week ending July 7

Fed balance sheet expands in latest week (Reuters) - U.S. Federal Reserve's balance sheet expanded in the latest week, Fed data released on Thursday showed. The Fed's balance sheet stood at $2.848 trillion on July 4, down from $2.846 trillion the previous week. The Fed's holdings of Treasuries totaled $1.666 trillion as of July 4, versus $1.667 trillion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $16 million a day during the week versus $27 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 $855.03 billion versus $854.98 billion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $91.48 billion, unchanged from the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--July 5, 2012

Is the Fed pushing on a string? - OCCASIONALLY, I'm asked why I think the Fed can do more to support the economy (indeed, can for the most part engineer a complete recovery without much assistance from fiscal authorities) while its policy rate is effectively zero and long-term rates are close to all-time record lows. Doesn't additional easing amount to little more than pushing on a string? It does not, in my view. The reason is that, in my opinion, a determined central bank cannot fail to raise inflation expectations. The Fed has the ability to create as much money as it wants and can use that money to purchase every scrap of federal-government debt, every scrap of outstanding mortgage-backed securities backed by federal housing agencies, and as much foreign exchange as other governments will sell it. It strains credulity to think that the Fed could use its printing press to entirely fund the government and most of the mortgage market and to devalue the dollar with reckless abandon without having an impact on inflation expectations. In practice, it seems to take nothing like that to move expectations; a bit of tweaked language or a few hundred billion in QE purchases are enough to do the trick. If you concede that the Fed can raise inflation expectations, then you concede everything. Higher expected future inflation raises inflation in the present, and higher inflation in the present simply represents more demand: prices rise because people are deploying more money, to buy assets and goods, to spend and invest.

A monetary policy for the 1% -- THE proper role of a central bank has been under much discussion lately. In its recent annual report, the Bank for International Settlements lamented central banks being forced into loose monetary policy as politicians fail to take steps to restructure their economies for growth. In the developed world most central banks have had a clear target—to achieve price stability—and independence in how they hit it, with the aim of avoiding political entanglement. However, even such technocratic work can easily become political, as demonstrated by a new paper on monetary policy and inequality by a team of American academics. Arguments abound for how loose money can benefit or harm different groups in society. The wealthy hold more assets, the value of which is eroded by high inflation; but the few assets held by the poor tend to be in cash rather than more inflation-resistant choices such as stocks or commodities. Low-wage labour income (which is almost all income for the less wealthy) is more affected by economic boom and bust, although not as much as the business and financial income that fills the coffers of the super-rich. Unemployment in busts also tends to fall more heavily on low-income jobs, but during booms, support for those on low incomes through benefits dries up. The authors used US Consumer Expenditure Survey data from 1980 to 2008 to try and tease out which effects are the most important.

Three's company - Sometimes such actions are co-ordinated—as in the big rate reductions made by the world’s main central banks during the financial crisis in October 2008; or, more recently, the steps taken last November by the US Federal Reserve, the European Central Bank (ECB) and four others to ease dollar shortages in the euro area. Today’s decisions by three central banks in Asia and Europe were not a concerted effort, but they all eased monetary policy, albeit in different ways. In China, the central bank cut the benchmark lending rate from 6.31% to 6%. The European Central Bank (ECB) cut its main policy rate from 1% to 0.75%, a record low. In Britain, where the base rate has stood at an all-time low of 0.5% since March 2009, the chosen device was a third bout of quantitative easing (QE)—buying government bonds with freshly minted money. Over the next four months the Bank of England will purchase bonds worth an extra £50 billion ($78 billion), taking the total to £375 billion. The BofE previously had made purchases worth £325 billion in two separate phases, the last of which ended as recently as early May.

Some Doubts About NGDP Targeting - One idea that has been pushed recently is a revived proposal for NGDP targeting. The economists pushing this are bloggers - Scott Sumner and David Beckworth, among others. Some influential people like the idea, including Paul Krugman, Brad DeLong, and Charles Evans. In its current incarnation, here's how NGDP targeting would work, according to Scott Sumner. The Fed would set a target path for future NGDP. For example, the Fed could announce that NGDP will grow along a 5% growth path forever (say 2% for inflation and 3% for long run real GDP growth). Of course, the Fed cannot just wish for a 5% growth path in NGDP and have it happen. All the Fed can actually do is issue Fed liabilities in exchange for assets, set the interest rate on reserves, and lend at the discount window. One might imagine that Sumner would have the Fed conform to its existing operating procedure and move the fed funds rate target - Taylor rule fashion - in response to current information on where NGDP is relative to its target. Not so. Sumner's recommendation is that we create a market in claims contingent on future NGDP - a NGDP futures market - and that the Fed then conduct open market operations to achieve a target for the price of one of these claims. So, what do we make of this? If achieving a NGDP target is a good thing, then variability about trend in NGDP must be bad. So how have we been doing?

Reply to Williamson on NGDP targeting - Williamson has an excellent discussion of the evolution of the NGDP.  And then I start to have some problems with his analysis:One might imagine that Sumner would have the Fed conform to its existing operating procedure and move the fed funds rate target – Taylor rule fashion – in response to current information on where NGDP is relative to its target. Not so. Sumner’s recommendation is that we create a market in claims contingent on future NGDP – a NGDP futures market – and that the Fed then conduct open market operations to achieve a target for the price of one of these claims. Imagine buying a boat and being told by the sales person that the steering works fine 99% of the time, and only fails in wild and raging typhoons.  I don’t know about you, but a stormy day is when I most want the steering mechanism to work.  And it’s during periods where NGDP falls far below trend (1932 and 2009) where I most want my monetary policy instrument to work.  Given rates are at zero, and we need more stimulus, it seems an odd time to question my dissent from interest rate targeting orthodoxy. More importantly, I rarely discuss NGDP futures targeting in my blog, as I know it’s not going to happen anytime soon.

Excess volatility and NGDP futures targeting - Steve Williamson has a post arguing against NGDP targeting. I just wanted to throw my two cents in, and consider an issue that Steve didn't mention. When he talks about "NGDP targeting", Scott Sumner actually means the following (quoting Williamson): In its current incarnation, here's how NGDP targeting would work, according to Scott Sumner. The Fed would set a target path for future NGDP. For example, the Fed could announce that NGDP will grow along a 5% growth path forever (say 2% for inflation and 3% for long run real GDP growth). Of course, the Fed cannot just wish for a 5% growth path in NGDP and have it happen...One might imagine that Sumner would have the Fed conform to its existing operating procedure and move the fed funds rate target - Taylor rule fashion - in response to current information on where NGDP is relative to its target. Not so. Sumner's recommendation is that we create a market in claims contingent on future NGDP - a NGDP futures market - and that the Fed then conduct open market operations to achieve a target for the price of one of these claims. So basically, the Fed would do its utmost to keep NGDP futures prices on a certain path. I have a problem with that. The problem is called "excess volatility".

A response to David Andolfatto - monetary policy as insurance policy. - David has two posts in which he presents a model in which price level targeting is optimal and NGDP targeting isn't. (It's best to start with his second post). His model has an interesting feature (the bit about imperfect news being IS shocks but the shocks themselves being AS shocks is really neat), but to my mind it misses the main reasons that those of us who support NGDP targeting do so. And, as I will explain below, his result that price level targeting is optimal is a total fluke! Suppose that keynesians and monetarists were totally wrong. Suppose all prices were perfectly flexible, so that random changes in monetary policy only caused random changes in the price level but did not cause booms or recessions. Would monetary policy still matter?  Well yes, I expect so. But not nearly as much. An unexpected jump in the price level would cause a redistribution of wealth from creditors to debtors, if their nominal loan agreements were unindexed. That matters. It's a real effect of monetary policy, and that might cause other real effects too. And the expectation of those real effects will also cause real effects. What sort of monetary policy would we want in such a world? That's the question David is asking. That's the world of his model.

The Fed And LIBOR - The Biggest Manipulator Of Them All - Via Peter Tchir of TF Market Advisors, The Fed does everything it can to keep LIBOR low. This chart says it all. The Fed cannot affect LIBOR directly, but in general LIBOR trades in line with Fed Funds.  You can see that historically as Fed Funds was changed, LIBOR responded appropriately.  There was typically some small premium to reflect the "credit risk" of banks versus the Fed, but it was relatively small, and fairly stable.  3 Month LIBOR would deviate a bit as rate cuts and hikes were anticipated in the market, but in general, it was a fairly stable game.That all started to break down in 2007.  We saw the first real signs of LIBOR deviating from its normal spread to Fed Funds in the summer of 2007. The Fed responded by cutting the "penalty" rate for using the discount window, and in fact encouraged banks to use the discount window (I still can't shake the mental image of someone sitting in a dark basement with a green eye-shade doling out money to banks that request it).  Then the crisis got worse.  Bear needed to be rescued.  Facilities such as the Term Auction Facility that had been put in earlier were increased in size.  The Fed backstopped some portfolios that JPM acquired as part of the Bear Stearns deal.

And Now The Fed Gets Dragged Into LiEborgate - As was first reported two days ago, and confirmed today, Barclays' natural response to allegations it single-handedly manipulated the interest rate complex for up to $500 trillion notional in IR-sensitive swaps and other products (it didn't - everyone else did it too), was to drag everyone into the scandal, starting off with the Bank of England (and about to drag Whitehall into it too), and specifically the man who was next in line for governorship of the English Central Bank: Paul Tucker. What does this mean? Well, as we suggested also two days ago, 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 (and makes one wonder if this whole affair was not merely orchestrated by the Squid from the get go... but no, that would be a 'conspiracy theory'.) Yet the fact that Goldman is hell bent on global domination by stretching its tentacles into every monetary policy administration is no secret: it is only a matter of time before GS also runs the English CTRL-P macros. More interesting is that in addition to the BOE, Barclays today also dragged America's very own Federal Reserve into the fray.

Prolonging unemployment to demonstrate inflation credibility - Why do central banks in the US, UK and EZ appear to focus on inflation, and ignore unemployment or the output gap? More specifically, why are they apparently not prepared to allow inflation to be above target by, say, 1% for a few years in order to generate a more rapid recovery? There are many potential answers (see, for example, Joe Gagnon), but one that is often mentioned is that excess (above target) inflation would destroy anti-inflation credibility. Here is Bernanke in April (via Felix Salmon): We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four or five years to support the economy without leading to an unanchoring of inflation expectations or a destabilization of inflation. To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.”   What is exactly meant by this? In terms of a Phillips curve this statement seems odd. Over the last 4 years the recession has kept inflation and inflation expectations low. As long as unemployment remains above the natural rate, rising core inflation is not a danger. Is it plausible that QE might cause inflation without any impact on the real side?

Fed’s Williams: Inflation Surge Won’t Happen - The Federal Reserve‘s massive balance sheet hasn’t sparked an inflation surge, nor is it likely to, a top central bank official said Monday. “In a world where the Fed pays interest on bank reserves, traditional theories that tell of a mechanical link between reserves, money supply, and, ultimately, inflation are no longer valid,” Federal Reserve Bank of San Francisco President John Williams said in the text of a speech prepared for delivery before the Western Economic Association International, in San Francisco.

Fed's John Williams Opens Mouth, Proves He Has No Clue About Modern Money Creation - There is a saying that it is better to remain silent and be thought a fool than to speak out and remove all doubt. Today, the San Fran Fed's John Williams, and by proxy the Federal Reserve in general, spoke out, and once again removed all doubt that they have no idea how modern money and inflation interact. In a speech titled, appropriately enough, "Monetary Policy, Money, and Inflation", essentially made the case that this time is different and that no matter how much printing the Fed engages in, there will be no inflation. To wit: "In a world where the Fed pays interest on bank reserves, traditional theories that tell of a mechanical link between reserves, money supply, and, ultimately, inflation are no longer valid. Over the past four years, the Federal Reserve has more than tripled the monetary base, a key determinant of money supply. Some commentators have sounded an alarm that this massive expansion of the monetary base will inexorably lead to high inflation, à la Friedman.Despite these dire predictions, inflation in the United States has been the dog that didn’t bark." He then proceeds to add some pretty (if completely irrelevant) charts of the money multipliers which as we all know have plummeted and concludes by saying "Recent developments make a compelling case that traditional textbook views of the connections between monetary policy, money, and inflation are outdated and need to be revised." And actually, he is correct: the way most people approach monetary policy is 100% wrong.

John C. Williams: The Federal Reserve's Brand of Modern Monetary Theory - One point of contention for me has been this whole issue of the Fed paying interest on excess reserves, essentially incenting banks, if the rate is high enough, to cause banks to hoard reserves at the Fed rather than lend the money out to the real economy. This point was argued quite vociferously some years ago during the first quantitative easing. We were told by the New York Fed, as I recall, that this was not the case, and that the payment of interest on excess reserves was only a means for the Fed to manage rates at the zero bound, and did not affect the levels of reserves which are only an accounting identity, after all. Williams seems to contradict this now. But I have to give it an extra careful reading in this case. However, some might look at his data and his reasoning and conclude that while the Fed's policies have been doing quite a bit to provide solvency to the banking system, it has not done well by the real economy. The GDP and employment numbers seem to bear this out. One might conclude that reducing the interest paid on reserves would cause the banks to make more loans to the real economy. And yet not so long ago the NY Fed and several of their economists also argued against what seems like common sense that this was not the case, not at all. So it might be important to pin the Fed down a bit on this now. Their thinking could be evolving, or it might just be dissembling to suit the changing situation. One might gather from what Mr. Williams is saying about rewriting established theory that they don't quite know what it is that they are doing, but instead are feeling their way along in uncharted waters.

The (Other) Deleveraging: What Economists Need to Know About the Modern Money Creation Process - One of the financial system’s chief roles is to provide credit for worthy investments. Some very deep changes are happening to this system – changes that surprisingly few people are aware of. This column presents a quick sketch of the modern credit creation and then discusses the deep changes are that are affecting it – what we call the ‘other deleveraging’. Modern credit creation without central bank reserves. In the simple textbook view, savers deposit their money with banks and banks make loans to investors (Mankiw 2010). The textbook view, however, is no longer a sufficient description of the credit creation process. A great deal of credit is created through so-called ‘collateral chains’. We start from two principles: credit creation is money creation, and short-term credit is generally extended by private agents against collateral. Money creation and collateral are thus joined at the hip, so to speak. In the traditional money creation process, collateral consists of central bank reserves; in the modern private money creation process, collateral is in the eye of the beholder. Here is an example.

On The USD's Demise - Last week the BEA published it preliminary take on the international investment position (IIP) of the country. As Citi's FX team note, the IIP measures foreign investment assets minus native assets owned by foreigners. In the US, the IIP has been negative (meaning the US is a debtor nation) since 1985. The US’s IIP deficit reached USD 4.03trn in 2012, up sharply from 2.47trn in 2011. As a share of nominal GDP, the IIP deficit reached a record (for the US) of -27%.  Commonly accepted wisdom based on a combination of models and experience is that an IIP bigger than +30% of GDP or smaller than -30% is a problem. On the IIP surplus side, having too big of a net creditor position leads to a perennially strengthening currency that chokes out industry and stokes deflation (think JPY). On the IIP deficit side, having too big of a net debtor position leads to a debt spiral. High debt leads to reluctant external creditors charging ever high interest rates, which leads to economic stagnation and ultimately crisis. The US may not be able to run another dozen years of 3-6% current account deficits without starting to look like a ponzi scheme - but while risk aversion flows (and rates) suggest there is little to worry about, we have noted again and again the moves behind the scenes in global trade flows to shift away from the world's current numeraire.

Back to the gold standard? It makes no economic sense - Ever since Richard Nixon ended the convertibility of the US dollar into gold in 1971, there have been calls for a return to some form of gold standard. Proponents of this view, often known as "gold bugs", want to see an end to paper money guaranteed by promises and for currencies to once more be backed by precious metal. In the last few years as central banks around the world have engaged in quantitative easing to try and support their economies these voices have become louder. Monday night's Analysis on Radio 4 looked at the argument in some detail. The specific appeal of gold can be hard to rationalise: it might be aesthetically pleasing, but does that make it a sound basis for a monetary system? Sometimes I wonder if gold bugs just listened to too much Spandau Ballet in the 1980s. In the programme, Robert Skidelsky argued that supporters of the gold standard have an almost atavistic belief in its powers, rooted in the age-old worship of sun gods. What they tend to ignore is that the world has tried the gold standard before and it was, in most respects, a disaster. At present, as the economy grows and produces more goods the central bank can expand the money supply to keep up with output. Under the gold standard, as output increases, the money supply will be fixed and with more goods but the same amount of money, prices will tend to fall.

Update: Recovery Measures - By request, here is an update to four key indicators used by the NBER for business cycle dating: GDP, Employment, Industrial production and real personal income less transfer payments.  These graphs show that several major indicators are still significantly below the pre-recession peaks.This graph is for real GDP through Q1 2012. Real GDP returned to the pre-recession peak in Q3 2011, and has been at new post-recession highs for three consecutive quarters. At the worst point - in Q2 2009 - real GDP was off 5.1% from the 2007 peak. Real GDP has performed better than other indicators ... This graph shows real personal income less transfer payments as a percent of the previous peak through the May report released Friday. This measure was off 10.7% at the trough in October 2009. Real personal income less transfer payments is still 3.7% below the previous peak. The third graph is for industrial production through May. Industrial production was off over 17% at the trough in June 2009, and has been one of the stronger performing sectors during the recovery. However industrial production is still 3.4% below the pre-recession peak.The final graph is for employment.  Payroll employment is still 3.6% below the pre-recession peak. All of these indicators collapsed in 2008 and early 2009, and only real GDP is back to the pre-recession peak.

Fed Watch: Manufacturing Turns South - Today's ISM manufacturing report revealed clear signals of global weakness. Does it point to an impending US recession? Not necessarily. Does it point to additional Fed easing? Also not necessarily. In short, I don't think this data is yet sending a particularly clear signal about the US economy. First, the headline number: I marked the initiation of Fed easing cycles since 1995. Notably, multiple sub-50 ISM readings have traditionally triggered Fed easing, with the 2007 rate cut being something of an outlier. Of course, we have yet to start the tightening cycle this time around, but it is safe to say that ongoing sub-50 readings were generally consistent with ongoing easing. On balance, a first look of the data thus suggests additional Fed easing. Notice, however, that a sub-50 reading does not always indicate a fresh recession is on the way. Not by a long-shot. Two not-necessarily exclusive issues are likely at play. First, the drop in the ISM index might be indicative of external issues that are insufficient to trigger a recession in the US. In other words, recessions are domestic events; the external sector alone is simply too small to overwhelm the internal tide. Second, the appropriate application of monetary policy might have been sufficient to safeguard against recession given the relatively small external threat. I think it is clear that new orders sagged as a result of external weakness:Both the 1998 and 2001 easings followed sharp falls in the export index. Less so for the 1995 easing, but some external weakness was clearly at play. The 2007 easing was primarily a domestic issue; at the time, the external sector was source of strength. The general story, however, is that the Federal Reserve has tended to lean against external weakness.

Recession Now More Likely - There’s no way to sugarcoat it: The already-sluggish U.S. economy is stalling out, stung by doubts about our economic and fiscal future. The Institute for Supply Management reported that its manufacturing index dropped to 49.7 in June from 53.5 in May, signaling that the manufacturing sector is contracting for the first time since mid-2009. Both the ISM headline index and the ISM new orders index plunged below 50 in June. By itself, the decline in the ISM index below the benchmark 50 level does not mean that the economy is in a recession, but it does make it much more likely. A reading of 49.7 is consistent with slow, but positive growth of about 2.4, according to the ISM. The manufacturing sector has been the most robust part of the economy coming out of the recession, but that momentum has now been lost. The U.S. has now caught the fever racing through Europe and China. The decline in the ISM was led by the biggest one-month drop in new orders since October 2001, just after the Twin Towers were destroyed. The new-orders index now stands at 47.8, a level that’s extremely rare outside of recessions.

Goldman Lowers Q2 Tracking Estimate To 1.5% - As the stock surge on escalating bad news accelerates, here is one more datapoint that should be good for at least 5 more S&P points: Goldman just lowered its Q2 GDP forecast even more, from 1.6% to 1.5%.  BOTTOM LINE: Factory orders increase, but weak inventory growth implies downward revision to Q2 GDP tracking estimate. Factory orders increased by 0.7% (month-over-month) in May, more than generally expected. Key underlying details in the report were mixed. On the one hand, orders and shipments of “core” durable goods (nondefense capital goods ex-aircraft) were revised up. On the other, inventory accumulation in the manufacturing sector was below our assumptions. Taking together, the news was a slight negative for our tracking estimate of Q2 GDP growth: we revised down by one tenth to +1.5% (annualized).

Who's in Charge of Fixing This? - Another month, another lackluster jobs report, and once again investors are lifting their eyes unto the Fed, from whence cometh help.  And perhaps those prayers will be answered. After all, the Federal Reserve is legally required to minimize unemployment. But anyone counting on the Fed’s policy-making committee to begin another round of “quantitative easing” when it meets at the end of the month should keep in mind a few reasons for caution. Fed officials were not expecting the unemployment rate to decline. They predicted last month that the rate would stand between 8 percent and 8.2 percent at the end of the year, and that still looks like a pretty good guess. Furthermore, that bleak outlook has so far not roused them to action. The Fed’s policy-making committee did decide last month to extend a bond-buying program until the end of the year, but that was a placeholder intended to maintain that status quo, not improve it.  Finally, the closer we get to a presidential election, the greater the potential political advantages of lying low and waiting another few months. Yes, the Fed is a nonpartisan body insulated from political pressure. So is the Supreme Court.

The Failure of Government-Provided Prosperity -- If I had one bit of advice to reach the ears of Barack Obama, Mitt Romney, and Ben Bernanke, it would be this: stop the illusion that you have any significant control over the US economy.  Government is designed for justice, and does not do well when trying to promote prosperity.  At most, economically, the government can set ground rules that reduce the probability of fraud.As it is, at present, the US still has an over-indebted economy, and as a result, will grow slowly, because businesses and individuals in danger of default do not spend freely. Politicians claim that they can being prosperity, but they rarely do that.  I’m not talking about marginal tax rates, or monetary policy, which offer transitory relief, but changes in regulations.  The economy as a whole would do a lot better if marginal regulation were reduced.  That would be a help, but few politicians in either party want to reduce the power of the government.Prosperity exists aside from the government.  Yes, in the short-run the government can tweak the economy to grow faster, but at the price of the situation we are now in, where nothing works.  Far better for the government to focus on things it can do well: defense, internal security, public health, etc.  But it does not do well with macroeconomic management, so it should give up on that, run balanced budgets, and replace the Fed with a currency board.

US Economy May Be Bottoming Out: Economist - A surprise contraction in U.S. manufacturing activity in June has raised the prospects of a worsening slowdown in the U.S., but one economist says the economy may actually be showing signs of bottoming out. Gary Schlossberg, Chief Economist at Wells Capital Management, told CNBC Asia’s “Squawk Box” on Tuesday a recovery in housing and construction will lend support to the economy for the rest of the year. Construction spending in the U.S. increased a better-than-expected 0.9 percent in May to an annual rate of $830 billion, the highest level since December 2009, the Commerce Department said on Monday. Economists polled by Reuters had expected construction spending to rise 0.2 percent after a 0.6 percent gain in April. “I think it’s interesting that the construction spending numbers do point to the fact that this recovery, such that it is, is being led increasingly by housing, which could provide some support to the economy later in the year,” Schlossberg said. Housing is becoming one of the few bright spots in the U.S. economy, whose recovery has slowed in recent months as the debt crisis in Europe and worries about a “fiscal cliff” of higher taxes and lower spending create a cloud of uncertainty for businesses and households.

Manufacturing vs. Housing - A note on manufacturing vs. housing: The ISM manufacturing index dropped below 50 for the first time since July 2009 (below 50 indicates contraction). And the JPMorgan Global Manufacturing PMI also fell below 50. Meanwhile, in the US, housing is picking up. Housing starts have been increasing, residential construction spending is up 17% from the recent low, and new home sales have averaged 353 thousand on an annual rate basis over the first 5 months of 2012, after averaging under 300 thousand for the previous 18 months. If someone looked at just manufacturing, they might think the US is near a recession. And if they just looked at housing, they'd think the economy is recovering. Which is it? First, the decline in the ISM index was partially driven by exports, The ISM export index declined to 47.5 in June from 53.5 in May, the lowest level since early 2009. However some of this export weakness will probably be offset by lower oil and gasoline prices. Second, the current ISM reading of 49.7 isn't all that weak. Goldman Sachs analysts noted yesterday: "A reading such as this has historically been associated with just under 2% real GDP growth--very near our current second-quarter tracking estimate of 1.6%." Third, housing is usually a better leading indicator for the US economy than manufacturing. Historically housing leads the economy both into and out of recessions (not out of the recession this time because of the excess supply in 2009). Manufacturing is more coincident.

The Handoff – Manufacturing to Housing - As you may have heard, the latest reading on the ISM Manufacturing index declined in June to a level of 49.7. The index is designed such that values of over 50 indicate expansion while values below 50 indicate contraction. This marked the first time since July 2009 that the index registered in contraction territory ... Now, does that mean the economy is doomed? Not neccessarily. Even after a slowdown in manufacturing, the industry can and likely will continue to grow in the coming years, just that the growth is and was not expected to remain consistently strong. Second and more importantly ... is the transition from manufacturing to housing as a major economic driver. ... Residential Investment (new home construction) is now growing nearly 10% year-over-year while the manufacturing cycle is slowing. In the recovery so far, beyond personal consumer expenditures, exports and investment – largely the manufacturing cycle – have been significant contributors, while the housing downturn continued to languish. Now, housing growth has returned but the industry is not yet doing the heavy lifting. The much stronger growth in housing is not expected until 2013 and 2014 in our forecast.

What Are We Expecting From Housing?, by Tim Duy: Josh Lehner and Bill McBride note that the manufacturing slowdown does not necessarily indicate recession, something I noted as well. Another version of that story is seen by comparing the ISM headline number with the new orders data: Again, manufacturing slowdowns in 1995 and 1998 did not presage recessions (albeit possibly due to offsetting monetary policy). McBride reiterates that housing is a better leading indicator than manufacturing, and Lehner discusses a "tradeoff" from manufacturing to housing. For my part, I am wondering what people expect when they talk about a housing recovery. I tend to break the housing story into two parts. One is the residential construction story, the activity that amounts to screwing sticks of wood onto slabs of concrete. The related contribution to GDP growth since 1985: During the 2002-2005 period, arguably the height of the housing bubble, residential construction contributed an average of 0.4 percentage points to GDP growth each quarter. In the first quarter of this year, the contribution was 0.42 percentage points. So, barring the occasional pop in the data, housing is already contributing to GDP growth about what we would expect. Presumably, we would be hoping that as the housing rebound deepens, there will be secondary impacts. For this reason I am hesitant to embrace the "tradeoff" terminology. That said, there is another element to the housing story - the household balance sheet issue. Arguably, as Karl Smith has said, the housing bubble was less about a construction bubble (again, note the relatively limited contribution to GDP growth; we didn't necessarily build too many units, especially given the subsequent construction drought), and more about a price bubble. And that price bubble fueled spending activity via mortgage equity withdrawal. The chart via Bill McBride:

Current economic conditions -I'll get to today's seriously stinky employment report in a moment, but let me start with a bit of good news. Calculated Risk, who to my knowledge has never been wrong, called the bottom to the decline in both house construction and prices last February, and sees considerable confirmation of that prediction since then:

• housing starts are increasing
• residential construction spending is up 17% from its low
• new home sales are up 17% so far this year relative to the previous 18 months
• Case-Shiller and Core Logic house price measures may have started to rise modestly. Moreover, a broader perception by home owners and buyers that prices have stopped falling would itself be a significant positive.

Autos are another bright spot for the economy. June sales of cars manufactured in North America were up 31% over the previous year, and up 24% so far for the first 6 months of 2012 compared to 2011:H1. Tim Duy asks how a recovery in housing could make that much difference. Here's my answer. The graph below plots the shares of total spending on final goods and services that are attributable to autos and residential construction. These sectors are indeed small relative to the whole economy, with autos and housing between them on average accounting for only about 8% of GDP. But the key point is that housing and autos hardly ever grow at the same rate as everything else. The table below summarizes the drop in real GDP during recent recessions. In an average recession since 1970, real GDP fell at a 1.34% annual rate, of which housing alone accounted for 0.74 percentage points, and autos another 0.27 percentage points.

Number of the Week: Has Housing Bottomed? - 10: The number of consecutive months that the construction sector has shown year-over-year job growth. The signs of a bottom in the housing market are piling up, and after Friday’s employment report we can add construction jobs to the pile. The most widely reported construction numbers weren’t particularly encouraging. Although there was a small 2,000 monthly gain in June, that followed four months of moderate declines. That doesn’t exactly scream recovery. To see the broader trend we need to look a little deeper. The monthly numbers include a seasonal adjustment factor included by the Labor Department in an effort to smooth out the figures. Usually that’s a big help to gauge what’s going on, since weather plays an outsized role in construction. But this year, the effort to smooth out the figures was complicated. Because the winter was so mild, some hiring that would have occurred later in the year was pulled earlier. To get a look at the broader trend we can look at the monthly change from a year earlier. There we see that surge in December and January, but we also see that there has been consistent growth for 10 months — the longest sustained increase since 2006. That’s not just good news for the construction industry, but for the economy as a whole. After nearly five years of subtracting from the labor market and the economy, the housing sector might be ready to contribute again. It’s unlikely that we’ll see growth similar to the boom years, but we don’t need a bubble to get a substantial boost. .

IMF calls U.S. recovery tepid, warns of 'fiscal cliff' ahead -- Calling the U.S. recovery tepid, the International Monetary Fund warned that failure to halt the tax increases and big budget cuts set to hit next year could stifle the weak growth and damage "an already fragile world economy." Just as the Federal Reserve did last month, the IMF lowered its growth projections for the U.S. in its annual report on the nation's economy and said Washington policymakers needed to be careful not to further choke the recovery by cutting back too much on spending. The IMF said the U.S. economy would grow just 2% this year and annual growth would remain below 3% until 2015. The unemployment rate would hold at 8.2% this year and improve only slightly to 7.9% next year and to 7.5% in 2014. Those forecasts are on the low end of the range projected in June by the Federal Reserve, which saw annual growth of 3% to 3.5% in 2014. The financial strains in Europe have increased the risks to the U.S. economy, with the nation "vulnerable to contagion from an intensification of the euro area debt crisis," the IMF said. But uncertainty about Washington's plans to address the nation's fiscal problems also loom over the recovery. The so-called "fiscal cliff" at the end of the year -- the expiration of the George W. Bush-era tax breaks combined with deep automatic spending cuts -- would threaten the U.S. recovery.

IMF to Cut Global Growth Forecasts in Another Blow to Confidence - An extraordinary number of actions have been taken recently that show a rising belief the global economy is in trouble. First among these are the rate actions taken by the European Central Bank, Bank of England and Chinese officials to make money more affordable. Another is a recent International Monetary Fund warning that U.S. economic growth could dip to 1% next year if political gridlock continues. Another is a new set of tentative plans by Europe to immediately help some of its nations that have fallen into deep recessions. Each of these pieces of news or decisions has served to undermine confidence that a global economic recovery is under way. That confidence was hit hard again today when IMF Managing Director Christine Lagarde said that her organization plans to drop its forecasts of world growth when it issues its new outlook. “The global growth outlook will be somewhat less than we anticipated just three months ago,” Lagarde said. “And even that lower projection will depend on the right policy actions being taken.” Three months is not a very long time, especially when it comes to an analysis of the prospect of the economy across the entire world. However, Lagarde’s comments show how quickly the world economy has deteriorated.

Has the European Slowdown Finally Hit the U.S.? - Unemployment has hit a new record high in Europe, and while some progress was made in last week’s euro zone summit, the continent’s leaders still lack a credible and cohesive plan to stop the death spiral of economic contraction and ever-higher debt loads. But even as fears of recession plague Asia and Europe, America had been fortunate enough to show consistent, albeit slow, job and GDP growth. But new manufacturing data released yesterday has many economists and pundits worried that the European crisis has finally washed up on American shores. A survey from the Institute for Supply Management showed that manufacturing activity contracted in June, with its measure of new orders showing a steep decline into contraction as well. Manufacturing had been one of the lone bright spots in an otherwise weak recovery, and such a steep drop in activity in the sector is a bad omen for the broader economy. Steven Blitz of ITG Investment Research believes as much, telling the Wall Street Journal, “Assuming the pace of decelerating activity continues, and we make that assumption, it is only a matter of time before the service sector mirrors the real goods slowdown and overall employment gains move from sluggish to worse. The markets can continue cheering each new policy initiative adding liquidity to the capital markets, especially in Europe, but today’s ISM data proves out the bigger issue — insufficient demand for credit rather than an insufficient supply.”

The bond market: Not to yield | The Economist - OUR correspondents discuss the remarkable demand for low-yielding government bonds and the broader impact of ultra-low interest rates

Debt Fireworks Continue On This Independence Day - On Independence Day two years ago I wrote a piece comparing America’s exploding debt projection (from the 2009 and 2010 Congressional Budget Office’s Long Term Budget Outlook) with the fireworks on the 4th of July. As I later put it in First Principles (p. 101) the debt projection's "soaring upward climb resembles the fireworks on America's Independence Day. But rather than remind us of America's founding, it portends America's ending.” Here is the chart I was referring to, hoping that the Congress and the Administration would get their act together so CBO would be able to project something more responsible in 2011.Well, after two more years of Long Term Budget Outlooks (2011 and 2012) the CBO projections unfortunately look virtually the same. The problem has not been fixed as my grand daughter requested in my Economics 1 class at Stanford nearly three years ago. In fact, only one thing has really changed. CBO put a ceiling on its projections. They now stop reporting the debt to GDP ratio once it hits 250% or more, as if Congress finally voted for such a debt ceiling in a binding way. CBO used to go out 75 years, but now they just stop when things look really bad. So, as shown below, the latest projection (in green) now stops in 2042 when the debt hits 247 percent of GDP.

IMF warns on U.S. economy -- Boost the U.S. economy now and worry about cutting deficits later, the International Monetary Fund recommended Tuesday. The U.S. recovery remains "tepid" and according to the IMF, is expected to grow only 2% this year. Meanwhile, the fiscal cliff looms in 2013, threatening to reduce the economy's growth to only 1% next year.Meanwhile, the IMF predicts the job market will improve only at a snail's pace. It expects the unemployment rate to average 8.2% this year and 7.9% in 2013. Amid that weakness and threats from slower growth abroad, the IMF recommended U.S. policymakers spend more on infrastructure, worker training programs, extended unemployment benefits and fixes for the housing market. "Continued policy action is needed to boost the recovery," IMF Managing Director Christine Lagarde said at a news conference. "We believe the U.S. authorities do not have a lot of space available to act, but they should use it to support the recovery in the near term." The fiscal cliff and other spending cutbacks would not only stunt U.S. growth but also have "significant spillover effects" on the global economy, Lagarde said.

Recent US government spending cuts dampened recovery - further "austerity" may risk recession - In this week's economic report, the IMF described the US recovery as tepid and highly vulnerable to global shocks.  IMF: - The U.S. recovery remains tepid. After rebounding in the second half of 2011, growth slowed to around 2 percent in the first half of this year. Strong headwinds persist on private consumption, as households continue to deleverage....  The United States remains vulnerable to contagion from an intensification of the euro area debt crisis. U.S. financial institutions have limited direct claims on the euro area periphery, but strong financial linkages with the core euro area. Lower demand in the euro area would reduce U.S. exports to the region, while U.S. dollar appreciation on safe haven flows would hurt exports more generally.The IMF also pointed to the "fiscal cliff" uncertainty as one of the developments inhibiting growth. IMF: - It is critical to remove the uncertainty created by the “fiscal cliff” as well as promptly raise the debt ceiling, pursuing a pace of deficit reduction that does not sap the economic recovery.  In fact it is the broader government belt tightening that has already taken place which is contributing to this weakness - even before the impact of the "fiscal cliff". Here is a comparison of the recent government spending growth (inflation adjusted) to the average of the previous 9 cycles. The initial stimulus has ended and cuts are starting to take effect just when historically in the cycle government spending had been picking up.

The IMF Goes All-Out on Balance-Sheet Recessions, Providing Sanity on Economic Policy - The literature summary I just put out on balance-sheet recessions examines the recent April 2012 World Economic Report by the IMF. It is remarkable how important this report is. The relevant part is Chapter 3, Dealing with Household Debt. This IMF report is well to the Keynesian side of almost all major US debate, and its recommedations and observations are incredibly sensible. You should read it all, but I want to point out five few high-level arguments they make:

• 1. A run-up in household debt and leverage explains the economic collapse across countries.
• 2. Financial crises are not a driver of prolongued recessions. If anything they are a symptom.
• III. HAMP is a failed program.
• IV. Foreclosures are a problem. It's never been clear whether Treasury views mass foreclosures as a macroeconomic problem. Well, the IMF does:
• V. Demand demand-side stimulus. Across the board. Now.

Why Congress Won’t Touch Jamie Dimon: JPM Derivatives Prop Up US Debt - When Jamie Dimon, CEO of JPMorgan Chase Bank, appeared before the Senate Banking Committee on June 13, he was wearing cufflinks bearing the presidential seal.  “Was Dimon trying to send any particular message by wearing the presidential cufflinks?” asked CNBC editor John Carney.  “Was he . . . subtly hinting that he’s really the guy in charge?” The groveling of the Senators was so obvious that Jon Stewart did a spoof news clip on it, featured in a Huffington Post piece titled “Jon Stewart Blasts Senate’s Coddling Of JP Morgan Chase CEO Jamie Dimon,” and Matt Taibbi wrote an op-ed called “Senators Grovel, Embarrass Themselves at Dimon Hearing.”  He said the whole thing was painful to watch. “What is going on with this panel of senators?” asked Stewart.  “They’re sucking up to Jamie Dimon like they’re on JPMorgan’s payroll.”  The explanation in a news clip that followed was that JPMorgan Chase is the biggest campaign donor to many of the members of the Banking Committee. That is one obvious answer, but financial analysts Jim Willie and Rob Kirby think it may be something far larger, deeper, and more ominous.  They contend that the $3 billion-plus losses in London hedging transactions that were the subject of the hearing can be traced, not to European sovereign debt (as alleged), but to the record-low interest rates maintained on U.S. government bonds.

The Role of Fiscal Stimulus in the Ongoing Recovery - Brookings - The Great Recession has profoundly affected almost all Americans, but it has not impacted all states equally. Some states have rebounded strongly, while others continue to struggle. Why is this the case? The answer is not simple—many economic forces are at work in creating these differences, but two are of particular importance: (1) the varying responses of state and local governments to the economic downturn, and (2) the impacts of federal stimulus spending across states.In this month’s employment analysis, The Hamilton Project examines the effects of government policy in the rates of recovery among states and nationwide. Our survey of new evidence indicates that states that expanded government spending more (due in large part to support from federal stimulus during the recession) experienced smaller increases in their unemployment rates. This conclusion comes from a pair of new academic studies on the American Recovery and Reinvestment Act (ARRA) or the 2009 stimulus plan; both studies find robust evidence that government policy helped reduce the extent of the downturn and improve job growth. We also continue to explore the nation’s “jobs gap,” or the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels.

U.S. Fiscal Policy: Headwind or Tailwind? - SF Fed Economic Letter - Aggregate state, local, and federal fiscal policy was expansionary during the Great Recession and the initial stages of recovery, providing a tailwind to economic growth. Federal fiscal policy in particular was more expansionary than usual, according to a historical analysis, even when the weakness of the economy is taken into account. However, during the past year, aggregate government budgetary policy has reversed course. Over the next few years, as federal fiscal policy shifts toward austerity, it is likely to be a headwind against economic growth.

Is Congress to blame for a downshifting US economy? -- Evidence is mounting that the economy is taking a hit because Congress can't – or won't – deal with the 'fiscal cliff' looming at year's end. The fight on Capitol Hill last summer over the national debt limit also took an economic toll.  A rising chorus of voices, inside and outside Washington, is warning that political gridlock in Congress is now so severe that it has actually done damage to the economy – and threatens to do a lot more. President Obama, of course, is the chief "blame Congress" finger-pointer, perhaps to be expected as he fights to win reelection as the economy flails. But plenty of others – Federal Reserve Chairman Ben Bernanke, the US Chamber of Commerce, and Congress's own budget office, to name a few – also cite Congress as a factor that is inhibiting economic recovery, though they put it more diplomatically than does Mr. Obama. Consider Mr. Bernanke's reply to lawmakers when asked June 7 about Fed efforts to stimulate the economy via low interest rates: "I'd be much more comfortable," he said, if "Congress would take some of this burden from us and address those issues." Or take this complaint about how "uncertainty" is causing small businesses to refrain from hiring and investing. "Most of this uncertainty ... is coming out of Washington," concludes a June 14 report from the National Federation of Independent Business.

IMF urges U.S. lawmakers to remove ‘fiscal cliff  — A failure to avoid the “fiscal cliff” could slash the U.S. growth rate to under a 1% annual rate and risk harming the global economy, the International Monetary Fund said in a report released Tuesday. The fiscal cliff is Washington shorthand for current tax and spending plans, enacted in law when the debt ceiling was narrowly passed last summer, that would shrink the deficit by around 4% of gross domestic product in 2013. These policies “could reduce growth to well below 1%, with negative growth early next year and significant negative repercussions on an already fragile world economy,” the IMF warned. Lawmakers should replace the fiscal cliff with a program of small deficit reduction in the short-term with a longer-term fiscal sustainability program, the IMF said. A small deficit reduction means cuts totalling about 1% of gross domestic product in calendar year 2013, IMF Managing Director Christine Lagarde said at a press conference. Growth in the largest global economy is expected to average 2% in 2012 and 2.25% in 2013, and downside risks have intensified, the IMF said

Defense Department Minskyites - The National Association of Manufacturers (NAM) recently endorsed expanding a government program with the intent to directly and indirectly create one million jobs. Bruce Bartlett (former Treasury Secretary in the Reagan administration) highlights the fact that the influential NAM has released a report detailing how the defense spending cuts scheduled for 2013 as a result of the Budget Control Act (the debt ceiling deal from last summer) will harm employment and growth.  So technically this isn’t really an example of pushing for more stimulus; we’re just talking about preserving levels of funding and preserving jobs.  But the logic of the NAM position goes a long way. For instance, they argue that the knock-on effects of restoring the public spending cuts would create a substantial net number of jobs in the private sector.  In other words, they have implicitly abandoned the argument that increasing government spending or public job creation (above scheduled 2013 levels) would “crowd out” private spending and job creation, embracing instead some version of a multiplier effect.  And if you follow the NAM that far, what reason is there to assume that we’re currently sitting (which is to say, before the Budget Control Act cuts take effect) right at some optimal level of spending and employment beyond which a direct job creation program would no longer be effective?

Big government pushed by the right -- Dean Baker notes that liberals have let the right wing get away with the small government mythology... It is astounding how liberals are so happy to work for the right by implying that conservatives somehow just want to leave markets to themselves whereas the liberals want to bring in the pointy-headed bureaucrats to tell people what they should do. This view is, of course, nonsense. Pick an issue, any issue, and you will almost invariably find the right actively pushing for a big role for government. ...These TBTF banks operate with an implicit subsidy from the government. Lenders expect the government to step in to back up these banks' debt if they fail, as happened on a massive basis in 2008. As a result, TBTF banks can borrow money at lower interest rates than would be possible in a free market. ...To take another easy example, drug patents raise the price of prescription drugs by close to $270 billion a year above their free-market price. This is roughly five Bush tax cuts to the wealthy... ...Patents imply very big government since the government will imprison anyone who produces a drug without the patent holder's consent. In recent years, big government has been actively working to extend Pfizer's and Merck's patent monopolies to the rest of the world through NAFTA, CAFTA, and other recent trade deals. ...While the government has been using the banner of "free trade" to drive down the wages of manufacturing workers, it has simultaneously been increasing the protection afforded doctors in order to prevent any similar downward pressure on their wages...

Looking for Cash, Congress Finds Some in a Corporate Pension Rule Tweak -- Lawmakers looking for money to finance low-cost student loans and fix aging highways have found about $20 billion in an unlikely place: company pension funds. Pension funds are not exactly brimming over with extra money. But the highway bill contains a measure that would let companies slow their pension contributions again. Because the contributions are tax-deductible, permitting smaller contributions would mean that companies take fewer tax deductions — and as a result, create more federal revenue. The provision is expected to increase corporate income tax receipts by $9.4 billion over the next 10 years, according to calculations issued Thursday by the Joint Committee on Taxation. The effect is most powerful in the first years, then winds down, a Congressional staff member who worked on the measure said, to keep from giving companies funding relief in perpetuity. Another provision of the bill would raise the annual premiums that companies pay to the federal program that takes over failing pension plans when companies go bankrupt. Over the next 10 years, that will let lawmakers count another $9.5 billion toward the cost of highway improvements and low-cost student loans. Although the premiums are in fact supposed to finance the operations of the Pension Benefit Guaranty Corporation, the Congressional Budget Office counts them as general revenue for budgeting purposes.

Reduce Tax Rates on Low-Income Families by Extending Tax Phase-Outs -- An ominous announcement for a House Ways & Means Committee joint hearing on “how welfare and tax benefits can discourage work” seemed a set-up to attack programs like the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) for their apparent disincentive to work. But that’s not what happened.  Rather than eliminate or downsize the programs, witnesses at the June 27 hearing suggested another possibility: Extend the credits so they phase out more slowly. At issue are the high marginal tax rates that low- and moderate-income families face as their income rises and they lose the benefit of both transfer payments and tax credits (a problem I’ve discussed here).  At the extreme, a Connecticut mom of two children who participates in every tax and transfer for which she is eligible could double her earnings from $17,000 to $34,000 in 2008 but her post-tax and transfer income would increase by only about $2,000. As noted by my colleague Gene Steuerle, it’s the classic liberal-conservative compromise. Liberals want to distribute benefits to the needy and conservatives want the programs to be limited. The end result is the need to phase programs out quickly – and when multiple programs phase-out at the same time, beneficiaries end up paying very high marginal tax rates.

Get Ready for the New Investment Tax - It really is happening. Until this week, investors were waiting to see what the Supreme Court would do about the 3.8 percentage-point surtax on investment income, part of President Obama's health-care overhaul. The Internal Revenue Service hasn't yet released guidance on the new tax. So when the court affirmed the law on Thursday, investors—and tax advisers—started scrambling.The new tax, which Congress passed in 2010, affects the net investment income of most joint filers with adjusted gross income of more than $250,000 ($200,000 for single filers). Starting on Jan. 1, 2013, the tax rates on long-term capital gains and dividends for these earners will jump from their current historic low of 15% to 18.8%, assuming Congress extends the current law.If, on the other hand, Congress allows the tax rates set in 2001 and 2003 to expire on Dec. 31—an unlikely scenario, according to many experts—the top rate on capital gains will rise to 23.8% and the top rate on dividends will nearly triple, to 43.4%.

How Delaware Thrives as a Corporate Tax Haven - NOTHING about 1209 North Orange Street hints at the secrets inside. It’s a humdrum office building, a low-slung affair with a faded awning and a view of a parking garage. Hardly worth a second glance. If a first one.  But behind its doors is one of the most remarkable corporate collections in the world: 1209 North Orange, you see, is the legal address of no fewer than 285,000 separate businesses.  Its occupants, on paper, include giants like American Airlines, Apple, Bank of America, Berkshire Hathaway, Cargill, Coca-Cola, Ford, General Electric, Google, JPMorgan Chase, and Wal-Mart. These companies do business across the nation and around the world. Here at 1209 North Orange, they simply have a dropbox.  What attracts these marquee names to 1209 North Orange and to other Delaware addresses also attracts less-upstanding corporate citizens. For instance, 1209 North Orange was, until recently, a business address of Timothy S. Durham, known as “the Midwest Madoff.” On June 20, Mr. Durham was found guilty of bilking 5,000 mostly middle-class and elderly investors out of $207 million. It was also an address of Stanko Subotic, a Serbian businessman and convicted smuggler — just one of many Eastern Europeans drawn to the state.

Romney’s offshore wealth deeply hidden: report - Much of White House hopeful Mitt Romney’s fortune lies well-hidden in a network of opaque offshore investments including some $30 million in the Cayman Islands, Vanity Fair reported Tuesday. Romney has amassed vast wealth — estimated to be as high as $250 million — since founding private equity firm Bain Capital in 1984, and he consistently says his successful business experience is what puts him in better position than President Barack Obama for turning around the sluggish US economy. But while his campaign insists Romney has not exploited the offshore havens to avoid paying necessary US taxes, the difficulty in tracking the overseas transactions and holdings raises questions about the candidate’s finances in the heat of a campaign.  The report detailed how Romney continues to have personal interests in at least 12 of the 138 funds organized by Bain in the Caymans, where such investments are hidden behind confidentiality disclaimers, making an assessment of Romney’s true wealth virtually impossible.

What is Mitt Romney Hiding? - Mitt Romney has so far released only one year of tax returns (2010), plus an estimate for 2011. This stands in stark contrast to his father, Michigan Governor George Romney, who released 12 years of tax returns when he began running for President in 1967. As his father said at the time, "One year could be a fluke." So the questions remain about what is in Romney's older returns. Two stories this week and last have ratcheted up the pressure. One is a recent web exclusive for "The Last Word with Laurence O'Donnell" where David Cay Johnston has five questions for Romney that can only be answered with his tax returns. The other is a blockbuster story by Nicholas Shaxson (h/t TPM) in the new Vanity Fair on the shadowy world of Romney's tax havens. Together, they put a laser-like focus on the finances of the man who could become our 45th President.  Johnston is a well-known former New York Times reporter, Pulitzer Prize winner, and the author of the major books Perfectly Legal and Free Lunch. If you don't have time to watch his 3:45 video, here are the five questions: 
"1. Did you buy any illegal or gray area tax shelters?
"2. Did an IRS audit ever uncover serious problems with any of your tax returns?
"3. Did you make use of offshore vehicles to defer, or avoid paying, federal income taxes?
"4. Did you take advantage of any tax strategies that the IRS did not uncover in audits?
"5. Did you fully tithe to the Church of Jesus Christ of Latter Day Saints every year and take a deduction on your tax return that shows that?"

Is Taxing Capital OK? - In simple economic models taxing capital has one of the biggest long-run negative effects on the economy of any tax. It looks OK in the short run, but with lower investment, the capital stock gradually declines. In this spirit you would be better off taxing land a la Henry George, since the amount of land won’t decline even if you tax it. But taxing the buildings on top of the land is like taxing any other kind of capital. (However right now we tax houses very lightly compared to factories, so if it weren’t for the housing bubble’s aftermath, we would be better off taxing houses more and factories—which employ people—less.) One way to tax capital some in a way that won’t hurt capital formation is to shift from labor taxation (such as Social Security taxes) to consumption taxation, since in the long run the shift to consumption taxation increases taxes on people who have the wealth to consume more than they earn. But in the shorter run, the shift to consumption taxation hits people who are temporarily having to consume more than they earn. Also, consumption taxation has a big life-cycle element. The biggest category of people who have the wealth to consume more than they earn is senior citizens.

Dean Baker: A Wall Street Gambling Tax: The Remedy to Inequality: Washington elites in both parties are actively scheming to find ways to cut Social Security and Medicare benefits for retired workers. The media have widely reported on efforts to slip through a version of the deficit reduction plan developed by Morgan Stanley director Erskine Bowles and former Senator Alan Simpson. Since the vast majority of voters across the political spectrum reject cuts to these programs, the Washington insiders hope to spring this one on us after the election, when the public will have no say. That is the sort of anti-democratic behavior we expect from elites who naturally want to protect their own interests. Of course, the rest of us are more concerned about the well-being of the country as a whole rather than preserving the wealth of the richest 1 percent. For the 99 percent there are much better ways of dealing with whatever deficit problems may arise down the road. Most obviously, insofar as we need more revenue we can look to tax the sort of financial speculation through which the Wall Street gang makes its fortunes. A very small tax on trades of stocks, options, credit default swaps and other derivative instruments could raise a vast amount of money. The Joint Tax Committee of Congress estimated that a tax of just 0.03 percent on each trade, as proposed by Senator Tom Harkin and Representative Peter DeFazio, would raise more than $350 billion over the first nine years that it is in place. This is real money. It is an order of magnitude larger than the measures that have been suggested to go after the wealthy, such as President Obama's bank tax or most versions of the Buffet Rule.

Regulator Proposes New Rule for Large Derivatives Trades - Wall Street traders making big bets on derivatives would receive relief from regulation only if they met certain standards under a rule proposed on Monday. The Commodity Futures Trading Commission voted to introduce a draft rule that limits how firms can qualify for exemptions through so-called block trades. Banks and brokerage firms place the trades, large private transactions typically negotiated outside the scope of an exchange, as a service to investors that want to purchase a big bulk of derivatives.  Block trades will receive certain exemptions from new derivatives rules, including requirements that the positions are traded on open platforms and that the price and size of the positions are immediately reported to the public. The requirements, which apply to derivatives contracts known as swaps, stem from the Dodd-Frank regulatory overhaul law.

Obama Threatens To Veto Bill That Defunds Wall Street Reform - House Republicans, after failing to prevent the 2010 Dodd-Frank financial reform law from passing Congress, have attempted to undermine it by refusing to give Wall Street regulators adequate funds to do their jobs. Both the Securities and Exchange Commission and the Commodity Futures Trading Commission are short of the funding they require, and House Republicans recently voted in committee to fund the SEC $245 million below the Obama administration’s request for 2013. However, should that funding bill actually reach President Obama’s desk, he has announced that he will veto it: The 2013 Financial Services bill is heading to the House floor after being considered by the Rules Committee on Thursday. “The bill severely undermines key investments in financial oversight and implementation of Wall Street reform to protect American consumers, as well as needed tax enforcement and taxpayer services. It also hampers effective implementation of the Affordable Care Act (ACA),” the White House statement reads.

Financial Services Chair Bachus: “This Is How the System Is Supposed to Work” [Is This Man on Bath Salts?]  - Spencer Bachus is the Chairman of the powerful House Financial Services Committee. On June 19, 2012, Bachus issued a press release that carried his opening remarks for the hearing on JPMorgan’s $2 billion (and growing) losses.  The final sentence of that prepared text read as follows:  “Before closing, once again I want to re-emphasize the point that JPMorgan and its shareholders – not the bank’s clients, and more importantly, not the taxpayers – are the ones paying for the bank’s mistakes. This is how the system is supposed to work.”  This is how the system is supposed to work? Maybe for the Russian Mafia or in some dystopian universe where only descendants of the Koch brothers are permitted to live.  But here in America, those who have not yet had a Fox News lobotomy, believe this is exactly how the system is not meant to work.  First, Bachus is dead wrong on his facts. The money that JPMorgan was gambling with was tens of billions of depositors’ money. That fact is not in dispute, by JPMorgan or the regulators.  In any world but that of Congressman Bachus (Republican from Alabama), depositors are clients of JPMorgan Chase, even if their deposits are being used to bet for the house. 

77% of JP Morgan’s Net Income Comes from Government Subsidies - JP Morgan’s credit rating would be much lower without government backing. As Bloomberg noted last week: JPMorgan benefited from the assumption that there’s a “very high likelihood” the U.S. government would back the bank’s bondholders and creditors if it defaulted on its debt, according to the statement. Without the implied federal backing, JPMorgan’s long-term deposit rating would have been three levels lower and its senior debt would have dropped two more steps, Moody’s said. And as the editors of Bloomberg pointed out a couple of weeks ago: JPMorgan receives a government subsidy worth about $14 billion a year, according to research published by the International Monetary Fundand our own analysis of bank balance sheets. The money helps the bank pay big salaries and bonuses. More important, it distorts markets, fueling crises such as the recent subprime-lending disaster and the sovereign-debt debacle that is now threatening to destroy the euro and sink the global economy. To estimate the dollar value of the subsidy in the U.S., we multiplied it by the debt and deposits of 18 of the country’s largest banks, including JPMorgan, Bank of America Corp. and Citigroup Inc. The result: about $76 billion a year. The number is roughly equivalent to the banks’ total profits over the past 12 months, or more than the federal government spends every year on education.

Head of JPMorgan's trading unit retires with $57.5 million -- Ina Drew, the former chief investment officer at JPMorgan Chase who oversaw the London office where the bank lost billions on a botched trade has walked away with about $57.5 million, according to a Bloomberg News report.  Drew, who resigned from the bank May 14, is keeping $17.1 million in unvested restricted shares and about $4.4 million in options, the report said. If she had been terminated from the bank she would have been required to forfeit that money, Bloomberg reported. Drew’s unrestricted shares of common stock are worth about $23.7 million based on the May 14 closing price, $9.7 million in deferred compensation and $2.6 million in pension pay as of Dec. 31, according to the report. In total, her stock, pension and deferred pay come to about $57.5 million, Bloomberg said.

What happened to Ina Drew’s clawback? - When he was testifying to Congress, Jamie Dimon hinted that there might be clawbacks of bonuses with the CIO group — the group which lost as much as $9 billion, shattered public trust in the bank, and turned Dimon from a hero into a goat. Top of the list, when it came to clawbacks, had to be Ina Drew. She was in charge of the CIO, she let the London office become an uncontrollable beast, and she was paid eight-figure bonuses on the grounds that she was going a spectacular job of managing risk. Since we now know that she wasn’t doing a spectacular job of managing risk, JPMorgan not only can but must take some of those bonuses back. Otherwise, the lesson for JPMorgan executives will be clear: if your bets blow up after you’ve received your bonus check, don’t worry, it’s safe with you. Well, guess what: Drew’s gonna get to keep her bonuses, according to Bloomberg.* Drew wasn’t fired; she was allowed to resign. As a result, she gets to keep, for herself, a whopping great slew of unvested stock and options.

JP Morgan Treated Its Retail Investors as Stuffees, Accused of Lying in Marketing Materials -- Yves Smith  - One long standing bad idea on Wall Street has been to have a retail brokerage operation along with in-house mutual funds. The business model always assumes that the retail brokers will happily sell lots of the firm’s funds to their customers. This has been a recognized conflict of interest for decades; I’d hear it come up often on studies back in the stone ages when I was at McKinsey. A story tonight in the New York Times’ Dealbook points out that most banks have finally recognized the folly of their ways. The ones that have in-house brokers have largely exited the in-house mutual funds business….except JP Morgan. According to the Times:JPMorgan, with its army of financial advisers and nearly $160 billion in fund assets, is not the only bank to build an advisory business that caters to mom and pop investors. Morgan Stanley and UBS have redoubled their efforts, drawn by steadier returns than those on trading desks. But JPMorgan has taken a different tack by focusing on selling funds that it creates. It is a controversial practice, and many companies have backed away from offering their own funds because of the perceived conflicts.

Bankers constantly lying, defrauding; most still not in jail - Has there ever been a better time to be a disastrously inept banker? Well, probably — over the course of human civilization it’s almost always been a pretty good time to be a banker — but today’s finance titans seem uniquely immune to punishment of any sort. Remember how JPMorgan Chase accidentally lost $2 billion in a “hedge”-slash-huge stupid bet placed by a guy in the Chief Investment Office? Funny story, it will actually end up being closer to $6 billion, or maybe like $9 billion — who can be sure, math is pretty complicated, it’s all imaginary money anyway — as the bank attempts to extricate itself from the insanely complex losing trade made by the office that is supposed to manage the bank’s risk. Funnier story: Remember when Mr. Jamie Dimon, the head of JPMorgan Chase and the World’s Sagest Banker, was asked to sit before the Senate Banking Committee and be repeatedly complimented and praised? And remember how he kept mentioning “claw-backs,” the weird bank term for taking bonuses away from people who screw up? Turns out Ina Drew, the former head of the Chief Investment Office — the one who lost somewhere between more money than you’ll ever see in your entire life and more money than God has ever seen in His entire life — will not have any of her money clawed back.. 

Big Banks Have Criminally Conspired Since 2005 to Rig $800 Trillion Dollar Market - We noted Friday: Barclays and other large banks – including Citigroup, HSBC, J.P. Morgan Chase, Lloyds, Bank of America, UBS, Royal Bank of Scotland– manipulated the world’s primary interest rate (Libor) which virtually every adjustable-rate investment globally is pegged to. That means they manipulated a good chunk of the world economy. We actually understated the impact of the Libor scandal. Specifically, more than $800 trillion dollars worth of investments are pegged to the Libor rate.   As the Wall Street Journal reports today: More than $800 trillion in securities and loans are linked to the Libor, including $350 trillion in swaps and $10 trillion in loans. (Click here). Remember, the derivatives market is approximately $1,200 trillion dollars.  Interest rate derivatives comprise the lion’s share of all derivatives, and could blow up and take down the entire financial system. The largest interest rate derivatives sellers include Barclays, Deutsche Bank, Goldman and JP Morgan … many of which are being exposed for manipulating Libor. They have been manipulating Libor on a daily basis since 2005.

Banking scandal: how document trail reveals global scam - It's not a comfortable weekend for the men heading some of the world's biggest banks. Barclays has already been hit by a £290m fine for rigging interest rates but that could be dwarfed by a series of global lawsuits which could cost banks billions. The interest rate rigging scandal that has engulfed Barclays was the result of a coordinated attempt at collusion by traders working for a coterie of leading banks over at least five years, according to a series of lawsuits and legal rulings filed in courts in Asia and North America. The lawsuits allege the fraud was extensive, spanning at least three continents and involving trades worth tens of billions of pounds. The allegations raise further serious questions about the banks' ability to police themselves and the role of senior management in monitoring the activities of their employees. In a 28-page statement of facts relating to last week's revelation that Barclays had been fined a total of £290m, the US Department of Justice discloses how a network of traders working on both sides of the Atlantic conspired to influence both the Libor and Euribor interest rates – the rates at which banks lend to each other. It was, in effect, a worldwide conspiracy against the free functioning of the market. The size of the fines was significant and the opprobrium heaped on Barclays unremitting. "This is the most damaging scam I can recall," said Andrew Tyrie, chair of parliament's Treasury select committee. "It appears that many banks were involved and Barclays were the first to own up."

The LIBOR scandal and reforming the banking sector -  While the media is transfixed by whose head will roll, many of the substantive issues around the micro-structure of key funding markets have in fact been known for a long time. Indeed, the real surprise is that the institutions responsible for overseeing financial stability – the Treasury, Bank of England and the Financial Services Authority – and those charged with reforming the banking sector continue to permit patently fragile structures in key funding markets. This tolerance probably reflects the persistent ideology that financial markets are somehow efficient and so the structure is best devised and operated by those who use them. If there is a silver lining from these revelations it is that plans to reform the financial sector are still on the drawing board: there is still time to reconsider.  LIBOR is not an actual borrowing rate. It is a (trimmed) average of interest rates that banks report that they could borrow funds in a reasonable size just prior to 11am each day.  So in periods of distress there is an incentive for banks which borrow at typical rates (so not trimmed) to submit lower interest rates to avoid this perverse signalling effect. Collusion could be an even more powerful way of forcing interest rates lower. Moreover, modern banks also hold very large positions in over-the-counter derivatives which are priced relative to LIBOR. This creates a second direct incentive to influence the reference rate.

Rigged Rates, Rigged Markets  - New York Times’s editorial - Marcus Agius, the chairman of Barclays, resigned on Monday, saying “the buck stops with me.” His was the first departure since the British bank agreed last week to pay $450 million to settle findings that, from 2005 to 2009, it had tried to rig benchmark interest rates to benefit its own bottom line.  Mr. Agius was right to go and the bank’s chief executive, Robert Diamond Jr., should follow him out the door. But the investigations cannot stop there.  The rates in question — the London interbank offered rate, or Libor, and the Euro interbank offered rate, or Euribor — are used to determine the borrowing rates for consumers and companies, including some $10 trillion in mortgages, student loans and credit cards. The rates are also linked to an estimated $700 trillion market in derivatives, which banks buy and sell on a daily basis. If these rates are rigged, markets are rigged — against bank customers, like everyday borrowers, and against parties on the other side of a bank’s derivatives deals, like pension funds.  Barclays is only one of more than a dozen big banks that provide information used to set the daily rate for Libor and Euribor. The settlement, struck with regulators in Washington and London and with the Department of Justice, indicates that the bank did not act alone. It shows that unnamed managers and traders of Barclays in London, New York and Tokyo colluded with or prevailed upon bank employees who provide the benchmark data to make false reports. The aim was to bolster Barclays’s trading positions and to aid or counteract other banks’ attempts at manipulation.

There’s Something Rotten in Banking - Bloomberg editorial - You might have missed the latest bank scandal, the one involving Barclays Plc (BARC), in the hubbub of last week’s U.S. health-care ruling and euro salvage plan.  If so, allow us to fill you in: On June 27, Barclays, the U.K.’s second-largest bank by assets, admitted it deliberately reported artificial borrowing costs from 2005 to 2009. The false reports were used to set a benchmark rate, the London interbank offered rate, or Libor, which affects the value of trillions of dollars of derivatives contracts, mortgages and consumer loans. The bank agreed to pay a hefty $455 million to settle charges with U.S. and U.K. regulators, and on Monday its chairman resigned.  Earlier today, Robert Diamond resigned as chief executive officer, following the chairman out the door. In an apology to employees before he resigned, Diamond wrote that some of the misconduct occurred on his watch, when he was head of Barclays Capital, the investment-banking unit. Diamond was already in the doghouse with investors. In April, 27 percent of shareholders, upset that Barclays had missed profit targets, voted down his $19.5 million pay package.  Heads should roll at other banks, too. Regulators and criminal prosecutors, including the U.S. Justice Department, are investigating at least a dozen other firms to determine whether they colluded to rig the rate. Among them: Citigroup Inc., Deutsche Bank AG, HSBC Holdings Plc and UBS AG.

Mirabile Dictu! Barclays CEO Bob Diamond Resigns Over Libor Scandal (Updated) -  Wow, this resignation took place a mere day before the Treasury select committee hearings on Wednesday. The Wall Street Journal bizarrely sent a news alert out announcing the resignation, yet it links to a front page story that is out of date, saying that Diamond “resisted pressure to resign” and has “no plans to leave. FT Alphaville, natch, already has the resignation announcement from the board posted, which clearly shows that Diamond has resigned with “immediate effect” and that the departing chairman, Marcus Aigus, will lead the search for his replacement. This sudden announcement also makes it seem much more likely that serious shoes will drop at the Wednesday hearings.  Although this news has just broken, and I’m sure there will be a ton more commentary in the next few hours, I suspect the proximate cause is that Diamond’s attempts to defend the rigging of Libor during the crisis as being tacitly approved by the Bank of England was not going to fly.

How Barclay Manipulated the Libor Rates - Al Jazeera briefing, interview with Bill Black

Everything You Wanted to Know About LIBOR, but Were Afraid to Ask - How is LIBOR calculated? The UK trade association BBA provides a fairly detailed analysis of the process. The key here is what the rate is meant to be. The contributors are supposed to submit a rate for each currency they contribute for overnight, one week, two week, and monthly out to a year. The rate is meant to answer the question: “At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 a.m.?” This is a bit like self-reporting your weight. The bank is supposed to submit a rate where they think they could borrow, not where they actually borrowed or where they would lend to other contributors. Right from the start, the question raises other questions that have been discussed for years. How can a bank “know” where some other bank will lend them money? Can’t they use transactions? Can’t they get firm “offers” from other banks? Why not have the banks submit levels where they would lend to other banks? The very nature of the question used to solicit rates tells you all you need to know. LIBOR has always had an element of “gamesmanship” if not outright lying.

European and American Governments Encourage Bank Manipulation and Fraud to Cover Up Insolvency - We noted yesterday that the big banks have criminally conspired since 2005 to rig $800 trillion dollar Libor-based market. Barclay’s chairman says that the Bank of England gave explicit approval for the manipulation. A former Barclay’s executive – who was close to the Libor-setting manipulation – told the Daily Mail that Barclay’s manipulated Libor to make the bank look healthier than it really was, and , and the cover-up led to a slow policy response which prolonged the financial crisis. This appears to be very similar to what happened in America.   As I noted last year: The Tarp Inspector General has said that [then-Secretary of the Treasury Hank] Paulson misrepresented the big banks’ health in the run-up to passage of TARP. This is no small matter, as the American public would have not been very excited about giving money to insolvent institutions. (Paulson also threatened martial law if Tarp was not passed.) As we reported last year: [All of the big banks were] insolvent in the 1980s, but the government made a concerted decision to cover that up. Financial writers such as Mish and Reggie Middleton pointed out in late 2007 and early 2008 that B of A was again insolvent. Nouriel Roubini noted in January 2009 that the entire U.S. banking system is “bankrupt” and “effectively insolvent”: “I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion.”

Libor scandal exposes banks’ rigging of global rates - This type of gaming of the Libor and Euribor rates (as well as the Tokyo-based Tibor) was being carried out by virtually all of the major international banks. This bankers’ conspiracy has a very real and vast impact on the lives of ordinary people. Countless billions were effectively stolen from new homeowners or those with variable-rate mortgages, credit card holders, students with college loans, small business borrowers and other consumers when the banks priced the Libor rate artificially high. The Wall Street Journal noted Thursday that an extra 0.3 percentage point would add $100 to the monthly payment on a $500,000 adjustable-rate mortgage. The lowballing of the Libor rate, on the other hand, cost bondholders who were not parties to the plot untold billions in lower returns. This includes state and local governments that have pared budget deficits by slashing jobs, wages and public services. It also includes pension funds and retirees with fixed investments, whose income was significantly lowered. The settlement with Barclays is a whitewash designed to let the bank’s top executives off the hook and conceal the complicity of governments and bank regulators in the scam. The $453 million fine is a fraction of the billions Barclays made illegally over the years by falsifying its loan rates to Libor and Euribor. It is a small price to pay for allowing what is, in essence, a criminal operation to continue.

Libor’s Dirty Laundry - Here in the early stages of the Libor scandal — and, yes, this thing is far from over — there are two big surprises.  The first is that the bankers, traders, executives and others involved would so openly and, in some cases, gleefully collude to manipulate this key interest rate for their own benefit. With all the seedy bank behavior that has been exposed since the financial crisis, it’s stunning that there’s still dirty laundry left to be aired. We’ve had predatory subprime lending, fraudulent ratings, excessive risk-taking and even clients being taken advantage of in order to unload toxic mortgages.  Yet even with these precedents, the Libor scandal still manages to shock. Libor — that’s the London interbank offered rate — represents a series of interest rates at which banks make unsecured loans to each other. More important, it is a benchmark that many financial instruments are pegged to. The Commodity Futures Trading Commission, which doggedly pursued the wrongdoing and brought the scandal to light, estimates that some $350 trillion worth of derivatives and $10 trillion worth of loans are based on Libor.  With so much depending on this one critical interest rate, there shouldn’t ever be a question about its reliability. Yet beginning in 2005, according to the C.F.T.C. and the Justice Department, derivative traders at Barclays, the too-big-to-fail British bank, with the active involvement of traders at other yet-unnamed banks, persuaded their fellow bank employees to submit Libor numbers that were shaded in ways that would help ensure their trades were profitable. Even Robert Diamond Jr., the former Barclays chief executive who lost his job over the scandal, said that reading the traders’ e-mails made him “physically ill.”

Massive Furor in UK Over Libor Manipulation; Where’s the Outrage Here? - - Yves Smith - In case it isn’t yet apparent to you, the unfolding scandal over manipulation of Libor and its Euro counterpart Euribor is a huge deal. Even though at this point, only Barclays, the UK bank that was first to settle, is in the hot lights, at least 16 other major financial players, which means pretty much everybody, is implicated.  First, Libor is the basis for pricing over $10 trillion of loans. As the CTFC noted: US dollar Libor is the basis for the settlement of the three-month Eurodollar futures contract traded on the Chicago Mercantile Exchange, which had a traded volume in 2011 with a notional value exceeding $564 trillion. The Wall Street Journal puts total in contracts affected at $800 trillion. Second is that price fixing is a criminal violation under the Sherman antitrust act. The Department of Justice stressed that Barclays had been the first bank to cooperate with the investigation and had been extremely forthcoming, and for that reason it would not be prosecuted if it complied with the settlement terms for two years. The implication is that the DoJ will not be as generous with other banks involved in the price-fixing scheme. This is an overview from the Financial Times of Barclay’s misdeeds: The bank admitted that it lowballed estimates of its borrowing costs from late 2007 to May 2009 because it wanted to reassure investors of its strength during the financial crisis and it believed other banks were doing the same. It also admitted that its traders improperly influenced the rate submissions from 2005 to 2008 to make money on derivatives.

Why is Nobody Freaking Out About the LIBOR Banking Scandal? - Taibbi - The LIBOR manipulation story has exploded into a major scandal overseas. The CEO of Barclays, Bob Diamond, has resigned in disgrace; his was the first of what will undoubtedly be many major banks to walk the regulatory plank for fixing the interbank exchange rate. The Labor party is demanding a sweeping criminal investigation. Mervyn King, Governor of the Bank of England, responded the way a real public official should (i.e. not like Ben Bernanke), blasting the banks: It is time to do something about the banking system…Many people in the banking industry are hardworking and feel badly let down by some of their colleagues and leaders. It goes to the culture and the structure of banks: the excessive compensation, the shoddy treatment of customers, the deceitful manipulation of a key interest rate, and today, news of yet another mis-selling scandal. The furor is over revelations that Barclays, the Royal Bank of Scotland, and other banks were monkeying with at least $10 trillion in loans (The Wall Street Journal is calculating that that LIBOR affects $800 trillion worth of contracts).The banks gamed LIBOR for two semi-overlapping reasons. As noted here last week, there were instances of Barclays traders badgering the LIBOR submitters to "push down" rates in order to fatten their immediate bottom lines, depending on what they were trading or holding that day. Most intriguingly, or perhaps disturbingly, there were revelations last week that Bank of England deputy Governor Paul Tucker had a conversation with Diamond at the peak of the crisis in 2008. The conversation reportedly left Diamond, and subsequently his traders, with the impression that the bank had carte blanche to rig LIBOR downward in order to help allay spiraling public fears about the banks’ poor financial health.

Ready, Fire, Aim - The Epicurean Dealmaker - The news out of Old Blighty this morning that Bob Diamond, CEO of Barclays, has resigned under pressure seems to indicate the ongoing LIBOR fixing scandal is finally gaining enough momentum to fly off the rails. The current rumblings are that Mervyn King, Governor of the Bank of England, wiggled his stately eyebrows disapprovingly and conveyed, with the minimum regulatory fuss, that, yes, indeed, he would be exceedingly obliged if the presumptuous Mr. Diamond were encouraged to remove himself forthwith to a less embarrassing locale. Like, say, Inner Mongolia.  Increasingly lost in the hubbub surrounding this folderol is the nature of the offense. Diamond himself admitted that Barclays did two things wrong. First, certain traders within the bank apparently cajoled, wheedled, and perhaps even bribed the employees charged with submitting Barclay’s LIBOR fixing over a period of several years in order to book profits or reduce losses on their own proprietary positions. While this manipulation may have benefited these individual traders, it is not at all clear that it benefited the bank as a whole. As a huge global commercial and investment bank, Barclays stands on the paying and receiving end of tens if not hundreds of thousands of financial contracts indexed to LIBOR, which is the base rate underlying hundreds of trillions of dollars of loans, mortgages, derivatives, and other financial contracts around the world. On many of these contracts, Barclays pays interest calculated as a spread to LIBOR, and on many others it receives the same. As a whole, one would only be able to determine Barclays’ exposure to LIBOR if one summed up all these obligations to determine its net exposure. It is an empirical question. If one takes the theoretical position that a huge bank like Barclays as a whole should normally be structurally short floating rates—that is, is a net short-term borrower which pays floating rate interest—then one can say an artificial reduction in LIBOR should in fact benefit it by reducing its borrowing costs.¹

Lie More, as a Business Model - Simon Johnson - On Monday, Robert E. Diamond Jr., the chief executive of Barclays, one of the largest banks in the world, was supposedly the indispensable man, with his supporters contending that he was the only person who could see the global megabank through a growing scandal. On Tuesday, Mr. Diamond resigned, and the stock market barely blinked. In fact, Barclays stock was up three-tenths of 1 percent.  Mr. Diamond’s fall was spectacular and complete. It was also entirely appropriate. Dennis Kelleher of Better Markets, a financial reform advocacy group, summarized the situation nicely in an interview with the BBC World Service on Tuesday. The controversy that brought down Mr. Diamond had to do with deliberate and now acknowledged deception by Barclays staff with regard to the data they reported for Libor, the London Interbank Offered Rate. Mr. Kelleher was blunt: the issue is “Lie More,” not Libor (pronounced LIE-bore). This post on his blog makes the point that this behavior affects credit transactions with a face value of at least $800 trillion. Mr. Kelleher’s words may seem harsh, but they are exactly in line with the recently articulated editorial position of The Financial Times, not a publication generally hostile to the banking sector. In a scathing editorial on June 28, (“Shaming the Banks Into Better Ways” ), the editorial writers blasted behavior at Barclays and nailed the broader issue in what it called “a long-running confidence trick”: The Barclays affair may lack the spice of some recent banking scandals, involving as it does the rather dry “crime” of misreporting interest rates. But few have shone such an unsparing light on the rotten heart of the financial system.

Wall Street Bank Investors In Dark On Libor Liability -- Barclays investors, blindsided by the bank’s $451.4 million regulatory fine for trying to rig benchmark rates, saw the stock drop 16 percent a day later. Other bank shareholders may be just as surprised.  Barclays, like other lenders that help set key rates for $360 trillion in securities, has given investors scant guidance on the liability they face for alleged market manipulation. More than a dozen banks are being probed by U.S., Asian and European regulators for collusion in setting interbank lending rates. The others have mirrored Barclays on minimal disclosure.  Bank of America Corp., Citigroup Inc. (C), Royal Bank of Scotland and UBS are among the lenders whose participation in setting the London and Europe interbank offered rates, known as Libor and Euribor, are under investigation. None of the banks would say if they set aside reserves to cope with potential liabilities and, if so, how much.

Useless Hearings on Bank Fraud - We know that our Senators and Congressfolk use congressional hearings to grandstand, or to promote their ignorance into something that sounds like profundity. I had hopes for the British Parliament’s inquiry into the LIBOR scandal, based on watching MPs going at each other in the open sessions on C-SPAN. The British people are genuinely outraged by Barclays’ admission that it fraudulently fixed the interest rate charged to millions of customers and on billions if not trillions of financial instruments. My hopes were shared by The Guardian’s liveblogger, Andrew Sparrow, who wrote that today would be “… some kind of day of reckoning for banking as a whole.” After it was over, he repents; I apologise. I was clearly talking nonsense. There wasn’t any kind of reckoning at all. The MPs castigated Bob Diamond for presiding over a bank involved in multiple banking scandals. (See 16.16am) But Diamond broadly refused to accept any blame, insisted that he acted properly as soon as the abuses were brought to his attention and claimed (particularly in his final answer) that Barclays was being unfairly stigmatised because it had actually been so much better than the other banks at ‘fessing up. That castigating probably would sound more impressive with a British accent, but it had the same effect that Jeff Merkley had on Jamie Dimon: none at all.

On Internal Indexes, like LIBOR -- When I was a life actuary, following the deferred annuity market, the concept of market-value-adjusted annuities arose.  Annuity values could react like bonds to:

• An external index rate, or,
• An internal index, driven off of the new money rate for annuities

Now, the internal index sounds soft, but it is not so.  Yes, you can lower your new money rate but reserves grow on indexed products.  You can raise your rates, but reserves will shrink.  It’s not perfect here, but the internal index will work over the long haul. So when I look at LIBOR and potential manipulation, I don’t see a lot of reason for concern. When bond deals are priced, the relative yield is what is priced; it does not matter what the benchmark is, roughly the same overall yield would have been obtained.  Spreads are a way of expressing the excess yield over equivalent maturity government or AA bank (swap/LIBOR) yields.  They are a result of the process, not a driver of the process. If 3-month LIBOR were replaced by the on-the-run 3-month Treasury yield, new deals would be priced, and the spreads would be higher by the TED (EuroDollar – Treasury) yield spread.

The Big Losers in the Libor Rate Manipulation - We know that the big banks conspired to manipulate Libor rates, with the approval of government authorities. We know that the Libor manipulation effected the world’s largest market – interest rate derivatives. But who are the biggest victims? Sometimes the big banks manipulated the Libor rates up, and sometimes down.  Different groups of people got hurt depending which way the rates were gamed. Bloomberg’s Darrell Preston explained last year how cities and other local governments got scalped when rates were manipulated downward: In the U.S., municipal borrowers used swaps to guard against the risk of higher interest costs on variable-rate debt by exchanging payments with another entity and tying how much they pay to an underlying value such as an index. The agreements can backfire if rates move in unexpected directions, resulting in issuers making larger payments.The derivatives were often designed to offset the risks of increases in the short-term rates tied to auction-rate securities, fixing borrowers’ costs by trading their debt- service payments with another party. Instead, rates dropped. The yield on two-year Treasury notes fell from about 5.1 percent in June 2007 to a record 0.14 percent on Sept. 20. On Oct. 6, the U.S. Treasury sold $10 billion of five-day cash- management bills at 0 percent.

Yes, Virginia, the Real Action in the Libor Scandal Was in the Derivatives - - Yves Smith  -- As the Libor scandal has given an outlet for long-simmering anger against wanker bankers in the UK, there have been some efforts in the media to puzzle out who might have won or lost from the manipulations, as well as arguments that they were as “victimless” or helped people (as in reporting an artificially low Libor during the crisis led to lower interest rate resets on adjustable rate loans pegged to Libor; what’s not to like about that?) What we have so far is a lot of drunk under the streetlight behavior: people trying to relate the scandal to the part that is most visible and easy to understand, meaning the loan market that keys off Libor. As much as that’s a really big number ($10 trillion), it is trivial compared to the relevant derivatives. From the FSA letter to Barclays:  The Eurodollar futures contract traded on the CME in Chicago (which is the largest interest rate futures contract by volume in the world) has US dollar LIBOR as its reference rate. The value of volume of that contract traded in 2011 was over 564 trillion US dollars. This is only one blooming exchange contract, albeit a monster of a contract. There are loads of OTC contracts in addition to that: Interest rate derivative contracts typically contain payment terms that refer to benchmark rates. LIBOR and EURIBOR are by far the most prevalent benchmark rates used in euro, US dollar and sterling OTC interest rate derivatives contracts and exchange traded interest rate contracts.

LIBOR 4-1-9 -- I remember the first time I had to toil through the turgid definitions and legal boilerplate constituting the LIBOR provisions of a typical syndicated loan agreement. I remember saying to myself I hope I never have to look at this shit again. But it was not to be. During the course of my career I had to read the same whiteshoe goobldygook over and over, including when I took out my last mortgage. Why? Because it is ubiquitous in modern finance. Interest rate clauses are one of the basic foundations of debt. Yet LIBOR is not the kind of thing that the average man on the street or paid political hack thinks about or even recognises by reference. Search "LIBOR" in google news. Better yet, search " LIBOR cesspit." You will see that there are literally thousands of news stories covering the nascent LIBOR scandal, which obviously encompasses Barclays and the entire TBTF banking system. Suddenly English politicians are calling it a "massive cesspit." These are the same people who chose to ignore that every facet of the ongoing global financial crisis somehow winds its way back into the financial Liberia known as the City of London (e.g. AIG Financial, Lehman, MF Global, London Whale to name but a few). The truth is what we all ready know. You would be very very hard pressed to find a pristine ungamed corner of TBTF banking. It is not that the politicians don't know this. It is that they have been paid to shut their mouths. And now they will be paid to control the damage from this unfortunate LIBOR situation as best they can.

Skimmers - I can't put a number on it, but I don't think it's hyperbole to describe the LIBOR manipulation as theft at an almost unimaginable scale. One issue with too big banks, a too big banking system, and generally asleep regulators, is that the amount of money to be made by shifting any key rates by even a tiny unnoticeable amount is huge. A teensy percentage of a trillion dollars is still big money. Free money for the Great Casino, government backstopping of losses, and legal means to take a chunk of every transaction aren't enough for them. They want to steal some more. But they're extraordinary people, so what's to be done?

Why the LIBOR scandal is a bigger deal than JPMorgan - Last week, Barclay’s admitted to rigging the London InterBank Offered Rate (LIBOR) and agreed to pay U.S. and British regulators $450 million dollars in penalties to settle the case. Then the heads began to roll: On Tuesday, its CEO, Bob Diamond, and COO Jerry del Missier resigned, and yesterday Diamond told a British parliamentary inquiry that regulators in Washington and London alike were complicit in his manipulations. This is a big deal. Remember that JP Morgan scandal a few months back? That was mostly JP Morgan hurting itself. The LIBOR scandal was Barclay’s making money by hurting you. In the simplest terms, LIBOR is the average interest rate which banks in London are charging each other for borrowing. It’s calculated by Thomson Reuters — the parent company of the Reuters news agency — for the British Banking Association (BBA), a trade association of banks and financial services companies. The actual process of determining the rates is dead simple, and in fact conducted by only two people. Donald MacKenzie described the process in the London Review of Books:

Stiglitz: Much of What Goes on in the Financial Sector is Rent-Seeking - An interview with Joe Stiglitz: Why does growing inequality matter? ... We care about inequality partly because we pay a high price in terms of our economic performance. We care about it also because of the impact that it has in every other aspect of our society -- our democracy, our rule of law, our sense of identity or a land of opportunity -- because we aren't anymore. The people at the top are not the people who made the most contributions to our society. Some of them are. But a very large proportion (is) simply people I describe as rent-seekers -- people who have been successful in getting a larger share of the pie rather than increasing the size of the pie.  ...[W]e don't understand the extent to which our economy has really become a rent-seeking economy. How has the financial sector contributed to the growing inequality? Much of what goes on in the financial sector is this kind of rent-seeking. The most dramatic example was the predatory lending and the abusive credit card practices, which took money from people on the bottom and the middle often in a very deceptive way, sometimes in a fraudulent way, and moved it to the top....There is another example where the financial sector has been particularly bad. They pushed for laws like our bankruptcy laws that gave priority to derivatives. In bankruptcy, derivatives got protected and workers and everybody else has to swallow their losses. That encourages more risk-taking.

Joseph Stiglitz: Man who ran World Bank calls for bankers to face the music - The Barclays Libor scandal may have shocked the British public, but Joseph Stiglitz saw it coming decades ago. And he's convinced that jailing bankers is the best way to curb market abuses. A towering genius of economics, Stiglitz wrote a series of papers in the 1970s and 1980s explaining how when some individuals have access to privileged knowledge that others don't, free markets yield bad outcomes for wider society. That insight (known as the theory of "asymmetric information") won Stiglitz the Nobel Prize for economics in 2001. When traders working for Barclays rigged the Libor interest rate and flogged toxic financial derivatives – using their privileged position in the financial system to make profits at the expense of their customers – they were unwittingly proving Stiglitz right. "It's a textbook illustration," Stiglitz said. "Where there are these asymmetries a lot of these activities are directed at rent seeking [appropriating resources from someone else rather than creating new wealth]. That was one of my original points. It wasn't about productivity, it was taking advantage." Yet Stiglitz's interest in the abuses of banks extends beyond the academic. He argues that breaking the economic and political power that has been amassed by the financial sector in recent decades, especially in the US and the UK, is essential if we are to build a more just and prosperous society. The first step, he says, is sending some bankers to jail. " That ought to change. That means legislation. Banks and others have engaged in rent seeking, creating inequality, ripping off other people, and none of them have gone to jail."

Following Barclays’ Scandal, Stiglitz says ‘Send Bankers to Jail’ - Nobel Prize winner and former World Bank economist Joseph Stiglitz has called recent revelations that Barclays and other large banks colluded to defraud their costumers by artificially leveraging international interest rates a "textbook illustration" of how banks use privileged information and lax oversight to reap rewards for themselves while savaging the wider societies in which they operate.  In an interview with The Independent on Monday, Stiglitz argued (with Barclay's as just the most recent example) that bankers -- without threat of prosecution or jail time -- would continue to use their elevated status to exploit weak regulations, consolidate power, and avoid accountability. The scandal at Barclays claimed the resignation on Sunday of Chairman Marcus Agius after traders at the bank admitted manipulating Libor, a baseline interest rate used by banks to set lending costs around the world and which acts as the benchmark, according to an estimate by Reuters, on $350 trillion in derivatives and other financial products. Stiglitz argues, in paraphrase by interviewer Ben Chu, "that breaking the economic and political power that has been amassed by the financial sector in recent decades, especially in the US and the UK, is essential if we are to build a more just and prosperous society. The first step, he says, is sending some bankers to jail."

Bad Bankers May Face Criminal Charges Bloomberg video

Schneiderman (Technically, Obama) Financial Fraud Task Force Takes Credit for Busting Barclay’s on Libor, Peter Madoff -  Yves Smith  - Normally I try to avoid dumping on the same person twice in a short period of time, no matter how much they deserve it, but a post by masaccio at Firedoglake on the PR exercise known as the Financial Fraud Task Force deserves amplification. Recall when Schneiderman turned Quisling to the efforts by a small group of state attorneys general to craft a decent mortgage settlement, his shiny prize was being appointed as one of a number of co-chairmen to the so-called Financial Fraud Task Force. This was actually an effort to wrestle new propaganda value from an initiative that has been largely moribund since its creation in 2009 (technically, the 2012 effort is called the “Residential Mortgage-Backed Securities Working Group” of the Financial Fraud Task Force). Occasionally, various interested parties look for signs of life from this group. They’ve consistently reported back that perilous little appears to be happening. Masaccio looked through press releases on the official website, and found they confirmed one of the theories voiced by Neil Barofsky and your humble blogger, among others, namely, that the task force was merely consolidating existing efforts, and not adding much (if anything) new. Masaccio’s reading showed that the few big fish, such as the fines for Barclays over Libor-rigging and further fallout from the Bernie Madoff Ponzi scheme, were ongoing efforts on which some members of the task force arguably played a role, and had nothing to do with the State of the Union head fakery. And the few announcements that were mortgage related were so penny-ante so as to prove that there is still no intent to go after big players, despite widespread evidence of rampant fraud.

What’s Next After the Barclays Settlement - The settlement by Barclays over accusations that it manipulated the benchmark London interbank offered rate, or Libor, is like the first crack of thunder signaling a coming storm; the question now is how big the storm will be. It has already claimed the bank’s chief executive, Robert E. Diamond Jr., who announced his resignation on Tuesday, and the potential for criminal prosecutions looks strong. Barclays admitted to submitting false information at the behest of its traders to benefit pricing for derivatives, and later providing incorrect interest rates to counter media speculation about the bank’s stability. The Justice Department did not require the bank to plead guilty to any crimes by allowing it to enter into a nonprosecution agreement, no doubt to avoid the potential consequences a criminal conviction would have. The bank also reached settlements with the Commodity Futures Trading Commission and the Justice Department in the United States, and the Financial Services Authority of Britain, paying about $450 million in fines and civil penalties. Barclays was not the first bank to reach an agreement in the Libor investigation. In July 2011, UBS disclosed that it had received a grant of conditional immunity under a leniency program of the Justice Department’s Antitrust Division, which allowed the first company to report violations to receive a free pass on any criminal prosecution.

JP Morgan, Barclays, Other Banksters Investigated for Manipulating Electricity Markets - The Financial Times reported yesterday that the Staff of the Federal Energy Regulatory Commission (FECR) was investigating a number of electric power marketing affiliates owned by major banks — including JP Morgan Chase, Barclays, Deutsche Bank AG, and others, on charges of manipulating electricity prices.  Immediately, reporters starting wondering whether this is like Enron’s antics back in the early 2000s, which ripped off California consumers and decimated California’s flawed electricity markets.  I don’t think it’s the same kind of schemes, but we need more information. FERC is the federal regulator for electricity markets in the US, with jurisdiction over interstate transmission and the grid operations that include the regional power markets.  The information is sketchy now, but the Staff alleges that the banks’ power traders were manipulating bids and possible generator operations to increase prices in at least two regional US electricity markets, California and the Midwest ISO region.  Reuters, Bloomberg, HuffPo and others then picked up on the story without adding anything on how the alleged manipulation worked, so it’s still unclear exactly what they’re alleged to have done. The question is, what were these bank-affiliated power traders doing?  I’ll get to that in a minute, and it looks like the San Francisco Chronicle picked up a clue, perhaps without knowing it.

Feds investigate JPMorgan for possible energy market manipulation - The Federal Energy Regulatory Commission (FERC) subpoenaed JPMorgan twice in the past three months on allegations that the bank manipulated energy markets for financial gain, court filings show. The filings, made on Monday, revealed FERC is investigating the banking giant for "abusive" tactics that resulted in "at least $73 million in improper payments." FERC made the filings with the U.S. District Court in Washington, D.C. California and Midwest energy organizations claim JPMorgan engaged in manipulative bidding practices between March and June 2011, according to a Financial Times report Tuesday that cited the court documents.

JPMorgan in US power market probe -- The US electricity regulator has subpoenaed JPMorgan Chase twice in the past three months as it investigates whether the bank manipulated power markets in California and the Midwest region, court filings showed.  The Federal Energy Regulatory Commission revealed the probe in court papers filed on Monday that said the bank’s bidding practices may have inflated electricity costs by at least $73m.  Wholesale electricity has attracted heightened regulatory attention since the California energy crisis of 2000-01, when Enron and other traders were accused of rigging supplies and causing blackouts.  FERC has in the past year alleged Barclays and Deutsche Bank manipulated electricity markets and has compelled Constellation Energy to pay $245m to settle another case. Barclays and Deutsche declined to comment.  The disclosure comes as JPMorgan is already under intense scrutiny by authorities since its shock disclosure in May of more than $2bn in trading losses related to credit derivatives positions.  The electricity investigation involves whether JPMorgan’s bidding strategies extracted “inflated” or “excessive” payments from two wholesale power markets serving California and several Midwest states. The bank’s commodities business owns or has rights to output from several electric generators.

JPMorgan probed over possible power market manipulation (Reuters) - U.S. energy regulators have subpoenaed JPMorgan Chase & Co to produce 25 internal emails as part of an investigation into whether the bank manipulated electricity markets in California and the Midwest. The Federal Energy Regulatory Commission (FERC), which has recently stepped up its efforts to end manipulation of U.S. power markets, filed a petition in federal court on Monday to require the bank to produce emails from 2010 and 2011 as part of a formal investigation into the bank's power trading. News of the subpoena follows a series of more advanced probes of other big Wall Street banks and a record $245 million penalty against Constellation Energy that have sent shudders through electric markets this year, rekindling memories of the California power crisis and Enron melt-down a decade ago. The inquiry also comes at a delicate moment for JPMorgan , already facing losses from its disastrous "London Whale" derivative trades that could amount to as much as $6 billion. FERC does not normally disclose investigations, but it chose to subpoena JPMorgan after the bank claimed emails - some between commodities chief Blythe Masters and head of principal commodity investments Francis Dunleavy - were protected by attorney-client privilege, which the regulator disputes. "The investigation focuses on JPMorgan bidding practices that may have been designed to manipulate the California and Midwest electricity markets," FERC lawyers said in the subpoena. "Any such improper payments to generators are ultimately borne by the households, businesses, and government entities that are the end consumers of electricity."

Judge orders JPMorgan to explain withholding emails (Reuters) - A U.S. judge has ordered JPMorgan Chase & Co to explain why the court should not force the bank to turn over 25 internal emails demanded as part of an investigation into whether it manipulated electricity markets in California and the Midwest. The Federal Energy Regulatory Commission (FERC) filed a petition in federal court in Washington on Monday asking the court to order the bank to show cause as to why it would not comply with a subpoena issued by the commission as part of its investigation into the bank's power trading. On Thursday, U.S. District Judge Colleen Kollar-Kotelly gave the bank until July 13 to submit an explanation as to why the court should not enforce FERC's subpoenas. JPMorgan has asserted the emails are protected by the attorney-client privilege.

The Many Ways Banks Commit Criminal Fraud - Here is a partial list:

• Committing massive and pervasive fraud both when they initiated mortgage loans and when they foreclosed on them (and see this)
• Pledging the same mortgage multiple times to different buyers. See this, this, this, this and this
• Cheating homeowners by gaming laws meant to protect people from unfair foreclosure
• Charging veterans unlawful mortgage fees
• Engaging in mafia-style big-rigging fraud against local governments. See this, this and this
• Cooking their books (and see this)
• Bribing and bullying ratings agencies to inflate ratings on their risky investments
• Pushing investments which they knew were terrible, and then betting against the same investments to make money for themselves. See this, this, this, this and this
• Engaging in unlawful “frontrunning” to manipulate markets. See this, this, this, this, this and this
• Engaging in unlawful “Wash Trades” to manipulate asset prices. See this, this and this
• Otherwise manipulating markets. And see this
• Shaving money off of virtually every pension transaction they handled over the course of decades, stealing collectively billions of dollars from pensions worldwide. Details here, here, here, here, here, here, here, here, here, here, here andhere
• Participating in various Ponzi schemes. See this, this and this
• Charging “storage fees” to store gold bullion … without even buying or storing any gold . And raiding allocated gold accounts
• Laundering money for drug cartels. See this, this and this (indeed, drug dealers kept the banking system afloat during the depths of the 2008 financial crisis)
• Owning and largely running the Federal Reserve … which is itself arguably a Ponzi scheme

Punytive Damages? World’s Biggest Corporate Fines -  Bad week for mega-corps. GlaxoSmithKline facing a $3 billion settlement for fraud (link) . Barclays hit with a $450 million penalty for manipulating interest rates (link). But are these punishments proportional to the crime? After all, one company’s million-dollar fine is another corporation’s small change. We’ve gathered and visualized the biggest corporate fines of the last seven years, not just as raw amounts, but also as a percentage of each company’s profits. That way you can see for yourself if the punishment was painful or puny… See the visualization  --  See the data -- These settlements are scattered and hard to find. So let us know if we missed any.

Bailout Update - $1.5 Trillion Still Owed To Treasury, Fed - A new study released by the Center for Media and Democracy (CMD) shows that, despite rosy statements about the bailout's impending successful conclusion from federal government officials, $1.5 trillion of the $4.8 trillion in federal bailout funds are still outstanding. The analysis, presented in charts and an online table and program profiles, is based entirely on government records. This comprehensive assessment of the bailout goes beyond the relatively small Troubled Asset Relief Program (TARP) program to look at the rest of the Treasury and Federal Reserve's multi-trillion dollar response to the financial crisis. It shows that while the TARP bailout of Wall Street (not including the bailout of the auto industry) amounted to $330 billion, the government also quietly spent $4.4 trillion more in efforts to stave off the collapse of the financial and mortgage lending sectors. The majority of these funds ($3.9 trillion) came from the Federal Reserve, which undertook the actions citing an obscure section of its charter.

Banks in US reveal ‘living will’ details - Nine of the world’s largest banks doing business in the US have told regulators how they should be broken up in the event that one of them nears failure. The so-called “living wills” provide regulators with detailed road maps that would help the government prevent a repeat of taxpayer-funded bailouts that took place during the financial crisis. Called for by the 2010 Dodd-Frank overhaul of US financial regulations, the plans came in two parts: a detailed confidential plan for regulators; and a general overview for the public of what would happen to the banks. JPMorgan Chase, Bank of America, Goldman Sachs, Citigroup, Morgan Stanley, Barclays, Credit Suisse, Deutsche Bank and UBS were the first to submit the living wills. More than 125 institutions are expected to produce resolution plans eventually. But the public portions of the plans contained few details beyond what the banks have already produced in securities filings. Dwight Smith, an attorney with Morrison & Foerster who is helping banks produce their living wills, said: “They really don’t provide much insight.” By comparison, a hypothetical plan by JPMorgan, explaining what would happen if it suffered a $50bn loss, forecast a “run on the bank” that might result in an additional $150bn loss and $200bn of temporary government funding to ensure the company was resolved smoothly.

Scant detail in big banks' 'living wills' - (video & transcript) The so-called "living wills" of the nine largest U.S. banks are now available for viewing. Filed this week, the documents are supposed to prevent another "too big to fail" scenario -- they tell regulators what the banks plan to do in the event they become insolvent. But very few details of the plans were publicly disclosed. So will the wills do their job?

Good news for the big banks - Noni Mausa - The Associated Press had an article this morning about how well the banking sector is recovering from the financial crisis.  I had to giggle -- it's like reporting that little Billy is feeling better now after getting a tummyache from eating Little Susie's entire birthday cake.  I commented online to that article, but here's my comment for your delectation.
And this is being presented as GOOD news?  Let's see:
-- Interest rates are down, so they're not making money off interest, or not much.
-- Loans are being offered "cautiously," which I guess means they're only loaning to people and businesses who don't really need it.
-- Instead, they are profiting from "higher account fees and more mergers," that is, charging more the same or lesser services. (Could you remind me how this cannot be a drag on the economy?)
-- Bank failures are slowing -- but hundreds of banks have closed down (http://www.fdic.gov/bank/individual/failed/banklist.html) or been swallowed up by others since 2000.  Thirty-one have closed in 2012 alone, all smaller, local banks from the look of the lists. http://www.zacks.com/stock/news/77303/bank-failures-31-so-far-in-2012

Fannie and Freddie Demands Could Pressure Bank Earnings - Regional lenders may see “material” mortgage-putback pressure on earnings as recent signs suggest Freddie Mac and Fannie Mae are “sharpening their focus on recovery” of rep and warranty claims, Fitch says. The ratings agency cited recent announcements by PNC Financial, SunTrust and First Horizon, which are boosting reserves to cushion against future mortgage putback claims. The broader focus would be a “significant shift” in claims activity as the five largest U.S. mortgage originators, including Bank of America, Wells Fargo and JPMorgan Chase, accounted for more than 85% of claims by the GSEs and private-label MBS investors. Fitch does not expect increased claims pressure to have much impact on bank ratings.

GSE Debates Show How Little We’ve Learned -- Pssst. Fannie and Freddie caused the entire financial crisis! That was the adamant conclusion of an event held last week at the American Enterprise Institute. Cast as an attempt to "break through the wall of media ignorance and bias" by host and AEI Fellow Peter Wallison, the event received scant press coverage. But it went a long way toward demonstrating how shoddy the discussion of the government-sponsored enterprises and housing policy has become. There are plenty of good arguments for winding down Fannie and Freddie, but blaming them for the global financial crisis isn't one of them. Each side of the conversation has failed to carry its weight. Depending on who's doing the attacking, the GSEs are invariably assailed as either a nasty government housing policy intrusion into the financial sector or a nasty financial-sector intrusion into government housing policy. It's the pro-market team versus the pro-housing subsidy team, and Wallison's an unabashed member of the former.  The star guest at the AEI panel was Oonagh McDonald, a former member of the British Parliament who has written a book pinning the genesis of the housing crisis on Bill Clinton's 1995 National Home Ownership Strategy. Yet for someone with such an excellent recollection of history, McDonald appeared to botch some extraordinarily basic elements of GSE securitization in her speech. How did the U.S. housing decline touch off a worldwide financial crisis, for example?

Corporate Profits at All-Time High; Wages at All-Time Low: Can We Call it Class War Yet? - This week, David Segal at the New York Times broke the news to America that not only was Apple -- the computer and gadget manufacturer formerly seen as a symbol of good old American ingenuity -- making its profits on the backs of abused factory workers in China, but also on poorly paid store employees here in the US. Apple store workers, he wrote, make up a large majority of Apple's US workforce—30,000 out of 43,000 employees in this country—and they make about $25,000 a year, or about $12 an hour. Lawrence Mishel at the Economic Policy Institute notes that that's just a dollar above the federal poverty level. This for a company that paid nine of its top executives a total of $441 million in 2011.“The discrepancy between Apple’s profits/executive pay and its compensation to its workers is a particularly glaring example of what is occurring in the wider economy,” Mishel writes. And he's right. Also this week, Henry Blodget at Business Insider posted three charts that show just how out of whack our economic system really is. Corporate profits are now at an all-time high, while wages as a percent of the economy are at an all-time low, and fewer Americans are employed than at any time in the previous three decades.

Fighting over Claims - This brief segment from a recent speech by Joe Stiglitz sums up very neatly the nature of our current economic predicament (emphasis added): We should realize that the resources in our economy... today is the same is at was five years ago. We have the same human capital, the same physical capital, the same natural capital, the same knowledge... the same creativity... we have all these strengths, they haven't disappeared. What has happened is, we're having a fight over claims, claims to resources. We've created more liabilities... but these are just paper. Liabilities are claims on these resources. But the resources are there. And the fight over the claims is interfering with our use of the resources. Part of the reason for our anemic and fitful recovery is that contested claims, especially in the housing market, continue to be settled in a chaotic and extremely wasteful manner. Recovery from subprime foreclosures is typically a small fraction of outstanding principal, and properly calibrated principal write-downs can often benefit both borrowers and lenders. Modifications that would occur routinely under the traditional bilateral model of lending are much harder to implement when lenders are holders of complex structured claims on the revenues generated by mortgage payments. Direct contact between lenders and borrowers is neither legal nor practicable in this case, and the power to make modifications lies instead with servicers. But servicer incentives are not properly aligned with those of the lenders on whose behalf they collect and process payments. The result is foreclosure even when modification would be much less destructive of resources.

Reis: Office Vacancy Rate unchanged in Q2 at 17.2% - Reis reports that the office vacancy rate was unchanged in Q2 at 17.2%. Comments from Reis Senior Economist Ryan Severino:  The office sector absorbed 4.138 million SF during the second quarter, the sixth consecutive quarterly gain in occupied stock since the beginning of 2011. However, national vacancies ceased falling.. National asking and effective rent both grew by 0.3% during the second quarter, but this represents a slowdown from the 0.5% and 0.6% growth rates that asking and effective rents respectively achieved during the first quarter. Annual gains of 1.6 and 2.0 percent, respectively, are virtually unchanged from last quarter, and remain feeble. Supply growth in the office sector remains muted. During the second quarter of 2012 only 1.606 million square feet of office space were completed, the equivalent of one large office building. This represents the lowest quarterly level on record since Reis began tracking quarterly market data in 1999. Nonetheless, demand for space during the quarter was so weak that even with such little supply being delivered, the level of absorption that we observed during the quarter was insufficient to generate a vacancy rate decline.  This graph shows the office vacancy rate starting in 1980 (prior to 1999 the data is annual).

Hot new filing claims internal docs show rating agencies lied on MBS - If you're reasonably literate about the financial crisis, you probably know that the credit rating agencies have slipped through the carnage like a cat walking away from a knocked-over vase. With their opinions on publicly offered mortgage-backed securities protected by the First Amendment, Standard & Poor's and Moody's have won dismissals of the vast majority of MBS investor claims against them in state and federal court, despite powerful evidence from congressional investigations that they worked with underwriters to confer investment-grade ratings on securities backed by dreck. With one possible exception, the only surviving cases against rating agencies involve claims by investors in private placements, who have successfully argued that private ratings aren't protected free speech. The near-spotless litigation record of the rating agencies means we've seen very little internal evidence, in the form of emails between rating execs, emails between the agencies and underwriters and deposition testimony from credit rating agency insiders.  Until Monday. In a series of filings in federal court in Manhattan, Abu Dhabi Commercial Bank and its lawyers at Robbins Geller Rudman & Dowd disclosed thousands of pages of internal communications and deposition transcripts to back their claims that S&P and Moody's are liable for fraud and negligent misrepresentation in connection with their rating of a structured investment vehicle underwritten by Morgan Stanley.

Liars, Crooks and Thieves | Fraudclosure - Another Accidentally Leaked Email, This Time By Albertelli Law and Wells Fargo -  Well, well, well... Look what we have here. Another attempt by the Fraudclosure industry to steal a home in the name of the wrong plaintiff. This is almost identical to what happened in the LOPEZ case. See here, here, here, here, here, and here, but potentially much worse. Could this one be real trouble for the parties involved? This one goes a little something like this... From pages 11-14 below... 

Wells Fargo: Um, your firm just sent us a rush request on this file, but before we can take care of that for you can you please take care of the request I been waiting for? Been waiting on your sorry asses and we need to steal this house ASAP since there are some issues that need to be addressed. Oh, and by the way, can you send us a copy of the complaint? Something might not be right.

Albertelli Law: We have no idea what your are talking about, (like usual) could you be more specific? 
Wells Fargo: Yes David. Here is the message I sent over in LPS Desktop:  We are in the process of trying to complete the theft judgment affidavit on this file, however the one that was received has the Plaintiff as DEUTSCHE BANK AS TRUST COMPANY AMERICAS AS TRUSTEE FOR GMAC-RFC MASTER SERVICING. We have the plaintiff as U.S. BANK, NATIONAL ASSOCIATION, AS TRUSTEE FOR RALI 2006-QSB. Once the change is fabricated acknowledged by your office we will forge execute the affidavit received. Your office can assign the bid at sale or the affidavit can be falsified resubmitted to judgementaffidavit@wellsfargo.com mailbox with an amended plaintiff name. Either option to steal this house is acceptable to us - please advise on how your office will proceed to impose a fraud on the court proceed within 48 hours or the file will be stopped.

Quelle Surprise! State Legislatures Aren’t Buying Bogus Mortgage Settlement -- Yves Smith -- The Obama Administration’s full-bore effort to push a bank-favoring mortgage “settlement” over the line earlier this year has led to a rearguard action that appears to have caught the mortgage industrial complex and its allies flatfooted. As Nick Timiraos reports in the Wall Street Journal, states are disgusted with the way that banks have ignored their long-established real estate laws. Many are passing new legislation to put more teeth into existing requirements to offer modifications to borrowers that could be salvaged and comply with foreclosure procedures. You can detect the consternation from his story: States across the country are proposing a range of new rules that would make it more difficult for banks to foreclose on troubled homeowners. The moves have been prompted by concerns that lenders have been inefficient in restructuring mortgages, which results in unnecessary foreclosures, while using shoddy paperwork to repossess homes. Lenders are strongly resisting the measures, arguing that they will introduce new bottlenecks in the foreclosure process that could obstruct the incipient housing recovery. Notice how the two sides are talking past each other? The beef of the states is that banks are failing to negotiate in good faith with borrowers, and thus breaking the law there and with their reliance on bogus documentation in foreclosures. The banks, amazingly, continue to insist that more foreclosures are good for the market. Since when is increasing supply (homes for sale out of foreclosure) likely to yield an increase in prices?  The reality is that banks make more foreclosing than they do on mods, even with bribes from taxpayers like HAMP 2.0. Doing a mod is tantamount to underwriting a new loan. The servicers would have to set up new infrastructure to do that, and they don’t want to make the investment. On top of that, their existing servicing platforms are terrible, so a good deal of borrower abuse comes from their refusal to improve their systems.

Big Foreclosure Compensation, But Only for the Right Wrongs - Can you put a price on the damage caused by a wrongful foreclosure? Banking regulators have. And it’s $125,000. Or $60,000. Or $15,000. Or… it’s unclear. Last November, banking regulators launched a process to force the big banks to compensate homeowners victimized by their foreclosure abuses. Many crucial details remained unclear [1], including how much victims might receive. More than seven months later, regulators finally released a “framework” [2] that shows some of the possible outcomes. It’s a list of thirteen mortgage servicing “errors,” each with its own associated form of compensation. In addition to fixing the bank’s errors, remedies include cash payments ranging from $500 all the way up to $125,000. It turns out that, for homeowners seeking compensation for those errors and abuses, it’s crucially important just how the servicer messed up. The logic for the differences in payment isn’t always apparent and in some instances seems to defy common sense.  Two homeowners who each had their bid for a modification mishandled, for instance, could emerge with either $125,000 or $15,000 depending on just where in the process the error occurred. Regulators also left unsettled how homeowners will be compensated for so-called robo-signing, the scandal that provoked the foreclosure review to begin with.

Quelle Surprise! GAO Finds Foreclosure “Request a Review” Materials Too Complicated for a Lot of Borrowers - 07/06/2012 - Yves Smith  - Readers may remember that one of the outcomes of the robosigning scandal was that mortgage servicers entered into consent decrees with the OCC and other regulators in early 2011.  One component of the OCC program was “independent” foreclosure reviews that would be offered to borrowers to determine if they had been harmed by a foreclosure and provide restitution. The servicers were required to do “outreach” to borrowers who might have suffered to give them the opportunity to request a review. You have to understand that this was never a good faith effort, even though HUD secretary Donovan trumpeted these assessments as an important part of “social justice.” The purpose of every new bank review process implemented since the Obama administration took office has been to go through the motions of being thorough (typically not convincingly, as with the first stress test and the Foreclosure Task Force demonstrate ) and give a clean bill of health. Having the OCC look at a whole passel of foreclosures and say, “See, the overwhelming majority were OK” would be an important step in turning the clock back to before the robosigning scandal broke. The participation has been underwhelming, given the theoretical upside to borrowers. After extending the deadline twice, the servicers got a 5% response rate. The GAO, which was asked to look into this matter, came down on the servicers for their failure to develop jargon-free, readable materials.  The GAO was not impressed with that, and referred to Federal “plain language” guidelines that stress the importance of avoiding jargon and writing to the level of the audience, which in the US means at the eight grade level or lower. By contrast, the mailings were scored at the second year college reading level (roughly that of this blog). Now of course, one should never attribute to malice that which can be explained by incompetence. But there is ample evidence they’ve been using every trick at their disposal to to throw a spanner in the works of these reviews. From a post by Abigail Field:

New Agency Plans to Make Over Mortgage Market - Over the next six months, the Consumer Financial Protection Bureau, a newly formed regulator vilified by the right, intends to overhaul the home mortgage market as a first step toward improving its fairness and clarity. The goal is to remake the process of getting a mortgage, making it easier for borrowers to understand the kind of loan they are getting and its cost.  Such an achievement by the bureau —  a lightning rod for criticism of the Dodd-Frank regulatory law passed by Congress in 2010 — would help to establish its legitimacy and quiet its critics as it approaches its first birthday this month.  Richard Cordray, a former Ohio attorney general who is the director of the bureau, said he wanted to show that the bureau could help consumers without drowning banks in red tape. “We have an overarching goal here,” Mr. Cordray said in an interview in his office near the White House, “which is to restore trust in the consumer financial marketplace. I don’t think we are just a regulatory body or just an enforcement body.”  The mortgage market is at the top of the agenda because “it’s the market where consumers have the most at risk and they have the most at stake,” Mr. Cordray said. “I expect that the mortgage market in the fairly near term will look different in the sense that, first of all, it will be a clearer and more straightforward place for consumers, and second, it will be a more reliable market.”

California Passes Significant Protections Against Illegal Foreclosure Processes - Pressured by a coalition of activists and state Attorney General Kamala Harris, the California legislature completed a months-long project yesterday to significantly improve its foreclosure process.  The measure gives homeowners a new right to sue over fraudulent practices, ends dual tracking – where servicers process foreclosures while negotiating loan modifications – and extends a single point of contact at all borrowers. The state Assembly passed the companion bills by 53-25, with the Senate passing by 25-13. The bill is crucial, because according to the latest statistics, more than 362,000 California homes are in foreclosure or seriously delinquent, and another 700,000 are at risk. A tough anti-fraud policy in the nation’s largest state will create ripple effects through the mortgage industry and could lead to an overall change in practices. “Each day’s not equal in the lives of these homeowners,” said Kamala Harris, the Attorney General who pushed for the changes to state foreclosure law, in an interview with FDL News. She stressed the need to set up clear rules for foreclosures that enable the borrower to get a fair chance and for violaters of the law to face consequences.

Attorney General Kamala D. Harris Announces the Passage of Additional Components of the California Homeowner Bill of Rights -- Attorney General Kamala D. Harris today announced that the non-conference committee components of the California Homeowner Bill of Rights have passed out of legislative committees. “The entire Homeowner Bill of Rights legislative package will create a level playing field for California homeowners,” said Attorney General Harris. “In addition, it will allow my office to continue to prosecute those who take advantage of homeowners who are desperate to stay in their houses.” Assembly Bill 1950, authored by Assemblymember Mike Davis (D-Los Angeles), passed out of the Senate Judiciary today. The bill extends the statute of limitations for prosecuting mortgage related crimes from one year to three years, giving the Department of Justice ample time to investigate and prosecute mortgage fraud crimes. Two bills to provide additional protections to tenants who rent homes that are foreclosed upon also passed out of the Senate Judiciary and Assembly Judiciary Committees today.

Some Advice from the IMF: Cramdown Mortgages in Bankruptcy - The International Monetary Fund has focused its critical gaze on us. Just in time for the holiday marking the end of our colonial period, the IMF has completed its "Mission to the United States of America."  See here.  The IMF has held up its neocolonial mirror and found us problematic: "The U.S. recovery remains tepid."  Anyone disagree? Annoying to have outsiders tell us the truth. There are many recommendations about how we could reinvigorate our economy. Notably, at number 10, there is this:  "Consideration should also be given to allowing mortgages on principal residences to be modified in personal bankruptcy without secured creditors’ consent (cram-downs)."

IMF: Principal Reductions Now! - The International Monetary Fund has explicitly called for principal reductions for underwater borrowers to deleverage individual balance sheets and jumpstart a soft recovery. An endorsement of principal reductions at such an establishment level could remove some of the stigma, and force a deeper reckoning over the need for them. And the IMF goes further, stating that the US should consider cram-down, the ability for judges to discharge and rewrite the terms of mortgage debt in bankruptcy. The IMF cited three major impediments to US growth over the next two years: household deleveraging, fiscal restraint and subpar global demand. All three go hand in hand; fiscal restraint will reduce demand, and so will deleveraging, which reduces consumption. The US cannot do much about slow global demand and growth, but we can impact our own fiscal situation here. And the IMF believes that one of the few upside risks in the economy is in the housing market: A more positive outlook for the housing market can also be envisaged, with a faster-than-expected recovery in housing starts associated with pent-up demand. The recovery could also strengthen if the policy measures aimed at a faster resolution of the housing crisis gain traction. Emphasis mine. What are those resolutions? Topping the list for the IMF are principal reductions

How the Fannie and Freddie Could, But Won’t, Cut the Housing Gordian Knot - Yves Smith - The ongoing, still unresolved issue of the mortgage mess is that irresponsible, unaccountable, self-serving “agents” called servicers manage foreclosures and mortgage modifications. Pretty much anyone who has looked at the problem argues that mortgage modifications to viable borrowers would lead to lower losses to investors and less damage to the housing markets than the Mellonite “Liquidate real estate” program in place now.  The reason we seem unable to get off this destructive path is servicers are paid to foreclose, and not to modify, hence they have set themselves up pretty much only to foreclose. And even with bribes like HAMP 2.0 (and increasingly, threats, like pending legislation in California and other states that puts more teeth in the requirement that a servicer negotiate with a stressed borrower), servicers really can’t be bothered. Part of it is their existing software platforms are held together with bubble gum and rubber bands; the other part is that they’d have to create new infrastructure, with very different staffing and management approaches than in their existing businesses.  So it appears servicers need more pressure applied to them to make them offer mods to borrowers. Adam Levitin has come up with a new idea that could be implemented readily, at least for Fannie and Freddie borrowers:  Under current bankruptcy law, a Chapter 13 plan may be confirmed only if secured creditors receive their collateral, receive the value of their collateral, or consent to the plan. The legislative proposals for cramdown all sought to enable involuntary modification of mortgages; cramdown was to be the stick that would encourage voluntary modifications.  But we could have voluntary cramdown under existing law and this could be done on a large scale staring immediately. Specifically, FHFA could require the GSEs to adopt a policy of consenting to Chapter 13 plans that have cramdown.

Cities in California Consider Seizing Mortgages - A handful of local officials in California who say the housing bust is a public blight on their cities may invoke their eminent-domain powers to restructure mortgages as a way to help some borrowers who owe more than their homes are worth. Investors holding the current mortgages predict the move will backfire by driving up borrowing costs and further depress property values. "I don't see how you could find it anything other than appalling,"Eminent domain allows a government to forcibly acquire property that is then reused in a way considered good for the public—new housing, roads, shopping centers and the like. Owners of the properties are entitled to compensation, which is usually determined by a court. But instead of tearing down property, California's San Bernardino County and two of its largest cities, Ontario and Fontana, want to put eminent domain to a highly unorthodox use to keep people in their homes. The municipalities, about 45 minutes east of Los Angeles, would acquire underwater mortgages from investors and cut the loan principal to match the current property value. Then, they would resell the reduced mortgages to new investors.

Investors With Ties To Buffett, Soros, Obama Plan Mortgage Eminent Domain Grab - A group of businessmen with ties to Warren Buffett, George Soros, President Obama, and socialist senator Bernie Sanders are pushing a plan to use the government's power of eminent domain to seize billions of dollars worth of underwater mortgages from banks and bondholders. Word of the plan surfaced earlier this month in a Reuters dispatch that reported the eminent domain strategy but not the political ties of the businessmen involved in the plan nor their links to two of America's most prominent and outspoken billionaires. The Reuters article said a firm called Mortgage Resolution Partners, chaired by Steven Gluckstern, a former owner of the New York Islanders hockey team, was working with politicians in Nevada, Florida, and California's San Bernadino County to advance the plan.California, Florida, and Nevada all changed their state laws to make it harder to use eminent domain after the Supreme Court's 2005 decision in Kelo v. City of New London allowed a Connecticut city to seize a private home for a corporate development plan and ignited a national political storm over government property condemnations via eminent domain. In the case of the mortgages, lawyers may be able to argue that the anti-Kelo laws do not apply because the houses themselves aren't being condemned, just the mortgages. They may also argue that the mortgage condemnations, by preventing foreclosures, are actually consistent with the anti-Kelo law's intent of allowing people to remain in their homes.

Over 2.5 million delinquent mortgages to be resolved this year; shadow inventory shrinking quickly - In spite of the fear mongering taking place in the media and in the blogosphere with regard to the US housing "shadow inventory", considerable progress is being made in shrinking the oversupply of distressed properties around the country.  CoreLogic: -

• As of April 2012, shadow inventory fell to 1.5 million units, or four-month’ supply and represented just over half of the 2.8 million properties currently seriously delinquent, in foreclosure or REO.
• The four-month’ supply of shadow inventory is at its lowest level in nearly three years. It parallels the unsold months’ supply of non-distressed active listings that hit a more than five-year low in April, falling to a 6.5-months’ from a 9.1-months’ supply just a year ago.
• Of the 1.5 million properties currently in the shadow inventory, 720,000 units are seriously delinquent (two months’ supply), 410,000 are in some stage of foreclosure (1.1-months’ supply) and 390,000 are already in REO (1.1-months’ supply).
• The dollar volume of shadow inventory was $246 billion as of April 2012, down from $270 billion a year ago and a three-year low.

FHFA: "Robust" Market Reponse to Bulk REO Pilot Program -- From the FHFA: FHFA Announces Next Steps in REO Pilot Program The Federal Housing Finance Agency (FHFA) today announced that the winning bidders in a real estate owned (REO) pilot initiative have been chosen and transactions are expected to close early in the third quarter. Market response has been robust with strong qualified bidder interest. “FHFA undertook this initiative to help stabilize communities and home values in areas hard-hit by the foreclosure crisis,” said Edward J. DeMarco, Acting Director of FHFA. “As conservator of Fannie Mae and Freddie Mac, we believe this pilot program will assist us in achieving our objectives and help to maximize the benefit to taxpayers. We are pleased with the response from the market and look forward to closing transactions in the near future.” FHFA launched the pilot program in late February, and in the second quarter bids were solicited from qualified investors to purchase approximately 2,500 single-family Fannie Mae foreclosed properties. Fannie Mae offered for sale pools of properties in geographically concentrated locations across the United States.

MBA: Mortgage Applications Decrease, Record Low Mortgage Rates - From the MBA: Mortgage Applications Decrease Driven by a Drop in Refinances in Latest MBA Weekly Survey The Refinance Index was down about 8 percent overall this week, largely driven by a significant drop in refinance applications for government loans. The HARP 2.0 share of refinance applications has been 24 percent over the past two weeks, up slightly from 20 percent three weeks ago. The seasonally adjusted Purchase Index increased less than 1 percent from one week earlier. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.86 percent from 3.88 percent, with points increasing to 0.41 from 0.40 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. This is the lowest 30-year fixed rate since MBA began tracking the series.  The decline in refinance activity was from a very high level. This just offset the surge in refinance activity two weeks ago related to the change in FHA streamline refinancing. The purchase index is mostly moving sideways.

Housing: Investor Buying in Oakland - A report on investor buying in Oakland: Who Owns Your Neighborhood? The Role of Investors in Post-Foreclosure Oakland. From the San Francisco Chronicle: Investors buying, renting many Oakland foreclosures According to the Urban Strategies Council's report, real estate investors have purchased - usually with cash - 42 percent of the 10,508 homes in Oakland that went into foreclosure between January 2007 and October 2011.  Many of these investors are turning the homes into rental properties  "They are massive landlords in neighborhoods that historically have had high rates of homeownership, and very few people are aware of the investor activity that's taking place under their feet," said Steve King, the organization's housing and economic development coordinator... In its report, the Urban Strategies Council, which focuses on development issues in low-income urban areas, argues that banks and government-controlled financial institutions Fannie Mae and Freddie Mac could be doing more to help families buy foreclosed homes.

Housing: Seriously Dude, Where's my inventory? - Here is another update using inventory numbers from HousingTracker / DeptofNumbers to track changes in listed inventory. Tom Lawler mentioned this last year. According to the deptofnumbers.com for (54 metro areas), inventory is off 24.2% compared to the same week last year. Unfortunately the deptofnumbers only started tracking inventory in April 2006. This graph shows the NAR estimate of existing home inventory through May (left axis) and the HousingTracker data for the 54 metro areas through early July. Since the NAR released their revisions for sales and inventory last year, the NAR and HousingTracker inventory numbers have tracked pretty well.  On a seasonal basis, housing inventory usually bottoms in December and January and then starts to increase again through the summer. So inventory might still increase a little over the next month or two, but the forecasts for a "surge" in inventory this summer were incorrect. In fact inventory might have already peaked for the year! The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker. HousingTracker reported that the early July listings, for the 54 metro areas, declined 24.2% from the same period last year. So far in 2012, the NAR has reported only a small seasonal increase in inventory - and the housing tracker numbers are lower in early July than for January!  This decline in active inventory remains a huge story, and the lower level of inventory is helping stabilize house prices.

CoreLogic: House Price Index increases in May, Up 2.0% Year-over-year - Notes: This CoreLogic House Price Index report is for May. The Case-Shiller index released last week was for April. Case-Shiller is currently the most followed house price index, however CoreLogic is used by the Federal Reserve and is followed by many analysts. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic® May Home Price Index Shows Third Consecutive Monthly Increase - Home prices nationwide, including distressed sales, increased on a year-over-year basis by 2.0 percent in May 2012 compared to May 2011. On a month-over-month basis, home prices, including distressed sales, also increased by 1.8 percent in May 2012 compared to April 2012. The May 2012 figures mark the third consecutive increase in home prices nationwide on both a year-over-year and month-over-month basis. Excluding distressed sales, home prices nationwide increased on a year-over-year basis by 2.7 percent in May 2012 compared to May 2011. On a month-over-month basis excluding distressed sales, the CoreLogic HPI indicates home prices increased 2.3 percent in May 2012 compared to April 2012, the fourth month-over-month increase in a row. Distressed sales include short sales and real estate owned (REO) transactions. This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index was up 1.8% in May, and is up 2.0% over the last year.  The index is off 30% from the peak - and is up 5% from the post-bubble low set in February (the index is NSA, so some of the increase is seasonal). The second graph is from CoreLogic. The year-over-year comparison has turned positive. This is the third consecutive month with a year-over-year increase, and excluding the tax credit bump, these are the first year-over-year increases since 2006.

Trulia: Asking House Prices increased in June - Press Release: Rent increases outpace home prices rises, reports Trulia Trulia today released the latest findings from the Trulia Price Monitor and the Trulia Rent Monitor ... Based on the for-sale homes and rentals listed on Trulia, these monitors take into account changes in the mix of listed homes and reflect trends in prices and rents for similar homes in similar neighborhoods through June 30, 2012. Asking prices on for-sale homes–which lead sales prices by approximately two or more months – increased 0.3 percent in June month over month (M-o-M), seasonally adjusted. With the exception of nearly flat prices in May, prices rose in four of the past five months. Asking prices in June rose nationally 0.8 percent quarter over quarter (Q-o-Q), seasonally adjusted. Year-over-year (Y-o-Y) asking prices rose by 0.3 percent; excluding foreclosures, asking prices rose Y-o-Y by 1.7 percent. Nationally, 44 out of the 100 largest metros had Y-o-Y price increases, and 84 out of the 100 largest metros had Q-o-Q price increases, seasonally adjusted.  However, seven of the 10 metros with the largest increase in asking prices also have a high share of homes in foreclosure, including Phoenix, the Florida metros, and Detroit and its suburbs. More from Jed Kolko, Trulia Chief Economist: Rising Home Prices Can’t Keep Up with Rent Increases, According to Trulia, rents are increasing even faster than house prices.

House Prices: Goldman sort of Calls the Bottom - Goldman Sachs put out a research note today: House Prices Finding a Bottom. This isn't a strong call, and is only a slight upward revision to their previous forecast. As they note, there are many factors adding to the "noise" in the house price indexes (distressed sales, foreclosure moratorium, recent warm weather), and a 0.2% increase in prices over the next year isn't much. A few brief excerpts:  [O]ur model projects a nominal house price gain of 0.2% from 2012Q1 to 2013Q1 and another 1.4% from 2012Q1 to 2013Q1. Taken literally, this would imply that the bottom in nominal house prices is now behind us. While the recent house price news is encouraging, we would not yet sound the "all clear" for the housing market or the broader economy. First, the instability in the seasonal factors over the past few years is a potential source of noise in the recent house price indicators, and also in our model. ... In addition, the seasonal factors can be also distorted by one-off items ... All of these complications ... adds to the uncertainty as to whether the better recent numbers indicate a true turnaround in the US housing market. Second, even if the market is gradually turning, as our model implies, the difference between a slightly declining and a slightly increasing national average for home prices is minor, especially given the wide variation between stronger and weaker markets.

Housing Crisis Could End Suburbia As We Know It - If there’s a defining image of the housing crunch, it might be the demolition of four brand-new luxury homes in Victorville, Calif. The developer built them in September 2007 as part of a planned 16-unit project, but abandoned the effort after home prices in the area fell more than 50 percent in 18 months. After foreclosing, the Texas-based bank, which held the loan, decided it was cheaper to tear them down than to cut prices and sell. So it hired a wrecking crew that flattened the homes and sold off the gorgeous granite countertops, whirlpool baths and double-pane windows to passers-by.That story represents what’s happening to Victorville itself, a fringe suburb of 116,000 in the high desert 100 miles north of Los Angeles as it slides toward higher unemployment, rising crime and increased poverty. Warren Karlenzig, who runs an urban planning consulting firm, has been watching Victorville as part of his research on the future of suburbs nationally, and has little hope for the area’s recovery.  Nationally, some experts say that the housing collapse may have tipped far-flung suburbs like Victorville into permanent stagnation. Brookings Institution demographer William Frey cites new census data showing that all of the 100 fastest-growing exurbs and outer suburbs experienced lower growth from 2008 to 2011 compared with 2003 to 2007.

Construction Spending in May: Private spending increases, Public Spending declines - This morning the Census Bureau reported that overall construction spending increased in May: The U.S. Census Bureau of the Department of Commerce announced today that construction spending during May 2012 was estimated at a seasonally adjusted annual rate of $830.0 billion, 0.9 percent above the revised April estimate of $822.5 billion. The May figure is 7.0 percent above the May 2011 estimate of $775.8 billion. Private construction spending increased while public spending decreased:  Spending on private construction was at a seasonally adjusted annual rate of $560.4 billion, 1.6 percent above the revised April estimate of $551.8 billion. ... In May, the estimated seasonally adjusted annual rate of public construction spending was $269.6 billion, 0.4 percent below the revised April estimate of $270.7 billion.This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted. Private residential spending is 61% below the peak in early 2006, and up 17% from the recent low. Non-residential spending is 28% below the peak in January 2008, and up about 30% from the recent low. Public construction spending is now 17% below the peak in March 2009 and at a new post-bubble low.

Vital Signs: Construction Spending Picks Up - Construction spending grew in May as more building by the private sector offset a continued slide in government construction. Total U.S. construction spending increased to an $830 billion annual rate in May, up 7% from a year ago. The uptick was driven by growth in the volatile multifamily housing segment as well as continued improvement in the single-family housing market.

Reis: Apartment Vacancy Rate falls to 4.7% in Q2 - Reis reported that the apartment vacancy rate (82 markets) fell to 4.7% in Q2 from 4.9% in Q1 2012. The vacancy rate was at 5.9% in Q2 2011 and peaked at 8.0% at the end of 2009. From Reuters: US apartment rents rise at highest rate since '07 -Reis Renting an apartment in the U.S. became even more expensive during the second quarter, as vacancies set a new 10-year low and rents rose at a pace not seen since before the financial crisis, according to real estate research firm Reis Inc. ... The average U.S. vacancy rate of 4.7 percent was the lowest since the fourth quarter of 2001 ... Asking rents jumped to $1,091 per month, 1 percent higher than the first quarter and the biggest increase since the third quarter of 2007. Excluding special perks designed to lure tenants, like months of free rent, the average effective rent rose 1.3 percent to $1,041.

Reis: Mall Vacancy Rate declines slightly in Q2 -- Reis reported that the vacancy rate for regional malls declined slightly to 8.9% in Q2 from 9.0% in Q1. This is down from a cycle peak of 9.4% in Q3 of last year. For Neighborhood and Community malls (strip malls), the vacancy rate declined to 10.8% in Q2, from 10.9% in Q1. For strip malls, the vacancy rate peaked at 11.0% in Q2 of last year. Comments from Reis Senior Economist Ryan Severino:  [Strip mall] The national vacancy rate fell by 10 bps during the second quarter to 10.8%. This is the second consecutive quarterly decline in the vacancy rate after vacancies had generally been rising between the second quarter of 2005 and the fourth quarter of 2011. Although demand for space remains weak, new construction remains moored at such low levels that even weak demand is sufficient to push vacancy rates downward. Only 572,000 SF of neighborhood and community center space were delivered during the quarter. That is the second-lowest quarterly figure on record since Reis began publishing quarterly data in 1999. This graph shows the strip mall vacancy rate starting in 1980 (prior to 2000 the data is annual). The regional mall data starts in 2000. Back in the '80s, there was overbuilding in the mall sector even as the vacancy rate was rising. This was due to the very loose commercial lending that led to the S&L crisis.  In the mid-'00s, mall investment picked up as mall builders followed the "roof tops" of the residential boom (more loose lending). This led to the vacancy rate moving higher even before the recession started. Then there was a sharp increase in the vacancy rate during the recession and financial crisis.

Vital Signs: Americans Saving More - Americans are saving more money. The personal saving rate — savings as a percentage of after-tax income — rose to a seasonally adjusted 3.9% in May, up from 3.7% in April and 3.4% in February. Workers are seeing modestly higher earnings and lower oil prices are keeping inflation in check. Consumers appear to be holding on to the extra money and not spending it.

U.S. consumers better at debt repayment for now - (Reuters) - U.S. consumers continued to make improvements in paying back their debts during the first quarter of this year but the trend may slow in the coming quarters, the American Bankers Association said on Tuesday. The ABA said consumer delinquencies fell in 10 of 11 categories it tracks, including personal loans, bank cards and direct auto loans. The only category in which delinquencies rose was in home equity lines of credit. That rate of delinquency rose to 1.78 percent of all accounts from 1.69 percent the prior quarter, which the ABA attributed to the sluggish recovery in the housing sector. The ABA defines a delinquency as a late payment that is 30 days or more overdue. James Chessen, the chief economist for the ABA, said the first quarter was another period of strong improvement, but he warned that the gains will likely not be as dramatic going forward. "We've moved back to historical norms now and further improvement could be hard to achieve. The economy has slowed recently and uncertainty remains high,"

Consumer Bankruptcy filings Decrease 13 Percent in First Half of 2012 - From the American Bankruptcy Institute: Bankruptcy Filings Fall 14 Percent for the First Half of 2012, Commercial Filings Drop 22 Percent The 601,184 total noncommercial filings for the first half of 2012 represented a 13 percent drop from the noncommercial filing total of 691,902 for the first half of 2011. Total commercial filings during the first six months of the year were 30,946, representing a 22 percent decrease from the 39,598 filings during the same period in 2011. The 99,057 total bankruptcy filings for the month of June represented an 18 percent decrease compared to the 120,698 filings in June 2011. This graph shows the non-business bankruptcy filings by quarter using quarterly data from the ABI. Note: The spike in 2005 was due to the so-called "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005". (a good example of Orwellian named legislation). It is possible that consumer bankruptcy filings peaked in 2010, but filings might increase again next year as pre-bankruptcy act filers file bankruptcy again.

Retailers post worst June sales in three years— As economic uncertainty sapped both consumer confidence and sentiment in June, shoppers also exercised caution with their wallets and delivered U.S. retailers’ worst monthly sales in three years.  Total June sales at stores open at least a year — a key performance metric that strips out the impact of new and closed stores — rose 0.1%, missing the 0.5% gain Wall Street was looking for. That was the smallest pace since sales declined in August 2009, according to Thomson Reuters. Sales rose 6.7% a year earlier. More than two-thirds of 20 retailers that reported their results missed estimates, Thomson Reuters data showed.  “Consumers are holding back, cautious and losing confidence,” said IHS Global Insight economist Chris Christopher.  Shortfalls were seen Thursday from discounters Costco Wholesale and Target Corp.to department-store operator Macy’s Inc. and teen-oriented Buckle Inc.  Signaling that retailers in the middle continued to be squeezed, Kohl’s Corp.’s sales fell a bigger-than-expected 4.2%. The company said second-quarter profit would be at the low end of its previously forecast range of 96 cents to $1.02 a share.

June Retail Sales Reflect Consumer Qualms - Many Chain Stores Notch Disappointing Receipts; Those Catering to Well-Heeled Were an Exception.  Lower gasoline prices and steep promotions did little to get America's consumers out shopping last month. June retail sales grew at the slowest pace in more than two years, held back by flagging consumer confidence. More than half of the stores that report same-store sales in June missed analysts' expectations, which had been relatively muted to begin with. Mid-tier department stores such as Macy's Inc. and Kohl's Corp. fared particularly badly, suggesting that middle-class consumers are losing confidence in the economy and turning to discounters like Wal-Mart Stores Inc. and Dollar General Corp., as they did in the recession years.  The 18 retail chains tracked by Thomson Reuters together registered a 2.5% rise in June sales, measuring stores open at least a year and excluding drugstore chains. The figure out Thursday compares to a 7.7% surge in June of 2011, and was the lowest since November 2009, when sales edged up 0.9%.

Economic Fears Take Toll on Retail Sales in June - Retailers reported largely disappointing sales in June, as consumers pulled back on spending amid concerns about jobs and the economy. Thomson Reuters was expecting its same-store sales index to inch up 0.5 percent in June, far weaker than a year-ago when the index rose 6.7 percent in June. However, when the results were in, the index only rose 0.1 percent, as many retailers fell short of analysts' estimates. Although June tends to be a weaker month on the retail calendar with fewer reasons to drive shoppers to the store, some retailers said the weak results were enough to hurt their earnings forecasts. The weak results also raise some concerns heading into the back-to-school shopping season, which is the second busiest time fror retailers after the Christmas holiday period.

AAR: Rail Traffic "mixed" in June, Intermodal at Record Level -  Once again rail traffic was "mixed". This was mostly due to the year-over-year decline in coal traffic. Building related commodities were up such as lumber and crushed stone, gravel, sand. Lumber was up 11.4% from June 2011. From the Association of American Railroads (AAR): AAR Reports Mixed Rail Traffic for June The Association of American Railroads (AAR) today reported U.S. rail carloads originated in June 2012 totaled 1,140,271, down 1.3 percent compared with June 2011. Intermodal volume in June 2012 totaled 996,022 containers and trailers, up 49,168 units or 5.2 percent compared with June 2011. The June 2012 average weekly intermodal volume of 249,006 units is the highest average for any June on record and the third highest for any month, behind August and October 2006. This graph shows U.S. average weekly rail carloads (NSA).  U.S. rail carload traffic in June 2012 wasn’t as encouraging as intermodal traffic, but it was better than it’s been lately. U.S. freight railroads originated 1,140,271 carloads in June, an average of 285,068 carloads per month and down 1.3% from June 2011..Grains are down due to fewer exports. The second graph is for intermodal traffic (using intermodal or shipping containers): Intermodal traffic is now at peak levels. U.S. railroads originated 996,022 intermodal containers and trailers in June 2012, up 5.2% (49,168 units) over June 2011 and an average of 249,006 units per week.  The top months for intermodal are usually in the fall, and it looks like intermodal traffic will be at record levels this year.

Romney's Independence Day Advice: Buy Foreign: America commemorates its Independence Day this week with food, festivity and fireworks. To supply these events, Mitt Romney recommends: Buy foreign. Romney's decisions over his business and political career clearly illustrate that for him the most important symbol isn't the American flag. It's the almighty dollar. As the CEO of Bain Capital, he could have invested in any sort of company. He chose several that helped corporations move or expand off shore. In fact, Romney was, as the Washington Post put it, a pioneer in this area. Romney took that "buy foreign" philosophy with him to the Massachusetts governor's mansion. There he specifically permitted state contractors to move work overseas. He vetoed legislation to forbid the practice. Romney thwarted lawmakers' attempt to stop a contractor from using state tax dollars to move work from America to India and Bangladesh. As a result, unemployed Massachusetts residents who called the state government for information on food stamps got connected to foreign nationals performing jobs that unemployed Americans could have had.

Weekly Gasoline Update: Prices Fall Further - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data with an overlay of West Texas Crude (WTIC). Gasoline prices at the pump, rounded to the penny, declined yet again over the past week: regular and premium both dropped 8 cents. This is the twelfth week of declines. Regular is now up only 13 cents and premium 11 cents from their interim weekly lows in the December 19th EIA report.As I write this, GasBuddy.com still shows the two non-continental states with the average price of gasoline above $4. California has the highest mainland prices, averaging around $3.72 a gallon with Idaho as the second highest at $3.62.

Update on U.S. gasoline prices - Two weeks ago, I commented on the tendency of U.S. retail gasoline prices to follow the price of Brent crude oil, anticipating on the basis of the price of Brent, then at $91.50, that we might expect to see average U.S. retail gasoline prices, then at $3.47, to fall an additional 35 cents/gallon. The gasoline price has since come down about 11 cents. But with Brent now surging back up near $100, this is about all we can expect. Here's an update of the Brent price and predicted gasoline price. With gasoline down and Brent up, the two are back to their long-run relation.

Auto Sales Stall With 500,000 Cut From 2013 U.S. Outlook - The pace of U.S. auto sales probably stalled for a second straight month in June as the labor market stumbled and confidence waned, leading analysts at Citigroup Inc. and Deutsche Bank AG to lower estimates for demand in 2013. Light-vehicle sales in June, set for release tomorrow, may have run at a 13.8 million seasonally adjusted annualized rate, the average estimate of 15 analysts surveyed by Bloomberg. That average estimate matches May’s rate, the year’s first month to dip below 14 million, and trails the 14.5 million pace in the first four months of 2012. Even with the slowdown, U.S. auto sales are on pace for the best annual total since 2007. With sales in Europe falling a fifth-straight year and China’s market slowing, automakers such as Ford (F) Motor Co. are counting on demand to warrant more production in North America to offset losses in other regions.  “We’re talking about less strength than earlier in the year,”

ISM Index of U.S. Manufacturing Declines in June - Manufacturing in the U.S. unexpectedly contracted in June for the first time in almost three years, indicating a mainstay of the U.S. expansion may be faltering.  The Institute for Supply Management’s index fell to 49.7, worse than the most-pessimistic forecast in a Bloomberg News survey, from 53.5 in May, the Tempe, Arizona-based group’s report showed today. Figures less than 50 signal contraction. Measures of orders, production and export demand dropped to three-year lows.  Assembly lines may be slowing as consumers temper purchases of vehicles and other goods and companies limit investments in new equipment. At the same time, export markets for manufacturers like DuPont Co. (DD) and Steelcase Inc. (SCS) are finding it more difficult as Europe struggles with a debt crisis and Asian economies including China weaken.  “The investment picture is softening in the face of all the uncertainty,”. “Europe is already weighing on the manufacturing sector, and U.S. growth is decelerating.”

ISM Reports Slowdown in Manufacturing - Today's ISM report suggests that economic activity in the U.S. manufacturing sector contracted slightly in June, as the overall ISM manufacturing index (PMI) fell below 50 for the first time since July 2009 (see chart above).  However, the direction of both the "manufacturing production" and the "manufacturing employment" sub-indexes are still considering to be "growing" according to the ISM, although both are now listed as "slowing" for the "rate of change."  Based on today's report, growth in the overall economy (GDP) could be slowing to 2.4% this year based on May's PMI, but could be as high as 3.5% based on the PMI during the first half of the year. Here are some highlights: "Manufacturing contracted in June as the PMI registered 49.7 percent, a decrease of 3.8 percentage points when compared to May's reading of 53.5 percent (see chart above). A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

ISM Manufacturing index declines in June to 49.7 - This is the first contraction in the ISM index since the recession ended in 2009. PMI was at 49.7% in June, down from 53.5% in May. The employment index was at 56.6%, down from 56.9%, and new orders index was at 47.8%, down from 60.1%. From the Institute for Supply Management: June 2012 Manufacturing ISM Report On Business® Economic activity in the manufacturing sector contracted in June for the first time since July 2009; however, the overall economy grew for the 37th consecutive month, The PMI registered 49.7 percent, a decrease of 3.8 percentage points from May's reading of 53.5 percent, indicating contraction in the manufacturing sector for the first time since July 2009, when the PMI registered 49.2 percent. The New Orders Index dropped 12.3 percentage points in June, registering 47.8 percent and indicating contraction in new orders for the first time since April 2009, when the New Orders Index registered 46.8 percent. The Production Index registered 51 percent, and the Employment Index registered 56.6 percent. The Prices Index for raw materials decreased significantly for the second consecutive month, registering 37 percent, which is 10.5 percentage points lower than the 47.5 percent reported in May. Here is a long term graph of the ISM manufacturing index. This was below expectations of 52.0%. This suggests manufacturing contracted in June for the first time since July 2009. This was a weak report, and the decline in new orders was especially significant.

US Manufacturing Shrinks for First Time in 3 years — U.S. manufacturing shrank in June for the first time in nearly three years, a troubling sign that the economy is faltering. The Institute for Supply Management, a trade group of purchasing managers, said Monday that its index of manufacturing activity fell to 49.7. That’s down from 53.5 in May and the lowest reading since July 2009, one more after the recession officially ended. Readings below 50 indicate contraction. The most troubling sign in the report was a sharp drop in a measure of new orders. The gauge plunged by the most in a decade, from 60.1 to 47.8. That’s the first time it has fallen below 50 since April 2009, when the economy was still in recession.

US Manufacturing ISM Contracts for First Time in Three Years; New Orders and Prices Plunge; Perfect Miss: 0 of 70 Economists Polled By Bloomberg Expected Contraction - US Manufacturing contracted this month as reported in the June 2012 Manufacturing ISM Report On Business® Economic activity in the manufacturing sector contracted in June for the first time since July 2009; however, the overall economy grew for the 37th consecutive month, "The PMI registered 49.7 percent, a decrease of 3.8 percentage points from May's reading of 53.5 percent, indicating contraction in the manufacturing sector for the first time since July 2009, when the PMI registered 49.2 percent. The New Orders Index dropped 12.3 percentage points in June, registering 47.8 percent and indicating contraction in new orders for the first time since April 2009, when the New Orders Index registered 46.8 percent. The Production Index registered 51 percent, and the Employment Index registered 56.6 percent. The Prices Index for raw materials decreased significantly for the second consecutive month, registering 37 percent, which is 10.5 percentage points lower than the 47.5 percent reported in May. A Bloomberg Survey shows the collapse in ISM was unexpected.  The median forecast in the Bloomberg survey called for a decline to 52. Estimates of 70 economists ranged from 50.5 to 53.5. The gauge averaged 55.2 in 2011 and 57.3 the prior year.

Breaking Down Contraction in Manufacturing Activity - Chief Economist Robert Brusca of Fact & Opinion Economics talks with Jim Chesko about a report showing that U.S. manufacturing activity contracted in June for the first time in nearly three years.

Economists React: ISM Indicates ‘Economy Is Going Nowhere’ -- Economists and others weigh in on the unexpected contraction in the U.S. manufacturing sector:

• –If you haven’t heard the news: stay on vacation, no reason to hurry back. This economy is going nowhere according to the purchasing managers at manufacturing firms. The latest reading from the Institute of Supply Management is saying the economy’s engines have gone into reverse at the start of the summer. –Christopher Rupkey, Bank of Tokyo-Mitsubishi
• –The fall in June’s ISM manufacturing index to below 50 for the first time since the last recession is the surest sign yet that the US is catching the slowdown already underway in Europe and China. But the index does not suggest that another recession is looming. –Paul Dales, Capital Economics
• –We never expected anything like the magnitude of the decline in the new orders index in June. The drop of 12.3 points in the orders index is the largest since October 2001 (when, in the wake of 9/11, the index dropped 12.4 points) and the second largest decline since December 1980. Thus we are dealing with an event that occurs in roughly one in 100 reports. The question, which we cannot answer at this point, is does this represent volatility reflecting fears over Europe (the export order index fell six points) and will orders bounce back (as the orders index did in November 2001) or is it a slide into something more worrying? –RDQ Economics

US manufacturing stalls - The US manufacturing sector, one of the stronger elements of the US recovery, has stalled. And it seems that not all of it is driven by declines in exports, with domestic demand weakening as well.  GS: - The nearly four-point drop in the US ISM in June marked its second consecutive fall, the biggest month-on-month decline since July 2011, and the weakest level since July 2009. Moreover, the composition of the ISM was particularly weak this month. New Orders, considered the most forward-looking constituent component, fell over 12 points – the largest monthly decline since October 2001, and one of the largest deteriorations on record. The New Exports component also weakened in June, reflecting slowing external demand. But as Andrew Tilton discussed in a recent US Daily, the drop in the New Orders index went well beyond what can be explained by weaker export activity, and therefore implies some deceleration in domestic demand as well.There is some uncertainty as to the exact causes of the declines in the US manufacturing activity. NYTimes: “Comments from the panel range from continued optimism to concern that demand may be softening because of uncertainties in the economies in Europe and China,” the I.S.M. report said.  The main drivers of the weakness were large reversals in new orders and exports, He attributed the deceleration in manufacturing to the inability of the economy to sustain a production surge in the first quarter of the year and to seasonal patterns that were distorted by the warm winter.

Charting the Drop in U.S. Manufacturing Activity - U.S. manufacturing activity is contracting, according to data from the Institute for Supply Management. The drop was led by a plunge in new orders, especially export orders. That offers a worrying sign about future demand. A subindex that look at employment was lower, but above 50, suggesting that manufacturers are still adding jobs, albeit at a slower rate.

Counterparties: The global manufacturing slowdown - In the US, today’s data from the ISM showed “contraction in the manufacturing sector for the first time since July 2009″. (As usual, Reuters’ Scotty Barber has the charts.) There were two particularly troubling data points. No one seemed very interested in buying things – new orders fell at the fastest pace in a decade; and people paid less for those things – prices paid fell at the fastest rate since just after 9/11. This is, as one analyst put it to the WSJ, a bad omen: “It is only a matter of time before the service sector mirrors the real goods slowdown and overall employment gains moves from sluggish to worse.” In its own manufacturing index released today, Markit Economics suggested the US manufacturing industry is slowing, but not quite in contraction. But like the ISM report, Markit’s data also showed that new orders fell. And the company’s own economist acknowledged that “the ISM suggests something drastic happened in June”. Then there’s Asia, where South Korea and Japan are in full manufacturing contraction territory. China’s manufacturing sector also shrank in June, and, as Kate Mackenzie notes, “the components of the index suggest the companies surveyed were busily producing without necessarily having any customers lined up”. Zero Hedge has BofA’s compilation of all of the grim global details: 17 of 24 major economies’ manufacturing sectors are now shrinking. Add all this up, and it explains why, globally, the manufacturing sector is technically in contraction. Thank God US fiscal policy is going to help out. Oh… wait.

Is Manufacturing Slowing or Shrinking? - Is the U.S. manufacturing sector slowing or is it falling off a cliff? The answer depends on which of the two manufacturing reports you looked at on Monday. According to the Institute for Supply Management’s closely followed and market-moving report on sentiment among factory purchasing managers, the U.S. manufacturing sector contracted in June for the first time in three years. The new orders index — a crucial gauge of future activity — plunged at a rate that hasn’t been seen since the aftermath of the September 11 terrorist attacks on the Pentagon and World Trade Center. Analysts used words like “plunged” and “awful” to describe the report. But a second purchasing managers’ report released Monday, this one from Markit Economics, was much more sanguine: Markit’s overall PMI index fell from 54.0 to 52.5 — slower, but well above an out-and-out contraction in activity. Meantime, Markit’s new orders sub-index fell to 53.7 from 54.6 — a far cry from the 12.3 drop reported by the ISM. Readings above 50 in both indexes signal expansion, while a number below that level is consistent with contraction. What happened? Chris Williamson, Markit’s chief economist, thinks the difference is mostly just noise. The movement in the ISM report is far too large to have been caused by seasonal factors or survey adjustments, he says.  It’s no coincidence that June’s month over month new orders drop was the largest since September 2001.

Is The June Slowdown In Manufacturing Activity A Sign Of Things To Come? - Manufacturing activity contracted in June, according to the Institute for Supply Management’s manufacturing index. For the first time since July 2009, the ISM Index slipped under 50, dropping to 49.7 last month. A reading below 50 indicates a contracting manufacturing sector.  Is this an early warning of a new recession? Perhaps, but we're still a long way from declaring the current growth phase of the business cycle dead. Like any one economic indicator, the ISM Index is far from flawless when it comes to using it as a benchmark for anticipating major turning points in the economy. To be precise, a below-50 reading for this indicator doesn't always correspond with recession. The history of this index is littered with periods when below-50 levels didn't equate with a new downturn in the broad economy. Then again, it's also clear that every recession in the post-World War II era has been accompanied by sub-50 readings in the ISM index. Sometimes a dip is relevant, sometimes not. It's too soon to say if today's today is an early warning or another false signal. Nonetheless, it's hard to overlook the latest reading for new orders, which tumbled sharply last month relative to May. On the other hand, manufacturing employment is holding steady.

'This Is Not Good': Factories Show Signs Of Slowing : NPR: U.S. manufacturing shrank in June for the first time in nearly three years, a troubling sign as evidence builds that economic growth is slowing. The Institute for Supply Management, a trade group of purchasing managers, said Monday that its index of manufacturing activity fell to 49.7. That's down from 53.5 in May and the lowest reading since July 2009, one month after the recession officially ended. Readings below 50 indicate contraction. Production fell to a three-year low and a measure of new orders plummeted by the most in more than a decade, suggesting the weakness will likely persist in the coming months. "This is not good. Not good at all," said Dan Greenhaus, chief economic strategist at BTIG, an institutional brokerage. While the report "does not mean recession for the broader economy, it is still a terribly weak number."

U.S. Auto Sales Top Estimates as GM, Ford Gain - General Motors, Ford Motor Co. and Chrysler said U.S. auto sales exceeded estimates in June as gains for the three carmakers and Nissan Motor surprised analysts by surpassing projections.  U.S. auto sales may have accelerated to faster than a 14 million seasonally adjusted annualized rate, GM and Chrysler said in e-mailed statements. The pace may be in the mid-14 million range, including medium- and heavy-duty trucks, Ford said in a conference call. The forecasts top the 13.8 million light-vehicle pace that was the average estimate of 15 analysts surveyed by Bloomberg. That average estimate matches the rate for May, the year’s first month to dip below 14 million.

U.S. Light Vehicle Sales at 14.1 million annual rate in June - Based on an estimate from Autodata Corp, light vehicle sales were at a 14.08 million SAAR in June. That is up 22% from June 2011, and up 2.6% from the sales rate last month (13.73 million SAAR in May 2012). This was above the consensus forecast of 13.9 million SAAR (seasonally adjusted annual rate).  This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for June (red, light vehicle sales of 14.08 million SAAR from Autodata Corp). June was the weakest month this year, and the year-over-year increase was large because of the impact of the tsunami and related supply chain issues in May 2011. Sales have averaged a 14.28 million annual sales rate through the first half of 2012, up sharply from the same period of 2011. The second graph shows light vehicle sales since the BEA started keeping data in 1967. This shows the huge collapse in sales in the 2007 recession. Sales will probably increase some more, but most of the recovery from the depth of the recession has already happened.

Relief on Autos: Domestic Sales Up Strongly - I was bracing for a bad month on Auto sales. The chatter did not sound good but the numbers came in strong, especially for Domestically Sourced Trucks. Domestic Truck sales came in 6.14 million SAAR for what I believe is the highest rate since start of the recession. Cars came in well at 4.92 for an 11.06 total that is the best domestic month since Feb. Sales of imported cars and trucks on the other hand have slid every month since Feb and are now below levels from September of last year. Just looking at the raw numbers I think it is likely that auto production will contribute positively to GDP in Q2 though not likely through PCE. PCE on autos will be down but the auto component of Net Exports will likely be up. This is part of the nuance of the GDP numbers that make simplistic reads a bad idea. Even if sales of domestic cars to domestic buyers is up, the GDP numbers can show that as a decline in Personal Consumption offset by an even bigger decline in imports. Nowhere is a GDP number higher even though both domestic production and sales of domestics are higher.

Auto Sales in June Provided Bright Spot for U.S. Economy - The U.S. auto industry shrugged off a weakening labor market and waning consumer confidence in June, surpassing analysts’ estimates and completing the best first half for vehicle sales since 2008. General Motors Co. (GM), Ford Motor Co. and Chrysler Group LLC reported better than predicted gains from the year-earlier period in which they dominated the U.S. market because of vehicle shortages at Toyota (7203) Motor Corp. and Honda Motor Co. caused by Japan’s tsunami. The 22 percent June increase for the industry gives reason for optimism after analysts under- estimated demand following lower than projected sales in May.Light-vehicle sales accelerated to 14.1 million seasonally adjusted annualized rate, according to researcher Autodata Corp., beating the 13.8 million light-vehicle average of 15 analyst estimates surveyed by Bloomberg. The world’s second- largest auto market remains on pace for the best annual sales total since 2007. “The auto market continues to be the one bright spot in an otherwise complicated and generally negative marketplace,”

Orders to U.S. Factories Rise, First Time in 3 Mos - Orders placed with U.S. factories rose in May for the first time in three months, easing concern that manufacturing is faltering.  The 0.7 percent increase in bookings followed a revised 0.7 percent drop in the prior month, the Commerce Department said today in Washington. The median forecast of economists in a Bloomberg News survey called for a rise to 0.1 percent.  Europe’s debt crisis and a slowdown in Asian markets including China is restraining exports, weighing on the outlook for manufacturers like Joy Global and DuPont.  Business investment, a mainstay of growth, will provide less of a boost to the economy as a weakening labor market holds back American consumers from boosting purchases of vehicles and other goods.  “Orders were so weak in prior months that the healthy gain in May is not enough to buck the softening trend,”

Why Should Unemployed Manufacturing Workers Care If Engineering and Design Jobs Move Overseas? - Steven Pearlstein has a lengthy and somewhat confused discussion of offshoring in his Post column today. First of all, the discussion would be much more straightforward if it just referred to trade. There is no theoretical difference between the impact of imports through trade in general and the impact of outsourcing. It makes little difference to the U.S. economy whether a Chinese manufacturer sells computers to retail stores in the United States like Wal-Mart and Costco, or if Apple contracts with a Chinese manufacturer to produce computers that it will sell to Wal-Mart and Costco. By treating outsourcing as a special entity that is distinct from trade, Pearlstein creates unnecessary confusion. This unnecessary confusion prevents the piece from getting any clear grip on the issues involved. When the economy is below full employment, as most economists would concede today, then a trade deficit costs jobs. There is not much ambiguity about this fact.

ISM Manufacturing and Non-Manufacturing Business Activity Indexes - Earlier today the Institute for Supply Management published its June Non-Manufacturing ISM report on business. The more closely followed Manufacturing ISM report was published on Monday. The first chart below shows the Manufacturing series, which stretches back to 1948. I've highlighted the eleven recessions during this time frame and highlighted the index value the month before the recession starts. For a diffusion index, the June reading of 49.7 is slightly contractionary. How does that compare to the months before the start of recessions? Here are the eleven data points for the months before recessions arranged in numeric order with the latest data pointed included.  Seven were lower than the June data, and four were higher (the recessions that began in 1969, 1973, 1981 and 2007). The two extremes are rather interesting: At the high end is the month before the recession triggered 1973 Oil Embargo. The economy was clearly blindsided. At the low end was the recession following the Dot.com bust. The non-manufacturing series only dates back to July 1997, so we don't have a comparable historical perspective on the correlation of this indicator with recessions. Suffice to say that the June number for the Non-manufacturing Business Activity Index shows mild expansion and is fractionally above the level just before the start of the post-Dot.com recession. From its peak of 67.7 in January 2004, indicator had been trending downward for nearly four years prior to onset of the last recession. The recent pattern has been a downtrend since its post-recession peak of 65.4 in February of 2011.

U.S. Services-Sector Growth Slows -- The U.S. nonmanufacturing sector slowed more than expected in June, but employment prospects improved, according to data released Thursday by the Institute for Supply Management. The ISM’s nonmanufacturing purchasing managers’ index came in at 52.1 last month, from 53.7 in May. Forecasters surveyed by Dow Jones Newswires had expected last month’s PMI to fall to 53.0. Readings above 50 indicate activity is expanding. The non-manufacturing index has been in expansion territory for more than two years. The expansionary report from the non-manufacturing sector–comprised mostly of services–helps to lessen the recession worries triggered by Monday’s ISM report on the factory sector. That report showed manufacturing activity contracted last month and orders plunged. Within nonmanufacturing, the ISM subindexes in June generally were mixed. Importantly, the employment index rose to 52.3 after it had fallen sharply to 50.8 in May from 54.2 in April. Also within the ISM survey, the business activity/production index fell sharply to 51.7 from 55.6 in May, while the new orders index slowed to 53.3 from 55.5. Price pressures dropped again last month. The prices index declined to 48.9 from a contractionary 49.8 in May.

ISM Non-Manufacturing Index declines, indicates slower expansion in June -- The June ISM Non-manufacturing index was at 52.1%, down from 53.7% in May. The employment index increased in June to 52.3%, up from 50.8% in May. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: May 2012 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in June for the 30th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®. . "The NMI registered 52.1 percent in June, 1.6 percentage points lower than the 53.7 percent registered in May. This indicates continued growth this month at a slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 51.7 percent, which is 3.9 percentage points lower than the 55.6 percent reported in May, reflecting growth for the 35th consecutive month. The New Orders Index decreased by 2.2 percentage points to 53.3 percent, and the Employment Index increased by 1.5 percentage points to 52.3 percent, indicating continued growth in employment at a faster rate. The Prices Index decreased 0.9 percentage point to 48.9 percent, indicating lower month-over-month prices for the second consecutive month. According to the NMI, 12 non-manufacturing industries reported growth in June. Respondents' comments are mixed and vary by industry and company." This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

ISM Non-Manufacturing Services Index Declines 1.6% - NMI 52.1% for June 2012 - The June 2012 ISM Non-manufacturing report shows the overall index decreased, -1.6 percentage points, to 52.1%. The NMI is also referred to as the services index and the decline indicates slower growth for the service sector.  New orders decreased -2.2 percentage points, business activity dropped -3.9 percentage points and new export orders decreased by -3.5 percentage points. This is the lowest NMI since January 2010. Anything below 50% shows contraction for the non-manufacturing index. Below is a copy of the ISM services table, abbreviated. Below is the graph for the non-manufacturing ISM business activity index, or current conditions, what we're doin' now meter. Business activity decreased -3.9 percentage points to 51.7% and is also at January 2010 levels. Here is the ISM's ordered services sector business activity list: The industries reporting growth of business activity in June — listed in order — are: Educational Services; Arts, Entertainment & Recreation; Utilities; Management of Companies & Support Services; Information; Accommodation & Food Services; Retail Trade; Public Administration; Finance & Insurance; Construction; Transportation & Warehousing; and Wholesale Trade. The industries reporting decreased business activity in June are: Mining; Real Estate, Rental & Leasing; Other Services; Health Care & Social Assistance; and Professional, Scientific & Technical Services.

Vital Signs: Slowing in Nonmanufacturing - The service sector is slowing. The Institute for Supply Management’s nonmanufacturing index, a monthly measure of service-sector activity, fell to 52.1 in June from 53.7 in May. Readings above 50 indicate expansion, so the service economy is still growing. But the index has fallen three times in the past four months, and is now at its lowest level in 2½ years.

Federal budget cuts could hit energy companies -- Houston could lose more than $800 million by 2013 due to upcoming fedeeral budget cuts, according to a recent NPR story., and energy industry companies with government contracts could be among those hit. Under a deal forged during budget battles last year, Congress is set to cut $1 trillion from domestic spending and defense budgets. Texas received more than $35 billion from defense contracts last year. Fort Worth, with its aviatiaon industry, was the No. 1 recipient,  but Houston was second, according to NPR. The network reported that Houston received more than $4 billion from defense contracts in 2011, and Frank Gaffney, the president of the Center for Security Policy in Washington, said Houston could lose $800 million due to the budget cuts. KBR, an engineer, construction and service company, could be in line to get hit the worst. It received $2 billion from the government in 2011. The company didn’t comment to NPR about potential contract cuts.

Airbus Fires Shot in Labor War - Airbus announced plans to start assembling passenger jets in the U.S. starting in 2015, a move likely to affect labor and trade relations on both sides of the Atlantic.  Airbus outlined the plan Monday at an event in Mobile attended by U.S. suppliers, airlines and politicians, carefully stage-managed amid potential negative reaction on both sides of the Atlantic. EADS shares rose 2% Monday in Paris. The company said it would create 1,000 jobs at its Brookley Aeroplex in Mobile, doubling the company's U.S. workforce. One assembly-plant job typically supports up to four at suppliers, Airbus said. Parts for the aircraft will be shipped to Mobile from Hamburg, the site of an existing single-aisle Airbus assembly plant. "We go where the talent is," Airbus Chief Executive Fabrice Bregier said in Mobile ahead of a parade of local politicians welcoming the $600 million investment. He didn't respond directly when asked whether the move would shift employment to the U.S. from Europe. The company's European unions have voiced concern about production moving overseas, according to French media reports.

contra Krugman - Paul Krugman writes that Keynesian thought has progressed. I disagree in comments with the usual. I do not think that Keynesians accept that there is a natural rate of unemployment. The concept is inconsistent with hysteresis. OJ Blanchard and LH Summers are definitely Keynesians. They presented a model without a natural rate in 1986. I don't know about Blanchard but Summers and his former student JB DeLong continue to stress hysteresis (with an open mind about the sum of autoregressive coefficients of unemployment on lagged unemployment so there model might or might not be consistent with a natural rate but with certainly no evidence of any faith in policy invariant stationarity). Also there is this guy named Krugman (have you heard of him) who shows no sign of faith in a natural rate and writes about life long (OK not permanent but life long) effects of low demand on labor market experience.

Why Americans should work less – the way Germans do - Dean Baker - We can deal with unemployment every bit as effectively by having people work fewer hours, as we can by increasing demand. The most important point to realize is that the problem facing wealthy countries at the moment is not that we are poor, as the stern proponents of austerity insist. The problem is that we are wealthy. We have tens of millions of people unemployed precisely because we can meet current demand without needing their labor. This was the incredible absurdity of the misery that we and other countries endured during the Great Depression,  The world did not suddenly turn poor in 1929, following the collapse of the stock market. Our workers had the ability to produce just as many goods and services the day after the collapse as the day before; the problem was that after the crash, there was a lack of demand for these goods and services. The result of this lack of demand was a decade of double-digit unemployment in the United States. The spending programs of the New Deal helped to alleviate the impact of the downturn, but because of the deficit hawks of that era, Roosevelt never could spend enough to bring the economy back to full employment – at least until the second world war made deficits irrelevant. This is the same story we face today. The US and European economies were close to full employment in 2007 due to demand created by housing bubbles in the United States and across much of Europe. These bubbles then burst, substantially reducing demand.

U.S. Jobless Aid Applications Fall to 6-Week Low - The number of people seeking unemployment aid last week fell to its lowest level since mid-May, suggesting layoffs are easing and hiring could pick up. The Labor Department said Thursday that weekly unemployment benefit applications dropped by 14,000 to a seasonally adjusted 374,000, the fewest since the week of May 19. The four-week average, which smooths out weekly fluctuations, dipped by 1,500 to 385,750. Weekly benefit applications serve as a measure of the pace of layoffs. Unemployment benefit applications declined steadily over the winter, coinciding with a burst of hiring. But they rose in the spring and were stuck near 390,000 for five weeks. During that time, the job market slumped.Employers added an average of only 73,000 jobs per month in April and May. That’s much lower than the average of 226,000 added in the first three months of the year.

Jobless Claims Drop & The June ADP Employment Tally Perks Up - There’s still no sign of an imminent recession in the latest numbers for initial jobless claims. New filings for unemployment benefits last week dropped to a two-month low of 374,000 on a seasonally adjusted basis. Meanwhile, the year-over-year change in unadjusted terms posted a roughly 14% decline. There’s a lot of chatter about a slowing economy these days, based on certain indicators. Some pundits have already declared that another recession is fate. But fears that growth has hit a wall appear overblown based on today's claims figures. It’s true that new claims have been stuck in neutral in recent months, as the chart below shows. But if the economy was tipping over into a full-blown contraction, jobless claims would be rising consistently. Instead, claims have been treading water.  Meantime, today’s update of the ADP Employment Report for June also suggests that the economy is still expanding. Private sector nonfarm payrolls rose by 176,000 last month, the strongest rise since March and a moderate amount of progress from May's discouraging number. That implies that Friday’s employment report for June from the Labor Department may surprise on the upside too.

Big Bump Down in UI Claims and ADP - But don’t get too excited re an upside surprise in tomorrow’s job’s report behind this 14K bump down in UI claims.  First, they’re noisy.  The more reliable 4-week moving average remains elevated.  Second, this report reflects last week, while the BLS jobs report reflects the middle week of June. Also suggestive of an upside print tomorrow is today’s ADP, which spiked 176K for private sector payrolls in June.  But be forewarned: you don’t want to extrapolate on a monthly basis from either ADP or UI claims to the more important BLS survey.  Re that release, the forecast for tomorrow is 100K for payroll jobs, nothing to pop champagne over.  More to come…

ADP: Private Employment increased 176,000 in June -- ADP reports: According to today‟s ADP National Employment Report, employment in the nonfarm private business sector rose 176,000 from May to June on a seasonally adjusted basis. Employment in the private, service-providing sector rose 160,000 in June, after rising a revised 137,000 in May. According to Joel Prakken, chairman of Macroeconomic Advisers, LLC, “The gain in private employment is strong enough to suggest that the national unemployment rate may have declined in June. Today‟s estimate, if reinforced by a comparable reading on employment from the Bureau of Labor Statistics tomorrow, likely will ease concerns that the economy is heading into a downturn.There seems little doubt that recent employment gains have been restrained by heightened uncertainty over the European financial crisis and by growing concerns about domestic fiscal policy. However, the acceleration of employment since April does lend credence to the argument that unseasonably warm weather boosted employment during the winter months, with a "payback" spread over April and May.”  This was way above the consensus forecast of an increase of 95,000 private sector jobs in June.

Private survey: US economy added 176K jobs in June — A private survey shows U.S. businesses increased hiring in June, suggesting the job market could be recovering after three sluggish months. Payroll provider ADP says businesses added 176,000 jobs last month. That’s better than the revised total of 136,000 jobs it reported for May. The report only covers hiring in the private sector and excludes government job growth. The Labor Department will offer a more complete picture of June hiring on Friday. The ADP survey offered some hope that hiring is picking up. But it has often deviated sharply from the government report. In May, the Labor Department said employers added just 69,000 jobs, the fewest in a year and nearly half ADP’s estimate.

ADP Says Better Than Expected 176K Private Jobs Added, Of Which Only 4,000 Manufacturing Jobs -- The ADP Private jobs report is out, and in June America allegedly created 176K private jobs, better than expectations of 100K, and up from last month's 136K revised print. What hasn't changed is the continued lack of correlation between the ADP and the NFP report, nor the ongoing deterioration in claims. More importantly, Obama's promise of doubling US exports in 5 years from 2 years ago may be in jeopardy, since of the 176,000K extra jobs created, a whopping 4K was in manufacturing, the rest, or 160,000K, was service jobs.

U.S. Hiring Steady in June at Four-Year High – Gallup - U.S. workers reported essentially no change in net hiring at their workplaces in June, with the Gallup Job Creation Index averaging +20 for the month, similar to the +19 recorded in May and identical to the +20 in April. The index continues to hold at levels that are the most positive since mid-2008. The Job Creation Index in June reflects 36% of U.S. adult workers saying their employers are hiring and expanding the size of their workforces, and 16% saying their employers are letting workers go and reducing the size of their workforces. Both components of the index have also been steady since April. The June results are based on Gallup telephone interviews conducted throughout the month with a nationwide random sample of nearly 17,000 employed Americans. The index -- not seasonally adjusted -- provides an ongoing summary of U.S. workplace hiring conditions as reported by employees.

Unemployment Report for June - The nation’s employers created almost enough jobs to keep up with population growth in June, but not nearly enough to reduce the backlog of nearly 13 million unemployed workers. The economy added 80,000 jobs last month, the Labor Department reported Friday, after a revised increase of 77,000 in May. The unemployment rate remained at 8.2 percent.  Economists are expecting similarly tepid job growth for the rest of the year.  “This economy has no forward momentum and little help from monetary or fiscal policy,”  “As if that were not enough, ill winds are blowing in from both a contracting Europe and slowing growth in emerging markets. Also, domestic lawmakers’ inaction on the upcoming ‘fiscal cliff’ creates uncertainty that is not conducive to hiring.”  During the winter, the economy seemed to be picking up steam, as private companies took on more and more workers and the unemployment rate dropped steadily. But then job growth slowed suddenly in March, leading some economists to wonder whether the unseasonably warm winter, rather than a fundamentally healthier economy, had been the real source of the temporary employment surge.  “The net of it is not as if the economy is collapsing, but it wasn’t really as strong as it looked in December, January and February,

June Employment Report: 80,000 Jobs, 8.2% Unemployment Rate - From the BLS: Nonfarm payroll employment continued to edge up in June (+80,000), and the unemployment rate was unchanged at 8.2 percent, the U.S. Bureau of Labor Statistics reported today. ...Both the civilian labor force participation rate and the employment-population ratio were unchanged in June at 63.8 and 58.6 percent, respectively. ... The change in total nonfarm payroll employment for April was revised from +77,000 to +68,000, and the change for May was revised from +69,000 to +77,000. This was another weak month, and the revisions for the previous two months were offsetting. This was below expectations of 90,000 payroll jobs added.The second graph shows the employment population ratio, the participation rate, and the unemployment rate. The unemployment rate was unchanged at 8.2% (red line).  The Labor Force Participation Rate was unchanged at 63.8% in June (blue line). This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although most of the recent decline is due to demographics. The Employment-Population ratio was unchanged at 58.6% in June (black line). The third graph shows the job losses from the start of the employment recession, in percentage terms.

Employment situation (7 graphs) Both the payroll and the household. survey showed continued weak employment gains as payroll employment only added some 80,000 jobs and the household survey showed a 128,000 gain. Private payrolls expanded some 84,000 as government jobs only contracted by 4,000. But the workweek did expand from 34.4 to 35.5 hours for all employees and from 33.7 to 33.8 for nonsupervisory employees. The index of hours worked for all employees is now back to the trend for this recovery. But the index of hours worked for nonsupervisory workers fell below trend. Average hourly earnings for nonsupervisory employees rose from $19.69 to $19.74, a 0.25% increase. So wage gains continue at or near record lows. Small changes in wages and hours worked mean that weekly wages only grew modestly and is still only some 2.6% above its year ago level. . I watch the wage and earnings data because of what it tells about economic prospects. It dominates income gains that in turn is the single most important factor driving consumer spending, especially later in the cycle. The US is clearly in a spiral of weak wage gains leading to weak spending that in turns leads to further weak wage gains. It is hard to see what will cause the economy to break out of this spiral.

Unemployment Rate Unchanged at 8.2% on Only 80K New Jobs - Here is the lead paragraph from the Employment Situation Summary released this morning by the Bureau of Labor Statistics:Nonfarm payroll employment continued to edge up in June (+80,000), and the unemployment rate was unchanged at 8.2 percent, the U.S. Bureau of Labor Statistics reported today. Professional and business services added jobs, and employment in other major industries changed little over the month.  Today's June nonfarm number is below the briefing.com consensus, which was for 100K new nonfarm jobs. However, the May number for new jobs was revised higher by 8K from the original 69K to 77K. The unemployment peak for the current cycle was 10.0% in October 2009. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948. Unemployment is usually a lagging indicator that moves inversely with equity prices (top chart). Note the increasing peaks in unemployment in 1971, 1975 and 1982.  The second chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. The latest number is 3.5% — unchanged from last month. This measure gives an alternative perspective on the relative severity of economic conditions. As we readily see, this metric remains significantly higher than the peak in 1983, which came six months after the broader measure topped out at 10.8%.

Yet Another Abysmal Jobs Report Shows Only 80,000 Jobs for June 2012 - The June 2012 BLS unemployment report is another abysmal jobs report. Total nonfarm payroll jobs gained were only 80,000. May's payrolls were revised up, from 69,000 to 77,000. April job gains were revised down, again, from 77,000 to only 68,000. The below graph shows the monthly change in nonfarm payrolls employment.  June shows only 84,000 private sector jobs gained while government payrolls shrank another -4,000. In addition, at least 25,200 of those private jobs were temporary. The start of the great recession was declared by the NBER to be December 2007. The United States is now down -4.894 million jobs from December 2007, 4 years and 6 months ago.  The below graph is a running tally of how many official jobs are permanently lost, from the establishment survey, since the official start of this past recession. Increased population growth, implies the United States needs to create at least 10 million jobs or self-employment, using the population survey statistics. This estimate assume a 62.7% civilian non-institutional population to employment ratio, as it was in December 2007. This implies an additional 5 million jobs were needed over a 54 month time period beyond the ones already lost. This is just taking into account increased population against the payroll jobs gap, the actual number of jobs needed is much higher, in part because payrolls, CES, and population, CPS, are two separate data surveys from the BLS.  Another problem with the employment market is the gross number of part-time jobs generally. There is a huge number of people who need full-time jobs with benefits who can't get decent jobs. Those forced in part time jobs increased by 112 thousand. Of the 142,415,000 employed as reported from the current population survey, there are still 8.21 million of the 27,039,000 part-timers working low hours because they cannot get full time jobs.

Third Consecutive Weak Payroll Report: Jobs +80,000, Unemployment Rate Steady at 8.2% - Quick Notes About the Unemployment Rate:

• US Unemployment Rate steady at 8.2% 
• In the last year, the civilian population rose by 3,666,000. Yet the labor force only rose by 1,754,000.
• This month the Civilian Labor Force rose by 156,000.
• This month, those "not" in the labor force increased by 34,000 to 87,992,000, another record high. If you are not in the labor force, you are not counted as unemployed. 
• In the last year, those "not" in the labor force rose by 1,912,000 
• This month, the number of people employed rose by 128,000. Over the course of the last year, the number of people employed rose by 3,030,000.
• Participation Rate was steady at 63.8%;
• There are 8,210,000 workers who are working part-time but want full-time work, an increase of 112,000
• Long-Term unemployment (27 weeks and over) was steady at 5.4 million. 
• Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Jobs Report, First Impressions  - Payrolls grew by 80,000 last month and the unemployment rate was unchanged at 8.2% in a jobs report that confirms the slower trend in employment gains that showed up a few months ago.  In order to get a better feel for the underlying trend, it’s useful to average across a few months.  With today’s report, we now have job data for the second quarter of the year–such quarterly numbers are less noisy and thus more reliable than the monthly ones. Over the second quarter, payrolls are up an average of 75,000 per month, compared to 226,000 in the prior three months.  First quarter numbers may have been biased up by seasonal effects that failed to reflect the warm winter, so the lower second quarter gains may reflect some “payback.” Still, I’m inclined to believe that we’ve actually settled into a slower trend, as shown in the figure, and that is really not where we need to be right now.  The slowdown is apparent across many industries, including manufacturing, which added 11,000 in June, but averaged 10,000 per month in the second quarter compared to 41,000 in the first.  Even so, continued job gains of even small magnitudes in our factory sector are extremely welcome.  The fact that the unemployment rates been stuck north of 8% for months now also confirms the downshift diagnosis.

June Jobs Report, with Details - Details:

• –consistent with the downshift, the number of involuntary part-timers has climbed steadily from 7.7 million in March to 8.2 million in June.
• –after trending down fairly consistently since the official recession ended in mid-09, the share of unemployed as a result of layoffs climbed last quarter.
• –though long-term unemployment ticked down from 42.8% of the unemployed in May to 41.9% in June, it remains highly elevated, as over five million people have been looking for work for more than six months.
• –wages and hours were a bit of a bright spot: average weekly hours bumped up a tenth of an hour and weekly earnings are up 2.2% over last year’s level.  With inflation running below 2%, in part thanks to lower gas prices, that means real paychecks have increased buying power.
• –as noted, the downshift in job growth appeared across most industries, which continue to add jobs but at a slower rate than earlier in the year (see manufacturing numbers above).
• –in the public sector, a significant decline of 14,000 in local education jobs was offset by gains elsewhere in local government; still the public sector as a whole was again down slightly (-4,000).  In all but three of the last 25 months, the public sector has shed jobs.

U.S. Economy Adds Just 80,000 Jobs in June - The Labor Department released its monthly Employment Situation Report this morning, announcing that the economy added 80,000 new jobs in June – slightly less than what economists were predicting, and far too small a number to put a dent in the unemployment rate or to be a harbinger of sustained and vigorous economic recovery. Economists surveyed by Bloomberg news were expecting 90,000 new jobs added, after weak numbers in Europe and a pronounced slowdown in manufacturing activity further dampened prospects for the economy. But it appears that the headwinds of uncertainty in Europe and Asia, paired with high unemployment and weak demand at home, are preventing employers from undertaking the kind of hiring that could induce an economic comeback. Even the high end of economists’ expectations – 167,000 new jobs — wouldn’t have represented a robust-enough number to indicate a swift or sustained recovery. According to the Congressional Budget Office, The U.S. economy must to add at least 90,000 jobs a month to keep up with population growth, although that number is an estimate and could range higher depending on how many workers decide to rejoin the labor force in a given month.

The doldrums -HOW long ago seem the promising months of early 2012, when the American economy added jobs at a healthy 225,000 monthly clip. And how disappointing when the labour market slumped back into its now traditional spring-and-summer slump. The Bureau of Labour Statistics' June employment report, out this morning, is anticlimatic in its confirmation of the already-too-obvious: job creation is back in the rut that seems the default position for this recovery. Employers added just 80,000 jobs in June, up negligibly from an increase of 77,000 in May and 68,000 in April. Private employment growth did a bit better once again, coming in at an 84,000 increase for the month. That compares quite unfavourably to the more than 250,000 private positions added in January and February. Government continued to drag down payroll growth, albeit it a slower pace than earlier in the year. In the year to June, private employment was up 1.9m while government at all levels slashed 169,000 jobs. Since the labour market hit a bottom in February of 2010, private employment is up 4.4m jobs while government employment is down over 500,000. Manufacturing job growth has slowed sharply since the first quarter—unsurprising given the broad weakness in industrial activity in recent months, in America and elsewhere. Perhaps more disconcerting is the disappointing performance of employment in construction. Home prices and sales seem to have reached a bottom and commenced rising, and new permits are up strongly this year, but that has yet to translate into strong residential construction employment growth.

Economists React: This Jobs Number ‘Stinks’ -- Economists and others weigh in on the tepid gain in jobs in June and the unchanged unemployment rate.

Another Disappointing Payrolls Report For June -Private-sector payrolls grew by a sluggish 84,000 on a net basis in June, the Labor Department reports. That’s down from the revised growth of 105,000 in May. It’s a disappointing report in absolute terms, and it doesn’t help that yesterday’s far-more encouraging ADP estimate inspired expectations that we’d see something better. But while no one can deny that the jobs growth is s-l-o-w, according to the government’s figures, it’s still premature to argue that it signals a new recession.  Let’s start by reminding everyone that revisions to payroll estimates can and swing wildly through time. For example, the initial report for May's private-sector payrolls was a tepid 82,000, as I discussed a month ago. That number has since been revised up to a rise of 105,000 net new jobs for May. Hardly a game changer, but it's one more reminder that what you see today isn't necessarily what you'll find tomorrow. In fact, if you look at revisions since 2000, monthly estimates for the total number of people on private-sector payrolls have varied far and wide. Indeed, over the past decade, revisions for the monthly total of payrolls have been as high as nearly 800,000, and cut by more than 1.6 million, according to the St. Louis Fed. Revisions aren’t generally so extreme, but it’s safe to say that it’s always wise to remain skeptical for thinking that the first estimate is the last word on labor market’s trend.

Employment Report Shows Little Change from Last Month: - The employment report released earlier today was not as strong as many analysts had predicted. Nonfarm payroll employment increased by 80,000, just under what is needed to keep up with population growth, and the unemployment rate was unchanged from the previous month at 8.2 percent. The report highlights the fact that the economy is treading water rather than making progress on the unemployment problem. The number of long-term unemployed, which accounts for 41.9 percent of the unemployed, was essentially unchanged as was the civilian labor force participation rate (63.8 percent), the employment- population ratio (58.6 percent), and the number of part-time workers (8.2 million). Jill Schlesinger has more details, and a discussion of why the economy is stagnating. The report is not a disaster in the sense that it shows that things are getting worse. But it is very worrisome that things are not getting better, particularly the long-term unemployment problem. Long-term unemployment is, of course, disastrous for the individuals who cannot find jobs, from health effects to reduced lifetime earnings potential, but it is also a problem for the economy as a whole. Evidence from previous recessions shows that long-term unemployment can turn into permanent unemployment, and this reduces our long run growth potential. That has implications for future taxes, which will be lower, future spending on social programs, which will be higher, and for our ability to provide decent jobs in the future.

Weak Employment in One Chart - Another weak jobs report with payrolls up only 80,000, unemployment stuck at 8.2 percent, and underemployment ticking up to 14.9 percent. But the real news continues to be how far employment has fallen. As recently as 2006, more than 63 percent of adults had a job. Today, that figure is less than 59 percent: With the exception of the past several years, you’ve got to go back almost three decades to find the last time that so few Americans were employed (as a share of the adult population). The stunning decline in the employment-to-population ratio (epop to its friends) reflects two related factors. First, the unemployment rate has increased from less than 5 percent to more than 8 percent. That accounts for roughly half the fall in epop. The other half reflects lower labor force participation. Slightly more than 66 percent of adults were in the labor force back them, but now it’s less than 64 percent.

Video: What Does Disappointing Jobs Report Mean? - WSJ Staff - Jon Hilsenrath, Brendan Conway, Phil Izzo and David Wessel on The News Hub break down June's jobs report, which saw unemployment remain at a disappointing 8.2%.

Worst Quarter for Jobs Growth Since 2010 - America’s job market hasn’t been this feeble since the economy started adding jobs regularly two years ago. The latest data show the U.S. economy added an average of 75,000 jobs per month between April and June. That’s paltry compared with the average of 225,000 jobs notched in the first three months of the year. Worse, it’s the weakest quarter for job growth since the third quarter of 2010, when the economy lost an average of 45 jobs each month. After this past quarter, the next weakest is July-to-September 2011, when the economy added an average of 128,000 jobs–a relatively healthy figure  and one high enough to at least keep unemployment from rising. Clearly, America’s job market has lost the momentum it had early this year. And as we pointed out on June 25, this weakness on  jobs is outweighing the boost to consumers’ wallets from lower gasoline prices. Proof? Check out June’s retail sales figures, which grew at the slowest pace in over two years.

5 Million Jobs Still Missing Since Recession Ended  - A third straight month of weak hiring shows the U.S. economy is still struggling three years after the recession officially ended. U.S. employers added just 80,000 jobs in June, and the unemployment rate was unchanged at 8.2 percent, the Labor Department said Friday. For the April-June quarter, the economy added an average of 75,000 jobs a month — one-third the pace in the first quarter. And for the first six months of 2012, employers added an average of 150,000 jobs a month. That's fewer than the 161,000 average for the first half of 2011. Slow job growth has led consumers to pull back on spending. Many analysts think the economy is growing at a sluggish annual rate of less than 2 percent. Job creation is the fuel for economic growth. When more people have jobs, more consumers have money to spend — and consumer spending drives about 70 percent of the economy.

Another (Seasonally Adjusted) Slowdown -  The recovery has been chugging along slowly for a couple of years, and while it may have slowed a little in the last few months, that change has been minor. The reason that few doubt that the jobs picture is getting worse is that they look at the Labor Department’s seasonally adjusted figures. But those adjustments most likely overstate reality these days. Employers are acting more cautiously than they did in previous cycles. They add fewer seasonal jobs than they used to, and they therefore get rid of fewer seasonal workers when the season is over. The result is that the seasonal adjustments make things look better than they are in the winter, when fewer workers are being let go than the government expects, and worse in the spring and summer, when the workers who were not let go cannot be rehired. There is, of course, more than seasonal adjustment going on, but I suspect that the underlying swings are far more modest than the monthly figures seem to indicate.  On a monthly basis, by the way, there were more than 800,000 private sector jobs added — before seasonal adjustments — in each of the last three months. But the seasonal adjustments reduced the monthly average to less than 100,000. Below is a chart showing the annual change in actual private sector employment since January 2000. Looking at 12-month changes means you can ignore seasonal adjustments, so these are unadjusted figures. In June, the number of jobs was up 1.8 million from a year earlier, or 1.6 percent. The annual changes were a little higher in the winter, but the year-to-year change was the best for any June since 2006.

Employers Get More From U.S. Workers As Jobs Gain Lags Forecast - Companies in the U.S. are relying on existing workers and temporary employees instead of hiring, helping to explain why payrolls grew less than forecast in June.  The average workweek rose for the first time since February and temporary staffing climbed for a third consecutive month, according to Labor Department figures issued in Washington yesterday. The report also showed payrolls advanced by 80,000 workers, less than the median estimate in a Bloomberg News survey of economists, and the jobless rate held at 8.2 percent.  The need to boost hours and add provisional employees is a sign that sales are holding up in the face of a deepening slump in Europe and a slowdown in China and the rest of the world. Nonetheless, businesses may lack conviction that revenue gains will be sustained in light of the threats, making them reluctant to permanently expand payrolls.  The average workweek climbed by six minutes to 34.5 hours in June, the report showed. Temporary staffing rose by 25,200, the biggest increase since February.

Broader Jobless Rate Ticks Up to 14.9% - The U.S. unemployment rate was unchanged at 8.2% in June but a broader measure rose to 14.9% as the ranks of the underemployed grew. More In Jobs The jobless rate was unchanged even at the number of people who consider themselves employed jumped by 128,000.. The unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks, and that number rose just 29,000. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The rate is calculated by dividing that number by the total number of people in the labor force. When the unemployed return to the labor force, both numbers increase and the unemployment rate climbs. In June, the reason the rate didn’t decline was that while the number of employed increased, so did the labor force — by a larger 189,000 people. That is a worrying sign in that the labor force is growing faster than job growth. If that continues, the unemployment rate could be headed higher. Meanwhile, the broader unemployment rate, known as the “U-6″ for its data classification by the Labor Department, was up even higher in June. The U-6 figure includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find.

Employment: Another Weak Report (more graphs) The unemployment rate was unchanged at 8.2% in June The household survey showed a another increase in employment (128,000 jobs added), and since the participation rate was unchanged at 63.8%, that was just enough to keep with the increase in the labor force. U-6, an alternate measure of labor underutilization that includes part time workers and marginally attached workers, increased slightly to 14.9%. The bottom line is this was another disappointing employment report. Here are a few more graph ... Since the participation rate has declined recently due to cyclical (recession) and demographic (aging population) reasons, an important graph is the employment-population ratio for the key working age group: 25 to 54 years old. In the earlier period the employment-population ratio for this group was trending up as women joined the labor force.  So far the ratio has only increased slightly from a low of 74.7% to 75.6% in June This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at maximum job losses. In the earlier post, the graph showed the job losses aligned at the start of the employment recession. The number of part time workers increased in June to 8.21 millon. These workers are included in the alternate measure of labor underutilization (U-6) that increased in June to 14.9%, up from 14.8% in May. Unemployed over 26 Weeks This graph shows the number of workers unemployed for 27 weeks or more. According to the BLS, there are 5.37 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 5.41 million in May. This is generally trending down, but very slowly. Long term unemployment remains one of the key labor problems in the US. State and Local Government So far in 2012 - through June - state and local government have lost 20,000 jobs (3,000 jobs were added in June). In the first six months of 2011, state and local governments lost 133,000 payroll jobs - and 230,000 for the year. So the layoffs have slowed. This graph shows total state and government payroll employment since January 2007. State and local governments lost 129,000 jobs in 2009, 262,000 in 2010, and 230,000 in 2011.

Real Number of People Needing a Good Job is 27,5 Million - The June employment report was crappy and not enough jobs to keep up with population growth. This overview shows the situation is even worse than what is typically reported. Officially there are 12.75 million people unemployed and the unemployment rate is 8.2%. We calculate below an alternative unemployment rate of 17%, which shows 27.5 million people need a full-time, real job.  We have a never ending long length of unemployment, even with people plain dropping out of the count. The average length of unemployment is 39.9 weeks and increased from last month's 39.7 weeks. The median time one is unemployed, which means 50% of people have gotten a job in this amount of time, decreased from 20.1 to 19.8 weeks.  People unemployed for 27 weeks or more remains at high levels of the total unemployed, 41.9%. That's 5.37 million people officially unemployed for over half a year, even though the percentage dropped 0.9 percentage points from May. Don't think this is that great of a sign, people are simply run out of unemployment benefits and then just drop out of being even counted as needing a job.  There are 8.21 million people stuck in part-time jobs because that's all they can get, an up-tick of 112 thousand from last month.  Some are stuck in part-time because their hours were cut by their employer. These part-timers due to slack work now number 5,446,000, an increase of 299 thousand from last month. Below is a graph of forced part-time because they got their hours cut as a percentage of the total employed. If you want to see a recession economic indicator, this looks like a pretty damn strong one. See how closely the percentage increase matches recessions, the gray bars?

Trends in Civilian Population, Labor Force, Employed - Here is an interesting chart from Tim Wallace on Civilian Population, Labor Force, Employed. The chart compares June of 2012, to June in previous years.  Population keeps growing but labor force does not. This is mostly due to the weak economy not boomer demographics (although demographics does come into play).  Demographics suggests the labor force would be growing at a smaller rate, but still growing. Instead, the labor force has stalled for four years. For example: in 2000 it took about 150,000 jobs per month to keep up with birthrate and immigration. In 2007 it took about 125,000 jobs per month (a number I believe Bernanke still uses). I think it now takes about 75,000. However, so many boomers are desperate for jobs and the participation rate has dropped so low, that should the economy improve and people start looking for work, the number could easily rise back up to 125,000 per month.For a detailed discussion, please see Question on Jobs: How Many Does It Take to Keep Up With Demographics?

Federal Job Cuts Outpacing State, Local Reductions - The slump in state and local government jobs, which has dragged on job growth throughout the recovery, has started to wane. The new drag: A more austere federal government. The government sector shed 4,000 jobs in June but the breakdown is a stark contrast from the recovery thus far, where most of the jobs losses were in cities and states. Last month the federal government cut 4,000 jobs while states cut 1,000 and local governments actually added 4,000. As the left-leaning Economic Policy Institute notes, where public sector jobs are concerned, this has been the worst recovery in recent memory. But state and local governments, while still under stress, are at least seeing increased revenue. State governments, in fact, are finally bringing in more tax revenue than they did before the recession. “Going forward, the ongoing improvement in [state and local] tax receipts should ultimately translate into faster spending and hiring,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank, in a recent note to clients.

Three years into recovery, just how much has state and local austerity hurt job growth?   ..the public sector has seen massive job loss in the current recovery—largely due to budget cuts at the state and local level — which represents a serious drag that was not weighing on earlier recoveries.  How many more jobs would we have if the public sector hadn’t been shedding jobs for the last three years?  The simplest answer is that the public sector has shed 627,000 jobs since June 2009.  However, this raw job-loss figure understates the drag of public-sector employment relative to how the economy functions normally. ver this same period the overall population grew by 6.9 million. In June 2009 there were 7.3 public-sector workers for every 100 people in the US; to keep that ratio constant given population growth, the public sector should have added roughly 505,000 jobs in the last three years.  This means that, relative to a much more economically relevant trend, the public sector is now down more than 1.1 million jobs. And even against this more-realistic trend, these public-sector losses are dominated by austerity at the state and local level, with federal employment contributing only around 6% of this entire gap.It should be noted that this counter-factual of 1.1 million additional public sector jobs is a perfectly reasonable benchmark.  Before the Great Recession, the number of public-sector workers per 100 people had averaged right around 7.3 since the late 1980s.  In other words, having 1.1 million more public-sector workers, which would put us back at 7.3 public-sector workers per 100 people, would simply restore our economy to a normal level of government employment.

Chart of the day, government payrolls edition - Today’s payrolls report was a relatively dull one, showing the same story we’ve seen for the past couple of months: job growth which is barely positive, and certainly isn’t big enough to bring down the unemployment rate or even keep up with population growth. Go one level down, and you can see the way that the payrolls number is split, between the private sector and the government. This month, the headline growth of 80,000 jobs represented 84,000 new jobs in the private sector, and 4,000 jobs lost in the public sector. And that story — jobs in the private sector growing, while jobs in the public sector are shrinking — turns out to have been in effect basically as long as the recovery has been in place. The chart above shows the period of the recovery: the years from 2010 onwards when we stopped losing jobs and started gaining them. Or, at least, when the private sector stopped firing people and started hiring people. The government gets the credit, or the blame, for all that job creation. But really, the only job creation that the government can directly control is its own. And since the beginning of 2010, net government job creation is massively negative: we have 536,000 fewer government jobs today than we did in January 2010. (That red spike you see in May 2010 is the census; all those jobs and then some were lost in the following months.) During the same period, the private sector created 4.3 million jobs.

Where are the construction jobs? -- There were several reasons why construction jobs didn't decline at the same time as housing starts. First, construction includes residential, commercial and other construction (like roads). Even after housing starts began to collapse, commercial real estate was still booming and workers shifted from residential to commercial (many commercial projects have long time frames - and many developers remained in denial). Also some construction workers are paid in cash (illegal immigrants), and these workers weren't counted on the BLS payrolls. Now people are asking "Where are the construction jobs?" Oh, Grasshopper ... the construction jobs are coming.  The graph below shows the number of total construction payroll jobs in the U.S. including both residential and non-residential since 1969 compared to housing starts. Unfortunately the BLS only started breaking out residential construction employment fairly recently (residential specialty trade contractors in 2001).  Right away we can see that construction employment isn't just tied to housing starts. There are other categories that have been generally increasing over the decades.

Where Work Disappears and Dreams Die: Not all teenagers are as lucky as J’Len Glass. He trusts his parents. He knows they will always tell it to him straight. Yet the 15-year-old, who wants to be a doctor, can’t help being skeptical of his elders’ veracity—or at least of their memories—when they tell him that his shrinking, economically depressed hometown of Gary, Indiana—Steel City—was, once upon a time, a wonderful place to raise a family. That it had good public schools and well-maintained city parks and streets. That there were department stores, restaurants, movie theaters, nightclubs, and crowded office buildings up and down Broadway, its main thoroughfare. That a young guy could go outside, play some ball, flirt with girls, and not worry about getting killed in a drive-by shooting. That he could graduate high school, and if he didn’t want to go to college or join the military, he could just stay put and make a decent living in one of the smoke-belching steel mills that ringed the city and provided paychecks to tens of thousands of workers. That Gary used to be part of the American working- and middle-class mainstream, a place folks moved to and put down roots in—not some decaying, can’t-wait-to-pull-up-stakes-and-get-the-hell-away-from-here outpost of the Other America, which these days is just about the only America J’Len sees when he walks out his front door.

Jobs - Jobs and the nature of work are central to the issues I laid out in my first post “What is a Supply-Side Liberal?” I am prompted to write about jobs and the nature of work today by the interesting debate about giving up freedom to get and keep a job kicked off by Crooked Timber:

1. Abridgments of freedom inside the workplace:

On pain of being fired, workers in most parts of the United States can be commanded to pee or forbidden to pee. They can be watched on camera by their boss while they pee. They can be forbidden to wear what they want, say what they want (and at what decibel), and associate with whom they want. They can be punished for doing or not doing any of these things—punished legally or illegally (as many as 1 in 17 workers who try to join a union is illegally fired or suspended). But what’s remarkable is just how many of these punishments are legal, and even when they’re illegal, how toothless the law can be. Outside the usual protections (against race and gender discrimination, for example), employees can be fired for good reasons, bad reasons, or no reason at all. They can be fired for donating a kidney to their boss (fired by the same boss, that is), refusing to have their person and effects searched, calling the boss a “cheapskate” in a personal letter, and more. They have few rights on the job—certainly none of the First, Fourth, Fifth, Sixth, and Seventh Amendment liberties that constitute the bare minimum of a free society; thus, no free speech or assembly, no due process, no right to a fair hearing before a panel of their peers—and what rights they do have employers will fight tooth and nail to make sure aren’t made known to them or will simply require them to waive as a condition of employment. Outside the prison or the military—which actually provide, at least on paper, some guarantee of due process—it’s difficult to conceive of a less free institution for adults than the average workplace.

2. Abridgements of freedom outside the workplace

In addition to abridging freedoms on the job, employers abridge their employees’ freedoms off the job. Employers invade employees’ privacy, demanding that they hand over passwords to their Facebook accounts, and fire them for resisting such invasions. Employers secretly film their employees at home. Workers are fired for supporting the wrong political candidates(“work for John Kerry or work for me”), failing to donate to employer-approved candidates,challenging government officials, writing critiques of religion on their personal blogs (IBM instructs employees to “show proper consideration…for topics that may be considered objectionable or inflammatory—such as politics and religion”), carrying on extramarital affairs, participating in group sex at home, cross-dressing, and more. Workers are punished for smoking or drinking in the privacy of their own homes. (How many nanny states have tried that?) They can be fired for merely thinking about having an abortion, for reporting information that might have averted the Challenger disaster, for being raped by an estranged husband. Again, this is all legal in many states, and in the states where it is illegal, the laws are often weak.

The liberty to pee - My advisor requested a blog post on the recent debate over workplace freedom, so here it is. The debate started with an excellent article by the folks at Crooked Timber, detailing how the libertarian philosophy, which chooses to focus only on government, overlooks the ways in which employers restrict the freedoms of their employees. This is one instance of what I've called "the liberty of local bullies", so I'm very sympathetic to the idea. Tyler Cowen then argued against the Crooked Timber post, basically making three points, which were: 1) employees agreed to workplace restrictions on freedom when they made their employment contracts, 2) most of the violations of workplace freedom cited by Crooked Timber are not objectionable, and 3) employee shirking and theft are just as significant as bosses' abuse of power. I do not agree with Tyler. I want to ask two questions about workplace restrictions. First, do they decrease liberty? And second, do they decrease utility?

Job Insecurity: It’s the Disease of the 21st Century – And It’s Killing Us -- Remember Dilbert, the mid-level, white-collar Cubicle Guy of the '90s who could never seem to get ahead? In the 21st century, his position looks almost enviable. He has been replaced by Waiting-For-the-Other-Shoe-to-Drop Man.  Across America, freaked-out employees are coping with sweat-drenched nights and heart-pounding days. They’re reaching for the Xanax and piling on the work of two or three people. They’re running the risk of short-term collapse and long-term disease. The hell created by three grinding years of 8 percent-plus unemployment brings us plenty of stories of what people suffer when they lose their jobs. But what about the untold millions who live in chronic fear that tomorrow’s paycheck will be their last? Research shows that the purgatory of job insecurity may be even worse for you than unemployment. And it's turning the American Dream into a sleepwalking nightmare. From young temporary workers to middle-aged career veterans, Americans are being pushed to their physical and psychological limits in what has the makings of a major national public health crisis.

Yes, wages at Wal-mart are awful - My colleague Marlon Boarnet and co-authors show that they are: in the Bay Area, Wal-mart grocery workers' total compensation is a little over half the compensation of unionized workers (Table 4).  Wal-mart also initially offers grocery costs that are between 8 and 20 percent lower than the stores with which they compete, and lead other stores to reduce their prices by 5 to 13 percent (Table 2).  I am prepared to accept the argument that higher wages are more important than lower grocery prices, although it is not an overwhelming argument to me.  Nevertheless, there are good reason reasons not to like Wal-mart (which is one of the reasons I don't shop there).  On the other hand, it makes no sense to me to bundle a bunch of weak arguments with a strong one, and yet that is what anti-Wal-mart activists often do.  And zoning should be zoning--if one entity has the right to use land for a particular use, others should as well, whether they are liked or not.

The Sharp, Sudden Decline of America's Middle Class - Every night around nine, Janis Adkins falls asleep in the back of her Toyota Sienna van in a church parking lot at the edge of Santa Barbara, California.  who is 56 years old, parks the van at the lot's remotest corner, aligning its side with a row of dense, shading avocado trees. The trees provide privacy, but they are also useful because she can pick their fallen fruit, and she doesn't always­ have enough to eat. Despite a continuous, two-year job search, she remains without dependable work. She says she doesn't need to eat much, but food stamps supply only a fraction of her nutritional needs, so foraging opportunities are welcome. Prior to the Great Recession, Adkins owned and ran a successful plant nursery in Moab, Utah. At its peak, it was grossing $300,000 a year. She had never before been unemployed – she'd worked for 40 years, through three major recessions. During her first year of unemployment, in 2010, she wrote three or four cover letters a day, five days a week. Now, to keep her mind occupied when she's not looking for work or doing odd jobs, she volunteers at an animal shelter. Each evening, 150 people in 113 vehicles spend the night in 23 parking lots in Santa Barbara. The lots are part of Safe Parking, a program that offers overnight permits to people living in their vehicles. The nonprofit that runs the program, New Beginnings Counseling Center, requires participants to have a valid driver's license and current registration and insurance.

Are You Now or Have You Ever Been an “Anti-Labor Leftist”? - The recent defeat of the Scott Walker recall in Wisconsin, an election in which Walker soundly defeated the same Democratic challenger who ran against him when he became governor in 2010, has generated much discussion. Why was the Wisconsin Uprising of early 2011, where hundreds of thousands of Wisconsinites took to the streets and occupied the Capitol building to protest Walker’s attempt to destroy public employee unions and eliminate social welfare programs, diverted by the Democratic Party and labor leaders into a recall effort? Why was the man chosen by the Democrats to run against Walker a person who had himself been an enemy of labor unions and who distanced himself from organized labor every chance he got during the recall campaign? Why didn’t the unions build on the Uprising to reconstitute the state’s labor movement on a more militant and class conscious basis? Several people, including radical economist and Left Business Observer editor Doug Henwood and Progressive magazine editor Matt Rothschild, took labor leaders to task for not taking advantage of the mass anger and willingness to protest shown by the Uprising.

The History Of US Unemployment By State, And A Surprising Observation - The following fascinating chart from Tableausoftware shows the history of US unemployment by state since 1976, and specifically the difference from historical averages. What the chart shows is that as more and more people have migrated to populated coastal areas, or those areas hit hardest from the recent deleveraging mean reversion depression, it is the flyover states, typically considered the least interesting, that are actually performing by far the best, with some places like North Dakota, Nebraska, South Dakota, and Vermont paradoxically having better relative employment right now than during any time in the past 40 years! As the economy continues to revert to trendline along every possible axis, despite the Fed's persistent efforts to overrule nature, how long until reverse migration kicks in, and all those hopefuls who had trekked to the big coastal cities dreaming of better prospects, leave in disenchantment and head back to where they came from, and just how would that impact the future of US economic and demographic trends?

House Agriculture Committee to propose deep cuts to SNAP - In contrast with the medium-sized cuts to SNAP proposed by the Senate (see earlier post), the House Agriculture Committee today proposed deep cuts. "Do Republicans in Congress want to fix the food stamp program — or punish it?," asks David Rogers at Politico:  That’s the question facing the House Agriculture Committee leadership as it rolls out its plan this week to cut farm subsidies together with about $16 billion in 10-year savings from food stamps — also known as the Supplemental Nutrition Assistance Program. The story quotes Rep. Austin Scott (R-GA) to illustrate some Republicans' animosity toward the nation's most important anti-hunger program: “Americans, working Americans, the middle income and low-income working Americans — they are out there doing the best they can and struggling — are sick and tired of watching the abuses of the system,” Scott said. “I just want to say this one more time. You can’t feed the hungry by starving the farmer.”

The financial benefits of food stamps – Record $78 billion worth of food stamps issued in 2011. Select Wal-Mart stores pulled in 25 to 40 percent in revenues from food stamps according to a recent analysis.: When you think of food stamp usage you rarely think about big financial profits. Yet some businesses are managing to get a big piece of the food stamp pie. Last year alone the government spent a record $78 billion in food stamps. This is a large amount of money and this is why you might notice more EBT signs if you ever pay attention when you are driving around. The money when broken down by the 46 million Americans receiving this aid is not much but actually speaks to the underlying bifurcated nature of our economy. Many are stuck below poverty status and many in the middle class simply struggle to get by. The Congressional Budget Office projects that food stamp usage will be high deep into 2015. Let us examine where this money is actually going. It is hard to call it a recovery when projections from the government are showing high food stamp usage well into 2015. In fact, the projection shows that in 2015 the government will spend $80 billion on food stamps:

More on Debtor’s Prisons - In my post Debtor’s Prison for Failure to Pay for Your Own Trial I wrote: Debtor’s prisons are supposed to be illegal in the United States but today poor people who fail to pay even small criminal justice fees are routinely being imprisoned. The problem has gotten worse recently because strapped states have dramatically increased the number of criminal justice fees. The New York Times is now on the case and gives an example: Three years ago, Gina Ray, who is now 31 and unemployed, was fined $179 for speeding. She failed to show up at court (she says the ticket bore the wrong date), so her license was revoked. When she was next pulled over, she was, of course, driving without a license. By then her fees added up to more than $1,500. Unable to pay, she was handed over to a private probation company and jailed — charged an additional fee for each day behind bars. For that driving offense, Ms. Ray has been locked up three times for a total of 40 days and owes $3,170, much of it to the probation company.

Mapping the Criminal Ecosystem - Would you believe that the same math that describes how predators in the animal kingdom stake out their territory can be used to identify the boundaries between the turf claimed by rival gangs? The evidence comes from the UCLA Newsroom:  A mathematical model that has been used for more than 80 years to determine the hunting range of animals in the wild holds promise for mapping the territories of street gangs, a UCLA-led team of social scientists reports in a new study.  "The way gangs break up their neighborhoods into unique territories is a lot like the way lions or honey bees break up space," said lead author P. Jeffrey Brantingham, a professor of anthropology at UCLA.  Further, the research demonstrates that the most dangerous place to be in a neighborhood packed with gangs is not deep within the territory of a specific gang, as one might suppose, but on the border between two rival gangs. In fact, the highest concentration of conflict occurs within less than two blocks of gang boundaries, the researchers discovered.

Pelican Bay Prison: One Year Later, Policy Remains "Debrief or Die" - October 1990, only months after being transferred to Pelican Bay's Security Housing Unit (SHU), Todd Ashker was shot in the right wrist by a prison guard. "This nearly severed my hand from my wrist and caused severe damage to hand, wrist and forearm," he recounted. Ashker stated that he was denied medical care, including pain management, and was told by medical staff, "If you want better care, get out of SHU. It's your choice." Ashker's experience is the norm rather than the exception. On July 1, 2011, Ashker and thousands of other prisoners went on hunger strike to protest such draconian conditions. As reported in Truthout last year, for three weeks, at least 1,035 of the 1,111 inmates locked in the SHU refused food. In the SHU, which comprises half of California's Pelican Bay State Prison, prisoners are locked into their cells for at least 22 hours a day. Over 500 people have been confined in the SHU for over a decade, over 200 for more than 15 years and 78 for over 20 years. The only way that a person can be released from the SHU is to debrief, or provide information incriminating other prisoners. Even those who are eligible for parole have been informed that they will not be granted parole so long as they are in the SHU. "They are told they can debrief or die," The Pelican Bay hunger strike spread to 13 other state prisons and, at its height, involved at least 6,600 people incarcerated throughout California. "We have decided to put our fate in our own hands. Some of us have already suffered a slow, agonizing death in which the state has shown no compassion toward these dying prisoners." "No one wants to die. Yet under this current system of what amounts to immense torture, what choice do we have? If one is to die, it will be on our own terms."

Solitary Confinement - In the United States, approximately 100,000 prisoners are kept in solitary confinement. Colin Dayan reports: Prisoners there are locked alone in their cells for 23 hours a day. Their food is delivered through a slot in the door of their 80-square-foot cell. They stare at unpainted concrete walls onto which nothing can be put. They look through doors of perforated steel, what one officer described to me as “irregular-shaped Swiss cheese.” In this condition of enforced idleness, prisoners are not eligible for vocational programs. They have no educational opportunities; books and newspapers are severely limited; post and telephone communication virtually nonexistent. Locked in their cells for as many as 161 of the 168 hours in a week, they spend most of the brief time out of their cells in shackles, with perhaps as much as eight minutes to shower. An empty exercise room — a high-walled cage with a mesh screening overhead, also known as the “dog pen” — is available for “recreation.” These are locales for perpetual incapacitation, where obligations to society, the duties of husband, father or lover are no longer recognized. An inmate wrote me, “People go crazy here in lockdown. People who weren’t violent become violent and do strange things. This is a city within a city, another world inside of a larger one where people could care less about what goes on in here. This is an alternate world of hate, pain, and mistreatment.”

The Victims in the Libor Scandal Include Local Governments and Local Taxpayers - As we absorb the Libor banking scandal, one of the things that will drive it is a recognition of who this hurt, at whose expense Barclays and a host of other banks made profits by manipulating the benchmark lending rate. Kevin Drum argues that it’s limited to floating-rate interest note investors, traders on futures exchanges who used Libor, or perhaps investors in Libor-linked CDs. This doesn’t have the kind of victims who are completely sympathetic. You can argue that, since Libor was a benchmark rate, anyone who had any adjustable-rate lending instrument was susceptible to being ripped off. But sometimes banks rigged Libor up and sometimes they rigged it down, frustrating efforts to figure out when they screwed people with those attributes and when they actually helped them. But Barry Ritholtz argues for a much broader view: Bloomberg’s Darrell Preston explained last year how cities and other local governments got scalped when rates were manipulated downward: In the U.S., municipal borrowers used swaps to guard against the risk of higher interest costs on variable-rate debt by exchanging payments with another entity and tying how much they pay to an underlying value such as an index. The agreements can backfire if rates move in unexpected directions, resulting in issuers making larger payments.The derivatives were often designed to offset the risks of increases in the short-term rates tied to auction-rate securities, fixing borrowers’ costs by trading their debt- service payments with another party. Instead, rates dropped [...]

How Wall Street Scams Counties Into Bankruptcy - We are told repeatedly that when Wall Street’s deeply flawed incentive system leads to one bad outcome after another, year after year, it will never happen again. Yet it does. And you can add this vital business to the list: The way state and local government officials hire Wall Street firms to raise the billions of dollars their municipalities need to build schools, hospitals, airports and sewers, and provide other essential services. For some reason, Wall Street never seems to get the message that bribing government officials -- and paying each other off - - to get access to lucrative municipal-bond underwriting business is illegal. Wall Street has never learned this lesson because the miniscule price it ends up having to pay for misbehaving has absolutely no deterrent value whatsoever. Indeed, what the cartel of the major banks does over and over again to win underwriting business from local government officials, and the way the cartel then sorts out among itself who gets what fees, is a microcosm of a much wider problem of the increasing power that the Wall Street survivors of the financial crisis have over the rest of us.

Is Schneiderman Giving a Pass on Possible Illegal Lobbying on Redevelopment Effort Favored by a Major Donor? -  Yves Smith  - An alert reader pointed to a new post by Norman Oder, who has been following the so-called Atlantic Yards project, a $4/9 billion proposed “redevelopment” for part of Brooklyn proposed by Bruce Rattner of Forest City Development. What caught his eye was that Schneiderman had secured a settlement from three groups, one New York City’s “economic development agency” and two local development corporations. This triumverate was pushing local legislators to support development projects in Willets Point in Queens and Coney Island in Brooklyn.  What’s wrong with that? The Wall Street Journal explains: Local development corporations are nonprofit organizations that can acquire land from a municipality without public bidding, and they are commonly used in major public projects. While technically separate from government, their political independence varies widely. They are banned from lobbying. This is also a poke in Bloomberg’s eye, since they were pet initiatives of his. But Oder raises the question: why didn’t Schneiderman also pursue the Downtown Brooklyn Partnership, which operates in pretty much the same manner? Might it have something to do with the $12,500 that Rattner gave to Schneiderman’s 2010 campaign?

Slow Speed Rail and the Infrastructure Deficit - High speed rail, especially California’s project, looks to me to be monorail economics, a costly boondoggle whose appeal lies not in rational calculation (also here) but in the desire of some politicians (and voters) to feel visionary and sexy. In theory, CA HSR  might work but the inevitable reviews, delays, lawsuits and special interest payoffs make the prospects of a beneficial project look dim, demosclerosis kills. Slow speed rail, however, i.e. freight transport, isn’t sexy but Warren Buffett is investing in rail and maybe we should as well. In particular, there are basic infrastructure projects with potentially high payoffs. Congestion in Chicago, for example, is so bad that freight passing through Chicago often slows down to less than the pace of an electric wheel chair. Improvements are sometimes as simple as replacing 19th century technology with 20th century (not even 21st century!) technology. Even today, for example: …engineers at some points have to get out of their cabins, walk the length of the train back to the switch — a mile or more — operate the switch, and then trudge back to their place at the head of the train before setting out again. In a useful article Phillip Longman points out that there are choke points on the Eastern Seaboard which severely reduce the potential for rail:

California Approves Funding for High-Speed Rail Line - NYTimes.com: California lawmakers approved billions of dollars Friday in construction financing for the initial segment of the nation's first dedicated high-speed rail line connecting Los Angeles and San Francisco. The move marked a major political victory for Democratic Gov. Jerry Brown and the Obama administration. Both have promoted bullet trains as job generators and clean transportation alternatives. "No economy can grow faster than its transportation network allows," U.S. Transportation Secretary Ray LaHood said in a statement applauding the legislative vote. "With highways between California cities congested and airspace at a premium, Californians desperately need an alternative." The bill authorizes the state to begin selling $4.5 billion in voter-approved bonds that includes $2.6 billion to build an initial 130-mile stretch of the high-speed rail line in the Central Valley. That will allow the state to collect another $3.2 billion in federal funding that could have been rescinded if lawmakers failed to act Friday.

Investing in Public Mega-Projects During a Time of Deep Fiscal Deficits -- You have to respect the courage of California's state leaders to make a major long term investment in high speed rail during a time of deep and ongoing fiscal deficits at the local, state and national level.  The NY Times reports here.  I must admit that I side with the Republicans on this issue.  Peter Gordon's recent blog post eloquently traces out the issues.  I would like to add a few points.
1.  How much will this high speed rail really cost?  This is a random variable that the current governor will not be around to know the final answer.  I may never learn the answer either!
2.  A high speed rail train will offer some externality benefits.  Has any economist quantified these? How much less traffic congestion will there be?  How much less GHG emissions will there be? What is the social benefits of these increments?  Could these benefits add up to match the billions of dollars of costs?
3. Who will really enjoy the benefits of HSR? The answer is geographical locations that are currently far from San Fran and LA that will now become suburbs of these cities. You should buy land now in the areas where the train will stop.  You will be the winner from HSR.
4.  How much Federal $ will California collect to pay for this train?

Brown Lifts Agency Default Risk in Budget Balancing: - California Governor Jerry Brown’s decision to wipe out 400 blight-fighting redevelopment agencies has increased municipal-bond defaults in the state and pushed the yield penalty on the authorities’ debt to a six-month high. Scrapping the agencies freed about $1 billion for schools and helped close a budget gap. Brown’s plan, which took effect Feb. 1, called for local governments to handle payments on the bonds using reserves and property taxes from redevelopment zones. Payments were disrupted in the case of cities including Monrovia in Los Angeles County and Hercules near San Francisco. The debt, issued to rehabilitate buildings and land, traded in June at yields averaging 3.3 percentage points above similar- maturity Treasuries, the most this year, according to BondDesk Group LLC. Invesco Ltd. (IVZ) (IVZ) is among investors concluding disruptions will be temporary, enhancing the appeal of the extra yield on the nearly $30 billion of redevelopment securities as municipal interest rates remain near four-decade lows. “What we’ve been looking at are deals where it’s a good redevelopment bond with debt service coverage that is fairly solid,”

Is Stockton the Start of a Rash of Municipal Bankruptcies? -- On Thursday, the Central Valley town announced that it was insolvent and became the largest city in U.S. history to declare bankruptcy. There’s no doubt that other such bankruptcies will follow, considering how the brutal recession and sluggish recovery have battered state and local finances over the past few years. But the key economic question is whether these will be exceptional cases or whether there will be a nationwide string of local bankruptcies that could rock the entire country’s finances. Some analysts have long believed that municipal finances were a disaster waiting to happen. Prominent financial services analyst Meredith Whitney, who foresaw trouble at Citibank and Lehman Brothers prior to the banking crash, subsequently warned of possible widespread municipal financial crises. In an interview in late 2010 she said that 50 to 100 local governments could potentially default, with losses totaling hundreds of billions of dollars. That obviously hasn’t happened yet. And since such defaults have never occurred on even a tenth of that scale, some critics have accused Whitney of overreaching. Nonetheless, the finances of many local governments have continued to deteriorate, and states have become less willing – and perhaps less able – to bail out counties, cities and towns that get into serious trouble.

Probation as a Revenue Scheme for Cash-Strapped States -- If you liked for-profit prisons pushing tougher sentencing and leading to a sharp increase in the warehousing of US citizens, then you’ll love for-profit probation: Three years ago, Gina Ray, who is now 31 and unemployed, was fined $179 for speeding. She failed to show up at court (she says the ticket bore the wrong date), so her license was revoked. When she was next pulled over, she was, of course, driving without a license. For that driving offense, Ms. Ray has been locked up three times for a total of 40 days and owes $3,170, much of it to the probation company. Her story is not about innocence. It is, rather, about the mushrooming of fines and fees levied by money-starved towns across the country and the for-profit businesses that administer the system. The result is that growing numbers of poor people, like Ms. Ray, are ending up jailed and in debt for minor infractions. It’s largely hidden from view for those who stay on the right side of the law, but the indignities placed on those unlucky enough to get caught up in the justice system include layered-on financial penalties. Over the years, states have added all kinds of fees on those least able to pay. And they outsource the collection to private companies that simply do not relent, and know exactly how to pyramid fees on top of fees. That’s how a speeding ticket becomes a debt for life.

Price Tags for Parents - Every year the Department of Agriculture publishes estimates of family spending on children. This year, as in other years, many journalists duly passed the information on, often with snide asides about the “gift that keeps on taking” or the escalating price of bundles of joy. A married middle-income two-child family can expect to spend about $235,000 on housing, medical care, food, clothing, toys and other items over the next 17 years for a child born in 2011. The costs of college are extra. But — as an article in The Wall Street Journal recently noted — the official estimates omit consideration of the value of the time that parents devote to children, because that is considered an indirect rather than a direct expenditure. Indirect costs are not insignificant. Time taken out of paid employment to provide family care reduces the lifetime earnings of mothers, in particular, leaving them vulnerable to poverty if they are unmarried or experience divorce. My research, based on analysis of the Child Development Survey of the Panel Study of Income Dynamics, shows that even a very cautious estimate of what it would take to hire a replacement for family care was higher than direct expenditures on children under 12 for the year 2000. In other words, the total costs were more than twice as high as the direct costs.

Your E-Book Is Reading You - In the past, publishers and authors had no way of knowing what happens when a reader sits down with a book. Does the reader quit after three pages, or finish it in a single sitting? Do most readers skip over the introduction, or read it closely, underlining passages and scrawling notes in the margins? Now, e-books are providing a glimpse into the story behind the sales figures, revealing not only how many people buy particular books, but how intensely they read them. For centuries, reading has largely been a solitary and private act, an intimate exchange between the reader and the words on the page. But the rise of digital books has prompted a profound shift in the way we read, transforming the activity into something measurable and quasi-public.  The major new players in e-book publishing—Amazon, Apple and Google—can easily track how far readers are getting in books, how long they spend reading them and which search terms they use to find books. Book apps for tablets like the iPad, Kindle Fire and Nook record how many times readers open the app and how much time they spend reading. Retailers and some publishers are beginning to sift through the data, gaining unprecedented insight into how people engage with books.

The bottom line of the barrel — A common refrain about Bobby Jindal is that he is ruthlessly ambitious. It's interesting, though, that many people see his enthusiastic slashing of education and other social programs as part of his presidential aspirations. It's especially screwed up that such a thing would make him attractive as a candidate. We're living in a time of sociopathic capitalism, where the primary, if not sole, benchmark of leadership is how much money a leader can save. Everything else is expendable. In these austere times, it's downright quaint to believe that anything has a value beyond what fits in a ledger or a spreadsheet. Profits reign so supreme now that if we have to choose between earning 50 cents and educating a student, or making 51 cents and telling the kid to go to hell, we'll gladly give the kid directions. This mindset, long the province of smoky corporate boardrooms, has spread to politics as the economy tanks ever so further. When people are broke, they often throw everything on the back burner out of desperation, and only the most immediate needs matter. When they're always fighting to catch up to the next bill, they have no time for principles or to aspire to a better life. It gives the misers in government a license to gut the programs that keep society going, which in any other context would make them look like the heels that they are.

Giving up control of education - Aspen is the natural habitat of America’s overconfident plutonomy: the kind of people who are convinced that since they have been successful themselves, they are therefore qualified — more qualified than education professionals, in fact — to diagnose problems and prescribe solutions. The ultimate example of this in recent weeks was the firing of Teresa Sullivan as president of the University of Virginia, by rich trustees who had no substantive beef with her at all. Instead, they just didn’t like her reluctance to sign on to various inchoate strategies, which sound great in a mass-market leadership book but which are unlikely to be particularly helpful in the context of a venerable educational institution. These people have all read their Steve Brill, and have watched (or even funded) Waiting for Superman. They’re generally convinced that bad teachers are The Problem, and seem to think that that reforming the nation’s education system is a task somehow akin to akin to remaking General Electric. Measure everything, work out who’s good and who’s bad, and fire the underperformers: half of the problem is solved right there. Then, look at the great teachers, the inspirational ones, and the ed-tech innovators. If America’s remaining teachers just take a leaf out of their books, and start doing the things that work really well, that’s the other half of the problem addressed.

U.S. Human Capital: Gains Flatten Out - High school graduate rates in the U.S. levelled out rose sharply in the first part of the 20th century, but levelled out several decades ago.  "Figure 7, which plots high school completion rates at age 35 by birth cohort for U.S. residents born between 1930 and 1975, shows that the secular trend increase in overall high school graduation rates prevailing since at least 1890 ... sharply decelerated starting with the 1948 birth cohort and then plateaued with the 1952 birth cohort. It showed no trend improvement over the subsequent three decades." College graduation rates have risen a bit in recent decades, but the increased is completely due to gains in college graduation rates by women. Acemoglu and Autor write: "Figure 8, which similarly plots college completion rates at age 35 by birth cohort, reveals an equally discouraging inter-cohort trend in college completions. The aggregate college graduate rate peaked with the 1951 birth cohort and did not begin to rise again until the 1966 birth cohort completed college. Despite the surge in the college [wage] premium ... there has not been a robust supply response among recent cohorts." These two figures also break down the overall rate (blue line) into a rate for males (red line) and females (green line). For men, high school graduation rates are lower for men born in the 1970s than they were for men born in the 1950s. For men, college graduation rates have rebounded a bit, but still haven't returned to the level for men born around 1950. These graphs measure the quantity of people graduating, but there is little reason to believe that the quality of graduates is improving, either.

Teachers, Cheating, and Incentives -- In recent years there seems to have been a surge in academic dishonesty in high schools. No doubt this can be explained in part by 1) increased vigilance and reporting, 2) greater pressure on students to succeed, and 3) the communicable nature of dishonest behavior (when people see others do something, whether it’s enhancement of a resume or parking illegally, they’re more likely to do the same). But, I also think that a fourth, and significant, cause in this worrisome trend has to do with the way we measure and reward teachers. To think about the effects of these measurements, let’s first think about corporate America, where measurement of performance has a much longer history. Recently I met with one of the CEOs I most respect, who had tried to create a specific performance evaluation matrix for each of his top employees, and he asked them to focus on optimizing that particular measure. He also changed their compensation structure so that 10 percent of their bonus depended on their performance relative to that measure. What he quickly found was that his top employees did not focus 10 percent of their time and efforts on maximizing that measure, they gave almost all of their attention to it. This was not such good news, because they began to do anything that would improve their performance on that measure even by a tiny bit—even if they caused problems with other employees’ work in the process.

Measuring the results of on-line learning - This report documents several learning effectiveness studies that were focused on the OLI-Statistics course and conducted during Fall 2005, Spring 2006, and Spring 2007. During the Fall 2005 and Spring 2006 studies, we collected empirical data about the instructional effectiveness of the OLI-Statistics course in stand-alone mode, as compared to traditional instruction. In both of these studies, in-class exam scores showed no significant difference between students in the stand-alone OLI-Statistics course and students in the traditional instructor-led course. In contrast, during the Spring 2007 study, we explored an accelerated learning hypothesis, namely, that learners using the OLI course in hybrid mode will learn the same amount of material in a significantly shorter period of time with equal learning gains, as compared to students in traditional instruction. In this study, results showed that OLI-Statistics students learned a full semester’s worth of material in half as much time and performed as well or better than students learning from traditional instruction over a full semester.

UF’s Board of Trustees agree on a 9 percent tuition increase - UF is finally getting what it asked for. After an hour of haggling, storytelling and sidestepping on the last day of its meeting, the Board of Governors approved a 9 percent differential tuition increase for UF. A frustrated Gov. Tico Perez tried to keep the debate on track. “Fifteen years ago, [University of Central Florida] was known as ‘U Can’t Finish,’ because you couldn’t get your classes,” he said. He argued that “modest” tuition increases could alleviate that problem and help students graduate on time. Although UF has raised tuition by the state maximum of 15 percent for the last five years, UF President Bernie Machen announced to UF’s Board of Trustees earlier this month he would seek only a 9 percent increase this year to give struggling students a break. Machen previously said a 15 percent increase was necessary to help balance a $38.2 million budget cut dealt by the state. All 11 Florida public universities requested increases in differential tuition, which is an increase in base tuition set by the state according to the needs of each university. At 9 percent, UF had the lowest request. Most other universities requested the maximum of 15 percent.

DSU Raising Tuition, Housing, Meal Plan Rates - Delaware State University is raising its tuition, housing and meal plan rates for the 2012-2013 academic year. The university said Monday that tuition and fees for in-state students will rise 4 percent to about $7,335 from $7,055 a year ago. Out-of-state tuition and fees will go up 4.25 percent to about $15,690 from $15,050. In addition, the cost of residence halls will range from about $6,975 to $7,490 and meal plans will cost about $3,310 to $3,730. Both rates will be 4.5 percent higher than they were during the previous academic year.

Munis face $2 trillion in unfunded pension costs - U.S. states and localities have run up more than $2 trillion of unfunded pension liabilities, Moody's Investors Service said on Mo nday, citing data on plans offered by 8,500 local governments and over 14,000 individual entities. Wall Street credit agency said that according to its estimate, the total liabilities for fiscal 2010 were more than three times the amount reported by local governments. "Pension liabilities are widely acknowledged to be understated," Moody's Managing Director Timothy Blake said in a statement. Most states end their fiscal years on June 30. Investors in the $3.7 trillion municipal bond market are focused on whether states, counties, cities and towns can afford the pension benefits granted public workers. The rising cost of public pensions has strained finances for cities around the country. Stockton, California, which last week became the biggest U.S. city to file for Chapter 9 protection, plans to cut employee compensation and retiree benefits by $11.2 million to help close its deficit.

Let's abolish retirement - Retirement is not as old as you think. According to the Bible, God expelled Adam from Paradise with the terrible words: "In the sweat of thy face shalt thou eat bread, till thou return unto the ground." And that's more or less how it was until about a hundred years ago. Most people worked till they died. Pensions in the UK date from 1908, and the cost of the first pension schemes was tiny, as the retirement age of 70 was 20 years beyond average life expectancy. Retirement was for heaven – if one had lived a virtuous life. Work has remained central to our existence, despite the lengthening gap between work and death we call retirement. We are expected to work till our sixties and somehow make the best of the dead years to follow. This is a problem for both finance and occupation. Lord Wei wants to fill up retirement with "work, leisure, and service". His National Retirement Service, proposed in a report published yesterday, would help retirees to "embrace a concept of retirement that is more active, economically and socially … saving taxpayers money and generating health and wealth for all generations". In my view this is to get it the wrong way round. We shouldn't be aiming to extend the domain of work into old age, but to extend the domain of non-work into young age – that is, to abolish the concept of retirement altogether. A rich society no longer has the need to work its labour force into the grave. It already has "enough".

This Week in Poverty: 89,000 Children in Pennsylvania Lose Medicaid - Since August 2011, 89,000 children in Pennsylvania have lost their Medicaid coverage, including many with life-threatening illnesses who were mistakenly deemed ineligible. The state currently hasn’t a clue whether many of these children have any healthcare coverage at all. How did this happen? In late summer, the Pennsylvania Department of Welfare (DPW) began notifying hundreds of thousands of families by mail that they had ten days to provide necessary documentation in order to keep their children enrolled in Medicaid. If the family missed the deadline—or even if they met it but DPW failed to process the paperwork within the ten days—they were dropped from Medicaid. Federal law indeed requires that families prove their Medicaid eligibility annually. Pennsylvania requires verification every six months. During the previous administration, under Democratic Governor Ed Rendell, caseloads grew as a result of the recession, while county assistance offices were shorthanded due to budget cuts. Caseworkers simply couldn’t keep pace with the workload and there was a backlog of renewal applications.

How Much Would the Medicaid Expansion Cost Your State? - The 50 statehouses have become the next major battleground for the Affordable Care Act, President Obama’s health care law. Last week’s Supreme Court decision held that each state could choose whether to extend Medicaid coverage to all adults living within 133 percent of the poverty line – an expansion that could add as many as 17 million previously uninsured people to the Medicaid rolls. The federal government would cover a vast majority of the new costs, but strapped states would need to kick in some money, too. Some governors, like Martin O’Malley, Democrat of Maryland, have indicated they will say yes. Other governors, including a number of Republicans, have said they will say no. But will it be a good deal for the states to take the money and cover more people? I created a chart to show how much a state would have to spend in dollar terms and as a percentage of its 2011 economic output to expand coverage between 2014 and 2019. (The cost estimates come from the indispensable Kaiser Family Foundation, and the state output estimates come from the Bureau of Economic Analysis.) I also added in how much the federal government would spend in a state if it chose to expand coverage, again in dollar terms and as a percentage of the given state’s economic output. A few states would actually save money — meaning their new spending would be negative.You can check your state out in the table below, created with the help of the graphics designer Alicia Parlapiano.

Could States Save by Expanding Medicaid? - About a dozen states have indicated that they will opt out of the Medicaid expansion in the Affordable Care Act, with many citing the price tag as the reason. As I wrote in an earlier post, states opting in will get federal subsidies that will cover a vast majority of the cost of expanding coverage to all adults with earnings up to 133 percent of the federal poverty line. But states will need to kick in some money, too. A few readers, though, argued that other, fuller analyses show that some states might actually save money by covering more people. The study I cited looked at the costs of extending coverage. But it did not estimate the savings that might come along with it. In 2009, the Council of Economic Advisers put out a report making the case. “Rather than harming the budget situation of the states, health insurance reform would improve it,” the economists wrote. So where do the projected savings come from?  First, state and local governments end up footing much of the bill for uncompensated care. Say you are a low-income, uninsured adult who has an accident, goes to the emergency room and cannot pay out of pocket for your care. The hospital might just absorb the cost for your treatment. Second, financing care for the uninsured forces hospitals and doctors to charge the insured higher prices, meaning higher premiums for coverage.

Will states really turn down federal money? They’ve done it before.: The Supreme Court has now forced states to make a choice about whether to expand Medicaid, as my colleague Sarah explains this morning. But will they actually turn down federal money, while other states scoop it up? Certainly it’s happened before, as states have rejected federal money for everything from health care and high-speed rail to unemployment benefits. But state lawmakers have also reneged on their promises to turn their backs on the federal government. The most prominent and obvious example is the original Medicaid program itself. In 1965, when Congress first created the federal-state partnership, every state moved to implement it—except for Arizona. For 17 years, Arizona was the only state without Medicaid, instead leaving it to county governments to manage health coverage for the poor. Texas is a more recent example. The state-based Children’s Health Insurance Program was passed in 1998 to cover children from families whose incomes were modest, but too high for them to qualify for Medicaid. Texas dragged its heels on joining up, held back by conservatives who were fearful of a growing welfare state. But the state soon relented and joined CHIP in 2000.

States and the Affordable Care Act: An Offer They (Still) Can’t Refuse - For months, astute observers called Medicaid the “sleeper issue” of the Supreme Court’s Affordable Care Act deliberations.  Last Thursday, they were proven correct.  A majority of the Supreme Court struck down a provision of the law giving the Health and Human Services Secretary authority to pull all federal Medicaid funds from states refusing to extend eligibility to low-income, non-elderly adults. The ruling was surprising for several reasons.  First, starting with land grants for public colleges and universities and continuing through to the interstate highway system and social safety net, the federal government has a long history of conditioning state and local grants on acceptance of its rules.  A prime example is federal funding for K-12 education under the No Child Left Behind program. This is also how Medicaid has operated since its inception in 1965.  At the time, Congress explicitly reserved to itself the “right to alter, amend, or repeal any provision.”  Indeed, it has exercised this right several times, expanding eligibility to low income pregnant women and various groups of children in the 1980s and 1990s.  Some expansions came with carrots (promises of extra money) and some with sticks (threats to existing funds). But the majority held that this expansion was different, not just tinkering around the edges but fundamentally changing the program’s identity.  What’s more, because Medicaid has grown so big (it was states’ single largest budget item in FY 2010, including federal funds) and so much a part of state law, giving the HHS Secretary discretion to yank federal funds amounted to an order, even an existential threat (a “gun to the head” or “your money or your life” proposition).

The GOP Push to Opt-Out of Medicaid Expansion Begins - Now that the Supreme Court has made it easier for states to choose not to take part in the Medicaid expansion provision of the Affordable Care Act, some Republican governors have already started seizing on this latitude. In just the few days since the ruling came down, both South Carolina Gov. Nikki Haley (R) and Florida Gov. Rick Scott (R) have affirmatively declared their states will not take part in the Medicaid expansion. There are indications other Republican governors may also soon follow. The governors are refusing to take part even though generous federal funding — initially, 100% of the expansion costs — means the cost to the states would be very small compared to the number of additional people who would receive benefits in each state. There is a chance these governors may relent after the 2012 election as a result of political pressure both from regular people and powerful health care industry lobbies.  But if the states do follow through in denying coverage, this could have a huge impact on the lives of millions of Americans. According to the Kaiser Family Foundation, Florida is tied for first in having the largest percentage of non-elderly people making less than 139 percent of the Federal poverty line (FPL) who are uninsured, with 44 percent of this population without coverage. South Carolina is not far behind in 4th place with 39 percent of their population without insurance. These are the states where the Medicaid expansion is most critical.

Medicaid Expansion and Jobs - The coming Medicaid expansion will reduce employment, but last week’s Supreme Court ruling could permit states to prevent that outcome. The state-administered Medicaid program pays health care providers on behalf of low-income individuals and families. It is the largest antipoverty program, spending about $8,000 per beneficiary a year. Unlike other major safety-net programs like unemployment insurance and food stamps, the Medicaid program has not significantly expanded its eligibility or average benefit in recent years. Some states have restricted Medicaid benefits in order to control costs. A number of states have expanded eligibility, but those expansions were small enough that nationwide Medicaid enrollment and inflation-adjusted Medicaid spending actually grew slightly less between 2007 and 2010 than did the number of Americans in poverty.As a result of the Patient Protection and Affordable Care Act, Medicaid enrollment and spending were expected to increase significantly in 2014, when the program will be made available to able-bodied adults with incomes up to 133 percent of the federal poverty level . Full-time employment is a major reason that able-bodied adults would have incomes above 133 percent of the federal poverty level. If carried out, this expansion is expected to reduce full-time employment among able-bodied adults, because they would no longer need to be employed full time to obtain health insurance (previously they could pay out of pocket for health insurance when not employed full time, but that is a more expensive way to obtain health insurance).

GOP’s Rejection of Medicaid Funds Is One More Ideologically Driven Bad Idea - One important aspect of the Court’s decision gives no reason to celebrate: the ruling that the federal government can’t withdraw all Medicaid funds from governors who refuse to expand Medicaid rolls in their states, essentially making it possible for them to opt out. The Medicaid expansion is meant to give coverage to about 17 million Americans by 2019, accounting for almost half of the 32 million people the bill promised to insure. Yet as Sarah Kliff reported, if states opt out of expanding Medicaid, it could leave some of the poorest Americans stuck in a no-man’s land in which they don’t qualify for Medicaid but also don’t qualify for subsidies to buy insurance. Beyond literally being a matter of life or death for many uninsured Americans, it’s also an economic issue: the White House calculated that expanding the number of Americans with insurance would increase economic well-being by about $100 billion a year, or about two-thirds of a percent of GDP. It seems foolhardy for governors to reject what is basically free money to help more people in their own states gain health insurance. Yet Republican governors are already contemplating rejecting the money. The Hill reported this week that fifteen governors are either flat-out planning to reject the Medicaid expansion money or are leaning in that direction.

Why Medicaid expansion is key part of health reform - Many Americans still don't understand how Medicaid works. The biggest misperception is that Medicaid is a universal health care program for all poor people. That's just not true. Many people with little to no income do not qualify for Mediaid. Yes, all children up to 100% of the poverty line, and children under 6 up to 133% of poverty line, are covered. Pregnant women up to 133% of the poverty line are covered as well. So are elderly and disabled Americans who qualify for Social Security's Supplemental Security Income. But there's where things start to break down. Parents are covered, but only to 1996 welfare levels. This keeps a lot of parents, even those who are very poor, from qualifying for Medicaid. Two parents and a child living in Alabama, Arkansas, Indiana, Louisiana or Texas with an income of $4,850 a year actually earn too much to qualify for traditional Medicaid. And if you're not a parent, then things are even worse. In most states, if you have no children, you can't qualify for Medicaid no matter how little you make. In most states, even if you make no money at all, there's no Medicaid for you. This means Medicaid is far from the safety net many imagine it to be. It has so many holes that when the heath care law really gets going in 2014, more than half (PDF) of the newly insured will be those earning less than 133% of the poverty line. The poor still constitute a significant percent of the uninsured.

States Opting Out of Medicaid Expansion Could Reduce Their Rolls Without Consequences - Kaiser Health News sketches out a terrifying scenario for Medicaid in states that opt out of the expansion. Not only could they refuse to cover low-income adults up to 133% of the federal poverty line, but they could actually roll back their current Medicaid plans without any consequence. In 2014 the “maintenance of effort” rules expire for Medicaid, meaning that states could actually make their plans stingier. And don’t think that budget-conscious states won’t kick the poor before, say, raising taxes on corporations or the wealthy. This wasn’t supposed to happen under President Barack Obama’s health law, which was designed to expand coverage for 30 million Americans, in part by adding 17 million people to Medicaid. But the impact of the Supreme Court’s ruling last week making the expansion voluntary is likely to be compounded by another provision in the law that the justices left intact: In 2014, states no longer are barred from making it harder for adults to qualify for Medicaid.Experts worry that those two developments taken together could spur some states to reduce the number of people covered [...]

What happens if a state opts out of Medicaid, in one chart:  If governors opt their states out of the health law’s Medicaid expansion — as many are now threatening to do — it’s the poorest Americans who would find themselves getting the rawest deal. This set of charts from our graphics department helps explain why: People who earn less than 100 percent of the Federal Poverty Line (about $11,170 for an individual) are ineligible for tax credits to purchase health insurance. In a state like Arkansas, for example, that could be a big deal: Anyone in the orange area above is stuck in a sort of no-man’s land: They’re both ineligible for tax subsidies but not covered under their state’s current Medicaid program.

Why Logic Won’t Work in the Medicaid Expansion Debate - I’m clearly not above wonking out every now and again. And it’s worth looking at the facts on the costs of the Medicaid expansion. But before we go that far, you have to understand how this is not about costs to those who want to deprive their poorest citizens health care, and it should be about costs to those of us who want to extend it. It’s about lives. And it’s also, it must be said, about race. Medicaid expansion in Red States is not going to be argued as “extending health insurance to uninsured adults,” but rather, “giving free stuff to people of color” (though that won’t be the phrase used) [...] Already, my anecdotal experience is that a proportion of voters in the states in question claim that the first black President has spent his first term making sure that people of color get more than their fair share of benefits (I think they make this argument based on expanded food stamp usage, though of course the argument is not coherent). The GOP frame for the Medicaid argument will not focus at all on insuring the uninsured. It will not breathe a word of how insured people subsidize uninsured people who use emergency rooms for care. Rather, it will extend and enlarge on this argument about a black President giving free stuff to black people (or Latinos in states like Texas). And I believe that will remain true even if Obama loses in November.

Pure Spite -- In my Atlantic column on Thursday, I wrote the following about the Roberts Court’s decision to allow states to opt out of Medicaid expansion without losing their existing Medicaid funding: “What we are going to see is Republican-controlled state governments refusing to expand Medicaid out of bitter hatred toward President Obama and spite for the working poor who need access to health care.” For those who aren’t up to speed, the deal is basically this. Medicaid is administered by states (which often outsource it to third parties), but the federal government sets certain minimum coverage requirements that states must meet in order to receive federal funding. Those requirements are pretty low, states can choose not to cover able-bodied adults without children, regardless of their income. The Affordable Care Act required states to dramatically increase their Medicaid coverage, with the federal government kicking in 90 percent of the additional funding required (100 percent in the early years).

Health Insurance Rebates Show How Bad Insurers and State Regulators Can Be - Thursday's health care ruling was a surprising victory for the middle class. Most of the story is well-known, and summarized in the President's speech: six million young adults under 26 who have gained insurance, children now (and adults starting in 2014) can no longer be denied insurance due to pre-existing conditions, an end to terminating people's insurance when they get ill, closing the Medicare donut hole, etc. I want to focus on one provision the President mentioned in passing, the $1.1 billion in insurance rebates that 12.8 million Americans will be receiving August 1. The rebates are due to the medical loss ratio or "80/20" rule that insurance companies cannot spend more than 20% of premium dollars on "administration, CEO pay, and profits," as Health Care for America Now (HCAN) summarizes it. The requirement is 85% spent on actual medical care for firms in the large group market, according to healthcare.gov.(via HCAN). Of the $1.1 billion in rebates, $393.9 million will be in the individual market, $386.4 million in the large group market, and $321.1 million in the small group market.  Although $1.1 billion in rebates is not a lot of money in the multi-trillion U.S. health care system, it is enough to provide noticeable rebates to millions of consumers before the November election. Consumers Union has a state-by-state breakdown of which insurance companies owe rebates in each state, and how much. Three patterns emerge from these data: First, some companies routinely failed to meet the 80/20 rule in state after state after state. Second, Blue Cross/Blue Shield companies, which were once largely non-profit but were converted to for-profit corporations mostly in the 1990s, are now frequent violators of the medical loss ratio rule. Third, some states, most notably Texas, have such lax insurance company regulations that violations of the rule are rampant. The data below come from the Consumers Union link above.

Republicans Can Also Opt Out of Exchanges, Force Defunding for Federally Administered Ones -- I believe that the ability for Republicans to undermine the Medicaid expansion in the health care law is really terrible, because this is one of the few unquestionably good parts of the legislation. But it’s worth noting that Republicans have plenty of opportunities to undermine the rest of the law too, even if they never get in the position to “repeal and replace.” Even if the law goes into effect as scheduled in 2014, red state governors can vow not to implement its component parts. This covers not only the Medicaid expansion, but the insurance exchanges, the marketplaces where customers can shop on the individual market and compare policies, and reap subsidies for the purchase of coverage at the low end. There was supposed to be a fail-safe in the law; if governors rejected setting up the exchanges, they revert to the federal government, which would set them up for the states. However, there’s one key detail that was left out of that equation. There’s no money to pay for that. So why isn’t Jindal reluctantly complying rather than hand a small measure of sovereignty over to the federal government? Because as the result of a drafting oversight, Congress neglected to include automatic appropriations for federally facilitated exchanges (FFEs). That means there’s money on hand to help states that want to set up the exchanges themselves, but the government’s options vis-a-vis states that can’t or won’t act on their own are more limited [...]

Why States Should Set Up Health Insurance Exchanges - Now that the Supreme Court has upheld the Affordable Care Act, we know that insurers will no longer be able to deny people coverage or charge them more based on their health status or gender, subsidies will be available to help people with low and moderate incomes afford coverage, and a state or federal exchange will be operating in every state in 2014. A number of states are well on their way to establishing their own exchanges.  But many other states instead have dragged their feet, citing uncertainty prior to the high court’s ruling (see map).  With last Thursday’s decision, however, states can no longer use that excuse as grounds to avoid implementing the law.  States that have said they prefer to operate their own insurance exchanges (rather than have the federal government run the exchanges for them) must act quickly. Five reasons why states should start or resume planning activities immediately:

• 1. Deadlines are approaching – quickly. States must officially notify the Department of Health and Human Services (HHS) by November 16, 2012 of their intention to operate a state-based exchange and submit an application for federal approval of the exchange’s design and operations.
• 2. Applications alone won’t be enough. States seeking approval of their exchange proposal have to demonstrate sufficient progress to HHS by January 1, 2013

The Health Care Mandate: If it seems Like a Tax it is a Tax-Becker - In the past I supported a health care mandate that would require everyone to have minimal insurance against catastrophic health events, such as cancers, that are very expensive to treat. Catastrophic insurance alone is pretty cheap since they are rare for younger persons, the main ones not covered either by private insurance, Medicare or Medicaid. The argument I gave in support of such a mandate is that individuals without insurance who develop a catastrophic medical condition would impose significant burdens on those with insurance by raising the cost of insurance to everyone. But research convinced me that while in principle this is a concern, the medical care provided to the many uninsured in America has had only a small effect on the cost of private health insurance.These authors find that private insurance premiums were raised by no more than 1.7% because of the shifting of the costs of the uninsured to private insurers. Partly for this reason I have changed my position on the health care mandate, and no longer believe it is worth the cost of getting the government involved in mandating health insurance for everyone.The form the health care mandate takes in the Affordable Care Act also influenced my change in position on these mandates. This Act does not simply mandate catastrophic insurance coverage, but mandates a far more extensive coverage that can hardly be justified by the need to protect individuals against the cost of serious illnesses. Moreover, instead of just subsidizing the poor, this Act also subsidizes individuals and families with incomes that are several times above the poverty line. As frequently happens in the political implementation of possibly good policies, the actual mandate and many other programs under this Act are likely to do more harm than good.

Is the Health Care Law’s “Mandate” Really a Tax?—Posner - I agree with Becker (and with the Supreme Court) that the “mandate” in the health care law—the requirement that people who can afford to buy health insurance must do so on pain of having to pay a “penalty” if they do not—is within Congress’s taxing power under Article I of the U.S. Constitution, the article establishing the legislative branch of the federal government. Article I among other things authorizes Congress "to lay and collect taxes, duties, imposts and excises." The fact that Congress called the mandate exaction a penalty rather than a tax is of no significance. It was done simply because “tax” has become a dirty word in American political discourse.  It is true that the main reason for taxes is to generate revenue for the government, and the mandate exaction is not a revenue tax but a regulatory tax. But regulatory taxes—a tax on emission of pollutants, for example—are common; their aim is not to generate revenue but to discourage undesirable practices, though they generate some revenue because some of the taxpayers find the tax less onerous that discontinuing the taxed activity. The “duties, imposts, and excises” to which Article I refers would include tariffs, which are often intended to discourage imports rather than to raise revenue. It is true that from an economic standpoint a regulatory tax may not seem sharply different from a fine (for illegal parking, for example), which is not a tax within the meaning of Article I (if it were, Congress would have virtually unlimited regulatory power, rather than just the enumerated powers set forth in Article I). But there is a significant difference. Fines are imposed on activities that are forbidden, rather than merely sought to be discouraged or reduced.

The Old "Solidarity vs. Rugged Individualism" Diversion on Health Care - The elites continually try to give us phony political frames to divert the public from the real issues in politics. We have an excellent example of such an effort in the NYT's Economix blog where Uwe Reinhardt tells us that the health care debate is about "Solidarity vs. Rugged Individualism." Reinhardt's story is that we have the solidaristic liberal types who think that everyone should be put in a single pool. If someone ends up getting really sick, then the healthy among us will pick up the tab. These are the supporters of Obamacare or other plans to extend health insurance coverage. Then we have the rugged individualistic types who are willing to pay for their own care, but don't want to be stuck with the tab for others. Their philosophy is that if someone gets sick, then they should just get out of the way. There is no reason to stick everyone else with the tab. That's a great way to frame the central issue in the debate, except of course that none of the leading opponents of Obamacare openly expouses anything like the rugged individualist view that Reinhardt wants to attribute to them. Instead they say things like they want to use market mechanisms to extend coverage. We can show that their approaches will not work, but that is not the same thing as espousing Reinhardt's rugged individualistic view that people just should not get care.

Let Us Have a Constitutional Moment Here, Nino... - Brad DeLong - Maybe I am simply being stupid, but it seems to me that there were three nearly-indistinguishable ways to structure the "mandate" part of the Affordable Care Act:

1. A command to purchase health insurance--under pain of losing (part of) your tax refund.
2. A command to have purchased health insurance continuously since the effective date of the ACA when you show up at the emergency room--under pain of having to pay the back premiums plus a fine.
3. Simple "play or pay"--purchase health insurance or else pay an extra tax to cover the costs of treating you when you show up, uninsured, at the emergency room.

Only the first of these might be unconstitutional under any theory that the commerce clause does not allow the regulation of "inactivity". The second and third are fine. And, indeed, five justices say that the first is fine precisely because when the rubber hits the road it is indistinguishable from (3), which is a simple and constitutional exercise of the government's taxing power.

Giving Health Care a Chance to Evolve - Nearly every economic analysis of the health care industry rests on the observation that individually purchased private insurance is not a viable business model. The fundamental problem is that ... people with serious pre-existing conditions are likely to need expensive care. Any company that issued policies to such people at affordable rates would be driven into bankruptcy, its most profitable customers lured away by competitors offering lower rates made possible by selling only to healthy people. Economists call this the adverse-selection problem. Because of it, unregulated private markets for individual insurance cannot accommodate the least healthy — those who most desperately need health insurance. Many countries solve this problem by having the government provide health insurance for all. In some, like Britain, the government employs the care providers. Others, like France, reimburse private practitioners — as does the Medicare program for older Americans.  Modeled after proposals advanced by the Heritage Foundation, the American Enterprise Institute and other conservative research organizations in the 1990s, the main provisions of the president’s health care law were intended to eliminate the most salient problems associated with the current system.

Here's a Map of the Countries That Provide Universal Health Care (America's Still Not on It) - The Atlantic: As excited as American liberals and proponents of expanding access to health care might be about the Supreme Court's decision to largely uphold the Affordable Care Act, the U.S. still stands out from much of the developed world in state efforts to make medical care available to the public. If universal health care in the U.S. is your goal, then today was a big step forward, but maybe also a reminder of how far behind America still lags. The above map shows, in green, countries that administer some sort of universal health care plan. Most are through compulsory but government-subsidized public insurance plans, such as the UK's National Health Service. Some countries that have socialized and ostensibly universal health care systems but do not actually apply them universally, for example in poverty- and corruption-rife states in Africa or Latin America, are not counted. What's astonishing is how cleanly the green and grey separate the developed nations from the developing, almost categorically. Nearly the entire developed world is colored, from Europe to the Asian powerhouses to South America's southern cone to the Anglophone states of Australia, New Zealand, and Canada. The only developed outliers are a few still-troubled Balkan states, the Soviet-style autocracy of Belarus, and the U.S. of A., the richest nation in the world.

FACT CHECK: Buyer beware in health debate: President Barack Obama promises nothing will change for people who like their health coverage except it'll become more affordable, but the facts don't back him up. Mitt Romney groundlessly calls the health care law a slayer of jobs certain to deepen the national debt.  Welcome to the health care debate 2.0. As the claims fly, buyer beware.

• OBAMA: "If you're one of the more than 250 million Americans who already have health insurance, you will keep your health insurance. This law will only make it more secure and more affordable."
• ROMNEY: "Obamacare also means that for up to 20 million Americans, they will lose the insurance they currently have, the insurance that they like and they want to keep."
• THE FACTS: Nothing in the law ensures that people happy with their policies now can keep them. Employers will continue to have the right to modify coverage or even drop it, and some are expected to do so as more insurance alternatives become available to the population under the law. Nor is there any guarantee that coverage will become cheaper, despite the subsidies many people will get

For businesses, plenty of questions remain about the health-care law - For all the clarity that the Supreme Court’s ruling on health care provided Thursday, it could take years for companies to sort out how the law will affect them — and what it means for the future of America’s $2.7 trillion health-care industry. There is much work ahead for businesses that work directly in health care. The insurance industry has had to rethink its business model to comply with new restrictions on how it spends money and an individual market expected to gain millions of new customers within the next decade.  The fortunes of the insurance industry also rest, in part, on whether states participate in the health reform law’s Medicaid expansion, which the Supreme Court ruled was a choice rather than a requirement. There, analysts say as much as $46.3 billion in new revenue could be at stake. Hospitals face some relief but also new pressures. Expanding health insurance to about 30 million more Americans will mean hospitals won’t have to shoulder as much cost caring for uninsured individuals. But all those added patients will need thousands more physicians than are working now.

The Supreme Court Rules, Markets Yawn - Austan Goolsbee - Of all the public reactions to last Thursday's surprise ruling from the Supreme Court on the Affordable Care Act, one of the most interesting came from the markets: Nothing happened. That probably disappointed those who spent the past two years saying that the costs from increased regulation and fear of the health plan explain why U.S. companies have not hired faster and have accumulated huge amounts of cash on their balance sheets. If that were so, the court ruling should have had a big impact on expected future profits. Stocks should have tumbled. They didn't, and the markets' collective yawn was the latest piece of evidence refuting the notion that the health plan and other regulations are the main problems facing the economy.

What Hath Roberts Wrought? - Thomas Friedman in his New York Times column praises Roberts to skies for putting the country ahead of ideology. Others have seen Roberts as saving “his court” from the appearance of ideological control. But Roberts is a conservative, and a very smart, forward-looking one at that.  What Roberts accomplished on one issue was to enshrine two conservative ideologies — without the Democrats even noticing while they were cheering.  He did this by using the Court’s ability to turn metaphors into law. He accomplished this with two votes. First he was the swing vote that imposed the idea that Health Care Is A Product and set the stage for a possible general principle: The Interstate Commerce Clause governs the buying and selling of products and the government cannot force anyone to people to buy a product (real or metaphorical). Second, Roberts was the swing vote on the ruling that saved the Affordable Health Care Act by creating a precedent for another metaphorical legal principle: A fee or payment imposed by the government is a tax.   In short, in his votes on one single issue, Roberts single-handedly extended the power of the Court to turn metaphor into law in two conservative directions.

An Important New Limit on the Commerce Clause -- Broccoli carried the day. To the delight of conservatives and libertarians and the dismay of many legal scholars, the Supreme Court ruled that the commerce clause in the Constitution does not empower Congress to force people to buy health insurance — or healthy green vegetables like broccoli, for that matter. Widely dismissed — even ridiculed — by most constitutional scholars, the broccoli argument was cited by Chief Justice John G. Roberts Jr., who also wrote, “Under the gov­ernment’s theory, Congress could address the diet problem by ordering everyone to buy vegetables,” adding, “That is not the country the framers of our Constitution envisioned.” Charles Fried, a constitutional law professor at Harvard, said that he was “dispirited” by the ruling. “The limitation of the commerce clause runs counter to 75 years of Supreme Court jurisprudence,” he said. “It is a complete capitulation to the bogus logic of the broccoli argument and its proponents in the Tea Party.” Professor Fried, a solicitor general under President Ronald Reagan, is a conservative and not a fan of the heath care law, but he has consistently argued that it was constitutional. While the health care legislation itself survived, the limitation of Congressional power under the commerce clause is likely to have far-reaching consequences, and the decision may prove a Pyrrhic victory for liberal supporters of Congress’s expansive power. Some Libertarians, while disappointed that the law was not struck down, were celebrating the stake the court drove into the heart of the commerce clause.

Hostage Racket --  Not to put too fine a point on it, but didn't that cunning rogue Chief Justice John Roberts pour a jug of Karo syrup into the gas tank of America's twelve trillion cylinder engine? Or, put another way (forgive the metaphor juke), didn't he just give President Obama enough rope to hang himself? Out to dry, that is. Roberts must know exactly what he is doing: prompting x-million young and/or poor voters to an election year tea party tax revolt. The Obama health care reform will henceforth be defined as a tax against people too economically strapped to buy health insurance - in other words, a gross injustice, courtesy of Obama. Of course, with or without the so-called reform, the American health care system remains a hostage racket. When you are sick, you will do anything to get better, and the system knows it. You will sign onto any agreement to keep yourself alive, even if the health care system ends up taking your house and your children's educations. It is a well-established fact that the chief cause of personal bankruptcy in the USA is unpayable medical bills on the part of people who have health insurance. It is considered bad manners to inquire of a surgeon what his fee might be for a life-saving operation. Anyway, you don't want to know because it will be a figure with no anchor in the reality of hours spent or services rendered. Ditto the folks who run the hospital, where there is no reality-based relationship between things dispensed and prices charged. It's simple racketeering and true health care reform would be the vigorous application of Department of Justice attorneys on the doctors, pharma companies, insurers, hospitals, and HMOs who are engaged in routine, systematic swindling. But the truth is, we don't want to remove the swindle and the grift, we just want to find some way to get the American public to pay for their own shakedown.

Obamacare, the Great Swindle - Now that Obamacare has been ruled a tax by the U.S. Supreme Court, reality is starting to sink in for all those who emotionally supported it. Promoted as a way to provide either free health care or low-cost health care to the masses, the sobering reality is that under Obamacare, health insurance prices keep rising, not falling. That's no surprise, of course, since the Obamacare legislation was practically written by the health insurance companies, and they sure didn't put their weight behind a sweeping new law that would earn them less profit. In an era when the so-called "99%" are sick and tired of being exploited by the one percent who control everything, they just handed their medical futures over to precisely the one percent who skillfully monopolize the conventional health care system! Obamacare is, at every level, a huge victory for the one percent.By the year 2016, the Obamacare "penalty" tax will reach roughly $2,000 per year for a two-person household. According to Stephen Moore of the Wall Street Journal, 75% of the financial burden of Obamacare's new taxes will fall onto Americans making less than $120,000 a year (http://www.humanevents.com/2012/06/30/wsj-chief-economist-75-of-obama...). The great Middle Class, in other words, will bear this new tax more than anyone else.

Meet the health care 'thing' that is a tax -- The problem for Obama is that, if the Thing is indeed a tax, he is by definition a raiser of taxes on the middle class, which he promised not to be. If that sounds like an opportunity for Republican presidential rival Mitt Romney, well, it's not that simple. Obama's health care law is closely modeled on the universal-coverage plan Romney achieved as Massachusetts governor, which contains a penalty for noncompliance similar to the one in the federal law upheld by the court last week. So if Obama is a raiser of taxes, so is Romney. Contortions have ensued. Romney adviser Eric Fehrnstrom strayed from Republican talking points when he told MSNBC that Romney agrees with Justice Antonin Scalia's minority opinion that "very clearly stated that the mandate was not a tax." That position is at odds with congressional Republicans who are determined to portray the penalty as an Obama tax pure and simple. "The American people do not want to go down this path," House Speaker John Boehner, R-Ohio, said. "They do not want the government telling them what kind of insurance policy they have to buy, and how much they have to pay for it, and if you don't like it we're going to tax you." As for the other side, House Democratic leader Nancy Pelosi of California and some others have taken to calling it a "penalty for free riders." The whatever-it-is starts in 2014, will be collected by the Internal Revenue Service and functions like a tax in that its amount is keyed to the income of those who must pay it.

The ObamaCare Tax on the Middle Class - If you get health insurance through your employer, the individual mandate doesn’t apply to you. There’s no chance you’ll pay the penalty, so the amount of the “tax” is exactly zero. If you get health insurance from the government (primarily Medicare or Medicaid), the same thing applies. Your tax: zero. If you already buy health insurance in the individual market, you can continue buying insurance the same way. The main change is that prices will probably come down (or at least grow more slowly) because of transparent competition in the insurance exchanges. (Curious? Check out what we have in Massachusetts, thanks to RomneyCare.) Your tax: zero. All right, that covers more than eighty percent of you. What if you’re among the roughly 50 million Americans who are currently uninsured? The typical uninsured household is a family of three that makes between $25,000 and $50,000 per year, probably around $35,000 (see Table 8). If you are a single parent with two children under eighteen, your penalty for not buying insurance is $1,390. But: Because your household income is less than 200 percent of the applicable federal poverty level, you also receive a premium credit. So you get to buy a family plan, which would ordinarily cost around $12,000, for just $2,205. That’s a benefit of $10,000.

How Much Is The Obamacare Penalty Tax? - Many Americans are furious that Obamacare will require them to buy health insurance. Most of these folks seem to hate the idea that Obama is forcing them to do something more than they hate the idea of shelling out money. But for those who also care about the money, here are the details. The good news is that, for most people, the "penalty tax" for those who choose not to buy health insurance will cost a lot less than health insurance.As with everything tax-related, there's no simple answer to "How much is the Obamacare penalty tax?" But here are some key points, from FactCheck.org:

• The penalty/tax will be phased in from 2014 to 2016.
• The minimum penalty/tax in 2016 will be $695 per person and up to 3-times that per family. After 2016, these amounts will increase at the rate of inflation.
• The minimum penalty/tax per person will start at $95 in 2014 (and then increase through 2016)
• No family will ever pay more than 3X the per-person penalty, regardless of how many people are in the family.

Obamacare’s Uninsured Tax is a Mouse - The Affordable Care Act’s tax on those who choose not to buy health insurance was the linchpin of the Supreme Court’s decision to uphold the law’s constitutionality. But in reality, the tax (nee penalty) is a mouse. The tax itself is modest, at least to start. It will affect relatively few people. And it will be almost impossible for the IRS to make anybody pay it. The Urban Institute’s Health Policy Center estimates that if the law were in effect today, only about 7 percent of the non-elderly, or about 18 million people, would be faced with the choice: Get insurance or pay the tax. To put it another way, 93 percent, or 250 million, would not—either because they already have insurance or because the ACA explicitly exempts them from the levy. But that doesn’t mean that 18 million will owe the tax. Many will buy insurance rather than pay the fee.  About 11 million, or about 60 percent of those subject to the tax, will be eligible for government subsidies to buy their own coverage. For some, that help will still not be enough to make insurance affordable. And about 3 percent of those under 65—or about 7 million individuals–will have to acquire insurance and pay the full cost. Many in those two groups may choose the tax rather than insurance.

Will Enough People Enroll in Obamacare? - Earlier this week, I concluded that the Affordable Care Act’s tax on those who do not have health insurance will be both modest and difficult for the IRS to collect. But will it be enough to encourage people to buy coverage?  If not, healthy people may opt out until they get sick, a decision that could drive up premium prices for those who do buy coverage. If past experience is any guide, the vast majority of people will get insurance—mostly because, well, having health insurance is a good idea. Besides, government will subsidize premiums for many. But will this mix of subsidies and taxes be enough to avoid the sort of adverse selection problems that some economists fear could wreck the system? They were in Massachusetts, where 86.6 percent of people were insured just before that state’s health reform passed in 2006 (under the leadership, of course, of then-governor Mitt Romney) but 94.2 percent were covered in 2010.    The Romneycare tax is roughly similar to  Obamacare’s—though the two levies are not directly comparable. In Massachusetts, the tax is adjusted for both age and income but maxes out at $1,260-a-year. The ACA tax is only $95 for an individual in the first year but due to rise to $695 ($2,085 per family) or 2.5 percent of adjusted gross income in 2016. The maximum penalty under the ACA is equal to the price of the low-cost insurance option under the law—much higher for wealthy households than the Massachusetts tax. 

Don’t Expect the Affordable Care Act to Get Popular - There are signs that the Affordable Care Act popularity got a very tiny boost after the Supreme Court ruled it constitutional, but don’t expect the law to become popular any time in the near future. Opinions about it have remained remarkably fixed and relatively unchanged for two years. While it is true that some provisions of the law are popular, other provision are very unpopular, and overall, impressions of the whole law are not good. This new Gallup poll helps show why Democrats still have an uphill battle selling this. According to the poll a plurality, 46 percent, thinks the law will hurt the economy. Only 37 percent think it will help it. While this impression is mostly false, I don’t see how Democrats will change it. Opinions about the law are very strongly set by now and Democrats have basically given up efforts to try to sell the law. Even when Democrats were focused on selling it, they mostly talked about it reducing the deficit long-term and “bending the cost curve.” This was a message disconnected from the people’s main concern at the time, the economy.

Boehner: Health reform law must be ‘ripped out by its roots’ - House Speaker John Boehner (R-OH) on Sunday admitted that some parts of President Barack Obama’s health care reforms were beneficial, but insisted that the entire law must be “ripped out by its roots.” “There’s always going to be parts of it that are good,” Boehner told CBS Chief White House Correspondent Nora O’Donnell. “Since you’re going to be repealing it, are you willing to roll back the provisions that would provide free mammograms under Medicare?” O’Donnell wondered.“Listen, there are a lot of provisions that can be replaced,” Boehner explained. “Remember I said we want to take a common-sense, step-by-step approach to replacing Obamacare.” “Why not then, if you like some of the provisions in the Affordable Care Act, why not work with it?” O’Donnell asked. “No, no,” Boehner replied. “This has to be ripped out by its roots. This is government taking over the entire health insurance industry.” “It has to be ripped out and we need to start over.”

McConnell: Uninsured people are ‘not the issue’ - Senate Minority Leader Mitch McConnell (R-KY) on Sunday pledged to repeal President Barack Obama’s health care reforms and said that the 30 million Americans that the law is likely to cover were “not the issue” for Republicans. During an interview on Fox News, host Chris Wallace asked McConnell how Republicans who were promising to “repeal and replace” the law would make sure those 30 million Americans had access to health insurance.  “The single best thing we could do for the American health care system is to get rid of Obamacare,” McConnell explained.

No, Obamacare Isn't the Biggest Tax Increase in History - Republicans have eagerly taken to the airwaves to say that the Supreme Court has proven that Democrats are liars. After all, Democrats have long insisted that Obamacare's penalty for not buying health insurance isn't a tax, but on Thursday the Supreme Court upheld it on the grounds that it was a tax. J'accuse! Or, as America's Bard of the Frozen North tweeted, "Obama lies, freedom dies." This is so stupid it hurts. But Josh Marshall says that what comes next is even more brain dead: Republicans are now saying it's the 'biggest tax increase in history' — either of America or the universe of whatever. But this is demonstrably false. The Congressional Budget Office says the mandate penalty will raise $27 billion between 2012 and 2021. $27 billion over a decade. Anybody who cares to can do the math. But if you want to call it a 'tax increase' — which is debatable — it's clearly one of tiniest ones in history.

Supreme Court Just Getting Started on Health Care Rulings - Last week’s ruling in the Supreme Court on the Affordable Care Act has been framed as an end to all the uncertainty about the law. As we’re seeing with the Medicaid expansion, that’s not true. But it’s not even true in a legal context. As Jennifer Habenkorn points out, there are several other challenges to the law, on discrete parts rather than the entire thing, working their way through the courts. The next wave of lawsuits likely wouldn’t put the whole law at stake, as the challenge to the individual mandate could have. But they’re going after pieces of the law that happen to be red meat for many conservative voters — like the law’s contraception mandate and a new Medicare panel that Republicans call a “rationing board.” And one possible legal challenge, which would try to block the feds from offering subsidies in a federal health insurance exchange, is meant to exploit a loophole in the law. But it could also be a good “messaging hit” — allowing them to attack the subsidies they see as a budget-busting new entitlement. Setting aside the “messaging hit,” this is a serious problem. The courts could rule that, while the federal government can take over the exchanges from states which decide not to enact them, they cannot deliver subsidies on a federal exchange. There is no specific authorization for subsidies in a federal exchange in the law, although the federal exchanges are just backstops for states that don’t provide their own. The Administration allowed the tax subsidies when they wrote the regulation for the reversion to federal exchanges, but opponents could argue to the courts that this regulation misread the law. A ruling in favor of the opponents would mean that states resisting implementation of Obamacare would not only subject their poor residents to ineligibility for Medicaid, but they would stop anyone in their state from receiving subsidies for the exchanges.

Glaxo To Plead Guilty To 3 Charges In Sweeping Health Settlement - If you've grown numb to the federal fraud charges settled by drugmakers one after another, shake it off and take note of today's huge settlement by GlaxoSmithKline. The British drugmaker has agreed to pay $3 billion and will plead guilty to three misdemeanor criminal charges related to its unlawful marketing of two antidepressants — Paxil and Wellbutrin — and failure to provide the Food and Drug Administration with required information about studies that could have shed light on safety problems with the diabetes pill Avandia. The government says it's the biggest single settlement of federal and state health fraud charges in U.S. history. Deputy Attorney General Jim Cole called it "unprecedented in both size and scope."

Glaxo pays $3bn for illegally marketing depression drug - GlaxoSmithKline, the UK's largest drug maker, tricked and bribed doctors into prescribing children with dangerous antidepressants, it was revealed last night. The company will pay $3bn (£1.9bn) to settle a slew of charges in the US after admitting a multi-year criminal scheme to hide unhelpful scientific evidence, manipulate articles in medical journals and lavish gifts on sympathetic doctors. The drug at the centre of the scheme, the blockbuster pill Paxil, which is branded Seroxat in Britain, has since been banned for use by children because it can make them suicidal. Company managers, all the way up to GSK's chief executive, Sir Andrew Witty, will have their pay and bonuses clawed back if there is any further wrongdoing, under the terms of a wide-ranging settlement with the Department of Justice. GSK admitted illegally marketing several of its drugs for uses that had not been approved by safety regulators, and documents released by the Justice Department detailed the luxurious conferences in exotic climes where paid-for scientific speakers hyped up the conclusions of dubious academic papers.

How Not to Get Big Pharma to Change Its Ways, by Robert Reich: Earlier this week the Justice Department announced a $3 billion settlement of criminal and civil charges against pharma giant GlaxoSmithKline — the largest pharmaceutical settlement in history — for improper marketing prescription drugs in the late 1990s to the mid-2000s.  The charges are deadly serious. Among other things, Glaxo was charged with promoting to kids under 18 an antidepressant approved only for adults; pushing two other antidepressants for unapproved purposes, including remedying sexual dysfunction; and, to further boost sales of prescription drugs, showering doctors with gifts, consulting contracts, speaking fees, even tickets to sporting events. $3 billion may sound like a lot of money, but during these years Glaxo made $27.5 billion on these three antidepressants alone, according to IMS Health, a data research firm — so the penalty could almost be considered a cost of doing business. Besides, to the extent the penalty affects Glaxo’s profits and its share price, the wrong people will be feeling the financial pain. Most of today’s Glaxo shareholders bought into the company after the illegal profits were already built into the prices they paid for their shares. Not a single executive has been charged — even though some charges against the company are criminal.

OxyContin For Kids: What Could Possibly Go Wrong? - A day after Glaxo agreed to pay the largest drug fraud settlement ever for illegally marketing anti-depressants - and as further if redundant proof that Big Pharma will do anything to make a buck - comes news that Purdue Pharma is trying to get six more months of patent protection for its wildly profitable, highly addictive painkiller OxyContin - second cousin to morphine and heroin - by trying it out on kids as young as six. The company, which in a landmark case already paid $635 million in fines after being found guilty of misleading doctors and the public about OxyContin’s risk of addiction, says it is doing the pediatric trials so doctors "can make better decisions about the care of their patients.” They also have a bridge to sell you. Shameless.

Insider Report on Big Pharma’s Corrupt Marketing and Phony Science - Yves Smith - Francois T pointed to a post at the blog Health Care Renewal that summarizes an important insider report at the British Medical Journal on how much so-called medical research is of dubious validity, and performed to give talking points for marketing rather than to improve the lives of patients.   And keep in mind, the costs of manipulated research findings are real. Cathy O’Neil, aka mathbabe, wrote up one of the most deadly cases, Vioxx. The summary of her detailed post:Madigan has been a paid consultant to work on litigation against Merck. He doesn’t consider Merck to be an evil company by any means, and says it does lots of good by producing medicines for people. According to him, the following Vioxx story is “a line of work where they went astray”.Yet Madigan’s own data strongly suggests that Merck was well aware of the fatalities resulting from Vioxx, a blockbuster drug that earned them $2.4b in 2003, the year before it “voluntarily” pulled it from the market in September 2004. What you will read below shows that the company set up standard data protection and analysis plans which they later either revoked or didn’t follow through with, they gave the FDA misleading statistics to trick them into thinking the drug was safe, and set up a biased filter on an Alzheimer’s patient study to make the results look better. They hoodwinked the FDA and the New England Journal of Medicine and took advantage of the public trust which ultimately caused the deaths of thousands of people.  To give an idea of the significance of the Vioxx withdrawal: per O’Neill, it led to a meaningful drop in the overall death rate in the US in the following 12 months.

Can Science Be Crowd-Sourced? - There is no substitute for the rigorous training credentialed scientists undergo to tackle our most challenging problems, but this story, and others like it, gives many observers the impression that anyone can "do" science. Indeed, much attention has been paid lately to the notion of "citizen science" -- members of the general public participating directly in the scientific research process. In fact, some scientists themselves have been championing the idea, seeing it as a way to increase public involvement and support for science. But we need to think carefully about the appropriate role of citizens in science in order to harness the public's interest and energy while still preserving the integrity of the scientific process. As I see it, there are definitely opportunities for non-scientists to participate, but their roles must be carefully defined. Research in any domain of science today requires specialized training to build up knowledge and clinical competence. To make major breakthroughs, we need people with expertise who are engaged in sustained research over a long period of time -- in a word, scientists. So, when and how should citizens be involved in science?

The Amazing June Heat Wave of 2012. Part 1: The West and Plains June 23-27 - One of the most intense heat waves in U.S. history has enveloped portions of the western plains and Midwest and has now spread eastward. All-time heat records have fallen at a number of significant weather stations. And it is still just June. Is this a prelude for the coming summer or just a flash in the pan? The air aloft became so abnormally warm that the NWS office in Dodge City focused on how intense the air aloft was in their daily discussions. At the 850 millibar level (about 5000’) the temperature was averaging an amazing 30°C (86°F) at the 5 a.m. (12Z) observation times on June 23-27!  The heat at surface level reached its greatest extent on June 26th, although the period of all-time records broken ranged from June 23 to June 27. Here is a surface temperature map for 5p.m CST time on June 26:
Perhaps the single most impressive record broken of all was the 114°F recorded at Las Animas, Colorado on June 23rd. This tied the hottest temperature ever measured during any month anywhere in the entire state of Colorado  All-time heat records (for any month) were also set or tied in Denver with 105° on both June 25 and June 26 (tied with 105° on July 20, 2005 and Aug. 8, 1878), Colorado Springs with 101° on June 26 (previous record of 100° set on five previous occasions including June 24 and June 25), Lamar hit 112° on June 27 (previous record 111° on July 13, 1934 and also on June 26, 2012). In far northeastern Colorado all-time heat records were also set at Yuma (111°) and Holyoke (110°) on June 27th. June all-time monthly heat records were set at virtually every site in the state east of the Rocky Mountain front range (like the 102°s at Fort Collins and Trinidad).

The Amazing June Heat Wave of 2012: Part 2 The Midwest and Southeast June 28-30 - After scorching portions of the West and Plains early last week, the amazing heat wave of June 2012 slid eastward on Thursday, June 28, continuing to astonish us with more all-time heat records. Below is a summary of those. The powerful upper level high ridge slid out of the Plains and anchored itself over Tennessee by Friday. Compare the 500 mb charts that I posted in my blog on Friday with those below.There is no point in listing or even attempting to summarize all of the June monthly records set in the region from Missouri to Maryland and south to Georgia during the June 28-30 period. The 108° in St. Louis on June 28th was perhaps the most significant of those. What was truly astonishing was the number of all-time any month records that were broken or tied.  This is especially extraordinary since they have occurred in June rather than July or August when 95% of the previous all-time heat records have been set for this part of the country. 109° at Cairo Airport on June 29th broke the all-time record for Cairo (old record 106° on August 9,1930) and also surpasses Illinois’ June state record of 108° at Palestine in June 1954. Chicago reached 100° at both O’Hare and Midway Airports on June 28th, the first 100° reading for either site since 2005. As of July 1st Chicago O’Hare has experienced 18 90°+ days so far this year, the most on record at this point in the season and about what the average number of such days is for an entire year.

Millions Without Power After Storms - Millions of people learned a new word over the weekend: “derecho.” It was not a happy lesson.The Spanish term for what is essentially a squall line that moves rapidly across the landscape was widely used to describe the wall of storms that killed 22 people, according to The Associated Press, and knocked out power for some 4.3 million customers in 10 states and the District of Columbia. About half have had their power restored so far, according to the Edison Electric Institute, leaving nearly two million customers still without lights, refrigeration, air-conditioning or even electric fans. David K. Owens, the executive vice president for operations at the institute, said, “It was like a hurricane — but we didn’t get the warning that you do with a hurricane.” Crews have come from as far away as Canada, Texas and Wyoming to deal with the mess, but there is a lot of mess to deal with, said Ken Barker, a vice president for customer services at Dominion Virginia Power, which estimates that some of its customers will not have service back until next weekend. So many neighborhoods have sustained “catastrophic damage,” with downed poles and wires swirled like spaghetti on the ground, he said, “basically, we’re just hauling it off and rebuilding our poles and wires.” 

Long, hot summer: West's wildfires feed off drought, heat and wind - After several years of relatively benign fire seasons, the West is headed into a hot, dry summer of potentially ferocious blazes like the ones that have scorched Colorado in recent weeks. The wildfires that have already destroyed more than 700 homes and outbuildings along Colorado's Front Range and blackened hundreds of thousands of acres of New Mexico wilderness are not likely to be the season's last for one simple reason: drought. "This year, fires are going big," Tom Harbour, fire and aviation director for the U.S. Forest Service, said last week. "We've had some really extraordinary runs … fires that are running 10 miles in lighter fuels. Fires that are running miles in forested areas." A dry La Nina winter and a paltry, quick-melting snowpack in much of the West have set the stage for another incendiary summer, compounding the effects of a long-term drought that has gripped the seven-state Colorado River basin for more than a decade. 

Colorado’s table was set for monster fire - Snow hardly fell during winter in snowy Colorado. On top of that, the state’s soaking spring rains did not come. So it was no wonder that normally emerald landscapes were parched as summer approached, tan as a pair of worn khakis. All the earth needed was a spark. Colorado and U.S. Forest Service firefighters are battling the state’s most destructive wildfires ever. Lightning and suspected arson ignited them four weeks ago, but scientists and federal officials say the table was set by a culprit that will probably contribute to bigger and more frequent wildfires for years to come: climate change. In the past two years, record-breaking wildfires have burned in the West — New Mexico experienced its worst wildfire, Arizona suffered its largest burn and Texas last year fought the most fires in recorded history. From Mississippi to the Ohio Valley, temperatures are topping record highs and the land is thirsty. “We’ve had record fires in 10 states in the last decade, most of them in the West,” said Agriculture Department Undersecretary Harris Sherman, who oversees the Forest Service. Over the past 10 years, the wildfire season that normally runs from June to September expanded to include May and October. Once, it was rare to see 5 million cumulative acres burn in a year, but some recent seasons have recorded twice that.

More than 2,000 heat records matched or broken (Reuters) - More than 2,000 temperature records have been matched or broken in the past week as a brutal heat wave baked much of the United States, and June saw more than 3,200 records topped, the National Oceanic and Atmospheric Administration (NOAA) said Monday. From June 25 to July 1, some 2,171 record temperatures were either broken or matched, the NOAA said. For the 30 days of June, that number rose to 3,215. Accuweather meteorologist Alex Sosnowski said the number of records broken was very unusual. He said that while some aspects of the heat wave are unknown, much of it is because of a lack of snow cover during the late winter on America's plains. Instead of the sun's heat melting snow, it instead heated the ground, which in turn warmed the air. The increase in temperature even made crops grow ahead of schedule until now; Sosnowski said the lack of rainfall has stunted crops' growth. Sosnowski added that while some areas are not unusually warm, namely New England and the Northwest, the center of the country will experience high temperatures for the next several weeks, possibly into August.

Our Nation is Baking in the Heat and So Is Our Economy -- We've been so busy with bail outs, unemployment, corruption and the destruction of the middle class, we as a nation seem to have put global warming on the back burner. With the country baking, temperatures so high assuredly there will be deaths, let's revisit the economic impact of climate change. Below is NASA's witness global warming in 26 seconds video. The heat wave of March is already been blamed on global warming. May was the 2nd warmest on record. Climate change is being implicated for the Colorado wildfires . The corn crop has already taken a hit with the supply dropping to 1996 levels and just last week a hailstorm cost Dallas a record $2 billion.  Now the country is baking and it seems we maybe in the oven permanently. Climate Scientist Katharine Hayhoe has dire predictions of the number of over 100°F days expected for the United States. The below map shows the time temperatures were above 100°F from 1961-1979, or what should be considered normal.  What we rarely heard about is the negative economic impact global warming will have. We continually hear denials this is happening as well as claims regulation and those nasty green and environmental people will cost businesses. We do not hear how global warming is a threat to economic activity. With that, we tried to find some facts as we could.

June Heat Wave Broke 3,215 Temperature Records -- A scorching heat wave has fueled a rare derecho leaving millions without power, destructive wildfires, and thousands of record-setting temperatures. The National Oceanic and Atmospheric Administration reports 3,215 temperature records set or matched in June, with more than 2,100 of those records occurring in one week, between June 25 to July 1. Five states saw more than 100 high temperatures broken: Texas (237 records), Colorado (226), Kansas (164), Missouri (126), and Arkansas (115). With no end in sight to the record heat, the media are now finally connecting the dots between global warming and these rare events, reporting “This is what global warming looks like at the regional or personal level.”

Why has 2012 been the hottest year on record in the US? - More than 40,000 daily heat records have been broken around the country so far this year, according to the National Oceanic and Atmospheric Administration, compared with last year's 25,000 daily records set by this date. Heat is beating records around the country: the first five months of 2012 have been the hottest on record in the contiguous United States. And that's not including June, when 164 all-time high temperature records were tied or broken around the country, according to government records. That's unusual, since the most intense heat usually comes in July and August for much of the country, said Jake Crouch, a climate scientist with National Climatic Data Center. For example, only 47 all-time high records were tied or broken in June of last year. Also, more than 40,000 daily heat records have been broken around the country so far this year, according to the National Oceanic and Atmospheric Administration. Compare that with last year —the ninth warmest on record — when only 25,000 daily records had been set by this date.

NOAA Says ‘Chances Increase For El Niño’: That May Be Good for U.S. In Short Term, But Would Lead To Rapid Warming - It’s looking increasingly likely we’ll see an El Niño starting this summer. If so, next year will almost certainly be the hottest year on record. The silver lining is that climatologist Kevin Trenberth says an El Niño would probably be a change “for the better” for the U.S. ”in the short term” since it might mean a weaker hurricane season and some relief for the devastating drought that is slamming the Southwest.The latest U.S. Drought Monitor shows just how widespread the drought is: So what’s coming? NOAA’s’s Climate Prediction Center says in its monthly “El Niño Southern Oscillation (ENSO) Diagnostic Discussion“: ENSO Alert System Status: El Niño Watch Synopsis: Chances increase for El Niño beginning in July-September 2012. Let’s look at the global and national implications.

More than 1 million in US still without power 5 days after storm - (Reuters) - More than 1 million homes and businesses in a swath from Indiana to Virginia remained without power on Wednesday, five days after deadly storms tore through the region. The outage meant no July 4 Independence Day holiday for thousands of utility workers who scrambled to restore lingering power outages. Much of the damage to the power grid was blamed on last weekend's rare "derecho," a big, powerful and long-lasting wind storm that blew from the Midwest to the Atlantic Ocean. Violent weekend storms and days of record heat have killed at least 23 people in the United States since Friday. Some died when trees fell on their homes and cars, and heat stroke killed others.

Is it now possible to blame extreme weather on global warming? - Wildfires, heatwaves and storms witnessed in the US are 'what global warming looks like', say climate scientists Share 64 Email 'The odds are changing': Kevin Trenberth, a climate scientist at the US National Center for Atmospheric Research, discusses the relationship between weather extremes and global warming on PBS Newshour. Credit: PBS.org Whenever an episode of extreme weather – heatwave, flood, drought, etc – hits the headlines, someone somewhere is sure to point the finger of blame at human-induced climate change. Such claims are normally slapped down with the much-aired mantra: "You cannot blame a single episode of bad weather on global warming." But with the on-going record high temperatures affecting large parts of the US, there seems to be a noticeable reduction in such caveats and notes of caution. This week, scientists have been queuing up, it seems, to explain how the wildfires in Colorado, the heatwave across the eastern seaboard, and the "super derecho" are all indicative of "what global warming looks like". Most pulled back, though, from directly blaming global warming for such weather events. "In the future you would expect larger, longer more intense heat waves and we've seen that in the last few summers," ." The same report added: "At least 15 climate scientists told the Associated Press that this long hot US summer is consistent with what is to be expected in global warming."

“This is a view of the Future. So Watch Out!” – Kevin Trenberth on PBS - Lack of water, “the great air conditioner”, is causing unusually high temperatures and extreme weather events in the United States, Kevin Trenberth with the National Center for Atmospheric Research tells Judy Woodruff. Dr. Trenberth knocks it out of the park here. It’s striking that Judy Woodruff, the interviewer maintains to the end an all-to-characteristic checked-out journalist view from nowhere – “Well, that ought to be something to keep you scientists busy.” Earth to Judy – Colorado is burning. Trenberth, to his credit does not let is slide. NewsHour update on the recent rash of storms and heat below.

We are all ‘Climate Test Dummies’ now, providing data on how humans respond to extreme weather - We have turned ourselves into test subjects for the single most terrifying “crash” the world will ever know — the crash of a livable climate. Since we have done so wittingly, and continue blissfully subjecting ourselves to the impending climate crash without making any serious effort to stop it in spite of the gravest warnings from the most credible sources, that makes us little better than crash test dummies: I offer this definition of the other CTDs and ATDs: “Climate test dummies are full-scale anthropocene test dummies (ATDs) that simulate exactly the dimensions, weight proportions and articulation of the human body, and usually record or complain about the impact of off-the-charts heat, rainfall, floods, snow, fire, dust or drought during a collision with extreme weather for use in climate tests. Or, rather, climate test, because we only get one and unlike cars we don’t get to go back and redesign the planet or the energy system to avoid the otherwise easily preventable suffering.”

Graphene Can Improve Desalination Efficiency by Several Orders of Magnitude, Can Do Pretty Much Anything - Desalination might sound boring, but it’s super important. Around 97% of the planet’s water is saltwater and therefore unpotable, and while you can remove the salt from the water, the current methods of doing so are laborious and expensive. Graphene stands to change all that by essentially serving as the world’s most awesomely efficient filter. If you can increase the efficiency of desalination by two or three orders of magnitude (that is to say, make it 100 to 1,000 times more efficient) desalination suddenly becomes way more attractive as a way to obtain drinking water.

What Does Climate Change Mean for Water in the Colorado River Basin? (National Geographic) But it’s not clear that the American Southwest can sustain an American style of agriculture, or for that matter an American style of lawn. Nearly every climate change model puts a red bulls-eye on the Colorado River Basin, suggesting profound temperature increases over the coming decades.  The models don’t speak in unison when it comes to precipitation projections, but most studies that have looked at the effects of both temperature and precipitation agree that the temperature signal will far outweigh the precipitation signal when it comes to water availability in the region.  It’s going to get much hotter and drier. Last year the Bureau of Reclamation finalized their first assessment of climate change impacts on Colorado River flows, concluding they would most probably decline by 8.7% by 2060.  That’s a loss of 1,300,000 acre-feet, the entire annual capacity of the canal diverting water to Los Angeles, Orange, and San Diego counties. Now we have confirmation from Reclamation that whatever water is left in the Colorado River won’t go as far.  Hotter temperatures will drive an increase in water demand.  The average projected increase in water use, based solely on temperature increases, is 500,000 acre-feet.

European Drought Map - Here's the latest instance of the European drought map - for the first 10 days of June.  The map has moved and is now here.  As you can see, Europe is having a lot less drought than the US so far this summer.  That's not to say that there's no extreme weather, however.  Britain, for example, just had the wettest June on record.

Book details a new model for sharing water - MIT News - From the American Southwest to the Middle East, water is a highly contested resource: Many neighboring nations, and several states in the United States, have fought decades-long battles to control water supplies. And that need for water only seems likely to increase.   “Out in the world, there’s growing demand for fresh water, especially where there is urban development,” says Larry Susskind, the Ford Professor of Urban and Environmental Planning in MIT’s Department of Urban Studies and Planning. “At the same time, climate change is altering in unexpected ways how much water there is. So you have increasing pressures on water supplies and thus battles over how water will be allocated.”  Many of these disputes seem extremely difficult to solve. How, for example, can Israel and its neighbors share scarce water supplies? How can there be enough water to supply both populous Southern California and fast-growing Arizona? Such problems are virtually intractable, right? Wrong, according to Susskind. “Water is not most usefully thought of as a scarce resource,” Susskind says. “It’s a flexible resource. It’s not that there’s not enough water. It’s that we waste it and don’t invest in the technologies that would allow us to make more efficient uses of it. If you keep thinking water is a scarce resource, you will be locked into battles you don’t need to be locked into.”

A Mediocre Farm Bill - The farm bill approved by the Senate last week makes significant changes in existing farm programs, some for the better. But it takes a disproportionate whack from environmental programs, needlessly trims food stamps and does not fundamentally alter the program’s bias toward relatively well-off growers of big crops like corn, wheat and soybeans. The bill would cost $969 billion over 10 years, about $23 billion less than projected. Much of this comes from eliminating notorious subsidies like the direct payment program, which doled out $5 billion a year to farmers in good times and bad. The Senate put some of that savings into a suite of generous crop insurance programs that will protect farmers against both natural disaster and market fluctuations. These programs will disproportionately benefit large farmers (the more you grow, the bigger the subsidy) who could afford to pay a bigger share of the premiums. An exasperated Senator John McCain said he was “hard-pressed to think of any other industry that operates with less risk at the expense of the American taxpayer.” Despite the efforts of Senator Kirsten Gillibrand of New York to keep food stamp programs intact, they were cut by $4.5 billion over 10 years — a fraction of some $750 billion in total spending but harmful to many poor families. Conservation programs that encourage farmers to withdraw highly erodible land from production were slashed by 10 percent. These cuts would have been less painful if the Senate had spent less on crop insurance.

Heatwave threatens US grain harvest - An intense heatwave is threatening havoc with this year’s US grain harvest, burning up hopes of blockbuster yields and sending prices soaring.  Even a modest reduction in crops could send ripples through global food commodities markets, as the US is the world’s top exporter of corn, soyabeans and wheat, and stocks of the first two are relatively low. Soyabean prices have surged to the highest level since the 2007-08 food crisis and the price of this year’s corn crop has risen 30 per cent since mid-June. Worries about the size of the US crop come only months after drought hit the Latin American soyabean belt of Brazil, Argentina, Uruguay and Paraguay.Top US farming states such as Illinois and Indiana had suffered temperatures above 38ºC (100ºF) for several days already, with no let-up this week. “The forecast is going to remain pretty much the same over the next week. We’re not looking at much of a break in the heat,” said Matt Barnes, meteorologist at the National Weather Service’s central Illinois office. “We aren’t seeing widespread failure yet, but it sure is developing rapidly,” said Brian Fuchs, climatologist at the National Drought Mitigation Centre.

Food prices could rocket as US harvest continues to wilt in blistering heat - Chicago corn price jumps by 3% to highest since last autumn as maize, soybean and wheat yields also suffer due to drought. Fears that food prices will rocket at the end of the year after a poor US harvest were heightened after predictions that a drought across the Midwest will to continue for at least another week. Maize yields are suffering after a long drought that hurt the crop in its crucial pollination phase, experts said, as the price of Chicago new-crop corn jumped more than 3% to its highest since last autumn. Soybean crops and the crucial wheat harvest are also expected to suffer in the blistering heat, which has stayed in the high 30s centigrade for much of the last few months. A repeat of the drought in 2010 in another crucial wheat producing country, Russia, which saw food prices rise in the UK, is likely to make the situation worse, while soybean producers Brazil and Argentina have also suffered poor weather. The US government played down the extent of the problem with figures showing farmers planted more fields of maize and soybeans, which it said should offset the fall in crop yields.

Tenn. crops, livestock in peril as drought spreads (AP) — A blistering start to summer coming at the end of a spring that was short on rainfall has imperiled Tennessee crops and made livestock production harder. This week's report from the U.S. Agriculture Department listed 94 percent of the state's cropland short or very short on topsoil moisture. Eddie Sanders, who with his son Josh farms about 1,500 acres in southwestern Williamson County, said he won't get any crop out of 800 acres of corn he has in the field. "The corn, which was silking last week, was in the brunt of the heat and probably won't pollinate," Sanders said. He holds out hope for 700 acres of soybeans.

Thunderstorms Threaten WV Famine -The third horseman of the Apocalypse — Famine — is abroad in West Virginia today, the day after Independence Day 2012, because of a thunderstorm. In a stunning development illustrating the fragility of the industrial food chain, people in many of West Virginia’s counties began experiencing hunger three days after the storm knocked out power in their area.The storm — actually a squall line of several thunderstorms abreast in a bow-shaped line called a derecho — swept from Ohio across West Virginia, Maryland, Virginia and Washington DC to the Atlantic coast late Friday night (June 29). It was a strong storm, but not exceptionally so; its winds were not nearly as strong as a tornado’s nor as widespread as a hurricane’s, and reached hurricane strength only briefly in 80-mile-per hour gusts. Yet this storm in effect took down the power grid for millions of people. And a full week later, hundreds of thousands remained without power. According to the lamestream media, the thing to be feared from all this was inconvenience; people accustomed to cradle-to-grave air conditioning were going to break a sweat, and commuting would be more annoying than usual. But across wide swaths of West Virginia, the combination of blocked roads and broken power lines became, in just three days, a threat to the lives of thousands. The minuscule amounts of food stored in home refrigerators and freezers went bad in about two days. Likewise, the small amounts of food in stores.

Corn prices break above the 2008 highs  - The drought across the US continues to cause havoc, driving agricultural commodities prices higher. Corn futures hit a record today, exceeding the 2008 highs.  Reuters: - The hot, dry weather prompted analysts to reduce corn yield estimates, pointing to a smaller crop in the world's No. 1 grower than had been expected. In a Reuters poll Tuesday - the day after the U.S. Department of Agriculture (USDA) reported on crop conditions - analysts on average pegged the U.S. corn yield at 153.4 bushels per acre, down from 157.3 bushels a week ago.  The USDA on Monday slashed its condition rating for U.S. corn to 48 percent good-to-excellent, down 8 percentage points from a week earlier. It pegged the soybean crop at 45 percent good-to-excellent, compared with 53 percent a week ago. The forecasters are predicting some relief from the heat wave coming soon, but the damage may already have been done. As the chart below shows, corn crop conditions have deteriorated rapidly in recent weeks and the futures prices are reflecting it.

Fewer workers cross border, creating U.S. farm labor shortage -- On more than 10,000 acres of drained swampland in western New York, Maureen Torrey’s family farm grows an assortment of vegetables in the dark, nutrient-rich soil known as “Elba muck.” Like other farms in the area, Torrey Farms Inc. of Elba, N.Y., depends on seasonal labor, mainly undocumented field hands from Mexico, to pick, package and ship its cabbage, cucumbers, squash, green beans and onions throughout the nation. With the peak harvest season at hand, Torrey’s concerns about a labor shortage are growing. A crackdown on illegal immigration, more job opportunities in Mexico and rising fees charged by smugglers are reducing the number of workers who cross the U.S. border illegally each year to help make up more than 60 percent of U.S. farmworkers. The American Farm Bureau Federation projects $5 billion to $9 billion in annual produce-industry losses because of the labor shortages, which have become commonplace for farmers such as Torrey, who said there were 10 applicants for every job five years ago.  With the cherry harvest under way in south-central Washington state, the Sage Bluff farmworker housing compound in Malaga is only half full, with nowhere near the 270 workers it can accommodate.

Drought persists across U.S. Corn Belt - Drought conditions are increasing from the U.S. Great Plains into the Ohio and Tennessee valleys, weather officials say. Scattered relief may come in the form of cold front passages or organized thunderstorm clusters, but summers are usually a fairly dry time of year for the central part of the nation, the National Weather Service Climate Prediction Center said Thursday. Northern tier states, including North Dakota, Minnesota and upper Michigan, are more likely to benefit from the frontal passages due to their position close to the polar jet stream. In the Southeast, coastal portions of Georgia and South Carolina will likely see some improvement in drought conditions due to the greater likelihood of a tropical cyclone, meteorologists said.

For Midwest Corn Crop, the Pressure Rises, Like the Heat - - Across a wide stretch of the Midwest, sweltering temperatures and a lack of rain are threatening what had been expected to be the nation’s largest corn crop in generations. Already, some farmers in Illinois and Missouri have given up on parched and stunted fields, mowing them over. National experts say parts of five corn-growing states, including Indiana, Kentucky and Ohio, are experiencing severe or extreme drought conditions. And in at least nine states, conditions in one-fifth to one-half of cornfields have been deemed poor or very poor, federal authorities reported this week, a notable shift from the high expectations of just a month ago. Crop insurance agents and agricultural economists are watching closely, a few comparing the situation with the devastating drought of 1988, when corn yields shriveled significantly, while some farmers have begun alluding, unhappily, to the Dust Bowl of the 1930s. Far more is at stake in the coming pivotal days: with the brief, delicate phase of pollination imminent in many states, miles and miles of corn will rise or fall on whether rain soon appears and temperatures moderate. “It all quickly went from ideal to tragic,” said Don Duvall, a farmer in Illinois who, in what was a virtually rainless June, has watched two of his cornfields dry up and die as others remain in some uncertain in-between. “Every day that passes, more corn will be abandoned,” Mr. Duvall said. “But even if it starts raining now, there will not be that bumper crop of corn everyone talked about.”

Drought envelops Ohio - Much of Ohio has slipped officially into drought, creating economic and wildfire concerns for emergency-management officials, as well as for agriculture and farmers statewide. A drought-assessment committee led by the Ohio Emergency Management Agency will meet Friday to begin to plan for the state’s response to the drought. Potential agricultural responses include mandatory water conservation, emergency livestock-feed distribution, and emergency payments and loans to producers who lose property or production. “If it’s any consolation, the drought is not as bad here as in Indiana, Illinois and Missouri,” said Ohio Climatologist Jeffrey Rogers. “Nonetheless, with the high temperatures this coming week, things are going to get very bad in Ohio.” And that would be bad for Ohio farmers, food companies and, eventually, Ohio consumers. Food and agriculture are the state’s top industry, according to the Ohio Department of Agriculture. They contribute more than $105 billion to the economy and employ 1 in 7 Ohio residents.

Drought lowering Mississippi River – – Drought conditions are contributing to a Mississippi River level that may not be the lowest ever but still is cause for concern. "We've had barges running aground, shoaling in a few places," Coast Guard Lt. Cmdr. Rebecca Walthour said. "We've had some groundings, but none have resulted in a major incident yet." If the channel gets too narrow, barges hit bottom or they can't pass each other, the Coast Guard will have to institute one-way traffic, she said. "It has potential to have some big issues," Walthour said. "I know industry folks aren't happy because they can't push as much up and down the river as they want to. But obviously we can't make it rain, and we can't put water in the river. We're getting to historical lows here." At Natchez, Miss., about 60 miles downriver from Vicksburg, the Mississippi is at 12.72 feet, about 49 feet below what was the record high on May 19 of last year. Mississippi's Emergency Management Agency director, Robert Latham, said drought conditions are a part of what's causing the low river level, but other factors also influence. "When you look back at this past winter, one of the things that impacts us is the snow pack and the melt that causes the fluctuation in the river levels," he said. "We didn't have that snow pack that we had over a year ago."

Texas Farmers Watered Crops Knowing They Wouldn't Grow — Water Supply - Last summer, during the height of the drought, West Texas farmers kept watering their cotton crops despite knowing they wouldn't grow. They needed to do so to qualify for federal crop insurance. "It's as if you're watching a guy in the Sahara Desert pour out water," said Stewart Rogers, who manages a cotton farm near Lubbock. Farmers hate wasting a resource, he added, so "it just angers everybody, too." Plenty of West Texas farmers found themselves in this situation last year. The most intense drought in recorded Texas history meant that it was so hot and dry by mid-summer that many gave up all hope of producing a crop from irrigated fields. Yet they say they had to keep watering, using precious resources from diminishing aquifers like the Ogallala, because the insurance companies, before making payouts, would ask for proof — like electric bills for pumping — that the farmers had tried to grow a crop. "We had to keep pumping water when we knew it was a lost cause," said J.O. Dawdy, a farmer near the West Texas town of Floydada, adding, "I knew it was a waste. Everybody knew it was a waste."

Intensifying Midwestern Drought Threatens Farmers, Water Supplies  - The toll from record high temperatures across the United States is mounting. As triple digit temperatures and an intense drought spread, conditions for wildfires continue to get worse, livestock suffers, and corn crops are under threat. Even the mighty Mississippi River is seeing its waters recede. St. Louis, Milwaukee, Minneapolis and Chicago are just some of the Midwestern cities with record high temperatures this week. In St. Louis, a record high high temperature of 105 was followed up by a record high low temperature of 83. Milwaukee and Madison, Wisconsin also set records with their low temperatures.The heat wave isn’t limited to the Midwest. Here in Washington DC, we’re experiencing our record ninth consecutive day over 95 degrees, with at least two more days in the 100′s on the way. According to NOAA’s National Climatic Data Center, over 4,000 daily heat records have been broken in the last 30 days, including 224 all-time heat records. Tomorrow, the expected high in Washington, DC is 106, which would be the highest recorded temperature since 1930. The heat and associated drought are wreaking havoc on the nation’s corn crop. The U.S. is the world’s largest producer of corn and 2012 was supposed to be a banner year. Farmers planted 96.4 million acres of corn, a 5 percent increase over last year. But the heat and drought have already caused much of it to shrivel and die. “We’re talking five-feet-tall corn with no ears, no shoots and no tassels,” said Randy Anderson, a farmer from Illinois. “It wears on your nerves to even look.”

Rising Temperatures and Drought Create Fears of a New Dust Bowl - Triple-digit days. Weeks with little to no rain. Soil crumbling away. Stunted corn stalks. Right now the fertile fields of the U.S. Midwest are experiencing corn-killing weather, with parts of five corn-growing states in the region experiencing severe or extreme drought. In at least nine states, one-fifth to one-half of cornfields are currently in poor or very poor conditions. And all of this comes after earlier expectations that corn farmers were going to produce a bumper crop this season, with 40 million hectares planted — the largest corn area in 75 years. Instead, we could see that crops wilt, as Darrel L. Good — a professor emeritus of agricultural and consumer economics at the University of Illinois at Urbana-Champaign — told the New York Times: What we know is this: there’s been some permanent and substantive yield reduction already, and we’re on the cusp, depending on the weather, of taking that down quite a bit more. So terrible is the weather in the heartland that farmers have begun to compare it to the drought of 1988, which wiped out millions of hectares of corn and caused $78 billion in crop damage, or even worse, the great Dust Bowl era of the 1930s. Already, stockpiles of corn have fallen by 48% from March to June, the biggest drop since 1996 — and that was before the drought and the brutally hot weather began in earnest. The percentage of the corn crop with top-quality ratings was 48% as of July 1, compared with 69% a year ago.

Drought hits 56 percent of continental US; 'significant toll' on crops - The prolonged heat across the Midwest has not only set temperature records, it is also expanding and intensifying drought conditions -- and relief isn't on the horizon for most areas, the National Weather Service reported Thursday. Drought conditions are present in 56 percent of the continental U.S., according to the weekly Drought Monitor. That's the most in the 12 years that the data have been compiled, topping the previous record of 55 percent set on Aug. 26, 2003. It's also up five percentage points from the previous week. The drought hasn't been long enough to rank up there with the 1930s Dust Bowl or a bad stretch in the 1950s, David Miskus, a meteorologist at the weather service's Climate Prediction Center, told msnbc.com. "We don't have that here yet," he said. "This has really only started this year."

As U.S. Corn Belt Bakes, Wheat Heats Up in Europe - WSJ.com: Global grain markets are being transformed by extreme heat and dryness in a key U.S. growing region. Fields in the Midwest are baking under relentless sunshine, raising concern over crops in the country's corn belt. Led by corn, grain prices have soared. In July, the bulk of the corn crop will pollinate, a critical phase of growth that leaves the plants highly sensitive to heat. If the weather worsens this month, as forecasts suggest, that could mean prices will rise further in the near term, according to Goldman Sachs. The bank said it could cut its yield estimate from the current 153.5 bushels per acre.  The U.S. Department of Agriculture last week raised its estimate for the amount of land on which U.S. farmers planted corn this year to 96.4 million acres. Farmers planted 5% more acres of corn this year than last year, boosting the total to the highest level since 1937, the agency said. However, the USDA's closely watched data on prospective corn yields is widely seen as being out of step with developments on the ground. "Historically it's been pretty good, just not this year as these weather conditions have been unprecedented,"

Global drought is damaging crops; will have a destabilizing geopolitical effect - The recent drought conditions across some of areas in the US have caused a number of wildfires in western states. The media has focused on the fact that some states are cancelling the 4th of July fireworks in fear that they could ignite dry brush and trigger yet another wildfire. Futures: - The most recent crop progress report released on June 25 is not up to date with the effects of the weather of the past few days. But even so, the downgrade to the crop’s health was steep. The good-to-excellent portion of the crop fell to 56% from 63% the week before. Last year at this time, the good-to-excellent section was 68%. The July 2 progress report will almost certainly contain a further reduction in the estimate for the quality of the crop. What's more is that these drought conditions are not limited to the US. FT: - Fears of crop damage in Russia due to dry weather supported wheat prices, with US benchmark prices hitting an eight-month high on Friday, shrugging off concerns about the eurozone and global economic growth. Concerns over the past few weeks about limited rainfall in southern Russia elevated this week as farmers in the region faced the critical flowering stage. Winter wheat goes through the flowering phase in the last one to two weeks of May into early June.

As long as the rich can speculate on food, the world’s poor go hungry -- WHEN we think of overseas aid, we think of helping people who need it. The government says aid helps people overcome poverty. But does it? Obviously, to overcome poverty we have to overcome the causes of poverty, and the big causes of poverty today are untouched by aid. Poor countries are still forced to pay off unpayable debts. The global poor are facing ever-higher food prices, driven by speculation. And climate change is already destroying lands and livelihoods. The United Nations warns that these three factors are now reversing global development. To stop this we need radical change. We need complete debt cancellation. We need to dismantle financial institutions that use debt to control poor countries, and we need to require banks to finance public goals, not derivatives. Advertisement We need to ban food speculation and protect the peasant farmers, who produce the bulk of the world's food. We need to halt ''market access'' rules and limit large-scale agribusiness. We need real action to leave fossil fuels in the ground - to stop mining coal, oil and gas. And we need to pay our climate debts to poor countries that are facing climate change now. Utopian? Yes, but necessary now, to overcome the wholesale reversal in development the UN is warning of.

Fat people 'a threat to food security': OVERWEIGHT people are a threat to future food security, scientists say. Increasing population fatness could have the same implications for world food energy demands as an extra 1 billion people, researchers say after examining the average weight of adults worldwide. Scientists from the London School of Hygiene and Tropical Medicine said tackling population weight was crucial for food security and ecological sustainability. The United Nations predicts that by 2050 there could be a further 2.3 billion people on the planet and the ecological implications of the rising population numbers will be exacerbated by increases in average body mass, researchers said. The world's adult population weighs 287 million tonnes, 15 million due to being overweight and 3.5 million due to obesity, according to the study. The data, collected from the UN and the World Health Organisation, shows that while the average global weight per person is 62 kilograms in 2005, Britons weighed 75 kilograms. In the US, the average adult weighed 81 kilograms. Across Europe, the average weight was 70.8 kilograms compared with 57.7 kilograms in Asia. More than half Europe's inhabitants are overweight (55.6 per cent) compared with only 24.2 per cent of Asians. Almost three-quarters of North Americans are overweight.

Tanzania: Climate Change Cripples Farming in Kilimanjaro: Climate change, blamed on heavy environmental degradation on the slopes of Mount Kilimanjaro, has dealt a devastating blow on farmers as almost all cash and food crops have been affected by this year's unreliable weather patterns, it has been revealed. Opening a stakeholder's workshop, the Kilimanjaro Regional Administrative Secretary (RAS), Dr Faisal Issa warned participants that unless Kilimanjaro residents resolve to restore the environment and the depleted natural resource, the area may turn unproductive due to unreliable and unpredictable seasonal rainfalls. He, therefore, appealed to participants who included members of the police force, the judiciary, the press, conservationists, to be vigilant of environmental degradation perpetrators and take stern measures because environment props our lives here on earth. "There will be no or very little to harvest this year as long rains continue being elusive, at a time they are badly needed by crops," said the RAS.

Despite Drop from 2009 Peak, Agricultural Land Grabs Still Remain Above Pre-2005 Levels -An estimated 70.2 million hectares of agricultural land worldwide have been sold or leased to private and public investors since 2000, according to new research conducted for our Vital Signs Online service. The bulk of these acquisitions, which are called “land grabs” by some observers, took place between 2008 and 2010, peaking in 2009. Although data for 2010 indicate that the amount of acquisitions dropped considerably after the 2009 peak, it still remains well above pre-2005 levels. Africa has seen the greatest share of land involved in these acquisitions, with 34.3 million hectares sold or leased since 2000. East Africa accounts for the greatest investment, with 310 deals covering 16.8 million hectares. Increased investment in Africa’s agricultural land reflects a decade-long trend of strengthening economic relationships between Africa and the rest of the world, with foreign direct investment to the continent growing 259 percent between 2000 and 2010. Asia and Latin America come in second and third for most heavily targeted regions, with 27.1 million and 6.6 million hectares of land deals, respectively. Investor countries, in contrast, are spread more evenly around the globe. Of the 82 listed investor countries in the Land Matrix Project database, Brazil, India, and China account for 16.5 million hectares, or around 24 percent of the total hectares sold or leased worldwide. When the East Asian nations of Indonesia, Malaysia, and South Korea are included, this group of industrializing countries has been involved in 274 land deals covering 30.5 million hectares.

Biomass Burning Really Heats Things Up: New Study Shows Significance of Fire's Brown Carbon for Global Warming - Emissions from forest fires and other biomass burning has a greater impact on global warming than previously understood, according to a new study.  “We used to think the lighter particles in the smoke from forest fires and crop burning had a cooling effect that might offset the warming effect of the darker black carbon particles in the smoke,”“But because we’ve found brown carbon particles mixed in with the lighter organic matter, we now know that the net effect of the lighter particles is about zero, meaning there is no significant cooling to offset the warming from black carbon particles from fires.” Carbonaceous aerosol emissions from forest fires and other biomass burning have long been known to include both dark particles that absorb heat, known as black carbon, as well as lighter colored particles known as organic matter or organic carbon that reflect heat back into space and cancelled the warming.  The new study now shows that even some of the lighter organic particles, those known as brown carbon, absorb heat that is more than the total cooling effect of the lighter particles.  The absorption of these brown carbon particles essentially negates the overall cooling effect of the lighter organic material.  As a result the overall warming impact of carbonanceous aerosols is approximately equivalent to the black carbon components. The study is based on empirical data from a ground-based aerosol network integrated with field data and satellite observations.

Global Warming Favors Proliferation of Toxic Cyanobacteria -- Cyanobacterial populations, primitive aquatic microorganisms, are frequently-encountered in water bodies especially in summer. Their numbers have increased in recent decades and scientists suspect that global warming may be behind the phenomenon, and are particularly concerned by the increase in toxic cyanobacteria, which affect human and animal health. Cyanobacteria are among the most primitive living beings, aged over 3,500 million years old. These aquatic microorganisms helped to oxygenate Earth's atmosphere. At present their populations are increasing in size without stopping. It appears that global warming may be behind the rise in their numbers and may also lead toan increase in the amount of toxins produced by some of these populations. "Cyanobacteria love warm water, therefore an increase in temperature during this century may stimulate their growth, especially that of the cytotoxic varieties, which could even produce more toxins and become more harmful," says Rehab El-Shehawy, a researcher from IMDEA Agua and co-author of the study published in the journal, Water Research. Her team is working on developing efficient tools to monitor the number of cyanobacteria in water. Blooms of these microorganisms in lakes, reservoirs and rivers all over the world, and in estuaries and seas, such as the Baltic, are becoming a more and more frequent phenomenon. According to the experts, this poses an economic problem -as it affects water sanitation, shipping and tourism, for example-, and an environmental problem.

Fish Learn to Cope in a High Carbon Dioxide World, New Study Suggests - Some coral reef fish may be better prepared to cope with rising CO2 in the world's oceans -- thanks to their parents. Researchers at the ARC Centre of Excellence for Coral Reef Studies (CoECRS) recently reported in the journal Nature Climate Change, encouraging new findings that some fish may be less vulnerable to high CO2 and an acidifying ocean than previously feared. "There has been a lot of concern around the world about recent findings that baby fish are highly vulnerable to small increases in acidity, as more CO2 released by human activities dissolves into the oceans," says Dr Gabi Miller of CoECRS and James Cook University. "Our work with anemone fish shows that their babies, at least, can adjust to the changes we expect to occur in the oceans by 2100, provided their parents are also raised in more acidic water." "Human activity is expected to increase the acidity of the world's oceans by 0.3 to 0.4 pH by the end of this century, on our present trends in CO2 emissions," co-researcher Prof Philip Munday says. "Previous studies, and our own research, have shown that growth and survival of juvenile fish can be seriously affected when the baby fish are exposed to these sorts of CO2 and pH levels," he says.

Greenland Ice Sheet Melt Nearing Critical 'Tipping Point' - The Greenland ice sheet is poised for another record melt this year, and is approaching a "tipping point" into a new and more dangerous melt regime in which the summer melt area covers the entire land mass, according to new findings from polar researchers. The ice sheet is the focus of scientific research because its fate has huge implications for global sea levels, which are already rising as ice sheets melt and the ocean warms, exposing coastal locations to greater damage from storm surge-related flooding.Greenland's ice has been melting faster than many scientists expected just a decade ago, spurred by warming sea and land temperatures, changing weather patterns, and other factors. Until now, though, most of the focus has been on ice sheet dynamics — how quickly Greenland's glaciers are flowing into the sea. But the new research raises a different basis for concern. The new findings show that the reflectivity of the Greenland ice sheet, particularly the high-elevation areas where snow typically accumulates year-round, have reached a record low since records began in 2000. This indicates that the ice sheet is absorbing more energy than normal, potentially leading to another record melt year — just two years after the 2010 record melt season.

Arctic sea ice concentration meltdown, June 27, 2011, compared to June 27, 2012 - graphics

Arctic waters are heating up - The post Fires are raging again across Russia featured the image below, showing how much sea waters in the Arctic were already warming up on June 15, 2012. The animated image below shows warming of Arctic waters for the period June 13 up to July 1, 2012 Sea water temperatures in the Arctic are likely to warm up even further, as the summer sun warms up the ocean currents and the rivers, and as less sunlight gets reflected by sea ice and is instead warming up ever larger areas of water. The image below shows the extent to which waters did warm up in September 2011. As described in the post Abrupt Local Warming, sea surface anomalies of over 5 degrees Celsius were recorded in August 2007 (NOAA image right). Strong polynya activity caused more summertime open water in the Laptev Sea, in turn causing more vertical mixing of the water column during storms in late 2007, according to one study, and bottom water temperatures on the mid-shelf increased by more than 3 degrees Celsius compared to the long-term mean.

PIOMAS Arctic Sea Ice Volume Falls Off Cliff  (graphic)

Rise in sea level can't be stopped, scientists say | Reuters: (Reuters) - Rising sea levels cannot be stopped over the next several hundred years, even if deep emissions cuts lower global average temperatures, but they can be slowed down, climate scientists said in a study on Sunday. A lot of climate research shows that rising greenhouse gas emissions are responsible for increasing global average surface temperatures by about 0.17 degrees Celsius a decade from 1980-2010 and for a sea level rise of about 2.3mm a year from 2005-2010 as ice caps and glaciers melt.

Flood insurance premiums could double in four years - Floridians could be hit with dramatically higher flood insurance bills in the next few years. Congress passed legislation on Friday that extends the National Flood Insurance Program five years and raises the cap on annual premium hikes to 20 percent, from 10 percent under current law. President Barack Obama is expected to quickly sign the bill into law. More than a third of the flood insurance program's 5.6 million policies are in Florida. "Although these rate increases and other measures taken are necessary, it's … bad timing due to economic issues we are all facing," said Dulce Suarez-Resnick, an insurance agent in Miramar. The program was set to expire July 31 — during hurricane season — and a lapse would have prevented or delayed some home sales. Home buyers can't get federally backed mortgages in flood-prone areas without coverage.

Bill McKibben on What a Global Warming “Hoax” Looks Like (video) Please don’t sweat the 2,132 new high temperature marks in June—remember, climate change is a hoax. The first to figure this out was Oklahoma Senator James Inhofe, who in fact called it “the greatest hoax ever perpetrated on the American people,” apparently topping even the staged moon landing. But others have been catching on. Speaker of the House John Boehner pointed out that the idea that carbon dioxide is “harmful to the environment is almost comical.” The always cautious Mitt Romney scoffed at any damage too: “Scientists will figure that out ten, twenty, fifty years from now,” he said during the primaries. Still, you have to admit: for a hoax, it’s got excellent production values. Consider the last few weeks. Someone turned on the rain machine up in Duluth, Minnesota, where they broke all their old rainfall records (and in an excellent cinematic touch flooded the city zoo with so much water that the seal escaped and swam down the road. You can make this stuff up). And when that was over, the production team hastened to the Gulf of Mexico, turning on the giant fans to conjure up Tropical Storm Debby—the earliest fourth storm of the season ever recorded, which dumped “unthinkable amounts of rain” on central Florida. (Giveaway movie moment: the nine-foot gator that washed into a Tampa swimming pool).

War-born Climate Change - A hypothetical war between India and Pakistan would decrease the yield of staple crop around the world, according to a study published in the journal Climate Change. Researchers from the University of Wisconsin-Madison and Rutgers calculated impact of 50 nuclear weapons used by each of the two countries, and found that the soot from fires started by the bombs would travel to neighboring countries and block the sunlight, smothering fields of crops around the world. The authors were surprised to see such a large effect “from a war with 50 small nuclear weapons per side— much, much less than 1 percent of the current nuclear arsenal,” Alan Robock of Rutgers University said in a press release. Indeed, according to the model, the soot would reduce corn and soy yields as much as 20 to 40 percent, respectively, in places as far away as Indiana and Missouri.

Time to Get Crazy - By Chris Hedges - Native Americans’ resistance to the westward expansion of Europeans took two forms. One was violence. The other was accommodation. Neither worked. Their land was stolen, their communities were decimated, their women and children were gunned down and the environment was ravaged. There was no legal recourse. There was no justice. There never is for the oppressed. And as we face similar forces of predatory, unchecked corporate power intent on ruthless exploitation and stripping us of legal and physical protection, we must confront how we will respond. The ideologues of rapacious capitalism, like members of a primitive cult, chant the false mantra that natural resources and expansion are infinite. They dismiss calls for equitable distribution as unnecessary. They say that all will soon share in the “expanding” wealth, which in fact is swiftly diminishing. And as the whole demented project unravels, the elites flee like roaches to their sanctuaries. At the very end, it all will come down like a house of cards.Civilizations in the final stages of decay are dominated by elites out of touch with reality. Societies strain harder and harder to sustain the decadent opulence of the ruling class, even as it destroys the foundations of productivity and wealth. Karl Marx was correct when he called unregulated capitalism “a machine for demolishing limits.” This failure to impose limits cannibalizes natural resources and human communities. This time, the difference is that when we go the whole planet will go with us. Catastrophic climate change is inevitable. Arctic ice is in terminal decline. There will soon be so much heat trapped in the atmosphere that any attempt to scale back carbon emissions will make no difference. Droughts. Floods. Heat waves. Killer hurricanes and tornados. Power outages. Freak weather. Rising sea levels. Crop destruction. Food shortages. Plagues.

Australia introduces controversial carbon tax - Australia has introduced its highly controversial carbon tax, after years of bitter political wrangling. The law forces about 300 of the worst-polluting firms to pay a A$23 (£15; $24) levy for every tonne of greenhouse gases they produce. The government says the tax is needed to meet climate-change obligations of Australia - the highest emitter per-head in the developed world. But the opposition calls it a "toxic tax" that will cost jobs. The opposition also argues that the tax will raise the cost of living, promising to repeal the legislation if it wins the next election, due in 2013. Environmentalists have broadly backed the scheme, but there have been large public protests against it.

A Carbon Tax, Sensible for All - ON Sunday, the best climate policy in the world got even better: British Columbia’s carbon tax — a tax on the carbon content of all fossil fuels burned in the province — increased from $25 to $30 per metric ton of carbon dioxide, making it more expensive to pollute. This was good news not only for the environment but for nearly everyone who pays taxes in British Columbia, because the carbon tax is used to reduce taxes for individuals and businesses. Thanks to this tax swap, British Columbia has lowered its corporate income tax rate to 10 percent from 12 percent, a rate that is among the lowest in the Group of 8 wealthy nations. Personal income taxes for people earning less than $119,000 per year are now the lowest in Canada, and there are targeted rebates for low-income and rural households. The only bad news is that this is the last increase scheduled in British Columbia. In our view, the reason is simple: the province is waiting for the rest of North America to catch up so that its tax system will not become unbalanced or put energy-intensive industries at a competitive disadvantage. The United States should jump at the chance to adopt a similar revenue-neutral tax swap. It’s an opportunity to reduce existing taxes, clean up the environment and increase personal freedom and energy security.

US ethanol output falls to 10-mo low, drought darkens outlook - U.S. ethanol production dropped to its lowest level in 10 months last week as dwindling pre-harvest corn stocks crushed profit margins, while a deepening drought in the Midwest threatens to extend the pain into next year. Following the temporary closure of three U.S. ethanol plants in recent weeks, production plunged 3 percent, or 26,000 barrels per day, to 857,000 bpd in the week ending June 29, the Energy Information Administration said. It was the lowest output and the sharpest decline in production since September. "We have negative margins and plants don't typically like heat. Both of those combined to KO (knock out) the production number," The ethanol industry is bracing for its worst spell since the bankruptcy-ridden days of 2007 and 2008. Kitt said profit margins at ethanol plants ranged from 40 to 60 cents per gallon of ethanol produced. That is about 20 cents below what the plants need to make to be profitable. The squeeze initially came on two fronts: Gasoline prices tumbled this spring as global economic woes counter cuts to Iran's oil exports. And corn basis bids, or the amount above or below benchmark Chicago Board of Trade futures users bid to buy the grain in a specific location, have spiked as stockpiles dwindle to their lowest since 2004. In the past two weeks a third factor has pushed some operations into the red: corn futures have surged by a third since early June as record-high heat and the most severe drought conditions in 24 years stress the developing crop.

TVA: Diminished rainfall, high temperatures impacting area lakes, electricity -- The hot and dry summer weather continues to affect both the water levels of area lakes and the demands on electric power, Tennessee Valley Authority officials said Tuesday. Last weekend’s record, 100-plus-degree temperatures ushered in what is historically the hottest season of the year. But weeks of diminished rainfall and high temperatures are beginning to impact area lakes, said Tom Barnett, TVA’s manager of river forecast center operations. “Hot weather is increasing the evaporation rate, so we’re losing some levels. What’s more concerning is the lack of rain and runoff that we’re seeing. It’s really impacting the lake levels. We have had well below normal rainfall since mid-spring and it has continued through June and into July,” Dry conditions downstream are also prompting the agency to reduce lake levels across its system. “Each dam has minimum flow requirements below it, to maintain river levels, support recreation and water quality. And we have a system minimum flow requirement so the Tennessee River you can still navigate, have good water supply and water quality – all of our benefits the Tennessee River system provides,”

10 sobering realizations the Eastern U.S. power grid failure is teaching us about a real collapse: (NaturalNews) In the wake of violent storms, the power remains out today for millions of Americans across several U.S. states. Governors of Virginia, West Virginia and Ohio have declared a state of emergency. Over a dozen people are now confirmed dead, and millions are sweltering in blistering temperatures while having no air conditioning or refrigeration. As their frozen foods melt into processed goo, they're waking up to a few lessons that we would all be wise to remember. Here are 10 hard lessons we're all learning (or re-learning, as the case may be) as we watch this situation unfold:

Brazil tribes occupy contentious dam site -  The Xikrin are joined by about 150 indigenous people from three other tribes - the Arara, Juruna, and Parakana - that are occupying one of the work sites at the Belo Monte dam construction site in what is becoming a high-stakes standoff. The occupation, which is entering its second week, has halted a part of the construction on what will be the world's third-largest hydroelectric dam. At the site of the protest, visited by Al Jazeera on Wednesday, the tribesmen were carrying clubs and spears and had built rudimentary sleeping quarters in what has essentially become a non-violent sit-in. An anthropologist was with them, typing away at her laptop as the indigenous people articulated their demands. The tribes are occupying a road, built by the dam builders, which cuts through part of the Xingu River's waterways. The road blocks the natural flow of the waters.

China's controversial Three Gorges dam completed The final turbine of China's massive Three Gorges dam has been connected to the power grid, marking the completion of a controversial hydropower project that cost the country more than £38bn and displaced at least 1.3 million people. The installation of the project's 32nd 700-megawatt unit on Wednesday brought total capacity up to 22.5 gigawatts (GW), accounting for 11% of the country's total hydroelectric capacity. Britain's largest power station, Drax, produces 4GW. "The complete operation of all the generators makes the Three Gorges dam the world's largest hydropower project, and the largest base for clean energy," Zhang Cheng, general manager of the project's operator, China Yangtze Power, told a ceremony. The construction of the world's biggest hydropower plant began in 1994 and its first generating unit was connected to the grid in July 2003. The official state news agency Xinhua said the dam had already generated a total of 564.8bn kilowatt-hours, saving nearly 200m tonnes of coal a year. But the project, located on the middle reaches of the Yangtze river, cost 254bn yuan (£26bn), four times the original estimate, and another 123.8bn yuan (£12bn) has been spent on "follow-up work". The project's 185-metre dam and 600km reservoir have forced the relocation of at least 1.3 million residents, and the government has acknowledged that earthquake and landslide risks have also increased in the region.

Erratic Energy Supplies Threatens Indian Growth - This news video report from the Wall Street Journal is superb in highlighting the economic consequences of the chronic shortages of energy and fuel in the fast-growing Indian economy. The focus is on a newly opened coal-fired power station (note the investment in it from Hong Kong and China) which has already had to close dow production twice because it has run out of coal supplies. Erratic electric power forces people to rely on more expensive fuels such as diesel - it is a persistent problem facing many Indian businesses from poor farmers to chemists who need reliable power supplies to keep their drugs cool. The Indian economy too becomes more reliant on imports of oil, coal and gas worsening their trade balance.

Should Indians Adopt a D-I-Y Approach to Electricity? - Every year, in spite of ambitious plans to increase electricity generation, India hasn’t met its targets. The monthly peak power shortage — the gap between demand at its highest and available supply — is around 7.5% at the moment, but has gone as high as 12% in recent months, according to the Central Electricity Authority. As the Wall Street Journal reported Monday, coal shortages mean that India’s power crunch isn’t likely to ease any time soon, especially as demand is constantly growing. Many companies and well-off residential complexes already make their own power arrangements, usually through diesel-fueled generators, admittedly at a higher cost both financially and in terms of pollution than if they were able to access steady power from the grid. But even for those with shallower pockets, it’s possible to think of power beyond the public electricity grid. It might not be ideal – but it’s better than the alternative: no electricity at all.

BLM Sells $60 Worth Of Coal For A Buck And Change - Recent talk about leaving coal in the ground got me thinking:  What’s it worth there? The question looms large in light of recent and imminent federal leases to extract a bazillion tons of coal from public land in the Powder River Basin (PRB).  Critics of the practice note that Americans are being compensated for this public resource at well below its market value. But if you don’t happen to be in the coal business, the market value of coal-to-burn pales in comparison to the vital functions of coal-in-the-ground (hereafter, “coal ITG”).Undisturbed coal delivers enormous benefits, like long-term strategic resource security, and locking up mercury that otherwise floats around causing neurological disorders.  And the greatest value of coal ITG may be in the carbon it stores.  That carbon was once in the atmosphere, as a result of which the Earth was a sauna with much higher sea levels.What’s it worth to continue living on Earth as it is, rather than in, say, Jurassic Park?  The value in the absence of large predatory reptiles alone is incalculable!  Now… Where does BLM get OFF selling that $60 a ton public coal ITG for $1.11 a ton (the price of the most recent federal lease)? Their primary justification appears to be that it helps Americans get cheap electricity.  But the external costs cited in the Harvard School of Public Health study at least double the cost of coal-fired electricity.  And this false excuse completely falls apart when the coal is being used for export.

Burning Rivers: How Coal And Nuclear Are Sucking Up Our Fresh Water - The 20th century was characterized by the frenzied acquisition, storage, and use of oil. But many experts believe that the 21st century will be remembered as the century of water. One of the most alarming emerging issues is the symbiotic — and often conflicting — relationship between electricity generation and water. A new report called “Burning Our Rivers: The Water Footprint of Electricity” details this relationship, illustrating the massive amounts of water resources used for electricity generation — particularly from fossil fuels and nuclear. An average U.S. household’s monthly energy use (weighted by cooling technology and fuel mix) requires 39,829 gallons of water, or five times more than the direct residential water use of that same household…. Electricity—as we generate it today—depends heavily on access to free water. The impact to our freshwater resources is an external cost of electrical production. What the market considers ‘least cost’ electricity is often the most water intensive. According to the U.S. Geological Survey, 53 percent of all the fresh surface water withdrawn for human consumption in 2005 was used for electricity generation.

Japan nuclear crisis ‘man-made’ -- The crisis at the Fukushima nuclear plant was "a profoundly man-made disaster", a Japanese parliamentary panel has said in a report. The disaster "could and should have been foreseen and prevented" and its effects "mitigated by a more effective human response", it said. The report catalogued serious deficiencies in both the government and plant operator Tepco's response. It also blamed cultural conventions and a reluctance to question authority. While the report is highly critical of all the key parties, it digs even deeper. The panel called the disaster "Made in Japan", because the mindset that allowed the accident to happen can be found across the country. It flagged up the bureaucracy's role in both promoting and regulating the nuclear industry, and also cultural factors such as a traditional reluctance to question authority. The report was expected to use strong language, but not many thought it would be this harsh. The panel also found that there was a possibility that the plant was damaged by the earthquake, contradicting the official position that only the tsunami contributed to the disaster. It could put further pressure on the government, which recently authorised the restart of two nuclear reactors in western Japan. They were declared safe in April but the plant also sits on top of a fault line. Members of the Fukushima Nuclear Accident Independent Investigation Commission were appointed to examine the handling of the crisis and make recommendations. In the panel's final report, its chairman said a multitude of errors and wilful negligence had left the plant unprepared for the earthquake and tsunami.

Fukushima Disaster Was Man-Made, Investigation Finds - The breakdowns involved regulators working with the plant operator Tokyo Electric Power Co. to avoid implementing safety measures as well as a government lacking commitment to protect the public, the Fukushima Nuclear Accident Independent Investigation Commission said in the report.  The March 11 accident, which set off a wave of reactor safety investigations around the world, “cannot be regarded as a natural disaster,” the commission’s chairman, Tokyo University professor emeritus Kiyoshi Kurokawa, wrote in the report released yesterday in Tokyo. It “could and should have been foreseen and prevented. And its effects could have been mitigated by a more effective human response.”  The report dealt the harshest critique yet to Tokyo Electric (9501) and the government. The findings couldn’t rule out the possibility that the magnitude-9 earthquake damaged the Fukushima Dai-Ichi No. 1 reactor and safety equipment. This is a departure from other reports that concluded the reactors withstood the earthquake, only to be disabled when the ensuing tsunami slammed into the plant.

America’s Jaw-Dropping Shale Gas Boom Is Starting To Slow Down -Everyone's raving about the American shale gas revolution, which could make the country the next Saudi Arabia of energy. Indeed, the growth rate in shale gas production has gone geometric. However, things are showing signs of slowing down. Credit Suisse's Oil & Gas Exploration & Production research team led by Arun Jayaram is out with a note titled 10 Observations About Natural Gas.  Here's their second observation: 2. Production from unconventional plays is starting to soften. Exhibit 1 illustrates the jaw dropping increase in natural gas production from unconventional dry gas plays. After taking many years to reach 5 Bcf/d of production, the industry added 5 Bcf/d in a two year stretch between 2008 and 2010, which took overall production to 10 Bcf/d. In the past two years, the industry has nearly doubled production to ~20 Bcf/d or 27% of supply. Recent data suggests that this trend is finally beginning to ease given sharp reductions in drilling activity in the Barnett, Haynesville, Fayetteville, and Woodford Shale plays, which should mute further gains in the Marcellus Shale.

NC State Rep Pushes Wrong Button, Overrides Veto - A North Carolina state representative says she voted mistakenly to override the governor's veto of a bill to allow the shale gas exploration called "fracking" but was told she couldn't change it because this would have altered the outcome. Democratic Rep. Becky Carney of Charlotte says she pushed the green "yes" button at her desk Monday night to override Democratic Gov. Beverly Perdue's veto of the measure before realizing she wanted to vote red, or "no." Her "yes" vote made the tally 72-47 — just above the 60 percent required to override in the Republican-controlled Legislature. The chamber's rules prevent members from changing a vote if it affects the outcome.

Fracking in Ireland and Being Dependent on Halliburton’s Mud - On the 20th of April 2010, the Deepwater Horizon oilrig blew out in the Gulf of Mexico, killing eleven men instantly, then destroying 600 miles of coastline. On 9 September 2010, a natural gas pipeline exploded in San Bruno, California, burning eight to death, one of several recent pipeline explosions in the USA. In 1992, in Chicago, a gas pipe leaked and 18 houses exploded, incinerating three people. What do these deaths have to do with plans for “fracking” for natural gas in Ireland? Everything. It was my job to investigate these three explosions, the Deepwater Horizon and California explosions as a reporter for the UK Channel 4's Dispatches, the earliest as a US government investigator. In all three cases, the deaths were preceded by the same reassurances about the safety of drilling and piping that I read now in the debate about fracking in Ireland. First, the Deepwater Horizon. Eleven men died when the ‘mud’ - drilling cement meant to cap the wellhead - failed and methane gas blew out the top of the pipes and exploded. The Shannon Basin is not the Gulf of Mexico, but your safety will be just as dependent on Halliburton’s mud. Can we trust Halliburton’s reassurances? The owners of the Deepwater Horizon have told a US court that they’ve discovered that Halliburton hid critical information that the well cement could fail. Halliburton denies the cover-up. But cover-up or not, the cement failed as it has several times recently in the US in wells drilled for fracking. In all cases, including the contamination of water supplies in Pennsylvania (where some residents could set their tap water alight with a match), drilling was preceded by mollifying studies indicating that all was safe. But they failed to see all the looming dangers.

The Race for Energy Resources - Malaysia’s state-owned oil and gas company just made a multibillion-dollar bet that Canada will choose to export its shale gas riches. Even though the odds of securing permission to export liquefied natural gas (LNG) from the Canadian west coast are still pretty poor, the costs of such an endeavor immense, and the timeline in question very long, Petronas is putting $5.5 billion on the table – far more than it has ever spent on an acquisition before – to secure a large foothold in the British Columbia shale gas scene. It’s yet another sign that things are getting serious in the global race for resources. The race for resources drives much of our thinking within the Casey Research energy group. It’s more than a common theme – we believe that it is one of the strongest forces at work in our world today, and that it plays a role in determining the tone of many international relationships and domestic policies. Countries that have resources, from Russia to Australia, are altering fiscal structures and ownership rules so as to glean as much benefit as possible from their riches, while still reserving sufficient supplies to fuel their futures. Countries that lack natural-resource wealth, such as Japan and South Korea, are racing to lock up projects and partnerships abroad that can supply their future resource needs. And a race it is, because they are not alone.

Natural gas liquids - According to the Energy Information Administration, in March the United States produced a "total oil supply" of 10.8 million barrels per day, which was 2.1 mb/d more than in January 2005. But if you just rely on those aggregate numbers, you'll miss some very important trends. The EIA's definition of total oil supply represents the sum of a number of different components. The core is field production of crude oil and lease condensates, the latter being hydrocarbons that are a gas at reservoir temperatures and pressures but that can be separated into liquids at wellhead surface facilities. This core production is represented by the blue region in the graph below. Another category is the refinery processing gain, which results from the fact that the refined products occupy a larger volume than the original crude oil. These two components represented about 3/4 of the total in 2005, but account for only 40% of the 2.1 mb/d increase in the U.S. total supply figure since 2005. A bigger factor in the U.S. increase since 2005 has been natural gas plant liquids (hydrocarbons with a higher energy content than methane which can be separated out from methane at natural gas processing facilities) and other liquids (chiefly biofuels).

Oh Canada: the government's broad assault on the environment - Outsiders have long viewed Canada as a pristine wilderness destination replete with moose, mountains, and Mounties who always got their man. Recognizing the tourism value of that somewhat dull but wholesome image, successive Canadian governments — both Liberal and Conservative — were content to promote the stereotype in brochures, magazine advertisements, and TV commercials. The lie of that was evident in the rampant clear-cutting of forests in British Columbia, the gargantuan oil sands developments in Alberta, the toxic mining practices in the Arctic, and the factory fishing that literally wiped out the Canadian cod industry by the 1990s. But this wholesome image endured because progress was made on several environmental fronts, such as creation of many new national parks, and because Canada remains sparsely populated with large swaths of unspoiled boreal forest and tundra. But Canada's pristine image — and more importantly its environment — is not likely to recover from what critics across the political spectrum say is an unprecedented assault by the Conservative government of Prime Minister Stephen Harper on environmental regulation, oversight, and scientific research. Harper, who came to power in 2006 unapologetic for once describing the Kyoto climate accords as "essentially a socialist scheme to suck money out of wealth-producing nations," has steadily been weakening environmental enforcement, monitoring, and research, while at the same time boosting controversial tar sands development, backing major pipeline construction, and increasing energy industry subsidies. 

Michigan: Record Fine Sought for Spill - The federal Pipeline and Hazardous Materials Safety Administration said Monday that it would seek a $3.7 million fine, a record civil penalty, from the pipeline operator Enbridge over a 2010 oil spill in the Kalamazoo River. The spill, which involved at least 800,000 gallons of a form of crude called diluted bitumen, has been difficult to clean up, and parts of the river remain closed. The agency found that the company had violated many federal regulations, including failing to follow proper management procedures and using operators without the proper qualifications. Enbridge has 30 days to indicate whether it will accept the fine.

Drilling trucks have caused an estimated $2 billion in damage to Texas roads-- The new wave of oil and gas production, which has created thousands of jobs and plowed big money into the Texas economy in recent years, has also taken a huge toll on the state's roads. The Texas Department of Transportation told industry representatives and elected officials Monday that repairing roads damaged by drilling activity to bring them up to standard would "conservatively" cost $1 billion for farm-to-market roads and another $1 billion for local roads. And that doesn't include the costs of maintaining interstate and state highways. "Right now there's not a dedicated revenue source," John Barton, the department's deputy executive director, told the Star-Telegram after a task force meeting about the problem. "We need $2 billion, and the shortfall is $2 billion." The task force -- made up of county judges, state legislators, state highway and public safety officials, and industry representatives -- plans to forge legislative recommendations this fall to address what has become a statewide infrastructure problem caused by five big energy plays, he said.

Chesapeake’s 1% Tax Rate Shows Cost of Drilling Subsidy - Chesapeake Energy Corp. (CHK) made $5.5 billion in pretax profits since its founding more than two decades ago. So far, the second-largest U.S. natural-gas producer has paid income taxes on almost none of it.  Chesapeake paid $53 million over its 23-year history, or about 1 percent of the cumulative pretax profits during that period, data compiled by Bloomberg show. That’s less than half of Chief Executive Officer Aubrey McClendon’s compensation, for example, in 2008 alone.The company and other U.S. oil and gas producers can thank a century-old rule that allows them to postpone income taxes in recognition of the inherent risk of drilling wells that may turn out to be dry. The break may be outdated for companies such as Chesapeake, which, thanks to advances in technology, struck oil or gas in 99.6 percent of its wells last year.

US Coast Guard Creates ‘Protest-Free Zone’ in Alaska Oil Drilling Zone - The United States Coast Guard will establish and enforce "a 500-meter safety zone" around the Shell Oil Company's drilling vessel Noble Discoverer as it drills exploratory offshore wells in the sensitive Arctic waters off the coast of Alaska beginning this July.In documents just obtained by Cryptome, the USCG says that "request for the temporary safety zone was made by Shell Exploration & Production Company due to safety concerns for both the personnel aboard the Noble Discoverer and the environment." The 'buffer zone' would apply to all vessels, but the 'special rules' are clearly designed to make it more difficult for those trying to protest against the Shell's oil drilling in the Chukchi and Beaufort Seas this summer. "For any group or individual intending to conduct lawful demonstrations in the vicinity of the Noble Discoverer," reads the USCG memo, "These demonstrations must be conducted outside the safety zone." Earlier this year a federal judge specifically forbade the environmental group Greenpeace from coming within a 1,000 meters of Shell's drilling vessel while stationed in Puget Sound in Washington state.

Vital Signs: Fewer Wells Being Drilled for Oil and Gas - Oil and gas companies are drilling fewer wells. There were 1,959 rigs operating onshore in the U.S. last week, down seven from a week earlier and 67 fewer than in early November. The low price of natural gas has driven a 43% drop in gas drilling in recent months, as companies redirected their efforts to more-valuable oil. But now oil drilling is also flattening out amid falling crude prices.

Energy Development Could Hold the Key for America's Unemployed Masses - In this so-called “jobless” recovery, aka the Great Recession, an estimated 20 million American workers are unemployed or underemployed. One out of every two college students cannot find work in their chosen fields. Competition for well-paying jobs is likely to become even tougher when thousands of men and women in uniform return home from Afghanistan and look for ways to support their families. Although many U.S. industries have been reluctant to hire new workers due to political and economic uncertainty, the oil and natural gas industry is booming worldwide. Jobs are available on offshore rigs, at service companies that support energy production activities, and onshore where technologies are unlocking energy supplies from impermeable rock deep underground. In North Dakota, where drillers are producing crude oil from the Bakken Shale, workers are finding jobs offering wages that are significantly higher than the national average. Truck drivers are being paid $80,000 a year to start. Some workers on oil rigs are being paid six figures. And yet many jobs are going begging. According to the mayor of Williston, “A lot of jobs get filled every day, but it’s like for every job you fill, another job and a half opens up.” In April, North Dakota had a jobless rate of 3.0 percent, the lowest in the country.

Rising Energy Output/Input Ratio for US Oil and Gas - I discovered something interesting while poking around this morning on the website of the Bureau of Economic Analysis (the agency that produces GDP statistics for the United States).  It turns out they have a spreadsheet with estimates of the amount of energy inputs to different industries.  Since they also have estimates of the outputs of different industries, and for the oil and gas industry "output" means oil and gas, it's possible to form estimates of the ratio of energy output to energy input.  That ratio is above for 1998-2010 - all the data available. This is very, very roughly like an energy-return-on-energy-invested (EROEI) for US oil and gas - a familiar concept in energy analysis.  It isn't that for several reasons:

• We are measuring both inputs and outputs in dollars, not joules.  Since the figures mix oil and gas which have had substantial variations in their price ratios, it's not straightforward to turn the dollar ratios into energy ratios.
• We are comparing the inputs and outputs for a single year - not comparing all the outputs for projects with all the inputs required for that particular project integrated over time.

The last point, for example, should probably be invoked to explain the spike in 2009 when new investment collapsed in the low price environment following the financial crisis, yet output was still fairly high based on prior investments.

US Crude Production by State - The above chart shows US crude oil production by month from Jan 1981 through April 2012.  I have broken out all the states producing more than 100 kbd (thousand barrels/day) by the end.  The original peak level of the total came in November 1970 at 10.044mbd, but the per-state data doesn't go back that far on the EIA website.  There was a secondary peak (mainly due to Alaska) in 1985/1986.  Then there was a long decline until the last couple of years. The resurgence of production in the US in recent years has given new hope to long-standing cornucopians.  At a minimum, it's certainly important in driving the spread between WTI and Brent oil prices.  I remain uncertain at this time how far this trend can go - there's little doubt that there's a huge amount of oil in the ground in the Bakken rock formation, for example, but there remains huge uncertainty in how much will be eventually recoverable given the very poor properties of the rock and I, at least, am not yet clear on what the long-term sustainable economics of these projects looks like. If we take the state data above and do invidual lines, we get this:  You can see that the upsurge in the last couple of years comes entirely from North Dakota (Bakken) after 2007 and then Texas even more abruptly since 2010 - Texas has added something like 600kbd in two years.

Lower Oil Prices: Not A Good Sign - Are lower oil prices good news? Not really, if it means the world is sinking into recession. We know from recent past experience and from common sense that higher oil prices are a drag on oil importing economies, since if more $$$ are spent on the same amount of oil, there is less to spend on discretionary goods and services. In addition, oil money sent to oil exporting countries is likely to be spent within those economies, rather than being reinvested in the oil importing country that the funds came from. A rough calculation based on 2012 BP Statistical Review data indicates that the combination of the EU-27, the United States, and Japan spent a little over $1 trillion dollars in oil imports in 2011–roughly the same amount as in 2008. Governments have been running up huge deficits and have been keeping interest rates very low to cover up this damage, but it is hard to make this strategy work. The deficit soon becomes unmanageable, as the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) countries in Europe have recently been recently been discovering. The US government is facing automatic spending cuts, as of January 2, 2013, because of its continuing deficits. Furthermore, lower interest rates aren’t entirely beneficial.  Below the fold, we will discuss what is really happening with oil prices, and consider reasons why lower oil prices may be a signal that the world is again headed for deep recession.

Oil: The Next Revolution (pdf) Contrary to what most people believe, oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption. This could lead to a glut of overproduction and a steep dip in oil prices.

How Much Oil Does The World Produce? - In the first installment of this series, I took a look at U.S. and global oil reserves according to the 2012 BP Statistical Review of World Energy. Today, I want to examine oil production statistics since 1965. Highlights of this article and topics that will be explored include:

• New global oil production record set in 2011, but the growth rate is slowing
• Global oil production has grown by 163% since 1965
• Production picked up in the U.S. again during President Obama’s first year in office
• U.S. share of global oil production dropped from 24% in 1970 to 9% in 2011
• Quality of oil produced today is lower than it used to be

We were wrong on peak oil. There's enough to fry us all | George Monbiot - The facts have changed, now we must change too. For the past 10 years an unlikely coalition of geologists, oil drillers, bankers, military strategists and environmentalists has been warning that peak oil – the decline of global supplies – is just around the corner. We had some strong reasons for doing so: production had slowed, the price had risen sharply, depletion was widespread and appeared to be escalating. The first of the great resource crunches seemed about to strike. Among environmentalists it was never clear, even to ourselves, whether or not we wanted it to happen. It had the potential both to shock the world into economic transformation, averting future catastrophes, and to generate catastrophes of its own, including a shift into even more damaging technologies, such as biofuels and petrol made from coal. Even so, peak oil was a powerful lever. Governments, businesses and voters who seemed impervious to the moral case for cutting the use of fossil fuels might, we hoped, respond to the economic case. Some of us made vague predictions, others were more specific. In all cases we were wrong.  Peak oil hasn't happened, and it's unlikely to happen for a very long time. A report by the oil executive Leonardo Maugeri, published by Harvard University, provides compelling evidence that a new oil boom has begun. The constraints on oil supply over the past 10 years appear to have had more to do with money than geology. The low prices before 2003 had discouraged investors from developing difficult fields. The high prices of the past few years have changed that.

Monbiot says he was wrong on peak oil but the crisis is undeniable - There has been "a boom in oil production" of late, Monbiot says. Wrong. Global production has been essentially struggling along a plateau since 2004, as Bob Hirsch, an ex-Exxon advisor to the US Department of Energy describes. Hirsch expects the descent to begin in one to four years. Monbiot is correct that there has been a small increase in oil production in the United States in recent years. But can that continue, as he infers? Gas-industry whistleblower Art Berman describes how the shale gas gold-rush of recent years, now extending into shale oil, may well be a giant ponzi scheme: decline rates in wells are unexpectedly fast, meaning more and more have to be drilled at ever more expense, meaning ever more money has to be borrowed against cash flows from production that fall ever further behind. He looks at the resulting disaster in the balance sheets of oil and gas companies, and expects the bankruptcies to start any time soon. John Dizard has also warned of this particular bubble, in the Financial Times

Tech Talk - New Energy Report from Harvard Makes Unsupportable Assumptions - The Tech Talks of the last few months have followed a path of looking in a relatively realistic manner at crude oil production with emphasis on that coming from the United States and Russia, as well as Saudi Arabia, the current focus of my weekly pieces. An earlier piece looked at a Citigroup report of considerable optimism, and the post explained why, in reality, it is impractical to anticipate much increase in US production this decade. Since then, after reviewing the production from Russia, several posts have shown why the current lead in Russian daily crude oil production is likely to be soon over and then decline, as the oil companies are not bringing new fields on line as fast as the old ones are running out.So, there now comes an Energy Study from Harvard which boldly states that this is rubbish - that by 2020, global production will be at 110.6 mbd and these concerns that most of us have at The Oil Drum (inter alia) are chimeras of the imagination. ... The amount of oil in the region tapped by the well is finite, and when it is gone it is gone, whether from a vertical well that shows gradual decline with time, or from the horizontal well that holds the production level until the water hits the well and it stops. I am not sure that the author of the report understands this. ... The report further seems a little confused on how horizontal wells work in these reservoirs. As Aramco has noted, one cannot keep drilling longer and longer holes and expect the well production to double with that increase in length. Because of the need to maintain differential pressures between the reservoir and the well, there are optimal lengths for any given formation. And as I have also noted, the report flies in the face of the data on field production from the deeper wells of the Gulf of Mexico.

Unconventional Oil is NOT a Game Changer - Beyond the shale oil of the Bakken in North Dakota or the Eagle Ford in Texas, there are other forms of unconventional oil that form part of the North American production boom hype. Robert Rapier again:When some people speak of hundreds of billions or trillions of barrels of U.S. oil, they are most likely talking about the oil shale in the Green River Formation in Colorado, Utah, and Wyoming. Since the shale in North Dakota and Texas is producing oil, some have assumed that the Green River Formation and its roughly 2 trillion barrels of oil resources will be developed next because they think it is a similar type of resource. But it is not. The prospects for some of these are significantly worse than for shale oil, especially where the EROEI is even lower. Colorados oil shale in particular is unlikely ever to amount to much. While shale oil is a liquid hydrocarbon trapped in low permeability source rock, which can be liberated through fracking, oil shale is not a liquid at all, but solid kerogen that requires tremendous energy inputs to be separated from the source rock. Those required energy inputs mean a rock-bottom EROEI. Costs in monetary terms are sky-high as well.

Email From Lead Analyst at EIA on Petroleum Usage - In response to my post 3-Month Petroleum Usage Chart for March, April, May Shows 14 Years of Supply Demand Growth has Vanished (with charts from Tim Wallace) I received a nice email from James Beck, Lead Analyst, Weekly Petroleum Status Report Team, Energy Information Administration (EIA). I just wanted to chime in on your latest charts. While I do appreciate the use of the weekly numbers, I wanted to send you these three charts (with all of their data included) based on the EIA's Petroleum Supply Monthly which supports your point that demand for gasoline is at 2002 levels and that total petroleum product demand is at 1997/98 levels.  Additionally, I have included the distillate demand chart which shows that since the recession began in 2008, we have had distillate demand at 2000-2002 levels, and 2012 has the second-weakest Jan-Mar level since 2002 (2012 is 0.3% higher than the Jan-Mar demand for 2010, which was the lowest since 2000). Since diesel demand is a very good proxy for the health of the economy (all shipping uses diesel--trucking, rail, barge, etc.), this weakening might be an indication of things to come. The reason to look at the monthly numbers is that they are more reliable than the weekly as the survey is of the entire industry and there is a great deal of extra time used to verify the data. Many people believe that the monthly numbers are a revision of the weekly numbers. This is not true. These are separate surveys. Where the monthly surveys the entire industry and collects much more detailed information, the weekly information is based on a sample of the industry drawn from the monthly reporters, collects less information, and is focused on timeliness versus completeness.

Oil Wealth Returning, Iraq Sees Malls Rise - American-style malls, fixtures in most of Iraq’s wealthy Persian Gulf neighbors, have come late to war-torn Baghdad, but Iraqis are taking to them now like Valley Girls, as a consumer society fueled by the country’s booming oil profits begins to flourish here.  Big malls are being built across the capital. The largest will include a five-star hotel and a hospital, and at one already in operation, a truck arrives each week carrying frozen Big Macs from a McDonald’s in Amman, Jordan.  The construction boom is generally hailed as proof of Iraq’s progress and return to normalcy, more than nine years after the American invasion and six months after the last combat troops departed. But economists and other experts see a dark side. They say the emerging consumer culture masks fundamental flaws in an economy that, like those of other energy-rich countries like Saudi Arabia and Qatar, stifles productive enterprise by relying almost solely on oil profits and the millions of government salaries those profits finance as part of the country’s vast patronage system.  “Basically, Iraq is trying to build a consumer society, not on state capitalism like in China, but on socialism,”

Oil prices Rollercoaster Another leap. Where next? -- BROADLY, two factors govern the price of oil. One is actual supply and demand, the other market sentiment about the state of the world. The fundamentals change slowly; the market’s mood is more volatile. Both have sent the price careering up and down in recent weeks. In March fears that the Iranians might do something dramatic in the Strait of Hormuz, cutting off supplies to global markets, helped to propel the price of a barrel of Brent crude to over $128 (see chart). Since then oil has sagged by 30%, to a low of $88 a barrel on June 22nd, as intensifying worries over the euro-area debt crisis and fears of a sharp slowdown for China’s economy darkened prospects for demand. The supply side also weighed on prices. For some months Saudi Arabia has been pumping oil at its fastest rate in 30 years to make up for Iranian crude lost to American and European sanctions, which officially started on July 1st. Plenty of Libyan oil is also back on the market. Oil from America’s shale fields has all but plugged the gap caused by disruptions to supplies from Syria, Yemen and South Sudan. The emotional rollercoaster is now climbing again. On June 29th oil markets responded to the latest euro summit with undisguised, and unmerited, glee. The price of Brent crude leapt by 9%, the biggest one-day advance in three years, and has since risen to around $100 a barrel. The fundamentals and the fear factor suggest the price will remain there for a while.

Why Vladimir Putin Needs Higher Oil Prices - Falling oil prices make just about everyone happy. But Vladimir Putin is not one of them. The economy that the Russian President has built not only runs on oil, but runs on oil priced extremely high. Falling oil prices means rising problems for Russia – both for the strength of its economic performance, and possibly, the strength of Putin himself. Despite the fact that Russia has been labeled one of the world’s most promising emerging markets, often mentioned in the same breath as China and India, the Russian economy is actually quite different from the others. While India gains growth benefits from an expanding population, Russia, like much of Europe, is aging; while economists fret over China’s excessive dependence on investment, Russia badly needs more of it. Most of all, Russia is little more than an oil state in disguise. The country is the largest producer of oil in the world (yes, bigger even than Saudi Arabia), and Russia’s dependence on crude has been increasing. About a decade ago, oil and gas accounted for less than half of Russia’s exports; in recent years, that share has risen to two-thirds. Most of all, oil provides more than half of the federal government’s revenues.

U.S. Bets New Oil Sanctions Will Change Iran’s Tune - After three and a half years of attempting to halt Iran’s nuclear program with diplomacy, sanctions and sabotage, the Obama administration and its allies are imposing sweeping new sanctions that are meant to cut the country off from the global oil market. Many experts regard it as the best hope for forcing Iran to change its course.  On Sunday, the European Union is putting in place a complete embargo of oil imports from Iran, which was the Continent’s sixth-biggest supplier of crude in 2011.  Three days ago, the United States imposed a new round of sanctions that could punish any foreign country that buys Iranian oil. However, it has issued six-month exemptions to 20 importers of Iranian oil who have significantly cut their purchases, including China, which has openly opposed the pressure on Iran.  Even before these steps, Iran conceded last week that its oil exports were down 20 to 30 percent. Its currency has plunged more than 40 percent against the dollar since last year. But so far the escalating sanctions, which the Bush administration started and the Obama administration has intensified, have failed in their central goal of forcing Iran’s mullahs to stop enriching uranium. Negotiations have stalled, though it is unclear whether this is a tactical move by Iran or a collapse of the latest diplomatic effort.

Iran Oil Sanctions Risk Biggest OPEC Loss Since Libya - European Union sanctions on Iran entered into full force today after exemptions on some contracts and insurance ended, boosting crude prices and pressure on the Persian Gulf nation to halt its nuclear-enrichment program.  The reduction in Iranian exports may become the biggest supply disruption from a member of the Organization of Petroleum Exporting Countries since an armed rebellion all but halted pumping in Libya last year, according to the International Energy Agency. It also comes as a strike by Norwegian workers is curbing flows from North Sea fields.  “We expect Brent oil prices to be supported by Iranian oil sanctions and potential loss of supplies from the North Sea,” . “The imminent EU insurance ban on tankers carrying Iranian crude could drive up demand for Brent and Dubai crude.”  Brent futures fell below $90 a barrel on June 21 for the first time in 18 months as concern that Europe’s debt crisis would spread sapped the outlook for fuel use worldwide. Now, the Iran embargo and Norwegian strike are stoking speculation about a rebound in prices, Brent for August settlement surged 7 percent on June 29 to close at $97.80 a barrel on the ICE Futures Europe exchange

Iran calls for extraordinary OPEC meeting - Sanctions-hit Iran on Saturday called for OPEC to hold an extraordinary meeting to rein in output going over its agreed total quota because oil prices have dipped to a "critical level" under $100 a barrel. "We have asked the secretary general to set up an extraordinary meeting as prices have become irrational," Iranian Oil Minister Rostam Qasemi was quoted as saying on his ministry's official news website Shana. He stressed that the last Organisation of Petroleum Exporting Countries meeting, on June 14, had decided the cartel's overall quota would be 30 million barrels but "members' production has reached 33 million barrels a day." OPEC had agreed that "when the prices go below $100 a barrel, they have reached a critical level," and therefore an extraordinary meeting was needed before the next scheduled OPEC meeting in December, he said.

Crude Spikes On News Iran Lawmakers Propose Straits Of Hormuz Blockade For Sanctions Countries -- What goes down, must come up. In this case crude, which is soaring on news out of FARS that Iranian lawmakers have drafted a bill proposing a blockade of the Straits of Hormuz for oil tankers heading to sanctions supporters, i.e., embargo countries. Naturally, if implemented, this would mean an almost inevitable military retaliation on behalf of the "western world." Then again, this is not the first time Iran has postured with a blockade. If indeed willing to follow through, it surely mean Iran has at least implicit whisper support of Russian and Chinese support when the situation inevitably escalates.

Iran Says It Has ‘Inalienable Right’ to Enrich Uranium - Iran is declaring that it has an “inalienable right” to enrich uranium, reasserting a stand that is rejected by world powers and may prevent a deal to resolve Western suspicions it seeks to build nuclear weapons.  Iran’s ambassador to the United Nations, Mohammad Khazaee, said in New York today that Iran’s position is that international law and the Nuclear Nonproliferation Treaty guarantee its right to enrich uranium for peaceful purposes and allow it to obtain nuclear-related technology from any country that’s signed the treaty.  The U.S. and its allies have said the treaty provides general assurances about the peaceful use of civilian nuclear technology, in compliance with international safeguards, not the specific right to enrich asserted by Iran. The enrichment process produces fuel for use in electric power reactors or, with further processing, for nuclear bombs.

Sanctions hit Iran finds another huge Oil reserves - Sanctions hit Iran announced finding a huge oil discovery that contains approximately 6 billion barrels of recoverable oil reserves. Announcing the discovery,Iran's Oil Minister Rostam Qassemi said the newly discovered oil field is located near the Yadavaran oil field 70 kilometers Southeast of Ahwaz city, in the oil-rich Khuzestan province, near the borders with Iraq. In November, Qassemi announced that the country's recoverable oil reserves had risen from 151 billion barrels to 154.8 billion barrels, adding that there are plenty of unexplored hydrocarbon reserves in the country. Qassemi said the volume of the newly discovered oil reserve is more than earlier forecasts.Referring to the development plan of Yadavaran oil field, the minister said that the field would be developed in three phases, and added that early production would start at 20 thousand barrels per day.

India Said to Pay in Euros for Iran Oil Due to Rupee Hurdles - India is using euros to clear most of its purchases of Iranian oil through a Turkish bank because of hurdles in making rupee payments, according to three people with knowledge of the transactions.  While some payments have been made in rupees, they are more difficult after India barred Tehran-based Parsian Bank from opening a branch in Mumbai and because the rupee can’t be directly converted overseas to other currencies, the people said, asking not to be identified because the information is confidential.  The euro payments are continuing even as the U.S. and the European Union seek to limit oil revenue in Iran, which they say is developing nuclear weapons. The payments also mean Iran won’t be handicapped by difficulties in converting rupees, the worst performer among Asian currencies over the past 12 months.

Deep integration in free trade agreements in China and India - Since the 2000s, creeping protectionism and the stalled WTO Doha Round trade talks have prompted China and India to pursue a variety of bilateral and regional free trade agreements (FTAs). Before 2000, the sole FTA involving China and India was the Asia-Pacific Trade Agreement. By February 2012, the Asian giants were among the region’s leaders in trade agreements with 12 FTAs in effect in China and 13 in India. These figures are likely to rise as both giants are presently negotiating increasingly ambitious FTAs. Since 2007, India has been involved in negotiations with the EU on an FTA that seeks to sharply reduce tariffs on goods and liberalise services and investments provisions. China is in talks with Japan and Korea on a trilateral FTA, which some see as a rival to the US-led Trans-Pacific Partnership (TPP) process.  With little end in sight for the Doha Round of trade talks, this column argues that China and India are only going to pursue more free trade agreements. It asks what can be done to make sure these agreements lead to deeper integration between these countries and the rest of the world.

China starts stockpiling rare earths: report - China has started stockpiling rare earths for strategic reserves, a state-backed newspaper said Thursday, in a move that may raise more worries over Beijing’s control of the coveted resources. China has already started the purchase — using state funds — and storage of rare earths for strategic reserves, the China Securities Journal said, but did not specify exactly when the initiative was launched. “This is China’s start of work for state strategic buying and storage of rare earths,” the newspaper said. The country produces more than 90 percent of the world’s rare earths, which are used in high-tech equipment ranging from iPods to missiles, and it has set production caps and export quotas on them. Major trading partners last month asked the World Trade Organization (WTO) to form a panel to resolve a dispute over China’s export limits on rare earths after earlier consultations through the global trade body failed. The European Union, the United States and Japan accuse China of unfairly choking off exports of the commodities to benefit domestic industries.

China Manufacturing Weakens 8th Month; Will the US Economy Continue to Decouple From the Rest of the World? The global economy led by Europe and China continues its downward path. Will the US follow? First let's take a look at China. Markit reports China Manufacturing PMI Declines 8th Consecutive Month. Key points:

• New orders fall to greatest extent in seven months, as export orders slump
• Factory output declines marginally in comparison; stocks of finished goods rise 
• Input costs and output charges down at sharpest rates in 39- and 42-months respectively

China’s goods producers reported an eighth successive month-on-month deterioration in operating conditions during June, as output, incoming new orders and employment continued to decrease. After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – inched lower from 48.4 to 48.2 in June, a level indicative of a modest pace of deterioration in business conditions. For the second quarter as a whole, the index averaged its lowest quarterly value since Q1 2009.

China’s Manufacturing Growth Weakens As New Orders Drop - China’s manufacturing expanded at the weakest pace in seven months as overseas orders dropped, and South Korea cut its estimate for export growth this year, underscoring risks to Asian economies from Europe’s debt crisis. The Purchasing Managers’ Index fell to 50.2 in June from 50.4 in May, the Beijing-based National Bureau of Statistics and China Federation of Logistics and Purchasing said yesterday. South Korea’s Ministry of Knowledge Economy lowered its projection for overseas sales to an increase of 3.5 percent from 6.7 percent, citing a slowdown in major economies.  Manufacturing data from China, the world’s biggest exporter, signal the government may need to add stimulus to arrest an economic slowdown that probably extended into a sixth quarter. The downturn is rippling through Asian nations, with South Korea’s sales to China, its biggest market, stalling in the first 20 days of June.  “It’s clear the slowdown of export growth as a result of weakness in Europe and the U.S. continues to weigh on the Chinese economy,”

China Data Show Drops in Exports and Prices - — The Chinese manufacturing sector is set to contract for an eighth consecutive month in June, with export orders and prices slumping by the highest percentage since the depths of the financial crisis in early 2009, according to a private-sector survey released Thursday.  The data on industrial activity came as the Chinese securities regulator took new steps to widen access for foreign investors to its mostly closed financial markets. This is seen in part as an attempt to bolster slumping mainland Chinese stock markets, which fell Thursday to their lowest levels since March. A preliminary purchasing managers index compiled by HSBC and the data provider Markit Economics showed that China’s manufacturing activity has fallen to a seven-month low of 48.1 index points in June, down slightly from a final reading of 48.4 in May. It was the eighth consecutive month that the P.M.I. had been below 50, indicating contraction. A reading above 50 signifies growth.  Both input and output prices at Chinese factories have plunged this month to their lowest levels in more than two years, the survey showed. New export order activity dropped even more sharply, to 45.9, its lowest level since March 2009.

China's Landing Getting Harder As Stimulus Fails To Prime Pump -  The spread between HSBC's and China's version of Manufacturing PMI increased a little over the weekend when the headline of China's data point managed to cling perilously above the 50-line of expansion over contraction (while HSBC's drifts lower and lower under 50). The headline print - still its lowest since Nov 11 - however, hides a much less sanguine truth in the sub-indices with the new orders index fell once again staying in the contractionary territory under 50. What is more worrisome for China (and implicitly the rest of the world) is that while transport equipment and electrical machinery improved (explicitly thanks to government funded infrastructure projects) there has been no multiplier effect of a broad-based investment rebound. As Credit Suisse notes: "The stimuli launched in middle of May seems to have failed to jump-start the overall economy, yet the moderation in PMI is not severe enough to justify a much more aggressive rescue package

Caixin Online: Dealing with a double whammy in China — By most measures China’s economy has slowed quickly since the last quarter of 2011. Electricity production, the National Bureau of Statistics reports, grew 1.7% in April and May from last year.  Over the past decade the annual growth rate was 12%. Also in April and May, the railroad ton-kilometer figure grew by 1.3% compared to the same months last year, down from the 6% growth seen from 2005 to 2011.  Due to the resulting decline in commodity prices, the inflation situation has improved, which lessens pressure on the household sector. At the same time, the slowdown has not caused widespread reduction in employment. There may be some impact on construction jobs already, but, as the labor market was very tight before the slowdown, the employment picture remains healthy.  There are no widespread bankruptcies. The main reason for this is government-owned banks not foreclosing on delinquent businesses. Of course, banks may have more bad assets down the road, which is the cost for achieving a soft landing.

Death of the China Cult - People in Hong Kong have a long history of mistrust of China.  In this city, you seldom hear anything bad about Britain (because most have no idea), but you hear a lot of bad things about China, particularly the Chinese Communist Party. We just don’t trust them. While the mistrust of the political class of China continues in Hong Kong (and will certainly continue for much longer), the doubts on the strength of the Chinese economy and the doubts on the ability of the political class to manage the economy have more or less evaporated after 15 years of Chinese rule. It used to be that Hongkongers would go to China to purchase really cheap stuff. Now, it is the Mainland Chinese who come to Hong Kong to buy really expensive stuff.  The only difference between the recent years and ten years or so ago is that people just ignore it now, because the extraordinary bull market and the seemingly unstoppable economic growth has created a China cult, a cult among the investing community that China is the best place to invest. Just as hedge fund manager Hugh Hendry said “10 years are enough to create a cult in capital market”. In fact, China has not seen any year with negative growth for more than 30 years.

Central bankers opposed to functioning markets - As I outlined in the kleptocracy post Chinese households save an absurdly large proportion of their income in bank deposits with regulated interest rates earning about 1 percent nominal. This is an observable fact. The reasons for it (I blamed the One Child Policy and deliberate financial oppression) are less observable - but the fact of these enormous savings is not in doubt. Inflation is also highly observable in China. Whether you believe the official statistics or not does not matter. Inflation causes observable political disturbance and many companies are complaining about cost pressure. There is no doubt that inflation rates in China have been above the regulated bank interest rate and that situation has been persistent. Simple observable fact: one of the biggest savings pools in the world and possibly the largest incremental savings pool in the world (Chinese middle and lower classes) have saved (and are clearly prepared to save) at observable and high negative real interest rates. My speculation: if there were full capital mobility the market clearing real interest rate for riskless assets globally would be negative because of that large pool of savers prepared to save at negative real rates.

Chinese banks' profits soar amid euro crisis (CNN) -- Chinese banks have left European banks behind in terms of their profitability during the eurozone crisis, according to a global survey of 1,000 banks released Tuesday by The Banker magazine. The world's most profitable bank Industrial Commercial Bank of China made $43.2 billion in pre-tax profits last year, followed by China Construction Bank Corporation and the Bank of China, which took in $34.8 billion and $26.8 billion respectively. JP Morgan Chase and Co. of the United States took fourth while the Agricultural Bank of China rounded out the top five. Chinese banks accounted for 4% of profits in 2007, but following the economic downturn, now make up nearly one-third (29.3%) of total global profits. Eurozone banks by contrast now make up just 6% of total bank profits, compared to 46% five years ago.

China banks took 29 pct of 2011 global profit - study (Reuters) - Chinese lenders accounted for almost a third of global bank profit last year, up from 4 percent in 2007, as they grabbed market share given up by struggling European peers, according to The Banker magazine's annual rankings. Three Chinese banks topped the profit table, led by Industrial and Commercial Bank of China for the second successive year, with pretax earnings of $43.2 billion, according to The Banker. ICBC was followed by China Construction Bank which delivered a $34.8 billion profit, and Bank of China with earnings of $26.8 billion. JPMorgan (JPM.N) was fourth with a profit of $26.7 billion, while HSBC was the most profitable European bank, with earnings of $21.9 billion. Bank of America (BAC.N) topped the magazine's Top 1,000 list for the second year, which uses Tier 1 capital as a measure of a bank's ability to lend on a large scale and endure shocks.

China cuts key interest rates for second time this year - China cut its interest rates for the second time in less than a month Thursday in an unexpected move that signals widening concern about the seriousness of the country's economic slowdown. China's central bank said it would lower lending rates 0.31 percentage points to 6% and deposit rates 0.25 percentage points to 3%. The move is intended to spur growth at a time when expansion in the world's second-largest economy has slowed to its weakest pace since the aftermath of the 2008 financial crisis. "China's decision to cut interest rates again ... is a very important move," "This aggressive policy action reflects, in our view, a deepening concern by policymakers that the economy has yet to find a bottom and requires additional stimulative monetary settings to engineer a recovery."

China’s central bank cuts lending, deposit rates — China’s central bank on Thursday unveiled a surprise interest rate cut, lowering borrowing and deposit rates while also enabling banks greater leeway in setting their own lending rates at a discount to the benchmark. The People’s Bank of China lowered its one-year yuan deposit rate 25 basis points, or a quarter percentage point, to 3% and its one-year lending rate by 31 basis points to 6%, according to a statement posted on its website. The central bank also announced more relaxed rules on lending for commercial bans, allowing lending rates to be set as low as 70% of the benchmark rate, down from 80% currently. The move, the second rate cut in a month, was seen as part of efforts to prop up lending after data showed credit growth in an apparent stall in June. It also comes on a day when the European Central Bank cut interest rates by a quarter-point and the Bank of England extended an asset purchase program by 50 billion pounds. Read more on ECB, BOE decisions. “The [China] rate cut itself is surely good news to markets, but investors might wonder if second-quarter data to be released in the coming week might be worse than expected,”

China Cuts Rates in Bid to Reverse Slowdown - China’s central bank unexpectedly cut regulated bank lending rates by nearly a third of a percentage point on Thursday evening, and made a rule change that could further reduce borrowing rates for companies with good credit by an additional three-fifths of a percentage point. The double-barreled move comes just four weeks after a similar rate reduction and rule change by the People’s Bank of China, and underlines the growing worries in Beijing about what the government has begun to describe as a sharp economic slowdown. Much like top Federal Reserve officials receive advance warning of economic statistics in the United States, Chinese policy makers have almost certainly received at least a rough preview of second-quarter economic statistics due for release next week. Most economists now expect those figures to show considerably weaker-than-usual growth, at least compared with China’s vigorous expansion over most of the last three decades. Surveys of business executives in recent weeks have shown low expectations for overall manufacturing activity, along with concern about slackening orders and mounting inventories of unsold goods. The People’s Bank of China reduced the regulated rate for one-year bank loans by 0.31 percentage points, to 6 percent. On Thursday, the central bank also lowered the regulated minimum interest rate that banks must pay depositors. But the reduction in deposit rates was smaller, a quarter of a percentage point. The smaller change in deposit rates is the latest sign that Chinese banks have found themselves lately in the unfamiliar position of struggling to persuade Chinese households and companies to deposit more money.

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

China Takes a Big Step to Make the Yuan a Rival to the Dollar - Shenzhen is where China’s economic miracle began. Back in 1980, Deng Xiaoping and his Beijing comrades launched a special economic zone, or SEZ, in the southern enclave that became the center of a grand experiment in introducing free capitalism into Communist China.   On Friday, Chinese policymakers formally revealed that they would turn a slice of Shenzhen into a new sort of SEZ to experiment in currency convertibility. The SEZ, called the “Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone” will be developed near the border with bustling Hong Kong at a cost of $45 billion. Details on exactly what financial reforms will take place in the zone were sparse. It is possible that the measures will include the permission of some cross-border yuan lending between Hong Kong and mainland firms. But the purpose was made clear: China is will take steps to free up the ways in which its currency, called the yuan or renminbi (RMB), can be used in international finance. “The country’s policy is to gradually open up its capital account and realize the full convertibility of the yuan,” said Zhang Xiaoqiang, vice chairman of China’s influential National Development and Reform Commission. “Qianhai, as the first experimental zone of the country’s modern service industry, should be a pioneer of that.”

China's Industrial Age Feudalism - What is China's future? I believe it will be similar to Russia's, but with less alcoholism. Both had a centrally planned government that directed fairly obvious investment to move their economies from the agrarian to the industrial age. The move to the industrial age created an enormous amount of wealth in state owned enterprises, which are controlled by the priviliged and powerful few with connections to the state. Neither nation has a powerful enough middle class, large enough young population, or history of democratic expectations to deliver economic and political power to the people. So this condition will exist for decades, if not centuries. Governments may come and go over that period, but not much will change. Efforts at privatization will merely solidify ownership by the privileged few, or will be mere shell games that hide the concentration of wealth. With the obvious high return investments made and growth stagnating, China's elite will reap their rewards by systematically depleting every resource available, starting by absconding with foreign investment and continuing with the rape of natural resources. Unlike Russia, China does not have a surplus of petrochemical energy resources to export, so it will export the human energy (labor) of its people. To do that, it will practice wage repression, which may mean that investments to automation and robots in production lines are retarded from the natural flow of economic progression.

Will China Face a Lost Decade? -  Yves Smith - Although various commentators (including our Marshall Auerback) have raised warning flags about the long-term viability of China’s growth model, the middle kingdom’s performance during the crisis seemed to prove skeptics wrong. Never mind that creditors like China tend to suffer most in the aftermath of major financial crises, or that no country has ever sustained such a high combination of exports plus investment (over 50% of GDP) for very long. And the ongoing reports of all those vacant cities seemed to be irrelevant. The critics have been looking less off base of late. A report late last month in the New York Times discussed how the always unreliable Chinese official figures were looking even dodgier of late, reflecting an effort to mask flagging growth. Savvy investors had been using proxies for real economy activity, such as electricity consumption, to compensate for these shortcomings. But the officialdom has become so concerned about keeping up appearances that they’ve started to dress up those figures as well.  Michael Pettis, a long standing commentator on the Chinese economic model, provides a short summary as to why China is unlikely to have a soft landing. Remember that China has shown signs of overinvestment for years. On the eve of the financial crisis, it took $4 to $5 of investment in the US to produce $1 of GDP growth. In China, the ratio was closer to $7 to $8 of investment to $1 of growth. And recall that the way China came through the crisis relatively well was by massive spending….which again was weighted heavily toward investment.. Pettis explains:

Taiwan to Allow Local Companies to Issue Yuan-Denominated Bonds - Taiwan will allow local companies to issue bonds denominated in Chinese yuan in order to provide them further sources of funds, the Financial Supervisory Commission said in a statement on its website yesterday. Bonds would be issued in Hong Kong or through overseas banking units, the statement said. The regulator also plans to ease restrictions on Taiwanese asset managers’ investments in Chinese securities and allow local financial institutions to offer yuan-based products such as deposits and remittances, it said.

Obama challenges Chinese car import tax - The US will challenge Chinese duties imposed on imported American vehicles, in a counter-strike timed to coincide with Barack’s Obama’s tour of manufacturing states that will be pivotal in this year’s presidential election. The “enforcement action” allows the US to demand formal consultations with China at the World Trade Organisation in Geneva. Mitt Romney, Mr Obama’s Republican challenger, has accused the president of not standing up to China on trade.

Hit at home, China's ghost fleet sails high seas (Reuters) - China's huge fleet of coastal ships, usually confined to plying the Chinese seaboard, has sailed out of the shadows to seek international business in yet another sign that China's economy is slowing. The fleet, previously unnoticed by the global market, is suffering from a slowdown in China's coastal trade amid weaker domestic demand from utilities and steel mills and a growing glut in Chinese coal and iron ore stockpiles. The vessels are now being forced to seek new business such as in the Indonesian coal trade, dealing a further blow to the depressed global dry bulk shipping market. "There are many more ships lying idle at Chinese ports now - the environment for making money is not so good," said a source at one of the big five coastal shippers, who asked not to be identified. The slowdown of the Chinese economy has been among the main worries for global markets in general and commodities markets in particular. China, the world's biggest coal producer, is also the biggest single coal and iron ore importer and freight user and a small change in its buying or freight use sends ripples around the world markets.

China’s ghost ships ply the bulk routes - From Reuters today comes an interesting story that complements this morning’s coal musings: China’s huge fleet of coastal ships, usually confined to plying the Chinese seaboard, has sailed out of the shadows to seek international business in yet another sign that China’s economy is slowing. The fleet, previously unnoticed by the global market, is suffering from a slowdown in China’s coastal trade amid weaker domestic demand from utilities and steel mills and a growing glut in Chinese coal and iron ore stockpiles. The vessels are now being forced to seek new business such as in the Indonesian coal trade, dealing a further blow to the depressed global dry bulk shipping market. “There are many more ships lying idle at Chinese ports now – the environment for making money is not so good,” said a source at one of the big five coastal shippers, who asked not to be identified.

Japan Composite PMI Contracts; China Composite PMI Stagnates -- The contraction hit parade keeps humming along. Japan Composite data show first fall in business activity since November 2011 Business activity in Japan’s service sector decreased for a second successive month during June, as new order growth remained muted. Meanwhile, manufacturing PMI™ data showed factory output falling for the first time in six months. Consequently, the Composite Output Index (covering manufacturing and services) dipped below the neutral 50.0 threshold in June, down from 50.1 to 49.1, and indicated the first reduction in private sector activity since November 2011. Behind the latest reduction in service sector activity was a worsening of market conditions. Markit China Services PMI Activity Growth Eases to Near-Stagnation in June Key points:

• Overall new business down for first time in six months
• Composite data showed input prices falling at the fastest rate in 39 months
• Service sector optimism remains subdued

Japan Could Run Out of Cash by October: Minister - Japan's government could run out of money to fund this fiscal year's budget by the end of October, the finance minister said, as a standoff in parliament over a deficit financing bill threatens to wreak havoc with the country's finances. The deficit financing bill, which would allow the government to sell bonds needed to fund almost half of the budget, has languished in parliament as the ruling Democratic Party tussles with opposition parties that can use their control of the upper house to reject legislation. The finance minister issued a plea on Friday to the two largest opposition parties to pass the bill, because without it government spending would grind to a halt, the economy would be put into jeopardy and Japan's standing among credit ratings agencies could suffer. I really hope that we can get a multi-partisan agreement on the deficit bill," Finance Minister Jun Azumi said. "It doesn't matter which party is in power. Without this bill, the budget will collapse." Japan's budget for the current fiscal year that started in April totals 90.3 trillion yen. The deficit financing bill allows Japan to sell 38.3 trillion yen in government bonds to fund the budget. The remainder is funded by tax revenue, non-tax revenue and income from bonds earmarked for public works projects.

New Zealand’s Savings & Loans Companies: Not Like Any Banking Industry You’ve Ever Seen Before - After the Reserve Bank of New Zealand’s little flail at companies using “restricted words”, there are not so many New Zealand companies with Bancorp in their name any more, but one does detect in the Company Register a lingering fondness for other bank-like appelations, such as “Savings and Loan”, or “Savings & Loan”. Names like that, on a New Zealand company, have no official meaning, but they might appeal to any Americans out there whose due diligence on an overseas bank stops at checking whether the bank has a vaguely familiar-looking name. That level of nonchalance identifies ideal scam victims. The company name functions as a filter: only dopes sign up. Should the Reserve Bank be warning judiciously about these foreign-accented phrases, and others, too, no doubt; whether or not the words are in their Reserve Bank of New Zealand Act 1989? Let’s see whether I can form any strong but purely personal opinions about that, which I will express in capital letters, bold.

Overspending in India - Check out this story in the New York Times about free-wheeling consumer credit in India. Much of the article focuses on how Indians are using consumer credit to pay for cosmetic surgery. What especially caught my attention from the news story was the conventional wisdom from the middle of the article: Many older Indians see the trend as young India’s rush headlong toward a financial precipice. In a country of savers, middle- and upper middle-class Indians of the preceding generations paid up front for everything except life’s biggest purchase, a home. Then, about a decade ago, buying a car, a washing machine or a refrigerator on credit became common.These days, India’s in-a-hurry generation is pushing the boundaries of what can be purchased on credit. Many a country's financial reporters have retold this story. Financial attitudes suddenly change, and a country of savers becomes a country of borrowers. My hypothesis, however, is that the story has the causality all wrong. It is not cultural attitudes but institutions that are doing the changing. When consumer credit becomes widely available, people borrow, and societies experience overindebtedness. A perfect example of my hypothesis is South Korea where, a generation ago, you likely would have been given stereotypical cultural attitudes about the need to save and an aversion to debt. After the Asian debt crisis of the 1990s, South Korean banks needed new profit opportunities and turned to the consumer credit markets. Now, South Korea has a substantial consumer overindebtedness problem.

It may take more than stimulus to arrest Brazil's slowdown - As is the case with China and India, we are now seeing material deterioration in Brazil's business conditions, particularly manufacturing. The June manufacturing PMI is showing some unexpected weakness.  HSBC/Markit: - June data indicated a further deterioration in manufacturing business conditions in Brazil. Both output and new orders fell over the month, with the rates of contraction the strongest in eight months. Manufacturers generally commented on weak client demand. Concurrently, job losses were reported for the third month running... Today's Industrial Production number came in considerably weaker than expected - down 4.3% YOY vs. 3.3% expected. GS: - The industrial sector has been beset by higher costs (e.g., labor), soft domestic and external demand, and external competitiveness issues related to a still overvalued BRL. The government has been pushing through quite a bit of stimulus to halt economic contraction.Reuters: - Intent on reviving growth, President Dilma Rousseff's administration has chopped central bank benchmark interest rates, provided industries and consumers with tax breaks, and vowed to step up government purchases of industrial goods.  In anticipation of further rate cuts, the yields on government bonds have come off sharply. As the chart below shows, the 1-year yield is at a multi-year low.

National balance-sheets: Wholewealth | The Economist - This week's Free Exchange column looks at a more recent inquiry into the wealth of nations: the Inclusive Wealth Report, It covers 20 economies, including all the big ones, from 1990 to 2008.Don't be misled by the word "inclusive" in the report's title. The study is not principally about inequality. (Not, at least, intra-generational inequality. A focus on wealth does, however, lead quite naturally to concerns about inheritances, legacies, and inter-generational inequality.) The word "inclusive" instead refers to the broad range of assets the report considers. In addition to a country's physical capital stock, which a number of national statistical authorities already measure, the report also calculates the value of each country's human capital and natural resources, official measures of which are rare. The table below ranks all 20 economies by their GDP in 2008 and their inclusive wealth in the same year. (The amounts are expressed in year 2000 dollars to be consistent with the report.) It also shows each economy's ratio of wealth to GDP. That ratio can be thought of as a measure of the capital-intensity of the economy, where capital is defined "inclusively". The highest ratios, as one might expect, belong to countries rich in natural resources. Russia, in particular, emerges as a country that is getting relatively little out of its rich stock of assets. That is not, sadly, because it is hoarding them abstemiously: its stock of natural capital fell by almost $440 billion from 1990 to 2008.

The UN Reports on the “Real Wealth of Nations” - This week’s Economist magazine calls our attention to a United Nations report (the “Inclusive Wealth Report”) that compares the wealth of nations, looking beyond GDP: Despite the obvious advantages of wealth, nations do a poor job of keeping count of their own. They may boast about their abundant natural resources, their skilled workforce and their world-class infrastructure. But there is no widely recognised, monetary measure that sums up this stock of natural, human and physical assets. Economists usually settle instead for GDP. But that is a measure of income, not wealth. It values a flow of goods and services, not a stock of assets. Gauging an economy by its GDP is like judging a company by its quarterly profits, without ever peeking at its balance-sheet. Happily, the United Nations this month published balance-sheets for 20 nations in a report overseen by Sir Partha Dasgupta of Cambridge University. They included three kinds of asset: “manufactured”, or physical, capital (machinery, buildings, infrastructure and so on); human capital (the population’s education and skills); and natural capital (including land, forests, fossil fuels and minerals).

Africa on the Rise - Six of the world’s 10 fastest-growing economies between 2001 and 2010 were in Africa, according to The Economist. The International Monetary Fund says that between 2011 and 2015, African countries will account for 7 of the top 10 spots.  . Global companies are expanding in Africa; vast deposits of oil, gas and minerals are being discovered; and Goldman Sachs recently issued a report, “Africa’s Turn,” comparing business opportunities in Africa with those in China in the early 1990s.  I’m writing this column in Lesotho, a mountainous kingdom (it was snowing the day I arrived!) in southern Africa. This country is Africa’s biggest apparel exporter to America.  One set of factories we visited, belonging to the Nien Hsing Textile Company, a giant Taiwanese corporation, employs 10,000 people in Lesotho, making this its biggest operation in the world. Workers turn out bluejeans for Levi’s and other American companies, and Alan Han, a senior company official, said quality is comparable to that of factories in Asia.  While America may largely misperceive Africa as a disaster zone, China does get the promise on the continent. Everywhere you turn in Africa these days there are Chinese businesspeople seeking to invest in raw materials and agriculture.  Why does that matter? Because trade often benefits a country more than aid. I’m a strong supporter of foreign aid, but economic growth and jobs are ultimately the most sustainable way to raise living standards.

Global Growth Outlook Weakens -- Three weeks ago we noted that Goldman Sach's Global Leading Indicator (GLI) and its Swirlogram had entered a rather worrying contraction phase. Today's update to the June GLI data suggests things got worse and not better as momentum is now also dropping as well as the absolute level. This continued deterioration in momentum suggests further softening in the global cyclical picture. Of particular concern is the broad-based deterioration in the GLI’s constituent components in June. Nine of ten components weakened last month, only the second time this has occurred since the depths of the recession in 2008Q4. The June Final GLI confirms the pronounced weakening in global activity in recent months. Goldman has found elsewhere (as we noted here) that this stage of the cycle, when momentum is negative and decelerating, is typically accompanied by deteriorating data and market weakness.

US manufacturing contraction feeds fear of global slowdown  - America’s manufacturing sector has contracted for the first time in almost three years, raising the spectre of the world’s major economic centres suffering a simultaneous slowdown. An index of manufacturing activity unexpectedly fell to 49.7 in June from 53.5 in May, the Institute for Supply Management said yesterday. A reading below 50 signals contraction and last month’s figure was lower than the most pessimistic forecast. There was little encouragement to be found in the majority of the smaller indices that made up the worrying headline figure. A measure of new orders dropped to 47.8 from 60, while prices paid slumped to 37 from 47.5. Overseas demand for US manufactured goods was also down, the ISM survey said. Although manufacturing accounts for just 10pc of GDP, the sector has been one of the brightest parts of the economy since America emerged from recession in the middle of 2009. It is also the part of the US economy where the effects of Europe’s recession and a slowing in Asian growth is most likely to show up first. Even before the release of yesterday’s report, investors had been unsettled by figures showing unemployment in the eurozone climbing to an record 11.1%

World-Wide Factory Activity, by Country - A global manufacturing slowdown deepened in June, as the U.S. slipped into contractionary territory for the first time since July 2009. The JPMorgan Global Manufacturing Purchasing Managers’ Index, a broad measure of manufacturing activity across the world, fell to a three-year low of 48.9 in June. The reading below 50 signals that global activity is contracting for the first time since last November and only the second time since 2009. Much of Asia and the U.S. joined the euro zone in contractionary territory last month. An official figure from China indicated that the sector there continues expanding, though at a reduced rate. But a figure released by private companies Markit and HSBC indicated that the nation’s factory activity was contracting. The drop in global factory activity was driven by declines in new orders, especially in the export sector. That increases fears that a slowdown will continue into the summer months. The following chart lists PMIs from a variety of countries. Readings above 50 indicate expansion. Click any column head to re-sort.

The World's Grim Economic Growth Prospects  - The analysts at the Brookings Institute have developed an index that they use to track the global economic recovery cleverly called the TIGER or Tracking Indexes for the Global Economic Recovery. Dr. Eswar Prasad, Senior Fellow at the Brookings Institute and a Senior Professor of Trade Policy at Cornell University recently released his updated and rather sobering outlook for the world's economy.  As most of us are aware, the global economy is firing at about half-speed on a good day. The economies of both the emerging and advanced nations of the world certainly look like they are running out of steam as evidenced by a string of bad news. Unemployment in the Eurozone is at a new high and is stalled at a level above percent in the United States. Many of Europe's economies are also straddling the fence between modest contraction and modest expansion even though the world is supposedly in the third year of the post-Great Recession expansion. A map showing the global economic and development data for both the advanced and emerging market economies as measured using TIGER is available here.  For the purposes of this posting, I'll select a few key countries and show how global growth is stalling out as measured by the overall growth index graphs from 003 to the present and how this has left us standing on the edge of the next recession. Please note that the overall growth index is composed of several economic measures as follows:
Real activity indicators which includes industrial production, imports, exports, employment and GDP growth.
Financial indicators which includes equity market indices, stock market capitalization and credit growth.
Confidence indicators which includes business and consumer confidence.
Included for each country are graphs showing the performance of each of the indicators and economic measures as noted above which you can view by clicking on the country name

Headline in Spain: Government 'sacrificed' Bank of Spain in Exchange for Financial Sector Bailout; ESM Agreement Raises More Questions Than Answers - In the wake of a huge market reaction on Friday, it's interesting to see how the headlines read other places, especially Spain. Here is one such viewpoint by El Confidencial: Government 'sacrificed' Bank of Spain in Exchange for Financial Sector Bailout "The government has chosen to advance the loss of competition in banking supervision, it was inevitable sooner or later if you go to a European Banking Union in exchange for breaking the feedback loop between the banking and public debt, which is very positive and not only for Spain, "says an analyst. Officials of both Economy and the Bank of Spain claimed yesterday that has not yet been defined how will such a monitoring mechanism or what the status of the former Central Bank. Some sources believe that it is logical that national central banks are the arms of the central agency in each country and to continue in office today, but accountable to a higher power who will make the final decisions. Other experts, such as Eurointelligence, say that "it is far from clear that Germany is willing to give up their own banks to supervision by the ECB." It is also unclear what will happen to insurance, which can not be monitored by the ECB according to the EU Treaty.

Hollande Emerges as Leader at EU Summit -  BLM video - France's new president Francois Hollande left his mark at the EU Summit in Brussels

Rajoy real winner despite Monti delight - “It is a double satisfaction for Italy,” said Mario Monti, a reference to both Italy’s victory over Germany in the European football championships and his outflanking of the German chancellor, Angela Merkel, forcing her to agree emergency measures she had for months said she would not accept.  But for all of Mr Monti’s chest-beating, the real winner in the early-morning deal was not the courtly economist. It was his Spanish counterpart, Mariano Rajoy. For the first time since the outbreak of the crisis two years ago, a huge and some would say inevitable bailout of Spain’s teetering domestic banking sector, stuffed with bad real estate investments – will no longer be Madrid’s responsibility.

The real victor in Brussels was Merkel - Mario Monti faced down the German chancellor and won the battle. He will survive a few more weeks or months in politics. It was clever of him to threaten a veto on something Angela Merkel badly needed. He had her in the corner. It was an example of classic EU diplomacy. But this was only the foreground spectacle. If you look behind the curtain, you will find that, for Italy at least, nothing has changed at all.  Mr Monti may have secured the right kind of deal politically but to solve the ESM’s size problem he really should have insisted on a banking licence. With that, the ESM could have leveraged its lending ceiling to a more realistic level. It will not be able to do this now. The deal on Spain was marginally better – on paper. But it, too, is not what it seems. I see three obstacles:
1. A mandate to inject equity into the banks will be conditional on a political agreement for joint banking supervision. This is where Ms Merkel can still exact her revenge. Do not expect this to proceed easily. A joint system of banking would be a very big deal, and I doubt that a sensible agreement can be agreed by October.
2. Direct bank recapitalisations may require a change in the ESM treaty. I know this point is disputed. EU officials say they can do it by diktat. But I cannot see how one can conceivably let the ESM inject equity into banks directly when the treaty says specifically that the ESM lends money to member states for that purpose. Would the treaty not have mentioned this important detail? The head of the Bundestag’s budget committee also seems to think that a treaty change is now needed.

3. The new facility is still constrained by the same overall funding limits of the ESM as the bond purchases. I believe the Spanish banks will ultimately need a lot more than the €100bn earmarked for this programme once you take into account the effects of both the housing crash and the depression. The ESM is seriously overloaded.

No Winners or Losers in EU Summit Clash - Summit discussions between European Union and eurozone leaders ended with no winners or losers Friday, EU President Herman Van Rompuy insisted, after a clash was resolved between Italy and Spain on one side, and Germany on the other. Madrid secured a change in the terms of an upcoming eurozone-funded bank rescue, while Rome obtained a "mechanism" to reduce the borrowing costs of countries that are cleaning up their economies, but still face market pressure. "It was a tough negotiation, it took hours - certainly yesterday - and you can't summarize this in winners and losers," Van Rompuy said, referring to discussions that dragged until 4:30 am (0230 GMT) on Friday.

Satyajit Das: “Super Brussels” Saves The World, Again, Maybe! - The Pavlovian response of financial markets to the European leaders’ summit of 28 and 29 June 2012 was remarkable. The frugal communiqué of 322 words fired the “animal spirits” of financial markets, which now believe that the European debt crisis has been “solved”. As comedian Robin Williams joked: “reality is just a crutch for people who can’t handle drugs.” The summit supported a single regulatory body for all European banks. The previously agreed Euro 100 billion capital injection for Spanish banks was ratified. Payments will now be made directly by the European Financial Stability Fund (“EFSF”) and its successor the European Stability Mechanism (“ESM”) to the banks rather than as loans to the relevant country. Loans will also not have priority of repayment over commercial lenders. The EFSF/ ESM will take whatever actions are “necessary to ensure the financial stability of the euro area… in a flexible and efficient manner”. This was taken to mean that they will purchase bonds of beleaguered countries like Spain and Italy to reduce the cost. The European Union (“EU”) will provide Euro 120-130 billion of financing for investment to boost growth.The language was vague and the details sketchy. After the meeting German Chancellor Angela Merkel told the Bundestag that differing communications” from various Euro-Zone leaders about the exact agreement had “led to a whole number of misunderstandings”.

What Did the EU Summit Accomplish? - Paul Krugman - OK, the summit was clearly an upside surprise: in effect, the Latin bloc forced Merkel to bend, at least slightly. But was it good enough? Charles Wyplosz argues, sensibly, that it was nowhere close. The main substantive thing was the agreement in principle to set up something more or less like a European version of the TARP, in which funds for bank recapitalization will be supplied by a consortium rather than lent to governments already overburdened with debt. Good move, and Irish bond buyers are especially happy. But even this doesn’t take effect right away. Also some bond purchases, but not by the ECB, so limited in size. So think of this as a very small version of quantitative easing. So what we know even for the US is that the TARP and QE were perhaps enough to forestall disaster, but not to produce recovery — and Europe has the additional problem of huge needed realignments in competitiveness, which would be much easier if the ECB announced a dramatic loosening — which is didn’t. Not nearly enough, then. Yet markets were buoyed.

Europe’s small step on a long road - The EU summit ended late last week with a better than expected outcome, but as usual the devil is in the details. The summit statement (available below) was as loosely worded as these things come and many decisions are still left to interpretation and future actions. Going into the summit my major concern wasn’t so much economic, but political, because the chicken and egg issue of debt sharing and national sovereignty appeared a bridge too far. I therefore think that the major success from Friday’s summit was that it showed that when push comes to shove the Eurocrats will move in order to break an existential debt-lock. That in itself is a big step forward and the banking union, although again very vague at this moment, appears to be a move towards debt-sharing.  Most of the southern European news agencies appear to have taken the line that this was a huge win by their leaders and a massive capitulation from Germany. The truth, however, maybe a little less clear. Spain and Italy did play hard ball on the “Growth pact” forcing Angela Merkel to agree to concession on direct bank re-capitalisation and the use of the ESM as she required it to get the ESM/fiscal pact vote through her own parliament. Markets have rightly welcomed the news and celebrated the disconnection of banks from sovereigns but this by no means removes conditionality.

One more summit: The crisis rolls on - Reading the official documents from the June 28 summit requires linguistic and divination skills. The texts are convoluted and clearly aim at giving various positive impressions while shying away from deep commitments. The clearest result is that EFSF/ESM funds can be used directly to support banks. The summit attendees seem to have successfully drawn the conclusions that this was necessary from the disastrous impact of their mid-June decision on new lending Spanish authorities to shore up their banks. ...At the end of the day, the summit was a little move in the right direction bank supervision, but keep watching; we still don’t know what will actually get put in place. There was nothing on collapsing Greece, nothing on unsustainable public debts in several countries, and no end in sight to recession in an increasing number of countries. There was no knock-out winner in this summit, but on points I’d have to say that the winner is the crisis.

German Adviser Sees Risk in ESM Bond Buying, Handelsblatt Says -- Easing the conditions for the euro area’s rescue fund to buy Italian sovereign bonds risks swamping the financial backstop, Oxford University economist Clemens Fuest wrote in a commentary in Handelsblatt. Using the planned European Stability Mechanism in an attempt to lower the borrowing costs of highly indebted countries might lead bondholders to sell massively to the ESM, exhausting its finances and forcing governments to commit more resources, Fuest, a member of the German Finance Ministry’s group of academic advisers, said in the op-ed article published in the Dusseldorf, Germany-based newspaper today.

Europe’s Great Illusion, by Paul Krugman - Over the past few months I’ve read a number of optimistic assessments of the prospects for Europe. Oddly, however, none of these assessments argue that Europe’s German-dictated formula of redemption through suffering has any chance of working. Instead, the case for optimism is that ... a breakup of the euro ... would be a disaster for everyone, including the Germans, and that in the end this prospect will induce European leaders to do whatever it takes to save the situation.  It comes as something of a shock, even for those of us who have been following the story all along, to realize that more than two years have passed since European leaders committed themselves to their current economic strategy — a strategy based on the notion that fiscal austerity and “internal devaluation” (basically, wage cuts) would solve the problems of debtor nations. In all that time the strategy has produced no success stories; the best the defenders of orthodoxy can do is point to a couple of small Baltic nations that have seen partial recoveries from Depression-level slumps, but are still far poorer than they were before the crisis.  Meanwhile the euro’s crisis has metastasized, spreading from Greece to the far larger economies of Spain and Italy, and Europe as a whole is clearly sliding back into recession. Yet the policy prescriptions coming out of Berlin and Frankfurt have hardly changed at all.

European Central Bank Head, Draghi, Has New Powers - The spotlight in the European debt crisis has now shifted decisively toward the influential leader of the European Central Bank, Mario Draghi, who emerged from the recent summit meeting in Brussels with new powers and stronger backing to address the Continent’s financial woes. Political leaders took significant strides toward making the central bank more like the United States Federal Reserve, giving it authority to oversee the euro zone’s largest banks and, once that new regulator is in place as soon as the end of this year, a likely role in rescuing Spanish banks with capital directly from the European rescue funds.  Many of the longer-run plans under discussion, like European deposit insurance, would mean shifting further responsibilities toward the bank, arguably giving Mr. Draghi the most influential executive powers in Europe.   “He’s going to have huge influence over bank supervision and over the purchase of sovereign debt, whether he’s the head of the committees in charge or not.” On Thursday, the central bank’s policy meeting will serve as kind of a second act to the summit meeting, with its council probably offering a rate cut as a tacit reward to leaders for the progress they made, as well as a chance for Mr. Draghi to sketch out his version of a stronger Europe. He is the one actor in a fragmented Continent who can move swiftly and resolutely, as he did in dispensing nearly $1.3 trillion in cheap loans to banks and briefly stilling market unrest.

Why the EU summit decisions may destabilise government bond markets - Among the questions still remaining since last week’s summit of European leaders is whether the new measures will stabilise government bond markets. This column’s answer is ‘no’.While the principle of a European mechanism for resolving banking crises is now accepted, major practical problems of implementation of that principle lie before us.

• What will be the supervisory powers of the ECB?
• Who will run the recapitalised banks?
• What if a bank has to be nationalised?

These and many other practical questions will pop up on the road to implementing the new principle. The focus of this column, however, is on the new role that is given to the European Stability Mechanism (ESM), otherwise known as its bailout fund, that should start its operations very soon.

France Pushing for a Maximum Wage; Will Others Follow? - Yves Smith - A reader pointed out a news item we missed, namely, that the new government in France is trying to implement a maximum wage for the employees of state-owned companies. From the Financial Times: France’s new socialist government has launched a crackdown on excessive corporate pay by promising to slash the wages of chief executives at companies in which it owns a controlling stake, including EDF, the nuclear power group. In a departure from the more boardroom-friendly approach of the previous right-of-centre administration, newly elected president François Hollande wants to cap the salary of company leaders at 20 times that of their lowest-paid worker. According to Jean-Marc Ayrault, prime minister, the measure would be imposed on chief executives at groups such as EDF’s Henri Proglio and Luc Oursel at Areva, the nuclear engineering group. Their pay would fall about 70 per cent and 50 per cent respectively should the plan be cleared by lawyers and implemented in full… Of course, in the US, we have companies feeding so heavily at the government trough that they hardly deserve the label of being private, but the idea that the public might legitimately have reason to want to rein in ever-rising executive pay is treated as a rabid radical idea.  In July 2011, Doug Smith proposed a maximum wage, using a 25 to one ratio, for any enterprise that used taxpayer funds. I’d be curious to learn how this idea developed in France, since it would be helpful to know who this idea developed and what experts/research they relied on.

Auditor Says France Needs EUR 33 Bln To Meet 2013 Deficit Goal - France may need up to 33 billion euros to cover the deficit gap in 2013, the national auditor said Monday in an annual report on the country's public finances. The country will have to find 6-10 billion euros in savings to meet this year's budget reduction target, the report pointed out. The Court of Auditors also said it see the risk of acute revenue shortages during the coming months. According to the auditor, a strong compliance with the fiscal consolidation path is crucial in restoring the health of the public finances. The government aims to reduce the deficit to 4.4 percent in 2012 and then to 3 percent in 2013. Last year, the deficit was successfully reduced to 5.2 percent of GDP, but the structural deficit at 4 percent remained above the euro area average of 3.2 percent. Efforts should be extended beyond 2013 to ensure the return to balanced budget in 2016 or 2017, the auditor said

Farage On EU Summit 'Breakthrough': "It's Not Credible; Nobody Believes You" - Judging by the modest rallies in what was already hugely oversold risk asset markets in a perfectly timed illiquid 'holiday' mode, it would appear that, just as MEP Nigel Farage blasts his European Parliamentary leaders, "Breakthrough? Nobody believes you". The new bailout vehicle - the ESM - is doomed before it starts as he notes "the wheels are coming off" highlighting the legal challenges in Ireland and Germany, the Estonian Justice Minister saying it won't fit their constitution, but most fun of all, the erudite Englishman barks "the Fins and the Dutch seem to have broken the agreement that was made in the middle of the night". Perhaps the "little countries" don't have a say in Europe anymore as his frustration with Barosso and Van Rompuy in their self-congratulatory smugness is clear when he jibes that "The Euro-crisis appears to be insoluble" noting that their incessant public calls that the worst is over or finger-pointing and blaming others has made them "an international laughing stock". It appears, like us, Farage does not see this as a game-changer - concluding that vacations should be put on hold as "the markets will all but guarantee we'll all be back here in August".

Finland to block ESM secondary market bond buying (Reuters) - Finland will block the euro zone's permanent bailout fund from buying government bonds in the open market, the Finnish government said on Monday, while The Netherlands also indicated opposition to the bond-buying idea. Comments suggesting a rough time ahead for the idea followed euro zone leaders' agreement at a summit last week to take steps to shore up their monetary union and bring down Spanish and Italian borrowing costs. They gave few details on how they might use the temporary EFSF and permanent ESM rescue funds to buy bonds. A Dutch finance ministry spokesman said on Monday his government did not like the bond-buying idea but did not explicitly say the Netherlands would block the plan, saying only that it would evaluate purchases on a case-by-case basis. "The prime minister said on Friday he is not in favour of buying up bonds," said Niels Redeker, spokesman for the Dutch finance ministry. "Using the existing instruments to buy up bonds will be expensive and can only be done if there is unanimity (between member states). That means the Netherlands would need to vote in favour."

Finns, Dutch cast first doubt on euro zone deal (Reuters) - Finland and the Netherlands, the euro zone's most hardline creditor states, cast the first doubts on Monday on a European summit deal designed to save Spain and Italy from being engulfed by the currency bloc's debt crisis. The Finnish government told parliament that Helsinki and its Dutch allies would block the euro zone's permanent bailout fund buying bonds in secondary markets. Euro zone leaders agreed last Friday that rescue funds could be used in a "flexible and efficient manner" to lower government borrowing costs. Their statement gave no further detail. The euro fell and safe-haven German Bunds reversed losses on news of the Finnish statement, which raised fears that the latest deal which drew a positive initial market reaction could be fraying. Several previous market rallies after euro zone crisis agreements have fizzled within a day or two as investors have fretted about the lack of detail, the risk of delay and national vetoes, or the inadequate size of the rescue funds available. The 17 euro zone leaders agreed in Brussels on steps to shore up their monetary union and bring down borrowing costs for Spain and Italy, regarded as too big to fail but also too expensive to rescue if they are shut out of markets. They gave few details on the use of the temporary EFSF and permanent ESM rescue funds.

Can Greece Buy Freedom From Debt For a Mere €3,000 Per Person? - Greek shipping heir Peter Nomikos has a plan wipe out Greek debt. His idea is to buy all the Greek bonds then forgive the debt. Given that Greek bonds sell for 12 cents on the dollar, on the surface his plan may seem like a reasonable idea. First let's consider the idea, then potential problems. Der Spiegel interviews Peter Nomikos who says 'For a Donation of 3,000 Euros, Every Greek Can Buy Freedom' Greek shipping heir Peter Nomikos has taken matters into his own hands. While EU leaders wrangle for a solution to Greece's problems, Nomikos started a non-profit to wipe out the country's debt. If all of his countrymen do their part, he tells SPIEGEL ONLINE, they will be able to shore up the country's finances. SPIEGEL: Mr. Nomikos, you have just started a campaign to free Greece of debt. Your organization buys up Greek bonds and then forgives the debt. Are you serious? Nomikos: Professionally, I deal with distressed debt. And it struck me that Greece has a historical opportunity. In the euro, the Greeks have a very strong currency, while the price of their government bonds has collapsed. That makes it possible to buy back debt at very low prices and reduce the Greek debt burden with relatively little expenditure.

The Euro’s Latest Reprieve - Joseph E. Stiglitz – Like an inmate on death row, the euro has received another last-minute stay of execution. It will survive a little longer. The markets are celebrating, as they have after each of the four previous “euro crisis” summits – until they come to understand that the fundamental problems have yet to be addressed. There was good news in this summit: Europe’s leaders have finally understood that the bootstrap operation by which Europe lends money to the banks to save the sovereigns, and to the sovereigns to save the banks, will not work. Likewise, they now recognize that bailout loans that give the new lender seniority over other creditors worsen the position of private investors, who will simply demand even higher interest rates. It is deeply troubling that it took Europe’s leaders so long to see something so obvious (and evident more than a decade and half ago in the East Asia crisis). But what is missing from the agreement is even more significant than what is there. A year ago, European leaders acknowledged that Greece could not recover without growth, and that growth could not be achieved by austerity alone. Yet little was done. What is now proposed is recapitalization of the European Investment Bank, part of a growth package of some $150 billion. But politicians are good at repackaging, and, by some accounts, the new money is a small fraction of that amount, and even that will not get into the system immediately. In short: the remedies – far too little and too late – are based on a misdiagnosis of the problem and flawed economics.

The Euro and the Mediterano - Now, in 2012, countries such as Portugal, Spain, Italy and Greece could use more expansionary monetary policy than what is right for Germany and some other countries in the North of the Eurozone. Getting back an independent monetary policy requires getting back one’s own currency and so requires exiting the Eurozone. But it is hard to exit the Eurozone in an orderly way—and exiting in a disorderly way risks causing another financial crisis. The aim of this post is to propose an orderly way to restore some degree of monetary policy independence to the different parts of the Eurozone. It might roil financial markets too, so I am not necessarily advocating it, but I see it is preferable to any country simply exiting the Eurozone.  So my objective here is to design a minimum-distance modification to the Eurozone that adds some ability to adjust monetary policy independently for different parts of the Eurozone. The basic idea is “one central bank, two currencies.” In this plan, the Eurozone remains together and the European Central Bank (ECB) continues to determine monetary policy for the entire Eurozone. But the ECB now decides monetary policy for both a “North Euro” and a “South Euro.” The North Euro and the South Euro start out with an exchange rate of 1 to 1, but ultimately are allowed to drift apart in value.

A Step At Last in the Right Direction - The 19th crisis summit was better than many of its disappointing predecessors. But the game has not yet changed. Helpful steps were taken. The most important were the agreements to allow the euro zone’s rescue funds to recapitalize undercapitalized banks directly, rather than provide money via vulnerable governments (of particular benefit to Spain and potentially enormous benefit to Ireland) and to buy sovereign bonds in the market (of apparent benefit to Italy and Spain). It was also agreed that loans from rescue funds would not be senior to existing loans, which should reduce the risk of panics by lenders. Leaders also agreed a 120 billion euros ($151 billion) package of measures to promote growth. On the principle that support should coincide with control, the European Central Bank is to be given responsibility for a new system of European banking supervision, as a step towards what protagonists hope will be a true banking union. Yet what was not agreed is even more important. The list includes any increase in the funds available for the European Stability Mechanism (capped at 500 billions euros); euro zone bonds, in any form; and a euro zone-wide deposit guarantee or bank resolution regime. 

Spain Economy Likely Deteriorated Further In 2Q Says Finance Minister --The Spanish economy likely deteriorated further in the second quarter, but the government will take all necessary measures to ensure it meets this year's budget targets, Finance Minister Luis de Guindos said Sunday. "Available second quarter data show a slightly bigger contraction" than in the first quarter, Mr. de Guindos said on the sidelines of a conference. Spanish gross domestic product fell 0.3% in the first quarter from the fourth. In a report last week, Spain's central bank also said the contraction had likely deepened in the second quarter, citing declining confidence and tightening credit conditions caused by the country's sovereign debt crisis.

Spain may need more aid despite EU summit steps (Reuters) - Spanish Prime Minister Mariano Rajoy will find it tough to avoid asking for a full-scale sovereign bailout despite steps taken at an EU summit to help the country's indebted banks and pressured borrowing costs. Euro zone leaders agreed on Friday to let their rescue fund directly inject aid into Spanish banks from next year and buy bonds to support troubled member countries, to try and curb a regional debt crisis that threatens the single currency. But the deal lacks details and Rajoy, who struggles at the EU negotiating table, will face long and difficult talks to finalise the rescue, while the recession deepens, the public deficit rises and one in four of the workforce has no job. Investors and officials say the steps may not be in place quickly enough to stop the country needing more cash to keep the state afloat on top of up to 100 billion euros made available to fund the country's banks. "Spain remains at risk. Its total debt, public and private, is still massive... It will be key to see if the recapitalisation can be done quickly enough," said one senior European union official who attended the summit.

Not So Fast: Finland And Holland Will Block ESM Bond Buying - While the bailout ball is in the German constitutional court, which has 8 days to decide, and potentially put the entire timeline of Europe's bailout in limbo should it cogitate longer than July 9 without handing over the ESM law to the president, in effect forcing the country into a Euro bailout referendum, it is easy to forget that there are other AAA-rated countries in Europe, which also have a say as to who gets bailed out. As of this morning, it appears that Germany may increasingly be the only one left footing the insolvency bill as both Finland and Holland said "Ei" and "Nee" respectively.

Finland Firm on Collateral as Spain Aid Terms Discussed - Finland underlined its determination to get collateral in exchange for loans to Spain’s banks as the Nordic country targets similar terms to those won last year on its contribution to Greece’s second bailout. “We have the requirements of collateral on the loans that are from the temporary vehicle,” Jukka Pekkarinen, director general at the Finnish Finance Ministry in Helsinki, said in an interview in Oslo yesterday. “The details are still open, but the principle standpoint is the same” as in the case of Greece, he said. Finland, one of only four AAA rated nations left in the euro area, threatened to hamper efforts to agree on a second bailout for Greece by insisting on collateral last year. The Nordic country was the only nation to negotiate security in exchange for loans from the temporary fund, or the European Financial Stability Facility, because the vehicle doesn’t give its creditors preferred status. The Nordic country yesterday questioned the ability of the permanent rescue fund, the ESM, to purchase bonds through the secondary market. Finland, which opposes such purchases, argues the process would require unanimity inside the euro area to be possible.

Finland Unwavering on Collateral as Spain Aid Terms Reviewed (Bloomberg) -- Finland underlined its determination to get collateral in exchange for loans to Spain’s banks as the Nordic country targets similar terms to those won last year on its contribution to Greece’s second bailout. “We have the requirements of collateral on the loans that are from the temporary vehicle,” Jukka Pekkarinen, director general at the Finnish Finance Ministry in Helsinki, said in an interview in Oslo yesterday. “The details are still open, but the principle standpoint is the same” as in the case of Greece, he said. Euro-area nations agreed in Brussels last week to ease the terms of Spain’s bank bailout after the country’s borrowing costs soared above 7 percent. Finland is fighting its corner to reassure taxpayers they’re no worse off after euro-zone leaders decided Spain’s emergency loan of as much as 100 billion euros ($126 billion) won’t give preferred status to contributor countries. Finland has demanded collateral for any loans that don’t give taxpayers seniority.

Eurozone Unemployment Hits New Record in May - Official figures show that unemployment in the 17 country euro currency bloc hit another record in May as the continent continued to be buffeted by its debt crisis. Eurostat, the E.U.’s statistics office, said Monday that unemployment rose to 11.1 percent in May from 11 percent the previous month. That’s the highest rate since the euro was launched in 1999. Unemployment has been edging higher for over a year now as concerns over the debt crisis have weighed on economic activity. The highest unemployment rate was recorded in Spain, where nearly one in four people are out of work, closely followed by Greece. In total, 17.6 million people were out of work in the eurozone in May, 1.8 million higher than the year before.

Eurozone unemployment hits new record in May - Unemployment in the 17-country euro currency bloc hit another record in May as the crippling financial crisis pushed the continent toward the brink of recession, official figures showed Monday. Eurostat, the EU's statistics office, said unemployment rose to 11.1 percent in May from 11 percent the previous month. May's rate was the highest since the euro was launched in 1999 and adds further urgency to the eurozone countries' plan to create economic growth and cut excessive government debt. At a summit last Friday, eurozone leaders agreed to a limited economic growth package as well as measures to boost confidence in financial markets. Those include allowing Europe's bailout fund to rescue banks directly, without adding to government debt, and not requesting painful new austerity measures in return for sovereign bailouts. May's unemployment rate compares badly with an unemployment rate of 8.2 percent in the United States and 4.4 percent in Japan, and is expected to rise further in the coming months as the eurozone economy is forecast to slide back into recession this year.

Experts warn that Greek unemployment may hit 30% - Labour Institute of the Greek General Confederation (INE/GSEE - ADEDY) warned that Greek unemployment rate will hit 30% by the end of the year. In other words, this is 1.6 million people, Greek Skai Radio reported. At the moment there are more than one million unemployed people in Greece. Only 165,000 of these people will receive social benefits next month, as most of the unemployed have been without a job for already a whole year, which is the maximum period for receiving state aids for unemployment.

The European economy sinks - Overnight we also had Euro area unemployment which continues to set records that no one can be proud of: Euro area unemployment rate at 11.1% - EU27 at 10.3%. The euro area1 (EA17) seasonally-adjusted unemployment rate was 11.1% in May 2012, compared with 11.0% in April. It was 10.0% in May 2011. The EU27  unemployment rate was 10.3% in May 2012, compared with 10.2% in April. It was 9.5% in May 2011. Eurostat estimates that 24.868 million men and women in the EU27, of whom 17.561 million were in the euro area, were unemployed in May 2012. Compared with April 2012, the number of persons unemployed increased by 151 000 in the EU27 and by 88 000 in the euro area. Compared with May 2011, unemployment rose by 1.952 million in the EU27 and by 1.820 million in the euro area. And then there was the latest manufacturing PMIs:Eurozone manufacturing PMI Deteriorating manufacturing conditions in June round off weakest quarter for three years:

• Manufacturing PMI holds at 45.1 in June
• Widespread declines in output and new orders; Ireland and Austria only nations to see growth
• Weak demand leads to lower input costs and selling prices

Eurozone Recession: Record Unemployment, Manufacturing Shrinks- From Eurostat: Euro area unemployment rate at 11.1% The euro area (EA17) seasonally-adjusted unemployment rate was 11.1% in May 2012, compared with 11.0% in April. It was 10.0% in May 2011. The EU27 unemployment rate was 10.3% in May 2012, compared with 10.2% in April4. It was 9.5% in May 2011. Eurostat estimates that 24.868 million men and women in the EU27, of whom 17.561 million were in the euro area, were unemployed in May 2012. From the WSJ: Euro-Zone Data Show No Sign of Improvement: Activity at euro-zone factories continued to fall sharply in June, while the currency area's unemployment rate rose to a record high in May ... In a particularly worrying sign for the currency bloc's economy, German manufacturing activity fell at its fastest rate in three years—the latest evidence that Europe's biggest national economy is braking ... The final reading of the manufacturing purchasing managers' index was 45.1 in June [below 50 is contraction] It is no surprise that Germany's export economy is starting to feel the impact of the eurozone recession. The "good" news is Spanish 10-year bond yields are down to 6.27%, and Italian yields are down to 5.71%.

A real mess -- The recession in the euro zone is getting worse. New data on manufacturing activity in June show a steady pace of decline in that month. As you can see at right, Irish activity is improving, but that's small comfort given its tiny contribution to overall euro-zone growth. Among large economies, the pace of decline moderated slightly in France and the Netherlands but accelerated in Italy, Spain and Germany (where activity touched a three-year low). Spain and Greece remain in depression territory. Distressingly, the analysis from the chief economist at Markit, which produces the surveys, reads: The Eurozone Manufacturing PMI suggests that the goods-producing sector contracted by around 1% in the second quarter, with this steep rate of decline looking set to accelerate further as we move into the second half of the year. Companies are clearly preparing for worse to come, cutting back on both staff numbers and stocks of raw materials at the fastest rates for two-and-a-half years. Unsurprisingly, the employment picture continues to deteriorate. According to the latest figures from Eurostat, euro-zone unemployment ticked up again in May to 11.1%. Germany's unemployment remains flat despite manufacturing weakness, but Spanish unemployment is now 24.6% and over 52% of Spanish youths are unemployment. Across the euro area as a whole, the ranks of the unemployed topped 17.5m in May, nearly 2m more than a year ago and more than 5m above the level in early 2008.

European Manufacturing Contracts For 11th Consecutive Month As Unemployment Hits Record - The just released MarkIt PMI data showed that while Spanish bonds may be up 50 bps one day, down 75 bps the next, "the downturn in the Eurozone manufacturing sector extended to an eleventh successive month. Production and new orders suffered further severe contractions, leading to the steepest job losses since January 2010." And here is where Germany, which as noted earlier, is becoming isolated in its European bailout ambitions, should pay attention: "The rate of decline in Germany was the steepest for three years, and marked a fourth successive monthly decline in the region’s largest economy." This metric is only going to get worse, only in the future it will be coupled with increasingly more direct and contingent debt all around.  From MarkIt: At 45.1 in June, unchanged from the previous month, the final Markit Eurozone Manufacturing PMI® was up slightly from its earlier flash estimate of 44.8. However, the rate of decline signalled was identical to May, when operating conditions deteriorated at the fastest pace for almost three years. Over the second quarter as a whole, the PMI registered its lowest average reading (45.4) since the second quarter of 2009.

Europe’s Crisis is Re-Emerging - As I‘ve been saying over the last few days, last week’s EU summit provided Europe with some political success but actual deliverables are some time off. According to the Finnish PM at least a year. There is already rumbling from a number of countries, including Germany, about what exactly was and wasn’t decided last Friday morning and my suspicious are, as we’ve seen many times before, that final outcomes will be some 17, or 27, headed beast built on layers of political compromise.In the meantime the implementation of austerity policy across the periphery, and now France it seems, continues to lead to a slowing economy across the monetary union. Overnight we had yet another tranche of PMI data that once again highlighted the same downward trend. Eurozone PMI rises in June but still signals steep rate of contraction

Final Eurozone Composite Output Index: 46.4 (Flash 46.0, May 46.0)
Final Eurozone Services Business Activity Index: 47.1 (Flash 46.8, May 46.7)
Near-record fall in service sector confidence

The Eurozone economic downturn extended into a fifth consecutive month in June, as the debt and political crises continued to have an adverse impact on both the manufacturing and service sectors. At 46.4 in June, the Markit Eurozone PMI Composite Output Index was higher than both May’s reading of 46.0 and the earlier flash estimate of 46.0, but still remained deep in contraction territory. The average reading for Q2 2012 was the lowest for three years as a result.

Eurozone Composite PMI Signals Steep Rate of Contraction; Germany Contracts at Steepest Rate in 3 Years; German Construction Activity Plummets 3rd Month -- PMI reports from Europe continue to show severe signs of stress. Yesterday, Markit reported Eurozone PMI rises in June but still signals steep rate of contraction. Key points for June:

• Final Eurozone Composite Output Index: 46.4 (Flash 46.0, May 46.0)
• Final Eurozone Services Business Activity Index: 47.1 (Flash 46.8, May 46.7)
• Near-record fall in service sector confidence

The Eurozone economic downturn extended into a fifth consecutive month in June, as the debt and political crises continued to have an adverse impact on both the manufacturing and service sectors. The spreading of the economic malaise from the periphery of the currency union to its core continued in June. German output contracted at the fastest rate in three years, and France also saw a further decline (albeit slower than in May). Italy and Spain, meanwhile, remained in deep recessions.

Global PMI Goes Sub-50 - Business Insider: From Markit...The global PMI reading drops to 48.9, decisively sub-50 for the first time since 2009.

June Global PMI Summary: Euro Area Slowdown Is Beginning To Impact The Rest Of The World - The sea of red just got even redder as Japan, Korea, Norway, South Africa and Taiwan all dropped below 50, i.e., into contraction territory. From Bank of America: "Overnight and early this morning, a bevy of global manufacturing PMI reports were released. This provides us with an early reading on the state of manufacturing. Out of the 24 countries reporting so far, 10 saw month-over-month improvements in their manufacturing PMIs, while fourteen countries saw their PMIs worsen in June. Seventeen of the manufacturing PMIs were below the 50 breakeven level that divides expansion (+50) from contraction (+50). A majority of the below-50 PMI indices are located in the Euro area. The ongoing sovereign debt and banking crisis continues to weigh on the region’s economic activity and sentiment. The Euro area slowdown is beginning to impact the rest of the world."

Greek Idiots Attack Microsoft Building - Three idiots drove a van straight into  the Greek Microsoft Headquarters, pulled weapons on security personnel and attempted to burn the largely concrete structure before fleeing. As a result, it is not clear which of the world's ills these morons are upset with. What is clear is the Greek economy is in a heap of trouble, and a thriving company like Microsoft is only there to help. Not sure trying to drive it out of business is such a sharp plan.

Greece to present debt inspectors 'alarming' data — A spokesman for Greece's new government says it will present "alarming" data on its recession and unemployment to international debt inspectors this week, in a bid to renegotiate the terms of its bailout agreements. Spokesman Simos Kedikoglou said in a television interview Tuesday that the data would demonstrate that the current austerity program was counterproductive. He did not elaborate. Debt inspectors from the European Commission, the European Central Bank and the International Monetary Fund are due in Athens Wednesday. Greece is relying on rescue loans from its partners in the eurozone and the IMF to avoid bankruptcy. It is in a fifth year of recession, with unemployment topping 22 percent, roughly double the eurozone average.

Irish crash worst since Depression - IRELAND'S bank crash is the most expensive and deepest of any economy since the Great Depression, says a new IMF report. The fund said that Ireland is the only country to suffer from fiscal costs, increases in public debt and output losses due to a banking crisis. And it said there is no sign of conclusion in the debt crisis. "Ireland holds the undesirable position of being the only country currently undergoing a banking crisis that features among the top 10 of costliest banking crises along all three dimensions, making it the costliest banking crisis in advanced economies since at least the Great Depression," according to the IMF paper, entitled Systemic Banking Crises Database: An Update. "And the crisis in Ireland is still ongoing." The authors believe that advanced economies have more options available to exit the downturn. They also have more credibility with the markets, which allows them time to manoeuvre and use options such as bank guarantees.

Is Ireland the poster child of growth? - Rebecca Wilder - Many politicians refer to Ireland as the poster child of austerity – according to the contentious thesis of expansionary austerity (a review from the IMF .pdf here), is it therefore the poster child of growth? In this post, I review the cyclical data and find that the Irish economy is quite divergent with optimism only evident in the industrial and export sectors. In aggregate, there’s really been no momentum at all. On the one hand, the industrial sector seems to be holding in okay, with the manufacturing PMIs remaining above 50 since March 2012. Furthermore, international saving, or the current account, moved from a 6% of GDP deficit in Q3 2008 to a small surplus in the fourth quarter of 2011(4-qtr moving average). However, the current account has been deteriorating slightly at the margin, beginning in the second half of 2011. In contrast, the consumer sector is suffering quite explicitly. After yesterday’s revisions to previous months, we now see the harmonized unemployment hovering near its peak rate, 14.6% in May vs. 14.8% peak (in the chart below, the red line maps the pre-revised unemployment rates). Consumer confidence is very low, which implies that retail sales could tumble a bit in coming months. Furthermore, price inflation lost some steam, although it remains above the deflationary period that ended in 2010 by the headline measure. Finally, for all of the optimism on Ireland, Q4 2011 GNP and GDP are just 1% and 0.7%, respectively, higher than their 2010 lows.

Irish unemployment hits 18-year high of 14.9 pct - Ireland's unemployment rate rose to an 18-year high of 14.9 percent in June, underscoring the country's struggle to stimulate economic growth in the face of austerity measures, government statisticians reported Wednesday. The rising joblessness could have been worse but for Ireland's tradition of mass emigration in times of economic hardship. The Central Statistics Office says about 76,000 left this country of 4.5 million last year for stronger job markets in other English-speaking countries - chiefly Britain, Australia and Canada - and the trend has continued this year. Irish unemployment rose from 14.7 percent in May. It last reached 15 percent in March 1994, the year that Ireland began its first extended economic boom, becoming known as the Celtic Tiger. Boom turned to bust in 2008 when the global credit crunch exposed reckless lending at Irish banks, forcing the government to nationalize five of them at a crippling cost. While Ireland's economy has officially eked out tepid growth thanks to export strength by Irish-based multinationals, economists say those headline GDP figures mask unrelenting recession in the real domestic economy.

Slovenia in line for sixth euro bailout: economists -- Slovenia is headed toward becoming the sixth euro-area nation to seek a bailout as faltering banks strain the finances of the first post-communist nation to adopt the common currency, said economists from London to Warsaw. The nation, which adopted the euro in 2007, is assessing the fiscal burden of covering the liabilities of its financial industry after Nova Ljubljanska Banka d.d., the largest bank, got a capital boost. Premier Janez Jansa, who said on June 27 that Slovenia risks a “Greek scenario,” told reporters two days later in Brussels the government is “doing everything to find a solution” and avoid the need for assistance.“It’s increasingly likely that Slovenia will be the next small economy asking for a European Union bailout, which would be focused on the banking sector,” Michal Dybula, an economist at BNP Paribas SA in Warsaw, said by phone.

French PM cuts growth forecasts for 2012 and 2013 (Reuters) - Prime Minister Jean-Marc Ayrault slashed France's official growth forecasts on Tuesday, paving the way for a slew of cuts next year that are bound to anger many after the new Socialist government promised to avoid austerity. In response to a grim assessment of public finances by the state auditor on Monday, Ayrault said the economy was set to grow by only 0.3 percent this year, less than the 0.7 percent that the previous conservative government had envisaged. For 2013, Ayrault said growth would be higher - at 1.2 percent - but still well below the previously slated forecast of 1.75 percent. "We knew the 2012 budget included under-assessments of spending and over-optimistic estimations of revenues," Ayrault said in a speech to parliament. "The Court of Auditors has confirmed what we feared. The situation is serious." With France's triple-A credit rating already cut by Standard & Poor's in January, other rating agencies are watching the new government closely to see that it is serious, despite its socialist ideals, about finding ways to hit its deficit targets.

France cuts growth forecasts, prepares for cuts (Reuters) - Prime Minister Jean-Marc Ayrault slashed France's official growth forecasts on Tuesday, paving the way for a slew of cuts next year that are bound to anger many after the new Socialist government promised to avoid austerity. In response to a grim assessment of public finances by the state auditor on Monday, Ayrault said the economy was set to grow by only 0.3 percent this year, less than the 0.7 percent that the previous conservative government had envisaged. For 2013, Ayrault said growth would be higher - at 1.2 percent - but still well below the previously slated forecast of 1.75 percent. "We knew the 2012 budget included under-assessments of spending and over-optimistic estimations of revenues," Ayrault said in a speech to parliament. "The Court of Auditors has confirmed what we feared. The situation is serious." With France's triple-A credit rating already cut by Standard & Poor's in January, other rating agencies are watching the new government closely to see that it is serious, despite its socialist ideals, about finding ways to hit its deficit targets. Blaming the sickly economy on the previous conservative administration, Ayrault said President Francois Hollande's government would tackle the problem by focusing on getting France's economic motors running again rather than resorting to sweeping austerity cuts.

France slashes growth outlook, readies budget cuts - France's new Socialist government slashed the country's economic growth forecasts on Tuesday, paving the way for a slew of cuts that are bound to anger many voters after President Francois Hollande promised to avoid austerity.After a grim assessment of public finances by the state auditor on Monday, Prime Minister Jean-Marc Ayrault acknowledged France's economy was on track to grow by just 0.3 percent this year, less than half the 0.7 percent budgeted by the previous conservative government. For 2013, Ayrault said growth would be higher, at 1.2 percent, but still well below the previously slated forecast of 1.75 percent - leaving a substantial shortfall in tax revenues. "The Court of Auditors confirmed what we feared. The situation is serious," Ayrault said in a speech to parliament, pointing the finger at the previous government. "We knew the 2012 budget included under-assessments of spending and over-optimistic estimations of revenues."

France needs ‘unprecedented’ spending cuts - - France’s socialist government needs to make “unprecedented” cuts in public spending and avoid further undermining the country’s weakened competitiveness as it raises taxes in the battle against the budget deficit, the national auditor warned on Monday. In a report ordered by President François Hollande when he took office in May, the Cour des Comptes spelt out the scale of the task facing the government in meeting France’s commitments to reduce its budget deficit to 3 per cent of gross domestic product next year and eliminate the deficit by 2017. “2013 is a crucial year,” said Didier Migaud, the Cour des Comptes president and a former socialist parliamentarian. “The budgetary equation will be more difficult than expected because of the worse economic situation. “The government must simultaneously cut not one but two deficits, in the public finances and in its competitiveness.” Estimating that savings of €33bn will be needed to hit the 2013 deficit target, the auditor said France could see its public debt hit 90 per cent of GDP this year. It pulled few punches on the country’s “far from exemplary record” on its public finances, noting that it lagged far behind Germany – and that Italy and Spain had made twice the effort on their deficits. “The country is in the danger zone. The risk of a surge in the debt can’t be excluded. The sovereign debt crisis in Europe shows that the risk is not theoretical,” said Mr Migaud. 

Italian Q1 Deficit To GDP Widens - Italy's deficit to gross domestic product increased to 8 percent in the first quarter, the statistical office Istat reported Wednesday. During the same period of last year, the deficit stood at 7 percent of GDP. The report showed that total expenditure rose 1.3 percent from the previous year, while revenues dropped 1 percent in the first quarter. The current deficit totaled EUR 21.95 billion compared to a EUR 17.12 billion shortfall in the same period of prior year.

Italy deficit up on higher interest costs, lower tax intake - The deficit in the first quarter of 2011 had been 7.0 percent of GDP, the Istat data agency said in a statement. It was Italy's worst quarterly result since the 9.5 percent reached in the first quarter of 2009 at the height of the global financial crisis. "The results of the first quarter 2012 were affected by increased spending on interest due to the increase in borrowing costs in 2011 and by the lower tax returns because of the negative development of the economy," it said. Quarterly deficit figures in Italy are based on gross data and therefore vary widely from quarter to quarter. Istat also said that the primary surplus excluding interest payments on debt of 2.6 percent registered in the last quarter of 2011 had become a primary deficit of 3.0 percent in the first quarter of this year.

Italy warns of euro disaster as debt costs rise - The European Union faces potential disaster if its leaders don't cooperate and find a way to keep interest rates on Italy's national debt down, Italian Premier Mario Monti warned Wednesday. Monti's remarks included a thinly-veiled jab at German Chancellor Angela Merkel on a day that Italy's borrowing costs hit year-highs in reaction to Merkel reportedly saying she wouldn't let European governments share debt obligations _ which would bring relief to Italy _ "as long as I live." The Italian premier was in Brussels for a meeting of European leaders focused on the continent's raging debt crisis. He said Italians have made great sacrifices and gotten their country's deficit under control. But yields on Italian government bonds keep rising anyway. If Italians become discouraged that their efforts aren't helping, it could unleash "political forces which say `let European integration, let the euro, let this or that large country go to hell', which would be a disaster for the whole of the European Union," Monti said.

Spain’s Banking Crisis Moves Into the Courtroom - On Wednesday, a Spanish national court judge ordered Rodrigo Rato, a political ally of Spain’s prime minister and former head of the International Monetary Fund, to appear in court to face criminal fraud accusations over his recent stewardship of the giant mortgage lender Bankia.  Bankia, which the government seized in early May, is at the center of the financial storm that has led Spain to seek a European bailout of its banks. But several other Spanish banks are also embroiled in court cases, brought by politicians, shareholders and prosecutors, as well as the government’s own bank overhaul agency. The spate of lawsuits could further complicate efforts to clean up and consolidate Spain’s banking sector, given that Madrid has yet to complete the terms of the 100 billion euro ($125.3 billion) bailout that euro currency union finance ministers agreed to last month.  “We are entering a new phase in this banking crisis, adding to the questions of solvency the need to establish accountability for past mistakes,”

Spain Plans 30 Billion Euros in Asset Sales, Europa Press Says - Spain plans to raise as much as 30 billion euros ($37.7 billion) from the privatization of state assets, Europa Press reported, citing unidentified government officials. Assets to be sold include Aena Desarrollo Internacional SA, Renfe Operadora SC and the hotel chain Paradores de Turismo de Espana SC, Europa Press said. Revenue from the sales will be used to reduce debt, not deficit, the news service said. The plan will probably be approved before August, Europa Press reported.

Spain to unveil new austerity steps soon: sources (Reuters) - Spain's government is putting finishing touches to an up to 30 billion euro ($38 billion) package of spending cuts and tax hikes to help it meet this year's deficit targets, sources with knowledge of the matter said. Running over several years, the program could involve raising Spain's main consumer tax, a new energy levy, reforms to the pension system, pay cuts for civil servants, new motorway tolls and another drastic reduction in ministry and regional spending, the sources said. Some measures may be announced next week, when the EU is likely to grant the government an extra year to cut its deficit below 3 percent of output, and others could be presented over the summer and included in a multi-year budget plan due to be prepared in August. Spain's highly-indebted regions and banks badly hit by a property crash four years ago have put the country firmly in the sights of investors who fear that, given its size, it could derail the entire single currency project if its economy collapses. The new austerity drive aims to put Spain back on track to meet its deficit goals for 2012, though some questioned whether it would simply add to the country's problems by entrenching its recession even more deeply.

Austerity is undermining Europe's grand vision - The dream of the unification of Europe goes back at least to the 15th century, but it is the nastiness of the world wars in the 20th century that established its urgent need in our time. It is important to appreciate that the movement for European unification began as a crusade for cross-border amity and political unity, combined with freer movement of people and goods. Giving priority to financial unification, with a common currency, came much later, and it has, to some extent, started to derail the original aspiration of European unity. The so-called "rescue" packages for the troubled economies of Europe have involved insistence on draconian cuts in public services and living standards. The hardship and inequality of the process have frayed tempers in austerity-hit countries and generated resistance – and partial non-compliance – which in turn have irritated the leaders of countries offering the "rescue". The very thing that the pioneers of European unity wanted to eliminate, namely disaffection among European nations, has been fomented by these deeply divisive policies (now reflected in such rhetoric as "lazy Greeks" or "domineering Germans," depending on where you live).  There is no danger of a return to 1939, but it does not help Europe to have dogs barking, sequestered in resentment and contempt – if not hate. On the economic side, too, the policies have been seriously counterproductive, with falling incomes, high unemployment and disappearing services, without the expected curative effect of deficit reduction. .

The Latin Troika’s Coup: what is left of the joy it generated a week later - The half life of joy and celebration, following Europe’s Summits, is continuing to slide. The 19th such Summit since the Crisis erupted was, as I wrote here, the most successful (in that it produced, for the very first time in two and a half years) a decision that is not wholly fraudulent, irrational and irrelevant. It was, in effect, a first, important step toward decoupling the insolvent banks from the insolvent states. However, already, the politicians of the surplus nations are clawing back the encouraging elements of this decision, after having buckled in front of the Latin troika (the spontaneous alliance of Italy, Spain and France). It is, thus, no surprise, that the post-Summit’s enthusiasm’s half life proved no longer than three days. The Netherlands are asking for a Treaty change, in order to permit the ESM to inject capital directly into banks. Finland continues to demand collateral – an act of determined refusal to behave like a prospective member of a closer union. Germany’s CSU is threatening to bring Mrs Merkel down over the same issue. The German constitutional court is waiting in the wings. Greece, Ireland and Portugal are frozen out of this agreement by some remarkable argument in favour of double and treble standards. The vagueness over the timing of, and conditions for, the direct capital injections are threatening to turn this singularly good idea into a dead letter. In a sense, the Latin troika secured an agreement that may be confirmed in the total breach rather than the implementation.

Lagarde Not in Mood for Greek Renegotiation --- International Monetary Fund Managing Director Christine Lagarde said she is not in the mood to renegotiate the terms of Greece’s bailout agreement. “I am not in a negotiation or renegotiation mood at all,” Lagarde said in an interview on CBNC television today. “We are in a fact-finding mood.” Officials from the IMF, European Central Bank and the European Commission begin a visit to Greece tomorrow to assess the country’s progress in implementing the terms of its second international bailout, commission spokesman Simon O’Connor told reporters in Brussels. Greece will tell its creditors that high unemployment and recession necessitate changes to the country’s bailout agreement, government spokesman Simeon Kedikoglou said. “I’m sure that they will have excellent numbers to show in various directions,” Lagarde said in the CNBC interview. “I’m very interested in seeing what has been done in the last few months in terms of complying with the program.”

German 'bad bank' of HRE posts big 2011 loss -- FMS Wertmanagement, which is in charge of the porftolio of toxic assets from Hypo Real Estate, said in its annual report that its risk provisions for Greek debt amounted to 8.9 billion euros ($11.2 billion) in 2011. The bad bank's losses are underwritten by the German state and are part of the bill being footed by German taxpayers for last year's Greek debt swap. For 2012, FMS Wertmanagement said it expected its results to improve. "However the performance of our portfolio depends to a large extent on macro-economic developments," chief executive Christian Bluhm said. Hypo Real Estate in 2010 transferred toxic debt with a face value of 175.7 billion euros to the bad bank.

German Economy Shows Dangerous Signs of Weakening - SPIEGEL - The euro crisis and the higher capital requirements being imposed by regulators have adversely affected almost all European banks. And because of growing fears within the banks of a collapse of the euro zone, they are preparing for the worst by withdrawing to their home markets and winding down many investments. This has serious consequences for the economy, not just along the periphery of the euro zone, but also in Germany, which had proved to be crisis-proof and was in fact booming until recently. Companies had been banking on the assumption that growth in emerging economies would offset weakness in the euro zone. But now even those markets are no longer as promising. Growth is weakening across the board in the emerging markets, a Citigroup study concludes. The German economy will stagnate by this fall because of the euro crisis, Hans-Werner Sinn, president of the Munich-based Ifo Institute for Economic Research, said recently. The Macroeconomic Policy Institute (IMK) sees the German economy stagnating both this year and next. "The crisis in the euro zone, the strict austerity policies and the associated recession in many EU countries" have taken hold of the German economy, says the IMK. The economists at Citigroup expect a recession in the euro zone in 2012 and 2013.

German finmin spokesman: Spain aid deal unlikely July 9 (Reuters) - It is unclear whether the Eurogroup will be able to decide on an aid package for Spain's banks at its meeting next Monday as it is still awaiting an expert report on the situation, a German finance ministry spokesman said on Wednesday. The signature of the Memorandum of Understanding (MoU) regarding a 100 billion euro European bailout for Spanish banks was initially scheduled for July 9, when euro zone finance ministers hold their monthly meeting in Brussels. But two sources on Tuesday said that a final agreement on aid for Spanish banks may be delayed until July 20, to allow more time for negotiations. "With Spain, we are currently at the stage of a request,"

Germany Rumbling As Spiegel Leads With "Euro Endangers German Economy" - Objective analysis, or media spin to gauge popular reaction to Plan Z? Whatever it is, today's staff lead article in the English section of Spiegel has a piece that will likely raise more than a few eyebrows: "The common currency union was supposed to benefit the economy of the entire European Union. Now that the euro is struggling, however, it is bringing growth down with it. Germany's economy, once seemingly immune to the crisis, is now facing mounting difficulties." From Spiegel: When the board of Commerzbank met last Tuesday, Stefan Otto was supposed to make an appearance.  But the presentation was cancelled; Commerzbank had no need for the numbers, having previously decided it no longer wanted anything to do with German shipping. The executive board of Deutsche Schiffsbank was not notified in advance of the parent company's reversal. The supervisory board was also taken by surprise. Only three months earlier, Commerzbank CEO Martin Blessing had declared the financing of ships and commercial real estate to be part of the bank's core business. And although it was expected to shrink, Germany's second-largest bank intended to create a separate segment for the business. But the executives had underestimated the risks that the European sovereign debt crisis presents to Commerzbank, and how much capital the ship and commercial real estate business ties up. Now Blessing has slammed on the brakes.

German Party Leader Threatens To Axe Coalition - Chancellor Angela Merkel faces growing resistance to her European policy from within her own coalition. Horst Seehofer, the leader of the powerful CSU party, sharply criticized the outcome of last week's EU summit, and threatened to let the coalition government collapse if Berlin makes any more concessions to ailing euro members. Bavarian governor Horst Seehofer, the leader of the conservative Christian Social Union party (CSU) which is part of Chancellor Angela Merkel's center-right federal government coalition, has criticized the outcome of last week's European Union summit and threatened to let the government collapse if Berlin makes any further financial concessions to ailing euro member states. "The time will come when the Bavarian government and the CSU can no longer say yes. And I wouldn't then be able to support that personally either," Seehofer said in an interview with Stern magazine released on Tuesday. "And the coalition has no majority without the CSU's seats." The CSU is the Bavarian sister party to Merkel's Christian Democratic Union.

What to do with the Euro ?  - G. has to leave the Eurozone. No not Greece Germany.  Germany and a bunch of small Northern countries use the undervalued Northern Euro as their currency while we use the over valued Mediterranian and Irish (or Catholic and Orthodox) Euro. We need one more flexible exchange rate somewhere between them and the Sea.  If Greek politicians so much as mention the possibility of bringing back the Drachma everyone will take their Euros out of Greek banks before they become Drachmae. This may be necessary, but it won't be pleasant. Also I would try to get my Euros out of Italy before they turned into Lire if they did (I'd probably fail -- but I'd try). But If Germany switches from Euros back into Deutchsmarks no one will panic. They always disliked the Euro. Now the Euro dislikes them too. It's time for a divorce.

ECB to Write History With Rate Cut But Will It Do More? - The European Central Bank is widely expected to write history Thursday by cutting its policy rate to a fresh all-time low. But would it go further?  Inflation risks are abating and the euro-zone’s recessionary economy badly needs a boost, conditions that are both permitting and pushing the ECB to loosen monetary conditions further. More than two-thirds of the 46 banks and think tanks polled by Dow Jones Newswires forecast that the ECB will cut its one-week lending rate 0.25 percentage point to 0.75% from the current 1.0% and nine are predicting a deeper cut to 0.50%.

ECB Cuts Key Rate to New Low to Help Economy — The European Central Bank has cut its key interest rate by a quarter percentage point to a record low of 0.75 percent to boost a eurozone economy weighed down by the continent’s crisis over too much government debt. The move followed a rate cut by China’s central bank and new stimulus measures by the Bank of England as global financial authorities seek to shore up a slowing global economy. European leaders last week agreed on new steps to strengthen market confidence in their shared euro currency bloc. They set up a single banking supervisor to keep bank bailouts from bankrupting countries and made it easier for troubled countries to get bailout help. Those steps helped calm financial markets, which have expected the ECB to follow up with more help in the form of a rate cut.

French Socialists Raise Taxes to Fight Deficit - — France’s new Socialist government announced on Wednesday billions of euros in tax increases and new taxes, to be borne by businesses and the wealthy, in a revision of the 2012 budget designed to meet promised deficit targets in a period of nearly stagnant growth. Connect With Us on Twitter Follow @nytimesworld for international breaking news and headlines. Twitter List: Reporters and Editors The government needs to make up a gap of 6 billion to 10 billion euros, or $7.5 billion to $12.5 billion, this year to bring the budget deficit down to 4.5 percent of gross domestic product, according to the national audit office, the Cour des Comptes. To meet a 3 percent target in 2013, an additional $41.2 billion in tax revenue and spending cuts will have to be found, the auditors said. For this year alone, the government announced about $9 billion in higher taxes, with about $7.6 billion more to come next year. A freeze on government spending is expected to save $1.8 billion. “We face an extremely difficult financial and economic situation,” the finance minister, Pierre Moscovici, said at a news conference. “The wealthiest households, the big companies, will be asked to contribute. In 2012 and 2013, the effort will be particularly big.”

France slaps seven billion euros in taxes on rich and big firms (Reuters) - France's new Socialist government announced tax rises worth 7.2 billion euros on Wednesday, including heavy one-off levies on wealthy households and big corporations, to plug a revenue shortfall this year caused by flagging economic growth. In the first major raft of economic measures since Francois Hollande was elected president in May promising to avoid the painful austerity seen elsewhere in Europe, the government singled out large companies and the rich. An extraordinary levy of 2.3 billion euros ($2.90 billion) on wealthy households and 1.1 billion euros in one-off taxes on large banks and energy firms were central parts of an amended 2012 budget presented to parliament. The law, which includes tax increases on stock options and dividends and the scrapping of an exemption on overtime, should easily receive approval by a July 31 deadline after the Socialists won a comfortable parliamentary majority at elections last month. Hollande says the rich must pay their share as France battles to cut its public deficit from 5.2 percent of GDP last year to an EU limit of 3 percent in 2013 despite a stagnant economy and rising debt.

Wealthy hit hardest as France raises taxes - France’s socialist government announced a big one-off increase in wealth taxes on Wednesday, by far the biggest single element in a €7.2bn package of new levies aimed at meeting this year’s budget deficit target that also included surcharges on banks and energy companies. The supplementary 2012 budget, required to ensure the government hits its deficit target of 4.5 per cent of gross domestic product this year, was weighted overwhelmingly towards taxes on the rich and big companies as ministers said planned spending cuts would mainly take effect from next year. An extra €2.3bn will be raised by an exceptional tax charge on all those with net wealth of more than €1.3m. Citing an “an extremely difficult financial and economic situation”, Pierre Moscovici, the finance minister, said: “The wealthiest households and the big companies will be asked to contribute. In 2012 and 2013, the effort will be particularly large.”Further tax increases for next year, when the government is expected to have to find €33bn in savings to bring the deficit down to 3 per cent of GDP, will be spelt out in the autumn. They will include President Francois Hollande’s election pledge of a 75 per cent marginal rate on annual incomes of more than €1m – and permanent increases in wealth taxes.

Paths to eurobonds - This paper discusses proposals for common euro area sovereign securities. Such instruments can potentially serve two functions: in the short-term, stabilize financialmarkets and banks and, in the medium-term, help improve the euro area economic governance framework through enhanced fiscal discipline and risk-sharing.  Many questions remain onwhether financial instruments can ever accomplish such goals without bold institutional and political decisions, and,whether, in the absence of such decisions, they can create new distortions. The proposals discussed are also not necessarily competing substitutes; rather, they can be complements to be sequenced along alternative paths that possibly culminate in a fully-fledged Eurobond. The specific path chosen by policymakers should allow for learning and secure the necessary evolution of institutional infrastructures and political safeguards.

What Euro Crisis? - What constitutes a crisis? Is it sustained economic decline, high and long-term unemployment, poverty, rampant inflation, a precipitous fall in the exchange rate, fiscal deficits, high borrowing costs, and political dysfunction? Most would agree that a crisis exists if just some of these “misery indices” are present. But, while Europe is widely perceived to be in the grip of crisis, only a handful of them are present, and in only a few eurozone countries. So, why is there a eurozone crisis, and what defines it? Time and again, it is argued that the single currency does not fit the different needs of its member countries, and that unsustainable economic divergence will ultimately require that the euro be abandoned. The fatal divergences that are most frequently cited include differences in growth rates, job-creation, and unemployment rates, as well as dramatic disparities in current-account balances, all of which may be traceable to wide deviations in unit labor costs. Perceptions of such divergences force considerable risk premiums on problem countries, inevitably resulting in accelerating capital flight to safe havens. All of these developments are now visible in the eurozone, particularly in its peripheral countries. Risk premiums started rising above benign levels in 2009, and then more strongly in 2011-2012, while capital flight became rampant in 2011.

Government By Banks, For Banks -- On June 29, German Chancellor Angela Merkel acquiesced to changes to a permanent eurozone bailout fund - "before the ink was dry", as critics complained. Besides easing the conditions under which bailouts would be given, the concessions included an agreement that funds intended for indebted governments could be funneled directly to stressed banks. According to Gavin Hewitt, Europe editor for BBC News, the concessions mean that: [T]he eurozone's bailout fund (backed by taxpayers' money) will be taking a stake in failed banks. Risk has been increased. German taxpayers have increased their liabilities. In future a bank crash will no longer fall on the shoulders of national treasuries but on the European Stability Mechanism (ESM), a fund to which Germany contributes the most. In the short term, these measures will ease pressure in the markets. However there is currently only 500 bn euros [US$631 billion] assigned to the ESM. That may get swallowed up quickly and the markets may demand more. It is still unclear just how deep the holes in the eurozone's banks are. The ESM is now a permanent bailout fund for private banks, a sort of permanent "welfare for the rich". There is no ceiling set on the obligations to be underwritten by the taxpayers, no room to negotiate, and no recourse in court. Its daunting provisions were summarized in a December 2011 youtube video originally posted in German, titled "The shocking truth of the pending EU collapse!" [1]:

German finmin spokesman: Spain aid deal unlikely July 9 (Reuters) - It is unclear whether the Eurogroup will be able to decide on an aid package for Spain's banks at its meeting next Monday as it is still awaiting an expert report on the situation, a German finance ministry spokesman said on Wednesday. The signature of the Memorandum of Understanding (MoU) regarding a 100 billion euro European bailout for Spanish banks was initially scheduled for July 9, when euro zone finance ministers hold their monthly meeting in Brussels. But two sources on Tuesday said that a final agreement on aid for Spanish banks may be delayed until July 20, to allow more time for negotiations. "With Spain, we are currently at the stage of a request,"

Finland Contests Seniority Clause in Spain Aid - Finland is contesting the wording of an agreement struck last week in Brussels, arguing it doesn’t adequately address the possibility that loans to Spain from Europe’s permanent rescue fund can give taxpayers seniority.  A June 29 statement from the 17 euro-area leaders stripping the European Stability Mechanism of its preferred creditor status in Spain was incomplete, said Martti Salmi, a Finnish Finance Ministry official. The 100 billion-euro ($126 billion) bank bailout could provide seniority to contributor nations if fresh funds are transferred by the ESM, he said.  Last week’s release out of Brussels “gives the impression that the entire bailout is without seniority,” Salmi, a director at the Finance Ministry under Jutta Urpilainen, said in a phone interview yesterday. “This is not the case exactly.”  Since euro-area leaders emerged from last week’s summit with a list of measures to stem the debt crisis, Finland and the Netherlands have cast doubt over the success of the talks by signaling disagreement with a number of key points. The government of Prime Minister Jyrki Katainen this week underscored its opposition to using the ESM to purchase bonds on the secondary market, while Finland has also said it expects collateral in exchange for any aid commitments that don’t give it preferred creditor status.

Something's rotten in Paris  -- The French government's new budget and agenda could destabilize the nation's already shaky economy, setting the stage for a vicious chain of events that could end up pummeling its weak banks on Wall Street, while shattering the eurozone for good. While some elements of the budget are laudable, there are still too many that risk pushing France into a deeper economic sleep. Hard reforms are needed in the country's bloated bureaucracy and overly generous health and pension schemes if it ever hopes to balance its budget and move forward, but that is much easier said than done. Nevertheless, France's new government, led by the Socialist Party, has the political capital and connections to get things done in a speedy and positive manner. But as long as party ideology trumps reason, France could eventually find itself in the same boat as its fellow eurozone counterparts, struggling to cope with impossibly high borrowing rates and anemic economic growth.

IMF's Lagarde: Global economy outlook 'worrisome' - International Monetary Fund Managing Director Christine Lagarde said Friday that the global economic slowdown has "become more worrisome," underlining the need for a coordinated response. Speaking in Tokyo, Lagarde said: "Many indicators of economic activity -- investment, employment, manufacturing -- have deteriorated. And not just in Europe or the United States. Also in key emerging markets: Brazil, China, India." The remarks come a day after central banks in China, the euro zone and the U.K. moved to ease monetary policy. Lagarde said the IMF will downgrade its forecast for global economic growth of 3.5% in 2012 when it releases an update later this month. Lagarde said the interconnected nature of the global economy means solutions to the European debt crisis and other threats to growth must be "grounded in cooperation." Achieving lasting stability and growth "will require coordinated action to break the main chains of this crisis: weak sovereigns, weak banks, and weak growth," she said.

Plunging New Orders Suggest Global Recession Has Arrived - Forget about probabilities and statistics and measures of so-called leading indicators (such as the stock market which does not lead), and the yield curve that is useless when zero-bound. Instead, simply focus on data from around the globe, especially new orders.

• US Manufacturing ISM: ISM's New Orders Index registered 47.8 percent in June, which is a decrease of 12.3 percentage points when compared to the May reading of 60.1 percent. ISM's New Export Orders Index registered 47.5 percent in June, which is 6 percentage points lower than the 53.5 percent reported in May, and represents the first month of contraction in the index since June 2009
• US Services ISM:  ISM's Non-Manufacturing New Orders Index grew in June for the 35th consecutive month. The index registered 53.3 percent, a decrease of 2.2 percentage points from the 55.5 percent reported in May.
• Eurozone Composite PMI: Steep rate of contraction, Near-record fall in service sector confidence, Service providers were hit by a further sharp fall in new business
• Eurozone Manufacturing PMI: The level of new export orders subsequently fell at the fastest pace since last November. The German export engine in particular continued to splutter, with new export business falling at the most substantial pace since last November. Only Greece reported a steeper rate of export order book decline than Germany.
• Germany Services PMI: New business received by service providers in Germany dropped for the third month running in June. Month-on-month fall in business sentiment was the greatest since November 2002
• Germany Manufacturing PMI:  Sharpest drop in new export orders since November 2011. June data highlighted another marked reduction in German manufacturing output, as shrinking new order volumes continued to squeeze production requirements. The reduction in new work extended the current period of deteriorating order books to 12 months.
• France Services PMI: New business received by French service providers decreased for the third month running in June. Evidence of spare capacity in the service sector, as outstanding business fell for a sixth successive month in June
• France Manufacturing PMI:  Underlying the fragile performance of the manufacturing sector during June was a further reduction in the level of incoming new orders. Backlogs of work decreased at an accelerated pace in June, with the rate of contraction the sharpest since May 2009. Correspondingly, employment was cut at the fastest pace for 33 months.
• Italy Services PMI: Job shedding accelerates to solid pace. Outstanding business decreased at an accelerated rate in June. Overall rate of backlog clearing was the sharpest since October 2009.
• Brazil Manufacturing PMI: Output and new orders both decline at strongest rates in eight months
• UK Services PMI: UK service sector growth slumps to eight-month low in June
• Spain Services PMI: New business fell sharply again and firms lowered employment. New orders decreased for the twelfth successive month.
• China Services PMI: New order growth in China’s service sector eased since the month before, with the index measuring trends in overall new work at a ten-month low. This, coupled with an accelerated decline in new orders placed at goods producers, meant that overall new work fell for the first time in 2012 so far.
• China Manufacturing PMI:  New orders fall to greatest extent in seven months, as export orders slump. A lack of demand was behind the latest deterioration in operating conditions, with total and foreign new orders falling at accelerated rates in June. New export orders placed at goods producers dropped at the steepest rate in over three years. North America and Europe were both cited as sources of new order book weakness.
• Japan Services PMI: Subdued growth of service sector new business meant that companies transferred spare resources to completing existing workloads in June, with backlogs of work falling further. Rates of decline in outstanding business were broadly similar across both manufacturing and services.
• Japan Manufacturing PMI:  June data pointed to the first month-on-month reduction in manufacturing output since December 2011, as both new business and new export orders fell.

IMF to cut global growth forecast - The International Monetary Fund will cut its forecast for global economic growth in a quarterly assessment later this month, IMF Managing Director Christine Lagarde has said. She did not say which nations or regions were contributing to the lowered assessment for 2012, characterising it as "tilted to the downside" compared with the IMF's 3.5% global growth projection given three months ago. "In the IMF's updated assessment of the world economy, to be released 10 days from now, the global growth outlook will be somewhat less than we anticipated just three months ago. And even that lower projection will depend on the right policy actions being taken," she said in a speech. "I am not going to give any number," she told reporters during a visit to Tokyo to meet Prime Minister Yoshihiko Noda, other ministers and business leaders. "Tilted means that there is not an enormous variation, but it's a negative variation. And clearly certain regions of the world are more affected than others."

Marshall Auerback: All Roads Lead to the ECB - Recently, Professor de Grauwe wrote an excellent analysis explaining why the latest “rescue plan” cobbled together by the Eurozone authorities is destined to fail. The key points:

• 1) ECB is not currently a ‘lender of last resort’. The ECB was set up with fundamental flaws, where “… one of the ECB’s main concerns is the defense of its balance sheet quality. That is, a concern about avoiding losses and showing positive equity- even if that leads to financial instability.” This is a profoundly misconceived idea. As we have noted many times, a private bank needs capital – clearly because there are prudential regulations requiring that – but because it can become insolvent. It has not currency-issuing capacity in its own right.
• 2) The creation of the European Financial Stability Facility (EFSF) and the ESM has been motivated by the overriding concern of the ECB to protect its balance sheet and to avoid engaging in “fiscal policy”. The problem again goes back to the creation of the euro: no supranational fiscal authority to go with a supranational central bank, which means that the only entity that can conceivably carry out “fiscal transfers” of the sort exemplified by a bond buying operation is the ECB. 3) Related to this problem is the fact that the ESM has been given only finite resources as per Germany’s stipulation the minute it begins. It is capitalised at 500bn euros. And it’s unclear that Germany can go much further, given that there are currently 3 constitutional challenges which the ESM is now facing within Germany’s courts.

ECB cuts rates; BOE boosts quantitative easing - Europe’s major central banks delivered a further round of monetary stimulus in the face of a deepening slowdown Thursday, with the European Central Bank cutting its key lending rate to a record low and the Bank of England embarking on additional quantitative easing. China’s central bank, meanwhile, surprised markets by cutting its benchmark lending and deposit rates. The ECB cut its key lending rate by a quarter of a percentage point to 0.75%, taking it below 1% for the first time in the central bank’s history. The central bank also cut the deposit rate, which it pays on funds parked at the ECB overnight, to 0% from 0.25% and lowered the rate on its marginal lending facility from 1.75% to 1.5%. Draghi, speaking to reporters at his monthly news conference after the decision, said the rate moves were warranted by a further weakening of the euro-zone economy. In particular, he noted that the downturn has become more widespread, hitting even the region’s strongest countries. “We can genuinely say that this measure is addressed to the whole of the euro area, and not only specific countries,” he said. Earlier, the Bank of England’s Monetary Policy Committee voted in London to boost its asset purchases by 50 billion pounds ($78.1 billion), bringing the total size of the program to £375 billion. The bank said it expected the purchases to take four months to complete.

ECB Lowers Key Interest Rates - The ECB announced today several monetary policy decisions:

• The interest rate on the main refinancing operations of the Eurosystem will be decreased by 25 basis points to 0.75%, starting from the operation to be settled on 11 July 2012.
• The interest rate on the marginal lending facility will be decreased by 25 basis points to 1.50%, with effect from 11 July 2012.
• The interest rate on the deposit facility will be decreased by 25 basis points to 0.00%, with effect from 11 July 2012.

Introductory Statement to ECB Press Conference...Based on our regular economic and monetary analyses, we decided to cut the key ECB interest rates by 25 basis points. Inflationary pressure over the policy-relevant horizon has been dampened further as some of the previously identified downside risks to the euro area growth outlook have materialised. Consistent with this picture, the underlying pace of monetary expansion remains subdued. Inflation expectations for the euro area economy continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. At the same time, economic growth in the euro area continues to remain weak, with heightened uncertainty weighing on confidence and sentiment.

ECB Death Wish -  Krugman - Can the euro be saved? It’s not easy. I think of the euro problem as involving three layers: troubled banks, overlaid on troubled sovereign debt, overlaid on a deep problem of competitiveness created by runaway capital flows between 2000 and 2007. Saving the thing requires credible bank rescue, sufficient intervention in Spanish and Italian bonds to keep yields manageable, and high enough inflation in Germany that the south doesn’t face an impossible need for deflation. I don’t expect Europe to accept the whole program all at once. But just to keep the crisis from exploding, we need enough movement from policy makers to give hope that a solution is coming, and reassure markets. So what did the ECB do today? The minimal amount. Even in Frankfurt I guess they realized that not cutting rates at all would have meant full-blown crisis right away; but there was no effort to get ahead of the curve, no message about more to come. And sure enough, bond yields are moving back into meltdown territory. The euro could be saved. I’m really doubting whether it will.

Central Banks Move to Spur Economy on 3 Fronts - - Concerned about waning economic growth, central banks in Europe and China announced measures Thursday to increase borrowing and spending by businesses and consumers, a response that was all the more striking because it was uncoordinated. Three major central banks announced policy changes in the space of an hour. China’s central bank unexpectedly cut regulated bank lending rates for the second time in four weeks. The European Central Bank cut its benchmark interest rate to 0.75 percent, the lowest level in its 14-year history. And the Bank of England announced it would expand its holdings of government bonds by about 15 percent. The Federal Reserve announced two weeks ago that it would extend its own bond-buying program until the end of the year. The actions once again cast central bankers in the role of primary responders to the global economic malaise, aiming at the same basic goal that they have tried to hit repeatedly over the last six years: encouraging people and businesses to borrow and spend and take greater risks with their investments.

The Bottom Line: Central Bankers are Worried - t’s a volatile day already, with a lot of news out there and markets erratic after three major central banks took easing measures, some better-than-expected jobs data, warnings from the ECB’s Mario Draghi, and German Chancellor Angela Merkel sounding like she’s trying to back off the purported “deal” at last week’s summit. Let’s try to make sense of all this. The upshot of all this appears to be that central bankers are worried about their economies being weak. That’s no surprise to anybody who lives in the real world, but it’s apparently a surprise in some quarters. U.S. stock futures are dropping, with Dow futures down 55. Better-than-expected weekly jobless claims and the ADP report aren’t having much of an effect. We’d imagine the comments from Draghi at this press conference are the main catalyst. Among the flood of headlines crossing the Tape, this one stands out: “Draghi: Downside Risk To Growth Outlook Has Materialized.” We didn’t know Europe actually had a growth outlook, but no matter. The euro is getting hammered today, down more than 1% at $1.2383. There were also some comments from Germany’s Angela Merkel that might be dampening sentiment. Here are the headlines that crossed the Tape at 8:25:

• *Germany Took On No Additional EU Commitments Beyond Existing Treaties – Merkel
• *Germany’s Merkel: Summit Deal No Change To Current Bailout Rules
• *Germany’s Merkel Says Summit Deal Not About Taking On Additional Liability

Counterparties: Central banks’ uncanny timing - How’s this for uncanny timing? Central banks in Europe, the UK and China all decided to actually do something about the slowing global economy today. As the NYT notes, these moves somewhat magically happened in the span of an hour. ECB President Mario Draghi denied any sort of central banking master plan: “On coordination, no, there wasn’t any”. Still, the European Central Bank cut rates to a historic low of 0.75% from 1%; China cut its main interest rate by 31 basis points, to 6%; and the Bank of England announced it would buy $78 billion worth of assets. (David Keohane has the respective releases here.) The ECB’s move gathered the most attention, if only because Spanish and Italian bonds got trounced after Draghi’s speech announcing the rate move today. Economist Dario Perkins saw the ECB’s move as mostly about optics: “It appears some ECB members wanted this trivial move to be a reward for politicians ‘doing the right thing’ at their recent summit. If that’s the case, it’s a silly, highly political way to run monetary policy.” Sober Look notes that, at least from a balance-sheet perspective, the ECB’s approach has been shifting: In just over a year, the ECB’s lending to banks has doubled as a percentage of its balance sheet. But the most pressing issue is that the ECB’s latest actions, which also included cutting the deposit rate to zero, are well short of what’s needed. Given the worries of a global manufacturing slowdown, central banks may quickly realize that Europe’s platitudes about growth pacts and a still quite undefined banking union are not enough. Here’s Nouriel Roubini: @Nouriel: Trifecta today of monetary easing / policy rate cuts: PBOC, BOE & now ECB. A clear sign of how weak global growth is & how worried CBs are...

'No Measurable Effect': ECB Interest Rate Cut Inspires Little Hope - In a widely anticipated move on Thursday, the European Central Bank cut its key interest rate to a historic low of 0.75 percent in the hope of reviving the euro-zone's flagging economy. At the same time, the ECB cut its overnight deposit rate, the rate it pays banks to park money with the ECB overnight, from 0.25 percent to zero in the hopes that banks will be encouraged to invest their money in the real economy or lend to each other. "The risks surrounding the economic outlook for the euro area continue to be on the downside," ECB President Mario Draghi said in a statement. "They related, in particular, to a renewed increase in the tensions in several euro area financial markets and their potential spillover to the euro area real economy." Still, despite the fact that the ECB rate is now below 1 percent for the first time in the history of the euro zone, hopes are not high that the rate cut will have much of an effect on the economy. A raft of recent data has pointed to rough times ahead for the euro-zone economy as a whole. And the German economy, the largest in the common currency area, is also facing a modest downturn. Moreover, the rate cut is not expected to ease the euro crisis or take pressure off the high borrowing costs that have made it increasingly difficult for Italy and Spain to refinance their debt.

Global Uncoordinated Panic; ECB Cuts Rates to Record Low, Deposit Rate to Zero; Bond Market Response Was "Not Enough"; Words "Heightened Uncertainty" Explained -- In a 45-Minute Salvo today, the ECB cuts rates to a record low 0.75 percent and reduced the deposit rate to zero. Meanwhile, the People’s Bank of China cut their benchmark borrowing costs (the second time in a month), and the Bank of England raised the size of its asset-purchase program. Also note the central banks of Australia, the Czech Republic, Kazakhstan, Vietnam and Israel cut rates in June, while the Swiss National Bank is buying euros to defend its franc ceiling. ECB president Mario Draghi said these events were not global coordinated easing. I am willing to take him for his word. Thus, it's safe to assume that what has transpired was more akin to global uncoordinated panic. The market response to this 45-minute volley of coordinated easing was "not enough". One look at the bond market in Italy and Spain makes that point crystal clear.

Denmark Cuts Rates to Record Lows as Zero Threshold Breached - Denmark’s central bank cut its main borrowing costs to record lows and brought the rate it offers on certificates of deposit below zero, as policy makers test uncharted territory to fight a capital influx. The benchmark lending rate was cut to 0.2 percent from 0.45 percent, while the deposit rate was reduced to minus 0.2 percent from 0.05 percent, Copenhagen-based Nationalbanken said in a statement today. The move followed a quarter of a percentage point cut in the European Central Bank’s main rate to 0.75 percent. Nationalbanken doesn’t hold scheduled meetings and only adjusts rates to defend the krone’s peg to the euro. “There’s no experience of how negative deposit rates will affect the financial markets and the krone,” . “It’s a sign of the strong Danish economy. This is good. The opposite situation would be far worse, if the central bank would have to hike rates to defend the krone. We have a luxury problem.”

Central Banks Helpless As Denmark Goes NIRP, Cuts Deposit Rate To NEGATIVE 0.2% - A few days ago we noted that the ECB may well be contemplating the monetary neutron bomb, which would see it lower rates to below zero, ushering in a Negative Interest Rate Policy. Today, Mario Draghi cut such speculation short promising the ECB has not discussed this. Yet one bank which certainly has is the Danish Central Bank, which just lowered its Discount Rate to 0%, joining China, England, the ECB, and, of course, Kenya in easing, but also went one step further and cut its deposit rate to negative 0.2%. Keep a note of this: NIRP is coming to a central bank, and shortly thereafter to a bank deposit branch, near you very soon. From Bloomberg: Denmark’s central bank cut its main borrowing costs to record lows and brought the rate it offers on certificates of deposit below zero, as policy makers test uncharted territory to fight a capital influx. The benchmark lending rate was cut to 0.2 percent from 0.45 percent, while the deposit rate was reduced to minus 0.2 percent from 0.05 percent, Copenhagen-based Nationalbanken said in a statement today. The move followed a quarter of a percentage point cut in the European Central Bank’s main rate to 0.75 percent. Nationalbanken doesn’t hold scheduled meetings and only adjusts rates to defend the krone’s peg to the euro.

JPMorgan, Goldman Shut Europe Money Funds After ECB Cut - JPMorgan Chase, Goldman Sachs Group Inc. and BlackRock Inc. closed European money market funds to new investments after the European Central Bank lowered deposit rates to zero.JPMorgan, the world’s biggest provider of money-market funds, won’t accept new cash in five euro-denominated money- market and liquidity funds because the rate cut may result in losses for investors, the company said in a notice to shareholders. Goldman Sachs won’t accept new money in its GS Euro Government Liquid Reserves Fund, and BlackRock, the world’s largest asset manager, is restricting deposits in two European funds. “The European market environment is in unchartered territory with such historically low -- or even negative -- yields for high-quality issuance,” Goldman Sachs (GS) said in a memo to fund shareholders, citing the ECB’s rate cut. “It is not currently feasible for our portfolio managers to deploy capital without substantially diluting the yield for the existing base of shareholders.” The ECB yesterday reduced its benchmark rate to a record low of 0.75 percent and took its deposit rate to zero. Money funds have been struggling to invest client assets at a profit as interest rates globally are near record lows and Europe’s sovereign debt crisis has reduced the supply of available debt. Managers have been forced to cut fees to keep customer returns above zero, and some have abandoned the business.

Spanish 10-year debt costs rise despite European deal - Spain gained little relief on Thursday from a euro zone leaders’ deal aimed at helping the bloc’s most troubled economies, with the Treasury paying the highest rates in over seven months to borrow 10-year funds. Madrid sold €3-billion ($3.75-billion U.S.) in three maturities of bonds at a debt auction, and while demand was solid, yields on the longer-dated bonds were higher than when they were last sold in June. However, measures agreed by the euro zone leaders last weekend seemed to be having little positive effect on Spain, which is to get European aid to rescue its most troubled banks. “The market continues to function, but on this evidence there is still no significant change in sentiment or investor demand towards Spanish debt,”

Portugal’s government faces political pressure to change terms of $98 billion bailout— Pressure is mounting on Portugal’s government to ask its international rescue creditors for more time to meet certain deficit targets. Austerity measures linked to a €78 billion ($98 billion) financial rescue in May last year are widely blamed for a predicted third recession in four years, and record unemployment of 15.2 percent. Lower tax revenue and higher welfare payouts are slowing efforts to reduce spending. Opposition parties, business leaders and trade unions are pushing the center-right government to request at least another year to meet a 2013 target of reducing the budget deficit to 3 percent of GDP. (Reuters) - Greece's new finance minister publicly acknowledged on Thursday that the debt-laden country had partially veered off course from pledges included in its 130-billion-euro rescue package. "The economy has gone through two difficult elections and the program is off track in some respects, and it is on track in others," Yannis Stournaras told reporters in his first public comments since he was sworn in earlier on Thursday. He said officials from the so-called "Troika" of European Union, European Central Bank and International Monetary Fund had warned him he would have a tough time at a meeting of Eurogroup finance ministers on Monday.

Portuguese court blocks key part of austerity plan - The Portuguese government might extend a pay cut for civil servants to others after a court blocked a key part of its deficit-cutting programme by saying it was unconstitutional. Centre-right Prime Minister Pedro Passos Coelho said: "The only solution to hold to the intention of adjusting the finances, essential if Portugal is to meet its commitments, is to extend the measure to others." Newspaper Diario de Noticias estimated that the ruling would cost the state €2bn in 2013. The country's Constitutional Court judges that since a plan to limit extra holiday and Christmas pay is targeted only at public sector workers, it infringes basic principles of equality. In Portugal nearly all public and private sector employees receive an extra month's salary in the summer and at Christmas. The government wanted to abolish this in order to meet tough agreements following a eurozone bailout.

Irish May Need 2nd Bailout Even With Debt Relief, Citigroup Says - Ireland will probably need a second bailout even if it succeeds in moving the cost for bailing out the former Anglo Irish Bank Corp. to a European fund as its economy contracts, Citigroup Inc. said. “Ireland may be able to shift a sizable portion of the bank debt, but I doubt European parties will agree to shifting all of it,” said Michael Saunders, chief European economist at Citigroup in London, in an interview. “Ireland will probably still need a second bailout.” Ireland may be able to move about 31 billion euros ($39 billion) in promissory notes used to rescue Anglo Irish to Europe’s permanent bailout fund, according to Saunders. That probably won’t be enough to allow Ireland to avoid the need for more official aid when its bailout runs out at the end of next year, as Europe’s debt crisis weighs on growth, he said.

Greece admits is off-track in implementing bailout (Reuters) - Greece's new finance minister publicly acknowledged on Thursday that the debt-laden country had partially veered off course from pledges included in its 130-billion-euro rescue package. "The economy has gone through two difficult elections and the program is off track in some respects, and it is on track in others," Yannis Stournaras told reporters in his first public comments since he was sworn in earlier on Thursday. He said officials from the so-called "Troika" of European Union, European Central Bank and International Monetary Fund had warned him he would have a tough time at a meeting of Eurogroup finance ministers on Monday.

Greece to renegotiate bailout terms with lenders - Greece's new prime minister will on Thursday offer international lenders to hasten privatization and plans to downsize the public sector in return for more favourable bailout terms, media reports said. Antonis Samaras wants the European Union, the European Central Bank and the International Monetary Fund - known as the troika - to give Greece more time to meet fiscal targets. Finance Minister Yiannis Stournaras, who was sworn in on Thursday, held his first meeting with troika inspectors. He is expected to suggest that taxpayers be allowed to pay in installments, which will delay taxes worth 2.5 billion euros (3.1 billion dollars) until next year. Troika officials are expected to meet with Samaras later in the day. Greece needs international loans to avoid bankruptcy, but after two months of political deadlock, it has fallen behind on the reform agenda demanded by creditor, and is also struggling with a worsening recession and record unemployment of more than 22 per cent. The conservative New Democracy-led government, which is backed by the Socialist PASOK and a small left wing party, is looking to revise some of Greece's bailout conditions, insisting the terms of the bailout have failed to stimulate growth.

Greece drops demand to ease bailout terms - Greece’s new government has dropped a plan to seek softer terms for its second bailout following warnings that it would be rejected by international lenders. Yannis Stournaras, finance minister, said the governing coalition would have to accelerate reforms before asking for modifications in a €174bn programme agreed in February with the European Union and the International Monetary Fund. “The programme is off-track and we can’t ask for anything from our creditors before we get it back on course,” Mr Stournaras told the Financial Times. “There is light at the end of the tunnel but it is a long tunnel,” he added. Greece’s change of tack came as EU and IMF officials visiting Athens this week echoed a statement by Christine Lagarde, the IMF managing director, in a television interview that she was “not in negotiations or re-negotiations mood” on the Greek bailout. The three coalition partners – the conservatives and two left-of-centre parties – all pledged during recent election campaigns that Greece would seek a one- or two-year extension of the programme to ease the impact of almost five years of recession, with unemployment now above 21 per cent. Yet Antonis Samaras, the centre-right prime minister, avoided any mention of a timetable change during his first meeting on Thursday since taking office with officials from the so-called troika – the EU, IMF and European Central Bank – according to people with knowledge of the discussions.

And Then There Were Six – Is Slovenia Next? - Slovenia is in the news. According to press reports (and here) solving the problems which have accumulated in the country’s banking system may well mean the country is next in line for some sort of EU bailout assistance. Speculation was fueled last week when ECB Governing Council member and Bank of Slovenia Governor Marco Kranjec said that the country may well eventually need assistance, even if for the moment it will not be necessary. Sounds a lot like the other denials we have heard just before the “happy event”. “We do not exclude anything … but for now this is an entirely hypothetical question,” he told his conference audience,”Conditions (in the Slovenian banking sector) are going in the bad direction, but for now I do not see a reason that Slovenia would need to ask for (international) help.” He also made the point that “Yields on our (Slovenian) debt are very high but poor availability of (financial) resources is even more worrying,” If the bailout materialises (and it seems to me likely it will) this will put the country in the same group as Spain and Ireland, who are to receive EU assistance for their banking sectors (even if Ireland’s share is still to be negotiated) as a result of having credit driven construction booms which were incentivised by excessively lax monetary policy at the ECB

Finland warns of euro exit rather than pay debts of others - FINLAND would consider leaving the eurozone rather than paying the debts of other countries in the currency bloc, Finnish Finance Minister Jutta Urpilainen has said. In a newspaper interview today she said she'd consider crashing her AAA-rated country out of the eurozone. “Finland is committed to being a member of the eurozone, and we think that the euro is useful for Finland. Finland will not hang itself to the euro at any cost and we are prepared for all scenarios. “Collective responsibility for other countries' debt, economics and risks; this is not what we should be prepared for. We are constructive and want to solve the crisis, but not on any terms,” she said. Meanwhile, eurozone officials are cautioning against expecting any quick action from the currency bloc's finance ministers when they meet on Monday to sort out the tangle of loose ends and disagreements left by last month's EU debt-crisis summit. Time-frames may already be slipping and opposition is building in euro zone hardliners the Netherlands and Finland. "You have a Finnish problem. You have a Dutch problem. You have a German problem too," said one euro zone diplomat, ..."I don't see a package done by Monday."

Eurozone crisis: Tough questions for Franco-German axis after Merkel’s big defeat - The German chancellor, Angela Merkel, ran up against the limits of her own powers at the eurozone leaders' summit in Brussels. Germany's political course since the beginning of the euro crisis two years ago had left it isolated, and she was no match for an alliance of Italy, Spain and France. She had no choice but to concede and agree to far-reaching changes to the EU's new fiscal compact that will ease refinancing of the crisis countries and their banks. The German dogma of "no payments without counter-performance and control" was thus off the table, and the bargain struck in the early hours of the morning was exactly the opposite of what she had wanted. The fiscal compact had been reduced to a shambles even before Germany's parliament, the Bundestag, approved it later that day. In terms of addressing the eurozone financial crisis, however, the agreement reached in Brussels was anything but a breakthrough because it never transcended the logic of narrow crisis management. It offers no strategy for overcoming the crisis in the south of Europe, which means that the threat to the eurozone has not been removed. Politically, however, the agreement amounts to a small revolution because it has shifted the balance of power within the eurozone: Germany is strong, but not strong enough to get away with isolating itself completely from Europe's other major players. Decisions that go against Germany are possible.

Weidmann warns Merkel over weakening - Germany’s top central banker has criticised the decisions of last week’s summit to help debt-laden eurozone members, warning that the bloc was “constantly mutualising risks and weakening the agreed rules”. “Fiscal aid should be the last resort of crisis management,” said Jens Weidmann, president of the Bundesbank. “This position has by now been recognisably weakened.” In a speech that looks set to increase political pressure on Angela Merkel, the chancellor, Mr Weidmann said strict conditions that had come with emergency aid at the start of the crisis had been “clearly eroded” since then – and possibly again at last week’s European summit. In remarks apparently meant as a warning shot to Berlin, Mr Weidmann signalled any further steps to loosen aid conditions had to come together with eurozone commitments to pool fiscal decision-making. If mutual liability was to be the only path, then “those taking on liability should get the opportunity to exercise oversight.”

Patience with bailouts wears thin among Merkel MPs - Senior lawmakers from Angela Merkel's conservatives warned on Friday of growing resentment at perceived concessions by Germany on euro zone bailout schemes, exacerbated by Italy's portrayal of the last EU summit as a setback for the chancellor. At the June 28-29 summit, Italy's technocrat Prime Minister Mario Monti and Spanish leader Mariano Rajoy overcame Merkel's reluctance to use the bailout funds to stabilize bond markets and directly help the banks of struggling euro zone countries. I think we are getting near the limit of what the Bundestag (lower house) and the population are willing to bear," Michael Stuebgen, speaker on European policy for the conservatives in the German parliament, told Reuters. Merkel has insisted the summit agreements do not contradict Germany's insistence on strict conditions for aid to its euro zone partners or its opposition, based on German law, to accepting liability for other nations' debt.

Merkel’s public approval ratings soar - Angela Merkel this week weathered a barrage of accusations that she had abandoned her tough stance on strict conditions for eurozone bailouts – only to witness her public approval rating soar to a two-and-a-half year high. Two-thirds of Germans, or 66 per cent, are satisfied with the chancellor’s work, a leap of 8 points from June and Ms Merkel’s highest score since the first bailout of Greece, according to a poll published yesterday by the ARD public television network. The shift in public opinion flies in the face of days of political sniping over the results of the EU summit late last month. Ms Merkel stood accused of caving in to Italian, Spanish and French demands for softer conditions on sovereign bond buying and direct capital injections for banks by the eurozone’s emergency fund.

German economists say 'no' to euro banking union - More than 150 economists led by the head of Germany's influential Ifo think tank urged voters on Thursday to lobby lawmakers to oppose plans for a European banking union that Chancellor Angela Merkel signed up to last week. The Frankfurter Allgemeine Zeitung newspaper released an open letter in which Hans-Werner Sinn and other experts said forcing Europe's biggest economy to extend its liabilities to weaker euro zone states and their banks was not the answer to the region's debt woes. "The decisions which the chancellor saw herself forced into at the EU summit were wrong," wrote the economists in a letter addressed to "fellow citizens". "We are deeply concerned about the step towards the banking union, which means collective liability for the debts of the banks of the euro system," wrote the economists. "Neither the euro nor the European idea will be saved by the extension of liabilities to banks." The letter reflects the deep frustration many Germans feel over the euro zone crisis and their growing impatience at bailing out their struggling partners.

Germany launching Libor probe of Deutsche Bank: sources - Germany’s markets regulator has launched a special probe into Deutsche Bank AG over suspected manipulation of interbank lending rates, joining authorities around the globe investigating the world’s largest banks, two people familiar with the matter said on Friday. Investigators in the United States, Europe and Japan are examining more than a dozen big banks over suspected rigging of the London Interbank Offered Rate (Libor). Britain’s Barclays Bank PLC has so far been the only bank to admit wrongdoing, agreeing last week to pay a fine of more than $450-million (U.S.). The Libor rates, compiled from estimates by large banks of how much they believe they have to pay to borrow from each other, are used to determine interest rates on trillions of dollars worth of contracts around the world. The two sources said Germany’s BaFin regulator was now probing Deutsche Bank with a “special investigation,” a process initiated by the regulator which is more severe than a routine investigation initiated by a third party. The results were expected to emerge in mid-July, one of the sources said.

Cameron orders review of interbank rates -- David Cameron has ordered an independent review into the workings of interbank lending rates, following news earlier this week that US and British authorities fined Barclays $450m for manipulating the the rate at which banks lend to each other overnight. The announcement, on Saturday, came after Ed Miliband, Labour leader, called for a full-scale public inquiry into banking culture and practices. Mr Cameron, who is resisting calls for a public inquiry, has ordered a short, urgent review that he says will allow the government to amend the Financial Services Bill currently going through parliament. The review is expected to look at oversight of the rate-setting process and sanctions for breaking the rules. Asked about a full public inquiry, Mr Cameron told BBC television: “Let’s take our time, think this through carefully ... Let’s get this right.”  Ed Balls, Labour’s shadow chancellor, said the review did not go far enough. “We need the proper independent and public inquiry into the culture of banking that Ed Miliband and I have demanded,” he said.  Mr Miliband has seized on public anger over the Libor scandal to back his campaign for responsible capitalism and against what he has described as a “swaggering culture” in which some bankers believe they are above the law.

Banking scandal: how document trail reveals global scam - It's not a comfortable weekend for the men heading some of the world's biggest banks. Barclays has already been hit by a £290m fine for rigging interest rates but that could be dwarfed by a series of global lawsuits which could cost banks billions.The interest rate rigging scandal that has engulfed Barclays was the result of a coordinated attempt at collusion by traders working for a coterie of leading banks over at least five years, according to a series of lawsuits and legal rulings filed in courts in Asia and North America. The lawsuits allege the fraud was extensive, spanning at least three continents and involving trades worth tens of billions of pounds. The allegations raise further serious questions about the banks' ability to police themselves and the role of senior management in monitoring the activities of their employees. In a 28-page statement of facts relating to last week's revelation that Barclays had been fined a total of £290m, the US Department of Justice discloses how a network of traders working on both sides of the Atlantic conspired to influence both the Libor and Euribor interest rates – the rates at which banks lend to each other. It was, in effect, a worldwide conspiracy against the free functioning of the market.

Barclays Big-Boy Breaches Mean Libor Fixes Not Enough -The blueprint regulators gave Barclays and other banks for correcting Libor-rate abuses may not be enough to salvage a benchmark so discredited it needs to be overhauled, some investors say. The U.S. Commodity Futures Trading Commission ordered Barclays on June 27 to keep thorough records on how it comes up with its London2 interbank offered rate submissions and erect so- called Chinese Walls between traders and rate-setters. It also said lenders should expect random checks from regulators on whether their submissions reflect actual borrowing costs. Investors say the proposals amount to little more than window dressing. “As long as banks are allowed in the henhouse, then the system is ripe for abuse,”

Barclays chairman poised to resign - Marcus Agius will resign as chairman of Barclays on Monday, in the hope that his departure will take the sting out of mounting criticism from politicians and shareholders over the bank's role in the price-fixing of interbank lending rates. "The buck stops with me," Mr Agius will say in an announcement due on Monday morning, as he criticises the "devastating" revelations of last week's Libor probe by regulators but praises the bank's "excellent executive team" led by chief executive Bob Diamond.

The Libor Scandal and the Price of Prosperity - To the long, dismal list of fatally broken institutions — GDP, governments, schools, corporations — we can add the mysterious Libor, and its conveniently comfortable calculation. It's difficult to overstate what a pillar of the global economy Libor is — it's used in setting interest rates that affect the daily lives of pretty much every citizen of every advanced economy across the globe. And it's difficult to overstate how troubling it is that this, too, is an institution rigged by the few, for the few; that this institution too, is, corrupted. This scandal isn't about price-fixing. It's not about a bank.  It's not even about power and privilege, corruption and compromise. It's about life, tragedy, and human potential. Let me couch this for you in the pedestrian terms of financial hydraulics — the tawdry terms which seem to substitute for thinking in what's become of our thin, shallow economic and political discourse. The most basic function of a financial system is to price money. If a financial system can't undertake that simple task effectively — if the price of money is fixed like a roulette wheel stuck on red — all else must necessarily fail: investment must become malinvestment, speculation must precede creation, "profit" must become divorced from benefit, and wealth is effectively transferred from poor to rich, in a form of quiet but lethally effective institutionalized theft.

On Lie-borgate: "Everyone Knew, And Everyone Was Doing It … "I wish I could say that this was an isolated case... You will hear more on this in due course" is how the UK FSE's Director of enforcement described Lie-borgate to Reuters this weekend. It seems incredibly that the US regulators and investing public alike are shunning this interest rate rigging scandal as the UK goes to DEFCON 1 with more than a dozen other banks being investigated in the long-running global probe. The Barclays Chairman quit over the weekend (and we assume will not be the last casualty) as The Telegraph notes the 'dislocation of libor from itself' - since banks could not be seen borrowing at higher rates for fear of liquidity repercussions, as widespread. According to the trader the BBA asked for a rate submission but there were no checks and "everyone knew" and "everyone was doing it". What is incredible is the level of nonchalance that this illegal act had taken on with entire teams of people well aware as open discussion occurred (not clandestine blue-horseshoe-likes-low-libor-style). Indeed this widespread and well-known action of dislocating libor from itself (since in a trader's words "everyone knew we couldn't borrow at Libor, you only needed to look at CDS to see that... with real Libor rates 3 to 4 per cent higher than the BBA's submitted Lie-bor") has now led George Osbourne, as per the FT, to launch a 'Leveson-style' probe into standards in the banking industry - a full, public independent inquiry into the $504 Trillion market's underlying integrity. Libor had dislocated with itself for a very good reason – to hide the true issues within the bank.

As Lie-Bor Unwinds, Just How Much Is At Stake? -- This much: That's $504 trillion with a T.

Libor scandal: How I manipulated the bank borrowing rate - It was during a weekly economic briefing at the bank in early 2008 that I first heard the phrase. A sterling swaps trader told the assembled economists and managers that "Libor was dislocated with itself". It sounded so nonsensical that, at first, it just confused everyone, and provoked a little laughter. Before long, though, I was drawing up presentations to explain the "dislocation of Libor from itself" for corporate relationship managers. I was deciphering the subject in emails, internally and externally. And I was using the phrase myself openly with customers of the bank. What I was explaining was that the bank was manipulating Libor. Only I didn't see it like that at the time. What the trader told us was that the bank could not be seen to be borrowing at high rates, so we were putting in low Libor submissions, the same as everyone. How could we do that? Easy. The British Bankers' Association, which compiled Libor, asked for a rate submission but there were no checks. The trader said there was a general acceptance that you lowered the price a few basis points each day.

Q&A: Barclays and bank rates - BBC - Barclays' chief executive Bob Diamond has resigned, less than a week after the bank was fined £290m ($450m) for trying to manipulate a key bank lending rate called Libor. But why is Libor so important? Here we take a closer look at the issues involved:

The strange silence and an absence of information - There is a strange silence at the core of the Barclays Libor manipulation. A strange absence of information. But this may be remedied on Wednesday if a committee of MPs gets better answers than Newsnight is getting about emails alleged to exist between a Bank of England boss and the boss of Barclays. Barclays was found guilty of, and paid a fine for, two types of market manipulation. But it is the second offence that is raising systemic questions. This involved a decision by Barclays to manipulate the rate during the credit crunch of 2007-08, with the purpose of avoiding the impression that Barclays was in trouble. As Barclays struggled to avoid being forced to take bailout money from the UK government, on 29 October 2008: "A senior Bank of England official contacted a senior Barclays manager... As the substance of the conversation was passed to other Barclays employees, certain Barclays managers formed the understanding that they had been instructed by the Bank of England to lower Barclays' Libor submissions, and instructed the Barclays Dollar and Sterling Libor submitters to do so - even though that was not the understanding of the senior Barclays individual who had the call with the Bank of England official." These senior people have now been named by the BBC's business editor Robert Peston: Paul Tucker at the Bank of England, and Bob Diamond at Barclays. Thus, the official picture drawn by the FSA is that the Bank of England did not instruct Barclays to fiddle the rate, and that Bob Diamond "did not understand" that he had been so instructed. And here is where the unfortunate silence begins. Why was the discussion between Tucker and Diamond not noted or recorded? And where does the trail of orders begin that led to Barclays lowering their submissions on 29 October?

Bank forecasts futile now all trust has gone, says analyst -- Banks have blown so much trust that there is no point crunching the numbers on them, a leading City analyst has declared in the wake of the Barclays Libor scandal. Sandy Chen, bank analyst at Cenkos Securities, said it was pointless revising forecasts until Barclays came clean over what had gone on. “Analysts spend 99pc of their time crunching numbers, but underneath the complicated edifice of earnings forecasts lies a basic foundation of trust,” he said. “In essence, the price movements in markets track the flow of conversation around one basic question – 'Do I trust them and their promised returns?’ Without the trust, nothing stands.” Mr Chen said revelations that Barclays chief executive Bob Diamond had held talks in 2008 with the Bank of England over Libor simply clouded the issue further. “The trust has been breached. Until the banks clear their names, we expect the markets for their shares and bonds will remain dysfunctional,” he said. “Without full management clarity, transparency and responsibility... we think forecast revisions are futile.”

Regulators On Libor Probe Said To Seek More Time - Barclays Plc (BARC)’s settlement of about $451 million with U.S. and U.K. regulators last week offered the first glimpse of what banks may have to pay to resolve a global probe of interest-rate manipulation. The question now is who’s next. The two-year investigation, which involves regulators on three continents, has touched as many as 18 financial institutions that help set London and Tokyo interbank offered rates for dollars, euros and yen. That number includes as many as 12 firms that have fired or suspended traders in connection with related internal probes of whether their employees tried to manipulate the rates known as Libor and Tibor. The span of the investigation has prompted at least one regulator to ask for more time, according to a person with knowledge of the matter. The U.S. Commodity Futures Trading Commission recently sent out so-called tolling agreements in which the banks would waive their right to claim a lawsuit should be thrown out if a five-year statute of limitations has elapsed, said the person, who asked not to be identified because the agreements aren’t public.

Financial scandal: Diamond’s not for ever - Guardian editorial - Bob Diamond resigned on Tuesday as the head of Barclays Bank in an effort to begin drawing a line under the Libor-rigging scandal. That in itself is astonishing; the boss of a high-street bank slapped with a record fine for manipulating markets quitting not in apology or contrition but to stop the affair "damaging the franchise" of his company. In any case, the manoeuvre failed: his departure simply turned what is already one of the most remarkable corporate falls from grace in contemporary history into something still more spectacular. Too bad for the executives at Barclays; but good news for the rest of the country. Because what is taking shape this week is an argument that Britain should have had at least after the rescue of the banks in autumn 2008, if not long before that: namely, a discussion of what kind and size and style of banking industry is right for Britain. Many heavyweight bankers, not to mention senior figures in politics and officialdom, doubtless want to duck this public conversation – and its fallout. Again: too bad. If Britain does not hold a democratic debate – however irksome or embarrassing – on how to make an over-powerful banking industry less dangerous and better suited to our needs, it runs a much higher risk of repeating the financial crisis.

The LIBOR scandal will expose more naked bankers - Some time ago I worked as a short term interest rate trader. Essentially I took bets on the movements in interest rates out to 1 year. I did this using a portfolio of bank bills, NCD’s (negotiable certificates of deposits), PN’s (promissory notes), Futures (bets on the level of interest rate at some time in the future) and FRA’s (forward rate agreements).  For more information please see this RBA paper. Basically if you had a position that needed a bit of enhancement you could try to move the price around in the run up to the rate set. You’d do this by buying or selling bank bills in the market in the run up to 10am to try to move the yield. More often than not you’d end up with one of the other big banks on the opposite side trying to bash you into submission so that they could get the price that suited their book. It was almost impossible for any one player to materially influence the actual rate set more than a few points and only very briefly because we all had our limits. And reversing the position after the rate set would have cost more than it was worth. So it is against this backdrop that I have been thinking about this Barclays LIBOR fixing news and the fine and scandal it has caused. The question I am asking myself is how did Barclays manage to influence the whole market over an extended period in a manner that was material to their borrowing costs all on their own? It strikes me as almost impossible. So it is interesting to note that other institutions are being looked at.

Libor scandal: Bank of England condoned rate-fixing, says former Barclays chief Bob Diamond -- FORMER Barclays chief executive Bob Diamond is set to drag the British political and banking establishment into the interest rate fixing scandal today, after he and another senior exectutive dramatically quit over their roles in the affair.

• • Senior Barclays executives embroiled in rate fixing scandal after e-mail detailing conversation between Bob Diamond and BoE’s Paul Tucker emerges
• • Jerry del Missier follows Bob Diamond out the exit door at Barclays in wake of e-mail that Government sources call “explosive”
• • Mr Diamond to appear before Commons Treasury select committee today

Last night, Barclays revealed how its most senior executives became embroiled in rate fixing when it released an e-mail and details of a telephone conversation between Mr Diamond and Paul Tucker, deputy governor of the Bank of England, in 2008. In the e-mail, Mr Tucker is reported as saying that “it did not need to be the case” for the rate at which the bank borrows short-term money – known as the Libor – to be as high as it was. According to the e-mail, Mr Tucker, tipped to succeed Sir Mervyn King as the Bank’s next governor, had told Mr Diamond he was coming under pressure from “senior figures at Whitehall” who were questioning why Barclays was registering such high rates of interest.

Fink Says Diamond ‘Emotion’ May Have Aggravated Regulator - Bob Diamond, who stepped down as chief executive officer of Barclays today, aggravated U.K. regulators by taking an aggressive stance over the manipulation of interest rates, said Laurence D. Fink, head of BlackRock.  “He led with a lot of emotion which obviously” angered “regulators and some other people within the U.K.,” Fink, 59, said in an interview with Erik Schatzker and Trish Regan on Bloomberg Television’s “Market Makers.” “For me it’s sad. I know Bob very well.”  Diamond, 60, stepped down as head of Britain’s second- biggest bank amid a deepening dispute about whether the Bank of England pushed the lender to submit artificially low Libor rates during the financial crisis. Barclays was hit by a record 290 million-pound ($455 million) fine last week for rigging the London interbank offered rate, the benchmark for more than $360 trillion of securities. Diamond yesterday defied pressure to quit, pledging to implement the findings of a review into how the bank sets its Libor rates.  Fink said he was “surprised” Barclays was the first to go public with its settlement because other banks were also implicated in fixing Libor. BlackRock is the second-biggest shareholder of Barclays behind Qatar Holdings LLC, the country’s sovereign wealth fund, and Diamond was on BlackRock’s board of directors until this year.

City faces a double crisis over trust and reputation, FSA’s Lord Turner warns - Financial Services Authority boss Adair Turner, a leading contender to be the next Bank of England Governor, yesterday warned the City faces a new "crisis of trust and reputation" and slammed previous regulation as "clearly inadequate". Lord Turner told the FSA's annual meeting that "the Libor scandal has caused a huge blow to the reputation of the banking industry" and regulators "must in future find ways to intervene earlier on". He admitted the FSA had suffered its own "pre-crisis failings", before he joined in 2008, just as Lehman Brothers, Royal Bank of Scotland and HBOS failed.

Diamond’s Exit Shows Libor Only What Each Bank Says It Is - The resignation of Barclays Plc (BARC) Chief Executive Officer Robert Diamond for the firm’s role in rigging the London interbank offered rate underscores the disconnect between the market’s perception of bank borrowing costs and the benchmark for $360 trillion of global securities.  Barclays has gone from saying in January it can borrow for three months at interest rates that were on average above other banks to saying it can borrow more cheaply than its peers even though the cost of insuring the London-based firm’s debt using credit-default swaps rose 36 percent, according to data compiled by Bloomberg.  The contrast between banks’ daily submissions for Libor and other measures of their creditworthiness shows why regulators from Europe to the U.S. are beginning to fine them for manipulating the market for short-term rates. While the British Bankers’ Association reveals Libor submissions from each bank, the process that the firms use to come up with their individual rates is opaque and not based on actual transactions.  “After the Barclays admission, we have proof that Libor is not a reliable benchmark,”

Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates Barclays

Defiant Barclays - The resignation of Bob Diamond notwithstanding, it seems that Barclays is sticking to its scorched-earth, if-we’re-going-down-we’re-taking-you-with-us strategy. In its submission to the UK parliament in the run-up to Bob Diamond’s testimony tomorrow, Barclays is very aggressive and not at all contrite. The submission starts with a statement that Barclays should somehow be viewed in a better light than all the other banks: The bank has invested nearly £100m to ensure that no stone has been left unturned [in the investigation]. The bank’s exceptional level of cooperation was expressly recorded by each of the Authorities, and was described by the DoJ as “extraordinary and extensive, in terms of the quality and types of information provided” and ”the nature and value of Barclays cooperation has exceeded what other entities have provided in the course of this investigation.” That cooperation has led to Barclays being the first to reach resolution of these issues. It ironic that there has been such an intense focus on Barclays alone, caused by our being first to settle in the midst of an industry-wide, global investigation.

Financial scandal: Diamond’s not for ever - Guardian editorial - Bob Diamond resigned on Tuesday as the head of Barclays Bank in an effort to begin drawing a line under the Libor-rigging scandal. That in itself is astonishing; the boss of a high-street bank slapped with a record fine for manipulating markets quitting not in apology or contrition but to stop the affair "damaging the franchise" of his company. In any case, the manoeuvre failed: his departure simply turned what is already one of the most remarkable corporate falls from grace in contemporary history into something still more spectacular. Too bad for the executives at Barclays; but good news for the rest of the country. Because what is taking shape this week is an argument that Britain should have had at least after the rescue of the banks in autumn 2008, if not long before that: namely, a discussion of what kind and size and style of banking industry is right for Britain. Many heavyweight bankers, not to mention senior figures in politics and officialdom, doubtless want to duck this public conversation – and its fallout. Again: too bad. If Britain does not hold a democratic debate – however irksome or embarrassing – on how to make an over-powerful banking industry less dangerous and better suited to our needs, it runs a much higher risk of repeating the financial crisis.

Parliamentary inquiry into banking scandal in balance - An inquiry by MPs and peers into the banking scandal is hanging in the balance after the Tory MP chosen to lead it said he would quit without cross-party backing. The Daily Telegraph has learnt that a former mandarin has been lined up to lead the Parliamentary inquiry into the rate-fixing scandal if Labour fails to support the Government’s plan. Barclays Labour MPs are to vote in the Commons tomorrow on whether to support a joint Parliamentary inquiry by MPs and peers, chaired by Andrew Tyrie, a senior Conservative MP, or opt for a judge-led investigation demanded by Labour. The Government’s position was backed by the former cabinet secretary Lord O’Donnell, who told peers last night to get on with the joint parliamentary committee inquiry, and see if a judicial inquiry was required. Labour was holding firm, insisting its MPs would vote for a judge-led inquiry and insisting that it had not yet decided whether to back any Parliamentary investigation chaired by Mr Tyrie. Mr Tyrie, the chairman of the Treasury select committee, made it clear he was “not prepared” to lead any committee which did not have the support of the House of Commons as a whole.

The rotten heart of finance - Economist - THE most memorable incidents in earth-changing events are sometimes the most banal. In the rapidly spreading scandal of LIBOR (the London inter-bank offered rate) it is the very everydayness with which bank traders set about manipulating the most important figure in finance. They joked, or offered small favours. “Coffees will be coming your way,” promised one trader in exchange for a fiddled number. One trader posted diary notes to himself so that he wouldn’t forget to fiddle the numbers the next week. “Ask for High 6M Fix,” he entered in his calendar, as he might have put “Buy milk”. What may still seem to many to be a parochial affair involving Barclays, a 300-year-old British bank, rigging an obscure number, is beginning to assume global significance. The number that the traders were toying with determines the prices that people and corporations around the world pay for loans or receive for their savings. It is used as a benchmark to set payments on about $800 trillion-worth of financial instruments, ranging from complex interest-rate derivatives to simple mortgages. The number determines the global flow of billions of dollars each year. Yet it turns out to have been flawed.

Another Domino Falls In The LIBOR Banking Scam: Royal Bank Of Scotland – Taibbi - Another one bites the dust. The Royal Bank of Scotland is about to be fined $233 million (£150 million pounds) for its role in the Libor-rigging scandal. It joins Barclays as the first banks to walk the plank in what should be, but so far is not, the most sensational financial corruption story since the crash of 2008. Many of the banks implicated in the Libor mess have also been targeted in the various municipal bond bid-rigging investigations, and RBS is no different – its subsidiary Natwest is also a defendant in the major civil lawsuit in the bid-rigging case. The cases aren't related, except in the sense that they both involve manipulation and anticompetitive cooperation. It's going to be harder and harder to make the case that the major banks do not routinely cooperate at the expense of the public when it serves their purposes to do so. The news that RBS is involved comes with a perverse twist. This is from the Times UK: The bank, which is 82 per cent owned by the taxpayer, is preparing for a political firestorm over the affair because it believes that it has no power to claw back bonuses from the traders responsible. Instead, the expected fines would be borne by the shareholders — largely the Government.

LIBOR Banking Scandal Deepens; Barclays Releases Damning Email, Implicates British Government | Matt Taibbi This Libor-manipulation story grows crazier with each passing minute. We have officially disappeared now down the rabbit-hole of the international financial oligarchy. Former Barclays CEO Bob Diamond is testifying before parliament in London today, and that's sure to bring some shocking moments. But there's already been one huge stunner. In advance of that testimony, Barclays released an email from October 29, 2008, written by Diamond to then-Chairman John Varley and COO Jerry del Messier (who also stepped down yesterday). The email from the CEO to the other two senior Barclays execs purports to detail the content of the conversation Diamond had with Bank of England deputy governor Paul Tucker that same day. In the email, Diamond essentially tells the other two execs that he has been given permission by Tucker – encouraged, actually – to rig Libor rates downward. What’s even worse is that Diamond’s email suggests that Tucker was only following orders, i.e. that Tucker had received phone calls from "a number of senior figures within Whitehall" – that is, the British government – expressing concern about Barclays' high Libor rates. Tucker in this version of events was acting as a middleman for the British government, telling Diamond to fake his borrowing rates in order to preserve the appearance of financial stability, for the good of Queen and country as it were.

Libor scandal: Serious Fraud Office opens investigation - The Serious Fraud Office (SFO) has formerly opened an investigation on the Libor scandal that will probe individuals and banks for evidence of criminal actitivity. The crime busting organisation said in a statememt that its director David Green had “decided formally to accept the Libor matter for investigation” in a move that will re-open for Barclays the case it has just paid £290m to settle with financial US and UK regulators. Danny Alexander, Chief Secretary to the Treasury, said: “I want the Serious Fraud Office to follow the evidence wherever it goes, to bring prosecutions if they possibly can.” He added: “We of course as a government will make sure that they have all the resources that they need to carry out this investigation absolutely to the full.” Separately, Germany’s financial watch-dog BaFin started an investigation into allegations of Libor manipulation at Deutsche Bank, according to Reuters. Deutsche’s shares plunged more than 4pc as traders ditched the stock. BaFin declined to comment except to say: “We are making use of our entire spectrum of regulatory instruments, so far as this is necessary.” There were also reports that the steering committees that sets the euro-denominated interbank-lending rate, Euribor, is planning to hold an emergency meeting on Monday to discuss the implications of the scandal that rocked Barclays and the wider banking sector. 

Former Senior Barclays Staffer Charges Diamond with Lying to MPs in Select Committee Testimony - Yves Smith  -- It’s hardly surprising to think that Barclay’s CEO Bob Diamond shaded the truth more than a tad in his Parliamentary testimony earlier this week. Recall that he said the manipulation was the doing of 14 traders, and in context, he was clearly saying only those 14, their immediate supervisors, and the lax compliance types were at fault out of all of Barclays. The FSA’s letter to Barclays shows that to be untrue. It clearly says “at least” 14 traders were involved, as well as various “submitters” which were in a completely different unit operationally. The Independent has posted an interview with a former senior executive who calls out Diamond for his biggest howler, that he had no idea that anything untoward was happening until about two weeks ago. This blog had noted that Diamond’s claim that he had just found out about the rate fixing two weeks ago was utterly implausible, but it is quite a different matter for an insider to confirm that. From the Independent: Diamond said he found out what his traders were up to only two weeks ago, when the fines dropped into his inbox. What I don’t understand is why the MPs didn’t make more of that. If that is the case, and yet they’ve paid £300m in fines, in my view it is impossible that he wouldn’t have known.

Sometimes Being Responsible Means Pissing People Off - Janet Tavakoli – Last week, Gillian Tett of the Financial Times wrote how five years previously, she and her fellow journalists were intimidated into backing off of a huge story about banks manipulating LIBOR. This is the London Interbank Offered Rate set by a poll of leading banks to determine the benchmark interest rate referenced by many home mortgage loans, floating rate notes, collateralized debt obligations, and many other financial instruments: “At the time, this sparked furious criticism from the British Bankers’ Association, as well as big banks such as Barclays; the word “scaremongering” was used. But now we know that, amid the blustering from the BBA, the reality was worse than we thought. As emails released by the UK Financial Services Authority show, some Barclays traders were engaged in a constant and pervasive attempt to rig the Libor market from 2006 on, with the encouragement of more senior managers.  Unfortunately, the intimidation was a success. The BBA and Barclays chose their word carefully, because accusing journalists of “scaremongering” suggests they are irresponsible sensationalist hacks. In essence, through lies and intimidation, they threatened to ruin careers. The Financial Times backed off. As a result, the best coverage of the ongoing scandal came from a controversial blog with mostly anonymous writers called ZeroHedge. It pounded on the story harder than mainstream financial media. Not only are other banks implicated in the scandal, the Bank of England, a bank regulator, is also implicated.

Bankers and the neuroscience of greed - The unconstrained power of bankers acts like a drug on their brains' reward systems, creating insatiable appetites. Senior bankers hold enormous power, greater than that of many elected national leaders. Largely unaccountable except to occasional shareholders meetings and often quiescent boards, their power is much less constrained than that of democratically elected leaders. And given that power is one of the most potent brain-changing drugs known to humankind, unconstrained power has enormously distorting effects on behaviour, emotions and thinking. Holding power changes brains by boosting testosterone, which in turn increases the chemical messenger dopamine in the brain's reward systems. Extraordinary power causes extraordinary brain changes, which in their extreme form manifest themselves in personality distortions, such as those seen in dictators like Muammar Gaddafi. The "masters of the universe" who have arisen out of a deregulated world financial system were given unprecedented power that inevitably must have caused major changes to their brains. While power in moderate doses can make people smarter, more strategic in their thinking, bolder and less depressed, in too-large doses it can make them egocentric and un-empathic, greedy for rewards – financial, sexual, interpersonal, material – likely to treat others as objects, and with a dulled perception of risk. 

Let’s end this rotten culture that only rewards rogues - The Barclays rate-rigging scandal has once again exposed a world where men and women with little skill and no moral compass can become very rich very fast. Investment banking is an organised scam masquerading as a business. It is defined by endemic conflicts of interest, systemic amoral behaviour and extreme avarice. Many of its senior figures should be serving prison sentences or disgraced – and would have been if British regulators had been weaned off the doctrine of " light touch" regulation earlier and if the Serious Fraud Office's budget had not been emasculated by Mr Osborne. It is a tax on wealth generation and an enemy of honest endeavour – the beast that is devouring British capitalism. The £290m fine on Barclays for rigging the interest rates in the inter-bank market is a defining moment. Not just for Barclays but for every bank with which it colluded. Barclays had the wit to come clean first – the first of many banks to suffer political and moral opprobrium for illicitly inflating its profits. It was also trying to protect itself from "reputational damage" – not wanting other banks' assessment of its creditworthiness to become public.In the light of what we now know, that seems laughable.

Banking reforms after the Libor scandal - On June 14 2012, I wrote a column Two cheers for Britain’s bank reform plans] on the government’s plans to implement the recommendations of the Independent Commission on Banking, chaired by Sir John Vickers, of which I was a member. I noted that the government had rejected the Commission’s recommendations on several points, in favour of the banks. After the scandal of the deliberate misreporting of the London Interbank Offered Rate. these concessions must now be reconsidered. My interpretation of the Libor scandal is the obvious one: banks, as presently constituted and managed, cannot be trusted to perform any publicly important function, against the perceived interests of their staff. Today’s banks represent the incarnation of profit-seeking behaviour taken to its logical limits, in which the only question asked by senior staff is not what is their duty or their responsibility, but what can they get away with.

Libor scandal may have cost families their homes - Telegraph: Families may have lost their homes as a result of the bank rate-fixing scandal, the housing minister warned last night. Grant Shapps said that the scandal may have been a “contributory factor” in some home repossessions following the credit crisis. The Housing Minister issued the warning as David Cameron and George Osborne announced a fast-track Parliamentary inquiry into the behaviour and culture of Britain’s banks. The inquiry, which is not the independent judge-led inquiry demanded by Labour, will report back before the end of the year. Last week, Barclays paid a record £290 million fine after it admitted manipulating a key international interest rate which is used to set borrowing costs for millions of businesses, consumers and investors. RBS and Lloyds Banking Group are among other banks also facing investigation over their role in fixing the rate, known as Libor. The issue has sparked renewed calls for an overhaul of the banks amid concern over their culture and ethical standards.

Manufacturing PMI - up but still weak - The UK's manufacturing purchasing managers' index perked up in June, rising from 45.9 to 48.6. But it still points to a contracting sector. This is Markit's summary: "Conditions in the UK manufacturing sector remained fragile in June. Although output volumes recouped some of the losses incurred in the previous month, demand remained weak and job losses continued. On a slightly brighter note, cost pressures fell sharply, with average input prices declining at the fastest pace since May 2009. "At 48.6 in June, up from May’s three-year low of 45.9, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index® (PMI®) remained below the neutral 50.0 mark for the second consecutive month. Over Q2 2012 as a whole, the average PMI reading (48.2) was the weakest since Q2 2009."June saw manufacturing production rise for the sixth time in the past seven months, but only following a solid contraction during May. The underlying outlook remained subdued overall, as companies reported that output volumes had been underpinned by a marked reduction in backlogs of work. In contrast, new order intakes fell further."

Five reasons the summer curse may strike - Right now, with the summer heat rising, the mood in the financial markets seems relatively calm. But the issue worrying some investment firms is what might be called the “summer curse”; precisely because trading volumes tend to be so thin in the summer months, and senior hands are away, markets can go completely haywire if something does go wrong. And this “summer curse” is not a theoretical issue. Just think of 1998 (the Russian crisis and Long-Term Capital Management hedge fund implosion); 2007 (the mortgage securities and money market freeze); 2008 (the Fannie Mae “jolt”, which led to the Lehman Brothers disaster); or, for that matter, think back to how markets were rocked last year by the eurozone crisis and the US debt ceiling dramas. So could this summer be sticky, once again? Personally, I have a nasty feeling that it might, given that the markets are seeing the collision of at least five unwelcome issues:

• ● The eurozone.
• ● US politics and debt.
• ● China slowdown. Investors have been bracing themselves for months for sub 8 per cent gross domestic product growth in China. But it is crucially unclear whether they have understood all the knock-on implications of this.
• ● The Libor scandal. This has already caused turmoil at Barclays (and the Bank of England). However, other banks may soon be forced into costly settlements, and management changes, or even face criminal indictments,
• ● The Olympics. When Britain decided to stage the 2012 Olympics, pundits fretted about whether London’s creaking transport infrastructure would cope. What nobody asked, however, was the potential risk of partly shutting down the City, which is the world’s largest foreign exchange trading centre

Another £50 billion of QE - The Bank of England, as expected, announced a further £50 billion of quantitative easing, while leaving Bank rate unchanged at 0.5%. Economic weakness and concerns about the eurozone, along with falling inflation, triggered the move. This is what the Bank said about the economy: "UK output has barely grown for a year and a half and is estimated to have fallen in both of the past two quarters. The pace of expansion in most of the United Kingdom’s main export markets also appears to have slowed. Business indicators point to a continuation of that weakness in the near term, both at home and abroad. In spite of the progress made at the latest European Council, concerns remain about the indebtedness and competitiveness of several euro-area economies, and that is weighing on confidence here. The correspondingly weaker outlook for UK output growth means that the margin of economic slack is likely to be greater and more persistent. "CPI inflation fell to 2.8% in May and is likely to edge down further in the near term. Commodity prices have fallen, which should help to moderate external price pressures. And pay growth remains subdued. Given the continuing drag from economic slack, that should ensure inflation continues to ease into the medium term." The full statement is here.

QE: a modest proposal - The Bank of England's extension of QE on Thursday has been greeted with a big "meh". Other policies - a fiscal boost, credit easing, a helicopter drop, whatever* - might be necessary. So, here's a modest proposal. The Bank of England should buy the debt not of the UK government, but of the Spanish, Italian and Portuguese governments.This is not a cranky idea. In a famous speech 10 years ago, Ben Bernanke said: The Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations. Such a move would have several advantages:

• - It would help weaken sterling, thus supporting UK exporters and manufacturers.
• - In improving European banks' liquidity and solvency it would help avert the tail risk of financial collapse and so improve lending conditions and business confidence not just in the euro area but around the world.
• - In helping resolve the euro crisis, it would boost aggregate demand in the region and so further help UK exporters.

Brian Cox: Bank bailout costlier than UK science ‘since Jesus’ - Prof Brian Cox claimed the UK has spent more on saving banks in a year than it had on science "since Jesus". He also appeared to reject Alastair Campbell's suggestion to stand as an MP - claiming only the prime minister has any real power and nothing much happens in Parliament. Full Brian Cox interview

English police face drastic cuts -- The police force in England and Wales could be cut by 13,400 officers by 2015 as part of an effort to cut the total budget by 20 percent, officials said Monday. Her Majesty's Inspectorate of Constabulary said in a report it is especially worried about the effect on London's Metropolitan Police, The Independent reported. "The Metropolitan Police Service is considered a particular concern because of its outstanding savings requirement, its performance issues and not least the fact that it accounts for one-quarter of police spending," the report said. Hundreds of police stations may be closed. Officials said some could be replaced with officers stationed in public libraries and similar places. The HMIC said the 43 police departments in England and Wales appeared to have survived a first round of budget cutting without any drastic impact on public safety. A total of 32,400 jobs, including civilian positions, would have to be eliminated to meet budget targets. Of the police officers, 7,800 would be in back-office jobs and 5,600 in front-line positions.

U.K.'s Hidden Hunger Spotlights Cameron Budget Cuts -When the British economy fell back into a recession at the end of last year, Ryan Hall, 24, lost his job, his home and the means to feed his family.  His employer, a retail company, first reduced his hours and then eliminated his job altogether. No longer able to pay the rent, he was forced to seek emergency shelter at the home of a friend. He relied on food charities to help feed his wife and four-year-old son. "We had nowhere to go, no money, things were really, really hard, I was looking for jobs, but there was nothing out there. We were barely surviving.”  The plight of Hall and tens of thousands of other Britons living on the breadline is fueling the debate over Prime Minister David Cameron’s unprecedented austerity program as the economy struggles to emerge from its second recession since 2009. Cameron’s assertion that Europe’s sovereign debt crisis is largely to blame for the economic malaise has been called into question after the U.K. contracted for a second straight quarter between January and March, while the euro region escaped recession. The Labour opposition, led by Ed Miliband, says the government now must spur the economy by scaling back its deficit-cutting program and spending more.

This cruel welfare system is steadily crushing lives – where is the anger? - If you want a sobering flavour of where Britain is heading, set aside banking, the Leveson inquiry, our relationship with Europe and whatever else – and consider a Guardian story by Patrick Butler that appeared last week. It was about food banks, the charitable set-ups that supply emergency parcels to people who have fallen between society's cracks. FareShare, a charity that sits at the heart of all this, says it is experiencing "ridiculous growth" in demand, and expects that trend to continue for at least five years; over the last 12 months, it claims to have sent out 8.6m meals.Spend any time around a food bank – and I have, in Inverness and Liverpool – and it quickly becomes clear that their core constituency is based around two groups of people: refugees who have either recently arrived in the UK or opted to go underground; and people who have suddenly had their benefits stopped. Thanks to the increasingly cruel regime that now applies to benefits – which, we now know, David Cameron wants to make yet crueller – the latter seem to be increasing in number by the week, pushed into their predicament by a system that can summarily ruin lives, but offer only the most sluggish remedies by way of appeal. By and large, they remain invisible, but their fate is starting to intrude on the news media: last week, a man set himself alight outside a Birmingham jobcentre, reportedly thanks to a "dispute over benefit payments", an episode that occurred just as the Guardian was revealing rising concerns about suicides among people faced with so-called benefits "sanctions".