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

Saturday, June 2, 2012

week ending June 2

Fed's Balance Sheet Shrinks In Latest Week - The Fed's asset holdings in the week ended May 30 were $2.845 trillion, down from $2.862 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities were unchanged from a week earlier at $1.657 trillion. The central bank's holdings of mortgage-backed securities fell to $851.75 billion, from $864.99 billion a week ago. Thursday's report showed total borrowing from the Fed's discount lending window was $5.51 billion on Wednesday, down from $5.83 billion a week earlier. Commercial banks borrowed $51 million from the discount window, up from $22 million in the previous week. U.S. government securities held in custody on behalf of foreign official accounts totaled $3.510 trillion, unchanged from the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts was $2.789 trillion, unchanged from a week earlier. Holdings of federal agency securities fell to $721.04 billion, compared with $721.40 billion in the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--May 31, 2012

Fed’s Rosengren: ‘Monetary Policy Needs To Be More Stimulative’ - A veteran Federal Reserve official expressed strong support Wednesday for the central bank doing more to aid the economy, given his expectation of tepid growth and high unemployment looming well out into the future. “Given the poor current conditions and my forecast for continued weakness,” Federal Reserve Bank of Boston President Eric Rosengren said “monetary policy needs to be more stimulative.” “We should be looking for ways that monetary policy can foster more rapid growth, to bring down the unemployment rate more quickly,” Rosengren said, adding “I believe further monetary policy accommodation is both appropriate and necessary.”

Fed’s Dudley: If Growth Continues, More Fed Stimulus Isn’t Warranted - The leader of the Federal Reserve Bank of New York repeated Wednesday his expectation that the U.S. central bank will not need to provide additional stimulus to the economy, even as he left the door open to further action. Acknowledging the options before the central bank each have costs and benefits, New York Fed President William Dudley said “as long as the U.S. economy continues to grow sufficiently fast to cut into the nation’s unused economic resources at a meaningful pace, I think the benefits from further action are unlikely to exceed the costs.”

Fed’s Pianalto Supports Accommodative Fed Policy - It will take as much as half a decade for the U.S. economy to get back to its natural unemployment rate of around 6% in an economic environment that will require strong Federal Reserve support, a U.S. central bank official said Thursday. “My current assessment is that the real economy continues to show considerable cyclical weakness,” Federal Reserve Bank of Cleveland President Sandra Pianalto said. “This assessment, along with my outlook for moderate growth and subdued inflation, calls for today’s highly accommodative monetary policy.”

Q&A: Philadelphia Fed President Charles Plosser - Federal Reserve Bank of Philadelphia President Charles Plosser spoke Saturday with The Wall Street Journal’s Brian Blackstone in Eltville, Germany. Mr. Plosser discussed risks to the U.S. from the Greek crisis, the Fed’s tools to contain any fallout and the central bank’s evolving communications strategy.

Fed’s Lacker Warns Federal Debt Could Put Pressure on Central Bank - If federal debt approaches unsustainable levels, Congress could pressure the central bank to let inflation rise, Federal Reserve Bank of Richmond President Jeffrey Lacker warned in a message in the regional bank’s 2011 annual report Thursday. Facing a mounting federal debt, Congress could be tempted to lean on the Fed to permit higher inflation to shrink the real level of debt or make the cost of borrowing cheaper, said Lacker, a critic of the central bank’s easy-money policies.

What the Jobs Report Means for the Fed -- On Wednesday, one of the most important voices on the Federal Reserve’s policy-making committee strongly indicated that the Fed was unlikely to expand its extraordinary campaign to stimulate the economy.“As long as the U.S. economy continues to grow sufficiently fast to cut into the nation’s unused economic resources at a meaningful pace, I think benefits of further action are unlikely to exceed the costs,” said the official, William C. Dudley, the president of the Federal Reserve Bank of New York. On Friday, we learned that in the month of May, growth did not make much of a dent in those unused resources. Only 69,000 jobs were created. The Fed remains the only plausible source of significant government action to bolster the economy in the foreseeable future. Will the central bank decide to take action when its policy-making committee meets in late June? We will learn more when the Fed chairman, Ben S. Bernanke, testifies before the Joint Economic Committee on Thursday.

Weak Jobs Data Ignite Expectations of Twist Extension - Friday’s weak jobs report immediately ignited market expectations that the Federal Reserve‘s “wait-and-see” mode may be coming to an end. Three months of disappointing jobs data increases the chances that Fed officials may act later this month to extend Operation Twist, currently scheduled to expire at the end of June, economists predicted Friday.

Will the weak employment report prompt action from policymakers? - Today's employment report was disappointing. Only 69,000 jobs were created in May, the unemployment rate rose from 8.1 to 8.2 percent, and downward revisions to previous months, for example April's number was revised down from 115,000 to 77,000, made the picture even worse. But is it enough to prompt action from policymakers? Monetary policymakers have indicated that they do not see the need for further stimulus. There are exceptions such as Federal Reserve presidents Charlie Evans at Chicago and Eric Rosengren at Boston, but the predominant sentiment is that the present level of stimulus is sufficient unless the economy takes a large downward turn. Given the risks ahead from Europe, the chance the oil price hikes could derail the recovery, and the weakness in the latest job market data, a case can certainly be made for more aggressive monetary policy. Thus, there is no doubt that the probability of another round of easing from the Fed has increased. But I don't think this will be enough, by itself, to prompt an actual change in policy. Instead, the Fed is likely to use communication to say that the balance of risks has changed, and then remain in wait-and-see mode. However, if there are any further indications of weakness, and in particular if there are any signs of a deflation threat, then the Fed is likely to act.

Fed Watch: I've Seen This Movie Before - Nothing like waking up on the West Coast to view the carnage on the East Coast. Two thoughts come to mind. First, I have said it before and I will say it again: If you become either too optimistic or too pessimistic about the path of the US recovery, you will almost certainly be slapped down in a matter of months. Second, this summer is looking like a carbon copy of 2011. The US data is turning softer just while the European saga is heating up. This time, we have some additional icing on the cake, with emerging markets faltering as well. And that black box that is China could be in free fall for all we know - commodity prices and cash outflows are pointing to some real distress. And, if history serves as a guide, the Fed will eventually step up with another round of easing. But again, if history serves as a guide, they are going to make us wait until the end of a long, hot summer before they get to that point. The primary news this morning was the dismal US employment report for May. Firms added just 69k workers for the month, with the private sector total just 82k. Worse yet, the March and April numbers were revised downward. The picture looks similar to last year's slowdown: And for those on the Federal Reserve who insist on fretting about inflation at every turn (you know who you are), notice that wage growth continues to trend lower as well:  I just don't see sustained inflationary pressures in this environment. Indeed, note that we also got a read on PCE inflation this morning, and surprise, surprise:

Romney Not Hoping for More Fed Action - Republican presidential hopeful Mitt Romney is likely to leave the nation’s long-term unemployment problem up to the states to solve. The ranks of the long-term unemployed, those who’ve been jobless for more than six months, swelled to more than 5.4 million in May, up from 5.1 million a month earlier. Some 42.8% of all of those who were out of work last month had been jobless for more than six months, according to the Labor Department. It was just one worsening statistic in a wholly disappointing jobs report Friday that prompted Republicans to step up their attacks on President Barack Obama’s jobs record. In a CBS interview Thursday, before the jobs numbers were released, Mr. Romney pointed to a program in Massachusetts as a potential model for combating prolonged unemployment spells. “One of the things we tried when I was the governor of Massachusetts was to create an incentive for employers to actually hire people who had been out of work for a long time,”

Romney’s Thinking on Long-Term Unemployment - At least one person on Friday wasn’t hoping that the Federal Reserve will start another round of bond-buying: Republican presidential nominee Mitt Romney. While Friday’s disappointing jobs report had economists and investors ratcheting up expectations that the central bank might embark on another round of quantitative easing, often called “QE3,” Romney told CNBC Friday that the Fed’s actions to boost the economic recovery have “really run their course.” The Fed’s second major bond-purchasing program, referred to as QE2, “was not able to yield the economic benefit which they hoped it would be able to yield,” Romney said, blaming the failure of the program on President Barack Obama’s economic policies. Further action from the Fed wouldn’t fare any better, he predicted. “I don’t think we’re looking for more, a QE3 if you will, I don’t think that will have any more impact than QE2 did,”

With Rates so Low, QE3 Won’t Matter - Of course, the talk now turns to the Federal Reserve riding to the rescue of the U.S. economy. Here’s the problem, already cited by many observers: the market has done what any additional Fed monetary easing (code name: QE3) would maximally accomplish, lowering interest rates to induce more borrowing and increase economic activity. News flash: the 10-year U.S. Treasury note yields about 1.5%. The overnight federal funds rate controlled by the central bank has stood at about zero for three-and-a-half years. To further ease monetary policy after the disappointing May jobs data (69,000 new jobs) and mounting evidence of decelerating economic growth would only offer evidence the Fed has reached the limits of its power to spur growth. Oh sure, another easing round might create a stir in the declining stock market for a time, but any real economic impact will be quite limited.

Threat of fiscal dominance? - BIS - The massive expansion of central bank balance sheets to contain the worst financial crisis in living memory raises questions about the theory and practice of monetary policy. The persistence in many advanced countries of large fiscal deficits and the prospect of high public debt/GDP ratios for many years is likely, at some point, to create policy dilemmas not only for central banks but also for public debt managers. Some countries have already had to cope with higher sovereign risk.  Worries about both "fiscal dominance" and "financial repression" have certainly gained ground. Whatever view is taken of this, the boundary between monetary policy and government debt management has become increasingly blurred. Policy interactions have changed in ways that are difficult to understand. The current delineation of policy mandates may need to be reassessed.  The aim of this BIS-OECD workshop was to better understand these issues. Theoretical perspectives draw on a long and rich body of monetary theory, but the theory is far from settled. Analysis of the history of fiscal/debt/monetary policy interconnections shows how such linkages have varied across countries and over time - there is no "one size fits all". And careful review of empirical studies shows that precise estimates of the impact of large-scale central bank purchases of government bonds need to be treated with caution.

"We Need a Hegemon Who Won't Drive Us Crazy..." Tyler Cowen is pessimistic:We may be entering a new world where international cooperative arrangements, in environmental areas as well as finance, are commonly recognized as impossible.  If the core European nations cannot coordinate effectively, what can we expect in dealings with China, Russia and other countries that have less of a common background and understanding? What is the answer?:We are realizing just how much international economic order depends on the role of a dominant country — sometimes known as a hegemon — that sets clear rules and accepts some responsibility for the consequences. Which reminds me of something Brad DeLong wrote awhile back: We Need a Hegemon Who Won't Drive Us Crazy...: ...Given that there are going to be sudden shocks to risk and duration tolerance on the part of global investors, we need a global institution to provide support for asset prices in an emergency: a global lender of last resort.That lender of last resort needs two things if it is to function. First, it needs to be able to "print money"--to have its own liabilities be and be perceived to be the safest assets in the world so that when it borrows it calms markets by giving them more of the high-quality short-duration low-risk paper for which they suddenly have such a great craving. Second, it needs to know what it is buying--to have sufficient regulatory oversight and control over global finance to be able to limit the growth of potentially toxic assets beforehand and then to understand what prices it should offer when it does decide that it is time to support the market.

Fed’s Fisher: ‘Very Satisfied’ Inflation Under Control - Federal Reserve Bank of Dallas President Richard Fisher described himself as “very satisfied” Wednesday that inflation appears to be under control, saying he views lackluster job creation as a bigger near-term concern for the U.S. economy. Fisher, speaking at a community forum here, placed the blame for stubbornly high unemployment squarely on what he called “feckless” politicians of both parties who “just can’t make up their minds” on fiscal policy.

Personal Consumption Expenditures: Price Index Update - The monthly Personal Income and Outlays report was published today by the Bureau of Economic Analysis. The first chart shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation.  The latest Headline PCE price index YOY rate of 1.81% is a decrease from last month's 2.14% (a downward revision from 2.32%). The Core PCE index of 1.89% is a decrease from the previous month's 1.95% (an upward revision from 1.90%).  I've calculated the index data to two decimal points to highlight the change more accurately. It may seem trivial to focus such detail on numbers that will be revised again next month (the three previous months are subject to revision and the annual revision reaches back three years). But PCE is a key measure of inflation for the Federal Reserve, and the price increase in oil and gasoline, although now well off their interim highs, puts consumer behavior in the spotlight.  In the past, a core PCE range of 1.75% to 2% is generally mentioned as the target for the Federal Reserve's price-stability mandate. However, the Fed has now explicitly identified 2% as the long-term target:

Two Measures of Inflation: New Update - The BEA's Personal Consumption Expenditures Chain-type Price Index for April, released today, shows core inflation below the Federal Reserve's 2% target at 1.89%. In contrast, the Core Consumer Price Index, data through April, is above the target at 2.31%. The Fed, of course, is on record as using Core PCE as its inflation gauge:  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.  [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 well off their respective interim highs set in September.

The Fed to the Citizenry: Remain Calm, All is Well -- WSJ: Americans, stand easy: Your Federal Reserve will take care of everything. Okay, that’s a bit facetious, but that was mainly the message delivered by Philadelphia Fed President Charles Plosser to our Brian Blackstone over the weekend. Plosser, in Europe for a conference, said the Fed has the tools to handle any fallout in the U.S. from a European meltdown, and “there’s absolutely no reason for people in the United States to get all in a dither.” We hope Plosser’s right, but it’s hard to believe the Fed is prepared for every contingency in the event of a European meltdown, especially since nobody knows exactly what will happen in such an event. It kind of reminds us of the scene at the end of Animal House, when the ROTC cadet, played by a very young Kevin Bacon, is trying to stop a stampede of people by yelling “remain calm, all is well!” Right before he gets run over. (video)

A central-bank failure of epic proportions -  I'd LIKE to say a bit more about the policy side of things given the state of the world economy. There is a great deal of attention paid to fiscal issues, and certainly fiscal issues deserve scrutiny. Greece, Ireland, and Portugal have little choice but to embrace swingeing short-term austerity, but massive short-term cuts in places like Spain and Italy are foolish and counterproductive. Maybe Germany and France can't be talked into substantial fiscal stimulus but, again, focusing fiscal consolidation efforts on the long-term and practicing a sort of benign deficit neglect at this moment of crisis seem the smart options. In America, the fiscal situation is extraordinarily frustrating. Each day, Treasury yields touch unbelievable new lows. It would certainly seem a very good opportunity to undertake, in scale, any capital investments the government has been putting off, and there are many. Congress isn't doing that, obviously. Instead, paralysis reigns and may produce a massive fiscal contraction at year's end, on top of which may come a disastrous debt-ceiling battle. I reserve my greatest frustration for central bankers, however. Politics is always hard, central banks are supposed to be free to act independently of the political sphere, and monetary policy can largely offset fiscal missteps. Given this, and given the state of the world economy, the behaviour of the European Central Bank and the Federal Reserve is simply inexcusable.

Liquidation Syndrome - Massive monetary interventions have not done much for the economy, but have proved capable of provoking speculation for several months at a time. As I've noted recently, there may be latitude to take a more constructive stance between the point that any new monetary intervention produces an improvement in our measures of market internals, and the point where we re-establish an overvalued, overbought, overbullish syndrome. Without a material improvement in valuations or market action here, we remain defensive. Undoubtedly, the best outcome would be a strong improvement in valuations, followed by signs of improvement in our measures of market action, which is the typical sequence of events that complete a market cycle and can launch a very favorable investment environment.

GDP Q1 Second Estimate Trimmed to 1.9% - The Second Estimate for Q1 GDP came in at 1.9%, down from 2.2% in the Advance Estimate. Today's number was in the ballpark for most mainstream media estimates. The consensus at was for 2.0%, and's own estimate was for 1.9%. Here is an excerpt from the Bureau of Economic Analysis news release: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.9 percent in the first quarter of 2012 (that is, from the fourth quarter to the first quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2011, real GDP increased 3.0 percent.  The deceleration in real GDP in the first quarter primarily reflected a deceleration in private inventory investment, an acceleration in imports, and a deceleration in nonresidential fixed investment that were partly offset by accelerations in exports and in PCE. [Full ReleaseHere is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. The start date is when the BEA began reporting GDP on a quarterly basis. Prior to 1947, GDP was reported annually. Here is a close-up of GDP alone with a line to illustrate the 3.3 average (arithmetic mean) for the quarterly series since the 1947. I've also plotted the 10-year moving average, currently at 1.7. The Advance Estimate for Q1 GDP puts us closer to the moving average.

Real GDP Per Capita is 2.19% Below the 2007 Peak  - This morning we learned that the Second Estimate for Q1 real GDP came in at 1.9%, a decline from the 2.2% Advance Estimate. The latest data does not significantly change the long-term view of real per-capita GDP, but it did slightly increase the recession warning implicit in the latest real GDP year-over-year percent change, now at 1.99%, an increase over the Advance Estimate's YoY 2.08%. My monthly updates on GDP and its revisions feature column charts illustrating real GDP. These have the advantage of highlighting the patterns of change and the correlation between negative GDP and recessions.  For a better understanding of the historical context, here is a chart of real GDP per-capita growth since 1960. For this analysis I've chained in current dollars for the inflation adjustment. The per-capita calculation is based on the mid-month population estimates by the Bureau of Economic Analysis, which date from 1959 (. The population data series is available in the FRED series POPTHM. I used quarterly population averages for the per-capita divisor.  The real per-capita series gives us a better understanding of the depth and duration of GDP contractions. As we can see, since our 1960 starting point, the recession that began in December 2007 is associated with a deeper trough than previous contractions, which perhaps justifies its nickname as the Great Recession. In fact, at this point, 17 quarters beyond the 2007 GDP peak, real GDP per capita is still 2.19% the all-time high, which is somewhere between the troughs that followed the recession in the early 1990s.

Visualizing GDP - The chart below is my way to visualize real GDP change since 2007. I've used a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself. As the analysis clear shows, personal consumption is key factor in GDP mathematics. My data source for this chart is the Excel file accompanying the BEA's latest GDP news release (see the links in the right column). Specifically, I used Table 2: Contributions to Percent Change in Real Gross Domestic Product. Over the time frame of this chart, the Personal Consumption Expenditures (PCE) component has shown the most consistent correlation with real GDP itself. When PCE has been positive, GDP has been positive, and vice versa. In the latest GDP data, the contribution of PCE came at 1.90 of the 1.86 real GDP. This is a decline from the 2.04 contribution to last month's advance estimate. Essentially, in today's second estimate, the 0.81 contribution from private investment was more than cancelled out by the -0.08 from net exports and -0.78 from the government.

GDP Revisions And Jobs Numbers Add Up To Grim Economic News - When we entered 2012, there were some hopeful signs that things were actually turning around. After all, economic growth at the end of 2011 was fairly strong, although it was ultimately revised downward and economic growth for all of last year was a pathetically weak 1.7%. At the same time, there were signs of improvement in the jobs market in the final two months of last year, as well as the beginning of this year. As we’ve seen happen before, though, a round of oddly positive economic news in the winter has turned into something far more disappointing in the spring. Last month, for example, we learned that the Gross Domestic Product in the 1st Quarter of 2012 grew at a disappointingly weak 2.0%, a report that was followed up at the beginning of this month with a rather disappointing jobs report. Now, it appears, things might actually been a little worse than when we looked at them a month ago. This morning, the Commerce Department issued a revision for First Quarter GDP and, rather than going up as analysts had expected, it went down: The U.S. economy grew more slowly in the first quarter than previously estimated, reflecting smaller gains in inventories and bigger government cutbacks. Gross domestic product climbed at a 1.9 percent annual rate from January through March, down from a 2.2 percent prior estimate, revised Commerce Department figures showed today in Washington. The report also showed corporate profits rose at the slowest pace in more than three years and smaller wage gains at the end of 2011.

Will the 'Real' GDP Please Stand Up? - How do you get from Nominal GDP to Real GDP? You subtract inflation. The Bureau of Economic Analysis (BEA) uses its own GDP deflator for this purpose, which is somewhat different from the BEA's deflator for Personal Consumption Expenditures and quite a bit different from the better-known Bureau of Labor Statistics' inflation gauge, the Consumer Price Index. The charts below show quarterly Real GDP since 1960 with the official and three variant adjustment techniques. The first chart is the official series as calculated by the BEA with the GDP deflator. The second starts with nominal GDP and adjusts using the PCE Deflator, which is also a product of the BEA. The third adjusts nominal GDP with the BLS (Bureau of Labor Statistics) Consumer Price Index for Urban Consumers (CPI). The forth chart, prompted by several requests, adjusts nominal GDP using the Alternate CPI published by economist John Williams at I have a note at the bottom showing the real GDP calculation method. Suffice to say that the higher the increase in compounded annual percentage change in the deflator, the lower the real GDP. Conversely the lower the increase (or if there is a decrease), the higher the real GDP. With this in mind, consider: The BEA puts the latest compounded annual percentage change in the GDP deflator (i.e., the inflation rate) at 1.7% (1.67% to two decimal places). That is a bit higher than the 1.5% of the Advance Estimate, but it's still quite low, which gives us a higher GDP number. If I make the same calculation using the compounded annual percentage change for seasonally adjusted quarterly CPI, I get an inflation rate of 2.5%, about 0.8% percent higher, which thus would produce a lower real GDP.

Are Two Economic Clocks Better Than One? - This week brings the two heavyweights of economic statistics. On Thursday morning we got the latest read on economic growth, and on Friday we learn how the job market fared in May. For the economy as a whole, it’s the annual growth rate of gross domestic product (GDP), which logged in at a mediocre 1.9 percent in the first quarter. For jobs, it’s the number of nonfarm payroll jobs created in the past month (115,000 in April, but that will be revised on Friday morning). In each case, the government also reports a second measure of essentially the same thing. payroll figure comes from a survey of employers, but the Bureau of Labor Statistics also reports results from a survey of people. That provides the other famous job metric, the unemployment rate, and a second count of how many people have a job.  The downside of this extra information, however, is that it can foster confusion. In April, for example, payrolls increased by 115,000, but the household measure of employment fell by 169,000. Did jobs grow or decline in April? Another, less well-known example happens with the GDP data. The Bureau of Economic Analysis calculates this figure two different ways: by adding up production to get GDP and by adding up incomes to get gross domestic income (GDI). In principle, these should be identical. In practice, they differ because of measurement challenges.In Q1, for example, GDI expanded at a respectable 2.7 percent, much faster than the 1.9 percent recorded for GDP. Is the economy doing ok or barely plodding along?

Chicago Business Barometer Signals Economy on Edge of Recession - A closely-watched index gauging U.S. factory output fell to a near 2 1/2-year low in May, indicating the economy might be heading back toward a recession. The Institute for Supply Management-Chicago reported Thursday that its business barometer fell 3.5 points to 52.7 in May, the third straight monthly drop and lowest reading since September 2009. Readings above 50.0 reflect economic expansion. However, three consecutive declines are “associated with the onset of each of the last seven national recessions, with a lead of some six-to-eight months,” ISM-Chicago said in a news release. The May reading was lower than economists expected. The consensus forecast of economists surveyed by Dow Jones Newswires was for the barometer to stand at 56.0. ISM-Chicago’s production index fell 7.1 points in May to a neutral reading of 50.0, also the lowest since September 2009. The index is determined from surveys of purchasing managers in the Chicago region. It was released on the same day that other indicators revealed the fragile state of the U.S. economy.

Once Again, Economy Cools When Weather Warms Up - The U.S. recovery can’t seem to shake off the hot-weather jinx. Thursday brought uniformly bearish news on May economic activity. Private-sector hiring is weak, jobless claims are rising and factory activity in Chicago slumped to its weakest level since September 2009. The data paint an economy stumbling in the spring. Gross domestic product growth probably won’t turn negative, but a jump to above 3% also looks like a long shot this quarter.The weak ADP report–which showed only 133,000 private jobs created–raises questions about the health of the labor markets just ahead of Friday’s closely watched employment report. Most economists are sticking to their payroll forecasts. But the risks are clearly on the downside for the consensus projection of 155,000 new jobs added in May. The unemployment rate is expected to stay at 8.1%. About the only bright spot in the trove of Thursday data was slower inventory accumulation last quarter that led to GDP growth being revised down to a 1.9% annual rate from 2.2%. U.S. businesses ended the first quarter with fewer goods on hand than previously estimated. That diminishes the risk that excessive stockpiles will lead to less ordering and production and job cutbacks.

Euro-Crisis Response Draws In Top White House Officials - Top officials in the Obama administration have long held talks with European leaders about the ongoing debt crisis, but discussions are reaching a new level this week as problems in Greece and Spain appear to be escalating. Earlier in the week, the Treasury Department dispatched its top economic diplomat – Lael Brainard – to Greece, France, Spain and Germany for talks with European leaders. She is expected to stay until at least the end of the week. On Wednesday, President Barack Obama held a videoconference with German Chancellor Angela Merkel, French President Francois Hollande, and Italian Prime Minister Mario Monti. “They discussed developments in Europe, following up on the discussions held at the G-8 Camp David Summit and at the informal meeting of European Union Leaders last week,” the White House said, offering little else. Meanwhile, Treasury Secretary Timothy Geithner, who has been actively involved in talks with European leaders for more than three years, is meeting Thursday with Spanish Vice President Soraya Saenz de Santamaria. Mr. Geithner is also meeting Thursday with Mr. Obama at the White House.

Q&A: World Bank’s Zoellick on the Global Economy, Euro-Zone Crisis and U.S. Fiscal Cliff - World Bank President Robert Zoellick, who wraps up a five-year term in his post next month, joined the institution as it prepared to fight one financial crisis and leaves as it faces another on the horizon. He spent much of that time trying to reorient the bank as the role of developing countries changed in the global economic landscape. Mr. Zoellick, who spent decades working in Republican administrations, is frequently mentioned as a potential Secretary of Treasury or State if the GOP takes the White House in the fall. In a wide-ranging interview Wednesday, he discussed the euro-zone crisis, risks to developing nations, the U.S. fiscal cliff and his work at the bank. Here are excerpts:

Port in the storm, but for how long? - AMERICA'S economy, oddly enough, has been playing the role of bright spot in the world economy in recent months. The worse the outlook elsewhere, however, the less distinction comes with the part, and the less impressive becomes the American recovery. According to the second estimate of first quarter output, the American economy grew at a 1.9% annual pace in the first three months of 2012, down from 3.0% in the fourth quarter and less than the 2.2% growth initially estimated. A second measure of output—Gross Domestic Income—showed a somewhat better first quarter performance, growth of 2.7%, more in keeping with employment growth early in the year. But that's not much comfort; the employment outlook continues to disappoint. . Absent a crash somewhere else in the world, a double dip seems very unlikely (reassessments may be in order if Congress can't smooth the fiscal cliff and raise the debt ceiling). More probable is the same frustrating deceleration that occurred last year and the year before, as policymakers reacted painfully slowly to headwinds from abroad.

JPM Cuts Q3 GDP Forecast From 3% To 2% - So it starts. "Taking down the US growth projection has almost become a summertime ritual, and in keeping with tradition we are shaving our 2012 GDP outlook (Q4/Q4) from 2.3% to 2.1%. Over the first five months of the year the labor market has steadily lost momentum and we are now confronted with a global growth slowdown which will provide a further headwind to the economy. As such, we are taking Q3 growth from 3.0% to 2.0%, with much of the downward revision accounted for by an expectation that the pace of export growth will slow. We are leaving our Q4 forecast unchanged at 2.0%, though there are downside risks to that quarter as the fiscal uncertainties could weigh on the economy. One thing we are not changing is our Q2 growth projection, which we still see as coming in around 2.5% with only modest downside risks. The exercise of adding up current quarter indicators has received support from today's April real consumption number, which gives a firm start to consumer spending for the quarter. Below is our revised forecast table."

ECRI Recession Call: Another Weekly Leading Index Decline - The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) dropped to 122.4 from last week's 123.0 (a slight downward revision of 123.1). See the fifth chart below. The WLI growth indicator also slipped, now at -0.6 as reported in Friday's public release of the data through May 25, down from the previous week's 0.1. The latest data release to the general public continues to command focus in the wake of Lakshman Achuthan repeated reaffirmation of ECRI's recession call in live interviews around the major business networks on May 9th. The most detailed of the interviews was his Bloomberg appearance. See also Achuthan's similar video interview with the Wall Street Journal.  A key argument in ECRI's latest reaffirmation of its recession call is seen in the long-term pattern of year-over-year real personal income (illustrated below, which I updated with the latest PCE data released this morning). See this May 9th commentary on the ECRI website. ECRI's weekly leading index has become a major focus and source of controversy ever since September 30th of last year, when ECRI publicly announced that the U.S. is tipping into a recession, a call the Institute had announced to its private clients on September 21st.

Guest Post: Enter The Swan - We know the U.S. is a big and liquid (though not really very transparent) market. We know that the rest of the world — led by Europe’s myriad issues, and China’s bursting housing bubble — is teetering on the edge of a precipice, and without a miracle will fall (perhaps sooner, rather than later). But we also know that America is inextricably interconnected to this mess. If Europe (or China or both) disintegrates, triggering (another) global default cascade, America will be stung by its European banking exposures, its exposures to global energy markets and global trade flows. Simply, there cannot be financial decoupling, not in this hyper-connected, hyper-leveraged world. All of this suggests a global crash or proto-crash will be followed by a huge global money printing operation, probably spearheaded by the Fed. Don’t let the Europeans fool anyone, either — Germany will not let the Euro crumble for fear of money printing. When push comes to shove they will print and fiscally consolidate to save their pet project (though perhaps demanding gold as collateral, and perhaps kicking out some delinquents). China will spew trillions of stimulus money into more and deeper malinvestment (why have ten ghost cities when you can have fifty? Good news for aggregate demand!).

The End Game (scribd) For the first time since the 1930’s we are entering a recession. Before Industrial Production, Durable Goods Orders, Employment and Private Sector GDP have made back their previous highs.

US Let China Buy Treasuries Directly During Debt Ceiling Crisis - Reuters has a story on how the Treasury Department allowed China to start buying US Treasuries directly last June. The documents viewed by Reuters show the U.S. Treasury Department has given the People’s Bank of China a direct computer link to its auction system, which the Chinese first used to buy two-year notes in late June 2011. China can now participate in auctions without placing bids through primary dealers. If it wants to sell, however, it still has to go through the market. Now, Reuters offers a number of potential reasons why China might want to do this: it would get a better price by by-passing Wall Street, it reflected growing confidence its money managers could buy debt more efficiently than through primary dealers. But I can’t help notice the timing. Last summer, just as it was becoming increasingly clear that Republicans were willing to crash the economy to win the debt ceiling debate, China started buying US debt directly. I have no idea whether that would enable Treasury to exceed the debt limit without notice–assuming everything else worked the same, it presumably wouldn’t. But as Reuters reported last year (almost at the same time this latest change was taking place), when China wanted to keep buying 30% or more of our treasuries at auctions in 2009, we fudged the rules to allow them to do that. Then by letting China buy directly last year, as The Big Picture shows, Treasury gave the appearance that China was net selling debt, rather than (presumably) continuing to buy a great deal of it.

Government debt and the burden on future generations - In an earlier post, I looked at how we might think about the ‘cost’ of additional public debt, if that debt financed public investment, and our concern was intergenerational equity. Here I want to examine the question of how great the burden of extra debt is on future generations, if that debt financed not investment, but consumption spending or tax cuts that had only current period benefits.    Our initial instinct would be that this burden is bound to be positive. The current generation gets the benefit of additional spending, or a tax cut, but future generations pay the cost in terms of finding the money to pay the interest on the debt. However, if the additional debt is never paid off, and remains a constant share of GDP, then there is a situation in which it is not a burden, which I discussed in that earlier post. Let the ‘growth corrected real interest rate’ be r-g.[1] Suppose r-g=0. In that case the interest on the outstanding debt each year could be entirely paid for by issuing new debt such that the total debt to GDP ratio remained unchanged. The debt is only a burden on the final generation, but there is no final generation.

Dollar Scarce as Top-Quality Assets Shrink 42% - The dollar is proving scarce, even after the Federal Reserve flooded the financial system with an extra $2.3 trillion, as the amount of the highest-quality assets available worldwide shrinks.  From last year’s low on July 27, the greenback has risen against all 16 of its major peers. Intercontinental Exchange Inc.’s Dollar Index surged 12 percent, higher now than when the Fed began creating dollars to buy bonds under its extraordinary stimulus measures at the end of 2008.  International investors and financial institutions that are required to own only the highest quality assets to meet investment guidelines or new regulations are finding fewer options beyond dollar-denominated assets. The U.S. is one of only five major economies with credit-default swaps on their debt trading at less than 100 basis points, meaning they are viewed as almost risk free. A year ago, eight Group-of-10 nations fit that category, data compiled by Bloomberg show.  “The pool of high-rated assets has been shrinking, not just in the euro zone but elsewhere as well,” Ian Stannard, Morgan Stanley’s head of Europe currency strategy, said in a May 22 telephone interview. “With the core of Europe shrinking, and the available assets for reserve purposes shrinking, it makes the euro zone less attractive.”

Bill Gross: The Global Monetary System Is Reaching Its Breaking Point - The global monetary system which has evolved and morphed over the past century but always in the direction of easier, cheaper and more abundant credit, may have reached a point at which it can no longer operate efficiently and equitably to promote economic growth and the fair distribution of its benefits. Future changes, which lie on a visible horizon, may not be so beneficial for our ocean’s oversized creatures. Both the lower quality and lower yields of previously sacrosanct debt therefore represent a potential breaking point in our now 40-year-old global monetary system. Neither condition was considered feasible as recently as five years ago. Now, however, with even the United States suffering a credit downgrade to AA+ and offering negative 200 basis point real policy rates for the privilege of investing in Treasury bills, the willingness of creditor whales – as opposed to debtors – to support the existing system may soon descend. Such a transition occurs because lenders either perceive too much risk or refuse to accept near zero-based returns on their investments.

Plunging Yields - The nominal yields on "high-grade" government debt instruments continue to plunge; see here. Real interest rates on U.S. government debt are negative (I talk about real yields here).  It is a pretty bearish sign when the only thing investors appear to trust is the ability of (some) governments to service their debts The "flight to safety" phenomenon is a natural response by investors when uncertainty (along several dimensions) increases. Much of this uncertainty appears to be political in nature; even Mark Thoma appears to agree (of course, Mark blames the Republicans for this; as if only one side of a boxing match can be held responsible for inflicting harmful blows and counter punches.)  Not all that ails us has its roots in politics though. Personally, I think that the recent recession was associated with a significant "structural" shock that will take a long time to work out (see here). The U.S. unemployment remains elevated at 8.1%. People are eager to work (at well-paying jobs). At a Hyundai plant in Montgomery, Alabama, more than 20,000 have applied for one of the 877 job openings; see here. At the same time, employers appear to be having a hard time finding qualified workers in several occupations, including truck drivers, software developers, laborers, nurses, machinists, accountants, scientific researchers, administrative assistants, leisure and hospitality workers, and repair technicians; see here.

Treasuries Update: 10- and 20-year Yields at Historic Closing Lows - Financial turmoil in the Eurozone continues to take the spotlight in financial news. But an important sidebar is the sharp decline Treasury yields. The 10-year note closed the day at another historic low of 1.63, as did the 20-year bond at 2.32. The 30-year, at 2.72, is 19 basis points above it closing low on December 18, 2008. The 10-year note had been hovering around the two percent level for the past few months after hitting its historic low of 1.72 immediately following the September 21st "Twist" announcement last year. Despite the Fed's stated purpose of lowering long-term interest rates, the 10-year steadily rose to an interim high of 2.42 on October 27th, but it soon settled into a pattern of hovering around 2.00 with the one quick dip to 1.82 and an upper range of 2.11. But in mid-March the yield on the 10 surged to a closing high of 2.39 on March 19th and then declined to a hover range around 2.23. Since the mid-March drama, which was certainly counter the Fed's stated intention, the yield on the 10-year has steadily fallen to its historic closing low of 1.63. The 30-year fixed mortgage, according to the latest Freddie Mac weekly survey, is at its all-time low at 3.78.

More on the Recent Anomaly in the Real Term Structure of Interest Rates - In a post last week, I pointed out that there was a highly unusual inverse correlation between the 5- and 10-year real interest rates as approximately reflected in constant maturity 5- and 10-year TIPS.  Since early May the correlation coefficient between the yields on constant maturity 5- and 10-year TIPS was about -.72 (as of today it’s -.77), while the correlation coefficient between the two yields since the start of 2012 was .86.  This week, I was able to do a little further work, looking at data since 2003, on the correlation between interest rates at the 5- and 10-year time horizons. Since 2003, the correlation between real 5- and 10-year interest rates is about .96. I computed monthly correlations, which are usually over .8 and regularly over .9. Only very rarely was there a (barely) negative monthly correlation, certainly nothing close to the -.77 correlation during the first 30 days of this month. However, as I computed the correlations, I found that a more meaningful measure of the relationship between the 5- and 10-year yields on TIPS is the absolute difference between them. The graph below plots the yields on 5- and 10-year constant maturity TIPS since 2003. The most striking period is clearly in October and November of 2008, when the yield on 5-year TIPS soared above the yield on 10-year TIPS, because of the desperate scramble for liquidity at the height of the financial crisis.

US 10-Year Treasury Yield Hits Record Low of 1.62% - The benchmark U.S. Treasury yield fell to its lowest level in at least 60 years on Wednesday as worries of contagion from Spain's ailing banks raised bids for low-risk investments. Yields on 10-year notes sank to a record low of 1.62 percent, down sharply from 1.73 percent in late U.S trading on Tuesday. The 30-year bond yield fell to 2.71 percent, its lowest level since October, and down from a yield of 2.84 percent in late U.S. trade on Tuesday.

10Y Treasury Under 1.6% - Record Low Yields Continue - With 10Y rates under 1.6%, new record low yields, we suspect Bernanke's 'keep rates low to help housing via QE' argument is going to be a tough one. Perhaps its just 'print money to save the world for 3 more months' honesty will just have to come out... and 30Y rates are dropping rapidly back to the plunge lows of Dec 2008...

Treasuries Update: 5-, 7-, 10-, 20-, and 30-year Yields at Historic Lows  - Today we saw Treasury history in the making. Government bonds in the safe-haven countries around the world plunged -- in some cases to historic lows. Of the various US instruments that I track, today the 5-, 7-, 10-, 20- and 30-year Treasuries set historic closing lows. The flight to safety is leading us into previously "uncharted" territory. The Fed's latest strategy for managing the economy, Operation Twist, has a month to go. The program was announced on September 21st of last year with the stated purpose of selling $400 billion in shorter-term Treasury securities by the end of June 2012 and using the proceeds to buy longer-term Treasury securities. The Fed assumed this would put downward pressure on longer-term rates, which would stimulate the economy through "a broad easing in financial market conditions."  At face value, it would appear that the Fed has been successful in driving rates lower. However, the extreme plunge in Treasury yields at 5-years and longer was presumably not part of the Fed's goal. We can attribute this trend to financial fears around the world as the Eurozone teeters on disaster and emerging markets appear increasingly wobbly as well. The 30-year fixed mortgage, according to the latest Freddie Mac weekly survey, is at its all-time low at 3.75. That probably suits the Fed just fine. But as for loans to small businesses, the Fed strategy is a solution to a non-problem.

Speechless - Krugman - I’m finding it almost impossible to write about the economic news right now. It’s not just the scale of the disaster; it’s the way we were led into disaster by Very Serious People who were quite sure that their prejudices somehow constituted wisdom. If there’s any saving grace in the meetings I’ve been in lately, it is that at least some of the VSPs seem finally to get the fact that maybe they don’t actually have it all sorted. But then there are the others. I’ll get some substantive stuff up shortly; but just look at the man who insisted that credit default swaps had made the financial system stable, that there was no housing bubble, that the housing market was poised for recovery in 2006, telling us that with interest rates at their lowest levels ever, what we need to worry about most is … the threat of rising interest rates.

Counterparties: The debt crisis we’re wasting - US and German government debt, the WSJ reports, is now “trumping gold as a safe haven”.  In fact, today a host of government bond yields around the world approached new lows. Yields for 10-year Treasuries hit 1.625%, a new record. As Joe Weisenthal notes, German, British, Finish, Swedish, Australian and Canadian borrowing costs have never been lower. German two-year bond yields even hit zero. As one analyst said:”This is fear.” Edward Harrison, for his part, warns that low rates could force the US into a Japanese-style state of “permanent zero” that punishes savers and hamstrings banks. And Matt Yglesias wonders: If inflation-adjusted interest rates on US debt are actually negative, why bother collecting taxes at all? While the world is willing to lend to the US for next to nothing, it’s worth revisiting the last time 10-year Treasury yields hit 60-year lows. In September, as America was fresh off the debt ceiling debacle, Martin Wolf reminded us that the market was not particularly worried about deficits, at least not in the US, UK and Germany. (Ezra Klein had similar things to say in August.) The bond market, Wolf wrote, is “loudly saying” we should use cheap funds to raise future wealth and so improve the fiscal position in the long run. It is inconceivable that creditworthy governments would be unable to earn a return well above their negligible costs of borrowing, by investing in physical and human assets, on their own or together with the private sector. Translation: Never let another country’s debt crisis go to waste.

DeLong and Summers and Self-Financing Fiscal Expansion - As has been referenced on this blog a number of times, the recent paper by Brad DeLong and Larry Summers has had a significant impact on the debate over optimal fiscal adjustment in a depressed economy. Although the authors themselves note that the balance of arguments may be quite different in a non-creditworthy economy, the paper is still important to our debate (see also here and here). The key innovation in the paper is to incorporate the fiscal implications of potential “hysteresis effects.” Put simply, these effects refer to long-lasting effects on future output – and thus on the future fiscal position – of fiscal adjustment measures today that reduce today’s output. For example, the loss of a job due to weaker growth this year could have long-lasting fiscal implications if it makes it harder for the person losing their job to gain employment in the future. A striking conclusion in the paper is that, under what appear to be a relatively undemanding set of conditions, an expansion of government spending (or alternatively not engaging in some planned expenditure cut) could be self-financing from a long-term fiscal perspective. Put another way, fiscal expansion could bring about improvement rather than disimprovement in a country’s underlying creditworthiness. Thus, fiscal adjustment could be self-defeating from a creditworthiness perspective. Given the influence of their argument, it is important to look closely at the assumptions that underlie this result.

The Economic Costs of Fear, by Brad DeLong -The S&P stock index now yields a 7% real (inflation-adjusted) return. By contrast, the annual real interest rate on the five-year United States Treasury Inflation-Protected Security (TIPS) is -1.02%. Yes, there is a “minus” sign in front of that: if you buy the five-year TIPS, each year over the next five years the US Treasury will pay you in interest the past year’s consumer inflation rate minus 1.02%. Even the annual real interest rate on the 30-year TIPS is only 0.63% – and you run a large risk that its value will decline at some point over the next generation, implying a big loss if you need to sell it before maturity.So, if you invest $10,000 in the S&P for the next five years, you can reasonably expect (with enormous upside and downside risks) to make about 7% per year, leaving you with a compounded profit in inflation-adjusted dollars of $4,191. If you invest $10,000 in the five-year TIPS, you can confidently expect a five-year loss of $510That is an extraordinary gap in the returns that you can reasonably expect. It naturally raises the question: why aren’t people moving their money from TIPS (and US Treasury bonds and other safe assets) to stocks (and other relatively risky assets)? ...

The Obama spending binge - Nine days ago Mr. Rex Nutting of MarketWatch wrote a provocative column titled “Obama spending binge never happened.” Here is the key quote: Over Obama’s four budget years, federal spending is on track to rise from $3.52 trillion to $3.58 trillion, an annualized increase of just 0.4%. Referencing and relying on this article (rather than on the hundreds of talented OMB career staff who sit nearby), White House Press Secretary Jay Carney told reporters: I simply make the point, as an editor might say, to check it out; do not buy into the BS that you hear about spending and fiscal constraint with regard to this administration. I think doing so is a sign of sloth and laziness. President Obama then followed suit in a campaign speech in Iowa one week ago: But what my opponent didn’t tell you was that federal spending since I took office has risen at the slowest pace of any President in almost 60 years. President Obama and Mr. Carney are both relying on Mr. Nutting’s key quote above. Let’s examine the quote as Mr. Carney suggests we should do.  The President argues that his fiscal stimulus law, enacted in February 2009, had a big positive effect on the growth rate of the economy. We are now asked to believe that President Obama’s policies did not significantly increase spending but did significantly increase economic growth. This is, to say the least, an intellectually inconsistent argument. The whole Keynesian fiscal stimulus argument is premised on a significant increase in government spending.

Who’s the Biggest Spender? Obama or Bush? - Lately, there has been some controversy about the growth of spending under Barack Obama. It began on May 22 with a column by Rex Nutting of MarketWatch, which concluded that the rate of growth of federal spending under Obama has actually been trivial compared to the last 4 presidents.According to Nutting’s calculations, spending has grown only 1.4 percent per year under Obama – one-fifth the rate under Ronald Reagan and George W. Bush. Following is a chart accompanying the article. There has been a considerable amount of debate about Nutting’s calculations, which fly in the face of Republican dogma. Much involves technical accounting issues, such as how to allocate spending during fiscal year 2009. This is important because fiscal year 2009 began on September 1, 2008 during Bush’s administration, reflecting his priorities. By the time Obama took office on January 20, 2009 the fiscal year was almost half over; he didn’t submit his first budget until February 26, 2009 and the fiscal year 2010 budget is really the first one that reflected his priorities. Nutting assigned the bulk of fiscal year 2009 spending to Bush, an assumption that other analysts have questioned. Glenn Kessler of the Washington Post found that Nutting overstated his argument in various ways. But the PoliFact site of the Tampa Bay Times concluded that the Nutting column was essentially correct.

Confusion About the Deficit - Laura D’Andrea Tyson - Is a decrease in the federal budget deficit good or bad for jobs and growth in the American economy? This deceptively simple question confuses thousands of students who enroll in introductory economics every year, and it will undoubtedly confuse millions of voters this year. Based on misleading political rhetoric — a naïve assumption that government budgets are like individual or family budgets (and poorly taught economics courses) — most voters believe that a large government deficit is necessarily bad for the economy. Following this logic, the large spending cuts and tax increases scheduled to occur in January 2013 should be good for the economy because they would sharply reduce the deficit. But the Congressional Budget Office has just issued a sober warning that these measures, which would reduce the fiscal deficit by about 5 percent of gross domestic product between 2012 and 2013, are likely to throw the economy back into recession. Even Mitt Romney, who is attacking President Obama for fiscal profligacy and has pledged to balance the budget if he is elected, has acknowledged that slashing more than a trillion dollars from the deficit next year would bring on another recession. The effects of an increase or a decrease in the deficit depend on the economy’s specific conditions. Under current conditions, an increase in the budget deficit would be better for the economy than the decrease scheduled to take effect next year.

Growth Rates & Government Spending - How fast is the federal government's spending rising? It's a politically charged question these days, of course, and so there's an excess of spin attached to the discussion of government budgets at the moment. Fortunately, the offending numbers are easily located and dissected, courtesy of the Congressional Budget Office's "Budget and Economic Outlook: Fiscal Years 2012 to 2022" report (specifically: the historical data in tables F-1 and F-3). The results may enrage or inspire you, depending on your political persuasion and budgetary assumptions. But the first intelligent step in any debate is to take a sober look at the data, assuming it's available. Oh, yes, one other necessary condition for informed analysis: no screaming, please. Let's start with total federal outlays on a fiscal year basis. For perspective, the chart below compares a simple one-year percentage change with its annualized (geometric) two- and three-year counterparts. The recent surge in growth rates is due to fiscal year 2009, but there's been a sharp slowdown in the pace of federal spending in the two subsequent years. The future is unclear on this front, but the past is crystal.

Reminder: US Can Borrow Extremely Cheaply at the Moment - This is your occasional reminder that the US has the ability to borrow right now at just about the lowest rates in history. 2% for a 10-year Treasury bond was a dream; we’re now in the range of 1.64%. The reasons for that are actually not auspicious: fear over potential economic headwinds have caused a flight to safety in the bond markets, with almost every country in control of their currency seeing their borrowing rates drop. But in the context of a country with stubbornly high unemployment, this is a gift. The markets are begging the United States to borrow more – offering real negative interest rates over a ten-year horizon. The US can use that borrowed money to jumpstart hiring and make a significant dent in the jobless rate. And they can pay back the money, again, AT A NEGATIVE INTEREST RATE, adjusted for inflation. There’s no good reason not to do this, which of course is why we’re not doing it. This is happening all over the world. Germany, which has effective control of the European Central Bank, saw their two-year notes fall to zero today. The UK, Switzerland, Canada are all seeing this phenomenon as well.

Government investment: timing vs. levels - Tyler Cowen is skeptical of the argument low interest rates mean we should boost government investmentIt is often claimed that the governments of the United States, the UK, and Germany should spend more money because they can borrow at low rates, thus raising the present expected return on the investment considered as a whole.  Maybe, but keep in mind that the interest rates on quality government debt are down, in part, because the risk premium is up...You might think the government investments are “low hanging fruit” in terms of quality.  Maybe yes, maybe no, but the low real interest rate doesn’t signal that, rather it signals merely that people expect to be repaid.  In this argument for more government investment, the notion of government investments as low hanging fruit is doing a lot of the work. I think that Tyler may be conflating an argument about levels of investment with an argument about the timing of investment.

Randy Wray: MMT Without the JG? - The contentious issue is this: can one adopt MMT while rejecting the JG? If you knew that a vaccination can prevent smallpox, would you oppose providing vaccinations (at least to those who want them—I do not want to get into a debate about forcing vaccinations as we have never advocating forcing jobs on those who do not want to work)? Now I do realize this is not quite a fair comparison because it is possible that there are many cures for the disease of unemployment. MMTers advocate the Jobs Guarante (JG) cure. I am open to alternative cures. I just do not hear any coming from the critics. Some try bait and switch: Let’s give them a Basic Income Guarantee (BIG) instead of jobs. That does not cure the disease of unemployment. It is like providing antibiotics instead of vaccinations to fight Polio. They then try to justify this on the argument that if we give people BIG, they can still choose to work if they want to. No, they cannot. There must be jobs. Certainly it is true that giving everyone antibiotics does not prevent them from seeking vaccinations. But the vaccinations need to be available. I’m not going to argue more about this—the argument is just too silly. Yes we can give people BIG but that does not give them jobs. If someone is involuntarily unemployed, she wants a job. BIG will not cure the unemployment disease. Can we have BIG and JG? Sure. But it is the JG that cures the disease of involuntary unemployment. (Some claim BIG cures the disease of poverty; I doubt that, but it is a different disease.)

The Skipping Stone and Job Growth - Some time ago when certain individuals were trumpeting the coming expansion, sans real data, this blog was putting forward the skipping stone thesis: namely policy makers were afraid of another significant downturn, but because of the red queen's race, did not want to have a robust expansion, therefore, as soon as enough expansion took hold to ease the fears of a wipe out of the present political order, they would turn to austerity again, and economies would slow. This is a consequence of the end of cheap oil, and the accumulation of assets in the hands of those oilarchies with small stakeholder bases versus the accumulation of assets in the hands of those who control the capital system. That's the real argument of political economy in a nutshell: how to keep the holders of capital rents ahead of the holders of sovereign resource rents. Everything should be looked at through this lens.  According to the skipping stone, the US economy would be allowed to slow to near standstills, and then there would be a pump of money, largely by revenue reductions and other capital inflation measures, id est QEFoo. This is why mid-cycle governments such as the UK are taking their recession now, with two years to recover, Sarkozy's fall in France being an object lesson.

Debt-Ceiling Deja Vu Could Sink Economy - Europe is crumbling. China is slowing. The Federal Reserve is dithering. Yet the biggest threat to the emerging U.S. economic recovery may be Congress. John Boehner, the leader of the House Republicans, has promised yet another fight with the White House over the debt ceiling -- the limit Congress has placed on the amount the federal government can borrow.   If this sounds familiar, it’s because we suffered through an identical performance last summer. Our analysis of that episode leads to a troubling conclusion: It almost derailed the recovery, and this time could be a lot worse.  Sometime around the end of this year, the federal government will bump up against its $16.4 trillion borrowing limit, as a direct result of spending and tax laws enacted by Congress. To raise the limit, legislators must pass a separate law. In principle, the extra level of approval can serve as a useful mechanism, forcing Congress to debate its priorities. But refusing to raise the limit wouldn’t free the government of its existing spending obligations. Rather, it would leave the government with no choice but to default on its debts.  In other words, congressional Republicans are taking the government’s creditworthiness hostage when they threaten not to increase the debt ceiling. Politically advantageous as this may be, it is terrible economics. To understand why, let us consider the economic effects of last year’s debt-ceiling debate. If we know our history, perhaps we will not be doomed to repeat it.

A Budget Grand Bargain Will Follow the Election - Robert Rubin - Congress's failure to reach a fiscal "grand bargain" last summer manifested the deep economic-policy divide separating Democrats and Republicans. Fortunately, the so-called fiscal cliff will soon create an extraordinary second opportunity for a breakthrough compromise. Washington's continued failure to get our fiscal house in order poses five basic risks. One, government borrowing risks crowding out private investment. Two, our unsustainable fiscal outlook undermines business confidence by creating uncertainty about future policy, economic conditions and our ability to govern, which in turn dampens investment and hiring.  Three, deficits constrain our capacity to make the public investment critical to competitiveness, growth and widespread income gains. Four, deficits hamper our financial ability to cope with economic weakness or geopolitical events. And five, our fiscal position creates a strong potential for some form of severe macroeconomic distress at an unpredictable time: high inflation, high interest rates and low confidence in the future that produce an extended period of slow or negative growth, or a harsh financial crisis. Soon after November's election several events will put serious pressure on both parties, possibly providing the impetus for a serious fiscal program. The critical decision-making period will be Congress's lame-duck session after the election, and the first two or three months of the new Congress.

Democrats Muddled on Fiscal Cliff Solutions as Lame Duck Session Nears - It’s often said that Democrats have no bumper sticker argument, nothing that can be said in an elevator pitch to boil down the principles of the party. That can be seen in the utter confusion with which the party is approaching the lame duck session and the fiscal cliff. I follow this stuff fairly closely, and I can say without reservation that I have no idea what the overarching plan for the lame duck is coming out of Democrats in Congress or the White House.Take the Bush tax cuts, for example. In the 2008 primaries, the universally acknowledged plan was to repeal the Bush tax cuts to pay for other priorities. By the time we got to the general election, that had narrowed to letting the Bush tax cuts expire for the top two brackets, above $250,000 a year. That has held in all Presidential budgets since that time, though in 2010 all the tax cuts got extended for two years. And now there’s not even a clear direction. Nancy Pelosi’s shift, asking for the Bush tax cuts to be extended except for incomes over $1 million, came as a surprise to allies. I have been able to confirm that Americans for Tax Fairness, the organization launched to argue for repeal of the Bush tax cuts over $250,000 a year, as it is in the President’s budget, was totally blindsided by the Pelosi letter to John Boehner, setting the dividing line at $1 million. They hastily rushed out their coalition, which includes some of the biggest progressive and labor groups in the country. They weren’t even able to complete their Web presence. They felt the need to answer Pelosi’s shift.

Bowles and Simpson Lurking on the Edges of Fiscal Cliff Disarray - One of the bigger issues with the complete lack of consensus from the Democratic establishment as the fiscal cliff nears is that it gives oxygen to a group of right-leaning fiscal scolds who see the opportunity to decimate safety net programs, allegedly in exchange for some tiny giveback on taxes they will describe as balanced. You can see this with the renewed prominence of Erskine Bowles and Alan Simpson, who claim to be working with a bipartisan group of lawmakers. Two respected former lawmakers whose names have become synonymous with bipartisan compromise in a highly divisive Congress are meeting with dozens of lawmakers to forestall a potential year-end fiscal crisis dubbed “taxmageddon.” Former Democratic White House chief of staff Erskine Bowles said he and former Republican Senator Alan Simpson, are working with a bipartisan group of 47 Senators and as many House members to frame a compromise on $7 trillion in looming fiscal decisions, Bowles said on CNN’s news program, “Fareed Zakaria GPS.” [...] “I believe this group will come together during the lame duck,” after the November 6 elections, said Bowles, in reference to the congressional session that occurs after an election but before the new members have been sworn in.

Big Fiscal Phonies, by Paul Krugman - Until now the attack of the fiscal phonies has been mainly a national rather than a state issue, with Paul Ryan, the chairman of the House Budget Committee, as the prime example. As regular readers of this column know, Mr. Ryan has somehow acquired a reputation as a stern fiscal hawk despite offering budget proposals that, far from being focused on deficit reduction, are mainly about cutting taxes for the rich while slashing aid to the poor and unlucky. In fact, once you strip out Mr. Ryan’s “magic asterisks” — claims that he will somehow increase revenues and cut spending in ways that he refuses to specify — what you’re left with are plans that would increase, not reduce, federal debt.  The same can be said of Mitt Romney, who claims that he will balance the budget but whose actual proposals consist mainly of huge tax cuts (for corporations and the wealthy, of course) plus a promise not to cut defense spending.  Both Mr. Ryan and Mr. Romney, then, are fake deficit hawks. And the evidence for their fakery isn’t just their bad arithmetic; it’s the fact that for all their alleged deep concern over budget gaps, that concern isn’t sufficient to induce them to give up anything — anything at all — that they and their financial backers want. They’re willing to snatch food from the mouths of babes (literally, via cuts in crucial nutritional aid programs), but that’s a positive from their point of view — the social safety net, says Mr. Ryan, should not become “a hammock that lulls able-bodied people to lives of dependency and complacency.” Maintaining low taxes on profits and capital gains, and indeed cutting those taxes further, are, however, sacrosanct.

Is This The Economic Dark Ages In The U.S? - My guess is that Paul Krugman thought that this post was one of the more trifling economic-oriented pieces he has written in a while. It was short and probably took little time. It was also seemingly commonplace. After all, it was about a politician who said something inherently and obviously false. But I found it to be extremely disturbing, not because it was off-the-wall -- it's anything but -- but because it described a behavior -- bald-face lying -- that has become so blatant and commonplace among Republican policymakers on economic issues that any one of them who is even slightly honest and candid now would be both an absolute rarity and a welcome relief. And the fact that the GOP lying about the economy...and especially the so accepted and expected means that any Republican who wasn't jump-the-shark ridiculous on these issues wouldn't be allowed to stay in the party much longer.

Here's What The US Must To Avoid The European Austerity Trap - Robert Reich - We now know austerity economics is bad for weak economies facing large budget deficits. Much of Europe is in recession because of budget cuts demanded by Germany. And as Europe’s economies shrink, their debts become proportionally larger, making a bad situation worse. The way to avoid this austerity trap is to get growth and jobs back first, and only then tackle budget deficits. The U.S. hasn’t yet fallen into the trap, but it could soon. Last week the non-partisan Congressional Budget Office warned we’ll be in recession early next year if the Bush tax cuts end as scheduled on January 1, and if more than $100 billion is automatically cut from federal spending, as required by Congress’s failure last August to reach a budget deal. Predictably, Capitol Hill is deadlocked. Democrats refuse to extend the Bush tax cuts for high earners and Republicans refuse to delay the budget cuts. If recent history is any guide, a deal will be struck at the last moment – during a lame-duck Congress, some time in late December. And it will only be to remove the January 1 trigger. Keep everything as it is, the Bush tax cuts as well as current spending, and kick the can down the road into 2013 and beyond. Which means no plan for reducing the budget deficit. I’ve got a better idea — a different kind of trigger. Instead of a specific date, make it the rate of growth and employment we should reach before embarking on deficit reduction.

Panetta: Cuts to defense spending would be ‘disastrous’ -- Defense Secretary Leon Panetta warned Sunday that it would be “disastrous” for Congress to allow cuts in defense spending to take place as scheduled in January.  In an interview that aired on ABC’s “This Week,” Panetta said the Pentagon “has to play a role in trying to be able to achieve fiscal responsibility,” but warned against allowing the cuts, which would take place as a result of the failure to reach a deficit reduction deal last year.  The cuts to Medicare and defense spending are to be made through a process known as sequestration.  “I think what both Republicans and Democrats need to do, and the leaders on both sides is to recognize that if sequester takes place, it would be disastrous for our national defense and very frankly for a lot of very important domestic programs,” Panetta said. “They have a responsibility to come together, find the money necessary to de-trigger sequester. That’s what they ought to be working on now.”

Memorial Day Thoughts on National Defense - Robert Reich - The United States spends more on our military than do China, Russia, Britain, France, Japan, and Germany put together.  With the withdrawal of troops from Afghanistan, the cost of fighting wars is projected to drop – but the “base” defense budget (the annual cost of paying troops and buying planes, ships, and tanks – not including the costs of actually fighting wars) is scheduled to rise. The base budget is already about 25 percent higher than it was a decade ago, adjusted for inflation.  One big reason: It’s almost impossible to terminate large defense contracts. Defense contractors have cultivated sponsors on Capitol Hill and located their plants and facilities in politically important congressional districts. Lockheed Martin, Raytheon, and others have made spending on national defense into America’s biggest jobs program.  So we keep spending billions on Cold War weapons systems like nuclear attack submarines, aircraft carriers, and manned combat fighters that pump up the bottom lines of defense contractors but have nothing to do with 21st-century combat.

The amazing expanding Pentagon - Today, the Pentagon is the chief agent of nearly all American foreign policy, and a major player in domestic policy as well. Its planning staff is charting approaches not only toward China but toward Latin America, Africa, and much of the Middle East. It’s in part a development agency, and in part a diplomatic one, providing America’s main avenue of contact with Africa and with pivotal oil-producing regimes. It has convened battalions of agriculture specialists, development experts, and economic analysts that dwarf the resources at the disposal of USAID or the State Department. It’s responsible for protecting America’s computer networks. In May of this year, the Pentagon announced it was creating its own new clandestine intelligence service. And the Pentagon has emerged as a surprisingly progressive voice in energy policy, openly acknowledging climate change and funding research into renewable energy sources.The huge expansion of the Pentagon’s mission has, not surprisingly, rung plenty of alarm bells. In the policy sphere, critics worry about the militarization of American foreign policy, and the fact that much of the world—especially the most volatile and unstable parts—now encounters America almost exclusively in the form of armed troops. Hawkish critics worry that the Pentagon’s ballooning responsibilities are a distraction from its main job of providing a focused and prepared fighting force. But this new reality will be with us for a while, and in the short term it creates an opportunity for the next president. Super-empowered and quickly deployable, the Pentagon has become a one-stop shop for any policy objective, no matter how far removed from traditional warfare.

Barack O’Romney Foreign Affairs - If Barack Obama is reelected, he ought to consider making Mitt Romney his new secretary of state. I propose this far-fetched idea to drive home a broader point. Despite his campaign rhetoric, Romney would be quite comfortable carrying out President Obama's foreign policy because it accords so closely with his own. And that brings up an extraordinary fact. What has emerged in the second decade after 9/11 is a remarkable consensus among Democrats and Republicans on a core approach to the nation's foreign policy. It's certainly not a perfect alignment. But rarely since the end of the Cold War has there been this level of consensus. Indeed, while Americans may be divided, polarized and dysfunctional about issues closer to home, we are really quite united in how we see the world and what we should do about it.

Should Congress Change CBO's Scorekeeping Rules? - On Monday I participated in a constructive debate with Jared Bernstein, sponsored by e21, about my paper, “The Fiscal Consequences of the Affordable Care Act.” For those unfamiliar with my paper, it shows that the enactment of 2010’s health care law will add more than $340 billion to federal deficits over the next ten years, an adverse fiscal consequence disguised by Congress’s current scorekeeping conventions.Without getting too far into the weeds, the main scorekeeping issue involves the treatment of Medicare. Social Security and Medicare are financed under law from special trust funds and are only permitted to pay benefits to the extent they have resources in those trust funds. The scorekeeping conventions currently in use ignore these constraints. They instead implicitly assume that all financing discipline imposed by the trust funds under current law will be overridden by future Congresses. During the question period after the debate, AEI economist Alan Viard challenged me as to whether and how I thought these scorekeeping rules should change. I gave essentially the same answer I’d given in my paper, which is that I thought the scoring rules made sense for most policy evaluation purposes, but they simply had a drawback in the particular case of the ACA.

American Community Survey: Why Republican hate it. -Does the government have the right to ask you when you leave for work in the morning? How long it takes you to get home? Whether you have a flush toilet? The answers to these questions are at the heart of an unexpected controversy about a government program most non-wonks have no idea even exists. To supplement the main decennial census, the Census Bureau conducts the annual American Community Survey. The objections to the ACS are a fascinating window on the radicalized post-2008 version Republican Party, a party that’s gone beyond skepticism about the merits of particular government programs to a generalized belief that even the most useful public sector undertakings are an infringement of basic rights.

A diabolical mix of US wages and European austerity - Robert Reich - What if Europe and the US converged on a set of economic policies that brought out the worst in both – European fiscal austerity combined with a declining share of total income going to workers? Given political realities on both sides of the Atlantic, it is entirely possible. So far, the US has avoided the kind of budget cuts that have pushed much of Europe into recession. Growth on this side of the pond is expected to be around 2.4 per cent this year. And jobs are recovering, albeit painfully slowly. But a tough bout of fiscal austerity could be coming in six months. The non-partisan Congressional Budget Office warned last week that if the Bush tax cuts expire on schedule at the start of 2013, just as $100bn of budget cuts automatically take effect under the deal to raise the debt ceiling that Democrats and Republicans agreed to last August, the US will fall into recession in the first half of next year. Even if these measures were to reduce the cumulative public debt, a recession would increase the debt as a proportion of gross domestic product – making a bad situation worse. That is the austerity trap much of Europe now finds itself in. Meanwhile, real wages in the US continue to fall. A new “World Outlook” released by the International Monetary Fund last Friday showed that in the three years since the depths of the downturn in 2009, total national income has rebounded in most of Europe and in the US. But the share of national income going to labour has fallen sharply in the US, while rising in Europe as a whole.

A Breach in the No New Taxes Wall? - Rosalind Helderman of the Washington Post reports in Saturday’s paper that a “Faint rift opens in GOP over tax pledge”–referring to the pledge that Americans for Tax Reform’s Grover Norquist has compelled virtually all Republican policymakers to sign.  Helderman explains how the ground seems to be shifting: In GOP activist circles it is known simply as “the pledge,” and over the past generation it has become the essential conservative credential for Republicans seeking elective office. Of the 242 Republicans in the House today, all but six have signed the pledge. But now, an increasing number of GOP candidates for Congress are declining to sign the promise to oppose any tax increase, a small sign that could signal a big shift in Republican politics on taxes. Of the 25 candidates this year promoted by the National Republican Congressional Committee as “Young Guns” and “Contenders” — the top rungs of a program that highlights promising candidates who are challenging Democrats or running in open seats — at least a third have indicated they do not plan to sign the pledge authored by anti-tax crusader Grover Norquist. Why the change in heart?  For one reason, because the lopsided, no new revenues (not just no new higher tax rates) stance just doesn’t make policy sense to many of these Republicans, who can’t see how spending-side-only approaches are easier than approaches involving a mix of spending cuts and revenue increases:

Pelosi: Promote growth, reduce deficit - Democrats have called on House Speaker John Boehner, R-Ohio, to set an immediate vote on extension of the middle-income tax cuts. Our economic growth requires that we act now. Our nation's entrepreneurial spirit depends on a thriving middle class. These tax cuts strengthen the economy by putting money into the pockets of consumers and supporting small businesses, the engines of our recovery and job creation. We face two tasks: One is to promote growth and create jobs; the other to reduce the deficit. Our proposal achieves both goals. If Democrats and Republicans agree that we should not raise taxes on the middle class, then the question Republicans must answer is: Will they support middle-class tax relief now, or will they continue to insist that it be coupled with tax breaks for the wealthy that increase the deficit and do not grow the economy or create jobs?

Pelosi's tax ploy demolishes Democrats' leverage - Let's say you're shopping for a new car. You're willing to pay $25,000. The sticker price is $30,000. Would your first offer to the dealer be $29,000? Of course not. But that's the equivalent of what House Democrats are doing as they seek to execute a too-cute-by-half strategy on the George W. Bush tax cuts. The Bush tax cuts, you might recall, are set to expire at the end of this year. Most Republicans want to make the cuts permanent. For everybody.Sounds appealing, but few things would make it harder to get control of the nation's budget deficits and its worsening debt. The tax cuts were unaffordable when President Bush pushed them through Congress in 2001, and they're even more destructive now that the nation's debt has grown to ruinous levels.

366 Billion Reasons Not to Raise the Bush Tax Cut Threshold - Raising the income limit for extending President Bush’s income tax cuts from $250,000 to $1 million, as House Minority Leader Nancy Pelosi has proposed, would cost several hundred billion dollars, our new report explains — and about half of the benefits would go to millionaires.  The proposal, as we write in our report: would lose nearly half of the revenue that President Obama’s proposal to extend the tax cuts only for households making up to $250,000 would raise, according to new estimates from Congress’ Joint Committee on Taxation (JCT).  The higher threshold would raise 44 percent — or $366 billion — less in revenue over the coming decade than the lower threshold.  Citizens for Tax Justice has released estimates showing a virtually identical percentage revenue loss. This means that policymakers ultimately would need to find $366 billion more in deficit savings to offset the cost.  That would make key programs ranging from Medicare to Medicaid and other low-income programs to education, basic research, food safety, defense, and homeland security significantly more vulnerable to deep cuts. . Nor, despite common misconceptions, would the $1 million threshold end the Bush tax cuts for people making over $1 million.  In fact, millionaires would benefit substantially from the Pelosi proposal; they would receive roughly half of the tax cuts from raising the threshold from $250,000 to $1 million, according to Citizens for Tax Justice, because they would continue to get the full benefit of the Bush tax cuts on all of their income between $250,000 and $1 million. 

CBPP’s Take on the Pelosi Threshold Lift - As I pointed out the other day, raising the threshold on the highend Bush tax cuts, as proposed by House Minority Leader Nancy Pelosi, is a great way to lose a bunch of revenue.  CBPP’s out today with our own analysis based on the score by Congress’s Joint Committee on Taxation (my earlier post used a preliminary estimate by the group Citizens for Tax Justice–they got the same answer as JCT, proving once again that CTJ punches well above their weight).  As the picture shows, you move the threshold on the expiring tax provision from $250K to $1 mil, you lose $366 billion over 10 years–44% of the total. If we’re thinking about stabalizing the debt over the next decade, that $366bn loss has gotta be made up somewhere else.  But as Marr and Huang point out in the CBPP brief, we keep taking more and more stuff off the table–we’re narrowing the base–until all that’s left is stuff that actually helps low-income people…the stuff we count on congressional Democrats to fight for (policies, btw, that Leader Pelosi has been a tireless and successful fighter for, often against tough odds). So I remain unhappy and confuzzled by this move.

Republican Keynesians - Most Republicans and conservatives despise the British economist John Maynard Keynes and believe his theories are the root of all evil in economic policy. Yet when push comes to shove, Republicans are happy to fall back on Keynesian theories when it suits them. As David Frum, a speechwriter for George W. Bush, recently put it, “We’re all Keynesians during Republican administrations.” The latest evidence comes from Mitt Romney, in an interview with Time magazine, during which he expressed concern about the impending fiscal contraction on Jan. 1, 2013, when the Bush-era tax cuts expire and various large cuts in spending are scheduled to take place – a result of last summer’s budget deal. A May 22 report from the Congressional Budget Office estimated that these actions would reduce the federal budget deficit by about 4 percent of gross domestic product next year. One would think that Mr. Romney would embrace this huge deficit reduction and say, “Bring it on!” After all, his party has long asserted that deficits drain capital from the economy that would better be put to use by the private sector. Indeed, many conservatives claim that deficits are destabilizing and the principal impediment to economic growth. In Europe, conservatives have been successful in making fiscal consolidation the principal means of stimulating growth.

Is the GOP Tax Reform Strategy a Fiscal Trap? - I recently blogged on Doug Holtz-Eakin’s four-step framework for tax reform.  His roadmap—first agree on a progressive tax code, a top rate, and the total amount of revenue to be raised, then cut the tax preferences necessary to accomplish the first three—has generated lots of interest. But Chuck Marr over at the Center on Budget and Policy Priorities is no fan. In his own blog, Chuck argues that the Holtz-Eakin model is a fiscal trap that would increase both deficits and income inequality. Thus, he presents his own alternative four-step plan:

1. Let the Bush tax cuts aimed at households making over $250,000 expire on schedule.
2. Agree on how much additional revenue to raise, alongside significant spending cuts, as part of a balanced deficit-reduction package.
3. Agree on specific revenue-raisers while maintaining or improving tax progressivity.
4. Reduce tax rates below their scheduled current law levels only if Congress can cut enough tax preferences to meet the revenue target without gimmicks.
The differences between the two models are subtle but very important. Let’s look at a couple:

Jeb Bush Backs Tax Increases to Cut Debt - Former Florida Governor Jeb Bush, in a break with his party, said he could support tax increases to help reduce the federal government’s budget deficit.  The brother of former President George W. Bush told a congressional panel in Washington today that he could back a theoretical deficit-reduction package that would include $1 in tax increases for every $10 in spending cuts.  “If you could bring to me a majority of people to say that we’re going to have $10 in spending cuts for $1 of revenue enhancement -- put me in coach,” Bush told the House Budget Committee. “This will prove I’m not running for anything,” he said, prompting laughter from lawmakers and the audience.

America's 1 per cent take a battering as they lose 129,000 millionaires last year while China and India gain them - Even America's 1 percent had a tough year in 2011, according to a new report. While the U.S. still has the world's biggest population of millionaire households, they shrank in number by 2.5 percent to 5.1 million in 2011 compared with a year earlier. Those declines came as private wealth in America declined 0.9 percent to $38 trillion, as markets were rocked by crises in U.S. government and European debt, according to the Boston Consulting Group's annual global wealth report. Millionaire households in China rose 16 percent to 1.43 million while those in Singapore climbed 14 percent to 188,000 and India saw a 21 percent increase to 162,000. BCG estimates that private wealth in India and China will grow at compound annual growth rates of 19 percent and 15 percent, respectively, through 2016, compared with a global growth rate of 4 percent to 5 percent. More than a third of the global increase will come from China alone.

One in four of those with $200,000 or more in AGI paid no federal taxes in 2009  - The IRS recently released another "statistics of income" report.  This one has news that should make most ordinary Americans think twice about the GOP agenda of reducing taxes for the rich while cutting back on all kinds of programs that serve ordinary Americans--the fact that a large percentage --one out of every four--of Americans with $200,000 or more in income pay no federal income taxes whatsoever.  See Rubin, IRS Finds One in 189 High Earners Paid No U.S. Taxes in 2009,   How does someone with $200,000 or more in income pay no taxes, when ordinary folk with jobs who make $50,000 to $75,000 pay 15% to 25% of their income in taxes?

  • As I've often discussed here (see items under charitable contribution deduction), rich folk can easily afford to give away more to charity and they get a tax bonus that is much more than that available to poorer folk when they do so.  They get an especially big break if what they give away is appreciated stock that they bought a while ago--and rich folks own most of these financial assets, so they are the ones that get almost exclusive enjoyment of this lucrative loophole:  they get to deduct the full value of the stock they donate, without having ever paid taxes on the appreciation. 
  • Another way rich folk pay less in taxes is by ensuring that the income they earn is of a type that isn't subject to tax.  Big CEOs generally have rich pension plans and other forms of deferred tax compensation that facilitate lowering their tax bills.  Rich folk are the buyers of municipal bonds, which again enjoy a specific tax break in section 103 of the Code that excludes the interest income from the owners' tax returns.
  • A third way that rich people avoid taxes is by having so many deductions--high-end medical "equipment" (like swimming pools for arthritic patients), lots of interest on mortgages on high-end homes, and other deductions of special value to those who would otherwise pay tax at a higher rate.

Big Paychecks, Tiny Tax Burdens: How 21,000 Wealthy Americans Avoided Paying Income Tax - The richest woman in Wisconsin, Diane Hendricks, is worth an estimated $2.8 billion, but she did not pay a dime in state income tax in 2010, the Milwaukee Journal-Sentinel first reported. Because of a change in how her company, ABC Supply Inc., the country's largest distributor of roofing, windows and siding, is structured, Hendricks reduced her personal state income tax burden from $2.3 million in 2009 to zero in 2010, according to records the state Department of Revenue released to the Journal-Sentinel. While a tweak in ABC's corporate structure allowed its CEO to get out of state income taxes, a complex web of deductions and exemptions in the federal tax code have allowed more than 20,000 wealthy tax filers get off the hook on paying federal income taxes. A recent IRS report showed that 20,752 households that reported earning more than $200,000 in 2009 paid no federal income taxes. About 1,500 of those tax-free Americans were millionaires. So how does someone in the top 3 percent of America's income earners finagle their income tax burden down to zero? For the majority of them, it's all about donating to charity, investing in local and state governments, earning money overseas and writing off doctor bills

Bill would give bank a $300M benefit - A one-sentence bill worth $300 million to a bank owned by a politically connected family that has doled out hundreds of thousands of dollars in campaign donations is about to get a big push forward. Set to be approved by the House Financial Services Committee on Thursday, the legislation would help Emigrant Savings Bank of New York sidestep a costly mandate of the Dodd-Frank financial reform law. No other bank in the country would be affected. The bill was introduced by Rep. Michael Grimm (R-N.Y.), but it’s backed by members of both parties on the financial services panel. Emigrant Bank is owned by billionaire Howard Milstein, a bundler for President Barack Obama’s 2008 campaign and a major Empire State political player.

The Case Against Tax Breaks for Private Equity - Private equity disproportionately rewards privatization companies while others are burdened with the risks. So let’s begin with one point: there is a place for private equity. In a privatization or leveraged buyout, a company is bought by an investment partnership with moneys borrowed against the company itself. The new money can be used productively even when levels of debt against the company’s assets and profits soar. A smaller company that cannot raise adequate equity can raise money by being bought by a private equity partnership. A company that is doing poorly can benefit from added capital and new management. Sometimes trimming labor costs in the process makes sense, of course. But the record of leveraged buyouts and private equity reflects its excesses, and most importantly, the lopsided nature of the financial incentives for doing the deals in the first place. Companies like Romney’s Bain or Steve Schwartz’s Blackstone or Kohlberg Kravis Roberts, the early industry leader when privatizations were called leverage buyouts (LBO), take advantage of a major government-provided benefit. The interest on debt is tax-deductible, and high levels of debt are the source of profits in these transactions. It is just like buying a house with a small down payment; if you can sell as the value goes up, the return on the down payment is high and the interest was deductible all along. In the meantime, the house is collateral for the loan. Similarly, partners are rarely if ever on the line for the debt; the company being privatized is. The one difference is that if the collateral value of the house falls, as it has recently, the homeowner is on the line. This is usually not so with privatizers.

McCain on Romney’s Bain record: ‘Free enterprise system can be cruel’ - Former Republican presidential nominee John McCain on Sunday walked back on his 2008 attacks on current GOP hopeful Mitt Romney for his record of killing jobs as the head of Bain Capital.  During a 2008 campaign stop in Florida, McCain had blasted Romney for taking over companies and laying off “thousands of workers.” On Sunday, Fox News host Chris Wallace asked McCain, who is now campaigning for Romney, if he was engaging in the same kind of “class warfare” that he has accused President Barack Obama of for attacking Romney’s Bain record. “This is the free enterprise system,” McCain insisted. "This is what investors do in the free enterprise and capitalism system.” “And, yes, the free enterprise system can be cruel,” he added. “But the problem with this administration is that small businesses have been the ones that have suffered the most, the kind that need investors, the kind that don’t need the hundreds of pages, the thousands of pages of regulations that continue to plague them and have them continue to hold back on hiring and investment.”

SEC Staff Ends Probe of Lehman Without Finding Fraud - U.S. Securities and Exchange Commission investigators have concluded their probe of possible financial fraud at Lehman Brothers Holdings Inc. without recommending enforcement action against the firm or its former executives, according to an excerpt of an internal agency memo. Pressure on the agency to punish any wrongdoing related to Lehman’s collapse escalated after Anton Valukas, the court- appointed bankruptcy examiner, found the firm misled investors with “accounting gimmicks” that disguised its leverage. Senior SEC officials have been reluctant to formally close the matter even though investigators found a lack of evidence of wrongdoing, according to people with direct knowledge of the matter. The officials have weighed issuing a public report on their findings that would stop short of an enforcement action while highlighting the firm’s questionable conduct.

The Sellout of the Ivory Tower, and the Crash of 2008 - Many people who saw my documentary film about the 2008 economic crisis, Inside Job, found that the most surprising, and disturbing, portion of the film was its revelation of widespread conflicts of interest in universities, think tanks, and among prominent academic experts on finance, economics, business, and government regulation. Viewers who watched my interviews with eminent professors were stunned at what came out of their mouths. Over the last thirty years, in parallel with deregulation and the rising power of money in American politics, significant portions of American academia have deteriorated into "pay to play" activities. These days, if you see a famous economics professor testify in Congress, appear on television news, testify in a legal case or regulatory proceeding, give a speech, or write an opinion article in the New York Times (or the Financial Times, the Wall Street Journal, or anywhere else), there is a high probability that he or she is being paid by someone with a big stake in what's being debated. Most of the time, these professors do not disclose these conflicts of interest, and most of the time their universities look the other way. Increasingly, professors are also paid to testify for defendants in fraud trials, both civil and criminal. The pay is high -- sometimes a quarter of a million dollars for an hour of congressional testimony. But for banks and other highly regulated industries, it's a trivial expense, a billion or two a year that they barely notice; and just as with politicians, it's a very good investment, with very high benefits.

Barry Ritholtz on the Crisis: Causes, Cures, Corptocracy, and Suggested Reading - When you get bit by a dog, you don’t just look at the dog, you have to look at the owner who is holding the leash. To me, a lot of the regulatory changes, and a lot of what the Federal Reserve did, stand on their own as a major factor. But if you’ve read David Hume, if you’ve studied the philosophy of causation, you have to look at what motivated those changes. I have these debates with friends. One group blames everything on big government; the other group blames everything on big corporations. The sad news is that there’s really no difference between the two: Big government and big corporations work hand-in-hand. If you want to know who is the puppet and who is the puppet master, it sure looks like Wall Street has been pulling the strings of Congress for many, many, many years. I remember the Dick Durbin quote, right in the middle of the crisis. He was astonished at all the bankers and bank lobbyists running around the halls of Congress, and said, “I can’t believe these guys – they act as if they own the place.” The fact is, it’s not an act – they do own the place.

Our Nation's Biggest Money Problem of All - Sometimes I wonder if amidst all of our world-weary cynicism we are even cynical enough. It's hard to wrap your mind around the immensity of the problem of money in politics, but it's this part of it that still shocks and depresses me. Thomas Edsall wrote this column earlier this week: Four years after the 2008 collapse, the finance industry has regained its dominant position in American politics. Perhaps the development of deepest significance is an absence: the failure of a powerful anti-Wall Street faction to emerge in either the House or the Senate. This is in contrast to the response to previous financial crises, when Congress enacted tough legislation—after the Savings and Loan implosion of the 1980s, for example, and more recently after the bankruptcy of Enron and WorldCom in the early 2000s. Obama's ambivalence about speaking out is a tacit victory for the industry. Indeed it is. And you can see the results of such far-reaching influence when you read this amazing piece by Matt Taibbi: The American people will never again be asked to foot the bill for Wall Street's mistakes," Obama promised. Two years later, Dodd-Frank is groaning on its deathbed. The giant reform bill turned out to be like the fish reeled in by Hemingway's Old Man—no sooner caught than set upon by sharks that strip it to nothing long before it ever reaches the shore.

Your Tax Dollars At Work, Wall St. Edition - When we last left Morgan Stanley, the company was taking all manner of abuse for botching the biggest IPO of the millennium. Alas, that turns out to be the least of its problems. Far more pressing is the fact that Moody’s may be on the verge of massively downgrading Morgan Stanley’s bond rating, which could cost the company billions of dollars (perhaps tens of billions) in collateral and increased borrowing costs.  Then yesterday’s Financial Times brought even worse news. To help save some cash in the event of a downgrade, Morgan Stanley was hoping to park a big portion of its $52 trillion derivatives portfolio inside its bank subsidiary—the portion of the company that functions as an old-fashioned loan-maker, not a hedge fund or investment bank. The reason for doing this is that it would lower borrowing costs that would otherwise shoot up when its credit rating dropped. Why? Because being a bank means you have lots of customer deposits, most of them insured by the federal government, and that you have access to really cheap loans from the Federal Reserve. If, say, you suddenly took a multi-billion-dollar bath on your derivatives bets, Uncle Sam would be there to absorb the losses, or at least help you manage them, and the bondholders who'd loaned you money wouldn’t feel the pinch. And, of course, the bondholders know that in advance, which is why they're likely to loan you money at reasonable rates in the first place. Hence the low borrowing costs.

How Political Clout Made Banks Too Big to Fail - How did it happen? In 1933, the Glass-Steagall Act erected a wall between two ways that banks could help customers borrow money. The idea was to keep commercial banks from exploiting their depositors, who might get saddled with the bonds of firms that could not repay the money they owed. One beneficial side effect of the Glass-Steagall Act was to fragment the banking sector and reduce the financial industry’s political power. Another was to foster healthy competition between commercial banks and investment banks.Starting in the 1970s, these limits were progressively removed. The deregulation unquestionably increased the efficiency of the banking sector and fostered economic growth. But with this growth came concentration. In 1980, there were 14,434 banks in the U.S., about the same number as in 1934. By 1990, this number had dropped to 12,347; and by 2000, to 8,315. In 2009, the number was less than 7,100. Most important was that the concentration of deposits and lending increased significantly. In 1984, the top five U.S. banks controlled only 9 percent of the total deposits in the banking sector. By 2001, that figure had increased to 21 percent and, by the end of 2008, to almost 40 percent. This process of deregulation and consolidation culminated in 1999 with the passage of the Gramm-Leach-Bliley Act, which completely removed the separation between commercial banks and investment banks. The real effect was political, not economic, at least directly. Under the old regime, commercial banks, investment banks and insurance companies had different agendas, so their lobbying efforts tended to offset one another. But after the restrictions ended, the interests of all the major players aligned. This gave the industry disproportionate power in shaping the political agenda.

Dim Prospects for Financial Crisis Prosecutions - As has been noted many times, the lack of criminal prosecutions arising out of the financial crisis has been painfully obvious. And two items in the news last week underscores that the prospect for a signature case is growing even more distant. First, Reuters reported on Thursday that Securities and Exchange Commission staff members wrote in a memo that fraud charges “will likely not be recommended” against Lehman Brothers executives. Then, the New York attorney general, Eric T. Schneiderman, said that the federal-state mortgage fraud working group announced in President Obama’s State of the Union address in January needed more resources — an indication that the group was still trying to digest evidence from transactions made more than four years ago. The collapse of Lehman seemed to be the most likely source of criminal prosecutions, or at least civil enforcement actions. The firm’s examiner, Anton R. Valukas, issued a report in 2010 castigating senior management for shifting up to $50 billion off the balance sheet through the so-called Repo 105 transactions.

SEC: Taking on Big Firms is 'Tempting,' But We Prefer Picking on Little Guys - Matt Taibbi - It’s by now been well-established that the S.E.C.’s performance in policing Wall Street before, after, and during the crash has been comically inept. It would be putting it generously to say that the top cop on the financial services beat has demonstrated particular incompetence with regard to investigations of high-profile targets at powerhouse banks and financial companies. A less generous interpretation would be that the agency is simply too afraid, too unwilling, or too corrupt to take on the really dangerous animals in this particular jungle. The S.E.C.’s failure to make even one case against a high-ranking executive involved in the mass frauds leading to the 2008 crash – compare this to the comparatively much smaller and less serious S&L crisis twenty years earlier, when the government made 1,100 criminal cases and sent 800 bank officials to jail – became so conspicuous that by the end of last year, the “No prosecutions of top figures” idea became an accepted meme in mainstream news media coverage of the economic crisis. The S.E.C. in recent years has failed in almost every possible way a regulator can fail to police powerful criminals. Failure #1 was that it repeatedly fell down on the job even when alerted to problems at big companies well ahead of time by insiders. Six months before Lehman Brothers collapsed, setting off a chain reaction of losses that crippled the world economy, one of Lehman’s attorneys, Oliver Budde, contacted the S.E.C. to warn them that the firm had understated CEO Dick Fuld's income by more than $200 million; the agency blew him off. There were similar brush-offs of insiders with compelling information in cases involving Moody’s, Chase, and both of the major Ponzi scheme scandals, i.e. the Bernie Madoff and Allen Stanford cases.

Alexander Field (and Santayana) on Financial Regulation - Here I turn to Alexander Field’s new volume on the Great Depression, A Great Leap Forward. From Chapter 10, "Financial Fragility and Recovery": The regulatory or policy failure was not simply or primarily a matter of interest rate policy. Rather it was a failure to control, or really be interested in controlling, the growth of leverage. ... ...This is understandable from a political-economic perspective. In the boom period, higher leverage combined with riskier lending engendered vastly increased financial sector profits and compensation and both the means and motivation to lobby effectively against government regulation, which stood in the way of the continued operation of the money train. That is how we got to where we are.There is thus a strong case that lax regulatory environments contributed to the onset of both the Great Depression and the recession of 2007-09 and that the well-designed rules are necessary to reduce the likelihood of future crises. In part it is a matter of fairness. Citizens should not be faced with the choice of either saving the creditors and employees of financial institutions that are too big or too interconnected to fail from the consequences of their risky behavior or enduring serious declines across the economy in output or employment. Once the economy goes into recession, of course, it is too late. . . .

U.S. Needs a National Safety Board for Financial Crashes - Simon Johnson - There are growing concerns that the regulatory bodies overseeing the financial sector are incapable of understanding, preventing or even properly investigating excessive risk taking that threatens to ruin the economy.  This issue was raised before the 2008 financial crisis and received more attention during the debate that led to the 2010 Dodd-Frank financial-reform law. Some tweaks were made in various parts of the regulatory apparatus, including the governance of the Federal Reserve Bank of New York, to reduce the influence of Wall Street.  In light of the $2 billion-and-counting trading losses at JPMorgan Chase, the issue is back on the table. If anything, the key points have been sharpened both by what we know and don’t know about JPMorgan’s losses. It is time to consider establishing the equivalent of a National Transportation Safety Board for the financial sector, In 2008, many things went wrong to create a true systemic crisis. The Financial Crisis Inquiry Commission spent a great deal of time poring over the details; in the end its conclusions split along party lines. In my assessment, deregulation allowed big financial companies to take on and mismanage excessive risks. They blew themselves up at great cost to the economy, and then received arguably the most generous bailout in history.

Counterparties: Measuring the shadow banking industry - In a new report, Deloitte cites no fewer than eight different definitions of a sector that’s anywhere between $10 trillion and $60 trillion in size. Welcome to the amorphous world of “shadow banking.” The Deloitte Shadow Banking Index attempts to estimate the size of an assortment of financial activities that happen, at least in part, outside the normal world of  regulated banking. Shadow banking, as Ben Bernanke put it, is how your car loan – or, before the crisis, your mortgage – gets chopped up, sold to investors and might even end up in your neighbor’s mutual fund. It includes the kind of securities-lending operations which helped to blow up AIG, and it’s vulnerable to a relatively new and dangerous kind of run. Under Deloitte’s own definition, the US shadow banking system has essentially been cut in half since 2008, to roughly $10 trillion at the end of 2011. This figure is significantly smaller than previous estimates, including one by New York Fed staffers, which put the size of the US shadow banking system at $15 billion.

What is shadow banking? - Atlanta Fed's macroblog - What is shadow banking? Announcing a new index—hat tip to Ryan McCarthy—Deloitte offers its own definition: "Shadow banking is a market-funded, credit intermediation system involving maturity and/or liquidity transformation through securitization and secured-funding mechanisms. It exists at least partly outside of the traditional banking system and does not have government guarantees in the form of insurance or access to the central bank."  As the Deloitte study makes clear, this definition is fairly narrow—it doesn't, for example, include hedge funds. Though Deloitte puts the size of the shadow banking sector at $10 trillion in 2010, other well-known measures range from $15 trillion to $24 trillion. (One of those alternative estimates comes from an important study from the New York Fed.)  What definition of shadow banking you prefer probably depends on the questions you are trying to answer. Since the interest in shadow banking today is clearly motivated by the financial crisis and its regulatory aftermath, a definition that focuses on systemically risky institutions has a lot of appeal. And not all entities that might be reasonably put in the shadow banking bucket fall into the systemically risky category. Former PIMCO Senior Partner Paul McCulley offered this perspective at the Atlanta Fed's recent annual Financial Markets Conference (video link here):

Bank Regulators Under Scrutiny in JPMorgan Loss - Scores of federal regulators are stationed inside JPMorgan Chase’s Manhattan headquarters, but none of them were assigned to the powerful unit that recently disclosed a multibillion trading loss. Roughly 40 examiners from the Federal Reserve Bank of New York and 70 staff members from the Office of the Comptroller of the Currency are embedded in the nation’s largest bank. They are typically assigned to the departments undertaking the greatest risks, like the structured products trading desk. Even as the chief investment office swelled in size and made increasingly large bets, regulators did not put any examiners in the unit’s offices in London or New York, according to current and former regulators who spoke only on condition of anonymity. Senior JPMorgan executives assured the bank’s watchdogs after the financial crisis that the chief investment office, with hundreds of billions in investments, was not taking risks that would be a cause for concern, people briefed on the matter said. Just weeks before the trading losses became public, bank officials also dismissed the worry of a senior New York Fed examiner about the mounting size of the bets, according to current Fed officials. The lapses have raised questions about who, if anyone, was policing the chief investment office and whether regulators were sufficiently independent. Instead of putting the JPMorgan unit under regular watch, the comptroller’s office and the Fed chose to examine it periodically.

Bill Black: Embedded Examiners always married the Natives, but now their Bosses Do Hook Ups - Jessica Silver-Greenberg and Ben Protess have written an extraordinarily important column for the New York Times about embedded examiners at JPMorgan. Embedded examiners’ are federal regulators whose normal work station is a desk at the bank.  We only embed examiners for systemically dangerous institutions (SDIs) – banks so large that they pose a systemic risk to global economy. Embedded examiners do not work.  They get too close to the bank officers and employees.  In the regulatory ranks we called this “marrying the natives.”  Nothing works with SDIs – they are too big to manage, too big to fail, and too big to regulate.  A conventional bank examination, scaled up to size to fit an SDI the size of JPMorgan would have 500 examiners and take 18 months to “complete.”  (Obviously, when it takes that long to complete an examination it is impossible to “complete” an examination in any meaningful sense – by the time you’ve spent 18 months examining an SDI it can be a radically different bank.)  One cannot conduct an effective conventional bank examination of even a medium-sized bank on a “real time” basis because of the amount of new information pouring in every minute.  Conventional examinations examine a bank’s records and operations “as of” some date (typically the last quarter-end for which reports have been filed).  Embedding examiners is an effort at achieving an “early warning” system.   They simply viewed embedding as the least bad manner of attempting the impossible – effectively regulating SDIs.  Here is the key passage of the NYT column: Roughly 40 examiners from the Federal Reserve Bank of New York and 70 staff members from the Office of the Comptroller of the Currency are embedded in the nation’s largest bank. They are typically assigned to the departments undertaking the greatest risks, like the structured products trading desk. Even as the chief investment office swelled in size and made increasingly large bets, regulators did not put any examiners in the unit’s offices in London or New York, according to current and former regulators who spoke only on condition of anonymity.

The Second Act Of The JPM CIO Fiasco Has Arrived - Mismarking Hundreds Of Billions In Credit Default Swaps - As anyone who has ever traded CDS (or any other OTC, non-exchange traded product) knows, when you have a short risk position, unless compliance tells you to and they rarely do as they have no idea what CDS is most of the time, you always mark the EOD price at the offer, and vice versa, on long risk positions, you always use the bid. That way the P&L always looks better. And for portfolios in which the DV01 is in the hundreds of thousands of dollars (or much, much more if your name was Bruno Iksil), marking at either side of an illiquid market can result in tens if not hundreds of millions of unrealistic profits booked in advance, simply to make one's book look better, mostly for year end bonus purposes. Apparently JPM's soon to be fired Bruno Iksil was no stranger to this: as Bloomberg reports, JPM's CIO unit "was valuing some of its trades at  prices that differed from those of its investment bank, according to people familiar with the matter. The discrepancy between prices used by the chief investment office and JPMorgan’s credit-swaps dealer, the biggest in the U.S., may have obscured by hundreds of millions of dollars the magnitude of the loss before it was disclosed May 10, said one of the people, who asked not to be identified because they aren’t authorized to discuss the matter.  “That’s why you have a centralized accounting group that’s comparing marks” between different parts of the bank “to make sure you don’t have any outliers” .... Jamie Dimon's "tempest in a teapot" just became a fully-formed, perfect storm which suddenly threatens his very position, and could potentially lead to billions more in losses for his firm.

Why banks shouldn’t play in CDS markets - There are a few different ways to look at the seemingly-unstoppable rise of the amount of “excess deposits” that JP Morgan ended up handing to its Chief Investment Office, rather than lending out to individuals and businesses needing loans. But as Roger Lowenstein explains today, a large part of what we’re seeing here is the way in which lending has morphed into investing. All of us intuitively understand that there’s a difference between lending someone money, on the one hand, and buying a bond, on the other. The former is a bilateral contractual relationship which lasts until the loan is repaid; the latter is an anonymous purchase of securities which can be flipped for a profit (or sold at a loss) after weeks or days or even minutes. The CIO, playing in the bond and derivatives markets, is very much in the latter camp rather than the former, as you can guess by looking at its name. It makes investments, rather than disbursing loans. But the danger here is not just that $400 billion of JP Morgan’s assets are being put to work gambling in the markets rather than extending loans to clients. The danger is that as the CIO gets bigger, it effectively turns the JP Morgan Chase loan portfolio into an investment, too.

We Must Not Speak Uncomfortable Truths to Power: Why I Won’t be Briefing Congress about Derivatives - Bill Black - Today, I received definitive word that I had been disinvited from a bipartisan briefing of members of Congress on the subject of financial derivatives. I have deleted the name of the staffer because he is not the issue. The relevant email thread is below. The member of Congress putting the event together is one of the strongest advocates of the need for banking reform. I have assisted the Member’s staff in the past in such efforts. The Member’s chief of staff called me today. His position is that I was never invited to participate and that it was unfortunate that I booked the flights and put UMKC on the hook for the non-refundable fares and hotel before informing his office that I was accepting their inquiry about participation (as opposed to invitation). He explains that it is impossible physically to have me participate and that the decision not to have me participate has nothing to do with concerns about “balance” or “bank bashing.” I emphasize also that, unlike St Germain’s disinvitation the email thread states an interest in inviting me to speak at future briefings. I hope that such invitations will be made.

Career Limiting Gestures (CLG): Trying to Speak Truth to Congress - Bill Black - At the large law firm where I began my professional career we were warned about making “career limiting gestures” (CLGs).  I confess to being an expert in committing CLGs, such that I am unemployable in the federal government.  I’m a serial whistle blower who blew the whistle too often and too effectively on too many prominent politicians and bosses running my agency.  One of the proofs of what a great nation America is capable of being is that I survived and the prominent politicians and agency heads who tried so hard to destroy my career and reputation failed.  Indeed, in the process they helped to make me an exemplar that public administration scholars use to illustrate how regulators should function.  The latest act of Congress disinviting me from speaking truth to power has caused me to ruminate on CLGs.  I have concluded that they are essential to effective regulation.

Are CDS Derivatives Associated With Higher Corporate Defaults? - Title VII of the Dodd-Frank Act requires that some derivatives contracts be traded on centralized exchanges. While the Act is broadly targeting mostly standardized derivative instruments, the most important derivatives contracts under scrutiny are credit default swaps (CDS). Several policy makers and financial commentators argue that CDS trading amplified risks during the recent financial crisis. In this post, I summarize some findings of my recent New York Fed Staff Report (coauthored with Vanessa Savino) that investigates whether a company with CDS trading on its debt faces a higher default risk.   One important issue that has attracted interest is the behavior of hedged creditors. As Hu and Black (2008) formalize the argument, creditors hedged by swaps are “empty creditors” that may be indifferent to a firm’s survival and, thus, less willing to negotiate a restructuring plan. Indeed, some hedged creditors might actually stand to benefit from a distressed firm’s failure and may prefer a bankruptcy to other resolutions. Bankruptcy costs are generally very onerous, so the interference of an empty creditor may lead to an inefficient economic outcome for other creditors, shareholders, and workers.

Banking Industry Risk Is Too Complex to Manage - Joe Nocera admitted yesterday, building on previous opinion and research, that Dodd-Frank, the financial reform law, was essentially too complex to work. The crucial difference between the Glass-Steagall Act, the landmark banking reform law that was passed during the Great Depression, and Dodd-Frank, is that the former had an appealing simplicity that Dodd-Frank lacks. Glass-Steagall did one basic thing. It forced banks to get rid of their investment banking arms. Dodd-Frank, by contrast, accepts the complexity of modern banking — and then adds to that complexity with its thousands of pages of regulations. That complexity is something to worry about.That is why I wrote a recent column about a persuasive paper by Karen Petrou, a banking expert, in which she argued that Dodd-Frank was creating a new kind of risk that she labeled “complexity risk.” Nocera devoted much of the rest of the op-ed to this article on how to fix banks by Sallie Krawcheck. She noted that the complexity of the trades JPMorgan Chase’s Chief Investment Office made led to the bank misunderstanding and mismanaging the risks. Aside from banks being too big to fail, her comments lead to the conclusion that mega-banks are actually too complex to manage. The two concepts go hand-in-hand – you don’t worry as much about risk management when you have a backstop guarantee from the government.

JPMorgan: Jamie Dimon and the horse he fell off - If there’s one person you probably don’t envy right now, it’s Jamie Dimon. In the past week, the JPMorgan CEO has been summoned to testify before Congress and learned that his company is facing investigations by an alphabet soup of federal agencies, from the CFTC to the FBI to the SEC. He’s also had to spend a lot of time in the middle of a media feeding frenzy, offering mea culpas and referring to himself and members of his team as “stupid,” “sloppy” and “dead wrong.” In short, Jamie Dimon has been knocked off the large, white horse he rode through the financial crisis. Now, echoing the general consensus, nothing illegal appears to have occurred in the course of JPMorgan’s $2 billion-plus trading loss. No taxpayer money was involved, and the investigations, it seems, are largely pro-regulation, political grandstanding with a dose of schadenfreude thrown in. At least so far, nothing has happened that’s actually going to seriously damage the bank’s long-term value to shareholders. It’s just that – well, it’s just that JPMorgan made a mistake. Guess what? It happens all the time, from Wall Street to the factory floor. Work is hard, fast and complicated. People make mistakes. God knows we’ve both made them, and if you’ve got a few years of work under your belt, so have you.

How Boaz Weinstein and Hedge Funds Outsmarted JPMorgan - BOAZ WEINSTEIN didn’t know it, but he had just hooked the London Whale.  It was last November, and Mr. Weinstein, a wunderkind of the New York hedge fund world, had spied something strange across the Atlantic. In an obscure corner of the financial markets, prices seemed out of whack. It didn’t make sense.  Mr. Weinstein pounced.  As the financial world now knows, what was out of whack was JPMorgan Chase & Company. One its traders, Bruno Iksil, the man later nicknamed the London Whale for his outsize trades, was about to blow a multibillion-dollar hole in the mighty House of Morgan.  But the resulting uproar, in Washington and on Wall Street, has largely obscured a simple truth of the marketplace. Yes, Morgan lost big — but, as Mitt Romney has pointed out, someone else won. And that someone or, rather, those someones, turn out to be Boaz Weinstein and a wolf pack of like-minded hedge fund managers.  In the London Whale, these traders saw a rich opportunity, and they seized it with both hands. That, after all, is the way hedge funds roll. His cool calculus has made Mr. Weinstein a very rich man: he is in talks to buy the Fifth Avenue co-op of a reclusive heiress, Huguette Clark, for $24 million.

Jamie Dimon’s Illegal “Cookie Jar” - The bad news just keeps on coming in the JP Morgan CIO scandal. We’re getting a lot of salacious detail, but the media manages to continue to miss the bigger picture.  On Tuesday, David Henry at Reuters coined a wonderful catch-phrase that should prove difficult for JPMorgan to explain away to its depositors and to the rest of us -  “JPMorgan dips into cookie jar to offset ‘London Whale’ losses”.The main point of the article is that the ‘cookie jar’ contains $8 billion of unrealized gains from the profitable investment of excess deposits. The tricky bit for JPM, its depositors and inquisitive regulators, investors, external auditors, and disgusted citizens  is explaining why $1 billion of that reserve was gifted to the CIO desk to cover its trading losses. Trickier still is Dimon’s pledge of the entire $8 billion to cover any further CIO trading losses. Henry reports:‘JPMorgan Chase & Co has sold an estimated $25 billion of profitable securities in an effort to prop up earnings after suffering trading losses tied to the bank’s now-infamous “London Whale,” compounding the cost of those trades.’ The story estimates that JPM sold $25 billion of the Investment portfolio assets to generate the initial $1 billion gain used to offset the $2 billion losses Dimon disclosed in the May10 press conference. There is no word yet on the size of the losses JPM has incurred since the announcement.

Marcy Wheeler: Will Treasury Hire the Guy Who Allowed JP Morgan Help Iran Launder Money? - Two weeks ago, Treasury fired the guy in charge of FinCEN (the part of Treasury that enforces and tracks Suspicious Activities Reports), Jim Freis, reportedly (pay wall) because he wanted to focus on law enforcement and financial crimes, rather than a more focused counterterrorism focus. The issue wasn’t Fincen’s speed or personality conflicts, but more about control. To put it simply, Treasury wants more oversight of Fincen’s activities, including additional focus on international areas such as terrorist financing. “Fincen ought to be better integrated and tethered to the policy issues that relate to money laundering, terrorist financing and economic sanctions on behalf of the U.S. government. It’s not as well integrated as it should be,” said a senior administration official who spoke on condition of anonymity. Freis saw Fincen’s role as more independent, and was primarily concerned with the agency’s role in supporting law enforcement agencies as well as tackling other financial crimes such as mortgage fraud. And if that isn’t enough to make you wonder about this Administration’s commitment to making banks obey the law, consider that the apparent leading candidate to replace Freis is JP Morgan’s anti-money laundering VP, William Langford.

Wells Fargo’s Stumpf Eyes Insurance Pick-Ups - Chief Executive John Stumpf said during an investor conference in New York Thursday that the bank is in the market to buy insurance companies. A key reason: Wells is one of the largest originators of mortgages and used-car loans and that those borrowers all need insurance, he said. "I love the insurance distribution business," he said at the Sanford C. Bernstein conference. Stumpf's comments were first reported by Reuters. Stumpf also reiterated his interest in growing the bank's retail brokerage and wealth management offerings, Reuters reported. Wells Fargo and some of its competitors have been opting to buy niche businesses rather than whole banks. It has not made a bank acquisition in more than three years, instead striking deals for specialty lenders, insurance brokerages and asset-management firms.

Commodity index funds and oil prices - In my previous post I described a new research paper with University of Chicago Professor Cynthia Wu on the Effects of Index-Fund Investing on Commodity Futures Prices. Previously I discussed what we found for the prices of agricultural commodities. Here I review our findings about oil prices. Part of the interest in a possible effect of commodity-index funds on oil prices comes from testimony before the U.S. Senate by hedge fund manager Michael Masters, in which he produced a provocative graph of oil prices against an estimate of the number of crude oil futures contracts held by commodity-index funds. We reproduced his methodology to update his graph below. The figure certainly seems to suggest a strong connection between these two series, particularly during 2008 and 2009.  In my new paper with Cynthia Wu, we demonstrate that Masters' idea for imputing crude oil holdings from agricultural measures does not require finding a commodity that appears in one index but not the other. Algebraically, the method can be thought of as simply solving a system of two equations to determine two unknowns. In fact under Masters' assumption, it would be possible to infer crude oil holdings from almost any two arbitrary agricultural commodities. The graph below shows what those inferences look like if one uses soybean oil plus any one of the indicated second commodities. The inferred series for crude oil holdings is quite sensitive to which agricultural series one uses. The figure also plots a regression method that we developed that makes use of all 12 commodities together, which can be viewed as a generalization of Masters' averaging idea.

Funds Make Wrong-Way Bets Before Price Slump - Speculators raised bullish bets on commodities before signs of Europe’s deepening debt crisis and slowing Chinese growth drove prices lower for a fourth consecutive week, the longest slump since September.  Money managers boosted net-long positions across 18 U.S. futures and options by 9.5 percent to 675,362 contracts in the week ended May 22, government data show. The Standard & Poor’s GSCI Spot Index of 24 raw materials reached a five-month low on May 23. A gauge of net positions for 11 U.S. farm goods surged 21 percent, the most since February, before agriculture prices tracked by S&P posted the biggest weekly loss in eight months.

Retirement: Where Corporate Executives Make the Real Big Bucks - With most of the attention focused on the rising level of CEO pay while executives are actively working, an even more important aspect of executive compensation has been overlooked. What a top corporate executive makes when he or she retires from a publicly traded corporation is an ongoing expense to the company every year for the rest of their lives, as opposed to their yearly pay, which is a one-time payment.  Many people don't realize that over the course of the last few decades, corporations have essentially spiked their top management's retirement pay as they exit, adding bonuses, stock options, perks and other incentive compensation to their retirement benefit calculations, exponentially increasing the total amount of money they will receive once they are no longer providing any services to the company. This has occurred at the very same time these corporations have restructured and eliminated pension benefits for average workers, and as public pensions are decried as exorbitant and unsustainable.  This has all been done under a cloak of darkness, as there is no requirement for companies to disclose how much a retired executive actually receives once they retire. All the Securities and Exchange Commission currently requires is an estimate, often severely low-balled by company accountants, of what an executive might make once they retire. What has occurred is a massive run up in unfunded liability at a time when our economy can least sustain it.

Spain and US hold talks on bank aid  - Madrid has begun openly discussing outside assistance for its troubled banking sector, with a top Spanish official saying she had raised the issue with Tim Geithner, the US Treasury secretary, who urged the EU to “find a solution” to stabilise Spain’s banks. Soraya Sáenz de Santamaria, Spain’s deputy prime minister, said after a meeting with Mr Geithner that the two had discussed proposals to recapitalise Spanish and other European banks “without state intervention and without conditions,” a clear reference to Madrid’s wish to get EU bailout assistance without strings attached.  “It’s something in the debate, and we’ve been discussing that possibility,” Ms Santamaria said. “Treasury secretary [Geithner] has indicated that we are working in the same direction and that we must find a solution to the banks, because the problem is not just a problem in Spain as a nation, but our financial system.” Madrid has insisted it will not need an international rescue, with the government in complete opposition to any form of externally imposed programme as seen in Greece, Portugal and Ireland.

Calculating the Cost of Bailouts - Linda Beale - A recent New York Times includes a piece on the Treasury's study of the various bailouts or "rescues" of distressed financial and other institutions. Gretchen Morgenson, Seeing Bailouts Through Rose-Colored Glasses, The Treasury study, The Financial Crisis Response--in charts (April 13, 2012), is positive about the way that government handled the bailouts.  Collectively, these programs --carried out by both a Republican and a Democratic administration--were effective in preventing the collapse of the financial system, in restarting economic growth, and in restoring access to credit and capital. They were well-designed and carefully managed. Because of this, we were able to limit the broader economic and financial damage. Although this crisis was caused by a shock larger than that which caused the Great Depression, we were able to put out the financial fires at much lower cost and with much less overall economic damage than occurred during a broad mix of financial crises over the last few decades. Reading that, one might conclude that everybody now is sitting fairly pretty, and that it was all done in a very upfront, fair and damage-free way. That ignores the fact that the bank bailouts treated the banksters with kid gloves--letting managers continue to receive their customary overcompensation and allowing banks generally to continue their predatory practices even while the taxpayers were providing them extraordinarily low-cost financing with practically no strings attached. Meanwhile, ordinary Americans--especially those in the lower half of the income distribution--suffered enormously. Congress--at the behest of the banksters--refused to enact mortgage clawback provisions in bankruptcy, the one law that would have done wonders at saving families and neighborhoods from unprecedented deterioration and blight.

John Titus' BAILOUT Connects the Dots: Fraud > Crisis >Fraud> Bailouts >Fraud> American Tragedy - Mention bailouts in the company of polite establishment and you will likely get either an eye-roll, or sober reassurance that every dollar has been paid back with interest - depending on just how compromised your audience is. If you want to know what the rest of America thinks of bailing out privileged bankers who commit massive fraud, BAILOUT: The Dukes of Moral Hazard is a fine place to start. Americans are apparently pissed off about having their tax money used to save reckless and criminal financial sector executives from their own bad behavior. John Titus and his crew have done a masterful job of describing the crony path chosen by American elites following the crisis. There is no ambiguity in terms of who was served by bailouts: criminal bankers, corrupt politicians, captured regulators, and an army of compromised middlemen. Who are the victims? Taxpayers. Middle class Americans. And anyone on the wrong end of a contract. The wrong end of a contract, when it comes to contracts with banks, is your end. When Tim Geithner, as president of the Federal Reserve Bank of New York, insisted that Goldman Sachs be made whole by forcing US taxpayers to pay AIG counterparties 100 cents on the dollar, he justified it stating that he was ensuring the sanctity of US contract law. But contract law was not so sanctified when it came to borrowers who were on the losing end of the robo-signing scandal. Those parties have been denied due process.

Morgan Stanley Bonds Trade at Junk Pricing, Downgrades Coming; Will Morgan Stanley Survive? Top 5 Banks Collectively Have 45:1 Leverage - Morgan Stanley's corporate borrowing costs are already way higher than Goldman Sachs and more downgrades are likely in the works. The Fiscal Times explains How Morgan Stanley sank to junk pricingThe bond markets are treating Morgan Stanley like a junk-rated company, and the investment bank’s higher borrowing costs could already be putting it at a disadvantage even before an expected ratings downgrade this month. Bond rating agency Moody’s Investors Service has said it may cut Morgan Stanley by at least two notches in June, to just two or three steps above junk status. Many investors see such a cut as all but certain. Even before any downgrade, the bank is suffering in the bond markets. Prices for Morgan Stanley’s bonds and credit derivatives have been trading at junk levels since last summer, according to Moody’s Analytics. Prices moved further into the non-investment-grade category over the past two weeks amid troubles in Greece and other Euro zone nations.

U.S. CMBS delinquency rate sets new benchmark - The delinquency rate for commercial mortgage-backed securities in the U.S. has surpassed 10 percent for the first time ever, confirming suspicions that a bevy of loans originated just before the market crashed in 2007 would plague lenders as they came due early this year. Citing Trepp data, reported the delinquency rate rose to 10.04 percent in May after coming in at 9.80 percent in April. Since February the CMBS delinquency rate has jumped 67 basis points. In total, $59.1 billion worth of loans are delinquent and an additional $79.2 billion in loans is in special servicing. The multi-family sector is in the worst shape as 15.17 percent of its loans are delinquent. Stuyvesant Town’s $3 billion delinquency accounts for about 4 percent of that figure. But the hotel sector experienced the largest month-over-month delinquency growth, as its rate skyrocketed 172 basis points to exceed 12 percent.

Unofficial Problem Bank list increases to 931 Institutions - This is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for May 25, 2012. (table is sortable by assets, state, etc.) As expected, this week the FDIC released the Official Problem Bank List through March 2012 and it enforcement actions through April 2012. For the week, there were nine removals and 12 additions, which leaves the Unofficial Problem Bank List with 931 institutions and assets of $358.1 billion. A year ago, the list held 997 institutions with assets of $415.4 billion. From last week, the count on the UPBL increased by three while assets dropped by $3.9 billion. However, the decline in assets was solely due to shrinkage as updated assets figures through q1 declined by $5.1 billion. Moreover, the count increased in back-to-back weeks, which has not happened since a three consecutive weekly increase from June 24, 2011 through July 8, 2011. For the month, the UPBL increased from 930 to 931, but assets declined by $3.7 billion with the shrinkage also due to the updated assets figures. The FDIC reported the Official Problem Bank List at 772 institutions with assets of $292 billion.

Citigroup Still Committing Mortgage Fraud as Late as 2012 - Bloomberg’s Bob Ivry has a great piece out on mortgage whistleblower Sherry Hunt, who just won a false claims suit against Citigroup. By 2006, the bank was buying mortgages from outside lenders with doctored tax forms, phony appraisals and missing signatures, she says. It was Hunt’s job to identify these defects, and she did, in regular reports to her bosses. Executives buried her findings, Hunt says, before, during and after the financial crisis, and even into 2012. In March 2011, more than two years after Citigroup took $45 billion in bailouts from the U.S. government and billions more from the Federal Reserve — more in total than any other U.S. bank — Jeffery Polkinghorne, an O’Fallon executive in charge of loan quality, asked Hunt and a colleague to stay in a conference room after a meeting. The number of loans classified as defective would have to fall, he told them, or it would be “your asses on the line.” Neil Barofsky noted that this behavior implies that the banks are still engaging in the same set of unchanged risky and damaging patterns of behavior that led to the initial crisis.Citigroup behaving badly as late as 2012 shows how a big bank hasn’t yet absorbed the lessons of the credit crisis despite billions of dollars in bailouts, says Neil Barofsky, former special inspector general of the Troubled Asset Relief Program.“This case demonstrates that the notion that the bailed-out banks have somehow found God and have reformed their ways in the aftermath of the financial crisis is pure myth,” he says.

Investigators Seek More Firepower - A law-enforcement group formed to go after wrongdoing related to the financial crisis needs more investigators in order to rev up its work, New York's attorney general said. More than 100 people now work for the Residential Mortgage-Backed Securities Working Group, a coalition of U.S. and state regulators and prosecutors announced by President Barack Obama in January. President Obama said the group would "turn the page on an era of recklessness" by bringing lawbreakers to justice. New York Attorney General Eric Schneiderman, one of the five officials in charge of the group, said it is making impressive progress but could accelerate those efforts with more investigators. "Do I want more resources, want things to go faster? Yes," he said in an interview. "Am I asking for more? Yes. Do I believe we'll get that? Yes." A spokesman for the attorney general declined to specify how many extra people are needed. The working group is funded through existing resources, rather than new money, according to a Justice Department official. Various government agencies and state prosecutors involved in the group are providing staff and existing investigations are falling under the aegis of the working group, the official said. There also is a coordinating team based in Washington.

Where Are Eric Schneiderman's Resources Going to Come From? - Last week, New York attorney general Eric Schneiderman took his plea for more resources for the Residential Mortgage-Backed Securities working group to the Wall Street Journal. “Do I want more resources, and want things to go faster? Yes, Am I asking for more? Yes. Do I believe we’ll get that? Yes.” This is a request Schneiderman has made frequently in recent weeks—he said the same thing to the Congressional Progressive Caucus in late April. Over at the New York Times, Peter Henning sees this as an ominous sign. “His statement is hardly a ringing endorsement of the working group’s effort because it is a common refrain to blame a lack of resources for the absence of any real progress on cases,” Henning writes. I’m not really convinced that Schneiderman is already priming the pump for defeat—it seems just as plausible he’s trying to spark some action, publically and inside Washington, to give the task force the juice it needs. (Though Henning does make some valid points elsewhere that what the RMBS working group has done points away from any criminal prosecutions and towards civil settlements).

House Democrats Call Out Administration on HARP 2.0 - A group of over 50 House Democrats are calling out the Obama Administration for their management of the HARP 2.0 program. In a letter to Treasury Secretary Timothy Geithner and Acting Director of the Federal Housing Finance Agency Ed DeMarco, the Democrats, led by Rep. Maxine Waters, point to data showing that the new version of HARP, designed to steer more refinancing to underwater borrowers, simply isn’t meeting those goals. The Obama Administration has been touting the HARP 2.0 changes as a way to unlock refinancing for borrowers who otherwise could not get it. However, only 21% of HARP loans in the first quarter of 2012 went to borrowers with loan-to-value ratios above 105%, according to Inside Mortgage Finance. This obvious outcome stems from the fact that banks have simply not implemented the changes to HARP in a way to facilitate underwater refis. The letter addresses how banks are either ignoring or gaming the system: The participation of banks in HARP 2.0 is also a problem. According to the Federal Reserve’s April 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices, 70 percent of banks are either not actively soliciting HARP 2.0 applications or have participated very little in the program.For the banks that are participating, many of them have added their own requirements on top of HARP 2.0 requirements that are either pushing otherwise qualified borrowers out of the program or forcing them to refinance at a higher price.

Barney Frank: Obama Rejected Bush Administration Concession to Write Down Mortgages - Here’s Barney Frank, in an exit interview recently in New York Magazine, revealing unwittingly that Obama during the transition rejected a Bush administration concession to write down mortgages.  Here’s what Barney said.  The mortgage crisis was worsened this past time because critical decisions were made during the transition between Bush and Obama. We voted the TARP out. The TARP was basically being administered by Hank Paulson as the last man home in a lame duck, and I was disappointed. I tried to get them to use the TARP to put some leverage on the banks to do more about mortgages, and Paulson at first resisted that, he just wanted to get the money out. And after he got the first chunk of money out, he would have had to ask for a second chunk, he said, all right, I’ll tell you what, I’ll ask for that second chunk and I’ll use some of that as leverage on mortgages, but I’m not going to do that unless Obama asks for it.  This is now December, so we tried to get the Obama people to ask him and they wouldn’t do it. This is consistent with other accounts.  There were policy debates within Obama’s economic team about what to do about the mortgage crisis.  The choices were to create some sort of legal entity to write down mortgage debt or to allow the write-down of mortgage debt through a massive wave of foreclosures over the next four to six years.  He choice the latter.  That choice was part of what led to roughly $7 trillion of middle class wealth gone, with financial assets for the elites re-inflated.

JPMorgan Chase & the Senator’s Short Sale: It’s Hypocritical – But Is It Corrupt? - Why is it that most Americans can't get a principal reduction from Chase or any other bank, but JPMorgan Chase was so very flexible with a sitting member of the United States Senate? The hypocrisy from Sen. Lee and JPMorgan Chase CEO Jamie Dimon overfloweth. But does the Case of the Senator's Short Sale rise to the level of full-blown corruption? We won't know until we get some answers.  It's not a pretty picture: In one corner is the Senator who wants to strike down Federal child labor laws and offer American residency to any non-citizen who buys a home with cash. In the other is the bank whose CEO said that the best way to relieve the crushing burden of debt on homeowners is by seizing their homes.  The story of the short sale on Sen. Mike Lee's home broke broke shortly not long after the world learned that JPM lost billions of dollars through trading that might have been illegal, and about which it certainly misled investors.  A Senator who doesn't believe in child labor laws, and a crime-plagued bank that was just plunged into a trading scandal after losing billions in the London markets.  Why, they were practically made for one another.

CoreLogic: 66,000 completed foreclosures in April - From CoreLogic: CoreLogic® Reports 66,000 Completed Foreclosures Nationally in April CoreLogic ... today released its National Foreclosure Report for April, which provides monthly data on completed foreclosures and the overall foreclosure inventory. According to the report, there were 66,000 completed foreclosures in the U.S. in April 2012 compared to 78,000 in April 2011 and 66,000* in March 2012. Since the start of the financial crisis in September 2008, there have been approximately 3.6 million completed foreclosures across the country. Completed foreclosures are an indication of the total number of homes actually lost to foreclosure. Approximately 1.4 million homes, or 3.4 percent of all homes with a mortgage, were in the national foreclosure inventory as of April 2012 compared to 1.5 million, or 3.5 percent, in April 2011 and 1.4 million, or 3.4 percent, in March 2012.So far we haven't seen a surge in completed foreclosures - or a large increase in REO (lender Real Estate Owned) coming on the market. Note: The foreclosure inventory reported by CoreLogic is lower than either reported by LPS of 4.14% of mortgages or 2 million in foreclosure, and the Mortgage Bankers Association’s (MBA) Q1 report showing 4.39% of loans in the foreclosure process.

LPS: Foreclosures Sales declined in April, FHA foreclosure starts increased sharply - LPS released their Mortgage Monitor report for April today. According to LPS, 7.12% of mortgages were delinquent in April, up slightly from 7.09% in March, and down from 7.97% in April 2011.  LPS reports that 4.14% of mortgages were in the foreclosure process, unchanged from March, and also unchanged from April 2011. This gives a total of 11.26% delinquent or in foreclosure. It breaks down as:
• 1,927,000 loans less than 90 days delinquent.
• 1,595,000 loans 90+ days delinquent.
• 2,048,000 loans in foreclosure process.
For a total of 5,570,000 loans delinquent or in foreclosure in April. This is down from 6,388,000 in April 2011. This following graph shows the total delinquent and in-foreclosure rates since 1995. The in-foreclosure rate was at 4.14%, down from the record high in October 2011 of 4.29%. There are still a large number of loans in this category (about 2.05 million).  The second graph shows foreclosure starts by investor. From LPS: "[O]verall foreclosure starts were down 2.6 percent in April, FHA foreclosure starts spiked significantly, jumping 73 percent during the month. The rise was driven primarily by defaults in 2008 and 2009 vintage loans, though all FHA vintages saw increases in foreclosure starts in April, despite that fact that the more recent vintages – from 2009 forward – have shown improved relative credit performance." The third graph shows the FHA performance by vintage. This graph shows the 90%+ delinquency rate by month since origination (number of payments). The worst performing loans were in 2006, 2007 and 2008. The best performing loans were made in recent years However, as the last graph shows, the FHA made a huge number of loans in 2008, 2009 and 2010.

FHA Foreclosures Soared in April - FHA foreclosures rose 73 percent in April, driven primarily by defaults of loans made in 2008 and 2009 vintage loans, raising new questions about the solvency of the popular government program, which accounts for about a third of all new mortgages. New foreclosures on FHA-backed loans rose to 63,126 in April from 36,311 a month earlier, mortgage-data provider Lender Processing Services Inc. (LPS) said yesterday. “In 2008, when the loan origination market virtually dried up, the FHA stepped in to fill the void,” explained Herb Blecher, senior vice president for LPS Applied Analytics, which released the data of FHA foreclosures in its May Mortgage Monitor Report. “FHA originations tripled that year, and increased to five times historical averages in 2009. High volumes like that, even with low default rates, can produce larger numbers of foreclosure starts. That represents a lot of loans to work through - the 2008 vintage alone represents some $14 billion of unpaid balances in foreclosure, and the overall FHA foreclosure inventory continues to rise. The FHA immediately challenged the data, saying its own numbers showed an 11 percent drop in April foreclosures to 18,975. LPS may have erred extrapolating numbers from its database of information on 40 million loans, said an FHA spokesman. The LPS report showed that defaults for loans written from 2004 through 2010 rose in April, but the largest spike was in loans originated in 2008 and 2009, when FHA lending exploded as private lenders pulled out of the housing market, reaching nearly 2.5 million loans,

Fannie Mae Serious Delinquency rate declined in April, Freddie Mac unchanged - Fannie Mae reported that the Single-Family Serious Delinquency rate declined in April to 3.63%, down from 3.67% in March. The serious delinquency rate is down from 4.19% in April last year, and is at the lowest level since April 2009.The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.  Freddie Mac reported that the Single-Family serious delinquency rate was unchanged at 3.51% in April. Freddie's rate is only down from 3.67% in April 2011. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. These are loans that are "three monthly payments or more past due or in foreclosure".With the mortgage servicer settlement, I'd expect the delinquency rate to start to decline faster over the next year or so. I don't know why Fannie's delinquency rate is falling faster than for Freddie. The "normal" serious delinquency rate is under 1%, so there is a long way to go.Note: HUD also released the quarterly FHA Single-Family Mutual Mortgage Insurance Fund Programs report. This showed the FHA serious delinquency rate declined in Q1 to 9.4% from 9.6%, but this was probably just a seasonal decline.

Lawler: Pending Home Sales and updated Table of Short Sales and Foreclosures for Selected Cities - Earlier this month I posted some distressed sales data for Sacramento Economist Tom Lawler has been digging up similar data, and he sent me the updated table below for several more distressed areas. For all of these areas, with the exception of Rhode Island, the share of distressed sales is down from April 2011 - and for the areas that break out short sales, the share of short sales has increased and the share of foreclosure sales are down - and down significantly in some areas. In five of the seven cities that break out short sales, there are now more short sales than foreclosure sales.  Lawler noted "all of the below shares are based on MLS data save for California [that uses] Dataquick estimates based on property records.  And Lawler on Pending Home Sales: "The National Association of Realtors reported that its Pending Home Sales Index declined by 5.5% on a seasonally adjusted basis in April, after jumping by 3.8% (downwardly revised) in March. April’s PHSI was up 14.4% (SA) from last April. By region, April’s PHSI increased by 0.9% in the Northeast, fell by 0.3% in the Midwest, dropped by 6.8% in the South, and plunged by 12.0% in the West (after jumping by 8.5% in March).The jump in contracts signed in March, and decline in April, could well have been related to the FHA’s announcement in late February that it was increasing its up-front and annual mortgage insurance premiums effective for FHA case numbers assigned in early April or later."

Minneapolis Police Chief on Seizing Occupy-Backed Home: We’re Done With This Job - Dozens of Minneapolis police officers (and representatives from the Hennepin County Sheriff’s Office) stormed the Cruz family house in South Minneapolis yesterday and, in their third attempt, successfully took the foreclosed house from Occupy Homes protestors and boarded it up. Police held nearly 100 protestors at bay, despite a tense standoff that involved pushing and shoving.  Following the action, Minneapolis Police Chief Tim Dolan confirmed that the mortgage lender (he cited Fannie Mae, but meant Freddie Mac) and not PNC Bank (which originally serviced the loan) had called for the raid. Occupy Homes activists claim that Pittsburgh-based PNC Bank has shown a willingness to negotiate with the Cruz family, which is now effectively homeless. Chief Dolan also implied that the City’s work was finished, and that Minneapolis would no longer expend resources to protect the Cruz home on behalf of Freddie Mac. Activists interpreted this to mean that the police was effectively adopting a moratorium on forced home evictions.

MBA: Mortgage Rates Drop to New Survey Lows -- From the MBA: Mortgage Rates Drop to New Survey Lows The Refinance Index decreased 1.5 percent from the previous week. The seasonally adjusted Purchase Index decreased 0.6 percent from one week earlier. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.91 percent, the lowest rate in the history of the survey, from 3.93 percent, with points increasing to 0.46 from 0.39 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The purchase index is still very weak. This index has mostly been moving sideways for the last two years, although the 4-week average has increased slightly over the last couple of months.

Home Prices Lowest Since 2002 -- Home prices hit new post-bubble lows in March, according to a report out Tuesday. Average home prices were down 2.6% from 12 months earlier, according to the S&P/Case-Shiller home price index of 20 major markets. Home prices have not been this low since mid-2002. "While there has been improvement in some regions, housing prices have not turned," said David Blitzer, spokesman for S&P. Although five cities -- Atlanta, Chicago, Las Vegas, New York and Portland -- saw average home prices hit new lows, that's an improvement from last month's report, in which nine cities notched new lows, Blitzer noted. In 13 of the 20 cities, average home prices fell in March from the year before. Atlanta fared the worst, with home prices down 17.7% year over year. Home prices in Atlanta, Cleveland, Detroit and Las Vegas are all below their January 2000 levels. Alternatively, Phoenix posted the largest gain, with prices up 6.1% from last year. Other cities showing an uptick included Dallas, Denver and Miami. Overall, the 20-city composite is down about 35% from its peak in 2006. Experts say affordable mortgages, combined with much lower home prices, should help to bolster the housing market. "It's probably the best time to buy a home in decades,"

Case Shiller: House Prices fall to new post-bubble lows in March NSA - S&P/Case-Shiller released the monthly Home Price Indices for March (a 3 month average of January, February and March). This release includes prices for 20 individual cities, two composite indices (for 10 cities and 20 cities) and the National index. Note: Case-Shiller reports NSA, I use the SA data.  From S&P: Pace of Decline in Home Prices Moderates as the First Quarter of 2012 Ends, According to the S&P/Case-Shiller Home Price Indices Data through March 2012, released today by S&P Indices for its S&P/CaseShiller Home Price Indices ... showed that all three headline composites ended the first quarter of 2012 at new post-crisis lows. The national composite fell by 2.0% in the first quarter of 2012 and was down 1.9% versus the first quarter of 2011. The 10- and 20-City Composites posted respective annual returns of -2.8% and -2.6% in March 2012. Month-over-month, their changes were minimal; average home prices in the 10-City Composite fell by 0.1% compared to February and the 20-City remained basically unchanged in March over February. However, with these latest data, all three composites still posted their lowest levels since the housing crisis began in mid-2006. The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).  The second graph shows the Year over year change in both indices. The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Vital Signs: Home Prices at New Low - Housing prices fell in the first three months of the year. Nationwide, average sale prices of single-family homes fell 2% from the fourth quarter and 1.9% from a year ago, according to the S&P/Case-Shiller home-price index. The index is now at its lowest level since the housing crisis began. However, the decline in prices moderated, boosting hopes of a recovery.

Real House Prices and Price-to-Rent Ratio at late '90s Levels - Another Update: Case-Shiller, CoreLogic and others report nominal house prices. It is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio. Below are three graphs showing nominal prices (as reported), real prices and a price-to-rent ratio. Real prices, and the price-to-rent ratio, are back to late 1998 and early 2000 levels depending on the index. The first graph shows the quarterly Case-Shiller National Index SA (through Q1 2012), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through March) in nominal terms as reported. In nominal terms, the Case-Shiller National index (SA) is back to Q4 2002 levels, the Case-Shiller Composite 20 Index (SA) is back to February 2003 levels, and the CoreLogic index (NSA) is also back to February 2003. The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). In real terms, the National index is back to Q4 1998 levels, the Composite 20 index is back to January 2000, and the CoreLogic index back to May 1999. In real terms, all appreciation in the '00s is gone. Here is a Price-to-Rent graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes. This graph shows the price to rent ratio (January 1998 = 1.0). On a price-to-rent basis, the Case-Shiller National index is back to Q4 1998 levels, the Composite 20 index is back to March 2000 levels, and the CoreLogic index is back to August 1999.

A Look at Case-Shiller by Metro Area - S&P/Case-Shiller reported that its indexes ended the first quarter of 2012 at new lows. The national composite, which covers the entire country and is only released on a quarterly basis, was down 1.9% from a year earlier and fell 2% in the first quarter compared with the fourth. The composite 20-city home price index, a key gauge of U.S. home prices, was essentially flat in March from the previous month and fell 2.6% from a year earlier. Eighteen cities posted monthly declines, with just Phoenix and Miami showing increases. Thirteen of the 20 cities posted annual declines in March, but Phoenix, Minneapolis, Denver, Miami, Detroit, Dallas and Charlotte notched gains. On a seasonally adjusted basis, which aims to take into account the slower selling season in the winter, things looked a little better. The overall 20-city index was up 0.1% from the previous month, and just four cities posted monthly declines. Although home prices were at new lows in March, there are signs of stabilization. “The improvement in the underlying conditions of housing market, as well as a change in the mix of home sales (distressed assets which tend to be sold at deeply discounts account for a smaller share of home sales than before) continued to help home price indices stabilize,” Read the full S&P/Case-Shiller release.

Number of Cities with Increasing House Prices - The following graphs show the number of cities with increasing house prices on a year-over-year, six month, and month-over-month basis. The first graph is based on the Case-Shiller Composite 20 cities using seasonally adjusted data starting in January 2007. There were still a few cities with increasing prices in early 2007. The increases in 2009 and 2010 were related to the housing tax credit (all of those gains and more are gone). Recently prices have started increasing in more and more cities again. Note: Case-Shiller data is through February, Zillow data is through April. The second graph shows the same year-over-year, six month, and month-over-month price increases for the 166 cities tracked by Zillow. The pattern is similar to the Case-Shiller Composite 20 cities. I expect that the number of cities with a year-over-year price increase will continue to climb all year, and later this year the Case-Shiller Composite 20 index (and Zillow national index) will turn positive on a year-over-year basis. In February, the Case-Shiller Composite 20 index was down 3.4% year-over-year, down 2.5% over the last six months, and up slightly in February.  The Zillow national index was down 1.4% year-over-year in April, only down 0.4% over the last six months, and up 0.7% month-over-month. This index will probably turn positive year-over-year in a few months.

Case-Shiller Seasonal Factors - Economist Tom Lawler wrote today: I put “seasonally” in quotes, as there have substantial changes in the purported “seasonal” pattern of home prices since the housing market cratered. The reason, of course, is that there is a marked “seasonal” in the distressed-sales share of home sales, which peaks in the late winter months and hits a trough in the summer months. Not coincidentally, the “shift” in the “seasonal” pattern of home prices has been one where home prices are “seasonally” much weaker than they used to be in late winter, and “seasonally” much strong than they used to be in the summer.The following graph shows the change in the seasonal factor over time using the Case-Shiller National Index.  Most of the wild "seasonal" swings are related to foreclosures. As Lawler noted, foreclosure sales are fairly steady throughout the year, and conventional sales have a seasonal pattern. So in the winter foreclosures are a higher percentage of sales, and that pushes down the NSA prices. The second graph shows the year-over-year change in the seasonal factor. Clearly something started to happen around 2005. It seems that the seasonal factors started changing in 2005 - when prices were still going up. Also, it appears that the change in the seasonal factors has slowed, and will probably start to reverse soon. Lawler also commented that he thinks there is a "better than even shot" the National HPI will show a year-over-year gain next quarter.

Housing Is Bottoming - Today's Case-Shiller housing report for March was a bit of a disappointment. The headline sequential gain for the 20-city composite was just 0.09%, bit below the 0.2% that analysts had expected. But it's obvious: Housing is bottoming. As S&P's David Blitzer said on CNBC today: Housing is "a whole lot better than the headlines" Indeed, the more you unpack the data, the clearer it gets that things are improving. First, let's just look at the general, YOY chance in the 20 city composite. Clearly we're getting closer to YOY improvement. Digging deeper, this was two straight months of sequential gains, and 13 out of the 20 cities in the index were flat or up for the month. Remember, too, that Case-Shiller is a famously laggy index. Not only are we talking about March data here (in late May) but that March data is based on data that can be several months old. Other more recent numbers are showing even more aggressive improvement.

Housing Bottom Does Not Mean Recovery - Every year for the past three years there have been recurring calls for a housing bottom and recovery. The importance of an eventual recovery in housing should not be dismissed as it is a critical component of an economic recovery due to the large multiplier effect of each dollar spent. The recovery in housing would signal that a foundation for a more lasting economic recovery would be in place. That is the hope anyway. However, as we have discussed in the past (see here, here, and here) the reality is that while housing construction and sales may have bottomed after the largest decline in history, it is highly likely that a correction in prices likely has further to fall particularly if interest rates rise for any reason. The one overlooked issue is that while it is likely that housing may have found its natural bottom — a bottom and a recovery are entirely different things.During the past couple of weeks there has been a tremendous amount of ink spilled in the press about home sales, both new and existing, starts and permits which all showed some very modest improvement. It is important to note that the improvement in the data is welcome news. It is a bit premature, however, for it to be called a recovery. With mortgage rates currently below 4%, employment somewhat stable, major banks continuing to stall the foreclosure process and the home buying season moving into full swing — we should see improvement in the housing data. If we weren't — that would be very bad.

Housing Has Already Reached the Inflection Point: McBride - Tuesday morning, S&P reported that the Case-Shiller Home Price composite indices "posted their lowest levels since the housing crisis began in mid-2006." At first glance this seems like more of the same, with house prices continuing to decline. However, the March Case-Shiller index is released with a significant lag to current prices, and there are several signs that prices may already be at or near a bottom. Wednesday's report from the National Association of Realtors that pending home sales fell 5.5 percent in April does not change this view, as this is just one month of data. First, it is important to understand that the March Case-Shiller index is actually a three-month average of sales closed in January, February and March. The purchase agreement for a house that closed in January was probably signed in November or early December, so some portion of the just released Case-Shiller index will be for contract prices six or even seven months ago. Usually this delay is not critical, but this means the Case-Shiller index will be slow to indicate the turning point for prices. Other data suggest prices may have already bottomed. The CoreLogic repeat sales house price index showed prices increased in March and the Zillow House Price index indicated that prices also increased in April. Trulia has recently developed an asking price index that is adjusted both for the mix of homes listed for sale and for seasonal factors — and their analysis suggests prices have been up for three consecutive months through April.

Importance of Home Prices Goes Beyond Housing - Measures of home prices have become as numerous as dandelions in the lawn of a foreclosed home. The National Association of Realtors, real-estate websites CoreLogic and Trulia, and government agencies like the Federal Housing Finance Agency and the Commerce Department all report indexes covering real-estate values. The best known, the S&P/Case-Shiller home price index, reported Tuesday that home prices nationally fell 2.0% in the first quarter. The S&P report warned home prices haven’t yet turned the corner, although other measures, including the CoreLogic measure, show prices have bottomed out. (That’s especially true when distressed sales, which tend to be made at a steep discount, are excluded from the mix.) According to Jed Kolko, chief economist at Trulia, the indexes differ in three major ways: the mix of homes listed and sold, seasonal adjustments, and the weighting of different homes and metro areas. While each methodology has its merits, the end result, says Kolko, is that the indexes can disagree by as much as 10 percentage points. Getting the trend in home prices correct matters because stable prices would signal demand and supply of houses are falling into balance. Clearing out the overhang of unsold homes is a prerequisite for a sustained pickup in building activity.

 Real Estate: The Great Lie - Real Estate & housing are not terrific investments.  Most suggestions otherwise are a huge lie, perhaps The Great Lie.  The Lie is perpetrated most in the commercialization of the “American Dream”: a white, picket fence for every man, woman, and family.  Non-income-producing, residential real estate is broadly a money pit.  For long-term holding periods (5-20 years), the value of this real estate is severely eroded by its cost of carry, including  Taxes + Insurance + Maintenance.  Let’s consider an example¹ though:

  • National Average Homeprice= $297,700 (average sale price, 2010)
    National Average Mortgage Payment= $14,638.68 (annual, 2010)
    National Average Real Estate Tax= $1,180 (annual, 2010²)
    National Average Homeowner’s Insurance= $860 (annual, 2006)

Those $2,040/year in taxes and insurance premia are never recovered by the homeowner.  Theoretically, nor are the mortgage interest and origination fees.  While you can argue that the monetary value of a home discounts these expenses (which it certainly does), that discount is surpassed by the recurring expenses the longer a homeowner holds his asset.  In fact, that $2,040 eats away at your home’s fair market value at  a rate of 0.7%/year on average, almost like an internal expense on a mutual fund.

All the subscribers to the housing Armageddon theories, just look at the data - the US housing market is beginning to recover - The US housing's bubble and its spectacular end left a indelible mark on people's view of residential property markets. Sadly the idea of a "permanent" US housing market decline has been drummed into the heads of numerous, often well educated and otherwise open-minded people. Hoards of angry bloggers keep spewing the same line over and over again - housing prices will fall "forever" because of the shadow inventory, etc., etc. People, including many in academia, would deny a housing market improvement even if it stared them in the face. Positive housing news cause many to experience what psychologists call "cognitive dissonance", as they desperately attempt to rationalize away the data that doesn't conform to their views.  The housing market bottom has to come some time, and as predicted at the beginning of the year (which really angered some of the folks described above), 2012 seems to be that year. Nobody is talking about a recovery of prices to the bubble years or even a robust growth in housing. We all know the issues. But on average across the US, home price declines have stopped. Multiple data points are now suggesting that is indeed the case. A sudden spike in the FHFA housing price index is one of those points. A 1.8% monthly increase in March is the largest monthly move in recent years.

Housing Recovery - Hope and Reality - Every year for the past three years there have been recurring calls for a housing bottom and recovery. The importance of an eventual recovery in housing should not be dismissed as it is a critical component of an economic recovery due to the large multiplier effect of each dollar spent. The recovery in housing would signal that a foundation for a more lasting economic recovery would be in place. That is the hope anyway.However, as we have discussed in the past (see here, here and here) the reality is that while housing construction and sales may have bottomed after the largest decline in history, it is highly likely that a correction in prices likely has further to fall particularly if interest rates rise for any reason. The one overlooked issue is that while it is likely that housing may have found its natural bottom — a bottom and a recovery are entirely different things. During the past couple of weeks there has been a tremendous amount of ink spilled in the press about home sales, both new and existing, starts and permits which all showed some very modest improvement. It is important to note that the improvement in the data is welcome news. It is a bit premature, however, for it to be called a recovery. With mortgage rates currently below 4%, employment somewhat stable, major banks continuing to stall the foreclosure process and the home buying season moving into full swing — we should see improvement in the housing data. If we weren't — that would be very bad.

Pending home sales post surprise fall in April - - Contracts to purchase previously owned U.S. homes unexpectedly fell in April to a four-month low, undermining some of the recent optimism that the housing sector was touching bottom. The National Association of Realtors said on Wednesday its Pending Home Sales Index, based on contracts signed last month, fell 5.5 percent to 95.5, its lowest level since December, after a downwardly revised 3.8 percent increase in March. The series still remained sharply higher from a year earlier, and economists said the data did not change the view that the U.S. economy remains in recovery mode. "The drop in pending home sales is clearly disappointing," said Pierre Ellis, an economist at Decision Economics in New York. "It remains to be seen whether this is the beginning of a real downturn."

NAR: Pending home sales index declined 5.5% in April - From the NAR: Pending Home Decline in April but Up Strongly From a Year Ago The Pending Home Sales Index, a forward-looking indicator based on contract signings, declined 5.5 percent to 95.5 from a downwardly revised 101.1 in March but is 14.4 percent above April 2011 when it was 83.5. The data reflects contracts but not closings.  ...The PHSI in the Northeast rose 0.9 percent to 78.9 in April and is 19.9 percent higher than April 2011. In the Midwest the index slipped 0.3 percent to 93.0 but is 23.0 percent above a year ago. Pending home sales in the South fell 6.8 percent to an index of 105.7 in April but are 13.3 percent higher than April 2011. In the West the index dropped 12.0 percent in April to 94.9 but is 5.1 percent above a year ago. This was below the consensus of a 0.5% increase for this index. Contract signings usually lead sales by about 45 to 60 days, so this is for sales in May and June.

Construction Spending in April: Private spending increases, Public Spending declines - This morning the Census Bureau reported that that overall construction spending increased in April: The U.S. Census Bureau of the Department of Commerce announced today that construction spending during April 2012 was estimated at a seasonally adjusted annual rate of $820.7 billion, 0.3 percent above the revised March estimate of $818.1 billion. The April figure is 6.8 percent above the April 2011 estimate of $768.2 billion. Private construction spending increased while public spending decreased: Spending on private construction was at a seasonally adjusted annual rate of $549.7 billion, 1.2 percent above the revised March estimate of $543.4 billion. ... In April, the estimated seasonally adjusted annual rate of public construction spending was $271.0 billion, 1.4 percent below the revised March estimate of $274.7 billion.. Click on graph for larger image. This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted. Private residential spending is 62% below the peak in early 2006, and up 14% from the recent low. Non-residential spending is 29% below the peak in January 2008, and up about 20% from the recent low. Public construction spending is now 17% below the peak in March 2009 and at a new post-bubble low.

Rent Affordability on Minimum Wage - As part of its 2012 report on rent affordability, the National Low Income Housing Coalition released a chart that’s been floating around the Internet. It shows that there isn’t a single state in the country where it’s possible to work 40 hours per week at minimum wage and afford a two-bedroom apartment at Fair Market Rent. In West Virginia and Arkansas, you’d need to work at least a 63-hour week, and that’s as good as it gets. In California, Maryland, D.C., New Jersey and New York you’d need to work 130 hours or more. Hawaii comes in last place: 175 hours. By “affordable,” the Coalition means paying no more than 30 percent of income for housing costs (rent and utilities). And why a two-bedroom apartment, as opposed to a one-bedroom?  Thirty percent is a generally accepted standard, and there are plenty of single-parent households as well as families where, for various reasons, only one member is able to work.But even if you quibble with how exactly the Coalition put the chart together, it’s clear that there’s a mismatch between the minimum wage and the cost of living (or at least a decent cost of living). In New York, which is in the midst of a fight over raising the minimum wage, two individuals would need to work 68 hours a week each to manage the rent on a two-bedroom unit. If they have kids, the 70 percent of their paychecks left after rent won’t get them very far.

NY Fed: Consumer Deleveraging Continued in Q1, but Student Loan Debt Continued to Grow - From the NY Fed: New York Fed Quarterly Report Shows Student Loan Debt Continues to Grow: In its latest Quarterly Report on Household Debt and Credit, the Federal Reserve Bank of New York today announced that student loan debt reported on consumer credit reports reached $904 billion in the first quarter of 2012, a $30 billion increase from the previous quarter. In addition, consumer deleveraging continued to advance as overall indebtedness declined to $11.44 trillion, about $100 billion (0.9 percent) less than in the fourth quarter of 2011. Here is the Q1 report: Quarterly Report on Household Debt and Credit Mortgage balances shown on consumer credit reports fell again ($81 billion or 1.0%) during the quarter; home equity lines of credit (HELOC) balances fell by $15 billion (2.4%). About 291,000 individuals had a foreclosure notation added to their credit reports between December 31 and March 31, about the same as in 2011Q4, but 20.8% below the 2011Q1 level. Total household delinquency rates continued their downward trend in 2012Q1. As of March 31, 9.3% of outstanding debt was in some stage of delinquency, compared to 9.8% on December 31, 2011. Here are two graphs:The first graph shows aggregate consumer debt decreased slightly in Q1. This was mostly due to a decline in mortgage debt.  The second graph shows the percent of debt in delinquency. In general, the percent of delinquent debt is declining, but what really stands out is the percent of debt 90+ days delinquent (Yellow, orange and red). The percent of seriously delinquent loans will probably decline quicker now that the mortgage servicer settlement has been reached.

U.S. Savings Rate Falling Amid Stagnant Incomes - The government made a sharp downward revision to fourth-quarter income figures Thursday, a sign of stagnant wages and a potential hurdle for consumer spending. The figures, tucked in to the latest GDP report, show real disposable personal income–income minus taxes, adjusted for inflation–rose only 0.2% in the fourth quarter, compared with an earlier estimate of 1.7%. The change is largely due to lower-than-expected paychecks. Real first-quarter income was unrevised at a 0.4% gain. The upshot: consumers are saving less in order to spend more. Consumer outlays rose a solid 2.1% in the fourth quarter and 2.7% in the first three months of this year. But the personal savings rate for the first quarter dropped its lowest level since the start of the recession. Americans stashed away 3.6% of personal income in the first quarter, down from 4.2% in the fourth quarter and a near-term peak of 6.2% in the second quarter of 2009.

Inflation and Savings Lower, Spending and Income Higher in April‎ - The April report on personal income and outlays from the Department of Commerce is out today. According to the Bureau of Economic Analysis, personal income rose 0.2% month-over-month in April in both current and chained (2005) dollars. Disposable personal income also rose 0.2% and personal consumption expenditures (PCE) rose 0.3%. Personal savings fell by $8.3 billion in April to 3.4% from 3.5% in March. The best n ews is that the PCE price index excluding food and energy costs rose less than 0.1% in April. The PCE price index is a key inflation measure and is up just 1.8% in the past year, below the Fed’s target number of 2%. With both income and spending rising while inflation falls, the rise in US unemployment to 8.2% and the low gain in non-farm payrolls makes a bit more sense. One might conclude that the people who are working are getting paid more and they are not saving the increase but spending it, either to make an often-postponed purchase or as a modest splurge. February’s PCE growth was 0.6%, then spending went flat in March before rising again in April. More spending should lead to more jobs, but that’s not happening. If ‘Plan A’ was quantitative easing, what’s ‘Plan B’? The BEA’s report is available here.

U.S. Personal Income +0.2%, Consumer Spending +0.3%, Savings Rate at 3.4% in April 2012: BEA → The U.S. Bureau of Economic Analysis has reported that personal income increased $31.7 billion, or 0.2 percent, and disposable personal income (DPI) increased $22.0 billion, or 0.2 percent, in April. Personal consumption expenditures (PCE) increased $31.8 billion, or 0.3 percent.  In March, personal income increased $52.2 billion, or 0.4 percent, DPI increased $45.9 billion, or 0.4 percent, and PCE increased $25.4 billion, or 0.2 percent, based on revised estimates. The personal saving rate as a percentage of DPI was 3.4 percent in April.

Personal Income increased 0.2% in April, Spending 0.3% - The BEA released the Personal Income and Outlays report for April:  Personal income increased $31.7 billion, or 0.2 percent ... in April, according to the Bureau of Economic Analysis. Personal Personal consumption expenditures (PCE) increased $31.8 billion, or 0.3 percent. Real PCE -- PCE adjusted to remove price changes -- increased 0.3 percent in April, compared with an increase of less than 0.1 percent in March. ... PCE price index -- The price index for PCE increased less than 0.1 percent in April, compared with an increase of 0.2 percent in March. The PCE price index, excluding food and energy, increased 0.1 percent, compared with an increase of 0.2 percent.The following graph shows real Personal Consumption Expenditures (PCE) through April (2005 dollars). This graph shows real PCE by month for the last few years. The dashed red lines are the quarterly levels for real PCE. You can really see the slow down in Q2 of last year. Even if May and June are flat compared to April this year, real PCE would increase around 2% in Q2. Another key point is the PCE price index has only increased 1.8% over the last year, and core PCE is up 1.9%. And it looks like the year-over-year increases will decline further in May.  Also the personal saving rate declined to 3.4% in April.

More Americans Rely on Credit Cards for Everyday Expenses -  Americans are increasingly dependent on credit cards just to put food on the table and keep the lights on, a new study shows. Although we’re doing a better job overall paying our bills on time these days, many people are relying on more easily attainable credit just to keep their heads above water. With no home equity left to tap, skimpier health insurance coverage and jobless benefits for the long-term unemployed vanishing, even middle class Americans are once again at risk of tumbling down the rabbit hole of debt. According to “The Plastic Safety Net,” a survey conducted by nonprofit group Demos, 40% of low- and moderate-income families rely on credit cards for what the group categorizes as basic needs: rent or mortgage payments, groceries, utilities, or insurance. Among households with annual incomes of less than $50,000, this increases to 45%. That 40% is several percentage points higher than Demos found when it conducted this survey prior to the recession in 2005, when roughly a third of respondents reported relying on credit for everyday expenses. Back then credit was a substitute for an emergency savings fund; people dipped into it when unforeseen circumstances arose. Today, those emergency measures have become everyday survival tools.

May Sales: How Retailers Fared - Retailers reported same-store sales for May that were generally stronger than expected. The 18 retailers tracked by Thomson Reuters posted a 3.9% rise in May same-store sales when a 3.6% gain was expected. The figure compares with 5.8% growth a year ago and a 2.2% advance in April. See a sortable chart of how individual retailers fared. Click any column to re-sort.

Consumer Confidence in the Economy Plunged in May — American confidence in the economy suffered the biggest drop in eight months as worries about the weak jobs, housing and stock markets rattled them again. The decline comes after a few months of optimism amid some positive economic news. The Conference Board, a private research group, said on Tuesday that its Consumer Confidence Index now stands at 64.9, down from a revised 68.7 in April. With gas prices falling, Americans were expected to push the measure to 70, according to analysts polled by FactSet. But the May figure, which represents the biggest drop since October 2011 when the measure fell about 6 points, shows that consumers need more encouraging economic signs before their concerns start to dissipate. Americans remain worried about slow hiring, declining home values, big drops in the stock market and a worsening European economy that they fear will negatively impact the U.S. “Consumers were less positive about current business and labor market conditions, and they were more pessimistic about the short-term outlook,”

Dueling Consumer Confidence Reports - Last Friday, Thomson Reuters/University of Michigan reported that its consumer sentiment index increased in May for the ninth straight month.  That set a new record for the most consecutive monthly increases in the history of the index going back to 1978.  It was also the most upbeat American consumers have been in more than fours years, since October 2007 before the recession started.  Bloomberg reported that "A record number of households said they'd heard better news on the jobs outlook, which combined with cheaper gasoline and an improving housing market may help sustain consumer spending and shield the economy from Europe's debt crisis."  This morning, Gallup reported that its Economic Confidence Index held at -16 last week, the highest index level in the four-plus years of Gallup Daily tracking in the United States.   Also this morning, The Conference Board reported that its consumer confidence index fell to a five-month low in May, as Americans were less optimistic about current labor market and business conditions, as well as the short-term outlook. What are we to make of these conflicting consumer confidence reports?  Perhaps it's a reflection of the weakness in survey-based measures of consumer confidence, or that surveys have large margins of error? 

How Do Consumers Feel? It’s Anyone’s Guess - U.S. consumers are feeling better or worse about the economy in May, depending on whom you ask. The Conference Board said Tuesday that its confidence index tumbled to 64.9 this month, the lowest level since January. The unexpected drop was in sharp contrast with last week’s jump in the consumer sentiment index put out by Thomson Reuters/University of Michigan. The sentiment index rose to its highest reading since October 2007. “How U.S. consumers are feeling at the moment is anyone’s guess,” wrote Chris Williamson, chief economist at data provider Markit. Household attitudes are important since the U.S. economy relies heavily on consumers to keep demand growing. And while less confidence doesn’t always mean less spending, there is some correlation. Economists at Credit Suisse calculate that in a simple regression, the consumer expectations index is consistent with 2.0% real consumer spending growth. That’s good, but not great. What’s worrisome is the renewed pessimism about the job markets within the board’s survey. (Another finding in stark contrast to the Michigan report.) In May, 41.0% of consumers think jobs are “hard to get,” up from 38.1% saying that in April. Looking out six months, 15.8% expect there to be more jobs, down from 16.9% saying that last month.

Why do people dislike inflation? -Matt Yglesias thinks that if people knew that wages were the biggest component of the price level, they wouldn't be as freaked out by inflation[T]he most important price in the economy is the price of labor and the price of labor is equal to workers' incomes, so a general increase in the nominal price level is necessarily a general increase in nominal incomes. But nobody seems to believe that. Instead people are convinced that gasoline and milk are the main prices in the economy, and that a general increase in the nominal price level is necessarily a general decline in real incomes. This is a pretty common idea: People dislike inflation because of money illusion. They mistake their nominal incomes for real incomes, and mistake consumer prices for the real cost of living. Seems plausible. And it provides a parsimonious explanation for other phenomena, such as downward nominal wage stickiness. Except that I see a problem with this explanation. Money illusion explains why people dislike hypothetical or prospective inflation, but it does not explain why people are unhappy when inflation actually happens. Suppose real prices and real wages are unchanged, but inflation spikes to 10%. People who suffer from money illusion will tend to be upset when consumer prices rise, but happy when their nominal wages rise. So in this scenario, it seems that their elation at rising "incomes" would at least mostly cancel out their dismay at rising "costs of living". Instead, it seems that actual inflation causes a lot more dismay than elation.

U.S. Declines to Stop China From Sending Foreign Aid to American Consumers through Low Prices - "The Obama administration may be getting tougher with China on trade on behalf of U.S. producers seeking to reduce foreign competition, but its approach in dealing with Beijing on the thorny currency issue remains patient diplomacy, especially because China's currency policy does generate huge cost advantages for American consumers and businesses purchasing their products.  The Treasury Department, in its semiannual report Friday on exchange-rate policies, once again refrained from labeling China a currency manipulator -- an accusation that would embarrass Beijing and trigger negotiations and possibly even lead to U.S. sanctions that would raise prices for American consumers and businesses purchasing Chinese imports.  The Treasury report made plain that U.S. officials believe that China’s currency, the yuan, remains “significantly undervalued,” saving Americans billions of dollars annually.  An artificially cheaper yuan gives Chinese exporters American consumers an extra price advantage in selling purchasing their China's goods in the U.S.  But Treasury still declined to cite China on behalf of American producers competing against China's everyday low prices, saying that the Chinese have made progress in correcting currency and related imbalances and also have assured the U.S. that they would move more quickly to adopt a more flexible, market-based exchange-rate system, even though that could disadvantage American households by raising prices on China's exports to the U.S.

Weekly Gasoline Update: Prices Continue to Fall - 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, rounded to the penny, declined over the past week: regular is down four cents and premium is down five. This is the seventh week of declines in advance of the summer vacation season. Despite the welcome declines, regular is still up 44 cents and premium 42 cents from their interim weekly lows in the December 19th EIA report. As I write this, shows five states (unchanged from the previous two weeks) with the average price of gasoline above $4 but only one state with the price above $3.90, down from four last week. California has the highest mainland prices, averaging around $4.26 a gallon. How far are we from the interim high prices of 2011 and the all-time highs of 2008? Here's the answer

U.S. Light Vehicle Sales at 13.8 million annual rate in May - Based on an estimate from Autodata Corp, light vehicle sales were at a 13.78 million SAAR in May. That is up 17.9% from May 2011, and down 4.1% from the sales rate last month (14.37 million SAAR in April 2012). This was below the consensus forecast of 14.5 million SAAR (seasonally adjusted annual rate). This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for May (red, light vehicle sales of 13.78 million SAAR from Autodata Corp). This was the weakest month this year. The year-over-year increase was large because of the impact of the tsuanmi and related supply chain issues in May 2011. Sales have averaged a 14.43 million annual sales rate through the first five months of 2012, up sharply from the same period of 2011. The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Toyota, Honda May Sales Gain as Industry Trails Estimates - Toyota Motor Corp. and Honda Motor Co. led five of the six largest automakers in reporting U.S. sales gains in May that trailed estimates as slumping job growth limited their rebound from last year’s earthquake and tsunami. Toyota deliveries last month surged 87 percent to 202,973 and Honda sales climbed 48 percent to 133,997, according to company statements. The Japan-based automakers, rebounding from the natural disasters that curtailed production and slashed inventories, missed analysts’ estimates for gains of 93 percent and 53 percent, respectively. General Motors Co. (GM), Chrysler Group LLC and Nissan Motor Co. sales also trailed estimates.U.S. light-vehicle sales ran at a 13.8 million seasonally adjusted annualized rate, according to an e-mailed statement by Autodata Corp. The pace missed the 14.4 million average estimate of 14 analysts surveyed by Bloomberg and slid below 14 million for the first time this year. Employers in May added the fewest workers in a year, according to the Labor Department.

Will Truckers Ditch Diesel for Natural Gas? - Rising diesel costs last year forced Waste Management Inc. to charge customers an extra $169 million, just to keep its garbage trucks fueled. This year, the nation's biggest trash hauler has a new defensive strategy: it is buying trucks that will run on cheaper natural gas. In fact, the company says 80% of the trucks it purchases during the next five years will be fueled by natural gas. Though the vehicles cost about $30,000 more than conventional diesel models, each will save $27,000-a-year or more in fuel. By 2017, the company expects to burn more natural gas than diesel. The shale gas revolution, which cut the price of natural gas by about 45% over the past year, already has triggered a shift by the utility industry to natural gas from coal. Vast amounts of natural gas in shale rock formations have been unlocked by improved drilling techniques, making the fuel cheap and plentiful across the U.S. Now the shale-gas boom is rippling through transportation. Never before has the price gap between natural gas and diesel been so large, suddenly making natural-gas-powered trucks an alluring option for company fleets, rather than an impractical idea pushed mainly by natural-gas boosters like T. Boone Pickens, the Texas oilman. Railroad operators also are being affected as coal shipments decline. Many fleet operators, particularly long-haul truckers, remain concerned about a scarcity of refueling stations. Other challenges include the bulky tanks for compressed gas and the hazards of handling liquefied gas. In the past, the volatility of natural-gas prices also hampered wider use.

Dallas Fed: Texas Manufacturing Expands but New Orders Remain Flat - From the Dallas Fed: Texas Manufacturing Expands but New Orders Remain Flat:Texas factory activity continued to increase in May, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, held steady at 5.5, suggesting growth continued at about the same pace as last month.The general business activity index remained negative for the second consecutive month and edged down from -3.4 to -5.1. Labor market indicators reflected slightly slower labor demand growth and shorter workweeks. Employment grew again in May, but the pace continued to slow; the index receded from 11.8 to 8.5. Eighteen percent of firms reported hiring new workers, while 10 percent reported layoffs. The hours worked index remained negative but edged up from -4.6 to -2.2. This was below expectations of an increase in the general business activity index to +3.0. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Dallas Fed Reports Deteriorating Manufacturing Conditions - Business conditions in Texas-area manufacturing contracted further this month although production continued to expand, according to a report released Tuesday by the Federal Reserve Bank of Dallas. The bank said its general business activity index fell to -5.1 in May from -3.4 in April. The company outlook index rebounded to 4.7 from -4.5. Readings below 0 indicate contraction, and positive numbers indicate expanding activity.

Chicago Fed's Manufacturing Index Up 2.4% In April - -- Manufacturing output in the U.S. Midwest is estimated to have increased 2.4% in April as auto production surged after a dip in March.  The Federal Reserve Bank of Chicago said Tuesday that its Midwest Manufacturing Index rose to 94.2, reversing a 0.3% decline in March.  The increase was driven by a 7.6% sequential rise in auto output from what is still the industry's heartland in the U.S., well above the 2.1% expansion seen nationwide.  The index is calculated using data on working hours, and output in the five-state Midwest region has broadly outperformed the national average over the past 12 months, having fallen more during the last recession.  Steel output in the Midwest rose 0.7% in April from March, ahead of the national average, while a 0.6% increase in machinery production narrowly lagged the U.S.

Chicago PMI declines to 52.7 - Chicago PMI: The overall index declined to 52.7 in May, down from 56.2 in April. This was below consensus expectations of 56.1 and indicates slower growth in May. Note: any number above 50 shows expansion. From the Chicago ISM2: The Chicago Purchasing Managers reported the May Chicago Business3 Barometer decreased for a third consecutive month to its lowest level since September 2009. The short term trend of the Chicago Business Barometer, and all seven Business Activity indexes, declined in May. Among the Business Activity measures, only the Supplier Delivery index expanded faster while Order Backlogs and Inventories contracted. ...
• PRODUCTION and NEW ORDERS lowest since September 2009;
• PRICES PAID lowest since September 2010;
• EMPLOYMENT rate4 of growth slowed

New orders declined to 52.7 from 57.4, and employment decreased to 57.0 from 58.7.

ISM Manufacturing index declines in May to 53.5 - PMI was at 53.5% in May, down from 54.8% in April. The employment index was at 56.9%, down from 57.3%, and new orders index was at 60.1%, up from 58.2%. From the Institute for Supply Management: May 2012 Manufacturing ISM Report On Business® Economic activity in the manufacturing sector expanded in May for the 34th consecutive month, and the overall economy grew for the 36th consecutive month, say the nation's supply executives. Here is a long term graph of the ISM manufacturing index. This was below expectations of 54.0%. This suggests manufacturing expanded at a slower rate in May than in April. Although this was slightly weaker than expected, new orders were up and prices were down. Not all bad.

U.S. Manufacturing Sector Declines 1.3% in May 2012: ISM → The Institute for Supply Management has announced that the U.S. manufacturing sector expanded at a slower pace in May 2012.  “The PMI registered 53.5 percent, a modest decrease of 1.3 percentage points from April’s reading of 54.8 percent, indicating expansion in the manufacturing sector for the 34th consecutive month,”  “The New Orders Index continued its growth trend for the 37th consecutive month, registering 60.1 percent in May. This represents an increase of 1.9 percentage points from April and also the highest level recorded by the index since April 2011. The Prices Index for raw materials fell to 47.5 percent in May, dropping 13.5 percentage points from April, indicating lower prices for the first time since December 2011. Comments from the panel generally reflect stable-to-strong orders, with sales showing steady improvement over the first five months of 2012.”Despite the slowdown, most respondents indicated that business was holding steady or slightly improving.  The only negative comment came from the computer and electronic products sector, which said “Business is lower than forecast for Q2 2012.” Commodities prices were mixed.

Measuring Small Business Employment over the Business Cycle - Many analysts have tried to understand why the pace of job growth has been so slow since the end of the Great Recession. This issue has focused attention recently on the hiring behavior of small businesses during the recovery. It turns out that simply measuring the hiring practices of small businesses can be difficult. To examine trends in small business employment, we first analyzed data from the Business Employment Dynamics (BED) series of the Bureau of Labor Statistics (BLS). These data represent a quarterly census of all establishments under state unemployment insurance programs and characterize about 98 percent of all employment on nonfarm payrolls. We looked at three classes of firms: small (1-49 employees), medium (50-499 employees), and large (500 or more employees). Prior to the recession, large firms accounted for 44 percent of overall employment, medium-size firms 30 percent, and small firms 26 percent. Comparing shares of employment losses for these different sizes of firms during each of the three most recent recessions, we can see that the smallest firms played a less significant role in the 2001 recession than in the other recessions, while employment losses for large firms were relatively muted in 1990. In the last recession, employment losses were proportional to the employment shares of each group, so it appears that all groups were hit evenly.

Explaining the Rise of Unemployment: Unemployment rose dramatically during the Great Recession because highly indebted consumers slashed their spending, according to Atif Mian and Amir Sufi writing in What Explains High Unemployment? The Aggregate Demand Channel (NBER Working Paper No. 17830). They find that shocks to household balance sheets account for 4 million of the 6.2 million jobs lost in the United States between March 2007 and March 2009. The stage was set for a substantial shock to household balance sheets during the housing bubble. Housing prices rose sharply, but homeowners borrowed even more aggressively. Between 2001 and 2007, household debt doubled from $7 trillion to $14 trillion. Homeowners' debt-to-GDP ratio rose sharply, from 0.7 to 1.0, during the same period. When housing prices collapsed, households were stuck with much higher debt, forcing them to cut back spending, which has shaped the depth and length of the economic slump that followed. Earlier research by these authors and others had already demonstrated the link between dramatically weaker household balance sheets and plummeting consumer spending. In high-debt U.S. counties, housing prices fell by nearly 30 percent from 2006 to 2010. Households in those counties slashed consumption of durable goods and even cut back grocery spending. In the 10 percent of U.S. counties with the lowest debt-to-income ratios, house prices didn't fall and the fall in consumption wasn't as dramatic. Consumption of durable goods fell 20 percentage points more in high-debt counties than in low-debt counties.

Vital Signs: Fewer Help-Wanted Ads - The number of help-wanted ads posted online fell in May. Total U.S. job vacancies on the Internet slipped by nearly 1% from April to 4.72 million, the Conference Board said. That ended five consecutive months of increases, as demand slowed for workers in the computer, transportation and financial fields. However, there were more openings in May than during any month last year.

Weekly Unemployment Claims: Unexpectedly Higher at 383K - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 383,000 new claims is an unexpected rise over last week's upward revision to 373,000 -- which was originally reported at 370,000. The less volatile and closely watched four-week moving average came in at 374,500. Here is the official statement from the Department of Labor:  In the week ending May 26, the advance figure for seasonally adjusted initial claims was 383,000, an increase of 10,000 from the previous week's revised figure of 373,000. The 4-week moving average was 374,500, an increase of 3,750 from the previous week's revised average of 370,750.  The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending May 19, unchanged from the prior week's unrevised rate.  The advance number for seasonally adjusted insured unemployment during the week ending May 19 was 3,242,000, a decrease of 36,000 from the preceding week's revised level of 3,278,000. The 4-week moving average was 3,263,750, a decrease of 12,000 from the preceding week's revised average of 3,275,750.  As we can see, there's a good bit of volatility in this indicator, which is why the 4-week moving average (shown in the callouts) is a more useful number than the weekly data.

U.S. Filings for Unemployment Aid at Five-Week High — The number of Americans seeking unemployment benefits rose last week to a five-week high, evidence that the job market remains sluggish. The Labor Department said Thursday that weekly applications for unemployment aid rose 10,000 to a seasonally adjusted 383,000. The four-week average, a less volatile measure, increased for the first time in a month to 374,500. Economists were disappointed by the data, particularly when coupled with a separate report Thursday that showed only modest hiring by private businesses in May. On Friday, the government will report on May hiring by private and public employers. “The jobs data were not reassuring ahead of tomorrow’s … report,” said Jennifer Lee, an economist at BMO Capital Markets. Applications had declined to roughly 370,000 for four weeks. That drop suggested that hiring could pick up in May.

ADP: Private Employment increased 133,000 in May - ADP reportsEmployment in the U.S. nonfarm private business sector increased by 133,000 from April to May on a seasonally adjusted basis. The estimated gain from March to April was revised down modestly, from the initial estimate of 119,000 to a revised estimate of 113,000.  Employment in the private, service-providing sector increased 132,000 in May, after rising a revised 119,000 in April. Employment in the private, goods-producing sector increased 1,000 in May. Manufacturing employment dropped 2,000 jobs, the second consecutive monthly decline. This was below the consensus forecast of an increase of 154,000 private sector jobs in May. The BLS reports on Friday, and the consensus is for an increase of 150,000 payroll jobs in May, on a seasonally adjusted (SA) basis.

ADP Private Payrolls Print At 133K, Miss Expectations; Manufacturing Jobs Drop Two Months In A Row - That the ADP would miss today's expectations of 150K is no surprise: after all as we have been explaining for a while, the only way the Fed will have a green light to proceed with NEW QE if it so chooses at the June 19-20 meeting, is if the economic data suddenly turn horrendous. Which means tomorrow's NFP data is make or break: in fact, as far as markets are concerned, the worse the better - should a -1,000,000 NFP print come in, stocks will soar. Which is why the ADP print, which indeed was a miss, of 133K raised eyebrows that it wasn't bigger. Still, 3rd consecutive miss of expectations in a row, and 4th out of the last 5, it gives the BLS enough rope with which to hang itself, and potentially the president, who may have no choice but to sacrifice job creation "momentum" heading into the presidential race, in order to keep stocks higher.

U.S. job growth remains weak, May data show - A key survey of businesses released Thursday revealed a pickup in the pace of job creation in May, but the growth was not enough to shake lingering fears about the impact of a broader global slowdown. The ADP National Employment Report showed a gain of 133,000 jobs last month — less than economists had expected. Most of the increase was driven by the service industry, while manufacturing and construction employment declined.  The ADP survey is widely viewed as a bellwether of the government’s official employment data, which is set to be released Friday. Economists have predicted that the country added 150,000 jobs in May on hopes that the slowdown in hiring over the past several months was merely a fluke of unseasonably warm weather. But the weaker-than-expected ADP results could indicate more fundamental challenges to the recovery. The May unemployment rate is expected to remain 8.1 percent.

Slow Growth Still Prevails In The Labor Market - Today’s updates on weekly unemployment claims and ADP’s estimate of private sector payrolls for May suggests that the labor market continues to grow. The expansion is modest and perhaps vulnerable to the ongoing turmoil linked to the euro crisis, and it's not likely to impress analysts, but the growth rolls on. Let’s start with jobless claims, which jumped last week by 10,000 to a seasonally adjusted 383,000, the Labor Department reports. That’s the highest in five weeks and so the rise is sure to fan worries about the economy’s strength. But if you’re looking for clear-cut signs of trouble, it’s not yet obvious that today’s claims numbers are the smoking gun. As the chart below shows, new filings for jobless benefits remain well below the 400,000 mark. Weekly numbers bounce around a lot and so the jury's still out on whether the falling trend has run its course. Whatever good news one may take away from the annual decline in new claims is tempered by the fact that job growth has clearly slowed. Today’s ADP estimate of private nonfarm payrolls for May doesn’t offer much evidence for thinking otherwise. “While May’s increase was the twenty-eighth consecutive monthly advance, it nonetheless reflected a notable slowdown in the recent pace of hiring,”

Announced U.S. Job Cuts Jump 67% From Year Ago, Challenger Says - Job cuts announced in the U.S. jumped in May by the most in eight months, led by computer companies. Planned firings surged 67 percent from May 2011 to 61,887, according to figures released today by Chicago-based Challenger, Gray Christmas Inc. It marked the fourth year-over-year increase so far in 2012. Employers have announced 245,540 reductions since Jan. 1, 20 percent more than a year earlier, the report said. Hewlett- Packard Co. (HPQ) (HPQ) accounted for almost half the announcements this month, making the computer industry the top job-cutter of the year. Firings may also occur in the food industry as Hostess Brands Inc. restructures following its filing for bankruptcy protection, the report said. Compared with April, job-cut announcements were up 53 percent. Because the figures aren’t adjusted for seasonal effects, economists prefer to focus on year-over-year changes rather than monthly numbers.The computer industry led firings with 27,754 planned cuts in May, followed by 5,419 in transportation and 4,424 in financial businesses. California led all states with 31,679 announced job cuts last month, followed by Georgia with 2,807. Maryland had 2,685 reductions and Texas had 2,460 firings.

U.S. Economy Added 69K Jobs in May, Fewest in a Year - U.S. employers created 69,000 jobs in May, the fewest in a year, and the unemployment rate ticked up. The dismal jobs figures could fan fears that the economy is sputtering. The Labor Department also says the economy created far fewer jobs in the previous two months than first thought. It revised those figures down to show 49,000 fewer jobs created. The unemployment rate rose to 8.2 percent from 8.1 percent in April, the first increase in 11 months. Dow Jones industrial average futures, which were already down 100 points before the report, fell an additional 100 points within minutes of its release. The yield on the benchmark on the 10-year Treasury note plunged to 1.46 percent, the lowest on record, suggesting investors are flocking to the safety of U.S. government bonds The economy is averaging just 73,000 jobs per month over the past two months — roughly a third of jobs created per month in the first quarter.

U.S. Employers Add 69,000 Jobs, Fewer Than Forecast - American employers in May added the smallest number of workers in a year and the unemployment rate unexpectedly increased as job-seekers re-entered the workforce, further evidence that the labor-market recovery is stalling. Payrolls climbed by 69,000 last month, less than the most pessimistic forecast in a Bloomberg News survey, after a revised 77,000 gain in April that was smaller than initially estimated, Labor Department figures showed today in Washington. The median estimate called for a 150,000 May advance. The jobless rate rose to 8.2 percent from 8.1 percent, while hours worked declined... Estimates of the 87 economists surveyed ranged from increases of 75,000 to 195,000 after a previously reported 115,000 rise in April. Revisions subtracted a total of 49,000 jobs to payrolls in March and April.

Weak U.S. Hiring Adds to Global Gloom — The United States economy gained a net 69,000 jobs in May, the Labor Department said Friday1, a dismal showing that reflected mounting evidence of a global slowdown. The unemployment rate rose to 8.2 percent from 8.1 percent in April, but largely because more people began looking for work.  The report, which came in at less than half what analysts had expected and was the lowest number of net jobs created in a year, was potentially devastating for President Obama as he faces reelection and creates increased pressure on the Federal Reserve to expand its stimulus campaign.  As the third disappointing performance by the job market in three months, for many it served as confirmation that the economic recovery has once again lost momentum.  Global financial markets, already weak in early trading Friday, sank further on the numbers. At the same time, yields on United States and German government bonds also slumped more as traders sought safer investments. The 10-year Treasury yield fell to another record, 1.46 percent, and the German tw0-year bond fell below zero

May Employment Report: 69,000 Jobs, 8.2% Unemployment Rate - From the BLSNonfarm payroll employment changed little in May (+69,000), and the unemployment rate was essentially unchanged at 8.2 percent...The civilian labor force participation rate increased in May by 0.2 percentage point to 63.8 percent, offsetting a decline of the same amount in April. The employment-population ratio edged up to 58.6 percent in May...The change in total nonfarm payroll employment for March was revised from +154,000 to +143,000, and the change for April was revised from +115,000 to +77,000. This was a weak month, and the previous two months were revised down. This was below expectations of 150,000 payroll jobs added. The second graph shows the employment population ratio, the participation rate, and the unemployment rate. The unemployment rate increased to 8.2% (red line).The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although some of the recent decline is due to demographics. The Employment-Population ratio increased to 58.6% in May from 58.4% in April (black line).  The third graph shows the job losses from the start of the employment recession, in percentage terms.

U.S. Nonfarm Payrolls +69,000 in May 2012, Unemployment Rate Up to 8.2% - The U.S. Bureau of Labor Statistics has reported that nonfarm payroll employment changed little in May (+69,000), and the unemployment rate was essentially unchanged at 8.2 percent. Employment increased in health care, transportation and warehousing, and wholesale trade but declined in construction. In addition, the nonfarm payroll figures for March and April were revised sharply downward.  March was revised to +143,000 from +154,000.  April was revised to +77,00o from +115,000. The average workweek declined by 0.1 hour to 34.4 hours, suggesting that there is little demand for more workers. Average hourly earnings rose 2 cents to $23.41. Over the past 12 months, average hourly earnings have increased 1.7 percent.  Inflation is up 2.3 percent over the same period.

The Employment Situation (6 graphs) Usually I describe the employment report as disappointing. But this one was just miserable. Private sector employment only rose 69,000 and the unemployment rate ticked back up from 8.1%to 8.2%. On a positive note, the household survey showed a gain of 422,000 and generally this series tends to lead the payroll data. But the average work week fell from 33.5 to 33.4. In combination with the weak employment increase this generated a significant drop of 0.2% in aggregate hours worked. This reversed the recent strengthened in the index of hours worked as it fell back below the trend for this cycle. Average hourly earnings rose less than 0.1% from $23.39 to $23.41. The year over year gain is back to an all time record low of 1.39% With the drop in hours worked, average weekly earnings fell $806.96 to $805.30. The unemployment rate rose for almost every category of workers. One of the exception was a fall in the unemployment rate for college graduates.

Unemployment Rate Rises to 8.2% on Only 69K New Jobs - Here is the lead paragraph from the Employment Situation Summary released this morning by the Bureau of Labor Statistics: Nonfarm payroll employment changed little in May (+69,000), and the unemployment rate was essentially unchanged at 8.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in health care, transportation and warehousing, and wholesale trade but declined in construction. Employment was little changed in most other major industries.  Also disturbing is downward revision of April's 115K new jobs to 77K. In effect, the combination of new jobs for the past two months was 4K less than the consensus for May alone. Moreover, the increase in the unemployment rate to 8.2% is the first monthly increase since June of 2011. The unemployment peak for the current cycle was 10.0% in October 2009. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948.  The second chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. The latest number is 3.3% — down from 3.4% last month.  As we readily see, this metric remains significantly higher than the peak in 1983, which came six months after the broader measure topped out at 10.8%.  The next chart is an overlay of the unemployment rate and the employment-population ratio. This is the ratio of the number of employed people to the total civilian population age 16 and over.

May Jobs Report: First Impressions - The Bureau of Labor Statistics just released the employment and unemployment results for May and the results solidly confirm that the pace of job creation has once again slowed significantly. Job growth for May came in at only 69,000 jobs, the worst month in a year.  Unemployment ticked up to 8.2%, but that was largely due to more people coming back into the job market.  Moreover, April’s already weak jobs number was significantly revised downward, to 77,000, a markdown of 38,000 jobs.  Weekly hours worked ticked down a bit as well, further confirming the weakening labor demand story told by these numbers. The deceleration in payroll job growth is alarmingly clear (see figure).  It’s important to average the past few months to get a better feel for the underlying trend in these data.  Over the past three months, net job gains have averaged 96,000 per month, compared to 252,000 in the prior three months. These jobs data come from a survey of workplaces, while the unemployment rate comes from a household survey.  As is sometimes the case, the two surveys revealed very different results in today’s release.  Employment growth was strong in the HH survey—up 422,000—but analysts discount this monthly number as the underlying sample is a lot smaller and much more volatile, month-to-month. Nevertheless, even with this job growth from the HH survey, unemployment rose because the labor force expanded and enough people already in and newly entering the job market were jobless last month to send the rate up one-tenth, to 8.2%.

The BLS Jobs Report Covering May 2012: More Nothing - This jobs report reflects a weak even stagnant economy. The two big numbers this month are a weak jobs number 69,000 and an unemployment rate which rose a tenth of a percent to 8.2%. Additionally, the March job numbers were revised down 11,000 from 154,000 to 143,000. April was revised down 38,000 from 115,000 to 77,000. Total downward revisions were 49,000. The April number is significant because it fell below the 105,000 needed for that month to keep up with population growth.  Diving into the numbers, the potential labor force, the Civilian Non-Institutional Population over 16 (NIP) increased 182,000 from 242.784 million to 242.966 million. Multiplying this increase by the employment-population ratio which increased two-tenths of a percent (a good sign) yields 107,000. That means that 38,000 fewer jobs were created than were needed to keep up with population growth. This number is the result of a combination of a weak economy and seasonal adjustments.  The participation rate, the ratio of the actual labor force to the potential labor force of the NIP, increased 0.2% to 63.8% seasonally adjusted, and 0.4% to 63.8% unadjusted. This is an improvement. The actual labor force increased strongly in May, up 642,000 seasonally adjusted from 154.365 million to 155.007 million, and up 1.093 million from 153.905 million to 154.998 million seasonally unadjusted. We expect an inrush of job seekers this time of year looking for summer work, but the size of the inrush this year is unexpectedly high. The increase last year seasonally adjusted was 280,000, less than half this year's figure. As the actual labor force is the sum of the employed + those defined as unemployed by the BLS, we can see the breakdown of the labor force number by looking at these two numbers.

Another Payroll Disaster: Jobs +69,000, Employment Rate +.1 to 8.2%, April Jobs Revised Lower to +77,000; Long-term Unemployment +310,000 - Quick Notes About the Unemployment Rate:

  • US Unemployment Rate rose .1 to 8.2%  
  • In the last year, the civilian population rose by 3,653,000. Yet the labor force only rose by 1,307,000. Those not in the labor force rose by 2,345,000.  
  • This month the Civilian Labor Force rose by 642,000.  
  • Those "Not in Labor Force" decreased by 461,000. If you are not in the labor force, you are not counted as unemployed.  
  • Those "Not in Labor Force" fell to 87,958,000 from last month's record high of 88,419,000.  
  • By the Household Survey, the number of people employed rose by 422,000.  
  • By the Household Survey, over the course of the last year, the number of people employed rose by 2,479,000.  
  • Participation Rate rose .2 to 63.8%  
  • There are 8,098,000 workers who are working part-time but want full-time work, an increase of 245,000  
  • Thus of the the net of 422,000 people presumably hired by the household survey, 245,000 were for part-time jobs.  
  • Long-Term unemployment (27 weeks and over) rose by 310,000.  
  • Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Counterparties: The slow-burn jobs crisis - Today’s jobs report was decidedly bad: The US added just 69,000 jobs in May, leaving unemployment unchanged at 8.2% and employment gains in both March and April revised down. The ranks of the long-term unemployed, those without a job for 27 weeks or more, swelled by 300,000. Justin Wolfers is convinced that economic conditions demand fiscal stimulus. And although Treasury yields are once again a fear gauge, Felix thinks they also show us the way out: vast government borrowing at cheap rates and spending to invest in infrastructure, public-sector employment and the social safety net. But congressional intransigience and the president’s seeming discomfort with stimulus makes that an unlikely path. Betsey Stevenson calls on Congress to “stop acting like children and do something about the fiscal cliff and debt ceiling” rather than engage in seven months of brinkmanship. But Jared Bernstein, Joe Biden’s former economic adviser, doesn’t think that a Congress committed to acting on narrow, partisan terms ”regardless of the degree of hardship in the current economy” can mature on a whim. After all, the benefits of the president’s jobs bill are looking awfully attractive right now, and it was pronounced DOA. Binyamin Appelbaum thinks the most likely source of economic juice will come from the Fed. Ryan Avent agrees that the Fed will be forced to consider action, but thinks it’s unlikely to be decisive enough:

The Spring Slowdown Has Arrived - Friday’s jobs report was the most important in a while – and it was terrible. When the jobs market weakened in March and April, economists could tell a sensible story about why the weakening wasn’t as severe as it looked. The unusually warm weather had caused people to spend more money than they had planned, pulling forward economic activity – and hiring – into late 2011 and early 2012. The slowdown in March and April seemed as if it might simply be payback, rather than a truly worrisome new trend. But you can’t tell that story anymore. Some combination of problems – Europe’s new troubles, the rise in gas prices from several months ago, the continued cuts in government employment, the continued hangover from the financial crisis – has clearly slowed the economy. You can look at either survey that the Labor Department does, of businesses or households, and you can look at any time period. The message is the same. For the third straight year, the economy has fallen into a spring slump. Over the last three months, the economy has added an average of only 96,000 jobs a month, down from a three-month average of 252,000 in February. The growth of the last three months is the weakest since August. It’s weaker than the three-month growth in most of 2011 and half of 2010. Job growth in the private sector has slowed, while the federal government and local governments are cutting workers.

Third time unlucky - THE story of the American recovery is one of constant disappointment: two steps taken forward, followed inevitably by one step back. Early this year, it seemed as though the economy might finally have reached escape velocity.. Alas, the summer blues seem to have struck again. America's economy added just 69,000 jobs in May, according to a report released this morning by the Bureau of Labour Statistics. The BLS also revised down job gains in March and April; all told payrolls rose just by just 289,000 in the three months to May—the worst performance since August of last year. The slowdown is broad-based. Manufacturers added just 12,000 jobs in May, and construction employment tumbled by 28,000. Retail employment was virtually flat, and the government, once again, shed jobs for the month. Government employment dropped by 161,000 in the year to May, 50,000 of which loss came at the federal level. News from the household side of the survey was brighter for the month of May. Employment and participation in the labour force both jumped (labour-force growth led the unemployment rate a shade higher, from 8.1% to 8.2%). Yet the smaller survey size and the volatility of the household data suggests one shouldn't take much comfort from the result. And elsewhere the news is bleak. Long-term unemployment rose after falling in recent months. Hours worked edged down slightly.

May Jobs Report: Dismal, Disappointing, See Also Disastrous - I noted yesterday that there were plenty of signals that the May jobs report was going to be disappointing, ranging from disappointing GDP growth in the First Quarter, an ADP report that was way off expectations, and indications that major corporations were ramping up plans for layoffs going into the summer. We also had a disappointing jobs report in April that indicated the job growth we’d seen starting back in December was not going to sustain itself into the spring. Going into this morning, the consensus forecast had been for at least 150,000 net jobs created and a drop in the unemployment rate to 8.0% from 8.1%, but by yesterday afternoon there were already indications that analysts and traders on Wall Street were preparing for bad news this morning. As it turns out, they were wise to do so, because today the Bureau Of Labor Statistics released the worst jobs report in a year:

Dire Jobs Report Throws Washington into the Pressure Cooker - It’s bad, man. The May unemployment report released Friday morning didn’t just announce one month of lethargic job growth — 69,000 added, fewer than necessary to even keep up with population growth. The government’s regular estimates can be off by enough to turn whispers of doom to shouts of joy. These things are fickle. But that’s just the problem: embedded in May’s miserable data were big downward revisions for March and April, and it seems the momentum the U.S. economy appeared to have after a sunny February report was little more than a mirage. GDP was slower than we thought too: a 1.9% annual rate rather than the 2.2% clip reported last month. Toss in a cautious central bank, a gummed-up Congress, bedlam in Europe and China’s running out of juice, and you get a dizzying confluence. Bad times. And Washington, more than ever, is feeling the effects. With millions out of work, maybe it’s crass to say President Obama is suffering*. But he is. The economy has not reached escape velocity from the recession the way he had planned. . “Problems in the job market were long in the making and will not be solved overnight,” White House Council of Economic Advisers chief Alan Krueger said in a statement, which was heavy on historical reminders of the recession’s origins and light on silver linings. It was the most optimistic analysis he could muster, and if the White House, which is eyeing Europe with increasing concern, wasn’t already in a panic, it surely is now.

The Bleak Unemployment Report: Is Europe to Blame? - For the first time in almost a year, the unemployment rate rose to 8.2% in May as the economic recovery appeared to not only slow but almost completely stall. And it gets worse. By almost all measures, the latest unemployment news this morning is troubling. Economists were estimating anywhere from 75,000 to 195,000 new jobs in May. Instead, 69,000 new jobs were added. The April numbers, initially reported at 115,000, were revised by the Bureau of Labor Statistics to a mere 77,000. On average, about 73,000 new jobs were created over the last two months, far from the kinds of numbers most economists say are needed for the U.S. to get back to where it was before the recession, which would be more like 200,000 to 250,000 jobs per month – for the next seven years. The Department of Labor’s revisions subtracted a total of 49,000 jobs from payrolls in March and April. Another bleak statistic from May’s jobs report is the so-called underemployment rate, which increased from 14.5% to 14.8%. Those numbers include part-time workers who are looking for full-time work as well as those who have given up looking for a job.

Another Month Of Slow Job Growth In May - Job growth remained sluggish in May, the Labor Department reports. Nonfarm private-sector payrolls rose by a slim 82,000 on a seasonally adjusted basis last month. That’s the smallest increase since last August. It’s also a sign—confirmation!—that economic growth overall slowed in the spring.  For two months running, the labor market’s growth has been mild, at best. The 200,000-plus growth in private payrolls in each of the three months through this past February now looks like ancient history. Pessimists will cite today’s news as clear evidence that the economy is destined for more trouble, and perhaps a new recession. It would be foolish to dismiss that possibility in the wake of today’s employment news. But it's still premature to argue that the tipping point for the business cycle in the U.S. has been reached and that it's all downhill from here.For starters, two months of sluggish payrolls growth is hardly definitive. It's not encouraging, and it may be a smoking gun if the weakness rolls on. Statistically speaking, however, it's still quite unimpressive. The difference in net job growth of 80,000 and 200,000 in a labor force of 155 million is a rounding error, at least for the span of a month or two. Keep in mind too that the annual percentage change in the labor force, even after May's weak performance, is near the best pace in the last three years. Private-sector payrolls increased by 1.78% on a year-over-year basis through last month, or only moderately lower than the post-recession high of 2.09% for this past January.

A Lagging Recovery - The jobs report for May was worse than almost anyone expected. It cries out for action from Washington, but the political pressures point the other way. Just as Europe needs to do something to push growth, so does the United States. But there are powerful forces screaming to cut government spending on both continents. It may be worth noting that — in the private sector — this recovery is going a little faster than did the one following the early 1990s downturn, and is only a little slower than the most recent ones. The big difference is in government jobs. Total employment bottomed out in February 2010, well after the official end of the recession. The previous post-recession lows were in May 1991 and August 2003. Now construction employment remains lower than it was when the overall job number bottomed out in 2010. State and local governments, dependent on property taxes in many cases, are being badly squeezed. So they cut back on infrastructure spending, which is badly needed on its own merits and could provide jobs in a sector where they are most needed. There is absolutely no prospect that will change anytime soon.

Video: Analysis of the Tepid Job Gains, Higher Unemployment Rate - The U.S. economy added just 69,000 jobs in May, less than expected, and the unemployment rate rose to 8.2%. David Reilly, Phil Izzo and Sudeep Reddy have details on The News Hub.

Will labor force participation continue to rise? - Atlanta Fed's macroblog - The labor force participation rate ticked up in May, as did the rate of unemployment. As we have noted in the past, the near-term trajectory of the unemployment rate depends critically on what happens to the participation rate. So the question is, can we expect further upward changes in the participation rate? The answer depends a lot on the labor market attachment of those that are currently out of the labor force. A few weeks ago, my frequent coauthor, Julie Hotchkiss, wrote about what we can gain from detailed labor market data about the activities of people who have exited the labor force. In her posting, she discussed the overall increase in exits from the labor force, with a focus on 25–54 year olds. Her work concluded that while people identified "Household Care" as the dominant activity for those not in the labor force, there has been a significant upward shift since the recession in those indicating "School" or "Other" as their primary reason for not being in the labor force. A supposition is that at least those that indicated they were in school would reenter the labor force at some point, doing so with a higher level of skills or, at least, with skills that are better aligned with labor demand. However, because we know little about those in the Other category, the future labor market attachment for them is less clear.

Even Mediocre Job Growth Coming From Wrong Places - Job growth was weak in May. Just as bad: the type of jobs the economy did manage to add. According to today’s jobs report, 422,000 more Americans were employed in May than in April. (The figure is based on a monthly survey of around 60,000 households. The more widely cited figure of 69,000 payroll jobs is based on a separate survey of employers.) That isn’t a great number, but it’s better than April, when the number of Americans with jobs actually fell by 169,000. But the job growth is coming entirely from workers getting part-time jobs. The number of Americans working full-time fell by 266,000 in May, erasing all the gains of the past three months. The total employment figure only rose because 618,000 more people got part-time jobs. Many of those people would rather be working full-time: The number of people classified as “part time for economic reasons” — meaning they’re working part-time because they can’t find a full-time job — rose by 245,000 to 8.1 million. The growth of part-time workers helps explain one of the more surprising elements of today’s jobs report: the growth in employment among women.. But there, too, the gains were among part-time workers. Part-time employment among women jumped by 461,000 in May, while the number of women working full-time dropped by 142,000.

Broader Jobless Rate Jumps to 14.8% - The U.S. unemployment rate ticked up to 8.2% in May and a broader measure rose even more to 14.8%. But the increases belied a slightly positive trend. The increase in the jobless rate primarily came from people returning to the labor force. The unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The rate is calculated by dividing that number by the total number of people in the labor force. When the unemployed return to the labor force, both numbers increase and the unemployment rate climbs. In May, the number of unemployed dropped rose by 220,000, but so did the number of people employed — by an even bigger 422,000. But the overall labor force jumped by 642,000, indicating that some of the jobless who dropped out are searching for work again. When people leave the labor force it could be due to discouragement of the long-term unemployed or by choice over retirement or child care. The labor force has dropped dramatically over the course of recession and recovery, and concerns have been raised it was due to discouraged workers.

May Employment Summary and Discussion - The average workweek declined to 34.4 hours, and average hourly earnings increased slightly. "The average workweek for all employees on private nonfarm payrolls edged down by 0.1 hour to 34.4 hours in May. ... In May, average hourly earnings for all employees on private nonfarm payrolls edged up by 2 cents to $23.41. Over the past 12 months, average hourly earnings have increased by 1.7 percent. There are a total of 12.7 million Americans unemployed and 5.4 million have been unemployed for more than 6 months. Since the participation rate has declined recently due to cyclical (recession) and demographic (aging population) reasons, an important graph is the employment-population ratio for the key working age group: 25 to 54 years old. In the earlier period the employment-population ratio for this group was trending up as women joined the labor force. The ratio has been mostly moving sideways since the early '90s, with ups and downs related to the business cycle. This ratio should probably move back to or above 80% as the economy recovers. So far the ratio has only increased slightly from a low of 74.7% to 75.7% in May ( This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at maximum job losses. From the BLS report: The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) edged up to 8.1 million over the month. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job. The number of part time workers increased in May to 8.1 millon. These workers are included in the alternate measure of labor underutilization (U-6) that increased in May to 14.8%, up from 14.5% in April. Unemployed over 26 Weeks This graph shows the number of workers unemployed for 27 weeks or more.

America’s jobs crisis - This is about as bad as the jobs report could possibly be: just 69,000 jobs created, split between 95,000 new jobs for women and 26,000 fewer jobs for men. The market reaction has been swift and merciless, with stocks and bond yields plunging: the 10-year Treasury bond now yields less than 1.45%. When stock prices fall, of course, the earnings yield on the S&P 500 goes up, even as bond yields go down. Which means that the numbers on this chart are now even more extreme than at the close yesterday: The green line, here, should not be able to simply go up and to the right indefinitely. While market failures clearly happen all the time, things are really bad when they persist for this long. And what you’re looking at, here, is a market failure, as Brad DeLong explains: what we’re seeing, he says, is nothing less than “a massive failure of our economic institutions”. The first reason betrays a lack of trust that governments can and will do the job that they learned how to do in the Great Depression: keep the flow of spending stable so that big depressions with long-lasting, double-digit unemployment do not recur. The second reveals the financial industry’s failure adequately to mobilize society’s risk-bearing capacity for the service of enterprise.

Number of the Week: Most Unemployed Have College Experience -- 52%: Percent of the unemployed who have spent at least some time in college. In a significant shift in the labor market, the majority of people who are unemployed have some college education, reversing the situation that prevailed for decades. In 1992, only 37% of the unemployed had some college experience. Getty Images The change is unfolding amid a torpid jobs market, where more time in school translates into lower unemployment and higher wages. In May 4.8 million of the 9.2 million people older than 25 looking for work had spent at least some time in college, while 48% of the unemployed had only completed high school. The shift is due primarily to changing demographics in the U.S. A larger share of the population is attending college than ever before. In October of last year, 68.3% of 2011 high school graduates were enrolled in colleges or universities, according to the Labor Department. As more people seek higher education, a greater share of the labor force has college experience. So, while 52% of the unemployed have attended college, a much larger 65% of those with jobs have attended—that is up from 53% in 1992.

Update: State and Local Government Job Losses - So far in 2012 - through May - state and local government have lost 7,000 jobs (8,000 jobs were lost in May alone though). In the first five months of 2011, state and local governments lost 126,000 payroll jobs - and 230,000 for the year. This graph shows total state and government payroll employment since January 2007. State and local governments lost 129,000 jobs in 2009, 262,000 in 2010, and 230,000 in 2011. Note: Some of the stimulus spending from the American Recovery and Reinvestment Act probably kept state and local employment from declining faster in 2009. Of course the Federal government is still losing workers (50,000 over the last 12 months), but it looks like state and local government employment losses might be ending (or at least slowing sharply).

Job recovery is scant for Americans in prime working years - The proportion of Americans in their prime working years who have jobs is smaller than it has been at any time in the 23 years before the recession, according to federal statistics, reflecting the profound and lasting effects that the downturn has had on the nation’s economic prospects. By this measure, the jobs situation has improved little in recent years. The percentage of workers between the ages of 25 and 54 who have jobs now stands at 75.7 percent, just a percentage point over what it was at the downturn’s worst, according to federal statistics.  Before the recession the proportion hovered at 80 percent. While the unemployment rate may be the most closely watched gauge of the economy in the presidential campaign, this measure of prime-age workers captures more of the ongoing turbulence in the job market. It reflects “missing workers” who have stopped looking for work and aren’t included in the unemployment rate. During their prime years, Americans are supposed to be building careers and wealth to prepare for their retirement. Instead, as the indicator reveals, huge numbers are on the sidelines.

Number of high-school students with jobs hits 20-year low - The American job market is no place for students as the number of employed high schoolers has hit its lowest level in more than 20 years, according to new figures from the National Center for Education Statistics. In 1990, 32 percent of high school students held jobs, versus just 16 percent now. Blame their elders. “By definition, teenage workers get the jobs that are left over,” said Charles Hirschman, a sociology professor at the University of Washington who has studied and written about student employment. “When you can’t find someone else to bag your groceries or work construction, often teenagers are the labor force you can count on to pick up that slack for a low wage. But now, with the recession, everybody has moved down. Those jobs aren’t going to teenagers.” Local McDonald’s managers, for example, are no longer forced to accept young workers who can show up after class. They now have the option to hire older employees with more experience and, in many cases, much more education. “They think, ‘I can hire this old guy instead. He already knows how to work, so we don’t need to teach him,’ ” The crunch is also hitting college students. In 2000, 52 percent of full-time college students worked. That number has now fallen to 40 percent, the National Center for Education Statistics reports.

The growing concentration of education -  Dayton sits on one side of a growing divide among American cities, in which a small number of metro areas vacuum up a large number of college graduates and the rest struggle to keep those they have.The winners are cities like Bridgeport, Conn., San Francisco and Raleigh, N.C., where more than 40 percent of the population has a college degree. Cities like Youngstown, Ohio, Bakersfield, Calif., and Lakeland, Fla., where less than a fifth of the population has a college degree, are being left behind. The divide shows signs of widening as college graduates gravitate to places with a lot of other college graduates and the atmosphere that creates. “This is one of the most important developments in recent economic history of this country,” said Enrico Moretti, an economist at the University of California, Berkeley, who just published a book on the topic, “The New Geography of Jobs.” Here is more.

Projected Job Openings By Occupation in the Next Decade - In this blog, we will address the BLS projection of job openings due to growth and replacement for 754 occupations. "Replacement needs" can be defined as job openings that result from workers retiring or permanently leaving an occupation. To calculate replacement needs, the BLS looked at change in employment among various age brackets from 2005-2010. It then applied these numbers to projected employment and demographic information for 2010-2020.  This estimate of replacement needs does not include workers who change jobs but remain in the same occupation. When combined with expected growth in these professions, we can determine the total number of projected openings due to growth and replacement. The table below lists 30 of the occupations with the largest projected job openings relative to their 2010 employment level.  Other things being equal, occupations with a higher number of projected job openings relative to current employment are more likely to suffer from labor shortages in the next decade.

The Asymmetric Recovery - By one measure, the labor market has not recovered at all. By another, the recovery is complete. The red line in the chart below is a monthly index of the employment-to-population ratio, normalized to a value of 100 in December 2007, when the recession began. In this series, each employed person counts the same, regardless of how many hours she or he works. The employment-to-population ratio fell more than 5 percent during the official recession period and fell almost an additional 2 percent in the second half of 2009. The ratio has been essentially constant since then; there has been no meaningful increase in the fraction of Americans who are employed. The blue line shows the average number of hours worked by people with jobs in the private sector. In this series, only people with jobs are included in the calculation. The hours series reflects a large contraction of more than 2 percent during the recession years. In other words, a number of employees found that their hours were cut during the recession and that long-hours jobs like construction were lost to a greater degree than short-hours jobs. Unlike the employment-to-population ratio, average work hours have largely recovered since 2009. Earlier this year, the average hours series reached 100, which was its value for much of 2007.

Profits, Not Wages, Rising in This Recovery - Does it feel like a long time since you’ve gotten a raise? A new study released Friday suggests the average American worker is going backwards. The report also hints at why that might be the case. By looking at the share of new national income going to workers instead of business profits, the latest International Monetary Fund World Economic Outlook found Americans are lagging far behind their counterparts in Europe. Only workers in two advanced economies on the continent have fared worse during the recent recovery: Spain and Greece. “The recent recovery in the United States appears unusual from a historical perspective . . . with a much stronger rebound in profits relative to labor income,” “One explanation is that workers’ fear of long-term unemployment has led to more subdued wages relative to labor productivity growth during the recent recovery.” In the three years since the depths of the downturn in 2009, total national income has rebounded smartly in the U.S. as it has in most of Europe. But national income has two components: wages, salaries and non-salary income (interest, capital gains and stock compensation); and profits to business. While profits are up everywhere, total labor compensation has increased in every leading economy except four: the United States, Greece, Ireland and Spain, the IMF outlook showed. If one looks at the change in relative share of total income going to labor, it has fallen sharply in the U.S. since the trough of the downturn, while rising slightly in Europe as a whole.

Unpaid Overtime: Wage And Hour Lawsuits Have Skyrocketed In The Last Decade - Do American companies have a problem with paying their employees? A growing number of workers seem to think so. Collective action lawsuits alleging wage and hour violations have risen 400 percent in the last 11 years, according to a recent post at CNNMoney. In 2011, there were more than 7,000 such lawsuits filed in federal court -- a huge increase since the turn of the century. These lawuits involve workers who claim they didn't get paid the full amount for all the hours they worked -- either because they were improperly listed as ineligible for overtime, or because they simply never got the money for the work they put in. Claims of this kind have become incredibly pervasive in recent years. Lawyers cited in a 2007 Bloomberg story on wage and hour lawsuits estimated that companies may be paying out more than a billion dollars a year to resolve these cases. It's hard to think of a major company that hasn't had at least one wage and hour suit brought against it lately.

U.S. Winds Down Longer Benefits for the Unemployed —Hundreds of thousands of out-of-work Americans are receiving their final unemployment checks sooner than they expected, even though Congress renewed extended benefits until the end of the year. The checks are stopping for the people who have the most difficulty finding work: the long-term unemployed. More than five million people have been out of work for longer than half a year. Federal benefit extensions, which supplemented state funds for payments up to 99 weeks, were intended to tide over the unemployed until the job market improved. In February, when the program was set to expire, Congress renewed it, but also phased in a reduction of the number of weeks of extended aid and effectively made it more difficult for states to qualify for the maximum aid. Since then, the jobless in 23 states have lost up to five months’ worth of benefits. Next month, an additional 70,000 people will lose benefits earlier than they presumed, bringing the number of people cut off prematurely this year to close to half a million, according to the National Employment Law Project. Separate from the Congressional action, some states are making it harder to qualify for the first few months of benefits, which are covered by taxes on employers. Florida, where the jobless rate is 8.7 percent, has cut the number of weeks it will pay and changed its application procedures, with more than half of all applicants now being denied. 

More unemployed Americans to lose jobless benefits -Unemployment checks will soon run out for many people who've been hit the hardest by the recession: the long-term unemployed. Thousands are expected to lose their jobless benefits this summer, pushing the number who have been cut off this year to nearly half a million. The federal extension of unemployment checks is a hot issue. Some states have cut initial benefits to less than 26 weeks, and others have limited eligibility. Many Republicans say long term benefits discourage the long term unemployed from seeking work, while Democrats argue that many people have faced extreme difficulty finding employment in a weak labor market. The irony is that cutting people from benefits lowers the official unemployment rate. Only those who are officially seeking work are counted by the government.

6 Out Of 10 Are Long Term Unemployed - Nearly six out of every 10 unemployed workers in Georgia have been out of work for more than six months. That is believed to be the highest rate of long-term joblessness since the Great Depression. Even while overall job growth has been improving and the state’s unemployment rate has fallen to 8.9 percent, the situation for those out of work at least 27 weeks is getting worse. 10 days ago, the state labor department reported that the long-term jobless in April represented 56.8 percent of all those searching for work — the highest proportion during the recent recession and its aftermath. The situation is relatively better nationally at 41.3 percent. “This has been the hardest time I’ve ever gone through,” said Edward Harris, 62, of Cobb County, an accountant and information technology professional. “I know I’ve got skills. I’ve had maybe 15 ‘almost’ opportunities, and then each time the project got pulled. We are living in the second version of the Depression.”

Valuing Domestic Product - How ironic that the measure we call gross domestic product excludes the value of most domestic work. Services don’t count unless they are explicitly exchanged for money. Marry your butler (or your research assistant) and share your income equally instead of paying him by the hour. The size of G.D.P. will shrink. Divorce him, and G.D.P. is likely to expand. Longstanding though distinctly marginal efforts to challenge this accounting convention are now gaining traction. An article in this month’s Survey of Current Business provides fascinating estimates of the value of household production in the United States from 1965 to 2010. Like most previous efforts, it relies primarily on measures of the total amount of time devoted to unpaid household tasks, multiplied by a household worker’s market wage. That is, it asks, “How much would it have cost if you had hired a nanny or a maid to do it?” Most of us probably consider ourselves more productive at many household tasks than a hired substitute, if only because we have family-specific skills.

Income Disparity Solution: Restore The Minimum Wage To 1969 Levels - There is much hand-wringing about the vast income disparity in the U.S. between the top 5% and the bottom 25%, and precious little offered as a solution. Once again we are told the problem is "complex" and thus by inference, insoluble. Actually, it's easily addressed with one simple act: restore the minimum wage to its 1969 level, and adjust it for the inflation that has been officially under-reported. If you go to the Bureau of Labor Statistics Inflation Calculator and plug in $1.60 (the minimum wage in 1969 when I started working summers in high school) and select the year 1969, you find that in 2012 dollars the minimum wage should be $10 per hour if it were to match the rate considered "reasonable" 43 years ago, when the nation was significantly less wealthy and much less productive. The current Federal minimum wage is $7.25, though states can raise it at their discretion. State rates runs from $7.25 to $8.25, with Washington state the one outlier at $9.04/hour. In 40 years of unparalleled wealth and income creation, the U.S. minimum wage has declined by roughly a third in real terms.

Time to fight for a minimum wage increase - The federal minimum wage is now $7.25 cents an hour, about $15,080 for a full time, year round worker. At that level, it means poverty wages for a family of three, and weakened demand for the economy. As Cardinal Timothy M. Dolan and New York’s bishops concluded, this leaves workers “on the brink of homelessness, with not enough in their paychecks to pay for the most basic of necessities, like food, medicine or clothing for their children.” Poverty wages offend both justice and common sense. It is time to raise the floor. If today’s minimum wage were at its previous height in 1968, adjusted for inflation, it would be over $10.00 an hour.  The Economic Policy Institute (EPI) estimates that the recently-introduced proposal by Sen. Tom Harkin (D-Iowa) to lift the minimum wage to $9.80 over three years would give 28 million workers a raise. In a time of faltering growth, this money would be immediately spent, a direct boost to demand and the economy.  This country is now scarred by staggering inequality. In 2010, the last year figures were available, the wealthiest 1 percent captured a staggering 93 percent of the income growth, while most Americans fell behind. One way to address that kind of inequality is to bring down the top — through progressive tax reform and curbing the perverse compensation schemes of CEOs and big bankers. Another is to bring up the floor, by empowering workers to gain a fair share of the rising productivity and profits they help to produce. One step in doing that is to raise the floor under the most vulnerable workers.

A new New Deal to cut youth unemployment - The crisis in the eurozone is once again rightly fuelling concern over youth unemployment. The numbers are shocking, but no business or political leader in the developed world can be surprised. “If people don’t get the right start it can affect them their whole lives,” Robert Zoellick, president of the World Bank, said at Davos this year. “It is not enough to muddle through. It is not enough to do a fiscal fix.” Well, muddling through is what many western countries have been doing. Take Britain, where an estimated 1m young men and women are out of work and where last summer thousands of youths went on the rampage.   Not being in a position to place young offenders on constructive programmes, the magistrates sent them to prison. So, what is to be done? There is, of course, no universal cure. Germany’s well stewarded tradition of apprenticeships was praised at Davos, but it was also accepted that it was unviable to imagine a standard international template to create work for young people. Yet a radical local scheme could ultimately have a widespread impact. In the US, 80 years after Franklin Roosevelt first used the term, it is time to give the next generation of workers a “New Deal”. This new New Deal would aim to enhance young people’s skills to make them more employable. At the same time, they would serve their community or country and so, I would hope, gain a positive impression of working life. All US citizens aged 16-24 would have a mandatory one-year commitment to the programme, with an option to serve a second year. Young people would enter the scheme having completed – or dropped out of – high school and before starting higher education. Each young person would receive a monthly income for accommodation and living expenses, and there would be comprehensive medical and dental care. To all intents and purposes this would be a new and enlightened form of national service.

Income Inequality Keeps Poorer Americans Away from the Polls - It’s no secret that money and politics enjoy a nasty love affair in this country. And as Ari Berman has written here, the problem has gotten even worse this cycle after the ill-fated Citizens United decision unleashed the power of Super PACs. As he reports, campaigns are increasingly reliant on that money, yet “Super PACs on both sides of the aisle are financed by the 1 percent of the 1 percent.” That means the rich have an even more outsized impact on the outcome of the election. At the same time, it’s been hard to miss the GOP’s relentless campaign to roll back voting rights in the name of eliminating the (mostly imaginary) threat of fraud. Many of those tactics will severely impact low-income voters and likely suppress their turnout in November, handing even more power over to the 1 percent.  There’s something else that suppresses their vote, however, even if they are legally able to do so. And that something is income inequality, as a new report from the OECD on the Better Life Index shows. Of the thirty-four countries included in the report, the U.S. ranks second to last in social inequality, bested only by South Korea. When it comes to income inequality we are at the extreme end of the scale, with levels similar to those of Cameroon, Rwanda, Sri Lanka, Ecuador, Nepal and Uganda.

Fox Mangles Data to Claim “The Poor” are Getting “Richer” - Stossel: "The Rich Have Gotten Richer, But So Have The Poor." From Fox News' Fox & Friends: STOSSEL: There are just two myths. One is that the rich are getting richer and the poor are getting poorer. And the truth is yes, over time the rich have gotten richer, but so have the poor -- 20 percent richer since I was in college. [Fox News, Fox & Friends, 5/24/12] CBPP: "The Era Of Shared Prosperity Ended In The 1970s." From the Center on Budget and Policy Priorities report:Census family income data show that the era of shared prosperity ended in the 1970s and illustrate the divergence in income that has emerged since that time. CBO data allow us to look at what has happened to comprehensive income since 1979 -- both before and after taxes -- and offer a better view of what has happened at the top of the distribution. As Figure 2 shows, between 1979 and 2007, average income after taxes in the top 1 percent of the distribution rose 277 percent, meaning that it nearly quadrupled. That compares with increases of about 40 percent in the middle 60 percent of the distribution and 18 percent in the bottom fifth.The report included this graph:

This Week in Poverty: Will Janitors Strike in Houston? - In Houston, more than 3,200 janitors clean the offices of some of the largest and most powerful corporations in the world: JP Morgan Chase, Shell, Exxon Mobil, Chevron, Wells Fargo, KBR and Marathon Oil, to name a few. For their labor, they are paid an hourly wage of $8.35 and earn an average of $8,684 annually. Two janitors together would earn about $17,300 a year—still well below the poverty line of $22,314 for a family of four. Yesterday, the contract between the janitors and the cleaning contractors expired. SEIU Local 1 spent the past month trying to reach an agreement to raise the janitors’ hourly wage to $10 over the next three years. But the contractors countered with an offer of a $0.50 pay raise phased in over five years and—according to SEIU spokesperson Paloma Martinez—said that they “wouldn’t budge.” The contractors claimed that the building owners and tenants—the aforementioned corporations—aren’t willing to pay anything close to a living wage. In response the janitors voted to authorize their bargaining committee to call a strike. For workers already struggling on sub-poverty wages, this was no easy decision.

You can identify poor neighborhoods from space -- Tim De Chant at Per Square Mile has noted that rich urban areas have way, way more trees than poor areas in the same city. In fact, the difference is so stark that income inequality can be seen from space. The satellite images above are low-income West Oakland and high-income Piedmont, and I probably don’t have to tell you which is which. De Chant has collected images from four U.S. cities and two international cities, and in every one, the wealthier areas are conspicuously more leafy. Since trees increase property values, this is a classic case of the rich being given whatever they need to get richer. And considering the other things trees do for us, it’s also a case of the rich getting to be smarter, cooler, and have fewer allergies.

Where is poverty in the national agenda? - Our elected officials are charged to do their best to create legislation and policies that work best to secure the important life interests of all citizens. Can we take that as a shared assumption? This is how we want it to work, and we feel morally offended when legislators substitute their own wants and opinions for those of the public.  If this is a fair description of the role obligations connected to elected office, then there are some important discrepancies that arise when we look at the actual work that legislators do, both nationally and at the state level. For example, a striking number of legislators bring their own personal and religious convictions into their work. Legislators all too often attempt to draft legislation that furthers their moral opinions on issues like stem cell research, gay marriage, abortion, and even birth control. But given that reasonable and morally grounded people disagree about these issues, how could they possibly be the legitimate object of legislation? Legislation needs to be designed to treat all citizens equally and fairly, so how can the personal moral or religious opinions of the legislator ever be a legitimate foundation for legislation? How is it any different from a legislator who tries to steer a highway project over a particular piece of land in order to favor his own business interests?

Why Some States Are More Economically Mobile Than Others - According to an important new study from the Economic Mobility Project at the Pew Center on the States, economic mobility varies by geography within the United States as well. The map above shows that economic mobility is highest in the New England and the mid-atlantic states, especially New York, New Jersey, and Maryland. The states where residents experience the least economic mobility are all in the south, with Louisiana, Oklahoma, and South Carolina scoring at the bottom. The data, developed by Bhashkar Mazumder of the Federal Reserve Bank of Chicago, is based on the Survey of Income and Program Participation and the Social Security Administration. Americans’ earnings between the ages of 35 and 39 were averaged during the period from 1978 to 1997 and then again 10 years later, when the same people were between the ages of 45 and 49. Absolute mobility measures their earnings’ change over time. Relative upward and relative downward mobility are measures of people’s ranks on the earnings ladder relative to their peers and their own movements up or down the ladder.

Wage Theft in the City of Millionaires - For two years running Houston has added more millionaires to its population than any other city in the United States. Near-millionaires are enjoying some nice upward mobility, especially those involved in the oil and gas industry. Low-wage workers, on the other hand, aren’t faring too well in the city. In fact, a recent report from Houston Interfaith Worker Justice (HIWJ) estimates that low-wage workers lose $753.2 million annually due to wage theft. Wage theft can occur in many ways, including: workers being denied the minimum wage or overtime pay; stolen tips; illegal deductions from paychecks; people being forced to work off the clock; or workers getting misclassified as independent contractors so they aren’t entitled to overtime or benefits. “We’re not talking about a worker here or a worker there, it’s something that has a lot of ripple effects,” says José Eduardo Sanchez, campaign organizer with HIWJ. “It impacts families, communities and local economies.” Although there are laws on the books against wage theft, there are problems with understaffing, enforcement, and jurisdiction disputes in institutions like the Department of Labor’s Wage and Hour Division, the Texas Workforce Commission, and the courts.

Do Millionaires Vote With Their Feet? - Andrew Rosenthal points us to one of the most eye-poppingly specious arguments I’ve ever seen against high-earner taxes, from Scott Hodge at the Tax Foundation:…612,520 people renounced their New York State citizenship and moved to Florida between 2000 and 2010. They took with them nearly $20 billion in adjusted gross income, after adjusting for inflation. During the same period, 208,784 Pennsylvania residents renounced their state citizenship and moved to Florida, taking $8 billion in income with them.Many of these New York and Pennsylvania residents no doubt moved to Florida for the warm weather, but many more may have moved their because the state does not have an individual income tax, an estate tax, nor an inheritance tax.“May have” is certainly a strong piece of evidence. It’s hard to argue with. But let’s try. Back when we were trying to pass a high-earner tax in Washington State a couple of years ago I got curious to know whether millionaires do actually congregate in low-tax states. It turns out they don’t: Of the 12 states with the highest concentration of millionaires, 10 (83%) have above- or at-trend (in this case, median) income tax rates.

Taxes and migration myths - Jared Bernstein writes on the same points on why people move to other states and taxes as Steve Roth and Linda Beale address in their posts today and gives us this evidence:

  • Migration is not common.
  • The migration that’s occurring is much more likely to be driven by cheaper housing than by lower taxes.
  • Recent research shows income tax increases cause little or no interstate migration.
  • Low taxes can prevent a state from maintaining the kinds of high-quality public services that potential migrants value.

Also highlighted are the sources of several of the 'sources' of such claims demonstrated as bogus from media claims. 

U.S. Imprisonment in International Context: What Alternatives?  - The May 19 issue of the Economist magazine, in an article  about California's budget problems and high prison costs, tossed in the following factoid: "Excessive incarceration is an American problem. The country has about 5% of the world’s population but almost 25% of its prisoners, with the world’s largest number of inmates and highest per capita rate of incarceration." This comment sent me scampering to the website of the International Centre for Prison Studies,  and based on data from their World Prison Brief, I put together the following table. The table lists the 20 countries around the world that imprison the greatest numbers of people, and the first column shows the total for each country. The second column shows how many people are imprisoned in the country per 100,000 population. Either way you slice it, the U.S. leads the way with its 2,266,832 prisoners and an imprisonment rate of 730 per 100,000 population.I've posted back on November 30, 2011, about "Too Much Imprisonment," and that post has details largely based on U.S. Department of Justice Statistics about the rapid rise in U.S. imprisonment over recent decades, the share of this rapid rise related to nonviolent offenses, and the cost.  Here, I want to raise a different question: If not prison, then what?

New York Has Some Prisons To Sell You - One property, in the Hudson Valley, includes a 16-car garage, a piggery and hundreds of yards of lake frontage. Another offers 69 acres of waterfront land on the west shore of Staten Island, complete with a two-story gymnasium, a baseball diamond and an open-air pavilion. Those seeking seclusion have an option, too: 20 acres adjoining state forest land in rural Schoharie County, perfect for hunting, trapping and fishing. The property comes with its own wastewater- and sewage-treatment plants, as well as a chapel and a carpentry shop. The ideal buyer is someone who craves space to spread out, and who does not mind a property that has had thousands of guests over the years. And a fondness for “The Shawshank Redemption” would not hurt. These real-estate listings come from an unpracticed seller, the State of New York. After cutting costs through traditional means like freezing wages of state workers and consolidating government offices, Gov. Andrew M. Cuomo1 is embarking on a less conventional effort: trying to sell New York’s old prisons.

Federal Officials Shut Down 26 Bus Operators - Citing imminent safety hazards, federal officials ordered 26 companies on Thursday to stop operating many of the inexpensive buses that pick up passengers at curbsides all over Manhattan’s Chinatown and haul them to other cities up and down the East Coast.  The crackdown was the most sweeping action ever taken against American passenger-bus operators and was intended to chasten other low-budget companies that might try to evade safety regulations and the relatively small pool of inspectors who enforce them, Transportation Secretary Ray LaHood said.  “Shutting them down will save lives,” Mr. LaHood said at a sidewalk news conference in Chinatown.  The 26 companies were affiliated with three “unscrupulous” networks of bus operators that ignored federal rules and, when they were caught, simply changed names and continued operating, said Senator Charles E. Schumer, Democrat of New York, who was also in Chinatown.  On paper, only four of the companies were based in New York, but in reality, much of their business involved shuttling about 1,800 passengers a day between Manhattan, Boston, Washington and places as far south as Florida.

Questions arise about builder’s work on Bay Bridge foundation - A builder of the new San Francisco-Oakland Bay Bridge failed to disclose that a 19-foot section of concrete in the foundation of the span's signature tower had not hardened before it was tested. By keeping quiet about the problem, the builder prevented further examination or repair.  The Sacramento Bee found descriptions of the apparent defect in records provided by Caltrans last fall to reassure the public about the overall stability of the suspension segment of the bridge's eastern span. Experts said the problem, combined with other construction and testing lapses by the California Department of Transportation and its contractors, raises new questions about the structural integrity of the bridge.

California Note Sale May Top $10 Billion, Chiang Says - California, the most indebted state, may need to sell more than $10 billion in short-term securities in order to pay bills through the fiscal year that begins in July, Controller John Chiang said. The size of the revenue-anticipation note sale may exceed previous estimates as tax collections have trailed projections and the state exhausted most of its internal borrowing ability, Chiang said in an interview yesterday in Bloomberg’s San Francisco office. “It could be more,” said Chiang, a 49-year-old Democrat. “The question is whether there is market capacity.” A $10 billion sale would be the largest since 2010. California lost more than 1 million jobs in the recession that started in 2007, reducing revenue by 24 percent. This year, the largest state by population borrowed $5.4 billion in September and had to seek another $1 billion in February after tax collections fell short and spending exceeded expectations.

Is Your State Asking Congress for Toll Roads to Close Budget Gaps? - Traditional sources of revenue are declining and there is an urgent need to add capacity and repair to the highway infrastructure system. States are finding it next to impossible to come up with the funding they need for these expenses and are turning to Congress to request permission for toll roads to help raise money they need. Simply keeping up with the roadways is a $137 billion expense according to a Congressional commission report recently released. But there is less and less money going into that budget and zero is going to be the number in the federal highway funds as early as 2013. The decrease in operational budgets for our roadways is due in part to the recession, but it is compounded due to people driving less, less tax coming from fuel expenditures caused by more fuel efficient cars and people refusing to drive as much. But road and bridges are becoming more expensive to maintain and construct. With the traditional sources of revenue declining, toll roads may seem like a viable option for the states requesting it, but harder on the wallets of the citizens who survive there. Currently trials are being conducted in three states to test out toll roads and 15 states are prohibited by Federal law from collecting tolls. Some of the toll roads have increased prices while traffic is more congested which adds an additional burden on commuters that need to pay those tolls to get to their jobs, to make more money, to pay more tolls. At this point, it does look like nationwide approval for these “pay to drive” byways is a long way off, the biggest concern from the federal government is that states seem to want to toll the roads that are most likely to host out of state travelers

Beware unlicensed casket-selling monks - DEBATES over the burdensome nature of regulation in America typically focus on national-level rules, on the overactive Environmental Protection Agency or the hopeless Food and Drug Administration or that oh-so-many-pages-long Dodd-Frank financial reform act. In practice, the red tape that grows like kudzu at state and local levels is ofetn felt more keenly by would-be entrepreneurs. Take, for instance, the case of some Louisiana monks trying to earn their way out of financial trouble by selling handmade cypress coffins: Brown, a soft-spoken man who is only the fifth leader of a monastery that dates to 1889, said he had not known that in Louisiana only licensed funeral directors are allowed to sell “funeral merchandise.”That means that St. Joseph Abbey must either give up the casket-selling business or become a licensed funeral establishment, which would require a layout parlor for 30 people, a display area for the coffins, the employment of a licensed funeral director and an embalming room.

The sad, sad story of the UNICEF Child Poverty Report and its critics - David Morely, UNICEF Canada’s Executive Director, has just issued a bold challenge. “It is clearly time for Canada to prioritize children when planning budgets and spending our nation’s resources, even in tough economic times,” says a press release announcing the publication of a report on child poverty. In fact, the UNICEF Innocenti Report Card released today is the 10th in a regular series on child poverty in rich countries, each report hitting the headlines every second year or so. Sadly, when it comes to discussions of child poverty kick-started by these reports there are two things that are not new: the conclusions; and the reaction of pundits and many policy makers. I say “sadly” because the two are not linked, and public policy discussion is not the better. UNICEF documents that at 13.3% Canada’s child poverty rate is almost two percentage points higher than the overall national rate. And of the 35 countries studied, Canada ranks 24th, in the bottom third. You think that’s bad, check out the US figures: at 23.1%, and 34th out of 35. It is just these sort of cross-country comparisons the structure of the report encourages: Iceland, Finland and Cyprus finish 1st, 2nd, and 3rd; the US, 34th, just ahead of—wait for it—Romania.

America’s Children Living in Poverty- Ranked 2nd from the Highest of 35 Developed Nations - Those advertisements that ask you to send money to feed a starving child in a foreign country should carry a significantly new meaning after reading a new report released by the Office of Research at the United Nations Children’s Fund (UNICEF). The United States now has one of the highest rates of children living in poverty in developed countries. Children in the U.S. now rank second after Romania. This rate is based on the definition of poverty- a child is deemed to be living in relative poverty if he or she is growing up in a household where disposable income, when adjusted for family size and composition, is less than 50% of the median disposable household income for the country concerned. According to this definition,  only two countries have over 20% of their children living in poverty- Romania and the United States. According to the Washington Post, “1 in 7 people in the U.S. now subsist on food stamps, and, in 2009, nearly 15 percent of U.S. households were found to have low or very low “food security,” meaning that, on a regular basis, nearly 50 million Americans ran short on food. ABC News reports “As many as 17 million children nationwide are struggling with what is known as food insecurity. To put it another way, one in four children in the country is living without consistent access to enough nutritious food to live a healthy life, according to the study, "Map the Meal Child Food Insecurity 2011."” The long term consequences of malnutrition caused by failure to maintain a healthy diet include learning disabilities, developmental issue and other long term problems.

The New Political Correctness -  Krugman - Remember the furor over liberal political correctness? Yes, some of it was over the top — but it was mainly silly, not something that actually warped our national discussion. Today, however, the big threat to our discourse is right-wing political correctness, which — unlike the liberal version — has lots of power and money behind it. And the goal is very much the kind of thing Orwell tried to convey with his notion of Newspeak: to make it impossible to talk, and possibly even think, about ideas that challenge the established order. Thus, even talking about “the wealthy” brings angry denunciations; we’re supposed to call them “job creators”. Even talking about inequality is “class warfare”. And then there’s the teaching of history. Eric Rauchway has a great post about attacks on the history curriculum, in which even talking about “immigration and ethnicity” or “environmental history” becomes part of a left-wing conspiracy. As he says, he’ll name his new course “US History: The Awesomeness of Awesome Americans.” That, after all, seems to be the only safe kind of thing to say.

EM turns Muskegon Heights schools into charter district, terminates staff - There will be school in Muskegon Heights this fall, but it will look very different. Late last Friday afternoon, Don Weatherspoon, Muskegon Heights’s appointed Emergency Manager (EM), announced his plan to turn the school district into the first charter school district in Michigan. He is taking bids from private companies and is expected to award the job on June 6. Earlier in the week, teachers were notified they were being laid off and could reapply for their jobs. Now, however, they’ve been told they are terminated and their jobs sold off to the lowest bidder. “Our teachers had no advance knowledge of the Emergency Manager’s plan to convert the school district into a charter school system. We have been left out of the planning process. The staff, students and community are paying the price for the district’s financial mismanagement that they had nothing to do with creating,” said Muskegon Heights EA President Joy Robinson. Under the plan, the district would no longer be in the practice of educating children. However, the district would keep its projected $14.48 million debt, and the new charter company will start out debt-free and receive state aid payments.

Selling out public schools - Here in the industrialized world’s most economically unequal nation, public education is still held up as the great equalizer — if not of outcome, then of opportunity. Schools are expected to be machines that overcome poverty, low wages, urban decay and budget cuts while somehow singlehandedly leveling the playing field for the next generation. That vision, however, is now under assault by both political parties in America. On the Republican side, the Washington Post reports Mitt Romney just unveiled “a pro-choice, pro-voucher, pro-states-rights education program that seems certain to hasten the privatization of the public education system” completely. On the other side, Wall Street titans in the Democratic Party with zero experience in education policy are marshaling tens of millions of dollars to do much of what Romney aims to do as president – and they often have a willing partner in President Barack “Race to the Top” Obama and various Democratic governors. Funded by corporate interests who naturally despise organized labor, both sides have demonized teachers’ unions as the primary problem in education — somehow ignoring the fact that most of the best-performing public school systems in America and in the rest of the world are, in fact, unionized.

Bedford-Stuyvesant Preparatory High School To Hand Out Condoms To Students Leaving Prom « CBS New York: There is a condom controversy at a Brooklyn high school. On prom night, administrators are planning on handing out free condoms to students. Condoms might be considered commonplace in New York City high schools — just last year 680,000 were distributed to students — but a principal’s plan to make them available at the prom on June 7 is raising some eyebrows.

Judge sends honor student to jail for missing school - A Houston-area teenager has been jailed and fined for missing school by a judge who hopes to make an example of her. 17-year-old Diane Tran is working two jobs while taking advanced placement and dual credit courses at Willis High School in Willis, Texas. Some mornings, she is simply too exhausted to make it to school on time. Some days she misses classes altogether.  She was warned by Judge Lanny Moriarty in April not to miss any more school. When she missed school again last week, he sentenced her to 24 hours behind bars and a $100 fine. “If you let one of ‘em run loose, what are you gon’ do with the rest of ‘em, let them go too?” the judge offered as justification.

School desegregation and the fear years - UC Berkeley Professor David Kirp’s powerful op-ed in the May 20th Sunday Review section of The New York Times (read it here) restating the overwhelming social-science case in favor of school desegregation drew a bevy of weighty and thoughtful letters in the  New York Times (read them here). That evidence shows that the educational gap between Whites and Blacks — recently embraced by both parties as the holy grail of reducing the accumulating disadvantages of generations of de jure racial segregation in America — shrank the most substantially during those years between 1970 and 1990 when school desegregation orders were most active in American states. It was in these years that the epic legal campaign to desegregate schools, which had achieved a historic Supreme Court victory in Brown v. Board of Education, actually began to effect numerous schools around the country, due to the increase in federal financial incentives beginning in the 1960s and because desegregation orders began to reach large northern urban districts where generations of soft segregation strategies (based on residential segregation and school location) had left public schools almost as segregated as the infamous Jim Crow schools in the South.

Today's Grade-Inflated, Lake Wobegon World; Letter Grade of A Now Most Common College Grade - In 1960, the average undergraduate grade awarded in the College of Liberal Arts at the University of Minnesota was 2.27 on a four-point scale.  In other words, the average letter grade at the University of Minnesota in the early 1960s was about a C+, and that was consistent with average grades at other colleges and universities in that era.  In fact, that average grade of C+ (2.30-2.35 on a 4-point scale) had been pretty stable at America's colleges going all the way back to the 1920s (see chart above from, a website maintained by Stuart Rojstaczer, a retired Duke University professor who has tirelessly crusaded for several decades against "grade inflation" at U.S. universities). By 2006, the average GPA at public universities in the U.S. had risen to 3.01 and at private universities to 3.30.  That means that the average GPA at public universities in 2006 was equivalent to a letter grade of B, and at private universities a B+, and it's likely that grades and GPAs have continued to inflate over the last six years. 

On Campus, New Deals With Banks -  College campuses have long been attractive hunting grounds for financial institutions looking for new customers.   But many colleges, struggling to offset cuts in state funds and under pressure to keep tuition down, are finding new ways to strike deals with financial institutions, by turning student IDs into debit cards and allowing lenders to take over disbursement of financial aid. Consumer advocates worry that financial firms are again profiting from unsuspecting students, by charging them fees and even gaining access to their financial aid funds. Now a prominent consumer group has tried to document the extent of the practice.  In a report released on Wednesday, the group, the United States Public Interest Research Group Education Fund, found that nearly 900 colleges and universities have card partnerships with financial institutions; in some instances, the colleges receive hefty payments from banks for the exclusive access to students; in other instances, the schools save money by outsourcing financial functions to banks or other vendors

The strong demand for charlatans - In the improbable event of ever being invited to give a commencement address, my advice to graduates wanting a lucrative career would be: become a charlatan. There has always been a strong demand for witchdoctors, seers, quacks, pundits, mediums, tipsters and forecasters. A nice new paper by Nattavudh Powdthavee and Yohanes Riyanto shows how quickly such demand arises. They got students in Thailand and Singapore to bet upon a series of five tosses of a fair coin. They were given five numbered envelopes, each of which contained a prediction for the numbered toss. Before the relevant toss, they could pay to see the prediction. After the toss, they could freely see the prediction.The predictions were organized in such a way that after the first toss half the subjects saw an incorrect prediction and half a correct one, after the second toss a quarter saw two correct predictions, and so on. And here's the thing. Subjects who saw just two correct predictions were 15 percentage points more likely to buy a prediction for the third toss than subjects who got a right and wrong prediction in the earlier rounds. Subjects who saw four successive correct tips were 28 percentage points more likely to buy the prediction for the fifth round. This tells us that even intelligent and numerate people are quick to misperceive randomness and to pay for an expertise that doesn't exist; the subjects included students of sciences, engineering and accounting.

New York Fed Quarterly Report Shows Student Loan Debt Continues to Grow - Federal Reserve Bank of New York: In its latest Quarterly Report on Household Debt and Credit, the Federal Reserve Bank of New York today announced that student loan debt reported on consumer credit reports reached $904 billion in the first quarter of 2012, a $30 billion increase from the previous quarter. In addition, consumer deleveraging continued to advance as overall indebtedness declined to $11.44 trillion, about $100 billion (0.9 percent) less than in the fourth quarter of 2011. Since the peak in household debt in the third quarter of 2008, student loan debt has increased by $293 billion, while other forms of debt fell a combined $1.53 trillion. The New York Fed also released historical student loans figures, by quarter, dating back to the first quarter of 20031 as part of this quarter’s report. These data show that student loan debt has substantially increased since 2003, growing $663 billion. Outstanding student loan debt surpassed credit card debt as the second highest form of consumer debt in the second quarter of 2010.Additionally, 90+ day delinquency rates for student loans steadily increased from 6.13 percent in the first quarter of 2003 to its current level of 8.69 percent. They remain higher than that of mortgages, auto loans and home equity lines of credit (HELOC).2 90+ day student loan delinquencies were at their peak during the third quarter of 2010 at 9.17 percent and are the only form of those delinquencies to increase this quarter (by 0.24 percent).

Student-Loan Debt Rose to $904 Billion in First Quarter - Debt from educational loans in the U.S. rose 3.4 percent to $904 billion in the first quarter, according to the Federal Reserve Bank of New York. Outstanding student debt increased from $874 billion three months earlier, the New York Fed said today in a report. The total includes loans that are backed by the U.S. government as well as private borrowing by students and their parents. Student-loan debt surpassed credit-card debt in the second quarter of 2010. In the year ended March 31, outstanding student debt rose by $64 billion from a year earlier, while all other forms of household debt fell a combined $383 billion, according to the report. “Student loan debt continues to grow even as consumers reduce mortgage debt and credit card balances,” Donghoon Lee, senior economist at the New York Fed, said in a statement accompanying the report. “It remains the only form of consumer debt to substantially increase since the peak of household debt in late 2008.”

Student debt up, all other kinds down - The New York Fed is out with its credit report for the first quarter of 2012. It shows student debt bucking the trend (“Student Loan Debt Continues to Grow”), rising while all other kinds of debt fell from the end of last year. Student debt, at $904 billion (not yet the much-advertised trillion), is now considerably larger than credit card and auto debt. A decade ago, student debt was a less than half credit cards and autos. For the quarter, student debt rose by $30 billion, or 3.4%, while all other kinds of debt fell by $131 billion, or 1.2%. Of the other major categories, only auto debt was up (but just 0.3%); mortgages (-1.0%), credit cards (-3.6%), and home equity lines (-2.4%) all fell. Debt has broadly been falling for almost four years, but student debt continues to rise. Nonstudent debt is down 13% from its 2008 peak—but student debt makes a new peak every quarter.

More Student Loans Are Past Due - More Americans are taking out student loans, and more borrowers are falling behind on paying them back on them. Americans owed $904 billion in student loans at the end of March, nearly 8% higher than a year ago, the New York Fed said in its quarterly report on consumer credit. In the first quarter of 2012, 8.7% of student loans were more than 90 days past due, according to data from the Federal Reserve Bank of New York. That’s down from a high of 9.2% in 2010, but is higher than the previous quarter. Student loans were the only type of debt tracked by the New York Fed that notched an increase in the delinquency rate in the first quarter. Younger workers have continued to face the most difficult conditions in the labor market. Workers between 20 and 24 years old have a 13.2% unemployment rate, compared to the national average of 8.1% recorded in April. That comes even as the share of 20- to 24-year-olds that are working or looking for a job is at the lowest level since the 1970s, before women entered the labor force en masse.

Ditch College for All - The college-for-all crusade has outlived its usefulness. Time to ditch it. Like the crusade to make all Americans homeowners, it's now doing more harm than good. It looms as the largest mistake in educational policy since World War II, even though higher education's expansion also ranks as one of America's great postwar triumphs. Consider. In 1940, fewer than 5 percent of Americans had a college degree. Going to college was "a privilege reserved for the brightest or the most affluent" high-school graduates, wrote Diane Ravitch in her history of U.S. education, "The Troubled Crusade." No more. At last count, roughly 40 percent of Americans had some sort of college degree: about 30 percent a bachelor's degree from a four-year institution; the rest associate degrees from community colleges.

Is Student Debt Excessive? Posner - A recent two-part series in the New York Times (“Degrees of Debt,” May 12, 14) focuses on the rise, and potential consequences, of student debt for college, which now exceeds $1 trillion. Of that amount almost 90 percent is federal, because the federal government makes student loans at low rates (there is a movement afoot in Congress to raise the rates). About two-thirds of college students graduate (or leave college before graduation) with debt, compared to 45 percent twenty years ago. Although the average debt of a graduating college student is only $20,000 or so, there is considerable variance.  In particular, the debt burden is lighter at private colleges, both because they often offer scholarships and because they attract many rich kids. The burden is heavy at public colleges (state colleges and community colleges) and heavier at for-profit colleges; they now enroll 11 percent of the nation’s college students but their students account for some 25 percent of total student loan debt.  The low-interest federal loans thus provide an indirect subsidy to many colleges, in a form that preserves competition among colleges, as would not be true if the subsidy went directly to the schools. The loan subsidy is thus the approximate equivalent of a voucher system, in which schools are supported by subsidized tuition and school choice is preserved. The college subsidy is only partial, however; the loans have to be repaid—and federal loans cannot be discharged in bankruptcy, which does not prevent defaults (which in fact are common) but does reduce their incidence. 

Is Student Debt Too Great? Becker - Doing away with federal guarantees of student loans would discourage college from trying to foster excessive debt on students with these unpromising economic futures. Moreover, especially if federal guarantees were eliminated, student loans should become dischargeable through personal bankruptcy, the way most other loans are dischargeable. One might also want to experiment with student loans that are like equities; that is, where the amount to be repaid depends on earnings. These equity-type student loans have their own problems, but they might be a useful complement to the present system where loans are given with fixed rather than effectively variable interest rates. Young families with mortgages that exceed $100,000 under normal circumstances are not considered to be in dire economic straits, even though their homes can be taken if they fail to meet their mortgage payments, and they are only investing in more comfortable living arrangements. Young couples that contracted a similar level of debt when they were students have invested in raising their earning power, usually by a lot. So I find it difficult to comprehend why sizable mortgages are accepted while there are political and media outcries over comparable student loans that are based on usually highly productive investments in human capital.

Student Debt Bubble Delinquencies Surge - By now, the bubble in student loans is becoming more widely understood. The absolute level continues to rise significantly and growth is accelerating with 8% YoY growth just reported, via the WSJ. Of course the reasons are anathema but attending college on the back of hope of a better-paying job when everyone else is also attending college in that hope (thanks to endless student-loan funding from your helpful government) seems to be self-defeating as the supply of supposedly better-qualified workers into a stagnant economy will do nothing but reduce higher-end wages further? Of course this is over-simplified but as the rest of the country delevers, pays down credit cards, or BKs, those that remain jobless heading to college for a way out are now struggling also - as is clear from WaPo this last weekend where dropout rates are increasingly dramatically. What is more worrisome is that while every other class of debt, according to the New York Fed's data, is seeing delinquency rates dropping, Student Loans 90+ days delinquent surged in Q1 to 8.7% - near its peak crisis highs and remains above peak mortgage delinquency rates.

US pensions' equity holdings the highest among OECD nations- US pension funds are still heavily invested in equities - close to 50% of assets. In fact US pensions have the highest concentration of equities among all OECD nations.  This is somewhat troubling, particularly for defined benefits corporate pensions. That's because there are risks of a feedback loop. When equities decline, pension funds become underfunded, forcing some companies to inject cash into their pension accounts. And that in turn may add to the declines in equity prices. But no worries. Corporations are shifting to defined contributions plans, letting their employees take this equity risk. And for the remaining defined benefits plans, the pension managers will use corporate bonds to discount pension liabilities - the wider the spread, the lower the "present value" of what they owe to future retirees.Good luck with your retirement plans.

US public pension funds take on more risk‎ - US public pension funds have used loose regulation to camouflage their liabilities and take on risks as they have matured, according to a new study by academics from Yale and Maastricht universities. US corporate pension plans, as well as corporate and public plans in Canada and Europe, responded to rising numbers of retirees and falling interest rates over the last 20 years by reducing investment risks, the study finds. But US public funds have moved in the opposite direction: increasing allocations to risky investments such as stocks, private equity and alternatives even as their proportion of retired members increased. Martijn Cremers, professor at the Yale school of management, said that the behaviour was because of the “perverse incentives” of regulations that allow US public plans to calculate liabilities based on expectations for investment returns, typically 7.5 to 8 per cent a year. An individual typically takes less investment risk as they get older and economic theory suggests a pension fund should do the same as it matures – as the ratio of retirees to active workers rises. However, the rules give the plans an incentive to take more risk to maintain high returns targets and so camouflage rising liabilities, Prof Cremers said. “All the current fund boards, politicians and even taxpayers have an incentive to kick the can down the road.” 

Ford readies first set of landmark pension buyouts (Reuters) - Ford Motor Co will pursue its boldest attempt yet to tackle a nearly $50 billion risk to its business when it begins offering lump-sum pension payout offers to 98,000 white-collar retirees and former employees this summer. The voluntary buyouts have the potential to lop off one-third of Ford's $49 billion U.S. pension liability, a move that could shore up the company's credit rating and stock price. It is unclear to Ford, retirees and analysts just how many people will gamble on the offer, which pension experts described as unprecedented in its magnitude and scope. "We think if we can get at least a meaningful number of employees, this will take billions of dollars of obligations potentially off the table," Chief Financial Officer Bob Shanks told Reuters in an interview. The offers are the latest in a series of steps Ford and its larger rival General Motors Co have taken to cut these risks. As early as August, between 12,000 and 15,000 U.S.-based workers will receive the first wave of offers to swap their monthly pension checks for a one-time payment. The offer shifts the responsibility of managing those funds from Ford to the retiree. It is rare for a company to amend an existing pension plan.

Fragile Calculus in Plans to Fix Pension Systems - While Americans are typically earning less than 1 percent interest on their savings accounts and watching their 401(k) balances yo-yo along with the stock market, most public pension funds are still betting they will earn annual returns of 7 to 8 percent over the long haul, a practice that Mayor Michael R. Bloomberg recently called “indefensible.” Now public pension funds across the country are facing a painful reckoning. Their projections look increasingly out of touch in today’s low-interest environment, and pressure is mounting to be more realistic. But lowering their investment assumptions, even slightly, means turning for more cash to local taxpayers — who pay part of the cost of public pensions through property and other taxes. In New York, the city’s chief actuary, Robert North, has proposed lowering the assumed rate of return for the city’s five pension funds to 7 percent from 8 percent, which would be one of the sharpest reductions by a public pension fund in the United States. But that change would mean finding an additional $1.9 billion for the pension system every year, a huge amount for a city already depositing more than a tenth of its budget — $7.3 billion a year — into the funds. But to many observers, even 7 percent is too high in today’s market conditions.

Social Security Disability Insolvent Unless Congress Votes -- A U.S. government entitlement program is headed for insolvency in four years, and it's not the one members of Congress are talking about most. The Social Security disability program's trust fund is projected to run out of cash far sooner than the better-known Social Security retirement plan or Medicare. That will trigger a 21 percent cut in benefits to 11 million Americans -- disabled people, their spouses and children -- many of whom rely on the program to stay out of poverty. "It's really striking how rapidly this is growing, how big it's become and how D.C. is just afraid of it," said Mark Duggan, a University of Pennsylvania economist and adviser to the Social Security Administration. Part of the reason for the burgeoning costs is that the 77 million baby boomers projected to swamp federal retirement plans will reach the disability program first. That's because almost all boomers are at least 50 years old, the age at which someone is most likely to become disabled. The growing costs are also a result of the economy, because when people can't find work and run through their jobless benefits, many turn to disability for assistance.

Bloomberg Plans a Ban on Large Sugared Drinks - New York City plans to enact a far-reaching ban on the sale of large sodas and other sugary drinks at restaurants, movie theaters and street carts, in the most ambitious effort yet by the Bloomberg administration to combat rising obesity. The proposed ban would affect virtually the entire menu of popular sugary drinks found in delis, fast-food franchises and even sports arenas, from energy drinks to pre-sweetened iced teas. The sale of any cup or bottle of sweetened drink larger than 16 fluid ounces — about the size of a medium coffee, and smaller than a common soda bottle — would be prohibited under the first-in-the-nation plan, which could take effect as soon as next March. The measure would not apply to diet sodas, fruit juices, dairy-based drinks like milkshakes, or alcoholic beverages; it would not extend to beverages sold in grocery or convenience stores. “Obesity is a nationwide problem, and all over the United States, public health officials are wringing their hands saying, ‘Oh, this is terrible,’ ” Mr. Bloomberg said. “New York City is not about wringing your hands; it’s about doing something,” he said. “I think that’s what the public wants the mayor to do.”

Obama’s Health Care Aid to Small Firms Disappoints — It seemed like a good idea at the time. But a health insurance tax credit for small businesses, part of President Barack Obama’s health care law that gets strong support in public opinion polls, has turned out to be a disappointment. Time-consuming to apply for and lacking enough financial reward to make it attractive, the credit was claimed by only 170,300 businesses out of a pool of as many as 4 million potentially eligible companies in 2010.That’s put the Obama administration in the awkward position of asking Congress to help fix the problems by allowing more businesses to qualify and making it simpler to apply. But Republicans who run the House say they want to repeal what they call “Obamacare,” not change it.

Guest Post: The Taxpayer Funded PR Campaign For Obamacare Begins - Only in public schools and universities is the fairy tale still taught that governments are representative of the people.  The blue collared man on the street realizes the chips are stacked against him.  For those who don’t have political connections, the pseudo fascist system that is still referred to as “capitalism” in the U.S. is akin to a casino game of chance.  That is, the odds are always in the house’s favor.  The house is the federal leviathan and its equivalent at the state and local level as well as the big, cartelized industries which feed off government protection. With Obamacare, the middle class will end up being liable for yet another entitlement program that, like any other government initiative, will cost more than was initially estimated.  Worse yet, they will be bombarded with advertisements they paid for which attempt to convince them that Uncle Sam has once again delivered prosperity with a badge and a gun. The disheartening part is some Americans will be foolish enough to actually believe it.

Insurers forcing patients to pay more for costly specialty drugs - Anthem Blue Cross, Aetna and other health insurers are increasingly shifting more prescriptions for complex conditions to a new category requiring customers to shoulder a larger share of the medication's cost.Thousands of patients in California and across the nation who take expensive prescription drugs every month for cancer, rheumatoid arthritis and other ailments are facing sticker shock at the pharmacy. Until recently, most of these patients typically paid modest co-pays for the advanced drugs. But increasingly, Anthem Blue Cross, Aetna and other insurers are shifting more prescriptions to a new category requiring patients to shoulder a larger share of the drug's cost. The result: Pharmacy bills are going up by hundreds of dollars a month — on top of insurance premiums. Robert Gomer saw his cost for three HIV drugs soar to $450 a month on a new Anthem Blue Cross plan this year from $80 a month on a previous plan. "All of a sudden you're starting to count pills and asking friends to borrow some," Gomer said. "It was a very stressful situation to be faced with."

Many hospitals, doctors offer cash discount for medical bills - Unknown to most consumers, many hospitals and physicians offer steep discounts for cash-paying patients regardless of income. But there's a catch: Typically you can get the lowest price only if you don't use your health insurance. That disparity in pricing is coming under fire from people like Snyder, who say it's unfair for patients who pay hefty insurance premiums and deductibles to be penalized with higher rates for treatment. The difference in price can be stunning. Los Alamitos Medical Center, for instance, lists a CT scan of the abdomen on a state website for $4,423. Blue Shield says its negotiated rate at the hospital is about $2,400. When The Times called for a cash price, the hospital said it was $250. "It frustrates people because there's no correlation between what things cost and what is charged," . "It changes the game when healthcare's secrets aren't so secret."

Why the surge in obesity? - The Weight of the Nation is a four-part series on obesity in America by HBO Films and the Institute of Medicine, with assistance from the Centers for Disease Control (CDC) and the National Institutes of Health (NIH). It’s been showing on HBO and can be viewed online. Each of the four parts is well done and informative. Obesity is defined as having a body mass index (BMI) of 30 or more. For a person 6 feet tall, that means a weight of more than 220 pounds. For someone 5’6″, the threshold is 185 pounds. People who are obese tend to earn less and are more likely to be depressed. They are at greater risk of diabetes, heart disease, stroke, and some types of cancer, and they tend to die younger. The CDC estimates the direct and indirect medical care costs of obesity to be $150 billion a year, about 1% of our GDP.The chart below, which appears several times in The Weight of the Nation, shows the trend in obesity among American adults since 1960, the first year for which we have good data. The data are from the National Health and Nutrition Examination Survey (NHANES). They are collected from actual measurements of people’s height and weight, rather than from phone interviews, so they’re quite reliable. After holding constant at about 15% in the 1960s and 1970s, the adult obesity rate shot up beginning in the 1980s, reaching 35% in the mid-2000s.

The Political Economy of the Obesity Epidemic  - A few week ago I was called upon to debate the idea of taxing big, high calorie soft drinks to help offset the high health costs of the American obesity epidemic.  Since then, I been dipping a toe into this literature and finding it quite interesting.   Given partisan gridlock, money in politics, and filibuster abuse, nothing’s easy in public policy these days.   And when you start regulating food policy, you bump into the personal freedom/responsibility issues that always loom large in our debates. But at least in terms of the economic arguments, there’s low hanging (and highly nutritious) fruit in terms of negative externalities, Pigouvian taxation, and “do no harm” legislation. Before I get to those points, however, a quick review of some relevant facts of the case.   Here’s an excellent new infographic from the Institute of Medicine.   While there’s predictable controversy over what to do about this, there’s little disagreement over a) the facts, and b) their negative implications for both health and the costs to society (see also this fact sheet from the CDC).  Policy-wise, this gives this epidemic a leg up over, say, global warming, where we still have to argue the science with deniers.

Infographic: A Fast Food Burger Is 3 Times Larger Now Than in the 1950s - - Research has shown that the bigger your plate, the likelier it is you'll overeat. The same logic may apply to fast food, where according to a new infographic by the Centers for Disease Control, portion sizes for popular items have increased dramatically since the 1950s. Since the dawn of the Cold War, the volume of an order of french fries has grown 180 percent. The weight of the average burger has more than tripled. And get this -- sodas are six times larger than they were back in the days of "I Love Lucy."

An Epidemic Of Diabetes In American Teenagers - It takes a lot to shock me here on Planet Stupid, but when I heard Teenage Diabetes Rates Soar on Tom Ashbrook's NPR talk show On Point  last Thursday, I almost couldn't believe what Tom's guests were saying. Stunning numbers this week in the journal Pediatrics on teenage [type 2] diabetes in America. In less than a decade, the number of American teens testing positive for diabetes or pre-diabetes jumped from nine percent to 23 percent. Almost one in four. That is shocking. For those kids. And for the country. People can live with diabetes. But you wouldn’t wish it on them. Vision loss. Nerve damage. Kidney failure. Amputation. All risks. Then there’s the cost, to young lives, and the nation. Of so many teens looking down this road. McDonald's. Burger King. Potato Chips. Ragu spaghetti sauce. High-fructose corn syrup. The list of crap corporate assholes want to sell to young people goes on and on. This is not a country. It's a Death Trap. Nobody saw anything like this in the 1990s. This epidemic of type 2 diabetes has "broken out" in the last 10 years.

Rand Paul says mislabeled bad milk is Free Speech, accurate FDA label laws are censorship: It's like BadLipReading, only he's actually saying this stuff on purpose… Watch Senator Rand Paul try to end the FDA's ability label to accurately label food. That's right, food labels that are accurate are unconstitutional. The logic behind this is an insane rant that could come out of an Adam Sandler movie. Rand Paul is an awesome senator if you are a business or a businessman, if you are people, and I mean flesh and bone people, Senator Rand Paul is about as useful as trying to block sunburn with Capri Sun. Case in point….  Sen. Paul:Mr. President, today I'm offering an Amendment to the FDA. I'm troubled by images of armed agents, armed FDA agents raiding Amish farms and preventing them from selling milk directly from the cow…. The First Amendment says you can't prevent speech, even commercial speech, in advance of this speech. You can't tell Cheerios that they can't say that there is a health benefit to their Cheerios…

Rand Paul's Freedom to Lie Amendment - Rand Paul: (a) IN GENERAL.—The Federal Government may not take any action to prevent use of a claim describing any nutrient in a food or dietary supplement… as mitigating, treating, or preventing any disease, disease symptom, or health-related condition, unless a Federal court in a final order following a trial on the merits finds clear and convincing evidence based on qualified expert opinion and published peer-reviewed scientific research that—

(1) the claim is false and misleading in a material respect; and
(2) there is no less speech restrictive alter- native to claim suppression, such as use of disclaimers or qualifications, that can render the claim non-misleading.
Note: not based on it being "more likely than not" that the claim is false, or based on no evidence that the claim is true, but based only on "clear and convincing evidence based on qualified expert opinion and published peer-reviewed scientific research"; not an administrative decision, but a court finding; not a rebuttable presumption, but after a trial on the merits.General Mills does not want the "freedom" to claim that Cheerios is the key to eternal life until and unless somebody publishes peer-reviwed scientific research saying it is not, and the FDA takes them to court and persuades a judge to issue a final order stating that there is clear and convincing evidence that it is not.

To combat dengue fever, a biotech firm unleashes genetically engineered bloodsuckers. What could possibly go wrong? - In August 2009, a 34-year-old woman from Rochester, New York, went to her doctor complaining of flulike symptoms. The doc ordered some blood tests, which came back positive for dengue fever, a mosquito-borne virus that can cause serious illness and sometimes death­—a baffling diagnosis, since the woman hadn't recently traveled anyplace where dengue is endemic. She had, however, been to Key West, where, in the months that followed, more tourists and residents were diagnosed. Thus began Florida's first significant dengue outbreak since 1934. The agency in charge of mosquito control for the Keys responded by blanketing the city with pesticides targeting both larvae and adult mosquitoes. Even so, the outbreak lasted for 15 months and sickened 93 people. While there hasn't been a new case since November 2010, local leaders aren't eager to relive the nightmare. And now they figure they won't have to, thanks to a recent high-tech innovation: self-destructing mosquitoes. These specialized skeeters, developed by the British company Oxitec, are genetically engineered to need the antibiotic tetracycline—common in the lab but scant in the wild—in order to survive past the larval stage. The altered males mate with wild females and presto: Lacking tetracycline to feed on, their offspring die before they're old enough to bite.

What Superweeds Can Teach You - Superweeds, like Pigweed seen to the right, are going to make food much more expensive over the next couple of years. Here’s some background on why. A superweed is a weed that developed resistance to a herbicide called Roundup. Roundup is used by farmers just about everywhere. It’s being used so much that about 90 percent of the soybeans and 70 percent of the corn and cotton grown in the US have been genetically modified to tolerate high dosages of Roundup to kill weeds more effectively. However, something went wrong with that plan. The same genetic modifications that made useful crops immune to Roundup have migrated into the genetic code of the weeds that were sprayed with it. Now, 20 species of weeds across 12 million acres of farmland (about 8% of all US farmland) are resistant to Roundup. Further, given current rates of growth, most of US farmland will have them too in five years. What does this mean? Killing weeds has become very hard, nearly overnight. There isn’t any easy method for removing weeds and the costs of doing so are much higher than what they were previously. The bottom line is that the price of food will go up, and up, and up as these superweeds spread.

Major Scientific Conference Convened to Review The Safety Of GMO Crops - A major international conference scientific meeting titled “Risk Assessment in Agricultural Biotechnology” was held at the University of California, Davis.  It was sponsored by the College of Agriculture, The National Association of State Universities and Land Grant Colleges, and the USDA.  It included presentations by eminent scientists from around the world and covered a wide range of topics including potential effects on non-target organisms, potential health effects, ecological risks, and the potential for “gene flow” for various crops.  There was extensive discussion of how to best regulate this technology, and what monitoring methods were appropriate.  There was also a discussion of potential impacts on community function in agricultural areas.  Finally there was an analysis of how risk assessment affects public perceptions of biotechnology. If you are reading this now, chances are you just missed it – by more than two decades!

First Super Weeds, Now Super Insects -- Thanks to Monsanto…A new generation of insect larvae is eating the roots of genetically engineered corn intended to be resistant to such pests.  The failure of Monsanto's genetically modified Bt corn could be the most serious threat ever to a genetically modified crop in the U.S. And the economic impact could be huge. Billions of dollars are at stake, as Bt corn accounts for 65 percent of all corn grown in the US. The strain of corn, engineered to kill the larvae of beetles, such as the corn rootworm, contains a gene copied from an insect-killing bacterium called Bacillus thuringiensis, or Bt.  But even though a scientific advisory panel warned the Environmental Protection Agency (EPA) that the threat of insects developing resistance was high, Monsanto argued that the steps necessary to prevent such an occurrence -- which would have entailed less of the corn being planted -- were an unnecessary precaution, and the EPA naively agreed.

Mexican Farmers Block Monsanto Law to Privatize Plants and Seeds - Progressive small farmer organizations in Mexico scored a victory over transnational corporations that seek to monopolize seed and food patents. When the corporations pushed their bill to modify the Federal Law on Plant Varieties through the Committee on Agriculture and Livestock of the Mexican Chamber of Deputies on March 14, organizations of farmers from across the country sounded the alarm. By organizing quickly, they joined together to pressure legislators and achieved an agreement with the legislative committee to remove the bill from the floor. What’s at stake is free and open access to plant biodiversity in agriculture. The proposed modifications promote a privatizing model that uses patents and “Plant Breeders’ Rights” (PBR) to deprive farmers of the labor of centuries in developing seed. The small farmers who worked to create this foundation of modern agriculture never charged royalties for its use

Holy Cow! India Is the World's Top Beef Exporter India, homeland of the sacred cow, is on pace to become the world's leading beef exporter in 2012. This graph is based off data from the USDA's Foreign Agricultural Service. It forecasts that India, shown in blue, will be ship roughly 1.5 million metric tons of beef, passing reigning export champion Australia. It's a remarkable rise from just three years ago, when the famously bovine-friendly country exported less than half that amount.  Here's how this has come to pass. Indian beef isn't really beef as we Americans know it. It's water buffalo, which the country's exporters sell at low cost to the meat-hungry but price-sensitive consumers in the Middle East, North Africa, and Southeast Asia. Indian federal law bans cow slaughter, as well as the killing of milk producing buffalo. But the males and unproductive females are still fair game for the abattoir. So we're not quite talking about American prime grade Angus here -- either from a gastronomic, or theological point of view. But the USDA still counts it all as beef, and economically, it competes in the same markets.

Graph of the Day: Most Endangered U.S. Rivers, 2012

Groundwater depletion in semiarid regions of Texas and California threatens US food security - The nation's food supply may be vulnerable to rapid groundwater depletion from irrigated agriculture, according to a new study by researchers at The University of Texas at Austin and elsewhere. The study, which appears in the journal Proceedings of the National Academy of Sciences, paints the highest resolution picture yet of how groundwater depletion varies across space and time in California's Central Valley and the High Plains of the central U.S. Researchers hope this information will enable more sustainable use of water in these areas, although they think irrigated agriculture may be unsustainable in some parts. Three results of the new study are particularly striking: First, during the most recent drought in California's Central Valley, from 2006 to 2009, farmers in the south depleted enough groundwater to fill the nation's largest man-made reservoir, Lake Mead near Las Vegas—a level of groundwater depletion that is unsustainable at current recharge rates. Second, a third of the groundwater depletion in the High Plains occurs in just 4% of the land area. And third, the researchers project that if current trends continue some parts of the southern High Plains that currently support irrigated agriculture, mostly in the Texas Panhandle and western Kansas, will be unable to do so within a few decades.

Self-DustBowlification II: Farmers In The High Plains And California Are Depleting Groundwater, Study Says - Irrigated agriculture is rapidly depleting groundwater resources in parts of the High Plains and the Central Valley region of California, which are both critical regions for food production, according to a new study.  According to the study, if groundwater depletion were to continue at current rates, 35 percent of the southern High Plains will no longer be able to support irrigation within the next 30 years. With climate change projections showing that more severe droughts in both the Southwest and High Plains are likely as the climate continues to warm, groundwater resources are going to be even more highly stressed in the coming decades, the study says. The groundwater resources that sustain agricultural production in California’s Central Valley and the High Plains enabled farmers to produce $56 billion in agricultural products in 2007 alone, the study reported, and these two areas comprise the country’s most productive agricultural lands. The High Plains is commonly known as America’s “bread basket,” while the moniker of the country’s “fruit and vegetable basket” is sometimes applied to California’s Central Valley. The research, published in the journal Proceedings of the National Academy of Sciences, integrates water observations from different sources, including NASA satellites, about 11,300 wells, and computer models to produce one of the most comprehensive looks yet of how irrigated agriculture is drawing down vital groundwater supplies.

Shale energy triggers bean rush in India (Reuters) - In India's northern desert states, farmers are scrambling to harvest as much as they can of a bean with the power to lift them out of poverty. In the United States, the multi-billion dollar shale energy industry is banking on their success. U.S. companies drilling for oil and gas in shale formations have developed a voracious appetite for the powder-like gum made from the seeds of guar, or cluster bean, and the boom in their business has created a bonanza for thousands of small-scale farmers in India who produce 80 percent of the world's beans. "Guar has changed my life," said Shivlal, a guar farmer who made 300,000 rupees ($5,400) - five times more than his average seasonal income - from selling the beans he planted on five acres (two hectares) of sandy soil in Rajasthan state. "Now, I have a concrete house and a color TV. Next season I will even try to grow guar on the roof." Guar gum, which is also used to make sauces and ice cream, is a main ingredient of the hydraulic fracturing, or fracking, process used to extract oil and gas from oil shale.

U.S. post office struggles with alternative fuel delivery: Kemp - The post office operates the largest civilian vehicle fleet in the world, with more than 210,000 vehicles travelling almost 1.3 billion miles a year. The agency has a powerful reason to switch from expensive petroleum-derived fuels as rising fuel costs make a small but significant contribution to its mounting financial problems. Its struggles to find cost-effective alternatives, however, highlight the obstacles to rolling out alternative vehicle technologies across the United States. USPS has a substantial number of alternative fuel vehicles. Out of a total stock of 212,000 vehicles in 2010, almost 44,000 (21 percent) were alternative fuel vehicles, according to the annual report of the Federal Fleet Policy Council. The largest number were flex-fuel vehicles capable of running on E85, which accounted for 39,000 vehicles. The postal service has always been at the forefront of new transport technologies. USPS is also working with manufacturers to pioneer and test the latest generation of alternative vehicles and is currently testing vehicles made by E-Ride, Vantage, Navistar and Grumman. The problem is not the vehicles, however, but availability of alternative fuels to use in them. In FY2011, USPS vehicles consumed just 782,000 gallons of alternative fuels (on a gasoline equivalent basis) out of a total of 155 million gallons, less than 1 percent. Most of the time, dual fuel vehicles have been filled with regular gasoline and diesel.

Oil and corn don't mix: Ethanol reports fuel gasoline debate -- Oil and corn don't mix well, particularly in an election year, as was evidenced this month when the petroleum and ethanol industries came out swinging on the virtues and sins of the corn-based gasoline additive. At issue was an academic study that concluded ethanol keeps a lid on the cost of gasoline and another report warning the plan to increase the ethanol content of gasoline to 15 percent -- a blend known as E15 -- could put motorists on the road to some expensive engine repairs due to its chemical makeup. The reports provided fresh fuel for the simmering debate over the future of the federal government's tax and regulatory support for ethanol. The federal Renewable Fuel Standard, which mandates the amount of ethanol that must be used to cut the U.S. gasoline supply, expires next year and will be replaced with a new version. The outbreak of back-and-forth vitriol this month may not be a deliberate attempt to muddy the politically charged debate over ethanol and the Renewable Fuel Standard, but it will no doubt be a basis of future hearings and negotiations in Washington where the farm and oil lobbies have been known to have a degree of clout.

Fat Lady Preparing to Sing: U.S. Crushing Warmest Spring Record - As suggested last week, the U.S. is well on its way to crush the record for warmest spring since national temperature data began in 1895. Here's an indication of just how far that record could go. The previous record spring in 1910 had a national average temperature of 55.1 °F. However, the March 2012 temperature exceeded March 1910 by 0.5 °F to set a new record for the month. April 2012 then exceeded April 1910 by 1 °F (see the charts to the right). At this point, May 2012 would have to be 1.5 °F cooler than May 1910 to avoid exceeding the record. What are the chances of that? Somewhere between slim and none. Here is the temperature departure from average for May 1-24: Note that the chart is in °C. Nearly all of the country is above average, with large areas over 2 °C higher. How did May 1910 compare? Most of the country was below average. In fact, May 1910 was 1.8 °F below the 1981-2010 average overall. If the last 7 days of the month completely reversed the May 1-24 pattern shown above so that May averaged equal to the climatological mean, Spring 2012 would still be 1.1 °F warmer than the old record, as big a margin as the difference between the current record and the 10th place year of 1977. If May averages as much as 2 °C above climatology, which looks quite plausible, the spring average would be an eye-popping 2.3 °F above the old record (see the chart at the top of the post).

Heidi Cullen, NYT: Clouded Forecast - OUR ability to forecast the weather is in big trouble. Last month, the National Research Council concluded that the nation’s system of Earth-observing satellites is in a state of “precipitous decline” and warned of a “slowing or even reversal of the steady gains in weather forecast accuracy over many years.” This worrisome development puts all of us in harm’s way and should particularly trouble us as the annual six-month hurricane season begins today. Gathering timely and accurate weather data is, of course, vital to saving lives. The deadliest hurricane ever to strike the United States hit Galveston, Texas, on September 8, 1900, killing as many as 8,000 people. Scientists had lacked the tools to predict the storm’s severity. We have made tremendous progress in the accuracy of our hurricane forecasting (and overall weather forecasting) since then, much of it a result of government-owned satellites that were first launched in the 1960s and now provide about 90% of the data used by the National Weather Service in its forecasting models. Satellite and radar data and the powerful computers that crunch this information are the foundation of the weather information and images we get. Thanks to these instruments, for instance, the 5-day hurricane track forecast we get today is more accurate than the 3-day forecast from just 10 years ago.

Unprecedented May heat in Greenland; update on 2011 Greenland ice melt - The record books for Greenland's climate were re-written on Tuesday, when the mercury hit 24.8°C (76.6°F) at Narsarsuaq, Greenland, on the southern coast. According to weather records researcher Maximiliano Herrera, this is the hottest temperature on record in Greenland for May, and is just 0.7°C (1.3°F) below the hottest temperature ever measured in Greenland. The previous May record was 22.4°C (72.3°F) at Kangerlussuaq (called Sondre Stormfjord in Danish) on May 31, 1991. The 25.2°C at Narsarsuaq on June 22, 1957 is the only June temperature measured in Greenland warmer than yesterday's 24.8°C reading. Wunderground's extremes page shows that the all-time warmest temperature record for Greenland is 25.5°C (77.9°F) set on July 26, 1990. If the massive icecap on Greenland were to melt, global sea level would rise 7 meters (23 ft). Temperatures in Greenland are predicted to rise 3°C by 2100, to levels similar to those present during that warm period 120,000 years ago. During that period, roughly half of the Greenland ice sheet melted, increasing sea level by 2.2 - 3.4 meters (7.2 - 11.2 ft.) However, the 2007 IPCC report expects melting of the Greenland ice sheet to occur over about a 1,000 year period, delaying much of the expected sea level rise for many centuries. While Greenland's ice isn't going to be melting completely and catastrophically flooding low-lying areas of the earth in the next few decades (sea level is only rising about 3 mm per year or 1.2 inches per decade at present), the risk later this century needs to be taken seriously.

Greenland's loss of ice mass during the last 10 years is unusually high compared to last 50 years: Loss through melting and iceberg calving during the last 10 years is unusually high compared to the last 50 years. The Greenland ice sheet continues to lose mass and thus contributes at about 0.7 millimeters per year to the currently observed sea level change of about 3 mm per year. This trend increases each year by a further 0.07 millimeters per year. The pattern and temporal nature of loss is complex. The mass loss is largest in southwest and northwest Greenland; the respective contributions of melting, iceberg calving and fluctuations in snow accumulation differing considerably.
The result was made possible by a new comparison of three different types of satellite observations: measurements of the change in gravity by changes in ice mass with the satellite pair GRACE, height variation with the laser altimeter on the NASA satellite ICESat and determination of the difference between the accumulation of regional atmospheric models and the glacier discharge, as measured by satellite radar data. For the first time and for each region, the researchers could determine with unprecedented precision which percentage melting, iceberg calving and fluctuations in rainfall have on the current mass loss.

America’s falling carbon-dioxide emissions - The International Energy Agency has just released some data that green-minded fans of shale gas should appreciate. The organisation's latest figures show that America’s carbon-dioxide emissions from generating energy have fallen by 450m tonnes, more than in any other country over the past five years. The turnaround has been welcomed by many, and Fatih Birol, the IEA’s chief economist, ascribes much of the credit to a shift away from dirty coal towards cleaner gas, according to an article in the Financial Times. The importance of coal in America’s energy mix has indeed tumbled since 1997, from almost half of electricity generation to just 36.7% in February, according to America's Energy Information Administration (see chart). This has come about mostly because of an increase in the use of natural gas (from 21.6% to 29.4% over the same period) rather than renewable energy (from 8.3% to 12.1%). However, the numbers may not be welcome among all environmentalists, some of whom tend to loathe shale gas because of the “fracking” process through which it is released from rock formations. Some greens claim that fracking contaminates the air and groundwater and can even cause earthquakes (although there is no evidence linking fracking to increased seismic activity, according to the US Geological Survey).

Global carbon-dioxide emissions increase by 1.0 Gt in 2011 to record high -  Global carbon-dioxide (CO2) emissions from fossil-fuel combustion reached a record high of 31.6 gigatonnes (Gt) in 2011, according to preliminary estimates from the International Energy Agency (IEA). This represents an increase of 1.0 Gt on 2010, or 3.2%. Coal accounted for 45% of total energy-related CO2 emissions in 2011, followed by oil (35%) and natural gas (20%). The 450 Scenario of the IEA’s World Energy Outlook 2011, which sets out an energy pathway consistent with a 50% chance of limiting the increase in the average global temperature to 2°C, requires CO2 emissions to peak at 32.6 Gt no later than 2017, i.e. just 1.0 Gt above 2011 levels. The 450 Scenario sees a decoupling of CO2 emissions from global GDP, but much still needs to be done to reach that goal as the rate of growth in CO2 emissions in 2011 exceeded that of global GDP. “The new data provide further evidence that the door to a 2°C trajectory is about to close,” said IEA Chief Economist Fatih Birol. In 2011, a 6.1% increase in CO2 emissions in countries outside the OECD was only partly offset by a 0.6% reduction in emissions inside the OECD. China made the largest contribution to the global increase, with its emissions rising by 720 million tonnes (Mt), or 9.3%, primarily due to higher coal consumption. “What China has done over such a short period of time to improve energy efficiency and deploy clean energy is already paying major dividends to the global environment”, said Dr. Birol. China’s carbon intensity — the amount of CO2 emitted per unit of GDP — fell by 15% between 2005 and 2011. Had these gains not been made, China’s CO2 emissions in 2011 would have been higher by 1.5 Gt.

Global CO2 emissions hit record in 2011 led by China (Reuters) - China spurred a jump in global carbon dioxide (CO2) emissions to their highest ever recorded level in 2011, offsetting falls in the United States and Europe, the International Energy Agency (IEA) said on Thursday. CO2 emissions rose by 3.2 percent last year to 31.6 billion tonnes, preliminary estimates from the Paris-based IEA showed. China, the world's biggest emitter of CO2, made the largest contribution to the global rise, its emissions increasing by 9.3 percent, the body said, driven mainly by higher coal use. "When I look at this data, the trend is perfectly in line with a temperature increase of 6 degrees Celsius [which is an increase of 10.8 degrees Fahrenheit] (by 2050), which would have devastating consequences for the planet," Fatih Birol, IEA's chief economist told Reuters. Scientists say ensuring global average temperatures this century do not rise more than 2 degrees Celsius above pre-industrial levels is needed to limit devastating climate effects like crop failure and melting glaciers. They believe that is only possible if emission levels are kept to around 44 billion tonnes of CO2 equivalent in 2020.

When hitting 400 is not good: Levels of key greenhouse gas pass milestone, trouble scientists - — The world’s air has reached what scientists call a troubling new milestone for carbon dioxide, the main global warming pollutant. Monitoring stations across the Arctic this spring are measuring more than 400 parts per million of the heat-trapping gas in the atmosphere. The number isn’t quite a surprise, because it’s been rising at an accelerating pace. Years ago, it passed the 350 ppm mark that many scientists say is the highest safe level for carbon dioxide. It now stands globally at 395.So far, only the Arctic has reached that 400 level, but the rest of the world will follow soon. Carbon dioxide is the chief greenhouse gas and stays in the atmosphere for 100 years. Some carbon dioxide is natural, mainly from decomposing dead plants and animals. Before the Industrial Age, levels were around 275 parts per million. For more than 60 years, readings have been in the 300s, except in urban areas, where levels are skewed. The burning of fossil fuels, such as coal for electricity and oil for gasoline, has caused the overwhelming bulk of the man-made increase in carbon in the air, scientists say. It’s been at least 800,000 years — probably more — since Earth saw carbon dioxide levels in the 400s, Butler and other climate scientists said.

EU’s greenhouse emissions up but still meeting Kyoto target - The European Union’s greenhouse gas emissions rose in 2010 for the first time in six years, but the 27-nation bloc is still on track to meet its target under an international climate accord, the EU’s environmental agency said Wednesday. Emissions of carbon dioxide and other gases increased by 2.4 percent as some EU countries bounced back from recession, the European Environment Agency said. In addition, a colder winter than in the previous year led to higher heating demand, the EEA added.“Emissions increased in 2010. This rebound effect was expected as most of Europe came out of recession,” The figures were verified by member countries and submitted to the United Nations’ climate agency. The emissions for 2011 are still being calculated but data from the EU’s emissions trading scheme indicate a 2 percent decrease. The trading system covers about 40 percent of the EU’s emissions, but not sectors such as transportation, household heating and agriculture. Despite the increase in 2010, the EU is on track to meet its emissions targets under the Kyoto protocol, a 1997 climate accord limiting the emissions of most industrialized countries, the EEA said. Fifteen EU countries are committed to an 8 percent reduction in greenhouse gases in 2008-2012, compared to 1990 levels. The other 12 countries have individual targets except the small island nations of Malta and Cyprus.

Britain's climate change policy is going up in smoke - Monbiot - Energy policy in the United Kingdom looks like a jam factory hit by a meteorite: a multicoloured pool of gloop studded with broken glass. Consider these two press releases, issued by the Department of Energy and Climate Change last week.Tuesday: the government's new energy bill will help the UK to "move away from high carbon technologies". Wednesday: applications for new oil and gas drilling in the North Sea have "broken all previous records". This is "tremendous news for industry and for the UK economy". The government knows that these positions are irreconcilable. Natural gas is mainly used for producing electricity. The draft energy bill, launched last week, says that if the government's legal obligation to cut 80% of greenhouse gases by 2050 is to be met, electricity plants "need to be largely decarbonised by the 2030s". (This is a subtle slippage from December's Carbon Plan, which said 2030). The only hope of reconciliation lies in the universal deployment of carbon capture and storage: technology which removes the carbon dioxide emanating from power stations and buries it. But the government has made it clear that it does not believe this is going to happen.The new bill sets a limit for the amount of carbon dioxide that power stations can produce. This is 450 grams of CO2 for every kilowatt-hour of electricity. Compare it to the 50g which the Committee on Climate Change says should be the average produced by power stations in this country by the end of the 2020s, if the government is to meet its 2050 target.

Is environmentalism bad for fighting climate change? - For most of its history, environmentalism has essentially been about stopping things, or at least slowing them down.  Whether it’s sprawling subdivisions, industrial development on sensitive habitat lands, or factories spewing pollution, environmentalists have mobilized support to prevent these projects from happening, or at least make them more efficient and therefore more expensive (think scrubbers on smokestacks or building efficiency codes).  The successes are undeniable: significantly cleaner air and water and the prevention of some environmentally destructive projects. But when it comes to fighting climate change, a movement designed to stopping things is counter-productive.  We need the opposite dynamic, because our task now is to build our way toward reducing greenhouse gas emissions.  That means building a significant amount of new housing, services, and job centers in urbanized areas near transit; building renewable energy facilities both locally and in rural regions; building new rail and busways through developed cities and towns; and fostering a regulatory environment where innovation in clean technologies can take place without years of delay and uncertainty brought on by often well-intentioned environmental laws. Unfortunately, the broader environmental movement has helped to stymie each of these efforts.  Whether it’s resistance to loosening environmental review and land use requirements in infill areas, Clean Air Act impediments to on-farm renewables, or permitting processes for renewable energy projects, the movement has been schizophrenic at best, counter-productive at worst.

A Conservative's Approach to Combating Climate Change - No environmental issue is more polarizing than global climate change.  Many on the left fear increases in atmospheric concentrations of greenhouse gases threaten an environmental apocalypse while many on the right believe anthropogenic global warming is much ado about nothing and, at worst, a hoax.  Both sides pretend as if the climate policy debate is, first and foremost, about science, rather than policy. This is not so. There is substantial uncertainty about the scope, scale, and consequences of anthropogenic warming, and will be for some time, but this is not sufficient justification for ignoring global warming or pretending that climate change is not a serious problem. Though my political leanings are most definitely right-of-center, and it would be convenient to believe otherwise, I believe there is sufficient evidence that global warming is a serious environmental concern.  I have worked on this issue for twenty years, including a decade at the Competitive Enterprise Institute where I edited this book. I believe human activities have contributed to increases in greenhouse concentrations, and these increases can be expected to produce a gradual increase in global mean temperatures.   Even if some parts of the world were to benefit from a modest temperature increase -- due to, say, a lengthened growing season -- others will almost certainly lose.

Can Market Forces Really be Employed to Address Climate Change?, by Robert Stavins: ...The U.S. political response to possible market-based approaches to climate policy has been and will continue to be largely a function of issues and structural factors that transcend the scope of environmental and climate policy. Because a truly meaningful climate policy – whether market-based or conventional in design – will have significant impacts on economic activity in a wide variety of sectors and in every region of the country, it is not surprising that proposals for such policies bring forth significant opposition, particularly during difficult economic times.In addition, U.S. political polarization – which began some four decades ago and accelerated during the economic downturn – has decimated what had long been the key political constituency in Congress for environmental (and energy) action: namely, the middle, including both moderate Republicans and moderate Democrats. Whereas congressional debates about environmental and energy policy have long featured regional politics, they are now largely partisan. In this political maelstrom, the failure of cap-and-trade climate policy in the Senate in 2010 was collateral damage in a much larger political war.

Climate Change and Global Politics - Mark Thoma's post offers me the opportunity to mention the publication of my 2012 Economic Inquiry paper on this topic.   I wrote my 2010 climate change adaptation book titled Climatopolis, because it was clear to me that there is a voting bloc in Congress (namely Conservatives from poor, high carbon areas) who will oppose any carbon legislation.   I've been quite pessimistic that a global deal on carbon can or will happen in the short term.   I predict that individual initiatives such as California's AB32 will teach useful lessons and that the host of low carbon technologies will become more price competitive over time due to globalized free trade. Take a look at this slide below and explain how in a world where population and world per-capita emissions are rising how we will start a chain reaction so that all of the world's key players join the carbon coalition.  Who will provide the "carrot" to nudge the BRIC nations to play ball?   Who will pay for this nudge?  The units are tons per-capita per year in the following graph.

Companies need to disclose climate risk: investors (Reuters) - Institutional investors and environmental advocates on Thursday urged companies to disclose their risks from the impact of climate change, two years after the Securities and Exchange Commission issued guidelines for firms to do just that. While the SEC guidelines do not force publicly traded corporations to assess such climate-related events as severe storms, droughts, floods and heat waves, some companies have done so anyway. But those disclosures have not been particularly useful, according to Maryland State Treasurer Nancy Kopp. "Among those who disclosed, they used different procedures, different rubrics, different metrics," Kopp said in a telephone interview. "So the idea of having some basis for comparing companies consistently is an important thing to us, to investors. Otherwise you get a hodgepodge of data that's not useful information." The guide was put together by Calvert Investments, relief organization Oxfam America and the Ceres coalition of investors, companies and public interest groups that aims to foster sustainable business practices. "Businesses have ample opportunity to get this right by understanding the climate impacts they face and working to build resilience at the ground level,"

The Energy Loan Scandal as a Non-story -- Mark A. Thiessen writes, as Hoover Institution scholar Peter Schweizer reported in his book, "Throw Them All Out," fully 71 percent of the Obama Energy Department's grants and loans went to "individuals who were bundlers, members of Obama's National Finance Committee, or large donors to the Democratic Party." Collectively, these Obama cronies raised $457,834 for his campaign, and they were in turn approved for grants or loans of nearly $11.35 billion. If our political digestive system were functioning properly, it would vomit out the energy loan program and the people responsible. There would be daily front-page headlines in the newspapers. Congressional hearings would feature harsh attacks by Democrats as well as Republicans and be carried live by all major news channels. Steven Chu would be as generally reviled as Bernie Madoff. There would be a special prosecutor operating and talk of impeachment. Instead, this has produced among left-of-center politicians and pundits little concern, much less outrage. My fear is that what will emerge is a pattern in which Republican scandals are ignored by the right and Democratic scandals are ignored by the left. The result will be a spiral of ever-worsening corruption.

Storytelling our energy future - I want to tell you two stories. The first is this: You were born into an exceptional culture of enormous wealth. If you work hard and take advantage of the inherent genius and innovativeness of that culture, you can become wealthy, secure, happy, and comfortable. And if they work hard, your children can have even more wealth than you did. Here’s the second: Right now, you are living at the absolute historical peak of human wealth. In terms of the energy you consume, the variety of foods and beverages available to you, and the amount of physical labor you don’t have to do every day, you are vastly more wealthy than any generation before you. Your children will be much poorer than you, will have far fewer options about what they can eat and drink and do with their free time, and will have to do a lot more physical labor. Their children will have even harder lives, and so on into the future, as wealth per capita declines for the next several hundred years. Now: Which story do you think is more true? Then: Why do you think it’s true? And finally: When you thought about which was more true, what thought process did you go through?

Solar power generation world record set in Germany - German solar power plants produced a world record 22 gigawatts of electricity – equal to 20 nuclear power stations at full capacity – through the midday hours of Friday and Saturday, the head of a renewable energy think tank has said. Germany's government decided to abandon nuclear power after the Fukushima nuclear disaster last year, closing eight plants immediately and shutting down the remaining nine by 2022. They will be replaced by renewable energy sources such as wind, solar and bio-mass. Norbert Allnoch, director of the Institute of the Renewable Energy Industry in Muenster, said the 22 gigawatts of solar power fed into the national grid on Saturday met nearly 50% of the nation's midday electricity needs.The record-breaking amount of solar power shows one of the world's leading industrial nations was able to meet a third of its electricity needs on a work day, Friday, and nearly half on Saturday when factories and offices were closed. Government-mandated support for renewables has helped Germany became a world leader in renewable energy and the country gets about 20 percent of its overall annual electricity from those sources.

Making a Big Stink: Is That a Landfill or a Gold Mine? - Who here likes landfills? Hands up! What... no one? Don't worry, you're not alone. Almost no one like landfills, and it's not hard to imagine why. Mountains of garbage, sometimes piled several stories high. All manner of pests including vermin and insects. How about the stench of methane and carbon dioxide? Not only repulsive, but contributing to the greenhouse effect to boot. Oh yeah, and also potentially a source of energy. That's right, that trash-heap isn't just a blight on whatever land it's dumped on -- it's a readily available methane deposit. They say one man's trash is another man's treasure... Makes you wonder if they ever imagined it could be taken quite so literally. The United States isn't doing so well on the energy front. High oil prices raise costs on virtually every industry, while stymied efforts to access resources in North America offer little relief. Hydraulic fracking has come under considerable scrutiny due to issues with groundwater contamination, non-disclosure of the used chemicals, and even increased geological activity. With American solar companies increasingly losing ground to low-cost alternatives from China, even alternative power is feeling a pinch. But there's a great resource out there... Garbage. Mountains and mountains of garbage.

Washington - Seattle Votes Against Coal Terminals - The Seattle City Council has unanimously passed a resolution opposing development of coal-export terminals in Washington over concerns about increased train traffic and potential harm to health and the environment. The vote Tuesday came as the federal government is reviewing the first of at least six port facilities proposed in Washington and Oregon to ship coal from Montana and Wyoming to Asia. If all of them were built, trains could carry at least 100 million tons of coal a year through the Northwest. Councilmember Mike O’Brien says mining and burning more coal is not consistent with the city’s goal to fight climate change. Opponents say the resolution is premature and that the council should let an environmental review be completed.

Even in Kentucky, Coal Industry Is Under Siege - For generations, coal has been king in this Appalachian town. It provided heat, light and jobs for the hundreds of people who worked in the nearby coal mines and the smoke-coughing Big Sandy power plant that burned their black bounty. So when the operator of the Big Sandy plant announced last year that it would be switching from coal to cleaner, cheaper natural gas, people here took it as the worst betrayal imaginable. “Have you lost your mind?” State Representative Rocky Adkins, a Democrat and one of Kentucky’s most powerful politicians, thundered at Michael G. Morris, the chairman of the plant’s operator, American Electric Power, during an encounter last summer. “You cannot wave the white flag and let the environmentalists and regulators declare victory here in the heart of coal country.”  American Electric Power, which is based in Columbus, Ohio, is proposing a $1 billion retrofit to allow the plant to continue burning coal and has asked Kentucky regulators to approve a 30 percent increase in electricity rates to pay for the work. ... Channeling the animosity toward Washington and fears about their livelihoods, coal producers, union leaders, landowners and railroads came together to pressure American Electric Power to back down on its plan to close the coal furnaces at Big Sandy. They have leaned on county judges, state legislators and other politicians to attempt to silence public criticism of the 30 percent electricity rate increase and to pressure the Kentucky Public Service Commission to approve the retrofit project. Saving coal, they argued, justified the rate increase, which would cost the average residential customer about $472 a year in addition to the typical $1,580 annual bill today.

The War on Coal: A Lie Invented by the Coal Industry - Big polluters and their Congressional allies have created a new straw man to knock down with the invention of the so-called “War on Coal.” It is a multi-million dollar disinformation campaign funded by Big Coal polluters to protect their profits and distract Americans from the deadly effects of air pollution on public health. However, with the number of coal jobs in key coal states actually on the rise since 2009, it’s more like peacetime prosperity than war in coal country. The War on Coal is nothing more than a new shiny object, designed by big polluters to distract Americans from the real war – the polluters’ attacks on their health – and the truth. Coal companies and dirty utilities claim that long overdue requirements to reduce mercury, arsenic, smog, acid rain, and carbon pollution from power plants will kill jobs. In West Virginia, however, coal mining employment was higher in 2011 than at any time over the last 17 years. Federal jobs statistics also show modest coal mining job growth in coal states like Virginia and Pennsylvania. In West Virginia, a recent report from the non-partisan West Virginia Center for Budget and Policy showed coal mining jobs are actually rising, with 1,500 new coal jobs added since 2009. In Pennsylvania, Energy Information Administration (EIA) data shows a 2.3% increase in coal related jobs. And in Virginia, EIA data shows a 6.7% increase in coal mining employment from 2009 to 2010.

Bankrupt Nuclear Waste Firm Impact Services Gets Deadline - Impact Services Inc., the bankrupt nuclear waste processor storing 1 million pounds of scrap radioactive material at its Oak Ridge, Tennessee, facility, was told to produce missing financial documents by next week. Impact filed for Chapter 7 liquidation May 24 in U.S. Bankruptcy Court in Wilmington, Delaware, listing assets of less than $10 million and debt of as much as $50 million. Specific creditor claims and company financial details haven’t been filed. “There is about one million pounds of waste” at the company’s compound, and “there is a $1.2 million surety bond” provided “to cover the liabilities incurred when a facility abandons their responsibility,” said Meg Lockhart, spokeswoman for the Tennessee Department of Environment and Conservation, in an e-mailed statement after the filing.

Radioactive bluefin tuna crossed the Pacific to US - Across the vast Pacific, the mighty bluefin tuna carried radioactive contamination that leaked from Japan's crippled nuclear plant to the shores of the United States 6,000 miles away - the first time a huge migrating fish has been shown to carry radioactivity such a distance.  "We were frankly kind of startled," said Nicholas Fisher, one of the researchers reporting the findings online Monday in the Proceedings of the National Academy of Sciences. The levels of radioactive cesium were 10 times higher than the amount measured in tuna off the California coast in previous years. Previously, smaller fish and plankton were found with elevated levels of radiation in Japanese waters after a magnitude-9 earthquake in March 2011 triggered a tsunami that badly damaged the Fukushima Dai-ichi reactors. But scientists did not expect the nuclear fallout to linger in huge fish that sail the world because such fish can metabolize and shed radioactive substances. One of the largest and speediest fish, Pacific bluefin tuna can grow to 10 feet and weigh more than 1,000 pounds. They spawn off the Japan coast and swim east at breakneck speed to school in waters off California and the tip of Baja California, Mexico.

Rubble hinders decommissioning work at Fukushima No. 4 reactor - Mountains of rubble stand in the way of decommissioning the No. 4 reactor of the Fukushima No. 1 nuclear power plant, part of an unprecedented challenge facing Japan to decommission four crippled reactors. The No. 4 reactor building was opened to a handful of media organizations on May 26 for the first time since the nuclear crisis was triggered following last year's March 11 Great East Japan Earthquake and tsunami. A reporter from the Tokyo Shimbun described the scene on the fourth floor as looking like that of a "battlefield after being bombed." The wall facing the sea had been blown off in a hydrogen explosion on March 15 last year. "Pipes were severely bent," the reporter said. "Steel frames were also twisted and rusted. It was hard for me to believe such a thick wall was blown off over a wide area." A tour of the No. 4 building by media outlets was given to coincide with an inspection by Goshi Hosono, minister in charge of handling the nuclear disaster. What is most under threat in the No. 4 building, experts in and out of Japan say, is the spent fuel pool, which holds 1,535 fuel assemblies, an equivalent of those in three reactors. Many point out the risks of the collapse of the pool if another huge temblor with the power of last year's quake strikes the plant.

Next Japanese nuclear accident will be even worse - - Here’s the problem. In the damaged Unit 4 at Fukushima Daiichi there are right now 1,535 fuel rods that have yet to be removed from the doomed reactor. The best case estimate of how long it will take to remove those rods is three years. Next to the Unit 4 reactor and in other places on the same site there are more than 9,000 spent fuel rods stored mainly in pools of water but in some spots exposed to the air and cooled by water jets.  The total volume of unstable nuclear fuel on the site exceeds 11,000 rods. Again, the best estimate of how long it will take to remove all this fuel and spent fuel is 10 years but it may well take longer. Fukushima has always been a seismically active area. Called the Japan Trench Subduction Zone, it has experienced nine seismic events of magnitude 7 or greater since 1973. There was a 5.8 earthquake in 1993; a 7.1 in 2003; a 7.2 earthquake in 2005; and a 6.2 earthquake offshore of the Fukushima facility just last year, all of which caused shutdowns or damage to nuclear plants. Even small earthquakes can damage nuclear plants: a 6.8 quake on Japan’s west coast in 2007 cost TEPCO $5.62 billion. But last year’s 9.0 earthquake and tsunami made things far worse, further destabilizing the local geology. According to recently revised estimates by the Japanese government, the probability of an earthquake of 7.0 magnitude or greater in the region during the next three years is now 90 percent. The Unit 4 reactor building that was substantially damaged by the tsunami and subsequent explosions will not survive a 7.0+ earthquake.

Where Do I Go If Fukushima Blows? (Northern Hemisphere Nuclear Fallout Map) -  With warnings about the Fukushima disaster getting more dire every day, many are wondering how they can avoid the inevitable radioactive fallout should things worsen in Japan. The bottom line is, unless you’ve got a fully stocked nuclear bunker and radiation suits, there’s not much you can do to prevent exposure – other than to get the heck out of Dodge. Over the years there have been numerous maps developed to identify nuclear safe zones in the event of war between nuclear powers like the United States, Russia and China. While not exactly perfect, as the Fukushima nuclear release is not the same as multiple, simultaneous nuclear detonations across the Northern Hemisphere resulting from war, the following map may provide some insight as to where nuclear radiation will be limited and significantly lowered based on global weather patterns.

Fukushima: A Nuclear War without a War: The Unspoken Crisis of Worldwide Nuclear Radiation - The World is at a critical crossroads. The Fukushima disaster in Japan has brought to the forefront the dangers of Worldwide nuclear radiation. The crisis in Japan has been described as "a nuclear war without a war". In the words of renowned novelist Haruki Murakami: "This time no one dropped a bomb on us ... We set the stage, we committed the crime with our own hands, we are destroying our own lands, and we are destroying our own lives." Nuclear radiation --which threatens life on planet earth-- is not front page news in comparison to the most insignificant issues of public concern, including the local level crime scene or the tabloid gossip reports on Hollywood celebrities. While the long-term repercussions of the Fukushima Daiichi nuclear disaster are yet to be fully assessed, they are far more serious than those pertaining to the 1986 Chernobyl disaster in the Ukraine, which resulted in almost one million deaths. Moreover, while all eyes were riveted on the Fukushima Daiichi plant, news coverage both in Japan and internationally failed to fully acknowledge the impacts of a second catastrophe at TEPCO's (Tokyo Electric Power Co Inc) Fukushima Daini nuclear power plant. The shaky political consensus both in Japan, the U.S. and Western Europe is that the crisis at Fukushima has been contained. The realties, however, are otherwise.

Iranian team to collaborate with US company on nuclear fusion project - A US company and an Iranian university have agreed to collaborate on nuclear fusion, the elusive technology that promises a limitless supply of clean energy. New Jersey-based Lawrenceville Plasma Physics Inc and Tehran's Islamic Azad University will jointly design a fusion machine that "would be affordable to construct in industrializing nations", according to a contract signed last weekend and seen by The Guardian. The partnership comes amid tensions between the US and Iran over allegations that Iran is enriching uranium – a process that is different from fusion – to support a nuclear weapons programme. Sceptics doubt whether US trade sanctions will permit the collaboration. But LPP claimed in a written statement that the pact qualifies as an official US department of treasury exemption "which authorizes collaborating with academics and research institutions on the … creation and enhancement of written publications." LPP is scheduled to notify the president's council of advisors on science and technology of its Iranian partnership at 2pm ET on Friday in Washington DC.

How Can We Cope with the Dirty Water from Fracking? The nation's oil and gas wells produce at least nine billion liters of contaminated water per day, according to an Argonne National Laboratory report. And that is an underestimate of the amount of brine, fracking fluid and other contaminated water that flows back up a well along with the natural gas or oil, because it is based on incomplete data from state governments gathered in 2007. The volume will only get larger, too: oil and gas producers use at least 7.5 million liters of water per well to fracture subterranean formations and release entrapped hydrocarbon fuels, a practice that has grown in the U.S. by at least 48 percent per year in the last five years, according to the Energy Information Administration. The rise is quickest in places such as the oil-bearing Bakken Formation in North Dakota or the natural gas-rich Marcellus Shale underlying parts of New York State, Pennsylvania, Ohio and West Virginia.The problem is that the large volumes of water that flow back to the surface along with the oil or gas are laced with everything from naturally radioactive minerals to proprietary chemicals. And there are not a lot of cost-effective options for treating it, other than dumping it down a deep well. But as certain states that are experiencing drought begin to restrict industrial water usage, fossil-fuel companies are experimenting with traditional and untraditional water treatment chemistries and technologies to try to clean this dirty water—or limit its use in the first place.

Ohio Passes One of the Worst Fracking Laws in the U.S. - On May 24, the Ohio’s State Assembly passed Senate Bill 315—one of the worst fracking laws in the nation—by a 21-8 vote in the Senate and a 73-19 vote in the Ohio House that approves new regulations governing hydraulic fracturing in the Utica and Marcellus shale formations running under nearly half of the state. The shale gas provisions are part of a larger energy bill that also addresses Ohio’s renewable energy portfolio standard. The bill heading to Gov. Kasich’s desk fails to reinvest in Ohio communities, adequately protect Ohioans from the toxic impacts of the fracking industry and address the growing climate crisis. SB 315 will allow health and safety loopholes. It requires the gas industry to pay less than almost any other state in the country, exposing our communities to the worst excesses of the fracking industry. Doctors will be prevented from talking openly about the sickness they see in their patients, and the gas industry will keep profits flowing out of our communities. The rumblings you hear when this bill is signed is not the sound of another injection well caused earthquake—it’s the rumblings of a backlash against the politicians who have been bought by the gas industry and have chosen to sacrifice Ohio in return.

5/29/2012 -- Italy earthquakes = FRACKING! Two DOZEN people dead in two weeks !! - YouTube

Italian earthquakes: 800 aftershocks in Emilia-Romagna and ‘more to come’ - Emilia Romagna, the Italian region that has some of the country's finest culture and produces what many consider Italy's best food, was coming to terms on Tuesday with the idea that it could be shaking violently for years to come.Residents were told by experts that there was no telling when the spate of earthquakes would subside. "It is likely they could continue for years," said Giuliano Panza, professor of seismology at the University of Trieste. Since they were first thrown out of bed in the early hours of 20 May by a 6.0-magnitude quake, residents' nerves have been jarred by 800 aftershocks. But Tuesday's 5.8 jolt was nothing less than an entirely new earthquake, said Italy's civil protection chief, Franco Gabrielli. According to Giulio Selvaggi, the director of Italy's National Institute of Geophysics and Vulcanology, the two quakes originated from two entirely different faults deep below the surface. But he said they were caused by the same phenomenon. "It is down to the pressure caused as the Apennine mountains push slowly north under the Po valley," he explained. "The whole area has been shaking for a year, with shocks above 4.5, and we just cannot say if we have reached the climax yet."

Fracking boom spurs environmental audit - For Ohio, a Midwestern state hit hard by recession, the promise of an energy boom driven by hydraulic fracturing, or ‘fracking’, would seem to be a sure route to financial health. Far less certain is whether the technique has an impact on human health. Fracking uses high-pressure fluids to fracture shale formations deep below ground, releasing the natural gas trapped within. With the number of gas wells in Ohio that use fracking set to mushroom from 77 to more than 2,300 in the next three years, the state is the latest to try to regulate a rapidly growing industry while grappling with a serious knowledge gap. No one knows what substances — and at what levels — people near the gas fields are exposed to in the air and water, and what, if any, health threat they might pose. In a nod to those concerns, Ohio’s legislature passed a bill on 24 May, awaiting signing by the state governor as Nature went to press, that requires companies to disclose the chemicals they use during the fracking process and during the construction and servicing of the wells. However, the bill does not compel companies to divulge a complete list of the ingredients in their fracking fluid before it is pumped underground.  “There is a real lack of data,” says John Balbus, senior adviser on public health at the National Institute of Environmental Health Sciences who spoke at a workshop organized by the Institute of Medicine in Washington DC last month to discuss research strategies for studying the health impacts of gas extraction. “There’s a lot of variability from region to region, in the kinds of mixtures that need to be used for the specific geology.”

Fracking at top of Chevron, Exxon meetings -  Groups of protesters descended on the respective annual meetings in California and Texas. One of about 80 outside Chevron Corp headquarters in San Ramon waved a sign that said "Fracking is environmental rape," while others called on the company to better address its protracted legal battle in South America over oil pollution. Energy companies use hydraulic fracturing, or fracking, to create fissures in rock like shale that allow oil and gas to escape. In the process water, sand and chemicals are pumped at very high pressures into wells drilled deep into the ground. "If you think the reputational risks are bad with people coming from Ecuador, wait until they come from Pennsylvania and Colorado," said Larry Fahn, president of investor pressure group As You Sow, while arguing for a Chevron shareholder proposal on the risks of hydraulic fracturing.

Canada to force striking rail workers back to work - The Canadian government has introduced legislation to force striking workers at Canadian Pacific Railway to go back to work. Almost 5,000 staff took action at midnight last Wednesday, bringing traffic to a halt on 24,000 km (14,900 miles) of track. The government decided to take action after talks stalled over the weekend. Labour Minister, Lisa Raitt said the shutdown of Canadian Pacific's freight service was hurting the economy. "The strike can't go on," Ms Raitt told parliament. "We need to get the trains running again." The legislation was introduced on Monday and the government hopes striking workers will be back to work on Thursday. Canadian Pacific is the nation's second biggest railway firm and moves half of its potash, wheat and coal production. Union leaders are unhappy over the company's contribution to staff pension plans. 

Texas isn’t ready for bigger ships from Panama Canal expansion - Texas and other Gulf states may not be ready when their ship comes in.  A massive expansion of the Panama Canal is on track to be completed in about two years, making it possible for huge ships often carrying goods from Asia to bypass their usual stops in the Los Angeles/Long Beach area and instead sail directly to Texas and other states along the Gulf of Mexico, as well as the East Coast. From there, the freight could be put on trains and trucks and shipped across the country -- potentially generating billions of dollars and creating thousands of jobs not only on the coasts but also in major inland hubs such as Dallas-Fort Worth. But Texas and other Gulf states are woefully unprepared to handle the goods brought to the area on enormous ships soon to pass through the canal, several experts said. The region's ports aren't deep enough to handle the ships, although the Port of Houston plans to deepen its berths in front of its container terminals to 45 feet by 2014. Still, farther inland, highways and rail lines lack the capacity for additional freight traffic.  Officials in those states are scrambling to calculate what kinds of transportation improvements need to be made and how to pay for them. It's unlikely that major infrastructural improvements will be completed by the scheduled August 2014 opening date of the new canal locks, so advocates say the real question is how many years will go by before the states on the southern end of America's breadbasket make a genuine effort to steer more of the shipping business their way.

Plan to Pipe Tar Sands to East Coast Protested - Environmental justice protestors temporarily shut down a hearing into a proposal to have tar sand oil piped through Ontario. The hearing took place place in London, Ontario, on Wednesday. The three day hearing, held by the National Energy Board (NEB), is examining a proposal by Enbridge to reverse the flow of an existing pipeline (Line 9), which currently carries imported overseas oil west. Enbridge wants to instead use the pipeline to bring tar sands oil east. This oil may then be exported to Europe. After entering the hearing, protestors employed the People's Mic, where the crowd would echo back whatever was said by a spokesperson in order to project their voices. After a few minutes of the People's Mic commencing, most other attendees at the hearing exited the room. The NEB hearing was shut down for approximately an hour.  The spokesperson who led the Peoples Mic was arrested and then removed from the room. She was later released with a ticket for trespass

Center of gravity in oil world shifts to Americas - A host of new discoveries or rosy prospects for large deposits also has energy companies drilling in the Chukchi Sea inside the Arctic Circle, deep in the Amazon, along a potentially huge field off South America’s northeast shoulder, and in the roiling waters around the Falkland Islands.  Because oil is a widely traded commodity, analysts say the upsurge in production in the Americas does not mean the United States will be immune to price shocks. If Iran were to close off the Strait of Hormuz, stopping tanker traffic from Middle East suppliers, a price shock wave would be felt worldwide. But the new dynamics for the United States — an increasingly intertwined energy relationship with Canada and more reliance on Brazil — mean U.S. energy supplies are more assured than before, even if oil from an important Persian Gulf supplier is temporarily halted. The fracking ‘revolution’ Perhaps the biggest development in the worldwide realignment is how the United States went from importing 60 percent of its liquid fuels in 2005 to 45 percent last year. The economic downturn in the United States, improvements in automobile efficiency and an increasing reliance on biofuels all played a role. But a major driver has been the use of hydraulic fracturing. Conservative estimates are that oil and natural gas produced through “fracking,” as the process is better known, could amount to 3 million barrels a day by 2020.

Drill, Baby, Drill! More drilling doesn't necessarily mean more oil - The United States has a problem. An oil problem. No matter how many wells are drilled oil companies just can't seem to raise production to anywhere near the figures required to reach the holy grail of energy independence. Looking at the oil production data, active rigs in use and footage drilled over the last forty years it is clear that no matter how much investment is made are there just isn't the size and quality of oil producing fields left in the U.S. any more. Figure 1: U.S. Crude oil production (including lease condensate) and active rig count, January 1973 to January 2012. Various news items and opinion pieces have announced that the United States is entering an exciting new era of energy independence. Figure 1 shows that the truth is a bit more sobering. We can see that over the last 40 years the overall trend for crude oil production has been steadily decreasing. There are a few anomalies however. In the late 70’s and early 80’s the rig count climbed dramatically as a response to high global oil prices. This however only produced a very slight increase in oil production over the boom period. Once the bubble burst in 1985 crude oil production continued on its downward trajectory.  U.S. oil production begins rising for the first time in over 20 years.  This increase in oil production is what pundits have been hailing as a new era for U.S. energy independence. There are a number of reasons why this is overly optimistic and these will be explored below.

To Tap Arctic Oil, Russia Partners With Exxon Mobil - Russia is still the world's largest producer of oil and gas, but growth has stalled and to get to new supplies requires going to a very difficult place — the Arctic. "If you want to be in this business in 2020, 2025, you must think about the Arctic," says Konstantin Simonov, head of the National Energy Security Fund in Moscow. In the past month, Moscow has signed several deals with foreign oil companies designed to maintain Russia's position as the top producer. The most important deal, and the most lucrative, is a partnership between Exxon Mobil and Russian oil giant Rosneft. Exxon Mobil could eventually spend half a trillion dollars to look for and extract oil and gas in the Russian Arctic. The investment is enormous, but so are the potential rewards.

Abu Dhabi set to avoid Hormuz with pipeline - Abu Dhabi oil will be able to bypass the Strait of Hormuz in a matter of weeks thanks to the completion of a pipeline leading to the port of Fujairah.The 270-kilometre connection from Abu Dhabi's oilfields to the to Fujairah on the Indian Ocean is set to transport half of Abu Dhabi's oil, providing security for its core export amid fears of a western confrontation with Iran. "The pipeline will be operational in June," Sheikh Hamad bin Mohammed, the ruler of Fujairah, told Agence France-Presse in an interview. Twenty per cent of the world's oil, including all of Abu Dhabi's exports, travels by tanker through the Strait of Hormuz, a waterway that narrows to 39km at its narrowest.

Iran Looks to Reduce Reliance on the Straits of Hormuz with new Oil Terminal - Iran has been feeling increased pressure from US and EU sanctions against its oil industry, and as a result has on more than one occasion threatened to blockade the Straits of Hormuz, the busiest oil shipping channel in the world; a move that could severely disrupt global oil supplies and affect oil prices. Now, according to the news agency Shana, Iran has announced that the Iranian Oil Terminals Company (IOTC) plans to build a new oil export terminal on the Gulf of Oman as Bandar Jask, away from the Straits of Hormuz. Pirouz Mousavi, the managing director of IOTC said they also intend to build a pipeline to transport an extra one million barrels of oil per day to the Caspian Sea port of Neka; a move that will give them more exporting options and remove their own reliance on the Straits of Hormuz. Is it a good sign that Iran has threatened to disrupt global oil supplies by blockading the straits, and is now finding ways to reduce their own use of the straits, so that any incident there wouldn’t affect their own exports? No specific details have been provided about the dates of completion, the cost of development, or the expected capacity of the new terminal.

Iranian Oil Production Declines Further in April - Both IEA and OPEC detailed numbers for April oil production are now available.  The above shows the situation for Iran (not zero-scaled).  It appears that production is continuing to decline - down around 500kbd from the plateau in the mid-2000s, and down 300kbd from the post-great-recession plateau.  The rate of decline is accelerating. If this continues (with more sanctions to bite in June/July), it would appear that Iran might have to become less intransigent in negotiations over its nuclear program. Meanwhile in Saudi Arabia, production has eked out very small increases in the last few months and definitely seems to have established a new high a little above the 9.5mbd that appeared to be the practical ceiling on Saudi production in the 2000s.Looking at Iranian and Saudi production side-by-side: It appears that the Saudi increases are not quite offsetting the Iranian declines so far (though this is complicated by noting that the large increase to belatedly offset Libyan losses has not been removed as Libya has turned back on).

Europe’s oil bill is set to reach USD500 billion in 2012 - Europe is on track to spend over USD500 billion on oil imports this year, which is well in excess of the Greek government’s USD370 billion debt, the IEA’s Executive Director said on 23 May in Paris. Speaking at a debate on the outlook of the global economy organised by the Organisation for Economic Co-operation and Development, Maria Van der Hoeven stressed that although there has been a recent slide in oil prices, they remain at “worryingly high levels.” “Prices at these levels are forcing households to either cut back on spending on other items or to increase their debt; they are also undermining the profitability of companies that are unable to pass on fully higher input costs,” she said. From 2000 to 2010 the average amount spent on oil imports in Europe was USD182 billion a year. In 2011 oil imports reached a record of USD488 billion.

Night Thoughts in Hagsgate - There are times, at least for me, when the fate in store for industrial society can be seen with more than the usual clarity. I’m pondering another of those moments now, but the trigger this time isn’t a trackside glimpse or a memento in a repurposed warehouse. It’s the current flood of news stories, opinion pieces, and public statements by pundits of various kinds, all focused on one theme—the supposed irrelevance of peak oil.  Those of my readers who have managed to miss that torrent so far may find it helpful to spare a glance at this typical example of the species, which was forwarded to me by one of this blog’s readers.   The author, Timothy Worstall, is a senior fellow at the Adam Smith Institute in London, and a specialist in rare earth elements; he starts off by complaining that he doesn’t understand peak oil, goes on to demonstrate that fact in impressive detail, and finishes up with the sort of whopper that normally earns an F on a freshman paper in Geology 101. (No, Mr. Worstall, kerogen shales such as the Green River formation are not at all the same thing as oil-bearing shales such as the Bakken formation, and nobody yet has a viable way to extract oil from kerogen shales; I trust you provide better information to clients who ask your advice about rare earth elements.)  I wish I could say that this is an extreme example, but it’s not.   Look at other efforts to dismiss peak oil and you’ll find worse.  The question I’d like to raise is why this outpouring of misinformation and denial happens to be in full flood right now.

Jorgen Randers: Our Species' Biggest Risk is Our Lack of Coherent Long-Term Decision Making - Forty years ago, a group of researchers at MIT ran a study to address the question of how humans would adapt to the physical limitations of a finite planet. That study became the book, “Limits to Growth” It should have been a starting point for a critical discussion at the national -- or even global -- level. It could have led to the birthing of many practical and then-implementable initiatives that may have brought our unsustainable demographic, industrial and consumptive behavior under better control. But sadly, the book instead became a lightning rod for controversy. And decades later, the issues it warned of loom larger than ever. In this interview, Chris discusses our collective failure to act on this book's message with Jorgen Randers, one of the authors of “Limits to Growth and Limits to Growth: The 30-Year Update” as well as a new book “2052: A Global Forecast for the Next Forty Years.” While there are some differences in opinion between Jorgen and Chris, particularly on the acuteness of our resource predicament, both agree that continuing to pursue the status quo will result in a poorer quality of life for most of the world's denizens. We increasingly appear to be facing a future shaped either by design or disaster, and unless we actively decide to change our behavior intelligently, the latter outcome will prevail.

Part 10: Inter-Regional Trade Movements of Petroleum to and from Japan - It may seem odd that I separately cover Japan (JP) in this survey of the trade movements of all major regions of the world. After all Japan’s population is only 127 million (US international census bureau) which is less than half than the next smallest region by population, the former Soviet Union (FS) at 282 million. Japan, however, is still presently the third largest economy in the world, and not long ago was the second largest economy, a title Japan held for more than 40 years, before China overtook it in 2010. As you will see, as the former second and now third largest economy, Japan has a very high petroleum consumption rate, but virtually no domestic production, making it highly dependent on inter-regional petroleum imports. Indeed, more dependent than any of the other eight regions examined in this series. Without these imports, Japan’s economy would grind to a halt and its people’s standard of living would crash.  The dynamics of petroleum trade flow changes in Japan China and the remaining Asia Pacific region (rAP) over the last decade are quite interesting, and one that I will return to several times.

Gary Shilling On Copper, Oil And China - There are two commodities that are watched particularly closely for their abilities to predict the direction of the global economy: copper and oil. Economist Gary Shilling is bearish on both. Shilling recently invited Business Insider to his home where he explained to us, among other things, why copper is a more reliable economic indicator than oil. In this segment, he explains.  He also explains why he thinks China's economy is headed toward a hard landing

After Barreling Ahead in Recession, China Finally Slows - A nationwide real estate downturn, stalling exports and declining consumer confidence have produced what a Chinese cabinet adviser, quoted on the official government Web site on Thursday, characterized as a “sharp slowdown in the economy.” Though the Chinese economy continues to expand, construction workers are losing jobs in droves and retail sales grew last month at the slowest pace in more than three years. Investments in fixed assets have increased more slowly this year than in any year since 2001. The most striking feature of the slowdown is that it extends beyond the coastal provinces, which depend on exports and are closely linked to the global economy, to the country’s far more insular interior, including cities like Xi’an here in northwestern China. China’s unexpected economic difficulties are starting to unnerve investors in world markets, especially commodity markets, as China is the world’s largest consumer of most raw materials and the second-largest consumer of oil. A deepening slowdown would ripple across the world economy. Until now, China’s economy barreled ahead mostly unhindered as the main engine of global growth, even as Europe struggled with its government debt crisis and the United States limped along with a crippled housing market.

Greek Euro Exit Aftershocks Risk Reaching China - Greece, responsible for 0.4 percent of the world economy, now poses a threat to international prosperity as investors raise bets its days using the euro are numbered.  A Greek departure from the currency would inflict “collateral damage,” says Pacific Investment Management Co.’s Richard Clarida, a view echoed by economists from Bank of America Merrill Lynch and JPMorgan Chase & Co. At worst, it could spur sovereign defaults in Europe as well as bank runs, credit crunches and recessions that may spark more euro exits.  Global trade and financial ties mean the pain wouldn’t be confined to the euro area. JPMorgan Chase estimates a 1 percentage point slump in the euro countries’ economy drags down growth elsewhere by 0.7 percentage point. Exporting nations from the U.K. to China would suffer and commodity producer Russia would face falling oil prices. While the U.S. may fare better, even it would feel echoes similar to the financial infection following the bankruptcy of Lehman Brothers Holdings Inc.  “An awful lot depends on what is done to limit the contagion within Europe,” said Barry Eichengreen. “If too little is done then, to use a financial term, all hell breaks loose. I can imagine things playing out that way.”

Is Chinese real estate nearing a tipping point? -  China’s property developers — who last year contributed a collective 13 per cent of GDP — seem determined to hang on.  Despite months of falling prices in most cities, completions are powering ahead. Chinese real estate investment reportedly rose 23.5 per cent in Q1, year-on-year. And yet new construction rose only 0.3 per cent and sales of residential and commercial property fell 14.6 per cent. As Patrick Chovanec points out, despite accounting for the aforementioned 13 per cent of GDP, there was little questioning of the incongruence of these Q1 2012 numbers which showed steeply rising investment in a sector that was actually shrinking in terms of revenue. And yet, while we and others have wondered about a wave of developer defaults was imminent, there’s been only the occasional reports of smaller developers running into difficulties. It *might* be about to change, however. Inventories are well past the 12-month mark and are forecast to reach about 36 months by the end of this year, according to Standard Chartered. Last week we wrote about some research from Nomura arguing that a month-on-month collapse in housing starts in April (down 27 per cent) signalled a turning point. Standard & Poor’s are also dubious about the sector’s health: The key issues remain high inventory and competition, which could lead to a price war. In our view, the government is unlikely to materially change its stance on curbing speculation in the property sector.

Drooping Credit Curve Signals Inflection Point (Beijing)–Orders are down, raw material prices and unsold inventories are up, and overseas markets are looking bleaker by the day. So uncertain is the business environment that many export-oriented Chinese manufacturers can think of nothing more than short-term survival. Borrowing from a bank for new investment is the last thing on their minds as the second half of 2012 gets under way. Cooling demand for expansion-oriented loans has been mirrored, for example, by the downward trend since February in the one-year Shanghai interbank offered rate. The Shibor for bank-to-bank loans declined to around 5.1 percent in late April from nearly 5.24 percent just three months earlier. Technically, commercial borrowing is still very much alive: A central bank report said growth of fixed-asset investment loans from banks reached 649.6 billion yuan in the first quarter, 209 billion yuan less than the same period last year. Businesses alone borrowed an extra 277 billion yuan during the first three months compared to the same period last year.

Numbers Show China’s Still Working -- In the midst of gloom about China’s economic outlook, new labor market data provides an optimistic counterpoint — and a possible explanation for why a long-anticipated stimulus has been slow to arrive. Data for 2011 shows private sector wages growing 18.3% year-over-year, up from 14.1% in 2010. Wages in the all-important manufacturing sector rose 20.1%. That’s good news for two reasons. First, it shows China’s labor markets are tight, with strong demand for labor – a sign the economic engine is not sputtering out. Second, 2011 was the first year in the short history of the data series that China’s private sector wage growth exceeded growth in nominal GDP. That means household income is growing faster than the economy as a whole, a crucial part of China’s rebalancing agenda. The bad news is that higher wages dent the competitiveness of China’s exporters, and firms in low value-added sectors like textiles and tools are already suffering. But China’s wages are starting from a low base, 4.2% of the level in the U.S. in 2008 according to the U.S. Bureau of Labor Statistics. That means rapid growth can run for a while before China’s low-wage status is eroded.

China to be top consumer market in '15 - China's Commerce Minister Chen Deming said Monday that China is expected to become the world's largest consumer market in 2015. The volume of consumer retail sales will surpass $5 trillion in 2015 amid an accelerated urbanization rate and the rise of people's incomes, Chen said at the opening ceremony of the first Beijing International Fair for Trade in Service. The number of outbound tourists is expected to reach 88 million at that time, he said. Demand for home services, education and training, medical care, financing, technology and tourism is booming, he said. China currently ranks fourth in the world in terms of service trade volume, with $419.1 billion in 2011 compared with $66 billion in 2000.

China may be looking to immigration to ease labor shortages - Global demographic projections show divergence in labor force growth among world's major economies. We know that Japan's labor force is on a steady decline. The US labor force is expected to increase at a fairly constant pace, supporting a re-emerging manufacturing base.  China's labor force on the other hand has been rising until recently but has now peaked and is expected to decline going forward, The one-child policy has had a profound impact on China's demographics, resulting in a "top-heavy" population age structure (not as bad as Japan, but certainly visible). What's more, it caused a gender imbalance among the younger generations. Traditional families faced with one-child limitation, "chose" to have boys - something China is desperately trying to correct.Clearly this decline in labor force is inconsistent with the 7-8% GDP growth targeted by Beijing. This is particularly difficult given China's "labor-intensive" massive manufacturing base. To deal with this issue, China is looking for creative solutions. One of them is immigration - something that allowed the US for example to maintain growth for generations. And who is willing to come to China to work in a factory? The North Koreans of course.

The Shifting U.S.-China Trade Picture -The standard story of U.S.-China trade over the last decade or so goes like this: Huge U.S. trade deficits, matched by huge Chinese trade surpluses. One underlying reason for the imbalance is that China has been acting to hold its exchange rate unrealistically low, which means that within-China production costs are lower compared to the rest of the world, thus encouraging exports from China, and outside-China production costs are relatively high, thus discouraging imports into China. This story is simplified, of course, but it holds a lot of truth. But it's worth pointing out that these developments are fairly recent--really just over a portion of the last decade--and not a pattern that China has been following since its period of rapid growth started back around 1980. In addition, these development seem to be turning: the U.S. trade deficit is falling, China's trade surplus is declining, and China's exchange rate is appreciating. Here's the evolution in graphs that I put together using the ever-helpful FRED website from the St. Louis Fed1.First, here's a look at China's balance of trade over time. The top graph shows China's  current account balance since 1980, roughly when China's process of economic growth got underway. Notice that China a trade balance fairly close to zero until the early 2000s, when the surpluses took off. Because the first graph stops in 2010, the second graph shows China's trade balance from 2010 through the third quarter of 2011. Clearly, China's trade surplus has dropped in the last few years, and in all likelihood will be lower in 2011 than in 2010.

Cash Exiting China, by Tim Duy: Something that I have thinking about for a few weeks - and was reminded of reading Ryan Avent this morning - is the series of pieces at FT alphaville regarding the outflow of cash from China. See here and here and here. The thinking had been that the renminbi was a one-way bet as China moved forward with capital account liberalization as investors rushed to be part of the Chinese story. The growing exodus of cash, however, is calling that story into question. Moreover, I am interested in how much of the outflow is attributable to a generalized rush to safety as a result of the European crisis versus how much is attributable to capital flight due to a a deteriorating economic environment inside China itself. I am reminded of this story from the Wall Street Journal earlier this year: And yet, while the party touts the economic success of the "Chinese model," many of its poster children are heading for the exits. They are in search of things money can't buy in China: Cleaner air, safer food, better education for their children. Some also express concern about government corruption and the safety of their assets. Domestic money in China will be the first to head for the exit - insiders will always know more than outsiders about the underlying economic conditions. So the exodus of cash could indicate that the Chinese story is coming to a close - and that will have significant consequences for the global economy.

China PMI Retreats More Than Expected in May - China's economy betrayed signs of a broadening slowdown as surveys of its vast factory sector showed momentum eased in May, signalling a deeper-than-forecast deterioration in demand at home and abroad and the likelihood of more policy easing. The official purchasing managers' index - covering China's biggest, mainly state-backed firms - fell more than expected to 50.4 in May, the weakest reading this year and down from April's 13-month high, with output at its lowest since November 2011. The HSBC China manufacturing PMI, tracking smaller private sector firms, retreated to 48.4 from 49.3 in April - its seventh straight month below the 50-mark that demarcates expansion from contraction - with the employment sub-index falling to 48.1, its lowest level since March, 2009. "Growth in Q2 is likely to slow, probably below 7.5 percent year-on-year. That puts the annual growth target at risk and the risks continue to increase because the external environment is weakening,"

China and the Impending Global Slowdown - Even before the newest portents of a slowdown, [0] it was clear that 2012 gains in world output were going to be highly reliant on Chinese growth. Figure 1 shows that the Eurozone switches to a net drag on world growth. China’s contribution is thus a much larger share of total world growth. That is why the news from China is consequential (and I think the April IMF forecast is a little optimistic with respect to Eurozone growth, given recent developments, both policy and economic). From the World Bank’s China Quarterly Update, published in April: Clearly, a slowdown is underway. In addition, a domestic source of growth –- namely the property market –- is cooling off. With price pressures declining, China has some flexibility in terms of response. Monetary policy is easing already, by way of decreased reserve requirements. More likely fiscal policy will be stressed, as China has more fiscal space [1] than countries that engaged in reckless tax cuts at the beginning of the last decade [2]. (Although see Eswar Prasad's arguments regarding how China should structure its fiscal response [3]Just because there is a government reaction function does not mean, however, that Chinese policymakers can actually hit the target.

China And Japan Dropping Dollar Cross Rate System, Will Transact Directly - While various three letter economic schools of thought continue sprouting left and right, in an attempt to validate endless spending predicated on one simple thing: transitory reserve currency status, and we emphasize transitory, reality moves on, oblivious of what economic theoreticians believe it should be doing. As Yomiuri Shimbun reported last night, China and Japan are set to launch direct currency trading, bypassing the dollar, and the associated benefits and risks, entirely. "But how can that be?" dollar purists will scream. After all, when one bypasses the dollar, one commits blasphemy to a reserve currency. Somehow we think China gets that. From the AP: "Japan and China are expected to start direct trading of their currencies as early as June as part of efforts to boost bilateral trade and investment, according to reports. With the planned step, exchange rates between the yen and the yuan will be determined by their transactions, departing from the current "cross rate" system that involves the dollar in setting yen-yuan rates, Kyodo News said on Saturday."

Japan as "Role Model" - Krugman - In my interview with Martin Wolf, I joked about apologizing to the emperor over Japanese policy — not because it was good, but because our policy in response to the liquidity trap has been even worse. I thought it might be useful to have some indicator of what I’m talking about. So, here’s the employment-population ratio of men 15-64 in Japan and the United States since 1991, when Japan’s woes are often considered to have begun. Why men as opposed to both sexes, and why the age limitation? Basically, to abstract from social change and demography — Japan has lagged the US in terms of women in paid labor, and also of course has a rapidly aging population. I don’t mean to suggest that only prime-age men matter; this is just a relatively clean indicator. And here’s what it looks like: For all its woes, Japan has never experienced the kind of employment collapse we’ve suffered. That’s the sense in which we’re doing far worse than the Japanese ever did. So as I said, in a way Japan is no longer a cautionary tale; it’s still a lousy story, but compared to us it almost looks like a role model.

Indonesia Proposes 40% Ownership Cap on Banks Published - Indonesia's central bank said on Thursday it is proposing to cap single ownership in the country's banks at a maximum 40 percent for new investment, from up to 99 percent currently. Halim Alamsyah, the central bank deputy governor responsible for banking supervision, told analysts on a conference call that individuals or families can only own up to 30 percent of local lenders while financial institutions can own up to 40 percent. "This new regulation will only hold for new initiatives, new investment...there will not be a retroactive regulation," said Alamsyah. The rule, if it goes ahead, could scupper a $7.3 billion bid by Singapore's DBS Group Holdingsfor Indonesia's Bank Danamon.

Global Inflation Cooled in April - The annual rate of inflation across developed economies fell again in April as oil and food prices rose more slowly. Figures released by the Organization for Economic Cooperation and Development on Tuesday showed consumer prices in its 34 member countries rose 2.5% in the 12 months to April, a smaller increase than the 2.7% rise in the 12 months to March. It was the third straight month of decline in the rate of inflation, and gives leading central banks more room to cut their key interest rates or provide other forms of stimulus to counter a global economic slowdown. Energy prices rose 4.8% in the 12 months to April, having risen 6.5% in the 12 months to March. That was the slowest annual increase since August 2010. Food prices rose 3.1% in the 12-month period to April, having risen 3.5% in the 12 months to March. Excluding energy and food, the core rate of inflation rose to 2% from 1.9% in March. Although the inflation outlook is uncertain and is linked to prospects for oil prices, the decline in inflation rates may encourage central banks to ease policy in coming weeks.

Vital Signs: Low Shipping Costs for Bulk Goods - Rates to ship bulk goods across seas are falling. The Baltic Dry Index, which tracks the cost of chartering ships to transport coal, grain, iron ore and other commodities, settled at 1034 last week, falling more than 10% this month. The index, at one time a leading indicator of global economic activity, was as high as 1922 in December.

The Broken Legs of Global Trade - The Doha Round, the latest phase of multilateral trade negotiations, failed in November 2011, after ten years of talks, despite official efforts by many countries, including the United Kingdom and Germany, and by nearly all eminent trade scholars today. While trade officials in the United States and the European Union blamed the G-22 developing countries’ excessive demands for the failure of earlier negotiations in Cancún in 2003, there is general agreement that this time it was the US whose unwarranted (and unyielding) demands killed the talks. So, now what? The failure to achieve multilateral trade liberalization by concluding the Doha Round means that the world lost the gains from trade that a successful treaty would have brought. But that is hardly the end of the matter: the failure of Doha will virtually halt multilateral trade liberalization for years to come.  Of course, multilateral trade negotiations are only one of three legs on which the World Trade Organization stands. But breaking that leg adversely affects the functioning of the other two: the WTO’s rule-making authority and its dispute-settlement mechanism. The costs here may also be large.

Aid Works - Jeffrey D. Sachs - The critics of foreign aid are wrong. A growing flood of data shows that death rates in many poor countries are falling sharply, and that aid-supported programs for health-care delivery have played a key role. Aid works; it saves lives. One of the newest studies, by Gabriel Demombynes and Sofia Trommlerova, shows that Kenya’s infant mortality (deaths under the age of one year) has plummeted in recent years, and attributes a significant part of the gain to the massive uptake of anti-malaria bed nets. These findings are consistent with an important study of malaria death rates by Chris Murray and others, which similarly found a significant and rapid decline in malaria-caused deaths after 2004 in sub-Saharan Africa resulting from aid-supported malaria-control measures.

Satyajit Das: The Great Pretender – India’s Economic Past & Future, Part 1: “India Shining”- In the aftermath of the global financial crisis, optimists hoped that the BRIC (Brazil Russia India China) would drive the global economic engine. But China’s economic growth has slowed to its lowest rate in three years. Brazil’s economic growth has fallen from around 7.5% to under 3%. Russia’s economy is heavily dependent on oil and energy prices. India also has stalled. This 3-part paper looks at the development and future trajectory of the “I” in the “BRIC”. The first part looks at the background to India’s recent rise. Despite the world and its citizens earnest desires, India seems destined to never fulfil its economic potential.

Satyajit Das: The Great Pretender – India’s Economic Past & Future, Part 2: “A Sea of Troubles” - -This 3-part paper looks at the development and future trajectory of the “I” in the “BRIC”. The second part looks at the India’s current problems. In late 2011, the Indian government’s 12th five-year plan forecast growth of 9% between 2012 and 2017. By early 2012, India’s growth had slowed to around 6%, high by the standards of developed countries but well below the levels required to maintain economic momentum and improve the living standards of its citizens. Elements of the “India Shining” story remain intact – the demographics of a youthful population, the large domestic demand base and the high savings rate. Increasingly, India’s problems – poor public finances, weak international position, structurally flawed businesses, poor infrastructure, corruption and political atrophy- threaten to overwhelm its future prospects. In recent years, India has consistently run a public sector deficit of 9-10% of GDP, including the state governments and off-balance-sheet items.

Satyajit Das: The Great Pretender – India’s Economic Past & Future, Part 3: Political Atrophy - This 3-part paper looks at the development and future trajectory of the “I” in the “BRIC”. This third part looks at the India’s inability to confront its current problems. India’s growth has slowed to around 6%, high by the standards of developed countries but well below the levels required to maintain economic momentum and improve the living standards of its citizens. The demographics of a youthful population, the large domestic demand base and the high savings rate all remain positive. But increasingly, corruption and political atrophy threaten to overwhelm its future prospects. Petty corruption by poorly paid local officials has been common in India for decades. The real problem is a deep-seated and endemic corruption on a large scale, highlighted by scandals surrounding the issue of telecommunication licenses and also sales of coal assets. A 9-month investigation by the auditor and Central Bureau of Investigation found that the Ministry of Communications and Information Technology sold licences for the use of spectrum for mobile telephony bandwidth at below market prices to telecoms companies in 2008. The report found that 85 of the 122 licenses were granted to companies that “suppressed facts, disclosed incomplete information and submitted fictitious documents”. The sale cost the Indian government and citizens lost revenues of around US$39 billion.

Tales of India’s Economy Twistier Than Kama Sutra - In 2006, Foreign Affairs, among many other periodicals, proclaimed India to be “a roaring capitalist success story.” This story, we are now increasingly told, is over. The rate of growth in India’s gross domestic product has slowed to slightly more than 6 percent from the peak of about 10 percent that once excited fantasies of India overtaking China. The rupee is plunging. Standard & Poor’s downgraded India’s credit rating to “negative” from “stable.” The next stage is “junk,” if it loses its BBB- grading.  Corruption and India’s threat of retroactive taxes on companies are scaring away foreign investors. India’s own captains of industry are looking for more opportunities abroad.  Still, is it premature to bring down the curtains on the “India Growth Story”? To be sure, foreign investment in India sparked a retail credit boom -- and visions of hundreds of millions of middle-class Indians achieving the purchasing power and consumption patterns of their European and American peers. Total GDP grew, even though employment had no corresponding increase, and a terrible agrarian crisis caused by high indebtedness, drought, failed crops and international competition -- which compelled some 200,000 farmers to commit suicide -- didn’t rapidly boost mass consumption.

Report Uncovers True Scope of India’s ’Black Money’ - It would appear from India's unnaturally low taxpayer base, widespread anecdotal evidence of tax evasion, and lack of procedural clarity and prosecutorial energy on many aspects of tax collection that the country's Ministry of Finance, the Department of Revenue, and the Central Board of Direct Taxes are incapable of working cohesively. Nonetheless, these bodies spoke in one voice last week through a "white paper" on the problem of black money in India that was tabled in Parliament by Finance Minister Pranab Mukherjee, who said in a prefatory note: Two issues have been highlighted in this debate. First, several estimates have been floated, often without adequate factual basis on the magnitude of black money generated in the country and the unaccounted wealth stashed aboard. Secondly, a perception has been created that the Government’s response to address this issue has been piecemeal and inadequate. This document seeks to dispel some of the views around these two issues and place the various concerns in a perspective.Mukherjee is right. The issue of black money and corruption is one that greatly inflames Indian people, especially the country's middle class, which over the years has come to think of this problem as a leech that is draining India of its vigor

Indian growth weakest in 9 years as rupee slides (Reuters) - India's economic growth slumped to its lowest level in nine years in the first three months of 2012, marking a dramatic slide in the fortunes of a country whose economy boasted nearly double-digit growth before the global recession. "Urgent and bold steps are immediately needed to prevent the economy from descending into a full blown crisis. This must be averted at all costs," said Rajiv Kumar, secretary-general of the Federation of Indian Chambers of Commerce and Industry. The economy grew 5.3 percent in the last quarter from a year earlier, a sharp slowdown from 9.2 percent growth in the last quarter of the previous year, government data showed. The figures were the latest confirmation that the slowdown of Asia's third-biggest economy is deepening. Finance Minister Pranab Mukherjee blamed the weak data on the poor performance of the manufacturing sector, which shrank 0.3 percent from a year earlier, and promised to take "all necessary steps" to trim the country's ballooning budget and current account deficits, which are a major drag on growth. The data was released as the rupee plunged to yet another record low. Adding to a sense of crisis, a general strike called by opposition parties to protest a steep petrol price hike shut down government offices and shops and stalled trains and buses in some of the country's 28 states.

India's GDP growth hits a wall  - Concerns about India's growth that were reflected in the sharp decline of the rupee (see this post) turned out to be quite justified. India's GDP is in free-fall - with growth well below the levels of 2008-09 global recession. One could argue that 5% is still respectable when it comes to GDP growth. Not for India. Reuters: - India's economic growth slumped to its lowest level in nine years in the first three months of 2012, marking a dramatic slide in the fortunes of a country whose economy was boasting nearly double-digit growth before the global recession.  "Urgent and bold steps are immediately needed to prevent the economy from descending into a full blown crisis. This must be averted at all costs," said Rajiv Kumar, secretary-general of the Federation of Indian Chambers of Commerce and Industry.  The economy grew 5.3 percent in the last quarter from a year earlier, a sharp slowdown from 9.2 percent growth in the last quarter of the previous year, government data showed. Finance Minister Pranab Mukherjee blamed the poor performance of the manufacturing sector, which shrank 0.3 percent from a year earlier, for the slowdown.

Counterparties: The BRICs miracle may be ending - The economic miracle of the BRICs, which are estimated to account for more than half of global growth in the last three years, could be coming to an end. Today we learned that India’s economy grew at a rate of 5.3% in the first quarter, down from 9.2% over the same period last year and the slowest pace of expansion in nearly a decade. Walter Russell Mead sees the causes for the falloff as internal and  self-inflicted: “Parliament is paralyzed, economic reforms stall before takeoff, and the government is plagued by corruption scandals”. India is, of course, the vowel that anchors the BRICs, and expectations are high. As Sober Look highlights: “one could argue that 5% is still respectable when it comes to GDP growth. Not for India.” And certainly not for China, where there are not just concerns over the validity of economic data but also the fear that the economy may have been knocked off its 8% growth trajectory and into a recession. Chinese Premier Wen Jiabao has called for the government to increase its focus on “stabilizing growth”, but it’s uncertain whether or not that means stimulus is on the way. And as the US economy continues its tepid recovery and European growth concerns intensify, Matt Yglesias is dire and direct on the potential effects of slowing growth in the BRICs: “This time around, if the rich countries can’t get our act together, the whole world will spiral into recession”.

Global economic crisis: China, India, Brazil are slowing…America is still recovering from the Great Recession and Europe is melting down, yet from a global perspective, the economy has never been as healthy or prosperous. Sadly the good news seems to be coming to an end in Brazil, China, and India, and that’s horrible news for us. The first half of May saw a staggering 22 percent year-on-year drop in Brazilian heavy vehicle purchases. Overall economic growth slowed last year to a bit under 3 percent, and Brazil’s finance minister recently had to cut the 2012 growth forecast to a number many private forecasters think is still too high.  And problems for Brazil aren’t just problems for Brazil, as neighboring Argentina (and other smaller countries like Uruguay and Paraguay) rely on Brazil to buy their exports. More alarmingly, both China and India are running into trouble. Catch-up growth, in which a poor country improves its public policy, begins importing foreign production techniques, and gets rapidly richer is a time-honored Asian tradition. We saw it in Japan, then South Korea, then Taiwan and other Asian “tiger” economies in the 1980s and ’90s. China and India are so large that their catch-up growth was able to raise the entire worldwide rate of economic growth. That’s why the world economy kept growing through the 2008-09 financial calamity.The slowdown in India, which remains a much poorer country than China, is very alarming. Even as its economy surged recently, the country did little to raise the productivity of the agricultural sector in which most Indians work

World-Wide Factory Activity, by Country - A global manufacturing slowdown took hold in May, as Europe weighed heaviest on world-wide factory activity. The JPMorgan Global Manufacturing Purchasing Managers’ Index, a broad measure of manufacturing activity across the world, fell 0.8 point to 50.6 in May, its lowest reading in five months. The reading above 50 signals that global activity still is expanding. That’s thanks in large part to a continued expansion in the U.S. The U.K. and euro zone indexes both were at three-year lows. An official figure from China indicated that the sector there continues expanding, though at a reduced rate. But a figure released by private companies Markit and HSBC indicated that the nation’s factory activity was contracting. “The rate of expansion in global manufacturing production slowed sharply in May, as growth of total order books remained lackluster and international trade volumes posted a marginal decline,” said David Hensley, director of global economics coordination at J.P. Morgan. “The sector is hitting a softer patch heading into mid-year and this is being reflected in reduced cost inflationary pressures and lower commodity prices.” The following chart lists PMIs from a variety of countries. Readings above 50 indicate expansion. Click any column head to re-sort.

Asia Exposed - Stephen Roach -  Asian authorities were understandably smug in the aftermath of the financial crisis of 2008-2009. Growth in the region slowed sharply, as might be expected of export-led economies confronted with the sharpest collapse in global trade since the 1930’s. But, with the notable exception of Japan, which suffered its deepest recession of the modern era, Asia came through an extraordinarily tough period in excellent shape. That was then. For the second time in less than four years, Asia is being hit with a major external demand shock. This time it is from Europe, where a raging sovereign-debt crisis threatens to turn a mild recession into something far worse: a possible Greek exit from the euro, which could trigger contagion across the Eurozone. This is a big deal for Asia. Financial and trade linkages make Asia highly vulnerable to Europe’s malaise. Owing to the former, the risks to Asia from a European banking crisis cannot be taken lightly. Lacking well-developed capital markets as an alternative source of credit, bank-funding channels are especially vital in Asia. Indeed, the Asian Development Bank estimates that European banks fund about 9% of total domestic credit in developing Asia – three times the share of financing provided by banks based in the United States. The role of European banks is especially significant in Singapore and Hong Kong – the region’s two major financial centers. That means that Asia is far more exposed to an offshore banking crisis today than it was in the aftermath of Lehman Brothers’ collapse in 2008, which led to a near-meltdown of the US banking system.

10 Year Bonds Around the World - The table above was constructed right before the payroll report. It shows a snapshot of the lowest 10-year yields on the planet. The US has the 11th lowest 10-year yield. The Swiss yield of 0.48% is the lowest 10-year ever recorded anywhere. As much as the US 10 year is a source of awe — it hit 1.44 this morning after the NFP report — there are numerous 10-year yields lower around the world showing how intense the flight to quality bid has become. Long term 10 Year chart after the jump

Inflation-targeting and Forex intervention: Are two targets better than one? -  The global financial crisis has reminded emerging market economies, if they needed reminding, that capital flows can be highly volatile and that crises need not be home grown. Emerging markets have been affected in a variety of ways, not least by the sharp ups and downs in exchange rates that volatile capital flows engender. These ups and downs may be less benign in emerging markets than they might be in advanced economies for a number of reasons. Before the global crisis, central banks could reply ‘inflation targeting’ to virtually any question about their policymaking and the ‘Great Moderation’ seemed to back them up. The crisis has put a stop to this smugness. Central banks are now engaged in emergency evasive manoeuvres and are scrambling for new intellectual anchors. This column argues that emerging market central banks should view both price and exchange-rate stability as targets.

Lunch with the FT: Paul Krugman - (interview) The Nobel Prize-winning professor of economics talks to Martin Wolf about what Japan got right, what the Federal Reserve got wrong and how the eurozone can be saved

Austerity and Debt Realism - Kenneth Rogoff - Many, if not all, of the world’s most pressing macroeconomic problems relate to the massive overhang of all forms of debt. In Europe, a toxic combination of public, bank, and external debt in the periphery threatens to unhinge the eurozone. Across the Atlantic, a standoff between the Democrats, the Tea Party, and old-school Republicans has produced extraordinary uncertainty about how the United States will close its 8%-of-GDP government deficit over the long term. Japan, meanwhile is running a 10%-of-GDP budget deficit, even as growing cohorts of new retirees turn from buying Japanese bonds to selling them. Aside from wringing their hands, what should governments be doing? One extreme is the simplistic Keynesian remedy that assumes that government deficits don’t matter when the economy is in deep recession; indeed, the bigger the better. At the opposite extreme are the debt-ceiling absolutists who want governments to start balancing their budgets tomorrow (if not yesterday). Both are dangerously facile.The debt-ceiling absolutists grossly underestimate the massive adjustment costs of a self-imposed “sudden stop” in debt finance. Such costs are precisely why impecunious countries such as Greece face massive social and economic displacement when financial markets lose confidence and capital flows suddenly dry up.

The Euro: an alternative moral tale - Part of the austerity mindset that I talked about in the context of the Irish referendum is the belief that transfers from creditors to debtors are unfair (HT MT) because they result from the feckless behaviour of the debtor. There is a clear parallel with the attitude to benefit recipients within a society, which Chris Dillow talks about here. I do not want to get into the economics or politics of attitudes of this kind, but just claim that they are important in influencing policy, a position I think David Glasner supports here. Instead I want to confront this mindset with an alternative moral tale. Let’s talk about the Core countries and the Periphery, because I want to look at why they became creditors and debtors.

A Power Vacuum is Killing the Eurozone -- That is the title of my latest column, here is one excerpt: We thus face the danger that the euro, the world’s No. 2 reserve currency, could implode.  Such an event wouldn’t be just another depreciation or collapse of a currency peg; instead, it would mean that one of the world’s major economic units doesn’t work as currently constituted. We are realizing just how much international economic order depends on the role of a dominant country — sometimes known as a hegemon — that sets clear rules and accepts some responsibility for the consequences.  For historical reasons, Germany isn’t up to playing the role formerly held by Britain and, to some extent, still held today by the United States.  (But when it comes to the euro zone, the United States is on the sidelines.) THERE appears to be a power vacuum, and the implications are alarming. We may be entering a new world where international cooperative arrangements, in environmental areas as well as finance, are commonly recognized as impossible.  If the core European nations cannot coordinate effectively, what can we expect in dealings with China, Russia and other countries that have less of a common background and understanding?

Hard cash for tough times - FT - If bank notes ever stop coming out of ATMs, that produces existential shock – even if cyber bank accounts are full. In recent days, pundits have asked plenty of theoretical, abstract questions about what a eurozone bank run might look like. Peter McNamara lives with that issue, up close and personal, every day. The reason? After a career as a banker and analyst, he is now executive chairman of NoteMachine, a company that runs ATMs across much of the eurozone. So, with political tensions rising in the region, McNamara and his team are now in a state of high alert, battling to ensure that the ATMs will always be stocked, in case consumers ever panic and rush to grab paper notes. After all, as McNamara recently explained to me in a TV studio, if, during a crisis, cash-laden trucks suddenly arrive at ATMs, that in itself can spark alarm. And if those ATMs actually run out of cash, it is doubly worse. Thus, companies such as his are working to keep the machines constantly full – but in a manner the public never sees, or even has reason to think about.

German taxpayers face re-denomination loss from TARGET2 - As the risks of Greek exit from the EMU increased, the mainstream financial media began to pay attention to growing TARGET2 issues within the Eurosystem. A recent Bloomberg article did a good job in describing the situation. But strangely, rather than referring to it as TARGET2 - the technical term, they called it the German "bailout" (although they've written about the topic before).Bloomberg: - Here’s how it worked. When German banks pulled money out of Greece, the other national central banks of the euro area collectively offset the outflow with loans to the Greek central bank. These loans appeared on the balance sheet of the Bundesbank, Germany’s central bank, as claims on the rest of the euro area. As opposed to the claims of the private banks, the Bundesbank’s claims were only partly the responsibility of Germany. If Greece reneged on its debt, the losses would be shared among all euro-area countries, according to their shareholding in the ECB. Germany’s stake would be about 28 percent.  Let's help Bloomberg with the explanation here. To start with, this is the "tricky part" - it's actually fairly straightforward. The arrows point to the direction of claims. And here is how the Bundesbank claims grew. Bundesbank refers to it as "BBK01.EU8148: External position of the Bundesbank since the beginning of EMU / Claims within the Eurosystem / Other claims (net)".  For those who have trouble finding it on the newly redesigned Bundesbank website, you can plot it using Bloomberg charts here (just extend the period to 5 years to see the full effect

Europe’s biggest fear: A run they cannot stop - It’s been a week since shares in Bankia plummeted on reports, later denied, that customers were pulling deposits out of the Spanish lender. Fears of a full-scale bank run in Greece have not yet materialised. But the possibility of a deposit run in Europe's peripheral states is still very much alive. It is also the thing that policymakers are least prepared for.  As with most aspects to the euro crisis, the usual answers are not much help. One tactic is to show customers the money. Old hands of emerging-market bank runs talk of how they used to pile cash up in full view of panicking customers so that they could see how well stocked the banks were with money. The equivalent now is to let the central bank provide enough liquidity that the ATMs always spit out cash. But if the idea is to get your hands on euros today in case of a currency redenomination tomorrow, then you will still want it out of the bank and under the mattress. Another response to runs is to calm worries about the solvency of specific institutions by beefing up the scale of deposit guarantees. In the first phase of the crisis, which now seems almost innocent in its simplicity, that is what governments did. But that makes the problem worse, not better, if government solvency is at the root of the problem.

Another confirmation of run on Spanish banks - There have been some questions about the veracity of the ISI data shown in the post labeled "Run on banks in Spain is very real". As a confirmation of those results we provide the latest data from the ECB. The chart below shows quarter over quarter changes in total deposits by the "real economy" (excluding deposits by banks with each other) at German and Spanish banks. The data is through Q1 of this year. Given the record spreads of Spanish to German bonds was saw on Friday, does anyone believe this situation has improved since the end of the first quarter?

Spain's Bankia set for massive bailout - Spain's fourth-biggest bank Bankia says it is certain of securing the 19 billion euros ($24 billion) in state aid it is seeking in the largest bank bailout in the country's history. Bankia is considered key to the country's financial system, and a failure would contaminate the entire banking sector. The plight of Bankia - which holds some 10 per cent of the nation's bank deposits - has added to the concerns over the massive debt crisis gripping Spain and the rest of the eurozone. Bankia president Jose Ignacio Goirigolzarri has sought to reassure investors and the public about the future of the struggling bank at a press conference called the day after it announced huge losses, and asked for a government rescue. "I am certain that the Spanish state will obtain the financing so we will receive the 19 billion euros. That's the commitment," said Mr Goirigolzarri, adding that he expected to get the funds in July.

Spain may recapitalize Bankia with government debt - Spain may recapitalize Bankia with Spanish government bonds in return for shares in the bank which last week asked for rescue funding of 19 billion euros ($24 billion), a government source said on Sunday. Bankia could use the sovereign paper as collateral to get cash from the European Central Bank, forcing the ECB to get involved with restructuring Spain's banking sector, laid low by lending to property developers in a boom that ended in 2008. ECB policymakers, who have pumped over 1 trillion euros into Europe's financial system in recent months, are resisting pressure to do more to shore up the euro zone. "The biggest problem here is that the ECB could object. That's a legal issue, but technically it is possible," said Jose Carlos Diez, economist at Intermoney Valores.

Spain's borrowing costs near crisis level  - Spain's borrowing costs have jumped as lingering worries over the state of the country's banking system and the cost to the state of nationalising Bankia continued to pound sentiment. Yields on Spain's 10-year government bonds on Monday moved above 6.50 per cent once again -- moving closer to the 7 per cent level that prompted bailouts for Greece, Portugal and Ireland. Spreads on Spanish 10-year bonds over German Bunds were also flirting with euro-era highs, climbing above 500 basis points. Spain's cost of borrowing had recovered dramatically from the highs seen at the end of last year after the European Central Bank injected more than €1tn into the eurozone banking system under its three-year longer-term refinancing operation.

Bankia Bailout Hits Spanish Bonds - Spanish government bonds yields jumped Monday in the wake of the €19 billion ($23.78 billion) bailout of Bankia late Friday. The effective nationalization of Bankia raised concern the government may be on the hook for further funds to prop up its fragile banking sector. Bankia is Spain's third-largest lender by assets, and public finances are already precarious. Spanish 10-year bond yields climbed 0.15 percentage point to 6.445%, according to Tradeweb, and near its high for the year. In another measure of how investors are assessing the health of the government's finances, the bonds yield 5.08 percentage point more than German debt, the euro-zone benchmark. Prime Minister Mariano Rajoy defended the rescue on Monday, describing the takeover of Bankia as part of a wider process to strengthen Spain's financial sector, similar to those undertaken by other countries in recent years. He insisted Spain isn't seeking an outside rescue package for the troubled sector, and added that financial reforms should help the banks get rid of troubled property assets, making it easier to revive the real-estate sector and contribute to the wider economy.

Spain funding situation 'very difficult', PM Rajoy says - Spain's prime minister has said it is "very difficult" for the country to get funds.  The premium investors demanded for holding Spain's 10-year bonds over its German equivalent rose to a record 5.05 percentage points. But Mr Rajoy said the banking system did not need an international bailout. "There will not be any [European] rescue for the Spanish banking system," he said, but he backed calls for the European rescue fund to be able to lend to banks directly. Last week Bankia, which was formed from the merger of several struggling regional lenders, requested a 19bn-euro bailout, which was a much bigger amount of help than had been expected. "We took the bull by the horns because the alternative was collapse," said Prime Minister Mariano Rajoy, adding that Bankia customers' savings were now safer than ever.Rather than borrowing money on the open markets, potentially at high cost, there are reports that Madrid is considering giving Bankia government bonds. The bank would then use them as collateral for loans from the European Central Bank.

The market to Spain: recapitalize the banks or face funding problems - Spain's banking system and regional debt problems are now becoming the key driver behind the risk aversion sweeping  the Eurozone. The German current 3-month bill yield is now firmly in the negative territory. People are paying the German government to hold on to their euros. Spanish authorities continue to deny there is a problem. It's all because of the euro... Reuters: - Prime Minister Mariano Rajoy pinned the blame for the rising borrowing costs on concern about the future of the euro. ... while the denial of the inevitable continues.  He again ruled out seeking outside aid to revive a banking sector laid low by a property boom that has long since bust.And now the nation's ability to meet its near-term funding requirements are being questioned. Reuters: - The government said last week its highly indebted regions faced 36 billion euros of debt refinancing bills this year, way above the previously stated 8 billion. Catalonia said it was running out of options and needed central government help. A plan to recapitalize Bankia with Spanish government bonds, which the bank could then use as collateral to get cash from the ECB, could add to the government's refinancing problems. Spain's Treasury insisted it would repay debt maturing without problems.

Bankia Opens Fresh Cans of Worms for Spain - It's the story of the euro crisis: for every problem solved, two new ones emerge. So it is with the recapitalization of Bankia. Madrid's decision Friday to provide €19 billion ($23.78 billion) of new capital to Spain's largest domestic lender is a major step forward in confronting the country's four-year property bust. But it has left the government nursing a number of fresh headaches that it looks increasingly unable to treat on its own. The first concerns the read-across to other Spanish banks. Only a month ago, Bankia was proposing to pay a dividend. Now Bankia and its parent Banco Financiero y de Ahorros are taking a combined €17 billion of new write-downs on troubled real-estate exposure and other loans plus €7 billion of mark-downs on investments.  That is enough to wipe out their entire book value in the same way that those of savings banks Banca Civica, Unmin and CAM were written down to zero after their recent acquisitions. That raises fresh doubts about the reliability of Spanish banks' balance sheets.  But extrapolating these write-downs to other banks suggests a further €45 billion of further provisions are required across the sector, according to UBS. The second headache concerns how Madrid should finance the capital injection: via cash or government bonds. With Spanish 10-year government bond yields now at 6.45%, Madrid is naturally reluctant to risk raising cash in the markets. But providing Bankia with government bonds will only increase Bankia's exposure to the sovereign at a time when Spain's solvency is also being questioned.

Bankia debt issue plan splits opinion - Last year the recently formed Bankia, a fusion of seven savings banks, announced its arrival to the Spanish public with the advertising slogan “our future together”. Following news of its €23.5bn nationalisation, at a cost of about €500 for every Spaniard, gallows humorists were quick to observe that their futures are now intertwined with Bankia like never before. More videoHowever, if one unorthodox and highly controversial plan being considered by the Spanish government goes ahead, the stricken lenders’ future will sit not only together with the country’s taxpayers, but with the balance sheet of the European Central Bank. While it is known that Bankia and its parent group BFA will need the largest bailout in Spanish banking history to survive, where that money is going to come from is still unclear, with Mariano Rajoy, prime minister, refusing to elaborate on Monday. With the country’s borrowing costs at their highest level since it abandoned the peseta, using bond auctions to fund the capital injection into Bankia-BFA would be expensive. As an alternative, officials are examining the possibility of directly injecting BFA with €19bn of Spanish government debt when the recapitalisation takes place in June or July in return for equity in the bank.

Spain Delays and Prays That Zombies Repay Debt: Mortgages - Spanish banks are masking their full exposure to soured property loans while they continue to prop up insolvent “zombie” developers, leading to credit-rating downgrades and plummeting share prices.  Spain is trying to clean up its banks, requiring lenders to set aside more for possible losses on loans deemed performing to developers like Metrovacesa SA (MVC), which hasn’t completed a project in more than a year and has none under way. While that represents about 30 billion euros ($38 billion) of increased provisions, it’s not enough because many of the loans said to be performing aren’t, said Mikel Echavarren, chairman of Irea, a Madrid-based finance company specializing in real estate. “Spain has engaged in a policy of delay and pray,” Echavarren said in an interview. “The problem hasn’t been quantified by anyone because there is huge pressure not to tell the truth.”

Rajoy Seeks European Backing as Spain’s Access Narrows - Spanish Prime Minister Mariano Rajoy called for a show of force from European authorities as his government sought ways to avoid tapping markets to fund the bailout of the nation’s third-biggest lender.  “Europe has to dissipate any doubts about the euro,” the premier told a hastily called news conference in Madrid yesterday. It “must affirm that the euro is an irreversible project and act in consequence,” he said.  Spain is trying to shore up its banks and help cash- strapped regions while its own borrowing costs compared with Germany’s are the highest since the creation of the euro. As Spain’s narrowing market access depends on domestic lenders financed by the European Central Bank, the government is considering using public-debt securities rather than cash to fund the 19 billion-euro ($24 billion) bailout of BFA-Bankia.  “The truth is that Spain can’t do this on its own -- it can’t afford to bail out or recapitalize its banking system,”. “Spain itself doesn’t need a bailout -- this has always been about the Spanish banks, but it’s also true that you can’t borrow money from someone who doesn’t have it.”

Spain hit hard by record debt risk in bank crisis - Spain's sovereign risk premium shot to a euro-era record Tuesday as Madrid announced new bonds to finance debt-struck regions and as banks scrambled to clean up bad loans. The debt premium -- the extra return investors demand to hold Spanish bonds over their safer German counterparts -- leapt to a euro-era record of 5.16 percentage points. Markets buckled on concerns over the debt load in powerful regional governments and on signs of a banking system under stress as it is forced to abide by tough new reforms. Spain's government said it would approve on Friday the issuing of joint bonds -- "hispanobonos" -- by the 17 regional governments so as to make it cheaper for them to finance their debts. "The goal is to reduce the pressure on the regions, which is often greater than the pressure on the state in general, with some regions not able to borrow on the market," an Economy Ministry spokeswoman said. Spain's 17 regional governments have suffered a plunge in tax revenues and soaring debt since the collapse of a decade-long property boom in 2008, and they are struggling to pay suppliers.

Bankia parent group BFA posts 2011 loss of 3.3 billion euros - BFA, the parent group of nationalized Spanish bank Bankia , said on Monday it had restated its 2011 results to reflect a 3.3 billion euro loss, rather than a 41 million euro profit, following a bailout from the state. In a statement to the stock exchange regulator, BFA said the restated loss reflected a review of its loan portfolios and capital needs after a new audit and as part of the clean-up plan implemented by the government. BFA last Friday asked for a public bailout of 19 billion euros ($23.8 billion) on top of an earlier cash injection of 4.5 billion euros.

Spain says to approve joint regional bonds on Friday - The government hopes the creation of "hispanobonos", to be guaranteed by the state, will help reduce financing costs for Spain's 17 autonomous communities, which now vary sharply. "I can confirm that this will be approved Friday. The goal is to reduce the pressure on the regions, which is often greater than the pressure on the state in general, with some regions not able to borrow on the market," she said. Spain's 17 regional governments have seen their tax revenues plunge and their debt levels soar following the collapse of a decade-long property boom in 2008, and they are struggling to pay suppliers. The central government earlier this month secured a five-year syndicated loan of 30 billion euros ($38 billion) with 26 banks that will allow regional governments and city halls to refinance their debt and pay suppliers. The massive loan will allow city halls to start paying their suppliers as of May 31 while regions will be able to begin payments as of June 30.

Yields rise at Italy 2-yr debt sale - Italian two-year borrowing costs rose to their highest since December at a sale of zero-coupon paper on Monday as the prospect of a possible Greek euro exit and Spain's banking woes continued to weigh on the debt of weaker euro zone borrowers. Italy sold 3.5 billion euros of a new May 2014 zero-coupon bond, the top of its planned range for the tender, and the yield of 4.037 percent was almost half of highs reached late last year.But a month ago, before inconclusive Greek electoral results further clouded the outlook for the euro zone, Italy had sold a similar bond at an average 3.36 percent. "Things have got worse over the last month. It's not as bad as we've seen at the direst moments of this crisis however, and we are to hope we won't get there again," an Italian bond trader said.

A Very-Useful Chart To Prepare You For The Next Greece Election Chart from Credit Suisse -   Yes, this is a photograph of a printed out chart from Credit Suisse. Sorry, that's the form we got it in. That being said, it provides a fairly useful odds-based approach to what might happen in the June 17 election.

Greek tax revenues: very little, very late - Greece’s latest tax revenue numbers were out on Friday, reports the Ekathimerini. Everyone expected them to be dire and, guess what?  They are really dire. Inflows in the first 20 days of May were down 20 per cent on the same period a year ago. The general election in early May didn’t help things, but these figures are still worse than most analysts were expecting. A report by the State General Accounting Office in fact suggests that the budget revenues target this year will have to be revised, as there is a forecast for a lag of 1.35 billion euros. This is mainly attributed to income tax revenues (seen missing their target by 330 million euros) due to cuts in salaries and pensions, direct taxes from previous years (275 million), transaction taxes (209 million), special consumption taxes (110 million), and the postponement of the early renewal of the Athens International Airport concession contract (230 million). As a result, the finance ministry is now considering dipping into the Hellenic Financial Stability Facility – which was supposed to be a bank-focused recapitalisation fund – next month in order to tide it over until Brussels sends over the next cheque.

Greece warned of public finances collapse - Greece’s public finances could collapse as early as next month, leaving salaries and pensions unpaid unless a stable government emerges from the June 17 election, according to Lucas Papademos, the technocrat prime minister who left office after this month’s inconclusive vote. Mr Papademos warned that conditions were deteriorating faster than expected with cash flow likely to turn negative in early June amid a sharp fall in tax revenues and a loosening of spending controls during two back-to-back election campaigns.Mounting anxiety that Greece is headed for further political instability and a possible exit from the euro has prompted many Greeks to postpone making tax payments, and has also accelerated outflows of deposits from local banks. Athens bankers estimate that more than €3bn of cash withdrawn since the May 6 election has been stashed in safe-deposit boxes and under mattresses in case the country is forced to readopt the drachma.The finance ministry has halted repayment of value-added tax to Greek exporters, and slashed public investment spending by more than 20 per cent in the first four months. Transfers to the health ministry to pay debts owed to hospital suppliers and pharmacies have been temporarily suspended, obliging patients to pay the full cost of prescription drugs for the first time.

Swiss Prepare Plans in Case of Euro's Demise - Switzerland is considering capital controls to fight a sharp rise in the Swiss franc in the event of a euro-zone collapse. Capital controls—tools that directly influence the inflow of capital into Switzerland—are a radical measure that the Alpine nation hasn't employed since the 1970s. The risk of a potential Greek exit from the euro has increased in recent weeks as the political crisis in Athens has intensified, heightening worries about possible effects on other heavily indebted euro-zone nations. This is strengthening the Swiss franc, traditionally considered a refuge in times of economic and political turbulence.

Swiss eye capital controls if Greece goes - The Swiss National Bank is considering imposing capital controls on foreign deposits if Greece leaves the euro, as the franc comes under heavy demand from investors seeking a haven in Europe. The Swiss franc has come under increasing pressure since the Greek elections at the start of the month. Currency traders have reported unusually high levels of franc buying in response to the problems in the eurozone, which has seen the euro slide to its lowest level in nearly two years. “We’re preparing ourselves for turbulent times,” Mr Thomas Jordan [head of the Swiss central bank] said in an interview with SonntagsZeitung, a Swiss newspaper. “The situation has become worse in the past few weeks and the outlook has become much more uncertain. We’re seeing a clear upward pressure on the franc,” he told the newspaper. “Investors are looking for a safe haven. For many, that includes the franc.”

Christine Lagarde: Greeks can help themselves out of the crisis by 'paying their tax' - Christine Lagarde has warned that Greece can expect little sympathy from the International Monetary Fund on its bail-out terms, and called for its citizens to "help themselves" out of the financial crisis by "paying their tax".  The managing director of the IMF said that while she sympathised with the financial plight Greeks now faced, she thought "equally" about the rampant tax evasion that has dogged the country for years.  "As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time. All these people in Greece who are trying to escape tax.  "I think of them equally. And I think they should also help themselves collectively [by] paying their tax," she said.  Asked by the Guardian whether it was "payback time" for Greece for the years of profligacy the country enjoyed when it first joined the euro, she responded, "That's right".  Greece's central bank estimates that personal income tax evasion in Greece equates to between 2.5pc and 3.8pc of GDP, while its shadow economy – made up of the trade, goods and services, both legal and illegal where taxes are not paid – grew from 24.3pc of GDP in 2008 to 25.4pc in 2010.

It's payback time: don't expect sympathy – Lagarde to Greeks -The International Monetary Fund has ratcheted up the pressure on crisis-hit Greece after its managing director, Christine Lagarde, said she has more sympathy for children deprived of decent schooling in sub-Saharan Africa than for many of those facing poverty in Athens. In an uncompromising interview with the Guardian, Lagarde insists it is payback time for Greece and makes it clear that the IMF has no intention of softening the terms of the country's austerity package. Asked whether she is able to block out of her mind the mothers unable to get access to midwives or patients unable to obtain life-saving drugs, Lagarde replies: "I think more of the little kids from a school in a little village in Niger who get teaching two hours a day, sharing one chair for three of them, and who are very keen to get an education. I have them in my mind all the time. Because I think they need even more help than the people in Athens." Asked if she is essentially saying to the Greeks and others in Europe that they have had a nice time and it is now payback time, she responds: "That's right." Jens Weidmann, president of the Bundesbank, poured cold water on the idea – which is strongly backed by the French president, François Hollande – and also said financial aid to Greece should be cut off if it failed to keep to the bailout deal.Jürgen Fitschen, joint head of Germany's biggest bank, Deutsche, described Greece as "a failed state … a corrupt state".

Christine Lagarde's Greek comments provoke fury - IMF chief Christine Lagarde's uncompromising description of Greeks as rampant tax-dodgers has provoked a furious reaction in Athens less than a month before the crisis-hit country heads to the polls. With Greece mired in ever-worsening recession, with cutbacks and tax rises, the IMF managing director was rounded on by almost the entire political establishment. In an interview with the Guardian, Lagarde said she had more sympathy for victims of poverty in sub-Saharan Africa than Greeks hit by the economic crisis. "As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time. All these people in Greece who are trying to escape tax." Evangelos Venizelos, the Greek socialist leader, who met Lagarde several times as finance minister, accused her of "insulting" Greeks. "Nobody has the right to humiliate the Greek people during the crisis, and I say this today specifically addressing Ms Lagarde … who with her stance insulted the Greek people." In the face of a barrage of criticism posted on her Facebook page, the IMF chief was forced to issue a statement saying she was "very sympathetic to the Greek people and the challenges they are facing".

Germany Walks Away From Greece - Preparing for Greece’s exit from the Eurozone has been picking up momentum and has reached critical mass—on the way to a fait accompli. Still unspeakable in public discussion last year, it has become a routine topic at all levels of government. While everyone at the very top still hues to the line that Greece should stay in the Eurozone, out of the other side of the mouth comes but—especially since the focus is on Spain, the real problem, the one problem that the Eurozone will have trouble digesting. Even if it could digest bailing out Spain or losing Spain, the next step up, Italy, due to its size, is beyond bailout and would cause the Eurozone to fracture into its component pieces—unless the ECB decides against all treaty limitations and stiff German opposition to monetize directly and without qualms any sovereign debt that needs to be monetized. And even that would tear up the Eurozone because Germany and a handful of other countries would refuse to be tied to that kind of loosey-goosey management of their currency. There are political realities in Germany, where 60% said they wanted Greece out of the Eurozone, a jump from November when an already shocking 49% had wanted them out, according to a ZDF Politbarometer poll released Friday. Only 31% wanted Greece to remain in the Eurozone, down from 41% in November, with 9% not giving a hoot.And Eurobonds. An astounding 79% were against them, and only 14% were for them.

German slackers vs toiling Greeks...In the (relative) absence of news, we should share this tweet from @presseurop Unsurprisingly, those stats were being pinged around with glee at pixel time, but the numbers — from the OECD — are actually a little stale. Whoever handles the PressEurop Twitter feed looks to have picked up the 2009 column from this table, where the 2010 figures are the most recent available:

Netherlands   — 1377
Germany  –  1419
Ireland   —  1664
UK   —  1647
Portugal    – 1714
Italy   —  1778
Poland   —  1939
Greece   —  2109

The graft gap between Greece and Germany has narrowed, but not by much — 690 hours! Click the table below for full details.  Note the hard graft going on in Korea…

Greece, the Euro, and Behavioral Economics - As usual, the turmoil centers on Greece, which is in its fifth year of recession and struggling beneath a colossal debt load. This year, in exchange for drastic austerity measures, Greece’s government agreed to an aid package (its second) with the European Union and the International Monetary Fund, totalling $174 billion. But three weeks ago furious Greek voters tossed the ruling parties out of office; attempts to form a coalition government failed, and new elections are scheduled for next month. Now Greek politicians are talking tough about renegotiating, but the E.U., led by Germany, which is the largest contributor to the bailout, says that there will be no more money for Greece if it doesn’t live up to its promises. So policymakers are seriously discussing a so-called Grexit—in which Greece would default on its debts and abandon the euro. This isn’t an outcome that anyone wants. Even though a devalued currency would make Greece’s exports cheaper and attract tourists, it would do so at a terrible price, destroying huge amounts of wealth and seriously harming the country’s G.D.P. It would be costly for the rest of Europe, too. Rationally, then, this standoff should end with a compromise—relaxing some austerity measures, and giving Greece a little more aid and time to reform. And we may still end up there. But the catch is that Europe isn’t arguing just about what the most sensible economic policy is. It’s arguing about what is fair.

Let’s Talk Turkey About Greece - When Greece exits the Euro it will be punished severely by the monetary authorities.  They intend to let Greeks starve.  They will cut off food supplies, and Greeks will not be able to afford food.  Oil is also going to be a problem.  Greeks will probably not be able to flee to other countries. 4) Greece is going to have get hardcore and creative about creating a new economy.  Since the monetary authorities intend to starve them and deprive them of oil, they must retaliate hard.  Greece has a number of options, and this is what Greece should do. You don’t play nice with people who are trying to cause a famine in your country.

  • Greece has a large fleet.  Use it to strip mine the Mediterranean of all resources possible.  Yes, the Med is a fragile ecosystem.  If the other Euros don’t like it, they can not punish Greece, otherwise Greece will have to feed itself.  The Euros could send fleets, but as the British-Iceland fishing war proved, that’s prohibitively expensive.
  • Start gun-running and other black market activities up.  European gun-running currently goes through Albania.  Greece has much better ports.  If the Euros don’t like it, they can militarize Greece’s borders at a cost much higher than feeding the Greeks.
  • Become a full on black-hole for banking.  If anyone wants to store money in Greece, they can.  No questions asked, no forms needed.
  • Make deals with other “pariah” and semi-pariah nations.  Start with Iran and Russia for oil (Iran will be happy to give oil in exchange for black market help).  Make a deal with various 2nd world nations for food, start with Argentina, they have no reason to love the IMF or the European Union, which promised to “punish” them for nationalizing oil in Argentina.  In exchange Greece can offer use of their fleet, for cheap, and port rights for the Russian navy.  They’ve wanted a true warm water port for some time.  Offer them a nice island in the Med with a 30 year lease.
  • Hold on for a couple years.  Odds are that soon enough Ireland, Spain, Portugal and maybe others will leave the Euro.  They won’t be in any mood to screw Greece for their ex-Euro masters.  Heck, odds are 50/50 that there won’t be a Euro zone at all in 3 years, since Germany wants to screw everyone, including France.

“It’s the end of the world as we know it and I feel fine” - “It’s the end of the world as we know it and I feel fine” say the French as consumer confidence in May rose to the highest since Nov ’10 as they welcome and get excited about new Pres Hollande. Also, the French 10 yr bond yield touched the lowest on record this morning. June consumer confidence in Germany held at 5.7, just .2 pts off the highest since Mar ’11. To the euro bond debate which is now taking on greater rhetoric with those with high bond yields wanting them and those with low ones saying no way, ECB member Weidmann, a German, said ‘it’s an illusion to think euro bonds will fix the crisis.’ He’s right as only debt extinguishment and economic growth can lead to a sustainable fix instead of the ‘buying time’ tools that have occurred to date. This said, back in Nov, the German Council of Economic Experts published a paper on a European Redemption Fund which would be a ‘joint debt vehicle,’ similar to euro bonds but would be temporary, ‘say 25 years.’ There is a story on BN that German political parties, including Merkel’s, will further study this. In Asia, the Shanghai index closed at a 5 1/2 week low and Japan reported a y/o/y CPI gain of .4% headline and .2% core, below the BoJ target rate of 1.0% and leading to calls in Japan for more yen printing.

What We Talk About When We Talk About the Fiscal Treaty - Ireland votes on the Fiscal Stability Treaty on Thursday. The local debate over the last month has been highly revealing in terms of the evolving attitude to Europe and the euro.  One strand of the debate has been narrow in scope, focusing on the technical details of the Fiscal Treaty (measurement of structural balance, implications for speed of austerity). My own take is that, if the Treaty is implemented in an intelligent, cyclically-sensitive manner (consistent with the flexible, holistic interpretation laid out in the “six pack” regulations), the new fiscal framework will be a positive force, helping Ireland and other European countries to gradually exit from high debt levels and avoid destabilising pro-cyclical fiscal policies in the future. Calibrating the optimal speed of fiscal adjustment at national and European levels is no easy task, especially in periods of shifting macroeconomic conditions, and we may expect many future debates about the balance between austerity and growth in delivering the fiscal targets laid out in the Treaty.  In any event, even before the EU/IMF bailout, Ireland was already planning to introduce some type of fiscal framework along these lines and the Treaty is really a marginal addition relative to existing European commitments. Importantly, having fiscal rules built into domestic legislation should improve local accountability relative to purely European regulations.

How to build a fiscal union to save the eurozone - We have reached bifurcation point – the time to make a decision. If Greece were forced to abandon the euro, the eurozone would mutate from a monetary union into a loose single currency area. I would then expect a mass withdrawal of foreign investment, a credit crunch and a large sustained fall in economic output. There is no way the eurozone will survive this shock in one piece. The consequences of a withdrawal would also be catastrophic for Greece. A fiscal union lies in the other direction. But if it is to save the eurozone, it should comprise the following four elements. Not all have to be immediately introduced, but eurozone leaders should commit to them. First, a eurozone-wide deposit insurance scheme with an unequivocal guarantee that deposits will be repaid in euros even if the host country leaves the eurozone.Second, a eurozone-funded resolution trust company with the power to force a recapitalisation of the banks – without national veto. It is vital that this includes all banks, not just the biggest, as the most vulnerable happen to be the second-tier banks, such as Spain’s Bankia. The trust needs to be accompanied by a further centralisation of bank regulation and supervision. Third, a proper eurozone bond to cover a large portion of outstanding and new debt. It would require a partial transfer of fiscal sovereignty from the member state to the centre. Ideally, the new fiscal union should also have regulatory powers over labour and product markets. Fourth, a change in the mandate of the European Central Bank to include specific responsibility for financial stability – and to make it explicit that the ECB faces no constraints on the conduct of secondary market operations in pursuit of its new mandate.

Germany Seeks Financial ‘Redemption’ for Europe - Germans hate the idea of covering the debts of the big spenders of Southern Europe, but the hottest new idea for sharing Europe’s debt burden comes from … Germany. Surprising but true: Germany’s opposition parties have gotten Chancellor Angela Merkel to reconsider an idea floated last winter that involves joint European liability for nations’ sovereign debt. The idea comes from the German Council of Economic Experts, also known as the “wise men.” It’s called the European Redemption Pact (PDF), which sounds a bit religious to the American ear but isn’t intended to be. Since fresh thinking on the European debt crisis is badly needed, it’s worth taking a look at what the wise men advise. Here’s the plan in a nutshell: The debt of the 17 countries belonging to the single-currency euro zone is split into two parts. The portion up to 60 percent of each nation’s gross domestic product stays on the books, unchanged. The portion of nations’ debt exceeding 60 percent of GDP is transferred into something called the European Redemption Fund. The 17 countries are still liable for the portion of their debt that’s transferred in the fund. They have 20 or 25 years to pay it off.Legally, however, all 17 nations are jointly liable for the debt placed in the fund. This is a way for low-debt nations such as Germany to backstop high-debt nations like Greece, giving peace of mind to their creditors and lowering interest rates.

Switzerland fears euro fallout – because its currency is too strong - The biggest fear is over the ever- reliable Swiss franc. Last year, the mayhem in the 17-member euro area drove up the value of the Swiss currency, threatening the country's economy. Increasing pressure on the franc adversely affected Swiss exports and led to a marked decline in tourism. Central bankers in Berne were eventually forced to step in and the currency rise was halted only after the Swiss National Bank intervened to peg its value against the euro at a floor of 1.20 per franc.But there are concerns that Switzerland will be struck by another wave of foreign currency if Greece decides to leave the eurozone after its forthcoming general election. This could drive up the franc yet again – presenting a fresh headache for Swiss politicians and businessmen alike. Already, fears about the situation in Greece and the possibility of widespread eurozone instability have caused the value of the franc to rise again against the euro. In recent weeks it has been trading within a fraction of the floor set last year.

Moody's warns over potential LBO-debt defaults -- Moody's Investors Service has warned that at least a quarter of 254 unrated European leveraged buyout deals with debts worth €133 billion could default owing to refinancing burdens in part caused by the euro-zone crisis. "Over half the debt maturing through 2015 is concentrated in 36 companies, each of which has over €1 billion of debt," said Chetan Modi, head of Moody's European leveraged finance. "While this debt is broadly dispersed across industries, there is a concentration of debt to be refinanced in 2014." And these companies are now one year closer to the 2014-2015 refinancing peak, which is worrisome given the weak macroeconomic environment and generally low credit quality of the debt. Many bigger companies will seek to refinance via high-yield bonds, but will need to be "sufficiently creditworthy" to do this, and the openness of European and U.S. high-yield markets will determine how these companies can navigate the refinancing burden. Moody's said market access will likely remain in "windows," and it expects new-issuer pricing to remain costly.

The spike in ratings downgrades is driven by banks - Fitch has been on a downgrade "war path" recently. The latest downgrade vs upgrade statistics are showing a "mini spike" in the number of downgrades. It's not nearly as bad as the 2008/2009 cycle, but is clearly visible. This spike is coming entirely from rating actions in the developed markets. Drilling down further reveals what is actually driving the downgrades. The chart below compares the rating actions for industrials versus financials. Clearly Fitch has been aggressive in downgrading banks.The equity market seems to agree with this assessment. Financials have underperformed considerably over the past year (covering the period of these downgrades). The other rating agencies have also been active in downgrading financials - particularly last year. At this rate it is only a matter of time before many banking institutions will lose their investment grade standing. It will be interesting to see how the high yield and the crossover markets handle this inflow of new names.

Europe Is Fighting the Wrong Battles Again - Europe continues to fight the wrong battle, and continues to spread contagion risk. It is clear that Greece has had a solvency issue now for over 2 years.  The ECB and Troika chose to treat it as a liquidity problem.  Maybe, they could have argued that in early 2010, but by the summer of 2011 it was obvious to any credit observer that the problem was solvency, yet they continued to treat it as one of liquidity.  That is scary because if they fail to see the problem correctly now, they will fail miserably.  Not only is the problem clearly solvency, but now forced currency conversion has been added to the mix. Any "solution" from the EU must now address that risk, and it is not the same as solvency.  Programs that can protect against solvency may do nothing for the redenomination risk. We keep playing with scenarios and find it hard to find out where a Greek exit doesn't result in a steep sharp decline in the market.  We could go through more ideas of ECB intervention, but in the end most will have flaws.  Dealing with currency conversion risk is huge.  Dealing with the contagion risk that has been created by the EFSF is huge. Will Europe force Greece out thinking they have a plan; that fails miserably and sparks the miserable series of consequences we’ve outlined?  Sadly, yes.

How Big Are the PIIGS? (Bigger than you may realize!)  My topic is the relative size of these five countries in a basic economic sense -- to one another and to the world as a whole. To make comparisons, I'm using GDP based on purchasing power parity (PPP). My source for the data is the IMF (International Monetary Fund), specifically the IMF's World Economic Outlook Databases. The complete IMF database includes over 180 countries. For the chart below, I used the 58 countries with the largest GDP, which thereby includes the newcomer and smallest of the PIIGS (both in size and GDP) -- Ireland. The financial threat of Greece to the Eurozone and a potential spillover to the rest of the world has, of course, been much in the news. My illustration of the relatively tiny contribution of Greece to world GDP, should not be construed as an effort to downplay the reality of the financial risk it poses. The complex financial and political interlinkage of debtors and creditors trumps an easy metric such as GDP. The bar chart above does suggest the rationale for the broader anxieties about potential risks posed by the financial stresses in Spain and Italy. To put the size issue in a broader context, consider this: The European Union, which I didn't include in the chart above, would be the largest entity if I had. It's about 4.8% larger than the US based on GDP purchasing power parity. The PIIGS collectively constitute about 5.05% of world GDP, but they account for 25% of the GDP of European Union.

Main points of SYRIZA proposals

  • 1. Creation of a shield to protect society against the crisis
  • • Not a single citizen without a guaranteed minimum income or unemployment benefit, medical care, social protection, housing, and access to all services of public utilities.
  • • Protection of and relief measures for indebted households.
  • • Price controls and price reductions, VAT reduction, and abolition of VAT on basic-need goods.
  • 2. Disposal of the debt burden - We are asking immediately for:
  • • A moratorium on debt servicing.
  • • Negotiations for debt cancellation, with provisions for the protection of social insurance funds and small savers. This will be pursued by exploiting any available means, such as audit control and suspension of payments.
  • • Regulation of the remaining debt to include provisions for economic development and employment.
  • • European regulations on the debt of European states.
  • • Radical changes to the European Central Bank's role.
  • • Prohibition of speculative banking products.
  • • A pan-European tax on wealth, financial transactions, and profits.
  • 3. Income redistribution, taxation of wealth, and elimination of unnecessary expenses
  • • Reorganization and consolidation of tax collection mechanisms.
  • • Taxation of fortunes over 1 million euros and large-scale revenues.
  • • Gradual increase, up to 45%, of the tax on the distributed profits of corporations (SA).
  • • Taxation of financial transactions.
  • • Special taxation on consumption of luxury goods.
  • • Removal of tax exemptions for ship owners and the Greek Orthodox Church.
  • • Lifting of confidentiality for banking and merchant transactions, and pursuit of those who evade taxes and social insurance contributions.
  • • Banning of transactions carried out through offshore companies.
  • (more)

Greek Democratic Left Demands Euro Pledge to Back Syriza -  Greece’s Democratic Left party, which may determine the governing coalition following June 17 elections, said its backing for the biggest anti-bailout party depends on getting a guarantee to stay in the euro.  “We have two red lines: one is a policy which serves the country’s steady presence in Europe, the euro, the euro area, and the other is a gradual disengagement from the terms of the bailout,” party leader Fotis Kouvelis, 63, said in a May 25 interview in Athens. “All this needs to be set out because red lines may exist but the policies you choose is what matters.”  With opinion polls indicating no party winning a majority, Kouvelis said he’d team with Syriza leader Alexis Tsipras, who advocates unilaterally canceling the austerity measures demanded for a bailout, with an agenda of re-negotiating the terms of the rescue. The cuts required for 240 billion euros ($306 billion) of aid have driven the country into the worst recession since World War II.  Kouvelis refused to join a unity government that didn’t include Syriza, the second-place finisher after a May 6 election, requiring the need for a revote. Another inconclusive result may mean the country runs out of money as soon as early July. International inspectors won’t visit Greece for a review that allows funds to be paid until a government is formed

Christine Lagarde, scourge of tax evaders, pays no tax - Christine Lagarde, the IMF boss who caused international outrage after she suggested in an interview with the Guardian on Friday that beleaguered Greeks might do well to pay their taxes, pays no taxes, it has emerged. As an official of an international institution, her salary of $467,940 (£298,675) a year plus $83,760 additional allowance a year is not subject to any taxes. The former French finance minister took over as managing director of the IMF last year when she succeeded her disgraced compatriot Dominique Strauss-Kahn, who was forced to resign after he faced charges – later dropped – of sexually attacking a New York hotel maid. Lagarde, 56, receives a pay and benefits package worth more than American president Barack Obama earns from the United States government, and he pays taxes on it.

Anger over Christine Lagarde's tax-free salary - It was called her "Let them eat cake" moment. Now Greece will be saying: "Make her pay tax". The IMF chief Christine Lagarde was accused of hypocrisy yesterday after it emerged that she pays no income tax – just days after blaming the Greeks for causing their financial peril by dodging their own bills. The managing director of the International Monetary Fund is paid a salary of $467,940 (£298,675), automatically increased every year according to inflation. On top of that she receives an allowance of $83,760 – payable without "justification" – and additional expenses for entertainment, making her total package worth more than the amount received by US President Barack Obama according to reports last night. Unlike Mr Obama, however, she does not have to pay any tax on this substantial income because of her diplomatic status. The news will intensify criticism of the former French Finance Minister following her controversial remarks on the increasingly bleak prospects for the Greek economy last week. Stating that she had more sympathy for poor African children with little education than for jobless people complaining about austerity measures in Greece, she said last week: "As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time. All these people in Greece who are trying to escape tax." Speaking to The Guardian, she added that they could "help themselves collectively" by "all paying their tax," and agreed that it was "payback time" for ordinary Greeks.

Ponzi Financing in Greece Continues; Greek Banks Receive €18bn Transfer - Greek banks have been shut off from regular ECB liquidity operations due to lack of sufficient collateral. Today the Banks have that collateral thanks to a disbursement of funds from the EFSF which in turn will be used as collateral for more loans from the ECB. If this makes little sense to you it is because it should not make any sense to anyone. It is another act of desperation in a long line of desperate acts. Please consider Greek banks receive €18bn transfer: Greece’s four largest banks received a €18bn transfer on Monday as the first instalment of a recapitalisation plan agreed as part of the country’s second bailout by the EU and the International Monetary Fund. The funding, in bonds issued by the European Financial Stability Facility, will help banks reduce their dependence on emergency liquidity assistance, a temporary lifeline provided by the Greek central bank after they were excluded from European Central Bank liquidity operations this month. The four banks are now expected to regain access to the ECB’s liquidity operations, using the bonds as collateral for funding at cheaper rates than under the emergency liquidity arrangement. Anyone who thinks this will stop outflows has holes in the head. As I see it, it will allow a means of additional outflows.

False dawn in Greece - European markets were lead by Greek equities which were up 6.8%, attempting a bounce last night on the news that: Greece’s conservatives have regained an opinion poll lead that would allow the formation of a pro-bailout government committed to keeping the country in the euro zone, a batch of new surveys showed on Saturday. I’m not too sure why this is such good news, Greece is in deep trouble either way and it would take a person with a serious short term memory problem to forget what has already happened to Greece under the existing programs. Either way, the campaign by New Democracy appears to be clawing back voters leading to a response from the left: Alexis Tsipras, the head of the Coalition of the Radical Left (SYRIZA) the surprise second-place finisher in stalemated May 6 elections is swinging back. He is locked in a neck-and-neck duel to win the next elections. He accused New Democracy leader Antonis Samaras and PASOK Socialist leader Evangelos Venizelos of trying to frighten Greeks into voting for them with horror stories of a complete economic collapse and anarchy if Greeks support him and other anti-austerity parties that won 68 percent of the vote in the first elections. Tsipras accused “domestic political forces” of “blackmail, threats and lies,” and with scaremongering.

General payments freeze takes hold - Political uncertainty and fears of a Greek eurozone exit that have recently come on top of the protracted recession and choking lack of liquidity seem to have accelerated the downturn in the real economy, which is near crash condition. Together the rise of the black economy and the freeze in payments, the clearest sign of disintegration is in public revenue collection. After showing a timid rise in the beginning of May, it nosedived right after the May 6 elections. By May 20 the fall was in the order of 20 percent, with taxpayers putting off paying dues and the practice of discounts for not issuing a receipt spreading even to the catering sector. The government, meanwhile, facing the threat of a delay in the disbursement of bailout installments from the troika, has suspended rebates and payments to suppliers of the public sector. The effects of this mutual suspension of payments between private and public sector are further exacerbated by two factors: First, the inability of banks to maintain a satisfactory level of liquidity in the economy. Loans have been cut off even to businesses with a sound financial base.  Second, the suspension of credit between businesses, which prefer not to sell at all instead of selling on credit and post-dated checks that may never be paid.

Greece Is the Laziest, Most Incompetent Nation in the EU - The Atlantic: Greece is the hardest-working country in the EU! According to Greece. And only Greece.  According to Britain, Germany, Spain, Poland, and the Czech Republic, it's the laziest country in Europe. Meanwhile, Germany is the most respected EU country, according to the Pew Global report, European Unity on the Rocks. And Greece appears to be living in a bizarro universe where 78% of its respondents held negative views of Germany. Three in five Greeks said their country had Europe's hardest working citizens. Half of the rest of the respondents from the other seven nations said Greece had the laziest workforce in Europe. Europe's problem isn't stereotypes. It's institutions. Or, more accurately, it's the continent's dearth of working, supranational institutions that can transcend international stereotypes and politics. In the U.S., we don't debate "permanent bailouts" to poor people in Mississippi and New York, no matter how racist or smarmy they are. We just keep sending them money because modern Medicaid is an established institution that is bigger than the month-to-month political squabbles and stereotypes that can bog down decision-making at the federal level. Europe's stereotypes aren't good. But they wouldn't put the European Union at risk unless the institutional bedrock of that Union was flawed to begin with. And it is. Oh, how it is.

Food Shortage in Peloponnesian Prisons Due to State Budget Cuts - Amidst the deepening financial crisis, the state budget for many prisons has decreased to a minimum for some months now resulting in hundreds of detainees being malnourished and literally surviving on the charity of local communities, a Proto Thema article reveals. The latest example is the prison in Corinth where there’s a supply stoppage from the nearby military camp, and prisoners are about to starve reports prison staff, since not even one grain of rice has been left in their warehouses. The prison staff reports they haven’t received any state funds for the last three months. A few days earlier, the commander of the camp announced to prison management the transportation stoppage, citing lack of food supplies even for the soldiers, and had shut down the last source of supply for 84 prisoners. The response of some Corinth citizens was immediate as they took it upon themselves to support the prisoners, since all protests to the Justice Ministry were fruitless.

Most Aid to Athens Circles Back to Europe - Its membership in the euro currency union hanging in the balance, Greece continues to receive billions of euros in emergency assistance from a so-called troika of lenders overseeing its bailout.  But almost none of the money is going to the Greek government to pay for vital public services. Instead, it is flowing directly back into the troika’s pockets. The European bailout of 130 billion euros ($163.4 billion) that was supposed to buy time for Greece is mainly servicing only the interest on the country’s debt — while the Greek economy continues to struggle.  If that seems to make little sense economically, it has a certain logic in the politics of euro-finance. After all, the money dispensed by the troika — the European Central Bank, the International Monetary Fund and the European Commission — comes from European taxpayers, many of whom are increasingly wary of the political disarray that has afflicted Athens and clouded the future of the euro zone.  As they pay themselves, though, the troika members are also withholding other funds intended to keep the Greek government in operation.

Athens No Longer Sees Most of Its Bailout Aid - In an elaborate payment system that began after the May 6 election that brought down the Greek government, and is meant to ensure that the Greeks do not touch the cash, the big three creditors are now wiring bailout payments to an escrow account in Greece. There the money sits for two or three days — before much of it is sent back to the troika as interest payment on the Greek bonds that Europe accepted under terms of the bailout deal struck in February. “Greece will not default on the troika because the troika is paying themselves,” said Thomas Mayer, a senior advisor at Deutsche Bank in Frankfurt. “Why are we doing it like this?” Mr. Mayer said. “Because we’re Europe.”  A Greek government advisor who spoke anonymously, for fear of alienating the European lenders, said of the troika: “They made sure that the sum for domestic spending is kept small enough to force Greece to dramatically raise its own revenues.”  On its face, the situation seems absurd. The European authorities are effectively lending Greece money so Greece can repay the money it borrowed from them. “You send the money, you call it a ‘loan’ — you get it back and call it an ‘interest rate,”’ said Stephane Deo, global head of asset allocation in London for UBS.

When it comes to credit, Greece is already out of the Eurozone - Following up on an earlier discussion that shows extraordinarily tight liquidity conditions in Greece, we are starting to see further evidence of "credit isolation".  Capital Economics: - Recently, the problem of tight credit conditions have been exacerbated by domestic and foreign firms becoming more unwilling to sell goods to Greek customers unless they are paid for up front. In other words, credit risk is stopping some transactions from taking place. What’s more, some foreign buyers of Greek goods and services are delaying payment, in case Greece exits and the size of their bill (in euro-terms) drops. Greek refiners continue to purchase Iranian crude because Iran is the only nation willing to provide these firms credit to finance crude purchases until this oil is refined.  Such behavior is quite similar to the way suppliers and customers treat a company that is about to file. This is all at the time when Greek banks are unable to step in to deal with this isolation. New domestic lending has pretty much halted, as existing loans roll off.

Greek Opinion Poll Shows Majority Want Revised Bailout Terms -- Most Greeks want to see the terms of an international financial rescue revised even as they acknowledge that failing to abide by them may lead to the country exiting the euro, an opinion poll showed. Seventy-seven percent of the 1,600 Greeks surveyed by GPO SA said the terms of the bailout should be revised. More than half, or 52.4 percent, said they should stay in the euro if they were forced to accept the current austerity measures tied to the bailout, while 44.5 percent said they shouldn't. Eighty-one percent said they wanted to remain in the single currency. The survey was broadcast on Athens-based Mega TV today. The findings suggest the June 17 election may still cast doubt on Greece's place in the 17-nation euro area. While the New Democracy party, which supported the international rescue of the country earlier in the year in return for austerity measures, placed ahead of anti-bailout party Syriza, the difference between the two parties remained within the margin of error. New Democracy had 23.4 percent support compared with 22.1 percent for Syriza, according to the survey. The error margin was 2.6 percentage points. Syriza leader Alexis Tsipras advocates unilaterally canceling the austerity measures demanded for the bailout, with an agenda of renegotiating the rescue terms.

GOLDMAN SACHS: 'It May Be Necessary To Take Greece To The Edge Of The Abyss' - Goldman Sachs in their latest note to clients on Greece writes that under the most likely of three scenarios for the political dynamic that arises in the eurozone after the June 17 elections in Greece, "it may be necessary [for the troika] to take Greece to the edge of the abyss." The Goldman team, led by the bank's chief global equity strategist Peter Oppenheimer, points out that doing so "has been the strategy on past occasions: it may need to be repeated again, with the threat only being credible when chaos is imminent." The note goes on about the political posturing between Greece and the troika:With each iteration of this game, the political cost to the two parties involved has increased. And to manage the domestic political pressures created by the arrangement, policy makers on both sides have adopted more outspoken language in their negotiations. We have reached the stage where officials in the Euro area ex-Greece (not just the Germans and the Dutch) openly threaten Greece with expulsion from the Euro if the existing troika package is not adhered to by the new government, while leaders of rising Greek political parties openly say that the Greeks need not follow their bailout programme since the rest of the Euro area cannot throw them out given the costs involved. Goldman details three scenarios that could occur following Greece's scheduled June 17 elections and discusses each one's impact on markets.

The fiscal economics of a Greek exit - How much would Greece’s creditors lose if the country were to exit the Eurozone? It is widely assumed that an exit would be followed by a default because the new currency would depreciate so massively that debt service in euros would be impossible. This assumption is wrong. Most of Greece’s debt is foreign debt and must thus ultimately be serviced through higher exports or import compression. An exit followed by a massive depreciation of the new drachma should accelerate export growth and provoke a further fall in imports, thus increasing the capacity of the country to service its foreign debt. After a decade of adjustment, Greece might be able to pay its debts.

A Fiscal Union Won't Fix the Euro Crisis - Austan Goolsbee - The economies of Greece and of Minnesota are about the same size (2% of U.S. gross domestic product), so why is an independent currency viable for one and quackery for the other?  One key economic difference is the existence of a fiscal union in the United States. Increasingly, euro-zone hardliners have called for putting in a disciplined, unified fiscal arrangement similar to the one we have in the U.S. Unfortunately, their vision of fiscal union has badly missed the essence of the U.S. experience and would not fix the euro crisis. At root, the euro-zone problem remains the locking together of very different economies into a monetary union without a way to adjust. Since the start of the union in 1999, productivity in the North, especially in Germany, has grown rapidly while wages have not. In the South, productivity has lagged. As a result, the unit labor costs in Germany have fallen about 25% since the euro's creation as compared to the Southern countries and France.  Normally, exchange-rate adjustments would reduce this gap. The slower growing, poorer country would become more competitive as its manufactured goods and its tourism became cheaper. Real incomes would take a hit initially, but the economies would have a path to growth. Inside a monetary union, however, there are no exchange rates to change. That alone doesn't need to doom the monetary union. But without an exchange-rate safety valve you need an alternate way to rebalance economies. Moving, inflating, struggling, or subsidizing are your only choices—and none of them is easy.

Greece Exit From Euro Seen Exposing Flaws of Deposit Guarantees -- The threat of Greece exiting the euro is exposing flaws in how banks and governments protect European depositors' cash in the event of a run. National deposit-insurance programs, strengthened by the European Union in 2009 to guarantee at least 100,000 euros ($125,000), leave savers at risk of losses if a country leaves the euro and its currency is redenominated. The funds in some nations also have been depleted after they were used to help bail out struggling lenders, leading policy makers to consider implementing an EU-wide protection plan. "These schemes were not designed to deal with a complete meltdown of a banking system," . "If there's a systemic failure, there needs to be some form of intervention."

Devaluation and the Euro - Nick Rowe - "Consider a small open economy with fixed exchange rates. Suppose the central bank announces that it will devalue the currency by 50% one year from today. What are the consequences of this announcement?" IIRC, the whole point of the Euro was that questions like that wouldn't make any sense, and so would never need to be asked again, and so we wouldn't have to face the ugly answers. It hasn't worked out that way. That same question is back on the exam paper, only in a more ambiguous form. Nobody knows exactly which assets are denominated in domestic currency units and which assets are denominated in foreign currency units. Maybe bank deposits will be devalued, but bank notes won't. Some debts will be devalued, but other debts won't. Nobody knows exactly how much foreign exchange reserves the central bank has, or can borrow from foreign central banks. The students are raising their hands, asking the professor to clarify the exam question. But the professor doesn't know either, because he didn't write this question. But there's no choice on the exam paper, so the students just have to do the best they can with what they've got. The students know roughly what must happen...

NBG: Greeks would lose half income with euro exit - An exit from the euro would see Greeks lose more than half their annual income and prompt a dramatic rise in unemployment and inflation, a report from the country's largest bank has warned. The National Bank of Greece study was published Tuesday as Greece heads to new general elections on June 17, amid Europe-wide concern of broader financial turmoil if Greece's place in the single currency is threatened by a victory for an anti-austerity party. "An exit from the euro would cause a significant drop in the living standards of Greek citizens — with a reduction of at least 55 percent in per capita income," the authors of the 17-page report wrote. "This would affect those on a lower income the most, with a significant devaluation of the new currency, by 65 percent, and financial contraction of 22 percent on top of the (GDP) reduction of 14 percent that occurred between 2009 and 2011."

In Europe, a Dispute Over Facts and Fairness - Part of Europe’s problem is that Europeans can’t agree on some basic facts about the continent’s financial crisis. Consider the striking results of a recent poll by the Pew Research Center: In most large European countries, a plurality of people say Germans are the hardest-working Europeans, with a substantial share also saying that Greeks are the least hard-working. Greeks, on the other hand, say Italians are the least hard-working — and view themselves as the hardest working. Pew explains: The crisis has exposed sharp differences between some Europeans. Germany is the most admired nation in the E.U. and its leader the most respected. The Germans are judged to be Europe’s most hard-working people. And the Germans are the strongest supporters of both European economic integration and the European Union. Greece is the polar opposite. None of its fellow E.U. members surveyed see it in a positive light. In turn, Greeks are among the most disparaging of European economic integration and the harshest critics of the European Union. And they see themselves as Europe’s most hard-working people. James Surowiecki’s column in this week’s edition of The New Yorker touches on similar themes: Europe isn’t arguing just about what the most sensible economic policy is. It’s arguing about what is fair. German voters and politicians think it’s unfair to ask Germany to continue to foot the bill for countries that lived beyond their means and piled up huge debts they can’t repay.

European dysfunction chart of the day, Greece vs Germany edition - Mark Dow has found an astonishing set of results from a February opinion poll in Greece; it’s hard to imagine that Greek attitudes to Germany have improved since then. Here’s just one of the 13 slides: The overwhelming majority of the Greek electorate believes that Germany, quite literally, owes Greece money. In the decades since World War II, Greece has been waiting patiently for its rightful reparations — and instead it’s finding itself in the midst of another attempted takeover by Germany, a Fourth Reich. Looked at through this lens, the Syriza position doesn’t seem contradictory or indifferent to the realities of the Greek economy. Instead, it’s noble resistance to a dangerous hegemon.

Europeans Ambivalent to the Euro, Survey Finds — The debt crisis that has ravaged Europe for the best part of three years has exposed a dislike of the single currency but little desire to abandon it, a wide-ranging survey of public opinion found Tuesday. Pew Research Center’s survey across eight European Union countries, including five members of the 17-country eurozone, indicated that the region’s financial problems have triggered full-blown fears about the future of Europe as a political project.“This crisis of confidence is evident in the economy, in the future, in the benefits of European economic integration, in EU membership, in the euro and in the free market system,” Pew said in a statement accompanying its survey. Despite those concerns, Pew found there was no desire for those countries that use the euro to return to their former currencies, such as the French franc or the Spanish peseta.

All Eyes Turn to Spain - The news from Europe was all Spanish overnight as the country continues to struggle to find traction on any plan that will lead it away from the need for external help:Spain backtracked on a plan to use government debt instead of cash to bail out Bankia, as Prime Minister Mariano Rajoy struggles to shore up the nation’s lenders without overburdening public finances.An Economy Ministry spokesman said yesterday that the government was considering using an injection of treasury debt instead of cash to recapitalize BFA-Bankia, as laid out in legislation approved in February. Spanish bond yields rose and investors criticized the idea, which the spokesman, speaking anonymously under ministry policy, said today had become a “marginal” option for the 19 billion-euro ($24 billion) rescue. The government’s push to merge banks continues with the announcement that three savings banks, Ibercaja, Liberbank and Caja3, will vote shortly on whether to combine into a single entity. The merger, if approved, would create the country’ seventh largest financial institution with a combined £96bn in assets. Obviously we’ve seen this before with Bankia, which unfortunately didn’t go to plan.

Spain to go to market to fund Bankia, regions -source (Reuters) - Spain will recapitalise nationalised lender Bankia by issuing new debt, not by injecting bonds into the lender, and will likely adopt on Friday a new mechanism to back its regions' debt, a government source told Reuters on Tuesday. "There is a clear preference to tap the market. The other option (injecting state bonds directly into Bankia) is marginal," the source said. "The (bank restructuring fund) FROB has liquidity and can tap the market. The Treasury also has a strong liquidity position. We'll choose one or the other mechanism."

The Governor Of The Bank Of Spain Will Leave His Post Early After Charges Of ‘Grave Misconduct’ Over Bankia - Miguel Angel Fernandez Ordoñez, the Governor of the Bank of Spain, will leave his post on June 10 instead of the planned June 12, according to Bloomberg. This comes after a he met with prime minister Mariano Rajoy today. In a phone interview, Miguel Bernad, the Secretary General of Manos Limpias, told Business Insider that recent claims filed against Ordonez by his organization were ultimately responsible for the early resignation. Those suits were admitted today by a judge in Madrid. Other reporters and analysts point out that this is not the first charge against Ordonez, implying that the judge's decision might have been the final straw (Spanish) after a string of questionable behavior. Officially, the Bank said in a statement that Ordonez's early departure is based on timing. June 10 will mark the end of a series of momentous decisions for the government, after which the Bank will face a variety of new challenges. "The governor considers that he would only have one month to face a new phase in the crisis, and so thinks that it best that a new governor presides over and participates in all these important decisions from the first moment," it said in a statement.

Spain Said to Consider Backing Regional Bonds With Taxes - The debt premium -- the extra return investors demand to hold Spanish bonds over their safer German counterparts -- leapt to a euro-era record of 5.16 percentage points. Markets buckled on concerns over the debt load in powerful regional governments and on signs of a banking system under stress as it is forced to abide by tough new reforms. Spain's government said it would approve on Friday the issuing of joint bonds -- "hispanobonos" -- by the 17 regional governments so as to make it cheaper for them to finance their debts. "The goal is to reduce the pressure on the regions, which is often greater than the pressure on the state in general, with some regions not able to borrow on the market," an Economy Ministry spokeswoman said. Spain's 17 regional governments have suffered a plunge in tax revenues and soaring debt since the collapse of a decade-long property boom in 2008, and they are struggling to pay suppliers.

ECB rejects Madrid plan to boost Bankia - A Spanish plan to recapitalise Bankia, the troubled lender, by indirectly tapping the European Central Bank for cash, was bluntly rejected as unacceptable by the ECB, European officials said. Madrid had floated the unorthodox idea over the weekend of recapitalising Bankia by injecting €19bn of sovereign bonds into its parent company, which could then be swapped for cash at the ECB’s three-month refinancing window, avoiding the need to raise the money on bond markets. The ECB told Madrid that a proper capital injection was needed for Bankia and its plans were in danger of breaching an EU ban on “monetary financing,” or central bank funding of governments, according to two European officials.The ECB’s rebuff appeared to toughen Madrid’s insistence that the only solution to a crisis that is pushing its borrowing costs close to unsustainable levels is for the ECB to become a government lender of last resort. Senior government officials in Madrid argue that bailouts in Portugal, Greece and Ireland have been catastrophic and Spain will not compromise on its refusal to accept a similar form of intervention

Spain Crisis Quickening Pace for Eurozone Response - A couple days ago, Spain floated an idea to deal with their bailout of Bankia, which would have represented a back-door way for the country to print money without having control of their own currency through a central bank. It would have worked this way: Spain would agree to a debt-for-equity swap with Bankia, and then use the Spanish government debt (bonds) as collateral for cash from the European Central Bank. The ECB would have to agree to such a scheme, of course. And there are conflicting reports about their posture. Several news outlets have reported that the ECB opposed the recapitalization scheme for Bankia. But then, the ECB said they have not given an opinion on the plan. For their part, Spain said they never formally proposed the idea. So everybody denied everything. But given the ECB’s staunch adherence to their bylaws, which disallows them financing government operations, and well as their endless concerns about credibility and precedent, it’s unlikely they would consent to the scheme. Spain’s other option is to go to the markets to finance the Bankia bailout – they only have $9 billion in a domestic bailout fund, and rescuing Bankia could cost as much as $23 billion – but then they have to contend with the high borrowing rates that has driven the country to the brink of default. Clearly Spain’s economic situation is deteriorating, and since there is broad agreement that Spain is too big to be jettisoned from the euro, that demands action on the part of Eurozone leaders.

'Spexit' Will Come Before a 'Grexit'.“The euro debt crisis, like any really spectacular geo-economic event, is spawning its own special vocabulary” said Matthew Lynn of Strategy Economics on Wednesday. We can now add Spexit to a list which includes Merkozy and Grexit, and Lynn believes the chances of Spain leaving the euro are now higher than those of Greece leaving. “The Spanish are a lot more likely to pull out of the euro than the Greeks, or indeed any of the peripheral countries” said Lynn. “They are too big to rescue, they have no political hang-ups about rupturing their relations with the European Union, they are already fed up with austerity, and there is a bigger Spanish-speaking world for them to grow into,” said Lynn. “One in four Spanish households now have no bread-winner. Retail sales are falling 10 percent year-on-year. Yet the prescription from Brussels and Berlin is precisely the same as it has been for every other country struggling with the euro. Endure a deep recession. Let unemployment rise. Allow wages to fall until you claw back competitiveness," he said.

6 Reasons Spain Will Leave the Euro First - The Grexit, short for Greece finally giving up on the single currency, has been trending for the last few weeks. And coming up next: the Spexit. In Greece, people have just about put up with it — until now. So have the Irish, the Portuguese, and the Italians. The Spanish won’t. Here’s why.
One: Spain is too big to rescue.
Two: Spain has tired of austerity already. Remember, the protests against cuts began in Madrid a year ago with the “indignados” movement, which started sit-ins across major cities in 2011.
Three: Spain has a real economy. The Greeks understandably feel nervous about life outside the euro zone. They don’t really make anything. Spain is a successful economy with a perfectly respectable industrial base – its export to GDP ratio is 26%, similar to the U.K., France or Italy.
Four: Spain is politically secure. The Greeks stay in because it locks them into Europe (rather than being part of the Turkish sphere of influence). Latvia wanted in because it made it part of the EU rather than being dominated by Russia. For the Irish, it is about separating themselves from Britain.
Five: Spain has bigger horizons. The Spanish economy looks partly to Europe. But it looks just as much to the booming Spanish-speaking economies of Latin America. Why tie yourself to a failing project when there are much bigger opportunities out there?
Six: The debate has already started. There is already a serious discussion underway in Spain about the future of the currency. Plenty of mainstream economists and pundits are arguing that the real problem is the euro, and Spain will only recover once it gets the peseta back. The taboo has been broken. That isn’t true in Greece, where even the far-left Syriza party still clings to the idea that it should stay in the euro.

Spanish bond yields hit euro-era high - Spain's borrowing costs soared Wednesday to reach their highest level since the country joined the euro, close to levels where other debt-stricken countries such as Greece and Ireland have asked for an international bailout. The interest rate - or yield - on Spanish 10-year bonds, a key indicator of market confidence in a country's ability to pay down its debt, shot up 25 basis points Wednesday to 6.67 percent - matching the level it hit at the height of the eurozone crisis late last year, according to financial data provider FactSet. The yield later fell back to hit 6.55 percent in afternoon trading. A yield of seven percent is seen by many analysts as unsustainable for a country to continue financing itself over the long term. Meanwhile, the difference between the Spanish bond and the equivalent safe-haven German bunds was a record 5.36 percentage points. The country's conservative government has introduced harsh austerity measures, including spending cuts on health and education, in an attempt to control the level of its debt relative to the size of its economy and bring it with European guidlines.

Egan-Jones Cuts Spain’s Debt Rating to B From BB- on Outlook - Spain’s sovereign credit rating was cut by Egan-Jones Ratings Co. to B from BB- on the country’s deteriorating economic outlook.  The nation’s 9.6 percent budget deficit, 24 percent jobless rate and bank losses of as much as 260 billion euros ($324 billion) weigh on the economy, the ratings company said in an e- mailed statement today.  “Spain will inevitably be faced with payments to support a portion of its banking sector and for its weaker provinces,” the Haverford, Pennsylvania-based company said. “Assets of Spain’s largest two banks exceed its GDP. We are slipping our rating to ‘B’; watch for more requests for support from the banks and money creation.”  Spain is trying to bolster its banks and help cash-strapped regions at a time of surging borrowing costs. The yield difference between Spanish and German 10-year bonds increased yesterday to the highest since the creation of the euro. As Spain’s market access narrows, it depends increasingly on domestic lenders, which in turn are getting cash from the European Central Bank, to buy its debt.

Record Drop In Retail Sales Adds To Spain's Woes - A record drop in retail sales added to Spain's economic woes on Tuesday as the government struggled to boost market confidence in the crippled banking industry and investors remained doubtful of the country's ability to get a grip on its debts amid a recession. Retail sales dropped 9.8 percent year-on-year in April as the country battled against its second recession in three years and a 24.4 percent jobless rate that is expected to rise. The fall in sales was the 22nd straight monthly decline, and was more than double the 3.8 percent year-on-year fall posted in March, the National Statistics Institute announced. A gloomy Bank of Spain report heaped more bad news on the government. The central bank said it predicts the economy will keep shrinking at least until the end of June, after contracting 0.3 percent in the first quarter, as Spain endures a double-dip recession. The government has predicted a 1.7 percent contraction for the whole of 2012.

Eurozone retail sales continue to fall sharply in May - The Eurozone retail sector remained firmly in contraction in May, according to PMI data from Markit. Sales fell sharply on a month-on-month basis, and revenues compared with a year ago  were down at a near-record rate.  Commenting on the retail PMI data, Trevor Balchin, senior economist at Markit and author of the Eurozone Retail PMI, said ``Eurozone retailers reported a further sharp fall in sales in May, indicating that the region’s ongoing financial crisis and austerity measures continue to hit consumer spending.``   ``Sales fell especially steeply in Italy, but are now also falling at a worrying pace in France. German retailers meanwhile reported only very modest growth, and have seen sales come under pressure in recent months as consumer confidence has waned.``  ``With sales falling sharply again in May compared with April, the second quarter is currently looking the weakest since the height of the financial crisis in the final quarter of 2008. Comparisons of the PMI data with official data suggest that retail sales are now falling at a quarterly rate of around 1%. Moreover, the annual drop in sales was one of the sharpest since the survey began in January 2004.``

BBC News - Eurozone retail sales fall to lowest level since 2008 - Retail sales in the three largest eurozone economies - Germany, France and Italy - have fallen to their second lowest level on record, a survey says. The purchasing managers' index (PMI) for the three countries, compiled by research firm Markit, fell to 41.3 in April, down from 49.1 in March and the weakest reading since November 2008. A reading below 50 indicates shrinking activity.  Another survey from the ECB found small businesses being refused bank loans.  The European Central Bank said banks were increasingly turning down lending requests from small and medium sized companies in the eurozone. Markit said the retail sales figures indicated it had been a "torrid" start to the second quarter of 2012.The rate of contraction in Germany was the fastest since April 2010. French retailers said the presidential elections had disrupted sales and contributed to the biggest drop since the survey began in 2004, The Markit index has now posted contractions every month since last June.

Commercial Landlords Fail to Pay Loans Amid Crisis, Moody’s Says -  Landlords of commercial properties in Europe are struggling to repay mortgages as banks pull back from refinancing the loans, according to Moody’s Investors Service. Seventy-nine percent of the loans packaged into commercial mortgage-backed securities rated by Moody’s that came due in the first quarter weren’t repaid on time, Frankfurt-based analyst Oliver Moldenhauer wrote in a report. The non-payment rate more than doubled from 35 percent in 2009 and reflects “the current weak state of the lending market,” Moldenhauer wrote. The economic slowdown is hurting landlords of properties from office blocks to car parks and shopping malls across Europe. A total of 38 billion euros ($47 billion) of commercial real estate loans come due this year and next, Moody’s said. “As banks need to deleverage due to regulatory requirements, commercial real estate financing will remain constrained,” Moldenhauer wrote. “Most loans will not be repaid.”

The Wrong Narratives - News sections are littered with shortcuts for explaining what’s going on in the eurozone, often featuring easy, morally sodden narratives. But the real problem here is not that narratives and other shortcuts are being employed—after all, sometimes the data need a little help.  The real problem is that they’re using the wrong narratives.We’re told more often than not that the reason peripheral countries like Spain are in trouble is that their governments engaged in an irresponsible spending binge and are now reaping the consequences.  But in 2007 Spain’s debt-to-GDP ratio was low—a quaint 27 percent of GDP—and had been falling for some time.  Likewise, by contrast with the Aesop-flavored conventional wisdom, German ants work 690 fewer hours per year compared to their Greek grasshopper counterparts.  But this doesn’t mean morality has no place in an assessment of Europe’s economic woes.  Today, for instance, the imposition of austerity and the waste of human potential this is generating—even as austerity fails to summon the “confidence” and growth that was promised and fails to make a significant dent in debt-to-GDP ratios—begs for moral judgement. And while a technical analysis of the basic setup of the EU and all the imbalances it has generated can get you most of the way toward explaining what’s going on (take a look at the private debt ratios displayed in this graph), this doesn’t mean that domestic political considerations in the peripheral countries haven’t played a part.

ECB: Spain bank deposits tumbled in April-- Private deposits gushed out of Spanish banks in April on fears the country's financial industry has understated its problems with property loans. Retail and corporate deposits in Spanish banks fell by EUR31.44 billion to EUR1.624 trillion, their lowest since the euro-zone debt crisis began in earnest, according to European Central Bank data published Wednesday. By contrast, private deposits at Greek banks were stable in April, rising 0.2%, or just under EUR400 million, to EUR171.48 billion. That was before elections in May threw into question the country's future in the euro zone, promting a flurry of deposit withdrawals. The ECB data also showed a change in tactics by the banks in the euro zone's periphery in April. After two months of snapping up government bonds, Spanish and Portuguese banks turned net sellers, and Italian banks reduced their net purchases to EUR6.62 billion from an average of EUR23 billion a month in the first quarter.

EU Proposes Direct Rescue Fund Bailout For Eurozone Banks - The Eurozone's permanent bailout fund must be given authority to directly recapitalize the troubled banks, according to a set of proposal from the European Commission, released Wednesday. The commission said a 'banking union' will be another step towards full economic and monetary union. Allowing direct bank recapitalization by the European Stability Mechanism will serve as a link between banks and their national governments, the executive branch of the EU said. Germany is likely to resist the call for this liberal use of bailout fund. The recommendations come amid escalating concerns over a possible EUR 19 billion bailout for the Spanish lender Bankia. The ESM, the permanent bailout fund will come into operation by July.

EU May Grant Spain More Time To Meet Deficit Goal: Report - In view of the renewed tensions surrounding Spain's public finances and the banking sector, the European Commission may allow more time to the government to meet its deficit target, El Pais reported Wednesday citing an EU draft document. The Commission may ask the European Union finance ministers to extend the deadline to 2014 from the current 2013 to bring its deficit to 3 percent of GDP. In return, the EU may demand a number of measures, including speeding up the increase in retirement age and increase in tax bases, including the value-added tax. In the draft document, the Commission urged Spain "to implement the fiscal strategy as planned" in the stability program. Meanwhile, the government on Tuesday said the country is on track to meet the deficit goals. State Secretary for Budgets and Expenditure Marta Fernandez Curras said the deficit in the first four months of the year was EUR 25.46 billion, equivalent to 2.39 percent of GDP. This compares to 1.9 percent of GDP in the January to March period. The figure matched the calculations by the government in light of the policies being implemented in Spain, Fernandez Curras said. On an adjusted basis, the deficit would be 1.43 percent of GDP, down from 1.51 percent in the January-April period of 2011. 

EU throws Spain two potential lifelines - The European Commission threw Spain, the latest frontline in Europe's debt war, two potential lifelines on Wednesday, offering more time to reduce its budget deficit and direct aid from a euro zone rescue fund to recapitalize distressed banks. EU Economic and Monetary Affairs Commissioner Olli Rehn said Brussels was ready to give Spain an extra year until 2014 to bring its deficit down to the EU limit of 3 percent of gross domestic product if Madrid presents a solid two-year budget plan for 2013-14, something it has committed to do.Commission President Jose Manuel Barroso said tighter euro zone integration could include a joint bank deposit guarantee scheme to prevent a bank run and euro area financial supervision, saying the mood had changed since member states unanimously rejected a joint deposit guarantee fund only months ago."In the same vein, to sever the link between banks and the sovereigns, direct recapitalization by the ESM (European Stability Mechanism) might be envisaged," the report said.Permitting the ESM to lend directly to banks would require a change to a treaty in the midst of ratification by member states that might come too late for Spain's needs. Spanish premier Mariano Rajoy backs the idea but Rehn appeared cool to it.

Spain up against a wall as borrowing costs soar — Economists and analysts were asking just how long Spain can hold out before it needs some form of international bailout amid a chaotic trading session Wednesday that sent the government’s borrowing costs to nearly the highest levels since the euro’s inception. The yield on the 10-year Spanish government bond rose 22.2 basis points to 6.685%, but pushed above that earlier, setting a fresh 2012 high, according to Tradeweb. The Nov. 25, 2011 intraday high of 6.779% and closing high of 6.723% weren't far off, while beyond that, the yield will sit at euro-era highs. The yield on Italy’s government bond jumped 17.4 basis points to 6.068%. Global stocks and oil suffered as investors poured into the perceived safe-have of the dollar. Dollar probes two-year high The 7% level for the Spanish yield is key as that was the point reached by yields for Greece and Irish 10-year government bonds when they required a bailout.

Spain Credit-Default Swaps Surge to Record on Bank Bailout Woes -- The cost of insuring against default on Spanish sovereign bonds rose to a record as the nation's debt crisis deepened amid concern over bank bailouts. Credit-default swaps linked to the nation's debt climbed 23 basis points to 583 at 11:44 a.m. in London, according to data compiled by Bloomberg. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose seven basis points to 320.5. An increase signals worsening perceptions of credit quality. Bank of Spain Governor Miguel Angel Fernandez Ordonez resigned a month early, handing over the task of convincing investors that Spanish banks won't need an international rescue. Bankia group, the nation's third-biggest lender which received 4.5 billion euros ($5.6 billion) of public funds in 2010, asked for another 19 billion euros on May 25.

EU Commission Calls On Spain To Raise Taxes -  The European Commission Wednesday called on austerity-stricken Spain to increase taxes further to help contain a mounting public debt problem, and warned that planned banking bailouts may lead to higher budget deficits. In a staff working document reviewing Spain's progress in addressing previous Commission recommendations, the European Union's executive arm said growing entitlement spending as a result of the rapid aging of Spain's population may drive the country's government debt to reach 100% of gross domestic product by 2020 from an estimated 81% of GDP this year, in the absence of new policy adjustments. In the latest of a series of grim assessments of Spain's economic and fiscal condition, the EU Commission said the euro-zone's fourth-largest economy should deepen growth-friendly reforms, including further steps to kickstart a comatose labor market, and ensure that spending-prone regions meet tough budget deficit targets. It also reiterated a call to increase tax revenue from a below-EU-average 32% of GDP, preferably through higher environmental taxes and an increase in the value-added-tax, which at 18% is one of the lowest in the euro zone. This call for more consumption taxes in a country already suffering from a marked decline in household spending has often been rebuffed by Madrid in recent weeks. Just Tuesday, Deputy Budget Minister Marta Fernandez Curras said Spain is not seeking to raise VAT until it is clear such a move would result in an actual rise in revenue, and wouldn't hurt consumption further.

Spain Runs Out Of Money - El Mundo reports that the country can no longer resist the bond markets as 10-year yields flirt with 6.5pc again, and the spread over Bunds – or `prima de riesgo' — hits a fresh record each day. Premier Mariano Rajoy and his inner circle have allegedly accepted that Spain will have to call on Europe's EFSF bail-out fund to rescue the banking system, even though this means subjecting his country to foreign suzerainty. Mr Rajoy denies the story, not surprisingly since it would be a devastating climb-down, and not all options are yet exhausted. "There will not be any (outside) rescue for the Spanish banking system," he said. Fine, so where is the €23.5bn for the Bankia rescue going to come from? The state's Fund for Orderly Bank Restructuring (FROB) is down to €5.3bn, and there are many other candidates for that soup kitchen. Spain must somehow rustle up €20bn or more on the debt markets. This will push the budget deficit back into the danger zone, though Madrid will no doubt try to keep it off books – or seek backdoor funds from the ECB to cap borrowing costs. Nobody will be fooled.

Spain in a state of 'total emergency' - Spain is in a state of 'total emergency', the country’s former prime minister has warned, with Madrid facing punitive borrowing costs and the prospect of needing a Greek-style bail-out. Felipe González, the country’s elder statesman, said: “We’re in a situation of total emergency, the worst crisis we have ever lived through.” Global financial markets lurched yesterday at the spectre of the eurozone’s fourth biggest economy being locked out of international capital markets and being unable to fund itself. Spanish borrowing costs soared, while the Madrid stock market fell 2.6 per cent, the euro sank to a 22-month low against the dollar and the price of Brent crude dropped 2 per cent. Meanwhile, global investors fled to “safe havens” sending UK bonds to another low. The FTSE 100, however, dropped 1.7 per cent, along with European and American stockmarkets.

The future of the euro is at stake: Spanish deputy PM - Europe must move quickly with measures to pull Spain back from the brink of a debt crisis, with the future of the euro common currency at stake, Spanish Deputy Prime Minister Soraya Saenz de Santamaria said. Saenz, a long-time politician in the centre-right People's Party, spoke with Reuters Editor-at-Large Harold Evans during a critical week for Spain as it seeks to fund a 19-billion-euro rescue of one of its biggest banks and the country's autonomous regions face a liquidity crunch. Spain's borrowing cost hovered close to an unsustainable level on Tuesday - the yield on the benchmark 10-year government bond was 6.5 percent - as investors worry costly rescues of the regions and banks will push Spain's finances over the edge. Spain has made enormous strides in containing its deficit and making its economy more competitive, Saenz said, but it needs European-wide measures to give confidence to the common currency and restore calm to markets.

Italy 10-year borrowing costs breach 6 percent on Spain fears - Italy paid a high price for the troubles of fellow problem debtor Spain on Wednesday when its 10-year bond borrowing costs topped 6 percent at auction, marking a new high since January. A month ago Italy, with the world's fourth-largest debt pile, had raised 10-year funds at 5.8 percent. The climb in Italian yields was even sharper on a five-year maturity. The Treasury paid 5.66 percent, the highest since December, on a new June 2017 bond - 80 basis points more than a month ago. Despite the generous yields, Italy missed the top of a planned issue range of up to 6.25 billion euros ($7.8 billion). The volume of bids for Wednesday's 5.73 billion euro auction was broadly in line with a month ago, but analysts said the fact that the bonds were sold at a discount compared with market levels was a sign of weakness as Spain's struggle to prop up its debt-laden banks fed fears around the euro bloc. "We're seeing Italy being taken hostage by the Spanish concerns. The market does not discriminate anymore," Italian bonds suffered heavy losses in the secondary market ahead of the publication of the auction results. Benchmark 10-year yields stood at 6.13 percent by 1027 GMT, more than 480 basis points above equivalent German yields.

Italy's Bond Sale Misses Target as Yields Climb on Contagion -- Italy sold less than the maximum amount of debt and borrowing costs rose at an auction as concern deepened the debt crisis is spreading, driving the 10-year yield to 6 percent for the first time in two weeks. Italy auctioned 5.73 billion euros ($7.1 billion) of five- and 10-year bonds, less than the 6.25 billion-euro maximum target for the sale. The Treasury priced the 10-year debt to yield 6.03 percent, the highest since Jan. 30 and up from 5.84 percent at the previous auction on April 27. "While things are going from bad to worse in Spain, the uncertainty surrounding Greece's membership of the euro zone is weighing heavily on sentiment,". "Italy is currently experiencing an externally driven deterioration in its perceived creditworthiness."

Portugal's big banks need bailout - Portugal's central bank says three of the bailed-out country's four largest banks will likely need state aid to meet new capital requirements. European banks are required by law to shore up their reserve cushion of high-quality capital, known as core tier 1, to 9 percent by the end of June. The measure aims to strengthen lenders against financial market uncertainty amid the continent's debt crisis. The Bank of Portugal said in a report on Tuesday it expects three Portuguese banks to tap a 12 billion euros ($A15.37 billion) fund to support capital increases, although it did not say by how much. It did not name the lenders, but Banco Comercial Portugues, Banco Portugues do Investimento and Banif have previously said they may need help.

Danske Downgraded with Eight Other Danish Lenders by Moody's -- Moody's Investors Service downgraded nine Danish financial institutions, including the country's biggest bank, Danske Bank A/S, arguing loan books have deteriorated and debt refinancing has become harder. Danish banks suffer from "a weak operating environment, pressurized asset quality and poor profitability," the rating company said late yesterday in a statement published out of London. Danske Bank's deposit rating was cut two steps to Baa1 from A2, after Standard & Poor's yesterday cut the Copenhagen-based bank's long-term rating to A- from A. Nykredit Realkredit A/S, the country's largest mortgage lender and Europe's biggest issuer of covered bonds, was cut three levels to Baa2. Pohjola Pankki Oyj of Finland was cut to Aa3 from Aa2, in a separate statement. The downgrades are souring client relations with the rating company. Moody's has already been fired by a number of Danish lenders, including Nykredit, amid disagreements over the rater's methodology. Danske Bank Chief Executive Officer Eivind Kolding criticized Moody's in an interview this month for its stance on systemic support. The bank's mortgage arm sacked Moody's less than a year ago, while Nykredit terminated its contract with the rater in April.

European money slows to a crawl - European monetary aggregate data from the ECB came out this week and continues to follow the trends we have seen over the last year. The annual growth rate of the broad monetary aggregate M3 decreased to 2.5% in April 2012, from 3.1% in March 2012.1 The three-month average of the annual growth rates of M3 in the period from February 2012 to April 2012 stood at 2.7%, unchanged from the previous period. Regarding the main of M3, the annual growth rate of M1 decreased to 1.8% in April 2012, from 2.8% in March. The annual growth rate of short-term deposits other than overnight deposits (M2- M1) stood at 3.2% in April, unchanged from the previous month. The annual growth rate of marketable instruments (M3-M2) decreased to 2.9% in April, from 4.1% in March. Among the deposits included in M3, the annual growth rate of deposits placed by households increased to 2.5% in April, from 2.2% in the previous month, while the annual growth rate of deposits placed by non-financial corporations was more negative at -0.8% in April, from -0.2% in the previous month. Finally, the annual growth rate of deposits placed by non-monetary financial intermediaries (excluding insurance corporations and pension funds) decreased to -1.0% in April, from 4.4% in the previous month.

Spain Just Gave Us a Glimpse Into the True State of the EU Banking System -  In case you missed it, Spain just gave the entire world a glimpse of what’s happening “behind the scenes” in the financial system. I am of course referring to the Bankia nationalization, the largest bank nationalization in Spain’s history. Bankia was formed in 2010 when the Spanish Government merged seven insolvent cajas So it’s no surprise that Bankia was a trainwreck waiting to happen… at least to anyone with a working brain. However, both the bank and the Spanish Government decided to maintain the charade that the bank was in great form right up until it collapsed (only one month ago Bankia was talking about paying its dividend). On May 9th the Spanish Government stepped in to nationalize the bank. Its first step was to convert its (the Spanish Government’s) €4.5 billion worth of preferred shares to common shares, thereby taking a 45% stake in the bank. Then Bankia announces €17 billion of new write-downs as well as €7 billion of mark-downs on investments, thereby rendering the bank insolvent. It also revised its 2011 results from a €309 million profit to a €3 billion LOSS.

The Monster Has Awakened - The most significant event of yesterday was not the Spanish banking system unlocking the door to the horror chamber and clicking the melt-down button that it found on the wall but what happened at the European Union. That which had been created woke and in its new found consciousness sat upright and staring into the void it turned upon its Master. It should not have come as a surprise, I suppose, but the mockery of the beast was a frightening sight. For thirteen years the nations of Europe had worked, slaved, propped up their egos with their ministrations and yesterday the Creation came into its own mind and threw off the shackles in which it had been bound and leapt up upon the table and announced that it no longer belonged to any man and that the chains that had held it would not enslave it any longer. Brussels turned, and looking Berlin squarely in the eye, it used impolite words and gestures and essentially said: "Stick it."

Bankia Vortex Risks Dragging Spain to Bailout as Costs Mount -- Bankia group risks dragging the rest of Spain into its vortex. As Spain's third-biggest bank asks Prime Minister Mariano Rajoy's government for 19 billion euros ($24 billion), international investors are tallying the potential cost for the rest of the industry and betting he won't be able to foot the bill. With foreign investors shunning Spanish debt, leaving national banks to fund the government, the nation's 10-year borrowing costs compared with Germany's are near a record. "The problem for Spain is that they can't simply finance all this by issuing debt," . "It's a perfect storm for Spain, with more banks now being sucked in." Spain needs to bail out lenders still reeling from the collapse of the real-estate boom while its own access to funding increasingly depends on domestic banks being kept afloat by the European Central Bank's refinancing operations. Rising borrowing costs are putting pressure on Rajoy's five month-old government to join Greece, Portugal and Ireland in seeking a rescue that would be the European Union's biggest.

Europe Fears Bailout of Spain Would Strain Its Resources - Spain is the euro zone’s fourth-largest economy, after Germany, France and Italy, and the cost of a rescue would strain the resources of Europe’s new 700 billion euros ($867 billion) bailout fund that is to become available this summer. That would leave little margin for any additional bailouts.  Spanish and European officials hope a bailout will not be needed. But each day, financial turmoil mounts over the government takeover of the giant Spanish mortgage lender Bankia, the flight of money to safer borders and a worsening recession.  Compounding Spain’s problems has been an outflow of foreign capital from the country, meaning the Spanish banks in recent months have been the only major buyers of its government bonds needed to finance the nation’s budget deficits. With those bonds now plummeting in value, the fate of Spain’s banks and government are intertwined in a financial tailspinIn the bond market, the Spanish government’s borrowing costs are approaching the symbolically dangerous level of 7 percent on 10-year bonds. The rise has stoked worries that Spain might need bailouts similar in scope — though many times larger — than those extended to Greece, Portugal and Ireland. Interest rates in that range had pushed them out of the debt markets that governments rely on to finance their operations.

Spain reveals €100bn capital flight - Madrid was dealt a double blow on Thursday after it emerged that almost €100bn in capital had left the country in the first three months of the year and the head of the European Central Bank lambasted its handling of Bankia, the troubled Spanish lender. Data published by Spain’s central bank showed €97bn had been pulled out in the first quarter – around a 10th of the country’s GDP – as concerns mounted over Madrid’s ability to contain its twin economic and financial crises, which have forced government borrowing costs to euro-era highs. The data appeared to corroborate earlier assessments from economists that foreign investors were selling Spanish assets, while Spanish banks were increasing their holdings of domestic bonds, helped by cash accessed through the ECB’s three-year liquidity operations. “My concern is that we haven’t yet seen the most recent numbers, which could be far worse,” “We are seeing a perfect storm.” In a damning indictment of Spain’s handling of the problems at Bankia, its third largest lender, ECB president Mario Draghi said national supervisors had repeatedly underestimated the amount a rescue would cost. He also cited the rescue of Dexia, the Franco-Belgian lender, as an example. “There is a first assessment, then a second, a third, a fourth,” Mr Draghi said. “This is the worst possible way of doing things.

IMF Begins Talk On Spain Contingency Plans - The European department of the International Monetary Fund has started discussing contingency plans for a rescue loan to Spain in the event that the country fails to find the funds needed to bailout its third-largest bank by assets, Bankia SA, BKIA.MC +0.19% people involved in the handling of the Spanish crisis said Thursday. Both the EU and IMF want to avoid having to bailout Spain at all costs, the people said, but initial planning is under way given that the country is struggling to raise a EUR10 billion shortfall in funds to bail out Bankia. The stakes are extremely high because a three-year rescue loan for Spain could be as much as EUR300 billion, one person said, although any bailout could involve smaller, shorter-term loans. "A better picture will emerge after the IMF review of the Spanish economy starting June 4," one of the people said. "But thoughts are already being discussed (within the European department)". "Some say a Spanish bailout is inconceivable, but it's equally inconceivable that preparations are not being made for such an eventuality," the person added.

IMF Begins Spain's Schrodinger Bail Out - Wondering what prompted the most recent "month end mark up" ramp in stocks? Look no further than the IMF, which one month after failing miserably to procure a much needed targeted amount of European bailout funds as part of Lagarde's whirlwind panhandling tour, hopes that markets are truly made up of idiots who have no idea how to use google and look up events that happened 4 weeks ago. So here it is: the Spanish bail out courtesy of the IMF. Well, not really. Because according to other headlines the IMF claims no plans are being drafted for a bailout. Why? Simple - if the IMF admits it is even considering a bailout, it will launch a bank run that will make the Bankia one seem like child's play, as the cat will truly be out of the bag. So instead it has no choice, but to wink wink at markets telling them even though it has been locked out from additional funding by the US, UK, Canada and even China, it still has access to funding from... Spain. From the WSJ: The European department of the International Monetary Fund has started initial discussions on a contingency plan for a rescue loan to Spain in case the country fails to find the funds needed to bail out its third-largest bank by assets, Bankia, people involved in the handling of the Spanish crisis said. Update: as expected, "IMF Says Spain Discussions Internal, No Talks With Spain"

Goldman Sachs eyes $2tln European bank firesale - US investment bank Goldman Sachs sees a silver lining in the troubles of Europe's banks, which may need to sell more than $US2 trillion ($A2.07 trillion) in assets, a top Goldman executive says. European banks, pressed to bolster their capital cushions, are expected to dispose of $US607 billion in assets this year, the majority of them in soured debt, said Gary Cohn, president and chief operating officer of the prestigious Wall Street bank. They could divest another $US243 billion in assets in 2013, and $US147 billion the following year, Cohn said at a Sanford Bernstein strategy conference in New York on Thursday. Advertisement: Story continues below According to Cohn, Europe's total bank deleveraging could exceed $US2 trillion and Goldman Sachs is "well-positioned to intermediate these asset sales". Cohn said the assets put up for sale were expected to be under-pressure debt securities backed by distressed assets.

Europe ponders 'banking union' to avert further euro crises - European leaders called Wednesday for the 17-nation Eurozone to create a "banking union" to collectively stabilize struggling financial institutions and protect national governments from taking on excessive debt to bail out their banks. The proposal of the European Commission was spurred by mounting fears that Spain, the fourth-largest economy among the nations that use the euro currency, can't afford to recapitalize banks staggering under the weight of bad loans issued during a building boom that went bust with the 2008 recession. If the Spanish government is left to bail out the nation's banks, the government itself risks becoming insolvent. Its borrowing costs have risen to record highs on fears that Spain could be the next Eurozone member to need a bailout. Spain last week promised troubled lender Bankia nearly $24 billion to keep it afloat in a sea of defaults and foreclosures on properties now worth a fraction of the prices buyers paid.

ECB’s Draghi Calls for Centralized Banking Control — European Central Bank head Mario Draghi has urged Europe to set up a more centralized authority to oversee its troubled banks, criticizing national regulators for choosing “the worst possible way” to help their banking sectors by delaying tough decisions. Draghi said bailouts for Bankia in Spain, and before that Dexia in Belgium, show that national regulators are reluctant to admit the extent of troubles at home. That only has the effect of raising the end costs of rescuing the banks and undermining trust and transparency, he said. “What Dexia shows — and Bankia shows as well — is that whenever we are confronted with the dramatic need to recapitalize, if you look back, the reaction of the national supervisors… is to underestimate the problem, then come out with a first assessment, a second, a third, fourth. “ “That is the worst possible way of doing things, because everybody ends up doing the right thing but at the highest possible cost and price,” Draghi said in testimony in the European Parliament in Brussels.

Time Bomb? Banks Pressured to Buy Government Debt - US and European regulators are essentially forcing banks to buy up their own government's debt—a move that could end up making the debt crisis even worse, a Citigroup analysis says. Regulators are allowing banks to escape counting their country's debt against capital requirements and loosening other rules to create a steady market for government bonds, the study says. While that helps governments issue more and more debt, the strategy could ultimately explode if the governments are unable to make the bond payments, leaving the banks with billions of toxic debt, says Citigroup strategist Hans Lorenzen. "Captive bank demand can buy time and can help keep domestic yields low," Lorenzen wrote in an analysis for clients. "However, the distortions that build up over time can sow the seeds of an even bigger crisis, if the time bought isn't used very prudently." "Specifically," Lorenzen adds, "having banks loaded up with domestic sovereign debt will only increase the domestic fallout if the sovereign ultimately reneges on its obligations."

Europe has been hijacked by dangerous ideologues -I have argued for some time now that the recurring crisis in the eurozone is not driven by financial markets' demands for austerity in a time of recession, as is commonly asserted. Rather, the primary cause of the crisis and its prolongation is the political agenda of the European authorities – led by the European Central Bank (ECB) and European commission. These authorities (which, if we included the IMF constitute, the "troika" that runs economic policy in the eurozone) want to force political changes, particularly in the weaker economies, that people in these countries would never vote for. This is becoming more blatantly obvious here in Spain, where the government – run by the rightwing Popular party (PP) – shares the political agenda of the European authorities, perhaps even more than the IMF does. The PP government has taken advantage of the crisis to impose labour law changes that will make it easier for employers to get out of industry-wide collective bargaining agreements. They have also taken away rights that workers' had to challenge unfair firings. The goal is to weaken labour as part of a longer-term strategy to dismantle the welfare state; these changes have nothing to do with resolving the current crisis, or even reducing the budget deficit. The government has also mandated huge cuts in healthcare spending, at €7bn. This is comparable to cutting 25% of Medicaid spending in the US, something that would be both devastating to the poor and politically impossible. Another €3bn will be cut from education.

"Fun" Is Not The Word I Would Use - Bloomberg quotes Nassim Taleb: A breakup of the euro “is not a big deal,” Taleb said yesterday at an event in Montreal hosted by the Alternative Investment Management Association. “When they break it up, there will be a lot of fun currencies. This is why I am not afraid of Europe, or investing in Europe. I’m afraid of the United States.” Somehow I think this over-trivializes the situation in Europe. Just a little. Yes, a Euro breakup would create new currencies, and I imagine they could be thought of as "fun" depending on the printing, colors, artwork, etc. But overall, I don't think economic upheaval is the path to "fun."

Smart Taxes -Governments throughout the European Union and around the world confront a seeming Catch-22: the millstone of national debt around their necks has required them to reduce deficits through spending cuts and tax increases. But these are impeding the consumer spending needed to boost economic activity and kick-start growth. As the debate shifts from austerity towards measures aimed at stimulating growth, smarter taxation will be essential to getting the balance right. When governments think about the difficult task of raising taxes, they usually think about income tax, business taxes, and value-added tax (VAT). But there are other taxes that can raise significant amounts of revenue with a much less negative impact on the economy. These are the taxes that governments already levy on electricity and fossil fuels. Such taxes play a crucial role in cutting the carbon emissions that cause climate change. But recent research shows that they can also play a useful role in raising government revenue at little cost in terms of economic growth.

Debt spiral may trigger Greek power cuts - Greece may suffer power cuts later this year unless its international lenders allow an emergency cash injection into electricity producers to allow them to buy fuel, the chief of Greece's biggest utility PPC said on Friday. A yawning gap of more than 300 million euros ($370.9 million) in the accounts of state-run LAGHE, which acts as a clearing house for power transactions, is causing the system to clog up. If unchecked, that may halt operations at independent power producers, PPC's CEO Arthouros Zervos told Reuters in an interview. Weighed down by debt, LAGHE is unable to reimburse independent power producers for the electricity they generate. “This is an emergency and it has to be addressed immediately,” said Zervos. “There's a real threat of power cuts.” PPC would be forced to hike its own hydro and coal production to plug immediate energy gaps. But in the longer run, it would not be able to cover the shortfall and it would have to resort to rotating power cuts - both to businesses and households - in order to prevent a general blackout.

New Greek poll gives anti-bailout leftists 6-point lead (Reuters) - A new Greek opinion poll published on Friday showed the anti-bailout leftist SYRIZA party with a six-point lead over their conservative pro-bailout rivals, ahead of a key election on June 17 that may decide whether the country will stay in the euro zone or not. If elections took place today, SYRIZA would get 31.5 percent of the vote versus 26.5 percent for the conservative New Democracy, according to the Public Issue/Kathimerini poll. The finding contradicts most other pollsters, who show New Democracy with a slight lead. In its latest survey published on May 24, Public Issue projected a 4-point lead for SYRIZA. Below is a table of recent poll results:

Greek Left Prepares Nationalization of Energy/Telecom Industries, Key Infrastructure - What happens with a society’s social contract collapses?  That question is being posed in Greece right now.  Often what happens is that so-called “swamp things”, like the Greek neo-Nazi group Golden Dawn, emerge.  Often, the left begins articulating a genuine alternative vision.  And the corrupt rotted center calls in every chip it can, hoping to preserve patronage and corruption.  Right now, much of the Euro-elite, when not panicking about Spanish borrowing costs, is watching the anti-bailout Greek left (Syriza) and the pro-bailout center right (New Democracy) running neck and neck in the polls.  If Greece goes anti-bailout, it’s going to create tremendous political uncertainty.  With much of the left in Europe looking to Greece, a win by Syriza in mid-June could spark similar anti-bailout left-wing alternatives, much as the Arab Spring ignited the Occupy movement. So what does Syriza actually want?  Their political platform is fairly interesting.  Syriza leader Alexis Tsipras admires FDR’s nationalization of the American banking system in the 1930s and the stimulus pursued by Obama in 2009.  But it seems like he may go much further. SYRIZA will present on Friday its economic manifesto with nine major sectors, including privatization and nationalization issues, salaries and pensions increases and the introduction of a new tax system.One of the party’s main issues will be the nationalization of several former public institutions, including telecommunications and energy companies, as well as airports and ports. SYRIZA members state that, despite yet unknown, their party will find the appropriate way of re-nationalizing these companies, when the time is good for such an action.

Euro Zone Unemployment Rises to a Record 11% - The jobless rate in the 17-nation euro zone reached 11 percent in March and April, the highest since the start of the data in 1995, Eurostat, the European statistical agency said in Luxembourg. The previous record had been 10.9 percent in February, Eurostat said, after it revised March’s figure upward from the 10.9 percent initially estimated. “We have an economy that’s freezing up, it’s clearly not creating jobs,” Peter Dixon, global equities economist at Commerzbank in London, said. “But right now policy makers’ main concern is to ensure that the peripheral countries’ governments and banks can stay afloat. Given that, the real economic data is taking a back seat.” But before long, he said, unemployment “is going to be a major problem for those countries,” as it rises to the top of the political agenda and further complicates the financial problems. For the overall European Union, made up of 27 nations, the jobless rate was 10.3 percent in April, up from 10.2 percent in March. Spain’s jobless rate, of 24.3 percent, was again the highest in the European Union, while Austria’s, at 3.9 percent, was the lowest. The European figures contrasted with April unemployment of 8.1 percent in the United States and 4.6 percent in Japan.

Eurozone unemployment stays at record 11 per cent; Spain, Greece worst off - Unemployment across the 17 countries that use the euro stuck at 11 per cent in April — the highest level since the single currency was introduced back in 1999, piling further pressure on the region's leaders to switch from austerity to focus on stimulating growth. The eurozone's stagnant economy left 17.4 million people out of a population of some 330 million without a job, with rates continuing to climb in struggling Spain, Portugal and Greece. The EU's Eurostat office said 110,000 unemployed were added in April alone. In recession-hit Spain, unemployment spiked to 24.3 per cent, the worst rate in the EU. It was up 0.2 points since March, and 3.6 percentage points compared to last year. Youth unemployment ballooned to a 51.5 per cent, up from 45 per cent last year. Friday's seasonally adjusted figures follow on from last week's European Union summit, where leaders including the new socialist President of France Francois Hollande called for measures to boost growth and employment to offset the impact of stringent austerity policies. Experts argue that targeted measures could help get people, especially youngsters, off the unemployment lines.

Portugal Raises Forecast For 2012 Unemployment Rate to 15.5% - The Portuguese government forecasts the unemployment rate will rise to 15.5 percent this year and 16 percent next year, Finance Minister Vitor Gaspar said. After 2013, the government expects a “sustainable drop” in the unemployment rate, Gaspar said at a press conference in Lisbon today. The government had previously forecast an increase in the unemployment rate to 14.5 percent this year before declining to 14.1 percent in 2013. The jobless rate was 12.7 percent in 2011.

Italian Jobless Rate Rose to 10.2% in April Amid Slump - Italy’s joblessness rose more than economists forecast in April to the highest in 12 years amid a deepening slump in Europe’s fourth-biggest economy. The unemployment rate increased to a seasonally-adjusted 10.2 percent, the highest since the first quarter of 2000, from a revised 10.1 percent in March, Rome-based national statistics office Istat said in a preliminary report today. Economists forecast an increase to 9.9 percent, the median of 10 estimates in a Bloomberg News survey showed. The jobless rate rose to 9.8 percent in the first quarter from 9.1 percent in the previous three months, Istat said.

ECB Must Print Euros or Italy May Say ‘Ciao:’ Berlusconi - Former Premier Silvio Berlusconi said Italy should say “ciao, euro” if the European Central Bank doesn’t start printing money to tackle the debt crisis and Germany should quit the single currency if it won’t back a bolder role for ECB. “The economic crisis can’t be solved” in Italy, Berlusconi said in comments posted on his party’s website today. He called on Prime Minister Mario Monti to “change his political line” and lobby European leaders to back a money- printing campaign by the Frankfurt-based ECB. If the central bank doesn’t become a “lender of last resort,” Italy should say “ciao, euro,” the former premier said. The media tycoon-turned-politician became the latest European leaders to step up pressure on German Chancellor Angela Merkel and the ECB to permit a more aggressive response to the region’s debt crisis. Monti yesterday called on Merkel to drop her opposition to allowing the euro region’s rescue mechanism to lend directly to banks.

Ireland Approves EU Fiscal Compact In Crucial Referendum - Ireland's voters have decided to ratify the European Union's deficit-fighting treaty with "yes" votes reaching nearly 60 percent, according to election officials citing early unofficial results. Leading Irish opponents of European austerity conceded defeat. The treaty's approval, to be declared officially later Friday, relieves some pressure on EU financial chiefs as they battle to contain the eurozone's debt crisis. But critics said the tougher deficit rules would do nothing to stimulate desperately needed growth in bailed-out Ireland, Portugal and Greece nor stop Spain or Italy from requiring aid too. "The 'yes' side is going to win. The question now is where will the jobs and the stability they have promised come from, against the backdrop of a continuing and deepening capitalist crisis within Europe? Their policies will only make the situation worse," said Joe Higgins, leader of Ireland's Socialist Party, which opposed the treaty. Dozens of party activists monitoring the ballot counting at several centers across Ireland reported the "yes" side solidly outpolling "no" voters several hours ahead of the official result announcement at Dublin Castle. The activists, called "tallymen," stood near official ballot-counters and made their own calculations. A strong majority of districts reported pro-treaty majorities, with the "yes" side polling between 55 percent and 75 percent in largely middle-class suburban areas of Dublin, home to a third of Ireland's 4.5 million people. The anti-treaty vote was strongest in urban working-class districts where anger over the crippling cost ofIreland's bank-bailout program runs highest. But even there, tallymen reported, the votes were splitting nearly evenly.

Capital is leaving Europe…There are two stories regarding capital flows and the eurozone: flows between member states, and flows to and from the eurozone as a whole. We’ll ignore the flows into Germany and away from Italy for a moment. Although only for a moment, because the intra-euro capital flows actually appear in the capital flows to and from the eurozone, if only indirectly. So it is worth noting new capital flow data from March, which worsened considerably, via a missive from Nomura analysts on Wednesday: Portfolio investments saw a net outflow of €35bn (compared with February net inflows of €19bn). As for inflows into the eurozone, demand for debt instruments was weak (€2bn), while eurozone equities saw better demand (€22bn), probably helped by relatively strong risk sentiment in March. Perhaps more interestingly, the main reason behind the negative overall portfolio flows was the activity of eurozone investors, who bought €60bn of foreign assets, mainly bonds and money market instruments. This is the largest foreign investments in almost 1.5 years.

The Breakeven Point (Wonkish But Terrifying) - Paul Krugman - A number of us have been saying for some time that the euro crisis is, at its root, a balance of payments problem. During the careless years, capital flooded from the core to the periphery, leading to big trade deficits and overvalued real exchange rates; now, all that needs to be reversed. Yet “internal devaluation” via deflation in southern Europe is basically impossible; if this is going to have any chance of working, we need a real devaluation in Spain mainly via German inflation rather than Spanish deflation. 4 percent German inflation plus zero in Spain might work; 2 and minus 2 can’t.And this in turn means that overall eurozone inflation must be sufficiently high. That’s a necessary but not sufficient condition for salvation; not sufficient because a banking crisis can still blow the thing apart, but necessary because you can’t resolve the banking crisis unless there’s some plausible path back to sustainable economies.One indicator I like to look at is the German “breakeven” — the difference between the interest rate on ordinary German bonds and on bonds indexed to inflation (which it turns out means overall eurozone inflation). This is an implicit market forecast of the inflation rates, and I’ve been arguing for a long time that it really needs to be above 2 for there to be real hope. So what’s happening? Oh, boy.

Increasing crisis of confidence in the EU - Germany is the European Union's only major nation that still believes political integration has helped its economy amid "a full-blown crisis of confidence" across the region, opinion surveys have found. The Pew Global Attitudes Project polled 8,000 people in France, Germany, Spain, Italy, Greece, Poland, Britain and the Czech Republic from mid-March to mid-April and identified unprecedented levels of discontent with the EU. "The European project, which began with the creation of a small common market in 1957, grew to a larger single market in 1992 and then created the single currency in 2002, is a major casualty of the sovereign debt crisis," the report concluded. "Majorities or near majorities in most nations now believe that the economic integration of Europe has actually weakened their economies." At a time when the EU is pushing closer to an economic and fiscal union for the eurozone, popular opinion is pulling the other way. That contradiction has led to electoral upsets across Europe, from Greece to the Netherlands and France in the past three months alone. Majorities in most countries now blame EU integration for damaging their economies, but the figures hit 70pc in Greece, 63pc in France and 61pc in Italy, all countries once regarded as staunchly pro-European. Just one third of people – 34pc – believe that economic integration, a central plank of the EU's raison d'etre, is a benefit.

Push Comes to Shove, by Tim Duy: The Spanish banking crisis is forcing another showdown in Europe with the German-led Northern contingent increasingly under siege not just from the South but now from just about everyone else. Spain is under pressure to finance a bank recapitalization, but worries that that path will push them straight into a Troika bailout program. And we all know just how well that has worked for Greece and Ireland and Portugal. And Spain holds real leverage. No one is under the delusion (well, almost no one) that Spain can exit the Euro without significant economic damage throughout Europe. Hence we are seeing increasing pressure on Germany to step-up the timetable to real fiscal integration, starting with a Euro-wide banking rescue using ESM funds. From Bloomberg: German Chancellor Angela Merkel was besieged by critics for letting the euro crisis smolder, with the leaders of Italy and the European Central Bank demanding bolder steps to stabilize the 17-nation economy. Italian Prime Minister Mario Monti and ECB President Mario Draghi pushed Germany to give up its opposition to direct euro- area aid for struggling banks. Monti further antagonized Germany by urging a roadmap to common borrowing. The idea is to let banks tap the funds directly without going through their respective national governments - thus avoiding another Troika bailout disaster. Germany, of course, continues to resist, as this would force them to give up one of their tools to enforce austerity throughout Europe.

The Euro Zone: Join, Or Die - The head of the European Central Bank said this week that the Euro Zone is unsustainable under current conditions, and seemed to hint pretty strongly that the only way it can survive is if it becomes far more centralized than most Europeans seem comfortable with at this time: U.S. and European officials, who just weeks ago seemed to be getting a handle on the euro zone’s financial crisis, are now scrambling to prevent a new round of problems from pulling down some of Europe’s largest economies. European Central Bank President Mario Draghi warned in Brussels on Thursday that he considered the euro zone’s current structure “unsustainable,” and said the region’s governments must surrender far more budget and regulatory power to a central authority if the currency union is to be saved. His comments — and an intense week of high-level lobbying by U.S. officials — come amid a worldwide swoon on stock markets, a flight by investors to the safe haven of U.S. and German bonds, and a growing concern that problems in Spain’s banking sector may force the euro zone’s fourth-largest economy to seek a costly bailout. Major U.S. stock market indexes were down 6 percent in May and the euro is trading near a two-year low against the dollar.

Europe’s debtors must pawn their gold for Eurobond Redemption - Southern Europe’s debtor states must pledge their gold reserves and national treasure as collateral under a €2.3 trillion stabilisation plan gaining momentum in Germany. The German scheme -- known as the European Redemption Pact -- offers a form of "Eurobonds Lite" that can be squared with the German constitution and breaks the political logjam. It is a highly creative way out of the debt crisis, but is not a soft option for Italy, Spain, Portugal, and other states in trouble. The plan is drafted by the German Council of Economic Experts and inspired by Alexander Hamilton’s Sinking Fund in the United States -- created in 1790 to clean up the morass of debts left by the Revolutionary War. Flourishing Virginia was comparable to Germany today. Chancellor Angela Merkel shot down the proposals last November as "completely impossible", but Europe’s crisis has since festered, and her Christian Democrat party has since suffered crushing defeats in regional elections. The Social Democrat opposition supports the idea. The Greens say they will block ratification of the EU Fiscal Compact in the German Bundesrat -- or upper house -- unless Mrs Merkel relents.

ECB, EU officials warn euro's survival at risk (Reuters) - The European Central Bank stepped up pressure on Thursday for a joint guarantee on bank deposits across the euro zone, saying Europe needed new tools to fight bank runs as the bloc's debt crisis drives investors to flee risk. The European Commission's top economic official, Olli Rehn, warned that the single currency area could disintegrate without stronger crisis-fighting mechanisms and tough fiscal discipline. The twin warnings came as worries about Spain's banks and Greece's survival in the euro area pushed the euro to a two-year low against the dollar and hastened a rush into safe-haven assets such as Austrian and French bonds, whose 10-year yields hit a euro-era low. Spaniards alarmed by the dire state of their banks moved money abroad in March at a faster rate than at any time since records began in 1990, official figures showed. The 66.2 billion euros ($82.0 billion) net capital flight occurred before the nationalisation of Spain's fourth biggest lender, Bankia , in May due to massive losses from a burst property bubble. The head of the International Monetary Fund met Spain's deputy prime minister on Thursday and later denied a media report that the IMF was considering contingency plans for a Spanish bailout.

Totting up Germany's eurozone exposure - Any discussion that involves a discussion of the Euro-system’s TARGET2 mechanism carries a big fat tail-risk that this correspondent’s head will explode. But we’ll run that risk in the interests of readers… Christian Schwarz and Matthias Klein at Credit Suisse have produced a tome entitled, rhetorically: Will Germany Continue to Pay? It’s a substantial tome, and you’ll find further details in the usual place. But before you look at that, consider this table: Messrs Schwarz and Klein know that it’s really, really hard to accurately tot up Germany’s commitments to the various bailouts and support mechanisms keeping Europe in a vaguely upright position. The various commitments are not really comparable. Some are already distributed, others aren’t and it’s all but impossible to judge which commitments might be drawn upon. But they’ve had a go at producing a snapshot, along with a slightly conspiratorial swipe… We are not aware of such an aggregate and we would not rule out that it might have been kept out of public debate by not specifically quantifying the actual amounts involved. The big figure they arrive at is €600bn — roughly a quarter of German GDP.  Here’s the thinking:

German Law, Not European, if a Central Bank Defaults - My column today looks at Target 2, the interbank loan system through which some central banks have fallen deeply in debt to the European Central Bank, and others — most importantly the German Bundesbank — have lent huge sums to the E.C.B.Peter R. Griffin, an international lawyer who is the managing director of Slaney Advisors, a consulting firm based in London, points out an interesting fact showing just how much Germany can call the tune if trouble arises. Within the maze of documents explaining the Target 2 system, there is the following:

1. The bilateral relationship between the E.C.B. and participants in TARGET2-E.C.B. shall be governed by the law of the Federal Republic of Germany.
2. Any dispute arising from a matter relating to the relationship referred to in paragraph 1 falls under the exclusive competence of the courts of Frankfurt am Main, without prejudice to the competence of the Court of Justice of the European Communities.

Not being an international lawyer, I have no idea what it means to give one court “exclusive competence” — another way of saying exclusive jurisdiction — but then to add that that statement is “without prejudice” to the competence of another court. Still, it sounds as if it is Germans who will judge any disputes if a central bank does default on loans, or if the Bundesbank tries to put a halt to the gigantic loans it is being forced to make.

Eurozone faces 'financial disintegration' unless it acts again, warns commission - The eurozone is confronted with the prospect of "financial disintegration" and should use its new bailout fund to recapitalise distressed banks directly while embarking on a transnational banking union, the European commission said today. Delivering more than 1,000 pages of diagnosis and policy prescriptions on the dire condition of the European economy and how to try to end almost three years of euro crisis, the commission also talked up the merits of eurobonds or pooling of eurozone debt, a proposal gaining in traction but strongly resisted for now by the biggest economy, Germany. With international attention focused on Spain wrestling with an escalating banking crisis, the commission was surprisingly critical of Mariano Rajoy's attempts to chart a way out of an extreme predicament – recession, soaring national debt, a ballooning budget deficit, the highest unemployment in Europe, and the banks sitting on tens of billions of toxic assets from the bust property bubble. "The policy plans submitted by Spain are relevant, but in some areas they lack sufficient ambition to address the challenges," the commission's Spanish report card said.

Eurozone set-up unsustainable, says Draghi - European Central Bank (ECB) president Mario Draghi says that eurozone leaders must decide what they want the bloc to look like in the future, because the current set-up is "unsustainable". He said that the ECB could not "fill the vacuum" left by governments on creating growth or structural reforms. EU economics commissioner Olli Rehn said more austerity was needed if the eurozone was to avoid disintegration.  Speaking to the European Parliament, Mr Draghi said: "Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no. Can the ECB fill the vacuum of the lack of action by national governments on the structural problem. The answer is no.

Spain faces 'total emergency' as fear grips markets -Spain is facing the gravest danger since the end of the Franco dictatorship as the country is frozen out of global capital markets and slides towards an epic showdown with Europe.“We’re in a situation of total emergency, the worst crisis we have ever lived through” said ex-premier Felipe Gonzalez, the country’s elder statesman. The warning came as the yields on Spanish 10-year bonds spiked to 6.7pc, pushing the “risk premium” over German Bunds to a post-euro high of 540 basis points. The IBEX index of stocks in Madrid fell 2.6pc, the lowest since the dotcom bust in 2003. Chaos over the €23.5bn rescue of crippled lender Bankia has led to the abrupt resignation of central bank governor Miguel Ángel Fernández Ordóñez, who testified to the senate that he had been muzzled to avoid enflaming events as confidence in the country drains away. Markets are on tenterhooks as Spanish yields test levels that forced the European Central Bank to respond last November with its €1 trillion liquidity blitz. “Nobody is short Spanish debt right now because they are expecting ECB intervention,” said Andrew Roberts, credit chief at RBS. “If it doesn’t come -- if we take out 6.8pc -- we’re going to see a hyberbolic sell-off,” he said.

Italy, Spain default insurance costs hit record - The cost of insuring Spanish and Italian government debt against default via instruments known as credit default swaps, or CDS, hit new records on Friday, according to data provider Markit. The spread on five-year Spanish CDS widened to 610 basis points from 596 basis points on Thursday. That means it would now cost $610,000 annually to insure $10 million of Spanish debt against default for five years, up $14,000 from the previous day. The spread on Italian CDS widened by 22 basis points to 579. Core euro-zone countries also saw a rise, with the French CDS spread widening by 8 basis points to 225 and Germany widening by 4 basis points to 106, Markit said

Euro fears spur fresh demand for safe assets (Reuters) - Demand for safe-haven assets kept German and U.S. Treasury debt yields near record lows on Thursday, as worries over Spain and its troubled banks kept markets nervous, although shares and the euro regained some stability. The single currency and world shares are poised for their biggest monthly drops since last September, while the oil price fall in May is set to be the largest for two years, as the escalation in the euro-zone crisis stokes concerns over its impact on the global economic outlook. But markets were not in a mood to push prices on riskier assets much lower ahead of a batch of U.S. data, which includes weekly and private sector jobs numbers, regional manufacturing output and growth figures. "We've got some serious numbers coming out of the States this afternoon, and if they're not good, given the backdrop in Europe, it could make the situation worse,"

Rush for havens as euro fears rise - US benchmark borrowing costs plunged to levels last seen in 1946 and those for Germany and the UK hit all-time lows as investors took fright at what they see as a disjointed policy response to the debt crisis in Spain and Italy. In a striking sign of the flight to haven assets, German two-year bond yields fell to zero for the first time, below the equivalent rate for Japan, meaning investors are willing to lend to Berlin for no return. US 10-year yields fell as low as 1.62 per cent, a level last reached in March 1946, according to Global Financial Data. German benchmark yields reached 1.26 per cent while Denmark’s came close to breaching the 1 per cent level, hitting 1.09 per cent. UK rates fell to 1.64 per cent, the lowest since records for benchmark borrowing costs began in 1703.

Catastrophic Credibility - Krugman - A little while ago Ben Bernanke responded to suggestions that the Fed needed to do more — in particular, that it should raise the inflation target — by insisting that this would undermine the institution’s “hard-won credibility”. May I say that what recent events in Europe, and to some extent in the US, really suggest is that central banks have too much credibility? Or more accurately, their credibility as inflation-haters is very clear, while their willingness to tolerate even as much inflation as they say they want, let alone take some risks with inflation to rescue the real economy, is very much in doubt. Yesterday I pointed to the German breakeven, a measure of euro area inflation expectations, which has plunged lately. Here’s a longer view:Note the peak in April 2011. It wasn’t very high; slightly above the ECB’s target, but arguably still too low to make the needed adjustment within the euro area feasible. Nonetheless, the ECB raised rates — and that was when the euro really began falling apart. The direct effects of the rate increase can’t explain that unraveling, but the effect on expectations — aha, so they really are that fanatical about price stability! — can.Now the breakeven is plunging. I’d like to think that the ECB is holding frantic meetings and planning to announce a surprise sharp rate cut, preferably to zero, the day after tomorrow. But I doubt it. The fact is that the ECB is highly credible: most observers, me included, are quite sure that it is totally allergic to inflation and relatively indifferent to the collapse of the real economy.

The Truth About Europe: There Is No Solution - But I don't think it can all be summed up, the reasons why I mean, in one article. So I think I'll make it a running series. Still, whatever data we can look at, past, present and future, none of it will make an essential difference. All I can do is keep pointing to news and stats and data that confirm that. All of them do, so that should make it a lot easier, even if most voices out there never tire from pointing out the opposite. Nor do I need to limit my topic to Europe; it's not as if the US, or Australia, or any other industrialized country, has any other fate to look forward to. This global debt deflation is truly global, the only thing that differs is the exact time the hammer comes down. Maybe those people are best off who never had much, though they will be sure to be squeezed ever harder by us, the declining rich.

The End Of The Euro: A Survivor’s Guide - The end of the euro system looks like this.  The periphery suffers ever deeper recessions — failing to meet targets set by the troika — and their public debt burdens will become more obviously unaffordable. The euro falls significantly against other currencies, but not in a manner that makes Europe more attractive as a place for investment. Instead, there will be recognition that the ECB has lost control of monetary policy, is being forced to create credits to finance capital flight and prop up troubled sovereigns — and that those credits may not get repaid in full.  The world will no longer think of the euro as a safe currency; rather investors will shun bonds from the whole region, and even Germany may have trouble issuing debt at reasonable interest rates.  Finally, German taxpayers will be suffering unacceptable inflation and an apparently uncontrollable looming bill to bail out their euro partners. A disorderly break-up of the euro area will be far more damaging to global financial markets than the crisis of 2008.   In fall 2008 the decision was whether or how governments should provide a back-stop to big banks and the creditors to those banks.  Now some European governments face insolvency themselves.  The European economy accounts for almost 1/3 of world GDP.  Total euro sovereign debt outstanding comprises about $11 trillion, of which at least $4 trillion must be regarded as a near term risk for restructuring.

"The End Game: 2012 And 2013 Will Usher In The End" - The Scariest Presentation Ever? If Raoul Pal was some doomsday spouting windbag, writing in all caps, arbitrarily pasting together disparate charts to create 200 page slideshows, it would be easy to ignore him. He isn't. The founder of Global Macro Investor "previously co-managed the GLG Global Macro Fund in London for GLG Partners, one of the largest hedge fund groups in the world. Raoul came to GLG from Goldman Sachs where he co-managed the hedge fund sales business in Equities and Equity Derivatives in Europe... It is his writing we are concerned about, and specifically his latest presentation, which is, for lack of a better word, the most disturbing and scary forecast of the future of the world we have ever seen.... And we see a lot of those. Consider this:

  • We don’t know exactly what is to come, but we can all join the very few dots from where we are now, to the collapse of the first major bank…
  • With very limited room for government bailouts, we can very easily join the next dots from the first bank closure to the collapse of the whole European banking system, and then to the bankruptcy of the governments themselves.
  • There are almost no brakes in the system to stop this, and almost no one realises the seriousness of the situation.
  • The problem is not Government debt per se. The real problem is that the $70 trillion in G10 debt is the collateral for $700 trillion in derivatives…
  • Yes, that equates to 1200% of Global GDP and it rests on very, very weak foundations

  • Lloyd's of London preparing for euro collapse - The chief executive of the multi-billion pound Lloyd's of London has publicly admitted that the world's leading insurance market is prepared for a collapse in the single currency and has reduced its exposure "as much as possible" to the crisis-ridden continent. Richard Ward said the London market had put in place a contingency plan to switch euro underwriting to multi-currency settlement if Greece abandoned the euro. In an interview with The Sunday Telegraph he also revealed that Lloyd's could have to take writedowns on its £58.9bn investment portfolio if the eurozone collapses. Europe accounts for 18pc of Lloyd's £23.5bn of gross written premiums, mostly in France, Germany, Spain and Italy. The market also has a fledgling operation in Poland. Lloyd's move comes as a major Franco-German provider of credit insurance for eurozone trade, Euler Hermes, said it was considering reducing cover for trade with Greece because of the risk the country might leave the eurozone.

    BOE'S Dale says expects euro zone uncertainty set to continue - Uncertainty in the euro zone will continue for the next few years, acting as a drag on the UK economy, Bank of England policy maker Spencer Dale was quoted as saying in a newspaper on Sunday. Britain is not a member of the single currency bloc, but it depends on the economic area for 40 percent of exports. The UK economy slipped back into recession in the first quarter of this year and data continues to show Britons have been shopping much less and factories are getting fewer orders. "I'd expect the uncertainty (in the euro zone) to continue for the next few years, even if some of the worst outcomes are avoided," he was quoted in the Sunday Times as saying. "It will continue to act as a drag on our economy." 

    Cameron and the Confidence Fairy - Paul Krugman - As the Brits get prepared for my satanic intervention, I’m hearing the line that Cameron can’t be to blame for the double dip because there hasn’t been any actual austerity yet. First of all, that’s not true. As Jonathan Portes says, public investment has already plunged. But the main point, which I’ve already made, is that even if much of the austerity has yet to happen, the austerity story has already failed: Now, the defense I hear from Cameron apologists is that the austerity mostly hasn’t even hit yet. But that’s really not much of a defense. Remember, the austerity was supposed to work by inspiring confidence; where’s the confidence? Basically, the expansionary aspect should already have kicked in; it’s all contraction from here. Policy disaster in the making.

    Austerity Defenses - Krugman - From what I’m hearing, the current defense of Cameron’s austerity policies against people like Martin Wolf, Jonathan Portes, and me runs like this:

    • 1. Austerity works! Look at our low, low rates!
    • 2. Austerity? What austerity?
    • 3. Anyway, America does it too.
    So, on the first point: as Portes says, those low rates reflect pessimism about British economic prospects, not optimism about its creditworthiness.On the second, a couple of things to bear in mind. First, spending as a share of GDP tends to rise in an economic slump even without a change in policy, both because GDP is smaller and because safety-net programs kick in. As a result, UK spending as a percentage of GDP shot up between 2007 and 2009.What about since then? I’m suspicious of the IMF numbers on potential output, which seem too pessimistic to me. But for what it’s worth, they say that the output gap — the degree to which Britain has been operating below potential — hasn’t changed much since 2009. Given that, here’s what the IMF World Economic Outlook database says about spending: Finally, about America — yes! We’re doing a lot of austerity! Not as much as Britain, I think (although the numbers are hard to parse), but when you count in state and local government we’re doing a lot of contraction. But that doesn’t reflect deliberate policy; it reflects deadlock in Washington and the fiscal woes of state and local governments.

    Britain's Trap – Krugman - Martin Wolf nails it: the Cameron government made a terrible mistake by going all in for austerity doctrine — and now cannot change course, because to do so would be to admit its mistake. It may be humiliating for the government to offer such a speech now. But there is no reason why the people of the UK should suffer for its mistake, indefinitely. But there is a reason, of course: the ambition and vanity of politicians. Hello, Mr. Clegg.

    The Austerity Agenda, Paul Krugman - Even if you have a long-run deficit problem — and who doesn’t? — slashing spending while the economy is deeply depressed is a self-defeating strategy, because it just deepens the depression.  So why is Britain sharply reducing investment and eliminating hundreds of thousands of public-sector jobs, rather than waiting until the economy is stronger?  Over the past few days, I’ve posed that question to a number of supporters of the government of Prime Minister David Cameron, sometimes in private, sometimes on TV. And all these conversations followed the same arc: They began with a bad metaphor and ended with the revelation of ulterior motives.  The bad metaphor — which you’ve surely heard many times — equates the debt problems of a national economy with the debt problems of an individual family. What’s wrong with this comparison?   Our debt is mostly money we owe to each other; even more important, our income mostly comes from selling things to each other. Your spending is my income, and my spending is your income.  So what happens if everyone simultaneously slashes spending in an attempt to pay down debt? The answer is that everyone’s income falls — my income falls because you’re spending less, and your income falls because I’m spending less. And, as our incomes plunge, our debt problem gets worse, not better.

    Does Monetary Policy make Austerity Irrelevant? - There are three variations of this question that I have come across in recent posts and comments. 1) If monetary policy had targeted nominal GDP, it could have been successful whatever fiscal policy had been.  2) Even within the context of inflation targeting, Quantitative Easing (QE) allows monetary policy to overcome the problem of the zero lower bound (ZLB) for nominal interest rates. So inadequate demand can be put down to not enough QE.  3) Less austerity would have led to higher inflation, which given the recent behaviour of monetary policy makers  would have led to higher interest rates, leading demand back to where it now is. On (1), I have said that the possibility of moving to a different monetary target has a lot to commend it, and that this should be discussed much more actively in the UK right now. However I do not think targeting nominal GDP means that the monetary authorities can achieve that target at all points in time.    Argument (2) in effect says that the ZLB does not matter: monetary policy just switches from one instrument to another. I think this is seriously wrong.       Argument (3) suggests that if we had not had austerity, inflation would have been higher, and monetary policymakers would have raised interest rates. There are two uncertainties here. First, we cannot be sure that if there had been less austerity, inflation would have been significantly higher. In the UK there is a very simple reason for this – part of the additional austerity was to raise VAT. But more generally, what we may be seeing today is that inflation is much less sensitive to the output gap when inflation is low.

    Heads I win, tails you lose -I was at a private luncheon in the City some 15 years ago discussing whether hedge fund investments should be considered a new and distinct asset class. A very prominant hedge fund trader was asked his opinion. Surprisingly, he said that hedge funds were less a new method for investment, than a new method for higher remuneration. The appeal of hedge funds was in the outsize fees rewarding the fund managers rather than any superior returns for investors. I was reminded of that luncheon again this morning by two pieces in my inbox. The first referenced a paper from the Bank of England estimating the public subsidy of the UK's largest banks at more than £220 billion during the past couple years. These banks secure a funding premium in wholesale and deposit markets from the implicit state guarantee of obligations attaching to their too big to fail status. The subsidy distorts competition and risk taking, storing up even more future draws on beleaguered taxpayers. The second was a blogpost summarising recent comments of a Bank of England executive to the effect that all the cost savings generated by technology advances and automation in the banking sector had been paid away in increased bonuses and remuneration. IT efficiency gains fund bonus payments. The financial sector's appetite for technology investment is not driven by a desire to provide more efficient services, but to secure ever larger remuneration packages.

    The British Government Is Forcing People To Work For Free Or Lose Their Unemployment Benefits - Thousands more unemployed people will be forced to work for free or lose their benefits under controversial plans to be announced by the work and pensions secretary, Iain Duncan Smith, as the government is warned its drive to get people back into work appears to be floundering. The scheme, under which the jobless are obliged to accept an unpaid work placement for a month to keep their benefits, will be "significantly extended" within the next two weeks, according to Whitehall sources. The government believes forcing people to work or lose their benefits is inculcating a work habit in the 10,000 people currently on the programme and will be effective for others. Ministers are also looking at rolling out a national trial under which the unemployed must work for up to six months for free to avoid their benefits being docked. However, The Observer has learned that a release of statistics on the outcomes of the mandatory work programme had been due this week but is to be delayed, raising concerns about its efficacy in helping the country's 887,000 long-term unemployed – defined as being jobless for over a year. Critics also claim the move is an indication of the panic within government over the failure of ministers' various schemes to tackle long-term unemployment, which is at its highest level in 16 years.

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