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

Saturday, August 25, 2012

week ending Aug 25

Fed's Balance Sheet Shrank in Latest Week - The Fed's asset holdings in the week ended Aug. 22 were $2.828 trillion, down from $2.835 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities fell to $1.637 trillion from $1.646 trillion in the previous week. The central bank's holdings of mortgage-backed securities edged up to $859.31 billion from $854.16 billion a week ago. Thursday's report showed total borrowing from the Fed's discount lending window was $2.85 billion on Wednesday, down from $3.61 billion a week earlier. Commercial banks borrowed $9 million from the discount window, down from $16 million in the previous week. U.S. government securities held in custody on behalf of foreign official accounts totaled $3.565 trillion, compared with $3.553 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts was $2.867 trillion, an increase from $2.860 trillion a week earlier. Holdings of federal agency securities rose to $698.39 billion from $693.03 billion in the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--August 23, 2012

Fed Watch: Self-Fulfilling Prophecies -  Is the Federal Reserve doing enough? Joe Gagnon says no: For more than two years, the Fed has dragged its feet and resisted the obvious need for more aggressive action... ...A large majority of the committee projects [pdf] that inflation will be below target over the next two and a half years. If they assign any weight to their employment objective, they should be willing to accept inflation at least modestly above target in order to get a better outcome on employment. The willingness to accept the current state of affairs suggests that fear of the 1970's remains alive and well on Constitution Ave. The risks of inflation simply outweigh the expected benefits of additional easing, at least from the point of view of Federal Reserve Chairman Ben Bernanke. Earlier this spring, Brad DeLong made an insightful observation about the real parallels with the 1970s: The Federal Reserve of today does not take effective steps to reduce unemployment because it thinks any risk of sustained inflation above 2%/year is unacceptable. The Federal Reserve of the 1970s did not take effective steps to control inflation because it thought sustained unemployment above 7% was unacceptable.  The Fed is really making the same mistake as they did in the 1970s. Not so says David Altig, who does not see so much of a conflict between the Fed's objective and the actual outcomes:. But if you are willing to accept that employment growth remains on a pace of 150,000 jobs per month—and I see no clear evidence to the contrary—it is not at all obvious that the pace of the recovery is inconsistent with the FOMC's view of achieving its dual mandate...Mark Thoma replies: It sounds as though the Fed has given up -- we've done all that we can, there's nothing more we can do, so we won't even try -- and we're not about to risk even the tiniest bit of inflation to find out if we are wrong...

Fed’s Lockhart: There Are Risks In Asking Too Much Of Monetary Policy -- A key U.S. central bank official worried Tuesday that monetary policy stimulus could be aimed at problems beyond its reach, in comments that acknowledged the continued challenges facing the U.S. economy. “There is a risk to monetary policy being employed too aggressively and without effect to address economic problems that can be resolved only by fiscal reforms that involve making tough choices about the allocation of public resources,” Federal Reserve Bank of Atlanta President Dennis Lockhart said in prepared remarks. “Monetary policy can exert a powerful positive influence on an economy, but as [U.S. Federal Reserve] Chairman [Ben] Bernanke has pointed out, monetary policy is not a panacea,” Mr. Lockhart said.

Lockhart’s Outlook Suggests QE3 Isn’t A Done Deal - A key Federal Reserve official on Tuesday suggested the case for more central bank easing is not the slam dunk so many in the markets now believe. In a speech, Federal Reserve Bank of Atlanta President Dennis Lockhart told a hometown audience that the current stance of monetary policy is “appropriate” to prevailing economic conditions. But he also said “there is a risk to monetary policy being employed too aggressively and without effect to address economic problems” that would be better sorted out by other parts of the government. The voting member of the interest rate-setting Federal Open Market Committee is closely watched because he is considered by many central bankers to have views aligning closely with the FOMC’s consensus outlook. So when an official–who had in recent remarks signaled a growing openness to additional central bank stimulus–flags the risk of the Fed doing too much, markets take notice. Mr. Lockhart also described himself as “undecided” as to what will happen when policymakers next meet in September. And having signaled the uncertain nature of the next meeting, Lockhart placed himself in the company of the core of Fed officials, most of whom have been open to further action without signalling it’s imminent. Only a few officials have definitively come out signaling a preference for easing or doing nothing at all. Mr. Lockhart’s comments appear to suggest more Fed stimulus in the guise of balance sheet-expanding bond purchases “would not fundamentally alter the growth trajectory in this current recovery,”

Fed Watch: Chances of QE3 Diminishing - I have made the case that neither the doves nor the hawks that are important for the course of monetary policy. It is the center that is the key, and that center needs to be pulled in one direction or the other by Federal Reserve Chairman Ben Bernanke. If the 2Q12 slowdown proved to be temporary, I doubt Bernanke is inclined to pursue more QE in the absence of clear financial market disruption. And with that in mind, although economic performance continues to be no better than lackluster, recent data has dispelled the worst fears that we are heading into recession. This combined with stable financial markets argues against additional easing in September. If the center is the key, we need to see where the center is moving. This should provide some insight into Bernanke's leanings as well. On July 13, Atlanta Federal Reserve President Dennis Lockhart said: my support for the current stance of policy rests on a forecast that sees a step-up of output and employment growth by year-end and into 2013. If the economy continues on the track indicated by the most recent incoming data and information, that forecast will become untenable, as will the policy premises underlying it. So, as I said at the outset, this is a challenging juncture for policymaking. The data since that time has shifted Lockhart's views, with likely no small part of that change due to the employment report. Today:  There is a risk to monetary policy being employed too aggressively and without effect to address economic problems that can be resolved only by fiscal reforms that involve making tough choices about the allocation of public resources. Monetary policy can exert a powerful positive influence on an economy, but as Chairman Bernanke has pointed out, monetary policy is not a panacea. It is not that Lockhart believes the economy is surging forward. It is muddling along. But muddling along at a rate that does not justify additional easing. Nor is it clear that such easing would be effective as the remaining problems are beyond the scope of monetary policy.

Many at Fed Ready to Act if Growth Doesn’t Pick Up - Many Federal Reserve officials at their most recent policy meeting pushed for further actions to support the economy if the recovery failed to strengthen over the summer, an official account released on Wednesday showed.  “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” according to the minutes of the meeting, which ended Aug. 1. After that meeting, the Fed issued a statement that included stronger language to signal its commitment to helping the recovery. The minutes revealed that the committee had carefully chosen to say it “will provide additional accommodation as needed.” In June, it used softer phrasing, saying that the committee “is prepared to take further action as appropriate.” At the time, economists and analysts noted the change as a sign that the bank was more likely to act. The next chance for the Fed’s policy-making committee to introduce measures is in September. The committee is to meet Sept. 12-13, and Ben S. Bernanke, the chairman, is also scheduled to hold a news conference.

Fed Signals Readiness to Ease Without U.S. Growth Pickup - Federal Reserve policy makers signaled readiness to boost record stimulus unless they are convinced the economy is poised to rebound. Recent signs of strength may not be enough to satisfy them. Sponsored Links Many members of the policy-setting Federal Open Market Committee said further action would probably be needed “fairly soon” without evidence of “substantial and sustainable” improvement in the recovery, according to minutes of the July 31-Aug. 1 meeting released yesterday in Washington. Attention now turns to Fed Chairman Ben S. Bernanke’s Aug. 31 speech in Jackson Hole, Wyoming, where he may clarify his thinking on the need for stimulus in view of recent reports showing gains in retail sales and housing. Many participants at the Fed’s meeting said a new large- scale asset-purchase program “could provide additional support for the economic recovery,” according to the minutes. Policy makers said in a statement after the meeting that they will step up record stimulus if needed to spur growth and cut a jobless rate stuck above 8 percent since February 2009.

Further easing ‘warranted soon’, Fed says - The US Federal Reserve is set to ease policy unless there is a sharp change in economic data after the minutes of its August meeting revealed a strong consensus for action.  “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” say the minutes of the rate-setting Federal Open Market Committee  That is an unusually clear statement of the FOMC’s views about future action and sets a tough condition for it to change course and keep policy on hold. Some better recent data – notably stronger retail sales and the creation of 163,000 jobs in July – had begun to raise doubts about whether the economy might improve enough to stay the Fed’s hand. Payrolls data for August will be released shortly before the Fed’s September meeting, but even if jobs growth is better, it is unlikely to amount to “a substantial and sustainable strengthening” in the pace of recovery. In another indication that the FOMC is ready to act, it discussed a range of tools with which to ease monetary policy further, including a possible third round of quantitative easing. Under QE3, the Fed would buy more long-term assets.

FOMC Minutes: Discussion of policy tools the FOMC "might employ" - Here is a key sentence:  "Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery" From the Fed: Minutes of the Federal Open Market Committee, July 31-August 1, 2012. Excerpt:  Participants discussed a number of policy tools that the Committee might employ if it decided to provide additional monetary accommodation to support a stronger economic recovery in a context of price stability. One of the policy options discussed was an extension of the period over which the Committee expected to maintain its target range for the federal funds rate at 0 to 1/4 percent. It was noted that such an extension might be particularly effective if done in conjunction with a statement indicating that a highly accommodative stance of monetary policy was likely to be maintained even as the recovery progressed. Given the uncertainty attending the economic outlook, a few participants questioned whether the conditionality of the forward guidance was sufficiently clear, and they suggested that the Committee should consider replacing the calendar date with guidance that was linked more directly to the economic factors that the Committee would consider in deciding to raise its target for the federal funds rate, or omit the forward guidance language entirely.Participants also exchanged views on the likely benefits and costs of a new large-scale asset purchase program. Many participants expected that such a program could provide additional support for the economic recovery both by putting downward pressure on longer-term interest rates and by contributing to easier financial conditions more broadly.

Economists React: Fed ‘Is Itching’ to Take More Action - Economists and others weigh in on the minutes from the latest Federal Reserve meeting. –With the exception of one member, the Minutes underscored the willingness among FOMC voters to engage in another round of [large-scale asset purchases], with the report stating that “many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.” This reference is key as it reinforces our long-standing belief that the burden of proof has remained on the data to prove that further policy easing will not be required.–If there was any doubt about how close the FOMC is to easing, the minutes to the most recent meeting should dispel those concerns. Many members suggested that additional easing would be warranted unless a “substantial and sustainable” pickup in economic activity materialized. And how many took the other side? According to the minutes, one member said additional accommodation would not improve the outlook.  –The FOMC is once again itching to ease. I was surprised that they were able to resist the urge at this meeting, but the minutes made clear that they took a pass for two reasons. First, after having adopted a second round of Twist in June and hyping that as a major move, the FOMC couldn’t very well come back 6 weeks later and do something else and claim that was big too. In the FOMC’s words, “more time was seen as necessary to evaluate the effects of that decision.” Second, and more importantly, as laid out above, they were revving up to do something in September. I would be shocked if the next FOMC meeting came and went without something.

Fed to Deliver More Stimulus "Fairly Soon"; How Much Stimulus Does It Take? - Analysts poring over the July 31 - August 1, 2012 Fed Minutes quickly honed in on the following paragraph. The Committee had provided additional accommodation at its previous meeting by announcing the continuation of the maturity extension program through the end of the year, and more time was seen as necessary to evaluate the effects of that decision. Nonetheless, many members expected that at the end of 2014, the unemployment rate would still be well above their estimates of its longer-term normal rate and that inflation would be at or below the Committee's longer-run objective of 2 percent. A number of them indicated that additional accommodation could help foster a more rapid improvement in labor market conditions in an environment in which price pressures were likely to be subdued. Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery. What's the Definition of Many? There are 12 voting members on the FOMC. Is "many" three, four, or seven? I think the wording of the Fed minutes was purposely vague, hoping to get a "bang for no buck".

Minutes minutiae and open(-ended) questions - There was a seemingly minor item in the FOMC minutes released yesterday that didn’t get much attention but that, naturally, interested us quite a bit. The participants noted that the Fed staff had presented an analysis showing “substantial capacity for additional purchases without disrupting market functioning”. But the staff part of the minutes offered no details of this analysis. We’d sure love to see it. Not that we question its findings, whatever they were. It’s because we remain curious to get some details about exactly what Bernanke meant when he said that further easing shouldn’t be undertaken lightly because it would pose a risk to “market functioning” and “financial stability”. This is something we tackled in previous posts (try here and here) suggesting some possibilities, and the NYT’s Binyamin Appelbaum took a good look here. But we’re still not sure.

Markets Push Expectations for First Fed Rate Increase Out Past 2014 - Interest-rate futures extended gains Thursday as traders continued to push out the timing of the Federal Reserve‘s first policy-rate increase. After details from the last Fed meeting were released midday Wednesday, traders have become more comfortable with the notion that the central bank’s next move will be to prolong its low-rate intentions. Rate strategists at Bank of America Merrill Lynch see a “strong” likelihood the Fed will push out that guidance to late 2015 from its current late 2014 timetable.

Fed Watch: It's All About the Data - The minutes of the July 31 - August 1 FOMC meeting are out. In my opinion, they reiterated the importance of the data flow in assessing the Fed's next move. The money quote was: Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.  At first blush, this can be taken to indicate that easing is imminent, as early as September, in direct contradiction to what I wrote yesterday. The key, however, is how have conditions changed since the last meeting? The next line in the FOMC minutes is: Several members noted the benefits of accumulating further information that could help clarify the contours of the outlook for economic activity and inflation as well as the need for further policy action. Recall that as we headed into this meeting, the data had turned particularly weak. The pace of job growth had fallen dramatically from the start of the year, retail sales were flattening out, and GDP growth had slowed to 1.5%.  Since then, the data have turned upward, much more consistent with the Fed's medium-term forecast. The July employment report was stronger, retail sales picked up, and overall growth is looking stronger, with Goldman Sachs' GDP tracking estimate rising to 2.3% for the third quarter I think the better data influenced Atlanta Federal Reserve President Dennis Lockhart to shift his language away from his dovish July comments. In short, I would argue that the data since the last FOMC meeting has in fact pointed toward an improvement in the pace of the recovery, which I think will pull the middle ground back from the brink of additional asset purchases.

Bullard Says Modest Growth Would Keep Fed on Hold -- Continued modest growth in the U.S., in the range of 2% for the balance of the year, should be enough keep Federal Reserve policymakers on hold and as data continue to show signs of improvement, St. Louis Federal Reserve Bank President James Bullard said Thursday. Mr. Bullard, in an interview on CNBC, played down a belief by some in the marketplace that minutes released Wednesday from the Fed suggest the central bank is inclined to act to stimulate the economy. Those minutes, said Mr. Bullard, are “a bit stale,” and that he doesn’t believe U.S. data now warrant a “gigantic” policy response by the Fed. The probability of further stimulus from the Fed is “not as high” as expectations seen this summer in the financial markets, he said. Still, he said he might support a more modest response if data turn soft, and that the central bank has that option on the table. In response to U.S. initial jobless claims data, released Thursday and which showed a rise of 4,000 to 372,000, Mr. Bullard said he doesn’t get concerned unless the indicator rises about 400,000. Mr. Bullard added that the Fed is intentionally vague about the timing of any possible easing. He also expressed concern that the Fed in unintentionally facilitating a build up in debt, and that more quantitative easing would make the central bank’s exit from that build up more difficult.

Fed Watch: Dueling Fed Presidents -- For those of us tracking the odds of QE3 in September, two regional Fed presidents - both non-voting participants - offered opposite views today. Neither was terribly surprising. Chicago Federal Reserve President Charles Evans reiterated his support for additional easing. Via Reuters: "The (July) employment data was a little better than expected," said Evans, one of the Fed's most dovish policymakers and who has led the most recent calls for active easing of monetary policy "It is still not nearly good enough," he added. "We need 300,000 to 400,000 (new jobs) a month to get to where we should be."... ...Evans reiterated that he thought current economic conditions already warranted action, adding that this was the third successive summer slowdown seen in the United States, and that as the Fed had acted to boost activity in the previous two downturns, there was every reason to be prepared to act this time. Of course, Evans has been pushing this story for awhile, to no avail so far. I think that had he been a voting member, he would have dissented at the last three FOMC meetings. On the other side of the coin is St. Louis Federal Reserve President James Bullard. Again, via Reuters: "I do think that the minutes are a bit stale because we have some data since then that has been somewhat stronger," Bullard, who will be a voting member of the policy-setting committee next year, said in an interview. This is similar to the concern I mentioned yesterday. To what extent have the FOMC minutes been overtaken by events, particularly better US data? Bullard further downplayed the tone of the minutes: "The tone of the discussions, for me anyway, was 'gosh things are not as good as we thought and it if continues to decelerate here, we're going to have to do something'," he said.

Bernanke letter to Issa: Scope for more easing -- In a letter to House Oversight Chairman Darrell Issa written Wednesday and released Friday, Federal Reserve Chairman Ben Bernanke said there is scope for further action by the Federal Reserve, language largely borrowed from the most recent minutes of the July 31-Aug. 1 meeting. He said the impact of Operation Twist is still working its way through the economy but said policy must be set in light of a forecast of future performance, responding to a question on whether it's premature to take further action

Bernanke Letter Defends Fed Actions - Federal Reserve Chairman Ben Bernanke, in a letter responding to questions posed by U.S. Rep. Darrell Issa (R., Calif.), chairman of the House oversight committee, defended actions the Fed has taken to support the economy and said there is room for the Fed to do more.  "There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery," Mr. Bernanke wrote in a letter dated Aug. 22, a copy of which was obtained by The Wall Street Journal.  The Fed's "Operation Twist" program—buying long-term Treasury bonds and selling short-term securities—is still "working its way through the economic system," Mr. Bernanke said. The program was first launched in September 2011 and in June 2012 was extended through the end of this year. Asked by Mr. Issa if it were premature to consider additional monetary moves, Mr. Bernanke said that "because monetary policy actions operate with a lag," the Fed must make policy "in light of a forecast of the future performance of the economy."  The Fed chairman also said that the Fed's bond-buying of recent years has "helped to promote a stronger recovery than otherwise would have occurred, and to forestall the possibility of a slide into deflation…by putting downward pressure on longer-term interest rates and contributing to broader easing in financial conditions."

Video: Hilsenrath on Bernanke’s Defense of Fed Actions - Federal Reserve Chairman Ben Bernanke, in a letter responding to questions posed by Republican Rep. Darrell Issa, chairman of the House Oversight Committee, defended actions the Fed has taken to support the economy and said there is room for the Fed to do more. Jon Hilsenrath has details on The News Hub.

Further Evidence on the Fed's Superpower Status - I have made the case many times that the Federal Reserve is a monetary superpower. The Fed has this power because it manages the world's main reserve currency and many emerging markets are formally or informally pegged to dollar. As a result, its monetary policy gets exported to much of the emerging world. The ECB and Bank of Japan are also influenced by the Fed's decisions because they are careful not to let their currencies becomes too expensive relative to these dollar-pegged currencies and the dollar itself.  U.S. monetary policy, consequently, gets exported to the Eurozone and Japan as well.    This understanding helps explains why there was a global liquidity glut during housing boom period and suggests that some of the "global saving glut" was simply a recycling of loose U.S. monetary policy.  It also implies that the Fed could now do a lot of good for both the U.S. and Eurozone economies if were to adopt something like a NGDP level target.  Based on this view, the global economy sorely needs the Fed to wake up from its slumber. Fed Chairman Ben Bernanke admitted as much in one of his classroom lectures earlier this year.1  Chris Crowe and I developed this monetary superpower hypothesis in a paper that is now in my newly published book. In a new paper, Colin Gray has gone even further by formally motivating this hypothesis in a rational expectations model.  He also has provided more robust empirical evidence for it. 

Paper: Foreign Banks Were Biggest TAF Borrowers - Foreign banks dominated a key Federal Reserve bank lending program that ran from 2007 to 2010, a paper released Monday said. At issue in the paper written by Northwestern University’s Efraim Benmelech is the Fed’s now shuttered lending tool called the Term Auction Facility. The mechanism lent directly to deposit taking banks and was created to circumvent many financial institutions’ reluctance to borrow from the central bank’s traditional source of emergency lending, the Discount Window. The research was published by the National Bureau of Economic Research. Lending via the TAF was substantial and at its peak represented the largest category on the Fed’s expanding balance sheet. It functioned by auctioning money for a fixed term, in transactions collaterized by the range of securities also available to be used at the Discount Window. Borrowing peaked at around $500 billion in early 2009 and steadily trailed off as the worst days of the financial crisis passed. Benmelech said an analysis of Fed data shows foreign banks absorbed 58% of TAF lending, at $2.2 trillion versus the $1.9 trillion borrowed by U.S. banks. Between December 2007 through the majority of 2008–the hottest period of financial distress–the “vast majority” of TAF lending went to foreign and not American banks. The biggest borrower was Barclays, and “out of the ten largest borrowers, five are foreign banks, and out of the fifty largest borrowers, more than thirty are from foreign countries.”

The Fed’s Emergency Liquidity Facilities during the Financial Crisis: The CPFF - (NY Fed) This is the first post in a series that details the steps taken by the Fed in its role as lender of last resort during the 2007-09 financial crisis. At the height of the crisis, financial intermediation activities had virtually collapsed. In response, the Federal Reserve created liquidity facilities authorized under section 13(3) of the Federal Reserve Act, citing “unusual and exigent circumstances.” These facilities provided last-resort lending options in strained markets to prevent stress in the financial sector from spilling over onto real economic activity. In this post, we review the Commercial Paper Funding Facility (CPFF), a crucial program among the special lending facilities.

The Fed’s Emergency Liquidity Facilities during the Financial Crisis: The PDCF - NY Fed - During the height of the 2007-09 financial crisis, intermediation activities across the financial sector collapsed. In response, the Federal Reserve invoked section 13(3) of the Federal Reserve Act, citing “unusual and exigent circumstances,” to authorize the creation of a series of emergency lending facilities. These liquidity facilities provided last-resort-lending options to qualified borrowers in several strained markets in order to prevent the distress on Wall Street from spilling over onto Main Street. In an earlier post, we discussed the commercial paper funding facility. In this post, we review the Primary Dealer Credit Facility (PDCF), a program that represents the Fed’s first lending facility to nondepository financial institutions since the Great Depression.

Romney Offers Lukewarm Support for Fed Audit -- Mitt Romney offered a chilly endorsement of the idea of auditing the Federal Reserve Monday. Speaking at a campaign event in New Hampshire, Mr. Romney said he was for an audit, but he added that he didn’t want to sacrifice the Fed’s independence or hand over control of the central bank to Congress in the process. The qualification puts him closer to the Fed’s own position on subjecting itself to outside scrutiny. “The Federal Reserve should be accountable and we should see what they’re doing,” Mr. Romney said when asked at an event in Goffston, N.H., whether the Fed should be audited. He said yes to the question on audits but later added, “I don’t want to have Congress run the Fed, by the way…I want to keep it independent. There are very few groups that I would not want to give the keys to, one of them is Congress.” The House voted in late July, in a 327-98 vote, to subject the Fed’s monetary policy decisions to scrutiny from the Government Accountability Office, or GAO, a congressional watchdog. The Fed’s financial statements are already reviewed by an outside audit firm before publication in its annual report. The Government Accountability Office also audits the Fed’s financials. The GAO doesn’t evaluate its monetary policy decisions or the deliberations behind those decisions. The bill introduced by longtime Fed critic Rep. Ron Paul (R., Texas) would eliminate that exemption for the Fed’s closed-door discussions of monetary policy.

Romney Reiterates He Would Replace Bernanke - Mitt Romney said Thursday that he would replace Federal Reserve Chairman Ben Bernanke, dismissing the advice of a top adviser who suggested this week that the chairman should be considered for a third term. The presumptive Republican nominee told the Fox Business Network that as president, he would want to install someone new in the Federal Reserve post. Mr. Bernanke’s term ends in January 2014. On Tuesday, Glenn Hubbard, a top economic adviser to Mr. Romney, told Reuters TV that Mr. Bernanke should “get every consideration” to stay on at the Federal Reserve, calling the chairman a “model technocrat” and saying that he deserves a pat on the back. Many of Mr. Bernanke’s acquaintances believe he wouldn’t want a third term. Mr. Romney said he appreciates the counsel of Mr. Hubbard and others but reiterated his plans to replace Mr. Bernanke. He declined to say whether Mr. Hubbard, whom he called a wonderful economic adviser, might be a candidate for the job.  In the interview, Mr. Romney offered few specifics about his plans going forward to address the fiscal cliff and to implement tax reform. The president should work with Congress and “make sure we do not have a cliff,” Mr. Romney said of the automatic tax increases and spending cuts set to take effect at the end of the year. Watch the latest video at

Should the Fed Risk Inflation to Spur Growth? - Room for Debate - NYTimes. - The specter of runaway inflation has haunted many economists since the 1970s. Even as, by one measure, inflation was at 0 percent for the past two months, some have warned that more action by the Federal Reserve to spur growth would lead to price increases.  But should the Fed overcome fears of inflation in order to help the stagnant economy?

  • Put Inflation Fears Aside - Mark Thoma - The Fed is far too worried about the potential for inflation, and far too pessimistic about its ability to lower the unemployment rate.
  • Inflation Should Be Feared - John Cochrane - While preventing deflation in the recession was vital, the idea that a deliberate inflation is the key out of our policy-induced doldrums makes no sense.
  • There's Little the Fed Can Do - Edward Harrison - With the federal funds rate at zero, the Fed has few effective tools. It's up to Congress to help, but it won't act.

The Cost-Benefit Challenge - Atlanta Fed's macroblog - In its latest Room for Debate feature, The New York Times poses the question "Should the Fed Risk Inflation to Spur Growth?" Befitting a balanced panel of blogging experts, Mark Thoma (Economist's View) says "yes," John Cochrane (The Grumpy Economist) says "no," and Edward Harrison (Credit Writedowns) says something like "irrelevant question, it's going to do neither." The whole discussion, naturally, is about differing assessments of the costs and benefits of additional monetary stimulus. Not surprisingly, this was also a theme disclosed in the just released minutes of the July 31–August 1 meeting of the Federal Open Market Committee:Participants also exchanged views on the likely benefits and costs of a new large-scale asset purchase program.   However, others questioned the possible efficacy of such a program under present circumstances, and a couple suggested that the effects on economic activity might be transitory. In reviewing the costs that such a program might entail, some participants expressed concerns about the effects of additional asset purchases on trading conditions in markets related to Treasury securities and agency MBS, but others agreed with the staff's analysis showing substantial capacity for additional purchases without disrupting market functioning. Several worried that additional purchases might alter the process of normalizing the Federal Reserve's balance sheet when the time came to begin removing accommodation. A few participants were concerned that an extended period of accommodation or an additional large-scale asset purchase program could increase the risks to financial stability or lead to a rise in longer-term inflation expectations...

Shhhh… It’s Even Worse Than The Great Depression - In just four short years, our “enlightened” policy-makers have slowed money velocity to depths never seen in the Great DepressionHard to believe, but the guy who made a career out of Monday-morning quarterbacking the Great Depression has already proven himself a bigger idiot than all of his predecessors (and in less than half the time!!).  During the Great Depression, monetary base was expanded in response to slowing economic activity, in other words it was reactive  (here’s a graph)They waited until the forest was ablaze before breaking out the hoses, and for that they’ve been rightly criticized.  Our “proactive”  Fed elected to hose down a forest that wasn’t actually on fire, with gasoline, and the results speak for themselves.  With the IMF recently  lowering its 2012 US GDP growth forecast to 2%, while  the monetary base is expanding at about a 5% clip, know that velocity of money is grinding lower every time you breathe.

The Financial System’s Death Knell? - Under widespread NIRP, pensions, annuities, insurers, banks and ultimately all savers will suffer a slow but steady decline in real wealth over time. Just as ZIRP has stuck around since the early 2000’s, NIRP may be here to stay for many years to come. Looking back at how much widespread damage ZIRP has caused since its introduction back in 2002, it’s hard not to expect that negative interest rates will cause even more harm, and at a faster clip. In our view, NIRP represents the death knell for the financial system as we know it today. There are simply too many working parts of the financial industry that are directly impacted by negative rates, and as long as NIRP persists, they will be helplessly stuck suffering from its ill-effects.

Chicago Fed: Economic Activity Increased in July - According to the Chicago Fed National Activity Index, July economic activity increased from June. The indicator, however, is still negative (meaning below-trend growth), and the data revisions of recent months worsened the 3-month moving average from last month's -0.18 to -0.21. Here are the opening paragraphs from the report: Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to –0.13 in July from –0.34 in June. Three of the four broad categories of indicators that make up the index improved from June, but only the production and income category made a positive contribution in July.  The index's three-month moving average, CFNAI-MA3, decreased slightly from –0.18 in June to –0.21 in July—its fifth consecutive reading below zero. July's CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.  . [Download PDF News Release]  The Chicago Fed's National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed's website. The first chart below shows the recent behavior of the index since 2007. The red dots show the indicator itself, which is quite noisy, together with the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of the actual trend for coincident economic activity.

Chicago Fed: Growth in Economic Activity below trend in July - The Chicago Fed released the national activity index (a composite index of other indicators): Index shows economic activity increased in July Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to –0.13 in July from –0.34 in June. ...  The index’s three-month moving average, CFNAI-MA3, decreased slightly from –0.18 in June to –0.21 in July—its fifth consecutive reading below zero. July’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year. This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.  This suggests growth was below trend in July.

Understanding the CFNAI Components - The Chicago Fed's National Activity Index, which I reported on earlier today, is based on 85 economic indicators drawn from four broad categories of data:

  • Production and Income
  • Employment, Unemployment, and Hours
  • Personal Consumption and Housing
  • Sales, Orders, and Inventories

The complete list is available here in PDF format. A chart overlay of the complete 45-year span of all four categories, even if we use the three-month moving averages, is a bit challenging for visual clarity: So here is a close-up view since 2000:  But a snapshot of the 21st century contains only two recessions, so it's unclear how the individual components have behaved in during the seven recessions since the 1967 starting point for this data series. Here is a set of charts showing each of the four components since 1967. Because of the highly volatile nature of the data, the charts are based on three-month moving averages, a smoothing strategy favored by the Chicago Fed economists:

The (Unfortunately?) Consistent Record of the Recovery: Duy and Thoma Respond - Atlanta Fed's macroblog -- Mark Thoma, always generous in linking and reposting our musings here at macroblog, took a look at my last post and read a sense of helpless resignationDavid Altig of the Atlanta Fed argues that "the majority of FOMC participants don't seem to think that the unemployment rate will improve that quickly, but "it is not at all obvious that the pace of the recovery is inconsistent with the FOMC's view of achieving its dual mandate." It sounds as though the Fed has given up -- we've done all that we can, there's nothing more we can do, so we won't even try -- ...  Tim Duy, whose observations in fact motivated my post, had his own response to my comments:  Altig's calculations make the important assumption that the labor force participation rate holds at 63.7%. This effectively assumes that none of the decline in the labor force participation is cyclical. Instead, it is all structural...  There are really two separate thoughts in these comments. So let me take them in turn, but first recap what I said in the previous post (or at least what I meant to say):

  • Stepping back and looking at the data, I am drawn to the conclusion that U.S. economy looks like it has settled into a pattern of something like 2 percent GDP growth with net job creation somewhere around 150,000 payroll jobs per month.
  • The unemployment projections published in the FOMC participants.' June Summary of Economic Projections (SEP) would, under certain assumptions, be consistent with annual job growth averaging the 150,000 per month pace we have seen over the past year and a half.

Consumer Debt and the Economic Recovery - FRBSF  -A key ingredient of an economic recovery is a pickup in household spending supported by increased consumer debt. As the current economic recovery has struggled to take hold, household debt levels have grown little. Some evidence indicates that households adjusted debt in line with house price movements in their local markets. However, the data show that consumer debt cutbacks were largest among households that defaulted on mortgages or had lower credit scores, suggesting that household borrowing also was restricted by tight aggregate credit supply.

What trash can tell us about the U.S. economy - What fascinating secrets are buried in our garbage? Perhaps an indication of how well the economy is doing. Over at Marketplace, Kai Ryssdal offers up this fascinating graph from economist Michael McDonough. It shows that U.S. GDP growth has long been tightly correlated with the change in carloads of trash that are being shipped off by rail to landfills across the country: In fact, the trash index has had an 82.4 percent statistical correlation with U.S. economic growth since 2001. Few indicators are quite so revealing. As McDonough explains to Marketplace, trash provides a broad-based indicator of economic activity: “It’s holistic because it’s not isolated to a single part of the economy. It’s people throwing things out, it’s buildings being demolished — it’s everything. … I mean, if you’re going to build a new building, there might be a building that’s already there. If you buy a couch, you might be throwing out an old couch. If you go out to McDonald’s and you buy something, you’re going to throw something out.” And that’s worrisome because, as the graph above shows, the garbage indicator (which is gleaned from statistics provided by the American Association of Railroads) appears to have plummeted for the third quarter of 2012. That could be a sign that the U.S. economy is heading for a rough patch, dragged down by the recent slumps in both Europe and China.

Is Ambercrombie & Fitch’s Difficulties in Making Sex Sell an Economic Portent?  - Yves Smith - Since I can’t get worked up enough about the latest Fed minutes (short story: Mr. Market is unhappy because he wants his QE and doesn’t see evidence that it is imminent), it might instead be worth examining something quite curious: that Ambercrombie & Fitch is having trouble making sex sell.  You have to understand what a total fail that is. The advertising industry is largely devoted to using sex, either overtly or covertly, to get consumers to buy stuff. This is most true for products like clothing for target customers under, say, 50, cosmetics, and accessories. Just flip through the front of a Vanity Fair or a fashion magazine. I avoid them precisely because you get an overload of messages of how cool it would be to be somebody else. For women, that’s a size two woman with pouty lips and often drugged out looking eyes whose life aspiration is to be kept by (and per the subtext of some ads, dominated by) a rich man (as in they are clearly attired in a manner they couldn’t pay for themselves). The message for men is a bit more confused. You now see men treated as sex objects too, starting with those Men’s Health covers. In my youth, hemlines were seen as a leading economic indicator. Recall the miniskirts of the 1960s, versus the dowdy below the knee length of the 1970s? That’s now broken down since women have more latitude regarding attire than they once did. Nevertheless, as Lynn Parramore pointed out in a recent Alternet article, being worried about money is an anti-aphrodisiac. So the real question is whether Ambercrombie & Fitch’s tsuris are company specific, or a sign of how the lousy economy is undermining libido to such a degree that people won’t spend as much as they used to on hopes of getting laid.

Forecasting Economic Activity... Just Slightly - Last week’s update of the Capital Spectator Recession Risk Index (CSRRI)—a simple but revealing diffusion index based on a broad spectrum of economic and financial indicators—suggested that the probability was low that July will mark the start of a new recession. A broad review of recent history can reveal quite a lot about the business cycle, but it’s only a beginning. In an effort to peek ahead by projecting CSRRI's readings for the next several months, modern econometric modeling techniques can help.  In particular, by torturing the data with what’s known as an ARIMA model (short for autoregressive integrated moving average), we can develop a robust benchmark for peering forward. Yes, all the standard caveats apply—forecasting, like playing with matches at a gasoline station, can be dangerous in the wrong hands. But with a bit of adult supervision, predicting can help us to think productively about what may or may not be coming. With that in mind, let’s kick the tires on the possibilities. As a preview, crunching the numbers with a series of ARIMA estimates for each of the 17 indicators in CSRRI, and aggregating the results, implies that recession risk will remain low for August. That’s no guarantee, of course, but it’s one signal (and arguably a robust one) that the slow-growth momentum will roll on for the near term.  Here’s how the latest reading on CSRRI’s indicators stack up via the published data so far:

The End Of U.S. Economic Growth - Are the good times really over for good?  A provocative new paper from economist Robert Gordon, “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds,” makes just that case, or at least questions the assumption “that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely …  the rapid progress made over the past 250 years could well turn out to be a unique episode in human history.” Indeed, as the above chart shows, growth may be headed on a trajectory back to the zero-growth (or super slow growth) era before the Industrial Revolution. Doubling the standard of living took five centuries between 1300 and 1800. Doubling accelerated to one century between 1800 and 1900. Doubling peaked at a mere 28 years between 1929 and 1957 and 31 years between 1957 and 1988. But then doubling is predicted to slow back to a century again between 2007 and 2100 Or to put it another way, per-capita real GDP growth could slow down to a rate of a mere 0.2 percent by 2100. That is roughly what it was for the 400 years before the Industrial Revolution.

America's Future in an Enduring Recession - America's national optimism is so pervasive that not much public thought has yet been given to the possibility that the Great Recession could endure for many years. Even if GDP, the Dow Jones, and other standard economic indicators suggest that the overall economy is healthy once more, labor markets may not recover. Thus, all employment-related indicators could remain low to the end of the decade and beyond, justifying a guess about the social and political effects of an enduring recession.  If the country faces a continuing labor market recession, short- and long-term unemployment are likely to rise. So will underemployment, such as involuntary part-time work and shorter work weeks for full-time workers. Discouraged workers will continue to drop out of the labor market, older ones will head for involuntary retirement, and some young people may not obtain a steady job during the entire period. The total number of labor market victims will rise well above the current official estimate of close to 15 percent of the labor force. And this estimate leaves out other victims of the recession -- people brought down by foreclosures, humongous debt, and lost pensions, as well as poor people driven into more severe poverty.  If the numbers rise sufficiently, the social effects of the enduring recession, which are now still mostly hidden, will become apparent. High levels of depression and other emotional illnesses and related physical ones will multiply, as will family conflict and breakup, interpersonal and criminal violence, and other kinds of self and social destruction. Militant extremists threatening bodily destruction of immigrant and other vulnerable populations may increase in number as well. The medical community and the media are likely to be talking about post-traumatic economic stress disorder. America will be full of very unhappy people.

"Uncertainty" Is Nothing More Than Wall Street Whining - It's time to have an honest talk about "uncertainty" -- the B.S. complaint by Wall Street and corporations that they don't know what's going to happening in Washington; don't, therefore, know what to do; and are sitting on their hands and cash rather than (take your pick) expanding, hiring, investing. Look, for example, at this story by John Melloy at about the latest from David Kostin at Goldman Sachs. In talking about the fiscal cliff, Kostin is quoted as saying, “We believe the uncertainty is greater this year than it was 12 months ago.” Because of that, he urges investors to get out of equities before the fiscal cliff hits, could hit, might be settled, or...well...Kostin/Goldman Sachs doesn't really know, that is, they/it are "uncertain."  As Kostin notes, last August's cliff-hanger fight over the debt ceiling should convince anyone who's watching what's happening now that there's no guarantee a deal will be cut, a rational agreement will be reached or the Democrats and Republicans, House and Senate, and Congress and the White House have the ability to deal with tax, spending, debt and deficit issues in a timely manner. But to bemoan the uncertainty as immobilizing and make it into its own issue is disingenuous if not completely deceitful. It's time to call it what it really is: Wall Street Whining.

Treasury Yields Reverse Directions - With the latest contraction in US equities, Treasury yields have pulled back with a flight (brief so far) to bonds. Today's Freddie Mac survey listed the 30-year fixed-rate mortgage at 3.66, up 17 basis points from its historic low four weeks earlier. As for the Fed's, Operation Twist, here is a snapshot of selected yields and the 30-year fixed mortgage since the inception of program.The 30-year fixed mortgage at current levels no doubt suits the Fed just fine, and the current low yields have certainly reduced the pain of Uncle Sam's interest payments on Treasuries. But, as for loans to small businesses, the Fed strategy is a solution to a non-problem.  Here's a snippet from a recent NFIB Small Business Economic Trends report: Ninety-three (93) percent of all owners reported that all their credit needs were met or that they were not interested in borrowing. Twenty-nine percent reported all credit needs met, seven percent reported that not all of their credit needs were satisfied and 51% said they did not want. Only 3% reported that financing was their top business problem.  The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed's website for the FFR.

On the Specialness of Long Treasuries - When Gary Schilling presented to the Baltimore CFA Society, he made the comment about how much bonds beat stocks by.  His proxy for bonds was 25-year zero coupon bonds.  Invest in those from 1980 to the present, rolling to the new 25-year regularly, and yeah you can beat stocks handily when interest rates fall and continue to fall. Think of what a 25-year zero coupon Treasury means.  The price measures how much you are willing to discount inflation and nonexistence of the US government 25 years from now.  When interest rates fall 3% for a 25-year zero, the value of the bond more than doubles.  Falling almost 12% in yield since the peak, that multiplies the value of the bond more than 16 times, far more than the equity market over a similar period, including dividends.

Bankrupt! No, not the U.S. economy, just the policy discussion about it  - This Week with George Stephanopolous  yesterday was dominated by a panel discussing the deeply silly question of, “Is the U.S. going bankrupt?” It’s a silly question for one because it conflates issues with the federal budget deficit (which the show was entirely about) with the U.S. economy writ large. I know this is news to far too many pundits but the budget deficit and the U.S. economy are not the same thing. And if you look at the broader perspective of the U.S. economy, it’s clear that it’s not “going broke.” On average, the U.S. economy over any long period of time has been (and will be, absent some catastrophe) growing acceptably fast. Unfortunately, very few American households have actually experienced this “average” growth, since incomes at the very top have grown extraordinarily rapidly and absorbed vastly disproportionate shares of income growth in recent decades. And even in its own poorly-defined terms (i.e., the outlook for the federal budget deficit), the show was mostly a bust. For one, nobody reminded the panel or its viewers that the large increase in budget deficits in recent years have been driven entirely by the Great Recession (and its aftermath) and the explicitly temporary policy responses passed in its wake. This is important to know. In 2006 and 2007—even after the Bush tax cuts, wars fought with no dedicated funding and the passage of a deeply-inefficient Medicare drug program that also had no funding source—budget deficits averaged around 1.5 percent of total GDP, levels that no economist would argue are evidence of a crisis.

U.S. 2012 budget deficit $1.1 trillion: CBO -- The U.S. government will run a budget deficit of $1.1 trillion in fiscal 2012, or 7.3% of gross domestic product, the Congressional Budget Office estimated in a new report on Wednesday. The new deficit estimate is slightly lower than the agency's March estimate of $1.2 trillion. The nonpartisan CBO predicts that the U.S. economy will grow at a 2.1% clip in 2012, but fall by 0.5% between the fourth quarter of 2012 and the fourth quarter of 2013 if scheduled tax increases and spending cuts take effect in January. Under that "fiscal cliff," the U.S. would experience a recession, with U.S. unemployment jumping to about 9% in the second half of 2013 from its current 8.3%, CBO said. Previously, the CBO said growth would be 0.5% in 2013 under the fiscal cliff.

America’s Deficit Attention Disorder - In the United States, as Republican deficit hawks tell the story, “America is broke. We must cut government spending on social programs we cannot afford. And we must lower taxes on Wall Street job creators so they can invest to get the economy growing, create new jobs, increase total tax revenues, and eliminate the deficit.” We can only borrow money from each other. The idea that we borrow money from the future is an illusion. Democrats respond, “Yes, we’re pretty broke, but the answer is to raise taxes on Wall Street looters to pay for government spending that primes the economic pump by putting people to work building critical infrastructure and performing essential public services. This puts money in people’s pockets to spend on private sector goods and services and is our best hope to grow the economy.” Democrats have the better side of the argument, but both sides have it wrong on two key points.

  • First, both focus on growing GDP, ignoring the reality that under the regime of Wall Street rule, the benefits of GDP growth over the past several decades have gone almost exclusively to the 1 percent—with dire consequences for democracy and the health of the social and natural capital on which true prosperity depends.
  • Second, both focus on financial deficits, which can be resolved with relative ease if we are truly serious about it; and ignore far more dangerous and difficult-to-resolve social and environmental deficits. I call it a case of deficit attention disorder.

CBO warns of significant recession if Congress doesn’t act to avoid fiscal cliff - The nation would be plunged into a significant recession during the first half of next year if Congress fails to avert nearly $500 billion in tax hikes and spending cuts set to hit in January, congressional budget analysts said Wednesday. The massive round of New Year’s belt-tightening — known as the fiscal cliff or Taxmageddon — would disrupt recent economic progress, push the unemployment rate back up to 9.1 percent by the end of 2013 and produce economic conditions “that will probably be considered a recession,” the nonpartisan Congressional Budget Office said. The outlook is considerably darker than the forecast the agency released in January, when the CBO predicted that the fiscal cliff would trigger a mild recession in the first half of 2013 followed by a quick recovery.Since that forecast was issued, Congress has steepened the cliff by extending a temporary payroll tax break and emergency unemployment benefits, which are now also set to expire in January. In addition, CBO analysts have concluded that the underlying economy is weaker than had been predicted. The shock would be felt for years to come, with the unemployment rate stuck above 8 percent through 2014, the agency said. And the effects are likely to be felt well before the fiscal cliff hits, as “businesses’ and consumers’ concern about the scheduled fiscal tightening will lead them to spend more cautiously than they otherwise would have” during the remainder of 2012.

CBO predicts deeper "fiscal cliff" recession in financial year 2013 (Reuters) - Massive spending cuts and tax hikes due next year will cause even worse economic damage than previously thought if Washington fails to come up with a solution, Congress' budget office said on Wednesday. Without Congressional action to avoid a "fiscal cliff," Americans should expect a "significant recession" and the loss of some 2 million jobs, Congressional Budget Office director Doug Elmendorf said in his gloomiest assessment yet. He said the economy is already being "held back" by the mere anticipation of the cliff and the uncertainty surrounding it. "The sooner that uncertainty is eliminated, the better," said Elmendorf. The report could intensify the pressure on Congress and the White House to resolve their differences. But the likelihood of a resolution any time soon, particularly before the November election, is seen as slim. Chances could improve after the election for action during the lame-duck session of Congress, but that's unpredictable as well. Neither Democrats nor Republicans have shown a willingness to back away from fixed positions on either budget cuts or extension of tax cuts originally enacted during the administration of George W. Bush.

CBO Sees Recession Unless Congress Acts - The Congressional Budget Office released its updated budget and economic outlook on Wednesday, likely the last official forecast to come this year ahead of the November elections. Here are some quick takeaways:

  • 1) If Congress doesn’t address the looming spending cuts and tax increases set to kick in next year, the economy will quickly go into recession, averaging a reduction in gross domestic product of 2.9% on an annualized rate in the first half of 2013. If the spending cuts and tax increases are averted, the economy is only expected to grow at an anemic 1.7% next year.
  • 2) If the tax increases and spending cuts aren’t averted, the unemployment rate will rise to 9.1% at end of 2013. If they are avoided, the unemployment rate will fall just slightly, to 8.0% at the end of 2013, according to CBO’s forecasts.
  • 3) CBO projects the deficit in the year that ends Sept. 30, 2012, will be $1.128 trillion, or 7.3% of GDP, slightly less than the $1.211 trillion projected by the White House a few weeks ago.
  • 4) For the next fiscal year, which ends Sept. 30, 2013, if the tax increases and spending cuts go into effect, the deficit will shrink to just $641 billion, the equivalent of 4.0% of GDP. If the spending cuts and tax increases are averted by Congress next year, the deficit is projected to be $1.037 trillion, or 6.5% of GDP. That’s because less tax revenue will come into the government, and higher spending levels will continue.

CBO Expects 2013 "Fiscal Cliff" Recession Because of Automatic Spending Cuts and Tax Hikes - Automatic tax hikes and spending cuts will go into effect in 2013 causing a "fiscal cliff" recession according to the CBO. Massive spending cuts and tax hikes due next year will cause even worse economic damage than previously thought if Washington fails to come up with a solution, Congress' budget referee said on Wednesday. The Congressional Budget Office said failure to avoid the so-called "fiscal cliff" of expiring tax cuts and automatic spending reductions would cause U.S. gross domestic product to shrink 0.5 percent in 2013. Previously, the non-partisan CBO forecast full-year GDP growth of 0.5 percent. The first half of 2013 will be particularly difficult, the CBO said in its mid-year forecast update. Tax hikes and spending cuts will cause GDP to shrink 2.9 percent in the first half, compared with a prediction in May for a 1.9 percent contraction. There will still be a slight bounceback in the second half of 2013, but it will be weaker, with growth of only 1.9 percent, compared with a previous forecast of 2.3 percent growth.

CBO: If nothing changes, we’re in for another recession - Usually the release of Congressional Budget Office economic and budget projections is as dull as that phrase makes it sound. But not these economic and budget projections, released today by the CBO. The main takeaway is that if we go over the fiscal cliff — that is, if we let the Bush tax cuts and payroll tax holiday expire while allowing the automatic budget cuts under last summer’s debt ceiling deal to take effect — we’re going to fall into another recession, with real GDP declining by 0.5 percent in 2013. That’s nowhere near the 3.1 percent decline we saw in 2009, but it’s a far cry from the already anemic 2.4 percent and 1.8 percent growth rates of 2010 and 2011 respectively, and the 1.75 percent average we’re at for 2012 so far. Doing nothing also leads unemployment to rocket up to 9.1 percent, as the graph below shows. The “projected baseline” is what happens if we do nothing, and the “alternative fiscal scenario” is what happens if current policies are extended. Note that in 2015, in both scenarios, unemployment is still way above its pre-recession level. We’re just not growing fast enough to get back to normal:

The CBO Outlines How The Fiscal Cliff Would Send The US Into A Recession  (Infographic) -  Investors are wary of the fiscal cliff – the over $600 billion in tax and spending provisions that are set to change unless Congress acts – that would be a major drag on the U.S. economy. Now, the Congressional Budget Office is out with a new infographic on their baseline scenario which projects a recession for the U.S. economy in 2013. And an alternative fiscal scenario in which lawmakers extend tax cuts and prevent spending reductions. The infographic also looks at the impact this would have on the federal deficit, economic growth, and the implications this would have on future policy decisions.

‘Fiscal Cliff’ Has Many Perils - The U.S. economy likely would slide into a “significant recession” next year if Congress doesn’t avert tax increases and spending cuts set to begin in January, the Congressional Budget Office said Wednesday. But if they are postponed for at least a year, the federal government faces the prospect of a fifth straight year with a budget deficit greater than $1 trillion, the CBO said…The CBO painted two starkly different scenarios for next year, depending on which path lawmakers take. Under current law, the Bush-era tax cuts are scheduled to expire at year-end, raising tax rates on more than 100 million Americans. These tax increases, combined with roughly $100 billion in required spending cuts on military and other government programs, would shrink projected deficits from $1.13 trillion in the fiscal year ending Sept. 30 to $641 billion for the year that ends Sept. 30, 2013. That would reduce the deficit from roughly 7.3% of the nation’s gross domestic product to roughly 4% of GDP, the CBO said, the largest one-year reduction since 1969. But as a consequence, the economy would contract at a projected annualized rate of 2.9% in the first half of 2013, and by 0.5% over the entire year. The unemployment rate would rise to 9.1% at the end of the year from just above 8% now, the CBO estimated. If Congress were to postpone the tax increases and spending cuts, the deficit would shrink just slightly in the next fiscal year, to $1.037 trillion, or 6.5% of GDP. The unemployment rate at the end of 2013 would be 8%, a difference of roughly two million jobs from the other scenario, CBO said. The economy would grow by 1.7% over the year

Gloom or Doom from CBO -- The Congressional Budget Office’s summer budget update charts two undesirable paths for the nation’s economic and fiscal health next year. Call them Gloom and Doom. Gloom is what happens if the tax increases and government spending cuts scheduled to arrive in January actually occur. CBO says that would drive the economy back into recession in 2013 and push unemployment above 9 percent. But there’s some sunshine too: the federal deficit would drop sharply—by nearly half in 2013 alone—and would be under 1 percent of GDP by 2016 (dark blue bars in graph). The federal debt would decline from 73 percent of GDP this year to 59 percent in 2022. And the economy would resume growing in a year or so. Long-term gain for short term pain. Doom occurs if Congress and the president agree to extend all of the expiring tax cuts and postpone the scheduled spending cuts for the next ten years. Short-term extension would prevent renewed economic collapse—the economy would maintain its slow growth and unemployment would continue its slow downward trend. But deficits would fall much less (the sum of the bars in the graph) and government debt would climb to nearly 90 percent of GDP in 2022.

Fiscal Cliff Risk In Perspective - The Congressional Budget Office warned yesterday that there's a recession coming next year if Congress doesn't act to soften the blow from the scheduled expiration of tax cuts and automatic budget cuts. The so-called fiscal cliff, in short, is moving closer. What can you do with this information? Nothing. Unless, of course, you're prone to making decisions today based on forecasts six months or more into the future. But history suggests you should think twice before jumping off the forecasting cliff, regardless of who's dispensing the prediction. Don't misunderstand: the scheduled expiration of tax cuts and automatic budget cuts represent real, albeit potential, threats to the economy. But so is the economic blowback via higher oil prices if Israel attacks Iran in a pre-emptive strike; or if Syria's civil war worsens and turns into a regional war. In fact, anyone can come up with a laundry list of plausible scenarios, both here and abroad, that would probably push the economy into recession. The fiscal cliff scenario is one of them, and it's a risk that we should take seriously, but not too seriously... at least not yet. The problem is that there are always risks lurking that could derail economic growth. But it's also true that recessions rarely arrive as bolts out of the blue with no advance warning in the numbers. The idea that you could go to sleep on Monday, when all is fine, and wake up on Tuesday and find the economy contracting is the macro equivalent of worrying about hobgoblins under your bed.

The ‘Fiscal Cliff’ in Charts - The Congressional Budget Office released its latest budgetary outlook, noting that the U.S. economy could slip into recession if Congress fails to act on the “fiscal cliff.” The report also included the following charts: Charts from CBO's August 2012 Budget and Economic Outlook from Congressional Budget Office  Among the highlights:

  • Slide 3: Shows deficit forecasts under several different scenarios.
  • Slide 9: Shows actual and projected growth for the U.S. and its leading trading partners.
  • Slide 12: Shows projected unemployment rates under both a scenario where the fiscal cliff is avoided (8% at end 2013) and if the spending cuts and tax rates are allowed to occur (9.1% at end 2013).
  • Slide 13: Shows actual and projected GDP compared to potential. According to the chart the U.S. still has a long way to go to get back to potential.

Latest CBO Budget Projections Underline Need for Goldilocks Budget Deal - The latest analysis from the Congressional Budget Office (CBO) shows a sharp divergence between  a baseline projection and an alternative fiscal scenario for the U.S. economy. To put it in language a child could understand, the baseline projection is too cold while the alternative scenario is too hot. It is clear from the report that we need a Goldilocks budget deal to get things just right. The CBO’s baseline assumes no changes in current law. Paradoxically, no change in the law would mean big changes in policy. That is because we are facing the so-called fiscal cliff–a set of measures that include  allowing the Bush tax cuts to expire as scheduled, making sharp cuts in Medicare payments to doctors, ending extended unemployment benefits, and allowing mandatory cuts to defense and nondefense spending to come into force. The CBO projects that those changes would shrink the budget deficit to about 4.0 percent of GDP, compared with a projected 7.3 percent for 2012. The deficit would decline to 1 percent of GDP by 2016. The alternative fiscal scenario assumes that Congress will make the kinds of changes to current law that it has regularly made in the past. Tax cuts will not be allowed to expire (except for the temporary reduction in payroll taxes); Medicare cuts will be postponed (the so-called “docfix”); and mandatory spending cuts will be cancelled or postponed. Under those projections, the deficit for 2013 would be 6.5 percent of GDP, never falling below 4.2 percent of GDP. The alternative fiscal scenario—business as usual—is “too hot” in the sense that it keeps the deficit and debt on unsustainable paths.

As the Fiscal Cliff Nears, Will Anyone Swerve? - While Congress is on recess and both major political parties are gearing up for their conventions, the Congressional Budget Office on Wednesday issued a stark reminder of the danger posed to the U.S. economy by the set of budget cuts and tax increases set to go into effect after the new year. These budget measures, popularly known as the “fiscal cliff,” will cut more than $500 billion from the deficit, money that would come directly from a convalescent economy, most likely forcing the U.S. back into recession, according to CBO forecasts. As it stands, on January 1 the following cuts and increases will go into effect:

  • The expiration of the Bush tax cuts for every tax bracket;
  • The expiration of a 2% cut in payroll taxes enacted by President Obama and Congress in 2010 and extended again earlier this year; and
  • Spending cuts to Medicare, defense and other discretionary spending as part of Congress’s and the Obama Administration’s deal to raise the debt ceiling last summer.

With federal debt held by the public reaching 73 percent of GDP, and yearly deficits recently topping $1 trillion, it’s almost unanimously agreed upon that the U.S. has a long-term debt problem. But most economists and policy analysts believe that the debt situation isn’t bad enough that it can’t be addressed in a more gradual and careful manner than current law allows.

The Fiscal Cliff Is Not as Steep As It Seems - Dean Baker - The Congressional Budget Office came out with its mid-year budget update. The update included a warning that if the Bush tax cut and the payroll tax cut are both allowed to expire and the cuts from last year's budget agreement take effect, the economy will sink into recession in 2013 and the unemployment rate will rise to 9.0 percent. The NYT immediately picked up on this warning in a news article on the new projections. It is important to realize that this projection for a shrinking economy and rising unemployment rate is based on the higher taxes and lower spending remaining in place for a whole year. The failure of Congress and the president to agree to a package by January 1, 2013, by itself, would not lead to this sort of contraction. If Congress and the president were to work an agreement somewhere in the month of January or even February, it would mean that people would be paying higher taxes for a short period of time. This reduction in disposable income, coupled with the cuts in spending scheduled to take place, would dampen growth. However, if an agreement reached early in the year restored part of the tax cuts and reversed some of the spending cuts, then the impact on the economy would be very limited.  The point is that January 1, 2013 is not a drop dead date. While it would be desirable to have an agreement on tax and spending issues before this date, and in fact as soon as possible, there will be little harm if negotiations continue into next year, as long as a deal is reached before we get too far into the new year.

Hitchcock Could Teach Congress About Dangers of ‘Fiscal Cliff’ - The CBO report projected that current fiscal laws would cause gross domestic product to contract at a severe annual rate of 2.9% in the first half of 2013 and the jobless rate would rise back above 9%. Despite the dire warnings, politicians in Washington have made little effort to avoid the cliff. Dithering policy makers seem to think their decisions can be made in isolation. They could use some lessons from director Alfred Hitchcock on human reaction to suspense. In Hitchcock’s view, if a movie audience watches an innocent-looking scene and a bomb under a chair goes off, the reaction is immediate surprise. But if the audience knows the bomb is under the chair and timed to go off in five minutes, they will watch the scene holding their breath, fingernails digging into their armrests. For economic players, the bomb under the chair is the billions in coming tax increases and spending cuts. The economic equivalent of holding their breath is to table buying and hiring decisions. As the CBO report says about the second half of 2012, “businesses’ and consumers’ concern about the scheduled fiscal tightening will lead them to spend more cautiously than they would otherwise.”

Nobody Cares About the Deficit - Paul Krugman  -- Dave Weigel makes a good point: there’s a huge inconsistency between the way Republicans are responding to the new CBO report on the fiscal cliff and everything they’ve been saying for the past two years. What the CBO says is that allowing the Bush tax cuts to expire and the sequester to kick in would hit the economy hard next year — because it would lead to a sharp fall in the deficit while the economy is still depressed. It’s pure Keynesianism, the same point that all of us anti-austerians have been making for years. If the right was at all consistent, it would be denouncing the CBO report for failing to take into account the impact of a lower deficit in deterring the invisible bond vigilantes and encouraging the confidence fairy. But whaddya know: suddenly the deficit is not an issue. Of course, it has been obvious all along that the whole deficit-hawk pose was insincere, that it was all about using the deficit as a club with which to smash the social safety net. But now we have a graphic demonstration.

Even if ‘Fiscal Cliff’ Gets Resolved, Outlook Is Anemic - The most distressing aspect of the Congressional Budget Office’s outlook for 2013 isn’t the fact that the U.S. economy will fall into recession if the ‘fiscal cliff’ of looming tax increases and spending cuts becomes reality. Various worthies, including Federal Reserve Chairman Ben Bernanke, already have told us there would be another recession if, as current law dictates, tax rates that have been in effect since the Bush administration ratchet up and are joined by about $100 billion in federal government spending reductions. No, the most distressing aspect of the report by the nonpartisan CBO, released Wednesday, is that it forecasts that even if we don’t dive off the “fiscal cliff” — and optimists believe even a divided Congress won’t allow that to happen — we still will experience anemic growth in 2013. CBO, in an “alternative fiscal scenario” took a stab at what the economy would look like if all the “fiscal cliff’ stuff doesn’t happen: Tax rates would generally stay the same, the $100 billion in cuts in defense and elsewhere would be sidesteppedFor one thing, of course, the budget deficit remains around $1 trillion in 2013, well above what would be the 2013 overspend if the economically constricting tax hikes and budget cuts kicked in.  More important, in the CBO’s view, avoiding the “fiscal cliff” results in real gross domestic product growth of only 1.7% between the fourth quarter of 2012 and the fourth quarter of 2013. And the unemployment rate would stand at an unhealthy 8% or so when 2013 comes to a close.

CBO: Fiscal Cliff Would Cause Recession, But Punting Fiscal Cliff Would Lead to Stagnant Economy, Too -- The interesting part of the CBO report, what most policymakers will focus on, concerns the baseline scenario for the next fiscal year (begins September 2012), under the policies of the fiscal cliff. If Congress does nothing, the deficit will shrink almost in half, to $641 billion from $1.1 trillion. However, this would also lead to a recession. If all the tax increases and spending cuts kicked in, GDP would decline by 0.5% through 2013, according to CBO, if nothing else happens, and unemployment would rise back to 9% by the end of next year. CBO also sketches out an alternative fiscal scenario, where almost everything in the fiscal cliff gets pushed out: This is actually a bit more damning. CBO is saying that, even if Congress avoids the fiscal cliff, the deficit would shrink by about $100 billion year-over-year, GDP would remain below the historical trend of 2.5%, and unemployment wouldn’t budge from today’s numbers. That’s if fiscal policy DOESN’T contract to a major degree. The whole thing suggests a fairly phlegmatic economy that needs but is not likely to get more government spending to boost aggregate demand.

Fiscal cliff scenarios - the Credit Suisse version - Back in May we discussed the impact of several possible "fiscal cliff" scenarios on the US GDP growth (the GDP drag). Those projections were developed by Goldman. We now have a similar analysis performed by Credit Suisse. CS broke down the various possibilities into four likelihood "baskets":

Basket 1 – The CBO’s “other spending and revenue changes” and the Obamacare tax increases. In our judgment, both highly seem likely to phase in. This would impart the smallest amount of fiscal drag.
Basket 2 – The payroll tax cut, which is losing support and doesn’t appear likely to be extended, but there is still some chance it will. Basket 1+2 is our “most likely” scenario.
Basket 3 – This includes the upper income tax hikes, budget sequester, and expiration of emergency unemployment insurance benefits and the “other expiring provisions” (including the bonus depreciation allowance). These are “on the table” but not part of our baseline. 
Basket 4 - The expiration of tax rates below the $200K/$250K threshold, failure to patch the AMT, and failure to enact the “Doc Fix.” In our view, all are highly unlikely.

Then each scenario would represent a combination of these baskets as a cumulative effect. And here is the impact of these scenarios on nominal US GDP.

Q&A: What Is the Fiscal Cliff? - Here are some answers to common questions about the “fiscal cliff” facing the U.S. economy. This is a revised version of the original post published earlier this year.

  • What is the “fiscal cliff”? The fiscal cliff is the combination of large spending cuts and tax increases that are scheduled to be automatically enacted at the start of 2013. Bush-era income-tax cuts will expire for tens of millions of Americans, and billions of dollars of spending cuts will take effect because Congress couldn’t reach a deal last year to reduce the deficit by at least $1.2 trillion over 10 years. Democrats want a combination of spending cuts and tax increases, while Republicans want to cut spending, but don’t want to raise taxes. Both want to avoid the fiscal cliff, because it forces severe cuts, particularly in defense.
  • What taxes and spending are affected? A payroll-tax holiday ends, which means a tax increase for workers of as much as 2% of wages. Income-tax rates revert to pre-George W. Bush levels, rising not only for the rich but for nearly all taxpayers. Across-the-board cuts in domestic and, particularly, defense spending are triggered.
  • What is the immediate cost to the economy? The sudden rise in taxes and cuts in spending would have a harsh impact. In all, according to an analysis by J.P. Morgan economist Michael Feroli, $280 billion would be pulled out of the economy by the sunsetting of the Bush tax cuts; $125 million from the expiration of the Obama payroll-tax holiday; $40 million from the expiration of emergency unemployment benefits; and $98 billion from Budget Control Act spending cuts. In all, the tax increases and spending cuts make up about 3.5% of GDP, with the Bush tax cuts making up about half of that, according to J.P. Morgan.

Full Recovery by 2018, says the CBO - Twice each year, the Congressional Budget Office publishes a "Budget and Economic Outlook" for the next 10 years. The just-released August version1 offers a timeline for the eventual recovery of the U.S. economy to its pre-recession path of economic growth, and some worries about the budget fights that are scheduled to erupt later this year.  On the subject of eventual full recovery, the CBO regularly estimates the "potential GDP" of the U.S. economy: that is, what the U.S. economy would produce if unemployment was down to a steady-state level of about 5.5% and steady growth was occurring. During recessions, of course, the economy produces below its potential GDP. During booms (like the end of the dot-com period in the early 2000s and the top of the housing price bubble in about 2005-2006), it's possible for an economy to produce more than its potential GDP, but only for a short-term and unsustainable period. Here's the CBO graph comparing actual and potential GDP since 2000. The shallowness of how much the recession in 2001 caused actual GDP to fall below potential, compared to the depth and length of how much actual GDP has fallen below potential in the aftermath of the Great Recession, is especially striking. 

Federal receipts and expenditures - I was interested to take a look at the trends in receipts and expenditures of the U.S. federal government over the last 40 years. The top panel in the graph below plots federal expenditures as a percentage of GDP since 1972. There were a few years when this fell below 20%, but it has averaged about 22% over this whole period and for the last 3 years has been above 25%.  Federal receipts, in the bottom panel, have rarely been above 20% of GDP, and historically averaged about 19%. The difference (22 - 19 = 3) is the 3% deficit the U.S. has maintained on average over this period. For the last 3 years, receipts have been below 17%. With expenditures in 2011 3.2% higher as a percent of GDP than average, and receipts as a percent of GDP 2.4% lower than average, we had a federal deficit in 2011 equal to 8.6% of GDP, or 5.6% higher than average. Next consider breaking spending down into its 3 main components: defense, entitlements, and other. The graph below plots each of these as a percent of GDP, with horizontal lines indicating the historical averages. U.S. defense spending at the moment is right at its historical average of 4.7% of GDP, though at one point it had been as low as 3.0%, a value reached in 2000. Spending on categories other than defense and entitlements is also close to its historical average. From a long-term perspective, all the growth in spending has come from entitlements.

America's Demographic Cliff: The Real Issue In The Coming, And All Future Presidential Elections -- In four months the debate over America's Fiscal cliff will come to a crescendo, and if Goldman is correct (and in this case it likely is), it will probably be resolved in some sort of compromise, but not before the market swoons in a replica of the August 2011 pre- and post-debt ceiling fiasco: after all politicians only act when they (and their more influential, read richer, voters and lobbyists) see one or two 0's in their 401(k)s get chopped off. But while the Fiscal cliff is unlikely to be a key point of contention far past December, another cliff is only starting to be appreciated, let alone priced in: America's Demographic cliff, which in a decade or two will put Japan's ongoing demographic crunch to shame, and with barely 2 US workers for every retired person in 2035, we can see why both presidential candidates are doing their darnedest to skirt around the key issue that is at stake not only now, be every day hence.

Report: Romney Economic Plan Hurts Red States, Helps Wealthy Urbanites, While Obama Boosts Rural Areas - (see maps) According to a new analysis of tax and census data, Mitt Romney’s economic plan is heavily tilted towards big cities, but tough on the rural areas that comprise the GOP’s base. Barack Obama’s economic proposals lean the other way, offering little to wealthy urbanites, while delivering broad tax savings to the middle- and lower-class Americans spread across the South and Midwest. The findings, released Thursday by a start-up called Politify, present a novel way to view the diverging economic promises in this recession election. In a race dominated by the rhetoric of deficits and the 99 percent, Politify says it offers unassailable data and objective answers for voters wondering how the candidates’ plans will affect their wallet, their neighborhood, or the whole country. The most dramatic image—which organizers believe will spread quickly online—provides a geographic model of how the candidates’ plans for taxes and benefits will impact individual households. All the data is from the IRS and a US census survey. Nikita Bier, Politify’s founder, says this is the most granular model of campaign policy impact ever created. After he first ran the numbers, Bier recalls that he was “shocked” to see just how severely the results favored Obama’s plan:

Five Things Government Does Better Than You Do: When Wisconsin Congressman Paul Ryan and other hard-line conservatives talk about cutting the government’s budget, their primary rationale is that individuals can make better decisions with their own money than the government can. As Ryan himself said, “We put our trust in people, not in government. Our budget incorporates subsidiarity by returning power to individuals, to families and to communities.” It sounds reasonable—of course we want individuals to have power, and of course we want communities to take care of their neediest members. And since conservatives have done a fine job of portraying the government as full of heartless, inept bureaucrats, allowing people to make their own decisions sounds better than the alternative. The conservative approach to government stems from a basic tenet of free-market economics: that people always act rationally to maximize their own benefits, and that from this rises a general state of well-being for society as a whole. But this isn’t always true. One of the hottest academic disciplines to arise in the last few decades is behavioral economics, which explores the ways in which people behave irrationally. In addition, easy-predictable problems with certain markets prevent us from achieving the best outcomes. These two facts have consequences for how we should think about government in certain instances. There are many ways in which the government can make better decisions with our money than we can, and there are many ways that the Ryan budget would make society worse off by getting rid of government programs. Here are five.

False piety and the Medicare debate - Deficit hawks are worried that the Medicare debate in the presidential campaign will make it impossible to reach a post-election deal to balance the budget. At the same time, much of the punditry focuses on how mean and nasty this campaign is. Those who are anxious about the deficit should relax. This campaign could actually pave the way for a sensible budget deal. And those who bemoan the rock-’em-sock-’em campaign should stop wringing their hands and get about the business of calling out falsehoods and identifying misleading assertions.On the budget, the fear is that because President Obama is attacking Paul Ryan’s fiscal road map and because Mitt Romney is responding by assailing the Medicare savings in Obama’s Affordable Care Act, Congress will be scared away from reducing the government’s health-care costs. In this view, the campaign will poison the well for future budget talks. Nothing could be further from the truth. The fact is we cannot have honest budget negotiations until we resolve one big question: Will new revenue — yes, higher taxes — be part of a budget deal or not? The election will settle where the country stands on this proposition.

The real Romney-Ryan cuts are to programs for the poor - Ezra Klein - In the next decade, Paul Ryan’s most recent budget keeps the Medicare cuts that President Obama passed as part of the Affordable Care Act, and … that’s pretty much it. The voucher system you’ve heard about? That happens. But it doesn’t happen for 10 years. So, it doesn’t happen until after the hypothetical Romney-Ryan presidency has hypothetically ended its hypothetical second term. As a general rule in politics, if you’ve got two guys from the Republican Party running for president on a platform that says you can’t cut even a dollar from Medicare for current retirees, but they’re saying they’ll pass legislation that will completely remake Medicare in a really unpopular way for the generation of retirees that’ll come after they leave office, you may not want to assume that’s a total lock. But here’s the thing. Ryan says his budget cuts more than $5 trillion in the next decade. Less than a trillion of that is coming from Medicare. Romney says his budget cuts about $7 trillion from the budget over the next decade and not a dollar of that comes from Medicare. And neither Romney nor Ryan want to cut Social Security and both increase spending on defense. If you’re not cutting Medicare or Social Security or defense you’ve already taken more than half of the federal budget off the table. And you know what’s mainly left, the big pot of money you can still cut? Programs for poor people.

Congress Pushes for Weapons Pentagon Didn't Want - The Pentagon, which is facing end-of-year cuts that it says could cripple its ability to fight future wars, may spend billions in coming years on weapons systems and programs it says it doesn't need but are favored by area members of Congress. The Dayton Daily News analyzed proposed defense budgets for 2013 and identified five programs that Ohio's congressional delegation is fighting for although Pentagon officials have called them unnecessary and unaffordable. Critics say these big-ticket items are earmarks in disguise, using the Department of Defense budget for economic stimulus. They also point out that the multi-million dollar contracts are awarded to major campaign contributors. Defenders of these programs say the Pentagon isn't flawless, and sometimes doesn't budget for things it needs. Plus, without the money, lawmakers say Ohio could lose thousands of jobs.

The Census Zombie Eats Another Brain - Krugman Back in 2010 all the usual suspects were going on about how there had been a huge increase in federal employment under Obama. This was funny, for two reasons: it was all about temporary hiring for the Census, and the meme continued to be part of what everyone on the right knew, just knew, to be true long after the Census blip was over and federal employment was back below its level when Obama took office. Eventually, however, the thing vanished from the discussion, and I thought we’d hear no more about it. But guess who didn’t get the memo? For what it’s worth, in this case I don’t think we’re looking at a blatant attempt to mislead; I suspect that we’re just looking at raw ignorance.

Federal Spending Is VERY Popular: Episode 1 - As I said back in June, in spite of all of the discussion about the need to cut federal spending, the gospel truth is that it's VERY popular and cutting anything -- including the always denigrated foreign aid and the constantly belittled waste, fraud and abuse -- will be much, much harder than anyone ever admits. So here's the first installment in what I suspect will be a continuing series about just how difficult that's going to be. Note in this Roll Call story by Jonathan Strong about Pentagon cuts that will affect Pennsylvania that no one is saying the spending shouldn't be reduced because it will hurt U.S. defense capabilities, hollow out of the military or do any of the other praise-the-Lord-and-pass-the-ammunition reasons that are typically used to argue against cuts. As Strong points out, the opposition to the military reductions is all about how it will hurt the local economy. In other words, we don't care if it reduces the deficit, the spending reductions will hurt me so they have to be stopped.

Federal Spending Is VERY Popular: Episode 3: Medical Research - According to this Roll Call story by Kate Ackley, a substantial, bipartisan majority of voters want more taxpayer money spent on medical research. The money quote is from pollster John Zogby: “In this poll, what I’m struck by are what I call border crossings,” he said. Democrats, Republicans and those in agreement with the Tea Party to Occupy Wall Street found broad areas of agreement on medical research funding by the government, he said.

The reality of trying to shrink government - Larry Summers - There is disagreement over what constituted “normal” levels of spending in the past and, indeed, over what constitutes “spending.” But there is a widespread view in both parties that it is feasible and desirable that in the future the federal government should be no larger as a share of the overall economy than it has been historically. Unfortunately, this is unlikely to be achieved. For structural reasons, even preserving the amount of government functions that predated the financial crisis will require substantial increases in the share of the U.S. economy devoted to the public sector. First, demographic change will greatly expand federal outlays unless politicians decide to degrade the level of protection traditionally provided to the elderly. Between Social Security, Medicare, Medicaid and some smaller programs about 32 percent of the federal budget, or about 7.7 percent of gross domestic product, is devoted to supporting those over 65. The ratio of this age group to those of working age will rise from 1 for every 4.6 workers to 1 for every 2.7 over the next generation. Second, the accumulation of more debt and a return to normal interest rates will raise the share of federal spending devoted to interest payments. Third, increases in the price of what the federal government buys relative to what the private sector buys will inevitably raise the cost of state involvement in the economy.

The Progressive Budget Alternative, by Paul Krugman: I’ve been remiss in not calling attention to the budget proposal from the Congressional Progressive Caucus. The CPC plan essentially balances the budget through higher taxes and defense cuts, plus some tougher bargaining by Medicare (and a public option to reduce the costs of the Affordable Care Act). The proposed tax hikes would fall mainly on higher incomes, although not just on the top 2%: super-brackets for very high incomes, elimination of deductions, taxation of capital income as ordinary income, and — the part that would be most controversial — raising the cap on payroll taxes. None of this is economically outlandish. Marginal tax rates on high incomes would rise substantially — enough to make even liberal economists slightly uncomfortable — but the historical evidence suggests that the incentive effects wouldn’t be too severe. Overall taxes as a share of GDP aren’t given, but they would clearly remain well below European levels. It’s worth pointing out that if you want to balance the budget in 10 years, you pretty much must do it largely by cutting defense and raising taxes; you can’t make huge cuts in the rest of the budget without inflicting extreme pain on millions of Americans. So the CPC plan is actually much more of a real response to the deficit worriers than all the nonsense we’re hearing from the right. What it doesn’t do is address the long-run health cost issue, which is essential looking beyond the next decade. But as a medium-term proposal, it’s quite sensible.

The 10-Year Fiscal Outlook Is a Story About Tax Policy Choices - The Congressional Budget Office released their latest budget and economic outlook today, and although the basic messages are not really new, they do show some new ways of presenting their numbers that help reinforce those basic messages. First, Figure 1-1 above, from page 3 of the report, highlights the difference between deficits under the current-law baseline (the bottom segment of the deficit bars) and deficits under the CBO’s “alternative fiscal scenario” where scheduled spending cuts are bypassed and expiring tax cuts are extended.  What’s clear from this chart is that:

  1. while current law produces economically-sustainable deficits (meaning deficits as a share of GDP that are lower than the growth rate of the economy), the alternative scenario produces hugely unsustainable deficits;
  2. it is choices over tax policy, not spending policy, that account for the bulk of the difference between the two policy scenarios within the 10-year budget window;
  3. by the end of the 10-year budget window, the additional interest payments alone associated with the extra deficit-financed policies under the alternative scenario swamp the entire deficit under the current-law baseline.  (Interest payments swell because: (i) the big difference between the scenarios starts immediately, (ii) interest compounds, and (iii) interest rates rise significantly over the 10-year window.)

CBO: Ending High-Income Tax Cuts Would Save Almost $1 Trillion - The Congressional Budget Office’s (CBO) new report shows that allowing President Bush’s 2001 and 2003 income tax cuts on income over $250,000 to expire on schedule at the end of 2012 would save $823 billion in revenue and $127 billion on interest on the nation’s debt, compared to permanently extending all of the Bush tax cuts.  Overall, this would mean $950 billion in ten-year deficit reduction, a significant step in the direction of fiscal stability.Prior CBO analysis showed the minimal economic risk this would pose in the short-term.  CBO previously concluded that extending only the so-called “middle class” tax cuts on income below $250,000, instead of extending all of the tax cuts, would “be more cost-effective in boosting output and employment in the short run because the higher-income households that would probably spend a smaller fraction of any increase in their after-tax income would receive a smaller share of the reduction in taxes (relative to current law).”

Mitt Romney’s peculiar approach to tax fairness - Mitt Romney in a recent Fortune magazine interview: “I indicated as I announced my tax plan that the key principles included the following. First, that high-income people would continue to pay the same share of the tax burden that they do today.” That’s odd. Sensible debates about tax fairness and tax policy focus on what rate each group should pay, not on what each group’s share of total tax payments (the “tax burden”) should be. High-income people’s share of tax payments is determined by their average tax rate, their share of total pretax income, and the average tax rate among all taxpayers. Policy makers have a lot of control over tax rates. They have some, but far less, influence on the share of pretax income that goes to each group.In the past several decades federal tax rates on the top 1% of Americans have been lowered (Reagan), raised (Bush I and Clinton), then lowered again (Bush II). If all else stayed the same, that would have reduced the top 1%’s share of total tax payments. But this effect has been dwarfed by the large rise in the top 1%’s share of pretax income, which causes their share of total tax payments to increase. Here’s what the numbers looked like in 1979 and 2007, two years at comparable points in the business cycle (data are from the CBO).

Gawker Releases Trove of Records on 21 Romney-Owned Bain Caymans Entities - As a public service, I’m pointing to an important post at Gawker on some Mitt Romney investments that he has until now managed to shield from scrutiny. I hope qualified NC readers will put some of the pieces together and share your conclusions with Gawker as well as with NC readers in comments. This is the overview: Today, we are publishing more than 950 pages of internal audits, financial statements, and private investor letters for 21 cryptically named entities in which Romney had invested—at minimum—more than $10 million as of 2011 (that number is based on the low end of ranges he has disclosed—the true number is almost certainly significantly higher). Almost all of them are affiliated with Bain Capital, the secretive private equity firm Romney co-founded in 1984 and ran until his departure in 1999 (or 2002, depending on whom you ask). Many of them are offshore funds based in the Cayman Islands. Together, they reveal the mind-numbing, maze-like, and deeply opaque complexity with which Romney has handled his wealth, the exotic tax-avoidance schemes available only to the preposterously wealthy that benefit him, the unlikely (for a right-wing religious Mormon) places that his money has ended up, and the deeply hypocritical distance between his own criticisms of Obama’s fiscal approach and his money managers’ embrace of those same policies. They also show that some of the investments that Romney has always described as part of his retirement package at Bain weren’t made until years after he left the company… The full text of the post is here and the documents, here. Have fun!

Bain’s “Commitment to Transparency” Canard - I would like to point out the utterly misleading nature of the statement issued by Bain Capital in response to the documents’ release. The Bain Capital press release, which was quoted by many news outlets, stated: The unauthorized disclosure of a number of confidential fund financial statements is unfortunate. Our fund financials are routinely prepared by auditors and demonstrate a commitment to transparency with our investors and regulators, and compliance with all laws First, the Bain statement incorrectly states that “Our fund financials are routinely prepared by auditors…” In reality, auditors–especially a big one like PriceWaterhouse Coopers–absolutely refuse to prepare financial statements for any clients in any industry that I am aware of. Instead, for liability reasons, they explicitly confine their activity to auditing the statements prepared by their clients and expressing an opinion about them based on the audit. PwC states its role clearly in its cover letter, on PwC letterhead, accompanying all the Bain financial statements it audited: These financial statements are the responsibility of the General Partner. Our responsibility is to express an opinion on these financial statements based on our audit. PwC is taking pains to clearly disavow a role in preparing the financial statements because PwC knows that any financial statements, despite being audited, may be materially inaccurate. Bain’s statement yesterday, on the other hand, is trying to convince the public that the statements must be accurate because, Bain falsely claims, the auditors prepared them.

Lid Blowing Off Romney Tax Secrecy - Romney previously claimed that his Cayman Island funds had to be located there in order to attract foreign investors, who invested via the Caymans so they would not be subject to U.S. taxes on their earnings, and that he did not reduce his tax bill as a result of his Cayman holdings. The newly released documents confirm that among these 21 funds, two set up a total of five so-called "blocker corporations" which allow U.S. non-profit entities to legally pretend to be foreign (i.e., Cayman) corporations in order to avoid the 35% "unrelated business income tax, which was created to prevent nonprofit groups from undertaking profit-making ventures that compete with taxpaying companies," as the New York Times reports. The still-unanswered question is whether Romney's huge 401-k, valued between $20 million and $102 million on financial disclosure forms, is one of the entities that invested in a blocker corporation, which would then refute Romney's assertion that his Cayman investments had not reduced his tax.A second issue that has been raised is that various Bain entities converted management fees to carried interest (via Ryan Grim).While people know that the carried interest loophole exists and is legal, the issue raised is that private equity firms have come up with a way to make fees that are unarguably management fees subject to ordinary income (35% tax) into capital gains (15% tax)

Fed Sends Taxpayer and Business Money to Banks Via Interest Rate Swaps - Among the many issues that won’t be discussed in the coming elections is the burden on taxpayers and businesses created by interest rate swaps. It isn’t that the issue is a secret, all kinds of people write about it. Here’s Matt Taibbi writing in April 2010; and here’s a 2010 white paper from the SEIU showing the impact on several states and local governments. The problem is that interest rate swaps are at the confluence of bank power and governmental weakness. And, of course, the too big to fail banks suck a ton of money out of the real economy using swaps. One source of information is the OCC’s Quarterly Report on Bank Trading and Derivatives Activities. According to the report for the fourth quarter of 2011, trading revenues from cash positions and derivatives at insured commercial banks were $25.8 billion, up by $3.3 billion over 2010. Bank holding company trading revenues were $51.8 billion, down from $61 billion in 2010.  Banks are notoriously close-mouthed about their swaps business, so when JPMorgan Chase provided some data on revenues, it was regarded as a surprise. The numbers are amazing: trading revenue at JPMorgan Chase was about $20.2 billion for 2011. Trading revenue from interest rate swaps was approximately $1.44 billion. But that’s not all the money they make on derivatives.

The Rich Are Less Charitable Than the Middle Class: Study - A new study shows that middle-class Americans give a larger share of their income to charity than the wealthy. The study, conducted by the Chronicle of Philanthropy using tax-deduction data from the Internal Revenue Service, showed that households earning between $50,000 and $75,000 year give an average of 7.6 percent of their discretionary income to charity. That compares to 4.2 percent for people who make $100,000 or more. In some of the wealthiest neighborhoods, with a large share of people making $200,000 or more a year, the average giving rate was 2.8 percent. Religion is the big factor here. “Regions of the country that are deeply religious are more generous than those that are not,” the Chronicle said.  Red states give much more than blue states. The eight states where residents gave the highest share of their income to charity went for John McCain in 2008, according to the Chronicle. The seven-lowest ranking states supported Barack Obama.The study will no doubt prompt controversy from both sides of the political aisle, with liberals saying the wealthy don’t give (and therefore should be taxed more), while conservatives will say they give more than left-leaning states.

Top U.S. tax expert in savage attack on transfer pricing rules - Lee Sheppard of Tax Analysts is one of the world's top experts in international tax, as well as being a soccer expert, a formidable intellect, and quite a character. She has just issued one of the most devastating critiques ever made of the prevailing system for taxing multinational corporations, in a nine-page document entitled Is Transfer Pricing Worth Salvaging? Tax Analysts have kindly given us permission to republish it. What is the tax problem?, Sheppard asks, in her (fairly U.S.-focused) article. "In a nutshell, developments in law and planning have enabled U.S. multinationals to deprive the United States of tax revenue, as though it were any other source country." And the main way they do this is through transfer pricing. The next section is so good it is worth quoting at some length, even if it does require a (very) little advance knowledge of the issues. Our emphasis added: "Defenders describe it as ‘‘the arm’s-length principle’’ — as though attaining perfection in pricing between fictitious entities would resolve the question of who should pay how much tax where. Transfer pricing is the leading edge of what is wrong with international taxation. It raises all of the other issues.

 Spooked by Glass-Steagall’s Ghost? -- America’s long-controversial Glass-Steagall Act of 1933, which separated deposit-taking commercial banks from securities-trading investment banks in the United States, is back in the news. This separation long symbolized America’s unusual history of bank regulation – probably the most unusual in the developed world.   American banking regulation had long kept US banks small and local (unable to branch across state lines), unlike their European and Japanese equivalents, while limiting their operational capacity (by barring banks from mixing commercial and investment banking). These limits on American banking persisted until the 1990’s, when Congress repealed most of this regulatory structure. Now the idea of a new Glass-Steagall is back, and not only in the US. Sandy Weill, Citigroup’s onetime CEO, said last month that allowing commercial and investment banks to merge was a mistake. This is the same Weill who had lobbied to gut Glass-Steagall in order to build today’s Citigroup, which put insurance companies, securities dealers, and traditional deposit-taking banks all under one roof. In fact, he engineered an agreement to merge Citi with a large insurer – illegal at the time under Glass-Steagall – and then pushed for the law’s repeal, so that the merger could proceed. A similar debate has been underway in Britain. A commission headed by Sir John Vickers, the Oxford economist and former Bank of England chief economist, wants banks’ retail operations to be “ring-fenced” from riskier trading and investment banking businesses.

Eric Holder’s Justice Department: Too Much Revolving Door; Too Little Justice - Given the growing public perception that U.S. Attorney General Eric Holder is unwilling to prosecute the worst miscreants on Wall Street, one would think his former Wall Street powerhouse law firm would be laying low.  On the contrary, Covington and Burling, where Attorney General Holder previously served as partner and former lobbyist for Global Crossing, is bragging about the competitive advantages its close ties to the Justice Department offer its clients.  The company writes as follows under the subheading, “Our Competitive Advantages.”  “Covington is one of the few firms in the world with lawyers who recently held senior positions in both the US Department of Justice (“DOJ”) and UK Serious Fraud Office (“SFO”). Both Eric Holder, the U.S. Attorney General, and Lanny Breuer, the Assistant Attorney General for the Criminal Division (which has principal responsibility in DOJ for enforcing the FCPA [Foreign Corrupt Practices Act] ), were Covington partners before they joined the Obama administration. [Since this paper was penned, Dan Suleiman, who also worked at Covington and Burling, has become the new deputy chief of staff and counselor to Lanny Breuer at the Department of Justice.]  “Two of our partners have recently returned from senior government posts working with Messrs. Holder and Breuer and are uniquely positioned to advise on the U.S. enforcement landscape:

  • Steven Fagell, Co-Chair of the Anti-Corruption Practice Group, served as Deputy Chief of Staff and Counselor to Assistant Attorney General Breuer. Mr. Fagell was integrally involved in the formulation and communication of Criminal Division policy in connection with the FCPA. 
  • James Garland served as Deputy Chief of Staff and Counselor to Attorney General Holder and advised the Attorney General on a range of enforcement issues.

The unrepentant and unreformed bankers - Money laundering. Price fixing. Bid rigging. Securities fraud. Talking about the mob? No, unfortunately. Wall Street. These days, the business sections of newspapers read like rap sheets. GE Capital, JPMorgan Chase, UBS, Wells Fargo and Bank of America tied to a bid-rigging scheme to bilk cities and towns out of interest earnings. ING Direct, HSBC and Standard Chartered Bank facing charges of money laundering. Barclays caught manipulating a key interest rate, costing savers and investors dearly, with a raft of other big banks also under investigation. Not to speak of the unprecedented wrongdoing that precipitated the financial crisis of 2008. Evidence gathered by the Financial Crisis Inquiry Commission clearly demonstrated that the financial crisis was avoidable and due, in no small part, to recklessness and ethical breaches on Wall Street. Yet, it's clear that the unrepentant and the unreformed are still all too present within our banking system. A June survey of 500 senior financial services executives in the United States and Britain turned up stunning results. Some 24 percent said that they believed that financial services professionals may need to engage in illegal or unethical conduct to succeed, 26 percent said that they had observed or had firsthand knowledge of wrongdoing in the workplace, and 16 percent said they would engage in insider trading if they could get away with it.

Sad But True: Corporate Crime Does Pay - Almost daily we read about another apparently stiff financial penalty meted out for corporate malfeasance. This year corporations are on track to pay as much as $8 billion to resolve charges of defrauding the government, a record sum, according to the Department of Justice.  Last year big business paid the SEC $2.8 billion to settle disputes.    Sounds like an awful lot of money. And it is, for you and me.  But is it a lot of money for corporate lawbreakers?  The best way to determine that is to see whether the penalties have deterred them from further wrongdoing.      The empirical evidence argues they don’t. A 2011 New York Times analysis [3] of enforcement actions during the last 15 years found at least 51 cases in which 19 Wall Street firms had broken antifraud laws they had agreed never to breach.  Goldman Sachs, Morgan Stanley, JPMorgan Chase and Bank of America, among others, have settled fraud cases by stipulating they would never again violate an antifraud law, only to do so again and again and again.  Bank of America’s securities unit has agreed four times since 2005 not to violate a major antifraud statute, and another four times not to violate a separate law. Merrill Lynch, which Bank of America acquired in 2008, has separately agreed not to violate the same two statutes seven times since 1999.

Final Volcker rule expected by year-end - Treasury official - U.S. regulators plan to unveil a final version of the Volcker rule by the year-end, a Treasury official said, and banks will have to start complying with some parts of the rule soon after that. The Volcker rule, which limits big banks' ability to place market bets with their own money, is one of the most hotly debated elements of the 2010 Dodd-Frank financial reform law. The Treasury Department is coordinating a group of five regulators writing the Volcker rule, whose implementation is now a month past its initial deadline. The delay stems from differences in how regulators want the rule to be implemented, as well as an overwhelming volume of feedback from industry groups and the public, said the official, speaking on Monday on the condition of anonymity. The official would not elaborate on the differences in the regulators' views.

Wall Street Sets the Rules for Regulators - The current dynamics of the regulatory overhaul is a depressing development. While we're normally quick to criticize regulators (and for good reason), we also have to admit that monetary deprivation of such agencies by Republicans, as evidenced by budget cuts for the Commodity Futures Trading Commission, transfer some blame to anti-regulatory forces in Congress. Regulators currently entrusted with the task of policing Wall Street are facing a well-funded, well-connected and politically shrewd beast. In essence, regulators are not writing the rules for Wall Street. Wall Street is writing the rules for regulators. A few months ago, for instance, the CFTC was given the power to oversee derivatives and futures markets. At the same time, according to Reuters, Congress plans to cut $25 million (a 12% decrease from a year before) from the CFTC's budget in a time when it desperately needs more resources to effectively accomplish its new responsibilities. It is remarkable, although not surprising, the most restrictive language in the new appropriations bill, which set the CFTC's budget, came from Wall Street lobbyists. What's more amusing is to hear the authors of the bill vie for fair and effective regulation of the swap market, offering suggestions on how that sort of regulation should be achieved and then cutting funding that would undermine the implementation of those very suggestions. This is schizophrenic!

Why Does Wall Street Always Win? - Simon Johnson - After a long summer of high-profile scandals – JPMorgan Chase trading, Barclays rate-fixing, HSBC money-laundering and more – the debate about the financial sector is becoming livelier. Why has it has become so excessively dominated by relatively few very large companies? What damage can it do to the rest of us? What reasonable policy changes could bring global megabanks more nearly under control? And why is this unlikely to happen? If any of these questions interest you – or keep you awake at night – you should take another look at the last time we had this debate at the national level, and reflect on the work of Ted Kaufman, the former Democratic senator from Delaware, who was far ahead of almost everyone in recognizing the problem and thinking about what to do. Senator Kaufman represented Delaware in 2009 and 2010, and Jeff Connaughton – his chief of staff – has a new book that puts you in the room: “The Payoff: Why Wall Street Always Wins,” Mr. Kaufman was unique in ways that should give us pause. He was appointed to his seat (after Joe Biden became vice president) and immediately said he wouldn’t run in the next election. So he never had to raise any money to reach the Senate or stay there longer. His experience gives us a glimpse of what we would get if we could really remove the money from politics.

“Mother” of All Bank Frauds Shocks and Awes Regulators - Many wonder why Federal regulatory precincts are so quiet several weeks following discovery that the London Interbank Offered Rate (LIBOR), a key interest rate determining charges to and earnings by American borrowers, lenders, pension funds, retirees and consumers had been rigged for years to benefit a handful of the world’s largest banks. Experts estimate damages to the economy can be measured in multiples of trillions of dollars. Predictably, a relatively minor fine of $450 million – chump change in Jamie Dimon’s world – was levied by US and British regulators upon Barclays Bank, the most obvious of several likely perps in history’s biggest bank heist. Fortunately, the vigilant attorneys general of New York and Connecticut are issuing subpoenas to JP Morgan Chase and Citigroup, among other banks too big to regulate federally. And, private class action lawsuits charging violations of securities and anti-trust laws have been launched. But, where are the expressions of horror and outrage, and other hot air emissions from the people’s elected representatives in Washington?

Reagan-appointed judge: Deregulation advocates made a fundamental mistake -Richard Posner, a well-respected federal judge, said Thursday on Current TV that he no longer believed the financial industry should not be regulated. “I was an advocate of the deregulation movement and I made — along with other, a lot of smarter people — made a fundamental mistake, which is that deregulation works fine in industries which do not pervade the economy in their consequences,” he said. “The financial industry undergirds the entire economy and if it is made riskier by deregulation and collapses and widespread bankrupties the entire economy freezes because it runs on credit.” In light of the 2008 financial crisis, however, Posner doesn’t think every industry should be deregulated. He said it was wrong to assume that government intervention always failed and that the free market always corrected itself. Posner has recently acknowledged being an outlier in the Republican Party. In July, he told NPR that he has “become less conservative since the Republican Party started becoming goofy.”

The Problem of Committing Against Bailouts - Economist Robert Stein had a recent post at the American Enterprise Institute about ending Too Big To Fail. His major advice, which frames the rest of his argument, is that "Ideally, the federal government would end Too Big To Fail (TBTF) by credibly pre-committing not to bailout large financial firms when they run into trouble." There's some other problems with the piece [1], but I want to run with this statement. The implication is that the Dodd-Frank financial reform act doesn't do such things. Let's take a second and document what Dodd-Frank does in terms of pre-committing to avoid bailing out a large financial firm, and where the problems with such a process could really occur.  Dodd-Frank strips out previous language from the Federal Reserve Act that was used to execute the (unpopular) emergency lending facilities (Sec. 1101).  Going further it writes "The Board shall establish procedures to prohibit borrowing from programs and facilities by borrowers that are insolvent."Provided we want the Federal Reserve to act as a lender-of-last-resort, this is a proper way to do it.  Now let's look at what is required to activate an orderly-liquidation action, or what is often called resolution authority. This is the FDIC taking over a failing financial institution and winding it down. If you've seen movies where two people need to turn their key to activate a nuclear weapon, then you'll understand that there's a three-key mechanism for resolution authority (Sec. 203).

Goldman, Still Playing in Bayou’s Mud - Mr. Israel, it turned out, wasn’t managing a hedge fund at all. He was running a Ponzi scheme — a small-time version of the Madoff racket that, at that very moment, was still going strong. Mr. Israel, who said he’d become addicted to painkillers, was later sentenced to 20 years in prison — then two more for jumping bail, faking his suicide and going on the lam.   Now, as Mr. Israel sits in jail, this tale has taken yet another twist. It came late last month from, of all places, Goldman Sachs.  Goldman had executed and cleared trades for Bayou, and there were questions about how well Goldman supervised the account. On July 30, Goldman paid $20.7 million to roughly 200 Bayou investors in the United States. Those investors, unsecured creditors in a separate Bayou bankruptcy case, were awarded that amount by a securities arbitration panel in June 2010.  It was one of the few bright spots of the Bayou story, but it didn’t last. The same day Goldman paid the investors, the firm filed its own creditor’s claim for the same amount — $20.7 million — in the Bayou bankruptcy. Goldman contended that paying the award had made it, too, a Bayou creditor. If the court agrees, the investors who won their arbitration case — also unsecured creditors of Bayou — will be out of luck.

Bill Black: Unless we Fix the Perverse Incentives in our Economy, We are Rolling the Dice Every Day - Elites have not been prosecuted for the fraud they committed: None of the financial elites, who drove the crisis through massive fraud, has been pursued criminally. It was accounting fraud, which mathematically guarantees wealth to executives, and drives the companies into the ground (or to bailouts, in our case), that led us to crisis. Bank Living Wills are useless: Bank Living Wills are absolutely useless and everybody knows they are useless. Nobody can predict how the next crisis will evolve and what markets will be like in those circumstances. The idea that we would be able to use these living wills is ridiculous. Bank Living Wills do nothing to address Too Big To Fail banks: Bank Living Wills are being sold as a response to TBTF, which is even more ridiculous. We made the largest entities bigger even though they were already too big to jail and too big to manage. The obvious response to having systemically dangerous institutions is to shrink the TBTF banks.

Standard Chartered Fought the Lawsky and the Lawsky Won - Benjamin Lawsky, New York’s top state banking regulator, shook up the financial world by squeezing a record settlement out of Standard Chartered Plc (STAN) over allegations that it laundered money for Iran. Let’s get this much straight about him, too: He’s no rogue cop. He’s a loyal soldier.  Look at the section on the New York State Department of Financial Services website that lists the agency’s press releases this year, and you will see a pattern. Most of the headlines start with the name of New York Governor Andrew Cuomo, not Lawsky, the department superintendent who serves at the governor’s pleasure. Within minutes of Lawsky’s disclosure this week that Standard Chartered had agreed to pay a $340 million penalty, Cuomo released his own statement taking much of the credit for the 10-month-old department’s creation last year.

HSBC in Settlement Talks With U.S. Over Money Laundering - HSBC Holdings Plc (HSBA), which is under investigation by U.S. regulators for laundering funds of sanctioned nations including Iran and Sudan, is in talks to settle the matter, two people with knowledge of the case said. The bank, Europe’s largest by market value, made a $700 million provision in July for any U.S. fines after a Senate Committee found it had given terrorists and drug cartels access to the U.S. financial system. That sum might increase, Chief Executive Officer Stuart Gulliver has said. An HSBC settlement regulators and the Manhattan District Attorney were aiming to conclude as early as September may have been slowed when New York’s banking superintendent accused Standard Chartered of laundering $250 billion for Iran. Regulators had been talking with both banks about universal accords when Benjamin Lawsky on Aug. 6 threatened to revoke Standard Chartered’s license. Deals with the London-based banks next month are still possible, said the people, who asked not to be identified because the investigations are confidential.

You Don’t Suppose All These Dictators Have Been Looting with SCB’s and HSBC’s Help? - It happens every time. Around about the time it becomes clear a corrupt Middle Eastern dictator will fall, but before he has actually fallen, the press begins to report on the hunt for the money the dictator looted from his country. There was the “discovery” of Hosni Mubarak’s up-to $70 billion in February 2011. And reports, in March 2011, of the up to $200 billion that Moammar Qaddafi looted. And today, Even as the war in Syria rages and Bashar al-Assad clings to power, the race to find the regime’s vast—and mostly hidden—fortune is already underway. Experts say al-Assad and his associates have amassed as much as $25 billion through investments in banks, state industries and other concessions, and has stashed the money in offshore tax havens and in investments across the Middle East.  It’s just that few people ever want to talk about the looting that goes on–often with the assistance and for the profit of American and/or European banks–while it’s occurring. Which is one of the reasons why the flap over Standard Chartered is so interesting. It revealed that most of the regulators overseeing our sanctions and money-laundering enforcement really wanted SCB to reach a settlement on transactions that SCB now admits represent just a fraction of a percent of the affected transactions. And that’s just the Iranian transactions; it doesn’t include the Libyan transactions that Benjamin Lawsky alluded to in a footnote of the report.

When Wall Street Watchdogs Hunt Whistle-Blowers - In January 1998, Sivere joined JPMorgan as a surveillance analyst in the compliance department of the fixed-income group. In December 1999, Sivere was promoted to vice president and then again to be the “team leader” of electronic-communications compliance. On Sept. 26, 2003, Sivere received his annual review and a rating of 9.63, or “great,” according to the bank’s evaluation scale.  Despite that review and the promotions, things had actually started going off the rails, careerwise, for Sivere earlier that month, when then-New York State Attorney General Eliot Spitzer filed a complaint against Canary Capital Partners LLC, a (now defunct) New Jersey hedge fund and a big client of JPMorgan. The next day, the Securities and Exchange Commission started its own investigation into late trading and asked for documents and e-mails from JPMorgan. Sivere was put in charge of a group of four internal lawyers searching for documents to provide the SEC. Several weeks later, the bank’s litigation department removed the four lawyers from the project, allegedly because they failed to find all the “responsive e-mails” called for in the SEC’s subpoena.  Sivere contests that claim. “I observed that the attorneys had discovered a number of E-mails” that JPMorgan’s litigation department “had not identified,” he wrote in an affidavit.

Try to Contain Your Laughter: The SEC Has Opened a Whistleblower Office -  Pam Martens - If you want a hearty laugh, check out the web page for the SEC’s official whistleblower office.  They’d like us all to know that “Assistance and information from a whistleblower who knows of possible securities law violations can be among the most powerful weapons in the law enforcement arsenal of the Securities and Exchange Commission.”  Really? Let’s take a walk down memory lane at what happened to past whistleblowers...

How Goldman Sachs Created the Food Crisis - Demand and supply certainly matter. But there's another reason why food across the world has become so expensive: Wall Street greed. It took the brilliant minds of Goldman Sachs to realize the simple truth that nothing is more valuable than our daily bread. And where there's value, there's money to be made. In 1991, Goldman bankers, led by their prescient president Gary Cohn, came up with a new kind of investment product, a derivative that tracked 24 raw materials, from precious metals and energy to coffee, cocoa, cattle, corn, hogs, soy, and wheat. They weighted the investment value of each element, blended and commingled the parts into sums, then reduced what had been a complicated collection of real things into a mathematical formula that could be expressed as a single manifestation, to be known henceforth as the Goldman Sachs Commodity Index (GSCI).

Why Are There Still No Bankers In Jail ? - The story below is a great example of why bankers are so hated and why they don’t get it. Even if it is true that history will be kind to TARP (we think the exact opposite will happen), do not even try to make this argument for at least a decade. As we wrote a few weeks ago, bankers’ reputations are somewhere between that of a used car salesman and a drug dealer right now. TARP is so hated it was the catalyst for some of the biggest political movements of our lifetime, namely the Tea Party (they hated bailouts/TARP and blamed the government) and Occupy Wall Street (they hated bailouts/TARP and blamed Wall Street). Given all this, for a banker to say “history will be fairly kind to TARP” redefines the term “tin ear.”

Warren Pollock and Ann Barnhardt On the Increased Risk to Customers In the US Financial System - "The way I read it was that basically you no longer have property rights. If you have your money in any (US) financial institution, you now have no property rights because in a crisis situation a bankruptcy judge now has the right to say that all of this speculation (by the banks and brokers) takes precedence over your savings." This is an enlightening discussion on the precedent set in the Sentinel ponzi scheme case that places customer money in brokerages at risk by destroying the principle of the primacy of the customer money, customer segregated funds.  There is an Orwellian sounding distinction made by the Courts between 'stolen funds' and 'misappropriated funds' that seems to provide the TBTF banks and their cronies a license to loot the financial system with impunity, although it could have been written with Jon Corzine and JPM in mind. Unlike some of the commenters I did not get the connection that the ruling provided approval for brokers to pledge customer funds as collateral for their own speculative loans, but rather it indemnified the lending banks from having to question the source of the funds, even when they could be reasonably expected to know the funds were being taken illegally from customers. 

Don’t Break Up the Big Banks - BANKS aren’t always popular even in the best of times, but the anger of recent years is unprecedented. The anger, while understandable, has fueled the misguided idea that we should break up the nation’s largest banks.  The argument is simple and sound-bite ready: In the years before the crisis, greedy bankers used their political muscle to grow from small, specialized banks into giant, all-purpose financial institutions. This transformation led to the financial crisis because banks became too big to manage and too big to fail. If we break them back up, we will eliminate the risk of future crises.  The problem is that every part of this argument is based on a fallacy.  The first fallacy is that the emergence of large, universal banks — combining commercial banking with investment banking — was an artificial or unnatural development. In 1990, there were 15,000 banks in the United States; this fragmented market meant that banks could not achieve economies of scale or easily serve clients on a national or global level.  A second fallacy is that these large, universal institutions were primarily to blame for the financial crisis. As most serious observers acknowledge, a combination of bad lending and risk management by banks, poor regulation and ill-advised consumer behavior all played a role. A third fallacy is that large financial institutions have become too complex to manage. A company of any size needs robust management and controls to manage complexity.

Quelle Surprise! Former JP Morgan Chairman Offers Dubious Defenses of Big Banks - Ordinarily, it might not seem worth the bother to debunk yet another piece of bank propaganda. However Thursday’s op ed by former JP Morgan Chase chairman William Harrison, “Don’t Break Up the Big Banks,” recites a classic set of time-worn canards. As regulatory compliance expert Michael Crimmins said via e-mail, “It’s sounding desperate that they’re dragging Harrison out of retirement to spout this drivel.”Thus shredding this piece makes for one-stop shopping on this topic.  In classic Ministry of Truth style, Harrison depicts the critics of big banks as logically challenged: The first fallacy is that the emergence of large, universal banks — combining commercial banking with investment banking — was an artificial or unnatural development. In 1990, there were 15,000 banks in the United States; this fragmented market meant that banks could not achieve economies of scale or easily serve clients on a national or global level. Guess what, sport fans? Bigger banks exhibit DISECONOMIES of scale. Every study of banking ever done show that banks have a slightly positive cost curve once a certain size threshold is passed. That means that costs rise as banks get bigger. One study found the break point to be $100 million in assets, most find it to be between $1 and $5 billion in assets; I’ve seen ones that put it at $10 billion. The sort of bank Harrison is defending is vastly above that size level; JP Morgan at year end 2011 had $2.3 trillion in assets.

Profits in G.M.A.C. Bailout to Benefit Financiers, Not U.S - Among the companies that were bailed out by the federal government during the financial crisis, perhaps the most intractable is proving to be the company formerly known as the General Motors Acceptance Corporation. It’s a case study in how bailouts can linger and profits, when they do come, flow not to the government but to the Warren E. Buffetts of the world. G.M.A.C. was the financial arm of General Motors. In the years leading up to the financial crisis, it was also G.M.’s most profitable unit, which tells you something about the auto industry at the time. The company earned more profit from lending money to customers than in selling cars. G.M.A.C. staved off collapse thanks only to a government infusion of $17.2 billion. The company was renamed Ally Financial. The Treasury Department owns 73.8 percent of Ally, with Cerberus retaining an 8.7 percent stake. Almost since that time, the Treasury Department has wanted to rid itself of its Ally stake. Ally filed for an initial public offering in March 2011, but it has so far languished in the face of a weak market and concerns over Ally itself. The Treasury Department has been paid back about $5.7 billion and still controls the company through its stock ownership and appointment of a majority of Ally’s directors.

CNBC’s Advocacy For Wall Street Is Painfully Evident in This Neil Barofsky Interview - Heavy handed and amateurish performance by the 'journalists' was the name of the game in this interview which CNBC conducted with former TARP inspector general Neil Barofsky. I think Barofsky was taken aback and kept off balance for much of the interview, and did not present some of the alternatives to TARP that could have been discussed in a more intelligent and less adversarial venue.  I would have thought a former federal prosecutor would have been tougher, but I think he came in expecting a rational discussion and not a tag team group takedown. This performance represents the level of journalistic quality and objectivity of its parent NBC, which is one of the corporate arms of General Electric.   And such a disregard for any pretense to journalistic principles is no longer the exception. Maybe I am missing something but it seems astonishing that a major financial network can feature a stock advisor who bragged on tape about how he used reporters for planting stories favorable to his market manipulation to cheat the public when he ran a hedge fund, and apparently sees nothing wrong with it, up to and including breaking the law. How cynical can a people get?

It is in the interests of bankers and landlords to masquerade as capitalists - As I see it, there are two forms of income. The first type of income is generated through productive achievement that benefits others and grows the economic pie – this is the symbiotic relationship between labor and capital. The second type of income is generated through rent-seeking behavior that simply alters the flow of money, but does not grow the economic pie – examples of this include fractional-reserve banking and the land increment of rent. It is in the interests of bankers and landlords to masquerade as capitalists, but they are not capitalists (since they don’t grow the capital stock) – they are rent-seekers. Republicans are people who correctly see the benefits of capitalism (the expansion of the capital stock that adds value to labor), but they are fooled into thinking bankers and landlords are capitalists. Democrats are people who correctly see the evils of wealthy rent-seeking individuals, but they incorrectly attribute rent-seeking to capitalism. In my opinion, Democrats would be wise to change their target from “the 1%”, which may include capitalists that help others (Apple is not the problem), and focus their attention specifically on the rent-seekers (banking is the problem). By using this strategy, Democrats can align themselves with Republican voters who support productive capitalist activities, while at the same time exposing the rent-seekers who masquerade as capitalists. In my experience, Republicans are increasingly skeptical of banking. They are starting to get that banking is different from other capitalist activities. There is a real opportunity for Democrats, but they’ve got to be sure they select the correct bogeyman.

More Evidence Wall Street Is Overpaid - Taibbi - There's a great little piece at Zero Hedge about how hedge funds are having a terrible year (for the second straight year), with only 11% of all funds outperforming the Standard and Poor's 500, the basic stock index. Here's Tyler's take on the panic in the hedge fund industry: This is the worst yearly aggregate S&P 500 underperformance by the hedge fund industry in history, and also explains why the smooth sailing in the S&P500 belies the fact that nearly every single hedge fund manager (and at least 89% of all) is currently panicking like never before knowing very well there are only 4 more months left to beat the S&P or face terminal redemption requests. And with $1.2 trillion in gross equity positions, the day of redemption reckoning at the end of the year (and just after September 30 for that matter as well) could be the most painful yet. it also explains why, just like every other quarter in which career risk is at all time highs, HFs are dumping everything not nailed down and buying up AAPL, which as of June 30 was held by an all time high 230 hedge funds (more on that later). Translating that into English, all those super-rich people who turned to hedge funds with their millions in the hopes that bunches of Whiz-Kids from Wharton and Harvard and Yale would find unseen and wildly creative investment ideas to fatten their fortunes are actually finding out now that those same Whiz Kids are buying Apple just like the rest of us.  These guys are buying Apple? Couldn't we have just started off doing that and saved ourselves all that trouble?

Changes to Money Market Funds Stall - Attempts to make sweeping changes to a popular type of mutual fund that played a central role in the 2008 financial crisis have been derailed. chairwoman of the Securities and Exchange Commission, Mary L. Schapiro, wanted to bring her vision for regulating money market mutual funds to a vote as early as next week. But Ms. Schapiro acknowledged on Wednesday evening that three of the five commissioners opposed her plan and said she was calling off the vote.  While opposition was certain from the two Republican members of the commission, the crucial swing vote, a Democratic commissioner, Luis A. Aguilar, said in an interview on Wednesday afternoon that he would feel comfortable voting only after significant further study of the industry.  Ms. Schapiro wanted the $2.6 trillion money market fund sector to start holding cash reserves or to let their share prices fluctuate, instead of promising to pay investors $1 for every $1 they put in, among other changes.

A Case Study in Wall Street Getting Its Way in Washington - Every once in a while the financial industry lives up to its critics’ worst expectations: that it operates against the interest of the investing public, in cahoots with captive regulators and Washington’s powerful elite.  This is exactly what happened Wednesday, when Securities and Exchange Commission Chairman Mary Schapiro had to cancel an Aug. 29 vote on sensible new rules to make money-market mutual funds safer. Although Schapiro had the support of Federal Reserve Chairman Ben S. Bernanke and leading conservative economists, she knew that three of the five commissioners would oppose her. This came after an intensive and often-misleading campaign by the $2.6 trillion money-fund industry to gloss over the inherent instability of the funds.

Why So Few Mega-Credit Card Class Action Settlements?  -- JPMorgan Chase and Class Counsel have received preliminary approval of a $100 million class settlement in In re Chase Bank USA, NA "Check Loan" Contract Litigation (MDL 2032), a case involving Chase's increases in minimum payment amounts on some Chase cardholders who had taken advantage of low-APR balance transfers.  If confirmed, the proposed settlement would be, as far as I can determine, the second largest private settlement (or judgment) in a consumer class action relating to credit cards.  Given the huge volume of consumer credit card complaints both before and after the CARD Act, it's interesting to note how rare 9-figure private settlements have been. Whether this is a reflection on the state of our class action litigation system or a reflection on the actionable strength of consumers' complaints is unclear, but I would have expected to see more large consumer credit card class actions settlements. I'd be curious to hear others' thoughts on whether I'm expecting too much or why there haven't been more such settlements (or if I've missed some big ones).

Retailers Wal-Mart, Target to Escape ‘Conflict Mining’ Rule -- Big retailers including Target Corp and Wal-Mart Stores may largely escape a costly new rule that requires U.S.-listed companies to disclose whether their goods contain so-called conflict minerals that are blamed for fueling violence in central Africa. Retailers lobbied to be exempted from the requirement, which will affect manufacturers of a range of products, including smartphones, light bulbs and footwear. The Securities and Exchange Commission had proposed an earlier version of the rule that would have applied to retailers carrying products sold under their own brand names, but which are typically produced by outside contractors. On Wednesday, however, the SEC voted 3-2 to adopt a final rule that would exempt companies that don't exert direct control over the manufacture of such products.  The rule, which was mandated by the Dodd-Frank financial overhaul, have been a source of friction between the SEC and companies ever since the law was passed in 2010. Companies have said the requirement would be burdensome and expensive.

SEC Said Set to Make Energy Firms Reveal Payments to Governments - Exxon Mobil, BHP Billiton, and other energy and mining firms will have to report what they pay each country they tap resources from under a rule the U.S. Securities and Exchange Commission has the votes to adopt, according to a person with knowledge of agency deliberations.  SEC commissioners are ready to approve a final rule today that will compel public disclosure of taxes, royalties and fees paid to any government -- including the U.S. -- for access to resources, said the person, who spoke on condition of anonymity because the pre-vote discussions are private. The measure, required by the Dodd-Frank Act, has been opposed by groups representing the so-called extractive industries who say it will open U.S.-listed companies’ strategies to competitors.  “The SEC appears to want to require publicly traded energy firms to release commercially sensitive, detailed payment information about every foreign and U.S. project,” John Felmy, chief economist for the American Petroleum Institute, said yesterday in a teleconference with reporters.

Large corporate bond issues dominating secondary market -- Earlier this year we discussed how the Volcker rule combined with Basel III is already reducing corporate bond liquidity by diminishing dealers' ability to make markets. It's just one of those "unintended consequences". Dealer inventories, which are essential for market making, have shrunk to the lowest level in 10 years. Some, including people at the Fed, have suggested that non-bank entities will step in to take the dealers' place as market makers. That is unlikely to happen in the near future. One question that people are asking is why haven't we seen more lobbying from the corporate sector against the Volcker rule. There are multiple reasons for this, including corporations' unwillingness to put their reputation on the line by lobbying against this populist anti-bank regulation. But one of the key reasons is that the biggest impact will be on the medium to smaller US firms who simply don't have the resources to battle this legislation. With limited inventories the dealers increasingly make markets only in the largest bond issues, particularly those traded by the large corporate bond ETFs (LQD, HYG, etc.).

Moody’s Rental-Home Bond Grades May Be Restrained By Data Limits - Potential issuers of securities tied to U.S. home rentals may not be able to obtain the credit ratings they seek because of a dearth of historical data on the business, according to Moody’s Investors Service.  The risk to investors with the unprecedented rental-home bonds would be tied mainly to the quality of property managers and the variability in net revenues from tenants and eventual home sales, the New York-based ratings firm said today in a report. Moody’s listed the types of data it will probably seek, saying debt issuers may not always be able to overcome limited information by structuring deals with more investor protection.  “In some stressed cases, credit enhancement would not be able to mitigate the concern associated with limited historical information and requested ratings would not be achievable,” analysts led by Kruti Muni and Joseph Snailer wrote.

Junk Bonds: Wall Street’s Newest Bubble? - With interest rates being so low for so long, yield-starved investors have been increasingly willing to risk their money on junk bonds in order to get that extra yield. And as new money starts pouring into high-yield bonds, some are starting to worry that the junk bond market has reached bubble-like levels. Matt Wirz of the Wall Street Journal said as much in an article in The Wall Street Journal last week, warning that investors piling into junk bonds for the attractive yields should worry about the fact that the default rate – the rate at which companies fail to honor their debt commitments – has been creeping up lately:"The disconnect behind falling bond yields and rising default rates reflects the mismatch between supply of and demand for junk debt as yield starved investors bail out of Treasurys and investment-grade debt and pile into the market . . . There’s a name for markets in which supply outpaces demand, pushing prices sharply above intrinsic value – asset bubbles.”

The Stock Market Is An "Attractive Nuisance" And Should Be Closed - In tort law, an attractive nuisance is any potentially hazardous object or condition that is likely to attract the naive and unwary, i.e. children. A classic example is an abandoned swimming pool half-filled with fetid water. The stock market is demonstrably an "attractive nuisance" and should be closed immediately. It should never be reopened unless these conditions can be met: 1) All shares must be owned for at least four hours 2) All trading must be executed by humans on a transparent exchange where all trading activity (and open orders) is visible to all participants 3) Intervention in the market by the Federal Reserve or any Central State agency or agents is against the law. If you insist on putting money at risk in the stock market, be aware that you are playing a rigged roulette wheel and thus you are a mark. You might win, or the entire game might collapse in a rotten heap of lies and corruption. Just remember that the market is ruled by parasites who need to keep their hosts (investors) alive so they can continue to feed off them (i.e. biotrophic parasites). If the hosts all leave the market, the parasites will have only themselves to feed on, and they will quickly expire.

Unofficial Problem Bank list declines to 899 Institutions - Here is the unofficial problem bank list for Aug 17, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  While the latest monthly release of enforcement action activity by the OCC contributed to many changes to the Unofficial Problem Bank List, it finished the week largely unchanged at 899 institutions with assets of $347.5 billion, compared to 900 institutions and assets of $348.6 billion last week. A year ago, the list held 984 institutions with assets of $412.5 billion.

Cramdown and the Cost of Mortgage Credit -- Joshua Goodman and I have a new paper out examining the impact of Chapter 13 cramdown on the cost and availability of mortgage credit.  Historically, when cramdown was permitted in some judicial districts prior to 1993 it was associated with a statistically significant, if small, increase in the cost of credit. Here's the abstract: Recent proposals to address housing market troubles through principal modification raise the possibility that such policies could increase the cost of credit in the mortgage market. We explore this using historical variation in federal judicial rulings regarding whether Chapter 13 bankruptcy filers could reduce the principal owed on a home loan to the home’s market value. The practice, known as cramdown, was definitively prohibited by the Supreme Court in 1993. We find evidence that home loans closed during the time when cramdown was allowed had interest rates 10-20 basis points higher than loans closed in the same state when cramdown was not allowed, which translates to a roughly 1-2 percent increase in monthly payments. Consistent with the theory that lenders are pricing in the risk of principal modification, interest rate increases are higher for the riskiest borrowers and zero for the least risky, as well as higher in states where Chapter 13 filing is more common.

FDIC files lawsuit tied to failed bank RMBS investments - The Federal Deposit Insurance Corp. filed three lawsuits against big banks, alleging the lenders misrepresented the quality of securitized loans sold to the now defunct Texas firm, Guaranty Bank. The FDIC took Austin, Texas-based Guaranty Bank into receivership back in Aug. 2009. This week, the regulator filed multiple lawsuits in Travis County (Austin), suggesting Guaranty suffered major losses from toxic RMBS loans sold and packaged by mega banks and other financial institutions. Defendants named in the multibillion-dollar lawsuits include Countrywide, JPMorgan Chase. Ally Financial, Deutsche Bank, Bank of America and Goldman Sachs among others.  FDIC, on behalf of Guaranty, claims the banks misrepresented loan-to-value ratios, underwriting criteria and appraisal amounts when selling, packaging and underwriting home loans that became collateral for mortgage securities sold to Guaranty. Specifically, the FDIC alleges the financial firms violated federal and Texas securities laws by failing to fully disclose or truthfully represent the quality of mortgages backing the security certificates.

US Treasury shrinking the GSEs, capping taxpayer support - The US Treasury has restructured its holdings in the GSEs with the ultimate goal of shrinking the US government's dominant role in the mortgage market. Fannie Mae and Freddie Mac were told that they will be required to shrink their mortgage programs by 15 (rather than 10) percent annually. And rather than paying a fixed (10%) dividend to the government as they have in the past, the agencies will simply turn over all their profits back to the US Treasury (based on US government's 80% stake).Bloomberg: - The mortgage companies, which have drawn $190 billion in aid and paid $46 billion in dividends since being taken over by U.S. regulators in 2008, will turn over any quarterly profits to the Treasury, the agency said today. The change replaces a requirement that the companies pay quarterly dividends of 10 percent on the government’s nearly 80 percent stake.  Fannie Mae, based in Washington, and Freddie Mac (FMCC) of McLean, Virginia, also will be required to shrink their investments in mortgages and mortgage-backed securities by 15 percent annually, up from 10 percent, the Treasury said.  “We are taking the next step toward responsibly winding down Fannie Mae and Freddie Mac, while continuing to support the necessary process of repair and recovery in the housing market,” The privately held FNMA preferred shares collapsed on the news because there will be no funds left for private investors. All the profits go to the US government and growth will be negative due to the declining mortgage portfolio holdings.

Fitch Foresees Troubles for FHA as Delinquencies Rise - Times haven’t been too swell for the Federal Housing Administration. That was apparent, by some accounts, when the agency raised insurance premiums for lenders of single-family mortgages in February, a choice it made to shore up its crisis-weary Mutual Mortgage Insurance Fund. Now, according to Fitch Ratings, a new tide of mortgage delinquencies and price declines may tip the fund back toward troubled waters – and possibly insolvency. The ratings agency said Friday that it sees problems arising from a difference between 90-day past due delinquency patterns for home loans backed by the agency and those without government guarantees. “This may eventually force the FHA to look for opportunities to put back some defaulted loans to the banks, particularly if the agency’s funding status worsens and U.S. home prices fail to rebound quickly,” it said in a statement. According to Fitch, the FHA’s fiscal position benefited from the raise in upfront premiums but stays “very weak” in lieu of its inability to meet a congressionally required 2 percent capital buffer. The FHA capital ratio buffer currently stands at just 0.24 percent. The ratings agency found that government-backed mortgages constitute 83 percent, or about $66 billion, of 90-day past due delinquencies currently out there on the market.

FHA's 30x leverage on mortgages is creating a new "subprime" market - The U.S. Federal Housing Administration (FHA), who continues to provide (via insurance) 30x leverage on mortgages by requiring only a 3.5% down-payment, is having a rough time. The loans the agency has been insuring are seeing worsening delinquency trends.  Reuters: - Fitch Ratings sees a growing divergence between 90-day past due delinquency patterns for guaranteed and nonguaranteed loans as a potentially troubling signal of future losses. This may eventually force the FHA to look for opportunities to put back some defaulted loans to the banks, particularly if the agency's funding status worsens and U.S. home prices fail to rebound quickly. For eight of the largest U.S. banks with substantial portfolios of FHA-guaranteed loans on their books, combined 90-day past due delinquencies totaled $79.4 billion at June 30. Of that total, 83%, or $66.0 billion, represented government-guaranteed mortgages.  This highlights the dimension of the growing delinquency problem for the FHA, given the predominant position of FHA-guaranteed loans in the troubled asset categories of major banks. While delinquency rates for nonguaranteed loans have been improving steadily at these institutions, the trend for FHA-guaranteed loans is starkly different.In the spring the agency increased its premiums to insure mortgages by 75bp to 1.75% - which is still materially below market, particularly given the extremely low equity the borrower ends up having in his/her house. These FHA guaranteed mortgages are today's version of the "subprime" market.

Slow Response to Housing Crisis Now Weighs on Obama - After inheriting the worst economic downturn since the Great Depression, President Obama poured vast amounts of money into efforts to stabilize the financial system, rescue the auto industry and revive the economy.But he tried to finesse the cleanup of the housing crash, rejecting unpopular proposals for a broad bailout of homeowners facing foreclosure in favor of a limited aid program — and a bet that a recovering economy would take care of the rest. During his first two years in office, Mr. Obama and his advisers repeatedly affirmed this carefully calibrated strategy, leaving unspent hundreds of billions of dollars that Congress had allocated to buy mortgage loans, even as millions of people lost their homes and the economic recovery stalled somewhere between crisis and prosperity. The nation’s painfully slow pace of growth is now the primary threat to Mr. Obama’s bid for a second term, and some economists and political allies say the cautious response to the housing crisis was the administration’s most significant mistake. The bailouts of banks and automakers are now widely regarded as crucial steps in arresting the recession, while the depressed housing market remains a millstone.

New York Times Publishes Apology for Obama’s Failed Housing Policies - Yves Smith - On the one hand, the dismal failure of the Administration’s cosmetic responses to the foreclosure mess is so evident that the New York Times is willing to acknowledge it, via a first page article titled, “Cautious Moves on Foreclosures Haunting Obama.” On the other, what the story offers is a whitewash, not an analysis. The Times puts forward a long form apology for the Administration’s failure to face the housing crisis head on. It admittedly does start off as if it might be a hard-hitting piece: After inheriting the worst economic downturn since the Great Depression, President Obama poured vast amounts of money into efforts to stabilize the financial system, rescue the auto industry and revive the economy. But he tried to finesse the cleanup of the housing crash, rejecting unpopular proposals for a broad bailout of homeowners facing foreclosure in favor of a limited aid program — and a bet that a recovering economy would take care of the rest.During his first two years in office, Mr. Obama and his advisers repeatedly affirmed this carefully calibrated strategy, leaving unspent hundreds of billions of dollars that Congress had allocated to buy mortgage loans, even as millions of people lost their homes and the economic recovery stalled somewhere between crisis and prosperity. But even here, you can see the deck being stacked in Obama’s favor. He “inherited” the housing mess, so how much can we blame him. Bold measures were “unpopular”. Really? “Controversial” is a better word. Helping millions and boosting the housing market would have been more “popular” than letting stressed homeowners twist in the wind and the home values, and the economy, continue to stagnate. The excuse for the inaction? The servicers were even screwed up than the Administration thought, so even if they had pushed really hard, it’s unlikely things would have been different. That’s a convenient cover for what was really at work: a belief by Geithner, who was driving this train, that the banks needed to be coddled, which aligned with Obama’s disinclination to ruffle powerful industry incumbents.

Mortgage Cramdowns: A Missed Opportunity -  Binyamin Appelbaum at the NY Times reviews some of the Obama administration's missed opportunities: Cautious Moves on Foreclosures Haunting Obama Here is an excerpt on mortgage cramdowns:  Former Representative Jim Marshall, a centrist Georgia Democrat who lost his House seat in 2010, was a staunch advocate of the administration’s economic policies. The administration made just one mistake, he said in a recent interview: it failed to rewrite the bankruptcy code. Congressional Democrats wanted to change the law to permit “cramdown” — a term that meant letting bankruptcy courts cut mortgage debts — to put pressure on mortgage companies to modify loans and to provide a backup plan for borrowers who could not get the help they needed. “There was another way to deal with this, and that is what I supported: forcing the banks to deal with this,” Mr. Marshall said. “It would have been better for the economy and lots of different neighborhoods and people owning houses in those neighborhoods.” When proponents sought to add a cramdown to the Emergency Economic Stabilization Act in September 2008, Mr. Obama, who had flown back to Washington from the campaign trail, persuaded them to postpone the “partisan” effort as an example to Republicans, who said the measure would violate existing contracts.

Ezra Klein Deems Joe Stiglitz, Paul Krugman, and Elizabeth Warren (Plus Other Serious People) Not Credible - Ezra Klein demonstrated how far he’s has to descend into the Humpty Dumpty world of words meaning just what he chooses them to mean in order to defend failed Administration policies.  Washington DC’s Baghdad Bob waded into the fray over a an unconvincing apology in the New York Times for Obama’s bank-friendly response to the mortgage crisis. It wasn’t hard to see this piece as dictation. While it’s now acceptable for the messaging apparatus to describe the policies as inadequate, the party line is lame: there was no support for bold measures and those big bad servicers were an insurmountable obstacle. Help me.  So what is Klein’s attempt at a save? He repeats the canard about the lack of political support for bold action and tries to fob this one off: The right question on housing, then, is not whether the administration’s policies proved insufficient. They did. It’s what would have been better. And that’s not a question that either Appelbaum or Goldfarb conclusively answer. It’s not even a question that the most credible critics of the Obama administration’s housing policies conclusively answer. Huh? Sorry, plenty of people vastly more credible than Klein had concrete recommendations at the time that would have been vastly better than Obama-Geithner program of coddling the banks.

FHFA: New Short Sale Guidelines for Fannie and Freddie - From the FHFA: New Standard Short Sale Guidelines for Fannie Mae and Freddie Mac The Federal Housing Finance Agency (FHFA) today announced that Fannie Mae and Freddie Mac are issuing new, clear guidelines to their mortgage servicers that will align and consolidate existing short sales programs into one standard short sale program. The new guidelines, which go into effect Nov. 1, 2012, will permit a homeowner with a Fannie Mae or Freddie Mac mortgage to sell their home in a short sale even if they are current on their mortgage if they have an eligible hardship. Servicers will be able to expedite processing a short sale for borrowers with hardships such as death of a borrower or co-borrower, divorce, disability, or relocation for a job without any additional approval from Fannie Mae or Freddie Mac.  “The new standard short sale program will also provide relief to those underwater borrowers who need to relocate more than 50 miles for a job.” A few details:  Fannie Mae and Freddie Mac will waive the right to pursue deficiency judgments in exchange for a financial contribution when a borrower has sufficient income or assets to make cash contributions or sign promissory notes: Servicers will evaluate borrowers for additional capacity to cover the shortfall between the outstanding loan balance and the property sales price as part of approving the short sale.

Short Sales Would Be Subject to Taxation, Too, If Congress Doesn’t Act - The Federal Housing Finance Agency, overseer of Fannie Mae and Freddie Mac, announced new short sale guidelines that would go into effect November 1. These guidelines are designed to eliminate red tape and encourage short sales as a way for underwater borrowers to get out of their home without going through the foreclosure process. In a short sale, the borrower and lender agree that the borrower can sell their house at a market rate, even if that comes up lower than the outstanding balance on the mortgage. The lender then forgives the remaining mortgage amount. FHFA’s announcement got some praise in the financial press, albeit in the midst of protecting them for foregoing principal reductions (Mike Konczal demolishes the argument against principal reductions here). But predictably, everyone is forgetting one thing. In practice, a short sale IS a principal forgiveness. The bank forgives the spread between the final price on the short sale and the balance of the loan. And because short sales operate as a principal forgiveness, then it’s just as vulnerable to the expiration of the Mortgage Forgiveness Debt Relief Act. That means a large tax bill for someone who negotiated a deal with their lender to put their mortgage debt behind them. And while there are potential (but hard to navigate) hardship exemptions to taxation that someone getting a principal reduction can access, the situation for those in a short sale may be very different. That person may have means such that they cannot extinguish the tax debt. It means the government will punish them for having the misfortune of an underwater home.

What Could Romney's Secret Housing Plan Look Like? - Josh Barro, writing from his new column at Bloomberg, wonders if Mitt Romney has a secret economic plan to fix housing: "But where I think a big improvement from Romney is likely is on housing policy. While Romney has been conspicuously silent on housing, one of his top advisers, Glenn Hubbard, advocates an aggressive plan to restructure mortgages. The Hubbard plan would lower mortgage rates and reduce principal for underwater borrowers, both of which would stimulate the economy. That's a tough sell to Republicans in Congress -- but they would be much more open to it under a Republican president than a Democratic one." As David Dayen noted in a great, comprehensive Salon piece, none of this matters if Congress doesn't extend a special law put into place during the crisis that keeps principal reduction, even reduction from a short sale, from being treated as income, and thus requiring it to be taxed. The law is set to expire on Dec. 31, 2012. Extending it has bipartisan support in the Senate, but none in the House so far. I can't emphasize how much this matters - homeowners would get a giant tax bill under any relief program, making them difficult to do. It isn't clear what Romney would do about this.

Mark Ames: Tracy Lawrence: The Foreclosure Suicide America Forgot  - Nevada’s case against LPS rested primarily on the testimony of a whistleblower, Tracy Lawrence, who worked in Lender Processing Services’ office in Las Vegas. Her testimony threatened to unravel tens of thousands of fraudulent foreclosures in the state of Nevada between the years 2005-2008, and the criminal activities of the entire mortgage servicing industry. Nevada has suffered the worst foreclosure problem of any state in the union. In return for turning state’s witness, Tracy Lawrence plea bargained her charges down to a single misdemeanor charge of falsely notarizing a signature, which carries, in the worst case scenario, a maximum of one year in prison and a $2,000 fine. However, her testimony could put her two LPS superiors behind bars for decades—which is why many believed Nevada’s goal was to turn those two LPS officers into state’s witnesses against LPS’s senior executives. On November 29, 2011—just two weeks after the Nevada attorney general announced the landmark criminal case—whistleblower Tracy Lawrence was supposed to appear before a judge for her sentencing. It should have been a routine appearance, but she didn’t show up. Her lawyer grew anxious, called police to check on Tracy Lawrence’s home, and that’s when they found her dead. The timing of her death was suspicious, to say the least. Immediately, before any investigation had been conducted, Las Vegas police officially “ruled out homicide” as her cause of death.

Mortgage Delinquencies by State: Range and Current - Two weeks ago I posted a graph of mortgage delinquencies by state. This raised a question of how the current delinquency rate compares to before the crisis - and also a comparison to the peak of the delinquency crisis in each state. The following graph shows the range of percent seriously delinquent and in-foreclosure for each state (dashed blue line) since 2007. The red diamond indicates the current serious delinquency rate (this includes 90+ days delinquent or in the foreclosure process).  Many states have seen declines, and several states have seen significant declines in the serious delinquency rate including Arizona, Michigan, Nevada and California. Other states, like New Jersey and New York, have made little or no progress in reducing serious delinquencies.  Arizona, Michigan, Nevada and California are all non-judicial foreclosure states. States with little progress like New Jersey and New York are judicial states. Florida is a judicial states - and has the highest serious deliquency rate - but Florida has seen some improvement. The second graph shows total delinquencies (including less than 90 days) and in-foreclosure. Although some states have seen significant declines in delinquency rates, all states are still above the Q1 2007 levels - and some states have seen little progress.

Fed: Foreclosures Have Little Influence on Prices of Nearby Homes - Despite conventional wisdom that foreclosed properties negatively impact the values of neighboring homes, a paper from the Federal Reserve Bank of Atlanta reported Aug. 6 that that isn’t the case. In fact, it’s the condition of the distressed property, and not its foreclosure status, that most impacts surrounding home values.   According to the research, any negative effects that foreclosures have on nearby property values tend to peak before distressed properties even complete foreclosure — and in those cases the study revealed reduced values of only 0.5 to 1 percent in most cases. And if the subject property is in good condition, adjacent homes may sell at even higher prices.  Federal Reserve Bank researchers studied housing information in 15 metropolitan areas with a focus on single-family homes. “We find that while properties in virtually all stages of distress have statistically significant, negative effects on nearby home values, the magnitudes are economically small, peak before the distressed properties completed the foreclosure process, and go to zero about a year after the bank sells the property to a new homeowner,” the report stated.

Nearly half of Fannie Mae REO unable to reach market - Only half of the previously foreclosed homes owned by Fannie Mae are either on the market or being prepared for sale. The remaining properties are currently locked away in some step of the foreclosure system. The National Association of Realtors said in its existing home sales report Wednesday that its officials were pressuring government agencies to release more of their REO in markets short of inventory. Many market participants long claimed the government – including Fannie, Freddie Mac and the Department of Housing and Urban Development – are deliberately holding these homes off the market in order to get more for them when home prices recover. Fannie disclosed for the first time this year where these properties are in the lengthy and complicated REO process. In its second quarter financial filing, the government-sponsored enterprise said 23% of its more than 109,000 repossessed homes are currently available for sale. That's down from 28% at the end of last year. An offer has been accepted on another 19%, and 11% have an appraisal pending, Fannie said. But 47% of its inventory is unable to be marketed. Roughly 14% of Fannie's entire REO inventory is redemption status, meaning the time frame borrowers and second-lien holders can redeem the property under various state laws. The timelines vary and have come under much change across the country. In Michigan, for example, lawmakers passed a bill last year to extend the redemption period to as much as one year in some cases. The bill was referred back to a state committee in March. Fannie said another 13% of its properties are still occupied by the borrower. The eviction process just hadn't been completed.

Chicago's Quiet Home-Liberation Front - A housing liberation movement is brewing in Chicago. The idea is simple: Tens of thousands — possibly hundreds of thousands — of vacant, bank-owned homes are a large part of what is making the poorest neighborhoods of Chicago into semi-forsaken tracts ridden with crime and blight. These houses are so bad that Mayor Rahm Emanuel recently announced that he’d spend $4 million just to tear some down. Meanwhile, there are more than 20,000 homeless adults and tens of thousands of additional homeless youth in the city fighting through life as capitalism’s refugees. (They aren’t receiving any additional mayoral funding.) The supposed truism of supply and demand seems to have gone haywire. Many no longer recognize the banks’ claim to ownership. The only definition of these so-called assets that makes sense is their immediate capacity to serve as homes for families. “This is how we can house the city of Chicago,” said Thomas Turner, who has worked with Occupy Chicago and was homeless before he liberated and renovated four homes since the summer began. When a local property owner saw what Turner was during, she donated three more. “You know this economic situation isn’t getting any better,” he continued. “So just like Harriet Tubman, Marcus Garvey, MLK — all the people that stepped in and made our lives better today, we’re working for — how do you say it? Our living aspects of life. It’s a domino effect — and when it all falls down, we’re going to have a big beautiful design.”

MBA: Mortgage Refinance Activity declines as Rates Increase  - From the MBA: Refinance Applications Decline as Rates Increase The Refinance Index decreased 9 percent from the previous week to the lowest level since early July. The seasonally adjusted Purchase Index increased 0.9 percent from one week earlier.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.86 percent from 3.76 percent, with points decreasing to 0.42 from 0.47 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The first graph shows the MBA mortgage purchase index. The purchase index has been mostly moving sideways over the last two years. The second graph shows the refinance index.The refinance activity has declined for three straight weeks as mortgage rates have moved higher.

FNC: Residential Property Values increased 1.1% in June -  FNC released their June index data today. FNC reported that their Residential Price Index™ (RPI) indicates that U.S. residential property values increased 1.1% in June (Composite 100 index). The other RPIs (10-MSA, 20-MSA, 30-MSA) increased between 1.1% and 1.3% in June. These indexes are not seasonally adjusted (NSA), and are for non-distressed home sales (excluding foreclosure auction sales, REO sales, and short sales). The year-over-year trends continued to show improvement in June, with the 100-MSA composite down 0.2% compared to June 2011. This is the smallest year-over-year decline in the FNC index since year-over-year prices started declining in 2007 (five years ago). This graph is based on the FNC index (four composites) through June 2012. The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals. Some of the month-to-month gain is seasonal since this index is NSA. The key is the indexes are showing less of a year-over-year decline in June. If house prices have bottomed, the year-over-year decline should turn positive soon.

Misc: Negative Equity declines, FHFA house prices increase - From Zillow: Negative Equity Falls in Second Quarter; Nearly Half of Borrowers Under 40 Remain Underwater Negative equity declined in the second quarter, with 30.9 percent of U.S. homeowners with mortgages – or 15.3 million – underwater, according to the second quarter Zillow® Negative Equity Report. That was down from 31.4 percent of homeowners with mortgages, or 15.7 million, underwater in the first quarter. The total amount of negative equity in the country declined by $42 billion in the second quarter to $1.15 trillion.That is a decline of about 400,000 borrowers (I expect a larger decline when CoreLogic reports). Zillow chief economist Stan Humphries has more: Negative Equity Declines Slightly on the Back of Modest Home Value Gains While roughly one out of every three homeowners with mortgages is underwater, 91 percent of these homeowners are current on their mortgage and continue to make payments.  Humphries provided this chart of Zillow's estimate of the Loan-to-Value (LTV) for homeowners with a mortgage.

U.S. House Prices Rose 1.8 Percent From First Quarter to Second Quarter 2012 - FHFA -  U.S. house prices rose 1.8 percent from the first quarter to the second quarter of 2012 according to the Federal Housing Finance Agency’s (FHFA) seasonally adjusted purchase-only house price index (HPI). The HPI is calculated using home sales price information from Fannie Mae and Freddie Mac mortgages. Seasonally adjusted house prices rose 3.0 percent from the second quarter of 2011 to the second quarter of 2012. FHFA’s seasonally adjusted monthly index for June was up 0.7 percent from May. “Although some housing markets are still facing significant challenges, house prices were quite strong in most areas in the second quarter,” said FHFA Principal Economist Andrew Leventis. “The strong appreciation may partially reflect fewer homes sold in distress, but declining mortgage rates and a modest supply of homes available for sale likely account for most of the price increase.”

U.S. Home Prices Post Biggest Jump Since 2005 - Here’s another sign the housing market is improving: U.S. home prices took the biggest quarterly jump in 6 1/2 years, according to a government index. Home prices rose 1.8% in the April-June period compared with the first quarter of the year, the Federal Housing Finance Agency said Thursday. It was the biggest quarterly jump since the fourth quarter of 205, when prices rose by 2.2%. Prices were up 3% from the same quarter a year earlier. On a monthly basis, prices adjusted for seasonal factors were up 0.7% in June from a month earlier, a better result than forecast. Economists surveyed by Dow Jones Newswires had expected a 0.6% monthly increase. Prices in May were up 0.6% from a month earlier, revised from the previous reading of a 0.8% increase.

Zillow forecasts Case-Shiller House Price index to show small Year-over-year increase for June - Zillow Forecast: Zillow Forecast: June Case-Shiller Composite-20 Expected to Show 0.3% Increase from One Year Ago On Tuesday, August 28th, the Case-Shiller Composite Home Price Indices for June will be released. Zillow predicts that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]) will be up by 0.3 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) will be flat on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from May to June will be 0.9 percent for both the 20-City Composite and the 10-City Composite Home Price Index (SA). All forecasts are shown in the table below and are based on a model incorporating the previous data points of the Case-Shiller series and the June Zillow Home Value Index data, and national foreclosure re-sales.  This will be the first month with positive annual appreciation in the 20-City Index since September of 2010. In 2010, home prices showed increases due to the Federal home buyer credit, which artificially lifted the market. This time around the home price appreciation is organic and represents a recovering housing market. Zillow has called a home value bottom for the national real estate market with many regional markets experiencing inventory shortages and strong near-term price appreciation.

US Home Sales Rose 2.3 Percent in July - Americans bought more homes in July than in June and prices rose, evidence that the housing market is slowly recovering. The National Association of Realtors says sales of previously occupied homes rose to 4.47 million in July, a 2.3 percent increase from the previous month. It was the first increase in three months. But the recovery is slow and uneven. July sales were below the 4.6 million pace reached in April and May. And the annual sales pace is below the roughly 5.5 million that economists consider healthy.

Existing Home Sales in July: 4.47 million SAAR, 6.4 months of supply - From the WSJ: Home Resales Jump Existing-home sales increased 2.3% in July from a month earlier to a seasonally adjusted annual rate of 4.47 million, the National Association of Realtors said Wednesday. The month's sales were 10.4% above the same month a year earlier. The sales pace for June was unrevised at 4.37 million per year. The median sales price in July, meanwhile, was $187,300, up 9.4% from the same month a year earlier and the strongest year-over year gain since January 2006. At the end of July, meanwhile, the inventory of previously owned homes listed for sale rose 1.3% to 2.4 million. That represented a 6.4 month supply at the current sales pace This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in July 2012 (4.47 million SAAR) were 2.3% higher than last month, and were 10.4% above the July 2011 rate. The second graph shows nationwide inventory for existing homes.. Inventory is not seasonally adjusted, and usually inventory increases from the seasonal lows in December and January to the seasonal high in mid-summer. The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Existing Home Sales Increase 2.3% for July 2012 While the Shadow Inventory Lurks -- The NAR released their July 2012 Existing Home Sales. Existing home sales increased 2.3% from last month and inventories are down to a measly 6.4 months of supply. Existing homes sales have increased 10.4% from July of last year. Volume was 4.47 million, annualized against June's 4.37 million annualized existing home sales.  The NAR claims the reasons for low existing sales are constrained supply and tight lending standards. We're shocked to see commentary that is actually true. Of course they leave out the fact most of America isn't earning enough to afford a mortgage.  The market is constrained by unnecessarily tight lending standards and shrinking inventory supplies, so housing could easily be much stronger without these abnormal frictions. This is a never ending drumbeat from NAR, to claim the problem is supply vs. demand. Yet in the report are the quoted inventory statistics: Total housing inventory at the end July increased 1.3 percent to 2.40 million existing homes available for sale, which represents a 6.4-month supply at the current sales pace, down from a 6.5-month supply in June. Listed inventory is 23.8 percent below a year ago when there was a 9.3-month supply.

US housing inventory at post-crisis lows - As discussed earlier the US housing recovery is progressing, albeit quite gradually, as the unsold inventory of homes continues to decline. Barclays Capital: - We continue to see conditions in the existing home market as putting downward pressure on inventories and as supportive of a gradual cleansing of shadow inventory. Our view is that housing is in a recovery phase, but one that will be restrained by the availability of credit, pace of improvement in labor market conditions, and overhang from distressed and foreclosed properties.

Existing Home Sales: Inventory and NSA Sales Graph - The NAR had some issues with the report this morning. Here is the press release: Existing-Home Sales Improve in July, Prices Continue to Rise Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, grew 2.3 percent to a seasonally adjusted annual rate of 4.47 million in July from 4.37 million in June, and are 10.4 percent above the 4.05 million-unit pace in July 2011. Total housing inventory at the end July increased 1.3 percent to 2.40 million existing homes available for sale, which represents a 6.4-month supply at the current sales pace, down from a 6.5-month supply in June. Listed inventory is 23.8 percent below a year ago when there was a 9.3-month supply. ...Distressed homes – foreclosures and short sales sold at deep discounts – accounted for 24 percent of July sales (12 percent were foreclosures and 12 percent were short sales), down from 25 percent in June and 29 percent in July 2011. The following graph shows inventory by month since 2004. In 2005 (dark blue columns), inventory kept rising all year - and that was a clear sign that the housing bubble was ending. This year (dark red for 2012) inventory is at the lowest level for the month of July since 2004, and inventory is below the level in July 2005 (not counting contingent sales). However inventory is still elevated using months-of-supply, but I expect months-of-supply to be below 6 later this year. The following graph shows existing home sales Not Seasonally Adjusted (NSA).

Lawler: Updated Distressed Home Sales Share Table - Economist Tom Lawler sent me the table below for several more distressed areas. For almost of these areas (except Rhode Island), the share of distressed sales is down from July 2011 - and for the areas that break out short sales, the share of short sales has increased (except Minneapolis, and Lee County, FL) and the share of foreclosure sales are down. In most areas, short sales are higher than foreclosures, and for some areas like Phoenix, Reno and Las Vegas, short sales are now double the rate of foreclosures. From Lawler: For the combined markets below showing the “total” distressed share of home sales, total home sales in July were up 8.7% from last July, but “non-distressed” sales were up by over 30%!

Housing Better, Still Not Normal - Housing continues its slow creep toward stability. Normalcy is a long way off. The National Association of Realtors announced July sales of existing homes rose to an annual rate of 4.47 million, close to expectations. Interestingly, the NAR says sales could be even higher: “The market is constrained by unnecessarily tight lending standards and shrinking inventory supplies, so housing could easily be much stronger without these abnormal frictions.” What would be normal? The NAR said current demographics would support existing home sales in the 5.0-5.5 million range if conditions were optimal. But of course, conditions are not. First-time and move-up buyers are restrained by tight lending standards and weak job growth. Investors are stepping into the breach. Their purchases of homes reflect the shift from owning to renting among U.S. households. It’s a lifestyle change triggered by high unemployment, stagnant incomes and tighter mortgage conditions, and one that will hang around for a few more years. In July, investors bought 16% of homes sold. That’s on the low end of their share of sales over the past two years but that’s not because of less interest. Instead, it’s because speculators are finding fewer bargains to buy. Distressed homes–foreclosures and short sales sold at deep discounts–accounted for 24% of July sales, down from 29% a year earlier.

Vital Signs Chart: Slowing Improvement in Home Sales - Home sales are up but aren’t growing as fast as earlier this year. Sales of existing homes increased 2.3% to a 4.47 million annual rate in July, an improvement from June but the second slowest pace this year. Sales increased in every region but the West — which was hit hardest by the real estate bust — where sales were flat over the month.

New Home Sales increase in July to 372,000 Annual Rate - The Census Bureau reports New Home Sales in July were at a seasonally adjusted annual rate (SAAR) of 372 thousand. This was up from a revised 359 thousand SAAR in June (revised up from 350 thousand). Sales in May were revised down. The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. Sales of new single-family houses in July 2012 were at a seasonally adjusted annual rate of 372,000 ... This is 3.6 percent above the revised June rate of 359,000 and is 25.3 percent above the July 2011 estimate of 297,000.  The second graph shows New Home Months of Supply. Months of supply declined to 4.6 in July from 4.8 in June.  The all time record was 12.1 months of supply in January 2009.  This is now in the normal range (less than 6 months supply is normal). The seasonally adjusted estimate of new houses for sale at the end of July was 142,000. This represents a supply of 4.6 months at the current sales rate.

New Home Sales Increase 3.6% for July 2012, June Significantly Revised to -3.5% -- July New Residential Single Family Home Sales increased by 3.6% declined by -8.4%, or 372,000 annualized sales. June's single family new home sales were significantly revised up, from -8.4% to -3.6%. The July monthly percentage change has a ±14.1% error margin and this is why we see large revisions to this report constantly. In other words, don't get too attached to the monthly percentage changes for odds are they will be revised.  New single family home sales are now 25.3% above July 2011 levels, but this figure has a ±18.2% margin of error. A year ago new home sales were 297,000. Sales figures are annualized and represent what the yearly volume would be if just that month's rate were applied to the entire year. These figures are seasonally adjusted as well.  The Census claims the Northeast region July new home sales skyrocketed 76.5% in a month. For the same Northeast region, last month's statistical release reported sales plunged -60.0%. That figure has since been revised to a -55.3% decline. While both monthly percentage changes look absurd, it's more a matter of such low sales volume. Minor variations in monthly sales become whopping percentage changes. This month's Northeast reported sales have a ±145.9% error margin, which tells you to not take to heart the figures.

New Home Sales and Distressing Gap - As I mentioned earlier, new home sales have averaged 360,000 on an annual rate basis through July. That means sales are on pace to increase 18% from last year (I expect some upward revisions, and for sales to increase 20%+ this year). Here is a table showing sales and the change from the previous year since the peak in 2005: This is still a very low level of sales, but clearly new home sales have bottomed and are starting to recover. I don't expect sales to increase to 2005 levels, but something close to 800,000 is possible once the number of distressed sales declines to more normal levels. Here is an update to the distressing gap graph.This "distressing gap" graph that shows existing home sales (left axis) and new home sales (right axis) through June. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.  Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales. The flood of distressed sales has kept existing home sales elevated, and depressed new home sales since builders haven't been able to compete with the low prices of all the foreclosed properties.  I don't expect much of an increase in existing home sales (distressed sales will slowly decline and be offset by more conventional sales). But I do expect this gap to close - mostly from an increase in new home sales.

Spot The Housing Bottom: New Homes For Sale Drop To Lowest Ever; Average New Home Price Plunges To 2012 Lows - Looking at the headline number in the just released New Home Sales data one would be left with the impression that the tepid "recovery" in housing may be chugging along: after all with a seasonally adjusted annualized 372,000 new homes sold in July, this was an improvement to the revised 359K in June (ignoring that the US housing market at best continues to drag along the bottom). This impression, however, promptly changes when one looks at the underlying data. The reality: the actual number of new homes sold in July was 34,000, the same as in June, and the lowest since March. Of this, a massive 3,000 (yes, three thousand) homes were sold in the Northeast in the entire month. Where things get worse is when one looks at the number of new homes for sale. At 142,000 (of which just 38,000 actually completed), this was the lowest number. EVER. And finally, to ruin all hopes that the housing bottom may mean an actual pricing bottom, the median new home price slid to $224,200, down from $229,100 in June, and the lowest since January, while the average home price declined from $266,900 to $263,200. This was the lowest average price posted so far in 2012.

Still Looking for a Housing Bottom - Every day a growing crescendo of housing cheerleaders posit the end of the foreclosure crisis. We’re flipping our way out of the mess that we flipped ourselves into, is their usual line of reasoning. I’ve looked at national data, local data, and even data on my own block here in Florida. I tried to make the evidence prove the market has found a genuine, sustainable bottom. There are clearly gimmicks giving a temporary boost, a great PR campaign that may or may not be coordinated, and some foreclosure flippers that may do well, until they don’t. But the evidence is overwhelming: home prices are anything but stable. For background, a chorus of the same people that created the housing crisis have been predicting a housing bottom every year or so. They’ve always been right for anywhere from a few days to a few months, then the cycle of foreclosures and lowered home values restarts and causes prices to spiral downwards. This time though, especially in certain micro-markets, there does seem to be measured home price appreciation. Two trends are apparent. One is that banks are delaying foreclosures, or not foreclosing at all despite long-term delinquencies. The other is that private equity firms – flush with cash thanks to Tim Geithner’s religious devotion to trickle-down economics and the resulting cascade of corporate welfare – have been bidding up and holding foreclosed houses off the market. These two factors have artificially limited supply and, combined with cheap mortgages rates, driven up prices. While we can debate whether these strategies represent the best public policy, these policies are obviously not long-term sustainable.

Negative Equity Still Cripples Young Families - Despite rising home values that are freeing homeowners from negative equity, nearly half of all homeowners under 45, many of whom have young, growing families in need of more space, are still frozen in place because they are underwater on their mortgages. New data released today by Zillow show that younger homeowners are more susceptible to negative equity than older owners. Some 46 percent of homeowners under the age of 40 are underwater and slightly more than half (50.8 percent) of those aged 30 to 34 are underwater. Yet younger owners between the ages of 20 and 45 are more likely to be current on their mortgages compared to older homeowners. Zillow reported that negative equity declined in the second quarter, with 30.9 percent of U.S. homeowners with mortgages - or 15.3 million - underwater. That was down from 31.4 percent of homeowners with mortgages, or 15.7 million, underwater in the first quarter. Zillow said the total amount of negative equity in the country declined by $42 billion in the second quarter to $1.15 trillion. Of the 30 largest markets tracked by Zillow, negative equity fell the most from the first to the second quarter in the Phoenix metro (from 55.5 percent to 51.6 percent) and the Miami-Ft. Lauderdale metro (from 46.4 percent to 43.7 percent). The Las Vegas metro continues to see the highest negative equity rate, with 68.5 percent of borrowers underwater. That was down from 71 percent in the first quarter.

Vital Signs Chart: Mortgage Rates Head Higher - Mortgage rates are inching up as the economy slowly improves. Rates for a 30-year fixed mortgage rose to an average of 3.62% for the week ended Aug. 16, from 3.59% a week earlier. That was below the 4.15% average rate a year ago and this year’s 4.08% high in March. The economy’s growth, though still weak, has pushed up Treasury yields—in turn putting pressure on mortgage rates.

Mortgage Shopping, Made Easier - Choosing a home and mortgage is probably the largest financial decision that most Americans ever make. Yet perhaps because the loan process is so onerous and opaque, many take the first quote they are offered. In fact, research shows that people typically spend more time shopping for a car or vacation than for a mortgage, and I suspect that many families spend as much or more time picking out a microwave oven.  Shirking on mortgage shopping is a costly type of sloth. Other research, done for the Department of Housing and Urban Development, finds that most borrowers could save several thousand dollars by getting just one more quote.  Now is a propitious time for raising these issues because the new Consumer Finance Protection Bureau is undertaking a Congressionally mandated revision of some disclosure forms that are required by law. The bureau’s goals should be to make mortgage shopping easier and more efficient, and to make the industry more transparent and competitive, all while reducing the kinds of bad loans that helped create the financial crisis.

AIA: Architecture Billings Index Downturn Moderates as Negative Conditions Continue in July - This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.  From AIA: Architecture Billings Index Downturn Moderates as Negative Conditions Continue The Architecture Billings Index (ABI) pointed to a slower decline in July in design activity at U.S. architecture firms. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the July ABI score was 48.7, up considerably from the mark of 45.9 in June. This score reflects a decrease in demand for design services (any score below50 indicates a decline in billings). The new projects inquiry index was 56.3, up from mark of 54.4 the previous month. “Even though architecture firm billings nationally were down again in July, the downturn moderated substantially,” This graph shows the Architecture Billings Index since 1996. The index was at 48.7 in July, up from 45.9 in June. Anything below 50 indicates contraction in demand for architects' services. Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions

“Sticky Prices, Store-Switching, and Effective Price Flexibility” » Each new release of Consumer Price Index (CPI) inflation numbers is met with howls of derision by a number of online commentators. While some of the claims are baseless and already debunked by statistical agencies (e.g. Greenlees and McClelland 2008), others reflect the numerous practical and conceptual difficulties involved in measuring the price level and its changes over time. For example, the “substitution bias”—which reflects the reallocation of expenditures by households across different goods as their relative prices change—has long been emphasized as a potential source of long-term bias in the measurement of prices in the CPI (e.g. Boskin Commission report 1996). The substitution bias could also lead to cyclical mismeasurement of inflation if the properties of price changes vary over the course of the business cycle. For example, a greater frequency of sales in recessions could readily lead to an overestimation of the average prices paid if households switch brands in response to these sales.  More broadly, a key conceptual distinction is that between the prices charged by retailers (what the BLS tracks in constructing the CPI) versus the “effective” prices actually paid by households. The substitution bias is one mechanism which can drive a wedge between the two, but it is not the only one. A second is the reallocation of expenditures by households across retailers. That is, because consumers can switch from expensive stores like Whole Foods to cheap stores like Walmart, the effective price paid by consumers can decline even if consumers buys identical baskets of goods after the switch. Unlike the substitution bias, store-switching can drive a wedge between the two price concepts even at the level of an individual product (e.g. a pack of Saltine crackers).

Household Income Has Fallen More In The Recovery Than In The Great Recession -- A truly sobering statistic brings home just how severe the downturn of the Great Recession was, and how weak the recovery has been: — American incomes declined more in the three-year expansion that started in June 2009 than during the longest recession since the Great Depression, according an analysis of U.S. Census Bureau data by Sentier Research. Median household income fell 4.8 percent on an inflation- adjusted basis since the recession ended in June 2009, more than the 2.6 percent drop during the 18-month contraction, the research firm wrote in a report today. Household income is 7.2 percent below the December 2007 level, the former Census Bureau economic statisticians wrote. Almost every group is worse off than it was three years ago, and some groups had very large declines in income,” Green, who previously directed work on the Census Bureau’s income and poverty statistics program, said in a phone interview today. “We’re in an unprecedented period of economic stagnation.” While gains in hourly earnings and average hours worked per week may have had “a minor mitigating effect” on income declines, they couldn’t offset a jobless rate that hasn’t fallen below 8 percent since February 2009 and a record duration of unemployment.

The Cheapest Generation -- The company is trying to solve a puzzle that’s bewildering every automaker in America: How do you sell cars to Millennials (a k a Generation Y)? The fact is, today’s young people simply don’t drive like their predecessors did. In 2010, adults between the ages of 21 and 34 bought just 27 percent of all new vehicles sold in America, down from the peak of 38 percent in 1985. Miles driven are down, too. Even the proportion of teenagers with a license fell, by 28 percent, between 1998 and 2008.  In a bid to reverse these trends, General Motors has enlisted the youth-brand consultants at MTV Scratch—a corporate cousin of the TV network responsible for Jersey Shore—to give its vehicles some 20-something edge.  Subaru, meanwhile, is betting that it can appeal to the quirky eco-­conscious individualism that supposedly characterizes this generation. All of these strategies share a few key assumptions: that demand for cars within the Millennial generation is just waiting to be unlocked; that as the economy slowly recovers, today’s young people will eventually want to buy cars as much as their parents and grandparents did; that a finer-tuned appeal to Millennial values can coax them into dealerships.  But what if these assumptions are simply wrong? What if Millennials’ aversion to car-buying isn’t a temporary side effect of the recession, but part of a permanent generational shift in tastes and spending habits? It’s a question that applies not only to cars, but to several other traditional categories of big spending—most notably, housing. And its answer has large implications for the future shape of the economy—and for the speed of recovery.

Gasoline Volume Sales, Demographics and our Changing Culture - The Department of Energy's Energy Information Administration (EIA) data on volume sales is over two months old when it released. The latest numbers through mid-June were released today. However, this report offers an interesting perspective on fascinating aspects of the US economy. Gasoline prices and increased in fuel efficiency are important factors, but there are also some significant demographic and cultural factors in this data series.  I've added a 12-month moving average (MA) to give a clearer indication of the long-term trends. The next chart includes an overlay of monthly retail gasoline prices, all grades and formulations. The retail prices are updated weekly, so the price series is the more current of the two. As we would expect, the rapid rise in gasoline prices in 2008 was accompanied by a significant drop in sales volume. With the official end of the recession in June 2009, sales reversed direction ... slightly. But the 12-month MA of volume for the latest month (June 2012) is still about 6.6% below the pre-recession level. In fact, the latest data point is a level first achieved over thirteen years ago, in February 1999.  Some of the shrinkage in sales can be attributed to more fuel-efficient cars. But that presumably would be minor over shorter time frames and would be offset to some extent by population growth. Also, if we look at for data on the top 10 best-selling vehicles, energy efficiency doesn't seem to be a key factor, to judge from the weighting towards pickup trucks and of SUVs.

Gasoline Prices up 30 cents over last 7 weeks - Just filled up my car, and I paid $4.11 per gallon. Using the calculator from Professor Hamilton, and the current price of Brent crude oil, the national average should be around $3.68 per gallon. That is about the current level according to (see graph below). In California, where I live, gasoline prices are always higher than the national average. Update: Some of the recent increase in California was due to the refinery fire in Richmond The following graph shows the recent increase in gasoline prices. Gasoline prices are down from the peak in early April, but up about 30 cents over the last seven weeks. Note: This will push up the headline CPI numbers. Note: If you click on "show crude oil prices", the graph displays oil prices for WTI, not Brent; gasoline prices in most of the U.S. are impacted more by Brent prices.

Weekly Gasoline Update: Premium Tops $4.00 - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data. Gasoline prices at the pump, rounded to the penny, rose for the seventh week after 13 weeks of decline: Regular and premium both are both averaging eight about three cents higher than a week ago. They are now up 51 and 51 cents, respectively, from their interim weekly lows in the December 19th EIA report. The average price of Premium broke above $4.00 (at $4.014) for the first time since the week of May 14th. As I write this, shows three states, Hawaii, California and Illinois with the average price of gasoline above $4. DC and four other states are above is close behind at $3.90 (Connecticut, Oregon, Washington and New York). And speaking of Oregon, where I'm vacationing through the end of the month. Regular in downtown Portland seemed to in the vicinity of $4.25 (call it the metropolitan effect).

Gas costs more - in absence of shortage - Gas prices in California remain significantly higher than they were prior to the Aug. 6 fire at Chevron's Richmond oil refinery - despite the fact that the blaze didn't impact gasoline production in the state as initially feared. In fact, the state's refineries churned out more gasoline last week than they did the week before the fire, not less. Production of California-grade gasoline jumped 12.4 percent, nearing 6.8 million barrels for the week, according to an update from the California Energy Commission. The rise came in spite of - and probably in response to - the fire that seriously damaged California's third-largest refinery, which typically makes about 15 percent of the state's gasoline. "Other refiners around the state picked up the slack,"

Retail Gasoline in U.S. Rises to Record High for Season - Retail gasoline in the U.S. rose to a record for this time of year after refinery upsets cut fuel supplies and crude traded near a three-month high. The national average price for regular gasoline gained 2.3 cents to $3.744 a gallon this week, and was up from $3.581 a year ago, the Energy Information Administration said in report yesterday. That’s the highest level for this season since at least 1990, when the agency began collecting prices. U.S. retail gasoline has climbed for seven weeks, advancing 38.8 cents a gallon since July 2, as crude prices gained more than $12 a barrel and refinery disruptions sent gasoline inventories to the lowest level for this time of year since 2008. Prices at the pump averaged $3.72 a gallon yesterday, the highest ever for that day, and will probably break daily records for at least several more weeks, the AAA motoring organization said yesterday. “Crudes prices are most of it, and gasoline stocks are still really low,”

Vital Signs Chart: Falling Lessor Confidence - Confidence is falling among firms that help businesses lease and finance new equipment. A gauge of current and future business conditions among executives in the equipment leasing and finance industry fell to 50.2 in August from 51.5 in July. Executives surveyed said their more-pessimistic view is due to many kinds of uncertainty: economic, political and regulatory.

Survey: Economy, Fiscal Policy Trouble Small Businesses - A group that lobbies for small businesses released a big survey showing that uncertainty over the economy and fiscal policy have zoomed to the top of the list of businesspeople’s concerns. Health-care costs and taxes remain big bugaboos too, according to the once-every-four-years survey by the National Federation of Independent Business. “In the last four years, the federal government has enacted significant policy changes of an immense nature; their impact will continue as the regulatory system works to implement new policy directives,” NFIB said in a press release accompanying the survey. “Uncertainty also surrounds pending government action on the expiring 2001 and 2003 tax cuts, the debt ceiling and the federal budget. All of these policy changes create a huge ‘question mark’ for small-business owners, impeding their ability to make short and long-term business decisions.” Two important sources of uncertainty are the major overhauls of health-care and financial-services regulation that Congress passed in 2010. NFIB unsuccessfully challenged President Barack Obama’s health-care revamp in court. The survey shows that the cost of health insurance remains business owners’ top concern, followed by uncertainty over the economy at number two and uncertainty over government action at number four. Various other tax concerns filled out the list, at numbers 6-10.

Durable Goods orders increase 4.2% in July - Durable goods is always very volatile. This increase was related to a large increase in aircraft orders (Nondefense aircraft and parts increased 14.1%), Ex-transportation, orders fell 0.4% in July.  From the Census Bureau: Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders New orders for manufactured durable goods in July increased $9.4 billion or 4.2 percent to $230.7 billion, the U.S. Census Bureau announced today. This increase, up three consecutive months, followed a 1.6 percent June increase. Excluding transportation, new orders decreased 0.4 percent. Excluding defense, new orders increased 5.7 percent. Transportation equipment, up five of the last six months, had the largest increase, $9.9 billion or 14.1 percent to $80.4 billion. Expectations were for a 1.9% increase in orders.

Durable Goods Orders Up 4.2%, Above Expectations; But ex Transportation, Down 0.4% -- The August Advance Report on July Durable Goods was released this morning by the Census Bureau. Here is the summary on new orders:  New orders for manufactured durable goods in July increased $9.4 billion or 4.2 percent to $230.7 billion, the U.S. Census Bureau announced today. This increase, up three consecutive months, followed a 1.6 percent June increase. Excluding transportation, new orders decreased 0.4 percent. Excluding defense, new orders increased 5.7 percent. . Download full PDF  New orders at 4.2 percent blew away the consensus estimate of 2.5 percent. However, the ex-transportation -0.4 percent was below the consensus forecast of 0.6 percent.If we exclude both transportation and defense, "core" durable goods orders rose 1.3 percent, a major advance over last month's disturbing 5.7 percent in June following a flat May core equivalent. The first chart is an overlay of durable goods new orders and the S&P 500. An overlay with unemployment (inverted) also shows some correlation. We saw unemployment begin to deteriorate prior to the peak in durable goods orders that closely coincided with the onset of the Great Recession, but the unemployment recovery tended to lag the advance durable goods orders. An overlay with GDP shows some disconnect in recent quarters between the recovery in new orders and the slowdown in GDP — another comparison we'll want to watch closely.

Durable Goods Orders Rise In July, But Business Investment Slumps Again - New orders for durable goods rose by a healthy 4.2% last month, according to the U.S. Census Bureau, but the increase is marred by the ongoing drop in a widely monitored subset of these orders: business investment, defined as new orders for capital goods excluding aircraft and defense. Does the ongoing weakness in business investment tell us that we should ignore the otherwise encouraging news for broadly defined durable goods orders? If there are more clouds on the macro horizon than the top-line number suggests, what does that imply for the economy? In search of some perspective, let's take a closer look at the numbers. What is clear is that new orders overall have been reviving in recent months, gaining 4.2% in July—the best month since last December. It's another story for business investment, which slumped again last month by 3.4%, the biggest drop since last November.  For a clearer look at the trend, let's turn to rolling 1-year percentage changes. Unfortunately, today's update also delivers a mixed bag on this front. Although top-line durable goods orders appear to be stabilizing at a 5%-a-year-growth pace, business investment continues to weaken on a year-over-year basis. For the second month in a row, in fact, business investment fell relative to a year ago. We haven't seen such a run of negativity since 2009, as the second chart below reminds.

Mixed Picture in Durable-Goods Report - New orders for long-lasting manufactured goods surged in the United States in July, the Commerce Department said Friday, but a decline in a gauge of planned business spending pointed to slowing growth in the factory sector.  Durable goods orders jumped 4.2 percent on strong demand for civilian aircraft after an upwardly revised 1.6 percent increase in June, the government said. Last month’s increase was the largest since December. Economists polled by Reuters had forecast orders for durable goods, items from toasters to aircraft that are meant to last at least three years, rising 2.4 percent after a previously reported 1.3 percent increase in June.  Orders excluding transportation fell 0.4 percent, dropping for a second month in the a row.  Nondefense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, declined 3.4 percent after falling 2.7 percent in June.  Economists had expected this category to rise 0.7 percent after a previously reported 1.7 percent decline in June.

Underlying Weakness in Durable-Goods Report - Durable goods orders jumped 4.2% in July, yet all anyone can do is wring their hands over the sad state of manufacturing. It’s easy to figure out why: The gain was concentrated in aircraft and autos. Excluding transportation, new bookings fell 0.4% last month on top of a 2.2% decline in June. The narrow increase in orders has broad implications for the outlook. The factory sector had been the leader in this recovery. Now many manufacturers are suffering from a dearth of demand. Producers of fabricated metals, machinery, communications equipment and electrical goods and appliances saw orders drop in both June and July. Economists at RDQ Economics say shrinking order levels echo the contractionary readings of new orders compiled by the Institute for Supply Management. “This red flag suggests that manufacturing, which had been the mainstay of the recovery, could slow sharply over the coming months,” they write. If so, the RDQ economists think the U.S. economy may not pick up from its paltry sub-2% growth rate posted in the first half. A key sign of business pessimism: They have put capital projects on hold. New orders for nondefense capital goods excluding aircraft have declined significantly over the past two months. If companies felt confident about the future, many would be moving ahead to upgrade and expand their facilities.

Analysis: Disappointing Details in Durable-Goods Orders -- Orders for long-lasting goods posted the strongest gain of the year in July due to demand for cars and airplanes, though weakness continued outside the transportation sector. The Wall Street Journal Online’s Tom Ortuso breaks down the numbers with Sarah Watt, economic analyst at Wells Fargo

July Core Durable Goods Ex-Transports And Defense Implode - Today's Durable Goods number was blistering, if only on the headline. Coming at $230.7 billion, it was up a whopping $9.4 billion or 4.2%, on expectations of a 2.5% increase. The reason for the surge: the volatile transportation segment, which rose 14.1% to $80.4 billion. This is entirely due to Boeing aircraft orders, which rose to 260 this year compared to 10% of that a year ago, which however, as Quantas reminded us yesterday, can and will be promptly reversed (see: "Boeing hit by 'biggest-ever 787 order cancellation'"). In other words next month will be a headline disaster. So what happened beneath the headline when excluding volatile series: well - Durable Goods ex-transportations decline -0.4% in July, missing expectations of a +0.5% print, with the June number revised down from -1.1% to -2.2%. It gets worse: Nondefense capital goods excluding aircraft tumbled in July, and imploded to -3.4%, crashing below expectations of a -0.2% print, with the previous print revised from -1.4% to -2.7%). This means that indeed the brief blip higher in economic activity in the summer was largely transitory and was purely a byproduct of seasonal adjustment. Expect cuts to Q3 GDP forecasts to commence imminently by the sellside lemmings.

The ''Real'' Goods on the Latest Durable Goods Orders - Earlier this morning I posted an update on the August Advance Report on July Durable Goods Orders. This Census Bureau series dates from 1992 and is not adjusted for either population growth or inflation. Let's now review the same data with two adjustments. In the charts below the red line shows the goods orders divided by the Census Bureau's monthly population data, giving us durable goods orders per capita. The blue line goes a step further and adjusts for inflation based on the Producer Price Index, chained in today's dollar value. This gives us the "real" durable goods orders per capita. The snapshots below offer a sobering alternative to the standard reports on the nominal monthly data. Economists frequently study this indicator excluding Transportation or Defense or both. Just how big are these two subcomponents? Here is a stacked area chart to illustrate the relative sizes over time.Here is the first chart, repeated this time ex Transportation.  Now we'll exclude Defense orders.  And now we'll exclude both Transportation and Defense for a better look at "core" durable goods orders.

The Cost of Federal Rules on Manufacturing -A public policy group in Washington that represents mostly big manufacturers is putting a price tag—as well as a host of other numbers—on federal regulations. The Manufacturers Alliance for Productivity and Innovation, known as MAPI, hired NERA Economic Consulting, also D.C. based, to probe the impact of federal regulations on the U.S. manufacturing sector. The result: a 109-page report that picks apart the costs of federal rules large and small on various industrial sectors, including food and machinery, and also projects how much regulation could curb manufacturing output over the next decade. Not surprisingly, it’s not a pretty picture. A few those numbers, just to whet your appetite: U.S. manufacturers as a group face an estimated 2,183 unique regulations put in place between 1981 and April of 2012. In 2012, major regulations could cut the total value of shipments by U.S. manufacturers by up to $500 billion, calculated in 2010 dollars. The Environmental Protection Agency is largest single source of regulations on manufacturers—accounting for 972 regulations—followed by the Department of Transportation (880 regs), the Labor Department (214 regs), and the Energy Department (106 regs).

Foreigners Invest in U.S. Manufacturing - If the U.S. manufacturing revival is real, shouldn’t it be showing up at least partly as more foreign investment in American plants? It does, but you have to peel back a bit of the onion to see it. A recent analysis by U.S. Trust’s chief market strategist Joseph P. Quinlan found that, while there’s been an explosion in outward foreign investment of all kinds by U.S. companies over the past five years, the investment flow the other way slumped. But those numbers are distorted by an exodus of foreign banks, obscuring what Quinlan notes is a healthy boost in foreign investment in U.S. factories. Quinlan found that assets owned by euro zone banks in U.S. fell from a peak of $1.5 trillion in the second quarter of 2008 to $973 billion in the first quarter of 2012, a 35% decline. The upshot: Foreign investment into the U.S. finance sector dropped to a mere $26.4 billion last year — a fraction of the $120 billion in 2008. But as the banks rush for the door, foreign manufacturers have stepped up investments. “Foreign manufacturers are setting up shop in America at a near-record pace because they want to,” according to Quinlan. Indeed, investment inflows from foreign manufacturers hit about $91 billion last year—the highest annual total since 2007. Among the attractions: Proximity to the world’s richest consumer market and access to America’s stock of skilled workers and low-cost energy.

Why The Growth In Manufacturing Production Is A Mirage - A lot of people lament the decline in manufacturing employment, which has fallen by about 1/3 since 2000. As Upjohn Institute economist Susan Houseman points out in the linked article, we're talking about 5.5 million lost manufacturing jobs in that time frame. Instead of recovering as it did in previous recessions, after the 2001 recession manufacturing employment continued to fall, as Houseman points out. Here's what it looks like in long perspective:  But a number of commentators, including Matthew Yglesias and some more conservative ones cited by Houseman, have argued that what we really ought to be looking at is manufacturing output, which has risen steadily except for small blips during recessions. What's wrong with needing fewer people in manufacturing due to greatly increased productivity? Houseman argues that the increased productivity is a mirage, due to a single industry, computers. She writes: Real value added in the computer industry grew at a staggering rate of 22 percent per year from 1997 to 2007 and 16 percent per year from 2000 to 2010. In contrast, average growth of real value added in the rest of manufacturing was just 1.2 percent per year from 1997 to 2007; real value added in the rest of manufacturing was actually about 6 percent lower in 2010 than at the start of the decade.With that kind of growth, many multiples of GDP growth, we must be an export powerhouse in computers and electronics, right? Of course we aren't, so where does that gigantic growth rate come from? Houseman argues that the huge increases in computer power and semiconductor processing speed are what are beneath the apparently massive growth in productivity in the industry. In other words, the price deflators used to calculate real growth are the real reason productivity is apparently growing so rapidly in computers.

Markit Releases US PMI -- The Markit Flash U.S. Manufacturing Purchasing Managers’ IndexTM (PMITM)1 continued to signal only a modest improvement in U.S. manufacturing business conditions in August. The preliminary ‘flash’ PMI reading which is based on around 85% of usual monthly replies rose slightly from 51.4 in July to 51.9 and was the third-lowest since the manufacturing recovery was first indicated by the headline index in October 2009. This morning Markit Economics released their US PMI Index. They outlined the following key points:

  • Slight rise in the headline PMI index, but third- lowest reading in 35 months
  • Growth of output and new orders remain modest
  • Employment increases at slowest pace since December 2010
  • Marginal falls in input and output prices

Download the PDF from Markit Economics.

Philly Fed: State Coincident Indexes in July show weakness - From the Philly Fed:  The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for July 2012. In the past month, the indexes increased in 22 states, decreased in 17, and remained stable in 11, for a one-month diffusion index of 10. Over the past three months, the indexes increased in 32 states, decreased in 14, and remained stable in four, for a three-month diffusion index of 36. Note: These are coincident indexes constructed from state employment data. The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.  This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged). In July, 30 states had increasing activity, down from 35 in June. The last three months have been weak following eight months of widespread growth geographically. The number of states with increasing activity is at the lowest level since January 2010. Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession. And the map was all green just just a few months ago. Now there are a number of red states again.

The US labour market doesn’t work  - A quarter of a century ago, the US workforce was a wonder. Laid off in one corner of the economy, Americans quickly landed jobs elsewhere. But over the past decade, a profound change has come about. If US leaders understood what was at stake, their fights on taxes and spending would assume a different character. In 2000, according to data from the Organisation for Economic Co-operation and Development, US unemployment was the lowest in the G7 group of countries. Because jobs in America were easy to find, Americans felt confident in seeking them: the labour force participation rate was the G7’s highest. Combining these two effects, the share of US 15-64 year-olds in work, at 74 per cent, stood head and shoulders above competitors. Fast forward to 2012. US unemployment has gone from lowest in the G7 to third highest. Because workers have become discouraged, the US labour force participation rate has slipped from the top spot to the middle of the pack. In consequence, the share of Americans in work has declined by fully 7 percentage points, a fall nearly three times more drastic than experienced in the UK. Meanwhile, in the other five G7 countries, the employment-to-population rate has actually risen. A once enviable labour market has consigned millions to material and psychological want. Nor is it simply the amount of joblessness that has exploded. Back in 2000, the US could boast that just 6 per cent of its unemployed workers had been out of a job for 12 months or more. But by 2011, that share had jumped to 31 per cent. Why has the US lost its advantage? The answer is bigger than the financial crisis.  Rather, the truth is that US labour market arrangements, which worked brilliantly for a generation, are no longer adequate.

Most Of US Labor Market Damage Triggered By Recession Is Reversible: NY Fed - The majority of the damage to the U.S. labor market triggered be the Great Recession is reversible, according a research compiled by the Federal Reserve Bank of New York. About 1.5 percentage points of the increase in U.S. unemployment from 5 percent as the economic slump started to its 10 percent high in October 2009 stems from a mismatch between the supply of labor and job vacancies, according to a new study by the New York Fed. The remainder of the unemployment rate increase stems primarily from a lack of demand.

August Unemployment Not Looking Good  - Gallup’s Daily tracking of the unemployment situation is based on interviews with more than 30,000 adults over the 30 days ending Aug. 15, and shows essentially no change in the unadjusted unemployment rate at 8.3% compared to 8.2% in July. In turn, this suggests that the government’s unadjusted unemployment rate could increase to 8.7% in July from 8.6% in June. The government’s measurement of the unadjusted unemployment rate has been known to differ with Gallup’s findings, but a drop of 0.3% in July is necessary to bring the government’s unadjusted rate down to Gallup levels. More interestingly, there were no BLS seasonal adjustments in August 2011. If this remains the same in 2012, the Gallup seasonally adjusted unemployment rate for August would be 8.3% while that of the BLS would be 8.7%, assuming a similar increase to that shown in the Gallup data. Further, Gallup’s data show the labor force participation rate to be increasing in August. In turn, that could have an additional negative impact on the unemployment rate for August if the government’s data show a similar pattern.(…) Regardless, barring heroic adjustments or a sharp change in direction, Gallup data suggest the seasonally adjusted U.S. unemployment rate for August will increase — possibly substantially — when announced in early September.

Weekly Unemployment Claims: 372K, Above Expectations - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 372,000 new claims number was a 4,000 rise from the previous week's upward revision of 2,000. The less volatile and closely watched four-week moving average rose to 368,000. Here is the official statement from the Department of Labor:  In the week ending August 18, the advance figure for seasonally adjusted initial claims was 372,000, an increase of 4,000 from the previous week's revised figure of 368,000. The 4-week moving average was 368,000, an increase of 3,750 from the previous week's revised average of 364,250.  The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending August 11, unchanged from the prior week's unrevised rate.  The advance number for seasonally adjusted insured unemployment during the week ending August 11, was 3,317,000, an increase of 4,000 from the preceding week's revised level of 3,313,000.   Today's seasonally adjusted number was above the the consensus estimate of 365K. Here is a close look at the data since 2005 (with a callout for 2012), which gives a clearer sense of the overall trend in relation to the last recession and the trend in recent weeks.

Jobless Claims Rise Slightly Last Week, But The Trend Is Still Encouraging - Jobless claims rose modestly last week, the Labor Department reports, but reviewing the numbers in context with recent history suggests that this indicator is still on track to trend positive. New filings for the week ended August 18 increased by 4,000 to a seasonally adjusted 372,000, the highest level in five weeks. But that pales as a relevant factor compared with the year-over-year change for unadjusted claims, which posted a 10% decline as of last week. That's in line with recent history and an encouraging sign that the labor market continues to heal, albeit slowly. As usual, it’s best not to get worked up over the latest data point for this series, which has a habit of suffering lots of misleading short-term volatility. Even so, it’s worth mentioning that last week's seasonally adjusted update remains near a four-year low. More importantly, the annual percentage change in new claims—before seasonal adjustment—is still comfortably below zero, dropping 10% last week from its year-earlier level. That’s roughly the pace we’ve seen for the better part of the past year, give or take the occasional diversion. The message is that new filings for unemployment benefits are still drifting lower, once we strip away the short-term noise and seasonal distortion.

Millions Now Stuck in the Rut of Self-Employment - Whether it’s by preference or an act of desperation by people who’ve gone years without a full-time job, U.S. workers are striking out on their own in greater numbers than ever before. The number of Americans who consider themselves self-employed reached 22.1 million in 2010, up 414,000 from the previous year, according to the latest data from the Census Bureau. That represented 14.4 percent of the civilian labor force, more than two percentage points higher than 2002. The average pay for self-employed people, however, has fallen sharply because of the Great Recession. The self-employed earned $43,003 in 2010 -- $3,721 less than average self-employment pay in 2006. As opportunities in better-paying fields like construction and real estate evaporated, people moved into fields like health care and social assistance; arts, entertainment and recreation; education; and “other” services like personal care and beauty parlors, all of which pay less than $30,000 a year on average.

BLS: Displaced Workers Summary - This is an interesting biennial survey that tracks people who lost jobs that they had held for 3+ years ... From the BLS: Displaced Workers SummaryFrom January 2009 through December 2011, 6.1 million workers were displaced from jobs they had held for at least 3 years, the U.S. Bureau of Labor Statistics reported today. This was down from 6.9 million for the survey period covering January 2007 to December 2009. In January 2012, 56 percent of workers displaced from 2009-11 were reemployed, up by 7 percentage points from the prior survey in January 2010.Some improvement for the previous survey (that included 2008). But, as of January 2012, only 56 percent of these workers had found new employment. And about 1/3 of those who were reemployed, took 20%+ pay cuts. From the survey: Of the 3.0 million displaced workers who lost full-time wage and salary jobs during the 2009-11 period and were reemployed, 2.4 million had full-time wage and salary jobs in January 2012. Of these reemployed full-time workers who reported earnings on their lost job, 46 percent were earning as much or more in January 2012 as they did at their lost job. About one-third reported earnings losses of 20 percent or more.

New Jobs Come With Lower Wages - During the recession, people who lost long-held jobs struggled to find new employment and often took substantial pay cuts if they did find new work. Little appears to have changed after the recession ended, a new Labor Department report shows. From 2009 to 2011, 6.1 million workers lost jobs they had held for at least three years. Just over half — 56% — of them were reemployed by this January, the department found in its latest survey of displaced workers. Two years ago, the survey found that 49% of people who lost such jobs from 2007 to 2009 were reemployed. People lucky enough to find new work are often taking steep wage cuts. Of the displaced workers who lost full-time wage and salary jobs from 2009-2011 and were reemployed by January, just 46% were earning as much or more than they did in their lost job. A third of them reported earnings losses of 20% or more. Both figures are almost identical to those from the prior report. (See our article from last year about these workers: “Downturn’s Ugly Trademark: Steep, Lasting Drop in Wages”)

The Stranded Unemployed - On Thursday I wrote about how incomes have declined sharply in the last few years, particularly for people approaching retirement age. A new report from the Bureau of Labor Statistics sheds some light on why: People who lost work, especially if they’re older, often aren’t finding re-employment; even when they do find new work, they’re taking major pay cuts. The bureau’s report looked at workers who were laid off from 2009 to 2011, and where they ended up as of January 2012. Of all these workers, just 56.9 percent had jobs as of January. Another 27.5 percent were still unemployed, and 15.7 percent had dropped out of the labor force altogether. Older workers were much less likely to find re-employment, and more likely to drop out of the labor force. Among workers near retirement — ages 55 to 64 — less than half found re-employment. And nearly a quarter just dropped out of the labor force. Those 65 or older were even more likely to drop out of the labor force; about half (50.5 percent) did so. Remember, though, that people in that demographic have a relatively easier time getting by without a job because they can receive their full Social Security benefits. Men were also more likely than women to find re-employment, with 60.5 percent of men and just 51.7 percent of women taking new jobs.

Trade With China Has Cost the U.S. 2.7 Million Jobs - So says the Economic Policy Institute in an updated study. Over the last decade, from 2001 to 2011, the United States has lost a whopping 2.7 million jobs to China alone and this estimate is conservative. The China PNTR trade agreement was signed by President Clinton on October 10th, 2000 and China entered the WTO in 2001.  The more than 2.7 million jobs lost or displaced in all sectors include 662,100 jobs from 2008 to 2011 alone—even though imports from China and the rest of the world plunged in 2009. Below is EPI's map showing China unfair trade's job losses as a percentage of total state employment. These are not just a few minor localized pockets of jobs. We're talking significant payroll percentages per state being lost just due to China trade.

What is a Beveridge Curve and What is it Telling Us? - A Beveridge curve is a graphical relationship between job openings and the unemployment rate that macroeoconomists and labor economists have been looking at since the 1950s. But in the last decade or so, it has taken on some new importance. It is used as part of the explanation for search models of unemployment, part of the work for which Peter Diamond, Dale Mortensen and Christopher Pissarides won the Nobel Prize back in 2010. It also has some lessons for how we think about the high and sustained levels of unemployment in the U.S. economy in the last few years.   Let's start with an actual Beveridge curve. The monthly press release from the Job Openings and Labor Turnover Statistics (JOLTS) data from the U.S. Bureau of Labor Statistics offers a Beveridge curve plotted with real data. Here's the curve from this month's press release: The economy’s position on the downward sloping Beveridge Curve reflects the state of the business cycle. During an expansion, the unemployment rate is low and the job openings rate is high. Conversely, during a contraction, the unemployment rate is high and the job openings rate is low. The position of the curve is determined by the efficiency of the labor market. For example, a greater mismatch between available jobs and the unemployed in terms of skills or location would cause the curve to shift outward, up and toward the right."

Looking for a Good Job? Don’t Get Your Hopes Up - If you think your job stinks, you're not alone. And if you’re still looking for a decent job, don’t expect to find one anytime soon, or ever. A new analysis of job quality, assessing various measures of benefits and wages, confirms what many of us already suspected: Good jobs are vanishing from the United States, with global trade and social disinvestment leaving workers stranded on a barren economic landscape. The report, published by John Schmitt and Janelle Jones from the Center for Economic and Policy Reseach (CEPR), shows that the downward spiral began long before the recent economic crisis. It notes that since 1979, the "good job" (one that "pays at least $18.50 an hour, has employer provided health insurance, and some kind of retirement plan") has become an endangered species: [T]he economy has lost about one-third (28 to 38 percent) of its capacity to generate good jobs. The data show only minor differences between 2007, before the Great Recession began, and 2010, the low point for the labor market.

The State Willing to Pay Big Bucks to Attract New Workers -- Throughout the Great Recession and the post-recession era, North Dakota has stood out from the pack with an unusually low unemployment rate. Thanks mainly to the state’s oil boom, jobs in North Dakota have been plentiful for years. As of July, the unemployment rate was just 3%, lowest in the nation. In early 2011, when the unemployment rate throughout the U.S. stood at 9%, North Dakota’s was 3.9%, prompting the Wall Street Journal to report on how the state was struggling to attract much-needed doctors, nurses, truck drivers, welders, engineers, retail clerks, insurance agents, and more. A year later, by which time North Dakota’s unemployment rate dropped to 3.3%, a much-cited op-ed suggested that America’s unemployed and underemployed youth desert states such as Nevada (13% unemployment) for greener pastures (at least figuratively) in North Dakota. Lately, though, the state going to the most extraordinary lengths to attract workers isn’t North Dakota, but its neighbor to the south. Earlier this year, South Dakota agreed to pay up to $5 million to the Wisconsin-based recruiting firm Manpower Group to help pursue what it’s calling the “1,000 New South Dakotans” initiative. As the name indicates, the plan is to attract 1,000 new workers—in fields such as health care, education, manufacturing, technology, and finance—to the state by the spring of 2014. The hope is that the millions spent on recruiting will quickly be recouped in the form of the taxes and other revenues collected through the arrival of all of those new workers.

New York City Jobs: Striking Divergence in Household Survey vs. Establishment Survey - The Federal Reserve Bank of New York is asking the question Good News or Bad on New York City Jobs?: Unlike much of the nation, New York City has seen a robust rebound in employment since the recession. In early 2012, employment here reached 3.86 million, the largest number of jobs ever recorded. Yet the city’s unemployment rate has risen in recent months and is now 10 percent—its peak during the recession—and well above the 5 percent rate seen before the downturn.  Two estimates of New York City employment are reported each month—the count of the number of jobs (based on a survey of business establishments) and a count of the number of people employed (based on a household survey). Between August 2008 and December 2010 the establishment survey showed that New York City lost 130,000 jobs, or about 4 percent of total city employment, and the household survey showed comparable declines. As of June 2012, however, the establishment survey showed that city employment had rebounded by almost 200,000, reaching an all time high, while the household survey showed no rebound at all. In fact, the unemployment rate, which is calculated from the household survey, has recently crept up—from 9.1 percent in December to 10.0 percent in June.

Young Women Face Tougher Summer Job Market - It’s getting harder for young women to find summer jobs. The unemployment rate for women aged 16 to 24 rose this summer from 13.8% in April to 16.2% in July—the peak month for summer jobs—as high-school kids and college graduates sought work at restaurants and retailers or entered the job market for the first time in a weak economy, according to data released by the Labor Department Tuesday. By contrast, the unemployment rate for young men only nudged higher, from 17% to 17.9%. The number of young men actively participating in America’s labor force by working or seeking work increased 16% between April and July compared with 12% for women. That suggests it wasn’t simply a huge glut of additional women in the workforce that pushed female unemployment higher. The new data provide the latest evidence of how bad the economic rebound has been for women compared with men. Adult men suffered more intensely than women during the recession as industries like manufacturing and construction cratered, yet they’ve also been quicker to find work during the recovery.

For Some Women, Discrimination Prevents Return to Work - Women have yet to recover in the recovery. While men suffered bloated unemployment levels during the “mancession,” the trends have since reversed. Since the beginning of the recovery (June 2009), men experienced more than quadruple the job gains made by women. This can at least be partially explained by the fact that men were climbing back from low employment levels, plus massive layoffs in some areas, such as education, where women hold the majority of jobs. But can it all be explained that way? A new study helps fill in the picture with what else might be at work: good old-fashioned discrimination. There are some logical, if preventable, reasons for women’s employment struggles: first and foremost is the fact that austerity and budget cutting has lead to a historic loss of public sector jobs, and women, who are the majority of government workers, have born the brunt of those layoffs. We’ve lost about 600,000 public sector jobs since the recession ended, making for the smallest government workforce relative to our population since 1968. Much of those were public school teachers. For every ten jobs women gained in the private sector during the recovery, they’ve lost more than four public sector jobs. And yes, we might expect men to make faster job gains after experiencing such low levels of employment during the height of the crisis.

Part II - Robots to Rule the World? Taking All Jobs? Replace Women? - In part I of Robots to Rule the World? Taking All Jobs? Replace Women? I took a deep look at numerous robot and computer technologies that are displacing workers at a rapid pace.  Will Robots to Rule the World? Right now it appears that way. Manufacturing may be returning to the US, but automation has eliminated the human workers. And it's not just manufacturing. For example, consider, JCPenney to Eliminate All Checkout Clerks, Instead Using RFID Chips and Self-Checkout. If that idea catches on for major retail stores, tens-of-thousands of jobs will vanish. Will anything replace those jobs? What follows is a pair of widely-differing viewpoints from an email exchange with a couple of friends regarding technology and robots. One friend talks about a collapse of society, the other sees unimaginable numbers of jobs in industries we cannot even conceive of now.

Immigration and Skilled Workers - The U.S. is the world’s most popular destination for foreign students, hundreds of thousands of whom go to college and graduate school here. . But there’s also a missed opportunity for the U.S.: many of these foreign students would prefer to stay and put their skills to work here after they graduate, but they can’t get work visas. What’s more, studies estimate that hundreds of thousands of highly skilled immigrants already working here find themselves stuck in immigration limbo for years, waiting for visa and green-card applications to be approved. These are well-educated, motivated workers who want to play for our side. Yet we’re making it difficult for them to do so.  Since the nineteen-sixties, U.S. immigration policy has been designed to encourage the immigration of family members rather than of skilled workers. In 1990, the number of employment-based permanent visas was capped at a hundred and forty thousand a year. We also cap the visa allocation for each country, regardless of size, at seven per cent of the total number of visas, so only a fraction of the applications from China and India get approved. As of 2006, according to one study, more than half a million highly skilled immigrants were waiting for permanent visas, and the backlog in some visa categories was decades long. Other countries, meanwhile, have positioned themselves to benefit from the talent we’re turning away.

California Farm Labor Shortage 'Worst It's Been, Ever' - There's a different sort of drought plaguing California, the nation's largest farm state. It's $38 billion agricultural sector is facing a scarcity of labor.  The Western Growers Association told CNBC its members are reporting a 20 percent drop in laborers this year. Stronger border controls are keeping workers from crossing into the U.S. illegally, and the current guest worker program is not providing enough bodies. "We have 100 fewer people this year," said Sergio Diaz, who provides workers under contract for growers. "We're having difficulty finding people to do this work."The lack of workers is forcing farmers to pay more. In one of Underwood's fields, pickers are harvesting peppers for $9.25 a hour, or $5 a bucket, whichever is more. Craig Underwood said his workforce is aging and starting to retire, and no one is coming in to replace them.

The Luddite Fallacy Fallacy -- I’ve spent a lot of time considering (here, here, here, and here) the notions of technological unemployment and the Luddite Fallacy: the idea that technologically driven productivity — machines — will replace, are replacing, human labor. I’d like to revisit that here. My basic conclusion: the Luddites were obviously wrong at the time. But they’re right now — at least in the U.S.  I think the Luddite Fallacy argument ignores two things:
1. The limits to human capabilities. By definition, 50% of people have an IQ below 100. I don’t think anyone who’s reading (or writing) these words can begin to imagine how hard it would be to make a go of it in modern America with an IQ of 90 — to build a prosperous and secure life, raise a stable, happy family, or ensure that you can be self-sufficient in your waning years. Even getting through high school would be really hard. The original Luddites weren’t hitting that cognitive limit — not even close. Today, tens of millions of people are slamming right into it (over time, hundreds of millions).
2. The declining marginal utility of innovation and consumption. As I pointed out in a post a while back: Pretty much every important invention of the modern world – trains, planes, automobiles, air conditioning, antibiotics, painkillers, telephones, radio/television, computers – had already been invented and was in at-least-fairly widespread use when I was growing up in the sixties. The only thing since then has been the internet.

Men on a Wall -- I recently saw a newspaper photo of ten or twelve men sitting on a crumbling stone wall beside a dirt road. It was somewhere in Africa, but the location doesn’t matter. What matters is that the men, as the caption made clear, were sitting on the wall because they had nothing else to do: they had no land to farm, there was no local job or employment available to them, they had no savings or credit with which to start some venture. So they sat. Presumably there was some place of charity they trudged off to at the end of each day, where they got some food and water and a place to sleep; but when they awoke, there was nothing really to do except go back and sit on the wall. What is interesting to consider is the Conservative and Progressive positions with respect to these men. The Conservative believes the only thing that can improve their daily plight is the “free market”: Until some local or regional entrepreneur organizes a tranche of capital and starts a venture that requires the men’s labor, there is nothing to be done except let them sit. The Progressive believes that, in absence of the free market coming along and giving the men something to do, the sovereign government ought to hire them to do something—anything really, like, for example, getting off the wall and restacking the fallen stones so the wall is tall and straight again. The Progressive argues that hiring the men to do something—even if it’s just stacking stones in an orderly fashion—puts into motion a virtuous cycle of benefits:

A nation of temps - Almost one-third of American workers now do some kind of freelance work—and they lack almost every kind of economic security that permanent full-time workers have traditionally had. Though exact figures are impossible to find, many experts and labor organizers estimate that about 30 percent of U.S. workers are “contingent.” That means they don’t have a permanent job. They work as freelancers, temporary workers, on contract, or on call, or their employers define them (often illegally) as “independent contractors.” Their ranks include writers and warehouse workers, janitors and business consultants, truck drivers and graphic designers—and their number is rising. Richard Greenwald, a sociologist of work and professor at St. Joseph’s College in Brooklyn, estimates that their share of the U.S. workforce has increased by close to half in the last ten years. In July, Staffing Industry Analysts reported that the average share of contingent workers at companies it surveyed had gone up by one-third since 2009, to 16 percent. Last year, a different survey found that contingent workers averaged 22 percent of the workers at 200 large companies. These workers are often called the “precariat,” a combination of “precarious” and “proletariat,” because the traditional social safety nets for workers don’t cover them. They have no job security as they hustle from one gig to the next, and they often don’t know where their next job is coming from or when it will come. They very rarely get paid sick days or vacation. They don’t get paid extra for working overtime. They are usually not eligible for unemployment benefits. They generally have to pay both the worker’s and the employer’s share of Social Security taxes. They have to pay for their own health insurance, and Obamacare won’t change that.

Middle class continues to shrink: study - The American middle class continued to shrink last year while also falling behind in its share of the nation's wealth as more affluent citizens grab an ever larger piece of the economic pie, according to a report released Wednesday by the Pew Research Center. In 2011, the middle income tier -- those making $39,000 to $119,000 a year -- comprised just 51% of all adults, down from 61% in 1971. Over the same period, the upper tier rose to 20% of adults from 14% while the poor are now 29% as opposed to 25%. And, over the last 40 years, only the rich increased their share of the wealth, now taking in 46%, up from 29%, with the middle tier getting 45%, down from 62%. "The middle class has shrunk in size, fallen backward in income and wealth, and shed some -- but by no means all -- of its characteristic faith in the future," Pew said in announcing the results of its study.

Study: Middle class poorer, earned less in 2000s – For the first time since at least World War II, middle-class families finished the first decade of the 21st century poorer and with lower incomes than they had 10 years earlier.And 85% of those surveyed say that in the 2000s, it was harder than before to maintain a middle-class lifestyle, according to a study out Wednesday by the Pew Research Center's Social and Demographic Trends project. Median household income dropped nearly $3,500 for a three-person middle-class household, to $69,487 a year, after adjusting for inflation, the Pew study said. The median household's net worth dropped 28% to $93,150. Incomes have dropped since 2000, while wealth rose modestly early in the decade before gains were wiped out by the recession that began in 2007 and the financial crisis sparked in 2008,"It's been 11 years since the peak in household incomes, and that covers the early part of the decade as well." The middle class grew smaller, poorer and more pessimistic during the decade, Pew said after analyzing both its own polling data and a raft of government and private economic reports. The results show even a weakening of Americans' traditional faith that their children will be better off than their parents, Taylor said: 43% of respondents think their children will be richer than they are, down from 51% in 2008.

Last decade worst for US middle class - America’s middle class suffered its worst decade in modern history during the 2000s as net worth and wages declined, according to a report from the Pew Research Center that underlines the challenges facing President Barack Obama as he seeks re-election. Median household income for America’s middle class fell from $72,956 in 2001 to $69,487 in 2010, the report said, the first time since the second world war that the middle class ended a decade with a smaller income than it started with.  While all sectors of society experienced a decline in income, the middle class is the only one that also got smaller. It shrank from 61 per cent of adults in 1971 to 51 per cent last year. “The notion that the middle class always enjoys a rising standard of living is a part of the idea of America,” said Paul Taylor, executive vice-president of the Pew Research Center. “Now the middle class has a smaller slice of a smaller pie.”

Lost Decade for Shrinking Middle Class - The middle class — defined as households with between two-thirds and double the nation’s median income — has shrunk considerably over the past few decades, a decline that has been greatly exacerbated by the recession and housing bust. In 2011, the nation’s middle class income bracket held 51% of households, down from 61% in the 1970s, according to this report released today by the Pew Research Center. Over the same period, both the upper and lower income brackets have grown. Pew notes that while middle class incomes fell over the 2000s decade, the bigger hit was falling home and asset values. The median middle class income fell 5% over the decade, but total wealth — assets minus debt — fell 28%. The recession has left many middle class families feeling more pessimistic about their future — only 23% said say they were very confident that they would have enough income and assets to last throughout retirement — and even eroded their faith in hard work. About two thirds middle class people believed most people who want to get ahead can do so if they work hard, down from 74% in a 1999 survey.

A New Report on the Middle Class -- The Pew Research Center just released a report worth a close look, called “The Lost Decade of the Middle Class.”  (FTR, I wrote this a year ago…I await royalties.) The title comes from the observation that real median income or the more comprehensive measure of net worth were lower at the end of the last decade than at the start (see figures below). That’s historically unusual, if not unprecedented.  For years, starting in the 1980s, I wrote that median wages and incomes were diverging from productivity growth and were growing considerably more slowly than they had in the past.  But they were at least growing in real terms—i.e., they were lagging behind productivity but at least beating inflation.  Now, they’re lagging both. Before digging into what’s behind these changes, some definitions and a few other factoids of note from the report:

  • –Pew uses an admittedly arbitrary but reasonable measure: households with between 2/3 and two times the median income, which amounts to about $40-120K in 2011 dollars. 
  • –As shown in the second chart below, real median net worth—assets minus debts—cliff-dove 2007-10, down a massive $60K, a 40% loss.  But the fact that middle-class net worth is back to 1980s levels is important and unsettling.
  • –The middle class may have been doing less well over time, but measured as noted above, they were always the largest share of the population and held the largest share of income.  They still comprise the largest share of households, but just barely, at 51%, and their share of total income, trending down for decades, is now slightly below that of the top tier group.

The 14 Potential Causes of the Income Slump - Why has median household income just endured its worst 12-year stretch since the Great Depression.The immediate answer to that question is that economic growth has slowed and inequality has risen. The pie isn’t growing very quickly, and the few new slices are going to a disproportionately small portion of the population. But that answer is really just an accounting answer. The more important questions are why economic growth has slowed and why inequality has risen – not just over the last 12 years but, less severely, since the early 1970s as well. With help from economists and from Times readers who commented on our first post in the Agenda series, I compiled a list of 14 potential major causes for the income slowdown. In coming days, I’ll be writing posts about what economists see as the major causes.  For now, we invite you to weigh in: for each of the 14 causes, listed alphabetically below, let us know if you think it’s very important, modestly important, or only marginally or not important. If you want to skip some potential causes because you’re not sure, you can do that too. We also invite you to use Twitter to send your answers to #TheAgenda.

‘The Price of Inequality’ and ‘The Betrayal of the American Dream’ - Every four years, the nation seems to find itself wrapped in a debate about economic fairness and the struggles of the middle class. A presidential campaign has a wonderful way of focusing Washington’s mind on the country’s largest economic voting bloc, and 2012 is no exception. But the concerns seem more real and more threatening this time. There is increasing evidence that the nation is splitting into a land of haves and have-nots. I’ve seen the disparities first-hand in small communities and big cities around the country. And recent figures from the Federal Reserve show that the median family has assets (including their house but subtracting their mortgage) of roughly $77,300. The top 10 percent of families have nearly $1.2 million. That’s the kind of gap not seen since the 1920s, just before the Great Depression. For people on the left of the political spectrum, those figures aren’t just disheartening, they demand action, or at least talk — lots and lots of talk. Flip through the TV or radio dial, and you will find no shortage of progressive politicians, journalists and thinkers offering analyses and critiques of the growing wealth gap. The White House, too, has joined in, bringing the populist argument to President Obama’s stump speeches and attack ads.

Payday Lenders Using Courts to Create Modern-Day Debtors' Prisons in Missouri, Critics Say - A practice in Missouri of summoning debtors to civil court for an "examination" is resulting in arrests and prompting critics to complain about modern-day debtors' prison tactics in the state. While Missouri's Bill of Rights explicitly declares "no person shall be imprisoned for debt, except for nonpayment of fines and penalties imposed by law," the St. Louis Post-Dispatch reports that residents are regularly being jailed over their private debt. Jail time comes into play after a creditor secures a civil judgment against a debtor, then asks to have the debtor summoned to court for an "examination" to explore creditor assets, the Post-Dispatch explains. If the debtor is a no-show, the creditor can ask for the debtor's arrest in the form of a "body attachment." Once arrested, the debtor can be held until there's a court hearing or bond is posted. "Debtors are sometimes summoned to court repeatedly, increasing chances that they'll miss a date and be arrested," the Post-Dispatch reports. "Critics note that judges often set the debtor's release bond at the amount of the debt and turn the bond money over to the creditor—essentially turning publicly financed police and court employees into private debt collectors for predatory lenders."

Chart Of The Day: Americans At Or Below 125% Of The Poverty Level - From AP: "the number of Americans with incomes at or below 125 percent of the federal poverty level - the income limit for qualifying for legal aid - is expected to reach an all-time high of 66 million this year. A family of four earning 125 percent of the federal poverty level makes about $28,800 a year, government figures show." And visually...

Poverty's Up, Yet Still on the Back Burner - Nearly 50 million people in this country, the richest in the world, are poor. Another 50 million, the near-poor, are just a notch or two above the official poverty line. They can feel the awful flames of poverty licking at their heels. Those two groups, the poor and the near-poor, make up nearly one-third of the entire American population. And what are our mainstream politicians doing? When they’re not hammering the poor, mocking them, waging war on the threadbare safety net programs that help stave off destitution, they’re running as fast as they can away from the issue of poverty and from the poor themselves, running like sprinters chasing Olympic gold. No one wants to be too closely identified with the poor.

This Week in Poverty: Here's to the Houston Janitors - Last week, more than 3,200 janitors in Houston called an end to their five-week strike. The cleaning contractors initially offered a total wage increase of $.50 an hour phased in over five years—so in 2016 the janitors would earn $8.85 an hour. The janitors asked for a raise to $10 an hour over three years. In the end, the janitors accepted $9.35 an hour over four years, a 12 percent increase over their current pay. They also fought off an effort by the contractors that would have allowed them to underbid the union wage when competing against non-union shops. It is distressing (though not surprising) that the janitors had to sacrifice to such an extent just to gain a raise of twenty-five cents an hour for four years. Houston is “Millionaire City,” after all, having added more millionaires to its population than any other city in the United States for two years running. These janitors sanitize the bathrooms and workspaces, empty the trash and vacuum the floors of some of the largest and most powerful corporations in the world: JPMorganChase, Shell, ExxonMobil, Chevron, Wells Fargo, KBR and Marathon Oil, to name a few. Many in this predominantly female workforce literally have to run to clean more than 100 toilets in five hours each night. Prior to the strike, the janitors earned about $8,684 annually. In four years, when they see their full raises, they will be paid about $10,000 annually.

Writing Off Poor Children - Blame those single moms. If only they had married and stayed married, their children would have turned out so much better. This argument elicits furious responses from those who insist that single mothers deserve more respect, with good reason. The role that men play in the single-parent situation also deserves more attention. But the blame game persists. In a recent New York Times article on poverty problems, a youth counselor says, “If you don’t have a father figure in your life, you don’t have discipline and structure, and without structure, you don’t have anything. You have chaos.” But the “chaos” conclusion does not follow from research showing that, on average and controlling for easily measured factors like income and education, children raised by two biological parents tend to fare better than others. The “chaos” argument does provide a rationale for minimizing public expenditures on poor children, on the grounds that they are damaged human capital, nonperforming assets, sunk costs that can never be recouped.Step back from any moral concerns and focus on an economic balance sheet. Would greater public investments in poor children pay off for taxpayers? Many economists have demonstrated a high rate of social return on public expenditures on poor children. James Heckman makes a famously strong case for early childhood education.

Philadelphia woman faces charges for feeding poor children — RT: A woman may be fined $600 for each day she provided free food to children in a poor Philadelphia neighborhood for the past few months.Angela Prattis, 41, of Chester Township has been distributing free healthy lunches in a neighborhood that has a per capita income of $19,000 a year.Prattis made no money from the meal distribution, and gave out food provided by the Archdiocese of Philadelphia. The “lunch lady” ran the charity out of her garage, to which about 60 children came, five days a week.After the city council was alerted of the free lunches, it ruled that she would have to acquire a variance to give away food next summer – or pay a fine of $600 a day. The council considers Prattis’ deed a zoning violation. Three months of distributing food would instigate a fine of more than $50,000.“It’s not like I’m selling food,” she objected. “These kids are hungry. I’m not tearing down the community. I’m keeping the children out of harm’s way,” she said in a Fox News interview.But a variance to distribute food would also be costly. Administrative fees for a variance would cost up to $1,000.

Councilwoman goes against peers to feed Houston's homeless - - A city councilwoman broke city ordinance as organizers passed out dozens of warm meals to the homeless in Downtown Houston. Volunteers set up camp on public property across the street from the city's library. The problem? They didn't give the council notice nor did they receive written permission to serve food. "We do not need permission to feed and share with our fellow people," said Nick Cooper with Food Not Bombs, the group behind Wednesday night's event. Cooper was fully aware he could face a citation, but he said his organization feeds four days out of the week and will continue to do so, despite the revised city ordinance that went into effect July 1.

Pre-Trial Slave Sues Jail for $11 Million—in Vermont - The year was December 2008, and University of Vermont graduate student Finbar McGarry faced a dilemma. An inmate in a Vermont county jail, McGarry was required by correctional authorities to work in the jail laundromat for 25 cents per hour. If he refused to work, McGarry would have been thrown in solitary confinement—otherwise known as “the hole.” Not a pleasant alternative. There’s plenty of legal and historical precedent for putting convicts to hard work in America. But McGarry was still awaiting trial. He had yet to be convicted. Upward of 1,000 inmates trapped in jail pre-trial posed little to no danger to the public—more than five percent of the county jail population. They were simply being held because they were too poor to pay for bail. Eventually, McGarry relented and chose to work in the laundry rather than face a prolonged and brutal spell in “the hole.” During the course of his work, McGarry says he contracted a serious MRSA lesion on his neck—a potentially deadly bacterial infection. McGarry’s charges were ultimately dropped, and he was released. In 2009, he pressed a suit against his former captors in Brattleboro, Vermont, federal court for $11 million—claiming he was made a slave in violation of his 13th Amendment rights. The Brattleboro judge ruled that McGarry’s constitutional rights had not been violated, but that finding was overturned on appeal last week.

Local Governments May Be Less Willing to Pay Debts, Fitch Says - Rating cuts in the $3.7 trillion municipal-debt market will outpace upgrades by “a wide margin” as lagging property-tax revenue and persistent labor costs stress local governments, according to Fitch Ratings. Chapter 9 bankruptcy filings and defaults may extend beyond California, where Stockton, Mammoth Lakes and San Bernardino each sought court protection in the past two months, Fitch said today in a report. Twelve percent of local-government rating actions in 2012 through July were reductions, compared with 2 percent for upgrades, according to the New York-based company. “The consideration of municipal bankruptcy as a viable option for relief in itself calls into question an issuer’s commitment to repaying debts,” Fitch analysts including Dan Champeau said in the report. “Chapter 9 filings on a broader scale would represent a marked departure from municipal governments’ long demonstrated willingness to avoid default and bankruptcy.” Local governments have been slow to recover from the 18- month recession that ended in June 2009, with revenue falling for six straight quarters, according to a report from the Nelson A. Rockefeller Institute of Government in Albany, New York. Cities and counties receive about 33 percent of their revenue from state transfers and 29 percent from property taxes, according to the Fitch report.

Buffett’s Move Raises Red Flag - A decision by Warren Buffett's Berkshire Hathaway Inc. to end a large wager on the municipal-bond market is deepening questions from some investors about the risks of buying debt issued by cities, states and other public entities. The Omaha, Neb., company recently terminated credit-default swaps insuring $8.25 billion of municipal debt. The termination, disclosed in a quarterly filing with regulators this month, ended five years early a bullish bet that Mr. Buffett made before the financial crisis that more than a dozen U.S. states would keep paying their bills on time, according to a person familiar with the transaction.

Cities near a tipping point - While the state's financial situation has stabilized in the past two years, municipalities hurt by the 2008 recession have been limping from fiscal year to fiscal year, worried that they'll stumble without some sort of aid. Rochester used a one-time, $15 million dollop of state aid to reduce its $40 million deficit this year. The mayor of Syracuse has asked a law firm to draft a memo about the possibility of municipal bankruptcy. In Yonkers, project deficits over the next four years will total over half a billion dollars. That's billion with a B. Officials at the state and local levels say many governments outside of New York City are at or near a tipping point — between eliminating services such as garbage collection or imposing financial control boards, like the ones already in place in Buffalo and Nassau County.

In Affordable Housing Program, City Oversight of Builders Is Found Wanting -- Like her neighbors, Ms. Estrella and her husband said they had battled ever since with the builder and implored city officials to deal with many problems, like cracks in the foundation walls, a leaky roof, a sinking backyard, windows that move with the wind, crumbling front steps and an undersized boiler. “We trusted the city. We feel like we were bamboozled.” Ms. Estrella and other owners of city-subsidized housing insist that oversight is critically needed for one of Mayor Michael R. Bloomberg’s main initiatives, the largest municipal housing program in the country. They, along with a group of construction unions, support a bill that the City Council approved unanimously last month that would require the city’s Department of Housing Preservation and Development to publicly disclose information about builders of affordable housing, including how they were selected, the size of their subsidies, construction complaints for each project and workers’ wages. But Mr. Bloomberg has vowed to veto the legislation, saying a key element of the bill would be costly and irrelevant to resolving construction-related complaints at what city housing officials say are a relatively small number of projects. The City Council will almost certainly override the veto. Bloomberg administration officials say they support disclosing information about the builders and construction-related complaints and have already started a series of contractor reviews. But they say the construction unions have pushed to require a wealth of unnecessary information on workers’ wages.

Goldman Sachs Looks to Turn a Profit on Program to Fight Recidivism | The Nation: Earlier this month, New York Mayor Michael Bloomberg announced the first-ever “social impact bond” in the United States. The bond, between the city of New York and investment giant Goldman Sachs, will finance a behavioral treatment program for incarcerated adolescents on Rikers Island. Unlike a traditional revenue bond, a social impact bond will pay a dividend only if the target outcomes are met—in this case, that the recidivism rate among the youth treated falls by 10 percent. If it does even better, Goldman Sachs will turn a small profit—with the city footing the bill. The initiative is based on a program in Peterborough, England, which used a social impact bond to fund a program that also sought to reduce recidivism. But there is one big difference between the Peterborough program and Bloomberg’s. In Peterborough, the investors were a group of individuals and charitable organizations, including the Rockefeller Foundation. (The results of the Peterborough experiment remain inconclusive). In New York City, the investor is a profit-driven private company that has a track record of making huge returns on other people’s financial troubles. To sweeten the deal for Goldman Sachs, Bloomberg has arranged for his foundation to guarantee most of the bond, allowing Goldman Sachs to face almost no risk.

BP recalls bad gasoline in Indiana, but after $1,200 repair bills for some drivers - Thousands of drivers in northwest Indiana face hefty car repair bills after BP sold some 2.1 million gallons of contaminated gasoline that can foul their engines. BP has recalled the bad fuel and says it will pay for repairs -- but first drivers have to get it out of their tanks. BP says "a higher than normal level of polymeric residue" contaminated 50,000 barrels of regular unleaded gasoline from its Whiting, Ind., refinery shipped between Aug. 13 and Aug. 17. That fuel went to hundreds of gas stations in northern Indiana -- some under the BP brand, but many independent stations as well. Soon after, scores of drivers began coming to repair shops reporting hard-starting and stalling engines, "check engine" lights, odd noises and other signs of engine trouble. Getting contaminated fuel out of a vehicle isn't as easy as just draining the gas tank. Every part that the gas touched between the tank and the engine has to be flushed and cleaned as well, and bad fuel has been known to ruin higher-pressure fuel injectors common to newer vehicles. Not every car will need a mechanic; people who bought only a few gallons could try to dilute their bad gas with premium unleaded and get by. A simple fix might run $200 to $300, but a few owners have already said their repair bills have topped $1,200.

New Orleans is no longer the most blighted city in America, report finds - Since Hurricane Katrina, New Orleans has consistently held the unwanted crown of most blighted city in America. That's no longer true, said Allison Plyer, chief demographer for the Greater New Orleans Data Center. A report released by the nonprofit agency on Monday shows that Detroit and Flint, Mich., had a greater percentage of dilapidated housing stock than the Crescent City, a first since the levees failed and drowned the city in 2005. The new report estimated that 8,000 properties in New Orleans were repaired or rebuilt between September 2010 and March 2011, leaving around 21 percent of all properties blighted, compared with 27 percent in Flint and 24 percent in Detroit. Youngstown, Ohio, a poster child of Rust Belt decline that has been further hammered by the recent recession, tied with New Orleans in the survey, followed by Cleveland at 19 percent and Baltimore at 14 percent. The study does not track blight in every city in America, but the researchers have monitored six of the U.S. cities most synonymous with urban decline.In comparing New Orleans with other places, the report estimates there are roughly 43,680 blighted or vacant units here. But of those, about 8,000 are likely habitable, the report says, meaning the number of truly blighted lots and units is more like 35,700.

Metal thieves ravage more than a third of Camden school buildings - Metal thieves have knocked out the heating, ventilation, and air-conditioning (HVAC) units in more than a third of Camden school buildings since fall, leading district officials to wonder how they will pay for replacements. In the last year, at least 15 units in 11 locations have been destroyed by vandals who stripped them of copper and iron. District leaders are scrambling to come up with more than $750,000 for new apparatus and protective cages. The unexpected expense "can take away from things that needed to be done during the school year," district business administrator Celeste Ricketts said. "You need to make smart decisions where you don't impact programs."

Indiana public schools wage unusual ad campaign - Struggling Indiana public school districts are buying billboard space, airing radio ads and even sending principals door-to-door in an unusual marketing campaign aimed at persuading parents not to move their children to private schools as the nation's largest voucher program doubles in size. Unlike voucher programs in other states that are limited to poor families and failing school districts, the Indiana subsidies are open to a much broader range of people, including parents with a household income up to nearly $64,000 for a family of four. The median income for an Indiana family of four was just over $67,000 in 2010, making many of the state's nearly 1 million public school students eligible for vouchers. Last year, the effect of the new vouchers was limited because the law passed just four months before the start of school, and many parents were still unfamiliar with the program. But this year, more than 8,000 students have already applied for vouchers, and there is room for up to 15,000. The number of participants could grow even more next year, when the ceiling on the number of vouchers is eliminated. Leaders of poor urban schools, which suffered the most defections last year, are especially worried. A district loses $5,300 to $8,400 for each student who leaves.

The Hispanic high school graduation rate is increasing - The number of young Hispanics enrolled in college, which surpassed black enrollment for the first time in 2010, jumped to almost 2.1 million last year, from about 1.3 million in 2008. That is partly a product of a swelling Hispanic population, as well as the increased rate of college attendance. But it also reflects a fast-rising high school graduation rate. In the 1990s, fewer than 60 percent of Hispanics 18 to 24 had a high school diploma, but that figure hit 70 percent for the first time in 2009, and 76 percent last year. Here is a bit more.

Education policy comes into sharper focus - For those who've seen Mitt Romney's stump speech several hundred times, it's easy to recite the Republican's five point plan in our sleep: he wants to (1) expand U.S. energy policy, (2) improve education; (3) expand trade; (4) cut the deficit; and (5) help small businesses. Do any of these planks come with any details at all? Well, no, but Romney promises to fill in the details later. It's that second element of the five-part platform, however, that's of particular interest this week. On education, Romney's stump speech tells voters, "We're going to make sure our kids and our adults have the skills they need to succeed. We need to make sure our schools are the best in the world. They are not now. They will be. We'll make them the best." How?  The Democratic National Committee unveiled this video this morning, noting Romney's education plan and the details of the Republican agenda: slash Pell Grants, cut college tax credits, reintroduce the loan-system middleman that rewards banks instead of students, and encourage young people to choose wealthy parents when thinking about higher education.

ACT scores show less than half of test-takers are ready for college math - Nearly 60 percent of Portland Public Schools students who took the ACT college entrance exam are not ready to pass college-level math courses, according to data released by ACT this week.  Chief Academic Officer Sue Ann Higgens called the results "disappointing," especially considering the district's continued focus on mathematics. The district has pushed to have algebra classes available to more students before high school, and mandates three math courses for a diploma. This week's results showed only 42 percent of test-takers from the class of 2012 were college-ready in math. "We're certainly not satisfied with the level of achievement we're seeing on this measure," Higgens said. Many universities require the ACT or SAT examinations for admission, but the ACT also tries to use benchmark scores to measure college readiness. For example, an 18 on the English section of the exam indicates a 75 percent chance of getting at least a C in a college-level English class. A score of 22 on the math test would do the same for a college-level algebra class.

How Does Education Help in the Great Recession? - There's a new report, "Weathering the College Storm," that has attracted some attention in the economic blogs. Dylan Matthews wrote about it here and again here, with Dean Baker and Larry Mishel adding in critical commentary.The report looks at who has gained the most jobs since the "recovery" started, a period they benchmark to January 2010. They find that people with bachelor's degrees and some college have gained all the jobs, while people with just a high-school diploma or less haven't gained any jobs over this time period. They also find that about 80 percent of the new jobs created since January 2010 have gone to men. What should one conclude? Well, one conclusion is that we wouldn't have any unemployment if we had fewer women and more men. Since men are gaining all the jobs, it stands to reason that if we, on net, had more men and fewer women, we'd have a lot more people employed.  You might point out that I must have skipped a step somewhere. When we are so far away from full employment, does this analysis make sense? Instead of actually reflecting the proper allocation of labor this is just reflecting the fact that, for a variety of reasons including discrimination, men are jumping to the front of the queue to take all of the new jobs that are created. But the report seems to go in the other direction and argue that if there were a lot more college-educated workers we'd have more employment; alternatively, the lack of properly educated workers is a check on recovery.

Trading Caps and Gowns for Mops - After commencement, a growing number young people say they have no choice but to take low-skilled jobs, according to a survey released this week. And while 63% of “Generation Y” workers — those age 18 to 29 — have a bachelor’s degree, the majority of the jobs taken by graduates don’t require one, according to an online survey of 500,000 young workers carried out between July 2011 and July 2012 by, a company that collects data on salaries. Another survey by Rutgers University came to the same conclusion: Half of graduates in the past five years say their jobs didn’t require a four-year degree and only 20% said their first job was on their career path. “Our society’s most talented people are unable to find a job that gives them a decent income,” says Cliff Zukin, a professor of political science and public policy at Rutgers. The jobs that once went to recent college graduates are now more often going to older Americans. Over the past year, workers over 55 accounted for 58% of employment growth, says Dean Baker, a co-director of the Center for Economic and Policy Research, a nonprofit think tank in Washington, D.C. Why? Employers think older workers are a safer bet and more likely to stay, he says. Unemployment hovered at 6.2% in July for workers over 55, according to the Labor Department, but was more than double that rate — 12.7% — for those ages 18 to 29. As a result, college graduates are finding themselves locked into lower-paid jobs.  The starting salary for a graduate is $27,000, 10% less than five years ago, the Rutgers' study found.

Why go to college if I can’t get a job? - The College Board reports that from 1981 to 2011, after adjusting for inflation, the average published cost of going to college is up 180% for private, nonprofit four-year colleges and 268% for in-state, public four-year colleges. The College Board indicates that the increase in median family income, adjusted for inflation, was up only 17.8% from 1981 to 2011. Largely due to the Great Recession, inflation-adjusted median family income dropped 8% and net worth dropped 39% from 2007 to 2010,  The Project for Student Debt notes that the average amount of federal student loan debt held by two-thirds of graduating seniors has increased from $18,259 in 2005 to $25,250 in 2010 (a 38% increase).  This average debt doesn't include private loans or credit card debt held by these grads. The unemployment rate for all college graduates over 25 years old is currently 4.1%, less than half of the national unemployment rate of 8.3%.  But a recent Economic Policy Institute study reports that the unemployment rate is 9.4% for college grads ages 21 to 24 (not currently seeking a post graduate degree), and the underemployment rate for this group is 19.1% (this includes part-time workers who want full-time jobs). In 2011, those grads lucky enough to have a full-time job earned an average of $35,000 a year, a 5.4% inflation adjusted decrease from 2000 average income.   Finally, it is estimated that nearly 4 of 10 grads are working in fields that don't require a college degree (the college-grad barista syndrome).

Intangible Infrastructural Capital - By intangible infrastructural capital, I mean knowledge about other people acquired by individuals in the course of their daily lives when interacting with, and relating to, other people, even superficially, within the different sorts of communities to which they belong. The concept of intangible infrastructural capital could properly be expanded to include language and law and traditions of various kinds, but for purposes of this post, I prefer to focus chiefly on a narrow subset of the entire class of knowledge that might fit into the category. By knowledge, I don’t mean factual or scientific knowledge, I mean expectations about what people will do or how they will react under a variety of conditions or circumstances. I call this knowledge capital, because almost all knowledge has some value and usefulness, and this knowledge is acquired only through the expenditure of some effort, even when the knowledge is acquired more or less incidentally in the course of actions that people take or activities in which they engage that bring them into contact — regular contact — with other people. Thus, the assets are acquired and maintained only by way of some minimal investment of time and effort to form such relationships, however superficial. The assets are intangible, because the assets are almost never embodied in physical form, rather existing only in the minds and memories of individuals, available for use when particular circumstances make that knowledge useful. The assets are infrastructural, because, like physical infrastructure – roads, public utilities and the like — they create an environment in which people are able to pursue their own interests and formulate and execute their own plans to advance those interests. The individual pieces of knowledge are more meaningful and useful in the aggregate than they are considered as separate bits of information, because the aggregate of knowledge helps people coordinate expectations in a way that allows their lives to be conducted on the basis of shared mutually consistent expectations about how each other will behave.

Fracking and academic freedom: A former researcher who says he left the Colorado School of Mines due to pressure from the oil and gas industry has now lost his university job in Wyoming after an industry association complained to his superiors about comments he made about fracking. It appears to be one of several examples of faculty around the country experiencing blowback from the powerful oil and gas industry after releasing research exposing the possible health hazards associated with hydraulic fracturing, or fracking, and other extraction processes. What makes Geoffrey Thyne’s case distinctive is that he claims he and his university employers have caught heat from the industry more than once.

Elite Public University Gives Up On Climate Science In Response To Not-So-Elite Public University’s Campaign To Smear Its Former Climate Scientist - When I first heard news in the beginning of the summer of a coup underway at the University of Virginia, I wondered idly if it had anything to do with climate change—specifically, ousted (and since reinstated) President’s Teresa Sullivan’s defense of the former UVA professor behind the “hockey stick” graph documenting its existence against state attorney general Ken Cuccinelli’s demands for every email/paper/grant application/log/cocktail napkin/etc. he touched during his seven years at the school. Well, this is starting to look like the most depressingly accurate hunch I’ve had in my career as a journalist—and trust me, the “hunch” thing gets way too easy at a certain point in this business.  First it emerged that Sullivan had not simply defended Mann from Cuccinelli’s itchy subpoena finger, she’d been campaigning to hire him back to UVA. To a cushy deluxe professorship endowed by coup co-conspirator Mark Kington, no less! It’s as if she didn’t even care that Ken Cuccinelli is running for governor next year!

Getting Rid of the College Loan Repo Man: Not so long ago, the kind of troubles McNeil has known were generally limited to poor and working-class people who attended shady for-profit trade schools. But these days, more and more middle-class Americans who attended mainstream public and private colleges are having trouble with the loans they took out to finance their educations, and they too are getting caught in the often brutal gears of the system that manages those loans. In the absence of serious reform, the feelings of rage and helplessness that accompany such experiences are likely to become much more common. The average amount of debt amassed has risen by 50 percent since 1993, to about $25,000. According to the Project on Student Debt, the proportion of students who graduated from four-year colleges owing at least $40,000 has grown, from 3 percent in 1996 to 10 percent in 2008. Four out of five of these recent borrowers took out high-cost private student loans on top of their federal loans.Our current system for collecting student loans makes no distinction between deadbeats who cheat and the much greater numbers of people who just don’t have the money to repay. As predatory debt collection agencies ruin the lives of more and more Americans, we are ignoring an easy and fair solution.

Low-interest locusts (Reuters) - Another financial crisis looms for U.S. taxpayers, a disaster likely to create even worse human misery than the mortgage fiasco that some of us warned about years before the Wall Street meltdown in 2008. The crisis next time: collapsing investment incomes for older Americans as artificially reduced interest rates force them to use up their savings and drive more pension plans into failure. Eviscerating the interest income of savers is the undeniable result of a long-running Federal Reserve policy to reduce interest rates, especially since December 2008. The Fed reiterated on Aug. 1 that it plans to keep interest rates low through late 2014. It says this helps to promote stronger economic growth and bring down the jobless rate. As in the mortgage crisis, you can see this disaster building by examining the official data. At the broadest level, 53 percent of taxpayers earned interest in 2000. But by 2010 just 39 percent did, my analysis of Internal Revenue Service data shows, while high-interest debt has become ubiquitous. From 2000 to 2010 total interest earned by savers fell 53 percent in real terms, a decline of $134 billion. Average interest earned per taxpayer, measured in 2010 dollars, plummeted from $1,950 to $825. A drop of $1,125 per taxpayer may not seem like much, especially since the average income reported on 2010 tax returns was more than $56,000. But look at who relies on interest to make ends meet and the problem comes into focus.

Big Income Losses for Those Near Retirement - Americans nearing retirement age have suffered disproportionately after the financial crisis: along with the declining value of their homes, which were intended to cushion their final years, their incomes have fallen sharply. The typical household income for people age 55 to 64 years old is almost 10 percent less in today’s dollars than it was when the recovery officially began three years ago, according to a new report from Sentier Research, a data analysis company that specializes in demographic and income data. Across the country, in almost every demographic, Americans earn less today than they did in June 2009, when the recovery technically started. As of June, the median household income for all Americans was $50,964, or 4.8 percent lower than its level three years earlier, when the inflation-adjusted median income was $53,508. The decline looks even worse when comparing today’s incomes to those when the recession began in December 2007. Then, the median household income was $54,916, meaning that incomes have fallen 7.2 percent since the economy last peaked.  Income drops vary significantly by age, though. Households led by people between the ages of 55 and 64 have taken the biggest hit; their household incomes have fallen to $55,748 from $61,716 over the last three years, a decline of 9.7 percent.

CalPERS defends pension benefits while risking bankruptcy losses - CalPERS is defending government workers against criticism of their benefits even while it risks losses as municipalities, faced with rising retirement costs, file for bankruptcy. The $238.4 billion pension fund is the largest creditor in Chapter 9 bankruptcy cases filed by two California cities, Stockton and San Bernardino, since the end of June, with a total of $290.8 million in payments to the system at stake. Increasing retiree obligations are straining budgets of cities across the Golden State, still grappling with income- and sales-tax revenue reduced by the longest recession since the Great Depression. The two bankrupt cities represent 0.7% of employer contributions to CalPERS, according to actuarial statements. Still, others may follow if judges relieve them of pension commitments, said Karol Denniston, a bankruptcy lawyer at Schiff Hardin. Stockton and San Bernardino both cited rising employee retirement costs as factors that drove them to seek court protection. A third community in bankruptcy, Mammoth Lakes, hobbled by a legal judgment, owes CalPERS $4.2 million, according to its filing.

Study warns of funding shortfalls for pensions - North America’s major pension plans have seen their cumulative funding shortfall balloon to more than $389-billion (U.S.), leaving many plans facing critical funding shortfalls, a new study shows. A pension study by debt rating agency DBRS Ltd. shows the majority of 451 major Canadian and U.S. pension plans that were examined are entering the “danger zone” where their funding shortfall is so large it is not easily reversed. The shortfalls are the result of weak markets harming the investment portfolios of pension plans, as well as declining interest rates hurting returns and boosting the funding obligations for future retirees.DBRS said 53.4 per cent of the pension plans it studied had assets below 80 per cent of their funding obligations at the end of 2011, which means their funding shortfall had passed the 20 per cent level. That compares to 45.7 per cent of pension plans with funding falling below 80 per cent in 2010. While there is no official measure of adequate funding for a pension plan, DBRS said it considers 80 per cent to be a reasonable level of shortfall that companies can recover from fairly easily. Below that level, the gap is so large that it becomes more difficult to fund.

Sen. Sanders talks about Social Security’s surprising surplus - Current TV: Sen. Bernie Sanders (I-Vt.) joins Bill to weigh in on Bill’s worries about Social Security and to talk about possible dangers to the program that Rep. Paul Ryan as Romney’s running mate represents. Sanders says, “With Paul Ryan on the ticket, we have to be very worried about Social Security.” He points out that Social Security has a surplus of $2.7 trillion that the mainstream media are ignoring, and he says that with some “minor changes,” that surplus will be good for another 75 years.

One Simple Measure That Would Save Social Security and More -- Today, a Post by Josh Boak highlighted the proposal of “fixing” Social Security by lifting the cap on payroll taxes. ”Social Security already appears to be running aground, just two decades before the program — which accounts for about 20 percent of federal spending — is projected to crash into insolvency. “There’s an easy repair, but it involves drastically hiking taxes, so voters aren’t hearing about it on the campaign trail. Under federal law, millionaires and billionaires get to dodge payroll taxeson a substantial percentage of their salaries. Employers and workers are charged payroll taxes on salaries up to $110,100 a year, meaning anything above that — a category that includes some of the middle class — is payroll-tax free. Simply lifting that cap would cover about 90 percent of the projected shortfall over 75 years, according to forecasts by the Social Security Administration. Boak then goes on to point out other difficulties with, as well as benefits of, the proposal. Even though this proposal is very simple; there is an even simpler solution the problem, without the drawbacks. Stephanie Kelton outlines it this way: “Part B of Supplemental Medical Insurance (SMI), which pays for doctors’ bills and other outpatient expenses, and Part D, which pays for access to prescription drug coverage, are both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet the next year’s expected costs.”

Romney Adviser Says GOP Would Extend Medicare's Solvency By Raising The Eligibility Age: Earlier this week, Mitt Romney pledged to restore Obamacare’s savings in the Medicare program — a move that would move up the insolvency date of the program’s trust fund from 2024 to 2016. On Fox News Sunday, Chris Wallace asked Romney senior adviser Ed Gillespie how the campaign would extend the life of the program if the Romney-Ryan reforms won’t kick in until 2023, long after Medicare reached insolvency. Gillespie replied by insisting that a Romney administration would raise the age eligibility to 67: WALLACE: But the problem is, those reforms don’t kick in until 2023. It doesn’t affect any seniors or anybody close to being a senior. But that doesn’t solve the Medicare part A problem which kicks in in 2016. What are you going to do to keep solvent between 2016, after you have repealed Obamacare, and 2023? GILLESPIE: Governor Romney supports increasing over time bringing Medicare eligibility in line with the Social Security retirement age … The Congressional Budget Office says assumptions about the Medicare trust fund being solvent through 2024 under the Obamacare proposal is unrealistic…. Booting 65- and 66-year-olds from Medicare would in fact have only modest savings, while raising health care costs across the board for seniors…. The Center On Budget and Policy Priorities estimates [extra] costs [to those kicked off of Medicare] could “total $11.4 billion — twice the net savings to the federal government” in 2014…

Medicare (Dis-)Advantage - One more quick dive into the weeds on the Medicare dust up and then I promise to get back to the real economy and jobs.    And hear this: the next misleading turn in the debate will be around something called Medicare Advantage and one can already get a pretty good idea of the obfuscation that’s coming. For decades, Medicare recipients could enroll in private plans instead of traditional Medicare and a few years ago, Congress created Medicare Advantage, further expanding private coverage options for seniors in Medicare.   About a quarter of Medicare recipients are enrolled in such plans right now. So why am I bugging you about this? First, yesterday Gov Romney said the following: “The plan that I’ve put forward is a plan very similar to Medicare Advantage. It gives all of the next generation retirees the option of having either standard Medicare, a fee-for-service-type, government-run Medicare, or a private Medicare plan.” Second, a significant source of health-care savings in the Affordable Care Act—a chunk of which extend the life of the Medicare trust fund by eight years—comes from reducing overpayments to these MA plans (see the blue section of the pie chart here).

Private-Market Tooth Fairy Can’t Cut Medicare Cost - Peter Orzag - The vast bulk of health-care costs arise from an extremely small share of patients, whose insurance will inevitably bear a substantial share of their expenses.  That’s why competition in health care doesn’t work as well as in other sectors, and it’s also why the key to keeping costs to a minimum is to encourage providers to offer better, less costly care in complex cases.  Unfortunately, proponents of moving Medicare to a private “consumer-driven” system, including Republican vice presidential hopeful Paul Ryan, seem to instead believe in a health-care competition tooth fairy -- that if we just increase the patient’s share of costs and bolster competition among insurance companies, the expense will come down. As Karl Rove recently argued, “Competition will lower costs by using market forces to spur innovation and improvement.”  Someone might want to tell that to the Congressional Budget Office, which evaluated Ryan’s original 2011 proposal to gradually move all of Medicare to private insurance companies. (In all these comparisons, we must remember that the goal is to reduce total cost -- to the government and the beneficiary combined -- compared with current projections. Merely shifting costs across the two categories is not a particularly impressive accomplishment.)  What did the budget office conclude? “A private health insurance plan covering the standardized benefit would, CBO estimates, be more expensive currently than traditional Medicare.” The reason was that “both administrative costs (including profits) and payment rates to providers are higher for private plans than for Medicare.”

How Obamacare's $716 Billion in Cuts Will Drive Doctors Out of Medicare - There are 600,000 physicians in America who care for the 48 million seniors on Medicare. Of the $716 billion that the Affordable Care Act cuts from the program over the next ten years, the largest chunk—$415 billion—comes from slashing Medicare’s reimbursement rates to doctors, hospitals, and nursing homes. This significant reduction in fees is driving many doctors to stop accepting new Medicare patients, making it harder for seniors to gain access to needed care. Here are a few of their stories.Paul Wertsch is a primary physician in Madison, Wisconsin. In 1977, he and his two partners invested $500,000 of their own money and opened their own practice, the Wildwood Family Clinic, on the east side of town. Wertsch’s clinic is popular with the seniors who go there, but over time, Medicare’s fee schedule has made it harder and harder on the practice. These problems with the Medicare program predate the passage of Obamacare. For decades, politicians have been wrestling with Medicare’s runaway costs. Conventional fixes, like raising the retirement age, reducing benefits, or raising premiums were considered politically toxic. So instead, Congress sought the path of least resistance: paying doctors and hospitals less to provide the same level of service.

Patients Would Pay More if Romney Restores Medicare Savings, Analysts Say -  Mitt Romney’s promise to restore $716 billion that he says President Obama “robbed” from Medicare has some health care experts puzzled, and not just because his running mate, Representative Paul D. Ryan, included the same savings in his House budgets. The 2010 health care law cut Medicare reimbursements to hospitals and insurers, not benefits for older Americans, by that amount over the coming decade. But repealing the savings, policy analysts say, would hasten the insolvency of Medicare by eight years — to 2016, the final year of the next presidential term, from 2024. While Republicans have raised legitimate questions about the long-term feasibility of the reimbursement cuts, analysts say, to restore them in the short term would immediately add hundreds of dollars a year to out-of-pocket Medicare expenses for beneficiaries. That would violate Mr. Romney’s vow that neither current beneficiaries nor Americans within 10 years of eligibility would be affected by his proposal to shift Medicare to a voucherlike system in which recipients are given a lump sum to buy coverage from competing insurers. For those reasons, Henry J. Aaron, an economist and a longtime health policy analyst at the Brookings Institution and the Institute of Medicine, called Mr. Romney’s vow to repeal the savings “both puzzling and bogus at the same time.”

Rationing Health Care More Fairly - Older adults are understandably anxious about the political sniping over the future financing of Medicare. That is precisely the intention of the presidential campaigns.  Yet the cross-fire over who will cut Medicare by how much sidesteps a critical issue about the future of our medical care: If we must ration our care to hold down costs in the future, how can we do it in a fair, efficient and transparent way?  Mitt Romney’s campaign was brazenly misleading in its charge that the president’s health plan would cut medical services to older adults by reducing Medicare spending by $716 billion. The president’s savings will come mostly from smaller payments to managed care companies, which provide the same services as Medicare at a higher cost, and from slower growth in reimbursement rates to health care providers.  But the response of President Obama’s campaign also aimed to stoke voters’ fears. It stressed — rightly — that the plan to curb Medicare costs proposed last year by Representative Paul D. Ryan, Mr. Romney’s vice-presidential running mate, would add thousands of dollars to older Americans’ out-of-pocket expenditures. Both campaigns claim they are out to protect future health care. Yet the sniping hides the real issue. Protecting federal health programs over the long term, as the population ages and medical costs keep rising faster than economic growth, will require curbing the programs’ spending. And we haven’t quite figured out how to do that.

Unethical Commentary, Newsweek Edition -- Krugman -- There are multiple errors and misrepresentations in Niall Ferguson’s cover story in Newsweek — I guess they don’t do fact-checking — but this is the one that jumped out at me. Ferguson says: The president pledged that health-care reform would not add a cent to the deficit. But the CBO and the Joint Committee on Taxation now estimate that the insurance-coverage provisions of the ACA will have a net cost of close to $1.2 trillion over the 2012–22 period. Readers are no doubt meant to interpret this as saying that CBO found that the Act will increase the deficit. But anyone who actually read, or even skimmed, the CBO report (pdf) knows that it found that the ACA would reduce, not increase, the deficit — because the insurance subsidies were fully paid for.Now, people on the right like to argue that the CBO was wrong. But that’s not the argument Ferguson is making — he is deliberately misleading readers, conveying the impression that the CBO had actually rejected Obama’s claim that health reform is deficit-neutral, when in fact the opposite is true. We’re not talking about ideology or even economic analysis here — just a plain misrepresentation of the facts, with an august publication letting itself be used to misinform readers. The Times would require an abject correction if something like that slipped through. Will Newsweek?

Understanding Medicare "Cuts" - Paul Krugman - Jackie Calmes has a very good piece about those Medicare “cuts” Romney promises to repeal. As she emphasizes, all of these involve reductions in payments to insurance companies and health providers, rather than reductions in patient benefits. So what are we talking about? Sarah Kliff had a good summary. Most of the proposed savings come from reducing overpayments to Medicare Advantage and reducing reimbursement rates to hospitals. What should you know about these changes?Medicare Advantage is a 15-year failed experiment in privatization. Running Medicare through private insurance companies was supposed to save money through the magic of the marketplace; in reality, private insurers, with their extra overhead, have never been able to compete on a level playing field with conventional Medicare. But Congress refused to take no for an answer, and kept the program alive by paying the insurers substantially more than the costs per patient of regular Medicare. All the ACA does is end this overpayment. As for the cuts in hospital reimbursement, the key thing to know is that the hospital industry itself negotiated those cuts. Here’s how John McDonough’s Inside National Health Reform describes it:The negotiation involved the White House and high-level Senate Finance staffers. The agreement involved two numbers: $155 billion in reductions over ten years, and health insurance coverage for 95 percent of all Americans.

The Baker-Mankiw Solution to the Impending Doctor Shortage -- Uwe Reinhardt lays out what seems to be a central theme in the conservative critique of ObamaCare as he cites this NYTimes discussion:  The Association of American Medical Colleges estimates that in 2015 the country will have 62,900 fewer doctors than needed. And that number will more than double by 2025, as the expansion of insurance coverage and the aging of baby boomers drive up demand for care. Even without the health care law, the shortfall of doctors in 2025 would still exceed 100,000. Health experts, including many who support the law, say there is little that the government or the medical profession will be able to do to close the gap by 2014, when the law begins extending coverage to about 30 million Americans. It typically takes a decade to train a doctor ... The Obama administration has sought to ease the shortage. The health care law increases Medicaid’s primary care payment rates in 2013 and 2014. It also includes money to train new primary care doctors, reward them for working in underserved communities and strengthen community health centers. Textbook economics suggests that the market addresses shortages by increases in prices – which in this case is the compensation for doctors. These critiques are missing something important, which we noted here. Simply put, doctors in the U.S. are already receiving much higher compensation than highly trained doctors in other nations for reasons noted by both Dean Baker and Greg Mankiw.

Health Care Thoughts: Hospitals Rising - One of the key operational themes of PPACA (Obamacare) is integration. Almost all models of integration have a hospitals or hospital networks as the hub. Some networks are already highly integrated, others are headed in that direction. (There was a big push for integration at the time of the Clinton-care proposals, some of the integration stuck and some of it unwound as a result of operational disasters.) This gives hospitals and hospital networks an immense amount of new power, whether it is used for good or ill is yet to be seen (I have often encountered a "not-for-profits give better care and are more ethical" theme, but as NFP merge into networks with billions of dollars this does not appear to me to be correct). In regions with competing networks there are stampedes for "market share," with a great deal of money often thrown into new facilities and new services. There are also bidding wars for employed physicians and battles for favorable affiliations with practice groups.  This also creates a "talent war" for quick and nimble executives, and I fear the ascendency of "slick-and-useless" MBAs in the hospital industry.

Testing Standard Medical Practices - BY 1990, many doctors were recommending hormone replacement therapy to healthy middle-aged women and P.S.A. screening for prostate cancer to older men. Both interventions had become standard medical practice. But in 2002, a randomized trial showed that preventive hormone replacement caused more problems (more heart disease and breast cancer) than it solved (fewer hip fractures and colon cancer). Then, in 2009, trials showed that P.S.A. screening led to many unnecessary surgeries and had a dubious effect on prostate cancer deaths. How would you have felt — after over a decade of following your doctor’s advice — to learn that high-quality randomized trials of these standard practices had only just been completed? And that they showed that both did more harm than good? Justifiably furious, I’d say. Because these practices affected millions of Americans, they are locked in a tight competition for the greatest medical error on record. The problem goes far beyond these two. The truth is that for a large part of medical practice, we don’t know what works. But we pay for it anyway. Our annual per capita health care expenditure is now over $8,000. Many countries pay half that — and enjoy similar, often better, outcomes. Isn’t it time to learn which practices, in fact, improve our health, and which ones don’t?

Health Care Thoughts: Physician Burnout - During the years I worked every day with physicians I learned a great deal, including about the time pressure, the relentless work flow and the sleep deprivation during physicians' "on call" days.  A Mayo Clinic ( has been published and 50% of physicians are feeling impacts of burnout. Not a surprise to me. Some of this stress may be alleviated by the trend of physicians becoming hospital employees and hospitalists covering inpatients rather than family practice and internal medicine docs. Will PPACA crank up the stress? We have high expectations of our physicians and the health system in general, may we have to temper those expectations just a bit?

The Widespread Problem Of Doctor Burnout - A senior doctor at a local clinic diagnosed a pinched nerve and prescribed a muscle relaxant. Two weeks later, only more incapacitated, the patient went to another clinic, where a younger doctor made the right diagnosis: A malignant tumor in his chest was pressing against a nerve to his arm. “That first doctor couldn’t be bothered by what I was trying to say,” the patient said. He was now receiving chemotherapy and was hopeful his cancer had been caught early enough, but the near miss still haunted him. “He acted like he just didn’t want to be there with me. Or with any patient.” After reading a study published this week in Archives of Internal Medicine, I’ve been thinking a lot about this patient’s experience. And I’ve come to two conclusions. First, the older doctor had classic symptoms of burnout. Second, mistakes like his may only become more common.

Fecal Matters: The burgeoning business of fecal transplantation: Most teenage boys make money the old-fashioned way. They mow lawns, wash cars or flip burgers. But one 13-year-old in Portland is the envy of his friends for the way he makes his money. He gets $50 for donating his feces. The boy (who, for reasons that will soon become obvious, asked not to be named) is part of a burgeoning business in fecal transplantation: a medical procedure in which—and here’s where you might want to put down that doughnut—donors’ poo is injected into a patient’s body. The treatment isn’t approved by the U.S. Food and Drug Administration. But the procedure—used in experiments since the 1950s—is getting approving articles in medical journals and increased use in mainstream hospitals, such as the Mayo Clinic in Phoenix, as a procedure to treat a very specific intestinal ailment. Bacteria from another person’s feces are delivered into the patient’s digestive system—usually through an enema—to fight Clostridium difficile, nasty bacteria that can rage in the digestive system and cause severe diarrhea and other unpleasantness. Natural defenses usually fight off C. diff, which can get out of control if antibiotics inadvertently kill the body’s good bacteria. A different, stronger antibiotic often works. If that fails, some doctors are turning to fecal microbial transplants, letting someone else’s good bacteria go in and kill the bad.

Genetically engineering ‘ethical’ babies is a moral obligation, says Oxford professor - Professor Julian Savulescu said that creating so-called designer babies could be considered a "moral obligation" as it makes them grow up into "ethically better children".  The expert in practical ethics said that we should actively give parents the choice to screen out personality flaws in their children as it meant they were then less likely to "harm themselves and others".  The academic, who is also editor-in-chief of the Journal of Medical Ethics, made his comments in an article in the latest edition of Reader's Digest.   He said that science is increasingly discovering that genes have a significant influence on personality – with certain genetic markers in embryo suggesting future characteristics.  By screening in and screening out certain genes in the embryos, it should be possible to influence how a child turns out.  In the end, he said that "rational design" would help lead to a better, more intelligent and less violent society in the future.  "Surely trying to ensure that your children have the best, or a good enough, opportunity for a great life is responsible parenting?"

Officials Say West Nile Outbreak Could Be Worst Ever In U.S. - As cases of West Nile virus continue to increase, authorities warned today that this could turn out to be the worst outbreak since the virus first showed up in the United States in 1999. The New York Times reports that the Centers for Disease Control and Prevention is still unsure about "where and how far" the disease will spread, but so far there have been 1,118 cases and 41 deaths reported. The Times adds: "Only about one case in 150 becomes serious enough for the patient to need hospitalization – usually when the virus gets into the brain and spinal cord. But 10 percent of those hospitalized die, and other patients are left paralyzed, comatose or with serious mental problems. The Dallas area has spent about $3 million – virtually all from the federal government – on aerial spraying to kill mosquitoes, the Texas health commissioner, Dr. David Lakey, said in the phone conference. He said that as of noon Wednesday, the state had 25 deaths attributed to the disease that he knew of. It is not known why this is turning into the worst year since the virus was discovered in New York City in 1999,  Experts assume that the early warm spring and very hot summer have played a crucial role.

Black Lung Disease: Life-Saving Rules, Technology Stymied By Politics, Experts Say - Someday, a device known as the personal dust monitor could save coal miners a lot of misery. The "PDM," as it's known in mining circles, can tell coal miners precisely how much coal dust they're breathing underground at a given moment. By helping moderate miners' exposure to this dangerous dust, public health experts believe the PDM will help scale back the prevalence of black lung disease, the debilitating respiratory illness that afflicts thousands of American miners. The PDM has been ready for the market for years, and the federal agency that oversees mining safety has proposed making its use mandatory in American mines. Yet the device remains shelved, caught in a game of Washington politics that public-health advocates say is costing lives in coal country. "We think it needs to be deployed," said Phil Smith, spokesman for the United Mine Workers of America (UMWA), the leading union for miners. "They are allowing a disease that we know kills people to continue."

U.S. Appeals Court Strikes Down Public Health Safeguards That Would Have Saved 34,000 Premature Deaths Each Year - Today, the U.S. Court of Appeals struck down the Cross-State Air Pollution Rule (CSAPR), blocking limits to harmful air pollution.  The measure would have limited sulfur dioxide and nitrogen oxide pollution, the main ingredients of acid rain and smog.  Each year, these regulations would prevent up to 34,000 premature deaths and hundreds of thousands of cases of aggravated asthma (see Table 1).  It was estimated to provide up to $280 billion in annual economic benefits through health and environmental improvements alone. Carol M. Browner, Former EPA Administrator, said: “Nobody can dispute the public health benefits of preventing harmful pollutants like sulfur dioxide and nitrogen oxides from crossing state lines and impacting air quality for millions of Americans.  Congress’ intent was that polluting states be held accountable for reducing cross-state air pollution.” Today’s ruling creates a huge amount of uncertainty for the power plant industry, which will have to act in limbo until a new rule can be promulgated.  The ruling endangers public health for all Americans.  Air pollution doesn’t stop at state borders. Once created, it quickly travels to neighboring communities and states – as far as hundreds of miles downwind.

Coal-fired plants spared US pollution rule - US electricity generators with coal-fired plants were spared from one of the more demanding new regulations planned by the administration’s Environmental Protection Agency, when an appeals court struck down the Cross-State Air Pollution Rule, which set tight limits on pollution from burning coal. The District of Columbia court backed the arguments of the industry and 15 states, led by Texas, that the limits set by the EPA for emissions of sulphur dioxide and nitrogen oxides, pollutants that cause acid rain and smog, were unjustifiably low. Generators had warned that the rule, alongside new regulations controlling other emissions such as mercury, would force widespread closures of coal-fired plants, potentially putting the reliability of electricity supplies at risk. The issue had also become highly politicised, with Republicans including Mitt Romney, the presidential candidate, accusing the administration of waging a “war on coal”.

240 Million Americans to Lose Protections From Coal Pollution - US Court Throws Out EPA Coal Pollution Rule, Leaves Millions Exposed to Harmful Emissions - Up to 240 million Americans will now lose protections against dangerous smog and soot pollution, following a decision by a US appeals court on Tuesday. In a 2-1 decision the US Court of Appeals for the D.C. Circuit overturned the Environmental Protection Agency's Cross-State Air Pollution Rule, which would have reduced harmful emissions from coal-burning power plants and saved the lives of up to 34,000 people per year.This decision allows harmful power plant air pollution to continue to aggravate major health problems and foul up our air. This is a loss for all of us, but especially for those living downwind from major polluters,” said John Walke, clean air director at the Natural Resources Defense Council. The rule, slated to reduced sulfur dioxide emissions by 73 percent and nitrogen oxide by 54 percent at coal-fired power plants from 2005 levels in 28 states, will now be sent back for revision for an indefinite period of time. The EPA had adopted the regulation one year ago in a bid to reduce downwind pollution from power plants across state lines. It was scheduled to go into effect in January; however, several large power companies and some states sued to stop it.

Cities, counties nationwide begin mass aerial sprayings of toxic 'anti-West Nile Virus' pesticides: Dallas County, Texas, and several nearby towns and cities in the Dallas area are currently being forcibly sprayed with toxic insecticides as part of a government effort to supposedly eradicate mosquitoes that may be carriers of West Nile virus (WNv). The mass sprayings, which are ramping up all across the country, involve blanketing entire areas with chemicals sprayed via airplanes, a highly controversial protocol that threatens not only all other insects and animals exposed, but also humans. According to the City of Dallas, more than 380 state-confirmed cases of WNv have been reported throughout Texas this year, and at least 16 people in the Lone Star State have died in conjunction with the virus. The specifics of these cases and deaths have not been publicly released, but authorities insist that the situation is serious enough to warrant a series of at least three conjunctive aerial sprayings throughout Dallas County, including in Highland Park and University Park. The chemical product being sprayed is known as Duet, an "advanced dual-action mosquito adulticide" that contains both sumithrin, the active ingredient in another mosquito pesticide known as Anvil, and prallethrin. Both chemicals are known to be highly-toxic neuropoisons that target not only mosquitoes, but also bees, bats, fish, crickets, and various other animals and insects

Nanoparticles Harm Crops - While some impacts of nanoparticles have been widely studied, there is concern over “trickle-down” into the environment with widespread nanoparticle use, where the effects are less well known. In a study published today (August 21) in Proceedings of the National Academy of Sciences, two common nanomaterials have been found to have negative impacts on soybean crops. Zinc oxide, a common nanomaterial used in cosmetics, escapes sewage treatment and ends up as a component of solid waste, which is widely used as organic fertiliser. Growing soybean in the presence of zinc oxide nanoparticles initially improved crop growth  over a control group, but zinc accumulated in the leaves and beans of the plant. There is some evidence zinc oxide particles may be toxic to mammalian cells in culture, but it is unknown whether the nanomaterial is harmful to humans. A second common nanoparticle, cerium oxide, used to improve combustion and reduce particulate emissions in diesel fuels, affected soybean crops more dramatically. Growth was significantly stunted, and the actions of nitrogen-fixing bacteria associated with the soybean root system appeared to be completely inhibited.

U.S. weed resistance growing to 2,4-D herbicide: report (Reuters) - As U.S. farmers struggle to control the rise of "superweeds" choking key crop land, a leading herbicide known as 2,4-D that has shown good weed control for decades appears to be losing its effectiveness, a report from a science journal said on Wednesday. Chemical makers have been racing to find an answer to resistance that has built up against the broadly used glyphosate-based Roundup herbicide, and they had hoped 2,4-D was at least a partial answer to the problem of how to stop weeds that can reach 6 foot tall or more and decimate crop production. Dow Chemical unit Dow AgroSciences is seeking federal regulatory approval to roll out corn, soybeans and cotton that are genetically altered to tolerate treatments of glyphosate and a 2,4-D based herbicide by Dow called Enlist. The aim is to wipe out weeds that have become resistant to glyphosate alone. Many critics have protested Dow's plans, citing fears of increasing weed resistance along with other environmental concerns. But Dow has said its new herbicide and 2,4-D cropping system is needed to fight back the weeds that have taken over millions of acres of key U.S. farmland. Dow officials did not immediately respond to questions about the journal report.

Incorrect reports say that California's Prop 37 has zero tolerance for accidental GMO content - California voters are considering a ballot initiative to require mandatory labeling for foods that contain Genetically Modified Organism (GMO) ingredients.  A recent Oakland Tribune editorial against the initiative gets key facts wrong. The editorial, which was widely published in other newspapers, claims that the proposal has a zero-tolerance for accidental GMO content in foods that aren't labeled as containing GMOs. Such a policy would force producers of essentially non-GMO products to use the label "may contain GMOs," simply out of fear of litigation.  But the editorial is mistaken. The initiative rightly allows foods that do not intentionally contain GMOs to carry a "non-GMO" label.  The initiative has several moderate and reasonable features.  For example, it would require genetically modified animals -- such as a fast-growing genetically modified salmon -- to contain a "GMO" label, but it would not require such a label for ordinary beef that had been fed genetically modified corn and soybeans.  A farmer or food manufacturer would not have to do any fancy testing to prevent accidental contamination with GMOs (for example by drifting seeds from a neighboring field, or from GMO-containing dust left over on farm machinery).  It suffices for the food producers to claim in writing that they used crop varieties and food ingredients that they reasonably believed were not genetically modified.

You're Throwing Away $2,275 Every Year on This - Forty percent of the food produced in the United States goes into landfills instead of our mouths, according to a new report from Natural Resources Defense Council (NRDC). That massive quantity of food, which amounts to 20 pounds per person per month, uses 25 percent of the country's freshwater supplies—all of which is being wasted as farmers across the country face unprecedented drought. The most wasteful food category by far is fruits and vegetables. Of all the fresh produce produced every year, just 48 percent is consumed. The other 52 percent is wasted. Seafood is another big loser: Fifty percent of it is wasted. Meat and milk fare slightly better, with 78 and 80 percent consumed, respectively. Reducing that food waste by just 15 percent, the report concludes, could feed half of the 50 million Americans who go hungry every year.  What's driving all this food waste? Every hand that touches food, from farmer to shopper, is partly responsible. For instance, low commodity prices on certain foods can mean that it's cheaper for a farmer to leave a field unharvested than to pay for labor, packaging, and shipping to a distributor.  Grocery stores stock shelves to overflowing in an effort to get people to buy more food. One source cited in NRDC's report estimated that one in seven truckloads of perishable foods sent to grocery stores is thrown away.

A Sour Season for Michigan's Cherry Farmers - Northwestern Michigan is considered by many an ideal place for growing fruit. Located on the 45th parallel, halfway between the equator and the North Pole, the surrounding Great Lakes and rolling hills help create a temperate climate. But as Pat McGuire walks through his orchards now, they are a haunting green. This year, nature harvested the trees. Cherry trees remain dormant throughout winter until a spring warming wakes them up. That happened much earlier this year. Temperatures in March shattered records across the country, reaching the mid-80’s in Michigan that month - that’s nearly 14 degrees Fahrenheit above the state average. That pushed the trees to a development stage about 5.5 weeks ahead of normal, Jim Nugent said. And when temperatures dropped again, the trees’ early buds were vulnerable. From late March through May, there were 15 to 20 nights in which temperatures fell below freezing. Farmers tried using wind fans to keep warm air circulating around the fruit trees, but it was little help. The cold snaps killed not only cherries, but also juice grapes, peaches, and apples. Losses across the state are estimated at $210 million.

For the Amish, Big Agribusiness Is Destroying a Way of Life -- At first glance, the Swartzentruber Amish of St. Lawrence County, New York, look to be self-reliant stewards of a bucolic and unchanging landscape. Although their daily chores demand Olympic stamina -- regiments weeding mugwort and baling hay -- the Swartzentrubers still pause and wave politely to 18-wheelers passing through the county, which stretches from the Adirondacks to the suburbs of Montreal. But over the last decade, new neighbors such as thousand-cow dairies and genetically modified starch producers have moved into the region, vying with Amish farm stands selling strawberries, night crawlers, and maple syrup. "They are not shy about saying that they can't compete with large agribusinesses," "It's getting harder for young people to find farms in the area. People are having to move further afield because there is more competition for farmland." For Amish fathers, who are expected to pass down land to each of their 10 to 15 children, acquiring new land is an escalating burden. When they first arrived in 1974, the Swartzentrubers -- considered the most conservative of more than 100 Amish sects nationwide -- rejuvenated thousands of idle acres, making way for general stores and, eventually, a cheese factory. But the continuous farmland they purchased in bulk 30 years ago is now prized by corn and soybean growers, who are attracted by high commodities prices and often willing to pay three or four times the market rate.

Hay becomes key U.S. commodity - -- Humble hay has become a key commodity in the US agricultural market, with price gains in drought-stressed areas far outpacing the rally in corn and soyabean prices and further straining the country's beleaguered cattle industry. The price of bales has more than doubled over the past year at auctions in states such as Iowa and Illinois, showing the impact of the severe Midwest drought on forage supplies. Average US hay prices have reached record levels after increasing a more moderate 8 per cent on year. The furious Midwest hay rally has gone largely unnoticed outside the cattle industry, as investors trade crops such as corn and wheat in Chicago's futures exchanges. But the rise is significant because it will push up meat and dairy prices as farmers shrink herds they cannot feed. Hay supplies per animal are at the lowest level in more than 25 years, economists at the US Department of Agriculture said. "My hay pile is going down in a hurry," said Michael Cordia, who farms in Belgrade, Missouri. "I'm going to have to sell my cows." Most cattle farmers would normally be grazing cattle at this time of year and mowing hay supplies for wintertime.Midwest pastures are in very poor condition, however, forcing cattle to eat hay now. The US faces its smallest hay harvest since 1976. At an auction in Rock Valley, Iowa, last week, hay topped $300 per short ton, up about 150 per cent from August 2011

Farm bill languishes while fields bake in drought. Congress' inaction raises aid questions for farmers - As farmers across the nation watch their crops bake and struggle to keep their livestock fed in the worst drought in 50 years, the long-term future of government programs designed to help them remains tied up in Washington gridlock. In Kentucky and Indiana, tens of millions of dollars are at stake. The current farm bill — a roughly $910 billion measure that includes programs like direct payments to help farmers avoid financial peril in such conditions — expires Sept. 30. And while there is widespread agreement that direct payments likely will be cut as lawmakers deal with government deficits and debt, debate continues on other assistance programs, such as marketing loans and payments that protect against future drops in crop prices.. “It’s a bad situation for farmers,” Kentucky Agriculture Commissioner James Comer said. While he supports elimination of direct subsidies, Comer argues farmers need to know what the terms of insurance programs will look like. “Hopefully we can get a farm bill passed that does provide that safety net for farmers.” As to whom he blames for the current inaction, Comer said, “I blame all of Congress for that.”

Paying more for food? Blame the ethanol mandate - Kay McDonald  - Because of the severe heat and drought in the Midwest, global food prices are going up. Why? Because the U.S. is the leading producer and exporter of staple grains. We are for food production what Saudi Arabia is for oil production. Our crop shortages have ripple effects throughout the food system and disrupt the global markets, especially in the food-insecure nations. Corn and soybean levels are extremely tight, and their prices have skyrocketed since June. However, these two grains are mostly used as livestock feeds. Corn is also diverted to produce ethanol because of our government mandate. Earlier this month, the United Nations urged the U.S. to ease its ethanol mandate. The origin of this policy goes back to 2005 when Congress set requirements of corn to be used for automotive fuel. In 2007, the Energy Independence and Security Act greatly increased those requirements to improve air quality and become more energy secure. Behind the scenes, however, corn and other agricultural lobbyists were promoting the mandate to create a larger market for corn. Using current numbers, this year's ethanol mandate would theoretically require 44% of this year's corn crop, a third of which is recycled back as distillers grains for livestock feed.

Warming-Driven Drought Pushes Crop Prices To Record Levels, As We Burn 40% Of Corn Crop In Our Engines - When will the madness stop? In a piece titled, “Nearly Half Of Corn Devoted To Fuel Production Despite Historic Drought,” Bloomberg editorialized: Record-high corn prices should be sending a clear message to policy makers in Washington: Requiring people to put corn-based fuel in their gas tanks is a bad idea. Bloomberg notes: The damage is far-reaching. Beef and pork producers are slaughtering their stocks at a record pace to cut use of corn feed that costs two-thirds more than three months ago. This week, President Barack Obama told a campaign rally in Iowa that the federal government will buy $170 million of meat to prop up the market. U.S. cattle herds next year are forecast to be the smallest since 1952, a guarantee of more expensive food in years to come. Researchers at Texas A&M University have estimated that diverting corn to make ethanol forces Americans to pay $40 billion a year in higher food prices. On top of that, it costs taxpayers $1.78 in subsidies for each gallon of gasoline that corn-based ethanol replaces, according to the Congressional Budget Office. Burning some 40% of the U.S. corn crop was crazy enough before the record drought, but now it is just plain inhumane.

Calls to lower ethanol quota rise as U.S. corn crop withers - The worst U.S. drought in more than half a century has rallied critics of the federal renewable fuel standard, which will reserve about 40% of the nation's corn crop for ethanol production this year. Critics have long questioned the commitment of a growing share of a food source for fuel use. But the calls for change have grown louder because the widespread drought has killed more than 50% of the corn crop, driving prices to record levels — and U.S. ethanol is made mostly from corn. To avert a possible domestic and international food crisis, several groups have urged changes to the fuel standard or at least a temporary waiver of the ethanol quota, which annually requires more ethanol be included in the nation's fuel production. Among them are members of Congress, the U.N. Food and Agriculture Organization and the American Petroleum Institute. The International Food Policy Research Institute has recommended the U.S. immediately stop using corn to make ethanol for fuel "to prevent a potential global food price crisis." "Poor and vulnerable groups in developing countries are hard hit by high and volatile prices of the agricultural commodities they depend on for their primary daily caloric intake,"

Ethanol Waiver May Lower Corn But Raise Gas Prices --Calls are growing to suspend the federal ethanol production mandate next year, as the worst drought in more than half a century has devastated the corn crop in the U.S. The question is whether a waiver of the Renewable Fuel Standard, or RFS, will actually bring down sky-high corn prices.  Georgia is among the states with major livestock production petitioning the Environmental Protection Agency for a waiver, arguing that scarce corn used for ethanol production is making feed prices unsustainably high for the state’s $20 billion poultry industry.  “Georgia has experienced severe economic harm during this crisis,” the state’s governor Nathan Deal wrote in a letter asking the EPA to issue a waiver.  “The state’s poultry producers are spending $1.4 million extra per day on corn due to the drought and the upward pressure on corn prices caused by the demand created by the RFS for ethanol,” Deal explained, citing research from the University of Georgia.  “Eight dollar corn is hard for all end users and that's no different for the ethanol industry,”  In response to the spike in corn prices, Cooper said ethanol producers have seen margins fall and as a result have been forced to reduce their use of corn. Roughly two dozen of the nation’s 200 ethanol plants have gone idle this summer, effectively reducing production by 15 percent.

Midwest Drought: Well Users Find Their Faucets Beginning To Run Dry -- After months of record-breaking heat and drought, many rural Americans who rely on wells for water are getting an unwelcome surprise when they turn on their faucets: The tap has run dry. The lack of running water can range from a manageable nuisance to an expensive headache. Homeowners and businesses are being forced to buy thousands of gallons from private suppliers, to drill deeper or to dig entirely new wells. Mary Lakin's family drained the last of its well water late last month in the small northern Indiana community of Parr. Since then, Lakin, her husband and two children have bathed and done laundry at relatives' homes and filled buckets from their backyard pool every time they need to flush a toilet. No one tracks the number of wells that go dry, but state and local governments and well diggers and water haulers report many more dead wells than in a typical summer across a wide swath of the Midwest, from Nebraska to Indiana and Wisconsin to Missouri. It's not unusual for rural wells to stop producing toward the end of a hot summer. But this year is different. Some of the same wells that are known to run dry in August or September instead ran out in June. Water suppliers and well drillers across the Midwest say they're working long hours to keep up with demand.

Midwest Water Wells Drying Up in Drought - The wells supplying people’s homes are running dry here at the heart of the nation’s drought, which the government announced on Thursday has spread to 63.2 percent of the country, centered in the parched earth of the southern Midwest.For some residents outside municipal water districts, it has become a struggle to wash dishes, or fill a coffee urn, even to flush the toilet. Mike Kraus, a cattle farmer in Garden City, Kan., twisted the tap on the shower the other day after work and heard nothing but hissing. “And that was it,” he said. While there are no national statistics on the rate at which residential wells are drying, drilling companies and officials in states across the Midwest have said that hundreds of people who rely on wells have complained of their pipes emitting water that goes from milky to spotty to nothing. An estimated 13.2 million households nationwide use private wells. From the middle of June through the end of July, 100 to 150 people have contacted Indiana state officials complaining that their wells had either failed or were running dangerously low, said Mark Basch, head of water rights and use section of the state’s Department of Natural Resources.

In Midst of a Drought, Trying to Keep Cargo Moving on the Mississippi - The Potter is scooping this stretch of the Mississippi River’s navigation channel just south of St. Louis, the ship’s 32-foot-wide head sucking up about 60,000 cubic yards of sediment each day and depositing it via a long discharge pipe a thousand feet to the side in a violent, muddy plume that smells like muck and summer. The Army Corps of Engineers has more than a dozen dredging vessels working the Mississippi this summer. Despite being fed by water flowing in from more than 40 percent of the United States, the river is feeling the ruinous drought affecting so much of the Midwest. Some stretches are nearing the record low-water levels experienced in 1988, when river traffic was suspended in several spots. That is unlikely this year, because of careful engineering work to keep the largest inland marine system in the world passable. But tow operators are dealing with the shallower channel by hauling fewer barges, loading them lighter and running them more slowly, raising their costs. Since May, about 60 vessels have run aground in the lower Mississippi. The low water is not just affecting the 500 million tons of cargo like coal, grain and fertilizer that move up and down the river each year. The owners of the American Queen, a paddle-wheel steamboat that takes passengers on tours along the inland waterways, decided not to send the boat below Memphis on a trip to Vicksburg, Miss., this month.

Coast Guard halts traffic on low-water stretch of Mississippi-- An 11-mile stretch of the Mississippi River near Greenville, Mississippi, was closed Monday to most vessel traffic because of low water levels, idling nearly a hundred boats and barges in the stream, according to the U.S. Coast Guard. "We are allowing a limited number of vessels based on size" to attempt to pass, said New Orleans-based Coast Guard spokesman Ryan Tippets, adding that the closure was affecting 97 vessels Monday afternoon and was halting both northbound and southbound traffic. This same area near Greenville, which sees about 50 vessels pass on an average day, has been closed "intermittently" since August 12, when a vessel ran aground, said Tippets. The Coast Guard and the Army Corps of Engineers have continued surveying the area and deemed it "dangerous for vessels to travel through," he said. The Army Corps of Engineers also has being dredging in the area to deepen the channel and help navigation.

11-mile stretch of Mississippi River closed - Nearly 100 boats and barges were waiting for passage Monday along an 11-mile stretch of the Mississippi River that has been closed due to low water levels, the U.S. Coast Guard said. New Orleans-based Coast Guard spokesman Ryan Tippets said the stretch of river near Greenville, Miss., has been closed intermittently since Aug. 11, when a vessel ran aground. Tippets said the area is currently being surveyed for dredging and a Coast Guard boat is replacing eight navigation markers. He says 40 northbound vessels and 57 southbound vessels were stranded and waiting for passage Monday afternoon. Tippets said it is not immediately clear when the river will re-open. A stretch of river near Greenville was also closed in 1988 due to low water levels caused by severe drought. The river hit a record low on the Memphis gauge that year. The Mississippi River from Illinois to Louisiana has seen water levels plummet due to drought conditions in the past three months. Near Memphis, the river level was more than 12 feet lower than normal for this time of year.

As Barges Sit Idle Along the Mississippi, the Economic Costs Grow -Close to 100 tows sit motionless in the shriveled Mississippi River along an 11-mile stretch outside of Greenville, Miss. For every day a single towboat sits idle, it costs about $10,000. So when you’ve got at least 97 of them stranded, those costs start piling up quickly.As the Midwest experiences its worst drought in 50 years, the Mississippi River is hitting water levels not seen since 1988, a year viewed by those in the industry as a benchmark of hard times. Back then, hundreds of barges sat idle near the same location that they’re sitting today: Greenville. Until now, the U.S. Army Corps of Engineers had successfully kept river traffic moving by dredging the river, keeping it at a depth of at least nine feet along its 2,300-mile length all summer, only closing ports here and there temporarily. But barges and towboats have now piled up near Greenville, forcing the Coast Guard to close an 11-mile stretch to shipping this week. That closure will really start to pinch shipping operators who use the country’s inland waterways to deliver a host of commodities, goods and products across the U.S.

Extreme Weather - During the past decade we’ve also seen severe droughts in places like Texas, Australia, and Russia, as well as in East Africa, where tens of thousands have taken refuge in camps. Deadly heat waves have hit Europe, and record numbers of tornadoes have ripped across the United States. Losses from such events helped push the cost of weather disasters in 2011 to an estimated $150 billion worldwide, a roughly 25 percent jump from the previous year. In the U.S. last year a record 14 events caused a billion dollars or more of damage each, far exceeding the previous record of nine such disasters in 2008. What’s going on? Are these extreme events signals of a dangerous, human-made shift in Earth’s climate? Or are we just going through a natural stretch of bad luck? The short answer is: probably both. The primary forces driving recent disasters have been natural climate cycles, especially El Niño and La Niña. Scientists have learned a lot during the past few decades about how that strange seesaw in the equatorial Pacific affects weather worldwide. During an El Niño a giant pool of warm water that normally sits in the central Pacific surges east all the way to South America; during a La Niña it shrinks and retreats into the western Pacific. Heat and water vapor coming off the warm pool generate thunderstorms so powerful and towering that their influence extends out of the tropics to the jet streams that blow across the middle latitudes.

Fire and Drought in the United States - I recently stumbled across statistics for the total acreage in the United States consumed by fire each year since 1960.  Graphed over time, the data look as follows:  Here I have expressed the acreage burned as a percentage of the total area of the United States. Notice the pattern of fire decreasing through the 1960s and 1970s and then increasing fitfully from there. That reminded me loosely of the PDSI data for the US:As you can see - there's definitely a relationship with around three times more burned in the driest years than the wettest years.  However, it's far from the only thing going on with substantial scatter away from any simple relationship.  Probably much of the variation is caused by regional fluctuations - one half the country very dry and the other half very wet will result in a lot more fires than everywhere uniformly normal, but the national average PDSI will be about the same.  The PDSI may also not capture the fire-relevant sense of "drought" perfectly.

US drought could spur civil unrest around the world - As prices rise, tempers fray. The US drought has pushed up global food prices and is likely to continue to do so. Some say riots and unrest may follow. According to the Climate Prediction Center, part of the National Oceanic and Atmospheric Administration, El Niño conditions are likely to develop over the Pacific in August or September, which should affect global weather before the end of the year. This may drive food prices up further if it causes floods or further drought. US farms are already crippled: the Department of Agriculture says the corn (maize) crop is likely to be the worst since 1995. As a result, the Food Price Index (FPI) of the United Nations Food and Agriculture Organization rose 6 per cent in July, to 213. That is dangerously high, says Yaneer Bar-Yam of the New England Complex Systems Institute in Massachusetts. He has found that if the FPI goes above 210, riots and unrest become more likely around the world. Both the 2011 Arab Spring and the 2008 riots in places such as Mexico, India, Russia and Belgium may have been partly triggered by high food prices.

U.N. calls on nations to adopt drought policies – The world urgently need to adopt drought-management policies as farmers from Africa to India struggle with lack of rainfall and the United States endures the worst drought it has experienced in decades, top officials with the U.N. weather agency said Tuesday.The World Meteorological Organization says the U.S. drought and its ripple effects on global food markets show the need for policies with more water conservation and less consumption. It is summoning ministers and other high-level officials to a March meeting in Geneva where it will call for systematic measures toward less water consumption and more conservation. U.S. farmers have experienced one of their worst growing seasons in memory. The annual corn harvest, for example, is much farther along than it ordinarily would be and expected to produce the least amount of corn since 2006 — despite the most acres of corn planted in more than 70 years — due to unusual triple-digit summer temperatures that disrupted pollination and a severe drought particularly in the middle of the country. "Climate change is projected to increase the frequency, intensity, and duration of droughts, with impacts on many sectors, in particular food, water, health and energy," WMO Secretary-General Michel Jarraud said. "We need to move away from a piecemeal, crisis-driven approach and develop integrated risk-based national drought policies."

Europe not insulated from agricultural commodities shock -  Some readers have commented that Europe is unlikely to be impacted as dramatically by the North American drought conditions and rising agricultural commodity prices as the US. But in these markets a local exogenous shock quickly becomes a global one. And this year the shock was actually global to begin with as crop damages, though most severe in north America, have been seen around the world. Given the recession in the Eurozone, the area is particularly vulnerable to these price increases. Meanwhile prices continue to rise. The US agricultural commodities hit new records today. Reuters: - Soybeans rallied 2.5 percent on Tuesday to hit another peak, while corn rose nearly 2 percent on evidence that the worst drought in half a century has shrunk the crop and that demand must be tempered through even higher prices.  Corn and soybean futures at the Chicago Board of Trade resumed their climb after a setback last week, making a push to retest record highs as money managers bet that end-users would scramble for the dwindling supplies.  Chicago wheat rose more than 2 percent in tandem with corn and soybeans and on a sharp drop in the dollar amid growing expectations that European officials will put together a plan to tackle the region's debt and economic crisis.

Speculation, Food Prices & Firm Reputation Risk - In any number of commodity classes, there is the accusation that speculators and other sorts of profiteers are driving up prices to a degree unwarranted by economic fundamentals. You often hear this with regard to oil, but it's also an accusation heard with regard to foodstuffs as their prices have exploded upwards. (Developing countries are supposed to be especially vulnerable to these shocks since food expenditures take up more of a poor households's expenditures.) And, of course, the normative issues behind speculating in food are much greater than those in oil since you cannot live without the former. I recently came upon an interesting Reuters article reminding how diversion of corn crops for ethanol is causing the price of this crop to increase Stateside. This concern is especially salient this year when yields of crops alike corn have been hurt by drought conditions. Almost as an aside, the article also mentions controversies over commodity speculation in foodstuffs. Given that many commodity traders were blamed for inflating food prices--there remains considerable controversy over this accusation--many have nevertheless become wary of being blamed this time around. One of the solutions that traders have devised is to simply avoid inclusion of food-related commodities in various indices and investment funds that may tempt certain parties to speculate on food prices. In any case, many financial services firms which do not wish to subject themselves to this form of reputation risk are avoiding the inclusion of these commodities:

We'll make a killing out of food crisis, Glencore trading boss Chris Mahoney boasts - The United Nations, aid agencies and the British Government have lined up to attack the world's largest commodities trading company, Glencore, after it described the current global food crisis and soaring world prices as a "good" business opportunity. With the US experiencing a rerun of the drought "Dust Bowl" days of the 1930s and Russia suffering a similar food crisis that could see Vladimir Putin's government banning grain exports, the senior economist of the UN's Food and Agriculture Organisation, Concepcion Calpe, told The Independent: "Private companies like Glencore are playing a game that will make them enormous profits." Ms Calpe said leading international politicians and banks expecting Glencore to back away from trading in potential starvation and hunger in developing nations for "ethical reasons" would be disappointed. "This won't happen," she said. "So now is the time to change the rules and regulations about how Glencore and other multinationals such as ADM and Monsanto operate." Glencore's director of agriculture trading, Chris Mahoney, sparked the controversy when he said: "The environment is a good one. High prices, lots of volatility, a lot of dislocation, tightness, a lot of arbitrage opportunities.

USDA Leaves Food Inflation Outlook Unchanged -- The U.S. Department of Agriculture Friday left unchanged its forecasts for food inflation in 2012 and 2013, and said most of the impact of the country’s drought on retail food prices won’t occur until 2013. The government projected prices for all food will climb 2.5% to 3.5% in 2012, unchanged from its July forecast. For 2013, the USDA projected the price of all food will climb 3% to 4%, unchanged from its forecast last month. A severe drought across the Midwest has sent prices for corn, soybeans and wheat soaring. But it usually takes several months for higher commodity prices to cause higher retail prices, the USDA said.

Climate Change Pushes Butterflies North : Butterfly populations in Massachusetts have shifted north over the past two decades likely in response to climate change, new research shows. Species that are used to subtropical and warm climates, such as the giant swallowtail and zabulon skipper, were rare or absent in Massachusetts in the late 1980s. But now these butterflies are showing up in high numbers in the state, the Harvard study found. Meanwhile, more than three quarters of northerly species, usually found north of Boston, seem to be fleeing Massachusetts to beat the heat. Populations of the atlantis fritillary and acadian hairstreak, for example, may have dropped by more than 80 percent, the researchers said. Species that spend the winter as eggs or small larvae and rely on snow cover seem to be the worst affected, according to the study.

US rule set to slash cars’ fuel use - New fuel economy standards for cars to be announced by the US administration are expected to cut consumption of petrol and diesel by up to 18 per cent over the coming decades, according to an official study, but are courting controversy. Some carmakers warn that the new rules, which are due to be published before the end of this month, will distort the US market and may not deliver the projected reductions in overall demand. The administration also argues that the regulations will help the environment by reducing carbon dioxide and other emissions, and will strengthen national security by curbing America’s reliance on imported oil.  The planned new Corporate Average Fuel Efficiency (Cafe) standards mark the latest stage in efforts by Mr Obama’s administration to direct US-based carmakers towards making vehicles less fuel-hungry and more sophisticated. The rules were last tightened in 2009. If, as expected, the new rules reflect draft standards published last year, they foresee a near-doubling of US-made cars’ average fuel efficiency by 2025 from 27.5 miles per US gallon at present to 54.5mpg, under test conditions.

Farmers may help utilities through water-pollution offsets - Faced with a planned federal mandate to cut water pollution from power plants, American Electric Power and other utility companies might simply pay farmers to do the job for them. In a “water quality trading” test program recently announced by environmental regulators in Ohio, Indiana and Kentucky, farmers could cut polluted stormwater runoff from their fields and sell the reductions as credits to power companies. Either way, proponents say, streams, rivers and lakes would be cleaner. Installing and operating pollution-treatment systems at power plants would be much more expensive, according to officials with the Electric Power Research Institute.AEP’s Cardinal station, located along the Ohio River near Brilliant, Ohio, would be among the first plants to participate in the program, said Melissa McHenry, a company spokeswoman. She said it would cost $52 million to install a system to keep Cardinal’s ammonia out of the Ohio River and at least $3 million a year to operate it. Paying farmers to cut a similar amount of phosphorus, she said, could cost as little as $100,000 a year. Farmers typically plant buffer strips of grass along ditches and streams instead of using those areas to grow crops. The strips absorb manure and fertilizers washed from fields during storms.

World's sea life is 'facing major shock', marine scientists warn: Life in the world's oceans faces far greater change and risk of large-scale extinctions than at any previous time in human history, a team of the world's leading marine scientists has warned.The researchers from Australia, the US, Canada, Germany, Panama, Norway and the UK have compared events which drove massive extinctions of sea life in the past with what is observed to be taking place in the seas and oceans globally today. Three of the five largest extinctions of the past 500 million years were associated with global warming and acidification of the oceans -- trends which also apply today, the scientists say in a new article in the journal Trends in Ecology and Evolution. Other extinctions were driven by loss of oxygen from seawaters, pollution, habitat loss and pressure from human hunting and fishing -- or a combination of these factors. "Currently, the Earth is again in a period of increased extinctions and extinction risks, this time mainly caused by human factors," the scientists stated. While the data is harder to collect at sea than on land, the evidence points strongly to similar pressures now being felt by sea life as for land animals and plants.

A Global Solutions Network - Jeffrey D. Sachs - Great social change occurs in several ways....Our own generation urgently needs to spur another era of great social change. This time, we must act to save the planet from a human-induced environmental catastrophe. Each of us senses this challenge almost daily. Heat waves, droughts, floods, forest fires, retreating glaciers, polluted rivers, and extreme storms buffet the planet at a dramatically rising rate, owing to human activities. Our $70-trillion-per-year global economy is putting unprecedented pressures on the natural environment. We will need new technologies, behaviors, and ethics, supported by solid evidence, to reconcile further economic development with environmental sustainability. United Nations Secretary-General Ban Ki-moon is taking on this unprecedented challenge from his unique position at the crossroads of global politics and society.To empower global society to act, Ban has launched a bold new global initiative, for which I am grateful to volunteer. The UN Sustainable Development Solutions Network1 is a powerful effort to mobilize global knowledge to save the planet. The idea is to use global networks of knowledge and action to identify and demonstrate new, cutting-edge approaches to sustainable development around the world. The network will work alongside and support governments, UN agencies, civil-society organizations, and the private sector.

Science advisor warns climate target 'out the window': One of the Government's most senior scientific advisors has said that efforts to stop a sharp rise in global temperatures were now unrealistic. Professor Sir Robert Watson said that the hope of restricting the average temperature rise to 2C was "out the window". He said that the rise could be as high as 5C - with dire conseqences. Professor Watson added the Chancellor, George Osborne, should back efforts to cut the UK's CO2 emissions. He said: "I have to look back (on the outcome of sucessive climate change summits) Copenhagen, Cancun and Durban and say that I can't be overly optimistic. "To be quite candid the idea of a 2C target is largely out of the window". Professor Watson is among the most respected scientists in the world on climate change policy.

New Arctic cyclone north of Greenland, August 19, 2012  - The photos are updated every few hours here:  Here is the 36-h outlook:®ion=nh&t=36h  The sea ice flows out a lot faster than it did back in 2007. Just about anything is going to flush it out into the North Atlantic if the wind blows in the right direction. The way the cyclone sits just now, it looks like it will blow it from west to east along northern Greenland, which is already its natural direction. Neven has ice drift map here:  CryoSat-2 shows that the thickness in that area is just about as pitiful as it gets.

Arctic Sea Ice Volume gif by Tamino! 1979-2012

Arctic Death Spiral Watch: (Cryosp)here Today, Gone Tomorrow -The record lows for Arctic sea ice area and volume are generally set in mid- to late September. But as Neven’s Arctic Sea Ice Blog reports, we’re already starting to see those September minimum records being broken in mid-August. Cryosphere Today, for instance, reports that the Arctic has just dropped below its lowest sea ice area on record:  We are  all but certain to set the record low volume this year. In fact the European Space Agency’s CryoSat-2 probe confirms what the Pan-Arctic Ice Ocean Modeling and Assimilation System (PIOMAS) at the Polar Science Center has been saying for years: Arctic sea ice volume has been collapsing faster than sea ice area (or extent) because  the ice has been getting thinner and thinner. In fact, the latest satellite CryoSat-2 data shows the rate of loss of Arctic sea ice is “50% higher than most scenarios outlined by polar scientists and suggests that global warming, triggered by rising greenhouse gas emissions, is beginning to have a major impact on the region.” A key point is that the thinner ice is much more vulnerable to winds and Arctic storms, like this month’s “Arcticane” (see “Massive Storm Batters Melting Sea Ice“).That is the true death spiral, and I’ll do a separate post on volume shortly.

Arctic cap on course for record melt: scientists - The Arctic ice cap is melting at a startlingly rapid rate and may shrink to its smallest-ever level within weeks as the planet’s temperatures rise, US scientists said Tuesday. Researchers at the University of Colorado at Boulder said that the summer ice in the Arctic was already nearing its lowest level recorded, even though the summer melt season is not yet over. “The numbers are coming in and we are looking at them with a sense of amazement,” said Mark Serreze, director of the National Snow and Ice Data Center at the university. “If the melt were to just suddenly stop today, we would be at the third lowest in the satellite record. We’ve still got another two weeks of melt to go, so I think we’re very likely to set a new record,” he told AFP. The previous record was set in 2007 when the ice cap shrunk to 4.25 million square kilometers (1.64 million square miles), stunning scientists who had not forecast such a drastic melt so soon.

Arctic sea ice levels to reach record low within days - The dramatic melt expected over the next week signals that global warming is having a major impact on the polar region. Arctic sea ice is set to reach its lowest ever recorded extent as early as this weekend, in "dramatic changes" signalling that man-made global warming is having a major impact on the polar region. With the melt happening at an unprecedented rate of more than 100,000 sq km a day, and at least a week of further melt expected before ice begins to reform ahead of the northern winter, satellites are expected to confirm the record – currently set in 2007 – within days. "Unless something really unusual happens we will see the record broken in the next few days. It might happen this weekend, almost certainly next week,"

One Man's Melting Ice Cap, Is Another Man's 40% Transit-Time Boost - "The numbers are coming in and we are looking at them with a sense of amazement," is how the director of the Snow and Ice data center in Colorado describes the 'startlingly rapid rate' of melting at the Arctic Ice Cap this year. As Agence France Presse notes, if the melt stopped today, this would be the third lowest level of ice on record. Of course while this maybe terrible news for some; others are 'increasingly interested'. The thaw in the Arctic is rapidly transforming the geopolitics of the region, with the long-forbidding ocean looking more attractive to the shipping and energy industries. The first ship from China – the Xuelong, or Snow Dragon – recently sailed from the Pacific to the Atlantic via the Arctic Ocean, cutting the distance by more than 40%. Five nations surround the Arctic Ocean – Russia, which has about half of the coastline, along with Canada, Denmark, Norway and the United States – but the route could see a growing number of commercial players. Of course this 'benefit' of global warming appears to rely on the fact that there are people left to trade goods with.

Arctic Coastlines Hitting Ecological Tipping Point - Along rocky coastlines of the Arctic Ocean, a radical change is taking place, perhaps as profound as vanishing sea ice but less evident to the eye. Ecological foundations are shifting, with existing algae replaced by warmth- and light-loving species. It might not seem like much, but algae form the base of ocean food chains, and the change is happening fast. “The abrupt character of these extensive changes, confirmed by our statistical analyses, provides a convincing case for tipping points being crossed,” wrote researchers led by marine biologist Susanne Kortsch of Norway’s University of Tromsø in an email to Wired. For scientists, tipping points aren’t just pop-culture shorthand, but refer to a specific type of transition: sudden and non-linear, with one set of conditions snapping into another. In marine settings, that’s been seen in the western Mediterranean, now dominated by jellyfish and invertebrates, and Caribbean coral reefs now overrun by algae. As for the Arctic, they’ve been detected, but mostly on land or in freshwater lakes and swamps.

Northern Hemisphere Land Snow Cover Anomaly -- June 2012 beats 45-year low record a month early! - When considering the impact of climate change on polar regions, the star of the show has always been Arctic sea ice. Playing supporting roles are the Greenland ice cap and Antarctica. Yet one actor in the drama remains badly overlooked: the snows that cover our Northern continents. In June 2012, for instance, it was reported that Northern Hemisphere Land Snow Cover had broken a record. The June snow anomaly was the lowest figure for June in the whole 45-year record, besting the previous record set in 2010 by 1 million square kilometres. This statement, reported as the last item in the US NSIDC's first July Arctic Sea Ice News & Analysis bulletin understandably never gained great widespread coverage. Yet this summer's Northern snow cover presents a far more dramatic story that surely deserve greater prominence. For a start, June 2012 snow cover was not just the record of June. Excluding Greenland with its ice cap, the June 2012 anomaly was the record for all months in the entire 45-year record. The anomaly stood at 5.74 million square kilometres, pipping the December 1980 record by 0.13 million square kilometres, although this again is hardly front page news.

Must-See Video: Oil And Ice Don’t Mix — The Risks Of Drilling In Alaska’s Arctic Ocean - As the decision looms whether to allow Shell Oil to begin exploratory drilling in the Arctic Ocean this summer, the Center for American Progress released a new video today examining our lack of preparedness to respond to an oil spill in the remote and untested region.  Whether the Department of the Interior approves offshore drilling activity in the Arctic Ocean this year or next, the Arctic is still dangerously deficient in infrastructure and scientific knowledge. In “Oil and Ice: The Risks of Drilling in Alaska’s Arctic Ocean,” U.S. Coast Guard Captain Gregory Saniel, Chief of Response says the thought of mustering a response to a major incident like an oil spill “keeps me up at night.”As Shell waits for heavy sea ice to clear and the Coast Guard to certify its containment barge, the fact remains that this region has far fewer resources to contain an oil spill than did the Gulf of Mexico. Even with the Gulf’s warm water and weather, large population centers, and decades of research and drilling experience, oil flowed unabated for three months in 2010, wreaking economic havoc and devastating the environment. If drilling in the Arctic starts next year, these fundamental infrastructure challenges still must be addressed.  This video highlights the perspectives of those who depend on the Arctic Ocean for their livelihood, the concerns and challenges facing the Coast Guard charged with its protection, and the grave doubts of the scientific community about the lack of knowledge in this area.

India eyes Russia's arctic shelf exploration — India’s ONGC Videsh Ltd says it is keen to get a foothold in the Arctic with Rosneft after Moscow proposed to lift all export duties for new projects in the Arctic shelf.­The overseas arm of India’s state-owned Oil & Natural Gas Corp said it wanted to expand in Siberia and Russia’s Far East, writes India’s The Economic Times.  In a letter to Rosneft on May 4 the company said it was interested in taking a stake in one of the three joint ventures on the Arctic shelf that Rosneft signed with US ExxonMobil, Italian ENI and Norway's Statoil. Under the deal, the foreign companies get about a 33 per cent stake in the joint project and will pay for all of the initial exploration cost. ONGC Videsh Ltd (OVL) wants Rosneft to give it part of its 67 per cent stake in one of the three projects.The Indian flagship said it was ready to join any of the 12 Arctic shelf fields that Russia plans to offer in the near future, if Rosneft refused to accept it in the three existing projects.

Grid Power And The Death Of the Automobile  - India’s recent series of power blackouts, in which 600 million people lost electricity for several days, reminds us of the torrid pace at which populations in the developing world have moved onto the powergrid. Unfortunately, this great transition has been so rapid that infrastructure has mostly been unable to meet demand. India itself has failed to meets its own power capacity addition targets every year since 1951. This has left roughly one quarter of the country’s population without any (legal) access to electricity. . But the story of India’s inadequate infrastructure is only one part of the difficult, global transition away from liquid fossil fuels. Over the past decade, the majority of new energy demand has been met not through global oil, but through growth in electrical power. Frankly, this should be no surprise. After all, global production of oil started to flatten more than seven years ago, in 2005. And the developing world, which garners headlines for its increased demand for oil, is running mainly on coal-fired electrical power. There is no question that the non-OECD countries are leading the way as liquid-based transport – automobiles and airlines – have entered long-term decline.Why, therefore, do policy makers in both the developing and developed world continue to invest in automobile infrastructure?

How to solve the solar storage problem - Australians installed more domestic rooftop solar PV in 2011 than in any other country in the world. Despite sharp cuts in subsidies, that seems likely to continue, and raises the question of how this will effect patterns of electricity demand and in particular the capacity of the electricity system to meet peak demand. I just ran across an interesting infographic prepared by a consulting group called Exigency management which puts the question into sharper focus . Under current conditions, demand peaks around noon, remains high through the afternoon, then has another peak in the early evening, as people come home and turn on airconditioning or heating. Widespread takeup of home solar PV will increase supply at the noon peak and even more in the afternoon, but drop off as evening approaches. The result, in the absence of any other changes, will be a system with a demand trough in mid-afternoon followed by a much sharper evening peak.

Fracking Fallout in Ohio: ‘Throwing Up Until the Blood Vessels in My Eyes Burst’ - I lay on the bathroom floor, night after night, thinking I would surely be dead soon. Throwing up until the blood vessels in my eyes and cheecks would burst. At that time, I did not know what fracking was, or that I was deliberately being poisoned. But I do now. When she first started to get sick—blinding headaches, nausea, mystery illnesses that ultimately took her gall bladder—she had no idea the two were related. But they were. While the human health impacts of fracking are still being documented, the natural gas industry shrugs off any such claims of a connection, contending there is no proof. Medical studies are underway to prove the linkage, but that will take years. In the meantime, it is not a stretch to imagine that pumping hundreds of thousands of gallons of chemicals into the earth and groundwater will inevitably, and adversely, impact both land and man.

Fighting fracking: introverts edition - One of the biggest threats fracking poses to the environment is the way it endangers the water supply. It does so in several ways, one of which has large-scale implications. Global impact like that is a little unusual; environmental issues are more likely to be local. Whether it’s fracking, lead paint/asbestos in old buildings, or a Superfund site, once you get a few miles away from it the greatest hazard is usually mitigated.  Fracking permanently removes water from the hydrological cycle, though, at which point it may as well be on the far side of the moon for as much use as it is. This goes beyond competition for scarce resources during a dry season, though the oil and gas industry is well positioned to elbow everyone else aside (via) if it comes to that. It is about the slow draining of the amount of water available for human use.  There are still the usual local concerns, though. Since fracking is exempt from the requirements of the Safe Drinking Water Act due to the Halliburton loophole, communities are left to do the work that the EPA is theoretically in charge of. I suppose an open abdication of responsibility is better than maintaining the charade that a worthless regulator is ostensibly on the case. Either way, though, there is no cop on the beat.

Mayhem Like Me: Duncan explained that fracking wells are drilled into brittle rocks containing billions of tiny deposits of oil that are released when the rocks are fractured by hydraulic pressure from water and sand they pump into the rock. He explained that fracking wells tend to start off producing between one and two thousand barrels per day and fall off rapidly in their second and third years of production. He explained that the key to continued production in a fracturing operation is a labor intensive continuation of drilling new wells to replace rapidly declining previous wells. A possible scenario: two hundred wells averaging 1,500 BPD (barrels per day) in year one, totaling 300,000 BPD, followed by 200,000 BPD from the same wells in year two, and 100,000 in year three. But each year, Great Bear plans another two hundred wells to replace the declining wells. Their second year of operation might include two hundred wells that have fallen off to 200,000 BPD, plus two hundred new wells producing 300,000 BPD, totaling 500,000 BPD. In year three, two hundred wells producing 100,000 BPD, two hundred wells producing 200,000 BPD, and two hundred new wells producing 300,000 BPD for a total production of 600,000 BPD.

Reliance On Natural Gas Sparks Concern - New England’s increasing reliance on natural gas has regional energy officials worried about potential shortages over the next few years that could disrupt electricity production, especially if the area is hit with an extremely cold winter. Abundant supplies and falling prices have led many power producers and home and business owners to switch to natural gas in recent years, but federal energy officials and the operator of the region’s power grid, ISO New England, say they are concerned that pipeline capacity is not keeping up with growing demand. In the case of an extended snap of very low winter temperatures and a rise in heating demand, pipelines might not be able to transport enough gas for both homes and power producers, leading to cutbacks in electricity generation and possible power interruptions, according to a study by ISO New England.  "You have all these stresses and strains being applied to the gas pipeline that weren’t there before,”   The issue also has caught the attention of federal energy regulators, who hosted a Monday meeting with local leaders in the power and natural gas industries to discuss possible solutions, including expanding pipeline capacity, changing the way the wholesale natural gas market operates, and requiring power generators to keep fuel reserves.

Shell plans at least $1 billion a year China shale gas investment (Reuters) - Royal Dutch Shell (RDSa.L) plans to spend at least $1 billion a year exploiting China's potentially vast resources of shale gas, the firm's top China executive said, part of an aggressive strategy to expand in the world's biggest energy market. Shell in March secured China's first product sharing contract for shale gas, hoping that getting in early will allow it to be a big beneficiary from the sort of boom in shale that has transformed the U.S. energy market. Asked if the firm remained committed to a plan to invest $1 billion a year in China's shale gas over the coming few years, Lim Haw Kuang, Shell's top China executive, said in an interview: "Yes, yes and yes." "If there has been an adjustment to that pledge, it could only be an upward revision," added Lim, a Malaysian national and a Shell veteran of 34 years. China is estimated to hold the world's largest reserves of the unconventional gas -- which can be unlocked from ancient shale rocks by "hydraulic fracturing", a technology well developed in recent years in North America. Shell is also aiming to build a $12.6 billion refinery and petrochemical complex in eastern China, a project that could become the single largest foreign investment in China. The Anglo-Dutch firm is one of the biggest investors in China's energy sector but faces strong competition. Exxon Mobil (XOM.N), BP (BP.L), Total (TOTF.PA) and Chevron Corp (CVX.N) are also trying to get a bigger slice of the Chinese market, where use of natural gas is set to triple this decade and growth in oil demand makes up more than a third of the world total.

Shale Growth in other Nations: How Realistic is it? - American leadership in developing horizontal drilling and hydraulic fracturing used in shale oil and gas plays is spreading around the world making it possible to extract previously uneconomic oil and natural gas resources from shale. While we think of these technologies as “new” in fact they have been commonly in use in the US oil fields for more than 20 years.  What changed was the price of oil and gas that made their use more attractive. A little more than five years ago we saw natural gas prices at near record levels above $13 per MMBTU and the US was expected to be a major importer of liquefied natural gas (LNG) from some of the same volatile places in the world that supply imported oil.  Those high prices started an unconventional revolution applying these new technologies to domestic US shales. Today we are awash in natural gas and our entire energy strategy is being turned on its head by the prospect of abundant supply and low—very low—prices.  The market forces that created this boom are at work today correcting the market excess as more E&P companies shift their drilling from natural gas to oil and natural gas liquids attracted to their higher prices.  We also expect to see some of this excess natural gas turned into LNG and exported to global markets which have higher prices.

Keystone XL rival Enbridge avoids scrutiny of oil pipeline plans — A major rival to the controversial Keystone XL oil pipeline project is vastly boosting its U.S. pipeline system, but it's avoiding the same scrutiny that federal regulators, environmentalists and landowners are giving Keystone owner TransCanada Corp. Enbridge Inc. is proceeding largely unencumbered with plans to spend $8.8 billion in the U.S. to transport greater volumes of petroleum to the Gulf Coast and other markets than TransCanada would with its Keystone XL pipeline project from Alberta, Canada, to the Gulf Coast. Rather than building a single new pipeline, Enbridge is replacing smaller, existing pipeline with bigger pipes, adding pumping capacity and installing new supply lines alongside existing ones. The Calgary, Alberta, energy pipeline and storage company is forging ahead even though it has been bedeviled recently by high-profile oil spills. TransCanada's Keystone XL plan, and its additional 830,000 barrels a day, snagged on the so-called presidential permit process, in which the State Department conducts environmental and other reviews of infrastructure projects that cross American borders. But Enbridge, which runs the longest pipeline system in Canada and the U.S., can proceed without new presidential permits — and the rigorous review they bring — because the company already has permits from the initial construction years ago and because the physical work will take place in the United States.

Texas judge rules in favor of TransCanada in eminent domain case -  A judge in Lamar County, Texas, ruled Wednesday night that TransCanada’s Keystone XL pipeline has the right of eminent domain, rejecting a plea by farm manager Julia Trigg Crawford and dealing a blow to landowners and environmentalists who have been trying to block construction of the pipeline. The ruling by Judge Bill Harris removes yet another potential obstacle for TransCanada, which already has permits from the Army Corps of Engineers for the southern leg of the pipeline, which starts in Cushing, Okla., and runs to Port Arthur, Texas. TransCanada has said it will start building as soon as possible.

The Horrifying Effects of a Canadian Tar Sands Oil Spill - Part of the US’s attempts to secure energy independence involves increasing the imports from friendly neighbours such as Canada. This has led to a large number of new pipelines spreading out across America in preparation for the increase in tars sands deliveries. With more pipelines comes the risk of more spills, and Canada’s tar sands do not produce conventional crude oil. It is thick, sticky and full of sand and other materials that are used in the extraction techniques. Little is known about how tar sands crude will behave after a spill, or whether its density and the fact that it contains sand will cause unknown wear on the pipes. Scientists are only just researching this, and still have little idea of what to expect. In July 2010 an Enbridge pipeline burst in Marshall, Michigan, causing tar sands crude oil to spill out over 40 miles of the Kalamazoo River. It was the first major spill of Canadian heavy oil, and would provide an interesting study on the effects of such a spill on the environment. sent a reporter to the Kalamazoo River two years later to check the site, and speak to a member of the clean-up crew. What he revealed was quite shocking.

Gulf seafood deformities alarm scientists - Eyeless shrimp and fish with lesions are becoming common, with BP oil pollution believed to be the likely cause "The fishermen have never seen anything like this," Dr Jim Cowan told Al Jazeera. "And in my 20 years working on red snapper, looking at somewhere between 20 and 30,000 fish, I've never seen anything like this either." Dr Cowan, with Louisiana State University's Department of Oceanography and Coastal Sciences started hearing about fish with sores and lesions from fishermen in November 2010. Cowan's findings replicate those of others living along vast areas of the Gulf Coast that have been impacted by BP's oil and dispersants. Gulf of Mexico fishermen, scientists and seafood processors have told Al Jazeera they are finding disturbing numbers of mutated shrimp, crab and fish that they believe are deformed by chemicals released during BP's 2010 oil disaster. Along with collapsing fisheries, signs of malignant impact on the regional ecosystem are ominous: horribly mutated shrimp, fish with oozing sores, underdeveloped blue crabs lacking claws, eyeless crabs and shrimp - and interviewees' fingers point towards BP's oil pollution disaster as being the cause.

U.S. Oil Imports to Seen Hitting 20-Year Low 42% of Use - Dependence on crude purchased from foreign countries is on a pace to decline from last year, Adam Sieminski, the head of the U.S. Energy Information Administration, said during a Bloomberg Government lunch yesterday in Washington. Higher oil prices and an increased use of a drilling technique known as hydraulic fracturing has producers including Continental Resources Inc. (CLR), Marathon Oil Corp. (MRO) and Hess Corp. (HES) boosting production from oil-rich geologic formations. Hydraulic fracturing, or fracking, involves pumping millions of gallons of water into the ground to free oil and natural gas and has been widely used in shale-rock formations such as the Bakken of North Dakota and Eagle Ford in Texas. “What’s happening in North Dakota, and in Texas, with Eagle Ford, Bakken formation in North Dakota, is a tremendous development for U.S. oil production and economic growth,” Sieminski said. In 2011, the U.S. relied on imports for 44.8 percent of its petroleum consumption, down from 60.3 percent in 2005, according to EIA data. This year, the country should end up at about 42 percent, Sieminski said in a telephone interview after the lunch.

Romney: Energy independence by 2020 -- The campaign for presumed Republican presidential nominee Mitt Romney released a plan Thursday for North America to be energy independent by 2020. Touting the country's newly accessible oil and gas reserves, Romney touched on familiar themes he said would wean the country off imported oil and spark an economic boom at home. Namely, fewer federal regulations, less support for renewable energy, and more oil drilling. Specifically, he called for:
-- States to have control over drilling on federal land within their borders.
-- Placing oversight of all onshore energy developments withing the hands of the states.
-- Opening of new offshore areas, starting with blocks off the coasts of Virginia and the Carolinas.
-- Approval of the Keystone pipeline.
-- Set minimum oil production targets in the government's leasing plans.
-- Start a fast track approval process for various energy projects, including nuclear.
-- Limiting the ability of environmental groups and others to file lawsuits.

Romney Would Give Reins to States on Drilling on Federal Lands - By proposing to end a century of federal control over oil and gas drilling and coal mining on government lands, Mitt Romney is making a bid for anti-Washington voters in key Western states while dangling the promise of a big reward to major campaign supporters from the energy industry.The federal government owns vast portions of states like New Mexico, Nevada, Utah, Colorado and Alaska. Under President Obama, officials in Washington have played a bigger role in drilling and mining decisions on federal lands in the states, and such involvement rankles many residents and energy executives, who prefer the usually lighter touch of local officials.  With gasoline prices again approaching $4 a gallon, Mr. Romney, the presumptive Republican nominee, is also trying to merge energy and economic policy in a way that will make voters see increased energy production as a pocketbook issue. He said that his overall energy plan, which includes speedy approval of the Keystone XL oil pipeline from Canada and new drilling off the coast of Virginia and the Carolinas, would help the country achieve energy independence and create three million drilling and manufacturing jobs.

Romney got his great energy policy ideas from oil execs - Mitt Romney’s proposed energy policy, released yesterday, focuses on giving states the ability to set their own resource extraction rules and to let them drill wherever they want — including on federal land. Even a conservative environmental organization took issue with that idea as reported by Politico: “These lands do not belong to individual states, any more than the Grand Canyon belongs to Arizona or Yosemite belongs to California.” So where’d Romney get this idea, anyway? I mean, besides how nicely it blends the common conservative arguments for neutering the federal government and drilling everywhere everywhere now now now. According to the New York Times, the idea came from oil executives. An individual close to the Romney campaign said that Mr. Romney’s staff drafted the proposal in consultation with industry executives, including Harold Hamm, an Oklahoma billionaire who is the chairman of the campaign’s energy advisory committee and chief executive of Continental Resources, an oil and gas driller.

Just Drill, Baby - Republican presidential candidate Mitt Romney will lay out policies on Thursday aimed at achieving North American energy independence by 2020 by pursuing a sharp increase in production of oil and natural gas on federal lands and off the U.S. coast. I know I'm dense, but can someone please explain to me why a market-favoring conservative would want complete North American energy independence?  This is like saying I want food independence for my neighborhood.  Sure, it reduces reliance on food from those other evil suburbs around Columbus, but it also makes my food more expensive, reduces my choices--where am I going to get my unsustainable seafood if I can't import from the Chesapeake Bay region--and makes me generally worse off.  Romney is to predict that a full-blown energy plan will create 3 million jobs in energy sectors and other areas, part of an ambitious effort to create 12 million jobs during a Romney presidency. "I want every American who wants a good job to be able to have one," Aha! It's the old jobs thing.  Last time I checked, job creation is a cost of a policy, not a benefit.

Don’t count on revolution in oil supply - Leonardo Maugeri’s recent paper Oil: The Next Revolution on the presumed future abundance of oil supplies rejects the pessimistic outlook of limited increases in oil capacity over the next decade. It suggests global oil capacity will exceed 110 million barrels per day by the end of the decade, putting an immediate end to concerns regarding constrained long-term oil supplies. This conclusion is based on an assessment of new projects with a reported capacity of 49 million b/d before a downward adjustment to 29 million b/d to allow for completion risks and reserves depletion. Maugeri holds two PhDs, one in Political Science and one in Economics, and has extensive executive experience with ENI in strategies and developments and in petrochemicals. In putting forth this optimistic thesis, Maugeri apparently sets aside a variety of technical realities, including the difference between natural gas liquids (NGLs) and conventional oil, reserves depletion versus capacity declines, and proven reserves as opposed to speculative resources. The report mixes NGLs, which feed petrochemicals and domestic or industrial fuel applications, with conventional oil, which is the main source for transportation fuels. When fractionated, NGLs yield propane, butane and light naphtha. These products cannot replace oil distillates such as gasoline, diesel or jet fuel.

New Indian Oil Find - Major Discovery, or Puddle? - According to the U.S. government’s Energy Information Agency, “In 2009, India was the fourth largest energy consumer in the world, after the United States, China, and Russia. Despite a slowing global economy, India's energy demand continues to rise. As vehicle ownership expands, petroleum demand in the transport sector is expected to grow in the coming years. While India's domestic energy resource base is substantial, the country relies on imports for a considerable amount of its energy use. According to the International Energy Agency, hydrocarbons account for the majority of India's energy use.” The good news? According to the EIA, in 2011 India had approximately 5.7 billion barrels of proven oil reserves, the second-largest amount in the Asia-Pacific region after China, primarily light and sweet crude. In 2010 India produced roughly 750,000 barrels per day crude oil.  The bad news? In 2010 India consumed 3.2 million bpd, and imports are rising, the cost of which represents a growing strain on India’s Treasury. In 2010 India was the world's fifth largest net importer of oil, importing more than 2.2 million bpd, roughly 70 percent of its indigenous consumption, primarily from the Middle East, with Saudi Arabia and Iran supplying the largest shares.It is in this austere context then, that the rapturous reports of recent oil finds off India’s western coast must be judged.

Venezuela Ramps up China Oil Exports Unsettling Washington - The biggest geostrategic change of the past decade overlooked by Washington policy wonks in their fixation on their self-proclaimed “war on terror” is that Latin America has been throwing off the shackles of the Monroe Doctrine. These ignored developments may well soon refocus Washington’s attention on the Southern Hemisphere, as Venezuela’s President Hugo Chavez reorients his country’s to China. So, where does Washington go from here? If it wants to preserve its increasingly tenuous foothold in a nation with the world’s largest oil reserves, it might begin by engaging in some honest diplomacy.

Chavez unveils $130 billion oil expansion - Venezuelan President Hugo Chavez, seeking re-election Oct. 7, says he plans to spend $130 billion over six years to double the country's daily crude oil output. Venezuela produces about 3 million barrels per day when its state-controlled hydrocarbons industry operates normally. However, production has slumped in recent years. The June government figure of 2.8 million barrels per day contrasted with industry reports of 2.3 million bpd, OPEC and other data indicated. Recent years have seen disruptions in Venezuela's oil sector because of the lingering effects of nationalizations and large-scale dismissals of oil experts and workers and an economic downturn across the board.Venezuela is the fifth largest oil exporting country with the second-largest reserves of heavy crude oil after Canada. Chavez announced the ambitious energy expansion program while on the presidential re-election campaign trail. His announcement of the planned investment was made in a televised address from the Orinoco Oil Belt, which is likely to receive most of the new investment. Of the $130 billion earmarked for investment, Chavez said, about $5 billion will be spent this year.

Saudi Arabia Oil Output Tops Russia in June, Jodi Data Show - Saudi Arabia pumped crude at the highest level in more than three decades in June, overtaking Russia as the world’s largest oil producer during the month, according to the Joint Organization Data Initiative. The desert kingdom’s output rose 3 percent to 10.1 million barrels a day in June from May as it exported the most in a month since November 2005, according to statistics the government submitted to OPEC and posted on JODI’s website today. Russia pumped 9.9 million barrels a day of crude oil in the same month, according to the initiative known as JODI. The Russian data exclude natural-gas liquids, JODI said. Saudi Arabia, the largest producer in the 12-member Organization of Petroleum Exporting Countries, put 272 million barrels of crude oil in storage inside the country in June, 2.2 percent less than in May, the data show. The world’s biggest oil exporter shipped 7.84 million barrels a day in June, an increase of 2.3 percent from a month earlier. The data for output and exports include condensates and exclude natural-gas liquids. JODI calculated a different barrel-per-day figure for Russia using data in metric tons that the country submitted to the Asia-Pacific Economic Cooperation forum, and compared that with information from other sources, it said.

Saudi Arabia is pumping at record levels but risks to crude supply disruptions remain - Saudi Arabia continues to pump crude at record pace, once again topping Russia in oil output. Supplanting production shortfall resulting from the Iran sanctions is certainly one of the goals. But Saudi Arabia's economy is growing rapidly and a great deal of the increases in production is driven by domestic demand. Saudi Arabia is part of the BICS group of nations (not BRIC) that now drive global economic growth.Given Saudi strong domestic demand, oil may be quite vulnerable to supply shocks in spite of Saudi record production levels. This is particularly significant given a sharp and somewhat unexpected decline in US oil stocks. With Brent crude already at $115/barrel (up 28% from June lows), the next shock to global economy could come from a potential (real or perceived) supply disruption - and Saudi Arabia may be unable to come to the rescue due to its domestic demand. That is one of the reasons the Israel-Iran "standoff" is so dangerous at this juncture.

Sanctions Force Iranian Retreat from Global Stage - The Organization of Petroleum Economies, in its August report, said Iranian crude oil production in part led to a decline in overall output from the Vienna-based cartel. OPEC said crude oil production for its members, not including Iraq, was reported at 28.1 million barrels per day in July, a decline of 270,000 bpd compared with the previous month.  The decline in OPEC oil production in part was led by Iran, which saw its export options curtailed by sanctions imposed by the U.S. and European governments. Tehran announced it still had a viable consumer base in China, however, which received about 12 percent of its oil needs from Iran. The Indian government, meanwhile, said it would circumvent EU sanctions by extending government-backed insurance to tankers carrying Iranian crude because of the "definite need" for oil.

U.S. Says Iraqis Are Helping Iran Skirt Sanctions - When President Obama announced last month that he was barring a Baghdad bank from any dealings with the American banking system, it was a rare acknowledgment of a delicate problem facing the administration in a country that American troops just left: for months, Iraq has been helping Iran skirt economic sanctions imposed on Tehran because of its nuclear program.The little-known bank singled out by the United States, the Elaf Islamic Bank, is only part of a network of financial institutions and oil-smuggling operations that, according to current and former American and Iraqi government officials and experts on the Iraqi banking sector, has provided Iran with a crucial flow of dollars at a time when sanctions are squeezing its economy. The Obama administration is not eager for a public showdown with the government of Prime Minister Nuri Kamal al-Maliki over Iran just eight months after the last American troops withdrew from Baghdad. Still, the administration has held private talks with Iraqi officials to complain about specific instances of financial and logistical ties between the countries, officials say, although they do not regard all trade between them as illegal or, as in the case of smuggling, as something completely new.

Report: Iraqis helping Iran skirt sanctions - Iraq has been helping Iran skirt economic sanctions imposed because of its nuclear program, using a network of financial institutions and oil-smuggling operations that are providing Tehran with a crucial flow of dollars, the New York Times said on Saturday. In some case, Iraqi government officials are turning a blind eye to trade with Iran, while other officials in Baghdad are directly profiting from the activities -- with several of them having close ties to Iraqi Prime Minister Nuri Kamal al-Maliki, the Times said. U.S. President Barack Obama acknowledged the problem last month when he barred a small Iraqi bank, the Elaf Islamic Bank, from any dealings with the American banking system, the newspaper said. At the time, the president said that the bank had "facilitated transactions worth millions of dollars on behalf of Iranian banks that are subject to sanctions for their links to Iran's illicit proliferation activities." 

Whatever Happened to Iraqi Oil? - There was only one reason to invade Iraq and it could be captured in a single word, “oil,” even if George W. Bush and his top officials generally went out of their way to avoid mentioning it.  Unfortunately, oil as a significant factor in invasion planning was considered far too simpleminded for the sophisticated pundits and reporters of the mainstream media.  They were unimpressed by it even when, as the looting began in Baghdad, it turned out that U.S. troops only had orders to guard the Oil Ministry and Interior Ministry (which housed Saddam’s dreaded secret police). Mind you, far more than Iraqi oil was in the administration’s crosshairs, though that country, with its then-crippled energy sector, was considered a giant oil reservoir just waiting for Big Oil to set it free.  To conquer and garrison -- “liberate” -- Iraq would put the U.S. in a position of ultimate domination in the oil heartlands of the planet, or so thought the top officials of the Bush administration, a number of whom had been in or associated with the energy business before scaling the heights of Washington. As Dick Cheney put it to the Institute of Petroleum Engineers in 1999, when he was still running the energy company Halliburton, "The Middle East, with two thirds of the world's oil and the lowest cost, is still where the prize ultimately lies."

RPT-Iraq's south oil exports head for record in August (Reuters) - Iraq's oil exports from its southern ports have risen by 30,000 barrels per day (bpd) so far in August versus last month, according to shipping data tracked by Reuters, putting shipments on course to reach a post-war record. Exports from Iraq's south have averaged 2.25 million bpd in the first 20 days of August, the data shows. That is up from 2.22 million bpd in July - the highest since before the 2003 U.S.-led invasion, according to the International Energy Agency. Iraq exports most of its oil from the south, where the opening of new export outlets and investment by foreign companies are increasing shipments which had stagnated for years. A rise in Iraqi supplies this year helped to keep a lid on prices as Western sanctions targeted Iran's exports. More oil is coming from the oilfields of southern Iraq including Rumaila, led by BP ; West Qurna-1, run by Exxon Mobil ; and Zubair, where Eni is in charge. In addition, an Iraqi official said in July the Halfaya field operated by China National Petroleum Corp. was pumping at least 80,000 bpd, helping to boost flows. Including about 300,000 bpd of crude shipped

Iranian Oil Production Falls Further - We have data through July from OPEC secondary sources and through June for most other sources.  The result looks as above (graph not zero-scaled to better show changes).  Iranian production has been falling noticeably for a number of months and is now down by about a sixth of the pre-sanctions level.  This ignores the possibility that Iraq is helping Iran to smuggle oil. So the sanctions are definitely biting - revenue will likely have dropped much more than production (since only a fraction of production is exported and prices paid will have dropped as Iran's few remaining customers use their leverage to extract price concessions).  Still, the Iranian response has been to double down on nuclear enrichment.  So sanctions are not, thus far, achieving the desired end goal.

First Indian tanker to take state cover for Iran load - The first Indian oil tanker company to accept state-backed insurance cover to carry crude from Iran will load its first cargo this week. Mercator is so far the only tanker company to take up the Indian government's offer of insurance, introduced after the European Union imposed a ban on EU-based insurance cover as part of its sanctions regime against Iran. Since last month, the state-run United India Insurance Company has been offering a cover of US$50 million (Dh183.6m) per voyage against pollution and personal injury claims, also known as protection and indemnity (P&I) insurance, as well as cover for hull and machinery to protect ships against physical damage. The amount is a fraction of the at least $1 billion coverage a very large crude carrier (VLCC) laden with about 2 million barrels of crude could expect to raise from reinsurers against any P&I claim.  

India parliament adjourned over $33bn coal scandal - India's parliament has been adjourned for a day after opposition MPs called on PM Manmohan Singh to quit over a recent report that the country lost $33bn by selling coalfields cheaply. Angry MPs shouted and crowded aisles in both the upper and lower houses. The government auditors in their report last week said coalfields were allotted without auction from 2005 to 2009. The report by the Comptroller and Auditor General (CAG) has, however, exonerated Mr Singh. But, opposition MPs say the PM was directly responsible since he was heading the coal ministry then. On Tuesday, Parliamentary Affairs Minister Pawan Bansal said the prime minister would not quit and offered to discuss the auditor's report in parliament. But the opposition blocked proceedings, forcing the two houses to be adjourned for the day.

Cartel Pushes Up Rubber Price - The weak global economy has driven down prices for everything from copper to coal, and now the cartel that controls most of the world's production of rubber, one of the hardest-hit commodities, is fighting back. The three Southeast Asian countries that control 70% of the world's supply of natural rubber said Thursday they would withhold supply now and keep supply tight by burning older rubber trees, hoping to boost prices, which have fallen 60% since their February 2011 peak. The move by the Bangkok-based International Tripartite Rubber Council, which represents Thailand, Indonesia and Malaysia and is the OPEC of the rubber market, rippled through markets. At one point on Friday, benchmark rubber futures at the Tokyo Commodity Exchange were up 9% from a nearly three-year low on Tuesday before settling at ¥221 ($2.78) a kilogram, 7% above the Tuesday low. Higher rubber prices would hit tire makers, the largest consumers of natural rubber, as well as makers of rubber gloves, shoes, condoms and toy balloons. But the Rubber Council faces challenges to its effort to boost prices. "It's something like OPEC. There's always cheating somewhere,"

Australia’s Mining Bonanza Is Over: Resources Minister - Australian Resources Minister Martin Ferguson said the nation’s mining boom has ended as BHP Billiton delayed approval of its Olympic Dam expansion that Deutsche Bank AG estimated at A$33 billion ($34.7 billion). “You’ve got to understand, the resources boom is over,” Ferguson told Australian Broadcasting Corp. radio today. “It has got tougher in the last six to 12 months.”  Australia’s economy has been powered by the biggest resource bonanza since a gold rush in the 1850s as Chinese-led demand for iron ore, coal and natural gas brought investment projects the government estimated to be worth A$500 billion. BHP, the world’s biggest mining company, said yesterday it doesn’t expect to approve any spending on major projects this fiscal year as metal prices decline amid sluggish global growth.  Prime Minister Julia Gillard’s government is seeking to end four years of budget deficits and return to surplus by mid-2013, and weaker resource investment may threaten that goal ahead of elections due next year. The opposition Liberal National coalition has attacked Gillard’s new taxes on carbon emissions and mining profits, saying they have created investor uncertainty and risk stifling economic growth.

China’s July electricity usage rises -- China’s electricity output growth picked up in July from 0% yoy in June to 2.1% yoy.  However, the detailed figures published by the National Bureau of Statistics suggests that the pick-up in output growth was driven mainly by the increase of output from hydroelectric sources.  Thermal power output growth continued to slide in July from –4.2% yoy in June to –4.5% yoy, while hydroelectric power output increased by 33.9% yoy in July.

Sharp declines in prices for steel and iron ore indicate contraction in China's industrial demand - With all the conflicting economic indicators coming out of China, it is difficult to gauge whether economic growth has stabilized after recent declines. One indicator that clearly points to a potential ongoing slowdown in construction and manufacturing is the weakness in iron ore and steel prices. The Shanghai steel rebar futures have hit a new low this morning. In fact the situation has gotten so dire that a number of Chinese steel mills have defaulted on their purchase agreements of iron ore. Their output product has rapidly declined in price, collapsing margins to unsustainable levels, forcing the mills to walk away from their contracts. Reuters: - Chinese mills, the world's biggest iron ore buyers, have either cancelled or deferred shipments of up to 4 million tonnes this month after [steel prices] tumbled to their lowest in more than 2-1/2 years, the latest evidence of a slowdown in the world's top steel market.  Shanghai steel rebar futures, down nearly 14 percent this year, hit a record low of 3,555 yuan ($560) a tonne on Wednesday.  The falling "downstream" demand (steel) is forcing iron ore ("upstream") prices to decline as well. Imported iron ore has hit a new post-2009 low.

China bubble in ‘danger zone’ warns Bank of Japan - China risks a repeat of Japan’s boom-bust disaster 20 years ago as exorbitant property prices combine with a demographic tipping point, a top Japanese official has warned. “China is now entering the 'danger zone’,” said Kiyohiko Nishimura, the Bank of Japan’s deputy-governor and an expert on asset booms. The surge in Chinese home prices and loan growth over the past five years has surpassed extremes seen in Japan before the Nikkei bubble popped in 1990. Construction reached 12pc of GDP in China last year; it peaked in Japan at 10pc. Mr Nishimura said credit and housing booms can remain “benign” so long as the workforce is young and growing. They turn “malign” once the ratio of working age people to dependents rolls over as it did in Japan. China’s ratio will peak at around 2.7 over the next couple of years as the aging crunch arrives. It will then go into a sharp descent, compounded by the delayed effects of the one-child policy.

Zombie China -  It is now quite well-known now that non-performing loans in China are surging, and loans at risk of turning non-performing are also on the rise. But we are always suspicious on these figures as they look artificially low. And here is why. The Chinese banking sector is dominated by state-owned banks, and as I said in my guide to Chinese monetary policy, the most powerful tool in the People’s Bank of China toolbox in stimulating credit is not interest rates, nor the reserve requirement ratio, but state directed lending, or in some other literature: window guidance. The state may define a target for new loans, and may even have specific sectors that it wishes the lending to be directed to. In turn, banks will lend because they are told/persuaded/forced to. Even though the risks in China’s financial system are surfacing, for the moment reported NPLs remain quite low. That is because loans to borrowers who are unable to service their debts and/or repay the principals might very well be rolled over to new loans (ever-greening loans), avoiding these loans being classified as non-performing. This was one of the ways that China used to deal with its banking crisis in the early 2000s, and indeed a report from the Financial Times early this year suggested that this might well be happening again:

What does "consumption-led growth" even mean? -There are a number of terms thrown around in the econosphere that confuse and annoy me. Perhaps they  annoy me because they confuse me? Anyway, one of these terms is "consumption-led growth" (and its evil sister terms, "investment-led growth" and "export-led growth"). This is usually invoked with respect to China. For example: IMF officials “underscored the urgency of reforms to rebalance the economy toward more consumption-led growth,” the lender said.  Or this: Why hasn’t China done more to rebalance? The scale of the adjustment necessary to switch from an investment-led to consumption-led growth machine is so monstrous that the country would likely experience a lower rate of growth while it is taking place Or this: The transition from export- and investment-led growth to domestic consumption-led growth based on technology innovation, and from lifting tens of millions out of abject poverty to satisfying a more demanding middle class will be even harder for the party to execute. What the heck is "consumption-led growth"? What does it even mean for a sector to "lead growth"? Recall that GDP = consumption + investment + government spending + net exports. Does "consumption-led growth" just mean that the consumption share of GDP should be higher than it is? If so, fine. Then why not just say "consumption-led GDP"?

Skilled Work, Without the Worker - At the Philips Electronics factory on the coast of China, hundreds of workers use their hands and specialized tools to assemble electric shavers. That is the old way. At a sister factory here in the Dutch countryside, 128 robot arms do the same work with yoga-like flexibility. Video cameras guide them through feats well beyond the capability of the most dexterous human. One robot arm endlessly forms three perfect bends in two connector wires and slips them into holes almost too small for the eye to see. The arms work so fast that they must be enclosed in glass cages to prevent the people supervising them from being injured. And they do it all without a coffee break — three shifts a day, 365 days a year. All told, the factory here has several dozen workers per shift, about a tenth as many as the plant in the Chinese city of Zhuhai. 

China Flash PMI Plummets As New Export Orders Collapse To Lehman Lows - HSBC-Markit just announced the Flash PMI for August and it's not pretty - printing at a nine-month low (47.8 vs 49.3 in July). Of course, China's own version remains in the Schrodinger-like >50-expansion state for now but with all 11 sub-indices in this evening's data pointing to weakness, we suspect not even the Chinese can sell that data for much longer. So what next - RRR? Massive stimulus? - don't hold your breath given the recent reverse repos and the already creeping-inflation in food and energy prices. The piece-de-resistance of the data-dump though has to be (in line with Japan's trade data last night) is the New Export Orders slumped to 44.7 - lowest since March 2009 when trade finance collapsed post-Lehman. China Flash PMI lowest in 9 months - almost back to 2009 lows...

China Flash Manufacturing PMI at 9-Month Low, New Export Orders Plunge at Sharpest Rate Since March 2009 - Adding to the grim news on global growth, the HSBC Flash China Manufacturing PMI shows new export business declines at sharpest rate since March 2009.  Key points:
Flash China Manufacturing PMI™ at 47.8 (49.3 in July). 9-month low.
Flash China Manufacturing Output Index at 47.9 (50.9 in July). 5-month low.
Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: “Falling orders dragged down the August flash PMI to a nine-month low, suggesting Chinese producers are still struggling with strong global headwinds. To achieve the stated policy goal of stabilizing growth and the jobs market, Beijing must step up policy easing to lift infrastructure investment in the coming months.” Notice the sheer absurdity of the proposal: China is loaded up with malls with no shoppers, trains with no passengers, and even entire cities where no one lives, and economists want or expect China to start more infrastructure projects.

China factory gauge hits nine-month low, HSBC says - HSBC's preliminary reading of Chinese manufacturing activity dropped to 47.8 for the current month from a final print of 49.3 in July, the bank said Thursday, marking the worst result in nine months. The flash version of the China manufacturing Purchasing Managers' Index remained below 50 for the 10th month in a row. The flash result is based on 85% to 90% of the total responses to the survey. Chinese stocks reversed direction after the result, with the Shanghai Composite Index swinging to a 0.3% loss.

China's slowdown can no longer be masked by cooked economic data - As today's flash PMI numbers show, the declines in iron ore prices (discussed here) were indeed signaling an ongoing broad based slowdown in China's economy.Bloomberg: - China’s manufacturing may be contracting at a faster pace this month, signaling more monetary and fiscal stimulus is needed to secure a second-half rebound in economic growth. A preliminary reading of 47.8 for a purchasing managers’ index released today by HSBC Holdings Plc (HSBA) and Markit Economics compares with July’s final 49.3 figure. If confirmed, it would be the lowest level since November and the 10th month that the reading has been below 50, the longest run in the index’s eight- year history.This completely contradicts Goldman's analysis of China's manufacturing sector (discussed here). Today's survey result is indicating a decline in production, new orders, and particularly new export business. NYTimes: - “The unexpectedly big drop more than reversed the gain seen in July,” Yao Wei, a China economist at Société Générale in Hong Kong, said in a research note. “A drop of this magnitude and a level significantly below 50 unambiguously spells trouble.”  The Chinese economy has been languishing for months, its domestic performance undermined by weakness in the important property sector and its export sector hit by sagging demand from overseas. China's economy is not yet able to adjust to declining orders, as the momentum driven manufacturing apparatus keeps producing in spite of slowing demand. Inventories of unsold finished goods are piling up.

China's Slowdown May Be Worse Than Official Data Suggest - Dallas Fed - In the months following the 2008–09 economic crisis, emerging-market economies robustly rebounded. Output in China and India expanded more than 10 percent in 2010, and Brazil’s gross domestic product (GDP) growth of 7.5 percent was its best performance in 25 years. Emerging-market economies retraced their precrisis level of industrial production by 2009, while advanced economies remained below their precrisis levels in 2012. But the strong emerging-market rebound—most significantly in China—hasn’t endured. When China’s average GDP growth remained above 9 percent in 2011, hopes rose that a sustained recovery would prop up the world economy amid the European sovereign debt crisis and subpar growth in the U.S. However, China’s economy deteriorated rapidly in 2012, with GDP growth slowing to 8.1 percent in the first quarter from 8.9 percent at year-end 2011. Second quarter GDP growth slid further, to 7.6 percent, the lowest reading since the height of the global financial crisis in early 2009.  Even with the decline, there is speculation that these figures may still understate economic slowing. Economists have long doubted the credibility of Chinese output data. For example, some studies indicate that GDP growth was overstated during the 1998–99 Asian financial crisis, when official figures reported that China’s GDP grew on average 7.7 percent annually. Alternative estimates using economic activity measures such as energy production, air travel and trade data ranged from 2 percent to 5 percent.[1]

China Confronts Mounting Piles of Unsold Goods— After three decades of torrid growth, China is encountering an unfamiliar problem with its newly struggling economy: a huge buildup of unsold goods that is cluttering shop floors, clogging car dealerships and filling factory warehouses.  The glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown. It has also produced a series of price wars and has led manufacturers to redouble efforts to export what they cannot sell at home.  The severity of China’s inventory overhang has been carefully masked by the blocking or adjusting of economic data by the Chinese government — all part of an effort to prop up confidence in the economy among business managers and investors.  But the main nongovernment survey of manufacturers in China showed on Thursday that inventories of finished goods rose much faster in August than in any month since the survey began in April 2004. The previous record for rising inventories, according to the HSBC/Markit survey, had been set in June. May and July also showed increases.  “Across the manufacturing industries we look at, people were expecting more sales over the summer, and it just didn’t happen,”  “Things are kind of crawling to a halt.”

China lands - So, how do we know whether China is headed for a "hard landing"? It's hard to tell just from the growth numbers, since A) China's growth numbers are year/year numbers, which are harder to interpret than the annualized monthly growth numbers we in the U.S. are used to, and B) China's growth statistics are not reliable (see this Dallas Fed paper for more worrying numbers). But if the difference between hard and soft landings is all about aggregate demand, then we can look at two other indicators to figure out whats happening: prices, and unemployment. Chinese inflation has slowed. However, prices in developing countries behave a bit differently than prices in developed countries, so this is a pretty difficult number to interpret, especially because it's not core inflation.  How about unemployment? This is worrying. After looking fine for months, China's job market is beginning to tighten a bit, though not as much as in 2009. All in all, it may be too early to call. In addition, China has been easing monetary policy, and home prices appear to be rising again. So an incipient "hard landing" may have been averted or delayed.

China’s weak factory data prompt calls for easing - Weak Chinese manufacturing data released Thursday raised calls for Beijing to add to stimulus efforts, with a poor reading on shipments suggesting little improvement in global demand. HSBC said its preliminary or “flash” reading of its China manufacturing Purchasing Managers’ Index (PMI) for August fell to a nine-month low of 47.8 on a 100-point scale, dropping from July’s final print of 49.3. The result suffered a drag from weakness in new orders and shipments, and marked the 10th straight month that Chinese manufacturing conditions have remained below the 50-point level, which separates contraction from expansion. In comments accompanying the PMI release, HSBC economist Hongbin Qu said China “must step up” policy easing to help kick start new investment projects. “Falling orders dragged down the August flash PMI ... suggesting Chinese producers are still struggling with strong global headwinds,” Qu said. Subcomponents in the PMI showed output now in contraction, reversing from expansion in July. Further deterioration was seen in the new orders and new export orders subindexes, with both measures indicating contraction at an accelerating rate. And although the employment conditions reading were steady from July, they remained in contractionary territory.

China injects more liquidity - People’s Bank of China (PBOC) just conducted yet another round of liquidity injection through reverse repo. PBOC conducted open market operations yesterday, injecting RMB80 billion through 7-day reverse repo and RMB65 billion through 14-day reverse repo.  This brings the total injection through reverse repo this week to RMB365 billion. As previously noted, maturing repo, central bank bills and reverse repo withdraw about RMB87 billion (net) for the week, thus this round of reverse repo brings the net injection for the week to RMB278 billion.  The net liquidity provision for the week is at a level not normally seen except around Chinese New Year.

S&P eyes China stimulus risks, city spending sprees floated (Reuters) - China can afford to deliver a fiscal stimulus for its sagging economy, but would risk making bad investments, ratings agency Standard & Poor's said on Wednesday as Chinese media fuelled speculation that a fresh spending boost was on the way. In its new report, S&P said a mountain of debt left behind by a stimulus package that helped China fend off global recession four years ago has curbed Beijing's appetite for a big stimulus this time round. "Inefficient spending can impair China's future growth trend," the report said. "It could also deepen the damage of the last round of stimulus spending by further weakening the balance sheets of governments and commercial banks and raising future financing costs across the economy." S&P's comments came as local media reported that Tianjin, a port on the northeastern coast that was one of China's two fastest growing cities last year, was planning a multi-year investment programme worth $236 billion. Though it is equivalent to around 150 percent of the city's annual economic output, the only reference to the plan was a newspaper article on the city government's website saying it exists. The 1.5 trillion yuan plan envisages spending in 10 major sectors including petrochemicals, port equipment, new energy cars, and aerospace industries, yet a spokesman for the city government contacted by Reuters denied any knowledge of it.

Rich Chinese flee - Rich folks in China simply want to leave the country. That is not news. A survey did point this out more than a year ago, and survey after survey is pointing to the same conclusion. And they are going everywhere, sometimes to places that we have not heard of, like Prince Edward Island, not to mention other more popular destinations, like Vancouver, Australia, or… whatever… One of the main reasons for their desire to leave is the safety and security of their wealth. The BBC recently asked one rich entrepreneur in China why he sought residency right in Singapore. And it perfectly illustrates the point: But he admits that for many of his wealthy friends it is a sense of insecurity which is leading them to ponder a life outside China. “Most of them think I’ve got so much money here but one day maybe the government will change the policies and take it all back,” he says.

China to Establish a Free Trade Zone with 10 ASEAN Countries in 2015 - GAO Hucheng, Vice Minister of the Ministry of Commerce (MOFCOM), said recently that China will establish a free trade agreement with 10 ASEAN member countries starting from 2015. According to GAO, ASEAN countries had replaced Japan to become China’s third largest trading partner at the end of 2011; China has been ASEAN’s biggest trading partner for the past three years. So far, China has imposed no tariffs on 90% of the imports from six ASEAN member countries.

The Fading Dream of Yuan-Yen Direct Exchange - One of the things people unfamiliar with currency markets do not fully appreciate is that all currency pairs involve the US dollar and something else. To change Japanese yen into Chinese yuan for instance, you would typically refer to the USD/JPY exchange rate first to obtain dollars, then change the dollars to yuan via the USD/RMB exchange rate. Recently, the Chinese and Japanese governments established mechanisms to bypass the need to exchange their currencies into dollars first. In other words, you could exchange yen for yuan and vice-versa straight without changing first into dollars. It sounds great in theory: why mess with dollars when you are doing trade within Asia, anyway? The transaction costs of not having to obtain dollars in the process should reduce the costs of foreign exchange. However, things have not quite worked out that way it seems. Because the market in direct yen-yuan or yuan-yen foreign exchange remains thin or lightly traded, bid-offer spreads tend to be fat. In layman's terms, the prices at which traders are willing to sell yuan and buy yen--or buy yen and sell yuan in the opposite instance--differ markedly. OTOH, in an active market, the prices for both should be nearly identical since there are many buyers and sellers of both currencies competing with each other for business. That is, profit margins would be wafer-thin. As it so happens, the practice of intermediating yen-dollar-yuan or yuan-dollar-yen trades still comes out cheaper since the dollarless trading markets are illiquid.

Trade War Escalates: China Threatens US Over Renewable Energy -  They were never just going to sit there and take it. With the election cycle hotting up, the Chinese were an easy target for any and every finger-pointing blame game that US politicians were cornered with - but they are coming out swinging.  As WaPo (via AP) reports, China's government has ruled that US support to six US solar and wind projects violates free trade rules - and while they have pledged (to cooperate in developing technology, they now accuse each other of improperly supporting their own producers and obstructing foreign competition (can't we all just get along in this centrally planned world?). At a time when WTI is breaking out (over $97) and Brent as EUR-priced highs, China's commerce ministry has called on Washington to stop the support and give 'fair treatment' to Chinese renewable products. These tri-party tensions - oh yes, Europe is involved too as in July the EU was asked to raise tariffs on Chinese solar cells - are only set to get worse as every nation attempts to unilaterally centrally plan and promote their own suppliers in the hopes of generating higher-paid jobs

Japan trade deficit shows world economy 'serious' - Sagging export markets in Europe and Asia left Japan with a much worse-than-expected trade deficit, figures showed Wednesday, ringing alarm bells over the parlous state of the global economy. The rumbling debt crisis in Europe and slowing demand in Asia -- until recently a bright spot on the economic horizon -- are taking their toll, with analysts sounding warnings that things are getting "even more serious". Japan's trade with the rest of the world in July showed a shortfall of 517.4 billion yen ($6.5 billion), the largest ever deficit for the month and nearly double the 275 billion yen deficit that had been forecast. The figure also marked a drastic reversal of June's numbers, when Japan recorded a small but respectable surplus of 60.3 billion yen. The data showed "the recent trend in which weakness in China and Europe has been putting major downward pressure on Japan's trade is getting even more serious",

In Vietnam, Growing Fears of an Economic Meltdown - In Vietnam’s major cities, a once-booming property market has come crashing down. Hundreds of abandoned construction sites are the most obvious signs of a sickly economy.  A senior Vietnamese Communist Party official, speaking in the ornate drawing room of a French colonial building, compared the country’s economic problems to the market crash 15 years ago that flattened many economies in Asia.  “I can say this is the same as the crisis in Thailand in 1997,” said Hua Ngoc Thuan, the vice chairman of the People’s Committee of Ho Chi Minh City, the city’s top executive body. “Property investors pushed the prices so high. They bought for speculation — not for use.”  Vietnam’s economic problems appear less severe than those of the 1997 financial crisis — the economy is still growing, albeit relatively anemically, at a rate of about 4 percent — but the country’s list of problems continues to grow.

Odds of Global Recession Are 100%: Marc Faber - When you look at the major economies, Europe, the U.S., China and the emerging markets that are dependent on China for growth, Faber, aka Dr. Doom, only sees weakness.  “Europe is already in recession,” he said. “Germany is still growing very, very slightly, but is likely to go into recession soon.”  Growth in the U.S. is also falling off. “The U.S. economy has decelerated and I don’t see much growth in the next six to 12 months,” Faber said. There’s also little the Federal Reserve and other policy makers can do to turn the U.S. economy around. “I think that if you look at the injection of liquidity and the intervention by the Federal Reserve and the Treasury with fiscal measures, it has already impoverished the U.S. economy,” he said. It would take “massive easing, a huge balance sheet expansion,” to boost economic activity in the U.S., according to Faber.

Russia's entry to WTO ends 19 years of negotiations - Russia's entry into the World Trade Organisation has been a long time in coming. The accession means that the last major economic power has joined the global trading system. Russia was the only member of the G8 group not be in the WTO and the Kremlin will be hoping entry will provide the sort of boost enjoyed by China after it was admitted to the club in 2001.That looks unlikely for three reasons. The economic climate is much frostier than it was in 2001, when the global economy was about to embark on its strongest period of growth since the late 1960s and early 1970s. China's economy was much better equipped to reap the benefits of WTO membership, with a strong manufacturing base contrasting with Russia's over-reliance on oil and gas. Finally, just as it proved impossible for other EU countries to replicate Ireland's Celtic Tiger period, so China gained from being the first former communist giant to join the WTO. There are, of course, still potential benefits to Russia from WTO membership. Moscow is hoping for a surge in foreign direct investment that will help make Russian industry more efficient. Russia's exporters will gain to the tune of $1.5bn to $2bn (£950m to £1.3bn) a year from the dismantling of foreign barriers. Lower tariffs on imported goods should lead to cheaper goods in the shops, boosting the spending power of consumers.

Most U.S. Trade Agreement Improve Trade Balance, but Effect Overwhelmed by NAFTA and China Trade - According to EPI's 2011 Annual Report,"Presently, the United States' non-oil deficit alone costs more than five million U.S. jobs." This underscores the importance of the deficit and what is at stake. Yet, as David Cay Johnston notes, the United States continues to negotiate new trade agreements while government agencies and government officials from the President down, tout them as engines of job creation. Johnston points out that the government predicted that our small pre-NAFTA trade surplus would continue, when instead we quickly went into a deficit that in 2011 reached $64.5 billion. Similarly, he says, the U.S. International Trade Commission predicted that normalizing trade relations with China would lead to a trade deficit of just $1 billion, when in fact it grew by 2011 to $295 billion!  How have these 19 trade agreements performed? The U.S. Census Bureau (then click on individual countries) has the answer to this. In 11 cases, the goods trade balance has improved from the year prior to the agreements' coming into effect through 2011, in one case it's too soon to tell (Colombia, effective May 15, 2012), and only in seven cases did the trade balance worsen.  Unfortunately, that's the end of the good news, because our trade with most of these countries is relatively small: in six cases the improvement was under $2 billion dollars, which pales against the country's overall goods deficit of $727.4 billion in 2011. The biggest gains have been with Singapore ($10.7 billion) and Australia ($9.1 billion).

The Benefits of Freer Global Migration - -- Dylan Matthews points to a new estimate of the potential gains from freer global labor mobility, this one from John Keenan at the University of Wisconsin. In Keenan’s model, completely free international migration leads to enormous economic growth, such that typical workers in developing countries would see annual wages more than double, from an average of $8,903 today to $19,272 with open borders. That is, the typical worker in the third world would end up making about double the individual poverty line in the United States today. By changing capital-labor ratios in the short-run, mass migration would initially reduce real wages in destination countries. But, as Keenan notes in the paper, “if immigration restrictions are relaxed gradually, allowing time for investment in physical capital to keep pace, [the model predicts] no implied reduction in real wages.” Matthews points out that Keenan’s estimate is consistent with a previous estimate by Lant Pritchett, who found that opening borders would double world economic output. The numbers also seem in line with Michael Clemens’ recent review of various estimates of the gains from reducing migration barriers:

Iceland Was Right, We Were Wrong: The IMF - For approximately three years; our governments, the banking cabal, and the Corporate Media have assured us that they knew the appropriate approach for fixing the economies that they had previously crippled with their own mismanagement. We were told that the key was to stomp on the Little People with “austerity” in order to continue making full interest payments to the Bond Parasites – at any/all costs. Following three years of this continuous, uninterrupted failure; Greece has already defaulted on 75% of its debts, and its economy is totally destroyed. The UK, Spain, and Italy are all plummeting downward in suicide-spirals, where the more austerity these sadistic governments inflict upon their own people the worse their debt/deficit problems get. Ireland and Portugal are nearly in the same position. Now in what may be the greatest economic “mea culpa” in history, we have the media admitting that this government/banking/propaganda-machine Troika has been wrong all along. They have been forced to acknowledge that Iceland’s approach to economic triage was the correct approach right from the beginning.  What was Iceland’s approach? To do the exact opposite of everything the bankers running our own economies told us to do. Iceland gave the banksters nothing

In The Aftermath Of The Greek Blue Light Precedent: Belize Demands Half Off On Its Debt... Or Else - "Greece set a precedent for 'Here's what you're going to get, take it or leave it'" is how the WSJ summarizes an analyst's 'shocked' thoughts on the growing game of 'call my bluff' being played among beggars being choosers. Belize, a Central American nation with an economy the size of Pine Bluff, Arkansas, is surprise surprise running out of money to pay its debts and is insisting that creditors forgive 45% of what they are owed - OR allow it to delay any debt payments for 15 years (yes, seriously, read that again) - leaving a default on the country's $543.8mm almost inevitable.

The Modern Debt Jubilee - The modern “debt jubilee” is characterised as “quantitative easing for the public”. It has been boiled down to a procedure where the central bank does not create new money by buying the sovereign debt of the government. Instead, it takes an arbitrary number, writes a check for that number, and deposits it in the bank account of every individual in the nation. Debtors must use the newly-created money to pay down or pay off debt. Those who are not in debt can use it as a free windfall to spend or “invest” as they see fit. This, it is said, is the only way left to restart economic “growth” and finally get the spectre of unending financial crisis out of the headlines. It is the latest of a long string of “print to cover” remedies.

Greek Shortfall Growing Ever Larger  - Athens has not been having an easy time coming up with the €11.5 billion in cost cutting measures over the next two years it has promised Europe. Indeed, Greek Prime Minister Antonis Samaras is reportedly set to request an additional two years to make those cuts during meetings later this week with German Chancellor Angela Merkel on Friday and French President François Hollande on Saturday.  But according to information obtained by SPIEGEL, the financing gap his country faces could be even greater. During its recent fact-finding trip to Athens, the so-called troika -- made up of representatives from the European Central Bank, the European Commission and the International Monetary Fund -- found that Greece will have to come up with as much as €14 billion to meet the terms for international aid. According to a preliminary troika report, the additional shortfalls are the result of lower than expected tax revenues due to the country's ongoing recession as well as a privatization program which has not lived up to expectations. The troika plans to calculate the exact size of the shortfall when it returns to Athens at the beginning of next month.

Grexit looms again - It’s been 7 months and taken a private sector default but there is mounting evidence that European leaders are again reaching the limits of their own failure on Greece. So are we being soften up for a Greek exit yet again? Possibly, but even if that isn’t the case there is growing evidence that Greece is in need of a renewed structured default in order to remain inside the Euro. In September the Troika is expected to deliver a new report on the state of Greek finances with the aim of issuing another € 31.5 billion tranche from the bailout agreed a year ago and most of this money is supposed to go towards supporting the Greek banking system. It is, however, becoming increasingly apparent the the country is failing to meet its obligations and speculation is mounting that the country is losing support from northern states. According to the EuroGroup leader, Jean-Claude Juncker, there is no threat of a ‘Grexit’ unless the country violates its obligations under the current bailout agreements:Greece will not leave the eurozone unless the country “totally refuses” to fulfil any of its reform targets, one of Europe’s most influential politicians said in advance of the latest Greek plea for leniency from its austerity programme.

Greece seeks approval for $14bn austerity plan - Greece hopes to obtain its lenders' approval for a new wave of austerity measures worth about 11.5 billion euros ($14.1bn) by the middle of next month, a Greek finance ministry source said yesterday. Winning approval for the savings due in 2013-14 is key to a positive review from the "troika" of the European Union, the European Central Bank and the International Monetary Fund, who are expected back in Athens next month for a verdict on whether they will keep funds flowing to the austerity-bound country. "Our aim is to have agreed with our partners by September 14," the senior finance ministry official said. An informal Eurogroup finance ministers' meeting has also been scheduled in Nicosia for the same date. The chiefs of the troika mission, who completed a preliminary visit to Athens earlier this month, are expected to return around September 5, the official said.

EU Leaders Plan Shuttle Talks to Bolster Greece - Europe’s leaders plan a week of intensive shuttle diplomacy to help defuse the continent’s debt crisis, as Der Spiegel magazine reported that the European Central Bank is considering a plan to put a cap on bond yields. As the debt crisis continues to threaten the global economy, French President Francois Hollande and German Chancellor Angela Merkel will meet in Berlin on Aug. 23. Greek Prime Minister Antonis Samaras travels to the German capital the next day before going on to Paris on Aug. 25. The talks come as the ECB fleshes out plans to curb the turmoil in European bond markets, a move that would give governments time to push through measures to revamp their economies. The ECB’s governing council may decide at its next meeting in early September to set yield limits on the debt of each country, German news magazine Der Spiegel reported yesterday, without saying where it got the information. A cap “could be a major step to defuse tensions in the eurozone and buy time for the fiscal repair and pro-growth reforms to work,” said Holger Schmieding, chief economist at Berenberg Bank in London. An ECB official declined to comment on the Spiegel report.

Germany’s Barthle Says ‘Small Concessions’ Possible for Greece (Bloomberg) -- Concessions are possible for Greece so long as Prime Minister Antonis Samaras’s government shows a willingness to strive to meet the main targets set out in its bailout program, a senior lawmaker with Chancellor Angela Merkel’s Christian Democratic Union said.A precedent for program adjustments was made with the first Greek bailout, when Greece secured lower interest rates and longer maturities on bilateral loans than those originally set, Norbert Barthle, the CDU budget spokesman in parliament, said today in a telephone interview.The German Parliament’s Budget Committee would be called upon to approve such adjustments rather than a vote going to the full plenary session, he said. That would probably make the concessions easier it to pass.

Greeks go back to basics as recession bites: As Greece sinks ever deeper into the most severe economic depression in living memory, some young people are taking drastic action to change their lives.The group sleeps communally in yurts they have built themselves, they grow their own food and exchange the surplus in the nearest village for any necessities they cannot produce. "What others saw as a global economic crisis, we saw as a crisis of civilisation," Mr Sianos explains. "Everything seemed to be in crisis - healthcare, the environment, education. So we made the decision to try something different."

Der Spiegel Says Hydra Residents Besieged Tax Inspectors - After a crackdown on tax evasion on Greek islands showed as much as 100 percent in flagrant violations, a sweep by tax inspectors on the popular Hydra, which attracts many wealthy visitors, led to the arrest of a tavern owner who was not issuing receipts – only to lead to the inspectors being forced to stay in a police station until reinforcements arrived because islanders were furious at them. The incident received widespread attention in the German news magazine Der Spiegel, which said it was typical of Greeks who refuse to pay taxes even though Germany is putting up much of the monies for $325 billion in two bailouts to prop up the near-dead Greek economy.

Durtch Damned By Homeowner Debt (Reuters) - The euro zone crisis is washing over the walls of one of the region's safest havens. So far the Netherlands, a founding member of the European Union and fiscal hawk along with neighbouring Germany, has been spared the dramatic collapse of property prices associated with southern European countries such as Spain. Housing prices have fallen roughly 15 percent since 2008, compared with up to 30 percent in Spain since the crisis began. Now, though, four years after the global financial crisis first hit, the economy is on the brink of another recession. And steadily sinking property prices are exposing a deep Dutch weakness: unpaid mortgages. The Dutch, who have been able to borrow up to 12 times their income to buy homes, are leveraged to the hilt. By some measures the Netherlands has the highest per capita mortgage debt in the European Union. ING, one of the country's largest lenders, forecast earlier this month that by next year, the debt on one in four mortgaged homes will exceed their value.

Dutch Domestic Demand Dragging Real Home Values -  Rebecca Wilder - Today Statistics Netherlands (CBS) warned ”House Prices Nosedive“. Prices of existing owner-occupied dwellings sold in July 2012 were on average 8.0 percent down from July 2011. This is the most substantial price drop since the price index of existing residential property was first recorded in 1995. In real terms and indexed to 2005, home values are down 10.1% over the year in July and dropped 21.3% since the August 2007 peak.What explains this real depreciation in home values? I’ll give you one chart: the unemployment rate. The labor market is sinking, and taking with it household demand. Companies probably hoarded labor in the crisis – the peak to trough drop in GDP was 4.9% versus a 1.6% cyclical drop in employment around that period. However, in late 2011 employment peaked and unemployment is surging – the quarterly employment data through March 2012 indicate a peak was seen in Q3 2011. On balance, the downtrend in Dutch home values is probably here to stay. FYI: the balance sheet of Dutch households and non-profits is roughly 2.5 times levered.

Lord Rothschild Betting On Euro Collapse? -  If the actions of Lord Jacob Rothschild are anything to go by, the long predicted collapse of the Euro may not be far away, with the banking titan placing a $200 million dollar bet against the troubled single currency. “Lord Rothschild, an elder member of the dynastic Rothschild banking family, has taken the position against the euro through RIT Capital Partners, the 1.9 billion pound investment trust of which he is executive chairman,” reports CNBC. RIT has upped its short against the Euro from 3 per cent in January to 7 per cent in July.The European Central Bank continues to try to re-animate a dead corpse by continually pumping bailout money into debt-ridden countries like Greece, Ireland, Portugal and Spain. However, top investors only see it as a matter of time before the single currency is consigned to the landfill of economic history.

Euro Watch: Greece and Germany Strike Conciliatory Note - Bild, Germany’s most-read newspaper, has accused Greece of “making our euro kaput” and only a few days ago referred to the country as “a bottomless pit.” On Wednesday, though, the paper featured a friendly chat with the man in charge of that bottomless pit: Antonis Samaras, the Greek prime minister, who pleaded during an interview for more time to repair his country’s shattered economy. The Bild reporter even inquired how Mr. Samaras was feeling after an eye operation. Coming from a newspaper known for a keen understanding of what its 2.8 million readers want to hear, the shift in tone could be significant. It coincides with signals from members of Chancellor Angela Merkel’s inner circle this week that, within limits, Germany may no longer be so insistent that Greece stick to existing agreements on its finances. “All that we want is a little breathing room to get the economy going and increase revenue,” Mr. Samaras told Bild, two days before his first trip to Berlin as head of government. “More time does not automatically mean more money.” Some top officials in Ms. Merkel’s governing coalition continue to insist that Greece stick to agreements it has made to rein in its government finances. But others, including Guido Westerwelle, the foreign minister, and Michael Meister, the deputy leader of Ms. Merkel’s Christian Democratic party in Parliament, have indicated a willingness to extend the schedule for meeting the terms that international creditors imposed on Greece.

ECB May Set Yield Limits on Euro Sovereign Bonds, Spiegel Says - The European Central Bank is considering setting limits on yields of euro area sovereign debt by pledging unlimited bond purchases, Germany’s Spiegel magazine reported without saying where it obtained the information.  The policy will be decided at the September meeting of the ECB’s governing council, Spiegel said. The Frankfurt-based central bank would immediately publish bond purchases after making them, the magazine added. An ECB official declined to comment on the article.  Speculation about additional ECB intervention to counter Europe’s sovereign debt crisis helped lift Spanish government bonds for the first week this month. Spain’s 10-year yield slid 46 basis points, or 0.46 percentage point, to 6.44 percent last week, the lowest since July 5.  ECB President Mario Draghi said on Aug. 2 that the central bank may buy government debt in unison with the region’s bailout funds to address elevated yields that are “related to fears of the reversibility of the euro.” Chancellor Angela Merkel backed the ECB’s insistence on conditions for helping reduce borrowing costs on Aug. 16, saying Germany is “in line” with the central bank’s approach to defending the euro. Even so, economists are divided on Draghi’s ability to deliver on such debt purchases.

European Central Bank mulls caps on borrowing costs - The European Central Bank is considering buying the bonds of crisis-wracked eurozone countries to ensure borrowing costs do not rise beyond a pre-determined level, German newsweekly Der Spiegel said Sunday. The bank will define an upper limit for borrowing costs in countries such as Spain and Italy and intervene in the markets to ensure it is not breached, Spiegel said, without citing its sources.  At the end of trade on Friday, Spain was paying 6.39 per cent to borrow for 10 years and Italy 5.76 per cent. In contrast, Germany was paying 1.49 per cent, as investors trust Europe's top economy to repay them. The so-called spread, or difference, between benchmark German bonds and the debt-wracked countries would be decisive for the proposed rate cap, Spiegel said. ECB President Mario Draghi announced earlier in August that his institution "may" buy bonds of struggling countries if they first apply for EU bailout funds and accept tough conditions in return. He said the details would be worked out before the next meeting of the ECB, scheduled for September 6. Spiegel said that ECB governors would decide then whether to implement the proposed borrowing cost cap.

ECB weighing shift to euro-zone bond buys: report — The European Central Bank is weighing a plan to cap borrowing costs for struggling euro-zone governments by buying unlimited amounts of bonds, the German news magazine Der Spiegel reported Sunday. Such a move would mark an aggressive and controversial turn by the central bank in an effort to bring down borrowing costs for Spain and Italy.  The report, which didn’t name sources, said the plan would see the ECB step in to buy bonds when the spread between yields on distressed government bonds moved above a certain, unspecified level versus German government debt.  The report said the ECB Governing Council would decide at its September policy meeting whether to implement the plan, which would serve not only to prevent borrowing costs from climbing to unsustainable levels but also ensure that the spread between peripheral and core yields doesn’t grow too wide.

ECB's Latest Deja Vu Bluff: Rate Caps On Sovereign Bonds - Just as Germany was warming its "Nein, Nein, Nein" machine, now that Merkel is solidly back from vacation and has caught up with all the desperation emails in the inbox, as reported yesterday, the ECB, in a furious attempt to preempt the unwind of every innuendo, speculation, "unsourced rumor", and everything else the ex-Goldman controlled printer of European currency (which however now and always is powerless without German support) has done in the past month to keep sovereign rates low, has just resorted to yet another deja vu preemption tactic: rate caps on sovereign bonds. Spiegel reports the based on unsourced data, "The European Central Bank (ECB) is considering to establish in its future bond purchases interest rate levels for each country. Thus, it would buy sovereign debt of the crisis countries whenever interest rates exceed a certain spread to German Bunds... At its next meeting in early September, the Governing Council will decide whether the interest rate target is actually installed." Which of course it won't for one simple reason: the same reason the ECB has done lots of talking in the past 3 months, and implemented absolutely nothing: the Bundesbank's Jens Weidmann, and the fact that as Danske (see below) and everyone else already explained when this idea was floated unsuccessfully the first few times, it would require an infinite balance sheet, something the ECB does not have, especially not when Germans are 'consulted.'

Spain says there must be no limit set on ECB bond buying (Reuters) - The European Central Bank must take forceful and unlimited steps to buy sovereign debt to help Spain reduce its refinancing costs and eliminate doubts over the euro zone's future, Spain's economy minister said in comments published on Saturday. "There can be no limit set or at least (the ECB) can't say how much they will use or for how long," when it buys bonds in the secondary markets, Luis de Guindos told Spanish news agency EFE. The Spanish government will study the details of the ECB's debt-buying program, which are likely to be outlined before the Eurogroup meeting mid-September, before making a decision on applying for more European aid, de Guindos said. Spain is at the centre of the euro zone debt crisis on concerns it may need a full bailout, which could stretch euro funds to breaking point, on top of up to 100 billion euros ($122.97 billion) it has already requested for its struggling banks. Prime Minister Mariano Rajoy has said his government would study any measures by the ECB and the potential conditions attached to any EU aid before deciding whether to apply for help.

Bundesbank Reiterates Objection To New Bond Buying As German FinMin Refutes Spiegel Report - Following the planting of an unsourced, glaringly obvious ECB propaganda report such as that attempted yesterday in Der Spiegel, in which nothing of substance was in fact enacted or even proposed (as rate caps is merely a regurgitation of ideas thrown out previously in the summer and fall of 2011), peripheral bonds once again tightened on absolutely nothing, with the Spanish 10 Year now back in the 6.30% territory, over 100 bps inside where it was a month ago. On not a single enacted reform or actual ECB action. Of course, it was a matter of hours before the German FinMin put an end to this latest rumor, and sure enough an hour ago a spokesman for the German FinMin said they were unaware of any ECB plan to target bond spread. Perhaps because there are none? And of course, if there were, the Germans would promptly put an end to what is my implication an open-ended bond buying program without conditionality: something that worked like a "charm" last summer with Italy. And just to make sure Germany's message was read loud and clear, here is the Bundesbank turning on the "just say 9" machine.

Bundesbank Widens Euro Rift With Criticism of ECB Bond Plan -Germany’s Bundesbank stepped up its criticism of the European Central Bank’s plan to embark on potentially “unlimited” government bond purchases, widening a rift over how to tackle the sovereign debt crisis. “The Bundesbank holds to the opinion that government bond purchases by the Eurosystem are to be seen critically and entail significant stability risks,” the Frankfurt-based central bank said in its monthly report today. The new program “could be unlimited” and decisions about potentially far greater sharing of solvency risks should be taken by governments or parliaments, not by central banks, it said. The comments suggest Bundesbank President Jens Weidmann won’t support a measure the ECB is rushing to design to help reduce governments’ borrowing costs and win them time to implement fiscal reforms. Spanish and Italian 10-year bond yields slid to the lowest in more than six weeks today after German news magazine Der Spiegel reported the ECB’s new program may set yield caps. In response, the ECB issued a statement saying it’s “misleading to report on decisions which have not yet been taken.” The ECB issued a statement today saying a bond-yield cap has “not yet been discussed by the ECB’s Governing Council,” and it is “wrong to speculate on the shape of future ECB interventions.” It didn’t deny that ECB officials are considering the idea. German Finance Minister Wolfgang Schaeuble said on Aug. 18 that the debt crisis mustn’t become a “bottomless pit” for his country. “There are limits,” he said, ruling out another aid program for Greece.

The ECB to potentially target periphery yields via unlimited buying - Today Der Spiegel published an article called "Aiming the Bazooka: ECB Plans to Set Yield Targets for Bond Purchases" discussing what could become the ultimate backstop for periphery government bonds.  Der Spiegel: - As part of its efforts to fight the euro crisis, the European Central Bank (ECB) is considering establishing caps on interest rates for government bonds in individual countries as part of its future bond-buying program. Under the plan, the ECB would begin purchasing government bonds from crisis-hit countries if yields for those bonds exceeded the interest rates for benchmark German sovereign bonds by a predetermined amount. This would signal to investors which interest rate levels the ECB believes to be appropriate.Targeting yields rather than specific amounts of bonds to purchase is not a new idea. In fact it has been considered by the Fed as an alternative version of QE3. But with respect to periphery debt, this would indeed be a "bazooka". The ECB would be providing a free put option to holders of sovereign debt and would even give more transparency on its bond purchases. Der Spiegel: - During its next meeting at the beginning of September, the ECB's Governing Council is expected to decide on whether the interest-rate goal will actually be implemented. However, it has already been decided that the ECB will be more transparent in the future about its bond purchases. Looking ahead, the ECB plans to publicly state the volume of bonds it has purchased from each country.

E.C.B. Rejects Speculation About Its Bond-Buying Intentions — The European Central Bank sought Monday to discourage speculation that it might act far more aggressively to contain borrowing costs for countries like Spain, while issuing a rare rebuke to government officials who have encouraged such speculation.  “It is absolutely misleading to report on decisions which have not yet been taken,” the central bank said in a statement. The report referenced, by the German magazine Der Spiegel, led to a temporary sell-off of United States Treasury securities while briefly lifting European stocks Monday  The magazine reported Sunday that the central bank was considering setting upper limits on borrowing costs for some euro zone countries. To enforce such limits, the bank would have to promise to buy bonds in whatever quantity was necessary, a risky commitment.  The central bank rarely comments on the rampant, often thinly sourced speculation about its internal deliberations that is common in the European media. That the bank did so could reflect its frustration about such news coverage. Der Spiegel did not cite any sources in its article.

Merkel Seems to Side With E.C.B. on Spain and Italy  — In a signal that August vacations are ending and it is time for European leaders to start grappling with the sovereign debt crisis again, Angela Merkel, the German chancellor, has expressed cautious support for measures to support Spain and Italy, while a Finnish official has suggested that euro zone leaders are preparing for the worst, including a possible breakup of the currency bloc.  Major European stock indexes advanced Friday after Ms. Merkel backed a statement by Mario Draghi, the president of the European Central Bank, that the bank would do whatever it took to preserve the euro.  In contrast to some members of the German Parliament, Ms. Merkel expressed no objections to plans by the E.C.B. to buy bonds to hold down borrowing costs for stricken countries, if certain conditions were met.  Speaking late Thursday at a news conference in Ottawa with Stephen Harper, the Canadian prime minister, Ms. Merkel appeared to show her openness to such action by the E.C.B. and the euro zone rescue fund, the European Stability Mechanism.

Germany backs Draghi bond plan against Bundesbank - Germany’s director at the European Central Bank has thrown his weight behind mass purchases of Spanish and Italian debt to prevent the disintegration of the euro, marking a crucial turning point in the eurozone debt crisis. “A currency can only be stable if its future existence is not in doubt,” said Jörg Asmussen, the powerful German member of the ECB’s executive board.  He signalled full backing for the bond rescue plan of ECB chief Mario Draghi, brushing aside warnings from the German Bundesbank that large-scale purchases would amount to debt monetisation and a back-door fiscal rescue of insolvent states in breach of EU treaty law.  Mr Asmussen told the Frankfurter Rundschau that the surge in Club Med bond yields over recent months “reflects fears about the reversibility of the euro, and thus a currency exchange risk” rather than bad economic policies in struggling states.  The choice of wording is crucial. If it can be shown that the ECB is acting to avert EMU break-up – known as “convertibility risk” – bond purchases would no longer be deemed a bail-out for Italy and Spain.  Mr Asmussen confirmed that purchases may be “unlimited” in scale, a far cry from the half-hearted intervention of the past two years, which failed to stem capital flight.

What Happened To The Debt? - Thus, we have a substantial part of the Eurozone sinking deeper fast than anyone will tell you, while at the same time the currency they use is rising. A rise based on expectations of other Eurozone nations, notably Germany, basically putting up the health of their own economies as collateral to inspire confidence in ECB sovereign bond purchases. Now, you can play this game for a while, no reason to doubt that. But I would personally think we've finished playing out that particular "while" a long time ago and running. Whatever remains now is but a wager. As in: the entire Eurozone has turned into a casino. If we, and they, the ECB, Germany, Holland, Finland on the one hand, and Monti, Rajoy and Samaras on the other, want to play these moves AND have a shred of credibility left once they're done (and I know what you're saying: will they ever be done?), we and they will need in the end to be able to answer this one simple question. Which they will never ask, we will have to do that for them. That question is: Where's The Debt? Or maybe more accurately: What Happened To The Debt?. If a party, be they an individual, a company or a sovereign nation, carries so much debt that it is vulnerable to attacks by the likes of bond markets (or bailiffs in the case of individuals), a handout or bailout will never suffice to abolish the threat for very long, unless it is provided on the condition that the debt that led to the threat in the first place is restructured. That is to say, creditors take a haircut on what is owed to them.

Eurozone leaders delay Greece aid decision -- Eurozone leaders have reiterated that they will not make decisions about supplying fresh aid to Greece until after international lenders have completed a review of the country’s finances – which is not expected before September. The comments, from Angela Merkel, the German chancellor, and Jean-Claude Juncker, the Luxembourg prime minister and president of the eurogroup of finance ministers, were meant to lower expectations as they embarked on a round of potentially pivotal meetings this week with Antonis Samaras, the Greek prime minister. Mr Samaras was to see Mr Juncker on Wednesday evening in Athens before meeting Ms Merkel in Berlin on Friday and then François Hollande, French president, in Paris on Saturday. The key question in all those meetings is whether Greece’s creditors – the EU, the International Monetary Fund and the European Central Bank – will be willing to offer the country additional aid to compensate for its setbacks in adhering to the terms of a €174bn bailout. EU officials estimate that Greece’s funding shortfall could total €20bn or more. The actual number will not be clear until the country’s lenders, known collectively as the troika, complete their review. A team of experts is expected to return to Athens in early September to finish their work.

Greece Asks for More Time as Juncker Meets Samaras in Athens -  Greek Prime Minister Antonis Samaras called for “more time” to carry out policy changes to address with Greece’s debt woes as he prepared to receive Luxembourg Prime Minister Jean-Claude Juncker in Athens.  “All we want is a little more air to breathe to get the economy going and increase government revenue,” Samaras was quoted as saying in an interview with Germany’s Bild newspaper published today before the arrival of Juncker, who heads the group of euro area finance ministers. “More time doesn’t necessarily mean more money.”  Limited concessions to Greece are possible as long as they are made within the framework of the second aid program for the over-indebted country, Norbert Barthle, the parliamentary budget spokesman for Chancellor Angela Merkel’s Christian Democratic Union, said yesterday. Options include front-loading aid for Greece, fellow CDU lawmaker Michael Meister said.

Germany's Schaeuble: More time won't help Greece -- German Finance Minister Wolfgang Schaeuble told a German radio broadcaster Thursday that granting Greece more money or time to implement austerity measures wouldn't help the country overcome its problems, news reports said. "More time is not a solution for the problems," Schaeuble told radio station SWR, reports said. Greek Prime Minister Antonis Samaras, who is scheduled to meet German Chancellor Angela Merkel Friday in Berlin, has argued that Greece needs additional time to implement austerity measures and reforms in order to leave room for the recession-wracked economy to recover in the near term.

Juncker: Greece's last chance to remain euro member -  Greece is facing its last chance to remain a member of the eurozone, the chief of the Eurogroup said Wednesday as cash-strapped Athens pledged to implement a new round of tough budget cuts needed to secure fresh financial aid. Jean-Claude Juncker was speaking in Athens after talks with Greek Prime Minister Antonis Samaras that are likely to set the stage for a critical few weeks for Greece and its prospects of remaining part of the 17-member currency bloc. The Eurogroup chief said Greece needed to introduce the 11.5 billion euros (14.3 billion dollars) of savings measures and privatizations as soon as possible. Juncker said: "It‘s the last chance for Greece."

Greece May Sell Islands as Juncker Urges Asset Sales Drive - Prime Minister Antonis Samaras, who will take his plea for more time for the Greek economy to Paris and Berlin this week, suggested his government could sell or lease some of the country’s islands to help revive a state-asset sales plan central to receiving international funds.  He told Le Monde newspaper in an interview published today that uninhabited Greek islands could be used to generate revenue, responding to a question on whether Greece would sell some of its islands.  “On condition that it doesn’t pose a national security problem, some of the isles could be used commercially,” Samaras said as quoted by the newspaper. “It would not be a case of getting rid of the isles, but of transforming unused terrain into capital that can generate revenue, for a fair price.”  Samaras vowed to speed up asset sales and structural revamping such as changes to labor markets after meeting yesterday with Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro-area finance ministers. Greece is behind on money-raising targets tied to 240 billion euros ($301 billion) of rescue packages in the past two year

Merkel lays down the law - “We expect Greece to deliver all that has been promised,” Merkel declared. In remarks that were unusually sharp for a joint news conference, she stressed that Berlin has heard words in the past but now expects deeds. The tough talk contrasted sharply with the head of state honours and diplomatic smiles with which Samaras was received on his first official visit, complete with red carpet and band. Merkel said that Samaras’ visit is a sign of the “very close ties” between the two countries, only to add later that each side had lost credibility in the eyes of the other and that trust must be regained. “Our aim is for Greece to remain in the eurozone, despite all the problems that exist,” Merkel said, noting that the euro is more than a currency, that it is the embodiment of European unification. Moreover, Merkel noted the tremendous sacrifices that the Greek people have made over the last years, underlining that the weaker classes have borne the brunt of austerity and that those who profited during previous years of prosperity have not done their part. The remark was a thinly veiled barb against the handling of austerity measures by successive Greek governments, which have done nothing to combat rampant tax evasion among the higher income brackets, opting instead for repeated horizontal wage and pension cuts.

Greece’s Great Depression: “Everyone is Going into a Black Hole” - RT interviews University of Athens economics professor Yanis Varoufakis on the latest round of Greek bailout negotiations. While Varoufakis is no doubt right that the impact of a formal default would not be significant, given the fact that private sector bonds have already been restructured with a large economic haircut, he did not address specifically the impact of Greece leaving the Euro. My bet is that if that were to come to pass, the knock-on effects would be significant, since it makes it plausible that Spain or even Italy might exit, and that would worsen the current financial balkanization and silent bank runs.

Spain Predicts 4.3% Increase in Tax Revenues, Actual Results are 3.5% Drop; Proposed "Solution" is More Tax Hikes -- Spain has been devastated by round after round of tax hikes. Another one is on the way. Via Google-translate, please consider this non-modified translation of government shuffles new tax increases to reduce the deficit Never two without three. The brutal tax increases approved by the Government of Mariano Rajoy in late 2011, increasing the income tax and the tax on savings , among other figures, and the recent increase launched last July, with the increase in VAT , Taxes -special rate you could add soon a new tax hike to reach the deficit target of 6.3% of GDP set for this exercise. This, with an eye on a country's total bailout, whose application could occur next September. Before formalizing the request for assistance, the government wants to make sure you are ready to meet the deficit target, and for that "is likely to take much more drastic measures they currently have," reveals a member of the Government, on Monday reported the newspaper El Pais. Among these, it weighs a new tax increases and a freeze on state pensions. "The evolution of expenditure, with the cuts we have made, we have more or less clear, we do not know is how the revenues are going to go," admitted to the Government. In the first half of the year things did not go well: overall, tax revenues fell by 3.5% annual rate, far from expected for 2012 (increase of 4.3% per year).

Spain borrowing costs dip but crunch looms - For now, Spain is enjoying a drop in interest rates sparked by European Central Bank chief Mario Draghi's promise to preserve the euro and possibly resume purchases of government bonds. The Treasury raised 4.51 billion euros ($5.6 billion) in a sale of 12- and 18-month bills with demand outstripping supply by more than two to one. Compared to a similar sale on July 17, the 12-month rate slumped to 3.070 percent from 3.918 percent and the 18-month rate dropped to 3.335 percent from 4.242 percent, Bank of Spain figures showed.

Spain boosts benefit for long-term unemployed - The special monthly payment -- a lifeline for many in a nation with one in four workers jobless -- kicks in only when regular unemployment benefits run out. Introduced by the last Socialist government, it had been due to expire on August 15. But at the last moment conservative Prime Minister Mariano Rajoy announced it would be extended. A cabinet meeting on Friday will approve the extension, and also increase payments to those recipients who have families to suport, the Labour Ministry said in a statement. The special benefit amounts to 400 euros ($500) for individual recipients, but is to be raised to 450 euros for people with a spouse or partner and at least two dependant children, it said. Regular unemployment benefits last a maximum of two years in Spain depending on how long a worker has made social security contributions.

Spain Deficit Goals at Risk as Cuts Consensus Fades - Quarrels over who bears the brunt of cuts worth more than 10 percent of Spain’s annual gross domestic product threaten Prime Minister Mariano Rajoy’s plan to tackle the euro area’s third-largest deficit as a second bailout looms.  A seven-day rally that has driven Spain’s 10-year yield to 6.2 percent at 9:05 a.m. in Madrid from 6.9 percent may falter as squabbles between the government, regions and towns about spending and tax receipt allocations hobble deficit reduction. Spain will miss its targets for budget gaps of 6.3 percent of GDP this year and 4.5 percent in 2013 as the nation’s recession worsens, according to the median forecast of 12 analysts surveyed by Bloomberg News.“As budget deficit targets look unachievable, the risk of a potential full bailout of the Spanish economy is still there,”

SocGen: Italy Looks ‘Perilously Close’ To Getting Shut Out Of The Bond Markets - Italian GDP contracted for the last 12 months and the country is now looking at a longer and deeper recession than was previously expected.  With Spain already expected to request a sovereign bailout, investors are worried that the giant Italian economy might be the next domino to fall. So the big question on everyone's mind: Is Italian debt sustainable? i.e. can Italy meet its debt without debt relief and avoid default.In answering that Societe Generale's James Nixon points out three key points about Italian debt and its economic growth:

  1. Italy has extremely high debt-to-GDP and to bring this in control, the government is pushing austerity. This austerity along with a credit crunch are hurting economic growth.  Nixon projects Italian GDP to decline 2.3 percent in 2012, and 1.4 percent in 2013, and expects it to be flat in 2014. The IMF puts Italy's long-term growth rate at 0.5 percent per annum.
  2. Rising unemployment is impacting consumer confidence and has caused a drop in private consumption.
  3. Finally, to achieve fiscal consolidation Italy is raising taxes on consumption and property, both sectors that are being hit hard by unemployment and tight conditions in the banking sector. "Italy also faces a significant increase in its service costs which, if not addressed, threatens to wipe out all of the consolidation planned for next year."

Why You Always Want Physical Everything - Simon Black recounts a recent experience as he pulled in to a gas station in Italy; he whipped out his American Express card and asked the attendant in broken Italian to turn on the pump. He acted like Simon had just punched him in the gut, wincing when he saw the credit card. "No... cash, only cash," he said. I didn’t have very much cash on me, so I drove to the next station where a similar experience awaited me. This is a trend that is typical when economies are in decline– cash is king. Businesses often won’t want to spend the extra 2.5% on credit card merchant fees... but more importantly, distrust of the banking system and a debilitatingly extractive tax system pushes people into cash transactions. You can’t really blame them.

ECB weighs target bands for bond yields: report -- The European Central Bank is considering a plan to set band targets for yields in the euro zone under a new bond-buying program, Reuters reported Friday, citing unidentified central bank officials. The approach would allow the ECB to shield its strategy and aims to limit the ability of speculators to profit, the report said. No decision would be made before the ECB's next policy meeting on Sept. 6, the report said. It's also not clear how wide the band would be and officials are also discussing whether it would be tied to bond yields or to the spreads between the yields on government bonds and benchmark German debt, Reuters reported. Germany's Der Spiegel magazine reported last weekend that the ECB was weighing a plan to cap yields as part of a bond-buying program

ECB Said to Await German ESM Ruling Before Settling Plan - European Central Bank President Mario Draghi may wait until Germany’s Constitutional Court rules on the legality of Europe’s permanent bailout fund before unveiling full details of his plan to buy government bonds, two central bank officials said.  With the court set to rule on Sept. 12, investors looking for Draghi to announce a definitive purchase program at his Sept. 6 press conference might be disappointed, according to the officials, who spoke on condition of anonymity because the deliberations are not public. The program is still being worked on and staff may not be able to finalize it by then, said the officials, who are familiar with thinking on the ECB Governing Council. An ECB spokesman in Frankfurt declined to comment. Draghi announced on Aug. 2 that the ECB may intervene in the secondary market to reduce bond yields in countries such as Spain and Italy if they apply to Europe’s bailout fund for aid and accept the conditions attached. The European Stability Mechanism, intended to replace the temporary European Financial Stability Facility, hasn’t entered into force yet as legal wrangling over its compatibility with the German constitution continues.

Studies in pre-commitmentphobia: the case of the ECB: ‘We’re not done yet, but we’re working on it’, a rather annoyed-looking ECB present Mario Draghi more or less told the public after the last meeting of the Governing Council. The piece of work in question was, of course, the planned intervention to support government bond markets conditional upon ailing sovereigns being part of a formal bailout. (Here’s looking at you, Spain.)The lack of detail initially underwhelmed markets that had expectations for greater granularity around the action plan. That eventually reversed, possibly when people realised what Draghi said was actually pretty daring when measured by the ECB’s own standards and stated mandate. What this meatless announcement also did was give every analyst (and ahem… blogger) something to write/speculate about in an otherwise quiet month. As FT Alphaville mentioned earlier, when discussing how the ECB might address seniority concerns, there has truly been no shortage of opinions.

Another delay from the ECB and the "revised" Eurozone chain of events - What a surprise. The ECB is now signaling it will delay the periphery bond purchases that everyone is waiting for. Bloomberg: - European Central Bank President Mario Draghi may wait until Germany’s Constitutional Court rules on the legality of Europe’s permanent bailout fund before unveiling full details of his plan to buy government bonds, two central bank officials said. Is this the excuse they are coming up with? Germany’s Constitutional Court is widely expected to approve the ESM, even if it decides to attach some strings to ESM's implementation. But now the ECB's decision is somehow tied to that approval? The reality is that there simply is no agreement on the asset purchase plan. The detail has not been worked out and the ECB is buying time. Bloomberg: - While Draghi is likely to give a progress report on the bond plan after the Sept. 6 rate decision, the ultimate design of the ECB’s program may depend on the uncertainty over the permanent bailout fund being resolved, so the officials said it makes sense to wait for the German ESM court ruling. Full details of the ECB’s plan could be a month away, they said. While the Bundesbank opposes ECB bond purchases, it expects to be outvoted, one of the officials said.:  JPM: - We regard [waiting for German Constitutional Court decision] as something of a smokescreen. While the Court may express some misgivings about the legislation and suggest modifications as it is put into practise, it is most unlikely to be blocked.

Interest Rate Caps vs. Bands: Can "Secret Sauce" Make a Difference? -- One day after the ECB warns people to not speculate on interest rate caps, the ECB throws fat into the fire causing speculation on interest rate bands. Reuters reports ECB mulls setting target bands for bond yields:The European Central Bank is considering setting yield band targets under a new bond-buying program to allow it to keep its strategy shielded and avoid speculators trying to cash in, central bank sources told Reuters on Friday. Setting a band is an option gaining in favour among central bankers, but the decision would not be made before the ECB's September 6 policy meeting, the sources said. "That is one of the options that is currently being discussed in the working groups and will then be handled by the Governing Council," a euro zone central bank official told Reuters on the condition of anonymity. "That is the most likely approach, and also the one that could be most successful." Supposedly "Keeping the intervention target secret could give the ECB an element of surprise and make it more difficult for investors to try to second-guess the bank."  Quite frankly, that's ridiculous, especially over the long haul.

Euro-zone Aug. PMI signals further contraction - Private-sector business activity in the 17-nation euro zone contracted for a seventh consecutive month in August but at a marginally slower pace than in July, the Markit preliminary composite purchasing managers' index for the region indicated on Thursday. The index rose to 46.6 from a reading of 46.5 in July. Economists had forecast an unchanged reading. A figure of less than 50 indicates a contraction in activity. The services PMI reading fell to 47.5 from 47.9 in July, while the manufacturing PMI rose to 45.3 from 44.0. The contraction continued across the euro zone, with national indexes for the core countries of Germany and France both signaling shrinking output. "Taken together, the July and August readings would historically be consistent with GDP falling by around 0.5% to 0.6% quarter-on-quarter, so it would take a substantial bounce in September to change this outlook," said Rob Dobson, senior economist at Markit.

Eurozone PMI Declines 7th Month; German Private Sector Output Falls at Faster Rate; New Business Declines 13th Month - As easily predicted, at least in this corner, the Markit Flash Eurozone PMI® shows Downturn in Eurozone economy extends into seventh month. Key Points:

  • Flash Eurozone PMI Composite Output Index(1) at 46.6 (46.5 in July). Seventh straight contraction.
  • lash Eurozone Services PMI Activity Index(2) at 47.5 (47.9 in July). Two-month low.
  • Flash Eurozone Manufacturing PMI(3) at 45.3 (44.0 in July). Four-month high.
  • Flash Eurozone Manufacturing PMI Output Index(4) at 44.6 (43.4 in July). Two-month high.
The Markit Flash Eurozone PMI® Composite Output Index – based on around 85% of usual monthly replies – was broadly unchanged at 46.6 in August, from a final reading of 46.5 in July. The index has now signalled a contraction of the Eurozone private sector for seven successive months.

Eurozone PMI data 'points to new recession' - The eurozone's economy is set to contract by 0.5%-0.6% in the July to September quarter, tipping it into its second recession in three years, a closely-watched survey suggests.The Markit Flash Eurozone PMI Composite Output Index, which measures new orders in manufacturing and services, was 46.6 in August, compared with 46.5 in July.A score below 50 indicates contraction. Output declined in both the manufacturing and services sectors, Markit said in a statement. This is the seventh consecutive month of contraction in the eurozone's private sector.

Europe marches into recession - It shouldn’t really be news to anyone, but the latest PMI data once again shows that Europe is heading into technical recession. Comments from Rob Dobson, senior economist at Markit Economics, give a good wrap of the data:The August Markit Eurozone Flash PMI reinforces the prevailing view of the economy dropping back into recession during the third quarter of 2012. Taken together, the July and August readings would historically be consistent with GDP falling by around 0.5%-0.6% quarter-on-quarter, so it would take a substantial bounce in September to change this outlook. The downturn is still led by the manufacturing sector, despite its pace of contraction easing a little this month. The service sector is also not out the woods, as business activity declined at an accelerated pace. The real interest inevitably comes from the national breakdown. Hopes that German economic strength will aid recovery in the broader currency union were dealt a blow by its rate of economic contraction accelerating, and further signs that its export engine has slammed into reverse gear. France may be edging closer to stabilisation, while conditions outside of the big-two remain weak overall. This is leading to job losses across much of the region, although Germany did provide some brighter news by bucking this trend and raising payroll numbers.

Pressure from all sides - Germany is beginning to feel the effects of falling global demand. Manufacturing sector data for its economy in a flash estimate by Markit for August 2012 was slightly better than that recorded in the previous two months, at 45.1 against 43 in July, but the overall output level remains low. The number sits below the important 50-point mark, indicating the economy is likely to be contracting. PMI indices tend to be decent leading indicators of GDP, so the flash estimate is worrying. Other data add to expectations that German productivity might show signs of greater strain during the third quarter. Official German government statistics confirmed actual GDP contracted by 0.2% between the first quarter of 2012 and the second from 0.5% to 0.3%. Despite being relatively robust against the effects of the financial crisis, Germany may be shedding some of its former resilience. A survey of German businesses in April and May 2012 by a national trade body reported a squeeze on demand from elsewhere in Europe, showing impact of the euro-zone debt crisis. According to DeStatis, 71% of Germany’s overall exports depended on European markets in 2011, 59% of which were euro members. With several of those economies undergoing aggressive austerity programmes, it seems unlikely demand there will recover anytime soon. In the event of a prolonged slowdown, Germany’s dependency on its fellow members within the currency union for trade means its domestic economy could be badly affected.

REPORT: Germany May Ask Greece To Exit The Euro 'Temporarily' - Market News International is reporting that the German Finance Ministry may ask Greece to exit the euro "temporarily" while it straightens out its finances. From MNI, citing unnamed "senior eurozone officials" as sources: The officials said that in the view of German Finance Ministry officials mulling the plan, it is now the most likely scenario. But it is not a done deal. There is strong opposition to such a plan among some key European officials, and no decision is likely at least until the end of the year. “It is another working scenario which is not new but has emerged in the past month as the most likely outcome for the German finance ministry,” one of the officials said. “There is a team under [German Finance Minister] Wolfgang Schaeuble that believes Greece’s public finances will need many years to return to acceptable levels.” The report goes on: “It all comes down to the fact that Greece will need a third loan. Even if everyone denies it, we all know it’s unavoidable,” this official said. But because of rising political pressure in Germany and other core Eurozone countries, “this decision will be delayed as much as possible.” He added that, “the hawkish team of the German finance ministry believes that since Greece will need more money, it would be better given as a bridge loan to facilitate a temporary exit.”

Who really benefits from weak euro? - Analysts often talk about how the weak euro helps exporters in the Eurozone, particularly Germany because of its massive export sector. But is Germany the main beneficiary? Which other nations want the euro to weaken further? BNP Paribas did some helpful analysis on the subject.  First of all it's not enough to be an exporter to benefit from the weak euro. A nation needs to be exporting outside of the Eurozone. The first chart shows who the "extra-Eurozone" exporters are as a percent of their total exports. Finland is at the top with close to 70% of its exports going outside of the euro area. But now one needs to ask if Finland's export sector a major portion of its GDP. Which nations' economies benefit the most from improved export conditions? The next chart shows exports as percentage of GDP for the Eurozone members.Finland it turns out has significant domestic demand to make its export sector an important but not a critical component of its GDP. Ireland and Belgium are now at the top. In fact nearly all of Ireland's GDP comes from net exports, offsetting ongoing declines in domestic demand. So the final question is what happens when we look at "extra-Eurozone" exports as a percentage of GDP? That should tell us which nations benefit the most in terms of their GDP growth from weak euro.From this we see that Ireland is by far the largest beneficiary of euro's correction. That explains in part why Ireland has been able to buck the trend of Eurozone's recession, expanding its manufacturing base while others in the Eurozone have been undergoing a contraction (discussed here).

Europe's Highway to Hell - Germany’s Chancellor Angela Merkel is scheduled for a series of meetings with leaders from France, Greece and Italy this month. Meanwhile, at a more rapid pace, Europe is in the midst of a massive run on bank deposits in Greece, Portugal, Spain, Italy and Ireland. While the last out-of-office auto-responses zip across the continent in multiple languages, the bank runs continue to accelerate. How did we get here? What can we expect next? And, most important, what is the way out? Europe’s trip down the highway to hell began with an original sin. At the birth of the euro, nations that adopted it and formed the European Monetary Union (EMU) gave up their national currencies. They could no longer “print” money to pay for expenses (despite the longtime use of keystrokes for this purpose, the image of stacked, crisp bills somehow hangs on). The European Central Bank, comparable to the US Federal Reserve, could increase the supply of euros, but individual nations could not. Like each of the US states, each nation in the EMU became a user, rather than an issuer, of money. But each country kept control of taxing and spending through its own treasury. The design flaw—think major miscalculation here—was the absence of a unifying body that could move resources from country to country in the event of local trouble, as the US government does between states.

Endgame for the Eurozone Bank Runs - Over at The Nation, Dimitri Papadimitriou writes about the accelerating eurozone bank runs, in which euros have been flowing out of Spanish and Greek banks and into Germany at an eye-popping rate, and lays out scenarios for how this whole things ends: The migration of money into Germany is quickening. And under TARGET 2, the trillions of euros that the ECB has loaned out to finance this race will be uncollectable. How to counteract a disaster of these proportions? Unlimited deposit insurance for all euros in EMU banks, backed by the creation of a strong European federal treasury, would end the bank runs, just as deposit insurance in the United States has prevented them here ever since the Great Depression. The insurance liability would be on Europe’s central bank, which would become insolvent if Spain or Italy abandoned the euro. Since, unlike the United States, the ECB doesn’t have a unified European treasury to backstop it, Germany would presumably get the bill for a default. As Randall Wray and I predict in a new Levy Institute policy paper, “That’s a bill Germany will not accept, hence, probably no deposit insurance.” And no future for the euro.

Banks to push for account fees in the wave of Libor scandal — RT: Several major financial institutions under inquiry in the Libor case are going to push for introducing account fees for their customers. They blame 'free' accounts as one of the reasons behind interest rate rigging.The major banks including Britain’s Barclays and Spain’s Santander are expected to argue in favor of introducing account fees at a meeting of the UK Parliamentary Commission on Banking Standards, the Daily Mail reports. Banks must submit evidence on the Libor case to the Commission by the end of this week. The panel was set up after Barclays admitted it was involved in Libor fixing and paid a more than $450 million fine to settle the probe.

Surprise deficit raises risk of more U.K. austerity - Britain’s public finances veered further off track in July after a shortfall in corporation tax revenues and higher spending, putting the government’s deficit goals in doubt and raising the prospect of more austerity on top of the planned spending cuts. After nine months of recession, the unexpected deficit underscored the lack of scope for chancellor George Osborne to give a meaningful boost to the economy – which looked at increased risk of prolonged weakness on Tuesday as manufacturers reported a slump in orders. The high deficit also casts doubt over the Conservative-led coalition’s plan to defend Britain’s top triple-A credit rating and hold down borrowing costs, and Mr. Osborne may soon face the unpleasant choice of more austerity or missing his goal to close the budget gap within five years. The public sector finances excluding financial sector interventions – the government’s preferred measure – showed a deficit of £557-million ($878-million U.S.), compared with a £2.8-billion surplus in July 2011, the Office for National Statistics said on Tuesday.

Austerity's not working -- Yet again, government borrowing has exceeded expectations. So far this financial year, the deficit on current borrowing* has been £42.1bn compared to £30.9bn in the same period last year. This puts in doubt the OBR's forecast that this deficit would fall this year, from £98.9bn to £95.3bn. Duncan says this shows how austerity is self-defeating; a squeeze on spending weakens growth and thus reduces tax revenue. I'd add that this will remain the case for as long as the private sector deleverages. This is because of a simple, basic, unavoidable identity - that for every borrower there must be a lender. Government borrowing - by definition - means that other sectors are net savers. The problem is that there are only three other sectors, and all three have reasons to want to save or pay down debt:

  • - Households. Low consumer confidence means these are loath to borrow. And it might be the case that - with the debt-income ratio still high - they will continue to deleverage.
  • - Foreigners. The desire of Asian economies to save heavily is unlikely to cease soon. And the credit squeeze in the euro area is creating forced savers.
  • - Companies. Spare capacity, a dearth of investment opportunities and depressed confidence (partly thanks to the euro crisis) are all holding back investment, and encouraging firms to build up cash piles and pay off debt.

Now, as long as these three sectors want to save, the government will have to borrow, simply as an accounting identity. The mechanism through which this happens is, of course, that higher private savings mean weak activity, which means weak tax revenues and higher welfare payments.

UK recession may have caused 1,000 suicides, study says - A painful British economic recession, rising unemployment and biting austerity measures may have driven more than 1,000 people in England to take their own lives, according to a scientific study published on Wednesday. The study, a so-called time-trend analysis which compared the actual number of suicides with those expected if pre-recession trends had continued, reflects findings elsewhere in Europe where suicides are also on the rise.The analysis found that between 2008 and 2010 there were 846 more suicides among men in England than would have been expected if previous trends continued, and 155 more among women. Between 2000 and 2010 each annual 10 per cent increase in the number of unemployed people was associated with a 1.4 per cent increase in the number of male suicides, the study found.

Who Benefits from QE? - Via Money Supply at the FT, who benefits from QE?: The rich. That’s according to a Bank of England study, out today, on the distributional effects of quantitative easing. This from the research: By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5 per cent of households holding 40 per cent of these assets. This is not a piece of research that the Bank will have welcomed having to publish, keen as it is to avoid criticism for favouring one group of society over another. But it has been forced to by a fierce debate ... about the impact of the Bank’s money-printing on pensioners and those who are just about to retire. ... The Bank acknowledges that by pushing down on gilt yields, QE has reduced the annuity rate. However, it also claims the policy has raised the value of bonds and equities held in pension pots. Home-owning pensioners – especially the wealthier among them – are among the big winners from QE and the Bank’s ultra-low interest rates. It is the young and others with few assets who have gained the least from the Monetary Policy Committee’s money printing. It trickles down, right?

R&D: how low can you go? - THIS week’s Free exchange print article—Arrested development—looks at the global research and development (R&D) race. The big trend it picks out is a shift from government funded R&D to private R&D; we can expect fewer space rockets and more hybrid cars in the future. Overall, this secular shift was pretty successful in the America: private firms have upped their innovation efforts, so that there are lots of businesses (there is a list here) that will soon spend over $10 billion on R&D each year. Contrast this with barren Britain, where ideas are in danger of running dry (see chart). There are three explanations. One is tax: Britain was very slow to spot the need to spur R&D by giving firms tax breaks. Another is that merger waves (see Surf’s up) may be blunting firms' urge to compete with R&D rivals. A final explanation is that short-termism means R&D is cut so that dividends don’t have to be. Whatever the reason, if you think R&D drives growth and creates good jobs the outlook is pretty depressing, especially for Britain.