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

Saturday, April 14, 2012

week ending Apr 14

Fed's Balance Sheet Expands Slightly In Week-- The Fed's asset holdings in the week ended April 11 were $2.870 trillion, compared with $2.868 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities rose to $1.681 trillion, up from $1.669 trillion a week earlier. The central bank's holdings of mortgage-backed securities held steady at $836.79 billion.  Fed officials in September said they would adjust the central bank's securities portfolio to hold more long-term government debt and mortgage bonds, a move intended to spur spending and investment by making borrowing cheaper.Thursday's report showed total borrowing from the Fed's discount lending window was $7.02 billion on Wednesday, compared with $7.07 billion a week earlier. Commercial banks borrowed $10 million from the discount window, compared with $12 million in the previous week. U.S. government securities held in custody on behalf of foreign official accounts totaled $3.486 trillion, down from $ 3.490 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts stayed steady from the previous week at $2.757 trillion. Holdings of federal agency securities fell to $728.93 billion, compared with $732.67 billion the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances -- April 12, 2012

Fed’s easy policy appropriate right now: Yellen -(Reuters) - The Federal Reserve's ultra-easy monetary policy is appropriate given high unemployment and the headwinds facing the economy, the No. 2 official of the U.S. central bank said on Wednesday, as she left the door open to further action if needed. Janet Yellen, the Fed's influential vice chair, said that, hypothetically speaking, the central bank has a variety of options were it to engage in further asset purchases, and that the Fed remains "quite willing" to take whatever actions are necessary to achieve its mandate of promoting employment and keeping inflation in check. Yellen said the economic outlook is particularly uncertain, as she highlighted concerns about unemployment. Still, overall, Yellen said she expects the economic recovery to continue and to strengthen somewhat over time. She defended the central bank's expectation that it will keep benchmark interest rates near zero through at least late 2014, but said guidance could shift in either direction depending on the economy's performance. "I consider a highly accommodative policy stance to be appropriate in present circumstances. But considerable uncertainty surrounds the outlook, and I remain prepared to adjust my policy views in response to incoming information," Yellen said

Fed's Yellen: Discusses "keeping the funds rate close to zero until late 2015"  -Fed Vice Chair Janet Yellen argues that the Fed is falling "far short" of the "maximum employment objective", and that inflation will be "at or below the FOMC's longer-run goal of 2 percent". She discusses reasons for considering keeping the Fed funds rate close to zero "until late 2015" as opposed to the current 2014. On QE3, she discussed additional stimulus "if the recovery faltered or inflation drifted down", but then added "doing so involves costs and risks." From Fed Vice Chair Janet Yellen: The Economic Outlook and Monetary Policy. Excerpt:  I see no good reason to doubt that our nation's high unemployment rate indicates a substantial degree of slack in the labor market. Moreover, while I recognize the significant uncertainty surrounding such forecasts, I anticipate that growth in real gross domestic product (GDP) will be sufficient to lower unemployment only gradually from this point forward, in part because substantial headwinds continue to restrain the recovery.  One headwind comes from the housing sector, which has typically been a driver of business cycle recoveries. We A second headwind comes from fiscal policy. State and local governments continue to face extremely tight budget situations in light of the weak economy, depressed home prices, and the phasing out of federal stimulus grants,  A third factor weighing on the outlook is the sluggish pace of economic growth abroad. For these reasons, I anticipate that the U.S. economy will continue to recover only gradually and that labor market slack will remain substantial for a number of years to come.

The Economic Outlook and Monetary Policy - Fed Vice-chair Janet Yellen (speech transcript)

Fed ‘Hawk’ Wants Rate Hike This Year or Next - The U.S. unemployment rate will continue to improve over the next two years, opening the door for policy makers to begin raising interest rates by as early as late 2012, the head of the Minneapolis Federal Reserve Bank said Tuesday. While the Fed’s stimulus has prevented the U.S. economy from suffering a deeper drop in production and employment, the economy’s rebound has gathered enough strength to begin preparing for the complicated process of tightening monetary policy, Minneapolis Fed President Narayana Kocherlakota said. The central banker – among the Fed’s more outspoken anti-inflation hawks — has gone against the mainstream at the Fed before and was a persistent critic of the central bank’s decision last year to provide additional stimulus to the economy. He dissented on the Fed’s decision to exchange $400 billion of its short-term Treasury securities for longer-dated ones, in a move dubbed “Operation Twist.”“My own belief is that we will need to initiate our somewhat lengthy exit strategy sometime in the next six to nine months or so, and that conditions will warrant raising rates sometime in 2013 or, possibly, late 2012,” he is expected to say Tuesday in a speech to the Southern Minnesota Initiative Foundation. “The outlook is better than a year ago–and so we should have less accommodation in place.”

Monetary Policy: More or Less? - Narayana Kocherlakota recently says (and Jason Rave is not happy): I would say that it would be appropriate to change the Fed’s current forward guidance to the public about the future course of interest rates.  My own belief is that we will need to initiate our somewhat lengthy exit strategy sometime in the next six to nine months or so, and that conditions will warrant raising rates sometime in 2013 or, possibly, late 2012. But I hope that John Williams, and others with similar views, carry the day: We are far below maximum employment and are likely to remain there for some time. The housing bust and financial crisis set in motion an extraordinarily harsh recession, which has held down consumer, businesses, and government spending. By contrast, inflation is contained and may even fall next year below our 2% target. Under these circumstances, it’s essential that we keep strong monetary stimulus in place. The recovery has been sluggish nationwide... High unemployment, restrained demand, and idle production capacity are national in scope. These are just the sorts of problems monetary policy can address. ... The hawks will keep pushing to tighten sooner rather than later, so let's hope those who want to do more, or at least not do less, can at least produce the gridlock needed to keep current policy in palce.

Fed’s Lockhart: No Policy Options Off the Table -  The weaker turn of March hiring data released last week doesn’t mean the recovery is coming off the rails, but even so, the Federal Reserve shouldn’t take any stimulus policy options off the table, a U.S. central bank official said Wednesday. “It is way too early to conclude that the economy is sputtering and the employment progress we’ve made is sputtering out,” even though it’s clear that the slower pace of job gains seen last month was “disappointing,” Federal Reserve Bank of Atlanta President Dennis Lockhart said.

Fed’s Bullard Sees Jobless Rate at 7.8% by Year-End - The Federal Reserve needs to wait and see more economic reports before deciding whether more easing or potential monetary policy tightening is needed, St. Louis Federal Reserve President James Bullard said during an interview with Bloomberg Radio. Bullard, who said he sees the unemployment rate at 7.8% by the end of the year, noted that March’s monthly employment report was just one “mediocre” report and not an immediate concern that would push the central bank toward further easing.

Janet Yellen: Fed Policy Has Been Too Tight Since 2009 - Vice Chair of the Fed Janet Yellen looks at a number of monetary policy rules and concludes that U.S. monetary policy has been too tight (my bold): [R]esource utilization rates have been so low since late 2008 that a variety of simple rules have been calling for a federal funds rate substantially below zero, which of course is not possible. Consequently, the actual setting of the target funds rate has been persistently tighter than such rules would have recommended. The FOMC's unconventional policy actions--including our large-scale asset purchase programs--have surely helped fill this "policy gap" but, in my judgment, have not entirely compensated for the zero-bound constraint on conventional policy. In effect, there has been a significant shortfall in the overall amount of monetary policy stimulus since early 2009 relative to the prescriptions of the simple rules that I've described. Finally, a prominent Fed official acknowledges what Market Monetarists have been saying for some time: over the past 3 years the Fed has failed to adequately ease monetary policy and thus has passively tightened.  Fed chairman Ben Bernanke acknowledges this possibility, but for obvious reasons is less willing to admit that the Fed is guilty of it.  What Yellen and Bernanke both need to embrace is a NGDP level target.  This approach would allow the Fed to make up the cumulative shortfall created by the Fed's passive tightening while at the same time keeping long-term inflation expectations anchored.  What more could a Fed governor want?

Fed Watch: Maddening Monetary Policy Making - Ryan Avent directs us to David Beckwork and the following excerpt from Federal Reserve Governor Janet Yellen's recent speech:Importantly, resource utilization rates have been so low since late 2008 that a variety of simple rules have been calling for a federal funds rate substantially below zero, which of course is not possible. Consequently, the actual setting of the target funds rate has been persistently tighter than such rules would have recommended.  In effect, there has been a significant shortfall in the overall amount of monetary policy stimulus since early 2009 relative to the prescriptions of the simple rules that I've described . The "in my judgement" clause is important. Not only do the simply rules say more easing is needed, but she agrees with that position. Beckworth sees hope in this paragraph:Finally, a prominent Fed official acknowledges what Market Monetarists have been saying for some time: over the past 3 years the Fed has failed to adequately ease monetary policy and thus has passively tightened. Avent sees another opportunity to urge for additional stimulus:One wants to scream, try overshooting for once. Try overshooting for once! Try it! Try pushing inflation up above 2% for a while and see if you can't generate enough growth to soak up some slack in the economy,  Try it! There is no way that a year of 3% inflation is bad enough to justify this pitiful hiccuping recovery. Try overshooting!  I find myself just plain frustrated, especially if you read further.

Kocherlakota gives us reason to worry... about the Fed - I’ve expressed dismay in the past about how intelligent economists seemingly confuse demand and supply, their different effects and thus prescribe supply side measures to demand side problems. Commenting on such issues may appear to be a common theme of this bog, but the underlying confusion of these basic issues is a serious and often unrelenting problem which needs to be addressed if we have any hope of undertaking relevant economic policies. After all, we can debate about the structure of DSGE models or New Keynesian theory, and we can discuss the adequacy of assumptions and macroeconomic forecasting, but what would be the point if we don’t fully understand the most basic micro concept of demand and supply? The latest reincarnation of this misunderstanding comes from Narayana Kocherlakota, and is probably one of the more worrying manifestations of the problem since Mr Kocherlakota is the president of the Minneapolis Federal Reserve. I should say that in the following discussion  I will refer to what Robin Harding’s post quotes Mr Kocherlakota as saying in his recent speech, since I’ve not had the time to read either his speech or his recent paper.

Parsing a Fed Official's Speech - A person is driving 60 miles an hour, three hours from home. A passenger starts shouting, “Slow down! You’re going to miss the house!” The driver responds, “I’ll slow down when we get close.” That was the message the vice chairwoman of the Federal Reserve, Janet L. Yellen, delivered in a Wednesday night speech that should be required reading for anyone trying to parse the Fed’s plans. Rephrased in the language of central banking: Recent signs of stronger growth have not affected the Fed’s intention to hold interest rates near zero through late 2014, at least, because it will still take a long time to recover from the financial crisis. Indeed, as I wrote in my article about the speech, Ms. Yellen said the hole is so deep that the Fed may need to continue its stimulus campaign beyond the end of 2014. Why is this important? The Fed appears to be concerned that every sign of increased growth is being treated as evidence that it’s time for policy makers to retreat from their efforts to increase growth. The message of Ms. Yellen’s speech is that the pace of growth could accelerate well beyond the Fed’s expectations, and it would still make sense for the Fed to maintain its current policies for the next several years.

References to Policy Rules in a Speech by the Fed Vice Chair - John Taylor - In a speech to the Money Marketeers in New York City this past week, Fed Vice Chair Janet Yellen gave a useful description of how she and other policy makers are thinking analytically about monetary policy. The speech referred extensively to monetary policy rules, and I hope it generates more discussion of policy rules and strategies both within and outside the Fed. I have argued the the Fed has moved too far in a discretionary direction, and if it is going to move back to a rules-based policy, this is the kind of discussion that has to take place. At this point I would only comment on two issues, both related to references to the Taylor rule in the speech.

Lollipops and Tantrums; Is the Fed Promoting Recovery or Desperation? QE "Appears" to Works Until It Obvious it Never Did - The Fed is much like a rotten mother who throws her spoiled brat a lollipop as a reward for a temper tantrum says John Hussman in yet another excellent missive: Is the Fed Promoting Recovery or Desperation?: On Friday, the Department of Labor reported that March non-farm payrolls increased by 120,000, falling well short of consensus expectations in excess of 200,000. For our part, we continue to expect a deterioration in observable economic variables, with weakness that emerges gradually and then accelerates toward mid-year. On the payroll front, our present expectation is that April job creation will deteriorate toward zero or negative levels. Immediately after the payroll number was released, CNBC shot out a news story titled "Disappointing Jobs Report Revives Talk of Fed Easing." Of course it does, because this remains a market dependent on sugar. And with little doubt the Fed will eventually deliver it - perhaps following a market plunge of 25% or more - but with little doubt nonetheless, because like the indulgent parent of a spoiled toddler, the FOMC can't stand to see Wall Street throw a tantrum without reaching for a lollipop.

Why Ben Bernanke Is Like A Bartender At An Alcoholics Anonymous Meeting -  In an interview on Consuelo Mack Wealthtrack (which we took notes on here), Paul McCulley likened Ben Bernanke to a "bartender at an Alcoholics Anonymous meeting." Now at first blush, this statement might sound highly critical and moralistic, like saying that Bernanke is feeding the worst habits of the economy, when in reality the economy needs to be cut off from cheap leverage and go cold turkey. And since elsewhere in his interview, McCulley slammed moralistic interpretations of macro-economics, this seems odd. But here's the full line from McCulley: "Suddenly the Federal Reserve is the bartender at an AA Meeting: You Keep cutting the price, but nobody's drinking!" So he actually wasn't making a judgment, but rather just describing the reality of an economy that's in deleveraging (or as put it, in a liquidity trap). When people want to have less debt, no amount of rate cutting will want them to take on more. When people are quitting alcohol, lowering the price doesn't matter (or at least, it's not the price that will make them change their mind.). Unlike in past recessions, where households were sensitive to changes in the price of credit, in this economy they're not, and Bernanke's actions do very little. So according to McCulley (who sounds very Richard Koo-like, when talking about all this) the answer is: Fiscal, fiscal, and more fiscal stimulus. Let the government lever up, so that the private sector can finishing levering down without an economic collapse.

Is There Really An Aggregate Demand Problem? - Probably the most important debate on U.S. monetary policy is whether there really is an aggregate demand shortfall and, as a result, a negative output gap.  If the answer is yes, then the Fed should be doing more. If no, then monetary policy should show restraint.  Some Fed officials like St. Louis Fed President James Bullard and Minneapolis Fed President Narayana Kocherlakota believe there is no significant aggregate demand or domestic output gap problem and thus want to tighten monetary policy soon.    And then there are the Market Monetarists and other like-minded commentators in the blogosphere who think there is a significant aggregate demand problems since the Fed has been effectively tight since mid-2008.  Who is right? The answer has always been clear to me. But for those still unsure let me direct you to some evidence that makes a very convincing case that there has been and continues to be an serious aggregate demand shortfall.  The evidence comes from the NFIB's survey of Small Business Economic Trends.  This survey, among other things, provides a question to the small firms of this nation that is relevant to this debate: "What is the single most important problem facing your firm?"  There are nine answers firms can choose, but below I focus on just four of them and their recent trends: The first thing to note from this figure is that  concerns about sales or demand became the most important problem.  It alone explodes in 2008.  

Banks look to cherry-pick Fed portfolio - Wall Street banks and investors are looking to cherry-pick $7.5bn of mortgage-related securities from the Federal Reserve Bank of New York’s sale of the assets used in the most controversial bailout of the financial crisis. The collateralised debt obligations are part of Maiden Lane III, a debt portfolio that the New York Fed acquired through the bailout of American International Group in 2008 and put up for possible sale last week. Large Wall Street banks are preparing bids for parts of the portfolio, which comprises about $47bn in face value of securities. The New York Fed declined to comment on the sale process, but market participants are focusing on two CDOs arranged by Deutsche Bank. At $7.5bn in face value, the so-called “Max 2007-1” and “Max 2008-1” deals are the largest CDOs in Maiden Lane III.  The New York Fed is considering selling the Maiden Lane III portfolio after it auctioned the remaining assets in Maiden Lane II, another portfolio related to AIG’s bailout, this year, logging a $2.8bn profit. Maiden Lane II housed bonds backed by subprime US home loans, securities that have been in demand in recent months for their relatively high yields. By contrast, Maiden Lane III comprises mostly illiquid CDOs which will entail a longer and more complicated sale process.

Bernanke: "Some Reflections on the Crisis and the Policy Response" - From Fed Chairman Ben Bernanke: "Some Reflections on the Crisis and the Policy Response" On the originate-to-distribute model:  Private-sector risk management also failed to keep up with financial innovation in many cases. An important example is the extension of the traditional originate-to-distribute business model to encompass increasingly complex securitized credit products, with wholesale market funding playing a key role. In general, the originate-to-distribute model breaks down the process of credit extension into components or stages--from origination to financing and to the postfinancing monitoring of the borrower's ability to repay--in a manner reminiscent of how manufacturers distribute the stages of production across firms and locations. This general approach has been used in various forms for many years and can produce significant benefits, including lower credit costs and increased access of consumers and small and medium-sized businesses to capital markets. However, the expanded use of this model to finance subprime mortgages through securitization was mismanaged at several points, including the initial underwriting, which deteriorated markedly, in part because of incentive schemes that effectively rewarded originators for the quantity rather than the quality of the mortgages extended.

The Federal Reserve's Abject Policy Failure - PIMCO CEO Mohamed A. El-Erian gave a speech at the St Louis Fed in which he argued that the Federal Reserve and the ECB were trying to solve the world's problems alone, but they can't and need help from others. What I take as his key points: While central banks can -- and have -- stabilized things, there is little they can do on their own to engineer the fundamental realignments that must accommodate seven specific dynamics in advanced economies (something that we will come back to later in discussing the way forward):

  • Accommodating the "safe" debt de-leveraging of the private sector by enabling high sustained growth
  • Safely de-risking the financial sector
  • Clearing or replacing clogged credit pipes
  • Achieving a sustainable trajectory for public finances
  • Improving the functioning of the labor market
  • Compensating for inadequate past investments in human resources, productive capacity and infrastructure
  • Adjusting to the ongoing developmental breakout phase in several systemically important emerging countries (including Brazil, China, India, and Indonesia).

To be effective, central banks in advanced economies needed -- and need -- help from other policymaking entities to deal with the twin unfortunate realities of too much debt and too little growth. They must be assisted with the engagement of the healthy balance sheets around the world, and fortunately there are quite a few of them in both the public and private sectors. And this must be done in an internationally coordinated fashion in order to accommodate the new global realities.

The Era Of Independent Central Banks Is Over - Federal debt has expanded by $9.5 trillion - from $5.7 trillion in 2000 to $15.2 trillion at the end of last year and, as Neal Soss of Credit Suisse notes, is still growing over $1 trillion a year (or $5 billion per day). The state of fiscal sustainability, as explained in this compendium of slides, is perilous, but as Soss notes - interest expense did not go up because interest rates fell faster than debt went up. Looking ahead, he notes that political choice theory suggests that taxes can go up, but not a lot (even as the change-maker-in-chief presents his case) and at the same time an unprecedented aging (demographic) shock limits the ability to control expenditures. None of this is news to readers but the financial implication is critical: interest rates must be kept as low as possible to avoid explosive debt dynamics. As Soss concludes therefore, and something we have been clear about for a long time, the era of independent central banks is closing as those institutions revert to their foundational role as fiscal agents of the state.

Inflation Targeting and Financial Stability - A number of commentators have argued that the desirability of inflation targeting as a framework for monetary policy analysis should be reconsidered in light of the global financial crisis, on the ground that it requires neglect of the implications of monetary policy for financial stability. This paper argues that monetary policy may indeed affect the severity of risks to financial stability, but that it is possible to generalize an inflation targeting framework to take account of financial stability concerns alongside traditional stabilization objectives. The resulting framework can still be viewed as a form of flexible inflation targeting; in particular, the paper proposes a target criterion that would still imply an invariant long-run price level, despite fluctuations over time in risks to financial stability or even the occurrence of occasional financial crises.

Rational Inflation Expectations Cannot Become Unmoored - This is a point I have been meaning to make for a while and Mark Thoma’s post this morning spurs me on. He writes My view is that the costs of doing too much — the inflation cost — is much lower than the costs of doing too little, i.e. the costs of higher than necessary unemployment (though see David Altig). I’m aware that we differ on this point, those in favor of relatively immediate interest rate increases see the costs of inflation as very high and it’s this point that I hope will generate further discussion. In reality, how high are the costs of a temporary bout of inflation — I have faith that the Fed won’t allow an increase in inflation to become a permanent problem — and are they so high that they justify erring on the side of doing too little rather than too much? I don’t think they are, but am willing to listen to other views. My understanding is that the principle fear regarding inflation is that if a sustained period of high inflation were allowed expectations would become unmoored and the Fed would lose it hard won credibility.The problem with this view is that it flies in the face of the notion that inflation expectations are rational.  A rational agent incorporates knowledge not only of Fed behavior but of the informational and operational constraints facing the Fed. And, we must remember that rational agents are not “cynical agents.”

Monetary Mandate Mischief - Paul Krugman - One of the remarkable things about the ongoing economic crisis is the way so many people have responded to events by adopting doctrines that would magnify our problems. The woes of Spain and Ireland demonstrate that balanced budgets and low debt in good times offer no protection against crisis, so European leaders make tougher fiscal rules the core of their agenda. The broader euro crisis demonstrates the downside of fixed exchange rates and inflexible monetary policy, so the right doubles down on the gold standard. The financial meltdown demonstrates the need for effective bank regulation; the right demands even less government intervention. And now, reading Luigi Zingales, I see a new one: just as experience is demonstrating that price stability is not enough, that central banks really need broader targets, there’s a push on to declare that the Fed should do price stability only. Why is this precisely the wrong time for such a push? Because the evidence is in: downward nominal rigidity is very much a reality. I wrote about this recently, pointing to new work from the San Francisco Fed. This work shows a large clustering of wage changes at precisely zero:

Producer Price Index: Headline is Tame but Core Inflation Jumps - Today's release of the Producer Price Index (PPI) for March shows a jump in core inflation. The seasonally adjusted finished goods number was up unchanged month-over-month and a moderate 2.8% year-over-year, down from last month's adjusted 0.4% MoM and 3.4% YoY. Core PPI (ex food and energy) rose 0.3% MoM, up from last month's adjusted 0.2%. The YoY 2.9% was unchanged from last month. Briefing The March numbers show a fractional crossover of the YoY rates for Headline and Core, something that last occurred in late 2008. Here is a snippet from the news release: Finished core: The index for finished goods less foods and energy moved up 0.3 percent in March, the fifth consecutive increase. Over one-third of the March advance can be attributed to prices for light motor trucks, which rose 0.7 percent. Increases in the indexes for passenger cars and for soaps and other detergents also contributed to higher finished core prices. (See table 2.)  Finished foods: Prices for finished consumer foods moved up 0.2 percent in March, the first increase since November 2011. Leading the March advance, the index for fresh and dry vegetables jumped 12.8 percent. Higher prices for pork also contributed to the rise in the finished foods index.    More... Now let's visualize the numbers with an overlay of the Headline and Core (ex food and energy) PPI for finished goods since 2000, seasonally adjusted. As we can see, Core PPI declined significantly during 2009 and increased modestly in 2010. The rate of increase moved higher in 2011.

Key Measures of Inflation in March - Earlier today the BLS reportedThe Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in March on a seasonally adjusted basis ... The index for all items less food and energy rose 0.2 percent in March The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning: According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.2% annualized rate) in March. The 16% trimmed-mean Consumer Price Index increased 0.2% (2.7% annualized rate) during the month.  ...Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers increased 0.3% (3.5% annualized rate) in March. The CPI less food and energy increased 0.2% (2.8% annualized rate) on a seasonally adjusted basis.Note: The Cleveland Fed has the median CPI details for March here.This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.4%, the trimmed-mean CPI rose 2.4%, and core CPI rose 2.3%. Core PCE is for February and increased 1.9% year-over-year. These measures show inflation on a year-over-year basis is mostly still above the Fed's 2% target.

Two Measures of Inflation: New Update - The BLS's Consumer Price Index for March, released today, shows core inflation above the Federal Reserve's 2% target at 2.26%. Core PCE, at the end of last month, is fractionally below the target at 1.90%. The Fed, of course, is on record as using Core PCE as its inflation gauge: The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances. [Source] The October 2010 core CPI of 0.61% was the lowest ever recorded, and two months later the core PCE of 0.93% was an all-time low. However, we have seen a significant divergence between the headline and core numbers for both indicators, especially the CPI, at least until a few months ago, when energy prices began moderating. The latest headline CPI and PCE are both off their respective interim highs set in September.

Sticky Wages and Inflationary Grease - Too much inflation, especially volatile rates of inflation, does operate like sand in the gears of an economy, by making it unclear how much prices throughout an economy are rising or falling in real terms.  But when an economy is trying to climb out of a recessionary episode caused by a wave of overindebtedness, and is suffering sustained high unemployment at the same time, a bit of inflation can grease the transition.  When it comes to overindebtedness, a bit of inflation means that past debts can be repaid in inflated dollars. For the millions of homeowners struggling with mortgages that are worth more than the value of their property, as well as others with high debts, a bit of inflation is a breath of fresh air. In the case of wages, standard price theory suggests that when unemployment is high and a large quantity of labor is available, wages should fall--for the same reason that at when the quantity of apples at an autumn farmers' market is high, the price of apples be lower than at other times. But employers are reluctant to cut wages. It decreases morale of existing workers, and encourages the more high-productivity workers--who have better outside options--to look for  other jobs. In contrast, apples don't get sulky and inefficient when the price of apples declines.

Latest Inflation Data Show Little Sign that Gasoline Prices are Derailing the Recovery - Recently many commentators have worried that rising gasoline prices will derail the fragile recovery of the U.S. economy. The latest inflation report from the Bureau of Labor Statistics shows little sign that any such thing is happening yet. The headline all-items CPI for urban consumers rose at a 3.54 percent annual rate in March, down from 5.03 percent in February. (I base these rates on the unrounded CPI data supplied by the Cleveland Fed and state monthly data as annual rates.) There are two parts to the concern that gasoline prices could harm the recovery. One is direct: Higher gasoline prices leave less money in consumer pockets for spending on other goods and services.  That was a definite concern in February, when the monthly increase in gasoline prices was a full 6 percent. The monthly rate slowed to 1.7 percent in March, still substantial but a little less alarming. The other potential effect of higher gasoline prices is indirect: If higher gasoline prices start feeding through to cause inflation in other CPI components, then the Fed might feel a need to tighten monetary policy. That would pose a much more significant threat to the recovery. Gasoline price could feed through to the broader CPI in one of two ways. First, gasoline itself is a cost for many firms, from delivery services to construction. Second, gasoline is an important component of the cost of living. In a tight labor market, a rising cost of living leads to higher wage demands, pushing up prices across the board. With as much slack as there still is in the U.S. labor market, that is less likely to happen.

Beige Book broadly optimistic --- The U.S. Federal Reserve said Wednesday that the economy expanded in each of its 12 districts from mid-February through March. "The economy continued to expand at a modest to moderate pace," the central bank said in its latest national survey published eight times a year and referred to as the Beige Book report. The Fed said manufacturing expanded "in most districts," with many businesses predicting growth but wary of rising petroleum prices. Consumer spending, a major portion of the nation's gross domestic product, "was encouraging," the Fed said. Even tourism "increased in most reporting districts," the Fed said. The central bank, sensitive to sounding overly optimistic about jobs, said, "hiring was steady or showed a modest increase," and noted "difficulty in finding qualified workers, especially for high-skilled positions." Manufacturers in the districts of Cleveland and Dallas "have become more cautious" about expectations in the near-term, and businesses in Boston and Cleveland districts "expressed concern about the European economy."

Fed's Beige Book: Economic activity increased at "modest to moderate" pace, Residential real estate "activity improved" -- Fed's Beige BookReports from the twelve Federal Reserve Districts indicated that the economy continued to expand at a modest to moderate pace from mid-February through late March. Activity in the Boston, Atlanta, Chicago, Dallas, and San Francisco Districts grew at a moderate pace, while Cleveland and St. Louis cited modest growth. New York reported that economic growth picked up somewhat. Philadelphia and Richmond cited improving business conditions. The economy in Minneapolis grew at a solid pace and Kansas City's economy expanded at a faster pace.  And on real estateResidential real estate activity improved in most Districts, though Cleveland and San Francisco noted that activity remained lackluster or at low levels. The St. Louis and Minneapolis Districts reported increases in building permits. The construction of multi-family housing units, including apartments and senior housing, expanded in many Districts. Home prices continued to decline in Boston, New York, and Minneapolis, but were largely flat in San Francisco. Contacts in Boston, Philadelphia, and Kansas City indicated that mild weather had boosted real estate activity.  Non-residential construction activity improved in the Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis Districts, though many of these contacts characterized the improvement as slow.

Thoughts about the Outlook - Minneapolis Fed President Narayana Kocherlakota (speech transcript)

Current economic conditions - Friday's jobs report was unquestionably a disappointment. But other recent U.S. economic indicators are more encouraging. One of the big concerns of many analysts was that rising oil prices of the last 5 months might significantly slow down economic growth. But the evidence suggests that an oil price increase that just reverses a previous oil price decrease-- and that is basically what we've experienced so far in 2012-- is not nearly as disruptive as if the price were rocketing into uncharted territory. The latest data confirm that sales of domestically manufactured light trucks (a category that includes SUVs) in March were still lower than they were in 2008, the first time we saw gasoline prices moving up to the values that now seem pretty normal.  Thus despite rising gasoline prices, the auto sector should make a nice contribution to 2012:Q1 GDP growth, mainly because what's happening now did not catch U.S. automakers or consumers by surprise. Some other recent U.S. economic data are also mildly encouraging. The latest national income accounts allow us to calculate a separate measure of real GDP growth based primarily on income data rather than purchases. The income-based measure suggests that U.S. real GDP grew at a 4.4% annual rate in 20011:Q4, compared with the 3.0% growth implied by the traditional GDP calculation.

An economic recovery that leaves workers further behind - Why is this recovery different from all other recoveries? Many of the reasons are widely known: Rebounding from a financial crisis takes an excruciatingly long time; the huge decline in housing values has reduced Americans’ purchasing power; large corporations are making do with fewer employees — at least, in this country. But what really sets the current recovery apart from all its predecessors is this: Almost three years after economic growth resumed, the real value of Americans’ paychecks is stubbornly still shrinking. According to Friday’s Bloomberg Briefing, “the pace of income gains is well below that of the past two jobless recoveries and real average hourly earnings continue to decline.” The Bloomberg report cites one reason for this anomaly: Most of the jobs being created are in low-wage sectors. According to Bloomberg, fully 70 percent of all job gains in the past six months were concentrated in restaurants and hotels, health care and home health care, retail trade, and temporary employment agencies. These four sectors employ just 29 percent of the country’s workforce but account for the vast majority of the jobs being created.

HUSSMAN: There's No Jobs Recovery, Just Older Workers 'Desperate' To Grab Any Menial Job They Can - In his latest weekly commentary, fund manager John Hussman takes on a few ideas. First he says that Friday's jobs report wasn't a surprise, and that April will be worse. What looks like job growth, he says, really just reeks of desperation. Last week, we observed "Real income declined month-over-month in the latest report, which is very much at odds with the job creation figures unless that job creation reflects extraordinarily low-paying jobs. Real disposable income growth has now dropped to just 0.3% year-over-year, which is lower than the rate that is typically observed even in recessions." It wasn't quite clear what was going on until I read a comment by David Rosenberg, who noted that much of the recent growth in payrolls has been in "55 years and over" cohort. Suddenly, 2 and 2 became 4. If you dig into the payroll data, the picture that emerges is breathtaking. Since the recession "ended" in June 2009, total non-farm payrolls in the U.S. have grown by 1.84 million jobs. However, if we look at workers 55 years of age and over, we find that employment in that group has increased by 2.96 million jobs. In contrast, employment among workers under age 55 has actually contracted by 1.12 million jobs. Even over the past year, the vast majority of job creation has been in the 55-and-over group, while employment has been sluggish for all other workers, and has already turned down.

High unemployment may dog the US for years - Feeman is among the more than 5 million Americans who have been out of work for more than six months and who represent the heart of the crisis in the labor market. Their plight also poses a warning that U.S. unemployment may not drop back to its pre-recession levels and could be stuck higher than many policymakers expect. One of the biggest challenges facing U.S. Federal Reserve Chairman Ben Bernanke and his colleagues is to understand whether people like Feeman will eventually find work once the economy gathers enough speed. Bernanke appears to think they will and he has suggested more stimulus by the Fed might be needed to kick-start demand, and job creation, into a higher gear. But if he's wrong, the central bank risks pumping too much money into the economy in an effort to help people who have become unemployable. Rather than bringing down the jobless rate, the Fed could eventually fuel higher inflation.

Are the Hawks Correct about the Fall in Productive Capacity? - There is a growing contingent at the Fed advocating interest rate increases sooner rather than later. I continue to think that is a mistake. The reasoning from those who think it's time to begin reducing monetary stimulus is that the natural rate of output -- the full employment level of output -- has fallen so much that even though the recovery to date has been slow, nevertheless we are nearing potential output. Thus, any further push to increase output further could be highly inflationary. Why do I think this is incorrect? I believe there are several types of shocks that can hit the economy. There are both permanent and temporary shocks to aggregate demand, and there are both permanent and temporary shocks to aggregate supply. As I explained here, analysts who conclude we are almost back to potential output may very well be confusing permanent and temporary shocks to aggregate supply. As Charlie Plosser explained to me recently, it is difficult to sort aggregate demand and aggregate supply shocks. Aggregate demand shocks can produce supply shocks, and supply shocks can have an effect on demand. The explanation I was given by Plosser was, I think, intended to convince me that what look like aggregate demand shocks are actually the result of supply shocks. However, I think the explanation works better in the other direction.

The Return Of Economic Weakness - Here is a number for you: 70%  That is roughly how many economic reports have missed their mark in the last month.  Why is this important?  Believe it or not - It has a lot to do with the weather.   We have written many times recently about the weather related effects skewing the seasonal adjustment figures in everything from the leading indicators and retail sales to employment numbers.  Now those weather related boosts are beginning to run in reverse as weather patterns return to normal and realign with the seasonal adjustments. This resurgence of economic weakness is only just beginning to appear in the fabric of the various manufacturing reports.  The Chicago Fed National Activity Index (a broad measure of 85 different data points) has declined from its recent peak in December of .54 to .33 in January and -.09 in February.   The ISM Composite index (an average of manufacturing and non-manufacturing data), Richmond, Dallas and Kansas Fed Manufacturing indexes all posted declines in March.

Spain, on the Brink, Could Derail the U.S. Economy - Greece’s austerity plan, complete with debt swap, is now in place. Spain has announced its most rigorous budget since the post–Franco restoration of democracy in the 1970s. Italy has passed economic reforms worth more than $130 billion, 7 percent of GDP, and is generally considered on target to balance its budget by 2013. So we are on the way back to economic health among the peripheral members of the euro zone. Isn’t this what the markets, together with conservative political leaders, have said all along that the eurozone needs? It is less and less likely to work out this way as each day passes. What we are witnessing this spring in Europe is a showdown among the surgeons in the operating room. The chiefs of surgery are certain that vigorously applied austerity is the fastest route to a cure. On the other side of the operating table are those—admittedly few—who are arguing that austerity alone will achieve the opposite of the desired outcome: It will kill the patient. What’s at stake is the health of the global economy -- the United States is especially vulnerable as it slowly climbs out of recession.

If Europe's Economy Tanks, Could the U.S. Benefit? - Last year when the European crisis was heating up, I floated the idea that the if the European Central Bank were able to contain the bank meltdown, its insane monetary policy would actually be fairly simulative for the US.Now, it looks like that scenario may be playing out. As George Wannabee points out, Germany is increasingly turning Japanese:  Much has been written about the US Economy going Japanese and there are indeed some worrying signs. And for all the Bernanke bashing, that is one thing he really understands and will fight aggressively.  Unfortunately, Euro zone policymakers and the Germans' inflation phobias are making all they can for Europe to get into an entrenched deflationary spiral. The critical issue - as Wannabee points out near the end of the post - is that this scenario will drive up the value of the euro. If the euro zone gets caught in a deflationary spiral, real European interest rates will rise and the euro will tend to appreciate. Under this scenario, Eurozone exports become increasingly less competitive against American exports. At the same time, the struggling European economy will likely reduce it oil imports.  This creates dual positive pressure for the United States which would see cheaper energy at the same time as more robust demand for manufactured goods.

High Oil Prices: Why $200 Oil Won’t Cause A Recession - Last Friday’s weak unemployment numbers, with only 120,000 jobs created, brought renewed wails that high oil prices were causing a recession. Having heard this refrain so many times, I thought I’d dig a little deeper. After all, a peak of $145 per barrel in the West Texas Intermediate oil price pretty well coincided with the onset of the 2008 recession. The question is whether or not high oil prices are always correlated with an inevitable downturn. For instance, when you look closer, oil was not to blame in 2008. Other factors were much more serious culprits, including the housing crisis (by then in market collapse) and the banking crisis that followed. Between them they are the hallmarks of financial crisis that brought on the nasty recession. To find out why, we need to do a little arithmetic.

The Recovery Compared - Following up on my post The Recovery According to Ed “We are not in a recession” Lazear , reader Rick Stryker writes: Lazear's points are clear: 1) Real growth has been sub-par in this recovery compared to previous recoveries...This point is clearly falsified by the graphs from the St. Louis Fed:  Even using employment, one sees that this is not the worst recovery. Further, inspection of real GDP heightens the disquiet one might have regarding Professor Lazear's assertion that the current recovery is the worst ever (even leaving aside recoveries in other countries).  I have stressed the fact that the output gap is the correct metric for assessing what policy should do. [1] [2] [3] Hence, another way to assess progress is to see what the output gap has done since the trough. I do this for the current and previous three expansions. (By the way, this is much better than picking an ad hoc trend to compare against, especially since log GDP appears to a difference stationary process).

Vast Majority Of Americans Wrongly Say Economy In Recession: Survey: We may not technically be in a recession anymore, but the vast majority of Americans say they aren't feeling the recovery.  More than 75 percent of Americans say they think the economy is still in recession and nearly half say there's no improvement in their area, according to a Washington Post-ABC News poll conducted last week.  The National Bureau of Economic Research -- the body responsible for determining when business cycle events start and end -- said the recession was officially over in June 2009. But the new survey results suggest that the positive indicators used by economists to measure the recovery may not be painting a complete picture. In fact, the recovery has left many American households worse off. With no growth in household income and still facing a weak job market, an overwhelming majority of Americans are skeptical about the future. Even employment gains must be taken with a grain of salt. Though the economy generated 1.2 million jobs in the last six months, the majority have been in low-paying industries like temporary work or retail, which may also explain why wage growth hasn't kept up with inflation. In addition, last month's job increases were offset by the number of people who are no longer considered unemployed, not because they found employment, but instead because they have stopped looking for work altogether.

Americans Agree: There Is No Recovery - From the latest Washington Post-ABC News poll [red highlighting mine]: No matter how you break it down -- whether by party/ideology, household income, age, or any other category -- the majority of Americans agree on one thing: there is no recovery. Needless to say, those feelings are also shared by a segment of the economy that just happens to provide jobs for over half of the nation's private workforce. "Dunkelberg Says Small Business Economy in Recession (Audio)" (Bloomberg) William Dunkelberg, chief economist at the National Federation of Independent Business, says small businesses in the U.S. are "not doing well at all." Dunkelberg talks with Bloomberg's Ken Prewitt and Tom Keene on Bloomberg Radio's "Bloomberg Surveillance."

Welcome to the new Great Depression - We’re already in the new Great Depression, says Nobel prize-winning economist Paul Krugman, and it could be a long time before we come out the other end. “My view is we are actually in a depression,” Krugman told Reuters in a recent video interview.. So what’s the same this time round? A persistently depressed economy, interest rates near 0% and in the United States a 9% jobless rate. “It’s not the total misery of the 1930s, but it’s not good,” he said. According to Krugman, Europe is dead wrong in its attempts to curb the crisis. Its preoccupation with austerity is like a “medieval doctor, you’re sick so he bleeds you, you get even sicker he bleeds you some more … Death is possible.”   What Europe needs is more expansive monetary policy, more quantitative easing and looser inflation targets. A major banking group in Europe weighed in with the same view Monday.

Some Implications of the Trade Release - So-so news, and how we can sustain net export growth. From BEA/Census: The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total February exports of $181.2 billion and imports of $227.2 billion resulted in a goods and services deficit of $46.0 billion, down from $52.5 billion in January, revised. February exports were $0.2 billion more than January exports of $180.9 billion. February imports were $6.3 billion less than January imports of $233.4 billion. The smaller estimated trade deficit has clear implications for the estimate of GDP in 2012Q1. From Macroeconomic Advisers (not online) today: We raised our tracking estimate of GDP growth in the first quarter by five-tenths to 3.1%. Net exports were above expectations in February with much of the surprise reflecting weak imports. However, net exports of capital goods were stronger than expected, implying less E&S in the first quarter. The data on trade in February had no bearing on our forecast for second-quarter GDP growth, which stands at 2.5%. I think it’s useful to place in perspective what these figures mean for growth looking further. I plot the NIPA series on exports and imports, and the trade release figures. I assume the first two months of 2012Q1 are representative of exports and imports for the entire quarter. This yields figures 1-3.

We Owe How Much??  - So, here's a formula: take $55 or so trillion of reported total debt (from the Fed's Z-1 report), and $100 or so trillion of unfunded liabilities, and toss in a modest portion of the derivatives that are effectively debt (any thoughts on that one?), and divide by 300 million Americans - we get more than half a million per capita.  Anyone have some other suggestions for the formula to determine what the actual debt is for all, and per capita?  One of the problems with the debate over the “national debt” is that there’s no generally agreed upon definition of that term. Is it what the federal government owes, or what it owes foreigners, or what the whole country, private and public sector together, owes? Does it include off-balance-sheet items and contingent liabilities? There’s a hundred-trillion dollar gap between lowest and highest on this spectrum, which allows each commentator to confuse the rest of us by picking the measure that best suits their point of view. New York Times columnist Paul Krugman, for instance, uses “net debt” — the amount that the US owes foreigners — to argue that since this number is relatively small and slow-growing, we’re actually fine. Analysts using broader definitions of debt come to the opposite, more apocalyptic conclusion

I Knew It: 61% of Treasuries Purchased by the Fed - As it turns out, the Federal Reserve flow of funds report for the entire year of 2011 reveals how "strong" demand is in the "market" for US treasuries. With 61% of Treasury purchases accounted for by Federal Reserve buying, both terms in quotation marks are cast in doubt. Yes, we know that open market purchases of treasuries are the result of policy decisions. But no, we did not know the cumulative extent of these purchases viewed in annualized terms. The proper analogy is one I made before: It's like calling your kid a "great salesman" after setting up a lemonade stand....only for the rest to find out that nearly two-thirds of all his "sales" came from you. So it is when monetary authorities justify currently bedraggled  American finances via some variation on the "deficits don't matter because US borrowing rates are so low." The questions I would like to see answered are following:
(1) If demand from foreigners for Treasuries is so great anyway since the US is providing a "safe haven" through "liquidity services," why is there a need for another arm of government to undertake such large-scale purchases? (2) Related to (1), there is also a concern about bloating the balance sheet of the Fed. Why needlessly do so if others would willingly lap up these securities?
(3)  Lastly, would rates be this low if the Fed deemed it unnecessary to make purchases on this scale?

It isn't a debt crisis - Let me explain what you're looking at here. We've charted a fiscal gap, which is defined as the budget surplus (net of interest) that a government would need to run from 2013 on if it wanted to reduce its sovereign-debt load to 50% of GDP by 2050. So take America (please!). Currently its gross debt-to-GDP ratio is a bit over 100%. In order to reduce its debt load, as a share of GDP, by half by the year 2050, the government would need to average a budget surplus of nearly 10% of GDP (before taking into account interest payments). That's a much bigger surplus than it would have needed to run had debt remained stable through the Great Recession; gross debt-to-GDP was just 65% in 2007 (it was 57% in 2000, since you ask). For America, the increase in this fiscal gap is mostly due to the substantial deficits run over the past 5 years. Elsewhere, the substantial rise in the debt stock is to blame (like in Ireland, where the government took on massive bank debts). In a handful of countries, a big rise in interest rates is to blame, whereas in Britain and America interest rates have actually shrunk the gap a bit. So, what does this all mean? Well, what it doesn't mean is that America needs to adopt a crash programme to move its fiscal balance to a primary surplus of 10% of GDP. There are costs to a high debt load, of course, but there is little reason to think that a 50% gross debt level is the right one, or that crash austerity is a better route to consolidation than debt stabilisation combined with appropriate investments in future growth.

The Fed Balance Sheet: What is Uncle Sam's Largest Asset? - Pop Quiz! Without recourse to your text, your notes or a Google search, what line item is the largest asset on Uncle Sam's balance sheet? The correct answer, as of the latest Flow of Funds report for Q4 2011, is ... Student Loans. The rapid growth in student debt has been a frequent topic in the financial press. One stunning chart that caught my attention illustrated the rapid growth in federal loans to students since the onset of the great recession. Here is a chart based on data from the Flow of Funds Table L.106, which shows the Federal Government's assets and liabilities.  As I point out on the chart, the two callouts are for Q4 2007, the quarter in which the Great Recession began (December 2007) the most recent quarter on record, Q4 2011. The loan balance has risen and astonishing 332% over that timeframe, most of which dates from after the recession. This chart only includes federal loans to students. Private loans make up an even larger amount. Last month the Consumer Financial Protection Bureau (CFPB) posted an article with the attention-grabbing title: Too Big to Fail: Student debt hits a trillion. The details of the private student loan market are not readily available, but CFPB plans to publish its study results on the topic this summer.But back to our quiz. Student loans may be a liability on the consumer balance sheet, but they constitute an asset for Uncle Sam. Just how big? Over 31% of the total federal assets, nearly four times the 8.2% percent for the total mortgages outstanding.

Because the stakes are so small? - People I admire were calling each other nasty names last week, so I cowered in the corner, put my hands to my ears, and hummed very loudly. I’m talking about the debate over money and banking that involved Steve Keen (1, 2, 3, 4, 5), Paul Krugman (1, 2, 3, 4, 5, 6, 7), Nick Rowe (1, 2, 3), Scott Fullwiler, and Randy Wray among others. Here are some summaries by Edward Harrison, John Carney, and Unlearning Economics. Anyway, although there were some good moments, this debate just made me unhappy. The mechanics of banking are straightforward and uncontroversial, although they are widely misunderstood. [1] Yes, some misunderstandings were expressed and then glossed over rather than acknowledged when corrected. But that is to be expected in a very public conversation in which people are not behaving cordially, but are instead playing “gotcha” with one another. When a conversation is framed with one group calling the other mystics and the other shouting “Ptolemy!”, that is not a good sign.

A note on model risk, policy design, and political alliances - My previous post advocating a collaborative detente between post-Keynesians, market monetarists, and mainstream saltwater economists, has drawn smart and often skeptical comments. Some critics suggest I understate the dissimilarities between the three schools, and argue that any sort of fusion would amount to a muddled middle, centrism only for its own sake. (I like this: “The centrist position on building a bridge would end up with a bridge halfway across the river.”) If I were advocating some kind of Grand Unified Theory, I might concede the point. But I’m not advocating a theoretical fusion at all. I’m advocating a policy compromise. Quarreling schools may not find very much common ground in arguments over theory. Theory and its inseparable twin, ideology, are too pervasive to admit much compromise. They are indistinguishable from reality. Our eyes form the world before the world forms our vision. When truth itself is at stake, we will not easily give ground.But it is not the truth that we are after here. We should strive for something far less grand: to do actual good in the world. It just so happens that the theoretical disputes which divide the disciples and apostates of Keynes do not prevent overlap in the solution space. We can work together even when the stories that we tell ourselves are worlds apart.

More On Safe Assets - Krugman - So Brad and I are having an interesting discussion — not sure if it rises to the level of a debate — about whether we’re really suffering from a shortage of safe assets. Two points. First, why look at equity valuations? Why not look at risky bonds? What you see there is a definite Bagehot moment in 2008-2009, aka the Oh-God-we’re-all-gonna-die period, but not thereafter: (I used junk bonds here, but the same pattern shows across the board). Second, there’s the question of whether a simple expectations-of-low-short-term rates story can explain low long-term rates. Well, here’s an exercise: take the CBO baseline forecast for unemployment and inflation. No claims here that CBO has special wisdom, but it’s an example of what reasonable, middle-of-the-road people might expect. Take a simple estimated Taylor rule, and assume that actual rates are the maximum of the Taylor number and zero. Here’s what you get:

If Americans Save, Who Will Borrow? (Part II) Everyone is familiar with paper currency, the dollar bills you may carry in your pocket. They are useful for buying things, but they are also inconvenient. Carrying around a lot of cash is dangerous for starters. To solve this problem we have bank accounts. The bank holds on to our cash and in return we can write checks and use a debit cards. Large international companies and financial institutions face a similar problem. Only for them even bank accounts will not due. Banks having to deal with such large accounts by institutions transacting around the world in all different currencies could not pay return for the equivalent of a savings account and would have huge fees for the equivalent of a checking account. Instead, these institutions participant in the shadow banking system. They hold bonds or other financial assets which they can easily turn into cash in the repurchase or repo market. In the repo market one institution will agree to buy a bond from another institution and then sometime later, often 3 days, the original institution will buy the bond back.  This essentially serves as a loan from one institution to another. However, in a larger sense it can be thought of as making a cash withdrawal from the shadow banking system. In that way, the bonds held by these companies serve as their bank accounts. As long as the repo market is functioning they can always make withdrawals based on the bonds they have.

Is The Treasury's Imminent Launch Of Floaters The Signal To Get Out Of Dodge? - Today, our favorite IMF economist, and arguably one of the few people who sees the big picture, Manmohan Singh issued a paper titled "Money and Collateral", which, not surprisingly, deals with the issues of money and collateral. And while it provides an interesting read, we can jump to the conclusion which is, not surprisingly, that there is simply not enough collateral within the global financial system, which in turn inhibits the proper intermediation of banks in traditional monetary conduits (due to the need for central banks to intervene in the place of traditional banks and shadow banking entities), which keeps the money multiplier low. We have extensively covered the issue of collateral scarcity and encumbrance previously so the paper's conclusion should not come as a surprise: until cash is used to replenish a diminishing, cash-poor asset base, nothing can change.  It was one of the tangential "boxes" in the Singh paper titled "Floating Rate Note “puts”—are they forthcoming?" that caught our attention because it reminded us that in all the distraction over the past 3 months, we had forgotten that probably the most important event of 2012 is about to take place, and it has nothing to do with Europe, or with a central bank's balance sheet. Namely: the imminent arrival of Floating Rate Note Treasurys, or Floaters.

Call that a budget? - Last week, when House Republicans passed Paul Ryan’s budget resolution, Ryan, the Budget Committee chairman, said that Congress had a “moral obligation” to get the country’s finances under control, and that the vote was a necessary response to a looming “debt-driven crisis.” What he didn’t mention was that it was also a vote to gut the federal government.  Because Ryan presents himself as a reasonable technocrat who’s just making the tough choices that other politicians shirk, that may sound like an exaggeration. But the simple truth is that his plan is not an evenhanded attempt to solve America’s long-term budget problems. It’s a profoundly radical document, its proposals skewed by ideological biases. Raising taxes, of course, is out of bounds. The same goes for using federal power to hold down Medicare costs, which will be the key driver of future budget deficits. Instead, House Republicans would cut spending on almost everything else the government does. According to an analysis by the Congressional Budget Office, the Ryan plan would, by 2050, reduce federal spending to its lowest point, as a percentage of G.D.P., since 1951. And since an aging population, with rising health-care costs, means that a hefty chunk of government spending will be going to retirement and health-care benefits, hitting Ryan’s target would require drastically shrinking everything else.

Ryan, Obama, and Deficits - Krugman - There’s an obvious calculation I haven’t see done: how does the Ryan proposal scored more or less honestly — that is, without the “mystery meat”, the assumed revenue from closing loopholes that Ryan refuses to identity — compare with the Obama budget? CBO has done a full scoring (pdf) of the Obama proposals; they estimate a deficit in 2022 of 3 percent of GDP (Table 2). Their scoring of Ryan (pdf) does not include any actual scoring of his tax proposals; they simply accept, because they have no choice, his unsupported claim that he can make the thing revenue neutral. Under that assumption, they come up with a deficit in 2023 (Table 1) of 1 3/4 percent of GDP. But the Tax Policy Center (pdf) has scored the actual Ryan tax proposals, minus the mystery meat, and concludes that they would reduce revenue by more than 2 percent of GDP in 2023. Put these things together, and what they say is that the Ryan proposal would lead to bigger, repeat bigger, deficits than the Obama proposal.

Origin of Speciousness -  Krugman - I was unhappy with President Obama’s decision to call Republicans “social Darwinists” — not because I thought it was wrong, but because I wondered how many voters would get his point. How many people know who Herbert Spencer was? It turns out, however, that right-wing intellectuals are furious, because … well, it’s a bit puzzling. One complaint is that some 19th-century social Darwinists were racists; well, lots of 19th-century people in general were racists, and racism is not the core of the doctrine. The other is that modern conservatives don’t literally want to see poor people die; so? As Jonathan Chait says in the linked piece above, the real defining characteristic of social Darwinism is the notion that harsh inequality is both necessary and right. And that’s absolutely what today’s right believes — which is the point all the faux outrage about the Darwinist label is meant to obscure.

On Ryan Apologists, by Paul Krugman - OK, I’m whining. But the continuing defense of Paul Ryan is a remarkable phenomenon. He’s still being treated by many pundits as a man deeply concerned about deficits, when the fact is that his policy proposals are all about redistributing income upward, and make no serious effort to curb debt. He’s even given credit for advocating higher taxes on the rich when he has more or less specifically rejected the things for which he’s given credit. What’s going on here? The defenders of Ryan come, I’d argue, in two types.One type is the pseudo-reasonable apparatchik. There are a fair number of pundits who make a big show of debating the issues, stroking their chins, and then — invariably — find a way to support whatever the GOP line may be. There’s no mystery in their support for Ryan. The other type is more interesting: the professional centrist. These are people whose whole pose is one of standing between the extremes of both parties, and calling for a bipartisan solution. What these people need is reasonable Republicans. And if such creatures don’t exist, they have to invent them. Hence the elevation of Ryan — who is, in fact, a garden-variety GOP extremist, but with a mild-mannered style — to icon of fiscal responsibility and honest argument, despite the reality that his proposals are both fiscally irresponsible and quite dishonest.

James B. Stewart is Clueless About the Ryan Budget - Dean Baker - NYT columnist James B. Stewart assured us the Ryan budge is a good starting point in his column on Saturday. What Stewart tells us is reasonable is that the budget calls for cuts in entitlements and tax reform. He then asks who could disagree with this.One has to wonder whether Stewart has looked at the Ryan budget. First, on taxes the only specifics are cuts in the tax rates paid by rich people and corporations. None of the offsetting tax increases are specified. If this sounds like a sensible opening gambit, let's imagine the equivalent on the opposite side. Suppose that we proposed to increase Social Security benefits for the bottom two income quintiles of retirees. Suppose that we also proposed increased spending on infrastructure, research and development, and education. Suppose the left-wing Ryan budget wrote down that these spending increases would be offset by unspecified reductions in government waste. We then told CBO to score it accordingly. Is this a good starting point for further discussion?

The Gullible Center, by Paul Krugman - Mr. Ryan, the chairman of the House Budget Committee and the principal author of the last two Congressional Republican budget proposals, isn’t especially interesting. He’s a garden-variety modern G.O.P. extremist, an Ayn Rand devotee who believes that the answer to all problems is to cut taxes on the rich and slash benefits for the poor and middle class.  No, what’s interesting is the cult that has grown up around Mr. Ryan — and in particular the way self-proclaimed centrists elevated him into an icon of fiscal responsibility, and even now can’t seem to let go of their fantasy.  The Ryan cult was very much on display last week, after President Obama said the obvious: the latest Republican budget proposal, a proposal that Mitt Romney has avidly embraced, is a “Trojan horse” — that is, it is essentially a fraud. “Disguised as deficit reduction plans, it is really an attempt to impose a radical vision on our country.” The reaction from many commentators was a howl of outrage. The president was being rude; he was being partisan; he was being a big meanie. Yet what he said about the Ryan proposal was completely accurate.

The Defense Budget Non-Debate - Last week, as he issued his political budget, House Budget Committee Chairman Paul Ryan tried to pull the “Generals are not telling us the honest truth” rabbit out of the hat. The Wisconsin Republican was suggesting that either the military leadership was lying — in saying they could live with $487 billion less over the next 10 years than they had previously hoped for — or that they had somehow been muzzled by the White House and were just singing to a common hymnal, scripted for the occasion. There is a stunning lack of awareness of the realities of national-security budgeting buried in Ryan’s attempt to make political hay out of the fact that defense budgets are now projected to be flat, not growing above the rate of inflation (for that is all the administration has done.) Ryan and many other political leaders appear not to be aware that budgets and policy operate in synergy, always have and always will. Time to wake up and smell the coffee.

The Empathy Gap - Krugman - In general, I’m a numbers and concepts guy, not a feelings guy; when I go after someone like Paul Ryan, I emphasize his irresponsibility and dishonesty, not his evident lack of empathy for the less fortunate. Still, there are times — in Ryan’s case and more generally for much of his political tribe — when that lack of empathy just takes your breath away. Harold Pollack catches Ryan calling his proposed cuts in Medicaid, food stamps and more welfare reform round two, and suggests that our current suite of safety net programs is “a hammock that lulls able-bodied people to lives of dependency and complacency”. First of all, if you think that welfare reform has been just great, read this extended Times report on the desperation of many poor Americans trying to survive in a depressed economy with a shredded safety net. It takes a monumental inability to imagine other peoples’ lives to blithely praise welfare reform’s results at a time like this.And if you look at how desperate you have to be to qualify for food stamps and Medicaid, the notion that these programs encourage “complacency” is breathtaking.

Paul Ryan refuses to define ‘rich’: ‘These are job creators’ - House Budget Committee Chairman Paul Ryan (R-WI) on Tuesday refused to define “rich” because the wealthiest Americans were “job creators,” and accused President Barack Obama of “verbal tantrums” for calling his proposed budget “thinly veiled social Darwinism.” During a speech in Washington last week, Obama blasted Republicans for proposing “more than a trillion dollars in tax giveaways for people making more than $250,000 a year.” “That’s an average of at least $150,000 for every millionaire in this country,” the president said. “It is a Trojan horse disguised as deficit reduction plans. It is really an attempt to impose a radical vision on our country. It is thinly veiled social Darwinism. It is antithetical to our entire history as a land of opportunity.”

Goldman Sachs: Best Way to Survive the “Fiscal Cliff” is Sending Obama, Republicans Back to Washington - Market-observers are worrying about a new obstacle in the path of economic recovery: America’s impending “fiscal cliff.” Economists from Fed Chairman Ben Bernanke to Alan Blinder have been warning of the $600 billion that will be sucked out of the U.S. economy – through a combination of tax increases and spending cuts – at the end of 2012 if current law is allowed to stand. These policies would reduce economic output by more than 3% in 2013 – enough to put the U.S. back into a recession by some measures. As Mark Zandi, Chief Economist at Moody’s Analytics, wrote last week, “While the federal government needs to tighten its belt to stabilize the nation’s debt-to-GDP ratio over the long term, the sharp spending cuts and tax increases coming next year would be hard to absorb even with a robust economy. The amount of fiscal braking the U.S. can withstand—before growth slows so much that it hurts rather than helps the push for fiscal sustainability—is closer to 2 percentage points of GDP.” In other words, we need to make some changes to the budget, but doing it all in one shot is unnecessary and potentially fatal to the recovery. In an ideal world, we would gradually raise taxes and reduce spending until the budget deficit is at a manageable level, and do it in a way that allows the private sector time to pick up the slack. A tricky task indeed, but one that Goldman Sachs has undertaken in a research note published last week.

Goldman Sachs: Most Fiscally Conservative Combo Would Be Obama, GOP House - An interesting new research note from Goldman Sachs analyzes the “fiscal cliff” and the prospects for fiscal conservatism resulting from the potential outcomes of the 2012 elections. Goldman remains a vampire squid, but their economic research notes are quite good. If there’s one thing they know about it’s money. And their assessment of the political landscape sounds right to me: In our view, the impact of the election outcome on the amount of fiscal restraint in 2013 depends on which time frame is considered. In the short term, any result that deviates from the status quo would increase the amount of fiscal restraint likely in Q1, since the probability of a short-term lapse in tax cuts and the phase-in of spending cuts would increase. However, over the full year the opposite may be true, and a status quo outcome in which divided government is maintained probably means slightly more fiscal restraint in 2013 as a whole than other possible scenarios. In other words, the most fiscally conservative outcome over the long term would be the current status quo, with Republicans in control of the House and Barack Obama in the White House. There are three reasons for this, according to Goldman. First, the trigger of defense and discretionary cuts would be more likely to be enacted under divided government, even if both sides agree that it should be avoided. Second, a Republican majority alone would seek to permanently extend the 2001 and 2003 Bush tax cuts. Third, with divided government, additional fiscal stimulus would be more out of the question, relative to a scenario where Democrats gain a sweep of all branches of government.

Ryan Budget Would Raise Some Taxes; Guess Who Gets Hit? - You’ve undoubtedly heard lots about how House Budget Committee Chairman Paul Ryan’s budget plan would give millionaires an average $265,000 apiece in new tax cuts, on top of the $129,000 apiece they would get from Ryan’s call to extend President Bush’s tax cuts. Have you also heard, however, that he wants to raise taxes for some other Americans?  Want to guess who would bear the brunt of his tax hikes? The Urban-Brookings Tax Policy Center has published new numbers that show the Ryan plan would raise taxes on low-income working families — those making up to $30,000 a year.  That’s because, while he would extend the Bush tax cuts, which are due to expire at the end of this year, he would not extend President Obama’s tax cuts for those with the lowest incomes, which will expire at the same time.  Our updated report gives the details. Chairman Ryan’s proposed tax hikes on low-income Americans would come even as, on the spending side, his budget would slash programs that assist this same population. Specifically, people with incomes below $10,000 would see their after-tax incomes fall by 2 percent, on average.  But people with incomes above $1 million would see their incomes rise by 12.5 percent (see graph).

Washington’s Counterproductive Consensus on Taxes: Ezra Klein -The two parties spent most of this week, as they tend to spend most of every week, arguing about taxes. Democrats are for ‘em. Republicans, against. Right? Wrong. These tiresome debates obscure the near-consensus in Washington on taxes: Republicans don’t want to raise taxes on anyone, and Democrats don’t want to raise taxes on almost anyone. The argument between the two parties rages over that sliver of territory between “anyone” and “almost anyone.”  The consequences of this unhealthy consensus stretch far beyond the budget deficit. Consider, for instance, our roads.  We used to have a straightforward way to fund infrastructure in this country: the federal gas tax. In 1956, President Dwight Eisenhower raised the tax from 1.5 cents a gallon to 3 cents to help pay for the creation of the interstate highway system.  In 1982, President Ronald Reagan raised the gas tax to 9 cents. In 1990, President George H.W. Bush raised it to 14 cents, with half of the increase going to reduce the deficit. In 1993, President Bill Clinton raised it to 18.4 cents. In other words, from 1956 to 1993, there was a bipartisan consensus on the federal gasoline tax: Both parties agreed that it occasionally needed to be raised in order to help pay for the nation’s infrastructure. But since 2000, there has been a bipartisan consensus against raising the federal gasoline tax.

Reality Check on Who Pays Taxes - Have you heard that close to half of U.S. households currently don’t owe federal income tax?  Does that mean, as some policymakers and pundits claim, that low- and moderate-income families don’t pay taxes, or don’t pay enough of them?  Not at all, as our updated analysis of this widely misunderstood issue explains. Here are some of its key points:

  • The oft-cited figure that 51 percent of households didn’t pay federal income tax in 2009 is a temporary spike caused by the recession. 
  • These figures cover only the federal income tax and ignore the substantial amounts of other federal taxes — especially the payroll tax — that many of these households pay (see graphs at right).  Some 82 percent of working households pay more in payroll taxes than in federal income taxes.  In fact, low- and moderate-income people pay a much larger share of their incomes in federal payroll taxes than high-income people do.
  • Most of the people who pay neither federal income tax nor payroll taxes are low-income people who are elderly, unable to work due to a serious disability, or students, most of whom subsequently become taxpayers.
  • Low-income households also pay substantial state and local taxes.  Most state and local taxes are regressive, meaning that low-income families pay a larger share of their incomes in these taxes than wealthier households do (see graph below).
  • When all federal, state, and local taxes are taken into account, the bottom fifth of households pays about 16 percent of their incomes in taxes, on average.  The second-poorest fifth pays about 21 percent.

Obama To Make Case For "Buffett Rule" - Previewing the message that President Obama will take to Florida on Tuesday, his economic team released a brief report making the case for his “Buffett Rule,” a proposal that would ensure the wealthiest Americans pay at least 30 percent of their income in federal taxes. The proposed minimum rate for those with incomes exceeding $1 million annually, which is based on an idea from the billionaire investor Warren E. Buffett, would restore some fairness to the federal tax code and reduce economically inefficient gaming of the system, according to the report from the White House National Economic Council. Over five decades, the report said, the average tax rate paid by the wealthiest Americans has dropped much more than the rate for middle-income taxpayers, even as the income of those at the top of the scale has grown significantly more than for everyone else. “The idea behind the Buffett Rule is to have a tax on high-income earners who avoid paying much of their income taxes,” said Alan B. Krueger, chairman of Mr. Obama’s Council of Economic Advisers. “So in that sense, it’s not a new tax — it’s bringing the high-income earners who managed to avoid paying a large share of their income in taxes up to the level of other high-income earners.”

White House makes case for the Buffett Rule --- President Obama made a broad push Tuesday for increasing taxes on the wealthy and in particular proposed Buffett Rule. His address to college students in Florida came on the heels of a White House report that laid out its case, arguing that the Buffett Rule would make the tax code fairer and make it harder for the very rich to lower their tax bills. "What drags our entire economy down is when the benefits of economic growth and productivity go only to the few ... and the gap between those at the very, very top and everybody else keeps growing wider and wider," Obama said.  The Buffett Rule is a key talking point in Obama's re-election bid. The general principle behind it is that millionaires and billionaires like investor Warren Buffett shouldn't pay a lower percentage of their income in federal taxes than middle-class households.

The Long Campaign to Tax “The Rich”: By Any and All Means Necessary? - Since the bipartisan passage of President Bush’s tax relief program in 2001, there has been a relentless drumbeat from the left that components of the tax relief allegedly benefiting only “the rich” should be repealed. Recent events underscore that the purpose of seeking such higher taxes is not to reduce the federal budget deficit but instead to fuel the insatiable spending appetite of the federal government. This determination to raise taxes has taken many forms over the past decade, and while some proposals have been enacted, proponents have made clear that much more is on the way. Over the past several years, many rationales have been offered for raising taxes: improving the federal budget outlook, increasing the tax code’s progressivity, shoring up Social Security, extending Medicare solvency, or paying for health care reform. The only constant has been the nearly theological imperative, on the left wing of the Democratic party, to impose higher taxes – regardless of what is done with the money.

Obama: Buffett rule about fairness, future - President Barack Obama laid out a case for the Buffett rule Tuesday that what’s at stake isn’t just fairness — it’s the future. The president made the pitch in a campaign-style speech to students at Florida Atlantic University in Boca Raton, connecting it to his message of fairness that he says is at the core of America. Brushing back accusations that he’s pushing “some socialist dream” Obama said that for education, research, infrastructure and other investments that benefit the country as a whole to continue, there must be a way to pay for it. “It’s our turn to preserve the American dream for future generations,” Obama said. “Here in America, we have a sense of common purpose. Here in America, we can meet any challenge. Here in America, we can seize any moment. We can make this century another great American century.” The Senate is set to vote next week on in change in tax laws that would set a 30 percent minimum income tax for Americans earning more than $1 million annually. 

Obama Makes Case for ‘Buffett Rule’ - All but certain now that his Republican opponent will be Mitt Romney, President Obama has made his proposed “Buffett Rule” minimum tax for the wealthiest Americans like Mr. Romney a centerpiece of his re-election campaign, defying the political risk of being seen as a tax-and-spender by wary voters.  With a rousing speech on Tuesday to a receptive university audience of about 5,000 in this battleground state, Mr. Obama defined the coming contest as a clash of philosophies: His argument that tax fairness and the common good demand the richest Americans pay at least as much as middle-income taxpayers do, contrasted with Republicans’ opposition to any tax increases as job killers and class warfare, even at the cost of deep cuts in domestic programs.  While voters have not often rewarded candidates who advocate tax increases, Mr. Obama and his campaign advisers, in league with Democrats in Congress, express confidence that voters are on their side, with polls showing that Americans overwhelmingly agree that wealthy taxpayers should pay more and that they favor spending for programs like education, research and health care.

Mr. Obama and the ‘Buffett Rule’ - President Obama accomplished two things when he made the case on Tuesday for the so-called Buffett Rule, which would require millionaires to pay at least 30 percent of their income in taxes. He persuasively argued that it would be a step toward fairness in a tax code tilted in favor of the wealthiest Americans. Not incidentally, it allowed him to take an implicit shot at his virtually certain opponent, Mitt Romney, both personally and politically.  Mr. Romney disclosed in January that his tax bill last year came to about 14 percent of his $21 million income, roughly the same percentage faced by middle-rung taxpayers. Even more important, Mr. Romney is determined to continue slashing taxes for the rich, starving the nation of needed revenue, while deepening the deficit.  The Buffett Rule, which would raise an estimated $50 billion over 10 years, would not make an appreciable dent in the deficit or provide a lot more for essential programs. By comparison, letting the Bush-era tax cuts expire for taxpayers making more than $250,000 a year, as the president has also called for, would raise $800 billion over 10 years.

Why Buffett When We’ve Already Got an AMT? - A strain of comments have reasonably wondered: why do we need a Buffet rule when we already have an Alternative Minimum Tax (AMT), presumably created to accomplish a similar goal of not allowing the wealthiest families to avoid paying their fair share by exploiting loopholes? My first reaction was: well, if the AMT worked, we wouldn’t need the Buffett rule.  But when you look at the results I enumerate here—lots of very rich people face average rates at or below that of the middle class–it’s clear the AMT ain’t working.But, as is my wont, I checked this hunch with tax experts at CBPP, and here’s what I got (h/t, CCH): –It (the AMT) obviously doesn’t work very well, because all of the statistics (see link above) and pictures like the one below, from here, are with the AMT in place! –As the figure shows, the AMT fails to block the preferential treatment of asset-based, or investment, income, like cap gains and dividends…and these types of income mean a lot to millionaire+ households.

Why the Buffett Rule Sets the Bar Too Low - Robert Reich - No one in Washington believes the Buffett Rule has any hope of passage this year. It’s largely symbolic. The vote will mark a sharp contrast with Republican Paul Ryan’s plan (enthusiastically endorsed by Mitt Romney) to cut the tax rate on the super rich from 35 percent to 25 percent – rewarding millionaires with a tax cut of at least $150,000 a year. The vote will also serve to highlight that Romney himself paid less than 14 percent on a 2010 income of $21.7 million because so much of his income was in capital gains, taxed at 15 percent. Hopefully in the weeks and months ahead the White House and the Democrats will emphasize three key realities:

  • 1. The richest 1 percent of Americans are now taking in over 20 percent of total national income, and so far have raked in almost all the gains from this recovery. Thirty years ago, the richest 1 percent got 9 percent of total income..
  • 2. The richest 1 percent are paying a lower tax rate than they’ve paid since 1980. Under Eisenhower, the top rate was 91 percent and the effective rate was 58 percent.
  • 3. Right now the nation faces two yawning deficits – an investment deficit and a federal budget deficit. The investment deficit includes deferred maintenance on America’s infrastructure – roads, bridges, public transit, water and sewer systems that are all crumbling – and an educational system that’s being starved for resources.

Any serious person looking at these three realities would conclude that the rich should be paying far more. It’s not just a matter of fairness; it’s also a matter of patriotism.  In fact, given these realities, the Buffett Rule sets the bar too low. For most Americans, wages and benefits are declining (adjusted for inflation), net worth has been plummeting (their only asset is their homes), and the public services they rely on have been disappearing. For the top, it’s just the opposite: Their incomes are rising, their stock-market portfolios have been growing, and a growing portion of their earnings has been subject to a capital-gains tax of just 15 percent.

Buffett Rule is really an Anti-Corporate Rule - Today the President once again pushed the Buffet Rule millionaire surtax as the solution to our tax problems.  Here is how the White House describes it: "No household making more than $1 million each year should pay a smaller share of their income in taxes than a middle class family pays. This is the Buffett Rule-a simple principle of tax fairness that asks everyone to pay their fair share." First, millionaires currently pay an average effective tax rate of 25 percent, while the average taxpayer pays 11 percent, according to the most recent IRS data. But these are the averages, and the rates certainly vary depending on the combination of deductions, credits, exemptions, preferential rates, etc.  So, the simplest approach would be to eliminate these so-called loopholes, right? Warren Buffett primarily takes advantage of the preferential rate on capital gains and dividend income, which is 15 percent versus a top rate of 35 percent on ordinary income.  This largely explains why his effective tax rate is 17.4 percent on taxable income of $40 million.  And it explains why a lot of millionaires pay less than the 25 percent average rate. So the straightforward debate is over the preferential rate on capital gains and dividends.  Why does it exist?  There is a moral reason and an economic growth reason.  First, the economic growth reason is that taxing investment means we get less of it, and less investment means less capital formation, less innovation, and less productivity - all resulting in a lower standard of living. 

The Weakness of the Buffett Rule - Now that America's burning hunger for Mitt Romney has overflowed, and he really is the Republican nominee-to-be, the Obama campaign must settle on its anti-Romney strategy. Or more properly, they will reveal to us the anti-Romney strategy they settled on many months ago. One central component will be an argument about taxes, contrasting Obama's approach with the Republican one, and the cornerstone of that argument looks to be the "Buffett Rule." Which is kind of unfortunate. The Buffett Rule is, I'm quite sure, good politics. What it isn't is particularly good policy. The fairness principle at play—that rich people shouldn't pay lower tax rates on their income than the rest of us—is perfectly sound. The problem is the way they've decided to implement that principle. I use the term "implement" loosely, because the chances that the Buffett Rule is enacted into law in its current form are pretty low. But in the form in which it's being proposed, it would require that anyone with an adjusted gross income (that means after deductions) of more than $1 million a year would pay a tax rate of at least 30 percent. Of course, many people earning that much already do pay that much in taxes, if they get their income from things like salaries. The people the rule would hit are those like Buffett (or like another very rich guy, whom we'll get to in a moment) who make most of their money through investments, and therefore pay the lower capital-gains rate, which tops out at 15 percent.

The limits of the 'Buffett Rule' - WEALTHY AMERICANS should pay a larger share of their income in taxes than middle-class households. And any given million-dollar earner should pay about the same share of income in taxes as the next one. The “Buffett Rule” makes sense as a matter of both kinds of tax fairness. But whatever the moral — and political — allure of President Obama’s pitch for the rule, it addresses a remarkably small problem. The version of the Buffett Rule that the Senate is expected to take up next week — and on which Mr. Obama has been focusing his reelection campaign — would essentially set an alternative minimum tax rate of 30 percent for households earning more than $1 million a year. The Tax Policy Center estimates that this version, sponsored by Sen. Sheldon Whitehouse (D-R.I.), would affect 116,000 households in 2015. Because of that small number — and because the tax would be gradually increased as income rose from $1 million to $2 million — the tax would bring in a scant $47 billion over 10 years, assuming that the Bush tax cuts for upper-income earners expire on schedule. (If the tax cuts are extended, the Buffett Rule would affect more households — 217,000 — and therefore bring in more revenue.) You read that right: $47 billion over 10 years. Less than $5 billion a year.

Top Earners Can Find Ways Around Buffett Rule Minimum Tax Rate - The highest-earning U.S. households have ways to escape President Barack Obama's Buffett rule with tax-planning techniques that would limit their liability and undermine the proposal's purpose. Those affected taxpayers -- the fewer than 0.5 percent of Americans with annual incomes exceeding $1 million and tax rates of less than 30 percent -- could take advantage of tax-free investments such as municipal bonds to escape the Buffett rule's bite. They also could time asset sales for maximum tax benefits, engage in transactions that don't result in taxable income and make charitable contributions that yield deductions."Largely, the Buffett rule is going to be manageable," said David Miller, a partner at Cadwalader, Wickersham & Taft LLP in New York. "That is, with tax planning, people will be able to avoid it." The proposal would deny high-income taxpayers many deductions and other breaks they use to drive down their average tax rate without closing out the tactics employed by the wealthiest, most sophisticated taxpayers.

Buffett Tax Proposal: Hype or Reality? (Interactive Graph Lets You Set the Tax Rate and See the Results) - Given all the hype from President Obama and Warren Buffet on "fair tax rates" (see Obama evokes Reagan in Touting Buffett Rule), inquiring minds are asking the critical question: Does the US have a spending problem or a tax problem? Rather than offer my own opinion, I will let you make the call. You can set whatever tax rate you want for the "Buffett Rule" all the way up to a tax rate of 100% on the following interactive Tableau display.Thanks to Ross Perez at Tableau Software for the above interactive map. Data is from the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937.

Everything you know about the Buffett rule is wrong - “It’s simple,” the president said on Tuesday. “If you make more money — more than $1 million a year, not if you have $1 million, but if you make more than $1 million a year, you should pay at least the same percentage of your income in taxes as middle-class families do.” And that is simple. But it’s not how the Buffett rule actually works.  When President Obama says that “this vote is coming up,” he means that the Senate is planning an April 16 vote on Sen. Sheldon Whitehouse’s “Paying a Fair Share Act.” This is the bill that actually enacts the Buffett rule. But it doesn’t do exactly what Obama says the Buffett rule does. Here’s Whitehouse explaining the legislation to me: It’s hard to do the math on that because it would be highly specific to their situation. If they were paying 18 percent now, and if they only went over one million by one dollar, they would be 18 percent plus one one-millionth of the Buffett rule adjustment. And if they were one dollar short of two million, they would pay the full 30 percent minus one one-million of the full adjustment. So there’s a ramp.

Obama dubs tax plan ‘Reagan rule’ - Barack Obama suggested Ronald Reagan would be sympathetic to a minimum tax on the wealthiest Americans, saying the so-called “Buffett rule” could be renamed the “Reagan rule” in the Republican icon’s honour.  Surrounded by a group of millionaires and their secretaries, Mr Obama invoked the late president in support of a measure to prevent millionaires from taking advantage of tax breaks to allow them to pay lower rates than some middle-class Americans. Administration officials say the push for the Buffett rule is an attempt more broadly to reframe the debate ahead of the November election in a way which forces Republicans to drop their opposition to tax rises in any form. In his second event in as many days to push for the rule, Mr Obama quoted a speech from 1985 in which Reagan said it was “crazy” that in some cases the wealthiest Americans were paying “nothing” while bus drivers were paying “ten per cent of their salary”. “What Ronald Reagan was calling for then is the same thing that we’re calling for now – a return to basic fairness and responsibility, everybody doing their part,” said Mr Obama. “And if it will help convince folks in Congress to make the right choice, we could call it the Reagan Rule instead of the Buffett Rule,” he said.

Raising Taxes on the Rich - This afternoon, I moderated an interesting Tax Policy Center panel on taxing the rich. With the Senate about to debate a Buffett tax on millionaires, the timing couldn’t be better. Unfortunately for the White House, about the only thing the panelists agreed upon was that the Buffett tax is a terrible idea.   My fellow panelists were Doug Holtz-Eakin, president of the American Action Forum and former advisor to President Bush; David A. Levine, former chief economist at the Wall Street firm of Sanford C. Bernstein & Co. and a supporter of  Responsible Wealth, a group of millionaires who believe high-income Americans can and should pay more taxes;  Donald Marron, my boss at TPC and a former acting director of the Congressional Budget Office; and Diane Lim Rogers, chief economist at Concord Coalition. The group agreed that some new tax revenues will be needed as part of a prudent fiscal plan and mostly agreed that broad-based tax reform should be a sensible part of such an initiative.   After that, we disagreed about as much as everyone else in Washington, The panel couldn’t even agree about what rich means. Is it $1 million-a-year in income? Is it $200,000,  Is it those in the top 1% of income, who make more than $500,000 and an average of about $1.5 million? Take your choice.

Reactions to the Buffett Rule: Put Down those Vapors! - The idea that some very rich people pay a smaller share of their income in federal taxes than many in the middle class strikes most Americans as unfair.  But you wouldn’t know it around here.  While there’s some variation, many in the DC chin-stroking, gum-flapping, chin-music-making class have been quite critical (and yes, I’ve stroked the chin and flapped the gums with the best of them). Dana Milbank at the WaPo judges the rule to be a campaign gimmick.  Art Laffer plays the class warfare card at the WSJ.  And the scholars at Tax Vox call it “a terrible idea,” arguing that “…imposing a minimum tax of any kind is an admission of policy failure. If the president thinks the rich don’t pay enough, he ought to restructure the tax code so they do, not stick on yet another Band-Aid.” OK, these critics have some points.  Yes, Dana, there’s politics in here—shocking, I know.  But far too often, when someone proposes a fix to something wrong in the tax code, the punditry reacts with palpable dismay—it’s not comprehensive, 86-style reform!  It’s not a flat tax!  It doesn’t lower the rates and broaden the base!  It’s not a VAT!  Quick, pass me the vapors before I swoon!

How Big Are Tax Preferences? - The tax code is chock full of credits, deductions, deferrals, exclusions, exemptions, and preferential rates. Taken together, such tax preferences will total almost $1.3 trillion this year. That’s a lot of money. But it doesn’t necessarily mean that $1.3 trillion is there for the picking in any upcoming deficit reduction or tax reform.  In fact, even if Congress miraculously repealed all of these tax preferences, it would likely generate much less than $1.3 trillion in new resources. Where did I come up with that number? For a short piece in Tax Notes, I simply added together all the specific tax expenditures identified by the Department of Treasury; these were reported in the Analytical Perspectives volume of the president’s recent budget. Treasury doesn’t report this total for a good, technical reason: some provisions interact with one another to make their combined effect either larger or smaller than the sum of their individual effects. As a result, simple addition won’t give an exact answer.

Thinking About Tax Policy, Part 2: Taxes Today Are Low -- Yesterday’s post in this series explained why the nation’s unsustainable budget deficits must be in the forefront of any tax reform discussions.  That means we’ll need to raise enough additional revenue to contribute to a balanced deficit-reduction plan. Fortunately, taxes are low right now, both historically and compared to other countries:

  • Across the board, federal taxes are far lower than they were before the early 1980s, Congressional Budget Office (CBO) data show.  For example, people in the middle 20 percent of the population paid 14.3 percent of their incomes in federal taxes in 2007 (the most recent year available), down from 18.6 percent in 1979.  For the top 1 percent of households, the average federal tax rate fell from 37 percent to 29.5 percent over this period.
  • As the chart shows, the United States is a low-tax country.  Total U.S. tax revenue (including both the federal government and the states) is below all of the other wealthy “G-7” countries as a share of the economy.  And it’s far below the average for members of the Organisation for Economic Co-operation and Development (OECD), which includes many less affluent countries (which tend to have lower taxes).

Sizing Up the Impact of Tax Cuts (and Their End) - Without the Bush tax cuts of 2001, 2003 and 2008 and the Obama tax cuts of the last few years, median after-tax household income would be about $1,750 a year lower than it is. All of those tax cuts, of course, face an uncertain fate, because they are scheduled to expire at the end of this year. If they do expire, they would make a major dent in the medium-term budget deficit, as I explain in a news analysis for this weekend’s Sunday Review section. But the expiration would also make a serious dent in income for many households. Already, the last decade has not been good for household income (except at the top of the distribution). Median income grew slowly between 2002 and 2008 – much more slowly than in other recent economic expansions – and then fell sharply in the recession.Pretax median income last year was still 6.2 percent below its 2000 peak, according to inflation-adjusted numbers from Moody’s Analytics. After-tax income fell only 1.3 percent between 2000 and 2011, thanks in large part to the tax cuts, which, for better or worse, are now at risk.

How Illegals Pay Billions in Taxes and Reap Rewards - As Tax Day approaches, a small but fast growing segment of the population will be filing federal returns on their payments of income, Social Security and Medicare taxes, but with absolutely no expectation that they will eventually be able to turn to those health care and retirement programs for benefits. These largely invisible taxpayers are undocumented immigrants, some of the 11.2 million people who are illegally living in the U.S. and lack green cards to work. They are part of the massive underground economy, with about half of the 8 million who are employed working off the books, and the rest securing jobs under false pretenses. Many of these illegal immigrants steal and use Social Security numbers in applying for work, or they obtain Individual Taxpayer Identification numbers (ITINs), which the Internal Revenue Service issues to people without Social Security numbers to allow them to file tax returns.  The Immigration Reform and Control Act required employers to verify that all newly hired employees present "facially valid" documentation verifying the employee's identity and legal authorization to accept employment in the United States That resulted in illegal immigrants acquiring fake documentation. 

A Tax Code of Politics, Not Practicality - If you are like me, you must be pondering how such a rich, high-technology democracy as the United States could endure what must be the most inefficient, mind-bogglingly complex tax system known to man. Either you’ve hired an accountant to prepare your tax returns or you’ve spent countless hours plowing through schedule after schedule, noting deductions, exemptions and limitations and hoping the software you are using will get it right. Exhausted and anxious, you’re thinking surely there must be a better way.  There are, in fact, more efficient ways for government to collect money. They are much less complicated. And they can raise a lot of revenue to solve our long-run budget deficit and pay for the increased benefits demanded by our aging society. What’s more, they can do so without raising income tax rates. Unfortunately, history suggests we won’t really consider these alternatives.  Our byzantine tax code is built upon a longstanding political deal: Democrats wanted a tax scale with higher rates for richer Americans to finance social programs aimed at the poor and the middle class. Republicans countered by pushing for tax exceptions, exclusions and deductions that shielded the incomes of the rich from the taxman and reduced government revenue.

How to Really Simplify the Tax Code - Politicians often rail against the complexity of the tax system as the key source of taxpayer frustration. Historically, however, voters have been unwilling to support meaningful simplification efforts and happily put up with complexity if it saves them in taxes. They seem always to fear that “simplification” is some sort of code word for raising their taxes while reducing someone else’s.  In 2003, the Treasury Department put forward a proposal to create a return-free tax system for most taxpayers, as many other countries have. In essence, the Internal Revenue Service would calculate your taxes for you and send you a bill or a refund. The Treasury proposal went nowhere, for two reasons. First, reporting of income and tax withholding would have to increase to provide the I.R.S. with the data needed to accurately calculate people’s taxes. But people have been highly resistant to additional withholding; The second problem is that the tax system would have to be radically simplified to allow the return-free system to operate. Radical simplification sounds nice in theory; just wipe the slate clean and start from scratch, many people believe. Two years ago, Alan Simpson and Erskine Bowles, co-chairmen of the National Commission on Fiscal Responsibility and Reform, put forward exactly such a plan. It would eliminate every single deduction, exclusion and credit in the tax code, which economists call “tax expenditures,” and sharply reduce tax rates to three brackets of 8, 14 and 23

Taxes and Cheating - Will Rogers once said that “The income tax has made liars out of more Americans than golf” and I worry that he was correct. During his confirmation hearing to become the Treasury Secretary, it was revealed that Tim Geithner failed to pay Medicare, Social Security, and payroll taxes for several years while he worked for the International Monetary Fund (IMF). When asked by Senator John Kyl (R AZ) during the hearing about the (more than $40,000) “mistake,” which Geithner blamed on the tax software he was using, he replied, “it was very clear that this was an avoidable mistake… You’re right. I had many opportunities to see it.” But he didn’t, apparently, and that was that. There are many problems here—one of which is the possibility of a double standard that allowed Geithner to get away with this entirely (I am not sure if this is the case or not). I suspect that if he had he been working for a domestic monetary agency, that is, the IRS, he would have faced heavy prosecution, fines, and almost certainly been fired.  Also, as the future head of the Treasury, we might hope that he understands the tax code well enough to do his own taxes. Part of his defense, was, of course, that the code is too complex. Which is true, but in light of this, and his own errors, we might then hope he would be more aggressive about reforming the code, which he has not. The worst part of it, however, is the personal example he provided to the rest of the American taxpayers: do your taxes wrong, omit a few things, and if they catch you all you need is to pay it back — it’s basically okay.

Audits of super-duper rich off to a slow start  -- The IRS defended itself this week against claims that the agency is going easy on the nation's super rich taxpayers.  According to a report by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University, a non-profit research group, the task force the IRS created to examine the tax filings of the nation's wealthiest individuals has completed the audits of very few taxpayers.  Through a Freedom of Information Act order requesting performance statistics of the IRS's Global High Wealth Industry Group, the division that examines the tax filings of those with incomes or assets of $10 million or more, TRAC found that the agency has only completed 36 audits over the two and half years since the division's launch. "This global high wealth initiative was rolled out to great fanfare as a huge game changer," said Susan Long, co-director of TRAC. "While it takes a while to gear up, it's now been more than two years into the program and the IRS has stopped talking about it, and despite the big fanfare, we have hardly anything to show for it."

Tax Havens Cost You Plenty - One of the reasons I’ve been blogging less of late has to do with tax havens and the $100 billion or so the tax dodgers using them cost this country each year. That is, I co-authored this report with U.S.PIRG to help people understand how much tax dodging by multinationals ($60 billion) and wealthy individuals ($40 billion) costs everyone. The issue is one of basic tax fairness and justice: Abuse of tax havens by multinational companies and wealthy individuals is one of the most outrageous loopholes in the American tax system. The “sheltered” profits generally depend on America’s largest-in-the-world consumer market; America’s well-educated workforce, trained by our extensive public school system; America’s strong private property rights enforced by America’s court and probate system; and American roads and rail to bring products to market. Despite their deep dependence on American economic and social infrastructure, these multinational companies shirk their duty to pay for it. And this tax-dodging is legal, because of tax code loopholes “our” government created and continues to let exist. The report contains many very specific recommendations for how to shut them all down. Unfortunately, rather than close loopholes, some in Congress want to give these un-American tax-dodgers another gift, a “tax holiday”. Despite lobbyists’ claims, the holiday would do nothing but help executives line their pockets more, as the report explains.

Washington, We Have a Revenue Problem - The United States has a revenue problem. Taxes at all levels of government are too low to balance budgets and, more important, to ensure America’s future prosperity and cope with an aging population. While many political and policy leaders argue that future revenues should reflect “historic norms,” this is a flawed assumption on which to base long-term fiscal planning. Tax revenues have accounted for around 18 percent of GDP since World War II, and 18.3 percent over the past 30 years. The budget released by Paul Ryan and the House Budget Committee proposes average revenue levels at this same level—18.3 over the next decade. (Although an analysis by the Tax Policy Center found that the average would in fact be 15.4 percent.) The Simpson-Bowles plan, released in late 2010, proposed average revenues of 19.3 percent through 2020. Meanwhile, the Obama Administration’s 2013 budget proposal sets revenues at 19.2 percent of GDP over the next decade. All three of these proposals would provide inadequate funding to the federal government. Indeed, each creates a funding shortfall and continued deficits: Simpson-Bowles projects average deficits of 2.8 percent of GDP; the Obama budget, 3.3 percent; and the Ryan plan 1.7 percent. While deficit spending at such levels is acceptable, these numbers are testament to the simple fact that revenue levels at, or even slightly above, historical levels will lead to trillions of dollars in new debt over the next decade.

Taxing Wall Street Speculation - As the White House mounts a major campaign to sell the “Buffett Tax” this week, there is another, better tax on the 1 percent that Washington should be considering: A financial-transaction tax—better known as a financial speculation tax (FST). Under the concept, financial transactions—purchases and sales of equity shares and bonds and the execution of derivatives—are taxed based, at least in part, on the size of the transactions. As a revenue source, it has great potential: An FST could easily raise more than $150 billion a year, according to some estimates, depending on the details of the tax and trading volumes in a post-tax environment. The FST could rein in some of the worst excesses of financial markets that too often operate like casinos. By increasing the costs of placing trades, the tax would moderate trading activity generally, but it would most strongly deter short-term trades rather than longer-term investments. Importantly, for example, an FST could reduce the profitability of high-frequency trading, whereby computerized trading system enter and exit trading markets many times during the day—a practice that regulators worry gives an unfair advantage to some firms and increases market volatility.

Fed Backs More Financial Oversight - More regulatory action may be needed to safeguard the money-market mutual-fund industry, Federal Reserve Chairman Ben Bernanke said in a Monday speech, putting his weight behind other officials who want to toughen oversight of the $2.7 trillion industry. In an address largely focused on scrutinizing murky corners of the financial system—the shadow banking system—Mr. Bernanke emphasized the need to establish regulations that protect the system as a whole from the risks that threatened it during the financial crisis Mr. Bernanke did not discuss any potential changes to monetary policy.

Bernanke: Fostering Financial Stability - From Fed Chairman Ben Bernanke: Fostering Financial Stability. A few excerpts on shadow banking:  I've outlined a number of ongoing efforts, both domestic and international, to bring the shadow banking system into the sunlight, so to speak, and to impose tougher standards on systemically important financial firms. But even as we make progress on known vulnerabilities, we must be mindful that our financial system is constantly evolving, and that unanticipated risks to stability will develop over time. Indeed, an inevitable side effect of new regulations is that the system will adapt in ways that push risk-taking from more-regulated to less-regulated areas, increasing the need for careful monitoring and supervision of the system as a whole. Unfortunately, data on the shadow banking sector, by its nature, can be more difficult to obtain. Thus, we have to be more creative to monitor risk in this important area. We look at broad indicators of risk to the financial system, such as measures of risk premiums, asset valuations, and market functioning. We try to gauge the risk of runs by looking at indicators of leverage (both on and off balance sheet) and tracking short-term wholesale funding markets, especially for evidence of maturity mismatches between assets and liabilities. We are also developing new sources of information to improve the monitoring of leverage.

Do Regulators Know Who the SIFIs Are? - A little-noticed sentence in the 93-page regulation top U.S. regulators approved last week suggests officials could be well down the path to figuring out which firms pose a threat to the financial system. Under Dodd-Frank, regulators must pick out which financial firms — other than banks — are so big, complex, and interconnected that they warrant tougher oversight because their failure could rock the wider system. Last week, regulators comprising the so-called Financial Stability Oversight Council finalized the three-stage process they’ll use to identify which hedge funds, insurers, private equity firms and other nonbanks deserve the designation. (Banks with at least $50 billion in assets automatically get slapped with tougher oversight.) Here’s the key line: “Based on data currently available to the Council through existing public and regulatory sources, the Council has estimated that fewer than 50 nonbank financial companies meet the Stage 1 thresholds.” (See page 53.) Translation: There’s a universe of fewer than 50 firms that will get scrutinized more closely in stage two to see if they deserve the dreaded “systemically important” label.

Big banks face $638 billion shortfall on new rules (Reuters) - The world's biggest banks would have needed to find more than $600 billion if tough new capital rules to be phased in from 2013 had been in place last year. The Basel Committee of global regulators said if the new rules, known as Basel III, had been in force at the middle of last year, banks would have needed 486 billion euros ($638 billion) to hold core capital of 7 percent of assets, which is the target level for banks to meet when new rules come in. The 103 biggest banks had an average capital ratio of 7.1 percent based on the new rules, just enough to pass the standard, the BIS said on Thursday in a review of the implications of the Basel III capital standards. But the capital of some of those big banks would have fallen below 4.5 percent, while many would have been short of the necessary standard. Basel III capital rules will be formally phased in from January 2013. They will mean banks have to hold more capital in reserve to cover loans. The aim is to create a bigger safety net to protect taxpayers from having to bail out banks and avoid a repeat of the 2007/08 financial crisis.

Rosengren Says U.S. Money Funds Threaten Financial Stability - Money-market funds in the U.S. may be taking excessive risks that pose a threat to financial stability by holding European debt whose value could decline if the region's crisis worsened, said Federal Reserve Bank of Boston President Eric Rosengren. "A significant source of the credit risk in many prime money market funds over the past year has been the large exposure to European banks," Rosengren said at Stone Mountain, Georgia, today. In evaluating "risk from unexpected problems in Europe, money-market funds remain an important potential transmission channel to the United States," he said. Rosengren presented the most detailed public argument yet by a Fed official on the need for new money fund rules. Regulators and executives of the $2.6 trillion industry have debated how to make the funds safer since Reserve Primary Fund's collapse in 2008, which triggered industrywide investor withdrawals that contributed to a freeze in global credit markets. Rosengren endorsed proposals by staff at the U.S. Securities and Exchange Commission to reduce risk by requiring firms to maintain capital buffers or to redeem shares at the market value of underlying assets rather than at a fixed price of $1.

K.C. Fed President George: Financial Stability and Microprudential Supervision - The following are selected passages from the speech delivered by the President of the Federal Reserve Bank of Kansas City, Esther L. George "Looking Ahead: Financial Stability and Microprudential Supervision": Too big to fail:  ...I believe the first and most important step that we can take is to eliminate TBTF policies. This crisis provided overwhelming evidence that the ingrained response of policymakers is to treat our largest institutions as being TBTF. With the help of bailouts, TARP money, the discount window, accommodative monetary policy and other actions, our largest institutions not only survived the crisis, but in many cases, emerged as even larger players in the financial system.  . One simple example of these advantages is that the five largest U.S. banking organizations in June 2009 were given ratings on their senior long-term bank debt that on average were four notches higher than what they would have received based on their actual condition alone. These ratings advantages continue to exist after the crisis—albeit at a notch or two less now, and investors have reason to believe that similar advantages may yet exist.  What can be done to address these moral hazard and TBTF issues? The Dodd-Frank Act provides an orderly liquidation authority for resolving the failure of a systemically important organization, thus adding to the existing framework for closing insolvent or nonviable commercial banks. Having this legal framework, though, is only the first, and perhaps easiest, step in dealing with TBTF...

Paul Volcker on the Volcker Rule - You’d think after such a calamitous economic fall, there’d be a strong consensus on reinforcing the protections that keep us out of harm’s way. But in some powerful corners, the opposite is happening. Business and political forces, including hordes of lobbyists, are working hard to diminish or destroy these protections. One of the biggest bull’s-eyes is on the Volcker Rule, a section of the Dodd-Frank Act that aims to keep the banks in which you deposit your money from gambling it on their own — sometimes risky — investments.On this week’s Moyers & Company, Bill talks with the namesake of the Volcker Rule — Paul Volcker, who served two terms as Chairman of the Board of Governors of the Federal Reserve System from 1979-1987, and formerly headed President Obama’s Economic Recovery Advisory Board. Volcker contends the rule aims to curb conflicts of interest between bankers and their customers. He suggests that former investment companies like Goldman Sachs and Morgan Stanley, which sought banking licenses during the economic crisis in order to access federal protection against failing, should now turn in those licenses if they want to do speculative trading.

While Jamie Dimon Gently Weeps, Another "Big Stick" Bank Attack on Democracy He's at again -- and we're glad. A lot of smart people are dedicating their lives to fighting the corrosive effect of Wall Street on our economy and our democracy, but the best spokesman for that cause comes from Wall Street itself. JPMorgan Chase CEO Jamie Dimon is still the poster child for today's morally degraded, self-entitled banker mentality. I don't know why he keeps talking, but he's the gift that keeps on giving. At every major junction in the post-crisis debate about banking, Dimon has stepped in with a perfectly tactless remark that illustrates both the vacuity and the moral corruption of his industry. This week was no exception. JPM: CSI Dimon's own bank is the perfect case study in the degraded state of Wall Street's ethics. Bankers have been able to break the law and walk away by agreeing to settlements in which their shareholders, not they, pay the penalty for their misdeeds. A Google search of the words "JPMorgan Chase settles" yields nearly two million hits. Narrow it down to recent events and you get items like these:

The Wall Street backlash - Here we go again. Another round of the game we call Congressional Creep. After months of haggling and debate, Congress finally passes reform legislation to fix a serious rupture in the body politic, and the president signs it into law. But the fight’s just begun, because the special interests immediately set out to win back what they lost when the reform became law. They spread money like manure on the campaign trails of key members of Congress. They unleash hordes of lobbyists on Capitol Hill, cozy up to columnists and editorial writers, spend millions on lawyers who relentlessly pick at the law, trying to rewrite or water down the regulations required for enforcement. Before you know it, what once was an attempt at genuine reform creeps back toward business as usual. It’s happening right now with the Dodd-Frank Wall Street Reform and Consumer Protection Act – passed two years ago in the wake of our disastrous financial meltdown. Just last week, for example, both parties in the House overwhelmingly approved two bills that already would change Dodd-Frank’s rules on derivatives — those convoluted trading deals recently described by the chairman of the Commodity Futures Trading Commission as “the largest dark pool in our financial markets.”

Bank Lobbyist on Rep. Maxine Waters as Chair of Financial Services Committee: “Just the name sends shivers up the spine” - Did you know that most international banks would leave America if Congresswoman Maxine Waters became the Chairwoman of the Financial Services Committee in the House of Representatives?  Apparently, that’s what the financial services industry is saying.  An expert at Pace University and former McKinsey consultant named John Allen James actually argued this in an article that was breathtaking in its viciousness.  He claimed that Waters, a sitting Congresswoman for over twenty years, simply hates people in suits and ties.  That’s how arrogant the industry has become. There’s a reason for the hyperbole. Last month, Yves highlighted this article, which technically was on the coming fight between senior Democrat Maxine Waters and senior Democrat Carolyn Maloney over the top spot on the Financial Services Committee now that the bank-friendly Barney Frank is retiring.  Maloney, of course, is the driving force behind several initiatives to deregulate Wall Street, including the JOBS Act (which Alexis Goldstein took down in Maloney’s face on Up with Chris Hayes).  She also pushed a bill through committee to get rid of a significant derivatives regulation by redefining a transparent public swaps exchange as two guys talking on the phone.  Maloney as ranking member of the Financial Services Committee would be a victory for the New Democrat caucus and its banking allies.  Waters, of course, carries her own baggage.  She is under an ethics cloud, which had dragged on for years inconclusively (but I suspect will wrap up without consequences).  She is widely hated by the financial services community, and she supported problematic policies around Fannie and Freddie in the 1990s and early 2000s.

Is William Cohan Right That Wall Street "Regulation" Has To First And Foremost Curb Greed? - Now that the world is covered in at least $707 trillion in assorted unregulated Over the Counter derivatives (as of June 30, the most recent number is easily tens of trillions greater) and with at least one JPMorgan prop|non-prop trader exposed to having a ~$100 billion notional position in some IG-related index trade, pundits, always eager to score political brownie points, are starting to ruminate over ways to put the half alive/half dead cat back into the box. Unfortunately they are about 20 years too late: with the world literally covered in various levered bets all of which demand hundreds of billions in variation margin on a daily basis, the second the one bank at the nexus of the derivative bubble (ahem JPMorgan) starts keeling over, it will once again be "the end of the world as we know it" unless said bank is immediately bailed out. Again.

For Capitalism to Survive, Crime Must Not Pay - Capitalism is not an abstract idea. It is an economic system with a distinct set of underlying principles that must exist in order for the system to work. One of these principles is equal justice. In its absence, parties will stop entering into transactions that create overall wealth for our society. Justice must be blind so that both parties — whether weak or powerful — can assume that an agreement between them will be equally enforced by the courts. There is a second, perhaps even more fundamental, reason that equal justice is essential for capitalism to work. When unequal justice prevails, the party that does not need to follow the law has a distinct competitive advantage. A corporation that knowingly breaks the law will find ways to profit through illegal means that are not available to competitors. As a consequence, the competitive playing field is biased toward the company that does not need to follow the rules. The net result of unequal justice is likely to be the destruction of the overall wealth of our society. I don’t mean the wealth of individuals; I mean the total wealth of goods and services that are the benefits of healthy competition. To the extent that unequal justice prevails, entities that are exempt from the laws will, in all likelihood, be more profitable than law abiding competitors.  The “rogue” company gains power, changes markets, and destroys direct and indirect competitors because it is playing by different rules.

Speculation and Criminal Manipulation of Food and Commodities Prices - Yet another market where the rule of law doesn’t apply. Check out the video from RNN: From the transcript:: But there’s another problem here, and that is some of these participants—and I’m not saying who they are, but I’m sure there are enough there doing this that they are adversely affecting the price—are actually not just swamping the markets with investments, but they’re working with each other to drive the price up. That is a criminal problem. That is called criminal manipulation of the price. And that is why the president of the United States has now twice asked the Justice Department, once in April 2011 and once in March 2012, to please, please investigate these markets to see if there is criminal wrongdoing.

Oil markets should heed Libor lessons - Five years ago, the word “libor” sparked a yawn from investors and journalists.  No longer. Since 2007, those Libor rates have sparked controversy, as it has become obvious that “reported” prices can sometimes be distorted, particularly during a crisis. More recently, global regulators have started investigating allegations that traders have sometimes deliberately manipulated Libor too. Could something similar be about to occur in oil markets too? It is a fascinating question. Six weeks ago, the International Organisation of Securities Commissions published a dry-sounding report called Functioning and Oversight of Oil Price Reporting Agencies, and duly asked for reactions. The issue revolves around the role played by price reporting agencies – PRAs – such as Platts, Argus Media and ICIS. These wield extraordinary power in the energy sector, since, as Liz Bossley, head of the Consilience Energy Advisory Group says in her submission to Iosco: “The vast majority of physical oil production moves under contracts that use PRA benchmarks as a reference point”, and “perhaps 60 to 70 per cent of OTC swaps and options are priced or cash-settled by reference to PRA quotes”.  But the PRAs do not create these indices just based on prices established by actual trades; instead, they also rely (sometimes heavily) on reported quotes from a pool of selected financial players, with sometimes as few as five participants taking part, as the Iosco report notes. And there is limited external scrutiny, let alone regulatory oversight of the prices, because reporting activities have been defined as “journalistic” activity and are shielded by free speech rules.

High-frequency trading is cuckoo - In the Australian Stock Exchange’s Sydney data room, which is about the size of a big lounge room, there are six “cuckoos”. These are the banks of servers installed by high frequency traders. They sit against the wall opposite the ASX servers and each is connected directly into the host by a fat fibre optic pipe. Each cable is precisely the same length by agreement with the ASX so that none gets an advantage; if one server is closer to the input, its cable is looped around to lengthen it. Think about that: one less metre of optic fibre carrying data at 299.8 million metres per second would give one share trader an unfair advantage over the rest. It suggests that something pretty quick is going on. The question is whether it’s fair to the rest of us; whether those six parasites with their suckers fastened directly into the heart of the ASX should be allowed to get away with it.

Déjà vu Dot Con - There is much talk, much too late of course, about the JOBS act. We warned about this inappropriately titled bill earlier, but as usual, when corporate lobbyists want, corporate lobbyists will get in Congress, no problem. The bill passed and was signed into law, despite having almost nothing to do with real jobs. Dealbook overviews what Wall Street is discovering after the Jumpstart Our Business Startups bill was passed, oops.  Provisions tucked into the so-called JOBS Act, or the Jumpstart Our Business Startups, will roll back some major securities regulations and parts of a landmark legal settlement struck almost a decade ago. That 2003 settlement built a Chinese wall between Wall Street research analysts and investment bankers, an effort to prevent analysts from improperly promoting stocks to help their firms drum up business from corporate clients. Now many are pouring over the nitty gritty to see what this bill really does. It ain't lookin' too pretty. While being billed as something to give start up companies more sources of funding and flexibility, instead the bill appears to be a re-awakening of the great Dot Con IPO ripoff circle jerk that was going on from 1994-2001.

This Must Be a Joke - From the Times article on President Obama’s signing of the JOBS Act (emphasis added):While soliciting investment funds online has triggered fears of fraudulent schemes, the law’s backers said the greater availability of information through social media sites like Facebook would allow would-be investors to conduct their own background checks, making it difficult for such schemes to succeed.“While it seems reasonable to worry about these issues, there is just so much more information these days,” said Timothy Rowe, the chief executive of the Cambridge Innovation Center, which provides office space for start-up firms next to the campus of the Massachusetts Institute of Technology.  The thing speaks for itself.

Why Obama’s JOBS Act Couldn’t Suck Worse –Taibbi - The "Jumpstart Our Business Startups Act" (in addition to everything else, the Act has an annoying, redundant title) will very nearly legalize fraud in the stock market. In fact, one could say this law is not just a sweeping piece of deregulation that will have an increase in securities fraud as an accidental, ancillary consequence. No, this law actually appears to have been specifically written to encourage fraud in the stock markets. Ostensibly, the law makes it easier for startup companies (particularly tech companies, whose lobbyists were a driving force behind its passage) attract capital by, among other things, exempting them from independent accounting requirements for up to five years after they first begin selling shares in the stock market. The law also rolls back rules designed to prevent bank analysts from talking up a stock just to win business, a practice that was so pervasive in the tech-boom years as to be almost industry standard. Even worse, the JOBS Act, incredibly, will allow executives to give "pre-prospectus" presentations to investors using PowerPoint and other tools in which they will not be held liable for misrepresentations. The JOBS Act also loosens a whole range of other reporting requirements, and expands stock investment beyond "accredited investors," giving official sanction to the internet-based fundraising activity known as "crowdfunding." But the big one, to me, is the bit about exempting firms from real independent tests of internal controls for five years.

High Gas Prices? Blame Goldman Sachs - Democrats in Congress are preparing a volley against oil market speculators in their effort to counter charges by Republican frontrunner Mitt Romney that the Obama administration’s energy policies are to blame for skyrocketing gasoline prices. A coalition of consumer groups, petroleum marketers and some industrial users said Thursday that legislation will be introduced in the House and Senate in the next few weeks that would slap new controls on oil futures markets. The goal is to curb the speculation that they say is driving up oil and gasoline prices and threatening to derail the economic recovery. According to Mark Cooper, the chief economist of the Consumer Federation of America, and University of Maryland law professor Michael Greenberger, who in the late 1990s oversaw derivatives trading at the Commodity Futures Trading Commission, the proposed law would stop investment banks like Goldman Sachs and Morgan Stanley from selling oil-based commodity index funds; order an immediate Justice Department probe into oil speculation; and add 400 oversight staff to the CFTC to police oil and other futures markets. “The American consumer is paying 75 cents more per gallon because of excessive speculation,” said Cooper. “That’s eating a hole in consumers’ pocketbooks and the U.S. economy.”

The Profits of Virtue - Corporate social responsibility has entered the lexicon of mainstream economics. Some thought this shouldn’t be, others that it simply couldn’t happen. Milton Friedman famously asserted that corporations’ only responsibility was to maximize profits. Many of his critics insisted that they were incapable of doing anything but that. Reality has given theory a nudge. A detailed article in the current Journal of Economic Literature by Markus Kitzmueller and Jay Shimshack points out that nearly 11 percent of professionally managed investment in the United States is designated as socially responsible.More than a third of large companies have voluntarily requested external certifications for meeting social or environmental standards. Many companies routinely provide accounts of their socially responsible contributions. Among the important questions addressed by recent economic research are whether socially responsible commitments lower profitability and, if not, how corporations distribute the costs among their stakeholders. The fond hope that companies can “do well by doing good” sometimes extends to the assertion that they can even increase profitability. Skeptical economists tend to counter with “there’s no such thing as a free lunch.”

Democratize Wall Street, for Social Good, by Robert Shiller- Many finance students and members of the Occupy Wall Street movement have a great deal in common: a deep interest in democratizing Wall Street. I’ve been hearing a great deal lately from my students about financial innovations linked to social media. One such innovation, called crowdfunding, is embedded in the jobs bill signed into law by President Obama... The idea involves Web sites that help many investors contribute small amounts of capital to projects that they read about online, and that might otherwise be starved for money.  There may well be disappointments at first, but the concept can be tinkered with, like other democratizing financial innovations that have eventually delivered much good to society.  Financial innovation, of course, takes unanticipated forms, but wherever it turns next, we can expect some breathtaking transformations during the careers of today’s students. And despite the damage to its reputation from the subprime mortgage crisis and its aftermath, financial innovation could help solve many vexing problems. The challenge ahead — both for my students bound for the world of finance and for those who would occupy it — is to truly democratize Wall Street.

Consumer agency softens fee limit — The Obama administration’s consumer financial watchdog agency is backing off a plan to limit big upfront fees on credit cards. The Consumer Financial Protection Bureau acknowledged today that its proposal would increase costs for cardholders and allow banks to charge more in fees. The limit applies to the fees that banks can charge people in the first year they hold a credit card. Those can include annual fees, application fees and other upfront charges. An earlier plan would have blocked banks from charging fees totaling more than 25 percent of the cardholder’s credit limit. It would have limited application fees and other upfront costs.The consumer agency is supporting a change that would let banks charge whatever fees they want before the card is issued. The 25 percent limit would only apply to fees charged after the card is issued.

Usury Takes a Bite Out of the Poor - Those of us struggling with the issues raised by payday and title loans are consistently told to take morality out of the equation when considering these loans. Thus, it was refreshing to hear a recent presentation by Professor Alex Mikulich of the Jesuit Social Research Institute at Loyola New Orleans entitled “From the Peril of Predatory Lending to the Hope of Economic Justice: A Religious Social Ethical Perspective.” Rather than avoiding morality questions, Professor Mikulich focused exclusively on them in his eye-opening presentation at a recent Family Impact Seminar. He noted that the loans create many unjust results, and then explained that the literal translation of the word usury in Hebrew is to “take a bite out of the poor.”   He distinguished usury from mere  “interest,” which Professor Mikulich defines as part of a mutually beneficial relationship that is good for the community as a whole.  Interestingly, in Exodus 22:25-27, the Torah commands that if a lender lends with a garment as collateral, the garment must be returned by sundown. In fact, no collateral could be taken that could threaten the well-being of the borrower, an interesting idea in light of the home foreclosure mess. Moving forward in history, in the 13th Century, Thomas Aquinas said that “usury leads to inequality which is unjust in itself.”

In Chief Executives’ Pay, a Rich Game of Thrones - IS any C.E.O. worth $1 million a day? That’s roughly $42,000 an hour. Or $700 a minute. Or $12 a second. Think of it this way: In the time it took to read those words, you could’ve pocketed $100. Finish this article and — well, you do the math. At Apple, the answer to that question is an emphatic yes, and then some. Not since Steve Jobs has a chief executive at Apple, or any other public American corporation, for that matter, been as richly rewarded in stock as Timothy D. Cook, who succeeded Mr. Jobs as chief executive last August, a few months before Mr. Jobs died. Mr. Cook was paid a cash salary of roughly $900,000 in 2011. On its own, that would have been a ho-hum paycheck for a top American C.E.O. in recent years. But then came a wild extra, a one-time award, in the form of Apple stock. It was initially worth a staggering $376.2 million. As of the end of last week, it was valued at roughly $634 million, reflecting Apple’s soaring share price.

JPMorgan Chase: The Great White Whale Of The Global Economy - Never mind the Squid. Keep your eye on the Whale. JPMorgan, that is, which is not nearly as vilified as Goldman Sachs, but is bigger and potentially far more important to the global economy than the Vampire Squid. With its size, reach and critical role in the still-thriving shadow banking system, JPMorgan will almost certainly play some role in the next financial crisis, whenever it happens. JPMorgan is now the country's biggest commercial bank by assets, with nearly $2.3 trillion, a number that has increased since the financial crisis. It is also now the biggest investment bank in the entire world, Reuters reported on Thursday, citing a report by a research group called Coalition. Second on the list? The first loser, in other words? Goldman Sachs. Along with Wells Fargo, the biggest U.S. bank by market valuation, JPMorgan is due on Friday to kick off a slew of first-quarter bank earnings reports. Bank profits are shrinking, with lending slow to recover from the recession and trading volume in stocks and bonds depressed. But JPMorgan is still the standard-bearer for the banking industry in more ways than one.

Measuring Up Citigroup and Bank of America - Bank of America used to be the stock Wall Street loved to hate. Citigroup, on the other hand, was supposed to be the troubled bank that had finally gotten its act together.  Those familiar roles have been reversed in 2012, however, and with bank earnings season set to start later this week, investors will be closely watching to see how the two banks match up.  The two have plenty in common. Both giants were forced to turn to the government for help in the wake of the financial crisis in 2008, and both have chief executives who have spent much of their tenure cleaning up the messes they inherited.  Both companies have also had to issue significant amounts of new stock to raise capital that solidified their balance sheets but left their shares at a fraction of precrisis highs. Citigroup and Bank of America also face the risk of a credit downgrade by the ratings agency Moody’s Investors Service in mid-May.  Until last month, it seemed that Citigroup was recovering more quickly. But when the Federal Reserve blocked the company’s proposal to buy back stock and increase its dividend after last month’s stress tests, investors were left wondering if they had bet on the wrong horse.

How Occupy Wall Street Plans to Take Down Bank of America--And How You Can Help  - Bank of America: the very name is meant to conjure up comforting, red-white-and-blue fantasies of a bank of the people, by the people, and for the people. But as Matt Taibbi pointed out in his latest feature for Rolling Stone, while there's almost nothing the megabank does that is for the people, it sure as hell is paid for by the people. It got $45 billion just in bailout money, and trillions (with a T) in emergency loans from the Federal Reserve—and not only did it not pay taxes last year, it received a tax refund of $1 billion. And yet it's still teetering on the edge of collapse. Unless we do something soon, we might be heading for yet another people's bailout of America's bank. Occupy Wall Street has decided to fight back. “This bank is not working, and the people should be deciding how to break up this bank, how it should be democratically run, before it gets either another bailout or is bought out by some other bank,” Nelini Stamp, an Occupy Wall Street participant and organizer, told AlterNet.

This Friday: Run on Bank of America | Occupy Wall Street Weekly Marches on Wall Street presents Run on Bank of America: Every Friday until May 1st, OWS is practicing various street mobilization tactics and formations in preparation for actions on May Day.  This week we are teaming up with the campaign to Break up Bank of America! Come out to the "Run on Bank of America" as we run, march, and call on everyone to move their money out of this monstrous bank. Bank of America is a giant, raging hurricane of theft and fraud, spinning through America and leaving a massive trail of destitute retirees and foreclosed-upon families in its wake. So we are moving our money out of this criminal institution.Time Banking in Relation to “Job Creation” - Some people worry that time banking will ”compete with job creation”. Someone in my time banking google group just mentioned encountering that argument again. So although time presses at the moment, I wanted to jot a few notes on this. I do think time banking is actively better than the cash economy, and not just different. Therefore:

  • 1. To be part of a time bank network is more fulfilling and resilient than to hold a job which earns you some cash. You not only have the benefit of a plethora of offered services (just like if you held cash), but you gain the benefits of giving to others as well, and you have all of this within a human framework which can build community, social life, and has many possibilities for strengthening political and spiritual life as well.
  • 2. As for well-paying jobs, those aren’t coming back anyway. The 1% has been permanently destroying them for decades now, toward its goal of restoring a feudalism far more vicious than the medieval variety. The pace of this destruction has accelerated in recent years. To look at time banking as competing with a hope which is a pipe dream is to look at things wrongly. Whether we have time banks or not, those jobs are gone forever. The system which controls “job creation” wanted them gone, and they’ll remain gone. Time banking, on the other hand, is completely in the people’s hands, and we can make of it whatever we wish.

Cash as Social Infrastructure - Sticker in San Francisco: "Of course it's cash-only, it's the Mission." The word “cash” derives from Latinate words referring to “a chest or box for storing money,” not the money itself. The term originally meant the practices of storing, and the objects used to store items of value – not just money -- as well as the act of going to those storage devices to receive money (to “cash” a bill of exchange,, meant to go to the specific box where the money was). Cash as we know it today is more than a store of value and a medium of exchange; it has symbolic, pragmatic and artistic functions. In the US, even before Durbin, small merchants placed an extra surcharge on credit or offered discounts if customers used cash. Research being conducted at the Institute for Money, Technology and Financial Inclusion (IMTFI) is bringing to light a host of social, ritual and religious uses of cash and coin beyond their economic functions. What's their relationship to, say, mobile money? For us, they are design challenges more than anything else (see, e.g., the Royal Canadian Mint's MintChip, or discussions among developers about Google Wallet). Building an infrastructure for digital payments, especially in places that have been cash-only, entails some connection to the existing social infrastructures of cash.

Is Commercial Loan Growth A Positive Sign For The Economy? - Lending activity is generally considered a lagging indicator of the business cycle, and rightly so. A look at a long-term chart of business loans, for instance, shows that this series has been known to rise well after the start of a new recession. But is the value of this indicator more timely in the current climate, in which the pain of the credit crunch is seared into the collective memory?  The financial sector is still skittish after suffering heavily in the Great Recession. Indeed, no corner of the economy took a heavier blow than finance. The slump of 2007-2009, after all, was partly triggered by an unusually deep financial crisis. It's only natural that banks, even after nearly three years of modest economic growth, are still cautious. If so, what does that say about the continuing rise in business loans generally?  The latest numbers on commercial and industrial loans, as compiled by the Federal Reserve, show that lending is still rising. The actual dollar amounts can be misleading, however, if we're trying to gauge the broad moves in the economy. A slightly better approach is to look at rolling 12-month percentage changes. History shows that when a new recession strikes, the annual pace of business lending, if it isn't already falling, peaks relatively early once the economy begins to shrink.

Unofficial Problem Bank List and Quarterly Transition Matrix - Here is the unofficial problem bank list for April 6, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  Quiet week for the Unofficial Problem Bank List as there were only two removals. The changes leave the list with 946 institutions with assets of $376.5 billion.  With the passage of the first quarter of 2012, it is time to update the Unofficial Problem Bank List transition matrix. The list debuted on August 7, 2009 with 389 institutions with assets of $276.3 billion (see table). Over the past 32 months, 230 institutions or about 59 percent of the institutions on the original list have been removed with 137 from failure, 71 from action termination, 20 from unassisted merger, and two from voluntary liquidation. About 35 percent of the 389 institutions on the original list have failed, which is substantially higher than the 12 percent figure usually cited by the media as the failure rate for institutions on the FDIC Problem Bank List. Since the publication of the original list, another 1,122 institutions have been added. However, only 789 of those additions remain on the current list as 333 institutions have been removed in the interim. Of the 333 inter-period removals, 178 were from failure, 72 were from an unassisted merger, 78 from action termination, and five from voluntary liquidation. In total, 1,511 institutions have made an appearance on the Unofficial Problem Bank List and 315 or 20.8 percent have failed. Of the 563 total removals, the primary way of exit from the list is failure at 315 institutions or 56 percent.

Mortgage-related Observations on Today’s Wells Fargo, JPMorgan Chase Earnings Reports - Today, both JP Morgan Chase and Wells Fargo released their earnings, beating expectations on revenue and profit.   Here’s the JP Morgan Chase release, and here’s the Wells release.  Deposits are up at both banks (Move Your Money campaign notwithstanding), and new regulatory guidance on second liens seems to be having a very modest effect at both banks.

  • - JPM earned $1.8 billion in its retail banking operation (p. 4), which is entirely due to the $1.8 billion in reduction for loan losses.  Its loan loss reserves dropped $3.9 billion from one year ago (p. 17).  These bank earnings seem like funny money, with loan loss reserves used to plug holes when necessary to smooth earnings.
  • - JPM Chase’s direct mortgage servicing expenses for the last quarter were $1.151 billion. JPM Chase’s direct mortgage servicing revenue was … $1.151 billion. (p. 6) What a coincidence!
  • - JPM Chase’s HELOC book dropped from $102B to $99.1B in the quarter, a fall of $2.9B. About 20% of that drop was due to charge-offs of $542M. (p. 7)
  • - JP Morgan is now reporting $1.6B of “high-risk” seconds due to new regulatory guidance we noted two days ago.
  • - Deliquency trends for second-liens seem bizarre.  Check out these charts from page 16.
  • - Wells Fargo wrote off $1.7 billion of second liens due to more aggressive examinations by regulators (see page 13)
  • - On slide 13, Wells says that HARP accounted for 15% of its mortgage originations in the quarter.  Total mortgage originations in the quarter for Wells are up to $129B.  HARP is a government program that allows for refinancing of underwater borrowers.   Shahien Nasiripour has a good article on this at the FT.

Dimon Vows Fight Moynihan Lost Over Claims From Mortgages -- Jamie Dimon, who’s already spent $18.5 billion cleaning up mortgages at JPMorgan Chase & Co. (JPM), is warning a growing list of claimants that they’re in for a fight.  Investors demanding that the biggest U.S. lender buy back soured loans or compensate them for losses on mortgage securities “face a long and difficult road,” Dimon said last week in a shareholder letter. Those lining up include holders of $95 billion of bonds represented by Gibbs & Bruns LLP, the law firm that won $8.5 billion last year from Bank of America Corp. (BAC)  “We are going to fight repurchase claims that pretend the steep decline in home prices and unprecedented market conditions had no impact on loan performance,” Dimon, chief executive officer of the New York-based lender, wrote in the April 4 letter. He’ll also oppose “securities claims brought by sophisticated investors who understood and accepted the risks.”

Green Slime Drives Our Financial Crises - Bill Black - As with the perversion of Adam Smith’s reliable butcher into a corporate butcher specializing in aiding the secret adulteration of our burgers with pink slime, however, the CEOs of our leading financial firms have adulterated our financial system with green slime (the color of our money.)  Pink slime was limited to 15% of our burgers and it generally does not makes purchasers sick.  Green slime became one-third of the mortgages made in 2006 and close to 100% of our collateralized debt obligations (CDOs).  Green slime typically caused severe financial losses.   Indeed, they ensured that the rating agencies would rate the green slime “AAA” and the outside auditors would give clean financial opinions to financial statements claiming that green slime was “prime” and free of adulteration.  The meat butchers and the financial butchers called their slimed products “prime” – prime meat and prime loans. Green slime drove the current crisis, just as it did the Enron era frauds and the second phase of the S&L debacle.  Studies of “liar’s” loans have shown their fraud incidence to be 90% — they are virtually all fraudulent.  The Orwellian term that BPI used to disguise the nature of pink slime was “Lean Finely Textured Beef.”  The Orwellian term the industry favored to disguise the nature of green slime was “Alt-A.”  “A” signifies that the mortgage is of the lowest credit risk – it is “prime.”  “Alt” is short for “alternative” and, falsely, implies that the loans were underwritten by an alternative process.  Failing to underwrite, e.g., by verifying the borrower’s income, is not an “alternative” means of underwriting.  Honest mortgage lenders do not make liar’s loans (the term that the lenders used in private to describe their green slime) because they create severe “adverse selection” and encourage endemic fraud.  Both results mean that the expected value of making such loans is negative.  In plain English, that means that the lender will suffer catastrophic losses and fail.

NY pushes objection to BofA $8.5 billion mortgage pact (Reuters) - Bank of America Corp's proposed $8.5 billion mortgage bond settlement received fresh opposition on Tuesday from New York's attorney general, who said the accord appears unfair to investors who may deserve to recover more. Eric Schneiderman, the attorney general, filed papers on Tuesday asking a New York State Supreme Court justice for permission to intervene. He had made the same request last August before the case moved to federal court. It returned to the state court in February. The settlement announced last June arose from Bank of America's 2008 purchase of Countrywide Financial Corp, once the nation's largest mortgage lender. While 22 institutional investors including BlackRock Inc, Metlife Inc and Allianz SE's Pacific Investment Management Co signed onto the accord, several other investor groups complained that the payout was too low. In papers filed Tuesday, Schneiderman raised questions about its "fairness and adequacy," with investors receiving only a few pennies on the dollar for losses suffered. Schneiderman also maintained that Bank of New York Mellon had a conflict of interest because it stood to receive financial benefits under the settlement. He dropped previous fraud counterclaims against Bank of New York Mellon.

More Proof of Obama Mortgage Settlement Lies: Woefully Underresourced Investigation Not Fully Staffed Yet -- Yves Smith - Eric Schneiderman is finding out he sold out to the Administration for far too little. The New York state attorney general torpedoed the opposition to the mortgage settlement via joining a newly-established mortgage fraud investigation and then going silent on where he stood on the settlement.  It was easy to see this task force wasn’t a serious effort. Schneiderman was only a co-chairman. The co-chairman, Lanny Breuer, was from the heretofore-missing-in-action Department of Justice. No one on the task force was head of a Federal agency.  The idea that this effort was all for show and would at most deliver a few suits conveniently close to the election was confirmed by its staffing. Schneiderman looked foolish when he said he’d have hundreds of investigators at his disposal, when Breuer announced it would be a mere 55. Those numbers are so paltry it begged the question as to what if anything Schneiderman was getting from this deal. If he has stuck with his earlier plan of a combined state AG effort, they probably could have mustered up this level of staffing among the 15 states that were considering breaking with the Administration prior to the Schneiderman betrayal. And in further proof of what bad judgment Schneiderman demonstrated, Dave Dayen highlighted this find in an e-mail from Credo: And now we’re hearing from insiders in Washington DC, that the full complement of 55 promised investigators — which is already not nearly enough — haven’t even been deployed to the task force.

Hiding the Enforcement Fraud At the Heart of the Mortgage Settlement - On Thursday, April 5th U.S. District Court Judge Rosemary M. Collyer announced she had decided to sign off on the ”$25 billion” Mortgage Settlement. By “announced”, I mean she signed the consent orders all our major law enforcers and the biggest bankers had agreed to, and entered them into the record. Judge Collyer didn’t actually say anything about the deal. She didn’t let anyone else say anything, either: she didn’t hold a public hearing on the deal. In acting silently, Judge Collyer not only okayed the deal’s lousy terms, which institutionalize servicer theft and foreclosure fraud, she reinforced the incredibly poor public process that’s kept the enforcement fraud at the heart of the deal hidden. Deliberately hidden. To understand just how deceptive “our” government and “our” law enforcers have been with us, imagine them as a Shakespearean magician, confessing his thoughts to us as he tries to trick an audience seated just off stage. Hear the magician, as he secretly pleads for his misdirection to work: ‘Please, keep focused on this hand, the one with the wand waiving above the shiny new servicing “standards.” Pay no attention to what I’m doing with my other hand. Please don’t notice me transforming the “standards” into empty promises through the ‘magic’ of metrics. I must succeed at controlling and guiding your attention, so you fall for my trick! Otherwise, my trick is obvious-my ‘magic’ is all there in black and white, in Exhibits E and E-1. So don’t look there…stay with me, stay focused on the new servicing “standards” and that big sounding “$25 billion”…

The Administration PR Fail on the Securitization Task Force - Remember that mortgage securitization task force that would supposedly satisfy the public’s deep yearning for some basic law enforcement by prosecuting the banks for securities fraud? Well, lately people have been pointing out that the task force isn’t showing many signs of life, and is showing every indication of being slow walked by the Feds. For starters, more than two months after the task force’s creation, it hasn’t been staffed with the 55 people its budget calls for. How’s that for serious commitment from the Feds? Well, yesterday the Administration pushed back, telling Reuters about the subpoenas the task force has issued.  But just as I was starting to feel better about the task force, I hit this part of the article: “The Justice Department last month posted a one-year position of full-time coordinator for the working group who could help manage discovery and coordinate investigations, according to the job posting.” Nothing says “we improvised politically expedient enforcement theater” rather than “we launched a serious task force designed to go after bank lawlessness” than admitting it took more than a month to begin advertising a basic but important job, and admitting that a month later the job remains unfilled.

Judge Rules Wells Fargo Engages in “Reprehensible,” Systemic Accounting Abuses on Mortgages, Hit with $3.1 Million Punitive Damages for One Loan -- Yves Smith - The facts that have surfaced in before one bankruptcy judge, Elizabeth Magner of the Eastern District of Louisiana, and one servicer, Wells Fargo, should give industry defenders pause. Wells, as we have pointed out repeatedly, has an annoying habit of piously claiming it is better than other servicers when it engages in the same indefensible conduct as its peers. So if you were to take Wells at its word, the conduct of other servicers is at least as bad as what has taken place in this jurisdiction, if not worse. Remember, servicers are highly routinized operations, so if something, it is almost certain to be standard practice. And Wells has admitted that in this case. Here is a snippet of background from another case in Magner’s court as recounted by the Center for Public IntegrityIn an April 2008 ruling, Elizabeth Magner, a U.S. bankruptcy judge in New Orleans, rejected the two charges [for broker price opinions charged when the parish in which the home was located was evacuated thanks to Hurricane Katrina] as invalid. She also disallowed 43 home inspections, 39 late charges, and thousands of dollars in legal fees charged to the Stewarts’ account. Almost every disallowed fee was imposed while the Stewarts were making regular monthly payments on their home… Magner determined that Wells Fargo had been “duplicitous and misleading” and ordered the bank to pay $27,000 in damages and attorneys’ fees. She also took the unusual step of requiring the servicer to audit about 400 home loan files in cases in the Eastern District of Louisiana.

BofA sues BofA in Foreclosure Filing: More "Robo foreclosure"? - Earlier this week, Zach Carter at the HuffPo wrote: Bank Of America Sues Itself In Unusual Foreclosure Case: Over the past two years, the nation's largest banks and the Obama administration have repeatedly vowed to clean up the foreclosure fraud mess. ... But in Florida's Palm Beach County alone, Bank of America has sued itself for foreclosure 11 times since late March, according to foreclosure fraud activist Lynn Szymoniak, who forwarded one such foreclosure filing, dated March 29, 2012, to The Huffington Post. This sounds like BofA is making a mistake. Nope. From the article:  "We are servicing the first mortgage on behalf of an investor and we own the second mortgage," Bank of America spokeswoman Jumana Bauwens told HuffPost. "Naming the second-lien holder in the suit is necessary to eliminate the junior interest," Bauwens said. Correct. Here is the BofA filing in Palm Beach, Florida. There are two reasons this is OK. First, as anyone who read the excellent overview "US mortgage and foreclosure law" , the top priority for BofA as servicer of the first lien is to clear title. Second, in this specific case, it appears the purchase loan was placed in an MBS and BofA is now only the servicer of the loan. As the servicer, BofA has a legal obligation to the MBS investors.

“Code is law.” Literally. -  We can look at the foreclosure crisis as the pre-emininent law enforcement crisis of our time: Elite impunity for crimes committed and still being committed by lenders and servicers (“banksters”) on a massive scale. We can also look at the foreclosure crsis as an issue of jurisprudence, where a revolutionary oligarchy seeks to change the nature of law itself.  Let’s start with “code ["the stuff that software writers write"] is law,” a terrific meme successfully propagated by Lawrence Lessig in the ’90s. From The Industry Standard: The single most significant change in the politics of cyberspace is the coming of age of this simple idea: The code is law. The architectures of cyberspace are as important as the law in defining and defeating the liberties of the Net. Activists concerned with defending liberty, privacy or access must watch the code coming from the Valley – call it West Coast Code – as much as the code coming from Congress – call it East Coast Code.  I’d like, respectfully, suggest that Lessig has the right meme, but the wrong content backing up the meme. As I hope to show, code is indeed law — and, increasingly, literally — but not in the clean, elegant, hip, candy-colored (and triumphal) world of “the Valley” and the Internet, but in the world of huge honkin’ crufty proprietary information systems run by major corporations. Especially those used by banksters (including MERS and LPS).  Is the foreclosure crisis a law enforcement crisis?  Yes. Yves Smith: The word “predatory” is not adequate to describe Wells’ conduct. The bank is not simply willing to steal from consumers, via blatant, institutionalized violations of its own agreements on mortgages and later on bankruptcy plans. It has absolutely no respect for the law, whether it be contracts or court procedures.

Consumer bureau plans overhaul of mortgage industry - The Consumer Financial Protection Bureau (CFPB) is looking to overhaul the mortgage servicing industry, arguing that the problem-plagued sector is unaccountable and opaque. The CFPB announced Monday that it was mulling rules to reform that industry, which has been hotly criticized because as foreclosures mounted, so did evidence of shoddy business practices.“For too long, mortgage servicers have not been held accountable to their customers, and the result has been profoundly punishing to homeowners in distress," said CFPB Director Richard Cordray. "It’s time to put the ‘service’ back in mortgage servicing.” Cordray is expected to tout the new initiative at a public event Tuesday. The new effort represents one of the broadest projects taken on so far by the new bureau, which opened its doors in July after being created by the Dodd-Frank financial reform law, targeting one of the more problematic areas under its jurisdiction. 

Consumer watchdog proposes crackdown on mortgage companies  — The Consumer Financial Protection Bureau on Tuesday will consider a host of new rules that would force the nation's mortgage servicers to provide greater accountability and transparency in their dealings with borrowers. Responsible for collecting payments on behalf of mortgage lenders, mortgage servicers typically calculate interest rates on adjustable-rate loans and handle customer service requests about taxes, escrow accounts, foreclosures and loan modifications. But in the housing meltdown that preceded the Great Recession, mortgage servicers were strongly criticized for providing faulty information to struggling borrowers, failing to correct errors in a timely manner and generally not providing enough assistance to help homeowners avoid foreclosure. New rules being considered by the bureau would make it easier for borrowers to get information from and communicate with their loan servicers. "For too long, mortgage servicers have not been held accountable to their customers, and the result has been profoundly punishing to homeowners in distress. It's time to put the 'service' back in mortgage servicing," said bureau director Richard Cordray. Proposals under consideration include requiring servicers to provide regular monthly statements with a breakdown of payments by principal, interest, fees and escrow. Another proposal would require servicers to make good-faith efforts to contact delinquent borrowers and explain their options to avoid foreclosure.

Treasury Department Faulted in Effort to Relieve Homeowners - A fund to support homeowners in the communities hit hardest by the collapse of the housing bubble has disbursed just 3 percent of its budget and aided only 30,640 homeowners in the two years since its creation, according to a report released on Thursday by a federal watchdog office.  The Hardest Hit Fund, which was created in the spring of 2010, grants money to state housing finance agencies for efforts to help families that are facing foreclosure. It has “experienced significant delay” because of “a lack of comprehensive planning” by the Treasury Department and limited participation by Fannie Mae, Freddie Mac and the large mortgage servicers, said the report by the special inspector general for the Troubled Asset Relief Program.  “TARP wasn’t supposed to be just a bank bailout,” . “It was specifically designed with the goal of helping homeowners, and our concern is that that goal may not be met.”  As of the end of 2011, the Hardest Hit Fund had spent $217.4 million out of its $7.6 billion budget, the report found. The program is intended to reach homeowners who are unemployed, or living in areas with high unemployment rates or steeply falling home values.  The report is just the latest to criticize the Obama administration’s efforts to relieve homeowners battered by the nationwide drop in housing prices and the broader recession.

HUD Secretary Donovan on Principal Reductions - This is about making the right decision for homeowners and for the taxpayer. We believe and there is a lot of agreement, many economists, those who have looked closely at this data who believe where you have someone who is deeply underwater, where you’re in a situation where there is really no light at the end of the tunnel, no sense that even if you’re paying your mortgage for three, four, five years or even a decade, that you’ll get back to building equity again. Families will give up at some point. We think the data shows that. Really the issue here is about the numbers and the analysis and whether this is not only good for homeowners but also good for the taxpayer. And we believe with the changes that we’ve made over the last few months that the case is compelling. And my experience with Ed DeMarco is whatever his personal feelings are, he is dedicated to making sure that he follows the law and what the conservator is required to do. And we believe based on the analysis that we’ve done that the evidence is that principal write-downs should happen in cases where it’s not only good for the homeowner but also good for the taxpayer.

Fannie and Freddie Regulator Considers Plan for Principal Reduction - The overseer of Fannie Mae and Freddie Mac on Tuesday opened the door to forgiving some mortgage debt of homeowners who owe more than their houses are worth, as the Obama administration has recently urged. The acting director of the Federal Housing Finance Agency, Edward J. DeMarco, said that in some circumstances it might make economic sense for the government-run companies to reduce borrowers’ mortgages, taking a hit to modify the loan but also making it less likely that a homeowner will default. But in his speech at the Brookings Institution, Mr. DeMarco described as limited the benefits from principal reduction, saying it would hardly be a magic bullet for struggling homeowners and noting that it might carry significant costs for taxpayers. His comments left doubt about whether he would change his long-held stance against principal reduction. “This is not about some huge difference-making program that will rescue the housing market,” he said. “It is a debate about which tools, at the margin, better balance two goals: maximizing assistance to several hundred thousand homeowners while minimizing further cost to all other homeowners and taxpayers.”

FHFA To Treasury: Forget Principal Forgiveness - FHFA Acting Director Edward DeMarco offered some prepared remarks today making it abundantly clear that his preference is for forbearance over forgiveness in the great mortgage hole in the US balance sheet's dam. As Bank of America's Chris Flanagan noted this evening "[DeMarco] effectively nixed the idea of broad-based principal forgiveness by Fannie Mae and Freddie Mac" in his comments on the Treasury's incentives to forgive principal on underwater borrowers. Citing three factors - NPV Impact to taxpayer, moral hazard, and operational costs - the FHFA Director indicated that forbearance (simply put - delaying foreclosure) is effectively a shared appreciation mortgage (SAM) without the operational complexities of a more formal SAM. BofA concludes: "his preliminary remarks on the incentive approach to principal forgiveness of GSE loans [mean] that there will be zero to minimal scale of such an approach." Back to the drawing board for the Treasury (or more forced-through unintended consequences?).

Addressing the Weak Housing Market:Is Principal Reduction the Answer? Remarks as Prepared for Delivery Edward J. DeMarco, Acting Director Federal Housing Finance Agency (PDF)

Strategic Defaulters vs. Strategic Modifiers - In FHFA acting director Ed DeMarco's speech on Tuesday, he discussed the risk of "strategic modifiers". Felix Salmon and I have been discussing this via email. Here is Salmon's post this morning: Ed DeMarco and the spectre of strategic modifiers A couple of definitions: A "strategic defaulter" is a borrower who is underwater and who is willing to walk away from their home, even though they have the capacity to make the payments. A "strategic modifier" is a borrower who intends to stay in their home, but is willing to miss some payments to qualify for a loan modification. Salmon writes:  I don’t believe that the problem of strategic modifiers (over and above the problem of strategic defaulters) is likely to be huge. One reason is that I’ve been writing about the upside of strategic default for a long time, and it really hasn’t caught on, outside a few second homes and the like. Strategic default is not something that Americans like to do, and one of the main reasons is that they really care about their credit rating. Even if a strategic modifier keeps her house, she’ll suffer the same hit to her credit rating as a strategic defaulter would. And people don’t like that at all. I disagree somewhat. First, someone who goes to foreclosure will take a much larger hit to their credit than someone who misses a few payments. So there is a difference - "strategic modifiers" will not take the same credit hit as "strategic defaulters". Second, I think most people feel an obligation to pay their mortgage, if they can, even if they owe more than their home is worth.

More on How Ed DeMarco and His Critics Miss the Point on Principal Reduction - I pretty much got out my thoughts about principal reductions and Ed DeMarco yesterday. In short, both sides are missing the point. DeMarco is consumed with self-doubt over 1/1000th of his total portfolio, and he’s inventing boogeymen to get him to stop making the logical and most beneficial call. Felix Salmon is great on this today. DeMarco invented an entire new category of “strategic modifiers” and worried that the financial incentive to the GSEs would be sapped if some of his underwater borrowers strategically stopped making payments in order to get a principal reduction.The one flaw with this logic is that it never happens. Not in an America without a strong safety net, not in an America where servicers can kick you out of your house with reckless abandon. Personally, I don’t believe that the problem of strategic modifiers (over and above the problem of strategic defaulters) is likely to be huge. One reason is that I’ve been writing about the upside of strategic default for a long time, and it really hasn’t caught on, outside a few second homes and the like. Strategic default is not something that Americans like to do, and one of the main reasons is that they really care about their credit rating. Even if a strategic modifier keeps her house, she’ll suffer the same hit to her credit rating as a strategic defaulter would. And people don’t like that at all.

Some Observations on the Second Lien Problem - Over the past three years, the big four servicers have been keeping hundreds of billions of dollars of second mortgages on their books (mostly in the form of Home Equity Lines of Credit, or HELOCs).  Many of these mortgages would seem effectively worthless, because a home equity line of credit or second mortgage on top of an already deeply underwater first mortgage has no value.  You can’t use it to foreclose, because you’d get nothing out of the foreclosure – all of that would go to the first mortgage holder (usually some investor in a pension fund somewhere).  It has only “hostage value”, or the ability to stop a modification or write-down from happening.  The best way to clean up this situation is to have the regulators (FDIC, OCC, Federal Reserve) simply tell the banks that they must write down their second mortgages on collateral that has been impaired.  That way, the incentive problem goes away.  By forcing the bank to recognize the loss now, the bank will no longer stop a modification on a first mortgage.  And in fact, the regulators pretty much agreed that this is what their examiners should do, when they issued new rules earlier this year on accounting for second liens. Only, the regulators haven’t done it, because the banks claim their seconds are performing.  Bank of America says that these loans are worth 93 cents on the dollar.  Several of the other banks don’t break out their loss reserves for seconds, so it’s hard to tell, but I think it’s clear they aren’t reserving enough.  We can tell that because the Federal Reserve itself is dramatically overvaluing these seconds.  In a stress test, the Fed said in its worst case scenario that the banks would lose only “$56 billion”.  These are low numbers.  According to their most recent investor report, Wells Fargo alone has $35 billion of second liens behind first mortgages that are underwater.

Lack of Competition Stifles Refinance Program for Underwater Homeowners - Some homeowners are getting stuck with relatively high interest rates even after they participate in the government's program to help them refinance their mortgages. The biggest banks are not lowering rates as much as they could be — and homeowners have few options to go elsewhere. Analysts say that the big banks are set to make major profits off of the Home Affordable Refinancing Program, also known as HARP, which allows homeowners with loans backed by government-owned Fannie Mae and Freddie Mac to refinance if they owe more than their home is worth. The program, launched in 2009, is designed to let struggling borrowers take advantage [3] of lower market interest rates. So far, about 1.1 million people have refinanced under the program, which was expanded [4] last fall to make it more attractive for banks and to let more homeowners participate. Since then, the government says there has been "tremendous borrower interest [5]" and estimates that another 1 million could qualify over the next two years [6]. But while the expansion may let more people refinance, it may not be at the lowest rate possible because the incentives don't favor competition, according to a new report [7] by an investment group Amherst Securities.

‘Tsunami’ of foreclosure complaints swamps Fla. Bar - The Florida Bar has fielded nearly 1,400 complaints against attorneys relating to the housing crisis, an unprecedented amount that has buried investigators and forced the group to rethink how it will handle widespread grievances in the future. Beginning in the fall of 2010, as foreclosures receded because of robo-signing revelations, a wave of consumer complaints alleging attorney misconduct began to hit the Bar. The complaint categories - mortgage fraud, foreclosure fraud, loan modification misconduct - didn't even exist three years ago, said Ken Marvin, director of lawyer regulation for the Florida Bar. His first recorded loan modification complaint was in November 2010. Today, 793 cases have been opened. "They just started coming in and the numbers were incredible," Marvin said. "We never even had a loan modification category or mortgage fraud or foreclosure fraud, and we had to create all of this because we wanted to track these reliably." The Bar hired an additional attorney to specifically process foreclosure and mortgage complaints, which make up about 17 percent of all open Bar cases.

N.J. Supreme Court order clarifies foreclosure paperwork for mortgage lenders - The state’s chief justice has given financial institutions that are foreclosing on homeowners more direction about how to file proper foreclosure paperwork. The judicial order, signed Wednesday by New Jersey Supreme Court Chief Justice Stuart Rabner, comes six weeks after the high court ruled unanimously that a mortgage lender must list its own name and contact information, as well as that of the loan’s servicer, on the document that initiates the foreclosure process, known as the notice of intent to foreclose. Because many loans have been bundled and sold to investors, financial institutions have often only listed the servicer, a third party that collects monthly payments. Any filing that only lists the servicer is now considered deficient, and the court order said the loan holder must submit additional information for uncontested foreclosure filings so a judge can make a decision. Nearly 95 percent of foreclosures in New Jersey are uncontested, the court has said. The lender must also send a copy of the updated paperwork to the homeowner. Thousands of cases pending in the court will be affected by this order in the so-called Guillaume case, a court spokesman said.

"US mortgage and foreclosure law" - Here is a very good overview (and fairly short) of US mortgage and foreclosure law by Zachary Kimball and Paul Willen at The New Palgrave Dictionary of Economics. This article discusses title and liens, the differences between judicial states and non-judicial states, judgments and recourse, the Mortgage Electronic Registration System (MERS) and much more. Here is an excerpt:  Two types of foreclosure by sale emerged in US law. The first is foreclosure by judicial sale, in which the lender petitions the court and the court orders a foreclosure auction. Judicial sale is available in every jurisdiction. The alternative approach is that, when the mortgage is originated, the borrower gives the lender the right to carry out a foreclosure auction in the event of default, a right known as the ‘power of sale’ (Osborne, 1951, p. 992). Although rare in the early 19th century, power-of-sale foreclosure became more common in the USA over time  Power-of-sale foreclosure is available in a majority of states.Of the states with the most severe foreclosure problems in the current crisis, Arizona, California and Nevada all allow power-of-sale foreclosure, while Florida only allows judicial foreclosure.

RealtyTrac: Q1 2012 Foreclosure Activity Lowest Since Q4 2007 - From RealtyTrac: Q1 2012 Foreclosure Activity Lowest Since Q4 2007 RealtyTrac ... today released its U.S. Foreclosure Market Report™ for the first quarter of 2012, which shows foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 572,928 properties during the quarter, down 2 percent from the previous quarter and down 16 percent from the first quarter of 2011.  Foreclosure filings were reported on 198,853 U.S. properties in March, a 4 percent decrease from February and a 17 percent decrease from March 2011. March’s total was the lowest monthly total since July 2007, and also the first monthly total below 200,000 since July 2007. “The low foreclosure numbers in the first quarter are not an indication that the massive reservoir of distressed properties built up over the past few years has somehow miraculously evaporated,” said Brandon Moore, chief executive officer of RealtyTrac. “There are hairline cracks in the dam, evident in the sizable foreclosure activity increases in judicial foreclosure states over the past several months, along with an increase in foreclosure starts in many judicial and non-judicial states in March. The dam may not burst in the next 30 to 45 days, but it will eventually burst, and everyone downstream should be prepared for that to happen — both in terms of new foreclosure activity and new short sale activity.”

Foreclosures Are at a 4-Year Low, But That’s Not Necessarily Good News - Foreclosure filings fell in March to their lowest level in four years, according to real estate data provider Realty Trac. For the first time since July 2007, the nationwide number of filings fell under 200,000 — a 4% drop from the month before and a 17% decrease from March of 2011. However, the news isn’t as good as it may sound. A closer look at the data reveals a complicated housing market, one that is still likely to get worse before genuine, long-lasting improvements take place. While filings have been decreasing, foreclosure “starts” — which include initial default notices and, in some states, foreclosure auctions — have actually risen three months in a row, including a 7% rise in March over February. Overall, we have a picture of a market that can seem unrealistically rosy. Homeowners are still defaulting on their loans at an alarming rate, yet banks have slowed repossessions. Unfortunately, that lull is likely to end soon. Why? It’s a consequence of banks playing it conservative while the federal government and many state attorneys general fought over allegations of abuses in the foreclosure process. But with a $25 billion settlement announced in February, the machinery is cleared to restart again.

Foreclosure Flood Ready to Burst -  Even though foreclosure activity over past three months hit the lowest level in five years, don’t break out the bubbly. We’re enjoying the calm before the storm. A flood of 1.6 million foreclosures backlogged during the 18 month period following the will soon make their way onto local markets, in the wake of the multi-state attorneys general settlement signed in March. As new processing standards that comply with the agreement are developed lenders already are moving ahead to foreclose on homes that have been in default for months First-time foreclosure starts, either default notices or scheduled foreclosure auctions depending on the state’s foreclosure process, increased 7 percent from February to March, the third straight monthly increase. Foreclosure starts in March exceeded 100,000 for the first time since November 2011, although they were still down 11 percent from March 2011, RealtyTrac reported today.

Here's Why You Should Expect A Gradually Rising Foreclosure Tide In 2012 - Foreclosure filings fell 8 percent year-over-year in February, with 206,900 U.S. properties receiving some form of filing, according to RealtyTrac's U.S. Foreclosure Market Report. But don't be fooled by these numbers. Foreclosure activity is expected to increase 15 percent this year compared to 2011, according to RealtyTrac's Daren Blomquist. While foreclosure activity was pushed down by decreases in some of the larger states, 21 states reported annual increases in foreclosure activity, a level not seen since November 2010. RealtyTrac CEO Branon Moore said he expects foreclosures to rise this year, pushed by states where courts are working through a backlog of foreclosed properties: "February’s numbers point to a gradually rising foreclosure tide as some of the barriers that have been holding back foreclosures are removed. …Not surprisingly, many of the biggest annual increases in February were in states with the more bureaucratic judicial foreclosure process, which resulted in a larger backlog of foreclosures built up over the last 18 months in those states." RealtyTrac's Daren Blomquist said foreclosure activity fell to artificially low levels last year because of the fall-out from the robo-signing scandal where banks were accused of shoddy mortgage paperwork and when judges prevented banks from foreclosing on homes.

STUDY: Banks Are Treating Minority Foreclosed Homes LIke Crap - A study of more than 1,000 foreclosed properties in nine cities found that banks have higher maintenance standards for properties they own in wealthy, predominantly white, neighborhoods than those in low-income ones.  The report by the National Fair Housing Alliance looked at aspects of maintenance and marketing including curb appeal, structure, signage, indications of water damage, and conditions of paint, siding and gutters. Some key findings:

  • • REOs in communities of color were 42 percent more likely to have more than 15 maintenance problems than properties in White communities.
  • • In Phoenix, AZ, 73 percent of REO properties evaluated in Latino neighborhoods were missing a “For Sale” sign, while only 31 percent of homes in predominantly White neighborhoods were missing a “For Sale” sign.
  • • REO properties in communities of color were 82 percent more likely than REO properties in White communities to have broken or boarded windows.
  • • In Philadelphia, PA, more than 10 distinct maintenance or marketing problems were documented in 41 percent of homes in African-American communities, while none of the properties in White communities had more than 10 maintenance or marketing problems.
  • • In Oakland, Richmond, and Concord, CA, REOs in the African-American communities were 3.45 times more likely to be missing a “For Sale” sign than their white counterparts. 

The Great American Foreclosure Story: The Struggle for Justice and a Place to Call Home - If Ramos were in her 20s, living off the land might be a marvelous adventure.  But it's not how this 58-year-old grandmother, who has custody of her three grandchildren, imagined spending her retirement after working for more than 30 years — nine running her own businesses. She regularly scours the local dump and recycling center for items she can salvage. The story of how she ended up in a tent is the story of how America ended up in a foreclosure crisis that has not ended, that still drags down the economy and threatens to force millions of families from their homes. Already, banks have foreclosed on more than 4 million homes since the crisis began in 2007. With almost 6 million loans still in danger of foreclosure, 2012 could very well be the worst year yet. Ramos' story is remarkable not because it's unique but because it isn't. Her story doesn't fit any of the conventional narratives. Ramos is not a helpless victim. She made mistakes. But she didn't take out her mortgages to splurge on luxuries or build a new wing for her house. She took out her first mortgage to live the free-market dream of starting her own business. She took out later mortgages to cope with injuries sustained in a car accident.Every step of the way, from her first subprime loan to foreclosure, her downfall was abetted by a mortgage industry so profit-driven and disconnected from homeowners that the common interests once linking lender and borrower have been severed.

An ugly foreclosure story, starring Bank of America - Dirma Rodriguez had five minutes to gather her things and vacate the West Adams house she and her severely disabled daughter had lived in for more than 25 years. As a property manager changed the locks, Rodriguez fluttered back and forth from the yard — where a pile of stuff lay by the kitchen stove — to her car, where her daughter, Ingrid Ortiz, sat screaming and crying. How Rodriguez and Ortiz ended up in this predicament is a long, messy story that resounds with a misery all too common in this age of foreclosure. Rodriguez took out a loan to retrofit her house for her special-needs daughter. After she fell behind on her payments, the Bank of America lowered her monthly obligation, but then sold the house at a foreclosure auction last September. The new owner, a house flipper from El Segundo called West Ridge Rentals, moved to evict the family. I came upon Rodriguez's story through Occupy Fights Foreclosure, the latest offshoot of the 99% movement. Occupy interceded to stop her eviction March 26, and it just may have saved her home for good. Bank of America said last week it is considering a loan modification that would return the home to Rodriguez and her family.

In foreclosures, Occupy groups see a unifying cause - Robinson-Duvallon says she would be homeless now but for the intervention of about 40 members of Occupy Fort Lauderdale, a Florida branch of the national movement that is protesting income inequality and corporate greed. The group took over her lawn and house and even baked her a birthday cake. The deputies decided to let her stay. "I owe the Occupy people," said Robinson-Duvallon, who is now challenging the eviction in court. "This has all been so horrible, I can't tell you how many times I've cried and cried." What happened in Miami is also occurring in Cincinnati, Los Angeles and Minneapolis, as local Occupy groups pursue an issue they believe has emotional resonance among America's struggling lower and middle classes. Fighting foreclosures and evictions, activists say, gives the disparate movement a unifying focus and embodies its anti-Wall Street message. It also has offered a way for Occupy - up till now a largely white, middle-class movement - to broaden its reach to minorities.

LPS: House Price Index declined 0.9% in January - Notes: The timing of different house prices indexes can be a little confusing. LPS uses January 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 February (without the weighting of several months).  From LPS: LPS Home Price Index Shows U.S. Home Price Decline of 0.9 Percent in January; Early Data Suggests Slowing Likely in February, to 0.3 Percent Drop LPS ...that starting with this month’s report, results are based on an updated view that more accurately tracks price changes for non-distressed homes. In addition to foreclosure price data the LPS HPI now accounts for the impact of short sale on estimates of normal market prices. The updated LPS HPI national average home price for transactions during January 2012 declined 0.9 percent to a price level not seen since March 2003. LPS excludes both foreclosures and short sales from the index - so this is non-distressed properties only. From LPS: Among the 26 MSAs for which LPS and the Bureau of Labor Statistics both provide data, average prices in January increased only in Washington, D.C. Fourteen of these MSAs saw declines of more than 1.0%, and three, San Francisco, Cleveland and Chicago declined more than 1.5%.

Mortgage Rates in the U.S. Fall With 15-Year at Lowest on Record - Mortgage rates in the U.S. fell, with the 15-year average hitting a record low, as weak job growth and concern about Europe’s debt crisis drove investors to the safety of the Treasuries that guide home loans.  The average rate for a 30-year mortgage declined to 3.88 percent in the week ended today from 3.98 percent, Freddie Mac (FMCC) said in a statement. The rate was 3.87 percent in February, the lowest in Freddie Mac data dating to 1971. The average 15-year rate dropped to 3.11 percent from 3.21 percent. The previous low was 3.13 last month, according to the McLean, Virginia-based mortgage-finance company. The 10-year Treasury yield, a benchmark for mortgages, fell below 2 percent for the first time in almost a month on April 10 as yields on Spanish and Italian bonds increased. The U.S. Labor Department said April 6 that employers added 120,000 jobs in March, the fewest in five months and less than the most pessimistic estimate in a Bloomberg News survey of economists. 

Freddie Mac: 15-Year Fixed-Rate Mortgage Hits New All-Time Record - From Freddie Mac: 15-Year Fixed-Rate Mortgage Hits New All-Time Record Low Freddie Mac (OTC: FMCC) today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates declining for the third consecutive week ... The 30-year fixed averaged just above its record low while the 15-year fixed averaged a new all-time record low of 3.11 percent breaking its previous low of 3.13 percent on March 8, 2012.30-year fixed-rate mortgage (FRM) averaged 3.88 percent with an average 0.7 point for the week ending April 12, 2012, down from last week when it averaged 3.98 percent. Last year at this time, the 30-year FRM averaged 4.91 percent.This graph shows the 15 and 30 year fixed rates from the Freddie Mac survey. The Primary Mortgage Market Survey® started in 1971 (15 year in 1991).

'This is crazy': Home ownership cheaper than renting - Monthly payments on a house are now cheaper than monthly rents on a similar house in most of North San Diego and Southwest Riverside counties, according to an analysis of county-supplied and Realtor data by the North County Times. In a traditional housing market, mortgage payments plus taxes come in much higher than house rents: A mortgage interest tax credit and a long-held preference for buying create demand such that people pay more for home ownership, and landlords  There are, of course, a host of caveats not included in the calculation. The analysis does not amortize the down payment on the house, nor does it include the maintenance costs that homeowners accrue to keep their homes in good repair, though many economists argue the mortgage interest tax deduction offered by the federal government balances those expenses. Still, the calculation depends on a homebuyer having enough money to make a down payment, and sufficient credit to get a loan. In 2011, banks raised the bar on those to whom they'd lend, making it difficult for many people to get mortgages. ... "If rates were back to 5.5 percent or 6 percent, then the mortgages become more expensive than rents. I would not call 4 percent a normalized housing market,"  "Today, people are able to afford more home because of the interest rates."

Analyst: Rising Rents "could tip the cost of housing in favor of ownership" -  This is from real estate analyst G.U. Krueger in the O.C. Register: Analyst: Rent hikes turning renters into buyers USC’s 2012 Casden Multifamily Forecast predicts two more golden years of apartment Southern California rent growth. The sky seems to be the limit for ecstatic landlords right now.However, emphatic landlords raising rents with gusto could tip the cost of housing in favor of ownership while at the same time a supply response (more construction) could keep vacancy rates from dropping much further....The “witching hour” for apartment rents may not be far off. The relative cost between rentals and ownership advances in favor of home purchases. CR: The price-to-rent ratio is close to normal (see: Real House Prices and Price-to-Rent Ratio decline to late '90s Levels ) As G.U. notes, rising rents and falling house prices will eventually tip the balance back to ownership.

More Americans think It’s a Good Time to Buy a Home - Nearly three-quarters of Americans said they thought it was a good time to buy a home last month, with expectations that rental and purchase prices will rise over the next year and as consumers’ views of their finances stabilized, according to a monthly survey by mortgage finance company Fannie Mae (FNMA). “Conditions are coming together to encourage people to want to buy homes,” said Doug Duncan, Fannie Mae chief economist. The portion of Americans who indicated that it is a good time to buy in March–73%–was up 3 percentage points. The percentage of those who said it is a good time to sell was up by 1 percentage point at 14%. The portion of participants who expected home prices to increase over the next 12 months improved to a third last month, from 28%. On average, consumers expected U.S. home prices to increase 0.9%. A record 49% of respondents expected rental prices to increase, the highest number since Fannie Mae began tracking the metric in June 2010. On average, consumers expected rents to rise 4.1%. Also, more respondents expect that mortgage rates–currently around historic lows–will increase over the next year: at 39%, up by 5 percentage points.

Charts of the day, house-price edition - If you haven’t read it, I can highly recommend Paul Kiel’s magnum opus on the US foreclosure crisis, available online or as a Kindle Single. Kiel tells the national story using synecdoche: the story of Shelia Ramos is representative of millions of others. And Kiel makes it very clear just how typical her tale is, zooming back out to a big-picture view on a regular and welcome basis. What Kiel doesn’t do is look forward, and give his informed opinion on whether the new rules being outlined by the Consumer Financial Protection Bureau are likely to work to prevent such events from happening again. The question isn’t whether the new rules are good ones; the much more important and salient question is whether they will be followed and enforced. I’ll believe it when I see it: as Kiel shows, servicers are really bad at this kind of thing, and there’s a strong case to be made that they’re simply not capable of following the rules that the CFPB is laying out. Meanwhile, the weird cognitive disconnect in the housing market seems greater than ever. If you look at Fannie Mae’s latest monthly survey, it shows lots of new highs being set: the percentage of people thinking that house prices are going up, the percentage of people thinking it’s a good time to buy, and, especially, the amount that people think they’re going to have to pay for housing if they don’t buy.

Home prices close to bottoming, to rise in 2013 - (Reuters) - The relentless decline in home prices is nearing an end and prices should rise for the first time in seven years in 2013, but a possible new wave of foreclosures could threaten the recovery, according a Reuters poll of economists. The median forecast of 24 economists polled by Reuters was for the S&P/Case-Shiller 20-city home price index to end the year unchanged. That was the same finding back in January for this house price gauge, which covers 20 cities. "We are expecting a gradual improvement, but if we get a big wave of new foreclosures coming to the market, price declines could be even greater," said Yelena Shulyatyeva, an economist at BNP Paribas in New York. The survey forecast the S&P/Case-Shiller home price index rising 2.0 percent next year, up from 1.5 percent in the January survey.

Las Vegas House sales up slightly YoY in March, Inventory down sharply - This is a key distressed market to follow since Las Vegas has seen the largest price decline of any of the Case-Shiller composite 20 cities. Prices, as of the January report, were off 61.8% from the peak according to Case-Shiller, and off 9.1% over the last year.  Sales in 2011 were at record levels - even more than during the bubble - and it looks like 2012 will be an even stronger year, even with some new rules that slow the foreclosure process. From the LVGAR: GLVAR reports local home prices, sales rising as inventory shrinks According to GLVAR, the total number of local homes, condominiums and townhomes sold in March was 4,388. That’s up from 3,794 in February, and up from 4,316 total sales in March 2011. Compared to one year ago, home sales were up 4.4 percent, while condo and townhome sales were down 8.4 percent....By the end of March, GLVAR reported 4,901 single-family homes listed without any sort of offer. That’s down 25.1 percent from 6,543 such homes listed in February and down 56.8 percent from one year ago.

Lawler: Expect NAR to report a 3% Year-over-year increase in the Median Price for March - Economist Tom Lawler wrote today: "Incoming data point to a YOY increase in the NAR’s Median Existing Home Sales Price of about 3% in March."  Of course the median price is impacted by the mix, and the increase in the median is probably due to fewer foreclosures at the low end. Tom will probably send me a projection for March existing home sales early next week Tom also sent me an update to the following table for several distressed areas. For all of the areas, the share of distressed sales is down from March 2011, the share of short sales has mostly increased and the share of foreclosure sales are down - and down significantly in some areas. Note: The table is a percentage of total sales.

More: Mall Vacancy Rate declines slightly in Q1 - On Friday I noted that Reis reported the mall vacancy rate declined slightly in Q1. The strip mall vacancy rate declined to 10.9% from 11.0% in Q4 2011, and the regional mall vacancy rate declined to 9.0% from 9.2% in Q4. Here are a few more comments and a long term graph from Reis.  Strip mall Vacancies finally began to fall during the first quarter, declining by 10 bps. This is the first quarterly decline in the vacancy rate since the second quarter of 2005. In the periods leading up to the recession, excess building was to blame for the increase in vacancies. Since the advent of the recession, supply growth has been virtually nonexistent, but anemic demand drove vacancies upward.. New completions remain near historically low levels. With such low levels of supply growth, any semblance of healthy demand would have pushed vacancy rates downward in a more pronounced fashion. ... With construction projected to remain at low levels, Reis expects vacancies to begin moving downwards slowly in 2012 as demand for space slowly begins to return. This graph shows the strip mall vacancy rate starting in 1980 (prior to 2000 the data is annual). The regional mall data starts in 2000. Back in the '80s, there was overbuilding in the mall sector even as the vacancy rate was rising. This was due to the very loose commercial lending that led to the S&L crisis.  In the '00s, mall investment picked up as mall builders followed the "roof tops" of the residential boom (more loose lending). This led to a higher vacancy rate even before the recession, and then a sharp increase during the recession and financial crisis. Mall investment has essentially stopped following the financial crisis.

Bankruptcy costs and America’s household debt crisis - In a recent NBER working paper, my co-authors and I document that legal and administrative costs inhibit a significant number of households from filing for bankruptcy (Gross et al 2012). Moreover, the number of households facing these barriers has doubled during this decade. In the paper, we examine how household bankruptcy rates responded to the 2001 and 2008 income tax rebates, using the fact that the rebate payments were distributed randomly based on filers’ social security numbers. We find that after receiving tax rebates ranging from $300 to $1200, households were more likely to file for bankruptcy. The positive response of bankruptcy rates to tax rebates suggests that households face liquidity constraints – impediments to purchasing services that benefit them over the long run due to costs today. The extra income from tax rebates allowed previously-constrained households to file for bankruptcy, explaining the increase in bankruptcy rates we observed.

Lenders Returning to the Lucrative Subprime Market - Annette Alejandro just emerged from bankruptcy and doesn’t have a job, and her car was repossessed last year. Still, after spending her days job hunting, she returns to her apartment in Brooklyn where, in disbelief, she sorts through the piles of credit card and auto loan offers that have come in the mail. In the depths of the financial crisis, borrowers with tarnished credit like Ms. Alejandro were almost entirely shut out by traditional lenders. It was hard enough for people with stellar credit to get loans. But as financial institutions recover from the losses on loans made to troubled borrowers, some of the largest lenders to the less than creditworthy, including Capital One and GM Financial, are trying to woo them back, while HSBC and JPMorgan Chase are among those tiptoeing again into subprime lending. Credit card lenders gave out 1.1 million new cards to borrowers with damaged credit in December, up 12.3 percent from the same month a year earlier, according to Equifax’s credit trends report released in March. These borrowers accounted for 23 percent of new auto loans in the fourth quarter of 2011, up from 17 percent in the same period of 2009, Experian, a credit scoring firm, said. Consumer advocates and lawyers worry that the financial institutions are again preying on the most vulnerable and least financially sophisticated borrowers, who are often willing to take out credit at any cost.

Could the bubble return? - KARL SMITH has written a provocative blog post this morning musing on the potential return of a housing bubble. The conditions for stabilisation in housing markets are right, he says; rents are rising and the new home pipeline is remarkably bare. Price stabilisation is unlikely to be a stable equilibrium, though:Once prices stabilize the incentive to begin massively expanding credit to potential borrowers will be enormous and is likely to reignite. I would tend to think it's unlikely that we will get the kind of price appreciation we saw the first time around. However, it is not impossible, and it's certainly possible to get a strong uptick in construction. It certainly appears probable that achievement of a real bottom for home prices could touch off a series of feedback loops. One, as Mr Smith mentions, is that mortgage standards may loosen, expanding credit to buyers. Standards are quite tight at the moment; while prices are falling, the chances of dipping underwater and becoming delinquent are relatively high, and banks have been correspondingly cautious. More lending should mean more buying which could soak up diminished inventory quite quickly, leading to rising prices. That, in turn, may push a lot of developers into action. As construction ramps up, resulting employment growth could boost housing demand, by raising domestic household growth and/or reigniting the flow of immigration. More housing demand means even faster appreciation, fueling the boom.

Consumer Credit in U.S. Rose Less Than Forecast in February - U.S. consumer borrowing rose less than forecast in February, restrained by a drop in credit-card debt, according to a Federal Reserve report. Credit increased $8.7 billion, the least in four months, after a revised $18.6 billion gain in January that was more than initially estimated, Federal Reserve figures showed today in Washington. Economists projected a $12 billion rise in the measure of revolving and non-revolving loans for February, according to the median forecast in a Bloomberg News survey.  Non-revolving debt, including educational loans and borrowing for autos and mobile homes, climbed by $10.9 billion in February, the smallest gain in four months, today’s report showed. The Fed’s report doesn’t track debt secured by real estate, such as home equity lines of credit. 

Vital Signs: Cutting Credit-Card Use - Americans dialed back their use of credit cards in February. Revolving consumer credit, which includes mostly credit-card debt, fell $17.3 billion to $794.84 billion—the second consecutive month of decline. The drop suggests consumers are whittling away some of their expenses. Overall consumer borrowing, including car and student loans, grew in February by a seasonally adjusted $8.73 billion to $2.522 trillion.

Quantitative Time Travellers - The price of gas relative to the price of milk has been trending upwards for the past 40 years:  The first diagram shows price trends with both gasoline and milk prices normalized so that 2002=100. It shows that the price of gas relative to the price of milk has increased 30 percent in the past 10 years, and doubled since the early 1970s.  The rise in gas prices looks dramatic in part because I have played fast-and-dirty with my vertical axis, starting at 0.6 to magnify the impact of price changes. I also chose my starting point with care. A longer time trend shows a different story. Yes, the relative price of gas and milk has risen since the early 1970s, but that was an exceptional time. Gas prices were lower then than they have ever been, before or since.  The point is that grounding our image of "the past" in the 1970s  can be highly misleading. One of my students this term, Kristian Laanamets, produced a graph with 2006 General Social Survey data that makes a similar point (used with permission). Kristian's graph shows the proportion of people, by age, raised by both of their biological or adoptive parents: The people most likely to be raised by both parents are 55 to 64 year olds, people born between 1942 and 1951.

The Everyday Price Index - A Superior Measurement of Inflation - Every month in Canada and the United States, Statistics Canada and the Bureau of Labor Statistics (BLS) release their latest versions of the changes to the prices paid for a basket of goods and services by consumers.  Inevitably, most of us who live in the real world find that the Consumer Price Index or CPI does not reflect the reality of our lives; the data always seems to show a far lower rate of overall price increases than what we find when we head to our local grocery store to buy that roll of ultra-soft toilet paper or bag of potato chips.  This is largely because the divergence in the CPI and the price that we pay has increased, in large part because of 21st century changes in both technology and globalization have affected the prices of large-ticket items that are included in the CPI.  Fortunately, the economists at the American Institute for Economic Research (AIER) have developed the Everyday Price Index or EPI to address this consumer experience. The Bureau of Labor Statistics or BLS has made adjustments to the components of the basket of goods and services that compose the CPI as they observe that consumers are changing their behaviors.  For example, in the 1980s, Americans and Canadians generally became more health conscious and started to eat more fish and chicken at the expense of beef and pork.  The current list of consumer goods that comprise the CPI includes all types of gasoline, white bread, ground beef, whole chicken, eggs, milk, red delicious apples, navel oranges, bananas, tomatoes, frozen orange juice and ground, roast coffee among other items.  For example, here is a chart showing the price of one dozen large Grade A eggs from 2002 to the present:

U.S. Core Producer Price Index Rise 0.3% - Wholesale prices in the U.S. excluding food and fuel rose more than forecast in March, led by a pickup in the costs of light trucks and soaps. The so-called core producer price index climbed 0.3 percent after a 0.2 percent rise, Labor Department figures showed today in Washington. Economists projected a 0.2 percent gain, according to the median estimate in a Bloomberg News survey. The overall gauge was little changed after a 0.4 percent rise. Fuel costs advanced more slowly last month, supporting the Federal Reserve’s view that the recent surge in energy prices will be temporary. With diminished inflationary pressure from energy, producers will probably find less reason to pass expenses to consumers, who are facing slow income growth. “Energy prices typically rise quicker than they did this particular month,” “Looking at the overall trend for producers, there doesn’t seem to be any sign of a major pickup in finished good prices.”

BLS: CPI increases 0.3% in March -- From the BLSThe Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in March on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.7 percent before seasonal adjustment. ...The gasoline index continued to rise, more than offsetting a decline in the household energy index and leading to a 0.9 percent increase in the energy index. The food index rose 0.2 percent as the index for meats, poultry, fish, and eggs increased notably. The index for all items less food and energy rose 0.2 percent in March after increasing 0.1 percent in February. . This was at the consensus forecast of a 0.3% increase in CPI and a 0.2% increase in core CPI.

Inflation Watch: Year-over-Year Headline and Core CPI Little Changed - The Bureau of Labor Statistics released the CPI data for last month this morning. Year-over-year Headline CPI came in at 2.65%, which the BLS rounds to 2.7%, down fractionally from 2.87% last month. Year-over year-Core CPI came in at 2.26%, which the BLS rounds to 2.3%, up from 2.18% last month. Here are excerpts from the BLS summary:  The indexes for food, energy, and all items less food and energy all increased in March. The gasoline index continued to rise, more than offsetting a decline in the household energy index and leading to a 0.9 percent increase in the energy index. The food index rose 0.2 percent as the index for meats, poultry, fish, and eggs increased notably.  The index for all items less food and energy rose 0.2 percent in March after increasing 0.1 percent in February. Most of the major components increased in March, with the indexes for shelter and used cars and trucks accounting for about half the total increase for all items less food and energy. The indexes for medical care, apparel, recreation, new vehicles, and airline fares increased as well, while the indexes for tobacco and household furnishings and operations were among the few to decline in March. More... The first chart is an overlay of Headline CPI and Core CPI (the latter excludes Food and Energy) since 1957. The second chart gives a close-up of the two since 2000.

A Long-Term Look at Inflation - The April 2011 Consumer Price Index for Urban Consumers (CPI-U) released today puts the March year-over-year inflation rate at 2.65%, which is well below the 3.95% average since the end of World War II.  For a comparison of headline inflation with core inflation, which is based on the CPI excluding food and energy, see this monthly feature. For better understanding of how CPI is measured and how it impacts your household, see my Inside Look at CPI components. For an even closer look at how the components are behaving, see this X-Ray View of the data for the past five months. The Bureau of Labor Statistics (BLS) has compiled CPI data since 1913, and numbers are conveniently available from the FRED repository (here). My long-term inflation charts reach back to 1872 by adding Warren and Pearson's price index for the earlier years. The spliced series is available at Yale Professor Robert Shiller's website. This look further back into the past dramatically illustrates the extreme oscillation between inflation and deflation during the first 70 years of our timeline. Click here for additional perspectives on inflation and the shrinking value of the dollar.

What Inflation Means to You: Inside the Consumer Price Index - The Fed justified the previous round of quantitative easing "to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate" (full text). In effect, the Fed has been trying to increase inflation, operating at the macro level. But what does an increase in inflation mean at the micro level — specifically to your household? Let's do some analysis of the Consumer Price Index, the best known measure of inflation. The Bureau of Labor Statistics (BLS) divides all expenditures into eight categories and assigns a relative size to each. The pie chart below illustrates the components of the Consumer Price Index for Urban Consumers, the CPI-U, which I'll refer to hereafter as the CPI. The slices are listed in the order used by the BLS in their tables, not the relative size. The first three follow the traditional order of urgency: food, shelter, and clothing. Transportation comes before Medical Care, and Recreation precedes the lumped category of Education and Communication. Other Goods and Services refers to a bizarre grab-bag of odd fellows, including tobacco, cosmetics, financial services, and funeral expenses. For a complete breakdown and relative weights of all the subcategories of the eight categories, see the link to table 1 near the bottom of the BLS's monthly Consumer Price Index Summary.

US Inflation Mild as Gas Prices Rise More Slowly - Gas prices rose more slowly in March, keeping overall U.S. inflation mild. The consumer price index rose 0.3 percent in March, the Labor Department said Friday. That’s slower than February’s 0.4 percent rise. Excluding food and gas, so-called “core” prices increased 0.2 percent in March. Inflation has eased since last fall and is expected to stay tame. In 12 months that ended in March, prices rose 2.7 percent. That’s below last year’s peak year-over-year rate of 3.9 percent. Core prices have risen 2.3 percent in the past 12 months, close to the Federal Reserve’s inflation target of 2 percent. (MORE: Fed Inflation Hawks Warn More Stimulus Could Fuel Prices) Prices are “benign and likely to stay that way for some time yet,” said Ian Shepherdson, an economist at High Frequency Economics.

Consumer Sentiment declines slightly in April to 75.7 - The preliminary Reuters / University of Michigan consumer sentiment index for April declined slightly to 75.7, down from the final March reading of 76.2. This was below the consensus forecast of 76.2. Overall sentiment is still fairly weak - probably due to a combination of the high unemployment rate, high gasoline prices and sluggish economy - however sentiment has rebounded from the decline last summer and is up from 69.8 in April 2011.

Michigan Consumer Sentiment: A Slight Decline - The University of Michigan Consumer Sentiment Index Preliminary report for April came in at 75.7, down from the 76.2 March final report. See the chart below for a long-term perspective on this widely watched index. Because the sentiment index has trended upward since its inception in 1978, I've added a linear regression to help understand the pattern of reversion to the trend. I've also highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy.  To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is about 11% below the average reading (arithmetic mean), 10% below the geometric mean, and 11% below the regression line on the chart above. The current index level is at the 26.7 percentile of the 412 monthly data points in this series. The Michigan average since its inception is 85.4. During non-recessionary years the average is 88.1. The average during the five recessions is 69.3. So the March final sentiment number of 75.7 keeps us above the recession average but well below the average for non-recessionary periods. The indicator can be somewhat volatile. For a visual sense of the volatility here is a chart with the monthly data and a three-month moving average.

US Gasoline Prices Hit $3.97 A Gallon, At Or Near Peak - U.S. retail gasoline prices over the past two weeks saw their smallest increase since early January and could be near or past their peak if crude oil prices remain stable, the widely followed Lundberg Survey shows. The average price of gas rose to $3.9671 per gallon as of Friday, an increase of 3.74 cents, the nationwide survey of 2,500 retailers showed. “Price hikes at the pump have been losing steam for weeks. ... Crude oil prices have slipped and if they don’t rebound in the very near future, gasoline prices will peak very soon, if they haven’t already,” Trilby Lundberg, president of Lundberg Survey Inc., told Bloomberg News. Tulsa, Okla., had the lowest average gas price in the United States, at $3.66 per gallon, while Chicago had the highest at $4.45 a gallon.

This Is Why Gas Prices Are Going Up Across The Country This Week - — Ahh, spring. The days get longer, flowers bloom, and gasoline gets more expensive. It's a galling time for drivers, and it's more maddening than usual this year. The average price of gasoline could surpass $4 per gallon nationwide as early as this week. It's already $3.93 per gallon, a record for this time of year. Why the seasonal spike? It's the time of year refineries reduce output to repair equipment and start making a cleaner, more expensive blend of gasoline for summer. Since 2000, pump prices have risen every year between early February and late May. The annual increase has boosted prices by 27 percent on average, according to the National Association of Convenience Stores. This year, prices have risen 14 percent, or 48 cents per gallon, since Feb. 1. "There's always built-in increase, and it's going to be accentuated this year," said Tom Kloza, chief oil analyst at Oil Price Information Service.

Weekly Gasoline Update: Prices Unchanged - 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, rounded to the penny, were unchanged. This breaks a chain of 16 consecutive weekly price increases. Regular is up 71 cents and premium 70 cents from their interim weekly lows in the December 19th EIA report.  As I write this, shows eight states plus DC with the average price of gasoline above $4 (down from ten last week) and another 13 states with the price above $3.90 (up from nine last week). Hawaii, not surprisingly, has to highest prices, averaging around $4.61 a gallon.  How far are we from the interim high prices of 2011 and the all-time highs of 2008? Here's the answer. Click for a larger image. The next chart is an overlay of WTIC, Brent Crude and unleaded gasoline (GASO). Brent Crude as been consolidating at a resistance level since late February, and the WTIC end-of-day spot price is 6.4% off its 2012 high set on February 24th. Gasoline now also appears to be retreating fractionally.

Summer gas prices will average 6% more than last summer, government says. - Although gas prices have been easing lately, the Energy Department has predicted that U.S. motorists will be shelling out an average of 24 cents a gallon more for gasoline during the peak summer driving season, defined as April through September. Peak prices will average $3.95 for a gallon of regular gasoline, up 6.3 percent, or 24 cents, from last year's April-September driving season, according to the agency's monthly Short-Term Energy Outlook. That represents an increase from last month’s peak season prediction of a $3.295 average. The highest monthly average is expected to be $4.01 in May, the agency said, putting the chance of a $4 average in June at 40 percent. Gasoline prices will vary widely by region, with the West Coast leading the way at an average of $4.20 for the peak season. All of this pump-price pain is expected to reduce gasoline consumption by 0.5 percent this summer compared with last summer, according to the forecast.

Forget gasoline, diesel topped $4 a month ago - As prices for gasoline at the pump inch closer to $4 a gallon, consumers should be even more worried about the threat from rising diesel prices, which topped that level over a month ago. High diesel prices are “even worse for an economic recovery than high gasoline prices,” said Denton Cinquegrana, senior markets editor at the Oil Price Information Service (OPIS). “Most Americans pay attention to the price of gasoline, but we totally neglect the impact high diesel prices have on goods and services.” On Thursday, the average price of diesel at the pump stood at $4.166 a gallon, up 8 cents from a month ago and 16 cents above a year ago, according to AAA data. Prices for the fuel have only topped $4 during two other periods, in 2008 and 2011. “Anything from milk and eggs at the grocery store, to beer at the liquor store, and the newest PlayStation games at Best Buy” all get to their destination somehow — and that somehow is usually by truck.

Understanding Gasoline Sales "By Refiners" - Reader David sent in a link to an alarming looking chart of gasoline sales on the EIA's website U.S. Total Gasoline Retail Sales by Refiners (Thousand Gallons per Day) David notes a stunning plunge from 41,972,600 to 28,433,900 (-31%) in the last four months.  I asked Tim Wallace what to make of this. Wallace writes ... I queried the EIA and as I expected the key to understanding the chart is the statement the chart shows retail sales by refiners. I have been closely following the divestiture of the retail outlets by the majors such as Exxon and BP over the past couple of years, accelerating now because there is NO MONEY in retail, just in exploration and distribution - basically through the wholesale level.  Therefore the sales by the refiners at the retail level is of course rapidly plummeting.

March U.S. Light Vehicles Raise Fuel-Efficiency Bar - U.S. new light vehicles achieved record fuel-efficiency for the third month in a row in March, according to the WardsAuto Fuel-Economy Index (see chart above). Cars and light trucks sold in the month had a combined 24.1 mpg rating, a 1% improvement on the previous record set in February. It was the first time the index has risen above 24 mpg. The new benchmark represents a 15% increase in fuel efficiency over the index’s base rating of 20.9 mpg, established in fourth-quarter 2007. March light vehicle sales signified a continued movement toward smaller fuel-efficient vehicles that dominated the first quarter. Car companies have rolled out an increasingly large selection of small and midsize vehicles, including a growing number of hybrid and alternate-power vehicles that provide consumers interested in fuel economy greater choice than ever. Indeed, vehicles rated higher than 30 mpg on the index accounted for 11.8% of sales in March, up from 4.3% year-ago. The 270% increase was made possible, in part, by the increasing number of vehicles available in that category."

What Detroit’s Resurgence Says About The Auto Bailout - Forget the ides, the American auto industry had a banner month in March. General Motors, Chrysler and Ford all reported some of their best sales numbers in years, with fuel-efficient vehicles, even some hybrids, accounting for much of the increases. The data reflect unvarnished good news for the country’s economic recovery, and the companies’ production strategies seem neatly tailored to withstand car consumers’ squeamishness over high gas prices. None of these strides would have been possible if the U.S. auto industry had vanished in 2009. That broadly vindicates the government’s intervention at the height of the economic crisis, but it also masks a more complicated story about the degree to which the government’s actions led to Tuesday’s stellar figures.

Rail traffic continues to soften - Rail data continues to soften this week with carloads posting a -7.7% decline and intermodal posting just a 1.1% increase.  Coal continues to drag the index down substantially although broader trends have deteriorated as well with just 9 of the 20 segments posting gains.  The 10 week moving average in intermodal has now declined to 2.9% down substantially from the beginning of the year.   AAR has more on the data: “The Association of American Railroads (AAR) today reported mixed weekly rail traffic for the week ending April 7, 2012, with U.S. railroads originating 270,974 carloads, down 7.7 percent compared with the same week last year. Intermodal volume for the week totaled 231,153 trailers and containers, up 1.1 percent compared with the same week last year. Nine of the 20 carload commodity groups posted increases compared with the same week in 2011, with petroleum products, up 33.3 percent; primary forest products, up 11.8 percent, and stone, clay and glass products, up 11.2 percent. The groups showing a significant decrease in weekly traffic included iron, steel and scrap, down 18.1; grain, down 16.6, and coal, down 16.1 percent. Weekly carload volume on Eastern railroads was down 5.2 percent compared with the same week last year. In the West, weekly carload volume was down 9.3 percent compared with the same week in 2011.

Trade Deficit declined in February to $46 Billion - The Department of Commerce reported: [T]otal February exports of $181.2 billion and imports of $227.2 billion resulted in a goods and services deficit of $46.0 billion, down from $52.5 billion in January, revised. February exports were $0.2 billion more than January exports of $180.9 billion. February imports were $6.3 billion less than January imports of $233.4 billion Exports increased slightly in February, while imports decreased sharply. Exports are well above the pre-recession peak and up 9% compared to February 2011; imports are near the pre-recession high and imports are up about 8% compared to February 2011. The second graph shows the U.S. trade deficit, with and without petroleum, through February. 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 $103.63 per barrel in February, down slightly from January. The decline in imports was a combination of less petroleum imports and less imports from China. Exports to the European Union were $22.5 billion in February, up from $20.0 billion in February 2011.

U.S. Import Prices Jump on Petroleum Costs -The cost of goods imported into the U.S. charged ahead in March, posting the largest gain in nearly a year, as petroleum prices jumped. U.S. import prices climbed by 1.3% from the month before, Labor Department said Wednesday. It was the largest monthly gain since April 2011. Economists surveyed by Dow Jones Newswires had forecast a 0.9% monthly increase. Oil products drove the gains. Petroleum import costs rose by 4.3% in March, also the largest since last April. Petroleum prices were 9.6% higher than a year ago. Petroleum costs rose 0.4% in February, a sharp downward revision from the previously reported 1.8% jump. As a result, overall import prices fell 0.1% in February, compared to an initial reading of up 0.4%. Excluding petroleum, import prices were up 0.3% in March; year over year, those prices were up just 1.4%. The Federal Reserve last month warned that increasing oil and gasoline costs could temporarily push up inflation. But central bank officials said they expect price increases to return to their long-term annual target of 2.0%. While the March gain was the steepest in several months, it was much milder than the run up in import prices seen a year ago. On an annual basis, import prices last month were 3.4% higher than March 2011. .

Oil and the Real US Trade Deficit - The monthly trade data was reported this morning and you will see press reports about the nominal trade deficit. But I like to look at the real trade data as it gives a better feel for the economic impact of trade. The real trade deficit is improving and the balance in February was $44,148 million ( 2005 $) as compared to $48,294 million ( 2005 $) in December. I am comparing the February to December because in the real GDP accounts they compare the change over the quarter versus the quarterly average for most of the economic series in the accounts. This looks like a nice gain and implies that trade will make a nice contribution to first quarter growth. But to understand what is happening to the trade data you need to look below the surface at some of the details. We are really seeing a structural change in the US energy environment because of falling domestic demand and expanded output from fracking. For the first time since oil became a major issue in the 1970's we are starting to see a real possibility that over the next decade the US could really achieve energy self sufficiency. Drill, Baby, Drill is no longer just some silly politicalcampaign slogan. The US probably will not actually achieve energy independence, but we should reach the point where we only import energy from other North American sources. It is already starting to happen and on a net basis US real oil imports have been cut almost in half from their 2005 peak.

America reassembles industrial policy - What if Gene Sperling, director of the White House’s national economic council, declared that a manufacturing renaissance would be strongly in America’s interest? Imagine he added that the US’s manufacturing decline was an aberration that should be reversed. Suppose he came close to breaking a real taboo by saying industrial policy may now make sense. Since Mr Sperling is President Barack Obama’s chief economic adviser – and thus speaking on his behalf – people would take notice, wouldn’t they? That is precisely what Mr Sperling said in a carefully researched speech in Washington 10 days ago. Almost no-one paid attention. The lack of interest may stem from it being an election year – nothing diverts eyeballs like a horse race. Poor White House marketing may also not have helped. In addition, few observers would expect Mr Obama to get anything important through a gridlocked Congress this year – let alone something unorthodox. And they would be right. Yet Mr Sperling’s words offered evidence of what is starting to sound like a change of world view in the White House. It is true that Mr Obama has created a few incentives here and there for favoured types of manufacturing – the 2009 stimulus contained boons for battery makers and clean energy. He entitled his state of the union address “An America built to last”. In his largely hypothetical 2013 budget proposal (Congress will almost certainly not pass a budget for the fourth year running) he offered incentives for manufacturers to “reshore” to the US.

Memo to the Times: Hold the funeral march for U.S. manufacturing  - A recent commentary by Eduardo Porter in the New York Times claims that a “revolution in manufacturing employment seems far-fetched,” despite the recent recovery of manufacturing employment. Porter then proceeds to pound nails in manufacturing’s supposed coffin, claiming that “most of the factory jobs lost over the last three decades in this country are gone for good. In truth, they are not even very good jobs.” Perhaps not for a physicist like Porter, but manufacturing does provide excellent wages and benefits for many working Americans. And, with 11.9 million jobs today, U.S. manufacturing is very much alive and kicking. Laura D’Andrea Tyson got the wage issue right in Why Manufacturing Still Matters, a post she wrote for the Times Economix blog in February. She notes that manufacturing jobs are “high-productivity, high value-added jobs with good pay and benefits.” According to Tyson, in 2009, “the average manufacturing worker earned $74, 447 in annual pay and benefits, compared with $63,122 for the average non-manufacturing worker.”1 Manufacturing wages and benefits are particularly attractive for workers without a college degree, for whom the alternative is often a job at low pay with no benefits. Porter is also wrong to suggest that manufacturing employment has been on a downward trend for three decades (see graph below). In fact, manufacturing employment was relatively stable between 1969 and 2000, generally ranging between 16.7 million and 19.6 million workers.

Robert Lawrence misleads the New York Times on manufacturing - Last week, Eduardo Porter wrote in the New York Times’ Economix blog about a response he received on his recent piece on manufacturing from Robert Lawrence of the Kennedy School. Porter should have dug into the topic further because what Lawrence wrote was rather misleading. Here are Porter’s words: “Prof. Robert Lawrence from Harvard makes an interesting point in response to my Wednesday column about our misplaced hopes in manufacturing as a source of new jobs: even if every single thing we bought was “made in America” — if we stopped multinationals from outsourcing production to China and closed our doors to imports — even then, manufacturing employment would lag. The reason is simple: we are spending less and less on goods and more and more on services.  Lawrence clearly wants people to believe that manufacturing jobs are declining because “we” just don’t buy much manufactured stuff anymore, or, in economic terms that there’s less demand for goods now than in the past. But that’s wrong, for a couple of reasons. First, goods are not only produced for household consumption, they are also produced for business and public investment, and for export. Second, and more importantly, the prices of goods have fallen relative to other types of products, so the goods share of total nominal (not inflation-adjusted) spending might fall, but the share in real (inflation-adjusted) spending might not follow.

Industrial policy déjà vu - Much of development economics is about coming up with ways of solving the problem of development. Some people emphasize the need to create more randomized experiments to validate specific programs. Others advocate foreign aid and other outside interventions. Yet others draw inferences from macroeconomic success, for example from the East Asian experience, and advocate “industrial policy” — government support for specific industries or firms that create jobs or generate positive spillovers on others. All countries use some sort of industrial policy. Moreover, one specific type of industrial policy is clearly much needed all around the world today: support for clean energy to reduce global carbon emissions.Is industrial policy the next big thing in economic development? Perhaps even for the United States? Some people think so (see, for example, this Washington Post column by Ezra Klein).Actually, the real question is not whether industrial policy is the next big thing, but whether it should be.

In Praise of Federal Loan Guarantees (Yep, Just Like Solyndra's) Various forms of federal loan guarantees have come under attack, from clear industrial policy-like loans related to solar power to more mainstream corporate welfare in the form of the Import-Export Bank to vanilla social policy like student loans. We may or may not question the wisdom of the federal government attempting to shape the future of US energy, rigging the game in favor of US manufactures, or pushing marginal college students to load up on debt. However, if we are going to do these things, it's important to recognize that loan guarantees are among the cheapest ways to do them. Why? Well, for one the United States has an incredibly low cost of credit. Lower in fact than any private organization on earth. If there were some way to handle the inevitable political corruption, it would make sense for the US government to act as a giant bank. Indeed, by using ever-rising debt to support unusually low tax rates, the US government does to a degree act as a bank. By offering its good name to guarantee other lending ventures the government forgoes the revenues of a bank but provides much of the same service. It allows projects to be entered into which the principals could not afford alone.

Factory Fallacies - There's been a lot of recent buzz about the revival of "industrial policy" in the United States. Insofar as that means thinking about the fact that employment growth in different sectors has different implications for prosperity, it seems all good to me. But all-too-often it seems to mean literally policy designed to encourage factories, manufacturing, and industrial enterprises. In my latest column I say this is a mistake and that rather than looking to poorer countries like China and Japan as models for American prosperity, we should look to the most propserous parts of America with their sectoral specializations in software, media, finance, technology, biotech, and other high-value services.  As an additional point to that, it's worth emphasizing something Jed Kolko said back in February—even in manufacturing-oriented places, relatively few people are actually making stuff on factory floors: Only 56% of jobs in manufacturing companies involve making or fixing actual stuff, what the government calls production, installation, maintenance, and repair occupations. (If you’re doing the math, that means only 4.5% of jobs in the U.S. involve making or fixing stuff in manufacturing industries.) What’s the rest? Service jobs: management, finance, sales, office support and so on.

Clothing Manufacturing, Newspapers are Among Top 10 Dying Industries - First, the bad news. A new report from research firm IBISWorld lists clothing manufacturers, appliance repair shops and video rental companies among the nation’s Top 10 dying industries. The reasons are familiar: Many manufacturing jobs are being off-shored to overseas nations where labor is cheaper while the same trend has reduced the price of electronics to the point where few people find it worth it to get them repaired. Meantime, the growth of online streaming has reduced the need to rent movies or video games. Of course, bad news for an entire industry can be good for the dominant companies who live on.

The revolution to come - EARLIER this week, Matt Yglesias discussed an interesting analysis of penetration rates for various modern technologies, built around the piece of data that smartphones have now achieved 50% penetration of the American consumer markets. In no time flat, as the accompanying chart shows:   Smartphones colonised half the American market in under ten years. It took the internet just over a decade. Historically speaking, those are remarkably fast rates of adoption. What makes this particularly interesting is the fact that information and communication technologies (of which smartphones represent an extraordinarily elegant and powerful marriage) are a general purpose technology. They have, in other words, the potential to reshape the economy and boost productivity across all sectors and industries, like electricity or the automobile. Such transformations are about far more than simple technical innovation, however. They often require wholesale remaking of infrastructure environments, of business models, and of cultural norms. Humanity has been busy taming and repurposing electricity for centuries. Before the automobile could change the structure of cities and production chains, any number of refinements were required: mass production of affordable automobile and truck models, creation of nationwide road networks (which themselves required a massive amount of legal and cultural innovation), and accompanying energy network, etc

NFIB: Small Business Optimism Index declined in March - From the National Federation of Independent Business (NFIB): After Six Months of Increases, Small-Business Optimism Drops For Main Street, No New Jobs in the Months to Come After six months of gains, the Small-Business Optimism Index fell by almost 2 points in March, settling at 92.5. After a promising start to the year, nine of ten index components dropped last month, most notably hiring plans and expected real sales growth each taking a significant dive, in spite of owners reporting the largest increase in new jobs per firm in a year. Job creation in March was the bright spot in this month’s Index; the net change in employment per firm seasonally adjusted was 0.22, far above January’s “0” reading.  A lack of sales remains a problem for owners with 22 percent reporting “poor sales” as their top business problem. This graph shows the small business optimism index since 1986. The index declined to 92.5 in March from 94.3 in February. This is slightly above the 91.9 reported in March 2011. This index remains low - probably due to a combination of sluggish growth, and the high concentration of real estate related companies in the index. And the single most important problem remains "poor sales".

US March Employment Trends Index Dips – Conference Board - U.S. companies modestly scaled back on their hiring efforts in March, the Conference Board’s Employment Trends Index reported Monday, figures that dovetailed with recent figures suggesting the upward trend in jobs creation may not be sustainable. The index fell 0.18% in March to 107.28, dipping from February’s revised figure of 107.47 yet still 5.2% higher than the same period last year. March’s reading was the first decline in six months, and follows Friday’s Labor Department data showing the U.S. economy added 120,00 jobs last month–far less than most market observers had expected. The index is calculated using eight labor market indicators. According to the Conference Board, a deterioration in at least five key areas helped push the ETI lower last month. Among the subcomponents that reversed were the percentage of those who found jobs “hard to get,” the percentage of initial unemployment claims, and the number of temporary workers. Pointing to Friday’s disappointing jobs report, the organization raised doubt about whether the thaw in labor markets can continue as the year progresses.

The structure of the structural unemployment question - Atlanta Fed's macroblog - In the middle of its thorough analysis of U.S. labor markets, the New York Fed tucked in a direct look at whether persistently high unemployment can be plausibly ascribed to mismatches between the skill sets of unemployed workers and those skill sets required by available jobs. The operating hypothesis goes something like this: structural unemployment arises when the skills that are appropriate for declining sectors are not easily transferable to the jobs available in expanding sectors. In the current context, we can think, for example, about the challenge of turning construction workers into nurses (a metaphor offered a while back by Philadelphia Fed President Charles Plosser). If skill mismatch is an important source of postcrisis unemployment, it stands to reason that we would find its markers in the construction sector. In fact, the authors of a New York Fed study find no evidence that construction workers are "experiencing relatively worse labor market outcomes." Though this observation comes with its caveats—in this space my colleagues Lei Fang and Pedro Silos noted that construction workers who are finding employment in nonconstruction businesses apparently have suffered unusually large wage reductions—the Crump-Şahin results generally conform to other research questioning the proposition that skill mismatch looks to be a larger-than-normal problem in the current recovery.

America's Energy Job Machine is Heating Up - Along the Texas coast it's easy to spot the effects of America's oil and gas renaissance in new hotels built in the past five years (many of them now populated by itinerant oilfield workers), in the multiplying numbers of overnight "shale-ionaires," in rising home values, expanding car and truck dealerships, and effectively full employment. What really excites experts is that these signs of prosperity in the gulf point to a larger trend. "We call it the great revival of the North American oil industry," declares Daniel Yergin, head of Cambridge Energy Research Associates. "This is a turnaround not just for North America's oil supply, but one with global impact. It's certainly the biggest development in the world oil market of this century." That means the oil and gas boom could make America a major player again in the world energy market and help spur the entire U.S. economy. Already, both Texas and Louisiana have unemployment rates significantly below the national average, and according to the Bureau of Labor Statistics, the West South Central region -- which includes Arkansas, Louisiana, Oklahoma, and Texas -- has the second-lowest overall unemployment rate in the country, at 7.1%. The lowest? West North Central, which includes North Dakota (with a 3% unemployment rate), where gas producers in the supergiant Bakken formation can't find enough workers to fill their shifts.

Job Gains in U.S. Trail Most-Pessimistic Forecasts - Hiring by American employers trailed forecasts in March, casting doubt on the vigor of the more than two-year-old economic expansion.  The 120,000 increase in payrolls reported by the Labor Department in Washington today was the smallest in five months and less than the most pessimistic estimate in a Bloomberg News survey of economists. The unemployment rate fell to 8.2 percent from 8.3 percent as people left the labor force. Stock futures, the dollar and Treasury yields all fell as the report highlighted Federal Reserve Chairman Ben S. Bernanke’s concern that stronger economic growth is needed to keep the nation’s jobs engine humming. Today’s data also showed that Americans worked fewer hours and earned less on average per week, boding ill for the consumer spending that makes up 70 percent of the world’s largest economy.

Still Crawling Out of a Very Deep Hole - The employment report for March, released Friday, was a big disappointment. After three straight months of job gains above 200,000, only 120,000 new jobs were added last month. Of course, one month’s data does not a trend make. But March’s reversal is a painful reminder that nearly three years into the expansion, the recovery has been a climb toward the rim of the crater left by the Great Recession, not an ascent to new economic heights. As the graphs with this piece show, the deepest deficits are in those areas that matter most to most Americans: jobs and home equity. That has left Americans wondering when, or if, the recovery will translate into broad prosperity, and policy makers looking either to take credit for gains so far or to assign blame for continued hard times. What distinguishes this jobs recovery from others is the sheer scale of the job loss that preceded it. The economy has regained 3.6 million jobs since employment hit bottom in February 2010, but it is still missing nearly 10 million jobs — 5.2 million lost in the recession and 4.7 million needed to employ new entrants to the labor market. The Economic Policy Institute estimates that at the average rate of job creation in the last three months, it would take until the end of 2017, fully 10 years from the start of the Great Recession in December 2007, to return to the prerecession jobless rate of 5 percent.

A Peek into the Employment Report Establishment Survey -  The BLS establishment survey doesn't get much press love or headline buzz when it comes to the monthly employment statistics, despite the survey's better accuracy than the population survey. For the past year, 1.899 million payroll jobs have been added and payrolls now stand at 132,821,000. From a year ago this is a 1.5% increase. The below pie chart breaks down March 2012 payrolls by major industry's percentage of total employment.  The above graph gives payroll jobs as reported by businesses and this report are jobs, not people working those jobs. This survey also lumps together part-time and full-time positions. Retail trade is 60% low paying sales clerks and such. Leisure & hospitality includes hotels, restaurants and bars. Government includes federal, state and focal government jobs. We see manufacturing is only 9% of total U.S. payrolls, when we would hope manufacturing, both durable and non-durable, would dominant the overall U.S. employment picture. Instead, government dominates.  For the year, we have professional and business services showing the most growth by raw levels. The below graph shows the employment levels change from March 2011.  Certain major industry sectors simply have way less jobs than others, by their nature and size. When looking at jobs growth by percentages per industry, we see mining and logging increasing their payrolls by 10.4% for the year. This employment category includes petroleum, gas, and coal and the increase in this sector's employment is due to petroleum and natural gas. Frack!

Big Repairs Still Needed To Fix the American Jobs Picture | A significant structural change in US labor markets has come to light in the years since the financial crisis, and that is our economy’s composition of full time vs. part time jobs. The US in the previous decade shouldered nearly five full time jobs for every part time job. But that ratio changed, rather dramatically, after 2008 and has not really recovered. No doubt, a few economists and some business leaders will be inclined to argue that the trend is not entirely negative. Fair enough. Perhaps it indicates flexibility in US labor markets, especially as the economy tries to recover through the formation of small business. Also, it makes sense that an economy trying to recover would first add back part-time work in equal amounts to full time work, before stepping up to the array of benefits extended to the full time worker. But therein lies the problem: American workers desperately need health-care coverage, which is not typically offered to part-time workers. Meanwhile, deleveraging of household balance sheets since the high debt levels of 2007 has been mild. The result is yet another way to see how deeply consumer demand is restrained: there’s not enough work to both pay down debt, and restart consumption.

Reactions and Overreactions -  Krugman - I see that some people are accusing me of overreacting to one bad month of job news. Um, no. What has actually been happening is that conventional wisdom overreacted to four months of good(ish) news, and the March numbers were a useful corrective.Look at my current favorite measure of the labor market, the employment-population ratio of prime-age Americans — employment rather than unemployment so as to avoid distortion by people dropping out, prime-age to avoid demographic issues as the population ages. Here it is:What has been happening lately is that conventional wisdom, including among people with influence over policy, has taken that little uptick at the right as evidence that it’s time to sound the all-clear, time to call off efforts to boost the economy and worry about inflation instead. This was a terrible misjudgment: we’ve barely made a dent in the employment decline that followed the financial crisis, and are still a very long way from full recovery..

El-Erian: "There Is Something Much Larger In Play" With Today's Jobs Miss - PIMCO CEO Mohamed El-Erian is shaken by today's disastrous jobs report. Writing on, El-Erian listed off the disappointing metrics of the report, but he warns of much worse. These disappointments partly reflect changing seasonal factors, including the prior impact of this winter’s unusually mild weather. But there is something much larger in play, and the implications go beyond economics; they influence key elements of the political narrative for the upcoming presidential and congressional elections. The report demonstrates that firms "lack conviction" to hire for "expected future business."Why? Uncertainty about everything, writes El-Erian:American consumers, as a group, still carry too much debt and have to cope with higher oil prices. The prospects for exports, which have grown markedly, are gradually dimming now that the rest of the world is slowing. Meanwhile, policymakers have yet to find a way to deal properly with a year-end fiscal cliff, the result of Washington’s repeated inability to design coherent fiscal policy.This demand uncertainty compounds worrisome structural impediments to growth.

Nomura Is 'Especially Concerned' By One Part Of The Jobs Report - From Nomura, an interesting observation on the weak jobs report:For details, job loss in the construction industry (-7k) was most likely a continuation of the reversal of the weather-related boost to jobs in this sector in December and January. Outside of construction, however, shifting weather patterns were not enough to explain the weakness in overall job creation in March. We are especially concerned by the second straight month of significant losses in retail (-29k and -34k in Feb and Mar, respectively). Again, weather patterns cannot explain this loss in retail jobs, which were concentrated in general merchandise stores. Furthermore, according to the International Council of Shopping Centers (ICSC) comparable chain store sales experienced solid growth in March, both on a year-on-year and month-on-month basis (Figure 1). It is possible that shifts in seasonal hiring are at play in the retail sales figures, nevertheless the puzzling job loss makes the March retail sales report (released on Monday, 16 April) all the more important. Indeed, something we've been talking a lot about is how -- to the surprise of many -- retail is not taking it on the chin due to higher gas prices.

Warm Winter Economic Boost May Limit Spring Jobs Picture - I was waiting for some enterprising conservative to make the argument that global warming improved the jobs landscape, because it turned certain industries like construction into more year-round pursuits. Of course, to make that argument, they’d have to acknowledge the existence of global warming. But they would have been missing what happens after the catch-up growth from unseasonably warm weather ends as America shifts into warmer months. The catch-up growth just moves economic activity forward, and the same seasonal adjustment models that didn’t catch job growth in January and February, according to this theory, caught too much in March: Economists say the mild winter has artificially inflated job growth. February alone stole as many as 72,000 positions from March and future months, according to Macroeconomic Advisers.Typically, these bumps in demand are evened out through a process called seasonal adjustment. That allows researchers to compare one month’s economic activity with the next for a more accurate picture of the nation’s health. But this year’s weather was so abnormal that those models fell short, and economists are now scrambling to figure out how much of the growth over the past three months was simply due to a glitch in their systems.

Greg Mankiw on the Employment-Population Ratio - I see that his blog Mankiw shows a chart of the employment population ratio to make a comment about the "so called recovery". But he selected the start date of the chart so that you could not see that during the eight years of the Bush administration the employment-population fell from 63.0 to 60.3, a 2.7 drop. Since Obama took office the employment-population fell from 60.3 to 58.6, a 1.7 drop. The ratio has done poorly under both administrations, but people who live in glass houses should be careful about throwing rocks. If you measure from the end of the recession you get similar results.

Labor Force Participation Rate Projection Update - BLS economist Mitra Toossi released some new projections for the participation rate as of January 2012: Labor force projections to 2020: a more slowly growing workforce. This post updates a couple of graphs with these projections. A key issue is what will happen to the labor force participation rate as the economy slowly recovers. In 2010 I looked at some of the cyclical and long term trends for the participation rate: Labor Force Participation Rate: What will happen? I concluded that a majority of the recent decline in the participation rate is due to changes in demographics.  That is why forecasting the participation rate is important - and why reports of the number of jobs needed to hold the unemployment rate steady are all over the place and can be very confusing. Here is an update to a couple of graphs based on Toossi's projections. Note that Toossi is expecting a couple of recent trends to continue: lower participation rates for people in the 16 to 24 year age group (I think this decline is mostly due to more people attending college), and an increase in the participation for older age groups (I think this increase is due to several factors including less physically strenuous jobs, and, unfortunately, financial need). The second graph shows the actual annual participation rate and two forecasts based on changes in demographics. Now that the leading edge of the baby boom generation is starting to retire, the participation rate is declining and will probably continue to decline for the next 20 years.

Convergence in US-EU labor markets - Out of the many signs that the US economic recovery is not as strong as previous ones, the variable that possibly best demonstrates the weakness of the recovery is the stagnant employment to population ratio. This ratio summarizes two labor market variables: the unemployment rate and the participation rate. A declining ratio indicates that out of the available population, we are using fewer resources either because workers cannot find jobs (high unemployment rate) or because they are giving up and leaving the labor force (low participation rate). The current level of the employment to population ratio in the US remains at a very low level (by recent historical standards) and has not increased since the recovery started. This behavior is very different from what we have witnessed in previous recoveries. The dynamics of the employment to population rate are not just cyclical. We have seen several interesting trends over the last years which can possibly explain the abnormal behavior during the current crisis. Albanesi, Sahin and Abel provide an in depth analysis of the dynamics of the US labor market during recessions. The authors argue that some of this difference can be explained by the different behavior of he female and labor force participation rates as well as demographic factors. I am borrowing the picture below from their analysis showing how the employment rate is much flatter than in any previous recovery.

BLS: Job Openings increased slightly in February - From the BLS: Job Openings and Labor Turnover Summary The number of job openings in February was 3.5 million, little changed from January. Although the number of job openings remained below the 4.3 million openings when the recession began in December 2007, the number of job openings has increased 46 percent since the end of the recession in June 2009. In February, the hires rate was essentially unchanged at 3.3 percent The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.  Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs. Jobs openings increased slightly in February, and the number of job openings (yellow) has generally been trending up, and are up about 16% year-over-year compared to February 2011.  Quits increased in February, and quits are now up about 9% year-over-year and quits are now at the highest level since 2008. These are voluntary separations and more quits might indicate some improvement in the labor market.

Employers Posted More Job Openings in February -  — Employers posted slightly more job openings in February, suggesting that modest hiring gains will continue in coming months. The Labor Department said Tuesday that employers advertised 3.5 million job openings in February. That was a slight increase from a revised 3.48 million in January but still below the three-year high of 3.54 million in December. The fact that job openings remained steady in February suggests that the disappointing March jobs report issued last week could be a temporary bump. It usually takes one to three months for employers to fill openings. Employers added 120,000 jobs in March — half the average from the previous three months. The unemployment rate fell from 8.3 percent to 8.2 percent in March, though that was mostly because people gave up looking for work. People who are out of work but not looking for jobs aren’t counted among the unemployed. Many economists downplayed the weak March figures, noting that a warmer winter may have led to some earlier hiring in January and February. With 12.8 million people unemployed, there are on average 3.7 people out of work for each open position. That’s much better than the nearly 7-to-1 ratio that existed in July 2009, just after the recession ended. But it’s worse than the 2-to-1 ratio that is more common in a healthy economy.

Job JOLTS - There are 3.66 Official Unemployed per Job Opening in February 2012 - JOLTS stands for Job Openings and Labor Turnover Survey. The February 2012 statistics show there were 3.66 official unemployed people hunting for a job to every position available*. There were 3,498,000 job openings for February 2012, an increase of 0.6%, from the previous month of 3,477,000. This is no change from January 2012 in actual job openings. Job openings have increased 60% from their July 2009 trough. Yet opportunities are still way below the 1.8 persons per job opening at the start of the recession, December 2007. Below is the graph of February official unemployed, 12.806 million, per job opening.  If one takes the official broader definition of unemployment, or U-6, the ratio becomes 7.73** unemployed people per each job opening for February. The February U-6 unemployment rate was 14.9%. Below is the graph of number of unemployed, using the broader U-6 unemployment definition, per job opening.  If you do not like the use of U-6 to look at the real number of people looking for a job to actual opportunities, consider this number. In February 2012, of those not in the labor force, 6,378,000 were actually wanting a job. U-6 only includes 2,608,000 of these people.

Vital Signs: Unemployed Per Job Opening - The number of unemployed people available for each new job vacancy in the U.S. has been on the decline. In February, there were 3.66 unemployed people for each job opening, the lowest level since 2008. That is still well above the pre-recession level of 1.8 workers per vacancy but suggests the labor market continues to show slow but steady improvement.

Good Jobs News: More People Are Quitting - Friday’s jobs report was a disappointment, but here’s one sign the labor market may be improving: More people are quitting their jobs. More than two million Americans quit their jobs in February, the Labor Department said yesterday. That’s the most since November 2008. Strategists at ConvergEx Group pointed out in a note to clients that quits are a measure of economic confidence — people don’t tend to quit their jobs in tough labor markets because they’re worried they won’t be able to find a new one. During the downturn, monthly quits plunged to a record low of 1.6 million in September 2009, down from more than three million per month before the recession began. The fact that they’re rising again suggests that workers may finally be seeing signs that the job market is improving. Quits matter for another reason, too: They’re a component of “churn,” the regular comings and goings that are a critical element of any healthy job market. When people leave jobs in search of higher pay and new opportunities, they open up opportunities for others. When they stop quitting, those opportunities dry up.“For workers who are unemployed, if there’s less churning of jobs, it’s harder to get on the merry-go-round,” University of Chicago economist Steven Davis said in a Wall Street Journal article in February.

Jobless Aid Applications at 2-Month High — More people sought unemployment benefits last week, pushing the number of applicants to the highest level in two months. The Labor Department said Thursday that weekly unemployment benefit applications jumped 13,000 to a seasonally adjusted 380,000. The previous week’s figures were also revised higher. The four-week average, a less volatile measure, rose to 368,500.After steadily declining since last fall, applications have leveled off in recent weeks. The four-week average is essentially unchanged over the past two months.When applications fall below 375,000, it generally suggests that hiring will be strong enough to lower the unemployment rate. The figures come after a disappointing employment report last week that showed that employers added only 120,000 jobs in March, half the average pace in the preceding three months. But many economists downplayed the weak March figures, noting that a warmer winter may have led to some earlier hiring in January and February.

Weekly Unemployment Claims: Up 13K, Biggest Increase Since December 2011 - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 380,000 new claims is an increase of 13,000, and that was from an upward revision of 10,000 for the previous week. The less volatile and closely watched four-week moving average came in at 368,500. Today's jump in claims is the largest since the 14K increase for the week of December 24th. Here is the official statement from the Department of Labor:  In the week ending April 7, the advance figure for seasonally adjusted initial claims was 380,000, an increase of 13,000 from the previous week's revised figure of 367,000. The 4-week moving average was 368,500, an increase of 4,250 from the previous week's revised average of 364,250.  The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending March 31, unchanged from the prior week's unrevised rate of 2.6 percent.The advance number for seasonally adjusted insured unemployment during the week ending March 31 was 3,251,000, a decrease of 98,000 from the preceding week's revised level of 3,349,000. The 4-week moving average was 3,334,250, a decrease of 35,750 from the preceding week's revised average of 3,370,000.

Are Seasonal Factors Behind Last Week's Jump In Jobless Claims? - Last week’s sharp increase in new jobless claims implies that the labor market’s recovery momentum is fading. Initial filings for unemployment benefits jumped a hefty 13,000 to a seasonally adjusted 380,000 for the week through April 7, the Labor Department reports. That’s discouraging for several reasons. First, it’s the biggest weekly increase in over three months. Second, new claims are now at the highest since late-January. Third, the upward deviation from the trend—defined as difference in the latest weekly claims number vs. its four-week moving average—is the most in nearly a year.  Let’s just say that the latest news on claims isn’t good. And if we consider the report in context with the dramatic slowdown in jobs growth last month, the cyclical clouds look even darker. But before we go off the deep end, it's time once again for some perspective. And once we consider a broader context, it’s obvious that it's too soon to admit defeat for anticipating the economy to continue growing.. The four-week average rose a bit last week, but otherwise it’s near a four-year low. The trend, as the chart below reminds, continues to look healthy.

Closer Look at Unemployment Claims, Covered Employees, Labor Force - Reader Tim Wallace supplied an interesting set of graphs and comments on unemployment claims, the labor force, and employees covered by unemployment insurance. Unemployment Claims Not Seasonally Adjusted - Data for the above chart: The above chart shows the number of employees that are covered by unemployment benefits. The implication is 11 years of lost jobs almost all of it in the last three years. The next chart shows that we need to add 17,598,279 to the work force with unemployment benefits coverage just to get back to equivalent coverage of 2001! Data for the above chart:  This chart straight from the BLS shows that the number of people of of working age continues to grow. Working age population grew by 28 million since 2001 and 9.4 million since 2008 alone. However, the number of people eligible for benefits is actually 911,000 lower than in 2001. The above chart divides the number of people in benefits producing jobs as shown by the Department of Labor report by the number of people in the age appropriate to labor from the BLS report and returns a percentage of people actually participating in a benefits producing job out of that potential labor pool.

The geography of recovery - ON TUESDAY, the Bureau of Labour Statistics released its latest employment figures for American metropolitan areas, for the month of February. I thought it might be a good opportunity to take a look at dynamics of labour-market recovery across the country's biggest cities. The charts below are drawn from data on the 50 largest metropolitan areas (thanks to our research and graphics departments for help preparing these). First up, a look at employment growth over the past year: In the year to February, only two of the country's biggest metropolitan areas saw net employment declines: Sacramento, California and Providence, Rhode Island. In Sacramento, the decline was mostly due to continued drops in state and local government employment; private employment was essentially flat over the year. In Providence, by contrast, government employment rose; lingering weakness across the economy seemed to be the issue. The employment profiles across other cities are somewhat idiosyncratic, but with a couple of big exceptions (Los Angeles) the cities enjoying the biggest job gains over the past year are...the biggest cities.  As we expand the period we examine, that ceases to be the case. Here is the employment change since the end of the recession:

The Incredible Shrinking Payroll - The key to sustained job growth may be helping more start-ups get off the ground. That’s one possible reading of a new Labor Department report, which finds that the average number of employees per company has been steadily decreasing over the last decade. If each company employs fewer and fewer workers, then more companies are needed in order just to keep employment flat, let alone rising. The average size of an establishment — which is a single physical location where business is conducted — rose during the tech bubble, going from 16.7 employees in March 1994 to 17.5 in March 2000. The economy was booming, and employers were scooping up new employees like ice cream. The number of workers per establishment then plunged during the 2001 recession, and  continued slipping through the mid-2000s expansion and Great Recession. As of 2011, there were 15.7 employees per physical office location. So what explains this slide? This shrinking has occurred in almost all industries, so it can only partly be explained by a change in the types of businesses that the economy comprises, the report says.

Federal Funds to Train Jobless Are Drying Up - NYTimes - Atlas Van Lines recently wanted to hire more than 100 truck drivers ahead of the summer moving season.  But a usually reliable source of workers, the local government-financed job center, could offer little help, because the federal money that local officials had designated to help train drivers was already exhausted. Without the government assistance, many of the people who would be interested in applying for the driving jobs could not afford the $4,000 classes to obtain commercial driver’s licenses. Now Atlas is struggling to find eligible drivers.  Across the country, work force centers that assist the unemployed are being asked to do more with less as federal funds dwindle for job training and related services.  In Seattle, for example, the region’s seven centers provided training for less than 5 percent of the 120,000 people who came in last year seeking to burnish their skills. And in Dallas, officials say they have annual funds left to support only 43 people in training programs, nowhere near enough to help the 23,500 people who have lost their jobs in the last 10 weeks alone.  The Labor Department announced on Friday that employers had added only 120,000 new jobs in March, a disappointing gain after three previous months of nearly twice that level. But with 12.7 million people still searching for jobs, the country is actually spending less on work force training than it did in good times.

Recession weighs heavily on young workers  - The number of young adults in their 20s without jobs is the highest since record-keeping began after World War II, and their bleak outlook has barely improved even as the broader U.S. economy has seen a sharp increase in new hiring in recent months. For those like Cocchi, a young male with no college training, the 2010s have hit like a neutron bomb. "I've never seen the world so bad for young people. The only way I can describe it is as a Great Depression," said Andrew Sum, director of the Center for Labor Market Studies at Boston's Northeastern University, who has studied young-adult unemployment in depth. The statistics are grim. Only 55 per cent of Americans in the 16-to-29 age bracket were working in 2010, down dramatically from 67 per cent in 2000, but Sum said that the situation is even worse than those numbers indicate. That's because millions of young adults are also underemployed, working part-time while looking for a full-time job. Sum calls that "mal-employed," which means holders of college degrees working low-end jobs.

Romney Infographic: “Women & The Obama Economy” - The Romney campaign is pushing back on the “Republican War on Women” meme with this infographic on “Women & The Obama Economy.”

Job Growth Isn't Just a Women's Issue - Mitt Romney has been saying all along that he wants smaller government. On Tuesday, he added that he was  angry that so many women have lost jobs in the last three years. But one thing that happens when you shrink government is that women lose jobs. That’s the fundamental political and economic paradox that Mr. Romney is facing. As my colleague Trip Gabriel reports, Mr. Romney has been pointing to the fact that 92.3 percent of the net total of jobs lost since President Obama took office in January 2009 belonged to women. The net number of jobs held by women has fallen by 683,000 since Mr. Obama’s inauguration, while those held by men have fallen by 57,000. But the statistic is misleading for several reasons. First, women have lost a lot of jobs in the last three years, but men lost far more jobs during the recession. Technically, the recession ended in June 2009, but let’s give Mr. Romney the benefit of the doubt and use his chosen benchmark of the start of the Obama presidency. From December 2007, when the recession began, to the Obama inauguration, men lost 3,264,000 jobs, while women lost “only” 1,157,000 jobs. The chart below shows the monthly change in jobs held by men and women over the last five years. You can see the magnitude of losses by gender  from 2007 to 2011 — and also that job losses have actually turned into job gains in each of the last 10 months for both men and women.

Mitt’s Misleading Stat - So I’m driving around today and I turn on the news, only to hear Gov. Romney state that 92.3% of the jobs lost over President Obama’s tenure have been lost by women.  That strikes me as a weird and unreliable statistic, possibly correct but certainly cherry-picked.  So I did a little crunching and I also stumbled on an excellent bit of analysis by Cathy Rampell at the NYT. And sure enough, as the table shows, by moving dates around, I can get pretty much whatever result you seek.  Though politically irresistible, it’s rarely good economics to measure trends over a presidential term as opposed to a business cycle.  President Obama and jobs is a perfect example.  When he came on the scene the job market was hemorrhaging; since Feb 2010, it’s changed course.  It doesn’t make any economic sense to mush those two different periods together. As you see, net job losses in the recession, or since the recession began, were worse for men, but women have made few net gains since the job market began to recover.

A Resurgence Of Lousy, Low-Wage Jobs - The latest jobs report from the Bureau of Labor Statistics threw a wet blanket on the propaganda party, the 2012 version, which had built up considerable momentum in the three months preceding that report. Not that this depressing report has stopped some economists from carrying out their main function in a modern society, which is cheerleading. The March setback in hiring will prove temporary as the U.S. economy, in its third year of expansion, now is better equipped to overcome a slowdown in Europe and rising fuel costs, economists said. Growing sales and profits may give business leaders the confidence to take on staff at a faster clip than last month’s 120,000 gain in payrolls, according to analysts at JPMorgan Chase & Co. and Deutsche Bank Securities Inc. They say the data don’t signal a repeat of 2010 and 2011 — when hiring was derailed after promising starts by concern about government debt, energy costs and natural disasters — even though the total was weaker than all the estimates from 80 economists surveyed by Bloomberg News. More cheerleading is not news, but there was some actual jobs data which is news (hat tip, Barry Ritholtz). The Huffington Post introduces the story in Job Market Recovery Led By Low-Wage Sectors.

The US Has the Highest Share of Employees in Low Wage Work - I wasn't aware of this (click on the figure for a larger graph): [I used this as part of a talk on Monday night at the Wayne Morse Center here at the UO. Dean Baker spoke first, and he talked about what caused the recession. I followed with what is likely to come next and how policymakers might help the economy in the short-run and long-run. In his talk, Dean Baker argued it was the housing bubble that caused the recession, not the collapse of the financial sector -- he argues that if the financial crash had not occurred, we still would have had a severe recession. I agree that the housing bubble was the primary cause, but I also think the financial sector played a role in making things worse, e.g. through the unwinding of high, under-regulated leverage ratios. I talked about both short-run and long-run problems and what we might so about them. The graph above was part of a discussion of how we might improve things for labor (the graph is from Tim Taylor, he has another graph I included in the talk showing increased wage polarization. The percentage of workers earning less than 2/3 of the median wage has increased from 22% in 1979 to 28% in 2009.]

Is the composition of job growth behind slow income growth? - Atlanta Fed's macroblog - Harold Meyerson, Washington Post opinion writer, channels a Bloomberg report (via The Big Picture), and thinks he finds a smoking gun: "Why is this recovery different from all other recoveries? "... what really sets the current recovery apart from all its predecessors is this: Almost three years after economic growth resumed, the real value of Americans' paychecks is stubbornly still shrinking. According to Friday's Bloomberg Economics Brief, ‘the pace of income gains is well below that of the past two jobless recoveries and real average hourly earnings continue to decline.' "The Bloomberg report cites one reason for this anomaly: Most of the jobs being created are in low-wage sectors. According to Bloomberg, fully 70 percent of all job gains in the past six months were concentrated in restaurants and hotels, health care and home health care, retail trade, and temporary employment agencies. These four sectors employ just 29 percent of the country's workforce but account for the vast majority of the jobs being created." Meyerson accurately repeats the Bloomberg story, but that story itself is somewhat misleading. To begin with, the 70 percent figure appears to include the entire category of professional and business services, of which temporary help services are only a part. The types of jobs that fall under the professional and business service label are broadly described by the U.S. Bureau of Labor Statistics and include employment in scientific and technical services, management jobs as well as administrative and support type jobs

Guest post: U.S. has 18th best unemployment benefits in OECD - Tim Vlandas at EU Welfare States flags some important recent International Monetary Fund data on the generosity of a number of countries' unemployment benefits. The metric used is the gross replacement rate (GRR) the ratio of unemployment benefits to a worker's previous wages.  The United States gives, on average, a miserly 27.5% of previous wages in unemployment benefits, behind 17 OECD members, though ahead of 11 others (no data was given for OECD members Iceland, Luxembourg, Mexico, Slovak Republic, and Slovenia). Not only that, the U.S. falls behind 13 non-OECD members, including Algeria, Taiwan, and Ukraine, all of which have at least double the replacement rate of the U.S.  Why is this important? As Vlandas points out, A high replacement rate...ensures that the negative effects of rising unemployment on aggregate demand are mitigated. It also prevents workers from falling into poverty when they lose their jobs. Furthermore, the generosity of unemployment insurance interacts with the state of other employment protections. As regular readers of this blog will recall, the United States has the absolute worst employment protections in the OECD, by a large margin compared to most other members. \As the data here show, however, U.S. workers are not well-protected with unemployment insurance.

Income and Living Standards - Perhaps the most important indicator in economics is the standard of living, often identified with “consumption”: the amount of consumer goods and services that people acquire. Despite a wealth of data on other economic subjects, our measurement of consumption is still rather primitive. A recent study by my University of Chicago colleague Erik Hurst and Profs. Orazio Attanasio and Luigi Pistaferri attempts some repairs on the little consumption data we have, in order to get a better understanding of how living standards relate to income. Economists believe that maintaining and enhancing one’s standard of living are among the most important motivators of economic behavior. A few people work purely for the sake of working, but many others work with the primary intention of providing for themselves and their families. A few people save purely for the joy of saving, but many others save so that they can maintain their living standard in the future, when they might be unemployed or retired. One criticism of the Soviet Union’s economic approach was that while it could create a vast military infrastructure it generated relatively little for consumers. For these reasons, consumption may be a more important economic indicator than even gross domestic product, which is the total production in the economy.

Chart of the Day: Consumption Inequality and Income Inequality Have Both Skyrocketed - One of the evergreen arguments in the debate over rising income inequality is that what really matters isn't income, it's consumption. And consumption inequality hasn't been rising all that fast. If you measure what people are actually buying, it turns out that the middle class is doing OK. To the extent that this was true, it was partly thanks to the fact that the middle class was borrowing ever greater amounts in order to support its consumption habits. But that couldn't last forever. In 2008 all that borrowing came crashing to the ground — taking consumption along with it — and we learned once again that income matters after all. But yesterday Matt Yglesias pointed to a recent paper that adds a whole new dimension to this dispute: the authors (contend that when you correct for well-known problems in the consumption data, consumption inequality has been rising about as fast as income inequality. All the old arguments were just based on faulty data. The charts below tell the story. They rely on survey data from the Panel Study of Income Dynamics, and for each year from 1980 through 2010 they measure the standard deviation of log income and log consumption.  The top chart shows the growth of income inequality: it's gone up from about .75 to .95, an increase of .2 units. The bottom chart shows the growth of various corrected measures of consumption inequality. The broadest measures are the two top ones, which have gone up from about .8 to 1.05, an increase of .25 units. Or, as the authors put it, "Taken together, the results from the PSID data [] is that consumption inequality and income inequality tracked each other nearly identically during this time period."

Growth of Income Inequality Is Worse Under Obama than Bush - Yesterday, the President gave a speech in which he demanded that Congress raise taxes on millionaires, as a way to somewhat recalibrate the nation’s wealth distribution.  His advisors, like Gene Sperling, are giving speeches talking about the need for manufacturing.  A common question in DC is whether this populist pose will help him win the election.  Perhaps it will.  Perhaps not.  Romney is a weak candidate, cartoonishly wealthy and from what I’ve seen, pretty inept.  But on policy, there’s a more interesting question. A better puzzle to wrestle with is why President Obama is able to continue to speak as if his administration has not presided over a significant expansion of income redistribution upward.  The data on inequality shows that his policies are not incrementally better than those of his predecessor, or that we’re making progress too slowly, as liberal Democrats like to argue.  It doesn’t even show that the outcome is the same as Bush’s.  No, look at this table, from Emmanuel Saez (h/t Ian Welsh).  Check out those two red circles I added.  Yup, under Bush, the 1% captured a disproportionate share of the income gains from the Bush boom of 2002-2007.  They got 65 cents of every dollar created in that boom, up 20 cents from when Clinton was President.  Under Obama, the 1% got 93 cents of every dollar created in that boom.  That’s not only more than under Bush, up 28 cents.  In the transition from Bush to Obama, inequality got worse, faster, than under the transition from Clinton to Bush.  Obama accelerated the growth of inequality.

Fix income inequality with $10 million loans for everyone! - Sheila Bair -  Are you concerned about growing income inequality in America? Are you resentful of all that wealth concentrated in the 1 percent? I’ve got the perfect solution, a modest proposal that involves just a small adjustment in the Federal Reserve’s easy monetary policy. Best of all, it will mean that none of us have to work for a living anymore. For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields. This type of profit-making, called the “carry trade,” has been enormously profitable for them.  So why not let everyone participate? Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Think of what we can do with all that money. We can pay off our underwater mortgages and replenish our retirement accounts without spending one day schlepping into the office. With a few quick keystrokes, we’ll be golden for the next 10 years.

A Campaign to Raise the Minimum Wage - As the nation’s economy slowly recovers and income inequality emerges as a crucial issue in the presidential campaign, lawmakers are facing growing pressure to raise the minimum wage, which was last increased at the federal level to $7.25 an hour in July 2009.State legislators in New York, New Jersey, Connecticut, Illinois and elsewhere are pushing to raise the minimum wage above the federal level in their own states, arguing that $7.25 an hour is too meager for anyone to live on. Massachusetts lawmakers are pushing for a big jump, with the Legislature’s joint committee on labor approving a measure last month that would raise the minimum to $10 an hour, which would leapfrog Washington State, whose $9.04 minimum is the nation’s highest. Voters in Missouri may be asked to vote on a minimum wage referendum in November. These moves are giving momentum to an effort to persuade Congress to embrace a higher national minimum wage. Some liberal and labor groups, capitalizing on the energy and message of the Occupy Wall Street movement, are urging Senator Tom Harkin, Democrat of Iowa and chairman of the Senate Labor Committee, to head a Congressional effort to raise the federal minimum to $9.80 an hour by 2014.

A rising tide for increasing minimum wage rates - On Monday, the New York Times reported on the growing groundswell to raise wages for the lowest-paid workers by increasing minimum wage rates. Legislators in New York, New Jersey, Massachusetts, Connecticut, and Illinois are all looking toward raising their state minimums. At the same time, Iowa Sen. Tom Harkin has introduced a bill that—among making other critical investments, strengthening worker protections, increasing tax fairness, and reducing the federal deficit—would raise the federal minimum wage to $9.80 per hour over three years and then index it to inflation.  As Table 1 shows, increasing the federal minimum wage in three steps to $9.80 per hour, as described in the Harkin bill, would raise the wages of 28 million Americans. About 19.5 million workers whose wages are between the current minimum and the proposed $9.80 rate would be directly affected. Another 8.9 million whose wages are just above the proposed minimum would also see a pay increase through “spillover” effects as employers adjust their overall pay scales.

The Age Demographics of Minimum Wage Earners - The BLS has released its report on the Characteristics of Minimum Wage Earners for 2011, and to mark the occasion, we've visualized the age demographic data from Table 7 of each report covering the years from 2006 through 2011 using pie charts, and then we set them in motion using Picasion's animated image generator. Our results are presented below:  In the charts, we see that even though the number of minimum wage earners has more than doubled from 2006's level, from 1,692,000 in that year to 2011's 3,829,000, the relative share of each age group's representation among those earning the U.S. federal minimum wage or less is largely stable from year to year.

Running on empty - We've been focusing on the 1 percent and the 99 percent for the past year, thanks to the Occupy movement. But here's another way of slicing American society -- right down the middle. How is the 50 percent doing these days?  The answer seems to be, not very well. And the conservative assault on the social safety net pretty much guarantees that this part of American society will do even worse in the coming years. Poverty is concentrated in this half of America, both adult and child; the percentage of uninsured people is high; and the median income has dropped significantly since 2000. The inequalities that have worsened in the US since 1980 have hurt the bottom half significantly.  Here is a summary from USAToday in 2011 (link): Median household income fell 2.3% to $49,445 last year and has dropped 7% since 2000 after adjusting for inflation, the Census Bureau said Tuesday. Income was the lowest since 1996. Poverty rose, too. The share of people living in poverty hit 15.1%, the highest level since 1993, and 2.6 million more people moved into poverty, the most since Census began keeping track in 1959.The poverty statistic is stunning: it implies that 30 percent of the bottom 50 percent are officially living in poverty -- almost one-third. So how do the bottom half of Americans do when it comes to health insurance? The Kaiser Family Foundation provides a major data source on rates of uninsured adults by income group (link). Here is a data snapshot for uninsured non-elderly Americans by income:

Corporations Plan for Post-Middle-Class America  - American corporations have pretty much written off the middle class. Their actions declare that the middle class is moribund. And they should know since they have been in the front lines shooting down and decimating the middle class. Indeed, American business has dismantled much of its manufacturing and has eliminated untold numbers of other middle class jobs, sending them overseas where cheap labor fattens corporate profits at the expense of American workers.  In view of the assault on American jobs and workers is it any wonder that a Stanford University study reveals a dramatic drop in American families living in middle class neighborhoods — from 65 percent in 1970 to 44 percent in 2009. Robert Borosage, President of the Institute for America’s Future, adds thisalarming note: “The broad middle class — the triumph and strength of America’s democracy — is sinking. Unless we change course dramatically, we will become even more a nation of haves and have-nots.”[...] Corporate America is shifting its focus in product development and marketing to serve the “hourglass economy.” The hourglass has two chambers connected by a slim channel. Translated into economic terms, or better yet, the emerging picture of America, the two chambers represent rich and poor, with virtually nothing in the middle.  The hourglass economy has become so entrenched that Bloomberg News credits it with dividing Americans and defining U.S. politics.

A Debate on Inequality, Opportunity, and Politics - Had a rousing debate on inequality tonight with Scott Winship from Brookings, moderated by Reihan Salam, both of whom lean conservative, and both of whom brought generally interesting and provocative views to the discussion.The conservative take on the issue tends to fluctuate from mild denial (Winship, not Salam), to which I strongly object, to “is it really that big a deal?” with which I disagree but find interesting and challenging. On the denial front, what you mostly get is the “if-you-just-adjust-it-this-way-or-that-way-it-all-goes-away.”  Scott raises immigration, incarceration, family structure, employer-provided health insurance, deflators, to name just a few.  Some of these don’t affect inequality, like deflators (although Scott cited research that finds prices grow more slowly for poor people); others cut “the other way”—incarceration disproportionately takes lower earners out of the mix, so putting them back in would widen the gap between lower and middle-wage earners.   Most of these are dealt with in the CBO data shown in the figure below, including health care, family size, taxes and transfer payments.   So, yeah, there’s a lot more inequality and forgive me if I won’t swim in de-Nile on this point.

Chris Christie’s Sweet Dream (And Romney’s)  - Beverly Mann -“I’ve never seen a less optimistic time in my lifetime in this country and people wonder why,” the first-term Republican governor said at the Bush Institute Conference on Taxes and Economic Growth in New York City. “I think it’s really simple. It’s because government’s now telling them ‘stop dreaming, stop striving, we’ll take care of you.’ We’re turning into a paternalistic entitlement society,” he said. “That will not just bankrupt us financially, it will bankrupt us morally because when the American people no longer believe that this a place where only their willingness to work hard … determines their success in life then we’ll have a bunch of people sittin’ on a couch waiting for their next government check,” Christie said. -- "Christie: Nation of couch potatoes,” Politico That, pretty clearly, is the message that the Republicans, party-wide, have settled on for this election: People are depressed because of the existence of the social safety net and other government programs such as student-loan and job-retraining programs, and because the very wealthy haven’t had their tax rates cut enough, the gap between the very wealthy, and all those couch potatoes who work regular jobs isn’t large enough.

Yasha Levine: Recovered Economic History – “Everyone But an Idiot Knows That The Lower Classes Must Be Kept Poor, or They Will Never Be Industrious” - Yves here. This post by Yasha Levine ran last week, but it is sufficiently important  that I thought it was worth featuring on NC. The conventional thinking on the so-called “lower orders” usually depicts them as deserving their fate (either due to lack of self-discipline and motivation, or in other ages, as genetically inferior), or as victims of circumstance. But Levine, citing a recent book by economic historian Michael Perelmen, points to another strain of thought: that self-sufficient peasants were indolent, and it would be better for them to reduce their income so as to force them to work harder. God forbid that anyone other that the aristocrats have the luxury of a lot of leisure time!I do have one quibble with Levine’s piece: just as Keynes has been done a disservice by Keynesians, so has Adam Smith been badly used by some of his purported followers. His “invisible hand” likely came from Macbeth. The “invisible hand” is a conjurer’s trick, so Smith appears to have been signaling some reservations about the seeming efficiency of market activity. Similarly, Smith wanted to be remembered for his Theory of Moral Sentiments, not the Wealth of Nations, and he criticized some of the abuses of early capitalism.

Number Of Undocumented Immigrants From Mexico Who Are Entering and Leaving U.S. Hits Net Zero - According to Mexican census data, 1 million undocumented immigrants returned to Mexico from the U.S. between 2005 and 2010 — more than three times the number who said they had returned from 2000 to 2004. The majority of these immigrants are returning to their homes for good, leading to a massive shift in Mexico, which has relied on billions in remittances as a form of social welfare. And the changing immigration patterns has led to “net zero” migration: At the macroeconomic level, Douglas Massey, founder of the Mexican Migration Project at Princeton University, has documented what he calls “net zero” migration. The population of undocumented immigrants in the US fell from 12 million to approximately 11 million during the height of the financial crisis (2008-09), he says. And since then, Mexicans without documents aren’t migrating at rates to replace the loss, creating a net zero balance for the first time in 50 years. The shift began as a result of the weak U.S. economy, but experts say anti-immigrant state laws, tougher U.S. border enforcement, and border violence are contributing factors as well.

Welfare Limits Left Poor Adrift as Recession Hit -  Perhaps no law in the past generation has drawn more praise than the drive to “end welfare as we know it,” which joined the late-’90s economic boom to send caseloads plunging, employment rates rising and officials of both parties hailing the virtues of tough love.  But the distress of the last four years has added a cautionary postscript: much as overlooked critics of the restrictions once warned, a program that built its reputation when times were good offered little help when jobs disappeared. Despite the worst economy in decades, the cash welfare rolls have barely budged. Faced with flat federal financing and rising need, Arizona is one of 16 states that have cut their welfare caseloads further since the start of the recession — in its case, by half. Even as it turned away the needy, Arizona spent most of its federal welfare dollars on other programs, using permissive rules to plug state budget gaps. The poor people who were dropped from cash assistance here, mostly single mothers, talk with surprising openness about the desperate, and sometimes illegal, ways they make ends meet. They have sold food stamps, sold blood, skipped meals, shoplifted, doubled up with friends, scavenged trash bins for bottles and cans and returned to relationships with violent partners — all with children in tow.

The Puzzle of Measuring Poverty - Despite four years of economic distress, the welfare rolls have barely budged, as my article this weekend shows. Many researchers see evidence of growing destitution, but the resources of the very poor have become increasingly hard to measure. Different yardsticks show diverging trends. Incomes have plunged. But spending has largely kept pace. That, at least, is what the poorest households tell government statisticians. The divergence in the trends complicates efforts to assess the effects of tough welfare laws on the most disadvantaged families. Most researchers follow income trends. There are several major data sets. The Current Population Survey interviews 100,000 households in March and asks them to reconstruct their income for the previous calendar year. (It is the source of the government’s official poverty statistics.) The Survey of Income and Program Participation interviews a smaller group of households every four months — requiring less long-term recall — and asks more questions about safety net programs.The two data sets show a similar pattern since 1996, when President Bill Clinton signed a tough law placing time limits and work requirements on welfare recipients. As the economy boomed and caseloads collapsed, incomes rose for single mothers as a whole. Yet a small but growing minority was left “disconnected,’’ reporting they had neither welfare nor work.

Falling Coverage Rates: One Reason Government Surveys May Not Show a Rise in Poverty - Dean Baker - In a NYT Economic blogpost Jason DeParle ponders the fact that government surveys are not showing much increase in poverty, even though we know there are many people experiencing long periods of unemployment and many forms of government assistance have been cut back. One possible explanation is that people in poverty and extreme poverty are less likely to be covered by the survey. My colleague, John Schmitt, found clear evidence of a coverage problem in comparing employment rates as shown in the 2000 Census and the overlapping months of the Current Population Survey (CPS). This is a useful check on the accuracy of the CPS, the main survey for measuring both unemployment and poverty, since the Census has near universal reach with a response rate of close to 99 percent. By comparison, the coverage rate for the CPS is close to 88 percent. Even after applying a Census adjustment formula, Schmitt still found a substantial difference in employment rates, with the CPS showing an overall employment rate that was more than a full percentage point higher than the Census. The difference was largest for groups with the lowest coverage rates. In the case of young African American men, who have a coverage rate of close to two-thirds, the CPS showed an employment rate that was 8 percentage points higher than the Census for the same months of 2000.

Teenage Birthrates at Record Low - The teenage birthrate fell to 34.3 births per 1,000 women 15 to 19 years old in 2010, the lowest rate at least since the government began keeping track in 1940, according to a new report from the Centers for Disease Control and Prevention. The rate has been falling relatively steadily since the early 1990s, and is now just over half the level it was in 1991. The report estimates that if the 1991 rate had stayed steady over the last two decades, the country would have seen an additional 3.4 million babies born to teenagers in that time. Still, as Motoko Rich wrote last week, the United States continues to have higher teenage birthrates than many of its peers. The individual American states also vary tremendously on this measure, from a low of 15.7 births per 1,000 women ages 15 to 19 in New Hampshire, to 55 in Mississippi.

10 Unbelievably Sh**ty Things America Does to Homeless People - For decades, cities all over the country have worked to essentially criminalize homelessness, instituting measures that outlaw holding a sign, sleeping, sitting, lying (or weirdly, telling a lie in Orlando) if you live on the street.  Where the law does not mandate outright harassment, police come up with clever work-arounds, like destroying or confiscating tents, blankets and other property in raids of camps. A veteran I talked to, his eye bloody from when some teenagers beat him up to steal 60 cents, said police routinely extracted the poles from his tent and kept them so he couldn't rebuild it. In the heady '80s, Reagan slashed federal housing subsidies even as a tough economy threw more and more people out on the street. Instead of resolving itself through the magic of the markets, the homelessness problem increasingly fell to local governments.  "When the federal government created the homelessness crisis, local governments did not have the means of addressing the issue. So they use the police to manage homeless people's presence,"  At about the same time, the arrest-happy "broken windows theory," which encourages law enforcement to bust people for "quality of life" crimes, offered ideological support for finding novel ways to legally harass people on the street.

Metal thefts putting homeowners on edge - Gregory Edwards knows the four video cameras monitoring his South Side home are no guarantee it won't be targeted yet again by thieves trying to steal copper or aluminum to trade for quick money at scrap yards. "No matter what, I'm never comfortable," Thefts of valuable metal — from gutters and downspouts to cemetery plaques and catalytic converters — have long plagued city neighborhoods and suburbs. State legislators passed a law nearly five years ago tightening regulations on scrap dealers. But high metal prices and the sputtering economy have continued to motivate criminals trying to turn someone else's property into their profit. Now, state lawmakers are trying to toughen the law again to force scrap dealers to keep better records and to make it more difficult for people to sell stolen goods. Victims welcome the crackdown but also say they're skeptical that any law can better regulate the scrap industry or dissuade thieves who aren't afraid to pull off heists in broad daylight.

Wells Fargo’s prison cash cow - Despite, or rather because of, its role as one of the leading sub-prime mortgage lenders prior to the 2008 crash in the housing market, Wells Fargo was handed $37 billion from the U.S. government, a transfer of wealth from the foreclosed upon have-nots to the haves doing the foreclosing. As Wells Fargo has grown over the years, using its bailout funds to gobble up rival Wachovia and expand to the East Coast, so has the U.S. prison population. By 2008, one in 100 American adults were either in jail or in prison – and one in nine black men between the ages of 20 and 34, many simply for non-violent offenses, justice not so much blind as bigoted. Overall, more than 2.3 million people are currently behind bars, up 50 percent in the last 15 years, the land of the free now accounting for a full quarter of the world’s prisoners.These developments are not unrelated. A driving force behind the push for ever-tougher sentences is the for-profit prison industry, in which Wells Fargo is a major investor. Flush with billions in bailout money and an economic system designed to siphon wealth from the working class to the idle rich, Wells Fargo has been busy expanding its stake in the GEO Group, the second largest private jailer in America. At the end of 2011, Wells Fargo was the company’s second-largest investor, holding 4.3 million shares valued at more than $72 million. By March 2012, its stake had grown to more than 4.4 million shares worth $86.7 million.

Cannibalize the Future, by Paul Krugman -  One general rule of modern politics is that the people who talk most about future generations — who go around solemnly declaring that we’re burdening our children with debt — are, in practice, the people most eager to sacrifice our future for short-term political gain. You can see that principle at work in the House Republican budget, which starts with dire warnings about the evils of deficits, then calls for tax cuts that would make the deficit even bigger, offset only by the claim to have a secret plan to make up for the revenue losses somehow or other.  And you can see it in the actions of Chris Christie, the governor of New Jersey, who talks loudly about acting responsibly but may actually be the least responsible governor the state has ever had.  Mr. Christie’s big move — the one that will define his record — was his unilateral decision back in 2010 to cancel work that was already under way on a new rail tunnel linking New Jersey with New York. At the time, Mr. Christie claimed that he was just being fiscally responsible, while critics said that he had canceled the project just so he could raid it for funds.  Now the independent Government Accountability Office has weighed in with a report on the controversy, and it confirms everything the critics were saying.

Monday Map: Top State Corporate Income Tax Rates - Today's Monday Map shows top state corporate income tax rates, as of January 1st, 2012. Click on the map to enlarge it. View a full list of corporate income tax rates and bracket structures here.

State Tax Collections Rise 9 Percent - The U.S. Census Bureau today released their data on state tax collections for the year ending June 30, 2011. Compared to the previous year, each state saw tax revenue rise, by amounts varying between 0.4 percent (Hawaii) and 44.5 percent (North Dakota). See the full table below for your state. Overall state tax collections rose 8.9 percent, with different taxes rising by different amounts: income taxes (9.8 percent), sales taxes (8.3 percent), excise taxes (9.4 percent), and license taxes (2.8 percent). Property taxes dropped 2.3 percent. The total state tax take of $764 billion is second highest only to the bubble peak of $781 billion in 2008. Even accounting for this drop, as the chart above shows, state taxes have grown at a healthy 4 percent annual rate since 1997. The trends are what you would expect during an economic recovery. Individual income and sales taxes are rising rapidly as income and consumer spending rise, while property tax collections drop as assessments catch up with depressed valuations from the housing crash.  Our review of this data last year is here.

New “Rich States, Poor States” Report Looks at Tax and Spending Policy - This week, the American Legislative Exchange Council released their 5th edition of the annual Rich States, Poor States report, which ranks states according to a variety of tax, spending, and regulatory policies. Some of the report's insights on taxes echo observations that we have made in our State Business Tax Climate Index. For example, in our Index, one of the things that top-scoring states have in common is that they are able to run their state without collecting one of the five major taxes. Rich States, Poor States praises such states, citing that limited taxes make for better economic indicators: "Over the last decade, the nine states without an income tax have outperformed the nine states with the highest income tax, by every measure. Low tax states beat the national average, and high tax states fail to live up to it." Below are the top and bottom ten ranked states in Rich States, Poor States:

Where Do Our State Tax Dollars Go? - Via the CBPP: (pie graph) ... States spend more than half of our tax dollars on education and health care, on average.

Corporate Tax Kickbacks: Busting Our Budgets, State By State - Alabama and Louisiana, two of the poorest states in the nation, recently battled to host a new ThyssenKrupp steel mill. Alabama "won," but getting the mill cost the state $734 million in tax breaks -- or $272,000 for each of the 2,700 jobs the steelmaker will create.  Federal tax giveaways to industries ranging from energy to agriculture have received much criticism, but the relocation incentives offered by states for corporations to move their facilities from one to another may be the most counterproductive of all corporate subsidies.  Companies know that states are willing to award generous packages for minor job additions and pit the governments against each other in bidding wars that essentially amount to blackmail.  One political scientist estimates these state and local giveaways to corporations at $70 billion or more. One of the biggest offenders in the corporate giveaway bonanza may be New Jersey Gov. Chris Christie. In just two short years, Christie has given away more than $1.5 billion to recipients including Panasonic (PC), Goya Foods, Campbell Soup (CPB), and Prudential Financial (PRU). The rewarded companies have promised to add just 2,364 jobs over the next decade, equivalent to a cost of $387,537 per job.

Even Without New Contracts, Many Public Employees Get Raises - Public employees are working without contracts in cities and counties across New York State, as labor negotiations stall because local governments say they cannot afford to raise wages. But many union members are still taking home larger paychecks, thanks to a state law that allows workers to continue receiving longevity-based salary increases after their contracts expire. The pattern is seen throughout the state. All labor contracts in Albany, New Rochelle and Yonkers have expired. So have seven of nine contracts in Syracuse, six of eight in Buffalo and most of the contracts in New York City. And the same trend is unfolding at the county level. The New York State Association of Counties surveyed 17 counties at the request of The New York Times and found that 41 of 67 labor contracts had expired.

Moody's cuts Detroit water and sewer debt ratings - Moody's Investors Service on Monday downgraded the ratings on Detroit's water and sewer debt, citing a heightened risk of default and bankruptcy by the city. "Should the city file for bankruptcy, the assets of the water and sewage disposal systems would not likely be subject to an automatic stay, however, the water and sewage disposal systems' assets and finances may not be immune from additional pressure given the city's deteriorating fiscal condition." the credit rating agency said in a statement. In addition, the water and sewer systems could be liable for some portion of an estimated $350 million Detroit may have to pay after a termination of the city's interest rate swap agreements was triggered when Moody's last month cut the city's general obligation bond rating further into the junk category to B2. Moody's cut the rating on Detroit's senior lien water and sewerage disposal debt to Baa1 from A1 and the rating on second lien debt to Baa2 from A2. The water and sewer debt ratings remain under review for a further downgrade pending a review of a recently approved consent agreement aimed at putting Detroit on a stronger financial footing, as well as other matters, according to Moody's.

At least 4,100 Detroit teachers get layoff notices - At least 4,100 Detroit Public Schools teachers have received layoff notices and are being told that they can reapply for their jobs next month. Detroit Federation of Teachers union President Keith Johnson told The Detroit News ( that that notices were sent by the district this week. The layoffs are effective Aug. 24, shortly before the 2012-13 school year starts. District spokesman Steve Wasko says notices were sent Tuesday. He says layoff notices also went to administrative employees several weeks ago. Wasko says the notices are sent to ensure that the district, which is being run by a state-appointed emergency manager, brings back the appropriate number of teachers in the fall. In 2011, the district issued layoff notices to teachers in the spring and spent the summer calling some back.

Let's Blame the Unions - Krugman - A good article in the Times about the terrible state of Texas schools — followed by a truly awful comment thread, in which many readers rush to blame, you guessed it, teachers’ unions.  Folks, this isn’t an article about New York, where three-quarters of public-sector workers are unionized. It’s about Texas, where only one in five public workers belongs to a union. Blaming unions for the problems of Texas is like, well, blaming Jews for the problems of Japan: there aren’t enough of them to matter.

Tennessee's 'Monkey Bill' Will Protect Anti-Science Teachers - Tennessee Gov. Bill Haslam is likely to sign into law a bill requiring Tennessee's public schools to allow teachers to discuss purported weaknesses of theories such as evolution and global warming in their classrooms. Haslam has until Tuesday to sign the bill, veto it, or allow it to become law without his signature. Opponents, including science organizations, teacher groups and the ACLU, argue the law -- SB 893, "The Monkey Bill" -- injects religion into public education and raises the specter of the 1925 "Scopes Monkey Trial", when a high-school science teacher in Tennessee was convicted of teaching evolution. The conviction was later overturned on a technicality. The statute prohibiting the teaching of evolution remained on Tennessee's books until it was repealed in 1967. The bill is "very clever" in its wording, but its hidden agenda is to "inject religious beliefs into scientific curriculum," said Hedy Weinberg, executive director of the American Civil Liberties Union of Tennessee. "It would clearly gut science education in our schools," she said, adding it recalls the era when the teaching of evolution was forbidden in Tennessee.

American digital public library promised for 2013 - An American digital public library of over two million books will be in place by next April, according to scholar, author and Harvard University librarian Robert Darnton. Professor Darnton, speaking at Columbia Law School earlier this week, made the public promise that the Digital Public Library of America, a non-profit initiative first dreamed up in October 2010, "will be up and running by April 2013, and its initial holdings will include at least two million books in the public domain accompanied by a dazzling array of special collections far richer than anything available through Google".

The peculiar case of higher education - Via a request for topic coverage, here are some very good remarks from Ryan Avent.  Excerpt: A sector dominated by the state—state-run in some cases, merely subsidised and regulated in others—is, I think most Americans would agree, both a major contributor to American prosperity and one of America’s most competitive industries on foreign markets, despite its glaring inefficiencies. What ought we to conclude based on this example?Certainly, one could reasonably argue that the sector would be even better if state control were relaxed, monopolies broken up, subsidies curtailed, and market controls (like those on immigration) eliminated. But one also has to wrestle with how different the American economy would look if the state had never muscled public universities (including a broad network of technology-driven, extension-oriented schools) into existence. This stuff is harder than we often pretend. A few observations:

  • 1. Postwar higher education has proven one of America’s most effective subsidies, and it has paid for itself many times over.  It is also one of the more significant successes of federalism.
  • 2. We are fortunate that U.S. state universities are more or less autonomous, compared to the Continental model where professors and administrators are treated as part of the state civil service bureaucracy.  The latter system does not work well, and those countries have struggled to move closer to American models.

Educational exports - LET me add one quick thought to the previous post on tradability and productivity. This developed from an offline conversation with Slate writer Matt Yglesias; I'll leave it abbreviated since I believe he's writing it up elsewhere and I don't want to steal his thunder. Tyler Cowen follows up a post praising David Brooks' praise of Tyler Cowen with a post on American higher education, which reads in part: The United States circa 2012 is one of the most productive economies of all time, arguably the most productive if you take into account size and diversification...Internationally speaking, in the richest and most productive global economy of all time, which is our most competitive sector? could well be higher education. Students from all over the world want to go to U.S. higher education. If we had nicer immigration authorities, this advantage would be all the more pronounced. In other words, I work in what is perhaps the most competitive and successful sector in the most competitive and successful economy of all time. And yet what I see around me is a total, total mess.

Selling a piece of your future - A UNIVERSITY education costs a fortune. Student loan debt in America has been rising rapidly in an effort to keep up with the expense. According to the 2007 Survey of Consumer Finance 8.9% of households had student debt in 1989, averaging $8,700. In 2007, by contrast, the share had risen to 16%, holding an average of $21,500 in debt. To make matters worse new graduates face a slack job market which could depress their earnings for decades. But what choice do they have? The cost of forgoing university may be even larger. Students in California have a proposal. Rather than charging tuition, they'd like public universities in California to take 5% of their salary for the first twenty years following graduation (for incomes between $30,000 and $200,000). Essentially, rather than taking on debt students would like to sell equity in their future earnings. This means students who make more money after graduation will subsidise lower-earning peers. It is not clear if this will provide adequate revenue for the university. It also means the university bears more risk, because the tuition it will ultimately receive is uncertain. But the proposal will benefit some students and the principle is not so ridiculous. American universities already practice price discrimination based on parental income. The more money your parents have the larger your tuition bill; richer families already subsidise poorer ones. Why not price discriminate based on future income of the student rather than the current income of the parent?

A Modest Proposal: Students Refuse To Become Debt Slaves, Opt To Sell Equity In Their Future Wealth Instead - The topic of the student loan bubble (and even its popping) has been digested to death on Zero Hedge. One topic that has been avoided however, is that of the student equity bubble, for the simple reason that until now the concept did not exist. That may change soon: as the Economist reports, some California students have a modest proposal to the symbiotic University-Banker net worth extraction mechanism - shove your debt. Instead, they will pay for their unaffordable education (except when funded with copious amounts of unserviceable and non-dischargable debt) with equity. From the Economist: Rather than charging tuition, they'd like public universities in California to take 5% of their salary for the first twenty years following graduation (for incomes between $30,000 and $200,000). Essentially, rather than taking on debt students would like to sell equity in their future earnings. This means students who make more money after graduation will subsidise lower-earning peers.

SoFi Reinvents College Loans With Alumni Funding - As the cost of a college education continues to rise, a startup called SoFi is offering a way for alumni to offer students financial assistance and more. Co-founder and CEO Mike Cagney describes the current student loan system as a “classic market failure,” resulting in students who are stuck with high interest rates and heavy debt that they struggle to pay off. He says that if you can remove government from the equation (specifically government loans) and replace it with alumni, then “you create a very virtuous cycle.” So that’s what SoFi tries to do. The company is creating university-specific funds for alumni to invest in, and those are used to make loans to students. SoFi says it’s offering to cover the full cost of attendance for participants, with loans ranging from $5,000 to $200,000. The loans are 6.24 percent fixed rate, and they can drop to 5.99 percent, lower than federal Stafford and PLUS loans and many private loans. So students get relatively low interest rates, while alumni get a significant financial return.

Did JPMorgan Pop The Student Loan Bubble? - Back in 2006, contrary to conventional wisdom, many financial professionals were well aware of the subprime bubble, and that the trajectory of home prices was unsustainable. However, because there was no way to know just when it would pop, few if any dared to bet against the herd (those who did, and did so early despite all odds, made greater than 100-1 returns). Fast forward to today, when the most comparable to subprime, cheap credit-induced bubble, is that of student loans (for extended literature on why the non-dischargeable student loan bubble will "create a generation of wage slavery" read this and much of the easily accessible literature on the topic elsewhere) which have now surpassed $1 trillion in notional. Yet oddly enough, just like in the case of the subprime bubble, so in the ongoing expansion of the credit bubble manifested in this case by student loans, we have an early warning that the party is almost over, coming from the most unexpected of sources: JPMorgan.

Strange Jubilee -  Is there a Baby Boomer so dim in this land of rackets and swindles who thinks that he or she will escape the wrath of the Millennials rising? The developing story is so obvious that only an academic economist could fail to notice. Here's how it will go: some months from now, as the financial unwind worsens, and the mirage of gainful employment shimmers away to nothing, and the technocrats of Europe meet nervously by some Swiss lakeside (and are seen glumly shaking their heads), and Romney and Obama try to out-do each other peddling miracle cures for the tanking national self-esteem - a dangerous meme will go forth across the internet, and this meme will say: Millennials, renounce your college loans and set yourselves free!    And then something truly marvelous will happen. They will at once disempower the swindling generation of their fathers, teachers, loan officers, and overlords and quite possibly bring on, at long last, the epochal collision of pervasive American control fraud with the hard hand of reality.    I think this will happen, and I would venture even to set the meme loose here and now and watch it go viral. The college loan racket has been an even more cynical enterprise than the mortgage racket was because so many people who ought to have known better, people of supposed intelligence such as college deans, cabinet secretaries, and think-tank Yodas, all colluded to support the false promise that the gigantic cargo cult of higher ed would keep churning out fresh careers forever - when the truth was that the entire groaning vessel of hopes and dreams was already under water and sinking into the eternal darkness.

Student-loan debt affecting aging Americans - New research shows Americans 60 and older owe $36 billion in student loans. About 5 percent of the $85 billion of student loans in the U.S. and another 12 percent of the total is by borrowers 50-59. John Dombrowski with Grand Canyon Planning Associates said many of these people are getting a rude awakening about their student-loan debt when they apply for social security. "(The federal government is), at that point, going to withhold some if not all of the social security check," he said. "They can do that because they gave you the loan and in their mind they have every right to take that payment." Dombrowski said those affected should work with a financial advisor, sooner rather than later. "It doesn't cost anything to sit down with a financial planner and get the information," he said. This comes after the recession turned the real estate market upside down with many losing equity in their homes, others in credit-card debt and now here comes the feds after their student-loan dollars via social-security checks.

Teacher retirement fund 'reality check': Insolvency possible - The Teachers’ Retirement System won’t go broke this year, or next, or the year after that. For retired teachers and the soon-to-be-retired, their benefits are safe. But Richard Ingram, executive director of the state’s largest public pension system, can’t make that guarantee for everyone. “I can’t say that to the 25-year-old teacher in Illinois,” . “The numbers just don’t work.” Ingram, who’s been at the helm of TRS for a little more than a year,  discussed three scenarios for the system’s solvency, based on a study commissioned by TRS:

  • * That TRS receives $2.4 billion a year, as it did in this fiscal year, and that amount increases by 3 percent a year annually. Under this scenario, TRS hits insolvency in 2049.
  • * That TRS receives $2.4 billion a year, and that amount remains flat. The recent study, conducted by Buck Consultants, determined the system would be insolvent in 2037 under that scenario.
  • * That TRS receives $1.44 billion a year, a 40 percent decrease from this fiscal year, annually from now on. It determined the system would be insolvent in 2029, or just 17 years from now

California Teacher Pension Plan’s Unfunded Gap Widens - The California State Teachers’ Retirement System, the second-biggest U.S. public pension, said the gap between its assets and projected obligations rose $8.5 billion as investment gains failed to cover previous losses. The unfunded liability climbed 13 percent to $64.5 billion as of June 30, according to a report from actuaries released today. The system had about 69 percent of assets needed to cover promises to current and future retirees at the end of fiscal 2011, down from about 71 percent a year earlier. The widening gap may require increased state funding, plan officials have said. Public pensions nationwide had a median of about 75 percent of the funds needed to cover obligations in 2010, according to Bloomberg Rankings data. The California fund’s overseers said losses on invested assets in 2008 and 2009 added $12.7 billion to the new deficit figure.

CalSTRS' unfunded liability rises 13%, funding ratio falls to 69.4% —The unfunded liabilities of the California State Teachers' Retirement System climbed 13% to $64.5 billion in the 12 months ended June 30, reducing its funded ratio to 69.4%, from 71.5%, according to a report from its actuary. The $152.2 billion system had an $8.5 billion increase in pension obligations during the 12-month period, according to report by Milliman Inc., the retirement system's actuary. The report is on the agenda for the retirement system's Thursday board meeting. The funding shortfall is due primarily to CalSTRS' lackluster investment returns, which averaged 5.5% a year over the last 10 years. This was significantly less than the retirement system's 7.5% rate of return assumption, according to the Milliman report. CalSTRS' board in February lowered the assumed rate from 7.75%, which added $3.5 billion to the funding gap, the report said. CalSTRS' assets would be depleted in about 35 years if additional funding is not secured, Millman said.

Team tells City Council that Seattle can't afford pension plan - Seattle's generous employee-pension system, underfunded by $1 billion over the next 30 years, will require larger infusions from the city treasury or reduced benefits for newly hired workers, a study team told the City Council on Monday. The $1.8 billion pension fund hasn't fully recovered from its $616 million loss during the 2008 financial crisis and is facing additional strain from the longer life spans of retirees. The city has stepped up its contributions to the plan, as directed by actuaries, diverting millions of dollars from city utilities and the general fund, the Retirement Interdepartmental Team reported. This year's diversions into the pension fund are $5.5 million higher than last year, and 2014 diversions are expected to be $20.6 million higher than in 2011. "That becomes sort of a budget driver like health care and other budget drivers," council staffer and retirement-team member John McCoy told the council. "Money going for pensions is not available for benefits or other spending." Employee contributions, at 10 percent of pay, are higher than the national median of about 5 percent for public-sector pension plans, the study group reported. It isn't clear whether the city's current assumption of 7.75 percent annual investment returns on the pension fund are achievable

US union pensions hole deepens to $369bn - The hole in the pension plans of US labour unions now stands at $369bn Credit Suisse has calculated with the aid of new reporting standards. This raises the prospect of higher pension contributions for employers and deteriorating industrial relations. Multi-employer pension schemes, managed by trade unions on behalf of members working for many different employers, are now just 52 per cent funded, the bank calculates with m ost of the burden to close this gap likely to fall on small and midsize companies. S&P 500 companies’ share of this obligation is estimated at just $43bn. However Credit Suisse identifies seven large companies in the S&P, including Safeway and UPS, where the pension liability is a significant proportion of their market capitalisation. There is also a “last man standing” risk for companies if other contributors to a fund fail. In 2007 it cost UPS $6.1bn to withdraw entirely from the Central States Pension Fund, capping its liability. More than 10m people are covered by such multi-employer schemes with contribution rates typically set by the collective bargaining agreements that cover pay, benefits and working conditions. Membership of these funds, and the businesses contributing to them, tend to be concentrated in industries with highly unionised workforces, such as construction, transport, retail and hospitality.

Union Pension Underfunding Time-Bomb Soars By 75% In One Year, Nears $400 Billion - The shortfall in US labor union pension funds is huge and growing rapidly. The latest data, from 2009, from the PBGC showed that these multi-employer plans were 48% underfunded with $331bn of assets to support $686bn of liabilities - and it has hardly been a good ride for those asset values since then. Critically, as the FT notes today, recent changes by FASB has enabled Credit Suisse to estimate shortfalls more accurately and it paints an ugly picture. The critical difference between reality and what is being reported is the ability for firms to use actuarial 'facts' to discount liabilities or compound assets at a 7.5% annual growth rate - as opposed to the sad reality of a financially repressed investing environment where returns swing from +20% to -20% in a flash forcing all funds into market timers and not long-term buy-and-hold growth players. These multi-employer pension schemes cover over 10 million people concentrated in industries with highly unionized workforces such as construction, transport, retail and hospitality but of the shortfall only $43bn lies with firms of the S&P 500 - leaving the bulk of the burden on small- and medium-sized businesses once again

WaPo WAY Off on Social Security - I was about to go after Robert Samuelson’s terribly misleading attack on Social Security this AM—it has become welfare!…FDR would hate it!—when it occurred to me that this is just the type of spurious attack the drives Dean Baker nuts (Dean and Mark Weisbrot were early recognizers of the Soc Sec crisis mongering). So, if you’re unfortunate enough to read Samuelson, here’s the antidote. Two points I’d add.  First, amplifying one of Dean’s points, be aware of the Social Security bait and switch.  In order to make the finances of the guaranteed pension system sound worse than they are, Samuelson, toward the end of the piece, switches from “Social Security” to “Social Security and Medicare,” the latter of which is truly on an unsustainable path.  That’s a separable issue, but it’s characteristic of the “no-more-social-insurance” crowd to jam them like this. Second, none of us are arguing that we should ignore the actual fiscal imbalances faced by Social Security.  Our point is that they are manageable with known solutions (whereas controlling costs in health care is less certain—although frankly, that too is less elusive than we generally think—every other advanced economy is doing much better than we are with some form of single payer or highly regulated delivery system and cost controls).

Robert Samuelson Shows that the Post Has no Fact Checkers - Dean Baker - Social Security and Medicare are hugely important for the security of the non-rich population of the United States. For this reason, Robert Samuelson and the Washington Post hate them. As we know, this is a question of basic political philosophy. In the view of Samuelson and the Post, a dollar that it is in the pocket of low or middle class people is a dollar that could be in the pocket of the rich. And Medicare and Social Security are keeping many dollars in the pockets of low and middle class people.  Today's column by Robert Samuelson tries to tell us that Franklin Roosevelt would be appalled by the current state of the Social Security program.Samuelson begins by telling us that: "It [Social Security] has become what was then called 'the dole' and is now known as 'welfare.' "Millions of Americans believe (falsely) that their payroll taxes have been segregated to pay for their benefits and that, therefore, they 'earned' these benefits. To reduce them would be to take something that is rightfully theirs." Of course Samuelson is 100 percent wrong here. Payroll taxes have been segregated. That is the point of the Social Security trust fund and the Social Security trustees report. These institutions would make no sense if the funds were not segregated.

Socialsecuritymedicareandmedicaid Strikes Again - Krugman - Jared Bernstein and Dean Baker are both mad, understandably, at Robert Samuelson, who pulls out, for the 7 millionth time, the old Social Security bait and switch. Here’s how it works: to make the quite mild financial shortfall of Social Security seem apocalyptic, the writer starts out by talking about Social Security, then starts using numbers that combine SS with the health care programs — programs that are very different in conception, financing, and solutions.And then the writer ends by demanding that we cut Social Security, as opposed to addressing health care costs. The serious (as opposed to Serious) thing to say here is that on current projections, Social Security faces a shortfall — NOT bankruptcy — a quarter of a century from now. OK, I guess that’s a real concern. But compared to other concerns, it’s really pretty minor, and doesn’t deserve a tenth the attention it gets. It’s also worth noting that even if the trust fund is exhausted and no other financing provided, Social Security will be able to pay about three-quarters of scheduled benefits, which would mean real benefits higher than it pays now. I don’t want to see that happen, but it’s worth keeping in perspective — especially when you look at the solutions “reformers” propose, which all seem to involve reducing future benefits relative to those currently scheduled.

Why Do So Many Elites Hate Social Security? - This week there was another big attack on Social Security by another elite. This time the attack comes from an elite columnist, other times it comes from Wall Street types, wealthy CEOs or the kind of politicians that have been in DC way too long. These attacks never come from people who depend on these programs (i.e. almost all of us.) Why do the privileged elites hate Social Security so much? Robert Samuelson wrote this week in the Washington Post, Would Roosevelt recognize today’s Social Security? Samuelson writes that Social Security, "has become what was then called “the dole” and is now known as “welfare.” " He discusses a book that, he writes, "shows how today’s “entitlement” psychology dates to Social Security’s muddled beginnings." Elites hate "entitlements" -- those things we all are entitled to as are citizens in a We-the-People democracy. Democracies are based on "we are in this together" and "watch out for each other." Plutocracies are based on rule by the elites. These elites especially hate what Samuelson calls "entitlement psychology" -- a state of mind in which 99% of us forget our place and get all uppity about being citizens in a democracy and the things that entitles us to. Samuelson's core attack on Social Security is that there is no trust fund, that the money has been spent, and it is just a program where working people pay for the retirement of older people, And, he restates, while people think they are entitled to their Social Security benefits it really is just "welfare,"

Damned Liars and Social Security - There are liars, damned liars, and “non partisan experts.” The non partisan experts are expert liars, “non partisan” because that’s the best lie of all. A damned liar need not be an expert, but he is usually pretty clever at mixing “true” facts, or at least “facts you can’t prove are not true,” with false implications that lead the people he wants to deceive into hurting themselves with false conclusions. Those false conclusions are ideally tied to other ideas that the mark really, really wants to believe, so he is never really able to let go of the lie he has been taught. Robert J. Samuelson is not an expert, but he gets all his “facts” from them pre-twisted and designed to mislead. He published a pretty good example of the art of deception on Easter Sunday in the Washington Post. Good enough, in fact, that when I started to deconstruct the lies for this post, I soon saw that I was in for a long job.. one too long to expect readers to put up with. So I will have to content myself, and you, dear reader, with “pointing at” the truth and leave you to decide for yourself how far you want to go to understand it for yourself.

The $30 billion Social Security hack - Sometime last year computers at the U.S. Social Security Administration were hacked and the identities of millions of Americans were compromised. What, you didn’t hear about that?  Nobody did. The extent of damage is only just now coming to light in the form of millions of false 2011 income tax returns filed in the names of people currently receiving Social Security benefits. That includes a very large number of elderly and disabled people who are ill-equipped to recognize or fight the problem. It’s an impact pervasive enough that the IRS now has a form just to deal with it: Form 14039: Identity Theft Affidavit, December 2011. The Wall $treet Journal has a story about this problem specific to Puerto Rico, but the Journal fails to mention that this is a national problem — a $30+ billion problem. The story is going public now because tax season is upon us and there’s no way to keep it under wraps as people file their tax returns only to learn that a return under that name has already been filed with refunds paid electronically into a bank account now closed. The December date on that IRS Form 14039 shows the Treasury has been expecting this for awhile.

IMF Warns U.S. Underestimates Costs of Citizens Living Longer - The U.S. and other governments are likely underestimating the life expectancy of their aging populations, a risk that could boost pension liabilities by nearly 10% and balloon already massive public debt levels, the International Monetary Fund warned Wednesday. The IMF said many governments should act now to raise mandatory retirement levels and encourage pension plans to better hedge their risk. “Delays would increase risks to financial and fiscal stability, potentially requiring much larger and disruptive measures in the future,” IMF economists wrote in a chapter of the fund’s Global Financial Stability Report. Erik Kopper, one of the chapter’s authors, said the chance the issue causes a major market disruption in the next couple of years is very low. But the longer governments put off dealing with the risk, the harder it will be for them to fix as the potential costs accumulate. For example, someone starting to save for retirement in their 20s stands a greater chance of covering their costs in their old age than someone who starts in their 40s.

How the Banks Endangered Medicare - Simon Johnson - The world’s largest banks have been accused of many things in recent years, including taking excessive risk in the run-up to 2008, doing great damage to the American economy by blowing themselves up and then working hard to resist any sensible notions of financial reform. All of this is true, but it misses what is likely to be the most profound negative impact of the banks’ behavior on most Americans. The banks’ actions led directly to an increase in government debt, which in turn has made the reduction of that debt by “cutting runaway spending” a centerpiece of the Republican presidential campaign to date. As a result of this pressure, Medicare now stands on the brink of being eliminated as a viable form of social insurance. Yet the executives who lead these banks – and the politicians with whom they work closely – will not be held accountable this election season. To be clear, there was already a potential fiscal issue looming in the distance, in the 2020s and beyond – with the retirement of the baby boomers, increase in life expectancy and, most of all, our collective failure to control health care spending. But until 2008 we had time to deal with this — and gradual solutions seemed most likely, preferably including ways to control the growth of health care spending more broadly across the economy.

Will the 2010 Health Law Cut the Deficit or Add to It? - In a new study, Chuck Blahous, who is a public trustee for Medicare and Social Security, concludes that the 2010 health law will add at least $340 billion to the federal deficit from 2012-2021. This is contrary to the official estimates by the Congressional Budget Office, which initially figured the Affordable Care Act would reduce the deficit by about $132 billion from 2012-2019. Who’s right? Who knows? In truth, unknowable and unpredictable changes in overall health costs will dwarf the variation between Chuck’s estimate and CBOs. However, Chuck makes some important points in his analysis. One, which TaxVox has written about recently as well, is the potential double-counting of increased Medicare payroll taxes.  The 2010 law raises the Medicare levy by 0.9 percent for high-income workers. But, due to CBO scoring conventions, the money it generates appears to both make the Medicare Hospital Insurance (HI) Trust Fund appear more solvent and reduce the general fund deficit. It can’t simultaneously do both, as Chuck correctly notes. In reality, if the extra tax goes to the general fund to “pay for” health reform, Medicare would be required to reduce its hospital benefits, absent some other new funding source. Chuck argues Medicare would cut benefits. CBO assumes it would not.

Another Bogus Attack on Health Reform - Krugman - Oh, boy. It turns out that the WaPo featured on its front page a report by Charles Blahous of the (yes, Koch-funded) Mercatus Center — although the Post describes him as a Medicare trustee, giving the impression that this is somehow an official document — claiming that the Affordable Care Act will actually increase the deficit. Jonathan Chait does the honors: You may wonder what methods Blahous used to obtain a more accurate measure of the bill’s cost. The answer is that he relies on a simple conceptual trick. Medicare Part A has a trust fund. By law, the trust fund can’t spend more than it takes in. So Blahous assumes that, when the trust fund reaches its expiration, it would automatically cut benefits. So saving Medicare money isn’t a deficit reduction, because Medicare is going to run out of money and cut benefits anyway. Right? OK, this is crazy. Nobody, and I mean nobody, tries to assess legislation against a baseline that assumes that Medicare will just cut off millions of seniors when the current trust fund is exhausted. And in general, you almost always want to assess legislation against “current policy”, not “current law”; there are lots of things that legally are supposed to happen, but that everyone knows won’t, because new legislation will be passed to maintain popular tax cuts, sustain popular programs, and so on.

Howard Dean Advises Corporate Health Care Clients To Fund ‘Both Sides,’ Run Attack Ads - One of the biggest problems with lobbying in Washington D.C. is the extent to which so many influence peddlers work behind closed doors, refusing to disclose their clients or register their work with the ethics office. Gingrich isn’t the only politician working as an unregistered lobbyist.  I have uncovered video that shows liberal icon Howard Dean discussing his government affairs work for corporate interests.  Dean has been lobbying without disclosure for about three years. In 2009 after his stint as chairman of the Democratic Party, Dean joined the law/lobbying firm McKenna, Long & Aldridge as a non-attorney “Strategic Advisor.” The firm’s lobbying practice has a wide range of clients, from health care, to insurance, to even Keystone XL beneficiary TransCanada. The firm website says Dean “focuses on health care and energy issues, as well as providing expertise derived from his extensive experience in public office.” The firm seems to advertise Dean as a lobbyist, despite the fact Dean has not registered as a lobbyist. I clipped a portion of a video posted online by McKenna, Long & Aldridge that features Dean discussing the post Citizens United campaign finance world along with former Republican Party chief, Michael Steele. Dean candidly disclosed that he works primarily with health care corporations, and that he advises that if they do contribute, they should contribute to both Republicans and Democrats:

A Dose Of Socialism Could Save Our States – State Sponsored, Single Payer Healthcare Would Bring In Business & Jobs -- How often do we hear the argument that American business is suffering under the yoke of a healthcare system that places a huge responsibility on employers to carry the heavy load of insuring their employees? According to a Gallup Poll out this week, 48 percent of small business owners who were polled said that their concern over healthcare costs is keeping them from hiring new employees. Now, how often do we hear that the answer to the severely stressed financial circumstances of almost every state in the nation is to create a friendly business environment that will lure employers into the state and solve all the budget problems? In what strikes me as the greatest combination since chocolate met peanut butter, it makes nothing but dollars and sense for clever state governments to shift to a single-payer state healthcare system as the key driver for attracting business to their struggling domains. Consider some of the substantial benefits to business in such an approach, as highlighted by the Business Coalition For Single Payer Healthcare:

America's Health Care System Can't Deal With This Many Part-Time Workers - A significant structural change in US labor markets has come to light in the years since the financial crisis, and that is our economy’s composition of full time vs. part time jobs. The US in the previous decade shouldered nearly five full time jobs for every part time job. But that ratio changed, rather dramatically, after 2008 and has not really recovered. No doubt, a few economists and some business leaders will be inclined to argue that the trend is not entirely negative. Fair enough. Perhaps it indicates flexibility in US labor markets, especially as the economy tries to recover through the formation of small business. Also, it makes sense that an economy trying to recover would first add back part-time work in equal amounts to full time work, before stepping up to the array of benefits extended to the full time worker. But therein lies the problem: American workers desperately need health-care coverage, which is not typically offered to part-time workers. Meanwhile, deleveraging of household balance sheets since the high debt levels of 2007 has been mild. The result is yet another way to see how deeply consumer demand is restrained: there’s not enough work to both pay down debt, and restart consumption.

Is high spending on cancer care 'worth it'? (Reuters) - With the United States spending more on healthcare than any other country — $2.5 trillion, or just over $8,000 per capita, in 2009 — the question has long been, is it worth it? At least for spending on cancer, a controversial new study answers with an emphatic "yes." Cancer patients in the United States who were diagnosed from 1995 to 1999 lived an average 11.1 years after that, compared with 9.3 years for those in 10 countries in Europe, researchers led by health economist Tomas Philipson of the University of Chicago reported in an analysis published Monday in the journal Health Affairs.  Those extra years came at a price. By 1999 (the last year the researchers analyzed), the United States was spending an average of $70,000 per cancer case (up 49 percent since 1983), compared with $44,000 in Europe (up 16 percent). Using standard figures for an extra year of life, the researchers concluded that the value of the U.S. survival gains outweighed the cost by an average $61,000 per case.  Experts shown an advance copy of the paper by Reuters argued that the tricky statistics of cancer outcomes tripped up the authors."This study is pure folly," said biostatistician Dr. Don Berry of MD Anderson Cancer Center in Houston. "It's completely misguided and it's dangerous. Not only are the authors' analyses flawed but their conclusions are also wrong."

Affordable Health Care in Thailand and Costa Rica - This year, a few hundred thousand intrepid American travellers will head to places like Thailand and Costa Rica, in search of something that they can’t find in the United States. They won’t be looking for Mayan ruins or ancient Buddhist temples, but something a bit more practical: affordable medical care. These medical tourists will be getting root canals, knee surgeries, and hip replacements at foreign hospitals. If health-care costs in the U.S. keep rising—and especially if Obamacare is overturned by the Supreme Court—more of us may soon be joining them. For decades, wealthy people from developing countries have come here for care, but these days medical tourists travel all over the world. And while it’s hard to disentangle the stats from the hype—a number of countries portray themselves as favored destinations—it’s clear that millions of people are now doing this. The Bumrungrad hospital, in Bangkok, treats four hundred thousand foreign patients annually. Malaysia had almost six hundred thousand medical tourists last year. And South Korea had more than a hundred thousand, nearly a third of them American.

Cost of aging rising faster than expected-IMF - People worldwide are living three years longer than expected on average, pushing up the costs of aging by 50 percent, and governments and pension funds are ill prepared, the International Monetary Fund said. Already the cost of caring for aging baby boomers is beginning to strain government budgets, particularly in advanced economies where by 2050 the elderly will match the numbers of workers almost one for one. The IMF study shows that the problem is global and that longevity is a bigger risk than thought. "If everyone in 2050 lived just three years longer than now expected, in line with the average underestimation of longevity in the past, society would need extra resources equal to 1 to 2 percent of GDP per year," it said in a study to be released in its World Economic Outlook next week. For private pension plans in the United States alone, an extra three years of life would add 9.0 percent to liabilities, the IMF said in urging governments and the private sector to prepare now for the risk of longer lifespans. Demographers for many years have assumed that the lengthening of lifespans would slow in developed countries. But with continual advances in medical technology, that has not happened as acutely as expected. In emerging economies, rising standards of living and the expansion of health care also are adding to lifespans.

Drug shortages and the mythical market - In response to the increased utilization of generic drugs (currently about 70% of drugs used in the US), a fact which should be applauded, we have seen a frightening increase in drug shortages. In Emergency Medicine, three of them have affected me directly as they are commonly used drugs. One, metoclopramide is useful for headaches, nausea, and gastric motility. Another, etomidate, is a useful sedative that is the staple drug in RSI (Rapid Sequence Intubation) kits across the country, and used on EMS ambulances extensively. There is a reason. Etomidate has lower cardiopulmonary depression than other sedatives like diprivan aka propofol. Another drug that is in shortage is Compazine, aka prochlorperazine, which is extensively used for migraines, as well as benign vertigo. In fact, it remains one of my favorite “staple” drugs.  Per the article, in 2005, the Center for Drug Evaluation and Research only noted 62 shortages through the year. 2009 saw 157 shortages, 2010, 178. 2011 had estimates of between 200 and 300. 75% in 2010 were sterile injectables. Ya know, The medications most frequently used in hospital settings. Many of these drugs are made at one site, by only one company, which limits supply and increases the chances of disruption.

Social Stress Changes Immune System Gene Expression in Primates — The ranking of a monkey within her social environment and the stress accompanying that status dramatically alters the expression of nearly 1,000 genes, a new scientific study reports. The research is the first to demonstrate a link between social status and genetic regulation in primates on a genome-wide scale, revealing a strong, plastic link between social environment and biology. In a comparison of high-ranking rhesus macaque females with their low-ranking companions, researchers discovered significant differences in the expression of genes involved in the immune response and other functions. When a female's rank improved, her gene expression also changed within a few weeks, suggesting that social forces can rapidly influence genetic regulation. "We were able to use gene expression to classify individuals based on their rank," said Yoav Gilad, PhD, associate professor of human genetics at the University of Chicago Biological Sciences and senior author of the study in PNAS. "Demonstrating these very plastic and temporal changes was novel and quite interesting."

The Wall Street Journal’s Weird Embrace of Pseudo Science and the War on Real Science - The Wall Street Journal published a self-revealing news article on Tennessee’s recently adopted law (modeled on a template created by the Discovery Institute – a Christian group whose ultimate goal is preventing the teaching of the core principles of biology) encouraging science teachers to teach their opposition to “controversial” scientific findings.  The Discovery Institute opposes the scientific consensus on evolution – the central pillar of biology.  One would never understand that fact, however, if one relied on the WSJ article. The wording of the bill comes from a template created by the Discovery Institute, a think tank in Seattle that questions evolution and promotes the concept of “intelligent design.” “Natural selection and descent does not explain the degree of complexity that exists out there,” [the head of the religious group promoting the bill] said. See, there are two rival views of biology, a “theory” v. a “proposition.”  The rival views represent different opinions on biology by respectable biologists embracing the same scientific method and differing only in their interpretation of the “scientific evidence” emerging from their scientific studies.  Remember, this is a WSJ news article, not a screed by their “three bubbles off plumb” editorial staff.  What a difference a Murdoch makes to what was once a superb news organization.

WTO Orders U.S. to Dump Landmark Obama Youth Anti-Smoking Law - A landmark U.S. health policy already was being struck down even as protestors surrounded the Supreme Court over the attack on President Obama's healthcare law. Behind closed doors in Geneva, a World Trade Organization (WTO) tribunal issued a final ruling ordering the U.S. to dump a landmark 2009 youth anti-smoking law. The Obama administration's key health care achievement slammed by the WTO was the Family Smoking Prevention and Tobacco Control Act (FSPTCA), sponsored by Rep. Henry Waxman (D-Calif.). The ruling, issued Wednesday, was on the final U.S. appeal which means that now the U.S. has 60 days to begin to implement the WTO's orders or face trade sanctions. This outrageous WTO ruling should be a wake up call. Increasingly "trade" agreements are being used to undo important domestic consumer, environmental and health policies. Instead, the Obama administration has intensified its efforts to expand these very rules in a massive Trans-Pacific Partnership (TPP) "free trade" agreement. The WTO's ruling against banning the sale of flavored cigarettes isn't the only example of its attack on consumer protection and health laws. The U.S. has filed WTO appeals on two other U.S. consumer laws -- U.S. country-of-origin meat labels and the U.S. dolphin-safe tuna label -- both were slammed by lower WTO tribunals in the past six months. Yup, in short order we could see the WTO hating on Flipper, feeding us mystery meat and getting our kids addicted to smoking.

Food ingredients most prone to fraudulent economically motivated adulteration: In new research published in the April Journal of Food Science, analyses of the first known public database compiling reports on food fraud and economically motivated adulteration in food highlight the most fraud-prone ingredients in the food supply; analytical detection methods; and the type of fraud reported. Based on a review of records from scholarly journals, the top seven adulterated ingredients in the database are olive oil, milk, honey, saffron, orange juice, coffee, and apple juice. The database was created by the U.S. Pharmacopeial Convention (USP), a nonprofit scientific organization that develops standards to help ensure the identity, quality and purity of food ingredients, dietary supplements and pharmaceuticals. USP's food ingredient standards are published in the Food Chemicals Codex (FCC) compendium. The new database provides baseline information to assist interested parties in assessing the risks of specific products. It includes a total of 1,305 records for food fraud based on a total of 660 scholarly, media and other publicly available reports. Records are divided by scholarly research (1,054 records) and media reports (251 records).

Meat (sic) The Other Slimes - Unfortunately, the mechanical process of "lean finely textured beef", aka pink slime, is just the beginning. As ProPublica shows, after pink slime, there comes Mechanically Separated Meat, aka "White Slime", and then Advanced Meat Recovery. And if recent history is a guide, any entities that have an equity stake in these last two processes should be afraid, very afraid, because the fate that befell the first, is about to visit the other two, in the process making such other 'delicacies" as bologna, hot dogs, taco filling, and meatballs surge in price once the traditional cheap "filler" substance is taken away by the same people who consume said meat byproducts in droves, in the process likely ending the concept of the dollar menu for good as restaurants have no choice but to resort to quality food. Ironically, will fat America itself, terrified by concepts such a colored slime, be responsible for its own weening from some of the worst products on earth, and in the process raise the price of food, and force itself to eat less? Will the end of the "slimes" be the one savior of the massively underfunded US welfare state as America gets healthy and lean again? Alas, we doubt it. But one can always hope.

Isolated for millions of years, cave bacteria resist modern antibiotics - The team say that their discovery supports the idea that antibiotic resistance long precedes the rise of modern medicine. This shouldn’t be surprising. As I wrote last year, many antibiotics come from natural sources, or are tweaked versions of such chemicals. Penicillin, the first to be synthesised, famously comes from a mould that surreptitiously landed on Alexander Fleming’s plate. Daptomycin comes from a bacterium called Streptomyces roseosporus.

FDA Seeks “Voluntary” Limits on Antibiotics in Livestock - I think you have to look at this new FDA announcement, that they will seek “voluntary” limits for antibiotics in animal feed, must be seen in a few different contexts. First, here’s Ezra Klein convincing me about the importance of this issue: This might not seem like a huge deal to you. But it is. And it gets to one of my favorite scary statistics: 70 percent of the antibiotics used in this country — 70 percent! — go into livestock production. And that’s before you even get to the antibiotics that are used on animals who actually fall ill. The reason is simple enough: If we didn’t pump our livestock full of antibiotics, they would get sick. They are, after all, packed into dim and dirty enclosures. They’re stacked on top of one another. And they’re being fed food they didn’t evolve to eat. All of this makes animals sick. But rather than raise them in a way that doesn’t make them sick, but costs somewhat more, we just keep them on constant doses of antibiotics. And then we eat them. Which means we get constant, low-grade doses of these antibiotics. Which means common bacteria get constant, low-grade doses of these antibiotics. And there’s mounting evidence that this background exposure to antibiotics is contributing to the startling rise in antibiotic-resistant bacteria. The drugs also promote rapid weight gain in farm animals. Because we can’t just wait around for cows and chickens to grow! Time is money!

Antibiotics for Livestock Will Require Prescription, F.D.A. Says - Farmers and ranchers will for the first time need a prescription from a veterinarian before using antibiotics in farm animals, in hopes that more judicious use of the drugs will reduce the tens of thousands of human deaths that result each year from the drugs’ overuse. The Food and Drug Administration announced the new rule Wednesday after trying for more than 35 years to stop farmers and ranchers from feeding antibiotics to cattle, pigs, chickens and other animals simply to help the animals grow larger. Using small amounts of antibiotics over long periods of time leads to the growth of bacteria that are resistant to the drugs’ effects, endangering humans who become infected but cannot be treated with routine antibiotic therapy. At least two million people are sickened and an estimated 99,000 die every year from hospital-acquired infections, the majority of which result from such resistant strains. It is unknown how many of these illnesses and deaths result from agricultural uses of antibiotics, but about 80 percent of antibiotics sold in the United States are used in animals.

48% of Chicken in Small Sample Has E. Coli - A recent test of packaged raw chicken products bought at grocery stores across the country found that roughly half of them were contaminated with the bacteria E. coli. E. coli, which the study said was an indicator of fecal contamination, was found in 48 percent of 120 chicken products bought in 10 major cities by the Physicians Committee for Responsible Medicine, a nonprofit group that advocates a vegetarian diet among other things. The study results were released Wednesday. “Most consumers do not realize that feces are in the chicken products they purchase,” said Dr. Neal D. Barnard, president of the group. “Food labels discuss contamination as if it is simply the presence of bacteria, but people need to know that it means much more than that.” Food safety specialists said the findings were a tempest in a chicken coop, particularly because the test was so small and the E. coli found was not a kind that threatened public health.

World food prices rise further, raising fears of unrest -  (Reuters) - Global food prices rose in March for a third straight month with more hikes to come, the UN's food agency said on Thursday, adding to fears of hunger and a new wave of social unrest in poor countries. Record high prices for staple foods last year were one of the main factors that contributed to the Arab Spring uprisings in the Middle East and North Africa, as well as bread riots in other parts of the world. The cost of food has risen again this year after coming down from a February 2011 record peak. The FAO index, which measures monthly price changes for a basket of cereals, oilseeds, dairy, meat and sugar, averaged 215.9 points in March, up from a revised 215.4 points in February, the United Nations' Food and Agriculture Organisation (FAO) said. Although below the February 2011 peak of 237.9, the index is still higher than during a food price crisis in 2007-08 that raised global alarm.

U.S. farmland price boom to slow but not plateau (Reuters) - The surge in farmland prices, which doubled in a decade amid an agricultural boom, should cool in the coming year as prices bump against the ability of cropland to pay for itself, said a panel of experts on Wednesday. A combination of low interest rates and high commodity prices sent levels sky-rocketing. Nebraska cropland values soared by 38 percent during 2010, while Iowa was up 28 percent and Indiana up 27 percent, say Federal Reserve regional banks.A 160-acre farm near York in eastern Nebraska sold for $12,000 an acre in February, a record for land in the state. Soaring prices have prompted fears of a price bubble that could ruin farmers' finances in an economic downturn. So far, farmers and lenders have been cautious and land prices are justified by likely returns.

Less than One Month to Comment on Corn Resistant to Agent Orange Herbicide 2,4-D - The U.S. Department of Agriculture (USDA) is currently deciding whether or not to approve an application by Dow Chemical for its controversial genetically engineered (GE) corn variety that is resistant to the hazardous herbicide 2,4-D. 2,4-D and the still more toxic 2,4,5-T formed Agent Orange, the defoliant used in the Vietnam War.   After receiving pressure from organizations like the Center for Food Safety (CFS), the USDA extended its public comment period until April 27–just a few weeks from today. There is overwhelming public opposition to this crop. To date, 155,000 comments opposing approval of 2,4-D corn have been collected by environmental, health, and farm groups.The stakes couldn’t be higher. Dow’s 2,4-D corn, soon to be followed by 2,4-D soybeans and cotton, are the first of many new GE crops designed to launch American agriculture into a new era of increased dependence on more toxic pesticides, reversing decades of progress. Two-thirds of GE crops awaiting approval by USDA are resistant to one to three herbicides each, with many more in the longer-term pipeline. For instance, Monsanto has developed crops resistant to dicamba, a close chemical cousin to 2,4-D.

Monsanto’s Roundup Altering the Physical Shape of Amphibians - Monsanto’s Roundup, which is the most popular herbicide used today, has been found to ignite morphological changes in amphibians. The research, conducted using tadpoles, found that environmentally relevant concentrations of Roundup are enough to cause two species of amphibians to actually change shape. This is the first research to show that herbicides can have such an affect on animals.  Setting up outdoor tanks closely resembling the environment of natural wetlands, study researcher Rick Relyea, University of Pittsburgh professor of biological sciences in the Kenneth P. Dietrich School of Arts and Sciences and director of Pitt’s Pymatuning Laboratory of Ecology, added 3 tadpoles to each tank and exposed them to a range of Roundup concentrations over a 3 week period. The cages also contained large predators, which naturally cause changes in tadpole morphology. These natural changes include a larger tail, due to chemical emissions.  While it wasn’t surprising to see morphological changes take part due to the naturally emitted chemicals from predators, it was rather shocking to find out that Roundup had the same effects — causing the tails of the tadpoles to grow in size. What’s more, the combination of the naturally emitted chemicals and Roundup caused the tadpoles’ tails to grow twice as large.

Wafting poison makes fertile ground for suit in Stearns County - Oluf Johnson's 1,500-acre farm in Stearns County is an organic island in a sea of chemically treated corn and soybeans. Improperly applied pesticides repeatedly drift over from neighboring farms, often with dire consequences for Johnson. But now, thanks to a new court ruling, he and other farmers can sue to recover their losses. Letting damaging chemicals cross property lines is trespassing, the Minnesota Court of Appeals ruled on Monday. Moreover, since those pesticides made his crop unsalable in the organic market, Johnson is entitled to damages from the company that applied it, the Paynesville Farmers Union Cooperative Oil Co., the court said.. And that could go for any farmer whose crop is made inedible by someone else's chemical spray and even homeowners whose property has been damaged by a neighbor's overuse of RoundUp, legal experts said.

Imidacloprid linked to bee colony collapse - Harvard scientists recently tested the effects of the pesticide imidacloprid on bee colonies in situ, meaning out in the field instead of in a laboratory.  At each site, four hives were treated with four different amounts of the pesticide.  Beginning with the hives that received the highest doses, and continuing to the hives that received low doses, the bees died in a fashion symptomatic of colony collapse disorder (CCD). Reactions: The scientists say their findings show that even low doses of imdacloprid, similar to those used in real agriculture, can cause CCD.  The pesticide's manufacturer, Bayer, says the low doses used in the study remained too high to be realistic.  The EPA still considers CCD to result from a mix of factors, possibly including pesticide exposure as just one factor.  That may still be a reasonable summary of the balance of current evidence, but the new study strengthens the case that pesticides -- imidacloprid in particular -- have a big role.

The Folly of Big Agriculture: Why Nature Always Wins - In its short, shameless history, big agriculture has had only one big idea: uniformity. The obvious example is corn. The U.S. Department of Agriculture predicts that American farmers — big farmers — will plant 94 million acres of corn this year. That’s the equivalent of planting corn on every inch of Montana. To do that you’d have to make sure that every inch of Montana fell within corn-growing parameters. That would mean leveling the high spots, irrigating the dry spots, draining the wet spots, fertilizing the infertile spots, and so on. Corn is usually grown where the terrain is less rigorous than it is in Montana. But even in Iowa that has meant leveling, irrigating, draining, fertilizing, and, of course, spraying. The point is this: When you see a Midwestern cornfield, you know you’re looking at nature with one idea superimposed upon it. This is far less confusing, less tangled in variation than the nature you find even in the roadside ditches beside a cornfield or in a last scrap of native prairie growing in a graveyard or along an abandoned railroad right-of-way. Nature is puzzling. Corn is stupefying. Humans have spent a lot of time trying to figure out what the big idea behind nature is. . But if we could speed up time a little and become a lot more perceptive, we would see that nature’s big idea is to try out life wherever and however it can be tried, which means everywhere and anyhow. The result — over time and at this instant — is diversity, complexity, particularity, and inventiveness to an extent our minds are almost unfitted to conceive.

Warm Winter Means More Pests - Get your pest-management program ready. This has been the fourth mildest winter on record. That’s good news for farmers looking for a head start on the 2012 crop season. Unfortunately, the lack of a deep freeze across the Midwest gave insects, weeds and crop diseases a head start, too. There are two ways that insects can arrive in a field, says Ron Hammond, a research entomologist at The Ohio State University. They can overwinter in the field, or they can migrate from somewhere else. Knowing which insects overwinter in your area tells you what to watch for. In Ohio, they’re tracking corn flea beetle and alfalfa weevil populations this spring. Corn flea beetles are particularly worrisome because they cause physical damage to seedlings and are a vector for Stewart’s wilt. Migratory insects should be managed on a case-by-case basis. Black cutworms, for example, fly north to the Midwest and are attracted to chickweed, which thrives in mild winters.

US sees warmest March in recorded history, NOAA reports -- March 2012 will go down as the warmest March in the United States since record-keeping began in 1895, NOAA said Monday. In addition, the three-month period of January, February and March was the warmest first quarter ever recorded in the Lower 48 states. The average was 42 degrees Fahrenheit, a whopping 6 degrees above the long-term average. A staggering 15,292 warm temperature records were broken, (7,755 record highs and 7,517 record high overnight lows), according to Chris Vaccaro, spokesperson for NOAA. "That's tremendously excessive. The scope and the scale of warmth was really unprecedented, Vaccaro said. A persistent weather pattern during the month of March led to 25 states east of the Rockies having their warmest March on record, NOAA said. That same pattern was responsible for cooler-than-average conditions in the West Coast states of Washington, Oregon and California, they said. The warm temperatures also contributed to conditions that were favorable for severe thunderstorms and tornadoes. There were 223 preliminary tornado reports during March, a month that averages 80 tornadoes, according to NOAA's Storm Prediction Center. The majority of these tornadoes occurred during a severe weather outbreak across the Ohio River Valley and Southeast in early March.

NOAA: Warmest March on Record - And the first three months of 2012 were also the warmest first quarter in the contiguous United States, according to NOAA.  For a fascinating video showing how the records were broken, over time, geographically, see this NOAA animation. From FoxNews: In March, at least 7,775 weather stations across the nation broke daily high temperature records and another 7,517 broke records for night-time heat. Combined, that's more high temperature records broken in one month than ever before, Crouch said. "When you look at what's happened in March this year, it's beyond unbelievable," NOAA climate scientist Gabriel Vecchi compared the increase in weather extremes to baseball players on steroids: You can't say an individual homer is because of steroids, but they are hit more often and the long-held records for home runs fall. RealClimate provides an explanation of how global climate change can, by inducing a spread-preserving mean shift, result in a higher probability of extreme events such as this March's high temperature. For those who do not believe in anthropogenic global warming, don't worry. With vigorous enough purging (c.f. Ryan Plan), we can be rid of these troublesome atmospheric scientists (this is the "ignorance is bliss" approach).For previous last year's attempt to cut NOAA funding, see here.

March Came In Like A Lamb, Went Out Like A Globally Warmed Lion On Steroids Who Smashed 15,000 Heat Records - It’s official. This was “the warmest March on record” since records began in 1895, according to the National Oceanic and Atmospheric Administration. How hot was it? It was so hot that NOAA reports “there were 15,272 warm temperature records broken (7,755 daytime records, 7,517 nighttime records).” NOAA released some amazing charts and factoids yesterday:

  • Hundreds of locations across the country broke their all-time March records. There were 21 instances of the nighttime temperatures being as warm, or warmer, than the existing record daytime temperature for a given date.
  • A persistent weather pattern led to 25 states east of the Rockies having their warmest March on record. An additional 15 states had monthly temperatures ranking among their ten warmest.
  • NOAA’s U.S. Climate Extremes Index, an index that tracks the highest 10 percent and lowest 10 percent of extremes in temperature, precipitation, drought and tropical cyclones, was 39 percent, nearly twice the long-term average and the highest value on record for the January-March period [see figure]:

Not just March, but start of 2012 shatter US records for heat, worrying meteorologists - — It’s been so warm in the United States this year, especially in March, that national records weren’t just broken, they were deep-fried. Temperatures in the lower 48 states were 8.6 degrees above normal for March and 6 degrees higher than average for the first three months of the year, according to calculations by the National Oceanic and Atmospheric Administration. That far exceeds the old records.The magnitude of how unusual the year has been in the U.S. has alarmed some meteorologists who have warned about global warming. One climate scientist said it’s the weather equivalent of a baseball player on steroids, with old records obliterated. “Everybody has this uneasy feeling. This is weird. This is not good. You’re out enjoying this nice March weather, but you know it’s not a good thing.” It’s not just March.“It’s been ongoing for several months,” said Jake Crouch, a climate scientist at NOAA’s National Climatic Data Center in Ashville, N.C.

Gulf of Mexico water temperatures the warmest on record; Dangerous tornado outbreak expected Saturday  - A dangerous tornado outbreak is expected on Saturday over the Plains, says NOAA's Storm Prediction Center (SPC). Warm, moist air flowing northwards from a Gulf of Mexico that has record-warm waters will collide with cold air funneling down from Canada, creating a highly unstable air mass capable of creating strong thunderstorm updrafts. An impressive upper-level low, accompanied by a jet stream with 105 - 125 mph winds at middle levels of the atmosphere, will create plenty of wind shear, giving the air the spin it needs to form tornadoes.  This is the second time SPC has issued a "High Risk" forecast this year; the first "High Risk" forecast came for the March 2 tornado outbreak, which killed 41 people and did $1.5 - $2 billion in damage. It is very unusual for SPC to issue a "High Risk" forecast more than a day in advance of a suspected tornado outbreak;  Temperatures in the states bordering the Gulf of Mexico were the 3rd - 7th warmest on record during the first three months of 2012, according to NOAA's National Climatic Data Center. This allowed Sea Surface Temperatures (SSTs) in the Gulf of Mexico (25 - 30°N, 85 - 90°W) to climb to 1.4°C (2.5°F) above average during March 2012, according to a wunderground analysis of the Hadley Centre SST data set. This is the warmest March value on record for the Gulf of Mexico, going back over a century of record keeping. During the first two weeks of April, Gulf of Mexico waters remained about 1.5°C above average, putting April on pace to have the warmest April water temperatures on record.

Arctic Warming is Altering Weather Patterns, Study - By showing that Arctic climate change is no longer just a problem for the polar bear, a new study may finally dispel the view that what happens in the Arctic, stays in the Arctic. The study, by Jennifer Francis of Rutgers University and Stephen Vavrus of the University of Wisconsin-Madison, ties rapid Arctic climate change to high-impact, extreme weather events in the U.S. and Europe. The study shows that by changing the temperature balance between the Arctic and mid-latitudes, rapid Arctic warming is altering the course of the jet stream, which steers weather systems from west to east around the hemisphere. The Arctic has been warming about twice as fast as the rest of the Northern Hemisphere, due to a combination of human emissions of greenhouse gases and unique feedbacks built into the Arctic climate system.

As weather gets biblical, insurers go missing (Reuters) - As weather disasters strike with more frequency, homeowners first get hit with the destruction or total loss of property. Many are then hit with the unexpected loss of homeowners insurance policies as insurance companies re-evaluate their financial liabilities. After a tornado ripped through Springfield, Massachusetts, last year, R. Paula Lazzari's home was badly damaged. The retired teacher found broken windows, missing siding and a damaged roof. Her insurer offered to fund repairs for one broken window and some of the siding. It took nine months -- and mediation services from an independent adjuster and the Massachusetts Division of Insurance -- to get her bills paid, according to the parties involved. In this era of unpredictable weather patterns, Lazzari's case is not unique. Insurance companies are raising rates, cutting coverage, balking at some payouts and generally shifting more expense and liability to homeowners, according to reports from the industry and its critics. "Insurance companies have significantly and methodically decreased their financial responsibility for weather catastrophes like hurricanes, tornados and floods in recent years," the Consumer Federation of America said in a statement after studying industry data.

El Nino Possible after U.S. Summer, CPC says -The U.S. Climate Prediction Center raised the prospect that El Nino conditions could return after the Northern Hemisphere summer, causing adverse weather that could potentially disrupt the harvest of vital crops such as cotton, corn and soybeans.  A return in the fall of La Nina's more infamous counterpart could increase rainfall, although farmers typically prefer it to the La Nina phenomenon. La Nina has been blamed for a bad dry spell in South America.  In its monthly climate forecast, the CPC said there is still considerable uncertainty for the remainder of the year, but it "slightly favors (La Nina) neutral or developing El Nino conditions over a return to La Nina conditions."  To the relief of U.S. farmers, La Nina has been fading since February and its impact is expected to disappear by the summer, CPC said on Thursday reiterating its previous forecast. With it dissipating between now and June, there is an increased chance of above-average temperatures in the south-central United States and below-average temperatures in the Northwest,

U.S. to Fund $35m in Bio-Oils Research Amid Food Price Concerns - The US Department of Energy and the US Department of Agriculture will jointly spend $35 million in research toward developing biomass-based oil supplements (bio-oils) that could eventually be mixed with petroleum, as the world struggles with increasing food prices as a result of biofuels production. The DOE describes the bio-oils as “precursors for fully renewable transportation fuels” that could be integrated into the oil refining processes for conventional gasoline, diesel and jet fuels. The Biomass Research and Development Initiative (BRDI) will fund a number of projects to develop bio-oil prototypes for testing at oil refineries. The potential biomass products to be used include algae, corn, wheat stovers and wood residues. All biofuels currently produced in the world come from feedstocks that would otherwise be used for the production of food or animal feed, or are produced on land that would otherwise be used for food production. That said, according to the Center for Agricultural and Rural Development at Iowa State University, there are other factors contributing to increasing food prices, particularly the increase in wheat and rice consumption worldwide over the past years.

A Difficult Choice on Water - Arizona’s two senators, John McCain and Jon Kyl, traveled to the Navajo reservation this week to meet with Navajo and Hopi tribal leaders about a proposed water rights accord that would settle the two tribes’ claims to the Little Colorado River system. Mr. Kyl and Mr. McCain have introduced a bill known as the Navajo-Hopi Little Colorado River Water Rights Settlement, which would require the tribes to waive their water rights for “time immemorial” in exchange for groundwater delivery projects to three remote communities. The tribes must sign off on the settlement, along with 30 other entities including Congress and the president, before the bill becomes law. Mr. Kyl said the bill was on a “fast track” and he would like to see it pushed through Congress before this session ends. But the outcome is uncertain, as there is a disagreement within the Navajo and Hopi governments over whether or not to endorse the bill, as well as disapproval within the communities, which are pushing for more public hearings.

Drought expands throughout USA - The USA hasn't been this dry in five years. Still reeling from devastating drought that led to at least $10 billion in agricultural losses across Texas and the South in 2011, the nation is enduring more unusually parched weather. A mostly dry, mild winter has put nearly 61% of the lower 48 states in "abnormally dry" or drought conditions, according to the U.S. Drought Monitor, a weekly federal tracking of drought. That's the highest percentage of dry or drought conditions since September 2007, when 61.5% of the country was listed in those categories. Only two states — Ohio and Alaska — are entirely free of abnormally dry or drought conditions, according to the Drought Monitor. The drought is expanding into some areas where dryness is rare, such as New England. "Conditions are starting to worry us now," According to the U.S. Geological Survey, stream flow levels are at record or near-record lows in much of New England. The Drought Monitor lists all of Vermont as "abnormally dry," just six months after the state's wettest August on record that stemmed mainly from disastrous flooding by the remnants of Hurricane Irene. So far this year, Connecticut has endured its driest January-March period ever, Weather Channel meteorologist Jonathan Erdman reports. This followed the state's wettest year on record.

States' readiness ranked in face of water threats - New Mexico, Arizona and more than two dozen other states could face increased threats to water supplies if they don't do more to plan for rising temperatures and changes in rain and snowfall patterns, according to an analysis released Thursday by the Natural Resources Defense Council. The nonprofit environmental group used the state-by-state analysis to highlight what it sees as a link between greenhouse gas emissions - the pollutants blamed for global warming - and weather changes that could ultimately affect water resources. "If government officials have a greater appreciation of the impacts they're facing now and in the pipeline for the future, that will cause them to think again about more support for curbing the pollution and thus slowing the train that's rushing at them," David Doniger, the NRDC's climate and clean air policy director, told reporters during a conference call. The analysis found that 29 states - nearly 60 percent of the nation - have either done nothing or very little to prepare for water-related effects from climate change. California, New York and Maryland are among the states ranked as most prepared. New Mexico, Arizona and Texas are among those that have done little, according to the report.

Egypt Could Run Out Of Water By 2025 - When construction began on the Nile’s Aswam Dam in 1960, in the southern reaches of Egypt, Egyptians were sure they were about to tame the world's longest river.  “Before the dam, the people’s lives here were much worse. The water would rise and fall without predictability,” But more than 50 years after Egypt’s firebrand socialist president, Gamal Abdel Nasser, seized on fevered Egyptian nationalism to build the dam and establish the country’s dominance over the Nile, this arid North African nation is facing threats to its near-sole source of freshwater. With rapid population growth, limited agricultural land and recent challenges to its majority share of Nile waters by upstream states, the United Nations now says Egypt could be water scarce by 2025. “In a sense, the average Egyptian is deprived of water,” “The average per capita water use in Egypt is 700 cubic meters [per year], while around the world, it’s about 1,000 cubic meters,” he said. “We are trying to find new sources of water. But soon, [there] will be less than 500 cubic meters.”

The Other Arab Spring - ISN’T it interesting that the Arab awakening began in Tunisia with a fruit vendor who was harassed by police for not having a permit to sell food — just at the moment when world food prices hit record highs? And that it began in Syria with farmers in the southern village of Dara’a, who were demanding the right to buy and sell land near the border, without having to get permission from corrupt security officials? And that it was spurred on in Yemen — the first country in the world expected to run out of water — by a list of grievances against an incompetent government, among the biggest of which was that top officials were digging water wells in their own backyards at a time when the government was supposed to be preventing such water wildcatting?All these tensions over land, water and food are telling us something: The Arab awakening was driven not only by political and economic stresses, but, less visibly, by environmental, population and climate stresses as well. If we focus only on the former and not the latter, we will never be able to help stabilize these societies. Take Syria. The past few years have seen a number of significant social, economic, environmental and climatic changes in Syria that have eroded the social contract between citizen and government. ... From 2006-11, they note, up to 60 percent of Syria’s land experienced one of the worst droughts and most severe set of crop failures in its history.

African Agriculture, Dirt Poor - Beyadi cultivates about half a hectare of plots in the village of Nankhunda, high on the Zomba plateau in southern Malawi. As testimony to her efforts, the maize (corn) on Beyadi's land stands tall even in the lashing rain, whereas the stunted, yellowed stalks on a neighbour's plot bow low. The strength of Beyadi's crop is down to more than her green fingers, though. It is also due to what she feeds the soil. Beyadi borrowed money from a European friend to purchase two 50-kilogram bags of chemical fertilizer for this growing season. Because a bag can cost up to 4,000 Malawian kwachas (US$24), it is beyond the reach of many Malawians, including Beyadi's neighbour, Catharine Changuya, an unmarried mother of four.Fertilizers make such a profound difference here because the rusty red soil, as in many parts of Africa, is deficient in organic matter and in key nutrients such as nitrogen and phosphorus. By farming intensively without replenishing soil nutrients, farmers across sub-Saharan Africa have lost an average of 22 kilograms of nitrogen, 2.5 kilograms of phosphorus, and 15 kilograms of potassium per hectare annually over the past 30 years — the yearly equivalent of US$4 billions' worth of fertilizer. As a result, yields are meagre.

Rapid climate change putting Asia`s rice production: Rapid climate change and its potential to intensify droughts and floods could threaten Asia's rice production and pose a significant threat to millions of people across the region, leading climate specialists and agricultural scientists have warned. South and Southeast Asia are home to more than one-third of the world's population and half of the world's poor and malnourished. Absent new approaches to food production, climate change in this region is expected to reduce agriculture productivity by as much as 50 percent in the next three decades. And with agriculture serving as the backbone of most economies in the region, such plunging yields would shake countries to the core.Also, farmers are being pressed to focus not just on coping with climate change but also on mitigating the impact of agriculture on greenhouse gas emissions. Farming, along with forestry and land use change, accounts for almost one third of greenhouse gas emissions globally. In response, it is imperative that agriculture simultaneously become more productive, more resilient and more climate-friendly, according to participants at a conference on climate smart agriculture in Asia taking place this week in Bangkok.

Which plants will survive droughts, climate change?  - New research by UCLA life scientists could lead to predictions of which plant species will escape extinction from climate change. Droughts are worsening around the world, posing a great challenge to plants in all ecosystems, said Lawren Sack, a UCLA professor of ecology and evolutionary biology and senior author of the research. Scientists have debated for more than a century how to predict which species are most vulnerable. Sack and two members of his laboratory have made a fundamental discovery that resolves this debate and allows for the prediction of how diverse plant species and vegetation types worldwide will tolerate drought, which is critical given the threats posed by climate change, he said.The research is currently available in the online edition of Ecology Letters, and will be published in an upcoming print edition.

New Science Reveals Agriculture’s True Climate Impact - When I examined the reasons agriculture often gets a pass in climate negotiations recently, I pointed to the fact that precise measurement of the climate impact of many industrial farming practices remains difficult and controversial. This is especially true when it comes to synthetic nitrogen fertilizer. The effect of excess fertilizer on our waterways gets much more attention than it does when it enters the air. And for good reason. It’s toxic to consume nitrates in your drinking water. We’re learning that agricultural overuse of fertilizer has contaminated the drinking water of whole regions of California. Meanwhile, nitrogen that runs into the ocean causes oxygen-depleted “dead zones” around the world. The dead zone in our own Gulf Of Mexico (measured every summer) keeps getting larger — last year’s was the size of New Jersey. While we know that excess fertilizer escapes farm fields as gas, exactly how much and where it goes has largely been a mystery. But it has been a mystery worth solving, as the amount of nitrous oxide — the third most potent greenhouse gas behind carbon dioxide and methane — in the atmosphere is increasing fast. In fact, it has risen by 20 percent since the Industrial Revolution, with a good part of that increase coming in the last 50 years. For the sake of comparison, atmospheric carbon dioxide rates have increased around 40 percent in the same period. But nitrous oxide is around 300 times more potent as a greenhouse gas. And it’s also a major ozone-depleting chemical.

Global warming may intensify disease - There may be more to fear from global warming than environmental changes. According to several leading climate scientists and public health researchers, global warming will lead to higher incidence and more intense versions of disease. The direct or indirect effects of global warming might intensify the prevalence of tuberculosis, HIV/AIDS, dengue and Lyme disease, they said, but the threat of increased health risks is likely to futher motivate the public to combat global warming. “The environmental changes wrought by global warming will undoubtedly result in major ecologic changes that will alter patterns and intensity of some infectious diseases,” said Gerald Friedland, professor of medicine and epidemiology and public health at the Yale School of Medicine. Global warming will likely cause major population upheavals, creating crowded slums of refugees, Friedland said. Not only do areas of high population density facilitate disease transmission, but their residents are more likely to be vulnerable to disease because of malnutrition and poverty, he said. This pattern of vulnerability holds for both tuberculosis and HIV/AIDS, increasing the incidence of both the acquisition and spread of the diseases, he explained.

Evolution at Sea: Long-Term Experiments Indicate Phytoplankton Can Adapt to Ocean Acidification — Fossil fuel derived carbon dioxide has a serious impact on global climate but also a disturbing effect on the oceans, know as the other CO2 problem. When CO2 dissolves in seawater it forms carbonic acid and results in a drop in pH, the oceans acidify. A wealth of short-term experiments has shown that calcifying organisms, such as corals, clams and snails, but also micron size phytoplankton are affected by ocean acidification. The potential for organisms to cope with acidified oceanic conditions via evolutionary adaptations has so far been unresolved Scientists of the Helmholtz Centre for Ocean Research Kiel (GEOMAR) have now for the first demonstrated the potential of the unicellular algae Emiliania huxleyi to adapt to changing pH conditions and thereby at least partly to mitigate negative effects of ocean acidification. These results  are published in the current issue of Nature Geoscience..

Oldest Arctic Sea Ice is Disappearing : Image of the Day - A new study by NASA scientist Joey Comiso has found that the oldest and thickest Arctic sea ice is disappearing at a faster rate than the younger and thinner ice at the edges of the ice cap. The rapid disappearance of older ice makes the Arctic Ocean's sea ice cap more vulnerable to further decline. Arctic multi-year ice “extent”—which includes all areas where at least 15 percent of the ocean surface is covered by multi-year ice—has been vanishing at a rate of –15.1 percent per decade, Comiso found. Over the same period, the “area” covered by multi-year ice—which discards open water among ice floes and focuses exclusively on regions that are completely covered—has been shrinking by –17.2 percent per decade. The findings were published in February 2012 in the Journal of Climate. The images above show sea ice coverage in 1980 and 2012, as observed by passive microwave sensors on NASA’s Nimbus-7 satellite and by the Special Sensor Microwave Imager/Sounder (SSMIS) from the Defense Meteorological Satellite Program (DMSP). Multi-year ice is shown in bright white, while average sea ice cover is shown in light blue to milky white. The data shows the ice cover for the period of November 1 through January 31 in their respective years.

Rising Pacific seas linked to climate change: study - Sea levels in the southwest Pacific started rising drastically in the 1880s, with a notable peak in the 1990s thought to be linked to human-induced climate change, according to a new study. The research, which examined sediment core samples taken from salt marshes in southern Australia's Tasmania island, used geochemistry to establish a chronology of sea level changes over the past 200 years. Patrick Moss, from the University of Queensland, said major environmental events which impacted the ocean such as the introduction of unleaded petrol and nuclear tests, showed up in the samples and were used for dating. The chronology revealed a major jump in sea levels around 1880 after 6,000 years of relative stability, Moss said, with peaks in the 1910s and 1990s -- the latter of which appeared to be linked to human activity. "Overall, over the past 200 years or so, sea levels have increased by about 20 centimetres (eight inches)," Moss told AFP on Thursday.

Sea Level Rise And Extreme Weather Are 'Happening Faster Than We Thought,' Says Energy Sec. Chu -  Energy Secretary Steven Chu said Wednesday that scientific evidence of climate change is getting more and more powerful, comments that come as global warming legislation remains moribund in Congress and Environmental Protection regulations are facing ongoing GOP assaults. “Over the last couple of years, the dispassionate, hard science evidence has been mounting, increasing,” said Chu, speaking at an energy forum hosted by The New York Times. Chu noted that “we don’t understand everything” and that in past years scientists have actually underestimated the pace of some changes, including sea level rise. “It is rising even faster than we thought. The number of violent rainstorms have increased faster than we thought,” he said at the event in New York, adding that though there are “bumps and wiggles” that are not understood, trends are clear in the long term.  “The debate is how much will it change. There are feedbacks both positive and negative that we are trying to understand,” said Chu, a Nobel Prize-winning physicist.

How a Patch of Ocean Helps Keep Europe from Freezing - Climate scientists have been explaining for years that the problem with global warming isn’t just warming. It’s also about the other changes warming can bring, including heat waves, droughts, rising seas, intense storms and much more. One of the scariest possibilities is that major ocean currents could abruptly stop entirely, plunging areas like Western Europe into an abrupt deep-freeze. It’s happened before, tens of thousands of years ago, and while climate experts doubt that it will happen again anytime soon, they haven’t had especially powerful evidence to back their optimism. But now they do, thanks to a new paper just published in Proceedings of the National Academy of Sciences. What will save Europe from disaster, say the authors, is the Bering Strait, the 50-mile-wide gap that separates Siberia from Alaska. “As long as the Bering Strait remains open,” said lead author Aixue Hu, a climate modeler at the National Center for Atmospheric Research (NCAR), in a telephone interview, “we will not see an abrupt climate event.”

"Economists Debunk Media Fearmongering About New EPA Rule" - Media Matters:After the EPA proposed regulations on greenhouse gas emissions from power plants, several conservative media outlets claimed that the new rule would increase electricity prices for consumers by prohibiting the construction of coal plants without carbon dioxide controls. But economists and other analysts say that because low natural gas prices are already suppressing coal-plant growth, the rule will not significantly affect electricity rates. Here is one example of economist debunking: Harvard's Robert Stavins: Given Low Natural Gas Prices, New Coal Regulation "Will Have Absolutely No Effect Whatsoever" On Electricity Prices. Professor Robert Stavins, Director of Harvard's Environmental Economics Program and a proponent of more market-based approaches to greenhouse gas regulations, explained that as long as natural gas prices remain low, there will be no new coal plants under construction. Therefore, EPA regulations on new plants will have "absolutely no effect whatsoever" on the price of electricity. He also noted that under these conditions, the new rule will have no environmental benefits. [Phone conversation with Media Matters, 4/2/12]

Can a low-carbon economy thrive in a resource-constrained world? - There’s a growing momentum around the world to build a ‘green’ economy – with a special focus on energy – as a key strategy to reduce greenhouse gas emissions and prevent dangerous climate change while also increasing energy security.But resource constraints could hinder this endeavour. Low-carbon technologies such as photovoltaics, wind turbines, and electric and hybrid cars, for example, use metals that are mined only in a handful of countries, which can limit their availability. This is already a major international issue, as evidenced by the recent complaint filed by the U.S., the EU and Japan with the World Trade Organization, challenging China’s restrictions on exports of rare-earth metals. Biofuels development, meanwhile, has faced substantial push-back because of concerns that fuel crops will displace food crops – or displace forests and vitally important ecosystems. In addition, these crops compete for what are often limited water resources.And while, for the most part, it’s less talked about, water availability could also constrain low-carbon electricity – not just hydropower, but also solar thermal, geothermal and other renewable technologies that use water for cooling. If we want to produce low-carbon energy on a large scale – a must if we want to keep global temperature increases under 2°C – we need to ensure we’ll have enough water.

EU CO2 law could scupper global climate talks-India - A European Union law that charges airlines for carbon emissions is "a deal-breaker" for global climate change talks, India's environment minister said, hardening her stance on a scheme that has drawn fierce opposition from non-EU governments. From Jan. 1, all airlines using EU airports have come under the European Union Emissions Trading Scheme (ETS). U.S. airlines have said they would grudgingly comply, but China has barred its carriers from participating unless they are given permission to do so and India has said it would boycott the scheme. "For the environment ministry, for me it is a deal-breaker because you simply cannot bring this into climate change discourse and disguise unilateral trade measures under climate change," Jayanthi Natarajan said on Wednesday. "I strongly believe that as far as climate change discussions are concerned, this is unacceptable." The minister leads India's negotiations at global climate change talks. It was not immediately clear if her comments reflected government policy in India.

Climate scientists are losing the public debate on global warming -  Dr James Hansen, director of the Nasa Goddard Institute for Space Studies, who first made warnings about climate change in the 1980s, said that public scepticism about the threat of man-made climate change has increased despite the growing scientific consensus.  Speaking ahead of a public lecture in Edinburgh this week, he admitted that without public support it will be impossible to make the changes he and his colleagues believe need to occur to protect future generations from the effects of climate change.  He blamed sceptics who are opposed to major social and economic changes to reduce greenhouse gas emissions for employing "tremendous resources" to undermine the scientific evidence.

Must-See Infographic: Americans Throw Away Enough Trash Per Year To Cover The State Of Texas Twice Over - Did you know that China accounts for one third of the world’s garbage output? Or that only 1 in 5 plastic bottles is recycled? Or that Americans throw away enough trash each year to cover the state of Texas twice over? I don’t want to give away all the cool trash factoids I just learned in one sitting. So I encourage you to check out this neat infographic on our ever-growing waste problem:

The Earth Is Full -- For 50 years the environmental movement has unsuccessfully argued that we should save the planet for moral reasons, that there were more important things than money. Ironically, it now seems it will be money -- through the economic impact of climate change and resource constraint -- that will motivate the sweeping changes necessary to avert catastrophe. The reason is we have now reached a moment where four words -- the earth is full -- will define our times. This is not a philosophical statement; this is just science based in physics, chemistry and biology. There are many science-based analyses of this, but they all draw the same conclusion -- that we're living beyond our means.The eminent scientists of the Global Footprint Network, for example, calculate that we need about 1.5 Earths to sustain this economy. In other words, to keep operating at our current level, we need 50% more Earth than we've got.

Should we care about the human future? If so, how much?  - In virtually every institution in human society, we humans concern ourselves with the continuation of the species. We have children, we raise them in some sort of family, we educate them for the world of work and citizenship, and then we see them couple and start the cycle all over again. All the while we seek to defend ourselves from disease, violence, economic deprivation, in fact, anything that might cut short our lives or those of our children. It ought to be self-evident that human beings do care about the future. What I want to examine is whether they should and if so, how much. For this I will need to take you through some simple thought experiments which will test just how much you might do for the sake of human continuity and just how far into the future you might project your own responsibility.

Lower Growth Can Be Better Than Higher Growth - Whenever the subject of carbon taxes is raised, the inevitable response from the political right is that such a tax would lower economic growth and employment, and therefore we shouldn't do this (the "it will kill growth and jobs" objection is a standard reply to policies the right doesn't like). Lower growth is, of course, worse than higher growth. But that's not necessarily true. If firms are allowed to pass some of the costs of production to others in the form of externalities, then it's likely that firms will grow faster than is optimal when all costs are internalized. If we force these firms to internalize the costs of production -- to pay the full costs of production, including in pollution/environmental costs -- then instead of moving away from the optimal growth path to a lower, suboptimal path, we would be moving from higher than optimal growth toward the optimum. More is not better when more depends upon being able to pass environmental costs costs off to others.

Renewable Energy and the “China Card” - In his address to the nation on the response to the BP oil spill, President Obama played the “China card” – invoking fear of falling behind the emerging economic superpower – to spur support for more subsidies for renewable energy. The President said “countries like China are investing in clean energy jobs and industries that should be right here in America.” The use of China as an exemplar of green energy investment is odd. Most analysts are more concerned about the “environmental crisis” caused by China’s rapid, fossil fuel-based industrialization. Last December, China refused to sign on to the non-binding Copenhagen greenhouse gas reduction goals and in March 2010 was only willing to agree to reduce its “carbon intensity.” Were China a leader in green energy investment and employment, one would expect its government to exploit this competitive advantage by championing a global climate accord. It is also difficult to reconcile the President’s statement with a speech given last month by his Commerce Secretary, Gary Locke. Secretary Locke explained that “in the past six months,” China was responsible for “the largest increase in human generated greenhouse gases of any country in history.” The Secretary chastened China for its over-reliance on fossil fuels for its growth, pointing out that “coal and oil sales in China jumped 24 percent” in the first quarter of 2010, which was “twice as fast as their economy grew” during that period. Secretary Locke’s worries are for more consonant with a fair reading of the data on China’s energy mix and growth than President Obama’s. When excluding hydroelectric, China accounts for about 1% of worldwide renewable electricity generation. At current market prices, fossil fuels are the most cost-efficient way for China to power its industrial base. Turning to more expensive sources of energy like wind and solar power would make little sense for a developing economy focused on growth.

Obama Invests $5 Million In Bullshit Energy - Just when we thought we had seen the epic failure of every single possible "alternative energy" project by this administration, along comes the announcement that the USDA is investing $5 million in a "biogas anaerobic digester" that will use "cow manure to heat an ethanol plant and create 15 permanent jobs." Which for anyone confused, is roughly exactly what it sounds like. Perhaps if "Hope and Change" is a little passe now, a far more appropriate slogan for the 2012 Campaign will be "From Bullshit to Jobs, and Back Again."

Energy Dept. to Revitalize a Loan Guarantee Program — Six months after the expiration of a federal loan guarantee program that backed $16 billion in loans to solar, wind and geothermal energy projects, the Energy Department has decided to offer a smaller set of similar guarantees by tapping another pot of money appropriated by Congress last year.  The department said Thursday that it had sent letters to potentially eligible companies inviting them to apply for the new money.  Under the other program, which was passed as part of the 2009 stimulus legislation, about three dozen companies that had applied for loan guarantees were told that they would not receive guarantees because the department had been unable to finish reviewing their applications before the program expired on Sept. 30, 2011.  Now, the department is saying that the companies can reapply under a loan guarantee program established under the Energy Policy Act of 2005 that is still in force.

Costs as benefits - In general, in public policy analysis, you’d like to judge ultimate success or failure of a program by its net results, by actual benefits less the costs involved in achieving those benefits. Admittedly sometimes benefits are hard to measure, but ultimately the point of a policy change is to bring about some improvement in something somewhere. Ultimately it would be nice, once a program is done, the try to find and measure that improvement. What we often get instead, however, is an attempt to infer a benefit based on the expenditures on the program: how much money was spent, how many people were employed, how many miles of ditches were dug, and so on. This is, more or less, what we see this week from the U.S. Department of Energy in the study it commissioned from the National Renewable Energy Lab on the impact of the Section 1603 Treasury Grant Program. But note that this is primarily a study which just measures the expenses of the program and a part of what the expenditures bought. So, it is a partial study of the costs of the Section 1603 program, and not any kind of estimate of any of the benefits of the program. Nonetheless, in the DOE press release accompanying publication of the study, they said the study found “the program has been a huge success.” How does it justify its claim of success? By noting how much was spent, how many people were employed, and how many things were subsidized by the program.

The Top Short-Term Threat to Humanity: The Fuel Pools of Fukushima - We noted days after the Japanese earthquake that the biggest threat was from the spent fuel rods in the fuel pool at Fukushima unit number 4, and not from the reactors themselves. See this and this. We noted in February: Scientists say that there is a 70% chance of a magnitude 7.0 earthquake hitting Fukushima this year, and a 98% chance within the next 3 years. Given that nuclear expert Arnie Gundersen says that an earthquake of 7.0 or larger could cause the entire fuel pool structure collapse, it is urgent that everything humanly possible is done to stabilize the structure housing the fuel pools at reactor number 4. As AP points out: The structural integrity of the damaged Unit 4 reactor building has long been a major concern among experts because a collapse of its spent fuel cooling pool could cause a disaster worse than the three reactor meltdowns. *** Gundersen (who used to build spent fuel pools) explains that there is no protection surrounding the radioactive fuel in the pools. He warns that – if the fuel pools at reactor 4 collapse due to an earthquake – people should get out of Japan, and residents of the West Coast of America and Canada should shut all of their windows and stay inside for a while.

Fukushima Dai-Ichi No. 4: An earthquake before spent fuel rods are moved to safe storage would be “the end” - This clip from TV Asahi is a lucid explanation of the biggest ongoing news story in the world today: The catastrophic consequences if an earthquake strikes the Fukushima Dai-Ichi No. 4 power plant before its spent fuel rods are moved to safe storage place, a process that will not even begin until December 2013, and could take years. It aired March 8, 2012 on “Morning Bird,” a mainstream Japanese news and information TV program.  NOTE Click the CC button at bottom right to show English subtitles!

Pool Near U.S. City Contains More Radioactive Cesium than Released By Fukushima, Chernobyl and All Nuclear Bomb Tests COMBINED - The spent fuel pools at Fukushima are currently the top short-term threat to humanity. But fuel pools in the United States store an average of ten times more radioactive fuel than stored at Fukushima, have virtually no safety features, and are vulnerable to accidents and terrorist attacks. If the water drains out for any reason, it will cause a fire in the fuel rods, as the zirconium metal jacket on the outside of the fuel rods could very well catch fire within hours or days after being exposed to air. See this, this, this and this. (Even a large solar flare could knock out the water-circulation systems for the pools.) The pools are also filling up fast, according to the Nuclear Regulatory Commission: The New York Times notes that squeezing more rods into pools may increase the risk of fire: The reactor operators have squeezed spent fuel more tightly into the pools, raising the heat load and, according to some analyses, raising the risk of fire if the pools were ever drained.

No timetable for restarting California nuclear plant (Reuters) - The top U.S. nuclear official said on Friday his agency has not set any timetable for restarting the troubled San Onofre nuclear station in Southern California and that it would only do so if safety was assured. Nuclear Regulatory Commission Chair Gregory Jaczko made his comments after touring the facility where both reactors have been shut since January due to the discovery of premature wear on tubes in giant steam generators installed in 2010 and 2011. San Onofre Nuclear Generating Station, which is known by the acronym SONGS and is nestled on the Pacific Coast between Los Angeles and San Diego, is one of two nuclear plants in California. Its two units which date from the early 1980s generate enough power for 1.4 million homes."I came to the San Onofre plant today because the NRC wants to get to the bottom of why SONGS is having trouble with relatively new steam generators," Jaczko told reporters. "The bottom line for us is we have to have assurances of safety before we allow the plant to restart," he said, adding that Southern California Edison (SCE), the utility that runs the plant, would have to show what had caused the problem with the steam generator tubes and provide a remediation plan.

Coal exports at highest level since 1991 -- Government data show U.S. coal exports reached their highest level in two decades last year as strong overseas demand offered an outlet for a fuel that's falling from favor at home. U.S. Department of Energy data analyzed by The Associated Press reveal that coal exports topped 107 million tons of fuel worth almost $16 billion in 2011. That's the highest level since 1991, and more than double the export volume from 2006. Much of the increase went to slake the thirst of power-hungry markets in Asia, where rapid development has sparked what mining company Peabody Energy calls a "global coal super cycle" that heralds renewed interest in the fuel. The AP's analysis showed coal exports to South Korea leapt 81 percent last year to more than 10 million tons. India saw a 65 percent jump, to 4.5 million tons. And Japan bought almost 7 million tons -- a 119 percent increase -- as the nation sought alternatives to nuclear power after an earthquake and tsunami prompted the Fukushima nuclear complex meltdown.

Pakistan must turn to coal to avert energy crisis  - Pakistan must turn to coal - both from its own large untapped reserves and from imports - to fuel power generation beyond the next decade if it is to ease the energy crisis which is capping economic growth, trade and industry sources said on Friday. The sixth most heavily-populated country globally with 180 million people, it has been plagued for years by power cuts and, unless new sources of generation can be developed, will see power demand outstrip supply for years to come. Yet it has one of the biggest, barely-touched, single coal reserves on the planet - the massive Thar coalfield in the northern Sindh province with 175 billion tonnes of extremely high water-content, low energy coal. This kind of low-grade, watery coal is found in abundance in other countries, such as Indonesia, the world's biggest exporter, but it has not been economic to exploit in the past. But high oil and gas prices, rising coal prices and new technology to dry out watery, gaseous coal or leave it in the ground but extract the gas from it instead, has prompted projects around the world.

China Beats U.S. With Power From Coal Processing - China is racing to solve its clean-energy riddle: How can a country that’s hooked on coal mitigate environmental damage from the dirtiest of fossil fuels? China passed the U.S. as the top carbon polluter in 2007; it now emits more than the U.S. and India combined, according to the U.S. Energy Information Administration.  Yet with 1.3 billion people, power-hungry industries and scant oil or natural gas, it has no immediate alternatives to coal for fueling its economy. China gets 70 percent of its energy from coal, three times the U.S. figure. It even converts coal into diesel fuel and ammonia that’s used for making fertilizer.  After consuming as much coal as did the rest of the planet combined in 2010, China still can’t muster enough electricity to avoid blackouts or accelerate the rise of its western provinces out of poverty, says Zhao Gang, director of a research institute at Beijing’s Ministry of Science and Technology.  By 2025, with 250 million more Chinese projected to be living in cities, China’s share of global carbon pollution will jump to 30.3 percent from 26.8 percent this year, the EIA says.

Gas Glut Rejiggers Industry - Plummeting natural-gas prices are pushing U.S. industries into virgin terrain, even beginning to dislodge cheap Western coal from its once-untouchable perch as the nation's favorite fuel for power production. On Tuesday, natural-gas futures settled at $2.03 per million British thermal units—just a hint above $2, the lowest price since January 2002.  The shock wave for industry could intensify this summer because the U.S. is running out of room to store the glut of natural gas, which could drive gas prices down to sustained lows not seen in decades.

New drilling technique leads to vast supplies and cheaper energy bills for homes, businesses - The price of natural gas has fallen below $2 per 1,000 cubic feet for the first time in more than a decade, a remarkable decline for a commodity that not long ago was believed to be in short supply. The U.S. supply of natural gas is growing so fast that analysts worry the country’s underground storage facilities could be full by fall and lead to further price declines. On Wednesday, the futures price of natural gas fell to $1.984 per 1,000 cubic feet, its lowest level since January 28, 2002, when it hit $1.91. If the price slides to $1.75, it would be the lowest since March 23, 1999. Natural gas production has boomed across the country as energy companies employ new drilling techniques to tap previously untouched reserves. The process has raised concerns about water safety and has been banned temporarily in New York and New Jersey. But where it has been allowed, it has led to increases in drilling, job growth and production. The falling price of natural gas has been a boon to homes and businesses that use it for heat and appliances, and for manufacturers that use it to power factories and make chemicals, plastics and other materials. Another benefit: Electricity costs are lower because natural gas is used to generate about a quarter of the nation’s electric power.

Gas For A Buck - No, not the kind you actually use in your car. The other kind: that which Europe would kill to be able to get at even a 500% higher price. From a peak at $15.78 in Q4 2005, Natural Gas (front-month futures) has now fallen to a lowly $1 handle for the first time since Q1 2002 on its way perhaps to its all-time low of $1.02 in Q1 1992 as it drops for the sixth quarter in a row.

Fuel to Burn: Now What? - THE reversal of fortune in America’s energy supplies in recent years holds the promise of abundant and cheaper fuel, and it could have profound effects on what people drive, domestic manufacturing and America’s foreign policy. Cheaper fuel produced domestically could reduce the cost of shipping and manufacturing, trim heating and cooling bills, improve the auto market and provide tens of thousands of new jobs. It might also pose new environmental challenges, both predictable and unforeseen, by damping enthusiasm for clean forms of energy and derailing efforts to wean the nation from its wasteful energy habits. But for Americans battered by rising gasoline prices, frustrated by the dependence on foreign oil, skeptical of the benefits or practicality of renewable fuels and afraid of nuclear power, the appeal of plentiful domestic oil and gas could far outweigh the costs.

Wider Availability Expands Uses for Natural Gas - AS horizontal drilling and the controversial extraction technique known as fracking have made domestically produced natural gas more available and sharply cheaper, that gas has been widely embraced by industry, electric utilities and trucking fleets. The rapid development of shale gas technology has helped reduce energy imports and, in some cases, encouraged companies producing petrochemicals, steel, fertilizers and other products to return to the United States after relocating overseas. Natural gas exports are growing and terminals built to hold imported supplies are being repurposed for international sales. The American petrochemical industry, for example, uses natural gas as both its primary raw material, in the form of liquid ethane, and as an energy fuel. And cheaper prices have led to a major expansion of capacity in the United States. The hydrocarbon molecules in natural gas are split apart and then recombined as building blocks for many products, including bulk chemicals and fertilizers. The chemical ethylene, which is largely derived from natural gas, is used to make things like pool liners, building insulation and food packaging.

The Imbalances in China's Economy - Nicholas R. Lardy, a senior fellow at the Peterson Institute for International Economics in Washington, is an authority on China and its economy. In his latest book, “Sustaining China’s Economic Growth After the Global Financial Crisis,” he warns about dangerous imbalances in China’s economy, starting with its emphasis on exports rather than household consumption. But Mr. Lardy’s book goes further, showing how Chinese policies hamper the development of private companies and the service sector. Because interest rates and the exchange rate are tightly managed and not market-oriented, Mr. Lardy says economic growth over the past decade has been badly distorted and inefficient. And that, he says, could set the stage for a lengthy period of sluggish growth. In an exchange by phone and e-mail, I asked Mr. Lardy about the roots of the imbalances, and whether China’s long-running economic boom could be coming to an end.

Buried Secrets: Is Natural Gas Drilling Endangering U.S. Water Supplies? - In July, a hydrologist dropped a plastic sampling pipe 300 feet down a water well in rural Sublette County, Wyo., and pulled up a load of brown oily water with a foul smell. Tests showed it contained benzene, a chemical believed to cause aplastic anemia and leukemia, in a concentration 1,500 times the level safe for people. The results sent shockwaves through the energy industry and state and federal regulatory agencies. Sublette County is the home of one of the nation's largest natural gas fields, and many of its 6,000 wells have undergone a process pioneered by Halliburton called hydraulic fracturing [2], which shoots vast amounts of water, sand and chemicals several miles underground to break apart rock and release the gas. The process has been considered safe since a 2004 study [3] (PDF) by the Environmental Protection Agency found that it posed no risk to drinking water. After that study, Congress even exempted hydraulic fracturing from the Safe Drinking Water Act. Today fracturing is used in nine out of 10 natural gas wells in the United States. Over the last few years, however, a series of contamination incidents have raised questions about that EPA study and ignited a debate over whether the chemicals used in hydraulic fracturing may threaten the nation's increasingly precious drinking water supply.

Fracking at Drinking Water Source for 80,000 Pennsylvanians Raises Alarms - Cynthia Walter, an ecologist at St. Vincent College outside Pittsburgh, gets a lot of emails from local wildlife enthusiasts asking about "this bird" or "that amphibian." But one day last year she got an uncommon request to inspect the forest cover around the Beaver Run Reservoir via Google Earth. The 1,300-acre lake is the main source of drinking water for 80,000 residents in southwestern Pennsylvania. It also rests atop the enormous Marcellus Shale gas reserve. "Are those natural gas wells on the peninsulas?" she recalls the email sender asking. Immediately, Walter spotted a square of barren earth on the satellite map. Later she learned that a company called CNX Gas had drilled more than a dozen wells on that bald patch from two sprawling well pads, using a controversial technique known as horizontal hydraulic fracturing, or hydrofracking, to release gas trapped in layers of shale rock deep underground. "I was kind of shocked. I've been on Beaver Run for 27 years and had no idea," Walter said. Nor was she aware that over the past decade or so about 100 shallow natural gas wells had been drilled throughout the reservoir.

New EPA Results: Fracking Has Not Contaminated Water In Pennsylvania - The U.S. Environmental Protection Agency is providing further evidence that hydraulic fracturing did not contaminate groundwater in a small Pennsylvania town where some residents believe natural gas drilling fouled their domestic wells. Twenty more homes in Dimock were tested by EPA investigators, and the results upheld findings released earlier in March according to which the water posed no immediate health risk.Dimock has been on the front lines in a battle against hydraulic fracturing, a drilling technique during which thousands of gallons of water, sand and chemicals are blasted underground to fracture rock and extract natural gas trapped underground.The EPA's findings are a blow to hydraulic fracturing opponents, who say the techinque is harzardous to the environment and people. The technique has been at the heart of much controversy, in states stretching from the East Coast to Wyoming.

Frack Freely But Disclose Chemicals Pumped Into the Ground: View -  The shale gas boom sweeping the U.S. is prompting states to make energy companies disclose what chemicals they are pumping into the ground to extract natural gas through hydraulic fracturing.  The new rules, adopted in places such as Colorado, Pennsylvania and Texas, should provide a nervous public with information it needs. Unfortunately, many of the rules contain large loopholes that could jeopardize public health and will only cast further suspicion on fracking, a practice with no shortage of critics. Ultimately, the states’ haphazard efforts highlight the need for a tough federal disclosure law. The disclosure requirements in several states allow energy companies wide latitude to claim “trade secret” status for the chemical makeup of their fracking fluids. And at least two states place unreasonable restrictions on doctors and other health officials who learn about any of these “proprietary” ingredients. We agree that companies should be allowed to protect the recipes for their proprietary fracking mixes. But regulators need to know all the substances that are being pumped into the ground. In certain cases, where companies demonstrate to regulators a clear need to keep their recipes secret, the amounts of specific ingredients could be shielded from public view -- though still disclosed to officials.

Frackers Outbid Farmers For Water In Colorado Drought - Colorado is facing drought not seen since 2002, following the fourth-warmest and third-least-snowy winter in US history. Colorado State University scientists report that 98 percent of the state is facing these drought conditions. The drought comes after a record-breaking warm winter that left very low “snowpack levels” in water basins. “Even though the reservoir levels are still strong and northeast Colorado soil moisture is still pretty good, we just don’t usually start out quite this warm and dry at this time — so this is very concerning,” Colorado’s hydrofracking boom — a technology that heavily relies on water — only adds additional strain as farmers and drillers bid for a scarce resource: At Colorado’s premier auction for unallocated water this spring, companies that provide water for hydraulic fracturing at well sites were top bidders on supplies once claimed exclusively by farmers. [...] State officials charged with promoting and regulating the energy industry estimated that fracking required about 13,900 acre-feet in 2010. That’s a small share of the total water consumed in Colorado, about 0.08 percent. However, this fast-growing share already exceeds the amount that the ski industry draws from mountain rivers for making artificial snow. Each oil or gas well drilled requires 500,000 to 5 million gallons of water. A Colorado Oil and Gas Conservation Commission report projected water needs for fracking will increase to 18,700 acre-feet a year by 2015.

Fracking Tied to Unusual Rise in Earthquakes in U.S - A spate of earthquakes across the middle of the U.S. is “almost certainly” man-made, and may be caused by wastewater from oil or gas drilling injected into the ground, U.S. government scientists said in a study.  Researchers from the U.S. Geological Survey said that for the three decades until 2000, seismic events in the nation’s midsection averaged 21 a year. They jumped to 50 in 2009, 87 in 2010 and 134 in 2011.  Those statistics, included in the abstract of a research paper to be discussed at the Seismological Society of America conference next week in San Diego, will add pressure on an energy industry already confronting more regulation of the process of hydraulic fracturing. “Our scientists cite a series of examples for which an uptick in seismic activity is observed in areas where the disposal of wastewater through deep-well injection increased significantly,” David Hayes, the deputy secretary of the U.S. Department of Interior, said in a blog post yesterday, describing research by scientists at the U.S. Geological Survey.

Fracking Tied to Unusual Rise in Earthquakes in U.S - A spate of earthquakes across the middle of the U.S. is “almost certainly” man-made, and may be caused by wastewater from oil or gas drilling injected into the ground, U.S. government scientists said in a study. Researchers from the U.S. Geological Survey said that for the three decades until 2000, seismic events in the nation’s midsection averaged 21 a year. They jumped to 50 in 2009, 87 in 2010 and 134 in 2011. Those statistics, included in the abstract of a research paper to be discussed at the Seismological Society of America conference next week in San Diego, will add pressure on an energy industry already confronting more regulation of the process of hydraulic fracturing. “Our scientists cite a series of examples for which an uptick in seismic activity is observed in areas where the disposal of wastewater through deep-well injection increased significantly,” David Hayes, the deputy secretary of the U.S. Department of Interior, said in a blog post yesterday, describing research by scientists at the U.S. Geological Survey.

Deja Vu - A new study by scientists from the U.S. Geological Survey, not yet published but scheduled to be presented at the upcoming annual meeting of the Seismological Society of America, reports a dramatic increase in earthquakes of magnitude 3.0 or greater over a large area of the U.S. More interestingly, the report states that the increase is “almost certainly man-made,” and attributes it to oil and gas production. Since I’m a data junkie, I retrieved some data on earthquake occurrences in the study region. The data I retrieved are from only one of the catalogues used in the USGS study, and I haven’t applied the control measures used by the study authors, so my numbers don’t theirs match exactly — but it should at least give us an idea whether or not there is an obvious increase in earthquakes as dramatic as reported. Annual counts of earthquakes of magnitude 3.0 or greater looks rather like, well, a hockey stick:

Oil and Natural Gas Ratio Explodes to 52:1 - The ink on our last article is barely dry when its dire prediction actually came true 48 hours later--natural gas price dropping below $2, a level not seen in over a decade. Henry Hub natural gas front month futures declined to $1.982 per 1,000 cubic feet (mcf) on Wed. April 11, its lowest level since January 28, 2002, when the price hit $1.91. Meanwhile, WTI crude oil rose by $1.68 to finish at $102.70 per barrel; Brent rude increased by 30 cents to finish at $120.18. The confluence of these price movements also brought the ratio between WTI and Henry Hub to a historical record high of 52:1 (see chart below) while the ratio of Brent to Henry Hub is a jaw-dropping 60:1 ! (And we thought the 25:1 ratio reached back in August 2009, also a historical high at the time, was parabolic.) Crude oil and natural gas are both energy commodities and should logically have a high degree of correlation. Theoretically, based on an energy equivalent basis, crude oil and natural gas prices should have a 6 to 1 ratio. However, due to various market characteristics, the price of oil typically had traded 8-12x that of natural gas in the past 25 years or so (see chart above).

Natural gas glut means drilling boom must slow - The U.S. natural gas market is bursting at the seams. So much natural gas is being produced that soon there may be nowhere left to put the country's swelling surplus. After years of explosive growth, natural gas producers are retrenching. The underground salt caverns, depleted oil fields and aquifers that store natural gas are rapidly filling up after a balmy winter depressed demand for home heating. The glut has benefited businesses and homeowners that use natural gas. But with natural gas prices at a 10-year low — and falling — companies that produce the fuel are becoming victims of their drilling successes. Their stock prices are falling in anticipation of declining profits and scaled-back growth plans. Some of the nation's biggest natural gas producers, including Chesapeake Energy, ConocoPhillips and Encana Corp., have announced plans to slow down. "They've gotten way ahead of themselves, and winter got way ahead of them too," "There hasn't been enough demand to use up all the supply being pushed into the market." So far, efforts to limit production have barely made a dent. Unless the pace of production declines sharply or demand picks up significantly this summer, analysts say the nation's storage facilities could reach their limits by fall. 

Natural Gas Is Sticky - Richard Morningstar, the U.S. envoy for Eurasian energy, spoke before a Greek delegation on the importance of a diverse, but interconnected, global energy market. Morningstar said that while Washington has a keen interest in natural gas, whether it comes from the Caspian region, Iraq, the Mediterranean and even Russia, none of it would ever get to the United States. It's still important, he said, because natural gas, like oil, is a global commodity. Immanuel Kant, more than 200 years ago, foreshadowed the notion that the denser the network of connections, the more stable the system becomes. With sticky power, the United States can sustain at least some semblance of hegemony with little effort by ensuring its political economy is influential at the global level. Energy is no different. Morningstar said the most important thing Europe can do with its energy is make sure it's connected. While he was speaking in large part about pipelines like Nabucco, he may have been making grand statements about sticky power. Energy, he said, is a zero-sum game where no single entity emerges as the decisive winner, but that doesn't mean there can't be a leader.

North Sea Gas Leak: Experts Assess Climate Impact of Ongoing Accident - The French energy company Total estimates that its North Sea Elgin field gas well is leaking about 200,000 cubic meters of natural gas per day, enough, according to the U.S. Energy Information Agency, to supply more than 100 average homes with natural gas for an entire year. Total estimates that it may take six months to stop the leak. If the gas continues escaping at that rate, and all of it reaches the atmosphere, it would approximate the annual global warming impact of 35,000 Americans, says Carnegie Institution for Science Department of Global Ecology director, Christopher Field. At a news conference on Monday, Total’s chief financial officer, Patrick de la Chevardiere, said that because the leak involves natural gas, which disperses into the atmosphere very quickly, and not crude oil, “the current impact on and risks for the environment are relatively low.” But climate scientists and biologists say the leak’s impact shouldn’t be dismissed just because it isn’t creating a beach- and wildlife-fouling oil slick.

Energy: Refined out of existence -  Sunoco petrol stations are a fixture of the US eastern seaboard, but after July, none of the petrol they sell will actually be made by Sunoco. The 126-year-old company’s decision to quit the refining business is the latest sign of the tumult in downstream fuel markets that is accompanying a global shift in oil use. As consumption flags in developed economies and grows in emerging markets, refineries are dying from Japan to Pennsylvania. The upheaval highlights the challenges facing policy makers as rising petrol prices endanger growth in the world’s biggest economy. Washington has floated largely predictable responses: drill more, punish speculators, work harder towards energy self-sufficiency. But global trading on markets for petrol, diesel and heating oil highlight the persistent fact of America’s energy interdependence. Half the refining capacity on the populous US east coast is set to disappear. Sunoco has pulled the plug on two refineries already and warns that another in Philadelphia will close in July if no buyer steps forward. ConocoPhillips is trying to sell a refinery in Pennsylvania, idle since last year. On May 1, it will spin off its refining business. More than 3m barrels of daily refinery capacity have closed in western countries, since the financial crisis, says the International Energy Agency, the west’s oil watchdog. Emerging economies have meanwhile added 4.2m b/d in capacity, with another 1.8m b/d coming this year

The reason it's called Texas Tea: Most oil-rich states - As gas prices reach record highs across many parts of the country, Americans have been blaming oil companies. But as much as they are disliked, the oil and gas industry is also an indispensable part of many states and an asset to their local economies. 24/7 Wall St. has identified the 10 states with the most oil reserves, or the estimated amount of oil in the state, and examined the effects that the industry has on their economies. In the states with the greatest amounts of oil reserves, those effects can be tremendous. The oil and natural gas industry supports nearly 25 percent of the economies of Texas and Wyoming, much more than the 6.8 percent it supports on a national scale. Every state on this list exceeds the national number by a significant amount. The oil and gas industry also can have an outsized impact on employment in some states. On a national level, only 4.6 percent of all jobs are attributable to the operations of the oil and gas industry, directly or indirectly. In many states, the industry’s impact on employment is significantly higher. In five states, all of which are included on this list, the industry supports more than 10 percent of all jobs.

The petroleum age is just beginning - Peak Oil is the theory that the production history of petroleum follows a symmetrical bell-shaped curve. Once the curve peaks, decline is inevitable. The theory is commonly invoked to justify the development of alternative energy sources that are allegedly renewable and sustainable. It's time to consign Peak Oil theory to the dust bin of history. The flaw of the theory is that it assumes the amount of a resource is a static number determined solely by geological factors. But the size of an exploitable resource also depends upon price and technology. These factors are difficult to predict.

Arctic oil rush will ruin ecosystem, warns Lloyd's of London - Lloyd's of London, the world's biggest insurance market, has become the first major business organisation to raise its voice about huge potential environmental damage from oil drilling in the Arctic. The City institution estimates that $100bn (£63bn) of new investment is heading for the far north over the next decade, but believes cleaning up any oil spill in the Arctic, particularly in ice-covered areas, would present "multiple obstacles, which together constitute a unique and hard-to-manage risk." Richard Ward, Lloyd's chief executive, urged companies not to "rush in [but instead to] step back and think carefully about the consequences of that action" before research was carried out and the right safety measures put in place. The main concerns, outlined in a report drawn up with the help of the Chatham House thinktank, come as the future of the Arctic is reviewed by a House of Commons select committee and just two years after the devastating BP blowout in the Gulf of Mexico.  Cairn Energy and Shell are among the oil companies that have either started or are planning new wells off the coasts of places such as Greenland and Canada, while Total – currently at the centre of a North Sea gas leak – wants to develop the Shtokman field off Russia.

Oil price salvation won't be found in the Bakken: When gasoline prices ratchet up and it costs a hundred bucks to fill your car, the political comedy starts. Who to blame? In the United States, the right blames the left and vice versa. Fuel taxes are too high, the American motorist moans, even though taxes in the United States are among the lowest in the world. Newt Gingrich is so outraged about high prices that he vows to slap a $2.50 (U.S.) a gallon price ceiling on gas if he is installed in the White House. At the same time, he supports tighter sanctions on Iran, one of OPEC’s biggest oil exporters, and is calling for regime change in Tehran. Call us contrarians, but bombing Iran to get lower oil prices seems a slightly flawed strategy. Then there are the oil Pollyannas, among them the energy analysts at Citigroup. Last month, they published a report that said soaring production in North America could turn the continent into “the new Middle East,” thanks to the suddenly prolific shale oil deposits. So relax and buy that SUV that sucks two gallons to haul your marshmallow butt to the Starbucks. The market is not listening to the politicians – some of whom want to drain strategic petroleum reserves in the United States and Europe to put a lid on prices – or the energy gurus who think peak oil is a myth. The price keeps going up.  This week, Brent crude climbed back to nearly $125 a barrel.

March Liquid Fuel Supply - I have updated my graphs with initial estimates of March total oil supply from OPEC and the IEA.  There continues to an appearance of a small plateau the last few months.  According to the IEA this is due to outages: Non-OPEC supply fell by 0.5 mb/d in March to 52.7 mb/d. Decline was widespread, but notable in the UK and at synthetic crude plants in Canada. Unplanned outages reached 1.1 mb/d in 1Q12, restraining non-OPEC output to 53.2 mb/d, albeit 0.5 mb/d higher than 1Q11.If so, we may get a bump up in supply shortly.  If not, I would expect prices to move up further before too long.  The graph above only goes back to 2008, and is not zero-scaled: it's intended to show recent movements in close-up focus.  If we broaden our view back to 2002, and add prices on the right scale, we get this:Which shows the "bumpy plateau" in oil supply since 2005 (and I've been maintaining a version of this graph for that long).  Note that this month I have updated the inflation adjustment basis for prices from Jan 2010 to Jan 2012. Finally, I received a request from the staff of Congressman Roscoe Bartlett for a version of this data that shows a still wider view and is zero-scaled.  So here is one that adds annual data back to 1970 and is zero-scaled:  .. Current prices are well above the levels of the 1970s oil shocks in inflation adjusted terms.

The Mideast's Awakening Energy Giant  - Iraq Progresses toward a Future Built on Oil Wealth - When the US toppled Saddam Hussein in 2003, few people imagined that it would take another decade before the Iraqi oil industry was rebuilt. Now, progress is finally being made, and the country's massive reserves could bring untold wealth. But before that happens, Baghdad needs to improve security and get corruption under control. For the past nine years, the world has been waiting for Iraq's oil. Ever since Saddam Hussein was toppled from power in 2003, politicians in Baghdad and Washington have been announcing that the country would soon double, triple or perhaps even quintuple its oil exports. After all, former US Deputy Secretary of Defense Paul Wolfowitz, one of the architects of the Iraq war, had promised that the country would finance its reconstruction on its own.

Iraq says OPEC seeking world oil price balance (Reuters) - OPEC is seeking a balance in world oil prices, but political instability rather than production issues are affecting the market price, Iraq's oil minister Abdul Kareem Luaibi said on Monday. "OPEC is still doing its best to produce enough crude to meet demand but political issues are affecting prices. World prices are affected more by political instability than by production issues," he told reporters. Luaibi said he expected Iraq's oil exports to be at 2.3 million barrels per day or slightly more in April. He said Iraq's government was still studying whether to allow Exxon Mobil to take part in a 4th oil bidding round due to a dispute over contracts it signed with Iraqi Kurdistan. 

Out of Africa (and Elsewhere): More Fossil Fuels - THE world’s largest energy companies have big plans for Mozambique. Until recently, the East African country was better known for its long civil war, but in the last 10 years, companies like Exxon Mobil, the BG Group of Britain and Eni of Italy have used the latest technologies, including advances in deep-sea drilling, to find new natural gas resources that are turning Mozambique into the center of an energy boom. Up and down the country’s shoreline, Western energy companies, as well as a number of Asian competitors, are drilling wells thousands of feet below the Indian Ocean in hopes of striking it rich. The rewards could be huge. Mozambique may have more deposits of natural gas — used in everything from manufacturing to electricity generation — than the European energy giant Norway. The East African country is not alone in its newfound energy wealth. Countries like Tanzania and Kenya also are attracting billions of dollars in investment from the world’s largest energy companies as they search for new oil and gas reserves. “Africa will be the backbone of our production and growth in the next 10 years,”

Kenya Must Get It Right With Oil - The country has seen a surge of interest in the region, where Tullow said the reserve potential is on par with the lucrative Lake Albert region in neighboring Uganda. Tullow said it planned to invest as much as $40 million at just one of its drill sites in Kenya and the London-listed company said it was "pretty confident" about developments in Kenya. Last week, however, the U.S. State Department issued a travel warning for Kenya, warning of "recently heightened" terrorism concerns and a "high rate" of violent crime in the country. Kenyan forces, meanwhile, are fighting alongside pro-government forces in Somalia, spurred on by a spat of kidnappings of Westerners in the region last year. The ICC, for its part, announced charges against four Kenyans for crimes related to post-election violence in 2007. More than 1,000 people were killed in the election violence and the State Department notes more elections are set for early 2013. This week, the White House said it was extending the national emergency regarding Somalia for another year because of the security situation there.

U.S. Defines Its Demands for New Round of Talks With Iran - The Obama administration and its European allies plan to open new negotiations with Iran by demanding the immediate closing and ultimate dismantling of a recently completed nuclear facility deep under a mountain, according to American and European diplomats.  They are also calling for a halt in the production of uranium fuel that is considered just a few steps from bomb grade, and the shipment of existing stockpiles of that fuel out of the country, the diplomats said.That negotiating position will be the opening move in what President Obama has called Iran’s “last chance” to resolve its nuclear confrontation with the United Nations and the West diplomatically. The hard-line approach would require the country’s military leadership to give up the Fordo enrichment plant outside the holy city of Qum, and with it a huge investment in the one facility that is most hardened against airstrikes.

President Scapegoat Can’t Stop Picking on Big Oil - Barack Obama isn’t the first U.S. president to conjure up scapegoats to serve his political ends. The Roosevelts, both Teddy and Franklin, were masters at the game. TR decided the trusts were an enemy of the people and busted the likes of Standard Oil and Northern Securities, which controlled the railroads in the northwest. FDR demonized just about anyone who had money. Obama has elevated scapegoating to a new level. He has his usual suspects -- the “millionaires and billionaires” who serve as foils at campaign events -- as well as temporary targets that come and go as the situation warrants. I agree with Obama that oil companies don’t “need” subsidies, some of which have been in place since 1916. But the reason isn’t their profitability. It’s that preferential treatment creates its own incentives, distortions and economic inefficiencies.Does Obama understand that one reason profits are so big is that the companies are big? Other better measures, such as profit margins (net income divided by sales), show energy producers underperforming other kinds of companies. For example, the average profit margin for the six largest U.S. integrated oil and gas companies was about 11 percent last year, compared with almost 14 percent for the Standard & Poor’s 500 companies.

Intelligence Report: Why Prospects of an Israel Iran Conflict Remains Low The ostensible cause of the potential conflict remained the nominal determination of key Western states to ensure that Iran did not acquire the capacity to build nuclear weapons, although even Israeli Prime Minister Binyamin Netanyahu has reportedly acknowledged that Israel understood that Iran had at least two nuclear weapons already deployed on medium-range ballistic missiles. These were weapons, how-ever, acquired from foreign suppliers, not from domestic manufacture. In reality, the issue is far more complex, and is particularly compounded by:
1. The fact that the United States is in a Presidential election year, which traditionally inhibits and distorts Administration decision making, and yet allows for opposition candidates to exercise strenuous — and often ill-informed and inflammatory — rhetorical positions;
2. The fact that the Iranian domestic political situation is clouded, as a result of recent first round of the Majlis elections (March 2, 2012; run-off round for the remaining 65 seats on May 4, 2012) which have already severely crimped the influence of incumbent Pres. Mahmud Ahmadi-Nejad, who may, in any event, soon be eclipsed from power with the end of his term. 

Iran Sends Mixed Signals Ahead of Nuclear Talks - In the diplomatic shadowboxing ahead of a planned resumption of nuclear talks between global powers and Iran1, a senior official in Tehran was quoted on Monday as hinting at what seemed to be a modest compromise to partially meet some Western concerns about the country’s uranium enrichment program.  But another high-ranking figure, Foreign Minister Ali Akbar Salehi, was quoted as saying that Iran would not accept preconditions for the discussions.  “Setting conditions before the meeting means drawing conclusions, which is completely meaningless and none of the parties will accept conditions set before the talks,” the Iranian parliamentary news agency quoted the minister as saying, according to Reuters.  Earlier, Fereydoon Abbasi, the head of the Iranian Atomic Energy Organization, indicated that Iran was prepared to enrich uranium to 20 percent purity “just to meet its own needs” for a research reactor but not beyond that point, the official IRNA news agency reported.

The case for the CTBT: Stronger than ever - In 1996, the United States was the first country to sign the Comprehensive Nuclear Test Ban Treaty (CTBT), but in 1999, the US Senate rejected the treaty. That year, Republicans who opposed the test ban did so largely on the grounds that the US nuclear deterrent cannot be maintained without testing and that the treaty is unverifiable. While the NAS report does not take a position on whether the United States should ratify the CTBT, it does conclude that the "United States is now better able to maintain a safe and effective nuclear stockpile and to monitor clandestine nuclear-explosion testing than at any time in the past." In other words, in this day and age, concerns about the maintenance of the stockpile and verification of the treaty are no longer compelling arguments. In short, the United States should ratify the CTBT as soon as possible: It has nothing to lose and everything to gain.

Behind the Battle for Argentina's Oil - With its boardroom standoff and a cameo appearance by a monarch, the drama of President Cristina Kirchner's battle with Argentina's largest oil company, YPF SA, is juicy enough to compete with an over-the-top Latin American soap opera. Incensed at YPF for Argentina's falling oil production, Mrs. Kirchner recently sent subordinates to sit in on a corporate board meeting—where they claim they were brusquely turned away by YPF officials. Amid withering government attacks on YPF, majority owned by Repsol YPF SA of Madrid, Spain's King Juan Carlos personally called Mrs. Kirchner to ask her to ease up on the company, a person familiar with the situation has said.  Investors are getting whiplash from gyrations in the stock, which swooned 15% in just one day last week after a provincial governor said he would revoke rights to one of the company's most important oil fields.  No one knows how the script will end. Mrs. Kirchner has said she will use "all means provided by the Constitution" to get more production out of YPF, which she blames for Argentina's increasing dependence on high-cost imported energy. But debates are raging within the government over a number of restructuring options, from nationalizing the company outright to teaming up with a private-sector partner to launch a hostile takeover bid.

Higher oil prices fuel widening euro zone rift - Higher oil prices are yet another force pushing the euro area’s economies apart. They hit gross domestic product three times harder in Greece than in Germany, according to data from Moody’s Analytics. Ireland and Italy are big losers, too. With Iran worries driving prices higher and sovereign debt fears flaring up again, governments may be even more tempted to tap strategic petroleum reserves. But that won’t guarantee lower prices.  The price of crude has been among the best predictors of global recessions, preceding downturns in each of the past four decades. In the euro area, the pain is not spread evenly. While a $10 (U.S.) increase in the price of a barrel of oil subtracts just 0.28 percentage points from German growth a year later, the damage to Ireland and Italy is twice as large, according to Moody’s.  Hapless Greece, which imports four times as much oil per unit of GDP than France, suffers most of all with a 0.8 percentage point slowdown in growth. The effect is magnified in sunny countries, since tourism suffers when petrol or jet fuel prices rise.  For crisis-hit countries already grappling with austerity, higher oil prices could complicate efforts to grow out from under onerous debt loads. This may affect policies concerning strategic or emergency reserves.

Analysis: Troubled euro zone states most at risk from high oil (Reuters) - Oil prices at record levels in euro terms are threatening to rock the euro zone's economy more than might be expected, with those countries least capable of riding out a shock being the worst hit. Standard estimates of the impact of oil prices on the euro zone economy are that a 10 percent price hike dents annual growth by some 0.2 percent in the ensuing three years, with disagreement over whether the hit is greater at the start or at the end. However, these projections do not take into account the euro/dollar exchange rate and may underestimate the impact at a time of widespread austerity. Nor do they reflect potential differences across euro zone countries. In dollar terms, oil prices are still some 13 percent short of the $147.50 per barrel Brent peak hit in July 2008. However, in euro terms, oil prices surpassed all-time highs last month.So far this year, the price of oil in euros has risen as much as 17 percent. The International Monetary Fund already projects euro zone GDP to shrink by 0.5 percent over 2012. Italian bank UniCredit estimates that a 10 percent rise in the euro-denominated price of oil depresses euro zone growth by 0.3 percentage points over a single year - not 0.2 percent over three years.

Oil Supply Tightness Coming to an End: IEA - The tale of ever-tightening oil inventories and reduced supply appears to be coming to an end, the International Energy Agency said on Thursday. Saudi supply assurances, market speculation on a potential strategic stock release and hopes pinned on multilateral talks over Iran’s nuclear program have eased fundamentals and prompted falls in prices recently, the report said. “Acknowledging that data remain preliminary, first quarter 2012 fundamentals nonetheless show a clear shift from the seemingly relentless tightening evident over the prior ten quarters,” the IEA said in its April report. “Further surprises almost inevitably lurk around the corner for both demand and supply. But for now at least, the earlier tide of remorseless market tightening looks to have turned,” it said. The agency left its forecast for 2012 global oil demand unchanged from last month’s report, and still expects global oil demand to rise to 89.9 million barrels per day in 2012, a gain 0.9 percent compared to 2011. The regional breakdown of demand was little changed, with Asia continuing to dominate. The only significant change from last month was the stronger growth now foreseen in oil-rich nations such as those in the Middle East and the former Soviet Union. Demand estimates have been revised lower for more price sensitive regions, such as North America.

Downstream Demand Destruction for Oil - One of the most pronounced trends in the Western world since the onset of the global financial crisis has been the plummeting demand for petroleum and the subsequent losses for the refinery industry, which has been squeezed by a combination of declining credit availability, higher prices for input crude and lower demand/prices for refined products (over-capacity). This ever-deepening trend was discussed on TAE earlier in Petroplus - The Tip of an Iceberg. What we are witnessing within the refinery industry and the petroleum industry in general is a situation in which higher prices, mainly fueled by leveraged speculation, geopolitical tensions and rising demand in the East, are burning themselves out by destroying demand in a positive feedback spiral. For those who think that oil prices can only go up, up and away from here on out, I am still waiting to hear how plummeting demand for crude oil from refineries, which are now dropping off like flies, will contribute in the short-term. Some may argue that the developing economies of the East will single-handedly keep prices elevated, but they are ignoring a) the speculative premium built in to oil prices and b) the fact that these emerging economies do not exist in a bubble that is isolated from the effects of demand destruction in the West, i.e. a decoupled global economy.

Graph of the Day: Growth in World Oil Supplies, 1983-2011 - The US Energy Information Administration (EIA) recently released full-year 2011 world oil production data. In this post, I would like show some graphs of recent data, and provide some views as to where this leads with respect to future production. The fitted line in Figure 1 suggests a “normal” growth in oil supplies (including substitutes) of 1.6% a year, based on the 1983 to 2005 pattern, or total growth of 10.2% between 2005 and 20011. Instead of 10.2%, actual growth between 2005 and 2010 amounted to only 3.0% including crude oil and substitutes.  The shortfall in oil production relative to what would have been expected based on the 1983-2005 growth pattern amounted to 4.7 million barrels in 2011. This is far more than any country claims as spare capacity. This is no doubt one of the reasons why oil prices are as high they are now. These high oil prices tend to interfere with economic growth of oil importing nations. […]

The New EIA Oil Supply Data Confirms Your Peak Oil Fears  - The US Energy Information Administration (EIA) recently released full-year 2011 world oil production data. In this post, I would like show some graphs of recent data, and provide some views as to where this leads with respect to future production. The fitted line in Figure 1 suggests a “normal” growth in oil supplies (including substitutes) of 1.6% a year, based on the 1983 to 2005 pattern, or total growth of 10.2% between 2005 and 20011. Instead of 10.2%, actual growth between 2005 and 2010 amounted to only 3.0% including crude oil and substitutes. The shortfall in oil production relative to what would have been expected based on the 1983-2005 growth pattern amounted to 4.7 million barrels in 2011. This is far more than any country claims as spare capacity. This is no doubt one of the reasons why oil prices are as high they are now. These high oil prices tend to interfere with economic growth of oil importing nations. The shortfall in growth especially occurred in crude oil.

What the EIA's World Oil Production Data for 2011 tells us about 2012 - The US Energy Information Administration (EIA) recently released full-year 2011 world oil production data. In this post, I would like show some graphs of recent data, and provide some views as to where this leads with respect to future production.  The fitted line in Figure 1 suggests a “normal” growth in oil supplies (including substitutes) of 1.6% a year, based on the 1983 to 2005 pattern, or total growth of 10.2% between 2005 and 20011. Instead of 10.2%, actual growth between 2005 and 2010 amounted to only 3.0% including crude oil and substitutes. The shortfall in oil production relative to what would  have been expected based on the 1983-2005 growth pattern amounted to 4.7 million barrels in 2011. This is far more than any country claims as spare capacity. This is no doubt one of the reasons why oil prices are as high they are now. These high oil prices tend to interfere with economic growth of oil importing nations. The shortfall in growth especially occurred in crude oil. Figure 2, below, shows crude oil production separately from substitutes.

Iran imposes oil "counter-sanctions" on EU: TV - Iran has cut oil exports to Spain and may halt sales to Germany and Italy, Iran's English-language state television reported on Tuesday, in an apparent move to strengthen its position ahead of crucial talks with world powers later this week. But, in an indication that Tehran's "counter-sanctions" were of little impact, Spain's biggest refiner said it had already replaced Iranian crude with Saudi Arabian oil months ago.Iran has played a tit-for-tat game over crude shipments since the European Union decided in January to stop all Iranian oil imports as of July, part of a range of tough new sanctions aimed at forcing Tehran to curb the atomic work that the West suspects is part of a nuclear weapons program.Talks between Tehran and six world powers aimed at easing the nuclear stand-off are set to resume in Istanbul on Saturday, and could pave the way for an easing of sanctions and might lift the threat of Israeli air strikes on Iran.EU states have sought alternative oil supplies ahead of July's deadline, with Iran threatening to cut exports first, something Iran's Press TV said was well under way."Tehran has cut oil supply to Spain after stopping crude export to Greece as part of its counter-sanctions," Press TV said, citing unidentified sources, adding that a similar move was being considered for Germany and Italy.

Iran Escalates Again, Cuts Off Oil Shipments To Spain - Those hoping for a quick and painless resolution to the Iranian question may have just seen their hopes dashed, following the breaking news from Iranian Press TV, according to which not only is Iran not seeking to appease its Western counterparts, but is, in fact escalating. From Press TV: "Tehran has cut oil supply to Spain after stopping crude export to Greece as part of its countersanctions, unnamed sources confirmed on Tuesday. Tehran also mulls cutting oil supply to Germany and Italy." "Countersactions" - lovely: another Swiss watch plan by the insolvent developed world. Said otherwise, one can hardly threaten to do something to a country, which is already doing so voluntarily, in the process hurting Europe's already crippled economies even more by removing the cheapest source of energy for both. Which however begs the question: just how much more Iranian crude are China and India importing despite promises to the contrary, and open warnings from the US not to do so?

Preemptive Move: Iran Stops Oil Exports to Germany - Spiegel  - Iran halted oil exports to Germany on Wednesday, a day after it stopped crude exports to Spain and Greece, according to Iran's official Press TV news network. The move appears to be an attempt to boost its position ahead of talks with world powers on its nuclear program in Istanbul on Saturday.  The station said the halt of exports was preemptive retaliation for an EU embargo on Iranian oil imports that is due to take effect in July. Iran has already stopped sales to Britain and France.  In an indication that Tehran's "counter-sanctions" are having little impact, Spain's biggest refiner said it had already replaced Iranian crude with Saudi Arabian oil months ago. Iran said it would halt crude oil deliveries after the EU announced its embargo in January, part of a range of tough new sanctions aimed at forcing Tehran to curb the nuclear work that the West suspects is part of a nuclear weapons program.

UPI: Iran offers oil at zero-percent interest - Iran is trying to overcome U.S. and European sanctions by offering oil to potential customers at zero-percent interest for six months, industry officials said. The free credit for 180 days -- offered to "a handful" of potential customers in Asia, including India -- amounts to a 7.5 percent discount per $118 barrel, the officials told the Financial Times. Each month of credit amounts to a discount of roughly $1.20 to $1.50 a barrel, they estimated. But even with zero-percent interest -- made popular in the United States by the auto industry to lure customers into empty showrooms during the 2008-2010 crisis -- Tehran is struggling to find customers, Gulf-based officials and European traders told the British business newspaper. "Obviously, [the extra credit is] the easiest way for them to discount," a senior European oil trader said. "However, I think very few will be tempted."

Hong Kong ship insurers unable to fill void in Iran oil cover - Hong Kong maritime insurers will not provide full cover to tankers carrying Iranian oil after EU sanctions take effect from July, a senior industry official told Reuters, another blow to Chinese importers struggling to find ways around the measures. As more insurers confirm they will soon halt or sharply reduce coverage to tankers operating in Iran, China's government may need to step in and take the risk to get contracted crude supplies from Tehran, said Arthur Bowring, managing director of the Hong Kong Shipowners Association. China is the top buyer of Iranian crude.

Chinese Crude Imports Remain At All Time High For Third Month In A Row - Overnight Chinese trade data came in modestly disappointing, with imports rising just 5.3% on expectations of 9% increase. However one area where imports certainly did not decline, is commodities, and especially crude. As the chart below shows, Chinese crude imports in March were virtually unchanged from February's all time high (and same as January), and while the bpd number was slightly lower due to fewer days in the month at 5.50, one thing is clear: every ounce of oil that the rest of the world does not want, China will rapaciously import and stockpile. Good luck to Saudi Arabia with perpetuating the lie that it can boost its production by 2.5 million bpd to offset Iran. And even if it can, we at least know who will be waving it all in.

Managing strategic petroleum reserves - The Wall Street Journal suggests today that part of the latest surge in China's oil imports is attributable to a desire to boost the country's oil stockpiles. The Wall Street Journal reports that for 2012:Q1, China's crude imports rose 11% from the year-ago quarter, a much stronger pace than full-year 2011's increase of 6%, the China's General Administration of Customs said....  China has brought new storage facilities online in recent months, said market observers and the International Energy Agency, another sign of a potential strategic reserve buildup. Also, China's desire for energy security is becoming stronger amid turmoil in the Middle East, they said.  It's interesting that this move by China is coming at the same time as the U.S. and its allies are moving in the direction of selling more oil out of their strategic stockpiles. Indeed, the 50 million barrel increase by China anticipated by Mr. Wu is about the size of the 60 million barrels sold from the strategic reserves of the U.S. and other countries last year. The proposed release of oil by western nations and the current accumulation of oil by China may have a common cause-- an effort to deal with the consequences of efforts to sanction Iran. While western sanctions are curtailing Iranian oil exports to many countries, China imported 30% more oil from Iran in 2011 than it had in 2010, a year when their overall crude imports were up only 6%. The U.S. sanctions and sells, while China ignores and buys. I think it's called arbitrage.

China Sets Up Rare Earth Body To Streamline The Sector - China has set up a rare earth association in a bid to streamline the sector's development, as it continues to face criticism over its policies. Beijing has imposed quotas on exports of rare earth elements, a move which its critics say has pushed up prices. Last month, the US, Japan and the European Union filed a case at the World Trade Organization, challenging China's restrictions. China produces more than 95% of the world's rare earth elements. Hardball? These elements are critical components in the manufacture of various high-tech products, including DVDs, mobile phones, flatscreen TVs and hybrid batteries. China's trading partners have alleged that Beijing has been trying to utilise its position as the world's biggest producer of rare earths to benefit domestic manufacturers.

Green Energy Strains Rare Earth Supply - As the world moves toward greater use of low-carbon and zero-carbon energy sources, a possible bottleneck looms, according to a new MIT study: the supply of certain metals needed for key clean-energy technologies. Wind turbines, one of the fastest-growing sources of emissions-free electricity, rely on magnets that use the rare earth element neodymium. And the element dysprosium is an essential ingredient in some electric vehicles’ motors. The supply of both elements — currently imported almost exclusively from China — could face significant shortages in coming years, the research found. The study looked at 10 so-called “rare earth metals,” a group of 17 elements that have similar properties and which — despite their name — are not particularly rare at all. All 10 elements studied have some uses in high-tech equipment, in many cases in technology related to low-carbon energy. Of those 10, two are likely to face serious supply challenges in the coming years. The biggest challenge is likely to be for dysprosium: Demand could increase by 2,600 percent over the next 25 years, according to the study. Neodymium demand could increase by as much as 700 percent. Both materials have exceptional magnetic properties that make them especially well-suited to use in highly efficient, lightweight motors and batteries. A single large wind turbine (rated at about 3.5 megawatts) typically contains 600 kilograms, or about 1,300 pounds, of rare earth metals. A conventional car uses a little more than one pound of rare earth materials — mostly in small motors, such as those that run the windshield wipers — but an electric car might use nearly 10 times as much of the material in its lightweight batteries and motors.

Chinese grain imports hit record high - China’s grain imports hit a record high in March, as the world’s most populous country increasingly turns to overseas markets to meet its agricultural needs. Customs data from Beijing revealed that grain imports reached 1.64m tonnes in March, up sixfold from a year earlier and up 50 per cent from the previous month. China has to feed a fifth of the world’s population with only 8 per cent of the world’s arable land, and does not grow genetically modified grains. As rising incomes and more meat-heavy diets boost grain demand, China’s reliance on imports has slowly increased. Big corn purchases likely contributed to the jump in March grain imports, said traders. The grain category includes corn, wheat, rice and barley. Specific data for each will be released toward the end of this month. China accounts for about 20 per cent of the world’s corn consumption and only four per cent of global corn trade, but its sudden increase in corn buying has greatly tightened the global market. China’s corn imports in January and February this year totaled 1.26m tonnes, four hundred times more than the same period last year.

Chinese prices keep climbing  -- Chinese consumers continue to pay the price for economic prosperity, in the form of inflation for pork, alcohol, traditional medicine and other products, the government reported Monday. The cost of living kept rising in China last month, especially for food prices, the government's National Bureau of Statistic said. The national consumer price level rose 3.6% in March, year-over-year, including a 7.5% spike in food. The price of pork, a staple in Chinese cuisine, rose 11.3% year-over-year, while the price of fresh vegetables soared 20.5%. The price of alcohol took off, up by 8.3% year-over-year. The price of Chinese herbal medicines jumped 8.5% year-over-year, compared to slight slump by 0.1% in the price of Western medicine. While inflation poses challenges for consumers, it is the byproduct of one of the most robust economies1 in the world. Chinese gross domestic product surged 9.2% last year, compared to an increase of 1.7% in GDP for the U.S. 

First-quarter home prices down 20.7% in capital - Prices of new homes in Beijing fell 20.7 percent year-on-year in the first quarter, as property developers offered more discounts to stimulate sales with tightening policies set to continue.  The average price of new homes in Beijing was 12,326 yuan ($1,956) per square meter as of end-March, compared with 13,173 yuan at the end of last year and 14,147 yuan at the beginning of 2011, the Beijing Real Estate Association said on Sunday.  According to Chen Zhiwu, secretary-general of the association, 16,000 new apartments were sold during the first quarter, with 90 percent of buyers being first-home purchasers.  Apartment sales (excluding subsidized units) fell 14.2 percent year-on-year in the first quarter, reaching the lowest level since 2007, Chen added.

The Imbalances in China's Economy - Nicholas R. Lardy, a senior fellow at the Peterson Institute for International Economics in Washington, is an authority on China and its economy. In his latest book, “Sustaining China’s Economic Growth After the Global Financial Crisis,” he warns about dangerous imbalances in China’s economy, starting with its emphasis on exports rather than household consumption. But Mr. Lardy’s book goes further, showing how Chinese policies hamper the development of private companies and the service sector. Because interest rates and the exchange rate are tightly managed and not market-oriented, Mr. Lardy says economic growth over the past decade has been badly distorted and inefficient. And that, he says, could set the stage for a lengthy period of sluggish growth. In an exchange by phone and e-mail, I asked Mr. Lardy about the roots of the imbalances, and whether China’s long-running economic boom could be coming to an end.

Capital controversy - China’s “overinvestment” problem may be greatly overstated - THE IMF says so. Academics and Western governments agree. China invests too much. It is an article of faith that China needs to rebalance its economy by investing less and consuming more. Otherwise, it is argued, diminishing returns on capital will cramp future growth; or, worse still, massive overcapacity will cause a slump in investment, bringing the economy crashing down. So where exactly is all this excessive investment?Most people point to the rapid growth in China’s capital spending and its unusually high share of GDP. Fixed-asset investment (the most widely cited figure, because it is reported monthly) has grown at a breathtaking annual rate of 26% over the past seven years. Yet these numbers are misleading. They are not adjusted for inflation and they include purchases of existing assets, such as land, that are inflated by the rising value of land and property. A more reliable measure, and the one used in other countries, is real fixed-capital formation, which is measured on a value-added basis like GDP. This has increased by a less alarming annual average of 12% over the past seven years, not that much faster than the 11% growth rate in GDP in that period.

Forthcoming IMF report may question whether the Yuan is materially undervalued - The WSJ reports that the IMF will reduce sharply it’s long term forecast of Chinese current account surplus in a report to be issued on the 17th April. Last September, the IMF reported that the surplus would amount to 7.0% of GDP. Speculation is that the IMF will reduce China’s forecast surplus to 5.0% or even lower which, if true, weakens the case that the Yuan is materially undervalued. Chinese authorities repeat that the Yuan is near “equilibrium”. The IMF is in the process of revising the basis by which it assesses currencies, with the new methodology to be revealed in June. As a result, the IMF is unlikely to comment on the Yuan at this stage; The FT reports on the major discrepancies in Chinese data. Some examples are:
HSBC March PMI came in at 48.3, though the official number was 53.1;
Industrial enterprise profit declined by -5.2% and SOE’s by -20%, though corporate tax rose by +29%;
Copper and Iron ore imports rose by 76% and 29% respectively – however, prices declined;
Industrial production grew, but inventories rose;
Retail sales growth fell though household consumption rose;
Inflation declined as did GDP, though overall tax revenue rose +35%.

The Chinese data choose-your-own-adventure - The great thing about Chinese economic data is that you can read whatever you like into it. Official PMIs not supporting your bearish call? No worries, because that stuff suffers from seasonality and is *obviously* fudged, anyway. HSBC PMIs harshing your bullish mellow? Meh, well their sample is too small and overly coastal. (The truly hip just dismiss all China PMIs.) The choose-your-own adventure of Chinese data has become even more strange of late. Is the central government’s clampdown on property going exactly according to plan, or is everything going to hell in a handbasket once Chinese investors realise their empty apartments are going to continue depreciating?  Are the widely-expected additional cuts to the reserve requirement ratio going to be enough, and do they really constitute easing anyway? What about all those bad debts that are being forcibly rolled over? Local governments losing land sales revenue? Shadow banking? Stockpiling of resources for collateral? Imbalances? Soft landing? And so on.

China Growth Seen at Slowest Since ’09 With Wen Revival Due This Quarter -- China’s economy probably expanded at the slowest pace in almost three years in the first quarter, setting the stage for monetary loosening and aid to exporters to drive a rebound and fuel global growth.  Gross domestic product rose 8.4 percent from a year earlier following an 8.9 percent increase in the fourth quarter, according to the median estimate of 41 economists surveyed by Bloomberg News ahead of a report tomorrow. The data may also show that industrial production and retail sales accelerated in March while spending on fixed assets slowed.  Australia & New Zealand Banking Group Ltd. and HSBC Holdings Plc predict the world’s second-largest economy will pick up this quarter as Premier Wen Jiabao cuts banks’ required reserves and directs funds to infrastructure projects and smaller companies. That would help a global expansion clouded by U.S. job gains that trailed forecasts in March and renewed concern over Europe’s sovereign-debt crisis.

China’s Economic Growth Falls to Nearly Three-year Low - China’s economic growth fell to its lowest level in nearly three years in the first quarter but analysts said the economy should rebound in coming months. Growth in the world’s second-biggest economy declined to a still-robust 8.1 percent in the three months ending in March, data showed Friday. That was down from the previous quarter’s 8.9 percent and the weakest rate since the second quarter of 2009. China’s rapid growth has declined steadily since 2010 as a slump in global demand battered its exporters and Beijing tightened lending and investment curbs to cool an overheated economy and surging inflation. An uncontrolled slump could have global repercussions, hurting demand for oil, industrial components and consumer goods at a time when U.S. and European growth are weak. It also might fuel political tensions in China as the ruling Communist Party prepares for a sensitive, once-a-decade handover of power to younger leaders.

China in GDP shock - The China GDP figures change little in terms of the choose-your-own-adventure thing happening with China. Yes, the 8.1 per cent growth for Q1 was lower than consensus forecasts of 8.3 or 8.4 per cent. But no, it’s not causing the bears to rejoice. What brought this about? We saw that the trade balance returned to surplus in March, but exports were not strong enough to push away fears for global demand, or hopes for easing. Another surprising piece of data released was loans, which came in much higher than expected. From Bloomberg: Local-currency-denominated loans were 1.01 trillion yuan ($160.1 billion) in March, the People’s Bank of China said yesterday, the biggest surprise above forecasts in more than a year. M2, the broadest measure of money supply, grew 13.4 percent from a year earlier. China’s foreign-exchange reserves, the world’s largest, rose to a record $3.31 trillion as of March 31 after dropping for the first time in more than a decade in the fourth quarter.

World Bank trims China’s growth outlookTheWorldBank cut its growth forecast for China on Thursday, adding to warnings the world’s second-largest economy might slow too abruptly, and said Beijing should be ready to launch a new stimulus if needed. The bank stressed it expects a “soft landing” but trimmed its growth outlook this year to a still-robust 8.2 per cent from 8.4 per cent. It cited U.S. and European economic woes and Chinese lending and investment curbs imposed to cool an overheated economy. Beijing is trying to steer growth that spiked to 10.4 per cent in 2010 to a sustainable level without causing the economy to stall. Some analysts say it is succeeding, but others say government controls, coupled with last year’s plunge in export demand, might cause growth to nosedive, raising the risk of job losses and unrest. “While the prospects for a soft landing remain high, there are concerns that growth slows too quickly,” the bank said in a quarterly report on China.

China's Gravity-Defying Economy: How Hard Will It Fall? - As China’s high-octane economy shifts into lower gear, virtually everyone agrees that the double-digit, super-charged boom years are drawing to a close. Speculation over the possibility of a so-called “hard landing” for the country flourishes with each boom and bust cycle, only to die down as China’s growth revs up again. This time, however, both external and internal factors — including global conditions, domestic politics and financial trends — are reinforcing the downturn. Many experts warn that without some painful reforms, there will be worse trouble to come. Still, economists’ opinions about just how far China’s economy will fall range widely. Also, exactly what constitutes a “hard landing” for a country that has until now been viewed as an almost unstoppable economic powerhouse varies from analyst to analyst, although most point to China’s growth rate as a key defining factor. “People give different definitions,” notes Wharton finance professor Franklin Allen. “Mine would be growth below 5%.” China’s growth slowed to 8.9% in the final quarter of last year, after months of attempts by the government to cool inflation through curbs on bank lending, interest rate hikes and stringent increases in banks’ reserve requirements. Premier Wen Jiabao set the annual growth target for 2012 at 7.5% — the first time the official benchmark has been set below the 8% level long viewed as the minimum needed to create enough jobs and ensure social stability.

In Surprise, China Posts Trade Surplus— China ran an unexpected $5.35 billion trade surplus last month, government figures released on Tuesday showed, indicating the country remains a strong exporter despite weak demand in Europe in recent months. The surplus is likely to bring renewed calls in the United States and elsewhere for China to allow further appreciation of its currency, the renminbi. Responding to complaints from exporters of weak overseas orders, the government has halted appreciation this year while Prime Minister Wen Jiabao has even raised the possibility of increasing tax rebates for exporters. China’s export prowess has stirred worries about job losses in the United States, especially in an election year. But the Obama administration has muted somewhat its criticisms of China’s currency policies this year as the country’s trade surpluses had seemed to be evaporating. Private economists had been predicting that China would show a trade deficit of $1 billion or more last month, not a surplus. China’s exports climbed 8.9 percent in March compared with a year earlier, more than expected, while import growth slowed to 5.3 percent.

China Doubles Yuan Trading Band in First Widening Since 2007 - China widened the yuan’s trading band for the first time since 2007, a move that may be intended to stem criticism from trading partners after expectations for gains in the currency diminished. The increase to 1 percent from 0.5 percent will take effect April 16, the People’s Bank of China said on its website today. The previous broadening of the trading band, which is centered on a rate set daily by the central bank, was from 0.3 percent in May 2007. The shift comes days before the International Monetary Fund and Group of 20 hold talks in Washington, forums used by finance chiefs to lobby China to let the yuan gain. Expectations for a stronger currency dwindled in the past six months as Premier Wen Jiabao cut the country’s economic growth target, Europe’s sovereign-debt crisis hurt exports, and China’s trade deficit in February swelled to the biggest since at least 1989.  

China moves on currency after growing US pressure - The People’s Bank of China said that from Monday it will double the trading band, so that the yuan can fluctuate by 1pc every day from a mid-point, compared with its previous limit of 0.5pc. The move demonstrates Beijing’s belief that the yuan is now stable enough to handle major structural reforms, despite slowing growth of the Chinese economy. Analysts said the slowdown may have actually spurred Beijing to make the change, because the Chinese government knew it could introduce the larger band without causing a spike in the yuan’s value. "The central bank chose a good time window to enlarge the trading band. The market's expectation for a stronger yuan is weakening," Nonetheless, The People's Bank of China took the unusual step of issuing its announcement in English rather than Mandarin. Sources said China wanted to deflect criticism of its currency policy ahead of the International Monetary Fund's annual spring meeting in Washington next week.

Time for closer ties' with India - Emerging economies 'hold key' to global growth over next 20 years A senior Indian planning official has called for closer economic cooperation between India and China for mutual benefit over the next 20 years. Montek Singh Ahluwalia, vice-chairman of India's planning commission, said emerging economies are now the world's engine. "Traditionally, probably both of us have seen industrialized countries as the world's growth pools and looked at how to deepen relations with the industrialized world," Ahluwalia told China Daily on the sidelines of the Boao Forum for Asia Annual Conference 2012. Over the next 20 years, industrialized nations "will be very important sources of technology" but GDP growth will almost certainly come from emerging markets like China and India, he said.

Happy Banking? - Ask most Australians about the impact of the GFC and they'll tell you it wasn't too bad. With prudent bank regulation and a Government guarantee on bank savings, Australia's economy was the envy of the world. But was it that simple? This week reporter Debbie Whitmont tells the story of one Australian bank's near death experience and the fall-out for its customers. "People sign a contract and I expect them to be honest about it. I expect them to be commercial about it and I expect that in times of crisis that we will band together as a team and sort the crisis out." Bank customer If you believe the advertising, when you borrow money from a bank you are dealing with people who say they understand you and your business; someone who's prepared to work with you in good times and in bad. For many in business though the reality is rather different.

Trouble in shipping turns ocean into scrapheap - Telegraph: The downturn in shipping is hitting the industry so hard that some of the world's biggest vessels are now worth little more than their scrap value, new figures show. Shipyards have been turning out new vessels at a pace designed to service global demand that has simply failed to materialise, meaning the industry is now sinking under massive overcapacity.  As owners have seen the rates charged to carry freight plunge, demand for their ships has collapsed to the point that selling them for scrap makes financial sense much earlier in a vessel's life.  In the worst hit sectors, the fall in the ships's value and the rise in the price of steel – driven by rapacious demand from China as it builds itself anew – means that the difference between the prices fetched if vessels are sold on to keep sailing and those if they are broken up for scrap is now minimal.  Cargo ships as a general rule are built to sail for 25 years, yet in the volatile VLCC or "very-large crude carrier" sector, which comprises the world's biggest oil tankers, scrap and resale prices reached parity in recent months for the average 15-year-old ship, according to prices tracked by industry information provider  A typical 15-year-old VLCC achieved an average resale price of about $78m (£49m) at the peak of the market in July 2008, its research shows. That figure has since plunged to $23m.

Analysis: Islamic finance pressured to join accounting mainstream (Reuters) - Rapid growth of Islamic finance is increasing pressure for the industry to enter the accounting mainstream, by seeking guidance from the International Accounting Standards Board (IASB), the global body which sets the tone for book-keeping in conventional finance. It would be a controversial move - by basing itself on religious principles, Islamic finance seeks to set itself apart from conventional finance. But some experts think the industry is becoming so big that it can no longer sit comfortably outside a trend towards harmonizing accounting rules across the world. "The whole thing about financial reporting around the world today is the global move towards a single comparable set of high-quality financial reporting standards..."  Islamic financial assets hit $1.3 trillion globally in 2011, a 150 percent increase over the past five years as the industry expanded into new countries beyond core markets in the Middle East and Malaysia, financial lobby group TheCityUK estimated last week. At present the industry remains governed by a patchwork of national regulators, Islamic standard-setting bodies and scholars interpreting Islamic law - a recipe for different rules and practices. This is creating confusion among investors, especially as major Western banks begin to enter the market.

U.S. walks dangerous line to support Argentina in bond cases - Distressed debt investors don’t have much credence as victims. These are, after all, hedge funds that buy up bonds in or near default, typically at a steep discount, in the hope they’ll be able to boost the value of the debt through the bankruptcy process or litigation in U.S. courts. Right now, for instance, distressed bond funds are preparing for battle over billions of dollars worth of Greek sovereign debt that they snatched up in anticipation of that country’s default in March. Distressed debt funds quite literally feed off the flesh of moribund companies and foreign economies, which is why they’re frequently called vulture funds. Vultures flanked by crafty lawyers aren’t entitled to a whole lot of sympathy. But they earned some from me when I read the Justice Department’s new amicus brief, filed last week at the 2nd Circuit Court of Appeals in the long-running battle between The Republic of Argentina and NML Capital, Aurelius, and other holders of defaulted Argentine bonds. The brief suggests that the Justice Department believes the foreign policy objectives of the executive branch trump the obligations of a foreign sovereign to comply with U.S. court directives. That’s an argument the government clearly feels conflicted about, based on the brief. And its support of Argentina, at the expense of the power of the U.S. court system, could roil the vulture-dominated secondary market for distressed sovereign debt in the midst of the Eurozone crisis.

Colombia-US FTA will halt labor rights progress - The imminent passage of the Colombia-U.S. Free Trade Agreement (FTA) will halt progress on the Andean nation's appalling workers' rights record, the Washington Office on Latin America (WOLA) said Tuesday. Gimena Sanchez, WOLA's senior associate for Colombia, told Colombia Reports the final approval of the FTA would “significantly reduce the political leverage of the U.S. government to really change things for labor rights conditions in Colombia.” U.S. President Barack Obama is expected to announce that Colombia has met the labor rights conditions required for final approval of the FTA at the upcoming Summit of the Americas, despite ongoing violence against unionists in the country. Since January 2012, four union members have been killed across the country, while dozens were murdered in 2011- Colombian unions say 51, the government says 30.

Putting the Gini Back in the Bottle - Krugman - Can policy make a difference to inequality? In particular, can governments reduce inequality without killing the economy? I’ve been looking at a story that has received very little discussion here, as far as I can tell, but is very interesting, to say the least: the remarkable decline in inequality that has taken place in Latin America. But wait — aren’t Latin nations extremely unequal? Yes, they are — still. But not as much as before. The region moved left politically circa 2000, partially turning its back on the Washington Consensus — and there has been a dramatic reversal in inequality trends: What about economic performance? The study linked above divides regimes into three kinds: Social Democratic (e.g. Brazil), Left-populist (e.g. Venezuela), and non-LOC (left of center): Lots to parse here, and of course many questions about the relevance to richer nations. But remember how the right exalted Chile’s privatized pension system a while back? (It turned out that the Chileans themselves didn’t share the enthusiasm). Well, maybe there’s a different lesson from our southern neighbors.

Bearish on Brazil -  Until recently, the consensus view of Brazil among investors and pundits was almost universally bullish. Under the landmark presidency of Luiz Inácio Lula da Silva, the country became known as a paragon of financial responsibility among emerging markets. Having contained hyperinflation and reduced its debt, Brazil weathered the 2008 financial crisis better than most, growing at an average annual rate of nearly four percent over the past five years. And in the last ten years, some 30 million Brazilians have entered the middle class, giving their country, according to Brazil's promoters, the power to expand despite a turbulent global environment and to reduce income inequality even as it grew elsewhere in Latin America. Yet this glowing image of Brazil rests on an extremely shaky premise: commodity prices. The country has grown largely in concert with surging demand for its stores of oil, copper, iron ore, and other natural resources. The problem is that the global appetite for those commodities is beginning to fall. And if Brazil does not take steps to diversify and boost its growth, it may soon fall with them.

The (Postponed) End of the Dollar Era - Remember "global imbalances"? The lopsided economic relationships between exporting nations like China, Japan, Germany, and the OPEC nations on the one side and importers — mainly the U.S. — on the other were a big topic a couple years ago. Some even argued that they'd caused the financial crisis. But you don't hear nearly as much about them now. I did a quick search on Factiva to verify this impression: 495 mentions of the phrase "global imbalances" in the first three months of 2009; 175 mentions in the first three months of this year. Part of the explanation for the reduced attention is reduced imbalances: The U.S. current account deficit, which measures the gap between what the country takes in from export income, investment income, and cash transfers and what it pays out, peaked at nearly 6% of GDP in 2006 and was down to 3.1% of GDP in 2011. Still, 3.1% is a big shortfall — one that takes hundreds of billions of dollars of new foreign capital every year to finance — and the gap shows no signs of shrinking further. So why does hardly anyone seem worried about it? I would bet it's mainly a case of limited attention: global imbalances haven't caused any obvious problems over the past three years, so everyone has turned their attention to other matters, such as Europe's struggle to deal with its own regional trade imbalances. The issue, and the danger, are still there. We've just had other things to think about. 

Off the Cuff: Chris Martenson and Mish on the Global Economy - Last week I did a podcast on the global economy with Chris Martenson. You can read a synopsis at Off the Cuff with Mike "Mish" Shedlock. Here is a snip. In this week's Off the Cuff, Chris and Mish look at the impact of the recently-released Fed minutes and the worsening situation in Europe (no, the problems there haven't gone away). Spain, in particular, is looking increasingly vulnerable. Its prime minister recently announced that Spain has serious economic problems that are folly to underappreciate (a rare admission for a politician to make). Its latest bond auction saw scarily weak demand, and the interest rates on its sovereign debt have resumed climbing at concerning speed. Nearly 57% of its budget is spent on pensions, unemployment benefits, and debt interest payments! The bailouts have not worked, yet at this rate, another bailout in the near future seems in the cards. Where will this end? And the rest of Europe is faring little better. Portugal and Italy are teetering. Their weakness (along with Spain's, Ireland's, and Greece's) will hit the "stronger" EU countries like Germany -- at the same time that wage price pressure is rising in Germany.  Meanwhile, civil unrest simmers higher in a number of countries. Political backlash against the ruling parties is making it harder for coalitions to form to get real changes made. Demonstrations and outbreaks of violence are on the rise.

The suffocation of unsustainable global debt – Total global debt is now over $190 trillion and more than three times global GDP. The biggest market in the world is the European Union and debt problems are still rippling through the global markets.  It is apparent with the financial crisis that the global markets are tied together by large banks and interconnected trade.  A problem in the largest market should be unsettling and the unemployment rate in the European Union is now at a 15 year high.  The global debt problem was never really solved but papered over with extensions and banking trickery.  The US has dealt with much of the debt issues by suspending major accounting rules and stuffing bad loans into the Federal Reserve like a Christmas stocking.  The European Union is facing some challenges ahead and all eyes will be watching given the impact of contagion impacts.  Greece was only a tiny sliver of the debt issues compared to the major debt restructuring that will be necessary for a large economy like Spain.

Dealing with debt - THE IMF is now releasing chapters from the April edition of its World Economic Outlook and one of them—chapter 3—is quite a nice discussion of the impact of household debt on economic recovery. It's worth reading in full. The chapter begins by explaining that it isn't the housing bust that makes downturns like the Great Recession so nasty, but the fact that the asset price crash occurred after a huge debt boom. A series of charts makes the point: A major housing bust with a minor debt stock adds up to...a minor downturn. Add a load of debt, however, and the situation is much nastier. Why does debt matter? The IMF points to three dynamics. One, which I've discussed here before, postulates two kinds of households—savers and borrowers. After a debt bust, borrowers will pull back on spending to repair balance sheets, and interest rates must fall to encourage savers to spend and invest more or the economy will fall into recession. After a large bust, however, the necessary interest rate may be negative, and the difficulty of achieving a negative interest rate may lead to a deep downturn and a weak recovery. The second dynamic is the firesale aspect of busts, in which falling asset prices prompt panicked sales which cause prices to overshoot downwards, worsening the crash. And third, a debt bust generates knock-on inefficiencies; households with negative equity, for instance, have been found to underinvest in upkeep of their properties.

Bruce Krasting: Houston - We have a problem, in Switzerland: The ‘risk off’ trade is commanding the markets. A subtle, but interesting example is the EURCHF. For four days the EURCHF has held to 1/8th percent away from the official 1.2000 peg. It sits at 1.2016 as I write. Wherever you look, from China to Japan, to the USA, and the EU, trouble is brewing. As currencies go, there is no safe haven left. The Yen has benefited (as I anticipated, Link). There may be more Yen strength ahead as the market turmoil escalates, but I think that the Yen is no longer a safe place to hide. On the other hand, Switzerland’s economy is doing very well, thank you. Its economy is growing and it has low unemployment. Thanks to an artificial exchange rate, (The Peg), it is still maintaining a trade surplus with its poorer neighbors. There is evidence that money continues to poor into Switzerland. Six month T-bills are now trading at -25%. That the short end of the curve is trading at negative levels is not all that surprising, but the Swiss two-year went negative earlier today:

MMT, Functional Finance and Dirigisme – Sketch of an Alternative Economic Approach for Developing Economies - One of the main concerns with implementing economic policy in developing countries is inflation. Many of these countries do not have sufficient productive capacity to ensure that their population is able to consume the goods and services they desire when their living standards rise. This often leads to rising imports, currency devaluation and inflation when policy is geared toward rising incomes. These are some of the problems that Randy Wray dealt with in his recent post on a jobs guarantee program as it might be implemented in developing countries. Wray says that in order to overcome inflation from higher incomes, the program should be implemented very gradually. While this seems like a sensible approach I think that Wray is being slightly too modest about what sort of policies Modern Monetary Theory (MMT) can facilitate to ensure both full employment and price stability. MMTers make the claim – following in the footsteps of Abba Lerner – that the government budget should not be subject to any sort of arbitrary balancing constraint. Instead Lerner and the MMTers advocate that the government budget balance should be conceived of strictly from the point-of-view of real economic variables. Thus, if there is unemployment the budget should be unbalanced, while if there is high inflation due to output capacity being outpaced by demand the budget should be moved closer to balance or even, in certain cases, into surplus. Lerner referred to this approach as ‘functional finance’.

Sociopaths, closed minds and a bit of Mayan cosmology - There was an article in the EU Observer this week (April 3, 2012) – EU ‘surprised’ by Portugal’s unemployment rate – which I had to re-read a few times to check that I was actually reading the words correctly. The dialogue presented was so shocking that it raises fundamental questions about how one is interact with the economics debate.  Closed minds are very resistant to change especially when socio-pathological dimensions are present. Which led me to investigate Mayan cosmology after being accused of being a practitioner of the art! Overall, another week in the life of a Modern Monetary Theorist (MMTist) – par for the course really. The latest Eurostat Labour Force estimates (for February 2012) – Euro area unemployment rate at 10.8%. which came out earlier this week and which I reported on in this blog – Policy failure in Europe scales new heights – were very scary. The data shows that overall unemployment and youth unemployment (under 25′s), in particularly, has risen dramatically over the last 12 months in many EMU countries.

IMF: Supply of Safe Assets Shrinking - Worries about nations’ fiscal health could cut the world’s supply of “safe” government debt by 16% in the next four years, the International Monetary Fund said Wednesday. The diminishing supply comes even as demand rises for safe assets such as high-quality corporate bonds and sovereign debt, which many banks and investors need amid market uncertainty and regulatory changes. The shrinking pool of safe assets could create more worries about financial stability, the IMF said. “Safe asset scarcity will increase the price of safety and compel investors to move down the safety scale as they scramble to obtain scarce assets,” the fund said in its Global Financial Stability Report. “It could also lead to more short-term spikes in volatility, and shortages of liquid, stable collateral that acts as the ‘lubricant’ or substitute of trust in financial transactions.”  The IMF called its analysis the first “comprehensive, integrated view of the global demand and supply pressures” for safe assets. It comes after a year of turmoil in markets that brought credit-rating downgrades to a number of countries, including the U.S., whose debt had long been considered risk-free.

The IMF on the bleak near-future of the safe asset shortage - It’s chapter three of the latest Global Financial Stability Report, and it is especially good on the varying roles of safe assets in global financial stability, mispricing before the crisis and the decline in quantity since, and the tricky path ahead for reform. – From the introduction, how’s this for a strong declarative opening… In the future, there will be rising demand for safe assets, but fewer of them will be available, increasing the price for safety in global markets. In principle, investors evaluate all assets based on their intrinsic characteristics. In the absence of market distortions, asset prices tend to reflect their underlying features, including safety.However, factors external to asset markets—including the required use of specific assets in prudential regulations, collateralpractices, and central bank operations—may preclude markets from pricing assets efficiently, distorting the price of safety. Before the onset of the global financial crisis, regulations, macroeconomic policies, and market practices had encouraged the underpricing of safety.Some safety features are more accurately reflected now, but upcoming regulatory and market reforms and central bank crisis management strategies, combined with continued uncertainty and a shrinking supply of assets considered safe, will increase the price of safety beyond what would be the case without such distortions.

Safety Second (Wonkish) - Krugman - The “safe asset shortage” meme has been gathering force lately, and is now the theme of a report from the IMF (pdf). The idea is that low long-term interest rates for the United States, the UK, and basically every country with its own currency that doesn’t have large foreign-currency debts reflect the desperate search of investors for something safe to buy. So, can I express some skepticism? I don’t think this is wrong, exactly, but I suspect that the search for safety is a distinctly secondary factor here. Surely the main point is that the major economies seem likely to remain depressed for a long time, and that as a result short-term interest rates are likely to stay low for a long time too — which means that long rates, which largely reflect expected short rates, are low right now. Consider, as you always should in these times, the example of Japan. Here’s 15 years of 10-year interest rates: That’s an extraordinarily low rate for a very long time — a low rate that persisted, by the way, despite downgrades from rating agencies and a more or less continual flow of claims that Japanese debt problems were going to come home to roost any day now. So what explains this? Safe assets didn’t seem to be in short supply in, say, 2005, when investors believed in the virtues of toxic waste. But the key point about Japan is that anyone who bought and held those bonds made money, because short rates were close to zero throughout.

The European Growth Outlook and Its Risks - NY Fed - As Europe continued to struggle with its sovereign debt crisis during the past two years, significant concerns about the growth outlook for European Union members began to emerge in late 2011. In response, the European Central Bank (ECB) and European authorities carried out a series of important policy initiatives. In this post, we use growth forecasts from an ECB survey to document the deterioration in the growth outlook and note parallels to late 2008—when Europe was in a deep recession. We also discuss how the next survey scheduled for release in May can be used to gauge whether recent policy actions have improved the growth outlook and reduced the uncertainty surrounding it. As seen in the chart below, real GDP in Europe is still several percentage points below its peak prior to the recession that extended from first-quarter 2008 to second-quarter 2009 (indicated in grey shading).

Greece Industrial Production Continues to Fall —Greece's industrial production fell sharply in February on lower demand for local products from abroad, data showed Monday, pointing to a further contraction of the country's recession-ravaged economy. The Hellenic Statistical Authority, also known as Elstat, said that industrial production fell 8.3% on the year in February, after declining by a revised 6% in January and a 11.9% drop in December. The continuing slump points to a further downturn in Greece's economy, which the European Commission expects to shrink by an annual pace of 4.7% in 2012, its fifth straight year of recession.

It's Time To Panic About Europe Again - Europanic is back in style. After a monthslong reprieve initiated by the European Central Bank’s decision to offer the continent’s banks nearly unlimited quantities of low-interest medium-term loans, the sovereign debt crisis has returned. This time ground zero is Spain rather than Italy, but the pattern is familiar. Interest rates on Spain’s debt went up a little, putting further strain on Spain’s budget. That called its solvency into question and pushed up rates further still. And as interest rates rise, Spanish banks’ viability comes into doubt, squeezing credit to the domestic economy and further weakening the budget. Depending on how you look at it, it’s a sovereign debt crisis, a banking crisis, or a simple growth crisis, but in any case, there is a risk of national default, total bank meltdown, and perhaps the collapse of the single currency or even the larger European project. If resolving the underlying problems with Europe’s economic framework were easy, it would have been done already. Solving hard problems takes time, so stopgap time-buying measures are welcome. The trouble is that months later, not only are the fundamental issues still with us, it’s difficult to say that any progress at all has been made.Simply put, Europe’s current institutions are unworkable. The aim of kicking the can down the road must be to create better ones.

Spanish and Italian Banks, Once More Buying Bonds, Seen as Vulnerable -  Only a few months ago, banks around the world were scrambling to sell piles of European government bonds that had lost value as the Continent’s sovereign debt crisis flared.  While the fear has eased since then, warning lights are blinking again in Spain and Italy — the two countries considered most susceptible to a second round of problems — amid signs that banks there are once more loading up on the sovereign debt of their governments.  New data shows that Spanish and Italian banks have been buying such debt in record amounts after the European Central Bank lent financial institutions billions in cheap money over the winter in the hopes that banks would buy more bonds from their own government to tamp down national borrowing costs, which had earlier shot toward the high levels that forced Greece to take a bailout..  From November to February, Spanish banks increased their holdings of government securities by 68 billion euros and Italian banks by 54 billion euros, both buying especially debt from their own countries. But while the purchases pushed down national borrowing costs, and have so far helped Spain and Italy avoid asking their European partners for a financial lifeline as Greece did, the effect has been to raise new risks by tying the health of the banks to the fate of their governments.

Inconsistencies in Spain's Budget Suggest Deficit will be 7% not 5.3%; Andalucia Regional Government Will Not Agree to Deficit Targets; Only 26% Trust Prime Minister to Overcome Crisis - Courtesy of Google translate, please consider The inconsistencies of the State Budget for 2012 Much is written these days about the budget submitted by the Government for 2012, which proposes that the deficit be lowered to 5.3% of GDP. In this article we focus not on a comprehensive analysis of these items but in both revenue and expenditure forecasts which seem less realistic. The first of these items is to transfer the SPEE (State Employment Service, former INEM). The government budgeted a reduction of 15.6% (2,464,000), arguing that many are unemployed benefits are ending.  Since the Government is assuming that unemployment will increase this year over 600,000 people, there is no reason for us to see a turnaround, quite the contrary. In view of the numbers a reasonable assumption would be a 10% increase in unemployment benefits starting in 2012. This means a delay of nearly 4,500 million from the budget, ie 0.4% of GDP. A second item of expenditure in which there are serious inconsistencies is Social Security. In the Budget is expected to increase costs (which are mainly pensions) of 0.9%. This assumption might have been possible if the pension had not been updated with the CPI, but in current circumstances is totally unworkable. In fact, the costs to February are up 3.7%. This would lead to a lag in the game cost about 3,300 million.

Debt-laden Spain eyes charging rich for healthcare (Reuters) - Spain is considering charging the rich for healthcare as it reforms its highly regarded and deeply indebted public health system, Economy Minister Luis de Guindos said on Monday, as the country struggles to show it can rein in its spending. De Guindos has stressed debt-laden Spain's commitment to reform in a string of interviews with international media in the last week, as the euro zone's fourth-largest economy tries to persuade the markets it can avoid a bailout the 17-nation bloc may not even be able to afford. Next on the agenda is reform of the healthcare system, which is 15 billion euros ($20 billion) in debt. Prime Minister Mariano Rajoy's office estimated 10 billion euros could be saved from spending on healthcare and education. That compares with 27 billion euros in cuts unveiled in the 2012 budget last week to comply with a target to cut the deficit to 5.3 percent of gross domestic product from 8.5 percent in 2011. "We need to cut out unnecessary costs, rationalise areas that are not working well, because if we don't, we won't guarantee the sustainability of the system," de Guindos said

Post-break, Spain yields resume march higher - Investors returning from the Easter break on Tuesday took fresh aim at Spanish bonds, pushing yields to new highs for the year, as the market brushed aside the latest measures by the government to meet fiscal targets. Yields on 10-year Spanish government bonds jumped 19 basis points to 5.93%, the highest level since late November. Yields for 10-year Italian government bonds also surged, up 31 basis points to 5.67%, a level not seen since mid-February. Pressure remains on Spanish yields Meanwhile, the yield premium demanded by investors to hold 10-year Spanish bonds over German bunds of the same maturity widened to 4.28 percentage points from 3.87 percentage points last Thursday, according to FactSet Research. Yields last week reached levels not seen since just before the European Central Bank kicked off its long-term refinancing program, or LTRO.

Spanish 10-Year Bond Yield Hits 5.99% as Official Denials in Spain Escalate; "Bailout" on the Way - From Iibre Mercado with an assist from Google translate, please consider Fear pervades the Government: "We do not need a bailout" Fear among members of the Government. Featured Rajoy government ministers and Governor of the Bank of Spain have ruled on Tuesday block the possibility that Spain required some kind of international rescue. The Minister of Finance and Public Administration, Cristobal Montoro, has said that the Government did not seek help from European Rescue Fund to clean up the Spanish banks have a liquidity cushion "considerable" after having gone to the European Central Bank auction (ECB) held in December and February. In this sense, told RNE by Europa Press, the finance minister denied that the government will opt for this possibility to help Spanish banks, as is exploring other. "We are studying the possibilities we have in hand as a government, "he assured Montoro, "We have to obtain and circulate the money, we are already exploring ways to accelerate the restructuring of banks in our country," said Montoro, while predicted changes in terms of bank mergers "increasingly committed to the supply of credit" .

21 Percent Increase in Number of Spanish Businesses Filing for Bankruptcy - More than 1,600 Spanish firms declared insolvency in the first quarter, a rise of 21 percent over the same period in 2011, PricewaterhouseCoopers said Monday in a report based on official data. Adding in personal bankruptcies brings the figure to 1,958, the highest quarterly total in eight years. The regions of Madrid, Valencia and Catalonia, which includes Barcelona, led Spain in bankruptcies in the first quarter, while the largest annual increase - 93 percent - was in the northwestern region of Galicia. The construction, real estate and service sectors accounted for nearly 60 percent of business insolvencies in the January-March period, PwC said. Most of the failing firms had assets of less than 2 million euros ($2.6 million).

Spanish banks 'need more capital' - Spain's banks may need more capital if the economy deteriorates, the head of the central bank said today, reflecting fresh concerns that some might not survive a recession made worse by the government's austerity drive. Spanish lenders were bruised by the 2008 property crash and have been under scrutiny since the euro zone debt crisis deepened last year. But a recent surge in loan defaults in other sectors has put them back under the spotlight again. Investors are worried the banking troubles may force Spain to take a bailout like Greece and neighbouring Portugal and sold Spanish bonds today, sending yields up to levels not seen since December. The government has ruled out a bailout and prime minister Mariano Rajoy announced new spending cuts yesterday in a bid to meet a stringent European Union deficit limit.

Slow Road to Hell: Spain Entertains VAT Hike - Of all the inept policy moves in the midst of a clear depression, hiking taxes is right at the top of the list. Yet, that is the path Spain is on, because it will not meet its budget projections. Here is a link to an amusing "as is" Google translation of an article on El Econimista whose headline reads "The Government will raise the VAT if they fail the current fiscal". Gonzalo Lira who lives in Chile graciously supplies the gist of the entire article: The upshot of the piece is that if the tax amnesty doesn't work, Spain will somehow have to raise money to meet the Brussels-imposed deficit targets for 2012 and 2014.  However, the Spanish government is loathe to raise taxes, much less the VAT, because the government is aware of how counterproductive to the economy raising the VAT would be. Tacitly, it sounds like they're worried about a popular backlash to raising the VAT, or any other tax. Nevertheless, Brussels is pushing for tax increases.

LTRO Failure Full Frontal As Spain 10 Year Approaches 6% Again - Spain (and less so Italy) has decompressed to its worst levels of the year (5.96% yield and 425bps spread on 10Y) has now lost all of the LTRO gains as the curves of these liquidity-fueled optical illusions of recovery bear-flatten (as front-running Sarkozy traders unwind into the sad reality - most specifically for Spain - that we described in glorious must read detail here). Divergence and decoupling remain sidelined also as Deutsche Banks' Jim Reid notes the 4-week rolling beat:miss ratio in the US macro data has fallen to 24%: 73% (3% in line) from a recent peak at a string 70%:30% on February 29th. His view is still that in a post crisis world, especially as severe as the one we've just been through, Western growth is going to continue to be well below trend for many years and with more regular cycles. With Spain teetering on the verge of a 6% yield once again, we are still off the record wides from late November but not by much as the vicious cycle of sovereign-stress-to-banking-stress-to-banking-stress re-emerges in style. The European situation is still incredibly political and while we'd expect much more intervention down the line, expect the discussions and rhetoric to be fairly tough. The ECB last week indicated that they felt the recent widening in Sovereign spreads was more due to sluggishness in the pace of reforms. They are therefore unlikely to intervene in a hurry. So if Europe does need further intervention it is likely to need to get far worse again first.

Spain Is on the Bleeding Edge of a New European Crisis - Things are unraveling in Europe at a startling pace. The country in the greatest danger is Spain, which could become the fourth member of the euro zone to require a bailout, following Greece, Ireland, and Portugal. Spain’s 709 billion euros of sovereign debt is roughly twice the debt of those three nations combined, according to data compiled by Bloomberg, so a rescue of Spain would be a heavy burden for the rest of Europe. Investors got overconfident in Spain after the European Central Bank announced last December that it would funnel cheap, three-year loans to European banks, which they could (and did) use to invest in the debt of their own nations. The ECB lent more than 1 trillion euros. Spanish government 10-year yields, which were over 7 percent last November, plummeted to below 5 percent this January and February. They have raced back upward, to just below 6 percent in recent weeks. Spain’s yields started jumping in early March, after Prime Minister Mariano Rajoy announced that the government budget deficit would miss the 4.4 percent of gross domestic product target that the previous administration had agreed to with the European Union. The problem is that the easy money from the ECB didn’t do anything to fix Spain’s fundamental problem—overindebtedness and an uncompetitive economy that, because of the common currency, can’t use depreciation as an escape hatch.

Spain's Lost Generation Looks Abroad - The 35-year-old biologist has had to move north to France for work she couldn’t find at home. “It was clear to me as soon as I finished my thesis I’d be packing my bags,” says Artells, who found a research post at the University of Aix-Marseille after completing her doctorate last year. “For my mother, it’s very difficult. Everything we’ve fought for since the dictatorship is being wrecked.” Across Europe, parents who assumed that after World War II each generation would be better off than the last are watching the debt crisis sweep aside those certainties. Greek teachers and state workers no longer have jobs for life, students at British universities face U.S.-style tuition, and the French have had to join other Europeans in retiring later. Politicians across the 27 European Union countries are adopting austerity measures that come to about €450 billion ($600 billion), according to data culled from government announcements. “Western European society cannot continue in the way it has been,” says Gabriel Stein, a director at Lombard Street Research, an economic analysis firm. “We have reached a limit to how much can realistically be done through the public sector.”

Monti’s Overhaul of Italy Can’t Stop Pain From Spain - Prime Minister Mario Monti’s efforts to overhaul the economy and protect Italy from the region’s debt crisis may be overwhelmed by Spain’s deepening fiscal woes and the fading effect of European Central Bank three-year lending. Monti sent parliament last week a plan to revamp the labor markets, which represents the most ambitious of his four major legislative efforts to make the Italian economy more competitive. The draft law was greeted on April 4 by a 9 basis point increase in the country’s 10-year bond yield to 5.43 percent as Spain’s debt slumped on renewed concern the country would need a bailout. “Spain and Italy are two different countries, but the problem is the two bonds are highly correlated because they share similarities,” “Both countries’ economies are going to contract this year.” Italian borrowing costs fell more than 2 percentage points between Monti’s appointment in November and the start of March as ECB lending and his efforts to spur an economy where growth trailed the euro-region average for a decade shored up demand for the nation’s debt. Now, Spain has revived contagion concerns after the government abandoned its deficit target, contributing to four weeks of declines for Italian bonds.

Spain’s 'lose-lose' struggle reignites euro crisis - The eurozone crisis has returned with a vengeance after Spain’s mounting woes pushed 10-year bonds yields back to the danger line of 6pc and the Madrid bourse crashed to its lowest level since the 2009.Markets took no notice of fresh austerity pledges from premier Mariano Rajoy, including new cuts worth €10bn in health and education - seen as a belated move to salvage Spain’s credibility after a spat with Brussels over fiscal slippage. Mr Rajoy said the bond attack should dispel the illusions of those who think Spain can muddle through without serious austerity. "Markets can decide to lend or not to lend, and they can do so at a rate that is affordable or not," he said. The country’s borrowing costs have jumped 100 basis points since February, when the European Central Bank last flooded banks with liquidity under its three-year lending scheme (LTRO). "The LTRO was supposed to be the game changer but the stimulus has worn off. It looks like it is falling apart at the seams," . A disastrous debt auction last week was taken as a sign that Spanish banks have exhausted their LTRO money and can no longer prop up the Spanish state through this back-door funding, leaving the country nakedly exposed. Other buyers are scarce after the EU imposed a 75pc haircut on investors in Greece.

Black Market in Spain: Cash Transactions Exceeding 2,500 Euros Now Banned - Things are going so "well" in Spain that the Government banned cash payments in excess of 2,500 euros Via Google Translate from Libre Mercado ...The Prime Minister, Mariano Rajoy, has announced on Wednesday that the plan to combat tax evasion on Friday approved the Cabinet prohibit the payment in cash transactions of over € 2,500 and n which at least involved a businessman professional. During the control session the Government in the House of the Congress of Deputies and in response to a question about the tax amnesty made by the general coordinator of IU, Cayo Lara, the Prime Minister has revealed that those who violate the ban will face fines of 25% of the payment made ​​in cash. This measure aims to prevent the use of black money in commercial transactions and, in the case of companies, give them an obstacle to not resort to false invoices. The plan to combat fraud adopted on Friday, the Cabinet intends to raise up to 8.171 million euros in 2012.

Investors run scared of Spain's battered banks - Spain's banks are fast joining the ranks of the most unloved in Europe just as many need to raise capital urgently, deserted by investors who believe the country is on the brink of a recession that many lenders will not survive.   The government has ruled out more state aid for a sector that comprises a motley mix of international lenders and heavily indebted local savings banks. That leaves two options: raising private capital or turning to the EU for bailout funds. Prospects for a private sector solution are poor. Nothing on the horizon looks likely to persuade foreign fund managers to invest, such is the fear of the banks' growing bad loans, their holdings of shaky sovereign debt and the worsening economy.   Already battered by a property market crash that began four years ago and continues unabated, few Spanish banks are able to borrow funds on wholesale credit markets and the majority are instead relying on the European Central Bank.

Hazards, moral and otherwise -  Many euro-zone officials appear to have an acute awareness of the dynamics of moral hazard. Step in to minimise the damage wrought by markets scared of a country's debt, they say, and that country's government will feel it has a license to budget recklessly. We must always be conscious of the incentive effects of our actions, they lecture. Well let's be conscious then. Say you're an economy that entered the crisis with a low and falling debt-to-GDP ratio, but which was nonetheless swept into the broad peripheral bond-market panic. Say that, despite your low debt level, euro-zone officials have consistently demanded of you ever stricter austerity programmes. Then say that these programmes failed to win market confidence (since overall indebtedness was hardly the cause of your initial troubles), and that the recession they generated has undermined whatever positive fiscal impact they might have been expected to have. What incentives do you face? It seems clear that markets will attack whether or not you hack away at deficits, so why not postpone austerity? You might observe that your bond yields are primarily governed by expectations of future central-bank rescues and worry that a failure to embrace austerity will lead the ECB to withhold support. But so what? You, Spain, are too big to default, and the ECB has yet to reward your budget cuts with sustained relief from market pressures. What is the payoff to sticking with the austerity plan? Euro leaders have worked hard to guarantee that there isn't much of one.

French economy grinds to a halt - France’s economy posted no growth in the first quarter and there are no signs of a strong recovery in activity in the coming months, according to a Bank of France survey on Tuesday. In its monthly report, the Bank of France indicated that the euro zone’s second largest economy avoided a recession, after it grew by 0.2 percent in the fourth quarter. However, it said that activity was likely to remain stable in the coming months, a picture confirmed by soft manufacturing data on Tuesday from the INSEE national statistics office.  The Purchasing Managers’ index (PMI) data last week showed the biggest decline in factory activity for 33 months in March, after briefly stabilizing in February. The Bank of France said that its business sentiment indicator for industry was unchanged in March at 95, a 3-month low it reached in February. It noted that industrial activity improved, with rises in pharmaceuticals and chemicals, transport equipment and hi-tech goods. “Forecasts suggest that activity will remain stable in the short term,” the bank said.

Rats on Sinking Ship Scramble for Last Exit; Get While the Gettin' is Still Possible Like rats on a sinking ship, the Greek prime minister Lucas Papademos seeks his exit before the total and complete destruction of Greece.  The New York Times reports Snap Elections for Greek Parliament Are Set for Early May Greece’s interim prime minister, Lucas Papademos, called for snap elections on Wednesday, opening the way for a contest that promises to be the most fiercely fought in decades but which might not yield a definitive result, potentially putting the debt-racked country’s international bailout plan in jeopardy.  In a televised address to the nation on Wednesday night, Mr. Papademos said he had gained the approval of President Karolos Papoulias to dissolve Parliament and go to elections on May 6.“The current government has completed the key task that it was assigned,” he said. “A new government, with a fresh popular mandate, will be tasked with continuing the effort to reconstruct the economy.”  Public anger has been swelling against the politicians who approved austerity measures and are perceived as having created the dysfunctional state that created the conditions for the debt crisis.

Half of Greek youths are unemployed..One in five of the population is jobless – Greece’s jobless rate rose to a record of 21.8 per cent in January, twice as high as the euro zone average, statistics service ELSTAT said on Thursday, as the debt crisis and austerity measures took their toll on the labour market. Youth unemployment remained at levels where more are jobless than in work. Budget cuts imposed by the European Union and the International Monetary Fund as a condition for saving 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 17.7 per cent from 12.5 per cent in the previous year, according to ELSTAT figures. December’s rates were 21.2 per cent. For the second consecutive month, those between 15 and 24 years old were hit hard. Unemployment in that age group stood at 50.8 per cent, twice as high as three years ago. Greece’s economy is estimated to have shrunk by about one-fifth since 2008, when it plunged into its deepest and longest postwar recession. About 600,000 jobs, more than one in 10, have been destroyed in the process.

Another Nail In The Greek Coffin: Cheap, Migrant Workers Are Now Returning Home To Albania - Four months ago we presented what was easily the clearest and most undiluted by media propaganda clue about the future of the European experiment, when we noted that even immigrants from places such as Afghanistan and Bangladesh, using Greece as a stepping stone onward to the gateway Shengen country of Italy, no longer have the urge to pursue their European dreams, and instead return home. As Art Cashin explained, "Over the decades, immigrants from Afghanistan, Bangladesh and other poor nations would work their way to Patras. They would stay for days or weeks awaiting a chance to smuggle themselves on to a freighter headed for Italy. Once there, they could make their way north into Europe to find hope and opportunity and maybe a job. Last week his relatives told him that things were changing. The immigrants still come to their way station of Patras (hope still blooms). But now, after a couple of weeks in Greece, they are trying to hop ships going the other way. They are going back home. Life was better, or at least no worse, where they came from and they had friends and family for support back there."

Dispatch from Greece: Translation of Austerity Suicide Note Left By Pensioner Dimitris Christoulas - The collaborationist Tsolakoglou [see note below —eXiled] government has annihilated my ability for my survival, which was based on a very dignified pension that I alone (without any state sponsoring) paid for 35 years. Since my advanced age does not allow me a way of a dynamic reaction (although if a fellow Greek was to grab a Kalashnikov, I would be the second after him), I see no other solution than this dignified end to my life, so I don’t find myself fishing through garbage cans for my sustenance. I believe that young people with no future, will one day take up arms and hang the traitors of this country at Syntagma square, just like the Italians did to Mussolini in 1945

Far-Right Golden Dawn Sees Opening in Greece’s Woes - On a recent morning in the upper-middle-class neighborhood of Papagou here, members of the Greek ultranationalist group Golden Dawn stood at an outdoor vegetable market campaigning for the coming national elections.“This is our party’s program, for a clean Greece, only for Greeks, a safe Greece,” Ilias Panagiotaros, the group’s spokesman and a candidate for office, said as he handed out leaflets. He approached an older woman, who recounted how a relative had been robbed of about $800. “They threw her on the ground, they took the 600 euros she had withdrawn from the bank to pay for her husband’s nursing home,” the woman said. “She was even a Communist, and she told me, ‘I’m going to Golden Dawn to report this.’ ” The exchange was a telling sign of how the hard-core group — better known for its violent tangles with immigrants in downtown Athens and for the Nazi salutes that some members perform at rallies — has been trying to broaden its appeal, capitalizing on fears that illegal immigration has grown out of control at a time when the economy is bleeding jobs. Many polls indicate that in the national elections scheduled for May 6, Golden Dawn may surpass the 3 percent threshold needed to enter Parliament. The group has been campaigning on the streets, something that mainstream politicians have avoided for fear of angry reactions by voters who blame them for Greece’s economic collapse.

Is austerity self-defeating? Of course it is - (A commentary in the VoxEU Debate on the Global Crisis - Has austerity gone too far?) The main argument of Giancarlo Corsetti’s article is that, in the short term, both fiscal austerity and “sovereign” risk have a contractionary impact in the short-term; the optimal policy for countries which require  fiscal adjustment  is hence to steer between the Scylla of excessive short-term fiscal contraction, which will reduce demand and output; and the Charybdis of a loss of market confidence in government debt, with knock-on impacts on risk premia for private sector borrowing and hence will also damage the real economy. Not a comfortable situation. At one level this is obvious.  At another level, however, it is misleading, and, if taken seriously by policymakers, potentially damaging, for three reasons. First, it fails to distinguish between Eurozone countries and those that have monetary sovereignty, for which these tradeoffs, at least in this form, simply don’t apply. Second, it fails, for the former, to correctly identify the source of sovereign risk, and hence risks prescribing policies that will be ineffective if not damaging.  And third, it treats individual countries as if they were making independent policy decisions –when, of course, this crisis is a Eurozone crisis and needs to be addressed as such.

Why Germany Should Leave the Eurozone -Most discussion about a potential breakup of the Eurozone assumes that Greece and other financially troubled countries would be the ones who ended up abandoning the common euro currency. But there’s a compelling alternative to that conventional wisdom – that the true problems of the Eurozone could be best addressed if Germany were the one to leave, accompanied, perhaps, by a few other rich countries. The argument for the weak countries leaving is that they would be able to escape the austerity policies imposed by Germany. Once they had abandoned the euro, their new national currencies would quickly depreciate, making their economies more competitive internationally because their exports would be cheaper for foreigners to buy. The trouble with this conventional scenario is that it rests on a couple of big misconceptions  – namely, that the chief problems of the weak countries are budget deficits and debt, and that if budgets are balanced and debt is managed down, those countries will be able to make interest payments on their bonds and the banks that own those bonds won’t have to suffer big losses. In reality, though, the biggest problem of financially troubled European countries is not debt, but high labor costs. Those countries will never be able to compete economically until they get their labor costs down significantly. And it’s very difficult politically to get workers to accept 10%-to-20% wage cuts.

Reversing Europe’s Renationalization - George Soros  – Far from abating, the euro crisis has taken a turn for the worse in recent months. The European Central Bank managed to relieve an incipient credit crunch through its long-term refinancing operation (LTRO), which lent over a trillion euros to eurozone banks at one percent. This brought considerable relief to financial markets, and the resulting rally obscured underlying deterioration; but that is unlikely to last much longer. The fundamental problems have not been resolved; indeed, the gap between creditor and debtor countries continues to widen. The crisis has entered what may be a less volatile but potentially more lethal phase. At the onset of the crisis, the eurozone’s breakup was inconceivable: the assets and liabilities denominated in the common currency were so intermingled that a breakup would cause an uncontrollable meltdown. But, as the crisis has progressed, the eurozone financial system has been progressively reoriented along national lines.This trend has gathered momentum in recent months. The LTRO enabled Spanish and Italian banks to engage in very profitable and low-risk arbitrage in their own countries’ bonds. And the preferential treatment received by the ECB on its Greek bonds will discourage other investors from holding sovereign debt. If this continues for a few more years, a eurozone breakup would become possible without a meltdown – the omelet could be unscrambled – but it would leave the creditor countries’ central banks holding large, difficult-to-enforce claims against the debtor countries’ central banks.

Italy borrowing costs double as euro debt concerns resurface - Eight billion euros in 12-month bonds were sold at a rate of 2.84 percent -- far higher than the 1.492 percent paid in March while three billion euros due July 2012 went at 1.249 percent compared to 0.492 percent last month. Borrowing costs had been on the decline in recent months after Prime Minister Mario Monti came to power in November, replacing Silvio Berlusconi who was ousted by a parliamentary revolt and a wave of financial market panic. Investor jitters have returned to the markets this week due to mounting fears over global growth prospects following weak Chinese trade and US jobs data, as well as doubts over debt-laden Spain's ability to control its finances. Stocks were performing relatively well, however, with the FTSE Mib index up 1.54 percent -- but this was a technical rebound to Tuesday's plunge of 4.98 percent led by a drop in bank shares, making it the worst performer in Europe. "Even though demand was stable as expected, the operation was impacted by the reigniting of tensions on eurozone sovereign debt and saw a sharp rise in rates," the Bank of Italy said in a statement.

Spain Bond Yields Rise, Reviving Fears of a Renewed Euro Crisis - Spain’s borrowing costs rose Tuesday to levels not seen since early January, raising concerns that the financial crisis in Europe was heating up again after a lull. Stock markets closed sharply lower across the region. The latest market anxieties come on the heels of a Spanish bond auction on April 4 that barely met the minimum amount sought, a sign that some investors worry that Spain might eventually follow Greece, Ireland and Portugal in seeking a bailout. Spain is entering its second recession in three years, and the government expects the economy to contract about 1.7 percent in 2012. With unemployment of around 23 percent, there is fear that austerity measures, deemed critical for winning back market confidence, could have the perverse effect of further depressing growth and creating a vicious cycle in which more budget cuts are needed to balance the public books. On Tuesday, however, Luis de Guindos, the economy minister, insisted that the government would not be distracted by short-term market fluctuations and would stick to the austerity program needed to put Spain back on track for meeting its deficit-cutting targets. He also played down the significance of the disappointing debt auction, noting that the Treasury had already met almost half of its debt-sale goals for the full year.

Spanish Debt Protection Costs Rise To Near Record - The cost of insuring Spanish debt against default rose to near record highs early Wednesday as negative sentiment around the sovereign continues on renewed concerns over its economic and political situation. Spain's five-year credit default swaps--derivatives investors can buy as protection should creditors fail to meet their obligations--were at 485 basis points, just off the record of 487 basis points hit on Nov. 23, according to data-provider Markit. The current level was eight basis points wider from the close Tuesday. Spanish industrial production figures came in today and as expected, they were weak. February industrial output declined by 5.1% on the year, compared to a decline of 4.3% in January. The Spanish Prime Minister is due to address his party this afternoon on the recently proposed budget cuts, but market participants are concerned that deficit targets will not be reached and that external aid will be necessary. .

Spain and EU reject talk of bailout -- Spanish ministers and European Union officials took turns on Tuesday to deny that the country needed an international bailout, in an effort to soothe the bond market. Investors have taken fright at the size of Spain's budget deficit, the rise in its public debt and the weakness of domestic banks. Luis de Guindos, the economy minister, ruled out a bailout of the kind already provided to Greece, Ireland and Portugal by the EU and the International Monetary Fund, saying Spain "does not need a rescue at this time".Cristóbal Montoro, the budget minister, rejected suggestions that Spain could turn to the EU to prop up its banking system, saying the liquidity provided by the European Central Bank was already substantial. Despite a sharp sell-off in Spanish sovereign debt and equities, senior EU officials insisted there had been no discussions about assisting Madrid with aid from the eurozone's €500bn rescue fund. Instead, Brussels was pushing the government to implement the tough reforms already announced. "The key now is that they stay the course and keep their nerve and implement their decisions," said one EU official involved in talks with Madrid. "They're dealing with the issues head-on.

Spain Has Only Denial - There seems to be a pattern emerging as stressed Eurozone nations struggle against the austerity based policy that slowly strangles them. The first stage is a denial that anything is wrong, the second is that there is some problems but with renewed vigour the issues will be solved and the third stage is when reality finally begins to sink in that the country is in serious trouble and some form of external “help” is inevitable. Given the recent denials by the Spanish economics minister I would suggest we are somewhere between stage 2 and 3 for Spain: A European bailout for Spain is not on the table and would be the worst possible outcome for the country’s debt troubles, Economy Minister Luis de Guindos said in an interview with state radio late on Thursday. De Guindos blamed the sharp rise in spreads on general market nerves about the lack of growth in European economies and said the issue was not restricted to Spain. Borrowing costs for countries and the private sector were not sustainable at these levels, he said. Overnight statements from the Spanish authorities became a bit more direct as they politely asked the rest of  Europe to keep their mouths shut about the country’s economic issues: Spain urged its EU peers to be “prudent” when making comments about its economic woes on Wednesday following criticism from France and Italy, even as it got praise for its reforms from across the bloc

Deja Vue All Over Again; ECB Says Bond Buying Program Available; Sweet Talkin' Guys - The ECB went from loading up on sovereign debt and making a huge mess of it when Greece defaulted, to the LTRO program which has not made a big mess yet but will. Things are about to go full-circle as the ECB threatens once again to make another mess of things with sovereign bond purchases. The Bundesbank, Germany's central bank protested bond purchases the last time (correctly), and will do so again, likely to no avail, and with the same predictable results. CNBC reports ECB Official Says Bond-Buying Program Available ECB Executive Board member Benoit Coeure, the ECB board member in charge of market operations, said the central bank still had the Securities Market program (SMP) in place allowing it to purchase debt of euro zone nations, should the need arise. "We are seeing today growing signs of normalization on a whole group of market segments ... but the situation in recent days shows that this normalization remains fragile," Coeure told a conference in Paris. Referring to Spain, where sovereign debt yields have spiked amid concerns over the government's ability to cut its deficit, Coeure said: "The political will is there, which makes me think that what is happening at the moment in the market does not reflect the fundamentals."

ECB ‘pixie dust’ takes heat off Spain, Italy bonds —The borrowing costs of Spain and Italy got a break on Wednesday after a European Central Bank official sparked speculation over a potential restart of the bank’s bond-buying program, a day ahead of yet another euro-zone auction hurdle for markets. “Will the ECB intervene? We have an instrument for intervention, the SMP (Securities Market Programme), which has not been used recently but which exists,” the ECB Executive Board Member Benoit Coeure reportedly said in response to questions from reporters at a conference in Paris on Wednesday. While Coeure made no specific comment about a restart of the so-called bond-buying program—something that has gotten the thumbs-down from the Bundesbank as well as some other ECB members in the past—it was enough to get the market to ease up on yields for Spanish and Italian 10-year government bonds in secondary markets. Yields for Spain fell 13 basis points to 5.81%, after a day earlier jumping 19 basis points to 5.93%. The 6% level is what many are watching, as the worry is such high borrowing costs could prompt the need for a bailout. And that’s one the euro zone can’t afford, given that Spain’s economy is nearly twice that of Greece, Ireland and Portugal combined.

Italy Borrowing Costs Jump to Highest Since January at Bond Sale (Bloomberg) -- Italy's borrowing costs jumped at a sale of 4.88 billion euros ($6.4 billion) of bonds amid concern Spain's deficit woes are reigniting the region's debt crisis. The Treasury sold the 3-year benchmark bonds to yield 3.89 percent, the highest since January and up from 2.76 percent at the previous auction on March 14. Investors bid for 1.43 times the amount offered, down from 1.56 times last month. The Rome- based Treasury also sold 2 billion euros of bonds due in 2015, 2020 and 2023. The auction's maximum target was 5 billion euros. "Contagion fears are back in Europe and Spain is the top worry, so peripheral spreads are likely to remain under pressure and probably widen further in the short term," Italian bonds have declined for the past four weeks after Spain's March 2 announcement that it wouldn't meet its 2012 deficit goal fueled bailout concerns and eroded confidence in the debt of so-called peripheral countries. The month-long slump has reversed some of the gains in Italian bonds prompted by Prime Minister Mario Monti's efforts to spur the economy and the European Central Bank's unlimited three-year lending operations.

Welcome back to the crisis! - About one trillion euros, the ECB has pumped into banks to stabilize the situation. But the idea is to buy time so that proves to be illusory. In Spain the situation worse, there is nervousness in financial markets. We are now back to the point where we were before Christmas. Welcome back to the crisis! It is not long ago, when Germany in Brussels refused to further increase the reserve fund on the grounds that the markets have finally calmed down. Surprisingly this is not. Two weeks ago, Europe was in the all-round optimism. In recent days, the markets collapsed again. What has changed in recent weeks? There have been two convictions enforced. The first relates to Spain, the second is the European Central Bank . The markets are now expected to Spain later this year needs a bailout. If that happens, just the increased bailout will prove to be too small. In a few months, we are again faced with the choice either to increase the screen again, or risk a rupture of the euro area.  The markets no longer believe in a stabilization of Spain's debt. It is no coincidence that the last panic attack just in the markets a week passes in which the Spanish Prime Minister Mariano Rajoy saving measures announced by ten billion euros in 2012, by "efficiency" in the health sector and in schools. Spain is now where Greece was two years ago.

Big Oops: "The Aggregate Shortfall Of Required Stable Funding Is €2.78 Trillion" For today's dose of sobering cold water we go to the Bank of International Settlements, best known for being the FX bid (and gold offer) of last resort, whose Quantitative impact study results published by the Basel Committee has some very bad news for long-term bank viability: "The Committee also assessed the estimated impact of the liquidity standards. Assuming banks were to make no changes to their liquidity risk profile or funding structure, as of June 2011, the weighted average Liquidity Coverage Ratio (LCR) for Group 1 banks would have been 90% while the weighted average LCR for Group 2 banks was 83%. The aggregate LCR shortfall is €1.76 trillion which represents approximately 3% of the €58.5 trillion total assets of the aggregate sample. The weighted average Net Stable Funding Ratio (NSFR) is 94% for both Group 1 and Group 2 banks. The aggregate shortfall of required stable funding is €2.78 trillion." You read that right: as of June 30, banks lacked €1.76 trillion in liquid assets, and needed €2.78 trillion to meet stable funding rules. And then Europe imploded.

Europe’s Debt Crisis Getting Worse, Pimco’s El-Erian Says - Europe’s fiscal crisis is getting worse and will keeping fueling market instability, according to Pacific Investment Management Co.’sMohamed A. El-Erian.  “The problems in Europe are getting bigger,” El-Erian, co-chief investment officer at the world’s biggest bond fund, said on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays as he prepared to speak before the Federal Reserve Bank of St. Louis. “Europe has a debt issue and Europe has a growth issue, and until Europe deals with both, we are going to have these reoccurring periods of nervousness in the market.” Yields (GSPG10YR) on Spanish bonds rose this week to the highest level since December and those on Italian notes advanced to the most since February. Those yields fell today as European Central Bank Executive Board member Benoit Coeure triggered speculation that the bank will revive its bond-purchase program to lower Spain’s borrowing costs.

 George Soros: Eurozone Crisis Has Entered “A Less Volatile but Potentially More Lethal Phase” - As the next INET conference begins in Germany, one topic of conversation is sure to be George Soros’s piece discussing the Eurozone crisis.  He points out that the Eurozone has been quietly restructuring its financial arrangements along national lines, ending an era of co-mingled assets and liabilities across national borders.  This is something I hadn’t realized, but it presents, as he shows, other dangers. At the onset of the crisis, the eurozone’s breakup was inconceivable: the assets and liabilities denominated in the common currency were so intermingled that a breakup would cause an uncontrollable meltdown. But, as the crisis has progressed, the eurozone financial system has been progressively reoriented along national lines.This trend has gathered momentum in recent months. The LTRO enabled Spanish and Italian banks to engage in very profitable and low-risk arbitrage in their own countries’ bonds. And the preferential treatment received by the ECB on its Greek bonds will discourage other investors from holding sovereign debt. If this continues for a few more years, a eurozone breakup would become possible without a meltdown – the omelet could be unscrambled – but it would leave the creditor countries’ central banks holding large, difficult-to-enforce claims against the debtor countries’ central banks. The big problem, Soros says, is Germany.  The Bundesbank doesn’t want to be left with credit losses or the remote possibility of inflation, so it is seeking to reduce aggregate demand in Germany.

Investors brace for more pain in Spain - Spain was firmly back in the spotlight on Friday, after news of a sharp rise in borrowing by the region’s banks from the European Central Bank triggered losses across European stocks, but especially for the IBEX 35 index XX:IBEX -3.58% , which fell more than 3% to a three-year low.  The yield on the 10-year government bond in Spain ES:10YR_ESP +0.0004% , which had appeared to get some relief in the latter half of the week, resumed a climb upward, rising 15 basis points to around 5.93%. The cost of insuring Spanish government debt against default using credit-default swaps, or CDS, rose to an all-time high. The five-year Spanish CDS spread widened to 505 basis points from 476 basis points on Thursday, according to data provider Markit. That means it would now cost $505,000 annually to insure $10 million of Spanish government debt against default for five years.

Spainaly under pressure - Italian borrowing costs were seen rising overnight as the country moved into a second day of auctions of  bonds and bills. Of note €2.884 billion in three-year debt at a yield of 3.89% were sold. The last auction of few weeks ago came in at 2.76% so there has been a 1.1% jump in under a month. The bid to cover was also down to 1.44 from 1.56. On Wednesday Italy’s one-year borrowing costs doubled.  Treasury raised €4.88 billion which was under the full allocation of €5 billion. Although these number are way down from the heady heights of late November yields, across the Italian curve yields have been rising since the end of March. The Italian authorities, ignoring yesterday’s message from the Spanish, blamed contagion for the higher yields. Interestingly, however, the movement of Italian and Spanish debt markets in unison isn’t all that uncommon.

Everyone Is Wondering When Spain Will Become The New Greece - Another week, another bout of social unrest in a Euro peripheral nation, if the fourth largest economy in the area (Spain) can even be called that. Yesterday's action saw more than a million people take to the streets in protest, while several million actually participated in the 24-hour general strike (about 77% of union workers), resulting in 176 arrests and a 104 injuries. It is estimated that 91% of all large business employees took part in the strike and/or occupied the streets. The Spanish politicians, of course, tried to downplay the rate of participation and claimed victory because the strike wasn't as bad as the last big one in 2010, but those claims merely reveal how their desperation is taking on a ridiculously childish quality at this point. All of this was in response to newly proposed budget cuts of €27bn that are the harshest in Spain's history (along with a 7% rise in electricity/gas bills), but are STILL estimated to fall well short of what's needed to meet the deficit targets required by the Troika gang. In fact, as TAE readers (and Greeks) should know by now, this severe austerity virtually ensures that deficits and sovereign rates will spiral out of control, necessitating calls for bailouts with capital that simply doesn't exist. With a general unemployment rate of about 23% and youth unemployment at stunning levels of 50%, it is rather surprising that the pain in Spain isn't projecting itself into the streets with even greater force.

Spain Targets Tax Fraud To Counter a Recession - The Spanish government approved a number of measures on Friday to crack down on tax fraud as part of its efforts to reassure investors that Madrid can replenish the public coffers by bringing to the surface some of the country’s hidden wealth. Jaime García-Legaz, the Spanish secretary of state for the economy, told the Spanish television channel laSexta on Friday that Spain “would be dead” without the loans provided by the European Central Bank.  To counter a deepening recession — the second in three years — the government of Prime Minister Mariano Rajoy is hoping to bring out some of the revenue buried in an underground economy that was estimated by the previous government to represent about 20 percent of gross domestic product. The efforts to combat fraud come on top of a squeeze of 27 billion euros, or $35 billion, in the central government’s budget this year, as well as regulatory changes in labor markets and other areas.

Spain Banks Boost Borrowing From ECB by 50 Percent in March -- Spanish banks' borrowings from the European Central Bank jumped by almost 50 percent in March, reaching the most on record, as lenders tap emergency loans and channel some of it into sovereign debt purchases. Average net borrowings by Spanish banks climbed to 227.6 billion euros ($300 billion) last month from 152.4 billion euros in February, the Bank of Spain said on its website today. Spanish lenders took 29 percent of the total long-term loans offered to euro-region banks, the data showed. That includes the three-year long-term refinancing operation loans known as LTRO. Spanish banks are using some of the emergency loans to support the nation's debt market as Treasury data shows banks have piled up holdings of Spanish bonds. While that helped tame the country's borrowing costs, it also meshes more closely together the risks to lenders and the sovereign, Economy Minister Luis de Guindos said this week. "The whole point of the LTRO was to incentivize the banks in ailing countries to take as much liquidity as they could, and the Spanish banks have done just that,"

ECB Seen Favoring Bond Buying Over Bank Loans - The European Central Bank will restart its controversial government bond purchases rather than offer banks another round of unlimited three-year loans as the sovereign debt crisis worsens, a survey of economists shows.  Of 22 economists polled this week, 17 predicted the ECB will be forced to resume the Securities Markets Program (ECBCSMP), while only one forecast it will offer another batch of three-year cash. Nine said the central bank may consider shorter maturity loans of one or two years.

A Reason for Pride? -- Via Bloomberg: European Central Bank Executive Board member Joerg Asmussen said the bank could start to raise interest rates to curb inflation if the economy picks up.“The ECB will act when needed,” Asmussen said in a speech in Berlin today. “Like last spring when the economic outlook had improved and we started carefully raising interest rates.” Still, inflation remains “in check” and will drop below the ECB’s 2 percent limit next year, he said. I am not exactly sure that the ECB's rate hikes last year are something to be proud of, nor would I describe the action as careful. Those rate hikes arguably accelerated and deepened the European debt crisis, which necessitated a policy reversal in the fall and the massive ballooning of the ECB balance sheet. One would think that the "careful" policy would have been to have not raised interest rates, thus lessening the degree of financial stress and perhaps avoiding subsequent large scale intervention. Moreover, one has to question the success of any policy that helped trigger this unfortunate unemployment path:  Europe: Where central bankers just think different.

Europe; square pegs for round holes - As many expected the euro zone crisis has taken another turn for the worse over the past couple of weeks as yields on Spanish and Italian debt have increased and demand for the sovereign assets has waned. Whilst the ECB’s LTROs bought time for fiscal policymakers to construct an adequate response to the ongoing malaise, now that the liquidity anaesthetic is wearing off and the pain is returning, it’s becoming increasingly apparent that policymakers have succeeded only in kicking the can further down the road. It’s becoming more and more obvious that austerity simply breeds the need for more austerity, like an economic Gremlin that is fed after midnight and subsequently produces ever uglier versions and results in more of a mess to clear up. This was not supposed to be the case when the prescribed policies of retrenched government spending and market liberalisation/privatisation were dreamt up. The almost new classicalist or “Ordoliberalist” views were that if government intervention is removed and previously uncompetitive markets are opened up and made more flexible, prices would decline in the troubled periphery relative to the core, and markets would clear thus erasing (or at least moderating) the large current account deficits that the troubled “GIPSIs” were running prior to the crisis. But as the ships drift closer to the sovereign default icebergs and unemployment persists at unimaginably high levels it is clear this hasn’t happened. But why is this the case?

The ECB’s Lethal Inhibition - Last December, with Europe’s financial system on the brink of disaster, the European Central Bank stunned the markets with an unprecedented intervention, offering banks across the eurozone essentially unlimited liquidity against any and all collateral for an exceptional period of three years. The ECB’s surprise liquidity operation put the continent’s crisis on hold. But now, just fourth months later, matters are again coming to a head. The big southern European countries, Spain and Italy, battered by austerity, are spiraling into recession. The deterioration of economic conditions is casting doubt on their governments’ budgetary arithmetic, undermining political support for structural reform, and reopening seemingly closed questions about the stability of banking systems. Once again, the eurozone appears to be on the verge of unraveling. So, will it be once more into the breach for the ECB? The hurdles to further monetary-policy action are high, but they are largely self-imposed. At its most recent policy meeting, the ECB left its policy rate unchanged, citing inflation half a percentage point above the official 2% target. Board members may have also been concerned by evidence of cost-push inflation in Germany. The leading German trade union, IG Metall, has called for a 6.5% wage increase in the next annual round of negotiations. And German public-sector workers obtained an agreement at the end of March that boosts wages by 6.3% in the coming two years. But this increase in German labor costs is, in fact, precisely what Europe needs to accelerate its rebalancing, because it will help to realign the competitive positions of the northern and southern European economies.

When monetary policy needs to incorporate fiscal policy - I’m in Berlin this week, at the annual INET meetings, where the big theme this year seems to be an attempt to rope in everyone from anthropologists to neuroscientists in an attempt to solve the big economic problems which are proving intractable to economists. But still, it’s the economics and finance folk who are top of the agenda. And since George Soros is footing a large part of the bill for this conference, he and his latest op-ed are getting star billing. Sadly, however, most of the delegates have been at the conference all day and therefore haven’t had the opportunity to read Mohamed El-Erian’s speech in St Louis, which is equally germane. The two, in fact, complement each other quite nicely. El-Erian’s main point is that central banks can’t solve the crisis on their own; Soros has an intriguing idea which addresses that fact, and attempts to add some fiscal-policy bite to the operation of monetary policy. The EU’s fiscal charter compels member states annually to reduce their public debt by one-twentieth of the amount by which it exceeds 60% of GDP. I propose that member states jointly reward good behavior by taking over that obligation.

More on tax increases versus spending cuts in an austerity programme - Monetary policy works by changing the real interest rate. At the zero lower bound monetary policy loses its power, unless it can influence inflation expectations. However inflation expectations for consumers will also depend on the evolution of sales taxes (indirect taxes like VAT). A pre-announced increase in sales taxes will raise expected inflation, and so reduce the real interest rate faced by consumers at the zero lower bound. In this sense changes in sales taxes can mimic monetary policy.     I first wrote about this some time ago (for the record Wren-Lewis, 2000, but some of that discussion is a little dated now). As a result, I thought the (surprise) temporary VAT cut introduced by the UK government at the end of 2008 was a good idea (see here). Thanks to @daniel’s comment on an earlier post, I’ve now read a nice and straightforward paper which formalises this idea in a standard New Keynesian model at a zero lower bound.    My original piece on this suggested that a temporary but unexpected cut in VAT, like a temporary increase in government spending, could provide an effective stimulus to aggregate demand for a given monetary stance. But what are the implications for Eurozone countries that are trying to bring down government debt? They are the mirror image: it is not a good idea to use cuts in government spending, or a surprise increase in sales taxes, as a way to bring down debt in a recession. However pre-announced increases in sales taxes work differently.

IMF warns UK pension costs set to double - THE UK faces a pensions time bomb, with expected increases in life expectancy set to put huge pressure on retirement costs, according to the International Monetary Fund (IMF). The IMF warned that the ballooning expense, which could double in the next forty years, could threaten the UK’s financial stability. Between 2010 and 2050, the cost of pension provision is set to rocket, increasing public debt from 76 per cent of GDP to as much as 135 per cent, the IMF has calculated. It warned that this burden will largely fall on the state due to its guarantees for failed private sector pensions, as well as its responsibility for public and state pensions. The institution’s calculations are based on just a three year rise in life expectancy over forty years, the period by which forecasters typically underestimate longevity.

Unemployment to rise as 100,000 lose jobs before summer  - An extra 100,000 people will lose their jobs before the end of the summer and unemployment will not fall for another year and a half, according to a grim report from the Institute for Public Policy Research (IPPR). The number of people out of work will not peak until at least September with almost 5,000 Britons becoming jobless each week between now and the end of August, the report from the Institute for Public Policy Research (IPPR) found.  The analysis, based on predictions for UK jobs by the Government’s independent forecaster, suggests Britain’s jobless toll may fall short of reaching 3m as some analysts predicted at the start of the recession. Unemployment stands at 2.67m at present.  However, the IPPR study paints a bleak picture in the year ahead for young people and jobseekers over 50, already hit disproportionately by the jobs crisis.  The study said 41,000 more people aged between 16 and 24 will join the ranks of the unemployed, breaking a new record since records began in 1992, while an extra 7,000 older workers aged 50 or over will become jobless.

Interest-only mortgage timebomb as hundreds of thousands struggle to pay their debts - Up to 320,000 homebuyers with interest-only mortgages risk losing their property because they are struggling to pay, the financial regulator warned yesterday.The figures, based on research by the Financial Services Authority, reveal they have either missed or struggled to make a payment on loans which are specifically designed to be more affordable.The scale of the problem follows recent warnings of a ‘ticking timebomb’ of interest-only mortgages.Of the 11.2million mortgages in Britain, around 35 per cent are interest-only, meaning that the homebuyer pays only the interest every month, but not a penny of the capital.In theory the mortgage-holder should save to pay off the capital at the end of the term, but nearly 80 per cent have no repayment strategy, according to the FSA. They have been categorised as ‘mortgage prisoners’.

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