week ending July 28

Fed balance sheet shrinks in latest week (Reuters) - The U.S. Federal Reserve's balance sheet shrank in the latest week, Fed data released on Thursday showed. The Fed's balance sheet stood at $2.833 trillion on July 25, down from $2.842 trillion the previous week. The Fed's holdings of Treasuries totaled $1.651 trillion as of July 25, versus $1.649 trillion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $17 million a day during the week versus $65 million a day previously. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) was $853.36 billion versus $863.02 billion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $91.03 billion on July 25, which was unchanged on the week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--July 26 2012

Fed Sees Action if Growth Doesn't Pick Up Soon - Federal Reserve officials, impatient with the economy's sluggish growth and high unemployment, are moving closer to taking new steps to spur activity and hiring. Since their June policy meeting, officials have made clear—in interviews, speeches and testimony to Congress—that they find the current state of the economy unacceptable. Many officials appear increasingly inclined to move unless they see evidence soon that activity is picking up on its own. Amid the recent wave of disappointing economic news, conversation inside the Fed has turned more intensely toward the questions of how and when to move. Central-bank officials could take new steps at their meeting next week, July 31 and Aug. 1, though they might wait until their September meeting to accumulate more information on the pace of growth and job gains before deciding whether to act. Fed officials could take some actions in combination or one after another. Fed Chairman Ben Bernanke, in testimony to Congress last week, listed several options under consideration, including a new program of buying mortgage-backed or Treasury securities, new commitments to keep short-term interest rates near zero beyond 2014 or an effort to push already-low benchmark short-term interest rates even lower.

Fed Moves Closer to Action - Federal Reserve officials, impatient with the economy's sluggish growth and high unemployment, are moving closer to taking new steps to spur activity and hiring. Since their June policy meeting, officials have made clear—in interviews, speeches and testimony to Congress—that they find the current state of the economy unacceptable. Many officials appear increasingly inclined to move unless they see evidence soon that activity is picking up on its own. Several officials have expressed both frustration with the disappointing recovery and a willingness to act if growth and employment don't pick up. Sandra Pianalto, president of the Cleveland Fed, said in public comments earlier this month she would be prepared to act if weak economic data persisted. Dennis Lockhart, the Atlanta Fed president, said more action could be needed barring a "step-up of output and employment growth." Fed "hawks"—who tend to worry more about inflation and have opposed more action to stimulate the economy—have softened their tone and acknowledged the frustration. "I know people feel like we haven't made enough progress," James Bullard, St. Louis Fed president, said in an interview this month. He said he would be prepared to act if inflation falls too low or if a new shock hits the economy.

Fed Focus: Fed strives to replenish depleted toolkit - - When economists at Bank of America piped headlines from minutes of the Federal Reserve’s June meeting down to the firm’s trading floor, one sentence elicited an audible gasp of excitement: the Fed was exploring "new tools" to support growth.  Investors are now trying to cull hints about just what Fed Chairman Ben Bernanke, who showed a willingness to stretch the boundaries of conventional monetary policy during the financial crisis, might have up his sleeve.  Two principal options have emerged as eligible candidates: following the Bank of England’s lead in some sort of "funding for lending" plan that favors banks that are actively making loans; lowering the rate the central bank pays financial institutions for parking their reserves at the Fed, currently at 0.25 percent.  A recent Reuters poll of U.S. primary dealers, banks that do business directly with the Fed, found that 70 percent expect another round of stimulus via bond buys. But yields on Treasuries are at or near record lows, casting doubt on what good yet more purchases can bring. Little action, if any, is expected at the next policy meeting, July 31-Aug. 1, when some economists think the Fed could push further into the future its conditional pledge to keep rates near zero through late 2014.

QE3 Talk - There is plenty of talk, coming from Fed officials and mainstream media (NYT and WSJ, for example) that the Fed is thinking about more QE, and will announce it, either after its meeting next week, or in September. Rightly or wrongly, the Fed has made clear how it interprets the dual mandate from Congress. The first part of the mandate, "price stability," translates to 2% inflation. The second part, "maximum employment," means concern with the labor market more generally, and often particularly with the unemployment rate. How are we doing? On the first part of the mandate, we're south of the target, as you can see in the next chart. The chart shows the inflation rate, as measured by 12-month percentage increase in the pce deflator, and the core pce deflator. The Fed has made clear that its interest is in the raw pce inflation measure. In any case, both measures are below 2%, though not by much for the core measure. On the second part of the mandate, the recent surprises have been on the down side. Employment growth is lower than expected and the unemployment rate is not falling as expected. Any Taylor-rule central banker would be pushing for more monetary accommodation. But what does the Fed have available that can allow it to be more accommodating? Other than QE, here are some other possibilities:

Bleak jobs outlook raises heat on Fed - The US will make little progress tackling high unemployment before 2014 unless the Federal Reserve eases policy further, one of the central bank’s leading officials has warned in the run-up to a meeting next week where the option of “QE3” will be on the table. The comments by John Williams, president of the Federal Reserve Bank of San Francisco, show how the weak economy is pushing the central bank towards action to support growth. In an interview with the Financial Times, he forecast that unless “further action” was taken, there would be a lack of progress in boosting the jobs market – where the unemployment rate has been stuck around 8.2 per cent since the start of the year – over the next 18 months. But he declined to call directly for a Fed move. “I think the argument against further action is the question of uncertainty around the effects, the costs and the benefits of doing so,” he said.Mr Williams is regarded as close to the centre of gravity on the rate-setting Federal Open Market Committee, of which he is a voting member this year. The FOMC will conclude its next meeting on August 1. A series of Fed officials, including chairman Ben Bernanke, have said the central bank will need to consider further action unless it sees progress towards lower unemployment.Mr Williams warned of “pretty significant” downside risks to the US economy from the eurozone crisis, the looming “fiscal cliff” of spending cuts and tax increases, and the dangers of a global slowdown. If the Fed launched another round of quantitative easing, Mr Williams suggested that buying mortgage-backed securities rather than Treasuries would have a stronger effect on financial conditions. “There’s a lot more you can buy without interfering with market function and you maybe get a little more bang for the buck,” he said.

Fed Watch: John Williams Gets It - San Francisco Federal Reserve President John Williams continues to make the case for another round of quantitative easing in an interview with Robin Harding at the Financial Times. I came away from the article with five takeaways:

• 1.) There will be little progress in the labor market in the absence of additional policy. Not surprising, given that the Fed's forecasts were never exactly exciting to begin with, and the recent weakness in the data flow is leading economists to downgrade Q2 growth to the 1% range, putting even the Fed's anemic forecasts into jeopardy.
• 2.) Williams believes the Fed should shift the focus to mortgage backed securities: He sees MBS as an avenue around the potentially disruptive effects of additional Treasury purchases, acknowledging one of the concerns about additional QE.
• 3.) Importantly, Williams realizes that the arbitrary end-dates for policy actions are disruptive and counterproductive. Instead, he argues for open-ended purchases: This is a big step, and, in my opinion, this is exactly where the Fed needs to go. Shift the focus from the policy itself to the macroeconomic outcomes the policy is trying to achieve. After two years of stop-start policy, Williams gets it.
• 4.) Eliminating interest on reserves is pretty much off the table. I never thought the Fed was too excited about the this option.
• 5.) Despite delivering a strong argument for QE, Williams himself is not convinced the FOMC will follow his lead: . “I think the argument against further action is the question of uncertainty around the effects, the costs and the benefits of doing so,” he said.

Chuck Norris Central Banking Promoted by Fed Official -- San Francisco Fed President John Williams is finally coming to the view that Market Monetarists have advocating for some time: the Fed should do open-ended QEs tied to some explicit economic objective.  Here is Williams:He added that there would also be benefits in having an open-ended programme of QE, where the ultimate amount of purchases was not fixed in advance like the $600bn “QE2” programme launched in November 2010 but rather adjusted according to economic conditions. “The main benefit from my point of view is it will get the markets to stop focusing on the terminal date [when a programme of purchases ends] and also focusing on, ‘Oh, are they going to do QE3?’” he said. Instead, markets would adjust their expectation of Fed purchases as economic conditions changed. This is encouraging that Fed officials are beginning to see the wisdom of this approach.  The irony of  an open-ended QE program, however, is that it should actually reduce the burden on the Fed to buy up assets while at the same time keep long-run inflation expectations anchored. Here is how I explained this approach to Jim Hamilton in an earlier post.[T]he Fed announces it plans to return the level of NGDP to some pre-crisis growth path and commits to buying up as many treasuries, GSEs, and foreign exchange as needed to accomplish that goal.  Note that this is a conditional LSAP tied to an explicit level target.  It sets a destination for monetary policy and thus firmly manages the expected path of nominal spending.  Previous LSAPs did not set an explicit destination and were very ad-hoc in nature.

Fed Watch: A Missing Ingredient - Ryan Avent makes a good point about San Francisco Federal Reserve President John Williams' recent FT interview. Avent is less impressed than me on Williams' conversion to open-ended QE as a policy tool because it by itself does not communicate a willingness to allow inflation to exceed 2%. I think that Avent is on the right path. While Williams did make what I think is a big step, he could go one step further and not only call for open-ended QE, but to do so in the context of Chicago President Charles Evans' suggestion for explicitly tolerating inflation up to 3%. That said, I also think this is too much to hope for, as I haven't seen any indication that Williams would be willing to deviate from the 2% target.  So I do think that Williams is making a significant shift in the right direction. But I agree with Avent that a clear communication of tolerance for higher inflation would be even more effective. Ultimately, I think the Federal Reserve made a huge policy error in committing to an explicit 2% inflation target. I think policymakers were under the impression that such a commitment would give them more flexibility by removing concerns that QE would be inflationary. In reality, I think it had the opposite effect - it eliminated a policy tool, thereby reducing their flexibility. And that commitment stands as a barrier to Evans' suggested policy path. Interestingly, they don't see Treasury rates below 1.4% as a threat to their credibility. They really should.

How Bernanke Can Get Banks Lending Again - Alan Blinder - Chairman Ben Bernanke keeps insisting that the central bank is not out of ammunition, and in a literal sense he is right. After all, the Fed has not yet exhausted its bag of tricks. It is still twisting the yield curve. It can purchase more assets. It can tell us that its federal funds target interest rate will remain 0-25 basis points beyond late 2014. It can even nudge the funds rate down within that range. The operational question is: How powerful are any of these weapons? Let's start with Operation Twist, which was recently extended through the end of this year. The Fed seeks to flatten the yield curve by buying longer-term Treasurys and selling shorter-term ones. And it's probably succeeding—a bit. But Federal Reserve activity in the Treasury markets is modest compared with the vast volume of trading. Realistically, the U.S. yield curve is probably influenced far more by daily developments in Europe. In any case, the Fed will be out of short-term Treasurys to sell by December. The logical next step would be more quantitative easing—QE3—or, as the Fed likes to call it, more large-scale asset purchases. Purchases of what? There are two main choices. One is Treasurys. But does anyone really think that lower U.S. Treasury rates are what this country needs?  Mortgage-backed securities (MBS) are a better choice, the idea being to reduce mortgage rates by shrinking the spread between MBS and Treasurys. But mortgage rates are already falling toward 3.5%. With 10-year expected inflation around 2.1%, can a 1.4% real interest rate be deterring many prospective home buyers? No, they are shut out of the market by the unavailability of credit. Posted rates are low, but try getting a mortgage.

Show some real audacity at the Fed - FT -- After the Lehman Brothers crisis, Ben Bernanke’s Federal Reserve demonstrated creativity and nerve. Unfortunately, that reputation is no longer justified. Today’s Fed confronts slowing growth, high unemployment and well-anchored inflation expectations. And yet it hesitates. Paradoxically, its image as a risk-taker inhibits its ability to be genuinely bold. Back in 2008-09, the Fed took real risks with its balance sheet – risks that private actors shunned. It bought portfolios of toxic securities. It lent to manufacturers. It backstopped money-market funds. But today the Fed’s supposedly audacious “unconventional policies” consist of buying Treasury securities. These are the safest possible instruments and there is no shortage of private actors lining up to buy them. Prices are screaming out this message. Interest rates on 10-year Treasuries are at a record low. Because of Mr Bernanke’s reputation for boldness, he is frequently accused of creating money wildly. When he appeared last week before Congress, he was rebuked by Republicans for his presumed recklessness, while Democrats appeared to feel he was pushing policy as far as he could. But there is nothing particularly wild about the Fed’s money printing. Its purpose is merely to effect a change in private balance sheets. Banks sell their Treasuries to the Fed in exchange for newly minted dollars (in the case of quantitative easing) or for shorter-term government securities (in the case of the current Operation Twist). Given that risk-free government securities are treated as cash equivalents by financial institutions, this is not radical.

Ezra Klein’s stimulus proposal - Tim Duy sent me an interesting proposal by Ezra Klein: I am convinced that there is something more the Fed can do, and that now is the right time for them to do it. I call it Uncle Ben’s Crazy Housing Sale. Tomorrow morning, Bernanke could walk in front of a camera and announce that the Federal Reserve intends to begin buying huge numbers of mortgage-backed securities with the simple intention of bringing the interest rate on a 30-year mortgage down to about 2.5 percent and holding it there for one year, and one year only. The message would be clear: If you have any intention of ever buying a house, the next 12 months is the time to do it. This is Uncle Ben’s Crazy Housing Sale, and you’d be crazy to miss it. This is a particularly good time for Uncle Ben to launch his sale, because the housing market appears to be turning: More houses are being built, the price of existing homes is beginning to rise, and inventory levels are falling. A recent Wall Street Journal poll of economic forecasters found that 44 percent thought housing had bottomed out, while only 3 percent thought the housing market had further to fall. This isn’t going to happen for a variety of reasons.  But even though it’s neither my first nor second choice, it’s an interesting proposal and might be re-shaped into something that’s “worth a shot.”  So here’s my attempt:

The academics on QE… for now - We’ll be back later with a proper preview of next week’s FOMC meeting, but for now here is something to argue about:

• 1. QE1 was more effective than QE2.
• 2. It is easier to find and quantify QE’s effect on Treasury yields than to identify and measure QE’s effect on real economic performance.
• 3. QE also lowered nominal interest rates on agencies, MBS, and corporate bonds, with magnitudes differing across bond types and maturities.

Those are the three conclusions drawn by Credit Suisse economists after reading through a number of papers on the efficacy of the Fed’s first two rounds of QE and its impact on a number of related variables. It’s early days yet and there will be many, many more studies about this in the years to come.We’ve written a lot about this before and won’t belabor the point, but we’ve always found it a bit strange to judge quantitative easing in terms of its impact on nominal yields. We had this debate back in 2010 in the months after QE2 was announced. Treasury yields first fell in anticipation of the move (after it was telegraphed at Jackson Hole) but then stared climbing in the weeks following the start of the program itself. This led to a bunch of nonsensical headlines about how QE2 had failed. And as we said then, the goal of quantitative easing was never to lower nominal treasury yields but to lower expected real yields by raising inflation expectations.

Another reason the Fed should do more - AMERICA would benefit from a higher inflation target, but it looks unlikely to get one. Luckily for those who want a more ambitious Federal Reserve, there are other reasons Ben Bernanke should do more. That the inflation target should rise is a policy a number of Fed-watching commentators (including my colleague) support. The idea is that higher inflation and inflation expectations would stimulate America’s economy. If you want a monetary boost, the call for a higher target makes sense. A credible commitment to more inflation means that the expected return from a safe bond is lower in real terms. These bonds become less tempting investments. This should encourage investors to switch to higher-risk assets. Pension funds, for example, would be forced to swap some of their holdings of government debt for riskier company bonds and equity. In turn, the firms borrowing from markets by issuing bonds and equity would face lower financing costs. Investment would rise.

Video: Jon Hilsenrath on Whether Fed Will Take More Action -- Federal Reserve officials, impatient with the economy’s disappointing performance, are moving closer to taking new actions to spur growth and employment if they don’t see evidence soon that activity is picking up on its own. Jon Hilsenrath has details on The News Hub.

How to be your own worst enemy - Ben Bernanke is his own worst enemy these days. He keeps insisting that the Fed is not out of ammunition and can do more to strengthen the economy, but to date, has not actually done anything "new" or "more". Which leads to his ritual excoriation in the blogo/twitter-sphere. And rightly so. 4 years on, we still have not reached pre-crisis employment levels.  High inflation is not on the immediate horizon, and growth and growth forecasts keep falling. If you can "do more", it's beyond time to walk the walk, not just talk the talk. Ben Bernanke is an excellent economist and a smart man. So what is going on? Let's break it down, "where the hell is Ben?" style: Maybe BB doesn't really think the Fed can do more, but fears all hell will break loose if he admits it. This is plausible to me. More QE, even if it buys mortgage related securities is not likely to do much, nor is extending the guidance of how long short rates will be low into 2015 or beyond.  In fact, extending that commitment further into the future may actually delay peoples' decisions to spend or invest.

Bank of America Sketches Out Fed ‘Nuclear Options’ -- Impending recession or a resurgent deflation threat could push the Federal Reserve toward truly extreme and risky measures, Bank of America Merrill Lynch economists said in a note Thursday. In the research, the analysts outline what they describe as “nuclear options” should the Fed have to provide more stimulus than most now expect. The strategies laid out by the bank entail big risks on the inflation and political front for the central bank, but even so, they may be all that’s available should the economy get even worse. Bank of America also noted a changed near-term monetary policy outlook. Forecasters there now expect the Fed’s current guidance that interest rates will be kept effectively near zero percent until late 2014 will be pushed out a year at the end of the Federal Open Market Committee meeting next week. The bank also sees the September FOMC meeting bringing an upsized $600 billion stimulus effort buying Treasury and mortgage debt. The arrival of new Fed stimulus is widely expected across Wall Street given weaker growth and stagnant unemployment rates. Comments from central bank officials over recent weeks have also stirred the pot in favor of action. With broad expectations of the arrival of QE3 joined with widespread worries about the effectiveness of the action, it isn’t surprising some are now thinking what the Fed could do if it has to go even farther.

Benefits of More Fed “Action” Do Not Exceed Costs -- Both the New York Times and the Wall Street Journal ran front page stories yesterday reporting that the Fed is yet again about to take action. “Fragile Economy Said to Push Fed to Weigh Action” said the Times. “Fed Moves Closer to Action” said the Journal. Both stories report that the benefits of such actions in the past have exceeded the costs, but there is precious little evidence for this. In an interview in the latest issue of MONEY Magazine I was asked about this: What’s your assessment of the Federal Reserve’s recent actions to help spur the economy?  The Fed has engaged in extraordinarily loose monetary policy, including two round s of so-called quantitative easing. These large scale purchases of mortgages and Treasury debt were aimed at lifting the value of those securities, thereby bringing down interest rates. I believe quantitative easing has been ineffective at best, and potentially harmful. Harmful how? The Fed has effectively replaced large segments of the market with itself—it bought 77% of new federal debt in 2011. By doing so, it creates great uncertainty about the impact of its actions on inflation, the dollar and the economy. The very existence of quantitative easing as a policy tool creates uncertainty and volatility, as traders speculate on whether and when the Fed is going to intervene again. It’s bad for the U.S. stock market, which is supposed to reflect the earnings of corporations.

Lowering the IOER is Not So Scary - Can the Fed really add more stimulus by lowering the interest paid on excess reserves (IOER)? Many observers say yes and are encouraged by the ECB's decision to do just that.  The idea behind this belief is that banks would invest their excess reserves in other assets if the IOER was below, or at least equal to, the market interest rate for safe assets.  This rebalancing of banks' portfolios would in turn cause a rebalancing of the non-bank public's portofolio and help kickstart a recovery. The folks at FT Alphaville, however, are not so sure.  They see problems with lowering the IOER.  They are concerned that doing so would eliminate the net interest margin for money market funds (MMFs) and drive them out of business.  The funds sitting at MMFs would then move directly to banks, which also face low net interest margins and increasing FDIC fees.  Banks, then, might start charging customers for deposit accounts and this, in turn, might cause the public to want to hold more cash.  As a result, financial intermediation would further weaken and the economy would sink even more.  That is a scary story.  The folks at FT Alphaville say the only way to avoid this outcome is if fiscal policy complimented the lowering of IOER by providing more safe assets in which financial firms could invest their would-be costly excess reserves.  Cardiff Garcia of the FT Alphaville wants to know what the Market Monetarists, long-time advocates of lowering the IOER, think of this scary scenario. 

Outright asset purchases by the Fed will increase US banking system leverage ratios and potentially limit lending - There seems to be quite a bit of confusion about the impact of US banks' deposits at the Fed on the overall bank credit. People are asking "how can US banks be lending when they are keeping all this money in excess reserves (deposits) with the Federal Reserve"? "They are just hoarding cash, etc." But as discussed in this post on the ECB Deposit Facility, bank excess reserves are a function of the central bank's balance sheet, and have nothing to do with how much banks are lending. If banks in the US for example double their lending today, the deposit amount at the Fed would stay constant.  That's because if you borrow dollars from Bank A, you are going to deposit your cash at another bank (Bank B) or pay someone who will deposit this money at their bank (Bank C).  Here is a good quote from JPMorgan on how this works in practice:  "... increased (or decreased) lending will not change the amount of aggregate reserves within the banking system. For example, Bank A lends money to a business by writing that business a check. The business deposits that check in its own bank, Bank B, which presents that check to the Fed. The Fed then debits the reserves of Bank A and credits the reserves of Bank B. Reserves have been neither created nor destroyed, they have just changed hands. The Fed is the only institution that can change the aggregate amount of reserves." "The only thing a bank’s reserves can become—other than another bank’s reserves—is [physical] cash. ... the demand for cash changes slowly, so increasing vault cash will only increase banks’ storage and handling costs."

More on QE raising bank leverage - An earlier post on how additional QE would cause bank leverage to increase, potentially curbing lending seems to have started quite a discussion, particularly on Twitter. Here is the complete quote from JPMorgan, who describe the process quite clearly: When assets on the Fed’s balance sheet increase, its liabilities will necessarily increase as well. Those liabilities are primarily reserves. Reserves can only be held by banks. Once reserves enter the banking system, no action on the part of the banks will decrease the aggregate amount of reserves. To see how this could become an issue for the banking system, consider if the Fed wished to buy $5 trillion in securities. This would imply that the aggregate balance sheet of the banking system would now have $5 trillion more of cash assets, namely, reserves. If the securities are purchases directly from the banks, there will be no change in bank balance sheets [though reserves will still go up]. However, securities purchased from nonbank investors will cause bank balance sheets to expand, as the funding will again be through reserves that cannot leave the banking system. Although this asset has zero-weighted risk, it will increase banks’ leverage ratios. For this reason, banks may be inclined to reduce other forms of credit. 

Market Monetarism Or An Attempt to Speed Up the Decline in Real Wages - The so-called ‘market monetarists’ – that is, a growing pack of neoclassical economists who are advocating that central banks should try to generate inflation – are not as strange a breed as many think. Recently we compared classic deflationary monetarism with contemporary QE policies and found that they were based on the same underlying theoretical framework. We also found that the high priest of classical monetarism himself, Milton Friedman, strongly advocated inflationary monetary policies for both Japan after 1991 and the US after the stock market crash of 1929. So, it is by no means surprising that when one monetarist policy fails (I refer to QE), another will quickly be cooked up by Friedman devotees. That is precisely the role of the market monetarists in the current policy and economic debates. They have introduced the banal notion that central banks should no longer target inflation or unemployment but instead they should focus on Nominal Gross Domestic Product (NGDP) – that is, a measure of GDP that has not been adjusted for inflation. The idea is that the central banks should pump up non-inflation adjusted GDP until economic growth begins once more. The only thing that market monetarists are more vague on than how such inflation will translate into economic growth (money supply voodoo?) is how they will actually accomplish the NGDP targets. Sometimes they refer to devaluation, sometimes to inflationary expectations, sometimes to banks levying taxes on deposits, sometimes… wait for it… to more QE – indeed, one sometimes gets the impression that they are saying nothing new at all. However, we will not concern ourselves here with peering into their little black boxes. Instead we will focus on what might, in the unlikely event that they succeed in their policy goals, be the likely end result. But first a detour into the distribution of income in today’s US of A. Recently Lance Roberts ran an excellent piece on corporate profitability and wages. He showed that while corporate profits are rising, real worker incomes are falling below trend. He provides the following graph to illustrate this:

The Fed is being too transparent in its agency paper purchases - One of the problems with asset purchases by the Fed is how transparent Fed's actions can sometimes be. And when that happens, the Fed will overpay while someone on Wall Street will make easy money. Here is an example. Last year the Fed announced that it will maintain a constant balance of MBS positions. That means as securities' principal declines due to prepayments (mortgage refinancing), the Fed buys more (see this post).  Here is the pattern of buying the 30y Fannie Mae paper. The Fed is decreasing its purchases of the 3.5% coupon paper (green) and moving into the lower coupon (on the run) 3% coupon bonds (blue). The central bank is no longer buying the 4% bonds (red). It's fairly easy to predict the next set of purchases. A skilled agency bond trader could take advantage of this. And if the Fed commits to increasing its MBS holdings through further asset purchases, it's pretty clear that the central bank will lean on the 3% coupon bonds and the 2.5% when it becomes the on the run bond. Transparency is great, but the taxpayer needs to be protected while the asset purchase program is in place. Being just a bit less obvious would go a long way in making sure the "front-running" is limited.

Investors betting on QE3 may find themselves in a crowded trade - Leveraged investors such as hedge funds are piling into longer term treasuries and other rate product in anticipation of QE3. The speculative long positions are near records. But the Fed may choose to avoid outright QE3 this year for the following reasons:
1. A spike in commodity prices that is now taking place could be exacerbated by outright asset purchases (as happened in early 2011). Higher commodity prices will make additional QE counterproductive.
2. Increases in US residential rents and rising commodity prices are yet to flow through to the CPI. The Fed will be cautions about stoking inflationary pressures.
3. Bank credit in the US is actually expanding, which was not the case prior to QE2, when the environment looked deflationary.
4. The Fed has other tools it will want to exhaust before commencing outright purchases. The Fed will save outright purchases as the last bullet in case of an extreme event such as the Eurozone losing one of its member states in a disorderly manner.
That means that these leveraged investors could find themselves on the wrong side of a crowded trade if the Fed sticks to some form of Maturity Extension Program rather than outright QE. And the unwind of this trade could end up being quite violent, pushing treasury yields considerably higher.

Bye Buy Zero Lower Bound? - It sure looks like it, and with that goes an enormous literature on the consequences of an absolute zero bound on nominal interest rates.  In the 1990s we saw occasional episodes where some rates would go negative in Japan, with Japan curiously still in the positive range in the current situation, if just barely on all its bonds.  The US had a few brief episodes at certain points on certain bonds at times, first in 2004.  In 2009, the Swedish central bank actually set a target interest rate of negative 0.5% at the worst of the financial crisis as it engaged in a massive monetary stimulus, but I am not sure how negative rates actually got.   However during the last few weeks and accelerating last week and into today, a raft of nations have been selling bonds at negative nominal yields.  The current list of recent ones includes the US, Switzerland, Germany, France, Finland, Austria, Denmark, and the Netherlands.  While most of these have been just barely below zero, the Swiss have sold two-year bonds as low as -0.45% recently.  The barrier has been broken, even as some other members of the Eurozone are experiencing record high interest rates.  I think that the deeply entrenched refusal to admit that this can happen is part and parcel of the long and somewhat equivalent refusal by most economists to admit that prices can be negative.  Standard economic theory simply assumes that negative prices do not exist, and when we see someone paying to give something away, we define it as a "new good," such as water removal or garbage removal. 

Want Jobs? Forget the Fed! -- Matt Yglesias beats a dead monetarist horse – the same defunct nag whose flogged and forlorn carcass should have been cremated years ago – by again seeming to pin the chief responsibility for attacking unemployment on the Fed, and on its supposed control over inflation and inflation expectations.  And yet as is often the case with Yglesias, the elected political leaders of the most economically powerful nation in the world rate no mention in his post, despite their scandalous and incompetent failure to address a national employment debacle. One of Yglesias’s readers asks a straightforward question in the comments section:  “Is it strictly necessary to have inflation to have growth?”  Now, while I expect correction from a few academic economists on this score, it seems to me that the correct answer to this question is “Absolutely not!” First, if an economy is experiencing severe unemployment of human and material resources – e.g. if it is an economy such as the economy we are in now – then it is entirely possible for that economy to grow fairly quickly in response to a surge in demand, without a rise in the price level.  The economy can match that demand with new output almost right away, without a significant rise in unit production costs.  And even in an economy running at full capacity, output can continue to grow without rising prices so long as the increased supply of output is not outpaced by increases in demand.  The outpacing of supply by demand can and does occur in a humming economy, no doubt.  But there is no strictly necessary reason it has to occur.

Democratic Leaders Again Whipping Against Audit of the Federal Reserve - Yesterday, on the House floor, there was a furious debate over the prospect for HR 541, Ron Paul’s bill to audit the Federal Reserve. The Republicans are by and large supportive of this bill, seeking to hamstring the ability of the Federal Reserve to act in secret. Democratic members, were they left to their own devices, would be split. But on votes on bills like this, party leaders can choose to endorse a position, or not endorse a position. Some votes are what’s called “whipped”, and some aren’t. There’s an intricate system of whips and assistant whips and staff networks who encourage members to vote a certain way, so when the party takes a position on an issue, it has a big impact on the final vote count. This is a whipped vote, which means that this is one of those times where the Democratic leadership – Steny Hoyer, Barney Frank and Nancy Pelosi – are putting their stamp on an issue. They have come out firmly for Fed secrecy. Here’s the whip notice from Democratic leadership on the House side encouraging members to vote against transparency at the Fed.

House Passes Ron Paul’s ‘Audit the Fed’ Bill - The House voted Wednesday to open up the Federal Reserve‘s core monetary policy decisions to the scrutiny of the federal government. The vote marks the latest clash between House Republicans, wary of the unprecedented moves the central bank has taken since the financial crisis to stabilize the economy, and Fed Chairman Ben Bernanke, who has warned the bill could expose the Fed to political pressures. On Wednesday, the House on a 327-98 vote, passed a bill that would permit the government to review the policy deliberations that are at the heart of the central bank’s mission. A senior Democratic Senate leadership aide said there are no plans to bring the bill up in the Senate, but didn’t rule out an attempt by Republicans to seek a vote on the measure as part of another piece of legislation. The Senate would be almost certain to defeat it given the Democratic majority in the chamber.

The Path Not Taken ... Thus Far: Debt Deleveraging by Inflation - From the latest issue of the Milken Institute Review, “Trends: Better Living Through Inflation”:If the aftermath of the Great Recession doesn’t feel like the recovery from a normal cyclical downturn, that’s because it wasn’t a normal cyclical downturn. We’re living through the consequences of a massive global debt crisis, and debt-driven crises produce an especially malign form of recession. ... The politics of debt is, if anything, more daunting than the economics. A debt crisis typically degenerates into bitter political conflict over who will bear the burden of the adjustment. Some of the conflict may be among countries, with creditor nations trying to force debtors to pay off in full and debtor nations rebelling against measures that could conceivably make that possible. Other political battles take place within countries, as taxpayers, bankers, government employees, pensioners and investors jockey to avoid being saddled with the costs of working off the accumulated debts. If we simply choose to wait for the world to find acceptable formulas for sharing sacrifice, we may be in for nearly a decade of snail’s pace growth -- a truly global lost decade. ...  Our recommendation: Conditional inflation targeting now, by keeping the Fed funds rate near zero and supplemented with other quantitative measures as long as unemployment remained above 7 percent or inflation stayed below 3 percent:

The idea that inflation might be our friend is gaining traction - Given the depth and persistence of the financial crisis here and in Europe, isn't it time to embrace one of our oldest economic foes, inflation? The way most people think about inflation is reminiscent of the old National Lampoon cover line about pornography: "Threat or Menace?" But the idea that inflation might be our friend is gaining traction, and not only among progressive economists such as Paul Krugman. The notion has been spotted recently on the Wall Street Journal editorial page, and its clearest expression yet has appeared in the most recent issue of the Milken Institute Review — neither venue being known as a breeding ground of the virus known as economic liberalism.The discussion focuses on how inflation reduces the debt burden. Debt is a head wind against recovery right now. But if you're a debtor paying a fixed rate of interest, like many homeowners, inflation is good for you — as prices, and hopefully your wages, rise, your mortgage burden falls relative to your income. On the other side of the coin, though, your lender is getting paid back with dollars lower in value than the ones he lent you. That's the point of the Milken Review paper by economists Menzie Chinn of the University of Wisconsin and Jeffry Frieden of Harvard. The idea, as they put it, is that debt is almost always denominated at fixed interest rates, so as prices and wages rise, the relative debt load falls.

IMF Paper Warns Against Letting Inflation Target Rise - One big debate facing the Federal Reserve is whether the central bank should allow inflation to rise to help bring down unemployment and spur economic growth. A working paper released by the International Monetary Fund on Wednesday weighed in: it’s probably not worth it. Since late 2008 the Fed has kept short-term interest rates near zero. That’s made it impossible for the Fed to use its normal monetary policy tool when it wants to ease financial conditions — lowering the federal-funds rate — and forced it to turn to more unusual options instead. So it’s tempting for policymakers to want to let inflation rise above the Fed’s 2% target, which could nudge interest rates higher and give the Fed more room to cut rates, according to a paper by Etienne Yehoue, a senior economist at theIMF. The problem is that higher inflation could bring “welfare costs,” Mr. Yehoue argues in the paper, estimating that letting inflation rise to 4% would cost the economy about 0.3% of real income. If inflation were to rise even higher, to 10% for example, the costs could rise to 1% of real income. Most of that damage would come from the “opportunity cost” of holding money: when interest rates are higher, people spend more time and effort trying to avoid holding on to funds that don’t earn interest.

Risk premium or deflation charge? - FT contributing blogger Gavyn Davies recently wrote about the impact of what he called a disaster risk premia on bond yields — something the FT’s Gillian Tett has also followed up on here. In both cases, the authors suggest that bond yields have disconnected from credit derivative valuations — not because the derivatives are incorrectly priced, but because bonds now feature an embedded risk premium. Goodbye risk-free. The safer an economy, the bigger the impact of the risk premium on bond yields — since the more likely the bond will be able to offer protection to the buyer. All very logical and rational thinking. But we can’t help but think it’s over-complicating matters. The risk premium isn’t as much a disaster premium, in our opinion, as a clear and overt deflation charge. We’re talking about the cost of protecting capital in an economy that lacks enough safe assets to do the job properly.What’s more, this is not a new phenomenon. The Great Depression saw high powered money crowd itself out in much the same way, with investors doing everything they could to secure principal protection, in a world that offered few safe options. As the chart shows, during a liquidity trap, there comes a point when dishing out liquidity actually starts to impede recovery — not dissimilar to when you overwater your plants. Indeed, because the liquidity has nowhere better to go — as the problem is arguably solvency rather than liquidity related — it starts to strike at the roots of the system itself. And in so doing, it starts to destroy and rot the very thing it was trying to save.

Michal Kalecki on the Great Moderation - So, it is to my great discredit that I had not read Kalecki’s Political Aspects of Full Employment (html, pdf) before clicking through from a (characteristically excellent) Chris Dillow post. There is little I have ever said or thought about economics that Kalecki hadn’t said or thought better in this short and very readable essay. Here is Kalecki describing with preternatural precision the so-called “Great Moderation”, and its limits: The rate of interest or income tax [might be] reduced in a slump but not increased in the subsequent boom. In this case the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump it will be necessary to reduce the rate of interest or income tax again and so on. Thus in the not too remote future, the rate of interest would have to be negative and income tax would have to be replaced by an income subsidy. The same would arise if it were attempted to maintain full employment by stimulating private investment: the rate of interest and income tax would have to be reduced continuously. Dude wrote that in 1943.

Model-Driven Regulation Fueled Bubble, Hobbles Recovery - Five years since the beginning of what some label the "Great Recession," economic growth in the U.S. and Europe remains tepid to non-existent.  Central banks maintain close to 0% interest rates and pump trillions of dollars into the banking system with little or no positive effect on economic growth and job creation. We search for the causes of our economic malaise in all the wrong places.  Government leaders would do well to look in the mirror. We will not have solid and sustainable economic recovery unless it is led by the financial sector.  The financial sector will not be able to lead the recovery unless we implement sensible, effective, and efficient regulatory policies.  The confusion sowed by up to 20,000 pages of regulations mandated by the Dodd-Frank Act is precisely what we don't need. The litany of problems in financial regulation is too long for this article.  So we will focus on just one – the risk-based capital models imposed under the Basel international accords. The Federal Reserve was enamored with risk-based capital models since at least the 1960s.  It sounds good in theory – riskier categories of assets would have more capital allocated to them than less-risky categories.

How big is the output gap? - Atlanta Fed's macroblog - It's fair to say, I think, that the question posed in the title of this blog post is at the heart of any monetary policy debate.  Here's how the discussion went at the June meeting of the Federal Open Market Committee (FOMC): "Meeting participants again discussed the extent of slack in labor markets. Some participants judged that the unemployment rate was being substantially boosted by structural factors such as mismatches between the skills of unemployed workers and those required for available jobs....One implication of the view that there is relatively little slack is that providing more monetary stimulus would be likely to raise inflation above the Committee's objective. Some other participants acknowledged that structural factors were contributing to unemployment, but said that, in their view, slack remained high and weak aggregate demand was the major reason that the unemployment rate was still elevated. These participants cited a range of evidence to support their judgment.... If you want more specifics about these contrasting views, you might find recent speeches by some FOMC meeting participants helpful. Jeff Lacker, president of the Federal Reserve Bank of Richmond, is pretty clearly in the "relatively little slack" group. Vice Chairman Janet Yellen is also pretty clearly on the other side of the debate: I read the evidence as suggesting that the bulk of the rise during the recession was cyclical, not structural in nature.

Why Europe Matters to the US, by Tim Duy: Last month I identified this error in the logic of St. Louis Federal Reserve President James Bullard:Bullard also dismisses financial market distress as an artifact of the European crisis: The global problems are clearly being driven by continued turmoil in Europe. China might be a bigger driver than we realize, but I digress. Given that this is a European problem, the Fed is helpless: A change in U.S. monetary policy at this juncture will not alter the situation in Europe. 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.  Via today's Wall Street Journal: Europe's deepening economic crisis is cutting into corporate earnings, with the continent's woes threatening to exert a drag on multinational corporations around the world into next year......The corporate alarm bells highlight how the miserable economic conditions in much of Europe are spilling onto the global stage. With much of Europe in recession and unemployment soaring, spending is sliding on everything from big-ticket items like cars to everyday staples like yogurt......Companies also are growing concerned about 2013 as government austerity measures eat into sales. And note the trend in capital goods orders:Flat growth year-over-year. Not necessarily a recession, but a clear warning sign as well.

Growth Cooled As Americans Curbed Spending: U.S. Economy Preview - The U.S. economy probably expanded in the second quarter at the slowest pace in a year as a weaker labor market prompted Americans to cut back on their spending, economists said before a report this week.  Gross domestic product, the value of all goods and services the nation produced, rose at a 1.4 percent annual rate after a 1.9 percent gain in the prior quarter, according to the median forecast of 70 economists surveyed by Bloomberg News. Factory orders softened and new-home sales were little changed, other data may show.  Consumer purchases, which account for about 70 percent of the world’s largest economy, are weakening at a time Europe’s debt crisis and looming U.S. tax-policy changes threaten to further restrain corporate investment. The deceleration in growth, a concern Federal Reserve Chairman Ben S. Bernanke highlighted last week, will make it harder to trim unemployment stuck above 8 percent since February 2009.

Fannie Mae Cuts 2012 GDP Growth Forecast - Fannie Mae has cut its U.S. gross domestic product growth projection for the year, citing an uncertain job market and weak consumer spending. The mortgage-finance company said GDP growth would be 2%, down from its earlier estimate of 2.2%. “The data from the past month collectively point to decelerating economic growth, but growth nonetheless,” Chief Economist Doug Duncan said. He noted, however, that housing continues to be a bright spot, presenting a “rare upside boost” to the economy. Compared with the same period last year, home sales increased by 9% and single-family housing starts were 20% higher, though the company said levels are still considered below healthy norms. Residential investment is expected to increase this year but from a very low base, and is expected to contribute to economic growth for the first time since 2005. According to Fannie Mae’s June 2012 National Housing Survey, homeowners are showing greater confidence in one-year-ahead home price expectations, and their broad attitudes regarding the housing market continue to improve.

Other Ways to Look at G.D.P. and What It Tells Us - My last post, on the impact of federal stimulus on economic growth, appears to have confused some readers. My purpose was to explain the basics of national income accounting and how stimulus fit in. The point was that some federal spending is stimulative by definition. Other spending may or may not be stimulative; only analysis can determine that. Let me revisit national income accounts to note that they are like double-entry bookkeeping: two completely different things, debits and credits, must necessarily add up. Because they are calculated separately from different sources, the fact that they must add up allows one to be a check on the accuracy of the other.In my previous post, I explained that the gross domestic product is calculated by adding together consumption, investment, net exports (exports of goods and services minus imports) and government consumption or investment at all levels (federal, state and local). But one can just as well look at G.D.P. in two other ways. The first is to decompose G.D.P. into a different set of categories consisting of sales of goods, services and structures, whether for consumption or investment, to their final users, whether they are businesses or individuals. Another way of looking at G.D.P. is to add up various types of income. This is done in a separate statistic called gross domestic income. In theory, it should equal G.D.P. and thus is a check on its accuracy, just as debits and credits are.

Chicago Fed: Economic Activity Increased in June - According to the Chicago Fed National Activity Index, June economic activity increased from May. The 3-month moving average of the indicator, while still negative (meaning below-trend growth), has reversed a three-month decline.  Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to –0.15 in June from –0.48 in May. Two of the four broad categories of indicators that make up the index improved from May, but only the production and income category made a positive contribution in June.  [Download PDF News Release]  The Chicago Fed's National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed's website. The index is constructed so a zero value for the index indicates that the national economy is expanding at its historical trend rate of growth. Nnegative values indicate below-average growth, and positive values indicate above-average growth.The first chart below is based on the complete CFNAI historical series dating from March 1967. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of coincident economic activity. I've also highlighted official recessions.

Chicago Fed National Activity Index: No Recession For U.S. As Of June - The Chicago Fed National Activity Index (CFNAI) for June rose modestly, suggesting that recession risk eased. Although the 3-month moving average of the index increased to -0.20 last month from -0.38 in May, the June number was the fourth straight month of below-zero readings, which “suggests that growth in national economic activity was below its historical trend,” the Chicago Fed reports. The view that the U.S. economy has weakened in recent months is old news at this point. But the idea that recession risk remains relatively low as of June is likely to be greeted with far more skepticism. Nonetheless, the 3-month moving average of the CFNAI has an encouraging record of signaling the arrival of new recessions, albeit with a slight lag. The trigger point for identifying a new period of economic contraction is when the 3-month average of CFNAI drops below -0.7. By that standard, the current -0.38 still affords a decent if not huge cushion between current conditions (as of last month) and another recession.

Chicago Fed: Growth in Economic Activity below trend in June --The Chicago Fed released the national activity index (a composite index of other indicators): Index shows economic activity increased in June Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to –0.15 in June from –0.48 in May. ... The index’s three-month moving average, CFNAI-MA3, increased from –0.38 in May to –0.20 in June—its fourth consecutive reading below zero. June’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.  This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.

UPS Sees Cooling Demand Showing Lower U.S. Economic Gains - United Parcel Service Inc. (UPS) predicted the U.S. economy will grow 1 percent in the rest of 2012 as slowing volume growth prompted the world’s largest package- delivery company to conclude average forecasts are too high. The projection by UPS, an economic bellwether because it moves goods from financial documents to pharmaceuticals, contrasts with a 2.2 percent growth rate predicted by economists in a Bloomberg survey. “Right now, the estimates are a little too optimistic,” Chief Financial Officer Kurt Kuehn said in a telephone interview. “We’re not trying to ring the alarm bell, but we do think that there’s probably a little more likelihood that the numbers will turn lower than estimates.”

UPS Sees Global Economy Getting Worse - UPS expects the global economy to get worse before it gets better. Again. The world’s largest package delivery company is more pessimistic about U.S. growth than many economists. It predicts global trade will grow even slower than the world’s economies — a trend not seen since the recession. It’s making cuts in its business and reducing its earnings projections. UPS on Tuesday lowered its forecast for all of 2012 and said its third-quarter earnings will fall below last year’s results.Customers are worried about the global economy weakening in the second half of the year, the company said. Their skittishness was also felt in the second quarter, where UPS missed analysts’ expectations for both earnings and revenue. The stock fell more than 4 percent in midday trading. “Economies around the world are showing signs of weakening and our customers are increasingly nervous,” Chairman and CEO Scott Davis said in a conference call with analysts.That sentiment, along with similar comments from chemical maker DuPont, weighed on investors, who are already nervous about the global economy. The S&P 500 index dropped 0.5 percent in the morning. UPS is a closely watched barometer of broader economic health because it moves millions of packages between consumers and businesses every day.

In the Dumps - In "CHART OF THE DAY: The US Garbage Indicator Is Sending An Ominous Sign For The Economy," Business Insider points us to another piece of data that suggests the U.S. has fallen into line with Europe, China, and others in a synchronized global economic slowdown: Among the 21 categories of items shipped by rail, none have a tighter correlation to GDP than waste. According to a 2010 piece on Bloomberg, economists Michael McDonough and Carl Riccadonna note that waste has an 82 percent correlation to US economic growth. This should be pretty intuitive.  The more you produce, the more you throw out. McDonough, a Bloomberg BRIEF economist, tweeted out an update on the indicator.And frankly, it stinks.  Waste carloads are way down.

Current Recovery Second Slowest Postwar Rebound - The current economic recovery is less robust than initially thought and — through its first two-and-half years — the second-weakest rebound of the post World War II era, according to data the Commerce Department released Friday. From the second quarter of 2009, when the recession ended, through 2011, the economy grew a total of 5.8%, a downward revision from a 6.2% gain, the recasting of the past three years’ gross domestic product figures found. Only the brief 4-quarter recovery in 1980 and 1981, when the economy grew a total of 4.4%, was weaker in the past 60 years. Growth in the early part of 2010 wasn’t nearly as strong as previously thought, with GDP advancing 2.3% and 2.2% in the first and second quarter, respectively. That’s down from prior readings of near 4.0% annualized growth. Business investments in the first half of 2010 are now seen as being much weaker. Conversely, the data showed the most recent recession was milder than prior readings – though still the largest downturn since the Great Depression. During the recession, which began in the fourth quarter of 2007, GDP declined 4.7%, compared to a previous reading of down 5.1%. The next worse recession since World War II came in parts of 1957 and 1958, when the economy contracted by 3.7%.

Recession Looks a Bit Less Bad Thanks to Government - Those who favor bigger government spending to boost the economy just got some more ammunition. According to the government’s latest number-crunching exercise — they revised old economic data while taking their first crack at how the economy performed in the second quarter — the Great Recession of 2007-2009 wasn’t as Great as we thought. Sure, it was the worst economic calamity since World War II, but the abyss we sank into three years ago wasn’t as deep as we thought. The reason? Government spending provided a cushion. Real gross domestic product shrank 4.7% between late 2007 and the middle of 2009 — not the 5.1% initially estimated, the Commerce Department says. In 2009, America’s economy contracted 3.1%, much less than the earlier estimate of 3.5%. (The government’s “positive” revisions to the first and second quarters of 2009 were the biggest ones they made.) So, what happened? It wasn’t consumer spending or business investments; those estimates were pretty much left alone. Net exports of goods and services abroad were a little stronger than initially thought, but that also doesn’t account for the change. That leaves “government consumption expenditures and gross investment,” which jumped far more in 2009 than initially estimated. Instead of rising 1.7% in 2009 from the previous year, government spending soared 3.7%. Instead of shrinking 0.9%, spending by state and local governments actually grew 2.2% in 2009 — probably a reflection of the Obama administration’s efforts to provide emergency cash to states during the depths of the recession.

U.S. economic growth slowed to 1.5 pct. rate in Q2 -  -- The U.S. economy grew at an annual rate of just 1.5 percent from April through June, as Americans cut back sharply on spending. The slowdown in growth adds to worries that the economy could be stalling three years after the recession ended.  The Commerce Department also said Friday that the economy grew a little better than previously thought in the January-March quarter. It raised its estimate to a 2 percent rate, up from 1.9 percent.  Growth at or below 2 percent isn't enough to lower the unemployment rate, which was 8.2 percent last month. And most economists don't expect growth to pick up much in the second half of the year. Europe's financial crisis and a looming budget crisis in the U.S. are expected to slow business investment further.  "The main take away from today's report, the specifics aside, is that the U.S. economy is barely growing," "Along with a reduction in the actual amount of money companies were able to make, it's no wonder the unemployment rate cannot move lower."

Real GDP increased 1.5% annual rate in Q2 - From the BEA:  Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.5 percent in the second quarter of 2012, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent. [revised up from 1.9 percent] The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and residential fixed investment that were partly offset by a negative contribution from state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased. Overall the revisions to the last three years were pretty minor. This graph shows real GDP before (blue) and after (red) the revision. The recession was not quite as deep as previously reported, and the recovery in 2010 was slightly slower - and the recovery in 2011 slightly faster. Real GDP in Q1 was slightly above the previously reported level indicating the output gap is about the same as previously estimated. The second graph shows the same data but as a percent change annualized. There were some downward revisions in Q1 and Q2 2010, and some upward revisions in 2011. A couple of comments:

• • Real personal consumption expenditures increased 1.5 percent in the first quarter, compared with an increase of 2.4 percent in the first.
• • Government spending continued to be a drag at all levels, but at a slower pace:

GDP Q2 Advance Estimate at 1.5% - The Advance Estimate for Q2 GDP came in at 1.5%, higher than most estimates (see my review of GDP forecasts here). Today's release also included revisions to GDP as far back as Q1 2009. Here is an excerpt from the Bureau of Economic Analysis news release: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.5 percent in the second quarter of 2012, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent....  The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and residential fixed investment that were partly offset by a negative contribution from state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.  The deceleration in real GDP in the second quarter primarily reflected a deceleration in PCE, an acceleration in imports, and decelerations in residential fixed investment and in nonresidential fixed investment that were partly offset by an upturn in private inventory investment, a smaller decrease in federal government spending, and an acceleration in exports. [Full Release]  Before we look at long-term GDP trends, here is a before-and-after snapshot of the 2012 revisions, which made changes back to Q1 2009.

Q2 GDP Rises a Sluggish 1.5% - The U.S. economy grew at a real (inflation-adjusted) 1.5% (seasonally adjusted annual rate) in the second quarter of 2012, the Bureau of Economic Analysis reports. That’s roughly in line with consensus forecasts, but it’s disappointing nonetheless. The economy’s tepid 1.5% growth rate represents a slowdown from Q1’s 2.0% pace and a world away from the 4.1% rate posted in last year’s fourth quarter. The slowdown in growth is due to several factors, starting with the lower rate of personal consumption expenditures. Consumer spending, which accounts for roughly 70% of GDP, decelerated to a 1.5% increase in Q2, down from 2.4% in Q1. Most of the downshift can be blamed on the dramatic decline in the durable goods portion of consumption, which retreated 1.0% in Q2 vs. a strong 11.5% rise in the previous quarter. The fall represents the first negative quarterly reading for durable goods spending since 2011’s Q2. It’s safe to say that no one will find inspiration for thinking positively in today’s GDP report. "The main take away from today's report, the specifics aside, is that the U.S. economy is barely growing," says Dan Greenhaus, BTIG LLC’s chief economic strategist. "Along with a reduction in the actual amount of money companies were able to make, it's no wonder the unemployment rate cannot move lower."

GDP, Second Quarter, First Look - The economy expanded by 1.5% in the second quarter, down from 2% in the first quarter and another sign of the downshift we’ve previously seen in the job market.  Consumer spending, still 70% of GDP, slowed in the second quarter to its slowest pace in a year, led by a 1% decline in spending on durable goods (big ticket items that last for a few years, like cars and refrigerators).  The public sector also continued to contract, subtracting 0.3% from growth in the second quarter. The usual suspects are contagion from Europe, worries about the fiscal cliff, the ongoing deleveraging cycle where households are still too wrapped up in smoothing out their balance sheets to do much consuming (the savings rate climbed in the 2nd quarter), and that in turn sends negative signals to investors.  Pushing the other way are lower gas prices and a housing market that seems to have finally carved out a bottom (investment in homes has contributed to growth for over a year now). Sure…but at this point, I’m less convinced by this list of suspects.  I think we’re stuck in a negative cycle where weak employment suppresses incomes which suppresses consumption, investment, and growth, feeding back into weak hiring.  It’s a cycle that’s clearly self-perpetuating, and the best way out would be, as Paul K points out this AM, to take advantage of the low borrowing costs available to the government and put some people back to work through state fiscal relief (fiscal contraction has lowered real GDP growth in 9 of the last 10 quarters), repairing the public schools, and other necessary infrastructure repairs (read THIS and tell me if you disagree!).

GDP Figures Show Economic Growth Slowed In Second Quarter - There were already plenty of signs that the second quarter didn’t go quite so well for the U.S. economy before this morning. We had weak jobs reports in April, May, and June  along with reports showing a decline in consumer spending, retail sales, corporate earnings forecasts, and a whole host of other economic statistics. Today, we got the first look at the GDP numbers for the second quarter and, as expected, it showed that the economy had slowed to a tepid rate of growth in the spring:The United States economy grew by a tepid 1.5 percent annual rate in the second quarter, losing the momentum it had appeared to be gaining earlier this year, the government reported Friday. Growth was held back as consumers curbed purchases and business investment slowed in the face of a global slowdown and a stronger dollar. Analysts had expected a 1.4 percent rate. The sluggishness of the recovery makes the United States more vulnerable to trouble in Europe and increases the likelihood of more stimulus from the Federal Reserve, which has lowered its forecasts in recent weeks. It also illustrates the election-season challenge to President Obama, who must sell his economic record to voters as the recovery slows.

Low and slow - IF RECENT data left any doubt, America's Bureau of Economic Analysis (BEA) dispatched it this morning: the American economy slowed sharply in the second quarter, adding to the weakest recovery of the post-war period. The BEA's advanced estimate of economic growth found that real GDP rose at just a 1.5% annual pace in the second three months of the year, down from 2.0% in the first quarter and a surprisingly strong fourth quarter performance of 4.1%—the fastest three-month spurt of the recovery. The advance estimate is subject to two revisions in coming months. Growth slowed across most major categories. Personal consumption grew at a more laggardly pace in the second quarter relative to the first, net exports shifted back to a drag on the economy as import growth outpaced exports. And the government remained an economic albatross; the federal government has reduced its contribution to output for all of the past year, and state and local governments have been a drag for 11 consecutive quarters. Investment added more to growth than in the first quarter, thanks mostly to shifts in inventories. It was a weak report right the way through, though slightly better than markets expected. Nominal output rose at just a 3.1% annual pace in the second quarter, a very weak performance and down sharply from the 4.2% fourth-quarter rate.

The Hobbled Recovery - Paul Krugman - New GDP report out today; slightly stronger than expected, but still very weak. So what’s holding back recovery? You know what the usual suspects are saying: big government! Bad Obama! Insulting businessmen! Here’s a chart. It shows changes since the second quarter of 2009, which was both the bottom of the recession and the earliest point at which you can plausibly say that Obama had any influence on actual policy. I show nonresidential fixed investment — basically business investment — and government purchases of goods and services:  Business investment has actually gone up a lot; maybe you think it should have gone up even more, but it’s not the heart of the problem. On the other hand, we’ve had a lot of cutbacks in government — mainly at the state and local level, but federal aid could have avoided that. This isn’t a picture of an economy hobbled by Big Government; it’s a picture of an economy hobbled by premature austerity.

Visualizing GDP: The Consumer is King (But Slipping) - The chart below is my way to visualize real GDP change since 2007. I've used a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself. As the analysis clearly shows, personal consumption is key factor in GDP mathematics. My data source for this chart is the Excel file accompanying the BEA's latest GDP news release (see the links in the right column). Specifically, I used Table 2: Contributions to Percent Change in Real Gross Domestic Product. Over the time frame of this chart, the Personal Consumption Expenditures (PCE) component has shown the most consistent correlation with real GDP itself. When PCE has been positive, GDP has been positive, and vice versa. In the latest GDP data, the contribution of PCE came at 1.05 of the 1.54 real GDP. This is a downward revision from the 1.72 PCE of the 1.96 GDP of Q1. For a long-term view of the role of personal consumption in GDP and how it has increased over time, here is a snapshot of the PCE-to-GDP ratio since the inception of quarterly GDP in 1947. The Q2 2012 ratio is 70.7%, a bit off the all-time high of 71.2% in Q1 2011.

Economists React: GDP ‘Not Satisfactory by Any Gauge’ - Economists and others weigh in on the tepid second-quarter gross domestic product growth rate.

New Figures Put Recession and Recovery in Focus - The second quarter is in the spotlight Friday, but there’s an interesting sideshow, too: revised gross domestic product numbers for 2009, 2010 and 2011. The annual update of older numbers shows that 2009 was a little better, and 2010 a little worse, than the government estimated when it crunched the numbers last summer. But the latest revisions also underscore that on the whole the recession was much worse, and the recovery much slower, than we understood at the time. The chart below compares the first estimate of quarterly growth, released by the Bureau of Economic Analysis one month after the end of each quarter, with the latest figures published Friday. (The numbers for 2008 were not revised Friday; the comparisons for that year are between the original estimates and the bureau’s most recent revisions, which were published last summer.) The pattern is obvious, but it’s worth underscoring the magnitude: The changes have erased more than $800 billion from the three-year period, roughly the annual economic output of the Netherlands.  As I wrote last summer, the early estimates have never been particularly reliable. They are concocted from comprehensive data, samples and educated guesswork, and then gradually refined.

GDP Growth, Unemployment, and the G-spot - In this graph, which economists call Okun’s law, you very much want to avoid the northwest quadrant (GDP down, unemp up) and inhabit the southeast corner (GDP up, unemp down). In fact, all the points in the NW are from 2008-09, the heart of the great recession.  And thus, all the points in the SE are from 2010-12, and in fact, there’s a nice little clump at the bottom there from when the jobless rate fell a point over the last year (though of course it’s been stuck north of 8% for the past few months). If you run a simple regression of these variables going back to 2000, you get the Okun coefficient of -0.5, implying that for every percentage point that real GDP grows above trend, the jobless rate should fall by half a percentage point. So what’s “trend GDP growth”?  According to my little regression, it’s 2.5%, though that’s a bit high given most other estimates around right now (CBO is closer to 2%).  You’ll notice we’ve actually gotten a favorable Okun bump lately, as recent points in the SW are below the line, suggesting a bit lower unemployment then you’d expect given GDP growth (maybe due to diminished labor force participation which tends to dampen the increase in the jobless rate as fewer folks are looking for work).

Q2 GDP: Comments and Investment - The Q2 GDP report was weak, but slightly better than expected. Final demand weakened in Q2 as personal consumption expenditures increased at only a 1.5% annual rate, and residential investment increased at a 9.7% annual rate. Investment in equipment and software picked up slightly to a 7.2% annual rate in Q2, and investment in non-residential structures was only slightly positive. The details will be released next week, but most of the recent positive increases in non-residential structures has been from investment in energy and power structures. Based on the architecture billing index, I expect the drag from other non-residential categories (offices, malls, hotels) to continue all year. And there was another negative contribution from government spending at all levels. However, it appears the drag from state and local governments will end soon (after declining for almost 3 years). Overall this was another weak report indicating sluggish growth.

How will the Fed react to the GDP report? - GDP grew at 1.5 percent in the second quarter of this year according to the advance report from the BEA. The increase in GDP, while positive, represents a slowdown from first quarter growth, driven primarily by a fall in consumption growth, a fall in the growth of business and housing investment, an increase in imports, and declines in government spending, particularly at the state and local level. With GDP growing too slowly to provide jobs for the millions of unemployed still seeking work, and too slowly to even keep up with population growth -- a 2.5 to 3 percent growth rate is needed to absorb new entrants into the workforce, and even higher rates are needed to make inroads on the unemployment problem -- the question turns to potential policy reactions. How will monetary and fiscal policymakers react to the news of slowing GDP growth? Political gridlock in Congress makes a fiscal policy response very unlikely, so there is little hope of an aggressive job creation program, an increase in infrastructure spending, or any other fiscal stimulus. Thus, the real question is whether this report will spur the Federal Reserve to do more to help the economy.

GDP Highlights: Inflation Data Won’t Constrain Fed - A few quick thoughts on GDP report out this morning:

• Key price indexes are uniformly running below the Federal Reserve’s 2% objective. The personal consumption expenditures price index was up 1.6% from a year ago, thanks in part to falling gasoline prices. This is the price index that the Fed watches most closely, more so than the consumer price index produced by the Labor Department, which is running a touch higher. Excluding food and energy, the PCE price index was up 1.8% from a year ago. The Fed watches this ex-food-and-energy index to get a read on underlying inflation trends. For the quarter at an annual rate, the PCE price index ran at 0.7% and excluding food and energy it ran at 1.8%. An alternate measure, the “market-based” price index, is also running below 2%..
• National defense spending contracted three quarters in a row. The winding down of two wars, it seems, is having a short-term negative impact on growth, though it is certainly in everyone’s interest in the long run that the nation not be at war. Of course budget cuts are also part of this story.
• Business investment ran at an 8.5% annual rate in Q2. Not bad, despite all of the uncertainty business leaders express about the world. That includes 7.2% in the all important equipment and software category.
• With very little fanfare, housing investment has been growing for a full year and went at a double digit pace in the first half of 2012.
• Final sales of domestic product — a measure of how the economy is doing when you take out inventory swings – up at a 1.2% rate in Q2 and averaging a 1.7% rate since 2011. That’s really substandard for a recovery.

Why Today’s GDP Numbers Should Scare You - James Pethokoukis points out the reason why the sickly GDP numbers released this morning are a concern: Earlier this year, the Obama White House predicted the economy would grow 3% in 2012. Today’s GDP report shows that ain’t going to happen. The Commerce Department said the economy grew at an anemic 1.5% annual rate from April through June, after a revised 2.0% in the first quarter. It now seems likely the economy will be lucky to grow at 2% for the entire year. And that’s after growing just 1.8% last year. Indeed, research from the Federal Reserve finds that that since 1947, when year-over-year real GDP growth falls below 2%, recession follows within a year 70% of the time. The U.S. economy remains in the Recession Red Zone. Based on these Federal Reserve figures, it would seem that there is a point at which economic growth becomes so slow that it ends up turning into a recession simply on its own momentum. There will be talk now of another round of Quantitative Easing from the Federal Reserve Board and other measures the Fed could take to supposedly stimulate the economy, but they’ve already gone through two rounds of QE and, in both cases, the effects were decidedly temporary in to a large degree limited to positive growth in the stock market.

 Is the U.S. Headed for Recession? - Is the U.S. economy headed for a recession before it fully recovers from the last one? Unfortunately, it's a timely question. Divide the answer in two parts: What we know. What might happen. We know growth is painfully slow, and slowing. Federal Reserve Chairman Ben Bernanke last week suggested that the American job-creation machine is "stuck in the mud." The economy expanded at a 1.9% annual rate in the first quarter. The second quarter was worse. Analysts expect the government estimate, due Friday, to be between 1% and 1.5% despite a boost from housing and auto sales. Retail sales have fallen for three months in a row. Consumer confidence is sinking. Manufacturing, which had been vigorous, shows signs of weakening. Government belt-tightening is restraining growth. Europe, which still buys about one-fifth of U.S. exports, is in recession, and the rest of the world is slowing. Drought is sure to push up food prices, pinching consumer spending on other things. Most forecasters add this up and predict sluggish growth, but no recession. "We don't see a double-dip recession," Mr. Bernanke told Congress last week. "We see continued moderate growth." But the Fed has been overly optimistic. In June 2011, officials predicted the U.S. would grow between 3.3% and 3.7% this year. Last month, they forecast between 1.9% and 2.4%, and some have grown gloomier since.

Safe Assets, Money, and the Output Gap -- In the past, I made the case that the shortage of safe assets is really just an excess money demand problem.  That is, the sharp decline in the stock of safe assets that began in 2008 matters because it means there are fewer assets that can facilitate exchange relative to the demand for them.  This relative shortage of transaction assets or money implies a deficiency of aggregate nominal expenditures and can explains the ongoing slump.  This notion of excess money demand is not novel, but what is new and makes this view a compelling narrative of the crisis is our expanded understanding what constitutes money.  Prior to the crisis, most observers thought of some measure of retail money assets like M2 as an appropriate measure of money.  Thanks to efforts of Gary Gorton (2008), Wilmot et al. (2009), Sing and Stella (2012), and others we now know that a more accurate measure of money should also include institutional money assets that facilitate exchange for institutional investors.  One attempt to measure this broader notion of money comes from the Center for Financial Stability (CFS).  Using their data, one can show that the supply of money has fallen sharply since 2008 and has yet to recover.  By itself, this decline in the stock of money assets implies an unsatisfied demand for money.  Throw into this mix the heightened demand for safe assets arising from economic fears and you have a pronounced excess money demand problem.

Federal Government's Debt Jumps More Than $1T for 5th Straight Fiscal Year - By the end of the third quarter of fiscal 2012, the new debt accumulated in this fiscal year by the federal government had already exceeded $1 trillion, making this fiscal year the fifth straight in which the federal government has increased its debt by more than a trillion dollars, according to official debt numbers published by the U.S. Treasury. Prior to fiscal 2008, the federal government had never increased its debt by as much as $1 trillion in a single fiscal year. From fiscal 2008 onward, however, the federal government has increased its debt by at least $1 trillion each and every fiscal year. The federal fiscal year begins on Oct. 1 and ends on Sept. 30. At the close of business on Sept. 30, 2011—the last day of fiscal 2011—the total debt of the federal government was $14,790,340,328,557.15. By June 29, the last business day of the third quarter of fiscal 2012, that debt had grown to $15,856,367,214,324.44—an increase for this fiscal year of $1,066,026,885,767.29.

Yield Stories - Paul Krugman - Low interest rates on the bonds of just about every country that still has its own currency have created a small industry of would-be explainers. It’s a bubble; no, it’s the global shortage of safe assets; no, it’s “disaster economics“. Maybe there’s some truth to some of these stories. But surely the dominant story is very simple: it reflects market perceptions that the economy is going to be depressed for a long time. As I’ve argued before, you really want to look at Japan, which exhibited this syndrome at a time when there was clearly no shortage of safe assets and few were talking about disaster: This time is not different.

Treasury Yields Drop to Records -  Treasuries rose, with five-, 10- and 30-year yields falling to records, before reports this week forecast to show U.S. growth cooled and as concern Europe’s debt crisis is worsening spurred demand for the safest assets.  Ten-year yields declined to an all-time low of 1.4128 percent, while the five-year rate dropped to 0.5427 percent and 30-year yields slid to 2.5074 percent. Treasuries have returned 1.2 percent this month after a 0.4 percent decline in June, according to indexes compiled by Bank of America Merrill Lynch. Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., wrote on Twitter that real assets are a “better bet” amid negative real interest rates.  The benchmark 10-year yield fell four basis points, or 0.04 percentage point, to 1.42 percent at 8:25 a.m. in London. The 1.75 percent note due in May 2022 rose 3/8, or $3.75 per $1,000 face amount, to 103 1/32.

Treasury Yields Plunge To All-Time Record Lows Across The Curve - While it seemed somewhat inevitable given the trend, the dismal reality from Europe has sent investors scurrying for the 'safety' of the US Treasuries overnight. The entire yield curve has fallen to all-time record lows with 10Y trading below 1.40% and 30Y below 2.48%. 7Y - the seeming cusp of Twist - is below 90bps now and 2Y below 20bps. The shortest-dated T-Bills still trade around 4-6bps (as opposed to the deeply negative rates in Switzerland and Germany this morning with FX risk premia expectations, and Twist+, affecting this differential). Not a good sign at all - and definitely not yield curve movements on the basis of renewed QE as we see stock futures plunging to the old new reality (as those pushing dividend yields as the 'obvious move here may note that since Friday's highs, you've lost half a year's dividend as equity capital has depreciated 2%). Perhaps the sub-1% 10Y we noted yesterday is not such a crazy idea after all...

Free Money - Krugman - Take a look at the latest Treasury real yield curve data — the interest rate the U.S. government pays on bonds that are indexed to inflation: That’s right: for every maturity of bonds under 20 years, investors are paying the feds to take their money — and in the case of maturities of 10 years and under, paying a lot. What’s going on? Investor pessimism about prospects for the real economy, which makes the perceived safe haven of US debt attractive even at very low yields. And pretty obviously investors do consider US debt safe — there is no hint here of worries about the level of debt and deficits. Now, you might think that there would be a consensus that, even leaving Keynesian things aside, this is a really good time for the government to invest in infrastructure and stuff: money is free, the workers would otherwise be unemployed. But no: the Very Serious People have decided that the big problem is that Washington is borrowing too much, and that addressing this problem is the key to … something.

Treasuries Update: Another Day of Historic Low Yields - The equity markets remained fairly stable today, but Treasury yields continue to claim center stage. Today the 5-, 10- and 30-year Treasuries recorded new historic lows. The US Department of the Treasury data for today puts the 5-year note at 0.56, the 10-year note at 1.43 and the 30-year at 2.46. Each shaved one basis point off yesterday's official close. As for the Fed's, Operation Twist, here is a snapshot of selected yields and the 30-year fixed mortgage since the inception of program. The 30-year fixed mortgage, according to the latest Freddie Mac weekly survey, is at 3.53, another all-time low. That probably suits the Fed just fine. But, as for loans to small businesses, the Fed strategy is a solution to a non-problem. Here's a snippet from a recent NFIB Small Business Economic Trends report: Ninety-three (93) percent of all owners reported that all their credit needs were met or that they were not interested in borrowing.

Money for Nothing, by Paul Krugman - For years, allegedly serious people have been issuing dire warnings about the consequences of large budget deficits — deficits that are overwhelmingly the result of our ongoing economic crisis. In May 2009, Niall Ferguson of Harvard declared that the “tidal wave of debt issuance” would cause U.S. interest rates to soar. In March 2011, Erskine Bowles, the co-chairman of President Obama’s ill-fated deficit commission, warned that unless action was taken on the deficit soon, “the markets will devastate us,”. And so on. But a funny thing happened on the way to the predicted fiscal crisis: instead of soaring, U.S. borrowing costs have fallen to their lowest level in the nation’s history. So what is going on? The main answer is that this is what happens when you have a “deleveraging shock,” in which everyone is trying to pay down debt at the same time. Household borrowing has plunged; businesses are sitting on cash because there’s no reason to expand capacity when the sales aren’t there. So they’re buying government debt, even at very low returns, for lack of alternatives. Moreover, by making money available so cheaply, they are in effect begging governments to issue more debt. And governments should be granting their wish, not obsessing over short-term deficits.

White House Projects Larger Savings on Big-Ticket Items in New Report - Buried in the White House’s annual “mid-session review” budget update on Friday are some steep reductions in projected spending for some of the government’s largest expenditures — Medicare, Medicaid, Social Security and interest on the debt.The White House on Friday updated its outlook for the U.S. economy, forecasting that the unemployment rate would be lower and deficits would be smaller than the Obama administration previously expected. The White House, however, lowered its projection for economic growth, saying it sees the U.S. economy growing 2.3% in 2012 and 2.7% in 2013. Previously, the White House expected growth of 2.7% in 2012 and 3% in 2013. The reductions in spending, which combined total $776 billion in savings over 10 years, don’t come from policy changes that have occurred since the White House put out its last budget proposal in February. Instead, the savings come mostly from changes in economic assumptions that have occurred since late last year, when the fiscal year 2013 budget was mostly compiled. For the interest the U.S. government pays on its sizable debt, the White House now believes that from 2013 to 2022 the government will pay $422 billion less in interest on its debt than the $5.889 trillion it estimated in February. It attributes this reduction “due to the effect of lower short- and long-term Treasury interest rates over the next few years.”

Mid-Session Review Shows a Smaller Deficit, as Federal Spending Drops - The White House released its mid-year budget estimate today, and as Jackie Calmes writes, it shows a smaller annual deficit for the year. She doesn’t bother to mention that this is exactly what we don’t need right now. The annual deficit will be lower for the fiscal year 2012 and for the rest of the decade than projected earlier this year, the Obama administration said on Friday. Its required midyear report on the nation’s fiscal health showed that though revenues to the Treasury have been lower than expected, a consequence of a slowed economy, federal spending has been lower as well. The report from the White House Office of Management and Budget projected that the deficit for the fiscal year ending Sept. 30 would be $1.21 trillion, which is $116 billion lower than the $1.32 trillion forecast in February as part of Mr. Obama’s annual budget. The new figure equals 7.8 percent of the size of the economy, down from the February projection of a deficit equivalent to 8.5 percent of the gross domestic product. What this really means is that the government is providing $116 billion less in fiscal support to the economy than what was expected at the beginning of the year. This is a pretty dour scenario in the context of an economy growing at a substandard rate, especially for a recovery. As today’s GDP numbers show, all of the economic gains since mid-2010 have been concentrated in the private sector, with the public sector dragging on growth. This actually decelerated in the last quarter, but it’s been bumping along the bottom for about a year.

'Big Government' Isn't So Big. It's Also Shrinking. - While Washington debates whether big government is holding back the economy, it’s worth keeping a couple of facts in mind: Government has been shrinking steadily for two years, and compared to the size of the overall economy, government is actually slightly smaller today than it has been on average in the postwar era. Here’s a chart showing the annualized percentage change in gross domestic product (blue) and the percentage change in total government spending and investment (red): The overall economy has been growing for 12 quarters. Total government spending (federal, state and local), on the other hand, has been falling for eight quarters. That decline has been driven primarily by state and local spending, which has been falling for 11 quarters. Federal spending has fallen for six of the last seven quarters. In other words, without the drag of shrinking government, the growth rate of the overall economy (which is measured as consumer spending + investment + government spending + net exports) would be faster. That is even before you consider how public layoffs ripple through the private sector as unemployed workers curb their spending.

December Debacle? U.S. Likely to Hit Debt Ceiling Then - New data from the White House suggest the federal government will hit its $16.395 trillion debt ceiling in mid- to late-December. Here’s how we came to the December projection: The White House on Friday said it estimates the deficit in fiscal year 2012, which ends Sept. 30, will reach $1.211 trillion. For the first nine months of the fiscal year, the deficit was $904.2 billion. That means the White House believes the cumulative deficit in July, August, and September will be $307 billion, or $102.3 billion a month. That’s pretty much on track with the monthly deficit average over the last 12 months – $102.6 billion. Stay with us. On June 30, the government had $15.816 trillion in debt subject to the $16.394 trillion borrowing limit. So, if the government, going forward, adds $102.3 billion in debt, it will hit $16.326 trillion in debt at the end of November. By the end of December, the government is set to hit $16.428 trillion, or $33 billion more than is statutorily allowed. In other words, a few days before Christmas, the folks at the Treasury Department’s debt management office probably won’t have too much time for holiday shopping. Keep in mind that once the government hits the debt ceiling, the Treasury Department has some wiggle room and can maneuver for a few more weeks using emergency measures.

U.S. Probably Won’t Have to Raise Debt Ceiling This Year - A senior Treasury Department official Thursday said Congress probably won’t have to raise the country’s debt limit this year, giving lawmakers some breathing room to hash out a solution after the upcoming election. “As you know we have some extraordinary measures we can deploy to earn some more time before we need to raise the debt ceiling,” Treasury Under Secretary for Domestic Finance Mary Miller said at a conference.  “I expect at this time that we probably will move into 2013 so that does not become an issue we have to resolve in 2012,” Mrs. Miller said. The Treasury Department has for months said it expects to hit its $16.39 trillion borrowing limit some time in the fourth quarter of this year, an estimate Mrs. Miller said still holds. But it can stretch out the time before the government defaults on its debt by shuffling funds among accounts, as well as suspending some payments and programs.

Country Half Full: An Optimistic Take On Our National Debt Nightmare - It’s rare that a United Nations report can engender optimism about anything, let alone America’s finances. But a recently issued (and mostly overlooked) study from the global body’s International Human Dimensions Program might just turn the trick, at least when it comes to U.S. federal indebtedness. It turns out that, at least from one angle, we’re not in as deep of a hole as we think! Blandly labeled the Inclusive Wealth Report 2012, this impressive research project, which is super fun to explore, is the first serious attempt to measure the total wealth of the planet’s richest countries. Not income, mind you, which is what Gross Domestic Product (GDP) refers to, but rather total wealth, i.e., the comprehensive value of the physical assets (buildings + roads+ vehicles + washing machines + railroad tracks + etc.), human capital (population + education + skills + earning potential + life expectancy) and natural resources (land+ trees + minerals + fossil fuels). As you , the winner, by a long shot, is the United States, with an inclusive wealth figure of roughly $118 trillion (in 2000 dollars). That’s more than double the total of  the next wealthiest country, Japan ($55 trillion), and almost six times the cumulative value of all the tea plus everything else in China ($20 trillion).

Deficit Will Be Lower Than Projected In Mid-Session Budget Review -  It was almost two weeks after the statutory deadline and released on a Friday afternoon in late July so you know the White House doesn't want it to be big news, but the fiscal 2013 mid-session budget review published yesterday by the Office of Management and Budget has a number of interesting and important data.

• 1. The fiscal 2012 deficit is now projected to be $1.2 trillion, $116 billion less than was projected in the budget released by the White House in February.
• 2. The mid-session review deficit estimate is probably too high. It looks to me that the White House has left some good news to be reported when the final numbers for 2012 are released just before the election in October.
• 3. The total deficits between 2013-2022 are now project­ed to be $240 billion lower than forecast in February. That also is too high given that it assumes that several Obama proposals to stimulate the economy will be enacted.
• 4. As I read the tea leaves, even with the relatively slow growth projected by OMB, the 2013 deficit will be close to or below $900 billion.

Sources of the Budget Deficit - Paul Krugman - We all know that the economic crisis is the overwhelming source of today’s budget deficit (except for those who have a political incentive to believe otherwise). But clear quantifications are surprisingly hard to come by, perhaps because it’s not completely clear exactly how best to make the point. So, here’s one approach I’ve been playing with: comparing actual budget outturns for fiscal 2011, as reported here, with CBO projections made before we knew the financial crisis was upon us, specifically in the 2008 CBO Budget and Economic Outlook.Now, you have to be careful with CBO baselines, which are unrealistic in known ways. And as far as I know, back then the CBO wasn’t correcting the unreality with a convenient alternative fiscal scenario. But you can roll your own.  So I took the baseline, then subtracted some stuff on taxes — keeping the Bush tax cuts and other expiring provisions, plus indexing the AMT for inflation; and added in discretionary spending growth in line with nominal GDP. When I do that, I get the following:Most of the deficit rise was due to revenues falling below expectations — mainly because of the slump, but to some extent because of tax cuts in the stimulus. Spending was higher than projected, too — but the bulk of the rise was in “income security”, i.e. stuff like unemployment benefits and food stamps, which rose mainly because more people became eligible, but also because of temporary expansion.

Cost of debt ceiling fight: $1.3 billion -- Turns out there's a price to pay for incessant fighting in Congress and political grandstanding. The federal government spent an extra $1.3 billion to borrow last year because of the showdown over the debt ceiling, the Government Accountability Office reported Monday. Republicans in Congress and the Obama administration were locked in battle for months over how to raise the country's legal borrowing limit. "Delays in raising the debt limit can create uncertainty in the Treasury market and lead to higher Treasury borrowing costs," the GAO said. Indeed, even though bond rates were low last year, the GAO found that the Treasury Department paid a premium on many government securities in the eight months leading up to the eventual deal in August. The premium reflected the relative risk of government securities to private-sector debt.

Things That Make You Go Hmmm - Such As The Fiscal Cliff - The effect on the USA of its casually wandering over the Fiscal Cliff will be catastrophic; adding approximately $607bln to the US deficit which in turn would sap anywhere up to 4% (according to the CBO) or possibly even 5% (if Chairman Bernanke—in full-on ‘scare Congress’ mode—is to be believed) from US GDP and send the country crashing into outright recession (or further into recession depending on how things continue to deteriorate in the coming months). “That we cannot have” was the opinion of Erskine Bowles who, along with former Sen. Alan Simpson, devised a debt reduction plan last year to prevent this doomsday scenario.... According to the OMB estimates, any attempt to do something remotely meaningful will result in at least a percentage point reduction in US GDP, which is fine in a world of 3% growth, but today that 1% is not something these guys have to play around with. In the run-up to December 31, you can guarantee that the issue of the US Fiscal Cliff will replace Europe as the major concern facing the world in general and the US in particular and, if things continue to deteriorate at their current pace, anything that will lead to even a 0.5% cut inGDP will be seen as a  disaster.

The fiscal cliff and rationality - What should happen, what could happen, and what will happen? Let's begin by acknowledging the obvious: the United States faces a very significant long-run issue of fiscal solvency. The graph below, taken from a recent analysis by the Congressional Budget Office, plots projected federal expenditures as a percentage of GDP under two scenarios: The extended baseline scenario, which reflects the assumption that current laws generally remain unchanged; that assumption implies that lawmakers will allow changes that are scheduled under current law to occur, forgoing adjustments routinely made in the past that have boosted deficits.  The extended alternative fiscal scenario, which incorporates the assumptions that certain policies that have been in place for a number of years will be continued and that some provisions of law that might be difficult to sustain for a long period will be modified, thus maintaining what some analysts might consider "current policies," as opposed to current laws.  Obviously any such projections are problematic. Nobody knows with any confidence what U.S. GDP is going to be in 2037. But the basic feature of the CBO's "alternative" scenario seems indisputable-- if historical policies remain in effect for the next 15 years we are going to be in real trouble. Although I emphatically agree that America needs to make changes today that change the fundamentals of those long-term trends, I do not think it is necessary to do so with immediate tax increases or spending cuts. As Karl Smith observes, with the current negative real yields on government debt, the government is actually making a profit by running a budget deficit, as long as the government's borrowing cost remains as low as it is at the moment.

What's One Good Thing About The Fiscal Cliff? - Ask the question in the headline above to a politician, and he or she is very likely to respond with something about how the pressure of the intentional and inadvertent spending cuts and tax increases that are scheduled to go into effect around Jan. 1, 2013 — the fiscal cliff — will finally force the other side to compromise. Without that policy guillotine poised to come down on everyone’s necks, they’ll say, the gridlock on the budget of the past two years will continue or, heaven help us, intensify. But ask that same question to a federal budget wonk like me and you’ll get a completely different answer. As far as I’m concerned, the one good thing about the fiscal cliff is that the debate has already produced significant results that completely contradict much of the nonsense (I’m really pulling my punches here) that’s been said about the federal deficit and that has made action on spending, revenues, the deficit and national debt much harder than it should have been. Sadly, the fiscal cliff debate has also shown that the red ink in Washington will be far more enduring than any Member of Congress will ever admit. Because of the debate over the fiscal cliff, we now know that even the fiercest opponents of federal spending — the ones who have been loudly insisting that what Washington spends kills jobs and hurts the economy and that the road to prosperity is paved with big cuts — don’t really know or believe what they’ve been saying.

More Actual Evidence The GOP Doesn't Really Care About The Deficit -- Two reports over the past two days by the most credible organizations that do budget analysis prove that, no matter what they say publicly, congressional Republicans don't actually give a damn about reducing the federal deficit or lower government spending. Each report shows that, for the GOP, the deficit not only comes in no better than second every time, it's not really a serious consideration. The first report, produced by the excellent analysts at the U.S. Government Accountability Office (GAO) and released on Monday, shows that last August's GOP-induced fight over raising the debt ceiling increased federal borrowing costs, that is, spending on interest, by a minimum of $1.3 billion. Here's the money quote: Delays in raising the debt limit can create uncertainty in the Treasury market and lead to higher Treasury borrowing costs. GAO estimated that delays in raising the debt limit in 2011 led to an increase in Treasury’s borrowing costs of about $1.3 billion in fiscal year 2011. However, this does not account for the multiyear effects on increased costs for Treasury securities that will remain outstanding after fiscal year 2011.

This Is Why Fixing The Cliff In The Lame Duck Is A Bad Idea - The Senate yesterday passed "The Sequestration Transparency Act" that requires the president to explain to Congress what he plans to cut to implement the sequester -- the across the board spending reductions that were triggered when the anything-but-super committee failed last November to come up with a deficit reduction plan. The act requires the president to submit the spending cut details to Congress within 30 days of the law being enacted. Assuming the president gets the actual legislation in about a week and signs it by around August 15, that would mean that the spending cut plan would be released by the middle of September.  But the BCA doesn't require the president explain in advance how he's planning to implement the sequester. In fact, other than the date when the spending is supposed to start to be reduced, the law provides no sequester-related deadlines and absolutely does not require the White House to pre-specify what will be cut. In other words, and in spite of the rhetoric, this was a congressional rather than a White House failure. And it's a huge warning sign about what could happen during the upcoming lame duck session of Congress when the same basic political environment -- the need to legislate quickly under extraordinary pressure -- not only will exist again but will be much worse.

CBO | Estimates for the Insurance Coverage Provisions of the Affordable Care Act Updated for the Recent Supreme Court Decision: CBO and JCT now estimate that the insurance coverage provisions of the ACA will have a net cost of $1,168 billion over the 2012–2022 period—compared with $1,252 billion projected in March 2012 for that 11-year period—for a net reduction of $84 billion. (Those figures do not include the budgetary impact of other provisions of the ACA, which in the aggregate reduce budget deficits.) The projected net savings to the federal government resulting from the Supreme Court’s decision arise because the reductions in spending from lower Medicaid enrollment are expected to more than offset the increase in costs from greater participation in the newly established exchanges.The Supreme Court’s decision has the effect of allowing states to choose whether or not to expand eligibility for coverage under their Medicaid program pursuant to the ACA. Under that law as enacted but prior to the Court’s ruling, the Medicaid expansion appeared to be mandatory for states that wanted to continue receiving federal matching funds for any part of their Medicaid program. Hence, CBO and JCT’s previous estimates reflected the expectation that every state would expand eligibility for coverage under its Medicaid program as specified in the ACA. As a result of the Court’s decision, CBO and JCT now anticipate that some states will not expand their programs at all or will not expand coverage to the full extent authorized by the ACA. CBO and JCT also expect that some states will eventually undertake expansions but will not do so by 2014 as specified in the ACA.

Yet Another Fiscal Turn for the Worse: Understanding the CBO Re-Score of the 2010 Health Care Law - The Congressional Budget Office (CBO) has just published, in two reports, its updated score of the 2010 health care law. The new score is bad news from almost any vantage point. CBO’s fiscal evaluation of the law is worse than before, even though the number of people receiving health insurance coverage is now projected to be fewer. Below I present the key features of the latest CBO report

Congress Moving to Wrap Up Budget, Farm Bill With Short-Term Extensions - With conservatives in retreat, it does look like we’ll get a six-month stopgap spending bill that will put off any budget hostage-taking until next March, when the character of Congress may change dramatically because of the elections. Politico advances the ball on that story today. Apparently, House Republicans figured out that they have to stand for re-election too, and a government shutdown on the eve of those elections would be bad for business. So they relented on the level of spending, keeping it at the levels mandated by the spending cap in the debt limit deal. They’ll try to fight another day. Congress also wants to make a deal on a couple other outstanding bill packages before their expiration dates. One is a “tax extenders” bill, mainly a set of special interest tax breaks, for everything from alternative energy to research and development, mostly for business but including some worthwhile measures. Conservatives on the House side are divided on which provisions to extend, which threatens the whole deal, which is balanced so that individual members of Congress can point to something to vote for in the package. The R&D tax credit might survive, but perhaps little else. Congress can fix these kinds of tax breaks retroactively, and often do, so the next Congress could take them up. But it would add a degree of disruption to the industries affected. Meanwhile, on the farm bill, which expires on September 30, momentum is swinging toward a one-year stopgap, provided that the parties enter into a conference committee on a longer bill after that. Collin Peterson, the Democratic ranking member on the Agriculture Committee, found that compromise acceptable.

Democrats Drop Estate Tax Changes on Tax Bill - In a move that really tells you who runs Washington, Senate Democrats backed down on a portion of their tax package, one that they already know won’t pass into law after it comes up for a vote next week. Despite this, instead of putting forward a tax package that conforms with what they presume to project as their values, they decided to swap out the estate tax portion, because they couldn’t get enough of their own members to agree to the plan with it in there: Senate Democratic leaders are eliminating a provision to tax wealthy estates in order to shore up support within their ranks for President Barack Obama’s election-year tax plan, senators and aides said Thursday. Since there was no consensus in the Senate Democratic Caucus over the levels to tax estates transferred after a person’s death, Senate Majority Leader Harry Reid told senators Thursday he’d drop that provision. The move could limit defections in his caucus and put the focus on this season’s central campaign fight: Whether to extend Bush-era tax rates at 35 percent for the top 2 percent of earners or let them increase to the 39.6 percent level.The bill would now cost $250 billion, down from the $272 billion, one-year cost of the original proposal, aides said.

Senate Democrats Would Keep Dividend Taxes Low, But Why? - Senate Democrats, who will vote this week to allow most of the 2001/2003 tax cuts to expire for high-income households, are likely to make an exception for capital gains and dividends. Under their proposal even top bracket taxpayers would pay a maximum rate on this investment income of 20 percent in 2013 (plus an additional 3.8 percent under the tax provisions of the 2010 health law). That would be far below the rate on ordinary income, which Democrats would restore to 39.6 percent. Their choice is interesting, especially since the evidence is mixed at best on whether the big tax cuts on investment income in 2003 did much to help the economy.  Indeed, economists still don’t agree on how much the 2003 dividend tax cut boosted payouts to shareholders, and whether it was good for economic growth or not. Some of the nation’s best tax economists have been peering at the data for a decade and the most they agree on is that firms did increase dividends after the tax cut passed. But did the tax cut cause the change? That, it seems, is the matter of more than a little debate.

Framing the Decision on Higher Tax Rates -- There are three basic positions one can take on the question of whether Congress should increase tax rates on high income taxpayers:

1. No to higher tax rates – higher tax rates will result in less work, savings, and investment which will slow the economy.
2. Yes to higher tax rates – there is no evidence that high income taxpayers respond to higher tax rates by working less. High income workers are more likely to save the incremental income rather than spend it so the tax increase will not depress output or demand.
3. Yes to higher tax rates – the negative economic impact of higher tax rates on work and investment is small relative to the economic costs of higher deficits.

The policy debate is principally between those who embrace positions (1) and (2). Those who support tax increases tend to be dismissive of the impact of tax rates on behavior. Robert Rubin famously ridiculed the notion that tax rates dent incentives to work by pointing to his experience on compensation committees. No executive ever told him they planned to work less the next year because marginal tax rates went up. Academic support for this position comes from a 2000 Journal of Political Economy paper authored by former CEA Chair Austan Goolsbee. Goolsbee looks at the taxable income of top corporate executives and finds no evidence that long-run taxable income responds to tax rates. While corporate executives would change the timing of compensation to reduce tax liabilities, Goolsbee finds no evidence of sustained economic changes in response to higher tax rates.

What the Dueling Senate Bills on Expiring Tax Cuts Would Mean for Taxpayers -- As early as today, the Senate is likely to vote on the first of two competing efforts to temporarily extend tax cuts passed between 2001 and 2010. Neither the Democratic nor Republican measures will pass in the hyper-partisan Senate, but it is instructive to see how the measures stack up. The short summary: The Democrats would increase the deficit by $250 billion, while the GOP would add about $405 billion, compared to what would happen if all of the tax cuts expire on schedule at the end of 2012. Under either plan, nearly all taxpayers would pay less than if the tax cuts are allowed to expire. However, the highest-income households would, on average, pay about $340,000 less under the GOP plan than with the Democrats’ version. But the story is more complicated. In their still-evolving bill, the Democrats left out two changes they have long supported–continuing to protect millions of middle- and upper-middle income families from the Alternative Minimum Tax and preventing the estate tax from returning to its pre-2001 level.  If you include both, the Senate Democrats would cut taxes by $368 billion compared with today’s rules. To help sort it out, my colleagues at the Tax Policy Center have put together a nice cheat sheet that summarizes the two bills. In addition, TPC has looked at how the measures would affect households in various income groups and, using Joint Committee on Taxation estimates, how much each plan would cost the Treasury in lost revenue.

The Senate Actually Passed a Middle-Class Tax-Relief Bill - It turns out when its members agree to play straight and give up filibustering, the Senate can get even controversial legislation passed, as it demonstrated Wednesday by approving the Bush-era tax cuts for all but the highest earners. It was a close vote, with the bill passing by just 51 to 48, but it achieved something the Senate couldn't do even in 2009 or 2010, when they had a larger majority, Talking Points Memo's Brian Beutler pointed out. "Republicans aided Democrats in the effort, by agreeing to drop their filibuster and allow the legislation to pass or fail on a simple majority basis." What a novelty! Democrat Jim Webb and independent Joe Lieberman (who usually votes with Democrats) voted against the bill, NBC News reports, but hey, that's what sometimes happens in a voting situation. Of course, the bill is not expected to make it through the Republican-controlled House of Representatives. There, NBC reports, Republicans "plan to take up their own bill next week that would extend the Bush tax rates for all Americans for one year while taking up comprehensive tax reform." A Senate bill to extend the tax cuts for everyone was defeated Wednesday, 45 to 54.

Democrats Support Multiple Tax Cuts for the Wealthy - One problem with talking about the “Bush tax cuts” is that they incorporate much more than just the individual income tax marginal rates. Among other things, you have the changes to the estate tax. And so today, House Democrats plan to introduce an estate tax measure that would freeze the tax at 2009 levels. In their release, Ways and Means Democrats said their proposal, which would increase the top estate tax rate back to 45 percent and lower the exemption to $3.5 million, would shield 99.7 percent of estates from any liability. The current top rate is 35 percent, with a $5 million exemption, indexed for inflation after 2011. Unless Congress acts, the estate tax will revert to a $1 million exemption and a 55 percent top rate. House Republicans have prepared a bill that, much like a similar GOP proposal in the Senate, would continue the current estate tax parameters for another year. The House is expected to vote on that measure next week, as well as an alternative modeled after the Senate Democratic package. What House Democrats won’t tell you is that the 2009 levels are the lowest of the 10-year Bush-era changes to the estate tax. Under Bill Clinton, the estate tax had that 55% top rate and $1 million exemption. The thresholds gradually rose and the rate gradually dropped, and then the estate tax disappeared in 2010, before the deal in the 2010 tax cut deal created the new, $5 million exemption.

No one pays the estate tax - The Senate’s partial extension of the Bush tax cuts Wednesday night did not include an extension of Bush’s cuts to the estate tax, passed in 2001. The Bush bill gradually phased out the tax such that it was fully eliminated in 2010. The extension of the cuts, passed as part of a deal between Obama and Senate Republicans in December 2010, imposed a top rate of 35 percent while exempting estates under $5 million. That’s bigger than no tax, but a lot less than the 45 percent top rate and $3.5 million exemption that was in place in 2009. Sen. Claire McCaskill (D-Mo.) has proposed a bill to extend the current rates, and Sens. Jon Tester (D-Mont.) and Mark Pryor (D-Ark.) have signed on. If no extension is passed, rates will return to where they were during the Clinton administration, with a 55 percent top tax and $1 million exemption. Republicans allege that would strike “millions of family farms and small businesses.” They’re wrong. Even under the Clinton administration rates, the estate tax hit a tiny fraction of Americans, hovering around 2-3 percent of all deaths according to this paper (pdf) by IRS researchers Darien B. Jacobson, Brian G. Raub, and Barry W. Johnson:

Screw the Clinton tax rates. Lets party like it's 1936! - Digby wrote a few days ago about the“grown-up” people coming to town to save America from the deficit. She listed a few of those people and their annual income. Also, a few days ago the Senate had a vote on the tax cuts. Letting the Bush cuts go (I'm all for it and we can stop the payroll tax cut too as it is all stupid policy when the problem is declining wages/income going to labor) will return us to the Clinton years rates. People have noted just how little such a rise means to those at the top.  Well, in keeping with my define rich series and my series looking at the purpose of taxation, I thought wouldn't it be interesting to see just what these 1%'ers might be paying if we went back to the beginning of the last great period of mass prosperity: 1936.  Yes indeedy, I say go for the brass ring. Let's show our maturity and actually implement the lesson learned from our history, that period from around 1906 to 1932 and then 1936 to 1979.

The Republican Plan to Tax the Poor - How will Republicans pay for their proposal to extend Bush-era tax cuts for the wealthiest two percent of Americans? In part, by raising taxes on low- and moderate-income working families. According to the watchdog group Citizens for Tax Justice, the GOP's tax plan would allow the expiration of tax breaks worth a total of $11.1 billion for 13 million working families. (Democrats want to keep those tax breaks in place.) That's enough money to make up for 40 percent of the value of the GOP's proposed tax cuts for the rich. Here's a rundown of the GOP's proposed tax increases, and what they'll cost working families:

• Child Tax Credit: A tax deduction for families with children
  GOP proposal: End a portion of the credit for families making between $3,000 and $13,300
  Savings to federal government: $7.6 billion annually
  Tax increase for average family: $854 annually
• Earned Income Tax Credit: A tax credit for people who work but have low wages
  GOP proposal: Reduce EITC for some married couples (i.e., bring back the "marriage penalty") and for families with three or more children
  Savings to federal government: $3.4 billion annually
  Tax increase for average family: $530 annually

About the Poor and Taxes - I see a push coming from the fortunate again, the ones who have been rewarded by the system as it has been, to 'scrap the tax system' and go to a lower flat tax, or even better, a much lower but general consumption tax. Whatever benefits them the most. And economics is a handmaiden flexible and malleable enough to provide them whatever rationale is required to support their arguments. But the truth is that a consumption tax falls particularly hard on those with the least disposable income, who must still buy the necessities of life.  I should add that a shift from an income to a consumption tax is a great idea if you would like to stimulate and subsidize a new bubble in speculative financial paper that would bring down the financial system once and for all when it collapses. Personally I would like to see a very nominal financial transaction tax of nominal flat of about $5 per trade, with NO exemptions including wiseguys trading for their own books in HFT. I would obviously like to dampen speculation and encourage real investment. And of course I would be in favor of the abolition of all 'dark pools' of publicly traded instruments or delays in reporting those trades. And charging for basic quotes in real time by the exchanges which should be a cost of their doing business.The problem with the tax system we have today is that there are so many loopholes and ways to avoid taxes for those with the most power and money. It really is more of a scandal than you might know. It encourages and rewards expoitative behaviour and foments financial corruption.

Why You Pay Too Much In Taxes - For years, American taxpayers have been shelling out $4.2 billion dollars per year to pay for a scam. A report by the Inspector General found that some 2 million illegal immigrants have been receiving large tax refunds by pretending that numerous dependents live with them ... when, in fact, most of the dependents live in Mexico and have never lived in the United States. Once whistleblowers called attention to this problem, their IRS bosses told them to ignore the fraud and look the other way: Pulitzer prize winning reporter David Cay Johnston reports that - in 16 states - giant companies pocket your "state income taxes" This includes foreign corporations. Workers are never informed that their "state income taxes" are being pocketed. And states often refuse to make this information public, claiming that it is "proprietary information".

New Info Explaining The Government War on Business - The staff on the Republican side of the Joint Economic Committee have been busy, as they’ve produced some great new material. First, an infographic showing the myriad ways Washington uses red tape to micromanage and control small businesses. Second, they’ve conducted a fresh analysis of the estate tax—known to everyone outside the Beltway as the death tax. Here are some of their conclusions:

• The estate tax impedes economic growth because it discourages savings and capital accumulation. 
• As of 2008, the estate tax has cumulatively reduced the amount of capital stock (buildings, equipment and software) in the U.S. economy by roughly $1.1 trillion since its introduction as a permanent tax in 1916, equivalent to 3.2 percent of the total capital stock. 
• The estate tax is an overwhelming cause of the dissolution of family businesses. The estate tax is a significant hindrance to entrepreneurial activity because many family businesses lack sufficient liquid assets to pay estate tax liabilities. 
• The estate tax does not reduce income and wealth inequality. Perversely, the estate tax creates a barrier to income and wealth mobility. 
• Economic inefficiencies due to the distortionary effects of the estate tax are burdensome, and the costs of compliance associated with the estate tax add to the paperwork and time necessary to comply with other taxes. 
• The estate tax raises a negligible amount of revenue. Since its inception nearly 100 years ago, the estate tax has raised just under $1.3 trillion in total revenue; by comparison, that is equivalent to the U.S. federal deficit for fiscal year 2011 alone

The size of the state: A big beast to tackle | The Economist…TO SAY that public schools, roads and bridges helped make America rich would ordinarily arouse no more controversy than to say that a dog is a man’s best friend. The exception is when Barack Obama clumsily tries to make the point during a presidential race, in an instant distilling the campaign down to a single question: what is the role of government? On a campaign stop at a fire station in Virginia on July 13th, Mr Obama said: “If you were successful, somebody along the line gave you some help…Somebody invested in roads and bridges. If you’ve got a business—you didn’t build that. Somebody else made that happen.”  In the days since then, Republicans have taken that last sentence and turned it into an attack ad to bolster their message that Mr Obama likes government more than business. It reveals “an ideology that somehow says it’s the collective and government that we need to celebrate,” declared Mitt Romney, the challenger. And the row goes on. New T-shirts are being printed, fresh denunciations penned.

Austerity's Big Winners Prove To Be Wall Street And The Wealthy: The poor and middle classes have shouldered by far the heaviest burdens of the global political obsession with austerity policies over the past three years. In the United States, budget cuts have forced states to reduce education, public transportation, affordable housing and other social services. In Europe, welfare cuts have driven some severely disabled individuals to fear for their lives. But the austerity game also has winners. Cutting or eliminating government programs that benefit the less advantaged has long been an ideological goal of conservatives. Doing so also generates a tidy windfall for the corporate class, as government services are privatized and savings from austerity pay for tax cuts for the wealthiest citizens. U.S. financial interests that stand to gain from Medicare, Medicaid and Social Security cutbacks "have been the core of the big con," the "propaganda," that those programs are in crisis and must be slashed, said James Galbraith, an economist at the University of Texas. Advocates of austerity measures have sold their proposals as a means to improve the economy.

The U.S. Economic Policy Debate Is a Sham - Watching Democrats and Republicans hash out their differences in the public arena, it’s easy to get the impression that there’s a deep disagreement among reasonable people about how to manage the U.S. economy. Nothing could be further from the truth.  In reality, there’s remarkable consensus among mainstream economists, including those from the left and right, on most major macroeconomic issues. The debate in Washington about economic policy is phony. It’s manufactured. And it’s entirely political. Let’s start with Obama’s stimulus. The standard Republican talking point is that it failed, meaning it didn’t reduce unemployment. Yet in a survey of leading economists conducted by the University of Chicago’s Booth School of Business, 92 percent agreed that the stimulus succeeded in reducing the jobless rate. On the harder question of whether the benefit exceeded the cost, more than half thought it did, one in three was uncertain, and fewer than one in six disagreed.  Or consider the widely despised bank bailouts. Populist politicians on both sides have taken to pounding the table against them (in many cases, only after voting for them). But while the public may not like them, there’s a striking consensus that they helped: The same survey found no economists willing to dispute the idea that the bailouts lowered unemployment.

I Know the Congressional Culture of Corruption, by  Jack Abramoff: ...No one would seriously propose visiting a judge before a trial and offering a financial gratuity, or choice tickets to an athletic event, in exchange for special consideration from the bench. Yet no inside-the-Beltway hackles are raised when a legislative jurist -- also known as a congressman -- receives a campaign contribution even as he contemplates action on an issue of vital importance to the donor. During the years I was lobbying, I purveyed millions of my own and clients' dollars to congressmen, especially at such decisive moments. I never contemplated that these payments were really just bribes, but they were. Like most dissembling Washington hacks, I viewed these payments as legitimate political contributions, expressions of my admiration of and fealty to the venerable statesman I needed to influence. Outside our capital city (and its ever-prosperous contiguous counties), the campaign contributions of special interests are rightly seen as nothing but bribes. The purposeful dissonance of the political class enables congressmen to accept donations and solemnly recite their real oath of office: My vote is not for sale for a mere contribution. They are wrong. Their votes are very much for sale, only they don't wish to admit it.

£13tn: hoard hidden from taxman by global elite - A global super-rich elite has exploited gaps in cross-border tax rules to hide an extraordinary £13 trillion ($21tn) of wealth offshore – as much as the American and Japanese GDPs put together – according to research commissioned by the campaign group Tax Justice Network.James Henry, former chief economist at consultancy McKinsey and an expert on tax havens, has compiled the most detailed estimates yet of the size of the offshore economy in a new report, The Price of Offshore Revisited, released exclusively to the Observer. He shows that at least £13tn – perhaps up to £20tn – has leaked out of scores of countries into secretive jurisdictions such as Switzerland and the Cayman Islands with the help of private banks, which vie to attract the assets of so-called high net-worth individuals. Their wealth is, as Henry puts it, "protected by a highly paid, industrious bevy of professional enablers in the private banking, legal, accounting and investment industries taking advantage of the increasingly borderless, frictionless global economy". According to Henry's research, the top 10 private banks, which include UBS and Credit Suisse in Switzerland, as well as the US investment bank Goldman Sachs, managed more than £4tn in 2010, a sharp rise from £1.5tn five years earlier.

Wealth doesn't trickle down – it just floods offshore, research reveals  - A far-reaching new study suggests a staggering $21tn in assets has been lost to global tax havens. If taxed, that could have been enough to put parts of Africa back on its feet – and even solve the euro crisis. The world's super-rich have taken advantage of lax tax rules to siphon off at least $21 trillion, and possibly as much as $32tn, from their home countries and hide it abroad – a sum larger than the entire American economy.James Henry, a former chief economist at consultancy McKinsey and an expert on tax havens, has conducted groundbreaking new research for the Tax Justice Network campaign group – sifting through data from the Bank for International Settlements (BIS), the International Monetary Fund (IMF) and private sector analysts to construct an alarming picture that shows capital flooding out of countries across the world and disappearing into the cracks in the financial system.

New Estimate of Offshore Wealth Shows Big Increase Since 2004 - A new report by the Tax Justice Network, "The Price of Offshore Revisited," shows that the amount of wealth held in tax havens has increased enormously since 2004, and confirms what I previously wrote about the huge cost to tax coffers of money hidden offshore.  The report was authored by the former Chief Economist of McKinsey and Company, James Henry. Its findings advance our understanding of tax havens and demonstrate that typical estimates of wealth inequality are significantly understated. The major finding is that offshore financial holdings now come to some $21-32 trillion, compared with the estimate in TJN's 2005 report of $9.5 trillion (this excludes non-financial wealth, such as real estate). James makes a very conservative estimate of how much governments lose in taxes of $189 billion a year, based on earning just 3% on this $21 trillion, taxed at 30%. How conservative? This is actually less than the $255 billion annually estimated in the first TJN report, but that is based on earning 7.5% annually on offshore wealth. We can get an idea of how conservative this estimate of lost taxes by seeing how sensitive it is to changing the rate of return and wealth estimate used:

The Real Problem With Offshore Tax Havens - Offshore tax havens are a hot topic these days – due in no small part to the Obama campaign’s attacks on Mitt Romney’s foreign holdings. But beyond that, governments across the globe are hard up for cash, as the global economic slump has eaten into tax revenues, and they would like nothing more than to get their hands on all that offshore wealth. So when the left-leaning Tax Justice Network issued a report this week which estimated that somewhere between $21 to $32 trillion in wealth is unreported and shielded from taxation from various governments, and argued that this money could be used to shore up balances of debt-ridden sovereigns, people took notice. The study is one of the most comprehensive to date, using data from the World Bank, United Nations, International Monetary Fund and central banks around the world to measure how much wealth is sheltered from the taxman globally. That the global elite are using whatever means at their disposal to hide their money from governments isn’t exactly surprising. But the term “offshore” — which brings to many minds sun-drenched islands ruled by corrupt governments in cahoots with felonious plutocrats — is misleading, according to the report. In fact, efforts by developed nation governments to crack down on efforts to impede their own tax collections have forced many governments, like the Swiss, to move away from their traditional banking protections that allow foreigners to evade taxation.

Big US Banks Have Gained Market Share in the Looter Assistance Business - As I noted earlier, the Tax Justice Network just released a study showing that there is somewhere between $21 and 32$ Trillion that tax cheats have hidden in tax havens. Really obscenely rich people like Mitt Romney make up for $9.8 trillion of that–or about 18% of the total liquid net worth in the world, hidden away in tax havens. But there are two other tables from the study that bear notice. The study suggests that the money stashed in tax havens has been growing steadily at a rate of 16% a year. Our analysis finds that at the end of 2010 the Top 50 private banks alone collectively managed more than $12.1 trillion in cross-­‐border invested assets for private clients, including their trusts and foundations. This is up from $5.4 trillion in 2005, representing an average annual growth rate of more than 16%. But that’s sort of misleading. As the table above makes clear, the amount in tax havens grew by 67% between 2002 and 2004, then grew by 40% in the following two years, then by another 23% in the last year of the bubble. Then it crashed, basically losing that 23% and plateauing for a year. And then it started growing again, 18% between 2009 and 2010. And who knows how much in the last year?

1% hide $21 trillion, US big banks hide $10 trillion; ending world poverty: $3 trillion - Using data from the BIS, IMF, World Bank, and governments, former Chief Economist at McKinsey, James Henry, reports the 1% have deposited $21 trillion to $32 trillion in tax havens to evade taxes. Related, the Federal Reserve reports the US top seven banks have over $10 trillion in assets recorded in over 14,000 created “subsidiaries” to avoid taxes. The 1% hide more than total annual economic output of the US and Japan combined. This is also 7 to 32 times the $1 to $3 trillion estimated to end global poverty (here, here). Importantly, the 1% in US government have reneged on their promise to end poverty since the 1990 World Summit for Children, and even reject full support of microcredit to end poverty while earning a profit. Global poverty kills a million children every month. Since the seven US banks created the last 10,000 of their tax haven subsidiaries since 1991, more human beings have died from preventable poverty than from all wars, murders, and violent deaths of any kind in all human history. As you may know, ending poverty reduces population growth rate in every historical case. To understand the 1%, please read the last two paragraphs again, and then consider the “emperor has no clothes” obvious unlawful wars and full spectrum of economic parasitism. This is what Occupy is helping the 99% recognize.

Lobbying Works! Big Spenders Reap Big Stock Gains Says Trennert  - "Follow the money," the simple but famous instruction whispered to Washington Post reporter Bob Woodward by his "Deep Throat" source, was enough to crack the Watergate scandal. Today, 40 years later, those very same words appear to have blown the lid off of another political outrage in our nation's capital: the corrupting influence of money in politics. While this financial connection, in and of itself, is hardly a great revelation, new analysis from Strategas Research Partners shows irrefutable evidence that companies are getting a real bang for their buck on the money they spend trying to influence lawmakers. By tracking the 50 companies that spend the most money — as a percentage of their total assets — on lobbying, the so-called Lobbying Index proves it's a darn good investment. How good? The Lobbying Index has now beaten the S&P 500 for 12 years in a row. "It's almost in the statistically hard-to-believe category," says Jason Trennert, Managing Partner at Strategas Research Partners, of the benchmark's unbeaten string. "Remarkably, it seems to work. The companies that spend more, tend to outperform," he surmises in the attached video.

Former TARP Official: Both Parties are Captive to the Big Banks - While the current presidential race has predictably devolved into a series food fights over tax returns and awkward speech wordings, the nation’s economy limps weakly along. In addition, the causes of the 2008 financial crisis still remain a dormant threat to the global economy — a point that neither candidate seems interested in addressing. Enter Neil Barofsky, the former Special Investigator General for TARP, the $700 billion bailout fund launched in 2008 in order to stabilize the nation’s financial system and broader economy. Barofsky is out today with a new book Bailout, which he hopes will refocus the national debate towards how little has changed on Wall Street since the shenanigans of too-big-to-fail firms nearly brought down the global economy. Bailout is an engaging account of the Washington turf wars and power plays that occurred as the Bush and Obama Administrations tried to revive the nation’s economy in the wake of the financial panic of 2008. Barofsky, an Obama-campaign-contributing Democrat, was plucked from a position in the U.S. Attorney’s office in New York City to oversee the government’s $700 billion TARP fund. But when Barofsky got to Washington, he found the Treasury Departments of both the Bush and Obama administration to be populated with those who either share Wall Street’s view that the broader economy is wholly dependent on the thriving of large, multinational banks, or regulators too concerned with their own career prospects to challenge that view. And at every turn, as Barofsky tried to impose more transparency and accountability on banks receiving TARP funds, he found himself met with resistance — most doggedly from Obama Administration Treasury head Timothy Geithner.

Reinventing Crony Capitalism: the Context of Geithner’s Obscene Rant against Barofsky - William K. Black -  Neil Barofsky, the former Special Inspector General for the Troubled Asset Relief Program (TARP) (SIGTARP), was one of the officials that made one proud of America.  Naturally, Treasury Secretary Timothy Geithner detested him.  Barofsky discusses Geithner’s antipathy for him in a newly published book: “Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street.”  The juicy parts that have been discussed in the media involve Geithner’s epic “f” word rant against Barofsky in fall 2009 in response to Barofsky’s recommendations for greater transparency about TARP. http://www.huffingtonpost.com/2012/07/19/timothy-geithner-neil-barofsky-tarp_n_1686047.html?utm_hp_ref=tw#slide=1248278 The Huffington Post article quotes from the book’s description of the meeting: “As we parried back and forth, Geithner repeatedly reached a pitch of anger, regaling me with detailed expletive-filled explanations that established my apparent idiocy. He would then calm himself down and give me a forced, almost demonic smile.” My column, however, expands on the article’s last paragraph: “[T]he more-damning allegations of the book [are] that Geithner’s Treasury Department repeatedly tried to undermine Barofsky’s authority, ignoring his warnings about the risk of fraud in TARP programs and generally carrying water for the banking industry.”

Barofsky On Geithner: "We Should See People In Handcuffs" - There is no point in recapping the ongoing vendetta between former SIGTARP Neil Barofsky and former head of the NY Fed, and current Treasury secretary and resident TurboTax expert Tim Geithner. One need but follow the former on Twitter for a quick and concise sampling of the sentiments harbored vis-a-vis the latter. However, in the following interview Barfosky does touch on some points which in the context of the recent Liborgate, should be brought front and center, especially since the increasingly apathetic US audience seems to not care about one bit (as opposed to their distant cousins across the Atlantic for whom Lieborgate has become a daily distraction). Namely, what Barofsky says is that Geithner and other regulators who allowed Lieborgate to proceed should not only lose their job but we should "see [Geithner] in handcuffs."  Sadly that will never happen as it would actually be a deterrent to future crime among the highest echelons of America: something which is just not allowed to happen in a system whose very survival is increasingly reliant on rampant criminality.

Crony Capitalism in the USA - Click on the infographic to experience US crony capitalism in full-size glory...

NYT’s Jackie Calmes’ “Grossly Inaccurate” Hit Piece on Neil Barofsky - It isn’t surprising that the knives are out. Former Special Inspector General of the TARP Neil Barofsky’s new book Bailout depicts the Treasury, where his effort was housed, as completely, hopelessly in thrall to the banks. While Hank Paulson at least seemed genuinely to appreciate the need for procedures and checks to protect taxpayers’ interests, Geithner chafed at any interference in catering to every whim of the financial services industry and used every bureaucratic trick at his disposal to undermine Barofsky. Although Barofsky’s book has generally gotten very positive reviews, including one from the New York Times’ Gretchen Morgenson last weekend, a rearguard action by Friends of the Administration was inevitable. And it has come in the form of a book review by a Washington reporter for the Grey Lady, one Jackie Calmes.  Reader e-mails criticizing particular articles are infrequent. Ex Adam Davidson at his worst, I can’t recall a previous time when I’ve had more than one reader complain about a specific piece. But the Calmes review led two readers (both pretty reasonable regulars) to object to what both called a “hit piece”. From Robert S: You simply must check out Jackie Calmes’ hit piece on Neil Barofsky, which is masquerading as a review of his new book, on page C1 of Wednesday’s NY Times. Here’s the link. What a load of “in-the-tank” crap it is! I NEVER send LTE’s [Letters to the Editor] to the NY Times, but tonight I did just that.

Dodd-Frank: Fossil of the Future? - There’s a sad truth about the fate of financial regulation: It’s almost certain to be outmoded by the time it’s introduced. This was as true of Glass-Steagall in 1933 as it is of Dodd-Frank today. This month we begin the third year since the Dodd-Frank Wall Street reform act passed, with the struggle over its shape ongoing. It’s a still-unmolded toddler, and already on the fast track to fossilization. Does the most ambitious finance legislation in decades carry the DNA to successfully cope with the next crisis? In a word, no. The take-away from this challenge doesn’t have to be cynicism, inaction, or laissez-faire tirades. To be ready for the next shock rather than the last one, though, we need to reset our thinking. Dodd-Frank is based on the idea that financial markets are normally stable, with the exception of the occasional alarming “event.” The New Deal’s Glass-Steagall Act and the Clinton-era Gramm-Leach-Bliley “Modernization” shared those assumptions. All of these efforts were conceived as system-wide overhauls. In reality, though, they were designed only to remedy random, ad hoc crises; shocks like the 2008 meltdown, sometimes called “Minsky Moments.”

Big Risk: $1.2 Quadrillion Derivatives Market Dwarfs World GDP - One of the biggest risks to the world's financial health is the $1.2 quadrillion derivatives market. It's complex, it's unregulated, and it ought to be of concern to world leaders that its notional value is 20 times the size of the world economy. But traders rule the roost -- and as much as risk managers and regulators might want to limit that risk, they lack the power or knowledge to do so. A quadrillion is a big number: 1,000 times a trillion. Yet according to one of the world's leading derivatives experts, Paul Wilmott, who holds a doctorate in applied mathematics from Oxford University (and whose speaking voice sounds eerily like John Lennon's), $1.2 quadrillion is the so-called notional value of the worldwide derivatives market. To put that in perspective, the world's annual gross domestic product is between $50 trillion and $60 trillion.How big is the risk to the world economy from these derivatives? According to Wilmott, it's impossible to know unless you understand the details of the derivatives contracts. But since they're unregulated and likely to remain so, it is hard to gauge the risk. But Wilmott gives an example of an over-the-counter "customized" derivative that could be very risky indeed, and could also put its practitioners in a position of what he called "moral hazard."

Former rating agency worker: 'I am genuinely frightened' - "Every time I read about a new financial product, I think: 'Uh-oh.' Every new product is described in those same warm, fuzzy phrases: how great they are and how safe. Well, that's how credit default swaps and asset-backed securities were explained when banks were introducing these."I still get so angry when I think about it. Taking a job at a rating agency seemed a perfect match: drawing a good salary while providing a service of genuine value for society. We need ratings to work out how safe a company or an investment bond is, what the risk of default might be. If you can't trust it, you shouldn't do business with it – it's that simple. "The reality was very different. What's making me even angrier is that we don't seem to have learned from the crisis. It's back to business as usual. I am no longer with a rating agency, and when I ask former colleagues what lessons they've taken away from the 2008 debacle, they give me a blank stare and say: 'That wasn't us, that was Moody's and Standard & Poor's.' But we just lucked out: our methods were similar. "Moody's and S&P are the two major credit rating agencies in the world. Between them, they control 80% of the market and they are large, rich and powerful. Then there's Fitch, desperately trying to get the training wheels off and grow. Finally, there are specialised smaller agencies, one of which I was working for.

Fed Official Wants Tougher Volcker Rule - A top Federal Reserve official sharpened her public criticism of a draft measure restricting banks' ability to trade with their own money, arguing in a speech Monday that regulators should draw the exemptions to the rule more narrowly. In remarks prepared for a speech in Colorado, Fed governor Sarah Bloom Raskin argued for a stronger version of the so-called Volcker rule that would be more difficult for banks to work around. The rule, which is required by the 2010 Dodd-Frank financial overhaul, provides exemptions to banks for market-making, or buying and selling assets on behalf of others, as well as hedging activities. Ms. Raskin stressed that those exemptions are only allowed if those activities also "do not threaten the soundness of the bank or the stability of the financial system as a whole." Ms. Raskin said that the market-making and hedging exemptions should be extremely narrow "because of the potentially severe dangers of, and costs associated with, proprietary trading by institutions that have access to the federal safety net." She raised the possibility that the financial system would be better off if banks ceased market making and hedging as well, saying it is possible that the combined regulatory, compliance and other costs could "outweigh the benefits we as a society supposedly receive."

How Well Is Our Financial System Serving Us? - Fed governor Sarah Bloom Raskin (speech transcript)

A Fed Governor Wants Tougher Rules - Simon Johnson - A powerful new voice for financial reform emerged this week – Sarah Bloom Raskin, a governor of the Federal Reserve System. In a speech on Tuesday, she laid out a clear and compelling vision for why the financial system should focus on providing old-fashioned but essential intermediation between savers and borrowers in the nonfinancial sector. Sadly, she also explained that she is a dissenting voice within the Board of Governors on an essential piece of financial reform, the Volcker Rule. Her colleagues, according to Ms. Raskin, supported a proposed rule that is weaker, i.e., more favorable to the banks; she voted against it in October. At least on this dimension, financial reform is not fully on track. Two years after the passage of the landmark Dodd-Frank financial reform legislation, you might imagine that the crucial detailed regulations would already be in place. But, not so, at least with regard to the Volcker Rule, which is intended to limit the ability of big banks to make large “proprietary” bets. (Proprietary trading is jargon for speculation – betting on asset prices going up and down.)

Can Financial Regulation Be Fixed? - The tragicomic events of the past few months—the London Whale (what are we up to now, $6 billion), Barclays-Libor, HSBC laundering money have prompted renewed interest in better, stronger regulation of the financial sector. Not that it’s going to go anywhere: it’s an election year, the Republicans have a blocking majority in the House and a blocking minority in the Senate, and they are only going to gain Senate seats in November. But we’ve been here before. Remember the financial crisis? The Obama administration’s response, codified in the Dodd-Frank Act, could be summed up as “better, stronger regulation”—instead of substantive changes to the industry itself. This misses the basic problem with our regulatory structure, as described by John Kay: “Regulation that is at once extensive and intrusive, yet ineffective and largely captured by financial sector interests. “Such capture is sometimes crudely corrupt, as in the US where politics is in thrall to Wall Street money. The European position is better described as intellectual capture. Regulators come to see the industry through the eyes of market participants rather than the end users they exist to serve, because market participants are the only source of the detailed information and expertise this type of regulation requires. This complexity has created a financial regulation industry – an army of compliance officers, regulators, consultants and advisers – with a vested interest in the regulation industry’s expansion.”

Excerpts: Geithner on Economy, Libor, Europe, Fiscal Cliff - Treasury Secretary Timothy Geithner had a wide-ranging and substantive interview airing Monday night on PBS’s Charlie Rose show. Here are some key excerpts from his interview, according to an initial transcript: “I think there’s these two clouds over us.  One is the impact of Europe on growth here and around the world and concerns about how they manage this crisis, and the second is a broader concern about whether the political institutions of the country are going to find a way to move again, to govern again, become unstuck, and do some things that are good for the economy in the short and the long run.”

Neil Barofsky vs Tim Geithner: Who's right on the bailouts?: Beneath the obvious mutual loathing between Barofsky and Tim Geithner, and the dueling teams of journalists around each man, is a relatively narrow disagreement about public policy. Unfortunately the nature of the dispute between the two teams' media proxies—see, e.g., Jackie Calmes for Team Tim and Gretchen Morgenson for Team Neil, both in the New York Times—tends to obscure what the actual disagreement is about, [T]he Treasury Department has been trying to create the kind of healthy well-capitalized banking system that's crucial… [and] trying to create the kind of well-regulated banking system that's less likely to blow up in the future. What does Barofsky think they're doing?… He agrees, for example, that Team Tim is in fact trying to better-regulate the banking system and that it's being fought in this effort by the Republican Party…. [D]oes Barofsky also agree that Team Tim is trying to create the healthy and well-capitalized banking system that's crucial for broader growth? Well only sort of: In almost every critical juncture when it came to really meaningful choices in conducting the bailout, this administration and the prior administration—there's no meaningful difference  between the two—consistently chose the interests of Wall Street banks over that of homeowners, over that of the broader economy….

Bankers Gone Wild - In order to work well, markets need a basic level of trust. As Alan Greenspan said, in 1999, “In virtually all transactions we rely on the word of those with whom we do business.” So what happens to a market in which the most fundamental assumptions turn out to be lies? That is the question in a scandal that has roiled the banking industry all summer. The LIBOR (London Inter-bank Offered Rate) index is the most important set of numbers in the global financial system. Used as a benchmark for interest rates around the world, it’s assembled by asking a panel of big banks to estimate what it would cost them to borrow money today, if they had to. Hundreds of trillions of dollars in derivatives, corporate loans, and mortgages are pegged to these rates. Yet we now know that for years LIBOR rates were rigged. Barclays has agreed to pay nearly half a billion dollars to regulators for its manipulations, and a host of other big banks are under investigation for similar misdeeds. Rigging LIBOR was shockingly easy. The estimates aren’t audited. They’re not compared with market prices. And LIBOR is put together by a trade group, without any real supervision from government regulators. In other words, manipulating LIBOR didn’t require any complicated financial hoodoo. The banks just had to tell some simple lies.

Bill Black on LIBOR and the NY Fed - Via New Economic Perspectives is this video from Bill Black:

Appearance on Air Occupy radio 7/24/12  - Air Occupy Show 16 Bankstas and Financial Frauds with Prof. Bill Black

Congress Presses New York Fed for More Details on Rate-Rigging Scandal - Congress widened its inquiry into the interest-rate manipulation scandal, pressing the Federal Reserve Bank of New York to further disclose its knowledge of the multiyear scheme. On Monday, the oversight panel of the House Financial Services Committee sent a letter to the New York Fed seeking volumes of records about the London interbank offer rate, or Libor, a measure of how much banks charge each other for loans. Lawmakers are demanding that the New York Fed detail its communications with employees from all 16 banks that help set the interest rate, which affects the trillions of dollars in mortgages and other loans. The letter follows an Congressional request that the New York Fed turn over transcripts from phone calls its officials had with just one bank: Barclays.

Geithner: ‘We don’t know’ about U.S. banks’ role in Libor-fixing scandal -Treasury Secretary Timothy Geithner on Thursday said he did not know whether three major US banks were involved in the manipulation of a key benchmark borrowing rate. Answering Senate Banking Committee questions about Bank of America, Citibank and JP Morgan Chase’s possible roles in the global Libor fixing scandal, Geithner referred lawmakers to investigators. Asked whether he was aware of possible wrongdoing, Geithner said: “We don’t know that. But I think that is a question you need to refer to the enforcement agencies.”

House Committee Rakes Geithner Over the Coals About Libor - Tim Geithner is testifying before the House Financial Services Committee on a number of issues today. It looked like he would skate by without questions on the Libor scandal until Scott Garrett, an unlikely source, tore into him: Garrett’s anger was different. Why? Because he was most upset that Geithner had four years, and meeting after meeting, to bring the LIBOR issue to Congress’ attention and it just wasn’t done. “You keep saying… we’re just like investors. Well you’re not! You’re the Secretary of the Treasury of the United States. You have the authority to do something about this.” Geithner said that he briefed the broader regulatory community about the problem — which only made Garrett more angry. “There’s always so much finger-pointing by regulators after the fact,” he said. Then he jumped on Geithner for not informing the Justice Department “simply because they weren’t at the table.” Jeb Hensarling added that Geithner treated the Libor scandal like it was a jaywalking ticket instead of robbery. Barney Frank operated as Geithner’s lawyer through all of this, saying that the 2008-era financial regulators were all Bush appointees. But that’s not the point; none of those regulators had access to documentary evidence of the commission of fraud

Geithner on Financial Crimes: The Dog Ate My Homework - If I rob a federally insured bank and make off with $20,000, I'm facing years of federal prison time. If I defraud federal insurance programs, be they FHA or Medicaid, I'm also facing years of prison. If I engage in insider trading, I could also be looking at prison time (although that's pretty rare). But if I rig the most widely used interest rate index in the world, a leading bank regulator doesn't think that the Department of Justice needs to be notified because they're not part of the regulatory working group focused on LIBOR. That was Timothy Geithner's explanation today as to why he didn't notify the DOJ when he learned of Barclay's LIBOR fraud. For real? What's next?  The dog ate my homework?  It all leaves me scratching my head. The harm from the LIBOR rigging is massively greater than any of the other financial crimes for which we send people to prison. Why wouldn't the then head of the NY Federal Reserve Bank think that this was potentially a criminal matter? The "not part of the working group" is just about the lamest excuse I can think of. I don't normally talk to the police, but I call them if I think there's a crime in progress.

Mitt Romney's Bankster Ball - Mitt Romney will show his true colors tonight, when he slips behind closed doors in a foreign capital to collect money from international bankers who are mired in scandal. The presidential contender is officially in London to cheer on the US team in the Olympics. But Romney doesn’t always cheer for Team USA. When it comes to global economics, Romney remains very much the “vulture capitalist” his Republican primary foes decried. And tonight, he’ll be swooping into central London to party with masters of the universe who know no country—and, it would appear, no ethical bounds.London is abuzz over the Libor (London InterBank Offered Rate) scandal, which saw some of the biggest banks in the world report false interest rates in order to fool investors and game the international economy. Bob Diamond, the top man in Barclays Bank, had to resign from his position after that bank paid almost $500 million in fines. Diamond also resigned as the co-chair of Mitt Romney’s $75,000-a-person fundraising event in London tonight. Not to worry. Another Barclay’s insider (chief lobbyist Patrick Durkin) took Diamond’s place as a co-chair for the Romney event, along with officials of Bank of Credit Suisse, Deutsche Bank, HSBC, Goldman Sachs, Blackstone and Wells Fargo Securities—and, of course, Bain Capital Europe.

Satyajit Das: The LIBOR Fix – Part 1 - The scandal surrounding the manipulation of LIBOR sets raises a number of issues. In the first part of the two part piece, the known facts are outlined. In the second part, the broader implications of the episode are discussed. Fix…Depending on context, the word “fix” can mean “set” or “determine”, “manipulate” or “rig” as well as “repair” or “correct”. “In a fix” means to be in difficulty. In colloquial use, “fix” is a dose of an addictive substance that is habitually consumed. The current furore surrounding manipulation of money market rates contains all these meanings and more.An objective mechanism is needed to set money markets rates used in a variety of instruments. A number of traders at leading banks submitted false rates seeking to manipulate the outcome. Banks are in a fix. If the current arrangements are unsatisfactory then it will be necessary to repair the mechanism. In a Fix…In June 2012, UK and American authorities fined UK’s Barclays Banks £290 million (US$450 million) for manipulating key money market benchmark rates, such as the London Interbank Offered Rate (“LIBOR”) and Euro Interbank Offered rates (“EuroIBOR”).The settlement follows a lengthy investigation into fixing money market rates by regulators, under way for at least 2 or more years.

Satyjit Das: The LIBOR Fix – Part II  -- Lord Turner, the head of UK FSA, told a UK parliamentary Committee that it hadn’t occurred to him before 2009 that the rate was something that could be manipulated. However, anecdotal evidence suggests that LIBOR submissions may have been manipulated over a long period. Banks and regulators may have been aware of these practices for some time but did not take corrective action. Barclays’ senior management and board of directors have indicated that became aware of the problem recently. Banks offer the same excuse as JP Morgan Junior in 1933: “Since we have not more power of knowing the future than any other men, we have made many mistakes (who has not during the past five years?), but our mistakes have been errors of judgment and not of principle.” The practice appears blatant and warnings were ignored. Canadian court documents indicate that a UBS employee contacted employees at other banks with a view to achieving a “certain movement” in Yen LIBOR. The correspondence does not attempt to hide the actions from superiors or express concern about any breach of internal or regulatory rules.

Financial Scandal Scorecard - Is it my imagination, or does every week bring news of another financial scandal? No, it’s not my imagination. First up: Peregrine Financial Group. This long-running fraud, which has apparently been going on almost as long as the Bernard Madoff Ponzi scheme, came to light when the firm’s founder and longtime chief executive, Russell Wasendorf Sr., tried to commit suicide a few weeks ago. (He failed.) Helpfully, he left a lengthy note that laid out what he had done. Peregrine, you see, is a commodities broker, and Wasendorf had been stealing the money that customers had on deposit with the firm. As you’ll no doubt recall from the very similar MF Global scandal, where $1.6 billion in supposedly segregated customer funds went missing as the firm careened toward bankruptcy,  Next up: HSBC. Who knew that the British bank was the favored institution of money launderers everywhere? Perhaps because we’re bank-scandaled out, this story hasn’t gotten the attention it truly deserves. Unlike, say, the JPMorgan Chase “London whale” scandal — in which the bank’s traders simply made a big, dumb bet — what HSBC did amounts to serious wrongdoing. Let’s now turn to “Liborgate,” where the plot continues to thicken. When last we left this scandal, Barclays had agreed to pay $450 million in fines, and a handful of top officials, including its chief executive, Bob Diamond Jr., had lost their jobs because the bank had been manipulating the London interbank offered rate, a key benchmark for all kinds of loans and derivative transactions. In recent days, however, the story has begun to revolve more and more around ... hmmm ... the regulators.

Randy Wray: Why We’re Screwed  - As the Global Financial Crisis rumbles along in its fifth year, we read the latest revelations of bankster fraud, the LIBOR scandal. This follows the muni bond fixing scam detailed a couple of weeks ago, as well as the J.P. Morgan trading fiasco and the Corzine-MF Global collapse and any number of other scandals in recent months. In every case it was traders run amuck, fixing “markets” to make an easy buck at someone’s expense. In times like these, I always recall Robert Sherrill’s 1990 statement about the S&L crisis that “thievery is what unregulated capitalism is all about.” After 1990 we removed what was left of financial regulations following the flurry of deregulation of the early 1980s that had freed the thrifts so that they could self-destruct. And we are shocked, SHOCKED!, that thieves took over the financial system. Nay, they took over the whole economy and the political system lock, stock, and barrel. They didn’t just blow up finance, they oversaw the swiftest transfer of wealth to the very top the world has ever seen. They screwed workers out of their jobs, they screwed homeowners out of their houses, they screwed retirees out of their pensions, and they screwed municipalities out of their revenues and assets. Financiers are forcing schools, parks, pools, fire departments, senior citizen centers, and libraries to shut down. They are forcing national governments to auction off their cultural heritage to the highest bidder. Everything must go in firesales at prices rigged by twenty-something traders at the biggest and most corrupt institutions the world has ever known.And since they’ve bought the politicians, the policy-makers, and the courts, no one will stop it. Few will even discuss it, since most university administrations have similarly been bought off—in many cases, the universities are even headed by corporate “leaders”–and their professors are on Wall Street’s payrolls.

Europe to Put Interest Rate Fixers in Jail - Yves Smith - Prospectively only, it seems. But we see “criminal” and “banking” in the same sentence so rarely in official circles that this is a welcome development. We’ve pointed out in the past that the Eurozone has been much more willing to talk and even occasionally get tough with bankers. They’ve been more serious about considering transaction taxes and imposed tough rules on private equity funds (most important being limits on leverage, so they will leave fewer bankrupt carcasses in their wake).  From the Independent: The European Commission is set to make interest rate-rigging a criminal act in the wake of the Libor scandal. In amendments to the Market Abuse Directive to be announced on Wednesday, it is expected that the Commission President, Jose Manuel Barroso, and financial services commissioner, Michel Barnier, will ensure that anyone caught rate-rigging will be jailed. There has been frustration that the UK’s Financial Services Authority and the Serious Fraud Office have appeared toothless over the Libor manipulation, which helped Barclays traders hide losses and improve their financial positions.

EXCLUSIVE- Prosecutors, regulators close to making Libor arrests (Reuters) - U.S. prosecutors and European regulators are close to arresting individual traders and charging them with colluding to manipulate global benchmark interest rates, according to people familiar with a sweeping investigation into the rigging scandal. Federal prosecutors in Washington, D.C., have recently contacted lawyers representing some of the suspects to notify them that criminal charges and arrests could be imminent, said two of those sources, who asked not to be identified because the investigation is ongoing. Defense lawyers, some of whom represent suspects, said prosecutors have indicated they plan to begin making arrests and filing criminal charges in the next few weeks. In long-running financial investigations it is not uncommon for prosecutors to contact defense lawyers before filing charges to offer suspects a chance to cooperate or take a plea, these lawyers said. The prospect of charges and arrests means prosecutors are getting a fuller picture of how traders at major banks allegedly sought to influence the London Interbank Offered Rate, or Libor, and other global rates that underpin hundreds of trillions of dollars in assets. The criminal charges would come alongside efforts by regulators to fine major banks, and could show that the alleged activity was not rampant at the lenders.

Lieborgate: Here Come The Arrests - For over four years, virtually everyone in the finance industry knew that Libor was manipulated. The stench of manipulation rose to the very top and thanks to a document release of formerly confidential information, we now know for a fact that even the Fed was in on it - recall that as part of production, the Fed provided a transcript of an April 2008 phone call between a Barclays trader in New York and Fed official Fabiola Ravazzolo, in which the unidentified trader said: "So, we know that we're not posting um, an honest LIBOR." And yet without any tangible, black on white evidence, there was no catalyst for pursuing legal action. That all changed when in a desperate attempt to protect its ass, Barclays decided to rat out everyone by settling with regulators, and "turn state" producing e-mail based evidence, most of it quite visual (after all what is more tangible to the common man that evil bankers sipping on Bollinger), which essentially threw years of quiet cartel cooperation under the bus. As a result, regulators, enforcers, and legal authorities, many of whom were in on this manipulation from the beginning, no longer had an excuse to not pursue civil and criminal charges against perpetrators, who until recently were footing the tabs at various gentlemen's venues and ultra expensive restaurants. And while the imminent waterfall of civil prosecution will force bank litigation reserves to go through the roof, here comes, with a very long delay, the criminal charges. As Reuters reports, here come the arrests.

Trust in Financial System Falls Back to 2009 Levels - Americans’ trust in the financial system dropped in June to the lowest point since the financial crisis, driven by waning faith in national banks. And that’s before the Libor scandal drew widespread attention in recent weeks. Just 21% of Americans trust the financial system, the fewest since March 2009, according to the latest quarterly measure by the Chicago Booth/Kellogg School Financial Trust Index released Tuesday. The worsening was driven largely by a drop in trust of national banks, which fell two percentage points to 23%. Trust in local banks rose four percentage points to 55%, while trust in credit unions increased five percentage points to 63%.

Is Banking Unusually Corrupt? - Financial intermediation was formerly dominated by commercial banks that borrowed short term and lent long term to local and sometimes national businesses. In those days, banking leaders denoted solid, respectable, if not very imaginative, individuals who were the pillars of society. Commercial banks are still important, but modern financial intermediation is dominated by investment banks, mutual funds, and hedge funds that often invest large sums of money in equities, derivatives, and other mainly risky assets, including junk bonds. Has this change in the nature of modern banking changed also the type of individuals who enter banking toward those who are more likely to be more corrupt and of lower character than the traditional banker? An April 2010 study in The Daily Beast, in partnership with the think tank Transparency International, listed the 17 most corrupt industries. Wall Street/ Securities was in fact number 2, but number 1 was Utilities, and numbers 3-5 were Telecommunications, Construction, and the Media. Traditional banking was among the remaining industries that were mainly other heavily regulated industries, such as mining, insurance, oil and gas, and pharmaceuticals. It is not clear how much weight to give to this and similar studies, but I believe two factors do encourage somewhat more corrupt individuals to enter modern banking.

Is Banking Unusually Corrupt, and If So, Why? - One has the impression—no more than that, but it is difficult even to imagine what “evidence” is obtainable that could confirm or refute the impression—that imprudent, unethical, unlawful, and downright criminal behavior is more common in large financial institutions (“banks,” as defined in the next paragraph) than in other, and otherwise comparable, business firms. Much of this behavior occurred during the housing and related credit bubbles of the 2000s and was discovered in the wake of the financial collapse of September 2008, yet much seems to have taken place afterward as well, continuing up to the present with the Libor scandal.  If the impression is correct, what might account for it? I think the answer lies in the nature of banking, understood broadly as financial intermediation: if A has money he’d like to save and B needs money, then rather than A lending directly to B A might lend to C to lend to B, because C—a bank—is a specialist in assessing creditworthiness. To finance its operations C will need to borrow from A at a lower interest rate than the rate it charges B for a loan. It can minimize the interest rate it pays A by borrowing short term (the shortest-term borrowing being a demand deposit). The bank’s business model is thus a risky one.

Numerous Top Bankers Call for Break Up of Giant Banks - The following bankers are calling for the big banks to be broken up:

• Former Citi CEO Sandy Weill
• Former Citi CEO John Reed
• Former Citi chairman Richard Parsons
• Former Merrill Lynch chairman and CEO David Komansky
• Former Morgan Stanley CEO Philip Purcell
• Former managing director of Goldman Sachs – and head of the international analytics group at Bear Stearns in London- Nomi Prins
• Numerous other bankers within the mega-banks (see this, for example)
• Former Natwest and Schroders investment banker, Philip Augar
• The President of the Independent Community Bankers of America, Camden Fine

Insight: Banks bristle at breakup call from Sandy Weill (Reuters) - Sandy Weill has a lot of convincing to do. The former Citigroup Inc CEO, who was in many ways the architect of the "too big to fail" giant bank system, dropped a bombshell on Wall Street on Wednesday by proposing that universal banks should be broken up because they are too big and complex to manage. But the idea is hardly resonating with top bankers and dealmakers of the past 20 years. "I don't buy it," said William Harrison, who was succeeded by Jamie Dimon as chairman and CEO of JPMorgan Chase & Co. "It gets back to management and risk-taking, and you can screw that up at a small bank or a large bank." Harrison, a Weill contemporary who was instrumental in building JPMorgan into the largest U.S. bank, said in an interview on Thursday that he would hate to see the anger toward bankers lead to a breakup of big banks and the efficiencies they bring to the U.S. financial system. Other Wall Street sources said the idea is also not new.

David Stockman: "The Capital Markets Are Simply A Branch Casino Of The Central Bank" -A selected excerpt by David Stockman from his just released interview with Alex Daley of Casey Research: This market isn't real. The two percent on the ten-year, the ninety basis points on the five-year, thirty basis points on a one-year – those are medicated, pegged rates created by the Fed and which fast-money traders trade against as long as they are confident the Fed can keep the whole market rigged. Nobody in their right mind wants to own the ten-year bond at a two percent interest rate. But they're doing it because they can borrow overnight money for free, ten basis points, put it on repo, collect 190 basis points a spread, and laugh all the way to the bank. And they will keep laughing all the way to the bank on Wall Street until they lose confidence in the Fed's ability to keep the yield curve pegged where it is today. If the bond ever starts falling in price, they unwind the carry trade. Then you get a message, "Do not pass go." Sell your bonds, unwind your overnight debt, your repo positions. And the system then begins to contract... The Fed has destroyed the money market. It has destroyed the capital markets. They have something that you can see on the screen called an "interest rate." That isn't a market price of money or a market price of five-year debt capital. That is an administered price that the Fed has set and that every trader watches by the minute to make sure that he's still in a positive spread. And you can't have capitalism if the capital markets are dead, if the capital markets are simply a branch office – branch casino – of the central bank. That's essentially what we have today.

Pigs Are Flying on Wall Street — Can Glass-Steagall Be Far Behind - It has only taken twelve years of unending Wall Street scandals and scoundrels, the greatest financial collapse since the Great Depression, a wrecked national economy, 46 million fellow Americans living below the poverty level – including one in every five children — but, finally, the pigs are flying over Wall Street. Yes, the unthinkable has happened. The New York Times has admitted it was wrong about repealing the Glass-Steagall Act while Sandy Weill calls for taking a wrecking ball to the big banks. In an editorial published in the print edition of the New York Times yesterday, “The Big Banker’s Change of Heart,” the paper of record at last fessed up to its role in America’s nightmare decade. The editorial page editors wrote: “While we are on this subject, add The New York Times editorial page to the list of the converted. We forcefully advocated the repeal of the Glass-Steagall Act. ‘Few economic historians now find the logic behind Glass-Steagall persuasive,’ one editorial said in 1988. Another, in 1990, said that the notion that ‘banks and stocks were a dangerous mixture’ ‘makes little sense now.’ “That year, we also said that the Glass-Steagall Act was one of two laws that ‘stifle commercial banks.’ The other was the McFadden-Douglas Act, which prevented banks from opening branches across the nation. “Having seen the results of this sweeping deregulation, we now think we were wrong to have supported it.”

Chris Dodd: Breaking Up Banks ‘Too Simplistic’ - Former Sen. Chris Dodd, a lead architect of the financial overhaul that bears his name, says Sanford Weill is wrong about breaking up the nation’s big banks. The idea that “breaking up these institutions is going to solve the problem, I think it’s frankly too simplistic an approach,” Dodd said in an interview Thursday morning on CNBC. The threat posed by a firm has to do with their product lines they’re involved in and how much risk they’re assuming, not just their size, he said. Mr. Dodd said it’s possible that “in certain circumstances” financial firms should be broken up, but that the Dodd-Frank law empowers regulators to take “that Draconian step” if they determine a company poses enough of a threat to the financial system. The law “provides the authority to do just what he’s talking about, if, in fact, there’s systemic risk posed by a financial institution. You can break them up,” said Dodd. Under the law, the Fed and the FDIC together can decide that a mega-bank or other financial firm that’s been designated as a potential risk to the financial system should be broken up — but only after several years of working with the firm to map out how they could be dismantled in a crisis without shocking the economy.

Banks That Are Too Big to Regulate Should Be Nationalized - THE Barclays interest-rate scandal, HSBC’s openness to money laundering by Mexican drug traffickers, the epic blunders at JPMorgan Chase — at this point, four years after Wall Street wrecked the global economy, does anyone really believe we can regulate the big banks? And if we broke them up, would they really stay broken up? Most liberals in Washington — President Obama included — keep hoping the banks can be more tightly controlled but otherwise left as is. That’s the theory behind the two-year-old Dodd-Frank law, which Republicans and Wall Street are still working to eviscerate. Some economists in and around the University of Chicago, who founded the modern conservative tradition, had a surprisingly different take: When it comes to the really big fish in the economic pond, some felt, the only way to preserve competition was to nationalize the largest ones, which defied regulation. This notion seems counterintuitive: after all, the school’s founders provided the intellectual framework for the laissez-faire turn against market regulation over the last half-century. But for them, “bigness” and competition could easily become mutually exclusive.

STUDY: 20% Of Companies Lie On Earnings Reports To Boost Stock Prices - A recent survey of 169 chief financial officers at publicly-traded companies in the U.S. reveals an interesting finding: 20 percent of the publicly-traded companies that are required by law to report earnings results on a quarterly basis are probably fudging the numbers, and almost every single one of the CFOs surveyed agrees this is the case.  Business professors Ilia Dichev and Shiva Rajgopal at Emory and John Graham at Duke published a paper detailing their findings. Here are a few bullets from the introduction:

• "CFOs estimate that in any given period, roughly 20% of firms misrepresent their economic performance by managing earnings."
• "For such firms, the typical misrepresentation is about 10% of reported EPS."
• "A large majority of CFOs feel that earnings misrepresentation occurs most often in an attempt to influence stock price, because of outside and inside pressure to hit earnings benchmarks, and to avoid adverse compensation and career consequences for senior executives."

"Oil Price Spike Exacerbated by Wall Street Speculation?" - The question of how much speculative pressures contributed to the surge in the real price of oil between 2003 and mid-2008 continues to be hotly debated in policy circles. A common view among policy makers is that excessive speculation driven by the financialization of oil futures markets played a key role in causing oil prices to peak at unprecedented levels in mid-2008. This interpretation has been driving recent policy efforts to tighten the regulation of oil derivatives markets in the U.S. as well as abroad. In sharp contrast, the academic literature on this subject is virtually unanimous that financial speculation played no independent role in this episode. One of the rare studies claiming some success in pinning down the effects of financial speculation has been a working paper by Luciana Juvenal and Ivan Petrella (2012) originally published by the St. Louis Fed in 2011. This study has received considerable media attention, but what does it really show and how were its surprising conclusions arrived at?

Rejoinder to "Oil Price Spike Exacerbated by Speculation?" - Disentangling the main drivers of oil prices is a critical first step for allocating resources and designing good policy. In our paper, “Speculation in the Oil Market,” we assess the roles of speculation and supply and demand forces as sources of oil price fluctuations. Our main finding is that global demand has been the primary driver of oil prices. An expanding global economy increases the demand for raw inputs, including oil, which pushes up prices. Borrowing from our abstract and conclusion our main message is:  “Our results support the view that the recent oil price increase is mainly driven by the strength of global demand but that the financialization process of commodity markets also played a role.”  “Our results highlight a major challenge faced by policymakers in the medium to long-run: Although speculation played a significant role, the high oil prices witnessed in the past decade are mainly due to demand pressures, which are likely to resurge with the recovery of the world economy.”  Our conclusions are thus in line with a large strand of the literature, including Kilian’s own contributions.

Occupy the SEC Urges the SEC to Investigate JP Morgan Over Likely (As in Bloomin’ Obvious) Sarbanes Oxley Violations #OWS - Yves Smith - We’ve written at length how the Obama Administration claim that it couldn’t prosecute bank CEOs and senior executives because they didn’t do anything illegal is utter hogwash. Sarbanes Oxley, passed in the wake of Enron, was designed to prevent CEOs and other top executives from escaping liability by claiming they were clueless face men. And it provides for a clear path to criminal prosecutions.  But the way Sarbanes Oxley was defanged is by making it an exercise in form over substance. Public firms engage in compliance theater while the SEC sits on its hands as far as enforcement is concerned (Note that the SEC did fail on its lone effort to use Sarbox against a CEO in the case of Richard Schrusy and Healthsouth. But that case was tried before a jury in Birmingham, Alabama, and I will spare readers the long form account as to why you can’t generalize from these results). Both the MF Global collapse and the JP Morgan Chief Investment Office fiasco look like slam-dunk Sarbox cases, yet we’ve seen nary a sign of interest from the SEC. Occupy the SEC has used House Financial Services Committee hearings this week on the tenth anniversary of the passage of Sarbanes Oxley to raise pointed questions as to why the SEC has not launched a probe of JP Morgan. I have a sneaking suspicion that this line of thinking won’t get any air time, and instead the Congresscritters will focus on how the nasty law inconveniences fine upstanding major corporations. I hope you’ll read their succinct and forceful letter. Occupy the SEC Letter to the House Financial Services Committee on Sarbanes Oxley

Manipulation of California energy market gives consumers a jolt - The next time your electricity bill prompts you to curse your local utility, here's another target where you should direct your anger: JPMorgan Chase & Co., which has manipulated the California energy market for its own profit and at a cost to residents and businesses in the state that could be $100 million, $200 million or much more. That's the accusation leveled by the California Independent System Operator, which has jurisdiction over 80% of the state's electrical transmission. The ISO, a nonprofit corporation controlled by the state government, estimates that JPMorgan may have gamed the state's power market for $57 million in improper payments over six months in 2010 and 2011.But that could be just the tip of the iceberg: The bank continued its activities past that time frame, according to the ISO. It also says JPMorgan's alleged manipulation could have helped throw the entire energy market out of whack, imposing what could be incalculable costs on ratepayers.

The Real Significance of Sandy Weill’s “Break Up Big Banks” Recommendation - Yves Smith - The two finance personality stories of the day were Timothy Geithner’s appearance before the House Financial Services Committee for a periodic Financial Stability Oversight Council Report, and former Citigroup CEO Sandy Weill’s unexpected conversion to the “smaller banking is better” faith. As Adam Levitin and Dave Dayen recount, Geithner reverted predictably to a combination of memory lapses and a “nothing to see here” stance on Libor (oh yeah, with the added wrinkle that if there was anything to see, it wasn’t his job to look anyhow). If any other grownup said he didn’t remember things as often as Geithner does, he’d be a candidate for an Alzheimer’s ward. But on to Weill. The former acquisition king (he and Jamie Dimon did 1100 deals) who had to get the dead in practice but still on the books Glass Steagall put down so he could consummate the Travelers-Citigroup merger, today said Glass Steagall should be brought back from the dead. He made it clear he meant a full separation of commercial and investment banking, and that commercial banks should have a leverage ratio of 12 to 15 times. The Wall Street Journal Deal Journal blog gave a good recap of the firestorm of reactions on Twitter. They fell into three camps: “Huh?” “Attaboy!” and ‘Oh, so he says that NOW?”  I hate to find myself agreeing with Charlie Gasparino (we tangled on Lehman in 2008). Per his piece in the Huffington Post (hat tip Dealbreaker): ….it’s hard to take Weill seriously. First this is a man with an ego the size of the bank he created. People who know him say he needs media attention like an alcoholic needs a stiff drink, and he’s gotten precious little of it since retiring from the banking business six years ago. Yesterday made him feel like the same old Sandy again.

New York Fed Backs Withdrawal Limit for Money Funds - Bloomberg: The Federal Reserve Bank of New York said money-market fund investors should be prohibited from withdrawing all their assets at once as a way to make the $2.5 trillion industry “safer and more fair.”  Money funds should set aside a portion of every investor’s balance as a “minimum balance at risk” that could only be withdrawn with a 30-day notice, the New York Fed’s staff said today in a report. The provision would reduce systemic risk and protect small investors who don’t pull out of a troubled fund quickly, according to the report.“The delay would ensure that redeeming investors remain partially invested in the fund long enough to share in any imminent portfolio losses or costs arising from their redemptions,” the bank said today in a statement.  The idea, opposed by the funds industry, is already part of a proposal before the U.S. Securities and Exchange Commission that would force money funds to float their share value or build capital cushions and impose withdrawal restrictions, a person familiar with the plan said last month. The agency hasn’t made the proposal public and hasn’t scheduled a meeting for commissioners to vote on it.

Too Big To Fail - Fed Proposal Allows Banks To Seize Your Money: As the financial crisis takes its toll and any number of events threaten to completely collapse an already fragile global banking system, the Federal Reserve has stepped in with a stop-gap measure to prevent liquidity from being drained out of money market funds in the event of a panic. What this means is that at exactly the moment when Americans need money, in the midst of a massive financial panic, access to funds will be limited or altogether restricted. Basically, according to the Fed, the minimum balance would make the financial system more fair, reduce systemic risk and protect smaller investors who can be left with losses if larger investors in their fund withdraw cash first. The proposal would require a “small fraction” of each fund investor’s recent balances to be segregated into a sinking fund to absorb losses if the fund is liquidated. Subsequently redemptions of these minimum balances at risk would be delayed for 30 days, “creating a disincentive to redeem if the fund is likely to have losses.” In other words: socialized losses. Where have we seen this before? But the real definition of what the Fed is suggesting is: capital controls. Once this proposal is implemented, the Fed, or some other regulator, will effectively have full control over how much money market cash is withdrawable from the system at any given moment. At $2.7 trillion in total, one can see why the Fed is suddenly concerned about this critical liquidity and capital buffer.

This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied - The Sequel - Two years ago, in January 2010, Zero Hedge wrote "This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied". The proximal catalyst back then were new proposed regulations seeking to pull one of these three core pillars from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7. A key proposal would give money market fund managers the option to "suspend redemptions to allow for the orderly liquidation of fund assets." In other words: an attempt to prevent money market runs (the same thing that crushed Lehman when the Reserve Fund broke the buck). This idea, which previously had been implicitly backed by the all important Group of 30 which is basically the shadow central planners of the world (don't believe us? check out the roster of current members), did not get too far, and was quickly forgotten. Until today, when the New York Fed decided to bring it back from the dead by publishing "The Minimum Balance At Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market FUnds".  What is surprising is that this proposal is reincarnated now. The question becomes: why now? What does the Fed know about market liquidity conditions that it does not want to share, and more importantly, is the Fed seeing a rapid deterioration in liquidity conditions in the future, that may and/or will prompt retail investors to pull their money in another Lehman-like bank run repeat?

Bungled Bank Bailout Leaves Behind Righteous Anger - Neil Barofsky -- In the year since I stepped down as the special inspector general of the Troubled Asset Relief Program, the sadly predictable consequences of the government’s disparate treatment of Wall Street and Main Street have only become worse. As the banks amass size and power, Main Street continues to get pummeled.  Part of the current economic malaise can be traced directly to Treasury’s betrayal of its promise to use TARP to “preserve homeownership.” The Home Affordable Modification Program has brought little meaningful improvement, with fewer than 800,000 ongoing permanent modifications as of March 31, 2012, a number that is growing at the glacial pace of just 12,000 per month.  In June 2011, Treasury appeared to take a tentative step toward holding the mortgage servicers accountable for the widespread misconduct in the program by pledging to withhold the incentive payments to three of the largest banks -- Wells Fargo (WFC) & Co., Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) -- until they came into compliance with HAMP’s rules.  Treasury couldn’t even keep this modest commitment. Although Wells Fargo had improved its performance and was awarded all of its withheld incentive payments, JPMorgan Chase and Bank of America continued to fail to meet the baseline standard. Nonetheless, in March 2012, as part of a broader settlement of the so-called robo-signing scandal, Treasury released all of the withheld payments, totaling more than $170 million. As a result, the government hasn’t held any servicer responsible for the widespread abuses of HAMP applicants, nor is it ever likely to do so

SIGTARP: Taxpayers still exposed as AIG shrinks CDS portfolio - Taxpayers are still owed more than half their original investment in American International Group ($30.52 0%) even as its non-insurance business operates without a consolidated banking regulator, according to the Special Inspector General for the Troubled Asset Relief Program. AIG still has $30.4 billion from the original $67.8 billion TARP investment outstanding as of July, which is on track to actually earn a return, SIGTARP said in a special report Wednesday. The more than 1 billion shares equal a 61% government stake in the monoline. Including other asset purchases, the total original commitment to the AIG bailout was $161 billion. The Federal Reserve Bank of New York continues to sell off those assets, most tied to faulty mortgages.The AIG Financial Products Corp. still operates today even though it has shrunk its credit default swap portfolio to $168 billion, one-tenth its former size. The firm remains massive and could be considered a systemically important financial institution, or SIFI, when regulators release such a definition. As a SIFI, the company would fall under Federal Reserve supervision. It still has 219 subsidiaries and is the third largest insurance company by assets in the U.S. The non-insurance business at AIG still lacks consolidated oversight, according to SIGTARP. Before the crash, part of it was considered a thrift and thus fell under Office of Thrift Supervision.

A Principle for Forward-Looking Monitoring of Financial Intermediation: Follow the Banks! - NY Fed - In the previous posts in this series on the evolution of banks and financial intermediaries, my colleagues and I considered the extent to which banks still play a central role in financial intermediation, given the rise of the shadow banking system. There’s no arguing that financial intermediation has grown in complexity. And there’s also little doubt that the balance sheet of banks is not as representative of financial intermediation activity, and the associated risks, as it once was. Yet as we’ve argued, regulated bank entities have remained very much involved in virtually every aspect of modern financial intermediation, either directly or indirectly providing support to other entities that themselves operate more in the regulatory shadow. I suggest in this post that the insights from the series can be relevant to the design of modern regulation as well.

Income Evolution at BHCs: How Big BHCs Differ - NY Fed - As noted in the introduction to this series, over the past two decades financial intermediation has evolved from a traditional, bank-centered system to one where nonbanks play an increasing role. For my contribution to the series, I document how the sources of bank holding companies’ (BHC) income have evolved. I find that the largest BHCs have changed the most; they’ve shifted their mix of income toward providing new financial services and are earning an increasing share of income outside of their commercial bank subsidiaries. In this post, I summarize my study’s key findings.

Unofficial Problem Bank list declines to 905 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for July 20, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808: Closings and enforcement activities by the FDIC and OCC led to many changes to the Unofficial Problem Bank List. This week just about every type of change occurred except for the issuance/termination of a Prompt Corrective Action order. In all there were nine additions and 16 removals that included four failures, one voluntary liquidation, two unassisted mergers, and nine action terminations. These changes leave the list with 905 institutions with assets of $349.7 billion. A year ago, the list held 993 institutions with assets of $415.7 billion.

Helping Households Also Helps Banks - Mathew Yglesias discusses a dispute about whether recovery from the recession would have been faster if we had provided more help for households, and less help for banks: This gets us to the actual dispute. Team Tim [Geithner] would say that they're trying to create a well-capitalized banking system in order to bolster the broader economy. Team Neil [Barofsky] counters that the broader economy would be better-served by a policy that imposed steep losses on banks and instead repaired household balance sheets. Beneath all the anger and accusations and counter-accusations is a fairly wonky policy disagreement about the relative importance of household balance sheets versus the credit channel to laying the preconditions for growth. Here's my take (from December 2010). As others have noted, we needed to help both banks and households, and it didn't have to be one or the other. But there was no need to bail out banks directly, at least not on the scale that it was done, banks could have been helped indirectly by helping households: ...recovery from these “balance sheet recessions” is notoriously slow. As households rebuild their balance sheets, resources are directed away from consumption, and the reduction in aggregate demand is a drag on the economy. It takes a long time for households to recover what is lost, and the recovery will be slow so long as this rebuilding process continues. Fiscal policy attempts to restore the lost aggregate demand, and that is important, but it does very little to directly address the household balance sheet issue.

Subprime Rally Building As Dealers Sop Up Supply: - The rally in U.S. home-loan securities without government backing is accelerating as investors wager the housing bust is over and supply is sopped up by bond dealers emboldened by new capital rules.  Gains on subprime-mortgage bonds from 2005 through 2007, the years that produced the most defaults leading to the worst financial crisis since the Great Depression, have soared to 5.4 percent in July, bringing returns for the year through last week to 21.6 percent, according to Barclays Plc data. Securities backed by option adjustable-rate mortgages jumped over the past month by 7 percent to the highest level since May 2011.  Investors faced with benchmark interest rates at record lows are seeking mortgage securities after a 35 percent decline in home prices from the peak in 2006. Wall Street banks are also adding to inventories after regulatory changes in June. As Citigroup Inc. warns prices may drop if dealers can’t place the holdings, daily trading volumes surged almost 40 percent last week, reaching the highest this year by one measure.

Securitization, Take II: Investment Firms Seek to Securitize Rental Payments - Though this proposal to use eminent domain to buy up underwater homes and refinance them has been getting a lot of publicity in intellectual circles, the unorthodox fix for the housing market is already happening. That would be the REO-to-rental revolution, where investment firms buy up foreclosed properties in mass quantities after repossession, and flip them into the rental market. Setting aside for a moment the potential problems of creating a large swath of hedge fund slumlords, as well as the possibility of razing entire neighborhoods with new development, the theory for the investors is that they can generate a steady stream of rental payments that will eventually dwarf the fire-sale price they paid for the foreclosed property. But there are all kinds of pitfalls to that model, like extended vacancies or troublesome tenants who refuse to pay. I hadn’t figured out how the investors planned to work around that model, until I saw this story in the Wall Street Journal. And then the light bulb went on. Four years after mortgage-linked deals played a starring role in the worst financial crisis in decades, banks and real-estate investors are at work on a new type of security tied to the housing market. In recent months, firms such as Colony American Homes and Waypoint Homes have snapped up houses in foreclosure and rented them. Backed by investment banks and credit-rating firms, these firms think they have spotted a new opportunity: Packaging thousands of those rental payments into securities and selling them to other investors, a process known as securitization. Potential issuers, like Colony and Waypoint, are seeking to create and sell these securities to tap outside investors for capital they in turn can use to expand their businesses.

U.S. Banks Haunted by Mortgage Demons That Won't Go Away - (Reuters) - Lenders like Bank of America Corp and Wells Fargo & Co say they are facing mounting pressure to buy back bad mortgages they sold to investors, signaling that banks' home-loan headaches could continue for years. Investors like Fannie Mae and Freddie Mac have been pressing banks to buy back bad mortgages for years, but in recent months those requests have intensified, the banks have said in recent second-quarter earnings reports. These comments from banks provide a fresh reminder of the loose ends that remain from the housing bust that started five years ago. The threat of new expenses and litigation is dampening bank share prices, and the problem could linger for some time, analysts and experts said.

How to help underwater homeowners - I’m a huge fan of Senator Jeff Merkley’s new plan to help out the 8 million American homeowners who are current on their mortgages but underwater and therefore unable to refinance. If you like to see such things in video form, the YouTube announcement is here; for the nerds among us, the full 31-page proposal is here. Merkley’s plan addresses that problem straight on, and because it only concerns homeowners who are current on their mortgages — and not the 3 million homeowners who are underwater — it doesn’t come with any moral hazard problems attached: indeed, at the margin, it encourages homeowners to stay current on their loans, rather than defaulting on them. The basic idea’s very simple: the government will buy, at par, any new underwater mortgage written on certain terms. So if you currently have a $240,000 mortgage on which you’re paying 8% interest, but your house is only worth $200,000 and you can’t refinance, then suddenly now you can refinance. In fact, you have three options. You can get a $240,000 15-year mortgage at 4%, which keeps your payments roughly the same, but which gets you paying down principal quickly, so that you should be above water in about three years. You can get a $240,000 30-year mortgage at 5%, which cuts your monthly payments substantially. And there’s a third option I don’t fully understand, which includes a $190,000 first mortgage at 5% and a $50,000 second mortgage with a five-year grace period; on that one, monthly payments, at least for the first five years, drop even further.

LPS: Mortgage delinquencies increased in June  - LPS released their First Look report for June today. LPS reported that the percent of loans delinquent increased in June from May, and declined year-over-year. The percent of loans in the foreclosure process decreased in June, but remains at a very high level. LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) increased to 7.14% from 6.91% in May. The percent of delinquent loans is still significantly above the normal rate of around 4.5% to 5%. The percent of delinquent loans peaked at 10.57%, so delinquencies have fallen over half way back to normal. The increase was mostly in the less than 90 days delinquent category. The following table shows the LPS numbers for June 2012, and also for last month (May 2012) and one year ago (June 2011). The number of delinquent loans, but not in foreclosure, is down about 10% year-over-year (379,000 fewer mortgages delinquent), and the number of loans in the foreclosure process is down 3% or 70,000 year-over-year.

LPS: Foreclosure inventory decline slow going  - Thawing the robo-signing freeze remains a slow-moving process. The amount of home loans in the foreclosure inventory declined just 1% from one year ago, according to preliminary June data from Lender Processing Services, The roughly 2.061 million defaulted mortgages somewhere in the process only dipped 2% from the previous month. The largest mortgage servicers halted the foreclosure process in October 2010 to correct faulty affidavits signed en masse. State and federal prosecutors launched investigations. Consent orders last spring and a $25 billion settlement in March brought new standards and relief owed to homeowners. But with the resolutions, came the hope of a restarted process free of past abuses. Foreclosure starts began to climb in the spring, according to some data reports, but the mountain of troubled loans was merely dented in the months since. There are 3.6 million mortgages 30 or more days past due but not in foreclosure, equal to 7.14% of all loans. States with the highest percentage of noncurrent loans continue to be Nevada, Florida, New Jersey, Illinois and Mississippi.

More than half of U.S. metros post higher foreclosure activity - Foreclosure activity in the first half of 2012 picked up in 125 of the 212 U.S. metros surveyed by RealtyTrac in the research firm's latest Foreclosure Market Report. Despite foreclosure increases in many markets, 129 metros still experienced year-over-year declines in foreclosure activity, according to the Irvine, Calif-based real estate research firm. Seven of the 10 metros with the highest foreclosure rates are located in the state of California. Meanwhile, Florida metros represented four of the areas on the list of 20 metros with the highest foreclosure rates. "Increasing foreclosure starts in many local markets helped push total foreclosure activity higher in the first half of this year compared to the second half of 2011," said Brandon Moore, CEO of RealtyTrac. "Those foreclosure starts are welcome news for prospective buyers and real estate brokers in many local markets where a shortage of aggressively priced inventory has been holding up sales activity. Markets with increasing foreclosure starts will likely see more distressed inventory for sale in the form of short sales and bank-owned properties in the second half of the year." Stockton, Calif., remains a market riddled with foreclosures, according to RealtyTrac. The metro had the highest foreclosure rate in the nation with 2.66% of its housing units facing a foreclosure filing in the first half. That figure is three times higher than the national average. 

New Crop of Foreclosures Is Coming - While fewer Americans are falling behind on their mortgage payments, the huge backlog of already delinquent mortgages is finally making its way through the banking system to foreclosure. Total foreclosure activity rose in the first half of this year from the previous six months, according to online foreclosure sale site RealtyTrac, driven by a jump in new foreclosure actions by lenders. “Those foreclosure starts are welcome news for prospective buyers and real estate brokers in many local markets where a shortage of aggressively priced inventory has been holding up sales activity. Markets with increasing foreclosure starts will likely see more distressed inventory for sale in the form of short sales and bank-owned properties in the second half of the year,” said Brandon Moore, CEO of RealtyTrac. More than half of the 212 metropolitan areas RealtyTrac surveys saw increases in foreclosure starts, and of the top ten foreclosure rates in the nation, five of them were in California. Stockton still holds the dubious distinction of the nation’s highest metro foreclosure rate, at more than three times the national average. Despite their high ranking, however, all of the California metros in the top ten actually saw decreasing foreclosure activity overall. In fact, Atlanta was the only metro area with a top ten foreclosure rate to see increasing foreclosure activity in the first half of this year.

California Q2 Foreclosure Activity Lowest in Five Years - The number of California homes entering the formal foreclosure process dropped in the second quarter to its lowest level since early 2007. The decline stems from a combination of factors, including an improving housing market, the gradual burning off of the most egregious mortgages originated from 2005 through 2007, and the growing use of short sales, a real estate information service reported. A total of 54,615 Notices of Default (NODs) were recorded on houses and condos during the April-though-June period. That was down 2.9 percent from 56,258 for the prior three months, and down 3.6 percent from 56,633 in second-quarter 2011, according to San Diego-based DataQuick. Most of the loans going into default are still from the 2005-2007 period. The median origination quarter for defaulted loans is still third-quarter 2006. That has been the case for three years, indicating that weak underwriting standards peaked then. .The all-time peak for Trustees Deeds was 79,511 in third-quarter 2008. The state's all-time low was 637 in the second quarter of 2005, DataQuick reported. Foreclosure resales accounted for 27.9 percent of all California resale activity last quarter, down from a revised 33.6 percent the prior quarter and 35.6 percent a year ago. It peaked at 57.8 percent in the first quarter of 2009. Foreclosure resales varied significantly by county last quarter, from 7.3 percent in San Francisco County to 47.4 percent in Madera County.

Bank makes $1 Million on Foreclosure - It looks like Capital One Bank made $1 million on this foreclosure. From the O.C. Register: $8.1M oceanfront home sells as foreclosure Located at 989 Cliff Drive on the oceanfront above Laguna Beach's Shaw's Cove, the Mission style villa sold for $8.1 million in an all cash deal ... The Cliff Drive property sold to the bank for $7,006,347 December 28, 2011. Actress Diane Keaton bought the house in 2004 for "around $7.5 million" and sold it in 2005 for $14.5 million (nice flip!). Capital One Bank foreclosed on the home in December 2011. There were no bidders and the house went back to the bank for just over $7 million. Of course Capital One Bank could have bid less than they were owed at auction (maybe someone can pull up the details), but with the house selling at the asking price of $8.1 million for all cash, it appears Bank One made $1.1 million minus expenses.

How a $140 bill snowballed into foreclosure - For Dominick Vulpis, a $140 sewer bill has become a $50,000 nightmare. Vulpis didn’t know he had a big problem with the four-year-old bill until last December, he said, when he was served with papers notifying him that he had lost his Middletown, N.J., home to foreclosure. Neither he nor his wife were notified of the foreclosure process until the final judgment was granted last December, he said. “It was never brought to my attention until it was too late and we were served with papers saying we had to move out of our house,” said Vulpis, a 60-year-old plumber. “I may pay a bill late, but I pay them. I’m not trying to beat anyone for $140.” Incredibly, that $140 debt snowballed to the loss of his home after the town sold the lien on his property to an investor, an increasingly common practice as cash-strapped cities and towns try to raise badly needed revenues to close widening budget gaps.

Reverse Mortgages - The number of new reverse mortgages in the U.S. was below 10,000 per year in the 1990s. But now the baby boomers are reaching retirement age. The number of reverse mortgages topped 110,000 in both 2008 and 2009, before dropped back to a range of 70,000-80,000 in 2010 and 2011. As the economy regains its footing, the total may start rising again. Thus, one small part of the Dodd-Frank legislation was to instruct the newly-created Consumer Financial Protection Bureau (CFPB) to publish a study on "Reverse Mortgages,"¹ which was published in late June.  Reverse mortgages have been around for several decades. They have a fairly small share of the market: "Today, the market for reverse mortgages is very small. Only about 2 to 3 percent ofeligible homeowners choose to take out a reverse mortgage.  Only about 582,000 HECM [Home Equity Conversion Mortgage] loans are outstanding as of November 2011, as compared to more than 50 million traditional mortgages and more than 17 million home equity loans and lines of credit." But the number of such loans was rising fast before the recession hit, and remains far above levels from just 10 years ago.

MBA: Refinance Activity Highest since 2009 --- From the MBA: As Low Rate Environment Persists, Refinance Applications Reach Highest Level Since 2009 in Latest MBA Weekly Survey The Refinance Index increased 2 percent from the previous week to its highest level since April 19, 2009. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier to its lowest level since June 22, 2012. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) remained unchanged at 3.74 percent, the lowest rate in the history of the survey, with points decreasing to 0.43 from 0.45 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The first graph shows the MBA mortgage purchase index. The purchase index has been mostly moving sideways over the last two years. The second graph shows the refinance index. The refinance index is at the highest level since 2009. This increase in refinance activity is probably a result of both record low mortgage rates and HARP activity.

US Rate on 30-Year Mortgage: 3.49%, New Record Low - The average rate on the 30-year fixed mortgage fell again, this time dropping below 3.50 percent for the first time on records dating back 60 years. Mortgage buyer Freddie Mac said Thursday that the rate on the 30-year loan declined to 3.49 percent. That’s down from 3.53 percent last week and the lowest since long-term mortgages began in the 1950s. The average rate on the 15-year fixed mortgage, a popular refinancing option, dipped to 2.80 percent. That’s below last week’s previous record of 2.83 percent. The rate on the 30-year loan has fallen to or matched record-low levels in 13 of the past 14 weeks. Cheaper mortgages have helped drive a modest but uneven housing recovery this year.

Record Low Mortgage Rates and Increasing Refinance Activity - Another month, another record ...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). The the MBA reported yesterday that refinance activity was at the highest level since 2009. And from Freddie Mac today: 30-Year Fixed-Rate Mortgage Averages a Record-Breaking 3.49 Percent Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing fixed mortgages rates continuing their streak of record-breaking lows. The 30-year fixed rate mortgage averaged 3.49 percent, more than a full percentage point lower than a year ago when it averaged 4.55 percent. Meanwhile, the 15-year fixed-rate mortgage, a popular choice for those looking to refinance, also set another record low at 2.80 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®.  The Freddie Mac survey started in 1971 and mortgage rates are currently at the record low for the last 40 years.

Rates Update: 30-Year Fixed at Historic Low - Treasury yields are off their historic lows of yesterday. The markets rallied on Mario Draghi's proclamation: "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough." Predictably, yields in the US rose a tad as the risk-on trade accelerated. The new historic low is the 30-year fixed mortgage. The Freddie Mac weekly survey published today puts the average at 3.49%, down four basis points from last week. For some near-term historical context, the average was 4.08% just four months ago. Here is an updated snapshot of Treasury yields and the 30-year fixed since the onset of Operation Twist.  Here is the weekly data on the 30-year fixed back to May 1976.

Number of the Week: No Rush to Lock in Low Rate -- 9: Number of months in the last 12 when mortgage rates hit new record lows. “Lock in your low rates” is a common refrain among realtors. So common, in fact, that we’ve been hearing it for years now, and likely for years to come. AFP/Getty Images Rates on 30-year fixed mortgages have never been lower. Nine of the last 12 months and 13 of the last 14 weeks have seen record lows, according to data from Freddie Mac, which put the rate at a staggering 3.49% in the most recent week. Rates are sure to go up, right? That’s what we were told when they hit 4% in 2011 and 4.5% in 2010 and 5% in 2009. You get the idea. But there are differences now. There are clearer signs than ever that housing has bottomed, and a stronger market could mean higher rates. Of course, a bottom just means things aren’t likely to get worse. It’s no assurance that housing is going to get better fast. The same logic also applies to rates. With rates already so low, there’s not a lot of room to fall further. But that also doesn’t mean they’re poised to shoot up. In fact, there are more signs that rates are going to stay low for “an extended period.”

House Price Index Up 0.8 Percent in May - FHFA pdf - U.S. house prices rose 0.8 percent on a seasonally adjusted basis from April to May, according to the Federal Housing Finance Agency’s monthly House Price Index. The previously reported 0.8 percent increase in April was revised downward to a 0.7 percent increase. For the 12 months ending in May of 2012, U.S. prices rose 3.7 percent. The U.S. index is 17.0 percent below its April 2007 peak and is roughly the same as the May 2004 index level. The FHFA monthly index is calculated using purchase prices of houses with mortgages that have been sold to or guaranteed by Fannie Mae or Freddie Mac. For the nine census divisions, seasonally adjusted monthly price changes from April to May 2012 ranged from -1.0 percent in the West South Central division to +1.7 percent in the Pacific division

Government Home-Price Index Registers Gain - U.S. home prices rose for the fourth-straight month in May, a sign of the gradual recovery in the housing market, according to a government home price index released Tuesday. Home prices rose 0.8% on a seasonally adjusted basis in May from a month earlier, according to the Federal Housing Finance Agency‘s monthly home-price index. Compared with a year earlier, home prices were up 3.7% April’s results were revised to a 0.7% monthly increase from March, compared with an originally reported 0.8% increase. The index remains 17% below its peak in April 2007 and is around the same level as in May 2004. The results were better than forecast. Economists surveyed by Dow Jones Newswires had expected a 0.3% monthly increase in May. The FHFA’s index is calculated by using the prices of houses purchased with mortgages backed by government-controlled mortgage companies Fannie Mae and Freddie Mac. A reading of 100 is equal to the price of homes in January 1991. May’s index value was 188.1.

Zillow: "Housing Market Turns Corner" -- From Zillow: U.S. Home Values Post First Annual Increase In Nearly Five Years: Home values in the United States have reached a bottom. The Zillow Home Value Index (ZHVI) rose on an annual basis for the first time since 2007, increasing 0.2 percent year-over-year to $149,300, according to Zillow’s second quarter Real Estate Market Reports. Values have risen for four consecutive months. ...“After four months with rising home values and increasingly positive forecast data, it seems clear that the country has hit a bottom in home values,” said Zillow Chief Economist Dr. Stan Humphries. “The housing recovery is holding together despite lower-than-expected job growth, indicating that it has some organic strength of its own. “Of course, there is still some risk as we look down the foreclosure pipeline and see foreclosure starts picking up. This will translate into more homes on the market by the end of the year, but we think demand will rise to absorb that, particularly in markets where there are acute inventory shortages now. Looking forward, we expect home values to remain relatively flat as the market works through a backlog of foreclosures and high rates of negative equity.”

Home Values Post First Year-Over-Year Increase Since 2007 - Home values posted their first year- over-year increase since 2007 in the second quarter as the U.S. property market began to lift off a bottom, Zillow Inc. said. The Zillow Home Value Index rose to $149,300, a 0.2 percent increase from the second quarter of 2011, according to the property-data company. Residential values have gained for four months in a row, the Seattle-based firm said today. Of the 167 markets tracked by Zillow, 53 posted annual increases. Home prices have begun to rise amid an increase in demand, interest rates at record lows and a tight supply of properties for sale. The residential market is showing strength even as job growth weakens and concerns that the European debt crisis will hurt the U.S. economy, said Stan Humphries, Zillow’s chief economist. The country’s unemployment rate has exceeded 8 percent for 41 straight months. The three months ended June 30 was “a really solid second quarter in the midst of some economic headwinds, which indicates the housing market has some organic fundamental strength on its own,”

Zillow forecasts 1% Year-over-year decline for May Case-Shiller House Price index - The Case-Shiller report is for May (really an average of prices in March, April and May). This data is released with a significant lag, see: House Prices and Lagged Data I think it is too early to look for a year-over-year increase in Case-Shiller prices, although some analysts think it is possible in the May report. We are definitely getting close - and it will make headlines when it happens. Zillow Forecast: Zillow Forecast: May Case-Shiller Composite-20 Expected to Show 1% Decline from One Year Ago: On Tuesday, July 31st, the Case-Shiller Composite Home Price Indices for May will be released. Zillow predicts that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]) will decline by 1 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) will decline by 1.3 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from April to May will be 0.8 percent for the 20-City Composite and 0.9 percent for the 10-City Composite Home Price Index (SA). All forecasts are shown in the table below and are based on a model incorporating the previous data points of the Case-Shiller series and the May Zillow Home Value Index data, and national foreclosure re-sales.

CNBC to Promote House Flipping -- Business network CNBC recently gave the go-ahead to shoot pilots for several reality shows they plan to possibly air in 2013. Among those on the list: Flipping Wars: Vegas. “The housing market plunge has created big opportunities for folks who are willing to strap on a tool belt and take a gamble,” the network wrote in the press release announcing the program. The show, they added, “follows four teams of wheeler dealers who see dollar signs every time they bid on a foreclosed home.” No word in the press release on whether home flipping promoters ranging from Robert Kiyosaki to Dean Graziosi will act as consultants. Nor does it discuss whether promoting house flipping is a good idea, given how well it turned out for all of us in the aughts. Finally, the press release does not answer the question that immediately popped into my mind, and that is whether the audience at home will get the opportunity to view the actual foreclosures themselves. But CNBC does promise an entertaining time with “bold characters” and “big stakes” for their “highly affluent, educated and influential audience.”

HVS: Q2 Homeownership and Vacancy Rates - The Census Bureau released the Housing Vacancies and Homeownership report for Q2 2012 this morning.  This report is frequently mentioned by analysts and the media to track the homeownership rate, and the homeowner and rental vacancy rates. However, based on the initial evaluation, it appears the vacancy rates are too high. It might show the trend, but I wouldn't rely on the absolute numbers. My understanding is the Census Bureau is investigating the differences between the HVS, ACS and decennial Census, and analysts probably shouldn't use the HVS to estimate the excess vacant supply, or rely on the homeownership rate, except as a guide to the trend. The Red dots are the decennial Census homeownership rates for April 1st 1990, 2000 and 2010. The HVS homeownership rate increased to 65.5%, up from 65.4% in Q1 2012. Last quarter was the lowest level for this survey since the mid-90s. I'd put more weight on the decennial Census numbers and that suggests the actual homeownership rate is probably in the 64% to 65% range. The HVS homeowner vacancy rate declined to 2.1% from 2.2% in Q1. This is the lowest level since Q1 2006 for this report. The homeowner vacancy rate has peaked and is now declining, although it isn't really clear what this means. The rental vacancy rate declined to 8.6% from 8.8% in Q1.The rental vacancy rate declined to 8.6% from 8.8% in Q1. I think the Reis quarterly survey (large apartment owners only in selected cities) is a much better measure of the overall trend in the rental vacancy rate - and Reis reported that the rental vacancy rate has fallen to the lowest level since 2001.

U.S. New Home Sales Fall to 5-Month Low — Americans bought fewer new homes in June after sales jumped to a two-year high in May. The steep decline suggests a weaker job market could make the housing recovery slow and uneven. The Commerce Department says sales of new homes fell 8.4 percent last month to a seasonally adjusted annual rate of 350,000. That’s the lowest in five months. Sales in the Northeast plunged 60 percent to the lowest level since November. Nationwide, sales in May and April were revised much higher. And June’s sales pace is still 15.1 percent higher than in June 2011. The number of unsold new homes is near record lows. There were 144,000 new homes for sale in June, just above May’s 143,000 — the lowest on records dating back to 1963.

New Home Sales declined in June to 350,000 Annual Rate - The Census Bureau reports New Home Sales in June were at a seasonally adjusted annual rate (SAAR) of 350 thousand. This was down from a revised 382 thousand SAAR in May (revised up from 369 thousand). Sales in March and April were revised up too. The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. Sales of new single-family houses in June 2012 were at a seasonally adjusted annual rate of 350,000 ... This is 8.4 percent below the revised May rate of 382,000, but is 15.1 percent above the June 2011 estimate of 304,000. The second graph shows New Home Months of Supply. Months of supply increased to 4.9 in June from 4.5 in May.  The all time record was 12.1 months of supply in January 2009.  This is now in the normal range (less than 6 months supply is normal).

Sales of New U.S. Homes Unexpectedly Fall from Two-Year High - Demand for new U.S. homes unexpectedly dropped in June from a two-year high, indicating the housing recovery will be uneven.  Purchases decreased to a 350,000 annual rate, down 8.4 percent from the prior month and the weakest since January, the Commerce Department reported today in Washington. The median estimate in a Bloomberg News survey of 74 economists was 372,000. The decline was led by a record 60 percent plunge in the Northeast.  A supply crunch and sluggish progress in the job market may be depressing home purchases even as prices and mortgage rates remain attractive. Federal Reserve Chairman Ben S. Bernanke is among those who say the housing market is showing a “modest” recovery as buyers still face obstacles.  “A dearth of construction has led to a very significant inventory shortage,”

New Home Sales Plunge -8.4% for June 2012 -- June New Residential Single Family Home Sales declined by -8.4%, or 350,000 annualized sales. This monthly percentage change has a ±12.4% error margin. May's single family new home sales were significantly revised down, from +7.6% to +6.7%, or 382,000 annualized sales. April was revised up to 358,000 from 343,000 as was March, to 352,000.  New single family home sales are now 15.1% above June 2011 levels, but this figure has a ±16.7% margin of error. A year ago new home sales were 304,000. Sales figures are annualized and represent what the yearly volume would be if just that month's rate were applied to the entire year. These figures are seasonally adjusted.  The Census claims June new home sales dropped -60.0% in the Northeast from May. While this seems absurd on it's face, the Northeast region was a mega hot baking oven in June. Northeast reported sales have a ±18.9% error margin.  The current supply of new homes on the market would now take 4.9 months to sell, an increase of 8.9% from last month. The amount of new homes for sale was 144,000 units, annualized and seasonally adjusted. From a year ago housing inventory has declined -25.8%. These is a record low in the supply of new homes for sale, as shown in the below graph.

New US home sales decline 8.4% in June -  Sales of new single-family homes fell 8.4% in June to an annual rate of 350,000 after reaching a two-year high in May, the U.S. Commerce Department said Wednesday. Economists polled by MarketWatch had forecast new home sales to rise to an annual rate of 375,000 last month. Sales in May were revised up to a seasonally adjusted 382,000 from an initial reading of 369,000 - the best month of sales since April 2010. The median price of new homes, meanwhile, fell 1.9% in June to $232,600, the lowest level since January. The supply of new homes on the market would last 4.9 months if they were all sold before any others were built. That's up from 4.5 months in May. Sales of new homes rose the fastest in the Northeast and fell the most in the South.

Sales of New Homes Slide Downward -- Bill McBride can spin this all he wants, with a very vague promise about after-the-fact revisions, but the facts are that June home sales fell, days after an existing-home sale measure fell as well.Sales of new single-family houses in June 2012 were at a seasonally adjusted annual rate of 350,000 … This is 8.4 percent below the revised May rate of 382,000, but is 15.1 percent above the June 2011 estimate of 304,000. Home sales are rising year-over-year, then, but falling over the last month. Maybe that data is noisy and we’ll see some revisions, but I think you cannot just say that it will automatically happen, as McBride does. What’s more, new home months-of-supply increased, suggesting that the inventory is starting to sit. It’s somewhat axiomatic that when you have a slowdown in the economy, it will eventually get reflected in the sales of the largest consumer good. Low mortgage rates, which have boosted refinancing, can counteract this a bit, but if people don’t have the money, they’re not going to buy the homes. On the existing-home front, the slowdown in sales could be attributable to the nagging second-lien problem:

Lawler on New Home Sales and Revisions - From economist Tom Lawler: The US Census Bureau estimated that new SF home sales ran at a seasonally adjusted annual rate of 350,000 in June, down 8.4% from May’s upwardly-revised (to 382,000 from 350,000) pace. March and April sales were also revised upward. Current seasonally adjusted sales estimates are higher than the originally-reported estimates for each of the last eight months (October 2011 – May 2012). In the past, turning points in housing/home sales have often been accompanied by strings of either upward (when sales are rising) or downward (when sales are falling) revisions in Census’ new SF home sales estimates. According to today’s report, seasonally adjusted sales in the Northeast plunged by 60% in June, fell by 8.6% in the South, increased by 2.1% in the West, and jumped by 14.6% in the Midwest. Census does not report sales estimates for individual states, noting that its sample size is too small to produce reliable state estimates. Bad weather at the end of the month possibly impacted sales in the Northeast and mid-Atlantic part of the South. Census also estimated that the number of new SF homes for sale at the end of June was 144,000 on a seasonally adjusted basis, up 0.7% from May’s downwardly-revised estimate but down 13.3% from a year ago.

"Actual" New Home Sales First 6 Months of 2012 vs. Prior Years; Reflections on the Housing Recovery - New home sales unexpectedly plunged today, with the biggest drop in over a year: New U.S. single-family home sales in June fell by the most in more than a year and prices resumed their downward trend, suggesting a set back for the budding housing market recovery. The Commerce Department said on Wednesday sales tumbled 8.4 percent to a seasonally adjusted 350,000-unit annual rate, the lowest rate in five months. The percent decline was the largest since February 2011. May's sales pace was revised up to 382,000 units from the previously reported 369,000 units, taking some of the sting from the report. Economists polled by Reuters had forecast sales at a 370,000-unit rate last month. Compared to June last year, new home sales were up 15.1 percent.  Reader Tim Wallace provides a look at actual new home sales, six-month running totals, not seasonally adjusted, not annualized, vs. prior years. Even with today's reported decline, new home sales have likely bottomed on an annual, cumulative-total basis. However, don't expect much in terms of recovery.

Vital Signs Chart: New Home Sales Suggest Uneven Recovery - Sales of newly built homes tumbled last month. New-home sales fell 8.4% from May to a seasonally adjusted annual rate of 350,000, the lowest level since January. Sales of previously occupied homes also fell in June. While sales are better than last year and the housing market appears to be improving, June’s reports are a reminder that the recovery will be uneven.

David Rosenberg Points To One Indicator That's Showing No Sign Of A Housing Recovery - David Rosenberg, the bearish economist at Gluskin Sheff, isn't convinced that the U.S. housing market is on the up and up. He points to the number of months it takes to sell a new house. From his note today: How can it possibly be that the housing market is showing a durable recovery when it is still taking a median of eight months for the builders to find a buyer upon completion of the unit? Up until April 2008 – in the midst of the Great Recession – a number this high was unheard-of, having happened but once previously and that was the peak of the previous housing market meltdown in June 1991. See chart below.

No Housing Recovery In These Three Charts - One day, we hope, the broader public will realize that just as the Libor scandal was largely precipitated by the fact that it was a self-reported number and thus open to collusion and manipulation by the same people who set it, so any data coming out of the National Association of Realtors - an organization that by definition benefits from high prices and frenzied real estate activity - is total manipulated garbage (in fact courtesy of the massive 2011 restatement from the NAR several months ago we know just that). In fact, when it comes to the NAR, it is worse: as a reminder, US real estate transactions are nothing but glorified and perfectly legal money laundering, which is the main reason why the NAR has a waiver from regulation for anti-money laundering.  And lately, with the latest forced delusion being that US real estate has bottomed and is rising even as the global economy is decelerating at the fastest pace in the past 3 years, the NAR serves a handy purpose: it provides a reflexive way of misrepresenting the underlying trends in real estate, suckering the marginal fool in once again, as it did throughout the period between 2000 and 2007. The question then is what does objective, unmanipulated data say. As the following three charts from Bloomberg confirm the last word one should use when discussing the US housing market, where as we already pointed out shadow inventory is once again building up while construction jobs have tumbled to decade lows, is "bottomed."

NAR: Pending home sales index decreased 1.4% in June - From the NAR: Pending Home Sales Slip in June, Remain Above a Year Ago The Pending Home Sales Index, a forward-looking indicator based on contract signings, slipped 1.4 percent to 99.3 in June from a downwardly revised 100.7 in May but is 9.5 percent higher than June 2011 when it was 90.7. The data reflect contracts but not closings. The PHSI in the Northeast fell 7.6 percent to 76.6 in June but is 12.2 percent higher than a year ago. In the Midwest the index slipped 0.4 percent to 94.4 in June but is 17.3 percent above June 2011. Pending home sales in the South declined 2.0 percent to an index of 106.2 in June but are 8.8 percent above a year earlier. In the West the index rose 2.6 percent in June to 111.5 and is 3.0 percent higher than June 2011. This was below the consensus forecast of a 0.9% increase for this index. Contract signings usually lead sales by about 45 to 60 days, so this is for sales in July and August.

Pending Home Sales June - Pending home sales declined in June from a month earlier, as homes in contract fell 1.4 percent, new data from the National Association of Realtors shows. At that pace, pending sales remain 8.4 percent above the rate seen in June 2011. The National Association of Realtors chalked the decline up to a large imbalance between buyer and seller interest. “Buyer interest remains strong but fewer home listings mean fewer contract signing opportunities,” NAR Chief Economist Lawrence Yun said. “We’ve been seeing a steady decline in the level of housing inventory, which is most pronounced in the lower price ranges popular with first-time buyers and investors.” Pending sales declined in the Northeast, South, and Midwest, off by as much as 7.6 percent in the country's northern corridor. Sales continued to strengthen in the West, up 3.0 percent from May's report.

Home Builders Held Back by Lack of Profitable Land -- There are signs that the spring selling season seems to have cooled off for new homes, as the Census reported Wednesday that as of June, builders are on pace to sell just 350,000 newly built homes in 2012, an 8.4% decline from May. A combination of factors is holding them back: mortgage credit remains tight, and many consumers are still spooked by instability in the global economy, particularly with Europe’s debt woes. But one factor in particular seems to be rearing its ugly head: the lack of profitable land. The last four to five years have been slow for land developers, the companies that pave roads, lay pipe for sewer lines and handle the paperwork to lay out subdivisions. That’s because the housing bust seemed to prove that most parts of the suburbs – where most of the large tracts of land that builders like to build on are available – are overbuilt. That realization, along with the grim reality of the 2008 credit crunch, has kept banks from lending land developers the capital they need to invest in land and prepare it for builders. For builders, that means lower margins, fewer new communities and fewer sales. Housing starts, though trending up, are still 60% below where they were in 2002, before the bubble got inflated.

Counterparties: The housing drag of student loans -The Consumer Financial Protection Bureau and the Department of Education released a great new report last week detailing how the market for private student loans ballooned from less than $5 billion in 2001 to more than $20 billion in 2008. In its arc, its reliance on securitization for rapid growth, and its push to lend superfluous amounts of money to individuals with relatively low credit scores, the boom and bust in this market very much resembled the subprime mortgage market. All told, the report points out that there’s more than $150 billion in outstanding private student loan debt, and that the poor outlook for jobs for recent grads is making defaults all the more likely: In 2009, the unemployment rate for private student loan borrowers who started school in the 2003-2004 academic year was 16%. Ten percent of recent graduates of four-year colleges have monthly payments for all education loans in excess of 25% of their income. Default rates have spiked significantly since the financial crisis of 2008. Cumulative defaults on private student loans exceed $8 billion, and represent over 850,000 distinct loans. And that’s just private loans. The New York Fed pegs total student loan debt outstanding in the United States at $902 billion as of the first quarter of this year. Dylan Matthews notes that the median amount of student debt last year was $12,800, or about 17% of median household wealth.

Vital Signs Chart: Rising Container Imports - Imports are rising as Americans buy more cars and homes. Imports shipped in containers climbed 2.9% in the second quarter from a year earlier, a faster pace than in the first quarter — notching the third straight quarter of increases. The economy is struggling, but demand for imported auto parts, furniture and electronics is rising, a sign of consumer demand.

ATA Trucking index increased in June - From ATA: ATA Truck Tonnage Jumped 1.2% in June The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 1.2% in June after falling 1.0% in May. (May’s loss was larger than the 0.7% drop ATA reported on June 19.) June’s increase was the largest month-to-month gain in 2012. However, the index contracted a total of 2.1% in April and May. The latest gain increased the SA index to 119.0 (2000=100), up from May’s level of 117.5. Compared with June 2011, the SA index was 3.2% higher, the smallest year-over-year increase since March 2012. Year-to-date, compared with the same period last year, tonnage was up 3.7%. Here is a long term graph that shows ATA's For-Hire Truck Tonnage index. The dashed line is the current level of the index. The index is above the pre-recession level and still up 3.7% year-over-year - but has been moving mostly sideways in 2012. From ATA:  Trucking serves as a barometer of the U.S. economy, representing 67% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9.2 billion tons of freight in 2011. Motor carriers collected $603.9 billion, or 80.9% of total revenue earned by all transport modes.

Consumers Sentiment Remains Low - U.S. consumers ended this month feeling only marginally better than the economy, according to data released Friday. The Thomson Reuters/University of Michigan consumer sentiment index edged up to 72.3 at the end of July versus a reading of 72.0 early in July and was down from a final-June level of 73.2, according to an economist who has seen the report. Economists surveyed by Dow Jones Newswires had expected the end-July index to stay at 72.0. The current conditions index’s final-July reading fell to 82.7 from the preliminary index of 83.2, while the expectations index rose to 65.6 from 64.8. Consumers are struggling with weak job growth, stagnant pay raises and the uncertainty of future tax policy. Earlier Friday, the government reported U.S. consumer spending grew at an annual rate of only 1.5% in the second quarter, the weakest pace in a year. The low reading on July sentiment doesn’t bode well for third-quarter spending. On the inflation front, consumers have been benefiting from falling gasoline prices but they are still wary about inflation, possibly reflecting news that the drought will increase food prices later on.

Michigan Consumer Sentiment: An Ongoing Case of the Summer Blues - The University of Michigan Consumer Sentiment Index final number for July came in at 72.3, a fractional increase over the 72.0 preliminary report and a decline from the 73.2 June final. Today's number was slightly above Briefing.com's consensus forecast of 72.0. See the chart below for a long-term perspective on this widely watched index. Because the sentiment index has trended upward since its inception in 1978, I've added a linear regression to help understand the pattern of reversion to the trend. I've also highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy. To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is about 15% below the average reading (arithmetic mean), 14% below the geometric mean, and 15% below the regression line on the chart above. The current index level is at the 20.2 percentile of the 415 monthly data points in this series. The indicator can be somewhat volatile. For a visual sense of the volatility here is a chart with the monthly data and a three-month moving average.

Restaurants Blame Weak Consumer Confidence for Sales Slowdown - Several typically-resilient U.S. restaurant chains are putting a face on the nation’s slower economic growth, reporting a pullback in customer traffic growth in June as consumer confidence weakened–a trend that seems to have bled into July. Overall, U.S. economic growth pulled back during the second quarter, the Commerce Department said Friday, as consumer spending slowed. The nation’s gross domestic product–the value of all goods and services produced–grew at an annual rate of 1.5% between April and June: a reading that suggests domestic fiscal worries may be having a greater impact on consumer confidence. McDonald’s Corp., Starbucks Corp. and Chipotle Mexican Grill Inc., which have in the past proved resilient during tough economic times, said they saw a bit of a slowdown in U.S. guest count-growth in the second quarter, which took some executives by surprise. “The U.S. continues to build sales and guest counts. It is, however, happening at a slower pace amid an unpredictable economic environment and increased competition,” McDonald’s Chief Executive Don Thompson said. Starbucks’ Chief Executive Howard Schultz said he’s been speaking with other heads of consumer companies, and most everyone saw a similar pattern of deceleration in June and July. “So, this is not a Starbucks issue, this is a macro problem,”

Consumers Unlikely to Feel Drought Impact on Food Prices Until 2013 - Consumers won’t feel the impact of higher food prices caused by this year’s severe U.S. drought until 2013, the government said Wednesday. The U.S. Department of Agriculture left its inflation forecast for all food in 2012 unchanged from a month earlier at 2.5% to 3.5%. But in its first forecast for 2013, the USDA projected the price of all food will climb 3% to 4%. Last year, U.S. food inflation ran at 3.7%, the highest rate since the 5.5% in 2008. The severe drought across the Midwest has sent the price of corn, soybeans and wheat soaring, which will eventually increase prices for meat and other products, economists say. But the USDA said the effect on food prices won’t be clear until it is clear how severe the drought has been and how much of the corn crop has been destroyed. “We are expecting most of the drought impacts to hit in 2013,” It is not clear how long the drought might last. Meteorologists say there is no clear sign that a drought-breaking weather pattern is on the way. There is some speculation about how this could be a multiyear drought, as in the 1950s. At the least, farmers will likely enter 2013 with significant soil moisture deficits.

Rising Farm Prices Don’t Pack Inflation Punch of Oil - Wheat is not oil. The drought in parts of the U.S. farm region has caused prices for commodities including corn, wheat and soybeans to jump this summer. But the rise in farm prices won’t have anywhere near the negative impact on consumer inflation that would come from a similar gain in oil. Bloomberg News That’s because, as UBS economist Paul Donovan says, “food really isn’t ‘food’.” Much of the food purchased in developed nations has gone through some form of processing, he points out. This and other factors including marketing and distribution add to the final price tag. As a result, food’s retail prices aren’t wholly determined by farm prices. In the U.S., farmers get only about 50% of the retail price of butter and a mere 7% for baked goods, according to U.S. Department of Agriculture data. In comparison, 68% of the 2011 retail price of gasoline was influenced by the market price of crude oil, as calculated by the Energy Information Administration. Plus, an increase in the cost of oil quickly translates into higher prices at the gas pump. Economists at Capital Economics say it can take up to nine months for increases in agricultural commodity prices to show up in prices at the grocery store.

Vital Signs Chart: Gas Prices Headed Higher Again - The price of gasoline is rising again. The average price of a gallon of regular gas stood at $3.49 on Monday, up nearly seven cents from the week before and 14 cents from early this month. The price has climbed for three consecutive weeks as fears of Iran disrupting global supplies have overshadowed weaker demand for energy in a softening world economy.

Gasoline Volume Sales, Demographics and our Changing Culture - The Department of Energy's Energy Information Administration (EIA) data on volume sales is over two months old when it released. The latest numbers through mid-May were released yesterday. However, this report offers an interesting perspective on fascinating aspects of the US economy. Gasoline prices and increased in fuel efficiency are important factors, but there are also some significant demographic and cultural factors in this data series. Because the sales data are highly volatile with some obvious seasonality, I've added a 12-month moving average (MA) to give a clearer indication of the long-term trends. The next chart includes an overlay of monthly retail gasoline prices, all grades and formulations. I've shortened the timeline to start with EIA price series, which dates from April 1993. The retail prices are updated weekly, so the price series is the more current of the two. As we would expect, the rapid rise in gasoline prices in 2008 was accompanied by a significant drop in sales volume. With the official end of the recession in June 2009, sales reversed direction ... slightly. But the 12-month MA of volume for the latest month (May 2012) is still about 6.6% below the pre-recession level. In fact, the latest data point is a level first achieved over thirteen years ago

DOT: Vehicle Miles Driven increased 2.3% in May - The Department of Transportation (DOT) reported on Friday: Travel on all roads and streets changed by +2.3% (5.7 billion vehicle miles) for May 2012 as compared with May 2011. Travel for the month is estimated to be 258.4 billion vehicle miles. The following graph shows the rolling 12 month total vehicle miles driven. The rolling 12 month total is mostly moving sideways.. Currently miles driven has been below the previous peak for 54 months - and still counting. The second graph shows the year-over-year change from the same month in the previous year. Gasoline prices peaked in April at close to $4.00 per gallon, and then started falling. Gasoline prices were down in May to an average of $3.79 per gallon according to the EIA. Last year, prices in May averaged $3.96 per gallon, so it makes sense that miles driven are up year-over-year in May.

Vehicle Miles Driven: Up in May, But Not the Moving Average - Late last week the Department of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through May. Travel on all roads and streets increased by 2.3% (5.7 billion vehicle miles) for May 2012 as compared with May 2011. However, the 12-month moving average of miles driven declined by 0.4% from May a year ago (PDF report). Here is a chart that illustrates this data series from its inception in 1970. I'm plotting the "Moving 12-Month Total on ALL Roads," as the DOT terms it. See Figure 1 in the PDF report, which charts the data from 1987. My start date is 1971 because I'm incorporating all the available data from the DOT spreadsheets.

Richmond Fed Faceplants At -17, Expectations Of Rise To -1; Worst Since April 2009 - And another epic miss in the slow motion trainwreck that is the US plowhorse economy now to its neck in quicksand. The latest B-grade economic indicator: the Richmond Fed, which was expected to rise modestly from -3 to -1. Instead it faceplanted to -17, the biggest miss since August 2010 and the lowest print since Apirl 2009. But at least US housing has bottomed. Just kidding. At this point there should be no doubt that the US economy is in freefall - and the only recourse we have is the definition of madness: more QE which everyone by now knows will do nothing but provide a brief sugar high, and spike inflation and stock prices, only for everything to implode demanding even more QEasing from the Chairsatan, and on, and on, until in the endgame, the USD finally loses credibility. Of course, if this horrifyingly bad economic print does not send stocks soaring, we don't know what will.

Manufacturers Pull Back, but Jobs Holding for Now - Don’t count on American manufacturing to save the economy again later this year. The first reports on U.S. factory activity in July are rolling in and the news ain’t pretty. A preliminary survey of purchasing managers at U.S. firms by data-provider Markit shows manufacturing has barely expanded so far this month. It turns out June’s expansion wasn’t as big as we thought. And an index for “new orders” in July, which gauges future factory activity, dropped to 51.9 from 53.7, while exports languished below 50. (A reading below 50 indicates activity is shrinking.) Regional reports have missed the mark too. In its latest monthly survey of regional conditions, the Federal Reserve’s so-called beige book noted that manufacturing in the Fed’s Richmond district weakened in June following six months of expansion. And July hasn’t brought a rebound: The Federal Reserve Bank of Richmond said Tuesday that manufacturing in the region shrank dramatically — with its overall index diving to -17 from -3 in June — the lowest since April 2009. Last week, the Philly Fed’s index failed to rebound as well, though a similar survey for the Empire State region from the New York Fed fared better. American factory activity fueled the early phase of the U.S. recovery by meeting pent-up demand for goods and services. But manufacturing may not be ready to come to the rescue in today’s sluggish economy: Manufacturing output grew at an annual rate of only 1.4% in the second quarter, down sharply from 9.8% in the first.

Manufacturing Activity Contracted in July; Manufacturers' Optimism Waned  - The pullback in manufacturing activity in the central Atlantic region deepened in July, after edging lower in June, according to the Richmond Fed's latest seasonally adjusted survey. The index of overall activity was pushed lower as shipments and new orders declined further into negative territory. Employment remained in positive territory, but grew at a pace below June's rate. Other indicators also suggested additional softness. In July, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — fell sixteen points to −17 from June's reading of −1. Among the index's components, shipments declined twenty-three points to −23, new orders dropped eighteen points to end at −25, and the jobs index moved down seven points to 1.

Vital Signs Chart: Falling Business Spending - A key business-spending measure fell in June. New orders for nondefense capital goods excluding aircraft—which many economists consider a proxy for business investment—fell 1.4% in June from a month earlier. That follows a similar drop of 1.5% in April. The recent declines suggest businesses continue to hold back on spending, which reduces the economy’s growth.

Kansas City Fed: "Modest" Growth in Regional Manufacturing Activity in July - From the Kansas City Fed: Growth in Tenth District Manufacturing Remained Modest Growth in Tenth District manufacturing activity remained modest in July, and producers were slightly more optimistic than a month ago.. ...   The month-over-month composite index was 5 in July, up from 3 in June but down from 9 in May ... The production index fell further from 12 to 2, and the shipments index dipped into negative territory. The new orders for export index dropped from -7 to -13, almost matching the all-time low of -14 in early 2009. However, the new orders index edged up from -7 to -4, and the employment and order backlog indexes also improved over last month. The future composite index climbed from 8 to 13, and future new orders and order backlog indexes also rose after decreasing in June. The future employment index edged higher from 13 to 16, while the future production, shipments, and employee workweek indexes were unchanged. The future capital expenditures index increased from 17 to 20, and the future new orders for exports index improved slightly.

Markit Flash PMI falls to 51.8 - From Markit: PMI signals slowest manufacturing expansion since December 2010:The July Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) indicated the weakest improvement in U.S. manufacturing sector business conditions in 19 months, according to the preliminary ‘flash’ reading which is based on around 85% of usual monthly replies. At 51.8, down from 52.5 in June, the headline index was the second-lowest since the manufacturing recovery was first signalled by the PMI in late-2009 (only December 2010 saw a weaker PMI reading). PMI index readings above 50.0 signal an increase or improvement on the prior month, while readings below 50.0 indicate a decrease. “Overall, the third quarter is so far shaping up to be worse than the second quarter in terms of growth, which is a growing concern for policymakers. Some comfort can be drawn from the fall in prices, which should help keep inflation at bay and increase the scope for further stimulus. However, falling prices are also a worrying sign of just how much demand has weakened in recent weeks.”

US manufacturing activity is hampered by declining orders and rising inventories - Markit flash (preliminary survey results) PMI suggests a material slowdown in US manufacturing. The US manufacturing advantages of relatively low labor costs (discussed here) and inexpensive energy have failed to prevent the slowdown. It seems that at least some of the decline is due to falling exports, as Europe undergoes a recession and China has slowed. Chris Williamson (Markit): - “The U.S. manufacturing sector is clearly struggling under the pressure from falling exports, which showed the first back-to-back monthly decline for almost three years in July. Growth of production is slowing closer to stagnation as a result, and rising levels of unsold stock may mean companies seek to scale back production in coming months unless demand picks up again.This trend of declining orders and rising inventories is now clearly visible in the data. Last year a decline in orders corresponded to a correction in inventories as companies quickly adjusted to lower demand. This time around however inventories have climbed even as orders fell. That's a worrying sign because firms will need to work through the inventories before production picks up again.

Durable Goods Orders Up 1.6%, But, ex Transportation and Defense, Down 4.6% -- The July Advance Report on June Durable Goods was released this morning by the Census Bureau. Here is the summary on new orders:  New orders for manufactured durable goods in June increased $3.4 billion or 1.6 percent to $221.6 billion, the U.S. Census Bureau announced today. This increase, up two consecutive months, followed a 1.6 percent May increase. Excluding transportation, new orders decreased 1.1 percent. Excluding defense, new orders decreased 0.7 percent.  Transportation equipment, up four of the last five months, had the largest increase, $5.1 billion or 8.0 percent to $68.8 billion. Download full PDF  New orders at 1.6 percent blew away the Briefing.com consensus estimate of 0.3 percent. However, the ex-transportation -1.1 percent was below the consensus forecast of -0.1 percent. If we exclude both transportation and defense, "core" durable goods orders actually declined a disturbing 4.6 percent in June following a flat May core equivalent. This is the sharpest decline in this adjusted series since the -5.0 percent drop in January. For deeper declines prior to January number we have to look back to the last recession. The first chart is an overlay of durable goods new orders and the S&P 500. An overlay with unemployment (inverted) also shows some correlation. An overlay with GDP shows some disconnect in recent quarters between the recovery in new orders and the slowdown in GDP — another comparison we'll want to watch closely.

Durable goods orders ex-transportation fall in June | Reuters: (Reuters)- - New orders for a range of long-lasting manufactured goods fell in June and a gauge of planned business spending plans dropped, pointing to a slowdown in factory activity. The Commerce Department said on Thursday durable goods orders excluding transportation dropped 1.1 percent, the biggest decline since January, after rising 0.8 percent in May. Economists had forecast this category being flat last month. Overall orders increased 1.6 percent as demand for aircraft surged, after an upwardly revised 1.6 percent increase the prior month. Economists polled by Reuters had forecast orders for durable goods, items from toasters to aircraft that are meant to last at least three years, rising 0.4 percent after a previously reported 1.3 percent increase in May. "The manufacturing sector is going through a weak patch with orders excluding transportation falling over the last three months. This is also the message of the sub-50 readings on the ISM manufacturing composite and new orders indexes for June,"

The ''Real'' Goods on the Latest Durable Goods Orders - Earlier this morning I posted an update on the July Advance Report on June Durable Goods Orders. This Census Bureau series dates from 1992 and is not adjusted for either population growth or inflation. Let's now review the same data with two adjustments. In the charts below the red line shows the goods orders divided by the Census Bureau's monthly population data, giving us durable goods orders per capita. The blue line goes a step further and adjusts for inflation based on the Producer Price Index, chained in today's dollar value. This gives us the "real" durable goods orders per capita. The snapshots below offer a quite sobering alternative to the standard reports on the nominal monthly data. Economists frequently study this indicator excluding Transportation or Defense or both. Just how big are these two subcomponents? Here is a stacked area chart to illustrate the relative sizes over time. Here is the first chart, repeated this time ex Transportation.  Now we'll exclude Defense orders.  Finally, here is the chart that I believe gives the most accurate view of what Durable Goods Orders is telling us about the long-term economic trend. The three-month moving average of the real (inflation-adjusted) core series (ex transportation and defense) per capita helps us filter out the noise of volatility to see the big picture.

Home Starts Buoy Pickup Truck Sales - In the first half of this year, sales of full-size pickups made by the Detroit Three increased 13%, to 707,175 vehicles. Analysts believe such trucks on average generate between $8,000 and $10,000 in operating profit. By comparison, profit on small and midsize cars can be just a few hundred dollars. Auto makers are encouraged by the latest housing indicators. In June, the rate of new-home construction rose to the highest level in four years, on pace for 760,000 on an annual basis. A continuing recovery in home construction should translate into even faster growth in truck sales in the second half and in 2013. Kent Pecoy is one of the people who could help. The owner of a construction company that builds and remodels homes in Massachusetts and Connecticut, he has 30 trucks in his fleet and badly needs to replace several of them. Now that the home business is perking up, he says he may just do that in the fall.

As China costs rise, technology lures U.S. factories home - After decades roaming the world in search of lower costs, U.S. manufacturers are finding that factories at home can compete with China, India, Mexico and other low-cost countries. To be sure, labor-intensive industries like clothing and electronics, which are heavily dependent on hand assembly, are seen as unlikely to come back to the United States in a major way. And the trickle of returning jobs is far from a flood. But higher transportation costs and wage inflation in China could drive more production back to the United States. Prime candidates for return are bulky, heavy items. GE has shifted production of appliances from Mexico and China to Louisville, Kentucky, partly due to rising shipping costs. The new plant that Caterpillar is building near Athens, Georgia, will employ about 1,400 and make small bulldozers and excavators. As manufacturers have learned to run factories with fewer workers - whose jobs consist of keeping high-cost, high-speed machines running smoothly, rather than assembling goods by hand - they have found that wages are a less critical issue in choosing a factory site.

The Future of Manufacturing Is in America, Not China - Many CEOs, including Dow Chemicals' Andrew Liveris, have declared their intentions to bring manufacturing back to the United States. What is going to accelerate the trend isn't, as people believe, the rising cost of Chinese labor or a rising yuan. The real threat to China comes from technology. Technical advances will soon lead to the same hollowing out of China's manufacturing industry that they have to U.S industry over the past two decades.  Several technologies advancing and converging will cause this. First, robotics. The robots of today are specialized electromechanical devices run by software and remote control. As computers become more powerful, so do the abilities of these devices. Robots are now capable of performing surgery, milking cows, doing military reconnaissance and combat, and flying fighter jets. Several companies, such Willow Garage, iRobot, and 9th Sense, sell robot-development kits for which university students and open-source communities are developing ever more sophisticated applications.  The factory assembly that China is currently performing is child's play compared to the next generation of robots -- which will soon become cheaper than human labor. One of China's largest manufacturers, Taiwan-based Foxconn Technology Group, announced last August that it plans to install one million robots within three years to do the work that its workers in China presently do. It has found even low-cost Chinese labor to be too expensive and demanding.

A Nation That’s Losing Its Toolbox - Ask the administration or the Republicans or most academics why America needs more manufacturing, and they respond that manufacturing spawns innovation, brings down the trade deficit, strengthens the dollar, generates jobs, arms the military and kindles a recovery from recession. But rarely, if ever, do they publicly take the argument a step further, asserting that a growing manufacturing sector encourages craftsmanship and that craftsmanship is, if not a birthright, then a vital ingredient of the American self-image as a can-do, inventive, we-can-make-anything people.  That self-image is deteriorating. And the symptoms go far beyond Home Depot. They show up in the wistful popularity of books like “Shop Class as Soulcraft,” by Matthew B. Crawford, in TV cooking classes featuring the craftsmanship of celebrity chefs, and in shows like “This Old House.”  Traditional vocational training in public high schools is gradually declining, stranding thousands of young people who seek training for a craft without going to college. Colleges, for their part, have since 1985 graduated fewer chemical, mechanical, industrial and metallurgical engineers, partly in response to the reduced role of manufacturing, a big employer of them.  The decline started in the 1950s, when manufacturing generated a hefty 28 percent of the national income, or gross domestic product, and employed one-third of the work force. Today, factory output generates just 12 percent of G.D.P. and employs barely 9 percent of the nation’s workers.

Best Fix for Postal Service Is to Take It Private - Orsag - Those who believe in the usefulness of government must be vigilant about making sure all its activities are vital ones, since the unnecessary ones undermine public confidence. With this in mind, Congress should now privatize the U.S. Postal Service.  Further evidence for why this should happen came last week, when the Postal Service announced that it would be unable to meet billions of dollars in payments that are coming due in August and September for future retiree health benefits. Privatization is not always the best way to improve efficiency, but the problems facing the Postal Service will be difficult to address if it remains within the government, and there is no longer any sound reason for it not to go private.

Philly Fed: State Coincident Indexes show weakness - From the Philly Fed:  The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for June 2012. In the past month, the indexes increased in 30 states, decreased in nine states, and remained stable in 11 states, for a one-month diffusion index of 42. Over the past three months, the indexes increased in 39 states, decreased in nine states, and remained stable in two states, for a three-month diffusion index of 60.  Note: These are coincident indexes constructed from state employment data.  This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged). In June, 35 states had increasing activity, unchanged from May. The last two months have been weak following eight months of widespread growth geographically. The number of states with increasing activity is at the lowest level since June of last year.  Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession.  And the map was all green just just a couple of months ago. Now there are a number of red states.

U.S. Jobless Claims Drop by 35,000 — The number of Americans applying for unemployment benefits dropped by 35,000 last week, but the numbers were skewed by seasonal factors. The Labor Department says applications fell to a seasonally adjusted 353,000, down from a revised 388,000 the previous week. It was the biggest drop since February 2011. The four-week average, a less volatile measure, declined 8,750 to 367,250, the lowest since the end of March. Economists view the recent numbers with skepticism, noting that the government struggles to adjust claims figures to reflect temporary summertime layoffs in the auto industry. Many automakers are foregoing the typical shutdowns because stronger sales have kept plants busier.

A Mixed Bag Of Economic Updates -- Today’s updates on initial jobless claims and durable goods orders bring encouraging news, albeit with a caveat: a widely followed subcategory of durable goods—commonly referred to as business investment—looks troubling. Does the weakness in business investment—i.e., new orders for non-defense capital goods less aircraft—overwhelm the brighter numbers in durable goods overall and the sharp drop in new filings for unemployment claims?  In search of some perspective, let’s start with the claims data: last week’s filings dropped a hefty 35,000 to a seasonally adjusted 353,000, or just slightly above a four-year low. Keep in mind that claims data in recent weeks has been buffeted by seasonal noise related to the auto industry (for some background, see here and here). Nonetheless, as the weeks roll on and new claims remain at or near the lowest levels in several years, it’s premature to jettison the case for optimism.  As for new orders for durable goods, the broad measure for this indicator posted a decent if not terribly impressive month in June: +1.6%. That’s the second straight month of roughly equivalent gains. The trouble spot was in capital goods, which slumped 1.3% last month after a 2.7% rise in May.

Jobless Claims Still Too Cloudy to Draw Conclusions - Thursday’s encouraging unemployment-benefit claim figures might bode well for the job market, but it’s too early to tell whether they’re believable. As we noted earlier, the Labor Department’s latest reports on how many Americans are filing new claims for jobless benefits have contained positive news about the economy even as other gauges of health have worsened. Thursday’s numbers add to that: Claims dropped 35,000 last week to a seasonally-adjusted 353,000. The four-week moving average of claims, which smooths out week-to-week volatility, fell 8,750 to 367,250 — the lowest since March. To find an even lower four-week moving average you’d have to go back to April 2008. And figures below 400,000 tell economists the job market is improving. America’s job market improved early this year and then hit a rough patch — one some economists chalked up as “payback” for job gains boosted by unseasonably warm weather in the winter. Some believe the rough patch could be ending. “It is starting to look as if the worsening of initial claims data a few weeks ago was indeed a repeat of the last 3 years seasonal pattern rather than a genuine worsening,”

Breaking Down Continuing Distortions in Jobless Claims - PNC Financial Services Senior Economist Gus Faucher talks about the underlying trend in jobless claims amid major seasonal volatility and caveats inside an increase in durable-goods orders with The Wall Street Journal Online’s Tom Ortuso.

US Labor Force as percentage of population: 1952-2012 -This is a different metric to, say, the Labor force Participation Rate. Although there has been a marked decrease in recent years, the most salient part of this graph has to be the 1962-1990 growth period, whereby large amounts of people entered the workforce. This reflects the growth of women choosing to work in the workplace rather than remaining at home. I'm sure that birthrates during this period would also reflect a downward trend. And although productivity is certainly a important feature in GDP growth, this graph should also prove that GDP growth between the 1962-1990 period was also driven by an expansion of the available workforce. Similarly, any discussion about how GDP growth in recent decades has been lower than the previous ones should also take into account the plateau from 1990 onwards. Note also that the 1981-1990 period grew at a slower pace than the 1964-1980 period. Reaganomics? The 1952-1962 period is interesting in that the population grew faster in proportion to the workforce. In a word: Baby Boomers. By 1962, the eldest Baby Boomers were 17 and ready to go to work. As the population ages and more people retire, there will be a fall in the above graph. I'd love to look at a graph for Japan, considering their population is aging and now in decline.

US unemployment: Neither natural nor unnatural - The Great Recession in the US has been followed by high and persistent unemployment. Although output recovered its pre-crisis level, the unemployment rate is still above its pre-crisis level, a situation that is popularly called ‘jobless recovery’. This ‘jobless recovery’ has led economists to argue that unemployment has reached a point where it can fall no further without further inflation. This column disagrees, suggesting the nature of the crisis affects the nature of the recovery.

Majority of Job Opening Filled by Workers Switching Industries -- Workers switching industries are filling the majority of U.S. job openings, a Federal Reserve Bank of San Francisco economist finds in a new examination of government data. The research lends support to the view that much of today’s unemployment reflects inadequate demand in the economy, and thus susceptible to government stimulus, rather than a mismatch between the skills of unemployed workers and the needs of employers that will persist. The working paper by Bart Hobijn is good news on a couple fronts. First, it means workers from industries that slumped during the recession and aren’t predicted to rebound later, such as construction, aren’t doomed. They are being hired in new fields. Second, it also suggests that some of the reasons that so many workers are unemployed while there are so many job openings may diminish or evaporate as the economic recovery picks up speed. If the weakness in the labor market isn’t due to permanent changes that will keep workers unemployed, that gives the U.S. Federal Reserve more room to take actions that could help bring down the jobless rate.

The Big Jobs Myth: American Workers Aren't Ready for American Jobs - A specter haunts the job market. You've witnessed it on the campaign trail. You've seen it on TV. It is the idea that the skills of U.S. workers don't match the needs of the nation's employers.  This "skills mismatch" is routinely held up to explain why the unemployment rate is still at 8.2% three years after the Great Recession officially ended, and why nearly half of those out of work have been so for more than six months. The Romney campaign affirms that the skills mismatch "lies at the heart of our jobs crisis."  President Obama quoted conversations with businessmen who can't find qualified workers, and then proposed "a national commitment to train two million Americans with skills that will lead directly to a job." In recent months, researchers from the Federal Reserve Bank of Chicago, the University of California-Berkeley, and the Wharton School have expressed skepticism about the existence of a national skills mismatch. A larger body of work, stretching back decades, paints a murky picture about how broad-based a problem worker skill level is. Despite this, policymakers have fretted about the issue for 30 years, in periods of high unemployment and low. If the research is far from certain, why does the skills-mismatch narrative stay with us? And by fixating on mismatched skills, are we ignoring a far bigger problem for the economy?

Long-Term Unemployment: Anatomy of the Scourge - Brookings - In the 11 recessions since World War II, unemployment reached 9 percent in just three (1974-75, 1981-82, 2008-9). Only in the most recent slump, though, did the rate of longterm unemployment exceed 3 percent. Indeed, it reached 4.5 percent in April 2010, almost two percentage points higher than the peak in any previous postwar business cycle. And the problem is worryingly persistent: by April 2012, the long-term rate had exceeded 3 percent of the labor force for 34 successive months. Between 2007 and 2011, the fraction of the nation's unemployed who were unemployed six months or longer increased from 18 percent to 44 percent. What’s going on here – and what can we do about it? The U.S. Bureau of Labor Statistics defines an unemployed person as a potential worker who is currently jobless, has actively sought work in the previous four weeks and is available for work. The BLS also counts workers as unemployed who have been temporarily laid off and anticipate being recalled, even if they’re not actively looking for another job. People who are neither employed unemployed by this definition are classified as “not in the labor force.”

Wages driven down, now relative to market you're over paid! - I heard and then went to look see that Caterpillar is working hard to control it's costs. "Despite earning a record $4.9 billion profit last year and projecting even better results for 2012, the company is insisting on a six-year wage freeze and a pension freeze for most of the 780 production workers at its factory here. Caterpillar says it needs to keep its labor costs down to ensure its future competitiveness."  It has purchased 17 other business since 2008, 9 were non US companies. Two companies were purchased in 2011. Here's the thing, a 6 year freeze? I guess there will be no inflation? I mean like zero. Though economist are saying inflation is needed as part of the solution to our slow economy. Of course, Obama having frozen government wages, I guess Caterpillar is just being patriotic. Nothing like We the People blazing the trail for how we want the private sector to treat We the People. Caterpillar made $4.9 billion profit. If they raised these people's pay $10,000 each, youre only talking $7.8 million. It is 0.159% (0.00159) of Caterpillar's profit. Inflation has averaged since 2008 about 2.075%.  Giving the worker $10,000 more per year does not equal the inflation rate as a share of the profit. If the worker were getting their due based on inflation they would get a piece of $101,675,000. This would be $130,352.56 each for the 780 workers. Caterpillar would still have $4,798,325,000.00 profit.

Unions Contract Out to PR Firms That Work for Anti-Worker - SKDKnickerbocker (SKD) is one of the top firms providing outside assistance to labor coalitions while raking in hundreds of thousands of dollars for work to undermine organized labor, particularly teachers unions. Led by Anita Dunn, a former White House communications director and current Democratic Party advisor, SKD has spearheaded state-based campaigns for Students First, the anti-teacher's union charter and school privatization group founded by former Chancellor of DC Public Schools Michelle Rhee. In Ohio, Rhee’s group and state groups funded by Students First pushed Senate Bill 5, Gov. John Kasich’s attempt to end collective bargaining for most public sector employees. (The bill was later repealed by labor-led ballot initiative.) In Michigan, a leaked Power Point presentation shows that Students First promoted a bill to weaken collective bargaining for teachers. And in New York, according to a presentation obtained by In These Times, a SKD executive named Stefan Friedman worked on a team to produce education reform ads to demonize teacher unions. SKD ads cast teachers’ unions as special interests that cost the state millions of dollars in taxpayer money.

Growing number of workers complain about being shortchanged -  There’s been a record spike in wage and hour violation claims by employees thanks to sustained tough economic times, an increase in enforcement by the government, and confusion over -- or disregard of -- overtime pay provisions. Already this year, there have been a record number of lawsuits filed under the Fair Labor Standards Act, which covers wage and hour provisions, with 7,064 filed so far this year. That's up from 7,006 filed for all of 2011 and just 2,035 cases filed a decade ago, according to data compiled by employment law firm Seyfarth Shaw. The Department of Labor's wage and hour division collected a record $224 million in back wages from employers in the latest fiscal year for more than 275,000 workers. “Many workers still have a hard time taking advantage of their legal protections,”

As California Warehouses Grow, Labor Issues Are a Concern - In the last decade or so, Moreno Valley and the rest of the Inland Empire have become the nation’s largest hub of distribution warehouses, where workers sort the imported goods that come through Los Angeles ports. In the industry, known as logistics, those goods are prepared for and delivered to stores across the country.  By most estimates, Inland Empire, with its $300 billion piece of the industry, is the country’s most bustling trade gateway. Lured by “cheap dirt,” as many here put it, companies are only increasing their demands for large tracts of land in the region.  Still reeling from the economic downturn, many community leaders in the Inland Empire say they are desperate for jobs, particularly for low-skilled workers, many of whom lost their jobs in construction after the housing collapse. They see the region’s warehouses and related delivery industries — which now employ an estimated 200,000 people, more than Salt Lake City’s population — as the best way out of the doldrums, seeing salvation in the form of shipping containers.  But there are plenty of skeptics. Environmentalists say the parade of trucks has a dangerous impact on the air in the area, contributing to an already high rate of asthma in children. Labor advocates say a vast majority of the jobs provide just minimum wage, often without benefits.  In some warehouses, workers are paid based on how much work they complete, like the number of trucks they empty. In October, a state investigation found that two staffing agencies that supply workers to Wal-Mart distribution centers failed to provide workers with proper information about their wages, making it unclear how much they were earning on the job.

Half of recent college grads underemployed or jobless, analysis says -  The college class of 2012 is in for a rude welcome to the world of work. A weak labor market already has left half of young college graduates either jobless or underemployed in positions that don't fully use their skills and knowledge. Young adults with bachelor's degrees are increasingly scraping by in lower-wage jobs -- waiter or waitress, bartender, retail clerk or receptionist, for example -- and that's confounding their hopes a degree would pay off despite higher tuition and mounting student loans. An analysis of government data conducted for The Associated Press lays bare the highly uneven prospects for holders of bachelor's degrees. Opportunities for college graduates vary widely. While there's strong demand in science, education and health fields, arts and humanities flounder. Median wages for those with bachelor's degrees are down from 2000, hit by technological changes that are eliminating midlevel jobs such as bank tellers. Most future job openings are projected to be in lower-skilled positions such as home health aides, who can provide personalized attention as the U.S. population ages.

STUDY: One In Four Private Sector Workers Earn Less Than $10 An Hour - The last increase in the federal minimum wage was passed into law four years ago today, but the current minimum wage falls far short of meeting the needs of the average worker. To match the buying power of the 1968 minimum wage, for instance, today’s would need to be increased to $10.55 an hour. And yet, more than a quarter of America’s private sector workers make less than $10 an hour, according to a report released this month by the National Employment Law Project: In 2011, more than one in four private sector jobs (26 percent) were low‐wage positions paying less than $10 per hour. These jobs, moreover, were concentrated in industries where low‐wage workers make up a substantial share – in some cases more than half – of the entire workforce. Worse yet, the share of low-wage jobs is increasing, as five industries that are comprised primarily of low-wage workers have grown faster than total employment since the end of the Great Recession, as this NELP chart shows:

How Did Time Use Change in the Recession? -  When U.S. unemployment rate started rising, going from 5.0% in January 2008 to 7.3% by December 2008, and thus on up to a peak of 10.0% in October 2009, many people had many fewer work hours. What did they do with those hours? Mark Aguiar, Erik Hurst, and Loukas Karabarbounis have the answer in "Time Use During Recessions," which is NBER Working Paper #17259. (NBER working papers are not freely available to the public, but many academic readers will have access through library subscriptions.) The authors make use of the American Time Use Survey, which is conducted by the Census Bureau. It first started collecting data regularly on how people spend their time in 2003.  Here's a summary figure showing patterns of hours worked, leisure hours, and hours of non-market work. The blue dashed line in each panel is a best-fit line for the data from 2003-2008, extrapolated forward for 2009-2010. The solid line is actual data. Thus, hours of market work was on an upward trend in 2003-2008, but dropped sharply when the recession hit. Leisure hours were on an upward trend, but then rose faster. Hours of non-market work were on a downward trend, but then reversed direction.

More Diversity in the Suburbs - America’s suburbs are becoming more diverse, but tenuously so, a study has found. The study determined that the number of racially diverse suburbs increased by 37 percent between 2000 and 2010, and diverse suburbs are growing more quickly than majority-white suburbs. The findings, which draw on data from the nation’s 50 largest metropolitan areas, also underscore shifting demographic trends, which indicate that minority groups will be in the majority in only a few decades. “People that grow up in diverse communities are comfortable living and working in the multiracial society we’re going to become,”  Diverse communities strike a fragile balance that can easily be lost over time, the study found. Once the communities fell back into segregation, they tended to remain that way. “The frightening thing is they don’t stay stable and we don’t have a plan to keep them stable,” Mr. Orfield said. “We haven’t finished with the issues of discrimination in the housing market that make these things unstable.”

The Agenda: A Closer Look at Middle Class Decline - For the first time since the Great Depression, middle-class families have been losing ground for more than a decade. They, and the poor, have struggled particularly badly since the financial crisis led to a global recession in 2008. The idea that living standards inevitably improve from one generation to the next is under threat. Many of the bedrock assumptions of American culture — about work, progress, fairness and optimism — are being shaken. Arguably no question is more central to the country’s global standing than whether the economy will perform better in the future than it has in the recent past. Over the next few months on this blog, several colleagues and I will look in some detail at the challenge and at possible ways forward, and we’ll encourage you to weigh in with questions, ideas and other feedback. Later, I’ll produce an article with my take, with the hope that it will serve as a jumping off point to further debate. This article will be one of a handful that The Times produces on the biggest issues facing the country as it chooses its leader for the next four years. We’re calling the series the Agenda.  Heading into the project, I see the economy’s problems along these broad lines: Since median inflation-adjusted family income peaked in 2000 at $64,232, it has fallen roughly 6 percent. You won’t find another 12-year period with an income decline since the aftermath of the Depression.

Counterparties: Imposing pay cuts on unions - ArcelorMittal, US Steel and Caterpillar each want to push labor costs lower — and that might well mean pay cuts, even for unionized workers. It’s all part of a trend that even the most well-organized unions haven’t been able to alter: “Wage and salary income… has fallen steadily from close to 55% of GDP in the early 1970s to less than 45% today”, writes Edward Alden. According to documents reviewed by the WSJ, ArcelorMittal is offering union workers a 36% pay cut and the elimination of retiree healthcare benefits for new workers. US Steel is likely pushing for cuts as well, although a similar specifics aren’t available. And Caterpillar is living up to its reputation for hard bargaining with labor, asking 780 workers to take a six-year pay and pension freeze. In response, workers at Caterpillar went on strike. That, however, is a measure that has lost its former force: Labor experts say that leverage has shifted to owners, who are increasingly willing to close unprofitable operations or bring in replacement workers… ”The strike is a weapon of the past,” said Gary Chaison, a professor of industrial relations at Clark University in Worcester, Mass.

What Happened to the Wage and Productivity Link? - Real (that is, inflation-adjusted) weekly wages have been essentially stagnant since 1970 while productivity has continued its previous trend. This leads to an obvious question: What happened in 1970 to decouple wages and productivity? This has generated discussion by, among presumably many others, American University doctoral student Daniel Kuehn, University of Michigan doctoral candidate Noah Smith, and NYT columnist Paul Krugman (who may have some economic training as well).  A summary of the more plausible explanations offered by those authors and their commenters:

• Changes in technology (robotics, computers, etc.) which accelerated productivity while decreasing the need for skilled labor or, indeed, labor altogether.
• The end of Bretton Woods currency peg to gold. Smith: Why would this have held down wages in the U.S.? Well, it might have allowed the start of globalization, which began to add labor-rich, capital-poor countries to the rich-country trading system, thus holding down wages via factor price equalization.
• Globalization writ large.
• The collapse of labor unions and the ability of labors to collectively negotiate compensation.
• The rise of dual-income households. The women’s liberation movement and other factors made it the norm for middle class women to take jobs outside the home, both putting downward pressure on wages (by increasing the labor pool) and giving the illusion of higher living standards (while individual wages may have stagnated, household disposable income exploded

The Minimum Wage Is So Low That It’s Immoral – and Foolish - Economic issues make some people's eyes glaze over, so we'll put this plainly: Today's minimum wage is epic in its injustice and Dickensian in its cruelty. It's a shame that Dickens himself isn't here to write about it.  Oh, and we almost forgot: Keeping it this low isn't very smart, either. A new report provides a good opportunity to revisit the subject, which leads to an inescapable conclusion: Raising the minimum wage isn't just the right thing to do. It's also economic common sense. Sen. Tom Harkin and Rep. George Miller have a new minimum-wage proposal that's worth fighting for. Here's why: Most low-wage workers work for large corporations, not Mom-and-Pop businesses. Many people assume that most minimum-wage employees work for small, family-owned businesses. But a new Data Brief from the National Employment Law Project finds that 66 percent of low-wage employees work for companies with more than 100 employees. That includes a handful of very large corporations which collectively employ nearly 8 million low-wage employees.  The largest of those mega-corporations is, unsurprisingly, Wal-Mart, with 1,400,000 employees. The next-largest is Yum! Foods, which owns Taco Bell, Pizza Hut, and KFC. After Yum! Foods comes McDonald's.

7 Ultra-Rich Companies Rake in Profits While Paying Workers Peanuts  - July 24 marks three years since the last time the federal minimum wage went up. Nationwide, as corporate profits have not only returned to pre-financial-crisis levels but hit record highs, millions of workers are still trying to survive on $7.25 an hour. A new report from the National Employment Law Project [PDF] found that more than one in four private-sector jobs pays less than $10 an hour—and those jobs are mostly with large corporations, not small businesses. Of the 50 largest employers of low-wage workers, 92 percent of those were profitable last year —and three-fourths of them are doing better than they were before the recession. Meanwhile, the executives at those companies are pocketing the money that isn't going to their workers. The NELP study found that top executive compensation at those firms averaged over $9 million last year. Assuming they work a 40-hour week, that's $4,326 an hour, about what 600 employees make at today's minimum wage. So who are these companies stiffing their workers while making record profits? Some of them are familiar names that you probably pass (and maybe even shop at) every day. Below we take a look at eight companies raking in profits while paying their workers poverty wages.

Paycheck-to-paycheck: US households barely getting -More than one-third of American households are barely able to manage their bills, getting by financially only paycheck-to-paycheck, a new study reveals. Research out of the Consumer Federation of America and the Consumer Planner Board of Standards, Inc. suggests that Americans are less well off now than during the Clinton administration, with 38 percent of households questioned — nearly two-fifths — saying they are only barely able to get by.  According to their survey of 1,508 US households, not only do a substantial sample of those polled say they live paycheck-to-paycheck, but nearly one-third, 30 percent, say they are actually financially comfortable. Additionally, only 34 percent say that they feel like they will be able to retire by age 65. The results of the responses out of the later study offer a sharp contrast to the findings of a previous analysis published in 1997. When the CFA participated in a similar poll 15 years earlier, only 31 percent said they lived paycheck to paycheck, showing an increase of seven percentage points in just a decade and a half. The federation adds that the percentage of respondents who indicated they felt comfortable financially has fallen significantly as well.

Americans put off having babies amid poor economy - Twenty-somethings who postponed having babies because of the poor economy are still hesitant to jump in to parenthood — an unexpected consequence that has dropped the USA's birthrate to its lowest point in 25 years. As the economy tanked, the average number of births per woman fell 12% from a peak of 2.12 in 2007. Demographic Intelligence projects the rate to hit 1.87 this year and 1.86 next year — the lowest since 1987. The less-educated and Hispanics have experienced the biggest birthrate decline while the share of U.S. births to college-educated, non-Hispanic whites and Asian Americans has grown. The effect of this economic slump on birthrates has been more rapid and long-lasting than any downturn since the Great Depression. Many young adults are unemployed, carrying big student loan debt and often forced to move back in with their parents — factors that may make them think twice about starting a family. "The more you delay it, the more you delay the possibility of a second or third child," "This is probably a long-term trend that is exacerbated by the recession but also by the general hollowing out of middle-class jobs. There's a growing sense that college is prohibitively expensive, and yet your kids can't make it without a college degree," so many women may decide to have just one child.

Stagnant Economy May Cancel Out Expected Baby Boom -  The sluggish economic recovery is continuing to drive down total births in the United States in 2012, according to the July edition of the U.S. Fertility Forecast from Demographic Intelligence. Moreover, the Total Fertility Rate (TFR) in the U.S. is predicted to fall to a 25-year low this year, 1.87 children per woman, from a recent high of 2.12 per children per woman in 2007.  The ongoing decline in total births is particularly striking because the Echo Boom generation, the children of the Baby Boomers, is moving into childbearing age. This means that the number of women in their prime childbearing age is now surging, which should have led to an increase in the overall number of children born each year. But this baby boomlet has so far failed to materialize because today's young adults are concerned about their current employment status and future economic prospects.  Drawing on an extensive analysis of demographic, economic, and cultural trends, including Google search trends, the new report from DI provides detailed projections of U.S. birth trends in 2012, 2013, and 2014. Three findings from The U.S. Fertility ForecastTM are particularly noteworthy:

• The U.S. total fertility rate (TFR) will fall more than 10 percent from 2.12 children per woman in 2007 to 1.87 in 2012, according to the forecast.
• Fertility fell most among women under 30 in the wake of the Great Recession.
• Fertility intentions among American women remain high. Despite the recession's fallout, the average American woman still intends to have more than 2.2 children over her lifetime.

Dean Baker: Raising the Minimum Wage Is Cheap and Easy - There are some policies that are pretty much no-brainers. We all agree that the Food and Drug Administration should keep dangerous drugs off the market. We all agree that the government should provide police and fire protection. And, we pretty much all agree that workers should be able to count on at least some minimal pay for a day's work. The minimum wage is non-controversial. The vast majority of people across the political spectrum support the minimum wage. In fact, one of the big accomplishments of the Gingrich Congress in 1996 was a 22 percent increase in the minimum wage. The only real issue is how high it should be. There are good reasons for believing that the minimum wage should be considerably higher than it is today. At the current rate of $7.25 an hour, a full-time year-round worker would have gross pay of less than $15,000 a year. This is less than half of what the average Fortune 500 CEO makes in a day. It would be hard enough for a single person to survive on this income, imagine trying to support a child or even two on this money. And, close to 40 percent of the workers who would be benefited by a minimum wage increase have kids.

Time to raise the minimum wage - - letter to Congressional leaders -As the three-year mark since the federal minimum wage was last raised approaches, we urge you to once again raise the federal minimum wage. A three-step raise of 85 cents a year for three years—which would mean a minimum wage of $9.80 by 2014—and then indexing to protect against inflation (corresponding to the legislation proposed by Senator Tom Harkin and Representative George Miller) would be a reasonable approach. The increase to $9.80 would mean that minimum wage workers who work full-time, full-year would see a raise from their current salary of roughly $15,000 to roughly $20,000. These proposals also usefully raise the tipped minimum wage to 70% of the regular minimum.This policy would directly provide higher wages for close to 20 million workers by 2014. Furthermore, another nearly 9 million workers whose wages are just above the new minimum would likely see a wage increase through “spillover” effects, as employers adjust their internal wage ladders. The vast majority of employees who would benefit are adults in working families, disproportionately women, who work at least 20 hours a week and depend on these earnings to make ends meet. At a time when persistent high unemployment is putting enormous downward pressure on wages, such a minimum wage increase would provide a much-needed boost to the earnings of low-wage workers.

Women Need a Raise in the Minimum Wage - Today marks three years to the day since the last increase in the federal minimum wage. It’s been stuck at $7.25 an hour, even as prices for gas and milk have risen. That adds up to just $14,500 a year, and it isn’t enough to afford rent in any state in the country. It’s also more than $3,000 below the poverty line for a parent with two children. This is an issue that affects women workers deeply. Why? Because women make up two-thirds of minimum wage workers in this country. They’re 95 percent of home health aide workers, who make just $9.70 per hour at the median. They make up over half of the retail workforce, and in particular are the majority of food service and clothing store workers. In fact, they are 72 percent of cashiers, 85 percent of maids and housecleaners, and 83 percent of personal care aides – all minimum wage occupations that pay little and usually offer few benefits. Things are even worse when it comes to waiters and waitresses, who are 64 percent female, as the minimum cash wage for tipped workers like them is a meager $2.13 per hour. That amount hasn’t changed in 20 years. No wonder restaurant workers, 70 percent female, experience poverty at about three times the rate of the rest of the workforce.This is a significant factor in that bothersome gender wage gap: women have long been stuck in poorly paying minimum wage jobs (that often don’t come with benefits or a steady schedule on top of everything else). If the jobs where women already work – which is a narrow group, as two-thirds of all working women are crowded into just 54 occupations – paid better, they would have a better chance at catching up to their male peers.

Zombie Straw Men - Paul Krugman - I was informed that the Tax Foundation was claiming that there has been no long-run upward trend in income inequality. My immediate question was, how did they fudge the data to get that result? Well, the answer is here. Actually, the whole post is kind of a classic of disinformation: pretense that income taxes are the only taxes? Check. Bemoaning the rising share paid by the rich, while ignoring their rising share of income? Check. Whining that the lucky duckies with low incomes don’t pay enough? Check. But what about that claim that there’s no trend in inequality? Here’s the chart: OK, what’s going on here? First of all, they’re using CBO data, which only go up to 2009; we do, as it happens, have estimates from Piketty and Saez that go up to 2010, and they show inequality already rebounding. Rebounding from what? Well, what major income source does the top 1 percent have that is major for them but minor for everyone else? Capital gains. And what was happening to capital gains in 2009? Financial crash, anyone?

Why Kids Today Have It Worse Than Their Parents - To understand why today’s young people have it so hard, take a look at their parents. Today’s 20-somethings are, broadly speaking, the children of the last of the Baby Boomers, those born in the late 1950s and early 1960s. That generation, like this one, came of age in the midst of a brutal recession: The unemployment rate for 18-24 year-olds topped 17% at the end of 1982. (In 2010, it briefly crossed 18%.) But for that generation, unlike for this one, the situation quickly improved. By the end of 1983, the unemployment rate for 18-24 year-olds had dropped below 14%, and it didn’t get back above that mark until the latest recession. This time around, joblessness among young people remains over 15% three years after the recovery began.    The slow recovery hits people of all ages, of course. But it’s likely to be especially hard on the young, as a new report from the Bureau of Labor Statistics makes clear. The report looks at data from the National Longitudinal Survey of Youth, which in 1979 began tracking nearly 10,000 Americans born between 1957 and 1964. The report reveals just how important the years of early adulthood are to lifetime earnings and career prospects.

Why the Poor Are on the Hook for the Housing Crash - Many are discussing a potential collapse of a housing bubble in Canada and what could be done about it right now. Here are posts on that subject from Matt Yglesias, Dean Baker, and Worthwhile Canadian Initiative. As I read the literature being written on this crisis, the key issue to watch for is whether the rapid growth in housing prices is matched by a similar growth in household mortgage debt. To see why, it might be useful to contrast the aftermath of the United States' housing bubble with the stock market bubble. The IMF recently studied a series of 25 OECD countries from 1980 to 2011. These countries experienced a total of 99 housing busts ("turning points (peaks) in nominal house prices"). It divided these housing busts into ones with a high run-up in household debt and ones with a low run-up, and found that "housing busts preceded by larger run-ups in household debt tend to be followed by more severe and longer-lasting declines in household consumption...real GDP typically falls more and unemployment rises more for the high-debt busts." This happens with or without a financial crisis occuring at the same time as the housing bust. Why is this the case? Let's look at the allocation of losses that occur from the collapse of a bubble.

U.S. poverty on track to rise to highest since 1960s – The ranks of America's poor are on track to climb to levels unseen in nearly half a century, erasing gains from the war on poverty in the 1960s amid a weak economy and fraying government safety net. Census figures for 2011 will be released this fall in the critical weeks ahead of the November elections. The Associated Press surveyed more than a dozen economists, think tanks and academics, both nonpartisan and those with known liberal or conservative leanings, and found a broad consensus: The official poverty rate will rise from 15.1 percent in 2010, climbing as high as 15.7 percent. Several predicted a more modest gain, but even a 0.1 percentage point increase would put poverty at the highest level since 1965. Poverty is spreading at record levels across many groups, from underemployed workers and suburban families to the poorest poor. More discouraged workers are giving up on the job market, leaving them vulnerable as unemployment aid begins to run out. Suburbs are seeing increases in poverty, including in such political battlegrounds as Colorado, Florida and Nevada, where voters are coping with a new norm of living hand to mouth.

Is The Poverty Rate Set To Reach A 40-Year High? -- Poverty is a hardy perennial. But while no one will be surprised to learn that eradicating poverty is difficult, perhaps impossible, there was at least some modest progress over the last several decades. But now even that thin reed appears headed for the dustbin of history as the U.S. poverty rate looks set to return to heights last seen in the 1960s.  Decades of progress on lowering the U.S. poverty rate is evaporating before our eyes, or so some analysts say, based on expectations for the scheduled release of the Census data for 2011 later this year. A recent survey of economists by the Associated Press found that a “broad consensus” expects that the 2011 poverty rate may rise to as high as 15.7%, up from 15.1% in 2010. As the chart below shows (via the Census Bureau’s “Income, Poverty and Health Insurance in the United States: 2010 report), the poverty rate rose for three straight years through 2010 and the data for 2011 is on track to make it four in a row.

Online Payday Lenders Seek More Respect and Less Oversight: Call Them What You Like, They are Still 1,000% Long-term Loans -- On-line lenders who are not tribal or offshore claim that they need the same lack of oversight that the tribal and onshore on-line lenders are getting. Otherwise, it isn’t fair to them.  . Keep in mind that these on- line loans: - accrue interest at twice the rate of storefront payday  loans or about 800-1,000% per annum, and  -are designed so the fee is paid automatically out of the customer’s bank account, …over and over again, but the loan principal is never repaid.  Lenders now request that we stop hurling derogatory epithets at them, such as er, “payday loan.”  They provide no explanation of why these loans are not payday loans but ask that we now call them “short-term, small dollar loans. Why we would call a loan like this (that is frequently kept out for months if not years) a short-term loan is beyond me. Lenders are spending millions to lobby Congress to exclude these loans from state payday loan legislation and transfer all oversight of on-loan payday lenders from states to the Office of the Comptroller of Currency. Hello preemption! The prosed bill would also “loosen the rules for how short-term lenders disclose the total costs of the loans to consumers,” according to a Bloomberg story, by excluding any loan with an initial term of less than a year from the Truth in Lending Act. That way, I guess, customers would not know the loans carried interest rates of 800-1,000% and this would be further “fair” to these lenders.

Growing Hunger and Homelessness in America - America’s most needy are largely abandoned by Washington.Millions of Americans now endure protracted Depression conditions at a time half the population is either poor or low income. Long-term unemployment is unprecedented, and federal aid is being cut, not increased.Two new reports highlight enormous depravation levels and human suffering, getting little or no major media attention. Many affected families used to be middle class. They’re now low-income or impoverished by unemployment or spotty low-pay part-time work. Most important is that much worse conditions are coming during America’s greatest ever Depression to last years and devastate many more households than already. In December, the US Conference on Mayors published its “Hunger and Homelessness Survey: A Status Report on Hunger and Homelessness in America’s Cities.” Only four cities said emergency help wasn’t requested in the past year, aid requests increased by 15.5%. Among those needing it, 51% were in families, 26% were employed, 19% were elderly, and 11% homeless. Causes cited included unemployment, poverty, low wages, and high housing costs. Cities reported an average 10% increase in the amount of food distributed. Over 70% of them reported emergency food purchase budget increases. Nonetheless, 27% of people needing it didn’t get it. Demand’s fast outstripping supply and/or the willingness of cities to help during hard times. Under tight budget conditions, 86% of emergency kitchens and food pantries reduced the quantity of food distributed per visit to accommodate larger numbers. Moreover, demand is so heavy that people are now turned away.

Creating a Countercyclical Welfare System - Welfare systems exist to reduce the worst excesses of poverty. When poverty increases during recessions, the welfare state is supposed to rush into countercyclical action, providing a firewall against a growth in destitution. That’s the theory, anyway. In practice, it’s never been the case. In recent years in particular, the American welfare system has increasingly shed itself of this key obligation. In 1996, Aid to Families with Dependent Children (AFDC)—the welfare system established in 1935 as part of the Social Security Act—was scrapped in favor of a more limited system, Temporary Assistance for Needy Families (TANF). But in the Great Recession that began in 2008, TANF has proved a total disaster. Unemployment doubled in many states, but in most of them, the number of TANF enrollees either increased only marginally or decreased.It wasn’t always that way. “AFDC used to be countercyclical,” says economist James Ziliak of the University of Kentucky’s Center for Poverty Research. The program expanded automatically when the number of eligible recipients swelled during recessions. TANF, by contrast, was designed so that it couldn’t expand unless Congress specifically voted it more funds.

Jobless Recovery: 43 States Have Fewer Jobs Now Than They Did Before Recession -- Three years since the recession ended, 43 states have yet to regain the jobs they lost in the downturn. The figure is a reminder of how weak the nation's job market remains. The states that are the furthest behind in job growth are those that were hit hardest by the housing bust: Arizona, Florida and Nevada. Overall, the U.S. economy has 3.5 percent fewer jobs than it did before the Great Recession, which began in December 2007. The national unemployment rate has been stuck at 8.2 percent. As slow as the recovery in jobs has been, a few states are doing quite well. Seven have more jobs now than before the recession. Some – North Dakota, Texas and Alaska – are benefiting from an oil boom. But most states have lagged behind. "Except for these energy-producing states, everywhere there's still this caution in terms of hiring," Steve Cochrane, a regional economist at Moody's Analytics, said. Last month, unemployment rates rose in 27 U.S. states, the most in almost a year. Unemployment rates fell in 11 states – the fewest since August – and were unchanged in 12, the Labor Department said Friday.

U.S. Cities Get Fleeced in Libor Scandal - In the two decades before the 2008 financial collapse, the investment banking industry sidled up to state and local finance officials with an offer they couldn’t refuse. Instead of issuing plain vanilla 30-year fixed-rate bonds to build roads, schools and parking garages, why not sell variable rate bonds at lower rates and buy a swap that would fix the total payment at something lower than what they’d pay in the fixed-rate market? It was supposed to be win-win. The government agency got a slightly lower rate, while the investment bank earned fees. If the variable bond’s rate rose above the fixed rate target – the scenario that government finance officials feared most – the swap counterparty (the banks often off-loaded the instruments to speculators) paid off the government agency. If the variable bond rate went down, the swap payments moved in the other direction: from taxpayers to speculators. Either way, the government’s total cost was supposed to stay fixed. There was a slight problem with the formula, though – one that would cause tremendous grief later on. Changes in the variable rate bonds were almost always tied to an index of actual municipal bond transactions compiled by the U.S.-based Securities Industry and Financial Markets Association (SIFMA). Changes in the swaps, on the other hand, were tied to the London Interbank Offered Rate (Libor), which is set by the British Bankers Association based on reported rates from global banks. If Libor moved lower at a faster pace than SIFMA, government agencies’ hedge would come up short.

A Follow-Up On Burying Power Lines - After last month’s dercecho event knocked power out for some two million people in the Washington, D.C./Baltimore, many people wondered why more of the power lines that provide electricity to our communities are buried underground where they’d be far less likely to be effected by inclement weather. As I noted at the time, the logistical and cost issues associated with such a project were far larger than most people anticipated. Yesterday, the U.S. Energy Information Administration released a study that explained just how expensive the project could be, and how much it differs depending on the type of area you’re talking about, as reflected in this chart: Not surprisingly, just putting up new overhead lines is the cheapest alternative. However, we’ve seen in most parts of the country that new developments, whether commercial or residential, typically end up having their power and other lines buried for the simple reason that it’s considered wiser to invest the extra cost of burying the lines to avoid the additional costs that would be incurred in the future by having to maintain and repair overhead lines. The costs differences between urban, suburban, and rural areas aren’t surprising either and are most likely related to issues of population density and having to deal with existing infrastructure. Conversions in suburban and urban areas are far more expensive, quite obviously, because such a project would involved tearing through existing neighborhoods, digging up streets, and being careful not to interfere with underground gas lines and other such items. At $2,000,000 per mile, completely converting an area like Suburban Maryland would be almost cost prohibitive, for example.

Over $1 billion needed to fix crumbling Miami-Dade sewage system - Miami-Dade County’s three main water treatment plants and 7,700 miles of pipelines are so outdated it would take an initial installment of more than $1.1 billion just to replace the “most deteriorated vulnerable sections” of the system, a five-month just released internal study shows. From water plants that serve from South Miami-Dade to Hialeah to the county line, to pipes that move drinking water and sewage, to sewage treatment plants from Virginia Key to North Dade, so much corrosion has taken place that initial repairs could take anywhere from three to eight years, the study found. Each day 300 million gallons of effluent pass through the county’s sewer system, which combined with treated drinking water is the 10th largest utility in the nation. The release of the report Tuesday comes five months after Commissioner Barbara Jordan demanded it, and two months after federal regulators swarmed Miami demanding repairs and upgrades. Authorities from the U.S. Environmental Protection Agency, the Department of Justice and the Florida Department of Environmental Protection are expected to spend up to another four months discussing how to fix and pay for a system its director said is “being held together by chewing gum.”

Pittsburgh among 21 Pennsylvania cities jockeying to avoid bankruptcy - Pennsylvania cities are teetering on the brink of bankruptcy because of ebbing revenue, skyrocketing employee legacy costs and a growing need for municipal services, officials say. The state defines 21 cities, including Pittsburgh, as financially distressed, and dozens more could seek refuge under Pennsylvania’s Act 47 fiscal oversight law. Scranton Mayor Chris Doherty this month took the radical step of slashing municipal salaries to minimum wage to meet payroll. Pennsylvania is not alone in the financial dilemma. In the past month three California cities filed for Chapter 7 bankruptcy protection. Cities in Illinois, Michigan and Alabama are in the same situation. Experts say Pennsylvania in many ways is better off than states such as California, which limits the amount of money that distressed municipalities can raise through real estate taxes. Pennsylvania fared better when the housing bubble burst, forcing foreclosures and further reducing cash flow.

Los Angeles School Police Chief Rethinking Discipline Policy -  In response to controversy over court citations to students as young as 10, the police chief of Los Angeles’ largest school district said he’s working with school officials to reduce such tickets and establish, by mid-August, more out-of-court counseling options for kids who are cited. But Chief Steven Zipperman, who leads the nation’s largest school police force, defended his 340 sworn officers’ authority to issue citations when officers believe it’s appropriate. Students have been cited for everything from truancy to vandalism to possessing a marker that could be used for graffiti. They’ve also been summoned to court for jaywalking, cigarette and pot smoking. Large numbers of students have additionally been cited for fisticuffs and for being disruptive inside and outside school.   Last year, LAUSD officers gave out 21 court summonses to children between the ages of 7 and 10. All these students were black or Latino. More than 170 citations were also issued to 11-year-olds. Nearly 770 were issued to 12-year-olds. And more than 1,550 were issued to 13-year-olds. Citations were concentrated in more than a dozen middle schools where the number of tickets issued ranged from 60 to more than 100 in a school year.” 

Bernanke Champions Early Childhood Education - Educating children starting at an early age increases their opportunities and benefits the larger economy, Federal Reserve Chairman Ben Bernanke said in a video prepared to be shown Tuesday. Effective education can help reduce poverty, increase lifetime earnings and boost personal satisfaction at home and on the job, Mr. Bernanke said in a prerecorded video prepared for a conference of the Children’s Defense Fund in Cincinnati. The Fed chief didn’t discuss monetary policy in his remarks. “When individuals are denied opportunities to reach their maximum potential, it harms not only those individuals, of course, but also the larger economy, which depends vitally on having a skilled, productive workforce,” said Mr. Bernanke, noting that his wife is a teacher and that he himself had been a professor. Starting children’s education at a young age prepares them better for school and makes them more likely to be economically successful and contribute more to society when they are older, Mr. Bernanke said. He pointed to one study showing that three- and four-year-olds who attended a “high-quality” day care for half the day were more likely to own their own homes when they were 40 years old than a control group who didn’t attend the day care.

Enhancing the Efficacy of Teacher Incentives through Loss Aversion: A Field Experiment: Domestic attempts to use financial incentives for teachers to increase student achievement have been ineffective. In this paper, we demonstrate that exploiting the power of loss aversion—teachers are paid in advance and asked to give back the money if their students do not improve sufficiently—increases math test scores between 0.201 (0.076) and 0.398 (0.129) standard deviations. This is equivalent to increasing teacher quality by more than one standard deviation. A second treatment arm, identical to the loss aversion treatment but implemented in the standard fashion, yields smaller and statistically insignificant results. This suggests it is loss aversion, rather than other features of the design or population sampled, that leads to the stark differences between our findings and past research.

The Nonsense Invasion of Knowledge, From Elizabeth Warren to Climategate - Virginia has long been at the forefront of letting money in politics turn educational institutions into ignorance mills. The giving patterns of the UVA Board seem to demonstrate that money in politics follows bigger money. There are no limits on political giving in Virginia state elections, all of the state university boards, which are entirely appointed by the governor, are dominated by prolific political givers. The majority of UVA Board members have given at least $100,000 individually to state political candidates over the years, and nearly contributed at least $10,000 to governor Bob McDonnell's 2009 victory, regardless of their usual political affiliations. Amphetamine billionaire Randal Kirk, an appointee of McDonnell's predecessor, had given more than a million dollars almost entirely to Democrats before 2009, when he gave $300,000 to McDonnell’s political action committee and began donating heavily to Tea Party favorites like Eric Cantor and Herman Cain as well. Also prior to 2009, Kington had never topped the $130,000 he invested in his old business partner (and former Democratic governor) Mark Warner's political career; all told he has now given $173,632 to McDonnell and his PAC.

Do Higher Education Tax Credits Make Sense? - Higher education is a good investment, even though some new grads currently struggling to get jobs don’t think so. But does it make sense for the federal government to subsidize college with both tax incentives and direct grants? And if it doesn’t, which program should it dump? There is a strong case that the government should keep and enhance the Pell Grant program, which is the main form of direct assistance for low-income kids. At the same time,  it may be time to eliminate  or at least consolidate some of the confusing collection of education tax credits.   That, at least was the consensus among witnesses at a recent hearing at the Senate Finance Committee. There are currently 14 tax benefits available for college students and their parents.  These include three broad classes – tax benefits for tuition and related expenses , tax benefits for student loans, and tax benefits for education savings plans.  Basically benefits for before, during and after college attendance. JCT estimates the cost to the federal government  of these tax benefits to be $95.3 billion between 2010 and 2014. The size of these programs and direct federal grants have rapidly expanded in the last few years. Spending on Pell Grants has doubled – from $18.3 billion in 2008 to $36.5 billion in 2010, reflecting more generous programs and expanded enrollment during the recent recession.  Likewise, spending on education tax credits doubled from $9 billion in 2008 to $18 billion in 2009.

$20K in-state tuition may not be far off in Wash. - Washington tuition rates are rising at such a rapid clip that the cost of attending a top university is projected to surpass $20,000 per year for in-state students before the end of this decade. Those numbers, produced as part of an actuarial analysis for the state's pre-paid tuition program, mean that higher education rates may quadruple from 2004 to 2019. Supporters of the university system hope that the state can begin restoring at least some of the cuts to blunt those rising costs. Students at the University of Washington are preparing to pay $11,782 in this coming academic year, along with some additional fees not included in the prepaid tuition calculations, up about 15 percent from the year prior. Future projected increases mean by the 2019-20 school year, tuition could be $20,249, plus additional fees.

A $150 Billion Burden: What to Do About Subprime Student Loans - Today, the Obama administration offered us some very bad news and some very good news about the America's student debt burden. First, the bad news. Thanks in part to grossly loose lending standards during the last decade, the Consumer Financial Protection Bureau (CFPB) says the country is now sitting atop a $150 billion mound of private student loans, which lack the flexible repayment options of federal loans and tend to be more expensive to pay off. The government also found that at least $8.1 billion worth of private student debt issued between 1999 and 2011 had entered default. Loosely speaking, we had a subprime student loan boom. Now the good news: Since the financial crisis, lenders such as Wells Fargo and Sallie Mae have become more responsible. They've tightened up their underwriting practices substantially and are now handing out fewer loans (as shown in the graph below) and picking more qualified borrowers.

Saving for college and retirement dropping -  Many more households are struggling to make ends meet than in 1997, when consumer confidence was high and unemployment was low, says a survey released Monday by the Consumer Federation of America and Certified Financial Planner Board of Standards. "Today the economy is in a far different place, and Americans are worried about their financial future," And now they have to decide how to use their limited resources to save for retirement and fund their children's college education, while maintaining an emergency fund and keeping out of debt.  And when low-income families have a financial plan, they are more likely to pay their credit card bills in full and avoid debt, the survey found.  Yet only 31% of Americans have put together a financial plan, whether on their own or with a financial adviser, the survey says. And that was the same percentage as in 1997, when a similar survey was conducted. Among other findings:
•38% of Americans live paycheck to paycheck, vs. 31% in 1997.
•48% of families with college-bound children are saving for their education, down from 56% in 1997.
•55% are worried about losing money if they invest it, compared with 45% in 1997.
•About half of Americans are behind in retirement savings, compared with 38% in 1997.
•34% of Americans say they can retire at 65, vs. 50% in 1997.

Pension Plans Increasingly Underfunded at Largest Companies…AFTER years of poor investment returns, the pension funds of the United States’ largest companies are further behind than they have ever been. The companies in the Standard & Poor’s 500 collectively reported that at the end of their most recent fiscal years, their pension plans had obligations of $1.68 trillion and assets of just $1.32 trillion. The difference of $355 billion was the largest ever, S.& P. said in a report. Of the 500 companies, 338 have defined-benefit pension plans, and only 18 are fully funded. Seven companies reported that their plans were underfunded by more than $10 billion, with the largest negative figure, $21.6 billion, reported by General Electric. The other companies with more than $10 billion in underfunding were AT&T, Boeing, Exxon Mobil, Ford Motor, I.B.M. and Lockheed Martin. JPMorgan Chase had the largest amount of overfunding, $1.6 billion. The main cause of the underfunding at many companies does not appear to be a failure to make contributions to the plans. Instead, it reflects the fact that investment markets have not performed well for a sustained period.

Our Pension Fund Scheme is Unsustainable - This time, which has been going on for a long time, I’m talking about how grossly underfunded both private and public pension funds are, and how we’ll all suffer the consequences. I’m going to strip out the mumbo jumbo so you see the truth with your own naked eyes. Retirement is getting further and further away for most Americans. And if they get there, they may not be reasonably compensated by the pension plans they thought they were paying into along with their co-payers, their private and public employers. That’s because a lot of those co-payers aren’t paying up. And that’s only part of the problem… Here’s the other, even more insidious, naked truth. The investment return assumptions inherent in pension plans’ calculations are so unrealistically high that the chances of funds ever meeting future obligations, or “promises,” is halfway between slim and none. Don’t worry, I’ll come back to the co-payers not paying up. But first let’s talk about assumptions (as in, making asses out of you and me).

Is a Great Grey Exodus from America Starting? - Yves Smith - Although there is no shortage of victims of the financial crisis, one group that has generally been missed is the middle aged and elderly. Yes, there are reports of people in their 40s and 50s moving in with their children or other relatives, but for the most part, this cohort does not get much attention. Yet it isn’t hard to see how grim their prospects are. Many thought they’d be employed at decent jobs through age 65 and are un or underemployed. And those still working full time are often victims of downward mobility, and have lost a well paying job and are now working at a lower pay level. If you don’t have a decent level of earnings, you can’t save much or at all. These pressures come against a backdrop of loss of wealth due to plunges in home prices and to a lesser degree, financial investments. And that’s before we get to pension fund whackage and plans to “reform” Social Security and Medicare. Some mainstream media outlets took note of an AARP study that found that the group that had the highest rate of foreclosures was the 75 and older cohort. And remember, these are people who retired after a period when unemployment was relatively low and the stock market delivered attractive returns. While people who are under financial stress don’t much in the way of options, I see more and more people of modest and better means planning on becoming expats to make their retirement incomes go further. San Miguel, Mexico, was long a destination for older Californians who wanted to stretch their retirement dollar. Costa Rica is apparently popular with economic emigrants. And I’ve now heard two mentions of Thailand in the last three weeks.

Social Security: Trust Funds, Actuarial Balance, Sustainable Solvency - Social Security is considered 'solvent' when its 'Trust Fund' is in 'actuarial balance'. The Social Security Trust Fund was created to hold any excess of dedicated Social Security revenue over cost and serves primarily as a reserve fund. Those excess revenues are held in the form of interest earning Special Treasuries with that interest being included as revenue. When the accumulated principal including retained interest equals 100% of projected NEXT YEAR cost the Trust Fund is considered to be in 'actuarial balance'. Now since Social Security income and cost project to change each year 'actuarial balance' cannot effectively be measured in nominal dollar terms because a year end 2012 balance equal to 100% of 2013 projected cost will generally be something less than 100% of 2014 cost. And this quite aside from any fluctuations in the economy, that is all things being equal a steady-state Social Security system requires a steadily increasing Trust Fund principal balance to be judged in 'actuarial balance'. Meaning 'fixing' Social Security, making it 'solvent', means something more than restoring actuarial balance for the current year, instead it requires having the system project to maintain 'actuarial balance' over time. Historically the Trustees of Social Security established two different measures of solvency: 'short term actuarial balance' and 'long term actuarial balance'. 'Short term' here means the same 10 year budget window used by the rest of government, if year end principal balance in the SS Trust Funds projects to be 100% or greater (in SS jargon a 'trust fund ratio of 100 or more') in EACH of the next 10 years Social Security 'meets the test for short term actuarial balance'. Similarly if the TF ratio projects to be 100 or more in EACH of the next 75 years Social Security meets the test for 'long term actuarial balance'.

The One Percent Want Your Social Security and Medicare - Dean Baker - Steven Pearlstein, the Washington Post business columnist, often writes insightful pieces on the economy, not today. The thrust of his piece is that we all should be hopeful that a group of incredibly rich CEOs can engineer a coup. While the rest of us are wasting our time worrying about whether Barack Obama or Mitt Romney are sitting in the White House the next four years, Pearlstein tells us (approvingly) that these honchos are scurrying through back rooms in Washington trying to carve out a deficit deal. The plan is that we will get the rich folks' deal regardless of who wins the election. It is difficult to imagine a more contemptuous attitude toward democracy. The deal that this gang (led by Morgan Stanley director Erskine Bowles) is hatching will inevitably include some amount of tax increases and also large budget cuts. At the top of the list, as Pearlstein proudly tells us, are cuts to Social Security and Medicare. At a time when we have seen an unprecedented transfer of income to the top one percent, these deficit warriors are placing a top priority on snatching away a portion of Social Security checks that average $1,200 a month. Yes, the country needs this.

Privatized prison health care scrutinized - About 20 states, including Arizona, Illinois and Maryland, have shifted all or portions of their prison health-care operations to private providers in an attempt to cut costs, a trend that is raising concerns among unions and prisoners’ rights groups. Officials in the states say the companies — which provide medical, dental, mental and pharmaceutical services — are less expensive than employing state workers, in part because using them saves on benefits and pension costs.  Human rights groups, however, say that private operators are not always providing care that is as good or better than what the state could do. Joel Thompson, co-chair of the Health Care Project at Prisoners’ Legal Services in Massachusetts, said using private services can have its own set of problems. “As with anything privatized or contracted out, you worry about whether the incentive to cut costs becomes too great,” he said.

Low-Income Older Women Will Be Worst Hit if States Don’t Expand Medicaid -- Last week I calculated that more than 4 million women could be left uninsured if their governors decide to opt out of expanding Medicaid as part of the Affordable Care Act, as many of them are indicating. But there are subsets within that number that are particularly vulnerable and who were expecting the most help from the ACA. Low-income women who are nearing retirement age could really feel the squeeze, just at a time when they should be focused on storing away money for a comfortable retirement. A report from The LDI Health Economist site says that under the ACA’s original form when it was passed, “uninsured low-income 55- to 64-year old women were among those who would benefit most from the expansion of Medicaid to cover people with incomes up to 133 percent of the poverty level.” As it reports, there are 27 million women who fall into this category, i.e., women who are “near-elderly” and making little income, and about 14 percent of them are uninsured. A third would have been covered by the Medicaid expansion in all fifty states, or more than 1.2 million. (Another 1.8 million are eligible for the insurance exchange subsidies.) If the Medicaid expansion were to go full steam ahead across the country, the overall rate of uninsured women in this group would be reduced to two percent from the current 11.7 rate. But that number is in danger if Republican governors like Rick Scott and Rick Perry wriggle out of the expansion. Texas, Florida and Virginia combined have more than 468,000 uninsured women in this category, nearly 160,000 of whom would be eligible for Medicaid. And as the report notes, “A ‘disproportional number’ of these women are reported to be African American and Latino.”

Expanding Medicaid to low-income adults leads to improved health, fewer deaths - In the past decade, several states expanded Medicaid from its traditional coverage of low-income children, parents, pregnant women, and disabled persons to include "childless adults," poor adults without any children living at home and the population most directly targeted by the Affordable Care Act (ACA). Medicaid currently covers 60 million people, and the ACA will extend eligibility to millions more beginning in 2014. However, the Supreme Court decision gives states the option of choosing whether or not to expand coverage and, because of budget pressures, some states are considering cutbacks, not expansion. The HSPH researchers analyzed data from three states—Arizona, Maine, and New York—that had expanded their Medicaid programs to childless adults (aged 20-64) between 2000 and 2005. They selected four neighboring states without major Medicaid expansions—New Hampshire (for Maine), Pennsylvania (for New York), and Nevada and New Mexico (for Arizona)—as controls. The researchers analyzed data from five years before and after each state's expansion. The results showed that Medicaid expansions in three states were associated with a significant reduction in mortality of 6.1% compared with neighboring states that did not expand Medicaid, which corresponds to 2,840 deaths prevented per year for each 500,000 adults gaining Medicaid coverage. Mortality reductions were greatest among older adults, non-whites, and residents of poorer counties. Expansions also were associated with increased Medicaid coverage, decreased uninsurance, decreased rates of deferring care due to costs, and increased rates of "excellent" or "very good" self-reported health.

Expanding Medicaid Reduces Death Rates - Arizona, Maine, and New York significantly expanded Medicaid coverage in the early 2000s. That expansion appears to have reduced death rates, according to a new study in the New England Journal of Medicine. Benjamin Sommers, Katherine Baicker, and Arnold Epstein, all of the Harvard School of Public Health, compared mortality in those states to four neighboring states (Nevada and New Mexico; New Hampshire; and Pennsylvania) that didn’t expand Medicaid coverage. They found that mortality fell in the three states that expanded coverage even as it increased in the neighbors: The authors use the usual battery of statistical techniques to try to tease our whether some other factors, perhaps changing economic fortunes or demographics, might explain the mortality differences. After all that, their best guess is that the reduction in death rates is real: on average, one death was averted each year for every 176 extra adults covered by Medicaid.

This Just In: It’s Good to Have Health Coverage - It’s always important to confirm or disprove our priors with high quality research, and in this light, the NYT’s coverage of a new study showing the positive impact of Medicaid coverage is worth reading.  The study looks mainly at mortality rates, but also health coverage, access to treatment, and general health outcomes, comparing outcomes in states that expanded coverage to childless adults to neighboring states that did not. Dedicated OTE’ers will recognize this as the beloved difference-in-difference test, a pseudo-experimental design where you net out the impact of a policy intervention by comparing (in this case) states that got the intervention with states that are otherwise similar, but were not subject to the policy change. Researchers looked at mortality rates in [three] states — New York, Maine and Arizona — five years before and after the Medicaid expansions, and compared them with those in four neighboring states — Pennsylvania, Nevada, New Mexico and New Hampshire — that did not put such expansions in place. The number of deaths for people age 20 to 64 — adults too young to be considered elderly by the researchers — decreased in the three states with expanded coverage by about 1,500 combined per year, after adjusting for population growth in those states,

'We Can’t Afford It': The Big Lie About Medicaid Expansion - In his letter to Health and Human Services Secretary Kathleen Sebelius rejecting the expansion of Medicaid under the Affordable Care Act, Texas Governor Rick Perry tells a whopper. Expanding Medicaid, he writes, would “threaten even Texas with financial ruin.” Texas has the highest rate of uninsured residents in the country (25 percent), and it stands to enroll some 1.8 million new Medicaid recipients through the expansion. These are some of the poorest people in America, making less than 133 percent of the federal poverty level (just $31,000 a year for a family of four). In the first six years of the expansion, from 2014 to 2019, the total cost of insuring these Texans would be about $55 billion—not an inconsiderable sum. But the federal government would pay more than 95 percent of that amount; Texas’s share would be just $2.6 billion. That’s not chump change—but threaten Texas with financial ruin? Not by a long shot.  What does threaten Texas with financial ruin is the fact that it has some of the most regressive, insane tax policies in the nation.

The Post-SCOTUS CBO Report - The Congressional Budget Office released a new cost estimate for the Patient Protection and Affordable Care Act on Tuesday to account for the Supreme Court’s June 28th decision to uphold the law in part and strike down some of its Medicaid provisions. CBO determined that the law would now cost $84 billion less while covering 3 million fewer people. ObamaCare was initially structured to force states to expand their Medicaid programs to cover all those with incomes below 138% of the poverty line while the exchange system would provide subsidies for those with incomes above that level to purchase private insurance. Pre-ObamaCare, coverage levels vary widely from state to state, but rarely cover everyone under the poverty line. States won the right to opt out of expanding their Medicaid coverage to those earning up to 138% of the federal poverty level. The law allows exchange subsidies to go to those earning between 100% and 138% of the poverty line, but not anyone below that. The government spends much more per person on exchange subsidies than Medicaid coverage. CBO suspects several states will choose not to increase their Medicaid rolls at all, some will only do it partially, and others will comply as originally planned. This will result in 6 million fewer enrolled in Medicaid and 3 million more enrolled in the insurance exchanges. Here’s how it explains the cost differential this creates.

Only the First Step in Containing Health Costs, by Christina Romer - Here's a frightening thought: Despite the recent Supreme Court decision upholding the Affordable Care Act, serious work on more health care legislation is still needed. Don’t get me wrong: the new law is a great step forward. It is expected to expand health insurance coverage to more than 30 million uninsured Americans without increasing the deficit, and it makes an important start on reining in the rapid growth of health care costs. Just how much the law will slow spending growth is highly uncertain. The Congressional Budget Office, whose views on this issue fall squarely between the optimists’ and the pessimists’, estimates that it’s likely to reduce the budget deficit by about $1 trillion in its second decade — when the cost-containment measures have had time to pay dividends. Big as those savings are, they will still leave a huge share of national output dedicated to health care and the federal budget far in the red. Sadly, serious debate over further cost-savings measures may be a long way off. Some Republicans seem more interested in just limiting the government’s share of health care expenditures than in slowing overall spending. And some Democrats seem more interested in just preserving existing government programs than in making the entire health care system more efficient.

Infographic: America's High Health Care Costs - Download individual graphics: Graphic 1, Graphic 2, Graphic 3, Graphic 4, Graphic 5

Cutting-edge technology and health care costs - Sophisticated medical imaging is often cited as a leading driver of health care costs. The increasing availability of techniques such as computed tomography (CT), magnetic resonance imaging (MRI) and positron emission tomography (PET), while aiding large number of patients, has also made the treatment of disease and injury more expensive. But as a new study co-authored by an MIT economist observes, the growth of such cutting-edge medical imaging procedures has slowed, suggesting that the diffusion of technology does not necessarily lead to steadily increasing health care costs.  Instead, in the paper — “The Sharp Slowdown In Growth Of Medical Imaging,” published this week in the August issue of the journal Health Affairs — MIT economist Frank Levy and David W. Lee of GE Healthcare suggest that a more selective use of high-end imaging is evolving within the medical profession. This transformation is likely due to the changing structure of insurance plans — especially the exercise of “prior authorization,” the preapproval of certain treatments — as well as increased concerns about the side effects of some imaging methods.

Nearly 10% of employers to drop health benefits, survey finds - Nearly 10% of employers anticipate dropping health coverage for their workers in the next three years as medical costs keep rising, according to a new survey by consulting firm Deloitte. The vast majority of companies, 81%, said they plan to continue providing health benefits even as new rules begin in 2014 under the Affordable Care Act. An additional 10% of employers said they weren't sure, the survey said. More than 160 million Americans get their healthcare through employer-sponsored plans. The average cost for healthcare benefits increased 9% last year, while average wages grew 2.1%, according to the Kaiser Family Foundation & Health Research Educational Trust. In response to those trends, more employers are exploring new ways to provide health benefits. Some are looking into defined-contribution plans where they give workers a fixed amount of money, akin to a 401(k) plan, and allow them to buy their own insurance on the open market or in a private exchange. Other companies are interested in direct contracting with hospitals and large physician groups in hopes of striking a better deal.

Health Care Thoughts: The Deloitte Survey - The annual employers survey by Deloitte (Big Four CPAs) has caused some buzz among us talking heads, although sadly drowned out by the tragedy in Colorado. Employers surveyed believe the US health system under performs, has some strengths in ability and access, is wasteful, employee lifestyles are a problem, and the system could be improved by investments in primary care.  Larger firms tend to be somewhat confident of coping with PPACA, smaller firms are not confident at all.  The headline finding is that 10% of employers are likely to dump employees onto state exchanges. My spin on this is the health of the labor market and the relative value of employees will be major decision factors come 2014. Whatever happens in the November election, PPACA is not a done deal or finished project.

Ellen Brown on the Drug Industry's Health Politics: The suppression of natural health treatments can be traced back to the corrupting influences of our private banking system, and the cancer- and drug industries are directly linked to the banking cartel.  Prosperity can be restored, according to the Public Banking Institute, by instituting a system of publicly owned banks.  The tyrannical financial structure we’re currently under is supported by the interest siphoned by banks into private coffers, bleeding society dry. The remedy is to replace the privately owned banking system with a public one, where interest is fed right back to the state or local community. Currently, 40 percent of the cost of everything you buy is interest. At every stage of development of a product, interest is paid on loans taken out to conduct business. If the state owns the bank and gives out the loans to local businesses, that interest comes back to the citizens of the state. Download Interview Transcript

Income related inequalities in health care - Austin pointed me to an OECD working paper, entitled “Income-Related Inequalities in Health Service Utilisation in 19 OECD Countries, 2008-2009.”  I’ve found it to be quite interesting. There’s one figure I’d like to highlight for all of you: What you are looking at is the needs-adjusted probability of having had a doctor visit in the last twelve years. For each country, the probability is shown for people in the lowest quintile of income, average income, and the highest quintile of income. The first thing to note is that the average rate of a visit to the doctor varies among all these countries from a high of 91% in France to a low of 68% in the United States. Think about that the next time someone tells you how our problem is that we consume too much health care. The second thing to note is how much variation there is between those at the upper and lower end of the economic spectrum. In the UK, for instance, there is almost no difference in utilization between the rich and the poor. All see the doctor equally. In most other countries, though, there is some inequality based on income.

Two more men with HIV now virus-free. Is this a cure? - Two men unlucky enough to get both HIV and cancer have been seemingly cleared of the virus, raising hope that science may yet find a way to cure for the infection that causes AIDS, 30 years into the epidemic. The researchers are cautious in declaring the two men cured, but more than two years after receiving bone marrow transplants, HIV can't be detected anywhere in their bodies. These two new cases are reminiscent of the so-called "Berlin patient," the only person known to have been cured of infection from the human immunodeficiency virus. These two cases, presented as a “late-breaker” finding on Thursday at the 19th annual International AIDS Conference in Washington, D.C., are among the reasons that scientists have been speaking so openly at the event about their hopes of finding a cure.

Overuse of deworming drugs led to widespread resistance among parasites: A long forgotten foe is beginning to reemerge on pastures and meadows around the world, and farmers are finding that they have no way to combat it. Parasitic worms infecting cows, sheep, goats and horses are becoming resistant to the drugs used to kill them, and if changes are not made in how the few remaining drugs that still work are used, there may be no way left to fight the growing threat, according to Ray Kaplan, a University of Georgia professor in the department of infectious diseases.Kaplan has studied drug-resistant parasites for years, and his findings recently published in the journal Veterinary Parasitology warn that the continued overuse of deworming drugs has the potential to create parasites that cannot be killed. "We're already seeing the worst-case scenario playing out," Kaplan said. "In goats particularly, which have the worst problems with parasites and drug resistance, we quite frequently see farms that have parasite resistance to all de-wormers. Some of these farms reached the point where they no longer could control the effects of the parasites and decided to go out of business."

E.P.A. to Consider Relaxing an Air Pollution Rule - The Environmental Protection Agency announced on Friday afternoon that it would review its new standards for mercury, soot and other emissions for a handful of proposed new coal-burning power plants. The review will delay the implementation of the regulation for the new plants for at least three months while experts determine whether the emissions limits may safely be relaxed. The agency said the action was a “routine” reconsideration of technical standards based on new information received after the adoption of the so-called mercury rule late last year. The review will affect five planned power plants in Georgia, Kansas, Texas and Utah. Mercury and other pollutants spewed by coal- and oil-burning power plants have been tied to developmental disorders and respiratory illnesses, particularly in children. Lisa P. Jackson, the E.P.A. administration, has said that the rule – the government’s first move to attack airborne mercury emissions – will save thousands of lives a year. The new air pollution standards were strongly opposed by utilities, which said that compliance would be technically difficult and prohibitively expensive. Utilities and industry groups have continued to complain about the rule, citing it as an example of the Obama administration’s overzealous approach to business and environmental regulation.

Fukushima - Local Children Unwitting (And Unwilling) Radioactive Guinea Pigs - Seventeen months after the earthquake and tsunami that destroyed the Tokyo Electric Power Company’s six–reactor complex at its Fukushima Daiichi, discussions continue about the possible effects of the radiation “dusting” the prefecture’s inhabitants received, and their consequences. Far outside most media coverage, 2012 is shaping up to be the media battleground between the massed proponents of the ongoing ‘safety’ of nuclear power, as opposed to a motley coalition of environmentalists, renegade nuclear scientists and anti-nuclear opponents, largely bereft of media contact. There is an involuntary irradiated “test” Fukushima group monitored since March 2011 displaying disturbing health abnormalities that may ultimately decide the debate, should the global media report it, forcing governments to debate its consequences. The children of Fukushima.

Drowning in a sea of plastic - One of the more sobering aspects of our journey has been the environmental abuse we’ve seen, sometimes in the least likely places. Although we’ve traveled all over the world and written about some incredible sights, the story that resonated the most with readers is the one we wrote about the plastic trash on the beaches of Bali. The tropical paradise of Bali was anything but. We visited during what some locals call the “trash season.” This coincides with the rainy season as garbage-filled storm drains flow rivers of plastic into the ocean, which then flings the trash back in waves onto the beach. It’s not exactly the recycling program that they need. Despite all the pretty pictures we have posted, the one below has garnered the most worldwide attention to our site.

Study: Bacteria outbreak due to ocean warming - Manmade climate change is the main driver behind the unexpected emergence of a group of bacteria in northern Europe which can cause gastroenteritis, new research by a group of international experts shows. The paper, published in the journal Nature Climate Change on Sunday, provided some of the first firm evidence that the warming patterns of the Baltic Sea have coincided with the emergence of Vibrio infections in northern Europe. Vibrios is a group of bacteria which usually grow in warm and tropical marine environments. The bacteria can cause various infections in humans, ranging from cholera to gastroenteritis-like symptoms from eating raw or undercooked shellfish or from exposure to seawater. A team of scientists from institutions in Britain, Finland, Spain and the United States examined sea surface temperature records and satellite data, as well as statistics on Vibrio cases in the Baltic.

Potato industry discussing ways to deal with big crop - The 2012 potato crop could be up to 41 million hundredweight bags larger than last year's crop, the head of United Potato Growers of America says. "No one knows the true scope of the problem because there's still significant growing season left in front of us, but it's judicious for us to prepare so that if oversupply occurs we can move quickly and smartly," Wright said. He envisions a combination of approaches could be needed. Among the options being discussed is some form of controlled harvest -- asking growers to leave some of their crop in fields or to just harvest the best quality potatoes. Another option is a coordinated diversion of spuds from the fresh market to other channels. Increasing supplies to government feeding programs could also help, he said.

Vandana Shiva on the Problem with Genetically Modified Seeds - Bill Moyers - Bill talks to scientist and philosopher Vandana Shiva, who’s become a rock star in the global battle over genetically modified seeds. These seeds — considered “intellectual property” by the big companies who own the patents — are globally marketed to monopolize food production and profits. Opponents challenge the safety of genetically modified seeds, claiming they also harm the environment, are more costly, and leave local farmers deep in debt as well as dependent on suppliers. Shiva, who founded a movement in India to promote native seeds, links genetic tinkering to problems in our ecology, economy, and humanity, and sees this as the latest battleground in the war on Planet Earth.

US food aid programme criticised as 'corporate welfare' - Two-thirds of food for the billion-dollar US food aid programme last year was bought from just three US-based multinationals. The main beneficiaries of the programme, billed as aid to the world's poorest countries, were the highly profitable and politically powerful companies that dominate the global grain trade: ADM, Cargill and Bunge. The Guardian has analysed and collated for the first time details of hundreds of food aid contracts awarded by the US department of agriculture (USDA) in 2010-11 to show where the money goes. ADM, incorporated in the tax haven state of Delaware, won nearly half by volume of all the contracts to supply food for aid and was paid nearly $300m (£190m) by the US government for it. Cargill, in most years the world's largest private company and still majority owned by the Cargill family, was paid $96m for food aid and was the second-largest supplier, with 16% of the contracted volume. Bunge, the US-headquartered global grain trader incorporated in the tax haven of Bermuda, comes third in the list by volume, and was paid $75m to supply food aid.

Miya Water's quest to plug leaks - Miya is working with one of two utilities in Manila, where the 300 staffers in the non-revenue water (NRW) division tackle 100 leaks per day and overall system losses of 300 ML per day (about 240 acre feet per day). Miya has had some success so far in reducing NRW from 67 to 50 percent. Miya uses three main tools to reduce NRW: monitor and fix leaks, manage system pressure to reduce leaks in low-demand periods (middle of the night), and increase payment for services. As a first step, Miya makes sure there are water meters at big junctions, to make it easier to track down branches with high 24/7 baseline use. These technical details were interesting, but Miya faces an additional problem: water managers and politicians facing water shortages prefer to increase supply (via desalination, reclamation, groundwater pumping, etc.) instead of reducing NRW losses. This behavior does not make sense from a cost-benefit perspective. A decent NRW program will increase revenue per unit of treated water pumped into the system. Those revenues mean that NRW programs "pay for themselves." I hate to say it, but this feature is even more attractive than my "raise prices" recommendation: it's an engineering solution (water managers like those) that will not increase prices (politicians like those).

Midwest Drought Worsens, Taking its Toll on Wildlife and Agriculture - photo essay -  A historic drought is taking its toll on wildlife and agriculture across the nation's heartland. In Terre Haute, Indiana, corn crops are withering, wildlife are suffering as important wetland habitat is drying up, and low water levels and burn bans are putting a damper on summer recreation.

Drought’s Footprint - More than half of the country was under moderate to extreme drought in June, the largest area of the contiguous United States affected by such dryness in nearly 60 years. Nearly 1,300 counties across 29 states have been declared federal disaster areas. Areas under moderate to extreme drought in June of each year are shown in orange below.

Satellite Image Shows How The U.S. Drought Is Stressing Crops - The drought currently hitting the U.S. has expanded across 64 percent of the country — with 42 percent of the country facing severe drought conditions. High temperatures and a lack of rain are crippling corn, wheat and soy crops. Since May 31st, corn futures have shot up by 48.5 percent, wheat prices have climbed 46.5 percent, and soybean futures have risen by 31.2 percent. The price of ethanol has also risen by 25 percent since the beginning of the year. The map below, crafted by Farm Futures and Kansas State University using satellite images, shows how poor this year’s crop yields are compared to last year. Green is healthy biomass development and brown is unhealthy:

The US Drought In Context: Spot The Global Warming - "The drought that has settled over more than half of the continental United States this summer is the most widespread in more than half a century," and as the New York Times points out "is likely to grow worse." However, a glance at the last 112 years' June 'drought' conditions does not suggest this is a systemic trend (a la global warming) - with notably drier/hotter periods in the past - but we do note some interesting analogs as drought conditions as epic as the current one evolve and fade: from 1936-1938 the Dow fell almost 50%; from 1955-1957 the Dow fell over 18% (11% p.a.); and 1987 of course saw a 40% plunge. "It’s got the potential to be the worst drought we’ve ever had in Arkansas," said Butch Calhoun, the state’s secretary of agriculture. "It’s going to be very detrimental to our economy." Nearly 1,300 counties across 29 states have been declared federal disaster areas. Areas under moderate to extreme drought in June of each year are shown in orange below

Extreme Heat Proves Relentless in Central States - While much of the country has had a brief respite from the extreme heat and humidity that has marked the summer of 2012, in the nation's heartland — including key agricultural areas from Nebraska to Illinois — the heat has proven relentless. When the temperature soared to 105°F at 3:00 pm central time, St. Louis tied its all-time record for the most days in a single year with high temperatures of 105°F or greater. The existing record of 10 such days was set in 1934.Through July 21, St. Louis and Columbia, Mo., had each set a record for the warmest year-to-date, beating a record established in 1921. The National Weather Service said that by October, the records for the maximum number of days with a high temperature of 90°F or greater, and 95°F or greater, "will also likely be threatened at all three of our official climate locations." Further west, it is possible that North Platte, Neb., will wind up with its second-longest streak of consecutive 100°F days, with nine such days if temperatures reach the century mark through Wednesday.Omaha has had its fourth-longest streak of consecutive days with high temperatures of 95°F or greater, and has hit 100°F or higher five times this month. The high temperature on both July 22 and 23 was 105°F, which were record daily highs. Omaha normally averages just two 100-degree days during July.

More Weather Extremes Leave Parts of U.S. Grid Buckling - From highways in Texas to nuclear power plants in Illinois, the concrete, steel and sophisticated engineering that undergird the nation’s infrastructure are being taxed to worrisome degrees by heat, drought and vicious storms. On a single day this month here, a US Airways regional jet became stuck in asphalt that had softened in 100-degree temperatures, and a subway train derailed after the heat stretched the track so far that it kinked — inserting a sharp angle into a stretch that was supposed to be straight. In East Texas, heat and drought have had a startling effect on the clay-rich soils under highways, which “just shrink like crazy,” leading to “horrendous cracking,” said Tom Scullion, senior research engineer with the Texas Transportation Institute at Texas A&M University. In Northeastern and Midwestern states, he said, unusually high heat is causing highway sections to expand beyond their design limits, press against each other and “pop up,” creating jarring and even hazardous speed bumps.  Excessive warmth and dryness are threatening other parts of the grid as well. In the Chicago area, a twin-unit nuclear plant had to get special permission to keep operating this month because the pond it uses for cooling water rose to 102 degrees; its license to operate allows it to go only to 100. According to the Midwest Independent System Operator, the grid operator for the region, a different power plant had had to shut because the body of water from which it draws its cooling water had dropped so low that the intake pipe became high and dry; another had to cut back generation because cooling water was too warm.

The Drought In The Midwest Could Cause Pork Prices To Surge In China - The drought in the American Midwest has sent corn prices soaring. And this is a very worrisome sign for Chinese pork prices.  Societe Generale analysts Michel Martinez, Wei Yao, and Jaroslaw Janecki write that nearly 90 percent of changes in Chinese domestic pork prices can be attributed to "global corn prices lagged by one quarter, and soybean prices lagged by two quarters". Given that China has outpaced the U.S. to become the world's largest meat consumer, and that Chinese demand for pork is expected to reach 52 million tons this year this could have significant implications for pork prices. The recent surge in food prices is unlikely to reverse the overall decline in consumer price inflation. But if food prices continue to soar through summer a rise in inflation could be seen in November or December. This chart from SocGen shows the correlation between global corn prices and Chinese CPI:

Ongoing Drought Hits Crops Hard - The drought affecting much of the continental United States — not to mention the heat and dryness around the globe — has sent corn and wheat prices skyrocketing, scientists said today (July 25). And the current weather could be a taste of what to expect in future decades. "Global warming helps make droughts hotter and drier than they would be without human influence," said Heidi Cullen, the chief climatologist for Climate Central, a non-profit organization dedicated to communicating the science of climate change. Cullen and Stanford University food security expert David Lobell spoke to the media on Wednesday about the effect of the current drought on agriculture.The price of corn has risen by 50 percent, to $8 a bushel, from where it was last month. And a U.S. Department of Agriculture report released today suggests that consumers can expect to see the price of meat and dairy products rise as feed for livestock becomes more expensive.  "It's not really going to affect the price of a loaf of bread or a corn muffin directly, but it will affect the price of meat," Lobell said. "The real impact you see is in the countries where they really rely on raw corn and wheat for a larger part of their diet."

More than 70% of Illinois land suffering extreme drought - A new report shows the drought in the nation's midsection is rapidly intensifying and shows no signs of abating. Illinois is one of the hardest hit states. It saw its percentage of land in extreme or exceptional drought balloon from 8 percent last week to roughly 71 percent this week, according to the U.S. Drought Monitor report released Thursday. The report shows the range of the drought in the continental U.S. has increased only slightly in the past week. But the severity is worsening. The report shows that the amount of U.S. land classified in extreme or exceptional drought jumped to more than 20 percent, up 7 percent from last week. More than 63 percent of the continental U.S. is in some stage of drought, a portion unseen since the Drought Monitor started 1999.

Current U.S. Drought Monitor - To view regional drought conditions, click on map below. State maps can be accessed from regional maps.

U.S. Drought Portal - homepage

Drought Tightens Its Grip on High Plains, Central States - The massive U.S. drought, which is already driving food prices skyrocketing and prompting federal disaster declarations, has only grown worse during the past week. According to the latest edition of the U.S. Drought Monitor, released Thursday morning, between July 17 and July 24, the portion of the country affected by “extreme” to “exceptional” drought jumped from 14 percent to about 21 percent. The portion of the country affected by exceptional drought, which is the most significant drought category, rose from 1 percent last week to 2.4 percent this week. In all, 33 of the lower 48 states were experiencing moderate drought or worse, with every state in the lower 48 experiencing at least “abnormally dry” conditions. For the fourth straight week, the U.S. set a record for the largest area of moderate drought conditions or worse since the U.S. Drought Monitor began in 2000. And climate outlooks for the next few months don’t offer much hope for sustained rainfall in the most severely affected drought regions, with above-average temperatures and below-average precipitation likely during the rest of the summer. As it has for most of the summer so far, the weather pattern across the U.S. was dominated by a huge dome of High Pressure, more popularly referred to as a “heat dome,” that brought stifling air to the Central states. High temperatures were in the 100s Fahrenheit from the Great Plains to the Midwest. St. Louis, Mo., for example, set a record for the most days with a high temperature of 105°F or greater in a single calendar year with 11.

Storms Threaten Ozone Layer Over U.S., Study Says - Strong summer thunderstorms that pump water high into the upper atmosphere pose a threat to the protective ozone layer over the United States, researchers said on Thursday, drawing one of the first links between climate change and ozone loss over populated areas. In a study published online by the journal Science, Harvard University scientists reported that some storms send water vapor miles into the stratosphere — which is normally drier than a desert — and showed how such events could rapidly set off ozone-destroying reactions with chemicals that remain in the atmosphere from CFCs, refrigerant gases that are now banned. The risk of ozone damage, scientists said, could increase if global warming leads to more such storms. “It’s the union between ozone loss and climate change that is really at the heart of this,”

Our Summer of Climate Truth, by Jeff Sachs - When the temperature is especially high, or rains are especially heavy or light, scientists try to assess whether the unusual conditions are the result of long-term climate change or simply reflect expected variability. So, is the current US heat wave (making this the hottest year on record), the intense Beijing flooding, or the severe Sahel drought a case of random bad weather, or merely the result of long-term, human-induced climate change? For a long time, scientists could not answer such a question precisely. They were unsure whether a particular weather disaster could be attributed to human causes, rather than to natural variation. Several studies in the past year have shown that scientists can indeed detect long-term climate change in the rising frequency of extreme events – such as heat waves, heavy rains, severe droughts, and strong storms. By using cutting-edge climate models, scientists are not only detecting long-term climate change, but also are attributing at least some of the extreme events to human causes. The evidence is solid and accumulating rapidly. Humanity is putting itself at increasing peril through human-induced climate change.Yet politicians everywhere are timid, especially because oil and coal companies are so politically powerful. Human well-being, even survival, will depend on scientific evidence and technological know-how triumphing over shortsighted greed, political timidity, and the continuing stream of anti-scientific corporate propaganda.

Area in extreme drought increases by size of Texas, report says -- The portion of the country with some level of drought increased only slightly in the last week, but areas at risk for major crop losses and widespread water shortages jumped significantly, according to a report from the National Drought Mitigation Center. Areas of the contiguous United States under extreme or exceptional drought conditions increased by an area roughly the size of Texas - from 13.5% of the land to 20.5% - in the past seven days, according to the Drought Monitor report released Thursday. "It's getting to the point where some of the (agricultural) damage is not reversible" in the extreme-drought areas, said Brian Fuchs, a climatologist at the center. "The damage is done, and even with rain, you're not going to reverse some of these problems, at least not this growing season." The areas newly put into the extreme category are spread over many states, including parts of Iowa, Illinois, Missouri, Nebraska, Oklahoma, Kansas, Arkansas and South Dakota. (See last week's map, for comparison with the one above.)

Drought diminishes mighty Mississippi, puts heat on Congress (Reuters) - The severe drought in the U.S. Midwest wreaked more havoc across the country on Thursday, forcing barges on the Mississippi River to lighten loads for fear of getting stuck and raising concerns about higher prices for food and gasoline. Damage to crops in the most extensive drought in five decades and the pressure of the November elections sparked some action in the U.S. Congress to bring relief to farmers and make progress on a generous farm bill. "When times are tough for farmers, they tend to be more active politically," Iowa Senator Charles Grassley said, urging fellow Republicans to act on the farm bill and avoid punishment at the polls. U.S. House of Representatives Speaker John Boehner said on Thursday that Republican leaders were working with the Agriculture Committee "on an appropriate path forward." "I do believe the House will address the livestock disaster program that unfortunately in the last farm bill was only authorized for four years," Boehner said. Rain in the northern Midwest overnight improved corn and soybean crop prospects, and grain prices eased back a bit from near-record highs. But only light rains fell over parched areas of Nebraska, Kansas, Missouri, Iowa and Illinois overnight, and more heat and dryness in the southern Midwest was forecast

U.S. Drought Set to Cut World Corn Supply by 60 Million Tons - The global corn market may see 60 million metric tons “disappearing” as drought cuts the U.S. harvest, said Australia & New Zealand Banking Group Ltd. The harvest in the U.S., the largest corn grower and exporter, will probably drop 20 percent to 25 percent this year, after drought cut wheat harvests in the Black Sea region, Paul Deane, an agricultural economist at ANZ, said . “We’re seeing two very big holes in the grain production side,” Deane said, referring to losses in the U.S. and the Black Sea. “Overall, we’re likely to see further gains for grains and oilseeds.”  Corn, which surged to a record $8 today, has soared more than 55 percent since June 15, signaling higher food prices and boosting expenses for producers of livestock feed and ethanol. The grain is in the fourth year of a bull market, heading for the longest rally since 1964. The drought that prompted the U.S. to declare almost 1,300 counties in 29 states as natural- disaster areas, may cause a global grains shortage, according to Commonwealth Bank of Australia. (CBA)  Global corn production was estimated by the U.S. Department of Agriculture at 905.2 million tons earlier this month, before drought worsened in the Midwest. Total use was forecast at 900.5 million tons, the agency said.

US drought could trigger repeat of global food crisis, experts warn -America's drought threatens a recurrence of the 2008 global food crisis, when soaring prices set off riots and unrest to parts of Africa, the Middle East, and Latin America, food experts warn. Corn prices reached an all-time high on Friday, as the drought expanded across America, trading at $8.24 a bushel on the Chicago exchange. Soybeans were also trading at record levels. The US department of agriculture meanwhile predicted there would be less corn coming onto global markets over the next year, because of a sharp drop in US exports. America is the world's largest producer of corn, dominating the market. Corn is also connected to many food items – as feed for dairy cows or for hogs and beef cattle, as a component in processed food – expanding the impact of those price rises. That means the effects of the drought will travel far beyond the mid-western states baking under triple-digit temperatures,

Relentless rise in food prices already showing up in inflation indicators  - Agricultural commodity futures prices continue to march higher in response to one of the worst North American droughts in decades. It has become clear that the genetic engineering technology developed to help crops better withstand drought will be ineffective against these weather conditions. Efforts to stabilize crop yields in many areas have failed. Some analysts have pointed out that it may take time before these elevated food prices feed through into the CPI measures. But in the fast moving global markets an exogenous shock of this magnitude propagates quite quickly.As discussed before, this is a dangerous development for a couple of reasons:
1. Food inflation will prevent emerging markets nations's central banks from stimulating their economies in an environment of a global slowdown. This could lead to stagflation that impacts global growth.
2. Food inflation was a major contributor to the "Arab Spring" movement and will have a destabilizing effect on a number of economically strained nations that depend on food imports (including Iran).

From American Drought to “Global Catastrophe”  - We are running out of superlatives with which to describe the Mid- and Southwestern drought and its effect on this year’s corn and soybean crops. According to this week’s USDA crop update the situation during the previous seven days went from “critical” to, um, worse than that. The drought is the worst in half a century. Of the largest US acreage ever planted in corn (industrial agriculture was crowing about that just a couple of months ago), only one-quarter is still in good condition. (Modest rainfall in drought-stricken areas early this week provided mostly emotional relief; the drought is forecast to continue unabated through October.) One guesstimate about how this is going to play out, from some financial analysts in Australia, is that the US corn harvest will be about 60 million metric tons short of expectations. For perspective, consider; Argentina, the number two corn-producing country in the world, puts about 25 million tonnes in the crib.  In addition, a heat wave across southern Europe into Ukraine is wilting the corn crop that typically provides 16 per cent of world supplies.

Asian Contagion Strikes Again Thanks To US Drought - With the heat-wave in Southern Europe, the missing Monsoon, and the earth-cracking drought in the US, it is no surprise that corn, wheat, and soymeal prices are soaring as crop yields plunge. The level of inventories were already low going in and as Bloomberg notes, consumers around the world will feel the effect of higher food prices as the worst drought in 50 years impact the world's largest exporter of corn and wheat (and 3rd largest of soymeal). Within Asia, Korea and Malaysia will be most adversely affected, considering direct effects referenced in per capita and GDP terms. Indonesia and Japan are Asia’s largest importers of wheat, both importing roughly 5.7 million metric tons on average. China is by a wide margin the region’s largest importer of soy, with average imports of 49.9 million in the last five years. The impact on headline inflation in Asia will be stronger for the economies with lower per capita incomes — Vietnam, India, the Philippines and Indonesia — where food and food products account for a larger share of the typical consumption basket. Even in places where incomes are high, such as Singapore, food accounts for 22 percent of the consumer price index.

In India's Farming Heartland, Barely a Raindrop Falls - With monsoon rains late and lackluster, swaths of the nation's most fertile farmlands are parched, including areas in the south and west that grow sugarcane, corn and rice—and parts to the north that grow grain. Out of 36 meteorological subdivisions across India, 21 have received below-normal rains; rainfall for the country as a whole is 22% below average. Rain has been most plentiful on the coasts and in the hills, away from the farming heartland. More than 60% of farmland is dependent on monsoon rainfall. Already, severe damage is being done. So far, no state has declared a drought. The prime minister's office says it has a contingency plan that includes providing seeds and more electricity to farmers, and improving water supplies, as India steps up efforts to tackle the consequences of the shortfall. "The intensity and spread of rainfall over the next week or so need to be watched carefully, especially in Karnataka, Maharashtra, Gujarat and Rajasthan," Prime Minister Manmohan Singh's office said in a statement Monday.June and early July are planting seasons for many crops and farmers have skipped sowing rather than watch their crops wither, and are now waiting to plant winter season crops at the end of the summer. Others are sowing different crops that take less time to grow. Still others have resorted to planting crops designed simply to feed their families and livestock to tide them over the difficult times.

The World Is Closer To A Food Crisis Than Most People Realise - In the early spring this year, US farmers were on their way to planting some 96m acres in corn, the most in 75 years. A warm early spring got the crop off to a great start. Analysts were predicting the largest corn harvest on record. The United States is the leading producer and exporter of corn, the world's feedgrain. At home, corn accounts for four-fifths of the US grain harvest. Internationally, the US corn crop exceeds China's rice and wheat harvests combined. Among the big three grains – corn, wheat, and rice – corn is now the leader, with production well above that of wheat and nearly double that of rice. The corn plant is as sensitive as it is productive. Thirsty and fast-growing, it is vulnerable to both extreme heat and drought. At elevated temperatures, the corn plant, which is normally so productive, goes into thermal shock. As spring turned into summer, the thermometer began to rise across the corn belt. In St Louis, Missouri, in the southern corn belt, the temperature in late June and early July climbed to 100F or higher 10 days in a row. For the past several weeks, the corn belt has been blanketed with dehydrating heat. Weekly drought maps published by the University of Nebraska show the drought-stricken area spreading across more and more of the country until, by mid-July, it engulfed virtually the entire corn belt. Soil moisture readings in the corn belt are now among the lowest ever recorded.

Running on Empty: U.S. ethanol policies set to reach their illogical conclusion - I’m as cynical as the next policy wonk, but sometimes even I am surprised at the perverse outcomes of some of those policies. Take the bizarre scenario outlined in the new agricultural outlook report from the FAO and the OECD regarding the projected rise in ethanol trade – ethanol traded for ethanol – between the United States and Brazil. That’s right, 6.3 billion gallons a year sloshing between the world’s pre-eminent ethanol producers by 2021. And all in the name of the environment, without a single drop helping people or the planet. Why would the United States, which now devotes 40% of its corn crop to the production of ethanol, import more than 4 billion gallons of ethanol from Brazil? And why would Brazil at the same time import a projected 2 billion gallons from the U.S.? Couldn’t we just save all those transactions costs and shipping-related greenhouse gas emissions by keeping our ethanol and cutting our projected ethanol imports from Brazil in half? Not if your goal is to game the U.S. biofuel mandate.

EIA: US ethanol still likely to lead world export market - The U.S. ethanol industry is on track to be a net exporter of ethanol in 2012, although at lower levels that last year’s record. The U.S. Energy Information Administration (EIA) highlighted ethanol in its July 18 report, “This Week in Petroleum.”   The EIA pointed to a number of factors that will influence the U.S. ethanol trade balance. “Sluggish gasoline demand, combined with ethanol blending limits, is currently restraining domestic consumption levels,” the report says. “At the same time, increased renewable fuel standard (RFS) mandates call for higher volumes in the fuel supply. In addition, sugarcane ethanol exported from Brazil looks to rebound from a low year in 2011 and compete with U.S. corn ethanol in the world market.”  Though there will be uncertainty, EIA is projecting U.S. export volumes will remain significant and lead world trade in 2012.

A Hungry World Population? Oh Well, Let Them Eat Ethanol! - Forbes: Here come the corn riots. Climate change policies—much more than the vagaries of climate–are now beginning to create the instabilities that cooler heads have been warning about for years. Corn prices on the Chicago Board of Trade are now at or near record levels, around $8.30 per bushel for spot delivery. The rise in recent weeks has been dramatic, driven by the perception of declining yields caused by hot and dry conditions mainly in the upper Midwest. Much of this corn is beyond redemption as grain. High temperatures render corn’s pollen sterile, and the narrow pollination season—usually around ten days in a given field—dictates that once this time has passed, there’s likely to be very few kernels set on each ear. While rain may allow the plant to recover, its value as feed is dramatically reduced.The Department of Agriculture’s July 11 projection is for a 9% reduction from that nominal 160. But it’s been pretty hot and dry since that estimate was made (with data from many days before 7/11), so things are going to drop further, which is why corn prices continue to climb. Which brings us to ethanol. It comes from corn. The amount to be produced is a mandate, not a choice. It’s 13.2 billion gallons this year. Last year we burnt up 40% of our crop. This year, given the expected yield reductions, we could easily destroy over half of our corn.

API sues over biofuel requirements -- An energy trade group said it filed a lawsuit against the U.S. Environmental Protection Agency for mandating biofuels in a 2011 renewable fuel standard. The American Petroleum Institute sued the EPA in the Washington, D.C., Circuit Court, saying standards for biofuel mixtures were "unattainable and absurd." "The mandate is effectively an added tax on gasoline manufacturers that could ultimately burden consumers," Bob Greco, downstream director for API, said in a statement. Passed under the George W. Bush administration, the fuel standard required the industry to use 6.6 million gallons of biofuels for 2012. Costs, logistics and diminished federal support dampened the requirement under the original measure, passed in 2007.

Security hawks should be freaked about population growth - Never mind the climate hawks. National-security hawks ought to be seriously stressing about rapidly rising population numbers: “About 80% of the world’s civil conflicts since the 1970s have occurred in countries with young, fast-growing populations, known as youth bulges, according to an analysis by the nonprofit Population Action International.” That’s from an L.A. Times article, “Runaway population growth often fuels youth-driven uprisings,” part of a series about population by Pulitzer Prize-winning reporter Kenneth Weiss. More from the article: In many developing countries, runaway population growth has created vast ranks of restless young men …, with few prospects and little to lose. …[Y]outh bulges have emerged in [Afghanistan,] Iraq, Pakistan, Yemen, Sudan, Somalia and the Palestinian territories — part of what security experts call an “arc of instability” reaching across Africa, the Middle East and South Asia.Of the 2 billion or more people who will be added to the planet by 2050, 97% are expected to be born in Africa, Asia and Latin America, led by the poorest, most volatile countries.

Loading the Climate Dice, by Paul Krugman -   On one side, the variability of temperatures from day to day and year to year makes it easy to miss, ignore or obscure the longer-term upward trend. On the other, even a fairly modest rise in average temperatures translates into a much higher frequency of extreme events — like the devastating drought now gripping America’s heartland — that do vast damage.  On the first point: Even with the best will in the world, it would be hard for most people to stay focused on the big picture in the face of short-run fluctuations. When the mercury is high and the crops are withering, everyone talks about it, and some make the connection to global warming. But let the days grow a bit cooler and the rains fall, and inevitably people’s attention turns to other matters.   How should we think about the relationship between climate change and day-to-day experience? Almost a quarter of a century ago James Hansen, the NASA scientist who did more than anyone to put climate change on the agenda, suggested the analogy of loaded dice. Imagine, he and his associates suggested, representing the probabilities of a hot, average or cold summer by historical standards as a die with two faces painted red, two white and two blue. By the early 21st century, they predicted, it would be as if four of the faces were red, one white and one blue. Hot summers would become much more frequent, but there would still be cold summers now and then.  And so it has proved. As documented in a new paper by Dr. Hansen and others, cold summers by historical standards still happen, but rarely, while hot summers have in fact become roughly twice as prevalent. And 9 of the 10 hottest years on record have occurred since 2000.

Durable Capital, Depreciation and Dr. Krugman's Pessimistic Views of Climate Change Adaptation - Krugman's blog piece on climate change adaptation is worth reading.   Here is a key quote: "My first-pass answer is that we have a global economy that is adapted to historically normal climate — not just in terms of what is grown where, but in terms of where we locate our cities. In the long run, after a couple of centuries’ worth of urban development and infrastructure has been drowned by rising sea levels and/or made useless because previously habitable regions need to be abandoned, we might be able to reconstruct an equally productive economy; but in the long run …" As the case of Las Vegas shows, we (even ignoring China) are completely capable of building new cities in 30 years or less. Krugman is right that cities are long lived durable capital but this capital depreciates over time and the forward looking investor must decide whether to invest in maintenance or not. Krugman ignores that our economy is an urbanized economy and cities insulate us from many of climate change's blows. As an expert on international trade, he knows that the key issue related to the food supply is international correlations in yields. If there are places on the planet where food can be grown in our hotter future with wackier more variable rainfalls then agriculture will move there and export back to the rest of the world. He also has forgotten about storage and inventories and futures markets. If we know that the variance of climate shocks has increased then food and commodity storage technologies become more valuable.

Global Warming's Terrifying New Math - If the pictures of those towering wildfires in Colorado haven't convinced you, or the size of your AC bill this summer, here are some hard numbers about climate change: June broke or tied 3,215 high-temperature records across the United States. That followed the warmest May on record for the Northern Hemisphere – the 327th consecutive month in which the temperature of the entire globe exceeded the 20th-century average, the odds of which occurring by simple chance were 3.7 x 10-99, a number considerably larger than the number of stars in the universe. Meteorologists reported that this spring was the warmest ever recorded for our nation – in fact, it crushed the old record by so much that it represented the "largest temperature departure from average of any season on record." The same week, Saudi authorities reported that it had rained in Mecca despite a temperature of 109 degrees, the hottest downpour in the planet's history.Not that our leaders seemed to notice. Last month the world's nations, meeting in Rio for the 20th-anniversary reprise of a massive 1992 environmental summit, accomplished nothing. Unlike George H.W. Bush, who flew in for the first conclave, Barack Obama didn't even attend.

Fingerprinting Climate Change - I'd like to think I helped inspire Krugman to write his column today, since he linked here the other day from his blog.  Hardly anyone reads this thing, but if the right people read it, maybe it can have some second-hand impact? Hansen's climate dice paper shows how much the relative frequency of extremely warm temperatures has increased.  But how is it that scientists know warming is due to greenhouse gas concentrations (primarily CO2)? The basic idea is to look at how the "fingerprint" of warming matches the core predictions of the various climate models.  This fingerprint includes much more than the amount of surface-temperature global warming.  They pay attention to the pattern of warming across different latitudes.  The climate models predict more surface warming in the polar regions and especially the north, as compared to equatorial regions. Most compelling to my mind, is the fingerprint of predicted warming and cooling in different layers of the atmosphere.   Unique to greenhouse gas emissions, the models actually predict cooling in the lower stratosphere, but more warming in the upper troposphere in equatorial latitudes.  I understand physicists predicted this distinct fingerprint before they had even begun measuring temperatures throughout the troposphere and stratosphere. 

Great Lakes Water Temperatures At Record Levels - Looking to escape to the beach this summer? Well, before you book that trip to Cape Cod or the Outer Banks of North Carolina, you might want to consider an unorthodox option — the shores of Lake Superior. The lake, which is the northernmost, coldest, and deepest of the five Great Lakes, is the warmest it has been at this time of year in at least a century, thanks to the mild winter, warm spring, and hot, dry summer.OK, so the lake’s average water temperature is still a bracing 68 degrees, but it's considered downright tropical for the region. As the above chart shows, based on the 30-year average, the lake’s average water temperature should be in the mid-50s. But thanks to scant lake ice cover this past winter, along with a rare March heat wave and warmer-than-average weather since then, the lake began warming earlier than normal, and that warming has kept right on going. Wintertime ice cover on the Great Lakes was the lowest observed since such records began in 1980.

Lake Superior is so hot right now! - Lake Superior is the largest and northernmost Great Lake, containing almost three times as much water as Lake Michigan, the second largest in volume. In fact, it contains more water than the other Great Lakes combined. Which should mean that it’s cold. Calling it hot is a stretch — but all of that water is heating up far more than expected. From Climate Central (which is also the source of the graph): As the above chart shows, based on the 30-year average, the lake’s average water temperature should be in the mid-50s. But thanks to scant lake ice cover this past winter, along with a rare March heat wave and warmer-than-average weather since then, the lake began warming earlier than normal, and that warming has kept right on going. Wintertime ice cover on the Great Lakes was the lowest observed since such records began in 1980. The chart itself is pretty amazing. At no point in 2012 has the surface temperature been below average, and it’s now spiking well above. Temperatures today range from 70 degrees at the southern shore to 60 at the northern-most points.

Greenland ice sheet record surface melting underway - While the potential impact of wildfires on darkening the Greenland ice sheet surface remain to be resolved, there is mounting evidence of an extreme year 2012 melt. Melt signatures from active microwave remote sensing are stronger than in recent years over the upper areas of the ice sheet. Dark areas indicate absorption of the microwave signal emitted by the satellite. While, year 2010 and 2011 are recognized as being record melt years (Tedesco et al. 2011, van As et al. 2011), year 2012 melting appears to be more extensive. An elevated occurrence of above melting temperatures are observed 11-14 July near the ice sheet topographic summit in an area typically considered to be melt-free, a.k.a. the “dry snow zone”. The dates of a 4 consecutive days with near-surface air temperature above melting at the Summit station coincide with the Watson river flooding. In my recently accepted albedo paper (Box et al. 2012, ACCEPTED VERSION), see abstract, the statement: “it is reasonable to expect 100% melt area over the ice sheet within another similar decade of warming.” may be coming true already.

Greenland ice sheet melted at unprecedented rate during July - The Greenland ice sheet melted at a faster rate this month than at any other time in recorded history, with virtually the entire ice sheet showing signs of thaw.  The rapid melting over just four days was captured by three satellites. It has stunned and alarmed scientists, and deepened fears about the pace and future consequences of climate change. In a statement posted on Nasa's website on Tuesday, scientists admitted the satellite data was so striking they thought at first there had to be a mistake.  "This was so extraordinary that at first I questioned the result: was this real or was it due to a data error?"  He consulted with several colleagues, who confirmed his findings. Dorothy Hall, who studies the surface temperature of Greenland at Nasa's space flight centre in Greenbelt, Maryland, confirmed that the area experienced unusually high temperatures in mid-July, and that there was widespread melting over the surface of the ice sheet.   The set of images released by Nasa on Tuesday show a rapid thaw between 8 July and 12 July. Within that four-day period, measurements from three satellites showed a swift expansion of the area of melting ice, from about 40% of the ice sheet surface to 97%.  Zwally, who has made almost yearly trips to the Greenland ice sheet for more than three decades, said he had never seen such a rapid melt.

Record Greenland Ice Melt Happened in Days - Greenland ice, it seems, can vanish in a flash, with new satellite images showing that over just a few days this month nearly all of the veneer of surface ice atop the island's massive ice sheet had thawed. That's a record for the largest area of surface melt on Greenland in more than 30 years of satellite observations, according to NASA and university scientists. The images, snapped by three satellites, showed that about 40 percent of the ice sheet had thawed at or near the surface on July 8; just days later, on July 12, images showed a dramatic increase in melting with thawing across 97 percent of the ice sheet surface. "This was so extraordinary that at first I questioned the result: was this real or was it due to a data error?" said Son Nghiem of NASA's Jet Propulsion Laboratory in Pasadena, Calif., referring to the July 12 images taken by the Indian Space Research Organisation's (ISRO) Oceansat-2 satellite. Instruments on two other satellites proved out Nghiem's findings — the Moderate-resolution Imaging Spectroradiometer (MODIS) on NASA's Terra and Aqua satellites.

ABC News On Stunning Greenland Ice Melt: ‘Scientists Say They’ve Never Seen Anything Like This Before’ -- NASA reported today some truly shocking findings on the melting of the Greenland ice sheet this summer: Satellites See Unprecedented Greenland Ice Sheet Surface Melt July 24, 2012: For several days this month, Greenland’s surface ice cover melted over a larger area than at any time in more than 30 years of satellite observations. Nearly the entire ice cover of Greenland, from its thin, low-lying coastal edges to its two-mile-thick center, experienced some degree of melting at its surface, according to measurements from three independent satellites analyzed by NASA and university scientists. On average in the summer, about half of the surface of Greenland’s ice sheet naturally melts. At high elevations, most of that melt water quickly refreezes in place. Near the coast, some of the melt water is retained by the ice sheet and the rest is lost to the ocean. But this year the extent of ice melting at or near the surface jumped dramatically. According to satellite data, an estimated 97 percent of the ice sheet surface thawed at some point in mid-July.

The Story Behind Record Ice Loss in Greenland - The news that an unusually widespread melt occurred in Greenland during mid-July, when 97 percent of the Greenland ice sheet — including normally frigid high-elevation areas — experienced some degree of melting, has made international headlines, and for good reason. Such a widespread melt event has not occurred there since at least 1889, and may be yet another sign of the consequences of manmade climate change.  But what does this event mean in the bigger picture of ice melt and sea level rise, and what led to it in the first place? The widespread melt so far this season, while dramatic and worrisome to many climate scientists, does not necessarily mean that Greenland is headed for a far faster and more significant melt than scientists already anticipate. The current projections for sea level rise related to the melting of Greenland and Antarctic ice sheets is scary enough, with the likelihood that it will raise global sea levels by about 2 to 6 feet by 2100. Greenland is the world's largest island, and it holds 680,000 cubic miles of ice. If all of this ice were to melt — and that won't happen anytime soon — the oceans would rise by more than 20 feet.

Is Recent Greenland Ice Sheet Melting ‘Unprecedented’? Absolutely. Is It ‘Worrisome’? You Bet It Is. -- Another day, another bad New York Times headline: ‘Unprecedented’ Greenland Surface Melt – Every 150 Years? The New York Times then launched into a critique of:

1. NASA — for what they asserted was an “inaccurate headline” in its press release, “Satellites See Unprecedented Greenland Ice Sheet Surface Melt”;
2. Most of the media coverage — for supposedly “hyperventilating” by accepting NASA’s use of the word “unprecedented”;
3. Me — for using James Hansen’s term “reticent” for one of the NASA scientists who said, “if we continue to observe melting events like this in upcoming years, it will be worrisome.”

Headlines are important because research shows that most newspaper readers don’t get much beyond them. And NY Times headlines sweep across the internet through twitter, facebook, news aggregators and search engines.  Probably 10 to 50 times as many people see the headlines as read any substantial portion of the story. I would define a flawed headline as one that, standing alone, is inaccurate or misleading or, as in this case, both. Indeed, this headline is so bad I’d urge the NY Times to change it. Let’s run through why the NASA headline is fine and why the NY Times headline is not.

Jason Box: Updated map of Greenland ice sheet albedo decline -- ~2 standard deviations below the 2000-2012 average  - It’s been 1 month since I updated this map. I had to re-adjust the color scale from the earlier post to accommodate greater values. The July 1-20, 2012, anomaly is off the scale for the albedo change I had established in earlier examinations of data beginning in year 2000. Map showing where the albedo reduction is greatest: the southern ‘saddle’ region, the peripheral low elevation areas, and the northwest.Averaged over the whole of the ice sheet, for nearly 2 months now, the ice sheet albedo has been ~2 standard deviations below the 2000-2012 average. Averaged over the whole of the ice sheet, for nearly 2 months now, the ice sheet albedo has been ~2 standard deviations below the 2000-2012 average.Earlier blog entries discuss these albedo visualizations; here, here and here.

Greenland May Become Green Again - The ice melt in Greenland has reached a modern high level in the summer of 2012, according to NASA. The giant Petermann Glacier produced a giant calf for the second time in two years (2010 and 2012). The extent of melt seen this summer was last experienced in 1889. The expansion of the area melting grew from 40% to 97% of the ice sheet in just four days from July 8 to the 12th. NASA scientists described the rapidity of the expansion as “extraordinary”. On the other hand, Fox News reports that skeptics say the concern about the melting event is unwarranted. These skeptics say that this event occurs regularly, once approximately every 150 years, on average. Follow up: As sudden as this summer’s ice melt phenomenon may seem, it is part of a progression of events that has been occurring for decades. The following graph from EEA (European Environmental Agency) shows the progression of ice melting for the 30 years 1978-2008. The following graph shows that as recently as 2003-2005 the net change in ice mass of Greenland has been positive, but the very short-term has been sharply toward increasing ice mass loss.The EEA has published estimates of what temperature changes would be necessary to trigger certain major climate/geological effects for the planet. The temperature changes reference 1990.The global temperature change since 1990 is approximately +0.50C, according to the data published by Hansen (see second graph below). A smaller estimate (0.2-0.30C) is obtained from the graph below.

2012 Arctic Sea Ice Minimum looks to blow waaay past 2007 - This is a comparison of the ice cover on September 16, 2007 (left) and on July 21, 2012 (right).  Basically, we can expect all of the orange-colored ice to melt away by mid-September and possibly some of the purple.  That leaves us with  precious little.  http://igloo.atmos.uiuc.edu/cgi-bin/test/print.sh?fm=09&fd=16&fy=2007&sm=07&sd=21&sy=2012

NSIDC Arctic Sea Ice Report, July 24, 2012: Sea ice continues to track at low levels - Arctic sea ice continued to track at levels far below average through the middle of July, with open water in the Kara and Barents seas reaching as far north as typically seen during September. Melt onset began earlier than normal throughout most of the Arctic.As of July 23, 2012, sea ice extent was 7.32 million square kilometers (2.82 million square miles). On the same day last year, ice extent was 7.22 million square kilometers (2.78 million square miles), the record low for this day. Arctic sea ice extent continued to track at very low levels, setting daily record lows for the satellite era for a few days in early July. Extent is especially low in the Barents, Kara, and Laptev seas. In the Barents and Kara seas, the area of open water extends to the north coasts of Franz Josef Land and Severnaya Zemlya, as far north as typically seen during September, the end of the summer melt season. Polynyas in the Beaufort and East Siberian seas continued to expand during the first half of July. By sharp contrast, ice extent in the Chukchi Sea remains near normal levels. In this region the ice has retreated back to the edge of the multiyear ice cover. Ice cover in the East Greenland Sea, while of generally low concentration, remains slightly more extensive than normal.

Loss of Arctic sea ice '70-95% man-made' - The radical decline in sea ice around the Arctic is at least 70% due to human-induced climate change, according to a new study, and may even be up to 95% down to humans – rather higher than scientists had previously thought The loss of ice around the Arctic has adverse effects on wildlife and also opens up new northern sea routes and opportunities to drill for oil and gas under the newly accessible sea bed. The reduction has been accelerating since the 1990s and many scientists believe the Arctic may become ice-free in the summers later this century, possibly as early as the late 2020s."Since the 1970s, there's been a 40% decrease in the summer sea ice extent," said Jonny Day, a climate scientist at the National Centre for Atmospheric Science at the University of Reading, who led the latest study.

Some of what I think about geoengineering - If all the people who know about geoengineering are meticulous in the care that they take in talking about it, they will create no new misapprehensions – but they may do little to dispel old misapprehensions, and they may pass up the opportunity to carve out for geoengineering a more central place in our ongoing discussion on climate. I think it deserves that place; if I didn’t I wouldn’t be writing a book about it. But while there may be good reason to be expansive in one’s talk, there’s no good reason for being careless, or even sloppy, in one’s reasoning. I have tried to be pretty careful in published stuff in the past, such as this 2007 piece in Nature and this 2010 piece in Prospect. But for the time being, here are a few key points in my current thinking, expressed with what I hope is appropriate care. Geoengineering and the two degree limit. I am not a great fan of the two-degree limit; among other things I think it’s arbitrary, that it sends an unnecessarily negative message about adaptation, and that it is unrealistic. To get a 50:50 chance of not going over the two degree limit through mitigation alone requires a level of decarbonisation far beyond what is currently on the table, let alone what has been achieved historically. That said, I realise that the two-degree limit is a pretty dominant framing of the problem. So I think people using this framing, or drawn into debates that use this framing, should feel compelled by intellectual honesty to talk about geoengineering in this context.

VSPs of Energy - Krugman - David Roberts has an interesting post about how the “experts” massively underestimated the potential for growth in renewable energy: wind and solar have grown enormously faster than the Very Serious People, energy sector, predicted circa 2000. He links this to the somewhat related tendency of the alleged experts to predict huge costs from efforts at energy conservation, huge costs that keep on not materializing. Roberts suggests that it’s because conventionally-minded experts aren’t in touch with the potential of technologies that are (a) new and (b) distributed, representing choices by millions of players as opposed to a few big corporations.Maybe. But I’d place more emphasis on a more cynical view: capture, both crude and subtle, by existing fossil-fuel interests (with nuclear power, another big business venture, somewhat similar).It should be obvious that Big Oil and Big Coal have a stake in having the public believe that there is no alternative to ever more drilling, digging, and burning. And who employs, funds, and generally shapes the careers of mainstream energy “experts”? Who actually has a seat at the table when international organizations are putting together their scenarios?

Greenhouse Gas Emissions Continue to Climb in 2011 - International talks to address human-caused global warming began 20 years ago in Rio de Janeiro. But despite attempts to curb emissions of the greenhouse gases responsible, they have continued to pour into the atmosphere since then. Last year was no exception. In 2011, the burning of fossil fuels, as well as other activities such as cement and oil production, produced 3 percent more carbon dioxide in 2011, bringing this segment of emissions to an all-time 37.5 billion-ton (34 billion-metric tons) high that year, a European analysis reports.The past decade has seen a 2.7 percent annual increase in carbon dioxide emissions. China, the United States, the European Union, India, the Russian Federation and Japan rank as the top five emitters, from highest to lowest. Last year's increase was driven by China and India, which saw their carbon dioxide emissions jump by 9 and 6 percent, respectively. Meanwhile, emissions from the European Union, the United States and Japan all decreased, according to the report, Trends in Global CO2 Emissions.

Carbon Dioxide Emissions Rise 3% In 2011 - According to a recent EU report, annual global carbon dioxide (CO2) emissions increased by 3% in 2011. I'll quote the summary from Green Car Congress.Global emissions of CO₂ increased by 3% last year according to the annual report Trends in global CO₂ emissions released by the EC Joint Research Centre (JRC) and the Netherlands Environmental Assessment Agency (PBL). At 3%, the 2011 increase in global CO₂ emissions is above the past decade’s average annual increase of 2.7%. Emissions in the advanced (OECD) economies shrank, but that decline was more than compensated for by rises in China and India. Weak economic conditions, a mild winter, and energy savings stimulated by high oil prices led to a decrease of 3% in CO₂ emissions in the European Union and of 2% in both the United States and Japan. Emissions from OECD countries now account for only one third of global CO₂ emissions—the same share as that of China and India combined, where emissions increased by 9% and 6% respectively in 2011. In China, the world’s most populous country, average emissions of CO₂ increased by 9% to 7.2 tons per capita—within the range of 6 to 19 tons per capita emissions of the major industrialized countries. According to the report, the top emitters contributing to the global 34 billion tons of CO₂ in 2011 are:

1. China (29%)
2. the United States (16%)
3. the European Union (11%)
4. India (6%)
5. the Russian Federation (5%)
6. Japan (4%)

Cut air pollution, buy time to slow climate change: U.S. - Cutting soot and other air pollutants could help "buy time" in the fight against climate change, a senior U.S. official said on Tuesday as seven nations joined a Washington-led plan. Air pollution, from sources ranging from wood-fired cooking stoves in Africa to cars in Europe, may be responsible for up to six million deaths a year worldwide and is also contributing to global warming, the U.N. Environment Programme (UNEP) said.Seven countries -- Britain, Denmark, Finland, France, Germany, Italy and Jordan -- formally joined the U.S.-led Climate and Clean Air Initiative, bringing the total of members to about 20 since the plan was launched in February. "If we are able to do this we could really buy time in the context of the global problem to combat climate change," Jonathan Pershing, U.S. deputy special envoy for climate change, told a telephone news briefing from Paris. Pershing said that time was "desperately" needed to slow global warming. Unlike other developed nations, the United States has not passed laws to cut greenhouse gas emissions despite proposed cuts by President Barack Obama.

We’re All Climate-Change Idiots - CLIMATE CHANGE is staring us in the face. The science is clear, and the need to reduce planet-warming emissions has grown urgent. So why, collectively, are we doing so little about it?  Yes, there are political and economic barriers, as well as some strong ideological opposition, to going green. But researchers in the burgeoning field of climate psychology have identified another obstacle, one rooted in the very ways our brains work. The mental habits that help us navigate the local, practical demands of day-to-day life, they say, make it difficult to engage with the more abstract, global dangers posed by climate change.  Robert Gifford, a psychologist at the University of Victoria in British Columbia who studies the behavioral barriers to combating climate change, calls these habits of mind “dragons of inaction.” We have trouble imagining a future drastically different from the present. We block out complex problems that lack simple solutions. We dislike delayed benefits and so are reluctant to sacrifice today for future gains. And we find it harder to confront problems that creep up on us than emergencies that hit quickly.  “You almost couldn’t design a problem that is a worse fit with our underlying psychology,”

Climate Emergency Action Plan - The extreme heat, storms, and drought sweeping most of the nation are finally convincing a large majority of Americans that climate change is upon us. According to Bloomberg News, 70 percent of Americans now believe the climate is changing.  It's late to be getting to solutions, but now, perhaps, we're finally ready to take on the challenge. Bill McKibben lays out how dire the picture really is in the upcoming issue of Rolling Stone: We’ve already warmed the planet by 0.8 degrees centigrade, and the weather is getting frightening. At the Copenhagen Climate Conference, the one thing the world agreed on is that we must stay within a 2-degree centigrade heat increase—although climatologist Jim Hansen has called even that level of increase a recipe for disaster. And if current trends continue, we're headed for much more global heating. But powerful oil, gas, and coal companies have blocked needed action. With billions in profits, they have plenty of money to channel to political campaigns, climate-denying think tanks, and right-wing media. Together, these groups have prevented progress.

GOP ex-lawmaker: Facts will ‘overwhelm’ GOP opposition to climate change - Former Rep. Bob Inglis (R-S.C.), who is trying to build support for a carbon tax, said the facts on global warming will “overwhelm” GOP resistance to climate change action and alter the party’s stance. “What we have been doing so far is sort of shrinking in science denial and holding onto shaky ideology that really will be overwhelmed by the facts,” the former GOP lawmaker said in an interview broadcast Sunday. “You can hold back the facts only for so long and eventually they overwhelm you,” Inglis said on Platts Energy Week TV. “I think that is happening on climate change. The science is pretty clear.”

Heroic Technology — Geoengineering To Control The Climate -- Let me say at the outset that geoengineering to control Earth's climate is not the wisest path which Homo sapiens ("Wise Man") could travel down. Because of the large scales involved, geoengineering  may turn out ot be the dumbest thing our dumb (albeit clever) species has ever done or will ever do. On Tuesday Jim Kunstler spoke of the unintended consequences of applying technology willy-nilly to solve all our problems. As global warming really gets going in the coming decades, the temptation to geoengineer the climate will become stronger and stronger. Indeed, I think we can make an even bolder prediction than that implied by mere temptation. If I am correct in my view, expressed on Monday in The Assumption Of Technological Progress, that an irresistable orientation toward technological thinking is built right into human coginition, it follows that geoengineering will necessarily be applied on large scales to control the climate. That's the way the future must look. Heroic technology will be deployed because that's just what Homo sapiens does, as opposed to making fundamental changes in their behavior to curb population and economic growth, and scale back their civilizations to a size commensurate with sustainable living on the Earth.

Rules intended to limit pollution from ships raises concerns in Alaska: Alaska has sued to block enforcement of rules intended to limit pollution from large ships, saying the rules will result in higher freight rates and pricier cruises that will hurt the state's economy. New rules set to take effect Aug. 1 will require that cargo carriers and cruise ships use a low-sulfur fuel within 200 miles of U.S. and Canadian shores. While the rules, initiated by the U.S. and agreed to by dozens of other nations as part of an international treaty, affect much of the North American coast and Hawaii, officials in Alaska say they will have a disproportionate effect on the state and want to keep them from being enforced in waters off Alaska's coast. About 90 percent of the commodities entering Alaska are delivered through a single port — the Port of Anchorage — and many southeast Alaska communities rely heavily on revenues from the cruise trade to survive. The state, relying on industry estimates, said the rules could increase shipping costs to the state by 8 percent and cruise passenger costs up to $18 a day, potentially leading to a 15 percent decline in visitors. The lawsuit was filed July 13 in U.S. District Court in Anchorage.

Renewable costs to continue slide, natural gas to rise: US FERC's Norris - The price of renewable energy technologies will continue to drop, while the price of natural gas will rise, US Federal Energy Regulatory Commission member John Norris said Sunday, telling state regulators and others that FERC's goal is to aid states in staying the course on renewables. With natural gas prices so low, "some of you may think this is time to bail" on renewables, Norris told state regulators from around the country at the summer committee meetings of the National Association of Regulatory Utility Commissioners in Portland, Oregon. During the discussion at NARUC's "emerging issues" forum, however, some state regulators described the difficulties of integrating renewable generation such as wind and solar. While Norris did not specifically say states should continue to bolster renewable portfolio standards (RPS), "my assumption is that they were started because they were a good idea," he said. Norris said that the federal production tax credit (PTC) and state RPS create market stabilities that are bringing the costs of renewable technologies down, but the question is "how do you finish a good idea with the mounting pressure that is building?" He added that renewables not only assist in meeting clean energy goals but also increase diversity of fuel supply.

The Dawn of the Great California Energy Crash - California, which imports over 25% of its electricity from out of state, is in no position to lose half (!) of its entire nuclear power capacity. But that’s exactly what happened earlier this year, when the San Onofre plant in north San Diego County unexpectedly went offline. The loss only worsens the broad energy deficit that has made California the most dependent state in the country on expensive, out-of-state power. Its two nuclear plants -- San Onofre in the south and Diablo Canyon on the central coast -- together have provided more than 15% of the electricity supply that California generates for itself, before imports. But now there is the prospect that San Onofre will never reopen. Will California now find that it must import as much as 30% of its power? The problem of California’s energy dependency has been decades in the making. And it’s not just its electrical power balance that presents an ongoing challenge. California’s oil production peaked in 1985. And despite ongoing gains in energy efficiency via admirably wise regulation, the state’s population and aggregate energy consumption has completely overrun supply.

Solar Wars: Now China Will Investigate US Firms - When countries fight over trade, you usually assume that they have meaningful things to fight over. That is, there is something at stake. I am thus befuddled by the likes of the US, China and the European Union going at it tooth and nail over solar panels when (a) the global market for them is small and (b) they are seldom central to national interests. Sure there is lip service about paving the way for the green economy and so forth, but let's just say solar panel manufacturing doesn't exactly represent the commanding heights of the economy circa 2012. In an act of gamesmanship, however, the Chinese government is now investigating American firms for receiving government subsidies: China's Commerce Ministry said Friday that it is investigating possible solar equipment subsidies by the U.S. and South Korea and their impact on Chinese manufacturers, widening a trade spat at a time of oversupply and weakening demand for solar power equipment. The ministry has launched an anti-dumping and anti-subsidy probe into polysilicon imports from the U.S...The timing is awfully suspicious, coming right after Chinese solar manufacturers' sales in the United States have been heavily dented by American-imposed duties. Yes, it's likely a tit-for-tat response...

Record flow tests Three Gorges Dam - The Three Gorges Dam yesterday withstood the most intense onslaught of water since its completion, while cities upstream of the Yangtze River fought some of their worst flooding in three decades....State media said floodwaters were running through the Three Gorges Dam at 70,000 cubic metres per second, the volume of 28 Olympic-sized swimming pools, in the afternoon. The inflow was expected to reach 71,300 cubic metres per second around 8pm before slowing after midnight. That is slightly higher than a previous peak of 70,000 cubic metres per second in the summer of 2010, and much higher than levels in 1998, when floods killed more than 3,000 people while the project was under construction.The dam is reducing the rains' impact on communities downstream by storing about 26,000 cubic metres of floodwater every second, according to Xinhua.

We’re ripping up our mountains to ship coal overseas. Maybe we shouldn’t? -America’s use of coal to generate electricity is dropping dramatically. And yet coal production remains fairly constant. What gives? Who’s using all of that coal? Is it being put into baby and/or puppy food? No. A lot of it is going overseas. As we reported earlier this week, American coal is partly responsible for China’s huge increase in coal consumption. But that’s just one part of the puzzle. Yesterday, Democrats on the House Natural Resources Committee released a report, “Our Pain, Their Gain: Mountains Destroyed for Coal Shipped Overseas” [PDF], that outlines the scale of America’s coal exports. Coal exports have nearly doubled since 2009 to 107 million tons last year, now accounting for almost 12 percent of U.S. production. Three out of every four tons that are exported come from the Appalachian region, and often this coal is produced by mountaintop removal mining — a devastating practice that has blanketed communities with soot, contaminated drinking water, and destroyed 2,000 miles of streams.

Merrill Lynch report: America’s energy sector delivers an economic stimulus of almost $1 billion every day - A new global energy report from Bank of America/Merrill Lynch estimates that the economic benefits to the U.S. economy from booming domestic energy production, especially from the surging output of unconventional shale gas and oil, are approaching $1 billion per day.To calculate the economic benefits that are being generated from America’s vast energy resources, Merrill-Lynch introduces the concept of “energy carry” in its report, defined as an estimate of the daily dollar value of the improvement in our energy balances, including “the natural gas advantage of the U.S. economy relative to Europe or East Asia, the growing revenues from increased exports of fuels, and the reduced crude oil import bill.” By that measure, America’s “energy carry” was $900 million per day in April, and the energy benefits to the economy will reach $1 billion per day by the end of the year. Merrill Lynch estimates that the daily “energy carry” in January 2010 was only $70 million per day, so the daily economic benefits of energy to the U.S. economy increased dramatically by a factor of more than 12 times in just a little over two years.

An Optimistic Energy/GDP Forecast to 2050, Based on Data since 1820 -- We talk about the possibility of reducing fossil fuel use by 80% by 2050 and ramping up renewables at the same time, to help prevent climate change. If we did this, what would such a change mean for GDP, based on historical Energy and GDP relationships back to 1820? Back in March, I showed you this graph in my post, World Energy Consumption since 1820 in Charts. Graphically, what an 80% reduction in fossil fuels would mean is shown in Figure 2, below. I have also assumed that  non-fossil fuels (some combination of wind, solar, geothermal, biofuels, nuclear, and hydro) could be ramped up by 72%, so that total energy consumption “only” decreases by 50%. In Figure 3, we see that per capita energy use has historically risen, or at least not declined. You may have heard about recent declines in energy consumption in Europe and the US, but these declines have been more than offset by increases in energy consumption in China, India, and the rest of the “developing” world. With the assumptions chosen, the world per capita energy consumption in 2050 is about equal to the world per capita energy consumption in 1905.

Will (a lack of) Water Threaten U.S. Energy Production? - One-fifth of the continental United States is currently under “extreme or exceptional” drought conditions. Crops across the country have reached a point of no return, withering in the field and leaving no hope for this growing season. And, as water becomes increasingly scarce, the nation’s energy supplies could also be threatened.  According to Dr. Michael Webber* at The University of Texas at Austin: “Our energy system depends on water. About half of the nation’s water withdrawals every day are just for cooling power plants. In addition, the oil and gas industries use tens of millions of gallons a day, injecting water into aging oil fields to improve production, and to free natural gas in shale formations through hydraulic fracturing… All told, we withdraw more water for the energy sector than for agriculture. Unfortunately, this relationship means that water problems become energy problems that are serious enough to warrant high-level attention.” In his recent NY Times Op-ed, Dr. Webber – a recognized expert on the energy-water nexus – explores how the current widespread drought could threaten U.S. energy supplies. He discusses how cities in Texas are already forbidding the use of municipal water for hydraulic fracturing (fracking). And how, in the Midwest, power plants are going head-to-head with farmers for limited water supplies.

Drought Helps Fracking Foes Build Momentum for Recycling - The worst U.S. drought in a half century is putting pressure on natural-gas drillers to conserve the millions of gallons of water used in hydraulic fracturing to free trapped gas and oil from underground rock.  From Texas to Colorado to Pennsylvania, farmers, activists and opponents of the technique, also known as fracking, are using the shortage of rain to push the industry to recycle water and reduce usage -- efforts that could prove costly to the industry.  One company, Devon Energy Corp. (DVN), estimates that recycling is as much as 75 percent costlier than pumping wastewater into deep wells. That disposal method, common in the industry, has also drawn complaints because it is linked to earthquakes.  “We just would like the oil and gas companies to figure out better ways, maybe a better use of this water,” Bill Midcap, renewable-energy development director at the Rocky Mountain Farmers Union covering Wyoming, Colorado and New Mexico, said in an interview. “It’s a concern about the future, it is the concern about the price of water, as we look forward, and also taking water away from agriculture.”

Doing Some Math on Fracking Propaganda - A story by the Associated Press that tried to do some jusitsu on fracking critics, claiming they were guilty of the same practices they accused the industry of using, namely, using bad science, ironically, it included a pro-fracking example of the same: An analysis by The Associated Press of data from Pennsylvania found that of the 10.1 million barrels of shale wastewater generated in the last half of 2011, about 97 percent was either recycled, sent to deep-injection wells, or sent to a treatment plant that doesn’t discharge into waterways. This is artful. Lets start from the beginning of the fracking process. Each well requires between 5-10 million gallons of fresh water (depending on the industry source for the estimate). We’ll give the frackers the benefit of the doubt and go with 5 million gallons of water per well. They take this 5 million gallons of water and pour it down a newly drilled gas well. Proprietary chemicals are then added to the well at different points in the fracking process to achieve different results. Some of these chemicals are added first, some last, some in between. This is important to note because it makes reusing the “frack fluid” impossible without some sort of treatment. You can’t get the flour back out of a loaf of bread without a lot of work. When the fracking is completed, about 10% of the water/chemical mixture flows back out of the well according to the industry.  10% of 5 million is 500,000 gallons. The treatment, or disposal wells are not next to the gas well. At a high estimate of 11,000 gallons of water per tanker truck, this means at least 45 tanker trucks full of wastewater to be trucked away after each well is fracked.

Fracking researcher has ties to industry -- The lead author of a recent University of Texas study that suggested that hydraulic fracturing, commonly called fracking, does not contaminate groundwater is a paid board member and shareholder in a company that engages in the practice, a situation that critics are calling a conflict of interest and of which the researcher's supervisors were unaware. "The report was presented as if it was an independent study of fracking when, in fact, the study was led by a gas industry insider," said Kevin Connor, the director of the nonprofit Public Accountability Initiative in Buffalo, N.Y., which reported the researcher's role Monday. Charles "Chip" Groat, who led a study released in February by UT's Energy Institute, billed the university-funded report as an independent look at the process of shale gas harvesting, a controversial process that has increased in recent years. Groat, who did not respond to messages from the American-Statesman, has been on Houston-based Plains Exploration & Production Co.'s board for several years. Groat was paid $413,900 in cash and stock by the company in 2011, according to SEC filings reviewed by the Statesman, more than twice his salary from the university, and holds almost $1.6 million in the company's stock.

Hiram residents seek local control on fracking - On Tuesday the town of Hiram held a public meeting with representatives of the company Mountaineer Keystone (MK). MK, a subsidiary of First Reserve Corporation, is set to begin fracking operations in Hiram next month. The company is a bit of an enigma; for one, it does not appear to have a web site, just a generic landing page at First Reserve. Also, according to Business Week it was founded in 2010 and lists no Key Executives. So who exactly the public was meeting with was something of a mystery. Before the MK portion kicked off, though, we had remarks from one of the township trustees, and another from its counsel. The subtext of the evening seemed to be, you can’t do anything. (With local officials there was also a leitmotif of “our hands are tied.”) Over and over citizens pressed: we don’t like this, we don’t want this here, what can we do about it? And the answer, over and over again, was: Nothing; this is a done deal. It all smacked of an effort to inculcate a sense of despair, hopelessness, cynicism or at least sullen resignation among citizens.

Philly: Court strikes down provisions in Pa. gas drilling law - A Pennsylvania appellate court panel is striking down limitations in a new state law that limits the ability of municipalities to regulate natural gas drilling, a defeat for Gov. Tom Corbett and the natural gas industry that had long sought the limitations.Commonwealth Court judges ruled 4-3 in a decision released Thursday that the limitations violated the constitution. Seven municipalities had sued over the sweeping, five-month-old law, saying it unconstitutionally takes away the power to control property from towns and landowners for the benefit of the oil and gas industry. A spokesman for the state attorney general's office says the ruling is under review. A Senate Republican lawyer who helped write the law says he expects the decision to be appealed to the Supreme Court.

Major Insurer Says It Won’t Cover Fracking - Nationwide Mutual has become the first insurance company to decline coverage for claims related to hydraulic fracturing, a controversial energy production known as “fracking.”"Fracking-related losses have never been a covered loss under personal or commercial lines policies. Nationwide's personal and commercial lines insurance policies were not designed to provide coverage for any fracking-related risks” Then Nationwide give the rationale behind its pronouncement, a direct slap at fracking companies’ insistence that the procedure is perfectly safe. The statement speaks for itself — “Insurance works when a carrier can accurately price the coverage to match the risks. When information and claims experience are not available to fully understand the scope of a given risk, carriers aren’t able to price protection that would be fair to both the customer and the company." It continues to say "From an underwriting standpoint, we do not have a comfort level with the unique risks associated with the fracking process to provide coverage at a reasonable price." "Insurance is a contract and it is designed to cover certain risks. Risks like natural gas and oil drilling are not part of our contracts, and this is common across the industry. Our longstanding underwriting guideline is that we do not insure the oil and gas business.”

The Upside of Default - Longtime readers may recall a comment of mine late last year to the effect that ordinary investors would surely find some way to pile into the shale gas bubble before the next year was out. It will thus come as no surprise that the cover story on the August 2012 issue of SmartMoney is "The Return of Fossil Fuels," and that it rehashes the latest clichés about vast new gas and oil reserves without raising any of the the inconvenient questions that a competent practitioner of the lost art of journalism, should one be wakened from enchanted sleep by the touch of a 1940s radio microphone, would ask as a matter of course. The article trumpets the fact that America is importing less oil than last year, for example, without mentioning that this is because Americans are using less oil—unemployed people who’ve exhausted their 99 weeks of benefits don’t take many Sunday drives—and it babbles about natural gas for two largely fact-free pages without mentioning that claims about vast supplies far into the future rely on assumptions about the production decline rate from fracked shale gas wells that make professionals in the gas drilling industry snort beer out their noses. 

Natural gas up 44% from the lows - The temperature forecast for the US is not looking great. The bulk of the nation is expected to have above normal temperatures in August exacerbating the drought conditions. This weather pattern has been driving up agricultural commodity prices but is now also impacting natural gas valuations. As residential and corporate electricity users crank up the air conditioning, the demand for power goes up, pushing utilities to burn more natural gas.The amount of gas in storage is still rising and the market is still oversupplied, but the inventory is approaching the 5-year range for this time of year. This trend is giving natural gas price a boost, with the futures rising above 3 dollars. This increase may not seem like much, but consider the fact that the nearby futures contract is up 44% from the lows - mostly driven by the ongoing heat wave.

On The ‘Daily Show,’ Herman Cain Asks ‘Do We Really Need Millions Of Acres Of Parks?’ - Sometimes it takes a bit of humor to reveal the core of bad policy ideas.  This is just what happened on the Daily Show two nights ago, when former Republican presidential candidate Herman Cain stopped by for an interview with Jon Oliver on energy policy.  As part of the interview, Cain called for selling off national parks:

• Jon Oliver:  Gas prices are strangling Americans.
• Herman Cain:  Yes.  Let’s sell some of these federal lands that contain newly discovered oil shale resources.  Let’s sell some of these parks that are nice to have but do we really need millions of acres of parks in order to say that we are environmentally friendly?
• Oliver:  How much can one family picnic?
• Cain:  Exactly.  And in today’s world, where we are a 24/7, 365 information overload society, how much picnicking are the kids doing if they are texting while picnicking?

Arctic wilderness faces pollution threats as oil and gas giants target its riches - It is home to a quarter of the planet's oil and natural gas reserves, yet humans have hardly touched these resources in the far north. But in a few days that could change dramatically if Shell receives approval to drill for oil in the Arctic. And that will bring trouble. Environment campaigners say that drilling could have terrible effects on the waters and wildlife of the Arctic.Exploiting the Arctic's vast oil reserves is just one cause of environmental unease, however. The far north is melting and far faster than predicted. Global temperatures have risen 0.7C since 1951. In Greenland, the average temperature has gone up by 1.5C. Its ice cap is losing an estimated 200bn tonnes a year as a result. And further rises are now deemed inevitable, causing the region's ice to disappear long before the century's end. As a result, global powers are beginning to look to the region for its gas and oil, minerals, fish, sea routes and tourist potential. All were once hidden by ice. Now it is disappearing, raising lucrative prospects for Arctic nations, in particular Russia, the US, Canada, Norway and Denmark, which controls Greenland. Large-scale investment could bring riches to areas of poverty, it is argued. However, development could destroy pristine ecosystems and the ways of life for people like the Inuit of Greenland and the Sami of Scandinavia.

In U.S. Agency, Drillers in Utah Have a Friend - “We got upheld!” Mr. Stringer said, meaning his bosses in Salt Lake City had gone along with his staff’s recommendation to allow oil drilling near Desolation Canyon, a national historic site known for its pristine wilderness and white-water rafting. Despite objections from environmentalists, more oil wells would dot the huge stretch of federal land Mr. Stringer oversees.  Mr. Stringer, 55, who sports a goatee, rides a motorcycle and sometimes wears rock band T-shirts to work, is a little-known manager in an agency many Americans have never heard of, but he is arguably as powerful as many of Utah’s elected officials. As head of the bureau’s outpost in northeast Utah, he and his colleagues make decisions that have affected livelihoods and largely favored oil and natural gas companies eager to join in a national energy boom. The companies’ lobbying efforts extend beyond Washington to officials across the West, including Mr. Stringer here in Vernal, population 9,000.  The Bureau of Land Management, part of the Interior Department, is the nation’s biggest landlord, controlling 248 million acres, including nearly half the land in Utah. Charged with protecting public lands while exploiting their resources — for mining, drilling, timbering, ranching — Mr. Stringer’s agency has been at the center of a fierce battle in recent years as companies have sought to lease federal property and get drilling permits.

TEPCO subcontractor tried to underreport workers' radiation exposure - An executive of a Tokyo Electric Power Co. subcontractor forced its nine workers at the crisis-hit Fukushima Daiichi nuclear power plant to cover their radiation monitoring meters with lead-made plates, the company said Saturday. The executive is believed to have tried to underreport radiation exposure, prompting the Health, Labor and Welfare Ministry to launch an investigation on suspicion of violating the industrial safety and health law, according to its officials. The executive in his 50s, who works for a company based in Fukushima Prefecture, told the workers last Dec. 1 to attach the plates to the alarm pocket dosimeters the utility known as TEPCO had provided them with to monitor their radiation exposure, according to sources close to the matter.

Japanese authorities investigate bogus readings at Fukushima plant - Japanese authorities are investigating subcontractors on suspicion they forced workers at the tsunami-hit nuclear plant to underreport their instrument readings so they could stay on the job longer. Labour officials said on Sunday that an investigation began over the weekend following media reports of a cover-up at the Fukushima Dai-ichi plant, which suffered multiple meltdowns following last year's earthquake and tsunami disasters. One of the subcontractors of Tokyo Electric Power Co, which operates the plant, acknowledged having nine workers cover their dosimeters – devices used to measure an absorbed dose of ionizing radiation – with lead plates late last year.

The Hunt to Unlock Oil Sands - —Ten years ago, new oil field technologies unlocked vast crude supplies from western Canada's oil-sands deposits, propelling America's northern neighbor to the top echelon of the world's petroleum repositories. Now oil companies here are experimenting with technologies that could unlock even more reserves from what is some of the world's heaviest and stickiest petroleum. The new technologies could also drive down the cost of producing oil in Canada. One consortium aims to get oil flowing to the surface by sending radio waves from huge antennae pushed through wells deep underground—adopting technology first developed for the U.S. government to eavesdrop on underground bunkers.Another company is working on inserting electrical heating coils into wells to melt the oil, while other firms are tinkering with petroleum-based solvents they hope to pump into wells to get more oil out. All the experimentation is aimed at improving a standard method of oil-sands extraction: so-called steam-assisted gravity drainage, or SAGD.

Will tight oil change the world? -- The quick rise of tight oil in the United States and Canada is dominating oil patch chatter as players take stock of what it could all mean — are we on the verge of a global energy revolution, or on a trend that is encouraging, but unlikely to meet lofty expectations? Tight oil is unconventional oil resources extracted by horizontal drilling and fracking technologies. With production in the United States gushing out of the Bakken and lots of potential in the Eagle Ford and 20 other plays, Canada barely getting warmed up, and other countries looking to copy the North American experience, optimists envisage the biggest game changer for the energy sector in decades.By offering North America a shot at energy independence, there’s talk of vast political implications, including a new U.S. foreign policy free of Middle East strings and less urgency to find/subsidize alternative fuels. Some argue the growing importance of tight oil could even shine a new light on Canada’s oil sands in the eyes of Americans because they make energy independence achievable.

What the Oil Companies Do With Their Record $375 Million A DAY In Profits-  With the Big Five oil companies – BP, Chevron, ConocoPhillips, ExxonMobil and Shell – slated to announce their second-quarter profits this week, a breakdown of how they spend $375 million in profits per day - $261,000 per minute, or a total of $1 trillion over the last ten years, with the added bonus of $6.6 million in federal tax breaks every day, despite reduced production - mostly on lobbying, obscene CEO compensation, campaign contributions to Republicans, false pro-oil ads, and more lobbying.

June Oil Supply Confirmed Down  -  The IEA has now publicly released their June figures for total liquid fuel supply and so I can update my graphs accordingly.  As you can see, June shows a downtick which adds to the overall impression that supply has been at best flat throughout 2012. This combines with the very sharp drop in oil prices in June: The overall impression continues to be that the global economy is faltering (meaning that even though supply is not rising, demand, or perceived demand, is lower than supply).

Tech Talk - Saudi Arabia Then and Now - The latest OPEC Monthly Oil Market Report (MOMR) foresees that demand for OPEC crude oil will decline over the next year by about 300 kbd. This is largely in anticipation of additional production from elsewhere: Non-OPEC supply is forecast to increase by 0.7 mb/d in 2012, supported by the anticipated growth from North America, Latin America, and FSU. In 2013, non-OPEC oil supply is expected to grow by 0.9 mb/d. The US, Canada, Brazil, Kazakhstan, and Colombia are expected to be the main contributors to supply growth, while Norway, Mexico, and the UK are seen experiencing the largest declines. OPEC NGLs and non-conventional oils are seen averaging 5.9 mb/d in 2013, indicating an increase of 0.2 mb/d over this year.Overall, OPEC sees demand staying below 90 mbd over the remainder of this year, with total growth in demand lying at 1.01 mbd. As this series of posts on Saudi Arabia comes to a conclusion and moves on to other countries, it is perhaps of some value to look back on the presentation by Mahmoud Abdul Baqi and Hansen Saleri to remember what was said. Back in those days, oil demand was expected to steadily rise with increasing rates to reach 100 mbd in 2015.

Iraq Oil Showdown And The Syria Endgame - As the Iraqi central government struggles to subdue the implications of the unilateral oil deals northern Iraq’s Kurdish government is making with Western oil majors, an end-game scenario for Syria comes into play in a complicated geopolitics-big oil cocktail. Chevron, the second oil major to have struck a deal with the Kurdish Regional Government (KRG) in northern Iraq, by passing Baghdad, has been banned from any oil dealings with the Iraqi Oil Ministry. On 19 July, Chevron announced it had signed a deal with the KRG for oil exploration rights in northern Iraq, taking over exploration from India’s Reliance Exploration and Production in the Rovi and Sarta blocks. This gives Chevron 80% of the contract and Austria’s OMV AG 20%. Last October, ExxonMobil signed a similar deal for six exploration blocks with the KRG, inviting the ire of Baghdad, which is losing control of the country’s northern oil capacity. The KRG has signed a number of similar deals in the past, but always with smaller companies. ExxonMobil changed the game, as the first Western oil major to step on Baghdad’s toes, with some hefty geopolitical blessings.

Is peak oil dead? – Regarding a new report by Leonardo Maugeri, an executive with the Italian oil company ENI and a senior fellow at a BP-funded center at Harvard University.... Conclusion: Although Maugeri does not state explicitly what decline rates he is using, researchers Stephen Sorrell and Christophe McGlade derived an annual average decline rate from the data in his report of 1.6 percent, or about one-third the global decline rates estimated by IEA, CERA and others. After analyzing the IEA data, they found an aggregate global production-weighted decline rate of 4.1 percent per year. At that rate, they found that Maugeri’s forecast for 2020 would reach just 95.1 mbpd, not 110.6 mbpd—a gain of just 2 mbpd over today, not 17.6 mbpd. We cannot independently evaluate Maugeri’s country-by-country forecasts without seeing the assumptions in his data model, but his summary expectations are optimistic in the extreme. For example, he sees production from Iraq expanding in the next eight years at rates that have never before been achieved, despite a great deal of uncertainty about the country’s stability, its ability to maintain security in the future, and its ability to attract Western oil partners with the knowledge and technology needed to exploit its resources. The failure of Iraq’s recent oil lease auctions do little to give one confidence that Maugeri’s extraordinary forecast can be realized. More generally, his assertion that, of the countries with more than 1 mbpd of production capacity, only four will have reduced capacity by 2020 is impossible to square with the fact that production has been declining in more 50 of those countries since 2000.

Rising oil prices combined with weak euro will add to Eurozone's woes - The euro's 6% decline year-to-date and 10% decline from the 2012 high will benefit German exporters, allowing them to undercut their Asian and US competitors on price. But the weak euro will also push the Eurozone periphery deeper into recession by increasing fuel costs. Italy's recession for example has already been exacerbated by high (and rising) taxes on gasoline. The hope was that the recent declines in Brent will help ease the pain. But as crude oil began to rise and the euro continues its decline, troubles of high fuel prices are plaguing the Europeans once again. The chart below shows Brent futures price denominated in euros.This concern is not limited to the Eurozone of course. The UK is feeling the pain as well, and as usual blaming the evil "speculators" for the jump in gasoline prices. But it is the Eurozone periphery that is most vulnerable to these increases due to the region's already drastically weakened economies.

CNOOC to buy Nexen for $15.1 billion in China's largest foreign deal (Reuters) - State-controlled CNOOC Ltd launched China's richest foreign takeover bid yet on Monday by agreeing to buy Canadian oil producer Nexen Inc for $15.1 billion, forcing Ottawa to decide whether security concerns outweigh its desire for foreign investment in its energy resources. CNOOC, China's third-largest oil company, hopes to sell the deal to shareholders and the government with a hefty 61 percent premium to Nexen's Friday stock price. It promised to retain all employees and to make Canada home base for its Western Hemisphere operations. CNOOC is offering $27.50 cash a share for Nexen, which has oil sands operations in the Canadian province of Alberta, shale gas in the province of British Columbia and extensive exploration and production holdings in the North Sea, Gulf of Mexico and offshore West Africa.

China Manufacturing Gauge Shows Slowdown May Be Ebbing: Economy - China’s manufacturing may contract at a slower pace in July after two interest-rate cuts and a rebound in lending spurred demand in the world’s second-largest economy, a private survey indicated. The preliminary reading was 49.5 for a purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics. If confirmed, that would be the highest since February. In June, the final number was 48.2. A slowdown triggered by weakness in exports, a crackdown on housing speculation and past monetary tightening has sent Chinese stocks to their lowest level since 2009. Standard Chartered Plc estimates expansion will rebound to above 8 percent this quarter after sliding to 7.6 percent in the April- June period.

A slowdown is good for China and the world - Pettis - China’s official growth rate has fallen sharply; its real growth rate may be substantially lower; the country is tipping into deflation; and Premier Wen Jiabao has warned, yet again, that the economy is under serious pressure. China seems to be heading towards a hard landing and Beijing, many Chinese and foreign experts warn, must cut interest rates drastically and expand credit, so saving itself and the world from disaster. The process will not be easy. Debt levels have risen so quickly that unless many years of over-investment are quickly reversed, China will face serious problems, maybe even a crisis – but the sooner China starts rebalancing, the less painful it will be. With China’s consumption share of gross domestic product at barely more than half the global average, however, and with the highest investment rate in the world, rebalancing will require effort.  The key to raising the consumption share of growth is to get household income to rise from its unprecedentedly low share of GDP. This requires China to increase wages, revalue the renminbi and, most importantly, reduce the enormous tax that households implicitly pay to borrowers in the form of artificially low interest rates. But these measures will slow growth. The implicit “financial repression” tax, especially, is both the major cause of China’s economic imbalance and the source of its spectacular growth. Forcing up the real interest rate is the most important step Beijing can take to redress the domestic imbalances and to reduce wasteful spending.

China's Schrodinger Economy Continues To Contract And Expand At Same Time - It's hard to know what the world wants but for sure those looking for massive stimulus-driving intervention by the PBoC will be sadly disappointed by the better-than-expected data out of China. With HSBC's China Flash Manufacturing PMI printing with a ninth month of contraction, at a five-month high, but with the Manufacturing Output index at a nine-month high, it would appear that goal-seeked Goldilocks struck again in the soft-landing being engineered across the Pacific. Converging up towards China's 'real' PMI data at the magic 50-mark, HSBC's Asia Economist suggests (via Markit) that "the earlier easing measures are starting to work." With input and output prices slowing, does this disinflationary move provide more room for easing - given that the headline PMI (which implies slowing demand) is still contractionary (as are critical segments like New Orders and Employment). Market reaction is flatline for now with AUD (and implicitly ES) managing a small bump that has now been retraced.

Three research groups' views of China's manufacturing PMI - China's manufacturing PMI (flash) unexpectedly increased in July. Production and new orders showed improvement. Is it possible that China's slowdown has ended and manufacturing growth is beginning to re-accelerate? Here are views from three research groups that focus heavily on China:
1. Goldman is quite bullish, pointing out that this will translate into a strong industrial production number. GS: - We see this as a very strong reading. Unlike the official PMI, the HSBC/Markit PMI does not have obvious seasonality problems. The index still rose by 1.3 ppt after making a standard x12 seasonal adjustment. This magnitude of rise in one month is significant.
2. HSBC views this as a stimulus driven improvement, pointing to continued weak demand and employment. But they believe that low inflation will allow China to push through more easing and materially improve growth. HSBC: - “July's headline PMI picked up modestly to a five-month high of 49.5, suggesting that the earlier easing measures are starting to work. That said, the below-50 July reading implied demand still remaining weak and employment under increasing pressure.  We believe the fast falling inflation allows Beijing to do so and a more meaningful improvement of growth is expected in the coming months when these measures fully filter through.”

3. The ISI Group is not ready to say that the slowdown is over. They also attribute this PMI jump to China's recent easing measures and expect more stimulus to come because of weak demand and employment. But they don't anticipate a material improvement in growth. ISI Group: - Finally an uptick but we are not ready to call this the turn...We expect the PMI to move roughly sideways in 2012. China’s economy is still growing, but no return to the sustained 9-10% growth rates of the past.

Unfunded pension liabilities surge in China - Future retirees may face the risk of getting a "bad check", as individual pension accounts are increasingly underfunded, local media reported Monday. Unfunded liabilities in the individual accounts of China's pension system exceeded 2.2 trillion yuan ($348 billion) in 2011, about 500 billion yuan more than the previous year, the Beijing-based Economic Information Daily reported, quoting a government researcher. Chinese employees had paid 2.5 trillion yuan into their pension accounts by 2011, but only about 270 billion yuan was payable, Zheng Bingwen, director of the Center for International Social Security Studies under the Chinese Academy of Social Sciences, told the newspaper. A large number of wage-earners won't be able to withdraw pensions from their individual accounts when they retire in the future, even though the numbers appear to add up, if the gaps are not filled, Zheng said.

China Will Get Old Before It Gets Rich - Yesterday, Houses & Holes stated that he was a long-term China bull, largely because of its status as an industrial powerhouse. Today I want to outline the reason why I am a long-term China bear: China’s rapidly ageing population. As written previously (here, here, and here), China will soon face an ageing problem that threatens to stifle its economy. Essentially, China’s ageing problem stems from its ‘one child policy’, which was brought into effect in 1979 and is credited with preventing around 400 million births from 1979 to 2010. This policy initially produced a population pyramid optimal to economic growth – that is, where the largest segments of the population were neither young nor old, but in the middle (i.e. working age). However, the demographic blessing provided by the one child policy will soon turn into a curse, with the United Nations forecasting that the number of working aged people to dependents is set to almost halve over the 50 years to 2065, from a peak of 1.9 workers to dependents in 2015 to only 1.0 by 2065 (see charts below). The stiff headwinds facing the Chinese economy were recently acknowledged at the China Update conference, According to conference presenter Cai Fang, who is a demographer and National People’s Congress standing committee member, China’s economy is ageing faster than previously thought, meaning that China is likely to grow old before it gets rich (extracts from here and here):

Corporate CEO Donates His $3 Million Bonus To Company’s Lower-Paid Workers - Yang Yuanqing, the chief executive of computer distributing company Lenovo, has decided to distribute his $3 million bonus to 10,000 of his company’s lower-paid workers, many of whom are manufacturers in the company’s Chinese plants. Each worker will receive about $317 worth of the bonus, an amount that roughly equals the average monthly salary of Chinese factory workers. Yang, who made $14 million last year, made the decision because the “strength of the company’s business performance to workers on the production line,” according to news reports. In the United States, CEO pay has risen 127 times faster than worker pay over the last three decades, and even as CEOs rake in massive bonuses, they continue to extract benefits from the workers they employ.

China to buy US assets via GM pension - The Chinese government has agreed to buy investment stakes currently held by General Motors’ pension plan, in a deal that will make Beijing a sizeable investor in many of the US and Europe’s largest private equity funds. The State Administration of Foreign Exchange, which manages China’s more than $3tn in foreign exchange reserves, will pay $1.5bn-$2bn for GM’s positions in blue chip private equity funds managed by firms including Carlyle Group, Blackstone and CVC Capital Partners. Performance Equity, an advisory firm that manages pension investments for GM and its affiliates, is one of many traditional private equity investors who are reducing their investments with private equity groups in order to lower the risk of their portfolios. Investors in private equity typically agree to lock up their money for as long as 10 years, but can cash out earlier by finding a buyer for their stake. According to people familiar with the transaction, Performance Equity has notified several large private equity firms that it will be selling some of its fund stakes over coming months.

Japan Sees Wider Global Slowdown as China Growth Cools: Economy - China’s economic outlook was cut by Japan, its biggest Asian trading partner, as the Shanghai Composite Index fell to its lowest level in three years on concern about faltering domestic demand and export growth. “The slowdown in the global economy is becoming more widespread,” the Cabinet Office said in a monthly report released in Tokyo today. Song Guoqing, an academic member of a monetary policy committee, said July 21 that China’s expansion may be 7.4 percent, the least since the first quarter 2009. Japan’s increased pessimism echoes that of the International Monetary Fund, which lowered 2013 global growth forecasts this month on Europe’s debt crisis and slower expansions in emerging markets from China to India. Chinese stocks fell today to the lowest since March 2009 as weakness in corporate profits threatens to add to the drags on growth from property-market curbs and limited export demand.

Chiang Mai Initiative: Designed not to be used? - The trauma of the 1997 Asian crisis spurred Asian nations into deeper regional cooperation. The most visible outcome was the ‘Chiang Mai Initiative’, which established a network of bilateral currency swap agreements among the region’s central banks (Henning 2009). The arrangement was multilateralised in 2010 and relabelled as the Chiang Mai Initiative Multilateralization – a self-managed reserve pooling mechanism for its member economies.  Asia’s recent doubling of its financial safety net looks impressive. But this column argues it is more icing than cake. It is, in fact, unusable – there is no fund but a series of promises; the institutional mechanisms to replace IMF-type surveillance and conditionality have not been established; and there are no rapid-response procedures to handle a fast-developing financial crisis.

Healing China means hurting Australia - Let me say up front that I’m a long term China bull. The production base that China has seized in the past decade is the stuff of super powers. Sure, China faces a much more difficult political economy at home than other super powers before it, and that may lead to a more troubled and shorter reign at the top, but becoming the industrial powerhouse of the world is a pre-requisite for sovereign super power and China is building it. But that does not mean Australia will benefit in the future as it has done for past ten years. Indeed, the minds that I respect most are becoming very worried about Australia’s relationship with China in the medium term. Some of that concern goes mainstream this morning at the AFR, driven largely by Chris Richardson of Deloitte. There are two articles, one op-ed and one report. From the op-ed: China wanted to slow: it has relied on cheap credit and galloping property and construction sectors for too long. …punting on China to achieve yet another round of “stronger for longer” has been the safest bet of the past decade, and the Chinese authorities are already on the job. Yet there’s more bad news already unleashed in China than many Australians have yet recognised. There is a huge underlying demand for new urban housing as people flock from the country to the city to live.

Aging Japan-Chinese Workers Drive Jobs To Southeast - The so-called demographic dividend from a rising supply of young workers is one reason Japan’s second-largest shipbuilder expanded in the Philippines, where workers are on average half the age of its Japanese employees. Tsuneishi is considering Indonesia, the Philippines and Myanmar for another shipyard, said Hitoshi Kono, chief of the company’s local operation.  Asia’s manufacturing powerhouses -- Japan, South Korea and China -- are among the fastest-aging countries in the world, while developing nations in Southeast Asia are among the youngest in the region. As factories, jobs and investment flow south to tap cheaper labor, growth in the 10-member Association of Southeast Asian Nations is poised to accelerate, propelling the area’s currencies and fueling consumer and property booms, Bank of America Corp. says.  “The demographic dividend is over for Japan and Korea, and it will be over for China soon,” said Yoshimasa Maruyama, chief economist at Itochu Corp., Japan’s third-largest trading company. “It’s happening now in the Asean area, and it will continue for some time.”

More on manufacturing convergence -- I have blogged before about a rather surprising result (to me at least) regarding productivity convergence in manufacturing.  Despite the lack of convergence among economies as a whole, there is apparently quite strong convergence within manufacturing industries.  What this means is that manufacturing sectors that are further away from the technological frontier tend to experience more rapid productivity growth.  And -- this is the really interesting part -- this happens regardless of the quality of domestic policies, institutions, or geography.  Manufacturing productivity converges even if you are in a remote country with lousy policies and institutions. In economics jargon, manufacturing industries are subject to unconditional convergence. The earlier results were produced using UNIDO data at the 4-digit level of disaggregation.  The problem was that these data are patchy, and forced me to work with only few developing countries, over short-term horizons, and with only post-1990 data. In the meantime, UNIDO issued its 2-digit data base (INDSTAT2), which covers many more countries and goes back to the 1960s.  So I redid everything with the new data, not without some trepidation -- for you never know what new data will produce.  But the results were equally striking and robust. Here is the scatter plot that illustrates the central finding, using the baseline sample (which looks for each country at the latest decade that has data):

Corporate Japan: Back on track - Tokyo’s latest drive for international growth in the face of a stagnant domestic economy represents an important regrouping for a nation that has suffered a critical loss of momentum. By 2010, Japan had lost its status as the world’s second-largest economy and its companies increasingly fretted about intense competition from China and South Korea. Overseas mergers and acquisitions – which reached $84bn last year – offer a way to punch back. Armed with a strong yen and spurred into action by last year’s tsunami, Japan’s companies are expected to post an even greater total this year, according to Dealogic, a research firm. Ten years ago, Japan’s outbound purchases totalled only $8.5bn. The latest deals range across sectors as diverse as commodities, breweries, advertising and pharmaceuticals. Landmark acquisitions of the 1980s and 1990s, such as Mitsubishi Estate’s investment in New York’s Rockefeller Center and Matsushita’s purchase of MCA, owner of Universal Pictures, fuelled fears that Japan was buying up America’s soul and was willing to overpay for it. Now bankers say Japanese companies are taking a far more disciplined approach backed up with intense due diligence.

Japan posts record first-half trade deficit - Japan posted a record first-half trade deficit of $37.3 billion Wednesday as energy costs soared and exports to key markets slumped, while analysts warned of further pain for the next six months. As the country struggles to recover from last year's quake-tsunami and nuclear crisis, costs have shot up while income has plummeted owing to the rolling debt crisis in Europe and a stuttering recovery in the United States and a strong yen. The 2.9 trillion yen deficit stemmed largely from energy costs, with the resource-poor nation seeing a nearly 50 percent jump in purchases of liquefied natural gas and a 16 percent increase in crude oil shipments, the data showed. Japan has struggled to meet its energy needs and has turned to pricey fossil fuel alternatives after its nuclear reactors were switched off following the crisis at the Fukushima Daiichi plant caused by the March 11 quake-tsunami. "Japan's trade balance continues to show a trend of weak exports and extreme sensitivity to import prices, such as those of crude oil,"

Japan Trade Deficit Swells to $37B in First Half - Japan reported its biggest half-year trade deficit ever as exports weakened and fuel imports soared to keep the power on while most reactors are idled in the aftermath of last year’s nuclear crisis.The Ministry of Finance on Wednesday reported a 2.9 trillion yen ($37.4 billion) trade deficit for the first half. The deficit was triple the size of the deficit reported for the same period last year. First half exports fell2.5 percent from last year while imports surged 13.1 percent.The latest trade deficit is the biggest since Japan started compiling such records in 1979.Until this month, all 50 of Japan’s working nuclear reactors were offline after the nuclear crisis set off in March 2011 by a massive earthquake and tsunami. Two reactors are back online but the country still must rely more on oil and gas to supply electricity.Exports were dented by weaker demand stemming from Europe’s debt crisis. A strong yen also hurt exports.  Imports surged on the back of the growing cost of importing fuel, including oil, petroleum products, gas and coal.

Amid energy shortages, a record first-half trade deficit for Japan - Japan posted its biggest first-half trade deficit on record, according to government figures released Wednesday, highlighting the economic consequences for this nuclear-averse country of importing fossil fuels to meet its energy needs. The Finance Ministry reported a 2.92 trillion yen (or $37.3 billion) trade deficit, which reflected not only Japan’s surging need for oil and liquefied natural gas (LNG), but also weakened exports to slumping markets such as Europe and China.  The world’s third-largest economy has averted economic crisis this year largely because of a spike in domestic demand, spurred by reconstruction of the earthquake- and tsunami-devastated northeast.  But in the long term, Japan faces some troubling challenges: Its famed exporters — automakers and tech giants — are pinched by a global economic slowdown. Meanwhile, the country’s enduring wariness of nuclear energy has led to record imports of fossil fuels, which arrive here on hulking tankers and help prevent the nightmare scenario of blackouts during the sweltering summer.

Is Global Trade About To Collapse? Where are Oil Prices Headed? A Chat with Mish -- Last week, I agreed to do an interview on OilPrice.Com. The initial interview was conducted over the phone, with follow-up emails. The interview first appeared on OilPrice and is repeated below. As markets continue to yo-yo and commentators deliver mixed forecasts, investors are faced with some tough decisions and have a number of important questions that need answering. On a daily basis we are asked what’s happening with oil prices alongside questions on China’s slowdown, which commodities or instruments will provide safety in the current environment, will the Euro-zone split in the future and what impact the presidential election is going to have on the economy and markets? In the interview, Mish discusses:
• Why global trade will collapse if Romney wins
• Why investors should get out of stocks and commodities
• Why we have been oversold on shale gas and renewable energy
• Why oil prices will likely fall in the short-term
• Why the Eurozone is doomed
• Why there may soon be an oil war with China
• How government interference is ruining the renewable energy sector
• Why we need to get rid of fractional reserve lending

Vital Signs: Falling Costs of Shipping Goods - The cost of shipping goods across oceans is sinking. The Baltic Dry Index, which tracks rates to transport bulk goods like coal by ship, has fallen to 1037, down 11% since July 9. The index, an indicator of global economic activity, has slumped 40% this year. That could suggest weakness around the globe is reducing demand to ship materials.

Developing economies slowing down - Recent reports confirm the slowdown in many major developing economies. In China, growth of the gross domestic product fell to 7.6% in the second quarter of this year, denoting a continuous deceleration from 10.4% in 2010, 9.2% in 2011 and 8.1% in first-quarter 2012. The IMF has lowered its growth projection for India to 6.1% for 2012. This compares to 6.5% last year and 8.4% in the preceeding two years. The Singapore economy contracted 1.1 per cent in the second quarter over the previous quarter at an annualised rate, mainly due to manufacturing output falling by 6 per cent. For Malaysia, the growth rate for 2012 is projected to be 4.2% by the Malaysian Institute for Economic Research. This is lower than last year’s 5.1 per cent growth, which had also slowed to 4.7 per cent in the first quarter. In Indonesia, the Central Bank said that growth was slowing and projected the rate to be 6.2 per cent for 2012, compared to 6.5% last year (and 6.3% in the first quarter). In South America, two of the largest economies are also facing decelerating growth prospects. For Brazil, the government has lowered its growth projection for 2012 to 3 per cent (from 4.5% earlier) but the IMF’s latest growth estimate is even lower at 2.5%. Industrial production declined by 4.3 per cent in the 12 months to May. Growth in 2011 was 2.7 per cent. Argentina had one of the fastest growing economies in the world. Growth was 8.9 per cent in 2011, and the average annual growth was 7.6 per cent in 2003-2010. But the economy contracted by 0.5 per cent in the 12 months to May. Industrial production in June fell 4.4 per cent on the year due mainly to a 31 per cent decline in the auto sector.

Africa and the War Against Offshore Finance - Real News Network’s Paul Jay interviews Léonce Ndikumana, Professor of Economics at the University of Massachussets – Amherst. He is the Director of the African Policy Program at the Political Economy Research Institute (PERI). Here’s what I see as the money quote: [NDIKUMANA:] You also have to look at where the money is going. These banks are actually established in nations with rules, very clear rules about banking. When we say offshore centers, when we say secrecy jurisdictions, when we talk about banking secrecy, people may think that these are alien lands, in no-man lands, but actually you will be surprised to know, if you didn’t know—I’m sure you know, but for those who didn’t know, they will be surprised to hear that the biggest offshore centers are in countries like the U.K., in London, the U.S., in New York, Paris in France. These are the biggest offshore centers where you find banks colluding with corrupt leaders, corrupt private investors, in hiding and not disclosing their investments and their bank accounts, because some of it was acquired illegally, was transferred illegally, is held illegally in the sense that it’s not reported to the government. Yeah, shocked, shocked, but this needs to be said over and over again.

Recovery and Equality - Today, while global attention focuses on Europe’s woes, the economic crisis continues to inflict devastating social consequences worldwide. In a new book from UNICEF’s Division of Policy and Practice, A Recovery for All: Rethinking Socioeconomic Policies for Children and Poor Households, analysis of the latest international data shows that unaffordable food, pervasive unemployment, and dwindling social support threaten much of the world’s population. For starters, after two major international food-price spikes in 2007-2008 and 2010-2011, people in nearly 60 developing countries are paying 80% more, on average, for local foodstuffs in 2012 than they did before the crisis. As a result, poor families’ food security is threatened, as they are forced to reduce the quality or quantity of their food. Furthermore, labor markets around the world are providing fewer jobs and lower salaries, increasing the incidence of poverty among employed people, which has already trapped nearly one billion workers and their families. Moreover, two of every five workers worldwide are unable to find a job, while rampant youth unemployment, coupled with a quickly growing pool of young laborers – more than one billion are expected to enter the world’s workforce between 2012 and 2020 – is further complicating labor-market recovery. Finally, access to public goods and services is under growing pressure in the global shift toward austerity. In 2012, 133 countries are expected to reduce annual spending by an average of 1.6% of GDP, with 30% of governments undergoing excessive contraction (defined as cutting expenditures to below their pre-crisis levels).

New housing bubbles set to burst - Dean Baker - The United States has more than 20 million people unemployed, underemployed or out of the workforce altogether because of a burst housing bubble. We also have more than 10 million homeowners who are underwater in their mortgages. And, we have tens of millions of people approaching retirement who have seen most of their life's savings disappear when plunging house prices eliminated most or all of the equity in their home. This situation could have been prevented if the government had taken steps to stem the growth of the housing bubble before it reached such dangerous levels. But even more astounding is the fact that no one in a position of authority has learned any lessons from this disaster. At the moment, there are housing bubbles in the United Kingdom, Canada and Australia that are arguably larger, relative to the size of their economies, than the one that collapsed and wrecked the US economy. The basis for saying that house prices in these countries are in a bubble is that there has been a sharp increase in the sale prices of homes that has not been matched by a remotely corresponding increase in rents.

Worrying about the Canadian housing market, Part 1: Higher interest rates - Like Nick, I've been thinking and worrying about the Canadian housing market, but not blogging about it. I've decided that it's worth putting some points out for discussion on the topic, if only because it's something we should be talking more about. I've broken it down to three separate posts: the second is here and the third is here.The Bank of Canada has been warning homeowners that low mortgage interest rates are not here to stay, and homeowners' financial planning should be based on higher rates in the future. This concern is also the reason why the Department of Finance has been tightening conditions on mortgages. We don't want to see a wave of houses being dumped on the market because highly-leveraged home owners were unable to renew their mortgages. Or worse: a wave of defaults as people find they can no longer make their payments after renewing at a higher rate.Below the fold, I'll try to sketch out how changing mortgage interest rates have affected mortgage payments in the past, as well as the sorts of changes people should be preparing for.

Nowhere to hide: Global economic troubles spread from Europe and US to China, India and Brazil - The global economy is in the worst shape since the dark days of 2009. Six of the 17 countries that use the euro currency are in recession. The U.S. economy is struggling again. And the economic superstars of the developing world — China, India and Brazil — are in no position to come to the rescue. They’re slowing, too.The lengthening shadow over the world’s economy illustrates one of the consequences of globalization: There’s nowhere to hide. Economies around the world have never been so tightly linked — which means that as one region weakens, others do, too. That’s why Europe’s slowdown is hurting factories in China. And why those Chinese factories are buying less iron ore from Brazil. As a result of this global economic slowdown, the International Monetary Fund has reduced its forecast for world growth this year to 3.5 percent, the slowest since a 0.6 percent drop in 2009. Some economists predict the global economy will grow a full percentage point less. For now, few foresee another global recession. But many economists say European policymakers aren’t moving fast enough to strengthen European banks and ease borrowing costs for Italy and Spain. They fear the global impact if Europe’s economy deteriorates further.

Is the US losing patience with the eurozone debacle? - Having shown the eurozone a lot of latitude, the rest of the world is on the brink of losing patience. With a presidential election looming, and the eurozone debacle hindering a US recovery, America is particularly miffed. The International Monetary Fund last week issued an “Article IV Consultation Report” which really was quite extraordinary. “The euro area crisis has reached a new and critical stage”, boomed the world’s leading financial watchdog. “The adverse links between sovereigns, banks, and the real economy are stronger than ever ... and financial markets in parts of the region remain under acute stress, raising questions about the viability of monetary union itself.” In structural terms, the single currency “is at an uncomfortable and unsustainable half-way point”, observed the IMF. The euro area is “sufficiently integrated to allow escalating problems in one country to spill over to others, but lacks the economic flexibility or policy tools to deal with these spill-overs”. The Washington-based IMF only makes important statements on the initiative of the US government. This statement, though, was made at the urging of China too. The IMF is now insisting on full-scale eurobonds – a genuine, loss-sharing banking union – and “sizeable” ECB money-printing on top of covert QE that has already happened.

There is no sovereign debt crisis: Most governments have never been able to borrow so cheaply - Spanish and Italian bond yields are surging again this week, driving those countries closer to the brink of insolvency. German government officials sound increasingly eager to kick Greece out of the eurozone, and the bond ratings agency Moody’s has put all eurozone members except Finland on notice that they’re at risk of downgrade.  My news feed is full of hits for “sovereign debt crisis”—a situation where governments are unable to borrow to fund their spending. This debt crisis is even being blamed for a global collapse in oil prices. So it’s worth asking: What sovereign debt crisis? There certainly isn’t one in the United States, where for weeks the inflation-adjusted yield on 20-year bonds has been negative. Investors, in other words, are so pessimistic about growth prospects and so frightened of losing their principal that they’re willing to pay the American government a small fee for the privilege of safeguarding their money. And a quick glance around the world reveals that the American experience is much more typical than the Greek or Italian one. British interest rates are tumbling, as are Germany’s and Japan’s. All across the world, governments have never been able to borrow so cheaply. It’s not just that the U.S. government is viewed as a safe haven or that Japan is an export dynamo. For example, Australia’s government borrowing costs are at their lowest level on record, which is entirely typical.

INET Council on the Euro Zone Crisis Offers Pragmatic Solutions in New Report - The INET Council on the Euro Zone Crisis, which features some of Europe’s top economic minds, yesterday released a report that offers a series of suggestions on how to resolve the ongoing euro zone crisis. The crux of the report comes down to recognizing the distinction between “legacy costs” (costs that now exist as a legacy of the initially flawed design of the euro) and “fixing the design itself.” While the Council suggests that both of these aspects of the current crisis need to be addressed if the euro zone is to survive, they separate out the immediate-term needs for addressing the legacy costs and saving the euro zone from self-fulfilling disasters and the medium- and long-term adjustments to the euro zone that need to be made as well. Importantly, this approach does not include “a permanent mechanism for common euro zone debt issuance and a mechanism for countercyclical fiscal transfers,” because the Council saw these as unnecessary measures for resolving the present crisis. Instead, they suggest a “minimal institutional framework to ensure the currency union functions as originally intended.”

Spain Bonds Slide as Valencia Aid Request Deepens Crisis - Spain’s bonds fell, sending five- and 30-year yields to euro-era records, as the region of Valencia prepared to seek a rescue, deepening concern policy makers are failing to find solutions to the debt crisis. “Valencia’s request for assistance underlines fears as to the central government’s ability to bring wayward regions to heel,” said Richard McGuire, senior fixed-income strategist at Rabobank International in London. “That puts Spain under a considerable degree of pressure.” Spanish five-year yields jumped 47 basis points, or 0.47 percentage point, to 6.88 percent at 5:21 p.m. London time, after touching 6.903, the most since the euro started in 1999.  Valencia will tap Spain’s financing facility for regional governments, the area’s administration said in a statement on its website today. The funding mechanism was created last week to inject liquidity into the cash-strapped regions.

Prepare for Spanish Implosion: Businesses Threaten to Leave Spain Over Tax Hikes; Finance Minister Proposes 56% Tax on Short-Term Financial Transactions -Cristobal Montoro, the Spain's finance minister has made a liquidity destroying proposal to tax short-term financial transactions at an astonishing 56% tax rate. Businesses are already upset over hikes in the VAT and have threatened to leave Spain. Interestingly, in spite of raising taxes elsewhere, the VAT was lowered on the highly subsidized renewable energy sector.  Why? "Secretary of State for Finance, Ricardo Martinez Rico, is the leading advisor in the industry". Here is the "as-is" Google translation of the El Econimista article Waiting for the Intervention. The Bundesbank is opposed to the purchase of deduda, the only thing that can save Spain and Italy. Autonomy, conflict, power and government crisis rumors complicate everything. The situation is out of control. The government approved last week the biggest adjustment of his story in hopes that it would serve to calm the markets. But it was not. The risk premium yesterday overcame the barrier of hundred basis points, something never seen, and the bond closed at 7.27 percent. The first question that arises is what should make efforts so painful as the increase in VAT or removal of the extra pay of officials if markets continue to punish us hard. It would be naive to think that just announced a big cut, things would begin to change. There are still many uncertainties that sow mistrust.

Desperate for more ECB funding and running out of collateral, Spain is creating a new type of covered bonds - Spanish banks are running out of collateral that can be pledged at the ECB. The ECB no longer permits banks' own bonds guaranteed by their government (beyond what's already been pledged) to be used as collateral (see the document in this post). What about using more covered bonds? Unfortunately with unemployment pushing 25% and housing declining quickly, demand for mortgages has dried up. That means mortgage-backed covered bonds (Cedulas) can no longer be issued. These bonds were quite popular in the Eurozone during the bubble years, but are now mostly sitting at the ECB as collateral.  In a desperate attempt to create more covered bonds in order to extract additional lending from the ECB, the Spanish government is about to authorize a new type of securitization structure:  Reuters: - Spanish banks are hoping that the new structure - Cedulas de Internacionalizacion (CI) - will extend this funding lifeline by allowing collateral, previously excluded, to be used.  Under the terms of the new law, export finance credit from high quality financial institutions or guaranteed public sector entities can be used to back a new issue. This would have the added benefit of lowering issuers' funding costs because covered bonds benefit from lower haircut valuations compared with securitisation, Moody's said.

Three Quarters of Spanish Think Austerity Will Fail, Mundo Says - Almost three quarters of Spaniards believe that billions of euros of austerity measures enacted by the ruling People´s Party won’t help the country recover from the economic crisis, El Mundo reported, citing a survey by Sigma Dos.  The poll showed 73 percent of respondents expect austerity measures to fail to bring a recovery in the economy and almost 82 percent said the government of Prime Minister Mariano Rajoy has failed to fulfill its electoral program, the newspaper reported. The survey carried out between July 17 and 19 polled 1,000 citizens and has a margin of error of 3.2 percent, El Mundo said.

ECB's Coeure says negative bank deposit rate an option - Cutting the deposit rate the European Central Bank offers lenders in the euro zone below zero is an option, ECB Executive Board Member Benoit Coeure said on Friday. Speaking in Mexico, Coeure said the bank needed to take the rate down 25 basis points to zero to match its cut in the reference rate. He said policymakers would need to consider whether it could take the deposit rate below zero, which would mean the central bank would start charging banks for the privilege of parking spare cash in the ECB. "It's still possible,"  "It's true that we are hitting a psychological limit at zero. And it's unclear whether markets can function at negative interest rates. Some of them can." "Some of them apparently can't. So before making the next step, which would be moving the deposit facility to a negative yield, we'll reflect about it," he added. Denmark introduced a negative interest rate this month and the ECB is watching closely how the move plays out.

EuroCrisis Intensifies as Spain Spirals Downward, Greek Impasse Nigh  - It is increasingly difficult to find metaphors adequate to describe the pathological dysfunction among European leaders as their rigidities and biases make a full blown crisis look inevitable. While there was never going to be an easy path out of the linked sovereign debt/banking crisis, since lasting solutions would require fundamental changes in institutional arrangements, short term expediencies and pandering to national prejudices were one of the worst choices on offer. So the surplus countries, unwilling to see that rescues of periphery countries are rescues of their banks and export markets, continue to punish the supposed wastrels, unable to see that their economic morality play will visit retribution on all the actors.  The discussions in some European papers, and even in this blog’s comment section, have a fundamentalist “burn them if they don’t repent” zeal. Yet even thought the rolling crisis has inflamed national passions and stereotypes, from an economic perspective, the periphery countries are no longer Other. It’s as if the northern countries have a case of body integrity identity disorder, when individuals believe they’d be better off if they were an amputee and keenly want to have healthy limbs cut off. This condition does not respond to drugs or psychotherapy and is not well understood. One theory is that these individuals have faulty sensory mechanisms, and don’t experience the limb they want to be rid of as part of their body.

Greece Back at Center of Euro Crisis as Exit Talk Resurfaces - Greece retakes its position at the heart of the European debt crisis this week as its creditors assess how far off course the country is from bailout targets, raising again the specter of its exit from the euro. Greece’s troika of international creditors -- the European Commission, the European Central Bank and the International Monetary Fund -- will arrive in Athens tomorrow amid doubts the country will meet its commitments and reluctance among euro-area states to put up more funds should it fail.  Greek Prime Minister Antonis Samaras’s three-way coalition, formed last month after a June 17 election ended a six-week political deadlock in the country, has scrambled to assemble budget cuts to convince troika officials. Finance Minister Yannis Stournaras has identified about 8 billion euros of spending cuts and savings for the next two years out of 11.5 billion in additional cuts required. The Greek government is also behind on state asset sales, having so far brought in 1.8 billion euros, a fraction of the 50 billion euros it aims to raise by 2020, half from sales in company stakes and half from real estate. The state is unlikely to generate more than 300 million euros this year, short of the about 3 billion euros targeted for 2012, according to the outgoing chief of the state’s asset-sales fund, Costas Mitropoulos.

What the EIB makes the ECB unmakes: The latest from the Greek front - Let’s begin with what the EIB’s ‘reactivation’ in the Greek context means, in terms of euros and cents. Around 600 million euros will be channelled into Greek SMEs (small and medium sized firms) during the remainder of 2012 (if all goes well and the transmission mechanism miraculously, in view of past failures, works). Then, during 2013 another 400 million will be added to the SME-reinforcement program, with a further 400 million to be disbursed over the two year period of 2014-5. Additionally, 500 million worth of guarantees will be offered to infrastructural projects that have ceased up over the past two years, courtesy of the collapse of private investment and bank credits. Of the above figures, the very first one is the one that matters: the 600 million that was announced for the coming autumn. The reason I am saying this is that the Greek economy is in turbocharged meltdown and autumn will prove particularly trying and cruel. It may very well be the turning point, involving a truly awful ‘turn’. Let us now juxtapose this figure, of 600 million euros to be provided by the EIB, to some other telling numbers.

German Vice Chancellor ‘Very Skeptical’ Greece Can Be Rescued - German Vice Chancellor Philipp Roesler said he’s “very skeptical” that European leaders will be able to rescue Greece and the prospect of the country’s exit from the euro had “lost its terror.” Roesler, who is Germany’s economy minister, told broadcaster ARD that Greece was unlikely to be able to meet its obligations under a euro-area bailout program as its international creditors hold talks this week in Athens. Should that be the case, the country won’t receive more bailout payments, Roesler said.  “What’s emerging is that Greece will probably not be able to fulfill its conditions,” Roesler said today in an ARD summer interview. “What is clear: if Greece doesn’t fulfill those conditions, then there can be no more payments.”

IMF to Stop Further Aid Tranches to Greece, Spiegel Says - The International Monetary Fund will stop paying further rescue aid to Greece, making the country’s insolvency in September more likely, the Der Spiegel magazine said. citing unidentified European Union officials. While a review of Greece’s progress in meeting terms of its rescue is unfinished, it is “already clear” to the reviewing body of the IMF, the EU Commission and the European Central Bank that Greece will not be able to fulfill its promise to cut debt to 120 percent of annual economic growth in euro terms by 2020, Der Spiegel said. Missing the target means Greece needs between 10 billion euros and 50 billion euros ($60.8 billion) in additional aid, a potential outcome that the IMF and several unidentified euro- area states are not prepared to accept, the magazine said, citing the review. Euro-area leaders regard Greece’s exit from the euro as manageable even though they want to prop up the country’s finances until the new and permanent rescue fund called the European Stability Mechanism is in operation, the magazine said, citing from the same sources. Germany is holding up the inception of the ESM as it awaits a court ruling on the fund’s constitutionality on Sept. 12, Spiegel said.

Spiegel bombshell: The IMF plans to dump Greece - German magazine Der Spiegel dropped a bombshell this morning in an article which is for now available only in German. My German is quite decent. Here's the original and my translation: IWF will Griechenland-Hilfen stoppen (IMF wants to stop Greek help) Greece could go bankrupt as early as September. Spiegel has obtained information that the IMF told the Brussels leadership it would not make more money available for help to Greece. [..] At the moment the EC, ECB and IMF troika is investigating to what extent the country lives up to its reform obligations. This much is already certain: the government in Athens will not be able to bring down its debt load to about 120% of GDP by 2020. The troika estimates that giving Greece more time to achieve its goals would cost an additional €10 billion-€50 billion. Many eurozone governments, however, are no longer prepared to shoulder new Greek burdens. Moreover, countries like Holland and Finland have made their help contingent on IMF participation.

IMF Seeks to Halt Aid to Greece, Bankruptcy Pending; Dominoes Will Fall -- According to Der Spiegel, the IMF Wants to Stop Aid to Greece as soon as the ESM is up and running in September. At that time Greece would become bankrupt. This is a Mish-modified translation from German:  The patience of the International Monetary Fund (IMF) with Greece comes to an end: According to to information obtained by SPIEGEL, senior IMF officials told EU leaders in Brussels that the IMF was no longer willing to provide additional funds for Greece. The Troika estimates that Greece needs between ten and 50 billion € to meet targets, but many governments in the euro zone are no longer willing to shoulder new burdens. In addition, countries like the Netherlands and Finland, have linked their support because the IMF was involved. The risk of withdrawal of Greece from the monetary union is now held in the countries of the Euro-zone control. To limit the risk of contagion to other countries, governments want to wait for the start of the new bailout ESM.  The judgment of the German Constitutional Court regarding the ESM on September 12th will come into play.

Euro Exit Looming? Berlin, IMF To Refuse Fresh Aid for Greece - Germany and other important international creditors are not prepared to extend further loans to Greece beyond what has already been agreed, German newspaper Süddeutsche Zeitung reported on Monday. In addition, SPIEGEL has learned that the International Monetary Fund (IMF) too has signalled it won't take part in any additional financing for Greece. The Süddeutsche Zeitung cited an unnamed German government source as saying it was "inconceivable that Chancellor Angela Merkel would again ask German parliament for approval for a third Greece bailout package." Merkel has had difficulty uniting her center-right coalition behind recent bailout decisions in parliamentary votes and would be unwilling to risk a rebellion in a another rescue for Greece, the newspaper reported. Meanwhile, German Economy Minister Philipp Rösler said on Sunday he was "more than skeptical" that Greece's reform efforts will succeed. "If Greece no longer meets its requirements there can be no further payments," he said in an interview with German public broadcaster ARD. "For me, a Greek exit has long since lost its horrors."

Greece should pay wages in drachmas: German MP - Greece should start paying half of its pensions and state salaries in drachmas as part of a gradual exit from the euro zone, a leading German conservative was quoted on Monday as saying. Alexander Dobrindt, general secretary of the Christian Social Union (CSU), the Bavaria-based sister party of Chancellor Angela Merkel's Christian Democrats (CDU), has long argued that Greece would be better off outside the euro zone. "With Greece we have reached the end of the road. There must not be any further aid. A country which does not have the will to fulfil the conditions, or is not able to do so, must get a chance outside the euro," Dobrindt told the daily Die Welt.

A Foolish Lack Of Terror -  Krugman -- Germany’s vice chancellor says that the prospect of a Greek euro exit has “lost its terror”. Meanwhile, Spiegel is reporting that the IMF has decided to pull the plug. I find their lack of terror … disturbing. I’m not saying that Greece should be kept in the euro; ultimately, it’s hard to see how that can work. But if anyone in Europe is imagining that a Greek exit can be easily contained, they’re dreaming. Once a country, any country, has demonstrated that the euro isn’t necessarily forever, investors — and ordinary bank depositors — in other countries are bound to take note. I’d be shocked if Greek exit isn’t followed by large bank withdrawals all around the European periphery. To contain this, the ECB would have to provide huge amounts of bank financing — and it would probably have to buy sovereign debt too, especially given the spiking yields on Spanish and Italian debt that are taking place as you read this. Are the Germans ready to see that? My advice here is to be afraid, be very afraid.

Europe's Juggling Act: Cuts, Tax Hikes, Bailouts - On the face of it, last week did not look like a very good one for Europe—not if you think it is time to push growth as well as fiscal discipline. Just days after Spain announced a $79 billion package of spending cuts and tax increases—including a rise in the value-added tax (VAT) from 18 percent to 21 percent— it was clear that the bond markets were still not satisfied. Spanish debt finished the week well over the informally recognized limit (7 percent), when governments have to start thinking about bailouts because they can’t afford to borrow. Greece, meantime, was busy with its own European-mandated round of pay, pension, and social spending reductions. We will see what comes of that.  Are we still stuck with the question of whether the cure for Europe is worse than the disease? Here is another one worth posing: How much can Americans learn from Europe’s continuing debacle and the methods they are trying to get out of it?

Spain on Edge as Focus Shifts from Banks to State’s Finances - Spain got the green light from its E.U. partners last Friday for a $120 billion bailout of its troubled banks. The approval came in record time for the beleaguered euro zone, less than a month after Prime Minister Mariano Rajoy made a formal request for funds on June 25. The reaction of financial markets? A rout on the Madrid stock exchange and a big jump in the yields on Spanish government bonds, which soared to over 7%, a crisis level that is unsustainable.What’s going on? The short answer is that the markets are switching their attention from the parlous state of Spanish banks, which have $192 billion in what the Bank of Spain calls “doubtful loans” on their books, or almost 9% of total lending, and are now focusing on the state’s finances, which are showing new signs of deterioration. That’s a worrying development for the euro zone as a whole, since the emergency bailout funds it has agreed on would barely cover a Greek-like sovereign rescue of an economy as big as Spain’s. The International Monetary Fund, in a new report on the euro zone issued on Friday, warns about “very high levels of stress” and is calling for “more determined action” to root out the causes of the crisis.

'Black Friday' Blame-Game Escalates As Spain Is Out Of Money In 40 Days - With Valencia bust, Spanish bonds at all-time record spreads to bunds, and yields at euro-era record highs, Spain's access to public markets for more debt is as good as closed. What is most concerning however, as FAZ reports, is that "the money will last [only] until September", and "Spain has no 'Plan B". Yesterday's market meltdown - especially at the front-end of the Spanish curve - is now being dubbed 'Black Friday' and the desperation is clear among the Spanish elite. Jose Manuel Garcia-Margallo (JMGM) attacked the ECB for their inaction in the SMP (bond-buying program) as they do "nothing to stop the fire of the [Spanish] government debt" and when asked how he saw the future of the European Union, he replied that it could "not go on much longer." The riots protest rallies continue to gather pace as Black Friday saw the gravely concerned union-leaders (facing worrying austerity) calling for a second general strike (yeah - that will help) as they warn of a 'hot autumn'. It appears Spain has skipped 'worse' and gone from bad to worst as they work "to ensure that financial liabilities do not poison the national debt" - a little late we hesitate to point out.

Spanish Yield Reaches Record on Regional Bailout Concern - Spanish bonds slumped, with 10-year yields climbing to a euro-era high, after El Pais said six regions may ask the central government for financial assistance, increasing concern the nation will need additional aid. German government bonds outperformed all their euro-area peers, pushing yields to record lows, as Der Spiegel magazine reported the International Monetary Fund will stop paying rescue funds to Greece, citing unidentified European Union officials. Italy’s 10-year yield reached a six-month high and Greek government bonds tumbled.  “The probable bailouts of some Spanish regions is weighing on markets and pushing up yields,”  “There is concern that Spain might be looking for a sovereign bailout sooner rather than later as a result of having to bail out the regions. Yields at current levels aren’t viable for Spain.”

Spanish Recession Probably Deepened in Second Quarter: Economy - Spain’s recession deepened in the three months through June as the toughest budget cuts in the country’s democratic history pushed the economy into a third consecutive quarter of contraction, the Bank of Spain said. The euro area’s fourth-largest economy shrank 0.4 percent from the first quarter, when gross domestic product fell 0.3 percent, the central bank said in an estimate in its monthly bulletin released in Madrid today. Domestic demand “fell more sharply than in the prior quarter,” while exports showed a “moderate recovery,” it said.

Spain slump deepens as bailout fears grow - Spain's economy sank deeper into recession in the second quarter, its central bank said on Monday, as investors spooked by an undeclared funding crisis in its regions pushed the country ever closer to a full bailout. The economy contracted by 0.4 percent in the three months from April to June having slumped by 0.3 percent in the first quarter of the year, the central bank said in its monthly report. As Spain's benchmark 10-year debt yields rose further above the 7 percent level that triggered an unsustainable spiral in borrowing costs for the euro's zone existing bailout recipients, Economy Minister Luis de Guindos ruled out a full-scale rescue on top of the 100 billion euros earmarked for the country's banks. Ministers in Madrid insist there is little more they can do to bring the borrowing costs down, but the central bank's deputy governor said more austerity was needed.

Full Spanish Bailout Coming Up; New Record High Yields on Spanish Bonds; Misguided Faith in Can-Kicking - El Pais reports Full Spanish Bailout Increasingly Likely "The financial credibility of Spain is close to zero. Fiscal credibility is zero. The political credibility is zero. Investors have been sentenced to Spain. The Government has wasted no time in recent months has squandered the credit granting him an absolute majority, has lost some confidence in European institutions and the whole market with a succession of errors, many of them for a bad communication strategy is correct now without success. Too late? Can not say such things in public, but without a change of attitude are you doomed to a full recovery. " "I see little chance that Spain is free," says Ken Rogoff, a Harvard professor and head of the IMF execonomista. "Spain will continue with serious growth problems and stop until there is a massive deleveraging. This can be achieved with painful structural reforms, especially in the labor market. Also with a sustained inflation in countries like Germany, which can be ruled out given the degree of obsession with the ECB. And take away significant restructuring and debt, the best approach but politically the most difficult. Most likely, this is made more than a decade of anemic growth and high unemployment, combined to a greater or lesser extent with the previous recipes, "says Rogoff, who predicts a sort of social depression (if it is not as friction unemployment 25%).

Spain moves nearer to full-scale rescue - Here are the chilling statistics. In the first five months of the year, Spain's banks lost 3% of their deposits as savers moved their cash to perceived safe havens, such as Germany, or spent their accumulated savings to make up for the collapse in their incomes. Meanwhile, in not much more than six months, Spanish banks' borrowing from the European Central Bank has risen from 106bn euros (in November 2011) to 365bn euros - or 9.5% of all their borrowing needs. The relevant comparators are not encouraging. The banks of Ireland and Portugal, two countries already in formal rescue programmes provided by the Eurozone and IMF, are dependent on funding from the ECB to the tune of 13.5% and 10% of their respective liabilities. Or to put it another way, the ECB's support for Spain's banks is already around the levels in Ireland and Portugal at which the ECB felt that enough was enough, and put pressure on eurozone governments to provide a full-blown rescue programme for those countries."

German Parliament to vote on Spanish bank rescue - Germany's Parliament has to endorse all decisions to use money from the eurozone's rescue fund. The country is Europe's biggest economy and the biggest single contributor to the bailout fund; it will guarantee loans to the tune of up to (EURO)29 billion under the Spanish package.Bailing out struggling eurozone nations isn't popular in prosperous Germany and helping banks is even less so, but officials argue that stabilizing Spain's banking sector _ which has been hit hard by a burst real-estate bubble _ is in the country's own interests. Finance Minister Wolfgang Schaeuble argued that the Spanish government itself is on the right path, pushing through unpopular austerity measures and reforms to get its finances in order. But it needs help to cope with losses at its banks _ investors fearing the Spanish government may be overwhelmed by such costs have pushed its borrowing rates high.

Spanish Debt Risk Soars to Record as Regions Ask for Assistance - The prospect of more Spanish regional governments following Valencia in asking for aid sent the cost of insuring the nation’s debt to a record. Credit-default swaps on Spain jumped as much as 31 basis points to 636, according to data compiled by Bloomberg, and were at 632 at 1:30 p.m. in London. A basis point on a swap protecting 10 million euros ($12.1 million) of debt from default for five years is equivalent to 1,000 euros a year. Spain created an 18 billion-euro bailout mechanism last week to help cash-strapped regions even as it struggles to access financial markets, with 10-year bond yields surging as high as 7.57 percent today, before trading at 7.49. Catalonia yesterday said it’s considering tapping the fund and El Pais reported that four other regions may seek assistance.

Europe Shaken by Fear Spain Will Need Full Bailout - Europe is on the brink again. The region's debt crisis flared on Monday as fears intensified that Spain would be next in line for a government bailout. A recession is deepening in Spain, the fourth-largest economy that uses the euro currency, and a growing number of its regional governments are seeking financial lifelines to make ends meet. The interest rate on Spanish government bonds soared in a sign of waning market confidence in the country's ability to pay off its debts. The prospect of bailing out Spain is worrisome for Europe because the potential cost far exceeds what's available in existing emergency funds. Financial markets are also growing uneasy about Italy, another major European economy with large debts and a feeble economy.

Spain Bans Short-Selling for 3 Months - Spain's stock market regulators banned short-selling on all Spanish securities on Monday for three months and said it may extend the ban beyond October 23. The ban, which will not apply to market makers, will apply to any operation on stocks or indexes, including cash operations, derivatives traded on platforms as well as OTC derivatives, the regulator said in a statement. European shares extended their losses following the move by Spain, which raised fears that the region's sovereign debt and banking crisis may be worse than expected. Earlier on Monday, Italy reintroduced a temporary ban on the short selling of financial stocks as a growing euro zone crisis buffeted markets and took a heavy toll on heavily indebted countries in southern Europe. In a move aimed to discourage speculative trading on Italian financial institutions, Consob said the ban on banking and insurance stocks would be effective immediately and remain in place until July 27.

Spain, Italy Ban Short Selling of Stocks to Slow Market Turmoil - Spain and Italy reinstated a short- sale ban on stocks as bank shares plunged to record lows, bond yields rose and the euro traded below its lifetime average against the dollar on concern the debt crisis is growing. Spain’s CNMV market regulator banned the creation of negative bets on equities through shares, derivatives and over- the-counter instruments for three months. Italy’s Consob prohibited the practice on 29 banking and insurance stocks for one week, citing “grave tensions” in financial markets. Today’s move echoes decisions in August last year by the two nations plus France and Belgium after European banks hit their lowest levels since the credit crisis of 2008 and 2009. Most bank stocks extended their decline once the bans were lifted.

Spain and Italy take gold for flailing, banning short-selling -  The actual announcement in Spanish is here. Reuters is saying that it’s on all Spanish securities, not just financials. While the Italian announcement is here. These appear to be the lucky companies involved: Intermobiliare bank Banca Monte Paschi Siena Banca Popolare Emilia RomagnaBanca Popolare Etruria and Lazio Banca Popolare Milano Banca Popolare Sondrio Profile Bank and Banco di Desio Brianza Banco di Sardegna AnswerBanco Popolare Cattolica Assicurazioni Credito Artigiano Credito EmilianoCredito Valtellinese Fondiaria – Sai

Italy bans stock short-selling as market plunges - Italy's market watchdog on Monday imposed a week-long ban on the short-selling of financial stocks as the Milan index plunged amid fears that if Spain needs a bailout, Italy could be next. The main stock index, the FTSE-MIB, closed 2.8 percent lower after being down by more than 5 percent in the morning. European markets have been battered by fears that Spain - which has already sought a bailout for its banks - could need a sovereign bailout as its borrowing rates remain prohibitively high. A bailout for Spain would stretch Europe's financial resources and put all eyes on Italy, which has the eurozone's third-largest economy and very high public debt. The continent's bailout fund would have no more money to help Italy.

Counterparties: Banning shorts in Europe - A ban on short selling didn’t reverse a drop in stocks when the SEC imposed one covering 19 financial companies in July 2008, including, ahem, Lehman Brothers. Spain and Italy believe they can achieve more success — the countries have reinstated a ban on short selling the shares of their financial institutions. Spain’s claim that the sell-off in bank stocks is overdone is made difficult by its continued negotiation of a $1.2 billion bailout of its financial banking system. That bailout looks increasingly necessary: The Bank of Spain reported that the economy contracted by 0.4% in the second quarter. And the fiscal health of the provinces continue to weaken. On Friday, the overly indebted region of Valenica sought financial aid from the central government in Madrid, and the tiny region of Murcia looks like it will do so as well. Those payments are getting increasingly expensive for the central government to fund. Yields on Spain’s 10-year bonds hit 7.52% today, a euro-era high. Italy is in a relatively better position (emphasis on “relatively”). Sicily’s situation is causing alarm in Rome, as policymakers announced they would send the island $484 million in aid to stave off a liquidity crunch. Sicily, which some call “the Greece of Italy,” faces the same problems of bloated public payrolls and overly generous public pension contracts, as the country as a whole:

Italian provinces warn on spending cuts - Italy's provincial government association warned on Monday that schools may not be able to open after the summer holidays due to planned spending cuts, highlighting growing concerns about local finances in the euro zone's third-largest economy. The comments follow Prime Minister Mario Monti's warning last week that the autonomous region of Sicily was on the brink of a default and come on the same day La Stampa newspaper said that 10 Italian cities faced serious financial difficulties - echoing similar problems in Spain. “With these cuts we won't be able to guarantee the opening of the school year,” UPI President Giuseppe Castiglione told reporters in Rome. Speaking at the same news conference, Piero Lacorazza, president of the province of Potenza in southern Italy, said the comment was “not an exaggeration”, adding that “half of the provinces are in serious financial difficulty”.

Social Media Panic in Italy: "Enough of this Agony; Give Us Back the Lira" - Black Monday messages on Facebook and Twitter have gone viral in Italy as people have had enough of austerity, job losses, and uncertainty. La Stampa reports on Panic in the Network. What follows is a Mish-revised translation of select ideas and quotes from the article. My specific comments are in brackets. Black Monday breaks early in the morning on websites across the world and social networking spreads alarm. "Withdraw money from bank accounts" is the appeal of Andrew to Facebook friends.  Pseudo-analysis on the alleged benefits of a return to the lira go around the net. "Enough of this sad agony. Bring back the old money", Paul insists. "In 2000 we had the lira. We were producing more, exporting more, and children were living better, the results of monetary sovereignty" says Magdi Cristiano Allam on Twitter. "We are on the brink of the abyss and the top EU cazzeggiano [slang for F* around]," accuses Ivan.  The tones on social networks are apocalyptic: "This is not a crisis, it's the end of capitalism." On the forum of the economics of printing a black player sees: "Folks, we begin to pray, after Greece's up to us. We are at the end titles, to every man for himself."

Mish on Capital Account: Discussion of Social Media Panic in Italy, Soaring Yields in Spain, and the Upcoming 20th Euro Summit, Bound to be Another Failure - I had the pleasure of being back on Capital Account with Lauren Lyster on Monday for a discussion of social media panic in Italy, soaring yields in Spain, and the end of the line for Greece. I come in at about the 18 minute mark, but positioned the video to automatically start play at the 17:15 mark, which is the start of the segment. That way you can hear a brief introduction from Lauren.

Europe losing battle against debt crisis - Europe is fighting losing battles on two fronts. The debt crisis which began in Greece almost three years ago has spread to other countries. The recovery from the global financial crisis is ending, and the region will be in recession during the rest of the year. To combat the debt crisis, Greece, Ireland and Portugal have received bailout funds from the EU, European Central Bank and the International Monetary Fund (the “troika”), but are required to reduce borrowing through cuts in spending and higher taxes. To offset the recessionary impact of the fiscal tightening, the ECB has repeatedly eased monetary policy to encourage lending to the private sector. Neither measure has worked as intended. The eurozone’s latest unemployment figure of 11.1 per cent in May is the highest in the euro era. Spain, the country recording the region’s highest unemployment rate of 24.6 per cent, announced a €65bn fiscal tightening programme this month. The new austerity measures will result in a deeper recession and even higher unemployment.

Playing with Fire in the Eurozone - Bloomberg quotes German Vice Chancellor Philipp Roesler as saying “What’s emerging is that Greece will probably not be able to fulfil its conditions. What is clear: if Greece doesn’t fulfil those conditions, then there can be no more payments.” (HT PK) OK, this is just the kind of thing you would expect to be said in negotiations between creditors and debtors. We have been here before, and the rhetoric appeared to work on the Greek electorate. In the Cold War, we mercifully only had a few moments like this, and we were lucky. But if you keep playing this game, one day you will lose control. Sometimes it seems as if Germany and its supporters are like a poker player with a very weak hand, who has managed to convince all the other players that their hand is much stronger than it is. But there is a danger that you may get so good at playing this bluff, that you may stop looking at your cards and actually believe you have a strong hand. Or worse still, that although your hand is weak, you deserve to have the better cards, and therefore you do have the better cards.  Reading the latest IMF report on the Eurozone, it seems to me that the IMF has decided they cannot be a part of this game anymore. The idea that those dastardly Greeks just refuse to take their medicine is absurd. Take a look at what has happened to fiscal policy in Greece, measured in a way that gives a true indication of the extent of policy adjustment that has been made.

5-year Swiss rate goes negative - The Swiss government bond curve is now negative for maturities of five years and under. Investors are willing to lock up a negative yield for 5 years just to get out of euro denominated assets without taking much FX risk. Fears of Eurozone breakup are escalating.As a result, debt issuance for Switzerland's government is becoming a profit center rather than a source of interest.

Spanish Finance Minister in Germany Pleads for Temporary Credit Line to Halt an "Imminent Financial Collapse" - Spain faces a bond rollover of €28 Billion in October and is rightfully scared about 2-year bond rates of 6.5%. El Economista notes the Spanish economy minister is at a meeting in Berlin to discuss Government Request for a Credit Line to Save the Year and forestall an imminent financial collapse. This is a heavily Mish-modified translation from the article .... Luis de Guindos will meet with Wolfgang Schäuble to negotiate measures noting the ECB is already 19 weeks without buying debt. Economy minister, Luis de Guindos, now travels to Germany for talks with German Finance Minister, Wolfgang Schäuble. The appointment is key because Spain is running out of time. With the 10-year bond about 7.5% and the risk premium on the 632 basis points, Guindos nevertheless insisted that Spain will not have to ransom all for a full sovereign bailout. Instead, he asks for the European Central Bank (ECB) to resume purchases of Spanish bonds in the market. Guindos believes Mario Draghi is not the problem. Rather, bond purchases have stopped primarily because Germany is opposed. Analysts are unanimous: An imminent financial collapse is at stake. If pressure on Spanish bonds continues and Treasury loses its access to the bond market, Spain cannot cope with the massive debt maturity that awaits him in October, close to the 28 billion euros. Amounts may be even greater if Spain has to funnel money to the regions requesting the help of special liquidity fund.

Spain to seek partial bailout to meet immediate needs, says report - Reports this morning say Spain is looking for a partial bailout from its European partners to meet its immediate financing needs. That is on top of the €100 billion bank rescue deal which was signed off on last Friday. El Economista said the government wants a line of credit to cover €28 billion in debt maturing in October. The publication says sources close to the Spanish government have admitted they are considering the negotiation of an overall rescue. It adds that any such money would serve to dampen fears. Spanish borrowing costs have soared above 7% in recent days making attempts to raise the money on the financial markets too expensive.

Relentless Pressure Pushes Spain Closer to Bailout - Spain paid the second highest yield on short-term debt since the birth of the euro at an auction on Tuesday, reflecting a growing belief that the country will need a full sovereign bailout that the euro zone can barely afford. Spain's increasingly desperate struggle to put its finances right has seen its borrowing costs soar to levels that are not sustainable indefinitely. Italy, commonly regarded as too big to bail out, has been dragged along in its wake. The Spanish Treasury raised 3.04 billion euros ($3.7 billion) of 3-, and 6-month T-bills, meeting its target. The average yield on the 3-month bill was 2.434 percent, up from 2.362 in June. For the six-month paper, the yield jumped to 3.691 percent from 3.237 percent last month. "The most important takeaway from this auction is that Spain was able get all its debt out the door," . "Still, in March, Spain was able to issue six-month debt at a yield of under 1 percent, now it is paying 3.7 percent."

Spain's CDS spread moving toward Portugal's - It's become the "new normal" watching Spain's yields hit new highs on a daily basis. It's an unsustainable process and Spain is now fully shut out from the capital markets. Spain's CDS spread hit a new record as well this morning - now at 645bp. Just to put things in perspective, Banco Santander (Spain's largest bank) CDS trades at 474bp and Banco Bilbao Vizcaya Argentaria (Spain's second largest bank) CDS is 492bp. Both trade tight to the sovereign. The market views the banks (who by the way rely on the ECB for most of their funding) as being financially safer than their government. In fact Spain's CDS is pushing toward Portugal's levels as the perceived risks of these two nations begin to converge.

Spain feels debt heat, Greece way off bailout terms (Reuters) - Spain paid the second highest yield on short-term debt since the birth of the euro at an auction on Tuesday, and EU officials said Greece had little hope of meeting the terms of its bailout, casting fresh doubt on its future in the euro zone. Spain's increasingly desperate struggle to put its finances right has seen its borrowing costs soar to levels that are not manageable indefinitely, reflecting a growing belief that it will need a sovereign bailout that the euro zone can barely afford. It has become the recent focus for investors, but Greece - where the sovereign debt crisis began - remains a powder keg. If Athens were to default or exit the euro zone, the knock-on effects could push Spain and even Italy over the edge. With inspectors from the EU, European Central Bank and International Monetary Fund returning to Greece to decide whether to keep it hooked up to a 130-billion-euro lifeline or let it go bust, three EU officials said they were likely to conclude Athens cannot repay what it owes, making a further debt restructuring necessary. This time, the European Central Bank and euro zone governments would likely have to take a hit on some of the estimated 200 billion euros ($242 billion) of Greek government debt they own if Athens is to be put back on a sustainable footing.

Spanish Bond Yields Soar - Financial markets flared anew Monday, despite various moves by European officials in recent weeks to buy the time that might let the money minds of Brussels and Frankfurt take a euro-policy vacation until September. The main trigger seemed to be the fact that Spain’s borrowing costs hit a record level, on investor concerns that a deepening recession and the financial strains on its regions might eventually lead the government to seek a Greek-style bailout from Europe. And those worries were hardly eased by new signs that Greece’s bailout may not be working out so well, either.  A chief worry once again is that Europe, which has already spent or pledged about €270 billion, or $327 billion, trying to rescue tiny Greece, would be hard-pressed to find the money to salvage an economy the size of Spain’s, the euro zone’s fourth-largest after those of Germany, France and Italy.

Spain 2-Year Treasury Yield Tops 7%, Inversion Between 5 and 10 Year Yields; Spain Sovereign Debt Restructuring Coming Up - Those wondering when the yield on Spain's 2-year government bond would exceed 7% now have an answer. Today is the day.  Note: the lines on the charts below reflect yesterday's close. The numbers in green accurately reflect today's price movements. Of further interest please note the inversion at the long end of the curve. The yield on 5-year treasuries now exceeds that on the 10-year treasury. Synopsis:
2-Year Yield + 36.5 basis points to 7.007%
5-Year Yield + 12.5 basis points to 7.717%
10-Year Yield + 2.7 basis points to 7.648%

Greece will need more debt restructuring – EU officials - – Greece is unlikely to be able to pay what it owes and further debt restructuring is likely to be necessary, three EU officials said on Tuesday, a cost that would have to fall on the European Central Bank and euro zone governments. The officials said that twice bailed-out Greece would be found to be way off track by EU and International Monetary Fund officials who have been assessing the country. Inspectors from the European Commission, the ECB and the IMF — together known as the troika — returned to Athens on Tuesday and will complete their debt-sustainability analysis next month, but the sources said the conclusions were already becoming clear. It means Greece’s official-sector creditors — the ECB and euro zone governments — will have to restructure some of the estimated 200 billion euros of Greek government debt they own if Athens is to be put back on a sustainable footing. But there is no willingness among member states or the ECB to take such dramatic action at this stage.

Germany Pushes Back After Moody’s Lowers Rating Outlook - Chancellor Angela Merkel’s government said Germany will remain Europe’s haven during the financial crisis, pushing back against Moody’s Investors Service’s decision to lower the outlook on the country’s top credit rating. The Finance Ministry said the risks in the euro zone are “not new,” and that Germany remains “in a very sound economic and financial situation.” In counterpoint to Moody’s, it cited the verdict of financial markets that have rewarded Germany with record low borrowing costs on government bonds.  "Germany will, through solid economic and financial policy, defend its ‘safe haven’ status and continue to responsibly maintain its anchor role in the euro zone,” the ministry said in an e-mailed statement. “Together with its partners, it will do everything to overcome the sovereign debt crisis as rapidly as possible.” Euro-area bonds fell today after Moody’s lowered the outlook to negative for the Aaa credit ratings of Europe’s biggest economy, the Netherlands and Luxembourg, citing “rising uncertainty” over Europe’s debt crisis. Finland was the only country in the 17-nation euro to keep a stable outlook for its top ranking, as Moody’s cited its limited exposure to the region in trade terms along with a lack of debt and a small and domestically oriented banking system.

Germany in Recession: Private Sector Sees Fastest Falls in Output and New Business Since June 2009; New Export Orders Collapse - The vaunted German export machine is sinking into the abyss. The Markit Flash Germany PMI® shows German private sector sees fastest falls in output and new business since June 2009.  Key Points:

• Flash Germany Composite Output Index(1) at 47.3 (48.1 in June), 37-month low. 
• Flash Germany Services Activity Index(2) at 49.7 (49.9 in June), 10-month low. 
• Flash Germany Manufacturing PMI(3) at 43.3 (45.0 in June), 37-month low. 
• Flash Germany Manufacturing Output Index(4) at 42.8 (44.8 in June), 37-month low.

Summary: The seasonally adjusted Markit Flash Germany Composite Output Index fell for the sixth month running in July, to 47.3 from 48.1 in June. The index has posted below the 50.0 no-change value in each month since May, and the latest reading signalled the fastest pace of private sector contraction since June 2009. Manufacturers suffered a sharper drop in business activity than service providers during July, as well as a greater loss of momentum relative to the situation in June. The latest reduction in manufacturing production was the steepest for just over three years, while new orders received in the sector dropped at the fastest pace since April 2009. Service providers recorded only a marginal decrease in business activity, although the rate of contraction was the joint-fastest in three years.

Auf wiedersehen European economy - Another night of purchasing management index data from the Eurozone and, once again as expected, the data was a disappointment. Recession approaches for the zone as a whole, Germany has moved into contraction while the periphery continues to suffer from a deep recession, and in some cases depression. Manufacturing has collapsed across the region while the only upside appears to be from the French services sector. Overall this data continues to be woeful as Markit Economic’s chief economist explains: The flash PMI for July suggests the euro area downturn showed no signs of letting up at the start of the third quarter and is consistent with GDP falling at a quarterly rate of around 0.6%, which is similar to the rate of decline we expect to see for the second quarter. The downturn is being led by an increasingly severe slump in manufacturing, where output is falling at a quarterly rate of around 1%. Germany is now contracting at the steepest rate for three years, while the rate of decline in the periphery is also among the highest seen since mid-2009. The only sign of improvement was limited to the French services sector, which is likely to be due to domestic business settling down again after the general elections and could therefore prove temporary.

German Minister Criticized for Comments about Greece - German Economy Minister Philipp Rösler, leader of the pro-business Free Democratic Party (FDP), has come under fire for comments he made about Greece on Sunday that contributed to uncertainty in financial markets on Monday, when the euro fell to its lowest level against the dollar in more than two years.  Rösler was accused of being reckless and unprofessional by saying in a television interview that he was "more than skeptical" that Greece's reform efforts will succeed. "If Greece no longer meets its requirements there can be no further payments," he said in an interview with German public broadcaster ARD. "For me, a Greek exit has long since lost its horrors."

Finnish Finance Minister Defends Debt Agreements - Finland reached a deal with Greece and Spain to get collateral in exchange for its share in any bailout packages. The deals are controversial, with critics worried that they may herald a quiet Finnish exit from the euro. In a SPIEGEL interview, Finance Minister Jutta Urpilainen, 36, defends the policy, saying her country wants to keep the euro intact.

Europe’s Auto Industry Has Reached Day of Reckoning - The most dreadful year for car sales in more than a decade may require the industry to deal with the overstaffed, underused factories that have been undermining earnings for years.  As the region’s weak economies keep many European car buyers away from showrooms, analysts say the unprofitable automakers have no choice but to start closing production lines and cutting payrolls. For the weakest, like General Motors’ Opel unit and PSA Peugeot Citroën, their survival may depend on it.  The question is whether any of the companies can do it fast enough — or at all — in the face of restrictive European labor laws and stubborn political resistance to cutbacks.  “I’ve never seen it this bad,” Sergio Marchionne, chief executive of both Chrysler and the Italian automaker Fiat, said during an interview. “All the unresolved issues that have been plaguing the industry for a number of years have all come forward.” Fresh evidence came Wednesday in quarterly earnings from Ford and Peugeot, which both reported huge losses and are each on track to lose more than $1 billion in Europe this year. Later in the day, the ratings agencies Fitch and Standard & Poor’s both lowered Peugeot’s debt by a notch, placing it deeper into “junk” territory.

Message to Europe: It's Time For Your Bank Holiday - Anecdotal reports suggest that the various attempts to shore up banks’ condition with phony financials and vast theft of public money are coming to an end. Despite these stopgaps, banks are still struggling, in many cases taking steps to delay or prevent withdrawal of funds. This amounts to a sort of soft default, which may progress soon to a hard default. “It is increasingly likely that some kind of total ‘bank holiday’ is enforced to put a stop to market pressures,” wrote Saxo Bank economist Steen Jakobsen in November 2011. He expected this to happen in 2012.

Euro Remedy for Greece Becomes Part of the Problem - Only a month after Greece installed a new government, the country is facing renewed peril. Its official lenders are signaling a growing reluctance to keep paying the bills of the nearly bankrupt nation, even as the government is seeking more leniency on the terms of its multibillion-euro bailout.Adding to the woes, there is little agreement within either side. The Greek government is itself a motley coalition of conservatives and Socialists, and the leaders of the European Commission, the International Monetary Fund and the European Central Bank, known as the troika, are increasingly divided among themselves. That is creating even more uncertainty as Greece and the rest of Europe head for yet another showdown, renewing doubts about how long Athens can remain within the euro zone.  Even as fears mount in Europe about the rapidly worsening situation in Spain, Greece’s problems are far from solved. The president of the European Commission, José Manuel Barroso, is expected to make his first visit to Athens since 2009 on Thursday to meet with Prime Minister Antonis Samaras as the troika begins yet another assessment of how well the country has complied with a spate of harsh austerity measures imposed as the price for loans. Greece’s lenders say they will not finance the country any further unless it meets its goals. But many experts say that the targets were never within reach and that pushing three increasingly weak Greek governments to comply has only profoundly damaged the economy.

Death of ‘risk on, risk off’ behaviour - Market cycles are frequently characterised by investor “herding” behaviour and investor positions currently show a high degree of uncertainty over the direction of markets. This uncertainty is justified given the confusion over four key risks in markets: whether US political gridlock in early 2013 will lead to a fiscal contraction and recession; the extent to which is China slowing; whether political and military events in the Middle East will lead to an oil price spike; and how the eurozone crisis will evolve.  All of these risks are skewed towards prolonged mediocre economic activity or outright recession. There is, therefore, a clear logic to investors chasing negative yields for short-dated bonds in perceived havens such as Germany, the Netherlands, Denmark and Switzerland and accepting historically low, but positive, yields in markets such as France, Belgium, Austria and Finland. The safer debt characteristics of many emerging economies have also led to investor flows into US dollar and euro-denominated emerging debt with 3-year Brazilian debt in US dollars trading on a yield of 1.5 per cent and four-year Turkish paper in euros yielding less than 3 per cent. There has been a shift in capital flows into corporate debt, too, with investment-grade spreads close to 100 basis points.

Basel III requirements hurting some European bank shares - Published Basel III-based capital measures are exposing European banks who will need to raise the most amounts of capital to meet the latest regulatory capital requirements (see attached Basel III handbook). There is also an expectation from investors, analysts, and some regulators that these banks will need to meet the minimum Basel III based Tier 1 ratio of 8% before the year-end.  But when it comes to European banks, it's not only the Eurozone periphery institutions that are in a race to improve their capital ratios. It turns out that some Swiss institutions, particularly Credit Suisse (CS) will look undercapitalized once Basel III becomes official. Responding to recent comments from the Swiss National Bank, CS announced an aggressive capital raising program.  Barclays Capital: - Credit Suisse acknowledged this challenge on 18 July when it announced a new set of capital enhancing measures in response to pressure from the Swiss National Bank. As of March 2012, Credit Suisse had a fully-loaded Basel III CET1 [Common Equity Tier 1 ] ratio of just 5.3%, among the weakest in Europe. In its 2012 Financial Stability Report published on 14 June 2012, the Swiss National Bank highlighted the weaker capital position of the Swiss banks relative to international peers, and that of Credit Suisse in particular. Reacting to these pressures, Credit Suisse announced last week a set of immediate capital measures for up to SFR8.7bn, expected to boost the bank’s fully-loaded Basel III CET1 ratio by 1.5pp and additional measures totalling SFR6.6bn to be implemented by the end of 2012...

Eurozone Crisis – No More Safe Havens - Past Eurozone growth, particularly in Germany, did not come from meaningful improvements in productivity, but rather on the back of household wage reductions and industry-friendly reforms to the labor market – the Hartz reforms – which transferred wealth from the people to the banking and export-driven sectors of the economy.While German and French taxpayers are justifiably angry, their anger is largely misdirected. Rather than embracing the false narrative blaming only peripheral nations for requiring bailouts, the anger should more rightfully be directed at:

• • Designers of the European Monetary Union who, at the creation of the EMU, ignored regular and repeated warnings, from noted academics, analysts and policy advisors, that structural weaknesses would lead us to the crisis we now face;
• • Banks, in the core, with weak internal controls and excessive leverage, which were profligate lenders in search of yield, to weak private, corporate and sovereign creditors in the peripheral countries;
• • Those officials and technocrats who failed to properly regulate the domestic banking industry and allowed bankers to treat all sovereign debt as equal regardless of the differing debt capacity of the issuer;
• • Rating agencies that failed to offer meaningful analysis of sovereign credit capacities and also assumed that too-big-to-fail financial institutions ratings should reflect an implied or explicit guarantee by their home country;
• • Political leaders who, since the beginning of the crisis, downplayed its ultimate costs and, thus, delayed its resolution and increased the ultimate costs to taxpayers;

Europe is sleepwalking towards imminent disaster, warn top economists - The euro has completely broken down as a workable system and faces collapse with “incalculable economic losses and human suffering” unless there is a drastic change of course, according to a group of leading economists. Europe is “sleepwalking towards disaster”, according to the 17 experts, who warned that over the past few weeks “the situation in the debtor countries has deteriorated dramatically”. “The sense of a neverending crisis, with one domino falling after another, must be reversed. The last domino, Spain, is days away from a liquidity crisis,” said the economists. They include two members of Germany’s Council of Economic Experts and leading euro specialists at the London of School of Economics, all euro supporters. “This dramatic situation is the result of a eurozone system which, as currently constructed, is thoroughly broken. The cause is a systemic failure. It is the responsibility of all European nations that were parties to its flawed design, construction and implementation to contribute to a solution. Absent this collective response, the euro will disintegrate,” they added in a co-signed report for the Institute for New Economic Thinking. The warning came as contagion from Spain pushed Italy’s borrowing costs to danger levels, with two-year yields rocketing 40 basis points to more than 5pc. The Milan bourse tumbled 3pc, led by bank shares. Italian equities have been in freefall since it became clear two weeks ago that the EU’s June summit deal had failed to break the nexus between crippled banks and sovereign states. The crisis is starting to ricochet back into Germany, where the PMI manufacturing index for July fell to its lowest since mid-2009. Doubts are emerging about the creditworthiness of the German state itself.

Euro Area Crisis Hits Confidence in the Core – Rebecca Wilder - France’s INSEE business confidence, Germany’s Ifo business climate, and the National Bank of Belgium’s business survey demonstrate ongoing infection as the Euro area debt crisis hits business expectations in the core. Through July, business confidence in Germany and France continued to slide while that in Belgium rebounded, albeit from a low base. Of note, the service industries in both Germany and Belgium may offer a “ray of hope” (the Ifo Institute puts it.), as these large economic sectors are perhaps stabilizing in the surveys.Furthermore, consumer confidence in the Netherlands and Italy remain depressed. Notably, the July prints increased 8 and 1.1 points, respectively, over the month – is this the start of a trend, or rather a dead-cat bounce? If I were a betting girl, I’d go with the latter, given the weakness in labor markets and election cycles coming up (September in the Netherlands and TBA in Italy).Finally, as demonstrated in the Ifo Business Climate survey that highlighted its ‘significant deterioration’, the manufacturing base is leading the way down. In France and Germany, Markit Manufacturing PMIs hit the low 40s, 43.6 and 43.3, respectively in July. This implies a quickening of the pace of contraction across the French and German manufacturing bases with not much hope of near-term relief, neither from domestic nor foreign demand.

Dominoes Tumbling: Catalonia Informally Requests Bailout As Spain Considering Credit Line Request - Things in Spain are now in freefall, and as a Spanish economist admits to El Economista "we are alone" which is not surprising: the country has cried not wolf then wolf one too many times, and following yesterday's warning by Moody's that Germany is now officially on the hook should it continue bailing out the insolvent periphery, it is no wonder that Germany will leave Spain to the same wolves it may or may not have been observing for months. Sadly, much more pain is in store for the rhyming country, but first of all for its north-eastern region of Catalonia which is responsible for a fifth of the country's economy output, and which has €13 billion in debt redemptions until the end of 2012. From El Nacional: "The Government of Artur Mas call on the help of regional liquidity fund that created the central government with 18,000 million euros, as confirmed by the spokesman Francesc Homs. After Valencia and Murcia, who have already made ??their intentions, Catalonia would be the third autonomy to resort to the rescue of the state. For its part, Andalusia may try to avoid government aid and negotiate a private loan of 800 million euros.

Spain feels debt heat, Greece way off bailout terms - Spain paid the second highest yield on short-term debt since the birth of the euro at an auction on Tuesday, and EU officials said Greece had little hope of meeting the terms of its bailout, casting fresh doubt on its future in the euro zone. Spain's increasingly desperate struggle to put its finances right has seen its borrowing costs soar to levels that are not manageable indefinitely, reflecting a growing belief that it will need a sovereign bailout that the euro zone can barely afford. It has become the recent focus for investors, but Greece - where the sovereign debt crisis began - remains a powder keg. If Athens were to default or exit the euro zone, the knock-on effects could push Spain and even Italy over the edge. With inspectors from the EU, European Central Bank and International Monetary Fund returning to Greece to decide whether to keep it hooked up to a 130-billion-euro lifeline or let it go bust, three EU officials said they were likely to conclude Athens cannot repay what it owes, making a further debt restructuring necessary. This time, the European Central Bank and euro zone governments would likely have to take a hit on some of the estimated 200 billion euros ($242 billion) of Greek government debt they own if Athens is to be put back on a sustainable footing.

Eurozone Danger Mounts As Spain Spins Out Of Control - Spain is battling to avert a fully-fledged sovereign rescue after borrowing costs spiralled out of control, with dangerous knock-on effects in Italy and Eastern Europe. The yields on closely-watched two-year debt surged by 78 basis points to a modern-era high of 6.42pc, leaving it unclear how long the country can continue funding itself. Italy’s two-year yields vaulted to 4.6pc. “We can’t keep going like this for another 15 days,” said Prof Miguel Angel Bernal from Madrid’s Institute of Market Studies. “The European Central Bank has to bring out its heavy artillery.” Andrew Roberts, credit chief at Royal Bank of Scotland, said the dramatic spike in short-term borrowing costs marked a key inflexion point in the crisis, replicating the pattern seen in Greece, Ireland and Portugal as they lost access to market finance. “We are fast approaching the endgame,” he said. Exchange clearer LCH Clearnet raised margin requirements on both Spanish and Italian bonds, a move that will automatically cause further selling by some funds. Confidence has evaporated since Germany effectively blocked plans for the European Union bail-out machinery to recapitalise the Spanish banking system directly, as originally announced after the EU summit deal in June. The EU’s €100bn (£78bn) package will be a loan to the Spanish state. This fails to sever the fatal link between banks and vulnerable states, each pulling the other down.

50 Billion Euros Could Be Too Much for Spain to Raise - Regional debts, soaring borrowing costs, a higher deficit and souring market sentiment are all making it nearly impossible for Spain to find 50 billion euros ($60.5 billion) in funding it needs by year end without external aid. Madrid will need 10 billion euros more than expected at the start of the year to fund a softer deficit target agreed with the European Union, and 12 billion extra euros for a new liquidity line to highly indebted autonomous regions. That raises the total funding requirements for the rest of the year to around 50 billion, squandering the advantage Spain had gained in the first half of the year by "frontloading" its funding at a time when the European Central Bank was giving banks cheap money to buy government debt. Spanish officials had boasted that the second half of the year would not be difficult after they raised 59 billion worth of their expected 86 billion euro funding requirement in the first half of the year. But the benefit has evaporated now that the Treasury needs to find extra funding to meet a deficit target revised to 6.3 percent of Gross Domestic Product from 5.3 percent, and provide the new cash for its rescue fund for the regions.

Spanish Debt Risk Jumps to Record, Credit-Default Swaps Show - The cost of insuring against a Spanish default rose to a record, according to credit-default swap prices. Contracts tied to Spain’s debt climbed as much as seven basis points to 647 and were up four basis points at 644 as of 8:41 a.m. in London. Credit-default swaps on Italy rose three basis points to 573, the highest since June 1, according to prices compiled by Bloomberg.

Rome Orders Sicily Into Fiscal Rehabilitation - Italian Prime Minister Mario Monti is stepping up pressure on Sicily to tighten its spending as the government seeks to stave off any prospect that the island, one of Italy's poorest regions, risks insolvency. Sicily must undergo a government-monitored austerity program aimed at restructuring the region's public administration—ranging from local hospitals to schools and waste-collection services—with the aim of cutting costs, Mr. Monti's office said in a statement on Tuesday. If the region's local government doesn't comply with the program, the Italian central state might withhold funding to the island, the statement said.

Italian cities risk 580 mln euro writedown-report (Reuters) - Italian cities risk having to write down around 580 million euros ($702.8 mln) in revenues they are unlikely to ever collect, an Italian daily reported on Tuesday citing calculations based on data from the statistics office. Under a new rule introduced this month as part of the government's austerity measures, a city must write down at least 25 percent of revenues that have been on its balance sheet for more than five years but which it has yet to cash in. The rule adds pressure on local finances, already under strain due to tough spending cuts as Rome strives to rein in its budget deficit. Italian daily Il Sole 24 Ore said on Tuesday that such revenues owed to Italian cities total around 2.3 billion euros, pointing to a 575 million euro charge if their value was written down by a quarter. Uncollected revenue, mainly due to non-payment of taxes, have long been a thorny issue for Italian cities. Ratings agency Fitch estimated in December 2010 that they would total around 5 billion euros in 2010-2011.

Greece would need further debt restructuring - Greece will probably not be able to face its obligations and more debt restructuring is likely to be necessary, according to a Reuters exclusive that cites three unidentified EU officials. Inspectors from the European Commission, the ECB and the IMF arrived to Athens on Tuesday to assess Greek debt-sustainability , and even though the analysis will be completed next month, "the conclusions were already becoming clear". According to the report, Greece is seen missing troika's targets. "Greece is hugely off track," told one unnamed official to Reuters. "The debt-sustainability analysis will be pretty terrible." According to the news report, that means a restructuring of around 200 billion euros of Greek government debt held by the ECB and eurozone governments will be needed to put the country back on a sustainable footing.

Spain, France, Italy Up Pressure on Germany, ECB - France's government Tuesday said an increase in the size of the European Union bailout funds or European Central Bank intervention may be needed to tackle a worsening crisis in Spain, backing up Madrid's call for a quick implementation of far-reaching deals announced after a summit last month. The comments made by France's Foreign Minister Laurent Fabius, on French television channel France 2, are supportive of growing requests from Madrid for the ECB to act to lower Spanish borrowing costs--political code for massive bond- buying along the lines of that conducted in recent years by the likes of the U.S. Federal Reserve or the Bank of Japan. In the latest iteration of such demand, Spanish Budget Minister Cristobal Montoro said Tuesday that unnamed "European institutions" must act more boldly to protect the euro zone. He also said that the EU faces an institutional problem, indicating that the ECB failed to signal the consequences of easy money policies in the years leading up to the 2008 crisis. In a more moderate tone, Mr. Fabius said that market speculation is becoming a concern as implementation of EU policies is typically slow

The IMF should heed this resignation - Eccentric in tone and cryptic in content, the resignation letter of a senior International Monetary Fund official released last week was, nevertheless, important for what it implied: the IMF is failing in two key respects. It has not provided independent intellectual leadership, most evidently on the eurozone crisis. And it is unprepared to provide stability for the next big global crisis. With Spain and possibly Europe inching back towards the abyss, that crisis looms. The possibility of the IMF being missing in action is cause to sound the alarm bells. On the eurozone, the IMF has toed the official European/German line on the crisis, possibly to the disservice of Europe and the world. It has not been a source of new ideas or critical thinking on key issues such as: the workability of the strategy for Greece; the responsibilities of creditor countries, including the need for symmetric adjustment in a currency union; and the alternatives to austerity in the short run. It is not that the official line is wrong but that the IMF has failed to challenge orthodoxy, forfeiting its role as a valuable referee in the policy debates. If things turn bad, the IMF will have to bear responsibility for its complicity in the less than optimal policy choices made in Europe.

Another Summer of Discontent: The Four Factors that Explain Why What We’re Doing Isn’t Working - Here is what we know about the global economy given the experiences of the past four years:

• •There is a global insufficiency of demand relative to the immense oversupply of labor and productive capacity.
  •The imbalances between high-wage/current-account-deficit/balance-sheet-indebted nations and lower-wage, surplus nations have produced a glut of savings in the latter, relative to the opportunities offered for profitable investment of those savings in additional capacity, either at home or abroad, given the absence of demand for such additional capacity.
  •The excess savings have inexorably reduced the cost of money in the developed world to the historically low levels we again achieved this week.
• •The private sector debt overhang in the advanced deficit economies is preventing the recovery of internal demand.
• •We are enduring the unfortunate coincidence of the two foregoing phenomenon coincident with a generational (as in, once-in-a-generation) new technological plateau that appears to find an ever expanding number of labor-saving, productivity-increasing, job-obsoleting applications; and
  •The developed world has achieved population demographics that force us to confront painful intergenerational economic issues—amidst the historic levels of economic insecurity that impact younger generations as a result of the foregoing issues.

With a bang, not a whimper - IT IS always darkest before August. When policymakers head on vacation, risk-takers put their optimism on ice, retreat to cash, and leave markets to find their own level. That’s how it’s looking in Europe anyway. Spain may be on the verge of losing market access. Any warm feelings its government generated with last week's new round of austerity were quickly washed away by mounting bad news on the economy, its regions’ finances, and its banks. European leaders, having announced plans to strengthen the European Stability Mechanism (ESM), can’t act on them until Germany’s constitutional court rules on their legality on September 12th. The European Central Bank remains on the sidelines. It is easy to envision a downward spiral that results in multiple countries leaving the euro amidst a financial and economic meltdown. It is almost impossible to envision the opposite. But somebody has to.

The Euro as the SDR of Europe? - The Euro is the national currency of a country that does not exist. Though there is a continent of Europe, as there is of America, there has never been a country of the United States of Europe, and there probably never will be. The Euro is therefore not a currency as is the American dollar, and yet it is forced to masquerade as one—badly—by the Maastricht Treaty, in which the countries of Europe abandoned the right to produce their own genuine national currencies. With the volume of the Euro being controlled by a supra-national authority (the ECB), and member states punished for breaching rules on government spending (the 3% maximum deficit and 60% accumulated deficit rules), the Euro is closer in function not to a currency, but to Special Drawing Rights as they were conceived of by Keynes at Bretton Woods. In his plan for a post-WWII international monetary system, Keynes proposed that common supranational currency be used for international trade (the “Bancor“), while domestic currencies should used for internal trade. The exchange rates between national currencies and the Bancor were to be fixed, with persistent trade deficit countries being forced to impose austerity and devalue, while persistent surplus countries were taxed Bancors, and required to stimulate their economies to increase imports. Keynes’s Plan was scuttled by the USA’s insistence on its “first among equals” status after WWII, leading to the crisis that the global economy is in today.

Is There Even a Panic Button in Europe?, by Tim Duy: I didn't think it was possible, but my confidence in the ability of European policymakers to pull the Continent out of crisis continues to fall. This is saying a lot because I had virtually no confidence to begin with. Consider where we are at today. Greece once again is making the headlines, as it is increasingly evident that they have made virtually no progress on the last bailout package, and will therefore need another. This should have come as no surprise; it was increasingly politically impossible to engage in additional austerity with the Greek economy plummeting into the abyss. But bailout fatigue will finally hit this time, as there appears to be no more appetite to limp Greece along. Evan Ambrose-Pritchard argues that Germany is leading the drive to finally force Greece out of the Eurozone. Ambrose rightly places at least some, if not the lion's share, of the blame for this outcome at the feet of the Troika: This was entirely predictable – and was predicted by many critics – since Greece faced an IMF-style austerity package without the usual IMF cure of devaluation. The Troika's ideology of "expansionary fiscal contraction" – which the IMF has to its credit since abjured, but the fanatics in charge still swear by – is breaking a whole society on the wheel. The Greeks were never given a bailout plan that had any hope of success. And they deserved such a bailout, given the rest of Europe's culpability in this crisis for letting Greece into the Euro in the first place.

Asked and Answered, by Tim Duy: Yesterday I asked: In my view, the lack of panic is downright scary. Is Europe completely devoid of new ideas? Or is everyone simply on vacation? The former might be true, but Bloomberg confirmed the latter is definitely true: German Finance Minister Wolfgang Schaeuble declared bond traders all wrong in driving up Spanish borrowing costs to unsustainable levels. After issuing the statement late yesterday, Schaeuble, 69, went off duty for a three-week vacation. It’s summertime in Europe, and like last year, borrowing costs are rising as investors fret over the fate of the 17- nation euro area. Most government leaders are heading to their favorite beaches, mountains and lakes to take a break from a crisis that U.S. Treasury Secretary Timothy Geithner said July 23 requires “immediate, short-term” measures to help Spain and Italy. This upshot of the article is that, like last summer, leadership will be hard to come by in Europe for the next month.

What the Summer Breeze Said - Europe is giving new meaning to the term "bootstrapping," the age-old (virtuous) idea of picking oneself up off the floor after some blow or reversal of fortune has laid you low. The new method might be called "skyhooking" in which a massive rescue apparatus secured at some mysterious point unseen in the clouds lifts whole exhausted nations from their knees in order get them to summer vacation. Hence: the interesting spectacle of an entire continent headed for vacation despite facing utter financial ruin, revolution, and civil war.   This skyhooking procedure has been both fun and sickening to watch, like any great public stunt of seemingly impossible derring-do. Here you have a whole bundle of nations, all up to their chins in the quicksand of debt, pretending to catch lifelines of new credit dropped mysteriously from the clouds by hidden central bank airships, only to find that the lifelines are a kind of collective hallucination coming over them like a fever dream in their hour of desperation. Seems rather cruel, actually. Especially since they have lately sunk deeper in the quicksand from their chins to their eyeballs.

Barroso pushes Greece to show results - José Manuel Barroso has urged Greece to accelerate reforms after two years of foot-dragging if it wants to stay in the eurozone, saying Athens needed to show “results, results, results”. The European Commission president, making his first visit to Greece since it sought assistance from the EU and International Monetary Fund in 2010 to avert a sovereign default, stressed that delays in implementing agreed measures had undermined the country’s credibility with its partners, adding: “Actions are more significant than words.”  Mr Barroso’s strongly-worded message, delivered after a two-hour meeting with premier Antonis Samaras, came after leaders of the three-party coalition government endorsed in principle a €11.5bn package of spending cuts for 2013-14 that were agreed with creditors six months ago but kept on hold during two successive election campaigns. The troika is not due to return until September to decide whether enough progress has been achieved to disburse a €31.2bn loan tranche from the country’s second bailout, already overdue since June.

The Ballooning Cyprus Fiasco -  The government of Cyprus is desperate. It is deliberately slowing down paying its contractors. “We are talking about final payments and settling of bills for work that was carried out and passed through the inspections, and for which an order was issued for payment,” said Nicos Kelepeshis, head of the Federation of Associations of Building Contractors. 120 days, and more. The government also told inspectors to delay inspections in order to slow down payments. In June, Cyprus had held its nose and requested aid from the Troika, those despised austerity thugs made up of the European Union, the European Central Bank, and International Monetary Fund that have, in Cypriot eyes, wreaked havoc in neighboring Greece. And this week, once again, these despised Troika inspectors are swarming over Cyprus to find out how much money the banks would need to deal with their putrefying balance sheets, and how much the government would need to stay afloat. If a deal is reached—sticking point are the conditions, namely structural reforms, budget cuts, privatizations, and tax increases—the first bailout money might arrive in October. But Cyprus is bankrupt now! So, the government is raiding the “semi-state“ sector. Last week, it pilfered €101 million from the Cyprus Telecommunications Agency, €50 million from the Ports Authority, and €24 million from the Human Resource Development Authority. Now it’s going after the pension fund of the Electricity Authority to get a couple hundred million. This place is seriously out of money.

Europe needs a bigger crisis firewall - European leaders are attempting to get ahead of a festering financial crisis by breaking the negative feedback loop between banks and sovereigns.  Having agreed an ambitious timetable for common bank supervision in June, the European Council has formally launched a two-front war in the push towards deeper currency union. Banking union has now leapfrogged fiscal union as a priority. Two wars require more ammunition and a solid strategy. By imparting more responsibilities without additional resources, the European Stability Mechanism, the eurozone’s permanent bailout fund, is being enfeebled. Each tap of the facility, which can lend up to €500bn against €80bn in paid-in capital, will tend to underscore how ineffectual the firewall is as a bulwark against multiple risks: sovereign default, bank runs and currency redenomination risk. The initial focus on direct ESM bank recaps reflects a bad strategic choice: common deposit insurance would be a much more effective and immediate tool in breaking a related link between private funding for banks and subsequent stress on sovereign borrowing costs. But common deposit insurance has been rejected because it mutualises insurance against bank runs. And thus the risk of runs against the periphery remains high.

EMU Gets Ostrichized - Paul Krugman - I think we need to bring that image back, because the head-in-the-sand factor is getting amazing. First, Greece, where it has been obvious for a very long time, indeed right from the beginning, that the program had no chance of working: “We knew at the fund from the very beginning that this program was impossible to be implemented because we didn’t have any — any — successful example,”  Because Greece is in the euro zone, he noted, the nation cannot devalue its currency to help improve its competitiveness as other countries subject to I.M.F. interventions almost always are encouraged to do. At the same time, Mr. Roumeliotis and others note, the troika underestimated the negative effect its medicine would have on the Greek economy. Yah think? Yet even now the rhetoric is all about how the Greeks aren’t trying hard enough.Then there’s Spain, which isn’t Greece but nonetheless lacks a plausible path back to a sustainable position. Yet the official line is now that the program is fine, and it’s all the fault of those gnomes: A joint statement by Wolfgang Schäuble, German finance minister, and Luis de Guindos, Spanish economy minister, condemned the high interest rates demanded for the sale of Spanish bonds as failing to reflect “the fundamentals of the Spanish economy, its growth potential and the sustainability of its public debt”.How about putting their money — or actually the ECB’s money — where their mouths are? I mean, if the markets are all wrong and Spanish debt is safe, surely the obvious thing is to have the ECB step up by buying those bonds until the markets see reason. Right?

Europe Smashes All Market Records On Its Way To Total Insolvency - Spain's IBEX equity index closed at Euro-era lows today having dropped over 10% in the last 3 days (crushing the hopes of the afternoon post-short-sale-ban squeeze yesterday). This leaves IBEX down over 30% for the year (and Italy down over 18% YTD). Add to that; inverted long-end curves in Spain (and almost Italy), all-time record high short- and long-term spreads for Spanish debt and euro-era record high yields, record wide CDS-Cash basis, dramatic short-end weakness in Italy, new low negative rates in Switzerland (-46bps) and Germany (-7bps), and EURUSD at its lowest since June 2010 at 1.2059. But apart from that, the EU Summit seems to have done the trick nicely. Financials have been crushed in credit-land as subs notably underperform seniors and HY and IG credit continues to lead the equity markets lower in reality. Meanwhile, remember Greece? 30Y GGBs have dropped almost 20% in price in the last few days and have closed at all-time record low closing price at just EUR11.55!! S'all good though - where's Whitney? You've seen enough Spanish charts - you nasty rubber-neckers... So here's Italy's 5Y Bond spread to bunds...

EU Rushes to Make ECB Single Bank Watchdog in Race for Spain --Europe’s quest to sever the link between Spain’s fiscal fate and its failing banks hinges on an obstacle-strewn race to hand greater powers to the European Central Bank. Until euro-area leaders overcome German doubts, ECB concerns, and turf battles everywhere, Spain will remain on the hook for a bailout of its banks of as much as 100 billion euros ($121 billion). Policy makers want to protect taxpayers from losses so potentially big they risk bankrupting governments, as happened in Ireland and Iceland. “We have got to cut the fatal loop between sovereigns and banks, which will otherwise bring the euro-zone project as it exists now down,” Adair Turner, chairman of the U.K. Financial Services Authority, said in a London speech yesterday. The euro area needs “rapid progress” towards a central fund that can directly recapitalize banks, he said.

ESM Banking License? Rumors of Non-Solution Send Sovereign Yields Lower; Purposeful Non-Elaboration - The mantra of eurocrats is quite obvious: When times get tough, roll out already discarded rumors and hope they stick for a while.  Earlier today yield on 2-year Spanish bonds hit 7.14%. The yield now is a still unsustainable 6.42%. What happened? The answer is another silly rehash of something the German constitutional court probably would not allow, and is not even being seriously discussed at the moment anyway: a banking license that would allow the ESM to use leverage.   European Central Bank council member Ewald Nowotny said there are arguments in favor of giving Europe’s rescue fund a banking license, reviving the debate on bolstering its firepower as leaders face the prospect of a full- scale Spanish bailout.Granting a banking license to Europe’s permanent bailout fund, the European Stability Mechanism, would give it access to ECB lending, easing concerns that its 500 billion-euro ($602.5 billion) cash pot won’t be enough if Spain or Italy require aid. While ECB President Mario Draghi said on May 24 that such a move amounts to the central bank financing governments, which is prohibited by European Union law, publicly-owned credit institutions such as the European Investment Bank are exempt.

ECB Financing of Rescue Fund Easier Said Than Done - A top European Central Bank official rekindled a longstanding debate over whether the ECB should help finance Europe’s rescue fund by granting it a banking license. The idea has many fans, particularly in financial markets, because it would ease concerns over the financial capacity of the euro zone’s rescue fund. There’s one big problem: the plan runs afoul of the ECB’s own legal decisions on the matter. The central bank ruled in a legal opinion last year that lending to the rescue fund would violate the ECB’s charter, which forbids it from financing governments.

Draghi pledge puts ECB bond buys back on table — European Central Bank President Mario Draghi indicated that the institution is ready to resume purchases of Spanish and Italian government bonds in a bid to bring down borrowing costs and ensure the survival of the euro. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” Draghi said, at an investor conference in London. “And believe me, it will be enough.” Draghi trotted out the rationale the central bank has previously used to justify its controversial bond-buying program: that irrationally high yield premiums for peripheral government debt are interfering with the ECB’s monetary-policy actions. Or as he put it: “To the extent that the size of these sovereign premia hamper the functioning of the monetary-policy-transmission channel, they come within our mandate.” Economists questioned just how far the ECB is willing to go, but said the remarks showed Draghi is ready for the central bank to resume a bond-buying program that’s been largely dormant in 2012.

ECB will do 'whatever' to save euro - European Central Bank president Mario Draghi said policy makers will do whatever is needed to preserve the euro, suggesting they may intervene in bond markets as surging yields in Spain and Italy threaten the existence of the 17-members currency union. "To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate," Mr Draghi said in a speech at the Global Investment Conference in London today. "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro," he said. "Believe me, it will be enough." Economists said the comments suggest the ECB may be preparing to unveil new measures to fight the crisis as potential bailouts for economies the size of Spain and Italy threaten to overwhelm Europe's rescue funds. Spanish politicians have called on the ECB to do more after yields on the country's bonds soared to euro-era records this week.

Key Excerpts: Mario Draghi Says ECB ‘Ready to Do Whatever It Takes’ - In comments Thursday, European Central Bank President Mario Draghi reassured investors that the Continent’s central bank would be vigilant about holding together the euro zone. Listen to his full comments and read key excerpts below.

Draghi sends strong signal that ECB will act (Reuters) - European Central Bank President Mario Draghi pledged on Thursday to do whatever was necessary to protect the euro zone from collapse, sending a strong signal that inflated Spanish and Italian borrowing costs were in his sights. Fears about the euro zone's future are intensifying with Spain and Italy facing frenzied pressure on financial markets and Greece holding crunch meetings with its international lenders having failed to keep its repair plans on track, raising fresh questions about its place in the currency bloc. With the need for urgent action becoming increasingly apparent, the ECB appears to be gearing up to flex its muscles, something Madrid and Rome have been seeking for months. "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough," "To the extent that the size of the sovereign premia (borrowing costs) hamper the functioning of the monetary policy transmission channels, they come within our mandate," he said. The ECB has cut interest rates to record lows and offered banks unlimited liquidity without any meaningful boost to the euro zone economy or bank lending resulting.

Draghi Blinks. Maybe., by Tim Duy: Global equity marekts surged this today on the back of supportive comments from ECB President Mario Draghi. Borrowing from FT Alphaville, who borrowed from Bloomberg: Draghi Says the Euro Is Irreversible -  Draghi says ECB will do whatever needed to preserve the euro – Draghi Says ECB Ready to Do ‘Whatever It Takes’ to Preserve Euro -  It looks like Draghi finally found that panic button. This is crucial, as the ECB is the only institution that can bring sufficient firepower to the table in a timely fashion. His specific reference to the disruption in policy transmission appears to be a clear signal that the ECB will resume purchases of periphery debt, presumably that of Spain and possibly Italy. The ECB will - rightly, in my opinion - justify the purchases as easing financial conditions not monetizing deficit spending. So far, so good. But there is enough in these statements to leave me very unsettled. First, the claim that the Euro is "irreversible" should send a shiver down everyone's backs. Sounds just a little too much like "the crisis is contained to subprime" and "Spain will not need a bailout." Second, the bluster that "believe me, it will be enough" is suspect. The ECB always thinks they have done enough, but so far this has not been the case. Moreover, he is setting some pretty high expectations, and had better be prepared to meet them with something more than half-hearted bond purchases. Also, note that despite Draghi's bluster, the rally in Spanish debt send yields just barely below the 7% mark.

‘Whatever It Takes’ Is Familiar Refrain From Europe -- Markets surged around the world Thursday after European Central Bank President Mario Draghi pledged to do “whatever it takes” to save the euro. “Within our mandate the ECB is ready to do whatever it takes to preserve the euro and believe me: it will be enough,” Mr. Draghi said. (See excerpts here) His caveat — “within our mandate” — generally should serve as a buzzkill for anyone looking for groundbreaking ECB action. (Germany, you might have heard, isn’t wild about ECB action to save its neighbors.) But the rest of Mr. Draghi’s statement also sounded familiar. “We have to ensure whatever it takes that we don’t have a recession coming from the funding pressure,” Draghi said last December, hoping to prevent a recession generated by a credit crunch as banks cut lending. Banks are facing a capital shortage because “the situation has changed profoundly,” he said at the time. This January, after warning of a “very grave state of affairs,” Mr. Draghi again pledged to do “whatever it takes to ensure financial stability” as long as its actions fit with its mandate of price stability. “Whatever it takes” appears to have been the phrase of choice across Europe around prior bouts of market turmoil. European Council President Herman Van Rompuy, German Chancellor Angela Merkel and Mr. Draghi himself — along with numerous other euro-zone officials — have repeatedly pledged to do “whatever it takes” during a debt crisis that’s now well into its third year.

Citi On Draghi: Expect Nothing From The ECB Before The ESM Is Active (In September At The Earliest) - Earlier we heard Goldman's talk down of Draghi's comments, which we will not tire of saying, were absolutely nothing new. Now here is Citi's Jurgen Michel throwing cold water in the face of all those who believe that the ECB (which can't really do more LTROs unless it is willing to accept Zynga's virtual farms as collateral) will save the day with more direct intervention. To wit: "in our view, such action is only likely to be taken after governments have taken action first, i.e. by activating the bond market support facility for Spain and Italy." In other words, nobody believes Draghi, despite his stern warning to "believe" him - everyone wants action out of the ECB head, not talk. From Citi: After saying that the ECB has “no taboos” in respect of taking measures to maintain price stability, Mr. Draghi is now also outspoken in respect of taking unconventional measures to preserve the euro. Mr. Draghi’s comments suggest that the ECB is less opposed to supporting sovereign bond markets again either indirectly through multi-year LTROs or directly through the use of the SMP. However, in our view, such action is only likely to be taken after governments have taken action first, i.e. by activating the bond market support facility for Spain and Italy.

Draghi Boxes Himself Into a Corner With Bond Signal: Euro Credit -- European Central Bank President Mario Draghi has boxed himself into a corner. Spanish and Italian bond markets rallied yesterday as investors cheered Draghi’s signal that the ECB is prepared to intervene to reduce soaring yields. Now he has to deliver, or face deep disappointment on financial markets, analysts said. The risk in doing so is alienating key policy makers on the ECB council, such as Bundesbank President Jens Weidmann. The Bundesbank reiterated its opposition to bond purchases today. “Draghi is damned if he does and damned if he doesn’t,” “He maneuvered himself into an extremely difficult situation. Expectations are very high.” The ECB is under pressure to lower borrowing costs after three interest-rate cuts since November failed to stop bond yields soaring in Spain and Italy, threatening the survival of the euro. The Frankfurt-based central bank shelved its bond- purchase program in March as dissatisfaction with it among council members grew, and some economists doubt it will be revived any time soon.

Central Banks Search Toolbox for Ideas as Growth Slows - Central banks are digging deeper into their tool kits in search of innovative ways to unclog bank lending and keep a weakening world economy afloat. With the fifth anniversary of the financial crisis approaching in August, policy makers from the Federal Reserve, the European Central Bank and the Bank of England all meet within 24 hours next week. Central banks, facing a global recovery that’s sputtering even after they delivered trillions of dollars of liquidity and near-zero interest rates, are having to consider fresh strategies to combat the slowdown. “Central banks are thinking hard about other ways to spur their economies and get credit into corners of the economies that need it and aren’t getting it,” Among the options up for consideration by the monetary authorities in addition to potentially doubling-down on previous policies: taking some of the credit risk of new lending onto their own balance sheets and forcing commercial banks to pay for parking cash in central banks’ coffers.

Draghi Said To Hold Talks With Weidmann On Bond Purchases -- European Central Bank President Mario Draghi will hold talks with Bundesbank President Jens Weidmann in the coming days in an effort to overcome the biggest stumbling block to a new raft of measures including bond purchases, two central bank officials said.  Having secured the backing of governments in Spain, France and Germany, Draghi is now seeking to win over ECB policy makers for a multi-pronged approach to reduce bond yields in countries such as Spain and Italy, the officials said late yesterday on condition of anonymity because the talks are private.  Draghi’s proposal involves Europe’s rescue funds buying government bonds on the primary market, flanked by ECB purchases on the secondary market to ensure transmission of its record-low interest rates, the officials said. Further ECB rate cuts and long-term loans to banks are also up for discussion, one of the officials said.

ECB may take losses in second Greek debt restructuring (Reuters) - European policymakers are working on "last chance" options to bring Greece's debts down and keep it in the euro zone, with the ECB and national central banks looking at taking significant losses on the value of their bond holdings, officials said. Private creditors have already suffered big writedowns on their Greek bonds under a second bailout for Athens sealed in February, but this was not enough to put the country back on the path to solvency and a further restructuring is on the cards. The latest aim is to reduce Greece's debts by a further 70-100 billion euros, several senior euro zone officials familiar with the discussions told Reuters, cutting its debts to a more manageable 100 percent of annual economic output. This would require the European Central Bank and national central banks to take losses on their holdings of Greek government bonds, and could also involve national governments also accepting losses. The favored option is for the ECB and national central banks to carry the cost, but that could mean that some banks and the ECB itself having to be recapitalized, the officials said.

Spanish unemployment hits fresh all-time high— Unemployment in Spain rose to an all-time high in the second quarter, as a recession in the euro zone’s fourth largest economy led to further job losses, albeit at a lower pace than in previous quarters. The jobless rate in the quarter, traditionally a good one for employment as it comes just ahead of the busy summer holiday season, rose to 24.63% from 24.44%, the national statistics bureau INE said Friday. The previous all-time high in Spanish unemployment had been hit in the first quarter of 1994, at a time when Spain was in the middle of an economic contraction that led to several currency devaluations. Spain, which is now part of a monetary union and has no control over monetary policy, is suffering from the collapse of a decade-long housing bubble and from deep spending cuts as the government tries to close a towering budget gap. Its unemployment rate is the highest in the euro zone, with unemployment especially high among the young and foreign residents.

Spain Jobless Reaches Post-Franco Record Amid Austerity: Economy -- Spanish unemployment rose to the highest on record after Prime Minister Mariano Rajoy made it easier to fire workers while implementing the steepest budget cuts in the country’s recent democratic history.  Unemployment, already the highest in the European Union, rose to 24.6 percent in the second quarter from 24.4 percent in the prior three months, the National Statistics Institute said in Madrid today. That was the largest proportion since at least 1976, the year after dictator Francisco Franco died, prompting the transition to democracy. The median forecast in a Bloomberg survey of nine economists was 24.7 percent.  The Bank of Spain said this week that the nation’s recession deepened in the second quarter as the government intensified efforts to reduce a budget deficit almost as large as Greece’s. Spanish ministers are focusing on reducing the nation’s debt burden while arguing that the euro area’s monetary policy isn’t helping them to revive its fourth-largest economy.

Spain discussed 300 billion euro bailout with Germany - source (Reuters) - Spain has for the first time conceded it might need a full EU/IMF bailout worth 300 billion euros (232.69 billion pounds) if its borrowing costs remain unsustainably high, a euro zone official said. Economy Minister Luis de Guindos brought up the issue with German counterpart Wolfgang Schaeuble in a meeting in Berlin last Tuesday as Spain's borrowing costs soared past 7.6 percent, the source said. If needed, the money would come on top of the 100 billion euros already agreed to prop up Spain's banking sector, stretching the euro zone's resources to breaking point, and Schaeuble told de Guindos he was unwilling to consider a rescue before the currency bloc's ESM bailout fund comes on line later this year. "De Guindos was talking about 300 billion euros for a full programme, but Germany was not comfortable with the idea of a bailout now," the official told Reuters. "Nothing will happen until the ESM is online. Once it is operational we will see what the borrowing costs for Spain are and maybe we will return to the question," the official said.

Germany 'Refuses Spanish Bailout Request' - The news agency Reuters, citing comments by a eurozone official, said the idea was floated by Spain at a meeting with German officials but it was dismissed by the Germans on the grounds that the European Stability Mechanism (ESM) bailout fund was not yet in place. Spain moved quickly to stamp on the report. A government spokeswoman said no such discussion had taken place and it "strongly denied any such plan". But such a move would come as little surprise to the markets amid the country's dire debt crisis. Spain's National Statistics Institute confirmed the jobless rate rose to 24.6% in the second quarter of the year from 24.4% - a result of firms shedding more jobs as fears of a prolonged recession grow amid a lack of confidence. The figures confirmed that almost a third of all those unemployed in the euro area are in Spain: 5.7 million are without jobs in the country; and 53% of Spain's eligible workers aged between 16-24 do not have a job. The latest government projections suggest Spain's recession, which began in the first quarter of 2012, will continue into next year while unemployment will remain above 22% until 2015. It is a high price the Spanish people are paying for the collapse of a property bubble which left banks saddled with huge debts.

Take Heed of IMF’s Worst-Case Scenario for Spain - The International Monetary Fund‘s warned Friday that “downside risks dominate” Spain’s economic outlook, despite encouraging efforts by both Madrid and the EU to restore the country’s prospects. Over the course of the euro crisis, the IMF has often led its economic reviews with optimism, outlining policy paths that ostensibly can help lead the economy out of the mire and back on to terra firma. But, maintaining intellectual honesty, the IMF often tucks “alternative” scenarios into its assessments that give insight into potential threats to its more ordered universe. In several cases, such downside scenarios have proved to be the more realistic projection. All that is to say that the IMF’s so-called “Risk Assessment Matrix” on page 51 of the latest review of the Spanish economy shouldn’t be dismissed. That’s particularly because most of the threats are characterized as “high.” Also, it should be heeded because the fund has been officially assigned to monitor the EU’s 100-billion-euro loan meant to recapitalize its financial sector.

Bundesbank Maintains Opposition to ECB Bond Buying - German Chancellor Angela Merkel and French President Francois Hollande stressed Friday that they will "do everything" to defend the euro zone and urged all European institutions to "fulfill their obligations," as reports in the French press suggested the European Central Bank is preparing to buy more government bonds. But Germany's central bank reiterated its opposition to any more government bond purchases by the ECB. In a joint statement, Ms. Merkel and Mr. Hollande--the leaders of the euro zone's two largest economies--said they are "determined to do everything to defend...the integrity of the euro zone." The comments come a day after ECB President Mario Draghi sent a surge of optimism through markets by hinting that the euro zone's central bank might be prepared to take a more active role in driving down borrowing costs of fiscally frail members of the currency bloc.

‘Germans Should Be Afraid’ of Economic Collapse - Credit ratings agency Moody's on Monday slashed its outlook for the creditworthiness of not only Germany, but also of the Netherlands and Luxembourg to "negative" from "stable."  Though Moody's maintained its triple-A ratings for all three countries, it said the increasingly uncertain outlook stemming from the European debt crisis was behind the changes.  The unsettling move followed controversy over comments made by German Economy Minister and Vice Chancellor Philipp Rösler, who on Sunday expressed his skepticism that Greek reforms would succeed. He also said a Greek exit from the euro zone has "long since lost its horrors."  The bad news continued to pour in on Wednesday, with new figures out from the Munich-based Ifo Institute for Economic Research showing Germany's business climate index dropped for the third time in a row in July, once again due to the European debt crisis. German commentators on Wednesday are concerned about the move by Moody's, but argue that the change was less significant than what will actually happen to the economy if the currency union collapses.

ECB, EU rescue fund plan joint action: report- The European Central Bank and the euro-zone's rescue fund are getting ready to step in to bond markets to bring down Spanish and Italian borrowing costs, French newspaper Le Monde reported Friday, citing unnamed sources. The report said the central bank is prepared to act as long as strained governments utilize the temporary European Financial Stability Facility and the future European Stability Mechanism, which would buy Spanish and Italian debt on the primary market. The ECB would then fire up its dormant Securities Market Program to purchase bonds on the secondary market, the newspaper said.

Kill the Euro now? - Nick Rowe - It's an ugly thing to say, especially since the end of the Euro will be an ugly thing. But it needs to be said.Back in June, Canada came under pressure to help the Eurozone survive, and came under criticism for failing to help (or failing to help enough). Canada's position was defensible on many levels. At its simplest, the Eurozone needs more Euros, not more Loonies; and the Eurozone can print Euros, while Canada can only print Loonies. "Print 'em yourselves" makes sense as a Canadian response, both technically and morally. But ought we try to help the Euro survive, even if we could, and the Eurozoners themselves couldn't? The Economist's Greg Ip  relays the most optimistic scenario for the Euro, from Montreal's Bank Credit Analyst. Short version: Greece leaves, and the rest are so scared they form a fiscal and banking union. This scenario is what I called a "shotgun wedding". If the people of Europe want an ever closer union, or if an ever closer union evolves naturally out of a sense of common identity, that's OK. But being duped and forced into marriage because the PIIGS are all pregnant and Germany is the father, though all of them thought they were just holding hands and nobody told them that sharing a common currency was quite such an intimate relationship -- is another thing entirely. The EU's legitimacy and governability, already shaky, would suffer.

Anglo Irish Bank's ex-CEO arrested for fraud – Fraud detectives arrested the former chief executive of Anglo Irish Bank and charged him Tuesday over a conspiracy to hide colossal losses at the bank that brought the nation to the brink of bankruptcy.Officers of the Bureau of Fraud Investigation arrested Sean FitzPatrick, 64, at Dublin Airport as he returned from a holiday around 5:30 a.m. FitzPatrick was arraigned hours later in Dublin's Central Criminal Court on 16 counts related to Anglo's doomed 2008 effort to prop up its collapsing share price. Forensic accountants found that Anglo provided secret loans to 16 insiders on condition they used the €1.1 billion ($1.35 billion) to buy Anglo stock.

BBA ‘warned weekly’ about Libor says former rate-compiler - The British Bankers' Association was given weekly warnings in 2008 that the process of setting the Libor interest rates was being distorted.  Each day the six-man team at Thomson Reuters would calculate the various Libor interest rates, based on estimates submitted by staff from a panel of banks about how much it would cost them to borrow in the financial markets, in various currencies and for various durations. A former member of the Libor compilation team at Thomson Reuters says it regularly warned senior BBA staff about the problem. Its reports regularly highlighted the implausible rate submissions of several banks involved in the Libor process. The BBA denied these had amounted to warnings of wrong-doing.

UK sinks deeper into recession - The UK economy contracted much more sharply than expected in the second quarter of the year, prolonging and deepening the country’s double-dip recession. Output fell 0.7 per cent between the first and second quarter, more than the 0.2 per cent fall economists had expected. The UK economy has contracted for three quarters in a row and is now smaller than when the coalition government took office in 2010, providing fuel to critics of its austerity measures. The Office for National Statistics said it was too soon to say how much the diamond jubilee bank holiday affected the output data. Most economists had predicted it would knock about 0.5 percentage points from gross domestic product growth. Vicky Redwood, an economist at Capital Economics, noted the output fall in the second “dip” of the double-dip recession was now almost 1.5 per cent. “Of course, there is a possibility that the GDP figures are underestimating the true strength of the economy ... Other economic indicators, such as employment, have recently painted a stronger picture. Nonetheless, it would take pretty hefty revisions to make the economy’s recent performance look even half decent,” she said. Construction output fell 5.2 per cent in the second quarter, while industrial production fell 1.3 per cent. Services output – which had been growing slightly – fell 0.1 per cent.

U.K. GDP drops 0.7% in second quarter, below views -  Growth in the U.K. dropped more than expected in second quarter, driven by weakness in the construction sector, the production sector and the service sector, data from the Office of National Statistics showed Wednesday. A preliminary estimate of gross domestic product for second quarter showed a 0.7% decline compared with the previous quarter. In the first quarter of 2012, growth slipped 0.3%. Analysts surveyed by Factset expected GDP growth to drop by 0.2%. The construction sector was hurt the most, with output dropping 5.2% quarter-on-quarter, following a 4.9% decrease between the last quarter in 2011 and 2012's first quarter

A GDP shocker - down 0.7% - The Office for National Statistics never loses its capacity to surprise. Against expectations of a 0.2% quarterly fall in GDP in the second quarter, its estimate is for a 0.7% fall. Some of that is due to the extra bank holiday but it seems likely there would have been a contraction even without that. These are bad numbers, with little in the way of optimism. The economy is now smaller than wne the coalition came to power and Labour will have a field day. They are even harder to square with the buoyant employment figures. Are they credible? Nobody doubts the economy is weak but the detail of these numbers should give some pause. The ONS has not really got its collective head around construction, and its figures, a 4.9% fall in the first quarter and a 5.2% drop in the second, suggests a sector collapsing at a 20% annual rate after being pretty flat on a quarterly basis during 2011. That does not make much sense. More here.

GDP shock fall: UK growth in 2012 'inconceivable', warn economists - The economy shrank by 0.7pc in the second quarter – far more than the 0.2pc fall expected, as record rainfall and the Jubilee holiday added to pressure from austerity cuts and the eurozone debt crisis. It marks the third successive quarter of contraction, leaving Britain in its longest double-dip recession in more than 50 years. The Office for National Statistics showed broad-based weakness across the private sector, with construction output down 5.2pc, industrial production down 1.3pc and services output – which accounts for 77pc of the economy – falling 0.1pc. Only public-sector services output, and business services registered any growth. “I think it’s inconceivable that there’ll be positive growth this year,” said Gerard Lyons, chief economist at Standard Chartered, forecasting a 1.3pc fall in GDP. In March, the Office for Budget Responsibility, the government’s independent fiscal watchdog, forecast 0.8pc growth this year, which now looks wildly optimistic.

UK Data Raise Fears for Triple A Status - The UK’s deepening recession will cost the country its cherished triple-A credit rating, leading bond investors warned after output fell 0.7 percent in the three months through June. Leading investors said that the foundering economy, which economists had projected would shrink 0.2 percent in the second quarter, was confounding George Osborne’s ambitious austerity program and is likely to spur Moody’s to strip the UK of its top rating. Moody’s put the UK on negative outlook in February this year. “The data are shocking and no amount of excuses about rainfall or the Queen’s Jubilee can explain away such weak growth,” said Alan Wilde of Baring Asset Management. “Osborne’s personal ratings for economic competency are plummeting and the credit rating agencies will be deeply concerned by today’s report ... this may well hasten a downgrade.” The chancellor admitted the country had “deep-rooted economic problems”, but maintained the coalition was “dealing with our debts at home and the debt crisis abroad.”

On The Path To Global Goldmanation: Former Goldmanite Mark Carney To Head The BOE After All? - When the Lieborgate scandal broke out and the Bank of England trace became publicly known, some of the more conspiratorially inclined elements saw in this epic shakedown at the English central bank nothing but an opportunity for the world's dominant investment bank, Goldman Sachs, to capitalize on the scandal and the succession panic now that Paul Tucker is obviously out of succession rotation, and to appoint its own tentacles to the head of this most important central bank that is currently squid free. In fact, on July 3 we said:"now that the natural succession path at the BOE has been terminally derailed, it brings up those two other gentlemen already brought up previously as potential future heads of the BOE, both of whom just happened to work, or still do, at... Goldman Sachs:  Canada's Mark Carney or Goldman's Jim O'Neil. Granted both have denied press speculation they will replace Mervyn King, but it's not like it would be the first time a banker lied to anyone now, would it?

The macroeconomic magic button - In a recent post on the Eurozone, I talked about an idea from Greek economist Yanis Varoufakis, where he imagined leaders were presented with a magic button that would end their countries macroeconomic woes. He said that leaders in the US and UK would surely press the button, but he was doubtful about Germany. I commented as an aside that I thought he was wrong about the UK, because that button exists, and it is called balanced budget fiscal expansion. (I think he is right about the US, if the only hand needed to press the button was the President. However my arguments below probably also apply to many Republicans.)  The idea is to temporarily increase government spending, and pay for it completely by temporarily raising taxes. There is no increase in government budget deficits or debt. This may seem like giving with one hand and taking with the other, but it has the effect of raising demand, because some of the taxes come from reduced saving, rather than lower consumption. Once demand rises, incomes increase, and theory suggests that in a closed economy the multiplier would be one. (For those who want more detail, see here, and for specific past proposals to implement this policy, see here for the UK and here for the US.) The only argument I have seen that it would not raise demand is if all consumers believed the tax increase was permanent. That seems highly unlikely.