week ending June 9

Federal Reserve Balance Sheet Grew Over Last Week - The Federal Reserve's balance sheet grew over the last week as the central bank continued with a plan to adjust its portfolio and stimulate an economy it expects to grow moderately this year. The Fed's asset holdings in the week ended June 6 were $2.854 trillion, up from $2.845 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities increased to $1.664 trillion, from $1.657 trillion in the previous week. The central bank's holdings of mortgage-backed securities increased slightly to $851.76 billion, from $851.75 billion a week ago. Thursday's report showed total borrowing from the Fed's discount lending window was $5.47 billion on Wednesday, down from $5.51 billion a week earlier. Commercial banks borrowed $10 million from the discount window, down from $51 million in the previous week. U.S. government securities held in custody on behalf of foreign official accounts totaled $3.517 trillion, up from $ 3.510 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts was $2.798 trillion, an increase from $2.789 trillion a week earlier. Holdings of federal agency securities fell to $719.38 billion, compared with $721.04 billion in the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--Release Date: June 7, 2012

Fed reviews former plot lines - For the third year in a row we also have an economic slowdown: payrolls growth fell to 69,000 new jobs in May. This slowdown may be the most wretchedly disappointing of them all, because the fundamentals of the US economy have been looking better, and it will be wretchedly difficult to respond to.All of the policy options are sequels as well. Perhaps we could try Fiscal Stimulus 4, Operation Twist 2, Quantitative Easing 3, or another episode of Fixing Housing Finance, although most people have given up on that one because the rambling plot lines never seem to go anywhere.This slowdown seems to be largely imported from Europe and the rest of the world so US policy makers are powerless to tackle it at source. Given that, some sort of fiscal action would probably be most effective, especially if it reduced uncertainty about tax and spending next year: the so-called fiscal cliff. Congress, however, is unlikely to risk giving anybody a substantive or political victory before the election.That leaves the Fed. On Thursday its chairman, Ben Bernanke, will testify to Congress on the economic outlook. As has happened so often during the past five years, a routine hearing will turn into a crucial policy moment, setting expectations for how the Fed will act at its policy meeting two weeks later. Recent talk from the central bank has leaned away from further action. But the situation is reminiscent of last August. All signals before that meeting were for policy to stay unchanged, not least because inflation was higher than it had been in 2010, the last time the Fed acted, and it was rising rather than falling.

Fed’s Fisher: Efficacy of Operation Twist Is Suspect - The efficacy of the U.S. Federal Reserve‘s policy of lowering borrowing costs by shifting its balance sheet into longer-dated assets is suspect, a senior Fed official said Tuesday.Federal Reserve Bank of Dallas President Richard Fisher told an audience of staff and students at St Andrews University in Scotland that lower bond yields in the U.S. are more reflective of investors seeking haven assets amid the debt crisis in the euro zone, rather than the success of the Fed’s “Operation Twist”.“We’re the best-looking horse in the glue factory,” Fisher said during a question and answer session following a speech.Fisher, who isn’t currently a voting member of the Fed’s rate-setting Federal Open Market Committee, added ultra-low yields on German government bonds indicate investors believe the euro zone will survive, although it isn’t clear in what form.

How Big Are Ben Bernanke's Testicles? - The increasingly repeated assumption in the aftermath of this past Friday's jobs report seems to be that this is what was needed to push the Federal Reserve over the edge for another round of monetary policy-induced stimulus. On the one hand, the thinking behind the assumption seems unassailable: With Congress unable or unwilling to use fiscal policy to give the economy a boost and businesses and consumers mostly continuing to stay on the sidelines, the Fed is the only game in town. But, on the other hand, the Fed has been repeatedly warned by congressional Republicans over the past year not to stick to its economic knitting by focusing just on inflation and not to do anything to boost GDP. As I've posted before, having eliminated any chance that fiscal policy will be used as a tool to enhance the recovery and boost Barack Obama's reelection chances, the GOP is trying to make sure that the only other tool available to do that -- monetary policy -- also isn't available. So...with bullseyes painted squarely between his eyes and on his back, the question is whether Bernanke with have the testicular fortitude to push for some version of monetary policy stimulus now, or will he decide that the best way to protect the Fed is to wait until after the election?

Fed Encouraged to Act Amid Jobs Crisis - The Federal Reserve meets later this month to determine the course of monetary policy. A couple months ago, you could have expected them to stay pat, to allow what was seen as a nascent recovery continue without tightening monetary accommodation or adding a boost. If anything they would have tightened by default, by wrapping up “Operation Twist,” the process of orienting its portfolio toward longer-term securities. Operation Twist was due to wrap up at the end of June. But that was before a troubling set of data that has increased talk of renewed Fed action: With the Fed officially charged with maximizing employment and controlling inflation, those bleak numbers have analysts and lawmakers wondering if the central bank will act to jolt the economy.“That’s the chatter,” The pressure heightened today when the Financial Times called for Fed action. First, and most immediately, Ben Bernanke could reverse the hawkish drift at the Federal Reserve and announce a third round of quantitative easing at the next Federal Open Market Committee meeting, later this month. Pessimists have been forecasting runaway inflation since the start of the financial crisis in 2008. Clearly the markets do not agree. US Treasury yields continue to plummet – last week the 10-year bond hit a record low of 1.45 per cent. It is obviously impossible for the Fed to cut its discount rate to below zero. But if things deteriorate further, it could double its inflation target to 4 per cent.

Fed Considers More Action Amid New Recovery Doubts - Disappointing U.S. economic data, new strains in financial markets and deepening worries about Europe's fiscal crisis have prompted a shift at the Federal Reserve, putting back on the table the possibility of action to spur the recovery.Such action seemed highly unlikely at the central bank's April meeting, when forecasts for growth and employment were brightening. At their policy meeting this month, Fed officials will weigh whether the U.S. economic outlook is deteriorating enough to justify new measures to boost growth, according to interviews and Fed speeches.  The Fed's next meeting, June 19 and 20, could be too soon for conclusive decisions. Fed policy makers have many unanswered questions and have had trouble forming consensus in the past. Top Fed officials have said that they would support new measures if they became convinced the U.S. wasn't making progress on bringing down unemployment. Recent disappointing employment reports have raised this possibility, but the data might be a temporary blip. Moreover, the Fed's options for more easing are sure to stir internal resistance at the central bank if they are considered. Their options include doing nothing and continuing to assess the economic outlook—or more strongly signaling a willingness to act later if the outlook more clearly worsens. Fed policy makers could take a small precautionary measure, like extending for a short period its "Operation Twist" program, in which the Fed is selling short-term securities and using the proceeds to buy long-term securities. Or, policy makers could take bolder action such as launching another large round of bond purchases if they become convinced of a significant slowdown.

Fed(wire) to the rescue - From the WSJ’s Jon Hilsenrath: Disappointing U.S. economic data, new strains in financial markets and deepening worries about Europe’s fiscal crisis have prompted a shift at the Federal Reserve, putting back on the table the possibility of action to spur the recovery. It’d probably be notable if a story like this *didn’t* appear. Anyway, Hilsenrath notes that the Fed’s main options are doing nothing; doing some more signalling; a short extension of Operation Twist; or outright new bond purchases. The FT’s Robin Harding expanded on the two more interventionist options earlier this week: If the Fed does choose to act then its main options are switching more of its existing investments into long-term securities, a so-called Operation Twist 2 – which is feasible and low risk but limited in capacity – or it could buy more assets outright, most likely mortgage-backed securities, in a QE3. That should be more effective, but might backfire if Republicans used QE3 as an election issue to attack the Fed, making markets question future policy stability. On Thursday, Mr Bernanke may indicate which if any sequel he prefers. Thursday is when Ben Bernanke testifies before a joint Congressional committee. But the direction of consensus within the Fed remains unclear, judging from the wrap of recent comments from Fed officials.

Fed Watch: Cold Water on QE3? - It seems that market participants are looking for the Fed to ride to the rescue with another round of quantitative easing. I doubt that conditions are dire enough to deliver that outcome at the next meeting, but could easily see a European-driven deterioration in financial markets driving such an outcome. A lot could hinge on tomorrow's ECB meeting - they really need to cut rates to at least sustain some expectation channel. Consensus view, however, is no policy change. From the Wall Street Journal: Although a rate cut this week can't be ruled out entirely, the central bank is likely to hold off this time while potentially starting to prepare the ground for a rate cut at its next meeting in July or later. Behind the curve, per usual. I think no action is going to be a significant disappointment, so I am hoping to be surprised. Quite honestly, doing nothing is really almost impossible to imagine as it would represent complete and total failure on the part of the ECB. Still, I don't put it past them. We have a couple of new comments in the wake of last week's disappointing jobs report. One from a credible policymaker, via the Wall Street Journal: "I'd have to see a substantial change in my outlook" to be convinced the Fed should do more, Ms. Pianalto, 57 years old, said Friday, in the second of two exclusive interviews with The Wall Street Journal over consecutive days. "I don't think this employment report, in and of itself, is likely to lead to a substantial change in my outlook."

Fed's Bullard Says Jobs Slump Hasn't Changed Economic Outlook - Federal Reserve Bank of St. Louis President James Bullard said disappointing job creation hasn’t changed the U.S. economic outlook and the Fed should be careful not to prompt borrowing by consumers with excessive debt.  “Monetary policy has been ultra-easy during this period, but cannot reasonably encourage additional borrowing by households with too much debt,” Bullard said. “The recent nonfarm payrolls report was disappointing, but not enough to substantially alter the contours of the U.S. outlook.”  U.S. job growth slowed to 69,000 last month from a high this year of 275,000 in January even as the Federal Open Market Committee sustained record stimulus, including a pledge to keep the benchmark interest rate near zero until at least late 2014.  Still, a policy change isn’t needed as more action by the Fed won’t help Europe’s debt crisis and the FOMC has time to wait before making any alterations, Bullard said.  “One possible FOMC strategy is to simply pocket the lower yields and continue to wait-and-see on the U.S. economic outlook,” Bullard said. While Europe’s turmoil is driving global problems, “a change in U.S. monetary policy at this juncture will not alter the situation in Europe.”

Fed Watch: More Cold Water - I see St. Louis Federal Reserve President James Bullard also spoke today, and downplayed the employment report: The recent nonfarm payrolls report was disappointing, but not enough to substantially alter the contours of the U.S. outlook. He suggested seasonal distortions are at work - although, if they are at work, it means that the gains we saw earlier were outsized. In other words, once again, expectations for high growth were excessive - which should suggest to Bullard that his earlier concerns that tightening would occur sooner than 2014 were misplaced.  He doesn't really appreciate the negative signal currently sent by global interest rates. I don't think the US needs lower rates at the moment, what it needs is policy that actually induces higher rates in response to an improving economic environment. I imagine that, since Bullard believes the economy is operating at potential output, he might think lower rates are helpful as they would be consistent with easing some resource constraint, but I interpret the lower rates as evidence of being well below potential output. Moreover, Bullard continues to believe that monetary policy is easy: Current policy is already very easy, as the policy rate remains near zero and the balance sheet remains large. If policy was easy, market participants would expect the Fed to raise interest rates sooner, and thus longer term yields would rise. If anything, the fall in rates implies that the Fed will need to keep interest rates low for a longer period. Policy is not easy.

If you walk backward, you run into things - TIM DUY quotes St Louis Fed President James Bullard, who says:The global problems are clearly being driven by continued turmoil in Europe...A change in U.S. monetary policy at this juncture will not alter the situation in Europe. I don't know about that; there are some unconventional things the Fed could do (but won't) that might make a meaningful difference. Setting that aside, I'm with Mr Duy (caps in the original): This is one of those things that makes you shake your head in the wonder of it all. The point of further easing would not be to alter the situation in Europe - THE POINT IS TO PREVENT THE SITUATION IN EUROPE FROM WASHING UP ON US SHORES. Scott Sumner echoes the point, commenting on an Australian rate cut: Australia has a 2-3% inflation target and faster trend RGDP growth than the US. That sort of nominal growth would be beyond my wildest dreams for the US. Rather think about how proactive they are. Unemployment is low and inflation is in the sweet spot. But they are easing monetary policy because they see the global slowdown, which for some reason the much more sophisticated Fed and ECB don’t quite comprehend. They aren’t cutting rates because 5.5% NGDP growth is too low, they are cutting rates to make sure that 5.5% NGDP growth happens.

Fed’s Lockhart: More Economic Weakness May Call for Fresh Action - With the U.S. economic recovery threatened by an array of negative developments, the Federal Reserve may need to add additional stimulus to the economy, a key U.S. central bank official said Wednesday. “Should it become clear that something resembling my baseline scenario of continued, though modest, growth is no longer realistic, further monetary actions to support the recovery will certainly need to be considered,” Federal Reserve Bank of Atlanta President Dennis Lockhart said. “The situation we face requires that the FOMC maintain a state of readiness to respond to financial or economic instability should the need arise,” he said. Mr. Lockhart’s comments came from the text of a speech. The official holds a voting slot on the Federal Open Market Committee. Mr. Lockhart is considered by many central bank watchers to be a centrist among monetary policy makers, and his views are seen as a weather vane for what the Fed is likely to do. He spoke in a climate of rising anxiety about the outlook, and his speech reflected those concerns. With Europe’s government debt crisis moving ahead at a fever pitch, and in the wake of disappointing U.S. economic data culminating in last Friday’s release of dismal May hiring news, expectations are mounting that the Fed may provide more stimulus to help the economy.

Headwinds, Risks, and Monetary Policy: Speech, Dennis P. Lockhart, President and CEO, Federal Reserve Bank of Atlanta; Key points:

• Federal Reserve Bank of Atlanta President Dennis Lockhart said the U.S. economy remains in recovery, which he expects to continue. As recent disappointing employment numbers illustrate, however, the economy is working against some strong headwinds.
• Lockhart said these headwinds include continued deleveraging by the household and financial sectors, a weak housing market, a contracting government sector, and an "uncertainty drag" on confidence and economic activity.
• In addition to headwinds, Lockhart described four risks in his outlook: the behavior of home prices, effect of pending sharp federal fiscal adjustment, financial instability along with recession in Europe, and slowdown in emerging market economies.
• Lockhart views today's highly accommodative stance of monetary policy as being appropriate for the outlook he envisions.
• His views about further policy measures consider two possibilities. First, if his baseline scenario of continued, though modest, growth becomes unrealistic, further monetary actions to support the recovery will need to be considered. Second, he believes the FOMC must maintain a state of readiness to respond to financial or economic instability.

Fed’s Williams: Monetary Stimulus ‘Crucial’; More Could Be Warranted = The Federal Reserve must stand ready to do more if the U.S. growth outlook worsens, a top central banker said Wednesday. If the outlook deteriorates such that the unemployment rate doesn’t fall to levels consistent with the central bank’s mandate and if the medium-term outlook for inflation falls significantly below the Fed’s 2% target, “then additional monetary accommodation would be warranted,” John Williams, president of the Federal Reserve Bank of San Francisco, said in prepared remarks to Seattle-area community leaders in Bellevue, Wash.

Williams Says Fed Must `Stand Ready to Do Even More'  - Federal Reserve Bank of San Francisco President John Williams said the central bank should be ready to step up stimulus in case economic growth slows and threatens to delay improvement in the job market.  The Fed must “stand ready to do even more if needed to best achieve our statutory goals of maximum employment and price stability,” Williams said today in the text of remarks prepared for a speech in Bellevue, Washington. If growth were to worsen or the inflation outlook fall below the Fed’s goal of 2 percent, “additional monetary accommodation would be warranted.”  The U.S. economy added the fewest number of jobs in a year last month, fueling concern the labor market rebound is sputtering as growth overseas slows. Fed officials are scheduled to meet June 19-20, having affirmed a pledge at their April meeting to hold the main interest rate near zero through at least late 2014.  “An effective tool would be further purchases of longer- maturity securities, potentially including agency mortgage- backed securities,” Williams said at a luncheon hosted by the San Francisco Fed.

Counterparties: The Fed puts (possibly) doing something back on the table - The Fed could do nothing, or it could try to repeat what it’s already done, while remaining vigilant, if things get worse. Reportedly.Jon Hilsenrath, the WSJ‘s top Fed reporter — whose words have been known to launch the vaunted “Hilsenrally” – reports this morning that “disappointing U.S. economic data” and worries over Europe “have prompted a shift at the Federal Reserve.” As it happens, “the possibility of action” is now back on the table.If this edition of the Fed’s latest strategic leaking – what Kate Mackenzie calls the “Fed(wire)” –  feels a bit underwhelming, it’s because the Fed has been quite busy over the last four years; its balance sheet has more than tripled since the financial crisis, while inflation has been kept under control and unemployment has remained persistently high. So what specifically could the Fed do now? For one, Hilsenrath hints at an extension of Operation Twist. Morgan Stanley puts the odds at another round of quantitative easing at a strangely precise 56%. There is also some talk of coordinated global action, in which the Fed would further entice banks to swap their currencies for dollars. It’s less clear if any of this will help. The WSJ‘s David Wessel evaluates whether the Fed’s post-crisis quantitative easing program has achieved its four main goals: signaling a long period of low rates (success); cutting interest rates for consumers and businesses (success); encouraging investors to buy higher-yielding securities (mixed results); and “pushing the dollar lower, giving exports a lift” (mixed results).

Fed's Yellen: "Scope remains for further policy accommodation" - From Vice Chair Janet Yellen: Perspectives on Monetary Policy. Excerpt:  Recent labor market reports and financial developments serve as a reminder that the economy remains vulnerable to setbacks. Indeed, the simulations I described above did not take into account this new information. In our policy deliberations at the upcoming FOMC meeting we will assess the effects of these developments on the economic forecast. If the Committee were to judge that the recovery is unlikely to proceed at a satisfactory pace (for example, that the forecast entails little or no improvement in the labor market over the next few years), or that the downside risks to the outlook had become sufficiently great, or that inflation appeared to be in danger of declining notably below its 2 percent objective, I am convinced that scope remains for the FOMC to provide further policy accommodation either through its forward guidance or through additional balance-sheet actions.  Clearly Yellen is considering QE3.

Fed Watch: Yellen Gives a Green Light - After a succession of Fed speakers pouring cold water on the idea of further easing, Federal Reserve Vice Chair Janet Yellen opened the door for additional easing at the next FOMC meeting. Perhaps I have simply been too pessimistic in my concern that we would need to wait until later this summer. Yellen gets to the point quickly, at the end of the second paragraph:As always, considerable uncertainty attends the outlook for both growth and inflation; events could prove either more positive or negative than what I see as the most likely outcome. That said, as I will explain, I consider the balance of risks to be tilted toward a weaker economy. A tilt in the balance of risks to the weaker side argues for easier policy. On the labor market: Smoothing through these fluctuations, the average pace of job creation for the year to date, as well as recent unemployment benefit claims data and other indicators, appear to be consistent with an economy expanding at only a moderate rate, close to its potential. Obviously, we need better than potential to close the output gap - a gap that Yellen believes to exist. She clearly believes the dominant problems are cyclical, not structural. Still, she recognizes that cyclical unemployment can become structural if leftunattended. Again, a reason for additional stimulus. She identifies housing, the fiscal cliff, and Europe as actual and potential drags on US economic activity. And she dismisses the idea that a large output gap is inconsistent with current inflation

Fed official urges US to consider easing - The US can and should consider easing monetary policy again if risks to the economy materialise, said senior Federal Reserve officials, increasing the chances of action at the bank’s next policy meeting, which will end on June 20. Janet Yellen, vice-chair of the Fed board and one of its most influential policy makers, said that while modest growth was the single most likely outcome for the US, “I see substantial risks to this outlook, particularly to the downside.” “If the committee were to judge that the recovery is unlikely to proceed at a satisfactory pace . . . or that the downside risks to the outlook had become sufficiently great . . . I am convinced that scope remains for the Federal Open Market Committee to provide further policy accommodation,” she said. Ms Yellen’s very dovish remarks to the Boston Economic Club on Wednesday evening show that the Fed, alarmed by developments in Europe and weak economic data, is considering whether to act. The Fed’s stance may become even clearer when Chairman Ben Bernanke testifies to Congress on Thursday. She said these risks to the economy meant policy might need to be even looser than otherwise to manage the risk. “It may well be appropriate to insure against adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest.”

Fed Members See No Need to Act Now - Three members of the Federal Reserve’s policy-making committee indicated in separate speeches Wednesday that recent economic data, while troubling, does not yet justify an expansion of the Fed’s economic aid campaign.  The remarks suggest that the committee, which meets in two weeks, will give more consideration to such an expansion, but also that Fed officials remain uncertain whether the growth of the nation’s economy has slowed.  While the government reported last week that employers added only 69,000 jobs in May, the Fed’s own survey of business activity, published Wednesday, said that the economy “expanded at a moderate pace” over the last two months. The Fed’s chairman, Ben S. Bernanke, is scheduled to testify on the state of the economy Thursday morning before a joint Congressional committee.  Before his highly anticipated remarks, the Fed’s vice chairwoman, Janet L. Yellen, said Wednesday evening in Boston that the jobs data “serve as a reminder that the economy remains vulnerable to setbacks,” and that the Fed was ready to act if it believed that the recovery was faltering.  While the Fed’s current outlook is more optimistic, Ms. Yellen added that it still might be appropriate to take additional action because of the risks that a sharp reduction in federal spending at the end of the year, or a financial crisis in Europe, would derail growth.

Testimony--Bernanke, Economic Outlook and Policy -- Before the Joint Economic Committee, U.S. Congress, Washington, D.C., June 7, 2012

Bernanke Senate Testimony: "Prepared to take action as needed" - Federal Reserve Chairman Ben Bernanke testimony "Economic Outlook and Policy" before the Joint Economic Committee, U.S. Senate:  Concerns about sovereign debt and the health of banks in a number of euro-area countries continue to create strains in global financial markets. The crisis in Europe has affected the U.S. economy by acting as a drag on our exports, weighing on business and consumer confidence, and pressuring U.S. financial markets and institutions. European policymakers have taken a number of actions to address the crisis, but more will likely be needed to stabilize euro-area banks, calm market fears about sovereign finances, achieve a workable fiscal framework for the euro area, and lay the foundations for long-term economic growth. U.S. banks have greatly improved their financial strength in recent years, as I noted earlier. Nevertheless, the situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely. As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.

Bernanke Says Federal Reserve Ready to Take More Steps to Strengthen Economy — Chairman Ben Bernanke said the Federal Reserve is prepared to take further steps to lift the U.S. economy if it weakens. But he didn’t signal any imminent action in testimony before a congressional panel Thursday. Bernanke said the European debt crisis poses significant risks to the U.S. financial markets. And he noted that U.S. unemployment remains high and the outlook for inflation subdued. “As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate,” Bernanke told the congressional Joint Economic Committee. Most economists don’t expect further moves at the Fed’s next policy meeting June 19-20, despite some signals from other Fed members in recent days. They note that long-term rates have already touched record lows. Even if rates did decline further, analysts say they might have little effect on the economy.

Ben Bernanke: No change in policy unless conditions deteriorate further- Federal Reserve Chairman Ben Bernanke said today that the risks to the economy have increased, and the Fed is prepared to take action if conditions deteriorate. But in his testimony before the Congressional Joint Economic Committee there was no indication that the Fed is prepared to alter policy at this point. Expectations that the Federal Reserve might ease policy were raised this week when three regional bank presidents, John Williams of San Francisco, Dennis Lockhart of Atlanta, and Eric Rosengren of Boston all seemed to indicate a willingness to consider further easing. Remarks by Federal reserve governor Janet Yellen also encouraged speculation that Bernanke might hint at a change in policy at the next monetary policy meeting. But with Bernanke's testimony, expectations that the Fed will change course soon have been all but eliminated. Instead, the Fed will stay in "wait and see" mode on the belief that its policy stance is already highly accommodative, and further easing is only called for if the economy begins to show signs of weakening further, or turns downward. In particular, the Fed fears deflation above all else, and any sign that inflationary expectations are plunging would likely motivate the Fed to action.

Not Jackson Hole - Federal Reserve Chairman Ben Bernanke did not deliver another Jackson Hole speech in today's testimony to the Senate.  Instead, he stuck to his usual style of delivering just the facts, or at least his version of the facts, and letting us pick apart the implications for monetary policy.  On on critical issue, the jobs report, he takes both sides of the debate: This apparent slowing in the labor market may have been exaggerated by issues related to seasonal adjustment and the unusually warm weather this past winter. But it may also be the case that the larger gains seen late last year and early this year were associated with some catch-up in hiring on the part of employers who had pared their workforces aggressively during and just after the recession. If so, the deceleration in employment in recent months may indicate that this catch-up has largely been completed, and, consequently, that more-rapid gains in economic activity will be required to achieve significant further improvement in labor market conditions. On net, I think Bernanke would like to see more data before he committed to further easing, which would push additional action into later this summer or early fall.  The near-term path of fiscal policy is also weighing on his mind: As an aside, note that Bernanke's repeated warnings about the fiscal cliff imply something interesting about his views on the limits to monetary policy.  Specifically, he does not think the Federal Reserve can offset entirely the negative impact of the cliff.  If the Fed could offset the impact, then why worry about it?  After all, the fiscal cliff does put the federal budget back on a sustainable path.  He should just embrace the cliff and let the Fed compensate with additional easing.  That is, of course, unless he thinks the Fed is really at the end of its rope.

Congress to Bernanke: Do less, not more - Judging from recent economic commentary, there are plenty of economists who think the Federal Reserve needs to do much, much more to juice the U.S. economy. Scott Sumner, Paul Krugman, and the Economist have all lambasted Fed Chairman Ben Bernanke on this front. But in Congress, this view seems curiously absent. On Thursday morning, Bernanke testified before the U.S. Congress Joint Economic Committee. Republicans at the hearing were quick to criticize the Fed chairman over recent reports that the central bank might contemplate more “quantitative easing” — the so-called QE3 — to jump-start the stalling recovery. Very few Democrats, however, offered any sort of counterbalance. At the moment, most of the political pressure on Bernanke is to do less stimulus, not to do more. “I wish you would take QE3 off the table,” said Texas Rep. Kevin Brady, the ranking Republican on the committee. “I wish you would look the markets in the eye and say that the Fed has done too much.” Similarly, Sen. Jim DeMint (R-SC) complained to Bernanke that many of the stimulative measures the Federal Reserve has taken “are giving us a false sense of security.”

A Fragment on the Interaction of Expansionary Monetary and Fiscal Policy at the Zero Nominal Lower Bound to interest Rates - Brad DeLong: Long ago, Bernanke (2000) argued that monetary policy retains enormous power to boost production, demand, and employment even at the zero nominal lower bound to interest rates:  Money, unlike other forms of government debt, pays zero interest and has infinite maturity. The monetary authorities can issue as much money as they like. Hence, if the price level were truly independent of money issuance, then the monetary authorities could use the money they create to acquire indefinite quantities of goods and assets. This is manifestly impossible in equilibrium. Therefore money issuance must ultimately raise the price level, even if nominal interest rates are bounded at zero. This is an elementary argument, but, as we will see, it is quite corrosive of claims of monetary impotence… His argument, however, seems subject to a powerful critique: The central bank expandeth the money stock, the central bank taketh away the money stock, blessed be the name of the central bank. In order for monetary policy to be effective at the zero nominal lower bound, expectations must be that the increases in the money stock via quantitative easing undertaken will not be unwound in the future after the economy exits from its liquidity trap. If expectations are that they will be unwound, then there is potentially money to be made by taking the other side of the transaction: sell bonds to the central bank now when their prices are high, hold onto the cash until the economy exits from the liquidity trap, and then buy the bonds back from the central bank in the future when it is trying to unwind its quantitative easing policies. Consider that:

• quantitative easing interventions are in thick and liquid financial markets and so could be easily undone in the future;
• after the economy were to exit from its liquidity trap there would then be no forward-looking reason not to undo liquidity-trap quantitative easing; and
• the central bankers who would be deciding whether to unwind the past liquidity-trap quantitative easing will be different people than the original central-banking team.

Hoisted from Comments: Daniel Kuehn on Credible Federal Reserve Commitment to Incredible Responsible Future Irresponsibility » Daniel Kuehn writes: We have the confidence fairy. We need to start talking more about the "expectations fairy" in reference to market monetarists like Scott Sumner. Of course in the best of all possible worlds the expectations channel works great and we can talk about monetary policy with confidence even with a non-existent interest rate channel. But we don't live in that world and we can advocate monetary policy while still having reservations about its effectiveness. Sumner seems to interpret that as opposition. So let's talk more about the "expectations fairy". Another way to say it is this: Krugman noted that what the central bank needs is to make a credible commitment to being irresponsible. There are legitimate questions about whether it is capable of credibly committing to being irresponsible. Nobody questions whether Congress is capable of credibly committing to being irresponsible. It's practically a prerequisite for the job.

The Fed, Once Again - I find Ryan Avent quoted at Political Animal. Matthew Zeitlin quotes and discusses.What’s interesting about Avent’s wonk-and-brimstone and Lahart is that both pieces start from a similar point: the Fed has been willing to step in with an unconventional policy measures when the economic picture has gotten particularly bad. But whereas Avent sees excess caution leading to calamity (“the Fed bears the greatest responsibility for America’s pathetic recovery”), Lahart voices the Fed’s possible concerns with more agressive policy, especially raising expectations of future inflation:Given the demonstrated (again) effectiveness of fiscal stimulus and the almost compete absense of any evidence that the Fed's efforts since the crisis have had much effect, I have no idea how Avent can possibly think that the Fed bears greater responsibility than Congress. I can see an argument for more aggressive monetary policy on the grounds that it certainly won't hurt, but I think Avent's blind faith that it is as effective now as in normal times is based on a refusal to deal with the evidence. I also think that Lahart's argument has no merit at all.

Fed Intervention and the Market: New Update -We have a little over three weeks left for the latest Federal Reserve intervention, Operation Twist, which was officially announced on September 21 of last year. We've seen several bouts of aggressive Fed attempts to manage the economy following the collapse of the two Bear Stearns hedge funds in mid-2007 about three months before the all-time high in the S&P 500. Initially the Fed Funds Rate (FFR) underwent a series of cuts, and with the collapse of Bear Stearns, the Fed launched a veritable alphabet soup of tactical strategies intended to stave off economic disaster: PDCF, TALF, TARP, etc. But shortly after the Lehman bankruptcy filing, the Fed really swung into high gear. If a picture is worth a thousand words, this chart needs little additional explanation — except perhaps for those who are puzzled by the Jackson Hole callout. The reference is to Chairman Bernanke's speech at the Fed's 2010 annual symposium in Jackson Hole, Wyoming. Bernanke strongly hinted about the forthcoming Federal Reserve intervention that was subsequently initiated in November of 2010, namely, the second round of quantitative easing, aka QE2.With three-plus weeks of "twisting" left, it's still just a bit too soon to make a definitive pronouncement on the success of this strategy for lowering interest rates. Changes can be sudden in this global atmosphere of economic unrest, and the decline in markets around the world is a bit nervous-making. But at this point, the Fed definitely seems to be achieving its "Twist" goal

Monetary Policy Transparency: Changes and Challenges - Speech - Narayana Kocherlakota - President, Federal Reserve Bank of Minneapolis

Forward Guidance from the Fed - It would seem to me that the increase of transparency at the Federal Reserve has made Fed-watching harder rather than easier. In no particular order, here are recent statements from various Fed officials.

• Charles Plosser, WSJ, May 29: “There’s absolutely no reason for people in the United States to get all in a dither,” Federal Reserve Bank of Philadelphia President Charles Plosser said in an interview with The Wall Street Journal.[...] “I think we have the tools at our disposal if they become necessary,” he said.
• Narayana Kocherlakota, June 7: “Inflation was distinctly higher in 2011 than in 2010,” and even core inflation went up, the central banker said. “I see these changes as a signal that our country’s current labor market performance is closer to ‘maximum employment,’ given the tools available to the FOMC, Kocherlakota said.
• Charles Evans, June 5: “With huge resource gaps, slow growth and low inflation, the economic circumstances warrant extremely strong accommodation,” Evans said
• James Bullard, May 17: “Generally speaking, the U.S. economy has done better than expected in the first part of 2012,” Bullard said today in Louisville, Kentucky. “My own forecast has rates going up a little sooner” than other central bankers, or “late 2013.”
• Janet Yellen, June 6: “I believe that a highly accommodative (Fed) policy will be needed for quite some time to help the economy mend,” Janet Yellen, vice chair of the Federal Reserve board of governors, said  “I anticipate that significant headwinds will continue to restrain the pace of the recovery.”
• Ben Bernanke, June 7: When asked whether the Fed is planning to take more measures to boost growth, Mr. Bernanke said he and his colleagues “are still working” on that question ahead of their June 19-20 meeting. The main question they need to answer, he said, is whether the economy will be strong enough to make material progress on bringing down unemployment.

What Constrains the Federal Reserve? An Interview with Joseph Gagnon -There's a growing consensus right now that the Federal Reserve could be doing more to bring about a stronger recovery given its current powers. It's even more relevant in light of the recent weakening of the recovery, as shown in the poor job numbers that came out last Friday. But there's a lot of disagreement and confusion about the constraints that prevent the Federal Reserve from taking more action. It's even more confusing given Federal Reserve Chairman Ben Bernanke's past research, where he described the Bank of Japan falling into “self-induced paralysis.” Some believe the constraints are political, others believe they are related to fighting among the various governors, and there are those that believe Bernanke is comfortable with monetary policy as it is. In order to make sense of the various constraints the Federal Reserve faces, I spoke with Joseph Gagnon, senior fellow at the Peterson Institute for International Economics, over the weekend. Gagnon was an associate director for the Federal Reserve’s Division of Monetary Affairs and Division of International Finance, where he was involved with the execution of QE1. I last spoke with Gagnon on the issue of QE3 last summer.

Fed risks diminishing returns with more QE - There are four rationales that could explain why the Fed might now increase the size, or change the composition, of its balance sheet. While the Fed could act, it risks diminishing returns and perverse outcomes. First, there is the “bank liquidity” rationale. To avoid a bank panic a central bank can rapidly expand its balance sheet to keep private bank balance sheets stable. This rationale supported the Fed’s actions in 2008 and the European Central Bank’s recent longer-term refinancing operations. But it does not provide a compelling reason for the Fed to act in response to economic weakness. Second, there is the “asset price” rationale which rests on the theory that if the central bank buys assets it can create momentum behind a rise in asset prices, stimulate investor animal spirits and create a virtuous cycle of confidence that will support economic expansion.  This approach provides little more than a bridging operation and the question remains: a bridge to what? Third, there is the “credit channel” rationale based on the theory that if the Fed holds down long-term interest rates it will stimulate private credit creation and, thus, economic expansion.  But, at this point, pursuing lower rates by the Fed buying more Treasury and agency securities could have a perverse impact on credit availability.  If the Fed pulls more Treasuries out of the market to lower long-term interest rates, it will be denying banks the core asset on which they build their balance sheets. Finally, there is the “radical monetarist” rationale to avoid deflation by flooding the banking system with enough “money” to prevent prices from falling. There are real challenges the Fed would have to overcome to pursue this rationale.

Congressman to Bernanke: Take QE3 Off the Table - Rep. Kevin Brady (R., Texas), warned Federal Reserve Chairman Ben Bernanke not to authorize a third round of quantitative easing, saying the central bank had already done “too much” and could be fueling future inflation. “I wish you would take a third round of quantitative easing off the table,” Mr. Brady said at a hearing on the economy before House and Senate lawmakers. Mr. Brady asked Mr. Bernanke to “look the market in the eye” and tell investors what the Fed’s plans were. Mr. Bernanke said during the hearing that Fed officials haven’t decided whether further steps from the Fed were needed to support economic growth, though a decision could come within two weeks. He defended the past actions the Fed has taken, saying they lowered interest rates and helped fuel economic growth and he clearly left the door open for more action. “In general we continue to believe that potentially that these sorts of measures could still add some additional accommodation, some additional support to the economy, but then again… there may be some diminishing returns and that would be a consideration that we look at,” he said.

"Does monetary policy have (bad) distributional consequences?" - Some questions are bad questions. This is one of them. We can get a clearer and more useful answer if we change the question. We can avoid wasting a lot of time arguing at cross purposes. Here's a better question: "If we used fiscal policy instead of monetary policy to remove a shortage of aggregate demand, would that switch from one policy to another have distributional consequences?" The answer is almost certainly yes, though what those distributional consequences are will depend on the exact nature of the fiscal policy. Here's an even better question: "If we assume that monetary policy always responds to changes in fiscal policy to keep aggregate demand at the same level, will changes in fiscal policy have distributional consequences?" Now the answer is certainly yes, though what those distributional consequences are will depend on the exact nature of the fiscal policy.

Bernanke on Bankers on Fed Boards, Too Big to Fail and Deflation - Here are some tidbits from Federal Reserve Chairman Ben Bernanke‘s testimony which go beyond the big question of whether the Fed will try to ease financial conditions again: ON THE ROLE OF BANKERS ON REGIONAL FED BANK BOARDS: Bernanke says Congress set this system up which requires bankers on its regional bank boards. If Congress wants to change the law, the Fed will work with it. ON TOO BIG TO FAIL: People argue that the government should break up big banks. “I think it is incredibly important to end too big to fail,” he says. But he hasn’t seen anybody specifies exactly how to break up the big banks. Instead, he says the best way to address too big to fail is to take away the advantages of being big, such as by using tougher supervision of the big banks and higher capital accounts. ON DEFLATION RISKS: Worries about deflation weighed heavily on the Fed in 2008 and 2009. Not anymore. Deflation, Mr. Bernanke said, is not at the forefront of his concerns.

Q&A: Pianalto on Monetary Policy, Fed Governance and Rock’n'Roll - Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, is sticking to her forecast for gradual improvement in the economy, despite a spate of recent disappointing economic data, including the disappointing May jobs report released Friday. Ms. Pianalto was interviewed by the Wall Street Journal Thursday and Friday and discussed a wide range of issues, including her economic outlook, monetary policy, manufacturing in the Midwest, her role on the policy making Federal Open Market Committee and her family’s Midwest roots. Below are excerpts of the interviews:

CEPR Co-Directors Call on Federal Reserve to Intervene in Spanish Bond Market - Center for Economic and Policy Research (CEPR) Co-Directors Dean Baker and Mark Weisbrot issued the following statement today, calling for action by the U.S. Federal Reserve to contain the eurozone crisis. Weisbrot just returned from Spain, where he observed the impact of the crisis firsthand. The statement reads: “The financial crisis in the eurozone, now centered on Spain, is contributing to the slowdown in the U.S. economy and opens the possibility of a worse financial meltdown, of the type that followed the collapse of Lehman Brothers in 2008.  This could tip the U.S. economy into recession. “The European Central Bank (ECB) could put an end to the acute crisis by intervening in the Spanish bond market, as it has done in the past year, thereby stopping financial markets from driving these bond yields to levels at which Spain’s debt is seen as unsustainable.  But it has so far refused to do so. “The ECB’s refusal to act, for political reasons, is reckless and inexcusable.  Since the eurozone crisis is affecting unemployment in the United States, and threatens to raise it further, it is within the Fed’s mandate to act in this situation.

Money Still Matters - Nick Rowe likes to remind us that money is the only asset on every market.  If the supply of or demand for this one asset is disrupted then every market will be affected.  This reasoning implies that monetary disequilibrium is essential for the emergence of general gluts. This crisis has reinforced this understanding, but also has shed some new light on what it means.  Specifically, this crisis has shown that what is used as money is far broader than the standard measures of money.  The widely used M2, for example, is limited to retail money assets like cash and deposits accounts that are used by households and small businesses.  Institutional investors also need assets that facilitate transactions, but the assets in M2 are inadequate for them given the size and scope of their transactions. Consequently, institutional investors have found ways to make assets like treasuries, commercial paper, repos, GSEs and other safe assets serve as their money. These institutional money assets, therefore, should also be considered part of the money supply. When viewed from this broader perspective, the money supply has been depressed during the crisis in both the United States and the Eurozone. It should be no surprise then that both regions are in slumps.   Here are some attempts to measure these broader notions of money.  First, from the Center for Financial Stability is the M4 Divisia money supply measure for the United States:

Stabilise that certain something - IN ADDITION to using my colleague's post as a jumping-off point for broad economic foreboding, I'd like to borrow it in making a much narrower observation about monetary policy. He rightly notes that the American economic picture is the most perplexing. The fundamentals seeem to be lined up nicely: deleveraging has proceeded surprisingly quickly, housing markets are rapidly clearing, petrol prices are subdued, manufacturing workers are once again globally competitive, and so on. Yet once again, the American recovery is losing a step. Why? My colleague suggests there's a small but meaningful chance of disaster in lots of places around the world, and so the typical investor is skittish: Is it any wonder that the marginal investor or business would prefer to hold Treasury bonds or sit on cash? And that sort of disengagement can make economic pessimism self-fulfilling. At its heart, the Federal Reserve ostensibly makes policy on what you might call an "inflation-targeting plus" basis. One can envision an alternative policy approach, however. In this approach, the economy has some level of potential supply or potential output, which is the product of all sorts of factors. Whether that supply is fully used, however, comes down to how tightly economic actors are grasping their dollars.The Fed's job, as steward of the economy's money, is managing demand. And in practice, that job amounts to coordinating expectations across the economy so that it doesn't find itself in a rut of self-fulfilling economic pessimism.

Finnish Leader Says U.S. Worried About Europe Banks - U.S. Treasury Secretary Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke are concerned about the European banking industry, Finnish Prime Minister Jyrki Katainen said after meeting the two U.S. officials.  “They were very worried about what was going on,” Katainen said in a Bloomberg News telephone interview yesterday. Katainen said he discussed with Geithner and Bernanke the options for recapitalizing banks in trouble.European Union leaders, including European Central Bank President Mario Draghi and European Commission President Jose Barroso, have called for a banking union with more coordination of regulation, as lawmakers seek to bolster confidence damaged by debt turmoil. EU President Herman Van Rompuy plans to report on proposed “building blocks” for deeper integration in the 17-nation euro area at the next summit of EU leaders on June 28- 29 in Brussels. “One of the issues which we talked most was how to deal with the banking sector in Spain or in some other European countries because we should avoid a new banking crisis,” Katainen said. “This is an issue which we are considering right now.”

Bernanke: Euro Zone Bigger Potential Threat Than China Slowdown - Federal Reserve Chairman Ben Bernanke said the euro-zone crisis has more potential to hurt the U.S. economy than indications of an economic slowdown in China, saying, in fact, that a less-torrid Chinese economy could actually benefit the U.S. Mr. Bernanke told Congress that, when the Chinese economy slows, it tends to result in a decline in oil prices, helping the U.S. economy, which is heavily affected by high commodity prices. Testifying before the congressional Joint Economic Committee, Mr. Bernanke said he didn’t think the indications of a Chinese slowdown, “on net, are enough to be concerning for the U.S.” China’s economy slowed to a nearly three-year low of 8.1% growth in gross domestic product in the first quarter of 2012. Beijing disclosed Thursday that it would cut its benchmark lending rate, one of a series of steps the government has taken in recent days to try to boost economic output.

Draghi: Don’t Blame Europe for Global Weakness - European Central Bank President Mario Draghi delivered a message to those outside of Europe who may be tempted to lay the weakness in the global economy at Europe’s front door: don’t go there. “I think it’s not balanced to say that only Europe has a responsibility,” Mr. Draghi said at his monthly press conference Wednesday. “It seems that [with all the] problems of a country with high and rising deficits, high public debts and so on… all the problems depend on Europe?” he said in what appeared to be a reference to the U.S.

Getting Out In Front of Economic Headwinds - Scott Sumners says the Fed and the ECB could learn something from the Reserve Bank of Australia: Australia has a 2-3% inflation target and faster trend RGDP growth than the US.  That sort of nominal growth would be beyond my wildest dreams for the US.  Rather think about how proactive they are.  Unemployment is low and inflation is in the sweet spot.  But they are easing monetary policy because they see the global slowdown, which for some reason the much more sophisticated Fed and ECB don’t quite comprehend.  They aren’t cutting rates because 5.5% NGDP growth is too low, they are cutting rates to make sure that 5.5% NGDP growth happens. Imagine that, a central bank that gets out in front of economic headwinds.  What would it take for the Fed and ECB to start acting like that?

Bernanke Anxieties Embodied as Bond Sales Tumble: Credit Markets - Sales of corporate bonds from the U.S. to Europe and Asia slumped to their lowest levels this year and borrowing costs soared to the most since February as a global slowdown curbed demand for all but the safest assets. Deere & Co. (DE) (DE), the largest maker of agricultural equipment, and Springdale, Arkansas-based Tyson Foods Inc. (TSN) (TSN) led weekly sales of at least $28 billion, the smallest amount since the five days ended Dec. 30, according to data compiled by Bloomberg. Offerings fell below the 2012 weekly average of $76.8 billion for the fourth consecutive period as yields rose to 4.297 percent from the low this year of 4.06 percent on May 8. High-yield issuance in the U.S. was virtually shut as Federal Reserve Chairman Ben S. Bernanke said the world’s largest economy is threatened by Europe’s debt crisis and government budget cuts, making it harder for corporate borrowers to meet their obligations.

Fed's Beige Book: Economic activity increased at "moderate" pace, Residential real estate "activity improved" -Fed's Beige Book:  Reports from the twelve Federal Reserve Districts suggest overall economic activity expanded at a moderate pace during the reporting period from early April to late May.  This is a slight upgrade from the previous beige book that reported "modest to moderate" growth. And on real estate:  Activity in residential real estate markets improved in most Districts since the previous report. Several Districts noted consistent indications of recovery in the single-family housing market, although the recovery was characterized as fragile. The apartment market continued to improve, and multifamily construction increased in several Districts. Home sales were above year-ago levels in most areas of the country and several Districts noted sales had improved since the previous report, although some noted that the pace was well below the historical average. In particular, the New York, Cleveland, and Richmond Districts noted a pickup in the pace of distressed sales. Most Districts reported that home inventories decreased. Overall, home prices remained unchanged in many Districts, although reports were mixed. There were a few reports that sellers were lowering asking prices, leading to downward pressure on housing prices.

Fed’s Beige Book: District by District Summary of Conditions - The Fed's latest "beige book" report noted that the economy expanded at a "moderate" pace across the U.S. The following is a district-by-district summary of economic conditions.

Just Released: New York’s Latest Beige Book Report Signals Steady Growth - The New York Fed’s latest Beige Book report points to continued moderate growth in the regional economy and some reduction in cost pressures. Eight times a year, each of the nation’s twelve Federal Reserve Banks produces a report on current economic conditions in its District, based on largely anecdotal information obtained from a variety of regional business contacts. The New York Fed’s report covers New York State, northern New Jersey, and southwestern Connecticut. The twelve District reports are combined with a national summary to produce what has come to be known as the Beige Book—a report that provides some of the most timely information available on economic conditions.    In the latest report—based on information collected through May 25—a number of sectors provide positive signals. Some of the most encouraging news has come from regional banks: contacts there report increases in loan demand that are more widespread than at any time since the mid-1990s, with much of the heightened demand generated by commercial borrowers. Moreover, bankers also cite widespread declines in delinquency rates across all categories—and this is on top of similar declines noted in the last Beige Book report, released in mid-April. Other signs of continued strength are coming from the travel and tourism sectors: New York City hotels report ongoing strong growth in revenue, and Broadway theaters saw increases in both total revenues and attendance. Even manufacturing contacts report improving business conditions and say they plan to hire, on net, in the months ahead. And finally, while housing markets have generally been slow to recuperate from the aftermath of the housing bust, activity has picked up recently in Western New York, and rental markets in and around New York City have continued to firm.

Seventh District Update - A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

• • Overall conditions: Economic activity in the Seventh District continued to expand at a moderate pace in April and May.
  • Consumer spending: Consumer spending increased at a slower rate, due in large part to the unseasonably warm temperatures that boosted activity in the early spring.
  • Business Spending: Business spending continued at a steady pace and inventories were generally indicated to be at comfortable levels.
  • Construction and Real Estate: Construction activity increased as demand continued to be strong for multi-family construction, especially apartments, but also increased for single-family homes. Residential and commercial real estate conditions continued to slowly improve.
  • Manufacturing: Capacity utilization in the steel industry reached its highest level since the end of the recession, and the auto industry remained a source of strength.
  • Banking and finance: Credit conditions were little changed on balance.
• • Prices and Costs: Cost pressures leveled off. Wage pressures continued to be moderate and retailers indicated that they were largely absorbing higher transportation costs and continued to heavily discount items such as clothing.
  • Agriculture: District corn and soybean planting were well ahead of last year’s pace. Corn, soybean, and milk prices fell during the reporting period, while wheat, hog, and cattle prices rose.

Is America Healing Fast Enough? - Mohamed A. El-Erian  – Six internal factors suggest that the United States’ economy is slowly healing. For some observers, these factors were deemed sufficient to form the critical mass needed to propel the economy into escape velocity. While I hoped that they might be proven right, the recent stream of weak economic data, including May’s timid net job creation of only 69,000, confirmed my doubts. With this and other elements of a disheartening employment report now suddenly raising widespread worries about the underlying health and durability of America’s recovery, it is important to understand the positive factors and why they are not enough as yet. For starters, large US multinational companies are as healthy as I have ever seen them. Their cash balances are extremely high, interest payments on debt are low, and principal obligations have been termed out. Rich households also hold significant resources that could be deployed in support of both consumption and investment.The third and fourth positive factors relate to housing and the labor market. These two long-standing areas of persistent weakness have constituted a major drag on the type of cyclical dynamics that traditionally thrust the US out of its periodic economic slowdowns. But recent data support the view that the housing sector could be in the process of establishing a bottom, albeit an elongated one. . Then there is the US Federal Reserve Board. Despite legitimate questions about the effectiveness of its unconventional and ever-experimental policy stance, the Fed appears willing to be even more activist if the economy weakens. Finally, with the November elections in sight and subsequently out of the way, some believe that politicians in Washington might finally be in a better position to agree to much-needed grand policy bargains. In addition to removing the damaging specter of the fiscal cliff – a potentially disruptive economic hindrance equivalent to some 4% of GDP, in the form of excessively blunt spending cuts and across-the-board tax increases – greater political effectiveness would serve to remove other uncertainties that inhibit certain economic activities.

How Slow Can the Economy Go? - There are two unavoidable conclusions from the May jobs report: The slow economy is getting slower, and there is no help on the way.  Republicans in Congress seem more determined not only to block any boost that President Obama wants to give the economy, but they are preparing to take the nation’s credit rating hostage again over the debt ceiling. Mitt Romney, the Republican presumptive presidential nominee, has no new ideas.  The statistics on Friday were daunting. Only 69,000 jobs were created last month, far lower than what’s needed just to keep up with population growth. The job tallies for March and April, shabby to begin with, were revised down, for an average monthly tally of 96,000 over the past three months, versus 252,000 in the prior three months.  The weakness was not only displayed in job growth. Average weekly wages declined in May, to $805, as a measly two-cents-an-hour raise was more than clawed back by a drop to 34.4 hours in the length of the typical workweek.  Similarly, the rise in the number of people looking for work is normally considered a sign of optimism, but, on closer inspection, it appears to be simply the reversal of a drop in job-seekers in April.

Why the U.S. economy is stuck in the slow lane -  The economy isn't careening into a ditch. It's just stuck firmly in the slow lane. A disappointing report on the job market Friday dashed hopes that a halting recovery would finally take off and generate hundreds of thousands more jobs every month. Economists initially blamed the slowdown on warm winter weather that pulled forward construction and other activity to early this year, damping spring sales and hiring. Mark Zandi, chief economist of Moody's Analytics, says some weather-related payback was still at work in May, contributing to a loss of 37,000 jobs in construction and hospitality. But many economists say the darker jobs picture can no longer be chalked up to weather. Zandi points to worries by U.S. corporations about Europe's worsening financial crisis and says businesses' uncertainty has held back hiring. IHS' [Nigel] Gault says the stronger gains early in the year "were clearly out of line with the (weak) underlying pace of (economic) growth."

Contrary to Popular Belief, the Recovery is not Stalling - Wells Fargo pdf - Nonfarm employment came in well below expectations in May, adding only 69K jobs with the unemployment rate drifting a notch higher to 8.2 percent. The details of the nonfarm payroll report suggest that weather could have been a driver for the weaker-than-expected outturn. The ISM manufacturing survey weakened a bit, sliding 1.3 points to 53.5; however, the forward-looking new orders component jumped to 60.1, the highest level in 13 months, showing the continued resilience of the manufacturing sector.

Growth Slowdown Seen for Third Year in U.S. Dodging a Recession - The U.S. economy looks set to deliver a repeat performance in 2012: for the third straight year, it may suffer a swoon yet not slip into a recession. “I don’t think the slowdown will be any more consequential than the past two years,” . “There are positives out there in the economy. We’ll avoid a recession.”  Household balance sheets are in better shape, with indebtedness down about $100 billion in the first quarter, according to the New York Fed. Banks are more profitable: earnings have risen for 11 straight quarters, based on data compiled by the Federal Deposit Insurance Corp. Even the housing market is reviving, with starts through the first four months of this year 24 percent higher than the comparable 2011 period.

Counterparties: The data downturn - Economic projections matter, because they are used to make real-world policy. Which is the second piece of bad news surrounding last week’s dismal jobs report – not just the horrible jobs numbers themselves, but also the fact that no economists expected them. Indeed, the economic consensus was for more than double the number of jobs actually created in May. Are the world’s policymakers buying into that all-too-cheery view of the economy? Underestimating how bad things are, it turns out, has been something of a trend of late. Economists expected US factory orders to rise by 0.2%; in fact, they fell by 0.6%. More broadly, 18 of the 21 economic indicators released last week came in weaker than expected, per the folks at Bespoke Investment Group. Does this matter? Calculated Risk points out – rightly – that economists’ missed projections don’t necessarily tell us anything other than how wrong economists tend to be. And John Mauldin notes that “the Blue Chip economics consensus has never forecast a recession. And they largely miss recoveries.” Here’s Mauldin’s chart:

By How Much Should a Jump in the Unemployment Rate Lead You to Mark Down Your Long-Run Forecast of GDP? - Brad DeLong: In the U.S. since 1948, if you believe the simple linear projection, an extra 1% point jump in the unemployment rate should lead you to mark down your forecast of real GDP ten years out by 0.57%. As you can plainly see from the scatter, this is, of course, not significant. Depending on what assumptions you make about the residual term, the marginal significance level can go from 0.4 down to 0.07. There are a huge number of other factors driving ten-year changes in real GDP, and simple chance might easily induce an in-sample correlation between them and initial changes in the unemployment rate large enough to drive this correlation. With an Okun's Law coefficient of 2 and a half-life of demand disturbances of two years, 0.57 corresponds to an η hysteresis parameter in the framework of "Fiscal Policy in a Depressed Economy" of 0.14. But the right answer to the question in the title is that the aggregate time series is saying "who the hell knows?"--and that is without taking into account the possibility of structural change in the economy between 1950 and 2010. Still, the pure time series is telling us that η is as likely to be above 0.28 as below 0...

The TIPS curve has inverted  - The US inflation indexed treasury curve (TIPS curve) has inverted sharply in the short end. The one-year TIPS yield went from negative 2.5% to zero in a matter of four months. The one-year treasury (nominal) yield on the other hand has held fairly steady near zero (between 12bp and 20bp over the past 4 months). That means that the market is now pricing near zero percent inflation over the next year (down from over 2.6% expected just 4 months ago) - as near-term inflation expectations collapse. We haven't seen this since 2009. One could argue that this is a positive development for the US consumer. However this move in the TIPS curve certainly raises the risk of near-term deflation, driven by weak demand growth. This feels (at least in the near term) a bit like Japan, a nation quite familiar with zero to negative inflation expectations.

Market rumor: Pimco and JP Morgan halt vacations to prepare for economic crash - On June 1, market rumors were coming out of a hedge fund luncheon stating that Pimco, JP Morgan, and other financial companies were cancelling summer vacations for employees so they could prepare for a major 'Lehman type' economic crash projected for the coming months.  These rumors came on a day when the markets nearly came to capitulation, with the DOW falling more than 274 points, and gold soaring over $63 as traders across the board fled stocks and moved into safer investments.

Todd Harrison tweet: Hearing (not confirmed) @PIMCO asked employees to cancel vacations to have "all hands on deck" for a Lehman-type tail event. Confirm?
Todd M. Schoenberger tweet: @todd_harrison @pimco I heard the same thing, but I also heard the same for "some" at JPM. Heard it today at a hedge fund luncheon.

Todd Harrison is the CEO of the award winning internet media company Minyanville, while Todd Shoenberger is a managing principal at the Blackbay Group, and an adjunct professor of Finance at Cecil College. Pimco and JP Morgan Chase are not the only financial institutions worried about a potential repeat of the 2008 credit crisis.  On May 31, one day before Pinco rumors began to spread around the markets, World Bank President Robert Zoellick issued the same warnings of a potential 'rerun of the great panic of 2008'.

Goldman Cuts Q2 GDP Estimate From 2.0% To 1.8% - Just as predicted earlier, the GDP downgrades begin. We revised down our Q2 GDP tracking estimate by two tenths to +1.8% (quarter-over-quarter, annualized) from +2.0% previously. The downward revision primarily reflects weaker-than-expected real export growth in April. This was partly offset by stronger than expected wholesale inventories, which increased by 0.6% (month-over-month) in April. Surely this explains why the market is about to turn green.

One Of The Biggest Bulls On Wall Street Just Cut His GPD Forecast - Deutsche Bank Chief U.S Economist Joseph LaVorgna cut his U.S. growth forecasts by half a percentage point today as government spending continues to depress economic growth. LaVorgna now projects the U.S. economy will increase some 2.4 percent in 2012, down from 2.9 percent. "The catalyst for the current quarter reduction stems from the lack of any defense spending snapback that we had assumed," LaVorgna said. "Recall that all of the unexpected weakness in Q1 real GDP was in government, specifically defense, which fell at an 8.3% annualized rate." Below, military spending over the past decade.

Welcome to the No-Growth Paradigm - Western developed economies have been resorting to almost every possible trick they can conjure up to maintain financial stability and economic growth over the last few years. And while stimulus, interest rate cuts, monetary easing, currency swaps, liquidity operations, bailout/austerity programs, bank "re-capitalizations", loan guarantees, entitlement/welfare programs, data manipulation, etc. have kept them muddling through so far, the undeniable truth is that there will SOON come a time when none of those things makes the least bit of difference anymore. For instance, Morgan Stanley just produced a report which concluded that the euphoric market effects of quantitative easing, the most potent monetary weapon possessed by CBs, may only last a few HOURS or DAYS, rather than weeks or months. This concept should be so familiar to readers of TAE by now that I don't even need to link to any of our articles for reference. Here's the bottom line - the U.S. population is still saturated with consumer, housing and business debts, as well as unserviceable public debts at the local/state level, and the deleveraging cycle is once again gaining momentum on the back of the Eurozone crisis. And that means no amount of cheap liquidity will be able to substitute organic economic growth with artificial growth on paper. If monetary easing cannot even manage to temporarily juice housing data, jobs data, retail sales data, consumer sentiment data, manufacturing data, etc., then the big market players no longer have anything to hang their hats on. Without support for asset prices and corporate profits on paper via leveraged market speculation, most people in the the corporate AND consumer worlds will not feel wealthy, happy and complacent anymore. Thus, the panicked spiral of debt deflation picks up steam once again.

Can The U.S. Economy Continue To Fend Off Euro Risk? - The U.S. economy is struggling on a number of fronts, but it’s also encouraging (and surprising?) that the economic turmoil in Europe hasn’t taken a deeper bite out of America’s moderate growth path of late. That could change, of course, but for now there’s still optimism that we’ll sidestep a new recession. Consider, for instance, yesterday’s update of the Livingston Survey, the oldest continuous polling of dismal scientists on the economic outlook: The 32 participants in the June Livingston Survey have raised their estimates of output growth for 2012. The forecasters, who are surveyed by the Federal Reserve Bank of Philadelphia twice a year, project that the economy’s output (real GDP) will grow at an annual rate of 2.2 percent during the first half of 2012 and 2.6 percent during the second half of 2012, followed by growth of 2.3 percent (annual rate) in the first half of 2013. Forecasters can be wrong, of course. In fact, you should count on no less to some degree. But the same applies to those who are predicting a new recession any day now. But if we’re analyzing the numbers reported so far, arguing on behalf of a new slump in the near term requires anticipating the economic news in the weeks and months ahead will deteriorate substantially relative to what’s known in the here and now.

Financial Collapse At Hand: When is "Sooner or Later"?: Ever since the beginning of the financial crisis and Quantitative Easing, the question has been before us: How can the Federal Reserve maintain zero interest rates for banks and negative real interest rates for savers and bond holders when the US government is adding $1.5 trillion to the national debt every year via its budget deficits? Not long ago the Fed announced that it was going to continue this policy for another 2 or 3 years. Indeed, the Fed is locked into the policy. Without the artificially low interest rates, the debt service on the national debt would be so large that it would raise questions about the US Treasury’s credit rating and the viability of the dollar, and the trillions of dollars in Interest Rate Swaps and other derivatives would come unglued.  In other words, financial deregulation leading to Wall Street’s gambles, the US government’s decision to bail out the banks and to keep them afloat, and the Federal Reserve’s zero interest rate policy have put the economic future of the US and its currency in an untenable and dangerous position. It will not be possible to continue to flood the bond markets with $1.5 trillion in new issues each year when the interest rate on the bonds is less than the rate of inflation. Everyone who purchases a Treasury bond is purchasing a depreciating asset. Moreover, the capital risk of investing in Treasuries is very high. The low interest rate means that the price paid for the bond is very high. A rise in interest rates, which must come sooner or later, will collapse the price of the bonds and inflict capital losses on bond holders, both domestic and foreign. The question is: when is sooner or later? The purpose of this article is to examine that question.

Here Comes Your 19th Nervous Breakdown - It's all over the news—the global economy is unraveling. Here's the Reuters' spin on what's going on. Gripped by fears that Europe's debt crisis is driving the world economy into a ditch, companies are delaying plans to raise capital and canceling deals, while investors are taking refuge in cash or any other place they think their money will be safe. The retreat has been so acute that yields on German two-year bonds have gone negative, meaning investors have become so wary of losses elsewhere that they are willing to pay for the privilege of lending money to the German government. Stocks and commodities have been hammered. And with the economic picture dimming in the United States and major developing economies, including Brazil, India and China, brave is the major corporation willing to take on new workers. The pace of hiring in the United States in May was the slowest in a year."What we're seeing is a sharp deterioration in economies worldwide. It's a very unstable situation. Markets are being driven by fear, and they're tougher to call than ever,"  It has become fashionable again—of course!—to blame China and now Europe for the woeful state of the U.S. economy, as if "scooping up potential bargains" in equity markets has a material effect on the daily lives of American and European citizens.

U.S. May Need Help From Abroad. Will It Come? - No two ways about it: The payrolls report was ugly.  The debate now shifts to what, if anything, can be done. In large part, the job problem is a lack of demand. Businesses won’t hire unless they have customers coming through the door or clicking on the Web. Pump up demand and hiring should follow. The Federal Reserve stands ready to help, perhaps with another round of security-buying to lower interest rates further. But the yield on the 10-year Treasury is already at a record low of sub-1.5%, and mortgage rates are south of 4%. The cost of borrowing doesn’t seem to be an obstacle to demand. That sub-1.5% Treasury rate, however, does mean the federal government could borrow boatloads of money at dirt-cheap rates and spend the money on job-creating projects. That’s Keynesian economics — but it won’t happen either. With Washington deadlocked, Blitz thinks help could come instead from two sources. First, China will step up and spend because Beijing doesn’t want the social unrest that would come from rising unemployment. Second, Germany will “once and for all bury its past reputation and move towards supporting growth in Europe,” says Blitz. If he is right, U.S. consumers/workers are in an unusual position: having to wait for help to come from elsewhere in the world.

US and Europe have no excuse for next recession - Four years after the onset of the Great Recession, a second and possibly worse global slump is starting to seem possible. If this happens, governments won’t be able to say they were taken by surprise. It will happen because governments have frozen in the face of hazards that are well understood and readily avoidable.  It’s hard to say whether the policy paralysis is worse in Europe or the U.S. I give the edge to Europe, where the failure of leadership has been more thorough and sustained. Still, the difficulties in the U.S. are easier to overcome, so neglecting them is more boldly incompetent. The country’s politicians, busy campaigning, have effectively said they’ll get back to us, maybe, after November’s elections. That’s audacious.  It has been plain for months, if not years, that the European Union needs collective monetary stimulus and some measure of debt mutualization to stabilize its economies. You would think neither would pose much of a test for an association of nations dedicated by treaty to “ever closer union.” Yet trying to avoid these steps has inflicted shattering recessions on several EU countries and worsened a manageable crisis of confidence to the point where it might destroy the entire euro project.

‘Simplistic Keynesians’ still right about the economy - Brad DeLong links to what he calls a “DeLong-Summers ‘Simplistic Keynesians’ Smackdown Watch“—a piece by Ken Rogoff calling “dangerously facile” those who argue for the “simplistic Keynesian remedy that assumes that government deficits don’t matter when the economy is in deep recession; indeed, the bigger the better.” Since “simplistic Keynesianism” is a pretty good description of my diagnosis and remedy for today’s U.S. economic troubles, and since I don’t want to ever be “dangerously facile,” I read both the Rogoff commentary and the Reinhart, Reinhart, and Rogoff (2012) paper that it links to.   I did learn one thing—it turns out that my earlier post about the likely provenance of a Rogoff claim about the potential damage from high public debt isn’t quite right—but the new provenance of this claim isn’t right either. There’s not much particularly new in either piece. Instead, they recycle the finding that, looked at over several centuries, there is an odd threshold of debt-to-GDP ratios—90 percent—that sees growth beneath the threshold run about 1 percentage point higher per year than growth above the threshold. They then do the arithmetic and argue that every year that the public debt-to-GDP ratio is over 90 percent is a year of GDP growth 1 percent lower than it would otherwise be and voila, the damage from high debt has been documented.

Breaking the negative feedback loop | Lawrence Summers: With the past week’s dismal U.S. jobs data, signs of increasing financial strain in Europe, and discouraging news from China, the proposition that the global economy is returning to a path of healthy growth looks highly implausible.  It is more likely that negative feedback loops are again taking over as falling incomes lead to falling confidence, which leads to reduced spending and yet further declines in income. Financial strains hurt the real economy, especially in Europe, and reinforce existing strains. And export-dependent emerging markets suffer as the economies of the industrialized world weaken. The question is not whether the current policy path is acceptable. The question is, what should be done? To come up with a viable solution, consider the remarkable level of interest rates in much of the industrialized world. The U.S. government can borrow in nominal terms at about 0.5 percent for five years, 1.5 percent for 10 years, and 2.5 percent for 30 years. Rates are considerably lower in Germany, and still lower in Japan.

Claims about the efficacy of fiscal stimulus in a depressed economy are based on as-flimsy evidence as the Laffer Curve?! Seriously false equivalence - Peter Orzsag calls the claim that the debt-to-GDP ratio can be lowered by providing a fiscal boost to a depressed economy the “Laffer curve of the left.”  The claim that it is relevant to the U.S. economy has been discredited empirically (and a long time ago). In light of this, Orzsag’s claim that the “Laffer curve of the left seems to have as much empirical relevance as the original Laffer curve” is not only odd but also flat wrong. Orzsag’s target is clearly a recent paper by DeLong and Summers that shows fiscal stimulus in a depressed economy has multiple salutary effects, not just on economic growth but even on long-run budget measures (like the debt-to-GDP ratio). The paper shows stimulus boosts near-term growth directly by relieving the constraint of insufficient demand; it boosts productive investments by giving firms an incentive (i.e., more customers coming in the door) to expand capacity; and it keeps chronic long-term unemployment from turning into a permanent erosion of workers’ skills (i.e., economic “scarring”). The assumptions about the strength of each of these effects that are needed to make fiscal stimulus debt-improving in a depressed economy are probably pretty close to real-life parameters. Let’s do some simple math with widely-agreed upon parameters, even ignoring some of the supply-side measures DeLong and Summers examine. I’m going to round very aggressively here, but it doesn’t affect results much.

U.S. posts deficit of $125 billion in May - The U.S. posted a deficit of $125 billion in May to bring the total federal shortfall to $845 billion through the first eight months of fiscal 2012, according to preliminary data from the Congressional Budget Office. That's about $80 billion less than the deficit reported at the same time a year earlier. Spending rose 1% to $306 billion last month, adjusted for changes in the timing of certain payments and the effects of the TARP emergency-relief program in 2011, the CBO said. The government's tax intake rose 3% to $180 billion in May. The federal fiscal year runs from October to September.

Fed Bought 77% of Federal Debt Increase in 2011: The Data Source - During an interview on CNBC Squawk Box this morning and in my Wall Street Journal oped of last Friday (June 1), I mentioned that the Federal Reserve purchased 77% of the net increase in the debt by the Federal government in 2011. Several people have asked for references for that amazing percentage. The calculation is due to my colleague John Cogan, and is based on data reported in the Federal Budget, FY2013 Historical Tables, Table 7.1: Federal Debt at the End of Year: 1940–2017. Here is how it is calculated. Table 7.1 shows that federal debt held by the public increased from $9,018,882 million at the end of fiscal year 2010 to $10,128,206 million at the end of fiscal year 2011 for an increase of $1,109,324 million during fiscal year 2011. The same table shows that Federal Reserve holdings of federal debt increased from $811,669 million to $1,664,660 million during the same period for an increase of $852,991 million, which is 77 percent of $1,109,324 million.

US rating faces '13 cut if no credible plan-Fitch (Reuters) - Fitch Ratings reiterated on Thursday it would cut its sovereign credit rating for the United States next year if Washington cannot come to grips with its deficits and create a "credible" fiscal consolidation plan. "The United States is the only country (of four major AAA-rated countries) which does not have a credible fiscal consolidation plan," and its debt-to-GDP ratio is expected to increase over the medium term, said Ed Parker, sovereign ratings analyst, speaking at a Fitch conference in New York.

Fitch Threatens Downgrade Waves Wet Noodle at US - Yves Smith - Here we go again…. As the Obama administration is quietly working towards a “Grand Bargain”, which is the current branding for “let’s put the middle class on the austerity rack just when the economy looks depression prone”, rating agency Fitch does its part by lobbing in a “the US needs to get its fiscal house in order” message. Readers may recall we went through this drama at the end of last summer. S&P huffed and puffed about a downgrade and the financial media obligingly went into a complete panic. Yet what happened when S&P pulled the trigger? As we predicted, pretty much nothing. In fact, US Treasury yields have continued to fall. Yet the Wall Street Journal shamelessly misreports what happened:A potential downgrade could send shockwaves through financial markets, similar to how S&P jolted markets last summer when it stripped the U.S. of its top credit rating. No, sports fans. The market upset was BEFORE the downgrade. And it also happened to coincide with an acute episode of stress in Europe, making it hard to parse out how much of the stock market reaction was due to concerns over Europe v. downgrade fearmongering. The downgrade was a non-event. Treasuries rallied, which is the exact opposite of what the overwhelming majority of commentators said would happen. This was worse than a Y2K scare (at least there was real remediation prior to Y2K; this by contrast, was simply overhyped).

The Level of Government Spending - Krugman - A quick note on what has happened to the level of government spending since the economic crisis began. Of course it has risen — we have a growing economy (usually) and a growing population, and you expect spending to rise even if the role of government remains unchanged. The question is how it has changed relative to some unchanged-role-of-government baseline. The chart below makes a first stab at such a calculation, but requires some further comment; when all is said and done, the role of government hasn’t actually grown. So, both lines below show total (federal, state, local) government spending as a share of potential GDP, the CBO’s estimate of what the economy would be producing at sustainable full employment: The first line shows the total; the second takes out unemployment benefits, which are an obvious example of spending that rises temporarily in a slump, but doesn’t represent a permanent change. What this second line suggests is that we’re left with a rise of about 1 percentage point of GDP. But even that is basically not a change in policy, for two reasons. First is that there are other programs that have ramped up because of the depressed economy, such as Medicaid and food stamps, not to mention more people going on disability and taking early retirement. Second is that demography and rising health care costs continue to do their thing.

Real Government Spending Per Capita - Krugman - A followup, for the purposes of a project I’m working on, on this post about falling government spending recently. Here are two figures, both in natural logs: overall real government spending per capita, and state and local real government spending per capita, this time in levels rather than changes.  One comparison I find instructive is between Obama and Reagan at this point in their presidencies, in each case compared with four years previous — which in each case roughly corresponds to the beginning of each era’s economic crisis (the double-dip recession that began in early 1980, the financial crisis that began in 2007 but really got serious in early 2008). Here’s what it looks like: Much more government spending under Reagan. Some of it was Reagan’s weaponized Keynesianism, some of it state and local — sustained in part by revenue-sharing that no longer exists, but also by a much greater willingness at the time to raise taxes on a temporary basis.

Latest Data Show We Are Already on a Downslope Toward the Fiscal Cliff - These days the “fiscal cliff” dominates the discussion of U.S. budget policy. The cliff is the package of tax increases and spending cuts baked into current law that will come into effect at the end of the year if Congress does not act. What is less widely recognized is that the U.S. economy is already on a downslope. The latest GDP and jobs data show that a substantial amount of fiscal austerity is already in effect. A steadily shrinking government sector is slowing growth of jobs and output. To say that the economy may teeter over the cliff at the end of the year understates the problem. If nothing is done, we will hit the cliff at a jog. There is much that we should do before we get there, and time is running out. According to a recently released CBO analysis, the potential austerity impact of the cliff would amount to more than 4 percent of GDP in calendar 2013, even taking automatic stabilizers into account. The CBO concludes that tax increases and expenditure cuts of that size would likely put the economy back into recession. Aren’t we already in recession? No, not by the usual definition. The exact levels of “potential GDP” and “natural unemployment” are matters of controversy, but almost everyone agrees we have not reached them yet. Furthermore, the latest data seem to show that the expansion is slowing. Pending annual revisions due out in August, real GDP appears to have grown at a 3 percent annual rate in Q4 2011. The advance estimate for Q1 2012 showed a 2.2 percent rate of growth. The second estimate for Q1, released last week, was just 1.9 percent.

Weak Economy Points to Obama’s Constraints - The bleak jobs report on Friday predictably had heads snapping toward the White House, looking to President Obama to do something. Yet his proposed remedies only underscore how much the president, just five months before he faces voters, is at the mercy of actors in Europe, China and Congress whose political interests often conflict with his own. That day, Mr. Obama continued his weekly travels around the country, prodding Congressional Republicans to pass his “to-do list” of temporary tax cuts and spending initiatives to help create jobs. The Republicans only mock him, which leaves Mr. Obama free to blame his opponents and their presidential standard-bearer, Mitt Romney. But in doing so, he telegraphs a message of powerlessness that no leader likes to convey — least of all one who ran for office four years ago vowing to bridge Washington’s partisan gulf. Developments overseas have not helped either. American officials have complained as Beijing began letting its currency devalue again, making its exports cheaper and those from the United States to China more costly. And administration officials, and Mr. Obama himself, have lobbied leaders in Europe for more forceful action to promote growth or at least contain the threat of financial contagion there.

Interest Rates So Low Even the Founding Fathers Would Gawk - We’ve been hearing that interest rates are “historically low” for some time now. But how historic are we talking? Even Thomas Jefferson would have been surprised to see the most respected debt issuer in the world paying just 1.47% on ten-year notes — the lowest in the history of the United States. Record interest rates — high or low — are generally not a good thing. When they are super high, as they were in the early 1980s, or super low as they are now, something is wrong somewhere. In the early 1980s, the problem was inflation. Now the problem is the weak state of the jobs market in the U.S. and economic chaos in Europe — especially Greece and Spain, where crushing  debt, high unemployment rates, and low productivity are threatening the banking systems. When investors are worried about the economy in or financial stability of their homelands, they gather up their Euros and dollars and park them in the safest place they can find. That would be the U.S. Treasury market.

A Gun to the Debt-Ceiling Fight - If Barack Obama turns out to be a one-term president, historians may mark the summer of 2011 as the moment his failure became inevitable. At that point, the new right-wing Republican House majority declared the national debt hostage and demanded Obama’s surrender to them on all points of domestic policy. When the debt-ceiling statute required authorization of a new federal borrowing limit, they refused to vote on the measure without massive cuts in federal spending and no increase in federal revenue. The crisis was averted by the appointment of an idiotic congressional “supercommittee” that was supposed to identify future cuts, matched with a set of “automatic” cuts that were to take effect if the “supercommittee” failed to come up with a compromise aimed at reducing federal debt. Not surprisingly, the “supercommittee”—perhaps better known as the “Clark Kent committee”—was unable to produce a compromise. The debt showdown, which paralyzed Washington for much of spring and early summer, severely shook investors’ confidence in the creditworthiness of the United States, which had been unquestioned since at least the time of Andrew Jackson. It led Standard & Poor’s to issue a first-ever downgrade of the nation’s credit rating. A few days ago, Wharton economists Betsey Stevenson and Justin Wolfers documented in Bloomberg the way the showdown also slowed, and almost reversed, the nascent recovery by crippling consumer confidence as well:

1937 - Krugman - Remember all the talk a few years back about how we wouldn’t repeat the mistakes of 1937, when FDR pulled back too soon on support for the economy? Here, from FRED, is the rate of change of real government spending per capita (federal, state, and local): Gosh, I wonder why the economy is underperforming? Update: Actually, a bit of a longer perspective may be useful. Here’s the same number calculated directly from FRED, using rates of growth: Government current expenditures – GDP deflator (the right measure of inflation) – Growth in civilian noninstitutional population: So we haven’t seen spending cuts like this since the demobilization that followed the Korean War.

Misguided “Fiscal Cliff” Fears Pose Challenges to Productive Budget Negotiations — The sooner policymakers enact legislation to put the budget on a sustainable long-term path without threatening the vulnerable economic recovery, the better. But, as they prepare for an almost certain post-election "lame duck" session of Congress, policymakers should not make budget decisions with long-term consequences based on an erroneous belief: that the economy will immediately plunge into a recession early next year if the tax and spending changes required under current law actually take effect on January 2 because policymakers haven't yet worked out a budget agreement. Understanding the relationship between changes to the budget and changes to the economy is critical for making sound decisions. Policymakers, media, and others widely refer to the tax and spending changes slated to take effect at the start of January as the "fiscal cliff." Those changes will not produce an economic calamity, however, if the measures most damaging to the economy in the short term are in effect for only a few weeks or even a month or so while policymakers work toward an agreement. If current law initially takes effect the economy will indeed start down a slope that could ultimately lead to a recession in 2013. But that's a far cry from the economy falling off a cliff and plunging immediately into recession.

It’s a Slope Not a Cliff - That’s how my CBPP colleague Chad Stone describes the fiscal contraction set for the end of this year when tax cuts expire and automatic spending cuts kick in. It’s an important and salutary distinction.  Go over a cliff, and you’re pretty much toast, like at the end of Thelma and Louise.  Start down a slope and if you turn around soon enough, you don’t have to go down too far. What’s the distinction?  Why the semantics?  Because if policy makers fail to distinguish between cliff and slope effects, they might be drawn into extensions of the expiring policies that do more long-term economic harm than we’d get from a short trip down the slope.   And the most notable such expiration is the high-end Bush tax cuts.  That should sunset on schedule at the end of this year. For the health of the economy in 2013-14, the important issue with respect to the tax cuts is to ensure that tax cuts for low- and moderate-income households do not expire; the fate of the Bush tax cuts for the top 2 to 3 percent of taxpayers should be of little economic consequence in 2013 and 2014.  Moreover, if only the tax cuts for lower- and middle-income households are extended, high-income taxpayers will still benefit from the reduced tax rates on the full portion of their income that falls in the lower tax brackets. 

Study: It’s not a ‘fiscal cliff.’ It’s a ‘fiscal slope - Chad Stone, chief economist at the Center on Budget and Policy Priorities, thinks all this talk of a “fiscal cliff” is dangerously misinformed. “The economy will not go over a cliff and immediately plunge into another Great Recession in the first week of January,” he writes. But the fact that so many politicians and analysts think it will, could, he worries, lead to some very bad negotiating. “The greater danger is that misguided fears about the economy going over a ‘fiscal cliff into another Great Recession will lead policymakers to believe they have to take some action, no matter how ill-conceived and damaging to long-term deficit reduction, before the end of the year.” In a new paper, Stone argues that we’re really facing a “fiscal slope” — and make no mistake, it “could ultimately lead to a recession in 2013.” But if you go policy by policy, we’re not facing a Wile E. Coyote moment in which Congress runs over the edge and, on Jan. 1, 2013, looks down and finds there’s nothing underneath the economy. Take the tax cuts. “The immediate impact on most households’ cash flow will be limited to an increase in taxes withheld from their weekly or monthly paychecks, while those taxpayers newly falling within the reach of the AMT in 2012 will not actually pay those higher taxes until they file their returns in subsequent months,” Stone writes.

The Fiscal Slope, and Why Words Matter - I want to revisit Chad Stone’s important analysis about the “fiscal cliff” and the dangers of metaphorical language. The truth is that there’s no such thing as a “cliff” in fiscal policy. First of all, everything is changeable, in many cases retroactively so. Second, it’s not like on January 1, 2013, without Congressional action, all Americans will get a tax bill for $10,000 or so, and half the public workforce will get sacked. Most fiscal policies are far more gradual. In this case, about half of the fiscal impact of the fiscal slope (not cliff) will not hit until tax season: In fact, the slope would likely be relatively modest at first (and then much steeper if 2013 unfolds without a fiscal resolution). This means that if there is no agreement by January 1, policymakers will still have some (although limited) time to take steps to avoid the serious adverse economic consequences that the Congressional Budget Office (CBO) outlines in its recent analysis of what will happen if the expiring tax cuts and new spending cuts take effect on a permanent basis [...] The expiration of the payroll tax cut and extended unemployment benefits, about 25% of the deficit reduction, is more immediate (so of course, those are the measures no one is talking about extending). But the Bush tax cuts simply don’t have to be resolved right before January 1. The automatic spending cuts from sequestration accounts for 13% of the deficit reduction in 2013, relative to the 46% for the Bush tax cuts. That spreads over a 10-year window, and even though they are somewhat front-loaded, the cuts fall over the entire fiscal year. So again, there’s time beyond the “cliff.” There are some other “tax extender” policies that account for the rest, and again, tax policies like that could be changed after the fact (and they often are).

Bernanke: Fiscal Cliff = Must Have A Higher Deficit In 2013 - For the record, although the explanation wasn’t reported or repeated as much as the catchphrase itself, Bernanke actually said the fiscal cliff was about the large spending cuts and tax increases already scheduled to occur being far too big for the current U.S. economy to handle at one time. “I hope that Congress will look at [the spending cuts and revenue increases] and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date,” he told the committee. In other words, “fiscal cliff” means the big deficit reductions that have been both inadvertently and intentionally scheduled to go into effect at the turn of the year are the absolutely wrong fiscal policy at that time and that the economy will be damaged if they are not changed. Bernanke was also saying something that he could not say directly: Next year’s federal budget deficit needs to be substantially higher than what it will be if current law isn’t changed.

Counterparties: Bernanke’s polite finger-pointing -  The world’s most powerful monetary policymaker mentioned fiscal policy 23 times in his prepared testimony before Congress yesterday. The word cloud from Bernanke’s speech pretty much sums it up: Congress, Bernanke argued, has the power to boost the US economy and save us from the dreaded “fiscal cliff”. If you haven’t been paying attention, Bernanke has spent much of the last few years very politely directing us to fiscal policy, arguing for deficit spending and, in pretty much the strongest language possible for a central banker, has begged for help propping up the economy. Tim Duy highlights something particularly pointed in Bernanke’s latest remarks: “Real federal government spending has also declined, on net, since the third quarter of last year, and the future course of federal fiscal policies remains quite uncertain”. All of which should make Paul Krugman nod approvingly. In his column and blog Krugman argued that “Reagan was a Keynsian” and noted that total government spending adjusted for inflation and population was actually higher under Reagan than Obama. (Donald Boudreaux calls Krugman’s numbers “highly questionable”.) Fareed Zakaria takes the spending argument a bit further: For those who think President Obama’s policies have done little to produce growth, keep in mind that the single largest piece of his policies – in dollar terms – has been tax cuts. They actually began before Obama, with the tax cut passed under the George W. Bush administration in response to the financial crisis in 2008.

A Longer-Term View of the “Cliff” - The Congressional Budget Office released its latest estimates of the long-term federal budget outlook today.  The graphic above comes from the report’s cover.    From Table 1-2 in the report (page 12), under the “baseline”/current-law scenario where expiring tax cuts either actually expire or are extended but paid for with offsetting revenue increases, revenues grow from 15.8 percent of GDP in 2012 to 23.7 percent of GDP in 2037.  If instead the expiring tax cuts are extended and deficit financed (as has been standard practice since 2001), revenues only reach 18.5 percent of GDP in 2037–which happens to be right around the 40-year historical average policymakers who don’t want to raise taxes like to label the “right” level of revenues for the future.  Comparing primary deficits (the difference between revenues and non-interest spending), the CBO table and graphic show that the 2037 deficit is 7.7 percent of GDP under business as usual, but is a primary surplus of 1.1 percent of GDP under current law.  This implies that nearly 60 percent of the difference between the unsustainable deficits under business as usual and the sustainable ones under current law (or paygo-compliant extended policies) is explained by the financing of expiring tax cuts.  Only about 40 percent of the difference is explained by the difference in spending paths under the CBO’s two scenarios.  And if you look in further detail at the spending breakdown, you might notice that despite the major contribution of Medicare, Medicaid, and Social Security spending to  federal spending growth over the next several decades, the difference between the CBO’s two scenarios on these spending levels in 2037 is just 0.8 percent of GDP–in contrast to the 5.2 percent of GDP difference in revenue levels.

Group of Senators Work to Avoid Fiscal Cliff -  A group of U.S. senators who proposed a $3.7 trillion deficit-reduction plan last year is courting a broader cast of lawmakers to try to avert a fiscal collision at the end of this year.  The lawmakers are seeking to address the expiration of tax cuts enacted under President George W. Bush and agree on spending cuts and changes in entitlement programs to avoid $1 trillion in automatic spending cuts set to begin taking effect in January.  Last year the bipartisan “Gang of Six,” led by Senators Mark Warner, a Virginia Democrat, and Saxby Chambliss, a Georgia Republican, agreed on a broad set of principles though the group never offered a full tax-and-spending proposal.  In an interview yesterday, another member of the group of six, Democrat Kent Conrad of North Dakota, said the goal is for at least 12 members to agree to a more detailed plan.

CBO paints grim long-term debt picture for US -- The US debt will exceed the size of the nation's economy in 25 years if the federal government doesn't chart a "sustainable fiscal course," the Congressional Budget Office warned in a new estimate on Tuesday. In its 2012 long-term budget outlook, the nonpartisan CBO said that extending current tax rates and rising health care costs would push the debt to almost 200 percent of gross domestic product in 2037. That is under the CBO's scenario that maintains current policies. "The explosive path of federal debt under the alternative fiscal scenario -- which maintains what might be deemed current policies -- underscores the need for large and timely policy changes to put the federal government on a sustainable fiscal course," the CBO report said. By the end of this year, the CBO projected that the debt will reach about 70 percent of GDP, the highest percentage since shortly after World War II.

CBO’s Long-Term Budget Outlook: What It’s Telling Us - To hear everyone from the WaPo editorial page to Bowles/Simpson to all the R’s and many of the D’s, there’s an entitlement crunch, crisis, death spiral, or whatever…waiting for us out there in the future if we fail to muster the steely-eyed courage to face it.  And “face it” invariably means cutting benefits, privatizing, voucherizing, raising the retirement age, means testing…basically, fixing them by breaking them. [EG, this AM's WaPo: "New estimates the Congressional Budget Office (CBO) released Tuesday underscore that Medicare must change, a lot."  A few lines in: "...a death spiral of ever-higher interest payments."]
Well, look at this chart, one I’m sure will be showing up all over the place.  It shows the debt as a share of GDP projected well into the future under two different scenarios.  Under the explosive scenario—the one on which all the scolds will focus—debt swamps the economy, reaching 200% by 2037. But look at the other line.  Under that scenario, which in fact happens to be current law (meaning all the Bush tax cuts expire, for example), debt stabilizes as a share of the economy in a few years and then starts down a slow glide path.  And Medicare, Medicaid, and Social Security as we know them today are all in that bottom line.

CBO: Hard Choices Ahead On Debt - The Congressional Budget Office on Tuesday painted a stark picture of the country's fiscal future, which will be determined in part by tough choices lawmakers face in the coming months on the federal budget. The CBO, the nonpartisan official beancounter in Washington, painted two scenarios for Congress. The first assumes laws currently in place rule the day. That means lawmakers do nothing to lessen the effects of the so-called fiscal cliff¹ and allow $7 trillion in tax hikes and spending cuts start to take effect in January. Under that scenario over the long run, debt falls to 53% of the size of the economy by 2037 from more than 70% today. Tax revenue would rise to 24% of GDP in 25 years and keep growing. That would be well above the 18.3% historical average. Simultaneously, spending in vast portions of the federal budget would shrink dramatically. Other than Medicare², Medicaid, Social Security and interest³, spending would fall to the lowest percentage of GDP since before World War II. But entitlement spending would continue to increase because of the aging population and the rising cost of health care.

The long-term budget outlook has improved dramatically over the last three years - Yesterday, the Congressional Budget Office (CBO) released its annual Long Term Budget Outlook (LTBO), which projects federal spending, revenues, deficits, and debt over the next 75 years.  There are many points of controversy with regards to the LTBO, not the least of which is that it’s pretty ridiculous for CBO to pretend it knows what health care costs will look like in 2087. Personally, I think that CBO’s LTBO provides a lot more heat than light, and I would be the first to applaud if CBO decided to only release ten-year budget projections (in themselves subject to a huge margin of error). Nevertheless, there is still value in looking at the change in projections from one year to the next.  The figure below clearly shows that over the past three years CBO’s extended current law budget projections—which assumes no changes are made to the law—have improved drastically.

• 2009: CBO projected that debt held by the public would rise from around 60 percent of GDP to just over 300 percent of GDP in 75 years.
• 2010: CBO markedly improves its 75-year outlook, which now shows debt rising to just over 110 percent of GDP.  This improvement largely reflected passage of the Affordable Care Act (ACA), which prioritized reducing long-run deficits and slowing the rate health of care cost growth (the predominant driver of long-run deficits).
• 2011: CBO again improves its outlook, now projecting debt rising to 87 percent of GDP in the first 30 years but then actually falling to 75 percent over the next 45 years.

Democrats Point to Gridlocked Congress for Blame on Jobs Woes - Democrats don’t really have a good way to spin the poor May jobs report and the stall speed of the latest attempt at recovery. I thought Alan Krueger, the Chairman of the Council of Economic Advisers, was fairly restrained in his remarks. But Krueger also hints at what the Administration and other Democrats brought up, that we’re living under divided government, and Republicans must shoulder some of the blame for not agreeing to things like the American Jobs Act, to accelerate the pace of recovery. Obama responded to the dismal news with a speech demanding Congress take action on a variety of measures, including infrastructure investments and aid to state and local governments to prevent teachers, firefighters and police from being laid off, that Republicans have thus far opposed [...] White House officials reinforced the message throughout the day. Labor Secretary Hilda Solis appeared on CNBC, warning that “Congress needs to take action” to accelerate job growth. Alan Krueger, chairman of the Council of Economic Advisers, released a statement urging Congress to pass more components of the president’s American Jobs Bill that he announced last year.

Bernanke Comments on ‘Austerity’ Policies - Rep. Maurice Hinchey (D., N.Y.) sounded a theme that is increasingly popular among Democrats: the idea that Republicans are pursuing “austerity” policies similar to those being pushed in Europe. The high unemployment and slow growth in much of Europe “clearly proves austerity is the wrong policy to pursue,” Hinchey said during testimony from Federal Reserve Chairman Ben Bernanke. In response, Bernanke offered support for both sides in the U.S. political debate over fiscal policy. For starters, he said, “you have to agree there are structural differences” between the U.S. and much of Europe. Greece, for example, probably had no alternative but to try to cut its deficits through the austerity policies, given the huge size of its public debt.

DeMint Says Bernanke Giving Congress ‘False Sense of Security’ - Echoing a concern of Tea Party supporters, Sen. Jim DeMint (R., S.C.) said the Federal Reserve’s policy of buying up U.S. government debt is giving Congress a “false sense of security” by keeping interest rates and government borrowing costs low. That’s encouraging Congress to overspend and overborrow, he suggested. In response, Chairman Ben Bernanke said the effect on interest rates isn’t really that great — maybe $100 billion a year. Compared to the $1 trillion or so in annual budget deficits, that’s a relatively small amount. Still real money, DeMint responded. “A trillion there, a trillion here…” Bernanke acknowledged, in an echo of the late Sen. Everett Dirksen’s famous line.Still, Bernanke said, given the size of primary deficits, “I would think Congress would have plenty of motivation to address that.”

GOP Plan To Cut OMB: Silly, Petty, Stupid, Infantile & Pathetic - Over at TPM, Brian Beutler has a story about House Republican efforts to cut the budget of the Office of Management and Budget. The story is sad and ridiculous: it shows that House Republicans have become just like the kid in the schoolyard who throws a tantrum and threatens to take the ball and go home if what he or she wants isn't done immediately. The bottom line: The House GOP says its going to reduce OMB's budget by $9 million from 2012 to 2013.Never mind that there's no indication that OMB is overstaffed or inefficient in any way. In fact, I haven't been able to find a single written analysis or congressional hearing where OMB's efficiency was seriously questioned. In other words, this decision isn't based on facts; it's all political.Never mind that $9 million doesn't even qualify as a rounding error when it comes to the federal budget and that the cost of the GOP's deciding to reduce OMB's budget by this amount probably wiped out a significant part of the proposed reduction. And never mind that one of the biggest costs OMB incurs every year is preparing materials at Congress' request and testifying before congressional committees.

The Provocative Case for Romney as a Better Economic Steward in a Time of Gridlock - Ezra Klein wrote a provocative article yesterday making the case that a Romney Presidency would probably include more Keynesian spending than if Obama won a second term. It’s being pilloried by partisans, but I’m not sure why. Klein is merely making the demonstrable point that Republicans have willingly resisted efforts to improve the economy over the past few years, but that they would not resist under a Republican President. Further, the implication is that Republicans could care less about the deficit when one of their own occupies the White House, which is also demonstrably true It’s not even an argument about Romney per se as much as it is about John Boehner and the GOP Congress. They will be highly unlikely to force a debt limit showdown under a President Romney, even if they get some long-run concessions out of it. They would be likely to agree to extended if not deepened tax cuts, not a particularly good form of Keynesianism but a fiscal expansion nonetheless. And they would be likely to boost Pentagon spending in a kind of military Keynesianism, also a proven loser relative to other federal spending, but an expansion. A lot of this depends on the outcome of the House and Senate, which is up in the air. But presumably, a Romney victory correlates with Republican victories in Congress.

Should We Delay the Tax Cut Debate Until Early 2013? - Over the past week or so, Bill Clinton, Larry Summers, and Glenn Hubbard have all made the same suggestion: Congress should extend all of the 2001/2003 tax cuts, due to expire at year’s end, into early next year. It seems like an awful idea. I suspect they have different motivations for this advice. Clinton, ever the master political strategist, may have done a calculation about President Obama’s re-election: Uncertainty over Taxmageddon is dampening the animal spirits that drive economic growth. And it is that growth, or its absence, that will largely decide whether Obama will remain in the White House after January. Thus, Clinton’s public intervention may be intended to convince the president to take that uncertainty off the table now by urging Congress to extend the tax cuts into 2013. A 3-month delay doesn’t change fiscal reality in any way, but Clinton may be hoping it improves perceptions by getting the end-of-year train wreck out of the headlines. Out of sight, as they say….

The Heartless Pursuit of Power - Robert Frank calls for more spending on infrastructure: ... The most important single step toward a brighter future is to repair our economy as soon as possible. And one of the surest ways to do so is a large and immediate infrastructure refurbishment program. This path would not require Republicans to concede the merits of traditional Keynesian stimulus policy. Nor would it require them to abandon their concerns about the national debt. In short, the philosophical foundation for an agreement is already firmly in place. If it doesn’t happen, the coming political campaign will provide a golden opportunity to learn why. At the inevitable town hall meetings, voters who are tired of gridlock should ask candidates when they think that long-overdue infrastructure repairs should begin. The only defensible answer is “Right now!” Candidates who counsel further delay should be pressed to explain why. For some reason, I always thought that people would come before politics, especially in a severe recession when so many households are struggling. But the Republican's lust for power ensures that gridlock will prevail.

Infrastructure Projects And Economic Stimulus - The idea that putting money into infrastructure projects would provide immediate economic stimulus to the economy was a central part of the President’s 2009 economic stimulus package, of course. While the Administration continues to point to that package as the reason the economy is doing so well today, as dubious an assertion as saying the economy is doing well might be notwithstanding, the reality is that the actual record of law’s impact on the economy tends to back up the point that Dave makes in the excerpt above. For one thing, it became clear rather quickly that there really is no such thing as a “shovel ready job,” to borrow a term that the Obama Administration and its supporters used quite frequently during the debate over the stimulus three years ago. This is largely true thanks to the same issues that Dave raises in his post, the fact that, in modern America, you cannot just hand money to some authority somewhere and know that they’ll be able to use it to build a road within the next year or so. As if that weren’t bad enough, we learned after the fact that the jobs supposedly “created or saved” by the stimulus bill cost more that $200,000 per job, a metric that is simply a perfect example of the waste and inefficiency that always seems to accompany a government endeavor. Given this, it’s not at all surprising that the actual impact of the stimulus on the economy was minimal at best.

The Unfunded Liabilities You Love - Here it comes: economic Armageddon. Reckless promises to finance the future costs of health care and retirement contribute to a crushing debt burden on American families that can be relieved only by cutting back on the size of government. Mitt Romney has made this position the centerpiece of his presidential campaign. But it is misleading, for reasons that go beyond nomenclature to touch the very conceptual heart of public finance. Unfunded liabilities are not technically the same as public debt. Congress can cancel or modify its commitments to potential recipients of Social Security, Medicare or Medicaid at any time. It is harder to default on formal loans.As my fellow Economix blogger Bruce Bartlett emphasizes, these public promises carry political and moral weight. Have you set aside specific funds to cover the future costs of your own health insurance, retirement and long-term care in old age? How about funds to cover the costs of educating your children and caring for a possibly disabled spouse or elderly parent?The sum of these costs is likely to exceed your projected future earnings stream — especially if the risk of long-term unemployment remains high and returns on standard retirement portfolios remain low. In other words, your own unfunded liabilities are probably pretty high.

Paycheck Fairness Act to Be Filibustered Today - Everyone knows this bill will not reach the 60-vote threshold required for cloture today. Harry Reid acknowledged that in his remarks on the Senate floor today, saying that “This evening, America will see where Republican Senators stand … It’s unfortunate they’ll once again favor obstructionism over equality.” So nobody is walking into this blind. Democrats want to highlight their position on the popular side of an 80/20 issue in favor of pay equity, and the fact that women to this day still make 77 cents on the dollar compared to men in comparable positions (down to 62 cents for African-American women and 54 cents for Hispanic women). Republicans are generally uninterested in the concept, and they don’t want to be bullied into support at this time. So women will be denied stronger tools to fight wage discrimination as well as better compensation for a successful claim, and would still be subject to retaliation from their employers for organizing against wage discrimination. And Democrats and the President will have another issue for their “war on women” file (the giveaway is the heightened attention to Mitt Romney’s stance on the legislation)

Why has Foreign Aid Been Untied? - The more cynical among us have sometimes thought that rather than recipient welfare the purpose of “foreign” aid is to provide a cover for domestic aid. Foreign aid pork, i.e. using foreign aid to subsidize special interests in the donor country has certainly been common. Historically, most foreign aid has been tied; that is, the recipient was required to spend the money on the donor country’s exports. Relative to cash, tying raises prices and reduces choice and recipient welfare–the deadweight loss of Christmas problem. US food aid is a classic example. US food aid tends to peak after a glut. It’s cheaper for us to give food away when we have lots and not coincidentally giving food away after a glut helps to keep prices higher, benefiting US farmers. It’s precisely when food is plenty, however, that prices are low and aid is less needed. When food is scarce, prices are high and aid is more needed but then we would rather sell our food than give it away. In addition, we typically require food aid to be transported on US ships which raises costs. Finally, the food we give away is not always best suited to the recipient’s preferences or needs.

Fiscal hawks’ double standard for Social Security cuts vs. tax cuts - The Committee for a Responsible Federal Budget (CRFB) has taken sides in a scuffle between Social Security advocates and former Senator Alan Simpson. This scuffle concerns Simpson’s colorful defense of Social Security proposals within the report he co-authored with fellow Fiscal Commission co-chair Erskine Bowles—a report CRFB has gone to great lengths to champion. CRFB was responding to a letter signed by young budget and social insurance experts—myself and others at EPI included—disagreeing with Simpson’s claim that the Bowles-Simpson proposals would strengthen the program for our generation. The merits of these proposals aside, CRFB is shamelessly cherry-picking baselines in response to the letter. Whereas CRFB and other fiscal hawks use a current policy baseline for almost all budget projections—e.g., assuming the continuation of the Bush tax cuts past their scheduled expiration—CRFB doesn’t adopt the same convention when it comes to Social Security. This is hypocritical and reveals what can only be described as a biased policy agenda.

Report: Romney’s tax plan would save him $5 million next year -Former Massachusetts Gov. Mitt Romney would save almost $5 million next year alone if he is elected president and able to enact his tax policies, according to a new report.  Nonprofit research groups Citizens for Tax Justice, which leans left, and the Tax Foundation, which leans right, compared President Barack Obama’s proposed tax policies to Romney’s and found that both men would pay less if the Republican candidate wins in November — but the current president’s potential savings amounted to a more modest $90,000.  “There’s quite a difference at higher incomes between the Obama and Romney plans,” Tax Institute researcher Gil Charney told The Associated Press. “Obama is looking at the rich — millionaires and billionaires — as a source of additional revenue to the government, where Romney is looking at them as a potential spark for economic growth.”

Rich Nontaxpayers - An oft-repeated Republican talking point is that close to half of all federal income tax filers have no tax liability. Prominent Republicans often imply that these people ought to be paying federal income taxes — and that they don’t is a major cause of the budget deficit. Last year, Senator Orrin Hatch of Utah, the ranking Republican on the tax-writing Senate Finance Committee, declared that taxes on the rich should not be raised until the poor are taxed. “I think many taxpayers are skeptical that the answer to our fiscal problems is for them to sacrifice more, when almost half of all households are not paying any income taxes,” Mr. Hatch said. In April, Representative Eric Cantor of Virginia, the House majority leader, said it was “unfair” that 45 percent of people don’t pay any federal income taxes. In a McClatchy-Marist College poll in early November, 71 percent of Republicans said they believed the poor should not be exempt from income taxes and only 26 percent said they thought the poor should not have to pay them.This is ironic, because two of the measures most responsible for the rise in the number of nontaxpayers are the earned income tax credit and the child credit — both Republican initiatives. Once upon a time, Republicans were more concerned about the number of rich people with no income tax liability.

Wealthy Non-Taxpayers -- From 60 to Thousands in 30 Years - Bruce Bartlett provides the numbers, but it's so much easier to see in a chart. Wealthy Non-Taxpayers 1977 to 2009, showing incomes over $200,000 per year.  Blue is percentage of total households over $200,000 paying no taxes, purple is numbers of high-income households paying no taxes. Numbers from chart here: http://economix.blogs.nytimes.com/2012/06/05/rich-nontaxpayers/, drawn  from IRS data. On this chart, the percentage appears relatively stable with a low of 0.066 to a high of 0.529 (66 per 100,000 to 529 per 100,000) but actually that’s an eightfold increase, mostly accruing after 2004. The numbers of households, however, leap like a gazelle after 2004, reaching a high of 22,000 high income households paying no taxes, from a low of only 60 in 1977.

Why Raise Taxes on Poor People? - My Atlantic column today is on the bizarre fixation that some conservatives have with taxing poor people, pointed out by Bruce Bartlett in his latest column. Here’s one explanation: The other, even-more-disturbing explanation, is that Republicans see the rich as worthy members of society (the “producers”) and the poor as a drain on society (the “takers”). In this warped moral universe, it isn’t enough that someone with a gross income of $10 million takes home $8.1 million while someone with a gross income of $20,000 takes home $19,000. That’s called “punishing success,” so we should really increase taxes on the poor person so we can “reward success” by letting the rich person take home even more. This is why today’s conservatives have gone beyond the typical libertarian and supply-side arguments for lower taxes on the rich, and the campaign to transfer wealth from the poor to the rich has taken on such self-righteous tones.

The fortunate 400 - (Reuters) - Six American families paid no federal income taxes in 2009 while making something on the order of $200 million each. This is one of many stunning revelations in new IRS data that deserves a thorough airing in this year's election campaign.The data, posted on the IRS website last week, brings into sharp focus the debate over whether the rich need more tax cuts (Mitt Romney and congressional Republicans) or should pay higher rates (President Obama and most Democrats).The annual report (link.reuters.com/vec68s), which the IRS typically releases with a two-year delay, covers the 400 tax returns reporting the highest incomes in 2009. These families reported an average income of $202.4 million, down for the second year as the Great Recession slashed their capital gains.In addition to the six who paid no tax, another 110 families paid 15 percent or less in federal income taxes. That's the same federal tax rate as a single worker who made $61,500 in 2009.Overall, the top 400 paid an average income tax rate of 19.9 percent, the same rate paid by a single worker who made $110,000 in 2009. The top 400 earned five times that much every day.

The Price of Inequality, by Joseph Stiglitz -There is less equality of opportunity in the United States today than there is in Europe – or, indeed, in any advanced industrial country... This is one of the reasons that America has the highest level of inequality... It would be one thing if the high incomes of those at the top were the result of greater contributions to society, but the Great Recession showed otherwise: even bankers who had led the global economy, as well as their own firms, to the brink of ruin, received outsize bonuses. A closer look at those at the top reveals a disproportionate role for rent-seeking: some have obtained their wealth by exercising monopoly power; others are CEOs who have taken advantage of deficiencies in corporate governance to extract for themselves an excessive share of corporate earnings; and still others have used political connections to benefit from ... either excessively high prices for what the government buys (drugs), or excessively low prices for what the government sells (mineral rights). Likewise, part of the wealth of those in finance comes from exploiting the poor, through predatory lending and abusive credit-card practices. ... It might not be so bad if there were even a grain of truth to trickle-down economics – the quaint notion that everyone benefits from enriching those at the top. But most Americans today are worse off ... than they were ...a decade and a half ago. ... Rent-seeking distorts the economy. ... Inequality leads to lower growth and less efficiency. Lack of opportunity means that its most valuable asset – its people – is not being fully used. Many at the bottom, or even in the middle, are not living up to their potential... But, most importantly, America's inequality is undermining its values and identity. With inequality reaching such extremes, it is not surprising that its effects are manifest in every public decision, from the conduct of monetary policy to budgetary allocations. ...

From The Price of Inequality: Joseph Stiglitz on the 1 Percent Problem -  Let’s start by laying down the baseline premise: inequality in America has been widening for dec­ades. We’re all aware of the fact. Yes, there are some on the right who deny this reality, but serious analysts across the political spectrum take it for granted. . The debate is over its meaning. From the right, you sometimes hear the argument made that inequality is basically a good thing: as the rich increasingly benefit, so does everyone else. This argument is false: while the rich have been growing richer, most Americans (and not just those at the bottom) have been unable to maintain their standard of living, let alone to keep pace. A typical full-time male worker receives the same income today he did a third of a century ago. From the left, meanwhile, the widening inequality often elicits an appeal for simple justice: why should so few have so much when so many have so little? It’s not hard to see why, in a market-driven age where justice itself is a commodity to be bought and sold, some would dismiss that argument as the stuff of pious sentiment. Put sentiment aside. There are good reasons why plutocrats should care about inequality anyway—even if they’re thinking only about themselves. The rich do not exist in a vacuum. They need a functioning society around them to sustain their position. Widely unequal societies do not function efficiently and their economies are neither stable nor sustainable. The evidence from history and from around the modern world is unequivocal: there comes a point when inequality spirals into economic dysfunction for the whole society, and when it does, even the rich pay a steep price.

Billions in Tax Refund Fraud–and How to Stop Most of it - The New York Times reported yesterday about the rampant use of identity theft to exploit weaknesses in the IRS’s tax refund processes, sometimes resulting in thousands of fraudulent refunds. The most common form of fraud simply requires criminals to obtain a valid name and social security number, preferably from someone who won’t be filing a tax return. Then the criminal makes up wage and withholding information, files a tax return electronically (avoiding the need for an actual W-2 form), claims a few deductions and tax credits to produce a larger refund, and waits a couple of weeks for the refund. Typically, the refunds are deposited electronically—often multiple refunds to the same account.  In one especially egregious example, J. Russell George, the Treasury Inspector General, testified about 4,157 “potentially fraudulent tax refunds … totaling $6.7 million … deposited into one of 10 bank accounts. Each … account had direct deposits of more than 300 refunds.” The criminals also use debit cards to claim fraudulent refunds.  The New York Times reported that swindlers in Florida use addresses for vacant houses (in ample supply), sometimes “even buying mailboxes for them, and collect the refunds there.”

Report: GSA handed out $1 million to workers under investigation - The federal General Services Administration has handed out more than $1 million in taxpayer-funded bonuses since 2008 to dozens of employees who were under investigation for misconduct. Already under fire for its lax oversight of spending, the GSA gave bonuses to at least 84 of its employees while they were being investigated, according to a Senate analysis. Some were as low as several hundred dollars, while one employee received nearly $76,000 over five years. The number of employees who received the bonuses while under investigation by the GSA’s inspector general could be even higher. Information related to some of its current work isn’t yet available, including an examination of a lavish conference in Las Vegas three years ago that outraged lawmakers and led to the resignation of agency Administrator Martha Johnson and the dismissal of two of her deputies in April. 

Only market evangelists reconcile Jekyll with Hyde - The American economist Robert Shiller successfully called the peak of the economy boom. Irrational Exuberance, published in 2000, became a best seller. Prof Shiller has done more than any other mainstream economist to emphasise how psychology influences markets. Early in his career he demonstrated that fluctuations in asset prices are far larger than can be explained by economic, or any other, concept of rational behaviour.And yet alongside Prof Shiller’s Dr Jekyll can be found his Mr Hyde. This alter ego believes that many economic problems would be solved by creating new speculative markets. He favours tax breaks for market makers who create still more exotic financial instruments. One side of him recognises that these instruments may be used more often to gamble than to hedge. But the other applauds not just mortgage securitisation but the process of dividing and repackaging securities.Shiller Jekyll acknowledges, with a degree of understatement, that the idea “turns out not to have worked superbly well in practice”. Shiller Hyde has long been anxious to promote liquid markets in real-estate derivatives. In the night hours he is co-author of the Case-Shiller index of US residential house prices, created to facilitate these markets.

Is Global Financial Reform Possible? - Paul Volcker - Nowadays there is ample evidence that financial systems, whether in Asia in the 1990’s or a decade later in the United States and Europe, are vulnerable to breakdowns. The cost in interrupted growth and unemployment has been intolerably large. But, in the absence of international consensus on some key points, reform will be greatly weakened, if not aborted. The freedom of money, financial markets, and people to move – and thus to escape regulation and taxation – might be an acceptable, even constructive, brake on excessive official intervention, but not if a deregulatory race to the bottom prevents adoption of needed ethical and prudential standards.  Perhaps most important is a coherent, consistent approach to dealing with the imminent failure of “systemically important” institutions. Taxpayers and governments alike are tired of bailing out creditors for fear of the destructive contagious effects of failure – even as bailouts encourage excessive risk taking.By law in the US, new approaches superseding established bankruptcy procedures dictate the demise rather than the rescue of failing firms, whether by sale, merger, or liquidation. But such efforts’ success will depend on complementary approaches elsewhere, most importantly in the United Kingdom and other key financial centers.

Will There Be a Meaningful Volcker Rule? - Simon Johnson - The Dodd-Frank financial reform legislation of 2010 stipulates that banks and the corporate entities that own banks should get out of the business of “proprietary trading.” That term refers to investments, often highly risky, that very big banks got into the habit making on their own account, i.e., unrelated to anything that their customers asked them to do. Such bets have the potential to break a bank, creating either an unacceptable liability for taxpayers or a serious risk to the financial system, or both. They also often put these megabanks in the conflicted position of betting against their customers. The regulators involved in drawing up the rules to carry out Dodd-Frank include the Federal Reserve’s Board of Governors, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, the Office of the Comptroller of the Currency and the Securities and Exchange Commission. They have still not been able to complete the rules, in part because, as with anything to do with modern finance, the details are complex.  I’ve taken part in many discussions on financial reform in the last four years, and this was one of the best. The commission invited some leading experts on financial reform, individually and collectively with a great deal of practical experience – and skeptical of big banks’ ability to manage their risk-taking appropriately. Yet I remain pessimistic that regulators will adopt a strong final Volcker Rule in the near term, partly because of recent disclosures about the efforts of Senator Scott Brown, Republican of Massachusetts, to blunt the impact of the rule, and what these activities tell us about the November elections.

Federal Reserve set to unveil capital proposals - The US Federal Reserve is set to propose new capital rules on Thursday, including a provision that will reverse a policy that has helped shield US bank capital levels from volatility, people familiar with the matter said. US banking industry groups and lenders, including Citigroup and Wells Fargo, have been trying to persuade lawmakers that the measure, which is among a batch of proposals to implement the Basel III accords, will hurt them relative to overseas competitors. They also say that they may have to curtail purchases of long-term US Treasuries and municipal debt. They argue that the net effect of the change will force them to hold more capital over and above the stated requirements and that because of different accounting treatments, their foreign peers will have their capital levels protected from changes in the market value of some securities holdings. The issue is one of many for which bankers including Jamie Dimon, chief executive of JPMorgan Chase, have decried the new Basel III rules as “anti-American”. The issue involves banks’ securities portfolios which are usually designated as “available for sale” (AFS).  US accounting rules generally require that these holdings be valued using mark-to-market accounting, although unrealised gains and losses do not affect banks’ bottom line until the securities are sold.

Banks weigh awkward truths on storage -Ten days ago the biggest global banks met some of the biggest institutional investors for a discussion in Boston. Topics for the summit, held out of the public eye, included electronic trading and concerns over bond liquidity. Together, they could define the future of Wall Street. For years fixed income divisions have been the biggest profit generators for many of the banks. For years huge asset managers have paid good money to shift huge volumes of bonds. Both sides are now worried about the arrangement. The buyside firms, like Fidelity which attended the meeting, fret about liquidity: banks are not holding as much inventory as in the past; as a result spreads between bids and offers widen and prices get more volatile. Federal Reserve data show a vertiginous decline in holdings of corporate bonds by primary dealers: down 80 per cent since the peak in 2007 to $45bn last week. The fall started during the financial crisis but has continued in the past 12 months. This is convenient for the banks because they are embroiled in a rearguard fight against the Volcker rule.  A final version of the rule, which prohibits proprietary trading, is due from regulators in the next few weeks. Volcker stops banks from holding bonds for an extended period because it is seen as evidence that they are trying to make money on price movements.

The Simplicity Solution - Time to fess up: With the two-year anniversary of the passage of the Dodd-Frank financial reform law approaching, I’m still not sure what to think about the darn thing.  Will the law prevent another bank bailout if we have a repeat of September 2008? Will it bring transparency to the trading of derivatives? Will the Volcker Rule truly eliminate the ability of banks to make risky trades for their own account? Are all the new regulations burying small and medium-size banks in excessive costs? Or are they ensuring their safety and soundness? No one can say for sure.  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.” And it is why, last week, I found myself drawn to an article in the June issue of The Harvard Business Review that argued for a handful of simpler ways to restrain banking behavior.

Reputational Sanctions in an Age of Internet Manipulation? - A major argument against substantive regulation of industries (including consumer finance) is that the market self-regulates. Bad actors get bad reputations and lose business.  Therefore, there's no need for government to intervene.   This type of argument involves a significant set of assumptions about how reputational sanctions work for any particular product and about the inability of bad actors to simply rename themselves. Often, these assumptions are unexamined or unwarranted--ideology trumps all--but the development of the Internet as a reputational reference complicates things.  The Internet provides a tremendous aggregation of reputational feedback, with everything from formal reviews to "XYZsucks.com" sites, etc. But the typical Internet reputational search involves a google search or the like, and the search results are manipulable. Not only can they be manipulated, but there are whole businesses set up to do just that.

Profits, Competition, and Social Welfare-Becker - The financial crisis and the resulting recession have led to a strong reaction in many countries against the profit motive and private enterprise. Left of center political parties are gaining office and power in France, Mexico, Greece, and elsewhere with the promise of much greater regulation of banks and other businesses, renationalizing some companies, and constraining profits through higher taxes and other ways. It is easy to sympathize with the hostility to the many banks that behaved (in retrospect) so foolishly in ways that damaged everyone else as they took on excessive risk in their quests for greater profits. Yet anyone concerned about the welfare of the poor and middle classes should resist the temptation to attack competitive private enterprise and capitalism- monopoly or crony capitalism should be deplored. This is only partly because “government failure” also contributed in an important way to the financial crisis as regulators did not rein in the asset explosion of banks and households. Indeed, regulators often encouraged lending to lower income families to buy houses with low down payments, large mortgages and ballooning interest payments. The main reason to be concerned about the attacks on competitive capitalism is that it has delivered during the past 150 years so much to all strata’s of society, including the poor. I will try to demonstrate this not with a general analysis, but with several rather impressive examples.

Our volatile age defies spreadsheet strategy - Why are investors engaged in a “dash for cash” (or a flight into any havens that they can find)? It is not hard to think of reasons: doubts are rising about the future of the eurozone, the underlying developed world economic data are grim – and in the US there is concern about the prospect of a “fiscal cliff”, or new debt debacle. But in addition to these obvious concerns there is another, more subtle factor at work. As turmoil builds, investors and policy makers are being tipped into cognitive shock. In the past few decades, most investors have operated as if the world was a place in which the key variables could be plugged into a spreadsheet or computer model. Ever since the computing revolution took hold on Wall Street and the City of London in the 1970s, finance has been treated not as an art but a science – and banks have operated as if computer models could not just explain the past but predict the future, too. Now those “quants” and rocket scientists find themselves at sea. Computer models alone can no longer calculate meaningful probabilities about what will happen next in the eurozone. Instead, what really matters now in places ranging from Finland to Greece are non-quantitative issues such as political values, social cohesion and civic identity.  The crucial variable, in other words, is whether voters have faith in their governments and central banks. Do they trust the safety of their banks? Are citizens willing to trust each other, and co-operate, when pain is imposed? 

Arms races and the real encumbrance problem - Among the “financial arms races” that Andy Haldane described in his April paper was the race for safety by financial institutions. Since the start of the US crisis of 2007, the race for safety has replaced one of the other two races that Haldane discussed: the race for returns, a catchy way to describe individual firms trying to maximise profits while setting the stage for the collective market failure that followed. (The other race, for speed, continues.) Or as Haldane memorably put it: “Return on capital is no longer investors’ priority.  Return of capital is…It is also evident in investors’ desire for financial instruments which are secured on high-quality collateral.  Investors are taking literally the notion of a security.” The obvious reason to worry about the flight to safety is that given the damage wrought by the crisis and current dearth of lending in Europe, there is now a smaller and finite pool of collateral that banks can use to access secured funding. This was one purpose behind the three-year LTROs announced in December: to make suitable as collateral a pool of assets that was previously unsuitable.

Meet the JOBS Act’s Jobs-Free Companies - The JOBS Act was supposed to be about clearing away regulation to help young companies create jobs.  Just eight weeks after its passage, however, more than a dozen of the companies seeking to use its looser rules for going public aren't the type of high-tech growth companies lawmakers had in mind.  "Special-purpose acquisition companies" and "blank check" companies, basically empty shells with almost no employees that are used in mergers or as a backdoor route to U.S. stock listings, have been quick to identify themselves in regulatory filings as "emerging growth companies."  The new law uses that phrase to describe which companies—once they have applied to go public—should be exempt from some financial-reporting and corporate-governance requirements.  The Securities and Exchange Commission also has been fielding questions about whether trusts that collect music and movie-royalty payments, or structures used to create tax-free corporate spinoffs, could qualify as emerging-growth companies, according to Meredith Cross, director of the SEC's Division of Corporation Finance."These are not companies that are job creators," Ms. Cross said.

JOBS Act Fallout: More Fraud, Fewer IPOs - Taibbi - A few months ago, I wrote a few articles about the JOBS Act, which a number of friends of mine from congress and from the regulatory community insisted would pave the way for a return to the IPO fraud boom of the late nineties, if not for a return to the penny-stock fraud age. Well, eight weeks after the passage of the law, we're finding some unexpected results. Among the more controversial provisions of the JOBS Act, remember, was a sort of blanket regulatory exemption for so-called "Emerging Growth Companies," which were loosely defined as public companies with less than $1 billion in annual revenues. Among other things, the new law allows such companies to avoid independent accounting requirements for the first five years of their existence. According to the WSJ, what's happening now is that the JOBS Act is being used to facilitate what are known as "reverse mergers." Because it's traditionally been difficult for new companies to meet the regulatory requirements for going public, what's often happened is that young companies look for dormant or dead corporations that are already registered. They then merge with those "empty shell" companies, use their corporate structures, and thusly avoid the IPO process altogether. This process is called a "reverse merger."So why does this matter? Well, the JOBS Act was ostensibly designed to make it easier to launch actual IPOs, and theoretically should have made the darker, more problem-ridden reverse merger process less appealing. But what we're finding now is that companies are using the JOBS Act to designate those "blank check" firms as "emerging growth companies."

Welcome to the Wormhole  - Now we get to the really fun part of the global unwind where even money flowing into supposedly safe havens turns, presto change-o, into an evaporation of wealth, and all of the lawyer-lobbyists who ever double-parked on K Street in the sorry history of this frantic era will not avail to contain the demons of their own design. The world is waiting to re-learn an old lesson: that untruth and reality exist in an adversarial relationship. Sad to say, there isn't enough legal infrastructure in the world, nor enough time, to pass judgment on all the lies and misrepresentations that burden the current edition of what passes for civilization. This goes especially for money matters, where currencies, certificates, and contracts actually have to represent what they purport to stand for. When those relationships fail, as they have been doing for some years now, everything falls apart. This is what comes of evading the enforcement of norms and standards and of running exchanges without clearing operations. The response to this mischief in deeds such as the Dodd-Frank so-called financial reform act only heaps more hyper-complex untruth on the smoldering compost of prior intentional falsities. It all seems so hopelessly abstract that even thoughtful citizens can't muster the means to object until that magic moment when, say, the supermarket shelves go empty or nobody will accept the green paper cluttering up your billfold. For all the epic volume of blather on the Internet and elsewhere, few have even remarked on extraordinary passivity of the vulgar masses in the face of having their future looted out from under them. The ethos of the penitentiary must have saturated the zeitgeist wherein you are expected to just bend over and take it good and hard where the sun don't shine and then you are rewarded with a baloney sandwich. At least that's been the theme since 2008.

Did JP Morgan Violate the Volcker Rule? - Would JP Morgan’s in-house trading be exempt from the Volcker rule? Probably not. It was too dangerous, and it is hard to see how it qualifies for even the proposed rule’s very loose concept of hedging. JP Morgan Chase’s $2 billion mark-to-market trading loss is a gift to those of us who want to preserve and strengthen the Volcker rule. One estimate is that the loss may eventually reach $7 billion. Traders on the other side are taking potshots as the bank tries to unwind its positions gradually. JP Morgan has cancelled a $15 billion share buyback.The New York Times says that Ina Drew, head of JP Morgan’s chief investment office, lost control of her unit’s powerful, London-based traders. What’s wrong with this picture? JP Morgan is a federally insured, regulated commercial bank. A story about traders who scare their own bosses and whose activities account for a big chunk of income is acceptable at a hedge fund or even an investment bank. A trading operation where the traders are so powerful has no place in a federally insured, regulated commercial bank.

JPMorgan Chase Not Threatened by Investigations, Threat of More Regulations - JPMorgan Chase will spin off a “special investments group” to isolate the Chief Investment Office that created the Fail Whale trades. Basically they are taking the salvageable remains out of the CIO and ring-fencing it, while curtailing the speculative trading that led to the massive losses. That’s the official story, anyway. We won’t know the truth because the regulators have been kept out of the process in identifying the risk positions at JPMorgan Chase. Even to this day, the investigations of the Fail Whale trades have nothing to do with the systemic risks borne by the Chief Investment Office, but on whether traders disclosed enough to their superiors about the bets when they turned bad, essentially exculpating the superiors for just “getting bad information.” I suppose it’s progress that the CFTC is bothering to use its new powers over credit derivatives to investigate JPMorgan Chase at all, but by this account, it’s an investigation channeled toward the smaller fish in the pond. Meanwhile, anything dealing with root causes has been taken off the table: Senate Democratic leaders have shown little appetite for taking on Wall Street before Election Day, despite urging by one of their star recruits, Massachusetts Senate candidate Elizabeth Warren. Senate Democratic leaders have carefully avoided a major confrontation with Wall Street this year, when millions of dollars are already flowing to Republican-allied super-PACs from anonymous donors.

The FDIC Continues to Promote the Fantasy That It Can Resolve Megabanks - Yves Smith  - Due to being a bit under the gun before taking off on holiday, we didn’t address a May 10 speech by the acting FDIC chairman, Martin Gruenberg, on the FDIC’s current thinking on how to resolve so called systemically important financial institutions, or SIFIs. I’m turning to this now because I see some people who ought to know better, such as the normally solid John Hussmann, taking the FDIC”s claims at face value.As an overview, Dodd Frank gave the FDIC new powers for resolving large, complex financial institutions, which are often referred to as “orderly liquidiation authority” or “Title II resolutions”. Nowhere does the Gruenberg speech mention that the FDIC does not have the authority to put a megabank down; it requires Fed and Treasury approval as well. So it seems unlikely, in the wake of Lehman, that any Administration is going to hazard euthanizing a foundering financial institution using an untested processes. It’s worth noting that the FDIC has retreated from its position in a paper it published a bit more than a year ago, a description of how it would have used its expanded powers in the case of Lehman. Gruenber’s speech is de facto climbdown from that piece, which we shredded in a series of posts (here, here, here and here; it took that many rounds to beat back staunch administration defender Economics of Contempt.The guts of the latest FDIC scheme is to resolve only the holding company and keep the healthy subsidiaries, including all foreign subsidiaries, going on a business-as-usual basis:

MF Global trustee: Corzine mismanaged firm’s growth (Reuters) - Jon Corzine failed to address MF Global Holdings Ltd's growing liquidity needs as he tried to build the commodities broker into a global investment powerhouse, helping create the conditions that led to its downfall, a trustee in MF's bankruptcy said on Monday. In a blistering 275-page report, James Giddens, the trustee liquidating the company's broker-dealer unit, said he might bring civil claims against former Chief Executive Corzine and other top MF Global executives for negligence and breach of duties to customers. Giddens also said he was prepared to sue JPMorgan Chase & Co, one of MF Global's main banks, if he and the bank could not settle within 60 days claims that the bank played a role in the disappearance of customer funds. To date, JPMorgan has returned $89 million of customer funds and $518 million of general MF Global assets, the report said.

Mapping MF Global’s cash - You’ll find 53 pages of charts like the one above in the MF Global trustee’s report trying to map the broker-dealer’s cash transactions in the week beginning October 26, when MF Global first inappropriately tapped customer funds, according to the trustee. Click below to open the 275-page pdf (warning: big file)… As the FT reports, the trustee, James Giddens, will decide within sixty days whether to sue Corzine and other senior staff for “breach of fiduciary duty and negligence”. The Wall Street Journal reported last night that federal investors are also looking into conversations had by employees of MF Global on October 28, just prior to telling CME regulators that customer accounts were safe.

The Real Bombshell in the MF Global Post Mortem - Yves Smith  - John Giddens, the bankruptcy trustee in MF Global, garnered headlines Monday by saying that he will decide in the next 60 days whether to filing suits against Jon Corzine and other officers for breach of fiduciary duty and negligence and against JP Morgan if he is unable to come to a settlement. JP Morgan so far has returned roughly $518 million in MF Global assets and $89 million in customer monies, a meager recovery relative to $1.6 billion in missing customer funds.  The report Giddens released Monday is thorough and confirms many of the observations made in journalistic accounts of the firm’s collapse, particularly regarding inadequate risk and accounting controls, JP Morgan’s aggressive posture greatly increasing the liquidity squeeze. It also makes clear that this is an interim report, and unlike the trustee’s report on Lehman, says that reaches no conclusion regarding legal strategies, including whether prosecutions are warranted.   But the real stunner comes early in the report, and the media write ups thus far seem to have missed it completely. Recall that the trade that felled MF Global was one directed by Corzine, and has been depicted as a repo-to-maturity trade, in which the maturity of the repo matched that of the underlying asset exactly. That in turn allowed the trade to be treated as off balance sheet, which was helpful in presenting the firm’s results to ratings agencies and analysts. 

Trustee Sees Customers Trampled at MF Global - If the collapse of the commodities brokerage firm MF Global were a murder mystery, the revelation that $1.6 billion of customer money had disappeared would be the equivalent of finding the corpse. Who did it? And given that customer assets, by law, must be segregated from a firm’s assets and operations, how could it have happened? This week, MF Global’s liquidation trustee, James W. Giddens, went a long way toward solving the mystery in a 181-page account of MF Global’s decline and fall. Contrary to vague and self-serving assertions that MF Global’s affairs in its last week were so chaotic that no one really knew what was happening, some people at the firm obviously knew only too well, and took desperate measures that ignored clients’ interests. In doing so, they violated the most basic obligation of any brokerage firm, which is to protect customers’ assets. More broadly, the report makes clear that the notion that customer assets are safely segregated, at least at commodities brokers, is an illusion thanks to a lax calculation of customer assets allowed by the Commodity Futures Trading Commission, which regulates commodities brokers.

Accounting Backfired at MF Global - Back when I was studying accounting, the professor had a handy way to determine whether it made sense for a company to recognize revenue: Had it completed the hard task in its business? GAAP — generally accepted accounting rules — were not so simple, he said, and sometimes let companies record revenue — and post profits — far too early. Companies that took advantage of such rules could well be reporting earnings they would never see. Over the years, I’ve seen any number of accounting disasters, ranging from Enron to subprime mortgages, where that simple principle was ignored. Sometimes that accounting was within the limits of GAAP and sometimes it was not. In all cases, it produced profits that vanished before they were actually realized. Now there is another example at MF Global, the brokerage firm that Jon Corzine ran into the ground. The accounting maneuver allowed MF Global to buy bonds issued by European countries and book profits the same day. That is the rough equivalent of a farmer’s booking profits as soon as he plants the crop. To be fair to MF Global, it did disclose what it was doing in a footnote to its financial statements. The accounting appears to have been proper under accounting rules that are now being reconsidered. In a minute, I’ll explain exactly what the company did and how the accounting rules came to make it possible to report profits that were at best premature and at worst fictional. But for now, consider the effect such rules had.

Michael Crimmins: What the Press Refuses to See in JP Morgan and MF Global Scandals - Two former finance and political influence gods (Jon Corzine and Jamie Dimon) have tumbled back to earth. Yet, troublingly, the mythology that’s cowed the political establishment and the financial press for so long remains very much intact. Almost without exception, mainstream commentators are still desperately trying to frame the train wrecks at MF Global and JP Morgan as outliers, tail risk situations, if you like. They seem unable to acknowledge that that these were simple cons, while dutifully reporting them as examples of ‘regulatory arbitrage’.  The term is appropriate, but it’s fancy enough to be off-putting to the folks who can spot a con a mile off and who would normally be enraged enough to take to the streets if these scams were framed in simpler terms.  Consider the backhanded compliment the financial press and the regulators, even PBS, bestowed on Occupy the SEC and the OWS Alternative Banking group. These outlets acknowledged that the barriers to entry to protest against bankster abuse can be breached, yet missed the real point: those barriers are lower than the banks and politicians believe they are. The various specialist groups in Occupy Wall Street prove that opposing a corrupt oligarchy isn’t attractive only “dirty hippies” but also to academics (Simon Johnson and Amat Admati), former and current regulators (Sheila Bair, Andrew Haldane) and industry professionals (the members of the aforementioned OWS groups); They also fail to get on board with the concept that the banksters’ line should be challenged even though that’s supposed to be the role of a free press….The OSEC comment letter was wonky enough to ensure it couldn’t be ignored, but the real objective was to call the too-clever-by half banking lobby and their enablers out in plain language. As a first step in alerting the powers that be that the Occupiers and the folks they represent will be heard, I like to think it was effective.

Bank of America Withheld Loss Figures Ahead of Merrill Vote - Days before Bank of America shareholders approved the bank’s $50 billion purchase of Merrill Lynch in December 2008, top bank executives were advised that losses at the investment firm would most likely hammer the combined companies’ earnings in the years to come. But shareholders were not told about the looming losses, which would prompt a second taxpayer bailout of $20 billion, leaving them instead to rely on rosier projections from the bank that the deal would make money relatively soon after it was completed.  What Bank of America’s top executives, including its chief executive then, Kenneth D. Lewis, knew about Merrill’s vast mortgage losses and when they knew it emerged in court documents filed Sunday evening in a shareholder lawsuit being heard in Federal District Court in Manhattan.  The disclosure, coming to light in private litigation, is likely to reignite concerns that federal regulators and prosecutors have not worked hard enough to hold key executives accountable for their actions during the financial crisis.

Bank of America’s Merrill scandal reignites -The New York Times’s Gretchen Morgenson has a big story today on how Bank of America fooled shareholders into approving its ill-fated merger with Merrill Lynch. Former CEO Ken Lewis, the business genius who drove his bank into quasi-nationalization with two of the worst acquisitions of all time in Countrywide and Merrill Lynch, has testified in a civil suit that he and his executives misled shareholders on the Merrill deal, Morgenson reports. Lewis says that before shareholders voted to approve the deal, he and other executives knew Merrill’s losses had intensified dramatically and intentionally failed to inform them. He didn’t even tell his board of directors until after the vote. Worse, Lewis, despite knowing that internal estimates predicted the deal would dilute 2009 earnings by 13 percent, told shareholders at the vote that it would be just a 3 percent dilution, and misled them that 2010 was expected to be accretive (add to profits) when he now knew it would not be. It appears that if you can get a lawyer—any lawyer to bless something, you can get off the hook. Recall how Lehman Brothers shopped around until it found a London law firm willing to sign off on its Repo 105 book cooking. So no prosecutions.

Group Forms to Urge Strict Oversight of Wall Street - Efforts to increase and improve regulation of Wall Street have bogged down, according to Sheila C. Bair, the former chairwoman of the Federal Deposit Insurance Corporation. On Wednesday, she will announce a new group, the Systemic Risk Council, that will monitor and encourage regulatory reform. “The great challenge is to devise a system to identify risks that threaten market stability before they become a danger to the general public,” she said. “We need a more effective and efficient early-warning system to detect issues that jeopardize the functioning of U.S. financial markets before they disrupt credit flows to the real economy. And two of the most critical tasks are how to impose greater market discipline on excess risk-taking and effectively end the doctrine ‘too big to fail.’ ” The Dodd-Frank act passed in 2010 provided for numerous steps, including the creation of an Office of Financial Research that was supposed to help the newly created Financial Stability Oversight Council in identifying threats to financial stability and deciding which financial firms were systemically important and how much additional regulation they should receive. That council is composed of all the major regulatory bodies, and so far it has accomplished little.

Goldman Sachs Cuts a Little Deeper - It isn’t getting better out there. Wall Street, which has been paring its ranks over the last year as it struggles with lackluster markets and new regulations, is cutting deeper as it heads into what is expected to be a rough summer. Goldman Sachs laid off about 50 people last week, according to people briefed on the matter but not authorized to speak on the record. The cutbacks have rattled some people in the firm, in part because a number of the employees were managing directors and on the higher end of Goldman’s pay scale. Managing directors make a base of $500,000 and receive an annual bonus that can climb into the millions of dollars. Last week’s layoffs are seen as a sign that Goldman is looking further up the food chain for additional cuts after already slashing 8.5 percent of its work force, or 3,000 people, in the last year. In addition it has cut more than $1.4 billion in noncompensation expenses from its operations over the last year or so. A Goldman spokesman declined to comment.

Companies Sitting on Much Less Cash Than First Thought - That record pile of idle corporate cash turns out to be much smaller than previously believed. Half a trillion dollars smaller. One of the enduring frustrations of the U.S. economic recovery has been companies’ tendency to hoard cash rather than using it to hire or invest. The issue has become a political football, with Democrats criticizing companies for not spending and Republicans saying excessive regulation was deterring corporate investment. But in its quarterly “flow of funds” report on Thursday, the Federal Reserve sharply revised its estimates of how much cash companies are holding on their balance sheets. The bottom line: Corporations have nearly $500 billion less cash on hand than previously believed. To be sure, companies are still holding onto an unprecedented amount of cash. As of the end of March, nonfinancial corporations had $1.74 trillion in liquid assets on their balance sheets, $12.6 billion more than at the end of the year. A decade ago they had barely $1 trillion on hand.

Number of the Week: Corporations Not Hoarding Cash - $496.5 Billion: How much less cash U.S. corporations had at year-end 2011 than previously believed. The Federal Reserve on Thursday came out with its quarterly “flow of funds” report, which for two years now has reflected the steady increase in the amount of cash on corporate balance sheets. Sure enough, the report showed that corporate cash ticked up yet again in the first quarter of the year by around $12.6 billion, to $1.74 trillion. But here’s the funny thing about that figure: Back in March, the Fed said nonfinancial companies ended the year with a record $2.23 trillion. The new release revised that figure down to $1.72 trillion. Even for the Fed, a half-trillion-dollar revision is a big deal. $1.7 trillion is still a lot of money, close to an all-time high. But more significant than the actual number is the implication for what had been one of the most enduring narratives of the recovery: the massive pile of cash that was sitting on the sidelines. The revised data — at least if it is to be believed — changes all of that. Under the new narrative, companies still rebuilt their reserves in the wake of the financial crisis, boosting their cash holdings from $1.4 trillion at the end of 2008 to $1.7 trillion in mid-2010. Since then, however, the cash hoard has barely budged, as companies neither draw down their reserves nor continue adding to them.

Quelle Surprise! Treasury Inspector Audit Report Whitewashes OCC Fail on Foreclosure Fraud - Yesterday, various news and financial sites picked up the release last Friday of a report by the Treasury’s Inspector General titled “SAFETY AND SOUNDNESS: OCC’s Supervision of National Bank’s Foreclosure Practices“. The media accounts are workman-like summaries with titles like “Bank oversight office failed to spot foreclosure fraud, Treasury inspector general says.”The problem is that these various accounts are narrowly accurate (in that they summarize the report) but missed the real story. First is that this tamely critical report was released well after the mortgage settlement was completed, even though its text has marks of it being finished before then. Notice this section: The regulatory environment surrounding mortgage servicing continues to evolve. Developing national mortgage servicing standards has been suggested and certain state attorneys general are working toward a comprehensive settlement with some banks that, among other goals, would define standards of servicer behavior.  This strongly suggests the report was completed prior to the settlement and not updated.  That in turn means there’s good reason to suspect that this official confirmation of what numerous critics had claimed, that the OCC was not at all on top of servicing bad practices, was held back until the settlement was no longer deemed news. Why? Well, the OCC and other regulators maintained they had a solid grasp of what was wrong; this was critical to believing they were competent to negotiate a settlement. Thus this inspector general report undermines the legitimacy of the settlement (not that anyone who is not part of the problem believes it was adequate).

OCC Flip-Flopped on Ethics Matter, Reassigned Husband of B of A Exec — When veteran regulator Tim Long announced his retirement from the Office of the Comptroller of the Currency last year, the agency quickly replaced him with David Wilson, its deputy comptroller for credit risk. To do so, however, officials had to work around the strict ethics rules governing federal employees because Wilson, who would oversee supervision policy for all national banks, is married to a high-level executive at Bank of America. Wilson recused himself from certain matters directly involving the bank and received an all clear from OCC ethics officials, but barely four months later, he was belatedly reassigned after regulators realized the situation created the perception of a conflict of interest. Although his objectivity and performance were never called into question, industry observers and ethics lawyers said placing Wilson in the position in the first place feeds the idea that the OCC is not only too close to big banks, but indifferent to the criticism. "Even here where there is no allegation of any actual serving of a private interest over public interest, these conflict-of-interest rules are intended to serve a kind of prohibitive purpose,"

US banks moving away from wholesale funding - Since the financial crisis, US banks have been rapidly reducing their reliance on wholesale funding. Large time deposits (CDs) went from 21% of the total bank liabilities prior to Lehman to around 13% today (chart below).Banks are not marketing these as aggressively as the used to (not offering very attractive rates on CDs as they did in the past) and there is less demand. People are uneasy about locking up their money for six months to earn less than a quarter of a percent. And not many people want to lock their money up for a longer period. Plus those who have more that $250K on deposit now need to worry about bank credit risk.

Unofficial Problem Bank list declines to 927 Institutions - This is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for June 1, 2012. (table is sortable by assets, state, etc.)

William K. Black: Abacus Bank Indicted for Mortgage Fraud – More Prosecutions to Come?

New York, Delaware Can Intervene In Bank Of America Deal - New York and Delaware won their bids to intervene in litigation over Bank of America Corp.’s proposed $8.5 billion settlement with mortgage-bond investors. New York State Supreme Court Justice Barbara Kapnick in Manhattan granted motions by the attorneys general of the states to intervene in the case over the objections of an investor group, according to a decision today. New York Attorney General Eric Schneiderman and Delaware Attorney General Beau Biden “have identified legitimate quasi- sovereign interests at play” in the case, Kapnick wrote. The judge also said she isn’t persuaded by arguments that the intervention would delay or burden the proceeding. The settlement would resolve claims from investors in Countrywide Financial Corp. mortgage bonds. Bank of America acquired the mortgage lender in 2008. Bank of New York Mellon Corp., as trustee for investors, is seeking approval of the deal in state court.

Alabama Appeals Court Reverses Decision on Chain of Title Case, Ruling Hinges on Question of Bogus Allonges - - Yves Smith -  In a unanimous decision, the Alabama Court of Civil Appeals reversed a lower court decision on a foreclosure case, U.S. Bank v. Congress and remanded the case to trial court.  We’d flagged this case as important because to our knowledge, it was the first to argue what we call the New York trust theory, namely, that the election to use New York law in the overwhelming majority of mortgage securitizations meant that the parties to the securitization could operate only as stipulated in the pooling and servicing agreement that created that particular deal. Over 100 years of precedents in New York have produced well settled case law that deems actions outside what the trustee is specifically authorized to do as “void acts” having no legal force. The rigidity of New York trust has serious implications for mortgage securitizations. The PSAs required that the notes (the borrower IOUs) be transferred to the trust in a very specific fashion (endorsed with wet ink signatures through a particular set of parties) before a cut-off date, which typically was no later than 90 days after the trust closing. The problem is, as we’ve described in numerous posts, that there appears to have been massive disregard in the securitization for complying with the contractual requirements that they established and appear to have complied with, at least in the early years of the securitization industry. It’s difficult to know when the breakdown occurred, but it appears that well before 2004-2005, many subprime originators quit bothering with the nerdy task of endorsing notes and completing assignments as the PSAs required; they seemed to take the position they could do that right before foreclosure. Indeed, that’s kosher if the note has not been securitized, but as indicated above, it is a no-go with a New York trust. There is no legal way to remedy the problem after the fact

Mortgage investors call robo-signing settlement a ’401(k) tax’ - A panel of mortgage bond investors complained to a House subcommittee Thursday about having to bear some of the burden in a $25 billion settlement with servicers over foreclosure abuses in which they had no role. The deal finalized in March forces mortgage servicers to provide roughly $10 billion in principal reduction via "credits." For every dollar a servicer writes down on loans it holds on its own portfolio, it gets a full dollar of credit toward the $10 billion figure. But should it write down principal on mortgages bundled into private securities, the servicer still gets $0.45 of credit. "We believe that all principals were well-intentioned in designing a plan for relief, but unfortunately, uninvolved pension plans, 401(k) funds and mutual funds were made a party to the settlement and forced to shoulder some of the burden for the bad acts of others,"  "The settlement, unfortunately, has the potential to be a retirement tax – a '401(k) tax.'" According to the agreement, servicers would have to follow pooling and servicing agreements with the bond investors before taking credit for principal reductions on packaged home loans.

Schneiderman Has Little “Independence” on Working Group Investigation - New York Attorney General Eric Schneiderman has hired former federal prosecutor Virginia Romano to work on the series of investigations around the RMBS working group he co-chairs. The interesting part of this to me is that Schneiderman did the hiring, rather than the Department of Justice. Romano, who led an investigation into mismarked mortgage-backed securities while an assistant United States attorney, is working closely with the task force, Federal authorities are still not pouring resources into the effort. Romano will work directly with Schneiderman. It’s a sign that Schneiderman recognizes that the resources aren’t coming. As for Romano’s mismarked MBS investigation, it was an investigation into traders at Credit Suisse who were, among other things, ripping off the bank. Meanwhile, remember that the idea was for Schneiderman to leverage his independence as a political actor into action on the working group. He could always threaten to walk if the investigation was being dragged out, and he would let everyone know who was responsible. He had this potential to call out the misdeeds of the federal law enforcement and regulatory apparatus, as a bargaining chip for accountability. This was said to me personally by people at the highest levels of Schneiderman’s office. Does this strike you as what someone in that position would do?

The Mortgage Fraud Fraud - When he leaves prison on June 20, Charlie, 49, will move temporarily to a halfway house, after which he will be on probation for another five years. And unless he can get the verdict overturned, he will have to spend the rest of his life with a felony on his record.  Perhaps you remember Charlie Engle. I wrote about him not long after he entered a minimum-security facility in Beaver, W.Va., 16 months ago. He’s the poor guy who went to jail for lying on a liar loan during the housing bubble.  There were two things about Charlie’s prosecution that really bothered me. First, he’d clearly been targeted by an agent of the Internal Revenue Service who seemed offended that Charlie was an ultramarathoner without a steady day job. The I.R.S. conducted “Dumpster dives” into his garbage and put a wire on a female undercover agent hoping to find some dirt on him. Unable to unearth any wrongdoing on his tax returns, the I.R.S. discovered he had taken out several subprime mortgages that didn’t require income verification. His income on one of them was wildly inflated.  Charlie has always insisted that he never filled out the loan document — his mortgage broker did it, and he was actually a victim of mortgage fraud. (The broker later pleaded guilty to another mortgage fraud.) Indeed, according to a recent court filing by Charlie’s lawyer, the government failed to turn over exculpatory evidence that could have helped Charlie prove his innocence. For whatever inexplicable reason, prosecutors really wanted to nail Charlie Engle. And they did.

MBS and Foreclosures Expose Our Degraded Legal Profession - We lawyers shrug off the ubiquitous jokes because once wronged, people want us. But in the socially crucial contexts of mortgages, foreclosures and securities, lawyers have become a new kind of joke, one that should shame us all. By now many are realizing that the bankers lied materially and often about the mortgage loans they packaged into securities and sold to suckers like pension funds and Fannie & Freddie. But stop and think about that–where were the lawyers? Underwriters’ counsel and issuers’ counsel should never have let those deals go through. Heck, in-house counsel shouldn’t have signed off. And yet the deals were done. The securities-related lawyering failures didn’t stop once the securities were created and sold. They also involve how the securities are managed-”serviced”- in an ongoing way. As Michael Olenick exposes here, servicer misconduct (including servicers’ foreclosure counsels’ misconduct), has made things much worse. Indeed, catastrophic costs will soon be realized. If the legal profession in this area were still a profession, Olenick’s case study shouldn’t be possible. That is, it should be impossible for investors to be told that a mortgage “in” the security is current when a judge has ruled the mortgage  can’t be enforced. Well, strictly speaking, the mortgage in Olenick’s example is computer coded by the servicer, Ocwen, the same way current loans are, so it’s indistinguishable from a current loan. But it’s not actually labelled ‘current’. Worse, the security in Olenick’s example is in a key market index for such securities. So is the entire market is distorted? I mean, given everything we know about foreclosure fraud, how likely is it that this loan is the only mis-coded one in this security, or in the index? Maybe regulators and law enforcers should start checking. Of course, that would require regulators and law enforcers that actually want to check.

Guiding You Through the Govt’s Foreclosure Compensation Maze - If you're a victim of banking abuses during the foreclosure crisis, the government says it'll make sure you receive compensation from your bank. It's a simple idea. But for victims, determining who's eligible, how to apply, and when you might get a check in the mail isn't simple at all.  So we built a list of Frequently Asked Questions [2]. It guides homeowners and other readers through the two separate government efforts: the National Mortgage Settlement [3] and the Independent Foreclosure Review [4].  While both share the goal of providing some compensation to homeowners who were harmed by their banks' abuses or errors, the two have very different approaches.  The National Mortgage Settlement [3] is a deal struck by attorneys general from 49 states and the federal government with five of the biggest banks, and it takes a pragmatic approach. Instead of trying to calibrate compensation to how badly each homeowner was harmed, officials opted instead for a one-size-fits-all solution. Everyone who qualifies for compensation will get the same amount of money. And the paperwork will be minimal: Homeowners will only have to check a box saying they were harmed.  Even with this simplified process, it will take months before people can expect to see the check in the mail. The best guess now is in the first three months of 2013.  And the check, critics contend [5], will be small. Exactly how much each homeowner will get depends on how many people claim they were harmed.  If a million responded, the payments would drop to $1,500.

Distressing Mortgage Conditions - Though mortgage distress peaked in 2010, many areas of the country continue to struggle and some regions are getting worse, according to data presented by Federal Reserve Bank of St. Louis President James Bullard. “We should expect and plan for slow adjustment in housing markets,” Bullard said. The Fed official presented the following charts. (View them all as a slideshow)They show a relatively healthy mortgage market in 2006, with the primary area of distress centered around the region hit hardest by Hurricane Katrina. By 2010, the problems had spread across the country. In the past two years, it’s clear that areas in the Midwest and parts of the South are recovering. But a close look suggests that some regions in the Northeast and Southeast are continuing to face deteriorating conditions.

2.4 million U.S. homes worth half their mortgage - 2.4 million U.S. households owe more than double what their homes are worth, the online housing site Zillow reported recently. That amounts to nearly one out of every 20 homeowners with a mortgage. And about one in eight – 12.5% – owe at least 40% more than their homes are worth. Stan Humphries, Zillow chief economist, said that homeowners are much more likely to walk away from their home when the amount they owe exceeds the home’s value by 35% or more. “It’s definitely worrisome,” Humphries said. Zillow’s latest report on “negative equity” – or homes worth less than their mortgages – found that 15.7 million U.S. households were “under water” on their mortgages during the first quarter of 2012. That’s 31.4% of all homeowners with a mortgage.  In addition, Zillow reported:

• The percentage of underwater homeowners had changed little in the past year – dropping one percentage point from 32.4% in the first quarter of 2011. That’s due mainly to the slowdown in foreclosures since the robo-signing scandal and to a lack of home-price appreciation, Humphries said.
• For most underwater homeowners, the decline of their home’s value is just a paper loss. Nine out of 10 continue to make their monthly house payments on time. Nearly 40% of underwater homeowners have debt exceeding their home’s value by 20% or less.
• More than 10% of homes with a mortgage are three months or more behind in making their house payments.
• In at least five metro areas, half of mortgage borrowers are underwater. They include Phoenix (55.5%), Atlanta (55.2%), Orlando (53.9%), Riverside County (53.4%) and Sacramento (51.2%).

The U.S. Housing Crisis: Where are home loans underwater? - Zillow interactive map - With U.S. home values falling by nearly 25% since peak in 2007, many homeowners are now underwater in their mortgages, meaning they owe more than their home is worth. Search our interactive map to discover what percentage of homes in your county or ZIP code are in negative equity, based on Zillow's first quarter 2012 data.

Is Florida’s Foreclosure Nightmare Only Half Over? - Despite the dramatic price increases registered by Miami, Fort Myers and other Florida resort communities over the past 12 months, the state’s foreclosure nightmare is far from over. Some 1.1 million distressed sales are in the pipeline for Florida markets in the near future. They include some 530,000 mortgages nearly 90 days delinquent and subject to future foreclosure, about 200,000 REOs of the 444,000 properties taken back by banks through completed foreclosures since 2007 and still owned by the banks and 371,000 foreclosures tied up in the huge post-Robogate inventory now in litigation before the Florida Supreme Court. Florida’s current and potential foreclosure inventory amounts to 6.8 times the size of the visible inventory of listings on Realtor MLS systems in the state and it will take years to clear out at today’s demand levels. Most of those distressed properties are in South Florida, the coastal resorts, and Orlando and Jacksonville, which have traditionally been the sites of most of the state’s foreclosure activity. “Whenever I hear people talk about foreclosures ending in Florida, I don’t think they are seeing the whole picture,”  McCabe believes the price gains achieved by markets like Miami and Fort Lauderdale over the past year will be erased when foreclosures and short sales currently in process come to market.

Mortgage Rates in U.S. Fall to Record Lows -  Mortgage rates in the U.S. dropped to record lows for a sixth straight week as concerns over slowing job growth pushed investors into the safety of government bonds that guide interest costs. The average rate for a 30-year mortgage dropped to 3.67 percent in the week ended today from 3.75 percent, Freddie Mac said in a statement. It was the lowest in the McLean, Virginia- based mortgage-finance company’s records dating to 1971. The average 15-year rate declined to 2.94 percent, also a record, from 2.97 percent.

MBA: Refinance Activity increases as Mortgage Rates fall to New Record Low - From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey The Refinance Index increased 2 percent from the previous week to its highest level since February 10, 2012. The seasonally adjusted Purchase Index decreased slightly from one week earlier to its lowest level since April 13, 2012.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.87 percent, the lowest rate in the history of the survey, from 3.91 percent, with points remaining unchanged at 0.46 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. (graph) The purchase index is still very weak. The purchase index has mostly moved sideways for the last two years.

Record Low Mortgage Rates and Increasing Refinance Activity - Below is a graph comparing mortgage rates from the Freddie Mac Primary Mortgage Market Survey® (PMMS®) and the refinance index from the Mortgage Bankers Association (MBA). Freddie Mac reported earlier today that 30 year mortgage rates had fallen to a record low 3.67% in the PMMS. And the MBA reported yesterday that refinance activity increased another 2 percent last week.  Earlier from Freddie Mac: Record-Setting Low Fixed Mortgage Rates Persist Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates falling to new all-time record lows for the sixth consecutive week ... 30-year fixed-rate mortgage (FRM) averaged 3.67 percent with an average 0.7 point for the week ending June 7, 2012, down from last week when it averaged 3.75 percent. Last year at this time, the 30-year FRM averaged 4.49 percent.  This graph shows the MBA's refinance index (monthly average) and the the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®.  It usually takes around a 50 bps decline from the previous mortgage rate low to get a huge refinance boom - and rates are there! The 30 year conforming mortgage rates were at 4.23% in October 2010, so a 50 bps drop would be 3.73% - and rates hit 3.67% last week.

Lower Costs on FHA's Streamline Refinance Program are effective on June 11th - Just an update because the effective date is next week ... As announced back in March, HUD is lowering the costs on the FHA's Streamline Refinance Program effective Monday, June 11th. From HUD back in March: FHA Announces Price Cuts to Encourage Streamline Refinancing Beginning June 11, 2012, FHA will lower its Upfront Mortgage Insurance Premium (UFMIP) to just .01 percent and reduce its annual premium to .55 percent for certain FHA borrowers. To qualify, borrowers must be current on their existing FHA-insured mortgages which were endorsed on or before May 31, 2009. [In February], FHA also announced it will increase its upfront premiums on most other loans by 75 basis points to 1.75 percent. In addition, FHA will raise annual premiums 10 basis points and 35 basis points on mortgages higher than $625,500. ... Currently, 3.4 million households with loans endorsed on or before May 31, 2009, pay more than a five percent annual interest rate on their FHA-insured mortgages. By refinancing through this streamlined process, it’s estimated that the average qualified FHA-insured borrower will save approximately $3,000 a year or $250 per month.  I expect this program will add to the recent increase in refinance activity.

CoreLogic: House Price Index increases in April, Up 1.1% Year-over-year - The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic® Home Price Index Shows Year-Over-Year Increase of Just Over One Percent Home prices nationwide, including distressed sales, increased on a year-over-year basis by 1.1 percent in April 2012 compared to April 2011. This was the second consecutive year-over-year increase this year, and the first time two consecutive increases have occurred since June 2010. On a month-over-month basis, home prices, including distressed sales, increased by 2.2 percent in April 2012. This marks the second consecutive month-over-month increase this year.  Excluding distressed sales, prices increased 2.6 percent in April 2012 compared to March 2012, the third month-over-month increase in a row. The CoreLogic HPI also shows that year-over-year prices, excluding distressed sales, rose by 1.9 percent in April 2012 compared to April 2011. Distressed sales include short sales and real estate owned (REO) transactions.This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index is off 32% from the peak - and is just above the post-bubble low set two months ago. The second graph is from CoreLogic. The year-over-year comparison has turned positive.

Stop the Presses! Some Maybe Kinda Sorta Pretty Good News from the Housing Market - Those looking for something to feel at least a little better about in our economy should look to the housing market.  It’s not that home prices are reliably rising again amidst robust sales.  But prices do seem to have stabilized nationally, home sales and starts were up in the most recent reports, and according to some new research, the likelihood of underwater borrowers defaulting has gone down. I’d call that evidence that the housing market is more bumping along the bottom than climbing, but if the big housing correction is really finally winding down, that’s a good thing.  It means housing will be less of a drag on the economy going forward.  It probably doesn’t mean that residential investment–home buying–adds a lot to near-term growth (though it’s been adding some), just that it stops subtracting. CoreLogic price data are always particularly revealing because they break down price trends into distressed (bank-owned or foreclosed properties and short sales) and non-distressed sales.  The overall price index was up 0.6% in March over February, and the non-distressed sales were up a strong 2% that month.  The figure shows yr/yr changes for distressed/non-distressed, showing positive trends with non-distressed breaking zero for a few months.

Trulia: Asking House Prices Unchanged in May - Press Release: Trulia Reports Flat Asking Prices in May After Three Straight Months of Increases, as Foreclosure Prices Decline Based on the for-sale homes and rentals listed on Trulia, these monitors take into account changes in the mix of listed homes and reflect trends in prices and rents for similar homes in similar neighborhoods through May 31, 2012. Asking prices on for-sale homes–which lead sales prices by approximately two or more months – were unchanged in May month-over-month, seasonally adjusted. Together with increases in April and March, asking prices in May rose nationally 1.6 percent quarter over quarter (Q-o-Q), seasonally adjusted. The price increase unadjusted for seasonality was even higher: 5.2 percent Q-o-Q, since prices typically jump in springtime. Year over year (Y-o-Y) asking prices fell slightly by 0.2 percent. Nationally, 41 out of the 100 largest metros had Y-o-Y price increases, and 86 out of the 100 largest metros had Q-o-Q price increases, seasonally adjusted. More from Jed Kolko, Trulia Chief Economist: Home Prices Stall, Breaking 3-Month Streak of Rising Prices. On Rents:  In May, rents were 6.0 percent higher than they were a year ago, up from the 5.4 percent Y-o-Y rent increase in April, and 4.8 percent in March

Comparing Housing Recoveries - Yesterday I mentioned a post I wrote over four years ago - back when I was a housing grizzly bear - where I discussed housing and recoveries and pointed out that 1) housing is usually "an engine of recovery" and 2) "Given the current [back in early 2008] fundamentals of housing – significant oversupply, falling demand – it is very unlikely that housing will act as an engine of growth any time soon. I've been asked to update the last two graphs in that post comparing the current recovery with previous recoveries. The first graph is constructed by normalizing new home sales at the end of the previous six recessions. Then the median is plotted as a percent from the recession bottom. I've made two updates to the graph since four years ago: 1) I added the current recession and recovery, and 2) I extended the period after the end of the recession. Usually housing bottoms a few months before the rest of the economy, and then acts as an engine of growth coming out of the recession. Obviously housing performed terribly following the recent recession - with a small increase due to the tax credit, and then new lows and moving sideways for several years - just as predicted. The second graph is the data for each of the last 7 recessions (including 2007). Housing didn't boom coming out of the 2001 recession because there was no significant collapse during the recession (an investment led recession). And new home sales faltered following the recession ending in July 1980 (green line) because of the double dip recession of 1980 and '81/'82.

Housing: Dude, Where's my inventory? - I've been using inventory numbers from HousingTracker / DeptofNumbers to track changes in listed inventory. Tom Lawler mentioned this last year. According to the deptofnumbers.com for (54 metro areas), inventory is off 22.0% compared to the same week last year. Unfortunately the deptofnumbers only started tracking inventory in April 2006. This graph shows the NAR estimate of existing home inventory through April (left axis) and the HousingTracker data for the 54 metro areas through early June. Since the NAR released their revisions for sales and inventory, the NAR and HousingTracker inventory numbers have tracked pretty well. On a seasonal basis, housing inventory usually bottoms in December and January and then starts to increase again through the summer. So inventory might increase a little over the next couple of months, but the forecasts for a "surge" in inventory this summer appear to be incorrect.The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker. HousingTracker reported that the early June listings, for the 54 metro areas, declined 22.0% from the same period last year. So far in 2012, there has only been a small seasonal increase in inventory.

Housing Inventory and Price Expectations - Yesterday I asked "Dude, Where's my inventory?" In the comments, 'TJ and The Bear' wrote: "My take is that when there's an expectation of rising prices buyers are motivated but sellers are not." Exactly! This is something I mentioned earlier this year. And it doesn't even take rising prices to change the dynamics. When the expectation is that prices will fall further, marginal sellers will try to sell their homes immediately. And marginal buyers will decide to wait for a lower price. This leads to more inventory on the market. But when the expectation is that prices are stabilizing (the current situation), sellers will wait until it is convenient to sell. And buyers will start feeling a little more confident. Also, as prices stabilize, private lenders will start thinking about entering the mortgage market (something we are starting to see). So expectations matter. And so do price fundamentals. Since we are close to normal prices, based on real prices (inflation adjusted) and the price-to-rent ratio, I think expectations of price stabilization have now taken over, and buyers, sellers and lenders are acting accordingly - and that is a key reason inventory has fallen sharply.

Goldman On Housing's False Dawn - Recent housing data have been generally been encouraging. However, the large number of residential properties that are "underwater"—meaning the borrower owes more on the mortgage than the property is worth—casts a long shadow on the sustainability of the housing recovery. Goldman estimates that approximately 10 million properties are currently underwater. Although this number has not changed much during the past three years, there is much divergence across the nation: California, Michigan, and Arizona, for example, experienced significant improvement, while Georgia, Utah, and Missouri saw many more properties falling underwater during this period. Given that there are 3 million first-lien mortgages that have LTVs of 125% or above as of April 2012, whether or not a large fraction of these mortgages will default in the near future has important implications for the housing market recovery.

Fitch Sees No Bottom Until Late Next Year - Fitch Ratings’ outlook for U.S. residential real estate prices has improved slightly in recent months, but the authoritative ratings service still sees no bottom to declining housing prices until late 2013. Fitch expects prices to decline by another 7.8 percent until the bottom of national average sold prices is finally reached. The prediction represents an in improvement from last quarter’s forecast of an additional 9.1 percent decline in prices. With annual inflation running close to 3 percent annually and an economic recovery taking hold, Fitch expects home prices to touch bottom in late 2013 and then begin a slow recovery. Underemployment, tight lending practices, and the large delinquent inventory of homes remain the biggest risks to all of these trends. The slow and steady recovery in the economy and some increasingly positive indicators caused the upward revision. Currently, Fitch analysts believe that 12 states are undervalued and 14 have prices in a sustainable range. For instance, the drastic declines of the last few years in Arizona appear to be over. However, some drops remain likely. Prices are beginning to fall in New York and New Jersey, which have performed better than most due to a large backlog of foreclosure inventory, which has begun to liquidate.

Radar Logic: Prices Will Fall Further, Strengths Due to Temporary Forces - Even though Radar Logic reported a monthly increase in home prices for March, the analytics company expects prices to fall and gave credit to “temporary market forces” for recent strengths seen in the housing market. “In light of the oversupply we continue to see in the market, we disagree with the widespread view that home prices have reached a bottom or will do so in the near future,” said Michael Feder, president and CEO of Radar Logic. Feder added that a negative response to economic news, either in the U.S. or elsewhere, could also undermine housing demand and seriously hurt home prices. According to Radar Logic, the RPX Composite price, which tracks home prices in 25 major metropolitan areas, showed a 1.8 percent increase on a monthly basis, but decreased by 0.87 percent year-over-year in March. With distressed homes remaining a significant portion of home sales transactions, Radar Logic said the significant discounts for distressed properties in relation to non-distressed means a further fall in prices. According to RealtyTrac, homes in foreclosure or bank-owned accounted for 26 percent of all residential sales during the first quarter of 2012. In addition, the average sales price of homes in foreclosure or bank-owned in the same quarter was $161,214, which is a 27 percent discount compared to the average sales price of homes not in foreclosure or bank-owned.

Another Reason Not to Like the Insurance Industry - I've made it clear how much I dislike the insurance industry, which has done a phenomental job making other areas of the financial services industry seem almost virtuous by comparison. For the latest example of how these people operate, I refer you to the Introduction from a new report by the Consumer Federation of America, entitled Low Ball: An Insider’s Look at How Some Insurers Can Manipulate Computerized Systems to Broadly Underpay Injury Claims:Over the past ten to fifteen years, the payment of bodily injury claims covered by automobile or home and property insurance has evolved from a system based primarily upon the experience and knowledge of claims’ adjusters to a computer-based assessment that has the potential to be easily and broadly manipulated by insurers. This technology has enabled many insurers to increase profits by reducing the amount paid to consumers who file bodily injury liability claims, including uninsured and underinsured motorist claims. Insurers have also been able to hire less-experienced employees to handle these types of claims, since the computer programs conduct much of the decision-making. Few consumers have knowledge of these practices, while even less understand the significant impact that the practices can have on their financial lives.

Is the 2005 Bankruptcy Reform Working? - While the name of the Bankruptcy Abuse Prevention and Consumer Protection Act suggests two goals, BAPCPA seemed to be more about abuse prevention than consumer protection. The abuse alleged by proponents of BAPCPA, particularly credit card lenders, was that filers were using Chapter 7 bankruptcy to avoid paying credit card debt they could afford to pay. BAPCPA aimed to curb the alleged abuse through a variety of obstacles, most notably a means test intended to divert better off filers from Chapter 7, where credit card and other unsecured debts are discharged (forgiven), to Chapter 13, where unsecured debts may be rescheduled. In this post, I investigate whether BAPCPA is working, where by “working” I mean reducing the overall bankruptcy rate, and reducing that ratio of Chapter 7-to-Chapter 13 filings. Some observers have argued that the reform failed on both counts, but my analysis suggests that conclusion may be only half right.

Is it Austerity or Is It Theft? In today’s New York Times, David Brooks has an extended meditation on debt that relies on one giant omission: Credit card companies seduced people into borrowing more. Politicians found that they could buy votes with borrowed money. People became more comfortable with red ink. Today we are living in an era of indebtedness. Over the past several years, society has oscillated ever more wildly though three debt-fueled bubbles. First, there was the dot-com bubble. Then, in 2008, the mortgage-finance bubble. Now, we are living in the fiscal bubble. Missing from this narrative is a few big things. Over the last thirty years, incomes have for ordinary people have stagnated at the same time that housing, health care, and education costs have gone up. Contrary to Brooks, Americans didn’t suddenly become, en mass, a group of irresponsible spendthrifts; by and large, Americans went into debt to afford necessities for themselves and their families. In the absence of rising incomes, debt was the means through which many people bought opportunity for themselves and their children. People became more comfortable with red ink because they had to, not because they lost “virtue.” These graphs, from the Economic Policy Institute’s State of Working America, are illustrative. Incomes for everyone but the richest Americans have stagnated

Eating the Seed Corn? Consumption in the American Economy Since 1929 - In national-account-speak, all consumption and investment spending is about purchases of real goods and services — things that are produced and consumed. Financial “goods” or “assets” — which aren’t/can’t be consumed by humans — aren’t even part of the accounting. (We’re “inside” the NIPAs.) Next: when you hear economists talk about “consumption,” they’re almost always talking about something somewhat different: consumption spending. Definition: purchases, within a period, of goods and services that are consumed within that same period. (If the period you’re looking at is long enough, everything is consumption. If it’s short enough, everything’s investment — breakfast is an investment in the afternoon’s work. I’ll just talk about one-year periods here to keep things simple.) But in any period, we’re also consuming stuff that was produced in the past, and so is not included in measures of consumption spending. We’re depleting inventories (these fluctuate up and down over the years, sort of a buffer stock), but more importantly we’re consuming real, long-term productive assets by using them, and through the inevitable decay of time (and obsolescence — a tricky technical accounting issue that I won’t explore here). When you run a drill press you’re using it up. You’re consuming it. It’s even true of living in your house. Absent maintenance and remodels, it eventually becomes a worthless heap of rotting lumber; you’ve consumed its value by living in it.

Fed's Q1 Flow of Funds: Household Real Estate Value increased in Q1 - The Federal Reserve released the Q1 2012 Flow of Funds report today: Flow of Funds.  According to the Fed, household net worth peaked at $67.5 trillion in Q3 2007, and then net worth fell to $51.3 trillion in Q1 2009 (a loss of $16.2 trillion). Household net worth was at $62.9 trillion in Q1 2012 (up $11.6 trillion from the trough, but still down $4.6 trillion from the peak). The Fed estimated that the value of household real estate increased $372 billion to $16.05 trillion in Q1 2012. The value of household real estate has fallen $6.3 trillion from the peak. This is the Households and Nonprofit net worth as a percent of GDP. This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). This graph shows homeowner percent equity since 1952.  Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008.  In Q1 2012, household percent equity (of household real estate) was at 40.7% - up from Q4, and the highest since 2008. This was because of a small increase in house prices in Q1 (the Fed uses CoreLogic) and a reduction in mortgage debt.. Note: about 30.3% of owner occupied households had no mortgage debt as of April 2010. So the approximately 52+ million households with mortgages have far less than 40.7% equity - and over 10 million have negative equity.   The third graph shows household real estate assets and mortgage debt as a percent of GDP.

Household net worth jumps $2.8 trillion - Feeling richer in 2012? According to the Federal Reserve you are. The net worth of households rose a collective $2.8 trillion in the first three months of 2012. That was the largest quarterly rise in household wealth since the beginning of the financial crisis, and roughly equates to an increase of $9,000 per American. Still, we have another four trillion to go before we regain what we lost in the financial crisis. Collectively, American households are worth just under $63 trillion, down from $67 trillion back in 2007, which was a peak. And while assets popped, debt was only down slightly. What's more, the data on household wealth, which was released by the Federal Reserve on Thursday, hinted as it has in the past, to the growing wealth divide in the United States. The biggest contributor to the overall growth in net worth was stock market assets, which jumped $931 billion in the first three months of the year. But while stocks are more widely held than they used to be, the majority of stock holdings are still owned by the wealthiest Americans. Mutual fund accounts were up too by $539 billion. But the money in households' plain-vanilla savings accounts rose by a much less robust $96 billion. And while, it's likely that some of that small rise could be due to the fact that banks are paying little or no interests on those accounts, it's not clear where else that money went. Holdings of savings bonds, for instance, dropped slightly.

U.S. Household Worth Rises Most Since '04 - Household wealth in the U.S. climbed in the first quarter by the most in seven years, bolstered by a jump in stock prices and more stable home values. Net worth for households and non-profit groups increased by $2.83 trillion from January through March, the biggest gain since the last three months of 2004, to $62.9 trillion, the Federal Reserve said today in its flow of funds report from Washington. The jump in wealth reflected the first-quarter’s 12 percent surge in stock prices, the biggest in three years. The gain in equities has been cut by almost half this quarter, which combined with a cooling job market and smaller wage gains indicates it will take time for households to repair tattered finances.

Record Hot Winter And LTRO Sent US Household "Net Worth" Up By $2.8 Trillion In The First Quarter - As noted above, financial assets are those whose values are driven exclusively by the moves in the S&P. Sure enough, of the $2.8 trillion increase in household "net worth", $2.3 trillion came exclusively from the rise in the S&P, which in turn impacted "corporate equities", "mutual fund shares", and "pension fund reserves", which according to the just released Q1 Flow of Funds report from the Fed, rose by $900 billion, $500 billion and $800 billion in Q1 alone, bringing total household net worth to $62.9 trillion, or levels last seen in Q1 2008.  Curious why the Fed chairman has officially long given up on focusing on housing (and of course generating jobs, or worrying about inflation) as the main source of US household "tangible" net worth creation, and is mostly focusing on the Russell 2000 as per his own words? Wonder no more: as the chart below shows, as of Q1 2012, over two-thirds of household assets, or 68.8% to be specific, was financial assets, or $52.5 trillion: assets who value is dependent primarily on the S&P 500.

The US Deleveraging Has Resumed - Last quarter, upon the release of the Q4 2011 Z.1 (Flow of Funds) report, we penned "The US Deleveraging Is Now Over", because, well, it was: all the categories tracked by the Fed's Credit Market Debt Outstanding series posted a sequential increase over Q3.. As it turns out, the entire "releveraging" was merely a one time artifact of consumers relying more than ever on credit to purchase items in the holiday season. Because as the just released update from the Fed indicates, deleveraging is back with a vengeance. In Q1 the Household sector saw its total debt decline by $81 billion, or the most since Q1 of 2011, to $12.85 trillion. That this happened even as overall net worth supposedly soared by $2.8 trillion as noted in the previous article is truly disturbing, and confirms what everyone knows: not only is nothing fixed in the US economy, but the deleveraging wave continues on its merry way.

Income and Wealth Are Down in U.S. - AMERICANS are used to recessions, but they are also used to relatively fast recoveries. Now, however, is the first time in more than half a century that the average American is both earning less and worth less than four years earlier, at least after inflation is factored in. The genesis of that fall was, of course, the financial crisis and the sharp decline in the value of homes, the principal asset of most Americans, followed by the sharp drop in stock prices. The crisis led to stubbornly high unemployment that cut income for many Americans and made wage increases harder to obtain for those who did hold on to their jobs. The Federal Reserve estimated this week that the value of owner-occupied real estate rose 2.3 percent in the first quarter of this year, the first such increase since 2010. Even with that gain, those homes are now estimated to be worth $16.4 trillion, 28 percent below the peak set in 2006. Some of that reduction is caused by the fact that fewer Americans now own their homes, but much of it reflects lower values. Total household net worth rose 4.7 percent to $62.9 trillion in the quarter but was still nearly 7 percent below the peak set in 2007. That figure is exaggerated because it includes nonprofit organizations, but the Fed says there is no way to separate them out. The per capita net worth of Americans at the end of the quarter exceeded $200,000 for the first time since 2008. The picture is not quite as bleak for disposable personal income — the money Americans have left over after paying taxes. On a nominal basis, it exceeded the old record last year, and has continued to grow. But after adjusting for inflation, the average American still earns less now than six years ago.

What is Uncle Sam's Largest Asset? - Pop Quiz! Without recourse to your text, your notes or a Google search, what line item is the largest asset on Uncle Sam's balance sheet? The correct answer, as of the latest Flow of Funds report for Q1 2012, is ... Student Loans. The rapid growth in student debt has been a frequent topic in the financial press. One stunning chart that caught my attention illustrated the rapid growth in federal loans to students since the onset of the great recession. Here is a chart based on data from the Flow of Funds Table L.105, which shows the Federal Government's assets and liabilities. As I point out on the chart, the two callouts are for Q4 2007, the quarter in which the Great Recession began (December 2007) the most recent quarter on record, Q1 2012. The loan balance has risen and astonishing 332% over that timeframe, most of which dates from after the recession. This chart only includes federal loans to students. Private loans make up an even larger amount. Earlier this year the Consumer Financial Protection Bureau (CFPB) posted an article with the attention-grabbing title: Too Big to Fail: Student debt hits a trillion. The details of the private student loan market are not readily available, but CFPB plans to publish its study results on the topic this summer. But back to our quiz. Student loans may be a liability on the consumer balance sheet, but they constitute an asset for Uncle Sam. Just how big? Nearly 35% of the total federal assets, over four times the 8.6% percent for the total mortgages outstanding.

Fed’s Consumer Credit Report to Include Flow of Credit - The Federal Reserve said Monday it is updating its monthly consumer credit report to include data on the flow of credit. “The new flow data represent changes in the level of credit due to economic and financial activity, rather than breaks in the data series due to changes in methodology, source data, and other technical aspects of the estimation that affect the level of credit,” the Fed said in a statement. “Access to flow data allows users to calculate a growth rate for consumer credit that excludes such breaks.” The new data, which reflects regulatory filing changes for banks, will first be published June 7, when the Fed releases its report for April consumer credit. The Fed also will revise estimates of outstanding consumer credit dating back to January 2006 to reflect the latest data.

Consumer Debt Growth Slows - U.S. consumer credit grew at a slower pace than expected in April while March figures were revised downwards, the latest indications of headwinds facing the U.S. economy. Consumer credit grew by $6.51 billion from March to $2.551 trillion, a Federal Reserve report showed Thursday. Consumer credit expanded at a 3.1% annualized rate, the slowest monthly growth rate since October. Economists surveyed by Dow Jones Newswires had forecast a $10.2 billion increase for April from the previously reported level. In March, consumer credit grew a revised $12.37 billion from an initial estimate of a $21.36 billion gain. In the latest report, the Fed made revisions to credit data back to January 2006, reflecting new methodology and a review of the source data. Slowing job creation and concerns about Europe have raised concerns about consumers’ continued willingness to spend, and to tap new lines of credit.

Consumer Credit Misses, As Fed Magically Creates $1.5 Trillion In Net Worth Out Of Thin Air - That the just released consumer credit update for April missed expectations of a $11 billion increase is not much of a surprise. As noted earlier, the US consumer has once again resumed deleveraging: April merely saw this trend continue with revolving credit declining by $3.4 billion, offset by the now traditional increase in student and subprime government motors car loans, which increased by $10 billion. In other words, following a modest increase in revolving consumer credit in March, we have another downtick, and a YTD revolving credit number which is now negative. Obviously the government-funded student loan bubble still has a ways to go. No: all of this was expected. What was very surprising is that as noted in the earlier breakdown of the Z1, the entire consumer credit series was revised, with the cumulative impact resulting in a major divergence from the original data series. Why did the Fed feel compelled to revise consumer credit lower? Simple: as debt goes down, net worth goes up, assuming assets stay flat. Which in the Fed's bizarro world they did! Sure enough, if one compares the pre-revision Household Net Worth data (which can still be found at the St. Louis Fed but probably not for long) with that just released Z.1, one notices something quite, for lack of a better word, magical. Ignoring the March 31 datapoint which does not exist for the pre-revision data set, at December 31, household net worth magically grew from $58.5 trillion in the original data set to $60.0 trillion in the revised one!

U.S. Consumers Cut Back on Credit Card Use in April — Americans cut back sharply on their credit card purchases in April, a sign that some may be worried about the slowdown in hiring. The Federal Reserve said Thursday that consumers increased borrowing by $6.5 billion in April, just half of the March gain. The gain was driven by a $9.96 billion rise in a category that includes auto and student loans. That offset a $3.4 billion drop in credit card debt, the first decline since January. Total borrowing rose to a seasonally adjusted $2.55 trillion. That was slightly below the all-time high of $2.58 trillion reached in July 2008, eight months after the Great Recession began.Consumers had begun to use credit cards more often at the start of the year, which coincided with solid job gains this winter. But hiring slowed sharply in April and May, which may have forced some to cut back on using their plastic.

Consumer credit increase once again comes from student loans -- MarketWatch: U.S. consumers increased their debt in April by a seasonally adjusted $6.5 billion, the smallest increase since last October, the Federal Reserve reported Thursday. This is the eighth-straight monthly gain in consumer borrowing. The increase in April was just more than half of the roughly $11 billion gain expected by Wall Street economists. The report also includes revisions to reflect improvement in methodology and a review of the source data, according to the Fed. Credit growth in March was revised to a gain of $12.4 billion, compared with the initial estimate of $21.3 billion. All of the increase in April came from nonrevolving debt such as auto loans, personal loans and student loans - with these three categories combined for a $10 billion jump. Credit-card debt fell by $3.4 billion in the month after a $3.7 billion increase in March. Once again reporters fail to point out what types of nonrevolving credit caused this increase. The chart below shows who owns all the non-revolving debt. Auto loans would be bank owned or securitized. Personal loans would be provided by banks or credit unions. When it comes to consumer credit, the federal government only owns student loans - and they own a great deal of them. In fact that's where the $10bn increase is coming from (orange line below).

Trends in the Distribution of Household Income, 1979-2007 - CBO (slideshow & pdf link)

Inequality Has Increased in Income and Consumption, Economists Argue - Inequality in U.S. incomes has been matched by disparities in consumption, according to recent economic research. While economists agree that income inequality in the U.S. has steadily increased, there has been debate over whether that has also translated to an increase in consumption inequality. Some economists have long suggested that consumption, rather than income, is most indicative of how people fare in an economy. Income then, becomes more of an issue of what kind of television a household can buy versus whether or not you can afford a television. Researchers at University of Chicago, University College London and Stanford University in a paper titled “The Evolution of Income, Consumption, and Leisure Inequality in the U.S. 1980-2010” suggest that not only has consumption inequality increased, but that it has also increased alongside income inequality and that inaccurate consumption data has been at the core of the issue. “Something’s amiss,” said Erik Hurst, a professor of economics at the University of Chicago’s Booth School of Business and one of the authors of the paper. Mr. Hurst said the study tries to correct the inaccuracies of consumption data in the U.S. Bureau of Labor Statistics’ Consumer Expenditure Survey, which may be skewed by underreporting from wealthier respondents. By focusing on easily quantifiable questions like “how many cars do you own?” Mr. Hurst said that economists can get a clearer picture of consumption and consumption inequality among various income levels.

''Real'' Disposable Income Per Capita: Still Flatlining - On Friday I posted my monthly update of the year-over-year change in the Bureau of Economic Analysis (BEA) Personal Consumption Expenditures (PCE) price index since 2000. But with Friday's avalanche of economic and market news, I decided to wait until the weekend to study the PCE data I find most interesting, namely, the monthly metrics on disposable income. Let's take a close look at that PCE data to understand what the latest numbers are telling us about a key driver of the U.S. economy: "Real" Disposable Income Per Capita. What we discover is that, adjusted for inflation, per-capita disposable incomes have flatlined for the past two years and are currently at about the level first achieved in November of 2006. The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000. Do you recall what you we're doing on New Year's Eve at the turn of the millennium? Nominal disposable income is up 48.9% since then. But the real purchasing power of those dollars is up a mere 14.4%. Real DPI per capita is at a level first attained in the Autumn of 2006 and remains about 0.5% below the level at the beginning the 2007-2009 recession. In fact, this metric of consumer well-being has essentially hovered around a flatline since May of 2010.

Delinquency Rates - I was just poking around FRED as I do when I can't sleep and I discovered something which amazed me (I am often amazed by my ignorance). Non mortgage delinguency rates are low. In fact the delinquency rate on credit card loans of all commercial banks is the lowest on record (records only go back to 1991) The blue curve shows delinquency rates on credit card loans by commercial banks. The red line shows the even lower (but not quite lowest ever) delinquency rate on business loans. If I put delinquency rates for single family home mortgages or all real estate secured loans, the graph would be hard to read as they dwarf the rates I graphed (and are at record highs). Similarly the volume of total consumer loans of all commercial banks ("Total Consumer Credit Outstanding (TOTALSL), Monthly, End of Period, Seasonally Adjusted" again in blue) and of commercial and industrial loans ( "Commercial And Industrial Loans, All Commercial Banks (ACILACB), Quarterly, Not Seasonally Adjusted", again in red) has recovered sharply after the recession.

RBC June Consumer Outlook Index Falls 1.5 Points to 46.1 - U.S. consumers in June turned more pessimistic about the economy, according to a survey released Thursday. Yet the sentiment on jobs barely moved, and fewer respondents were directly experiencing a job loss. The Royal Bank of Canada said its consumer outlook index fell to 4-month low of 46.1 in June from 47.6 in May. The RBC current conditions index dropped to 35.9, also the weakest since February. The expectations index fell to 56.0 from 57.5. “While falling gas prices are helping consumers stretch their dollars further; weak jobs reports, the ongoing euro-mess and a rough few weeks in the [stock] market have provided plenty of reasons to be concerned,” the report said. Although recent government data released in early June showed weak hiring in May, consumers in the RBC survey showed little change in how they view the labor markets. The RBC jobs index stood at 53.5 this month compared with 53.6 in May.

Pulse of Commerce Index: May Gain of 0.8% In a Now Discontinued Index - The latest Ceridian-UCLA Pulse of Commerce Index (PCI), a measure of the economy based on diesel fuel consumption, is now available. Each month I've looked forward to the publication of the Pulse of Commerce Index. I'm sad to announce that today's report was posted with the accompanying message: "Please note that the May 2012 Ceridian-UCLA Pulse of Commerce Index by UCLA Anderson School of Management will be the last report issued." Two months ago Ceridian and the UCLA Anderson School of Management announced that it "will no longer publish the accompanying monthly data interpretation report. In its place, the report will include a headline regarding the overall direction of the PCI in correlation with Industrial Production and a regional summary, all of which should be familiar from previous monthly PCI reports." Here is the summary for May. The Ceridian-UCLA Pulse of Commerce Index® rose 0.8 percent in May. This third straight positive month has turned the three-month moving average around, which is now growing at a rate of 2.2 percent.  My main interest in the PCI is the three month moving average of the index adjusted for population growth over the timeframe of the index. My assumption is that diesel fuel demand is highly correlated with the population dependent on its benefits. But first let's see the raw data, with and without seasonal adjustment.

Gasoline prices declining - Oil prices have fallen sharply. West Texas Intermediate (WTI) futures are down to $82.36, and Brent is down to $96.93 per barrel. From the Indystar.com: Gasoline prices expected to continue to fall, analyst says “With significant downward pressure on oil last week, motorists will continue to see prices sliding east of the Rockies, and even the West Coast will start to get in on the action, thanks to a supply situation that appears to be turning around.” Average retail gas prices in Indianapolis have dropped by 17 cents a gallon last week, averaging $3.53 Sunday and $3.52 this morning. That’s about 40 cents lower than last month and about half a dollar cheaper than last year, according to Gasbuddy.com. The following graph shows the decline in gasoline prices . Gasoline prices are down significantly from the peak in early April, and should fall further following the steep decline in oil prices last week. Gasoline prices in the west have been impacted by refinery issues, but prices are now falling there too.

Weekly Gasoline Update: More Relief at the Pump - 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 yet again over the past week: regular is down six cents and premium is down five. This is the eighth week of declines in advance of the summer vacation season. That said, regular is still up 38 cents and premium 37 cents from their interim weekly lows in the December 19th EIA report. As I write this, GasBuddy.com still shows five states (unchanged from the previous three weeks) with the average price of gasoline above $4 but no state with the price above $3.90, down from one last week. Washington has the highest mainland prices, averaging around $4.25 a gallon, bumping California from its usual claim on this dubious distinction.

Chicago Fed Survey Sees Strong Auto Sales - U.S. auto sales are expected to climb to 14.5 million this year despite the slowdown in May, according to an influential group of industry experts polled by the Federal Reserve Bank of Chicago. The forecast for car and light-truck sales is at the high end of the existing consensus for 2012, with sales next year seen rising to 15 million, according to the median forecast among participants at an auto sector conference hosted by the Chicago Fed last week. U.S. auto production this quarter is expected to reach its highest level since 2007, and the outlook for this year compares to sales of 12.7 million in 2011, with the industry relying on domestic sales to counter slowdowns elsewhere, notably in Europe.The Chicago Fed outlook reflected the views of 25 participants at last week’s conference, which concluded Friday at the same time as the report for May sales showed a slowdown to an annualized rate of 13.7 million from the average of 14.5 million seen in the first four months of the year.

US Factory Orders Post Surprise Fall in April - New orders for U.S. factory goods fell in April for the third time in four months as demand slipped for everything from cars and machinery to computers, the latest worrisome sign for the economic recovery. The Commerce Department said on Monday orders for manufactured goods dropped 0.6 percent during the month. The government also revised its estimate for new orders in March to show a steeper decline. Economists had forecast orders rising 0.2 percent in April. The report showed broad weakness in a sector that has carried the economic recovery, adding to a growing body of soft economic data. (…) Outside transportation, orders dropped 1.1 percent, with machinery down 2.9 percent and orders for computers and electronics off by 0.8 percent. Orders for non-defense capital goods excluding aircraft — seen as a measure of business confidence and spending plans — dipped 2.1 percent in April.

U.S. Factory Orders Fall 0.6% in April — Companies placed fewer orders to U.S. factories for the second straight month and a key measure that tracks business investment fell, adding to evidence that the economy is weakening. The Commerce Department says orders for factory goods fell 0.6 percent in April from March. Demand for core capital goods, viewed as a proxy for business investment plans, fell 2.1 percent in April following a 2.3 percent decline in March. Even with the declines, factory orders are still well above their recession lows. Orders in April totaled $465.98 billion, up 38.7 percent from the recession low reached in March 2009. Orders are still 3.1 percent below the peak reached in December 2007, the month the recession began.

Factory Orders Add Insult To Economic Injury - Nobody could have predicted that today's April Durable Goods number (and key component of where Q2 GDP is headed) just over two weeks from the FOMC's June 20 meeting, will be a slaughter. NOBODY. Printing at -0.6%, the number was a huge miss to expectations of a 0.2% rise, and is the 3rd drop in the last 4 months. The previous number was also revised lower from -1.5% to 2.1% so at least it rose. Still, this was miss number 5 out of the past 7 reports. Excluding transportation, new orders plunged 1.1%, after falling another 0.7% in march.. The main reason for the headline collapse: a 21.5% plunge in defense orders. As Bloomberg's Rich Yamarone said, "Crummy" start for 2Q investment component of GDP report as shipments of nondfense capital goods ex-aircraft fell 1.5%. Expect Q2 GDP forecast cuts from Goldman et al within minutes: we expect Hatzius to trim his 2.1% Q2 GDP estimate to about 1.8%.

Wholesalers’ Inventories Jumped in April - Inventories at U.S. wholesalers increased in April as stockpiles of cars, machinery and other long-lasting goods grew. The inventories of U.S. wholesalers increased by 0.6% from the prior month to a seasonally adjusted $483.50 billion, the Commerce Department said Friday. Economists surveyed by Dow Jones Newswires had forecast a 0.5% gain. Sales for wholesalers were up 1.1% in April to $415.02 billion. Wholesalers must stock the pipeline to keep up with end demand. Despite weak job creation and worries about Europe, personal spending has been a bright spot for the U.S. economy so far this year. The government’s gross domestic product report last week showed consumer spending rose 2.7% during the January-to-March period, the best quarterly gain since 2010. Separate data showed personal spending increased 0.3% in April from the prior month. But the economy as a whole slowed to a 1.9% growth rate in the first quarter, from a 3.0% annualized gain in the final quarter of 2011, partially because the pace of inventory increases slowed. According to Friday’s report, restocking of automobiles, up 1.7%, and machinery, up 2.4%, helped drive the overall inventory gains in April.

Trade Deficit declines in April to $50.1 Billion - The Department of Commerce reported:  [T]otal April exports of $182.9 billion and imports of $233.0 billion resulted in a goods and services deficit of $50.1 billion, down from $52.6 billion in March, revised. April exports were $1.5 billion less than March exports of $184.4 billion. April imports were $4.1 billion less than March imports of $237.1 billion. The trade deficit was above the consensus forecast of $49.3 billion. The first graph shows the monthly U.S. exports and imports in dollars through April 2012. Exports decreased in April. Imports decreased even more. Exports are 11% above the pre-recession peak and up 4% compared to April 2011; imports are 2% above the pre-recession peak, and up about 6% compared to April 2011. The second graph shows the U.S. trade deficit, with and without petroleum, through April.  The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. Oil averaged $109.94 per barrel in April, up from $107.95 in March. Import oil prices will probably start to decline in May. The trade deficit with China increased to $24.6 billion in April, up from $21.6 billion in April 2011. Once again most of the trade deficit is due to oil and China.  Exports to the euro area were $16.3 billion in April, down from $17.1 billion in April 2011, so the euro area recession appears to be a drag on US exports.

Breaking Down Narrowing U.S. Trade Deficit -  WSJ - Wells Fargo Global Economist Jay Bryson talks with Jim Chesko about this mornings report showing that the U.S. trade deficit narrowed.

‘Sugar High’ of Weaker Dollar Won’t Help Exporters in Long Run - The global slowdown is finally hitting U.S. exports. The Commerce Department reported Friday that exports fell 0.8% in April, the first drop in five months. Shipments to the euro zone plunged 9.8%. A larger fall in imports narrowed the total U.S. trade deficit to $50.06 billion, but the gap is higher than its first-quarter average. When exports get crimped, a common reaction from politicians and manufacturing groups is to call for a cheaper dollar. A weaker currency makes a country’s products cheaper on global markets–a reason why China micromanages the value of the yuan. A weak currency, however, isn’t in the cards for the U.S. The dollar is expected to continue to strengthen as investors seek safety amid no solution to the euro-zone crisis and worries about the global slowdown. But a strong dollar can be a positive to U.S. companies because it will force them to remain competitive in the long run, argues Michael Drury, chief economist of McVean Trading & Investments. Mr. Drury calls a cheap currency “a sugar high” that gives a temporary price advantage but doesn’t correct the underlying problems that are eroding the currency’s value in the first place

AAR: Rail Traffic "mixed" in May - Once again rail traffic was "mixed". This was mostly due to the sharp decline in coal traffic (mild winter, low natural gas prices). Most commodities were up, such as building related commodities such as lumber and crushed stone, gravel, sand. Lumber was up 16.9% from May 2011. From the Association of American Railroads (AAR): AAR Reports Mixed Rail Traffic for May The Association of American Railroads (AAR) today reported U.S. rail carloads originated in May 2012 totaled 1,392,352, down 40,405 carloads or 2.8 percent, compared with May 2011. Intermodal volume in May 2012 was 1,178,312 trailers and containers, up 39,696 units or up 3.5 percent, compared with May 2011. The May 2012 weekly intermodal average of 235,662 trailers and containers is the highest May average in history. This graph shows U.S. average weekly rail carloads (NSA).  U.S. rail grain carloads totaled 99,372 in May 2012, down 11.8% (13,322 carloads) from May 2011. Grains are down due to fewer exports. The second graph is just for coal and shows the sharp decline this year. From AAR: least. Coal carloads on U.S. railroads in May 2012 were down 12.1% (74,469 carloads) from May 2011, equivalent to 573 130-car coal trains. ... It would take a really, really hot summer for coal consumption in 2012 to come close to what it was in 2011.  The third graph is for intermodal traffic (using intermodal or shipping containers): Intermodal traffic is now at peak levels.

ISM Non-Manufacturing Index indicates slightly faster expansion in May - The May ISM Non-manufacturing index was at 53.7%, up from 53.5% in April. The employment index decreased in May to 50.8%, down from 54.2% in April - the lowest level since November 2011. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: May 2012 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in May for the 29th consecutive month, . "The NMI registered 53.7 percent in May, 0.2 percentage point higher than the 53.5 percent registered in April. . The Non-Manufacturing Business Activity Index registered 55.6 percent, which is 1 percentage point higher than the 54.6 percent reported in April, reflecting growth for the 34th consecutive month. The New Orders Index increased by 2 percentage points to 55.5 percent, and the Employment Index decreased by 3.4 percentage points to 50.8 percent, indicating continued growth in employment at a slower rate. The Prices Index decreased 3.8 percentage points to 49.8 percent, indicating lower month-over-month prices for the first time since July 2009. According to the NMI, 13 non-manufacturing industries reported growth in May. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

US service companies expanded in May -  U.S. service companies, which employ roughly 90 percent of the work force, grew at a slightly faster pace in May. It marked their 29th straight month of expansion. The Institute for Supply Management said Tuesday that its index of non-manufacturing activity edged up to 53.7 last month from an April reading of 53.5. The May reading was slightly below the long-run average for the index of 53.9. A reading above 50 indicates expansion. The new-orders component of the index rose, suggesting that demand will be solid in coming months. But there was concern that the employment component, though still signaling expansion, slipped to the lowest reading since November. Jennifer Lee, senior economist at BMO Capital Markets, noted that only 13 of 18 industries reported growth in May. That was the smallest total since the number stood at 12 in January. But she said it was a relief that the economy's non-manufacturing sector "didn't take as much of a hit" as manufacturing did this spring.

Vital Signs: Muted May Hiring for Services Businesses - U.S. services businesses throttled back hiring in May. The Institute for Supply Management’s seasonally adjusted Services Employment Index was 50.8 in May, down 3.4 points from the previous month. Readings above 50 indicate expansion. May’s slide follows a smaller drop in April, the biggest two-month drop in this index since December 2008. Overall activity among U.S. service businesses increased slightly last month.

Vital Signs: Turning Less Productive - The economy turned less productive during the first quarter. Nonfarm business productivity, the output per hour of all workers, fell at a 0.9% annual rate in January through March, the biggest slide in a year. The drop in productivity helps explain the economy’s sluggish 1.9% pace of growth during that period. Labor costs rose only 1.3%, a sign the economy is losing some steam.

No Mr. President, The Private Sector Isn’t Doing Fine - President Obama held an impromptu press conference this morning that was obviously meant to address the economic situation in the country, and the world. I can’t say that he said anything new, or proposed any new ideas, other than bringing up the “jobs bills” that everyone knows aren’t going to make their way through Congress any time soon once again. It was something else the President said, though, that is getting attention this afternoon: President Obama told reporters that “the private sector is doing fine,” as he attributed the high unemployment rate to a lack of government jobs. “Overall, the private sector has been doing a good job creating jobs,” Obama told reporters this morning. “The big challenge we have in our economy right now is state and local government hiring has been going in the wrong direction,” he explained, citing for Congress to avert the layoffs of police, firefighters, and other public employees that have taken place at the state level. As James Pethokoukis notes, the President seems to have a very odd definition of the word “fine”: Private-sector jobs have increased by an average of just 105,000 over the past three months and by just 89,000 a month during the entire Obama Recovery. In 1983 and 1984, during the supply-side Reagan Boom, private sector jobs increased by an average of 292,000 a month. Adjusted for population, that number is more like 375,000 private-sector jobs a month.

Another lousy jobs report -- is a second recession on the way? - The economy added only 69,000 jobs in May—only about half of what is needed to keep up with natural population growth. The unemployment rate rose to 8.2 percent. In the weakest recovery since the Great Depression, nearly the entire reduction in unemployment since October 2009 has been accomplished through a significant drop in the percentage of adults working or looking for work. Some of these folks returned to the labor market in May; consequently, unemployment ticked up a tenth of a percentage point. Growth slowed to 1.9 percent in the first quarter from 3 percent the previous period, and was largely sustained by consumers taking on more car and student loans, business investments in equipment and software, and some inventory build. The housing market is improving and that should lift second quarter residential construction a bit but overall, the economy and jobs growth should remain too slower to genuinely dent unemployment. The May jobs report indicates growth could be even slower in the second quarter, and the economy is dangerously close to stalling and falling into recession.

The Jobs Disaster - This morning’s Employment Situation Report from the Bureau of Labor Statistics was bad news masking even worse news. The economy added 69,000 jobs in May, far below the consensus expectation of economic forecasters. And the consensus expectation wasn’t even particularly optimistic. Few thought we could repeat the 200,000-plus jobs per month that we were adding in the winter, and absolutely nobody dared hope for the kind of 300,000-400,000 monthly job increases that would be associated with a traditional bounce-back economic recovery. But 140,000 or 150,000 new jobs would at least have continued to take a bite out of unemployment. Instead we got 69,000—basically flat with population growth. Except it’s even worse. With each new monthly data release, the BLS revises the previous two months’ data, and these revisions were devastating. April’s employment growth was revised down from a decent 115,000 jobs to an anemic 77,000, and March’s healthy 154,000 got cut down to 143,000. Over the winter when job growth was strong and optimism was running high, old data were regularly revised upward—typically a sign of an economy with some strong growth patches that are being missed in simple surveys. Downward revisions are bad news, typically meaning that new firms are being formed at an abnormally slow level. There’s simply no good news anywhere in this report.

Some Thoughts on the Employment Release - The employment release for May has raised concern, and rightly so, amongst policymakers. Figure 1 shows that nonfarm payroll employment growth has tailed off to 0.6% m/m, and 0.9% on a three month basis (both annualized, in log differences). Other labor indicators from the household survey are slightly more positive. Figure 1 also presents the household series employment series adjusted to conform to the nonfarm payroll concept. Note that it is both higher in level, and in m/m growth (at 3.6% in May). However, this series exhibits greater volatility due to its smaller survey size, so it’s useful to note that the 3 month growth rate is  -1.5%. Over the past year, the adjusted series has grown 1.7%, compared to 1.3% for the official NFP series. The establishment series will be benchmark-revised in the January release, while the household research series will be revised when new population controls are incorporated. I tend to focus on the establishment series because the sample is larger. However, the household survey does provide some interesting insights this time around. The most important insight, gleaned from Figure 2, is the reminder that the unemployment rate is the ratio of two variables, employment and the labor force.

Deconstructing Non-Farm Payrolls - We cannot say we were completely surprised by the May employment report. The 2008/9 contraction was the third in a string of asset price recessions suffered by the U.S. The path to recovery from bubble-induced recessions is more arduous and more prolonged than downturns arising from an excess of inventories. Until the 1990/91 recession, prior post-war U.S. economic downturns were generally induced by what economist call "involuntary inventory accumulation". As sales slow or contract, inventories pile up forcing businesses to cut back production. Unemployment rises, incomes and investment fall until excess inventories are worked down — at which point firms re-start idled production lines, in the process kicking off the next economic expansion. When the overhang is in the form of houses, office buildings or miles of fiber optic cable (as in the 2000/1 tech bubble recession), the inevitable adjustment process takes years, not just a matter of months. With a glut of long-lived assets, businesses, government or individuals have little incentive to invest in new hotels, hospitals or homes. Throw into the mix, worries about the health of the financial system, strained government finances and uncertainty regarding future tax policy, a reluctance to commit to new projects becomes an urge to remain liquid and hold cash regardless of the opportunities forgone. This is the situation we currently find ourselves.

Sluggish Growth and Payroll Employment: An Update - Last November I posted a graph showing two possible paths for payroll employment if sluggish growth continued. I've received several requests to update that graph. The two rates were 125,000 jobs added per month, and 200,000 jobs added per month. Since I posted that graph, payroll growth has averaged 172,000 jobs per month. Also, with the annual benchmark revision, the previous year was revised up - so at 125,000 per month from November 2011, it would have taken 48 months just to get back to the pre-recession level of payroll employment. From the current level, at 125,000 per month, it will take an additional 40 months (Sept 2015). At 200,000 payroll jobs per month, it will take an additional 25 months (June 2014) to get back to the pre-recession level from the current level. The following two graphs show these projections from last November. The dashed red line is 125,000 payroll jobs added per month. The dashed blue line is 200,000 payroll jobs per month. And this doesn't include population growth and new entrants into the workforce (the workforce has continued to grow). The second graph shows the same data but aligned at peak job losses.

Why is Employment Growth Still Disappointing and When Will it be “Normal” Again? - There are several combined factors that are dragging down the U.S. economy and labor market:

• 1) Government spending is shrinking. The hope was that the federal stimulus would create jobs while the private sector was in recession, and that this federal stimulus would eventually wind down while the private sector would pick up. This wind-down has occurred, but the private sector is not generating enough jobs by itself yet. At the same time, state and local governments, which have to balance their budget every year, have been cutting back for several years now, as a result of the decline in their tax revenues.
• 2) The housing market has barely started recovering, and employers in related industries are barely adding jobs. This typically strong driver of growth during expansions is missing in this economy.
• 3) The global economy is weak. Many countries in Europe are in recession, and the main emerging countries’ economies are significantly slowing down. As a result, U.S. exports and revenues of multinationals and overall consumer and business confidence are suffering.
• 4) Commodity prices are now at a much higher level than two-to-three years ago. This has caused large price increases in food, energy, and other commodity related products.

The skills gap: Still trying to separate myth from fact - Atlanta Fed's macroblog - Peter Capelli has looked at the skills gap explanation for labor market weakness and sees more myth than fact:"Indeed, some of the most puzzling stories to come out of the Great Recession are the many claims by employers that they cannot find qualified applicants to fill their jobs, despite the millions of unemployed who are seeking work. Beyond the anecdotes themselves is survey evidence, most recently from Manpower, which finds roughly half of employers reporting trouble filling their vacancies. "The first thing that makes me wonder about the supposed 'skill gap' is that, when pressed for more evidence, roughly 10% of employers admit that the problem is really that the candidates they want won't accept the positions at the wage level being offered. That's not a skill shortage, it's simply being unwilling to pay the going price." To some extent, the issue is semantic. In the language of economists, Capelli is defining skill as the possession of generalized human capital, while businesses are defining skill as the possession of firm- or job-specific human capital. In more familiar language, Capelli appears to be focused on innate skill levels and education, while businesses are looking for the types of skills that would be attained through past on-the-job training. In even more colloquial language, Capelli wants businesses to appreciate book-learning, and businesses prefer those who have already survived the school of hard knocks.

Skills Mismatch Playing Just Small Role in Weak Job Market, Chicago Fed Research Shows - Is the job market recovering so slowly because the overall economy is still weak? Or do companies want to hire but can’t find the workers they need? It’s one of the most hotly debated questions among economists, corporate executives and others trying to explain the halting pace of hiring since the recession ended three year ago. The answer carries significant policy implications: If the basic problem is the economy, then the conventional policy response would be to try to kick start demand through monetary or fiscal stimulus (or a combination of the two). But if there are deeper structural problems — such as a disconnect between the skills workers have and the ones employers need — then traditional stimulus measures won’t do much good. Economists at the Chicago Fed are the latest to weigh in on the debate in a new paper titled, “Is there a skills mismatch in the labor market?” Their conclusion: Maybe, but not a big one.

Much Ado About Nothing: the Labor Mismatch Problem - Is the ongoing weakness in the labor market the result of a large skill-mismatch problem? Many observers think so.  David Altig of the Atlanta Fed, however, says based on the evidence the answer is no: Despite the fact that we see some evidence consistent with skill mismatch, it is far from clear that this issue is the smoking gun that explains the current anemic state of job growth...we have yet to find much evidence that problems with skill-mismatch are more important postrecession than they were prerecession. We'll keep looking, but—as our colleagues at the Chicago Fed conclude in their most recent Chicago Fed Letter—so far the facts just don't support skill gaps as the major source of our current labor market woes. A far easier explanation that falls out of the data is that there is insufficient aggregate demand.  Let me be clear here. By insufficient aggregate demand I mean a lack of aggregate nominal spending created by an excess demand for retail and institutional money assets (i.e. the safe asset shortage problem).  This is a problem the Fed could solve through better management of expectations.  The Fed has failed miserably here and is therefore indirectly responsible for the labor market weakness.  Recent posts by Mike Konczal and myself provide some of the evidence for the insufficient aggregate demand view. Here are a few highlights from those posts.

Hey, That Famous 'Skills Shortage' You've Heard About? It's a Myth - The issue of whether our workers are talented enough and clever enough for the jobs that actually are out there is an enormously important one. If our workers don't have the right skills, then there's very little policymakers can do to bring down unemployment, because it's a "structural" crisis. More monetary or fiscal stimulus won't make us more skilled. The structural story -- what will all those construction workers and ex-mortgage brokers do now? -- certainly has intuitive appeal. All it needs is some evidence.  We would expect wages to be rising much faster in sectors where employers can't find enough qualified workers if a skills mismatch really was holding the economy back. But that hasn't really been the case. The chart below from the Chicago Fed tries to quantify how big an impact there's been from a skills shortage. The answer: not much.

The Structural Obsession - Krugman - The urge to declare our unemployment problem “structural” — a supply-side problem of some kind, not solvable by the “simplistic Keynesian” notion of just increasing demand — has been quite something to behold. It’s rapidly entering the category of a zombie idea, which just keeps shambling forward no matter how many times it has been killed. Basically, structural stories come in two variants: geography and skills. The geography story says that workers are in the wrong places; the skill story that they lack the right knowhow. At this point both stories have been thoroughly debunked. Unemployment is high almost everywhere. And via Mark Thoma, the very cautious Dave Altig looks at recent studies and concludes that we’ve been pretty sympathetic to structural explanations for the slow pace of the recovery. Nonetheless, we have yet to find much evidence that problems with skill-mismatch are more important postrecession than they were prerecession. Am I totally certain that the problem isn’t structural? Hey, I’m not totally certain of anything! But there really is no evidence, none at all, for a story that nonetheless gets asserted as absolute fact in op-ed after op-ed.

Will Jobs Be Reshored from China?  - China is becoming a less attractive place for off-shoring of manufacturing. But the result isn't likely to be a large movement of jobs back to the United States. Instead, globally mobile manufacturers are likely to seek out alternative low-cost destinations. Michel Janssen, Erik Dorr, and Cort Jacoby of the Hackett Group discuss these issues in a report called "Reshoring Global Manufacturing: Myths and Realities." The subtitle is: "By next year, China’s cost advantage over manufacturers in industrialized nations and competing low-cost destinations will evaporate." The report is freely available here, with free registration.  I was struck by some comments in the report about Apple's labor costs with the iPad and outsourcing to China. They emphasize that in some industries like furniture manufacturing, cost matters most. But in other industries, product quality, protection of intellectual property, time to market and ramp-up speed may matter more."The Chinese labor-cost component of an entry-level iPad retailing for $500 is estimated at $10, or 2% of revenue, while the profit margin is estimated at $150, or 30% of revenue. If Apple were to move production to the USA, and if one assumes that assembly costs would triple (to $30), it is conceivable that Apple could convince customers to pay for a large portion of the price increase based on the appeal of a “made in the USA” product."

Conference Board Index Offers Hope for Job Growth - Despite government reports of weaker growth in payrolls, a compilation of U.S. labor indicators continues to gain ground, according to a report released Monday by the Conference Board. The board said that its May employment trends index increased 0.29% to 108.34 from a revised 108.03 in April, first reported as 108.04. The May index is up 7.6% from a year ago. The index suggests no further slowing in employment after the recent weakness in job growth, said the report. “Employers have been very cautious in hiring in the past two months, but at the moment, economic activity in the U.S. is just strong enough to require a modestly growing workforce,”

Jumpstart Nation: The Clinton Global Initiative Tackles America’s Jobs Crisis - The Clinton Global initiative was created in 2005 to “inspire, connect, and empower a community of global leaders to forge solutions to the world’s most pressing challenges.” Seven years ago, when developed economies were still growing at a healthy clip, Clinton’s organization was focused mainly on the many problems of the developing world. But the financial crisis of 2008 fundamentally rearranged the world, and now one of it’s most pressing problems is over-indebtedness, anemic growth and unemployment in some of the world’s richest countries. In response to these issues, former President Clinton formed Clinton Global Initiative America in 2011, and the organization launched its second annual meeting yesterday in Chicago. The forum got right down to business with it’s first session “Jumpstart Nation: Getting America Back to Work.” TIME’s own Fareed Zakaria opened the forum, declaring his optimism at the chances of a full recovery of the American economy. He cited the many economic crises that America has weathered since his immigration to the U.S. in the 70s. After each downturn – from the stagflation of the 70s through the dot-com bubble bursting ten years ago — America regained it’s strength in both employment and output terms.

Unemployment Benefit Applications Drop to 377,000 - The number of people applying for U.S. unemployment benefits fell last week, suggesting modest job growth after three months of weak hiring. The Labor Department said Thursday that applications for weekly benefits dropped by 12,000 to a seasonally adjusted 377,000. That’s down from an upwardly revised 389,000 the previous week. It was the first decline in five weeks. The four-week average, a less volatile measure, rose by 1,750 to 377,500, the highest level in a month.

Jobless Claims Data (Still) Suggest Modest Job Growth Ahead - Today’s weekly jobless claims report seems to be telling us that the labor market isn’t fatally wounded. New filings for unemployment benefits fell 12,000 last week to a seasonally adjusted 377,000. That’s not far from the post-recession low of 361,000 in mid-February, when optimism was considerably stronger about the economy's prospects. One good report in the weeks ahead could take us to a new low and revive expectations that the future looks okay after all. Analysts are inclined to think otherwise, however, courtesy of the disappointing employment report for May. But today’s claims update suggests that maybe, just maybe, it’s too soon to write the obituary for economic growth. The operative question: If recession risk is high and rising, would the danger be conspicuous in jobless claims? If the answer is “yes” (and it probably is), then there’s at least one good reason for thinking that the business cycle may not be destined to turn dark just yet. You can’t rely on one indicator for reading the broad economic trend, but in the grand scheme of looking for major turning points in the business cycle there’s a strong case for expecting jobless claims to drop early clues about what’s coming.

Initial Claims Beat Expectations, With Prior Revised Higher, As Whopping 105 Thousand Lose Extended Benefits - While it is a number which nobody will care about today, especially if it is better than expected, initial claims printed at 377K on expectations of 378K, the first beat of expectations in 5 weeks. Of course, the claims number next week will be revised to over 380K. Why? Because, as now happens every single week, last week's initial claims number was revised higher from 383K to 389K. As a reminder, last week this number was expected to print at 370K. So only a 19K miss when all is said and done. But at least the mainstream media has its bullish for general consumption headline: "Initial Claims drop by 12,000" even as market participants realize this is still QE-promoting. Continuing claims printed at 3,293K, missing expectations of 3,250K, and down from an upward, of course, revised 3,259K. But the most disturbing observation is that in one week alone, a whopping 104,600 people hit the 99-week cliff, and stopped collecting extended unemployment benefits, the most since December 2011, as those on EUCs dropped by -45,808 while those on Extended benefits dropped by a astounding -58,829.

Where Are the Jobs??$#!?!!  - That’s the good question that led off an interview I did today with Alex Witt on MSNBC. My answer is largely the same as it’s been, and much what you’d expect from those of us who’ve long focused on the demand side of the equation:

• –the job market is still suffering from weak labor demand, which is itself derived from still-relatively-weak demand for the goods and services our firms produce;
• –we’ve never really hit the virtuous cycle where growth begets jobs, begets paychecks, begets rising consumer demand, feeding back into growth, jobs, etc.;
• –instead we’ve been stuck in a more vicious cycle where employers have been able to meet what demand there has been with only slight additions to their workforces;

Whenever this discussion of jobs comes up, I strongly recommend starting from the place that a) we’re a 70% consumption economy (71.2%, most recently, in fact) and b) labor demand is derived demand, i.e., derived from consumer/investor demand).  If households’ balance sheets are still fragile, if most workers’ real wages and most families’ real incomes aren’t going anywhere (see figure), if home values remain depressed (although they’ve pretty much stopped falling, which is good), if investors are largely sitting it out waiting for the virtuous cycle to get started—don’t expect to see much consistent strength on the jobs front.

The Growing Unemployed: A Case of Benign Neglect - The high unemployment rate ought to be a national emergency. There are millions of people in need of jobs. The lost income as a result of the recession totals hundreds of billions of dollars annually, and the longer the problem persists, the more permanent the damage becomes. Why doesn’t the unemployment problem get more attention? Why have other worries such as inflation and debt reduction dominated the conversation instead? As I noted at the end of my last column, the increased concentration of political power at the top of the income distribution provides much of the explanation.Consider the Federal Reserve. Again and again we hear Federal Reserve officials say that an outbreak of inflation could undermine the Fed’s hard-earned credibility and threaten its independence from Congress. But why is the Fed only worried about inflation? Why aren’t officials at the Fed just as worried about Congress reducing the Fed’s independence because of high and persistent unemployment? Similar questions can be asked about fiscal policy. Why is most of the discussion in Congress focused on the national debt rather than the unemployed? Is it because the wealthy fear that they will be the ones asked to pay for monetary and fiscal policies that mostly benefit others, and since they have the most political power their interests – keeping inflation low, cutting spending, and lowering tax burdens – dominate policy discussions?

The US economy and jobs: the basic arithmetic - Dean Baker - Last week's May jobs numbers were bad news, regardless of how you look at them. Job growth over the last three months has averaged slightly less 100,000 a month, roughly the pace needed to keep pace with labor force growth. The unemployment rate ticked up to 8.2% and the employment to population ratio is still just 0.4 percentage points above its trough for the downturn. And real wages almost certainly declined in May. However bad this story is, the usual gang of pundits cited in the media had their usual burst of over-reaction. There were many talking of a worldwide slowdown and a possible recession. This is a serious misreading of the jobs report and other recent economic data. The main story of the apparent weakness of the last three months is the apparent strength of the prior three months. In other words, the story is still the weather. The relatively strong growth in jobs and other measures that was the result of a relatively mild winter meant that we would see weaker growth than normal in the spring. If companies hire people because demand picked up in February rather than April, then they will not be doing as much hiring in the spring as would ordinarily be the case. The same story applies to consumer demand.

You Can’t Blame The Economy On The Weather - The pathetic jobs report¹ has ushered in a whole new blame game on the weather². January through March 2012 had the warmest temperatures on record for the United States.  Most economic data, including the employment report, is seasonally adjusted. The algorithm is called X-12-ARIMA³ and is maintained by the Census. Without going into the mathematics, this algorithm takes past cyclical patterns that are predictable and adjusts those spikes, attributed to the seasons. The algorithm takes out of an economic data series those wild swings, so one can more easily compare real growth instead of, say, fall harvesting or Christmas hiring. Construction employment, for example, is highly cyclical due to the nature of the work. Below is a graph of not seasonally adjusted construction employment. The below graph shows seasonally adjusted payroll jobs in comparison to the not seasonally adjusted payrolls. The maroon line is seasonally adjusted, the blue line is not. See how the blue line oscillates around the red? Seasonal adjustments act as smoothing filters, so one can more easily see real growth, not just the change of the seasons.That said, real GDP is seasonally adjusted and for the warmest months on record we had only 1.9%⁴ Q1 real GDP growth. Okun's law⁵ is a loose correlation of overall economic growth to employment. Without going into Okun's law nitty gritty⁶, we have GDP growth that is classified as treading water. We simply do not have enough economic growth to create jobs.

America's Transition To A Part-Time Worker Society Accelerates As Part-Time Jobs Hit Record - Back in December 2010 Zero Hedge was the first to point out what is easily the most troubling characteristic within America's evaporating labor force: its gradual transition to a part-time worker society. We elaborated on this back in February when we noted that the quality assessment of US jobs indicates that this most disturbing trend is accelerating. Finally, yesterday, the BLS' latest jobs report confirmed that our concerns have been valid all along: as of May, part-time jobs just as disclosed by the Bureau of Labor Statistics hit an all time high, over 28 million! These are people who traditionally have zero job benefits, including healthcare and retirement, and which according to the BLS "work less than 35 hours per week." In other words, as little as one hour per week of "work" is enough to classify one a part-time worker. More disturbing: the increase in part-time jobs in May compared to April: 618,000, or the fifth highest on record. It gets better: when added with the 508,000 increase in part-time jobs in April, this is the largest two month increase in part time-jobs in history. Which means of course that full time jobs in May must have declined: sure enough, at a -266,000 drop in full time jobs, the quality composition of the NFP report was just abysmal and makes any reported "increase" in those employed into a sad farce.

Employment Report Graphs: Construction, Duration of Unemployment and Diffusion Indexes -The first graph below shows the number of total construction payroll jobs in the U.S. including both residential and non-residential since 1969. Construction employment decreased by 28,000 thousand jobs in May, seasonally adjusted. Not seasonally adjusted, construction employment increased 169,000 in May. This suggests some weather related "payback" in May, as opposed to a new round of job losses in construction.  This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. All categories are generally moving down. The less than 5 week category is back to normal levels, but the other categories remain elevated. Unfortunately the long term unemployed increased to 3.5% of the labor force in May. This was offset by a decline in the '15 to 26 weeks' category. Apparently a number of people just moved from the '15 to 26 weeks' category to the '27 week or more' category. Diffusion indexes are a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS. If there are employment gains, the more widespread, the better - even if job growth is slow. The BLS diffusion index for total private employment was at 59.4 in May, up from 55.6 in April. For manufacturing, the diffusion index increased to 54.3, up from 53.7 in April.

Behind the Numbers: Slow Job Growth is a Problem; Long-term Unemployment is a Crisis - Any way you slice it, Friday’s jobs numbers were a huge disappointment. Forecasters were expecting 150,000 jobs added, and even that figure would have represented mediocre job growth. But the actual number of 67,000 new jobs isn’t even enough to keep up with population growth. Combine that with the downward revisions of the March and April numbers, and what we have on our hands is a sputtering recovery. But perhaps the most depressing aspect of last week’s report – and the recovery in general – is the huge number of long-term unemployed workers. Defined by the Bureau of Labor Statistics, someone is considered “long-term” unemployed if they have been jobless for 27 weeks or longer. According to Friday’s Employment Situation Report, the total number of long-term unemployed is at a staggering 5.4 million Americans, or 42.8% of the total unemployed. The effects of long-term unemployment are as numerous as they are pernicious. Dean Baker and Kevin Hasset, respectively of the progressive Center for Economic Policy and the conservative American Enterprise Institute, outlined many of these repercussions in a recent New York Times article. According to Baker and Hasset, problems plaguing the long-term unemployed include higher incidents of disease, suicide and lower future earnings for those workers and their children.

The Beveridge Curve and the Long-Term Unemployed - It's well known that the Beveridge curve relationship (the negative correlation between the unemployment rate and the vacancy rate) shifted out as the unemployment rate began to come down from its peak of 10% in late 2009. The first chart shows the most recent update. The data in the chart runs up to March 2012, the latest date for which we have JOLTS data. The unemployment/vacancies data from December 2000 to December 2007 (the beginning of the last recession) trace out what is apparently a stable Beveridge curve. As well, the data from December 2007 through October 2009 is consistent with that stable Beveridge curve, but the post-October 2009 observations make it appear that the relationship has shifted. If we had thought that the 2000-2007 Beveridge curve was structural, we would have predicted an unemployment rate of 5.25-5.5%, conditional on the observed vacancy rate in March 2012. But the actual unemployment rate in March 2012 was 8.2%. Suppose that we disaggregate, and look for Beveridge relationships in terms of duration of unemployment. The second chart is a scatter plot of the vacancy rate vs. the unemployment rate for those unemployed less than 5 weeks (those unemployed less than five weeks divided by the total labor force).

Fate of Non-College High School Grads -- There is a heartbreaking report out this morning from some social scientists at Rutgers university that presents results from a survey of recent US high-school grads who have not gone to college.  The above graph summarizes the main point - for the population that graduated post-recession (the right column), only a little over 20% are being paid for something full time (either employment, self-employment, or in the military - the green bars).  Another slightly over 20% are working part-time (blue bars), and the rest are not doing any paid work (red/pink bars).  For the immediate pre-recession population, things are better, though hardly good.Of those who do have jobs, very few feel that they are on any kind of a path to a good future:

WaPo’s Glenn Kessler Creates Stupid, Irrelevant Employment Chart, Then Misreads It - Leave it the Washington Post’s Mr. Pinocchio, Glenn Kessler,  to misinform readers again by providing useless, irrelevant information and then misreading it.   Today’s contribution to the dumbing of America is a chart the wizards of WaPo created to compare the job creation performance of Mitt Romney with that of President Obama.  What? Now the first thing you must be asking yourself is, how is such a comparison even possible?  When did the two men hold comparable jobs or have comparable power to affect employment?  Uh, never.  When did they preside over similar economies?  Uh, never, When did they even preside over the same economy? Uh, never.   In the periods being compared, were the economic conditions similar?  Uh, nope. So right from the start, you know that this is likely to be a dubious comparison at best, and in the hands of the Washington Post’s “fact checker,” a comic tragedy.  We are all about to become dumber.

Government regulation that works - The federal Occupational Safety and Health Administration (OSHA) is back in the news after the Government Accountability Office criticized the agency for taking too long to adopt new safety regulations. The GAO report says the delays compromise worker safety.OSHA has a long history of being attacked from all sides. But don’t be fooled. OSHA workplace inspections protect the health and safety of America’s workers. We now have the data to prove it.Workplace inspections not only improve safety, they cause no discernible damage to employers’ ability to stay in business and no reductions in sales or credit ratings, according to our research. Our analysis focused on the inspections that California’s Cal/OSHA conducted at random in dangerous industries, so our results are like those of a true randomized experiment — the most convincing type of evidence when evaluating a program. Cal/OSHA’s randomized inspections did what they were supposed to do. They reduced the number of injuries leading to workers’ compensation claims by around 9% and lowered the medical expenses and wage replacement paid from those claims by 26%. On average, inspections lowered employers’ medical costs and lost earnings due to workplace injuries by about $350,000 over the next few years.

The Not So Golden Years, Revisited - Over the years, debate has waxed and waned over the effects of the minimum wage and/or immigration policy on employment, particularly teen/youth employment. When the issue flared up most recently, a couple of years ago, I posted a rebuttal to that argument here, my point being that it was – at least this time around – crappy demographics and a lousy economy that had older workers staying in – and re-entering the labor market to seek – jobs far longer than we’d seen previously: What about demographics — an aging boomer population — and a crappy economy that has  the 55+ cohort postponing retirement and consequently crowding out the younger generation (parents keeping their own kids/grandkids out of the job market, as I put it a while back).  The data is there for all who choose to explore it. That said, why not revisit the issue of youth employment and see where we now stand? Here is how employment growth (or lack thereof) has evolved, by age cohort, since the beginning of the Great Recession:

More Young Americans Out of High School Are Also Out of Work - For this generation of young people, the future looks bleak. Only one in six is working full time. Three out of five live with their parents or other relatives. A large majority — 73 percent — think they need more education to find a successful career, but only half of those say they will definitely enroll in the next few years.  No, they are not the idle youth of Greece or Spain or Egypt. They are the youth of America, the world’s richest country, who do not have college degrees and aren’t getting them anytime soon.  Whatever the sob stories about recent college graduates spinning their wheels as baristas or clerks, the situation for their less-educated peers is far worse, according to a report from the John J. Heldrich Center for Workforce Development at Rutgers University scheduled to be released on Wednesday. The data comes from a national survey of high school graduates who are not enrolled in college full time, a notoriously transient population that social scientists and other experts had been having trouble tracking. (In the two months since the survey was conducted, a large share of participants have had their phone numbers disconnected and could not be reached.)  For this group, finding work that pays a living wage and offers some sense of security has been elusive.

New Hires Getting Left Behind on Pay - The weak pace of hiring in May cast a big cloud on the future of consumer spending. But the outlook dims more when you consider even those fortunate to get jobs are generally earning less than the average worker. Economists at the Royal Bank of Canada have calculated the average weekly pay of new workers in the U.S. versus the average weekly check earned by all private-sector employees. They looked at changes in hiring and average pay for the major employment sectors. What RBC found was that new-hire pay is starting to lag behind that of embedded workers. Over the past year, the weekly paycheck for new workers is about $36 less than the salary of existing workers. The gap doesn’t mean the economy is creating only low-paying jobs. It also suggests that, with so many job-seekers in the labor markets, businesses are able to offer lower starting salaries for higher-skilled, professional jobs.

How Phantom Accounting Is Destroying the Post Office -In 2001, the Government Accountability Office (GAO) put the Postal Service on its list of "high-risk" programs because of rising financial pressures resulting from exploding demand from both the residential and commercial sectors. A year later the Office of Personnel Management (OPM) found the Postal Service had been significantly overpaying into its retirement fund. It seemed a simple matter to reduce future payments and tap into the existing surplus to pay for current expenses. And that's when make believe began to have a tragic real-world impact. In late 2002, the CBO announced that a change in the retirement contribution formula could increase unified budget deficits by as much as $41 billion, about $3.5 billion a year. If the overpayments were used to delay future rate increases, the CBO added, future government receipts would decline, adding to the unified budget deficit. To overcome the budget scoring objections, Congress began what in retrospect we can see was little more than an exercise in rearranging the chairs on the Titanic. The final law allowed the Postal Service to use its overpayments to pay off its debt and delay increasing rates for three years. After that, any overpayments were to be collected in an escrow fund that would be unavailable to the post office until Congress determined how the funds would be used. And then came the quid pro quo. The Postal Service became responsible for paying postal workers for the time they spent in prior military service. Up until then, as one might expect, these obligations were paid by the U.S. Treasury. Assuming that obligation essentially eliminated any post office surplus during the 10-year scoring window.

Union decline and rising inequality in two charts - One hallmark of the first 30 years after World War II was the “countervailing power” of labor unions (not just at the bargaining table but in local, state, and national politics) and their ability to raise wages and working standards for members and non-members alike.  Labor unions both sustained prosperity, and ensured that it was shared. The impact of all of this on wage or income inequality is a complex question (shaped by skill, occupation, education, and demographics) but the bottom line is clear: There is a demonstrable wage premium for union workers. In addition, this wage premium is more pronounced for lesser skilled workers, and even spills over and benefits non-union workers. The wage effect alone underestimates the union contribution to shared prosperity. Unions at midcentury also exerted considerable political clout, sustaining other political and economic choices (minimum wage, job-based health benefits, Social Security, high marginal tax rates, etc.) that dampened inequality. And unions not only raise the wage floor but can also lower the ceiling; union bargaining power has been shown to moderate the compensation of executives at unionized firms. Over the second 30 years post-WWII—an era highlighted by an impasse over labor law reform in 1978, the Chrysler bailout in 1979 (which set the template for “too big to fail” corporate rescues built around deep concessions by workers), and the Reagan administration’s determination to “zap labor” into submission—labor’s bargaining power collapsed. The consequences are driven home by the two graphs below. Figure 1 simply juxtaposes the historical trajectory of union density and the income share claimed by the richest 10 percent of Americans. By most estimates, declining unionization accounted for about a third of the increase in inequality in the 1980s and 1990s. This is underscored by Figure 2, which plots income inequality (Gini coefficient) against union coverage (the share of the workforce covered by union contracts) by state, for 1979, 1989, 1999, and 2009.

 Turning Our Backs on Unions - Noah, a columnist for The New Republic, is not content to simply shake his fists at the heavens in anger.  Mostly, he grapples with the deep, hard-to-tickle-out reasons that the gap between the rich and the middle class in the United States has widened to such alarming proportions. How much have technological advances contributed to income inequality? Globalization and off-shoring? The necessity of having a college education to land a decent-paying job? The decline of labor unions?  That last one, I have to admit, caught me up short. My parents were both public high school teachers, who proudly walked picket lines when the need arose. My hometown, Providence, R.I., was about as pro-union a city as you could find outside the Rust Belt. But like many college-educated children of union parents, I have never been a member of a union, and I viewed them with mild disdain.  As Andy Stern, the former president of the Service Employees International Union, put it to me: “White-collar professionals tend to appreciate what unions did for their parents. But they don’t view today’s janitors or nurse’s aides in the same way.” Instead, they — or, rather, we — tend to focus on the many things that are wrong with unions, exemplified these days by the pensions of public service employees that are breaking the backs of so many cities and states. Unions seem like a spent force, and we tend not to lament their demise.

Time to start talking about the minimum wage - How many hourly-paid workers earn the minimum? The Times puts the figure at around 4 million, which doesn’t sound like much in a job market of over 130 million. But the more relevant number here is how many workers would get a boost if the minimum were raised to $10, as Jackson proposes. The Economic Policy Institute estimates that a similar proposal by Sen. Tom Harkin, an Iowa Democrat, would reach over 19 million workers. And another nine million who make more than $10 per hour would get an indirect boost. That’s because when the minimum wage goes up, employers tend to give a boost to workers right above the new minimum, research finds. So an increase of this magnitude could benefit a significant number of American workers—likely over one in five. You can imagine why low-wage workers and their advocates like this idea. You can also see why those employers whose labor costs would rise, as well as market fundamentalists who object to the government setting a wage floor, would fight it. (Their claim is that it will hurt low-wage workers by pricing them out of the job market, but a wealth of research has found otherwise (pdf)). Mitt Romney wants to index the minimum wage to inflation—a good idea—but starting at its current level—a very bad idea that would lock in a low, real minimum.  Back in 2008, President Obama campaigned  on raising the minimum to $9.50 by 2011, but he hasn't said much about it since.

Whatever Happened to Natchez? How to End the Nightmare of Jobless America - Over the last six months, reports of the faltering U.S. jobs market have inundated the media. Last Friday's bleak numbers showed unemployment ticking up a tenth of a point, from 8.1 percent to 8.2 percent. But largely absent from the discussion are the American cities where the jobs crisis is nothing new — areas that have been experiencing an ongoing unemployment nightmare since well before the financial crash. We can call them America’s "dead zones" —metropolitan and micropolitan areas where the unemployment rate has been at least 2 percentage points higher than the national average for five, 10 or 20 years. Conventional wisdom assumes that economically distressed areas exist only in inner-city slums or rural backwaters. But dead zones, although plagued by persistent high unemployment, rarely fit those stereotypes. Rather, they come in all shapes and sizes; these cities are not necessarily crime-ridden or poverty-stricken. In fact, many dead zones have median incomes at or even above the national average. Instead, they share sustained, and in many cases are begrudgingly resigned to, high unemployment rates regardless of the national business cycle.  The workforce in most dead zones has a low education level, with more than 50 percent possessing just a high-school degree or less. Most jobs in dead zones are in low-end service industries, especially retail. Such jobs offer few prospects for upward mobility or skill enhancement.  Shining a spotlight on five specific cases gives us clues to the scope of the predicament, and also potential solutions. We'll compare Henderson, North Carolina; Seneca, South Carolina; and Kokomo, Indiana with dead zones that seem doomed to further stagnation – Hanford, California and Natchez, Mississippi.

Think of the Children - Krugman - Every time I hear some smug pundit or politician saying that we can’t spend to create jobs because that would be laying too much of a burden on our children, I get angry — because of reports like this: For this generation of young people, the future looks bleak. Only one in six is working full time. Three out of five live with their parents or other relatives. A large majority — 73 percent — think they need more education to find a successful career, but only half of those say they will definitely enroll in the next few years. No, they are not the idle youth of Greece or Spain or Egypt. They are the youth of America, the world’s richest country, who do not have college degrees and aren’t getting them anytime soon. Everything we know says that this generation will never — never — recover from the terrible job market into which it has graduated. But hey, we can’t do anything about that; we must have austerity, for the sake of the next generation.

U.S. Child Poverty in International Context - UNICEF Innocenti Research Centre has issued its report: "Measuring child poverty: New league tables of child poverty in the world’s rich countries.  ¹The United States doesn't stack up very well, although it's important to be clear on just what the comparisons are showing.  For comparability across countries with different income levels, the report uses a working definition of "poverty" as half of the median income in that country. This graph shows the share of children in each country who are growing up in families where the income is less than half the median income for that country. The U.S., with 23.1% of its children in such families, ranks 34th out of 35 countries. It's important to be clear on what this graph doesn't show. It doesn't show that U.S. children are more deprived in absolute terms than children in other countries. The U.S. has a higher level if incomes than these other countries--much higher than some of them. In addition, income is more unequally distributed in the U.S. than in many of these other countries. As a result, the U.S. will have a larger share of its population living in households that earn less than 50% of the median income compared with countries that have a much more equal distribution of income like Iceland or Finland.  The UNICEF report offers an extended discussion of poverty lines set in absolute terms and those set in relative terms, and the report offers data and examples for both approaches.

Record Number Of US Households On Foodstamps - Last month, when the USDA released the latest foodstamps numbers for the month of February, there was some hope that following a third month of declines, we may just have seen the peak of US foodstamp usage and going forward we would only see the number decline. Sadly, the latest numbers refutes this: in March a total of 46,405,204 persons were at or below poverty level and thus eligible for foodstamps, a 79K increase in the month. Yet while many individuals have learned to game the system, and this numbers at the peak may fluctuate, when it comes to the far more comprehensive and difficult to fudge "households on foodstamps" number, there was no confusion: at 22,257,647, the number of US households receiving the "SNAP treatment" rose to an all time high, even as the benefit per household dropped to the second lowest ever. At least all these impoverished believers in hope and change have FaceBook IPO profits to look forward to. Oh wait.

The State and Local Drag on the Recovery - President Obama pointed out this morning that job losses among state and local governments are slowing the recovery.  The graph shows what he’s talking about:  states and localities have shed 662,000 jobs since employment in this area peaked in August 2008. A couple of other points are worth noting:

• When measured as a share of the population, the number of state and local government jobs has fallen in 37 of the last 40 months.
• The number of state and local jobs outside of education (in other words, law enforcement, parks, transportation, and so on) is the lowest it’s been since June 1985, as a share of the population.

The large-scale job losses we’ve experienced slow the economy by weakening consumer demand, since people who lose their jobs must scale back their spending dramatically. And, due to the services that states and localities provide — education, public safety, health care, and the like — these job losses also can have a real impact on residents’ quality of life

Alabama Officials File $1.6 Billion Claim Against County - State and city officials in Birmingham, Alabama, filed a $1.63 billion claim in Jefferson County’s bankruptcy case on behalf of sewer system ratepayers, alleging county employees engaged in criminal conduct. Birmingham City Council President Roderick Royal and Alabama state legislator Mary Moore were among a group of 14 officials and private citizens who filed the claim yesterday in U.S. Bankruptcy Court in Birmingham on behalf of about 130,000 ratepayers in the county. The claim is based on “published financial data and other evidence which establish the cost to the debtor county, and hence indirectly the ratepayer class, of dishonest, unlawful and sometimes criminal conduct on the part of employees of the county, certain private parties and others involved in municipal finance,” according to the filing. Jefferson County entered the largest U.S. municipal bankruptcy in November after local and state officials and creditors failed to implement an agreement to cut the county’s sewer debt by about $1 billion. The county owes creditors about $4.2 billion, including more than $3 billion in bonds related to the sewer system, according to court records.

Pennsylvania Readies Bond Sale for Jobless-Benefit Loans - Pennsylvania’s Senate is set to vote on whether the state should sell as much as $4.5 billion in bonds to repay federal loans to provide jobless benefits, which would be the largest such offering in the U.S. The legislation, supported by Governor Tom Corbett, a Republican, also would make the unemployment-compensation fund solvent by 2019. The Senate plans to vote on the measure today, according to Erik Arneson, a spokesman for Majority Leader Dominic Pileggi, a Chester Republican. States collectively owed the U.S. $29.8 billion at the end of last month, led by California at $8.49 billion, Labor Department figures indicate. The debt was amassed as the longest recession since the 1930s pushed the nation’s jobless rate to a 26-year high of 10 percent. Pennsylvania would sell the bonds to repay its loans before November, to prevent employer costs from rising. The commonwealth owed $3.86 billion, the data show.

Real Per Capita State GDP - BEA just published the state real GDP data for 2011.  Since I have not done it in a while I thought it would be interesting to create the state real GDP per capita data for 2011.  There has not been much difference since the last time I did this exercise several years ago.  The last time I did  it Massachusetts was 126% of the national average and Mississippi was 63% of the national average.  The long run trend of the poorest state tending to catch up with the wealthiest states has continued in force. Now, Massachusetts real per capita GDP  is only 187% of that in Mississippi vs the 200% it was several years ago..

Visualization of Real GDP by State in 2011 - The custom, interactive graphic above comes courtesy of the folks at Tableau Software, using the "Real GDP by State" data released today by the BEA and featured earlier today on CD.   The contributors to real GDP in 2011 are ranked in the top part of the graphic, showing that "durable goods manufacturing" was the largest positive contributor to real output growth in 2011at 0.5%, and real estate was the largest negative contributor at -0.2%.  The color-coded map below shows real GDP growth by state, from No. 1 North Dakota in dark grey at 7.6% growth in 2011 to No. 50 Wyoming at -1.5% growth, in dark pink.    If you click on a sector above, like durable-goods manufacturing, the map changes to show state rankings for that sector's contribution to state output growth, with Oregon ranked No. 1 at 3.94% (towards 4.7% state growth), followed by Michigan at 1.2% (towards 2.3% overall growth), etc.  Click on mining, and you'll see West Virginia ranked No. 1, at 3.9% growth towards 4.5% overall state growth, followed by North Dakota's mining growth of 2.81% towards 7.6% overall growth, etc. 

New Stockton City Hall building seized by Wells Fargo; city preps bankruptcy contingency plan - The Stockton City Council announced Wednesday that they will look at bankruptcy contingency plans after Wells Fargo seized the new city hall building. The city paid $35 million to buy the 8-story building, but was not able to move in because of its money problems, and recently stopped making debt payments all together. This is the fourth building that was repossessed by Wells Fargo; the bank seized three city parking garages for the same reason. At the June 5 Stockton City Council meeting, members will look at a contingency plan if mediation between the city and creditors failed, city spokesperson Connie Cochran said. For the past two months, the city, under AB 506, has been in a mediation process with creditors to come up with a payment plan in order to avoid bankruptcy.

Payless paydays for Scranton near as borrowing halted - City of Scranton employees face payless paydays as early as two weeks from now unless the city is able to borrow $16.5 million, funding the city council jeopardized by refusing to make a city parking authority bond payment, Mayor Chris Doherty said Monday. Mr. Doherty said the money represents 13 paydays, the equivalent of about half a year of pay for employees, in a year when the city has already struggled four or five times to meet payroll. The city already has enough money to make payroll this Friday, but not yet enough for the next payday, June 22, the mayor said. The city has had to rely on advances of state money or state loans to cover the four or five earlier payrolls, he said. He expects tax collections will "probably get us into July sometime," but not through the summer unless money is borrowed. Mr. Doherty also held out the possibility of going to court to force council to adopt a financial recovery plan that calls for steep tax hikes so that the city can borrow the money. The mayor has proposed a recovery plan that would, among other things, raise property taxes 78 percent over the next three years.

City budget deficits expected to continue through 2016 - Cincinnati’s budget problems extend much beyond next year’s $33 million hole, with deficits projected through at least 2016. A new report shows the city continues to spend more than it takes in, even as the population declines. Revenue is expected to rise, but spending more so. Cuts are inevitable, the city’s bond ratings could be at risk, meaning borrowing would cost taxpayers more, and the budget will be structurally imbalanced. City Manager Milton Dohoney won’t lay out his proposed cuts until November, but by far the biggest chunk of general fund spending – about 90 percent – goes to pay city employees. “If we don’t start putting in revenue streams,” said Meg Olberding, his spokeswoman, “we’re going to have to ask people: What don’t you want us to do?”

Why We Can’t Afford a Bus-Ride -Today I cut out of the Wall Street Journal an article and photo that, in combination, illustrate the absurd plight we have placed ourselves in as a society by insisting that we are too poor to create the things we really need. The article is about the Pittsburgh metro area and how it is drastically reducing its public transit routes (as well as increasing fares) in order to cope with a $64 million deficit in its operating funds. The accompanying photo was of a young, bright-looking mother of two day-care aged children (the article explained) sitting at a bus stop that will soon be removed, waiting not for a ride to her job, but for a ride to a job placement agency where she spends four hours a day looking for work. When her bus route is eliminated, she won’t even be able to get to the placement agency. And this is America, the great achievement of modern civilization. I hang my head in shame. The word “deficit,” of course, explains it all.  The article tells a familiar story: The public sector has mismanaged its finances. The union wages the metro area is required to pay its bus drivers are excessively generous. (Ralph Cramden, apparently, now lives in a mansion and drives a Mercedes).  Bus driver health care costs are unsustainable, and their retirement benefits are a shameless demand on the “backs of the tax-payers.”  The governor of Pennsylvania refuses any help whatsoever until the metro area gets its fiscal house in order. But then, what could the governor do anyway? He can’t spend what he doesn’t have, and states are still struggling, partly due to the fact that people are finding it harder and harder to get to work in the morning (if they have a job) and so are paying the state fewer and fewer taxes. The jobless young mother in the photo presumably pays no state income tax.

How corporate socialism destroys - A proposal to spend $250 million of taxpayer money on a retail project here illustrates the damage state and local subsidies do by taking from the many to benefit the already rich few. Nationwide state and local subsidies for corporations totaled more than $70 billion in 2010, as calculated by Professor Kenneth Thomasof the University of Missouri-St. Louis In a country of 311 million, that’s $900 taken on average from each family of four in 2010. There are no official figures, but this one is likely conservative because — as documented by Thomas, this column and Good Jobs First, a nonprofit taxpayer watchdog organization funded by Ford, Surdna and other major foundations — these upward redistributions of wealth keep increasing. Subsidies for retail businesses are the worst kind of corporate welfare because, as the end of the economic chain, retailing grows only when population and incomes increase. If population or income falls, then subsidies for new projects like Congel’s damage existing businesses, where people would otherwise be spending their money.

Priorities for tax dollars -There is a very strong impulse in many state legislatures to cut taxes, no matter what the cost is to the state's ability to provide essential services for its citizens.  The Michigan League for Human Services draws attention to the consequences of this impulse when it comes to the welfare of the children of Michigan.  MLHS is the publisher of an important report on the state of children's welfare in Michigan, and this report is a really important contribution (link). The Michigan legislature is proposing to speed up a reduction in Michigan income tax rates by a few months, resulting in a loss of tax revenue of about $90 million. This change will make only a very small difference for each individual Michigan tax payer, whereas these tax revenues could have made a large difference for a number of important public priorities. Gilda Jacobs, president & CEO of the Michigan League for Human Services, comments on the "opportunity cost" that this decision creates for the children of the state -- the things we give up by making this decision. "While this is being touted as a tax break, for most people it is not a decrease. Most of us will barely notice this change in light of the big increases that hit low- and moderate-income households the hardest starting in tax year 2012." Here is a list of items that could have been funded for that amount, and the investment would have had a meaningful impact on the children of the state.

How Bad Is It? – Pretty bad. Here is a sample of factlets from surveys and studies conducted in the past twenty years. Seventy percent of Americans believe in the existence of angels. Fifty percent believe that the earth has been visited by UFOs; in another poll, 70 percent believed that the U.S. government is covering up the presence of space aliens on earth. Forty percent did not know whom the U.S. fought in World War II. Forty percent could not locate Japan on a world map. Fifteen percent could not locate the United States on a world map. Sixty percent of Americans have not read a book since leaving school. Only 6 percent now read even one book a year. According to a very familiar statistic that nonetheless cannot be repeated too often, the average American’s day includes six minutes playing sports, five minutes reading books, one minute making music, 30 seconds attending a play or concert, 25 seconds making or viewing art, and four hours watching television.Among high-school seniors surveyed in the late 1990s, 50 percent had not heard of the Cold War. Sixty percent could not say how the United States came into existence. Fifty percent did not know in which century the Civil War occurred. Sixty percent could name each of the Three Stooges but not the three branches of the U.S. government. Sixty percent could not comprehend an editorial in a national or local newspaper.

How Christian fundamentalists plan to teach genocide to schoolchildren - The Bible has thousands of passages that may serve as the basis for instruction and inspiration. Not all of them are appropriate in all circumstances.  The story of Saul and the Amalekites is a case in point. It's not a pretty story, and it is often used by people who don't intend to do pretty things. In the book of 1 Samuel (15:3), God said to Saul: "Now go, attack the Amalekites, and totally destroy all that belongs to them. Do not spare them; put to death men and women, children and infants, cattle and sheep, camels and donkeys." Saul dutifully exterminated the women, the children, the babies and all of the men – but then he spared the king. He also saved some of the tastier looking calves and lambs. God was furious with him for his failure to finish the job. The story of the Amalekites has been used to justify genocide throughout the ages. This fall, more than 100,000 American public school children, ranging in age from four to 12, are scheduled to receive instruction in the lessons of Saul and the Amalekites in the comfort of their own public school classrooms. The instruction, which features in the second week of a weekly "Bible study" course, will come from the Good News Club, an after-school program sponsored by a group called the Child Evangelism Fellowship (CEF). The aim of the CEF is to convert young children to a fundamentalist form of the Christian faith and recruit their peers to the club.

Louisiana's bold bid to privatize schools (Reuters) - Louisiana is embarking on the nation's boldest experiment in privatizing public education, with the state preparing to shift tens of millions in tax dollars out of the public schools to pay private industry, businesses owners and church pastors to educate children. Starting this fall, thousands of poor and middle-class kids will get vouchers covering the full cost of tuition at more than 120 private schools across Louisiana, including small, Bible-based church schools. .The school willing to accept the most voucher students -- 314 -- is New Living Word in Ruston, which has a top-ranked basketball team but no library. Students spend most of the day watching TVs in bare-bones classrooms. Each lesson consists of an instructional DVD that intersperses Biblical verses with subjects such chemistry or composition. The Upperroom Bible Church Academy in New Orleans, a bunker-like building with no windows or playground, also has plenty of slots open. It seeks to bring in 214 voucher students, worth up to $1.8 million in state funding.  At Eternity Christian Academy in Westlake, pastor-turned-principal Marie Carrier hopes to secure extra space to enroll 135 voucher students, though she now has room for just a few dozen. Her first- through eighth-grade students sit in cubicles for much of the day and move at their own pace through Christian workbooks, such as a beginning science text that explains "what God made" on each of the six days of creation. They are not exposed to the theory of evolution. "We try to stay away from all those things that might confuse our children," Carrier said.

No Myth Left Behind: 46% Fail First Test Question on Evolution - Gallup released its annual results on the question of American beliefs regarding evolution/creationism.  Once again, the creationists manage to sustain a set of beliefs that can only persist after a determined effort to withhold facts and sources and the imagination to keep them from their own children. It seems that 46% of Americans still accept the creationist view of human origins, a share that hasn’t changed much in the last 30 years.  Another 32 percent believe some god may have had a hand in an evolutionary process, while a mere 15 percent think God had nothing to do with how the rest of you turned out.  From Gallup:

Don't Think College Is Worth It? Ask People Who Haven't Gone -- Last month the Heldrich Center for Workforce Development released data showing that college graduates generally do not regret going to college, despite lots of criticism of the value of higher education. Today the center released a new report focusing on the depressing state of America’s recent high school graduates, who seem to agree about the importance of further education. The study reported on a survey of high school graduates of the classes of 2006-11 who do not have college degrees and are not enrolled in school full time. This group overwhelmingly believes that additional education beyond a high school diploma is required to succeed: Seven in 10 of these recent graduates said they would need more education if they were to have a successful career. Despite their belief in the value of post-secondary education, though, only 38 percent definitely planned to attend college to get more education in the next five years. Barriers included skyrocketing tuitions and family obligations.

Employment Rate for Recent Law Grads at Record Low - The share of law graduates employed a year out of school fell again last year to its lowest level since 1994, according to NALP, the Association for Legal Career Professionals. Nine months after graduation, just 85.6 percent of the law class of 2011 was employed. That compares to a record high of 91.9 percent for the class of 2007, which graduated just before the great recession erupted. The overall employment rate masks an even worse reality for recent graduates, since it counts any type of work — law-related or otherwise — as employment. As of February, less than two-thirds of the class of 2011 held jobs that actually required bar passage: That’s the lowest share since NALP began tracking this figure in 2001. Not finding work as a lawyer doesn’t nullify one’s law-school debt, of course. Additionally, of all jobs obtained, fewer than half (49.5 percent) were in private practice, the lowest share since NALP began asking that question in 1985.

Students Pay SLM 9.25% On Exploitative Loans For College - JPMorgan Chase & Co. charges Mirella Tovar as much as 10.25 percent annual interest on her student loans -- a rate as high as a credit card.  The 24-year-old aspiring graphic designer, the first in her family to go to college, is among millions of former students paying off high-interest loans to private lenders, among them JPMorgan, SLM Corp. (SLM) and Discover Financial Services. In a good month, Tovar earns $730 as a part-time hostess in a pizza parlor, and most of that money goes toward her debt of $98,000.  Unlike the federal student-loan program, which lets consumers borrow at fixed rates directly from the government, these loans from at least 30 banks and other private lenders feature mostly variable rates that can be more than twice what some people pay in the U.S. program. With college costs spiraling, the marketing and interest rates of these loans are drawing increasing complaints from borrowers and regulators, who say teenage consumers often don’t understand their terms.

Funded Status of U.S. Pensions Declines to Lowest Recorded Level, According to BNY Mellon -- The funded status of the typical U.S. corporate pension plan in May fell 6.5 percentage points to 69.8 percent, its lowest level since BNY Mellon began tracking this information in December 2007. The decrease was driven by the worst monthly decline in U.S. equity markets in 2012 and lower interest rates, which sent liabilities higher, according to the BNY Mellon Pension Summary Report for May 2012. The report added that the two trends combined to erase all of the gains that had been recorded in the first quarter of 2012. Assets for the moderate risk U.S. corporate pension plan in May fell 3.9 percent as U.S. equity markets declined 6.2 percent and international developed markets dropped 11.5 percent on uncertainty regarding the Greek debt and related euro zone issues, according to the BNY Mellon report. Liabilities rose 5.1 percent as the Aa Corporate discount rate fell 31 basis points during the month to a record low of 3.98 percent, BNY Mellon said. Plan liabilities are calculated using the yields of long-term investment grade corporate bonds. Lower yields on these bonds result in higher liabilities.

Unfunded pension schemes and intergenerational equity - When I talk about intergenerational equity to students, I go through all the ways that the current generation is exploiting future generations, like climate change, rising house prices, and rising government debt. I also say that of course the older generation could just get the younger generation to pay them directly. I then reveal, to the surprise of some, that that is exactly what happens in many countries because these countries run unfunded pension schemes.    An unfunded scheme is where the working generation pays social security contributions, and that money goes straight into paying the pensions of the old, rather than buying some kind of asset (hence unfunded). When the scheme starts, the current old receive a windfall: a pension without having contributed anything. The young pay contributions, but then receive a pension when they get old from the new younger generation. So the older generation when the scheme starts are clearly winners, but are there any losers? The answer depends on two things.The first is whether the scheme ever stops. If it stops, the young in the period beforehand are clear losers. They paid contributions (which went straight to the then old), but get nothing when they get old. Obviously the scheme is a huge burden on this ‘final generation’. However if the scheme goes on forever, there is no last generation, so there is no loser on that account.  The second issue is whether those who are forced to save by contributing to the pension lose out because they could have done better saving for themselves.

Poll: Fed’s Low Interest Rates Breed Anxiety Over Retirement - The Federal Reserve‘s easy-money policy is breeding anxiety among investors looking at their retirement accounts, according to a new Wells Fargo/Gallup poll. Nearly two out of three U.S. investors think policymakers should “take into account the harm low interest rates do to older Americans” when making decisions, according to the survey conducted May 4-12 of 1,018 U.S. adults with at least $10,000 in assets to invest. Overall, around two-thirds of the investors polled thought the benefits of the Fed’s easy-money policy outweighed the costs. But many also felt nervous about the ripple effects of low rates, which have shrunk returns for senior citizens and others relying on interest earned from their savings to support them in retirement. The central bank has kept short-term interest rates near zero since late 2008 in an effort to make borrowing cheaper to spur spending and investment. Fed officials have said they plan to keep interest rates low through at least late 2014 and are considering whether to take further action at their next policy meeting on June 19-20.

Sleeping In Vermont Dumpster Shows Psychiatric Cuts’ Cost - Gluck, 47, is charged on this March morning with threatening her former husband with a hammer. Police who arrested her in Burlington, Vermont, know those tired eyes and stringy blond hair. In December, Gluck was charged but not jailed or hospitalized after she slammed a dead raccoon against the front door of City Hall. Her family urged her to get help for her bipolar disorder, which usually involves getting back on medication. She refused.
Hurricane Irene wiped out the last state-operated psychiatric beds in Vermont nine months ago.  Since then, private-hospital emergency rooms have been backed up with mentally ill patients -- some handcuffed to ER beds for as long as two days. Dozens of people are turned away each month without being admitted, and calls to Burlington police about mental-health issues increased 32 percent over the prior year.  As the only U.S. state with no government-operated psychiatric beds, Vermont’s experience reflects a growing realization among mental-health experts and advocates that the decades-long trend toward outpatient care has reached its limit -- and public outcry against the latest round of cuts is beginning to change the game.

Soaring deductibles are the new normal for Fortune 500 - Angela Wenger calls herself a self-reliant “German Midwesterner” who hates to complain. But the Wisconsin mom was dismayed when husband Dan’s employer switched to an insurance plan that increased the family’s medical expenses tenfold. The employer: General Electric, one of the largest companies in the world. High-deductible health plans, once deemed a last-resort, “catastrophic” alternative for those with few resources, have gone Fortune 500. Seventy percent of large companies recently surveyed by Olson’s firm said they’ll offer high-deductible insurance by 2013, combined with accounts that let patients buy medical services with pretax dollars, often funded by the employer. Nearly a fifth of the firms responding to the survey, conducted by Towers and the National Business Group on Health, a nonprofit alliance of large companies, said high-deductible coverage would be the only option in 2013.

The White Working Class Doesn't Believe That Obamacare Will Help Them - In poll after poll, more people believe that Obamacare will make them personally worse off than will make them personally better off: The problem, as on almost all issues relating to government's role, is centered on whites, particularly those in the working class....Just 18 percent believe the law will leave their family better off, compared to 38 percent who believe they will be worse off as a result. ....Gallup Polling in March 2010 found that while few whites expected to personally benefit from the law, a majority of them believed it would benefit low-income families and those without health insurance. That suggested they viewed health care reform primarily as a welfare program that would help the needy but not their own families. ....Democratic strategists have long viewed a program expanding access to health care insurance as a key to combating the widespread sense among whites, particularly those in the working class, that government only takes their money and redistributing it to the poor, without offering any tangible assistance in their own often economically-precarious lives. Instead, as the latest Kaiser Poll shows, the targets of that effort remain entirely unconvinced that the law will benefit them. Rather than ameliorating their skepticism that government will defend their interests, it appears to have only intensified it.

Young adults forgo health care as medical debts rise - Millions of young adults are forgoing necessary care and treatment because of rising health care costs, a report said Friday. In fact, 41% of young adults between age 19 and 29 failed to get medical care in a recent 12-month period because of cost, according to a Commonwealth Fund survey. Among uninsured adults, the number rose to 60%. They are not filling prescriptions, skipping recommended tests or treatments, avoiding doctor visits and failing to get specialist care they need. "This reflects the high cost of medical care right now and health pl ans that may not cover people very well," said Dr. Sara Collins, vice president for affordable health insurance at the Commonwealth Fund and chief author of the survey. And doctors are noticing that young adults stop listening to medical advice once they hear the cost of treatment.

Healthy behaviors and where the money goes - Via Ezra Klein, here’s a striking infographic from the Bipartisan Policy Center comparing what makes us healthy to how we as a nation spend our health dollars: As it illustrates, behaviors are major contributors to our health status, but a tiny fraction of US health spending goes to encouraging healthy behaviors like physical activity. The Bipartisan Policy Center report Lots to Lose: How America’s Health and Obesity Crisis Threatens our Economic Future offers several recommendations for improving nutrition and physical activity in the US. In addition to recommendations for schools and childcare providers (start encouraging physical activity at an early age, and require 60 minutes of physical activity during each school day), it has several recommendations for communities. One acknowledges that local government funds are tight, but suggests partnerships to increase the use of limited spaces for play and exercise:

What’s going on in NYC? - Mayor Bloomberg is getting a lot of heat for his recent decision to ban large soft drinks from sale in many sites in the city. He thinks that it will reduce obesity, and eventually make people healthier. Critics disagree. On the other hand, what’s up with this? That’s the life expectancy of people in the five boroughs of NYC compared to the rest of the country (red dotted line). Details: In the national context, the increase in New York City’s life expectancy stands out (figure). The Institute for Heath Metrics and Evaluation recently estimated the life expectancy for each of the USA’s 3147 independent cities and counties. Manhattan’s life expectancy rose 10 years between 1987 and 2009, the largest increase of any county, and the other four counties that make up New York City were all in the top percentile. By contrast, national life expectancy lengthened only 1·7 years per decade, and the USA—already trailing the world’s longest lived countries—dropped back further. “What we see in the United States sends an alarming, alarming message”, says Ali Mokdad, who led the research. “We are not catching up with what everyone else is achieving. And in many counties in the United States, we are falling behind: our life expectancy is going backward.” In this context it is all the more urgent to understand the improvements witnessed in New York City, and the lessons that can be applied elsewhere.

Life expectancy is a population metric - Yesterday, I posted on the fact that life expectancy in NYC has been rising amazingly quickly over the last few decades, much faster than it has for the country as a whole. I also quoted from the author of the work, saying that he believed that many of the public health interventions are responsible. I finished by saying that while that is far from proven as the cause, it’s compelling. And then all hell broke loose. I was inundated with comments, some tweets, and emails telling me it couldn’t be public health, it had to be some other reason. These included reduced traffic fatalities, reduced deaths from HIV/AIDS (or other illnesses), reduced death from homicides, or changes in demographics or population. Let’s start with the latter. The beauty of NYC is that it’s not homogenous. The five boroughs contain different mixes of both race/ethnicity and socio-economic status. All of them saw a rise in life expectancy. So it can’t be because everyone is rich in NYC. The Bronx is still the poorest urban county in the US. The fact that this borough is closing in on the national average is amazing. Something is different in NYC. As for race, parts of NYC have less of a minority population, and the Bronx has an enormous minority population. Again, all went up way more than the average. Something is different in NYC.

Rationing Life-Years - The discussion of previous post, “The Fork in the Road for Health Care,” reminded me of a fascinating column written in 2009 by N. Gregory Mankiw. He noted that he takes a statin pill every morning and that a physician “estimated that statins cost $150,000 for each year of life saved.” Musing whether the payoff was worth that much money, Professor Mankiw sought insight in the following hypothetical: Imagine that someone invented a pill even better than the one I take. Let’s call it the Dorian Gray pill, after the Oscar Wilde character. Every day that you take the Dorian Gray, you will not die, get sick or even age. Absolutely guaranteed. The catch? A year’s supply costs $150,000. Anyone who is able to afford this new treatment can live forever. Certainly, Bill Gates can afford it. Most likely, thousands of upper-income Americans would gladly shell out $150,000 a year for immortality. Most Americans, however, would not be so lucky. Because the price of these new pills well exceeds average income, it would be impossible to provide them for everyone, even if all the economy’s resources were devoted to producing Dorian Gray tablets. So here is the hard question: How should we, as a society, decide who gets the benefits of this medical breakthrough? Are we going to be health-care egalitarians and try to prohibit Bill Gates from using his wealth to outlive Joe Sixpack? Or are we going to learn to live (and die) with vast differences in health outcomes? Is there a middle way?

Poor and fat: The real class war - Over the past year we've heard a lot about class warfare, the "Buffett Rule" and the tax code and so on. But if you want to see a blatant form of poor vs. rich, walk into a grocery store. Here we are forced to decide between what's good for our kids and what we can afford to feed them.Ground beef that is 80/20 is fattier but cheaper than 90/10. Ground turkey breast is leaner than the other two but is usually the more expensive. And many of us can't even begin to think about free-range chicken and organic produce -- food without pesticides and antibiotics that'll cost you a second mortgage in no time at all. The American Journal of Clinical Nutrition recently published a study that found $1 could buy 1,200 calories of potato chips but just 250 calories of vegetables and 170 calories of fresh fruit. And it is also true that Mississippi, the poorest state in the country, is also the fattest. In fact, the five poorest states are also among the 10 fattest, and eight of the 10 poorest states are also among the 10 with the lowest life expectancy. I guess one could dismiss this as one big coincidence, but is it also a coincidence that half of the top 10 states with the highest median incomes are also in the top 10 in life expectancy?

Regulation is not a dirty word - Regulation has gotten a bad rap recently. It’s a combination of it being associated to finance, or big business, and it being complicated, and involving lobbyists and lawyers – it’s sleazy and collusive by proxy, and there are specific regulators that haven’t exactly been helping the cause. Most importantly, though, the concept of regulation has been slapped with a label of “bad for business = bad for the struggling economy”. But I’d like to argue that regulation is not a dirty word – it’s vital to a functioning economy and culture. And the truth is, we are lacking strong and enforced regulation on businesses in this country. Sometimes we don’t have the regulation, but sometimes we do and we don’t enforce it. I want to give three examples from yesterday’s news on what we’re doing wrong. First, consider this article about data and privacy in the internet age. It starts out by scaring you to death about how all of your information, even your DNA code, is on the web, freely accessible to predatory data gatherers. All true. And then at the end it’s got this line: “Regulation is coming,” she says. “You may not like it, you may close your eyes and hold your nose, but it is coming.” What? How is regulation the problem here? The problem is that there’s no regulation, it’s the wild west, and a given individual has virtually no chance against enormous corporate data collectors with their very own quant teams figuring out your next move.

Bodies with Histories - “What is the meaning of race?” While the question may seem straightforward on its face, it quickly spawns further questions, often vexing. Is race purely a political construct, or is it biologically encoded? Certainly there are aspects of human biology—skin color, hair color, the presence or absence of epicanthic folds, etc.—that are commonly associated with racial differences, but is race just the sum of these physical features, with all of the overlaps, exceptions, and ambiguities they involve? How do genes factor into the story? And what connection—if any—is there between biological markers of race and the social experiences of racial groups?  These days large numbers of medical research dollars are devoted to finding genetic differences between races that might explain health disparities. But many students of biology and race, and at least some of our bar mates, think that is a bad idea. They are not against medical research per se but against bad research. Instead of looking for genes that cause race and attending health outcomes (the standard approach) they point to evidence strongly suggesting that everyday events alter our bodies, making them sicker or more resistant to disease—events that the political economy ensures are more or less common depending on which racial categories one is assigned to. Indeed, it may be that biology doesn’t create race but that racial marking creates new biological states via processes that all three of these thinkers discuss in new books.

Fighting Back Against Big Water - Regular readers know that one of my pet peeves is the notion that everyone should drink eight glasses of water a day. And that's water and only water. Coffee, tea and Diet Coke don't count. It's nonsense. There was never any science behind this in the first place, and the food you eat contains much of the water you need to stay healthy in the first place. Basically, if you're thirsty, drink something. That's pretty much it. Today, Spero Tsindos of La Trobe University joins the fight in an editorial in the June issue of Australian and New Zealand Journal of Public Health: Mr Tsindos believes that encouraging people to drink more water is driven by vested interests, rather than a need for better health. "Thirty years ago you didn't see a plastic water bottle anywhere, now they appear as fashion accessories."....He also discusses the role of water in our constant quest for weight loss. "Drinking large amounts of water does not alone cause weight loss. A low-calorie diet is also required." "Research has also revealed that water in food eaten has a greater benefit in weight reduction than avoiding foods altogether. We should be telling people that beverages like tea and coffee contribute to a person's fluid needs and despite their caffeine content, do not lead to dehydration."

Antibiotics, the war on weeds, and the medical model in agriculture - Modern agriculture and modern medicine go hand in hand. And, perhaps one of the best-known ways they interact is the use of antibiotics. In agriculture, antibiotics are used on livestock, in part because the drugs enhance growth and in part to prevent disease in close conditions typified by confined animal feeding operations, known as CAFOs--in which animals live so crammed together that they are constantly exposed to an array of infectious agents. Now the director-general of the World Health Organization, Dr. Margaret Chen, says that we are facing a world without antibiotics because of increasing antibiotic resistance brought on by overuse. Increasing antibiotic resistance is actually old news; but the idea of living wholly without antibiotics is really the news here. That's the medical model applied to animal agriculture. But the same model is being applied to crops.  Instead, if we look to the farm field as the subject to be diagnosed and treated, we can see right away what is considered an infection: weeds. Weeds are considered the equivalent of pathogens in the farm field, something that must be eliminated because they drain the vitality (i.e., lower the yield) of the crops in question. And, this is where a parallel problem is arising. The genetically engineered crops of the 1990s were designed to allow herbicides to be used for chemical weeding while the crop is growing since the crop itself is genetically engineered with resistance to the weedkiller. The most popular combination has been Ready Roundup soybeans and Ready Roundup herbicide.

World Food Prices Fell Most in 2 Years on Dairy -- Global food prices had their biggest drop in more than two years in May as the cost of dairy products slumped on increased supply, easing strain on household budgets.  An index of 55 food items tracked by the United Nations’ Food & Agriculture Organization fell 4.2 percent to 203.9 points from 213 points in April, the Rome-based agency reported on its website. That was the biggest percentage drop since March 2010.  A stronger U.S. dollar may weaken the effect of falling prices on importers’ food bills, Abdolreza Abbassian, an FAO economist, said by phone from Rome. The U.S. Dollar Index, which tracks the exchange rate against major world currencies, jumped 5.4 percent in May, the biggest monthly gain since September.

Climate change-resilient landscapes identified in Va., W.Va. - Vast national forest areas and scattered pockets of undeveloped lands in in West Virginia and Virginia are among the regions that would be resilient to drought, rising temperatures and other threats associated with climate change, according to a study released today by The Nature Conservancy. The study identifies "strongholds" that could provide habitat to a variety of plants and animals under the extreme climate change predicted by many scientists. They also would be sources of clean drinking water and other resources for human populations. "These strongholds will be critical to all life as the threats of climate change continue to grow," said Michael Lipford, Virginia executive director of The Nature Conservancy. "They could serve as breeding grounds and seed banks for many plant and animal species that otherwise may be unable to find suitable habitat due to climate change." Lipford said various species of birds are already responding to climate change, such as black vultures now appearing in central Appalachian mountains and red-bellied woodpeckers sighted in northern areas of Appalachia.

Who Wants To Feed the World? - There’s lots of morbidly ignorant people of all political stripes who believe the Big Lie that industrial agriculture can Feed the World (TM) and has any intention of feeding the world. For these flat-earthers, the mere mention that fossil fuels are finite is tantamount to calling for the starvation of millions. Meanwhile for those who aren’t morbidly ignorant, there’s the facts. The fact is that organic and low-external input (LEI) agriculture even now outproduces industrial monoculture in terms of calories and nutrients. The fact is that this margin will extend astronomically as cheap fossil fuels become unavailable. But this kind of agroecology can’t be adapted to corporatism. It doesn’t scale up, it can’t be Taylorized, it doesn’t fit well into political and economic hierarchies. So when the morbidly ignorant blather about “feeding the world”, what they really mean is that they consider corporatism to be normative. But since corporatism cannot feed the world and does not want to, those ignoramuses are really the ones who want the world to starve.

Craig Venter’s Bugs Might Save the World - In the menagerie of Craig Venter’s imagination, tiny bugs will save the world. They will be custom bugs, designer bugs — bugs that only Venter can create. He will mix them up in his private laboratory from bits and pieces of DNA, and then he will release them into the air and the water, into smokestacks and oil spills, hospitals and factories and your house.  Each of the bugs will have a mission. Some will be designed to devour things, like pollution. Others will generate food and fuel. There will be bugs to fight global warming, bugs to clean up toxic waste, bugs to manufacture medicine and diagnose disease, and they will all be driven to complete these tasks by the very fibers of their synthetic DNA.  Right now, Venter is thinking of a bug. He is thinking of a bug that could swim in a pond and soak up sunlight and urinate automotive fuel. He is thinking of a bug that could live in a factory and gobble exhaust and fart fresh air. He may not appear to be thinking about these things. He may not appear to be thinking at all. He may appear to be riding his German motorcycle through the California mountains, cutting the inside corners so close that his kneepads skim the pavement. This is how Venter thinks. . Over the last 60 years, agricultural production has boomed in large part through plant modification, chemical additives and irrigation. But as the world population continues to soar, adding nearly a billion people over the past decade, major aquifers are giving out, and agriculture may not be able to keep pace with the world’s needs. If a strain of algae could secrete high yields of protein, using less land and water than traditional crops, it may represent the best hope to feed a booming planet. … “Agriculture as we know it needs to disappear,” Venter said. “We can design better and healthier proteins than we get from nature.”

Environmental benefit of biofuels is overestimated, new study reveals - Two scientists are challenging the currently accepted norms of biofuel production. A commentary published today in GCB Bioenergy reveals that calculations of greenhouse gas (GHGs) emissions from bioenergy production are neglecting crucial information that has led to the overestimation of the benefits of biofuels compared to fossil fuels.  The critique extends to the Life Cycle Analysis models of bioenergy production. Life Cycle Analysis (LCA) is a technique used to measure and compile all factors relating to the production, usage, and disposal of a fuel or product. The authors conclude that LCAs are overestimating the positive aspects of biofuel use versus fossil fuel use by omitting the emission of CO2 by vehicles that use ethanol and biodiesel even when there is no valid justification. Proponents of bioenergy argue that analyses should always ignore this CO2 because plants grown for biofuel absorb and therefore offset the same amount of carbon that is emitted by refining and combusting the fuel. The commentary critiques this method by arguing that doing so double counts the carbon absorbed by plants when the bioenergy crops are grown on land already used for crop production or already growing other plants because the bioenergy does not necessarily result in additional carbon absorption. Biofuels can only reduce greenhouse gases if they result in additional plant growth, or if they in effect generate additional useable biomass by capturing waste material that would otherwise decompose anyway.

Health Dangers in Your Hose: Are You Watering Your Garden With Endocrine Disruptors and Toxic Chemicals? - What says summer like running through the sprinkler, eating a homegrown tomato off the vine, or drinking right from the garden hose? Unfortunately, those summer experiences might come with toxic chemicals like lead, bisphenol A (BPA), phthalates, and even flame retardants. That's what the Ecology Center found out when it tested a number of different common garden products recently. The finding that your hose might be the most dangerous tool in your garden was not necessarily what the Ecology Center expected to find. What is so dangerous about an innocent-looking hose? To start, one in three of the hoses tested had levels of lead that exceeded drinking water standards. And water sampled from one hose was 18 times the levels allowed in drinking water! Only there is nothing illegal about this, because hoses are not regulated by the same laws that limit lead leached by plumbing fixtures into drinking water. (Since, you know, no one is ever going to drink out of a hose or use it to water plants they might eat.) Brass, often used in plumbing fixtures, is an alloy that can contain up to 8 percent lead. In addition to its uses in brass fixtures, lead is also sometimes used as stabilizers or pigments, particularly in yellow or green hoses. Lead is a neurotoxin and children are more vulnerable to lead poisoning than adults.

Garbage Problems Piling Up, World Bank Warns - The World Bank is raising a stink about a heaping mess that it says could be even more challenging than climate change: trash. In a new report today, the bank estimates the total amount of garbage generated by urban residents around the world will surge to 2.2 billion tons a year in 2025 from today’s 1.3 billion tons per year. (That’s about 2.6 pounds per person per day now.) The annual cost of managing all that trash will nearly double to $375 billion, from $205 billion, with low-income countries seeing more than five-fold increases. The World Bank calls the problem a “looming crisis” as cities grow and living standards rise around the world. “When you add the figures up we’re looking at a relatively silent problem that is growing daily,” said Dan Hoornweg, a co-author of the report Trash management is often the largest single budget item for poorer cities. Trouble in that area can signal that a city can’t manage more complex services such as health, education and transportation, the report says. Uncollected waste contributes to flooding, air pollution and public health issues such as respiratory troubles, diarrhea and dengue fever. The report says post-consumer waste accounts for almost 5% of total global greenhouse gas emissions.

Garbage: It’s where the jobs are - Garbage is heaping high around the world. According to the World Bank, many cities now devote more resources to coping with their trash than to any other single task: Solid waste management is almost always the responsibility of local governments and is often their single largest budget item, particularly in developing countries. Solid waste management and street sweeping is also often the city’s single largest source of employment. That’s from the World Bank’s new “What a Waste” report, which estimates that 1 to 5 percent of the world’s urban population is employed in some form of solid-waste management — that includes everyone from workers at recycling plants to the more than 2 million informal “waste-pickers” in poorer countries. And the garbage will keep piling up. Currently, the world spends $205.4 billion to handle about 1.3 billion tons of trash each year. (That's about 2.6 pounds per person per day.) Yet the World Bank expects the world’s solid waste to swell to 2.2 billion tons per year by 2025, largely driven by rapid growth in poorer countries like China and India. And the costs of trash are expected to quadruple or quintuple in many low-income countries.

China Asks Foreign Governments to Stop Reporting on Its Air Quality - After years of choking smog that stings the eyes and burns the lungs, regularly documented by an air sensor at the American Embassy in Beijing that posts the results hourly on Twitter, the Chinese government took a strong position on the issue on Tuesday. Wu Xiaoqing, the vice minister for environmental protection, demanded that foreign governments stop releasing data on China’s air. In a criticism clearly aimed at the United States, Mr. Wu said at a news conference that the public release of air-quality data by foreign governments’ consulates “not only doesn’t abide by the spirits of the Vienna Convention on Diplomatic Relations and Vienna Convention on Consular Relations, but also violates relevant provisions of environmental protection.” He complained that data from just a few locations were unrepresentative of broader air quality in China. He asserted that it was a mistake for a few consulates in China to be assigning labels like “hazardous” to China’s air based on standards that were drafted in industrialized countries and tightened over many years. Such standards may not be appropriate for conditions in developing countries like China, Mr. Wu said, adding that “we hope the few consulates in China would respect our country’s relevant laws and regulations, and stop publishing this unrepresentative air-quality information.”

One point does not a trend make (but many more points like this and I might reconsider) - The national temperature of 57.1 degrees F during spring was 5.2 degrees F above the long-term average, besting the previous warmest spring of 1910 by 2.0 degrees F. This marked the largest temperature departure from average of any season on record for the contiguous United States. The spring of 2012 was the culmination of the warmest March, third warmest April, and second warmest May. This marks the first time that all three months during the spring season ranked among the ten warmest, since records began in 1895.

Four Major U.S. Heat Records Fall In Stunning NOAA Report - Four major heat records fell in a stunning new climate report from NOAA on Thursday. The lower 48 states set temperature records for the warmest spring, largest seasonal departure from average, warmest year-to-date, and warmest 12-month period, all new marks since records began in 1895. While the globe has been tracking slightly cooler than recent years — thanks in part to the influence of now dissipated La Nina conditions in the tropical Pacific — the U.S. has been sizzling. The average springtime temperature in the lower 48 was so far above the 1901-2000 average — 5.2°F, to be exact — that the country set a record for the largest temperature departure for any season on record since 1895. Spring 2012 beat 1910, which had held the title for record warm spring, by a healthy margin of 2°F. No doubt much of this was driven by the massive heat wave that gripped the country during March, but unusual warmth continued during April and May, albeit not as intense. Such warming trends are consistent with both the influence of manmade global warming, particularly the prevalence of record warm nighttime temperatures, and natural variability has also favored warmer-than-average conditions so far this year. Studies show that as greenhouse gases continue to increase in the atmosphere, the odds of heat extremes are growing as well.

Dead Ahead: Less Rainfall For Drought-Sensitive Southern Hemisphere Regions? - Warming climate may mean less rainfall for drought-sensitive regions of the Southern Hemisphere, according to results just published by an international research team. Geoscientist Curt Stager of Paul Smith’s College in Paul Smiths, N.Y., and colleagues found that rainfall in South Africa during the last 1,400 years was affected by temperature–with more rain falling during cool periods and less during warm ones. The findings, published in the journal Climate of the Past, are supported by the National Science Foundation (NSF). “The link between climate change and rainfall in certain latitudes can have large effects on ecosystems,” said Paul Filmer, program officer in NSF’s Directorate for Geosciences. “Plants, for example, may be able to grow in a wider area, or conversely, be squeezed up a mountain or onto a peninsula. When the affected ecosystem supports a food crop, that can mean a bonanza–or a famine.”

Unprecedented May Heat In Greenland, Temperature Hits Stunning 76.6°F - The record books for Greenland’s climate were re-written [last] 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. The exceptional warmth this week was caused by the combination of an intense ridge of high pressure and a local foehn wind, said the Danish Meteorological Institute. The unusual May heat has extended to Scotland, which had its hottest May temperature on record on May 25 at Achnagart: 29.3°C (85°F). Greenland’s Narsarsuaq has seen a string of 3 consecutive days over 70°F this week–the 3rd, 7th, and 12th warmest days there since record keeping began in 1941. The ridge of high pressure responsible is expected to stay in place several more days, bringing additional 70° days over Southern Greenland. The warm May temperatures could be setting the stage for a big Greenland melt season this summer–the International Research Institute for Climate and Society (IRI) is predicting a 50 – 60% that the southern 2/3 of Greenland will experience above-average temperatures this summer. They forecast just a 10 – 15% chance of below-average temperatures.

Arctic climate change: Alaska town's fish stocks, drinking water threatened - Melting ice cellars and rotting whale meat, the arrival of beaver fever in a once-pristine land, and water supplies that might go dry are just a few of the health risks posed by climate change in the Arctic. Now, in a newly released fifth report examining looming threats to villages, the Center for Climate and Health at the Alaska Native Tribal Health Consortium zeroes in on the Arctic Alaska village of Selawik, population 830, about 70 miles southeast of Kotzebue that's said to be sinking as permafrost thaws. The Inupiat village has been called the "Venice of Northwest Alaska" because of the settling ground. Stairs to some houses no longer reach the ground. Shifting water pipes break more easily. And some homes tilt so much toilet bowls can't fill with water for flushing, forcing families to return to the old-fashioned honeybucket.

Global warming: Cornell researchers say melting Arctic ice may be setting the stage for more extreme winter weather — Evidence continues to mount that melting Arctic ice is having a significant effect in the mid-latitudes, where most people live, and it’s not something that’s going to take decades to develop. Instead, researchers say, the warming of the high latitudes has decreased a historic pressure gradient at the boundary of the high- and mid latitudes. Basically, the pressure difference has decreased, and that is having a fundamental effect on the way the jet stream moves from west to east in the northern hemisphere. The jet stream is a high-elevation, high-speed river of air that drives storm systems. Historically, there are variations in the flow of the jet stream, which also influenced by seasonal and decadal variations in sea surface temperatures and other factors. As the Arctic thaws, that prevailing westerly flow has slowed measurably, by 20 percent in the past few decades. This past winter, Rutgers University researcher called these changes the “revenge of the atmosphere,” while giving a climate and weather presentation in Breckenridge, Colorado. “Everyone thinks of Arctic climate change as this remote phenomenon that has little effect on our everyday lives,  “But what goes on in the Arctic remotely forces our weather patterns here.”

Who took the “think” out of think tanks? - The American Enterprise Institute is an interesting organization, often shrilly ideological but also scholarly from time to time.  I was curious to find out what kind of research they were doing on climate change. I did find some interesting policy papers on their webpage on the topic of climate policy. But here’s the surprising part: the latest paper on the subject is dated June 23, 2010.  Of course, AEI has continued to produce a stream of op-eds on the subject, but no actual research. The AEI is not alone in its lapsed research. There also seems to be no recent research on the subject by the Cato Institute.  The Heartland Institute’s webpage is more difficult to navigate, but I couldn’t find any recent research papers there either. The failure of the leading conservative think tanks to maintain their research on such an important issue is disturbing.  There are several possible reasons, all of them negative in terms of their implications for conservatism.  Maybe researchers can’t work on climate issues any more, even to advocate conservative positions, because that would require taking the science seriously, which is verboten on the Right.  Or perhaps the think tanks’ agendas are reactive, designed to attack liberal proposals but not to generate conservative policy responses on important issues. Or maybe the research agenda is driven by headlines rather than long-term social problems. None of these possible explanations bodes well for the capacity of the conservative movement to contribute to sound public policy.

Environmental collapse now a serious threat: scientists - Climate change, population growth and environmental destruction could cause a collapse of the ecosystem just a few generations from now, scientists warned on Wednesday in the journal Nature. The paper by 22 top researchers said a “tipping point” by which the biosphere goes into swift and irreversible change, with potentially cataclysmic impacts for humans, could occur as early as this century. The warning contrasts with a mainstream view among scientists that environmental collapse would be gradual and take centuries.The study appears ahead of the June 20-22 UN Conference on Sustainable Development, the 20-year followup to the Earth Summit that set down priorities for protecting the environment. The Nature paper, written by biologists, ecologists, geologists and palaeontologists from three continents, compared the biological impact of past episodes of global change with what is happening today.

Earth Facing Imminent Environmental ‘Tipping Point’: Report - Humankind is facing an imminent threat of extinction, according to new research released on Wednesday by the science journal Nature. The report Approaching a state shift in Earth’s biosphere reveals that our planet's biosphere is steadily approaching a 'tipping point', meaning all ecosystems are nearing sudden and irreversible change that will not be conducive to human life. The authors describe what they see as a fast paced 'state shift' once the tipping point is reached, which contrasts with the mainstream view that environmental change will take centuries. "It's a question of whether it is going to be manageable change or abrupt change. And we have reason to believe the change may be abrupt and surprising," said co-researcher Arne Mooers, a professor of biodiversity at Simon Fraser University in Canada's British Columbia. "The data suggests that there will be a reduction in biodiversity and severe impacts on much of what we depend on to sustain our quality of life, including, for example, fisheries, agriculture, forest products and clean water. This could happen within just a few generations,"  "My colleagues who study climate-induced changes through the Earth's history are more than pretty worried," he said in a press release. "In fact, some are terrified,"

For an Ailing Planet, the Cure Already Exists - The planet's climate recently reached a new milestone of 400 parts per million (ppm) of carbon dioxide in the Arctic. The last time Earth saw similar levels of climate-heating carbon dioxide (CO2) was three million years ago during the Pliocene era, where Arctic temperatures were 10 to 14 degrees C higher and global temperatures four degrees C hotter. Research stations in Alaska, Greenland, Norway, Iceland and even Mongolia all broke the 400 ppm barrier for the first time this spring, scientists reported in a release Thursday. A global average of 400 ppm up from the present 392 ppm is still some years off. If today's CO2 levels don't decline - or worse, increase - the planet will inevitably reach those warmer temperatures, but it won't take a thousand years. Without major cuts in fossil fuel emissions, a child born today could live in a plus-four-degree C superheated world by their late middle age, IPS previously reported. Such temperatures will make much of the planet unlivable. If today's CO2 levels don't decline - or worse, increase - the planet will inevitably reach those warmer temperatures, but it won't take a thousand years. Without major cuts in fossil fuel emissions, a child born today could live in a plus-four-degree C superheated world by their late middle age. In a four-degree warmer world, climate adaptation means "put your feet up and die" for many people in the world, said Chris West of the University of Oxford's UK Climate Impacts Program in 2009.

RGGI States Cut CO2 By 23 Percent In First Three Years - A three-year summary of America’s first carbon trading program was released yesterday. The news is pretty good for anyone who cares about reducing carbon emissions; it’s inconvenient for anyone hell-bent on preventing America from implementing a carbon pricing plan. According to the program administrator of the Regional Greenhouse Gas Initiative (RGGI) — a nine-state cap-and-trade market established in the Northeast in 2008 — average annual CO2 emissions have fallen by 23 percent compared to emission levels before the start of the program: Average annual CO2 emissions for the three-year period were 126 million short tons, a 23 percent reduction when compared to the preceding three-year period, 2006-2008. Three-year average electricity consumption across the ten-state region declined only moderately, by 2.4 percent, between the same periods, according to the U.S. Energy Information Administration. CO2 emissions were collectively reduced to 33 percent below the annual pollution cap of 188 million short tons. And the predictions of economic collapse and suffering ratepayers? Not happening.

Climate Change Stunner: U.S. Leads the World in CO2 Reductions Since 2006, Thanks to Natural Gas - The world has yet to figure out how to stop the relentless increase in climate pollution. But mixed in with all the bad news there was one shining ray of hope. One of the biggest obstacles to climate action may be shifting. As the IEA highlighted: "US emissions have now fallen by 430 Mt (7.7%) since 2006, the largest reduction of all countries or regions. This development has arisen from lower oil use in the transport sector … and a substantial shift from coal to gas in the power sector.  How big is a cut of 430 million tons of CO2? It's equal to eliminating the combined emissions of ten western states: Alaska, Washington, Oregon, Idaho, Montana, North Dakota, South Dakota, Wyoming, Utah and Nevada. It seems the planet's biggest all-time CO2 polluter is finally reducing its emissions. Not only that, but as the chart above shows, US CO2 emissions are falling even faster than what President Obama pledged in the global Copenhagen Accord.  Here is the biggest shocker of all: the average American's CO2 emissions are down to levels not seen since 1964 -- over half a century ago."

House Adopts Measure to Halt Light-Bulb Efficiency Law - Republicans in the U.S. House adopted a provision designed to save traditional incandescent light bulbs by blocking what one lawmaker called the “energy police” from enforcing an efficiency standard. Even if the House language approved last night survives in the Democratic-led Senate, the impact for consumers probably will be limited because manufacturers such as Royal Philips Electronics NV (PHIA) and General Electric Co. (GE) have revamped manufacturing to comply with the law, making bulbs that use less electricity to generate the same amount of light.The first phase of the federal efficiency standard, which was passed in 2007 during President George W. Bush’s administration, went into effect this year. It has become a symbol of government excess to Tea Party-aligned lawmakers, who say consumers should be able to buy the bulbs they want.

CNN On Solyndra Loan: Bush Started It, There’s No Evidence of Wrongdoing, And Romney’s Attacks Are Made Up - CNN has two dynamite pieces on Solyndra, “Romney wrong on Solyndra facts” and “Seven things you should know about Solyndra.” The first one, by Steve Hargreaves of CNN Money, ends: It’s one thing to spin something to one’s advantage. It’s another to simply make things up to make the other guy look bad. Romney’s Solyndra speech was an example of the latter. Disgraceful. Hargreaves shows that Mitt Romney’s key claim — “An independent inspector general looked at this investment and concluded that the Administration had steered money to friends and family and campaign contributors” — has no basis in fact. The second piece, also by Hargreaves, lists 7 key facts: 1.  It was started by Bush: The DOE loan program that funded Solyndra was actually started by President Bush in 2005. It was intended to provide government support for “innovative technologies”…. In fact, as Climate Progress reported back in September, the “Bush Administration advanced the Solyndra loan guarantee for two years” before Obama became President.

Solar Panel Payments Set Off a Fairness Debate - When the sun is shining, the solar panels on his Fresno condominium produce more than enough power for his needs, and the local utility is required to buy the excess power from him at full retail prices. But it’s not such a good deal for his utility, Pacific Gas and Electric. As he and tens of thousands of other residential and commercial customers switch to solar in California, the utilities not only lose valuable customers that help support the costs of the power grid but also have to pay them for the power they generate. Ultimately, the utilities say, the combination will lead to higher rate increases for everyone left on the traditional electric system. “Low-income customers can’t put on solar panels — let’s be blunt,” “So why should a low-income customer have their rates go up for the benefit of someone who puts on a solar panel and wants to be credited the retail rate?” The net metering benefit, which is available to residential and commercial customers with renewable energy systems in more than 40 states and has helped spur a boom in solar installations, is at the heart of a battle. Utilities, consumer advocates and renewable energy developers across the country are fighting over how much financial help to give to solar power and, to a lesser extent, other technologies. Regulators are in the middle, weighing the societal benefits of renewables as well as how best to spread the costs.

Power Shortage Vexes Texas - WSJ.com: Texas, which is facing an electricity shortage, should let power prices rise sharply to give companies more incentive to build badly needed generating plants, experts said in a new report to state grid officials. But consumer groups and a coalition of the state's cities said higher energy costs would hurt customers while the U.S. economy remains sluggish. As Texas's population has grown, power demand has surpassed increases in generating capacity, which is one solution to the state's problem. That has prompted grid operators to warn the state will be close to the edge this summer and could experience rolling blackouts

New cars in Europe will have to cut carbon emissions by a third…Carmakers will have to slash the carbon emissions of new cars sold in Europe by a  third by 2020, according to leaked European Commission documents seen by the Guardian.The EC proposals would be legally binding and the document plans for even stricter emissions targets for 2025 and 2030, which could only be met if hybrid or electric vehicles become mainstream.Greg Archer, of campaign group Transport & Environment, said: "Tighter CO2 standards for cars will be welcomed by drivers across Europe who will save €500 per year at the petrol pump on average if this proposal is adopted."But car manufacturers warned that tough regulation could harm an industry already struggling with the economic crisis and foreign competition. New car registrations in Europe are forecast to fall by 7% in 2012, and Volkswagen was the only major manufacturer in Europe that did not lose money in 2011.

Supervolcanoes that could destroy humanity ‘may explode sooner than scientists thought’ - Super-eruptions from massive volcanoes with the power to destroy humanity could take much less time to form than scientists previously thought, it was reported yesterday. Supervolcanoes are a huge but little understood natural disaster waiting to happen. Only a handful of such volcanoes exist in the world, but should one erupt the effect would be devastating. It is thought the sound of a super-eruption would be heard all over the planet, black rain would fall and the sky would darken across the earth. They are thought to be second only to a massive asteroid impact in terms of the devastation they would visit on the earth. The huge volcanoes are fuelled by massive magma pools that build up deep beneath the ground. They were previously thought to take between 100,000 to 200,000 years to build up enough pressure for the massive eruption to take place.` However research published in the online journal, Public Library of Science ONE, now suggests the process could take just thousands or even hundreds of years.

FirstEnergy Says It’s Fixing a Leak at Ohio Nuclear Plant - FirstEnergy Corp. (FE) is repairing a leak discovered June 6 as it restarted Davis-Besse nuclear station in Ohio following a refueling outage, a company spokeswoman said.  FirstEnergy can’t say for competitive reasons when it expects to complete the repair to the reactor’s coolant system or when the 913-megawatt unit will come online, Jennifer Young, a spokeswoman for the Akron, Ohio-based company said in a telephone phone interview today.  The amount of radioactive water that sprayed through the pinhole-sized leak was “relatively small” and no radiation was discharged from the plant, Young said.

66-foot concrete dock washes ashore in Oregon, may be from 2011 Japan tsunami - A massive, 66-foot concrete dock mysteriously washed up on the Oregon shore this week. And officials are trying to figure out if the floating structure had traveled all the way from Japan after the March 2011 tsunami. Local affiliate KATU reports that the dock has a placard with Japanese writing that they are attempting to translate. In addition, the station traced a phone number on the placard to a business located in Tokyo. The Oregon Parks and Recreation Department sent a picture of the placard to the Japanese consulate in Portland for review. Even if the dock did travel thousands of miles to reach the shores of Oregon, it did not defy physics to get arrive there. While the structure is nearly 70 feet long, 7 feet tall and 19 feet wide and made of concrete and metal, it was also reportedly designed to float.

Fukushima in Peril (and us, too)  - Its official! A building can be leaning and have bulging walls supporting a massive tank of liquid on the top floor, and still be secure from any earthquake! This means the world is safe!The Wall Street Journal just reported that TEPCO doesn’t have a plan to deal with the collapse of Spent Fuel Pool 4 at the Fukushima nuclear reactor in Japan. Yet a host of scientists, nuclear experts and researchers, say we facing a situation right now that is so serious that it literally threatened our very existence, for the entire Northern Hemisphere is at risk of becoming largely uninhabitable if the building collapses. According to U.S. Army General Albert Stubblebine of the Natural Solutions Foundation, the situation is extremely serious and poses a significant danger to our entire civilization. Since TEPCO and the Japanese government have refused the entombment option (as the Russians did with Chernobyl) the world is at the mercy of nature. A mistake here would cause the deaths of tens of millions of people across the globe. Read report here.

FUKUSHIMA: Pacific Ocean Will Not Dilute Dumped Radioactive Water - The operator of the stricken Fukushima nuclear plant has been dumping something like a thousand tons per day of radioactive water into the Pacific ocean. Remember, the reactors are “riddled with meltdown holes”, building 4 – with more radiation than all nuclear bombs ever dropped or tested – is missing entire walls, and building 3 is a pile of rubble. The whole complex is leaking like a sieve, and the rivers of water pumped into the reactors every day are just pouring into the ocean (with only a slight delay). Most people assume that the ocean will dilute the radiation from Fukushima enough that any radiation reaching the West Coast of the U.S. will be low. For example, the Congressional Research Service wrote in April: Scientists have stated that radiation in the ocean very quickly becomes diluted and would not be a problem beyond the coast of Japan. But – just as we noted 2 days after the earthquake hit that the jet stream might carry radiation to the U.S. by wind – we are now warning that ocean currents might carry more radiation to the at least some portions of the West Coast of North America than is assumed.

Quickstep to restarting reactors - The union of nine local governments in Kansai — the Shiga, Osaka, Kyoto, Hyogo, Wakayama, Tokushima and Tottori prefectures plus Osaka and Sakai cities — on Wednesday softened its opposition to the restart of the Nos. 3 and 4 reactors at Kansai Electric Power Co.'s (Kepco's) Oi nuclear power plant in Fukui Prefecture. The union's turnaround has removed one of the last major obstacles to the central government's effort to bring the reactors back on line. The central government is expected to make a final decision soon on restarting the reactors. Behind the union's turnaround was the central government's pressure and lobbying by Kepco and the Kansai Economic Federation, headed by Kepco Chairman Shosuke Mori. The call for a 15 percent reduction in power consumption apparently played an important role. If the central government decides to restart the Oi reactors, it will be a decision made in the absence of a solid foundation to ensure the safety of nuclear power generation. The sole "scientific basis" for restarting the Oi reactors 3 and 4 is the results of a stress test. But a stress test is, after all, a computer simulation whose results can vary depending on the data fed into computers and the computer programs used.

Fracking Fatalities - As hydraulic fracturing—aka, "fracking"—has become a more common way to extract natural gas from underneath the United States, employment in the natural gas industry has expanded dramatically. According to the Bureau of Labor Statistics, between 2003-2008 there was a 62-percent increase in the number of workers employed in the oil and natural gas industries in the United States. During this same period, the number of fatalities in the industries grew by 41 percent. Despite the increase in fracking sites, the number of inspections of areas being drilled has decreased. According to an analysis of more than 50,000 inspection reports by The New York Times, the number of drilling rigs rose by more than 22 percent in 2011 from the prior year, but the number of inspections at such worksites fell by 12 percent. In a letter sent last week, the AFL-CIO, the United Steelworkers union and the United Mine Workers complain that the Occupational Health and Safety Administration (OSHA) and the Mine Safety and Health Administration (MSHA) are not doing enough to regulate the potential hazards that harm fracking workers. “A strong effort by the federal safety and health agencies is needed to work with the industry and involve unions to ensure that these controls are properly implemented as employment in this industry sector rapidly grows,” the unions and the labor federation wrote.

Natural gas and the Seventh District - Chicago Fed - U.S. energy markets are undergoing significant upheaval because of the surging domestic production of natural gas and accompanying falling prices for this commodity. Enhanced production of natural gas has come about because of technological gains in gas extraction—namely, enhanced techniques for the fracturing of shale deposits and horizontal drilling. One of the main motivations for exploring domestic soil for more natural gas is the climbing prices of petroleum products that the U.S continues to import to a significant degree. If environmental concerns associated with extracting shale deposits can be resolved, natural gas offers an abundant, widely available, and secure energy source in the lower 48 states. As seen below, wholesale natural gas prices have fallen considerably in recent months. For gas purchased on the spot market (where transactions for gas needed within a matter of days, rather than months, are completed), prices have fallen by over one-half. Unfortunately, though such spot market prices are telling, they do not reflect the ultimate prices paid by end-users. That is because much of the natural gas product is purchased on long-term contracts, whereby the prices do not yet reflect recent production capabilities and output. Equally important, it takes much infrastructure, especially pipeline and storage, to bring the product to the location where it can be productively used. And so, depending on the location of use, and the type of user, natural gas prices vary to a great degree.

Unconventional Natural Gas and Environmental Issues - As a starting point, here's an overview of the U.S. situation, with a map showing where the main deposits are located: "Until recently, unconventional natural gas production was almost exclusively a US phenomenon. Tight gas production has the longest history, having been expanding steadily for several decades. Commercial production of coalbed methane began in the 1980s, but only took off in the 1990s; it has levelled off in recent years. Shale gas has also been in production for several decades, but started to expand rapidly only in the mid-2000s, growing at more than 45% per year between 2005 and 2010. Unconventional gas production was nearly 60% of total gas production in the United States in 2010. While tight gas and shale gas account for the overwhelming bulk of this, shale gas is expected to remain the main source of growth in overall gas supply in the United States in the coming decades. One part of the report tried to enunciate a set of "golden rules" that should be followed to protect the environment while extracting this gas. There is a lengthy discussion of these "golden rules," but the overall tone can be discerned from the main headings (each of which has several subheadings): Monitor, disclose and engage; Watch where you drill; Isolate wells and prevent leaks; Treat water responsibly; Eliminate venting, minimise flaring and other emissions; Be ready to think big; Ensure a consistently high level of environmental performance.

Exxon Mobil warns red tape risks snuffing out gas boom - (Reuters) - Exxon Mobil Corp, the world's largest publicly listed energy company, warned on Tuesday that too much government regulation could undermine a rapid global expansion of gas output from a range of unconventional sources. Helped by a boom in shale gas, Exxon Mobil has become North America's largest natural gas producer, but energy firms face pressure for tighter regulation of the industry over concerns about the impact of drilling on the environment and also public concern that U.S. gas prices could rise if the gas is exported. Exxon Mobil Chief Executive Rex Tillerson said governments had to ensure the right environment for future investments in gas projects. "Regulations should provide a clear, efficient roadmap for how to get things done, not a complex tangle of rules that are used to stop things from getting done," Tillerson told the World Gas Conference in the Malaysian capital. "If government puts the development of these new sources of energy at a standstill, they will find their economies walking backwards," he added.

Capital Destruction in Natural Gas - The travails of Chesapeake Energy and other drillers have been well documented. Their problem: a debt-fueled binge in horizontal drilling and hydraulic fracturing (fracking) unlocked vast reserves—how vast is being disputed—of natural gas in shale formations across much of the US. And the very success of that binge ended in a supply glut that drove the price of natural gas from a peak of $13 per million Btu years ago into the historic basement. The economics of fracking are horrid. All wells have decline rates where production drops over time. But instead of decades for traditional wells, decline rates in horizontal fracking are measured in weeks and months: production falls off a cliff from day one and continues for a year or so until it levels out at about 10% of initial production. To be in the black over its life under these circumstances, a well in the Barnett Shale would have to sell its production for about $8 per million Btu, pricing models have shown. At today’s price of $2.43 per million Btu at the Henry Hub—though up 28% from the April low—drilling is destroying capital at an astonishing rate, and drillers are left with a mountain of debt just when decline rates are starting to wreak their havoc. To keep the decline rates from mucking up income statements, companies had to drill more and more, with new wells making up for the declining production of old wells. Alas, the scheme hit a wall, namely reality. For that whole fiasco, read.... The Natural Gas Massacre Gets Bloodier.

Nord Stream: Russia's Natural Gas Link to the West - Since the 1991 implosion of the USSR, the Russian Federation has been bedevilled by a transit problem – how to shift its natural gas exports to lucrative European markets without the pesky problem of transiting former Soviet republics Belarus and Ukraine. In contrast, Russian consumers pay heavily subsidized prices for Gazprom products, leaving European customers as the company’s cash cow. Russia’s solution? The 759 mile-long Nord Stream subsea offshore natural gas pipeline, from Vyborg in the Russian Federation’s Karelia to Greifswald in Germany has been laid along the bottom of the Baltic. Nord Stream is owned and operated by Nord Stream AG. Nord Stream’s first pipeline leg was laid in May 2011 and inaugurated on 8 November 2011, with a second parallel line to be laid in 2011–2012. After the commissioning of the second line at the end of 2012 the Nord Stream pipeline will be transporting 55 billion cubic meters of gas per year to Europe. Now, Scandinavia and Britain are interested in Nord stream pipeline extensions.

Michigan Oil Spill Highlights Need for Safety Overhaul - Canadian pipeline company Enbridge is in the hot seat for an oil spill from a ruptured line in southern Michigan. Crews in Marshall, Mich., are still working to clean up contaminated areas nearly two years after Line 6B burst open, dumping about 20,000 barrels of so-called tar sands oil into the Kalamazoo River and surrounding waters. A report from the NTSB suggests operators in Canada interpreted the pressure drop associated with the spill incorrectly and continued pumping oil through the line after it broke open.  Line 6B of the Lakehead oil pipeline system burst open in the early evening of July 26, 2010. Enbridge didn't recognize the leak until 17 hours had passed. The pipeline was set for a 6pm shutoff and a 6.5 foot tear appeared in Marshall two minutes prior to the closure. Alarms that began to sound, according to the National Transportation Safety Board, were indicative of zero pressure at the section of Line 6B in Marshall and, minutes later, a leak. Operators, however, interpreted the alarms as a response to column separation, a depressurization that normally occurs when a pipeline is getting drained, as was the case with Line 6B. Operators decided to continue pumping oil, however, to get oil through to the next station. More or less the same thing happened when the next shift came in because, according to the NTSB account, operators were "never told of the alarms."

BP accused of attack on academic freedoms after scientists subpoenaed - A pair of scientists have accused BP of an attack on academic freedom after the oil company successfully subpoenaed thousands of confidential emails related to research on the Gulf of Mexico oil disaster. The accusation from oceanographers Richard Camilli and Christopher Reddy offered a rare glimpse into the behind-the-scenes legal manoeuvring by BP in the billion-dollar legal proceedings arising from the April 2010 blow-out of its well. It also heightened fears among scientists of an assault on academic freedoms, following the legal campaign against a number of prominent climate scientists. In an opinion piece in the Boston Globe, the scientists, from the Woods Hole Oceanographic Institution, said they volunteered in the early days of the spill to deploy robotic technology to help BP and the Coast Guard assess how much oil was gushing from the well. The two researchers turned over some 50,000 pages of research notes and data to BP. But BP demanded more, and obtained a court subpoena for the handover of more than 3,000 confidential emails. The scientists handed over the emails last week – but with severe misgivings, they wrote. "Our concern is not simply invasion of privacy, but the erosion of the scientific deliberative process," they wrote. They feared the email exchanges, in which the scientists discuss hitting dead ends or challenging each other on their conclusions, were open to deliberate misinterpretation.

Canadian government overhauling environmental rules to aid oil extraction - The government of Canadian Prime Minister Stephen Harper is rewriting the nation’s environmental laws to speed the extraction and export of oil, minerals and other materials to a global market clamoring for Canada’s natural resources. “The government is saying, politically, we want to hitch our wagon to an economic development strategy in which natural resource extraction plays a very large part,” .The government has added provisions to an omnibus budget bill that would revamp the way the government reviews the environmental impact of major projects, regulates threats to fisheries and scrutinizes the political activities of nonprofit groups.  Economic and political factors account for the controversial gambit. High prices for oil and minerals, along with demand from Asia, have given Canada new incentive to tap into its resources, and new technology has made extraction easier. And while Harper has been prime minister for six years, his Conservative Party won an outright majority just one year ago.

Canada Oil Sands And The Precautionary Principle - The precautionary principle is typically defined as “if an action or policy has a suspected risk of causing harm to the public or to the environment, in the absence of scientific evidence that the action or policy is harmful, the burden of proof that it is not harmful falls on those taking the action.” In practice, the principle is utilized by government policy makers to ensure technological advances don’t pose too dire of an effect on the surrounding environment. This may appear a noble goal if one accepts the premise that the prime function of government is the protection of life and property. History proves otherwise as easily corruptible politicians have tended to grant exceptions to wealthy business interests which look to dump their waste in public-owned natural resources such as waterways. It is also clear judging by historical cases that socialization often results in environmental degradation. One look at the pollution in once-communist nations such as China or the former Soviet Union reveals that a lack of private property results in a type of moral hazard en masse as there is little incentive to preserve what you don’t officially own. Rather than enforce property rights, the state systematically violates them in order to buttress its dominating hold over society and reward its supporters. What the precautionary principle has resulted in is further discretion over economic affairs given over to those public officials who take great delight in micro-managing the lives of others. The stifled progression in technology and industrialization that is a consequence of the precautionary practice is the insidious but sincere goal of its enthusiasts.

Canada’s oil production to double, industry says - Canadian crude oil production will more than double to 6.2 million barrels per day by 2030, according to an oil industry forecast published Tuesday. “Resurging growth in Western Canadian conventional oil production and new oil sands investments are driving the positive outlook,” Greg Stringham, vice-president, markets and oil sands, for the Canadian Association of Petroleum Producers, said in a release. “Canadian oil is clearly on the global stage and this forecast growth will put Canada in the top three or four oil producers in the world.” Canada currently ranks as the world’s sixth largest producer of crude oil after Saudi Arabia, Russia, the U.S., China, and Iran, according to the U.S. Energy Information Administration. The bullish outlook suggests that conventional production is increasing because new technology allows the oil industry to produce oil from “formerly uneconomic resources,” the report reads.

Canada's pipeline a pipe dream? - At first glance, the small Canadian town of Kitimat may not have a lot to offer. The town, on the coast of British Columbia, has seen a population decline in recent years and many of the local factories have shut down, with the exception of the aluminum smelter that was the centre of Kitimat's birth in the 1950s.But one thing Kitimat does have is an excellent deepwater harbour. And thats what makes this unlikely spot the fulcrum for Canada's effort to lever itself into a leading player in the worldwide energy market.With the third-largest oil reserves in the world - or, by some estimates, the second-largest - Canada has become the top energy supplier to the United States and hopes to become the top supplier for other nations as well. Approximately 1.5 million barrels a day are produced now, and that number is expected to double or triple in the next decade."We see Canada growing to close to 5 million barrels a day by 2025, 2026," Greg Stingham told Al Jazeera. Stingham is the vice-president for Oil Sands and Markets at the Canadian Association of Petroleum Producers. "We're looking to place 2 million barrels a day from Canada into new markets. So that's why we're so interested in expanding."

Oil Output Soars as Iraq Retools - Despite sectarian bombings and political gridlock, Iraq’s crude oil production is soaring, providing a singular bright spot for the nation’s future and relief for global oil markets as the West tightens sanctions on Iranian exports. The increased flow and vital port improvements have produced a 20 percent jump in exports this year to nearly 2.5 million barrels of oil a day, making Iraq one of the premier producers in OPEC for the first time in decades. Energy analysts say that the Iraqi boom — coupled with increased production in Saudi Arabia and the near total recovery of Libya’s oil industry — should cushion oil markets from price spikes and give the international community additional leverage over Iran when new sanctions take effect in July.

Carving Up Iraq, Barrel By Barrel - Iraq’s latest energy auction was a flop, and while major international companies balked at everything from unattractive contract terms to security concerns, the failure of the auction highlights how the struggle for power between north and south is shaping the future of energy in the region and beyond.  Earlier this week, Iraq held its fourth round of energy auctions with disappointing results that reflect the global gas glut, the rise of unconventional oil and gas and some very particular geopolitical maneuverings.  During the two-day auction which closed on 31 May, Iraq managed to seal a deal for only three contracts out of 12 gas and oil exploration blocks on auction. More specifically, eight of those exploration block offers were not even bid on as Baghdad stuck to its guns over some important financing questions. Major international companies had already set the stage with Baghdad before the auction, warning that they would not accept Baghdad’s offer of a maximum price of $6.24 per barrel of oil produced. Baghdad refused to budge and has clearly lost the gamble. 

Shale Play in Siberia 80X Bigger than Bakken - "The Bakken shale play is one of the biggest in the U.S., but is absolutely dwarfed by a shale play in Russia. The Bazhenov is located in Western Siberia, and according to Oswals Clint, Sanford Bernstein’s lead international oil analyst, it “covers 2.3 million square kilometers or 570 million acres, which is the size of Texas and the Gulf of Mexico combined;” an area 80 times bigger than the Bakken. News of the Bazhenov may be new to many of us, but geologists have actually been studying it for at least 20 years, however it is only in the last few years that the technology and expertise necessary to drill the oil has been developed.ExxonMobil and Statoil have agreed to start joint venture operations in the region with the Russian, state-owned Rosneft in an attempt to secure access to the Bazhenov. Exxon made a recent statement which confirmed the agreement “to jointly develop tight oil production technologies in Western Siberia.”

Cushing crude inventory unusually high - Crude oil stocks at Cushing, OK (where West Texas Intermediate futures contract is settled) continue to build to levels not seen for at least the past five years. Some of that buildup is of course due to lower demand, as the US economy slows further. There is also a structural component to this inventory rise. The US pipeline infrastructure is still insufficient to move the required amounts of crude to the various refineries. A number of pipeline projects are in the works to address this, but it may be a while before they have an impact.These inventory levels have certainly put downward pressure on prices and unless we see a substantial reduction, WTI price will stay subdued (particularly relative to Brent).

Bakken and Eagle Ford Oil Help Push U.S. Crude Oil Production in Q1 2012 to the Highest in 14 Years - As I reported recently on CD, U.S. crude oil production is booming and reached a 14-year high in the month of March, see chart above.  The EIA is now also reporting this today as its "Today in Energy" feature: "Strong growth in U.S. crude oil production since the fourth quarter of 2011 is due mainly to higher output from North Dakota, Texas,and federal leases in the Gulf of Mexico, with total U.S. production during the first quarter of 2012 topping 6 million barrels per day (bbl/d) for the first time in 14 years. After remaining steady between 5.5 million and 5.6 million bbl/d during each of the first three quarters of 2011, EIA estimates that U.S. average quarterly oil production grew to over 5.9 million bbl/d during the fourth quarter and then surpassed 6 million bbl/d during the first quarter of 2012, according to the latest output estimates from EIA's May Petroleum Supply Monthly report (see chart below). The last time U.S. quarterly oil production was above 6 million bbl/d was during October-December 1998."

Falling Oil Prices Are No Mystery - Oil prices have fallen sharply in the past two months, with Brent crude sinking to $97 a barrel and West Texas Intermediate hitting $83. The explanation is simple: Since March, the world has been producing more oil than it’s consuming, according to data gathered by the Energy Intelligence Group. Global oil consumption has been declining since the end of 2011, falling to 88.5 million barrels per day at the end of April, from 90.4 million barrels per day in late December 2011. At the same time, world oil production has risen steadily for more than a year, driven by new finds and drilling techniques in North America and a 10 percent increase in production from OPEC during the past 12 months. The last time supply outstripped demand was in 2006. The U.S. is now sitting on more oil supplies than it has since 1990. And yet our demand for it is at close to a 15-year low—a result of economic weakness and increased energy efficiency. “The amount of oil it takes to move the economy is declining,”  The price declines have coincided with a steep selloff in oil futures contracts over the last two months. Speculators cut their net-long positions—bets that the price will rise—to the equivalent of 136 million barrels of oil, the lowest level since September 2010, according to the Commodity Futures Trading Commission.

Hot Dollar and Cold Crude - The U.S. Dollar has moved up 6% over the past five weeks. This rally has pushed bullish sentiment to levels seldom seem the past four years. Each time bullish sentiment has reached these levels at (2) in the attached chart, the Dollar retreated for a while. At the same that time bullish sentiment is very high, several resistance lines are meeting at one price point...suggesting the Dollar should cool off for a while. At the same time the Dollar has moved higher, Crude oil has declined from $109 to the low 80's. Crude oil and the 500 index have had a high degree of correlation the past few years. Now Crude oil is hitting a support line that just happens to coincide with the stock market lows of 2010 and 2011.

The driver of oil prices - This is the third article in a special series on oil and the Persian Gulf.
Part 1: Riddle of the sands
Part 2: The sweet and sour of oil

Supply and demand are fundamental drivers of oil prices, but other factors play their role - speculation, the dollar's exchange rate, political disruptions, conflicts, the Organization of the Petroleum Exporting Countries. In the figure below, the two lines represent the long-term trend in oil prices, 1861-2010; the dark green gives prices as they were in the dollars of the day and the light green gives the same prices in what we call constant dollars, that is adjusted for inflation and thus more logically comparable from year to year. One thing is clear - over this long period of roughly 150 years, oil prices adjusted for inflation (in 2010 dollars) have been in the $10-30 range for all but about 35-40 years, which were made up of three periods highlighted by three major peaks in prices - in 1860-1861, 1979-1980 and 2007-2008. Let's start by stating the obvious. Oil prices, like all other prices, are driven by both supply and demand. On the supply side, an increase in the immediate or short-run supply of oil is limited by the available excess capacity (of a particular type of crude) and by the oil that is stored in strategic reserves, company reserves and on tankers. The long-run supply of oil is not fixed. As oil prices rise, a number of related activities are encouraged on the supply side. New technologies are developed. New areas are explored for crude. New fields are developed.  But can this go on forever-higher oil prices encouraging new technologies and exploration activities to increase global oil output? No. While new fields come on stream, older fields are depleted and stop producing.

Aggregate factors in the price of oil - How much of the recent moves in oil prices can be explained by changing perceptions of global economic activity? One way I thought to get an impression of this was to look at the extent to which recent oil price movements are mirrored in other commodities. I was able to assemble a quick data set on spot prices for copper, corn, palladium, platinum, soybeans, and wheat, and calculated the principal component of the weekly percentage changes in these 6 commodity prices over January 2005 to September 2011. The value of this principal component for any particular week in fact turns out to be pretty close to the average change across the 6 commodity prices for that week. I'm a big believer in using parameters that are a priori plausible values in preference to over-fitting a given sample, and the principal components analysis suggests that a simple average would be an excellent summary statistic to use for these purposes. I then regressed the weekly percentage change in the price of crude oil on the average change for the other six commodities over that same week, and came up with a coefficient of 1.15. Again the principle of parsimony suggests that a value of 1 is a pretty good a priori reasonable value to use to represent that regression. That gives me then an extremely simple-minded way of answering the question, that in fact is pretty close to what an exact fit to the historical data would lead you to choose, namely, the predicted percentage change in oil prices this week is just the average percentage change observed for other commodities over this week.

3-Month Petroleum Usage Chart for March, April, May Shows 14 Years of Supply Demand Growth has Vanished - The following chart from reader Tim Wallace shows three-month usage for March, April, May compared to the same three months in prior years. The chart shows petroleum usage is back to levels seen in 1998. Gasoline usage is back to levels seen in 2002. This chart is consistent with reports that show petroleum usage in the eurozone is expected to fall to 1996 levels. For more details and an analysis of tanker rates, please see Oil Tanker Rates Lowest Since 1997 as Demand in Europe Plunges to 1996 Level, Production in US at 13-Year High;

US Air Travel Plateau - Yesterday, I had a bad air-travel day (one of several lately on work trips) which led me to wonder about all the peak-oil related predictions of the demise of air travel.  The above shows the data for total US domestic passenger revenue-miles.  The obvious features seem to be:

• Strong growth in the 1990s
• A sharp disruption as a result of 9/11
• Even stronger rebound growth in the early 2000s
• An abrupt leveling off in 2005 with the onset of the plateau in oil production
• A decline with the great recession
• Weak growth since the end of the recession

I think this is more or less exactly what a peak oil moderate would have predicted.  Air travel is an interesting case in that there's no way it's demand limited.  Cars, for example, one might make a somewhat plausible case that further American demand for more vehicle-miles-traveled was going to be limited by already high car ownership and congestion and inability to fit more roads and parking into already crowded cities.  But jet travel is also something that does and will always depend on liquid fuel, so it is likely that constraints in the liquid fuel supply will directly show through into constraints in jet travel.

The Resource Shortage Is Real - In late March and early April, as average U.S. gasoline prices climbed above $3.80 per gal., headlines warned that soaring prices could imperil President Obama’s chance of re-election. But just two months later, after average prices dropped by 30 cents per gal., what once seemed a deal breaker for the election is no longer considered an issue. This narrow focus on short-term fluctuations in the price of a single commodity blinds us to one of the biggest threats to the world’s economic progress and political stability in the decades to come: resource scarcity. Although gas prices, along with prices across the commodity complex, are currently trending downward, the fundamental imbalance between constrained supply and skyrocketing demand continues to point to higher prices in the long term. A recent IMF analysis, for example, suggests that the price of oil could more than double over the next decade, ascending to $180 per barrel by 2022. While this trend is worrying, hundreds of millions of people around the world are already suffering the effects of resource scarcity, as people in places like India and African nations struggle to gain access to potable water. A February report from the National Intelligence Council warns that water shortages will likely lead to political disruptions and many more violent wars in strategically important regions over the next decade.

U.N. Nuclear Chief Announces New Talks With Iran - The top United Nations nuclear official announced new talks with Iran on Monday aimed at gaining access to restricted sites, and he expressed concern about satellite images taken last month that showed the Iranians had demolished buildings at one site that inspectors have been especially pressing to visit. The remarks, by Yukiya Amano, the director general of the International Atomic Energy Agency, based in Vienna, suggested that his announcement less than two weeks ago that Iran had basically agreed to allow access to agency inspectors may have been premature. Mr. Amano’s remarks also appeared to signal impatience over the pace of Iran’s compliance with his requests. They could reinforce suspicions among Iran’s critics that Tehran has been engaged in a pattern of delaying and possibly seeking to conceal evidence of past nuclear work before agency inspectors visit previously off-limits sites.

Inter-Regional Trade Movements of Petroleum to and from the remaining Asia-Pacific Region, Part 11 - As discussed in Part 1, the Asia-Pacific remainder countries (APr), or, the remaining Asia-Pacific (rAP—a better acronym, I think) corresponds to the countries of the Asia-Pacific region as defined in the BP review (see Definitions: Brunei, Cambodia, China, China Hong Kong SAR*, Indonesia, Japan, Laos, Malaysia, Mongolia, North Korea, Philippines, Singapore, South Asia (Afghanistan, Bangladesh, India, Myanmar, Nepal, Pakistan and Sri Lanka), South Korea, Taiwan, Thailand, Vietnam, Australia, New Zealand, Papua New Guinea and Oceania) minus China and Japan. Because the inter-area movement and total oil import/export data for China (CH) and Japan (JP) are reported separately for the last decade’s worth of BP reviews, I can derive a separate sum for the remaining countries in the Asia-Pacific. The analysis gets more complicated as the BP review has progressively split out more and more sub-regions or countries (e.g., Australasia, then Singapore then India), which to ensure that I was analyzing a constant region from year to year, I add back in to the sum for rAP, minus the intra-regional exchanges.

Oil Tankers Squeezed as Rates Drop to Lowest Since ’97 - Aframaxes, already this year’s worst- performing oil tankers, are poised for the lowest annual rates in at least 15 years as Europe’s economic stagnation curbs demand, the region’s most-accurate shipping analysts said.  The 800-foot vessels will make about $12,000 a day in 2012, the least since 1997, said Anders Karlsen, an analyst at Nordea Markets in Oslo. His recommendations on the industry returned 25 percent in the past year, more than any shipping analyst in Europe tracked by Bloomberg. The vessels are struggling to win cargoes on all sides of the Atlantic, with European oil demand contracting for a sixth year at a time when the U.S. push for energy independence is driving down crude imports to the lowest since 1999. That’s drawing more South American and West African supply to Asia on routes favoring very large crude carriers, displacing smaller Suezmaxes which in turn are competing with Aframaxes.

China Services Growth Weakens as JPMorgan Cuts - China’s non-manufacturing industries expanded at the slowest pace in more than a year, as export orders declined and weakness in real estate countered strength in retailing and leasing, an official survey indicated.  The purchasing managers’ index fell to 55.2 in May from 56.1 in April, the National Bureau of Statistics and China Federation of Logistics and Purchasing said yesterday in Beijing. That’s the lowest reading since March 2011 when the federation started seasonally adjusting the data.  The report adds to evidence that the world’s second-biggest economy is weakening as Europe’s debt crisis crimps demand and government curbs on the property market feed through to more industries. JPMorgan Chase & Co. has cut its full-year economic growth forecast for China twice in a month and now estimates an expansion of 7.7 percent, down from 9.2 percent in 2011.  “The data reinforce the message that the slowdown has spread from the manufacturing sector to the services sector,”

Debt, property risks curb China stimulus firepower (Reuters) - Investors counting on China to repeat its huge 2008-09 stimulus to backstop global economic growth are failing to recognize Beijing's limited scope to deliver another major spending surge. The 4 trillion yuan ($628 billion) stimulus package launched to counter the post-Lehman global crisis won worldwide applause but left a stellar bill - a 10.7 trillion yuan ($1.7 trillion) mountain of local government debt, the risk of sour loans as growth slows and a super-heated property market. Add in a naturally declining growth rate and China's ability and willingness to deliver a forceful response to mitigate the global impact from Europe's deepening debt crisis are seriously curtailed, analysts say. "Not only is the policy room smaller, but the incentives for the government to produce a large stimulus package are smaller," Qinwei Wang, China economist at Capital Economics in London, told Reuters. The National Development and Reform Commission (NDRC), China's top economic planning agency, is fast tracking investment projects to support economic growth, expected by economists to slide this year to its weakest pace since 1999.

China’s Antiquated Financial System: The Creaking Grows Louder - To date, the state-dominated financial sector has funded the extraordinary growth in China’s real economy, averaging 10% a year over the last 30 years. “The striking thing about China’s reform model is that they have used the financial sector as a tool to achieve reform in the real economy,” says Bottelier. But, says Gary Liu, deputy director of the China Europe International Business School’s Lujiazui International Finance Research Center in Shanghai, this system can also end up holding back the domestic economy.”Soon, this lag in financial sector reform will drag down growth in the real economy,” especially as China aspires to transition from a low-wage, investment-led, manufactured export-based economy to a higher-margin, consumption-led, knowledge-based economy. “If you want innovation, one precondition is an efficient financial system,” Liu notes. “That’s why the U.S. is so strong in innovation, because U.S. companies, at whatever stage of growth, can borrow money — from private equity, banks or the stock market. In China, many small- to medium-sized enterprises (SMEs) have to bribe government officials to get loans.”

China Lets Currency Weaken, Risking New Trade Tensions - China’s currency dropped further in May against the dollar than in any other month since the Chinese government began allowing the renminbi to appreciate gradually in the summer of 2005. The shift could help Chinese exports but worsen trade friction with Europe and particularly the United States. By setting weaker and weaker daily “fixings” for the renminbi against the dollar at the start of each day’s trading, China’s central bank has pushed down the renminbi 0.9 percent against the dollar over the last month. The decline in the daily fixings coincides with signs that the Chinese domestic economy is slowing sharply this spring and may need help from stronger exports. A cheaper renminbi makes Chinese exports more competitive in overseas markets while making foreign goods more costly and less affordable in China. The Obama administration has been pressing China for the last three years to allow faster appreciation in the renminbi, not depreciation, as a way to narrow the United States’s trade deficit with China, which reached a record $295.46 billion last year. The Treasury Department issued a report last Friday criticizing China’s management of its exchange rate and calling for the first time for China to release data on the scale of its foreign exchange market interventions. But the report stopped short of labeling China a currency manipulator, a label that Chinese leaders have indicated they would bitterly resent and oppose.

China Joins Global Easing Party By Cutting The Lending And Deposit Rates By 25 bps - While minutes ago the Bank of England followed in the ECB's footsteps, it was the China central bank that stole England's thunder, announcing an unexpected rate cut moments before 7 am, and thus finally joining the global easing party: this was the first Chinese interest rate cut since 2008. As a reminder, hours before the global central bank intervention on November 30, China announced its first (50 bps) reserve requirement cut since 2008. Is today's PBOC move, which is the first cut of deposit and 1 year lending rates also since 2008, a harbinger of something much bigger to come any second now? From the PBOC: The People's Bank of China decided to cut financial institutions RMB benchmark deposit and lending interest rates since June 8, 2012. One-year benchmark deposit rate cut of 0.25 percentage points, year benchmark lending interest rate cut by 0.25 percentage points; other deposit and lending interest rates and individual housing provident fund deposit and lending rates be adjusted accordingly.

China Cuts Interest Rates for First Time Since 2008 - China cut interest rates for the first time since 2008, stepping up efforts to combat a deepening economic slowdown as Europe’s worsening debt crisis threatens global growth. The benchmark one-year lending rate will drop to 6.31 percent from 6.56 percent effective tomorrow, the People’s Bank of China said on its website today. The one-year deposit rate will fall to 3.25 percent from 3.5 percent. Banks can also offer a 20 percent discount to the benchmark lending rate, the PBOC said, widening from a previous 10 percent. European stocks and U.S. index futures extended gains as China’s move fanned optimism that policy makers around the world will do more to bolster growth. The announcement, two days before China is due to report inflation, investment and output figures, may signal that the economy is weaker than the government expected.

China cuts rates - The People’s Bank of China has just announced that they would cut interest rates on both 1-year deposits and lending side by 25 basis points: The latest benchmark 1-year deposit rate will be at 3.25% after the cut, while the benchmark 1-year lending rate will be at 6.31% after the cut.  Banks are also allowed to offer discount in lending of up to 20% of the benchmark rate, while deposit rates can be offered at a 10% premium to the benchmark rate. Taking that into account, the spread between deposits and lending rates will narrow (which is bad for Chinese banks).  Not only that, taking that 10% premium into account, deposit rates can potentially go higher than before the interest rate cuts.  And if this is what banks are going to do, it could be an asymmetric rate cut (i.e. more cut in lending rates but less or no cut in deposit rates), which is positive as far as rebalancing the economy is concerned:

China faces stimulus dilemma -- In chess, the term "zugzwang" describes a situation in which a player cannot skip a turn but any move he makes will put him in a worse situation. That also neatly describes the situation facing the Chinese government as it cut interest rates on Thursday for the first time since the height of the financial crisis in late 2008, lowering benchmark lending and deposit rates by 25 basis points to 6.31 per cent and 3.25 per cent respectively.With growth slowing much more than expected and an array of indicators pointing south, Beijing has been forced to act to prop up activity in the world's second-largest economy. But many economists and analysts from inside and outside the government are warning of the dangers involved in a fresh round of stimulus and easy credit that could reinflate a property bubble and exacerbate the stark structural imbalances already present in the Chinese economy. "This rate cut is a clear indication the government sees further weakness in the May economic data [due to be released on Saturday],". "But there's obviously a risk that the increased focus on the short term undermines the structural reform agenda."

No One Is Talking About The Chinese Move That Is Even More Important Than The Rate Cut - This morning, the People's Bank of China announced a surprise interest rate cut for the first time since 2008.  More important and much less talked about is China's decision to allow commercial banks to offer up to 10 percent premium to the benchmark deposit rate (compared to 0 percent previously), and the up to 20 percent discount to the lending rates (compared to 10 percent previously), according to Societe Generale analyst Wei Yao. Deposit growth has continued to slow despite the steady increase in the real deposit rate i.e. the money paid out in interest by a bank on cash deposits and other investment accounts. While this could pressure banks, the deposit rate increase would give the Chinese higher returns and help increase spending. From Yao: "This was the reason that we didn’t expect any cut in benchmark deposit rates. Neither did we think the PBoC would take such a big leap of faith to liberalizing deposit rates – even just partially – this year, as it is a game changer for China’s financial market, seemingly presenting a point of no return. Such a combination should introduce more competition among banks but may compress their profit margins, which is quite risky in the midst of an economic downturn. Therefore, the further liberalization is actually more significant than the cut."

China economy weak in May, inflation at 2-yr low (Reuters) - China's inflation dipped to a two-year low in May while economic activity remained weak, reinforcing expectation that further policy easing could be in the pipeline to head off a sharper slowdown in the world's second-largest economy. The spate of data released by the National Bureau of Statistics on Saturday was not as grim as the market had feared after China's surprising interest rate cut this week - the first since the depths of the 2008/09 global crisis. Industrial output rose 9.6 percent in May from a year earlier, picking up slightly from the 9.3 percent pace in April but was still near the weakest level in three years. Fixed-asset investment rose 20.1 in the January-May period from a year earlier, easing a little from 20.2 percent in the first four months and hovering near a decade-low, while retail sales growth slowed to 13.8 percent in May from April's 14.1 percent. Reuters polls published earlier in the week forecast industrial output to rise 9.9 percent in May, while retail sales were seen up 14.3 percent and fixed-asset investment was seen at 20 percent.

Inflation eases in China to two-year low amid economic slowdown - Inflation in China eased in May to its lowest level in two years amid a broadening economic slowdown that led to the country’s first interest rate cut since 2008. China's  consumer price index grew 3.0% from a year ago, below many estimates and down from 3.4%  year-on-year growth in April. The country's National Bureau of Statistics also reported Saturday that the producer price index, a measure of inflation on the wholesale level, fell 1.4% from a year ago, the third consecutive month of decline. The softening prices gives  China's central planners more room to ease monetary policy in a bid to steer the world's second-largest economy away from a hard landing.

China’s Slowing Inflation, Output Growth Add Easing Pressure - China’s consumer prices rose the least in two years in May and industrial output and retail sales trailed estimates, adding pressure for more loosening after this week’s interest-rate cut. Inflation slowed to 3 percent from a year earlier, the National Bureau of Statistics said today, compared with the 3.2 percent median forecast in a Bloomberg News survey. Production increased 9.6 percent, lower than a projected 9.8 percent gain, and retail sales increased 13.8 percent, the Beijing-based bureau said in separate statements. Today’s data adds to concerns that global growth is stalling as Greece teeters on the edge of exiting the euro, Spain prepares a request for a bank bailout and U.S. job growth weakens. Premier Wen Jiabao may introduce additional stimulus to protect a full-year growth target of 7.5 percent even as the nation wrestles with bad loan risks from local government debt. “These data should defeat any remaining complacency that the policy response has been adequate to maintain steady growth,” said Shen Jianguang, chief Asia economist for Mizuho Securities Asia Ltd. in Hong Kong. “More dramatic easing, especially in housing and local government financing vehicles is urgently needed and necessary to avoid a hard landing in the Chinese economy.”

BIS warns Asia central banks about balance sheets - The rapid expansion of central bank balance sheets in emerging Asian economies could lead to higher inflation and financial instability in the long run, the Bank for International Settlements said in its quarterly report, published Sunday. "Serious consideration should also be given to capping and then shrinking the size of central bank balance sheets," the BIS said, adding its familiar recommendation of more flexible foreign exchange rates to slow or stop the accumulation of foreign reserves. "Greater tolerance of currency appreciation over time could be a key element of a framework to limit further accumulation of foreign assets," the BIS said in a special chapter in the report. The combined balance sheet of nine central banks in emerging Asia rose nearly six-fold between 2001 and 2011, from $1.1 trillion to $6.4 trillion. During the decade, a raft of countries, most with export-led economic growth models and persistent current account surpluses, stopped their currencies appreciating by building up vast foreign reserves, mainly in dollars. As a result, the balance sheet of, for example, the Chinese and Malaysian central banks was nearly 50% of gross domestic product by the end of 2011, more than twice as large, proportionately, as that of the U.S. Federal Reserve or the European Central Bank.

Shipbuilders in troubled waters: Korean shipbuilders are caught between a rock and a hard place. The prolonged global economic downturn has ship owners killing orders or requesting a postponement on deliveries as they struggle to cope with the financial squeeze. This has Korea’s once-mighty shipbuilding industry down on all fours. Shipbuilders say they are struggling to cope with a growing inventory of unsold ships, which they put up for resale at belowmarket prices but still struggle to get off their hands. This desperate measures trigger a vicious cycle where potential buyers demand for even lower prices for their ships, industry sources say. Daewoo Shipbuilding and Marine Engineering (DSME) is scrambling to find takers for two 320,100 deadweight tonnage (DWT) crude carriers, after Taiwan’s Today Makes Tomorrow (TMT) withdrew the orders for the ships it ordered for in 2007.

India's economy: The democracy bottleneck - BUSINESS leaders in India frequently suffer China envy. If only India's political system was like China's, they reason, the government could push through much needed reforms and the economy would take off (and stay airborne). Simplistic as that prescription is, recent data from India highlight the challenges of sustaining growth in a noisy democracy. In the first quarter of this year, India's economy grew by a paltry 5.3%—the country's lowest rate in nine years. With thinning capital inflows, the rupee has also taken a beating and market sentiment is negative. . The first wave of privatisation and deregulation, begun nearly twenty years ago, has largely run its course. But the coalition government, pulled by conflicting interests and lacking clear leadership, has not pushed significant new reforms to liberalise the economy. Even in instances where it manages to reach a decision, pressure from smaller allies often causes it to rollback policies.  Beyond the policy paralysis, the country has another problem: a growing debt burden. The Indian government's debt stands at nearly 70% of GDP and its fiscal deficit is 5.9% of GDP, up from 4.8% a year ago. Public debt in itself isn't bad, especially when private investment is low and growth is faltering. The numbers also seem manageable when compared to those in the euro zone. But in the context of India's economy it raises some questions.

Steel industry in Asia "worse than 2008"  - Credit Suisse analysts have spent a couple of weeks on the ground in Asia talking to some 40 participants about the state of the metals and mining industry in the region (producers, consumers, traders, etc.). Here is a quick summary: "Worse than 2008: Even considering the optimistic nature of human beings, our discussions suggest a significant loss of growth momentum, leading to a continuously challenging environment, especially for steel makers, and to a lesser extent, mining companies, driven by
(i) compressed Ebitda margins,
(ii) weak demand for finished products, and
(iii) surplus steel capacity, which are all likely to remain in place in the mid-term.
Asian risk appetite has fallen, and consensus is that structural problems faced by the Chinese industry will continue, regardless of a potential breath of air from an expected minimum RMB 1 trillion stimulus package, which would bring temporary relief at best."

Japanese Manufacturers Are Reversing Everything That Made The Country An Economic Powerhouse - In a darkened industrial hangar in eastern Osaka, Yoshihiro Yamanaka is tearing up the rule book that once made Japanese manufacturing the feared global standard of efficiency. At Fuji Spring, a company with one factory, one product and 18 workers, Yamanaka has dimmed the lights, allowed inventories to pile up and - most strikingly - shut off an automated part of his assembly to do more jobs by hand. The goal is to slash power consumption in the face of possible electric shortages, a new uncertainty that has pushed Japan's already embattled manufacturers closer to the brink. But in rejecting Japan's accepted industrial wisdom, Yamanaka is also accepting the do-or-die risk that customers will pay more for his springs. 

Japan Lawmakers Push to Curb Central Bank - A growing number of lawmakers are pushing for greater control over the Bank of Japan, just 14 years after the central bank first won its independence, as a strong yen and runaway deficits darken Japan's economic prospects. The moves come as politicians across the spectrum, and many economists, complain that the BOJ isn't acting aggressively enough to combat the country's persistent deflation, while mammoth borrowing limits the scope of fiscal policy to boost growth. Critics say it could lead to a sharp increase in central-bank purchases of government bonds, possibly triggering a European-style rout on Japan's sovereign debt.

Weak economic data points to interest rate cut - WEAK economic figures from Europe, China and the US are making a cash rate cut by the Reserve Bank of Australia (RBA) board tomorrow more likely.  Data in the form of the purchasing managers' index surveys (PMI), released on Friday, showed manufacturing activity in China barely grew in May and contracted in Europe to a three-year low. US non-farm payrolls data, also released on Friday, showed 69,000 jobs were added to the economy in May, much lower than market expectations of a rise of 150,000. HSBC chief economist Paul Bloxham said the dismal US employment report has prompted him to change his forecast for the RBA board's interest rate decision to a cut of 0.25 per cent. "It is quite clear that the economic momentum in the US has slowed in the past couple of months,"

Vital Signs: Slowing Global Manufacturing - Manufacturers around the globe are expanding more slowly. J.P. Morgan Chase & Co. said its index of global manufacturing fell to 50.6 in May, from 51.4 the previous month. A reading above 50 indicates expansion. This gauge has dropped close to its recent low of 49.6 in November. Weak manufacturing reports last week fueled fears of a synchronized slowdown.

Global economy at risk as US, Europe and Asia slow - The global economy's foundations are weakening, one by one. Already hobbled by Europe's debt crisis, the world now risks being hurt by slowdowns in its economic powerhouses. The U.S. economy, the world's largest, had a third straight month of feeble job growth in May. High-flying economies in China, India and Brazil are slowing, too. Fears of a global economic downturn have sent investors rushing toward the safest possible investments: U.S. and German government bonds. As a result, the interest rate on the 10-year U.S. Treasury note has hit a record-low 1.46 percent. The rate on the German 10-year bond is even lower: 1.17 percent. "Treasurys are at 1.46 because people are freaking out,"  The gravest fear is Europe. The most urgent threat is that in mid-June, Greek voters will reject the terms of a $170 billion bailout — which called for painful budget cuts — and abandon the euro. The move could ignite economic and financial chaos as Greek debts shift from denominations in euros to Greek drachmas of uncertain value. Yet the global economy's troubles go well beyond Greece. Here's a look at the global economy's vital signs:

Alarm grows in Russia as ruble continues to lose - The Russian ruble yesterday extended the previous week's losses to reach new three year lows as alarm grew over the effects of the euro zone crisis and the falling oil price on the currency. Prime Minister Dmitry Medvedev on Saturday ordered the central bank to step up interventions as authorities worried that a sharp depreciation could harm economic stability that is the cornerstone of President Vladimir Putin's rule. The pressure on the ruble, the most serious since it came under sustained attack by speculators in the 2008-2009 financial crisis, has been sparked largely by investors fleeing to safe havens due to the euro zone crisis. But there are also concerns over the effects of the falling price of oil on the Russian budget and investors are also extremely worried by capital flight from Russia which amounted to $35 billion in the first quarter alone. The ruble trades within a floating corridor which is fixed at between 32.15 rubles and 38.15 rubles against a euro/dollar currency basket which is made up of 0.45 euro and $0.55. With the ruble nudging its upper ceiling against the currency basket, Medvedev said that the central bank had to ensure that the currency stayed within the set band.

Global Economic Struggles Put Pressure On Political Leaders -  Anemic job growth in the United States, a business slowdown in Asia and the ever-intensifying debt crisis in Europe are raising pressures on political leaders to take new actions to bolster the world economy. But it's far from clear that they will be able to forge the necessary consensuses on exactly how to do that. In the United States, political deadlock in Washington has kept any significant economic measures from emerging from Congress, despite obsessive political rhetoric from Democrats and Republicans about the need to create jobs. In Europe, the policy gap remains wide between the austerity-minded leaders of Germany, the continent's wealthiest country, and a raft of newly elected populists seeking to increase government spending in their ailing countries. Attention is shifting to non-elected figures who may be able to affect the world economy. In Europe and the United States, markets are hoping that the central banks will act to loosen the availability of credit. And in China, where the government reported last week that growth had slowed sharply, there is talk of a central-government stimulus plan.

BIS warns global lending contracting at fastest pace since 2008 Lehman crisis - International lending is contracting at the fastest pace since the onset of the financial crisis in 2008 as Europe's banks scramble to meet tougher rules. The Bank for International Settlements (BIS) said cross-border loans fell by $799bn (£520bn) in the fourth quarter of 2011, led by a broad retreat from Italy, Spain and the eurozone periphery.  Lending to banks in the eurozone fell $364bn or 5.9pc, with drastic reductions of 9.8pc in Italy and 8.7pc in Spain.  The BIS's quarterly report said the decline in lending was "largely driven by banks headquatered in the euro area facing pressures to reduce their leverage". Banks must raise their core tier one capital ratios to 9pc by the end of this month or face the risk of partial nationalisation. The global Basel III rules are also pressuring banks to retrench.  The International Monetary Fund said banks will have to slash their balance sheets by $2 trillion (£1.6 trillion) by the end of next year even in a "best-case scenario".

BIS Quarterly Review: Global Banks Cut Lending - From the Bank for International Settlements (BIS): Quarterly Review.  And from the NY Times: Global Banks Cut Lending in Response to Economic Slowdown International lending by global banks in the fourth quarter last year fell by the largest amount since the collapse of Lehman Brothers in 2008, according to the Bank for International Settlements, an association of the world’s central banks. In total, financial firms cut overseas lending by $799 billion in the last three months of 2011, the latest figures available. Around 80 percent of the reduction came from the so-called interbank market where institutions lend money to one another. As the ripple effects of the European debt crisis have been felt across the United States and emerging economies in Asia and Latin America, banks in both developed and emerging economies have been looking to pullback on credit to risky borrowers. This pullback in lending is global, but it is concentrated in Europe. However there appears to be some tightening in the U.S. too. In a research note on Friday, Goldman Sachs noted this: US financial conditions have tightened by about 40bp since April, according to our GSFCI. If the current stress were sustained, the tightening would mechanically imply a 0.6% hit to real GDP. Our analysis suggests that perhaps half of this can be explained by the European crisis.

The many things that prey on our minds: A big hairball of risk - Perhaps the most disconcerting aspect of the world’s current flight to safety is the lack of a single overriding threat to justify it. China is slowing, but hardly in recession. Europe is in crisis – but when has it not been in the last three years? And America – well, there’s that fiscal cliff later this year but it’s hard to find any investor thinking that far ahead. The puzzle was underlined by May’s weak jobless report in America. What fundamental factors could explain it? Consider the usual suspects:

• 1. Petrol prices rose much less this year than a year ago, and peaked in the first half of April. Retail sales, the most obvious place where petrol prices would be felt, didn't signal distress.
• 2. The current episode of European stress can be traced to Spain’s announcement in early March that it would miss its deficit targets, but equity markets in America didn’t take notice until the Greek elections in the first week of May. That’s too late to explain a slowdown that began in April.
• 3. Emerging markets are slowing sharply. But even after extraordinary growth, exports to China, Brazil, India and Russia only equal 1.3% of American GDP.

Greg Ip’s risk hairball -- Greg Ip is getting in on the probabilities game, this time looking at the three big risks facing the global macroeconomy. Ip puts the chance of a Chinese hard landing at 20%; of the euro falling apart at 40%; and of the US fiscal cliff actually happening at 30%. Individually, each of these risks is bearable. But make the reasonable assumption that they’re independent variables, and it turns out that if you put them all together, the chances of none of them happening are just one in three. But let’s go a bit further. Let’s say that if none of these things happen, that’s Good. If one of these things happen, that’s Bad. If two of these things happen, that’s Dreadful. And if all three of these things happen, that’s Apocalypse. Then this is the result that you get. The chances of a good outcome are 33.6%, a bad outcome is 45.2%, a dreadful outcome is 18.8%, and the chances of apocalypse are a small but still scary 2.4%.

Losing faith - YESTERDAY, my colleague wrote a nice post on the troubles in the world economy that feels a little too optimistic to me, but which gets at one interesting and disturbing aspect of the present ill wind blowing around the world economy. As a different colleague noted in conversation this morning, the 2008 crisis was by many measures less scary in comparison. This time around, as my colleague's post suggests, is different. This time, a broad institutional crisis appears to be brewing. Markets may be questioning the ability of policymakers around the world to manage the macroeconomy in a non-disastrous way. Europe is the most obvious and dangerous flashpoint in this crisis, but it is by no means the only one. In America, as my colleague says, confidence was seriously rattled by last year's debt-ceiling showdown, and it is frightening to think that an ever bigger fiscal confrontation looms ahead at year's end. China's economy is weakening, and while it seems clear that the government has the tools to support it, the interaction of economic weakness and political transition in a place with such opaque political institutions breeds concern. In India, the citizenry and markets are rethinking their view of the economy. It once appeared to be on a path toward steady reform and rapid catch-up growth, but the recent burst in output now looks a one-off, suggesting that there are big reform challenges—and political battles—ahead. It wouldn't be too difficult to tell similar stories about most of the world's large economies.

Austerity has never worked - Last week saw a string of bad economic news reports. The eurozone leaders seem unwilling or unable to change from their austerity policies, even as Greece and Spain fall apart and the core eurozone economies contract. Britain watches on as its economy is heading for the third consecutive quarter of contraction, with an unexpectedly sharp fall in manufacturing. Last week's jobs figures confirmed that the US recovery is stuttering. . Four years after the financial crisis began, many rich capitalist economies have not recovered their pre-crisis output levels. The remedies on offer are well known. Reduce budget deficits by cutting spending – especially "unproductive" social welfare spending that reduces growth by making poor people less willing to work. Cut taxes at the top and deregulate business (euphemistically called "cutting red tape") so that the "wealth creators" have greater incentives to invest and generate growth; and make hiring and firing easier. It is increasingly accepted that these policies are not working in the current environment. But less widespread is the recognition that there is also plenty of historical evidence showing that they have never worked. The same happened during the 1982 developing world debt crisis, the 1994 Mexican crisis, the 1997 Asian crisis, the Brazilian and the Russian crises in 1998, and the Argentinian crisis of 2002. All the crisis-stricken countries were forced (usually by the IMF) to cut spending and run budget surpluses, only to see their economies sink deeper into recession. Going back a bit further, the Great Depression also showed that cutting budget deficits too far and too quickly in the middle of a recession only makes things worse.

Look beyond interest rates to get out of the gloom - Larry Summers - With the past week’s dismal US jobs data, signs of increasing financial strain in Europe and discouraging news from China, the proposition that the global economy is returning to a path of healthy growth looks highly implausible.It is more likely that a pessimistic view is again taking over as falling incomes lead to falling confidence that leads to reduced spending and yet further declines in income. Financial strains hurt the real economy, especially in Europe, and reinforce existing strains. And export-dependent emerging markets suffer as the economies of the industrialised world weaken. The question is not whether the current policy path is acceptable. The question is what should be done? To come up with a viable solution, consider the remarkable level of interest rates in much of the industrialised economies. The US government can borrow in nominal terms at about 0.5 per cent for five years, 1.5 per cent for 10 years and 2.5 per cent for 30 years. Rates are considerably lower in Germany and still lower in Japan.Even more remarkable are the interest rates on inflation-protected bonds. In real terms, the world is prepared to pay the US more than 100 basis points to store its money for five years and more than 50 basis points for 10 years. Maturities would have to reach more than 20 years before the interest rates on indexed bonds become positive. Again, real rates are even lower in Germany and Japan. Remarkably, the UK borrowed money last week for 50 years at a real rate of 4 basis points.

Bleak U.S. jobs report a danger to global economy — Another bad month for the U.S. job market is lengthening the list of perils facing the global economy. American employers added only 69,000 jobs in May, the fewest in a year and not even close to what economists expected. For the first time since June, the unemployment rate rose, to 8.2 percent from 8.1 percent. It was the third month in a row of weak job growth and further evidence that, just as in 2010 and 2011, a winter of hope for the economy has turned to a spring of disappointment. “This is horrible,” said Ian Shepherdson, chief economist at High Frequency Economics, a consulting firm. The job figures, released Friday by the Labor Department, dealt a blow to President Barack Obama at the start of a general election campaign that will turn on the economy. They also deepened the pessimism of investors, who even before the report was released were worried about a debt crisis in Europe with no sign of solution and signs of a slowdown in the powerhouse economy of China. “The U.S. is not an island, and what happens abroad matters here,” . “The weakness in Europe, in particular, has a global reach and is affecting us.”

In Economic Deluge, a World That’s Unable to Bail Together - Less than four years ago, with the world’s financial system in danger of collapsing, major countries managed to come together on a coordinated course that averted a global depression. Central banks pumped vast amounts of cash into economies, and banks were bailed out, with vows that they would be subject to stronger regulation. By early 2009, financial markets had bottomed out and begun strong recoveries. Economies were slower to follow; by last year, slow growth seemed to be the global pattern, spurring hope that the crisis had passed. But within the last few weeks, much of that hope seems to have faded. In Europe, the crisis has grown worse, not better, and the disputes among European leaders have intensified as much of the Continent appears to have drifted into a new recession. In China, growth remains robust by Western standards. But concern is rising over the possible end of a property boom that had been fueled in part by local government borrowing and spending. In the United States, which had been an oasis of relative calm with a growing economy and rising employment, job growth in May, reported Friday, was a puny 69,000. To make the outlook even gloomier, earlier numbers were revised lower. That capped a series of three disappointing monthly reports. Moreover, there seems to be little willingness — or perhaps lit-tle ability — for the major countries to act together again.

The Three Issues in the European Crisis - Brad DeLong - There are three issues in today's European crisis. They should be dealt with separately and independently, for they are different problems amenable to different kinds of solutions. The first issue is that Northern European bankers and investors loaned Greek politicians money when the Greek politicians did not have a mandate to raise taxes to pay that money back. The bankers and investors were betting on rapid growth that would produce a sufficient fiscal dividend that Greek taxpayers would not notice. Failing that, they were betting on being bailed out by somebody. The second issue is how Greece is going to balance its government expenditures and government revenues going forward, for nobody--or at least nobody sane--will lend the Greek government more money for a long time to come. The third issue is how is Greece as a country is--and the other countries of southern Europe that also received enormous capital inflows that pushed up their nominal wage and price levels are--going to balance its exports and imports going forward without suffering a decade-long depression. The Friedmanite monetarist solution would be to let the foreign exchange market do the job: abandon the euro, and let the drachma find the level at which imports balance exports. The alternative is structural adjustment--an increase in the level of nominal wages in euros in Northern Europe and increased efficiencies and stable nominal wages in euros in Greece and Italy and Spain and Portugal and Ireland.

One scenario for the eurozone - I have been thinking through one possible path. Germany supports a phased-in backstop of eurozone bank deposits, but with intermediate goals and targets along the way. They’re not simply going to write a blank check. Some of the goals and targets are fiscal, while others involve turning over bank supervision to the EU. Obviously, none of this can be done quickly, thus there is no immediate done deal, but it might calm the markets. Germany also requires that Spain commit “the Irish mistake,” namely guaranteeing the returns to bondholders and funding that guarantee through “austerity.” Since Germany would also be backstopping Italy, France, and others, it doesn’t want a bondholder run, even if Spain, taken alone, might be better off forcing the bondholders to take losses. Spain will claim it accepts the agreement, but in fact it won’t. It won’t over time, and it won’t pledge up front to fully protect the bondholders. Spain wants to see the money first. Capital flight continues and eventually intensifies. The deal does not get made in time and arguably there was no deal there in the first place, since Spain never had the willingness, or perhaps not even the ability, to meet the intermediate targets along the way.

Steepest Global Slide Since Recession Pushes Rate Cuts - Monetary-policy makers from around the world are being pressed into action to shore up a global economy that is suffering its steepest slowdown since the recession ended in 2009. On the heels of a June 5 interest-rate cut by Australia, China yesterday unveiled its first reduction in borrowing costs in more than three years to counter what Premier Wen Jiabao has called increasing downward economic pressure. European Central Bank President Mario Draghi left the door open at a June 6 press conference to a rate cut, while highlighting the limitations of the ECB’s tools in countering the region’s financial turmoil. And Federal Reserve Chairman Ben S. Bernanke told a Congressional committee yesterday that policy makers will discuss later this month whether to do more to spur growth, though he said the steps they could take may have “diminishing returns.”

Paul Krugman on fixing the global economy - Kai Ryssdal: You can analyze this stuff 'til you're blue in the face, but at some point the question does kinda become: How does a whole planet-full of people facing recession get out of it? So we got a guy on the phone who knows a little something about international economics. That's what Paul Krugman got his Nobel Prize for. Welcome to the program. Paul Krugman: Good to be on.

Egypt, Spain & Far Beyond: Youth Unemployment - As an educator, I believe there is a personal responsibility on my part to ensure that my students are able to find gainful employment. While there are others in academia who see themselves as  "preparing people for life outside of work" instead of "preparing people for working life," I must disagree. That is, contemplating higher pursuits in life doesn't quite work if you don't have the means to support it. To get all structuralist on you, someone must have laboured to erect those ivory towers.  Egypt has been paralyzed by unemployed youth with nothing better to do than protest again and again. So they overthrew Mubarak, but things have gotten even worse economically. Some change, and certainly not the sort you'd expect to help land jobs for the youth. Same thing in Spain: With the unemployment rate for those aged 15-24 reportedly above 50%, headlines numbers like these are hardly inspiring. While the relationship between youth unemployment and economic crisis is complex, you can at the very least say that high rates of the former are indicative of the latter.The International Labour Organization (ILO) has a neat publication from late last year that notes that these trends are not unique to certain troubled countries but are evident the world over. For another woeful statistic, consider that about 40% of those unemployed worldwide are the youth:

Spain calls for new euro fiscal authority (Reuters) - Spain, the latest combat zone in Europe's long-running debt wars, urged the euro zone to set up a new fiscal authority to manage the bloc's finances and send a clear signal to markets that the single currency project is irreversible. Prime Minister Mariano Rajoy said the authority would also go a long way to alleviating Spain's woes which, along with the prospect of a Greek euro exit, have threatened to derail the single currency project. It is not the first time a European leader has proposed creating such an authority but the problems and the size of Spain - a country deemed too big to fail - have prompted EU policymakers to hurriedly consider measures such as creating a fiscal and banking union ahead of a EU summit on June 28-29. Germany, the paymaster of the euro zone, and others insist such a move can only happen as part of a drive to much closer fiscal union and relinquishing of national sovereignty. Overspending in the regions and troubles with a banking sector badly hit by a property crash four years ago have sent Spain's borrowing costs to record highs and pushed the country closer to seeking an international bailout.

Spain could see us out of both Euros - Irish Independent - WHILE the market is still betting a solution will be found to the worsening Spanish bank crisis, there exists a very real possibility these efforts will fail and that several countries, including Ireland, could be forced out of the eurozone. On the plus side, there seems to have been very little short selling of Spanish government bonds. This means investors still expect the EU to cobble together some "solution" to the Spanish crisis. As against this, ECB president Mario Draghi's statement on Thursday that the eurozone was now "unsustainable" in its current form should have sent shivers down the spine of every investor. When a central bank boss feels the need to rubbish his currency area in such a public fashion, it is clear that things have gone very badly wrong. Further ratcheting up the pressure in this war of nerves was the sudden resignation of Bank of Spain governor Miguel Fernandez Ordonez.

Spain – too big to fail, not too big to bail - Spain is in its worst financial crisis for a century. The gallows-humour gagsters who brought you Grexit or Grout as terms for a possible disorderly exit by Greece from the euro have two more bits of japery on offer. "Spanic" is meant to encompass the markets' alarm over Spain's twin financial and economic crises. More portentously, "Squit" vulgarly raises the prospect of Spain quitting the euro too. Why should we care? For two reasons. A Spanish exit would send ripples round the global economy that might build to a tsunami by the time they crashed upon our shores. And the process Madrid is currently undergoing – slashing fiercely to reduce a budget deficit amid a gathering recession – has lessons for Britain at a time when George Osborne, for all his Budget volte-faces, continues to insist there is no alternative to his Plan A. Almost €€100bn has been pulled out of Spanish banks in the first three months of this year – about a 10th of the country's GDP. Two-thirds of it went in March alone, as Spanish citizens and foreigners rushed to find safer places for their money. This capital flight can only have accelerated since, as Spain has resisted pressure to seek international assistance for the parlously debt-stricken banks that provoked the latest crisis in the eurozone's fourth biggest economy.

Spain’s Game of Chicken - You can't bail anyone out if you don't have any money. This isn't exactly breaking news, but it is a problem for Spain. Their government is running out of money, and so are their banks. This is normally the time to go to Germany for a sovereign bailout. But Spain has understandably resisted. They're terrified of fully surrendering fiscal sovereignty like Greece, Ireland, and Portugal. An even deeper depression would beckon. So, instead, we get a game of chicken. Let's step back a minute. Spain has a trio of problems. First, it has a frightening unemployment problem that's created a deficit crisis, due to its housing bust. Second, its banks have a bad loan problem, again due to its housing bust. And third, it has a capital flight problem. Depositors are moving their money out of Spanish banks into German banks -- some €100 billion or so in the first quarter of 2012 alone -- due to fears that Spain might devalue and abandon the common currency. The chart below basically shows how much each euro zone member owes or is owed by the ECB. It's a good proxy for how much capital flight there's been from each euro zone country. Spain (purple) is the worst, just edging out Italy.

Mariano Rajoy Asked For a Eurozone Fiscal Authority - Spain on Saturday proposed the set up a new fiscal authority in the euro zone which would control and harmonize national budgets and manage the European debts. Prime Minister Mariano Rajoy said the authority was the answer to the European debt crisis and would go a long way in alleviating Spain's woes as it would send a clear signal to investors that the single currency is an irreversible project. "The European Union needs to reinforce its architecture," Rajoy said at an event in Sitges, in the north-eastern province of Catalonia. "This entails moving towards more integration, transferring more sovereignty, especially in the fiscal field. "And this means a compromise to create a new European fiscal authority which would guide the fiscal policy in the euro zone, harmonize the fiscal policy of member states and enable a centralized control of (public) finances," he added. He also said the authority would be in charge of managing European debts and should be constituted by countries of the euro zone meeting strict conditions.

German Finance Minister Pressures Spain to Accept Bailout; Germany Says €50 Billion to €90 Billion Needed; More Doublespeak - Germany and Spain are both digging in their heels. Courtesy of el Economista and Google Translate, please consider Germany pressed for Spain to resort to bailout fund. German Finance Minister, Wolfgang Schäuble, have pressured the Spanish owner of Economy, Luis de Guindos, for Spain to resort to European rescue fund, fearing that fails to stay afloat on its own.According to reports advanced by the weekly Der Spiegel, Chancellor Angela Merkel and her minister chose this route earlier this week.Schäuble would have raised the possibility to de Guindos at their last meeting held in Berlin on Wednesday, which the Spanish minister refused, arguing that Spain will be able to fend for themselves.Der Spiegel says, without specifying sources, Merkel and Schäuble pressure on Spain to resort to European Financial Stability Fund (EFSF), to the growing threat of contagion to other countries of southern Europe, if possible abandonment of Greece in the euro area.According to that publication, the German government estimates that Spanish banks will require a capital injection of between 50,000 and 90,000 million euros. Berlin flatly rejected the possibility of direct aid to rescue fund banks, bypassing governments, in this case Spanish, contrary to the views expressed in that direction from the International Monetary Fund (IMF) and the European Commission (CE).

Spain seeks centralised control of budgets - Mariano Rajoy, Spain’s prime minister, has called for centralised control of national budgets in the eurozone in an unexpected gesture to mollify Brussels and Berlin on the eve of what is expected to be a crucial week for Madrid. Spain’s Treasury plans to auction sovereign bonds on Thursday, even though analysts say the country may soon need an international Crunch time in Spain for Rajoy and yields on its debt have risen close to the 7 per cent level that heralded previous rescues for Greece, Ireland and Portugal. Meanwhile Cyprus, a much smaller eurozone economy affected by the crisis in Greece, is facing similar difficulties and may need to be rescued first. Panicos Demetriades, central bank governor, told the Financial Times that Cyprus was increasingly likely to seek European aid because of the need to find €1.8bn to recapitalise Cyprus Popular Bank, the country’s second-largest lender, by the end of this month. The country, Mr Demetriades said, was at “an important crunch time”. Two months ago, Mr Rajoy defiantly set a unilateral 2012 budget deficit target for Spain of 5.8 per cent of gross domestic product, saying the decision was a matter of national sovereignty. But he soon backtracked and yielded to EU pressure to cut the target to 5.3 per cent. At the weekend, he went a step further, calling for the creation of a “European fiscal authority” to direct eurozone fiscal strategy, to harmonise the fiscal policies of the 17 euro countries and to allow “centralised control of finances”.

Germany Gives Ground on Crisis Plan - Germany is sending strong signals that it would eventually be willing to lift its objections to ideas such as common euro-zone bonds or mutual support for European banks if other European governments were to agree to transfer further powers to Europe.If embraced, the move would deepen in fundamental ways Europe's political and fiscal union and represent one of the boldest steps taken by the bloc since the euro was launched. Germany has never before been willing to discuss the conditions it believes necessary to move toward assuming common risks within the euro zone. Now, although the end may be a long way off, it appears willing to discuss those conditions. "The more that other member states get involved with this development and are prepared to give up sovereign rights to get European institutions more involved, the more we will be prepared to play an active role in developing things like a banking union," a German official familiar with the discussions told The Wall Street Journal. "You can't have one without the other." Europe has been blocked from taking bold steps to stem the crisis and calm financial markets because leaders can't bridge two fundamentally different approaches to the crisis. Countries such as France believe Europe must create instruments such as euro bonds to place the burden of debt on many shoulders. Others, especially Germany, say a further economic integration requires a common fiscal policy and transfer of national sovereignty over budgets to Europe. Berlin wants all of these issues to be put into a broader discussion about the future of Europe and the structure of the euro zone. Germany believes the parts of any master plan for Europe can only be introduced together, not in isolation.

Berlin and EU Weigh Greater Bank Oversight - Every time the euro crisis begins to intensify, a new idea for solving it seems to start bouncing around European capitals. This week, talk is focused on the concept of creating a European banking authority to keep watch on those financial institutions that are too big to fail. And with Chancellor Angela Merkel and European Commission President Jose Manuel Barroso having discussed the idea in Berlin on Monday, it seems likely that it will figure prominently on the agenda of the European Union summit scheduled for later this month. "We will also talk about the extent to which we have to put systemically important banks under a specifically European oversight so that national interests don't play too large of a role," Merkel said prior to her working dinner. "Those are mid-term goals." The German chancellor also said that the European fiscal pact, which she foisted upon the EU in early March in order to improve budgetary discipline across the bloc, is just one step toward further euro-zone integration. "We need more Europe in the euro zone, not less Europe," she said. 

U.S. Steps Up Pressure on Europe to Resolve Euro Crisis - President Barack Obama is putting increasing pressure on European officials to resolve the euro crisis, talking with the leaders of Germany, France and Italy to help lay the groundwork for action before a Group of 20 summit meeting to be held in June in Mexico. Mr. Obama discussed the recent developments in Europe in video conference calls with the European leaders on Wednesday. Mr. Obama was following up on discussions he held at the recent Group of 8 meeting at Camp David with the German chancellor, Angela Merkel, the French president, François Hollande and Mario Monti, the Italian prime minister. “Leaders agreed to continue to consult closely as they prepare to meet at the G-20 summit in Mexico next month,” the White House said in a statement. The meeting will be held June 18-19, beginning just a day after a Greek election that is being seen as a de facto referendum on that country’s euro membership. The White House has also dispatched Lael Brainard, a Treasury under secretary, to Europe this week for talks with officials in Greece, Germany, Spain and France.

Merkel Rejects Debt Sharing As Obama Urges Europe Action - German Chancellor Angela Merkel hardened her opposition to joint debt sharing in the euro region as President Barack Obama singled out Europe’s leaders for not doing enough to arrest the financial crisis. With Europe’s debt crisis cited last week for canceled IPOs, weaker-than-expected Chinese manufacturing figures and a rise in the U.S. jobless rate, Merkel rejected joint debt issuance in the 17-nation euro area as a solution, saying “under no circumstances” would she agree to Germany-backed euro bonds. Some “come along and ask for euro bonds, saying all we need are equal interest rates and everything will turn out all right,” Merkel said in a speech to members of her Christian Democratic Union in Berlin yesterday. Instead, what’s needed is an economic overhaul to tackle the lack of competitiveness in Europe, she said.

Fiscal Federation or Fiscal Policy - Can a monetary union work without being a fiscal federation? This has been a question that has been repeatedly asked since EMU became a project. Economists consider a fiscal federation a way to share risks through a common (large) budget. Risk sharing allows for smoothing of business cycles at the regional or national level. In the absence of monetary policy (and exchange rates) the theory says that adjustment must come from either price adjustments (internal devaluation), labor mobility (towards regions/countries that are doing well) or fiscal transfers through a common budget. Back in 1998 when EMU was about to be launched I wrote an article with the title "Does EMU need a fiscal federation?" My conclusion was that while it would be nice to have one, the costs of not having one where not that high (and the implementation costs seemed too high at that point). Has the current crisis changed the logic of that analysis? Clearly this crisis is more asymmetric than all the previous ones in the Euro area. The 92/93 recession was very similar across countries. And 2001-2003 was a period of low growth for some of these economies but there was no deep recession in any Euro country. But since 2008 we are witnessing a recession which is very large and is not spread evenly among all Euro countries. No doubt that the benefits of any mechanism to share risks and alleviate national business cycles looks more important today than in any of the previous crisis.

As Taxes Dry Up, Greece Warns of Going Broke - As European leaders grapple with how to preserve their monetary union, Greece is rapidly running out of money. Government coffers could be empty as soon as July, shortly after this month’s pivotal elections. In the worst case, Athens might have to temporarily stop paying for salaries and pensions, along with imports of fuel, food and pharmaceuticals. Officials, scrambling for solutions, have considered dipping into funds that are supposed to be for Greece’s troubled banks. Some are even suggesting doling out i.o.u.’s. Greek leaders said that despite their latest bailout of 130 billion euros, or $161.7 billion, they face a shortfall of 1.7 billion euros because tax revenue and other sources of potential income are drying up. A wrenching recession and harsh budget cuts have left businesses and individuals with less and less to give for taxes — and growing incentive to avoid paying what they owe. The budget gap is widening as the so-called troika of lenders — the International Monetary Fund, the European Central Bank and the European Commission — withholds 1 billion euros in bailout money earmarked for government financing while it waits to see whether new leaders elected June 17 will honor Greece’s commitments. Even if the troika delivers that money, Greece will struggle to cover its obligations. It underscored a harsh reality that is playing out in other troubled euro zone economies. Prolonged austerity is making it harder, not easier, for governments like Greece to become self-reliant again.

Analysis: Greeks count mental health cost of a country in crisis - Behind every suicide in crisis-stricken countries such as Greece there are up to 20 more people desperate enough to have tried to end their own lives. And behind those attempted suicides, experts say there are thousands of hidden cases of mental illness, like depression, alcohol abuse and anxiety disorder, that never make the news, but have large and potentially long-lasting human costs. The risk, according to some public health experts, is that if and when Greece's economic woes are over, a legacy of mental illness could remain in a generation of young people damaged by too many years of life without hope. "Job loss can lead to an accumulation of risks that can tip people into depression and severe mental illness which can be difficult to reverse - especially if people are not getting appropriate care,"

HSBC Tests Cash Machines in Athens for Drachmas - HSBC has tested its cash machines in Greece to check whether they could cope with the reintroduction of the drachma if the country drops out of the euro. It is the clearest sign yet that the international financial sector believes Greece is on the brink of quitting the single currency and returning to its former currency. An HSBC spokesman said, “Like all banks, we have been working with regulators to undertake preparatory work at multiple levels in the event of a sovereign default, an exit from the euro, or any other eventuality.” Banking sources noted that it was the fear that Royal Bank of Scotland customers would not be able to withdraw their money from ATMs that marked the high point of the financial crisis in Britain in 2008 when the Government intervened to prop up RBS and the rest of the banking sector. The cash machine tests at branches in Athens are understood to have been extensive to ensure that the machines are able to handle banknotes of a different size and texture.

Going into final stretch, SYRIZA builds poll lead - In the last opinion poll to be published by Kathimerini before the June 17 elections, leftist SYRIZA maintains a clear lead over New Democracy, although short of enough support for a clear parliamentary majority. According to the Public Issue survey, SYRIZA garners 31.5 percent of the vote, 1.5 more than just a week ago. Support for New Democracy is largely unchanged at 25.5. PASOK has lost 2 percent and falls to 13.5. It is followed by Democratic Left (DIMAR) on 7.5 percent and the weakening Independent Greeks on 5.5. The Communist Party (KKE) also has 5.5 percent, while the neo-Nazi Chrysi Avgi (Golden Dawn) has fallen to 4.5 percent. The liberal alliance of Dimiourgia Xana (Recreate Greece) and Drasi attracts 2.5 percent. In terms of parliamentary seats, this translates into 134 for SYRIZA, 68 for New Democracy, 36 for PASOK, 20 for DIMAR, 15 for KKE, 15 for Independent Greeks and 12 for Chrysi Avgi. Most would fall slightly if the liberals reach the 3 percent parliamentary threshold. Most Greeks, however, are not convinced that SYRIZA will win. The poll indicates that 58 percent believes ND will come first and only 34 percent see the leftists triumphing.

Greek right a hostage to its own failures - “I’m now driven to the dreadful situation of having to vote for this man who is one of the causes of the problems we have right now,” he says, referring to Antonis Samaras, New Democracy’s leader. His friend, Niki Siropoulou, a marketing executive, is more succinct. “I have to vote for a complete idiot,” she says. Polls show New Democracy running a close race with Syriza – but it is hardly inspiring. “Terror-mongering will only get you so far,” Mr Potamitis complains. In a troubling sign for Mr Samaras, the MRB research firm found last week that educated voters aged 45 to 55 were tilting toward Syriza. Such voters – with children, mortgages and other duties – would normally seem unlikely supporters of a self-described “radical” party. Dimitris Mavros, head of MRB, speculates that the scale of Greece’s crisis has left many believing it is now too risky to stick with the status quo. “They have no room to go back and say, ‘Ok, let’s wait three or four years for Greece to re-set,’” Mr Mavros says.

Portugal Cuts Growth Forecast, Adding to Economic Gloom - Gloom continued over the euro zone Monday, as Portugal cut its growth forecast and announced a recapitalization of its biggest banks, while pressure built for greater integration in Europe to help stem the region’s debt crisis. Finance Minister Vitor Gaspar of Portugal said Monday that gross domestic product was expected to grow next year by 0.2 percent, down from the 0.6 percent growth it estimated in late April. He also forecast that the country’s debt would peak next year at 118.6 percent of gross domestic product, 3 percentage points worse than expected.  Portugal’s economic restructuring “remains on track amidst continued challenges,” the International Monetary Fund said in a statement. “The authorities are implementing the reform policies broadly as planned and external adjustment is proceeding faster than expected.”

Portugal to inject up to €6.65B into three banks - The Portuguese government said Monday it will inject up to EUR6.65 billion into three of its largest lenders in an attempt to strengthen a banking sector coping with fast-rising loan-losses after the country was bailed out less than a year ago. In a regulatory filing, the Portuguese finance ministry said it will inject EUR1.65 billion into state-controlled bank Caixa Geral de Depositos, up to EUR3.5 billion into Banco Comercial Portugues SA (BCP.LB), and EUR1.5 billion into Banco BPI SA. The bulk of the money for the recapitalization, some EUR5 billion, comes from the Bank Solvency Support Facility, a bank bailout mechanism set up as part of Portugal's EUR78 billion bailout package. The state will receive contingent convertible bonds in exchange for the injections into BCP and BPI, the two banks said.

Unemployment spike sets Portugal up for second bailout - Surging unemployment is stretching Portugal's austerity program to breaking point, and its international lenders are likely to respond by giving the country more time to hit its budget targets, likely paving the way for a second bailout. Portugal passed the latest of several performance reviews under its 78-billion-euro rescue package on Monday. But inspectors from the European Union and International Monetary Fund said the soaring jobless rate required "decisive policy action", adding fuel to a region-wide debate on whether to extend or row back on the austerity programs that have put a brake on growth in Europe's most vulnerable economies, including Portugal. The 'Troika' of lenders from the IMF, European Union and European Central Bank also said they anticipated that recent labor reforms would cut an unemployment rate that, at 15 percent, is the third highest in the euro zone. But economists say the reforms will take time to have an impact, while Lisbon hiked its jobless forecast for next year to 16 percent on Friday, reflecting rising levels of corporate bankruptcy as the country struggles through its worst recession since the 1970s.

And Now, Courtesy of Bridgewater... It's Italy's Turn -- Earlier today, by way of a simple graphic, the world's biggest hedge fund, Bridgewater, was kind enough to remind the world just how pointless any debates about Europe's future viability are if the primary funding conduit: the EFSF/ESM hybrid can not provide the cash needed for even half the combined funding needs of Italy and Spain. Now, Bridgewater strikes at Europe once again, this time redirecting the general attention to where it is long overdue: Italy.

SYRIZA not a threat to the euro, Tsipras says - Less than two weeks before general elections, Alexis Tsipras, the boss of Greece’s hard-left SYRIZA party, fended off accusations that his party is a threat to the troubled euro area as he once again vowed to cancel the terms of an international bailout. “The threat to the future of the euro does not come from Greece and certainly not from SYRIZA,” Tsipras said in an interview with Kathimerini on Sunday. “Look at what is happening in Spain, look at the anxiety of Italy, at the increasingly prevalent belief that the eurozone cannot survive in its present form without major changes,” he said calling for a Europe-wide solution to the debt crisis. The 37-year-old leader, ahead in the latest Public Issue opinion poll, repeated his pledge to roll back wage and pension cuts included in the EU-IMF deal -- a prospect that horrified Greece’s creditors but has won SYRIZA support ahead of the June 17 vote. “We must break the vicious cycle of the crisis...this means scrapping the policies of the memorandum and the terms of the loan agreement,” he said repeating his aim to nationalize key industries and freeze privatizations if he wins the polls.

Debt-free and proud: Greece under the leftists — No debt repayments, higher salaries and freedom from EU-IMF tutelage: Greece under the radical leftists, who are poised to win a June 17 election, seems a world removed from its current recession nightmare. The Syriza party has pledged to tear up Greece's loan agreement with the EU and the IMF, which is currently keeping the country on its feet but at the cost of an unprecedented wave of austerity cuts and structural reforms. If implemented, such a programme, which would also mean the nationalisation of banks and a halt to privatisation, could well mean Greece's ejection from the eurozone, potentially sending shockwaves through the global economy.Fed up with two years of salary and pension cuts, Greek voters on May 6 punished larger parties associated with the bailout and catapulted Syriza to second place, within striking distance of the top.Opinion polls show that the radical leftists, only the fifth party in 2009, could even emerge as the victors in this month's repeat ballot.

Why Europe Should Fear Fine Gael-like ‘Reasonableness’ Much, Much More Than it Fears Syriza - The other day, the Irish voted in favour of a hideous impossibility: They voted in favour of the EU’s fiscal compact which specifies that which is both impossible to attain and catastrophic if it is attained. What was that? The pledge by member-states that “general government budgets shall be balanced or in surplus”, that “the annual structural deficit must not exceed 0.5 percent of GDP”, that if “government debt exceeds the 60% reference level” it will be reduced “at an average rate of one twentieth (5%) per year as a benchmark” and that, failing all this, “the EU’s highest court will be able to fine a country”; a penalty equivalent to up to 0.1% of GDP”. Suppose that every European citizen adopts the fiscal compact as her or his guiding principle and puts its implementation above all else in life. If Spain, Italy, Portugal, Ireland, France, Greece, Germany etc. (i.e. countries with debt well above 60% of GDP) were to reduce their debt by the specified 5% per annum, this would mean that all these nations should turn an average 2.8% primary deficit to something akin to 6% primary surplus. Suppose we could do it (which, of course, we cannot). Were we to succeed in this endeavour, the result would be a very deep recession equal to at least -4.5% in terms of average Eurozone-wide ‘growth’. In a period when a banking crisis is in full swing, the Periphery is in free fall, US growth is tittering of the verge, China is slowing down etc., engineering such a recession via this piece of ‘legislation’ is the macroeconomic equivalent of committing suicide.

The week that Europe stopped pretending - The euro has essentially broken down as a viable economic and political undertaking. The latest rush of events reeks of impending denouement.Switzerland is threatening capital controls to repel bank flight from Euroland. The Swiss two-year note has fallen to -0.32pc, not that it seems to make any difference. Denmark’s central bank said it was battening down the hatches for a "splintering" of EMU. It has cut interest rates twice in a matter or days and pledged to do whatever it takes to stop euros flooding into the country. Contingency plans are on the lips of officials in every capital in Europe, and beyond. On a single day, the European Commission said monetary union was in danger of "disintegration" and the European Central Bank said it was "unsustainable" as constructed. Their plaintive cries may have fallen on deaf ears in Berlin, but they were heard all too clearly by investors across the world. Joschka Fischer, Germany’s former vice-Chancellor, said EU leaders have two weeks left to save the project. "Europe continues to try to quench the fire with gasoline – German-enforced austerity. In a mere three years, the eurozone’s financial crisis has become an existential crisis for Europe."

 EU, ECB working up eurozone 'master plan' The heads of four key European institutions are hammering out a "master plan" to lead the eurozone out of its crippling crisis, a German Sunday newspaper reported. European Central Bank chief Mario Draghi, European Union president Herman Van Rompuy, EU Commission head Jose Manuel Barroso and Eurogroup chairman Jean-Claude Juncker were tasked last month with working up a reforms roadmap, Welt am Sonntag said. The plan is to be presented at an EU summit in late June, the report said. Under global pressure to put an end to the turmoil rocking financial markets and creating deep economic uncertainty, the leaders want to point the way toward a lasting solution, an unnamed high-ranking EU official told the newspaper. "Around the world -- in America and Asia -- we are asked, 'Where do you want to go?'" the official said. "After two years of crisis, it is finally time to provide an answer." The proposals being considered would include European institutions having more power over national budgets; a European supervisory body for the banking sector with new powers; harmonised fiscal, tax, foreign and security policies; and reform of social welfare programmes.

Europe mulls major step towards "fiscal union" - When Jean-Claude Trichet called last June for the creation of a European finance ministry with power over national budgets, the idea seemed fanciful, a distant dream that would take years or even decades to realize, if it ever came to be. One year later, with the euro zone's debt crisis threatening to tear the bloc apart, Germany is pushing its partners for precisely the kind of giant leap forward in fiscal integration that the now-departed European Central Bank president had in mind. After falling short with her "fiscal compact" on budget discipline, German Chancellor Angela Merkel is pressing for much more ambitious measures, including a central authority to manage euro area finances, and major new powers for the European Commission, European Parliament and European Court of Justice. She is also seeking a coordinated European approach to reforming labor markets, social security systems and tax policies, German officials say. Until states agree to these steps and the unprecedented loss of sovereignty they involve, the officials say Berlin will refuse to consider other initiatives like joint euro zone bonds or a "banking union" with cross-border deposit guarantees - steps Berlin says could only come in a second wave.

Can a banking union save the euro?  - A few weeks ago, after the Greek election on May 6, a consensus developed among many macro investors about the likely path for the eurozone crisis during the summer. This consensus held that Greece would leave the eurozone in a disorderly manner; that this would cause severe contagion problems for the Spanish and perhaps the Italian banking system; and that the ensuing mayhem would finally force the Germans to permit a full resolution of the crisis, probably via a massive further use of the ECB balance sheet. This was held to be an “optimistic” scenario for global risk assets. This consensus has since frayed at the edges. Investors have realised not only that Greece may remain inside the euro for a further messy period, but that the condition of Spanish banks has spiralled out of control. This needs to addressed, whatever happens to Greece. Hence, the European Commission called last week for the formation of a “banking union”, a proposal which the ECB seems broadly to support. This is likely to be the centrepiece of the next Summit on June 28-29. However, like the fiscal union which came before it, the banking union may fail to impress investors sufficiently to end the crisis.A banking union would need to have several different features, all of which are problematic.

Eurozone crisis: What do the economists think? - How do European economists assess the economic crisis in Europe? This column presents results of a survey of members of the Association of European Conjuncture Institutes on various issues related to the European economic crisis, such as the likelihood of Greece leaving the Eurozone, the likelihood of Europe falling back into recession, and the role of the European Central Bank.

Soros: The European Union is a Bubble - My Twitter feed lit up yesterday with folks recommending a speech by George Soros about Europe. They were right. Whether you love him or hate him, he provides a fascinating perspective on Europe’s past, present, and future and, in so doing, provides a particularly clear presentation of his critique of (what he views as) mainstream economics. The whole speech is worth a read. Here are some excerpts describing his view that the European Union is a bubble: I contend that the European Union itself is like a bubble. In the boom phase the EU was what the psychoanalyst David Tuckett calls a “fantastic object” – unreal but immensely attractive. The EU was the embodiment of an open society –an association of nations founded on the principles of democracy, human rights, and rule of law in which no nation or nationality would have a dominant position. The process of integration was spearheaded by a small group of far sighted statesmen who practiced what Karl Popper called piecemeal social engineering. They recognized that perfection is unattainable; so they set limited objectives and firm timelines and then mobilized the political will for a small step forward, knowing full well that when they achieved it, its inadequacy would become apparent and require a further step. The process fed on its own success, very much like a financial bubble. That is how the Coal and Steel Community was gradually transformed into the European Union, step by step.

Soros on the Euro - Krugman - His speech is getting a lot of attention, and rightly so. It’s not so different from what many of us have been saying, but given the source — and, to be fair, the historical breadth of his perspective — I can see why it’s getting people to pay attention in a way they hadn’t before. His point about the euro bubble is particularly well taken. I’d put it this way: it so happened that the euro came into existence at a time when the German economy was in the doldrums. Then the euro made investors believe that southern Europe was safe, causing a huge fall in interest rates there: This in turn led to vast inflows of capital; the flip side of these inflows was large trade deficits, and large counterpart German surpluses, which was just what the Germans needed. Everyone was happy! For a few years. And then the bubble burst, leading to the crisis today.

George Soros and the two choices facing Europe - There’s a good reason why the likes of Paul Krugman, Joe Weisenthal (twice), Cullen Roche, Ezra Klein, and everybody else are raving about George Soros’s analysis of what went wrong in the Eurozone: it’s really good. The big theme is that the European-unity project is a bubble, which could burst at any minute. But it’s the granular analysis in this 4,400-word speech which really makes it worth reading. Essentially, Soros characterizes the European project as being a bit like a runner, moving at a steady clip in the direction of greater unity. Running is a weird thing: it’s basically the art of falling over continuously in a particular direction. So long as you keep on moving forwards, you can maintain a dynamic equilibrium. But stopping is really hard, because whenever you try to do that, you’re out of balance: The problem here is that the statesmen didn’t understand that they were running: they thought they were walking. They thought that while forward momentum was a good thing and maybe even necessary, ever-greater union was in and of itself a good thing, which would bring the continent closer together and make it stronger. With hindsight, by contrast, we can see that it was a way of turbo-charging the European bubble, and setting it up for a catastrophic pop if and when the process of integration didn’t continue far beyond what was politically feasible circa Maastricht.

Spain makes explicit plea for bank aid - Spain has made its most explicit call to date for European institutions to recapitalise the country’s banks. amid concerns about its own ability to raise the billions of euros needed on sovereign bond markets.Cristóbal Montoro, budget minister in the centre-right government, sent jitters through financial markets on Tuesday when he admitted that the high perceived risk of Spanish sovereign debt meant Spain “does not have the door to the markets open”. The comment startled analysts given that the Spanish treasury plans to auction up to €2bn of bonds on Thursday. Spain’s risk premium – the difference between its bond yields and those of low-risk Germany – rose sharply last month after the government decided to nationalise Bankia, a merged group of seven savings banks, and declared that the bank needed €19bn in extra capital. The surge has fuelled predictions that Spain will need to follow Greece, Ireland and Portugal’s example and seek an international bailout.Spanish authorities say a rescue of their much larger economy would be impossibly expensive. They are also reluctant even to ask for a limited bailout for their banks for fear of the conditions that would be imposed by the IMF and European institutions, something German and European officials say Madrid cannot escape. Mr Montoro said the sum needed to recapitalise Spain’s banks was not “astronomical”, though he declined to endorse an estimate by Emilio Botín, chairman of Santander bank, that the country’s banking system needed €40bn of new capital. Most analysts believe the sum required is higher.

Spanish bailout would be 'technically impossible' - Spain declared Tuesday it is being virtually shut out of stormy credit markets but a bailout is technically impossible for the eurozone’s fourth-biggest economy. Budget Minister Cristobal Montoro said soaring borrowing costs on the bond market were a sign that creditors were closing the door on loans to the sovereign. But he said a bailout was impossible and not necessary. The interest rate on Spanish 10-year government bonds peaked Tuesday at 6.512 per cent, a cost regarded as being impossible for the state to sustain over the longer term. When compared to safe-haven German debt, investors demanded up to an extra 5.25 percentage points for Spanish bonds — not far from a euro-era record of 5.48 percentage points struck last week. “What the risk premium shows is that Spain does not have the door of markets open to it and the challenge is to build confidence with these markets,”

Spain Warns Market Access Being Shut - WSJ.com: —Spain's Budget Minister Cristobal Montoro on Tuesday urged euro-zone partners to act faster to help support its enfeebled banks, saying that the government has effectively lost access to capital markets because of steep risk premiums demanded by sovereign bond investors. In making this dramatic admission, Mr. Montoro joined recent calls by the Spanish government for direct aid from European Union institutions for Spanish banks as the government hopes to avoid a full-blown bailout package. The matter has gained urgency after Madrid was forced into a €19 billion ($23.75 billion) rescue of lender Bankia SA.The government's borrowing costs have surged to record highs with yields on Spanish 10-year bonds staying above the 6% mark for the third straight week. Midday in Europe, the yield was at 6.37%. By comparison, the yield on the German 10-year bond, considered a haven for investors, was at 1.20%.

France, Italy, Spain Services PMI Show Continued Sharp Decreases; Eurozone Composite PMI Near 3-Year Low; Germany Services PMI at 6-Month Low - The Markit PMI data from Europe shows still more deterioration led by France, Italy, and Spain. Let's take a look at a few countries.

France: Business Activity Continues Contraction at Marked Pace. Key points:

• Final Markit France Services Activity Index at 45.1 (45.2 in April), 7-month low. 
• Final Markit France Composite Output Index at 44.6 (45.9 in April), 37-month low.

Italy: Services Activity Continues Contraction at Sharp Rate in May Key Points:

• Business activity and new work both decrease markedly 
• Employment falls at slowest rate for seven months 
• Cost inflation weakest since last November

Spain: Activity and new business both decline at faster rates Key points:

• Activity and new business both decline at faster rates 
• Job shedding intensifies 
• Sharp cuts in output prices as cost inflation eases

Germany: German Composite Output Index in Contraction Key points:

• Final Germany Services Business Activity Index(1) at 51.8 in May, down from 52.2 in April.
• Final Germany Composite Output Index(2) at 49.3 in May, down from 50.5 in April.

Spanish industrial production sinks 8.2% in April - Spanish industrial production dropped 8.2% in April on an annual basis, the national statistics office said Wednesday. That comes after a fall of 7.5% in March. Industrial production has been on the decline or flat for 14 months. In May and August of 2011, production was unchanged. The April fall was the biggest in more than a year.

Spain makes plea for EU aid for troubled banks -  Spain has admitted for the first time that it can no longer raise money on the global markets or roll over its sovereign bonds, threatening to set off a dangerous escalation of Europe's debt crisis. Premier Mariano Rajoy said the country is "in an extremely difficult situation" and called on Europe to stand by the mutual obligations of euro membership. "Europe must say where it is going and show that the euro is an irreversible project that is not in danger, that helps nations in difficulty," he told Spain's senate. Treasury minister Cristobal Montoro confessed that Spain can no longer raise money. "The market is no longer open. The risk premium is telling us that Spain as a state has a problem accessing the market when we need to refinance our debt." Despite the pleas, Spain's leaders are holding out against a formal EU-IMF rescue along the lines of loan packages for Greece, Ireland and Portugal, calling instead for EU action to recapitalise Spanish banks.

Spain says markets closing on it, seeks help for banks (Reuters) - Spain said on Tuesday it was losing access to credit markets and Europe should help revive its banks, as finance chiefs of the Group of Seven major economies conferred on the currency bloc's worsening debt crisis but took no joint action. Treasury Minister Cristobal Montoro sent out a dramatic distress signal about the impact of his country's banking crisis on government borrowing, saying that at current rates, financial markets were effectively off limits to Spain. "The risk premium says Spain doesn't have the market door open," Montoro said on Onda Cero radio. "The risk premium says that as a state we have a problem in accessing markets, when we need to refinance our debt." Spain is beset by bank debts triggered by the bursting of a real estate bubble, aggravated by overspending by its autonomous regions. The premium investors demand to hold its 10-year debt over the German equivalent hit a euro era high last week on concerns it will eventually have to take a Greek-style bailout. Montoro said Spanish banks should be recapitalised through European mechanisms, departing from the previous government line that Spain could raise the money on its own.

Portuguese Builders on ’Verge of Collapse,’ Industry Group Says - Portugal’s construction sector is on the “verge of collapse” and in need of an emergency program to help restructure debt, the country’s biggest industry group said. The construction industry owes banks about 25 billion euros ($31 billion) and insolvency risks are rising as banks cut back on loans, Ricardo Pedrosa Gomes, president of the Public Works and Construction Association said in an e-mailed statement today. The industry needs an emergency program to promote investment and to help cut and restructure debt, according to the statement.

French president Francois Hollande cuts retirement age - France's new socialist government cut the country’s retirement age in the face of the eurozone’s deepening crisis, citing “social justice” to explain a move that goes against austerity efforts across the region. Workers who entered employment aged 18 will be able to retire at 60 rather than 62, under the decree agreed at a cabinet meeting on Wednesday.  The decision follows pre-election promises from the new president Francois Hollande to reverse the rise in the retirement age introduced by his predecessor Nicolas Sarkozy in 2010.

Hollande About to Wreck France With Economically Insane Proposal: "Make Layoffs So Expensive For Companies That It's Not Worth It" - Unemployment in France touched 10.2% in April, a number last seen in 1999 according to data from Eurostat. The question on newly-elected President Francois Hollande's mind is what to do about it.   Hollande's layoff clampdown solution according to Labour Minister Michel Sapin is to "make layoffs so expensive for companies that it's not worth it." France's new Socialist government is planning to ramp up the cost of laying off workers for companies in the coming months, its labour minister said on Thursday after data showed the jobless rate hit the highest level this century at 10 percent. "The main idea is to make layoffs so expensive for companies that it's not worth it," Sapin said in an interview with France Info radio. "It's not a question of sanctions, but workers have to have compensation at the right level," he said.

Greece warns of going broke as taxes dry up - As European leaders grapple with how to preserve their monetary union, Greece is rapidly running out of money. Government coffers could be empty as soon as July, shortly after this month's pivotal elections. In the worst case, Athens might have to temporarily stop paying for salaries and pensions, along with imports of fuel, food and pharmaceuticals. Officials, scrambling for solutions, have considered dipping into funds that are supposed to be for Greece's troubled banks. Some are even suggesting doling out IOUs. Greek leaders said that despite their latest bailout of 130 billion euros, or $161.7 billion, they face a shortfall of 1.7 billion euros because tax revenue and other sources of potential income are drying up. A wrenching recession and harsh budget cuts have left businesses and individuals with less and less to give for taxes - and a growing incentive to avoid paying what they owe. The budget gap is widening as the so-called troika of lenders - the International Monetary Fund, the European Central Bank and the European Commission - withholds 1 billion euros in bailout money earmarked for government financing while it waits to see whether new leaders elected June 17 will honor Greece's commitments.

Greek May Deposit Loss Up to 6 Billion Euros, Kathimerini Says - Greek banks lost between 5 billion euros ($6.3 billion) and 6 billion euros in deposits in May after inconclusive elections heightened uncertainty about the country’s future in the euro, Kathimerini reported, without saying where it got the information. The rate of non-performing loans in the banking system at the end of March was 18 percent, with repayment arrears amounting to 44 billion euros, according to the Athens-based newspaper.

More pain in Greece as jobless rate hits new high (Reuters) - Greece's jobless rate hit a record high in March, data showed on Thursday, piling more misery on Greeks and giving ammunition to politicians campaigning against the nation's bailout terms in a parliamentary election on June 17. ELSTAT, Greece's statistics service, said that unemployment hit 21.9 percent in March, up from a downwardly revised 21.4 percent in February, with 1.075 million people out of work. It was a sharp rise from the same month a year ago when the unemployment rate was 15.7 percent, meaning 342,134 jobs have been lost since then, underscoring the depth of a recession that is already in its fifth year. "The situation is really bad, no one is hiring,"  "My unemployment benefit is 360 euros ($450) a month and will run out in four months. I don't see things improving."

The Wrong Austerity Cure - Laura Tyson – Fiscal profligacy did not cause the sovereign-debt crisis engulfing Europe, and fiscal austerity will not solve it. On the contrary, such austerity has aggravated the crisis and now threatens to bring down the euro and throw the global economy into another tailspin.  In 2007, Spain and Ireland were models of fiscal rectitude, with far lower debt-to-GDP ratios than Germany had. Deluded by the convergence of bond yields that followed the euro’s launch, investors fed a decade-long private-sector credit boom in Europe’s less-developed periphery countries, and failed to recognize real-estate bubbles in Spain and Ireland, and Greece’s slide into insolvency. When growth slowed sharply and credit flows collapsed in the wake of the Great Recession, budget revenues plummeted, governments were forced to socialize private-sector liabilities, and fiscal deficits and debt soared. With the exception of Greece, the deterioration in public finances was a symptom of the crisis, not its cause. Moreover, the deterioration was predictable: history shows that the real stock of government debt explodes in the wake of recessions caused by financial crises. Overlooking the evidence, European leaders, spearheaded by Germany, misdiagnosed the problem as one of fiscal profligacy for which painful austerity is the only cure. On this view, significant and rapid reductions in government deficits and debt are a precondition to restoring government credibility and investor confidence, stemming contagion, bringing down interest rates, and reviving economic growth.

Greece and the Euro: Fifty Ways to Leave Your Lover - The euro zone is proving to be a marriage of incompatible partners. A June 1 article in the UK Telegraph titled "The Triumph of Margaret Thatcher: Why Europe's Love Affair with the European Project Is Ending" reported that two-thirds of 9,000 respondents thought that having the euro as their single currency was a mistake. For the Greeks, the euro love affair is over, but breaking up is hard to do. Defaulting on their debts will force them out of the euro zone and back to issuing drachmas, which could get brutally devalued by speculators as soon as they are traded on foreign exchange markets. Fortunately, there are alternatives to an ugly divorce. The treaties binding the 17 member nations are just a set of rules, entered into by mutual agreement, and rules can be bent, broken or stretched, especially in crises. The European Central Bank (ECB) has already broken a litany of rules to save the banks, and so has the Federal Reserve, which found multiple ways to do what it initially said it couldn't do to save Wall Street in 2008. Rules that can be bent for banks can be bent for the people - not just the Greeks, but the Irish, Italians, Spaniards, Portuguese and others lined up behind them. Here are some creative alternatives that have been proposed.

The eurozone’s architects have created a doomsday machine and a gift for speculative capital - So why did the founders of the euro fail to establish an exit mechanism for the weaker constituent parts of the eurozone?  For the most cogent explanation, let’s turn to our friend, Greek economist Yanis Varoufakis: “The lack of a constitutional (or Treaty-enabled) process for exiting the Eurozone has a solid logic behind it. The whole point of creating the common currency was to impress the markets that it is a permanent union that will guarantee huge losses to anyone bold enough to bet against its solidity. A single exit suffices to punch a hole through this perceived solidity. Like a tiny fault line on a mighty dam, a Greek exit will inevitably lead to the edifice’s collapse under the unstoppable forces of disintegration that will gain a toehold within that fault line. The moment Greece is pushed out two things will happen: a massive capital flight from Dublin, Lisbon, Madrid etc., followed by a reluctance of the ECB and Berlin to authorise unlimited liquidity to banks and states. This will mean the immediate bankruptcy of whole banking systems plus Italy and Spain. At that point, Germany will face a hideous dilemma: jeopardise the solvency of the German state (by committing a few trillions to the task of saving what is left of the Eurozone) or bailing itself out (i.e. Germany leaving the Eurozone). I have no doubt that it will choose the latter. And since this will mean tearing up a number of EU Treaties and Charters (including the ECB’s) the EU will, in essence, cease to exist.”

Cleaning Up the Mess: What to Do About Teetering Eurobanks? - Yves Smith - Yves here. The Financial Times and New York Times tonight both have good overviews on the state of play in the effort to contain a slow-motion Spanish bank run. On the one hand, the Spanish government is in a position to tell the Eurocrats that it will consider only a bank bailout and not be required to take on further austerity measures. Given that retail sales have fallen nearly 10% year to year, it’s hard to see how anyone could expect more austerity to be a good idea. Although markets reacted as if a deal was imminent, the FT makes it sound as if quite a few details need to be ironed out. And no wonder: the ECB, the one institution that could act unilaterally, has indicated it will only play a limited role and is leery of making long-term loans to Spanish banks or buying their debt. In addition, Spain appears to be taking an unwise posture, of asking for as little money for its banks as it thinks it will need. Rumors from Spanish officials come in at €40 billion, while European officials are looking at numbers more than twice that large. The big rule of fundraising is always raise a good bit more than you think you need in the first round; it will be vastly more expensive if you need to come to the well later.  Given that the shape of a Spanish bank rescue is very much in play, posts by European experts may well influence the outcome. While some of these recommendations might sound like the banking versions of apple pie and motherhood, it’s important to recognize that few of these basic principles have been adopted in recent bailout programs.

Why the Euro Zone Could Unravel Shockingly Fast - How would a Greek exit from the euro zone be managed? What was being done to improve labor market flexibility in Italy? And what would today’s crisis mean to the potential enlargement of the E.U. to Turkey and beyond? The real problem facing the euro zone, however, is that there is no longer any such policy, no overall strategy, no big picture. Political and financial leaders acknowledge the challenges facing the euro zone. But they continue to insist that solutions will be found to keep the system working. Italian Prime Minister Mario Monti has said that some form of euro bonds backed by the countries collectively would allow Greece to remain in the common currency. German Chancellor Angela Merkel remains hesitant about any such bonds, which would largely be supported by Germany’s credit rating. But she has said she is open to greater common financial support. The trouble is that such schemes to muddle through are no longer adequate. Debt continues to compound for the financially weakest European countries, and sooner or later it will become insupportable. Only a massive common financial commitment could turn that trend around. But at this point, there is no grand purpose that could motivate such an enormous commitment. For the past few years, the euro has simply been held together by whatever practical advantages it offers. And when those practical advantages become too costly, the euro zone could unravel with astonishing speed.

Global Economic Collapse For Dummies - Forget the complicated flowcharts, scenarios, and government-banking-system reacharounds, the global economic collapse has never been so easy to comprehend...

G7 to hold emergency euro zone talks, Spain top concern (Reuters) - Finance chiefs of the Group of Seven leading industrialized powers will hold emergency talks on the euro zone debt crisis on Tuesday in a sign of heightened global alarm about strains in the 17-nation European currency area. With Greece, Ireland and Portugal all under international bailout programs, financial markets are anxious about the risks from a seething Spanish banking crisis and a June 17 Greek election that may lead to Athens leaving the euro zone. "Markets remain skeptical that the measures taken thus far are sufficient to secure the recovery in Europe and remove the risk that the crisis will deepen. So we obviously believe that more steps need to be taken," White House press secretary Jay Carney told reporters. Canadian Finance Minister Jim Flaherty said ministers and central bankers of the United States, Canada, Japan, Britain, Germany, France and Italy would hold a special conference call, raising pressure on the Europeans to act. "The real concern right now is Europe of course - the weakness in some of the banks in Europe, the fact they're undercapitalized, the fact the other European countries in the euro zone have not taken sufficient action yet to address those issues of undercapitalization of banks and building an adequate firewall," Flaherty told reporters.

Euro slumps on Spain warning, G7 fails to raise hopes - The euro fell on Tuesday as Spain's treasury minister said high borrowing costs were closing the country off to credit markets and investors received scant comfort from an emergency conference call of Group of Seven finance chiefs. The euro, which rallied the previous day on euro zone optimism, fell broadly after the G7 ministers did not unveil concrete actions to address problems in Spain and Greece. That disappointed investors hoping for measures. "None of these meetings have produced anything meaningful, and with debt burdens piling up across the globe, I remain highly doubtful that anything substantive will be implemented, and anything that falls short of fiscal union in Europe will allow the crisis to proliferate," In a later statement, the U.S. Treasury Department said G7 finance ministers discussed progress towards a financial and fiscal union in Europe.

EU, Germany exploring Spanish rescue (Reuters) - Germany and European Union officials are urgently exploring ways to rescue Spain's debt-stricken banks although Madrid has not yet requested assistance and is resisting being placed under international supervision, European sources said on Wednesday. Spain, the euro zone's fourth biggest economy, said on Tuesday it was effectively losing access to credit markets due to prohibitive borrowing costs and appealed to European partners to help revive its banks. The European Central Bank dashed investors' hopes of an easing of monetary policy or another flood of cheap liquidity for banks despite saying that the euro zone money market has again become "dysfunctional". The ECB left interest rates on hold at 1 percent at its monthly meeting. The move raised pressure on EU political leaders to outline a solution to the bloc's festering debt crisis at a summit later this month, which is being watched closely in the United States and other global powers anxious about a sluggish world economy.

Rajoy Seeks Formula for Spanish Banks in Talks With EU Leaders - Spanish Prime Minister Mariano Rajoy said he’s talking to other European leaders about how to shore up the country’s banks as a lawmaker said the industry may need a $126 billion international bailout. Rajoy said he wouldn’t give estimates on how much capital the nation’s lenders need until he has reports from two international consultants, due this month, and from the International Monetary Fund, due on June 11. “After that I will give my figure and the government will say what the system needs to be recapitalized,” he told a news conference with Dutch Prime Minister Mark Rutte in Madrid today. “I’ve been talking to my European Union colleagues, and to Prime Minister Rutte, to take a decision on this matter.”

Spain Holds a Trump Card in Bank Bailout Negotiations - The bargaining has begun over a deal to rescue Spain’s ailing banks, confronting Europe with urgent choices about whether to try to enforce onerous bailout terms on Madrid as the crisis spreads to the region’s largest economies.  The question has seemingly become one of when, and not if, Spain’s banks will receive assistance from European countries, with investors on Wednesday predicting an imminent rescue and pushing up stocks and bonds on both sides of the Atlantic. Spain, the euro zone’s fourth-largest economy, is too big to fail and possibly too big to steamroll, changing the balance of power in negotiations over a bailout. Political leaders in Madrid are insisting that emergency aid to their banks avoid the stigma in capital markets that has hobbled countries like Greece, Portugal and Ireland after accepting tough rescue terms. They are also fighting to slow the pace of austerity and economic change that have pushed those smaller countries into deeper recessions. Spain has the added advantage of seeking help in a changed political environment in which calls for growth have begun to outweigh German insistence on austerity. Unlike Greece, Spain’s government did not run large budget deficits before the crisis, giving it leverage to argue that European aid to its banks should not come weighed down with a politically delicate loss of decision-making power over its own economic and fiscal policies.

Germany finalizing face-saving aid deal for Spain - While Berlin remains firm in its rejection of Spain's calls for Europe's rescue funds to lend directly to its banks, the officials said that if Madrid put in a formal aid request, funds could flow without it submitting to the kind of strict reform program agreed for Greece, Portugal and Ireland. Instead, Spain would only have to agree to new conditions tied to the reform of its banking sector. Berlin is also exploring the possibility of funneling aid to Spain's bank rescue fund FROB to reinforce the message that it is the country's banks and not its public finances which are at the root of its problems. Berlin is certainly shifting positions. Last week, it signaled it supported granting Spain an extra year to cut its deficit to the EU's 3 percent of gross domestic product threshold, having previously held fast to the notion that austerity drives should not be diluted. Merkel has also sent the message that she is open to Europe-wide supervision of the banking sector, albeit as a "medium-term" goal, one element of a proposed "banking union" to break the vicious circle of interdependence between Europe's financial institutions and its sovereigns.

Yanis Varoufakis: Solidarity Euro-Style – Finnish Loans, ECB Bond Purchases, EFSF Tough Love and Assorted Horror Stories from the Postmodern Euro-Workhouse -  The world seems convinced that Europe, perhaps under duress, put together a large Solidarity Fund (the EFSF) for the purposes of helping the fiscally-stricken Eurozone member-states avoid bankruptcy once they were frozen out of the money markets. The criticisms waged at this type of ‘solidarity’ centred on two issues: First, that the Fund’s size was not large enough (and thus unable to help Italy and Spain). Secondly, that this Fund resembles more a Victorian Workhouse whose real purpose was not to show solidarity to its residents but, rather, to make their life so unpleasant as to deter able-bodied workers from ever seeking its assistance. The first criticism, about the EFSF-ESM’s size, is true but irrelevant. As I have argued from day one of the EFSF’s creation, its problem is not its size but its CDO-like structure. Turning to the second criticism, that it resembles a Dickensian Workhouse, Spain’s current predicament is instructive: To get money to give to its decrepit banks, the nation must be humiliated and undergo further fiscal waterboarding so that Italy and others are deterred from turning to the EFSF for help. In this sense, when Europe’s functionaries say that there is no need for further action on Spain since the EFSF is available to help, they are inviting the Spanish to enter the Workhouse for a life of undeserved misery on behalf of their bankers. And they have the audacity to call this ‘solidarity’ with the Spanish people. To think of the EFSF-Workhouse like the Victorians did: better than the alternative of being left on the street to perish; a place where ‘tough Victorian love’ is practised in order to refresh Europe’s puritan ethic. Well, be that as it may, I invite those who would like to think this way, to consider the following two examples with a view to establishing whether they are consistent even with this Victorian view of ‘solidarity’.

The talk about China's support for Eurozone was just talk - According to the news reports in February, China seemed fully prepared to provide support for the Eurozone. Beijing certainly committed to not selling any sovereign debt. Bloomberg (Feb 15th, 2012): - China pledged to invest in Europe’s bailout funds and sustain its holdings of euro assets, spurring gains in the currency and Asian stocks on optimism the region’s debt crisis will be overcome “China will always adhere to the principle of holding assets of EU sovereign debt,” People’s Bank of China Governor Zhou Xiaochuan said in Beijing today. “We would participate in resolving the euro debt crisis,” he said, echoing comments by Premier Wen Jiabao yesterday. Today however we've heard from CIC, China's sovereign wealth fund. And the message seems just a bit different. WSJ (today): - Mr. Lou said CIC sold down its exposure to European peripheral countries a long time ago, before incurring any losses, and has reduced its holdings of European stocks and bonds. "Right now we find there is too much risk in Europe's public markets," he said. It doesn't sound as though CIC is prepared to buy any Spanish or Italian debt - which is what the Eurozone really needs now. The fund may not even be holding any. That would have made it quite easy for Wen and Zhou in February to say they are not planning to reduce their holdings.

El-Erian: Spain Needs To Avoid European Funding Which Is A 'Roach Motel' - \ After months of resisting external aid, Spanish budget minister Cristobal Montoro said European institutions should help shore up the nation’s lenders. In fact reports suggest that there is a plan in place that would allow Spain to recapitalize its weakest banks with help from European partners. But in a Financial Times editorial, PIMCO's Mohamed El-Erian says there's a reason Spain had long avoided emergency European funding: "So far, emergency European funding has been impossible to exit, like a “roach motel”. Rather than act as a catalyst for crowding in private capital needed to restore growth, and financial viability, public money has provided the private sector with the possibility to exit programme countries at a much lower cost; and exit it did. As a result, governments have become highly dependent on official aid to cover their budget needs, meet interest obligations and roll over maturing debt; and domestic companies have been starved of the oxygen that is so critical for investment and job creation. No wonder, growth and solvency remain so elusive for the programme countries, including in Ireland and Portugal where citizens have been generally supportive of their governments’ policies. The possibility that the counter factual — i.e., no access to external emergency financing — could have yielded a worse outcome is no excuse for repeating the mistake in Spain. Indeed, This is more than just in the country’s self interest. Given its size and crucial role in any revived eurozone (along with France, Germany and Italy), Europe cannot afford Spain to be a long-term ward of the state."

Marshall Auerback: Beware German Trojan Horses – More “Europe” Might Mean More Fiscal Austerity - As several newspapers have recently highlighted, Germany is slowly but surely moving toward a plan to combine much of Europe’s bad debt into a single fund with the idea of paying it off over 25 years. The latter proviso is key, as the bonds are temporary, and therefore compliant with recent decisions by Germany’s Constitutional Court, which has ruled against permanently surrendering Germany’s budget-making power to another entity. The worsening crisis has led to a sweeping effort to chart a new path forward for the union, one that encompasses fiscal integration, Europe-wide banking supervision, and tighter coordination of economic policies. German leaders have not provided details of a potential deal — and not every country may be eager to sign on — but it would be likely to mean an expansion of executive power in Brussels over fiscal targets in member states and supervision of their banks, along with Europewide deposit insurance. It would go far beyond what was contemplated for Europe even six months ago. That’s the good news, right? To be sure, some form of a banking union is necessary, and it probably has to come sooner, rather than later. Given the magnitude of euro deposits which have already flooded into Germany’s banks, a euro area FDIC on its own could well be too little, too late, given the mounting deposit run. We could be looking at trillions of euros of bank deposits in the periphery countries now residing in German banks. Why would these depositors move their money back to, say, Spanish banks at this juncture? Nothing short of a commitment to infinite liquidity provision to banks will do.

The Euro Zone Crisis: Political and Economic Perspectives - Back in late April, I participated in panel "Europe at the Crossroads: The Euro Crisis and the Future of European Integration" (video). There're two graphs from my presentation I'd like to highlight, as they remain relevant even as the eurozone lurches into de facto recession [0]. The euro zone was not, and still is not, an optimal currency zoneThis was known as early as the early 1990's, as highlighted by this table from a 1994 paper by Tamim Bayoumi and Barry Eichengreen: The table is of correlations of estimated supply side shocks, obtained using a bivariate SVAR (demand side shocks are also relevant, but would change with the establishment of a euro zone wide central bank.)  Notice that the northern countries fit best into a common currency area, insofar as the correlations exceed 0.40. That is not the case for Italy, Spain, Portugal, and Ireland.While there is a similar asymmetry of shocks in the US, fiscal transfers from the center are much more pronounced here. In addition, labor mobility is much greater.By the way, none of the proposals that have thus far been forwarded addresses the issue that the EMU did not implement a fiscal union. The proposals that have been forwarded merely place greater restrictions on the deficits the member states can run.

The Accidental Empire - George Soros - It is now clear that the main cause of the euro crisis is the member states’ surrender of their right to print money to the European Central Bank. They did not understand just what that surrender entailed – and neither did the European authorities.  When the euro was introduced, regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital, and the ECB discounted all eurozone government bonds on equal terms. Commercial banks found it advantageous to accumulate weaker countries’ bonds to earn a few extra basis points, which caused interest rates to converge across the eurozone. Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. Other countries enjoyed housing and consumption booms on the back of cheap credit, making them less competitive. Then came the crash of 2008.  When financial markets discovered that supposedly riskless government bonds might be forced into default, they raised risk premiums dramatically. This rendered potentially insolvent commercial banks, whose balance sheets were loaded with such bonds, giving rise to Europe’s twin sovereign-debt and banking crisis. The eurozone is now replicating how the global financial system dealt with such crises in 1982 and again in 1997. In both cases, the international authorities inflicted hardship on the periphery in order to protect the center; now Germany is unknowingly playing the same role.

Moody's Downgrades 3 Austrian Banks on Debt Crisis Risks - Austria's three largest banks don't have enough capital to support the risks they face in Central and Eastern Europe compared with their Western European peers, Moody's Investor Services analyst Mathias Kueltmann told Dow Jones Newswires Wednesday after the agency downgraded all three. The senior debt and deposit ratings of Raiffeisen Bank International AG (RAIFY, RBI.VI) were downgraded by one notch to A2 while UniCredit Bank Austria's ratings were lowered a notch to A3. Erste Group Bank AG (EBKDY, EBS.VI) was downgraded by two notches to A3. The firm's outlook on Raiffeisen is stable while its outlooks on UniCredit and Erste are negative. UniCredit Bank Austria is the Austrian subsidiary of Italian banking group UniCredit SpA (UCG.MI,UNCFF). Moody's pointed to the banks' vulnerability to adverse operating conditions in some core markets in Central and Eastern Europe, as well as increased risks from shocks originating from the euro zone's sovereign-debt crisis.

Moody's downgrades six German banks - Moody’s Investor Services has downgraded six German banks as part of the increased risks posed by the sovereign debt crisis. Commerzbank, DekaBank, DZ Bank, Landesbank Baden-Wuerttemberg, Landesbank Hessen-Thueringen and Norddeutsche Landesbank have all been downgraded by the agency, while the decision on Deutsche Bank AG has been delayed. Moody’s has assigned stable outlooks to the ratings of most German banks. The banks received the downgrades not based simply on the geographical exposure of their portfolios, but on their exposure to asset classes which are expected to suffer if the sovereign debt crisis continues to escalate.

Italian Banks’ ECB Borrowings Hit New Record High in May - Italian banks’ borrowings from the European Central Bank rose to a third straight monthly record in May as concerns about the debt crisis limit access to funds and raise costs. Total borrowing by Italian banks rose to 272.7 billion euros ($342 billion) from 271 billion euros in April, the Bank of Italy said on its website today. Most of the funding, about 269 billion euros, was from longer-term refinancing operations, while 4 billion euros came from the main refinancing operations, the data showed. Lenders in the entire euro area borrowed about 1.12 trillion euros from the ECB, according to the central bank.

Latest on sovereign CDS activity; Germany makes top five  - A few items to note:
1. Italy and Spain being in the top 5 is not a surprise, but it looks like France is also a concern to market participants. The new Socialist government is not helping the matters.
2. It seems that Brazil's slowdown and capital outflows are causing lively activity and large net exposures in the CDS of that nation.
3. Germany is making the top 5 as well. That is an indication that traders are once again pricing in the risk that Germany will have to bail out (directly or indirectly) a large periphery nation at the expense of increased leverage (debt/GDP). That "bailout" could also take the form of addressing a default / re-denomination, should such a periphery nation exit (for example having to recapitalize Eurozone's institutions). That concern is causing German CDS to widen out, even as bunds trade at historically low yields.

Capital Flight Leaves German Banks Awash in Cheap Deposits -- As Europe's sovereign debt crisis escalates, Germany is becoming a magnet for depositors keen to stow their savings in the euro area's safest market. Deposits in Germany rose 4.4 percent to 2.17 trillion euros ($2.73 trillion) as of April 30 from a year earlier, according to European Central Bank figures. Deposits in Spain, Greece and Ireland shrank 6.5 percent to 1.2 trillion euros in the same period, including a 16 percent drop for Greece, the data compiled by Bloomberg show. As banks in Europe's periphery fret over lost deposits, German lenders are awash in liquidity that comes on top of more than 1 trillion euros the ECB has made available in three-year loans to banks since December to ease the flow of credit. The prospect of Greece leaving the 17-nation euro region is fueling the capital flight as parties opposed to the terms of the country's second bailout prepare for a new ballot on June 17 after winning most of the votes in elections last month. "The longer the debt crisis lasts, the more funds will flow to Germany,"

Eurozone citizens moving billions to Switzerland - Bloomberg/BW: - Switzerland saw its foreign currency reserves balloon by 66.2 billion Swiss francs ($69.5 billion) over the past month as the country's central bank spent heavily to prevent its currency from appreciating against the euro, according to data released Thursday.  The franc is considered a safe haven for investors concerned about the euro-zone debt crisis.  The Swiss National Bank held foreign currency reserves worth 303.8 billion francs in May, an increase of 28 percent from the 237.6 billion francs in April. Indeed we had a big spike in foreign currency reserves of the Swiss National Bank in May. And this was in fact caused by the SNB defending the 1.2 level on the EUR/CHF (euro/swiss) exchange rate - selling CHF and buying EUR (to keep CHF form appreciating too much). The reason the SNB had to do such a massive volume in FX transactions is that the euro area citizens are flooding Swiss banks with deposits (buying CHF and selling EUR). As Kostas Kalevras points out, the ECB's foreign reserve liabilities shot up €77.5bn in May to accommodate this transfer to Switzerland and to other non-euro countries. This confirms that not only do we have a run on periphery banks, with cash moving to Germany, but deposits are rapidly moving abroad as well. And Switzerland has become the main beneficiary (more on that later).

Germany feels the eurozone pain as exports plummet - Even the export powerhouse of Germany is being dragged down by the eurozone sovereign debt crisis, new figures suggested today. German exports fell at their fastest rate in two years in April, according to data from the country’s statistics office. They were down 1.7% on March to €90 billion (£72.7 billion), worse than the 1% decline analysts had expected. The German economy bounced back strongly in the first quarter of this year, registering growth of 0.5 per cent, helped by surging exports both to the eurozone and emerging markets. But fears are now growing that this source of growth could be evaporating, as the eurozone embarks on a programme of co-ordinated austerity policies and demand in China slows.

Berlin is ignoring the lessons of the 1930s - Is it one minute to midnight in Europe? We fear that the German government’s policy of doing “too little too late” risks a repeat of precisely the crisis of the mid-20th century that European integration was designed to avoid. We find it extraordinary that it should be Germany, of all countries, that is failing to learn from history. Fixated on the non-threat of inflation, today’s Germans appear to attach more importance to 1923 (the year of hyperinflation) than to 1933 (the year democracy died). They would do well to remember how a European banking crisis two years before 1933 contributed directly to the breakdown of democracy not just in their own country but right across the European continent. We have warned for more than three years that continental Europe needs to clean up its banks’ woeful balance sheets. Next to nothing has been done. In the meantime, a silent run on the banks of the eurozone periphery has been under way for two years now: cross-border, interbank and wholesale funding has rolled off and been substituted with European Central Bank financing; and “smart money” – large uninsured deposits of wealthy individuals – has quietly departed Greek and other “Club Med” banks.

Moody’s threatens to downgrade Germany if Greece leaves Euro - Moody’s warned Friday that a Greek pullout from the eurozone could lead to downgrades of the eurozone’s top-rated governments, including economic powerhouse Germany. Moody’s also said that an EU rescue of Spain’s banking sector could force a cut to Spain’s sovereign rating due to the “increased risk to the country’s creditors.” “Greece’s exit from the euro would lead to substantial losses for investors in Greek securities, both directly as a result of the redenomination and indirectly as a result of the severe macroeconomic dislocation that would likely follow,” said Moody’s.Should Greece leave the euro, posing a threat to the euro’s continued existence, Moody’s would review all euro area sovereign ratings, including those of the Aaa nations,” it said. The triple-A eurozone countries under Moody’s ratings are Austria, France, Germany, Finland, Luxembourg, and Netherlands.

Bank of Spain: Market access to funds difficult - Spain faces severe difficulties securing funds and can expect no immediate help from the economy, outgoing Bank of Spain Governor Miguel Angel Fernandez Ordonez said in a speech Friday. “The challenges faced by the Spanish economy are severe,” Mr. Fernandez Ordonez said in the speech, published alongside the central bank’s annual report for 2011. “The most recent episode of the sovereign debt crisis is having very severe consequences for confidence and for financing conditions.” In the report, the central bank appealed for stronger leadership in European efforts to control the region’s financial and debt crises. European Central Bank President Mario Draghi has made similar statements in recent weeks as the situation in Spain deteriorates.

Exclusive: Spain poised to request EU bank aid on Saturday (Reuters) - Spain is expected to ask the euro zone for help with recapitalizing its banks this weekend, sources in Brussels and Berlin said on Friday, becoming the fourth country to seek assistance since Europe's debt crisis began. Five senior EU and German officials said deputy finance ministers from the single currency area would hold a conference call on Saturday morning to discuss a Spanish request for aid, although no figure for the assistance has yet been fixed. Later the Eurogroup, which consists of the euro zone's 17 finance ministers, will hold a separate call to discuss approving the request, the sources said. "The announcement is expected for Saturday afternoon," one of the EU officials said. The dramatic development comes after Fitch Ratings cut Madrid's sovereign credit rating by three notches to BBB on Thursday, highlighting the Spanish banking sector's exposure to bad property loans and to contagion from Greece's debt crisis. "The government of Spain has realized the seriousness of their problem," a senior German official said.

Spain stocks up on hopes for near-term bank rescue - Speculation that the wheels could be set in motion for a Spanish bank rescue this weekend rallied stocks in Madrid on Friday, even as the government said no decisions would be taken on aid ahead of a series of reports and audits on the banking sector.  Spanish stocks moved higher after Reuters reported euro-zone officials would hold a teleconference call on Saturday to discuss the crisis, with a request expected to come from Spain that same day. However, Deputy Prime Minister Soraya Saenz de Santamaria told reporters Friday that the government would make no decisions on any aid request before the results of various reports on Spanish banks were known.  “The government has to respect the process before taking any decisions about the data of the banks,” said Sáenz de Santamaría, in the televised press conference. She also said there were no plans for any meetings in the coming days, but sidestepped questions about whether a teleconference call would be held.

Spain Pressed to Apply For a Bailout - Spain is coming under increased European pressure to apply for bailout aid for its ailing banks as early as this weekend, amid growing anxiety that Greece's election next weekend could trigger new financial panic that worsens Spain's festering banking crisis. In conference calls Saturday, euro-zone finance officials are expected to press Spain's government to request aid before the June 17 Greek elections, according to European officials familiar with the negotiations.  On the eve of those calls, the International Monetary Fund rushed out a report late Friday saying the banks need at least €37 billion ($46 billion); the report had been expected Monday.In two more signs of growing urgency, Moody's Investors Service warned Friday it could downgrade the debt of several euro-zone countries based on the troubles of Spain and Greece, and President Barack Obama publicly urged European leaders to shore up their fragile banks.

Spanish Banks Need $46 Billion, I.M.F. Says - The International Monetary Fund said late Friday that Spain’s banks would need to raise at least 37 billion euros, or about $46 billion, as a buffer against a sharper economic contraction in the country. That number will guide European policy makers as they seek to stabilize the Spanish financial system and prevent contagion to the rest of the euro zone. “The extent and persistence of the economic deterioration may imply further bank losses,” Ceyla Pazarbasioglu, deputy director of the fund’s monetary and capital markets department, said in a statement. “Full implementation of reforms, as well as establishing a credible public backstop, are critical for preserving financial stability going forward.” The I.M.F. released its banking audit as Spain contemplates making a formal bailout request to Europe to help recapitalize its fragile banking system. Spanish banks are struggling with significant losses on their housing portfolios, and they have been hurt by the country’s broader economic malaise. Last month, the Spanish government seized Bankia, the country’s biggest mortgage lender. And Spain’s borrowing costs have soared to close to record highs.

Spanish Bailout Plan Could Reach $125 Billion: Report - EU Business News - CNBC: A bailout for Spain's teetering banks, once requested by Madrid, could amount to as much as 100 billion euros ($125 billion), two senior European Union sources told Reuters on Saturday. Spain has not yet made a formal request for European aid but it could come during a conference call of euro zone finance ministers, the sources, who were both on an earlier call to discuss the technicalities of a rescue, said. "A decision on Spain will only be taken ... by the ministers (in a second call). Madrid has not officially asked for help yet," one of the officials said. "The statement will mention 100 billion euros as an upper limit." The Eurogroup of finance ministers is scheduled to begin its call later Saturday. Earlier, its chairman, Jean-Claude Juncker, called for a "quick solution." Several EU sources told Reuters on Friday that Madrid was expected to ask the currency bloc for help with recapitalizing its banks this weekend, becoming the fourth country to seek assistance since Europe's sovereign debt crisis began. Asked if he expected Spain to request help, Swedish Prime Minister Fredrik Reinfeldt told public service radio: "I think that is everybody's assessment. There is even talk about amounts up to 80 billion euros."

Pressure Mounts for Spain to Request a Banking Bailout - Pressure is mounting for euro zone officials to prepare a bailout for Spain’s banks, with the possibility of a discussion among European finance officials over the weekend. But by early evening Friday in Europe, officials in Brussels, Berlin and elsewhere were declining to confirm or fully deny news reports that a conference call had been scheduled for Saturday. And the Spanish government, meanwhile, said it would not formally request a bailout until it receives bank audit reports beginning next week from the International Monetary Fund and other organizations. The flurry of activity came the day after Spain’s credit rating was cut by Fitch Ratings, amid concerns for the government’s finances and problems in the banking sector. And euro zone leaders are thought to be eager to have a solution in place for Spain, ahead of the June 17 elections in Greece that could create further disarray for the currency union. Fitch announced Thursday after the close of trading that it had cut Spain by three steps, leaving it to two notches above junk. The agency cited Spain’s economic problems and the cost of recapitalizing its struggling financial sector, which Fitch said could reach as much as 100 billion euros, or $125 billion.

Europe's Bailout Costs In One Chart: €2 Trillion And Counting -  This chart, better than any we have seen so far, summarizes just how much has been injected already to preserve the Eurozone from collapse. This is what is known as a sunk cost, because last time we checked (and just as we explained back in March at the market highs when everyone was euphoric that Europe is now fixed) nothing has been fixed, and Europe is one 'rogue' democratic vote away from an EMU exit, and thus oblivion (or so they said last year, now everyone is prepared for a Greek departure, or so they say now, expect for the Greeks of course - they go straight to the 10th circle of hell and do not pass go). The truth is that by the time the status quo finishes its extend and pretend game, which incidentally has only one real outcome, the €2 trillion spent to date, will be orders of magnitude higher...

Moody’s tries to ruin our weekend, would have succeeded were it not already ruined - We already knew we’d have to watch for a Spanish banking bailout request tomorrow. Now comes Moody’s with a report warning that “recent developments in Spain and Greece could lead to rating reviews and actions on many of the euro area countries” — and offering a generally downbeat if less-than-original assessment of the euro zone’s future in general. You can already guess the two recent developments: the Greece elections in ten days threaten to produce a government that will demand a renegotiation of its bailout terms, and the aforementioned Spanish bank bailout. From the report, first on Greece (starting after the obvious bits about how the troika would withhold funds if the terms are not respected, leading Greece to leave):

Use of ECB dollar funds leaps as euro pain bites (Reuters) - Banks more than tripled their uptake of ECB dollar funding on Wednesday, the latest indication that some are finding it increasingly difficult to source cash on normal bank-to-bank markets as the euro zone's woes intensify. A total of four banks borrowed $1.54 billion of the 7-day loans. It is the highest amount since March and a significant leap from the $500 million taken by two banks a week ago. The increased uptake provides the latest evidence that banks are having to turn to the ECB for funding as the euro zone's woes increasingly restrict their access to open markets. On Tuesday, use of the ECB's weekly euro-denominated funding also more than doubled, adding to a rapidly emerging picture of sharp deterioration in the health of the money market. The jump in banks' reliance on the ECB will add extra pressure on its policymakers to provide additional support at their meeting on Wednesday.

E.C.B. Under Pressure to Ride to the Euro's Rescue - The European Central Bank must decide Wednesday whether to stand on principle and insist that political leaders take their turn at dealing with the euro zone’s banking and debt crisis, or bend to market forces and once again ride to the rescue.  Based on economic and market indicators, and a growing sense of public panic, the top officials at the central bank could easily justify a policy move when they hold their regular monthly meeting on Wednesday. The bank could, for example, cut the benchmark interest rate to a record low. Or it could flood commercial banks with more low-interest loans, something which worked to calming effect when it provided such infusions a few months ago.  But members of the bank’s governing council, and the bank president, Mario Draghi, might also be concerned that if they are too generous with monetary policy, the region’s political leaders might be tempted to shirk the hard work of creating a more durable euro zone.  Last week, in a rare public rebuke to the region’s elected officials, Mr. Draghi outlined the steps he said were necessary to strengthen the euro currency union, including requiring member nations to take shared responsibility for bank bailouts. If he walks this tough talk, the central bank might not take action until political leaders have made tangible progress in that direction.

ECB To Hold The Line As Euro Crisis Deepens -- As the euro crisis moves toward a decisive moment, the European Central Bank is under renewed pressure to stabilize the troubled currency union. "The euro area seems to be edging closer to its breaking point," said Jens Sondergaard, senior European economist at Nomura Securities, in a note to clients. "Markets are again calling on the ECB to deliver a substantial policy response that can pull the euro area back from the brink." Investors are hoping ECB president Mario Draghi will signal that some sort of rescue effort is in the works, when the central bank holds its monthly meeting in Frankfurt Wednesday. ECB officials will be meeting amid a deepening banking crisis in Spain and ahead of a pivotal election in Greece that could determine whether the nation remains in the eurozone. In a sign of growing international concern, finance ministers from the Group of Seven major economic powers held a conference call Tuesday to discuss Europe's deepening crisis. Draghi has called on euro area political leaders to clarify their vision for the future of the currency union, which he said could become "unsustainable" without further action. But the central bank chief has made it clear that the ECB cannot make up for a lack of progress by government leaders to correct the underlying political problems at the heart of the euro crisis.

ECB Leaves Benchmark Rate Unchanged — The European Central Bank has left its benchmark interest rate unchanged as it increases the pressure on eurozone governments to tackle the debt crisis that threatens the global economy. The decision Wednesday by the bank’s 23-member governing council left the refinancing rate at a record low 1 percent.The bank is under pressure to stimulate a weakening eurozone economy with a rate cut. But bank President Mario Draghi has said the central bank cannot make up for inaction by governments. Draghi told European politicians in Brussels last week that the euro‘s basic setup is “unsustainable” and urged them to sketch out a long-term vision for strengthening the framework of the shared currency.

Draghi Statement: ‘Growth Remains Weak With Heightened Risks’ - The following is the full text of Draghi's introductory statement to the press:

Crashing the Operating System - Liquidity Crunch In Practice - 2008 was a practice run, or a warning shot across the bow, compared to what is coming over the next few years. 2008 did not demonstrate what a liquidity crunch really means, but this time we are going to find out. As with many aspects of financial crisis, Greece is the canary in the coalmine, demonstrating what happens when liquidity disappears and it ceases to be possible to connect buyers and sellers or producers and consumers. As we have said before, and for a long time now, money is the lubricant in the engine of the economy in the way that motor oil is the lubricant in the engine of your car, and you know what will happen to your car if you drive it with the oil warning light on. Greece stands on the verge of an energy crisis caused not by lack of energy, but lack of money within the energy sector. This will become a common refrain throughout Europe and beyond in the coming months and years. Loss of liquidity has a cascading effect on supply chains, causing them to seize up.

The Urge to Punish - Krugman - I’ve been hearing various attempts to explain the ECB’s utterly bizarre refusal to cut interest rates despite soaring unemployment, sliding inflation, and on top of all that the special problems of a monetary union that probably can’t survive unless overall demand is strong. The most popular story seems to be that the ECB wants to “hold politicians’ feet to the fire”, letting them know that they won’t get relief unless they do what’s necessary (whatever that is). This really doesn’t make any sense. If we’re talking about enforcing austerity and wage cuts in the periphery, how much more incentive do these economies need? If we’re talking about broader fiscal union or something, what is it about the imminent collapse of the whole system that the Germans supposedly don’t understand? Is there any conceivable way that cutting the repo rate by 50 basis points will somehow undermine actions that would otherwise happen? What does make sense, maybe, is a two-part explanation. First, the ECB is unwilling to admit that its past policy, especially its past rate hikes, were a mistake. Second — and this goes deeper — I suspect that we’re seeing the old Schumpeter “work of depressions” mentality, the notion that all the suffering going on somehow serves a necessary purpose and that it would be wrong to mitigate that suffering even slightly.

Panic has become all too rational - Suppose that in June 2007 you had been told that the UK 10-year bond would be yielding 1.54 per cent, the US Treasury 10-year 1.47 per cent and the German 10-year 1.17 per cent on June 1 2012. Suppose, too, you had been told that official short rates varied from zero in the US and Japan to 1 per cent in the eurozone. What would you think? You would think the world economy was in a depression. You would have been wrong if you had meant something like the 1930s. But you would have been right about the forces at work: the west is in a contained depression; worse, forces for another downswing are building, above all in the eurozone. Meanwhile, policy makers are making huge errors. The most powerful indicator – and proximate cause – of economic weakness is the shift in the private sector financial balance (the difference between income and spending by households and businesses) towards surplus. Retrenchment by indebted and frightened people has caused the weakness of western economies. Even countries that are not directly affected, such as Germany, are indirectly affected by the massive retrenchment in their partners. According to the International Monetary Fund, between 2007 and 2012 the financial balance of the US private sector will shift towards surplus by 7.1 per cent of gross domestic product. The shift will be 6.0 per cent in the UK, 5.2 per cent in Japan and just 2.9 per cent in the eurozone. But the latter contains countries with persistent private surpluses, notably Germany, ones with private sectors in rough balance (such as France and Italy) and ones that had huge swings towards surplus: in Spain, the forecast shift is 15.8 per cent of GDP. Meanwhile, emerging countries will also have a surplus of $450bn this year, according to the IMF.

Thoughts on how to avoid another Great Depression - This is another excellent Martin Wolf column, read the whole thing.  Here is one excerpt: Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events. Perhaps the panic will vanish. But investors who are buying bonds at current rates are indicating a deep aversion to the downside risks. Policy makers must eliminate this panic, not stoke it. I believe people should take more seriously the notion that the ECB will remain hopeless, and that the crisis can only be addressed by some kind of joint US-German-UK-toss-in-the-other-sound-countries radical multilateral move.  Which is not to say I am predicting that.  But at least in principle, those three countries can get something done and they also have stronger common interests than those across the eurozone, sorry to say. Just to make the comparison biting, what if we postponed the costly benefits part of ACA for a year (it may be struck down anyway) and send $200 billion directly to Spain and its banks?  Is more money needed?  Use this as an excuse to get rid of farm subsidies and cut defense spending.  Surely the Germans would then chip in too, and perhaps even the Chinese, if we made the donors club sound exclusive and toney enough.  Drop hints about various silly islands

Doing Their Best to Destroy Europe -  Krugman - Martin Wolf is shrill (and rightly so): Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events. Right on cue, the European Central Bank has declined to cut interest rates, or announce any other policies that might help. Because what possible reason might there be to take action?  Oh, and survey data suggest that the euro area economy is really plunging now, plus Spain is on the brink. What about inflation? It’s falling fast — which is a bad thing under the circumstances. I don’t think there’s any conceivable economic logic for the ECB’s decision. It can only, I think, be understood as some kind of refusal to admit, even implicitly, that past decisions were wrong. Like Martin Wolf, I’m starting to see how the 1930s happened.

Global slump alert as world money contracts  Growth of the world money supply has dropped to the lowest level since the financial crisis of 2008-2009, heralding a severe economic slowdown later this year unless authorites rapidly take action. The latest data show that the real M1 money supply – cash and overnight deposits – for China, the eurozone, Britain and the US has been contracting since the early Spring. Any further falls risk a full-blown global recession. Clear signs of trouble are emerging in the US, until now the last bastion of strength. The New York Institute of Supply Management said its ISM business index – a proxy for business demand – flashed a "screeching halt" in May, crashing to 49.9 from 61.2 in April, where anything below 50 denotes contraction. Unemployment is rising again after grim jobs data for April and May, indicating that the economy may have fallen below stall speed. The world money data collected by Simon Ward at Henderson Global Investors show that real M1 for the G7 economies and leading E7 emerging powers peaked at 5.1pc in November and has since plunged to 1.6pc in April. The data explain why commodity prices are falling hard, with Brent crude down to a 16-month low of under $97 a barrel.

Egan Jones Downgrades The UK From AA To AA-  - Synopsis: On the balance of payment side, imports have exceeded exports by an average of approximately 500B pounds annually over the past several years. The major problems for the UK is that Europe's banking crisis does not appear to be abating as evidenced by the miserable results of most EU banks. On the fiscal side, the deficit to GDP has declined over the past three years from 11.5% to 8.3%, which is a respectable decline, but the bulk of the reduction was the result of increased taxes since GDP growth was weak. The over-riding concern is whether the country will be able to continue to cut its deficit in the face of weaker economic conditions and a possible deterioration in the country's financial sector. Unfortunately, we expect that the UK's debt/GDP will continue to rise and the country will remain pressed. Full report here.

Bank of England to consider £50bn stimulus for economy - Bank of England policymakers may opt to inject a further £50bn of stimulus into Britain’s ailing economy this week, according to leading economists.Worsening economic prospects could force the hand of the Bank’s Monetary Policy Committee, which last month voted to pause its purchase of government bonds after pumping £325bn into the market through quantitative easing. Since then however, the data have painted a picture of a worsening, not improving outlook for the British economy, and there is no sign of a solution to the eurozone crisis. The Office for National Statistics said the recession that began in the first quarter was deeper than it initially thought, with the economy shrinking by 0.3pc in the first three months of the year and not 0.2pc as it previously estimated. Then on Friday the Markit/CIPS manufacturing PMI showed the sector shrank at the fastest pace in three years in May, suggesting manufacturing will be a drag on the wider economy in the second quarter.

Pensioner couples £4,000 a year worse off in three years - A couple retiring today would be almost £4,000-a-year worse off than those who stopped work just three years ago because of plunging pension returns, figures show. The Bank of England’s policy of printing money to help kick-start the economy has been widely blamed for a drop in annuity rates which determine how much people receive each year on their pensions. A study by Prudential found that retirement incomes have fallen to a five-year low as separate figures from the Office for National Statistics also showed that working households are almost £400 a year worse off than at the start of the financial crisis. According to the Prudential a man retiring this year could expect to receive an annual pension of £18,000, 11 per cent lower than one who retired in 2009 when they averaged £20,313. A woman retiring today will receive just £12,250 in average - including both state and private pensions - down from £13,671 three years ago.