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

Saturday, August 11, 2012

week ending Aug 11

Fed balance sheet grows second straight week (Reuters) - The U.S. Federal Reserve's balance sheet grew for a second straight week on its purchases of more federal government debt, Fed data released on Thursday showed. The Fed's balance sheet - a broad gauge of its lending to the financial system - stood at $2.839 trillion on August 8, up from $2.834 trillion on August 1. The Fed's holdings of Treasuries totaled $1.652 trillion as of Wednesday, versus $1.649 trillion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $2 million a day during the week, down from the $32 million a day average rate the prior week. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) was $853.49 billion, little changed from $853.48 the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $91.03 billion, unchanged from the previous week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--August 9 2012

Fed Official Calls for Bond Buying  - Eric Rosengren, president of the Federal Reserve Bank of Boston, called on the Fed to launch an aggressive, open-ended bond buying program that the central bank would continue until economic growth picks up and unemployment starts falling again. His call came in an interview with The Wall Street Journal, the first since the central bank signaled last week that it was leaning strongly toward taking new measures to support economic growth. Mr. Rosengren isn't currently among the regional Fed bank presidents with a vote on monetary policy. Although all 12 presidents participate in Fed deliberations, only five join the seven Fed governors in Washington in the formal committee vote. Still, he is part of a wing of policy activists at the Fed who have pushed for more aggressive responses to a weak economy. His decision to speak out forcefully is a sign of the momentum building inside the Fed for a new phase of action. A bond-buying program, also known as quantitative easing, would aim to drive down long-term interest rates, drive up stocks and push down the value of the dollar, which many officials believe would spur activity. Mr. Rosengren likened the economy to a swimmer treading water and getting nowhere. The unemployment rate has been stuck above 8% all year.

Fed Watch: Is the Election Holding Back the Fed? - Boston Federal Reserve President Eric Rosengren is stepping up his call for additional policy action at the next meeting. Via the Boston Globe: Eric Rosengren, the head of the Federal Reserve Bank of Boston, is issuing an unusual public plea to his colleagues in Washington, urging the nation’s central bankers to ignore election-year pressures and do more to jump-start the muddling economy.Less than a week after Federal Reserve policy makers elected not to take new steps to stimulate the economy, Rosengren in an interview added his voice to a handful of dissenters, saying the central bank has to act at its next meeting in September to revitalize the economy. The Fed should not worry, he said, if the move is seen as influencing the presidential election. “We don’t get to pick the timing of a global slowdown,” Rosengren said. “If there’s a slowdown and you have an independent central bank, the appropriate response is to act. I think that’s exactly what we should do.” I have to admit that I was caught off-guard by the direct reference to the presidential election. I have seen speculation that the Fed is avoiding action until after the election, and this seems almost like an admission of such hesitation. Is this comment directed at the public, or at his colleagues? My response:Some Fed specialists said the remarks from Rosengren are unusually pointed in a world where even the simplest statements are carefully worded. Tim Duy, who writes a column called Fedwatch on the website Economist’s View, said he was struck, in particular, by Rosengren’s publicly urging the central bank to ignore the political situation.“That would be fine to say internally. But to say that externally, to pull back the curtain and say, ‘They’re doing this for the election,’ I think is a shift and reflects his level of frustration,” Duy said. Rosengren then goes further and calls for very aggressive policy.

Fed Uncertainty - Does economic uncertainty matter?  Yes, says Stanford professor Nicholas Bloom, University of Chicago professor Steven Davis, and Stanford grad student Scott Baker in a new paper titled Measuring Economic Uncertainty.  They find that economic uncertainty caused  real GDP to decline 3.2% over the past few years. This paper has stirred controversy because it has been used by conservatives to show that uncertainty created by President Obama is the main reason for the ongoing slump.  Some observers like Mike Konczal, Dylan Matthews, and Matt O'Brien have questioned the use of this index on methodological grounds as well as on its proper interpretation.  The latter point is really important.  While there can be exogenous shocks to uncertainty such as the debt ceiling talks last year, uncertainty is always with us and is endogenous to the the state of the economy.1   That is, people get more uncertain the weaker the economy becomes and vice versa. Here are some figures that illustrate this point.  The first one shows a 3-quarter centered moving average of the paper's uncertainty index along with the nominal GDP (NGDP) gap.  This gap measures aggregate demand deficiency and is calculated as the percent difference between potential and actual NGDP:

QE Forever And Ever? - The lunatics are running the asylum. This is the only conclusion one can come to when considering the nonchalance with which what was once considered an extraordinary policy with a firm 'exit' in mind is now propagated as a perfectly normal 'tool' to be employed at the drop of a hat. We refer of course to so-called 'quantitative easing' (QE), which really is a euphemism for money printing. Apart from his sole focus on short term outcomes, an important point that seems not be considered by the FOMC's Rosengren this week is the question of what should happen if the 'open-ended' QE policy were to fail to achieve its stated goals. He seems to assume that it will succeed in lowering unemployment and creating 'economic growth' as a matter of course. It goes without saying that money printing cannot create a single molecule of real wealth. If it could, then Zimbabwe wouldn't be a basket case, but a Utopia of riches. We must infer from Rosengren's idea of implementing open-ended QE until  certain benchmarks in terms of unemployment and 'growth' are achieved, that in case they remain elusive, extraordinary rates of money printing would simply continue until the underlying monetary system breaks down.

BofA Sees 80% Chance of QE3 Priced Into Markets -- Bank of America sees an 80% chance of another round of large-scale asset purchases by the Federal Reserve priced into markets. Economists pointed to the recent rise in U.S. equities and bond yields, but growing expectations of QE3 are perhaps most evident in the rise in TIPS breakeven inflation rates, they said. The 10-year breakeven has jumped to 2.26% from 2.10% in late July, a signal that investors are expecting more cheap-money stimulus from the Fed to fuel inflation down the line. BofA economists do expect the Fed to deliver QE3 in September, but add that given mounting market expectations, the risk is now that the central bank falls short — in which case Treasurys would suffer and the dollar would gain.

When Quantitative Easing Finally Fails - While markets await details on the next round of quantitative easing (QE) -- whether refreshed bond buying from the Fed or sovereign debt buying from the European Central Bank (ECB) -- it's important to ask, What can we expect from further heroic attempts to reflate the OECD economies? The 2009 and 2010 QE programs from the Fed, and the 2011 operations from the ECB, were intended as shock treatment to hopefully set economies on a more typical, post-recession, recovery pathway. Here in 2012, QE was supposed to be well behind us. Instead, parts of Southern Europe are in outright depression, the United Kingdom is in double-dip recession, and the US is sweltering through its weakest “recovery” since the Great Depression.It wasn’t supposed to be this way. Recently-released data from all these regions now confirm that previous QE, at best, merely bought time against even more grueling outcomes. Spain's unemployment, for example, has just hit a new post-Franco high of 24.6%, and the forecast for this crucially important EU economy remains negative. Recently revised US figures on GDP show that the post-2009 recovery was even weaker than previously estimated, with the first year post-crisis crisis clocking in at 2.5% vs. the expected 3.3%.

The Fed Is Inching Closer to a NGDP Level Target - Market Monetarists have long championed the Chuck Norris approach to central banking.  That is, the Fed should explicitly adopt a Nominal GDP (NGDP) level target and use this target to better manage nominal spending expectations.  Doing so would catalyze the public into changing their current spending and investment decisions toward more nominal expenditures.  In other words, it would incentivize the public to do the heavy lifting in sparking a robust recovery.   To make this credible, the Fed would have to commit to purchasing as many assets as necessary to hit its target.   Such open-ended QEs would be a vast improvement over the current make-it-up-as-we-go-along, incremental approach to QE.   This idea is now gaining traction at the Fed.  San Francisco Fed President John Williams first endorsed it a few weeks ago.  Now, Boston Fed Presdient Eric Rosengren has come out in favor of it: Eric S. Rosengren, president of the Federal Reserve Bank of Boston, said that the Fed should again expand its holdings of mortgage bonds and Treasury securities, and that the purchases should steadily continue until the Fed was satisfied with the health of the economy.  Mr. Rosengren and other officials, including John C. Williams, president of the Federal Reserve Bank of San Francisco, say that the focus instead should be on results.  Mr. Rosengren said he did not have a firm view on what kind of measuring stick the Fed should use for a new program of asset purchases. But he suggested the Fed could target a minimum rate of nominal growth — economic growth plus inflation — of 4.5 percent. The government estimates the rate of nominal growth in the 2012 second quarter at 3.1 percent.

Fed’s Fisher Argues Against Further Stimulus -  Federal Reserve Bank of Dallas President Richard Fisher on Wednesday continued making his case against further monetary easing, saying the central bank has done what it can to stimulate the economy, and repeated his call for Congress to provide incentives for growth through fiscal and regulatory reforms. In an interview on Bloomberg Television, Mr. Fisher also cautioned that a policy move now would be perceived as being politically motivated and was critical of congressional inaction, saying the central bank was “subsidizing their malfeasance.” Mr. Fisher’s comments come on the heels of public statements by Boston Fed President Eric Rosengren, who made his case for additional stimulus from the Federal Reserve. “I believe we have done our job,” Mr. Fisher said of Fed policymakers. “We have done enough. It [easing] does not solve the problem.” Mr. Fisher cautioned that Fed action in the run-up to a presidential election would risk casting the central bank as being “too politically pliant.” If the Fed felt it needed to move, “we [already] should have done it.

The Federal Reserve's Maturity Extension Program and Treasury debt management - Last September, the Federal Reserve began implementing a program to sell $400 billion of its holdings of Treasury securities of 3-years duration and shorter and use the proceeds to invest in 6- to 30-year securities instead. This June the Fed announced that it would do the same with an additional $267 billion in securities. Some analysts expect the Fed to announce additional related measures after the next FOMC meeting. The theory behind such measures is discussed in this statement from the Federal Reserve: By reducing the supply of longer-term Treasury securities in the market, this action should put downward pressure on longer-term interest rates, including rates on financial assets that investors consider to be close substitutes for longer-term Treasury securities. The reduction in longer-term interest rates, in turn, will contribute to a broad easing in financial market conditions that will provide additional support for the economic recovery. One could thus view the Maturity Extension Program as a deliberate effort by the Fed to undo the consequences of previous Treasury decisions for the composition of debt held by the public. A number of academic studies have looked at whether changes in the maturity composition of publicly held Treasury debt really do affect bond yields.

The Fed should buy stocks instead of bonds - In the days leading up to the FOMC’s July/August meeting, financial analysts wondered whether Fed chairman Ben Bernanke would show the same vigor as Draghi, and announce a third round of bond purchases. However, in the US the Fed’s low interest rates translate neatly into lower interest rates on US Treasuries. The yield on 10-year Treasuries is at 1.47 per cent even, almost a full percentage point lower than one would expect given the federal funds rate of 0.25  With an inflation rate surpassing 2 per cent, the real interest rate on 10-year US Treasuries has been in negative territory for quite a while. So, what would a new round of bond purchases achieve that the previous two rounds could not? However, the transmission mechanism in the US (that is the way the Fed’s interest rates translate into the real economy), has failed so far to lower the cost of risk capital. While bond yields have been steadily declining over the past decade, the cost of risk capital has soared dramatically. It is quite unlikely that a fresh round of quantitative easing will change that. Actually, the reverse is more likely to happen. A new round of bond purchases by the Fed would drive the price of US Treasuries up and interest rates down. But the low Treasury yield may just as well be seen as a harbinger of still more doom to come (just as the high price of caviar signals its exclusivity). In that case, the effect of QE3 will be that investors turn their back even further from riskier investments like stocks. Investors will seek refuge in the same Treasuries that the Fed is already buying in great quantities.

Does Easy Monetary Policy Enrich The Financial Sector? - The easing of credit conditions (in other words, the enhancement of banks’ ability to create credit and thus enhance their own purchasing power) following the breakdown of Bretton Woods — as opposed to monetary base expansion — seems to have driven the growth in credit and financialisation. It has not (at least previous to 2008) been a case of central banks printing money and handing it to the financial sector; it has been a case of the financial sector being set free from credit constraints. Monetary policy in the post-Bretton Woods era has taken a number of forms; interest rate policy, monetary base policy, and regulatory policy. The association between growth in the financial sector, credit growth and interest rate policy shows that monetary growth (whether that is in the form of base money, credit or nontraditional credit instruments) enriches the recipients of new money as anticipated by Cantillon. This underscores the need for a monetary and credit system that distributes money in a way that does not favour any particular sector — especially not the endemically corrupt financial sector.

Why It’s Time for Central Bankers to Say: ‘No More!’ - In my (too many) years covering the global economy and assorted financial crises, the perpetual hypocrisy exhibited by the world’s private bankers continues to amaze me. Confronted by government attempts to better regulate or in any way curtail their often irresponsible tactics to line their own pockets, bankers claim amid horrified gasps that overbearing bureaucrats are assaulting the West’s cherished free-market principles. But the moment things go a bit wonky, these same bankers are perfectly happy to accept a taxpayer handout or yelp for another slathering of easy money from the Federal Reserve or European Central Bank. Government action seems just fine with the world of Wall Street when it produces easy money for easy profits. In recent weeks, those calls for central bank rescues have gotten louder. The moment the recovery in the U.S. seemed to soften, traders and bankers immediately turned their eyes to Ben Bernanke, looking for another stimulating boost from the Federal Reserve. He is even getting pressure to put out from within his own ranks. The president of the Federal Reserve Bank of Boston told the Wall Street Journal that he favors another big bond buying program (known as quantitative easing) to stimulate the economy. You can practically see the drool running down bankers’ chins at the prospect of another Fed injection of mega-cash that would fuel another surge in stock prices. Meanwhile, in Europe, investors looked to ECB President “Super” Mario Draghi to step in with another mini-bailout to keep the monetary union afloat as borrowing costs for Spain and Italy soared.

Fed: 'If Jobs Are Meant To Be With Us, They'll Come Back On Their Own' - Following a two-day meeting to discuss the country's continually disappointing employment numbers, officials from the Federal Reserve announced Friday that if jobs are really meant to be with the American people, they’ll return of their own volition. "Listen, if it's meant to be, it’ll happen," said Fed chairman Ben Bernanke, adding that there’s no point in purchasing new mortgage-backed securities or keeping the federal funds rate near zero percent "if both parties don't want this to work." "We can't spend all our time and energy trying to force this. We have to let them do their own thing, and if they don't come back, then maybe we were just never meant to be together." Bernanke confirmed that, while he is realistic about the slim chance of jobs ever actually returning, Americans should "always leave the door open" in case things change in the future.

How Long for Low Rates? by Kenneth Rogoff —How long can today’s record-low, major-currency interest rates persist? Ten-year interest rates in the United States, the United Kingdom, and Germany have all been hovering around the once unthinkable 1.5% mark. In Japan, the ten-year rate has drifted to below 0.8%. Global investors are apparently willing to accept these extraordinarily low rates, even though they do not appear to compensate for expected inflation. Indeed, the rate on inflation-adjusted US Treasury bills (so-called “TIPS”) is now negative up to 15 years. Is this extraordinary situation stable? In the very near term, certainly; indeed, interest rates could still fall further. Over the longer term, however, this situation is definitely not stable....many (if not necessarily all) central banks will eventually figure out how to generate higher inflation expectations. They will be driven to tolerate higher inflation as a means of forcing investors into real assets, to accelerate deleveraging, and as a mechanism for facilitating downward adjustment in real wages and home prices. It is nonsense to argue that central banks are impotent and completely unable to raise inflation expectations, no matter how hard they try. In the extreme, governments can appoint central bank leaders who have a long-standing record of stating a tolerance for moderate inflation – an exact parallel to the idea of appointing “conservative” central bankers as a means of combating high inflation.

Pushback on the IOER Debate -- Should the Fed lower the interest on excess reserves (IOER) to help stimulate the economy?  Cardiff Garcia of FT Alphaville and I recently discussed this question.  He made the case that lowering the IOER is likely to severely disrupt short-term financial intermediation, particularly money market funds (MMFs), and its benefits are not clear.  I countered that with the right signalling the Fed could meaningful add monetary stimulus by lowering IOER without disrupting MMFs.  Garcia responded by questioning whether the Fed could really deliver what I claimed and to this point I replied here. Now it is Dan Carrol's turn.  He says not so fast Garcia and provides counterarguments.  Let me add to Carrol's points that the Treasury is now gearing up to handle negative interest rate bidding.  Bloomberg reports the following: The Treasury also said it is “in the process of building the operational capabilities to allow for negative-rate bidding in Treasury bill auctions, should we make the determination to allow such bidding in the future.”  Now go read Carrol's critique of Garcia's assessment. I have also posted his remarks below the fold.

Deflation Probabilities on Our Radar Screen - Atlanta Fed's macroblog - In the latest Wall Street Journal Economic Forecasting Survey, conducted August 3–6, economists were asked whether they "expect[ed] the Fed to start another round of large-scale bond buying in 2012?" Sixty-three percent answered yes, and 49 percent expected a program would be announced in September, presumably at the end of the next meeting of the Federal Open Market Committee (FOMC) on September 12–13. Obviously this question is of interest to more than just business economists. For example, at his July 17 testimony before the Senate Committee, the Chairman said that "we would certainly want to react against any increase in deflation risk." The entire video exchange can be viewed at the 52–55 minute mark here.As part of the Atlanta Fed's Inflation Project, we regularly update probabilities of deflation in the Consumer Price Index (CPI) estimated from Treasury Inflation-Protected Securities (TIPS) prices, described here and here. The basic idea is that a recently issued 5-year TIPS has less "deflation protection" than a 10-year TIPS maturing about the same date as the 5-year TIPS. The yield spread between the 5-year TIPS and 10-year TIPS can be used to help estimate the probability of deflation. The most recent (August 8) estimate puts the 5-year probability of deflation from early 2012 to early 2017 at around 15 percent. As seen in the figure below this probability is up slightly from May, but only about half the readings of the 5-year (2010–15) deflation probability seen in the late summer and early fall of 2010 and considerably below readings seen during the height of the financial crisis in late 2008 and early 2009.

Seeking the Inflation Cure - Central banks’ balance sheets don’t matter. Until they do. There’s a running debate about whether central banks are too cautious in expanding their balance sheets to generate economic growth or that they’re taking catastrophic risks. So far the “haven’t done enough” brigade has the upper hand. Despite massive quantities of quantitative easing, which is to say expanding their balance sheets through buying sovereign debt, central banks have managed to give their economies only modest boosts. Even at their post-crisis peaks, growth in major developed economies has been paltry. In the U.K., where the Bank of England has been one of the most aggressive proponents of QE, the economy has barely been treading water. The solution? More QE alongside fiscal stimulus argue economists like Paul Krugman. The flip side argue that massive central bank balance sheet expansion will eventually prove to be highly inflationary. Anyone looking at Japan’s routine deflationary episodes during the past twenty years would be right to be sceptical. And yet, it could be that both perspectives are right. More QE is needed to spur economic growth. But it will also eventually spur a high inflation rate.

A Summer Dip For The Monetary Base - For the first time since late-2010, the monetary base in the U.S. has been contracting on a year-over-year basis as of this past June. Does that represent a significant change for assessing risk in the outlook for the business cycle? Possibly… if the contraction rolls on. A proper analysis of the business cycle requires the monitoring of several factors, of course, but there’s a strong case for putting the monetary base—“high-powered” money, as some call it—on the short list. In particular: the annual percentage change in the real (inflation-adjusted) monetary base. For perspective, consider how the base (let’s call it M0) has fared over the past half century after deflating it by the consumer price index and calculating the changes vs. year-earlier levels: Note that the annual fluctuations in the real M0 tend to go negative either just before or during the early stages of economic recessions. No one should assume that this metric is flawless as a business cycle indicator, but it’s hardly irrelevant either. The dip under zero in late-2010, for instance, didn’t lead to a recession. Then again, M0’s descent was brief. It’s not obvious that trouble would have been avoided if a longer-lasting visit to negative terrain had prevailed.

Fed's zero rate policy carries significant costs for US households -- Ben Bernanke (Reuters): "Interest rates are low because our economy is still in a fragile recovery," Bernanke told a town hall meeting in Washington with educators.  "Lower rates are intended to restore more normal levels of employment and growth." That may be true, but on average a prolonged low interest rate environment has been hurting US households. Here is why. any economists point to the household debt-service ratio as an indication that low rates are helping consumers. The ratio has declined from the "bubble" years - roughly to the level it was in the 90s. It is true that one reason for this decline is the drop in interest rates (lower mortgage payments for example). But it's not the only reason. The US consumer has deleveraged considerably since the financial crisis, reducing debt levels (lower credit card balances for example) and therefore lowering the debt-service ratio. This component of the reduction has nothing to do with lower interest rates. Interest income as a percentage of disposable personal income (DPI) on the other hand had declined dramatically, far outpacing the decline in debt-service ratio. Consumers are not benefiting from the lower debt burden because their savings accounts are not paying them anything. In fact net household interest income (interest received less interest paid) is near record lows (negative) in dollar terms. That's money coming directly out of US consumers' pockets.

Bernanke: Many Individuals and Households Continue to Struggle - Ben Bernanke earlier today:...aggregate statistics can sometimes mask important information.  For example, even though some key aggregate metrics--including consumer spending, disposable income, household net worth, and debt service payments--have moved in the direction of recovery, it is clear that many individuals and households continue to struggle with difficult economic and financial conditions. Exclusive attention to aggregate numbers is likely to paint an incomplete picture of what many individuals are experiencing. One implication is that we should increase the attention paid to microeconomic data, which better capture the diversity of experience across households and firms. ... Another implication is that policymakers such as Ben Bernanke should do more to help individuals and households who "continue to struggle with difficult economic and financial conditions." So why isn't he pushing the Fed to do more at every opportunity?

Bernanke: Economists Should Seek Better Measurements of Well-Being -  Economists should look for better ways to measure well-being so they can make stronger decisions, Federal Reserve Chairman Ben Bernanke said in prepared remarks on Monday. Economists who focus all their attention on data looking at large groups may miss how some individuals are faring, Mr. Bernanke warned Monday in a prerecorded video to be delivered at a conference of the International Association for Research in Income and Wealth in Cambridge, Mass. For example, while some aggregate metrics, including consumer spending and disposable income, “have moved in the direction of recovery, it is clear that many individuals and households continue to struggle with difficult economic and financial conditions,” he said. The Fed chief didn’t discuss monetary policy in his remarks.

Fed Watch: US Baseline -- Every couple of months I revisit my set of baseline expectations for the US economy. This helps me gauge the importance of incoming data and events. This is the bones of the framework I have in mind: (14 graphs)

    • 1.) Overly pessimistic or optimistic forecasts continue to fair poorly. To be sure, this depends on your definitions of optimistic and pessimistic, but I continue to think the path of GDP growth is notable for its relative stability over recent quarters: If you avoid getting lost in the twists and turns of the data, you see that growth is hovering around 2% year over year.
    • 2.) The same story holds for the labor market. Interestingly, the six and twelve mont month averages for nonfarm payroll gains roughly converged with last months 163k gain
    • 3.) I don't expect significant deviations from points one and two in the further evidence that the Fed's much-anticipated acceleration is simply not in the cards. Indeed, the Federal Reserve's June forecasts for GDP growth stood in the 1.9-2.4% and 2.2-2.8% ranges (central tendency) for 2012 and 2013. I anticipate these will come down a notch in the next forecast.
    • 4.) I see multiple reasons to expect soft growth figures. Government spending is a clear drag: Some of the pent up demand in capital goods and auto spending has been satisfied: Deleveraging appears to be continuing in the US: Consumer spending has slowed: In addition, overseas economies, notably Europe and China, are struggling, which is showing up in manufacturing
    • 5.) From my perspective, housing looks set to support growth. Low inventories will support higher prices and, eventually, construction. To be sure, I would be hesitant to get carried away on this point. Plenty of negatives exist - tighter underwriting standards, shadow inventory, and sustained lower home ownership rates.

Update: Recovery Measures  - Here is an update to four key indicators used by the NBER for business cycle dating: GDP, Employment, Industrial production and real personal income less transfer payments. These graphs show that several major indicators are still significantly below the pre-recession peaks. This graph is for real GDP through Q2 2012. Real GDP returned to the pre-recession peak in Q4 2011, and has been at new post-recession highs for three consecutive quarters. At the worst point - in Q2 2009 - real GDP was off 4.7% from the 2007 peak. Real GDP has performed better than other indicators ... This graph shows real personal income less transfer payments as a percent of the previous peak through the June report. This measure was off 11.2% at the trough in October 2009. Real personal income less transfer payments are still 3.0% below the previous peak. The third graph is for industrial production through June. Industrial production was off over 17% at the trough in June 2009, and has been one of the stronger performing sectors during the recovery. However industrial production is still 3.3% below the pre-recession peak. The final graph is for employment. This is similar to the graph I post every month comparing percent payroll jobs lost in several recessions. Payroll employment is still 3.5% below the pre-recession peak.

Is this as good as it gets? - Several other new indicators confirm the message from the Q2 GDP report: the U.S. economy continues to grow, but at a discouragingly slow rate. Perhaps the most disturbing release last week was the ISM manufacturing survey, whose July index of 49.8 indicated that reports of contractions outnumbered expansions in manufacturing for the second month in a row. But fortunately, there were some other indicators also released last week suggesting things weren't universally that weak. Autos continue to sell reasonably well, by recent standards anyway. Sales of cars manufactured in North America were up almost 19% from last year and close to July 2007 levels.And then we have Friday's employment report, which showed a seasonally adjusted increase in July over June of 163,000 in the number of Americans on nonfarm payrolls. On the other hand, the separate BLS household survey showed a 195,000 monthly drop in the number of working Americans. There's a lot of noise and other confounding factors in either of these estimates. It's perhaps more meaningful to look at the growth in the seasonally adjusted numbers over the last six months, which averaged 131,000 per month according to the establishment survey and 97,000 according to the household.

Can Rising Food Prices Ruin the Recovery? - Here we go again. On two occasions since 2007, the world economy has endured rapid and extreme increases in food prices that have inflicted great pain, especially on the poor. Now, with drought in the Midwestern U.S. burning through one of the most important food-producing regions in the world, get ready for a dizzying feeling of déjà vu. Corn and soybean prices recently reached record highs. Wheat has also spiked. Jim Kim, President of the World Bank, is already warning that rising food prices can cause families to eat cheaper, less healthy food or pull kids out of school, steps that “can have catastrophic lifelong effects on the social, physical, and mental well-being of millions of young people.”That is bad news for the global economy. We are already facing all sorts of hurdles in our so far futile efforts to climb out of the Great Recession. Joblessness in the U.S. and Europe remains high. The euro-zone debt crisis continues to boil. The world’s emerging markets are slowing down. Rising food prices will just add to the gloom, since they can kill growth in two important ways. First, there is a consumption effect. When families are forced to allocate a larger share of their weekly income to milk, bread and other basics, they are unable to spend as much on clothes, toys and other stuff, dampening overall consumer spending.  Second, there is a policy effect. Rising food prices often cause higher inflation, which could force central banks to react by hiking interest rates to control the upward pressure on prices, slowing down growth in the process.

U.S. Chief Executives Less Confident on Economy, Survey Shows - Confidence among U.S. chief executive officers declined in the second quarter as more business leaders said economic conditions will worsen in the next six months, a private survey showed. The Young Presidents’ Organization sentiment index fell to 60 in the second quarter from 65.1 in previous three months, the largest decline since the survey began in 2009. Readings greater than 50 show the outlook was more positive than negative. “High gas prices, ongoing woes in Europe, and reduced growth in Asia, China in particular, no doubt dampened CEO optimism in the latest survey,” Stephen Slifer, YPO Global Pulse economic adviser and chief economist at NumberNomics, said in a statement. “The results seem to be pointing toward slower growth ahead and not a global contraction.” Thirty-seven percent of executives surveyed said the current economy has improved from six months ago, down from 60 percent who said so in the first quarter. Eighteen percent said the economy will worsen, up from 7 percent in the prior survey. 

Economists in Philly Fed Survey Lower Forecasts - The outlook for the U.S. economy and labor markets is weaker this quarter than it was three months ago, according to a quarterly survey released Friday by the Federal Reserve Bank of Philadelphia. According to the regional bank’s Survey of Professional Forecasters, real gross domestic product is expected to grow at only a 1.6% annual rate this quarter and 2.2% in the fourth quarter, down from 2.5% and 2.6% forecast three months ago. The 48 forecasters surveyed also trimmed their view for the first and second quarters of 2013, with growth of 1.8% and 2.3%, compared with earlier projections of 2.6% and 2.7%. Lower economic activity forecasts are leading to reduced expectations for job growth. The forecasters now see payroll gains averaging 125,000 per month this quarter and 135,300 in the fourth. That hiring pace is down sharply from the gains of 170,000 and 172,600 expected in the second-quarter survey. Slower hiring means the U.S. unemployment rate will remain above 8% until the second quarter of 2013. In the previous forecasts, the economists thought the rate would fall below 8% by the fourth quarter of this year.

The U.S. economy gets a dash of good news for a change - It’s fair to say that the U.S. economy has been in a worrisome funk these past few months. The unemployment rate has barely budged after a slew of disappointing jobs reports that started in April. GDP growth in the second quarter of the year turned out to be a tepid 1.5 percent annualized rate. The Federal Reserve noted glumly that “economic activity decelerated somewhat over the first half of this year.” Could that turn around in the second half of 2012? In the past few days, a handful of economic indicators have offered some reasons for cautious — very cautious — optimism. The labor market appears to be  strengthening somewhat. Exports have surged of late. And the U.S. housing market, which has long hobbled the economic recovery, is showing glimpses of improvement. So how significant are these trends? Let’s take a look:

The Making of America’s Imbalances- Many observers in the West have embraced a reading of the financial crisis in which global imbalances and the surge in uphill net capital flows from poor to rich countries play a dominant role. ... Such explanations conveniently blame events that took place outside of the advanced economies for at least providing the initial impetus for the economic and financial mess Ben Bernanke’s savings glut hypothesis (Bernanke 2005) skillfully argues that a large and sudden rise of desired savings from developing countries – a savings glut – flooded the US economy. The implication is that low American interest rates and, ultimately, the financial crisis were due to the unusual saving behavior elsewhere. Others disagree with such an imbalance-centered view of the crisis. ... This debate suggests that a closer look at the composition and role of imbalances in the run up to the crisis is warranted. ... In our new paper -- “The Making of America’s Imbalances” -- we examine the evolution of sectoral financial balances in the US economy in the past 50 years using the Flow of Funds accounts. ... What do we find? ... Who financed the household borrowing binge of the 2000s? China and other emerging markets played virtually no direct role in the financing flows behind the American credit bubble. The American financial system fed the credit hunger of the American economy mainly by issuing debt liabilities in international financial markets; but it was the foreign private sector, not foreign governments, that provided most of the fuel for the fire.

Treasury Bears Submit to Fed as Bond Optimism at High - Jay Mueller, who manages $3 billion of bonds for Wells Capital Management, resisted buying Treasuries for four months, anticipating the Federal Reserve would drop its pledge to keep interest rates at a record low through late 2014. No more. With the economy growing at a 1.5 percent annual pace, the odds of a recession have risen to 60 percent, making 1 percent yields on 10-year notes a possibility, he said. Wells Capital’s parent, Wells Fargo & Co., boosted its Treasury holdings 32 percent to $11.5 billion in May alone, according to the latest data compiled by Bloomberg.“We’re in a low-rate environment for a long time, longer than I had thought,” Mueller said. “I’m finally throwing in the towel.” So are Pioneer Investment Management Inc., Pacific Investment Management Co., Federated Investors Inc., Northern Trust Global Investments and Columbia Management Investment Advisers LLC. They are adding to holdings of Treasuries as economic growth cools. Of the 20 firms that own the most Treasuries, 16 bought more U.S. government debt during their most-recent reporting periods, Bloomberg data show.

Treasury Yields and the 30-year Mortgage on the Rise - Treasury yields have risen significantly from their historic lows on July 25th. At yesterday's close the 3-year note was up 10 basis points (bps), the 5-year 18 bps, the 7-year 24 bps, and the 10-year 26 bps. The 20- and 30-year bonds were up 29 and 32 bps, respectively. Yesterday Freddie Mac survey listed the 30-year fixed-rate mortgage at 3.59, up 10 bps from its historic low two weeks earlier. Given how low the rates were on July 25th, just 12 sessions ago, these increases are substantial. For instance, the 3-year yield is up 36 percent and the benchmark 10-year yield is up 18 percent from their historic lows. Is this simply a short-term blip, or were the July lows a turning point? Time will tell. 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.

A Year Later, S&P Downgrade of US Looks Like a Dud -- The rating agency Standard & Poor’s stunned the world a year ago by stripping the U.S. government of its prized AAA bond rating. The downgrade of long-term U.S. Treasurys threatened to sow chaos in financial markets, driving up U.S. interest rates, pushing the dollar down, scaring investors away from stocks and into that traditional refuge for the fearful: gold. The Dow Jones industrials dropped 635 points in panicked selling the first day of trading after the S&P announcement. A year later, S&P’s historic move looks like a non-event. Long-term interest rates are sharply lower, the Dow industrials reversed course and is now up more than 1,600 points. The dollar has rallied, and gold prices are down from where they were when S&P lowered the boom. Rival rating agencies Moody’s and Fitch have said they might downgrade the U.S. government’s blue-chip rating, too, though neither has followed S&P’s lead. It is difficult to imagine a more decisive repudiation of S&P’s warning that the U.S. government might not be able to pay its bills.

A Year After S&P's Rating Downgrade, US Treasuries Trade 1% Lower -  On August 5th, 2011, one year ago today, S&P downgraded the United States from AAA to AA+. This was four days after Congress voted to raise the debt ceiling. S&P did this because they didn't like the politics of the debt ceiling, implicitly blaming the Republicans' aggressive threat of a default on the national debt to obtain their political goals. Analysts at Treasury quickly noted, after reviewing the numbers, that S&P made a $2 trillion dollar mistake, which dramatically overstated the medium-term debt levels of the United States that were their economic justification. S&P stood by their downgrade while admitting the error. The United States losing its AAA rating was a political shock. The verdict was quick from the center and the right - this would be incredibly harmful to the United States' ability to deal with its national debt. When S&P first brought up the possibility of the downgrade in July, the centrist think tank Third Way highlighted that "S&P estimates that a downgrade would increase the interest rates on U.S. treasuries by 50-basis points," and urged "Congress and the Administration [to] come together and pass a 'grand bargain' that will put us on a sustainable path and avoid a credit downgrade." ... Did the downgrade increase interest rates on U.S. Treasuries 50-basis points? ... Here's FRED data on Treasury 10 years:... They are down a little over 1 full percentage point, from 2.58 percent to 1.51 percent.

Joseph Stiglitz: 'This Deficit Fetishism Is Killing Our Economy': — What's wrong with the U.S. economy? Growth comes in fits and starts. Unemployment has been over 8 percent for three and a half years. Cutting taxes and interest rates hasn't worked, at least not enough. To Joseph Stiglitz, the Nobel Prize-winning economist, the economy's strange behavior can be traced to the growing gap between wealthy Americans and everyone else. In his new book, "The Price of Inequality," he connects surging student loan debt, the real-estate bubble and many of the country's other problems to greater inequality. When the rich keep getting richer, he says, the costs pile up. For instance, it's easier to climb up from poverty in Britain and Canada than in the U.S. "People at the bottom are less likely to live up to their potential," he says.In an interview with The Associated Press, Stiglitz singled out the investment bank Goldman Sachs, warned about worrying over government debt and argued that a wider income gap leads to a weaker economy. Below are excerpts, edited for clarity

U.S. July deficit $71 billion, CBO estimates - The U.S. government will record a budget deficit of $71 billion in July, the Congressional Budget Office estimated on Tuesday, bringing the total shortfall to $975 billion for the first 10 months of fiscal 2012. The deficit for July was $58 billion less than the shortfall posted a year ago, while receipts were $24 billion higher. For the fiscal year through July 2012, the deficit is $125 billion less than for the same period in fiscal 2011. The U.S. Treasury is due to report the official July budget numbers on Friday.

July Deficit Lower - Whether you're inside or outside the beltway, you always have to be careful about saying that something is "only" $71 billion. Nevertheless, the latest report from the Congressional Budget Office that the July federal deficit was $71 billion, $58 billion lower than the July 2011 deficit, is one time when the word "only" is appropriate. Through the first 10 months of fiscal 2012, the overall deficit is $125 billion less than the $1.1 trillion in the same period last year.  The real question is whether this is good or bad news.Politically, the latest CBO numbers indicate that the 2012 deficit will be substantially lower than 2011 but will still exceed $1 trillion. That means that the red ink will still be a campaign issue. Economically, the numbers are a problem because the federal government is the only component of GDP that is adding any boost to the economy at the moment. With growth low and no prospect of businesses, consumers, trade, or state and local governments boosting their spending any time soon, the federal deficit reduction helps explain why the prospects for growth will remain limited.

Budget deficits are the devil you know - Given the hyperpolarization of today’s political commentary I don’t openly refer to myself as a conservative anymore. It would be misleading, as I rarely tow the typical “conservative” line. However, for years I did and largely based on the following disposition: Better the Devil You Know, Than the Devil You Don’t. That is to say, no matter how bad you think things are, rest assured they can get worse. And, if you go rushing in where angels fear to tread, you might very well make them worse.Today there is perhaps no better example of the Devil We Know, than the US budget crisis. We have lots of charts like the following. I’ve had a lot of fun on the blogosphere pointing out that this chart extends to 2085 and the sheer ridiculousness of naïve extrapolation 70 years into the future. However, there is another even more important observation: This chart exists. That is to say that smart folks have spent some amount of time actually attempting to estimate how much the government deficit will be 70 years into the future and many more people have spent thousands of blog hours debating the consequences.

U.S. Fiscal Policy: Avoiding Self-Inflicted Wounds -- iMFdirect - The United States and much of the world economy are still recovering from the devastating global recession that began in 2008.  But for the U.S. economy, serious risks could come at the end of this year from two potential self-inflicted wounds: the so-called “fiscal cliff” and the debt ceiling.  In simple terms: if U.S. policymakers do nothing, a number of temporary tax cuts will expire and significant across-the-board spending reductions will kick in on January 1, 2013. The combined effect of these measures could result in a huge fiscal contraction, which would derail the economic recovery. The payroll tax break, the Bush tax cuts (enacted in 2001 and 2003, and extended for two years at the end of 2010), as well as exemptions on the Alternative Minimum Tax are set to expire on January 1, 2013. As for the cuts to government spending, it was agreed last summer that if the so-called “Super Committee” (a Congressional committee in charge of reducing the deficit) failed to approve a set of deficit-reduction measures, draconian cuts to defense and nondefense spending would take effect starting on January 1, 2013. Unfortunately, this threat did not work as envisaged—the Super Committee did not come up with any plan to reduce the deficit—and, as a result, the deep spending cuts are scheduled to kick in. All in all, the cliff would remove about $700 billion from the U.S. economy next year—over 4 percent of GDP—with higher taxes contributing about three quarters of the total.

Your Complete Guide To The Coming Fiscal Cliff - All you need to know about the fiscal cliff which will savage the US economy in under 5 months, unless Congress finds a way to compromise at a time when animosity and polarization in congress is the worst it has ever been in history.

The Fiscal Cliff: Another Threat To The Economy - The so-called “Fiscal Cliff” has been the talk of Washington ever since the Congressional Budget Office that the year-end expiration of the Bush Tax Cuts, the Payroll Tax Cut, and the Medicare “Doc Fix,” along with the sequestration cuts that were part of last year’s debt ceiling deal and the fact that we’ll need to raise the debt ceiling again by early 2013 at the latest pose a serious risk of tossing the economy into a recession. Both sides have used the issue to take partisan swats at each other.  Everyone seems to have decided, though, to put this matter off until the lame duck session, which will start sometime in late November and continue through just before the Christmas holidays. That’s a mere four weeks and it’s hard to see how they’ll be able to get everything done, although they ought to figure something out because businesses are starting to become concerned about the high level of uncertainty to such a degree that it may start impacting economic growth:A rising number of manufacturers are canceling new investments and putting off new hires because they fear paralysis in Washington will force hundreds of billions in tax increases and budget cuts in January, undermining economic growth in the coming months. Executives at companies making everything from electrical components and power systems to automotive parts say the fiscal stalemate is prompting them to pull back now, rather than wait for a possible resolution to the deadlock on Capitol Hill.

Business Fears the Fiscal Cliff - As Nelson Schwartz reported in The Times on Monday, a number of manufacturers say they are canceling plans for investing and hiring, in part, because they fear that some $100 billion in budget cuts will take effect in 2013. In all, the law currently calls for $1.2 trillion in automatic spending cuts over 10 years, starting Jan. 1, divided between nondefense programs and defense projects.  Republican lawmakers demanded the cuts last year as part of their brinkmanship over the debt ceiling, and business lobbies have generally supported slashing the deficit. But now that the cuts are imminent, corporate executives seem to have realized that the last thing the economy needs is a large budget cut across the board.  They’re right about that. According to the Congressional Budget Office, the combined impact of the automatic spending cuts plus the scheduled expiration of the Bush-era tax cuts — the so-called fiscal cliff — would cause the economy to contract in the first half of 2013. Some business leaders seem to think the solution is for Congress to act as soon as possible to avert the spending cuts and to extend all of the tax cuts. That would avoid an economic downturn next year, but it would also mean no progress toward long-term deficit reduction. .

The Sequester and the Cliff -- The researchers at Goldman made an interesting graphic projecting the fiscal contraction from the various components of the fiscal cliff. Here are what I took to be key takeaways:

  • –The sequester hits very hard right out of the gate in 2013.  More on that in a moment, but that’s the first thing I see here.  Recent work by Scott Lilly and various press reports stress the disruption to economic activity by the spending cuts.  What the GS analysis shows is how front-loaded they are relative to the tax expirations.
  • –The magnitudes are recessionary.  As the CBO has pointed out, if we go over and stay over the cliff, the US economy, which—though slogging along—has proven to be quite resilient against many a blow, could be knocked back into recession, as we’ve seen in the European applications of fiscal austerity.   On the other hand, if it takes going over briefly to get a responsible budget deal, these deep negative effects need not occur.
  • –We’re already in austerity mode and have been so for some time.  Note the black parts of each bar.  Including state and local budgets, fiscal policy has been contractionary since around 2010 (see figure at the end).  That makes no economic sense, but…there it is.

Romney: Delay the Trigger Cuts - There was a big breakthrough in the Presidential race, with implications for US fiscal policy, that sort of slipped by unnoticed on a Friday in August. Mitt Romney, the presumptive Republican nominee, argued for a one-year delay in the trigger, the automatic cuts to defense and discretionary spending set to go at the end of the year. Importantly, he did not identify an offset. He merely said that the trigger ought to be delayed. The Republican presidential contender said Friday during a campaign trip to Las Vegas that the cuts would be “terrible,” particularly for the military [...] Romney says he wants President Barack Obama and lawmakers to work together to put, in his words, “a year’s runway,” in place to give the next president time to reform the tax system and ensure the military’s needs are met. Now, Romney is a pretty weak leader of his party. He called for an expiration of wind energy tax credits and Republicans on the Senate Finance Committee defied him and passed a one-year extension of that tax break as part of a tax extenders package that got committee approval this week. But the fiscal cliff is something different entirely, something sure to generate a lot of conversation as we near the election. And the man who will lead his party at the top of the ticket just said that the fiscal cliff should just get extended. He already held the position of extending the Bush tax cuts, and in fact lowering rates even more below that. His party just passed a similar plan through the House this week. And now, Romney wants to extend the trigger. There are no offsets for any of this.

House Defines Legislative Masturbation Before It Recesses For Summer -- One of the last things the House did last week before leaving Washington for five weeks was to spend time and energy defining legislative masturbation. At least that's the inescapable conclusion when you read H.R. 6169, the "Pathway to Job Creation through a Simpler, Fairer Tax Code Act of 2012." That bill, which passed 232-189, supposedly would set up a fast-track process for tax reform by requiring the House Ways and Means Committee to report a bill by April 30, 2013. The full House would then be required to vote on whatever the committee approved within a month. This was total nonsense and an absolute waste of the House's time and taxpayer money.

Sequester Report Due September 6 Won't Help Congress -- As expected, President Obama signed the "Sequestration Transparency Act" (H.R.5872) on Tuesday, so the report to Congress that supposedly details what will be cut by how much if the sequester occurs on January 2, 2013, is required to be sent to the Hill by September 6, This is likely to be a far more valuable event for the White House than the House and Senate. If the recent testimony by OMB Acting Director Jeff Zients before the House Armed Services Committee is any indication, the report will simply apply the sequestration rules in the Budget Control Act -- the law that provided for the sequester if the inevitable happened and the anything-but-super committee failed to agree on a deficit reduction plan -- in as bureaucratic a manner as possible. With the likely exception of excepting uniformed military personnel as the president is allowed to do, the report is very likely to apply the rules in a straight forward manner with no gimmicks or side comments about preferences.

Yes, The CR Can Be Used To Stop The Sequester - The question I've been getting most often since House Speaker John Boehner (R-OH) and Senate Majority Leader Harry Reid (D-NV) sort of announced an agreement on a six-month continuing resolution for fiscal 2013 is whether that CR can be used to stop the sequester from occurring on January 2. The answer is yes, and it's happened before. First, some quick background for anyone who isn't a complete budget process geek and doesn't repeat this hourly.

  • 1. The sequester is the across-the-board spending cut that was triggered when the anything-but-super committee failed to come up with a deficit reduction plan last November.
  • 2. The sequester will occur on January 2, 2013, unless Congress and the president legislatively agree to a change in the Budget Control Act, the law that created the anything-but-super committee and the fall back automatic spending cut if it failed.
  • 3. Sequesters are not new. They were first used in the Gramm-Rudman-Hollings law enacted in 1985. GRH was subsequently revised in 1987.

In the current hyperpartisan political environment, it's important not to minimize the difficulty of enacting legislation that has anything to do with federal spending, taxing, deficits, or the debt. But in general, all it would take to cancel, delay, or modify the sequester as everyone from Fed Chairman Ben Bernanke to the CEOs of many of the largest Pentagon contractors are suggesting/demanding/ praying for is to amend the Budget Control Act.

Defense Industry Pressuring Republicans to Save Their Funding By Considering Higher Taxes - The defense industry has a single-minded purpose for the balance of the year – get Congress to avert $600 billion in cuts to the military budget that automatically trigger, by any means necessary. That would include replacing those cuts with tax increases, per Brian Beutler. A House Armed Services Committee hearing two weeks ago first exposed the rift; two major defense contractors acknowledged that the GOP’s refusal to consider higher revenues was not conducive to solving the looming budget crisis. “I think everything’s gotta be on the table at this point, now,”. “This is a personal opinion. I’m not speaking for the employees of United Technologies, or for UTC.”Robert Stevens, CEO of Lockheed Martin, volunteered agreement.Pro-war Senators like Lindsey Graham have been pushing this angle in particular, allowing for certain tax increases in exchange for canceling the defense sequester. This was the thinking behind the debt limit deal, that painful automatic cuts would force the two parties to the table to hammer out a deal which, in the interest of compromise, would abandon certain sacred cows. That never happened in the Super Committee, but the military contractors, seeing the potential for their profits to drop, are screaming at Republicans to accept some tax changes

Republicans Encourage Defense Contractors to Issue Layoff Notices Before the Election -- Defense contractors have come up with a particularly devious way to undermine the automatic cuts to the military budget in a way that could impact the Presidential election. Under the Worker Adjustment, Retraining and Notification (WARN) Act of 1988, government employees must be notified 60 days in advance of any layoffs. Defense contractors are taking that to mean that they must give such pink slips to practically their entire workforce, consisting of hundreds of thousands of employees, to comply with the law. This is notably one of the first times that a government contractor has ever proactively complied with the WARN Act, they typically must be hounded to warn their workers. But this would have the effect of freaking out politicians with the threat of massive layoff notices four days before the 2012 election (60 days from the trigger enactment date of January 2 would be November 2, the Friday before the election). What’s more, Democrats have argued that the WARN Act does not compel defense contractors to deliver blanket notices. The Labor Department concurred with this, and in a guidance, they told defense contractors that it would be “inappropriate” to send out the notices.

Americans need to face the harsh truth and pay more tax - One of the guiding principles of contemporary tax policy in the US is the notion that Americans are terribly overtaxed. Both candidates are running on not raising taxes for the middle classes and Mitt Romney wants to not only make the George W. Bush tax cuts permanent, he wants to cut income tax rates another 20 per cent across the board. Yet, data from the non-partisan Congressional Budget Office reveal that, when it comes to federal taxation, US households are less taxed now than 30 years ago, and that is not just a function of the recession. The CBO data began in 1979 when the typical, or median, household paid 19 per cent of their income in federal taxes. In 2009, that share had fallen to 11 per cent. Both economic and policy changes account for the decline in “effective tax rates”. In recessions, progressive tax systems provide automatic tax cuts as declining incomes push households into lower tax brackets. Middle-income households lost an average $6,000 in market-based income, an 11 per cent decline, between 2007 and 2009, but their federal tax bill fell $2,300, or 24 per cent. Thus their effective tax rate fell from 14 per cent to 11 per cent. But policy changes also played a significant role and the Bush tax cuts have had a large impact on the fall of tax rates ever since. Over the 1980s and 1990s, the overall effective tax rate fluctuated within a narrow band of 20.2 per cent to 22.7 per cent – lower in the Ronald Reagan years, a bit higher in the Bill Clinton years. But from 2000-07, before the recession took hold, they fell by almost 3 percentage points, equal to about $300bn in revenue, or 2 per cent of gross domestic product.

Who should be held harmless for deficit reduction? - At some point, once the unemployment rate really starts to fall, the US needs to get on a steady-state path to deficit reduction.  A question worth asking is what part of the income distribution should contribute to this reduction.  Certainly the one percent should make the major contribution, but it is hard to see how it can close the gap by itself.  The current budget deficit is about $1.3 trillion.  According to IRS SOI data for 2009 (the most recent available), households in the top one percent paid income taxes of $318 billion in that year (see Table 5).  Because that was an anomalous year, let's go back to 2007, when the top one percent paid the most is had paid under current law, which was $451 billion. If we adjust that for five years of CPI growth, that translates to about $497 billion in current dollars.  This means that doubling taxes on the top one percent would get us less than halfway toward closing the budget gap. Of course, lower unemployment will mean less money going to unemployment insurance, and will add to the number of taxpayers, and these will help reduce the deficit.  But the taxing the one percent alone will not be enough--so how low do we go?  How one divides it up among the rest?  I am not sure.

The Clinton Tax Challenge for Republicans - Republicans are adamant that taxes on the ultra-wealthy must not rise to the level they were at during the Clinton administration, as President Obama favors, lest economic devastation result. But they have a problem – the 1990s were the most prosperous era in recent history. This requires Republicans to try to rewrite the economic history of that decade. In early 1993, Bill Clinton asked Congress to raise the top statutory tax rate to 39.6 percent from 31 percent, along with other tax increases. Republicans and their allies universally predicted that nothing good would come of it.  Ronald Reagan himself was enlisted to make the case the day after President Clinton unveiled his program. Writing in The New York Times, the former president said, “Taxes have never succeeded in promoting economic growth. More often than not, they have led to economic downturns.” Of course, Reagan himself raised taxes 11 times between 1982 and 1988, increasing taxes by $133 billion a year, or 2.6 percent of the gross domestic product, by his last year in office. Representative Jack Kemp, Republican of New York, predicted budgetary failure from the Clinton plan. “Will raising taxes reduce the deficit?’ he asked. “No, it will weaken our economy and increase the deficit.” According to the Congressional Budget Office, the federal budget deficit fell every year of the Clinton administration.

Romney urges ‘dramatic’ measures, not stimulus - Republican presidential hopeful Mitt Romney says the US economy needs “dramatic” measures to recover from a deep recession, but not another federal stimulus package. “I can absolutely make the case that now is the time for something dramatic and it is not to grow government,” the multimillionaire former businessman and investor said in an interview that aired Sunday on CNN’s “State of the Union.” Romney, who is challenging President Barack Obama in November’s election, said that instead, he would rather create “the incentives and the opportunities” for big and small businesses to increase hiring.The former Massachusetts governor favors lowering individual and corporate tax rates, slashing government spending and easing regulations on energy companies to help make America energy independent by 2020. He has predicted that his economic plan would lead to 12 million new jobs created by the end of his first four-year term, something he told CNN would be a “normal process” of economic recovery.

Romney tax plan on table. Debt collapses table. - I can describe Mitt Romney’s tax policy promises in two words: mathematically impossible. Those aren’t my words. They’re the words of the nonpartisan Tax Policy Center, which has conducted the most comprehensive analysis to date of Romney’s tax plan and which bent over backward to make his promises add up. They’re perhaps the two most important words that have been written during this U.S. presidential election. If you were to distill the presumptive Republican nominee’s campaign to a few sentences, you could hardly do better than this statement of purpose from the speech Romney delivered in Detroit, outlining his plan for the economy: “I believe the American people are ready for real leadership. I believe they deserve a bold, conservative plan for reform and economic growth. Unlike President Obama, I actually have one — and I’m not afraid to put it on the table.” The truth is that Romney is afraid to put his plan on the table. He has promised to reduce the deficit, but refused to identify the spending he would cut. He has promised to reform the tax code, but refused to identify the deductions and loopholes he would eliminate. The only thing he has put on the table is dessert: a promise to cut marginal tax rates by 20 percent across the board and to do so without raising the deficit or reducing the taxes paid by the top 1 percent.

Romney's Tax Plan is Mathematically Impossible -The big news in campaign trail policy wonkery last week was the Tax Policy Center's white paper arguing that it is mathematically impossible for the Romney tax plan to meet its described goals. Ezra Klein has write-ups here and here, and James Pethokoukis has analysis here. Since Romney hasn't released his plan, Brown, Gale, and Looney cleverly put together the best case scenario and crunch the numbers -- and conclude they don't work. How is that? Romney's plan has three goals. It starts by lowering tax rates by 20 percent. It then seeks to keep raising the same amount of tax revenues as it did before by removing tax expenditures, or the variety of exemptions, deductions, or credits in the tax code that function as government spending. As the wonks would say, it wants to "lower the rates and broaden the base." However, and this will be crucial, it excludes expenditures related to investment income and savings from being available for these cuts. Finally, it wants to maintain the current level of progressivity by making sure that the top one percent pays no less in taxes and everyone else pays no more. The Tax Policy Center analysis shows that it is impossible to do all three: enacting the Romney plan requires cutting taxes on the top one percent and raising them on everyone else. In order to better understand why this is impossible we need a quick, back-of-the-envelope class and distrbutional analysis of how tax expenditures work in the United States.

Romney Campaign Economic Policy Paper Refuted - Mitt Romney is hardly the first Republican presidential candidate to assure Americans that cutting taxes and ending regulation will bring joy to the nation.  Mr. Romney has said, for instance, that he can cut marginal tax rates by 20 percent, eliminate the estate tax and the alternative minimum income tax and end capital gains taxes for middle-income Americans without reducing the amount of money flowing into the Treasury.The answer, he said, is getting rid of certain loopholes. He won’t say what those are, of course (presumably not the $77,000 “business loss” he claimed for his wife’s dressage horse, Rafalca, who just flunked out of the Olympics.)But a recent study by the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute, found that there aren’t enough loopholes to balance the loss of revenue, and concluded that Mr. Romney’s proposal would lead to significantly lower taxes for the rich, and a higher tax burden on middle- and lower-income taxpayers. The Romney campaign attacked the study because one of the authors worked for the Treasury Department under Mr. Obama. Another worked for President George H.W. Bush, but—for the sake of argument—I’ll concede the point: A study by people who work for a candidate or used to work for one is, as the campaign policy director, put it, “just another biased study.”

Fiscal Policy Studies the Romney Campaign Omitted - “The negative effect of the administration’s ‘stimulus’ policies has been documented in a number of empirical studies,” write economists Glenn Hubbard, Greg Mankiw, John Taylor and Kevin Hassett in a paper released by the Romney campaign. But the paper only mentions two studies, and one of them, by Amir Sufi and Atif Mian, is about Cash for Clunkers, a tiny subprogram of the stimulus.A more comprehensive analysis of the studies that have tried to assess the stimulus leads to a very different conclusion. Last summer, I found nine such studies, seven of which found that the American Recovery and Reinvestment Act (ARRA) had promoted economic growth and reduced unemployment. A recent issue of the American Economic Journal: Economic Policy has six more papers assessing the stimulus, all of which conclude that stimulus works. In this post, I’ve pulled together my summaries of the original nine papers, and added sections on the six new additions to the literature. The critical issue in these studies concerns the “fiscal multiplier” — that is, how much bang the government gets for its stimulus buck. For example, if each dollar spent on a particular kind of tax cut results in a $1 increase in GDP, the multiplier for that tax cut is 1. Any multiplier that is greater than zero indicates a program is stimulative, but the higher the multiplier, the more effective stimulus spending is.

Understanding TPC’s Analysis of Governor Romney’s Tax Plan - The Tax Policy Center’s latest research report went viral last week, drawing attention in the presidential campaign and sparking a constructive discussion of the practical challenges of tax reform. Unfortunately, the response has also included some unwarranted inferences from one side and unwarranted vitriol from the other, distracting from the fundamental message of the study: tax reform is hard. The paper examines the challenges policymakers face in designing a revenue-neutral income tax reform. The paper illustrates the importance of the tradeoffs among revenue, tax rates, and progressivity for the tax policies put forward by presidential candidate Mitt Romney. It found, subject to certain assumptions I discuss below, that any revenue-neutral plan along the lines Governor Romney has outlined would reduce taxes for high-income households, requiring higher taxes on middle- or low-income households. I doubt that’s his intent, but it is an implication of what we can tell about his plan so far. (We look forward to updating our analysis, of course, if and when Governor Romney provides more details.) The paper is the latest in a series of TPC studies that have documented both the promise and the difficulty of base-broadening, rate-lowering tax reform.  The new study applies those insights to Governor Romney’s tax proposal.

Culture Of Fraud - Paul Krugman - The big story of the week among the dismal science set is the Romney campaign’s white paper on economic policy, which represents a concerted effort by three economists — Glenn Hubbard, Greg Mankiw, and John Taylor — to destroy their own reputations. (Yes, there was a fourth author, Kevin Hassett. But the co-author of “Dow 36,000″ doesn’t exactly have a reputation to destroy). And when I talk about destroying reputations, I don’t just mean saying things I disagree with. I mean flat-out, undeniable professional malpractice. It’s one thing to make shaky or even demonstrably wrong arguments. It’s something else to cite the work of other economists, claiming that it supports your position, when it does no such thing — and don’t take my word for it, listen to the protests of the cited economists. And by the way, this isn’t obscure stuff. To take one example: the work of Mian and Sufi on household debt and the slump has been playing a big role in making the case for a demand-driven depression, which is exactly the kind of situation in which stimulus makes sense — so you have to be completely out of it and/or unscrupulous to cite some of their work and claim that it refutes the case for stimulus. Or to take another example, which Brad DeLong picks up, anyone following the debate knows that the Baker et al paper claiming to show that uncertainty is holding back recovery clearly identifies the relevant uncertainty as arising from things like the GOP’s brinksmanship over the debt ceiling — not things like Obamacare.

Some Points Just Aren't Debatable - The policy paper issued by the Romney campaign has received a rather harsh reaction since its release.  Brad Delong provided the most well-researched and in-depth response (which should probably be called a very thorough smack-down), but there were others (see here and here). Most telling, a reporter contacted the economists cited in the report as in one way or another supporting the Romney camp's claims, who responded like this: Each of these sections include supporting documents from independent economists. And so I contacted some of the named economists to ask what they thought of the Romney campaign’s interpretation of their research. In every case, they responded with a polite version of Marshall McLuhan’s famous riposte. The Romney campaign, they said, knows little of their work. Or of their policy proposals.

The Bowles-Simpson and Romney Tax Plans Have Almost Nothing in Common - In the recent contretemps over Mitt Romney’s tax plan, some Romney partisans have asserted that the Massachusetts governor’s revenue plank mimics the tax elements of the deficit reduction plan proposed in 2010 by Erskine Bowles and Alan Simpson, the chairs of President Obama’s deficit fiscal commission. This claim is absurd. These two proposals could hardly be more different.  True, both propose a significant across-the-board rate cut on ordinary income. But after that, their tax plans have about as much in common as Infected Mushroom and the New York Philharmonic. True, they both play music, but after that…. The Bowles-Simpson tax reform was fundamentally a trillion-dollar tax increase designed to help cut the deficit, while Romney flatly opposes any deficit-reducing tax hike. Bowles and Simpson would have raised taxes on capital gains and dividends, Romney would cut them. Bowles and Simpson included very specific proposals for eliminating popular tax preferences. Romney is largely silent on how he’d broaden the tax base to pay for his rate cuts.

Why Romney’s tax plan won’t cut the deficit - Erskine Bowles -- Obama and Romney recognize that debt reduction starts with reducing long-term spending. As our commission recommended, both candidates have — to an extent — supported policies to limit some tax expenditures, slow the growth of health-care costs and reduce government spending in other areas. Since our report was published in late 2010, the president and Congress have enacted a down payment of more than $1 trillion in spending cuts over the next decade — and established that defense spending, not just domestic programs, must be cut. Romney has also backed the plan of Rep. Paul Ryan (R-Wis.) to limit entitlement spending.  But real deficit reduction — cutting the deficit by at least $4 trillion over the next decade to stabilize the debt and get it on a downward path as a percentage of gross domestic product — won’t happen without sweeping tax reform. This year, our broken tax code will give away more in loopholes — $1.3 trillion — than it collects in income taxes. That’s nuts, especially when most of the tax code’s backdoor spending goes to benefit well-off folks like me.

What Would Really Happen to Tax Burdens Under President Obama vs. President Romney? -- Last week the Tax Policy Center (TPC) released this distributional analysis of the Romney tax plan, exploring how the plan could be made revenue neutral as Romney has claimed it would be. The TPC analysis found that it is impossible to pay for Romney’s proposed additional tax cuts (which are skewed heavily toward the rich) with base-broadening revenue offsets (which according to the Romney plan cannot include increasing the taxation of capital income) without increasing tax burdens on net for most Americans. (I quickly summarized what I took as the main findings of the TPC analysis in my previous post.) By later the same day the Obama campaign had seized the moment by building the TPC calculations into an Obama “tax calculator” where any household can plug in their own income level, marital status, and number of children, and compare what their tax burdens would be under Obama versus under Romney. The Obama campaign’s tax calculator produces honest numbers based on TPC distributional tables, but its presentation is confusing. It makes Obama tax policy look like it gives tax cuts for everyone, even the rich (which is indeed true relative to current law) and to make Romney tax policy look like it raises tax burdens on the middle class (which is indeed true relative to Obama policy, a different baseline). It seems to purposefully switch the baseline–or march from one to another–to come up with the most politically effective punch line that Romney wants to raise taxes on most Americans. The truth is that both Romney and Obama want to cut taxes by a lot relative to current law; it’s just that on net, Romney will cut taxes relatively more for the rich and less for everyone else (and more on average).

Want More Tax Revenue? Increase Jobs Not Rates - The Obama campaign has amplified its push on increasing taxes on the wealthy and has painted Mitt Romney as a Robin-hood in reverse saying that he wants to take from the poor and give to the rich. The attack on Romney is incorrect. The real truth is that the current Administration is failing, once again, to recognize that the problems facing the economy have nothing to do with the current tax rate structure.  It is election season, however, and the Obama campaign's "eat the rich" rhetoric will play well with the 22% of the population that is unemployed, discouraged, working part-time for economic reasons or have just given up looking for work. It will also play well with the rest of the country that are living paycheck-to-paycheck as real wages have declined over the last few years while the cost of living has risen. While the speeches, finger pointing and podium pounding will certainly tug at the heart strings of those living in a recessionary economy, it only serves to deflect attention from where it should be directed - employment.  Unfortunately, it is this very anemic and lower-end employment that allows Obama's attacks on the rich to reverberate so loudly. Since the beginning of 2009, full-time employment is still lower by 1.485 million jobs. The rest of the employment has come from temporary hires, which have surged by 1.585 million jobs during the same period. This has suppressed median family incomes, exacerbating the problem of maintaining their standard of living and leading to record levels of dependence on government assistance.

Kleinbard: Tax Fairness and Fairness in Tax Data Reporting - Following up on yesterday's post, WSJ: Taxing the Rich -- The Facts:  Huffington Post:  Tax Fairness and Fairness in Tax Data Reporting, by Edward D. Kleinbard(USC):  The impetus for this little paper was an op-ed by Ari Fleischer in the Wall Street Journal a couple of weeks ago [The Latest News on Tax Fairness] that unfairly claimed that the Congressional Budget Office had demonstrated that the most affluent Americans were "overtaxed." That op-ed contained  many rhetorical tricks and incomplete statements that are a staple of the current political right, and I felt it important both to defend the honor of the CBO and to offer readers a more balanced presentation of the underlying issues. Editorials like Fleischer's simply polarize discussion and distract from the real questions of fiscal policy, which are the appropriate role of government in contemporary society and the best modes of financing it, and as to which reasonable people can come to somewhat different conclusions.

Taxing Olympic Medalists - If I get a bonus for good performance, it’s taxed. If you get a bonus for good performance, it’s taxed. Heck, when Lloyd Blankfein gets a bonus for good performance (or bad performance!), even he pays taxes on it. But if LeBron James — who, with a total compensation of $53 million, earns more than all three of us put together, I’m willing to wager — gets a bonus for performing well in a single athletic event, well, that should be tax-exempt. At least that is what Marco Rubio, a Republican senator from Florida, and President Obama believe. Senator Rubio has proposed exempting Olympic medals and the cash bonuses that accompany them from income taxes. These cash bonuses, awarded by the United States Olympic Committee, total $25,000 for gold, $15,000 for silver and $10,000 for bronze. A spokesman for Mr. Obama said the president would enthusiastically sign such legislation. “

Tax breaks for Olympic medals: a terrible idea whose popularity shows why tax reform is unlikely. - If they gave out awards for dumb new policy ideas, President Obama and Republican rising star Sen. Marco Rubio would both be medaling this week. Their achievements? Rubio’s completely pointless bill offering a tax break to recipients of Olympic medals and—even worse—the president’s decision to hop on the bandwagon rather than show the country he has a firmer grasp on the issues than his adversaries do. In the scheme of things, of course, winning Olympic prizes is not an important sector of economic activity, and the medals’ tax status doesn’t really matter. But the overall shape of the tax code does matter a great deal, and the speed with which a bipartisan consensus emerged around making it worse bodes quite poorly for efforts to make it better. The tawdry tale began on the first of the month when Rubio introduced his Olympic Tax Elimination Act and argued that “athletes representing our nation overseas in the Olympics shouldn’t have to worry about an extra tax bill waiting for them back at home.” Indeed, they should probably be focused on their athletic performances. The idea that they’d be worrying about taxes instead smells like yet another effort to exploit public confusion about how taxation of marginal income works

Tax reform is going to be really, really hard - Ezra Klein - Last week, I wrote about the nonpartisan Tax Policy Center’s effort to run the numbers on Mitt Romney’s base-broadening, rate-lowering tax reform plan. The numbers, as you may have guessed, didn’t add up. And that’s not just a problem for Romney. It’s a problem for anyone committed to the idea of tax reform. As polarized as Washington is over tax and budget issues, a base-broadening, rate-lowering tax-code overhaul has become the one policy every wonk in town can agree on. It formed the core of the Simpson-Bowles deficit-reduction plan, as well as the Domenici-Rivlin proposal. It was the cornerstone of the supercommittee’s failed negotiations. It has been talked up by Sen. Max Baucus, the top Senate Democrat on tax issues, and by Rep. Dave Camp, the Republican who heads the tax-writing House Ways and Means Committee. Romney, President Barack Obama and House Budget Committee Chairman Paul Ryan have all endorsed the idea. But in being all things to all kinds of politicians, it might, as the Tax Policy Center convincingly argues, amount to nothing at all. A bit of explanation is in order. “Base-broadening and rate-lowering tax reform” involves cutting deductions, loopholes, and sundry other “tax expenditures” in order to lower marginal tax rates and/or raise more revenue. The possible benefits are many: It reduces complexity in the tax code; offers policy makers an opportunity to wipe out tax breaks and giveaways that have outlived their purpose; and permits politicians to raise taxes even as they look to be cutting them.

ID theft as basis of systemic IRS tax refund fraud problems – Linda Beale - Early in 2012, the IRS and Justice Department announced a major crackdown on identity theft and enforcement efforts against tax refund fraud.  See IIRS, Identity Theft Crackdown Swweps Across the Nation: More than 200 Actions Taken in Past Week in 23 States,   However, the IRS, which hasn't been a perennial favorite funding target of GOPers in Congress and has had to operate with too few staff and resources to do its job well, has continued to fail to keep up with the criminals who commit tax fraud.  A recent report by the Inspector General for Tax Administration suggests a range of problems. TIGTA, There are Billions of Dollars in Undetected Tax REfund Fraud Resulting from Identity Theft. See also Richard Rubin, IRS may lose $21 billion in identity fraud, study says, Bloomberg. The TIGTA report suggests that identity thieves may end up claiming as much as $21 billion in fraudulent tax refunds over the next five years. Examples include $3.3 million in refunds sent to a single address in MIchigan listed on more than 2000 different tax returns and more than 300 direct deposits totaling almost half a million sent in to a single bank account.  There was one bank account that received 590 deposits totally more than 909 thousand dollars.  The agency responded that it has changed its screening filters to address the issues raised and taken several steps to address tax-related identity fraud, which has been concentrated in Florida. The TIGTA report had a series of recommendations, including better use of third party information and limits on tax refunds being sent to the same bank account.

Romney’s incredible extremes - Mitt Romney’s tax and spending plans are so irresponsible, so cruel, so extreme that they are literally incredible. Voters may find it hard to believe anyone would support such things, so they are likely to discount even factual descriptions as partisan distortion. When informed that Romney supported the budget plan by Rep. Paul Ryan (R-Wis.), and thus championed ending Medicare as we know it while also championing tax cuts for the wealthy, focus group participants simply didn’t believe it. No politician could be so clueless.  Incredulity may complement what New York Times columnist Maureen Dowd dubbed Romney’s strategy of “hiding in plain sight.” Romney refuses to release his tax returns, scrubbed the records and e-mails of his time as governor and as head of the Olympics, keeps secret details of his Bain dealings and covers up the names of his bundlers. And then, he’s able to announce extremely cruel policy positions with impunity, because the voters just can’t believe that’s what he is for.

Mitt Romney Started Bain Capital With Money From Families Tied To Death Squads - In 1983, Bill Bain asked Mitt Romney to launch Bain Capital, a private equity offshoot of the successful consulting firm Bain & Company. After some initial reluctance, Romney agreed. The new job came with a stipulation: Romney couldn't raise money from any current clients, Bain said, because if the private equity venture failed, he didn't want it taking the consulting firm down with it.  When Romney struggled to raise funds from other traditional sources, he and his partners started thinking outside the box. Bain executive Harry Strachan suggested that Romney meet with a group of Central American oligarchs who were looking for new investment vehicles as turmoil engulfed their region.  Romney was worried that the oligarchs might be tied to "illegal drug money, right-wing death squads, or left-wing terrorism," Strachan later told a Boston Globe reporter, as quoted in the 2012 book "The Real Romney." But, pressed for capital, Romney pushed his concerns aside and flew to Miami in mid-1984 to meet with the Salvadorans at a local bank. It was a lucrative trip. The Central Americans provided roughly $9 million -- 40 percent -- of Bain Capital's initial outside funding, the Los Angeles Times reported recently. And they became valued clients.

Grover Norquist - Romney Will Do As He's Told - At the conservative “Defending the American Dream Summit” in Washington, Grover Norquist, the Republican tax-cut Svengali said about Mitt Romney: “All we have to do is replace Obama. … We are not auditioning for fearless leader. We don’t need a president to tell us in what direction to go. We know what direction to go…. We just need a president to sign this stuff….Pick a Republican with enough working digits to handle a pen to become president of the United States…. His job is to be captain of the team, to sign the legislation that has already been prepared.” The summit was sponsored by Americans for Prosperity, a front group started by oil billionaire David Koch of Koch Industries. The AFP funds the “Tea Party” and special interest groups that work against Democratic initiatives, opposing protections for workers, the environment, labor unions, health care reform, stimulus spending, and cap-and-trade legislation.

Arthur Laffer, Anti-Enlightenment Economist - The Wall Street Journal, building on its solid reputation for providing a platform for moderately to extremely well-known economists to embarrass themselves, featured an op-ed today  by Arthur Laffer. Laffer’s op-ed is primarily a commentary on a table constructed by Laffer, which I reproduce herewith. For each of the 34 OECD countries, the table provides two numbers. The first number has the following description: “change in government spending as a percentage of GDP from 2007 to 2009.” This number is treated by Laffer as a proxy for the amount of stimulus spending to counteract the 2008-09 recession. The second number has the following description: “change in real GDP growth from 2006-2007 to 2008-2009.” The second number is treated by Laffer as a proxy of the effectiveness of stimulus spending. Laffer thus regards the correlation between the two numbers as evidence on whether government spending actually helped to achieve a recovery from the 2008-09 recession. Now, there are multiple problems with this starting with the following: Laffer’s description of the first number is ambiguous to the point of incomprehension. Does Laffer mean to say that he is subtracting the 2007 ratio of government spending to GDP in each country from the same ratio in 2009? Or, does he mean that he is subtracting total government spending in each country in 2007 from total government spending in 2009, and expressing that difference as a percentage of GDP in that country in 2007. Which calculation he is performing makes a big difference.

We Now Have Our Smallest Government in 45 Years - Since the official end of the Great Recession, America's public sector has shrunk. And shrunk. And shrunk some more. We've said goodbye to about 600,000 government jobs, handing the economy a nasty self-inflicted wound in the process.  But how small has our public sector really become? Here's one way to think about it: Compared to our population, it hasn't been this size since 1968. Your dreams are coming true Baby Boomers. We're almost all the way back to the Summer of Love! First, credit where it's due. The Hamilton Project has produced a beautiful graph illustrating the government employment to population ratio. As it shows, there are now fewer public sector employees per American than at any time dating back to the Carter administration (To be clear, we're talking state, federal, and local here).

What is the Economic Policy Uncertainty Index Really Telling Us? - I'm going to show you a set of Republican talking points magically turn into an economic index, an index that Republicans then use to argue for their policies. Mitt Romney's economics team of Hubbard, Mankiw, Taylor and Hassett have rapidly turned around an economic policy sheet titled The Romney Program for Economic Recovery, Growth, and Jobs. Matt Yglesias has a post on the issue of sluggish growth and Dylan Matthews has one on their review of the stimulus literature. Brad Delong takes the deep dive throughout the entire piece here. I'm interested in something I haven't seen people critically discuss enough, and that is the "policy uncertainty index." The Romney plan argues that "uncertainty over policy - particularly over tax and regulatory policy - limited both the recovery and job creation. One recent study by found that this uncertainty reduced GDP by 1.4 percent in 2011 alone, and that restoring pre-crisis levels of uncertainty would add 2.3 million jobs in 19 months." This appears to be a new talking point for the candidate's team, as the same langugage was in a Wall Street Journal editorial by Hubbard over the weekend.Let's take a critical look at this paper, Measuring Economic Policy Uncertainty, which also has its own website, as it is likely to come up again in the election season. There are two sets of issues, one related to what the index actually shows and another related to the construction of the index itself.

New Plan Expands EITC Benefits for Families with Young Children - The Earned Income Tax Credit (EITC) provides a significant income boost to low-income single-parent families, but can severely penalize those families if the parent marries. A new plan from Brooklyn College economist Robert Cherry could sharply reduce that problem while sharply increasing benefits for families with young children – particularly those with married parents. Analysts consistently find that the EITC encourages work and reduces poverty. Recent evidence shows that EITC receipt is correlated with improved health outcomes for infants. But the credit is not all roses. A major problem is the marriage penalty embedded within the structure of the EITC. Taken to the extreme, if a single mom of three children earns $17,090, her EITC totals almost $6,000. If she marries a partner who earns more than $5,210, her EITC falls by just over 21 cents for every dollar his earnings exceed that threshold. If he earns $32,970 or more, she loses her EITC entirely. Many analysts, including myself, have offered ideas for reducing or eliminating marriage penalties in the EITC, essentially by developing an individual worker credit and a child credit, rather than combining the two.

Measuring Mooching, by Nancy Folbre - Gregory Mankiw called attention to a recent Congressional Budget Office report showing that government transfers, net of federal taxes, were greater than market income for the bottom three quintiles of all households ranked by market income in 2009. Professor Mankiw concluded that the lowest 20 percent of families were receiving $3 in government benefits for every dollar they earned and that the middle quintile “having long been a net contributor to the funding of government, is now a net recipient of government largess.” This is not the same as calling the middle class moochers, but some might interpret it that way. Here are some important reasons to challenge Professor Mankiw:

    • First, a ranking of households by market income puts households with retirees, young children, the sick and disabled at the bottom. We shouldn’t be surprised that net government transfers to these groups exceed their market income. As the C.B.O. report points out, almost two-thirds of the benefits received by the bottom quintile came from Social Security and Medicare. ...
    • Second, earnings were low in the bottom quintiles largely as a result of involuntary joblessness. ... People shouldn’t be faulted for unemployment when no jobs are to be had. ...
    • Third, the C.B.O. estimates do not provide entirely accurate measures of net government transfers. They are based on calculations of the difference between total transfers (including those from state and local government), and federal, but not state and local, taxes.

Top Companies Paid 9% U.S. Tax Rate - A recent NerdWallet study found that the top ten most profitable American companies paid an average of 9% of their pre-tax earnings in taxes to the U.S. federal government last year.  These same companies reported an average tax provision of 32%. This information is available for 500 of America’s largest companies in the NerdWallet Tax Rate Transparency Tool. Tax provision is the accounting metric for amount of taxes a company owes to all taxing entities, domestic and foreign.  It includes both taxes that will be paid in the current year and taxes that have been deferred to be paid later. Because tax provision includes both domestic and foreign, current and deferred taxes, NerdWallet researched further to find how much was actually paid by these American companies to the U.S. federal government in the most recent tax year.  By dividing the current portion of federal taxes by pre-tax income, NerdWallet was able to calculate the percentage of these companies’ earnings that was paid to the U.S. government.  For the ten American companies with highest earnings in the most recent fiscal year, this number averaged 9%.

America's 10 Largest Corporations Paid 9 Percent Average Tax Rate Last Year -  America’s 10 most profitable corporations paid an average corporate income tax rate of just 9 percent in 2011, according to a study from financial site NerdWallet reported by the Huffington Post. The 10 companies include Wall Street banks like Wells Fargo and JP Morgan Chase, oil companies like ExxonMobil and Chevron, and tech companies like Apple, IBM, and Microsoft.  The two companies with the lowest tax rates were both oil companies. ExxonMobil paid $1.5 billion in taxes on $73.3 billion in earnings, a tax rate of 2 percent. Chevron’s tax rate was just 4 percent. None of the companies paid anywhere near the 35 percent top corporate tax rate, providing more evidence to debunk claims that America’s corporate tax rate is stunting economic growth and job creation (Despite the high marginal rate, American corporations pay one of the lowest effective corporate tax rates in the world).

Tax Breaks - Big Oil Makes Massive Profits whilst the Federal Budget Struggles -- Middle-class families may have gotten some relief in the second quarter of 2012 due to slightly lower gasoline prices compared to the first quarter of the year, but billions of dollars in big profits continue to pile up at the Big Oil companies. In the first half of 2012, the five biggest oil companies—BP plc, Chevron Corp., ConocoPhillips, ExxonMobil Corp., and Royal Dutch Shell Group—earned a combined $62.2 billion, or $341 million per day. This compares to an average dip in the average price of gas at the pump for American consumers of a mere 3 cents per gallon between the first and second quarters. Despite slightly lower oil and gasoline prices over the past three months, these companies still made a combined $236,000 per minute this year. This income is more than what 96 percent of American households earn in an entire year.

The opportunity cost of hoarding cash is lower than you think - Corporates have been hoarding increasing levels of cash since the start of the finanical crisis. Investors tend to frown on it, (see Apple’s cash pile) but are the alternatives really that much better? UBS has done some number crunching and found that the opportunity cost of higher cash levels is lower than you might expect, although the best way for corporates to improve return on equity is to buy back equity. Right. So, in case you need convincing about those rising cash levels… The team finds that buying back equity is the best stategy to improve RoE, but only if companies are very aggressive in drawing down on cash. If they just reduce their cash to 2005 levels, the effect is rather weak (emphasis ours).The results [of reducing cash to 2005 levels] are unimpressive… on average this would have improved the RoE since 2005 0.2ppt, and by only 0.5ppt in 2012. This is not negligible, at constant market prices it would mean a 3.3% improvement in P/E. But that is hardly a game changer. Only if companies are more aggressive in using their cash, will RoE be improved more noticeably. If they use all their cash RoE really improves, as you can see in the below chart. Unrealistic, but illustrative perhaps…

Intraday Liquidity Flows – NY Fed - Transactions denominated in U.S. dollars flow around the clock and around the globe, filling the pipelines that support commerce. On a typical day, more than $14 trillion of dollar-denominated payments is routed through the banking system. Critical to a well-functioning economy are the timing and smooth flow of dollars for large-value transactions and the infrastructure that enables that dollar flow. This financial market infrastructure provides essential economic services—“plumbing” for the economy—and is made up of a variety of entities. In this post, we describe this financial market infrastructure, providing a simple map of its main entities and describing the flow of U.S. dollar payments among these entities. A more detailed study of intraday liquidity flows has been released by the Payments Risk Committee.

Why does repo exist? - Nick Rowe -- I want to borrow $80 for one month. I have a watch worth $100. I go to the pawnbroker, hand over my watch as security, and borrow $80. I promise to repay the $80 plus interest next month, and the pawnbroker promises to give me back my watch if I do this. That's like a "repo", which is short for "sale and repurchase agreement". It is as if I had sold my watch for $80, and the pawnbroker had promised to sell it back to me, and I had promised to buy it back from him, for $80 plus agreed-on interest next month. If I borrow $80 on a watch worth $100 there's a 20% "haircut". (The difference is that in a repo I get to keep wearing the watch for the month (I get the coupons on the bond) even though the pawnbroker legally owns it.) Why don't I just sell my watch instead, then wait till next month before deciding whether to buy it back? Why do I and the Pawnbroker choose to agree in advance on what we will do next month? Why don't we just wait and see what we will want to do next month? The future is uncertain. We usually wait to get as much information as possible before deciding what to do. We might change our minds when we get new information. If we do make promises about what we will do in the future, there must be some reason that outweighs the benefits of making that decision with better information when next month arrives.

Barofsky v. Geithner and Administration Mouthpieces (Yglesias Edition) - Yves Smith - Neil Barofsky continues to take issue with the Administration’s efforts to depict itself as the friend of ordinary Americans when its real loyalties are to banks. In a Reuters op-ed, he took on the hypocrisy of the Administration and its allies in their “fire DeMarco” messaging. If you are late to this row, Ed DeMarco, head of Fannie’s and Freddie’s regulator, the FHFA, nixed the idea of having his wards make principal reductions on mortgages, despite the fact that top mortgage industry analyst Laurie Goodman has ascertained they are far more successful than mods that don’t lower principal balances.  As various commentators, including yours truly, have pointed out, the criticism of DeMarco is sheer scapegoating. DeMarco serves as a convenient bad guy for an Administration that has been utterly indifferent to the fact that many foreclosures are unnecessary and economically destructive (and that’s before you get to the fact that the Administration could have installed a permanent head for the FHFA when the Dems had 60 seats in the Senate).  Barofsky’s piece describes in some detail how Geithner stymied principal modifications, using exactly the same arguments that DeMarco is making now. The bottom line: The truth is that the administration – whether through principal reduction or otherwise – has never prioritized coming up with an effective approach to helping homeowners and reviving the housing market, even when it had a multi-hundred-billion-dollar TARP war chest at its disposal.

Neil Barofsky on ‘Foaming the Landing’ for Banks - On Making Sen$e this week we've been featuring outtakes from my interview with top TARP cop Neil Barofsky, appointed by President Bush and retained by President Obama to prevent fraud in the $700 billion Troubled Asset Relief Program. From the start, Barofsky has been acidly critical of the government's handling of bailout money. His chief complaint: that the banks were bailed out, not the victims of predatory lending. In this excerpt, Barofsky explains why he thinks it was a conscious decision.  For a response on how the TARP funds were handled we reached out to Treasury Secretary Timothy Geithner, but his office refused comment. Instead, you can see his exchange with fellow PBSer Charlie Rose on Barofsky's book, 'Bailout', here in "An Hour with Timothy Geithner."  In the last installment of our week with Barofsky we'll ask him why, if he was so impressed with Massachusetts Democrat Barney Frank as a legislator, he's so unimpressed with the legislation known as Dodd-Frank. And the oft-combative Congressman will then explain noncombatively why Barofsky has misunderstood the Wall Street Reform and Consumer Protection Act.

How Taxpayers Were Royally Screwed on the Citigroup Bailout - Pam Martens - When the U.S. taxpayer bailed out Citigroup and its two billionaire shareholders (Saudi Prince Alwaleed bin Talal and Sandy Weill, the company’s former Chairman and CEO), the public was unaware of just how financially corrupted the firm had become.  We have those perpetually  invisible hands of lawyers at the SEC and Citigroup to thank for that.  In this December 14, 2007 letter, Gary Crittenden, CFO of Citigroup at the time, responds to questions of serious financial irregularities posed by Kevin Vaughn, Branch Chief at the time of the SEC.  Pages 22 through 32 of this correspondence have been completely redacted.  They are still redacted after the U.S. taxpayer pumped $45 billion into the firm, over $300 billion in loan guarantees, and over $2 trillion in absurdly low cost loans from the Federal Reserve Bank of New York, where Sandy Weill sat on its Board of Directors from January 2001 through December 2006. On July 29, 2010, over two and one half years after Vaughn’s questions were posed, after almost $2.5 trillion had been pumped into Citigroup to prop it up, we finally learned what had been on Mr. Vaughn’s mind in December of 2007.  Citigroup had lied about its subprime mortgage loan exposure by $39 billion, not just verbally to investors, but in the financial statements it filed with the SEC. 

AIG Will Still Be Majority Owned by Tax Payers - Some quick back-of-the-envelope math shows the just-announced $4.5 billion offering of AIG shares by the U.S. Treasury is extremely unlikely to push the government’s stake in the once-troubled insurer below 50%. Assuming AIG buys $3 billion of its own stock, full participation in the sale by the underwriters and a lowest possible offering price of $29/share, Treasury would still own roughly 54%. But the price could be higher, since the last offering in May priced at $30.50 and the shares were trading at $31.17 recently, up 1.1%. A higher price would leave the government with a greater percentage of the company. As WSJ reported earlier this week, AIG is hoping to get  Treasury’s stake below the 50% threshold, which it would view as a significant success by management. But dropping below that level could create additional headaches, as at that point the Federal Reserve would start regulating AIG.

Trading venues ready for CDS turf war - The battle for supremacy among credit derivatives trading venues is ramping up, as platforms and dealers alike prepare for the most dramatic regulatory shake-up of market structure in the history of over-the-counter derivatives. Swaps that are cleared through central counterparties will be required to be traded on exchanges or electronic trading venues – often called swap execution facilities, or SEFs, in US regulatory parlance. The G20 had intended regulation to be in place before the end of 2012, but delays in penning the rules mean that they are likely to take effect some time in the first half of 2013. The electronic execution mandate is set to transform the credit default swap landscape. Smaller ticket sizes will most likely lead to thinner margins for banks, analysts note, although many believe that a boost in overall volumes could compensate for this shortfall. It also presents a quandary for a host of market participants, from inter-dealer brokers to electronic trading platforms, which will have to adapt to survive in the new regulatory world.

In the Financial World, a Less Scrupulous Class of Lawbreaker - This is the American headquarters for HSBC.  It’s a splendidly large bank, with $2.5 trillion in global assets, 300,000 employees and a 2011 profit of about $22 billion. It is one of our city’s prominent corporate citizens, contributing to museums and charitable groups. It also let Mexican drug cartels launder money on a grand scale, according to a Senate report, and it evaded laws intended to stop banks from doing business with Iran and North Korea. Perhaps most astonishing, the report said it had conducted business for many years with Al Rajhi, a bank in Saudi Arabia whose founder was an Al Qaeda benefactor. All of this is detailed in the report, 335 pages long, issued a few weeks ago by Senator Carl Levin. It reads like a racketeering indictment of the Genovese crime family, replete with evidence that senior officials knew the contours of the game.  “This is a global bank that failed to comply with rules aimed at combating terrorism, drug trafficking and the money laundering that fuels so much of what threatens the global community,” Mr. Levin said.

Standard Chartered Faces N.Y. Suspension Over Iran Deals - Standard Chartered Plc conducted $250 billion of transactions with Iranian banks over seven years in violation of federal money laundering laws, a New York regulator said in an order warning that the firm’s U.S. unit may be suspended from doing business in the state. Standard Chartered earned hundreds of millions of dollars in fees for handling transactions on behalf of Iranian institutions that are subject to U.S. economic sanctions, New York’s Department of Financial Services said yesterday. The London-based bank, which generates almost 90 percent of its profit and revenue in Asia, Africa and the Middle East, was ordered by the regulator to hire an independent, on-site monitor to oversee operations in the state. When the head of the bank’s U.S. unit warned his superiors in London in 2006 that Standard Chartered’s actions could expose it to “catastrophic reputational damage,” he received a reply referring to U.S. employees with an obscenity, according to the order. “Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?” a bank superior in London said, according to the New York regulatory order. 

Standard Chartered Bank accused of scheming with Iran to hide transactions -- Standard Chartered bank ran a rogue unit that schemed with Iran's government to hide more than $250bn (£160bn) in illegal transactions for nearly a decade, according to a scathing report by New York regulators that may put intense pressure on the management of the UK-based bank. According to the report filed by the New York state department of financial services (NYSDFS), when warned by a US colleague about dealings with Iran, a Standard Chartered executive caustically replied: "You f---ing Americans. Who are you to tell us, the rest of the world, that we're not going to deal with Iranians."  About 60,000 transactions were involved between 2001 and 2007 and the bank faces losing its ability to trade in the US if the allegations are proven.  The regulator has demanded a meeting with the bank on 15 August and just hours before trading began in its shares in Hong Kong this morning the bank insisted it "strongly rejects the position or the portrayal of facts as set out".

Standard Chartered Iran Suspension - Standard Chartered could be suspended from operating in New York after state finance regulators found hundreds of billions of dollars worth of transactions with Iran. The New York Department of Financial Services says the bank hid more than 60,000 transactions from regulators, totaling more than $250 billion over ten years. "For nearly a decade, SCB programmatically engaged in deceptive and fraudulent misconduct," regulators said in a statement. "These institutions included no less than the Central Bank of Iran/Markazi (“CBI/Markazi”), as well as Bank Saderat and Bank Melli, both of which are also Iranian State-owned institutions." The New York Department of Financial Services will require Standard Chartered to appear before it and explain the violations. New York regulators also allege that Deloitte & Touche aided the company in its actions. "SCB carefully planned its deception and was apparently aided by its consultant Deloitte & Touche which intentionally omitted critical information in its “independent report” to regulators," the Department of Financial Services said.

Neil Barofsky comments on Standard Chartered and Benjamin Lawsky - Since the New York State Department of Financial Services (NYDFS) filed a complaint against UK bank Standard Chartered, the Federal Reserve and the Treasury have been making a huge stink to the media about the one year-old NYDFS stepping out of line. The bank stands accused of illegally transferring hundreds of billions of dollars of Iranian money. Apparently, multiple agencies had been working on the case for years. Now back to why they're angry. According to CNBC's Steve Leisman, the Feds are even saying that the head of the NYDFS, Benjamin Lawsky, hijacked the investigation and may have over-stated the case, which could lead to a lower fine for Standard Chartered. They were also given little notice that the case was being filed. It all sounds very complicated, so having never been a regulator ourselves, Business Insider reached out to Neil Barofsky, former Special Inspector General of TARP. We figured he could explain why The Feds would be upset about someone from outside D.C. filing a case like this. Here's what he said: "They'd rather trash a potentially legitimate case than admit that they were asleep at the switch, especially now after the recent revelations about their failures with LIBOR and HSBC."

Counterparties: “You f—ing Americans. Who are you to tell us that we’re not going to deal with Iranians.” -- Just over a month ago, Standard Chartered’s CEO urged bankers to regain their “social legitimacy” and asserted that “good banking is never needed more than now”. That message was in line with the bank’s image as “boring but good“, as one FT headline put it. Standard Chartered now stands accused of helping Iranian banks – including the central bank – circumvent US sanctions by concealing roughly 60,000 transactions involving at least $250 billion from US regulators, and having reaped “hundreds of millions of dollars in fees” for itself over a decade. The whole damning complaint is here, and Business Insider pulled the choicest bits here. In this section, a StanChart Group Executive Director provides a great example of banker braggadocio, now destined to rank among the industry’s all-time PR lows: In short, SCB [Standard Chartered Bank] operated as a rogue institution. By 2006, even the New York branch was acutely concerned about the bank’s Iran dollar-clearing program. In October 2006, SCB’s CEO for the Americas sent a panicked message to the Group Executive Director in London. “Firstly,” he wrote, “we believe [the Iranian business] needs urgent reviewing at the Group level to evaluate if its returns and strategic benefits are … still commensurate with the potential to cause very serious or even catastrophic reputational damage to the Group.” Lest there be any doubt, SCB’s obvious contempt for U.S. banking regulations was succinctly and unambiguously communicated by SCB’s Group Executive Director in response. As quoted by an SCB New York branch officer, the Group Director caustically replied: “You f—ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians.”

Where Are the Feds? NY Banking Superintendent: Standard Chartered a “Rogue Institution,” Made $250 Billion of Illegal Transfers With Iran - The New York Superintendent of Financial Services dropped a bombshell today, filing an order against Britain’s Standard Chartered Bank. It charges the bank with having engaged in at least $250 billion of illegal transactions with Iranian banks, including its central bank, from 2001 to 2010, and of engaging in similar schemes with Libya, Myanmar and Sudan (those investigations are in progress). It threatens SCB with the loss of its New York banking license and termination of access to dollar clearing services. The latter alone is as huge deal. You are not a real international bank unless you have dollar clearing.  SCB squealed like a stuck pig, claiming that only $14 million of transactions were out of compliance. But the bank has nowhere to go. The NY Superintendent, Benjamin Lawsky, has made his determination. The only thing open for discussion is what sort of punishment he is going to impose. The bank must …submit to and pay for an independent, on-premises monitor of the Department’s selection to ensure compliance with rules governing the international transfer of funds. SCB is also up for a license revocation hearing and needs to “demonstrate” why it should not be suspended from clearing dollar transactions in the interim. Having poised a sword of Damocles over the bank’s head, I would expect Lawsky to demand a lot to make this go away, ideally including some executives’ heads as proof the bank was turning over a new leaf (the filing notes that any money damages are to be determined). The flip side is Lawsky may come under pressure precisely because he has shown up the Treasury, Fed, and DoJ. This is a Spitzer-level move from an unexpected source.

Fed and Treasury Irate at NY Bank Regulator's Vulgar Display of Public Diligence with Standard Chartered - The NY Banking regulators clearly do not understand the regulatory 'hands off' philosophy of Treasury and the Fed towards the pampered princes of finance and the privileged few. This was supposed to have been privately settled amongst gentlemen with a gentle wristslap and a thorough coverup. And of course this exposes the Federal government and their financerati as utter hypocrites, especially when they are stoking the fires of conflict. Only the little people are meant to suffer for their country. For the favored few, everything is just another law-bending, money making opportunity. Some of the wording in this is priceless, especially considering the extent of what the Bank had done and with whom. I won't be holding my breath for the US regulators to clean up their own manipulated markets and privileged insiders. It might muss someone's ruffled sleeves and Presidential cufflinks. Liberty and justice -- for some.

NYS Order on Standard Chartered’s Iran Transfers Opens Up US, UK Regulatory Pig Fight -- I hope Benjamin Lawsky, the New York Superintendent of Financial Services, has balls of steel. He will need them. In case you missed it, a major news story yesterday is the bombshell that Lawsky dropped on the British bank, Standard Chartered, in the form of an order (a regulatory determination) that set out in considerable detail how the bank, with deep involvement of senior in house counsel and compliance staff, had doctored (“repaired”) wire transfers so as to disguise the fact that the customers were major Iranian banks, including its central bank. Both SCB’s outside US counsel (in 2003) and the head of the US operations (in 2006) raised big red flags that the way the banks was operating was out of line with the regs. The US chief was begging to exit the Iran business. From the order:  Firstly,” he wrote, “we believe [the Iranian business] needs urgent reviewing at the Group level to evaluate if its returns and strategic benefits are . . . still commensurate with the potential to cause very serious or even catastrophic reputational damage to the Group.” His plea to the home office continued: “[s]econdly, there is equally importantly potential of risk of subjecting management in US and London (e.g. you and I) and elsewhere to personal reputational damages and/or serious criminal liability. Yet these concerns were ignored. The order states that over $250 billion was transferred impermissibly from 2001 to 2010 on behalf of Iranian clients, and it is also looking into similar transfers with Libya, Sudan, and Myanmar.

Reuters Runs Interference for Elite Corruption, Scrubs Article That Shows How Banks Get Out of Jail Free  - Yves Smith - Marcy Wheeler put up a useful post yesterday morning, based on a Reuters article describing the efforts of Standard Chartered to combat the damage done by its making illegal transfers on behalf of Iranian banks.  Marcy picked up on how the article revealed the techniques used by big banks to escape suffering meaningful consequences of their misdeeds:Reuters lays out the steps that SCB took that normally should be enough to minimize any consequences for violating Iran sanctions. First, you hire Sullivan and Cromwell and act contrite. Then, you pay a consultant to conduct a review and claim the violations involved just $14 billion million in transactions as opposed to $250 billion shown in your bank records. Then you bury all the embarrassing details showing willful flouting of the rules, so the proles don’t learn how craven banks really are.I suspect, for the reasons laid out here, that OFAC will still find a way to give SCB a nice cushy settlement. But Lawsky has revealed what really goes on behind these settlements: the coziness, the misrepresentations, the complicity in hiding the true face of banking. Now I decided to go have a look myself. Being on the vampire shift, I didn’t go looking until mid afternoon. And guess what, the story that was now at that URL was not the same story. Yes, there was a story on Standard Chartered. But the version that Marcy worked from was apparently the original, released at 00:28 AM, titled “U.S. regulators irate at NY action against StanChart.” I’ve loaded that version in a Word and put it up at ScribD, and am embedding it below. It’s 1766 words. Be sure to download it if you are interested in this topic.

Standard Chartered Makes Empty Threat to Sue New York Regulator Over Iran Money Laundering - Yves Smith - I have to confess I’m really enjoying the dust up between the New York Superintendent of Financial Services, Benjamin Lawsky, and his opponents, namely, his target, Standard Chartered, and the flummoxed Federal regulators that he is showing up as so deeply captured that they genuinely can’t tell regulatory theater from the real thing. The amount of consternation directed at Lawsky is telling. It’s as if he brought a heavily tattooed and body pierced trannie to a country club. He’s flouted the rules in a way that offends his detractors deeply, and yet he also can’t be brought to heel. The complaints in the media are a sign of powerlessness. As long as Lawsky has Governor Cuomo’s backing, the Feds and the unhappy Brits can’t get at him. The lead story in the Financial Times on SCB is so obviously barmy that I’m astonished that the pink paper would give it prominent play. The headline: StanChart seeks advice over countersuit. Even floating this as an course of action reeks either of desperation to create positive news hooks or delusion: The bank’s legal advisers believe “there is a case” for claiming reputational damage, according to two people close to the situation, although StanChart is conscious of the delicacy of taking an aggressive stance towards its regulators.  The whole “delicacy” part is code for this having odds of close to zero of happening, so this looks like yet more spin.

Osborne lobbies Geithner on StanChart - George Osborne has spoken to Tim Geithner, the US Treasury secretary, three times in the space of two days over the New York regulatory probe into Standard Chartered in a sign of the British government’s mounting concern.The chancellor spoke to Mr Geithner on Tuesday, Wednesday and then again on Wednesday night amid worries about the potential damage the investigation could do to the reputation of the City of London. One government source said that the coalition had been undertaking “quiet diplomacy” rather than “megaphone diplomacy” but that this did not mean there were not genuine concerns from Mr Osborne and other ministers. "The Treasury thinks that rules should not be broken but we were concerned about the way the allegations came out of the blue,” he said. “It is important that we receive fair treatment for British businesses.”

Federal Regulators Trying to Leash and Collar Standard Chartered’s Nemesis, Benjamin Lawsky - The plot thickens! Today, the Wall Street Journal reported that, “Regulators Seek Unity in U.K. Bank Talks.” If you read the article, a more accurate headline would be “Federal regulators desperate to get in front of Lawsky mob and call it a parade.” All the article says is the mucho unhappy and very much outflanked Federal regulators have gotten a meeting with Lawsky. Just look at the disconnect between the PR in the first paragraph and the actual state of play in the second:U.S. authorities are forming a group with New York’s top financial regulator to negotiate a settlement with Standard Chartered over allegations it illegally hid financial dealings with Iran.The U.S. Treasury Department, Federal Reserve, U.S. Department of Justice and Manhattan district attorney’s office are scrambling to reach an understanding with the New York State Department of Financial Services over the ground rules for negotiations with the U.K.’s fifth-largest bank by assets, according to people familiar with the talks. This is hysterical. “Ground rules for negotiations”? Lawsky does not need the permission of Geithner et. al. to negotiate with Standard Chartered. As long as Lawsky has Cuomo’s backing, he has all the leverage here. And three independent sources told me as of today that Cuomo was fully behind Lawsky. That means he is likely to remain free to operate as he sees fit. It’s a given that if the White House had any real sway over Cuomo and saw fit to intervene, they would have done so by now. There is no downside to Lawsky in going through the motions of seeing if there is a way for him to proceed and have the Feds save a bit of face.

Outsourcing Has Its Benefits - Money Landering, Stock Market Crashes and Failed Projects - Ah, we all know the claim offshore outsourcing is good for America. Seems offshore outsourcing is great for drug dealers and money launders too. Did you know offshore outsourcing enabled money laundering, flash crashes and failed projects?  The latest banking scandal of Standard Chartered laundering Iranian money is all over the news. But did you know Standard Chartered Bank offshore outsourced to India their entire compliance operations?The DFS probe found that SCB had assured the New York state in May 2010 that it would take immediate steps to comply with the US Office of Foreign Assets Control (OFAC) sanctions. However, another regulatory examination in 2011 found continuing and significant Anti Money Laundering failures. Among these, the bank was outsourcing its "entire OFAC compliance process for the New York branch to Chennai, India, with no evidence of any oversight or communication between the Chennai and the New York offices."

JPM Refuses To Comply With Broad PFG Subpoena - Last week we wrote that we were not surprised to learn that the first party of interest in the PFG bankruptcy was "none other than JPMorgan, which together with various other banks, will be the target of a subpoena by the PFG trustee." We added "How shocking will it be to find that Dimon's company is once again implicated in this particular episode of monetary vaporization." It appears that we were not the only ones shocked to learn that Jamie Dimon's firm could make a repeat appearance again when it comes to missing client money: JPM itself seems to not have expected this development. The result, as just reported by Reuters: "JPMorgan Chase & Co on Monday sought to limit the power the bankruptcy trustee for Peregrine Financial Group has to subpoena information from financial institutions that did business with the failed brokerage." Why, whatever may JPMorgan be hiding, and whyever is it taking preemptive steps from preventing such information from leaking into the public domain: because it is too "burdensome" - it is only logical that Jamie can not dedicate one person of his 261,453 employees to this modest matter. No fear though: even if it is found that just like in the MF Global bankruptcy JPM may have overreached just a tad when it comes to money that doesn't belong to it, the CFTC can just say that as a result of an extensive 4 year investigation, JPM was found to have done nothing wrong, and if the public can please already disperse.

JPMorgan revises down capital levels - JPMorgan has been forced by regulators to shave 50 basis points off its reported capital levels and has sustained four weeks worth of trading losses in the second quarter, following the $5bn trading loss reported by the bank earlier this year. The bank said on Thursday in a special regulatory filing that the Federal Reserve Bank of New York and the Office of the Comptroller had on Wednesday “determined” that the bank should amend its reported regulatory capital ratios. The regulatory directive will add to the long list of headaches stemming from the $5bn trading loss incurred by the bank’s chief investment office earlier this year. JPMorgan started an internal investigation into the trade which suggested that marks on the CIO’s so-called “synthetic credit portfolio” could be inflated, leading to the restatement of first-quarter results and a $500m drop in first-quarter net profit. Wednesday’s “determination relates to an adjustment to the firm’s regulatory capital ratios to reflect regulatory guidance regarding a limited number of market risk models used for certain positions held by the firm during the first quarter, including the CIO synthetic credit portfolio”, JPMorgan said in the amended filing.

Chase CEO: Placing blame hurts economy -- Look no further than the mirror if you want to know why the economy remains so sluggish, says the CEO of the JPMorgan Chase & Co. “It’s because of us. We scapegoat each other. We point fingers,” Jamie Dimon said yesterday while visiting with customers of the bank’s Kingsdale office. “I actually think the underlying economy is not bad,”  Consumers and small and large businesses have healthier balance sheets than before the recession, he said. “I can’t prove it in real time,” Dimon said of his thesis. But Dimon pointed to last summer’s debate in Washington over raising the debt ceiling and critical comments made of banks and other businesses as examples of how such episodes sap the confidence of consumers and businesses to invest and expand. “We’ve done it to ourselves,” he said. “I just hope something breaks the back of this political environment.”

DOJ Will Not Prosecute Goldman Sachs in Financial Crisis Probe - The Justice Department has decided it will not prosecute Goldman Sachs or its employees for their role in the financial crisis, following an investigation by senators Carl Levin (D-MI) and Tom Coburn (R-OK). The congressional investigation found problems with the credit rating agencies and poor oversight from regulators, and highlighted abuses by Goldman Sachs and other large investment banks. Senator Levin sent a formal referral to the Justice Department for a criminal investigation in April 2011. The investigative report by the Senate's Permanent Subcommittee on Investigations, chaired by Levin, found that Goldman Sachs "used net short positions to benefit from the downturn in the mortgage market, and designed, marketed, and sold CDOs in ways that created conflicts of interest with the firm's clients and at times led to the bank's profiting from the same products that caused substantial losses for its clients."

Levin hits back on lack of Goldman charges -- Carl Levin, the US senator who led an inquiry into the actions of Wall Street banks in the financial crisis, has hit back against the US Department of Justice’s decision not to prosecute Goldman Sachs for its role in subprime deals. Mr Levin had requested that the department investigate Goldman after his Senate subcommittee found the bank misled investors in a number of complex subprime mortgage-backed deals it sold before the crisis. But the justice department issued an unusual statement late Thursday saying it did not plan to press any criminal charges against Goldman, or its employees.  “Whether the decision by the Department of Justice is the product of weak laws or weak enforcement, Goldman Sachs’ actions were deceptive and immoral,” Mr Levin said on Friday. Goldman’s “actions did immense harm to its clients and helped create the financial crisis that nearly plunged us into a second Great Depression.”

Obama Administration Needs to Tap, Not Stiff-Arm, Wall Street Whistleblowers - Testifying recently before a Senate panel, the U.S. Treasury Secretary Timothy Geithner hailed progress in "repairing and reforming" the financial sector since the passage of the Wall Street reform act two years ago. Geithner's sunny take sits awkwardly with the recent news that large international banks conspired to "fix" the LIBOR, the interbank loan rate, and that a leading American bank, J.P. Morgan Chase, lost almost $6 billion of dollars on botched trades – revelations that, as former Sen. Chris Dodd (of Dodd-Frank fame) wrote last month, "makes the strongest case ... for strong oversight of Wall Street." But why, four years after large banks brought our economy to the brink of disaster, are we still reading about fraud, deceit, and reckless gambling by leading banks? The answer is partly that Wall Street has done everything in its considerable power to shred financial reform. But another big reason is that the Department of Justice has failed, inexplicably, to tap into the intelligence that financial whistleblowers like myself have tried to offer them.

Studies Show CEOs Not Subject to Same Rule of Law as You - Recent academic papers begin the formal work of proving that CEOs and giant corporations face a completely different legal system than the rest of us, one in which their vast resources are used to insure that they can safely ignore laws and rules applicable to small fry. One study looked at the influence of corporate lobbying on fraud detection. Corporate Lobbying And Fraud Detection, 46 Journal of Financial and Quantitative Analysis 1865 by Frank Yu of Barclays Global Investors and Xiaoyun Yu of Indiana University available here. From the abstract:  We find that firms’ lobbying activities make a significant difference in fraud detection: compared to non-lobbying firms, firms that lobby on average have a significantly lower hazard rate of being detected for fraud, evade fraud detection 117 days longer, and are 38% less likely to be detected by regulators. In addition, fraudulent firms on average spend 77% more on lobbying than non-fraudulent firms, and spend 29% more on lobbying during their fraudulent periods than during non-fraudulent periods. The delay in detection leads to a greater distortion in resource allocation during fraudulent periods. It also allows managers to sell more of their shares.

Are Handcuffs Needed for the Libor Scandal to Register With Bank Perps?  - (video) While many citizens favor criminal prosecutions of bankers (I recently had a BSchool classmate of Jamie Dimon ask me when he was going to jail), it’s been remarkable how little mention of it there has been in the mainstream media in connection with the Libor scandal (yes, sports fans, price fixing is criminal per the Sherman Anti-Trust Act). This interview of Dennis Kelleher and Felix Salmon by Eliot Spitzer provides a badly-needed counterpoint.

Banks in Libor Inquiry Are Said to Be Trying to Spread Blame - Major banks, which often band together when facing government scrutiny, are now turning on one another as an international investigation into the manipulation of interest rates gains momentum. With billions of dollars and their reputations on the line, financial institutions have been spreading the blame in recent meetings with authorities, according to government and bank officials with knowledge of the matter. While acknowledging their own wrongdoing, institutions are pointing out actions at other banks that they believe are worse — and in some cases, extend to top executives. One official involved in the case said that banks are emphasizing that “we’re not as bad as the next guy.”

Which LIBOR Scandal? - In his recent commentary on the LIBOR scandal, Jan Kregel elaborates on a distinction that is crucial to understanding this story.  The scandal centers around revelations that financial institutions had been manipulating their LIBOR rate submissions to the British Bankers’ Association (BBA).  Questions have subsequently been raised as to whether regulators were aware of and condoned, or actively encouraged, these manipulations.  But as Kregel explains, there were two very different types of manipulation that were going on, and the distinction between the two is acutely relevant to evaluating attempts to pin a major share of the blame for this scandal on regulators and central bank officials. Prior to the most recent financial crisis, LIBOR was rigged by banks in an attempt to benefit their trading positions (the banks had made bets whose payoffs depended in part on what was happening to LIBOR).  The investigative reports from the Financial Services Authority in the UK and the Commodity Futures Trading Commission and Department of Justice in the US point to evidence of such manipulation as far back as 2005. But during the heart of the financial crisis there was a different type of misreporting going on, this time driven by the collapse of interbank lending.  While regulators appeared to have been aware of the latter misreporting, the evidence does not suggest they were aware of the former, more nakedly venal, pre-crisis manipulation. 

Libor, Naked and Exposed - AMERICANS who save for the future, use credit cards or borrow money for tuition, cars and homes deserve assurance that the interest rates on their savings and loans are set in a reliable and honest way.  That’s why the revelation that the British bank Barclays attempted to manipulate the London interbank offered rate, or Libor — one of the benchmark rates used to determine the cost of borrowing around the world — is so disturbing. But the Barclays case isn’t only about misconduct by large financial institutions. It also raises questions about the reliability and accuracy of these key interest rates, which are largely determined by the private sector, without significant government oversight.  When you save money in a money market fund or short-term bond fund, or take out a mortgage or a small-business loan, the rate you receive or pay is often based, directly or indirectly, on Libor. It’s the reference rate for nearly half of adjustable-rate mortgages in the United States; for about 70 percent of the American futures market; and for a majority of the American swaps market, where businesses hedge risks from changes in interest rates.  Libor is supposed to be the average rate at which the largest banks honestly believe they can borrow from one another unsecured (that is, without posting collateral). Banks have shifted toward secured borrowing and, on occasion, borrowing from central banks like the Federal Reserve and the European Central Bank. As Mervyn King, the governor of the Bank of England, said of Libor in 2008: “It is, in many ways, the rate at which banks do not lend to each other.” These changes in the markets raise questions about the integrity of this important benchmark.

Former UBS Traders Offered Deal in Libor Investigation - Several former traders at UBS have been offered a deal by federal prosecutors in the unfolding Libor scandal, which if we had a criminal justice apparatus dedicated to accountability would be a moment of hope for the potential of going up the chain and indicting those who authorized the rate-rigging. Under the deal, the US would waive the traders from criminal charges in exchange for their cooperation in the investigation. The leniency deal was offered to former traders and other employees who had relatively junior-level jobs at the Swiss bank, the person said.No more than a few of the UBS employees under investigation for alleged interest-rate manipulation still work there, and the company has fired or suspended about 20 traders and managers as a result of the four-year inquiry, another person familiar with the investigation said. A Justice Department spokeswoman declined to comment. UBS already has a leniency deal in place for the company with respect to the antitrust division of the Justice Department, which is tasked with investigating collusion on rate-rigging (which has been alleged by the Barclays employee, when he said his bank wasn’t submitting an honest Libor mainly to keep up with the Joneses). Barclays and Deutsche Bank made similar leniency deals. The fraud section is supposed to be investigating individual criminal activities inside the firms, and that’s where this leniency deal springs from.

Who Else Wants to Break Up the Big Banks -  American Banker slideshow

Dubious Study Defends SEC Revolving Door -- Yves Smith -- The New York Times tells us a new study is being presented today at the American Accounting Association which defends the revolving door. I’m at a disadvantage at not having access to the actual report, but a summary at Accounting Today provides a bit more detail about the study methodology. This is the Times’ recap: The revolving door has long been the focus of government watchdogs here, a symbolic portal that business executives and lawyers pass through on their way to government posts and back again to the private sector. There, the thinking goes, they use their influence with former colleagues to reap benefits for themselves and their companies… Now, a group of accounting professors has produced a study showing that the revolving door actually toughens enforcement results at the Securities and Exchange Commission — the opposite of what government critics have long maintained. Yves here. Given that the SEC only hands out parking tickets pursues insider trading with any vigor, the idea that you can use any variant of the word “tough” in connection with SEC enforcement is a stretch.

Muni Issuers Could Use More S.E.C. Protection — YOU’VE got the power. Why not use it? That’s a question for the Securities and Exchange Commission when it comes to the murky market for municipal bonds. Munis might strike many people as dull. But this market is huge — and hugely important. Munis, after all, are how government is financed at the state and local level, where life actually gets lived. So calls for greater oversight are welcome, particularly given how Wall Street has hornswoggled some muni issuers over the years. In a report last week, the S.E.C. essentially asked for more power over this market, and called for greater disclosure by issuers — that is, the states, cities, towns and authorities that sell new munis. But the commission said it couldn’t act without Congress’s help. In light of the report, it’s worth looking at what the S.E.C. has been up to in the municipal bond market. While the commission has been active in protecting investors from some deceptive practices, it has been less inclined to take action on behalf of issuers against financial firms that underwrite these bonds. This, despite the fact that the commission has wide leeway to do just that under fair-dealing rules that have governed the muni market for decades.

More on the Incompetence and Venality of the SEC - Yves Smith -- In case you needed more proof of the utter incompetence of the SEC, two new items emerged late last week. First was more detail on the mindset of the jurors who found Citigroup CDO salesman Brian Stoker innocent in the SEC’s case against him on misrepresenting the bank’s role and interests in selling a CDO squared it had set up to fail and making $160 million by betting against it. Per the juror’s foreman, as recounted by the New York Times: “I wanted to know why the bank’s C.E.O. wasn’t on trial,” said Mr. Brendler, who served as the jury’s foreman. “Citigroup’s behavior was appalling.” Guess what? That is proof that the SEC muffed the case. The jury got the hard part, the complicated fact set, that the bank had arranged big time to profit from a dodgy deal and hid its role, and the fact that it had hired a supposedly independent but actually complicit investment manager, from investors.  But the SEC failed to attack the Stoker defense, when it was easy to anticipate (and on top of that, Stoker’s counsel telegraphed its argument in the media), that Stoker was just a poor dumb orders-following foot soldier. Sorry, the fact that the car driver at a bank robbery wasn’t the mastermind does not make him any less an accessory to the crime.

Oil Companies Failing To Adequately Disclose Drilling Risks To SEC And Investors -- As the drive for oil forces companies into increasingly risky environments, major oil companies are failing to disclose the risks associated with their endeavors, according to a group representing global investors. A new report released by Ceres found that ten of the world’s largest publicly-owned oil and gas companies failed to fully report risks associated with deep water drilling and climate change to the SEC or their investors. Of the ten companies, eight “provided minimal or no information about safety or environmental statistics,” or “investments in safety related R&D.”  In fact, ExxonMobil received ratings of poor or no disclosure on 8 of 10 categories, only receiving a “Fair Disclosure” evaluation for corporate governance. Such poor disclosure practices should concern investors and the public as oil companies race to tap wells thousands of miles beneath the sea in the Gulf of Mexico and in the ice-covered Arctic Ocean.

Pharma giant Pfizer fined for bribing officials in Eastern Europe and China - The US charged Pfizer and its subsidiary Wyeth on Tuesday with paying millions of dollars in bribes to build their business in Eastern Europe and China, and set hefty fines on the two to settle the charges. The Department of Justice and the Securities and Exchange Commission both said Pfizer subsidiaries paid off officials, doctors and healthcare professionals in Bulgaria, China, Croatia, Czech Republic, Italy, Kazakhstan, Russia, and Serbia during 2001-2007 in violation of the US Foreign Corrupt Practices Act. Employees of subsidiaries made the payoffs to secure approval and registration of Pfizer and Wyeth products, and obtain sales contracts for them, according to court filings and statements from the department and SEC. “Pfizer subsidiaries in several countries had bribery so entwined in their sales culture that they offered points and bonus programs to improperly reward foreign officials who proved to be their best customers,” But the Justice Department and SEC said Pfizer officials had not been aware of the payments, and were strongly cooperative with investigators, mitigating the need for criminal prosecution and heavy penalties.

Record Penalties for Fraud, Few Charges for Executives - Pharmaceutical companies, military contractors, banks and other corporations are on track to pay as much as $8 billion this year to resolve charges of defrauding the government, analysts say — a record sum and more than twice the amount assessed last year by the Justice Department.  The surge in penalties is because of a number of factors, including the resolution of longstanding actions against drug makers and military contractors, as well as lawsuits brought against mortgage lenders after the financial crisis. But it also reflects a renewed emphasis on corporate fraud, as the Justice Department devotes more resources to the issue and demands higher penalties from companies. The ballooning settlements are for civil charges of fraud against the government, criminal charges often related to the same conduct and, in the case of health care companies, recovery of money for states for Medicaid fraud. But while the collections are a boon to the government and taxpayers, they are resurrecting questions about the relative lack of charges against executives at the companies that are getting the stiffest penalties. “A lot of people on the street, they’re wondering how a company can commit serious violations of securities laws and yet no individuals seem to be involved and no individual responsibility was assessed,”

U.S. Banks Eased Lending Standards in Second Quarter -- U.S. banks eased their lending standards for loans to large- and medium-sized businesses along with auto loans and credit cards on strong demand in the second quarter, but remained wary of the home-loan market, the Federal Reserve said Monday. The Fed’s quarterly survey of senior loan officers at American banks and foreign ones with U.S. operations showed overall credit standards were looser in the second three months of the year compared with the first quarter. The report provided a bit of positive news for the U.S. economy, which has been expanding slowly this year.

Fed: Some domestic banks "eased lending standards", seeing "stronger demand - From the Federal Reserve: The July 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices In the July survey, modest fractions of domestic banks, on balance, continued to report having eased their lending standards across most loan types over the past three months. Relatively large fractions reported stronger demand for many types of loans over that period. ...Regarding loans to households, reported changes in standards were mixed across loan categories, while demand increased somewhat. Lending standards over the past three months were little changed, on net, for prime mortgages and tightened somewhat for nontraditional mortgages. However, a relatively large fraction of respondents reported having experienced stronger demand for prime mortgages over the same time period.Here are some charts from the Fed. This graph shows the change in demand for CRE (commercial real estate) loans.  Increasing demand and some easing in standards suggests some increase in CRE activity. The second graph shows the change in demand for mortgages. Note the break in the graph - in recent years, the Fed has asked about demand for different types of mortgages.

A Bipartisan Proposal for More Equity in Big Banks - Simon Johnson - It’s time for a new approach to bank capital. A proposal by two United States senators is not a panacea, but it would have a significant effect on big banks and how they operate. Earlier this week, Standard Chartered, a large global bank (about $600 billion in total assets) based in Britain was accused of breaking American law in its dealings with Iran and other countries under financial sanctions imposed by the United States. It’s precisely the prospect of unlimited and typically unconditional support from central banks that encourages moral hazard — meaning that bank management is not sufficiently careful. If we increase the government backing and implicit subsidies for megabanks, will they take bigger or smaller reckless risks? What would you do? A much better approach would be to force large financial institutions to increase their equity funding relative to how much they borrow. When the business is riskier and when its failure would have more dire consequences for the economy, we want any potential bankruptcy to become much less likely.

With Rates Low, Banks Increase Mortgage Profit - Interest rates on mortgages and refinancing are at record lows, giving borrowers plenty to celebrate. But the bigger winners are the banks making the loans. Banks are making unusually large gains on mortgages because they are taking profits far higher than the historical norm, analysts say. That 3.55 percent rate for a 30-year mortgage could be closer to 3.05 percent if banks were satisfied with the profit margins of just a few years ago. The lower rate would save a borrower about $30,000 in interest payments over the life of a $300,000 mortgage. “The banks may say, ‘We are offering you record low interest rates, so you should be as happy as a clam,’ ” . “But borrowers could be getting them cheaper.”Mortgage bankers acknowledge that they are realizing big gains right now from home loans. But they say they cannot afford to cut rates even more because of the higher expenses resulting from stiffer regulations.

Banks Making Large Profits off Artificial Increases in Mortgage Rate Offers - Mortgage delinquencies increased in the second quarter of 2012, after a small but steady drop in previous quarters. Meanwhile loans in the foreclosure process are down, and foreclosure filings are similarly situated, due to the still-stuck foreclosure machinery in judicial states and non-judicial states with laws criminalizing certain illegal foreclosure practices, like Nevada (when California’s Homeowner Bill of Rights comes online in January, you’ll see a similar stopping of the foreclosure machinery). The rise of short sales as a way to avoid foreclosure can also account for the drop in foreclosure filings.  In addition, we’re coming off an incredibly low bottom, so we’ll see a lot more suffering before it gets better. And also, we have no idea what we’re really looking at when we talk about housing, since the data is so incomplete. But even if the data were all pointing in the positive direction, and we were in the midst of a full housing recovery, we’d still have to look at the reasons why. Ultra-low mortgage rates and shortages of housing for sale, in part because of sales to investors and in part because of banks keeping REO off the market, are likely culprits. And this has allowed banks to take advantage of the artificial market created, and increase their profits, as they always manage to do.

Unofficial Problem Bank list declines to 899 Institutions -  This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Aug 3, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  Quiet week for the Unofficial Problem Bank List with the only change being the removal of the failed Waukegan Savings Bank, Waukegan, IL ($89 million). After removal, the list stand at 899 institutions with assets of $349.4 billion. The list has not been less than 900 institutions since November 12, 2010. A year ago, the list had 988 institutions with assets of $411.7 billion. Next week will likely be as quiet.

Debauched RMBS - Overnight Marc Joffe sent a paper entitled Why Did the US Market for Mortgage Backed Securities Unravel?  Dr. Romero explains the Financial Crisis as an instance of Gresham’s Law: ”Bad money drives out good if [the] exchange rate is set by law [Wikipedia quote].” He argues that ratings on RMBS had the force of law under the oligopolistic U.S. credit rating system. “These assets [RMBS] were not the result of a flawed design; they were rather debauched by government fiat.” We don’t disagree. However, the mechanism of debauchment was a failure in the design of structured ratings. The problem of lagging ratings was abysmal in RMBS; it was positively debauched in RMBS CDOs. If you understand how CDOs were rated, you understand why. Unlike corporate and government bonds, for structured credits the composition of risk and value naturally changes as the pool pays down. If the ratings don’t keep up with these changes, they will understate value and risk. This creates an opportunity to adversely select poorer credits and resecuritize them at inflated values. When you do this with a static rating model that was created for corporates, not structured, and uses only the rating as a risk input, i.e., the CDO model, you bury the performance signal. This was done over and over again. We have reviewed deals where whole tranches of RMBS CDOs were sold to investors that had a fair value of $0.

Foreclosure Settlement Fails To Force Mortgage Companies To Improve: The waiting inside this Bronx courtroom is emblematic of the waiting across the nation as the foreclosure crisis grinds on without resolution, keeping millions of distressed borrowers like Diaz stuck in legal and financial limbo. The waiting continues despite the $25 billion foreclosure settlement the Obama administration and state attorneys general struck in February with the nation's five largest mortgage companies -– servicers, in industry parlance. The deal, which resolved complaints of unlawful foreclosure practices, detailed standards mortgage companies must meet or face fines up to $1 million per initial violation: Servicers must approve or deny loan modification applications within 30 days of receiving them, and must also provide distressed borrowers with a single contact person to discuss their cases in a bid to eliminate confusion. President Barack Obama touted the "landmark settlement" as a curative, asserting that it would "speed relief to the hardest-hit homeowners, end some of the most abusive practices of the mortgage industry and begin to turn the page on an era of recklessness that has left so much damage in its wake." Despite the approach of an early-October deadline by which servicers must fully comply with the new standards, those who defend and process foreclosure cases say little improvement has emerged.

Very Bad Things Happen When We Depend on the Same People Who Caused the Foreclosure Crisis to Track Its Destruction - It’s a simple set of questions: “How many foreclosed properties are there in the country? What zip codes are they in? What factors sent people’s homes underwater?” For policy makers, journalists or anyone trying to size up or address the years-old housing crisis, these questions present the natural place to start. But their answers don’t quite exist. In Chicago, for example, the city’s official vacant property count, which relies on the banks’ reporting, hovers just under 5,000. The Chicago Tribune estimates 18,000. Housing activists say there are well over 100,000. Chicago is not unique in having absolutely no comprehensive list of in-progress or completed foreclosure properties, hampering any attempts to rehabilitate vacant homes or aid people being hit by the crisis. Nationally, there is not a single federal agency that has taken the initiative to track foreclosures comprehensively, a massive information gap that prevents the work of journalists, advocates and policymakers alike. The government is instead relying on the expensive, potentially biased and seemingly inaccurate information amassed by mortgage bankers, real estate hawks and credit reporting agencies. How this happened is a story of congressional warnings and broken promises, of lack of funding, and ultimately, the increasing dependence on the for-profit sector to quantify and analyze our lives. In this sense, it’s not only a story of the government’s failure, but also of Wall Street’s almost unquestioned power to determine not only value, but reality itself. 

We Don’t Know How Many Foreclosures Have Happened, Cont’d -- Picking up on some of Matt Stoller’s work, Sam Jewler and Chris Herwig at Alternet take a look at the inadequacy of foreclosure data. Just to reiterate, we have no idea how many foreclosures have occurred, where they occurred, and how many remain in delinquency. We have a rough sketch of that, but no comprehensive data that policymakers can use to mitigate the effects, that journalists can use to explain the urgency of the situation to the public, that analysts can use to define trends in the marketplace. Nationally, there is not a single federal agency that has taken the initiative to track foreclosures comprehensively, a massive information gap that prevents the work of journalists, advocates and policymakers alike.  The government is instead relying on the expensive, potentially biased and seemingly inaccurate information amassed by mortgage bankers, real estate hawks and credit reporting agencies.  In this sense, it’s not only a story of the government’s failure, but also of Wall Street’s almost unquestioned power to determine not only value, but reality itself.When you have self-interested analysts delivering the data, then you can get wild distributions that may or may not correspond to reality. And you can get a situation where everyone mindlessly parrots the new boost in the data sets without bothering to mention that over 90% of REO is held off the market, providing an artificial crutch for home prices

FAIL – Two Years After Foreclosure Probe Launched, Bondi’s Investigation Winds Down - The news conference was called. A five-paragraph statement issued. It was Aug. 10, 2010, and then Florida Attorney General Bill McCollum, a candidate for governor, was making his move against three of the state’s largest and most feared foreclosure law firms — ones he suspected of illegally speeding cases through the courts with forged and fraudulent documents. Thousands of final judgments of foreclosure may have been the result of illegal activities, the news release said. Two years later, one firm has inked a $2 million settlement with the state. The other law firm investigations, which came to total six by last summer, are “winding down,” Attorney General Pam Bondi’s office said Friday.

U.S. Needs to Be Much More Forgiving on Home Loans - The housing market is where the Great Recession started. It’s the main thing delaying recovery, and the reason fiscal and monetary stimulus (traditional and modern) haven’t worked better. The U.S. and U.K., especially, could have done a lot about it, but chose not to. Barack Obama’s administration has finally decided to try harder. It wants to encourage targeted debt forgiveness, but it’s being blocked by the Federal Housing Finance Agency, the independent body that oversees Fannie Mae and Freddie Mac. Edward DeMarco, acting director of the agency, explained his objections in a letter to Congress on July 31. Treasury Secretary Timothy Geithner replied immediately, urging him to think again. Let’s be clear about the context. The centrality of housing finance is the critical lesson of the past four years. Loans secured against housing drove prices to unsustainable highs. When valuations dropped, families saw their savings disappear. Millions moved from positive to negative net worth. This leveraged collapse in wealth hit consumption and output directly -- but that wasn’t the end.

FHFA Threatens to Kneecap Use of Eminent Domain to Condemn Mortgages  - All this talk of firing Ed DeMarco seems to have led him to decide to live up to his reputation. Amanda F pointed to a wee notice released by Fannie’s and Freddie’s regulator: Now let us recall that using eminent domain is a mere fondly-hoped-of cash cow for promoters like Mortgage Resolution Partners, who plan to nick a fee on every performing mortgage condemned (they are targeting ONLY borrowers that are paying on time but deeply underwater). While we think eminent domain could be a tremendously useful tool for getting around servicers who refuse to do modifications of borrowers who are delinquent or under financial stress, we are firmly opposed to the MRP scheme (the big reason is that the price at which they propose to condemn the mortgages is under fair market value and hence tantamount to stealing).  And by starting where investors will come out losers, MRP has set out to galvanize the opposition. When servicers have been sitting on their hands and abusing both borrowers and investors, condemnation is a win-win. But the MRP proposal is an exercise in extraction from investors, who most often place their money with fund managers who can’t be bothered to sue. While they say they will only condemn non Fannie and Freddie mortgages, their huge PR push has led other groups to start pushing eminent domain proposals. The nay-sayers’ slippery slope argument isn’t nuts. Anyone who condemns a first mortgage ought to condemn a related second (which will of course get the banks up in arms). And if you are a local pol, how can you justify condemning private label mortgages when someone in your jurisdiction might be identically situated from an economic standpoint, but doesn’t get a break because he is in a Fannie or Freddie mortgage?

Why the Administration Won’t Fire Ed DeMarco, Cont’d -- I went through last week why I don’t think Ed DeMarco will be fired. Now Neil BArofsky, who has a passing knowledge of the individuals involved, entered this debate. Last week the acting director of the Federal Housing Finance Agency, Ed DeMarco, made a familiar argument. He announced that he would not approve the Obama administration’s request that struggling borrowers whose mortgages are backed by Fannie Mae and Freddie Mac receive debt relief through principal reductions subsidized by the Troubled Asset Relief Program (TARP). DeMarco’s refusal was based on his concern that granting such relief would encourage other borrowers to “strategically default” by not making payments on their loan to take advantage of the promise of a reduction in their debt. This is a version of the moral hazard argument we heard about so often in the early days of the financial crisis. This is not the first time this debate is happening – but last time around, Geithner was the one arguing DeMarco’s points. Although one can argue whether principal reductions are the right way to address the ongoing housing slump – I have championed principal reductions for years but acknowledge that there are passionate arguments on both sides of the issue – no one should be fooled that the administration’s entreaties to DeMarco are anything but political posturing.

Number of Homes Facing Foreclosure Rose in July - More U.S. homes started on the foreclosure path in July, as lenders tackled a backlog of mortgages gone unpaid even as they pulled back on home repossessions. The number of homes that received an initial notice of default — the first step in the foreclosure process — increased 6 percent in July compared to the same month last year, foreclosure listing firm RealtyTrac Inc. said Thursday. Filings of initial default notices have increased on an annual basis for three months in a row. The trend comes as banks work to make up for time lost last year as the mortgage-lending industry grappled with allegations that it had processed foreclosures without verifying documents. The increase in homes entering the foreclosure process raises the possibility that more properties could end up being foreclosed upon in coming months. But of late, banks have been dialing back home repossessions and increasingly allowing the borrower to sell the home in a short sale. That’s when the bank agrees to accept less than what the seller owes on the mortgage. Banks took back 21 percent fewer homes last month than in July last year, RealtyTrac said. Repossessions were down 1 percent from June. They’ve been down on an annual basis every month going back nearly two years.

Another Housing Data Point Is Threatening To Hurt The Housing Recovery - Foreclosures fell 10 percent year-over-year in July and 3 percent from last month, according to RealtyTrac. A good sign for a housing recovery. But foreclosure starts – default notices or scheduled foreclosure auctions – increased 6 percent on a year-over-year basis.  This represents the third consecutive month of increases after 27 straight months of declines. And the foreclosure starts increased on an annual basis in 27 states, jumping 201 percent in Connecticut; 164 percent in New Jersey; and 139 percent in Pennsylvania. The real estate market had started to stabilize on signs that foreclosure inventory was decreasing. But a rise in foreclosure starts suggests that a tidal wave of foreclosures is building, especially in states with a judicial foreclosure process. Here's a chart from RealtyTrac that shows the 10 states where foreclosure starts climbed the most in July:

Late Payments on Mortgages Hit 3-Year Low in 2Q — U.S. homeowners are getting better about keeping up with their mortgage payments, driving the percentage of borrowers who have fallen behind to a three-year low, according to a new report. Still, the rate of decline remains slow, credit reporting agency TransUnion said Wednesday. The percentage of mortgages going unpaid is unlikely to return anytime soon to where it was before the housing market crashed. Some 5.49 percent of the nation’s mortgage holders were behind on their payments by 60 days or more in the April-to-June period, the agency said. That’s the lowest level since the first quarter of 2009. The second-quarter delinquency rate is down from 5.82 percent in the same period last year, and below the 5.78 percent rate for the first three months of 2012. The positive second-quarter trend coincided with an improving outlook for the U.S. housing market. Home refinancing surged in the second quarter, as interest rates sank to historic lows. And more borrowers with underwater mortgages — or home loans that exceed the value of the home — refinanced through the government’s Home Affordable Refinance Program than ever before.

U.S. Mortgage Delinquency Rates On The Rise, Says New MBA Survey  -According to the Mortgage Bankers Association's (MBA) latest National Delinquency Survey, the delinquency rate for mortgage loans on one-to-four-unit residential properties increased to a seasonally adjusted rate of 7.58 percent of all loans outstanding as of the end of the second quarter of 2012, an increase of 18 basis points from the first quarter, but a decrease of 86 basis points from one year ago. The non-seasonally adjusted delinquency rate increased 41 basis points to 7.35 percent this quarter from 6.94 percent last quarter. Delinquency rates typically increase between the first and second quarters of the year. The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans on which foreclosure actions were started during the second quarter was 0.96 percent, unchanged from last quarter and from one year ago. The percentage of loans in the foreclosure process at the end of the second quarter was 4.27 percent, down 12 basis points from the first quarter and 16 basis points lower than one year ago. The serious delinquency rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 7.31 percent, a decrease of 13 basis points from last quarter and a decrease of 54 basis points from one year ago. The combined percentage of loans in foreclosure or at least one payment past due was 11.62 percent on a non-seasonally adjusted basis, a 29 basis point increase from last quarter, but a 92 basis points decrease from the same quarter one year ago.

MBA: Mortgage Delinquencies increased in Q2 - The MBA reported that 11.85 percent of mortgage loans were either one payment delinquent or in the foreclosure process in Q2 2012 (delinquencies seasonally adjusted). This is up slightly from 11.79 percent in Q1 2012.. From the MBA: Mortgage Delinquencies Increase in Latest MBA Survey The delinquency rate for mortgage loans on one-to-four-unit residential properties increased to a seasonally adjusted rate of 7.58 percent of all loans outstanding as of the end of the second quarter of 2012, an increase of 18 basis points from the first quarter, but a decrease of 86 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey. The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans on which foreclosure actions were started during the second quarter was 0.96 percent, unchanged from last quarter and from one year ago. The percentage of loans in the foreclosure process at the end of the second quarter was 4.27 percent, down 12 basis points from the first quarter and 16 basis points lower than one year ago. The serious delinquency rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 7.31 percent, a decrease of 13 basis points from last quarter and a decrease of 54 basis points from one year ago.

Q2 MBA National Delinquency Survey Graph and Comments - A few comments from Jay Brinkmann, MBA’s Chief Economist and Senior Vice President for Research and Education, on the Q2 MBA National Delinquency Survey conference call.
• The 30 day delinquency rate is back to normal (at the long term average). (This means a normal amount of loans are going delinquent each month)
• This was a slight increase in overall delinquencies (Seasonally Adjusted), and he wouldn't read too much into the increase because the seasonal adjustment might be a little off right now.
• Foreclosure inventory continues to decline. In previous quarters the decline in non-judicial state inventory was offset by increases in judicial states. The change this quarter is the non-judicial states are also a decrease in foreclosure inventory.
• There was a sharp increase in FHA foreclosure starts, and this is probably a result of the mortgage settlement.
This graph is from the MBA and shows the percent of loans in the foreclosure process by state. Posted with permission. The top states are Florida (13.70% in foreclosure down from 14.31% in Q1), New Jersey (7.65% down from 8.37%), Illinois (7.11% down from 7.46%), New York (6.47% up from 6.17%) and Nevada (the only non-judicial state in the top 13 at 6.09% down from 6.47%). The second graph shows the percent of loans delinquent by days past due. Loans 30 days delinquent increased to 3.18% from 3.13% in Q1. This is at about 2007 levels and around the long term average. Delinquent loans in the 60 day bucket increased to 1.22% in Q2, from 1.21% in Q1. The 90 day bucket increased to 3.19% from 3.06%. This is still way above normal (around 0.8% would be normal according to the MBA). The percent of loans in the foreclosure process decreased to 4.27% from 4.39% and is now at the lowest level since Q1 2010.

LPS: Mortgage Delinquencies increased slightly in June, HARP refinance activity increased - LPS released their Mortgage Monitor report for June today. According to LPS, 7.14% of mortgages were delinquent in June, up from 6.91% in May, and down from 7.71%% in June 2011.  LPS reports that 4.09% of mortgages were in the foreclosure process, down slightly from 4.17% in May, and down slightly from 4.13% in June 2011.  This gives a total of 11.23% delinquent or in foreclosure. It breaks down as:
• 2,012,000 loans less than 90 days delinquent.
• 1,590,000 loans 90+ days delinquent.
• 2,061,000 loans in foreclosure process.
For a total of 5,663,000 loans delinquent or in foreclosure in June. This is down from 6,114,000 in June 2011. This following graph shows the total delinquent and in-foreclosure rates since 1995. The total delinquency rate has fallen to 7.14% from the peak in January 2010 of 10.97%. A normal rate is probably in the 4% to 5% range, so there is a long ways to go. The in-foreclosure rate was at 4.09%. There The second graph shows percent of loans in the foreclosure process by process (Judicial vs. non-judicial). Foreclosure inventory in judicial states is 6.42%, far above the level in non-judicial states (2.41%). The national average is 4.09%. A key change is that foreclosure inventory is now declining in judicial states too. Foreclosure inventory in non-judicial states has been falling since late 2010.  The third graph shows GSE prepayment speed by current LTV.

LPS' June Mortgage Monitor: Data Shows HARP Refinance Activity Up Since Beginning Of Year; New Seriously Delinquent Rate Stable -The June Mortgage Monitor report released by Lender Processing Services (NYSE:LPS) shows that while overall mortgage prepayment activity remains stable, despite historically low rates, the federal government’s Home Affordable Refinance Program (HARP) has seen considerable activity since the beginning of 2012. “For this month’s Mortgage Monitor, we looked at Fannie Mae and Freddie Mac [GSE] 30-year fixed-rate loans across a variety of loan-to-value ratios,”. “Since the beginning of this year, high loan-to-value refinances have increased significantly. As an example, 2006 vintage GSE loans with six percent interest rates and LTV ratios between 100 and 125 percent increased from a 10 percent annualized prepayment rate at the end of 2011 to more than 40 percent in June 2012. Our data also shows that this rise in loan activity extends beyond that subsection – the same type of increase holds true across other vintages with the same characteristics.” The June data also shows that the rate of new problem loans entering the delinquency pipeline remained stable at multi-year lows; late-stage delinquencies have also shown improvement over the last year, dropping more than seven percent. On a month-over-month basis, the national delinquency rate for loans 90 or more days delinquent remained stable, but after months of tracking very closely, the rate in judicial foreclosure states is now higher than in non-judicial. The share of aged inventory is higher in judicial states as well, with nearly 50 percent of borrowers with loans 90 or more days delinquent not having made a payment in more than one year, as compared to just slightly more than 40 percent in non-judicial states. Further, nearly 60 percent of borrowers with loans in foreclosure in judicial states had not made a payment in at least two years, as of June.

Consumer Financial Protection Bureau Proposes New Safeguards for Mortgage Borrowers - Yves Smith - The CFPB is proving to be tough minded on the mortgage front. The Wall Street Journal reports that it intends to require banks to consider a modification request before proceeding with a foreclosure: Under the Consumer Financial Protection Bureau’s proposal, loan servicers would be required to evaluate homeowners’ applications for loan-assistance within 30 days of receiving an application and would be barred from going ahead with a foreclosure until a final decision has been reached on a borrower’s application for help.  The article indicates that the big servicers won’t like this because they will “make less money” and will fob the work on to special servicers. This would be written more accurately as “servicers will lose more money.” Servicing portfolios with high levels of delinquencies is wildly unprofitable; that’s why servicers cheat so much these days. Of course, lousy servicer economics will be used to argue for seriously watering down this proposal. On top of this, the industry has such lousy infrastructure that I doubt the sort of servicers the article names as “special servicers” such as Ocwen and Nationstar, could give a response in 30 days. Ocwen and its peers have gotten so large that they are highly routinized and no longer able to do high touch servicing. There is a group of smaller servicers that may well be up to the task, but I doubt they have remotely enough capacity if the big banks start dumping their portfolios on other players.

Fannie Mae reports $5.1 Billion Net Income, Improvement due to increase in house prices, REO sales prices - From Fannie Mae: Fannie Mae Reports Net Income of $5.1 Billion for Second Quarter 2012 The company’s continued improvement in financial results in the second quarter of 2012 was almost entirely due to credit-related income, resulting primarily from an improvement in home prices, improved sales prices on the company’s real-estate owned (“REO”) properties, and a decline in the company’s single-family serious delinquency rate. The company’s comprehensive income of $5.4 billion in the second quarter of 2012 is sufficient to pay its second-quarter dividend of $2.9 billion to the Department of the Treasury.These are key points - the improvement was due to 1) an increase in home prices, 2) improved sales prices of REO, and 3) decline in serious delinquency rate. Here are some more details from the Fannie Mae's SEC filing 10-Q:

Fannie, Freddie, FHA REO declined 18% Year-over-year - The combined Real Estate Owned (REO) by Fannie, Freddie and the FHA declined to 202,765 at the end of Q2 2012, down from 209,077 in Q1, and down 18% from 249,501 in Q2 2012. The peak for the combined REO of the F's was 295,307 in Q4 2010. According to Fannie Mae, "foreclosures continue to proceed at a slow pace", even following the mortgage settlement:  Our foreclosure rates remain high; however, foreclosures continue to proceed at a slow pace caused by continuing foreclosure process issues encountered by our servicers and changing legislative, regulatory and judicial requirements. The delay in foreclosures, as well as a net increase in the number of dispositions over acquisitions of REO properties, has resulted in a decrease in the inventory of foreclosed properties since December 31, 2010. The bulk sales program has had a minimal impact so far.  This graph shows the REO inventory for Fannie, Freddie and the FHA. This is only a portion of the total REO. There is also REO for private-label MBS, FDIC-insured institutions, VA and more. REO has been declining for those categories too. Most analysts expect an increase in foreclosures, and the number of REO might increase over the next several quarters.

Housing: Inventory down 23% year-over-year in early August -- Here is another update using inventory numbers from HousingTracker / DeptofNumbers to track changes in listed inventory. Tom Lawler mentioned this last year. According to the for (54 metro areas), inventory is off 22.8% compared to the same week last year. Unfortunately the deptofnumbers only started tracking inventory in April 2006. This graph shows the NAR estimate of existing home inventory through June (left axis) and the HousingTracker data for the 54 metro areas through early August. Since the NAR released their revisions for sales and inventory last year, the NAR and HousingTracker inventory numbers have tracked pretty well.  On a seasonal basis, housing inventory usually bottoms in December and January and then starts to increase again through the summer. Inventory only increased a little this spring and has been declining for the last three months by this measure. It looks like inventory has peaked for this year. The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker. HousingTracker reported that the early August listings, for the 54 metro areas, declined 22.7% from the same period last year.

Big pick up in demand for mortgages but the market is still bifurcated - The thesis of improving demand for US residential housing (driven by demographics) remains intact. The latest bank survey from the Fed indicates demand for mortgage loans is on the rise. WSJ: - Nearly three in five U.S. banks surveyed by the Federal Reserve this summer said demand for loans to buy homes is growing as the housing market stabilizes and mortgage rates were falling to new lows. But according to bank credit officers, credit standards continue to be as tight as they were in 2010. WSJ: - The survey found that banks' credit standards aren't getting much easier for mortgage borrowers or small businesses. Among the loan officers surveyed, 93% said standards for approving mortgages to borrowers with strong credit were unchanged from the prior quarter, and 95% said standards were unchanged for firms with less than $50 million in annual sales.In the corporate space, lending to larger companies with poor credit has not been an issue - those firms simply have to pay a higher rate. The lower the credit rating, the higher the spread charged. That approach keeps credit growth in the corporate sector humming because the weaker credits are more lucrative for banks. Mortgages on the other hand continue to be fairly binary - one either qualifies for a standard Fannie mortgage or does not, and there is very little between the two. With the subprime lending gone, the market has become bifurcated into those who are able to obtain a loan and have access to incredibly cheap financing and those who are not.

Still waiting on looser lending standards (for mortgages) -  But the bigger worry, of course, is simply that it won’t work — that buying MBS won’t have the intended effect on actual mortgage borrowing rates. These rates haven’t been tracking MBS yields as closely as they once did, and on Thursday Peter Eavis gave an excellent overview of the issue. Banks profit from the wider spread, as there is no shortage of yield-hungry investors happy to accept lower MBS yields, and meanwhile the banks can blame the need for tighter lending standards for their charging higher rates to borrowers. Here is Eavis: In the six months through June, the average difference between the two rates was 1.1 percent, and at the start of this month it was 1.26 percent. From 2000 to 2010, it was about 0.5 percent. Bankers say they need the extra mortgage revenue to cover new costs. As a result of more stringent conditions since the housing bust, bankers are required to be more diligent in approving loan applications. The banks say this requires better-trained employees and other added expenses. If Fannie Mae and Freddie Mac find flaws in the loan applications, they ask the banks to buy back the faulty loans, which can be expensive for the lenders. We don’t really know what to believe here. The rationale used by the banks certainly seems… convenient. Regardless, it is true that lending standards for mortgage loans remain elevated relative to earlier periods, a point reinforced earlier this week in the Fed’s senior loan officer survey for July (which revealed that unlike for commercial and industrial loans, lending standards on mortgage loans actually tightened). Or you can see a simple graphical representation in this chart from Goldman economists. It compares the distributions of origination FICO scores in 2005 against those in the past year:

CoreLogic: House Price Index increases in June, Up 2.5% Year-over-year - Case-Shiller is currently the most followed house price index, however CoreLogic is used by the Federal Reserve and is followed by many analysts. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic® June Home Price Index Rises 2.5 Percent—Representing Fourth Consecutive Year-Over-Year Increase Home prices nationwide, including distressed sales, increased on a year-over-year basis by 2.5 percent in June 2012 compared to June 2011. On a month-over-month basis, including distressed sales, home prices increased by 1.3 percent in June 2012 compared to May 2012. The June 2012 figures mark the fourth consecutive increase in home prices nationally on both a year-over-year and month-over-month basis. Excluding distressed sales, home prices nationwide increased on a year-over-year basis by 3.2 percent in June 2012 compared to June 2011. On a month-over-month basis excluding distressed sales, home prices increased 2.0 percent in June 2012 compared to May 2012, the fifth consecutive month-over-month increase. This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index is off 29% from the peak - and is up 7% from the post-bubble low set in February (the index is NSA, so some of the increase is seasonal). The second graph is from CoreLogic. The year-over-year comparison has turned positive. This is the fourth consecutive month with a year-over-year increase, and excluding the tax credit bump, these are the first year-over-year increases since 2006.

Trulia: Asking House Prices increased in July - Press Release: Trulia Reveals Asking Prices Up for Sixth Straight Month - Trulia today released the latest findings from the Trulia Price Monitor and the Trulia Rent Monitor ... Based on the for-sale homes and rentals listed on Trulia, these monitors take into account changes in the mix of listed homes and reflect trends in prices and rents for similar homes in similar neighborhoods through July 31, 2012. Asking prices on for-sale homes–which lead sales prices by approximately two or more months – increased 0.5 percent in July month over month (M-o-M), seasonally adjusted, for a sixth straight monthly gain. Meanwhile, asking prices rose nationally 1.2 percent quarter over quarter (Q-o-Q), seasonally adjusted. Year-over-year (Y-o-Y) asking prices rose by 1.1 percent; excluding foreclosures, asking prices rose Y-o-Y by 2.7 percent. For the first time, a majority (62 out of 100) of large metros had Y-o-Y price increases.  Rents increased Y-o-Y in 24 of the 25 largest rental markets, with rent increases topping 10 percent in San Francisco, Miami, Oakland, Denver, Seattle and Boston. Three months ago, only two large rental markets – San Francisco and Miami – had Y-o-Y rent increases of 10 percent or more. Rents are rising faster than asking prices in 21 of the 25 largest rental markets Y-o-Y.

The Mystery of Rising Housing Prices - Housing prices are going up, but demand for housing is getting weaker. How can that be? Typically, when demand is weak, prices fall, but that is not what’s happening now. According to the latest Case-Shiller report, that was released on Tuesday, average home prices in the nation’s 20 biggest cities rose 2.2% in May from the prior month, “the strongest month-over-month percentage gain in more than a decade.” Okay, so prices are going up, but where’s the proof that demand is weakening? The National Association of Realtors (NAR) reported two weeks ago that sales of previously occupied homes decreased 5.4% in June to a seasonally adjusted annual rate of 4.37 million while new home sales tumbled 8.4 percent to a seasonally adjusted 350,000-unit annual rate, the lowest pace in five months. Also, applications for loans to buy homes fell last week despite record-low mortgage rates. So, demand is weaker across the board, and yet, prices are inching higher. Why? Supply. It’s all about supply. Existing inventory has dipped more than 20% year-over-year while distressed inventory (which is what really pushes down prices) has been has been slashed dramatically. In fact, completed foreclosures are down 24 percent from a year ago. According to Bloomberg: “Foreclosures and other sales of distressed properties made up about a quarter of the month’s sales, down from about a third a year ago.” The banks are operating on the theory that if they reduce the number of severely discounted properties on the market then–Voila–prices will rise. That’s what the banks are doing and, what’s interesting, is they all seem to be doing it at precisely same time.

Freddie Mac: Increase in Home Prices contributes to Lower Credit Losses -From Tom Lawler: Freddie Mac reported that its GAAP net income “attributable” to Freddie Mac was $3.020 billion last quarter, up from $577 million in the previous quarter and a net loss of $2.371 billion in the second quarter of 2011. The biggest “swing” factor last quarter was a sharp drop in the provision for credit losses -- $155 million last quarter compared to $1.825 billion in the previous quarter and $2.529 billion in the comparable quarter of last year. Freddie attributed the sharp drop in its loss provision – which fell far short of charge-offs, resulting in a steep drop in its loan loss reserves – to improvements in the number of newly impaired loans and to lower estimated future losses due to the positive impact of an increase in national home prices.” Freddie’s internal national home price index, which is based on repeat transactions of homes backed by mortgages owned or guaranteed by Freddie or Fannie with state weights based on Freddie’s SF mortgage book, jumped by 4.8% from March to June, and the June HPI was up about 1.0% from a year ago. Freddie’s GAAP net income “attributable” to stockholders last quarter was $1.212 billion, reflecting the $1.808 billion in dividends paid to Treasury’s senior preferred stock. Freddie’s GAAP net worth at the end of June was $1.086 billion, and as a result Freddie does not need another Treasury “draw." REO inventory for Freddie decreased in Q2. After Fannie announces results I'll post a graph of REO for the F's (Fannie, Freddie, and the FHA). FHA REO increased in Q2 to 40,217 from 35,613 in Q1.

The economic impact of a slight increase in house prices - If I’m correct about house prices bottoming earlier this year – and the CoreLogic report released this morning is another indicator that prices might be increasing a little - a key question is: What will be the economic impact of slightly increasing house prices? We saw the impact on Freddie Mac this morning. Freddie reported net income of $3 billion compared to a $2.4 billion loss in Q2 2011. Freddie noted that the decline in its loss provision was due to “improvements in the number of newly impaired loans and to lower estimated future losses due to the positive impact of an increase in national home prices.” Also I expect CoreLogic and Zillow to report a meaningful decline in the number of homeowners with negative equity in Q2. We might see something like 1 million households that regained a positive equity position at the end of Q2 2012. These are borrowers who might find it easier to refinance, or sell if needed.  We will probably also see a meaningful decline in the number of newer mortgage delinquencies..  Another impact that we've discussed before is the impact on listed “For sale” inventory. Seller psychology is very different if prices are perceived to be falling, as opposed to if prices are stabilizing or even increasing. If potential sellers think prices will fall further, then they will rush to sell and list their homes right away. That behavior pushes up inventory. But if potential sellers think prices are stabilizing, and may increase, then they are more willing to wait until it is more convenient to sell.

The Housing Bottom and the Unemployment Rate - Early this year when I wrote The Housing Bottom is Here and Housing: The Two Bottoms, I pointed out there are usually two bottoms for housing: the first for new home sales, housing starts and residential investment, and the second bottom is for house prices. For the bottom in activity, I presented a graph of Single family housing starts, New Home Sales, and Residential Investment (RI) as a percent of GDP. When I posted that graph, the bottom wasn't obvious to everyone. Now it should be, so here is an update to that graph. For the current housing bust, the bottom was spread over a few years from 2009 into 2011. This was a long flat bottom - something a number of us predicted given the overhang of existing vacant housing units. Housing plays a key role for employment too. Here is an update to a graph I've been posting for a few years. This graph shows single family housing starts (through June) and the unemployment rate (inverted) also through July. Note: there are many other factors impacting unemployment, but housing is a key sector.

Comparing Housing Recoveries - In the previous post, I noted that I think the housing recovery will continue to be sluggish relative to previous housing recoveries. There are several reasons for this. First, the causes of this downturn were different than in most cycles. Usually housing down cycles are related to the Fed fighting inflation, and then housing comes back strongly when the Fed starts to ease again. As everyone now knows (or should know by now), recoveries following a financial crisis are sluggish. This is especially true for housing as all the excesses have to be worked down before the recovery will become robust. There are also a large number of houses in the foreclosure process, especially in certain states with a judicial foreclosure process (like New Jersey). This means there will be competition for homebuilders from foreclosures for an extended period in these areas. This graph compares the current housing recovery (single family starts) to previous recoveries. The bottom is set to 100 for each housing cycle.  This doesn't even consider the depth of the current cycle (the deepest decline in housing starts since the Census Bureau started collecting data). The only comparable sluggish recovery (first year) was the one that started in 1981, and that was sluggish because mortgage rates were around 17%. When mortgage rates fell to only 13%, housing took off.

Counterparties: Green shoots in the housing market - It’s now five years since August 2007, which means that the US is now halfway into its very own lost decade. There is, however, a bit of good news coming from the housing market, as the WSJ’s Nick Timiraos reports: Prices rose by their largest percentage in at least seven years during the second quarter, propelled by low inventories of properties for sale and high demand for bargain-priced foreclosures… Prices rose by 2.5% in June from a year ago, and by 6% from the previous quarter, said CoreLogic Inc., The quarterly jump was the largest since 2005… Separately, Freddie Mac, which uses a different methodology, said home prices during the second quarter jumped by 4.8% from the previous quarter. That was the largest jump since 2004.  Bill McBride of Calculated Risk thinks it’s worth remembering the economic effects even modest gains in home prices can have. There’s increased profitability at Fannie and Freddie, fewer homeowners with negative equity, lower mortgage delinquency rates, fewer fear-driven sellers adding to excess inventory, and increased private residential investment.  Still, that doesn’t mean that younger Americans are going to become home buyers en masse anytime soon. Not only does student debt loom over many first time buyers, but as Bloomberg’s Caroline Fairchild notes, median wages for college graduates fell 10% from 2009-2011 compared to 2007.  As a result of this decreased cash flow, the workforce’s newest entrants prefer to rent; they’re delaying making other large purchasing decisions like cars, too.

NAHB: Builder Confidence in the 55+ Housing Market Increases in Q2 -- This is a quarterly index from the the National Association of Home Builders (NAHB) and is similar to the overall housing market index (HMI). The NAHB started this index in Q4 2008, so all readings are very low. This is expected to be key a demographic over the next couple of decades - if the baby boomers can sell their current homes. From the NAHB: Builder Confidence in the 55+ Housing Market Shows Improvement in the Second Quarter Builder confidence in the 55+ housing market for single-family homes showed improvement in the second quarter of 2012 compared to the same period a year ago, according to the National Association of Home Builders’ (NAHB) latest 55+ Housing Market Index (HMI) released today. The index more than doubled year over year from a level of 13 to 29, which is the highest second-quarter reading since the inception of the index in 2008. The 55+ single-family HMI measures builder sentiment based on a survey that asks if current sales, prospective buyer traffic and anticipated six-month sales for that market are good, fair or poor (high, average or low for traffic). An index number below 50 indicates that more builders view conditions as poor than good.

Weekly Hotel Occupancy Rate above 75% for the first time since 2007 - From STR: US results for week ending 28 July In year-over-year comparisons for the week, occupancy ended the week with a 3.3-percent increase to 75.1 percent, average daily rate increased 4.8 percent to US$108.95 and revenue per available room ended the week with an increase of 8.2 percent to US$81.87. The 4-week average is still above last year, and is close to pre-recession levels. The occupancy rate has been above 75% for the last two weeks - for the first time since 2007. The following graph shows the seasonal pattern for the hotel occupancy rate using a four week average. The red line is for 2012, yellow is for 2011, blue is "normal" and black is for 2009 - the worst year since the Great Depression for hotels. This could be the peak weekly occupancy rate for 2012 (the 4-week average will move up some more). Overall occupancy is back to normal, and will probably move higher over the next couple of years since there is limited new supply being built.

The Conservative Brookings Institute - The Brookings Institute was once a bastion of liberal thought, so much so that it was hard to find a reference to it that didn’t begin with “The Liberal Brookings Institute”. Its scholars were top-notch exponents of liberal values, and its reports and studies were widely reviewed and accepted. It was so important that when the conservative movement to control public discourse got underway, it was the model for the American Enterprise Institute, an openly neo-conservative, not to say, Paleolithic, perch for right-wing loyalists waiting for government positions. Now, though, it has become the Alan Colmes of think-tanks, fake liberals who meekly accept conservative mythology on every major point, but says we should at least think of the misery we are causing. Here’s an example. Scott Winship is a fellow in economic studies at the Brookings Center on Children and Families. He recently wrote a piece explaining that it is no big deal that there has been a massive decline in median wealth in this country as a result of the housing crash and the Lesser Depression. After all, he says, the median net worth increased 15% between 1970 and 2010, based on the Federal Reserve Board’s Survey of Consumer Finances.   Just think, 15% since 1970. Winstead explains that most of the gains in wealth in the 2000s were in home equity, and were therefore illusory.

Growth of Consumer Credit Slowed in June  — Consumer credit posted its weakest growth in eight months in June as Americans reduced their credit card debt, a potentially negative sign for an economy that has struggled to create jobs. Consumer credit grew by $6.46 billion in June, the Federal Reserve said on Tuesday. That was well below the $11 billion increase Wall Street economists had forecast in a Reuters survey. The Fed also said consumer credit climbed slightly less during May than originally estimated.  Consumer credit has been expanding since late 2010 as the United States rebounded from the 2007-9 recession, and on Monday, the Fed said a number of banks had eased loan standards on auto and credit card loans over the last three months. In June, however, the overall expansion of consumer credit was the smallest since October 2011.  In June, revolving credit, which includes credit cards, shrank by $3.7 billion.

US consumer credit: back to sideways - Quite a change from last month. A disappointing consumer credit report for June as revolving credit contracted (click to enlarge): Student loans, of course, account for most for most of the monthly increases in this report. But to strip out the noise of monthly reports (and this series does occasionally get revised dramatically), revolving credit has essentially been flat since the start of 2011, while student loans have continued driving up the headline number, as you can see in this Barclays chart below: So the situation for consumer credit is little changed. While we’re looking at credit trends, Monday’s Fed survey of loan officers for July was somewhat more encouraging. Demand for commercial and industrial loans continued climbing impressively while lending standards from banks loosened. Even better, demand for mortgage loans spiked. But lending standards for mortgages also tightened, which explains this comment via RBC: We noted that recently pending home sales (signed contracts) have outpaced actual sales and that this gap likely reflects contracts failing at the underwriting level. This latest survey suggests this dynamic is unlikely to change anytime soon.

U.S. Consumers Cut Back on Credit-Card Debt - U.S. consumer credit expanded at the slowest pace in eight months in June amid signs of slow economic growth. Consumer credit rose by a seasonally adjusted $6.46 billion, to $2.577 trillion, a Federal Reserve report showed Tuesday. Economists surveyed by Dow Jones Newswires had forecast a $10 billion expansion in credit during June compared with the prior month. In May, consumer credit grew a revised $16.70 billion, down from an initial estimate of a $17.12 billion gain.

US Consumer Credit Report Cites Lower Use of Revolving Credit - The June U.S. Consumer Credit Report missed expectation printing an increase in credit usage of only $6.459B compared to the consensus estimates of $10.25B, the weaker figure was followed by a decline in EURUSD. In addition the May figure was revised lower from $17.117B to $16.698B. The report went out to cite that Total Consumer Credit outstanding rose by 3.0 percent (annually adjusted) during the month of June. The rise was due an increase in nonrevolving credit, which tracks loans such as auto and student. The gain in nonrevoling credit was partially offset by a decline of 5.1 percent (annually adjusted) in revolving credit, which tracks loans without a fixed number of payments such as credit cards charges.

Consumer Credit Misses As Revolving Credit Has Biggest Contraction Since April 2011 - Just like every other aspect of the global economy and capital markets, the sudden, rapid moves in every times series are becoming increasingly more pronounced: today's case in point - consumer credit. Instead of rising by the expected $10.25 billion in June, following the whopper of a May bounce when it grew by $17 billion, in June, credit rose by only $6.46 billion. On the surface this was not a big miss and was the 10th consecutive increase in a row, driven exclusively by non-revolving credit - i.e. student and GM subprime loans. However, looking below the surface shows that following May's biggest monthly surge in revolving credit since November 2007 (+$7.5 billion), consumers have again expressed a revulsion to credit, with revolving credit sliding by $3.7 billion: this was the biggest monthly contraction in revolving credit since April 2011, and before that since February 2009. Did Americans developed a sudden taste for credit funded consumption in May, only to puke it all up and then some in June? It sure appears that way based on recent retail sales numbers. The July retail sales number will simply confirm if the re-icing of US consumers has continued for another month.

Consumer credit posts tepid growth in June (Reuters) - U.S. consumer credit posted its weakest growth in eight months in June as Americans reduced credit card debt, a potentially negative sign for an economy that has struggled to create jobs. Consumer credit grew by $6.46 billion in June, the Federal Reserve said on Tuesday. That was well below the $11 billion advance Wall Street economists had forecast in a Reuters poll. The Fed also said credit climbed slightly less during May than originally thought. Credit has been expanding since late 2010 as the country recovered from the 2007-09 recession and on Monday the Fed said a number of banks eased loan standards on auto and credit card loans over the last three months. In June, however, the overall expansion of consumer credit was the smallest since October 2011.

Vital Signs Chart: Consumer Credit Growth - Growth in consumer credit has slowed amid more caution. Total consumer credit outstanding increased $6.5 billion to $2.58 trillion in June from a month earlier, the slowest pace in eight months. Consumers cut back on credit- card debt — a sign that a recent slowdown in growth has some people more wary of spending — while student loans continued to rise.

Wholesale Inventories Drop - Inventories at U.S. wholesalers fell slightly in June as the value of petroleum stockpiles plunged. U.S. wholesalers’ inventories decreased by 0.2% from the prior month to a seasonally adjusted $481.91 billion, the Commerce Department said Thursday. Economists surveyed by Dow Jones Newswires had forecast a 0.3% gain. Sales for wholesalers tumbled 1.4% in June to $402.88 billion.

Heartaches by the Number: Just 14% Think Today’s Children Will Be Better Off Than Their Parents; Just 24% of Adults Think the Job Market is Better Than a Year Ago --Here is a round of "Heartaches by the Number" polls, all courtesy of Rasmussen Reports.

More Than 50% of Poll Respondents Expect Economy to Get Worse - Consumer spending in the U.S. continued to decline during July as consumer sentiment about the economy waned and expectations about personal finances were unchanged, according to Discover Financial Services’ U.S. Spending Monitor. The poll index, which tracks economic confidence and spending intentions of about 8,200 consumers a month, declined 1.4 points to 89.3 points last month. The poll found 28% of respondents view the U.S. economy as improving, down from 29% in June and 33% in May. Roughly 53% of respondents now rate the U.S. economy as poor, unchanged from June. However the portion of consumers that expect the economy will get worse rose to more than half for the first time this year–up 4 percentage points at 53%–as sentiment among men worsened. The portion of men who indicated expectations the economy will worsen was up 9 percentage points at 57%, while the amount of women who felt that way was unchanged at 50%.

Drought Effect on Consumer Food Prices Likely Muted -- The U.S. drought is going to drive up food prices next year, the Agriculture Department says. What exactly will that mean for consumer budgets? We did the math. The answer: Not that much. Reuters Americans, on average, will spend an additional $32.76 on food next year than they would have if the drought had not occurred, according to our back-of-the envelope calculations. That comes out to $2.73 a month. Food spending varies depending on a person’s income. Here is our projected dollar-impact of the drought on different income groups:

Recession Generation Opts to Rent Not Buy Houses to Cars - Anselmo and many of his peers are wary about making large purchases after entering adulthood in the deepest recession and weakest recovery since World War II. Confronting a jobless rate above 8 percent since 2009 and student-loan debt hitting about $1 trillion, 20-to-34-year-olds are renting apartments, cars and even clothing to save money and stay flexible. As the Great Depression shaped the attitudes of a generation from 1929 until the early years of World War II, so have the financial crisis and its aftermath affected the outlook of young consumers like Anselmo, said Cliff Zukin, a professor of public policy at Rutgers. Recession Effects “This is a generation that is scared of commitment, wants to be light on their feet and needs to adjust to whatever happens,” said Zukin, who’s researched the effects of the recession on recent college graduates. “What once was seen as a solid investment, like a house or a car, is now seen as a ball and chain with a lot of risk to it.”

Auto Sales Decline as Gen Y Chooses 4G Over V-8 - The auto industry says it’s concerned that financially pressed young people who connect online instead of in person could hold down peak demand by 2 million units each year. The rate of U.S. auto sales to 18-to-34-year-old buyers declined to 11 percent in April 2012, down from 17 percent for the same age group in April 2007, before the recession, according to Southfield, Michigan-based R.L. Polk & Co. 4G trumps V-8 for the 80 million U.S. consumers born from 1981 to 2001, according to Deloitte LLP. Though the car is still a gateway to independence, Generation Y has more ways to connect with the outside world than young buyers of past generations. “A car is a symbol of freedom,” “But unlike previous years, there are many different ways that a Gen Y person can capture that freedom.” 

Used Vehicle Prices Plunge Signaling End Of Auto Party - As channel-stuffing shifted from the US (here) to China (here) and Europe (here), so the new vehicle sales data has disconnected from a number of realities. Whether it is economic growth or Ford's share price, things look a little over-cooked in the land of if-we-build-it-the-government-will-buy-'em. However, there is one index that tends to see through all the unreality much more clearly than our analysis above, that is the Used Vehicle Price index. Each time this index has dropped and broken below its two-year average, the auto industry has tended to fade rapidly. After yesterday's comments on the lowering of collateral standards for subprime auto lending, it would appear we are setting up nicely for some whocouldanode moment in the manufacturing sector's most critical industry.

Weekly Gasoline Update: Big Jump - Regular up 14 Cents - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data with an overlay of West Texas Crude (WTIC). Gasoline prices at the pump, rounded to the penny, rose for the fifth week after 13 weeks of decline: Regular jumped 14 cents and premium 13 cents. They are now up 42 and 40 cents, respectively, from their interim weekly lows in the December 19th EIA report. As I write this, shows two states, Hawaii and Illinois, with the average price of gasoline above $4. Arizona has replaced South Carolina for the cheapest price, averaging 3.26.

Gasoline Prices up 20 cents over last 5 weeks - From CBS Atlanta: Gas prices in Metro Atlanta still on the rise: Average retail gasoline prices in Atlanta rose 5.7 cents per gallon last week, averaging $3.52/g Sunday ... The national average increased 9.3 cents per gallon in the last week to $3.60/g...."Watching the national average last week, one might have expected war broke out in the Middle East or a major hurricane shutting down production, neither of which happened, yet gasoline prices spiked," said Senior Petroleum Analyst Patrick DeHaan. "... The good news for motorists is that the end to the summer driving season and change to winter-spec fuel is in view, which will likely put downward pressure on gasoline prices." Professor Hamilton presented a calculator from Political Calculations that estimates the cost of gasoline based on Brent oil prices. Currently this suggests a price of around $3.55 per gallon - about the current price. The following graph shows the recent increase in gasoline prices. Gasoline prices are down from the peak in early April, but up about 20 cents over the last five weeks.

Vital Signs Chart: Gas Prices Moving Higher - Gasoline prices are rising along with the cost of crude oil. A gallon of regular gasoline cost $3.64 last week, and has climbed steadily through July and now August. Still, gasoline prices remain well below their $3.94 peak, reached in April. That easing has given some breathing room to consumers battered by a weak labor market and slow salary gains.

U.S. Midwest Hit By Perfect Gasoline Storm -  Retail gasoline prices in the U.S. Midwest were as much as 50 cents higher than in the rest of the country. By Monday, the price of a gallon of regular unleaded jumped 13 cents from last week in Detroit to settle at $3.99.  The spike in retail gasoline prices follows a series of pipeline spills in Wisconsin and refinery shutdowns in Chicago and elsewhere. The impact of the string of industrial incidents on consumers in the region may be short-lived, but retail prices rarely decline as fast as they increase. The American Automobile Association, in its daily gasoline report, states a gallon of regular unleaded gasoline in Detroit cost $4.05, up from the $3.69 average just one week ago. Chicago drivers, meanwhile, were paying on average $4.39 per gallon, a 10 percent increase from last week. According to AAA, the national average for a gallon of regular unleaded is $3.62.   An industry analyst said much of the region was hit by "a cluster of bad luck." Last month, pipeline company Enbridge reported a leak on a pipeline in Wisconsin. A section of the Lakehead oil pipeline system ruptured there, cutting off oil supplies to Chicago-area refineries. U.S. Transportation Secretary Ray Lahood said the incident was "absolutely unacceptable" and forced Enbridge to keep the line closed until authorities review a restart plan for the entire 467-mile pipeline.

Pricey Oil, Cheap Natural Gas, and Energy Costs - SF Fed -The price of oil approached record high levels earlier this year. At the same time though, natural gas prices reached their lowest level since the mid-1970s, as Figure 1 shows. How has this price divergence affected U.S. consumer energy costs? Have households and businesses moved away from expensive oil to cheaper natural gas to meet their energy needs? In this Economic Letter, we examine the extent to which U.S. consumers already have benefited by substituting natural gas for oil, and how much they potentially stand to gain if they were to continue to do so. We also analyze recent trends in domestic crude oil production and imports in order to grasp how much the United States pays foreign producers for oil.

First-Half Seventh District Manufacturing Performance - Chicago Fed - While manufacturing activity has been slowing over the past couple of months, its performance over the first half of 2012 would definitely be scored as a positive for the region. Seventh District manufacturing activity built on its momentum from last year and continued to grow through the first half of 2012. Growth occurred at rates fast enough to virtually eliminate the output deficit that the Seventh District had developed relative to the U.S. during the Great Recession. Chart 1 shows the performance of the Federal Reserve Bank of Chicago’s Midwest Manufacturing Index versus the Federal Reserve System’s Manufacturing Production Index, which is part of its Industrial Production release. The Seventh District’s output deficit narrowed quickly in the early months of 2012, as growth in the Midwest manufacturing sector accelerated. Chart 1: Chicago Fed Midwest Manufacturing Index vs. U.S. Manufacturing Production Index

Goods Are Good, Services Stink: Chart Of The Day - A curious thing happened on the way to (ever deferred) recovery: America's goods manufacturing sector has been resilient, and in line what one would expect from a recovery. So far so good: the problem as everyone knows, 70% of US GDP is based on "services." And it is here that things get very ugly. As the charts of the day below show, while "goods have been good", it is services that have stunk up the economy in the post-depression era, and are what the Fed has been unable to do anything to stimulate, and by implication have kept US GDP subdued at stall speed levels. From Bank of America:The nature of this recovery – with growth concentrated in goods rather than services – leaves the economy particularly vulnerable to an uncertainty shock. Unlike prior recoveries, the service side of the economy has remained disproportionately weak. The service sector shrank as a share of the economy over the past two years. That said, this was only a slight reversal from the multidecade trend away from goods toward services, which has left services as 70% of the economy. The shift last year toward manufacturing and away from services was not due to an exceptional boom in manufacturing. The contribution to GDP growth from manufacturing was akin to prior cycles. The sector gained market share because of an exceptionally slow recovery in services.

Vital Signs Chart: Distressing Sign for Services Jobs - A gauge of service-sector employment fell in July. The Institute for Supply Management’s index of employment in nonmanufacturing industries — a proxy for the U.S. service sector — tumbled to 49.3 last month from 52.3 in June. Any reading under 50 indicates contraction. July marked the first time this year the employment measure contracted, a worrying sign for the economy.

US Trade Deficit Hits 20-Month Low - The combination of falling oil prices and increased exports has the US trade deficit at its lowest point since December 2010.  The Hill (“US trade deficit hits 18-month low“): The U.S. trade deficit in June hit its lowest level since December 2010, the Commerce Department said Thursday, as the gap between the nation’s exports and its imports from abroad narrowed to $42.9 billion.The numbers are good news for the Obama administration, which has come under attack from Mitt Romney for being “soft” on China, the main driver of the U.S. trade deficit. The Republican presidential candidate has vowed to designate China a currency manipulator on his first day in office. The trend was fueled by a record high in exports, which reached $185 billion thanks to spikes in sales of consumer goods, automobiles and and industrial supplies and material. U.S. sales of food and beverages abroad were down by $800 million, however. Imports of goods and services fell to $227.9 billion, down from $231.4 billion in May, driven in large part by falling oil prices.

U.S. trade deficit falls to lowest in 18 months - The U.S. trade deficit fell to its lowest level in 18 months in June, pushed down by a steep drop in oil imports and a rise in exports. The trade gap narrowed to $42.9 billion in June, down from $48 billion in May, the Commerce Department said Thursday.Exports rose 0.9 percent to a record high of $185 billion. Overseas sales of autos, pharmaceuticals, and industrial machinery increased. Despite Europe’s struggling economy, exports to the 27-nation European Union grew 1.7 percent. Imports fell 1.5 percent to $227.9 billion, the lowest in four months. A key reason was the average price of imported oil fell $7.78 to $100.13, the biggest drop in 3 ½ years. That brought the trade deficit in oil to its lowest level since November 2010 and accounted for half of the improvement in the overall trade gap. Excluding oil, the trade deficit dropped to $20.4 billion in June from $23.2 billion in May. Imports of computer equipment and TVs also declined. A narrower trade gap acts as less of a drag on growth because it means the United States is spending less on foreign-made products and is taking in more from sales of U.S.-made goods. The sharp drop in the deficit could mean the economy actually grew at a faster pace in the April-June quarter than first estimated. The government said last month that the economy expanded at a 1.5 percent annual rate in the second quarter. It will issue its second of three growth estimates later this month.

Trade Deficit declined in June to $42.9 Billion -- The Department of Commerce reportedTotal June exports of $185.0 billion and imports of $227.9 billion resulted in a goods and services deficit of $42.9 billion, down from $48.0 billion in May, revised. June exports were $1.7 billion more than May exports of $183.3 billion. June imports were $3.5 billion less than May imports of $231.4 billion. The trade deficit was below the consensus forecast of $47.5 billion. The first graph shows the monthly U.S. exports and imports in dollars through June 2012. Exports increased in June and imports decreased. Exports are 11% above the pre-recession peak and up 7% compared to June 2011; imports are just below the pre-recession peak, and up about 2% compared to June 2011. The second graph shows the U.S. trade deficit, with and without petroleum, through June.  The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. Oil averaged $100.13 in June, down from $107.91 per barrel in May. The decline in oil prices contributed to the overall decline in the trade deficit. The trade deficit with China increased to $27.4 billion in June, up from $26.6 billion in June 2011. Once again most of the trade deficit is due to oil and China.  Exports to the euro area were $17.4 billion in June, up from $16.4 billion in June 2011; so the euro area recession didn't lead to less US exports to the euro area in June.

Trade Deficit Drops -10.7% to $42.9 Billion for June 2012 - The U.S. June 2012 monthly trade deficit declined $5.12 billion to $42.924 billion. This is a -10.66% monthly decrease in the trade deficit, mainly due to increased exports. Exports increased $1.666 billion, or +9.09%. Imports declined $3.454 billion, a -1.49% decrease from May and mainly due to lower crude oil prices. This is the smallest monthly trade deficit in 18 months.  The three month moving average gives a trade deficit of $47.188 billion, down from $50.419 billion in May.  The U.S.-China goods trade deficit alone was, $27.401 billion, or 46.5% of the total goods trade deficit. The not seasonally adjusted China-U.S. goods trade deficit increased $1.358 billion, or +5.2% from last month. The 46.5% ratio includes oil, our biggest commodity import. For comparison's sake the not seasonally adjusted goods trade deficit by Census accounting methods was -$58.957 billion. China's never ending import barrage is highly cyclical as one can see in the below graph: We should also mention the quick to increase South Korea-U.S. trade deficit. From January to June 2012 we have a $7.246 billion trade deficit with Korea, a $832 million increase from a year ago. March 15th the South Korean NAFTA style trade deal went into effect. Below is a graph of the Korean goods trade deficit, not seasonally adjusted and also cyclical, in particularly the cyclical high point seems to be December. This month showed a significant Korean trade deficit decline but we don't expect this to last.

US, UK trade balance trends diverge sharply - The US posted the lowest trade deficit in 18 months driven by increases in exports and declines in imports, particularly due to lower oil prices. WSJ: - The U.S. trade deficit with other countries narrowed to $42.9 billion in June from $48 billion a month earlier, the Commerce Department said Thursday, as imports fell and exports grew. Exports, which have been a pivotal contributor to the economic recovery, were strong almost everywhere except to Europe, where a recession and a protracted sovereign-debt crisis have sapped demand. Europe's lackluster appetite for U.S. goods was more than countered by countries such as China, where reliance on U.S. exports continues to expand, even as that economy has slowed from double-digit growth.  In June, the U.S. notched increases in exports of a variety of goods including pharmaceuticals, cars and industrial engines. Exports increased $1.7 billion to $185 billion, the highest monthly tally ever. Imports declined $3.5 billion to $227.9 billion, driven largely by a drop in oil prices that reduced the value of petroleum imports. On the other hand the UK posted the worst trade deficit in at least 15 years. WSJ: - The U.K.posted its largest overall trade deficit since comparable records began 15 years ago, indicating that weak demand for British goods, in Europe and beyond, is hampering the country's efforts to trade its way out of recession.

U.S. Trade Deficit Largely Due to "Intra-Firm" Trade - The vast majority of the U.S. $727 billion trade deficit in goods for 2011 is due to "intra-firm" or "related party" trade, that is, trade between two units of the same corporation, according to the U.S. Census Bureau. This is significant because such trade is the most open to companies manipulating the prices between subsidiaries to minimize tax liabilities, usually known as abusive transfer pricing. Moreover, as Stuart Holland argued in 1987, intra-firm trade is also less responsive to changes in exchange rates than is trade between independent businesses, since within an individual multinational corporation each subsidiary will have a specific role to play in its supply chain, which won't be quickly changed. U.S. goods trade and related party trade (billions of dollars), world and selected countries, 2011: Sources: Total trade, U.S. Census, Trade in Good with World, Not Seasonally Adjusted; Related party (RP) trade, U.S. Census, NAICS Related-Party, select all NAICS2, 2011, all countries, variables "imports related trade" and "exports related trade" and layout by country. Canada, Ireland, and Mexico as linked.  As we can see, related party trade (which can mean trade within either a U.S. or foreign multinational corporation) is 27.6% of goods trade, but it represents a whopping 95.0% of the trade deficit. Moreover, in countries where the U.S. has heavy foreign direct investment, such as Canada, Ireland, and Mexico, the trade deficit for intra-firm trade actually exceeds the country's overall trade deficit. In fact, virtually all U.S. imports from Ireland take the form of intra-firm trade. This is no doubt due to Ireland's status as a tax haven and low corporate income tax rate of 12.5%.

Analysis: Good News in Rising Exports - Wells Fargo Senior Economist Eugenio Aleman talks with Jim Chesko about today’s reports on the U.S. trade deficit and initial jobless claims. The U.S. trade deficit in June shrank by 10.7% to $42.92 billion as imports declined amid weak oil prices, while the number of U.S. workers filing applications for jobless benefits fell by 6,000 last week.

The continuing growth in U.S. exports - And this is from a time of economic turmoil:The U.S. trade deficit with other countries narrowed to $42.9 billion in June from $48 billion a month earlier, the Commerce Department said Thursday, as imports fell and exports grew. Exports, which have been a pivotal contributor to the economic recovery, were strong almost everywhere except to Europe… In June, the U.S. notched increases in exports of a variety of goods including pharmaceuticals, cars and industrial engines. Exports increased $1.7 billion to $185 billion, the highest monthly tally ever. Imports declined $3.5 billion to $227.9 billion, driven largely by a drop in oil prices that reduced the value of petroleum imports. Total U.S. exports are up 6% in the first six months of 2012 from the same period a year ago. In the first half of 2011, they were up 16% from the year-earlier period. Here is more.  Here is my earlier American Interest piece on U.S. exporting trends, “What Export-Oriented America Means.”

U.S. Exports Will Soon Slide From Lofty Heights - Despite European recessions and Asia slowdowns, U.S. exports managed to hit a record high in June. It’s sure to be a short stay at the top. According to Thursday’s trade report, exports rose 0.9% to $185 billion in June. Coupled with a 1.5% drop in imports (mostly related to falling oil prices), the jump in foreign shipments sharply narrowed the trade deficit to $42.9 billion from $48.0 billion in May. The trade improvement is evident in goods alone, which make up the bulk of trade flows and account for all of the U.S. deficit. Even after price adjustments, U.S. merchandise shipments overseas hit a high at the end of June, and the real trade gap fell. Since the narrowing in the June gap was more than the Commerce Department had estimated in its first reading of second-quarter gross domestic product, the trade report suggests real GDP growth will be revised higher from its feeble 1.5% initial rate. (Although some of the trade strength will be offset by weaker inventory growth as seen in Thursday’s wholesale data for June.) A look at the details behind the top-line export numbers, however, reveals some quirks in the June exports number that are unlikely to be repeated.

US import prices fall on oil, industrial supplies (Reuters) - U.S. import prices unexpectedly fell in July for the fourth straight month as costs declined for imported oil, industrial supplies and even many consumer goods, further icing inflation pressures. Overall import prices dropped 0.6 percent last month, the Labor Department said on Friday. Import prices have only risen once in the last eight months. Analysts had expected import prices would rise 0.1 percent in July, and the decline could give the U.S. Federal Reserve more scope to ease monetary policy if policymakers think the economy needs it. Still, an increase in the pace of hiring in July has led some economists to think the Fed might not be ready for a new round of bond purchases, a monetary easing strategy known as quantitative easing. Despite the downward trend in prices, analysts pointed out that much of the decline has been due to a drop in the cost of oil.

Import Price declined 0.6 percent in July - I rarely mention import prices, but this suggests less price pressure ... from the BLS: U.S. Import and Export Price Indexes - July 2012 U.S. import prices declined 0.6 percent in July, the U.S. Bureau of Labor Statistics reported today, after decreasing 2.4 percent in June and 1.5 percent in May. In each of the past three months, falling prices for both fuel and nonfuel imports contributed to the overall drop. In contrast, U.S. export prices rose 0.5 percent in July following a 1.7 percent decline the previous month. ... Prices of U.S. imports fell 0.6 percent in July, the fourth consecutive monthly decline for the index following a 1.4 percent increase in March. Import prices also fell over the past 12 months, declining 3.2 percent after increasing 13.7 percent between July 2010 and July 2011. ... The price index for import fuel decreased 1.2 percent in July following declines of 8.8 percent, 5.6 percent, and 0.9 percent, respectively, in the previous three months.  It wasn't just energy. On non-fuel prices:  Nonfuel prices also fell in July, declining 0.4 percent following a 0.3 percent decrease in June and a 0.1 percent drop in May. The July decline was the largest monthly drop since a 0.4 percent decrease in June 2010, and was driven by lower prices for nonfuel industrial supplies and materials and foods, feeds, and beverages. Despite the decline over the past three months, nonfuel import prices were unchanged for the year ended in July ...

Wholesale Inventories Drop MoM First Time in 9 Months - As we noted last night, inventory destocking is the great unknown as far as consensus expectations and the wholesale inventories data this morning just confirmed that this is a worrying trend. With the first drop MoM since September 2011 and dramatically missing expectations, inventories dropped 0.2% and perhaps more worryingly - given the drop in inventories - is the critical inventory-to-sales ratio has now risen two months in a row as clearly sales are dropping faster than companies were expecting.

Conference Board Strikes Cautious Tone on Employment Data - A compilation of U.S. labor indicators eked out a small gain in July, a month when U.S. payrolls increased more than expected, according to a report released Monday by the Conference Board. The board said that its July employment trends index increased 0.41% to 108.11 from a revised 107.68 in June, first reported as 107.47. The July index is up 5.9% from a year ago. Despite the gain, the board put a cautious spin on the data. “There is no reason to expect employers to rapidly expand their workforce in the current economic environment, and the July pace of job growth [163,000] is unlikely to be sustained,” said Gad Levanon, director of macroeconomic research at the board. In July, five of the eight components within the ETI improved. These indicators included jobless claims and industrial production.

Governor Romney Re-Calibrates Employment Forecasts - Last May, Governor Romney stated that in a typical recovery, monthly employment increases should be about 500,000 per month [1]. The sheer implausibility of that statement (assessed in this post) has induced him to reduce his estimate (without explanation of the change) to 250,000 per month. [2]. In Figure 1, I provide a plot of the implied path, as well as that from his May statement (which made me laugh for days!). In other words, his forecast has moved from clearly “Heritage Foundation space” to something that seems a bit less implausible, even if not clearly motivated by a specific model  Interesting observations:

  • The 500,000 number clearly exceeds that recorded in recent history. Kudos to Governor Romney for disposing of that number.
  • While 250,000 jobs per month is more in line with recent “jobless recoveries” (i.e., after the recessions of 1990-91, 2001, and 2007-09), it is still substantially above that recorded during the G.W. Bush recovery (250K >> 91.7K). It is also very much above (!!!) the 11,100 jobs per month recorded during the entire G.W. Bush administration, when we last implemented tax cuts advocated by supply-side advocates.
  • 250,000 is also above that recorded in the 1991-2001 recovery (196,700/mo, mostly spanning the Clinton Administrations).
  • To my knowledge, the 250,000 figure is not based on simulations from a model. Rather (inferring from the Romney white paper), it is based on extrapolations from two previous recessions, specifically the 1974-75 and 1981-82 recessions.

Mixed Message on the Labor Front -- BLS released its Employment Situation Summary for July. The payroll survey showed an increase in employment of $163 thousand but that unemployment rate rose to 8.3%. So what was the deal from the household survey? Actually the labor force participation rate fell from 63.8% to 63.7% so the small rise in the unemployment rate masks the fact that the employment to population rate fell from 58.6% to 58.4%. The household survey indicates that employment dropped by 195 thousand last month. So I’m sure the political hacks will have lots to debate on this news. But one thing is crystal clear – we are still far below full employment. This Administration and the Federal Reserve need to do a lot more in terms of stimulus. Of course the Republicans are proposing even more fiscal austerity. Go figure!

Four Different Viewpoints on Employment; Reflections on Biased Reporting - The latest jobs report showing a Gain of 163,000 on the Establishment Survey, But a Loss of 195,000 Jobs on the Household Survey got me to thinking about trends in employment. Much depends on your frame of reference. I can easily make numbers look good or bad, depending on how I want to present them. (click on any chart for sharper image) Civilian Employment Since 2011. That certainly looks quite robust, but is that the real sustainable trend? Here is another view. Which trendline is correct? If I want to emphasize how poor the recovery has been, I just might use the above view. Notice that actual employment in 2008 was over 146 million. Employment fell to 138 million and has only taken back half of previous losses, making this the worst recovery on record. Returning to the first chart, I just may want to emphasize that a trend change may be in the works. Indeed, I do think that is the case based on collapsing new orders. I have made the case numerous times.

The US still has a serious jobs problem- July's unexpectedly strong jobs report is no cause for celebration, though it does offer reason for optimism.  The 163,000 increase in non-farm payrolls is partly due to the automakers laying off fewer employees than expected.  US auto sales should continue to be fairly strong because many people have held onto their cars for longer periods and many of these vehicles are showing signs of age.  There were other positives, with professional and business services rising by 49,000,  leisure and hospitality surging by 29,000, manufacturing employment increasing by 25,000 while health care employment registered a gain of 12,000.  The average workweek was unchanged at 34.5 hours.  Employment ticked up to 8.3% as the numbers of long-term unemployed, those out of work for 27 weeks or more, was little changed at 5.2 million. These people account for 40.7% of the unemployed.  Though the numbers of discouraged workers fell to 852,000, that figure is still extraordinarily high. The economy is more or less creating enough jobs to keep up with population growth.  As Bill McBride noted in Calculated Risk, at this rate the economy would add around 1.9 million private sector jobs in 2012, less than the 2.1 million it added in 2011.  That means that odds are strong that unemployment will remain at 8% at the end of the year.

Wait, the U.S. economy actually lost 1.2 million jobs in July? - As Jacob Goldstein of Planet Money points out, the U.S. economy had 1.2 million fewer jobs (pdf) in July than it did in June. But, according to the bureau, the economy still had 163,000 more jobs than one would’ve expected, given seasonal trends. That’s a sign of a steadily recovering labor market. So BLS reported it as a 163,000 gain in jobs. In theory, that makes sense. But some economists and analysts now wonder if the BLS seasonal adjustments are somehow off a bit. If the financial crisis and recession mucked with the seasonal ebb and flow of the economy, then the adjustments that BLS makes for its monthly reports might be a bit skewed. Some jobs reports might look much better than they actually are. And others might look worse. There’s some reason to suspect this is happening. For the past few years, as the chart below from Kevin Drum shows, the BLS jobs reports have followed an odd pattern each and every year (the chart shows new jobs gained in excess of 90,000, in order to take into account population growth): The summer jobs reports are typically lousy while the fall and winter jobs reports are often much, much stronger. Maybe that’s because the U.S. economy is following a roller-coaster pattern–healthy in winter, sick in the summer. Or maybe, as Floyd Norris suggests here, the economy is actually making slow, steady progress and the seasonal adjustments are just making things appear topsy-turvy.

Payroll Employment and Seasonal Factors- Brad Plummer at the WaPo discusses two issues with employment and seasonal factors: Wait, the U.S. economy actually lost 1.2 million jobs in July? The U.S. economy lost 1.2 million jobs between June and July. But that’s not how it got reported. When the Bureau of Labor Statistics (BLS) released its jobs figures for July, it said the economy gained 163,000 jobs. So what gives? BLS isn’t hiding anything. The discrepancy just has to do with what’s known as “seasonal adjustments.” The U.S. economy follows certain predictable patterns in hiring and layoffs every year. School districts always let workers go for the summer and hire in the fall. Retailers always staff up for the Christmas holidays and lay people off afterwards. Students always flood the labor market in June. So if we want to know how well the economy is doing, we want to know how many jobs were added after taking these predictable fluctuations into account.  But some economists and analysts now wonder if the BLS seasonal adjustments are somehow off a bit. If the financial crisis and recession mucked with the seasonal ebb and flow of the economy, then the adjustments that BLS makes for its monthly reports might be a bit skewed. Even in the best of years there are a significant number of jobs lost in January and July. In 1994, when the economy added almost 3.9 million jobs, there were 2.25 million lost in January 1994, and almost 1 million payroll jobs lost in July 1994. This graph shows the seasonal pattern for the last decade for both total nonfarm jobs and private sector only payroll jobs. Notice the large spike down every January.

The Employment Rate In The United States Is Lower Than It Was During The Last Recession - Did you know that a smaller percentage of Americans are working today than when the last recession supposedly ended?  But you won't hear about this on the mainstream news.  Instead, the mainstream media obsesses over the highly politicized and highly manipulated "unemployment rate".  The media is buzzing about how "163,000 new jobs" were added in July but the unemployment rate went up to "8.254%".  Sadly, those numbers are quite misleading.  According to the Bureau of Labor Statistics, in June 142,415,000 people had jobs in the United States. In July, that number declined to 142,220,000. That means that 195,000 fewer Americans were working in July than in June. But somehow that works out to "163,000 new jobs" in July.  I am not exactly sure how they get that math to add up.   The employment to population ratio is a measure of the percentage of working age Americans that actually have jobs.  When it goes up that is good.  When it goes down, that is bad.  In July, the employment to population ratio dropped from 58.6 percent to 58.4 percent.  Overall, the percentage of working age Americans that have jobs has now been under 59 percent for 35 months in a row. The following is a chart of the employment to population ratio in the United States over the past 10 years....

Unemployment Rates at Various Demographic Labor Pool Growth Rates - Fed chairman Ben Bernanke estimated it takes about 125,000 jobs per month to keep up with birthrate and immigration. I think because of boomer retirements, the number is much lower, say 75,000 jobs a month.  However, there has been almost no increase in the labor pool for the past four years as noted in Reader Questions: Who is "Not in Labor Force"? Who is Counted as Unemployed? The labor force peaked at 154,875,000 in October of 2008, exactly on the cusp of the great recession.  The current labor force is 155,013,0000 barely above what it was nearly four years ago.  At 75,000 per month since October 2008, the labor force should have risen by 3,450,000 not 138,000. The result is a huge unwarranted drop in the stated unemployment rate. The above chart is courtesy of my friend Tim Wallace. I asked for a chart that shows what the unemployment rate would look like at various demographic labor pool growth rates, starting January 1, 2008. The chart is not seasonally adjusted. It compares July 2012 to the same month in prior years. At 100,000 per month, the unemployment rate would be over 11%.  The unemployment rate would be even higher if Ben Bernanke was correct. If my estimate of 75,000 per month was correct, the unemployment rate would be about 10.5%. At a meager 25,000 per month growth rate, the unemployment rate would be over 9.0%. The only reason the unemployment rate is artificially low because in the last year alone In the last year, those "not" in the labor force rose by a staggering 2,027,000.

Weekly Unemployment Claims: A Surprising Drop to 361,000 - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 361,000 new claims was a 6,000 drop from the previous week's upward revision of 2,000. The less volatile and closely watched four-week moving average rose to 368,500. Here is the official statement from the Department of Labor:  In the week ending August 4, the advance figure for seasonally adjusted initial claims was 361,000, a decrease of 6,000 from the previous week's revised figure of 367,000. The 4-week moving average was 368,250, an increase of 2,250 from the previous week's revised average of 366,000.  The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending July 28, unchanged from the prior week's unrevised rate.  The advance number for seasonally adjusted insured unemployment during the week ending July 28 was 3,332,000, an increase of 53,000 from the preceding week's revised level of 3,279,000. The 4-week moving average was 3,304,750, an increase of 4,500 from the preceding week's revised average of 3,300,250.  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.

Weekly Jobless Claims Remain Near Four-Year Low - Today’s weekly update on initial jobless claims tells us that nothing much has changed. That’s a good thing when it comes to evaluating the business cycle at the moment. This leading indicator fell modestly by 6,000 last week to a seasonally adjusted 361,000, the Labor Department reports. That’s near a four-year low, a sign that recession risk is low. With today's claims update in hand, it’s getting easier to argue that the past several months represent a temporary setback in the otherwise ongoing but slow downtrend in new filings for jobless benefits. If the labor market’s capacity for growth was truly collapsing, as some pessimists have argued, there’d be a clearer sign via deterioration in the claims numbers. So far, however, arguing on behalf a darker view is a stretch based on what we know as of this morning--a point supported by July's rebound in the growth of private payrolls.

Vital Signs Chart: Lower Jobless Claims - Initial claims for jobless insurance are down. First-time claims for unemployment insurance — a gauge of labor-market health — fell 6,000 to 361,000 last week. Claims had flashed worrying signs in much of April and May, rising to the 380,000 to 390,000 range as hiring slowed. The most recent figure shows that the labor market, while slow, may be starting to stabilize.

BLS: Job Openings increased in June -- From the BLS: Job Openings and Labor Turnover Summary There were 3.8 million job openings on the last business day of June, little changed from 3.7 million in May, the U.S. Bureau of Labor Statistics reported today.  The level of total nonfarm job openings in June was up from 2.4 million at the end of the recession in June 2009.  In June, the quits rate was unchanged for total nonfarm, total private, and government. The number of quits was 2.1 million in June, up from 1.8 million at the end of the recession in June 2009. .. The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.  difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for June, the most recent employment report was for July. Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.  The number of job openings (yellow) has generally been trending up, and openings are up about 16% year-over-year compared to June 2011. This is the most job openings since mid-2008.

Hiring in Northeast, West Lags South and Midwest - If you’re looking for a job, think about heading to Middle America. Last week’s July jobs report beat expectations, but it didn’t change the fact that the economy remains rough for job seekers. A new report on Tuesday gives a more detailed picture, albeit one that isn’t quite as up-to-date. The Bureau of Labor Statistics’ monthly Job Opening and Labor Turnover Survey, or JOLTS, lags a month behind the main employment report, so July data won’t be available for another month. Job openings hit their highest level in nearly four years, an encouraging sign that employers are seeing more demand for their products. But as has been a consistent problem in the recovery, companies are proving reluctant to fill their vacant positions. Job postings have risen 16% in the past year and are up 57% since the recession ended three years ago. But actual hiring is up just 19% in the recovery and a measly 3.6% in the past year. There are now 3.4 unemployed workers for every job opening, down from 4.3 a year ago, but little improved so far this year. A regional breakdown of the figures shows significant variation across the country. In the Midwest, hiring is up nearly 38% in the recovery, and the hiring rate — the number of hires per employed worker — has returned to pre-recession levels. The South’s rebound has been nearly as strong. Both regions have about three unemployed workers per job opening, better than the national average.

Workers’ Wages and Salaries Doing a Bit Better - It has been a long time coming, but U.S. workers seem to be reaping just a bit more of what they produce. Wednesday’s report on productivity and labor costs show productivity increased at a larger-than-expected 1.6% in the second quarter, but compensation rose even more, leaving unit labor costs rising at a 1.7% pace. When compared with year-ago levels, growth in productivity has been hovering around 1% for the past six quarters, while unit costs are up a faster 1.4%. The trends aren’t unusual at this stage of a recovery but they are having an impact on profits. “The net slowing in productivity and acceleration in [unit labor costs] are the main reasons corporate profit growth has slowed as the recovery has matured,” says Jim O’Sullivan, chief U.S. economist at High Frequency Economics. “In effect, growth in the economic pie was disproportionately benefiting corporate profits early in the expansion, with more balance recently.” Revisions to economic activity from 2009 through 2011, released at the end of July, also show a similar shift toward worker income and away from corporate earnings. The Bureau of Economic Analysis revised down sharply profits economy-wide in each year, but wages and salaries on net were refigured slightly higher.

U.S. Worker Productivity Up 1.6 pct. in 2nd Quarter - U.S. workers increased their productivity in the April-June quarter after companies scaled back hiring and got more out of their existing work forces. The gain was modest and suggests some companies may have to hire more workers if demand picks up. The Labor Department said Wednesday that productivity rose at an annual rate of 1.6 percent in the second quarter. It fell 0.5 percent in the first quarter, a smaller decline than first estimated. Productivity is the amount of output per hour worked. Rising productivity can slow job creation because it means companies are getting more from their current staff and don’t need to add workers. But productivity is increasing at a relatively weak pace. It is up only 1.1 percent compared to a year ago. Since 1947, productivity gains have averaged 2.2 percent a year.

Vital Signs Chart: Productivity Snaps Back - Labor productivity snapped back as firms slowed their hiring. Productivity — output per hour worked — rose at a 1.8% annual rate in the second quarter, compared with a 0.5% decline in the first three months of the year. While rising productivity normally is a good thing, the second-quarter increase reflects a slower pace of hiring rather than increased output.

Boy, Are We Ever “Competitive” -- New productivity numbers came out this AM showing, among other things, just how weak the expansion has been in terms of real compensation.  I’ve featured this at OTE for a while now in posts on surging profits (the growth has to going somewhere, right?), but these data reminded me of the ongoing productivity/comp split. Before I get into the evidence, a few points.  First, it’s been the pattern in recent expansions for productivity to start out growing faster than average compensation (and average comp tends to grow faster than median and lower wages, of course).  The result is related to jobless recoveries, where real output starts to rebound yet labor markets remain slack, boosting productivity and leading to low pressure on wage growth and quickly recovering profit rates. In this climate, firms squeeze as much output as they can out of their workforce before committing to any new hires, as they try to maintain profit margins by holding down labor costs.Eventually, average comp tends to accelerate, but, as I’ve discussed with economist Larry Mishel, there’s been a much longer pattern of productivity diverging from median comp (implying growing wage inequality and a shift from wages to profits).

Waiting in Vain for the Quick Fix - Jeffrey Sachs - Investors are awaiting the miraculous delivery from crisis by the ECB and the Fed, but they are waiting in vain. The economic problems in the U.S. and Eurozone are mostly structural, not monetary. Unfortunately ideologues and politicians on both sides of the spectrum are interested in quick fixes rather than the real groundwork of economic progress.  Consider the new U.S. unemployment announcement. If you are a college graduate, there is no employment crisis. 72.7 percent of the college-educated population age-25 and over is working. The unemployment rate is 4.1 percent. Incomes are good.  If you have less than a high-school diploma, however, you are barely scrapping by. Only 40.4 percent of those without a high-school diploma have a job. Their unemployment rate is 12.7 percent. Incomes are too low to make ends meet.  There are two Americas: the college-educated crowd that may have taken a hit in their retirement accounts, but who are generally doing well. Then there are the rest, around 60 percent of the population, who are increasingly dropping out of the middle class. Nearly one-half of American households are now classified as low-income, within twice the poverty line.

Unemployment Is Cyclical: Taking Jeffrey Sachs to School -  Jeffrey Sachs has played a useful role in challenging the economic orthodoxy in many areas over the last three years. However when he tries to tell us that the current downturn is structural not cyclical he is way over his head in the quicksand of the orthodoxy. Let's start with his simple bold assertion: "Consider the new U.S. unemployment announcement. If you are a college graduate, there is no employment crisis. 72.7 percent of the college-educated population age-25 and over is working. The unemployment rate is 4.1 percent. Incomes are good." Umm, no that's not right. If we go back to 2007 we would see that the unemployment rate for college grads was 1.9 percent at its low that year, less than half of the current rate. It averaged 1.6 percent in 2000.  If the current unemployment in the U.S. economy were structural than we should expect to see lower than normal for these college grads whose labor is in short supply. Instead, we see that their unemployment rate is more than twice the pre-recession level and close two and half times its 2000 level. We should also expect to see that real wages for college grads are rising rapidly. They aren't. They have not even kept pace with inflation for the last dozen years. In short, Sachs does not even have the beginning of an argument here. He better find some new data or give up his argument that the causes of unemployment are structural. His data indicate the opposite.

Back from Three Weeks Vacation with a Bold Proposal - Robert Reich - Every American should get a mandatory minimum of three weeks paid vacation a year. Most Americans only get two weeks off right now. But many don’t even take the full two weeks out of fear of losing their jobs. One in four gets no paid vacation at all, not even holidays. Overall, Americans have less vacation time than workers in any other advanced economy. This is absurd. A mandatory three weeks off would be good for everyone — including employers. Studies show workers who take time off are more productive after their batteries are recharged. They have higher morale, and are less likely to mentally check out on the job. This means more output per worker — enough to compensate employers for the cost of hiring additional workers to cover for everyone’s three weeks’ vacation time. It’s also a win for the economy, because these additional workers would bring down the level of unemployment and put more money into more people’s pockets. This extra purchasing power would boost the economy overall.

Does the clothesline paradox apply to IT? - Does the clothesline paradox apply to information technology? That will take some explaining. There are some terms to define. The clothesline paradox comes from energy economics. For a definition here is a quote from this well-meaning article from the Whole Earth Catalogue:If you take down your clothes line and buy an electric clothes dryer the electric consumption of the nation rises slightly. If you go in the other direction and remove the electric clothes dryer and install a clothesline the consumption of electricity drops slightly, but there is no credit given anywhere on the charts and graphs to solar energy which is now drying the clothes. In other words, standard approaches to economic measurement do not count inputs that lack a price. The clothesline paradox leads to under-counting the importance of activity that uses free endowments from nature. It is one of the quirks of modern economic measurement. No price equals no value. Why does that matter? For one, out of sight leads to out of mind. The sun does not have a firm that lobbies on its behalf. Policy conversation tends to favor existing firms with seemingly big economic contributions, and tends to underestimate the importance of the free.

Phantom Jobs - On his last day on the job, Kevin Flanagan, after clearing out a few personal effects and putting them in boxes in the back of his Ford Ranger, left the building where he'd worked for seven years. He settled into the front seat of his pickup truck on the lower level of the company garage, placed a 12-gauge Remington shotgun to his head, and pulled the trigger. He was 41 years old. He was a computer programmer. He'd been a programmer his entire working life. Until, that is, his job was shipped overseas. The business of moving traditional U.S. jobs abroad-called "outsourcing"-has been one of this country's few growth industries. It's the ultimate short-sighted business promoted by the country's elite because it means lower wages and fatter profits. As for the American workers eliminated along the way, they are just collateral damage. Kevin was a casualty of the new American economy. Only a few years before, programmers like him were seen as some of the brightest lights of a modern American workforce as technology became the backbone of so many corporate operations. His employer, Bank of America, did what so many companies now do to their employees. After years of dedicated service, one day they're told they're being replaced. Not because they haven't worked hard enough. Not because they aren't dedicated to their jobs. Not because they're not educated or qualified. They're being replaced because the company, thanks to federal policies, can hire someone else a lot cheaper.

In Outsourcing Attacks, Posturing and Little Leadership - Americans’ fear of foreign trade has grown sharply in the last 20 years, in tandem with a rising tide of globalization that has exposed American workers to overwhelming competition from laborers in developing countries.  In 1994, the year Nafta went into effect, trade amounted to 22 percent of the nation’s gross domestic product. By the eve of the financial crisis in 2008, it amounted to 31 percent. Over this period, the share of Americans who believed trade was a threat to the economy rose to 52 percent from 38 percent. Still, though our political leaders may feel workers’ pain, they have stopped short of following voters’ preferred prescriptions.  Last year, the White House pushed through free trade agreements with South Korea, Colombia and Panama despite the fact that only 38 percent of Americans supported the deals and 41 percent opposed them. Most Americans fear China’s rise as an exporting powerhouse. Many think Congress should slap tariffs on Chinese imports to compensate for its manipulation of the exchange rate. But the Obama administration, like the Bush administration before it, has repeatedly refused to do so.  A disconnect between campaign rhetoric and policy is hardly surprising. The most committed critics of the nation’s trade policies will argue that President Obama, like his predecessors, has been co-opted by pro-trade corporate interests. But the political contradictions wrought by globalization ring of more than politics as usual. More likely, our political leaders haven’t figured out what to do about this relentless economic force that is reshaping the American economy and society

Eduardo Porter’s “Folly”—Why we must end the “Race to the bottom” - Bill Black - Eduardo Porter began by studying physics but decided not to complete his studies and pursue a career in that field in favor of becoming a journalist. He worked for the Wall Street Journal before joining the New York Times, where he writes a periodic column. His primary interest is now economics. I was intrigued by a recent column he did entitled “The Folly of Attacking Outsourcing.” I reviewed a number of Porter’s NYT columns to get a feel for his views. Defending outsourcing and minimizing the criticisms of undocumented immigrants are his twin passions. He has written roughly a dozen columns on each of these topics. Porter’s starting point is neo-liberal economics. As I will show, he does so despite knowing that neo-liberal economics dogma has proven disastrously wrong. He often sees the errors, but he remains incapable of developing an alternative perspective. “Free trade” is the foundational neo-liberal creed. It is closely associated with a belief in the Schumpeter’s ode to “free markets” as a means to achieve “creative destruction.” These creeds define orthodox, neo-liberal economics and it is virtually impossible to be a member of the guild if one rejects these dogmas. The central difficulty with these beliefs is that they are labels that often have little to do with reality. Markets are not “free.” Indeed, the definition of “market” is a vague construct that is often defined circularly to produce “free” markets. When neo-liberal economists (rarely) try to provide a real definition of “free trade” actual trade is rarely “free” under that definition.

Where are the US jobs? Ask the corporate cash hoarders - As it does every month, Friday's jobs report is expected to underscore the desperate need for job creation in America. This time around, it would be refreshing if the pundit-political class considered a radical but obvious idea: tapping the multitrillion-dollar stockpiles of corporate cash currently sitting on the sidelines and benefiting no one. Compulsive hoarding is unhealthy for individuals. It's even worse for whole economies. The sorry facts are these: job growth is still half of what is needed to keep up with population growth. Meanwhile, more than 14% of the US workforce is unemployed, underemployed or discouraged from looking for work. Absent a massive inflow of tax dollars, jobs aren't going to come from the public sector. Obama's response to poor-if-slightly-improving numbers is to acknowledge that job creation isn't where it needs to be, but will eventually limp back to health. Mitt Romney says the numbers are catastrophic, and if only the US cut taxes for corporations and the rich, and busted unions, we'd open the floodgates to millions of jobs. In fact, both approaches only cause more harm – the former because many long-term unemployed are leaving the workforce for good, and the latter because it's a transfer of wealth to people and companies that will hoard money, not spend it. The only thing that will bring jobs back is more consumer demand. Demand comes from middle and working-class people spending money. That becomes a lot harder when you don't have a job, are afraid of losing the one you have, or are earning less than you used to for the same work.

Robert Samuelson's Generation Squeezed is Victimized by the One Percent, Not their Parents --- Ding, ding, ding! Robert Samuelson has just written the 1 millionth piece to appear in the Washington Post claiming that an aging population will undermine our children's prosperity. He gets awarded a miniature golden baseball bat to symbolize his and the newspapers decades of bashing the elderly and trying to take away their Social Security and Medicare. Arithmetic fans know that if our children and grandchildren live worse than we do it will be because the folks at the top grabbed away all the money. In any plausible scenario the gains from productivity growth will swamp any additional burdens placed on workers from a larger population of retirees. The projections that Samuelson cites to make his point in fact demonstrate the opposite. He told readers: "The ratio of workers to retirees, 5-to-1 in 1960 and 3-to-1 in 2010, is projected at nearly 2-to-1 by 2025." Yep, we have had a sharp decline in the ratio of workers to retirees from 1960 to 2010 (most of it by 1990) and yet average living standards rose substantially. This means that there is no reason that average living standards won't continue to rise in the next several decades as the ratio of workers to retirees falls further.

Has the Government Been Growing or Shrinking? Employment Edition - My recent post on government size prompted several readers to ask a natural follow-up question: how has the government’s role as employer changed over time? To answer, the following chart shows federal, state, and local employment as a share of overall U.S. payrolls: In July, governments accounted for 16.5 percent of U.S. employment. That’s down from the 17.7 percent peak in early 2010, when the weak economy, stimulus efforts, and the decennial census all boosted government’s share of employment. And it’s down from the levels of much of the past forty years. On the other hand, it’s also up from the sub-16 percent level reached back in the go-go days of the late 1990s and early 2000s. Employment thus tells a similar story to government spending on goods and services: if we set the late 1990s to one side, federal, state, and local governments aren’t large by historical standards; indeed, they are somewhat smaller than over most of the past few decades. And they’ve clearly shrunk, in relative terms, over the past couple of years. (But, as noted in my earlier post, overall government spending has grown because of the increase in transfer programs.

Government Has Smallest Workforce Since 1968 -- We’ve been talking about how this Great Recession, and its aftermath, represents a private-sector recovery and a public-sector depression. We haven’t seen government payrolls get slashed this deeply in some time in America. In fact, we now have statistics to put to that, courtesy of Jordan Weissman at the Atlantic. He looks at the ratio of government employment – at the local, state and federal levels – to the US population, and finds that the ratio is at its smallest point since 1968. That’s displayed in the chart above. In 1968, we were just at the beginning of delivering Medicare and Medicaid. We had a smaller government sector in terms of the services they provided. But now, we have the same ratio of government employees to the population doling out that larger amount of services, and performing that larger amount of tasks. It’s impossible for this to lead to anything but a poorer provision of those services, and poorer performance of those tasks. And who does this hurt? The most vulnerable segments of society, who inevitably qualify for more government services. Slashing government in this fashion inevitably rebounds back on the poor and the sick and the weak. But it also hurts the broader economy. The Hamilton Project, a centrist think tank, estimates that, if we had the same level of government employees to population that we had in 2007, we would have 1.7 million more workers on the job today. That’s enough to bring the unemployment rate down at least a full point, and probably closer to an even 7.0%

Cities in Northeast and South Lead Recovery - Cities throughout California continue to be the nation’s biggest economic laggards while the Northeast and South continue to fare better than average job growth, according to this report released today by the Urban Institute. The nation’s economic recovery is now in its fourth year but remains woefully slow on job growth. The nation’s 100 largest metropolitan areas saw employment decline by a median of 5% through the recession, which ended in June 2009. Since then they’ve seen media employment growth of 1%, according to the Urban Institute in Washington. The unemployment rate remains stuck in a narrow range between 8.1% and 8.3% this year. But below that national trend lies considerable regional variation. Despite a nascent real-estate recovery, cities that were hard hit by the bust remain worst off while southern cities, buoyed by faster population growth and industries like manufacturing and energy exploration, remain the most insulated by the recession. Most of the rest of the nation remains a hodgepodge of conflicting trends that are emblematic of the jagged national recovery.

Investment, employment trends belie claims - The claim that an excess of regulatory activity is stifling the economy and jobs growth continues to ignore the roots of the economy’s problems (the collapse of the housing and financial sectors) and the reality of current economic trends. We will save discussion of the causes of the downturn for a different day, except for noting the irony that regulatory opponents are fighting implementation of the stronger financial rules that could help prevent future collapses. Instead, we will update key information from a previous EPI analysis of whether business decisions, specifically investments, are consistent with the excessive regulation story. The earlier report documented that “what employers are doing  in terms of hiring and investment” was inconsistent with business claims that regulatory uncertainty under the Obama administration was impeding job growth. The new data include four additional quarters of results and also take into account revisions to the earlier data that were made available in late July (the Bureau of Economic Analysis annual benchmarking of the National Income and Product Accounts data leads to some revisions). Altogether, we are now able to compare investment trends during the first 12 quarters (or three years) of this recovery to the first 12 quarters of the three prior recoveries. Of particular interest is whether businesses are holding back from investing in equipment and software because of fears of new or potential regulations.

Congress Goes Postal -  The Postal Service has multiple financial problems, and, earlier this year, the Senate passed a bipartisan bill to deal with them. It would not have fixed everything, or even resolved the question of whether the strapped agency would be allowed to discontinue Saturday mail delivery as a cost-savings measure. “It’s not perfect,” admitted Senator Tom Carper of Delaware, one of the sponsors.  At this point, the American public has been so beaten down by Congressional gridlock that “it’s not perfect” sounds fine. In fact, we’d generally be willing to settle for “it’s pretty terrible, but at least it’s something.”  The Senate plan would have definitely been preferable to the Postal Service default, which could be followed by an all-purpose running-out-of-cash later this fall. Carper was pretty confident that if the House passed a postal bill of any stripe, the two sides could work out a compromise during the long August vacation. That would presumably be a watered-down version of imperfection, which, as I said, is exactly what we’re currently dreaming about.  But the House leadership wouldn’t bring anything up for a vote. Speaker John Boehner never said why. Perhaps he was afraid voters would blame his members for the closing of underused post offices. There is nothing Congress cares more about than post offices, 38 of which the House has passed bills to rename over the past 18 months.

Lucrative Gambling Pits Tribe Against Tribe - With little accessible space on its 40-acre territory, the 800-member tribe used government grants last year to buy a nearby trailer park that is now home to a dozen families. About half live in old trailers that were used by the Federal Emergency Management Agency to house those displaced by Hurricane Katrina.  To pull itself out of poverty, the tribe applied in 2002 to build an off-reservation casino at a spot with more economic potential, near towns and highways about 35 miles south of here. After the federal government gave its approval last year, the final decision now rests with Gov. Jerry Brown, who is expected to decide on the fate of the Enterprise casino and another tribe’s off-reservation proposal by an Aug. 31 deadline.  But plans for the two casinos are drawing fierce opposition and last-minute lobbying in the state capital from an unexpected source: nearby tribes with casinos that they say will be hurt by the newcomers.

Extended Benefits Come to an End - After this week, no state will provide additional weeks of emergency federal unemployment insurance (UI) payments through the Extended Benefits (EB) program, as federal UI benefits continue to wind down.  As we’ve explained previously, EB will no longer be available in any state, not because most states’ economies have improved to anywhere near pre-recession conditions, but because they have not significantly deteriorated in the past three years. Idaho was the last state offering EB, but its most recent three-month average unemployment rate of 7.7 percent did not meet the necessary criterion of being at least 10 percent higher than the comparable rate in any of the three previous years.  As a result, Idaho “triggered off” EB as of the week ending July 21 and will make its final EB payments this week. The table below shows the number of people in each state affected by the premature end of EB.  The maps below that show the maximum number of weeks of UI that will be available in each state beginning next week, compared with the maximum number of weeks that were available at the beginning of the year.

If the economy’s still weak, why are states cutting unemployment benefits? - The U.S. economy is about to reach a dreary milestone. At the end of this week, not a single state in the country will offer “extended benefits” to unemployed workers. The  program, which has long helped Americans who have been out of the job for many months, has been shrinking all year. And, as a result, more than 511,000 unemployed workers have now lost their jobless benefits. The unemployment program wasn’t designed to deal with a stagnating labor market of the sort the United States is now stuck in. Hannah Shaw of the Center on Budget and Policy Priorities (CBPP) explains. Since 1970, states have been able to offer “extended benefits” on top of regular unemployment insurance when times are tough. That’s usually an extra 13 or 20 weeks of coverage. And the states typically get matching funds from Congress to do so—right now, thanks to the stimulus, the federal government will pick up the entire tab until the end of 2012. But there’s a catch. Under the often-complicated rules, states can only offer extended benefits if their unemployment rate continues to get worse year after year. And that’s not happening right now. The jobs market isn’t getting significantly better. But it’s also not getting significantly worse. So many states have to switch off their extended benefits, even though unemployment remains high.

Cutbacks to Unemployment Insurance Came Long Before the Great Recession - You may have heard that we’re in the middle of an unemployment crisis. It’s little wonder that an average of 365,500 people per week made new claims for unemployment benefits over the past month. These high numbers have been straining unemployment insurance programs at the federal and state level, and many states have run out of reserves to pay for them, triggering a reduction in benefits. But this crisis wasn’t inevitable. The pull back in unemployment benefits is just another result of state-level choices to cut taxes at the expense of state spending, spending that could be cushioning the blow of the Great Recession.  As a new report from the National Employment Law Project shows, it was because they failed to finance them during the good times like they’re supposed to. Here’s the way it works: federal law requires each state to collect unemployment insurance contributions from employers and deposit them into a state trust fund held in the treasury. During good times, the trust funds accumulate reserves so that claims can be paid out during downturns. The problem is that employer contribution rates vary among and even within states. Not shockingly, business groups turn on political pressure to reduce employer contributions and taxes during good times before the coffers are adequately full. That left many of the reserves underfunded, especially when they were called upon to respond to the financial crisis.

Median Wages Have PLUMMETED Since 1969 - (graphs) - Wages need to rise to keep up with inflation, especially since the value of the dollar has been trashed: But Michael Greenstone and Adam Looney of the Hamilton Project  document (hat tip Ezra Klein) that real median earnings for men declined between 1969 and 2009:  And wages have only kept dropping since 2009. In addition – when those who have only part-time work are taken into account – we have depression-level unemployment. As Klein notes: When you take all men, not just those working fulltime, into account, the slight decline in the above graph becomes a plummet of 28 percent in median real wages from 1969 to 2009.  The bottom line is that – due to idiotic government policy – most of the jobs being created are part-time and low wage jobs.

Jared Bernstein: If we were really debating Welfare-to-Work, we'd be talking about jobs - I’m here to make a different point about this latest kerfuffle, one that’s been overlooked but shines some relevant light on candidates’ policy positions on the issue of welfare reform. Welfare-to-work doesn’t work without jobs. So if you want to evaluate the candidates or the parties based on how committed they are to work-based welfare, check out their commitment to helping low-income parents find jobs. It sounds terribly obvious, I know, but if you pay any attention to this debate, you know that this simple reality is constantly overlooked. It is widely agreed upon that work requirements should be part of programs that provide cash assistance to poor, typically single-parent families. And when this became law in the mid-1990s, the employment rates of poor single mothers grew to record high levels, leading many to proclaim the reform a great success (see figure here).But it's now clear that work-based welfare only works when the push of work requirements is met with the pull of a full-employment job market. Such conditions prevailed in the 1990s but they haven’t since. In their absence, the welfare program actually performed quite poorly in the Great Recession, failing to respond as vulnerable families lost what work they had.

From Occupying Wall Street To "Dying For Work"? - Imagine you are driving to work this morning in Las Vegas and you observe what appears to be a man who hung himself below a billboard saying "Dying for Work." Confused, you continue, only to drive by another billboard with what seem to be a man hanging off, this one saying "Hope you're happy Wall St." Slowly it all clicks: the man is not real, and this is not a suicide done in protest by some depressed unemployed person, instead it is merely a mannequin all part of some attempt at a statement. Would this be considered shocking, and will the thousands of commuters who saw this feel any worse or better toward Wall Street and its employees - America's bankers - having seen this, or will they merely continue with their lives? What if the dummy was a real person? And is this merely a foreshadowing of things to come in a country in which class warfare has never been as violent, and in which the divide between the haves and the have nots has never been as wide? And what happens when the next such stunt is a real person? More importantly, what happens if a depressed jobless person takes their life but first takes out some of those he thinks are responsible for his plight - say Wall Streeters?

Human Nature — Exhibit B - All complex human societies tend toward great wealth and income disparities. There are no significant exceptions to this rule over 6,000 years of human history. Socialist experiments in the 20th century also resulted in societies divided into the Haves and the Have-Nots. This is a follow-up to Human Nature — Exhibit A. The rise of a prosperous middle class in the United States was a short-lived (historically) experiment which has now reverted back to normal, a kind of social regression toward the mean. The first graph doesn't bother to show the change in income for Americans below the 50th percentile. This graph does. It is remarkable that few Americans notice or seriously consider what has happened to them. Occupy Wall Street, which used "We Are The 99%" as its theme, was a small, short-lived movement. Any serious discussion of the United States needs to take this blindness, or indifference, into account. It is hard for us to remember in 2012 the great struggle workers went through to raise their wages and living standards in the late 19th and early 20th centuries. Those efforts bore fruit after World War II, but that's all over now.

Universal basic income: how much would it cost? - We were talking not long ago about universal basic income policy, and there were a variety of opinions about the desirability, political sustainability and implications of such a policy. But, before arguing about those issues, it’s useful to consider whether a basic income is feasible at all and, if so, what kinds of tax policies, and adjustments to other welfare policies, would be required to support it. I’ve considered the relatively easy case of a guaranteed minimum income, rather than a universal basic income paid to everyone, as advocated by Philippe von Parijs and others. I’m going to work through it with a more or less realistic numerical example, with numbers chosen to simplify the calculations. The first simplification will be to consider only adults (I’ll try to explain my reasoning for children if I get time). I’ll assume that, initially 60 per cent of the population is employed and also that 60 per cent of income (before taxes and transfers) goes to labor, while 40 per cent goes to owners of capital and land. Initially, taxes are 30 per cent of total income, borne proportionally by labor and capital. For the moment, I’m going to ignore wage inequality, and write as if all workers get the same wage.

The transition problem for minimum income policies - I was planning this as a follow-up to my earlier post on the feasibility of guaranteed minimum income (GMI) and universal basic income (UBI) policies[1]. Although the two kinds of policies can be made roughly equivalent in terms of their effects on the distribution of income net of taxes and transfers, they seem (to me, at any rate) to indicate quite different political approaches, and therefore different transition paths, each with their own difficulties. For UBI, it seems natural to start with existing examples of unconditional and universal payments, such as the Alaska Permanent Fund, and the issue of shares in formerly state-owned enterprises in some transition economies. The natural approach, which seems close to what Chris is discussing, would be to accumulate a steadily increasing stock of income-generating public capital, and use the return to capital to fund a Basic Income Payment.The easy case is then the capital comes as a windfall, for example from mineral discoveries. But this is unlikely to be sufficient, except in the most favorable cases. Norway has probably done a better job of managing oil wealth than any other country and has accumulated about $600 billion, or around $120 000 per person, in its Government Pension Fund. Carefully invested, it might return $6000 per person per year. That’s impressive, but nowhere near enough to fund a poverty-line UBI.

A Slowdown in Growth, an Increase in Income Inequality - The income stagnation of the last decade stems, in the simplest terms, from two factors: a slowdown in economic growth and a rise in inequality, which has concentrated the economy’s modest gains among a small share of the population. In this post, I want to look at both factors in a bit more detail. The economy’s recent struggles arguably began in late 2001, when a relatively mild recession ended and a new expansion began. The problem with this new recovery was that it wasn’t especially strong. From the fourth quarter of 2001 through the fourth quarter of 2007 (when the financial crisis began), the economy grew at an average annual rate of only 2.7 percent. By comparison, the average annual growth rate of both the 1990s and 1980s expansions exceeded 3.5 percent. This mediocre expansion was followed by the severe recession and weak recovery brought on by the financial crisis. The combined result is that, in recent years, the economy has posted its slowest 10-year average growth rates since the Commerce Department began keeping statistics in 1947:

Always choose wealthy parents - Back in April, Mitt Romney delivered one of his more memorable pieces of advice. Talking to Otterbein University in Ohio, the Republican said President Obama is against "success" -- I still have no idea what that was in reference to -- but Romney prefers to "encourage young people.""Take a shot, go for it, take a risk, get the education, borrow money if you have to from your parents, start a business," Romney said. The line was significant because of what it told us about Romney's approach to economic opportunities. If you're a young person who can't afford rising college tuition rates and/or don't have the resources to launch a business venture, the GOP's would-be president has some advice for you: choose wealthy parents. I mention this because a very similar point came up yesterday at a Romney event in Elk Grove, Illinois, where the candidate was praising "the entrepreneurial spirit."

New Photo Essay Shows Human Dimension of Food Stamps - More Americans than ever before, 50 million, are in poverty. One in seven people rely on the government’s Supplemental Nutrition Assistance Program (SNAP) benefits, or food stamps. And they are not always the people you might expect. Formerly middle class families, veterans, college graduates and farmworkers are featured in our latest report, a photo essay produced by the Food & Environment Reporting Network in collaboration with Switchyard Media. The slideshow first appeared on MSN. Reporter Malia Wollan found that many of those featured are relying on foods like pasta and peanut butter to stave off hunger. Recent veteran Steven Johnson of Leander, Texas, was medically discharged from the Army in January, but has yet to begin receiving his disability benefits, which take an average of 394 days to process. After pawning jewelry and attempting to sell his TV on Craigslist, his family signed up for nutrition assistance. “Food stamps were the last resort for me,” says Johnson. Half of all food stamps recipients are children.  Food stamps cover the basics. “If we had more money to spend I’d buy more milk and more juice for the children,” he says.

The Real Problem With Welfare: It Stopped Helping the Poor - Mitt Romney has a new ad out accusing President Obama of attempting to "gut" welfare reform by letting states hand out cash to families that aren't working. At best, the claim seems to be some serious hyperbole surrounding the small kernel of truth that the administration wants to give states more leeway on how they move families into jobs. But hey, it's the summer, and campaigns need to fill air time, right? Rather than dwell on this skirmish, let's remember the bigger picture about the current state of our welfare system, as captured in this graph from the Center for Budget and Policy Priorities. Remember how Bill Clinton promised to "end welfare as we know it?" Well, did he ever. Clinton's big idea, if you'll recall, was to make families work for their cash benefits, which would expire after a few years. He also handed management of the system over to the states. The result: a massively shrunken program. Old-school welfare used to assist the vast majority of impoverished families. Workfare (or Temporary Assistance for Needy Families) reaches just about a quarter of them.

Nuns Challenge Romney To Spend A Day With Them To Learn About Plight Of America’s Poor - The group behind the Nuns On A Bus tour that highlighted the ill-effects of the House Republican budget in congressional districts across the country is now setting its sights on the party’s presidential candidate, inviting Mitt Romney to spend a day with the nuns to learn about the plight of America’s poorest citizens. NETWORK, a national Catholic social justice lobby, is inviting Romney to “spend a day with Catholic Sisters who work every day to meet the needs of struggling families in their communities,” according to a release. The group is specifically targeting Romney a day after his campaign released a misleading ad about welfare reform that Sister Simone Campbell, NETWORK’s executive director, said “demonize[s] families in poverty” and shows Romney’s “ignorance about the challenges” the poor face in America: “Recent advertisements and statements from the campaign of Governor Romney demonize families in poverty and reflect woeful ignorance about the challenges faced by tens of millions of American families in these tough economic times,” stated Sister Simone Campbell. “We are all God’s children and equal in God’s eyes. Efforts to divide us by class or score political points at the expense of the most vulnerable of our brothers and sisters reveal the worst side of our country’s politics.”

New York tests social impact bond investing with Goldman Sachs (Reuters) - Goldman Sachs will invest nearly $10 million in a New York City jails program, using an innovative financial instrument in which private investments fund public social services, Mayor Michael Bloomberg said on Thursday. Goldman will create one of the nation's first "social service bonds" to help fund a New York City program that aims to lower the 50 percent recidivism rate among youthful offenders jailed at the Rikers Island correctional facility. Unlike similar proposals being developed elsewhere, most of Goldman's ‘Rikers bond' will be guaranteed by Bloomberg Philanthropies, the mayor's philanthropic group, which will back $7.2 million of the $9.6 million investment the bank plans. Bloomberg called juvenile offender recidivism in New York City an "entrenched" problem. "Helping young people who land in jail stay out of trouble when they return home is one of the most difficult and important challenges we face," he said in a statement.

Solitary confinement: Torture chambers for black revolutionaries   Former Warden of United States Penitentiary Marion, the prototype of modern supermax-style solitary confinement, Ralph Arons, has stated: "The purpose of the Marion Control Unit is to control revolutionary attitudes in the prison system and in the society at large." One of these revolutionaries is Russell "Maroon" Shoats, the founder of the Black Unity Council, which later merged with the Philadelphia chapter of the Black Panther Party. He was first jailed in early 1970. Hailing from the gang-war-torn streets of West Philadelphia, Shoats escaped twice from prison system, first from Huntingdon state prison in September 1977 and then again in March 1980. Shoats' escapes - the first of which lasted a full 27 days, despite a massive national search complete with helicopters, dogs and vigilante groups from predominantly white communities surrounding the prison - earned him the nickname "Maroon", in honour of slaves who broke away from plantations in Surinam, Guyana and later Jamaica, Brazil and other colonies and established sovereign communities on the outskirts of the white settler zones.

Miami Declares Financial Urgency For Fourth Year In A Row  - Miami City Manager Johnny Martinez declared a state of financial urgency Friday for the fourth year in a row. The move gives the city commission authority to restructure its existing contracts with police, general employee, and fire unions. City commissioners agreed to not hike taxes in a budget meeting Thursday night, but instead will look to close a budget gap of tens of millions through union concessions. The $485 million budget must be balanced by September. "The unions are not cooperating with the process," Mayor Tomas Regalado told the Miami Herald. "We need to have a balanced budget." Martinez said in a statement that the city will be contacting union representatives to start up two weeks of negotiations. The declaration of urgency has likely incensed police and fire officials; according to Reuters, the latter group argued before city officials Thursday night that their pay has been cut 35 percent in the last 3 years already.

Rising Health, Pension Costs Top the List as Municipalities Struggle to Recover From the Recession - Fiscal woes that have caused high-profile bankruptcies in California are surfacing across the country as municipalities struggle with uneven growth and escalating health and pension costs. Moody's Investors Service recently said that while municipal bankruptcies are likely to remain rare, it warned of a "a small but growing trend in fiscally troubled cities unwilling to pay their debt obligations." Local government cuts are one factor slowing the broader economic recovery, offsetting stronger private-sector growth. State and local government spending and investment fell at a rate of 2.1% in the second quarter, according to the Commerce Department, the 11th consecutive quarterly drop. Local governments also have cut 66,000 jobs in the past year, mostly teachers and other school employees.

Will It Take Popular Pressure to Get Municipalities to Go After Libor Gaming Costs? - This Real News Network video provides an update on the Libor scandal. Tom Ferguson flags an issue that may come as a surprise to some readers. Even though states and municipalities are under extreme budget stress, which means one would think that getting restitution for extra Libor related costs due to price fixing would be a high priority, lax campaign finance rules at the state level may undermine these efforts.

Camden NJ, Population 77,344 Fires Entire Police Force, 270 Officers; Why Cities are Going Bankrupt - In an effort to rein in costs, the city of Camden NJ will fire its entire 270 member police force and instead will use Camden County officers.  Mayor Dana Redd and Police Chief Scott Thomson noted that for the same price, Camden can have 400 county officers on staff. That is nearly a 50% increase in the number of officers for the same price. Of course the unions are howling. In these cases, the county typically hires most or all of the officers at lower wage and benefit levels, but the article only notes a very vague "some current Camden officers will get jobs on the new force."

Vacant Detroit Becomes Dumping Ground for the Dead.  - From the street, the two decomposing bodies were nearly invisible, concealed in an overgrown lot alongside worn-out car tires and a moldy sofa. The teenagers had been shot, stripped to their underwear and left on a deserted block. They were just the latest victims of foul play whose remains went undiscovered for days after being hidden deep inside Detroit's vast urban wilderness - a crumbling wasteland rarely visited by outsiders and infrequently patrolled by police. Abandoned and neglected parts of the city are quickly becoming dumping grounds for the dead. And authorities acknowledge there's little they can do. The bodies have been purposely hidden or discarded in alleys, fields, vacant houses, abandoned garages and even a canal. Seven of the victims are believed to have been slain outside Detroit and then dumped within the city. "Detroit is a dumping ground for a lot of stuff," . "There is no one to watch. There is no capacity to enforce laws about dumping. There is a perception you can dump and no one will report it."

Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools - Last year the Poway Unified School District made a deal: It borrowed $105 million from investors to fund a final push in its decade-long effort to revamp aging schools. Without increasing taxes, the district couldn’t afford to borrow money in the conventional way. So, instead of borrowing from investors over 20 or 30 years and paying the debt down each year, like a mortgage, the district got creative. With advice from an Orange County financial consultant, the district borrowed the money over 40 years in a controversial loan called a capital appreciation bond. The key point for the district: It won’t make any payments on the debt for 20 years.And that means the district’s debt will keep getting bigger and bigger as interest on the loan piles up. As well as being expensive, capital appreciation bonds work by tapping future growth in property values to pay today’s debts, a concept considered by many in the school bond business to be both risky and inequitable. In 1994, the state of Michigan banned school districts from issuing bonds like this, deeming them too toxic to taxpayers.Nevertheless, California’s ever-strapped districts have increasingly looked to capital appreciation bonds to raise money for improvements without increasing taxes on current residents. Across the state, districts have borrowed billions this way, using exotic financing to shift the burden for paying for today’s school construction to future generations of Californians.

Looterism -- My friend Nik recently sent me a PandoDaily article written by Francisco Dao entitled Looterism: The Cancerous Ethos That Is Gutting America. He defines looterism as the “deification of pure greed” and says: The danger of looterism, of focusing only on maximizing self interest above the importance of creating value, is that it incentivizes the extraction of wealth without regard to the creation or replenishment of the value building mechanism. I like the term, I think I’ll use it. And it made me think of this recent Bloomberg article about private equity and hedge funds getting into the public schools space. From the article: Indeed, investors of all stripes are beginning to sense big profit potential in public education. The K-12 market is tantalizingly huge: The U.S. spends more than $500 billion a year to educate kids from ages five through 18. The entire education sector, including college and mid-career training, represents nearly 9 percent of U.S. gross domestic product, more than the energy or technology sectors.

Feds: Authorities in Meridian, Miss. Violated Rights of Black Children - The Justice Department’s Civil Rights Division has released investigative findings determining that children in predominantly black Meridian, Miss.  have had their constitutional rights violated by the Lauderdale County Youth Court, the Meridian Police Department, and the Mississippi Division of Youth Services in what civil rights investigators allege is a school to prison pipeline with even dress code violations resulting in incarceration. The Justice Department has been investigating the agencies since December 2011 and found that the police department arrests children  without probable cause,  violating the children’s Fourth Amendment protections of unlawful search and seizure. Also in the findings letter the Civil Rights Division alleges that “Lauderdale County and the Youth Court Judges violate the Fourth, Fifth, and Fourteenth Amendments by failing to provide children procedural due process in the youth court. Lauderdale County, the Youth Court judges, and the Mississippi Division of Youth Services violate the Fifth and Fourteenth Amendments by failing to provide children procedural due process rights in the probationary process.”

The Numbers Speak: Foreign Language Requirements Are a Waste of Time and Money - The average high school graduate spends two years studying a foreign language. (Digest of Education Statistics, Table 157)  What effect do these years of study have on Americans' actual ability to speak foreign languages? After nosing around for better data, I turned to the General Social Survey.  As usual, I was not disappointed. In 2000 and 2006, the GSS asked over 4000 respondents the following three questions*:
1. Can you speak a language other than English?  [Responses: Yes/No]  (OTHLANG)
2. How well do you speak that language?  [Responses: Very well/well/Not well/Poorly or Hardly at All]  (SPKLANG)
3. Is that a language you first learned as a child at home, in school, or is it one that you learned elsewhere?  [Responses: Childhood home/School/Elsewhere] (GETLANG)
The results showed an even smaller effect of foreign language instruction on foreign language fluency than I expected. 25.7% of respondents speak a language other than English.  Within this sample, 41.5% claim to speak the other language "very well."  Within this sub-sub-sample, just 7.0% say they learned to speak this foreign language in school.  If you multiple out these three percentages, you get 0.7%.  The marginal product of two years of pain and suffering per high school graduate: less than one student in a hundred acquires fluency.  (And that's self-assessed fluency, which people almost surely exaggerate).

The difference between a high school dropout and a college degree? A decade in lifespan - We know that education has a big impact on earnings and the ability to find employment. It also turns out to have a huge influence on how long Americans live: White men with less than a high school diploma had a life expectancy 12.9 years shorter than those with 16 or more years of education, according to new research in the journal Health Affairs. For women, the life expectancy gap stands at 10.4 years. Here’s another way to think about that: Americans with fewer than 12 years of education have a life expectancy that’s not much better than adults in the 1950s and 1960s. That tends to get masked by the overall increases in life expectancy the country has experienced. The education disparity in life spans looks to have increased in recent decades. This paper shows that back in 1990 differences tended to be much smaller. The  size of the disparity does vary by race, too. Here’s one chart from the paper that shows life expectancy for various levels of education, broken down by race and gender. The gaps between the most educated white men and women tend to be bigger than those of other racial backgrounds.

One Reason Why Merit Pay Fails - The assumption behind merit pay is that teachers are not trying hard enough. The assumption is that a cash bonus will make them care and prod them to work harder and get those test scores up. For 100 years, school boards at the state and local level have tried merit pay and it has always failed to produce higher test scores. There are many reasons for this. One is that merit pay is intrinsically insulting. It presumes that it takes a cash prize to incentivize lazy teachers. But when there are two groups, one offered merit pay, the other not, they seem to get the same results. That’s because the teachers in both groups are doing the best they can to get their students to learn.

Teacher incentives: F is for fewer bucks - HOW do you improve education? To economists the answer is simple. Pay teachers for performance: if the pupils get good test results, give the teacher a bonus. Attempts to incentivise US teachers to bump up grades have generally proven ineffective, however. The solution, according to a recent research paper finds, is to hand teachers a large sum in advance and dock their pay if students flunk their exams. This gets results. The authors of the paper divided Chicago teachers into two groups: a “loss” group and a “gain” group. They paid “loss” teachers a bonus of $4,000 at the start of term. If exam results were below average, they took away up to $4,000, depending on performance. If results were above average, teachers could earn an additional sum of up to $4,000. “Gain” teachers were simply paid a bonus of up to $8,000. The same performance entailed the same bonus in each group. Yet the “loss” group lifted standards while the “gain” group did not. “Loss” teachers raised maths test scores by 0.2 to 0.4 standard deviations. These effects are comparable to lowering class size by more than a third. “Gain” teachers raised maths test scores by small and statistically insignificant amounts. The authors put the difference down to a phenomenon economists call loss aversion. Humans tend to fear a loss more strongly than they desire a gain of the same value.

Free Textbooks Shaking Up Higher Education - Though paying for tuition and housing eat up more money, textbook costs are among the most groan-inducing expenses incurred by college students. With tools like Amazon and, only the least resourceful of freshmen are blowing $200 for a brand new textbook these days. But a new type of textbook is threatening to disrupt a $4.5 billion industry that has so far avoided the media upheavals experienced in music, movies and trade publications. Open-source textbooks, free for students to use and for professors to modify, are being developed by more companies and adopted in more classrooms. They may work hand-in-hand with the rise in free online courses to revolutionize the way we view—and pay for—higher education. “There’s a crisis of access in this country,” says Richard Baraniuk, a computer and electrical engineering professor at Rice University. He’s talking about the rapidly increasing cost of college education, which includes not only tuition, but also room and board, class fees and, yes, textbooks. Estimates of how much students spend on textbooks in a given year vary widely, but most colleges’ financial aid websites peg the cost at about $1,000. Baraniuk thinks that cost should be reduced to zero. He’s been part of the open-source educational movement since 1999, when he grew frustrated with the book he was using in his electrical engineering class.

College Debt Hits Well-Off - Rising college costs and a sagging economy are taking the biggest toll on a surprising group: upper-middle-income families. According to a Wall Street Journal analysis of recently released Federal Reserve data, households with annual incomes of $94,535 to $205,335 saw the biggest jump in the percentage with student-loan debt from 2007 to 2010, the latest figures available. That group also saw a sharp climb in the amount of debt owed on average. The surge is leading many such families to look closer at cost and value when choosing colleges. The Journal's analysis defined upper-middle-income households as those with annual incomes between the 80th and 95th percentiles of all households nationwide. Among this group, 25.6% had student-loan debt in 2010, up from 19.5% in 2007. For all households, the portion with student loan debt rose to 19.1% in 2010 from 15.2% in 2007. The amount borrowed by upper-middle-income families, meanwhile, has soared. They owed an average of $32,869 in college loans in 2010, up from $26,639 in 2007, after adjusting for inflation, according to the Journal's analysis. Borrowing has also increased for lower-income families, but by a smaller amount. Families with lower incomes tend to send their children to lower-cost schools and to cover a greater portion of their costs through financial aid, according to Sallie Mae. The typical low-income family receives grants and scholarships totaling 36% of the cost, the lender says, while for higher-income families such packages total 21%.

Yes, College Is Worth It — With Some Caveats - Soaring student debt loads and high levels of unemployment even among college graduates have led some people to question whether college is worth the money. New research from the Cleveland Fed provides the latest evidence that the answer is “yes” — but with a couple caveats. First a bit of raw data, courtesy of the Bureau of Labor Statistics: The unemployment rate for Americans with less than a high school degree was 12.7% in July. For those with a diploma but no college? 8.7%. Some college or an associate’s degree brings the rate down to 7.1%, and a bachelor’s degree or higher brings it down to 4.1%. So, more education clearly leads to better job prospects. It also leads to better jobs. The median worker with just a high school diploma earned $638 a week in 2011, 39% less than someone with a college degree. The trouble with those numbers, though, is that they’re extraordinarily broad, lumping together doctors and elementary school teachers and giving no indication of how the benefits of college have evolved over time. Jonathan James, an economist at the Cleveland Fed, helps disaggregate the data, at least a bit. First off, he distinguishes between the benefits of starting college and finishing it. Unsurprisingly, there’s a big gap. Less obviously, that gap has widened substantially over time.

The For-Profit College Racket - The for-profit college industry is known to most Americans by its commercials and billboards promising potential students new skills, job training and exciting career paths. The reality is far more sinister, as Senator Tom Harkin’s new report, released last week, reveals. “In this report, you will find overwhelming documentation of exorbitant tuition, aggressive recruiting practices, abysmal student outcomes, taxpayer dollars spent on marketing and pocketed as profit, and regulatory evasion and manipulation,” Mr. Harkin, an Iowa Democrat who is chairman of the Senate Health, Education, Labor and Pensions Committee, said in a statement… “These practices are not the exception — they are the norm. They are systemic throughout the industry, with very few individual exceptions.” According to Harkin’s findings, for-profit colleges take in about $33 billion each year from taxpayers (in the form of student loans), making up 85 to 90 percent of their revenues, yet they spend the large majority of that money on marketing, recruiting and executive salaries – CEOs took home an average of $7.3 million a year. Not surprisingly, this business model fails their students: 54 percent of the students who enrolled in the 30 biggest for-profit schools examined by Harkin in 2008-09 left institutions without a degree.

High cost and high debt for students at for-profit colleges - For-profit colleges tend to enroll students who are not familiar with traditional higher education. They are more likely to be low-income, African American or Latino. Significant numbers of veterans also enroll in these schools. The Senate Committee on Health, Education, Labor, and Pensions found that recruiters “were trained to locate and push on the pain in students’ lives.” Additionally, undercover recordings by the Government Accountability Office and other sources show that many for-profit college recruiters “misled prospective students with regard to the cost of the program, the availability and obligations of Federal aid, the time to complete the program, the completion rates of other students, the job placement rate of other students, the transferability of the credit, or the reputation and accreditation of the school.” This combination of naïve students and misleading information allows for-profit colleges to set tuition in line with their profit goals (many of these colleges are publicly-traded companies) rather than in line with the cost of education. Figure A shows that the average cost of a certificate program at a for-profit college is 4.7 times the cost of an equivalent program at a public community college. The average cost of an associate degree is 4.2 times what it would cost at a typical community college. Bachelor’s degree programs average 19 percent higher at a for-profit college than at a flagship state public university.

Bernanke Says Student Loans Won’t Cause Crisis - Federal Reserve Chairman Ben S. Bernanke said record U.S. student loan debt doesn’t put the financial system at risk the way mortgages did because most educational borrowing is backed by the government.  “I don’t think it’s a financial stability issue to the same extent that, say, mortgage debt was in the last crisis because most of it is held not by financial institutions but by the federal government,” Bernanke said today at a town hall meeting with teachers at the Fed in Washington.  Outstanding educational debt, which includes loans taken out by students and their parents, is estimated at $1 trillion, according to the Consumer Financial Protection Bureau. About 15 percent is private student loans, issued by lenders including banks. The rest is backed by the government.

How student loans could hit your Social Security It’s no secret that falling behind on student loan payments can squash a borrower’s hopes of building savings, buying a home or even finding work. Now, thousands of retirees are learning that defaulting on student-debt can threaten something that used to be untouchable: their Social Security benefits. According to government data, compiled by the Treasury Department at the request of, the federal government is withholding money from a rapidly growing number of Social Security recipients who have fallen behind on federal student loans. From January through August 6, the government reduced the size of roughly 115,000 retirees’ Social Security checks on those grounds. That’s nearly double the pace of the department’s enforcement in 2011; it’s up from around 60,000 cases in all of 2007 and just 6 cases in 2000. The amount that the government withholds varies widely, though it runs up to 15%. Assuming the average monthly Social Security benefit for a retired worker of $1,234, that could mean a monthly haircut of almost $190. “This is going to catch an awful lot of people off guard and wreak havoc on their financial lives,” Many of these retirees aren’t even in hock for their own educations. Consumer advocates say that in the majority of the cases they’ve seen, the borrowers went into debt later in life to help defray education costs for their children or other dependents.

Hope you die before you get old - The age war is heating up, and a lot of those sharp, cynical, disaffected smarties are falling for it. One of them has been in my comments for a while now, saying stupid things about how if only the Boomers would die off, things would be fine. In response to my last post, Soullite writes:  As long as you defend boomers, no sane millenial will ever listen to you.  We know enough about the world their parents handed them. We've seen enough of the world they handed us.  Nobody cares what kind BS you have to spew in their defense. The parents of the boomers were, by and large, born in the 20th century and doing whatever they had to in order to get by; they were not the decision-makers who "handed" a better world to the boomers. That was done by the generation that preceded "the Greatest Generation", especially one man in particular named Franklin Delano Roosevelt. Roosevelt was born in 1882 and handed the parents of the boomers that comfortable, enviable world. And since then, you will find few members of any generation who will say that was a bad thing, who think Social Security Insurance was a bad idea, who disagree with Roosevelt's belief in economic freedom, good education, and health care for all.  Nor will you find many "millenials" who think it was a bad idea to oppose racism and support equal rights for all, or oppose stupid wars as so many of the boomers did.

Bill Keller and Third Way’s misinformed baby boomer bashing - As you may have read, the centrist think tank Third Way recently came out with a paper finding that entitlement spending has crowded out public investments, and therefore Democrats who care about children should endorse cutting health and retirement benefits for the poor and/or elderly. Bill Keller then used the paper as the basis for a New York Times  column on how the baby boomer generation is greedy. Dylan Matthews and Jamie Galbraith vehemently disagreed.. We’ve written extensively on how public investments act both as a vital driver of economic growth and how they help push against inequality trends, helping us achieve a future where a higher level of prosperity is shared by more people. EPI has been writing about the deficit in public investment for more than two decades. But there are two intrinsic problems with the Third Way/Keller narrative.  The first is that the data do not really support it at all.  Below is their central graph, supposedly proving their point: I’ve redrawn the graph below, lopping off the data after 2011 because, as I understand it, their point is that historically public investments have been crowded out by entitlement spending, so we should only look at historical data. After all, the point is to look at what has already happened, and once you do that, it’s clear that the data do not at all support Third Way’s hypothesis. The timing is off: 70 percent of the decline in relative public investment happened before 1975, while about 70 percent of the entitlement spending increases happened after 1975.

Oakland's financial time bomb: pensions - It was 1976 when the city of Oakland realized it had a major problem on its hands: A pension created 25 years earlier to benefit police officers, firefighters and their widows was proving too costly to afford. So the city closed the plan to new employees and later passed a parcel tax to pay for the pension. Yet today, that pension remains the source of one of Oakland's biggest headaches. It's a generous plan that awards its retirees and widows - who now number 1,086 - raises to match up to two-thirds of the pay of the current-day workforce. But the city's costs ballooned because it never adequately contributed to the pension fund, relied on borrowing for years to give itself holidays from pension payments and watched investments go south. The result of the borrowing is that the pension, known as the Police and Fire Retirement System, has cost Oakland taxpayers hundreds of millions of dollars more than it should have. In 2010, City Auditor Courtney Ruby found Oakland spent $250 million more on the pension than it would have if the city had simply paid into the pension - and that was just for one of its bond deals.

Milliman analysis: July's $120 billion decline in funded status pushes pension deficit to a record $533 billion - Milliman, Inc., a premier global consulting and actuarial firm, today released the results of its latest Pension Funding Index, which consists of 100 of the nation's largest defined benefit pension plans. In July, these pensions experienced a $120 billion decrease in funded status based on a $133 billion increase in the pension benefit obligation (PBO) and a $13 billion increase in asset value. The $120 billion decrease in funded status is the worst in the 12-year history of this study, and it pushes the pension deficit to a record $533 billion, surpassing the previous record set on August 31, 2010, The funded ratio of 70.9% is the second lowest in the history of this study; on May 31, 2003, the funded ratio bottomed out at 70.5%. "I realize that record-breaking is in vogue this month with the Olympics in full swing, but these are not the kinds of records we want to see broken," said John Ehrhardt, co-author of the Milliman Pension Funding Study. "Record low discount rate, record high liabilities, record high deficit. When it comes to pension funding, we can do without any more records." In July, the discount rate used to calculate pension liabilities fell from 4.32% to 3.92%, pushing the PBO up to $1.831 trillion at the end of the month. The overall asset value for these 100 pensions increased from $1.284 trillion to $1.297 trillion.

Social Security not deal it once was for workers - People retiring today are part of the first generation of workers who have paid more in Social Security taxes during their careers than they will receive in benefits after they retire. It's a historic shift that will only get worse for future retirees, according to an analysis by The Associated Press. Previous generations got a much better bargain, mainly because payroll taxes were very low when Social Security was enacted in the 1930s and remained so for decades. "For the early generations, it was an incredibly good deal," said Andrew Biggs, a former deputy Social Security commissioner who is now a scholar at the American Enterprise Institute. "The government gave you free money and getting free money is popular." If you retired in 1960, you could expect to get back seven times more in benefits than you paid in Social Security taxes, and more if you were a low-income worker, as long you made it to age 78 for men and 81 for women. As recently as 1985, workers at every income level could retire and expect to get more in benefits than they paid in Social Security taxes, though they didn't do quite as well as their parents and grandparents.

Medicare Wants More Time to Study Cost of Security Fix - Five years after being told to look at taking Social Security numbers off Medicare cards, Medicare officials say they need six more months to figure out how much it will cost. At a tense House hearing on Wednesday, Medicare’s chief information officer, Tony Trenkle, said that he could not offer a timetable for making the change. Congressional auditors said that an earlier estimate of $800 million to $845 million was faulty, partly because of insufficient and inconsistent data. The Government Accountability Office saysas many as 48 million people risk having their identity stolen because their Social Security numbers are displayed on Medicare cards.

Study: One-third of doctors wouldn’t take new Medicaid patients last year -- Sandra Decker, an economist with the Center for Disease Controls, recently poured over the 2011 National Ambulatory Medical Care Survey, which asks doctors whether they would accept new Medicaid patients. What she found could spell trouble for the health care law: More than three in ten doctors – 31 percent – said no, they would not. Her research, published this afternoon in the journal Health Affairs, is the first that has ever given a state-by-state look at doctors’ willingness to accept Medicaid. That makes it a helpful report to understand the factors that influence doctors’ participation in Medicaid, alongside the public policy levers that could encourage them to join up.

Even patches of the holes in the safety net have holes A thirty-year-old uninsured woman came to the emergency department of a nonprofit hospital in a north Denver suburb, complaining of difficulty swallowing and breathing because of throat swelling. A computed tomography scan was performed, and she was found to have an abscess at the base of her tongue that was encroaching on her airway. The ear, nose, and throat surgeon on call was contacted, but he reportedly refused to see the patient because she was uninsured. Denver Health then accepted the patient as an EMTALA transfer. Throat surgery, followed by a four-day hospital stay, yielded total hospital charges of $15,815. This is not supposed to happen under EMTALA (Emergency Medical Treatment and Active Labor Act). Whether you’re insured or not, you should receive condition-stabilizing treatment at the first hospital with resources to provide it. A surgeon cannot legally refuse because of lack of insurance. But one did. Now, this is an anecdote. The new Health Affairs article by Sara Rosenbaum, Lara Cartwright-Smith, Joel Hirsh, and Philip Mehler, the source of the quote above,  includes several more, as well as a thorough analysis of the limitations of EMTALA. It’s worth a read. It

Poorest Americans at risk if states opt out of Medicaid expansion - Health coverage for the poorest Americans could be in jeopardy in many states as a result of the U.S. Supreme Court's ruling last month on the Affordable Care Act, according to a new legal analysis. The report examines federal and state Medicaid options following the United States Supreme Court's ruling in NFIB v Sebelius and appears in the August issue of the journal Health Affairs. "Some states will use the court's decision as an excuse to delay or refuse to participate in the expansion of Medicaid as outlined in the Affordable Care Act," "The ruling allows states to decline the expansion yet still continue to collect federal funding to operate a status quo Medicaid program, leaving millions of impoverished children and adults at risk for lack of coverage."  At the same time, the expansion would create new jobs as federal funding to pay for health care begins to flow into poor communities. Between 2014 and 2016 the federal government will pay for 100 percent of the cost of the Medicaid expansion and 90 percent of the costs by 2020 and thereafter. That influx of federal funds would represent a much-needed boost to thousands of communities affected by poverty, elevated unemployment and other signs of economic distress, according to the analysis.

Medicare and Medicaid Spending Trends Don’t Justify Restructuring, CBPP: Medicare and Medicaid spending per beneficiary has grown less rapidly than costs for private health insurance in recent years, as we have previously pointed out.  (See here and Figure 1 here.) This favorable trend is projected to continue for at least the coming decade, according to a new article in The New England Journal of Medicine.  These data belie the claim that spending for Medicare and Medicaid is “out of control” and that the programs must be fundamentally restructured... Looking at these trends, Holahan and McMorrow conclude: With the per-enrollee spending growth in Medicare and Medicaid less than that in private insurance and close to the growth in GDP per capita, it’s hard to argue that spending on either program, on a per-enrollee basis, is “out of control.”. . . Policy options such as premium support and block grants that entail indexing growth rates to some measure of economic growth will have a hard time achieving lower per-enrollee spending growth than is currently projected. CBO estimates suggest that both approaches may achieve savings for the federal government, but such savings shift Medicare costs onto existing enrollees and, in the case of Medicaid, onto the states as well. . . . Rather than pursuing major restructuring of either program, then, we should continue adopting available strategies to contain costs within the programs’ current structure, especially since many of those implemented in the past decade seem to be working, and many on the horizon appear promising.

U.S. Officials Brace for Huge Task of Operating Health Exchanges - — Obama administration officials are getting ready to set up and operate new health insurance markets in about half the states, where local officials appear unwilling or unable to do so.The markets, known as exchanges, are a centerpiece of President Obama’s health care law, and running them will be a herculean task that federal officials never expected to perform. When Congress passed legislation to expand coverage two years ago, Mr. Obama and lawmakers assumed that every state would set up its own exchange, a place where people could shop for insurance and get subsidies to help defray the cost. But with Republicans in many states resisting the creation of exchanges or deterred by the complexity of the task, federal officials are preparing to do the job, with or without assistance from state officials. “We realize that not all states will be ready to establish these exchanges by 2014, so we are setting up a federally facilitated exchange in those states,” said Michael Hash, the top federal insurance regulator. “We are on track to go live in October 2013, which is the beginning of the first open season for the individual and small group markets.”

Those who are covered, recover - Insurance status is a better predictor of survival after a serious cardiac event than race, and may help explain racial disparities in health outcomes for cardiovascular disease. A new study by Derek Ng, from the Johns Hopkins Bloomberg School of Public Health in the US, and his team shows that race is not linked to an increased risk of death but being underinsured is a strong predictor of death among those admitted into hospital with a serious cardiac event. African Americans living in poor, urban neighborhoods bear a high burden of illnesses and early death, from cardiovascular disease in particular. Lack of health insurance, or being underinsured may be a major cause of insufficient treatment and subsequent premature death. However, it is unclear to what extent these observed racial disparities are actually due to insurance status rather than to race itself. Ng and colleagues looked at whether the risk of early death was associated with insurance status or race. They took into account the potential effects of neighborhood socioeconomic status and disease severity.  They found that underinsured patients died sooner than patients with private insurance, whereas the survival rates were comparable between whites and blacks. More specifically, underinsured patients had a 31 percent higher risk of early death after a heart attack and a 50 percent higher risk after atherosclerosis. This survival effect was independent of race, neighborhood socioeconomic status and disease severity.

Breaking The Healthcare Cost Curve…Maryland -- Quite a bit of the commentary has been written on the question of how-to-rein-in rising healthcare costs and to slow costs to less than the rate of inflation. Massachusetts has been able to provide healthcare to its citizens but still struggles with keeping healthcare insurance costs low and affordable. Healthcare costs continue to rise at 8% annually and will double by 2020 unless Massachusetts can find a methodology to control the rising cost of healthcare.One answer might be Maryland’s solution, a regulatory commission of seven governor-appointed-commissioners serving 4 year terms and having the responsibility of setting appropriate rates for hospital inpatient, outpatient, and emergency department care to manage its rising healthcare costs by limiting payment to the minimum amount necessary to cover hospital operating expenses, and requiring all payers (both private insurers and Medicare) to adhere to the rates set. This regulatory commission is nothing new for Maryland and has been in place for years. At one time, 30 other states regulated hospital rates only to have them fall by the wayside in the late seventies and earlier eighties with the deregulatory movement. When Maryland’s Commission determines what can be charged by each hospital, it takes into consideration a hospital’s wages, charity cases, and the severity of illnesses. If not satisfied with the commission’s decision, hospitals can appeal to the commission or go to court for a variance in prices.

French Healthcare Inflation Vs. US Healthcare Inflation In One Devastating Chart - We're doing more tooling around through the new European inflation data that was just added to FRED and we thought this was interesting. The blue line represents healthcare inflation in the US. The red line represents healthcare inflation in France, where healthcare is universal.

More on the Economics of Single Payer Insurance  - Yves Smith -(video) The proposed Maryland Health Security Act has put the idea of single payer healthcare back on the table. The Maryland chapter of Physicians for a National Health Care Program has summarized its main features and provides a link to the bill. It proposes to lower health care costs by broadening the pool of the insured, lowering administrative costs, and negotiating for better prices on drugs and medical devices (anyone who has purchased pharmaceuticals outside the US will attest that this make a large difference). Real News Network has run a series of interviews on this plan. You can view Part 1 for an overview. I thought the second and third segments, on the economics, would be of particular interest to readers. Gerald Friedman of UMass Amherst has done a study of the plan which ascertained that it would produce considerable savings, which he describes in Part 2. Part 3 discusses broader economic ramifications, for instance, that employers in Maryland would enjoy a competitive advantage relative to other states, and that implementation of the plan would lead to some businesses shifting more of their operations into Maryland, thus increasing the state’s tax base.

The Economics of Bloomberg’s Large-Soda Ban - In an era of political polarization, Michael Bloomberg has the rare ability to come up with policies that enrage everyone. His latest pet project—banning large sodas, as a way of fighting obesity in New York—has been ridiculed by both Jon Stewart and John Boehner. And a recent Board of Health hearing on the plan saw Democratic and Republican politicians alike lining up to attack the idea, which would prohibit restaurants, delis, sports arenas, movie theatres, and food carts from selling any soft drinks larger than sixteen ounces. Critics dismiss the ban as yet another expression of Bloomberg’s nanny-state mentality and as a “feel-good placebo” that’s doomed to fail. They’re right that the ban is blatantly paternalist. But that doesn’t mean it won’t work. It’s true that the ban will be easy to circumvent: if you want to drink thirty-two ounces, you can just buy two sixteen-ounce servings. But Bloomberg’s proposal makes clever use of what economists call “default bias.” If you offer a choice in which one option is seen as a default, most people go for that default option. The soda ban makes sixteen ounces or less the default option for soda drinkers; if they want more, they’ll have to make an extra effort.

Slim chances for America’s obese - In the past four years, under the Obama administration, there has been a welter of handwringing about the fact that the US has become noticeably more obese since the 1980s. Government data show, for example, that some 70 per cent of Americans are considered overweight – and 36 per cent of those are deemed obese. That is almost twice the proportion seen three decades ago, leaving America the world’s fattest industrialised nation. But while there has been debate aplenty about the national trend, what is rarely acknowledged – largely because it is politically incorrect – is the self-reinforcing link between obesity and class. Tracking this link is certainly not easy. Precisely because the topic is sensitive, it seems that there is surprisingly little data on how current income levels correlate with weight. However, anyone who spends time travelling across the US – on the beaches or anywhere else – can see the contrasts. Just as aristocrats in medieval Europe used to be several inches taller than the peasants (due to a better diet), the modern elite of America can often be identified by being several inches slimmer than everyone else. And race differences add another twist. Obesity rates in places such as Mississippi or Alabama are much higher than around Boston. They are also much higher among African Americans and Hispanics than Caucasian whites. And research shows that women claiming food stamps over an extended period are 50 per cent more likely to be obese than the population at large.

Health Care Thoughts: Re-admissions, Resident Rights and Pie - PPACA is putting extreme pressure on hospitals to reduce Medicare re-admissions.  Hospitals are putting increasing pressure on nursing home to reduce re-admissions, particularly due to diabetes. Nursing homes are under constant pressure to respect "resident rights" including the right of residents to eat just about whatever they want, including piles of junk food provided by families of diabetics.  Nursing home nurses are under extreme pressure to 1) respect resident rights, 2) maintain blood sugar levels at the same time, and 3) document all of this at an extreme level.  Mrs. Rustbelt and a couple of other nurses may be in trouble for denying pie to a really, really sick diabetic (both legs amputated) who regularly sends his blood sugar readings north of 400. The fans of increased regulation should think through some of the conflicts and consequences.

Virtual Reality Is Addictive and Unhealthy -- In my days as an engineer, I ran the microprocessor division at Intel Corp. I then became a venture capitalist, investing in companies that built semiconductors, computers, networking systems, and Internet-related services. I gave little thought to how they might affect our minds, social interactions, and governance. That lapse now comes home to me as I see people walking down the street, eyes fixed on the screens of their mobile phones, ears plugged into their iPods, oblivious to their surroundings…to reality itself. They are not managing their tools; their tools are managing them. Tools now make the rules, and we struggle to keep up. I’ve spent my career developing and financing the companies that supply these profoundly powerful tools. For the most part, I thought of them as harmless, and I believed my job was simply to make the tools better so that others would use them to improve the world. Only in recent years have I become aware of and concerned about their serious side effects. And so I have decided to study them and do my best to explain those effects to the world. Here’s what I’ve learned.

Hospital Chain Inquiry Cited Unnecessary Cardiac Work - In the summer of 2010, a troubling letter reached the chief ethics officer of the hospital giant HCA, written by a former nurse at one of the company’s hospitals in Florida.  In a follow-up interview, the nurse said a doctor at the Lawnwood Regional Medical Center, in the small coastal city of Fort Pierce, had been performing heart procedures on patients who did not need them, putting their lives at risk.  “It bothered me,” the nurse, C. T. Tomlinson, said in a telephone interview. “I’m a registered nurse. I care about my patients.”  In less than two months, an internal investigation by HCA concluded the nurse was right.  “The allegations related to unnecessary procedures being performed in the cath lab are substantiated,” according to a confidential memo written by a company ethics officer, Stephen Johnson, and reviewed by The New York Times.  Mr. Tomlinson’s contract was not renewed, a move that Mr. Johnson said in the memo was in retaliation for his complaints. But the nurse’s complaint was far from the only evidence that unnecessary — even dangerous — procedures were taking place at some HCA hospitals, driving up costs and increasing profits

Cancer Fuel - Cancers are primarily an environmental disease with 90-95% of cases attributed to environmental factors and 5-10% due to genetics. Researchers at Oxford University are interested in understanding how changes in cells' metabolism — the chemical processes through which cells get the energy they need — could also prime them to become cancerous. They have just started collaborating with a lab at Keio University in Japan to bring large-scale techniques to the study of metabolic processes going on in cancer cells, much as gene technologies have given such insight into DNA changes involved in cancers. This is not a new finding - it is something that has been known for a long time. The biochemist and Nobel laureate Otto Warburg pointed it out in the early 1900s. He observed that most cancer cells get the energy they need predominantly through a high rate of glycolysis (the metabolic process that breaks down glucose to release energy). It helps the cancer cells deal with the low oxygen levels that tend to be present in a tumor.

Court to FDA: 35 years is too long to procrastinate on curbing antibiotics in meat - The Food and Drug Association has a problem. It knows it has to set rules for the use of antibiotics in meat production, but it doesn’t wanna. Like a petulant teen, kicking at stones and moaning under its breath, the FDA is dragging its feet. An antibiotic junkie.But a federal court in New York put its foot down yesterday, insisting once and for all that the FDA had to do its chores. (“Fine. I didn’t want to be a federal agency anyway. See if I care.”) The FDA now has roughly five years to get the job done, and it can’t delay just because an appeal is pending.There’s plenty of evidence that rampant antibiotic use in animals causes health problems. Just last month, we reported on a new strain of drug-resistant bladder infections linked to use of antibiotics in chicken. But changing practices means a big additional cost for producers, which of course they’d rather not pay. So the FDA has tried to avoid the issue, even — according to the Natural Resources Defense Council — last winter withdrawing its original 1977 findings on antibiotics and suggesting that meat producers police themselves. To continue the previous analogy, this is the equivalent of pushing all the clothes under the bed and asking them to fold themselves. From the NRDC blog:

EPA on Value of a Life - What is the value of a human life? For U.S. regulatory purposes, the Environmental Protection Agency has a FAQ page1 up on the subject. Here's the bottom line: "EPA recommends that the central estimate of $7.4 million ($2006), updated to the year of the analysis, be used in all benefits analyses that seek to quantify mortality risk reduction benefits regardless of the age, income, or other population characteristics of the affected population until revised guidance becomes available ..."On what sort of numbers is that estimate based? EPA offers this illustrative calculation: "In the scientific literature, these estimates of willingness to pay for small reductions in mortality risks are often referred to as the "value of a statistical life.” This is because these values are typically reported in units that match the aggregate dollar amount that a large group of people would be willing to pay for a reduction in their individual risks of dying in a year, such that we would expect one fewer death among the group during that year on average."

Wal-Mart OK with selling genetically modified sweet corn - Rejecting entreaties from consumers and activists, Wal-Mart Stores Inc. says it has no objection to selling a new crop of genetically modified sweet corn created by biotech giant Monsanto. “After closely looking at both sides of the debate and collaborating with a number of respected food safety experts, we see no scientifically validated safety reasons to implement restrictions on this product,” the company confirmed to the Tribune.

Kevlar Tires Now Required to Traverse ‘Spear-Like’ GMO Crops - The news surrounding GMO crops continues to get further and further outlandish as the crops are increasingly mutated and sprayed with a medley of harsh pesticides, herbicides, and insecticides. The latest news comes from an unlikely source — an automotive publication known as Auto blog. The website reports that farmers who have opted to plant Monsanto’s genetically modified seeds have run into one daunting problem (outside of decreased yields and an extremely higher risk of disease): little ‘spear-like’ stalks from the harvested GMOs are absolutely wreaking havoc on the heavy duty tractor tires. Described by one farmer as a ‘field of little spears’, farmers are now turning to Kevlar tires. Kevlar is the same material used in bulletproof vests to protect from gun bullets. The stalks are so sharp and weapon-like that they can wreck an entire set of wheels, which is a daunting reality when considered that one tractor can have as many as eight heavy duty tires. Furthermore, a single tractor tire can easily cost thousands of dollars. Thanks to the GMO crops, the average lifespan of a tractor tire has dwindled from five or six years down to just one or two — if the farmer is lucky. Add that to the exponentially increased amount of pesticide use required to maintain modified crops thanks to heavily mutated ‘super’ rootworms and other insects, and it’s easy to see how GMO farming is nothing but a monetary pitfall for farmers.

Global groundwater use outpaces supply -- A handful of thirsty countries are guzzling their groundwater reserves much faster than those resources can be renewed. India, Pakistan, Saudi Arabia, Iran, Mexico, and the United States lead the global pack of water-thirsty nations, researchers report online August 8 in Nature. Irrigation for agriculture drives much of the demand, says hydrogeologist and study coauthor Tom Gleeson of McGill University in Montreal. He and colleagues devised a new “groundwater footprint” measure to evaluate the sustainability of withdrawals from the world’s aquifers. The analytic tool balances water coming in with water going out, and gauges how large an aquifer would have to be to accommodate current withdrawals. A groundwater footprint larger than its aquifer means people are sucking down water faster that it can be replenished — treating it as a nonrenewable resource, Gleeson says. Though 80 percent of the world’s aquifers have sustainable footprints, people drawing on other aquifers are draining the world’s water supply. For these overtapped reservoirs, groundwater footprints vastly exceed aquifer areas. “It’s not sustainable,” Gleeson says. “We don’t know how long the aquifers will last.”

How Much Water Debt Are We Taking On? This Scary Map Shows How Much - We are currently using 3.5 times the water resources supplied by aquifers, according to new research on our global “groundwater footprint” just published in the Journal Nature. According to the researchers, nearly 1.7 billion people live in areas where groundwater is under threat. Interestingly, it’s only a handful of aquifers contributing to the problem. “80 per cent of aquifers have a groundwater footprint that is less than their area, meaning that the net global value is driven by a few heavily overexploited aquifers,” write the researchers. The scary map below illustrates just how depleted those few overexploited groundwater resources are:

Putting a price on the rivers and rain diminishes us all - In many countries, especially the United Kingdom, nature is being valued and commodified so that it can be exchanged for cash. The effort began in earnest under the last government. At a cost of £100,000, it commissioned a research company to produce a total annual price for England's ecosystems. After taking the money, the company reported – with a certain understatement – that this exercise was "theoretically challenging to complete, and considered by some not to be a theoretically sound endeavour". Some of the services provided by England's ecosystems, it pointed out, "may in fact be infinite in value". This rare flash of common sense did nothing to discourage the current government from seeking first to put a price on nature, then to create a market in its disposal. The UK now has a natural capital committee, an Ecosystem Markets Task Force and an inspiring new lexicon. We don't call it nature any more: now the proper term is "natural capital". Natural processes have become "ecosystem services", as they exist only to serve us. Hills, forests and river catchments are now "green infrastructure", while biodiversity and habitats are "asset classes" within an "ecosystem market". All of them will be assigned a price, all of them will become exchangeable.

Drought seen slashing U.S. corn crop to five-year low  The worst drought in more than half a century in America's Corn Belt has slashed the corn crop to the lowest in five years, leading to a plunge of corn supplies to the smallest in 17 years by next summer, a Reuters poll of 21 analysts showed on Monday. That would result in the third year in a row of razor thin corn stocks, keeping prices at record highs and rationing demand for the world's most popular feed grain, analysts said. Updated weather forecasts do little to change that scenario since the corn crop is basically done for the year, leading to little hopes for improvements in crop output. Crop-friendly showers and cooler temperatures are expected this week in much of the drought-stricken U.S. Midwest crop region but a return to heat and dryness is likely by next week, an agricultural meteorologist said on Tuesday. "There were very good rains over the weekend and another round of showers are expected in the northwest Midwest today and tomorrow," said Don Keeney, a meteorologist for MDA EarthSat Weather. Keeney said the rains came too late to help the corn crop but some of the late planted soybeans may benefit.

Drought's impact on food prices - - Cornflakes won't necessarily be more expensive as a result of rising corn prices, but the milk you pour over them might be. A drought covering two-thirds of the country has damaged much of the country's corn crops and pushed grain prices to record levels, triggering fears that a spike in food prices will soon follow. But there are many factors that determine the price of goods on supermarket shelves. A diminished corn supply doesn't mean that all food prices will be affected the same way. In fact, you're more likely to see higher prices for milk and meat than corn on the cob. That's because the sweet corn that shoppers buy at a grocery store is grown differently and not as vulnerable to drought conditions. As for the corn that's used as grain feed for cows, however, farmers are paying more as the drought persists. "The financial stress is starting to mount because the bills (to feed the cows) are bigger than they were six months ago," says Chris Galen, a spokesman for the National Milk Producers Federation. "What will consumers will see as a result? That's where it gets a little murkier."One major factor that complicates the equation is the amount that supermarkets decide to mark up the foods they sell to shoppers.

Global Food Reserves Falling as Drought Wilts Crops: Commodities - Stockpiles of the biggest crops will decline for a third year as drought parches fields across three continents, raising food-import costs already forecast by the United Nations to reach a near-record $1.24 trillion. Combined inventories of corn, wheat, soybeans and rice will drop 1.8 percent to a four-year low before harvests in 2013, the U.S. Department of Agriculture estimates. Crops in the U.S., the biggest exporter, are in the worst condition since 1988, heat waves are battering European crops and India’s monsoon rainfall already is 20 percent below normal. The International Grains Council began July by forecasting record harvests. It ended with a prediction for a 2 percent drop in output. The speed of the destruction drove corn and soybean prices to records last month and wheat to a four-year high. For investors, crops are the best-performing commodities this year, and Goldman Sachs Group Inc., Macquarie Group Ltd. and Credit Suisse Group AG say the trend will continue. The UN expects food costs to rise, less than two years after record prices pushed 44 million people into extreme poverty and contributed to uprisings in North Africa and the Middle East.

Fish Kills in Midwest Rise As Drought Effects Intensify - Thousands of fish are dying in the Midwest as the hot, arid summer dries up rivers and causes water temperatures to climb in some spots to nearly 100 degrees. About 40,000 shovelnose sturgeon were killed in Iowa last week as water temperatures reached 97 degrees. Nebraska fishery officials said they have seen thousands of dead sturgeon, catfish, carp and other species in the Lower Platte River, including the endangered pallid sturgeon.  Biologists in Illinois said the hot weather has killed tens of thousands of large- and smallmouth bass and channel catfish and is threatening the population of the greater redhorse fish, a state endangered species. So many fish died in one Illinois lake that the carcasses clogged an intake screen near a power plant, lowering water levels to the point that the station had to shut down one of its generators.

North American freshwater fishes race to extinction - North American freshwater fishes are going extinct at an alarming rate compared with other species, according to an article in the September issue of BioScience. The rate of extinctions increased noticeably after 1950, although it has leveled off in the past decade. The number of extinct species has grown by 25 percent since 1989. The article, by Noel M. Burkhead of the US Geological Survey, examines North American freshwater fish extinctions from the end of the 19th Century to 2010, when there were 1213 species in the continent, or about 9 percent of the Earth's freshwater fish diversity. At least 57 North American species and subspecies, and 3 unique populations, have gone extinct since 1898, about 3.2 percent of the total. Freshwater species generally are known to suffer higher rates of extinction than terrestrial vertebrates. ...  Burkhead concludes that between 53 and 86 species of North American freshwater fishes are likely to have gone extinct by 2050, and that the rate of extinction is now at least 877 times the background extinction rate over geological time.

The end of the line: Many of the world’s best-known fish and whales are in danger of extinction - Today, the totoaba is one of 414 species rated critically endangered on the “Red List”, the compendium of threatened plants and animals kept by the venerable International Union for Conservation of Nature. Another 486 fish are endangered; 1,141 are vulnerable and 60 are extinct, mostly thanks to the same species that killed off the totoaba: us. The human impact on fish has been worrying scientists and environmental campaigners for decades. But it has also become an increasingly disturbing economic issue for authorities overseeing the fate of the 90m tonnes of marine and freshwater fish the world’s 4.36m fishing boats catch each year, with their estimated value of $100bn. This was evident a few weeks ago, when the UN’s Food and Agriculture Organisation published its latest State of World Fisheries and Aquaculture report, a comprehensive assessment it has done since 1994. For the most part, the organisation said pretty much what it has said since 1994: too many countries have too many fishing boats doing too good a job. This year it added that the many “troubling” analyses of global fisheries suggested an “over-stressed” system “in imminent danger of collapse”.

Drought showing up in steepening of hogs and cattle forward curves - The current spike in corn prices is already making its way into the forward prices for meat products. Cattle and hogs markets are pricing in the impact of higher feed costs cutting into margins. Cattle ranchers are also affected by the drought destroying pasture. Ranchers will be cutting herd numbers, sometimes simply because there is no fresh grass, while hay supplies are running low. Keeping barns sufficiently cool has also been a problem with misters and fans running full blast. As the stored feed begins to run out, cattle and hogs liquidation begins. Cattle sale barns are booked weeks in advance these days. Reuters: - Cattle ranchers and hog farmers have been culling their herds because of high feed costs, scorched pasture and increased hay prices brought on by the drought.  This could result in a near-term boost to meat supplies and possible lower prices, but consumers might have to fork out more for meat next year when cattle and hog supplies tighten. With the expectations of reduced supply in 2013, the futures curves for lean hogs and live cattle have steepened materially.

Obama says Midwest drought historic, seeks aid for region (Reuters) - The worst drought in half a century is slashing U.S. crop and livestock production, President Obama said on Tuesday as he called on Congress to pass a farm bill that will send disaster aid to more farmers and ranchers. During a meeting of Obama's rural council at the White House, he said the administration will do all it can to alleviate the impact of the drought. "It is a historic drought and it is having a profound impact on farmers and ranchers all across many states," Obama said. More than 60 percent of the continental United States, including prime farm and ranch territory, is suffering moderate to exceptional drought. Analysts expect the drought will bring the smallest corn crop in six years. The government will make its first estimate of the fall harvest on Friday. With the U.S. election three months away, Obama said Congress needed to complete work on a new five-year farm bill. Republican leaders in the U.S. House of Representatives, unable to pass a bill in the lower chamber, proposed a $383 million disaster package for livestock producers before adjourning for the summer. The president said he hoped lawmakers get an earful from their constituents during the five-week recess away from Washington and that they reconvene on September 10 prepared to complete work on a farm bill "immediately."

To confront climate change, US agriculture seeks hardier breeds that can survive long droughts - The Washington Post: — Cattle are being bred with genes from their African cousins who are accustomed to hot weather. New corn varieties are emerging with larger roots for gathering water in a drought. Someday, the plants may even be able to “resurrect” themselves after a long dry spell, recovering quickly when rain returns. Across American agriculture, farmers and crop scientists have concluded that it’s too late to fight climate change. They need to adapt to it with a new generation of hardier animals and plants specially engineered to survive, and even thrive, in intense heat, with little rain. “The single largest limitation for agriculture worldwide is drought,” said Andrew Wood, a professor of plant physiology and molecular biology at Southern Illinois University.

The Silver Lining in the Drought - FROM where I sit on the north end of America’s grain belt, I can almost hear the corn popping to the south of me. The drought threatens to drive up global corn prices beyond their level in 2007-8, when food demonstrations broke out around the world. But such crises often lead to change — and transformation is what is needed to make our food system less vulnerable. We have become dangerously focused on corn in the Midwest (and soybeans, with which it is cultivated in rotation). This limited diversity of crops restricts our diets, degrades our soils and increases our vulnerability to droughts. The virtue of corn is that it is one of the most productive crops on the planet, a characteristic that has been greatly amplified by years of research and development. Over time, this cheap and plentiful commodity found more uses and worked its way into more countries. America’s corn surpluses also drove global market prices so low that many countries found it cheaper to import grain rather than grow their own. Corn’s weakness is that it is highly susceptible to drought. As an open pollinator, corn has a critical seven-day window (which varies across the Corn Belt depending on planting time) when it really needs sufficient rainfall in order to successfully cross-fertilize with other corn plants. The problem is not so much the drought but our over-reliance on this single crop. The No. 1 culprit behind our overreliance on corn is the federal farm subsidy program. While subsidies are not categorically bad, they become a problem if they leave farmers with little choice but to focus on a few crops.

U.S. Drought Drives Up Food Prices Worldwide - The drought that's drying up the Heartland isn't just an American problem. It's causing food prices to surge worldwide.  And it could get worse.  "This is not some gentle monthly wake-up call, it's the same global alarm that's been screaming at us since 2008," said Colin Roche of Oxfam, noting that the drought could lead to food shortages for millions of people worldwide.  Food is a major U.S. export, so the drought affects prices around the globe. "World leaders must snap out of their lazy complacency and realize the time of cheap food has long gone," Roche said.  In July, food prices jumped 6%, after three months of declines, according to the United Nations' monthly Food Price Index released Thursday. The main drivers behind the increase? Grain prices. And more specifically, corn prices, which have hit record highs in recent weeks.

Drought, food prices fan fears of new crisis (Reuters) - Global alarm over a potential repeat of the 2008 food crisis escalated after data showed food prices had jumped 6 percent last month and importers were snapping up a shriveled U.S. grain crop, helping drive corn prices to a new record. Ahead of a critical government report on Friday on the state of the U.S. corn and soybean crops, which have been decimated by the worst drought in over five decades, the United Nation's food agency warned against the kind of export bans, tariffs and buying binges that worsened the price surge four years ago. "There is potential for a situation to develop like we had back in 2007/08," the Food and Agriculture Organisation's senior economist and grain analyst Abdolreza Abbassian told Reuters. "There is an expectation that this time around we will not pursue bad policies and intervene in the market by restrictions, and if that doesn't happen we will not see such a serious situation as 2007/08. But if those policies get repeated, anything is possible." Adding a further risk of strain on global food supplies, Japan's official weather bureau said on Friday its climate monitoring data and models indicated the El Nino phenomenon had already emerged and was likely to last until winter.

U.S. Heartland Sees No End in Sight to Epic Drought - The drought that has been pummeling the U.S. for much of the summer shows no signs of letting up, according to the latest U.S. Drought Monitor released Thursday. While the overall area under drought was largely unchanged over the previous week’s figures, the nature of the drought has gotten more dire. Conditions in the nation’s agricultural heartland were especially worrisome: Missouri, Arkansas, Oklahoma, Kansas, Nebraska, and Illinois all saw an expansion of the most severe drought categories, “extreme” and “exceptional”; New Mexico also saw a worsening of its already significant dryness.  In fact, the entirety of eight states — Colorado, Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska and Oklahoma – are considered in a drought. At least moderate drought conditions prevailed over 52.27 percent of the U.S. (including Alaska, Hawaii, and Puerto Rico), down just slightly from 52.6 percent a week earlier, but the area suffering severe drought or worse was up, from 38.12 percent to 38.48 percent.

Moment of truth for US grain - Hundreds of hedge fund managers, commodity merchants, government officials and farmers will have one thing on their mind when they turn on their computers on Friday: US grain statistics. The release of this specialised report from the US Department of Agriculture has acquired huge market significance this year as the worst drought in half a century shrivels crops in America’s farm belt. It will influence trading for days and weeks to come as well as possible government decisions on biofuels and feed exports. However, the drought will test the department’s Herculean data-collection efforts. The risk of sharp revisions as the growing season advances in the world’s biggest grain exporter raises the prospect of further volatility in food commodities markets, where corn prices have hit record highs of more than $8 a bushel. Friday’s USDA crop production report will contain this season’s first national surveys of domestic corn and soyabean fields. Both crops have suffered the worst in the drought. “It’s clearly the most important report of the year thus far,” says Gary Blumenthal, chief executive of consultancy World Perspectives and a former USDA official.Extreme heat and dryness have prevented many stalks from forming grain. Last month the USDA lowered its average corn yield estimate to 146 bushels per acre from 166 and cut the production estimate by nearly 2bn bushels, or 12 per cent. The department’s July yield estimate was based on trends over the past two decades, adjusted for the drought. Friday’s report will be based on both a survey of farmers and visits to fields, in theory making it more accurate.

US Corn Crop Estimate Cut 17% With Yields Forecast To Drop To 17 Year Lows - Corn was already surging to new record highs before the USDA released the WASDE report this morning. With a consensus view of 10.929 billion bushels (compared to USDA's prior 2012 estimates of 12.97 billion), the USDA's 10.779 billion bushel forecast means a 17% slashing in harvest expectations. Crop conditions were the worst since 1988 with 69% of the Midwest in drought. Soybeans likewise were expected to show a 2.796 billion bushel production forecast (based on Bloomberg's survey) which compares with the 3.05 billion prior forecast from USDA and just came 4% below expectations. Bloomberg notes: "The U.S. drought means that global corn supplies will be critically tight for the next year; Livestock and milk-product prices will have to rise to cover the increased feed costs. Eventually, global consumers will have to pay the bill." It appears the algos were at play immediately after the report as prices surged (in corn) to $8.49 before falling rapidly back to $8.19, and are now up fractionally at $8.31. The biggest consequence is a heavier drag on any possibility of a sizable Chinese stimulus as food price inflation, as we noted last night, is set to stymie any flood of money

USDA Cuts Corn Outlook as Drought Takes Toll - The federal government on Friday slashed its expectations for U.S. corn and soybean production for the second month in a row as the worst drought in decades continues punishing key farm states. The U.S. Agriculture Department cut its projected U.S. corn production to 10.8 billion bushels, down 17 percent from its forecast last month of nearly 13 billion bushels and 13 percent lower than last year. That also would be the lowest production since 2006. The USDA, in its monthly World Agricultural Supply and Demand Estimates report, now expects corn growers to average 123.4 bushels per acre, down 24 bushels from last year in what would be the lowest average yield in 17 years. Soybean production is now forecast at 2.69 billion bushels, a 12 percent decline from last year and well off the 3.05 billion bushels the USDA had expected last month. Expected yields on average of 36.1 bushels per acre would be the lowest since 2003.

The Highly Anticipated USDA Corn, Soybean, Wheat, and Cotton Crop Figures Released August 10 2012 - The USDA crop report has been released. This one is the first this year to include thousands of national field surveys. Both the lack of rainfall and excessive heat have greatly diminished production, even in irrigated areas. The last three monthly corn yield estimates from the USDA have gone from 166 bushels per acre to 146 bushels per acre to today’s 123.4 bushels per acre.  Here is today’s report:

  • Corn production is forecast at 10.8 billion bushels, down 13 percent from 2011 and the lowest production since 2006. Based on conditions as of August 1, yields are expected to average 123.4 bushels per acre, down 23.8 bushels from 2011. If realized, this will be the lowest average yield since 1995.
  • Soybean production is forecast at 2.69 billion bushels, down 12 percent from last year. Based on August 1 conditions, yields are expected to average 36.1 bushels per acre, down 5.4 bushels from last year. If realized, the average yield will be the lowest since 2003.
  • All cotton production is forecast at 17.7 million 480-pound bales, up 13 percent from last year. Yield is expected to average 784 pounds per harvested acre, down 6 pounds from last year.
  • All wheat production, at 2.27 billion bushels, is up 2 percent from the July forecast and up 13 percent from 2011. Based on August 1 conditions, the United States yield is forecast at 46.5 bushels per acre, up 0.9 bushel from last month and up 2.8 bushels from last year.

USDA Slashes Corn Yield, Production Forecast On Drought - The U.S. Department of Agriculture Friday slashed its forecast for corn production this year by about 17% as drought conditions in key growing regions worsened. Farmers are now expected to produce just 10.779 billion bushels of corn this year, the USDA said in its monthly World Agricultural Supply and Demand Estimates report. That's a sharp drop from the 12.97 billion bushels the agency predicted a month ago and the reduction exceeded expectations from some traders and analysts. The new forecast puts U.S. corn production at its lowest since 2006, the USDA said. Corn yields have suffered sharply under the worst drought in decades that now covers more than 60% of the U.S. and nearly all major farming regions. USDA's new estimate for average corn yield in the U.S. is just 123.4 bushels per acre and that would put it at the lowest level in 17 years. last month the USDA was predicting the average corn yield at 146 bushels per acre. Demand for this year's crop is also expected to decline along with production, but the USDA still pushed its forecast for 2012-13 ending stocks lower. "Ending stocks for 2012-13 are projected at 650 million bushels...and the smallest carryout since 1995-96," the USDA said in the supply and demand report. The July report predicted ending stocks at 1.183 billion bushels.

Corn Prices Jump To Record Highs As Drought Hits 78 Percent Of U.S. - With 78 percent of the contiguous U.S. in drought conditions — including 24 percent in “exceptional” drought — the U.S. corn crop has taken a major hit. In a report today, the U.S. Department of Agriculture cut its estimates for this year’s corn yield to 10.7 billlion bushels — or nearly 17 percent below July estimates. That sent corn futures up 3 percent to $8.43 a bushel, a record peak. As the drought has worsened, grain prices have shot up by between 25 and 50 percent since June. The Financial Times reports: Politicians are increasingly alarmed by the current food supply situation. José Graziano da Silva, secretary-general of the UN’s Food and Agriculture Organisation, wrote in an opinion piece in Friday’s Financial Times that the situation was “precarious”. “While the current situation is precarious and could deteriorate further if unfavourable weather conditions persist, it is not a crisis yet,” he said. But he added that “risks are high and the wrong responses to the current situation could create [a new crisis]”.

Better weather, but too late for U.S. corn crop - Wetter, cooler weather was moving into the drought-stricken U.S. crop belt on Friday, and while the change comes too late to benefit the devastated corn crop, it may give some solace to soy. As the worst drought in over a half century took its toll, investors went on a buying spree, boosting corn prices by more than 50 percent from late May to fresh record highs above $8 per bushel. The U.S. government on Friday released fresh crop data that revealed shocking cuts for this year's grain and oilseed output as the drought spread through America's breadbasket. The better crop weather was expected in the U.S. Midwest on Friday and through next week, which will help some late-planted soybeans, but it's too late for corn, an agricultural meteorologist said. "We're looking at a much-improved forecast compared with what we've had all summer; not perfect but better,"

Reports: Worsening drought conditions in key farm states help stoke rising global food prices - The Plains states where the production of corn and soybeans is key are being hit harder by excessive drought conditions in the wake of the hottest month on record in the continental U.S., contributing to a surge in global food prices. The weekly U.S. Drought Monitor map released Thursday showed that the amount of the contiguous U.S. mired in drought conditions dropped a little more than 1 percentage point, to 78.14 percent as of Tuesday. But the expanse still gripped by extreme or exceptional drought — the two worst classifications — rose to 24.14 percent, up nearly 2 percentage points from the previous week. That’s because key farm states didn’t get as much benefit from rains as elsewhere on the heels of temperatures in July that federal scientists said were so high they broke a record set during the Dust Bowl of the 1930s. Growers in Iowa — the nation’s biggest corn and soybean producer — saw their conditions further deteriorate, with the amount of that state in extreme or exceptional drought more than doubling from 30.74 percent last week to 69.14 percent now. In neighboring Nebraska, the expanse of land considered in the two worst drought categories rose to 91.2 percent, up 8 percentage points. The amount of Kansas in exceptional drought also more than doubled, up to 38.58 percent from 17.45 percent, while extreme or exceptional drought in Illinois spiked roughly 10 percentage points, to 81.18 percent.

Latest Drought Science Alarming for US - On this blog in the past, I have extensively discussed the drought research of Aiguo Dai and others.  Today I'd like to add coverage of a new paper in Nature that Dai has published. First, let's quickly review the backstory.  In the past, it was discovered that the Palmer Drought Severity Index (a long-standing popular measure of drought), when applied to a suite of 21st century runs of climate models prepared for the 4th IPCC report, suggested that there would be  increasingly widespread global drought due to global warming:This was extremely alarming with most of the world's agricultural zones badly impacted by severe drought by mid-century.  However, there was one hopeful caveat - at least to those of us in the US.  Using a statistical procedure (principal components analysis) to extract the dominant trend from the actual observational data (not the models) showed a map of the drying/wetting trends like this:Here most of the US is in a wetting trend - in contrast to the average model run, which had the US drying out noticeably already.  So perhaps the models somehow get the regional distribution wrong and the US will continue to get wetter in future? Dai has now explicitly addressed this question, and while I think his case is less than cast-iron at present, the evidence suggests that the answer is no - the US just got lucky in the sixties through the nineties, and its luck is unlikely to continue to hold.

Demand for water outstrips supply -- Almost one-quarter of the world’s population lives in regions where groundwater is being used up faster than it can be replenished, concludes a comprehensive global analysis of groundwater depletion, published this week in Nature1. Across the world, human civilizations depend largely on tapping vast reservoirs of water that have been stored for up to thousands of years in sand, clay and rock deep underground. These massive aquifers — which in some cases stretch across multiple states and country borders — provide water for drinking and crop irrigation, as well as to support ecosystems such as forests and fisheries. Yet in most of the world’s major agricultural regions, including the Central Valley in California, the Nile delta region of Egypt, and the Upper Ganges in India and Pakistan, demand exceeds these reservoirs' capacity for renewal.

Global groundwater use outpaces supply -- A handful of thirsty countries are guzzling their groundwater reserves much faster than those resources can be renewed. India, Pakistan, Saudi Arabia, Iran, Mexico, and the United States lead the global pack of water-thirsty nations, researchers report online August 8 in Nature. Irrigation for agriculture drives much of the demand, says hydrogeologist and study coauthor Tom Gleeson of McGill University in Montreal. He and colleagues devised a new “groundwater footprint” measure to evaluate the sustainability of withdrawals from the world’s aquifers. The analytic tool balances water coming in with water going out, and gauges how large an aquifer would have to be to accommodate current withdrawals. A groundwater footprint larger than its aquifer means people are sucking down water faster that it can be replenished — treating it as a nonrenewable resource, Gleeson says. Though 80 percent of the world’s aquifers have sustainable footprints, people drawing on other aquifers are draining the world’s water supply. For these overtapped reservoirs, groundwater footprints vastly exceed aquifer areas. “It’s not sustainable,” Gleeson says. “We don’t know how long the aquifers will last.”

The pool of water under the Midwest is being sucked dry. The drought is making it worse -Even in good years, farmers in the Midwest supplement rainfall with irrigation from the Ogallala Aquifer. The map below shows irrigated areas in blue; the darker the color, the heavier the irrigation. That big, dark patch in the middle, to the left of the little icon, is irrigated by both surface water and water from the Ogallala and other aquifers in the High Plains system. The Ogallala spreads across 174,000 square miles, providing drinking water and irrigation to a huge swath of the United States, replenished slowly by rainfall in the region. It’s a critically important resource, which is why it’s been a big part of the Keystone XL fight — if it’s polluted by tar-sands oil, the damage could be catastrophic. The Ogallala and other aquifers around the globe are also threatened by overuse. According to research published this week in Nature, “about 1.7 billion people live in areas where groundwater resources and/or groundwater-dependent ecosystems are under threat.” Researchers estimate that the amount of water being used is 3.5 times the size of the aquifers.

How Much Water Debt Are We Taking On? This Scary Map Shows How Much - We are currently using 3.5 times the water resources supplied by aquifers, according to new research on our global “groundwater footprint” just published in the Journal Nature. According to the researchers, nearly 1.7 billion people live in areas where groundwater is under threat. Interestingly, it’s only a handful of aquifers contributing to the problem. “80 per cent of aquifers have a groundwater footprint that is less than their area, meaning that the net global value is driven by a few heavily overexploited aquifers,” write the researchers. The scary map below illustrates just how depleted those few overexploited groundwater resources are:

Study: Climate Change Will Reduce Milk Production From U.S. Dairy Cows - A new study conducted by researchers at the University of Washington concludes that milk production in dairy cows could fall dramatically in some areas of the U.S. due to climate change. The researchers showed that cows, like humans, are sensitive to heat stress. In certain hot and uncomfortable conditions, cows must devote more of their body’s resources to cooling down and devote less energy to milk production. The problem is exacerbated in humid conditions. Because cows perspire to cool down, higher concentrations of water in the air makes it more difficult for sweat to evaporate. Thus, as hot and humid climates become more extreme, they threaten the productivity of dairy cows.According to one of the researchers:  “Using U.S. Department of Agriculture statistics, if you look at milk production in the Southeast versus the Northwest, its very different,” said Guillaume Mauger, a postdoctoral researcher in the UWs Climate Impacts Group and co-author of the paper. “Its reasonable to assume that some of that is due to the inhospitable environment for cows in the Southeast.”

Drought, Corn, Cattle, Ethanol And Craziness - Corn prices have spiked this year due to the severe drought engulfing America's farming regions. Now cattle raisers are up in arms about the soaring cost of the corn they use to feed their livestock. Their solution? Stop using so much of that corn to support the ethanol mandate. Corn prices have spiked this year due to the severe drought engulfing America's farming regions. Now cattle raisers are up in arms about the soaring cost of the corn they use to feed their livestock. Their solution? Stop using so much of that corn to support the ethanol mandate. The surge in grain prices amid the worst drought in the U.S. in more than half a century, has led to livestock farmers demanding the Obama administration reduce or temporarily cancel a federal mandate, which requires part of the corn crop be set aside to produce ethanol for blending into cleaner-burning gasoline. The livestock lobby argues such a waiver will free up more supply and help ease record prices for corn, a key ingredient for animal feed. This year gasoline refiners will use some 13.2 billion gallons of ethanol... The debate is resurrecting painful memories of the food crisis of 2008 when farmers diverted corn crops from food production into the lucrative biofuel market.

Ethanol Declines as Rain, Cooler Weather in Midwest Boosts Corn - Ethanol futures fell in Chicago as rain and cooler weather in the U.S. Midwest provided some relief to drought-withered corn crops.  Futures tumbled after rain over the weekend improved the prospects for corn, the primary ingredient used to produce ethanol in the U.S. Distillers have responded to higher corn prices brought about by drought by cutting output by 16 percent to 809,000 barrels a day from a record 963,000 on Dec. 30. Assuming one bushel of the grain distills into at least 2.75 gallons of ethanol, companies stand to lose 48 cents on every gallon produced, based on the December contracts for the commodities, according to data compiled by Bloomberg.

Mikulski, Cardin among senators urging EPA waiver on corn-to-fuel rule - Maryland Sen. Barbara Mikulski says she is among a group of senators asking the Environmental Protection Agency to relax renewable fuel standards to require less corn. Mikulski says that will help ease corn supply shortages caused by drought conditions this year. Mikulski says other senators signing the letter include Maryland Sen. Ben Cardin, and Delaware Sens. Chris Coons and Thomas Carper. Mikulski says Maryland’s poultry growers have been deeply affected by extreme weather this summer that has pushed corn yields lower. That has raised prices for corn, which has caused animal feed prices to rise. Last week, House lawmakers also asked the EPA to relax rules requiring a percentage of the corn crop go to making ethanol.

Is ethanol impacting gasoline prices or are we looking at more political hype? - Bloomberg/BW: - The Obama administration is reviewing the country’s ethanol policy amid calls from both political parties and the United Nations to suspend annual targets as the worst drought in 56 years spurs corn prices. Twenty-five U.S. senators, both Republicans and Democrats, asked Lisa Jackson, administrator of the Environmental Protection Agency, to halt or lower mandates on how much ethanol the country must use this year and next. The senators’ Aug. 7 letter followed an Aug. 1 petition from a bipartisan coalition of 156 members of the House of Representatives.  “I would simply say that the EPA, in consultation with the Department of Agriculture, is looking at this,”  How material is the risk of US gasoline prices being impacted by the spike in corn prices or is this just a political maneuver on both sides of the isle? After all we are in the midst of what could turn out to be a close presidential election and such petitions should be taken with a grain of salt.Based on the latest data, it turns out that these politicians are full of hot air. According to the US Energy Information Administration (EIA) the US ethanol production is expected to be reduced by only about 3%.

UN urges US to cut ethanol production - The UN has called for an immediate suspension of government-mandated US ethanol production, adding to pressure on Barack Obama to address the food-versus-fuel debate in the run-up to presidential elections. Most US ethanol is made from corn. The dispute over ethanol promotion pits states such as Iowa that benefit from higher corn prices – and in some cases are swing states in the election – against livestock-raising states such as Texas that are helped by lower corn prices. The UN intervention will be seized upon by state governors, lawmakers and the meat and livestock industry, who have expressed alarm at surging prices for corn. Members of the Group of 20 leading economies – including France, India and China – have already expressed concern about the US ethanol policy. The US is poised to divert around 40 per cent of its corn into ethanol because of the Congress-enacted mandate despite “huge damage” to the crop because of the worst drought in at least half a century, José Graziano da Silva, director-general of the UN’s Food and Agriculture Organisation, warned. “An immediate, temporary suspension of that [ethanol] mandate would give some respite to the market and allow more of the crop to be channelled towards food and feed uses,” he wrote in an opinion piece in the Financial Times.

Dimwit Energy Policies, Record Corn Prices, and UN Pleas for US to Change Ethanol Policy; Obama Consistently Wrong, Romney an Energy Pretzel - The price of corn is at all all-time high because of extreme drought conditions in the US coupled with the hottest July temperatures since records began 117 years ago. US policy mandates production of ethanol for blending in gasoline. That ethanol comes mostly from corn. Diverting corn crops to inefficient ethanol production has members of the Group of 20 leading economies – including France, India and China – concerned about the US ethanol policy. In response, the UN urges US to cut ethanol production. The US is poised to divert around 40 per cent of its corn into ethanol because of the Congress-enacted mandate despite “huge damage” to the crop because of the worst drought in at least half a century, José Graziano da Silva, director-general of the UN’s Food and Agriculture Organisation, warned. “An immediate, temporary suspension of that [ethanol] mandate would give some respite to the market and allow more of the crop to be channelled towards food and feed uses,” he wrote in an opinion piece in the Financial Times. Tom Vilsack, US agriculture secretary, raised doubts about the impact of waiving the ethanol mandate, arguing that the US biofuel industry had reduced petrol prices and created jobs. The question at hand is whether the US agriculture secretary is an economic dimwit, a shill for the Obama administration, a shill for corn producers, or some combination thereof.

July Heat Records Crush Cold Records By 17 To 1, ‘Historic Heat Wave And Drought’ Fuels Oklahoma Fires - July saw 3,135 new daily high temperature records in the U.S. — over 100 per day. That overwhelmed new cold records by a factor of nearly 17 to 1, as this chart from Capital Climate shows. For the year to date, new heat records are beating cold records by a remarkable 12 to 1, which trumps the pace of the last decade by more than a factor of 5!I like the statistical aggregation across the country, since it gets us beyond the oft-repeated point that you can’t pin any one local record temperature on global warming. A 2009 analysis shows that the average ratio for the 2000s was 2.04-to-1, a sharp increase from previous decades. Lead author Dr. Gerald Meehl explained, “If temperatures were not warming, the number of record daily highs and lows being set each year would be approximately even.” Many of the country’s leading meteorologists and climatologists — including NASA’s James Hansen — have looked at the data and concluded that like a baseball player on steroids, our climate system is breaking records at an unnatural pace.

Hottest Year On Record For The Northeastern U.S. So Far - The twelve states that make up the Northeastern U.S. are experiencing their hottest year on record, according to data from the Northeast Regional Climate Center at Cornell University. From January to July, average temperatures in the Northeast were 49.9 degrees Fahrenheit — the warmest such seven month period since record keeping started in 1895. The Center also released data on the 12-month period from August of 2011 to July of this year, showing that it was the warmest 12-month period on record for the Northeast. Here are some data points released by the Northeast Regional Climate Center:

  • It was the seventh warmest July since 1895 in the Northeast. The average temperature was 72.8 degrees, which was 2.9 degrees above normal.
  • Each of the 12 states in the region averaged warmer than normal, with departures that ranged from +1.5 degrees in Rhode Island to +4 degrees in Delaware.
  • It was the second warmest July since 1895 in Delaware and the third warmest in Maryland.
  • All 12 states in the region ranked within the top 24 warmest since record keeping began in 1895.

Brutal July heat a new U.S. record - The July heat wave that wilted crops, shriveled rivers and fueled wildfires officially went into the books Wednesday as the hottest single month on record for the continental United States. The average temperature across the Lower 48 was 77.6 degrees Fahrenheit, 3.3 degrees above the 20th-century average, the National Oceanographic and Atmospheric Administration reported. That edged out the previous high mark, set in 1936, by two-tenths of a degree, NOAA said. In addition, the seven months of 2012 to date are the warmest of any year on record and were drier than average as well, NOAA said. U.S. forecasters started keeping records in 1895.And the past 12 months have been the warmest of any such period on record, topping a mark set between July 2011 and this past June. Every U.S. state except Washington experienced warmer-than-average temperatures, NOAA reported. The high temperatures have contributed to a "rapid expansion" of drought across the central United States, NOAA found. Dozens of cities and towns already have seen the mercury hit record levels this summer, and three states -- Nebraska, Kansas and Arkansas -- saw record dry conditions between May and July. That's battered American farmers' corn and soybean crops, driven farmers to sell or slaughter cattle they can't feed and spurred the U.S. Department of Agriculture to designate more than half of all U.S. counties as disaster zones.

NOAA: July Was Hottest Month Ever in US - July was the hottest month on record in the continental United States, continuing the warmest January-to-July period since modern record-keeping began in 1895, National Oceanic and Atmospheric Administration (NOAA) reported Wednesday. The average temperature for July across the continental US was 77.6 degrees F -- 3.3 degrees F above the 20th century average. The last four 12-month periods have each successively established new records for the warmest period of that length. In the 12-month span from August 2011-July 2012, every state observed warmer than average temperatures except Washington state, which was near average. A record setting drought continues to plague 63 percent of the 48 contiguous states, according to NOAA's Drought Monitor, with near-record drought conditions in the Midwest. According to Jake Crouch, a scientist at NOAA's National Climatic Data Center, drought and heat continue to play off each other, as dry soils in the summer tend to drive up daytime temperatures. "The hotter it gets, the drier it gets, the hotter it gets,"

NOAA: July 2012 marked the hottest month on record for the contiguous United States - According to NOAA scientists, the average temperature for the contiguous U.S. during July was 77.6 °F, 3.3 °F above the 20th century average, marking the hottest July and the hottest month on record for the nation. The previous warmest July for the nation was July 1936 when the average U.S. temperature was 77.4 °F. The warm July temperatures contributed to a record-warm first seven months of the year and the warmest 12-month period the nation has experienced since recordkeeping began in 1895. During July, the contiguous U.S. averaged a precipitation total of 2.57 inches, which was 0.19 inch below average. Near-record dry conditions were present for the middle of the nation, with the drought footprint expanding to cover nearly 63% of the Lower 48, according the U.S. Drought Monitor, while some areas such as the Gulf Coast and the Southwest had wetter-than-average conditions. This monthly analysis (summary, full report) from NOAA's National Climatic Data Center is part of the suite of climate services NOAA provides government, business and community leaders so they can make informed decisions. U.S. climate highlights - July:

•Higher-than-average temperatures engulfed much of the contiguous U.S. during July, with the largest temperature departures from the 20th century average occurring across most of the Plains, the Midwest, and along the Eastern Seaboard. Virginia had its warmest July on record, with a statewide temperature 4.0 °F above average. In total, 32 states had July temperatures among its 10 warmest, with 7 states having their 2nd warmest July on record.
•Drier-than-average conditions continued across the Central Plains and Midwest during July. Nebraska, Iowa, Illinois, and Missouri had July precipitation totals ranking among their 10 driest. Maine had its 5th driest July on record.
•An active storm pattern in the Southwest contributed to California having its 5th wettest July on record and Nevada having its 8th wettest. Wetter-than-average conditions were also observed through the rest of the Southwest, along the western Gulf Coast, and through the Ohio Valley where West Virginia had its 10th wettest July.

July hottest US month on record - July was the hottest month the continental US has seen since records began, federal scientists have said. Last month, the average temperature was 77.6F (25.3C), hotter than the old record from July 1936, during a period of severe drought known in the US as the Dust Bowl. The last 12 months were the warmest since modern records began in 1895. It was also more than 3F warmer than the average temperature in July during the 20th Century. Climate scientist Jake Crouch, from the National Climatic Data Center in North Carolina, attributed the phenomenon to both localised heat and drought, as well as global warming, according to the Associated Press. "It's a pretty significant increase over the last record," Mr Crouch said. The current heat "is out and beyond those Dust Bowl years. We're rivalling and beating them consistently from month to month."

"Hot, Damn Hot!" - July Is Hottest Month. Ever -  In the immortal words of Robin Williams: July was Hot, Damn Hot! In fact, according to NOAA, it was the hottest July and hottest month on record and there's no short-term indication of this massively dry spell ending anytime soon. What is perhaps even more impressive is that the the last year has been the warmest 12-month period for the contiguous US since records began in 1895! Just crazy anomalous conditions wherever you look in July...

July 2012: hottest month in US history - The most intense heat of the Dust Bowl hit during July 1936, which set a record for hottest month in U.S. history that stood for 76 years. That iconic record has now fallen, bested by 0.2°F during July 2012, which is now the hottest month in U.S. history, said NOAA's National Climatic Data Center (NCDC) this week. So far in 2012, we've had the warmest March on record, 3rd warmest April, 2nd warmest May, and warmest July. These remarkably warm months have helped push temperatures in the contiguous U.S. to the warmest on record for the year-to-date period of January - July, and for the 12-month period August 2011 - July 2012. Twenty-four states were record warm for that 12-month period, and an additional twenty states were top-ten warm. The past fourteen months have featured America's 2nd warmest summer (in 2011), 4th warmest winter, and warmest spring. The summer of 2012 is on pace to be a top-five warmest summer on record, and could beat the summer of 1936 as the warmest summer in U.S. history.For the fourth consecutive month, a new U.S. record for hottest 12-month period was set in July 2012. Five of the top-ten warmest 12-month periods in the contiguous U.S. since 1895 have occurred since April 2011.

Heat Wave! - July was the hottest month ever recorded in the continental United States, and the past 12 months have been hotter than any such period on record. Half of all counties in the country have been declared disaster areas, mainly due to drought.   We’ve rounded up some of the best journalism on the effects of rising temperatures. Got others you’re burning to share? Add them in the comments.

2012 Has Already Set More Daily Heat Records Than All Of 2011, And More Are On The Way - The U.S. has already seen more daily heat records broken or tied than 2011 — and its only August. In 2011, 26,674 daily heat records were broken or tied. As of August 5th, there have already been 27,042 heat records set or matched. Many of those records were set during heat waves in March and July. In March, almost 8,000 heat records were either set or tied, and another 4,420 were either set or tied last month. According to Climate Central: That this year has already eclipsed the number of records set during 2011 is especially remarkable because 2011 was a very warm year, during which Oklahoma set the record for the all-time warmest average summer temperature of any state in the country, with Texas coming in a close second thanks to the drought conditions and heat waves there. Both states have been baking under searing heat once again this summer. Oklahoma City reached 112°F on July 1 and 2, and 113°F on the 3rd, which tied the all-time high temperature record for that location. Every day from July 17 through August 4 reached or exceeded 100°F in Oklahoma City, and the heat and drought have led to an outbreak of wildfiresacross the state.

Post-Apocalyptic Fantasy Becomes Everyday Reality -- Wherever you look, the heat, the drought, and the fires stagger the imagination.  Now, it’s Oklahoma at the heart of the American firestorm, with “18 straight days of 100-plus degree temperatures and persistent drought” and so many fires in neighboring states that extra help is unavailable. It’s the summer of heat across the U.S., where the first six months of the year have been the hottest on record (and the bugs are turning out in droves in response).  Heat records are continually being broken.  More than 52% of the country is now experiencing some level of drought, and drought conditions are actually intensifying in the Midwest; 66% of the Illinois corn crop is in “poor” or “very poor” shape, with similarly devastating percentages across the rest of the Midwest.  The average is 48% across the corn belt, and for soybeans 37% -- and it looks as if next year’s corn crop may be endangered as well.  More than half of U.S. counties are officially in drought conditions and, according to the Department of Agriculture, “three-quarters of the nation's cattle acreage is now inside a drought-stricken area, as is about two-thirds of the country's hay acreage.”  Worse yet, there’s no help in sight -- not from the heavens, not even from Congress, which adjourned for the summer without passing a relief package for farmers suffering through some of the worst months since the Dust Bowl of the 1930s.

The economic cost of increased temperatures - MIT - Even temporary rises in local temperatures significantly damage long-term economic growth in the world’s developing nations, according to a new study co-authored by an MIT economist. Looking at weather data over the last half-century, the study finds that every 1-degree-Celsius increase in a poor country, over the course of a given year, reduces its economic growth by about 1.3 percentage points. However, this only applies to the world’s developing nations; wealthier countries do not appear to be affected by the variations in temperature. “Higher temperatures lead to substantially lower economic growth in poor countries,” says Ben Olken, a professor of economics at MIT, who helped conduct the research. And while it’s relatively straightforward to see how droughts and hot weather might hurt agriculture, the study indicates that hot spells have much wider economic effects. “What we’re suggesting is that it’s much broader than [agriculture],” Olken adds. “It affects investment, political stability and industrial output.”

IEA Bombshell: Global Warming May Lead To ‘Miami Beach In Boston’ Situation Unless Urgent Action Is Taken - The International Energy Agency was, until recently, a conservative and staid body. When I was at the U.S. Department of Energy in the 1990s, we ignored most IEA reports, because, like the vast majority of energy forecasters, they inevitably projected that the future would simply continue the trends of the recent past. But now, of course, if we stay on current trends, we are going to utterly destroy a livable climate and ruin the lives of billions of people. Even so, attention must be paid when a major international body is so uncharacteristically blunt, when they actually lead their website with this bombshell headline from their own news release! Anyone who follows the IEA or Climate Progress knows that they and many others have been issuing this warning for the last year or two. And because the world just keeps blithely dumping more and more carbon pollution into the air, the leadership of the IEA has been increasingly blunt. Their chief economist, Fatih Birol, said late last year that the world is on pace for 11°F warming, and “Even School Children Know This Will Have Catastrophic Implications for All of Us.” If only school children ran the world!

Alaskan Arctic villages hit hard by climate change - Fermented whale’s tail doesn’t taste the same when the ice cellars flood. Whaling crews in this Arctic coast village store six feet of tail — skin, blubber and bone — underground from spring until fall. The tail freezes slowly while fermenting and taking on the flavor of the earth.But climate change, with its more intense storms, melting permafrost and soil erosion, is causing the ice cellars to disintegrate. Many have washed out to sea in recent decades. The remaining ones regularly flood in the spring, which can spoil the meat and blubber, and release scents that attract polar bears. “They’re thawing and filling up with water,” Point Hope Mayor Steve Oomittuk said as he lifted a small wooden door to a cellar, surrounded by plastic sheets shielding the remaining snow cover from the sun. More quickly than any other place in the United States, the Alaskan Arctic is being transformed by global warming. The impacts of climate change are threatening a way of life.

Climate change hits shellfish: scientists: Ocean acidification caused by climate change is making it harder for creatures from clams to sea urchins to grow their shells, and the trend is likely to be felt most in polar regions, scientists said today. A thinning of the protective cases of mussels, oysters, lobsters and crabs is likely to disrupt marine food chains by making the creatures more vulnerable to predators, which could reduce human sources of seafood. "The results suggest that increased acidity is affecting the size and weight of shells and skeletons, and the trend is widespread across marine species," the British Antarctic Survey (BAS) said in a statement of the findings. Human emissions of greenhouse gases include carbon dioxide from burning fossil fuels, and some of that carbon dioxide ends up in the oceans, where it dissolves to form acid.

Global warming: Diseased trees may be major methane source « Summit County Citizens Voice: Along with the potential risk for increased fire danger, there may be another good reason to remove beetle-infested trees from western forests. Researchers at the Yale School of Forestry & Environmental Studies say some diseased trees release methane at a level that may be a globally significant source of the potent heat-trapping gas, according to the study published in Geophysical Research Letters. Sixty trees sampled at Yale Myers Forest in northeastern Connecticut contained concentrations of methane that were as high as 80,000 times ambient levels. Normal air concentrations are less than 2 parts per million, but the Yale researchers found average levels of 15,000 parts per million inside trees.“These are flammable concentrations,” said Kristofer Covey, the study’s lead author and a Ph.D. candidate at Yale. “Because the conditions thought to be driving this process are common throughout the world’s forests, we believe we have found a globally significant new source of this potent greenhouse gas.”

Study: Reservoirs May Produce 20 Times More Methane Than Normal During Water ‘Drawdown’ - Typically, at moderate sizes, power generated by dams and reservoirs is considered “green.” However, a new study from Washington State University has found that during times of drawdown — a period in which the water level behind a dam is rapidly lowered — temperate reservoirs can produce up 20 times more methane than normal. Methane is a greenhouse gas 25 times more effective than CO2 at trapping heat in the atmosphere over 100-year period, and is a hundred times more potent over 20 years. It is produced naturally in reservoirs thanks to biological activity. During drawdowns, though, when layers of decaying plants, among other things, are exposed, the amount of methane in the water column skyrockets. According to the study: “Bridget Deemer, a doctoral student at Washington State University-Vancouver, measured dissolved gases in the water column of Lacamas Lake in Clark County and found methane emissions jumped 20-fold when the water level was drawn down. A fellow WSU-Vancouver student, Maria Glavin, sampled bubbles rising from the lake mud and measured a 36-fold increase in methane during a drawdown.”Though researchers have long known that methane levels spike in reservoirs during drawdown, this study was the first to show the relationship and put a number on the actual methane emissions.

Ocean Acidification Could Disrupt Marine Food Chains, Scientists Say: (Reuters) - Ocean acidification caused by climate change is making it harder for creatures from clams to sea urchins to grow their shells, and the trend is likely to be felt most in polar regions, scientists said on Monday. A thinning of the protective cases of mussels, oysters, lobsters and crabs is likely to disrupt marine food chains by making the creatures more vulnerable to predators, which could reduce human sources of seafood. "The results suggest that increased acidity is affecting the size and weight of shells and skeletons, and the trend is widespread across marine species," the British Antarctic Survey (BAS) said in a statement of the findings. Human emissions of greenhouse gases include carbon dioxide from burning fossil fuels, and some of that carbon dioxide ends up in the oceans, where it dissolves to form acid. The ocean acidification makes it harder for creatures to extract calcium carbonate - vital to grow skeletons and shells - especially from chill waters in the Arctic Ocean and around Antarctica, according to the study in the journal Global Change Biology.

Cyclone warning! [ in the Beaufort and Chukchi Sea regions ]  I have postponed this post until I was sure that what follows is going to happen. Remember the term 'flash melting'? That's when from one day to the next large swathes of ice disappear on the University of Bremen sea ice concentration maps. We witnessed one such instance last year when a relatively large and intense low-pressure area moved in from Alaska over the ice in the Beaufort and Chukchi Sea regions (see blog post). It lasted about a day or two and then quickly faded, but the effects were spectacular. Well, it looks like we have something bigger coming up this year. This is the ECMWFweather forecast for the coming four days (click for a bigger version): Not only does this low-pressure area, or cyclone, look bigger, more intense and longer-lasting than the one from last year, the ice also seems to be in a weaker state than ever, as evidenced by the fact that 2012 trend lines on both sea ice area and sea ice extent graphs track lower than previous record years, despite weather that until recently would completely stall the decline.

NSIDC Arctic Sea Ice Report, August 2012: A Most Interesting Summer - Arctic sea ice extent declined quickly in July, continuing the pattern seen in June. On August 1, ice extent was just below levels recorded for the same date in 2007, the year that saw the record minimum ice extent in September. Low sea ice concentrations are present over large parts of the western Arctic Ocean. Warm conditions dominated the weather for most of the Arctic Ocean and surrounding lands. For a brief period in early July, nearly all of the Greenland ice sheet experienced surface melt, a rare event. Arctic sea ice extent for July 2012 averaged 7.94 million square kilometers (3.07 million square miles). This was 2.12 million square kilometers (819,000 square miles) below the 1979 to 2000 average extent. July 2012 ice extent was 20,000 square kilometers (7,700 square miles) above the 2011 record July low. As throughout the summer, the low ice extent for the Arctic as a whole is primarily due to extensive open water on the Atlantic side of the Arctic (Kara, Laptev and East Siberian seas) and the Beaufort Sea. By August 1, open water in the Laptev Sea, along the Siberian coast, had reached nearly 80o N latitude. Ice extent remains near average in the Chukchi Sea, and ice continues to block sections of the both the Northern Sea Route and the Northwest Passage. The ice extent recorded for August 1 of 6.53 million square kilometers (2.52 million square kilometers) is the lowest in the satellite record.

Jason Box: Early August 2012 Greenland ice reflectivity [albedo] dips again below 2 standard deviations - As in the mid-July case, the early August ice sheet albedo has declined to an average more than 5% (or 2 standard deviations) below the average of the previous 12 years (2000-2011). A “2-sigma” event has a probability of occurrence under 5% in a random climate.The decline is again concentrated in the accumulation area above 1500 m elevation where melting is less common as it is in the lower elevations. The thermodynamic impact of widespread reflectivity decline is:

  1. more ice sheet solar energy absorption
  2. more erosion of snowpack heat content
  3. more preconditioning of future early melt onset cases
  4. more melting in 2012

…all in a self-reinforcing feedback loop that amplifies melting (see Box et al. 2012, link below). The early August decline is similar to August declines in 2008, 2004, and 2001. What is different is that the decline is from a lower point.

Arctic Sea Ice Concentration, August 17, 2008 (graphic)

The risks of climate disaster demand straight talking - FT - These pages often focus on how the eurozone crisis will play out. Yet within a decade, this crisis will resolve itself one way or another. Meanwhile, the more important climate crisis gathers momentum with hardly a word on where it will lead. This is partly because climate change has slipped from the public agenda. But there is also, we suspect, a concern that climate is too contentious and complex a topic for a non-expert commentator to tackle. There may also be a fear that any honest appraisal of the possible course of events risks the charge of alarmism. In our view, the first is not the case and the second is a poor excuse. The carbon dioxide concentration in the atmosphere is now almost 400 parts per million and is increasing by 2 ppm each year. Since the rate of emissions is also increasing as the world economy expands, the carbon dioxide concentration is set to reach 550 ppm by mid-century, double the pre-industrial concentration. Doubling the carbon dioxide concentration will increase the mean near-surface air temperature by about 3 degrees centigrade. This is a crude way to infer the warming effect of emissions without using a climate model.  A 3 degree rise may sound small, but it compares with a 6 degree difference between the last ice age and the temperate 12 millennia since then. Disputes about the consequences of continued emissions boil down to how long it will take for a given level of warming to be reached and how high the costs of the associated damage will be. Yet given these numbers, it is clear that the risks of driving temperatures up at least 3 degrees are significant. Moreover, political pledges to limit warming to 2 degrees are manifestly hollow in the absence of rapid steps to decarbonise major economies. None of this is particularly complicated. All of it is discussed in private among senior scientists, business people and government advisers.

The Coming Hunger Wars: Heat, Drought, Rising Food Costs, and Global Unrest - The Great Drought of 2012 has yet to come to an end, but we already know that its consequences will be severe. With more than one-half of America’s counties designated as drought disaster areas, the 2012 harvest of corn, soybeans, and other food staples is guaranteed to fall far short of predictions. This, in turn, will boost food prices domestically and abroad, causing increased misery for farmers and low-income Americans and far greater hardship for poor people in countries that rely on imported U.S. grainsThis, however, is just the beginning of the likely consequences: if history is any guide, rising food prices of this sort will also lead to widespread social unrest and violent conflict. Food -- affordable food -- is essential to human survival and well-being. Take that away, and people become anxious, desperate, and angry. In the United States, food represents only about 13% of the average household budget, a relatively small share, so a boost in food prices in 2013 will probably not prove overly taxing for most middle- and upper-income families. It could, however, produce considerable hardship for poor and unemployed Americans with limited resources. This could add to the discontent already evident in depressed and high-unemployment areas, perhaps prompting an intensified backlash against incumbent politicians and other forms of dissent and unrest.

WWIII: Great commodities war to end all wars — Yes, WWIII: The Great Commodities War to End All Wars. We’ve heard that before. Remember WWI, known as The War to End All Wars, 37 million casualties. WWII was bigger, 60 million. Will WWIII finally end all wars? Or end the world, civilization, planet? And it’s already started folks, ending the Great American Dream. Fasten your seat belts, soon we’ll all be shocked out of denial. Some unpredictable black swan. A global wake-up call will trigger the Pentagon’s prediction in Fortune a decade ago at the launch of the Iraq War: “By 2020 ... an ancient pattern of desperate, all-out wars over food, water, and energy supplies is emerging ... warfare defining human life.” And that’s also the clear message in “The Race for What’s Left: The Global Scramble for the World’s Last Resources,” the latest book by noted international security expert Michael Klare. Earlier, about the same time as the Pentagon’s prediction, Klare published his classic, “Resource Wars: The New Landscape of Global Conflict,” a look ahead to a world that he now hopes will not “end in war, widespread starvation, or a massive environmental catastrophe.” Although they are “the probable results of persisting in the race for what’s left.” Unfortunately, hope can’t trump reality in today’s race for what little is left.

TEN BILLION: Return of the Population Bomb? -  A generation ago—no, two generations ago, already—Paul Ehrlich scared us all out of our wits with his book, The Population Bomb. It turned out to be a bomb that we gradually learned to live with. Yes, it exploded—the world’s population did double between 1960 and 2000, the shortest doubling time in human history. No—it didn’t kill us. As University of Michigan professor Donald Lam told us in a 2011 presidential address to the Population Association of America, the shift from large families making low investments in their children to small families making high investments in their children is a fundamental dimension of economic development that gives us reasons to be optimistic about the future. Now the population bomb is back, this time in the unlikely form of a sold-out, one-man play, entitled TEN BILL10N, at London’s Royal Court theatre. I haven’t seen the play, but I would like to comment on the reviews, which, after all, are likely to be as influential as the play itself. The thesis of the play seems simple enough. In the words of actor/scientist Stephen Emmont, “We’re f**ked.” Emmont, a professor of computational science at Oxford, goes on to tell his audience how we will be done in by the twin forces of overpopulation and climate change. More people eat more food, growing more food means more deforestation and transportation, more of those mean more CO2, more CO2 means more unstable weather, and so on. So, are we doomed?

As the Planet Reaches its Limits, What Solutions are Available? - We live in a finite world. At this point, we seem to be reaching limits in several different areas:
Cheap oil. Our economy runs on cheap oil, but there is a limit to the amount of cheap oil that can be pulled out of the ground. There is still a lot of expensive-to-produce oil left, but this is not a substitute for cheap oil.
Fresh water. Fresh water is used for drinking, for growing food, for producing oil and gas, and for creating electricity, among other things. In many parts of the world, we are using fresh water faster than aquifers can replenish.
Climate Change. Our agricultural system depends on relatively constant climate. Changes to climate, whether caused by humans or not, are a problem. It is possible that this year’s hot summer is caused by climate change.
Soil fertility. Soil fertility depends on adequate depth of top soil, adequate humus content, suitable bacteria in the soil, and proper mineral balance. We have been able to hide soil fertility problems through greater use fertilizers, pesticides, and irrigation, but these are not permanent “fixes”.
Pollution. There are many types of pollution that are problems, from excessive carbon dioxide, to mercury in food sources, to endocrine disruptors, to algal blooms.
Human population. The number of humans on earth is out of balance with world ecosystems and keeps growing, year after year.

The Wall Street Journal: Dismissing Environmental Threats Since 1976 - Media Matters timeline - For decades the conservative Wall Street Journal editorial board has campaigned with industry against government action to address major environmental threats. Regardless of the specific issue, the editorials offer this familiar refrain:

  • 'We Don't Know Enough': The Journal makes claims that are out of step with the weight of scientific evidence, seizes on uncertainties, and argues for further study before any action is taken to mitigate the risk.
  • 'It Will Cost Too Much': The Journal claims regulations would have enormous economic costs, often citing unreliable industry-backed studies.
  • 'It's All Politics': To sidestep the science showing a clear threat, the Journal claims that those who want to address the problem are motivated by politics, not science.

Why climate change doesn’t spark moral outrage, and how it could - Perhaps the single biggest barrier to action on climate change is the fact that it doesn’t hit us in the gut. We can identify it as a great moral wrong, through a chain of evidence and reasoning, but we do not instinctively feel it as one. It does not trigger our primal moral intuitions or generate spontaneous outrage, anger, and passion. It’s got no emotional heat.  I (and countless others) have tried to explain, address, and overcome this aspect of climate change many times, in many different ways. But the single best thing I’ve read on it is a new paper in Nature Climate Change called “Climate change and moral judgment,” by Ezra Markowitz and Azim Shariff, of the University of Oregon Psychology and Environmental Studies departments respectively. In it, they “review six reasons why climate change poses significant challenges to our moral judgment system and describe six strategies that communicators might use to confront these challenges.”This is one of the most valuable things I’ve read on climate in ages, so it’s a damn shame it’s behind a pay wall.  To compensate for this unfortunate state of affairs, I’m going to quote from it liberally

Unintended consequences of carbon offsets - It has long been known that pollution abatement subsidies are strongly preferred by polluting business firms. They can even lead to increases in pollution as profits encourage entry into the market. Here is a new example:  But where the United Nations envisioned environmental reform, some manufacturers of gases used in air-conditioning and refrigeration saw a lucrative business opportunity. They quickly figured out that they could earn one carbon credit by eliminating one ton of carbon dioxide, but could earn more than 11,000 credits by simply destroying a ton of an obscure waste gas normally released in the manufacturing of a widely used coolant gas. That is because that byproduct has a huge global warming effect. The credits could be sold on international markets, earning tens of millions of dollars a year. That incentive has driven plants in the developing world not only to increase production of the coolant gas but also to keep it high — a huge problem because the coolant itself contributes to global warming and depletes the ozone layer. That coolant gas is being phased out under a global treaty, but the effort has been a struggle.

People of the Lake - Al Jazeera video - The Aral Sea, located between Uzbekistan and Kazakhstan, was once the fourth-largest lake in the world - an immense body of fresh water covering a surface area of 68,000 square kilometres. Two port cities were located on it - Aralsk in Kazakhstan and Moynaq in Uzbekistan. Both featured thriving fishing communities and the lake itself held some 22 different varieties of fish - four of which could only be found in the Aral.  But then the Soviet Union decided to boost cotton farming by constructing dams on the two large rivers that flowed into the Aral Sea, the Amu Darya and the Syr Darya rivers. This diverted these two giant rivers away from the sea into the deserts further south to irrigate large tracts of land. It proved disastrous for the Aral Sea. Soil erosion and evaporation of the waters meant that by the 1970s the Aral Sea had diminished by 20 per cent. By 1980, 30 per cent of the sea had vanished. That figure rose to 40 per cent in 1990. And today, 90 per cent of the Aral Sea has disappeared, becoming desert.

Palm trees ‘grew on Antarctica’ - Scientists drilling deep into the edge of modern Antarctica have pulled up proof that palm trees once grew there. Analyses of pollen and spores and the remains of tiny creatures have given a climatic picture of the early Eocene period, about 53 million years ago. The study in Nature suggests Antarctic winter temperatures exceeded 10C, while summers may have reached 25C. Better knowledge of past "greenhouse" conditions will enhance guesses about the effects of increasing CO2 today. The early Eocene - often referred to as the Eocene greenhouse - has been a subject of increasing interest in recent years as a "warm analogue" of the current Earth. 

Defense Dept., Interior seek to speed renewables on military lands - The Pentagon and Interior Department have inked an agreement aimed at developing green electricity projects to feed power-thirsty military bases, a plan that officials said would help ensure energy for bases if the commercial grid is disrupted. The “memorandum of understanding (MOU),” unveiled Monday, is among the steps that Obama administration officials are taking to promote green power at a time when energy legislation is politically frozen on Capitol Hill. Interior Secretary Ken Salazar and Defense Secretary Leon Panetta’s plan calls for several steps to steer industry investment in wind, solar and other projects towards 16 million acres of Interior lands that have previously been “withdrawn” for use by military installations. “Developing renewable energy is the right thing to do for national security as well as for the environment and our economy,” Panetta said in a statement. “Renewable energy projects built on these lands will provide reliable, local sources of power for military installations; allow for a continued energy supply if the commercial power grid gets disrupted; and will help lower utility costs.” It’s also aimed at helping to develop offshore wind projects to power Defense Department sites along the Atlantic and Pacific coasts, the Gulf of Mexico and Hawaii.

Clear Solar Film Means Power From Windows, UCLA Says - Researchers at the University of California, Los Angeles have developed a transparent film that may be affixed to glass and other surfaces to capture sunlight and generate electricity.  The film is suitable for windows in highrise buildings, car sunroofs and consumer electronics such as the back of Apple's iPad, Yang Yang, a professor at UCLA’s California NanoSystems Institute, said in an interview yesterday.  The film may eventually be sprayed on to surfaces, a low- cost process that would bring cheap solar energy to a broad range of new products, he said. This technique would make solar systems easier to install than the rigid panels made from polysilicon or thin films that are the industry’s standard product now.  “It’s my dream that everyone’s window can be a solar panel in the future,” said Yang. “It could be potentially very cheap.”

The Vast Potential For Renewable Energy In The American West - Arizona, California, Colorado, Nevada, New Mexico, and Utah—the “Four Corners” states plus their western neighbors—are home to some of the best renewable electricity potential in the country. These states have consistently sunny skies for solar power, wind-blown plains and deserts for turbines, and underground heat perfect for geothermal energy. They also have incredible potential for smaller-scale technologies like rooftop solar panels and energy efficiency improvements. Our analysis shows these states can house clean energy projects that could realistically provide more than 34 gigawatts of solar, wind, and geothermal energy over the next two decades. This development could stimulate more than $137 billion in investment in the renewable energy sector, create more than 209,000 direct jobs, and provide electricity for 7 million homes. With supportive federal policies, these renewable electricity goals can be met and surpassed.

Total Available Renewable Resource - Several commenters questioned Friday's post on the grounds that the total amount of solar and wind power potentially available is insufficient to power modern civilization This is incorrect. Total available wind power available on land and near shore has been estimated at 72TW.   This is close to five times current total primary energy consumption, and still more than twice as large as energy consumption in 2040 (extrapolating at the 2.7% growth rate of the last decade). Of course, not all technically and economically feasible wind sites are politically feasible.  Thus it's important that total incoming solar radiation is also very large.  Top of the atmosphere incoming solar radiation is 174000TW.  If we just look at the world's desert areas, they represent about a third of the global land area, itself about 30% of the total surface.  Allowing 30% losses in the atmosphere over deserts, and throwing out something for Antarctica (a desert, but not a very useful one for solar power), we end up with something in the ballpark of 7000TW of available solar energy from deserts alone.  This is hundreds of times larger than current civilizational energy consumption.

300 Million Without Electricity In India After Restoration Of Power Grid - According to estimates, roughly one-third of a billion Indian citizens were left without power Wednesday after workers successfully repaired the nation’s electrical grid and brought all of its systems back online. “Since restoring our infrastructure to 100 percent capacity following Monday and Tuesday’s blackouts, vast swaths of India are now completely without access to electricity,” said the country’s power minister, Veerappa Moily, who confirmed that three out of every four residents lacked access to such basic amenities as lighting, food refrigeration, and the use of simple appliances now that the country’s grid had fully recovered. “We are currently not monitoring the situation, as everything appears to be functioning normally again in India.” Government officials also stated that the widespread power outage had in no way compromised their ability to provide adequate sanitation to 31 percent of India’s citizens.

India's Future in the Dark Following the Latest Blackouts - Electric power was restored across northern India on Wednesday after an electric grid failure on July 30 and 31 resulted in the world's largest blackout. More than 600 million people, or nearly one tenth of the global population, were affected. As the country's economy and population continues to rapidly expand, the energy crisis has sharpened fears about India's ability to invest in the infrastructure needed to support it. “As one of the emerging economies of the world, which is home to almost a sixth of the world population, it is imperative that our basic infrastructure requirements are in keeping with India’s aspirations,” Chandrajit Banerjee, director general of the Confederation of Indian Industry, said in a statement. “The developments of yesterday and today have created a huge dent in the country’s reputation that is most unfortunate.” Although officials say they are unsure what caused the blackout, some blame individual states for drawing too much power from the grid, defying regulations.

India’s blackout exposes choice between water & electricity - Let’s take a snapshot of India right now.

  1. In India, there is a drought. This year’s poor monsoon is likely to lead to the third drought in 10 years. But two-thirds of the water India receives is wasted because of inadequate storage and management.
  2. India just had a power outage affecting 650 million people, a population twice as large at the U.S.  Most cities in the state of Punjab faced an acute water shortage due to lack of proper co-ordination between the power and the municipal corporations.
  3. Water tensions are increasing between countries like India and Pakistan.
  4. Before the power grid outage India was “staring at a water drinking shortage.”
  5. There is a race to tap India’s coal resources to fuel a whopping 519 GW – nearly 500 power plants – leaving behind massive deforestation and water contamination that could have a ripple effect on the environment and health inside the world’s second most-populous country and neighboring Bangladesh.  Despite places like coal mining in the Jaintia Hills of India being one of the wettest places on earth, much of the water from the Ummutha River that flows through it is no longer drinkable.

According to Andrew Revkin, The New York Times blogger: “It’d be great to think that renewable energy sources and distributed electricity generation could solve such problems, and they’re great where they work. (And India is ramping up an ambitious effort to expand solar energy.) But the reality is that grids and central power plants are a mainstay of increasingly urbanized economies. In India, that means coal will be an economic keystone for decades.”

Ending Blackouts, One Solar Lamp At A Time - The blackouts in northern and eastern India last week helped highlight a basic fact of life in the country: many people here do not have access to reliable electricity. The humor newspaper, The Onion, perhaps summed it up best with this headline: “300 Million Without Electricity in India After Restoration of Power Grid.” In lieu of power from the grid, many in India, including big businesses like the software outsourcing firms TCS and Infosys, rely heavily on the diesel generators for electricity, as my colleague Heather Timmons reported earlier in the week. But those generators are expensive to run even with government subsidies on diesel and are considered a major contributor to greenhouse gases. For many Indians, diesel is not an affordable option, and the wait for a reliable connection to the grid seems like it will be a long one given the paralysis in policy making in New Delhi and slow pace of infrastructure development around the country.But increasingly entrepreneurs and energy specialists are trying to find creative ways to meet India’s electricity needs. While there are dozens of examples, I’ll focus on two that I have learned about recently.

India Blackout Foreshadows US Event - The United States is edging ever closer to the kind of power-grid failure that put 600 million Indians — ten per cent of the population of the planet — in the dark for two days this week. The reasons for the threat are the same here as they are there: one, no one is taking care of the grid — the network of transmission lines, interconnectors and transformers that is essential to life as we know it; two, supply cannot keep up with demand; and three, rate-setting is a political rather than an economic process. It should not come as a shock, so to speak, that neglect, failure to prepare and playing politics with essentials  should lead to disaster.  India simply does not have enough fuel to generate the power it needs, and the US does. Thus a large part of the Indian power problem is that supply shortfalls caused by coal shortages cause constant brownouts and blackouts around the country. They are becoming more frequent in America, too, (they have become a regular summer event in New York City) not because we are short of fuel but because we need more generation capacity and none is being built. Supply shortages cause inconvenience — loss of power or reduction in voltage for limited periods of time — but do not take down the grid. That requires an imbalance, a sudden shock that causes circuit breakers to trip all over the system. In the United States on June 29, a chunk of the eastern grid came down when three massive towers supporting a main transmission line in West Virginia blew down in a thunderstorm. (The winds were nowhere near the design capacity of the towers, they’re still trying to figure out what happened.)

Investing in the grid: When the going gets tough, the tough get … creative - The unexpected storms that knocked out power to millions in the Midwest and Mid-Atlantic last month highlighted how fragile America’s electric grid is. But while front-page photos of fallen trees and utility repair trucks capture people’s attention, there’s a much more grave and fundamental threat to our electric grid. The U.S. grid system was born in the 1920s, and has seen few major upgrades since the 1960s. With America’s growing population and exploding demand — bigger houses, A/C units, TVs, iThings — we have serious congestion and inadequate capacity on our nation’s power lines. This has led to more frequent power outages, which cost the American economy well over $100 billion each year [PDF]. The inefficiency of our old-fashioned grid also leads to enormous waste through “line loss.” In 2010, 6.6 percent [PDF] of the electricity generated in the U.S. simply disappeared before it could reach consumers. That’s $25.7 billion worth of electrons, lost into thin air. Investing in grid modernization would clearly save American consumers tremendous amounts of energy and money. So why aren’t we doing more of it? One reason is that these projects are just plain difficult to carry out. Siting and constructing power lines usually requires a utility to go through environmental regulators and public utility commissions for each state they cross, as well as federal regulators and local governments.

Nuclear waste issues freeze permits for U.S. power plants - -- The U.S. government said it will stop issuing permits for new nuclear power plants and license extensions for existing facilities until it resolves issues around storing radioactive waste. The government's main watchdog, the Nuclear Regulatory Commission, believes that current storage plans are safe and achievable. But a federal court said that the NRC didn't detail what the environmental consequences would be if the agency is wrong. "We are now considering all available options for resolving the waste issue," the five-member NRC said in a ruling earlier this week. "But, in recognition of our duties under the law, we will not issue [reactor] licenses until the court's remand is appropriately addressed." There are 14 reactors awaiting license renewals at the NRC, and an additional 16 reactors awaiting permits for new construction. Ultimately, it'll be up to lawmakers to find a solution to long-term nuclear waste storage, but their track record on the issue hasn't been good. Nuclear waste disposal has been a daunting political question that is still unanswered after decades of study.

Dispatch From Daejeon - Cold Fusion Now is attending the 17th International Conference on Cold Fusion ICCF-17 in Daejeon, Korea in the form of science fiction author and CFN contributor Arthur Robey traveling from Australia, and patent lawyer and author David French, who trekked from Canada.  ICCF-17 begins in two days on August 12-17, although a Workshop began today on the 10th. ICCF has been the primary international conference for cold fusion researchers since 1990.

It’s A Mad, Mad World: Obama Ad Touts Coal Record, Slams Romney For Having Admitted Coal Plants ‘Kill People’ -- So team Obama has decided the way to win votes in Ohio is with a very targeted radio ad touting his pro-coal record. They actually attack Romney for his 2003 remarks about a Massachusetts coal plant that was responsible for dozens of premature deaths and 14,400 asthma attacks each year (according the Harvard School of Public Health): I will not create jobs or hold jobs that kill people. And that plant kills people…. A year ago Climate Progress used the exact same clip that Obama does in his ad — except we were slamming Romney for having Etch-a-Sketched away his previous pro-environmental record, whereas team Obama is slamming Romney for supposedly not being as pro-coal as the President is! I hope you have multiple head vises on for this ad: I asked Bill McKibben for a comment. He wrote: Romney says so many untrue things that it’s deeply ironic and deeply troubling when he gets attacked for one of the few straightforward and accurate charges he ever made.

Shale Gas And The Overhyping Of Its CO2 Reductions -- Between 2006 and 2011 the US cut its CO2 emissions by nearly half a billion metric tons—more than any other country in the world. This remarkable decline overlaps with the boom in shale gas production, triggered by the large-scale commercialization of fracking technology. The production of natural gas has since soared, and the price has tumbled. Suddenly natural gas has emerged as a more attractive fuel for electricity generation than coal. Natural gas cannot be credited with the reductions in the US CO2 emissions observed in the last half-decade. Most reductions, nearly 90%, were caused by the decline in petroleum use, displacement of coal by mostly non-price factors, and its replacement by wind, hydro and other renewables. Where low price of natural gas saved some CO2 by displacing coal, it was quickly offset by its increased use in other sectors—highlighting the pitfall of justifying the current market for natural gas as a “bridge” or an interim phase of transition towards clean energy.

Another study finds fracking wastewater wells make earthquakes more likely - Wastewater injection wells that accompany natural gas “fracking” sties are linked to an increase in the probability of earthquakes, according to a University of Texas study published this week in the scientific journal Proceedings of the National Academy of Sciences.  Cliff Frohlich, the University of Texas researcher who conducted the study, used seismic data from the Barnett Shale region of Texas taken between November 2009 and September 2011. He found that while injection wells were typically near the site of small quakes, they did not always cause tremors, leading Frohlich to speculate that injection wells near existing faults were more likely to cause seismic activity. Most of the quakes registered for the study were so light that they could not be felt on the surface.  The study is just one of several that have warned about the possibility of inducing seismic activity by injecting hundreds of thousands of gallons of water underground in a short period of time. The National Research Council said earlier this year that while the risks posed by fracking itself are rather low, wastewater injection wells, along with the carbon capture and storage techniques typically used with “clean coal,” do in fact pose a heightened risk of earthquakes.  The U.S. Geological Survey also said as much in April, when it confirmed that America’s oil and natural gas boom has led to a dramatic increase in seismic activity in midwestern states where earthquakes used to be a bizarre occurrence. Even the British energy firm Cuadrilla Resources admitted in a 2011 study of its own operations that the combination of “unusual combination of geology” and underground pressure resulting from the injection wells caused “a number of minor seismic events.”

Disposal of hydraulic fracturing wastewater biggest possible contaminator - Current wastewater disposal methods for water used in hydraulic fracturing could put nearby drinking water in the Marcellus Shale at risk, according to a study issued on Tuesday. Hydraulic fracturing, a process where a mixture of water, sand and chemicals are pumped underground under high pressure, could be polluting nearby surface water sources through five different ways, according to a Stony Brook University study. The study found water could be contaminated by transportation spills, well casing leaks, leaks through fractured rock, drilling site surface discharge and wastewater disposal. The greatest contamination risks came from wasterwater disposal. “The used hydraulic fracturing fluid is transported to a wastewater treatment facility and discharged to streams,” according to the report. The researchers said those treatment facilities may not be equipped to handle the chemicals found in the used fracking wasterwater, leading to contaminated drinking water if it is released into nearby water sources, according to the report.

End of the anti-frack world near - For those desperately hoping against hope that high volume, horizontal hydraulic fracturing for natural gas will be blocked from coming into New York state, sorry. For you, the end of the world arrives before Labor Day. Top state officials are in the process of briefing selected environmental groups on a plan to be publicly released in a couple of weeks. It's a plan that unsurprisingly endorses hydrofracking, initially on a limited basis, supposedly under the tightest regulatory and permitting requirements in the country. The Department of Environmental Conservation is wading through the last of the more than 60,000 public comments received on the draft environmental impact statement over fracking. We have been assured those public comments will be reflected in the final environmental statement and in the subsequent new state fracking regulations that result. Details of the plan, which no doubt will be tweaked before going public, are scant, but generally follow those contained in the trial balloon floated in The New York Times a few weeks ago. Namely, that in the first year (2013), only 50 wells will be permitted, the second year, 100, and then only in towns that want them. This is consistent with what the governor has alluded to as a "ramp-up period," should fracking occur. Well, apparently it's going to.

Get It Right on Gas - WE are in the midst of a natural gas revolution in America that is a potential game changer for the economy, environment and our national security — if we do it right. The enormous stores of natural gas that have been locked away in shale deposits across America that we’ve now been able to tap into, thanks to breakthroughs in seismic imaging, horizontal drilling and hydraulic fracturing, or “fracking,” are enabling us to replace much dirtier coal with cleaner gas as the largest source of electricity generation in America. And natural gas may soon be powering cars, trucks and ships as well. This is helping to lower our carbon emissions faster than expected and make us more energy secure. And, if prices stay low, it may enable America to bring back manufacturing that migrated overseas. But, as the energy and climate expert Hal Harvey puts it, there is just one big, hugely important question to be asked about this natural gas bounty: “Will it be a transition to a clean energy future, or does it defer a clean energy future?” That is the question — because natural gas is still a fossil fuel.  A sustained gas glut could undermine new investments in wind, solar, nuclear and energy efficiency systems — which have zero emissions — and thus keep us addicted to fossil fuels for decades. That would be reckless. This year’s global extremes of droughts and floods are totally consistent with models of disruptive, nonlinear climate change. 

Chesapeake and the price of gas - One way or other the era of cheap fossils is over. This fact has been met by a barrage of propaganda by the oil industry claiming a new cornucopia of oil and gas from “unconventional” sources. There is definitely some new supply there, how much is certainly greatly debatable, but most importantly however much is there isn’t cheap. Take Chesapeake for example, which has led the fracking movement. The FT has a great article on Chesapeake’s earnings and financial shape: Chesapeake Energy has reported underlying post-tax earnings of $3m in the three months ended June, down from $528m in the equivalent period of 2011, after its revenues were hit by weak natural gas prices. Let’s see, that’s a drop in profits of 99.5%, for a company valued at $12 billion — almost double that a year ago. Let’s get to the nut: Chesapeake’s average realised gas price fell by 64 per cent, from $5.19 per thousand cubic feet of gas in the second quarter of 2011 to $1.88 per thousand cu ft in the equivalent period of 2012. Ain’t no one making money fracking at $1.88, and it’s doubtful they’re making much at $5.19. Of course, this gets to the question, what is the price of this new “cornucopia?” And let’s as always leave aside environmental concerns. First and foremost, it’s difficult to tell what the price is because presently it’s being subsidized by massive debt or by older conventional sources. Take for example Exxon’s latest statement that it “spent about 29% of its capital expenditures on U.S. drilling operations but generated only 4% of its profit in this segment.”

CBO Report: GOP Drilling Plan Will Generate Far Less Revenue Than Repealing Oil Tax Breaks - Proposals from GOP lawmakers to open nearly all federal lands and waters to oil-and-gas development would not generate much additional revenue, according to the Congressional Budget Office. CBO released an analysis on Thursday that said opening protected areas would generate a mere fraction of the revenue from existing oil-and-gas activity on federal land. CBO calculated that “under current laws and policies, the government’s gross proceeds from all federal oil and gas leases on public lands will total about $150 billion over the next decade.” CBO estimates that opening the Arctic National Wildlife Refuge (ANWR) would generate just $5 billion over the next decade. Drilling in protected waters in the Outer Continental Shelf would yield $2 billion over the same time period. The federal government could raise far more revenue by cutting the mature fossil fuel industry’s $4 billion in tax breaks each year. Repealing oil and gas tax breaks would generate $40 billion over the next decade, compared to the $7 billion from the GOP’s drilling plan.

Fracking Debate Racks South Africa —Africa's biggest economy is running dangerously short of energy, even as the country sits atop what geologists say could be substantial gas reserves.  South Africa, like the U.S. and other countries, is caught in a debate over hydraulic fracturing, the process of shooting millions of gallons of water, sand and chemicals into underground rock to release hard-to-access deposits. Multinational energy companies want to use fracking to release shale-gas reserves in this country's Karoo region. But environmentalists are fighting fracking in the Karoo, a pristine, arid expanse that is home to the threatened black rhinoceros and the planned location of a $1.87 billion telescope.  Some energy and environmental-affairs officials have said they weren't opposed to fracking but in April 2011 a moratorium was imposed on exploration in the Karoo after an uproar from environmentalists. The hiatus would give the government time to formulate a plan for production in the Karoo. The Department of Mineral Resources is due to present a report this month to the president's cabinet, which will determine the fate of fracking.  "It's what we call 'the F word' in our industry,"

Refinery fire could kick up gas prices by 30 cents a gallon - The fire at Chevron Corp.’s Richmond oil refinery is having an immediate impact on spot prices for the state's expensive blend of unfinished gasoline, sending them higher by as much as 30 cents a gallon over what it cost a day earlier, according to fuel price experts. A similar rise in retail prices should follow quickly, the experts said, but for how long was unclear. About the only good news was the fact that just a few minor injuries were reported, in spite of what appeared to be an intense blaze that was visible for miles. The fire began Monday evening around 6:15 p.m. at the refinery's No. 4 crude unit. Chevron's 110-year-old Richmond refinery is one of 21 in California, according to the state's Energy Commission, but only 14 of those make CARBOB gasoline, which is the nation's most expensive blend. Among those, the Richmond refinery is one of the most important, ranking third in production with a capacity of just under 243,000 barrels a day.

The Other Side Of The Sanctions - Iran has been pushed into a corner and is fighting for its life.  The safest weapon in its arsenal is an economic strategy; and it is the one point where the United States is vulnerable.   There is no doubt about it.  Section 1245 of the National Defense Authorization Act that was signed into law by President Obama on December 31, 2011 is having the intended effect upon Iran.  Unlike previous sanctions, Section 1245 attacks the foundation of the Iranian economy.  The provisions of the law seek to stop the sale of crude oil and to block transactions between the Iranian central bank and the rest of the world.  About fifty percent of the national budget is funded from the sale of exported crude oil that provides eighty percent of the foreign exchange.  "Crude (oil) sales are a trap which we inherited from the years before the (1979 Islamic) Revolution," Khamenei told a gathering of researchers and scientists at the end of July.  

Rare-earth mining in China comes at a heavy cost for local villages - From the air it looks like a huge lake, fed by many tributaries, but on the ground it turns out to be a murky expanse of water, in which no fish or algae can survive. The shore is coated with a black crust, so thick you can walk on it. Into this huge, 10 sq km tailings pond nearby factories discharge water loaded with chemicals used to process the 17 most sought after minerals in the world, collectively known as rare earths. The town of Baotou, in Inner Mongolia, is the largest Chinese source of these strategic elements, essential to advanced technology, from smartphones to GPS receivers, but also to wind farms and, above all, electric cars. The minerals are mined at Bayan Obo, 120km farther north, then brought to Baotou for processing. The concentration of rare earths in the ore is very low, so they must be separated and purified, using hydro-metallurgical techniques and acid baths. China accounts for 97% of global output of these precious substances, with two-thirds produced in Baotou. The foul waters of the tailings pond contain all sorts of toxic chemicals, but also radioactive elements such as thorium which, if ingested, cause cancers of the pancreas and lungs, and leukaemia. "Before the factories were built, there were just fields here as far as the eye can see. In the place of this radioactive sludge, there were watermelons, aubergines and tomatoes," says Li Guirong with a sigh.

Electricity Use Seen Overstating China Economic Slowdown - A stagnation in electricity output that fanned speculation China’s slowdown is intensifying may instead be evidence of an accelerated transition to a more services-based economy. The government will release information on July electricity production tomorrow as part of its report on industrial output. Power generation in June was unchanged from a year earlier even as industrial production rose 9.5 percent. Heavy industries including metals and cement consume about 60 percent of electricity and account for 20 percent of gross domestic product, according to GK Dragonomics, a Beijing-based consultant. The shifts signal that electricity’s relevance as an economic indicator is receding five years after Li Keqiang, now the vice premier, was quoted as saying he watched data on power, rail cargo and loans because GDP numbers were “man-made.” An evolution within manufacturing to more efficient production is also damping electricity use as China upgrades its factories.  “Steel plants, cement plants and refinery facilities -- these big electricity consumers -- have suffered a lot more than service-industry players in the first half,”

Special Report – China’s answer to subprime bets: the “Golden Elephant” (Reuters) - The Chinese investment vehicle known as "Golden Elephant No. 38" promises buyers a 7.2 percent return per year. That's more than double the rate offered on savings accounts nationally. Absent from the product's prospectus is any indication of the asset underpinning Golden Elephant: a near-empty housing project in the rural town of Taihe, at the end of a dirt path amid rice fields in one of China's poorest provinces. "They haven't even built a proper road here," said Li Chun, a car repairman, who said he lives in the project. "The local government is holding onto the flats and only wants to sell them when prices go up." Golden Elephant No. 38 is one of thousands of "wealth-management products", instruments aimed at monied investors, which have shown phenomenal growth over the last five years. Sales of them soared 43 percent in the first half of 2012 to 12.14 trillion yuan ($1.90 trillion), according to a report by CN Benefit, a Chinese wealth-management consultancy. They are usually created in China's "shadow banking" system - non-banking institutions that are not subject to the same regulations as banks - which has grown to account for around a fifth of all new financing in China. Like the subprime-debt lending spree in the United States that helped spark the 2008 financial crisis, the products are often opaque, and usually dependent on high-risk underlying assets, such as the Taihe housing project.

China’s leading indicator slides on - We will soon get a glimpse of how the Chinese economy was doing in July and to see if it has indeed reached a bottom as most are hoping for. Ahead of the data releases, here is a interesting indicator that we haven’t written about before.  The chart below is a leading indicator jointly developed by National Bureau of Statistics and Goldman Sachs.  So far, the leading indicator continues to slide:

China’s July lending and retail appear weak - China’s big 4 banks have extended RMB220 billion of net new loans in July, up from about RMB190 billion in June, according to China Securities Journal. Despite new lending at big 4 banks increased by 100% for the first half of July compared with the first half of June, total lending for the month of July has increased by about 15.8% compared with June.  Big 4 banks account for about 40% of total outstanding loans (stock) for banks.  Currently, market is expecting about RMB700 billion of new loans, but this later figure from big 4 banks suggest that the new loans figure could disappoint. The report also suggests that there is no major improvement in terms of the mix of new loans.  The proportion of medium- and long-term loans has not increased as hoped, which raises questions about the funding for investment projects aimed at stimulating growth.  In fact, some banks have not even started lending to those growth stabilisation investments projects.  On top of that, private sector corporate demand for loans remains weak according to the report.

Reform by stealth is reason for optimism about China -- China pessimists are claiming vindication as growth slows in the world’s second-largest economy. Optimists point out that Beijing has fiscal room to respond but there are risks to any short-term policy measures. A surge in bank-financed investment, for example, could boost growth but it is also likely to increase the stock of non-performing loans in the banking system and set back the goal of rebalancing growth by promoting private consumption. An ageing population and a rocky leadership transition strengthen the bears’ case. However, there are grounds for hope. The government has long recognised that reforming the financial sector is needed to improve the balance and sustainability of growth. Why has it not acted more forcefully before? The present system works well – for some. State-owned banks provide cheap financing for state enterprises, which are key fiefdoms of political patronage. Banks also provide financing to powerful provincial officials through shell corporations that bankroll pet investment projects. All of this needs fixing, but the best of intentions can backfire. In an economy with many policy problems, getting rid of one or two can have unintended consequences. Recent moves indicate that the government has learnt its lesson. It increased the flexibility of the exchange rate (in principle) when the renminbi was not under pressure to appreciate, relaxed the cap on interest rates paid on deposits, increased foreign investors’ access to capital markets and encouraged certain informal financial companies to become part of the formal banking system. 

China’s July disappoints - China’s July data dump is in and this an economy going nowhere fast. Year on year Industrial Production came in at 9.2%. That is down from growth of 9.5% in June and a big miss to consensus which saw 9.7%: The Fixed Asset Investment component came in at 20.4% year on year, the same as last month and a miss of 0.2% on consensus: Retails sales did better only falling 0.2% to year on year growth of 14.2% and well above consensus of 13.5%: Combine these with this morning’s steeply deflationary PPI and I conclude that this economy will not be so easy to turn around. The dollar, of course, ignored it all, and so did stocks by and large. In this environment, the persistent weakness in iron ore makes perfect sense and on these numbers is not over.

Chinese capacity utilisation plummets - For a long time, we have suggested that because of China’s GDP growth being driven primarily by investment, the end result will inevitably be over-capacity.  This has been apparent in industries such a ssteel, machinery and others (now even Caterpillar is exporting overcapacity in China, so to speak).  We also believe that the construction boom after the 2008/09 stimulus has already led to over-building of residential real estate.  The only problem we all have is that there are no accurate official statistics in China (like those in the US) that we are aware of for capacity utilisation. A recent staff report by the International Monetary Fund (IMF) (page 24 box 8 of Staff Report) shows an estimate of capacity utilisation in China.  Interestingly, according to IMF’s estimation, China has been operating below capacity (albeit not unreasonably) even at the peak right before the 2008/09 financial crisis, and that was supported by external demand which no longer quite exists now. China has built even more capacity since then, which is able to serve the demand from a global economy does not exist.  Capacity utilisation has dropped from about 80% before the crisis to a mere 60% in 2011.  That compares with about 78.9% for the US currently for total industry (which is not very high by US’s historical average), and 66.8% at the financial crisis trough according to the Federal Reserve.  In other words, current capacity utilisation in China appears to be even lower than that of the US during the 2008/09 financial crisis.

Hard landing for China as factory prices fall and deflation looms - Factory gate prices in China fell at an accelerating rate of 2.9pc in July as the economy flirted with industrial recession, prompting calls for further stimulus to head off Japanese-style deflation.  “Severe deflation pressures are rippling across the country,” said Alistair Thornton and Xianfeng Ren from IHS Global Insight. “Deflation, not inflation, is the greatest short-term threat to the Chinese economy.”  “The hard landing has happened,” said Charles Dumas from Lombard Street Research. “We don’t believe official data. We think GDP slowed to a 1pc rate in the second quarter.”  A blizzard of weak data has caught policy-makers off guard, though shares rallied in Shanghai on hopes for monetary loosening from China’s central bank after consumer price inflation (CPI) fell to 1.8pc.  New property starts fell 27pc in July. Industrial output growth fell to 9.2pc for a year ago but has been flat over recent months.

China export and import growth slows sharply in July: China's export and import growth slowed for the second straight month in July, raising fears about the strength of the world's second-largest economy. Exports rose by 1% from a year earlier, down from 11.3% growth in June, amid slowing demand from key markets. Meanwhile, imports rose by 4.7% compared with 6.3% in June, indicating that domestic demand was also slowing. Analysts said the data was weaker-than-expected and may see Beijing introduce stimulus measures to spur growth. "Trade data has come in dramatically below expectations - the worst export growth number (excluding Chinese New Year) since November 2009 - highlighting the risk that the external environment poses to an economy in the midst of a rapid internal slowdown," said Alistair Thornton of IHS Global Insight in Beijing. "The government is likely to respond by ramping-up its stimulus efforts, with both monetary and fiscal guns firing."

China's July exports slow sharply, outlook grim (Xinhua) -- China's export growth slowed sharply to a six-month low in July on dwindling foreign demand, strengthening anticipation for weak trade performance for the whole year and more government action to support the economy. Exports rose 1 percent year on year to 176.9 billion U.S. dollars in July, plummeting from the 11.3-percent growth seen in June and well below market expectations, the General Administration of Customs (GAC) said Friday. Imports also lost steam, increasing 4.7 percent year on year to 151.8 billion U.S. dollars, compared with a growth of 6.3 percent in June. Foreign trade expanded 2.7 percent year on year to 328.7 billion U.S. dollars in July, according to the GAC data.

Made in China's getting expensive -- Europe has finally found something it can export to China--falling growth. China's July exports were up a miserable 1% year-on-year, compared with a 11.3% rise in June. Exports to the European Union led the decline, down 16.2% year-on-year. Not all of China's export woes are made in Brussels though. Zhang Bin, an economist at the Chinese Academy of Social Sciences, says that long-term deterioration in China's export competitiveness is also to blame. He has a point. China's export growth peaked in 2004 at 35.4% year-on-year. Since then, costs for manufacturers have increased across the board. Average wages have risen more than 150%. Land prices have risen more than 70%. Nate Taplin, China energy analyst at Dragonomics, says electricity prices are up more than 30%. Compounding woes for exporters, the yuan has appreciated more than 30% against the dollar.

Michael Pettis: The Chinese Rebound Will be Short - Exclusively from Michael Pettis’ newsletter: While analysts are still arguing over whether or not growth in the first half of 2012 was lower than the already-low reported numbers (I think it was, and for reasons see Kate Mackenzie’s quick summary in the Financial Times), I expect, as I discussed in the previous issue of this newsletter, that over the next three months we will see a rebound in Chinese GDP growth as investment expands. The leadership transition, after all, is in October, and no one in power wants to see the ten-year period under the leadership of President Hu and Premier Wen end with an economic whimper. I don’t think, however, that any rebound or recovery will last more than one or two quarters, and even then it is going to be a very tedious and lop-sided recovery. Not only may we see reduced lending in July, for example, but even with renewed growth I expect manufacturers and small and medium enterprises (SMEs) are likely to see little to no relief – in fact manufacturing profits will probably continue to drop and bankruptcies among SMEs will continue to rise over the rest of this year. Last week’s Financial Times had an interesting piece on depressing prospects for regions that depend heavily on SME: China’s overall GDP figures give reason enough to worry about its economic slowdown. But the story is even more worrying at a local level. In Dongguan, a manufacturing hub in Guangdong province, GDP growth in the first half of this year hit a three year low. Its expansion of just 2.5 per cent shows the pain China factories are feeling as the engine driving the world’s second biggest economy begins to misfire.Guangdong’s purchasing managers index in July also fell for a fourth consecutive month to 50, slightly lower than the national reading of 50.1

Chinese mainland, Taiwanese negotiators sign cross-Strait agreements - Xinhua-  Chinese mainland and Taiwanese negotiators on Thursday signed two cross-Strait agreements on investment protection and promotion, as well as customs cooperation. The two pacts were signed by Chen Yunlin, president of the Chinese mainland-based Association for Relations Across the Taiwan Straits (ARATS) and Chiang Pin-kung, chairman of the Taiwan-based Straits Exchange Foundation (SEF), at their eighth round of talks held since 2008.In the long-awaited investment protection and promotion agreement, the two sides pledged to offer "just and fair treatment" to their respective investors and investment projects and provide full protection and security. They also agreed to gradually remove restrictions on investment projects, create a fair environment and promote two-way investment. The two sides also agreed on a dispute settlement mechanism that offers several settlement options, including negotiations between disputing parties, local dispute settlement authorities, the investment division of the Cross-Strait Economic Cooperation Committee (ECC) and local courts.

Chinese telecoms giants are taking over the world. Should we be scared? - Huawei is not yet a household name in the UK – for one thing, there is confusion over how to pronounce it – but the Chinese telecommunications giant is spreading its reach around the world. But accompanying its global expansion are worrying whispers of covert surveillance and espionage. This year Huawei’s revenues overtook that of its competitor Ericsson, making it the world’s largest supplier of telecoms equipment. The Economist sets out to chart the rise of the behemoth, and explores the myths surrounding the beast. It’s not hard to see where concerns come from. The company has close links to the government, the Economist explains, and founder Ren Zhengfei served in the People’s Liberation Army (PLA) engineering corps. According to the article, some critics of the telecommunications company worry that the technology is being used as a Trojan horse, with technological ‘backdoors’ to allow China’s spooks to eavesdrop. Even more dramatic is the suggestion that the technology could contain ‘kill switches’, allowing China to disable any Huawei system in the event of conflict.

"The Beijing Conference": See How China Quietly Took Over Africa - Back in 1885, to much fanfare, the General Act of the Berlin Conference launched the Scramble for Africa which saw the partition of the continent, formerly a loose aggregation of various tribes, into the countries that currently make up the southern continent, by the dominant superpowers (all of them European) of the day. Subsequently Africa was pillaged, plundered, and in most places, left for dead. The fact that a credit system reliant on petrodollars never managed to take hold only precipitated the "developed world" disappointment with Africa, no matter what various enlightened, humanitarian singer/writer/poet/visionaries claim otherwise. And so the continent languished. Until what we have dubbed as the "Beijing Conference" quietly took place, and to which only Goldman Sachs, which too has been quietly but very aggressively expanding in Africa, was invited. As the map below from Stratfor shows, ever since 2010, when China pledged over $100 billion to develop commercial projects in Africa, the continent has now become de facto Chinese territory. Because where the infrastructure spending has taken place, next follow strategic sovereign investments, and other modernization pathways, until gradually Africa is nothing but an annexed territory for Beijing, full to the brim with critical raw materials, resources and supplies. So while the "developed world" was and continues to deny the fact that it is broke, all the while having exactly zero money to invest in expansion, China is quietly taking over the world. Literally

Asia Buyers Snap Up Australian Hotels As Mining Boom Fills Rooms - Sales of Australian hotels to offshore buyers set a record in the first half as Asian companies including Shangri-La Asia Ltd., Starhill Real Estate Investment Trust and Langham Hospitality Group were lured by rising occupancy and room rates. Companies outside of Australia accounted for A$990 million ($1 billion) of the purchases, or 90 percent, through June 30, according to Jones Lang LaSalle Inc. That’s the highest first- half volume and percentage of the total since the Chicago-based broker began compiling comparable data in 2002. Hong Kong and Malaysian companies were the most active buyers. The biggest resources boom in a century is boosting mining- related business travel to the biggest cities, where companies such as BHP Billiton Ltd. (BHP) are based, while the Chinese are leading a pickup in tourism. Investors are preferring to buy rather than build as construction costs rise

The troubled trade deal with South Korea - In March, the United States and South Korea implemented a Free Trade Agreement that President Barack Obama touts as more significant than the last nine such agreements combined. He also said it was central to his goal of doubling American exports within five years. I think the president suffers from irrational trade exuberance, a view reinforced by my reporting in this city of 10 million people. This deal is likely to turn out badly for American taxpayers and workers, especially autoworkers. The president predicted 70,000 American jobs would be created as U.S. exports to South Korea grow faster than imports. That would be terrific for generating taxes and reducing demand for government services like food stamps, which have become the sole income for about 6 million Americans. But — based on previous major trade deals, the details of this one and a host of Korean business and cultural barriers — I think a much more likely scenario is the destruction of more than 150,000 American jobs over the next few years, as projected by the Economic Policy Institute, a Washington research organization that advocates for low- and middle-income workers.

Indonesia Surprises With Surge in Economy - Indonesia’s economic growth surprisingly picked up in the second quarter of this year, fueled by easy credit and strong domestic demand, a sign that Southeast Asia remained resilient amid the global slowdown. Most economists say they expect the central bank to keep interest rates on hold at a record low into next year to drive growth, although some analysts caution that tighter policy might be needed beyond that to dampen domestic demand. The Indonesian economy is growing faster than other major emerging- market economies except for China’s, leading some analysts to view the country as a worthy contender to join the BRICS grouping, which includes Brazil, Russia, India and South Africa, as well as China. The country’s statistics bureau said gross domestic product last quarter had grown 6.4 percent from the same period a year earlier, compared with 6.3 percent in the first quarter, helped by domestic consumption and investment. G.D.P. grew 2.8 percent on a quarterly basis, although the figures are not seasonally adjusted. The strong second-quarter growth “provides a cushion against the risk of further growth setbacks in the rest of the year,”

Africa's propaganda trail, part II: Kidnapped at birth - It took little more than a century for Nairobi's sprawling mass to erupt from the highland savannahs of central Kenya. Commercial towers thrust upwards from the central core, flanked to the east and west by suburbs that flow for miles before eventually giving way to farms and grasslands - yellow or green depending on the season. Kenya's economy is booming, boosted by a lively and innovative tech industry; but while evidence of new money can be seen almost everywhere you look, only a small minority of the city's three million inhabitants ever get to touch it.  The rich tend to live to the north and west of the city centre, where meandering roads trail through green suburbs dotted with gleaming villas and bright blue pools. Or at least, that's what we might have seen were it not for the gated roads, security guards and imposing walls topped with barbed wire. To the south, luxury homes give way abruptly to the informal settlements and slums of Kibera, the focus of yesterday's piece whose NGO-infested slums I'll return to later in the series. Mud and steel shacks cluster behind trees at the end of a putting green, marking a border between rich and poor so sharply-defined that from the air it looks as if some great socio-economic force-field has been erected to keep the two apart.

As food prices rise, Brazil begins to face inflationary pressures while growth stagnates  - Brazil continues to be on the forefront of the global inflationary wave that will be sweeping developing economies as rising food prices make their way through the system.  GS: - Inflation, as measured by the composite IGP-DI Index, accelerated to (a higher-than-expected) 1.52% mom in July, up from 0.69% in June. The July IGP-DI print was higher than 1.46% Bloomberg consensus and our 1.40% forecast. The acceleration of inflation in July from June was driven chiefly by the acceleration of wholesale agricultural prices to a very high 5.3% from 1.0% in June. We've gotten some e-mails on the topic basically asking: who cares? The answer is that anyone who cares about global economic growth should pay close attention to this. Brazil is the world's 6th largest economy. Inflation will reduce the central bank's ability to ease monetary policy, significantly limiting the nation's growth potential. And Brazil's growth is already slowing materially.Reuters: - Brazil's benchmark Selic rate is already at an all-time low of 8 percent after eight cuts since August 2011 as policymakers try to jump-start a stagnant economy.  The world's sixth-largest economy will grow only 1.85 percent this year, according to the survey, less than the forecast of 1.9 percent seen one week earlier.

Argentina: The Big Shrink » The winter weather is not the only thing chilling the bones of Argentina’s residents. Since the last week of July, a new set of words have been showing up in the articles about the economy. Shrinks. Slows. Stagflation. These chilling terms are being used to describe the consequences of what some nasty looking economic indicators might have in store. On July 26, Citigroup reported that Argentina’s gross domestic product will post its first annual contraction in a decade. Economists estimate that GDP will shrink approximately 1.7% this year. The same week, the official government statistics bureau INDEC reported that May economic activity fell .5% year on year, while private economists estimated the fall to be closer to 1.2% and predicted the June drop to be close to 3.9%. Check out this article to read more about these numbers. Now, enter stagflation. For those of you that weren’t alive or were busy eating crayons in the 1980s, stagflation describes a situation with:

  • Persistently high inflation:
  • Low and slowing economic growth
  • Steadily high unemployment

This specifically nasty combination of factors earns the name stagflation because it presents policy makers with a dilemma. Steps that could hem in inflation would actually exacerbate low growth and unemployment, and vice versa. Essentially, the government is presented with three problems, and fixing one would make the other two worse.

Free Exchange: Baby Monitor -- ECONOMIES benefit when people start having smaller families. As fertility falls, the share of working-age adults in the population creeps up, laying the foundation for the so-called “demographic dividend”. With fewer children, parents invest more in each child’s education, increasing human capital. People tend to save more for their retirement, so more money is available for investment. And women take paid jobs, boosting the size of the workforce. All this is good for economic growth and household income. A recent NBER study* estimated that a decrease of Nigeria’s fertility rate by one child per woman would boost GDP per head by 13% over 20 years. But not every consequence of lower fertility is peachy. A new study by researchers at the Harvard School of Public Health identifies another and surprising effect: higher inequality in the short term. mCountries with very high fertility are usually dirt-poor—peasants value extra hands, however small, to help in the fields. (In Niger, which has a GDP per person of $700, the average woman can expect to bear more than seven children.) Low-fertility countries (with significant exceptions, such as China) tend to be rich. The Harvard study confirms that this pattern is replicated within countries: as a rule, the poor tend to have larger families. The authors use Demographic and Health Surveys (DHS), which contain a lot of detail about family structure and household assets. DHS data from 60 developing countries enable them to divide households into five income groups and to show that in every continent, the “youth-dependency ratio” (the number of children under 15 compared with the working-age population) is lowest in the richest group, next lowest in the next-richest group and so on. The poorest group has the highest youth-dependency ratio. The gap between top and bottom is marked. Ratios in the richest households are a third below those in the poorest ones.

The end of deep development - As recently as the 1990s, catch-up economic growth was widely seen as really difficult to achieve, at least on any sustained basis. Postwar Europe managed it, as did Japan, South Korea, Taiwan, and a couple of Asian city-states. But for most of last century, and despite the concerted efforts of developing-economy governments, rich economies grew faster than emerging economies, widening the broad gap in incomes. Then, everything changed. Since the early 1990s, emerging markets have routinely and often substantially outgrown the rich world. The assumption is now that a place must be very badly governed indeed not to participate in economic catch-up growth. What happened? This week's Free exchange column looks at an explanation offered by economist Richard Baldwin: Most advanced economies industrialised as part of what Mr Baldwin calls globalisation’s first great unbundling: the geographical separation of producers and consumers. Early in the industrial era, high transport costs restricted trade. Expensive shipping limited most manufacturers to sales within the same city or country. But as the industrial revolution progressed, steamships and railways slashed transport costs, exposing firms to foreign competition for the first time. The most productive firms were those best able to take advantage of economies of scale. A single large plant could produce goods at a lower unit cost than lots of smaller factories, and a cluster of large suppliers at lower cost still. Production clustered in massive cities in a few economies.

Counterparties: Can poor nations manufacture wealth? - Dani Rodrik has a provocative piece for Project Syndicate arguing that the quest for growth has gotten more elusive over the past few years. During the second half of the 20th Century, he says, if poor countries wanted to grow up to be rich (and didn’t have the patrimony of natural resource wealth), they would have to first “move their labor from the countryside (or informal activities) to organized manufacturing”. Manufacturing industries are relatively easy to replicate; they create rapid growth in productivity and incomes “regardless of the quality of domestic policies, institutions, or geography“. That world is gone now. Achieving an Asian Tiger-style growth miracle is trickier for a couple of reasons: Technological advances have rendered manufacturing much more skill- and capital-intensive than it was in the past, even at the low-quality end of the spectrum … It will be impossible for the next generation of industrializing countries to move 25% or more of their workforce into manufacturing, as East Asian economies did. Second, globalization in general, and the rise of China in particular, has greatly increased competition on world markets, making it difficult for newcomers to make space for themselves. Ryan Avent points us to a recent column in the Economist that reaches the opposite conclusion: “[m]odern supply chains are making it easier for economies to industrialise”. In a blog post, he finds Rodrik’s concerns wanting:For the moment, Mr Rodrik’s concerns appear somewhat unfounded. Chinese manufacturing is very capital intensive, and yet employment in industry there has been remarkably consistent over the past two decades.

Update on June Global Trade - I promised an update on my early June global trade estimate.  Here it is with about half of global trade reporting.  The monthly data (with partial data through June) come from the WTO and I seasonally adjust them.  The fall in June is still just as strong in Imports, but has shrunk somewhat in Exports - increasing the discrepancy between the two.  As usual, time and more data will tell, but it certainly doesn't appear that June was a good month. After growing from early 2009 to mid 2011, global trade appears to have roughly stagnated for most of the last 12 months.  In particular, it appears to have had a bump up in February of this year, but then to have fallen back in March and April.  A small bump in May has now been, it seems, offset by a larger fall in June.  This continues to suggest that the global economy is either contracting, or at best growing very slowly.

World Trade Turning Down - Rebecca Wilder - Something different for today: world trade. Recently, South Korea and Taiwan released July 2012 trade statistics, where annual export growth was seen contracting at a 8.8% and 11.6% rate, respectively. The annual pace of export growth in Taiwan contracted for the fifth consecutive month, where that in South Korea turned negative following a 1.1% annual rate in June 2012. On balance, exports in key Asian markets, such as South Korea, Taiwan, and China, are seen as leading indicators for world demand due to their intermediate nature of production in the supply chain. And the signal there is not good for global demand. The Netherlands Bureau for Economic Policy Analysis and JP Morgan make available world trade statistics and a global PMI, respectively. A simple bivariate regression of the 3-month growth trend in world trade on the global PMI implies a 3-month annualized contraction of 0.66% in July. This is far from the pace of contraction in 2009 – according to this statistic, World trade declined at its fastest 3-month trend rate in January 2009 of 50.5%. Furthermore, there’s no precipitous downtrend in the PMI that would suggest a sharp contraction in world trade. I can only conclude that it’s too early to call stabilization in World trade, rather the opposite. However, the pace of contraction could be quite mild if policy makers ease globally.

No More Growth Miracles, by Dani Rodrik -  A year ago, economic analysts were giddy with optimism about the prospects for economic growth in the developing world. In contrast to the United States and Europe, where the growth outlook looked weak at best, emerging markets were expected to sustain their strong performance from the decade preceding the global financial crisis, and thus become the engine of the global economy. Today, such talk has been displaced by concern about what The Economist calls “the great slowdown.” Recent economic data in China, India, Brazil, and Turkey point to the weakest growth performance in these countries in years. Optimism has given way to doubt. To see why, we need to understand how “growth miracles” are made. Except for a handful of small countries that benefited from natural-resource bonanzas, all of the successful economies of the last six decades owe their growth to rapid industrialization. If there is one thing that everyone agrees on about the East Asian recipe, it is that Japan, South Korea, Singapore, Taiwan, and of course China all were exceptionally good at moving their labor from the countryside (or informal activities) to organized manufacturing. Earlier cases of successful economic catch-up, such as the US or Germany, were no different.

Outlook for the World Economy 2012-2020 - The Federal Planning Bureau’s new outlook for the world economy presents projection results for the main economic areas of the world over the period 2012-2020. The projection assumes a stable institutional framework in the European Union and the absence of any balance sheet consolidation that would be severe enough to have lasting effects on GDP growth rates. In such a framework, the projection for the euro area indicates that moderate growth in final domestic demand and positive real net exports should generate moderate real GDP growth over the period 2012-2020. Output growth should be strong enough to outpace the rise in potential output, thus closing the area’s output gap by 2017. The closing of the output gap would be accompanied by a decline in the area’s unemployment rate, which should fall back to its pre-crisis level. At the same time, consumer price inflation should pick up, reaching by 2020 a level compatible with the European Central Bank’s inflation target. The budgetary consolidation measures that are assumed in the projection should lead to primary surpluses that would allow for a decline in the area’s gross public sector debt-to-GDP ratio.

Japan’s 10-Year Yield Falls to Lowest Since 2003 on BOJ - Japan’s government bonds declined after German Chancellor Angela Merkel’s government backed the European Central Bank’s bond-buying plan, spurring a rally in global stocks that damped demand for safer assets. The benchmark 10-year yield was set to climb the most in almost five months after the Nikkei newspaper reported the Bank of Japan (8301) will probably avoid adding to monetary stimulus at a two-day meeting starting Aug. 8. Japan’s Ministry of Finance sold 399.4 billion yen ($5.1 billion) of 40-year debt today with demand for the bonds higher than the average of past 10 sales. “Bonds are being sold after Germany expressed its support for the ECB’s bond-purchase measures,” 

Japan's tragedy, cont. - NOAH SMITH responds to my critique of his view of Japan's recent economic history. He writes:The yen is currently at or weaker than its long-term average value...There has been no trend of yen strengthening since the mid-80s (when Japanese growth was robust). Hence, neither the trend nor the level of the yen exchange rate indicate that market-exchange-rate GDP is a worse measure than PPP GDP when discussing Japan's wealth relative to the United States. I think he misunderstands me. I'm not saying exchange-rate adjusted measures of GDP per capita are generally distorted by exchange rate swings. Over longer periods of time, exchange rates should adjust to equalise the cost, across markets, of traded goods. I'm suggesting, rather, that the unusual behaviour of exchange rates during the recent crisis has distorted recent measures of nominal GDP per capita, and that it's therefore very misleading to take as one's reference point (as Mr Smith does), the 2011 value of Japanese GDP per capita. A chart should help provide context:

Japan parliament passes doubling of sales tax to 10% - Japan's parliament has passed a contentious bill to double the country's sales tax by 2015, a move that could spark an early election. Japan's Prime Minister Yoshihiko Noda has argued the rise will help rein in Japan's huge public debt and rising welfare costs. However, some say the tax will severely hurt consumer spending. Opposition parties supported the bill on the condition that Mr Noda set an election date. This was the final hurdle for Mr Noda who has fought to bring the tax to 10% since he came into power in September 2011 as part of a financial reconstruction. It has led to disagreements even within the ruling Democratic Party of Japan, with more than 50 lawmakers opposed to the tax leaving the party. The tax bill was passed on Friday after a last minute deal between Mr Noda and the main opposition Liberal Democratic Party.

Japan Services PMI Shows Sharp Decline in New Orders; Global New Export Orders Have Steepest Drop Since April 2009. The global economy continues to weaken, but not in a straight line as China rebounded somewhat, with Japan deteriorating further. HSBC China Services PMI™ rebounded with the first increase in manufacturing in five months.  July’s survey findings showed business activity (covering manufacturing and services) in China rising at the join-fastest rate in nine months. This was signalled by the HSBC Composite Output Index posting 51.9, up from 50.6 in June. Overall growth reflected an increase in manufacturing production – the first in five months – and a stronger expansion of service sector output. The latter was highlighted by a rise in the HSBC Business Activity Index from 52.3 to 53.1. Behind the latest rise in service sector activity was a sustained increase in new order volumes. However, the rate of new business growth remained below-trend. This, coupled with a slower rate of decline in new orders placed at goods producers, meant that overall new business rose marginally in July. Markit reports Japan Composite data show sharpest decline in business activity since September 2011 Japanese service sector activity decreased further in July, and at the sharpest rate in ten months. The latest decline largely reflected a fall in incoming new business, which in turn contributed to another month of backlog depletion. Manufacturing PMI™ data showed factory output falling at the fastest rate in 15 months. Consequently, the Composite Output Index (covering manufacturing and services) dipped from 49.1 to 47.4 in July, and indicated the steepest reduction in private sector activity since September 2011.

BNP Paribas: Japan's fiscal problems could be reaching a "critical mass" - BNP Pribas is once again ringing the alarm bells on Japan. They show that the Japanese government bonds are becoming an increasing part of the private sector net worth. In fact the bulk of high private sector savings, which Japan is known for, now goes to finance the fiscal deficit. Government bonds are crowding out net private sector investments (which have been negative). And Japan's high savings rate will begin to decline as the population rapidly ages. BNP Paribas asks whether the crowding out of private investment indicates that the nation is closer (than most think) to the point of "critical mass", when debt levels begin to grow out of control.BNPParibas: - In this way, Japan has since the 1990s been able to finance its ballooning debt, without interest rates rising, because households and businesses have curbed investments in real assets, with their weak returns, and the money thus saved has been channeled by financial institutions toward the financing of government bonds. But financing fiscal deficits using private sector savings alone is starting to become hard. ... the abnormal situation of squeezing funds from drawing down capital stock (negative net private investment) has been observed. Could Japan be reaching its limit (critical mass)? And government policies to tackle this critical problem may be insufficient.  BNPParibas: - If just one of these three variables— strong yen, deflation, subdued interest rate— were to change, a fiscal meltdown could ensue (a fiscal crisis would be one process for moving from “deflationary equilibrium” to normal equilibrium, and it would also be a process for fiscal adjustment).

Eurozone New Business Sinks at Fastest Rate in 3 Years; Germany Composite PMI at 37-Month Low; Ass-Backwards Eurozone Policies - With everyone watching and analyzing US jobs data on Friday, there were a number of other news reports showing steeper contractions in much of the world. Let's start off with a look at the rapidly deteriorating eurozone. Markit reports Eurozone downturn continues at start of Q3 2012: The Eurozone economy remained in a downturn at the start of Q3 2012. At 46.5 in July, little-changed from 46.4 in June, the Markit Eurozone PMI® Composite Output Index signalled a contraction in output for the tenth time in the past 11 months. The headline index came in slightly above the earlier flash estimate of 46.4. Manufacturers and service providers both reported lower levels of output in July. The downturn was more severe in manufacturing, where production contracted at the fastest pace since May 2009. Service sector business activity fell for the sixth month running, though the rate of decline eased to its weakest since March. The worst performers by far were Italy and Spain. The rate of contraction in France slowed marginally, while the downturn in Germany was the steepest for over three years.

Eurozone's manufacturing contraction is now driven by Germany - As the Eurozone recession (which started months ago) worsens, the area's manufacturing activity, as measured by the PMI index, is contracting at a pace not seen since 2009.  Earlier in the recession the periphery nations had the largest impact on the Eurozone contraction. But increasingly the decline is driven by Germany, whose manufacturing PMI is showing a rapid deterioration. It is somewhat surprising, given that we had signs of economic improvements in Germany as recently as May. But the German "decoupling" hopes did not materialize, as the economy is pulled down by the rest of the Eurozone combined with the slowdown in China, one of the nation's largest export markets.  WSJ: - Business activity in the euro zone continued to shrink in July, new orders plunged and German private-sector activity fell at its steepest rate in more than three years, a sign that the euro zone's debt crisis is taking its toll on the region's biggest economy and main source of financial support. The figures suggest the 17-nation euro-zone economy is heading for a period of contraction and recovery is a distant prospect.

How cascading failures in the global finance system could mean TEOTWAWKI -- I've met David Korowicz, and he is a thoughtful, deeply knowledgeable, highly analytical, caring man who worries that the global system we now labor under is headed for what might be called the ultimate crash. To Korowicz, a physicist turned risk consultant, that system resembles nothing so much as a house of cards waiting to be blown down by the next financial hurricane that comes its way. The system's interlocking intricacies make it vulnerable not only to severe disturbance, but also to cascading failures that might end in a system unable to recover its former complexity and global reach, in other words, TEOTWAWKI. (For those who didn't get the memo, TEOTWAWKI stands for "the end of the world as we know it.") Korowicz rightly depicts our global system, financial and logistical, as extremely complex, but not so complex that he cannot understand it enough to predict a disaster of unprecedented proportions sometime this decade. He acknowledges the remarkable resilience and self-healing our current global system has shown in the face of repeated insults in the last several decades, especially the crash of 2008. But, in a new report he outlines why he believes that that resilience has been significantly eroded and may well be tested to the breaking point in the next several years.

Key repo contracts market falls 14%  - The market for a key funding instrument for banks has shrunk in Europe, highlighting how reliant financial insitutions in the region have become on European Central Bank support. The market for European repurchase, or repo, transactions contracted by an estimated 14.2 per cent year-on-year in the six months to June 30, based on constant samples over the period. The total value of outstanding repo contracts – in which banks pledge their securities as collateral for short-term loans from money market funds or other investors – stood at €5.647tn in June, according to the latest bi-annual snapshot of the market by the European Repo Council of the International Capital Market Assocation (ICMA).

From Euro Area Summit to the periphery "bridge loan" - a quick recap of major events in the Eurozone  -The news from the Eurozone continues to dominate markets' direction. Yet the information from the area has been incredibly confusing, even for many who reside in the EU. The mass media has not made things easier by jumping from one event to another, often without connecting these events together. We've gotten numerous requests to try to clarify some of the key events that have taken place just in the last couple of months and what they mean for the euro area going forward. Here is a highly simplified overview using basic diagrams. Solid lines indicate what actually transpired, while dashed lines show expectations at the time. Between escalating risks of the Spanish banking system failure and Mario Monti's efforts to stabilize Italy's government funding costs, pressure was mounting on the Eurozone to take immediate action. Spain and Italy had somewhat diverging needs, but they came together to ask the Eurozone "core" to come to a decision.  And with the brand new Socialist government in France lead by Hollande, Monti and Rajoy found a new ally. Hollande heralded a shift in the balance of power in the Eurozone (as predicted back in January). Together the three were able to pressure Germany into a new compromise. They reached a broad agreement to centralize bank regulation, provide bailout funds to Spain's banks, and most importantly give the European Stability Mechanism (ESM) the ability to buy periphery bonds in a "flexible manner" and allow the bailout vehicle to rescue banks directly. This was a broad agreement with no visible path to implementation.

Europe's Dangerous Dream of Unlimited Money -The bazooka isn't just the name of a portable American antitank weapon. Recently it has also become the synonym for a financial super weapon that is supposed to end the euro crisis once and for all. The bazooka debate heated up after a suggestion from some countries, including Italy and France, that the permanent euro rescue fund, the European Stability Mechanism (ESM), should be equipped with "unlimited firepower" through a banking license. In concrete terms, it would enable the ESM to borrow unlimited amounts of money from the European Central Bankand use it to shore up euro-zone member states threatening to buckle under the weight of the crisis. Given that billions of euros have already been deployed in the euro crisis, the idea of unlimited credit seems risky to say the very least. Not surprisingly, the reactions have been intense. "A banking license for the ESM would mean firing up the money printing machine, which means inflation and nearly unlimited liabilities," Patrick Döring, the general secretaty of the business-friendly Free Democratic Party, the junior partner in Chancellor Angela Merkel's government coalition, told SPIEGEL ONLINE. "That is why the FDP cannot and will not allow a banking license to be issued."

‘Vengeance for ECB Bond-Buying Will Be Bitter’ - The markets were disappointed. European Central Bank head Mario Draghi's press conference on Thursday sent stock indexes around the world plummeting, as investors had been hoping the bank would immediately resume buying up sovereign bonds from crisis-stricken euro-zone countries. Even worse, Spain's borrowing costs on 10-year bonds rocketed above the critical 7 percent mark -- a product of Draghi's press-conference pledge that the ECB would only step in if a country applies for a euro-zone bailout. Many politicians in Germany, however, were ecstatic. Leaders from most of the country's major parties welcomed Draghi's inaction, including lawmakers from parties in Chancellor Angela Merkel's governing coalition.  "I completely agree with ECB President Mario Draghi that decisive consolidation and reform policies at the national level should be the absolute top priority and are indispensable," said Economy Minister Phillip Rösler.  He added that monetary policy cannot replace national efforts and "does not offer a lasting solution to the crisis."

Watching the ECB play chess - Watching Mario Draghi  trying to gradually out manoeuvre some of his colleagues in order to rescue the Eurozone has a certain intellectual fascination, as long as you forget the stakes involved. I’m not an expert on the rules of this game, so I’m happy to leave the blow by blow account to others, such as Storbeck, Fatas, Varoufakis and Whelan. What I cannot help reflecting on is the intellectual weakness of the position adopted by Draghi’s opponents. These opponents appear obsessed with a particular form of moral hazard: if the ECB intervenes to reduce the interest rates paid by certain governments, this will reduce the pressure on these governments to cut their debt and undertake certain structural reforms. (Alas this concern is often repeated in otherwise more reasonable analysis.) Now one, quite valid, response is to say that in a crisis you have to put moral hazard concerns to one side, as every central bank should know when it comes to a financial crisis. But a difficulty with this line is that it implicitly concedes a false diagnosis of the major problem faced by the Eurozone.

Will Draghi Outmaneuver the Bundesbank? - Ambrose Evans-Pritchard of the Telegraph, who correctly called that ECB would not take action last week, argues in his latest article that Mario Draghi and Italy’s Mario Monti have isolated the Bundesbank and are closing in on being able to buy bonds along side the Eurozone rescue facilities once the ESM presumably goes live (the assumption is that the German constitutional court will lift its injunction on September 11). Draghi hopes to keep Mr. Market at bay till then by a combination of happy talk and threats.  We noted that members of Merkel’s party (but neither Merkel herself nor finance minister Schaeuble) said it might not be so terrible for the ECB to buy bonds provided there was “conditionality,” meaning recipients were relegated to subject nation status via the IMF-like procedures of the ESM and forced to wear the austerity hairshirt. But they did not sign off on having the ECB go full bore. My German-reading sources parsed their statements and took them to approve only of buying short-term bonds, and then only in limited amounts. So while this is a crack in the facade, this is not as big an opening as Draghi wants.  Evans-Pritchard reports that Draghi has also secured commitments to allow him to buy bonds from all the northern Eurozone central bankers ex Weidmann of the Bundesbank: The Bundesbank’s Jens Weidmann is isolated. The Dutch and Finnish governors backed the Draghi plan. So did Germany’s member on the ECB’s executive board, Jörg Asmussen. The Kanzleramt has lost patience with the ideological preening of the Bundesbank.

German Minister Warns of Euro Debate Tone -- Germany’s foreign minister warned on Monday that arguments about European policy are taking on a “very dangerous” tone as worries mount about the future of the euro. Guido Westerwelle didn’t specify who his comments were aimed at. But they came after Italian Premier Mario Monti warned over the weekend of tensions that “bear the traits of a psychological dissolution of Europe,” and a regional official in a German governing party said Greece must leave the euro this year. “The tone is very dangerous. We must take care not to talk Europe down,” Westerwelle said in a statement. He added that attempts to grab domestic political attention “cannot be the yardstick for our action in any European country, including Germany — the situation in Europe is too serious for that.”

It's Time To Break Up Massive Banks! - SPIEGEL - The banks are blackmailing us, Sigmar Gabriel, the head of Germany's center-left Social Democratic Party wrote in a position paper for his party. But with the fuss over Gabriel's partly justified and partly exaggerated claim, one hopes that the most important words spoken last week will not get lost in the noise.  Those words were from Sandy Weill, who for eight years was the decisive figure at Citibank, the major American bank. This is the same Sandy Weill who forged a financial empire and successfully fought against just about every regulation that has been thrown at the banking sector. His message today? Split up the massive banks. What Weill is calling for is a return to rules that already once served the world well. They were conceived during the 1930s financial crisis and then disposed of during the liberalization frenzy of the 1990s. For decades, America's Glass-Steagall Act ensured a clean division of commercial and investment banking. But its repeal helped pave the way for the global financial crisis. Today politicians should restore the dual banking system to help ensure that banks that are too big to fail do not exist in the future.

Monti Calls for More Crisis-Fighting Urgency in ECB Standoff - Italy’s Prime Minister Mario Monti warned of a potential breakup of Europe without greater urgency in efforts to lower government borrowing costs, as a standoff over European Central Bank help for Italy and Spain hardened.  Monti, in an interview with Germany’s Der Spiegel magazine published yesterday, said that disagreements within the 17- nation euro area are detracting from the policy response to the debt crisis and undermining the future of the European Union.  Spain and Italy, whose surging borrowing costs have shunted them to the heart of the turmoil in the euro area, are resisting pressure from ECB President Mario Draghi to formally request aid in return for strict conditions before the central bank will buy their bonds. Monti and Spanish Prime Minister Mariano Rajoy have both said they will await further details as the ECB works up its plan. The German government said for the first time today that Chancellor Angela Merkel supports Draghi’s proposals. French President Francois Hollande is pushing Monti and Rajoy to request aid from Europe’s bailout fund to help ease markets and protect France from speculation, Italian newspaper la Repubblica reported, without citing anyone.

Coeure: ECB Won't Accept Higher Sov Ylds Due Euro Fears - The European Central Bank will not allow fears regarding the euro's permanence to push up yields on sovereign debt, Executive Board member Benoit Coeure said in an interview released on Monday. Coeure told Slovakian daily Hospodarske Noviny in the same words used last Thursday by ECB President Mario Draghi that the euro is here to stay and that if monetary authorities buy government debt, then only if certain conditions are met and in sufficient amounts to accomplish its mission. "At its meeting on 2 August, the Governing Council has made it clear that it will not accept higher sovereign bond yields due to fears of the reversibility of the euro," he said. "The euro is irreversible." It is up to governments to activate the bailout fund in the bond market and impose conditionality on those member states recurring to the fund, he said. "Within its mandate to maintain price stability, and in strict independence, the ECB may then undertake sovereign bond purchases," he said. "Such operations will be of a size adequate to reach our objective. The Governing Council may also consider undertaking further non-standard monetary policy measures. Over the coming weeks, we will design and communicate the appropriate modalities."

Monti Blasts Democracy - Italian PM Mario Monti is the only leader of a huge, developed "democracy" who didn't get into their position by winning an election. Last year, when things were getting super-hairy in the Eurozone crisis, the ECB for all intents and purposes engineered an exit by Berlusconi, paving the way for the "technocrat" Mario Monti. Monti's task: Come in, reform the Italian system, and get out. Now he's apparently infuriated the rest of Europe by -- surprise surprise! -- criticizing a key tenet of a democratic system. In a soon-to-be released interview with German newspaper Der Spiegel Monti says: "If governments allow themselves to be entirely bound to the decisions of their parliament, without protecting their own freedom to act, a break up of Europe would be a more probable outcome than deeper integration." In other words, if leaders (like Monti, Merkel, and Hollande) have to listen to the bodies that represent the voice of the people (parliaments) then Europe is going to break up. Germany is flipping out: In Berlin, a number of politicians have spoken out against Monti's comments. "The acceptance of the euro and its rescue is strengthened through national parliaments and not weakened," Joachim Poss, deputy floor leader for the center-left Social Democratic Party, told the Rheinische Post newspaper.

ECB's Conditional Bond Buying Plan May Face Legal Challenges - The European Central Bank may face legal challenges to future sovereign debt purchases, as Germany's hardline opponents charge the new conditionality would further overstretch its policy mandate and could undermine its independence. "This is clearly fiscal policy," said Markus Kerber, professor of public finance and political economy. Together with the think tank Europolis, he has filed several constitutional complaints against the Eurozone's bailout policies, including the future bailout fund ESM. Depending on the details of the ECB's plan to reactivate its bond buying to help governments that accept the fiscal constraints linked to a bailout program, Kerber said he may launch legal action against the central bank. "I am not a man who enters the battle field without an exact plan," Kerber told MNI.

Germany and Italy near blows over euro - German politicians from across the spectrum have reacted furiously to warnings by Italy’s Mario Monti that Bundestag control over EU debt policies threatens to bring about the “disintegration” of the European project. “We must make it clear to Mr Monti that we Germans will not shut down our democracy to pay Italian debts,” said Alexander Dobrindt, secretary-general of Bavaria’s Social Christians (CSU). Bundestag president Norbert Lammert said parliament’s integrity cannot be subordinated to the ups and downs of the markets. Free Democrat (FDP) leaders said Italy’s unelected prime minister is playing with political fire by trying to circumvent democratic legitimacy. The dispute comes as relations between Germany and Italy touch the lowest ebb since the Second World War, with Il Giornale publishing a front-page picture of Chancellor Angela Merkel under the headline “Fourth Reich”. “The tone of the debate has turned dangerous. We must be careful that Europe does not rip itself apart,” said German foreign minister, Guido Westerwelle. He himself fanned the flames over the weekend, saying he was “categorically” against further expansion of the EU rescue machinery or bond purchases by the European Central Bank. “I can’t imagine that a majority of the Bundestag will back unlimited debt liabilities,” he said. The outburst leaves it unclear whether Germany will agree to activate the eurozone rescue fund (EFSF) on acceptable terms if Spain and Italy request bail-outs, the political trigger needed for ECB bond purchases under the “Draghi Plan”. 

Merkel is running the ‘Fourth Reich’: Fury in Germany after Berlusconi newspaper prints picture of Chancellor with hand raised and compares her government to the Nazis -- An Italian newspaper owned by former prime minister Silvio Berlusconi has caused controversy by printing a front page headline which said 'Fourth Reich' above a picture of German chancellor Angela Merkel. The picture in newspaper Il Giornale also showed Chancellor Merkel raising her right arm in salute, a gesture associated with the Nazi salute used by Hitler's followers. The article, which was published on Friday, has heightened a bitter war of words between Italy and Germany over the handling of the ongoing Euro crisis. The angry article attacked tough talking Chancellor Merkel saying that her intransigence had brought 'us and Europe to its knees' adding that 'Italy is no longer in Europe but in the Fourth Reich.' It went on to say: 'In the First Reich, Germany also wanted the title Emperor of Rome and in the next two they used their own means again against the states of Europe, two world wars and millions of dead, obviously this was not enough to quieten German egomania. 

Standard and Poor's downgrades 15 Italian banks, warning country's recession could be deeper than feared - Standard and Poor's has downgraded 15 of Italy's biggest banks, and cut the ratings of 15 more. The credit ratings agency said today that Italy's recession could potentially be deeper and more prolonged than previously thought. It said problem assets are mounting and that many banks have reduced provisions for loan losses, making them more vulnerable. The downgrading of UniCredit SpA and Intesa Sanpaolo SpA was confirmed by S&P. Banca Carige SpA, Banca Popolare dell'Alto Adige and Unione di Banche Italiane, among others, also saw their ratings reduced. S&P lowered its rating on 34 banks in February, citing the country's financial vulnerability and expectations of lower earnings. The move came as Italian prime minister Mario Monti gave an interview claiming that the nation needs moral support from Germany, but not its cash. Mr Monti told German magazine Der Spiegel he was concerned about growing anti-euro, anti-German and anti-European Union sentiment in the parliament in Rome.

Italy Economy Shrinks for a Fourth Quarter as Slump Deepens - Italy’s economy contracted for a fourth straight quarter in the three months through June as manufacturing slumped and the euro-area debt crisis intensified. Gross domestic product declined 0.7 percent in the second quarter, Rome-based national statistics institute Istat said in a preliminary report today. The contraction was less than the median forecast for a 0.8 percent decline in a survey of 22 economists by Bloomberg News. GDP fell 2.5 percent from a year earlier, the most since the final quarter of 2009. Prime Minister Mario Monti’s government is implementing 20 billion euros ($25 billion) in austerity measures that have curtailed consumer spending and prompted Italy’s largest manufacturer, Fiat SpA (F), to curb investment. Industrial output declined more than forecast in June, Istat said in a separate release today as Monti’s policies contributed to deepening the country’s fourth recession since 2001. “We believe Italy faces another two quarters of negative GDP growth this year,” 

Italy Industrial Production Plunges 8.2% YoY, GDP Declines 2.5% Annualized; Italy to Pay Civil Servants 80% of Their Salary - News in the eurozone's third largest economy is once again on the dismal side. Italian Industrial Production Plunged more than expected as did GDP.  Italian industrial production declined more than forecast in June, signaling the euro region’s third-biggest economy probably contracted for a fourth quarter. Economists forecast a decline of 1 percent, according to the median of 16 estimates in a Bloomberg News survey. Production fell 8.2 percent from a year ago on a workday-adjusted basis.   To plug the rising deficit gap, Prime Minister Mario Monti approved Deep Cuts in National Spending (a needed measure but not how they went about it), and also hike the VAT by 2% (economic insanity in a deepening recession).  Italy's government has agreed to cut spending by 26bn euros (£21bn, $32bn) over the next three years to plug the gap between spending and income.  Staffing levels will be assessed by October. Some workers will be sent home for two years on 80% of their salary before losing their jobs or being retired. The package means the country will not now need to bring in an unpopular increase of 2% in value added tax (VAT) and will be able to funnel 2bn euros to the Emilia Romagna region, which was hit by two earthquakes in May.

Italian Economy Contracts for 4th Straight Quarter -- Italy’s recession deepened in the April-June period, when the economy shrank for the fourth quarter in a row, official government statistics showed Tuesday. The economy contracted by 0.7 percent in the second quarter compared with the previous three months, more than the 0.6 percent drop expected by economists surveyed by FactSet, a financial data provider. The ISTAT statistics agency said activity fell in all sectors — industry, services and agriculture. The government, which is trying to reduce debt, has made spending cuts and tax increases that are hurting businesses and households. Fear that Italy will need a sovereign bailout if its borrowing rates rise further has created economic uncertainty. Analysts at UniCredit bank, which had expected only a 0.5 percent drop in GDP, said it was premature to change their projection for a 1.9 percent annual contraction in the economy, even though business surveys are showing no improvements are likely in the third quarter.

Greece exit from euro zone would be manageable: Juncker (Reuters) - A Greek exit from the euro zone would be manageable but is not desirable, Eurogroup President Jean-Claude Juncker said in an interview with Germany's WDR television posted on the Luxembourg government's website on Tuesday. "From today's perspective, it would be manageable but that does not mean it is desirable. Because there would be significant risks especially for ordinary people in Greece," Juncker told WDR television. Asked if he could categorically rule out a Greek exit from the euro zone, Juncker said: "At least until the end of the autumn. And after that, too."

Greece Agrees With Troika on Need to Strengthen Policy - Greece and its international creditors agreed on the need to strengthen policy efforts to support the economy and comply with its bailout terms after nearly two weeks of meetings in Athens. Representatives from the so-called troika of the European Commission, European Central Bank and International Monetary Fund met with Greek Finance Minister Yannis Stournaras in Athens yesterday at the conclusion of the meetings. The talks will determine whether Greece continues receiving funds from the country’s 240 billion euros ($297 billion) of rescue packages.“The discussions on the implementation of the program were productive and there was an overall agreement on the need to strengthen policy efforts to achieve its objectives,” the troika institutions said in a joint statement yesterday. Inspectors from the country’s creditors will return to Athens in early September to continue the talks.

ECB saves Greece from bankruptcy by securing emergency loans -The European Central Bank (ECB) has saved Greece from bankruptcy for the time being by securing it interim financing in the form of additional emergency loans from the Bank of Greece, German newspaper Die Welt said on Saturday. The ECB's Governing Council agreed at its meeting on Thursday to increase the upper limit for the amount of Greek short-term loans the Bank of Greece can accept in exchange for emergency loans, the newspaper said in an advance copy of the article due to appear in its Saturday edition. Until now the Bank of Greece could only accept T-Bills up to a limit of 3 billion euros ($3.70 billion) as collateral for emergency liquidity assistance (ELA) but it has applied to have this limit increased to 7 billion euros, the daily said, citing central bank sources. The ECB Governing Council gave this wish the green light, the paper said.

Greek crackdown on illegal immigrants leads to mass arrests - Thousands of migrants are being held in detention centres near Athens before being deported back to their home countries. Greek authorities have begun one of the country's biggest crackdowns yet on suspected illegal immigrants, deploying 4,500 police around Athens and detaining more than 7,000 immigrants in less than 72 hours. Most have been released, but about 2,000, mostly Africans and Asians, were arrested. They were sent to holding centres pending deportation in an operation that officials, bizarrely, elected to call Xenios Zeus after the Greek god of hospitality. On Sunday, 88 undocumented Pakistanis were put on planes, accompanied by guards, back to their home country. "We will not allow our towns, or our country, to be occupied and become a migrant ghetto," said Athens' hardline public-order minister, Nikos Dendias, as authorities discussed plans to build eight detention centres capable of holding up to 10,000 immigrants, in the capital.

Greece Considers Labor Pool For Some Public Workers - Greece may have to place thousands of public workers in a special labor pool at reduced pay to help achieve as much as €4 billion ($4.95 billion) in spending cuts demanded by international creditors, a politically risky move for the fragile coalition government. Athens has yet to finalize a significant amount of the cuts that are part of an overall €11.5 billion austerity package demanded by international creditors, Finance Minister Yannis Stournaras said Tuesday, and the government is considering setting up a special labor reserve pool for public-sector workers to help meet that goal.
Greek govt yet to finalise spending cuts - The government has to cut 11.5 billion euros off expenditure over the next two years in order to unlock the next instalment of its 130 billion euro bailout package -- the second for the cash-stripped country in two years. "11.5 billion is an important number. We are not there yet, we are still 3.5-4 billion euros away," said Stournaras after a meeting with President Carolos Papoulias. Stournaras denied cutting public sector jobs is back on the table, but said placing state employees on a labour reserve scheme remains a possibility. Greece's previous government had considered last winter placing 15,000 public sector employees on labour reserve by the end of 2012. The troika's report will determine whether the indebted country will receive the much-needed sum. Yesterday, Stournaras also said that the government decided to accelerate its privatisation programme, by adopting a new law "containing 77 administrative acts aiming to speed up privatisations."

Greece’s Power Generator Tests Euro Fitness Amid Blackout Threat - In the mountains of northern Greece lies an $800 million power plant whose future may help determine whether the country can salvage its euro status. The facility near Florina, a town known as “Where Greece Begins,” is the most modern of four production units that state-controlled Public Power Corp. SA (PPC) is scheduled to sell to competitors to meet four-year-old European Union demands that the country deregulate its energy market. The most powerful Greek union is now threatening nationwide blackouts at the height of the summer tourist season to derail the plan.  “We will make saving PPC a cause for all Greeks,” Nikos Fotopoulos, head of the 18,000-strong GENOP union, said last month in his Athens office adorned with photos of communist revolutionaries including Vladimir Lenin and Leon Trotsky. “We fight our battles with faith and passion, and we fight them hard. A serious state must control businesses of strategic importance.” While on the surface PPC is another tale of Greek conflict during the worst economic crisis of modern times, it encapsulates how Greece has found itself at the sharp end of Europe’s struggle to keep the euro intact and what the country still faces to defend its place in the currency.

Greek Government Could Collapse - In June, I wrote gloomily about the radical SYRIZA falling just short of the votes needed to lead a government of the Left. Instead, Antonis Samaras, New Democracy’s leader, took power alongside the Panhellenic Socialist Movement, long the voice of Greek social democracy, and the smaller Democratic Left, a right-wing split from SYRIZA. Samaras had the world’s backing. He was the respectable candidate, capable of playing ball with the international lenders that Greece has been beholden to ever since a 2009 sovereign debt crisis. That crisis began after investors feared that the country would be unable to pay back its growing public debt. But just days after his government announced another £9 billion in cuts, the coalition’s seams are already showing. The continued working class resistance isn’t surprising. Pensions and other public sector benefits are being reduced drastically, the retirement age is rising to 67, and the social safety net—including even hospitals and schools—is being sliced up and sold to the highest bidder.

EU will not lower deficit target for Greece - The European Commission spokesman Oliver Bailly assured on Tuesday that the deficit target for Greece will not be lowered and that it is expected that the Hellenic Republic will be able to reduce its debt to 120% by the end of 2020.  Bailly added that the deficit reduction plan is a very ambitious objective for the Greeks but that the EC is confident they will succeed in reaching it.

Complete Absurdity in Greece: ECB Prints Euros to Give to Greece to Make Interest Payments to ECB - No entity is willing to stand up and say the obvious, that Greece is insolvent and cannot and will not pay back its debts.  Moreover, in spite of an ECB mandate that  prohibits direct financing of governments, the ECB is doing just that. Simply put, the ECB is printing euros, to give to the Greece, so that Greece can make interest payments to the ECB on maturing bonds. Der Spiegel notes the absurdity of this setup in The European Central Bank's Discreet Help for Greece. "There is no time to lose," Jean-Claude Juncker warned just a few days ago. Leaders must use "all means at their disposal" to save the currency union, the head of the Euro Group said. But one thing is becoming clear: Politicians are increasingly pushing the dirty work on to the European Central Bank (ECB). Take Greece, for example, where liquidity is becoming scarce. The government in Athens needs to repay a maturing bond worth €3 billion ($3.7 billion) to the ECB by Aug. 20. The solution to that problem seems paradoxical: The ECB itself is pumping money into Greece, so that the country can in turn repay the ECB.

Greece Prints Euros To Stay Afloat, The ECB Approves, The Bundesbank Nods: No One Wants To Get Blamed For Kicking Greece Out - Suddenly Greece is out of money again. It would default on everything, from bonds held by central banks to internal obligations. On August 20. The day a €3.2 billion bond that had landed on the balance sheet of the European Central Bank would mature. Europe would be on vacation. It would be mayhem. And somebody would get blamed. So who the heck had turned off the dang spigot? At first, it was the Troika—the austerity and bailout gang from the ECB, the EU, and the IMF. It was supposed to send Greece €31.2 billion in June. But during the election chaos, Greek politicians threatened to abandon structural reforms, reverse austerity measures already implemented, rehire laid-off workers. The Troika got cold feet. Instead of sending the payment, it promised to send its inspectors. It would drag its feet and write reports. It would take till September—knowing that Greece wouldn’t make it past August 20. Then it let the firebrand politicians stew in their own juices. It’s easy to blame the Troika, and it can take the heat. History searches for the person who is responsible. But the Troika doesn’t have one. It was designed that way: a combo of multi-layered, undemocratic structures. And the Troika inspectors, though despised in Greece, are career technocrats, not decision makers.

Top Euro Honcho Juncker: “Europeans are dwarfs” - At first, Jean-Claude Juncker was just jabbering about Greece. No, he couldn’t categorically exclude its exit from the Eurozone, he said, but it wouldn’t happen “before the end of autumn.” With these words, he might have thrown the markets into vertigo-inducing tailspins a year ago. But Monday, during an interview on German TV (transcript), the Prime Minister of Luxembourg and President of the Eurogroup—where the finance ministers of the Eurozone manage the political ends of their currency—wasn’t ruffling any feathers; and markets went up. That’s how far the Eurozone’s debt crisis has advanced, after 21 summits to save the euro, and after two bailout packages to save Greece. The French President and the Prime Ministers of Spain and Greece had called him that morning and kept him from getting any work done, he mused. It was that kind of conversation, self-aggrandizing in a quiet way. Then he plowed into sound-bite happy politicians, particularly those who were pushing for a Greek exit, such as German Vice Chancellor Philipp Rösler who’d proclaimed that such an event had long ago lost its horror. “It would be good if more people in Europe would shut up more often,” Juncker explained.

Spain to soon create "bad bank" for toxic assets - Spain's economy minister says the government is set to approve a new law creating an asset management agency, or "bad bank," to deal with the toxic assets that have led many Spanish banks to seek a European Union bailout. The toxic assets - expected to total 200 billion euros ($244.9 billion) - will be segregated from the banks, and dealt with by the new agency. Luis de Guindos said Sunday in an interview with newspaper ABC that the law is up for approval Aug. 24. The EU is to provide up to 100 billion euro ($122.9 billion) for banks struggling from non-performing loans, foreclosed property and other unwanted assets resulting from the collapse of Spain's real estate market.

Spain Lost 57,000 Companies in 2011 - The number of active enterprises decreased 1.6% in 2011 and stood at 3,199,616. This is the fourth consecutive year of decline according to the latest update of the Central Companies Directory (CCD) released by the National Institute of Statistics (INE).  During 2011 more companies ceased their activities (391,270) than were launched (334,516). The net effect is a loss of 56,754 businesses. By size, measured in number of employees, Spanish firms are characterized by their small size. 55.2% of companies (1,764,987)  did not employ any workers in 2011. In addition, 867,550 companies (27.1%) had one or two employees, while those hired 20 or more workers accounted for only 4.7% of businesses. The fewest casualties were in education (2682), the utilities (1,478), recreation and entertainment (859), and sector programming and computer consulting (828).  By contrast, construction of buildings had 13,206 net company closures, followed by specialized construction (10,170) and architectural and engineering (7343).

Spain Proves that Austerity can never “Ensure” a Balanced Budget - Bill Black - The Wall Street Journal recently printed an economically incoherent and dishonest discussion of Spain’s budget deficit.  It begins its discussion with these paragraphs. “Spain’s central government reported a new deterioration in its finances and struggled to impose budget discipline on the country’s restive regions as data showed a surge in capital flight from the euro zone’s fourth-largest economy. The central government in Madrid said it had a budget deficit equal to 4.04% of gross domestic product in the first half, up from 2.2% a year earlier, as tax revenue remained weak and Madrid moved to extend emergency support to the country’s financially ailing regional and municipal governments.” Twelve paragraphs later, the article finally informs the reader about unemployment. “Spain’s economy continues to deteriorate. Unemployment figures for the second quarter of 2012, released last week, showed the jobless rate reached a record high of 24.6%, the highest in the developed world, and the government recently warned that the country’s economic contraction would drag through next year."  The fact that the two subjects are intrinsically linked appears to have escaped our nation’s most famous financial newspaper. 

Is Draghi’s EuroRescue Plan Coming Unglued?  - No sooner had some astute Euro commentators noted that Draghi might have found a path through the Euro mess to keep it patched up long enough for to impose austerity on the periphery and drive all of Europe into a lovely depression, various elements of his plan look as if they were coming unglued.  First, careful readings of the German press suggest, as we had warned, that the commitments he has gotten to bond buying, both from German pols and from northern central banks ex the Bundesbank, are qualified: only near term maturities (less than two years) and only in limited amounts (“limited” has not been translated into a particular number, it appears). Yet the media seems to think quite the reverse, that Draghi is going to engage in unlimited bond buying. A representative quote from the Financial Times: After denying for months that Spain will require anything resembling a sovereign bailout, Madrid hinted on Friday that it could, after all, take up Mario Draghi’s conditional offer of buying short-term debt.Unlimited bond buying by the ECB would surely soon follow. Um, no. It appears that anything like that would lead to a revolt by the northern bloc. Absent a September 2008 level meltdown, it does not look like they will give the ECB what it wants quickly or easily. Spain is now playing coy about asking for funds (the drill is the about-to-be-subject nation has to ask for a rescue, then agree to a Memorandum of Understanding which sets forth the details of the fiscal tortures that will be inflicted on it).

The way forward - I'VE been moaning all summer about the world's central bankers, twiddling their thumbs while disaster looms. They haven't exactly done nothing, however. Rather, central bankers have responded to changing circumstances with what a colleague of mine has called "open mouth operations", reinforcing the point that when conditions deteriorate enough some action will be forthcoming. There is a central bank put across the economy, such that markets know to expect action under certain circumstances and respond by placing a floor under sagging markets. These open-mouth operations seem, for now, to have halted the second-quarter swoon, in America at any rate.A brief recap of the recent economic timeline is in order. America's economy was relatively well positioned to start the year, and both markets and real economic variables looked fairly hale in the calm generated by the European Central Bank's €1 trillion bank-lending plan. From late March, however, backsliding began. Yields on the European periphery began rising again. Treasury yields began sinking again. Equity and commodity prices and inflation expectations dropped, and the real economic data began turning up disappointing datapoints. Things came to a head in early June, punctuated by a shockingly poor employment report from America. Then some central bankers began dropping heavy hints of additional action (including the Fed), while others, like the People's Bank of China, took concrete easing steps. Expectations found a bottom, which shows up clearly in the S&P 500 and 2-year breakevens. Open-mouth operations were enough to convince markets that doom wasn't imminent.

Bill Gross On Why Europe's Plan "To Get Your Money" Is Doomed - The very vocal head of the world's largest bond fund has long been critical of the global ponzi system better known as the "capital markets." Now, finally, he shifts his attention to Europe, where the interests of his parent - Europe's largest insurance company Allianz are near and dear to the heart, and deconstructs not only the biggest challenge facing Europe: getting access to your money, but also the fatal flaws that will make achieving this now impossible. To wit: "Psst! Investors – do you wanna know a secret? Do you wanna know what Angela Merkel, François Hollande, Christine Lagarde and Mario Draghi all share in common? They want your money!" .... but... "private investors are balking – and for what it seems are good reasons – because policy makers’ efforts have been, until now, a day late and a euro short, or more accurately, years late and a trillion euros short." And so they will continue failing ever upward, as permissive monetary policy which allows failed fiscal policy to be perpetuated, will do nothing about fixing the underlying problems facing the insolvent continent. Then one day, the ECB, whose credibility was already massively shaken last week, will be exposed for the naked emperor it is. Only then will Europe's politicians finally sit down and begin doing the right thing. It will be too late.

How Bad Could EU Crisis Get? IMF Attempts an Answer - Seriously, how bad could it really get? No one knows what the full impact could be, but the International Monetary Fund has tried to guess. Failure of euro-zone policy makers to tame their growing debt crisis would likely trigger a severe regional economic contraction, force a fire sale of financial-industry assets and trim the growth prospects of major world economies by several percentage points, the IMF says in its 2012 Spillovers Report. “What stands between the current situation and the playing out of the scenario is the residual public confidence that policy makers will ultimately act to avert the spread of the crisis,” the IMF said in its 2012 Spillover Report. The report quantifies the potential global effects from problems in the so-called systemic five economies: the euro area, the U.S., the U.K., Japan and China. If EU authorities don’t act in time, the IMF said output in the euro area could be cut by five percentage points. Further, around two percentage points would be lopped off U.S. growth prospects, and output in China, Japan and the rest of the world would take a hit of around 0.5 to 2.5 percentage points.

Credit-Default Swaps in U.S. Fall as Merkel Supports Bond Buying - A benchmark gauge of U.S. corporate debt risk dropped to a more than 13-week low as German Chancellor Angela Merkel’s government backed the European Central Bank’s bond-buying plan. The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark used to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 0.8 basis point to a mid-price of 102.8 basis points, according to prices compiled by Bloomberg. A basis point equals $1,000 annually on a contract protecting $10 million of debt. The index, which typically falls as investor confidence improves, declined after the German government said for the first time it supports ECB President Mario Draghi’s bond-buying proposals to help lower borrowing costs in Spain and Italy. The government is “not worried” by Draghi’s Aug. 2 announcement, Georg Streiter, Merkel’s deputy spokesman, told reporters in Berlin today when asked whether the government is concerned that ECB independence might be compromised.

This will not be enough, Mr Draghi - The ECB has announced that it will resume purchases of sovereign bonds. In principle, this policy could salve the crises of peripheral Europe by reducing borrowing costs. But US experience teaches that there is all the difference between the shock-and-awe bond purchases pursued in the first round of quantitative easing and the tepid intervention of today. Mario Draghi, ECB president, has appropriated the shock vocabulary, vowing to do “whatever it takes”. But his true position is, “whatever it takes – maybe”. To qualify for ECB support, countries must apply for a formal bailout, accept the attendant conditions and have their application approved by the rest of the eurozone, including fiercely austere Germany. Then, if they stay on track with the conditions, ECB bond purchases will supplement bond buying by the eurozone’s bailout funds. Mr Draghi is unspecific on the crucial question of how powerfully he would intervene. But one weakness is clear. Given that the crisis economies have a shaky record of delivering on reform targets, the ECB may be unable to sustain support under the conditions it has stipulated. The ECB plans only to buy bonds with short maturities. This will ease the risk of losses. But by signalling that it is leery of the long end of the yield curve, the ECB will encourage investors to feel the same. Governments will find long-term debt as hard as ever to issue. The shortening of debt maturity is a classic early warning of a full-blown crisis. Mr Draghi promises to address concern about the ECB’s seniority in debt restructurings. At present, the more bonds the ECB buys, the larger the potential haircut for remaining private bond holders, so ECB support can perversely accelerate investor flight from sovereign bond markets. However, having acknowledged this problem, Mr Draghi fails to specify a fix.

Shell 'pulling cash out of Europe on eurozone fears' - Royal Dutch Shell is pulling some of its funds out of European banks over fears stirred by the eurozone's mounting debt crisis, according to reports. The company's chief financial officer, Simon Henry, told The Times that Shell is cutting back its exposure to European credit risk in the worst-hit economies and putting a higher price on doing business with the region's peripheral nations. "There's been a shift in our willingness to take credit risk in Europe. The crisis has impacted our willingness to afford credit," Mr Henry is quoted as saying. Asked whether Shell regarded risk as different in Germany compared with some of the eurozone’s southern and heavily indebted members, he said: “We differentiate between different credit risk.” Mr Henry is cited as saying that the Anglo-Dutch oil major would rather deposit $15bn of cash in non-European assets, such as US Treasuries and US bank accounts.

The European Debt Crisis and the Dollar Funding Gap - New York Fed - Against the backdrop of the ongoing debt crisis in Europe, the difficulties faced by European banks in borrowing U.S. dollars have attracted increased attention. The inability to borrow dollars has been partially responsible for European banks’ decisions to sell dollar-denominated assets and reduce their lending activity in the United States, to the possible detriment of U.S. companies and global financial markets. In this post, we discuss the genesis of European banks’ dollar funding gap problem and the steps taken by central banks to help fill this gap. While we focus on European banks in this post, our discussion applies more generally to global banks that rely on short-term, foreign currency borrowings.

Tax Hike Indigestion in France - French president Francois Hollande wants to set the top tax rate in France at 75%, for those who make over €1,000,000 a year. As a result "Les Riches" Have Tax Indigestion and are looking to move outside France. “We’re getting a lot of calls from high earners who are asking whether they should get out of France,” said Mr. Grandil, a partner at Altexis, which specializes in tax matters for corporations and the wealthy. “Even young, dynamic people pulling in 200,000 euros are wondering whether to remain in a country where making money is not considered a good thing.” Because there are relatively few people in France whose income would incur such a tax — perhaps no more than 30,000 in a country of 65 million — the gains might contribute but a small fraction of the 33 billion euros in new revenue the government wants to raise next year to help balance the budget.

France's François Hollande Will Test The Laffer Curve - Apparently, Socialists do raise taxes. In France, some of the rich are packing their bags. Here is a quote from this article: "President François Hollande is vowing to impose a 75 percent tax on the portion of anyone’s income above a million euros ($1.24 million) a year.  “We’re getting a lot of calls from high earners who are asking whether they should get out of France,”  “Even young, dynamic people pulling in 200,000 euros are wondering whether to remain in a country where making money is not considered a good thing.” Way back in 1999, Austan Goolsbee wrote an important paper studying how the rich respond to higher taxes. Here is his paper's abstract. "This paper examines the responsiveness of taxable income to changes in marginal tax rates using detailed compensation data on several thousand corporate executives from 1991 to 1995. The data confirm that the higher marginal rates of 1993 led to a significant decline in taxable income. Indeed, this small group of executives can account for as much as 20% of the aggregate change in wage and salary income for approximately the one million richest taxpayers; one person alone can account for more than 2%. The decline, however, is almost entirely a short-run shift in the timing of compensation rather than a permanent reduction in taxable income.

France Collects a Financial Non-transaction Tax - Following the 2008 financial sector collapse, Europeans have been slowly moving, somewhat in concert, towards new financial transactions taxes.   Last week, France jumped the gun:  it initiated a package of financial transaction taxes all on its own that includes a novel tax on high frequency stock orders. The high frequency tax applies to traders that (1) use computer algorithms to determine the price, quantity, and timing of their orders (2) use a device to process these orders automatically, and (3) transmit, modify, or cancel their orders within half a second (the half a second has been set by draft administrative guidance).  The high frequency tax is .01% on the amount of stock orders modified or cancelled that exceeds 80% of all orders transmitted in a month (under the draft administrative guidance).  In effect, France now may tax orders that are not filled.  It has created a “non-transaction” tax. France’s high frequency tax would effectively limit a variety of “layering” techniques, which high frequency traders sometimes use to manipulate the market.  For instance, traders may enter multiple fictitious orders to drive a stock price up or down, and then cancel their orders.  Because the high frequency tax targets activities that may harm markets, but leaves other activities untaxed, the levy is more focused than a conventional financial transactions tax.  

French Central Bank Admits the Obvious: France Back in Recession - For those who who view matters on a practical basis, France has been in recession the entire year. For those who need to see two quarters of negative growth first, France slides back in recessionFrance is headed back into recession for the second time in just over three years, the country's central bank warned on Wednesday.The Bank of France predicted a 0.1 percent contraction in gross domestic product (GDP) for the third quarter of this year, an outcome which, if confirmed, would follow a similar fall in output for the three months to June. Economists define a recession as two consecutive quarters of negative growth. The economy was flat in the first three months of 2012 but the deteriorating outlook has forced the Socialist government to cut its growth forecast for the full year from 0.4 to 0.3 percent, and for 2013 from 1.7 to 1.2 percent.

Italy Sovereign Debt Held by Domestic Banks Rises to Record - Italian banks’ purchases of the country’s sovereign debt rose to a record in June as concerns that Italy may be forced to seek a bailout discouraged foreign investors. Banks boosted their holdings of Italian government bonds by about 14 billion euros ($17 billion) in June to 316 billion euros, according to a Bank of Italy report today. Italian banks “have been holding the fort at government debt auctions in the absence of foreign investors,” “The run on the bond markets of Spain and Italy continues unabated and domestic banks have been left to pick up the slack. The question is how much longer they will be able to plug the gap if foreign investors continue to steer clear of Spanish and Italian debt.” Italian banks have borrowed more than 283 billion euros from the European Central Bank and are investing part of the liquidity obtained at lower interest rates in short-term government bonds that offer higher yields. Banks increased their holdings of the nation’s bonds by about 78 billion euros in the first half.

Goldman Sachs Cut Italy Debt Holdings 92% Last Quarter - Goldman Sachs cut its holdings of Italian sovereign debt by 92 percent in the second quarter after boosting them in the first three months of the year. “Market exposure” to Italian government bonds fell to $191 million at the end of June from $2.51 billion at the end of March, the New York-based firm said in a quarterly regulatory filing today. Goldman Sachs also increased its credit-derivative positions on Italy in the quarter, pushing its total market exposure to Italian government and non-government securities to negative $977 million from positive $2.4 billion in March. Goldman Sachs discloses the firm’s credit and market stance for Italy, Greece, Ireland, Portugal and Spain each quarter because those five countries are viewed by investors as Europe’s riskiest. The filing today showed that the firm’s total market exposure to the five countries also swung to a negative $977 million as of June from a positive $2.68 billion three months earlier as the bank reduced its position in bonds and stocks and purchased more credit derivatives.

Put the ball in the ECB's court - BREUGEL'S blog rounds up a number of blog opinions on the European Central Bank's move toward explicit conditionality in its policy making, like so: In the Q&A session following his Introductory Statement Mario Draghi said that “the guidance that we have given to the committees of the ECB differs from the previous programme” [since] “we have explicit conditionality here”. “The first thing is that governments have to go to the EFSF”, but “to go to the EFSF is a necessary condition, but not a sufficient one”. “When governments have actually fulfilled the necessary conditions, namely have undertaken fiscal and structural reforms and applied to the EFSF with the right conditionality. At that point, we may act, if needed.” As I've written before, this seems like a dangerous policy to me, particularly given the already large democratic deficit in the European Union. Having elected governments under the thumb of all-powerful Frankfurt bankers and economists could prove highly corrosive to the EU's political legitimacy.

ECB’s Rescue Worsens Spain, Italy Maturity Crunch: Euro Credit --European Central Bank President Mario Draghi’s bid to bring down Spanish and Italian yields may spur the nations to sell more short-dated notes, swelling the debt pile that needs refinancing in the coming years. Yields on Italian and Spanish two-year notes plunged after Draghi said on Aug. 2 the ECB may buy debt on the “short-end of the yield curve” as part of a broader crisis-fighting plan. The gap between Spain’s two-year and 10-year yields rose on Aug. 6 to the widest in at least two decades, while the spread between similar Italian securities also approached a record. The average maturity of Spanish debt is the shortest since 2004 as Spain, like Italy, hasn’t issued 15- or 30-year bonds all year. As Prime Ministers Mario Monti and Mariano Rajoy fight to avoid bailouts that may threaten the euro’s survival, the ECB’s plan risks adding to pressure on the two nations’ treasuries.

Paul de Grauwe: The ECB Can Save the Euro – But It Has To Change Its Business Model -- Paul De Grauwe is a member of the INET Council on the Euro Zone Crisis and a professor at the London School of Economics. In this article prepared for INET, he discusses thoughts that he presented to the Council members on the role of a central bank as lender of last resort and how the ECB and European institutions must respond to stabilize and ward off a self-fulfilling default crisis in the sovereign debt markets of key euro zone countries. Prof, De Grauwe raises very important questions on the institutional structure of Europe and how it must be modified to fortify the euro zone. He focuses on the business model and social role of the ECB. In addition he raises provocative and deeper questions about the role of central banks in society. Embedded in his analysis are a series of profound social questions that are rarely examined: Why are central banks reluctant to buy sovereign debt in troubled countries but willing to lend to insolvent financial institutions? Why do central banks worry can about moral hazard vis-à-vis fiscal authorities and at the same extend credit freely to banks to alleviate their stress? Do central banks pick winners and losers? If so, is whom they are picking helpful to society?

Spanish unions tell king bailout would be suicidal -- Union leaders told King Juan Carlos on Tuesday they opposed an international bailout for Spain and said government austerity measures to reduce the bloated deficit are suicidal for the country. Conservative Prime Minister Mariano Rajoy last week admitted that Spain might ask for outside help but said he first wanted to know what its European partners and the European Central Bank would demand in return. The government has already admitted it needs help by asking for a loan from its eurozone partners of up to €100 billion ($124 billion) for a handful of its banks burdened by toxic assets following the collapse of the a real estate bubble in 2008. Spain's borrowing costs have been soaring in recent months as investors expressed a loss of faith in the government's ability to manage its finances. The situation drove the interest rate for the benchmark 10-year bond above 7 percent. Such a rate is deemed untenable over the long term and pushed countries such as Greece and Ireland and Portugal to seek full rescue packages. In a statement issued after a near hour-long meeting with the king on Tuesday, the General Workers Union and Workers Commissions said they are opposed to another rescue package because its conditions would likely throw the country further into recession and increase the hardship for Spaniards already suffering from austerity measure and reforms take over the past two years.

Spanish Industrial Production Declines for 10th Straight Month - Spanish industrial production fell for a 10th straight month in June as the recession in the euro area’s fourth-largest economy worsened amid more austerity measures to stem a surge in borrowing costs. Output at factories, refineries and mines adjusted for the number of working days, fell 6.3 percent from a year earlier, after declining a revised 6.5 percent in May, the National Statistics Institute in Madrid INE said in an e-mailed statement today. Economists forecast an annual drop of 6.2 percent, according to the median of eight estimates in a Bloomberg News survey. Prime Minister Mariano Rajoy last month gave up on the prospect of an economic recovery next year as he increased to more than 100 billion euros ($124 billion), or 10 percent of annual output, the amount of budget cuts and tax increases planned through 2014 to tackle the euro area’s third-largest budget gap. Spain’s recession intensified in the second quarter, while unemployment reached 24.6 percent, the highest in the country’s 34 years of democratic history. The number of bankruptcies increased 28.6 percent in the three months through June from a year ago, INE said on Aug. 6.

German Factory Orders Fall Twice as Much as Forecast - German factory orders declined more than twice as much as economists forecast in June as sales to euro-area countries slumped. Orders, adjusted for seasonal swings and inflation, dropped 1.7 percent from May, when they rose 0.7 percent, the Economy Ministry in Berlin said today. Economists forecast a 0.8 percent decline, according to the median of 35 estimates in a Bloomberg News survey. From a year earlier, orders fell 7.8 percent when adjusted for work days. Today’s report is the latest to show Europe’s largest economy is cooling as the sovereign debt crisis erodes demand for its goods, hurting earnings at companies including Bayerische Motoren Werke (BMW), Daimler AG and Siemens AG. While the Bundesbank last month estimated moderate growth in the second quarter, aided by domestic spending, the manufacturing industry is contracting and business confidence fell for a third straight month in July. 

German June Industrial Production Fell on Construction Output -German industrial production declined in June, led by a drop in construction output. Production fell 0.9 percent from May, when it gained a revised 1.7 percent, the Economy Ministry in Berlin said today. Economists had forecast a drop of 0.8 percent, the median of 34 estimates in a Bloomberg News survey showed. Production fell 0.3 percent from a year earlier when adjusted for working days. Today’s report is the third this week to signal Europe’s largest economy is cooling as the sovereign debt crisis erodes demand for its goods. German factory orders declined twice as much as economists had forecast in June and exports dropped, data showed yesterday and today. While the Bundesbank last month estimated moderate growth in the second quarter, aided by domestic spending, the manufacturing industry is contracting and business confidence fell for a third straight month in July. 

The German Economy Caves, And Eurozone Bailouts Take On New Dimensions » Last year, German exports rode to a new record, jobs were being created in massive numbers, real wages rose, housing and real estate boomed, the federal budget was nearly balanced, and consumers felt good and spent money. There were moments in 2012 that made people dream of a repeat performance—despite the havoc that the Eurozone debt crisis has been wreaking. Whatever was happening, Germany would be able to make up for declining exports to the Eurozone with strong exports to Asia and the US. Internal demand would remain solid. And this illusion of durable economic strength and fiscal virtue has tainted the discussion about saving the euro, bailing out debt-sinner countries in return for austerity measures, and keeping the European Central Bank in check. But now the crisis has moved from Germany’s front yard to its doorstep and is about to enter its living room.  Auto sales got clobbered in July, dropping by 5% from July last year, and by 16.5% from June, knocking year-to-date sales, which had been holding up well, into the red (-0.1%). Auto sales have been a fiasco in the Eurozone for a while. In Greece, where they’d been plummeting for years, they plummeted again in the first half, by 41.3%! In Italy, by 19.7%, in France by 14.4%, in Belgium by 12.7%. But until July, Germany had been spared. No more.

Europe: Germany’s judgment day - The date for Germany’s day of judgment on the eurozone’s €500bn rescue fund is fixed. On September 12, eight scarlet-robed judges will solemnly file into their courtroom in the city of Karlsruhe – former seat of the grand dukes of Baden, on the east bank of the Rhine – and announce its fate. It will be a seminal moment, not just in the struggle to sustain the euro and stabilise the most debt-laden economies in the 17-nation eurozone that has lasted almost three years. It may also define the relationship between Germany and the rest of its partners in Europe for the foreseeable future. On the face of it, the judges in the federal constitutional court are supposed simply to decide whether to issue an injunction to delay the establishment of the European Stability Mechanism while they ponder its legality according to the Grundgesetz (“basic law”), as the nation’s constitution is known. They have to do the same for the fiscal stability pact, the parallel treaty agreed in January that lays down strict budget rules for the common currency members. In effect, however, the five men and three women in Karlsruhe may be sealing the fate of the euro. The ESM cannot come into existence unless and until Germany, its main financier, ratifies the treaty.

German Opposition Calls for Wealth Tax - SPIEGEL ONLINE: In France, it featured as one of the biggest political platforms in François Hollande's campaign to become president. Now, calls are growing in Germany to introduce a wealth tax in order to combat a national budget deficit that has swelled during the economic crisis. The opposition center-left Social Democrats and the Green Party are proposing that Germany reintroduce a wealth tax that the country eliminated in 1997. Under the proposal, a 1 percent annual tax would be applied to Germans with assets exceeding €2 million (about $2.5 million). The tax allowance would be double that figure for married couples, Norbert Walter-Borjans of the Social Democratic Party (SPD), who is finance minister for the state of North Rhine-Westphalia, said on Wednesday. With the tax, the politician said, Germany's wealthiest people would play a role in consolidating the country's national budget. At only 1 percent, he added, the tax would not present a major burden on the rich. Walter-Borjans said his state, along with Rhineland-Palatinate, Baden-Württemberg and Hamburg -- all governed by the SPD or Greens -- planned to introduce an initiative in the Bundesrat, Germany's upper legislative chamber representing the interests of the states, where the opposition also holds a majority of votes, after the summer recess.

Breaking up the euro area: The Merkel memorandum - ANGELA MERKEL, the German chancellor—and also, in effect, the euro area’s boss—has always insisted that she wants to preserve the euro area in its current form. But as the euro crisis intensifies and the potential bills for Germany mount, she would be imprudent not to be considering a Plan B. Drafted in utmost secrecy by a few trusted officials for the chancellor’s eyes only, this is what the memorandum outlining a contingency plan might say.

Germany Considers Holding EU Referendum - Chancellor Angela Merkel wants Europe to move toward an ever closer union in a bid to solve the euro crisis. But she is already pushing at the limits of what is possible under the constitution. The debate about holding a referendum on transferring power to Brussels is gathering momentum in Germany. Indeed, the chancellor is in a tricky position at the moment, as she fails to get the euro crisis under control. Of course, the Economist's notion of a secret plan to break up the euro zone is purely fictitious. But it fits into the current debate, where more and more politicians from Germany's coalition government are talking about radical steps to solve the euro crisis.  Officially, though, Merkel's line is that she wants more Europe, not less. In the chancellor's bid to save the common currency, she is willing to go to the very limits of what is permissible under the German constitution. That was made clear by her support for the permanent euro rescue fund, the European Stability Mechanism (ESM), and her pet project, the fiscal pact. But Merkel still wants more. "We need a political union," she recently said on German public television station ARD. "That means we have to give up further competencies to Europe, step by step, in an ongoing process."

German economy faces recession fear in threat to euro zone (Reuters) - Three years into the euro zone debt crisis, the gravity-defying German economy has stalled and some fear it could fall into recession in the second half of this year. Over the past week, Europe's largest economy has been hit by a series of increasingly gloomy data releases, showing declines in manufacturing orders, industrial output, imports and exports. In an unusually stark warning on Friday, the economy ministry said these figures and a sharp drop-off in business sentiment in recent months pointed to "significant risks" to Germany's outlook. Next Tuesday, gross domestic product data for the second quarter is expected to show modest growth of about 0.2 percent. But the danger of recession in the second half of the year is growing, leading economists say, at a time when Europe's single currency bloc desperately needs growth from its economic powerhouse. The slowdown carries risks for German Chancellor Angela Merkel, who will seek a third term in an election one year from now, and could influence public opinion on her crisis-fighting strategy especially if a nascent rise in unemployment accelerates. "The German economy is losing momentum - there's no doubt about that - and in the third quarter the economy will shrink compared to the second quarter,"

Germany Seeks Delay Of New Bailout Tranches For Greece - A growing number of Eurozone countries, led by Germany, are reluctant to release the first two loan tranches of the second bailout package to Greece, as they doubt about Athens' commitment to reform, according to senior Eurozone officials. The International Monetary Fund is also sceptical, fearing that the baseline scenario of the bailout is no longer realistic and that another debt restructuring may be inevitable, the top-ranking officials told MNI. The two big tranches of E31.5 billion each are "a point of worry for the majority of the Eurogroup finance ministers, not just the hardliners," one source said. "We are talking about over E60 billion to be given in a period of a few months," he explained. "The majority of the Eurozone members are uncomfortable because of the complete derailment of the Greek program, the political instability, and the fact that we really don't believe in the commitments anymore."

Athens set to purge civil service - Greece is preparing a purge of civil servants deemed to have stepped out of line as it yields to international lenders’ pressure to be more pro-active in cutting public sector jobs. Those targeted will include senior officials said to have failed to cut pay levels, and civil servants with a disciplinary record for breaches such as financial malpractice.The move follows the rejection by the EU and International Monetary Fund of the coalition government’s proposal to reduce the bloated public sector payroll through natural attrition and a policy of hiring one new official for every 10 who retire. As a result, Athens is renewing its commitment to last year’s agreement to axe 150,000 jobs in the public sector by 2015 (about 20 per cent of the total), according to officials struggling to meet an EU-IMF deadline to identify €11.5bn of fresh spending cuts by the end of August.  The decision by Antonis Samaras, the centre-right prime minister, to pursue civil servants failing to toe the line, taps into widespread popular resentment of their status at a time of record private sector unemployment.

Squeezed by debt crisis, Greeks ditch cars for bikes -- Greece's dire economic plight has forced thousands of businesses to close, thrown one in five out of work and eroded the living standards of millions. But for bicycle-maker Giorgos Vogiatzis, it's not all bad news. The crisis has put cash-strapped Greeks on their bikes - once snubbed as a sign of poverty or just plain risky - and Greek manufacturers are shifting into fast gear. The high cost of road tax, fuel and repairs is forcing Greeks to ditch their cars in huge numbers. According to the government's statistics office, the number of cars on Greek roads declined by more than 40 percent in each of the last two years. Meanwhile, more than 200,000 bikes were sold in 2011, up about a quarter from the previous year. Shops selling bicycles, and equipment ranging from helmets to knee pads, are spreading fast across the capital, popping up even between souvenir shops on the cobbled pedestrian streets of the touristy Plaka district.

Greek jobless rate hits new record, more pain ahead (Reuters) - Greece's jobless rate climbed to a new record in May, underlining how austerity prescribed to slash deficits and keep bailout funds flowing is hitting the economy on which recovery depends. Latest data on Thursday showed the jobless rate climbed to 23.1 percent, with nearly 55 percent of those aged 15-24 out of work, a desperate situation that fed into the popularity of anti-bailout parties in Greek elections this year. The gloomy data coincided with news that the government plans to revive a labor reserve measure targeting 40,000 public servants for eventual dismissal, in a drive to achieve 11.5 billion euros in savings promised to international lenders. Government officials citing this scheme said Athens also intends to shed tens of thousands of temporary contract workers by streamlining its needs across ministries and state entities. Unemployment in Greece is already more than twice the average rate in the 17 countries sharing the euro and nearly as bad as in Spain where the jobless rate registered 24.6 percent in the second quarter. Greece's statistics service reported that unemployment climbed to 23.1 percent in May from 22.6 percent in April.

Austerity's Cost: Abandoned Children in Europe - As the euro zone debt crisis deepens and austerity measures take their toll across Europe, the number of young children and babies abandoned across the region has increased, according to local charities. A "baby hatch" in Hamburg, Germany.The rise in the abandonment of infants across Europe is most visible in the spread of "baby hatches" or "boxes" across Europe, where unwanted infants are left anonymously. The phenomenon was previously more prevalent among immigrants, but it is becoming more widespread among financially desperate members of the local population.The hatches are sensor-activated so when a baby is placed, an alarm is activated and a carer comes to collect the child. Despite the practice being widely viewed as contravening the 1953 European Convention on Human Rights, of the 27 EU member countries, 11 countries still have "baby hatches" in operation, including Germany, Italy and Portugal.  In those countries where hatches are illegal, the number of infants abandoned in hospitals, clinics and churches has also risen, raising concerns among European charities, the UN and the European Commission that austerity measures and increasing social deprivation are the catalyst for the rise in child abandonment. 

U.K. Posts Record Trade Deficit - —The U.K. has posted its largest overall trade deficit since comparable records began 15 years ago, indicating weak demand for British goods, both in Europe and beyond, is hampering the country's efforts to trade its way out of recession. The U.K.'s world goods trade deficit widened more than expected to £10.1 billion pounds ($15.82 billion) in June from £8.4 billion in May, the biggest deficit since September 2011, figures from the Office for National Statistics showed Thursday. The overall trade deficit, even including the slightly larger surplus in the trade of services, grew to £4.3 billion in June from £2.7 billion in May, the largest deficit since comparable records began in 1997. The overall trade deficit for the second quarter also grew to a record £28.3 billion, the ONS said.  Exports of goods fell 8.4% in June from May to £23.5 billion, driven by a record monthly fall in foreign oil sales, particularly to non-European Union countries including the U.S., a drop in foreign sales of chemicals, and weaker exports of cars including to China. By contrast, imports fell just 1.2% to £33.6 billion in June on lower purchases of intermediate goods, oil, and silver.

British Regulators Plan Changes to Libor Oversight — The system at the center of a rate-rigging scandal is set to be overhauled as regulators respond to public anger over the manipulation of the London interbank offered rate, or Libor. Martin Wheatley, the regulator in charge of a plan backed by the British government to restructure the rate-setting process, outlined steps on Friday that could lead to wholesale changes to Libor, which is used as a benchmark rate for more than $360 trillion of financial products, including mortgages and loans. The changes may include the replacement of the current system, which is overseen by the British Bankers’ Association, a trade body, with one overseen by government officials. They will also most likely make it a criminal offense to manipulate benchmark rates.

FSA's brilliant ideas to fix LIBOR  - While the media has been focused on the LIBOR setting scandal, no one seems to be asking the question: why would banks want to contribute their LIBOR numbers at all? If you run a bank you have to pay your treasurer to make up a bunch of numbers every day and send them out to be scrutinized. Yes, it's multiple numbers - by currency, by maturity. The media, the regulators, and clients will all read your contributions and compare them to other banks. Chances are that once in a while your numbers will be considerably higher or lower than the average and you will be accused of wrongdoing. It's just the law of random numbers - sooner or later you'll be on the tail of the distribution. Of course your treasurer can't be bothered with making up numbers daily, so she will delegate it to some junior folks. This is a serous headache. Most businesses want to get paid for their headaches.  Tons of downside risk with no upside opportunity. It is therefore likely that many banks will simply pull out of this exciting venture going forward, which could turn out to be a big embarrassment for BBA and EBF. So these organizations have been pushing regulators to force banks to submit the numbers and add more banks to the list. Make it the "cost of doing business". Seems the regulators may be receptive to that idea and are working on some "creative" solutions.

Lloyd Online Fraud Chief Admits 2.4M Fraud -- A former Lloyds bank boss in charge of online security has admitted a £2.4m fraud. Jessica Harper took the money over a four-year period while working as head of fraud and security for digital banking at Lloyds Banking Group. Harper stood in the dock at Southwark crown court and admitted a single charge of fraud by abuse of position through submitting false invoices to claim payments totalling £2,463,750. She also admitted a single charge of transferring criminal property, the money, which she had defrauded from her employers. The 50-year-old, from Croydon, south London, carried out the fraud between 28 December 2007 and 21 December 2011, the court heard. Antony Swift, prosecuting, did not open the facts of the case.

Fraud is Easy to Do (Doesn’t Hurt if You Work in Fraud Prevention) - The former interim head of fraud and security for digital banking at Lloyds Banking Group…plead guilty to fraud and money-laundering today, according to a statement from the Crown Prosecution Service. Jessica Harper submitted false invoices between 2007 and 2011 totaling $3.76 million, and used the funds to help family members purchase property and to renovate a second home in France, according to press reports. “Jessica Harper has today been convicted of the type of crime the bank employed her to combat,” Sue Patten, head of the CPS Central Fraud Division. the statement. “Harper was expected to safeguard the financial interests of the bank. Instead, she submitted false invoices totaling more that £2.4 million over a period of four years. She has also pleaded guilty to laundering the funds of the fraud.” Ms. Harper will be sentenced next month, and faces a prison sentence of as much as 24 years. For those of you who don’t work in fraud prevention, and do believe us when we say that fraud is easy to you, we’d like to direct you to this helpful web video from Brian Fox, founder and chief marketing officer at

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