so uppity and ask for the most outrageous things!

Labor's Fight Is OUR Fight » Unions have been fighting the 1% vs 99% fight for more than 100 years. Now the rest of us are learning that this fight is also OUR fight.  The story of organized labor has been a story of working people banding together to confront concentrated wealth and power. Unions have been fighting to get decent wages, benefits, better working conditions, on-the-job safety and respect. Now, as the Reagan Revolution comes home to roost, taking apart the middle class, the rest of us are learning that this is our fight, too.  The story of America is a similar story to that of organized labor. The story of America is a story of We, the People banding together to fight the concentrated wealth and power of the British aristocracy. Our Declaration of Independence laid it out: we were fighting for a government that derives its powers from the consent of us, the people governed, not government by a wealthy aristocracy telling us what to do and making us work for their profit instead of for the betterment of all of us. It was the 99% vs the 1% then, and it is the 99% vs the 1% now.

The Fight to Protect America's Growing Home Care Workforce - People who care for children, elderly people, and disabled folks of all ages in home settings make it possible for the rest of us to head to our jobs, yet they're consistently left out of basic labor protections. That’s finally starting to change. In 2010, New York passed a Domestic Workers’ Bill of Rights that ensures decent work hours, paid time off, and recourse for discrimination. Now, the fight for similar bills has expanded to other states. The issue also recently made progress at the federal level, with President Obama announcing a proposed change to federal labor law late last year December that will cover more home care workers. The comment period for the proposed change ends next week. These workers, predominantly women and people of color, comprise a booming industry: The number of home health aide jobs, for example, is projected to grow by 50 percent by 2018. But the pay and benefits remain dismal, with home health aides earning a median salary of less than $10 an hour. They rarely receive paid time off, almost 40 percent have no health insurance, and half rely on public benefits to supplement their incomes. Nannies don’t fare any better: A recent survey showed that the most common pay is $600 per week, or $31,200 a year before taxes.

Fanning the Flames of Class Warfare - A curious phenomenon occurs during every economic crisis – the rich whine that they are the ones who are suffering most. While obviously one’s capacity to suffer under any circumstances is subjective, when we hear that the very well-to-do, under any reasonable definition of the term, seek pity, it comes across as callous and clueless.. That is especially so when the political agents of the rich are demanding still more tax cuts for them while doing their best to slash spending for programs that aid the poor.  Those with expectations of staying on top, who have grown used to living the good life, no doubt do suffer meaningfully when those expectations are shattered and they must learn to get by on incomes only five or 10 times the poverty-level income rather than 20 or 30 times. But they should have the good grace not to ask for sympathy from those who are unemployed, barely have enough to eat or have had their homes repossessed. In particular, the wealthy ought to stop demanding more tax cuts and cuts in spending for programs aiding the poor, as every Republican presidential candidate promises. That’s just repulsive.

Famed economist: Income inequality bad for economy - Joseph Stiglitz, a Nobel Prize-winning economist, offered a sobering outlook on Europe's debt crisis at Ramapo College, predicting the euro in its current form was unlikely to survive. Stiglitz – a Columbia University professor whose résumé includes stints as the World Bank's chief economist and Clinton administration adviser – said Europe's austerity measures wouldn't end the crisis, only lead to greater civil unrest or debt-saddled countries like Greece leaving the continent's common currency. After his speech Wednesday — part of the Eastern Economic Association speaker series — The Record sat down with Stiglitz to talk about wealth inequality, taxes and how to spur growth in the United States.

Full Employment: A Force Against Rising Inequality - One of the more compelling graphs in the inequality debate is the growth of real family incomes for low, middle, and high income families, going all the way back to the 1940s.  The reason for its popularity is that it’s one of the few pictures (though not the only one) that very clearly delineates a period of growing together and a period of growing apart.For example, comparing two roughly 30 year periods, 1947-79, when inequality was relatively unchanged, incomes just about doubled for each group shown in the figure.  But between 1979 and 2010, income growth at the middle and bottom was pretty much flat, with the important exception of the mid-1990s, discussed below.  High incomes rose more consistently over the period, though that trend too looks flat in the 2000s.  That is, however, an artifact of these data, which exclude realized capital gains, an important income source re inequality’s growth over this period.  In fact, other data which include cap gains show that the share of national income accruing to the top 1% grew to historic highs in 2007, before falling with the financial bust in 2008.

Young Adults See Their Pay Decline - Young people entering the job market are taking the brunt of the downward pressure on wages caused by high unemployment, according to a new analysis of pay trends. In data compiled for a coming report, the Economic Policy Institute, a center-left think tank in Washington, found that the average inflation-adjusted hourly wage for male college graduates aged 23 to 29 dropped 11% over the past decade to $21.68 in 2011. For female college graduates of the same age, the average wage is down 7.6% to $18.80. "New college graduates have been losing ground for 10 years," said Lawrence Mishel, president of the institute, which derived the figures from regular government wage surveys. The drop in average wages for young adults is in contrast to U.S. government figures showing that average inflation-adjusted hourly wages for production and nonsupervisory workers of all ages and education levels are up 3% from a decade ago. The EPI data are another sobering sign for college students and have implications for the economy. With wages falling for many young people and about flat for the nation as a whole, consumers have limited ability to pay down debts and revive the economy with more spending.

The Real Cost of Living: $150,000 Minimum - The divide between the 1 percent and the 99 percent has ignited a national debate about the income gap, especially since Occupy Wall Street protesters descended on lower Manhattan last fall. But how much money does it take to feel financially secure these days? The answer, at least according to a new survey of Americans by WSL/Strategic Retail, is $150,000. That level of income is more than three times the national median of $49,445 for 2010, and it’s enough to put a household into the top 10 percent nationally. The survey asked respondents to choose which of four categories best described them: I can’t even afford the basics; I can barely afford the basics and nothing else; I can afford the basics plus some extras; and I can afford the basics, the extras, and I’m able to save too. It is only at that $150,000 level that the survey found the vast majority of consumers, 88 percent, saying they could buy what they need, afford some extras, and still be able to save a bit.

Over 90% of the income gains in the first year of the recovery went to the top 1% - Emmanuel Saez of the University of California at Berkeley has updated his work with Thomas PIketty on the evolution of US Top Incomes to 2010. He finds that: “In 2010, average real income per family grew by 2.3% … but the gains were very uneven. Top 1% incomes grew by 11.6%, while bottom 99% incomes grew only by 0.2%. Hence, the top 1% captured 93% of the income gains in the first year of recovery. Such an uneven recovery can help explain the recent public demonstrations against inequality.” The 10 page update offers a clear picture of how income shares have varied over different business cycles, as well as the long-term trends since 1917. Top income shares fell dramatically after World War II, stayed flat, then began to rise in the early 1980s and have returned to their pre-War levels. The top 10% in the US take now take home about 47% of all income, but this is driven by the top 1% who account for 20%. The difference between the business cycle of the 1990s and the 2000s is that the incomes of the bottom 99% grew by 20% between 1993 and 2000, but only by 6.8% between 2002 and 2007.

The One Percent Bounce Back - The "one percent"--that is, the people in the top percentile of U.S. incomes, or families currently pulling down more than about $350,000--have been gobbling up an ever-larger share of the nation's income for the past three decades. But during the Great Recession of 2007-2009 the one-percenters took a break from their meal. Some observers, including Megan McArdle of the Atlantic, took this to mean that the 33-year inequality trend might be reversing itself. Most everybody else, including me, pointed out that income share for the top one percent typically falters during recessions. When the economy recovered, so would the Great Divergence. Now we know that it has. The World Top Incomes Database tells the story.   It was Piketty and Saez who, in a now-famous 2003 paper, introduced to discussion of American income inequality the terms "one percent" and "99 percent." Anyway, the WTIC now has numbers for the post-recession year of 2010.  Saez has posted an essay on his Web site ("Striking It Richer: The Evolution Of Top Incomes In The United States") that translates his 2003 paper into laymen's English. Every time he gets new numbers he updates the paper. The latest version explains that during the Great Recession average family income fell 17.4 percent.  In the first year of the recovery, 93 percent of all income gains went to the top one percent. As of 2010, recovery was a luxury item.

They're Baaack! - Krugman - The one percent, that is. Emmanuel Saez has updated his distributional estimates (pdf), and as expected the top 1% share, which fell in the crisis, has resumed its upward march. How many people wrote stories about how rising inequality was a thing of the past, when anyone who had looked at the data at all knew about the cyclical issue?

Richest 1 Percent Account For Nearly All Of U.S. Recovery's Gains: Report - Technically, the economy has been in recovery for two years. But it turns out the rich have been doing most of the recovering. In 2010 -- the first full year since the end of the Great Recession -- virtually all of the income growth in America took place among the country's very wealthiest people, says an economist at the University of California, Berkeley. The top 1 percent of earners took in a full 93 percent of all the income gains that year, leaving the other 7 percent of gains to be sprinkled among the vast majority of society. Emmanuel Saez and his colleagues crunched the data on income growth from 2010, the most recent year available, and found that it was shockingly lopsided. While much of the country is simply treading water, with a growing number of people either edging toward poverty or already there, the richest of the rich seem to be coping nicely. Saez's findings suggest that even though the recession dealt a blow to the 1 percent, it did little to push the U.S. off the path it's been on for decades -- that of a vast and growing disparity between the richest and poorest citizens. Income for most workers has barely risen in the last 30 years, but the top 1 percent of earners have seen their income almost triple in the same amount of time. Economists and other experts say that could be the result of any number of factors, including the decline of labor unions, the explosion in capital gains during the middle part of the aughts, and tax policies put in place in recent years that favor the wealthy.

Income inequality: Growing apart | The Economist - EMMANUEL SAEZ has updated his well-known series on income shares of top earners through 2010. Here's a look at the latest numbers: The share of income going to the top 1% rivaled that of the Gilded Age prior to the crisis. When it dropped precipitously in the recession, some observers mused that a structural break may have occurred. As of 2010, however, this seems not to be true. Including capital gains, the income shares of the top 10% and the top 0.01% are nearly back to Gilded Age highs (though still some way away from the highs immediately prior to the recession. Stripping out capital gains, the recession scarcely dented the fortunes of those at the very top. As Mr Saez notes: This suggests that the Great Recession will only depress top income shares temporarily and will not undo any of the dramatic increase in top income shares that has taken place since the 1970s. Indeed, excluding realized capital gains, the top decile share in 2010 is equal to 46.3%, higher than in 2007...

Inequality by County - (map) New York County — that is, Manhattan — is the third-most economically inequitable county in the United States, according to a recent report from the Census Bureau. Using Census data from 2006 to 2010, the report looked at the Gini index — a measure of income inequality that ranges from zero to one. A value closer to zero represents more evenly distributed incomes, whereas a value closer to one indicates that there are larger gaps between rich and poor. The map above shows Gini indexes by county. As you can see, counties in the South generally had more inequality, while counties in the Midwest had less. The county with the highest inequality was East Carroll Parish, La., with a Gini index value of 0.645. For comparison, the value for the United States as a whole was 0.467. The most equitable distribution of income was in Loving County, Tex — the nation’s least populous county, with fewer than 100 residents — with a Gini value of 0.207. Generally speaking, many of the counties with more equitable income distributions had small populations, or happened to be “a fast-growing county containing commuter towns within a large metropolitan area,” Below are tables showing the counties with the highest and lowest Gini index values.

The Swedish One Percent -- Krugman - Via Mark Thoma, Daron Acemoglu and James Robinson react to Allan Meltzer claiming that the top one percent is surging everywhere, even in Sweden, so it’s not a proper political issue. As Acemoglu and Robinson say, there’s other strange stuff in Meltzer; how does a rising premium for education explain soaring shares for a tiny segment of the highly educated? But as they say, the premise about a global shock doesn’t stand up to evidence — not even the evidence Meltzer presents. And you have no business talking about international income distribution if you don’t know about the invaluable World Top Incomes Database. What does this database tell us about Sweden versus America? Yes, the top one percent has risen a bit in Sweden. But how anyone could look at this and see the story as similar boggles the mind.

Who Is Rich These Days? The Income Gap Myth - Having known a few billionaires over the years, I’ve never seen one who had a butler or lived anything like rich people appear to have lived in 1930s movies with hordes of servants everywhere. To be sure, they indulge themselves, but not in ways that make them so different from the rest of society. When analyzing the distribution of wealth and income, economists often use ad hoc definitions for who is rich and who isn’t. For example, they often assume that those in lowest income quintile (20 percent of households) are poor, those in the middle three are the middle class, and those in the top quintile are rich. But using this method means that households with just over $100,000 would be considered rich, according to the Tax Policy Center. It would take about twice as much income to get into the top 5 percent. Looking at polls, in January The New York Times and CBS News asked people what social class they thought they belonged to. One percent put themselves in the upper class, 15 percent in the upper middle class, 41 percent in the middle class, 34 percent in the working class, and 8 percent in the lower class. These responses are identical to those given the last time the question was asked in 2005.

Wealth and Antisocial Behavior: Reverse Causality? - There is quite a bit of buzz about this just-prepublished article in the Proceedings of the National Academy of Sciences. Here is the abstract: In studies 1 and 2, upper-class individuals were more likely to break the law while driving, relative to lower-class individuals. In follow-up laboratory studies, upper-class individuals were more likely to exhibit unethical decision-making tendencies (study 3), take valued goods from others (study 4), lie in a negotiation (study 5), cheat to increase their chances of winning a prize (study 6), and endorse unethical behavior at work (study 7) than were lower-class individuals.The tone of the first wave of commentary, as far as I can tell, is that we knew it all along—rich people are nasty. I would like to put in a word, however, for the other direction of causality, that dishonesty and putting one’s own interests ahead of others are conducive to wealth. I certainly don’t mean this deterministically; there are lots of stone-broke cheats and chiselers out there. Nevertheless, at many key moments of life people face a choice, whether to shade a bit and advance their own career, or remain honest and end up back in the pack. Do you take credit for someone else’s work in order to get a promotion? Do you leave out some information that would reduce the likelihood of a sale that would make you a tidy profit? And if you find yourself in a zero-sum situation where your gain is someone else’s loss, do you push your advantage as hard as you can?

Other People's Suffering - The publication last week in the Proceedings of the National Academy of Sciences of “Higher Social Class Predicts Increased Unethical Behavior” provided fresh fodder for the liberal critique of the Republican Party and the corporate ethic.The paper, by Paul K. Piff of the University of California, Berkeley, and four colleagues, reports that members of the upper class are more likely than others to behave unethically, to lie during negotiations, to drive illegally and to cheat when competing for a prize. “Greed is a robust determinant of unethical behavior,” the authors conclude. “Relative to lower-class individuals, individuals from upper-class backgrounds behaved more unethically in both naturalistic and laboratory settings.”

Americas Poor: Extreme poverty has DOUBLED in the last 15 years - Doubled..not increased..its friggin doubled. Thom Hartman did a piece on it on his show recently and TruthOut has a short blurb on it, A new study shows that extreme poverty in America has doubled in the last 15 years: A new study from the National Poverty Center shows that extreme poverty in America has doubled in the last 15 years – bringing the number of Americans who live on less than two-dollars a day to 1.46 million. This is an outrage in a nation of four hundred billionaires who own more wealth than 150 million other Americans combined – and more proof that Reagan’s trickle-down economics is nothing more than a scam. The study was conducted by the National Poverty Cntr at the University of Michigan. You can read the entire report here (pdf). Let me give you a few of the lowlights:In fact the 1996 welfare reform ended the only cash entitlement program in the U.S.for poor families with children, replacing it with a program that offers time-limited cash assistance and requires able-bodied recipients to participate in work activities. This reform, combined with changes to other means-tested public programs that have raised the benefits of work for low income households, has been followed by a dramatic decline in cash assistance caseloads, from an average of 12.3 million recipients per month in 1996 to 4.4 million in June 2011; only 1.1 million of these beneficiaries are adults.

BBC: Poor America - With one and a half million (1.5 million) American children now homeless, reporter Hilary Andersson meets the school pupils who go hungry in the richest country on Earth. From those living in the storm drains under Las Vegas to the tent cities now springing up around the United States, P a n o r a m a finds out how the poor are surviving in America and asks whatever happened to the supposed ‘government’ and the Real People in charge – those who you ‘don’t see’ pulling on the strings; and their vision and welfare for the country. Could this be a form of ‘Social cleansing’ without the need of war or disease inflicted by the orchestrators – simply a controlled bout of poverty? Or is this the forced education that only condition children to know only a certain amount of knowledge that can only ever see them progress in working environments such as confined offices within the ‘Human Zoo’ qualities within the desperately overcrowded cities. Why are our children not educated properly – to be able to survive communally with real craft and building skills? Is the social mobility (as in other ‘rich countries’ such as the UK) only fairing the rich; the wealthy and the ‘clever elite’; the white collar criminal, as per usual?

Under $2 a Day in America, Part 1 - CBPP  - Living on less than $2 per person a day is one World Bank definition of poverty for developing nations.  Unfortunately, this threshold is increasingly relevant to the United States, according to a new study from the National Poverty Center.The number of U.S. households living on less than $2 per person per day — which the study terms “extreme poverty” — more than doubled between 1996 and 2011, from 636,000 to 1.46 million, the study finds (see graph).  The number of children in extremely poor households also doubled, from 1.4 million to 2.8 million.The figures are for cash income only, although the authors note that extreme poverty is up even when one counts non-cash benefits like SNAP (food stamps).  The authors note an apparent connection between the sharp growth in extreme poverty and the loss of public assistance benefits, stating that “This growth has been concentrated among those groups that were most affected by the 1996 welfare reform.”  The 1996 law replaced Aid to Families with Dependent Children, which primarily provided cash assistance to eligible families, with the Temporary Assistance for Needy Families (TANF) block grant, which provided states with a fixed level of funding which they could use for many different purposes.

This Week in Poverty: Hunger—Where We Are, Where We Need to Be - There were over 46 million Americans on food stamps (SNAP) last year, and in 2010 the program kept 3.9 million people from falling into poverty. Nearly half of all recipients are children, and 76 percent of participating families have at least one employed person. That’s a good sign that SNAP expanded exactly as it was designed to during the Great Recession and as the economy continues to struggle. But if we actually want to end hunger in the wealthiest nation in the history of forever, we have a long way to go. Three studies released this week tell us a lot about where we are and where we need to be. Consider the Food Research and Action Center’s (FRAC) report, Food Hardship in America 2011. Since January 2008, 1,000 different households have been asked every day by Gallup, “Have there been times in the past twelve months when you did not have enough money to buy food that you or your family needed?”  More people answered “Yes” in the third and fourth quarters of 2011 (19.2 percent and 19.4 percent) than in any period since the fourth quarter of 2008. The national rate for the entire year was 18.6 percent, up from 18 percent in 2010 and the highest annual rate in the four years FRAC has tracked the data.

MN GOP lawmaker compares food stamp recipients to wild animals - One Republican lawmaker in Minnesota expressed a peculiar but existing belief in GOP circles Friday afternoon, claiming that food stamps recipients are virtually similar to feeding wild animals. State Rep. Mary Franson released a Youtube video describing her hopes of reducing the amount of time residents in Minnesota could stay on food stamps from five years to three. “And here, it’s kind of ironic, I’ll read you this little funny clip that we got from a friend,” she said. “It says, ‘Isn’t it ironic that the food stamp program, part of the Department of Agriculture, is pleased to be distributing the greatest amount of food stamps ever. Meanwhile, the Park Service, also part of the Department of Agriculture, asks us to please not feed the animals, because the animals may grow dependent and not learn to take care of themselves.”

High Gas Prices Take Bite Out Of Meals On Wheels - The high price of fuel not only affects families and businesses, but non-profit agencies as well. Volunteer drivers who deliver food to low-income elderly people are looking for answers from members of Congress. Meals On Wheels driver Gayle Sagmoe has a VIP riding shotgun on her route: South Dakota Congresswoman Kristi Noem. "It's the number-one issue that our office hears about right now, is gas prices," Rep. Kristi Noem, R-South Dakota said. The 500-plus volunteer drivers with Meals On Wheels furnish their own vehicles and pay their own gas. "I go probably average of 12-15-18 miles a day for a route; at $4 a gallon that's not going to go very far," Sagmoe said. Drivers like Sagmoe worry that if gas prices climb too high, she may have to cut back on deliveries or stop volunteering altogether.

Former New Jersey governor goes undercover as homeless man - Former New Jersey Gov. Richard Codey went undercover earlier this week and disguised himself as a homeless person on the streets of Newark, New Jersey's largest city."To find a place to take you if you were homeless was impossible, essentially," Codey said. Most shelters in Newark require applicants to be on government assistance, or at least have an official ID.After having trouble finding shelter, Codey, who is now a state senator, turned to a resource most homeless people don't have -- a personal connection with the Mental Health Association of Essex County. The connection put him in touch with case worker Ross Croesmann, who places homeless people in shelters and was able to get Codey into the Goodwill Rescue Mission in downtown Newark at about 9 p.m.

Texas funding cut leaves local agencies scrambling to continue services for homeless - The impact of state budget cuts on homeless programs is evident on the calendar pages inside Larry Beasely's personal planner. Last year, full hours were blocked off and highlighted for one-on-one assessments that Beasely, a case manager, conducted with people staying at the Salvation Army's emergency shelter in Fort Worth. This year, each line is crammed with the names of people he assessed in hurried 15-minute meetings. The shelter reduced its case managers from four to one after the state eliminated funding for a $20 million state homeless housing and services program last year. Other programs affected by the cuts include an employment program, street outreach and rental assistance. The funding loss has left cities and nonprofit groups stretching dollars to avoid big lapses in services, officials say. At the Salvation Army emergency shelter, client assessments fell from about 1,400 in three-month periods to fewer than 500.

"Cuts to State and Local Government Workforces are Particularly Damaging for Women" - Cuts to state and local workforces have not been qually distributed between men and women. It's not even close (ideally, state and local employment would have been protected during the recession so that we wouldn't have to worry about this at all, but policy has been far from ideal):...cuts to state and local government workforces, while a significant drag on the economy as a whole, are particularly damaging for women. In 2011, women made up 46.6 percent of the overall labor force, but among state and local workers, about 60 percent are women. Because women are so disproportionately represented in state and local jobs, they also have taken the brunt of the job losses in state and local governments. Of the net change in total state and local employment between 2007 and 2011—a decline of roughly 765,000 jobs—70 percent of the drop is from female employees. Today, there are about 540,000 fewer women in state and local jobs than in 2007, compared with about 225,000 fewer men. ...

Average sales tax rate lowest in 45 years - The average sales tax rate that Americans pay dropped last year to the lowest level since 1967 as a shift to tax-free Internet sales and untaxed services keeps eroding the No. 1 source of revenue for state and local governments, a USA TODAY analysis finds. States and cities are being forced to keep their belts tight because sales tax collections rose only 1.2% last year even though consumer spending climbed 4.7%. Governments have jacked up sales tax rates in recent years to get more money. But consumers are a step ahead, buying less of what's taxed and using the Internet to save money. The result: higher tax rates covering a shrinking share of purchases. Americans paid an average 4.27% sales tax rate on purchases in 2011, down from 4.63% five years ago and far below the peak of 5.18% in 1973, according to an analysis of Bureau of Economic Analysis data.  The Internet isn't the biggest reason for the sales tax decline. The primary cause is a long-term shift to buying tax-exempt services rather than taxable goods. Americans today spend more money than ever on medical care, college tuition, health clubs, pet grooming, house cleaning and other services that are rarely covered by the sales tax.

Monday Map: State Beer Excise Tax Rates - Today's Monday Map shows state excise tax rates on off-premise sales of beer.

State and Local Government Borrowing Constraints - Tyler Cowen writes I view state and local government spending as falling because voters wanted it to, either directly or indirectly.  Inflation-adjusted net worth per capita is still below the level of the late 1990s, and not returning any time quickly (an important point), and so voters/spenders wanted to cut back somewhere.  Local government is the target they chose, and not just in the Red states.  My point is not that the median voter is all-wise, but rather the Austerians are the guy next door.  Voters apparently don’t see marginal local government activity as having the same value as cash in their pockets.  I’ll say a bit since I actually advised State and Local Governments on this issue and in some cases helped write the budgets. I would find it highly shocking that median voter preferences played any serious role in the period from late 2008 through 2009. The primary concern for most state and locals was survival. Unlike the Federal Government which has lender of last resort, local governments in particular can and have gone bust. The scale of the recession was an extinction level event.  The primary goal, certainly for the State and Local governments that we worked for and as far as we can tell most other folks we talked to was to hold on as long as we could.  This meant a general mantra of: cut what is easy now, or cut what is hard later.

Illinois State ‘On Brink Of Collapse’ - Illinois’ financial problems are forcing it to choose between its pensions and its teeth.  Governor Pat Quinn says the state needs to face its “rendezvous with reality” and tackle its dysfunctional budget habits. Top of the list, Mr Quinn says, is to slash spending on Medicaid, a federal programme that provides healthcare to poor Americans. To save a system he says is “on the brink of collapse”, Mr Quinn proposes cutting $2.7bn from Illinois’ $11.5bn Medicaid bill. Few would dispute that the state needs to change its behaviour. Last year, Illinois underfunded Medicaid by $2bn as it struggled with debts totalling more than $280bn, an $86bn hole in its public pension funds and a $9bn backlog of unpaid bills. The Medicaid tab has grown since the financial crisis, which pushed more people into poverty. In 2007, 2.1m Illinois residents were eligible for the low-income programme. Today, 2.7m qualify – 1.7m of them children, according to the state’s department of healthcare and family services.

Some states consider higher fuel taxes - As if gas prices weren't high enough, several states across the U.S. are looking to raise fuel taxes they say are needed to pay for roads and bridges that are outdated, congested and in some cases, dangerous. Maryland's governor is proposing a phased-in 6 percent sales tax by 2 percent a year, which would raise about $613 million annually when fully implemented. Iowa is considering raising its current 21-cent-per-gallon tax by either 8 cents or 10 cents. Such proposals were hard to even contemplate during the recession and its immediate aftermath. Now, states forced to grapple with the problem are running into record-high gas prices for this time of year and lingering effects of the recession. In Maryland, lawmakers are questioning whether the time is right for such an increase, which is never popular even in good fiscal times. "They understand that it's needed," The average price of gas on Monday pushed toward $3.80 a gallon. "They get that, but they basically believe that you can't get blood out of a turnip. It's going to be a very, very tough sell."

State analysts brief Maryland lawmakers on ‘doomsday’ budget plan - Maryland analysts outlined nearly $800 million in potential budget cuts on Tuesday that would have considerable consequences for education, health and aid to local governments in a so-called doomsday alternative plan to Gov. Martin O’Malley’s proposed budget. The plan has been presented to lawmakers in case they fail to agree on new revenues and savings needed to balance the state’s books for the next fiscal year and reduce an ongoing $1.1 billion deficit by half. “This is not a scare tactic,” Senate President Thomas V. Mike Miller, D-Calvert, said. “The governor’s proposed budget, it’s got revenues as well as cuts. You’ve got three options — revenues, cuts or a combination of both, and this is what we’re going to come up with if we can’t come up with an agreement.”

Biggest Court in Nation Cuts Operations in 'Crippling Blow' - The nation's biggest court announced Monday extraordinary staff cuts and courtroom closures as a result of both California's budget crisis and long term policy by the top administrative brass for California's courts. "These are extraordinary measures, never before seen in the Los Angeles Superior Court," wrote Presiding Judge Lee Edmon in a memo sent to court staff Monday. "These changes will affect every judicial officer and staff member -- as well as the millions of attorneys and litigants who depend upon our courts to deliver justice." The immediate effect of the cuts is the layoff of 300 court employees this June plus the closure of 50 courtrooms. "It looks certain that more than 50 courtrooms will be closed countywide," said Los Angeles Superior Court Judge Dan Oki who is on the court's budget working group. "Our leadership in the past has done a great job reducing our operating budget without affecting courtroom operations," he added. "But that ability is gone now and we're moving strongly into the courtrooms."

Judge clears way for record bankruptcy in Alabama -  A judge in Birmingham has cleared the way for Alabama's largest county to move forward with the largest municipal bankruptcy in U.S. history. U.S. Bankruptcy Judge Thomas E. Bennett says state law authorizes Jefferson County to file for bankruptcy. Bennett is overruling objections by Wall Street creditors, who asked him to dismiss the bankruptcy petition. Bennett issued his order late Sunday. Jefferson County filed the largest municipal bankruptcy ever in November after years of negotiations failed to resolve a more than $4 billion debt linked to borrowing for the county's sewer system. Lenders asked Bennett to throw out the case, arguing that Alabama law doesn't allow Jefferson County to file a municipal bankruptcy. That would have sent the case back to negotiations. The judge disagreed, authorizing the bankruptcy

Bankruptcy Approved - Federal Judge Thomas Bennett cleared the way for Jefferson County to officially enter into Chapter 9 Bankruptcy. The order Overrules objections filed by The Bank of New York Mellon which sought to stave off Chapter 9 and forcing the County to resume negotiations with creditors over the counties multi-billion dollar sewer debt. The order ensures that the county may continue to operate while reorganizing the debt. While the order does not specify the amount of debt that Jefferson County will still have to pay, it does find that Jefferson County did negotiate in good faith with creditors to reduce its debt obligations.

Pennsylvania's Harrisburg to Skip Two Debt Payments - Pennsylvania's distressed capital city, Harrisburg, will skip $5.3 million of debt payments due next week, the first time the city has defaulted on its general obligation bonds, to ensure there is enough cash to fund vital services. Pennsylvania's capital of 50,000 people is mired in $326 million of debt due to the expensive retrofits and repairs of its troubled trash incinerator. "Although this default on general obligation bonds is unfortunate, I don't think it's going to hold up the process for proceeding under the recovery plan," Receiver David Unkovic said. The state tapped Unkovic to serve as receiver, and he devised a recovery plan that includes the proposed sale or lease of the city's major assets, including parking garages and the incinerator itself. Commonwealth Court President Judge Bonnie Leadbetter on Friday approved the plan, noting that it may change with more investigation from the receiver. Holders of the affected bonds and notes do have some protection because principal and interest payments are insured by Ambac Assurance Corp., Unkovic said.

Municipal Defaults May Surpass Record in 2011, Lehmann Says-- Municipal-bond defaults, including bankruptcies and the use of reserve funds for payments, may set a record this year as tobacco bonds and AMR Corp.’s Chapter 11 filing push the total to more than double the previous mark, said Richard Lehmann, publisher of the Distressed Debt Securities Newsletter. Adding tobacco debt sold by states such as California and Ohio as well as AMR-backed munis, the total will eclipse the $8.62 billion high set in 2009, Lehmann said today. His newsletter in Miami Lakes, Florida, tracks defaults and uses a broader measure than those applied by other municipal analysts. “We’re going to hit $20 billion this year,” Lehmann said today in a telephone interview. His tally wraps in everything from bankruptcies to missed payments and using reserve funds to service the debt. “These amounts will make 2011 the highest default year by far,” he said. Not all analysts put AMR and tobacco debt in their totals for defaults in the $2.9 trillion market, because payments to investors haven’t been officially missed, said Matt Fabian, managing director of Municipal Market Advisors in Concord, Massachusetts. Fabian, who compiles payment defaults, said those have reached $2.1 billion this year, down from about $2.8 billion in 2010.

The Growing Impact of “Mini Muni” Bonds - Of all the places to park cash after the financial crisis, the Oppenheimer Rochester Municipals fund seemed like an obvious choice. The fund, as its name implies, is filled with municipal bonds, those boring pieces of debt that typically finance sewers, highways and other civic projects. Those bonds have offered attractive yields and, for New York residents in particular, a ton of protection from taxes. So it's not surprising that the fund's assets grew more than 30 percent in the year after the crash. But it turns out, the $7.7 billion fund, one of the largest muni bond funds in the U.S., has been buying things that might surprise investors. The fund owns bonds that finance run-of-the-mill drainage projects and roads, but it also has a stake in a financially strapped nursing home, a hospital that has missed two bond payments and a charter school that shut its doors. The fund even owns the bonds of the American Folk Art Museum, known for its collection of unique quilts and, now, for not making payments on its $32 million in debt. (Its revenue fell almost 75 percent in two years, according to public documents.) Smaller, less traditional bonds like these seldom have independent ratings of their creditworthiness, but they make up almost one-fifth of the Oppenheimer fund's holdings.

Democracy, wealth, and local stimulus spending -- Paul Krugman asked a good question yesterday: “…if states and localities can borrow freely, how do you explain the drastic fall in their spending I have been documenting?” This is maybe too literal an answer to address his macroeconomic concerns, but I view state and local government spending as falling because voters wanted it to, either directly or indirectly.  Inflation-adjusted net worth per capita is still below the level of the late 1990s, and not returning any time quickly (an important point), and so voters/spenders wanted to cut back somewhere.  Local government is the target they chose, and not just in the Red states.  My point is not that the median voter is all-wise, but rather the Austerians are the guy next door.  Voters apparently don’t see marginal local government activity as having the same value as cash in their pockets.  There still may be a role for a federal fiscal bridge to ease the transition, but in democratic systems some expenditure declines are in the cards, just as the rollicking revenues of earlier years led to big boosts in state and local spending.  We are not as wealthy as we thought we were, and greater federal borrowing can blunt this reality only to some extent.  The notion of a voter ideal point ought to somewhere enter the analysis.

Detroit Police Roll Out New 911 Policy -- An old man beaten down by a carjacker last month. People stepping around him like he's garbage. Ignoring his calls for help. But what if somebody had the heart to call the police? There's a distinct possibility they wouldn't have come. Not with the new 911 policy. Unknown to most people, the Detroit police last week quietly rolled out its latest plan to save money: Virtual 911. This is how it works. If you've been held up and the gunman is long gone, or you've been assaulted but not too badly, or your home has been broken into, that's not 911 anymore. They'll transfer you or you can call the Telephone Crime Reporting Unit yourself at 313-267-4600. Since officers couldn't get to a majority of the 850,000 calls to 911 last year, most of the time you'll talk to an operator, not a cop. Nobody in the police department wanted to explain this on camera, but I'm told by a spokesperson if your call is life-threatening, you'll get an officer. Nobody we spoke to, however, thought this was a good idea.

Hamtramck, Wayne Co. face rising struggles making payroll - School districts and communities are considering tough decisions to cope with cash-flow problems tied to the current economy, some warning of payless paydays and looking to short-term loans and pay advances. Hamtramck Employees may soon experience payless paydays as the city faces an almost $2 million deficit by June. The city notified employees Tuesday some of their paychecks from the end of March through June could be put on hold, said City Manager William Cooper. The city had a $2.2 million general fund balance in place to cover an anticipated shortfall, but a recent series of financial hits has left the city in a bind. Besides income and property tax revenues losses, the city recently received $1 million less in property tax revenue from General Motors Detroit-Hamtramck Assembly and lost $200,000 in state revenue sharing. Wayne County again is facing a cash flow problem, requiring officials to approve an estimated $200 million in short-term loans this year to meet payroll and pay vendors. The county's Department of Management and Budget is expected to take in $100 million in the short-term funds by the end of the month.

As Usage Rises, Libraries Struggle to Stay Open- It's an all-too-familiar cycle in municipal budgeting: the city's on the verge of going broke, officials propose cutting funding to libraries, community members protest. It's happened in countless cities, especially since the onset of the recession. In Philadelphia, the record seems to be skipping: that city's libraries have been the recurring focus of proposed and realized cuts. When officials proposed shuttering 11 of 54 branches of the Free Library of Philadelphia back in 2008, outrage followed, community members pushed back, and eventually the branches were spared. Though the closures were prevented, cutbacks were not. Hours were slashed. And the drama has waged on over the years, with the mayor periodically threatening to close down or severely constrict the city's libraries. Larry Eichel, project director of the Philadelphia Research Initiative at The Pew Charitable Trusts wanted to know how cutbacks have affected library users not just in Philadelphia, but nationwide. He led a Pew study looking at big city library systems to see how they've fared in recent years – before the recession, during, and throughout the recovery. The report, The Library in the City, compares Philadelphia's system to those of 14 other large cities in the U.S. – Atlanta, Baltimore, Boston, Brooklyn, Charlotte, Chicago, Columbus, Detroit, Los Angeles, Phoenix, Pittsburgh, Queens, San Francisco and Seattle.

Alarming Number of Homeless Students - An alarming number of students in Pueblo City Schools do not have a place to call home. According to February reports, 1,523 students reported they do not have a permanent address, and have spent some of this school year homeless. Even more surprising is the growing number of teens who survive on their own. 57 students have to find shelter by themselves, many do what’s called “couch surfing” living at various friends houses, or they simply live on the streets. These are the latest numbers from Pueblo City Schools. They take an annual student survey as part of the district’s compliance with the federal Title X program. The program is aimed at helping students in homeless situations. And the numbers may be even higher. Posada officials say this is because most teens don’t choose to report it. Many times they are reluctant in order to not let their peers know, because they are running away from unstable homes of foster homes, or are afraid of getting in trouble with the law.

Are black and Hispanic students singled out for punishment in school? Report shows minorities receive harsher discipline than white peers - A new study shows that minorities are given far less opportunity than their white peers, are taught by less experienced teachers, and made up the majority of students arrested. According to the U.S. Department of Education’s Office for Civil Rights, black students – especially males - are three and a half times as likely to be suspended or expelled, according to the report. More than 70 per cent of students involved in school-related arrests or cases referred to law enforcement were Hispanic or African-American. The findings come from a national collection of civil rights data from 2009-2010 of more than 72,000 schools serving 85 per cent of the nation. 'The sad fact is that minority students across America face much harsher discipline than non-minorities, even within the same school,' Education Secretary Arne Duncan told reporters.

Black Students Face More Discipline, Data Suggests - Black students, especially boys, face much harsher discipline in public schools than other students, according to new data from the Department of Education. Although black students made up only 18 percent of those enrolled in the schools sampled, they accounted for 35 percent of those suspended once, 46 percent of those suspended more than once and 39 percent of all expulsions, according to the Civil Rights Data Collection’s 2009-10 statistics from 72,000 schools in 7,000 districts, serving about 85 percent of the nation’s students. The data covered students from kindergarten age through high school. One in five black boys and more than one in 10 black girls received an out-of-school suspension. Over all, black students were three and a half times as likely to be suspended or expelled than their white peers. And in districts that reported expulsions under zero-tolerance policies, Hispanic and black students represent 45 percent of the student body, but 56 percent of those expelled under such policies. “Education is the civil rights of our generation,” said Secretary of Education Arne Duncan, in a telephone briefing with reporters on Monday. “The undeniable truth is that the everyday education experience for too many students of color violates the principle of equity at the heart of the American promise.”

Philadelphia school deficit could hit $400 million, official says - The Philadelphia School District could face a budget shortfall of as much as $400 million in the next fiscal year, a top district official said Tuesday. Or it could be $145 million - "still very big" but more manageable, said Thomas E. Knudsen, the district's chief recovery officer. In a bit of good news, the district's current deficit has shrunk from $38.8 million to $26 million as the result of cuts and identification of new funding sources, he said. Knudsen revealed the budget figures Tuesday evening during a presentation to students about the district's financial health at School District headquarters on North Broad Street. The district estimates that its budget deficit will be $248 million, but that number could improve or worsen depending on new expenses and revenues, he said. If City Council and Mayor Nutter agree on changing the property-tax system with more accurate assessments, the district could see $94 million in added revenue, Knudsen said. The city is counting on more property-tax revenue in the next fiscal year thanks to the Actual Value Initiative, an effort to fix decades of inaccurate and incomplete assessments.

Long Beach board of education to review worst-case scenario budget -The Long Beach Unified Board of Education on Tuesday is expected to review a grim budget plan that calls for extreme cuts including eliminating high school sports and slashing the school year by 20 days if a November tax initiative fails. In a worst-case scenario, the district projects a $189 million deficit out of its $700 million operating budget by 2014 if state budget cuts continue. School officials are hoping voters will approve a November tax initiative that would help fund schools, but if the initiative fails, the district is most certainly looking at budget reductions that will be felt deep in the community, said LBUSD spokesman Chris Eftychiou. "We've cut so much for so long and now we're down to the bone," he said. By law, the district is required to provide a fiscal stabilization plan to the Los Angeles County Superintendent of Schools showing that it can meet its financial obligations for this fiscal year and the next two years.

Nearly 1,700 Layoff Warnings Issued by City Schools - The San Diego Unified School District board of trustees voted unanimously Tuesday evening to issue almost 1,700 pink slips to educators. I couldn’t be at Tuesday’s meeting, but I was able to attend a pre-meeting rally outside the school district auditorium where dozens of teachers, parents, grandparents and kids waved banners and chanted "No more layoffs." During a speech to the crowd, teachers union President Bill Freeman pointed stoically at the windows of the district's administrative headquarters, saying no teachers should be laid off until "all the lights are off in that building." The layoff notices are preliminary and are based on the district’s worst-case-scenario according to preliminary reports about the state budget. Last year, the district issued a similar number of pink slips but most were eventually rescinded.

About 2,000 Sacramento-area teachers getting notices; including 100+ in Placer County — Nearly 2,000 Sacramento-area teachers are wondering if they'll be losing their jobs this year. The Sacramento Bee reports that pink slips due by March 15 will warn teachers and other school employees that they could be out of work by the end of the school year. The newspaper says Sacramento City Unified board officials have voted to send notices to 700 teachers, while San Juan Unified officials have notified more than 600 employees, and Elk Grove Unified officials have sent out notices to 239 school employees. Placer County education leaders say about 125 teachers will get preliminary layoff notices, while smaller districts, including Twin Rivers Unified, will also be sending out notices.

Schools face $8 million in possible budget cuts - Laura Hewitt worries about her young son entering kindergarten this fall. Since 2008, the school district has cut nearly $7 million in programs and student services to maintain a balanced budget. Increasing class sizes has been one of the district’s many cost-saving measures. But officials say they’re facing “even tougher choices” in the months ahead if state tax initiatives don’t pass in November. Gov. Jerry Brown hopes to raise $6.9 billion in revenue by temporarily increasing the state sales tax by half a cent and raising taxes on individuals who earn $250,000 or more per year. The tax increases would expire in five years. If the taxes don’t pass, Napa Valley Unified will face a mid-year cut of up to $450 per student and a gaping budget shortfall of $8.6 million, said Wade Roach, assistant superintendent of business services. The impacts of those cuts would be widespread, affecting everything from transportation to counseling services.

Feds Buying 7 Million Pounds Of 'Pink Slime' For School Lunches - Pink slime -- that ammonia-treated meat in a bright Pepto-bismol shade -- may have been rejected by fast food joints like McDonald's, Taco Bell and Burger King, but is being brought in by the tons for the nation's school lunch program. The U.S. Department of Agriculture is purchasing 7 million pounds of the "slime" for school lunches, The Daily reports. Officially termed "Lean Beef Trimmings," the product is a ground-up combination of beef scraps, cow connective tissues and other beef trimmings that are treated with ammonium hydroxide to kill pathogens like salmonella and E. coli. It's then blended into traditional meat products like ground beef and hamburger patties. "We originally called it soylent pink," microbiologist Carl Custer, who worked at the Food Safety Inspection Service for 35 years, told The Daily. "We looked at the product and we objected to it because it used connective tissues instead of muscle. It was simply not nutritionally equivalent [to ground beef]. My main objection was that it was not meat."

Teachers, Unhappy in Their Work - Over the course of the Great Recession and its aftermath, school district budgets have been ravaged while 270,000 teachers and other public school employees have lost their jobs. The teachers who have not been laid off have also been deeply affected by the economic downturn: class sizes are larger, after-school and arts enrichment programs have been cut, and an increasing number of their students are relying on safety net sources for health services and other basic needs. As a result, job satisfaction among public school teachers is plumbing new lows, according to the MetLife Survey of the American Teacher. The survey, conducted by Harris Interactive on behalf of MetLife, found that teacher satisfaction has dropped to its lowest level in more than 20 years, and that the proportion of teachers who report being very satisfied with their work has fallen by 15 percentage points in just two years. Only 44 percent of teachers surveyed reported being very satisfied with their jobs, compared with 59 percent in 2009. The layoffs of recent years have definitely taken a toll on teachers’ sense of job security. In 2006, 92 percent of teachers said they thought their job was secure. By 2011, that proportion had fallen to 64 percent.

Breaking: Making Teachers Feel Like Garbage Makes Them Feel Like Garbage - Gee, if you demean teachers, single them out using dubious metrics and promote the idea that the way to improve schools is to fire them, small wonder that teachers start to feel unwanted: The slump in the economy, coupled with the acrimonious discourse over how much weight test results and seniority should be given in determining a teacher’s worth, have conspired to bring morale among the nation’s teachers to its lowest point in more than 20 years, according to a survey of teachers, parents and students released on Wednesday. More than half of teachers expressed at least some reservation about their jobs, their highest level of dissatisfaction since 1989, the survey found. Someone can explain to me how public education in America is enhanced by making teachers feel like shit. By the way, the real goal of this right-wing education policy isn’t solely to humiliate teachers as much as it is to humiliate unions. For the most part, the only organized entity that pushes back against right-wing ideas about education are teacher’s unions. So if you take them down a notch in the eyes of the public, you have more opportunity to get policies through like vouchers and charter schools and all the rest.

The Value Added Teacher Model Sucks - Today I want you to read this post (hat tip Jordan Ellenberg) written by Gary Rubinstein, which is the post I would have written if I’d had time and had known that they released the actual Value-added Model scores to the public in machine readable format here. If you’re a total lazy-ass and can’t get yourself to click on that link, here’s a sound bite takeaway: a scatter plot of scores for the same teacher, in the same year, teaching the same subject to kids in different grades. So, for example, a teacher might teach math to 6th graders and to 7th graders and get two different scores; how different are those scores? Here’s how different: Yeah, so basically random. In fact a correlation of 24%. This is an embarrassment, people, and we cannot let this be how we decide whether a teacher gets tenure or how shamed a person gets in a newspaper article.

California State rolls out plan for centralized online learning portal -The California State University System on Friday released new documents describing its plans for a centralized online learning hub, moving the system closer to its vision of a top-flight virtual campus while drawing skepticism from some faculty. The portal, called Cal State Online, will serve as a gateway to all virtual courses offered by the system’s 23 campuses. The goal is to increase capacity at California State, where massive budget cuts have coincided with a rising demand for higher ed degrees. System officials hope a centrally administered approach to online education will enable the university to enroll more online students and turn away fewer qualified applicants. Cal State Online will not outsource course development or instruction to outside providers, focusing instead on promoting existing online courses being offered by individual campuses and encouraging California State faculty to develop new ones, according to the current plan. While California State cannot be called a pioneer in distance education, its moves could have national significance. With more than 400,000 students, the system is the largest in the United States. And its online strategy, as well as the parallel efforts of the University of California, could serve as a test of whether a massive public higher ed system under extreme financial duress can use online education to expand access, streamline costs, and keep its faculty happy all at the same time.

Apprenticeships v. College - In my post, College has been oversold, I discussed the 40% college dropout rate. In a piece in this week’s Chronicle of Higher Education, Tuning in to the Dropping Out, I reprise some of this material but also discuss high school dropouts and the importance of alternative education paths. In the 21st century, an astounding 25 percent of American men do not graduate from high school. A big part of the problem is that the United States has paved a single road to knowledge, the road through the classroom.  Lots of students, however, crash before they reach the end of the road. Sit-down learning is not for everyone, perhaps not even for most people. There are many roads to an education.Consider those offered in Europe. In Germany, 97 percent of students graduate from high school, but only a third of these students go on to college. In the United States, we graduate fewer students from high school, but nearly two-thirds of those we graduate go to college. So are German students poorly educated? Not at all.Instead of college, German students enter training and apprenticeship programs—many of which begin during high school. By the time they finish, they have had a far better practical education than most American students—equivalent to an American technical degree—and, as a result, they have an easier time entering the work force.

Equality of Opportunity? Never Mind - Krugman - David Firestone catches Mitt Romney denying any public responsibility to help less-fortunate Americans get an education: “It would be popular for me to stand up and say I’m going to give you government money to pay for your college, but I’m not going to promise that,” “Don’t just go to one that has the highest price. Go to one that has a little lower price where you can get a good education. And hopefully you’ll find that. And don’t expect the government to forgive the debt that you take on.” Just the other day, Romney was telling us that he was the true heir of Teddy Roosevelt, because he favored equality of opportunity, not equality of results. Just a reminder of how unequal access to higher education already is: low-income students with high test scores are less likely to finish college than high-income students with low test scores: And Romney proposes making it even more unequal.But hey, he personally made it the hard way, getting through college with no income except from selling the stocks his father gave him.

Ignorance Is Strength, Paul Krugman - One way in which Americans have always been exceptional has been in our support for education. First we took the lead in universal primary education; then the “high school movement” made us the first nation to embrace widespread secondary education. And after World War II, public support, including the G.I. Bill and a huge expansion ofpublic universities, helped large numbers of Americans to get college degrees. But now one of our two major political parties has taken a hard right turn against education, or at least against education that working Americans can afford. Remarkably, this new hostility to education is shared by the social conservative and economic conservative wings of the Republican coalition, now embodied in the persons of Rick Santorum and Mitt Romney. And this comes at a time when American education is already in deep trouble. Adjusted for inflation, state support for higher education has fallen 12 percent over the past five years, even as the number of students has continued to rise; in California, support is down by 20 percent.

Google Begins to Scale Back Its Scanning of Books From University Libraries - Google has been quietly slowing down its book-scanning work with partner libraries, according to librarians involved with the vast Google Books digitization project. But what that means for the company's long-term investment in the work remains unclear.Google was not willing to say much about its plans. "We've digitized more than 20 million books to date and continue to scan books with our library partners," a Google spokeswoman told The Chronicle in an e-mailed statement. Librarians at several of Google's partner institutions, including the University of Michigan and the University of Wisconsin systems, confirmed that the pace has slowed. "They're still scanning. They're scanning at a lower rate than the peak," said Paul N. Courant, Michigan's dean of libraries. At Wisconsin, the scanning pace is "something less than half of what it was" in 2006, the year the work started there, said Edward V. Van Gemert, the university's interim director of libraries.

Out of Community Colleges and Into For-Profits - Last week I wrote about how cash-strapped state schools are cutting courses that cost more to teach, which unfortunately also happen to be the classes that are most likely to get students jobs (nursing, engineering, etc.). A couple of readers wrote to me asking why private schools don’t just step in to fulfill unmet demand for job-friendly courses unavailable at community colleges. Many private colleges are doing just that. In fact, perhaps the biggest beneficiaries of state cutbacks for higher education are the private for-profit schools, like the University of Phoenix and Kaplan University. John Aubrey Douglass, a research fellow at the Center for Studies in Higher Education at the University of California, Berkeley, actually wrote a paper last month about this shift from public colleges to for-profits, which has precedents. He calls it the “Brazilian effect”: The merits of routing students away from public schools and into for-profits are debatable. The for-profits can be seen as “nimble critters” and/or “agile predators,” to use the language of three Harvard economists who analyzed this sector in a recent paper.

Grading Student Loans - NY Fed - Student loans support the education of millions of students nationwide, yet much is unknown about the student loan market. Relevant data are limited and, for the most part, anecdotal. Also, sources tend to focus on recent college graduates and do not reveal much information about the indebtedness of parents, graduate students, and those who drop out of school.   To inform the public and policymakers, we devote this post to some new findings obtained from the FRBNY Consumer Credit Panel, a unique and nationally representative data set sourced from Equifax credit reports. The FRBNY Consumer Credit Panel has made possible our Quarterly Report on Household Debt and Credit, first issued in the second quarter of 2010. We will examine the overall student loan debt market as of third-quarter 2011, giving particular attention to changes from the second to the third quarter and highlighting new findings by age group as well.

Study Finds a Growing Student Debt Load - A report released Monday by the Federal Reserve Bank of New York renews concerns about the growing debt load of college students and graduates. The report suggests that as many as 27 percent of the 37 million borrowers have past-due balances of 30 days or more. “In sum, student loan debt is not just a concern for the young,” the report said. “Parents and the federal government shoulder a substantial part of the postsecondary education bill.” The report, which was created by an analysis of Equifax credit reports, said the total balance of student loans was $870 billion. Of the 241 million with Equifax credit reports (there are 311 million people in the United States), 15 percent had student debt. Forty percent of the people under 30 had outstanding student loans, and the average outstanding debt is $23,300. About 10 percent of borrowers owe more than $54,000 and 3 percent owe more than $100,000. Noting that that existing figures on student loans are spotty and largely anecdotal, the Fed said its analysis was an attempt to provide more accurate accounting of delinquency data. The Federal Reserve came up with the delinquency figure by excluding from their calculation borrowers who were still students or those who were granted permission to postpone payments. If they were included in the total, the percentage of borrowers who were 30 days late in making payments is 14 percent.

New data on student debt from the NY Fed - The Federal Reserve Bank of New York is out with some new data on student debt (“Grading Student Loans”). Two major highlights: beware of using simple averages, and, more strikingly, more than one in four borrowers is behind on payments—more than twice the share of other forms of personal debt.  Total student debt is about $870 billion—more than credit card balances ($693 billion) and auto loans ($730 billion). That’s an enormous number, but economists have paid it little attention—surprising, considering the attention paid to household finances. And student debt continues to rise, even though most other forms of personal debt are flat or even down, as consumers engage in the process that Wall Street likes to call “deleveraging.” About 37 million people owe student loans, or 15% of the population. But the age profile of the debtors, not surprisingly, skews young. Over 40% of people in their 20s are on the hook, and 25% of those in their 30s.  If you divide debt outstanding by the number of debtors, you get an average of $23,300. But that average is pulled upwards by a minority who are deeply in debt. The median debt is about half that mean, or $12,800.  About one-quarter of borrowers owe more than $28,000; about 10 percent of borrowers owe more than $54,000. The proportion of borrowers who owe more than $100,000 is 3.1 percent, and 0.45 percent of borrowers, or 167,000 people, owe more than $200,000.

Number of the Week: Most Borrowers Not Paying Down Student Loans - 39%: The percentage of student loan borrowers who were paying down their balances in the third quarter of 2011. Student loan debt is surging in the U.S. — hitting $867 billion at the end of 2011, more than credit card debt or car loans — but most borrowers aren’t paying down the balances. An analysis by the Federal Reserve Bank of New York released this week aimed to get an idea of how many student loan borrowers were delinquent. The official figures put that number at 14%, or about 5.4 million borrowers holding some 10% of all student debt — roughly comparable to levels seen in mortgages, credit cards and auto loans. But there’s a caveat. Student loans are special since they don’t have to be paid down immediately. If you’re currently in school, you’re adding to the debt and not paying it down. According to the NY Fed, some 29% of borrowers fall into this category. Meanwhile, student loans allow forbearance periods for recent grads or in time of economic hardship. The NY Fed estimates that 18% of borrowers fall into this category, meaning their third-quarter balance was equal to the second quarter and there was no past-due balance. Taking these borrowers who don’t have to make payments out of the equation, and looking only at those who do, 27% have balances that are past due.

Student Debt in the US Continues to Blow Up - Perhaps the most obvious indicator that the US has become a society of debtors is the ever-expanding market for student loans. Recently clocked at $870 billion and rising quickly, this market has been a focal point for the recent Occupy movements. The White House knows that this is a key issue among potential voters and recently tried to provide some relief to debtors by placing a cap of 10% of discretionary income on the repayment of such loans – down from a previous cap of 15%. But of course placing a cap on how much needs to be repaid is hardly a solution to what appears to be a much larger problem.Student loans are growing at a remarkable rate. Between the second and third quarter of 2011 they grew from an estimated $852m to an estimated $870 billion – that’s an increase of 2.1% in only one quarter; and this while other types of consumer debt either declined or remained flat. And even these estimates are pretty fuzzy because, as the New York Fed highlights, the market is highly complex and difficult to gauge: Student loans support the education of millions of students nationwide, yet much is unknown about the student loan market. Relevant data are limited and, for the most part, anecdotal. Also, sources tend to focus on recent college graduates and do not reveal much information about the indebtedness of parents, graduate students, and those who drop out of school.

The Screwing Of The American People Continues - After yesterday's justfied rant, let's get back to the cold, hard facts today. In Why Tuition Has Skyrocketed at State Schools, Charlotte Rampell of the New York Times Economix blog gives us this splendid chart.From Rampell — Here’s a chart showing price changes in these categories. The lines represent the price in a given year, as a percent of the price in 1985. For example, if a line reaches 200, that means prices in that year were 200 percent of those in 1985, or twice as high. College tuition and fees today are 559 percent of their cost in 1985. In other words, they have nearly sextupled (while consumer prices have roughly doubled). That's a horrible picture, but it wouldn't be so bad if income (at least in part) had kept up with inflation. So you can not truly appreciate the price changes since 1985 unless you look at income gains over that same period.You can easily see that average pre-tax income for 80% of Americans has been essentially flat since 1979. You do not have to be a rocket scientist to see that income did not even begin to keep up with huge increases in college tuition and health care since 1985, and relatively smaller increases in gasoline and "all consumer items." Screwed is the word that leaps to mind. It's important to understand that the income graph above renders the next graph almost meaningless.

Our "Let's Pretend" Economy: Let's Pretend Student Loans Are About Education - Let's pretend student loans aren't just a stupendous and highly profitable scam being run on the youth of America. Of course pretending doesn't make it so. We have a "let's pretend" economy: let's pretend the unemployment rate actually reflects the number of people with full-time jobs and the number of people seeking jobs, let's pretend the Federal government borrowing 10% of the GDP every year is sustainable without any consequences, let's pretend the stock market actually reflects the economy rather than Federal Reserve monetary intervention, and so on. We also have a "let's pretend" education/student-loan game running: let's pretend college is "worth" the investment, and let's pretend student loans are about education. There are three dirty little secrets buried under the education/student-loan complex's high-gloss sheen:

1. Student loans have little to do with education and everything to do with creating a new profit center for subprime-type lenders guaranteed by the Savior State.
2. A college diploma's value in the real world of getting a job and earning a good salary in a post-financialization economy has been grossly oversold.
3. Many people are taking out student loans just to live; the loans are essentially a form of "State funding" a.k.a. welfare that must be paid back.

Student Loan Delinquency Hit $85B in Q3 - About $85 billion in U.S. student loan debt, or 10 percent of the outstanding balance, was delinquent in the third quarter of 2011. Of the 37 million borrowers who have student-loan balances, 14 percent, or about 5.4 million people, have at least one past due student-loan account, according to a report posted today on the Federal Reserve Bank of New York’s website. As many as 47 percent of student-loan borrowers “appear to be in deferral or forbearance,” and didn’t have to make payments as of the third quarter, according to the report. The district bank reported last week that debt from educational loans in the fourth quarter was $867 billion, higher than credit-card debt, according to a survey of consumer credit. Special attention should be paid to these student-loan delinquencies compared with other household debt. “Some special accounting used for student loans, not applicable to other types of consumer debt, makes it likely that the delinquency rates for student loans are understated,” wrote the economists

Even senior citizens have student debt - It’s not just young people who are saddled with student debt. A new report from the Federal Reserve Bank of New York shows that one-third of all Americans with outstanding student loans are over the age of 40 — and 4.2 percent are over the age of 60. While borrowers in their 30s had the highest average balance, at $28,500, those in their 40s were close behind, with an average balance of $26,000. One reason seniors end up with student loans is parents are increasingly assuming debt on behalf of their children. And given the rapidly rising cost of college, the proportion of older borrowers — and the average debt load they are carrying — is likely to get even larger in the future.

No Letup Seen As Pennsylvania School Pension Costs Soar - Passage of Pennsylvania's education budget for 2012-13 is months away and the legislature likely will make significant changes to the spending plan Gov. Corbett proposed Feb. 7. But it's almost certain that one very sizable proposed expense won't change: contributions to the Public School Employees' Retirement System (PSERS). Payments for 2012-13 from the state and school districts will rise steeply, by about 45 percent. The $1.7 billion combined state and local PSERS payments for next fiscal year is locked in under a pension-overhaul law passed in 2010 that averts an even steeper increase. The state share of that contribution is $916 million; barring new legislation, that figure will be in the budget that will be passed about June 30.  This school year, the state made a $600 million pension contribution, about $316 million less than for 2012-13. That's about 6.7 percent of the total state K-12 public school budget. In 2012-13, the state PSERS payment will be more than 10 percent of the proposed K-12 total.

NYC Pension Costs Rose Fivefold Since 2002, Reform Group Says‎ -  New York City pension costs have risen more than fivefold to $8 billion since 2002 and changes to the system are needed to keep budgets in check, said a bipartisan coalition for pension reform.  The increase in pension costs has squeezed funding for other programs, New York Leaders for Pension Reform said today in an e-mailed statement. The coalition supports a plan by New York Governor Andrew Cuomo to lower pension costs in New York City and state through changes to plans for future employees.  Pensions will account for an estimated 28 percent of all New York City workforce expenses in fiscal year 2013, said the group, composed of mayors from Albany, New York City, Rochester and other cities, as well as county executives. That’s up from 9 percent in 2002. The group backs a plan for future New York state and New York City employees that would “reasonably” raise retirement age and exclude overtime from formulas that use salary to determine pension payments, it said in the statement.

Providence, Rhode Island, asks retirees to accept less - Angel Taveras, the mayor of Rhode Island's capital of Providence, on Saturday painted a dire fiscal picture of his city: by this summer, it could run out of money. "What we're trying to avoid is us falling off a cliff," Taveras said in an interview as he described Rhode Island as a "city-state" where livelihoods depended on the capital. Earlier in the day, Taveras said he met with about 475 city retirees to ask them to give up annual cost-of-living increases on their pensions to help Providence ward off bankruptcy. The most of the Providence retirees, many with white hair, promised a fight. "We've been very prudent. We've been looking forward to retirement and basically now we can't sleep at night," said Linda Walden, 60, whose husband retired from the Providence fire department in 2009.

State's public pensions worse than numbers show - Illinois' pension problems could be worse than the numbers show. Years of under-funding or borrowing to pay the annual pension obligation, coupled with a recent change in how liabilities and assets are calculated, have led to the problems. A new report by the U.S. Government Accountability Office says Illinois could face unforeseen payment hikes because of how the state has handled its public pensions. In 2009, the General Assembly changed the law dictating how the state calculates liabilities and assets. The new formula bases the pension payments off the average return on investments over the past five years. Previously, it was based on financial market conditions at the time. The idea was the state would be able to dodge markedly larger pension payments as a result of failing investments by using the average of those investments' values over the previous five years, which is what happened. The state shaved $100 million off of its pension payments for the State Employees' Retirement Systems in 2009, but those savings aren't real. Rather, the move just delays the inevitable, according to the report.

Pension Liabilities Swell Among U.S. Industrials on Low Interest Rates - Several large companies like General Electric, Boeing and 3M are getting hurt by low interest rates as their pension contributions to the employee pension benefit programs have increased due to historically low interest rates which are driving up the liabilities associated with pension plans. These companies along with other U.S. employers are expected to make contributions of over $100B in 2012 to pension funds, an increase of 67% over the last two years. The low interest rates have significantly increased the liabilities of companies, and consequently, they have to commit more assets to cover those liabilities.Over the next four years, it is expected that over $400B will be committed to 100 largest pension funds to ensure that they are adequately funded. The current assets in January cover less than three fourth of the projected layouts according to consultant Milliman Inc.

With a Pension Shortfall, Companies Want to Kick in Even Less - Not so long ago corporate pension plans were flush. Today, they are massively underfunded. And now, despite rising profits and soaring cash stockpiles, corporations are urging Congress to let them cut their level of contributions. They are rallying behind an obscure provision in a Senate highway bill that would potentially lower combined pension contributions by billions of dollars a year. What’s wrong with this picture? For starters, as recently as 1999 the private pension system had surplus assets of $250 billion. This was largely the result of a long bull market, which generated outsized investment gains. Predictably, the piles of money sitting in overfunded pension plans proved irresistible and the funds were raided in a variety of ways.

American Airlines Union President Sees Future Without Pensions - In a February 24 statement, AMR said that buyout proposals from both TWU and APFA “represent a significant cost to the company and could not be accepted on their terms,” but “we have a long-standing record of mitigating involuntary reductions through voluntary programs and remain willing to explore alternatives, at the appropriate time in this process, that don’t exacerbate our cost challenges.” On retirement security, TWU had already reached tentative contract agreements prior to the bankruptcy announcement that would replace pensions with 401(k)s for new employees in some bargaining units. Asked whether AMR is open to maintaining any of its current pension plans, an AMR spokesperson e-mailed a January 23 letter from Senior Vice President Jeff Brundage. Brundage’s letter tells employees that even if their pension plan is eliminated, most workers vested in the pension will continue to receive benefits due to the Pension Benefit Guaranty Corporation (PBGC), and employees will have “some form of retirement benefit going forward, regardless of whether the defined benefit plans are terminated or frozen.” PBGC blasted this statement as "misleading" and irresponsible, and is expected to further amplify its criticism of AMR this month (In These Times will have further reporting on the PBGC this week).

States facing ‘sleeping cancer’ in 96% unfunded retiree benefits - The near-failure by U.S. states to fund rising retiree health-care costs for millions of government workers threatens to produce budget crises similar to the one that pushed Stockton, Calif., to take a step toward bankruptcy last week. States haven’t financed almost 96 percent of the $627.4 billion they were projected to owe for future retiree benefits in 2010, according to Bloomberg Rankings data. The estimated deficit grew from about 95 percent in 2009 as governors coped with lower general-fund revenue and rising demand for services following the longest recession since the Great Depression. “The whole country is dealing with” finding a way to finance the projected costs of retiree health care, said Chris Christie, New Jersey’s Republican governor. His state owed almost $7,600 per resident for public workers’ post-employment benefits other than pension payments. Alaska, Connecticut and New Jersey had the largest unfunded liabilities, ranked in proportion to population, among the 47 states examined.

Stockton's Pension Struggles An Ominous Signal - In an act of political courage, City Manager Bob Deis persuaded the City Council last month to enter a mediation process that may lead to bankruptcy. If the city of 292,000 files for protection from creditors, it will be the most populous U.S. city to do so, raising the question: Who's next? San Diego is mired in debt, and its citizens will vote on reforming city workers' pensions in June unless the state Public Employment Relations Board succeeds in blocking the initiative. San Jose's City Council voted Tuesday to put pension reform on the June ballot. Assemblyman Jim Beall, D-San Jose, and other Bay Area Democratic legislators are asking to have a state auditor probe San Jose's pension costs - which, given the state's severe pension woes, seems ironic. Both measures would cut benefits of current employees, not just new hires. Stockton, like Oakland, has papered over its pension problems by selling pension revenue bonds to retire the debt for the short term, while requiring long-term payments to pay off the bonds.

California Pension May Lower Assumed Return for First Time Since Recession -The California Public Employees’ Retirement System, the largest U.S. public pension, may cut its assumed rate of return on assets for the first time since the global recession dragged down stock and real-estate prices. Actuary Alan Milligan recommended trimming the annual return estimate yesterday to 7.25 percent from 7.75 percent, potentially driving up what the fund, known as Calpers, requires from taxpayers to provide benefits for more than 1.6 million employees, retirees and their families. Public funds have come under fire for using investment assumptions that hide the true size of shortfalls. The $238.1 billion fund last adjusted its rate of return in 2004, to 7.75 percent from 8.25 percent. The plan is to be considered by the Calpers board next week.

CalPERS considers moves that would boost pension costs for governments - Directors of the California Public Employees' Retirement System are expected to vote next week on a staff recommendation to cut its target for investment returns, raising the prospect that state and local governments may have to boost their contributions to the pension fund. In a memo to the CalPERS board, actuary Alan W. Milligan suggested lowering the assumed annual rate of return to 7.25% from 7.75%, a decade-old benchmark, as the state continues to grapple with the slow recovery from the Great Recession. Milligan also is recommending that CalPERS, the nation's biggest public pension fund with a value of $238.4 billion, lower its ongoing inflation assumption to 2.75% from 3%. The effect of the two changes would raise the state government's employee pension costs as much as 4.5% in the fiscal year that begins July 1. Some pension costs for public safety agencies could jump as much as 6.6%, according to Milligan's report to the board.

Ky. retirees may lose cost-of-living increases — State and local government retirees in Kentucky won't get cost-of-living pension increases over the next two years under a budget proposal that could face a House floor vote by midweek. Some 200,000 retirees had been slated to receive 1.5 percent increases, but House lawmakers, faced with tight finances, are recommending those hikes be suspended. "It's a difficult budget," said state Rep. Rick Rand, chairman of the House Appropriations and Revenue Committee. "This is just the times we're in." Rand, D-Bedford, said he expects his committee to vote on the state's proposed two-year, $19.5 billion budget on Tuesday, and that a House floor vote could come as soon as Wednesday.

Doing Without: Economic Insecurity and Older Americans -More than one-half of elder households in the United States have incomes that do not cover basic expenses.   Which states have the largest income gaps between median income and necessary expenses?  What percentage of this country’s older population is unable to meet their basic needs on a daily basis? Who are these older Americans—are they male, or female? Caucasian, African American or Hispanic? Single or married? What age bracket does this population fall into, and what is their housing status? This overview, produced by Wider Opportunities for Women (WOW) and focusing on a ranking of the states by income shortfalls, offers an answer to the first question. The rest will be answered in a series of demographic briefs, Doing Without, which will provide a clearer picture of older Americans who are struggling to make ends meet.  Click here to access the brief on the ranking, which serves as a precursor to the Doing Without series. Click here to view the press release on the ranking. Click here to view a list of media coverage of the ranking.

Compare retiree living costs in every county of the US - Want to know how much income you'll need to meet your basic living needs? You can find out with the Elder Index, a new tool from Wider Opportunities for Women (WOW) that reveals the typical costs people age 65 and over have for housing, food, transportation, health care and miscellaneous expenses for every county and state in the U.S. WOW's Elder Index is a conservative estimate of needs and doesn't include any extras such as vacations, electronics, gifts or meals out. It outlines the basic living costs for six categories:
1. Single owner with a mortgage
2. Single owner without a mortgage
3. Single renter with a one-bedroom place
4. Couple with a mortgage
5. Couple without a mortgage
6. Couple renter with a one-bedroom place

Kicking the Can–Medicare Edition - Sarah Kliff reports that excess cost growth may be coming to an end. Many have dismissed a recent slowdown in Medicare cost growth as temporary, a consequence of the economic downturn leaving Americans with less to spend on their medical care. Chapin White and Paul Ginsburg, however, beg to differ. Tracing the health-care spending slowdown back to 2005, they think we could be at the beginning of a more permanent trend:There has been a long-term trend toward tighter Medicare payment policy, and policy changes that began in the middle of the 2000s have continued that tightening. The Deficit Reduction Act of 2005 (DRA) reduced payment rates for imaging, home health services, and durable medical equipment, and the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) made substantial cuts to Medicare Advantage plans. . . . All these specific constraints on payment rates probably also slowed growth trends in the volume of services provided, leading to a larger slowdown in spending growth. Of course I am SHOCKED, SHOCKED that some long run projections may turn out to be fundamentally off. There are a few things I want to note though...

Business Roundtable Proposes Obamacare to Restore American Competitiveness - Whodathunkit? And what do they recommend? Creating greater consumer value in the health care marketplace by using health information technology and empowering consumers with more information about good quality health care. Providing more affordable health insurance options for all Americans by creating an open, all-inclusive private market for health insurance and replacing today’s fragmented state-by-state market with multistate markets. To ensure that insurance plans are solvent and meet certain minimum requirements, the role of individual states as the primary regulator should continue. Broader, more competitive markets will create more choices for more health care consumers.Engaging all Americans in taking an active role in their health care. First, this means placing an obligation on all Americans to obtain health insurance either through their employer or the private market. Second, we must encourage all Americans to participate in employer- or community-based prevention, wellness and chronic care programs. Offering health coverage and assistance to low-income, uninsured Americans that create a stable and secure public safety net. This assistance would be financed from the cost savings and efficiencies generated by a more competitive and value-driven health care system.

The Green Party Urges the Supreme Court to Strike Down the Affordable Care Act's Health Insurance Mandates, Sees A Chance for Medicare For All -  Candidates and leaders of the Green Party of the United States expressed hope that the Supreme Court will strike down the ‘individual mandate’ section of the Affordable Care Act (ACA) when the court issues a ruling on its constitutionality in late March. Greens, who support single-payer national health care (Medicare For All), have called the passage of the ACA in 2010 a defeat for meaningful health care reform. “A Supreme Court decision gutting the ACA’s individual insurance mandate can bring us closer to real universal health care, because we already know that Social Security and Medicare are constitutional. Medicare For All is based on the same model as these successful programs,” said Mayor David Doonan (Green) of Greenwich, New York. Green Party members participated in protests and civil disobedience in 2009 when Democratic Party leaders held health care reform roundtables that included industry representatives and excluded single-payer advocates, particularly when Senate Financial Committee chair Max Baucus (D-Mont.) declared single-payer “off the table” and President Obama negotiated away the public option in backroom meetings with lobbyists.

People Like Expensive Health Care, Study Finds - Here's an unusual factor that could be helping to drive up U.S. health care costs: If people get a choice, they'll often go for the priciest option, researchers reported on Monday. Patients tend to equate cost with quality, Judith Hibbard of the University of Oregon and colleagues report in the journal Health Affairs -- something that retailers know all too well but that may not have been taken into account in health care reform efforts. The finding may argue against health care reform proposals, especially ideas about insurance-premium support put forward by Republicans such as House Budget Committee Chairman Paul Ryan, R-Wis., that assume consumers will make canny choices if they are shopping with vouchers or their own money. Hibbard's team studied 1,400 workers, offering them different doctors and care options. If they were given details on price alone, the volunteers chose the most expensive choice. But if given details about the quality of care, they moderated their choices, Hibbard's team said.

CDC: Deadly and preventable C. difficile infections at all-time high - The number of people being hospitalized for Clostridium difficile (C. difficile) has tripled in the past 10 years according to a new report from the Centers for Disease Control and Prevention. While other infections commonly spread in health care settings have been going down over the past decade, C. difficile infections are at "historically high and unacceptable levels," ."C. difficile is causing many Americans to suffer and die," Arias says. The CDC estimates about 14,000 people each year die from these infections, which can be treated if caught early. The new CDC report finds that 94% of all C. difficile infections are connected to medical care settings, impacting patients not just in hospitals but also in nursing homes, doctors offices and other outpatient settings. The report finds that infections are being moved from one facility to another as infected patients get moved and necessary precautions to prevent the spread aren't taken. The CDC estimates about one-quarter of patients develop symptoms while in a hospital, the other 75% get sick in nursing homes, clinics or doctors offices. C. difficile symptoms include (sometimes deadly) diarrhea, fever, loss of appetite, nausea, belly pain and tenderness.

Whistleblowers: 70 percent of U.S. ground beef contains ‘pink slime’ - Let’s hope you didn’t eat a hamburger before clicking on this story. A former U.S. Department of Agriculture scientist has come forward with a startling tale of how a substance known as “pink slime” has been embedded in about 70 percent of ground beef sold in the U.S. — a topic ABC News investigated for a segment Wednesday night. “Pink slime” is largely made up of connective tissue that used to be reserved only for dog foods. It was not classified as “meat” because it was largely seen as unfit for human consumption. It also contains ammonia, which is used to kill off bacteria so people who eat it do not get sick.But in the early 90s, former undersecretary of agriculture Joann Smith decided that it was meat, allowing it to enter the human food chain. When she left her post in 1993, she immediately took a job with Beef Products, Inc. on their board of directors. The meat industry now refers to it as “lean finely textured beef,” but in a government memo USDA scientist Gerald Zirnstein coined the term “pink slime,” which now appears to have stuck. Zirnstein and fellow former USDA scientist Carl Custer told ABC News that it has become so prolific, “pink slime” can now be found in approximately 70 percent of U.S. ground beef.

High Levels of Resistant Bacteria On Meat (Again) - A new report is out from the federal collaboration that monitors antibiotic resistance in animals, retail meat and people, and the news is not good. The full title is the 2010 Retail Meat Report from the National Antimicrobial Resistance Monitoring System. This report is issued by the Food and Drug Administration; the humans one comes from the Centers for Disease Control and Prevention and the animals one from the US Department of Agriculture. It reports the results of testing on 5,280 meat samples collected in 2010 in California, Colorado, Connecticut, Georgia, Maryland, Minnesota, New Mexico, New York, Oregon, Tennessee, and Pennsylvania. (Those are sites of state labs participating in a federal surveillance network, FoodNet, plus one volunteer lab, Maryland.) The report — which is broken down first by foodborne organism and then by meat type — notes a number of instances where either the percentage of bacteria that are antibiotic resistant, or the complexity of the resistance, is rising. Quoting from the report:

The Smoking Habit You Didn’t Know You Had: Diesel Exhaust - For many who are trying to take good care of their health, a study released late last week reaffirming that diesel exhaust can cause lung cancer, may be a major blow to their efforts to lead a healthy lifestyle.  That’s because the study found an up to seven fold elevated risk of lung cancer — a disease typically associated with smokers — among miners who don’t smoke.  The findings also relate to ordinary people who live in areas with high levels of diesel particulate matter (PM).  Millions of people in the US have the equivalent of a smoking habit, whether they want to or not, because they live close to busy freeways or in other areas with extremely high diesel PM levels. Scores of studies have shown that diesel exhaust, a sooty mix of toxic air pollutants, smog forming gases and tiny particulates, is dangerous.  It was recognized by the State of California as a carcinogen over a decade ago, and fortunately many laws and programs are in place to reduce diesel pollution.  However, even in California where there is a whole suite of diesel clean-up measures from low sulfur diesel fuel to retrofits and early retirements for trucks and equipment, thousands of people continue to die from exposure to diesel PM each year while these measures phase in over the next few decades.  Diesel engines are sturdy, lasting decades with older models polluting a hundred-fold more particulate pollution than modern replacements.

Indian Slums Provide Pharmaceutical Companies with Endless Supply of Human Guinea Pigs - Few people in the slums of Ahmedabad, India, know more about the supply of human guinea pigs for clinical drug trials than Rajesh Nadia. When Indian firms working for pharmaceutical companies need test subjects, they often turn to Nadia, who has carved a small niche for himself as a recruiter in the international drug-testing industry. “Companies call me or send me text messages,” he told “Dateline NBC” correspondent Chris Hansen. Self-confident and well-groomed with gelled hair and tight-fitting designer jeans, Nadia said he is paid about $12 for every recruit he brings to the three Indian research labs with whom he works. In a region of western Indian where the average worker earns 50 cents a day, that’s good money. “I don’t feel guilty,” Nadia said. “I believe conducting these studies is a humanitarian effort. So many people benefit from (the) advancement of medicine.”

"The Benefits of a Gas Tax" - Mark Thoma: MIT energy economist Christopher Knittel says a gas tax would pay for itself, or nearly so, with the benefits the tax would bring: Fuel for thought: Knittel’s research addresses a clutch of practical and linked questions: How much progress have automakers made on fuel efficiency? (More than you might think.) How do car owners respond when fuel prices rise? (They really do ditch their gas-guzzlers.) How large are the collateral health benefits of removing dirty vehicles from the nation’s fleet? (Very large.) ... A shift to newer, more fuel-efficient vehicles would actually help people in another way, besides releasing fewer greenhouse gases: It would reduce the amount of harmful local pollution in the air, . “When gas prices go up, you’re getting bigger mileage reductions from cars that are worse in terms of these pollutants,” Knittel observes. That produces significant health benefits beyond the problems associated with climate change. “We’re talking about asthma attacks and respiratory problems,” he adds. “This isn’t just a matter of helping the world two generations from now. You can point to this and say, ‘Here is a more immediate, salient reason for a gas tax.’” According to Knittel and Sandler, 70 percent of the costs of a gas tax of $1 per gallon could be recouped by immediate health benefits from reduced pollution. Other possible benefits from the tax — reductions in climate change, traffic congestion and accidents — could make it a net winner for people

Model on food prices and social unrest predicts crisis in 2013 - The people at NECSI sent me the following interesting blurb on the relationship between rise food prices and social unrest: These videos illustrate the correlation between increasing costs of food and worldwide food riots, especially from 2000 until the present day. Both prices and riots peaked in 2008 and 2011 after a brief drop in 2009. This month, NECSI is publishing the results of its food prices update, in which the institute extends its food price model to January 2012, entering no modifications to the model and continuing to use its dynamics. “The food price bubble of 2011 caused widespread hunger and helped trigger the Arab spring. In 2013 we expect prices to be even higher and may lead to major social disruptions.” According to the new study, the next food price peak will take place in about a year. The results will be dramatically higher prices than we have encountered thus far. The study warns that should ethanol production continue to grow according to multiyear trends, even this underlying trend will reach social-crisis levels in just one year.

Do Food Commodity Prices Follow Oil Prices? - People always seem to be interested in the comparison of food commodity prices with oil prices and many have proclaimed that food equals oil. This next graph going back to the 1950's, taken from this OECD publication, demonstrates that food prices have not followed very closely with oil prices. (Note that commodities are priced in USD's.) Because the above graph is difficult to read, I've highlighted "food" and "crude oil" in blue and red in the following version: Concerning this graph, from the report: This graph shows the evolutions of IMF indices of market prices for primary commodities. The increase in food prices took place in the context of a general rise in commodity prices led by crude oil and metals. However, the 42% rise in food prices and in beverage prices over the period 2006-08 has been modest relative to crude oil prices (51%) but large relative to metal prices (8%). While it is partly true in the industrial agricultural system that "food equals oil," there are many other factors which affect food prices, including the definition of "food" used in making the comparison. Below, I've listed some of them.

India Bans Exports Of Cotton, And Prices Instantly Surge: India's Directorate General of Foreign Trade announced today that the country has banned all cotton exports without offering any reason for the ban, according to the Financial Times. The embargo affects exports against registration certificates that have already been issued as well. Indian textile companies have said they are losing competitiveness because of high cotton prices in India and the trade regulator is believed to have banned cotton exports to push down prices domestically. India is the world's second largest cotton producer and this is expected to impact global supplies of the commodity and drive up international prices. Cotton futures have been up 4.53 percent to 92.23 cents in the U.S.. But this puts pressure on Indian farmers that will see the price of cotton fall domestically. Weak cotton prices have been linked to farmer suicides in India. Here's a chart of cotton's performance since the announcement:

The Last Famine - Early in February, without much fanfare, the United Nations officially declared the famine over in the Horn of Africa. This is welcome news. Last summer, when the worst drought in 60 years was wasting the region, 13 million people faced starvation. The misery was most acute in Somalia, where al-Shabab, the fanatical Islamist militia with links to al Qaeda, had blocked aid groups from working in the areas under its control. In the end, an estimated 35,000 Somalis-- along with some Kenyans and Ethiopians -- are thought to have died; most were children under five. The handling of the calamity nonetheless has been rated an overall success. Context helps in measuring such victories. Twenty years ago, a quarter of a million Somalis perished during a similar wartime drought. And before that, in the Sahelian emergencies of the mid-1980s, a million emaciated bodies were spooned prematurely into sandy graves.

Brutal Droughts, Worsened By Global Warming, Threaten Food Production Around The World - Severe drought (or Dust-Bowlification) “is the most pressing problem caused by climate change.” As I wrote in the journal Nature last year, “Feeding some 9 billion people by mid-century in the face of a rapidly worsening climate may well be the greatest challenge the human race has ever faced.” A comprehensive 2011 study of drought, by Aiguo Dai of the National Center for Atmospheric Research, looked at ”Characteristics and trends in various forms of the Palmer Drought Severity Index during 1900–2008.” The PDSI is “the most prominent index of meteorological drought” used in the U.S. That study concluded All the four forms of the PDSI show widespread drying over Africa, East andSouth Asia, and other areas from 1950 to 2008, and most of this drying is due to recent warming. The global percentage of dry areas has increased by about 1.74% (of global land area) per decade from 1950 to 2008…. Thus, I believe that our main conclusion is robust that recent warming has caused widespread drying over land. And model predictions suggest that this drying is likely to become more severe in the coming decades.

Peak Water - “It should be obvious from simple arithmetic that population growth is on a direct collision course with increasingly scarce resources.” Jeremy Grantham. The notion of peak water probably sounds crazy to most people. The earth is 70% covered by water. The water cycle replenishes water on a continuous basis. The global warming enthusiasts tell us that glaciers are melting and oceans are rising. This should make water more plentiful. But, as they say in the real estate business – Location, Location, Location. Freshwater shortages in the wrong places could have calamitous consequences to those regions, worldwide commodity prices, the economic future of nations with water shortages and possible war. Regional water scarcity means water usage exceeds the annual natural replenishment from the water cycle. The impact of water scarcity can be far reaching. It can lead to food shortages, famine, and starvation. Many nations, regions and states have mismanaged their water resources, and they will have to suffer the long-term consequences.

Report: Land under 50-plus Cities Is Sinking - Slated to be the China's tallest building upon completion, the 632-meter tall Shanghai Tower conveys stability, if not permanence.  The ground under it, however, is another story. Spectators were intrigued in mid-February when a giant 8-meter long crack appeared in the asphalt near the tower. The crack was a reminder of Shanghai's shifting and sinking ground, which scientists say makes the city vulnerable to rising sea levels.  And Shanghai is not alone. China's Ministry of Land and Resources recently reported that the ground is sinking under more than 50 cities. The culprit is the overuse of groundwater, the ministry's Geological Environment Department Deputy Director Tao Qingfa told Caixin.  When residents consume too much groundwater, water pressure underground depletes and causes the soil to shift and sink, Tao said. Beijing, Tianjin, Hangzhou and Xi'an are all sinking in certain places as a result, he said.  The State Council recently ratified a five-year plan to address the issue of sinking ground levels, identifying the Yangtze River Delta, North China Plains and Fenwei Basin in Northern China as the most serious cases.

Global Water Scarcity: Can We Solve It? - You’re probably doing your part to conserve water, especially if you live in a drought-stricken area. But water is in short supply across the globe because of people’s increasing demands for it—a huge problem for cities, agriculture and industry that will only get worse with climate change. Getting an accurate handle on what’s causing the problem has been missing—until now. A new study in the journal PLoS ONE and coauthored by Nature Conservancy scientist Brian Richter provides fresh insight into the factors behind water shortages in the world’s most important river basins. The study provides the most comprehensive picture of the global water problem to date, looking at monthly changes rather than annual and digging into the actual causes of water depletion—agricultural, industrial and domestic—in our ecosystems. While the findings aren’t rosy—more than 2 billion people are affected by water shortages each year—coauthor Richter says there are still reasons to be hopeful [in this interview]….

Monsanto’s Roundup Shown to be Ravaging Butterfly Population - Monsanto’s Roundup, containing the active ingredient glyphosate, has been tied to more health and environmental problems than you could imagine. Similar to how pesticides have been contributing to the bee decline, Monsanto’s Roundup has been tied to the decrease in the population of monarch butterflies by killing the very plants that the butterflies rely on for habitat and food. What’s been shown to be an even greater threat to the population, though, is Monsanto’s Roundup Ready corn and soybeans. A 2011 study published in the journal Insect Conservation and Diversity found that increasing acreage of genetically modified Roundup Ready corn and soybeans is heavily contributing to the decline in monarch butterfly populations within North America. Milkweed, a plant butterflies rely on for habitat and food, is being destroyed by the heavy use of glyphosate-based pesticides and Roundup Ready crops. Over the past 17 years, the monarch butterfly population in central Mexico has declined, reaching an all-time low in 2009-2010.

Warm Winter Weather May Bring Pest-Filled Spring: — The mild winter that has given many Northern farmers a break from shoveling and a welcome chance to catch up on maintenance could lead to a tough spring as many pests that would normally freeze, have not. Winters are usually what one agriculture specialist calls a "reset button" that gives farmer a fresh start come planting season. But with relatively mild temperatures and little snow, insects are surviving, growing and, in some areas, already munching on budding plants. Almost every state had a warmer-than-usual January, according to the National Oceanic and Atmospheric Administration. In Albany, N.Y., for example, the average high in January was 37 degrees, when it's usually less than freezing, according to the National Weather Service. In Tulsa, Okla., the average high last month was about 57 degrees, 9 degrees higher than normal. The Upper Midwest, Great Plains and a few other areas were "much above normal" in temperature, NOAA said.

Global warming, spread of infected ticks linked - A new study has documented the rapid growth in Canada of ticks that can cause Lyme disease, and global warming is thought to be a factor. Ticks capable of carrying Lyme disease went from being almost non-existent in populated areas in Canada in 1990 to now being in 18 per cent of such spots east of Saskatchewan, and this is expected to reach 80 per cent by 2020, says the paper published in the British Ecological Society’s Journal of Applied Ecology. The report did not specifically link global warming with this trend, but lead researcher Patrick Leighton, of the University of Montreal’s faculty of veterinary medicine, said rising temperatures are thought to be a reason. “My opinion is that there probably has been an increase in the spread [of ticks] due to the warming climate,” he said.

Climate change ravaging Forest Service budget for wildfire mitigation, officials say - The warming climate is breeding more beetle-ravaged forest and prolonged fire seasons, U.S. Forest Service Chief Tom Tidwell testified before a Senate committee on Tuesday, as he fielded questions about the White House’s proposed agency budget for fiscal year 2013. “We’ve been doing research on the effects of a changing climate to the vegetation on our nation’s forests for over two decades,” he told the Senate Committee on Energy & Natural Resources in Washington, D.C. “When it comes to fire, we’re definitely seeing much longer fire seasons in many parts of the country, another 60 or 70 days longer than what we used to experience.” The Forest Service is not only dealing with an uptick in the number of wildfires, wind storms, droughts and other extreme weather as a result of climate change. “We’re also seeing much more severe fire behavior than we’ve ever experienced in the past,” Tidwell noted…U.S. Sen. Al Franken, D-Minnesota, expressed frustration that politics are polluting scientific discussions. He said it only makes sense for Congress to begin incorporating the effects of climate change into budgetary decisions.

The Winter That Wasn’t Checks In at Fourth-Warmest Ever - The stats are in on the winter that wasn’t, and the December through February period stacks up as the fourth-warmest winter on record for the Lower 48 states, according to newly released numbers from the National Oceanic and Atmospheric Administration (NOAA). The average temperature for the Lower 48 states during the December through February period, the time span defined as meteorological winter, was 3.9 degrees Fahrenheit above the 1901-2000 long-term average, making it the warmest winter since 2000. The other winters that were warmer than this one occurred in 1992 and 1999.Winter was dominated by a northern storm track, which allowed mild air to repeatedly work its way northward, giving 27 states one of their top 10 warmest winters on record. Only one state — New Mexico — had winter temperatures below its 20th Century average, NOAA reported. In Massachusetts, February 2012 tied with February 1998 as the warmest such month on record, with average temperatures nearly 8 degrees F above average. New York's Central Park had its warmest February on record, with an average temperature of 40.9 degrees F, well above the typical monthly average of 35.3 degrees.

NOAA: Fourth Warmest Winter on Record - We've been remarking over and over about how mild and snowless this winter has been. Now we have the official word on just where the winter of 2011-2012 will rank in history. The National Oceanic Atmospheric Administration (NOAA) has announced that this was fourth warmest meteorological winter on record across the contiguous United States and the warmest since 1999-2000. (Note: The meteorological winter is December, January and February combined) Only the winters of 1991-1992, 1998-1999, 1999-2000 were warmer. All of this is based on records dating back to 1890s. New Mexico was the only state that had winter temperatures below the 20th century average. The map below shows where this winter ranked in history for each state. A number of 117 indicates the winter was the warmest on record. Conversely, a number 1 would signify the coolest winter on record. As you can see, there are many states that recorded a top 10 (27 total) and a top 5 warmest winter (18 total).

Inappropriate Global Warming Evidence Graphic of the Day

Tornadoes, Extreme Weather And Climate Change, Revisited -"The most prolific 5-day period of tornado activity on record for so early in the year”? National Weather Service Warnings for Past Week (graphic) The unexpectedly fierce and fast tornado outbreak so early in the season has folks asking again about a possible link to climate change. Climatologist Dr. Kevin Trenberth emailed me that, because of climate change, “there is every expectation that the [tornado] season will move up in time.  The warm winter in the US is perhaps an indicator of the nature of the changes to be expected.” The former head of the Climate Analysis Section of the National Center for Atmospheric Research stands by his 2011 statement, “It is irresponsible not to mention climate change in stories that presume to say something about why all these storms and tornadoes are happening.” Below is some clarification of the context of that quote that he added. Trenberth also said: Joe, what we can say with confidence is that heavy and extreme precipitation events often associated with thunderstorms and convection are increasing and have been linked to human-induced changes in atmospheric composition.

Tornado outbreaks already set record for March - National Weather Service officials said Saturday this week's tornado outbreaks in the South and Midwest set records for twisters in March, and that tornado alley should brace for more of the same in the weeks ahead. Tuesday's series of more than 50 tornadoes in Kansas, Missouri and Illinois combined with Friday's round of more than 85 from Alabama to Indiana and Ohio rank as the new high for number of twisters in March. The Friday series is also the largest one-day outbreak of tornadoes in the month. Usually, the tornado season doesn't start until later in March, picking up steam in April, May, and ending in early June. But Weather Service experts said this year's warmer-than-usual winter had an effect on weather conditions because of the lack of snow to cool warmer wind patterns as they move north.

Entire nation of Kiribati has to move to avoid rising seas - The Pacific island nation of Kiribati is moving up in the world — but not in the good way. The small country is looking to relocate to higher ground in order to escape rising seas brought on by climate change. Some of Kiribati’s 32 coral atolls have already started to disappear beneath the waves. President Anote Tong and his countrymen fear that continued sea level rise will wipe their civilization out entirely unless they relocate to Fiji lickety-split. Tong is reportedly in discussions with Fiji’s military government to buy 5,000 acres of land on the country’s second largest island, Vanua Levu. “This is the last resort, there’s no way out of this one,” Mr Tong said. “Our people will have to move as the tides have reached our homes and villages.” Depending on when Kiribati makes its big move, the country could be the world’s first modern climate-induced migration.

Climate adaptation through migration: A role for charter cities - There is considerable uncertainty about how climate change will affect different nations, but there is little doubt that the challenge of adaptation will be more difficult for families in the developing world. These families would benefit from more and better choices about where to live and work in the face of climate shocks. In early 2010, two similar earthquakes struck Haiti and later, Chile. The difference in loss of life was stark. This column points to the importance of well-governed and economically developed cities for coping with natural disasters and climate change. The authors propose a novel idea – charter cities built from scratch in the world’s poorest countries with their own rules and, hopefully, their own fast track to development.

Antarctic plants under siege from invasive species, report finds - Alien species are invading Antarctica from as far away as the Arctic — and could fundamentally alter ecosystems in the world’s last relatively untouched continent, an international team of scientists has reported. The risks from these biological interlopers — seeds and plant material carried in on the shoes and clothing of well-meaning scientists, ecotourists and support staff — will increase as the icy content continues to thaw because of climate change, the scientists reported Monday in the journal Proceedings of the National Academy of Sciences. People think of Antarctica as a pristine wilderness, but that is fast changing, said lead author Steven Chown of Stellenbosch University in South Africa. Over the last few decades, human activity there has increased dramatically. During the 2007-08 summer season, about 33,000 tourists and 7,000 scientists (including support personnel) made landfall there, bringing unintended ecological consequences, Chown said.

Global warming, a communist plot? - I happen to think carbon dioxide re-radiates energy within the infrared spectrum. I also believe combustion of a million years of fossilised carbon within the space of a year, as well as deforestation of large tracts of the world’s forests, is likely to lead to a material increase in carbon dioxide within the atmosphere. All other things being equal, I think this is likely to lead the Earth’s atmosphere to trap greater amounts of the sun’s energy, leading to an increase in global temperature. I also think that if we make emitting carbon dioxide more expensive and harder to do, we’ll reduce the amount of carbon dioxide we emit and moderate temperature rises. Does that make me a communist?

Global Land Sea Anomaly, Global Climate Change, etc. - Since my last post on government spending increase (it's actually decreasing) was hijacked by those focused on denying the impact of human activity on global climate, I thought it useful to recap the global land sea anomaly [0]. It's also useful to recall that on one side is Texas Governor Perry [1], and the other side the National Academy of Sciences [2]. I think that dichotomy speaks volumes. Here's the land sea anomaly through January 2012. Just to remind folks of where the scientific profession stands. From "Expert credibility in climate change," Proceedings of the National Academy of Sciences (2010)... we use an extensive dataset of 1,372 climate researchers and their publication and citation data to show that (i) 97-98% of the climate researchers most actively publishing in the field support the tenets of ACC outlined by the Intergovernmental Panel on Climate Change, and (ii) the relative climate expertise and scientific prominence of the researchers unconvinced of ACC are substantially below that of the convinced researchers.

Why the Global Warming Skeptics Are Wrong - William Nordhaus takes on the climate skeptics: ..I have identified six key issues..., and I provide commentary about their substance and accuracy. They are:

  • Is the planet in fact warming?
  • Are human influences an important contributor to warming?
  • Is carbon dioxide a pollutant?
  • Are we seeing a regime of fear for skeptical climate scientists?
  • Are the views of mainstream climate scientists driven primarily by the desire for financial gain?
  • Is it true that more carbon dioxide and additional warming will be beneficial?

As I will indicate below, on each of these questions, the sixteen scientists provide incorrect or misleading answers. ,,,. I will describe their mistakes and explain the findings of current climate science and economics.

Uneconomic Growth: When Illth Trumps Wealth - Herman Daly is a formidable mind. He has been writing for many years about the true effects of clinging to our perpetual growth paradigm. Daly concluded long ago that the solution to the plethora of problems this paradigm leads us to would be to move to a steady state economy. This conclusion is questioned by many, and perhaps not always for the wrong reasons. There can not really be a question, though, about the data that bring him to his conclusions. From a purely economical point of view, we can see that the added value conveyed by every additional - borrowed - dollar has at the very least threatened to become negative. That would of course mean the end of the game, even if those operating in the narrow confines of the financial world are loathe to even contemplate it. They see nothing narrow in their view of the world. For them, they are the world. They will simply refuse to entertain the idea that injecting more money/credit could start leading to less growth. But the numbers don't lie; if there's any growth left, it's very marginal. And that's in a system where externalities, the costs of things like depletion of resources and pollution resulting from consuming resources, are simply not counted. We discount the future, by pretending we live only in the here and now (and damn our children). It's our reptillian or even amoeba brain speaking. In short, we may have already reached the point where there no longer is any economic growth, there is only uneconomic growth. Or as Daly puts it: "illth increases faster than wealth".

Insurers confirm growing risks of climate change – ‘The trend of increasing damage to property and threat to lives is clear’ - Representatives from The Reinsurance Association of America, Swiss Re and Willis Re, and Ceres, a nonprofit organization that leads a national coalition of investors, environmental organizations and other public interest groups working with companies to address a variety of sustainability challenges, joined Sens. Bernie Sanders (I-Vt.) and Sheldon Whitehouse (D-R.I.) yesterday to discuss the growing financial impact of global warming. “From our industry’s perspective, the footprints of climate change are around us and the trend of increasing damage to property and threat to lives is clear,” said Franklin Nutter, president of the Reinsurance Association of America. “We need a national policy related to climate and weather.” Property and casualty insurers in the United States experienced an estimated $44 billion in losses last year when hurricanes, droughts, tornadoes, and other natural disasters were more severe, longer, more frequent, and less predictable than in the past. According to Swiss Re, the average weather-related insurance industry loss in the U.S. was about $3 billion a year in the 1980s compared to approximately $20 billion annually by the end of the past decade.

Green Donors Bet Romney Is Faking His New Climate Change Views And Will Flip Flop Back If Elected - According to his own standards on the campaign trail today, Mitt Romney was once a “radical” on energy issues. In 2003, as governor of Massachusetts, he supported “investing in cleaning technologies” for an old coal plant in the commonwealth responsible for dozens of deaths, saying “I will not create jobs … that kill people.” Also that year, Romney set up a $15 million green energy trust fund for renewable energy in order to create a “major economic springboard for the commonwealth.” And in 2005, before deciding to pull out of the Regional Greenhouse Gas Initiative, Romney called cap and trade “good business.” That was back when the Economist magazine named him a “climate friendly” Republican. Today, Romney says “we don’t know what’s causing climate change on this planet,” explaining that his new energy policy is to “aggressively develop our oil, our gas, our coal.” Romney’s changing positions on a broad range of issues have left supporters wondering where he’ll actually land on the issues if he becomes president. As Politico reported yesterday, some donors in the environmental community are putting their bets on another flip flop on climate and energy issues:

Airbus says China blocking jet orders to protest EU emissions trading fees - China is blocking orders for at least $12 billion worth of Airbus jets to protest the European Union’s emissions trading fees, in a new challenge to the program aimed at fighting global warming, the planemaker said Thursday. With some analysts warning of a brewing trade war, Airbus spokesman Stefan Schaffrath said his company is seeing “retaliation threats” from 26 countries, “in particular from China.” Speaking to The Associated Press, he said 35 orders by Chinese airlines for A330 planes are on hold because China’s government is refusing to approve them. He said orders for another 10 A380 superjumbos are also under threat, and that the combined list prices of the aircraft is $12 billion.

ERCOT: Expect another stressful summer for state's power grid - The state's primary electricity grid - which also serves the Austin area - can expect another stressful summer, officials with the Electric Reliability Council of Texas warned Thursday. This summer is expected to be hotter than normal but short of the historic extremes of the summer of 2011, when ERCOT narrowly avoided rolling blackouts. That long-term forecast by the National Weather Service, if accurate, could give the grid operator a little breathing room even though there is about the same generating capacity as last summer. ERCOT increased its projected summer peak demand an additional 1,297 megawatts because of the weather forecast - to 67,492 megawatts, just short of last summer's peak of 68,379 megawatts. "If that's the case, we expect to be able to meet the peak demand on the grid, unless we have above-normal generation outages," "If we have a higher-than-normal amount of generation outages or if we experience record-breaking electricity demand because of extreme temperatures - like we had last summer - we may have to ask the utilities to initiate rotating outages to protect the grid from a statewide blackout," Saathoff said.

The Booms and Busts of the Electric Power Industry (graphics) The electric power industry is driven by boom and bust cycles as market fundamentals and volatility sends signals to market participants to speed up or slow down their efforts. One of the lessons of that boom and bust experience is that seeds of the next boom are sown in the bust of the last business cycle. By that I mean the enthusiasm of the boom stage of the market always attracts new entrants and leads to excess which increases volatility before the fundamentals of supply and demand swing back toward equilibrium. This phenomenon is shown clearly by the graphic above from the US Energy Information Administration data which shows that huge spike in natural gas fired stage— those thousands of megawatts of gas fired generation did not go away in the bust. They got flipped or sold, they went bankrupt and were written off and sold to new owners. Their owners partnered with renewable energy developers to provide back-up generation or they are sitting out there under-utilized ready for the recovery and build up stages ahead.

Global Indium Supplies Could Be Exhausted By 2017 - Another iPad launch, another event filled with intense anticipation and speculation. But there is a problem looming on the horizon for fans of the latest tablet computers, not to mention smart phones and flatscreen TVs. Whether it is on the shiny new iPad, computer or phone, the chances are that you are reading this article through a screen laced with one of the rarest metals on Earth: indium. And analysts are warning that global supplies of indium could be exhausted as soon as 2017. So how will we live without the gadgets that we have come to depend on? Such a prospect might not seem as alarming as running out of essential commodities, such as food or water. But over the past few decades digital displays have become so enmeshed in our lives that they are integral to our social interactions and livelihoods from rural East Africa to the offices of Wall Street. I have met Kenyan fisherwomen trading their wares via SMS to clients based hundreds of kilometres away – an opportunity that depends on indium just as much as my need to read these words I am typing on my computer monitor.

Google Buys Wind, Bets on Sun - Google is stepping up wind-power purchases to reduce emissions, even as it devotes most of its renewable energy investments to sun-related projects, a trade-off aimed at reining in costs as the company seeks higher returns. Google drew 30 percent of the energy it consumed last year from renewable sources, virtually all of it from wind, up from 19 percent a year earlier. Yet of the $917 million that the company has invested in renewable-energy projects, about two-thirds—or $622 million —is channeled toward solar. Wind power is at least 50 percent cheaper than solar energy, according to data compiled by Bloomberg. That explains why Google, which consumes 2.26 million megawatt-hours of electricity a year, mainly for data centers that run its billions of Web searches, increasingly prefers wind.

Europe Maps Africa's Renewable Energy Potential - While foreign investors drool over Africa’s hydrocarbon reserves, the Dark Continent also has vast reserves of largely untapped renewable energy, from the Magreb’s immense solar potential to Africa’s mighty rivers. Now at last, African governments can begin to evaluate their countries’ potential, courtesy of the European Commission Joint Research Center, which last month published its remarkable 62-page “Renewable energies in Africa” report. The report is divided into four sections – solar, wind and biomass energy and “Pico and mini-hydro resource based energy potential.” All make for fascinating reading and provide an element frequently lacking in most writing about Africa – optimism. Dozens of maps and statistical tables provide an extremely detailed breakdown of the issues. Traditional, “Western” sources of power? “While endowed with a huge diversity of energy sources such as oil, gas, coal, uranium and hydropower, the local infrastructure and use of these commercial energy sources is very limited.”

Liquid Batteries Could Level The Load - The biggest drawback to many real or proposed sources of clean, renewable energy is their intermittency: The wind doesn’t always blow, the sun doesn’t always shine, and so the power they produce may not be available at the times it’s needed. A major goal of energy research has been to find ways to help smooth out these erratic supplies. New results from an ongoing research program at MIT, reported in the Journal of the American Chemical Society, show a promising technology that could provide that long-sought way of leveling the load — at far lower cost and with greater longevity than previous methods. The system uses high-temperature batteries whose liquid components, like some novelty cocktails, naturally settle into distinct layers because of their different densities. The three molten materials form the positive and negative poles of the battery, as well as a layer of electrolyte — a material that charged particles cross through as the battery is being charged or discharged — in between. All three layers are composed of materials that are abundant and inexpensive,

Fuel for thought - Knittel’s research addresses a clutch of practical and linked questions: How much progress have automakers made on fuel efficiency? (More than you might think.) How do car owners respond when fuel prices rise? (They really do ditch their gas-guzzlers.) How large are the collateral health benefits of removing dirty vehicles from the nation’s fleet? (Very large.) ... One of his papers, “Automobiles on Steroids,” recently published in the American Economic Review, examines technological progress in the auto industry. From 1980 through 2006, the fuel efficiency of America’s vehicles has increased by just 15 percent — at first glance, a lethargic rate of improvement. But as Knittel points out, cars’ average horsepower has roughly doubled since then, and average curb weight of those vehicles rose 26 percent... Adjusting for these changes, fuel economy has actually increased by 60 percent since 1980, but as Knittel observes, “most of that technological progress has gone into [compensating for] weight and horsepower.”  On the stagnation of overall fuel efficiency since 1980, Knittel adds, “It’s no fault of the manufacturers and consumers. Firms are going to give consumers what they want, and if gas prices are low, consumers are going to want big, fast cars. If you’re going to blame anyone, it’s the policymakers for not creating the incentive structure for putting that technological progress into fuel economy.”

And the money goes to ... fossil fuels -You might be tempted to believe that our government spends lavishly on green-energy sources relative to oil and coal and natural gas. Not a lot of people seem to understand by how much the facts run in the other direction. Unfortunately for our planet and for our future, we continue to encourage financially the burning of fossil fuels and the emission of carbon dioxide. Let's take a look at those energy subsidies. In a 2009 report, the Environmental Law Institute toted up the U.S. government's subsidies to all energy sources from 2002 to 2008. The total going to fossil fuels: $72.5 billion. Of this, $54.2 billion came in the form of tax breaks and $16.3 billion in the form of grants and direct payments. A mere $2.3 billion was spent on research into green fossil-based technology to capture and store the carbon dioxide that's released from burning coal. Meanwhile, the total subsidy to all renewable energy sources was $28.9 billion. Of this, more than half ($16.8 billion) went to corn ethanol. Ethanol might reduce our reliance upon foreign oil, but it is no longer thought to reduce carbon emissions by much.

42.8 GW of U.S. Coal Capacity Now Set for Closure - Today was a big milestone for people who care about public health and a livable climate. Two utilities announced the planned closure of nine coal plants in Illinois, Ohio, Pennsylvania and New Jersey, bringing total retirements (executed and planned) since January 2010 past the 100 mark to 106. Two plants in Chicago owned by Midwest Generation, the Fisk Plant and the Crawford Plant, had been a key target for local activist groups. These two plants have been in operation since the early 1900′s and were last updated in the late 50′s and 60′s. Along with violating “grandfathered” (i.e. lax) air quality standards and causing hundreds of emergency room visits each year, the two plants represented the largest source of local greenhouse gas emissions in 2010. Local and national activists groups, along with the Mayor of Chicago, Rahm Emanuel, put intense pressure on Midwest Generation to shut the plants down. The second set of plant closures come from the wholesale power provider GenOn Energy, which said it will close 3,140 MW of aging plants in Ohio, Pennsylvania and New Jersey. All of the plants are coal, except for one that is oil-fired. GenOn said new air quality regulations would make it difficult for the company to keep the plants operating.

Japan’s Nuclear Energy Industry Nears Shutdown, at Least for Now - All but two of Japan’s 54 commercial reactors have gone offline since the nuclear disaster a year ago, after the earthquake and tsunami, and it is not clear when they can be restarted. With the last operating reactor scheduled to be idled as soon as next month, Japan — once one of the world’s leaders in atomic energy — will have at least temporarily shut down an industry that once generated a third of its electricity. With few alternatives, the prime minister, Yoshihiko Noda, has called for restarting the plants as soon as possible, saying he supports a gradual phase-out of nuclear power over several decades. Yet, fearing public opposition, he has said he will not restart the reactors without the approval of local community leaders. Japan has so far succeeded in avoiding shortages, thanks in part to a drastic conservation program that has involved turning off air-conditioning in the summer and office lights during the day. It has also increased generation from conventional plants that use more expensive natural gas and other fossil fuels in a nation already uneasy about its reliance on foreign sources of energy. The loss of nuclear power has hurt in another way: economists blame the higher energy prices for causing Japan’s first annual trade deficit in more than three decades, which has weakened the yen and raised concerns about the future of the country’s export-driven economy.

Fukushima’s Last Resident - Naoto Matsumura is the only person living inside the exclusion zone and he has no electricity or running water. Reader Martha R recommended running this video as a way to commemorate the anniversary of the disaster.

Global accord on nuclear safety needed urgently – World Energy Council - A new international accord on the management and safety of nuclear power plants should be a priority for governments, an influential global energy organisation has said. A year after Japan’s Fukushima reactor was shut down, the World Energy Council – whose members include many of the biggest energy companies from around the world – said an agreement was possible and should be a matter of urgency. “Global nuclear power is one of the rare issues on which an international accord could be achieved with a reasonable level of efforts— the need to act is urgent, and the time is right,” its report found. “Very little has changed in respect of improving global governance of the nuclear sector, highlighting the need for action. There is critical need to inform the public about issues relating to nuclear generation technologies, safety, costs, benefits and risks.”

The Big Fracking Bubble: The Scam Behind the Gas Boom - Aubrey McClendon, America's second-largest producer of natural gas, has never been afraid of a fight. He has become a billionaire by directing his company, Chesapeake Energy, to blast apart gas-soaked rocks a mile underground and pump the fuel to the surface. "We're the biggest frackers in the world," he declares proudly over a $400 bottle of French Bordeaux at a restaurant he co-owns in his hometown of Oklahoma City. "We frack all the time. What's the big deal?" McClendon dominates America's supply of natural gas the same way the Tea Party-financing Koch brothers control the nation's pipelines and refineries. Like them, McClendon is an influential right-wing power broker – he helped fund the Swift Boat attacks against John Kerry in 2004, donated $250,000 to the presidential campaign of Rick Perry, and contributed more than $500,000 to stop gay marriage. But unlike his fellow energy czars, McClendon knows how to tone down his politics and present a friendlier, less ideological face to the public. He secretly gave $26 million to the Sierra Club to fight Big Coal, and built a Google-like campus for Chesapeake's 4,600 employees in Oklahoma City, complete with a 63,000-square-foot day care center, a luxurious gym and four cafes manned by cook-to-order chefs. He even voted for Barack Obama because he thought the country needed "an inspirational figure."

Commercial Natural Gas Falls to 9-Year Low in Dec.- The price of commercial natural gas fell to $8.28 per 1,000 cubic feet in December, according to data recently released by the EIA. Adjusted for inflation, that's the lowest price since September 2002, more than nine years ago, see chart above.

Why natural gas is already a game changer - Natural gas is a game changer for the U.S. economy according to PIMCO’s Mark Kiesel. The report says: “The energy sector is growing more quickly than the overall economy in numerous areas around the globe due to supportive long-term demand fundamentals from the emerging markets and emerging global supply sources. In the U.S., the use of new drilling technologies for onshore natural gas and oil production is a potential “game changer” for U.S. energy security and an improved economy.” But how exactly is natural gas a game changer? First, it’s lowering costs. Onshore shale natural gas production has surged in areas like Marcellus, Haynesville, Fayetteville and Barnett formations. Natural gas output has increased to 22.7 trillion cubic feet (tcf) in October 2011, from 20.2 tcf in December 2007.  This has helped push down nat gas prices, and is expected to lower heating costs in the future.Moreover, this will also make the U.S. less energy reliant. Nat gas imports have fallen to 1.7 tcf today, from 4 tcf in 2008. U.S. nat gas prices are also cheaper relative to international prices. Second, U.S. annual upstream (exploration, recovery and production) and infrastructure capital expenditure on shale gas is projected to grow to $48.7 billion in 2015, from $33.3 billion in 2010,. This is expected to increase “direct, indirect and induced” employment in shale gas to 869,684 employees in 2015, from 601,348 employees in 2010.

Waste-water injection well caused 12 earthquakes in Ohio, investigation show- A waste-water injection well induced the series of 12 earthquakes in Youngstown last year, an on-going state probe has concluded. And because of that, Ohio regulators on Friday unleashed a round of new permitting rules for injection well drilling that could limit or slow down the number of new injection wells as contractors scramble to comply with tougher rules. The regulations come on the eve of an expected boom in gas and oil drilling in the state -- a boom that will also produce millions of gallons of naturally occurring salt water and chemically-laced water used to fracture shale containing the gas and oil. In a 24-page preliminary report of its investigation into the quakes, the Ohio Department of Natural Resources has included a series of new permit requirements that it says go well beyond national standards. Among the requirements are mandates that injection well developers submit extensive geological mapping and other data before drilling. If such information does not exist or is incomplete, the developer will have to hire experts to do the seismic and other testing. State-of-the-art pressure and volume monitoring will be required at operating wells, along with an automatic shutoff system if pressures exceed the limits the state has set for each well. And injection well companies will be prohibited from drilling into the ancient bedrock or "basement rock" as what occurred in Youngstown.

Ohio: Gas-drilling injection well led to quakes — A dozen earthquakes in northeastern Ohio were almost certainly induced by injection of gas-drilling wastewater into the earth, state regulators said Friday as they announced a series of tough new rules for drillers. Among the new regulations: Well operators must submit more comprehensive geological data when requesting a drill site, and the chemical makeup of all drilling wastewater must be tracked electronically. The state Department of Natural Resources announced the tough new brine injection regulations because of the report's findings on the well in Youngstown, which it said were based on "a number of coincidental circumstances." For one, investigators said, the well began operations just three months ahead of the first quake. They also noted that the seismic activity was clustered around the well bore, and reported that a fault has since been identified in the Precambrian basement rock where water was being injected. "Geologists believe it is very difficult for all conditions to be met to induce seismic events," the report states. "In fact, all the evidence indicates that properly located ... injection wells will not cause earthquakes."

China finds success at shale gas wells - -- China's state-owned energy company Sinopec announced that natural gas was flowing from a series of shale deposits in Sichuan province. China Petroleum and Chemical Corp., or Sinopec, announced that its wells in the Yuanba field were producing around 17,900 cubic feet of natural gas from shale deposits in central Sichuan, the Platts news service reports. The energy company started tests in the field in 2010. It said the test results were encouraging and paved the way to further development. Last week, the Chinese Ministry of Land and Resources said there was an estimated 886 trillion cubic feet of natural gas deposits in onshore shale reserves. The ministry said the reserves were suitable for development, though acknowledged China "lags behind advanced countries" when it comes to exploiting shale reserves. Beijing aims to add more natural gas to its energy mix in an effort to control pollution. The country said it plans to start developing shale by 2015, though there are no commercial shale gas developments yet in China.

Enbridge U.S. oil line to be shut for four more days - Enbridge Inc said on Sunday a key segment of its oil pipeline system in the U.S. Midwest will remain shut down for up to four more days after a deadly vehicle accident in Illinois caused an oil leak and fire, likely squeezing supplies for refiners in the region.  The shutdown of Enbridge's 318,000 barrel a day Line 14/64, which extends to Griffith, Indiana, from Superior, Wisconsin, is also expected to pressure already-weak prices for Canadian crude this week as supplies back up in Alberta, market sources and analysts said.  Enbridge, whose pipelines carry the bulk of Canadian oil exports to the United States, idled the line early Saturday after what emergency officials described as a two-vehicle collision at an above-ground portion of the conduit close to a pumping station near the township of New Lenox, Illinois.

Spill from Hell: Diluted Bitumen. Poisoned air. Sunken gunk. A clean-up nightmare. What we're learning from the oil sands 'DilBit' dump into the Kalamazoo River - On a July morning in 2010 in rural Michigan, a 30-inch pipeline owned by Calgary-based Enbridge Energy Partnersburst and disgorged an estimated 843,000 gallons of thick crude into a tributary of the Kalamazoo River. This was no ordinary crude -- it was the first ever major spill into water of diluted bitumen from the Alberta oil sands. The cleanup challenges and health impacts around Kalamazoo were unlike anything the U.S. Environmental Protection Agency had ever dealt with, and raise serious questions about the preparedness in British Columbia to respond to such a disaster on the B.C. coast -- or the Vancouver harbour. Each year, increasing numbers of tankers filled with diluted bitumen leave Vancouver loaded from the existing Kinder Morgan pipeline from northern Alberta to a terminus in Burnaby. Unlike conventional crude, diluted bitumen or "dilbit" is a mixture of unrefined tar that is often heavier than water and "diluent." This is usually a cocktail of volatile solvents like naphtha or natural gas condensate that allows the thick bitumen to be pumped through the pipeline. The local residents and EPA responders near Kalamazoo quickly learned that bitumen and diluent do not stay together once released into the environment.

Must-See Video On The True Cost of Tar Sands -- What does environmental devastation actually look like? At TEDxVictoria, photographer Garth Lenz shares shocking photos of the Alberta Tar Sands mining project — and the beautiful (and vital) ecosystems under threat.This powerful talk is for anyone who thinks the tar sands are just another source of oil — and that the only source of greenhouse gases from the tar sands come from burning gas and oil

Keystone XL Tar Sands Pipeline Won’t Ease Gas Prices; Senate Must Reject It - This week the Senate is likely to vote on an amendment that would force approval for the Keystone XL pipeline. President Obama already rejected the dirty tar sands pipeline because it needed a more thorough safety and environmental review. Yet instead of allowing engineers, public safety, and other experts to assess the pipeline’s sweeping impacts — on American communities, drinking water supplies, and the stability of our climate — this amendment would let the politicians in Congress decide what is safe. It would bypass our nation’s long-standing environmental review process and give Congress the unprecedented authority to hand out permits on massive projects.

Ranchers Tell Keystone: Not Under My Backyard - Oil has put bread on Eleanor Fairchild’s table in Wood County, Tex., for more than 50 years. Her late husband was a geologist who worked on exploration for different energy companies, and was part of a team that discovered oil in Yemen in the 1980s. That doesn’t mean she welcomed a TransCanada (TRP) worker who appeared on her doorstep in March 2009. The company wanted to run nearly a mile of its 1,700-mile Keystone XL pipeline across Fairchild’s 350-acre farm 90 miles east of Dallas, the representative explained, and was willing to pay her $43,000 for an easement on five acres. Fairchild pondered the offer for several weeks. She says the company upped it to $60,000, but “they were really pushy, and that doesn’t go over well with me,” Fairchild says. “It’s my land.”

Senate rejects expediting Keystone pipeline - In the wake of lobbying by President Obama and Senate Democratic leaders, the Senate Thursday defeated legislation to speed up construction of a U-S.-Canadian oil pipeline. The White House victory came after the president started personally calling Democratic senators Wednesday night. The vote underscored the extent to which rising gas prices and energy supply have become a central political issue. Republicans–along with the oil industry, which is running a nationwide advertising campaign about energy supplies — have been attacking Obama on the campaign trail for failing to fully exploit traditional oil and gas resources while Americans are financially stretched. Democrats and their environmental supporters counter that the president must weigh the benefits of fossil fuels against their environmental impact and the importance of promoting renewable energy.

As pipelines stall, railways keep oil flowing - On any given week, three to seven CP Rail trains laden with crude oil from the North Dakota Bakken field whisk across North America, bypassing the pipeline bottlenecks in mid-continent that are depressing oil prices and unaffected by the noise in Washington, D.C., that is holding back the Keystone XL pipeline. It’s a roaring business. In 2009, when Calgary-based Canadian Pacific Railway Ltd. started dabbling in crude oil transportation, it moved 500 of its black barrel-shaped cars out of the basin. Last year, its oil trains carried 13,000 cars and soon CP could be moving 70,000 cars or more a year out of the North Dakota Bakken tight-oil field alone. With each tank car containing 650 barrels of oil, that’s 126,000 barrels a day — a significant pipeline on rail. “We think that’s foreseeable in the not-too-distant future, and we think based on what we are doing now there is potential above that,” Tracy Robinson, CP’s energy and merchandise vice-president, said in an interview.

BP settles while Macondo ‘seeps’ - As BP settles out of court for the first phase of thousands of lawsuits that could cost the company tens of billions of dollars, Al Jazeera has spotted a large oil sheen near the infamous Macondo 252 well. In September 2011, Al Jazeera spotted a large swath of silvery oil sheen located roughly 19km northeast of the now-capped well. But now, on February 29, Al Jazeera conducted another over-flight of the area and found a larger area of sea covered in oil sheen in the same location. Oil trackers with the organisation On Wings of Care, who have been monitoring the new oil since mid-August 2011, have for months found rainbow-tinted slicks and thick silvery globs of oil consistently visible in the area "This is the same crescent shaped area of oil and sheen I've been seeing here since the middle of last August," Bonny Schumaker, president and pilot of On Wings of Care, told Al Jazeera while flying over the oil.

BP Settlement Sells Out Victims - Some deal. BP gets the gold mine and its victims get the shaft. And a few lawyers will get vacation homes—though they won’t be so stupid as to build them on the Gulf Coast.  On the night of March 2, the judge-picked lawyers for 120,000 victims of the Deepwater Horizon blow-out cut a back-room deal with oil company BP PLC which will save the lawyers the hard work of a trial and save the oil giant billions of dollars. It will also save the company the threat of exposing the true and very ugly story of the Gulf of Mexico oil platform blow-out. I have been to the Gulf and seen the damage—and the oil that BP says is gone. Miles of it. As an economist who calculated damages for plaintiffs in the Exxon Valdez oil spill case, I can tell you right now that there is no way, no how, that the $7.8 billion BP says it will spend on this settlement will cover that damage, the lost incomes, homes, businesses and boats, let alone the lost lives—from cancers, fetal deformities, miscarriages, and lung and skin diseases. Two years ago, President Obama forced BP to set aside at least $20 billion for the oil spill’s victims. This week’s settlement will add exactly ZERO to that fund.  Indeed, BP is crowing that, adding in the sums already paid out, the company will still have spent less than the amount committed to the Obama fund.

Deepwater Oil Drilling Picks Up Again as BP Disaster Fades - Nearly two years after an explosion on an oil platform killed 11 workers and sent millions of gallons of oil gushing into the Gulf of Mexico, deepwater drilling has regained momentum in the gulf and is spreading around the world. The announcement of an agreement late Friday by BP and lawyers representing individuals and businesses hurt by the disaster represented something of a turning of the page, though BP and its drilling partners continue to face legal challenges. After a yearlong drilling moratorium, BP and other oil companies are intensifying their exploration and production in the gulf, which will soon surpass the levels attained before the accident. Drilling in the area is about to be expanded in Mexican and Cuban waters, beyond most American controls, even though any accident would almost inevitably affect the United States shoreline. Oil companies are also moving into new areas off the coast of East Africa and the eastern Mediterranean.

Legal Strategy Taken by Shell Is Rarely Successful - The oil giant Shell filed suit in federal court in Alaska last week against a dozen environmental groups, employing a rare — and rarely successful — legal gambit in an effort to pre-empt anticipated legal challenges to its plans to begin exploration in the Arctic Ocean this summer. Marvin E. Odum, Shell’s president for the United States, said in an interview that he was “highly confident” that the company’s plan for preventing and responding to an oil spill would survive any legal scrutiny. He said the company had filed the suit in the hopes of speeding up the judicial review of the plan that will come if and when the environmental groups — who have challenged Shell at every step of the process — file suit.

Leaders Ask Why We’re Exporting Fossil Fuels -- The “battle over energy exports is intensifying” and at the same time we have no coherent national export policy were the primary takeaways from an event called “Power Play:  Fossil Fuels and U.S. Export Strategy” held this morning at the Center for American Progress Action Fund.  Coal, refined petroleum products from tar sands, and natural gas are currently being exported to hungry overseas markets, and the event was designed to look at the implications of these decisions. Panelists Senator Ron Wyden (D-OR) and Congressman Ed Markey (D-MA)  bemoaned the fact that the United States does not have a national strategy on exports.  Wyden accused the country of being “on autopilot” to an energy export policy, which could have tremendous economic, social, and environmental consequences.  He expanded: So I have been somebody who’s been expansionist on trade and think that we ought to have freer trade, have fairer trade, but we also need to have smarter trade.  And allowing energy producers—we haven’t really touched on this—to trade away our international competitiveness and our energy independence by exporting the resources right now without thinking through the implications here of what it means for consumers and our companies doesn’t strike me as a smart trade policy. Watch it:

Is U.S. Energy Independence Finally Within Reach? - "Energy self-sufficiency is now in sight," says energy economist Phil Verleger. He believes that within a decade, the U.S. will no longer need to import crude oil and will be a natural gas exporter. Verleger says all of the previous presidents fighting for energy independence would be quite surprised by how this came about: It's not the result of government policy or drilling by big oil. "This is really the classic success of American entrepreneurs," he says. "These were people who saw this coming, managed to assemble the capital and go ahead." Small energy companies using such controversial techniques as hydraulic fracturing, along with horizontal drilling, are unlocking vast oil and natural gas deposits trapped in shale in places like Pennsylvania, North Dakota and Texas. North Dakota, for instance, now produces a half-million barrels a day of crude oil, and production is rising "This shale gale, I describe it as the energy equivalent of the Berlin Wall coming down. This is a big deal," says Robin West, chairman and CEO of PFC Energy, who has been in the energy consulting business for decades. "We estimate that by 2020, the U.S. overall will be the largest hydrocarbon producer in the world; bigger than Russia or Saudi Arabia," he says."

Bill O'Reilly is Misinforming Americans About Oil Supplies - Last week I was interviewed by Alan Colmes from Fox News Radio on the topic of gas prices. During the interview, he mentioned an idea that Bill O'Reilly has proposed, and that is to address gasoline prices by discouraging U.S. oil companies from exporting their products. The critics of Bill's proposal have generally focused on the notion that "We can't tell the oil companies where to sell their product." However, there is a far more fundamental issue, and that is that the basic facts of his proposal are based on an erroneous assumption. Let's first have a look at the proposal, in his own words:O'Reilly: We began covering the skyrocketing oil prices last Friday with Lou Dobbs. He was candid, saying because of the mild winter, there is plenty of oil and gas in the U.S.A. So supply and demand here should dictate lower prices. With all due respect, Bill O'Reilly has a fundamental misunderstanding about oil supplies. There is not "plenty of oil and gas in the U.S.A." He has mistakenly translated net exports of finished products like gasoline and diesel into "plenty of oil and gas in the U.S.A.", as I explain below.

There Is Little Disagreement That Drilling Off The US Coast Will Have Near Zero Impact On The Price Of Gas - In an article on the debate over offshore drilling, the NYT told readers: "while candidates have sparred over the reasons for rising prices, there is little disagreement over the call for more drilling, onshore and offshore." The NYT should have also told readers that there is almost no disagreement among economists that drilling everywhere all the time offshore will have almost no impact on the price of gas in the United States. The reason is that we have a world market for oil. The additional oil that might come from offshore drilling is a drop in the bucket in a world oil market of almost 90 million barrels a day. It is unlikely that drivers would even notice the difference between a policy where we told the oil industry that it could drill wherever it wants and pay no attention to the number of people it kills in the process or the resulting damage to the environment and local economies and a policy where we banned all new offshore drilling. Over the next 2 years the difference would be virtually non-existent and even after 10 years it is unlikely to change the price of gas by more than 2-3 percent. The media should point out this fact to readers and that politicians who claim otherwise either do not understand the oil market or are being dishonest. It also would have been worth reminding readers that politicians of both parties receive large campaign contributions from the oil industry.

The Ghost of Enron Past Explains Oil Market Manipulation - I outlined in a recent post my view that the oil market price has been inflated twice by passive (inflation hedgers) investors, albeit with short term speculative spikes from active (speculators) investors: once from 2005 to June 2008; and again from early 2009 to date. In attempting to ‘hedge inflation’ passive investors perversely ended up actually causing it, and allowed oil producers to manipulate and support the oil market price with fund money to the detriment of oil consumers. But there has always been a missing link – precisely how has this manipulation been achieved? A comment thread at the FT Alphaville blog a month ago shed light on the esoteric subject of collateralised commodity borrowing by BP, who with Goldman Sachs were the heroes of a January post. While Izabella Kaminska’s Alphaville post was as interesting as usual, the real nugget on this occasion lay in the extremely well informed discussion which followed. The protagonists were firstly, Patrick McGavock – a very clued up former banker whose blog rejoices in the name of the “Complete Banker”. The second commenter – whose nom de plume is “Free Again” – not only had technical mastery of a subject that has me reaching for an icepack for my head, but also displayed a comprehensive knowledge of Enron’s modus operandi.

Oil Is the New Greece: HSBC Chief Economist - Rising oil prices have displaced Greece as a source of investor anxiety, a new HSBC report says, warning that if the trend of rising oil prices persists, a fragile economic recovery in the developed world could quickly be derailed, and inflation could return to emerging markets.  Oil prices have risen to all-time highs in euro and sterling terms in recent days and are edging close to the $147 per barrel high seen in 2008, mainly as a result of rising tensions over Iran. HSBC Chief Economist Stephen King said in the report that sanctions against Iran have already led to supply shortages which have doubtless lifted oil prices. There are also plenty of other Iranian-related issues to worry about, he said. “Has Iran developed a nuclear capability, will there be a war with Israel or, indeed, the U.S., and, in a bizarre self-defeating act of retaliation, would Iran be tempted to seal the Straits of Hormuz?” he asked. King pointed out that the rise in oil prices was not just a result of geopolitical tensions however. One explanation for the latest increase is the impact of quantitative easing.

Global Oil Demand Projected to Rise 1.2% in 2012 - Global oil demand will rise by 1.2% in 2012 to 88.96 million barrels a day, led by increases in China and other developing nations, U.S. government forecasters said Tuesday. But the growth is about 260,000 barrels a day less than projected a month ago, after tweaks in 2011 demand in the major industrialized nations and slightly slower growth in China and other developing countries, according to the Energy Information Administration. In 2013, demand will rise by 1.5%, or 1.37 million barrels a day, to 90.33 million barrels a day. This level, too, is off about 0.5%, or 410,000 barrels a day, from the February estimate, with downgrades in the major industrialized nations as well as the developing countries, led by China. For 2012, demand in the nations comprising the Organization for Economic Cooperation and Development is expected to drop 0.5%, while non-OECD demand rises 3%. Within the non-OECD demand growth of 1.27 million barrels a day, China accounts for 440,000 barrels a day, and shows a 4.5% rise from a year ago, to 10.27 million barrels a day. Last month, China was forecast to show 5.4% growth, to 10.36 million barrels a day. In 2013, OECD demand is expected to rise by 0.4%, but that’s less than the 0.6% growth projected a month ago. Non-OECD demand in 2013 is seen rising by 2.7%, or 1.18 million barrels a day. China’s demand is expected to rise 4.6%, or 470,000 barrels a day, to 10.74 million barrels a day.

EIA raises price forecasts for U.S. oil, fuels -- The Energy Department raised its price forecasts for crude oil, gasoline and other petroleum products Tuesday, estimating oil prices will average $106 a barrel this year. U.S. retail gasoline prices are expected to average $3.92 a gallon this summer, with average monthly prices peaking at $3.96 a gallon in May, the Energy Department's forecasting group, the Energy Information Administration, said in its monthly Short-Term Energy Outlook. "Supply disruptions in the Middle East and Africa contributed to a significant increase in world crude oil prices during February," the EIA said in explaining the reason for its raised forecasts. The EIA's March estimate for West Texas Intermediate crude oil prices is $5 higher than its report in February and underscores the effect of rising tensions between Iran and the West on the U.S. petroleum market. U.S. retail gasoline prices are now expected to average $3.79 a gallon in 2012, up from a prior forecast of $3.55 a gallon. In 2013, the EIA expects gasoline prices at $3.72 a gallon, up from a previous estimate of $3.59 a gallon.

If Analysts Are As Wrong As Usual, Then Oil Is Headed To $135 Per Barrel This Year: Clearly, analysts can't see the future. But if analysts are as wrong about oil prices as they usually are, then brent oil could be headed for $135 per barrel this year—that is, if you believe the research that analysts are doing about analysts. Frank Holmes, CEO and CIO of U.S. Global Investors points to some interesting Deutsche Bank research in his latest Investor Alert: Beware of biases by oil analysts: Deutsche Bank research going back to 1999 found that analysts “consistently underestimate” the Brent oil price by an average of 27 percent. The chart below shows the forecasted price made by analysts compared to the actual Brent oil price outturn. Every year, analysts have underestimated how strong Brent will be, ranging from as little as 2 percent to as high as 54 percent. Using the average forecasting error, Brent could be as high as $135 a barrel.

No number crunching in Alan Kohler opinion piece on premature peak oil death - Alan Kohler, who is known for his excellent financial graphs on the ABC TV 7 pm News came out with an opinion piece on peak oil which does not display the level of research expected from him. Almost no statement in his article can be supported by statistical evidence. No numbers are shown to prove that shale oil can compensate for oil decline in maturing oil fields around the world. What’s worse, the fight over oil in and between Middle East and North Africa (MENA) countries due to peaking in key countries is completely forgotten. The EIA estimates that despite increasing unconventional oil production the dependency on OPEC oil will not be reduced. Reserves and resources are mixed up and those vast gas reserves are neither used to replace coal nor oil (as transport fuel). The CO2 from an assumed unconventional oil and gas boom will cook us alive. The problem with such articles is that they contribute to further delay the real transformation away from oil (and fossil fuels in general) which can only be done by massive rail projects and preserving oil where it will be needed most: in agricultural production and transport of food to the cities.

Tech Talk - Future Russian Fuel Production from the Arctic (w/ maps & graphics) In the past few weeks I have been looking at the potential for sustainability in oil and gas production in Russia, now at a predicted recent peak of 10.36 mbd, when condensate is included. But the question increasingly becomes whether or not Russia can sustain these levels through this decade, as has been assumed by those suggesting there will be no supply problems in the near future. In order to sustain this level of production against falling volumes from the current major sources in Western Siberia (estimated as 300 kbd in 2010), Russia is (so far) relying on bringing new fields into production in Eastern Siberia and Timan-Pechora, as well as having some increase in condensate as natural gas production continues to increase. However, as a broad generalization, these developing fields are at a size of about 500 mb each, with an anticipated maximum individual production level of around 150 kbd. Prirazlomnoye for example, which is coming on line has 526 million barrels in reserves, and will be producing at 132 kbd.

Crude Crisis: My appearance on RT television's Crosstalk - This week I appeared on the cable news television show Crosstalk. The topic was the cause of high oil prices. I managed to provide a succinct explanation near the beginning. I didn't use the words "peak oil" because the panel discussion format of the show would have prevented me from providing sufficient explanation and context. The show which lasts a little over 25 minutes can be found here. Here is the YouTube version:

Iranian Oil Production Declining - I haven't posted a graph of Iranian oil production in quite a long time, which seems a little slack of me.  Anyway, here it is with four sources up to date (EIA, IEA, JODI, and OPEC MOMR).  The graph is not zero-scaled in order to show the changes and discrepancies better.  The black line shows the average based on those four.  However, it's really worth looking at the individual sources here.  First look at the orange JODI line - this is based on Iranian self reports and shows Iran as a model citizen of OPEC - production was sharply reduced in line with OPEC decisions in late 2008, and has remained roughly flat since.  Given that a) this doesn't agree with any other source, and b) that the Iranian regime seems particularly dishonest even by the low standards of Middle Eastern autocracies, I don't believe this data: it's too good to be true.  Then there's the green line from the US EIA which looks very strange with several almost linear segments of tiny rises punctuated by little falls and which completely doesn't match the IEA or OPEC sources.  I have no idea what's going on here.  Finally, there are the IEA (plum) and OPEC (blue) sources which show roughly similar patterns that seem generally believable. It's tempting to assume these two are roughly onto the truth and ignore the others.  However, they could be wrong too - there's really no way to tell very reliably with a data situation this poor.

Iranian vs Saudi Oil Production History -- Yesterday I posted a composite oil production graph for Iran based on five data sources from 2000 through Jan 2012. It's interesting to contrast the Iranian production with that of Saudi Arabia, so I updated my graph for that country, based on the same sources: I also show the rig count on the right axis. In the second half of 2011, Saudi production has been hovering a little below 10mbd while the rig count has been gradually increasing. I then took the "average" line for each country and rescaled them so that both average 100% over the time period 2000-2012. This is what they look like together:Two features stand out where the countries acted similarly - the response to the late nineties boom and the 2001 recession, and the production cut following the onset of the great recession in 2008. However, other features show differences. The sharp boost in Saudi production in spring 2003 was to offset the loss of Iraqi production when the US invaded that country. The Iranians didn't help with that effort. Then the loss of about 1mbd of Saudi production in 2006-2007 was not matched by the Iranians. I interpret this as due to Saudi operational difficulties in sustaining 9.5mbd after a long period of underinvestment in their oil infrastructure since the early 1980s.

IAEA has "serious concerns" as Iran boosts nuclear work (Reuters) - Iran has tripled its monthly production of higher-grade enriched uranium and the U.N. nuclear watchdog has "serious concerns" about possible military dimensions to Tehran's atomic activities, the agency's chief said on Monday. As International Atomic Energy Agency head Yukiya Amano voiced his concerns at an IAEA meeting, U.S. President Barack Obama told Israeli Prime Minister Benjamin Netanyahu Washington "has Israel's back" and would not let Iran get nuclear arms. Amano told a news conference at the IAEA in Vienna there were indications of unspecified "activities" at an Iranian military site which his inspectors want to visit as part of a probe into fears Iran may be seeking nuclear weapons capability. His remarks confirmed comments made by IAEA diplomats to Reuters last week when one said: "we have heard about possible sanitation" of the Parchin site that he called "very concerning," suggesting Iran may be delaying access while it removed evidence of suspect activities. The United States and its Western allies are seeking Russian and Chinese

Obama Says Iran Strike Is an Option, but Warns IsraelPresident Obama, speaking days before a crucial meeting with Prime Minister Benjamin Netanyahu of Israel, stiffened his pledge to prevent Iran from acquiring nuclear weapons, even as he warned Israel of the negative consequences of a pre-emptive military strike on Iran’s nuclear facilities. The president also said he would try to convince Mr. Netanyahu, whom he is meeting here on Monday at a time of heightened fears of a conflict, that a premature military strike could help Iran by allowing it to portray itself as a victim of aggression. And he said such military action would only delay, not prevent, Iran’s acquisition of nuclear weapons.

Amid Risks Facing Economy, Mideast Uncertainties Stand Out - It’s deja vu all over again. The financial markets have refocused on the euro-zone debt crisis, and they don’t like what they see. At the same time, the China slowdown and Middle East tensions are creating large risks. The piling-on of these drags raises uncertainty about the U.S. recovery. But only one, the Middle East, has the potential to derail growth. On Tuesday came news that the euro-zone real gross domestic product contracted 0.3% in the fourth quarter. Plus, investors worried Greece will have to force a debt swap down the throats of bondholders which could activate credit default swaps. Add in China’s cut in its target growth rate for 2012 plus the oil market’s roiling over Israel and Iran, and it is easy to see why risk is definitely off in financial markets. The U.S. recovery has been here before: a good head of domestic steam to start the year, then growth gets clobbered by an outside force [last year brought the Japan disasters that disrupted factory supply chains and the Arab Spring which lifted oil prices.] The difference this year is that it’s not only activity data that look better, so do job markets.

Analysis: Oil creeps toward top of Asia's economic worry list (Reuters) - High oil prices are fast replacing Europe as the biggest danger to growth in Asia, threatening to smother consumer demand while taking a knife to exports and reigniting inflation. Brent crude topping $128 a barrel is also a headache for central banks as it makes it harder to use easy monetary policy to cushion growth. And any threat to Asia is a danger to all, as the world is counting on the region to keep growing to offset recession in Europe and a fitful recovery in the United States. "Just as the threat of a financial crisis has receded, the steep rise in oil prices in the first two months of 2012 has resurfaced as the greatest perceived threat to the outlook," warned Nomura's chief economic advisor, David Resler, in a note to clients. Oil matters to Asia. The region is now the largest consumer of the commodity having surpassed North America in 2007 to account for more than 31 percent of world demand. Asia is home to four of the world's 10 largest oil-consuming countries in China, Japan, India and South Korea. The region imports two-thirds of all its oil, which adds up to a very large bill indeed. Analysts at Nomura estimate that even after excluding Japan, Asia spent a net $447 billion on imports of oil and petroleum last year, up from $329 billion in 2010 and $234 billion the year before.

As US Contemplates Releasing Crude From The Strategic Reserve, China Resumes Building Emergency Inventory - A tale of two civilizations, one in ascent and one in decline, can probably be best summarized by how they ration for the future in that most important of commodities - energy, in this case vis-a-vis the respective treatment of the strategic oil reserves of China and the US. Because while all the rage in D.C. political gab in recent weeks has been whether the US will allow a release of oil from the SPR, just to appease those Obama voters who actually have a job and have to take a car to get to it, things over at America's nemesis in civilizational conflict are diametrically opposite. As Bloomberg reports, China has "started filling its emergency petroleum reserve at Lanzhou in the nation’s northwest, according to an official at the nation’s largest crude producer." Unlike the US, where everything is now a function of market liquidity, evil speculators, and political ambitions (rest in peace supply and demand), China is completely ignoring all the day to day mundane drivel, and is doing what is right - which is to make sure it is prepared for an "eventuality" in the crude supply. Said eventuality is 100% guaranteed to happen if the Panetta-McCain is given a green light to allow the liberation of Iranian crude to finally proceed following years of foreplay.

Plateau Oil meets 125m Chinese cars - Oil spikes usually metastasize once energy costs reach 9pc of global GDP. The longer they stay there, the greater the damage.  That proved to be the pain barrier in the 1970s and again in 2008, and we are just shy of that level right now. “Oil is already capturing a higher level of European GDP than in 2008,” said Francisco Blanch from Bank of America.  The rule of thumb is that a 10pc rise in crude cuts US growth by 0.2pc four quarters later, but the science is flabbily soft and nobody knows where the inflexion point lies. What is deeply troubling is that Brent crude should have reached fresh records in sterling (£79) and euros (€94) - with a knock-on effect on US petrol prices, mostly tracking Brent - even though the International Monetary Fund has sharply downgraded its world growth forecast to 3.25pc this year from 4pc in September, and even though International Energy Agency (IEA) has cut its oil use forecast for this year by 750,000 barrels per day (bpd).  Oil is not supposed to ratchet defiantly upwards in a downturn, which is what we have with the Euro zone facing a year of contraction in 2012, and much of the Latin bloc sliding into full depression. Japan‘s economy shrank in the fourth quarter.  The unpleasant fact we must all face is that the relentless supply crunch - call it `Peak Oil’ if you want, or `Plateau Oil’ - was briefly disguised during the Great Recession and is already back with a vengeance before the West has fully recovered.

China Car Sales Have Worst Start Since 2005 as Economy Slows - China’s passenger-car sales had their worst two-month start in seven years as slowing economic growth and record fuel prices discouraged consumers in the world’s largest vehicle market. Wholesale deliveries of passenger automobiles, including multipurpose and sport-utility vehicles, declined 4.4 percent to 2.37 million units in January and February, the biggest drop since 2005, according to the China Association of Automobile Manufacturers. Sales were projected to fall 3 percent, based on the median estimate of five analysts surveyed by Bloomberg News. China’s industry minister said car sales may fail to meet this year’s growth forecast after Premier Wen Jiabao this week set the lowest target for economic expansion since 2004. The data is a blow to global carmakers from General Motors Co. (GM) to Volkswagen AG that are already contending with a slump in European sales.

China power output to hit 2-yr low, slow coal production-NDRC report Reuters: - China's power production is expected to rise 7.5 percent in 2012, its slowest growth since 2009, and slackening demand from thousands of power stations across the country will also curb gains in coal output, a government work report showed on Monday. The report, issued by the National Development and Reform Commission (NDRC) ahead of the annual parliament meetings, said total electricity output was expected to hit 5.05 trillion kilowatt hours in 2012, slowing markedly from the 10 percent growth rate last year and a near 15 percent spurt in 2010. Raw coal output from China, the world's top producer and consumer of the fuel, is expected to rise 3.7 percent from a year ago to 3.65 billion tonnes, cooling from the 8.7 percent gain recorded in 2011. The moderation in power output growth, the lowest since the 6.75 percent recorded in 2009, comes as Beijing pulls out all stop to cool its economy, with Premier Wen Jiabao saying on Monday that China aims to grow its economy by about 7.5 percent in 2012.

Body blow for mining heavyweights as China growth expected to slow to near decade low - The mining sector’s bellwether companies were all beaten down on Monday after China’s premier Wen Jiabao delivered a downbeat outlook for the world’s second largest economy adding that there were “new problems” to deal with. China will grow by 7.5% this year Jiabao said at the opening of the country’s parliamentary session adding that the economy is experiencing “downward pressure” and that “internationally, the road to global economic recovery will be tortuous, the global financial crisis is still evolving and some countries will find it hard to ease the sovereign debt crisis any time soon.” China recorded GDP growth of 9.2% in 2011 and annual growth has averaged 10.4% since 2001, peaking in 2007 at 13%. The last time expected growth was pegged at below 8% was 2004. The FT puts the numbers in perspective saying China likes to underpromise and overdeliver on GDP expansion: “As with previous years, the real figure is likely to be somewhat higher – most economists predict China will grow 8.5 per cent this year – but the lower official target is highly significant all the same, for China and the rest of the world that increasingly relies on it to drive global growth

China’s defense spending on the rise - China announced a double-digit hike in military spending in 2012, in a move likely to fuel concerns about Beijing’s rapid military build-up and increase regional tensions. The defence budget will rise 11.2 percent to 670.27 billion yuan ($106.41 billion), said Li Zhaoxing, a spokesman for China’s national parliament, citing a budget report submitted to the country’s rubber-stamp legislature.The figure marks a slowdown from 2011 when spending rose by 12.7 percent but is still likely to fuel worries over China’s growing assertiveness in the Asia-Pacific region and push its neighbours to forge closer ties with the United States.Li described the budget as “relatively low” as a percentage of gross domestic product compared with other countries and said it was aimed at “safeguarding sovereignty, national security and territorial integrity”.“We have a large territory and a long coastline but our defence spending is relatively low compared with other major countries,” Li told reporters on Sunday.

Chinese Military Spending Will Rise 11% in 2012 - China plans to increase defense spending 11.2 percent this year as the country’s expanding global commitments and lingering territorial disputes drive demand for more warships, missiles and fighter planes.  Military spending is set to rise this year to about 670 billion yuan ($106.4 billion), Li Zhaoxing, spokesman for China’s National People’s Congress, said yesterday ahead of a speech today by Premier Wen Jiabao to open the annual 10-day session of the country’s legislature. China’s defense spending, the second highest in the world after the U.S., has risen in tandem with the expansion of its economy and a new focus by the Obama administration on the Asia- Pacific region. China is also involved in spats with Vietnam, the Philippines and Japan over control of oil- and gas-rich waters and has a lingering territorial dispute with India that erupted into a war in 1962.

China’s debt mounts to $2.78 trn, 43% of GDP - China may be sitting on world’s highest foreign exchange reserves of about USD 3.20 trillion but it is also burdened with USD 2.78 trillion government debt causing great deal of concern among policy makers. China's government debt amounts to about 17.5 trillion yuan (USD 2.78 trillion) about 43 per cent of the country's gross domestic product (GDP), Yang Kaisheng, president of the Industrial and Commercial Bank of China, said Tuesday. It is composed of 10.7 trillion yuan (USD 1.7 trillion) of local government debt and 6.8 trillion yuan of central government debt, Yang told a press conference on the sidelines of China's annual parliamentary session. As the concerns over the debt mount, China’s Bank regulator has said that the government will take steps to guard against possible defaults which could cause extensive damage to the financial stability of the country’s banks.

China orders local govts to set up debt repayment funds (Reuters) - China's local governments should set up special funds to repay some of the 10.7 trillion yuan ($1.7 trillion) debt they owe and must use all their fiscal resources to do a "good job" in paying their creditors, Finance Minister Xie Xuren said on Tuesday. Xie said China would continue to take measures to ensure debt risks are under control and that Beijing was considering incorporating debts of its local governments into the national budget. "Various local governments need to set up debt repayment funds to use all their fiscal resources available to repay their debts," Xie told a news conference on the sidelines of China's annual parliamentary meeting, the National People's Congress. "We ordered local governments to do a good job in repaying their debts." Xie did not elaborate on how debt repayment funds would work, or what the impact would be if Beijing were to include local government debt in the national budget.

Signs China’s February loan demand weak - We know January’s new loan issuance was well below expectations.  It seems that the same has happened for February. Sina reports that the Big 4 banks (ICBC, Bank of China, CCB, Agricultural Bank) have provided RMB176.3 billion loans for the first 26 days of February, which would be well below RMB300 billion expected.  The total new loans might be above RMB700 billion for February, but will probably be below the current consensus of RMB800 billion.  Meanwhile, deposits increased sharply after decreasing for the Chinese New Year.  Deposits for the Big 4 banks could have increased by RMB871.6 billion in the first 26 days of February. Below are the charts for China’s money supply, loans and deposits data up till January:

Measuring China’s real estate bubble - Needless to say that there is a huge bubble in Chinese real estate, just as Japan had twenty years ago. While it is almost ludicrous to say that there is no bubble, because of the poor quality of data (or sometimes, no data), it is difficult to tell exactly how big the bubble is. One of the approaches we can take is casual observation, as I have already done for the extreme case of Hainan. And indeed, I generally feel that the problems of having large numbers of unoccupied buildings exist in almost every city in China. One obvious weakness of casual observation, however, is that it is very hard, if not impossible, to generalise your findings in such a big country. If we look at the data instead, I am just as frustrated as everyone else because of the lack of reliable data. There are, of course, some pieces of data which consistently offered the impression that real estate investment increased significantly after the 2008 financial crisis as the Chinese government pumped in massive stimulus. For instance, we did see new constructions boom across the board towards the end of 2009 and 2010 after contracting in the first half of 2009:

In Chinese village that revolted, two former protesters win election — The Chinese fishing village that went into open revolt against government control last year held elections on Saturday, an event that some local people said was the first time they'd been able to elect their leaders fairly.  Young and old, the villagers who in December erected barricades made of felled trees took a seat on narrow benches and wrote in their choices for village council members. Men previously identified by officials as agitators and criminals watched the ballot boxes being sealed and then carted into school rooms. Under the glare of dozens of news cameras the votes were tallied on large orange posters leaned against the walls outside.As night fell, the new leader and deputy head of Wukan's committee were announced: Two former protest organizers, who once faced arrest, are now in charge of the village. A remaining five spots will be filled during a runoff election on Sunday.  "Before this year, I had never voted," said 71-year-old Zhang Aizhen, a woman with short white hair and a proud smile. Although China began to allow village-level balloting in the 1980s, many here said that in the past crooked officials either stage-managed elections or didn't bother to hold them at all.

China: selling baby rights - The head of Guangdong’s family planning commission created a stir last July when he said the province had applied to the central government to relax the one-child policy. Now, a deputy from Guangdong to the National People’s Congress, Li Xinghao, has come up with an innovative variation on this theme of allowing more Chinese to have more children and wants it discussed at the NPC meetings this month. This is a debate worth having for moral as well as material reasons. The trouble is Li’s suggestion is neither moral nor materially practical. The one child policy is less a blanket ban against a second child than many outsiders believe. Chinese couples are allowed to have a second child if they happen to be the children of couples who only had one child or if their first child is disabled. In rural areas, parents whose first child is a daughter are allowed a second child. Li suggests that such couples who are poor be allowed to profit from their right to a second child by selling that right to the well-off. He thinks this would both enhance the quality of the population and reduce the gap between rich and poor. Unsurprisingly, Li has been pilloried in a rare show of unity on both the free-wheeling and often subversive Chinese microblogs and in People’s Daily, the government mouth-piece. Chinese netizens have said he is commoditising the right to bear children. People’s Daily thundered on March 4, “To trade the birth quota of the second child is to exchange the birth right of the poor with the money of the rich. It’s as cruel or ridiculous as buying human organs.”

China lowers growth target half a point to 7.5%— China’s government on Monday lowered its economic-growth target to 7.5% from last year’s 8%, indicating that it intends to focus on higher-quality economic development that emphasizes internal consumption and services. Annual gains in consumer prices will be targeted at 4%, the same target as last year’s, while M2, the broadest measure of money supply in China, is targeted to expand 14%, according to figures announced Monday by Chinese Premier Wen Jiabao. He spoke in an opening address to the National People’s Congress. Wen also told the roughly 3,000 delegates attending the annual meeting of China’s legislature that the government would seek to promote steady growth and price stability and guard against financial risks by keeping money supply and credit at sufficient levels.

China Lowers GDP Target to 7.5% as Exports Slow -- China pared the nation’s economic growth target to 7.5 percent from an 8 percent goal in place since 2005, a signal that leaders are determined to cut reliance on exports and capital spending in favor of consumption.  Officials will also aim for inflation of about 4 percent this year, unchanged from the 2011 goal, according to a state- of-the-nation speech that Premier Wen Jiabao delivered to about 3,000 lawmakers at the annual meeting of the National People’s Congress in Beijing today. Asian stocks fell as Wen, 69, said the nation needs to shift to a more sustainable and efficient economic model and achieve “higher-quality development over a longer period of time.” China must boost the incomes of ordinary people, count less on exports and investment and reduce the state’s role in favor of private enterprise, Zong Qinghou, the country’s second- richest man, said in a March 3 interview.  “The growth target indicates the lowest level that the government is comfortable with and is also a signal to local officials that they shouldn’t solely focus on the rate of expansion,”

In China, Sobering Signs of Slower Growth - The Chinese economy, after nearly three decades of rapid, almost uninterrupted growth, seems to be settling down to a still strong but less blistering pace. But some sectors are struggling, including exports and luxury residential real estate construction.  Premier Wen said in his annual report to the National People’s Congress on Monday morning in Beijing that the government had scaled its economic growth target back to 7.5 percent this year, down from the 8 percent that Beijing has set as a minimum growth target in recent years. If growth does come in at only 7.5 percent, it will be the slowest pace in 22 years.  As Mr. Wen delivered his lengthy report, broadcast nationally and watched on countless TV sets in diners and shops here in Guangzhou, the mood at construction sites and factory districts seemed more downbeat than usual.  Shop clerks in a wholesale market complained about the scarcity of customers. At a factory gate, workers said that few jobs were available except at the minimum wage. And at an employment office, the jobless fretted that even if they found work, they would have little hope of buying apartments typically priced beyond their means.

Chinese economy slows more than expected (FT) China’s economy appears to be slowing more than expected and is likely to decelerate further in the coming months, prompting Beijing to consider fresh measures to boost waning growth. Consumer inflation in China increased 3.2 per cent from a year ago in February, down from 4.5 per cent in January and the slowest pace since June 2010, according to government data released on Friday. With stubbornly high inflation now apparently under control, Beijing is expected to shift its attention to supporting growth as a range of other indicators signal a clear deceleration in the world’s second-largest economy. Value-added industrial production grew by 11.4 per cent from a year earlier in the first two months of 2012, the slowest since mid-2009, while China’s power generation increased 7.1 per cent in the same period, the slowest growth rate in a year.

The Real China Story: It’s What Premier Wen Didn’t Say That Matters -According to Premier Wen Jiabao on Monday, China is only going to grow at 7.5% this year. But this isn’t the bombshell most Western analysts think it is-even though the markets sold off on the day and may continue their temper tantrum later this week. It’s actually what Premier Wen didn’t say that really matters. As is so often the case in China, it’s what goes on behind the scene that is far more interesting – and actionable. In that sense, Premier Wen’s comments aren’t really news at all, but rather recognition of the symbolic priorities attached to Chinese growth. As I have talked about at length in the past, China needs to do three things this year: 1) keep growth in line, 2) promote monetary stability and 3) be flexible with regard to inflation. What makes Wen’s 7.5% GDP figure significant is that in dropping it by half a percent, Premier Wen is not saying, but, in fact, telegraphing two things:
•China’s domestic growth priorities have now trumped growth through exports and manufacturing in terms of relative importance; and,
•The Communist Party expects to shift spending to lower brow projects like ordinary train lines, rural roads, education and technical infrastructure.

Why China Should Slow Down – but Probably Won’t - China’s Premier Wen Jiabao sent a shockwave through the global economy this week when he lowered the country’s GDP growth target for 2012, to 7.5% from 8%. In doing so, Wen was not only recognizing the tremendous headwinds China is facing from an uncertain global economy. He was also acknowledging that China needs to alter its growth model if the country’s economic miracle is to continue. Here are some comments from his Monday address, courtesy of state-news agency Xinhua: Here I wish to stress that in setting a slightly lower GDP growth rate, we hope to make it fit with targets in the 12th Five-Year Plan, and to guide people in all sectors to focus their work on accelerating the transformation of the pattern of economic development and making economic development more sustainable and efficient, so as to achieve higher-level, higher-quality development over a longer period of time. To be honest, I’ve had trouble figuring out why everyone got their underwear in a bunch over these comments. Sure, a slowing China would have negative implications for a global economy still suffering from the ill effects of the Great Recession and the ongoing sovereign debt crisis in Europe. Yet we should look at Wen’s statements with two key points in mind: First, the reality is China needs to slow its economy down. Secondly, China’s leadership shows no sign of allowing that to happen, no matter what nice speeches Wen might make. And that’s where the real threat to the world economy can be found.

China headed for 3% growth - [Recently] the PBoC cut minimum bank reserve requirements for the second time.  According to a February 18 article in Xinhua: China’s central bank on Saturday announced to lower banks’ reserve requirement ratio (RRR), underling its efforts to ease short-term credit crunch and secure growth in the wake of a lacklustre external market. I, along with I think most other analysts, had been expecting reserve cuts to come earlier given how weak the economy has been and the relatively slow pace of credit expansion so far this year, so this wasn’t really a surprise.  There have been some suggestions that the lateness of the two cuts suggests that Beijing is more optimistic about growth than the rest of us, and this has been seen as a positive sign. I am not so sure.  Certainly given the level and nature of the debate in China I don’t see any evidence that people aren’t concerned about domestic imbalances, the impact of further European deterioration, and the political atmosphere during the upcoming US election.  Last week, for example, I was invited, along with five prominent Chinese economists, to a lunch to discuss China’s economic prospects with senior EU representatives (who were all in town) and I was in the unaccustomed spot of not being the most worried person at the table.  Some of my Chinese colleagues were far more pessimistic than I was about Chinese growth prospects and the difficulty of engineering a rebalancing.  Clearly we worriers are no longer outliers.

China sees largest monthly trade deficit in at least a decade - China reported its biggest monthly trade deficit in at least a decade in February as imports rebounded after a Lunar New Year holiday slowdown, but a broader measure showed global and Chinese demand both weakening. Exports grew 18.4 percent over a year earlier to $114.5 billion, up from a 0.5 percent contraction in January, when factories were idled for a two-week holiday break, customs data showed Saturday. Imports jumped 39.6 percent to $145.9 billion, reviving after the previous month's 15 percent decline.China's global trade deficit was $31.5 billion — the biggest since at least the 1990s and a rare exception to a recent string of multibillion-dollar surpluses. The deficit reflected China's relatively strong growth amid Europe's debt crisis and U.S. economic troubles. The economy expanded by 8.9 percent in the final quarter of 2011 and the government's growth target this year is 7.5 percent.

China Has Largest Trade Deficit Since 1989 as Imports Rebound From Holiday -- China reported its biggest trade deficit since at least 1989 in February as Europe’s debt crisis crimped exports and imports rebounded after a weeklong holiday. The shortfall was $31.5 billion, the customs bureau said on its website today. Imports rose 39.6 percent from a year earlier, after a 15.3 percent slump in January, while exports increased 18.4 percent, the bureau said. Data in the first two months are distorted by the timing of the Lunar New Year holiday, which fell in January this year and February in 2011. Today’s data, along with lower-than-forecast expansion in industrial output and retail sales reported yesterday, raise the odds PremierWen Jiabao will ease policies to support growth in the world’s second-biggest economy. Commerce Minister Chen Deming’s warning this week that boosting trade by 10 percent this year will require “arduous efforts” may also signal a slower pace of yuan gains as policy makers seek to aid exporters. “Easing inflation and weakening economic activity send a strong signal for further loosening in the upcoming months,”

China to export yuan to BRICS - China is reportedly to begin extending loans in yuan to BRICS countries in another step towards internationalizing the national currency and diversifying from the US dollar. ­The Chinese Development Bank wants to sign a memorandum of understanding with the country's partners from BRICS group of developing countries on increasing yuan-denominated loans, while partners increase loans in their national currencies, The Financial Times reports, citing people familiar with the talks. The move aims to increase trade volumes between the five nations and diversify from using the US dollar. Brazil and South Africa were quick to react to the proposal, saying they expect the lending pledge to be included into a master agreement to be signed in New Delhi on March 29. “We will discuss the creation of structures and mechanisms for lending in local currencies in order to maximize economic and financial transactions between the countries that are members of the accord,” Brazil’s development bank BNDES said.

China offers other Brics renminbi loans - China intends to extend renminbi loans to other Brics nations, in another step towards the internationalisation of its currency. The China Development Bank will sign a memorandum of understanding in New Delhi with its Brazilian, Russian, Indian and South African counterparts on March 29, say people familiar with their talks. Under the agreement CDB, which lends mainly in dollars overseas, will make renminbi loans available, while the other Brics nations’ development banks will also extend loans denominated in their respective currencies. The initiative aims to boost trade between the five nations and promote use of the renminbi, rather than US dollar, for international trade and cross-border lending. Under 13 per cent of China’s Asia trade is transacted in renminbi, according to Helen Qiao, chief Asia economist for Morgan Stanley. HSBC estimates that the currency’s share of regional trade could swell to up to 50 per cent by 2015. BNDES, Brazil’s development bank with a loan book about four times the size of that of the World Bank, and South Africa’s finance ministry said they expected a master agreement to be signed in New Delhi that would include the lending pledge, with details to be ironed out during a summit.

China Moves To Further Marginalize Dollar: Offers CNY-Denominated BRIC Loans - Today we observed how as the US is considering releasing crude from its Political, pardon Strategic Petroleum Reserve, China was doing just the opposite. Now, in a further step confirming that China is acting as a much more rational capitalist power, and is rapidly encroaching on the "reserve" status of the sacrosanct USD, the FT writes that China intends to extend renminbi loans to other BRIC nations in "another step toward the internationalisation of its currency." To those following the stealthy Chinese incursion into currency markets as a dollar alternative, this is not news: already we know that China and Japan have bypassed the dollar entirely and now engage in direct bilateral trade using JPY and CNY (even as most other nations in Asia have developed bilateral agreements to transact in a non dollar basis). This is merely the latest incremental step which will see China become the dominant player in the currency arena, and further puts to doubt the fate of the US Dollar as the default currency. Of course, the market will not acknowledge any of this until the developing (i.e., non-insolvent world) is transacting entirely with US intermediation. And at that point, the US will be merely another Zimbabwe case study, where it can print all the money it wants to fund its deficit, and the only ones who care will be wheelbarrow manufacturers.

Does China’s Forex Policy Beggar Its Neighbors? - The U.S. is the source of most of the political heat generated by China’s foreign exchange policy. But how does that policy affect the developing world? According to U.S. lawmakers, manufacturers and a fair number of academics, China keeps its currency deliberately undervalued as a way to boost exports to the U.S., to the detriment of U.S. manufacturers. Now three economists — Aaditya Mattoo of the World Bank, Prachi Mishra of the International Monetary Fund and Arvind Subramanian of the Peterson Institute for International Economics — make the case that China’s forex policies have a big effect on developing nation exporters as well. In fact, they find, the way China values the yuan has a bigger effect on developing country exporters because China competes more closely with exporters in the developing world. According to the study, released by the World Bank on Thursday (pdf), a 10% increase in the yuan vs. the dollar would boost exports of a typical product from other developing nations in the U.S. market on average by 1.5% to 2%. In some cases, the gains for developing nations could be as high as 6% for every 10% of yuan appreciation vs. the dollar So keeping the yuan deliberately undervalued would have the opposite effect, which economists dub “beggar-thy-neighbor” policies.

Why is Canada keeping out China’s rich? - Masses of wealthy Chinese, their money huddled in less-than-secure foreign assets, are yearning to breathe the free air of Canadian capitalism. But Canada doesn’t seem to want them much. Brimming with the spoils of a historic economic expansion, Chinese millionaires by the tens of thousands wish to make Canada home for their families and their private wealth. The Canadian immigration system has a program in place to grant rich foreigners permanent resident status, provided they first hand over a six-figure sum to the federal government. By almost all accounts, that program is broken. It’s rife with delays, an enormous backlog of files and misallocation of funds — all providing fodder to critics who characterize the Federal Investor Immigrant Program (FIIP) as a cash-for-visa scheme that enriches banks while providing little benefit to the country. Two years ago, the federal government suspended the program, then reinstated it with double the financial requirements and a cap on new applications of just 700 a year. Would-be immigrants filed their submissions to an intake office in Sydney, N.S., beginning July 3. The quota was reportedly met soon after the office opened in the morning. Of the 700 applicants, 697 were from China. FIIP was then effectively shut down for another year.

As loonie climbed over past decade, 500,000 factories jobs vanished — A new paper on the impact the strong Canadian dollar has had on the economy puts into sharp focus why Ontario Premier Dalton McGuinty is not the oilsands’ best friend. The analysis by Bank of Montreal economist Douglas Porter traces the 10-year climb of the loonie from about 62-cents in the first quarter of 2002 to it current level above par with the U.S. currency. The loonie’s surge has had several triggers, but a big one has been wealth flooding into the country from exports of commodities such as oil, triggering a 22 per cent contraction in the manufacturing sector, with many of those 500,000 lost jobs being shed in Ontario. On Monday, the Ontario premier ruffled the feathers of his Alberta counterpart, Alison Redford, by suggesting the strong “petrodollar” had hobbled his province’s manufactured exports. “If I had my preferences as to whether we had a rapidly growing oil and gas sector in the West or a lower dollar, I’ll tell you where I stand — with the lower dollar,” McGuinty said. 

Australia's economy expands 0.4% in the fourth-quarter - Australia's economy has expanded by less than expected in the fourth quarter of 2011, as business spending dropped, sending the dollar to a six-week low. Gross domestic product rose by 0.4% in the three months to the end of December compared with the previous three months, said the Bureau of Statistics. Analysts were expecting growth of 0.8%. However, most analysts say that growth is expected to pick up in the coming months. "We're doing much better than most," said Stephen Walters, from JP Morgan.  The Reserve Bank of Australia (RBA) said it still expects growth of 3-3.5% this year and next.

The Australian economy is not growing at trend - Just before Christmas, I bemoaned the state of economic reporting by the Australian financial media and associated economist punditry, which seemed to be stuck in either “permabull” or “permabear” status. Whenever the quarterly Gross Domestic Product (GDP) figures come along, like they did today, the former status is usually supplied with a “raucous display of big numbers on capital expenditure or other cherry picked data, then annualised to infinity and beyond”. Apart from the peripheral extreme pundits, and the notable exclusion of Westpac’s chief economist Bill Evans, there has been a mea culpa today as the headline figure – 0.4% quarterly and 2.3% over the year – came in as disappointing and not in line with most economic models. Except here at MacroBusiness. Why? Because we look at the real economic growth – adjusted for inflation and population – and the underlying causes thereof, namely government spending and credit growth. This methodology strips away the inflated effects of population growth, stimulus packages and other economic chicanery.

Australian Construction Index Falls to Lowest in Four Months - A gauge of Australia’s construction industry fell to the lowest level in four months as commercial construction remained weak and house building declined. The construction performance index fell to 35.6 in February from 39.8 a month earlier, the 21st monthly decline, a survey by the Australian Industry Group and the Housing Industry Association released in Sydney today showed. A reading below 50 represents a contraction.  “The tentative signs of recovery that had emerged in the closing months of 2011 as interest rates were lowered appear to have dissipated since the start of this year,” Australian Industry Group Director of Public Policy Peter Burn said in a statement. “With new orders also weak in February and with market interest rates somewhat higher, the outlook for the next few months remains flat.”

Service Sector in Falls in February. Key Findings:

  • Service sector activity fell in February according to the latest seasonally adjusted Australian Industry Group/ Commonwealth Bank Australian Performance of Services Index (Australian PSI®) which was down 5.2 points to 46.7 in the month.
  • And in three-month-moving-average terms, the Australian PSI® has remained below the critical 50 point level for four consecutive months.
  • Reports of declining activity levels in February were common across the sector, with businesses reporting that sales, new orders and employment levels all fell back in the month.
  • The new orders component of the Australian PSI® recorded a particularly sharp fall, and is now at its lowest level in over 12 months.
  • In line with these soft trading conditions, the average selling price index declined in February, and is also at its lowest level in over 12 months.

Australian February Services Fall to Lowest in Almost a Year - Australia’s services industry declined in February to the lowest level in almost a year, driven by a drop in new orders as the gap between resources and other industries widens, a private survey showed. The performance of services index sank to 46.7 last month from 51.9 in January, the weakest reading since March last year, Commonwealth Bank of Australia and the Australian Industry Group said in Sydney today. Fifty is the dividing line between expansion and contraction. Today’s report, based on a poll of about 200 companies, is similar to the U.S. non-manufacturing ISM index.

Bleakest of views from the shopfronts - THE Australian retail sector is in trouble like it's never been before. Not even in the dark days of the 1990 recession. That should have been made blindingly clear when Woolworths, our biggest and most successful retail group, unveiled on Thursday its first drop in profit in nearly 20 years. Yes, Woolies is getting out of electronics because it stuffed up with Dick Smith. This story is repeated, with varying degrees of intensity, across all retail. The casualty list is long and growing. From women's fashions - one of the mainstays of shopping - to housewares and home furnishings, to the big department stores.Sales are struggling, profits are plunging, jobs are being slashed and names are disappearing from high streets and shopping centres. The numbers from the big listed retailers, such as Harvey Norman and David Jones, are ominous enough. We are not really seeing the havoc wreaked across small mum-and-dad retailing.

The 0.01 Per Cent: The Rising Influence of Vested Interests in Australia - We’ve always prided ourselves on being a nation that’s more equal than most – a place where, if you work hard, you can create a better life for yourself and your family. Our egalitarian spirit is the product of our history and our national character, as well as the institutions and safeguards built up over more than a century. This spirit informed our stimulus response to the global financial crisis, and meant we avoided the kinds of immense social dislocation that occurred elsewhere in the developed world. But Australia’s fair go is today under threat from a new source. To be blunt, the rising power of vested interests is undermining our equality and threatening our democracy. We see this most obviously in the ferocious and highly misleading campaigns waged in recent years against resource taxation reforms and the pricing of carbon pollution. The infamous billionaires’ protest against the mining tax would have been laughed out of town in the Australia I grew up in, and yet it received a wide and favourable reception two years ago. A handful of vested interests that have pocketed a disproportionate share of the nation’s economic success now feel they have a right to shape Australia’s future to satisfy their own self-interest.

Indonesia Seen Facing Inflationary Spiral - Indonesia could get caught in an inflationary spiral as rising global oil prices and falling gasoline subsidies at home combine with rising wages, said Sofjan Wanandi, chairman of one of the country's most influential business organizations. Local governments raised minimum wages in key industrial zones near Jakarta by as much as 36% last month. Similar increases could spread to other parts of the country, said Mr. Wanandi, who heads the Employers' Association of Indonesia—one of Indonesia's largest business associations, which includes many of the country's biggest companies—as other local governments consider doing the same to win votes in upcoming elections. ...

Dire Poverty Falls Despite Global Slump, Report Finds - A World Bank report shows a broad reduction in extreme poverty — and indicates that the global recession, contrary to economists’ expectations, did not increase poverty in the developing world.  The report shows that for the first time the proportion of people living in extreme poverty — on less than $1.25 a day — fell in every developing region from 2005 to 2008. And the biggest recession since the Great Depression seems not to have thrown that trend off course, preliminary data from 2010 indicate.  The progress is so drastic that the world has met the United Nations’ Millennium Development Goals to cut extreme poverty in half five years before its 2015 deadline.  “This is very good news,” said Jeffrey Sachs, director of the Earth Institute at Columbia University and the United Nations’ special adviser on the Millennium Development Goals. “There has been broad-based progress in fighting poverty, and accelerating progress. There’s a lot to be happy about.”  The report indicates that despite the world entering a recession in 2009, poverty did not increase in developing nations. That is contrary to the World Bank’s own expectations.

Are Western Activists Really Reducing Child Labor? -- In my Economic Scene column on Wednesday I discussed how anti-sweatshop campaigns in the West to improve the lives of workers toiling in dismal conditions in the third world often do more harm than good — turning low-wage workers into no-wage workers by inducing multinational companies to pick up shop and move somewhere else. Child labor offers perhaps the best example that big improvements in the workplace are always driven from pressure from within. Banning imports of products made by minors might make the people of San Francisco happy, but it has done very little to improve the lot of poor children overseas. “There is very little evidence supporting any connection between trade and child time allocation other than through the impact of trade on the living standards of the very poor,” Most child laborers do not work in trade-related industries but in more backward areas of the economy — mainly in agriculture and retail trade. Some 300,000 children weave carpets in India, Pakistan and Sri Lanka, often for export. But this number pales next to the 8.4 million children ages 10 to 14 in India’s work force alone.

Microcredit doesn’t end poverty despite all the hype - The idea has a wonderfully simple and powerful appeal: Give a tiny loan to a poor person in a poor nation. Watch her start a small business — whether hawking tomatoes or fattening goats — that puts her and her family on the first rung of a ladder that will elevate them out of poverty and into the middle class. Repeat across the planet. Few proposals for economic development have been so durable and so celebrated as microcredit — the provision of business loans as small as $100 to the poor. Its appeal has spanned the political spectrum, drawing in the left with its subversive promise to empower women in sexist societies and enticing the right with its emphasis on entrepreneurship and individual responsibility. The World Bank and other lending agencies have bought into it, as have foundations and countless individual donors.There has been enough time and evidence now to explore the full impact of microcredit in depth, and, set against its vaunted reputation, my verdict is dour: Microcredit rarely transforms lives. Some people do better after getting a small business loan, while some do worse — but very few climb into the middle class. It’s a constructive endeavor, but it has been vastly overhyped. And the hype has undermined the good that the movement can achieve.

The poor half billion in South Asia: Is there hope for change? - India and other South Asian countries have experienced high growth rates over the past decade. What has this meant for poverty reduction across different regions of South Asia? Analysis of Indian data has generated concern about the lack of convergence between rich and poor regions – richer states have grown faster so that inequality across states is increasing. Does this mean that poverty rates and social outcomes are also diverging across states? Are there poverty traps? Can poverty converge if incomes diverge? While the rate of economic growth in India and other South Asian countries is impressive, it does raise the question of whether this growth is inclusive. This column looks at a range of poverty measures over time and finds that while not all extremely poor people in the world are trapped in poverty, in India and South Asia the poorest are not catching up with the richest fast enough.

The Inequality Trap - As evidence mounts that income inequality is increasing in many parts of the world, the problem has received growing attention from academics and policymakers. In the United States, for example, the income share of the top 1% of the population has more than doubled since the late 1970’s, from about 8% of annual GDP to more than 20% recently, a level not reached since the 1920’s. While there are ethical and social reasons to worry about inequality, they do not have much to do with macroeconomic policy per se. The University of Chicago’s Raghuram Rajan, a former chief economist at the International Monetary Fund, tells a plausible story in his recent award-winning book Fault Lines about the connection between income inequality and the financial crisis of 2008. Rajan argues that huge income concentration at the top in the US led to policies aimed at encouraging unsustainable borrowing by lower- and middle-income groups, through subsidies and loan guarantees in the housing sector and loose monetary policy. There was also an explosion of credit-card debt. These groups protected the growth in consumption to which they had become accustomed by going more deeply into debt. Indirectly, the very rich, some of them outside the US, lent to the other income groups, with the financial sector intermediating in aggressive ways. This unsustainable process came to a crashing halt in 2008.

Is the one percent the same everywhere? - Allan Meltzer’s article raises a lot of interesting issues. The main argument is that top one percent has increased its share of national income pretty much everywhere, and this underscores that the causes of this trend should be sought in global trends. It is true that there have been important global trends... None of this is (very) controversial.But Meltzer claims more than this — that these trends account for the increase in share of the top one percent in the US. This is much more controversial. First, the book on the share of the top one percent, has been written by Anthony Atkinson, Thomas Piketty and Emmanuel Saez’s careful and painstaking work, see here. They show that the US — to some degree together with the UK — stands apart from others in terms of the extent of the increase in the share of the top one percent in national income. .Second, cross-country differences are even more jarring when one looks at the bottom of the income distribution. There seems to be no equivalent of the [US] 40-year stagnation of median wages in Europe.

Burma’s Turn - Joseph E. Stiglitz - Here in Myanmar (Burma), where political change has been numbingly slow for a half-century, a new leadership is trying to embrace rapid transition from within. The government has freed political prisoners, held elections (with more on the way), begun economic reform, and is intensively courting foreign investment. Understandably, the international community, which has long punished Myanmar’s authoritarian regime with sanctions, remains cautious. Reforms are being introduced so fast that even renowned experts on the country are uncertain about what to make of them. But it is clear to me that this moment in Myanmar’s history represents a real opportunity for permanent change – an opportunity that the international community must not miss. It is time for the world to move the agenda for Myanmar forward, not just by offering assistance, but by removing the sanctions that have now become an impediment to the country’s transformation.

BOJ official keeps up warning on strong yen's damage to economy (Reuters) - A strong yen may hurt Japan's economy by weighing on corporate earnings and sentiment, a senior Bank of Japan official said on Monday, signalling that the central bank is mindful of risks to growth from yen rises despite the currency's recent declines. Kazuo Momma, director-general of the BOJ's monetary affairs department, also told a parliamentary committee that setting too high a price goal in a country like Japan, which has seen very slow price growth, would heighten rather than lower uncertainty in the economy. The BOJ surprised markets by boosting its asset purchases last month and setting an inflation goal of 1 percent, although some lawmakers have argued that the central bank should target 2 percent inflation like the U.S. Federal Reserve 

Has Japan Run Out Of Cans To Kick? - Japan's Trade and Current Account imbalances appear to be hitting some kind of terminal velocity and while neither JGBs nor CDS seem to reflect the ensuing chaotic recognition that perhaps the can that has been so faithfully kicked down the "Nishi-no-michi" or the West Road may have plunged over the lip of Mount Fuji (conjuring images of Mordor), FX markets recent and abrupt weakness brought on by yet more printing (a topic we discussed in great detail recently as the chosen heretical method du decade) may well be coming face to face with reality. We assume Azumi is faithfully watching these market moves but we wonder at what point the quasi-intentional weakening of local currencies flares into a full-blown currency war - and instead of merely encouraging simpleton FX-carry strategies chasing momentum and leverage - quickly becomes the hyperinflationary super nova that many have been waiting for over the last decade. Dismal demographics aside, we wonder how long before Koo prescribes yet more of the same medicine for this constant state of deflation.

Peak Government Debt - We’re in an interesting situation where most developed country governments are borrowing at a rapid rate, and their central banks are financing it. Public old age retirement and health plans are underfunded. Most major developed countries can’t grow rapidly, and there’s really nothing that can be done about it — competition from cheaper labor in developing countries is forcing developed country wages down. We can’t grow out of the debt. We wait for the tipping point. When will investor sentiment change from believing debts will be paid in equivalent purchasing power, to believing that they will not get paid back in equivalent purchasing power terms? Greece is past the tipping point. Other nations in Europe teeter. Is Japan nearing such a point? They rejoice to see the Yen weakening as the BOJ finances the government deficit. Be careful what you wish for, Japan — what is good in small, can become self-reinforcing if lenders lose confidence in the Japanese government. Part of the trouble is with central banks repressing savers, deficits are considerably lower than they otherwise would be because short bond yields are low. If rates rose, deficits would begin to rise gradually but distinctly in proportion to the maturity structure of the country. That’s the tipping point.

Brazil 'Overtakes UK's Economy' - Brazil has become the sixth-biggest economy in the world, the country's finance minister has said. The Latin American nation's economy grew 2.7% last year, official figures show, more than the UK's 0.8% growth. The National Institute of Economic and Social Research (NIESR) and other economic forecasters also said that Brazil had now overtaken the UK. The Brazilian economy is now worth $2.5tn (£1.6tn), according to Finance Minister Guido Mantega. But Mr Mantega was keen to play down the symbolic transition - which comes after China officially overtook Japan as the world's second-biggest economy last year. "It is not important to be the world's sixth-biggest economy, but to be among the most dynamic economies, and with sustainable growth," he said. Brazil is enjoying an economic boom because of high food and oil prices, which has led to rapid growth. In 2010, the Brazilian economy was worth $2.09tn, compared with the UK's $2.25tn total output, in current US dollars, according to the International Monetary Fund.

Brazil’s GDP Growth of 2.7% Last Year Underperformed BRIC Peers: Economy - Brazil’s economy last year registered its second-worst performance since 2003 as higher borrowing costs and a currency that rallied to a 12-year high led it to underperform emerging-market peers China and India. Gross domestic product expanded 2.7 percent even after growth accelerated in the fourth quarter, the national statistics agency said today in Rio de Janeiro. The median estimate of 32 economists surveyed by Bloomberg was for the economy to grow 2.8 percent. .The GDP figure underscores central bank President Alexandre Tombini’s view that the economy is growing below capacity amid Europe’s debt crisis, reinforcing bets that the central bank may accelerate the pace of interest-rate cuts tomorrow. Growth in Latin America’s biggest economy will gain speed and grow 4.5 percent this year, Finance Minister Guido Mantega said today. “Brazil is losing international competitiveness,”

Brazil Declares New Currency War on US and Europe; Japan Losing Balance of Trade Battle - In hope-against-hope scenario, countries with balance-of-trade surpluses struggle to maintain it. Put Japan, Germany, Brazil, and China in that group.  In that group, Japan is losing the Balance of Trade Battle. Japan’s trade deficit widened to a record level in January, as falling exports combined with surging imports of energy.  Imports rose 9.8 per cent from a year earlier, while exports were down 9.3 per cent, resulting in a record monthly deficit of Y1.48tn ($19bn). Last year Japan’s trade balance fell into an annual deficit for the first time since 1980, driven by subdued global demand and soaring fossil fuel imports in the wake of the Fukushima nuclear power crisis. The Financial Times reports Brazil declares new ‘currency war’ Brazil has declared a fresh “currency war” on the US and Europe, extending a tax on foreign borrowings and threatening further capital controls in an effort to protect the country’s struggling manufacturers. Guido Mantega, the finance minister who was the first to use the controversial term in 2010, said the government would not “sit by passively” as developed nations continue to pursue expansionary monetary policies at the expense of Brazil.

Does the Current Account Still Matter? - Do global current account imbalances still matter in a world of deep international financial markets where gross two-way financial flows often dwarf the net flows measured in the current account? Contrary to a complete markets or “consenting adults” view of the world, large current account imbalances, while very possibly warranted by fundamentals and welcome, can also signal elevated macroeconomic and financial stresses, as was arguably the case in the mid-2000s. Furthermore, the increasingly big valuation changes in countries’ net international investment positions, while potentially important in risk allocation, cannot be relied upon systematically to offset the changes in national wealth implied by the current account. The same factors that dictate careful attention to global imbalances also imply, however, that data on gross international financial flows and positions are central to any assessment of financial stability risks. The balance sheet mismatches of leveraged entities provide the most direct indicators of potential instability, much more so than do global imbalances, though the imbalances may well be a symptom that deeper financial threats are gathering.

Tax evaders exploit varying global tax rates-OECD (Reuters) - International tax evasion by multinational companies that take advantage of tax-rate disparities among countries is on the rise, according to an international study group. By claiming multiple deductions and generating fake credits, corporations can cancel out taxes owed, said the Paris-based Organization for Economic Cooperation and Development on Monday. In a 25-page report, the OECD said billions of dollars of tax revenues were at risk through aggressive tax planning techniques used by companies to exploit tax rate differentials. The report says companies "exploit national differences in the tax treatment of instruments, entities or transfers to deduct the same expense in several different countries, to make income 'disappear' between countries or to artificially generate several tax credits for the same foreign tax." Companies typically use paper entities set up between home countries and foreign countries where they operate. Some strategies may be legal in countries where they are used. But the report said they pose "significant policy issues."

Perspectives On A Printing Press Pause - It would appear, given the actions and rhetoric of the last week or so, that global central bank printing presses have been switched to 'pause' mode and allowed to cool as implicit inflation 'energy' rears its economic-growth-dragging head around the world (as the bears told us earlier). Whether this leads to a slow grind higher or a tactical correction is the question Morgan Stanley considers in a recent note and their answer is that bullish sentiment, 'under-appreciated' risks, and 'tranquil' markets justify a cautious asset allocation. The focus has switched much more to growth, likely why we have not seen a greater deterioration post-printing yet, but this leaves the market much more sensitive to data surprises (as the backstop of QE has been removed for now). Simply put, we tend to agree with MS' view (given our previous discussions of the volatility surface) that as event and growth risks linger, and with valuations no longer cheap in most cases, expectations of a continued grind higher without a tactical correction are overly confident

On Contagion: How The Rest Of The World Will Suffer - Excess debt is causing global banking problems. Euro-Area debt is estimated to be 443% of GDP, third highest in the world, far above the US at 355% and completely unmanageable in a currency union burdened with a one-size-fits-none monetary policy and huge sovereign debt problems. Insolvent European banks sold many CDS, so counterparty risk is huge. A Greek or any other significant default will precipitate a European banking crisis in the foreseeable future. Markets are already speculating on Portuguese negotiations for haircuts and Ireland can’t be far behind, as it elected the current government to negotiate haircuts on private holdings of bank debt. The Lehman default occurred 13 months after the US TED spread crossed 100 basis points. The European equivalent crossed 100 basis points in September 2011, so its banking crisis would occur this autumn if a year or so is a normal incubation period. Contagion to US (and global) banking systems is inevitable given counterparty risks, debt loads (and refi needs), and capital requirements (no matter how well hidden by MtM math), no matter how many times we are told net exposure is small or non-current loans are reserved.

Their Assumptions are Getting Very Ugly - We are now just over two months into that oft-dreaded year of 2012, and the economic and financial projections/assumptions by public and private institutions across the world have noticeably worsened. These are the same institutions (i.e. politicians, bureaucrats and executives) that have everything to lose by painting an accurate portrait of their position in the global economy, so it’s an extremely safe bet that they are still over-estimating their prospects. Nevertheless, the fact that their inflated, yet worsening projections completely destroy the myth of an economic recovery is telling. The Chinese government just lowered its 2012 growth projection to 7.5%, which is the lowest it has been since 2004. As Ilargi recently noted here, that lowered projection itself is based on assumptions of stabilized exports, rising domestic consumption and no “hard landing” from the collapse of its unprecedented property/infrastructure bubble. Once we factor all of those things in, along with a potential 150% public debt/GDP ratio in 2011, the one and only remaining driver of the global growth story becomes much more of a liability than a boon. The alleged poster child for the ridiculous notion that bankster-benefitting austerity can lead to growth, Ireland, is unsurprisingly going to need another bailout once the money from the first one runs out, according to current assumptions by Moody’s. If the Irish people decide to reject the fiscal treaty compact in an upcoming referendum, then the country will be unable to receive additional aid from the ESM.

Debt Crisis: Ireland likely to need second bailout warns rating agency Moody’s - IRELAND is likely to need another bailout when the current €67.5bn from the EU/ECB/IMF programme runs out, according to ratings agency Moody’s. The agency also warned that a ‘no’ vote in the upcoming fiscal compact referendum would block Ireland receiving further funding from the European Stability Mechanism which replaces the existing European Financial Stability Facility. "We expect Ireland to face challenges regaining market access in 2013 and it will likely need to rely on the ESM, at least partially, when the current support programme expires,” it said. According to the agency, the Irish government will need to rely on the ESM for more funding after 2014. Moody’s described the decision to hold a referendum on the fiscal compact as credit negative.

Why are Irish taxpayers bailing out unsecured bank creditors? - This was the question put to the ECB’s Klaus Masuch by one persistent Irish journalist. The answer from Masuch was a complete dodge, a non-answer, because everyone knows that the Irish government has heaped what rightfully should be bondholder burdens onto the Irish taxpayer.  The video below is wonderful in getting at the heart of everyone’s problems with the bailouts in Ireland and elsewhere in Europe and the U.S. Take a look below, but let me say a few words first because my thinking here is a bit more complex than "bailouts are bad, default is good". Here’s what I am hearing: The answer from officialdom is that the (Irish) banking system was on the verge of collapse and so these debtholders, European banks, had to be bailed out. This is the same answer that Tim Geithner gives in the U.S. as I recounted last March. Geithner calls this "deeply unpopular, deeply hard to understand". And I think he’s right. These measures ARE deeply unpopular, deeply hard to understand. I don’t support the bailouts of bankrupt institutions and neither do most taxpayers in any of these countries.Here’s the thing though. It’s not a black and white situation. I wish it were.

Spain's safety net frays as care workers go unpaid - Mercedes Garcia, the director of a residency for severely mentally disabled adults, has a crisis in her kitchen. Two caterers have been supplying and preparing food for the centre's 46 patients for free for almost a year; the other 18 recently decided they'd had it and refused to provide further service without payment up front. The residency has been running on fumes for months because the local government, squeezed by austerity measures to combat the euro zone debt crisis, has not paid its share of expenses. "All of the residents here will need 24-hour care from cradle to grave, but our carers can't continue their own lives if we don't pay them," an exhausted-looking Garcia told Reuters in February. Her caregivers earn 800 euros a month, just above minimum wage and not enough to tide them over when their paycheques are delayed. One caregiver ran out in tears in the middle of a reporter's visit, after three months without pay.

Spain’s “Debt Crisis” Was Created by the ECB - Dean Baker - The NYT had an article on how Spain is struggling to both reduce its deficits to address its debt crisis and try to simultaneously promote growth. It would have been worth pointing out that Spain's debt crisis is almost entirely a result of the European Central Bank's policy. By explicitly refusing to act as a lender of last resort and imposing austerity conditions on Spain and other euro zone countries, the ECB has raised questions in financial markets about Spain's ability to pay its debt. Spain had been running budget surpluses before the crisis and its debt to GDP ratio remains below that of the UK, the United States and many other countries that have no difficulty borrowing in financial markets.

Eurozone Services and Composite PMI Back in Contraction; Italy, Spain, France at New Lows - Markit Eurozone Services and Composite PMIs show renewed contraction due to drop in services activity, making it extremely difficult to deny that Europe is in a recession. Let's take a look at some numbers. Markit Eurozone Composite PMI® The Markit Eurozone PMI® Composite Output Index fell from 50.4 in January to 49.3 in February, dropping below the earlier flash estimate of 49.7. The final reading confirmed that business activity contracted in February, having briefly returned to growth in January following four months of decline at the end of last year. Key points:

  • Final data confirm slide back into contraction, as drop in services activity offsets marginal rise in manufacturing output
  • Strong downturns still evident in Italy and Spain
  • Employment and prices charged fall as firms seek to cut costs and win new sales

Markit Eurozone Services PMI® Service sector weakness poses new recession risk. Key points:

  • Service sector activity contracts for fifth time in six months
  • Ongoing fall in new business leads to job losses
  • Growth in Germany contrasts with steeper declines in Italy and Spain
  • Business confidence hits seven-month high

The Bundesbank has no right at all to be baffled - One of the more intriguing recent developments of the eurozone crisis is the shock expressed by Germany’s economic establishment that the eurozone is, in fact, a monetary union. No one had apparently told them. The story behind this is long, but needs to be told. At issue is a rather technical debate about imbalances in the eurozone’s central payment system, known as Target 2. Germany has built up claims of now more than €500bn ($660bn) against the eurosystem – the network that consists of the European Central Bank and the various national central banks. The Bundesbank is getting nervous about a counterparty risk if the euro were to collapse suddenly. The discovery of the importance of Target 2 was made by Hans-Werner Sinn, president of the Ifo economics institute in Germany, and his co-author Timo Wollmershäuser*. They found that the Target 2 balance mirrors current account imbalances since the outbreak of the crisis. There was no problem before 2007, when current account balances were funded by commercial banks. Once that stopped, national central banks took over this role. Spanish banks can now refinance themselves with no limit from the Bank of Spain. If a Spanish company buys a German product, for example, the chain of transactions goes from the buyer’s Spanish bank to the Spanish central bank, which effectively creates the money for this transaction, and then sends it on to the Bundesbank, which records this transaction as a claim against the eurosystem.   Jens Weidmann, president of the Bundesbank, acknowledged the Target 2 imbalances are indeed important, and an unacceptable risk. The Bundesbank has now joined the united front of German academic opinion.

Goldman Secret Greece Loan Shows Two Sinners as Client Unravels - On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said. Papanicolaou and his predecessor, Christoforos Sardelis, revealing details for the first time of a contract that helped Greece mask its growing sovereign debt to meet European Union requirements, said the country didn’t understand what it was buying and was ill-equipped to judge the risks or costs. “The Goldman Sachs deal is a very sexy story between two sinners,” Sardelis, who oversaw the swap as head of Greece’s Public Debt Management Agency from 1999 through 2004, said in an interview. Goldman Sachs’s instant gain on the transaction illustrates the dangers to clients who engage in complex, tailored trades that lack comparable market prices and whose fees aren’t disclosed. Harvard University, Alabama’s Jefferson County and the German city of Pforzheim all have found themselves on the losing end of the one-of-a-kind private deals typically pitched to them by securities firms as means to improve their finances.

Greece edges towards credit event - Over the weekend Moody’s caught up to the rest of the rating agencies with a re-rating of Greece due to the pending restructure: Moody’s Investors Service on Friday downgraded Greece’s sovereign-debt rating to its lowest possible rating short of default after the country reached a debt-restructuring deal that imposes a hefty haircut on private creditors. The “invitation” to  exchange old Greek debt “voluntarily” expires on Thursday night, March 8th ( Greek time ), and , as we have seen previously, I expect there to be a major roll of conflicting headlines leading up to the event. In fact it has already begun: Greece’s Prime Minister Lucas Papademos said Friday that based on the information he had so far, the participation of private sector creditors in the country’s debt swap and reduction proposal (PSI) “is significant.” . Greece is aiming for a target of 90% participation, though it may decide to go ahead with the deal if participation is at least 75%. Yet: The European Central Bank expects that the participation rate of Greece’s private creditors in the planned voluntary debt restructuring deal will be too low and collective-action clauses will have to be invoked, a person at the central bank told German weekly magazine Der Spiegel.

Greek bond swap deal rests on knife-edge - Greece faces a decisive week in its struggle to avert a sovereign default, with a planned debt swap poised on a knife-edge amid doubts over the level of participation by private bondholders. The government’s tender offer has got off to a slow start, with its advisers trying to round up non-institutional bondholders and even Greek investors showing reluctance to sign up quickly, according to insiders. Private holders of 206 billion euros in Greek bonds have until Thursday evening to decide whether to take part in a swap where they would trade bonds for a package of bonds and cash that would knock about 100 billion euros off Athens’ debts. Greece must get 75 percent of holders to participate to avoid forcing the deal on holdouts through so-called “collective action clauses” which were inserted retroactively into Greek bonds by the government last week. If less than 66 percent participate, even the CACs would become invalid, scuppering the entire deal. People close to some bondholders warned other investors to take seriously threats by policymakers that if the deal fails Greece will default on its debt. “Some investors seem to think they will be rescued. That just isn’t the case,” one said. People involved in the deal denied that there was any nervousness about the outcome but nobody was willing to guess how high the participation rate would be.

Troika Believes Third Greek Bailout Worth Up To EUR50B Needed - Report - The "troika" of the Greece's official creditors -- the European Commission, the International Monetary Fund and the European Central Bank -- believes that a third Greek bailout worth up to EUR50 billion might be needed to help the country raise funds between 2015 and 2020, German weekly magazine Der Spiegel reports Sunday.  Citing from the most recent draft report of the troika on the situation in Greece, the magazine said in a prereleased report of its Monday edition that it's not guaranteed Greece will be able to return to the market and raise funds already in 2015 and that's why the country might have an "external financial need of up to EUR50 billion."  The magazine also reported that this part of the report has been deleted from the troika report due to pressure from the German government.  The euro zone has just approved a second, EUR130 billion bailout package for Greece, which depends however on a debt restructuring with private sectors investors worth EUR107 billion. German Chancellor Angela Merkel secured backing for the second bailout package in parliament, but an increasing number of lawmakers has expressed unhappiness about given more money. Comments by Finance Minister Wolfgang Schaeuble about a possible third Greek bailout package had caused uproar in Merkel's center-right coalition.

ECB Says Greece May Not Get Enough PSI Participation, Der Spiegel Reports - Bloomberg: Greece may fail to garner enough investors to participate in a voluntary writedown of its debt, Der Spiegel magazine reported, citing unnamed officials at the European Central Bank. A second Greek bailout is partly tied to investors’ agreeing to the writedown by a March 8 deadline.

My Big Fat Greek Restructuring - The situation in Greece should create some big headlines this week. The bond exchange “invitation” is set to expire at 3pm EST on Thursday March 8th. This is the so-called Private Sector Involvement or PSI. Greece has other steps to take during the week, and ultimately the Troika will determine how to proceed with the bailout, but not until the results of the PSI are known. It could be a week of confusing, misleading, and market moving headlines. Figuring out the “proper” reaction to each bit of news will require understanding the terms, and hoping the headlines are accurate – which given how confusing the situation is, cannot be fully counted on. Remember, the original “invitation” from the Greek government was for an amortizing bond, which was then changed to a series of 20 “bullet” bonds, so the level of confusion remains high. 

European Daily Catch: Retail Sales Stabilizing? - Rebecca Wilder - Today’s real retail sales gave the ECB and EU heads of state another reason to keep their fingers crossed for stability of the Euro area economy (.pdf of release). In January, volume adjusted retail sales increased 0.3% in the Euro area (EA) and broke a 4-month trend downward. On a 3-month annualized basis, though, real retail sales are falling at a 2.2% pace. Therefore, on a trended basis the second derivative may be stabilizing but the first derivative remains conspicuously negative. I suppose that the ECB and EU heads of state will take this month of reprieve to pat themselves on the back for policy well done. However, in looking at the cross section of the monthly gains, France was the primary driver of the regional improvement, +2.1% over the month. We’re not out of the woods yet. Greece, Spain, and Italy haven’t reported for January, so we’ll have to wait on the over or under regarding revisions. I’ll take the under, however, given that Spanish and Italian service PMIs are in the low 40′s with the employment component a serious drag (.pdf of the Markit release).

Soc Gen: LIBOR dispersion surging post-LTRO, funding conditions “may not be as healthy as they seem - Cross-asset strategists at Société Générale note that even while LIBOR rates have come down since the ECB’s first LTRO in December, dispersion in the rates submitted to the BBA for EUR LIBOR has actually been on a tear since then. This marks a dramatic divergence in two typically correlated numbers that is sending  mixed vibes on the true nature of the unsecured funding situation in Europe. In fact, while LIBOR has rolled over, dispersion is rapidly nearing levels not seen since Lehman Brothers went under in 2008: Interestingly, Soc Gen notes that this dispersion is being driven by stress in the long end of the curve, in which dispersion has indeed returned all the way up to Lehman (Oct-08) levels, as illustrated below:The December LTRO has been somewhat successful keeping dispersion on very short term rates down, but one must wonder just exactly which banks must be driving high dispersion in these submissions, and by extension whether the ECB’s recent flood of liquidity into the system has really achieved the desired objective of greatly reducing the probability of a tail event. And just in case there are any remaining notions that there isn’t much risk of a spillover effect into, for example, U.S. markets, look at what the dispersion in USD LIBOR is doing:

Of 530b borrowed, 300b goes right back - After receiving 530b euros of fresh funds from the ECB, European banks immediately redeposited 300b of it right back at the ECB. Total overnight deposits at the ECB now total 777b euros up from 475b yesterday. After 11 straight days of drops for Spanish bond yields, they are rising today after Spain’s PM said their budget deficit target is 5.8% of GDP, above the agreed level with the EU of 4.4%. This is not new news but Spain was hoping the EU would give them more breathing room but the Germans would have no part in that. Italian bond yields have also stopped falling for the 1st day in 6 as their 2011 budget deficit as a % of GDP came in at 3.9%, a touch below expectations of 4.0%. The rising price of oil showed up in the Euro zone PPI for Jan as overall prices rose .7% m/o/m, the biggest gain since April as energy prices rose 2.2% m/o/m. With brent crude up another 10% in Feb, this upward trend will continue. From an economic impact standpoint, comparing this move higher firmly above $100 with the one in ’08, both are being lifted by global easing but the main difference is this time is due to supply constraints, the bad kind as opposed to strong demand that was seen in early ’08 before everything hit the fan in late ’08.

Banks' ECB Deposits Hit New Peak - Banks' overnight deposits with the European Central Bank hit a new record Friday in the wake of the central bank's second three-year loan last week. The loan has boosted the already high amount of excess liquidity in the banking system even further. Banks deposited €820.819 billion ($1.1 trillion) with the ECB, the central bank said Monday, the second record in a row after Thursday's €776.941 billion. The amount banks deposit overnight at the ECB has been elevated since August last year and increased sharply since the central bank offered its first-ever three-year loan to banks in December.

Sovereign, Corporate Bond Risk Rises, Credit-Default Swaps Show - The cost of insuring against default on European sovereign debt rose to the highest in almost seven weeks on concern the region’s crisis will worsen as Greece struggles to get investors to agree to a bond swap. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments jumped 4.5 basis points to 349.5, the highest since Jan. 18, according to BNP Paribas SA at 10:46 a.m. in London. It now costs $7.6 million in advance and $100,000 annually to insure $10 million of Greek debt for five years, signaling a 98 percent chance of default in that time, according to CMA. Investors have until March 8 to agree to so-called private sector involvement aimed at cutting the nation’s debt load by more than 100 billion euros ($132 billion) and avoid default. There’s growing concern not enough bondholders will take part in the swap, causing Greece to use collective action clauses to enforce losses on all investors or collapsing the deal.

 Is Germany’s Euro Crisis Strategy Actually Working? - I have been guilty, on many occasions, of eviscerating the strategy taken by the leaders of the euro zone to combat its dangerous debt crisis. They have routinely acted too late with too little, causing contagion to spread through the zone, because they have been unwilling to put the interests of the euro over their own political careers. I have been far from alone in forwarding such a critique. The primary target has been German Chancellor Angela Merkel, who is really driving the entire effort. Her insistence on austerity would send Europe into a tailspin, critics contended, while her continued resistance to steps many believe would halt the crisis – such as a bigger bailout fund, or jointly issued Eurobonds – was putting the entire monetary union at risk. But sentiment appears to be changing. There seems to be growing optimism in Europe that the worst of the debt crisis is behind them. French President Nicolas Sarkozy was practically giddy at last week’s summit of European Union leaders. “We’re turning the page on the financial crisis,” he said at a press conference. “The strategy we’ve implemented is bearing fruit.” Now I find myself under attack. One former TIME editor is bombarding me with emails saying that my continued gloom about Europe’s future is more and more misplaced. So is Merkel’s debt crisis strategy actually working? Have its many critics been wrong all along? Well, in my opinion, the answer depends on what we mean by “working.”

Europe’s Recession Has Barely Begun - The reserves from the ECB’s LTRO stage II operation are making their way back into the excess reserve facility at the ECB. The overnight holdings were at an all time record of €820.81bn. As I explained previously, this in itself isn’t a problem. In fact, unless the reserves are moving to some other non-commercial bank accounts at the ECB there is little other place they can go. However, what is the problem:…is that the increasing use of the ECB’s marginal lending facility shows that not all of these parked reserves are actually “excess to market requirements”. The statistics from last night show that for the last 3 days there is still €783 million being rolled over using the ECB’s margin lending facility. With €0.8trn technically available for interbank lending it is certainly a concern that there is at least one bank still having to lean on the ECB for overnight liquidity. Once again this suggests the ECB is still holding up zombie banks that other banks are unwilling to trade with. On top of the LTRO outcomes I have been running two major risk themes on Europe under the current “plan” over the last few months. Firstly the major one: Periphery nations weakening, France in the middle, Germany outperforming, but the whole ship slowly sinking. Secondly, on top of the obvious problems in Greece and Portugal, the “black cygnet” that is Spain:

Spain’s sovereign thunderclap and the end of Merkel’s Europe - The Spanish rebellion has begun, sooner and more dramatically than I expected. As many readers will already have seen, Premier Mariano Rajoy has refused point blank to comply with the austerity demands of the European Commission and the European Council (hijacked by Merkozy). Taking what he called a "sovereign decision", he simply announced that he intends to ignore the EU deficit target of 4.4pc of GDP for this year, setting his own target of 5.8pc instead (down from 8.5pc in 2011). In the twenty years or so that I have been following EU affairs closely, I cannot remember such a bold and open act of defiance by any state. Usually such matters are fudged. Countries stretch the line, but do not actually cross it. With condign symbolism, Mr Rajoy dropped his bombshell in Brussels after the EU summit, without first notifying the commission or fellow EU leaders. Indeed, he seemed to relish the fact that he was tearing up the rule book and disavowing the whole EU machinery of budgetary control. He is surely right to seize the initiative. Spain’s economy will contract by 1.7pc this year under his modified plans and unemployment will reach 24pc (or 29pc under the 1990s method of counting). To compound this with manic fiscal tightening – and no offsetting devaluation – is intellectually indefensible.

ECB Balance Sheet Jumps to a Record $3.96 Trillion Amid Lending to Banks - The European Central Bank’s balance sheet surged to a record 3.02 trillion euros ($3.96 trillion) last week, 31 percent bigger than the German economy, after a second tranche of three-year loans. Lending to euro-area banks jumped 310.7 billion euros to 1.13 trillion euros in the week ended March 2, the Frankfurt- based ECB said in a statement today. The balance sheet gained 330.6 billion euros in the week. It is now more than a third bigger than the U.S. Federal Reserve’s $2.9 trillion and eclipses the 2.3 trillion-euro gross domestic product of Germany, the world’s fourth largest economy. The ECB last week awarded banks 529.5 billion euros for three years in the biggest single refinancing operation in its history, adding to the 489 billion euros it lent in December. The flood of money, which aims to combat Europe’s sovereign debt crisis by unlocking credit for companies and households, has increased the risk exposure of the 17 euro-area central banks that together with the ECB comprise the Eurosystem.

What is the ECB endgame? - Everyone is happy that bond yields are falling, but what is the next step in the resolution of the crisis?  Here is one report from the front, decide for yourself whether it is good or bad news: Last week 800 banks requested €529.5bn of three-year funding under the European Central Bank’s longer-term refinancing operation, on top of €489bn borrowed in the first tranche of the LTRO in December. The €1.019tn total is not far shy of the €1.106tn of European bank senior debt due to mature in 2012, 2013 and 2014 combined, according to Goldman Sachs, which said the “extremely high” injection of capital means “European banks are now effectively pre-funded through to 2014”. Given that the ECB funding costs 1 per cent, compared to yields on senior debt of 3.5 per cent, some believe many banks will simply let much of their senior debt mature… It would be an exaggeration to claim that the ECB has taken over European capital markets for three years, but you can see where my thoughts are headed.  What happens when the three years is up, or as that time approaches?  I see a few possible scenarios:

Analysis: Populists exploit euro zone crisis to gain influence (Reuters) - As the euro zone shudders, Europe's populist politicians from the Netherlands to Austria and Finland are exploiting its woes to build up support and even threaten some governments. Such strong smaller economies at the heart of the euro zone, which have benefited significantly from membership, are unlikely to leave the euro unilaterally, as some far-right parties want. However, right-wing groups are playing on public resentment at the cost of bailing out weak euro zone countries such as Greece to gain popularity. In the Netherlands, eurosceptic politician Geert Wilders is staging a campaign which could push the minority government to the brink of collapse after barely a year in power. Last week, Wilders proposed that the Netherlands should hold a referendum on whether to ditch the euro and embrace the Dutch guilder again, pending a study of the long-term economic costs.

Report Shows Netherlands Would Benefit by Leaving Eurozone; Country by Country Aggregate Costs; Dutch Freedom Party Wants Euro Exit Referendum; Critical Juncture for Eurozone  - Inquiring minds are reading a 73 page detailed report The Netherlands & The Euro that explains country by country why Italy, Greece, Portugal, and Spain are going to need lots more money, and the Netherlands and Germany will end up footing the bill. The study highlights the fundamental flaws of the Economic and Monetary Union (EMU), the damage done by the euro to date to the Netherlands, and the potential costs down the road. The report conclusion is Netherlands should exit the EMU.  Here are some snips from the report regarding the finances of Italy, Spain, and Portugal.[...] Bloomberg reports Dutch Freedom Party Wants Euro Exit ReferendumThe Dutch Freedom party wants voters in the Netherlands to decide in a referendum whether the country should return to the guilder, De Telegraaf reported today, citing an interview with party leader Geert Wilders. The Freedom Party hired Lombard Street Research to investigate the cost of maintaining the Euro zone and alternative scenarios if countries elect to leave, according to a statement by London-based FTI Consulting. The report will be presented in The Hague on March 5.

Euro-zone 4th-quarter GDP unrevised at 0.3% fall -- Gross domestic product across the 17-nation euro zone contracted by 0.3% in the final three months of 2011 compared to the third quarter, unrevised from an earlier estimate, the European Union statistics agency Eurostat reported Tuesday. That would translate into a roughly 1.3% annualized quarterly contraction, as measured by the U.S. government. Compared to the fourth quarter of 2010, GDP grew by 0.7% in the euro area

Euro area GDP Report: Not Pretty -- Rebecca Wilder - Today Eurostat released the second estimate of Q4 2011 Gross Domestic Product. Real Euro area (EA) GDP declined 0.3% over the quarter (-1.3% on an annualized basis). In this release Eurostat provides a breakdown across region, spending categories, and industry, and is much more detailed than the preliminary flash estimate. It’s not pretty. The expenditure side was very weak. Household and government consumption declined 0.4% and 0.2%, respectively, while gross capital formation tumbled 0.7%. Inventory depletion accounted for much of the reduction in investment and fixed investment deteriorated to a lesser degree. Exports fell 0.4%, while imports dropped a full 1.2%; therefore, net exports contributed +0.3% to overall GDP growth. The only positive contribution to GDP growth was imports – this type of technical growth is not sustainable. As the chart below illustrates, exports has been a major driver of growth during this recovery. However, export demand is dropping off at the margin, and more weakness is expected. The level of new export orders (a component of the Markit PMI) fell for eight consecutive months through February. So it it’s up to domestic demand to spur further recovery. I also have my doubts there, given that fiscal austerity pushed the unemployment rate to a historical high of 10.7% in January (rather vertically, I might add).

Portugal in Crosshairs as Yields Fuel Bailout Talk -- Portuguese bond yields are rising as investors are busy putting cheap money from the European Central Bank to work elsewhere. The increase in 10-year borrowing costs by almost two percentage points in the past two weeks is stoking concern among investors that the nation will struggle to resume bond sales in 2013. Portugal has been unable to sell debt due in more than a year since it was given a 78 billion-euro ($102.8 billion) bailout in May 2011, following Greece and Ireland. "The ECB's cash provides liquidity, but not solvency," "If the perception is that a country is already bankrupt, these liquidity measures won't work. There is growing concern that Portugal may need a second bailout."

Unintended Consequences: ECB’s Effort to ‘Save’ Europe Will Lead to Its Demise, Mauldin Says (video) The drama over Greece's bailout comes to a head this week. Debt holders have until Thursday to accept or reject the "voluntary" 53.3% haircut on their Greek holdings. If less than 75% of bondholders reject the terms, Greece will be considered in default, which would be the first sovereign default in the eurozone. A "disorderly" default by Greece could cost the global economy about $1.3 trillion, according to the International Institute of Finance. Fear over just such an outcome, as well as more weak economic data from Europe, put sharp downward pressure on global stocks Tuesday. Overnight, Hong Kong's Hang Seng fell more than 2% while major bourses in Germany and France were down over 2.3% in recent trading. At the U.S. open, the Dow fell over 100 points. The good news, for financial markets, is the European Central Bank has already extended over $1.3 trillion in loans to EU banks via two rounds of its long-term refinancing operation (LTRO). The ECB's aggressive actions have helped stabilize the banking system and make it far less-vulnerable to a Greek default, which market players have had eons to prepare for, anyway.

Cash-strapped Greece begins its bid to raise funds… by selling off Corfu - Greece is trying to sell off a huge slab of land on the holiday island of Corfu to raise cash to tackle its debts, it emerged today. Government officials revealed a tender has been launched for the exploitation of a large seaside plot on the western resort island. The Hellenic Republic Asset Development Fund said it is seeking to sell the 'right of surface' for the 120-acre, forested property at Kassiopi for up to 100 years. The tender is part of Greece's bid to raise 50billion euro ($66billion) through an open-ended program of privatisations and concession sales, half of which will involve real estate. The country has committed to raise 19billion euro ($25billion) of that sum by 2015.

Healthcare firms asked to take Greek debt writedown (Reuters) - International healthcare firms have been asked to accept losses on Greek government bonds they got in exchange for unpaid hospital bills, evidence that the country's debt restructuring deal will have an impact beyond the mainstream financial sector. German healthcare firm Fresenius and French drugmaker Sanofi both said on Tuesday they held Greek government debt affected by the move.

Greek 1-Year Bond Yield Hits 1,006% - As a matter of curiosity more than anything else, I occasionally take a peek at Greek bond yields. Today, the Greek 1-year yield topped 1,000% for the first time. The following chart courtesy of Bloomberg.  To be specific, the yield is a nice 1,066.661%That yield reflects the idea that 1-year bonds will be nearly worthless before the month is over.

Greek default looms as voluntary debt deal looks set to fail - European leaders are braced for the eurozone’s first ever sovereign default this week as Greece’s efforts to secure a €206bn (£172bn) “voluntary” bond swap looks increasingly unlikely. Authorities in Athens are ready to enforce the controversial collective action clauses, or CACs, to impose the restructuring deal on all bondholders as the number of voluntary agreements look set to fall short of the required amount. Credit rating agencies have warned they will declare Athens to be in default if the CACs are triggered which would be a dramatic culmination to a three-year rollercoaster ride for Athens, the eurozone and global markets. While the markets have been ready for a Greek default for months, the move could leave Greece and its banks barred from funding from the European Central Bank (ECB). On Monday, Standard & Poor’s declared Greece to be in a state of “selective default” which led to the ECB announcing it would no longer accept Greek government bonds as security for new loans.

Greece in Meltdown - The crisis has caused a tectonic shift in the Greek political landscape. This is largely because the old politicians are seen as responsible both for looting the country and for turning it over to the EU and IMF; with the economy in meltdown it’s no longer in anyone’s interest to turn a blind eye to the corrupt clientelist networks on which their power was based and which had come to operate as a kind of parastate. But it’s also because Greek democracy has been suspended for some time. Both main parties have split under the pressure of the impossible choice—default or deeper austerity—extorted from Greece by its lenders; on February 12 each expelled some twenty members of Parliament for voting against the terms of the new loan deal, a 700-page document they were given one day to read. The center-left Pasok, the former ruling party, is gasping for air in the polls between 8 and 13 percent; the center-right New Democracy is between 19 and 24 percent, despite the maneuvering of its leader, Antonis Samaras, who in opposition last year expelled an MP because she voted for the previous set of measures.

Banks and insurers pose Greek debt plan - A dozen banks, insurers and investment funds holding Greek bonds will participate in a massive debt relief plan for the country, a group for the private creditors said.  The statement from the Institute of International Finance comes amid concern that not enough investors will voluntarily swap their Greek government bonds for new ones with a much lower face value, longer repayment deadlines and lower interest rates.  Without the debt relief, Greece won't get a second, (euro) 130 billion ($172 billion) bailout from the other euro countries and the International Monetary Fund and face a messy default on its debts later this month.  Private creditors have until Thursday night to sign up for the bond swap, which could slice as much as (euro) 107 billion ($141.5 billion) off Greece's (euro) 350 billion ($460 billion) debt pile.  Investors who participate would lose around 75 percent of the value of their overall bond holdings. But without the bailout, they would likely face much bigger losses, not only on their Greek holdings but also on investments in other vulnerable eurozone countries as turmoil spreads across the region's financial markets.

Bondholder group sees 1 trillion euro Greek default risk (Reuters) - A disorderly Greek default would cause more than a trillion euros ($1.3 trillion) of damage to the euro zone and could leave Italy and Spain dependent on outside help to stop contagion spreading, the main bondholders group has said. Greek private creditors have until Thursday night to say whether they will participate in a bond swap that is part of a bailout and restructuring deal to help it manage its finances and meet a debt repayment on March 20. Investors will lose almost three-quarters of the value of their debt in the exchange. Finance Minister Evangelos Venizelos told Reuters on Monday it was the best deal they would get and those who did not sign up would still be forced to take losses. Analysts said the Institute of International Finance document, marked "IIF Staff Note: Confidential," may have been designed to alarm investors into participating in the exchange. "There are some very important and damaging ramifications that would result from a disorderly default on Greek government debt," the IIF said in the February 18 document obtained by Reuters. "It is difficult to add all these contingent liabilities up with any degree of precision, although it is hard to see how they would not exceed 1 trillion euros."

Greek default looms as voluntary debt deal looks set to fail - European leaders are braced for the eurozone’s first ever sovereign default this week as Greece’s efforts to secure a €206bn (£172bn) “voluntary” bond swap looks increasingly unlikely. Authorities in Athens are ready to enforce the controversial collective action clauses, or CACs, to impose the restructuring deal on all bondholders as the number of voluntary agreements look set to fall short of the required amount. Credit rating agencies have warned they will declare Athens to be in default if the CACs are triggered which would be a dramatic culmination to a three-year rollercoaster ride for Athens, the eurozone and global markets. While the markets have been ready for a Greek default for months, the move could leave Greece and its banks barred from funding from the European Central Bank (ECB). On Monday, Standard & Poor’s declared Greece to be in a state of “selective default” which led to the ECB announcing it would no longer accept Greek government bonds as security for new loans.

Implications of a Disorderly Greek Default and Euro Exit - pdf - There are some very important and damaging ramifications that would result from a disorderly default on Greek government debt. Most directly, it would impose significant further damage on an already beleaguered Greek economy, raising serious social costs. The most obvious immediate spillover it that it would put a major question mark against the quality of a sizeable amount of Greek private sector liabilities. For the official sector in the rest of the Euro Area, however, the contingent liabilities that could result would seem to be:

  1. Direct losses on Greek debt holdings (€73 billion) that would probably result from a generalized default on Greek debt (owed to both private and public sector creditors);
  2. Sizeable potential losses by the ECB: we estimate that ECB exposure to Greece (€177 billion) is over 200% of the ECB’s capital base;
  3. The likely need to provide substantial additional support to both Portugal and Ireland (government and well as banks) to convince market participants that these countries were indeed fully insulated from Greece (possibly a combined €380 billion over a 5 year horizon);
  4. The likely need to provide substantial support to Spain and Italy to stem contagion there (possibly another €350 billion of combined support from the EFSF/ESM and IMF);
  5. The ECB would be directly damaged by a Greek default, but would come under pressure to significantly expand its SMP (currently €219 billion) to support sovereign debt markets;
  6. There would be sizeable bank recapitalization costs, which could easily be €160 billion. Private investors would be very leery to provide additional equity, thus leaving governments with the choice of either funding the equity themselves, or seeing banks achieve improved ratios through even sharper deleveraging;
  7. There would be lost tax revenues from weaker Euro Area growth and higher interest payments from higher debt levels implied in providing additional lending;
  8. There would be lower tax revenues resulting from lower global growth. The global growth implications of a disorderly default are, ex ante, hard to quantify. Lehman Brothers was far smaller than Greece and its demise was supposedly well anticipated. It is very hard to be confident about how producers and consumers in the Euro Area and beyond will respond when such an extreme event as a disorderly sovereign default occurs.

IIF Outlines Dire ‘What If’ on Greek Default - The Institute of International Finance, which represents about 450 banks and other private creditors to Greece and has been trying to get the bond swap over the finish line, produced a confidential memo last month about what it called the “very important and damaging ramifications that would result from a disorderly default on Greek government debt.” “It is difficult to add all these contingent liabilities up with any degree of precision, although it is hard to see how they would not exceed 1 trillion euros ($1.32 trillion),” the IIF analysis reads. The IIF memo, dated Feb. 18, came to light last week when it was first reported by Athens News, an English language newspaper in the Greek capital. “The truth is that we have no idea how a disorderly default of Greece would be seen by the markets, but to be fair the idea that it would first spread to Portugal and have a massive impact upon the ECB is a reasonable one,”

IIF warns on €1tn cost of Greek euro exit - The cost of a Greek disorderly default and exit from the single currency could rise to €1tn, the body representing a substantial number of Athens’ private sector government bond holders, has warned. The International Institute of Finance has said that the contingent liabilities – potential losses across the eurozone – of a disorderly default would probably be in excess of €1tn, in a confidential document to staff. The IIF, which is representing global banks, asset managers and investors in negotiations over the €206bn debt swap of Greek bonds, said in the note: “There are some very important and damaging ramifications that would result from a disorderly default on Greek government debt. “Most directly it would impose significant further damage on an already beleaguered Greek economy, raising serious social costs.” But it warned the costs would spread across the entire eurozone, saying the contingent liabilities that could result in the event of a disorderly default would seem to include direct losses on Greek debt holdings of €73bn made up from both private and public sector creditors.  The European Central Bank would also face “sizeable losses” of €177bn, which the IIF said amounts to “over 200 per cent” of the ECB’s capital base.  The IIF went on to warn that the additional support needed for the governments and banks of both Portugal and Ireland to shelter them from fears of contagion could reach a combined €380bn over a five-year horizon.

Athens threat to bond holdouts. - Greece has threatened to default on any of its bondholders who do not take part in this week’s €206bn debt restructuring, raising the pressure on potential holdouts. The threat is aimed in particular at the 14 per cent of investors who own Greek bonds issued under international law. The remaining 86 per cent, who own bonds covered by Greek law, were warned in the same statement that Greece would use so-called collective action clauses to make any deal binding on any holdouts. People involved in the deal said there would be no sympathy for any holdouts in the international law bonds, as many of them were hedge funds who had bought in on the hope of being paid back in full as other investors suffered losses of about 75 per cent.  “They will be portrayed as evil hedge funds and nobody will have any pity for them. That means you can be violent with them. They need to realise that they don’t have a free option here,” one person close to the deal said.

Athens, creditor group turn up heat on Greek bondholders - Athens turned up the heat on its creditors on Tuesday as it sought to secure a bond swap that will cut its mountainous debt, while the main bondholders group warned a disorderly default would cause more than a trillion euros of damage to the euro zone. Greek private creditors have until Thursday night to say whether they will participate in the exchange that is a key part of a bailout program to help Greece manage its wrecked finances and meet a debt repayment on March 20. A number of the biggest bondholders are signing up but despite the dire warnings, a clutch of Greek pension funds and some foreign investors rejected the offer which will see investors lose almost three-quarters of the value of their holdings and lop about 100 billion euros off Greece's debt. Athens ratcheted up the pressure, delivering its starkest signal to date that it will force losses on those who do not volunteer. Its Debt Management Agency (PDMA) said if it got enough support, it intended to make losses "binding on all holders of these bonds" and said the offer was the best deal they would get, echoing comments by Finance Minister Evangelos Venizelos to Reuters on Monday.

REPORT: Greece Expects To Activate CAC In Bond Swap: Dow Jones reports that Greek officials expect to activate collective action clauses that would coerce private holders of Greek bonds to exchange their securities for new bonds with a lower face value and longer maturities. This bond swap deal constitutes the cornerstone of the second Greek bailout. Triggering a CAC is expected to trigger a credit event, where credit default swaps (insurance contracts on Greek bonds) would be paid out. The news agency cited official sources, who also said that 75 to 80 percent of bondholders were expected to participate in the deal—enough to vote to use the collective action clause but not sufficient to make the kind of progress EU leaders want towards alleviating Greece's public debt burden. However, these participation expectations are also worrisome should they miss expectations even by a small margin. Greece can only go through with the bond swap deal if a full 75 percent of its private creditors agree to go through with the bond swap voluntarily—the minimum number of investors that would decisively activate CACs on all its bond issuances. Those investors have until Thursday at 3 PM EST to decide whether they will participate in the bond swap.

Greece gets tough on potential holdouts - This, I think, is a major change of tune from Greece. When Greece first launched its exchange offer, on February 24, the language about when and whether it would active its collective action clauses was long and complex. I’ve uploaded the original press release here; the relevant language is at the bottom of page 2 and the top of page 3, and has caused a lot of confusion. (Simone Foxman, for instance, reported yesterday that if Greece gets 90% participation, the CACs would not be activated. That’s the exact opposite of what Greece said in the press release, where it declared its intention “to declare the proposed amendments effective” in that event.) Today’s press release, by contrast, is a lot simpler. Never mind the old distinctions about what happened if the take-up was less than 66%, or between 66% and 75%, or between 75% and 90%, or above 90%. Instead, we just get one, simple rule: The Republic confirmed that if it receives sufficient consents to the proposed amendments of the Greek law governed bonds identified in the invitations for the amendments to become effective, it intends, in consultation with its official sector creditors, to declare the proposed amendments effective and binding on all holders of these bonds. In other words, there are collective action clauses, and if Greece can trigger them, it will. End of story.

Now witness the firepower of this fully armed and operational collective action clause, etc - Latest from the Greek finance ministry (its debt manager has met German banks): The Republic confirmed that if it receives sufficient consents to the proposed amendments of the Greek law governed bonds identified in the invitations for the amendments to become effective, it intends, in consultation with its official sector creditors, to declare the proposed amendments effective and binding on all holders of these bonds. Consequently, all obligations of the Republic to pay holders of those bonds any amount on account of principal will be amended to permit the Republic to discharge these obligations in full by delivering to the holders of the amended bonds on the settlement date the consideration described in the invitations. In addition, the Republic’s obligation to pay interest on its Greek law governed bonds will be amended so as to reduce the amounts due to interest accrued through 24 February 2012 and to provide that such amounts will be paid by delivering short-term EFSF notes in lieu of cash. No further interest will accrue or be payable on those bonds. The Republic’s representative noted that Greece’s economic programme does not contemplate the availability of funds to make payments to private sector creditors that decline to participate in PSI. Finally, the Republic’s representative noted that if PSI is not successfully completed, the official sector will not finance Greece’s economic programme and Greece will need to restructure its debt (including guaranteed bonds governed by Greek law) on different terms that will not include co-financing, the delivery of EFSF notes, GDP-linked securities or the submission to English law.

At Last, A Credible Threat of Default: Too Little-Too Late Eupdate? - At long last, Greece is starting to resemble a normal restructuring--you know, the kind where the debtor just might not pay if it does not get the relief it is asking for. From the start, Europe's crisis management strategy has revolved around flatly denying the possibility of default within the Eurozone. This strategy has given us record-deep yet voluntary haircuts, bizzarre contortions to exempt central bank holdings, and mass confusion around CDS triggers. But even as it denied the possibility of nonpayment--thereby denying Greeks the smidgeon of agency debtors enjoy at the precipice--Europe failed to proffer an alternative "or else." As a result, creditors might be forgiven for wondering whether the alternative to haircuts just might be payment in full. Next to payment in full, the offer of English law in restructured bonds looks like a pathetic consolation prize. And so a bunch are threatening to hold out on the eve of Thursday's exchange deadline. This is not the long-lost evidence of creditor coordination problems to support calls for sovereign bankruptcy--presumably, countries that do not default do not file either--but rather proof that if you keep swearing you will pay, people will take you up on it. Now at last, with 48 hours to go, Greece has (sort of) promised to default if the offer fails. With so much on the line, it feels like we are cutting it awfully close.

Burning on - CONCERN about last-minute hitches to the Greek debt restructuring took the wind out of financial markets on Tuesday. Traders will remain nervy until the deal is concluded late on March 8th. Despite the jitters, the general expectation is that enough investors will sign up for the Greek government to impose the deal on the rest by invoking the collective-action clauses (CACs) imposed by legislation passed last month. That in turn is likely to trigger a credit event as early as March 9th, which will lead to payouts on credit-default swaps. That will come as a blow to European leaders who loathe the sovereign CDS market, but they are hoping that a successful debt deal together with the second bail-out, of €130 billion ($170 billion), will dampen down the Greek fire. That hope may itself be swiftly extinguished. With an economy in freefall and an election looming in late April or early May, trouble could flare up again in Greece soon. And attempts by European leaders to portray the Greek “private-sector involvement” (PSI) as a special case with no implications for debt held in other shaky euro-area economies may also prove overoptimistic. High Portuguese bond yields indicate investor suspicion that Portugal, forced into a bail-out about a year after Greece, will again follow the Greeks’ lead.

One Day Ahead Of PSI Deadline, IIF Can Only Account For 39% Of Greek Bondholders - The problem with the latest hare-brained scheme in Europe, namely to organize Greek bondholders among the various institutions that for 2 years did everything in their power to dump said Greek bonds in the open market, is that said institutions end up having no Greek bonds in inventory just at the time when they are supposed to have Greek bonds, 24 hours ahead of the Greek PSI deadline. As a reminder, participation in the PSI has to be 75%, with a CAC threshold of 66%, and according to some interpretations even 50% of Greek bondholders voting for the PSI will be sufficient. Which means that with the PSI conclusion just around the corner, or 8 pm Athens time time tomorrow, the IIF, which is the consortium of entities that have every interest in perpetuating the status quo (i.e., do not have Europe ransom demands) and more than happy to "volunteer" for a 70%+ haircut, the IIF only has members pledging securities equal to 39% of EU206 bln...

Investors holding $106 billion in Greek debt agree to participate in bond swap - Private investors holding some €95 billion ($125 billion) in Greek bonds said Wednesday that they will participate in a massive debt relief for the struggling country, bringing Athens closer to avoiding default. For the deal to work — and for Greece to secure a related €130 billion ($171 billion) bailout — Greece needs 90 percent of investors to sign up. However, a voluntary participation rate of around 70 percent could be enough to force most holdouts to go along. Investors holding a total of €206 billion ($271 billion) in Greek bonds have until Thursday evening to decide whether they want to participate in the bond swap. Athens needs to reach a participation rate of at least 66.7 percent of investors holding bonds issued under Greek law to force the deal onto holdouts.

Venizelos confident that bond swap will work - Finance Minister Evangelos Venizelos said on Wednesday that he is optimistic that Greece will get the necessary backing from its private creditors for a voluntary bond swap and that the Greek debt will fall to 120 percent of GDP "or even better" by 2020. "We will give an active response to the Cassandras that are trying to invalidate every possible solution, such as the PSI," Venizelos said, referring to the debt writedown by its official term or public sector involvement. He sharply criticised the boards of five of the country's social security funds that are refusing to participate in the bonds swap. "If the PSI does not succeed, what will be the value of their bonds? Zero!" Venizelos said.

Greece Has Assembled a Coalition of the Willing | Finance The estimates of both the required and actual levels of participation in Greece's PSI bond swap offering tomorrow are best described as - "all over the place". Using my gorilla math, it seems that anything below 50% of private sector bondholders participating is outright failure, as if the PSI never even happened. Between 50 and 66% (or is it 75%?) is pretty much a failure as well, since Greece will be forced to use CACs illegally and trigger CDS, as well as increasing the odds of successful litigation and recoveries by holdouts. Above that threshold but below 90-95% means the CACs can be retro-actively inserted without triggering CDS, and near ubiquitous participation means that CACs aren't even needed. So where does it all stack up one day before the swap gets underway? That's considerably less certain than the required levels above. From what I understand so far, the IIF's "steering committee", plus other significant bondholders who have recently announced their intention to participate, represents a total of 40% of outstanding Greek debt to be restructured. Obviously, that's well below what is needed for even a slightly successful swap. For what it's worth, here is RBS' estimate on how it will all end up, via The Telegraph's live blog (note that RBS is one of the banks that has already agreed to participate):

Four Greek pension funds refuse to join debt swap-official - (Reuters) - Most Greek pension funds holding Greek sovereign debt have agreed to take part in a bond exchange to ease the country's debt burden but four have refused to do so, a Greek official said on Tuesday. The pension funds have come under pressure from workers' unions worried the writedown on Greek debt holdings will affect the viability of their funds. About eight or nine funds have agreed to take part but pension funds for journalists, police, the self-employed and hotel workers - which hold Greek debt worth 2 billion euros - have refused, the official said.

Greece Moves Closer to Swap - Greece moved a step closer to completing its debt restructuring when a raft of bondholders pledged to participate in the swap, likely enabling the troubled nation to force the deal through. As of late Wednesday, about 52% of the €206 billion ($270.9 billion) in bonds up for restructuring had been pledged. Portuguese and U.K. banks, as well as Italian insurance companies added their names to the list of holders agreeing to the swap, as did Greek pension funds holding €19 billion of Greek debt. Thirty-two investors in a group known as the Private Creditor-Investor Committee for Greece have signed on.The €107 billion so far in pledges, coming ahead of the Thursday deadline, suggest that Greece is well on its way to getting enough creditors to consent to make the deal binding for any that refuse to take part. The holdouts aren't likely to affect the broad acceptance of the deal, but they could be a thorn in the side of Greece and its euro-zone rescuers for years to come.

Greece inches closer to €206bn debt deal - Greece inched nearer to a successful €206bn debt restructuring after private sector bondholders representing almost 40 per cent of securities said they were backing the deal. Banks, insurers and asset managers holding €81bn in Greek debt have agreed to exchange their bonds for new instruments that will leave them with losses of about 75 per cent. The list of 30 participants includes Allianz, BNP Paribas, Deutsche Bank, HSBC and Royal Bank of Scotland, as well as several Greek banks. Many of them had already publicly committed themselves to the deal but Wednesday’s statement marked the first time all the holdings had been added together. The move came a day after Greece threatened to default on any of its bondholders who did not take part in the debt swap, a move that turned up the heat on potential holdouts ahead of a deadline on Thursday. The Greek public debt management agency said Athens “does not contemplate the availability of funds” to pay private investors who hold on to their bonds once the restructuring occurs. The threat is particularly aimed at 14 per cent of investors who own Greek bonds issued under international law. The remaining 86 per cent, who own €177bn in Greek-law bonds, were also warned that Athens would use new legal provisions, called collective action clauses (CACs), to force the deal on holdouts.

Greece Confident Of Bond Swap Approval— Greece appeared to have clinched a landmark debt restructuring deal with its private sector lenders late Thursday. The deal would clear the way for the release of bailout funds from Europe and the International Monetary Fund that would save the country from default. Add to Portfolio Go to your Portfolio »Given all the twists and turns in the recent negotiations, and the ups and downs in Greece’s long debt struggle, something could still go wrong at the last minute, participants said. But most bond investors and government officials were expecting a positive outcome on the deal, which would help buy additional time for a European crisis that has recently shown signs of cooling down. Greek officials said the total number of participants in the deal would be announced at 6 a.m. Friday, London time — 1 a.m. Friday in New York. Stock markets in Europe were buoyant Thursday. The interest rates on the government debt of Italy and Spain were down as fears eased that a Greece default might start a panic among holders of other indebted European nations’ bonds. The European Central Bank also had a calming effect when it said on Thursday that it would hold a crucial interest rate steady on signs that the region’s economy and financial markets were stabilizing.

60 percent Greece bond swap: According to data compiled by Bloomberg, 60 percent of Greece's bondholders have agreed to participate in the country's debt-swap agreement. Economists are increasingly confident that the number will eventually clear the 66 percent hurdle, which is needed to activate the collective action clause (CAC). The CAC would force the balance of bondholders to go along with whatever the majority agrees to. However, questions remain on whether or not the use of CACs would or should activate the credit default swaps tied to the Greek bonds in question.

How lucky are Greece’s bondholders? - “Greece’s private creditors are the lucky ones,” says Nouriel Roubini — which I think is putting it a bit strongly. Nouriel — who at one point was one of the world’s foremost econobloggers — is falling back on bad habits here: he says that “a myth is developing” about the official sector getting off scot free in Greece, and goes on to tell us how “the argument runs”. But he doesn’t link to any such argument — and I’d dearly love to know who he has in mind, and what exactly they’re saying. Nouriel then gives a good overview of the degree to which the official sector really is bailing out Greece. This is important to remember: just because bondholders are taking a haircut, doesn’t mean this isn’t a bailout. It is. Greece is running a massive budget deficit, even before interest payments on its debt. It can’t borrow the money to cover that deficit in the markets, either foreign or domestic. Which means that the only thing standing between Greece and bankruptcy is the Troika, throwing billions of dollars at the Greek government to avert insolvency. As Nouriel says, this should give the Troika seniority, on the grounds that they’re providing the equivalent of “debtor-in-possession” financing.

Greek Swap Seen Provoking Aftershocks on Borrowing: Euro Credit - Greece’s day of reckoning with bondholders dawns with economists from Barclays Capital to Deutsche Bank AG concerned that the world’s largest debt restructuring will provoke aftershocks. Eight months of negotiations reach a head with today’s deadline for private creditors to accept a bond swap aimed at writing off 106 billion euros ($140 billion) of Greek debt. The government vows to bind holdouts to the deal should participation fall short of its target. Possible repercussions include a surge in borrowing costs for other indebted nations as investors refuse to lend to countries that may follow suit in imposing losses on bondholders. The accord may also trigger derivatives designed to insure against default, and may not be enough to prevent Greece from reneging on its debts in the coming years.

Greece Needs Extra Debt Relief in 12 Months, Merkel Adviser Says - Greece will require additional debt relief within the next 12 months even after the bond-swap offer that ends today, said Peter Bofinger, an economic adviser to the German government. Given that Greece’s debt load will remain at “very high levels” after the writedown, policy makers will have to begin thinking about further debt relief in the next “half a year” that could involve cuts among “official bondholders.” “What will have to be achieved is a real debt relief for Greece -- and it will have to come in the next 12 months,” Bofinger said in an interview from Berlin today with Bloomberg Television. Investors holding about 60 percent of the bonds eligible for the swap have so far indicated they’ll participate. The Greek government has said it wants participation above 90 percent and is seeking a minimum level of 75 percent, including with use of so-called collective-action clauses forcing holders of bonds under Greek law into swapping.

Greek PSI — the implications - While everyone is wondering about whether Isda will call a credit event on Greece or not, JP Morgan’s economic research team on Friday cuts straight to the point. Credit event or no credit event, what we should really be talking about is debt sustainability. And on this front the PSI deal, they believe, does not create immediate hurdles. Yay! That said, it doesn’t exactly resolve the problem of Greece’s imminent funding shortfall either. Here’s more of their thinking (our emphasis): Debt held in private hands following the PSI will be around €70 billion (less than a quarter of total debt), and will mature in 10 to 30 years. A large part of the value of this debt will be in the coupons it pays, but the funds earmarked for this in the second package will be in an escrow account outside of the Greek government’s control.

Greece Reports Results of Debt Swap - Just over 80% of Greece's private-sector creditors had agreed by a Thursday evening deadline to turn in their bonds for new ones with less than half the face value, touching off a massive debt swap that marks a seminal moment in Europe's long-frustrated efforts to rescue its most financially vulnerable nation.The Greek government announced the results of its proposed restructuring early Friday morning. It said 83% of bondholders had voluntarily submitted to the deal, and that it would invoke so-called collective-action clauses to impose the exchange on most of the rest, bringing participation up to 96%. The announcement that the restructuring will go ahead precipitates the largest-ever sovereign-debt default and the first for a Western European country in half a century. Greece had proposed €206 billion ($273 billion) in bonds for the exchange. Just over €100 billion will be sliced from the amount Greece owes.

Greek Debt Swap Clears 95% Level as Euro Chiefs Ready for Call -- Greece pushed through the biggest sovereign restructuring in history after cajoling private investors to forgive more than 100 billion euros ($132 billion) of debt, opening the way for a second rescue package. The euro fell and stocks erased initial gains after the government in Athens today said that it will trigger an option forcing some investors to take part in the exchange, allowing it to clear a 90 percent target rate for participation. Germany and fellow euro-area governments declared the debt swap a success. Attention now shifts to euro-region finance ministers, who brought forward a planned conference call to 12:30 p.m. Brussels time. They must decide whether the swap warrants proceeding with a 130 billion-euro second bailout package designed to prevent a collapse of the Greek economy. Officials from the International Swaps and Derivatives Association are to meet 90 minutes later to consider a “potential credit event” relating to Greece. “The debt-swap results show that international markets see the prospects the Greek economy has to regain a sustainable fiscal situation,”

Massive take-up of Greece bond swap offer (Reuters) - Greece secured an overwhelming acceptance of a bond swap offer to private creditors and beat its own most optimistic forecasts, a senior official said on Thursday after the deadline expired on a deal needed to avoid a chaotic debt default. A government official, speaking on condition of anonymity, said take-up on the offer was around 95 percent an hour before the offer closed at 2000 GMT with responses still coming in. The biggest sovereign debt restructuring in history will see bond holders accept losses of some 74 percent on the value of their investments in a deal that will cut more than 100 billion euros from Greece's crippling public debt. Preliminary results from the offer are expected to be announced officially at 0600 GMT on Friday and Finance Minister Evangelos Venizelos will hold a news conference before a call with euro zone finance ministers in the afternoon. After initial fears that the deal could fail altogether, pitching Greece and the euro zone into fresh crisis, the unexpectedly strong result may mean that Athens can avoid enforcing the exchange on recalcitrant holdouts. The government had been expected to activate so-called collective action clauses (CACs) on all 177 billion euros worth of bonds regulated under Greek law. That would potentially trigger payouts on the credit default swaps (CDS) that some investors held on the bonds, an event which would have unknown consequences for the market.

Greek Debt Swap at 95% After Bondholders Forced to Join - Greece pushed through the biggest sovereign restructuring in history after getting private investors to forgive more than 100 billion euros ($132 billion) of debt, opening the way for a second bailout. Euro-region finance ministers agreed on a conference call that with the swap Greece had met the terms for a 130 billion- euro rescue package designed to prevent a collapse of the economy. Ministers freed up 35.5 billion euros in payments and interest for bondholders, with a decision on the balance of the bailout funds to be made at a March 12 meeting in Brussels. “It would be a big mistake to think we are out of the woods,” German Finance Minister Wolfgang Schaeuble told reporters in Berlin after the call today. “We have a chance of making it. And we have to seize that opportunity.”

Greece: Historic restructuring paves way for bailout --- Greece announced Friday that its private sector creditors will take part in a historic restructuring of the government's debt, setting the stage for the nation to secure more bailout money and skirt a messy default. Investors agreed to restructure €172 billion worth of Greek bonds, which represents 85.5% of the total €206 billion held by the private sector, said the Greek finance ministry. Another 69% of investors that own Greek bonds not issued under Greek law agreed to restructure roughly €20 billion. Greek Finance Minister Evangelos Venizelos welcomed the agreement, saying the restructuring will help Greece get out of debt and revive its ailing economy. "We can say now that instead of what usually occurred, we are today reducing the debt," Venizelos said at a press conference in Athens. "We are removing a large burden off the backs of the Greek people...something which we owe to the next generations." The high number of volunteers enabled Greece to activate so-called collective action clauses

Greek Debt Deal to Pay $3 Billion Default Swaps on ISDA Rules -- Greece's use of collective action clauses forcing investors to take part in the sovereign restructuring should trigger $3 billion of insurance payouts under rules governing credit-default swap contracts. The International Swaps & Derivatives Association's determinations committee meets at 1 p.m. in London today to decide whether the use of CACs is a restructuring credit event which will cause a payout of swaps insuring Greek debt. The Greek government said today it reached its target for participation in the restructuring, with investors in 95.7 percent of bonds taking part, after it received approval to activate CACs to force the hand of holdouts. Bondholders tendered 152 billion euros ($201 billion) or 85.8 percent, of bonds governed by Greek law after the government offered to swap their holdings for new securities, it said. "After this morning's announcement that CACs clauses will be invoked I think most people would be surprised if the answer was negative," said "I've been surprised throughout at the strong desire not to trigger CDS. This should be good for anyone seeking protection elsewhere, such as Spain or Italy."

Greece Deal Triggers $3B in Default Swaps - Greece’s use of collective action clauses forcing investors to take losses under the nation’s debt restructuring will trigger payouts on $3 billion of default insurance, the International Swaps & Derivatives Association said. A total 4,323 credit-default swap contracts can now be settled after ISDA’s determinations committee ruled the use of CACs is a restructuring credit event. Before the ruling, Greek swaps rose to a record $7.68 million in advance and $100,000 annually to insure $10 million of debt for five years. The decision was unanimous, New York-based ISDA said today in a statement distributed by Business Wire. An auction to set the size of the payouts will be held on March 19. Auctions will set a recovery value on the bonds and swaps sellers will pay buyers the difference between that and the face value of the debt.

Gross Says Bond-Contract Sanctity Is Hurt by Greece’s Debt Swap - The “sanctity” of bondholders’ contracts has been diminished by Greece’s pushing through the biggest sovereign restructuring in history, according to Bill Gross of Pacific Investment Management Co. “The rules have been changed here,” Gross, co-chief investment officer at Pimco, said. “The sanctity of their contracts is certainly lessened. Bondholders have that to look forward to going into the future.” Greece drove through its debt swap after cajoling private investors to forgive more than 100 billion euros ($132 billion) of debt, opening the way for a second rescue package. The subordination of private bondholders to government organizations such as the European Central Bank may have added as much as 1 percentage point to bond yields, Gross said. The International Swaps & Derivatives Association meets today to consider a “potential credit event” related to Greece. The association will likely consider Greece’s restructuring a default, triggering credit-default swap insurance on the debt, Gross said. Pimco is a member of the committee that decides whether the default insurance will pay out.

As First Greek CDS "Anstalt" Appears, A Question Emerges: Did Banks Not Square Off Margins? - The irony is not lost on us that Bloomberg is reporting that KA Finanz, an Austrian bad-bank supported by the Austrian government, faces as much as a €1 billion need for funding to cover its exposures to Greek CDS (coughcreditanstaltcough). In a statement this morning, which we noted in a tweet, the bank noted "activation of the CDS with an assumed loss ratio of about 80% would mean an additional provisioning charge of EUR 423.6 million". KA Finanz's total amount of Greek CDS exposure is around EUR1bn. What is shocking and should be of great concern is that we have been led to believe that very little net cash will change hands on the basis of the $3.2bn net aggregate market exposure. This was based on the now false premise that variation margin was maintained and transferred throughout the process (as we note below from recent IMF filings). What appears to have happened is that dealer to dealer variation margin has been, let's say, less rigorous as perhaps all collateral was netted up across all exposures (or simply ignored on the basis of government backstops). The far bigger question then is: are banks simply marking ALL sovereign CDS at par, and not paying off cash to other dealers? Remember it only takes one counterparty in the chain to turn net into gross and quality collateral seems tied up a little right now at the ECB (or with margin calls).

Fitch Lowers Greece's Rating to Restricted Default - Fitch Ratings joined the two other major ratings agencies in a fresh round of downgrades for Greece's sovereign-debt rating following the euro zone's confirmation that Greece's government bonds will be exchanged at a hefty loss for creditors. Fitch's rating was dropped to restricted default from C. The ratings agency had said it would likely temporarily place Greece in selective default after the debt exchange. It downgraded Greece's credit rating earlier last month to C from triple-C after officials confirmed Greece's bailout package would force bondholders to take a loss on their holdings. Fitch said the downgrade was necessary as the exchange constituted a sovereign default under the agency's distressed debt exchange rating criteria.

Greece Has Defaulted: Here Is Where We Stand - In a nutshell---okay, a coconut shell---this seems to be where we are:

  • 1) Greece was able to write off 100 billion euros worth of debt in exchange for a 130 billion rescue package of new debt, of which Greece itself will receive 19%, or about 25 billion, so that it can continue to operate as an ongoing concern. Somehow Greece is in a better position than before, with more debt and less sovereignty and still---by virtue of sharing a common currency---trying to compete toe-to-toe with the likes of Germany and the Netherlands,
  • 2) As a result of the bond haircuts, Greece has many pension plans that can no longer even pretend to be viable, at least according to the original contracted scheme, but pensionholders still working can take heart in the fact that their current wages will be cut, too.
  • 3) CDS buyers will have to sweat bullets, jump through hoops, and be forced to endure every cliche known to man, but they might end up getting something for all their trouble, provided their counterparty is solvent and that counterparty itself is not heavily exposed to an insolvent party or a NTBTF institution,
  • 4) Good luck to any less than AAA rated sovereign who wants to issue debt from now on out. That contracts can now be unilaterally abrogated, as Greece' bonds were with the retro-CACs, bodes ill for attractive pricing from here on out.

Greece - Round III, In Which We Learn That Greek Debt Actually INCREASED Post-Default | ZeroHedge: We are finally getting some answers and that is the good news, maybe the only good new really. The Greek debt tender has ended and 85.8% of the bond holders have tendered. This is the number for the Greek law bonds but please note that the participation for the English law bonds was only 70% so that I would guess that not only will the English law bondholders sue for Estoppel but they will sue for acceleration, immediate payment, as an illegal CAC was implemented. This was my lead projection for the outcome and in-line with consensus thinking. This is just the beginning, however, of a number of incidents that are about to transpire. Next there will be suits in the Swiss courts, the British courts and in the American courts concerning the retroactive “Collective Action Clause” which may not be legal in other jurisdictions besides Greece and the European Union. Never, ever forget that the EU implicitly has gone along with a retroactive clause and that if it can be done in Greece that it then can be done for any other nation in Europe and if it can be done to force bond holder participation that it can be done for any other clause in any sovereign indenture in Europe.

Greece’s CDS: more lucky than smart -- It’s official: The International Swaps and Derivatives Association, Inc. (ISDA) today announced that its EMEA Credit Derivatives Determinations Committee resolved unanimously that a Restructuring Credit Event has occurred with respect to The Hellenic Republic (Greece). The word that jumps out at me here is Restructuring. In Europe, restructuring counts as a credit event; in north America, by contrast, it doesn’t. Which means that the derivatives market was pretty lucky here. If the standard Greek CDS documentation had looked like the standard US CDS documentation, there wouldn’t have been a credit event, as ISDA spokesman Steve Kennedy confirmed to me via email: If you own CDS, and if you do not have restructuring as a credit event in your contract, it would not trigger if a CAC were invoked. You would know this going in. It is not a surprise. The issue of restructuring as a credit event has been discussed for a decade. In other words, where restructuring is not a standard credit event (such as for US corporates), protection buyers buy the CDS protection knowing that there is no restructuring clause, that the credit event triggers are failure to pay and bankruptcy (for corporates) and repudiation/moratorium (for sovereigns), and the CDS is priced accordingly.

For the next round - With the completion of this deal, the International Monetary Fund and Greece’s European partners will possess 77 percent of the country’s outstanding debt. From now on, foreign taxpayers will be asked to suffer the bulk of the loss the next time Greece confronts a financial crisis — and they are likely to be much less forgiving. There is more here. Obviously, this will make it correspondingly difficult for Greece to borrow money from the private sector too. Lending to Greece will put you at the near-back of a very long line…

Greek Economy Shrinks More Than Initially Estimated - Greece's economy contracted more than initially estimated in the fourth quarter, final data released by the Hellenic Statistical Authority showed Friday. Unadjusted gross domestic product (GDP) decreased 7.5 percent year-on-year in the fourth quarter, faster than the 7 percent decline estimated initially. GDP has been declining regularly since the first quarter of 2011, when it edged up 0.4 percent. Final consumption expenditure of households decreased 7 percent annually, while public consumption expenditure dropped 10.5 percent during the three-month period. There was a 22.2 fall in gross fixed investment, and a 7.1 percent decrease in gross value added during the quarter. The crisis-stricken Greece today successfully completed the debt swap agreement with 85.8 percent of its private bond holders voluntarily signing up to take part in the deal, clearing the way for the euro member to secure international funds to avert a disorderly default.

Unemployment Hits New Record High in Dec. at 21% - Greece's jobless rate rose to a fresh record of 21 percent in December from 20.9 percent in November, statistics service ELSTAT said on Thursday, as the debt crisis and austerity measures took their toll on the labour market.According to Reuters, budget cuts imposed by the EU and the IMF as a condition to save the debt-laden country from a chaotic default have caused a wave of corporate closures and bankruptcies. Greece΄s average annual unemployment rate for 2011 jumped to 17.3 percent from 12.5 percent in the previous year, according to ELSTAT figures.Greek unemployment figures are not adjusted for seasonal factors. The average jobless rate in the 17 countries sharing the euro rose slightly in December to a seasonally adjusted 10.6 percent, from 10.5 percent in November.

Greece Surpasses Spain With Region’s Highest Youth Jobless Rate - Greece, with more than half of young people of out of work, surpassed Spain in December in having the highest youth jobless rate in the euro area following four years of economic recession. Greece’s unemployment rate rose to 21 percent from 20.9 percent in November, the Hellenic Statistical Authority said in an e-mailed statement from Athens today. The jobless rate for those between the ages of 15 and 24 increased to 51.1 percent from 48 percent in the previous month, compared with 49.9 percent in Spain in January. Prime Minister Lucas Papademos said on March 2 that Greece needs measures to immediately boost growth and job creation as the economy buckles under austerity measures linked to the country’s bailouts. The economy shrank 7 percent in the fourth quarter from a year earlier and 6.8 percent in the whole of 2011, a fourth year of contraction. Greece’s female jobless rate increased to 25.3 percent in December from 24.5 percent in the previous month, the statistical authority said.

Greek youth unemployment hits 51.5pc- The country's youth unemployment rate, at 51.1pc, is now the worst in the eurozone. Even Spain – which has been grappling with youth joblessness at around the high-40s mark for almost a year – has not quite hit the 50pc figure, falling 0.1pc short in recent weeks. Greece's youth unemployment rate, on the other hand, has doubled in just three years. In contrast, Germany's youth jobless rate rests at a cool 7.8pc. The UK's is 22.2pc.Such a high number of under-25s without jobs in Greece does not bode well for the country's future and will have far-reaching consequences, analysts said yesterday. Mats Persson, director of Open Europe, a London-based think tank, said the jobless situation was "ugly". "Greece is just not in a sustainable position on several counts," he said. "The extreme level of youth unemployment shows that the austerity cuts are fighting off any chance the country has of recovering. It will get worse; there's no way Greece can get out of this."

In Athens, Austerity’s Ugliness - In the United States, Republicans lambaste President Obama’s stimulus package as a failure and insist on bone-crunching budget-cutting. If you want to know how well that works, come visit Europe — especially Greece. Yes, Greece needed a wake-up whack and economic reform, but Republican-style austerity knocked the patient unconscious. Contrast the still-shrinking economies of Europe with the stirrings of recovery in the United States, and you feel lucky to be an American and a beneficiary of President Obama’s stimulus. It’s stunning here in Athens to see many traffic lights not working, to see beggars pawing through garbage for food, to see blackened ruins of shops burned in rioting. I was even greeted by a homeless man who spoke impeccable British-accented English. That man, Michael A. Kambouroglou, 35, claims that he studied English literature at Cambridge University and worked for years in the tourism industry, most recently at a five-star hotel. When Kambouroglou’s savings ran out, he moved under a bridge in Athens. The suffering is widespread. Some 250,000 Greeks now receive free meals from churches or shelters, according to the Greek Orthodox Church.

EU May Seek Tougher Rules for Repos - European Union regulators may impose tougher collateral requirements on repurchase agreements on concerns that such trades might lead to unsustainable debt levels that threaten market stability. The European Commission is weighing the measure as part of proposals to rein in risky financial activities that take place outside the regular banking system, according to a document obtained by Bloomberg News. Michel Barnier, the EU’s financial services commissioner, is scheduled to publish the plans next week. Repurchase agreements, contracts where one investor agrees to sell a security and then buy it back at a future date and a fixed price, are a “central issue,” according to the document. The EU is working with global regulators to identify “regulatory gaps and inconsistency between jurisdictions,” including for collateral management. The trades, known as repos, are one of several so-called shadow banking activities being targeted by the Group of 20 nations on concerns they may be used to evade a clamp-down on excessive risk taking. The Financial Stability Board, which brings together regulators, G-20 central bankers and finance ministry officials, said last year that shadow banks may create “an opportunity for regulatory arbitrage.”

European Banks Now Face Huge Margin Calls As ECB Collateral Crumbles - In what could prove to be the most critical unintended consequence of the ECB's LTRO program, we note that as of last Friday the ECB has started to make very sizable margin calls on its credit-extensions to counterparties. While the hope was for any and every piece of lowly collateral to be lodged with the ECB in return for freshly printed money to spend on local government debt, perhaps the expectation of a truly virtuous circle of liquidity lifting all boats forever is crashing on the shores of reality. This 'Deposits Related to Margin Calls' line item on the ECB's balance sheet will likely now become the most-watched 'indicator' of stress as we note the dramatic acceleration from an average well under EUR200 million to well over EUR17 billion since the LTRO began. The rapid deterioration in collateral asset quality is extremely worrisome as it forces the banks who took the collateralized loans to come up with more 'precious' cash or assets (unwind existing profitable trades such as sovereign carry, delever further by selling assets, or subordinate more of the capital structure via pledging more assets - to cover these collateral shortfalls) or pay-down the loan in part. This could very quickly become a self-fulfilling vicious circle - especially given the leverage in both the ECB and the already-insolvent banks that took LTRO loans that now back the main Italian, Spanish, and Portuguese sovereign bond markets

Euro Crisis Fuels South Tyrolean Separatist Dreams - Many in northern Italy have long wanted to secede. Now, the euro crisis is giving the separatist movement new momentum, with the rich north unwilling to pony up for the poor south. Prime Minister Monti's efforts to exert control may be making matters worse. What is happening in Italy's northernmost and wealthiest province mirrors the larger euro crisis: The rich north doesn't want to pay for the poor south. In the 1950s and 60s, this attitude was reflected in the "Away from Rome" movement, which, until recently, was considered just as outmoded as the prejudices of Northern Europeans against Southern Europeans that have now been brought to the surface by the crisis.

The Disruptive Rise of Niche Unions in Germany - Following controversial strikes at Frankfurt Airport, a fundamental dispute over the much-cherished principle of collective bargaining in Germany has come to a head. Small unions are gaining a disproportionate amount of influence, but the coalition government in Berlin is at odds over how to limit their power.. It is Wednesday of last week, and a labor court about 13 kilometers (8 miles) away has just ruled that the union of air traffic control workers (GdF) must end its strike. Members have to go back to work -- immediately. At least for now, the ruling puts an end to a David and Goliath labor dispute. The judge came down on the side of the giant, Fraport, the company that operates the airport. The small air traffic controllers' union took a gamble and lost. The expected chaos at the international hub largely failed to materialize, a court put an end to the strike and the public was irritated.

Portugal's economy shrank 1.6 percent in 2011 -- Portugal's economy shrank 1.6 percent last year as austerity measures adopted in return for a €78 billion ($103 billion) bailout took their toll, the national statistics agency said Friday. The return to recession was slightly worse than the National Statistics Institute's previous forecast of a 1.5 percent contraction and came as the country enacted tax increases and spending cuts to meet the demands of its international creditors. Last May, Portugal became the third country in the 17-country eurozone, after Greece and Ireland, to need a financial rescue to avoid bankruptcy. Portugal's debt burden mushroomed after a decade of average growth of below 1 percent. Reform measures accompanying the austerity are designed to push the country's growth levels higher. However, the government is predicting a contraction of 3.3 percent this year, triggering fears the country will need more financial aid from its European partners and the International Monetary Fund.

Legal skull-duggery in Greece may doom Portugal - Europe has ring-fenced Greece's debt crisis for now but its escalating recourse to legal legerdemain has shattered the trust of global bond markets and may ultimately expose Portugal, Spain, and Italy to greater danger. At the start of the crisis EU leaders declared it unthinkable that any eurozone state should require debt relief, let alone default. Each pledge was breached, and the haircut imposed on banks, insurers, and pension funds ratcheted up to 75pc. Last month the European Central Bank exercised its droit du seigneur, exempting itself from loses on Greek bonds. The instant effect was to concentrate more loss on other bondholders. "This has set a major precedent," . "It does not matter how often the EU authorities repeat that Greece is a 'one-off' case, nobody in the markets believes them." The ECB holds €220bn (£185bn) of Greek, Portuguese, Irish, Spanish, and Italian bonds. Its handling of Greece implicitly subordinates private creditors in each country. All have slipped a notch down the pecking order. This might not matter too much if Greece were really a "one-off" case but markets are afraid that Portugal will tip into the same downward spiral as austerity starts to bite.

The Death of The PIIGS Illustrated - Yesterday we pointed to the fundamental reason for Europe's angst - that of dramatic imbalance across nations finances. Today we look at the implications of the growing concerns at sustainability of the Euro-area itself. Deposits are fleeing the PIIGS at ever faster rates, growth remains a dream as PMIs for most of the PIIGS trend towards (or are at) record lows, and despite all the liquidity provision of the two LTROs, credit extension to the real economy dropped once again. The Greek PSI remains front-and-center from a headline perspective but yesterday's dismal Euro macro data combined with the reality of these three factors appears to be increasingly repriced into sovereign credit spreads as CDS drag manipulated bonds wider in the last week

As The EUR Jumped In January, German Non-Eurozone Factory Orders Plunged - Something funny happened in January as the EURUSD rose from its period low in the 1.26 level: German Industrial Orders imploded as the joint currency strengthened. But not so much for domestic orders within the Eurozone, which actually increased by 0.9% in January (as a reminder, the sole reason mercantilism still works efficiently within the Eurozone is that the Bundesbank, via TARGET2 and the ECB, subsidizes the import economies of the periphery via recycled Current Account proceeds, as shown here). Where the demand collapse came from was non-Eurozone (read China and America) orders which fell a whopping 8.6% in January, after posting a 12.1% rise in December as the EUR was plumbing 2011 lows. As a result, the blended orders rate was down 2.7% on expectations of a 0.6% increase. Does it become clear now why resolving the Greek crisis is not in Germany's interest, as all that would do is send the EUR even higher, and impair German industry - the lifeblood of Europe - even more?

The growth problem - IT ISN'T too difficult to find praise for Mario Draghi these days, and, indeed, those economies whose primary exposure to Europe's troubles is via financial market jitters are quite happy that he seems (for the moment anyway) to have done a very nice job propping up European banks. Britain and central Europe may be still be sweating, but other big economies are doing much better than they were in December, thank you. Which is a shame, in a way, because more dissatisfaction with Mr Draghi might return a focus to how miserably the European Central Bank is handling the European economy as a whole. Paul Krugman provides one view of its troubles, which amount to much more of a near-Depression than America experienced: So we had a 28 percent decline in industrial production peak to trough in 1929+, versus around 18 this time. By year 5 of the original Depression, output had recovered to 86 percent of its previous peak; right now, production is 91 percent of previous peak, and falling as Europe slides back into recession.

ECB balance sheet tops €3 trillion - Another milestone has been reached in European Central Bank history. Following last week’s three-year longer-term refinancing operation, the size of the ECB’s balance sheet has exceeded €3trn for the first time (ECB, in this context, actually means “eurosystem” — the network of eurozone central banks of which the ECB is part). Its latest financial statement shows a €330.6bn increase in assets compared with last week, which was more or less the same as the increase in lending to eurozone banks. As such, the ECB has drawn further ahead of the Federal Reserve in terms of the overall size of its balance sheet (see chart below). According to the Money Supply’s calculations, the point at which the ECB overtook the Fed was around last August – when the eurozone debt crisis started to escalate. But the effects of the two three-year LTROs sent the figures soaring. No doubt, the latest figures will add to the nervousness at the Bundesbank, which has raised concerns about the risks entailed in such a dramatic balance sheet expansion – and longer term dangers of a banking system which has become dependent on central bank funds. On the liabilities side, the effects of last week’s LTRO shows up in an increase in the funds deposited in the ECB’s overnight deposit facility.

ECB fires inflation warning, trumpets success of cash flood - (Reuters) - The European Central Bank signalled its policy course was slowly turning on Thursday, delivering a surprise warning on inflation and calling governments and banks to build on its recent blitz of radical support measures to foster a full crisis recovery. The ECB kept interest rates at a record of low of 1 percent for a third month running as expected, after completing two monster injections of cheap cash which have flushed over a trillion euros of three-year money into the euro zone. Despite lowering its euro zone growth forecasts, it strengthened its rhetoric about a euro zone recovery, saying there were signs of a pick up, rather than the phrase "tentative signs" it has used since the start of the year. The central bank also raised its forecasts for inflation this year, partly because of climbing oil prices. "At least for the time being, a rate cut is clearly off the table ... they took away the easing bias," . "They sounded a bit more positive but staff projections were worse ... at least the chance of the euro zone falling off the cliff is very low right now." ECB President Mario Draghi left little doubt that unless there was a relapse in the debt crisis, the bank had now done all it planned to in terms of extraordinary measures and that governments and banks needed to take up the baton.

Draghi Defends ECB Balance Sheet Expansion - One thing we all know about Mario Draghi now: he reads the papers. The European Central Bank president used his monthly press conference to take issue with a recent Wall Street Journal article on the ECB’s balance sheet now exceeding three trillion euros after it pumped a total of one trillion euros in three-year loans into European banks. The ECB’s balance sheet equals one-third of euro-zone GDP, a bigger share than the Federal Reserve’s balance sheet, which makes up 19% of U.S. GDP, and the Bank of England’s, which is 21% of U.K. GDP, the article noted.“You conclude that the expansion in the euro area is bigger than it is in the U.S. or the U.K.,” Mr. Draghi said. Mr. Draghi’s point was that looking at the total size of the balance sheet gives an incomplete view. The ECB holds large amounts of gold and currency reserves on its books that have nothing to do with monetary policy, he said. The Fed’s balance sheet, he said, “is very, very lean” in that regard, and “the Bank of England is also the same.”Instead, Mr. Draghi said the share of assets related to monetary policy is the more relevant indicator of risk. By that measure the ECB’s balance sheet is at 15% of GDP compared to 19% for the Federal Reserve and 21% for the Bank of England, he said.

Taking a breather - FOR once it was all quiet on the central-bank front today. After presiding a week ago over its second jumbo longer-term refinancing operation (LTRO), which provided three-year funding of €530 billion ($700 billion), the European Central Bank (ECB) left monetary policy settings on hold. Likewise, the Bank of England had nothing new to announce after its meeting today. That still leaves both central banks in expansive mode. The Bank of England had already decided last month to step up its programme of quantitative easing (QE), raising its purchases of assets with newly created central-bank money from £275 billion ($435 billion) to £325 billion by early May. Today marked the third anniversary of its decision both to start QE and to cut Britain’s base rate to an all-time low of 0.5%

Why JPM Sees A "Lot More Printing" By The ECB -While the catalyst for much of the recent rally in risk assets seems to have been on the back of Europe clambering back from the edge of the abyss (and admittedly hope for better global growth and US decoupling), JPMorgan's Michael Cembalest notes that Europe remains very much an Achilles Heel going forward. With former ECB member Stark's recent comments on the already 'shocking' quality of the ECB's balance sheet, it is the outflows (or net balance of payments) from the periphery that means the ECB will simply have to keep printing. ECB funding of Spanish and Italian banks is still a relatively small part of their liabilities and should we see even a crack in the resilience of these knife-sitting nations, the retail depositors, bondholders, and non-local wholesale/retail money is unlikely to stay put (especially if there is the continued lack of growth that seems inevitable). The latest Spanish data is dreadful, as Cembalest notes, but the economic situation in France remains weak and while JPM's analysis looks for a gradual closure of the periphery's current account deficit by 2015, the ECB's need to finance the gap in the interim raises a critical question. Since the ECB's printing has boosted the US stock market primarily, will the Fed now take the lead and return the favor (QE3 or more) to help its European partners grow their (net trade) way out of this hole?

Spain's Regions commit to new 2012 deficit target -- Spain's regions committed to meeting new budget-cutting targets set by the Spanish government, government officials said Tuesday. The agreement represents a crucial step forward for Prime Minister Mariano Rajoy's plans to slash one of Europe's largest budget gaps. Two months after coming to power at the end of December, the conservative leader last week announced his government will prepare a 2012 budget that aims to reduce its deficit to 5.8% of gross domestic product, far in excess of the 4.4% target his predecessor, Jose Luis Rodriguez Zapatero, had committed to with the European Union. Under Rajoy's plan, the central government in Madrid will be allowed to run a deficit of 4% of GDP in 2012, up from 3.2% earlier, and regional governments will be allowed a new target of 1.5%, up from 1.3%.

Alarm sounds over Spain's rising public debt (FT) In the years of economic crisis since the collapse of Lehman Brothers in 2008, Spanish leaders have always been able to boast to nervous investors that Spain’s public debt burden – however bad its annual budget deficits – is smaller than Germany’s and well below the European Union average. Economists, business executives and even government officials, however, have started to sound the alarm about the rapid and unsustainable growth of the country’s public debt. The original boast remains officially true, despite scepticism about “peripheral” European economies after the Greek bailouts. The latest statistics from September 2011 show total Spanish public sector debt standing at €706bn, as measured by the EU’s deficit-control rules – a manageable 66 per cent of the country’s €1.07trn gross domestic product. But the total debt is already much higher than the number calculated according to the EU’s definitions. Moreover, it is growing quickly with each successive annual deficit. This year will see a further €60bn added to the total, or 6 per cent of GDP, and it could be greatly swollen in future by contingent liabilities for everything from bank bailouts to guarantees for lossmaking toll road contracts managed by the private sector.

Finally, Spain - Krugman - I’ve always viewed Spain, not Greece, as the quintessential euro crisis country. With Rajoy’s government balking — rightly — at further austerity, the focus is now where it arguably should have been all along. And with Spain now front and center, the essential wrongness of the whole European policy focus becomes totally apparent. Spain did not get into this crisis by being fiscally irresponsible; here’s a little comparison: And while we say now that the surplus before the crisis was swollen by the bubble, Martin Wolf points out that in real time the IMF judged that surplus structural. The question is what to do now. Clearly, Spain needs to become more competitive; maybe the labor market reforms it’s trying will do the trick, though I tend to be skeptical; otherwise it’s about gradual relative deflation — or euro exit and devaluation. What’s clear is that even more austerity does nothing to help; all it does it reinforce the downward spiral, and bring the possibility of real catastrophe nearer.

Schools Without Toilet Paper? The Pain in Spain Falls Mainly on the Plain Folks - If you read the mainstream media reporting, you will learn that the European Central Bank (ECB) has “eased pressure” and “given breathing room” to the banks and financial markets, including the markets for sovereign debt. Translation: the ECB gave them a sweetheart deal that allowed them to borrow more than €1 trillion for three years at just 1 percent interest. The banks got bailed out and will continue their irresponsible and in some cases criminal activity unchecked. Hooray! Meanwhile, the full brunt of the crisis falls on the ordinary citizens of vulnerable countries like Spain, which has now emerged as the most worrisome of the so-called PIIGS countries (Portugal, Ireland, Italy Greece, Spain). For them, the present is grim and the future is dark. For those already enduring hardships, life has become a nightmare. Austerity measures, also known a “fiscal discipline” may have saved the euro and the banks. But they have not solved the underlying economic problems, because European elites are acting from two misguided notions. They refuse to recognize that Spain’s fiscal difficulties are a consequence of the economic crisis, not the cause. There’s a big difference, but this false narrative works to the advantage of the 1%, who would like to see the population in dire straits so that the plundering of the commons and shredding of labor protections and the social safety net can proceed unimpeded.

Minimum wage to be frozen for 20-year-olds - The national minimum wage for workers aged 20 and under is set to be frozen at less than £5 an hour in an attempt to create more jobs for them, the Government will announce soon.Vince Cable, the Business Secretary, has been persuaded that raising the legal minimum wage for those aged 18 to 20 from the current £4.98 could deter employers from taking people on. The moves comes as Mr Cable accused Britain's banks of "imperilling" the country's economic recovery. Employers' groups and Conservative MPs have lobbied for a freeze to the minimum wage after the number of jobless 16-24-year-olds passed the one million mark. But the decision, to be announced around the time of the Budget on 21 March, will be attacked by trade unions. The rate for those aged 16 and 17 is likely to remain at £3.68 an hour.

Libor Links Deleted as U.K. Bank Group Backs Away From Rate - Twenty-six years after helping to design the London interbank offered rate, Britain’s bank lobbyists are distancing themselves from their creation amid regulatory investigations and lawsuits. The British Bankers’ Association, the century-old lobby group that oversees the rate, last week deleted references from its website referring to its role in setting Libor. This week, it met regulators and bank executives to review the future of the benchmark. Under one option, the Bank of England’s proposed Prudential Regulation Authority would take responsibility for policing the rate, said a person with knowledge of the talks who asked to remain anonymous because discussions are private. The BBA says it isn’t seeking to cede oversight to the regulator. Libor, the basis for $360 trillion of securities worldwide, has transformed from a talisman of London’s influence in financial markets to an albatross for the industry. Regulators worldwide are investigating whether banks routinely lied about their true borrowing costs to avoid the perception they faced difficulty raising funds and traders rigged submissions to benefit their own wagers on derivatives linked to the rate. The probes have called into question whether banks can be trusted to set Libor with only minimal regulatory oversight.

QE blamed for surge in pensions shortfall - Corporate pension shortfalls have increased by an additional £90bn since the Bank of England resumed gilt purchases last October in an effort to drive down interest rates, according to an employers’ body. The National Association of Pension Funds said the impact of the Bank’s quantitative easing policy, aimed at kick-starting the economy, had been worse than expected since it was launched in March 2009. “Businesses running final salary pensions are being clouted by [QE],” Joanne Segars, NAPF chief executive, said in a statement marking the policy’s third anniversary. “Deficits that were already big now look even bigger because of [QE’s] artificial distortions.” According to the Pension Regulator, the national shortfall for corporate schemes stood at $470.7bn as of March 31, 2011. The NAPF’s salvo comes amid a rising chorus of criticism about how low interest rates are taking their toll on savers and retirees, whose annual incomes are closely linked to benchmark lending rates. While acknowledging that QE can have a detrimental effect on pensions, Steve Webb, pensions minister, has argued that gilts purchases are for “the greater good”.

Quantitative Easing and Savers - Quantitative easing aims to stimulate the economy and reduce gilt yields. A consequence of this is that lower bond yields lead to lower income for savers. This particularly affects pensioners who rely on income from savings to provide for their retirement. Since QE was implemented in March 2009, the income paid by pension annuities has fallen by a quarter (FT). The decision to pursue quantitative easing has also been criticised for effectively redistributing income from savers to borrowers.Another way savers could be harmed by quantitative easing is through fueling long-term inflation which further erodes the value of savings and wealth. At the moment, there is no signs of QE induced inflation, despite asset purchases of over £325bn, the headline rate is currently falling. It remains to be seen if the Bank can reverse effects of QE without causing inflation. But, with no signs of the economy taking off, it makes sense to concentrate on the task in hand (economic recovery) rather than worrying about a potential future economic problem.

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