Fed's Balance Sheet Shrinks Slightly in Latest Week The Fed's asset holdings in the week ended Aug. 15 were $2.835 trillion, down from $2.858 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities fell to $1.646 trillion from $1.652 trillion in the previous week. The central bank's holdings of mortgage-backed securities edged up to $854.16 billion from $853.49 billion a week ago. The Fed's portfolio has tripled since the financial crisis of 2008 and 2009 as the central bank bought government bonds and mortgage-backed securities in an effort to keep interest rates low and to stimulate the economy. Thursday's report showed total borrowing from the Fed's discount lending window was $3.61 billion on Wednesday, down from $3.63 billion a week earlier. Commercial banks borrowed $16 million from the discount window, up from $1 million in the previous week. U.S. government securities held in custody on behalf of foreign official accounts totaled $3.553 trillion, compared with $3.537 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts was $2.860 trillion, an increase from $2.845 trillion a week earlier. Holdings of federal agency securities rose to $693.03 billion from $691.91 billion in the prior week.
Fed Hawks Speak Out Against QE3 - The Federal Reserve's "hawks" are speaking out against additional action by the central bank to spur the economy. The Fed has moved despite this group's opposition before. Thus, the comments now don't represent a signal from the central bank that it is backing away from its statement earlier this month that it might act. But the remarks do highlight the complicated decision Fed policy makers face as they consider whether to launch a new bond-buying program, known as quantitative easing, at their meeting next month. Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said in an interview Wednesday with The Wall Street Journal that additional action by the Fed would be of minimal long-term benefit to the economy. Moreover, he said, the Fed could do little on its own to address problems out of its control which are holding back growth, including public uncertainty about government budgets in Europe and the U.S.He cited research by Johns Hopkins economist Jonathan Wright which shows the effects of Fed bond-buying, though initially stimulative, tend to wane within just a few months. Dallas Fed President Richard Fisher, in an interview Thursday, expressed similar skepticism about the efficacy of Fed action. He said businesses already have ample access to cheap credit, and that they are reluctant to borrow, hire and invest for other reasons, including concerns about regulation and taxes. With those uncertainties holding back business, he said, "I don't see any virtue to further quantitative easing."
The Jackson Hole "fix" is not coming - Expectations of a new asset purchase program by the Fed continue to persist as various pundits anticipate its unveiled at the Jackson Hole gathering. CNBC: - Ebullient stock markets are increasingly pricing in the possibility that the Federal Reserve will soon unveil another round of monetary stimulus, Pimco Managing Director Neel Kashkari told CNBC Wednesday. “The Fed is really in a box right now,” “Those indicators have already priced in … that the Fed should act,” Kashkari said. As a result, the fund manager suggested Fed Chairman Ben Bernanke’s “hands appear to be tied” ahead of a closely watched speech on the economic outlook later this month in Jackson Hole, Wyo. Market participants are looking for a fix, a repeat of the "high" Bernanke delivered at Jackson Hole in 2010 when QE2 was introduced. Markets however are in for a major disappointment because no outright asset purchases will be announced. There are multiple reasons for this, including the fact that real rates are now deep in the negative territory (as discussed here) and the policy as expressed in long-term real rates is far more accommodative than it was in 2010. But what makes 2012 entirely different is that the key concern that pushed the Fed into asset purchases in 2010 no longer exists. The summer of 2010 was marked by renewed fears of deflation driven by credit contraction. As discussed before, just the opposite is true in 2012 - credit is expanding at a decent pace. The chart below compares the trends now and in 2010.
Fed’s Kocherlakota Is OK With Fed Offering Rate Guidance - A key U.S. central bank official said he is comfortable with the idea of the central bank predicting very low rates for some time to come, although he added he would prefer a shorter-term view than the one now officially held by the central bank. Federal Reserve Bank of Minneapolis President Narayana Kocherlakota told an audience in Williston, N.D., Thursday the Fed’s decision to offer a conditional pledge to keep rates very low until at least late 2014 is “a reasonable attempt” to provide guidance. But Mr. Kocherlakota called any such action by the Fed a “forecast” and not a commitment. He also said had it been entirely up to him, “I would not have chosen to put that date as far out.”
Fed's Fisher Reluctant To 'Bail Out White House' With More QE -- It was not enough that the Fed's Richard Fisher was 'allowed' on CNBC this afternoon to expropriate himself and his merry-Fed-men from his 'fanatical' colleague nemesis Rosengren; but Maria B., for one glorious moment, asked a question so sensible it was stunning: "Is The Fed Bailing Out The White House?" The notably business-man-background Fisher was wonderfully heretical in explaining that additional stimulus would have little impact, that the Fed's action would indeed 'look political', and that "US lawmakers need to get their fiscal act together." While he doesn't see a high likelihood of a recession in 2013, he comprehends clearly the wait-and-see 'defensive crouch' that businesses are in given the huge uncertainty. On a slow day, with so much print-and-it's-all-fixed hope, the clarifying vision of at least one man on the FOMC is perhaps worth holding onto.
Fed's Fisher says more policy easing won't help on jobs (Reuters) - The president of the Dallas Federal Reserve Bank, Richard Fisher, on Wednesday repeated his view that more monetary policy easing will not help boost employment and could even hurt the U.S. economy because it could exacerbate market uncertainty. Fisher, an inflation hawk, has remained a staunch opponent of more policy stimulus even as some policymakers at the U.S. central bank, including San Francisco Fed President John Williams, say the Fed should act to try to push down stubbornly high unemployment. In an interview with CNBC, Fisher reiterated his call for lawmakers to provide more "fiscal clarity," giving U.S. businesses the certainty he says they need to make decisions about spending and hiring. "They are the only game in town," Fisher said, referring to members of the U.S. Congress. "They have to do something."
Will a more expansionary monetary policy give rise to a bubble? - I’ve been seeing a lot of this question in my Twitter feed. Here are a few points:
- 1. If a more expansionary monetary policy helps an economy recover, yes it may well raise the risk of a later bubble. We should then be cautious, but that is no reason to turn down the prospect of a recovery. Anything leading to recovery could have a similar risk.
- 2. There are already plenty of reserves in the system and there is plenty of room for credit to expand over its current level. Maybe we don’t know what triggers bubble-inducing investment behavior, but why should raising ngdp expectations and realities raise the risk of a bubble, if not for the factor cited in #1?
- 3. Arguably a flat yield curve induces a quest for higher returns elsewhere or in more dubious investment areas. Yet the flattening yield curve did not follow quickly from the massive injection of reserves. Rather it evolved slowly as prospects for real recovery deteriorated and the long-run outlook for the advanced economies turned down. Real factors drove the flattening, and if monetary expansion brought a bit of recovery it likely would unflatten that curve a bit. That could well lower the risk of a bubble.
Why are Most Advocates of Unconventional Monetary Policy so Conventional ? - I associate the phrase "unconventional monetary policy" with Joe Gagnon. Here we were in 2008 with the conventional monetary instrument -- the target Federal Funds rate -- pedal to the metal and the economy stalling. Many people said it was time for fiscal stimulus (I think Gagnon agreed). He also suggested unconventional monetary policy, by which he really meant unconventional policy by the Fed, since the point wasn't changing the money supply but rather changing demand for other assets. The Fed can create Fed liabilities (high powered money) and buy some assets driving up their prices. To Gagnon the point was the assets side of the Fed's balance sheet. His proposal was to buy a whole whole lot ($5 trillion worth). That isn't going to happen, so his new proposal is to buy assets which the Fed can buy which are perceived to be risky and are not close substitutes for money, that is Federal Agency issued mortgage bonds. Oddly he is, as far as I can tell, the only advocate of unconventional monetary policy who focuses on which assets the Fed should buy (I don't count myself and Brad DeLong occasionally sounds like Gagnon). Some other economists (I am thinking of Duncan Black) propose that the Fed ignore the Federal Reserve act and do things which it is clearly not allowed to do. Many more discuss unconventional monetary policy exactly as if it were conventional monetary policy. Why ?
Wray on Monetary Policy and Financialization - Randall Wray joined Suzi Weissman for radio KPFK’s Beneath the Surface to discuss monetary policy, financial fraud, and a number of other issues. The interview kicked off with Wray explaining his skepticism of the effectiveness of monetary policy, and in particular of quantitative easing, under current conditions, touching also on the question of why this long-term bias in favor of monetary over fiscal policy has developed. The interview turned to LIBOR and the long string of recent financial scandals and outright fraud, with Wray tying it all to a broader (and growing) financialization of the economy. Elaborating on the dominance of the FIRE sector in our economy, he discussed the increasingly fuzzy boundaries between, say, finance and industry. Listen to the interview here.
FRBSF Economic Letter: Monetary Policy, Money, and Inflation - Textbook monetary theory holds that increasing the money supply leads to higher inflation. However, the Federal Reserve has tripled the monetary base since 2008 without inflation surging. With interest rates at historically low levels and the economy still struggling, the normal money multiplier process has broken down and inflation pressures remain subdued. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Western Economic Association International on July 2, 2012.
Central Bank Balance Sheets and Inflation -(4 graphs) Given several prominent policymakers have worried about central bank actions leading to high inflation, (e.g. Representative Ryan) it seems reasonable to see how expansions in central bank balance sheets correlate with inflation. The first figure is an update on the figure I plotted a year and half ago . I will leave readers to see if they can discern a strong and positive correlation.
Fed’s Kocherlakota Highlights Jobs-Inflation Conflict - The Federal Reserve may need to be willing to let inflation rise above its 2% target to reduce “quite elevated” levels of unemployment, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Wednesday. In response to an audience question following a speech in Minot, N.D., on central bank structure, the official noted the central bank has mandates both to keep prices contained and to promote job growth, and he noted there could sometimes be tradeoffs when there are large imbalances at play. “In a context, in a world, where unemployment is as high as it is,” allowing inflation to tip over the current central bank target of 2% “could well be part of an appropriate policy,” Kocherlakota said. The central bank may have to “give a little bit on the inflation front to do better on the employment front,” although importantly, the central banker didn’t predict this scenario will come to pass.
Key Measures show slowing inflation in July - This is the last inflation report before the September FOMC meeting (the August report will be released September 14th and the FOMC meeting is Sept 12th and 13th). The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning: According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.5% annualized rate) in July. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.3% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report. Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers was virtually flat at 0.0% (0.6% annualized rate) in July. The CPI less food and energy increased 0.1% (1.1% annualized rate) on a seasonally adjusted basis. This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.3%, the trimmed-mean CPI rose 2.0%, and core CPI rose 2.1%. Core PCE is for June and increased 1.8% year-over-year. These measures suggest inflation is now at the Fed's target of 2% on a year-over-year basis and it appears the inflation rate is slowing. On a monthly basis (annualized), two of these measure were well below the Fed's target; trimmed-mean CPI was at 1.3%, Core CPI at 1.1% - although median CPI was at 2.5% and and Core PCE for June was at 2.5%.
Tame Inflation Gives Fed Room to Focus on Demand - To no one’s surprise, Wednesday’s consumer price report showed continued muted inflation. That fact gives the Federal Reserve more room to focus on its other mandate: reducing unemployment. The consumer price index was flat in both July and June, and the core index, which excludes food and energy, rose only 0.1% in July down from the 0.2% in June. Yearly inflation is just 1.4% for all consumer goods and services and 2.1% for core items. Those rates are well within the Fed’s comfort zone and likely to remain so. True, some inflation hawks warn the huge size of the Fed’s balance sheet will trigger future price pressures. But it is hard to see how businesses can raise prices when they are fighting desperately for customers.
Two Measures of Inflation: New Update - The BLS's Consumer Price Index for July, released yesterday, shows core inflation fractionally above the Federal Reserve's 2% target at 2.10%. Core PCE, at the end of last month, is below the target at 1.80%. The Fed is on record as using Core PCE as its inflation gauge: The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. [Source] The October 2010 core CPI of 0.61% was the lowest ever recorded, and two months later the core PCE of 1.08% was an all-time low. However, we have seen a significant divergence between the headline and core numbers for both indicators, especially the CPI, at least until a few months ago, when energy prices began moderating. The latest headline CPI and PCE are both well off their respective interim highs set in September. This close-up comparison gives us a clue as to why the Federal Reserve prefers Core PCE over Core CPI as an indicator of its success in managing inflation: Core PCE is lower than Core CPI and less volatile. Given the Fed's twin mandates of price stability and maximizing employment, it's not surprising that the less volatile Core PCE is their metric of choice. The Bureau of Labor Statistic's Consumer Price Index and The Bureau of Economic Analysis's monthly Personal Income and Outlays report are the main indicators for price trends in the U.S. The chart below is an overlay of core CPI and core PCE since 2000.
Fed Watch: Data Dump - We have seen a steady flow of data the past week, but I can't say that in sum it moves me much from my baseline as described in my last post. Starting with today's CPI release, Reuters has this to say: Consumer prices were flat in July for a second straight month and the year-over-year increase was the smallest in more than 1-1/2 years, giving the Federal Reserve room for further monetary easing to tackle stubbornly high unemployment. I would be a little nervous about reading too much into the drop in headline inflation. True enough, core edged up just 0.1%, but looking at the year-over-year trends is important at this juncture: I think the Fed will see the flattening out of core inflation as a sign that the hawk's obsessive fear of exploding inflation was once again proved incorrect. That said, the opposite is true - even the doves will have a hard time fearing falling inflation unless the shift in headline is confirmed by additional declines in the core. Yes, you can make the argument that in sum this confirms the Fed's forecast that inflation will remain at or below the 2% target, which in turn justifies additional easing. If I was on the FOMC, I would make that argument. Also note that gasoline prices are headed back up, which will reverse some of the recent decline in headline inflation: While normally I would say the rise in oil/gas costs is a signal of improving demand, in this case I worry that we are seeing a potential supply shock from fears of war in the Middle East. That said, this is a perpetual fear. As for the path of inflation overall, I tend to think the cost/risks that Bernanke worries about are overstated, a story that continues to be told in the productivity data:
Feeling a drought - MUCH of America's agricultural heartland is in the grips of extreme to exceptional drought. It is becoming increasingly clear that this drought will take a significant toll on some of the nation's principal food crops, especially corn, wheat, and soybeans. As a result, food prices are soaring—the price of corn rose 23% in July—and those food price increases are beginning to make their way into official inflation figures. This morning, the Bureau of Labour Statistics released its July producer-price index. Headline prices for finished goods rose 0.3% for the month, above expectations. The internals of the report show a sharp division between food price trends and the movement of prices for most other goods. Finished cored prices rose a strong 0.4% to 0.5% for finished foods. But core prices for intermediate and crude goods actually fell in July, while intermediate and crude food indexes soared. Prices for crude food stuffs rose by 5.2% in July alone. The impact of the drought on production is quite clearly a supply shock; productive capacity has actually been diminished and prices have risen as a result. Other things equal, the economy will grow a bit less than expected before the scope of the drought became clear and inflation will be a bit higher. There is very little reason to expect any persistence to this inflation. Wage growth remains as low as one would expect given the extent of labour-market slack.
Update: Real GDP Percent Change Graph, 1980-Q2 2012 - When the Q2 GDP report was released, I focused on the revisions and didn't post the usual graph showing the real GDP change since 1980. By request, here is an update. The graph shows the annualized real quarterly change in GDP from 1980 through Q2 2012. For Q2, the BEA's advance estimate was 1.5%. Since Q3 2009, GDP has been positive every quarter and averaged about 2.2% real growth. Another way to look at GDP is on a rolling year-over-year basis. See Tim Duy's graphs at US Baseline Note: I've also update several graphs in the GDP graph gallery. See: GDP Graphs
The Big Four Economic Indicators: Updated Retail Sales - Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method.There is, however, a general understanding that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:
- Industrial Production
Real Income (excluding transfer payments)
Real Retail Sales
US economic recovery is weakest since World War II - The recession that ended three years ago this summer has been followed by the feeblest economic recovery since the Great Depression. Since World War II, 10 U.S. recessions have been followed by a recovery that lasted at least three years. An Associated Press analysis shows that by just about any measure, the one that began in June 2009 is the weakest. The ugliness goes well beyond unemployment, which at 8.3 percent is the highest this long after a recession ended. Economic growth has never been weaker in a postwar recovery. Consumer spending has never been so slack. Only once has job growth been slower. More than in any other post-World War II recovery, people who have jobs are hurting: Their paychecks have fallen behind inflation. Many economists say the agonizing recovery from the Great Recession, which began in December 2007 and ended in June 2009, is the predictable consequence of a housing bust and a grave financial crisis. Credit, the fuel that powers economies, evaporated after Lehman Brothers collapsed in September 2008. And a 30 percent drop in housing prices erased trillions in home equity and brought construction to a near-standstill.
The (Unfortunately?) Consistent Record of the Recovery -- Atlanta Fed's macroblog -- In his last two posts (here and here), economist Tim Duy has done some yeoman work displaying and discussing the economic context of monetary policy decisions past and prospective. Though Wednesday's self-titled post "Data Dump" focuses on the incoming data as a set-up to the next meeting of the Federal Open Market Committee (FOMC), what strikes me is the consistency of the broad macroeconomic outcomes over the course of the recovery. Gross domestic product (GDP) growth has pretty clearly clocked in at about 2 percent....and, looking through the quarterly ups and downs, payroll employment growth has clearly trended near 150,000 jobs per month after a slower start in 2010: The inflation picture shows more variation......but in my view, that sort of variation is why it makes sense to think in terms of medium-term performance. "Medium-term" is more a measure of art than science, and I would concede the point that the recovery as a whole would be on the shorter end of that time frame. Suffice it to say that the pace of price-level growth over the past two and a half years wouldn't contradict the presumption that inflation is pretty close to the FOMC's stated longer-run objective. Duy looks at this performance and sees pretty clear evidence of failure: The economy continues to settle into a path that is not consistent with either part of the Fed's dual mandate. Moreover, there are very real downside risks to even a tepid outlook...
It's the Accounting, Stupid - The accounting systems we currently have in place are seriously flawed. Glaring omissions related to off-balance-sheet entities contributed to major meltdowns in the private sector of the economy in 2001 and 2007. Our national income accounts are full of similar holes. A recent report from Demos summarizes longstanding concerns: Official calculations of gross domestic product ignore unpaid work, count spending on education as a form of consumption rather than investment and pretend that depletion of natural-resource stocks, pollution and global climate change are irrelevant to our economic scorecard. Many smart economists have offered creative ways of addressing these problems. Progress on the technical front was particularly striking at the recent coordinated meetings of the International Association for Research in Income and Wealth and the National Bureau of Economic Research Conference on Research on Income and Wealth in Cambridge, Mass. New findings relevant to national income accounting ranged from estimates of the value of household production and human capital to measures of environmental damage and sustainable development. If these efforts represented nothing more than an exercise in intellectual innovation, we could just enjoy the sport. But national income accounting represents the scorecard of a very high-stakes game in which the current winners hate the very mention of any changes that might reduce their advantage.
It's the Housing Stupid - In a Washington Post column today, Kevin Hassett and Glenn Hubbard, two of the top economists on Governor Romney's economic team, rightly take President Obama to task for blaming the weakness of the economy since the downturn on the financial crisis. They cite a recent study from the Federal Reserve Bank of Cleveland as showing that recoveries following financial crises tend to be stronger not weaker than other recoveries. While there are some questions that can be raised about this study (was the financial crisis in the 1990 recession really comparable to what we saw in the fall of 2008?) the basic point seems right. However the Cleveland Fed study doesn't quite say that this recovery should be like any other recovery, as Hassett and Hubbard imply. The study goes on to note the extraordinary weakness in housing in this recovery and point out that this weakness could explain much of the weakness of the recovery.While the study notes that there are questions of causation (a weak recovery could lead to weakness in housing), there can be little doubt that if residential construction had returned to its pre-recession level, as had been the case by this point in all prior post-war recoveries, the economy would be back near full employment.
Gary Shilling: US in Recession Now or Within 3 Months, Deleveraging Will Take 5-7 More Years -- In a Daily Ticker Interview with Henry Blodget, economist Gary Shilling makes the case the US is already in recession. "We've had three consecutive months of declines in retail sales," says Shilling, president of A. Shilling & Co., an economic research and forecasting firm. "That's happened 29 times since they started collecting the data in 1947, and in 27 of the 29 we were either in a recession or within three months of it." Shilling expects this recession will last about a year and shave about 3.5% from growth from peak to trough. This time is different, says Shilling "because a lot of things that normally go down in a recession are already there, like housing." And policies that normally help revive the economy are absent. The Fed can't cut interest rates because they're already near zero and the housing market won't be a catalyst for growth, Shilling says.
Leading economic index climbs 0.4% in July - Slow growth in the U.S. economy looks set to continue, The Conference Board said Friday as it reported that its leading economic index grew 0.4% in July. Though the climb in the index was stronger than the 0.3% forecast in a MarketWatch-compiled economist poll, it comes after downward revisions to June and May figures. The Conference Board said the index fell 0.4% in June and rose 0.3% in May, with both months a tenth of a percentage point worse than previously reported. The leading economic index consists of 10 components that together are designed to show turning points in the economy. Seven of the ten indicators increased in July, led by weekly jobless claims and building permits, followed closely by the interest rate spread. The biggest drag came from the new-orders component of the Institute of Supply Management's manufacturing new-orders index, with average consumer expectations for business conditions also proving a drag
Conference Board LEI: ''Slow Growth Through the End of 2012'' - The Conference Board Leading Economic Index (LEI) for July was released this morning. The index inreased 0.4 percent to 95.8 (2004 = 100), following a 0.4 percent decline in June. The Briefing.com consensus had been for a 0.2 percent change. "Slow growth through the end of 2012" is the general forecast in today's press release. Here is the overview of today's release from the LEI technical notes: The Conference Board LEI for the U.S. increased in July after declining in the previous month. Positive contributions from initial claims for unemployment insurance (inverted), building permits and all of the financial components offset negative contributions from new orders and consumer expectations for business conditions. In the six-month period ending July 2012, the leading economic index increased by 1.2 percent (about a 2.3 percent annual rate), faster than the growth of 0.3 percent (about a 0.6 percent annual rate) during the previous six months. However, the strengths among the leading indicators have become somewhat less widespread in recent months. [Full notes in PDF format] Here is a chart of the LEI series with documented recessions as identified by the NBER. And here is a closer look at this indicator since 2000. We can more readily see that the recovery from the 2000 trough has been more or less flatlining in recent months.
Laugh out Loud: The Vixen Index (and other recession indicators) - Here are three additional signs that the economy is not in the greatest position – as if you had not figured that out for yourself. First there is the Vixen Index (sometimes referred to as the Hot Waitress Index). The premise is that attractive young women have more job options in a vibrant economy as they will likely find positions in companies wishing to show off. When the job market is tight they have fewer of these options and end up working in bars and restaurants. Don’t laugh – this index was developed almost 20 years ago and tends to track employment numbers accurately. Next up is the Lawn Index. It seems that a nice green lawn has become pretty costly in the middle of a massive drought. It can only be accomplished with significant investment in water. Restrictions on watering aside, the cost of that endeavor is getting steep and there are far more brown lawns than there were a few years ago. You really know that recession has set in when you see suburban homeowners turning their lawns over to the neighborhood ranchers for grazing cattle. Finally there is the Allowance Index. It seems that allowances hit an all-time high in the middle of the last decade – an average of 25 dollars a week for kids under the age of 12. Now that allowance has crashed and is less than $10. One does not know whether the little darlings have lost any further subsidy, but their cash income has slipped a lot.
Uncertain uncertainty effects and the fiscal cliff - Recently we’ve come across a few stories making the case that the looming fiscal cliff is already having an impact on the US economy, as companies are reluctant to invest given the possibility of severe fiscal contraction at the start of next year. But this “uncertainty” channel is always difficult to measure, as by necessity it relies both on anecdotal evidence, mainly the word of business executives who have an obvious interest in the outcome of whatever happens to be uncertain. Anyways, adding to the skeptical case is a short note from Citi analysts, who looked at the planned spending decisions of 700 nonfinancial public companies and found that such retrenchment has yet to begin.
Troubles Abroad Keep Cash Flowing to U.S. - Fears the U.S. will go over the "fiscal cliff" at the end of the year suggest not much has changed in Washington since the debt-ceiling battle hit the struggling economy a year ago. Also unchanged: Investors still appear convinced that the U.S. is the safest of borrowers, despite rising angst about government debt around the world. Why is Treasury debt still seen as one of the world's safest assets? The U.S. "effectively got a pass," . "If you needed to fly into the safety of a country, the U.S. was the best of the worst." How long this will last depends how long it takes the global backdrop to improve. The U.S., despite losing its coveted triple-A debt rating from Standard & Poor's last August, remains a magnet for money fleeing the globe's trouble spots. As Europe's debt crisis rages, turmoil in Greece, Spain or Italy sends investors rushing into the safe arms of the U.S. government. Markets continue—for now—to worry far more about global economic weakness than rising U.S. obligations, pushing yields lower on Treasury debt. The nation can borrow for a decade for around 1.6%, a near-record low, as investors gladly hand over their money expecting almost no return, after factoring in inflation.
Presenting The Shocking Source Of US Treasury Demand In The Past Year - When one thinks US Treasurys, and demand thereof, two entities pop into mind: the Federal Reserve, which over the past 3 years has been the biggest institutional buyer of US paper, and China, which is the largest foreign holder of US TSYs. Yet over the past year something curious happened: when it comes to setting marginal demand for US Treasurys, it was neither the Fed, whose sterilized Operation Twist has kept its holdings of US Tsys relatively flat, nor China, which has actually been a major seller of US paper, that has been the dominant source of marginal demand for Uncle Sam's never to be repaid obligations. Japan.
Treasury Yields Are Soaring - Treasury yields have risen significantly since their historic lows on July 25th. At today's close the 3-year note was up 14 basis points (bps), the 5-year 27 bps, the 7-year 37 bps, and the 10-year 40 bps. The 20- and 30-year bonds were up 46 and 50 bps, respectively. Today's Freddie Mac survey listed the 30-year fixed-rate mortgage at 3.62, up 13 bps from its historic low three weeks earlier. Given how low the rates were on July 25th, just 16 sessions ago, these increases are substantial. For instance, the 3-year yield is up 50 percent, 5-year 48 percent, 7-year 41% and the benchmark 10-year yield is up 28 percent from their historic lows. Is this simply a short-term blip, or were the July lows a a major 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. The 30-year fixed mortgage at current levels no doubt suits the Fed just fine, and the current low yields have certainly reduced the pain of Uncle Sam's interest payments on Treasuries. But, as for loans to small businesses, the Fed strategy is a solution to a non-problem. Here's a snippet from a recent NFIB Small Business Economic Trends report:
U.S. Government Finances Deteriorating, S&P’s Swann Tells MNI - The U.S. government’s finances have deteriorated “gradually” since Standard & Poor’s stripped the country of its top grade, Nikola Swann, an analyst for the credit-rating company, said in an interview with newswire MNI. America has had an AA+ rating with a negative outlook since Aug. 5, 2011, when S&P downgraded the country for the first time, citing the government’s failure to agree on a plan to reduce deficits. The grade may be cut again by 2014, the New York-based unit of McGraw-Hill Cos. said in a June 8 report. “The U.S. fiscal profile has continued to gradually deteriorate since last summer, at a rate in-between our base- case scenario and our downside scenario of August 2011, keeping the U.S. at the high end of our indebtedness range,” Swann said in an interview published today by MNI.
Economic collapse is inevitable, here’s why…America is quickly approaching a catastrophic economic collapse. Before you dismiss this as hype or paranoia, take a few minutes to review the facts outlined on this page. The numbers don’t lie. At this point, the dollar crash is unavoidable… far from an exaggeration this is a mathematical certainty. As repelling as that sounds, it’s in your own best interest to learn just how bad the situation is. According to the talking heads of mainstream press the economy is slowly recovering and the financial crisis is all but behind us, but we need a reality check. It’s time to stop being naive and start being more discerning. Instead of more false hope, we need the truth as bitter as it might sound… and the truth is, from our local municipalities, to our states to our federal government, we are broke… the truth is we can’t payback our debt without getting into even more debt… the truth is the housing crash of 2008 was just a small preview of what’s to come.
US Faces Low Borrowing Costs—Not Free Lunch - Those of us who want to see more temporary government spending on jobs programs right now (I’d call it “stimulus” but that’s a dog whistle these days) often cite the very low interest rates of government bonds as yet another good reason—along with the high unemployment rate—to do this. Last month, the interest rate on a 10-year government bond averaged 1.5%, the lowest level on record going back to the early 1950s, so the cost to the government of borrowing right now is very low. But as I’ve pointed out before, the reality of this is more complicated. I stumbled on some data from the Office of Management and Budget the other day that helps make the point It is still the case that the government should be taking advantage of low borrowing rates but the advantage may be less than many who write about this think it is. The reason is because the government doesn’t pay off such debts after a year or two. It rolls them over and thus, under the plausible assumption that interest rates go up in the future, it pays that debt off at higher rates down the road. The figure below presents two ten year trends in what the Treasury expected to have to pay in interest rates looking out from 2002 and 2013 (these are weighted average rates representing Treasury’s overall mix of financing, with maturities ranging from 3 months to 30 years).
Lesson for Reporters: Social Security Does NOT Add to the Budget Deficit - Associated Press decided to use a "Fact Check" to wrongly tell readers that Social Security adds to the budget deficit. The piece acts as though Social Security's impact on the budget is somewhat mysterious, with supporters of the program, like Representative Xavier Becerra and Senator Bernie Sanders, being confused into thinking that the program doesn't add to the deficit, even though it really does.There actually is not much mystery here to those familiar with government budget documents. Under the law, Social Security cannot possibly contribute to the on-budget deficit. It can only spend money that has been collected from the designated payroll tax or from the investment of past surpluses. (The money from general revenue to make up for the temporary payroll tax cut the last two years is an exception to this rule.) If benefit payments exceed current revenue and the money available in the trust fund, as the Congressional Budget Office projects will happen in 2038, then Social Security would not be able to pay full scheduled benefits. It could not force the government to increase its deficit.
The Fiscal Facts of Life: Do Americans Understand Where Budget Deficits Come From? — YouGov asked 1000 prospective voters “how the outcome of this fall’s presidential election will affect America over the next four years. Regardless of which candidate you personally support, what effect do you think the election outcome will have on the federal budget deficit?” The response options were “much higher if Obama is reelected” (selected by 35% of the sample), “somewhat higher if Obama is reelected” (11%), “no difference” (36%), “somewhat higher if Romney is elected” (5%), and “much higher if Romney is elected” (12%). The distribution of responses to this question is a testament to the political effectiveness of Republicans like Ryan and Tea Party activists, who have been loudly bewailing the escalation of the federal debt since Barack Obama became president. Democrats’ counterargument that recent outsized budget deficits reflect fallout from the 2008 Wall Street meltdown, the Bush tax cuts, and the Iraq War seems to have been much less persuasive. Nor have they made much headway, at least so far, in convincing the public that the Republican budget plan authored by Ryan and endorsed by Romney would actually exacerbate the deficit by slashing the taxes of top income earners.
Everything You Need To Know About The Fiscal Cliff In Just 3 Huge Slides - Three great slides from Morgan Stanley on the fiscal cliff.
Alan Simpson Confirms Reality: "All The Things You Love Will Not Come To Pass" - Conjuring images of Jack Nicholson in 'A Few Good Men', Alan Simpson laid out the sad and terrible truth that none of us or our politicians can handle in a very direct and sincere interview with Bloomberg TV's Deirdre Bolton. "Medicare costs stand to squeeze out the rest of domestic government spending," Simpson said, "it is on automatic pilot. It will use up every resource in the government." Simpson also said that the current path of debt, deficit and interest is “totally unsustainable” confirming once again the facade that his 18 years in Washington proved to him that he "never saw any projection of any economist ever come true." From Paul Ryan's plan to the 'simple math' of CBO budget projections, and whether older Americans should be afraid, Simpson pulls no punches as he sums up American society thus: "we don't care about our money, all we want is more money for our money."
Playing Defense on the Sequestration Battle: If you’ve been following the news, chances are you have heard of “sequestration” by now. Everyone in national security—from the Pentagon to Congress to industry to the think tanks—seems to agree that the spending cuts would be a menace that deserves to be squelched. But is it? Sequestration is an automatic spending cut inserted into the Budget Control Act of 2011. The cuts were designed to light a fire under the Supercommittee to agree on specific cuts, because failure would mean a blanket slashing of many areas of the federal budget, gutting both parties’ spending priorities. The Supercommittee didn’t accomplish its given task and the cuts remain, so we might theoretically see the first chunks of the $1.2 trillion in cuts (over ten years)—including $55 billion per year in reduced defense spending—take effect in January. Unless the national security establishment stops it first, that is. At about $676 billion (in FY2012), U.S. defense spending accounts for approximately half of all worldwide defense spending. If you to include our allies, together we account for 72 percent of global military spending. According to the International Institute for Strategic Studies, the United States spends five times more than China (5.5 percent of global spending) and Russia (3.3 percent), our biggest “adversaries,” combined. (Iran’s military budget is about $9.2 billion.)
Bill Black: Krugman Now Sees the Perversity of Economics’ “Culture of Fraud” - Wow, is Black fast. I had just seen the Krugman post decrying how the three academic authors of Romney’s white paper on economics – Glenn Hubbard, Greg Mankiw, and John Taylor – repeatedly and aggressively misrepresented research they cited in support of their positions, and wanted to say something. As much as it’s good to see Krugman call this sort of thing out, it nevertheless raises a basic question: where has he been? He was soft on his colleagues when the movie Inside Job came out, which discussed corruption in academic economics, focusing on Frederic Mishkin, Larry Summers, Laura Tyson, and….Glenn Hubbard:: OK, about the economist-bashing: I thought it was basically fair. There aren’t, I think, all that many cases when economists are literally paid to offer a specific opinion — although Greenspan’s defense of Keating qualifies. But the movie didn’t say there are. What it suggested, instead, was a kind of soft corruption: you get paid a lot of money by the financial industry, you get put on boards, but only if you don’t rock the boat too much. Besides, you hang out with these people, and get assimilated by the financial Borg. I think all of that is very true. In other words, the problem is cognitive capture. Right. So how do you explain Glenn Hubbard, who co-authored a solid piece that raised serious questions about LBO firms “Taxation, Corporate Capital Structure, and Financial Distress,” in 1990. Even though he put a major stake in the ground then, a scan of his subsequent articles indicates he has not revisited this topic. Might it be because he’s since joined the boards of KKR and Ripplewood Holdings (which BTW you don’t find on his official CV)? Oh, and might they have asked him to shut him up? Don’t laugh, it was common practice in the go-go M&A days of the 1980s to sideline the number one hostile takeover banker, Bruce Wasserstein (“Bid ‘Em Up Bruce”) by retaining him.
Which Economists Are Throwing Their Support Behind Mitt Romney? - Over 400 economists say they're throwing their weight behind Romney. Check out the list here. According to a press release from Economists For Romney (which is not an official arm of the presumptive GOP nominee’s campaign), over 400 economists have signed a statement in support of Romney’s “bold economic plan for America.” Some notable names are: Gary Becker, Robert Lucas, Robert Mundell, Myron Scholes, and Edward Prescott–all Nobel laureates; along with Robert J. Barro, Steven Davis, Charles Calomiris, Richard Clarida, Martin Feldstein, Glenn Hubbard, Arthur Laffer, Edward Lazear, Greg Mankiw, Allan Meltzer, George Shultz, and Robert Zoellick, among others.
Mitt Romney and Extreme Fiscal Policy - Simon Johnson - As the presumptive Republican vice-presidential candidate, Representative Paul D. Ryan of Wisconsin and his plans for the federal budget are drawing increasing interest. Mr. Ryan has been chairman of the House Budget Committee since the Republicans took control of the House of Representatives in the 2010 midterm elections and has articulated a vision for federal public finances that is quite different from what other prominent Republicans have been advocating – including Mitt Romney. The contrast between Mr. Romney and Mr. Ryan tells us a great deal about the competition among fiscal ideas within the Republican Party. It also highlights the challenge Mr. Romney will face in November, if he is shifting rightward toward Mr. Ryan’s approach to budget policy, away from independents in the center of the political spectrum. Mr. Romney has mentioned cutting tax expenditures – i.e., ways in which the government spends through giving various kinds of tax breaks – but so far he has been very vague on the details. To date, Mr. Romney has stood for cutting taxes and therefore increasing the deficit and debt relative to what it would otherwise be. (He embraces the wildly optimistic notion that such cuts would stimulate investment and lead to job creation, which in turn would increase tax revenue; previous tax cuts have not accomplished this.) Mr. Ryan is different. Rather than just wanting to cut taxes, he definitely and very specifically wants to reduce government spending. Mr. Ryan’s proposals are phased in – and in some versions debt would increase a great deal before it stabilizes. The difference between his approach and Mr. Romney’s is fundamental and clear: Mr. Ryan tells you what he would cut.
Bill Black: Romney Takes His Political Inspiration from Europe’s Worst Mistakes - Yves here. As much as Bill Black’s post makes a number of important observations about how the pro-austerity camp is misrepresenting its cause and the situation in Europe, it is also looking like Romney’s backers will win even if they lose. Recall that Obama himself is a budget hawk; we’ve discussed repeatedly how “reforming” Social Security and Medicare are long standing priorities of his. There was even a point in the budget negotiations of late 2011 where Obama was pushing for deeper cuts than Boehner. But the aggressiveness of Ryan’s talk will give Obama plenty of air cover, and as Dave Dayen has separately pointed out, take the focus off of some of Obama’s failures, such as the state of the economy and his refusal to provide anything beyond Potemkin reforms in the housing market. Jointly posted with New Economic Perspectives: One of Governor Romney’s criticisms of President Obama is that he “takes his political inspiration from Europe….”Romney never gives specifics on this criticism. The irony is that Romney (and Representative Ryan) “takes his political inspiration from Europe” and that the European policies they embrace have already proven disastrous in Europe. Here are five examples:
The Ryan Choice - Robert Reich - Ryan’s views are crystallized in the budget he produced for House Republicans last March as chairman of the House Budget committee. That budget would cut $3.3 trillion from low-income programs over the next decade. The biggest cuts would be in Medicaid, which provides healthcare for the nation’s poor – forcing states to drop coverage for an estimated 14 million to 28 million low-income people, according to the non-partisan Center for Budget and Policy Priorities. Ryan’s budget would also reduce food stamps for poor families by 17 percent ($135 billion) over the decade, leading to a significant increase in hunger – particularly among children. It would also reduce housing assistance, job training, and Pell grants for college tuition.In all, 62 percent of the budget cuts proposed by Ryan would come from low-income programs. The Ryan plan would also turn Medicare into vouchers whose value won’t possibly keep up with rising health-care costs – thereby shifting those costs on to seniors. At the same time, Ryan would provide a substantial tax cut to the very rich – who are already taking home an almost unprecedented share of the nation’s total income. Today’s 400 richest Americans have more wealth than the bottom 150 million of us put together
The Ryan Budget Plan May Be the New Centerpiece of Campaign 2012 - Already, the Romney campaign insists that voters should pay no attention to Paul Ryan’s fiscal agenda. It is the Romney-Ryan tax and budget plan, they say, not the Ryan-Romney plan. Good luck with that. Both Democrats and conservative Republicans will spend the next three months arguing otherwise. And like them or not, Ryan’s more comprehensive—and far more controversial—plans are likely to garner most of the attention. After all, big ideas seem to make Romney nervous. Thus he ducks the pesky details. But Ryan charges ahead. He loves his ideas, and he wants to tell people why they should too. Ryan has been nothing if not a fountain of policy: Social Security private accounts in 2004, his Roadmap for America’s Future in 2008, and his ambitious budgets in 2011 and 2012. But, for Ryan, these ideas are about more than economics. They define the very relationship between people and their government.
Paul Ryan: General Spending As A Share Of GDP - Over the coming days we're going to do a lot of unpacking of Paul Ryan's budget plan. Grace Wyler has a concise overview of his Medicare proposal (which is essentially to turn it into a voucher program). But there's more to his "Roadmap to a balanced budget. In April of last year, the Congressional Budget Office gave an assessment of his budget proposal, as represented to them by Ryan and his staff. Probably the most eye-popping part isn't about Medicare, but about what would happen to non-entitlement spending under his plan: Furthermore, the proposal specifies a path for all other spending (excluding interest and Social Security) that would cause such spending to decline sharply as a share of GDP—from 12 percent in 2010 to 6 percent in 2022 and 3.5 percent by 2050. For comparison, spending in this category has exceeded 8 percent of GDP in every year since World War II. The proposal does not specify the changes to government pro- grams that might be made in order to produce that path. Because the proposal speci- fies that such spending would grow only at the rate of prices in the overall economy, the quantity of real government services (that is, spending adjusted for inflation) per person would decline as population increases. Moreover, that spending would not grow with real income per capita, as it has tended to over long historical periods.
A closer look at Paul Ryan's federal budget plan - Mitt Romney has made a point of saying that he's running on his own budget, not Ryan's, but even before choosing him as a running mate, he had adopted much of Ryan's plan. Romney's tax plan would reduce tax rates by less, but closely resembles Ryan's, and so do his plans for Medicare, Medicaid and other safety-net programs. The Ryan plan would not balance the federal budget for another 28 years at least, according to an analysis by the nonpartisan Congressional Budget Office. That means the federal debt would continue to rise. That's partly because the tax cuts take effect right away while the Medicare cuts kick in later, as people now 55 hit retirement age. It's also partly because Ryan's proposed tax cuts considerably outweigh even his ambitious spending reductions. Ryan himself concedes that his plan would not balance the budget this decade, predicting it could be balanced by the "mid-to-early 2020s" because his plan would ignite rapid economic growth. Like his onetime mentor, Jack Kemp, the 1996 Republican vice presidential nominee, Ryan argues that the key to economic growth is not balancing the budget but lowering tax rates.
America has lost the battle over government - Jeff Sachs - With Congressman Paul Ryan as the Republican vice-presidential candidate, the US election is shaping up to be a full-throated ideological brawl. President Barack Obama champions public investment and social support for the poor, while Mitt Romney and Mr Ryan call for a smaller state with lower taxes and spending. Yet for all the rhetoric, the small-government agenda has already prevailed. No matter who is elected on November 6, dangerous cuts in public goods and services are already in train. There is considerable controversy about Mr Ryan’s budget plan, which exemplifies an aggressive Republican pitch to cut government spending, tax rates and social protection. Mr Ryan would reduce the top rate of personal income tax from 35 per cent to 25 per cent and slash transfer programmes for the poor, such as Medicaid and food stamps. His plan would also eliminate Mr Obama’s healthcare legislation. Radical stuff. There are also deep doubts about Mr Ryan’s claim that top tax rates can be reduced in a “revenue neutral” way by plugging loopholes. Mr Ryan invites these doubts by offering few details on how such loophole-plugging would work. It is more likely than not we would repeat the history of the Ronald Reagan and George W. Bush tax cuts: revenues would plummet and the supposed offsets would never materialise. Today’s enormous deficits would become even larger.Still, American liberals (those to the left of the political centre), who are now vehemently blasting Mr Ryan’s budget should take note. Their candidate has also already accepted a brutal shrinkage of government programmes in coming years. The similarities of the Obama budget and Mr Ryan’s are striking.
“Budget Hero” – Public Media’s Most Despicable Financial Propaganda - William K. Black - Representative Paul Ryan is treated by many in the media as “serious” and “courageous” because of his proposals to reduce dramatically federal payments for social security and health care. He and Governor Romney call for a stringent austerity program to balance the federal budget. Romney has repeatedly taken to calling ending any deficit a “moral” imperative. The media figures who call the public officials who make these deficit claims and proposals “serious” and “courageous” demonstrate how unserious and economically illiterate the media figures are. The call to “balance the budget” during a weak recovery from a Great Recession is profoundly unserious, wasteful, malicious, and self-destructive. It also displays a callous indifference to suffering of tens of millions of people. Most of all, it is obscene that the media still accepts as fact the myth that austerity would balance the budget. I explained recently why Spain’s austerity program caused its budget deficit to grow. This result is not anomalous – it is precisely what economic theory predicts will often be the result of pro-cyclical fiscal policies. Severe recessions are the leading cause of major budget deficits. Pro-cyclical fiscal policies (austerity) make recessions more severe by reducing private and public sector demand at a time when demand was already severely inadequate.
Compared to Ryan, Romney wants to spend much more on defense, and much less on everything else - Mitt Romney is trying to distance himself from Paul Ryan’s budget. “I have my budget plan. And that’s the budget we’re going to run on,” he said on Sunday. What’s the difference between the two? Well, in broad strokes, Romney would spend much more on defense and much less on everything else. Romney hasn’t released many details about his budget, but he’s laid out a few core principles. He would decrease and cap all federal spending at 20 percent of GDP, down from its current level of 24 percent of GDP. Within that, core defense spending would have a floor of 4 percent of GDP, leaving 16 percent for everything else. According to those principles, Romney would increase defense spending to $7.9 trillion between 2013 and 2022, says the Center on Budget and Policy Priorities. By comparison, Ryan would spend $5.7 trillion on core defense over the same period—only 72 percent of what Romney wants to spend. But Romney would also spend far less than Ryan on non-defense programs, including entitlements. To stick to his budgeting principles, Romney would have to cut $7 trillion from all non-defense programs, and he would have to cut $9.6 trillion if he wanted to balance the budget, as he’s also promised, the CBPP says. The Ryan plan would cut $5.2 trillion from entitlements and non-defense discretionary spending. “Thus, Governor Romney’s ten-year cuts would range from one-third deeper than those in the Ryan budget to almost twice as deep as the Ryan cuts,” the CBPP concludes.
Cost Shifting - Taxpayers are Gonna Pay One Way or Another - A recent study by the Centre on Budget and Policy Priorities has taken a deeper look at the Paul Ryan Budget in a report entitled "Deficit-Reduction Package That Lacks Significant Revenues Would Shift Very Substantial Costs to States and Localities". In this report, CBPP looks at how a federal budget that cuts deficits without increasing revenue would make deep cuts in funds that support both state and local governments. It is these lower levels of government that provide us with the everyday services that taxpayers use; education, our roads and bridges and law enforcement among others services. The fiscal picture of state governments has been grim since the Great Recession. In total, states have seen budget shortfalls of nearly $600 billion since fiscal 2009 and have been forced to make spending cuts in an attempt to bridge the funding gap. As shown on these two graphs, state and particularly local governments have shed a total of 697,000 jobs since their peaks in 2008: By way of comparison, the Federal government has seen the number of its employees rise by 57,000 over the same time frame as shown here: The Ryan budget would shift costs to the state and local level by doing the following:
- 1.) Cutting Medicaid Funding: The Ryan Budget would cut federal funding for the federal - state Medicaid program by 34 percent by 2022 and by larger amounts in later years compared to current law.
- 2.) Cutting non-Defense "Discretionary" Funding: The Ryan Budget would cut non-entitlement funding by 22 percent in 2014 and later years on top of Budget Control Act (BCA) spending caps. About one-third of discretionary funding is given to state and local governments to pay for services including education, law enforcement, disaster response, housing, public health care services and water treatment. On top of BCA cuts, the Ryan Budget cuts would amount to nearly $28 billion in 2014, adding up to $247 billion between 2013 and 2021.
Reviewing the Ryan Budget (Part 2): Details of the Ryan Plan - In the short week since Mitt Romney announced his VP pick, Rep. Paul Ryan, much speculation has been made about whether or not Romney will adopt Ryan’s policies as his own, primarily his fiscally conservative budget plan. Ryan, a darling of the Tea Party movement and its subsequent offspring the “Young Guns,” has become known for his aggressively austere budget plan introduced as legislation in 2010 as the “Roadmap to America's Future”, and subsequently passed by the House of Representatives in a slightly different iteration as the 2013 House Budget Resolution, the “Path to Prosperity.” While pundits were quick to assume that Romney would necessarily adopt the budgetary positions of his running mate (after all, Romney has publicly lauded many of Ryan’s proposals), many are scrambling to figure out just what exactly is the Paul Ryan budget plan? Part of the difficulty in discerning what Ryan’s budget “plan” is lies in the basic construction of a budget resolution. Although Ryan has publicly embraced the resolution, the resolution itself reveals little. First, budget resolutions are not legislation. They are resolutions between both houses of Congress and serve as a blueprint for spending for the year or years to come. Essentially, they represent Congress’s willingness to bind itself to a tax and spending plan for a series of future years. A budget resolution is never signed by the President and, as the Democrat Congress has shown for the last several years, they aren’t strictly required each year. Why does this matter? Because a budget resolution doesn’t change the law. It only sets top line numbers for spending and revenues; it does not go into detail on what changes are to be made in order to achieve those top line figures.
Paul Ryan’s Fairy-Tale Budget Plan - David Stockman - PAUL D. RYAN is the most articulate and intellectually imposing Republican of the moment, but that doesn’t alter the fact that this earnest congressman from Wisconsin is preaching the same empty conservative sermon. Thirty years of Republican apostasy — a once grand party’s embrace of the welfare state, the warfare state and the Wall Street-coddling bailout state — have crippled the engines of capitalism and buried us in debt. Mr. Ryan’s sonorous campaign rhetoric about shrinking Big Government and giving tax cuts to “job creators” (read: the top 2 percent) will do nothing to reverse the nation’s economic decline and arrest its fiscal collapse. Mr. Ryan professes to be a defense hawk, though the true conservatives of modern times — Calvin Coolidge, Herbert C. Hoover, Robert A. Taft, Dwight D. Eisenhower, even Gerald R. Ford — would have had no use for the neoconconservative imperialism that the G.O.P. cobbled from policy salons run by Irving Kristol’s ex-Trotskyites three decades ago. These doctrines now saddle our bankrupt nation with a roughly $775 billion “defense” budget in a world where we have no advanced industrial state enemies and have been fired (appropriately) as the global policeman.
Paul Ryan’s biggest cuts are to Medicaid, not Medicare - Paul Ryan’s Medicare overhaul may be the most controversial part of his budget.But the proposed cuts to the program are not the biggest cuts in the plan. As Ezra notes, Ryan’s cuts to Medicare “are only 60 percent as large as the cuts to Medicaid and other health-care programs.” What’s more, his biggest change to Medicare wouldn’t kick in until 2023—the start date for his voucher-based premium support program. By comparison, Ryan’s cuts to Medicaid are more drastic, and they start sooner: Between 2013 and 2022, it would make nearly $1.4 trillion in cuts to Medicaid that “would almost inevitably result in dramatic reductions in coverage” as well as enrollment, according to the non-partisan Kaiser Family Foundation. Over the next 10 years, the Ryan plan would cut Medicaid by $642 billion by repealing the Affordable Care Act and by $750 billion through new caps on federal spending—a 34 percent cut to Medicaid spending over the next decade, according to Edwin Park of the Center and Budget and Policy Priorities.
Paul Ryan has a 20 year plan to destroy the government. Where's ours? - Talk of Ryan's budget plan is all over the place. He's hailed as a strategist, deep-thinker, policy-wonk, and the intellectual heart of the Republican Party. He's their theorist. What's in his plan? Gutting Medicare and Medicaid. Deep cuts "for grants to state and local governments to support services that states and localities provide, such as education, law enforcement, water treatment facilities, and disaster response.". He'd cut taxes on the rich, raise them on the poor, and maintain or increase defense spending. What will we see in 20 years (or earlier)? The amplification of the worst trends already present in our society: the super-rich sheltered in their gates communities and high-rises, defended by the military (inclusive of a militarized police) and their own private security forces. Private education would continue to educate their children. Private health care would ensure their health and longevity. What about the rest of us? We will be free. Free to fight among ourselves--completely armed--for the scraps that remain. We will compete for scholarships--ostensibly proving the continuation of merit and opportunity. We will compete for grants for art, design, and various other sorts of contracts. We will work ever harder for ever less as public schools, roads, hospitals, and infrastructure declines. And when we resist, when we organize--the defense budget Ryan has secured will fund the drone warfare and surveillance used against us. Private prisons will provide housing.
A Tax Expert Takes a Closer Look At Romney’s Tax Returns - Tax Notes has seen fit to put an informative article by Lee Sheppard about Mitt Romney’s tax returns outside its paywall. This piece shows that questions about what might lurk in the returns that Romney has withheld has diverted attention from some dodgy tax issues in the filings he has provided. The public has gotten understandably unhappy about the $3 million Swiss bank account he held. Sheppard points out that it was common for people like Romney not to report it at all, and the release of older returns would reveal whether he had complied before the US crackdown.
Romney Pays 0.82% in Taxes Under Ryan's Plan - Under Paul Ryan's plan, Mitt Romney wouldn't pay any taxes for the next ten years -- or any of the years after that. Now, do I know that that's true. Yes, I'm certain. Well, maybe not quite nothing. In 2010 -- the only year we have seen a full return from him -- Romney would have paid an effective tax rate of around 0.82 percent under the Ryan plan, rather than the 13.9 percent he actually did. How would someone with more than $21 million in taxable income pay so little? Well, the vast majority of Romney's income came from capital gains, interest, and dividends. And Ryan wants to eliminate all taxes on capital gains, interest and dividends. Romney did earn $593,996 in author and speaking fees in 2010 that would still be taxed under the Ryan plan. Just not much. Ryan would cut the top marginal tax rate from 35 to 25 percent and get rid of the Alternative Minimum Tax -- saving Romney another $292,389 or so on his 2010 tax bill. Now, Romney would still owe self-employment taxes on his author and speaking fees, but that only amounts to $29,151. Add it all up, and Romney would have paid $177,650 out of a taxable income of $21,661,344, for a cool effective rate of 0.82 percent.
The Rich vs. the Super-Rich, in 2 Charts - Forget gold. If Scrooge McDuck were around today, he'd be diving into a big pile of capital gains. Okay, and maybe some dividends too. The charts below, courtesy of Bob Williams of the Tax Policy Center, compare where the merely rich and the super-rich get their money from. The first shows the breakdown for households with adjusted gross incomes of $1 million or greater, but who aren't among the top 400 tax filers. The second shows the same for that latter group. The cutoff for membership in this most exclusive club was $108 million in 2000, $111 million in 2005, $144 million in 2007 and $77 million in 2009, in constant 2009 dollars.The richer you are, the more you get from capital gains. This shouldn't surprise us. The top 0.1 percent of earners collect roughly half of all capital gains.
Taxing Capital Gains - Dividends in the U.S. are taxed at only 15 percent (much lower than wages/salaries). The argument is that since corporate profits, from which dividends are paid, are already taxed, taxing dividends is double taxation. But what about capital gains—why are they taxed at 15 percent too? The standard argument is that we should be taxing real capital gains, not nominal gains. Okay, but it would be easy to include the Consumer Price Index for each of many years in TurboTax or TaxCut, base taxes on real gains and tax the real gain at the same rate as wages. The administrative cost of calculating real gains has disappeared. Another argument for a lower tax on capital gains might be that investment/risk-taking is more responsive to net returns than is labor supply, justifying a lower tax rate as optimal taxation. Perhaps, but at best the evidence is scarce. My guess is that the real justification is the ability of wealthy people, who are the main beneficiaries of this tax giveaway, to get Congress to enhance their net incomes.
A Tax Plan That Defies the Rules of Math - In May of 2000, when George W. Bush was running for president on a platform of extravagant tax cuts for all, his campaign did something that would be considered remarkable today: it submitted his tax plan to the Congressional Joint Committee on Taxation, to see how much all those tax cuts would cost the Treasury. Mitt Romney, the presumptive Republican nominee, claims his far deeper tax cuts would have a price tag of exactly zero dollars. He has no intention of submitting his tax plan to the committee or anywhere else that might conduct a serious analysis, since he seems intent on running a campaign far more opaque than any candidate has in years. He has made his economic plan the fundamental basis of his candidacy, and yet with the Republican convention just two weeks away, we know next to nothing of the plan’s details. ... On issue after issue, the dominant theme of Mr. Romney’s plan is a refusal to make real choices..., you can scrutinize all 160 pages of his economic booklet without finding any evidence of decision-making. The plans Mr. Ryan submitted as House budget chairman — which are now Mr. Romney’s too — were never models of clarity, but they at least made his priorities quite stark: more than three-fifths of his cuts would come from low-income programs like job training, Pell grants and food stamps. That’s not something Mr. Romney ever talked about on the stump ...
FAQs about TPC’s Analysis of the Romney Tax Plan - Tax Policy Center’s analysis of Governor Romney’s tax plan has elicited much comment and misinterpretation. In a new paper, Sam Brown, Bill Gale, and Adam Looney clarify what the original paper did and did not say by addressing in a Q and A format some of the questions that have been raised. The authors reemphasize their conclusion that Governor Romney’s tax plan cannot meet all of his stated criteria: lower rates, repeal of the AMT and the estate tax, maintaining preferences for saving and investment, not raising taxes on the middle class, and revenue neutrality. The authors also find that the basic conclusions are unchanged if two preferences for saving and investment— the tax exclusion for municipal bond interest and the exclusion of inside-buildup on life insurance vehicles—are added to the list of base broadening provisions that might be used to pay for individual income tax rate cuts.Check out the new paper to see the authors’ responses to questions about their analysis
Romryanomics--prosperity for the well-off fueled by austerity for the rest - I've put off writing about stilted robo-Romney's choice of the perpetual-smily-Ryan as veep about as long as I can, I suppose. So let me talk about it in broad terms in this post. In the next posts, I'll discuss more methodically the vacuous "Romney program" and the toxic "Ryan path to prosperity" with particular attention to what they have said specifically (or not, in Romney's case) about what they want to do with the tax system. Both Romney and Ryan come from well-to-do families with the privileges of financial support, status and connections that adhere thereto (see this story on Romney--by the way, a donated inheritance is still an inheritance and donations of that magnitude earn other privileges for the elite; and this story on Ryan--whose wife also inherited millions including oil and gas interests), yet support the neoconservative economic mythology that wealth is wholly based on merit and that the way to have a good economy is to make sure the wealthy, who are deemed to be the (mythic) "job creators" are happy. This leads them to support austerity for the middle class and seniors coupled with deregulation, privatization, militarization and tax cuts--Romryanomics 101. Key to the Romney program (or what can be derived from a description of generalities-without-specifics that can't be scored by economists plus Romney's statement earlier that he would sign Ryan's budget proposal into law if passed by Congress plus his Monday statement that "his own plan for Medicare is 'very similar' to Ryan's", per this NBCnews.com story ) and the Ryan so-called "path to prosperity" (see, e.g., the LA Times story) is privatization of, and spending cuts to, Social Security and Medicare, along with spending cuts to everything else that serves the public good (environmental programs, parks, etc.)
The Romney Tax Plan, Industry and the Great Stagnation - Some of my fellow economist bloggers are upset over this sketch offered by John Taylor, Greg Mankiw, Glenn Hubbard, and Kevin Hassert. I want to deal with a different point. The tone of the tax plan feeds into the common notion that the problem with America is that it lacks sufficient business investment. The conventional wisdom used to be that America needed more investment generally, but most investment is in housing and promoting housing investment has become dreadfully unfashionable. Now people of good taste must all agree that it is time for America to get truly serious. Its business investment that we need, lest we be drowned in consumer licentiousness and government largess. So, what has America industry been up to this time? Here is industrial production in Consumer Non-Durables (Green), Consumer Durables (Blue), and Business Equipment (Red) since 1980. Production of business equipment is at near record levels, while consumer durables struggle to remake lost ground and non-durables remain mired in their decades long stagnation. Industrial production per member of the labor force (employed or not) is even more telling. Note that all three lines have a common divsor, so this isn’t some proxy for productivity. Its saying that relative to all the working people in America we are now producing 2.2 times as many business goods as in 1980. We are producing roughly 1.5 times as many consumer durables as in 1980 and we are producing slightly fewer consumer non-durables than in 1980.
Slipping Behind Because of an Aversion to Taxes - Italians live longer. Their poverty rate is much lower than ours. If they lose their jobs or suffer some other misfortune, they can turn to a more generous social safety net. Every developed country aspires to provide a better life for its people. The United States, among the richest of all, fails in important ways. It has the highest poverty and the highest infant mortality among developed nations. We provide among the least generous unemployment benefits in the industrial world. Not long ago one of the most educated countries in the world, the United States is slipping behind. The reason is not difficult to figure out: rich though we are, we can’t afford the policies needed to improve our record. The politicians in Washington all know that we face a long-term fiscal crisis. By 2020, 70 million Americans are expected to be on Social Security, up from 45 million in 2000. The ranks on Medicare will swell to 64 million, up from 40 million in 2000. Virtually every economist knows that just maintaining Medicare and Medicaid benefits will require raising taxes on the middle class. But though the nation’s fiscal challenge has taken center stage in the presidential election campaign, raising more taxes from American families remains stubbornly off the table.
The fallacy of privatization: anti-government screeds and the Romney agenda - As a prominent tax professor points out, Mitt Romney accumulated most of his additional wealth in a business that generally doesn't do anything to increase national wealth. Mitt Romney accumulated his wealth as managing director of Bain Capital, a leveraged buyout fund (LBO). LBOs are driven by tax savings. Tax savings are transfers from other people to LOBs without any increase in GDP or national wealth. An LOB replaces the stock of established companies with debt. The increase in debt harms the private economy because the companies become very fragile and the leverage encourages the owner to bet the company. Calvin Johnson, The Tax Explanation for the Romney Leveraged Buyouts, Romney's activities at Bain Capital are just one example of how the private economy can generate wealth for a few people at the top without doing anything to help the overall economy, GDP, or national wealth--or ordinary workers. With that in mind, we should then be rightly skeptical about the typical claims from the right that the private economy can always do a better job of any given task than government (the public economy). For Romney, efficiency and competition are gods that only the private marketplace can worship and therefore all government functions would be better handled by private rather than public forces. That seems to be the gist of his statement in a recent interview, highlighted by Mark Thoma's post on Outsourcing Government: What is Mitt Romney Taling About, Here's the most relevant language from Romney on the idea that private is always better than public:MITT ROMNEY: Well, clearly you don’t like to hear [about] anyone losing a job. At the same time, government is the least productive—the federal government is the least productive of our economic sectors. The most productive is the private sector. The next most productive is the not-for-profit sector, then comes state and local governments, and finally the federal government. And so moving responsibilities from the federal government to the states or to the private sector will increase productivity. But that's simply wrong. It is empirically wrong. It is theoretically wrong. And it is wrong-headed policy for America.
The 26 Top CEOs Who Made More Than Their Companies Paid In Federal Taxes: Once again, it's time for the annual Institute for Policy Studies report on which top CEOs are earning more money than the companies they work for are paying out to federal government in taxes. "Our nation’s tax code has become a powerful enabler of bloated CEO pay," writes the IPS [PDF]. "Some tax rules on the books today essentially encourage corporations to compensate their executives at unconscionably higher multiples of what their average workers are paid." Many of the companies on the list are household names (AT&T, Motorola, Ford, AIG, Travelers), while others are not on the tip of most people's tongues. Of the 26 companies on the list, seven were on last year's list of 25 CEOs -- -- Boeing, Motorola Mobility, Motorola Systems, Chesapeake Energy, Ford, Marsh & McLennan, and International Paper. This year's crop of CEOs averaged $20.4 million in total compensation, a 23% percent increase over the average for last year's batch of top executives. Meanwhile, the companies they worked for received an average of a $163 million tax refund from the federal government. Only a handful of businesses paid any federal taxes in 2011.
26 Corporations That Paid Their CEOs More Than Uncle Sam - In recent months corporate America has been lobbying the heck out of Washington to lower tax rates on businesses. As it should, defenders say, because corporations have a duty to maximize their return to investors. But if boosting profits were the goal, then you'd think more big companies would stop complaining about taxes, and look instead at an even greater expense: the bloated salaries of their chief executives. In a just-released report, the Institute for Policy Studies details 26 megacorporations that paid one guy (their CEO) more than they spent on their entire federal tax bills last year. (See our interactive graph below—whoa! Halliburton!) These same companies averaged $1.4 billion in profits—which were announced, in some cases, around the same time they were announcing massive layoffs. The report also looks at how these companies pull it off. Here, for instance, are the top four executive-pay tax loopholes and their costs to taxpayers.
Study: Companies Paid More to CEOs Than in U.S. Tax — Twenty-six big U.S. companies paid their CEOs more last year than they paid the federal government in tax, according to a study released Thursday by a liberal-leaning think tank. The study, by the Institute for Policy Studies, said the companies, including AT&T, Boeing and Citigroup, paid their CEOs an average of $20.4 million last year while paying little or no federal tax on ample profits, according to regulatory filings. On average, the 26 companies generated net income of more than $1 billion in the U.S., the study said. The study blasted tax rules allowing unlimited deductions for CEO “performance-based” pay, like many stock options. It said the five biggest performance payers among the 26 companies took $232 million of these deductions last year. Among the “kingpins” it criticized was CEO James McNerney Jr. of Boeing. It said he got $18.4 million in pay last year while his company received a tax refund of $605 million. The study also laid into Citigroup for paying CEO Vikram Pandit $14.9 million while the bank received a net $144 million in tax benefits.
Banks hand workers’ details to US - HSBC and several Swiss banks have handed over details of tens of thousands of current and former employees to US regulators in exchange for leniency for allegedly helping US clients avoid taxes, say lawyers representing bank staff. The banks have been subject to a tax investigation that resulted in Swiss bank UBS paying US$780 million in fines to the United States Department of Justice in 2009. HSBC confirmed this week that it gave details of current and former employees to the US Department of Justice and the Securities and Exchange Commission after submitting a first set of documents several months ago. Private bank Julius Baer said it had "provided certain information about its historic US busines s in full compliance with Swiss law". Credit Suisse said its co-operation with US authorities was in the interests of the bank and its employees.
Lessons from the French: It’s time to tax high-frequency trading - France recently pushed ahead of the European Union in implementing a financial transactions tax (FTT). Championed by both France and Germany, the European Union has been moving toward an FTT for several years, albeit with strong resistance from the United Kingdom. The new French FTT is fairly narrow in its base: 0.2 percent on the sale of stock of publicly-traded French companies valued above €1 billion (most FTT proposals would apply varying rates to range of assets—stocks, bonds, options, futures, and swaps—to minimize tax distortions and arbitrage opportunities). What’s unusual about France’s move is their additional high-frequency trading (HFT) tax, targeting algorithmic computer trades executed within half a second, as detailed by Steven Rosenthal on TaxVox. The timing of France’s HFT tax is quite apropos given Knight Capital Group’s near-fatal $440 million trading loss from a software glitch triggering a wave of unintended trades (a cash lifeline from outside investors kept the firm afloat while severely diluting existing shares). Citing computer errors marring Facebook’s NASDAQ IPO, the Associated Press observed this week that, “Problems such as the one Knight caused last week have been occurring more regularly as the stock market’s trading systems come under increasing pressure from traders using huge computer systems.” Indeed, remember the 2010 flash crash? In a bizarre spectacle on May 6 of that year, the Dow Jones Industrial Average—already down 4 percent for the day—abruptly plunged another 5-6 percent in a matter of minutes, hitting a floor down 992.6 points (-9.1 percent) from opening, and then rapidly rebounded.
US auto bailout cost keeps rising: The US Treasury raised its estimate of the net cost to US taxpayers of rescuing the country's auto industry by $3.3 billion, as the weak economy restrains the industry's rebound. The Treasury told Congress in a new report seen on its website Monday that the cost of the government's massive bailout of Detroit in the economic crisis of 2007-2008 would hit $25 billion, based on figures to May 31. That compared a forecast loss of $21.7 billion based on figures to February 29, according to Treasury data. The US government rescued General Motors and Chrysler at the height of the financial crisis, pouring $80 billion into the two. Both have since graduated from the program, and are making solid profits on reasonably strong auto sales. But the Treasury continues to prop up GM's former financing arm, now dubbed Ally Financial, which lost $898 million in the second quarter mainly due to the bankruptcy of its home mortgage arm, forced by its huge book of defaulted home loans. Treasury spokesman Matt Anderson defended the bailout as having had a broader impact on reviving the overall economy.
Treasury: U.S. to lose $25 billion on auto bailout - The Treasury Department says in a new report the government expects to lose more than $25 billion on the $85 billion auto bailout. That's 15 percent higher than its previous forecast. In a monthly report sent to Congress on Friday, the Obama administration boosted its forecast of expected losses by more than $3.3 billion to almost $25.1 billion, up from $21.7 billion in the last quarterly update. The report may still underestimate the losses. The report covers predicted losses through May 31, when GM's stock price was $22.20 a share. On Monday, GM stock fell $0.07, or 0.3 percent, to $20.47. At that price, the government would lose another $850 million on its GM bailout. The government still holds 500 million shares of GM stock and needs to sell them for about $53 each to recover its entire $49.5 billion bailout. At the current price, the Treasury would lose more than $16 billion on its GM bailout. The steep decline in GM's stock price has indefinitely delayed the Treasury's sale of its remaining 26 percent stake in GM. No sale will take place before the November election.
Wall St. “Cheetahs” and the Financial Transaction Tax - Real News Network video - The recent stock market volatility could have been restricted by a tax on transactions that would make the small quick score less attractive. Watch full multipart Securities Transaction Tax
Standard Chartered Case Casts a Chill Over Banks- Money laundering accusations leveled against a British bank by New York’s top banking regulator are causing global banks to worry that their New York operations could make them public targets for processing transactions already deemed legal by federal regulators, according to federal authorities with knowledge of the concerns. Benjamin M. Lawsky, who leads the New York Department of Financial Services, upended the regulatory landscape on Monday by accusing Standard Chartered of scheming with the Iranian government for nearly a decade and hiding from regulators $250 billion in transactions through its New York branch. The bank, for its part, has said it “strongly rejects the position and portrayal of facts” by Mr. Lawsky’s department. The accusations largely center on transactions that the federal government permitted until 2008, namely the transfer of money with Iran through the United States from one foreign-based entity to another. Until Mr. Lawsky’s case against Standard Chartered claimed that the bank cloaked these so-called U-turn transactions, there was virtual consensus among Treasury Department authorities, the Justice Department and the Manhattan district attorney’s office that such transactions were legal, even if they violated the spirit of the law, according to people briefed on the matter.
Banking industry must rebuild from new foundations - NEP’s own William K. Black weighs in on regulatory reform in light of Standard Chartered scandal. Read the story here.
Standard Chartered Bank Settles With New York State Over Money Laundering for $340 Million - Standard Chartered Bank avoided a contentious Wednesday hearing that could have led to the revocation of their ability to do business in the state of New York, by reaching a settlement with the state Department of Financial Services for $340 million over widespread money laundering charges. This is a bit less than some of the rumors that came out yesterday about the negotiations, but it does include a monitor for New York to enforce compliance. As part of the agreement, the bank agreed to install an on-site monitor for at least two years who will report directly to state officials. New York regulators will also place examiners at the bank. As a result of the accord, announced today by the state in an e-mailed release, the hearing that had been scheduled for tomorrow has been adjourned. On Aug. 6, Benjamin Lawsky, head of the New York Department of Financial Services, or DFS, issued an order accusing Standard Chartered of helping Iran launder about $250 billion in violation of federal laws. One analyst estimated loss of the bank’s New York license could result in a 40 percent drop in earnings
Standard Chartered Settles with New York State for $340 Million (Updated) - As we predicted, Standard Chartered has settled rather than face an August 15 hearing with Benjamin Lawsky, New York’s Superintendent of Financial Services over Iran-related money laundering charges. The amount agreed was less than he was initially rumored to be seeking, which was in the $500 to to $700 million range. However, as we also indicated, in a “good” settlement, neither side gets what it wants. And given that the Federal authorities were roused by the New York action and are also reported to be negotiating settlements, they will likely have to secure decent dollar amounts so as not to be perceived to be completely incompetent, which would have cut into what SCB would pay to New York. The benchmark here is HSBC’s recent money laundering settlement, which led observers to contend that $700 million or even as much as $1 billion, would be what SCB might be forced to pay for this to go away. Put it another way: if the Feds together don’t get at least as much as Lawsky did after he paved the way, it will prove a complete lack of seriousness on their part. From the Wall Street Journal: Standard Chartered agreed to pay New York’s top banking regulator $340 million, averting a public showdown and ending a weeklong, trans-Atlantic regulatory drama. After a harried week of debate, the U.K.’s fifth-largest bank by assets reached a settlement with New York’s Superintendent of Financial Services, Benjamin M. Lawsky. The agreement came eight days after Mr. Lawsky accused the bank of illegally scheming over a decade to hide more than 60,000 financial transactions totaling $250 billion for Iranian clients. Four other U.S. regulators that have been probing the bank’s actions weren’t part of the settlement. The U.S. Treasury Department, the Federal Reserve, the U.S. Department of Justice and the Manhattan District Attorney’s office have been negotiating with Standard Chartered since 2011 to reach a settlement over its Iran-related transactions.
Marcy Wheeler: Standard Chartered Bank Admits Promontory’s Estimates of Its Iran Business Were Wrong - Yves here. A few quick comments on the New York state settlement. Some readers are unhappy that there wasn’t a prosecution. First, as we’ve written before, criminal prosecutions of big financial firms put them out of business (tons of customers are forbidden to do business with them) so they settle pronto (prosecuting individuals is another matter completely). Second, Lawsky is only a banking regulator and does not have prosecutorial powers. To do that, he would have needed Eric Schneiderman’s cooperation. But Lawksy’s boss, Andrew Cuomo and Schneiderman are rivals. Marcy’s observation below is very important, and is being glossed over or even denied in the mainstream media. The Wall Street Journal has one of its all too common alternative reality editorial page pieces. Cross posted from emptywheel: Standard Chartered just settled with NY’s Superintendent of Financial Services. But here’s the detail I’m most interested in: The parties have agreed that the conduct at issue involved transactions of at least $250 billion. Just .1% fine, so not that big. But an admission that the scope of the fraud and the Iran business really did amount to $250 billion. I find that interesting for two reasons. First, because it’s going to cause all kinds of headaches for the folks at Treasury who would like to let SCB off easy but ordinarily base settlements on the amount of the underlying activity. More importantly, for me, because it demonstrates what a sham the Get Out of Jail Free industry is. A former OCC head and his minions at Promontory Financial Group claimed to have added it all up and determined that SCB only hid $14 million of transactions from Iran. SCB now says that Promontory was wrong.
Standard Chartered Still Faces Fed Probes After N.Y. Deal - Standard Chartered, having settled a New York money laundering probe for $340 million the day before it was to defend its right to operate in the state, still faces federal inquiries over claims it helped sanctioned nations including Iran illegally funnel money through the U.S. Regulators including the U.S. Treasury, Federal Reserve, Justice Department and Manhattan District Attorney declined immediate attempts at a global settlement, said two people familiar with the matter. A coordinated effort was already in progress before New York’s unilateral deal, announced yesterday by financial regulator Benjamin Lawsky, one of the people said. The agreement doesn’t take into account all of the bank’s alleged violations, including those involving nations such as Sudan, said one of the people, who added that September is the earliest a universal deal may be reached.
Bank Deal Rankles Regulators = Standard Chartered's money-laundering clash with a once-obscure New York regulator is shaking up efforts by financial overseers to rein in giant banks around the globe. The New York Department of Financial Services notified the U.K. regulator for Standard Chartered just 90 minutes before announcing allegations last week against the U.K. bank, said people familiar with the matter.Officials at the U.K. Financial Services Authority complained afterward to the New York regulator, which oversees Standard Chartered's U.S. unit, that the sudden move could have damaged the stability of the bank and that the lack of advance notice breached long-standing protocol among bank regulators, these people said. The New York case ended Tuesday when Standard Chartered agreed to pay the regulator $340 million to settle allegations it broke U.S. laws in handling transactions for Iranian customers. Observers said the outcome was a victory both for the New York regulator, Benjamin M. Lawsky, who used a high-profile case to flex the muscle of an office created just last year, and for the bank, which paid a manageable price tag to close a case whose announcement initially unsettled investors.
Oblivious - Benjamin Lawsky’s unilateral action against Standard Chartered has apparently upset the “bigger” regulators in Washington and London. According to the Wall Street Journal, “Officials at the U. K. Financial Services Authority complained . . . that the sudden move could have damaged the stability of the bank and that the lack of advance notice breached long-standing protocol among bank regulators.” Wait. Now how is that supposed to compared with the fact that Standard Chartered almost certainly conspired to evade U. S. sanctions?* Why are they mad at Benjamin Lawsky instead of at Standard Chartered? And when you think a violation of inter-regulator “protocol” is worse than a systematic plan to defraud the U. S. government and break sanctions against Iran, of all countries—it’s hard to imagine how you could be more captured, without knowing it. As for the point that the sudden announcement could have threatened the stability of Standard Chartered: First, how does that compare to breaking the law in the first place? Whose side are these guys on?
Deutsche Bank’s Business With Sanctioned Nations Under Scrutiny - Federal and state prosecutors are investigating Deutsche Bank and several other global banks over accusations that they funneled billions of dollars through their American branches for Iran, Sudan and other sanctioned nations, according to law enforcement officials with knowledge of the cases. But the recent clash between New York’s top banking regulator and federal authorities over how to handle a similar case against the British bank Standard Chartered could complicate the investigations. The United States prosecutors worry that the $340 million settlement between the New York regulator, Benjamin M. Lawsky, and Standard Chartered sends a message to international banks and regulators that American authorities are uncoordinated and torn by divisions — since Mr. Lawsky acted alone in leveling the charges and settling the case. They also worry that foreign banks and regulators will no longer readily cooperate in turning over valuable transaction data that reveal the parties behind the global movement of tainted money, according to the federal and state prosecutors who were not authorized to publicly discuss the investigations. Now the authorities in the Justice Department and the New York County district attorney’s office are debating how deeply involved Mr. Lawsky’s office should be in the investigations.
Lawmakers point to possible money laundering at Wal-Mart - Two U.S. House Democrats investigating bribery allegations in Wal-Mart's Mexico affiliate said on Tuesday they have obtained new internal records that may point to evidence of tax evasion and money laundering. Reps. Elijah Cummings and Henry Waxman, the ranking members, respectively, of the House Oversight and House Energy committees, disclosed the latest details of their probe in an Aug. 14 letter to the company."We have obtained internal company documents, including internal audit reports, from other sources suggesting that Wal-Mart may have had compliance issues relating not only to bribery, but also to 'questionable financial behavior' including tax evasion and money laundering in Mexico," the lawmakers wrote to Wal-Mart Chief Executive Michael Duke.
Wells Fargo Is A Little Sorry That It Sold Securities It Knew Nothing About - Don’t do this: One particular municipal entity had been a customer of Wells Fargo, or a predecessor, since at least 1988. This customer’s investment objectives were safety of principal and income. … Wells Fargo’s internal records for the customer’s account specifically stated that the account should not invest in MBS. In addition, applicable state law prohibited municipal entities such as this customer from investing in certain “high-risk mortgage-backed securities.” Respondent McMurtry nevertheless selected and purchased for this municipal customer a SIV-issued asset-backed commercial paper program which was backed by MBS and related high-risk mortgage-backed derivatives. … On April 30, 2007, McMurtry selected and purchased Golden Key on behalf of the customer. McMurtry did not know what a SIV was at that time he selected Golden Key for his customer. Further, he did not read the PPM for Golden Key, nor did he inform the customer of the risks related to the SIV structure or the underlying high-risk mortgage-backed assets held by Golden Key.
Jamie Dimon: 'It's A Free. Fucking. Country.' - Jamie Dimon wants you to remember what made this country great. The JPMorgan Chase CEO insisted in a New York magazine interview, published on Monday, that people should not blame big banks for the financial crisis. When asked him about his consistent defense of Wall Street and criticism of financial rules, Dimon pushed back, saying he considered himself more "an outspoken defender of the truth." "This is not the Soviet Union," he continued. "This is the United States of America. That's what I remember. Guess what.... It's a free. Fucking. Country." Since the financial crisis, Dimon has embraced his role as defender of Wall Street. Earlier this month, he said the larger problem surrounded scapegoating and finger-pointing, rather than systemic problems in his industry. Here is a big reason the public may be holding Dimon and other big bank CEOs responsible: In 2008, the size and interconnectedness of struggling big banks like JPMorgan Chase threatened to take down the financial system and the economy with it. As a result, big banks, including JPMorgan, received generous bailouts as businesses laid off workers en masse.
Dimon: JPMorgan Spends $500 Million per Data Center Data - JPMorgan Chase spends $500 million to build a data center, according to CEO Jamie Dimon. That figure places the firm’s facilities among the most expensive in the industry, on a par with investments by Google and Microsoft in their largest data centers. Dimon noted the company’s data center investments in an interview with New York magazine, in which the CEO cited such spending as one of the advantages of the banking company’s massive scale. “There are huge benefits to size,” Dimon said. Spending $500 million per facility places JPMorgan in the top tier of data center investments. Microsoft spent $500 million on its web-scale data centers, while Google valued its data center investments at $600 million per campus. The largest known single-site data center investment is the $1 billion Apple says it will spend on its massive iDataCenter in Maiden,North Carolina.
Seven banks in New York Libor probe - Seven of the world’s largest banks are facing fresh scrutiny from a powerful US state prosecutor over their role in the alleged rigging of Libor, the lending gauge at the centre of an international scandal. Eric Schneiderman, New York attorney-general, has sent subpoenas to Deutsche Bank, Citigroup, JPMorgan Chase, Royal Bank of Scotland, Barclays, HSBC and UBS in the latest probe into banks' setting of the London Interbank Offered Rate, according to people familiar with the matter and regulatory filings. Mr Schneiderman’s demands for documents and communications – most of which were sent out in July or earlier this month – is part of a two-state probe he has launched with George Jepsen, Connecticut’s top law enforcement officer. The pair want to examine whether banks colluded to fix interest rates determined by Libor, damaging the states’ borrowers and investors as a result. The state investigation comes on the heels of separate probes from prosecutors and regulators in countries including the UK, Canada, Japan and the US who are examining possible collusion by large financial groups to manipulate benchmark rates. But what may set Mr Schneiderman’s probe apart is his ability to use the Martin Act, a 1921 New York law considered one of the country’s most powerful prosecutorial tools. The law allows Mr Schneiderman to investigate anyone doing business in New York and to bring cases without having to show that the accused intended to commit fraud.
Why NYS Attorney General Eric Schneiderman Is Cranking Out Libor Subpoenas - According to news reports yesterday, New York State Attorney General Eric Schneiderman has been cranking out the subpoenas to Wall Street’s largest banks over allegations of an international bank cartel rigging Libor interest rates. Libor is the benchmark rate used to set many consumer loans, like credit card, student loans, and adjustable rate mortgages. It is also the primary rate used by Wall Street banks in setting rates on interest rate swaps. Both New York State and New York City have a boatload of those deals that are bleeding red ink. (Read how other municipalities around the country are being drained by these deals.) According to a December 2011 report by Michael Stewart of United NY, JPMorgan Chase is the counterparty to most of the interest rate swaps for New York City; the MTA currently has sixteen active swap agreements with JPMorgan Chase, Citigroup/Citibank, UBS, AIG, Morgan Stanley and Ambac.
Why Bother? - The SEC enters into another rounding error settlement with a financial insitution, this time Wells Fargo. Wells agrees to pay the princely sum of $6.5 million -- vs net income of $15 billion last year -- for providing advisory services to non-profits that apparently consisted of looking at the credit ratings on some MBS and telling the clients to buy those.
Glenn Greenwald: Two-Tier Application of Justice Undermines Legitimacy of American Political System (video & transcript) Brilliant Constitutional Law Attorney Glenn Greenwald chats with Noam Chomsky about Greenwald's latest book, With Liberty and Justice for Some, and the dismal state of our political system.
Quelle Surprise! SEC Plans to Make the World Safer for Fraudsters, Push Through JOBS Act Con-Artist-Friendly Solicitation Rules -- We and numerous others have railed about how absolutely awful the JOBS Act is. It’s going to do perilous little to help small businesses raise dough; in fact, the number of frauds that will arise will almost certainly raise the cost of capital for small ventures over time. The JOBS Act was a wet dream for bucket shop operators. And the SEC seems determined to make a bad situation worse. The Consumer Federation of America, along with a number of distinguished co-singers, has written the SEC objecting to its plan to circumvention of the public comment process for issuing rules under the JOBS Act. Specifically, it plans to end a long-standing ban on widespread solicitation and advertising in private offerings (yours truly is well aware of these rules: there are restrictions, for instance, on the number of parties that can be presented a possible deal when it is not registered with the SEC). As the CFA notes via e-mail: In the 1990s, a previous experiment with lifting the general solicitation and advertising ban led to an immediate upsurge in fraud, causing the Commission to reinstate the restriction…The JOBS Act itself requires the SEC to issue rules affecting how solicitation can be conducted and it does nothing to eliminate the agency’s existing responsibility to ensure that investors are adequately protected in private offerings What is depressing, if you read the letter below, is that the SEC clever ruse to avoid public comment is violation of the Administrative Procedures Act. And worse, the CFA contends that the SEC is putting its finger on the weighing machine when it makes a cost-benefits assessment as mandated by Dodd Frank, ascribing far too much importance to industry compliance costs, and too little to the risks to the public.
The Truth About the SEC and Wall Street - When JPMorgan Chase needed to hire a lawyer in May of this year to advise the bank on how to respond to regulatory probes into its multi-billion-dollar “London Whale” loss, it turned to William McLucas. The general counsel of JPMorgan Chase — then and now—is Stephen Cutler. Both men worked together at the law firm Wilmer Cutler Pickering Hale and Dorr before Cutler left for the bank in 2007. But it was another connection that raised some eyebrows: both McLucas and Cutler are former heads of the enforcement division of the Securities and Exchange Commission. For as long as any one can remember, there has been a lot of concern among self-styled “watchdogs” about the movement of officials between the SEC and the businesses it regulates or the law firms that represent those businesses. The assumption has long been that SEC officials who plan to join Wall Street firms would pull their punches to curry favor with future employers—and would later be able to extract more leniency for their Wall Street clients from former colleagues still at the commission.
"Calling the Big Banks' Bluff" The G-20’s decision in November 2008 not to let any systemically relevant bank perish may have seemed wise at the time, given the threat of a global financial meltdown. But that decision, and bad policies by central banks and governments since then, has given over-indebted major banks the power to blackmail their rescuers – a power that they have used to create a financial system in which they are effectively exempt from liability. Big banks’ ability to extort such an arrangement stems from an implicit threat: the financial sector – and with it the economy’s payment system – would collapse if a systemically important bank were ever pushed into insolvency. But it is time to call the bankers’ bluff: maintaining the payment system can and should be separated from the problem of bank insolvency. Above all, the G-20’s decision to prop up systemically relevant banks must be revisited. And governments must respond to the banks’ threats by declaring their willingness to let insolvent banks be judged accordingly. A market economy must rest on the economic principle of profit and loss. An economy with neither bankruptcies nor a rule of law that applies equally to all is no market economy. The law that is valid for all other companies should apply to banks as well.
Criminal sanctions: How to save banks without rewarding bankers - Recent revelations on traders’ behaviour in the Libor rigging case is worrisome not only as a sign of the rotten culture of financial operators, but also for the sense of total impunity prevailing among them.1 They suggest that bank CEOs and supervisors may have tolerated or encouraged rate rigging, or negligently lost control of banks’ operations, for years. They also indicate that law enforcement has been extremely weak in the realm of banking and finance. The recent allegations that some large UK banks have been involved in extensive money-laundering activities in favor of Mexican drug-cartels and Iran reinforce this impression considerably. In the light of these revelations, on 25 July the European Commission amended its proposal for a regulation and a directive on insider dealing and market manipulation to include criminal sanctions against that type of price fixing.2 Meanwhile, following a report by the FSA on the failure of the Royal Bank of Scotland, the UK Treasury started a consultation on how to introduce criminal sanctions against failed banks’ directors, ranging from automatic debarment to full fledged prison for extreme reckless behaviour (like RSB’s last acquisitions).3 The Libor and HSBC money-laundering scandals make this move even more likely.This column argues that fines for criminal behaviour in banks are not enough – it may be time to start locking people up.
Is That It for Financial Crisis Cases? - Last week turned out to be a good one for Goldman Sachs. The Justice Department closed a criminal investigation of the firm and its chief executive, Lloyd C. Blankfein, and the firm disclosed that the Securities and Exchange Commission had decided not to pursue a civil fraud case related to a subprime mortgage deal. When the story of the financial crisis is finally written, this may turn out to be the denouement of the government’s investigations of Wall Street for potential wrongdoing that contributed to the financial crisis in 2008. The criminal investigation was prompted by a referral from the Senate’s Permanent Subcommittee on Investigations, based on its 635-page report on the financial crisis that included details on Goldman’s transactions in mortgage-backed securities. The report highlighted potential conflicts of interest in how Goldman dealt with its clients and questioned whether Mr. Blankfein testified truthfully at an April 2010 subcommittee hearing when he said that the firm did not have a “massive short” position to bet on a decline the housing market. In announcing the closing of the investigation, the Justice Department said that “based on the law and evidence as they exist at this time, there is not a viable basis to bring a criminal prosecution.”
Capitalism Without Failure: Bethany McLean Demonstrates her Profound Lack of Understanding of Control Fraud, Gresham's Dynamics, and Justice - In this painful CNBC segment, former Goldman Sachs employee Bethany McLean provides a heartfelt apologia for her much-maligned former employer. Bethany says it is time for us all to move on for the good of confidence in the economy. In the process of prostrating herself for GS, she demonstrates her complete lack of understanding of control fraud, Gresham's Dynamics, and how white collar crime can be pursued. Bill Black attempts to address McLean's dilettantish assertions, but he is not given the chance to get into the complexities of the issue by snickering host Maria Bartiromo.
Insight: Goldman independent research arm dies, shunned by clients - (Reuters) - Goldman Sachs Group Inc has given up trying to sell research from independent analysts to its institutional clients, after spending millions of dollars on distribution only to find that big money managers had little interest. The bank has laid off or reassigned the dozen or so employees at its Hudson Street Services unit, which offered data and independent research to investors. Goldman also sold its minority stakes in most firms that were producing the research, generating an overall profit in the process. It wasn't always that way. Independent research was all the rage on Wall Street after a $1.4 billion settlement in 2003 between Wall Street banks and regulators led by then-New York Attorney General Eliot Spitzer concerning allegedly tainted research. The settlement followed accusations by Spitzer and other regulators that securities analysts at some major banks were glorified shills for companies' shares, instead of providing the objective advice they claimed to offer. Analysts often got bigger bonuses if their positive ratings, or help on sales calls, allowed a bank to win investment banking business.
No Criminal Case Is Likely in Loss at MF Global - A criminal investigation into the collapse of the brokerage firm MF Global and the disappearance of about $1 billion in customer money is now heading into its final stage without charges expected against any top executives. After 10 months of stitching together evidence on the firm’s demise, criminal investigators are concluding that chaos and porous risk controls at the firm, rather than fraud, allowed the money to disappear, according to people involved in the case. The hurdles to building a criminal case were always high with MF Global, which filed for bankruptcy in October after a huge bet on European debt unnerved the market. But a lack of charges in the largest Wall Street blowup since 2008 is likely to fuel frustration with the government’s struggle to charge financial executives. Just a few individuals — none of them top Wall Street players — have been prosecuted for the risky acts that led to recent failures and billions of dollars in losses. In the most telling indication yet that the MF Global investigation is winding down, federal authorities are seeking to interview the former chief of the firm, Jon S. Corzine, next month, according to the people involved in the case. Authorities hope that Mr. Corzine, who is expected to accept the invitation, will shed light on the actions of other employees at MF Global.
Oopsy - A firm granted primary dealer status from the Fed just got all confused and accidentally misplaced your billion dollars. A criminal investigation into the collapse of the brokerage firm MF Global and the disappearance of about $1 billion in customer money is now heading into its final stage without charges expected against any top executives. After 10 months of stitching together evidence on the firm’s demise, criminal investigators are concluding that chaos and porous risk controls at the firm, rather than fraud, allowed the money to disappear, according to people involved in the case. bygones. Doubt the "chaos and porous risk controls" excuse will fly when I try to pull a tenner out of the local 7-11 till.
After MF Global, a Need to Find New Ways to Protect Customers - The MF Global story still lingers as an insolvency matter, but now we hear rumblings that there will be no criminal charges. It may well be that no crimes were committed, but if this is so, it is time to seriously rethink how broker-dealers handle customer property. In theory, customer property at a brokerage firm should be even more secure than money in a bank, because banks use fractional reserves, meaning that by design they have “used” a large part of the deposits, while customer property at a brokerage firm is supposed to be segregated in a special fund at a third-party custodian bank. Somehow, it never works out that way.Assange Or Corzine? - The issue at hand is the sense that we have entered a phase of exponential criminality and corruption. A slavering crook like Corzine who stole $200 million of clients’ funds can walk free. Meanwhile, a man who exposed evidence of serious war crimes is for that act so keenly wanted by US authorities that Britain has threatened to throw hundreds of years of diplomatic protocol and treaties into the trash and raid the embassy of another sovereign state to deliver him to a power that seems intent not only to criminalise him, but perhaps even to summarily execute him. The Obama administration, of course, has made a habit of summary extrajudicial executions of those that it suspects of terrorism, and the detention and prosecution of whistleblowers. And the ooze of large-scale financial corruption, rate-rigging, theft and fraud goes on unpunished.
Everything You Always Wanted to Know About CDOs (But Were Afraid to Ask) - Bill Bratton and I have a new paper out, called A Transactional Genealogy of Scandal: from Michael Milken to Enron to Goldman Sachs. The paper is about the development of the collateralized debt obligation (CDO) and its incessant connection to financial scandal, from its origins in Michael Milken transactions through Enron (who knew that Chewco was basically a CDO?) and then of course Goldman Sachs' Abacus 2007-AC1 transaction. The paper is chock full of scandalous transactional detail (my personal favorite is how the Federal Home Loan Bank Board interpreted its 1% junk bond investment limit to mean 11%), but it also has a larger theoretical move: the CDO is a particular type of special purpose entity (SPE) that is often used for regulatory and accounting arbitrage purposes. SPEs are a new form of corporate alter ego. Whereas the traditional alter ego such as the subsidiary or affiliate has equity control, the SPE is nominally independent, but is in fact controlled by pre-set contractual instructions. As a result, SPEs like CDOs that are used in regulatory and accounting arbitrage transactions are particularly prone to scandal even over minor compliance violations whenever there is red ink in a deal because of the mismatch between corporate formalities (protesting separateness) and economic realities (the alter ego). Accounting treatment has caught up with the SPE, but corporate law has not. Yet because accounting gets incorporated into securities law, in particular, transaction engineers need to be particularly cognizant that liability may track the economic realities, not just the legal formalities of transactions.
Boston Fed: 78 money-funds needed sponsor help - The Federal Reserve Bank of Boston on Monday released a report finding that 78 prime money market funds between 2007 and 2011 received support from their sponsor firms and that without the help at least 21 of those would have "broke the buck" by having a net asset value of below $1 a share. The report provides ammunition to Securities and Exchange Commission Chairman Mary Schapiro and her efforts to introduce new costly reforms for the $2.7 trillion money market fund industry in the wake of the 2008 financial crisis where the Treasury created a taxpayer-backed guarantee program after a major fund "broke the buck." Schapiro is considering two major reforms for the industry, including one that would impose capital restrictions on the funds combined with limitations or fees on redemptions by consumers.
The Interchange Settlement - I've held my tongue for a while on the proposed class settlement in the multidistrict credit card interchange fee litigation (MDL 1720). I'm weighing in on it now. I've written up an analysis of the proposed settlement. It's available here. It's worthwhile noting that the settlement is not a done deal yet--at this point it is a deal between lead counsel for the proposed plaintiff class and the defendants--the settlement must still be accepted by the named plaintiffs (or at least some of them) and approved by the court. The short of my analysis is that the settlement is an exceedingly bad deal for merchants. The dollars involved amount to just two months of interchange fees, the settlement does not prevent future increases in interchange fees, the injunctive relief offered is largely illusory, the relief is unbelievably broad (and likely unconfirmable because it violates due process by purporting to bind future merchants who do not yet exist!), and it lumps into a single class merchants who are receiving different types of relief and may thus have divergent interests. Perhaps the most troubling aspect of the settlement is that the centerpiece of injunctive relief—removing the no-surcharge rule—is of no value to over 40% of US merchants—those based in the 10 populous states with state no-surcharge laws and those who want to accept Amex as well as MasterCard and Visa.
Credit Card Data - The CFPB released a beta version of its complaint database on June 19th. Right now, one can only search credit card complaints, which the CFPB began taking on the first birthday of its creation, July 21, 2011. My takeaway is that this is major step forward for the disclosure of complaint data but that the "beta" in the website is well-deserved. You can see some neat graphics and and best of all you can download the raw data. One problem is that this is SO apparently cutting-edge and sophisticated that I couldn't figure out how to use many of the features after a half-hour of poking around (and while some may disagree, I think it's safe to say I have more technology and statistical skills than the vast majority of U.S. consumers). Below was my effort to use the "embed" graphic feature that is touted as allowing one to "publish this dataset on the internet at large." https://data.consumerfinance.gov/dataset/Complaints-by-issue/c2vc-5i9b/widget_preview?width=760&height=646&customization_id= .
Exclusive: U.S. banks told to make plans for preventing collapse (Reuters) - U.S. regulators directed five of the country's biggest banks, including Bank of America Corp and Goldman Sachs Group Inc, to develop plans for staving off collapse if they faced serious problems, emphasizing that the banks could not count on government help. The two-year-old program, which has been largely secret until now, is in addition to the "living wills" the banks crafted to help regulators dismantle them if they actually do fail. It shows how hard regulators are working to ensure that banks have plans for worst-case scenarios and can act rationally in times of distress. Officials like Lehman Brothers former Chief Executive Dick Fuld have been criticized for having been too hesitant to take bold steps to solve their banks' problems during the financial crisis. According to documents obtained by Reuters, the Federal Reserve and the U.S. Office of the Comptroller of the Currency first directed five banks - which also include Citigroup Inc,, Morgan Stanley and JPMorgan Chase & Co - to come up with these "recovery plans" in May 2010. They told banks to consider drastic efforts to prevent failure in times of distress, including selling off businesses, finding other funding sources if regular borrowing markets shut them out, and reducing risk. The plans must be feasible to execute within three to six months, and banks were to "make no assumption of extraordinary support from the public sector," according to the documents.
Saving the Post Office: Letter Carriers Consider Bringing Back Banking Services - On July 27, 2012, the National Association of Letter Carriers adopted a resolution at their national convention in Minneapolis to investigate the establishment of a postal banking system. The resolution noted that expanding postal services and developing new sources of revenue are important components of any effort to save the public post office and preserve living-wage jobs; that many countries have a long and successful history of postal banking, including Germany, France, Italy, Japan and the United States itself; and that postal banks could serve the nine million people who don't have a bank account and the 21 million who use usurious check cashers, giving low-income people access to a safe banking system. "A USPS [United States Postal Service] bank would offer a 'public option' for banking," concluded the resolution, "providing basic checking and savings - and no complex financial wheeling and dealing." What is bankrupting the USPS is not that it is inefficient. It has been self-funded throughout its history. But in 2006, Congress required it to prefund postal retiree health benefits for 75 years into the future, an onerous burden no other public or private company is required to carry. The USPS has evidently been targeted by a plutocratic Congress bent on destroying the most powerful unions and privatizing all public services, including education. Britain's 150-year-old postal service is on the privatization chopping block for the same reason, and its postal workers have also vowed to fight. Adding banking services is an internationally tested and proven way to maintain post office solvency and profitability.
Can the Credit Union Industry Survive -- Its Regulator? - It is axiomatic that regulators never act before a crisis. But the public still does not understand the degree to which regulators encourage acts of willful idiocy for political purposes. Witness the recent track record for The National Credit Union Administration, the supposed regulator of the credit union industry, which has become an engine of systemic risk in this small but significant credit sector. The credit union industry is a bit over $1 trillion in assets, mostly in very small institutions around the country. The NCUA has a federally insured insurance fund. The skew towards very small institutions in the world of credit unions is even more severe than among banks, where 6 out of every seven depositories is a community bank. The NCUA took an especially severe kicking in the subprime mess, with several corporate credit unions gutted by losses on subprime securities. A tab measured in the tens of billions of dollars still awaiting a final resolution. See my comment in American Banker, “Say No to More Lending Power for Credit Unions,” describing how the largest corporate credit unions dug an amazing financial hole by speculating on subprime debt – with the full knowledge of the NCUA and other federal regulators. This fiscal black hole created by the NCUA is guaranteed by US taxpayers and now threatens the existence of little credit unions around the nation.
Unofficial Problem Bank list increases to 900 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Aug 10, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808: Activity by the Federal Reserve was responsible for most of the changes to the Unofficial Problem Bank List this week. The list pushed back up to 900 institutions but assets dropped by $780 million to $348.6 billion after three additions and two removals. A year ago, the list held 988 institutions with assets of $411.3 billion.
Insight: Fannie Mae, Freddie Mac clamping down on banks (Reuters) - Government-owned Fannie Mae and Freddie Mac are stepping up efforts to find bad home loans that they can force mortgage lenders to buy back from them, providing an increasingly bigger headache to banks. The government-controlled companies are squabbling with banks over who should bear the burden of losses from the housing crunch, in particular loans made between 2005 and 2008, when the market was at its frothiest. Fannie Mae and Freddie Mac's efforts will translate to higher mortgage losses for banks in the coming quarters. But the end of the fighting may be in sight. Fannie Mae, the larger of the two finance companies, is more than halfway through its review of loans to try to sell back to banks and is mainly focusing on that four-year period, a source familiar with the matter said. Fannie Mae and Freddie Mac buy mortgages from banks and bundle the loans into bonds that get sold to investors. The loans are supposed to have met guidelines to be eligible for bundling. The two mortgage giants guarantee the packaged bonds.Historically, Fannie Mae and Freddie Mac have taken banks at their word when they said loans were eligible. If later there were problems (because the borrower's income was not properly verified, for example), then Fannie Mae and Freddie Mac could ask banks to buy back the mortgages at face value and absorb any losses.
U.S. tightens reins on Fannie Mae, Freddie Mac (Reuters) - The U.S. Treasury on Friday revamped the bailout of Fannie Mae and Freddie Mac to curb chances the giant mortgage finance firms could emerge from government control as the powerful, profit-driven corporations they once were.The Treasury said it would require the companies, whose massive losses threatened the financial system after the housing bubble burst in 2007, to shrink their investment portfolios more quickly and turn over any profits to taxpayers.Previously, the companies, which buy mortgages from lenders and repackage them as securities for investors, were required to make a 10 percent dividend payment to the Treasury. At times, they had to borrow from the Treasury just to make the payments. Now, they simply won't be able to retain any profits. The new terms mark the latest step in Fannie Mae and Freddie Mac's fall from grace. The two companies were highly profitable and politically powerful as the U.S. housing bubble built. Now, most officials think they should eventually be dissolved.Lawrence Yun, chief economist at the National Association of Realtors, said the changes effectively make the two companies government utilities. "That new institution will be such that it's not going to be a for-profit company. It's just going to generate enough revenue to operate," he said.
U.S. to revamp Fannie, Freddie bailout terms - The Treasury Department on Friday announced it would rework the terms of its bailout of mortgage giants Fannie Mae and Freddie Mac to make sure taxpayers benefit from any profits.The government also affirmed its backing of the two firms, a move intended to assure the lending industry, which counts on Fannie and Freddie to finance the nation’s mortgage market. “We are taking the next step toward responsibly winding down Fannie Mae and Freddie Mac, while continuing to support the necessary process of repair and recovery in the housing market,” Michael Stegman, a Treasury official who oversees housing finance policy, said in a statement. The renegotiated terms of the four-year-old federal conservatorship require the firms to downsize the number of mortgages they hold on their books by 15 percent annually, up from 10 percent. The accelerated timetable would put such investment portfolios on track to reach the government’s target of $250 billion four years earlier than originally scheduled. Even after this, the two firms would still guarantee trillions in mortgages until lawmakers agree on a way to wind down the firms altogether.
Judge Tosses Case Against Fannie and Freddie - A federal judge dismissed claims that Fannie Mae and Freddie Mac claimed false exemptions from recordation taxes in property transfers. Lead plaintiff Robert Hager, of Nevada, sued the Federal National Mortgage Association and the Federal Loan Mortgage Corporation in a qui tam action which also involved intervening defendants Wells Fargo and the Federal Housing Finance Agency. "Accepting plaintiffs' argument would lead to near absurdity," U.S. District Judge John Bates wrote in his opinion. "It would leave the statutory provisions, so sweeping their language, virtually meaningless: Fannie Mae and Freddie Mac would be free only from capitations and taxes upon personal property. The entities' day-to-day operations would be subject to the full panoply of taxation." Hager sued the government-sponsored mortgage underwriters in the District of Columbia and Nevada Federal Courts, challenging their claimed exemption from the recordation tax, a tax levied when a deed that conveys title to real property or a security interest instrument is submitted for recordation. Hager claimed that Fannie and Freddie violated the D.C. False Claims Act by claiming not to owe recordation taxes.
Washington Supreme Court Issues MERS Smackdown - While MERS has served to illustrate the utter recklessness of the securitization industry, in that its promoters apparently believed that they could implement it nationwide and simply force state law to comply. But as the banks have found out, the law is not always so obliging. Today, Washington State, which is a non-judical foreclosure state, gave MERS a serious setback. Its finding in Bain v. Metropolitan Mortgage, that MERS may not foreclose in Washington, is not as bad as it sounds, since MERS instructed in servicers to stop foreclosing in its name in 2011. But the reasoning of the ruling is far more damaging. And the court has opened up new grounds for litigation against MERS in Washington, in determining that it false claim to be a beneficiary under a deed of trust is a deception under the state’s Consumer Protection Act (whether that can be proven to have led to injury is a separate matter). The case came before the Washington Supreme court because it was asked by a Federal district court to address three certifying questions: Is MERS is a lawful beneficiary with the power to appoint trustees within the deed of trust act if it does not hold the promissory notes secured by the deeds of trust? If no, then: What is the legal effect of Mortgage Electronic Registration Systems, Inc., acting as an unlawful beneficiary under the terms of Washington’s Deed of Trust Act? andCan consumers claim violations of the state’s Consumer Protection Act based on MERS having incorrectly claimed it was a beneficiary of a deed of trust? The answer to the overriding question was indeed “no”. The court’s immediate objection was straightforward. MERS claims not merely to be an electronic registry of deeds, but also to be a beneficiary of the deed of trust.
California Foreclosure Fraud Settlement Monitor: Servicers Dragging Their Feet - Katherine Porter, the monitor tasked with specific oversight for California’s foreclosure fraud settlement, says what most of us could have suspected: the servicers are dragging their feet on compliance. The California monitor of the $25 billion national mortgage servicing settlement received roughly 1,100 complaints in the last month from borrowers reporting a slow uptake to the new rules, according to an official in the state attorney general office [...] Brian Nelson, special assistant AG for the California Justice Department said during a HousingWire webinar on the state’s new Homeowner Bill of Rights, that the largest servicers are working to make the changes, especially BofA. But it may not be until October until homeowners start seeing the results, he said.
Brockton Saves $ and Protests Foreclosure Misdeeds by Moving $170 Million Account from Bank of America – Yves Smith - Although consumer-level “move your money” campaigns are popular, the sad thing is that many individuals are only marginally profitable as checking/savings account customers. So transferring your account out does not have enough of an impact to make a difference (unless you do so in a way that makes branch staff uncomfortable, by doing it in person and describing their banks’ bad behavior. Enough of that might make a psychological difference). The key to retail customer profitability is cross selling, usually at the time of account opening. So the checking account is the gateway product for them to get customers to sign up for retirement accounts/brokerage, credit cards, and (hopefully sooner rather than later) mortgages. By contrast, bigger customers who use multiple products are a sweet spot for banks. Getting churches, endowments, small businesses, and cities to move money out of the “too big to jail” banks hits them in their wallet and can also generate the sort of press coverage that will make it easier for their peers to make similar moves. The Boston Globe reports on how the City of Brockton, which has one of the highest foreclosure rates in the state of Massachusetts, decided to save money and send a message by moving its payroll account from Bank of America: Brockton will move its $170 million payroll account out of Bank of America, a move the city says makes good business sense but which advocates for residents facing foreclosure see as a just response to the national lender’s role in the subprime mortgage crisis…. in this case the switch means a savings of $20,000 to $30,000 a year in fees….
HOAs Foreclose on Deadbeat Banks - South Florida homeowner associations are foreclosing on some of the nation’s largest banks, accusing the lenders of failing to pay thousands of dollars in maintenance fees on repossessed properties. The foreclosure filings are a growing trend as associations become more aggressive in going after delinquent fees that have crippled HOA budgets during the housing bust. Banks owe a portion of the past-due maintenance fees and the full amount from the date they take title to the property, attorneys said. If the lenders fall behind, they’re subject to foreclosure just as an individual owner would be. In one Broward County case, Deutsche Bank didn’t pay maintenance fees for nearly three years on a townhome it repossessed in September 2009 at the Southbridge development in Pembroke Pines, said Ben Solomon, a lawyer for the association. The Southbridge HOA filed for foreclosure against Deutsche Bank last year. The bank finally paid $25,553 in June — and only then because it had to convey clear title to another buyer
Serious Mortgage Delinquencies and In-Foreclosure by State - Last week the MBA released the results of their Q2 National Delinquency Survey. One of the key points was the difference in the number of mortgage in the foreclosure process between judicial and non-judicial foreclosure states. The first graph below is from the MBA and shows the percent of loans in the foreclosure process by state. The second graph shows all stages of delinquency (and in-foreclosure) by states, sorted by the percent seriously delinquent (90+ days plus in-foreclosure). 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%). As Jay Brinkmann noted, California (3.07% down from 3.29%) and Arizona (3.24% down from 3.57%) are now a percentage point below the national average.The second graph includes all delinquent loans (sorted by percent seriously delinquent). Florida and New Jersey have the highest percentage of serious delinquent loans, followed by Nevada, New York, Illinois, Maine and Maryland. Nevada still leads with the highest percent of loans 90+ days delinquent. Previous high delinquency states like California and Arizona are now well down the list.
Mortgage Delinquencies by Loan Type -- The following graphs show the percent of loans delinquent by loan type based on the MBA National Delinquency Survey: Prime, Subprime, FHA and VA. First a table comparing the number of loans in Q2 2007 and Q2 2012 so readers can understand the shift in loan types. This 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. The second graph is for all prime loans. This is the category with the most seriously delinquent loans. Since there are far more prime loans than any other category (see table above), about half the loans seriously delinquent now are prime loans - even though the overall delinquency rate is lower than other loan types. This graph is for subprime. This category gets most of the attention - mostly because of all the terrible loans made through the Wall Street "originate-to-distribute" model and sold as Private Label Securities (PLS). Not all PLS was subprime, but the worst of the worst loans were packaged in PLS. This graph is for FHA loans. In Q2, there was a shift from 90+ days deliquent to in-foreclosure, but the overall percent of loans delinquent or in-foreclosure declined in Q2. The improvement in late 2010 was a combination of the increase in number of loans (recent loans have lower delinquency rates) and eliminating Downpayment Assistance Programs (DAPs). These were programs that allowed the seller to give the buyer the downpayment through a 3rd party "charity" (for a fee of course). The buyer had no money in the house and the default rates were absolutely horrible. The last graph is for VA loans. This is a fairly small but growing category (see table above). There are still quite a few subprime loans that are in distress, but the real keys are prime loans and FHA loans.
Lawler: Table of Short Sales and Foreclosures for Selected Markets - Yesterday I posted some distressed sales data for Sacramento. I'm following the Sacramento market to see the change in mix over time (short sales, foreclosure, conventional). Economist Tom Lawler has been digging up similar data, and he sent me the table below for several more distressed areas. For all of these areas, the share of distressed sales is down from July 2011 - and for the areas that break out short sales, the share of short sales has increased (except Minneapolis) and the share of foreclosure sales are down. In most areas, short sales are higher than foreclosures, and for some areas like Phoenix, Reno and Las Vegas, short sales are now double the rate of foreclosures. From Lawler: Below is a table showing the share of home sales by realtors in various markets identified in local MLS as being “distressed,” as reported by local realtor associations or MLS. As the table indicates, the distressed sales share of total sales last month was down compared to last July in all of the above markets, in some (but not all) cases by significant amount. And for those areas breaking out “distressed” sales by short sales or foreclosures, in most (but not all) cases the short sales share was higher, and the foreclosure sales share significantly lower, than a year ago.
Realty Q&A: When your mortgage servicer changes - Question: I am one of the unfortunate homeowners who drowned in the subprime lending crisis. I bought my home in July 2005 and lost it to foreclosure in February 2009. The loan was an 80-20 interest-only mortgage, with the same lender holding both the 80% first mortgage and the 20% second. But after closing, the second mortgage was transferred to another lender and I was told in a letter to send the payment for that loan to the new servicer. There was no other documentation provided except a letter directing me to send the payments to this new lender. Long story short, it now appears to me that the loan documents may be forged. Also, is this transfer legal since the original note signed by me was with only one lender? Another part of the trauma due to the foreclosure is that because the total mortgage amount was not satisfied fully to cover the first lender, the second lender got nothing. And as a result, the second lender added an entry to my credit report as “charged off.” I found out about this when I applied for a new mortgage three years hence. I was rejected because of the so-called charge-off. So I called the second lender and was told its records show the account as “inactive” since April 2009. I asked specifically, and was told categorically that I do not owe anything on that particular account for that property. I was advised to call all the three credit bureaus to have the erroneous entry removed. What is the best solution to my situation?
What Will We Do Without Wells Fargo? - The news flash that rocked the mortgage brokerage industry came out on July 12th. Wells Fargo decided that it would no longer fund mortgages that were originated, priced, and sold by independent mortgage brokers. For most people, this didn’t mean much; however, when you understand the context behind it, this is a huge blow not only to brokers, but to everyone who borrows for residential finance. As it stands, one in three mortgages originated by people in this country are done through Wells Fargo. Another key statistic is, that at one time, mortgage brokers originated 40% of all mortgages. Since 2008, this number has dwindled as enhanced scrutiny and the advent of the NMLS (National Mortgage Licensing Registry) testing requirements sent many brokers packing or back to school in order to maintain their profession. Settlements exceeding $25 billion in fines, fees, and penalties were levied against the major banks for various mortgage infractions in the last 36 months. This has caused Citibank, Chase, Bank of America, and Goldman Sachs to abandon the mortgage broker and/or correspondent (“direct lender”) distribution channels. As other mortgage professionals and I had shared with so many people, this is not good for brokers, but in the long run it is not good for the American people. In the end, borrowers will pay more in costs, fees, and higher interest rates.
The One Housing Solution Left: Mass Mortgage Refinancing - Stiglitz and Zandi - MORE than four million Americans have lost their homes since the housing bubble began bursting six years ago. An additional 3.5 million homeowners are in the foreclosure process or are so delinquent on payments that they will be soon. With 13.5 million homeowners underwater — they owe more than their home is now worth — the odds are high that many millions more will lose their homes. Housing remains the biggest impediment to economic recovery, yet Washington seems paralyzed. .. Late last month, the top regulator overseeing Fannie Mae and Freddie Mac blocked a plan backed by the Obama administration to let the companies forgive some of the mortgage debt owed by stressed homeowners. .With principal writedown no longer an option, the government needs to find a new way to facilitate mass mortgage refinancings. With rates at record lows, refinancing would allow homeowners to significantly reduce their monthly payments... A mass refinancing program would work like a potent tax cut. Senator Jeff Merkley, an Oregon Democrat, has proposed a remedy. Under his plan,... underwater homeowners who are current on their payments and meet other requirements would have the option to refinance to either lower their monthly payments or pay down their loans and rebuild equity.
House Prices and a Foreclosure Supply Shock - Those making the argument for further house price declines usually start with “shadow inventory”. Although there is no formal definition of “shadow inventory” it usually includes 1) some properties with homeowners who are current on their mortgages, but have negative equity in their homes, and 2) properties not listed for sale, but where the homeowner is seriously delinquent on their mortgage or already in the foreclosure process. This can lead to some pretty scary numbers being bandied about. As an example, CoreLogic recently reported that “11.4 million, or 23.7 percent, of all residential properties with a mortgage were in negative equity at the end of the first quarter of 2012”. And LPS reported 1.6 million loans were 90+ days delinquent at the end of June, and another 2.1 million are in the foreclosure process. These numbers suggest a coming “flood” of foreclosures to those arguing house prices will fall further. I think this is incorrect. If we look at negative equity, it is a serious issue for many homeowners, but it seems unlikely they will default en masse. Recent homebuyers who have negative equity are probably less than 10% underwater. Probably the biggest impact on the housing market is that people with negative equity can’t sell, and this restricts supply (the opposite of the “shadow inventory” argument). A more immediate concern is the 3.7 million homeowners currently 90+ days delinquent or in the foreclosure process. Many of these properties will eventually be a distressed sale, either a foreclosure or short sale, although some will receive loan modifications. It is important to remember that some of these homes are already listed for sale (so they are included in the “visible inventory”), and there has been a significant shift by lenders from foreclosures to short sales.
In spite of easier underwriting standards, home equity balances continue to decline - According to the latest OCC survey, banks in the US have been easing credit standards for home equity loans. Except for the poorly collateralized loans (HLTV), the survey indicates banks are once again becoming increasingly comfortable with this sector. Moreover banks now view their home equity portfolios as less risky. What's surprising is that even the risky HLTV home equity portfolios (loans with "high loan-to-value" ratios) are viewed by banks as posing lower credit risk. The concern over high rates of default for these loans has eased sharply. With these facts in mind, one would think that the holdings of these loans on bank balance sheets should be growing. But the reality is quite different. Home equity usage spiked in 2008/09 as consumers tapped revolving credit in fear of losing access to financing. Balances have been declining since.Clearly banks reduced home equity availability in cases where consumers refinanced their primary mortgages (refinancing of first lien mortgages usually required consent from the second lien lenders to make sure they retain their lien status). Balances also came down in cases of foreclosure via write-downs. But as the bank survey shows, a great deal of this reduction has been driven by lower demand from the borrowers rather than tightening credit standards. The US consumer deleveraging continues.
Report: Housing Inventory declines 19.3% year-over-year in July - From Realtor.com: July 2012 Real Estate Data The total US for-sale inventory of single family homes, condos, townhomes and co-ops (SFH/CTHCOPS) remains at historic lows across the country, with 1.866 million units for sale in July, down -19.25% compared to a year ago and -39.80% below its peak of 3.10 million units in September, 2007 when Realtor.com began monitoring these markets. The median age of the inventory of for sale listings was 88 days in July 2012, up slightly from June (84), but -9.27% below the median age one year ago (July 2011). While the median age of the inventory is highly seasonal, the year-over-year decline is consistent with other data showing a significant improvement in market conditions compared to one year ago. For sale inventories of SFH/CTHCOPS in July declined on an annual basis in all but two of the 146 MSAs monitored by Realtor.com, with for-sale inventory dropping -20% or more in 67 of the 146 markets covered. Eight out of 10 MSAs with the largest year-over-year declines in their for-sale inventories in July 2012 are in California. The NAR is scheduled to report July existing home sales and inventory next week on Wednesday, August 22nd. The key number in the NAR report will be inventory, and inventory will be down sharply again year-over-year in July.
Shadow Inventory: It’s Not as Scary as It Looks - The housing market is improving because there are more buyers chasing fewer homes. Skeptics of a housing bottom, however, often point to a scary set of numbers: the “shadow inventory” of potential foreclosures—the millions of mortgages that are either in foreclosure or in default. It’s true that home prices are unlikely to see brisk gains once they do hit bottom because it will take years to absorb this glut. But will this phantom inventory derail the incipient housing bottom? Maybe not, say a number of housing analysts. There are several reasons why the shadow inventory isn’t as scary as it sounds: It’s concentrated in a handful of markets—it isn’t inherently a national phenomenon. It is being offset by improved demand, particularly from investors. And the housing vacancy rate is low, a product of very little new home construction over the past few years that could counterbalance continued high inventories of foreclosed homes. While the shadow is very large, one often-overlooked fact is that the shadow isn’t nearly as large as it was two years ago. Barclays Capital estimates that at the end of May there were around 1.8 million mortgages in the foreclosure process and another 1.45 million where borrowers have missed at least three payments. That puts the total number of properties that could be repossessed and resold by banks at around 3.25 million mortgages. But it is down from a peak of 4.25 million in February 2010.
Shadow Inventory: Monitor Banks’ Speed, Not Just Volume - What’s more worrisome than the actual “shadow inventory” is how banks dispose of it—and whether there are enough buyers willing to purchase the homes when they do. While there were 3.25 million loans that were in the foreclosure process or in default at the end of May, banks owned around 407,000 homes at the end of May. The number of bank-owned homes is down from a peak of nearly 700,000 in September 2008. After that, changes to accounting rules and the introduction of government loan-modification programs prompted banks to slow down the process. Bank-owned foreclosures began rising again in 2010, peaking at around 600,000 that September, when banks again slowed down foreclosures, this time amid the “robo-signing” scandal. Since then, banks have been very slow to process foreclosures, particularly in judicial states, where courts are overwhelmed by the volume cases and banks have struggled to properly document their ownership of mortgages. But the problems haven’t been limited to so-called judicial states such as Florida, New York, and New Jersey. Non-judicial states such as Massachusetts and California have recently passed laws imposing new requirements on banks before they foreclose, which is likely to further slow down the process. In Nevada, a new law that took effect last fall has brought new foreclosures to a virtual standstill.
Shadow Inventory: How Low New Construction Helps the Outlook - There’s been a lot of attention over the last few years on the “shadow inventory” of potential foreclosures — a pent-up supply of homes that could smother an incipient housing recovery. But there’s been comparatively less attention on the lack of new housing construction, which has helped to offset the potential damage from elevated levels of foreclosed properties. New home building has been at its lowest levels since World War II in 2009, 2010, and 2011. "Not too many people talk about the lack of new construction over the last several years, which has set the foundation for a snapback in pricing,” says Michael Sklarz, president of real-estate research firm Collateral Analytics. Frank Nothaft, the chief economist at Freddie Mac, elaborated on this point in a research note published last week. While there was severe overbuilding at the depth of the housing bust, from 2006 to 2009, “the relatively small amount of new construction, coupled with increased household formation, has allowed much of the excess vacant inventory to be absorbed over the past few years,” he wrote.
”Shadow” & “Ghost” Inventory Quantified - Those estimating “shadow” inventory at levels inconsistent with a multi-year drag on housing are “definitionally” challenged. Moreover, they have bad data. Bottom Line: based on the data and simple math we have at least 10 -years of distressed supply to work through based on the past two years average monthly distressed sales demand quoted by the National Association of Realtors. Most “Shadow” inventory estimates use incorrect demand numerator assumptions and do not account for borrowers who are technically “stuck”. Note, that the analysis below looks at two measure; 1) real “shadow” inventory and time to clear and the more important 2) “ghost” supply that traps 25 million borrowers in their houses — the prime repeat buyer cohort who must be active in order for housing to be able to reach “escape velocity one day — making them useless in the macro housing market equation.
Liberals are more likely to be housing NIMBYs - I just caught up with Matt Kahn's JUE paper on the subject. The abstract: Traditional explanations for why some communities block new housing construction focus on incumbent home owner incentives to block entry. Local resident political ideology may also influence community permitting decisions. This paper uses city level panel data across California metropolitan areas from 2000 to 2008 to document that liberal cities grant fewer new housing permits than observationally similar cities located within the same metropolitan area. Cities experiencing a growth in their liberal voter share have a lower new housing permit growth rate. The paper is quite thorough, using a wide variety of specifications, and the results are quite robust. My research (and that of many others) shows that impediments to homebuilding are the largest cause of expensive houses. By impeding home construction, liberals are contributing to the rent being too damn high. Needless to say, this hurts low income households more than anyone else.
Housing starts fell unexpectedly in July - Groundbreaking on new U.S. homes unexpectedly fell in July and gains from the prior month were revised lower, a reminder of the housing market's weakness despite some recent signs of recovery. The Commerce Department said on Thursday that housing starts dropped 1.1 percent last month to a seasonally adjusted annual rate of 746,000 units. The reading, which is prone to significant revisions, was below the median forecast in a Reuters poll of a 757,000-unit rate. There were also some positive signals in Thursday's report. New permits for building homes rose 6.8 percent in July to a 812,000 unit pace, the highest rate since August 2008.
Housing Starts declined to 746 thousand in July - From the Census Bureau: Permits, Starts and Completions Privately-owned housing starts in July were at a seasonally adjusted annual rate of 746,000. This is 1.1 percent below the revised June estimate of 754,000, but is 21.5 percent above the July 2011 rate of 614,000. Single-family housing starts in July were at a rate of 502,000; this is 6.5 percent below the revised June figure of 537,000. The July rate for units in buildings with five units or more was 229,000. Privately-owned housing units authorized by building permits in July were at a seasonally adjusted annual rate of 812,000. This is 6.8 percent above the revised June rate of 760,000 and is 29.5 percent above the July 2011 estimate of 627,000. Single-family authorizations in July were at a rate of 513,000; this is 4.5 percent above the revised June figure of 491,000. Authorizations of units in buildings with five units or more were at a rate of 274,000 in July. Total housing starts were at 746 thousand (SAAR) in July, down 1.1% from the revised June rate of 754 thousand (SAAR). Note that June was revised from 760 thousand. Single-family starts decreased 6.5% to 502 thousand in July. The second graph shows total and single unit starts since 1968.
New Residential Construction Declines -1.1% in July 2012 - The July 2012 Residential construction report showed Housing starts decreased, -1.1%, from June's revised 754,000, to a level of 746,000. In June, housing starts increased by a revised +6.8%. Housing starts have increased +21.5% from a year ago, outside the ±14.2% margin of error. For the month, single family housing starts decreased -6.5%. Apartments, 5 units or more of one building structure, increased +9.6%, but don't get too excited, this monthly percentage change has a whopping ±31.3% error margin. Home construction statistics have massive error margins, so don't bet the farm on the monthly percentage changes. Housing starts are defined as when construction has broke ground, or started the excavation. One can see how badly the bubble burst on residential real estate in the below housing start graph going back all the way to 1960. New Residential Construction housing starts has a margin of error way above the monthly percentage increases. This month has a error margin of ±9.6% percentage points on housing starts. That's why one should not get too excited on the monthly percentage change. Single family housing is 75% of all residential housing starts. Below is the yearly graph of single family housing starts going back to 1960. Housing of 5 or more units, or apartments, has increased 30.1% from a year ago, but here again, the margin of error is ±49.7%. That's almost a flip of the coin in terms of accuracy.
Comment on Housing, and Starts and Completions - This is a very important year for housing and for the economy. The budding recovery for housing starts and new home sales is positive for GDP and employment. Even though housing starts are increasing, it is from a very low level, and 2012 will still be one of the worst years for housing starts (only 2009, 2010, and 2011 will be worse). But that is good news for the economy: housing starts are on pace to be up 20% from last year (how many sectors are growing 20% this year?), and housing starts could double again over the next several years. Through July, single family starts are on pace for over 500 thousand in 2012, and total starts are on pace for about 730 thousand. That is up from 431 thousand single family starts in 2011, and 609 thousand total starts. Starts are running above the forecasts for most analysts (however Lawler and the NAHB were close). But even with the increase in starts, completions will be near record lows again in 2012. Here is an update to the graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. The blue line is for multifamily starts and the red line is for multifamily completions. The rolling 12 month total for starts (blue line) has been increasing steadily, and completions (red line) is lagging behind - but completions will follow starts up over the course of the year (completions lag starts by about 12 months). This means there will be an increase in multi-family deliveries next year. The second graph shows single family starts and completions. It usually only takes about 6 months between starting a single family home and completion - so the lines are much closer. The blue line is for single family starts and the red line is for single family completions. Completions have barely turned up, but will increase over the next several months.
Quarterly Housing Starts by Intent compared to New Home Sales - In addition to housing starts for July, the Census Bureau released Housing Starts by Intent for Q2. This is a very useful report. For starts of single family structures, the Census Bureau includes owner built units and units built for rent that are not included in the new home sales report. For an explanation, see from the Census Bureau: Comparing New Home Sales and New Residential Construction We are often asked why the numbers of new single-family housing units started and completed each month are larger than the number of new homes sold. This is because all new single-family houses are measured as part of the New Residential Construction series (starts and completions), but only those that are built for sale are included in the New Residential Sales series. The quarterly report released this morning showed there were 106,000 single family starts, built for sale, in Q2 2012, and that was just above the 103,000 new homes sold for the same quarter (Using Not Seasonally Adjusted data for both starts and sales).This graph shows the NSA quarterly intent for four start categories since 1975: single family built for sale, owner built (includes contractor built for owner), starts built for rent, and condos built for sale.Single family starts built for sale were up about 28% compared to Q2 2011. This is the highest level since 2008. Owner built starts were up slightly year-over-year from Q2 2011. And condos built for sale are still near the record low. The 'units built for rent' has increased significantly and is up about 48% year-over-year. The second graph shows quarterly single family starts, built for sale and new home sales (NSA).
The Truth About How The Fed Has Destroyed The Housing Market - When observing the trends in the housing market, one has two choices: i) listen to the bulls who keep repeating that "housing has bottomed", a common refrain which has been repeated every single year for the past four, or ii) look at the facts. We touched briefly on the facts earlier today when we presented the latest housing starts data:construction of single family residences remains 46 percent below the long-term trend; the more volatile multifamily houses is 15 percent below trend and demand for new homes 47 percent below. This is indicative of reluctance by households to make long-term investments due to fear of another downturn in housing prices. Bloomberg summarizes this succinctly: "This historically weak demand for new homes is inhibiting the recovery of demand for construction workers as well, about 2.3 million of whom remain without work." But the best visual representation of the housing "non-bottom" comes courtesy of the following chart of homes in negative or near-negative equity, which via Bloomberg Brief, is soared in Q4, and is now back to Q1 2010 level at over 13.5 million. What this means is that the foreclosure backlog and the shadow inventory of houses on the market could be as large as 13.5 million in the future, which translates into one simple word: supply.
Housing’s Fortune Depends on Apartment Living - Reports from the housing front continue to show signs of stability. But the housing landscape is different from the boom years. Apartment construction is propping up the housing industry. For the first seven months of 2012 versus the same 2011 period, housing starts involving five or more units are up 41.4% compared with a 20.7% gain for single-family homes. Apartment projects now account for 28% of all new starts. Back in the housing boom of the 2000s, the share was 17.4% and in the more normal 1990s the share was 16.7%. The growth in apartment construction is the result of the shift toward renting rather than owning a home. The preference is a matter of current economic and financial realities. Younger workers aren’t making enough to save up the down payment or qualify for a mortgage. Past homeowners who defaulted on a previous mortgage also can’t get financing. And potential buyers have been sitting on the fence, anticipating more price declines. Since past construction was slanted toward single-family homes, vacancies among rental properties are at their lowest rate since 2002. Consequently, rentals have become a seller’s–or rather landlord’s–market. According to the real-estate website Trulia, U.S. rents in July increased 5.3% from year-ago levels. Government data show June rental income was up 12.4% over the past year, compared with a 3.5% gain for all personal income.
Home Builders’ Confidence Hits Five-Year High - U.S. home builders’ confidence jumped for a fourth consecutive month in August, as the housing market’s stabilization has been one of the positive developments in the economy in recent months. The National Association of Home Builders said Wednesday its housing market index rose two points to 37 this month, the highest level since February 2007. The results were above expectations. Economists polled by Dow Jones Newswires had forecast a reading of 34.
NAHB Builder Confidence increases in August, Highest since February 2007 - The National Association of Home Builders (NAHB) reported the housing market index (HMI) increased 2 points in August to 37. Any number under 50 indicates that more builders view sales conditions as poor than good. From the NAHB: Builder Confidence Continues To Improve in August Builder confidence in the market for newly built, single-family homes improved for a fourth consecutive month in August with a two-point gain to 37 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. This gain builds on a six-point increase in July and brings the index to its highest level since February of 2007. Every HMI component posted gains in August. The components gauging current sales conditions and traffic of prospective buyers each rose three points, to 39 and 31, respectively, while the component gauging sales expectations in the next six months inched up one point to 44. All were at their highest levels in more than five years.This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the August release for the HMI and the June data for starts (July housing starts will be released tomorrow). A reading of 37 was above the consensus.
Problems Riddle Moves to Collect Credit Card Debt - The same problems that plagued the foreclosure process — and prompted a multibillion-dollar settlement with big banks — are now emerging in the debt collection practices of credit card companies. As they work through a glut of bad loans, companies like American Express, Citigroup and Discover Financial are going to court to recoup their money. But many of the lawsuits rely on erroneous documents, incomplete records and generic testimony from witnesses, according to judges who oversee the cases. Lenders, the judges said, are churning out lawsuits without regard for accuracy, and improperly collecting debts from consumers. The concerns echo a recent abuse in the foreclosure system, a practice known as robo-signing in which banks produced similar documents for different homeowners and did not review them.
Banks Falsify Credit Card Lawsuits in Ninety Percent of Cases? - We hear every week about the massive LIBOR interest rate fixing, or the shady practices by which banks drain money from local municipalities, or the false promises given to homeowners across the country by the finance industry, or as much as 90% of foreclosed homes remaining off the market but still shuttered in and out of dispassionate algorithms, or that San Francisco’s assessor discovered ‘errors’ in 84% of home mortgage foreclosures (read: scams). It’s not a big leap of the imagination then to consider that almost all credit card lawsuits brought by banks are fraudulent. Lenders are still continuing the dubious fraud that caused such a scandal last year with robo-signing. via Russia Today: US credit card companies have been churning out lawsuits and improperly collecting debt from consumers 90 percent of the time, at least according to a New York judge who deals with these cases. Lawsuits produced by credit car companies to recoup unpaid bills often rely on inaccurate documents, incomplete records and generic testimonies from witnesses who repeatedly testify, the New York Times reported. The companies often sue clients for more money than is owed. “I would say that roughly 90 percent of the credit card lawsuits are flawed and can’t prove the person owes the debt,” said Brooklyn civil court judge Noach Dear. The judge told the Times he sees as many as 100 such cases a day. By “robo-signing” documents, banks “robotically” mass-produce similar papers for different clients, without properly reviewing them.
Judge: 90% of Credit Card Lawsuits Can’t Prove Borrower Owes Money -- Credit card debt collection may achieve the dubious distinction of making mortgage servicers look good. The New York Times has been keeping a bit of a watch on this area, and reported earlier that credit card debt collection was a heavy user of robosigned affidavits. A new story recounts how credit card companies frequently file erroneous lawsuits, sometimes saying a customer owes money when they’ve paid off the balance (sound familiar?) but more often, the consumer disputes the accuracy of the balance. And unlike foreclosure-land, where even after the revelation of widespread and varied mortgage abuses, most judges are pro-bank, in the credit card realm, the conduct of lenders is so bad that experienced judges are skeptical of them. From the article: As they work through a glut of bad loans, companies like American Express, Citigroup and Discover Financial are going to court to recoup their money. But many of the lawsuits rely on erroneous documents, incomplete records and generic testimony from witnesses, according to judges who oversee the cases.Lenders, the judges said, are churning out lawsuits without regard for accuracy, and improperly collecting debts from consumers. The concerns echo a recent abuse in the foreclosure system, a practice known as robo-signing in which banks produced similar documents for different homeowners and did not review them. “I would say that roughly 90 percent of the credit card lawsuits are flawed and can’t prove the person owes the debt,” said Noach Dear, a state civil court judge in Brooklyn, who said he presides over as many as 100 such cases a day….
Counterparties: Robo-suing is the new robo-signing - Of all the bad practices of the mortgage boom and collapse, robo-signing was among the worst. Unsubstantiated and at times fraudulent foreclosure documents submitted by banks affected more than a 138,000 US homeowners. Following the great series by the American Banker’s Jeff Horwtiz, the NYT’s Jessica Silver-Greenberg reports that some of the same tactics are being employed collecting credit card debt: As they work through a glut of bad loans, companies like American Express, Citigroup and Discover Financial are going to court to recoup their money. But many of the lawsuits rely on erroneous documents, incomplete records and generic testimony from witnesses, according to judges who oversee the cases.Lenders, the judges said, are churning out lawsuits without regard for accuracy, and improperly collecting debts from consumers…“I would say that roughly 90 percent of the credit card lawsuits are flawed and can’t prove the person owes the debt,” said Noach Dear, a civil court judge in Brooklyn, who said he presided over as many as 100 such cases a day. Americans may be reducing their outstanding credit card debt, but an overhang of unpaid loans remains. And lenders are looking for ways to maximize the value of those loans: JP Morgan is settling claims that it improperly raised minimum credit card payments, and then charged borrowers a fee if they couldn’t pay the new, larger amount.
How to Beat Vulture Debt Collectors - For those not familiar with this dark underbelly of the credit markets, these vultures buy consumer debt from banks (mainly credit card receivables) that the bank has written off. That means they don’t think it’s worth pursuing. At best it’s too close to the statute of limitations expiring or the documentation is questionable or the amounts are all wrong. Most of the time. it’s worse than that: the debt was never owed (they are going after the wrong person), the debt was paid off or discharged in bankruptcy, the statute of limitations has long passed. The buyers of this debt pay pennies on the dollar and treat it like a lottery ticket. They sue, but have NO intention of spending any money on the case beyond making that filing. Their fond hope is that the borrower fails to respond, and they win a default judgment. With that in hand, they can garnish wages or bank accounts. The flip side is any minimal credible response will beat back these claims. And remember, the burden of proof is on the debt collector to demonstrate that the consumer agreed to the debt, to provide a full record of principal, interest, payments, and fees, and to prove a complete and unbroken chain of title (sound familiar?). An article by law professor Peter Holland is a superb guide on how to beat these cases. While the intended audience for this article is lawyers, it is highly accessible, and gives a sense of what an utter swampland this area is. He also stresses that it takes diligence rather than experience to pursue these cases:
Subprime Car Loans Return to Favor Among Auto Lenders - Consumers without top-tier credit are finding it easier to get new car loans, as banks and other lenders are lowering the scores needed to qualify. While that means additional sales for automakers, and enables more motorists to get into new cars and trucks, it raises questions as to whether lenders are falling into the same risky lending practices they followed before the recession. "There's a lot of lenders now that are into the subprime business," "What used to be a good score at a 650 or 700, now 550 is a good score." During the first quarter of this year, total U.S. car loans totaled $52.5 billion. That's 49 percent higher than the same period in 2009 — the recession's low point — according to Equifax's National Consumer Credit Trends Report. Also during the first quarter, the average amount financed on new vehicles rose by $589, to $25,995, and for used cars by $411, to $17,050. Furthermore, buyers are stretching out payments for longer terms: The average length of new- and used-vehicle loans jumped a full month during the first three months of this year, to 64 and 59 months, respectively.
U.S. Retail Sales Rose Solid 0.8 Percent in July — U.S. retail sales rose in July by the largest amount in five months, buoyed by more spending on autos, furniture and clothing. The Commerce Department says retail sales rose 0.8 percent in July from June. The increased followed three months of declines, including a 0.7 percent drop in sales in June. Retail sales totaled a seasonally adjusted $403.9 billion in July, up 21.4 percent from the recession low hit in March 2009. All major categories showed increases, a sign that consumers may be gaining confidence after the longest stretch of declines since the fall of 2008. Auto purchases rose 0.8 percent. Excluding autos, retail sales also increased 0.8 percent. Consumers paid more for gas in July than June, although that had little impact on the data. Retail sales excluding gasoline station sales were up 0.8 percent, the same as the overall increase
Retail Sales increased 0.8% in July - On a monthly basis, retail sales were up 0.8% from June to July (seasonally adjusted), and sales were up 4.1% from July 2011. From the Census Bureau report: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for July, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $403.9 billion, an increase of 0.8 percent from the previous month and 4.1 percent above July 2011. ... The May to June 2012 percent change was revised from -0.5 percent to -0.7%.Ex-autos, retail sales increased 0.8% in July. Sales for June were revised down to a 0.7% decrease (from 0.5% decrease). This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 21.9% from the bottom, and now 6.6% above the pre-recession peak (not inflation adjusted). The second graph shows the same data, but just since 2006 (to show the recent changes). Excluding gasoline, retail sales are up 19.1% from the bottom, and now 7.0% above the pre-recession peak (not inflation adjusted). The third graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 5.0% on a YoY basis (4.1% for all retail sales). Retail sales ex-gasoline increased 0.8% in July.
US retail sales rise for first time in four months - US retail sales rose in July for the first time in four months as demand climbed broadly for everything from cars to electronics, a sign that consumers could drive faster economic growth in the third quarter. Retail sales rose 0.8 percent last month, the Commerce Department said on Tuesday. A separate report showed US producer prices climbing in July at the fastest pace in five months, although falling energy prices pointed to muted inflation pressures, Reuters reports. The gain in retail sales was the largest since February and well above analysts' expectations. Economists polled by Reuters had expected retail sales to rise 0.3pc. The report bolsters the view that the slowdown in economic growth during the second quarter will prove temporary.
Retail Sales: At Last, an Improvement! - The Retail Sales Report released this morning shows that retail sales in July came in at 0.8% month-over-month following declines of -0.7% in June, -0.1% in May and -0.5% in April. The year-over-year change is 4.4%, which is spot on the long-term growth trend for this indicator. Today's positive report breaks the longest string of MoM declines since the six (July-Dec 2008) during the Great Recession. Now let's dig a bit deeper into the "real" data, adjusted for inflation and against the backdrop of our growing population. The first chart shows the complete series from 1992, when the U.S. Census Bureau began tracking the data. I've highlighted recessions and the approximate range of two major economic episodes. Here is the same chart with two trendlines added. These are linear regressions computed with the Excel Growth function. The green trendline is a regression through the entire data series. The latest sales figure is 6.5% below the green line end point. The blue line is a regression through the end of 2007 and extrapolated to the present. Thus, the blue line excludes the impact of the Financial Crisis. The latest sales figure is 17.7% below the blue line end point. The next chart gives us a perspective on the extent to which this indicator is skewed by inflation and population growth. The nominal sales number shows a cumulative growth of 144.7% since the beginning of this series. Adjust for population growth and the cumulative number drops to 99.9%. And when we adjust for both population growth and inflation, retail sales are up only 20.9% over the past two decades.
A Surprisingly Strong Retail Sales Report For July -- If July is supposed to be the tipping point, when the business cycle succumbs to gravity, it's not obvious in today's update on retail sales. Spending rebounded strongly last month, the U.S. Census Bureau reports. The advance estimate of U.S. retail and food services sales for July, seasonally adjusted, popped 0.8%. That's the highest monthly gain since February's 1% surge. Economists generally were projecting a gain of roughly 0.3%, Bloomberg notes. One month doesn't tell us much, of course. Still, it's worth noting that July's handsome revival is a break with the monthly declines of late. It's anyone's guess if this is a positive sign for consumer spending in the near term vs. a one-time event, but it's a lot easier to ponder the brighter possibility in light of today's numbers. More importantly, the year-over-year percentage change in retail sales turned higher in July--for the first in five months. It's premature to say that the long deceleration in the annual rate of growth for retail sales has stabilized, but here again the thought resonates a bit stronger with the July update.
Mystery Of July Retail Sales "Beat" Solved: It Is All In The "Seasonal Adjustment" - Zero Hedge - The July retail sales beat came as a surprise to many: an 0.8% increase (full series here) at a time when the data was supposed to grow at less than half this would surely be indicative of a potential turnaround in the US economy. Then we decided to do a quick spot check if maybe the Census Bureau had not adopted one of the BLS' worst habits: fudging seasonal adjustment factors. The reason for this is because we happened to notice that Not Seasonally Adjusted (full series here) retail sales data in July actually declined by 0.9% from $405.8 to $402 billion. Of course, if the Census Bureau was using a consistent, or at least remotely comparable July seasonal adjustment factor as it has in the past, this would make sense and we would move on. So we decided to look at what the July seasonal adjustment variance over the past decade has been. What we found would have shocked us if indeed this is not precisely what we expected: with the July seasonal adjustment factor routinely subtracting a substantial amount from the NSA number, averaging at -$5.2 billion, in 2012, for the first time this decade, the seasonal adjustment not only did not subtract, but in fact added "value" to the NSA number, resulting in a seasonally adjusted number that was $1.9 billion higher than the NSA number at $403.9 billion.
Morgan Stanley Defends Retail Sales' Seasonal Adjustments From "Crazy Zero Hedge Analysis" - Basically, ZH claims that a bias in the retail sales seasonal adjustment factor distorted the July results to the high side. However, they are looking at the dollar adjustment for the level of sales in July alone. Since the main focus in the retail sales report is on the percent change in seasonally adjusted monthly retail sales, the relevant comparison is the percent change in the seasonal adjustment factor between June and July. Moreover, calendar effects matter. For example, the Fourth of July holiday was midweek this year and there were only 4 shopping weekends in July 2012 -- one less than in July of the past few years. The last time the July calendar was identical to 2012 was in 2007. So, we show below a comparison of the monthly percent change in the seasonal adjustment factor for 2012, 2011 and 2007. The bottom line is that seasonal adjustment factor for July 2012 added about 2 percentage points to the monthly change in retail sales -- essentially the same as in July 2007.
Consumers Hit Stores, But Companies Aren’t Buying It - Americans are starting to spend more in stores this back-to-school season, but companies still aren’t willing to bet on a big consumer rebound by stocking up on goods—at least not yet. Retail and food-service sales jumped a higher-than-expected 0.8% last month, the Commerce Department said Tuesday, after falling for three months in a row—including a nasty 0.7% drop in June and a 0.1% slip in May. Yet other economic reports out today suggest sentiment among firms remains glum and re-stocking—a gauge of companies’ expectations of future demand—remains muted. Inventories at U.S. businesses edged up only 0.1% in June as weak demand for goods kept firms from increasing their stockpiles. Meantime, a measure of confidence among small-business owners in July by the National Federation of Independent Business dropped again as firms worried about their earnings. When businesses expect healthy sales in coming months, they stock up on inventory. But it’s probably too early for U.S. businesses to be in anything other than “wait-and-see” mode given weak domestic demand, global economic concerns, European turmoil and the U.S. election. Excluding auto sales—which can be volatile—July’s 0.8% jump in retail sales simply offsets a similar drop the month earlier.
Weekly Gasoline Update: Prices Continue to Rise - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data. Gasoline prices at the pump, rounded to the penny, rose for the sixth week after 13 weeks of decline: Regular and premium both are both averaging eight cents higher than a week ago. They are now up 49 and 48 cents, respectively, from their interim weekly lows in the December 19th EIA report. As I write this, GasBuddy.com shows three states, Hawaii, Illinois and California with the average price of gasoline above $4. DC is close behind at 3.999 (two three decimals).
July Consumer Prices Unchanged as U.S. Pricing Power Wanes - The cost of living in the U.S. was little changed in July for a second month, showing companies lack pricing power. The unexpected reading in the consumer-price index capped a 1.4 percent gain over the past 12 months, the smallest year-to- year increase since November 2010, the Labor Department reported today in Washington. The median forecast of 85 economists surveyed by Bloomberg News called for an increase of 0.2 percent. The core index, which excludes volatile food and fuel costs, rose less than forecast. Companies may find it difficult to charge more while joblessness hovers above 8 percent. Tempered inflation makes it possible for Federal Reserve policy makers to take additional steps if needed to revive the economic expansion when they meet next month.
Inflation Watch: Headline and Core CPI Show Little Change - The Bureau of Labor Statistics released the CPI data for July this morning. Year-over-year unadjusted Headline CPI came in at 1.41%, which the BLS rounds to 1.4%, down from 1.66% last month (1.7% in the BLS record). Year-over year-Core CPI (ex Food and Energy) came in at 2.10%, down fractionally from 2.22%% (rounded to 2.2%) last month. Here is the introduction from the BLS summary, which leads with the seasonally adjusted data: The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in July on a seasonally adjusted basis. Over the last 12 months, the all items index increased 1.4 percent before seasonal adjustment. Major indexes posted small movements in July, with a 0.3 percent decline in the energy index offsetting 0.1 percent increases in the indexes for food and all items less food and energy. Within energy, declines in the indexes for electricity, natural gas, and fuel oil more than offset a small increase in the gasoline index. The index for all items less food and energy rose 0.1 percent in July, ending a streak of four consecutive 0.2 percent increases. The shelter index rose 0.1 percent for the second month in a row. The indexes for medical care, tobacco, household furnishings and operations, and apparel also increased, while the indexes for airline fares, used cars and trucks, recreation, and new vehicles all declined.. More... The first chart is an overlay of Headline CPI and Core CPI (the latter excludes Food and Energy) since 1957. The second chart gives a close-up of the two since 2000.
Consumer Prices Remain Flat in July; 3rd Time in 4 Months — U.S. consumer prices were unchanged in July from June, as a small drop in energy costs offset slightly higher food prices. The consumer price index hasn’t changed since March, evidence that the weak economy is keeping inflation in check. Core consumer prices, which exclude volatile food and energy costs, ticked up 0.1 percent last month, the Labor Department said Wednesday. More expensive medical costs, clothing and rents pushed up core prices. Prices increased 1.4 percent in the 12 months ending in July. That’s down from 1.7 percent in June and is the smallest yearly increase in 20 months. Core prices have increased 2.1 percent in the past year, down from a 2.2 percent pace in June.
CPI Shows No Change for July 2012, Up 1.4% From A Year Ago - The July Consumer Price Index, which measures inflation, was unchanged from June, the 2nd month in a row. The reason was electricity costs which dropped -1.3%. Gasoline increased 0.3% for July. Removing food and energy, inflation increased 0.1% for the month. Below is CPI's monthly percentage change.CPI is up 1.4% from a year ago, shown below. This is the lowest level of inflation since November 2010. Energy overall decreased -0.3% and is down -5.0% for the last 12 months. The BLS separates out all energy costs and puts them together into one index. Energy costs are also mixed in with other indexes, such as heating oil for the housing index and gas for the transportation index. Below is the overall CPI energy index, or all things energy. Piped natural gas declined -0.2% for the month and is down -12.7% for the year. Electricity decreased -1.3% for July and from a year ago, electricity has also declined -1.3%. Fuel oil dropped -0.5% for the month and is down -5.6% for the last 12 months. Graphed below is the household energy index which includes electricity and natural gas, shown by monthly percentage change. This month the index decreased -1.1% and for the last 12 months has declined -4.3%. This is a different, special index to show the overall costs for energy into your home. The gasoline index alone increased 0.3% for July, but is down -5.5% from this time last year, -5.7% for regular, seasonally adjusted. Graphed below is the CPI gasoline index and take a good look now because this index is going to increase later this year.
What Inflation Means to You: Inside the Consumer Price Index - The charts in this commentary have been updated to include the August Consumer Price Index news release for the July data. The Fed justified a previous round of quantitative easing "to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate" (full text). In effect, the Fed has been trying to increase inflation, operating at the macro level. But what does an increase in inflation mean at the micro level — specifically to your household? Let's do some analysis of the Consumer Price Index, the best known measure of inflation. The Bureau of Labor Statistics (BLS) divides all expenditures into eight categories and assigns a relative size to each. The pie chart below illustrates the components of the Consumer Price Index for Urban Consumers, the CPI-U, which I'll refer to hereafter as the CPI. The slices are listed in the order used by the BLS in their tables, not the relative size. The first three follow the traditional order of urgency: food, shelter, and clothing. Transportation comes before Medical Care, and Recreation precedes the lumped category of Education and Communication. Other Goods and Services refers to a bizarre grab-bag of odd fellows, including tobacco, cosmetics, financial services, and funeral expenses. For a complete breakdown and relative weights of all the subcategories of the eight categories, here is a useful link. The chart below shows the cumulative percent change in price for each of the eight categories since 2000.
Consumer Sentiment increases in August to 73.6 (graph) The preliminary Reuters / University of Michigan consumer sentiment index for August increased to 73.6, up from the July reading of 72.3. This was above the consensus forecast of 72.0 but still fairly low. Sentiment remains weak due to the high unemployment rate and sluggish economy - and rising gasoline prices probably aren't helping.
Michigan Consumer Sentiment: A Small Improvement - The University of Michigan Consumer Sentiment Index preliminary number for August came in at 73.6, a small increase over the 73.2 June final. Today's number was slightly above Briefing.com's consensus forecast of 72.2. See the chart below for a long-term perspective on this widely watched index. Because the sentiment index has trended upward since its inception in 1978, I've added a linear regression to help understand the pattern of reversion to the trend. I've also highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy. To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is about 14% below the average reading (arithmetic mean), 13% below the geometric mean, and 13% below the regression line on the chart above. The current index level is at the 23 percentile of the 416 monthly data points in this series. . So the latest sentiment number of 73.6 puts us below the midpoint (78.6) between recessionary and non-recessionary sentiment averages. The indicator can be somewhat volatile. For a visual sense of the volatility here is a chart with the monthly data and a three-month moving average.
Economic Outlook Drops To Lowest Of The Year As Inflation Expectations Surge - University of Michigan Consumer Confidence came modestly higher than expected and limped higher off the lowest levels of the year. However, aside from this apparently positive event (accoding to some media pundits), there are two worrying things shifting rapidly. Consumer outlook for the economy (as opposed to current conditions) dropped to their lowest of the year with the largest 3-month drop in 11 months (so much for hope?); and inflation expectations soared by the most in 17 months
Gasoline price spikes on lower supplies; will add to consumer woes - The US consumer can't catch a break. As if rising food prices weren't enough - with corn prices at record highs and other food prices expected to move higher next year - we now also have a sharp increase in gasoline prices. US gasoline inventories have declined more than expected - close to the lower end of the 5-year range. And US crude oil stocks also came in lower than the forecast. That sent gasoline prices sharply higher. NYMEX Futures have now retraced most of the spring 2012 declines. Bloomberg: - Gasoline futures jumped to a 14-week high on lower inventories, higher demand and rally in Brent crude oil. Futures gained 2.3 percent as the Energy Department reported gasoline supplies dropped 2.37 million barrels to 203.7 million, the lowest level since the week ended June 15 and the lowest for this time of the year since 2008. Wholesale demand jumped to a 13-month high. Rising Brent prices increased the price of imported crude and gasoline. Rising food and gasoline prices may materially dampen consumer confidence and push the "headline" CPI number to uncomfortable levels. High fuel costs will also impact the Eurozone, deepening the recession in a number of nations.
2012 gas prices head for record – Gasoline prices are up sharply in the past month on surging crude oil costs and refinery woes, and now are likely to make 2012 the costliest year ever at the pump.Nationally, gasoline averages $3.70 a gallon — up 30 cents since mid-July and is now higher than year-ago levels in 39 states. Prices are likely to continue climbing through August, with little relief until after Labor Day. The swift, month-long, 9% price climb has lifted 2012's average to $3.61 a gallon, vs. 2011's $3.51, which had been the most expensive year ever for motorists. Even with demand expected to recede after the peak summer driving season, 2012 will surpass last year's price, says Brian Milne of energy tracker Telvent DTN . The run-up comes at a time when prices typically have peaked for the year, and just weeks after decreasing demand and slowing worldwide economic growth pushed prices well off 2012 highs. The trend had prompted some industry experts to forecast $3 a gallon gasoline by autumn. Now, Milne expects a top at about $3.90 before dropping in September.
Jackson Hole To Be Empty: July Retail Sales Spike As Producer Prices Have Highest Increase In 6 Months -- Dash any hopes about a "surprise" Jackson Hole announcement by the Fed. The reason: July retail sales posted the biggest beat to expectations, rising at 0.8% on expectations of a 0.3% increase, which was above the highest Wall Street estimate of 0.6%, and which despite the downward revision of June headline retail sales from -0.5% to -0.7%, means that the Fed will now be looking at the possibility of inflation rising as a result of increased consumer spending. Ex autos and gas, the increase in spending was +0.9%, on expectations of a 0.5% rise (prior revised from -0.2% to -0.4%). Was this spike in spending credit driven or not? This will be seen once the next personal savings and consumer credit report is out, but that won't happen until after Jackson Hole. So those who trade based on hope and prayer may be well-advised to shelve those two strategies for the next 3 weeks, especially since PPI rise 0.3%, on expectations of a 0.2% pick up following June's 0.1% increase: the biggest increase in 6 months.
Producer Price Index Increases Above Forecast - Today's release of the June Producer Price Index (PPI) for finished goods shows a month-over-month increase of 0.3% in headline inflation, which is the biggest jump since January. Core inflation rose 0.5%, also the biggest increase since January. Briefing.com had posted a MoM consensus forecast of 0.2% for both Headline and Core PPI. The MoM finished goods number is up 0.4%, also the biggest jump since January. Year-over-year Core PPI is up 2.7%. Headline PPI, however, is up only 0.5%. Here is a snippet from the news release: In July, the increase in the finished goods index was led by prices for finished goods less foods and energy, which moved up 0.4 percent. Also contributing to higher finished goods prices, the index for finished consumer foods advanced 0.5 percent. By contrast, prices for finished energy goods decreased 0.4 percent. Finished core: The index for finished goods less foods and energy moved up 0.4 percent in July, the largest rise since a 0.6-percent increase in January 2012. Over forty percent of the July advance can be attributed to prices for light motor trucks, which climbed 1.6 percent. The indexes for pharmaceutical preparations and cigarettes also were major factors in the rise in finished core prices. (See table 2.) More... Now let's visualize the numbers with an overlay of the Headline and Core (ex food and energy) PPI for finished goods since 2000, seasonally adjusted. As we can see, Core PPI declined significantly during 2009 and increased modestly in 2010 and more rapidly in 2011. This year has witnessed a significant decline in core PPI.
LA area Port Traffic: Imports and Exports down YoY in July - The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for July. LA area ports handle about 40% of the nation's container port traffic. To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average. On a rolling 12 month basis, both inbound and outbound traffic are down slightly compared to the 12 months ending in June. In general, inbound and outbound traffic has been moving sideways recently. The 2nd graph is the monthly data (with a strong seasonal pattern for imports). For the month of July, loaded outbound traffic was down slightly compared to July 2011, and loaded inbound traffic was down 2% compared to July 2011.
Industrial Production in US Rises 0.6% on Autos, Utilities -- Industrial production in the U.S. increased in July, propelled by a pickup in motor vehicle output and a rebound in utility use during the hottest month on record. The 0.6 percent increase last month at factories, mines and utilities followed a revised 0.1 percent gain in June that was smaller than previously reported, Federal Reserve data showed today in Washington. Economists forecast a 0.5 percent rise, according to the Bloomberg survey median. Manufacturing, which makes up about 75 percent of total production, rose 0.5 percent for a second month. The pickup in industrial production, the most in three months, may ease concerns that the industry is faltering. At the same time, recessions in parts of Europe, a building of inventories and the prospect of fiscal tightening in the U.S. are hurdles for American factories.
Industrial Production increased 0.6% in July, Capacity Utilization increased - From the Fed: Industrial production and Capacity Utilization - Industrial production increased 0.6 percent in July after having risen 0.1 percent in both May and June. Revisions to the rates of change for recent months left the level of the index in June little changed from its previous estimate. Manufacturing output rose 0.5 percent in July, the same rate of increase as was recorded for June. In July, the output of mines increased 1.2 percent, and the output of utilities rose 1.3 percent. At 98.0 percent of its 2007 average, total industrial production in July was 4.4 percent above its year-earlier level. Capacity utilization for total industry moved up 0.4 percentage point to 79.3 percent, a rate 1.0 percentage point below its long-run (1972--2011) average. This graph shows Capacity Utilization. This series is up 12.5 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 79.3% is still 1.0 percentage points below its average from 1972 to 2010 and below the pre-recession levels of 80.6% in December 2007. The second graph shows industrial production since 1967. Industrial production increased in July to 98.0. This is 17.4% above the recession low, but still 2.7% below the pre-recession peak.
Another July Upside Surprise: Industrial Production -- Industrial production grew at a substantially faster pace in July vs. June, the Federal Reserve reports. The encouraging news comes on the heels of yesterday's better-than-expected retail sales report for July. Considering these data points in context with a broader read on economic conditions strengthens the case for expecting economic growth in the near term. Echoing the narrative for retail sales, industrial production revived last month after a run of sluggish activity. July's 0.6% increase is the best month for industrial activity since April's 0.8% gain. Meantime, the year-over-year trend in industrial production appears to be stable in the 4%-5% range. In other words, there are no signs of cyclical trouble here. The 4.4% increase in industrial production last month vs. its year-earlier level is in line with annual growth rates we've been seeing lately; it's also a healthy pace that suggests that recession risk remains minimal. That's also the message when we review the economic profile for July relative to history via the Capital Spectator Recession Risk Index (CSRRI), a diffusion index that reflects the trend for a broad mix of leading and coincident indicators.
Industrial Production Increases 0.6% for July 2012 - The Federal Reserve's Industrial Production & Capacity Utilization report, G.17, shows a 0.6% increase in industrial production for July 2012, an improvement from recent months. Manufacturing increased 0.5%, mining 1.2% and utilities 1.3%. June industrial production was revised down, from 0.4% to 0.1% and May revised up from -0.1% to 0.2%. This report is also known as output for factories and mines. While total industrial production has increased 4.4% from July 2011, the index is still down -2.0% from 2007 levels, that's right, five years. Here are the major industry groups yearly industrial production percentage changes from a year ago. Utilities is fairly surprising, considering the drought and heat domes.
- Manufacturing: +5.0%
- Mining: +6.0%
- Utilities: -2.4%
Below is the Fed's description of Market groups from the report and their monthly percent changes. The report also gives annualized rates and bear in mind these are much higher than monthly percentage changes by their nature. Autos are doing well. The production of consumer goods increased 0.6 percent in July after having decreased 0.4 percent in June. The output of durable consumer goods advanced 1.5 percent in July. Within durable consumer goods, the production of automotive products increased 1.9 percent and was 15.5 percent above its year-earlier level. The output of home electronics moved down for a fifth consecutive month and was 5.2 percent lower than its year-earlier level. The indexes for appliances, furniture, and carpeting and for miscellaneous durable goods increased in July; both measures were higher than a year earlier. The output of consumer nondurables rose 0.3 percent in July. The production of non-energy nondurables edged up 0.1 percent, with increases for foods and tobacco and for paper products mostly offset by a decrease for chemical products. The output of consumer energy products moved up 0.8 percent as a result of higher utilities output. During the past 12 months, the index for consumer goods has risen 1.8 percent, with the production of durable consumer goods up 10.4 percent and the output of nondurable consumer goods down 0.7 percent.
And The Downtrend Returns: Inflation Disappoints As Empire Manufacturing Posts First Sub-Zero Print Since October 2011 - The X-12/13-ARIMA seasonal adjustments on today's data were not quite up to snuff as both the CPI, printing at 0.0% (or 1.4% Y/Y) on expectations of 0.2%, the biggest CPI miss since January and the Empire Manufacturing index, at -5.85 on expectations of a +7.00 print, posting the biggest miss in 14 months. Notably, the number of employees declined in August from 18.52 to 16.47, while margins got crushed as Priced Paid soared from 7.41 to 16.47 as Prices Received slide from 3.70 to 2.35. And so baffle with bullshit returns, as following several weeks of better than expected, if largely seasonally adjusted, the speculation that NEW QE may be coming back is here again. In other words, yesterdays scorching retail data was good, but today's horrible NY manufacturing miss is better. At least to the complete idiocy that the market, and its "discounting mechanism" have become. Sure enough both EURUSD and gold spike on the weak news as the ghost of Bernanke's printing press is back in the room. Finally, how CPI could be unchanged when crude alone posted a 20% increase in July, and gas prices are back to doing their vertical thing, will always remain a mystery.
NY Fed Manufacturing Survey indicates contraction, CPI unchanged in July - From the NY Fed: Empire State Manufacturing SurveyThe general business conditions index slipped below zero for the first time since October 2011, falling thirteen points to -5.9. At -5.5, the new orders index was below zero for a second consecutive month, and the shipments index fell six points to 4.1. ...The index for number of employees inched lower, but remained positive at 16.5, suggesting a moderate increase in employment levels, and the average workweek index rose to 3.5. Indexes for the six-month outlook were generally positive but lower than in July, indicating that respondents expected business conditions to improve little in the months ahead. This was the first regional manufacturing survey released for August. The general business conditions index was worse than expected and new orders were down. From the BLS: The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in July on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.4 percent before seasonal adjustment
Manufacturing in New York Area Unexpectedly Shrank in August - Manufacturing in the New York area unexpectedly contracted in August for the first time in 10 months, indicating U.S. factories are burdened by the global economic slowdown. The Federal Reserve Bank of New York’s general economic index fell to minus 5.9 this month from 7.4 in July. The median estimate in a Bloomberg survey of economists was 7.0. Readings less than zero signal contraction in the so-called Empire State Index, which covers New York, northern New Jersey and southern Connecticut. A slowdown in demand from consumers in the first half of the year, limited capital spending and a build-up in inventories gives factories little reason to boost production. Orders for the region’s manufacturers fell to the lowest level in almost a year, showing the industry that spurred the recovery from recession is facing a bigger hurdle from a weaker global economy.
Philly Fed Business Outlook Survey: Fourth Month of Contraction - The Philly Fed's Business Outlook Survey is a monthly report for the Third Federal Reserve District, covers eastern Pennsylvania, southern New Jersey, and Delaware. Today's report shows the third consecutive negative reading in General Activity after eight months of positive data. The August -7.1 follows the -12.9 in July, -16.6 in June and -5.8 in May. This diffusion index continues to show contraction, but at a slower rate over the past three months. Here is the introduction from the Business Outlook Survey released today: The survey’s indicators for general activity and new orders remained negative for the fourth consecutive month, but both increased slightly from July. Firms also reported slight overall declines in employment and shorter work hours this month. Indicators of expected activity over the next six months remained positive but moderated for the second consecutive month. (Full PDF Report) The first chart below gives us a look at this diffusion index since 2000, which shows us how it has behaved in proximity to the two 21st century recessions. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average, which is more useful as a indicator of coincident economic activity.In the next chart we see the complete series, which dates from May 1960. The next chart is an overlay starting in 2000 of the General Activity Index and the Future General Activity Index — the outlook six months ahead. The latest Future reading is somewhat loweer, 12.5 in August versus 19.3 in July.
Philly Fed Misses For 5th Consecutive Month, Employment Index Lowest Since September 2009 - Even though in a centrally-planned world nobody cares about fundamental data anymore, and high frequency economics can't hold a candle to high frequency trading, today's Philly Fed was not good, missing expectations for the 5th month in a row, and printing in negative territory for the 4 month in a row, coming at -7.1 on expectations of -5.0, and down from -12.9. The data, however, was quite realistic, in that unlike BLS data which lately only keep track of part-time jobs, the Employment index in the Philly Fed printed at -8.6, the lowest since September 2009, and likely the most realistic indication of the jobs picture possible. And with prices paid soaring far over priced received, margins got crushed even more, as US companies continue to discover with every passing day.
Preliminary: Fed manufacturing surveys and ISM index for August -- Below is a graph I usually post after the release of the NY Fed and Philly Fed manufacturing surveys. Most of the economic data this week was a little more upbeat, but both of these surveys were disappointing ... This week the Philly Fed survey indicated contraction: The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased 6 points, to a reading of ‐7.1. This marks the fourth consecutive negative reading for the index but also its highest reading since MayAnd the NY Fed (Empire State) survey was also weak: The August Empire State Manufacturing Survey indicates that conditions for New York manufacturers deteriorated over the month. The general business conditions index slipped below zero for the first time since October 2011, falling thirteen points to -5.9. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through August. The ISM and total Fed surveys are through July.The average of the Empire State and Philly Fed surveys declined in August, and has remained negative for three consecutive months. This suggests another weak reading for the ISM manufacturing index.
Business Sales to Inventory Ratio Rises, Manufacturing Sales Decline -1.1% for June 2012 - The Manufacturing and Trade Sales and Inventories report shows a -1.1% decrease in sales and an +0.1% increase in inventories for June 2012. Sales declined -1.1% for manufacturers, -0.8% for retailers and -1.4% for wholesalers. This is the 3rd month in a row for declining sales and this is the largest monthly percentage decrease since March 2009. This is not a good sign for the economy. The change between Q2 and Q1 annualized sales is -0.78%, again not seen since Q2 2009. Business sales declined -0.26% for May and -0.07% for April. Below are manufacturing and trade sales by volume and again we see a similar slope emerging that is all too reminiscent of 2009. Below are total business inventories, which stand at $1.58 trillion. Business inventories have increased 5.0% from a year ago, whereas sales have only increased 3.0% from June 2011. Inventories for merchant wholesalers decreased -0.2%, manufacturers' inventories increased +0.1% and retailer's inventories increased +0.6%. Below is the monthly percent change for business inventories. A really bad sign of this report is the inventory to sales ratio, now at 1.29. If inventories accumulate, and sales are declining, that's not good news for economic growth and even worse news potentially down the road as businesses try to shed their excess inventories by any means possible. Notice this ratio increases before and during recessions. In other words, with this June 2012 MTIS report, business statistics look like the beginning of the great Recession.
Optimism Among Small Businesses Droops Again -- Small-business owner confidence fell a bit further in July, dragged down by worries about earnings, according to data released Tuesday. The National Federation of Independent Business’s small-business optimism index dropped 0.2 point to 91.2 last month following a steep 3-point drop in June. The report in general was downbeat about business conditions among small businesses. The view isn’t surprising given the other weak data reported in economic sectors from manufacturing to retailing. “The Index has averaged 90 in this recovery, now 3 years old and is the worst recovery period from a recession,” since 1973 when the data began, said the report. The top-line index was dragged down by concerns about earnings. The net earnings trend subindex fell another 5 percentage points to -27% after it had declined 7 points to -22% in June.
NFIB: Small Business Optimism Index declines in July -- From the National Federation of Independent Business (NFIB): Small-Business Optimism Continues to Decline in July Dipping for a second consecutive month, after ending several months of slow growth, the Small Business Optimism Index gave up 0.2 points, falling to 91.2. ... The Index has oscillated between 86.5 (July 2009) and 94.5 (February 2012) since the recession officially ended in June 2009. Prior to 2008, the Index averaged 100, well above the current reading. While "poor sales" has been eclipsed by other concerns as the top business problem, it still remains the No.1 issue for 20 percent of owners surveyed (down from 23 percent). Note: These survey results are based on a small sample and the commentary is getting more and more political (calling the 2000s the "best economy in history" is absurd), so I'm going to discontinue posting this survey. This graph shows the small business optimism index since 1986. The index decreased to 91.2 in July from 91.4 in June.
Small Business Sentiment: The Mood Worsens - The latest issue of the NFIB Small Business Economic Trends is out today (see report). The August update for July came in at 91.2, which is the lowest reading since October of 2011. The indicator remains in a range first seen during the early months of the last recession. Here is the opening summary of the report: The Optimism Index gave up 0.2 points, falling to 91.2. Owner optimism remains at recession levels and has stayed in a recession zone for years, oscillating between 86.5 (in July 2009) and 94.5 (February 2012) since the recession officially ended in June 2009. Prior to 2008, the Index averaged 100, significantly above the current reading. The Index has averaged 90 in this recovery, now three years old and is the worst recovery period from a recession in the NFIB survey history which began in 1973. Nothing happened in July that would make owners more optimistic about the near-term future. The first chart below highlights the 1986 baseline level of 100 and includes some labels to help us visualize that dramatic change in small-business sentiment that accompanied the Great Financial Crisis. Compare, for example the relative resilience of the index during the 2000-2003 collapse of the Tech Bubble with the far weaker readings of the past three years. The NBER declared June 2009 as the official end of the last recession.
Main Trends in the U.S. Labor Market - Conference Board - Labor Market Conditions:
1. The slowdown in economic activity in the U.S., coupled with lower business confidence, resulted in weak labor market conditions. Employment growth slowed down significantly in recent months, averaging just a little over 100,000 jobs per month in the past 3 months.
- a) The slowdown in employment growth occurred across most industries.
- b) Layoff rates picked up a bit from May through June.
- c) Hiring rates and quit rates were still well below pre-recession levels.
2. In the past year, labor productivity (i.e., output produced per hour of work) in the non-farm business sector grew by just 1 percent – well below its long-run trend of over two percent in the past two decades. .
3. The very high unemployment rate stopped declining and even inched up to 8.3 percent in July.
- While the overall U.S. unemployment rate remained very high, in specific regions and occupations, the unemployment rate has been much lower. After examining detailed unemployment and average weekly hours worked data by occupation, our findings suggest that some extraction and STEM occupations may be developing talent shortages.
5. Despite the improvement in employment in recent months, wage growth remains historically low with no signs of acceleration. The total wages bill of private production and nonsupervisory employees grew at 1.3 percent in the past 12 months, the lowest rate ever recorded in the establishment survey.
The Beveridge curve shows a structural shift in US employment dynamics - The Beveridge curve, developed in the UK back in 1958, compares job vacancies as a fraction of total labor force with the unemployment rate. It allows one to study, among other things, labor inefficiency and labor mobility. If there are job openings in one part of the country or one industry, but the unemployed are unable to fill those openings due to geographical or skill mobility constraints, the Beveridge curve would show it. Barclays Capital has recently looked at the Beveridge Curve for the US. The curve "regime" has shifted significantly in the post-recession environment With the current job openings number, the unemployment would have been at 5.5% on the pre-recession curve, but it clearly isn't. What does this tell us? This looks like a structural shift rather than a cyclical adjustment, with a completely new "equilibrium" level. That's why the Fed now believes that the new "natural" unemployment rate is closer to 6.7% rather than the 5% prior to the recession. This fact is critical as the Fed adjusts the monetary policy. If the unemployment rate begins to approach 6.7% (not the pre-recession 5%), the Fed Funds target rate will begin to rise. So what's the explanation for this shift? Geographic mobility constraints may explain some of it, as negative home equity makes it difficult for the unemployed to move. Economists however are skeptical that geographic "immobility" could explain the whole shift. If slow migration was the explanation, over time the Beveridge curves should start converging as migration picks up - people walk away from their homes, sell them, or find jobs locally. But so far the pre- and post-recession curves have been diverging.
Percentage Growth in Government Jobs vs. Private Jobs vs. Population Growth; Facts and Consequences - Keynesian clowns are concerned about the decline in government jobs in the past few years. They want the government to step up spending and hire more workers to make up for the loss of jobs in the private sector. Here is a chart from reader Tim Wallace that will help put the recent loss of government jobs in a better perspective. The growth in government jobs is not sustainable nor is there any genuine excuse for it other than political pandering and vote-buying operations. The deviance between private bobs and population growth is easily explained by the entry of women in the workforce.
Demographic Changes A Key Factor in Slowing Economic Growth - Economic growth in the United States has been disappointing for more than a decade now. Some of the reasons are complex and hotly debated, and will be the subject of a series of posts here starting next week. But one of the reasons is not mysterious at all. It simply reflects demographic changes. The share of Americans who are working age — old enough to be out of school but young enough not to be retired — is no longer growing. Only about 53 percent of the population was between the ages of 25 and 64 last year, unchanged from 2007 and up only slightly from 52 percent in 1997. Between 1967 and 1997, by contrast, the share grew 8 percentage points, to 52 percent from 44 percent. As more baby boomers retire, the share will begin to fall. Fewer people of working age means, obviously enough, fewer workers. It also means fewer potential entrepreneurs creating new businesses that hire people. And aging isn’t the only demographic weight holding back the economy. For most of the 20th century, the share of women in the labor force was rising. It reached 60 percent in 1997, up from just 32 percent in 1948. But the share isn’t rising anymore. It fell below 60 percent in the 2001 recession, spent most of the last decade around 59 percent and, in the long aftermath of the financial crisis, was only 57.6 percent last month.
Mish on Max Keiser: Jobs, Birth-Death Model, Inflation-Deflation, Gold, Student Loans, Demographics, Housing - About a week ago or so I taped a session with Max Keiser regarding a number of topics including Jobs, the Birth-Death Model of businesses, Inflation, Gold, Student Loans, Demographics, Housing, and family formation. The video was published a couple of days ago.
Number of the Week: Millions of Americans Don’t Get Paid Vacations - 55 million: The number of American workers who didn’t get any paid vacation time in 2011. It’s August, which means that if you aren’t reading this from a beach somewhere, the odds are at least one of your coworkers is. But no matter how empty the employee parking lot may have seemed this week, paid vacation is far from a universal benefit in the American workplace. According to data from the Bureau of Labor Statistics this week, 59% of American workers got access to paid vacation in 2011. 39.7%–or about 55 million people—did not. (Another 1.1% didn’t know.) The data are from the American Time Use Survey, an annual survey of about 12,500 Americans conducted by the Census Bureau. Other studies come up with somewhat different results: A separate set of BLS data, based on a survey of employers rather than employees, found that as of March, 74% of civilian workers had access to paid vacation time. One possible explanation for the difference: The employer survey included only incorporated businesses and therefore doesn’t cover domestic workers and some other employees who might be less likely to get paid time off. Regardless of the exact number, it’s clear that Americans are far less likely to get paid time off than their counterparts in Europe, where vacation time is literally considered a human right—
Weekly Unemployment Claims: 366K, Close to Expectations - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 366,000 new claims was a 2,000 rise from the previous week's upward revision of 3,000. The less volatile and closely watched four-week moving average dropped to 363,750. Here is the official statement from the Department of Labor: In the week ending August 11, the advance figure for seasonally adjusted initial claims was 366,000, an increase of 2,000 from the previous week's revised figure of 364,000. The 4-week moving average was 363,750, a decrease of 5,500 from the previous week's revised average of 369,250. The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending August 4, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending August 4, was 3,305,000, a decrease of 31,000 from the preceding week's revised level of 3,336,000. The 4-week moving average was 3,303,000, a decrease of 3,000 from the preceding week's revised average of 3,306,000. 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 Initial Unemployment Claims increase to 366,000 - The DOL reports: In the week ending August 11, the advance figure for seasonally adjusted initial claims was 366,000, an increase of 2,000 from the previous week's revised figure of 364,000. The 4-week moving average was 363,750, a decrease of 5,500 from the previous week's revised average of 369,250.The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 363,750. This was at the consensus forecast of 365,000. And here is a long term graph of weekly claims: The 4-week average post-bubble low is 363,000; this week the average was just above that level at 363,750.
Ongoing Jobless Claims Plummet as Program Ends in 34 States -- A federal unemployment program that provided weekly benefits to more than 1 million Americans less than two years ago has virtually disappeared as the last eligible state, Idaho, came off the rolls last week. Federal-State Extended Benefits program, which keeps checks flowing for up to 20 weeks after other jobless compensation ends, had a mere 5,223 participants the week ended July 28, according to Labor Department data released Thursday. That’s down from a recent peak of 1.03 million participants in October 2010. The program’s numbers plummeted as eligibility expired this year in 34 states and the District of Columbia. At the end of July, only Idaho could tap into the aid and the Potato State’s eligibility expired last Saturday–though the program’s numbers do reflect residual claims from other states. Extended Benefits’ rapidly shrinking rolls show why the number of workers collecting benefits is falling much faster than the amount of unemployed Americans. Some workers found jobs and others left the labor force, but many are simply no longer eligible for benefits. The number of unemployed has fallen by 1.7 million since July 2010, an 11.5% decline. But the number of Americans receiving any type of jobless benefits fell by 4.3 million during the past two years, a more than 40% drop.
Long Term Unemployment is the Crisis of Our Time - Every month we show a graph of the counted long-term unemployed, currently at 5.2 million. Behind every data point on this line is a real live person, with ability, skills, promise, knowledge and capability who desperately needs someone to hire them. CBS 60 Minutes brings home that reality in a segment about the long term unemployed. Putting a face to long term unemployment statistics shows highly educated, responsible and experienced people unable to find a job. People just like you.
Longer time to find new job, less pay for moms laid off during recession - In a 2010 survey of laid-off workers across the United States, married moms spent more time between jobs and were overall less likely to find new jobs compared with married dads. Once re-employed, married moms experienced a decrease in earnings of $175 more per week compared with married dads. The results suggest that the recent recession, dubbed the "man-cession" or "he-cession" because more men than women lost jobs, could also be viewed as a "mom-cession" as laid-off moms had the hardest time finding new jobs. "These findings hold true across different backgrounds, such as occupation, earnings and work history," said study co-author Brian Serafini, a University of Washington sociology graduate student. "This implies that laid-off moms aren't just taking part-time jobs or seeing being laid off as a way to opt out of the workforce and embrace motherhood instead."
The Rise of Residential Segregation by Income - I've posted in the past about "The Big Decline in Housing Segregation" by race, but it seems likely that another kind of residential segregation is on the rise. In a report for the Pew Research Center, Paul Taylor (no relation) and Richard Fry discuss "The Rise of Residential Segregation by Income Social & Demographic Trends." To measure the extent to which households are segregated by income, the authors take three steps. First, they look at the 30 U.S. cities with the largest number of households. Second, they categorized households by income as lower, middle, or upper income. "For the purpose of this analysis, low-income households are defined as having less than two-thirds of the national median annual income and upper-income households as having more than double the national median annual income. Using these thresholds, it took an annual household income of less than $34,000 in 2010 to be labeled low income and $104,000 or above to be labeled upper income. The Center conducted multiple analyses using different thresholds to define lower- and upper-income households. The basic finding reported here of increased residential segregation by income was consistent regardless of which thresholds were used." Third, they look at where households are living by Census tract: "The nation’s 73,000 census tracts are the best statistical proxy available from the Census Bureau to define neighborhoods. The typical census tract has about 4,200 residents. As a general rule, a census tract conforms to what people typically think of as a neighborhood."
Ryan and the Poor: YOYO vs. WITT - Note this excerpt from an NYT editorial this AM on the impact of Ryan’s budget on vulnerable families: More than three-fifths of the cuts proposed by Mr. Ryan…come from programs for low-income Americans. That means billions of dollars lost for job training for the displaced, Pell grants for students and food stamps for the hungry. These cuts are so severe that the nation’s Catholic bishops raised their voices in protest at the shredding of the nation’s moral obligations. Mr. Ryan’s budget “will hurt hungry children, poor families, vulnerable seniors and workers who cannot find employment,” the bishops wrote in an April letter to the House. “These cuts are unjustified and wrong.” Mr. Ryan responded that he was helping the poor by eliminating their dependence on the government. And yet he has failed to explain how he would make them self-sufficient. What struck me was the Times’ complaint that the new VP candidate “failed to explain how he would make them self-sufficient.” Such a complaint reveals an important misunderstanding of the agenda that Rep Ryan, the Tea Party, and now the Romney ticket are embracing. It’s there in the numbers and it’s there in the rhetoric. The point is that they wouldn’t do anything to make anyone more self-sufficient. That’s up to the individual. The heart of their theory of what’s hurting America is that government is trying to do things that people should do for themselves. That extends to health care, regulation, jobs programs, college aid, even retirement security.
The 64-Gazillion-Dollar Question - Peter Edelman has battled poverty for nearly half a century — first as a top aide to Senator Robert Kennedy, later as a state and federal official, and currently as a key figure at a widely respected law and public policy center in Washington. Over his years in and out of government, Edelman has probably earned as much respect as anyone in our nation's public policy community. Back in 1996, he did something few high-ranking federal officials ever do. He resigned in protest when President Bill Clinton signed a law that Edelman could not support in good conscience. Edelman, then an assistant secretary at the U.S. Department of Health and Human Services, publicly warned that the "welfare reform" that Clinton signed into law would be devastating for the nation's most vulnerable children. He turned out to be right. The number of children living in deep poverty — kids in families making under half the official poverty threshold — rose 70 percent from 1995 to 2005, and 30 percent more by 2010. America's elected leaders didn't listen to Edelman in 1996. Now they have another chance. Edelman, currently a co-director at the Georgetown University Law Center, has just released a new book — So Rich, So Poor — that aims "to look anew at why it is so hard to end American poverty."
The Truth about Welfare - After absorbing months of attacks on him as an economic royalist, Mitt Romney is hitting back with an ad as dishonest as any you'll ever see, accusing Barack Obama of coddling welfare recipients ("You wouldn't have to work … they just send you your welfare check"). Literally every word after the 8 second mark on this ad is a lie, with the exception of "I'm Mitt Romney and I approve this message." But the welfare attack is an old Republican standby; if the middle class suspects you're not one of them, remind them that their resentment should be pointed down, not up. The real enemy is poor people, and those who would indulge them. A GOP presidential campaign that doesn't eventually bust out this attack would be like a wedding band that doesn't know how to play "Y.M.C.A." But since there hasn't been much debate about welfare in some time, it's a good opportunity to remind ourselves of what the program is and isn't, and what role it plays in America today. Needless to say, you won't get this information from a campaign ad.
Over 100 million US residents on welfare - Government handouts are designed to help the needy across America, but how many US residents actually reap those benefits? According to a presentation to be delivered in Washington this week, it might be way more than you thought. Republican Party representatives sitting on the Senate Budget Committee plan to present Congress with their latest findings on welfare programs in the United States this week, and their research reveals that the number of US residents receiving federal assistance isn’t only on the up but now is at its highest ever in the history of the country. According to an excerpt from the committee’s new presentation, nearly one-in-three US residents receive government assistance — and that’s not even including those benefitting from Social Security or Medicare. Over 100 million people in the United States are now receiving some form of federal welfare, GOP reps claim, a figure they’ve found after combing through statistics collected from the US Census’s Survey of Income and Program Participation. Paired with recent figures out of the Census Bureau, that brings the percentage of people residing in the States receiving some form or another of federal welfare at nearly one-in-three, given that the country’s population is estimated to be around 314 million, according to the department’s most recent statistics.
Bankster Fraud Has Driven 100 Million Into Poverty, Killing Many - Fraud caused the Great Depression and the current financial crisis, and the economy will never recover until fraud is prosecuted. Fraud is the business model adopted by the giant banks. See this. The Obama administration has made it official policy not to prosecute fraud. Indeed, the “watchdogs” in D.C. are so corrupt that they are as easily bribed as a policeman in a third world banana republic. The mouthpieces in Wall Street and D.C. pretend that financial fraud (like Libor) is a “victimless crime“. But the World Bank notes that the financial crisis – you know, the one caused by financial fraud – has driven between 64 and 100 million people into destitution. Some estimate the figure to be much higher. For example, one 2009 study estimated that 140 million people would be driven into poverty in Asia alone.
Immigration policy should make children a priority - The Obama administration has offered a temporary reprieve from deportation for up to 1 and 3/4 million immigrants who came to the United States as children. Whatever the immediate merits of the Deferred Action for Childhood Arrivals, it signals a much broader principle all immigrant receiving countries should recognize: children experience migration differently than adults, and public policy can create both great opportunity and great risks for their long-run capacity to become independent and successful adults. The DACA initiative was announced earlier this year, but it is only now, with the release of the detailed eligibility criteria, that millions of young people, some of whom have been raised almost all their lives in the United States, are finding out if they qualify to shed their status as illegal immigrants, if only for a two year period. The policy offers a reprieve from deportation and an authorization to work for individuals who came to the US before the age of 16, and had not turned 31 by June 15th of this year. But there are other conditions that also have to be met: in addition to not having brushes with the law, potential beneficiaries must either currently be in school or be a high school graduate.
‘I’m sick to my stomach’: anger grows in Illinois at Bain’s latest outsourcing plan - The shock of losing a precious job in a town afflicted by high unemployment is always hard. A foundation for a stable family life and secure home instantly disappears, replaced with a future filled with fears over health insurance, missed mortgage payments and the potential for a slip below the breadline. But for Bonnie Borman – and 170 other men and women in Freeport, Illinois – there is a brutal twist to the torture. Borman, 52, and the other workers of a soon-to-be-shuttered car parts plant are personally training the Chinese workers who will replace them. It's a surreal experience, they say. For months they have watched their plant being dismantled and shipped to China, piece by piece, as they show teams of Chinese workers how to do the jobs they have dedicated their lives to.
Ryan Begins Attacking Romney’s Record As Massachusetts Governor - Within hours of joining the GOP ticket Saturday, Ryan went on the offensive against the GOP candidate, and he has continued to cast him as a “pro-abortion crusader” and “shameless political chameleon” in stump speeches throughout Wisconsin, Iowa, and Colorado. At town hall meetings and fundraising events, Ryan has repeatedly referred to Romney’s governorship as “disastrous,” even going so far as to warn voters that the Republican candidate was an unreliable and dangerous choice for president. “Mitt Romney doesn’t want you to know the disturbing truth about his record as governor,” Ryan said at the Iowa State Fair yesterday, immediately displaying the sort of passionate conservatism that led to his selection by the Romney campaign. "But the facts are clear. Gov. Romney embraced the legalization of same-sex marriage, he imposed anti-business carbon-emission limits, and he championed efforts to limit Second Amendment rights. This isn’t the record of strong family values and small government ideals that our country needs to get back on the road to prosperity—this is a record of ruin.” Ryan also carried out his hard-hitting assault on the presumptive GOP nominee on numerous Sunday morning talk shows, leveling sharply worded broadsides against the individual health insurance mandate included in the governor’s so-called Romneycare plan, which he blasted as “un-American” and claimed was “indisputably” the blueprint for Obamacare.
Labor Department $100 Million Giveaway to Stop State Layoffs - $100 million sounds like a lot of money, but it does not go very far these days. It is less than .01% of the deficit. The problem with such thinking is government programs start out "small" then end up costing tens of billions of dollars as each party tries to outdo the other in an attempt to buy voters. Please consider Labor Dept. Attempts to Stop Layoffs by Giving $100 Million to States to Subsidize Payrolls The Labor Department announced on Monday that it will be awarding almost $100 million in grant funding to states to prevent layoffs by allowing businesses to pay employees as part-time workers and the federal government will pick up the tab for the cost of a full-time paycheck. The “work-sharing” program was passed as part of a Republican-led bill in the House, H.R. 3630, and Senate Amendment 1465 to extend the payroll tax deduction and unemployment benefits. In February 2012, President Barack Obama signed the bill into law, which included the $100 million in funding. The work-sharing programs “allows employees to keep their jobs and helps employers to avoid laying off their trained workforces during economic downturns by reducing the hours of work for an entire group of affected workers,” according to the Labor Department.
U.S. Joblessness Rise Broad-Based as 44 States Show Gain - The jobless rate climbed in 44 U.S. states in July, showing last month’s increase in unemployment was broad based. Alabama and Alaska registered the worst performance, with joblessness advancing by 0.5 percentage point in each, figures from the Labor Department showed today in Washington. Payrolls grew in 31 states last month, led by California and Michigan. Unemployment jumped to 8.3 percent in Alabama from 7.8 percent in June, and climbed to 7.7 percent in Alaska from 7.2 percent, today’s report showed. Nevada, where the rate rose to 12 percent from 11.6 percent, remained the state with the highest level of joblessness in the country. Rhode Island, at 10.8 percent, was second, followed by California at 10.7 percent. North Dakota had the lowest unemployment rate in the nation, even as it rose to 3 percent from 2.9 percent the prior month. Two states, Idaho and Rhode Island, showed a drop in their unemployment rates. Joblessness was unchanged in four states. Unemployment in New York rose to 9.1 percent, the highest since 1983, and payrolls dropped by 3,700 workers.
State Unemployment Rates increased in 44 States in July - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were generally little changed or slightly higher in July. Forty-four states recorded unemployment rate increases, two states and the District of Columbia posted rate decreases, and four states had no change, the U.S. Bureau of Labor Statistics reported today. Nevada continued to record the highest unemployment rate among the states, 12.0 percent in July. Rhode Island and California posted the next highest rates, 10.8 and 10.7 percent, respectively. North Dakota again registered the lowest jobless rate, 3.0 percent. This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). Two states - New Jersey and New York - are at the maximum unemployment rate for the recession and set new cycle highs in July. The New York unemployment rate increased to 9.1%, the previous cycle high was 8.9%. The New Jersey unemployment rate increased to 9.8%, the previous cycle high was 9.7%. Every other state has some blue indicating some improvement. The states are ranked by the highest current unemployment rate. Only three states still have double digit unemployment rates: Nevada, Rhode Island, and California.
State Unemployment Paints a Bleak Picture for July 2012 - The July 2012 State Employment statistics show a never ending bleak picture for the U.S. worker. Forty-four states saw their unemployment rates increase and nineteen states show their payrolls shrank from June 2012. The national average unemployment rate is 8.3%. Yet from the above map, we can see some states unemployment rates just don't really budge. Nevada still has the highest unemployment rate, at 12.0%. Rhode Island came in at 10.8%, California, 10.7%. Alaska and Alabama show their unemployment rates increased 0.5% in a month. States with unemployment rates above 9.0% are New Jersey at 9.8%, North and South Carolina, both at 9.6%, New York, at 9.1%, and Georgia at 9.3%. Below is the table of significant unemployment rate changes from a year ago. While we can see some of the states with super high unemployment rates dropped, remember, people literally fall off of the count, without getting a job. Also, notice how short this list of significant change in unemployment rate from a year ago is. The monthly change in payrolls isn't so hot when one looks at the percentages. Remember California is the largest state by population followed by Texas. Almost 12% of America's population lives in California. From the actual statistics, once again, only North Dakota seems to really know how to employ people.
New Jersey Jobless Rate Increases to 35-Year High of 9.8% - New Jersey’s unemployment rate jumped to a 35-year high of 9.8 percent in July, the state Labor Department said. The rate climbed from 9.6 percent in June and is above the national level of 8.3 percent, which also increased last month. New Jersey lost 12,000 jobs in July, with the largest drops in manufacturing, construction, and professional and business services, the department said in a statement today. The last time it was 9.8 percent or higher was in April 1977, according to Labor Department data.
State Predatory Tax Liens Practices Could Destabilize Entire Communities - All it took was an erroneous property tax bill to nearly cost Atlanta, Ga. resident Rita James the home she lived in for half a century. Before she knew what hit her, the county tax commissioner's office found her in default, issued a tax lien against her home and sold it at auction to a debt collection firm that wanted her out. It took her four years in court to win it back. Unfortunately, cases like James' are all too common, as state and municipal tax offices scramble to meet their bottom line by aggressively pursuing unpaid property taxes––even if it means foreclosing homes to recoup a few hundred bucks. As a result, annual tax lien sales have topped $15 billion per year, according to a report released by the National Consumer Law Center on Tuesday. "Homeowners throughout the nation, particularly the elderly and people with cognitive challenges, have lost or stand to lose family homes along with long-term equity which may represent their sole savings and security for retirement,” said NCLC Attorney John Rao. "As a result, foreclosures related to tax lien sales may destabilize entire communities."
Retail Sales Rise? Not in California Where Sales Tax Collections Plunge Amazing 40% Year-Over-Year - On Tuesday we heard news that July retail sales rose, breaking a three-month downtrend. Doug Short at advisor Perspectives has a great set of charts in his report Retail Sales: At Last, an Improvement!. Doug puts the improvement in proper perspective. However, my first thought in reading the report was "July sales will be likely revised lower". Now I'm Wondering "What's Going on in California?" My change in perspective come from looking at California State Finances for July 2012. Compared to 2011:
Total Revenues: -$468.8 million (-10%)
Income Tax: $156.2 million (5%)
Sales Tax: -$390.7 million (-40%)
Corporate Tax: -$26.4 million (-9.1%)
What the Numbers Tell Us: Typically, July is a month when California revenues go on vacation, as the month accounts for about one dollar of every $20 deposited in the General Fund. (Only October has lower revenue volume.) Despite those low expectations, July’s revenues were $475 million, or 10.1%, below estimates. Most of the shortfall was attributable to sales tax, which dropped $295 million, or 33.5%, below estimates.
Good News or Bad on New York City Jobs? – NY Fed - Unlike much of the nation, New York City has seen a robust rebound in employment since the recession. In early 2012, employment here reached 3.86 million, the largest number of jobs ever recorded. Yet the city’s unemployment rate has risen in recent months and is now 10 percent—its peak during the recession—and well above the 5 percent rate seen before the downturn. This lack of improvement reflects the fact that the number of employed residents of the city has not rebounded at all from its losses during the 2008-09 downturn. While commuters from outside the city have always been a part of the employment scene, particularly in Manhattan, the recent divergence between the brisk growth in jobs in the city and the lack of growth in the number of employed residents in the city is unprecedented. Moreover, this gap between the two measures continues to widen, raising some questions as to how strong New York City’s recovery actually is. In this post, we explore several alternative explanations for the lack of growth in the employment of city residents in the face of a sharp recovery and expansion of jobs. While there are several potential explanations, the stagnation of resident employment remains largely a puzzle.
New York Acts Quickly Amid Sharp Rise in Homelessness -- The homeless population in New York City has jumped sharply over the last year, causing a record number of people to enter the shelter system. The increase has forced the Bloomberg administration to open nine more shelters in just the last two months — sometimes with only a few weeks’ notice to surrounding neighborhoods. The administration said the increase stemmed in part from the end of the city’s main rent-subsidy program for homeless families. But the new shelters — five in the Bronx, two in Manhattan and two in Brooklyn — have provoked criticism from local officials who say they were blindsided by the decisions to open them. The city, for example, relied upon its emergency authority to turn two residential buildings on 95th Street on the Upper West Side of Manhattan into shelters that will eventually house about 200 adult couples, officials said. The buildings had recently been used as illegal hotels before they were shut down, and they still have some long-term tenants. The city’s Department of Homeless Services told the community board about its plan in mid-July, only two weeks before people began moving in.
Expert says bankruptcy for Syracuse is unlikely, but mayor should explore option - While the financial situation in the city of Syracuse hasn’t been described as desperate yet, Mayor Stephanie Miner has asked for some legal expertise on municipal bankruptcy. The signs of the city’s financial problems have been evident for several years as city employees accept wage freezes and fire and police departments see staff reductions. The city will use an early payment from Albany to help keep the budget from dipping into dwindling reserves. Skyrocketing pension and healthcare costs continue to be a problem for the city budget. “Bankruptcy isn’t the answer. It’s not like we sort of restructure and become a different city,” said Professor of Economics and Senior Associate Dean, Maxwell School at Syracuse University Michael Wasylenko.
Harrisburg debt: In some cases, taxpayers are paying to sue themselves - In Harrisburg, lawsuits beget lawsuits like rabbits on a warm spring night. The situation is complex, fluid and every party is keen to advance — and protect — the interests of their constituents, be it taxpayers or bondholders. While the politicians’ rhetoric bounces back and forth across the newspaper’s pages, a small army of black- and gray-suited attorneys are fighting in the region’s courtrooms. In an environment where each step forward seems destined to be met with a lawsuit or legal challenge, the costs are stacking up. According to invoices retrieved through Right to Know requests, Harrisburg has spent roughly $210,000 in legal representation related to lawsuits arising from incinerator bonds. In a twisted way, Harrisburg taxpayers are paying for lawyers to not only sue a government that represents Harrisburg taxpayers, but also to defend themselves in suits they have in some small way paid for through their county taxes.County commissioners said they have tried to negotiate fairly with the city, but insist the city — namely City Council — has not reciprocated.
Detroit to cut 81 percent of water and sewage jobs - Workers at the Detroit Water and Sewerage Department woke up Thursday morning to see a glaring headline in the Detroit Free Press about their fate. Department management, Mayor Dave Bing and the Detroit Water Board announced support for a plan to cut 81% of department workers. The department would be reduced from 1,978 employees to about 374 over five years. The proposals came from consulting firm EMA Inc., hired by the water and sewerage department to study operations and map out a plan to cut costs. EMA conducted the study over three months. In addition to the job cuts, the plan calls for:
- Outsourcing 361 positions to low-cost contract workers in noncore functions, such as billing and mailing, grounds maintenance, office cleaning and facilities maintenance
- Outsourcing for large engineering projects and peak times
- Reducing job classifications from 257 to 31
Besides cutting costs by hiring workers at lower pay, the city saves by not providing health benefits and pensions for contractors.
The Untold Story of Municipal Bond Defaults - NY Fed - In our recent post on the state and local sector, we argued that structural problems in state and local budgets were exacerbated by the recession and would likely restrain the sector’s growth for years to come. The last couple of years have witnessed threatened or actual defaults in a diversity of places, ranging from Jefferson County, Alabama, to Harrisburg, Pennsylvania, to Stockton, California. But do these events point to a wave of future defaults by municipal borrowers? History—at least the history that most of us know—would seem to say no. But the municipal bond market is complex and defaults happen much more frequently than most casual observers are aware. This post describes the market and its risks.
Parade Magazine decries poor state of public school facilities - Parade Magazine published an excellent report by Barry Yeoman about the sad state of the nation’s school facilities this past weekend. It’s a surprisingly detailed look at a deficit—the backlog in school maintenance and repair—with much bigger consequences for our children than the federal budget deficit. By some estimates, the nation would have to spend $271 billion just to bring the public schools up to a decent state of repair, while a state of world class excellence would require investments several times larger. All of the talk about testing our way to educational excellence has only diverted attention and funding from the desperate state of the nation’s school buildings and grounds. Crumbling, antiquated facilities are, as Yeoman makes clear, hostile to learning and depressing to the children and teachers who spend so much of their lives there. State and local governments too often look the other way or blame teachers for the educational shortcomings of the students. Education seems to be the place where many people don’t believe “you get what you pay for.” Today, more than 14 million children attend class in deteriorating facilities; the average U.S. public school is over 40 years old. In the worst of them, sewage backs up into halls and classrooms, rain pours through leaky roofs and ruins computers and books, and sinks are off the walls in the bathrooms. As Mary Filardo, CEO of the 21st Century School Fund, puts it, they are “unhealthy, unsafe, depressing places.”
Animation Teacher Faces Termination For Refusing To Sell His Students Unnecessary Books - The standard of being a good teacher tends to be the same at most schools. It involves sharing one’s experiences and knowledge, pushing students to develop their existing talents and inspiring them to discover new ones, and preparing students to succeed in their chosen field. Animation artist Mike Tracy claims that his school, the Art Institute of California—Orange County, judges teachers by another criteria: how many e-textbooks each teacher sells to their students. Tracy, who has taught drawing and digital painting for eleven years at AIC—Orange County, felt that his class didn’t require the textbooks he was suddenly being asked to sell and told the school that he would prefer to teach without them. Tracy’s reward for working in the best interest of his cash-strapped, loan-burdened students was a termination notice from the school.
Moe Tkacik: Student Debt – The Unconstitutional 40 Year War on Students - Yves here. I’m featuring this post not simply because the student debt issue is coming to serve as a form of debt servitude, but also because the backstory is so ugly. Student debt is the only form of consumer lending where the obligation cannot be discharged in bankruptcy. This story chronicles how persistent bank lobbying, including disinformation portraying student borrowers as likely deadbeats, led to increasingly draconian treatment of student loans. A second reason for posting it is that due to technical difficulties at Reuters, the original ran without the hyperlinks, which are of interest to serious readers. First published at Reuters. You have probably mentally catalogued the student loan crisis alongside all the other looming trillion dollar crises busy imperiling civilization for the purpose of enriching the already rich. But it is different from those crises in a few significant ways, starting with the fact that the entire student loan business is arguably unconstitutional. You don’t have to take it from me: a preeminent bankruptcy scholar made precisely this argument under oath before Congress. In December 1975, when Congress was debating the first law that made student loans non-dischargeable in bankruptcy, University of Connecticut law professor Philip Shuchman testified that students “should not be singled out for The thing was, discrimination was kinda the whole idea. Stagflation was sending an unprecedented number of Silent Majority members into bankruptcy, and the bank lobby was fighting back with a propaganda assault that scapegoated counterculture student delinquents who were allegedly taking loans with no goal of paying them. As Shuchman and others explained in hearings, only about 4% of people who filed for bankruptcy protection in 1975 had student loans on their balance sheets, and of those fewer than one fifth did not have substantial other debts motivating them to file. special and discriminatory treatment,” adding that the idea gave him “the further very literal feeling that this is almost a denial of their right to equal protection of the laws.”
Cash-strapped US pension funds ditch stocks for alternatives (Reuters) - Faced with growing obligations and shrinking returns, many of the largest U.S. public pensions have raised their exposure to alternative investments to record levels this year, despite ongoing criticism of the risks and costs. Public pension fund managers have poured billions of dollars into alternative investments, ranging from Polish energy facilities to catastrophe bonds, as lackluster stock market returns and historically low interest rates have made it difficult for pensions to earn enough. Public plans with more than $1 billion had a median of 15 percent in alternatives as of June 2012, the highest ever and up from 9.2 percent in June 2011, according to the Wilshire Trust Universe Comparison Service. The increase carries risks of unstable performance and high fees amid a funding shortfall of $1.38 trillion as of 2010, according to Pew Center on the States data. Already, the vast majority of states have cut pension benefits or increased contributions from workers, or are trying to. "There are several ways in which the economics can start to go against you,"
July Update: Early Look at 2013 Cost-Of-Living Adjustments indicates 1% increase - The BLS reported this morning: "The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 1.3 percent over the last 12 months to an index level of 225.568 (1982-84=100). For the month, the index decreased 0.2 percent prior to seasonal adjustment." CPI-W is the index that is used to calculate the Cost-Of-Living Adjustments (COLA). The calculation dates have changed over time (see Cost-of-Living Adjustments), but the current calculation uses the average CPI-W1 for the three months in Q3 (July, August, September) and compares to the average for the highest previous average of Q3 months. Note: this is not the headline CPI-U, and not seasonally adjusted. Since the highest Q3 average was last year (2011), at 223.233, we only have to compare to last year. Note: The last few years we needed to compare to Q3 2008 since that was the previous highest Q3 average. This graph shows CPI-W since January 2000. The red lines are the Q3 average of CPI-W for each year. Currently CPI-W is above the Q3 2011 average. If the current level holds, COLA would be around 1.0% for next year (the current 225.568 divided by the Q3 2011 level of 223.233). With the recent increases in oil and gasoline prices, CPI-W might increase some in August and September, and COLA might be closer to 1.5%. This is early - we need the data for August and September - but it appears COLA will be slightly positive next year.
Projected Social Security Shortfall Dwarfed by Wage Growth - Dean Baker - That could have been the headline of a Boston Globe article on the size of the projected Social Security shortfall if the paper had not decided to use its news section to scare readers about the state of Social Security. In keeping with this effort, the headline of a recent article read: "Social Security surplus dwarfed by future deficits." The article then gave a series of numbers which could only be intended to scare readers since it is extremely unlikely that even 0.1 percent of the Globe's readers have any idea what they mean. "The projected shortfall in 2033 is $623 billion, according to the trustees’ latest report. It reaches $1 trillion in 2045 and nearly $7 trillion in 2086, the end of a 75-year period used by Social Security’s number crunchers because it covers the retirement years of just about everyone working today." To make sense of these numbers it would be necessary to know how large the economy is projected to be in 2033, 2045, and 2086. If the Globe was interested in conveying information instead of pushing its agenda for cutting benefits it might have told readers that the tax increase needed to keep the system fully funded over its 75-year planning horizon is just over 5 percent of projected wage growth for the next 30 years. (This is using the Social Security trustees projections. It would be less than 4 percent of projected wage growth using the projections from the Congressional Budget Office.)
Paul Ryan on Social Security - Ryan has long championed the privatization of social insurance programs. His last two budget blueprints put forth in fiscal 2012 and 2013—both called The Path to Prosperity—would turn Medicare into a system of vouchers that individuals could use to buy private insurance. These vouchers would not keep pace with rising health care costs, forcing seniors to bear an increasingly greater burden of their health care costs in years to come. Privatization of government programs seems to be a theme with Ryan. On Social Security, Ryan—a Social Security recipient himself as a young man—helped lay the groundwork for George W. Bush’s push to privatize Social Security, as described in a recent New Yorker profile of the congressman. Ryan worked with former Sen. John Sununu (R-NH) to create a plan which was centered on the creation of personal savings accounts. Under the plan, a portion of an individual’s payroll tax contribution would be diverted from the OASDI trust fund into an individual account, which would then be invested. Such a diversion of funds would have decreased Social Security’s revenue and required a transfer of funds from the rest of the budget to fund benefit obligations, as this Center on Budget and Policy Priorities analysis reported. In other words, the Ryan-Sununu plan to bring long-term solvency to Social Security would have required the federal government to borrow heavily to finance promised benefits.
Biden guarantees: 'no changes in Social Security' - - Vice President Joe Biden told cafe patrons in Virginia on Tuesday that he could "guarantee" he and President Obama would allow no changes to Social Security. As a debate over reforming entitlements -- particularly Medicare -- takes center stage in the 2012 presidential campaign, Biden seemed to promise not to allow changes to the program. "Hey, by the way, let's talk about Social Security," Biden said after a diner at The Coffee Break Cafe in Stuart, VA expressed his relief that the Obama campaign wasn't talking about changing the popular entitlement program. "Number one, I guarantee you, flat guarantee you, there will be no changes in Social Security," Biden said, per a pool report. "I flat guarantee you."The pool report noted that most of the patrons at the cafe toward whom Biden was directing his remarks were over the age of 60.
Some below poverty line don't qualify for Medicaid - She makes about $15,000 a year, supporting her daughter and unemployed husband. She thought she'd be able to get health insurance after the Supreme Court upheld President Barack Obama's health care law. Then she heard that her own governor won't agree to the federal plan to extend Medicaid coverage to people like her in two years. So she expects to remain uninsured, struggling to pay for her blood pressure medicine. "You fall through the cracks and there's nothing you can do about it," said the 52-year-old home health aide. "It makes me feel like garbage, like the American dream, my dream in my homeland is not being accomplished." Many working parents like Pico are below the federal poverty line but don't qualify for Medicaid, a decades-old state-federal insurance program. That's especially true in states where conservative governors say they'll reject the Medicaid expansion under Obama's health law. In South Carolina, a yearly income of $16,900 is too much for Medicaid for a family of three. In Florida, $11,000 a year is too much. In Mississippi, $8,200 a year is too much. In Louisiana and Texas, earning more than just $5,000 a year makes you ineligible for Medicaid. Governors in those five states have said they'll reject the Medicaid expansion underpinning Obama's health law after the Supreme Court's decision gave states that option.
Medicare and Medicaid Spending Trends Don’t Justify Restructuring -- 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 by adopting Medicare premium support or converting Medicaid into a block grant. Medicare and Medicaid spending per enrollee will grow at rates of 3.1 percent and 3.6 percent, respectively, over the next ten years — well below the projected growth rate of 5.0 percent for private insurance and somewhat less than the growth of gross domestic product (GDP) per capita. (See figure.) John Holahan and Stacey McMorrow of the Urban Institute, a nonpartisan research organization, base these estimates on the latest projections of national health expenditures prepared by the Office of the Actuary at the Centers for Medicare & Medicaid Services.
Medicare, Medicaid Far More Cost-Efficient Than Private Insurance - The New England Journal of Medicine reports that Medicare and Medicaid spending has decelerated in recent years, and not just because of the Great Recession. The public programs have seen their cost growth slow significantly compared to private health insurance. And this is expected to continue for the coming decade. This is so important because, as Paul van de Water of the Center on Budget and Policy Priorities explains, the public debate has focused on transforming Medicare and Medicaid in the coming years, constraining cost in the very programs that are the most cost-efficient. If anything, the opposite should be true, and more and more of the system should be converted into public programs to increase the risk pool, allow for greater bargaining leverage on prices, and provide stability. These data belie the claim that spending for Medicare and Medicaid is “out of control” and that the programs must be fundamentally restructured by adopting Medicare premium support or converting Medicaid into a block grant. Medicare and Medicaid spending per enrollee will grow at rates of 3.1 percent and 3.6 percent, respectively, over the next ten years — well below the projected growth rate of 5.0 percent for private insurance and somewhat less than the growth of gross domestic product (GDP) per capita. (See figure.)
Ryan’s Medicare Policies Draw Fire -- Several healthcare groups are opposing the policy ideas of new Republican vice presidential candidate Paul Ryan, claiming his proposals for Medicare and Medicaid reform would do more harm than good. Ryan, a Wisconsin Republican and chair of the Budget Committee in the House of Representatives, has offered to transform Medicare into a "premium support" system. Offered for those who turn 65 in 2023 or later, Medicare would provide an average of $8,000 to help offset the cost of buying private health insurance. Those eligible would still have a choice to enroll in the traditional fee-for-service program -- but would receive premium support for that option just as those using private plans would. Ryan's proposal, part of his overall budget plan, would also raise the age of eligibility from 65 to 67 and reopen Medicare Part D's "donut hole." It also calls for repealing the Affordable Care Act, an idea that's not currently advocated on the Congressman's website. The GOP-controlled House passed Ryan's budget plan each of the last two years. However, it stalled in the Democratic-controlled Senate.
Whose Plan Destroys Medicare — Obama’s or Romney-Ryan's?, by Robert Reich: Stumping in Florida today, Mitt Romney charged President Obama’s Affordable Care Act will “cut more than $700 billion” out of Medicare.What Romney didn’t say was that his running-mate’s budget — approved by House Republicans and by Romney himself — would cut Medicare by the same amount. The big difference, though, is the Affordable Care Act achieves these savings by reducing Medicare payments to drug companies, hospitals, and other providers rather than cutting payments to Medicare beneficiaries. The Romney-Ryan plan, by contrast, achieves its savings by turning Medicare into a voucher whose value doesn’t keep up with expected increases in healthcare costs — thereby shifting the burden onto Medicare beneficiaries, who will have to pay an average of $6,500 a year more for their Medicare insurance, according an analysis of the Republican plan by the non-partisan Congressional Budget Office. Moreover, the Affordable Care Act uses its Medicare savings to help children and lower-income Americans afford health care, and to help seniors pay for prescription drugs by filling the so-called “donut hole” in Medicare Part D coverage. The Romney-Ryan plan uses the savings to finance even bigger tax cuts for the very wealthy.
The Truth Has A Well-Known Demagogic Bias - Paul Krugman - The other day I picked up on something William Saletan wrote to illustrate the conventional wisdom that has let the essentially ridiculous Paul Ryan go so far. Today let me pick on William Galston – again not a household name, but a good representative of the Beltway gone bad. Galston urges Democrats not to “demagogue” Ryan, but despairs: Here’s what I fear will happen instead. The Obama campaign will not take the other side in a high-minded debate. Instead, it will relentlessly attack Romney-Ryan for plotting to “end Medicare as we know it,” and for leaving the poor to go hungry without food stamps and suffer, even die, without health insurance. What’s wrong with this lament? How about the fact that Romney-Ryan actually is a plan to end Medicare as we know it? (And why the quotation marks? That’s what it is – replacing the system with fixed-value vouchers). It is also a plan for drastic cuts in food stamps and Medicaid, not to mention canceling the expansion of coverage under the Affordable Care Act, which would mean lost insurance for tens of millions of Americans – thousands of whom would, in fact, die as a result. Yet pointing out these truths is, in the eyes of Very Serious People, “demagoguery.”
Will Obama’s Approach to Medicare Costs Lead to Shortages? - If we had perfect competition in the provision of health care, the traditional model predicts that price controls will lead to shortages. But the evidence is clear that we don’t live in this ideal world of perfect competition in terms of the supply of doctors, the supply of pharmaceuticals and medical devices, or in the provision of insurance. On the first issue, Romney and Ryan should talk to Greg Mankiw on how much doctors make in the U.S. versus abroad. Dean Baker once criticized Greg for hiding the role that government plays in this upward distribution of income towards doctors: We could have designed trade policy to make it as easy as possible for smart kids from China, India and elsewhere to study to U.S. standards and then practice medicine, law, and economics in the United States. This would put the same downward pressure on the wages of these professions as we have seen for manufacturing workers and non-college educated workers in general. To be fair, Greg has made the same recommendation. But let’s also note this from Dean: the fact that drugs are expensive is entirely due to government-granted patent monopolies. We spend about $300 billion a year on drugs that would cost less than $30 billion a year in a free market.
The Republican ticket’s big Medicare myth - Ezra Klein -- I’ve got a modest proposal: You’re not allowed to demand a “serious conversation” over Medicare unless you can answer these three questions:
1) Mitt Romney says that “unlike the current president who has cut Medicare funding by $700 billion. We will preserve and protect Medicare.” What happens to those cuts in the Ryan budget?
2) What is the growth rate of Medicare under the Ryan budget?
3) What is the growth rate of Medicare under the Obama budget?
The answers to these questions are, in order, “it keeps them,” “GDP+0.5%,” and “GDP+0.5%.” Let’s be very clear on what that means: Ryan’s budget — which Romney has endorsed — keeps Obama’s cuts to Medicare, and both Ryan and Obama envision the same long-term spending path for Medicare. The difference between the two campaigns is not in how much they cut Medicare, but in how they cut Medicare.
Romney's right: Obamacare cuts Medicare by $716 billion. Here's how. -The Romney campaign has gone on the offense on Medicare, charging that the Affordable Care Act “cuts $716 billion” from the entitlement program. That $716 billion figure is one you’ll probably be hearing a lot about during this election cycle. It’s worth understanding where it comes from and what the spending reductions mean for the Medicare program. First, where it comes from. On July 24, the Congressional Budget Office sent a letter to House Speaker John Boehner, detailing the budget impact of repealing the Affordable Care Act. If Congress overturned the law, “spending for Medicare would increase by an estimated $716 billion over that 2013–2022 period.” As to how the Affordable Care Act actually gets to $716 billion in Medicare savings, that’s a bit more complicated. John McDonough did the best job explaining it in his 2011 book, “Inside National Health Reform.” There, he looked at all the various Medicare cuts Democrats made to pay for the Affordable Care Act. The majority of the cuts, as you can see in this chart below, come from reductions in how much Medicare reimburses hospitals and private health insurance companies.
Ruth Marcus: Feeling ill over Medicare debates - The Republican National Committee chairman says President Obama has “blood on [his] hands” for cutting Medicare. Mitt Romney blasts the president for having “robbed” the program of $700 billion. Vice President Biden accuses Romney and running mate Paul Ryan of “gutting” Medicare. And, inevitably, President Obama warned that Romney-Ryan would “end Medicare as we know it.” Aren’t you glad we’re having a sober policy discussion about how to rein in entitlement spending? Such hyperbole was inevitable. The laws of political gravity drag every debate from the lofty realm of ideas to the grungy plain of invective. The more complex and weighty the issue, the more it is at risk of being distilled — distorted — into a 30-second caricature. Let’s pause for a bit of fact-checking. The cheeky response to the critique of Obama’s Medicare cuts is that Ryan assumes those very cuts in his budget — the one passed by the House and endorsed as “marvelous” by Romney. So there are robbers galore and blood to spread around.
Middle-Age Blues - Today, let’s consider what the selection of Ryan as Mitt Romney’s running mate will mean to the American health care system. To start, there’s good news for senior citizens: You can stop worrying! Neither Ryan nor Romney wants to change Medicare coverage for people over 55. Also, the news media is going to quit calling you senior citizens. You are now Medicare Sensitive Voters. Any other questions? Let’s start with you over there in the corner — the one jumping up and down and hysterically waving your arms. I am 54! How come nobody cares about my health care? As Romney said on “60 Minutes,” the Republican ticket is “looking for young people down the road and saying, ‘We’re going to give you a bigger choice.’ ” So the good news is that: A) you are getting a choice, and B) you are now officially a young person. No, I’m not! I am totally falling apart! And now you’re telling me that people just one year older than me will get guaranteed government coverage that everybody likes, while I am going to be getting a choice? What if I don’t want a choice? Freedom is always good. Freedom’s just another word for nothing left to lose.
Thinking about rationing - Not long ago I was on the prowl for a comprehensive article on health care rationing, what it means, how it influences policy consideration, and so forth. Well, all I had to do was wait. My Boston University colleague Alan Cohen has published one in the most recent issue of Inquiry. Here are a few passages I highlighted. First-dollar rationing has been the dominant form of rationing in this country, with both public and private payers limiting access to basic services and primary care—either by denying coverage or by imposing high deductibles and coinsurance—even as they pay for more expensive tertiary care, often at the end of life . In most other industrialized nations, last-dollar rationing has been the norm, with consumption of high-cost services limited via wait lists and constrained supply of costly technology, while universal coverage assures access to basic primary and secondary care. The ACA aims to reduce first-dollar rationing by promoting access to primary care and preventive services. [...] First-dollar rationing makes little sense if we want to obtain the highest value for our long-term investment in health care. Instead, first-dollar coverage of primary care andevidence-based preventive services should be the norm, as the ACA strives to attain. Rationing, then, should apply to services that are wasteful or non-beneficial, and in this respect, last-dollar rationing makes more sense because of diminishing marginal returns on expensive tertiary care, especially in endof- life situations.
Ambiguity in Health Law Could Make Family Coverage Too Costly for Many — The new health care law is known as the Affordable Care Act. But Democrats in Congress and advocates for low-income people say coverage may be unaffordable for millions of Americans because of a cramped reading of the law by the administration and by the Internal Revenue Service in particular. Under rules proposed by the service, some working-class families would be unable to afford family coverage offered by their employers, and yet they would not qualify for subsidies provided by the law. The fight revolves around how to define “affordable” under provisions of the law that are ambiguous. The definition could have huge practical consequences, affecting who gets help from the government in buying health insurance. Under the law, most Americans will be required to have health insurance starting in 2014. Low- and middle-income people can get tax credits and other subsidies to help pay their premiums, unless they have access to affordable coverage from an employer. The law specifies that employer-sponsored insurance is not affordable if a worker’s share of the premium is more than 9.5 percent of the worker’s household income. The I.R.S. says this calculation should be based solely on the cost of individual coverage for the employee, what the worker would pay for “self-only coverage.” Critics say the administration should also take account of the costs of covering a spouse and children because family coverage typically costs much more.
Health-Care Reform and the 'Doctor Shortage' - “Doctor Shortage Likely to Worsen With Health Law,” read the alarming headline of a recent article in The New York Times. The article cites a study by the authoritative Association of American Medical Colleges, according to which by 2025 the nation’s demand for doctors active in patient care will be 916,000, while the projected supply is 785,400. The report thus anticipates a shortage of 130,600 patient-care doctors, of which about half represent primary-care physicians. These figures assume that the Affordable Care Act of 2010 will be implemented as intended. According to the Times article, the association has estimated that the extension of health-insurance coverage under the new law to slightly more than 30 million otherwise uninsured Americans will increase the doctor shortage by 30,000 for any future year, beginning in 2015. Opponents of the health care law see in these numbers one more useful piece of ordnance. In this case the protest appears to be that we, the well insured, should not be asked to share already scarce health care resources with millions of currently uninsured Americans now adding their claim to these same already scarce resources. Sometimes this critique is styled as concern for the poor, on the strange theory that having no insurance coverage and ability to pay for care is better than having insurance coverage but having to wait for a doctor’s appointment to get non-emergency care.
Does, or did, Romney own shares in the Bain fund that is an owner of HCA (which appears to be engaging in Medicare fraud)? - During the Great Recession, when many hospitals across the country were nearly brought to their knees by growing numbers of uninsured patients, one hospital system not only survived — it thrived. In fact, profits at the health care industry giant HCA, which controls 163 hospitals from New Hampshire to California, have soared, far outpacing those of most of its competitors. The big winners have been three private equity firms — including Bain Capital, co-founded by Mitt Romney, the Republican presidential candidate — that bought HCA in late 2006. HCA’s robust profit growth has raised the value of the firms’ holdings to nearly three and a half times their initial investment in the $33 billion deal. The financial performance has been so impressive that HCA has become a model for the industry. Its success inspired 35 buyouts of hospitals or chains of facilities in the last two and a half years by private equity firms eager to repeat that windfall.. Among the secrets to HCA’s success: It figured out how to get more revenue from private insurance companies, patients and Medicare by billing much more aggressively for its services than ever before; it found ways to reduce emergency room overcrowding and expenses; and it experimented with ways to reduce the cost of medical staff, a move that sometimes led to conflicts with doctors and nurses over concerns about patient care.
- More than one-third of U.S. adults (35.7%) are obese. [Read data brief]
- Obesity-related conditions include heart disease, stroke, type 2 diabetes and certain types of cancer, some of the leading causes of preventable death. [Read guidelines]
- In 2008, medical costs associated with obesity were estimated at $147 billion; the medical costs for people who are obese were $1,429 higher than those of normal weight. [Read summary]
- By state, obesity prevalence ranged from 20.7% in Colorado to 34.9% in Mississippi in 2011. No state had a prevalence of obesity less than 20%. 39 states had a prevalence of 25% or more; 12 of these states had a prevalence of 30% or more: Alabama, Arkansas, Indiana, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Oklahoma, South Carolina, Texas, and West Virginia.
- Non-Hispanic blacks have the highest age-adjusted rates of obesity (49.5%) compared with Mexican Americans (40.4%), all Hispanics (39.1%) and non-Hispanic whites (34.3%) .
This Is America's Sugar Addiction - An Infographic - Want to solve the unresolvable issue of America's $100 trillion in unfunded welfare liabilities? Start with this: America's sugar addiction, because in 1822 America, the average person consumed 45 grams of refined sugar, or the amount found in one 12-ounce soda can, every 5 days; fast forward to 2012 and in the same period the average American now consumer a whopping 765 grams of sugar - the equivalent of 17 (non-diet) soda cans; also the equivalent of 130 pounds of refined sugar every year! More than anything, this country's fascination with the sugar high (as well as all other various forms of cheap fast food gratification) coupled with an increasingly sedentary "behind a computer" lifestyle is the leading contributor to obesity, chronic healthcare conditions, and numerous other known and unknown sources of emergency healthcare funds. As always: if one wants change, that change always has to start in the mirror.
What Potatoes Say about the State of US Democracy - The debate in the US Congress last winter over whether potatoes should be curbed in school lunches is emblematic of the modern-day crisis in US governance. Lobbyists and other powerful interest groups dominate the tenor of the debate. Unsurprisingly, most Americans have lost confidence in their leaders. Obama had tried to separate healthy from unhealthy food in school cafeterias and have more vegetables served to students instead of just pizza and French fries. But Udall has gained the support of seven other senators in his bid to block Obama's guidelines. Instead, he has drafted Senate Amendment 804 to the 2012 spending bill for the Agriculture Department. Every French fry and every Tater Tot, the 61-year-old politician argues, was once a potato, which makes it a vegetable, just like broccoli, green beans, spinach or carrots. Banning French fries, he says, is basically discriminating against potatoes just because they're sometimes dipped in oil. At issue, says Udall, is the equal treatment of vegetables, and the fact that even a potato has vitamins, as does pizza -- because of the tomato sauce.
Most People Who Take Blood Pressure Medication Possibly Shouldn’t - A new study is turning decades of medical dogma on its head. A panel of independent experts reports this week that drugs used to treat mild cases of high blood pressure have not been shown to reduce heart attacks, strokes, or overall deaths. Most of the 68 million patients in the United States with high blood pressure have mild, or Stage 1, hypertension, defined as a systolic (top number) value of 140-159 or a diastolic (bottom number) value of 90-99. The new review suggests that many patients with hypertension are overtreated—they are subjected to the possible harms of drug treatment without any benefit. The study was conducted by the widely respected Cochrane Collaboration, which provides independent analyses of medical data. The “independent” part is important: The panelists who conducted the analysis don’t take money from drug companies.
Here It Comes: Super Gonorrhea - I just got out of a telebriefing with the CDC. The atmosphere was not a jovial one. The words "gonorrhea epidemic" were thrown around in ominous tones. No one was up for hanging out after. Did you know gonorrhea can kill you? It can, and it's also tragically effective at making women infertile. According to her journals, my great aunt Mabel was "barren," and my grandmother always told me it was probably from gonorrhea. The only reason we don't hear about these awful complications more often -- and we instead think of it as a little oops of an infection ("Can I still drink on these antibiotics?" "Yes." "Cool.") -- is because we've been able to kill it early with relative ease. But over the past decades, gonorrhea has been mowing down our antibiotics. The list of effective antibiotics has been dwindling as the bacteria became resistant, and now it's down to one. Five years ago, the CDC said fluoroquinolones were no longer effective, but oral cephalosporins were still a common/easy treatment. Now injected ceftriaxone is the only recommended effective drug we have left. And it has to be given along with either azithromycin or doxycycline.
Big Ag Spends Big on Fight Against Labeling of Genetically Engineered Food - Big names in corporate agriculture and biotechnology firms are spending big -- to the tune of $12 million -- in their fight to prevent Californians from knowing whether their food contains genetically engineered ingredients. Contributions on file with the California Secretary of State's office show that the Coalition Against the Deceptive Food Labeling Scheme, the group with a loaded name fighting the labeling, has raised nearly $11.9 million in funds to fight the labeling. The fight is over Proposition 37, which noted food writer Michael Pollan called "easily the most important food battle of the fall," and is set for the ballot in California in November. If the "yes" votes win, genetically engineered foods would have to be labeled; if the "no" votes win, the status quo will remain -- a scenario in which consumers don't know if the food they're consuming contains genetically engineered ingredients or not. The top donors to this anti-labeling campaign include some of the most well-known names in biotechnology and industrial food: DuPont Pioneer (over $2.4 million), Bayer Cropscience (over $1 million), BASF Plant Science (nearly $1 million). PepsiCo, Nestle USA, General Mills, Conagra Foods, Coca Cola and Syngenta each gave $500,000.
Genetically engineering ‘ethical’ babies is a moral obligation, says Oxford professor - Professor Julian Savulescu said that creating so-called designer babies could be considered a “moral obligation” as it makes them grow up into “ethically better children”. The expert in practical ethics said that we should actively give parents the choice to screen out personality flaws in their children as it meant they were then less likely to “harm themselves and others”. The academic, who is also editor-in-chief of the Journal of Medical Ethics, made his comments in an article in the latest edition of Reader’s Digest.He explained that we are now in the middle of a genetic revolution and that although screening, for all but a few conditions, remained illegal it should be welcomed.
Forecasting Corn Yields - My colleague Wolfram Schlenker has developed forecasts for this year's corn yield based on weather through August 6. We've been considered pessimists by some, since this model predicts really big declines in crop yields under projected climate change. But this year we're the optimists: our model predicts a US yield only a 14 percent below trend. That's bad, but it's not nearly as bad as USDA's forecast last Friday of 25 percent below trend. I'm replicating his post so you don't have to click through: USDA today announced its forecast for corn yields. It might be fun to compare those forecast to one using a statistical model of corn yields that my colleague Michael Roberts and I have developed. It uses only four temperature variables (two temperature and two precipitation variables - if you want to read more, here's a link to the paper). The temperature variables in 2012 are shown here. All weather variables in the model are season totals for March 1st - August 31st. The following graph combines actual weather observations for March 1st-August 6, 2012 with historic averages for August 7th-August 31st in each county. Once the actual weather for the rest of August is realized, the predictions will obviously change dependent on whether it warmer or cooler than usual.
Enduring Drought, Farmers Draw the Line at Congress - John Askew pulled at a soybean pod and revealed two anemic beans dappled with stem rot, the harvest of a too hot sun and too little rain. “We need a farm bill — that’s the first thing,” said Mr. Askew, whose family has farmed here for six generations. Representative Latham, a Republican, agrees. But House leaders, including Speaker John A. Boehner, who popped into Iowa on Friday night to promote Mr. Latham’s re-election campaign, have been unable to muster the votes. A summer drought that has destroyed crops, killed livestock and sent feed prices soaring is now extracting a political price from members of Congress, who failed to agree on a comprehensive agriculture bill or even limited emergency relief before leaving Washington for five weeks. Farmers are complaining loudly to their representatives, editorial boards across the heartland are hammering Congress over its inaction, and incumbents from both parties are sparring with their challengers over agricultural policy.
USDA to purchase $170 million worth of meat to help farmers struggling with drought - — The government will buy up to $170 million worth of pork, lamb, chicken and catfish to help drought-stricken farmers, the White House said Monday as President Barack Obama brought his re-election campaign to rural voters in Iowa. The purchase for food banks and other federal food nutrition programs is expected to help producers struggling with the high cost of feed during the worst drought in a quarter-century.Federal law allows the Agriculture Department to buy meat and poultry products to help farmers and ranchers affected by natural disasters. The announcement came as Obama criticized Republican vice presidential candidate Paul Ryan for blocking a farm bill that could help farmers cope with the drought. Obama touted his efforts to help farmers as he began a three-day tour of the battleground state he won in 2008.
Estimated 2012 US Corn Yield - The USDA has published an early estimate of what they think this year's United States average corn yield will be - a much depressed 123.4 bushels/acre due to the current record-breaking heat and drought in the US. Since they also maintain statistics for average yields back to 1866 (!!), I made the graph above showing the context for this year's estimate (assuming it turns out to be reasonably accurate). You can see that prior to the late 1930s, yields were pretty much flat with fluctuations year-to-year. Then began a long and roughly linear rise in yields due to improving agricultural technology. Year-to-year weather causes fluctuations around the trend, and the latest fluctuation is particularly large (though not off the scale of what has been seen before). Hitherto, I've been of the view that there was no climate change signal visible in these yields, but the latest data point is perhaps starting to raise a small question mark there. Recall that the United States generally got wetter during the 1960s to 1990s, likely due to natural sea surface temperature fluctuations, but has been getting drier since then due to some (arguable) combination of reversal of the natural fluctuation and overall climate drying due to excess carbon dioxide:
Summarizing America's Record Drought In One Picture - No commentary necessary.
Two Images Tell the Story of 2012 Heat and Epic Drought - For the tens of millions of Americans who suffered from the punishing heat and drought during July, it probably comes as no surprise to learn that the two hazards were closely related. Both the unusually dry weather and the deadly heat resulted from the same weather pattern that set up across North America during the spring and summer, with a huge area of High Pressure, or a "heat dome," parked above the South Central states, pumping warm air northward and banishing storms that could have dropped beneficial rainfall. As you can see from these two graphics, the hottest areas in July were also some of the places that were caught in the grips of the most severe drought conditions. Because the ground was so dry, very little evaporation took place from the land surface and plants into the atmosphere. This meant that more of the sun's energy was able to go into directly heating the air, and the drier than usual conditions helped air temperatures climb higher than they otherwise would have. A whopping 4,420 daily high temperature records were set or tied during July, along with 3,673 warmest-overnight low temperature records. A total of 32 states had July temperatures among their 10 warmest, with seven states having their second warmest July on record.
Will Food Prices Jump After the Heat Wave? - With a giant swathe of the nation’s prime agricultural land affected by drought, the federal government and private forecasters have been projecting a significant drop in corn and soybean production—and a jump in food prices. Until this week’s report on worldwide supplies of agriculture commodities from the Department of Agriculture, however, there have not been any projections based on actual surveys of the affected crop. Today’s numbers, in line with expectations, foresee a giant drop in the amount of corn and soybean that will be harvested, and basically ensure a jump in prices across the wide range of food products that use soy and corn.The forecast for corn yield, the bushels of corn harvested per acre of planted, fell to 123.4, a drop from last month’s forecast of 146 bushels per acre. The continued slide in projected yields is particularly sharp considering that this corn crop was the biggest in more than 70 years. The yield is projected to be the lowest since 1995. The big drop in corn production means, in the words of the report, a “sharply higher price outlook” for corn. The projected price for corn soared to $7.50-to-$8.90 per bushel; last month’s projections were $5.40-to-$6.40 a bushel.
Lower Temperatures and Rain Won’t Be Enough to Ease U.S. Drought - Lower temperatures and rain forecast for parts of the Midwest won’t be enough to reverse the drought that has pushed crop prices up for months.In July, drought covered 57.2 percent of the contiguous 48 U.S. states, the worst since December 1956 when 57.6 percent of the country was dry, according to the latest Palmer Drought Index. The Palmer records, which date to 1895, are used to make comparisons to drought years before 2000. “The primary corn and soybean agriculture belt has been especially hard-hit by drought the last four months,” the Palmer index showed. “By the end of July 2012, about 86 percent of the primary corn and soybean belt was experiencing moderate to extreme drought, surpassing all previous droughts except those in 1988 and the 1930s.” A large part of the Midwest will be drier than normal through the end of the month even with the rain and lower temperatures, said Joel Widenor, co-founder of Commodity Weather Group LLC in Bethesda, Maryland. He said time may be running out for soybean yields.
RPT-After drought blights crops, US farmers face toxin threat (Reuters) - The worst U.S. drought in five decades has parched the land and decimated crops. It now threatens to deal a second blow to farmers, who may have to throw out tonnes of toxic feed. Growers are rushing to check the nitrate levels of that silage, the stalks and leaves that corn farmers often harvest to feed to locally raised cattle or hogs. Agriculture groups are warning farmers that drought-hit plants may have failed to process nitrogen fertilizer due to stunted growth, making them poisonous to livestock. Two months of dry weather and high heat that stunted plants and shriveled ears likely caused the absorption of excessive amounts of nitrogen, experts say. Instead of being distributed safely through the plant, the chemical built up in the lower portions of the stalk at potentially toxic levels. Exceptionally early spring planting has caused a crush of early summer requests for the tests. "We've had a lot of walk-in business and normally we are not a walk-in business," said Lola Manning at Agri-King, a laboratory that tests for nitrates and other toxins. " So far, few samples have shown elevated levels of toxins, she said. But late-season rains - far too tardy to help salvage the corn crop - could prompt mostly mature plants to draw even more nitrogen out of the soil and into the stalks.
Oklahoma's exceptional drought area more than doubles in week, report shows | NewsOK.com: The worst of the U.S. Drought Monitor categories, exceptional drought, is broadening its hold on Oklahoma. Thursday's report shows 38.86 percent of the state is experiencing exceptional drought, compared to 16.03 percent the previous week. In all, 100 percent of Oklahoma falls in the severe to exceptional drought categories. One such experience would be bad, but this year makes two consecutive. “The second year of drought is challenging,” Oklahoma Agriculture Secretary Jim Reese said. “Producers were certainly looking for some relief. We would love to take advantage of these market prices. Cattle producers sold a lot of cattle last year and for the most part are operating smaller herds to get through this.”
New biofuels offer hope to hungry world - The poorest people in the world face additional hunger as the price of staple foods soar. The growth of crops in 2012 has been badly affected by drought in the US and Russia and prices have risen 50% since June. According to a report about the hike in food prices, from the international agency Oxfam, 40% of US corn stocks are currently being used to produce fuel. The US Renewable Fuel Standard mandate requires that up to 15 billion gallons of domestic corn ethanol be blended into the US fuel supply by 2022. The chairman of the world's largest food producer is highly critical of the rise in bio-diesel. Peter Brabeck-Letmathe of Nestle says crops produced for biofuel use land and water which would otherwise be used to grow crops for human or animal consumption.
Fraud Fears Put a Chill in Fuel Program. - A government program designed in part to foster innovative new producers of alternative diesel fuels is now endangered by fears of burgeoning fraud. Congress in 2005 and 2007 set mandates requiring major oil refiners to purchase credits representing gallons of diesel-motor fuel made from alternative sources, such as cooking oil and soybeans. The idea was to jump-start a new industry by attracting start-ups that otherwise would have trouble competing on price with established biodiesel producers. But federal charges that two small producers passed along worthless credits—and warnings that more cases could be coming—have spooked major buyers, threatening the viability of the small companies trying to gain a foothold.
Ethanol vs. the World – The corn fuel mandate is raising food prices and hurting the poor. (WSJ) In 2007 and 2008, food prices spiked, resulting in much higher U.S. grocery bills and far more hunger in the poorest countries as the global supply chain buckled. The world may now be on the cusp of a 2012 reprise amid the drought in the Midwest farm belt, the worst in 50 years. Luckily, there are plenty of simple, modest things Washington can do to alleviate and even prevent another crisis. The problem is that these fixes are opposed by a minor industry that adds little if any value to the economy, even counting its prodigious Beltway operations. Yup, the ethanol lobby strikes again. It can't succeed without a mandate that forces consumers to buy its product every time they fill up the tank, and if the resulting corn shortages drive food prices up in a way that punishes consumers around the world, so be it. On Friday, the U.S. Agriculture Department downgraded its 2012 corn forecast by 13% from last year's crop, to 10.8 billion bushels. That would be the shortest harvest since 2006, even though the acreage planted with corn rose 4% since last year and is the highest since 1937. Scorching temperatures and little rainfall have left only 24% of the crop in good or excellent condition in the 18 major corn belt states, down from 72% in June. These represent the largest month-to-month potential declines in grain yields since the USDA started to keep records.
Boulder scientists find increase in ethanol concentrations - An increase in the amount of ethanol burned by vehicles has led to a six-fold increase in the amount of ethanol measured in urban air in the United States, according to Boulder scientists. Ethanol, which can be used by some vehicles as a primary fuel source and which also is mixed into traditional gasoline, is made from corn and other crops. The research team -- including scientists at the Cooperative Institute for Research in Environmental Sciences, a partnership between the National Oceanic and Atmospheric Administration and the University of Colorado -- did not find an impact to air quality tied to the increase in ethanol. "Increasing the ethanol in fuels is leaving a clear signature in the atmosphere," said Joost de Gouw, an atmospheric chemist with CIRES and lead author of the study published in Geophysical Research Letters.
Little Falls, Minn., ethanol plant suspends operations - The high price and low supply of corn has idled an ethanol plant in Little Falls. The Central Minnesota Ethanol Co-op has suspended operations. The plant's general manager, Dana Persson, says that until they can buy corn or sell ethanol at a better price, it's to their advantage to stop production. The St. Cloud Times says the co-op began operating in 1999 and has produced about 21 million gallons of ethanol a year. The cash price for a bushel of corn is currently $7.27 compared to $4.87 a bushel in November of 2010.
East Kansas ethanol plant closing in October : East Kansas Agri-Energy, an ethanol producer, plans to stop output at its Garnett, Kan., plant in October because drought in the Midwest has made the operation unprofitable. Garnett is southwest of Kansas City. Record corn prices and scarce supply forced the company to close the operation possibly until after the 2013 harvest, company Chairman Bill Pracht said. In Nebraska, ethanol plants in Sutherland, Albion and Atkinson have suspended operations, because of market circumstances. Ethanol output in the U.S. has fallen 15 percent to 817,000 barrels per day in the week ended Aug. 3, from a record Dec. 30, Energy Department data show.
Ethanol plant closures cause DDGS supply issues: The 2012 drought is not only taking its toll on U.S. Midwest crop and livestock producers. Ethanol plants also are succumbing as high corn prices dry up their operating margins. Suspension of operations, along with reduced production at many plants, has reduced the supply of distillers’ dried grains with solubles (DDGS), a co-product of ethanol production widely-used in swine diets. “High corn prices are not only affecting pork producers, but they are also causing ethanol plants to shut down or reduce ethanol and DDGS production due to negative profit margins,” says Dr. Jerry Shurson, professor of swine nutrition and management, University of Minnesota. “DDGS has typically been priced at 75 to 85 percent of the value of corn, making it a good alternative ingredient to reduce feed costs. Now it is being priced around 100 percent of the value of corn, making it less attractive.” A report received by Pork Network indicates that some Iowa pork producers have to travel an extra one hundred miles to source DDGS after their normal supplier shut down.
Why We Should Repeal the Ethanol Mandate and Replace it With a Carbon Tax - “Repeal and replace” is the right approach when a problem is real and existing policy addresses it in so a clumsy a way as to make it worse. With every passing day of drought in the American Midwest, the outcry against the ethanol mandate, or Renewable Fuels Standard (RFS), grows louder. The latest to weigh in is Jose Graziano da Silva, Director-General of the Food and Agricultural Organization of the United Nations. Writing in the Financial Times, he urges the U.S. government to suspend the ethanol mandate, which is expected to consume up to 40 percent of the reduced 2012 corn crop. Otherwise, he fears, the world will approach a tipping point where further supply shocks could cause a global food crisis. Worries about corn state votes have so far kept both major party presidential candidates on the side of ethanol, but opponents of the RFS also have significant support in Washington. Backed by livestock interests, among others, more than 150 members of Congress have urged the EPA to suspend the ethanol mandate for the duration of the drought. Some livestock producers are hoping that emergency drought-relief legislation will include a clause forcing the EPA to act. Suspending the RFS for the duration of the drought is not enough, however. The ethanol mandate is bad policy that should be scrapped permanently. It should be replaced with a policy that directly addresses the problem of overconsumption of carbon-based fuels. A carbon tax on transportation fuels—or better, on all forms of energy—would be an excellent choice.
Governors Ask EPA to Suspend Corn-Based Ethanol Mandate - Four states have asked the EPA to waive the renewable fuels standard that forces the nation to generate more corn-based ethanol at a time of significant drought and a corn shortage. The states all have Democratic Governors, though two of them come from the South. The worst drought in 50 years has sent corn prices to record levels, straining meat and dairy producers that use the grain as feed. Governors Mike Beebe from Arkansas and Beverly Purdue from North Carolina sent the requests in letters to the Environmental Protection Agency [...]The Renewable Fuels Standard, or RFS, which requires 13.2 billion gallons of ethanol to be made from corn this year “has imposed severe economic harm to my state’s swine, poultry, dairy and cattle producing regions,” said the letter from Purdue to EPA head Lisa Jackson. The Obama campaign has responded by saying that the President is a strong supporter of ethanol as a driver of the economy. The President was speaking in Iowa at the time. But even if you support ethanol – and studies show the corn-based version costs us more in energy to harvest than it’s worth – you cannot deny the economic harm created by the mandate at this time, given the drought conditions. The price spikes have caused a severe hardship for livestock producers in particular who use corn to feed their animals. The head of the UN’s food program, Jose Graziano da Silva, also called for a suspension of the ethanol mandate.
Ethanol Would Suffer Under Waived U.S. Mandate, Vilsack Says - Investment in U.S. ethanol production, which along with a drought-plagued crop is being blamed for near-record corn costs, may decline should federal use requirements for the biofuel be reduced, Agriculture Secretary Tom Vilsack said. At least 25 U.S. senators and 156 House members have signed letters asking Lisa Jackson, administrator of the Environmental Protection Agency, to suspend or lower mandates on how much ethanol the country must use this year and next. Last week the Obama administration said it’s reviewing ethanol policy. A review is appropriate, while a waiver may bring long-term harm to ethanol investment without having a major effect on food prices, Vilsack said. “My concern is that we send a signal to investors of perhaps, less confidence in the industry,” Vilsack said in an interview today at the Iowa State Fair in Des Moines. “We need to see whether the market is responding” with lower demand in the face of higher prices, before making a decision to relax use requirements, he said.
Will Nothing Slay the Ethanol Dragon? -As the drought kills off corn by the stalk, animal feed costs are rising, and this has a big impact on livestock management. It's causing ranchers to slaughter their animals earlier than usual, increasing the supply temporarily and actually pushing down meat prices. Yesterday, President Barack Obama announced a plan for the government to buy $170 million of this meat in order to keep farmers happy by keeping the prices up. This is a terrible idea, as Washington Examiner explains: "Prices are low, farmers and ranchers need help, so it makes sense," Obama explained. None of this makes sense. In fact, Obama's move only harms American consumers while protecting a corrupt federal program. A drought is currently driving down corn production. The shortage of feed is forcing livestock producers to slaughter animals early, putting downward pressure on meat prices in the short run and guaranteeing shortages and higher prices next year. But nature is not the biggest factor in this crisis -- the government is. Specifically, the federal government's ethanol mandate, which requires that 13.2 billion gallons of corn-based ethanol be produced in 2012. Thanks to the ethanol mandate, more than 40 percent of the nation's corn crop now goes into the production of a useless fuel that hardly anyone would buy if the government didn't require it. Only 36 percent of the corn crop now goes for feed, and 24 percent goes for food.
2012 Drought Inches Up In U.S. Historical Rankings - The costly and ongoing drought that stretches across a majority of the lower 48 states worsened during the past month, and by one measure it now ranks fifth on the top 10 list of the largest droughts ever recorded in the U.S., according to a new report released Wednesday from the National Climatic Data Center (NCDC). The drought is affecting the broadest swath of land and has the greatest intensity of any drought since 1956, and is comparable to the Dust Bowl era droughts of the 1930s as well, NCDC scientists reported. The drought footprint is currently the largest in the 13-year record of the U.S. Drought Monitor. To compare this drought with droughts that occurred prior to this period of record, climate scientists use drought indices such as the Palmer Drought Severity Index, or PDSI, which measures the balance between moisture demand and moisture supply. Based on PDSI data, 57.2 percent of the lower 48 states were experiencing "moderately to extremely dry" conditions at the end of July, which was up from 55.2 percent at the end of June. This places the 2012 drought in fifth place based on its aerial expanse, otherwise known as the drought footprint. According to NCDC, the last drought of comparable size occured in 1956. The drought's intensity has also worsened, with a 5 percent increase in the area of the country experiencing "severe" to "extreme" drought, to 38 percent. By this measure, the drought ranks as the sixth worst drought on record.
Summer’s record heat, drought point to longer-term climate issues - The undersides of dead sturgeon formed glistening constellations in the muddy brown water.In all, about 58,000 dead fish were along a 42-mile stretch, according to state officials, and the cause of death appeared to be heat. Biologists measured the water at 97 degrees in multiple spots. “I’ve never seen anything quite like it,” . Under the most wide-reaching drought since 1956, and torched by the hottest July on record dating from 1895, the United States has been under the kind of weather stress that climatologists say will be more common if the long-standing trend toward higher U.S. temperatures continues. Most immediately affected are the nation’s water sources and the people and crops that rely on them. The flow of the Mississippi River has slowed — at times rivaling 40-year lows — allowing saltwater from the Gulf of Mexico to seep far up the river channel, threatening community water supplies at the river mouth. Likewise, across the nation’s middle, many communities have invoked water restrictions to protect shrinking supplies. The lack of rain has sizzled the nation’s corn crop, too, with agriculture officials reporting last week that the overall yield is expected to drop 16 percent from last year.
Thinking About Yields under Future Drought - After writing yesterday's post, I realized I was almost certainly thinking about the problem the wrong way. In particular, I implicitly set the problem up as question about whether the trend in yields might turn negative in the near future. But I realized that it would take an extremely severe scenario for that to occur - much worse than current science will support. Let's take for example Dai's projections for the 2030s (based on analysis of the Palmer Drought Severity Index in climate models from the IPCC AR4). In that scenario, the maps looks like this: Here, most of the US is running around -4 (close to the dustbowl) as the average condition by 2040 or so. However, several points need to be kept in mind. Firstly, it's by no means the case that US corn yields completely collapsed across the country in the worst dustbowl years (1934 and 1936): They were certainly down, but they were 20-25% below normal, not 50-80% below normal. Secondly, there will not be a drought every year from here on - even if we assume Dai's projections are right. Instead, in that scenario, there will be many relatively normal years in the next few decades, but the droughts will become gradually more severe and more frequent. In the normal years, yields will continue to increase as agricultural technology is likely to continue to improve (and in particular the biologists are likely to be very focussed on improving drought tolerance). We might expect the pace of increase to slow (as drought increasingly becomes normal) but it's very unlikely that yields in the more normal years will drop.
A Closer Look at Extreme Drought in a Warming Climate The extraordinarily hot, dry summer in the American heartland has seen higher temperatures, so far, than any single year during the devastating 1930s. As corn crops wither and food prices rise, this has resulted in a steady string of visits to Iowa and other sun-baked states by politicians, including both Rep. Paul Ryan and President Obama today. It has also resulted in a stream of coverage and commentary on the relationship of this and other recent drought episodes to global warming. It’s worth digging a little deeper and putting the heated discussions of the moment into global and historical context. An article and related infographic in the Review section of the Sunday Times crystallized the issues that attend discussions of human-driven global warming in the context of drought. The Op-Ed article, “100-Year Forecast: Drought,” was by three of the co-authors of a new Nature Geoscience paper on the 2000-2004 drought in the American West, which was the worst drought in that region — by their estimate — in 800 years. In the article, they posited that such droughts, “once a rare calamity, have become more frequent and are set to become the ‘new normal’” if emissions of greenhouse gases are not curbed. At the same time, the related graphic, a timeline of 21 centuries of deviations from normal precipitation in New Mexico, showed that the authors’ notion of a “new normal” could easily be said to be the “old normal” given how much of recent history has been extremely dry in that state.
Drought and climate scepticism in corn belt - Extreme weather has visited Kevin Mainord’s farm business twice in the past two years. In 2011 a wall of water deluged his corn and soyabean fields after US authorities blasted a levee to relieve flooding on the Mississippi river. This year brought drought and weeks of devastating heat. Scientists have long warned of more frequent floods and droughts as the world’s climate changes. But for Mr Mainord and many like him, global warming is bogus. “It’s more God and nature’s dictates, rather than a man-made event,” the Missouri farmer said this week as he harvested a corn crop one-quarter of its normal size. Climate scepticism among farmers helps explain why carbon emissions are off the US legislative agenda despite the hottest temperatures on record. Drought has gripped the broadest area of the US corn belt since previous severe dry spells in the 1980s and the 1930s, the National Oceanic and Atmospheric Administration said on Wednesday. Even with plenty to lose, farmers’ champions in Washington have fought or diverted attention from climate policy to battle regulation and focus on subsidies. Their stance defies evidence that the country’s heartland is already changing because of global warming. Farmers are adapting to these changes, whatever their professed views.
Planet Records Fourth-Warmest July on Record - July was the fourth-warmest such month on record globally, and the 329th consecutive month with a global-average surface temperature above the 20th-century average, according to an analysis released Wednesday by the National Climatic Data Center (NCDC). The combined-average July temperature over global land and ocean surfaces was 61.52°F, which was 1.12°F above the 20th-century average. This was the 36th straight July with a global temperature above the 20th-century average.The last time the globe experienced a cooler-than-average July occurred in 1976, when Gerald Ford was the U.S. president. The globally averaged temperature over land areas was the third highest for July on record. For Northern Hemisphere land areas only, however, it was the warmest July on record, which is significant since this is where most of the planet’s land masses are located.
Parasites may get nastier with climate swings: study (Reuters) - Parasites look set to become more virulent because of climate change, according to a study showing that frogs suffer more infections from a fungus when exposed to unexpected swings in temperatures. Parasites, which include tapeworms, the tiny organisms that cause malaria and funguses, may be more nimble at adapting to climatic shifts than the animals they live on since they are smaller and grow more quickly, scientists said. "Increases in climate variability are likely to make it easier for parasites to infect their hosts," "We think this could exacerbate the effects of some disease," A U.N. panel of experts says that global warming is expected to add to human suffering from more heatwaves, floods, storms, fires and droughts, and have effects such as spreading the ranges of some diseases. And climate change, blamed on greenhouse gases released by burning fossil fuels, is also likely to mean more swings in temperatures. "Few...studies have considered the effects of climate variability or predictability on disease, despite it being likely that hosts and parasites will have differential responses to climatic shifts," they wrote.
As drought looms in India, fear for its cattle - Armed with the latest monsoon rainfall data, weather experts finally conceded this month that India is facing a drought, confirming what millions of livestock farmers around the country had known for weeks. For over three months, even state agencies have been providing free fodder to those most vulnerable to a shortfall in India's annual monsoon -- farmers who eke a living out of small landholdings and the milk provided by cattle.India is heavily dependent on the capricious annual monsoon, which brings about 75 p ercent of the rainfall that the country receives, to irrigate crops and fill its reservoirs. Although agriculture accounts for just 14 percent of the economy's output, a successful monsoon can be life-changing for some 600 million people - half of the population - who depend on farming for a livelihood. Monsoon failures have led to millions of deaths over the past century and buffeted the economy.
Extreme Weather and Drought Are Here to Stay - BY many measurements, this summer’s drought is one for the record books. But so was last year’s drought in the South Central states. And it has been only a decade since an extreme five-year drought hit the American West. Widespread annual droughts, once a rare calamity, have become more frequent and are set to become the “new normal.” Until recently, many scientists spoke of climate change mainly as a “threat,” sometime in the future. But it is increasingly clear that we already live in the era of human-induced climate change, with a growing frequency of weather and climate extremes like heat waves, droughts, floods and fires. Future precipitation trends, based on climate model projections for the coming fifth assessment from the Intergovernmental Panel on Climate Change, indicate that droughts of this length and severity will be commonplace through the end of the century unless human-induced carbon emissions are significantly reduced. Indeed, assuming business as usual, each of the next 80 years in the American West is expected to see less rainfall than the average of the five years of the drought that hit the region from 2000 to 2004. That extreme drought (which we have analyzed in a new study in the journal Nature-Geoscience) had profound consequences for carbon sequestration, agricultural productivity and water resources: plants, for example, took in only half the carbon dioxide they do normally, thanks to a drought-induced drop in photosynthesis.
Nestle chairman sees worse food crisis than 2008-paper (Reuters) - The chairman of Nestle, the world's biggest food group, warned that the world faced a worse hunger crisis than in 2008 given the amount of land devoted to producing biofuels instead of food. "The World Food Organization has now determined what I have been preaching for years: no food for producing fuels, too much land is lost for nutrition," Peter Brabeck told Austrian paper Wiener Zeitung in an interview printed on Tuesday. "But there is a strong lobby and high subsidies behind this so I expect an even stronger food and hunger crisis than in 2008," he added. Brabeck was referring to the United Nations Food and Agriculture Organization (FAO), which this month stepped up pressure on the United States to change its biofuel policies because of the danger of a world food crisis. Global alarm over the potential for a food crisis of the kind seen in 2007/08 has escalated as drought in the U.S. midwest has sent grain prices to record highs, fuelling a 6 percent surge in the FAO's July food price index.
Signs of food inflation seen across emerging markets are now visible in China - China's Ministry of Commerce blamed the increase in vegetable prices on "strong winds and rainfall in the country's eastern regions" that "disrupted production and logistics." Nevertheless vegetable prices are up 15.4% over the past four weeks. China Daily: - The wholesale prices of 18 types of vegetables in 36 cities rose for the fourth consecutive week, up 2.9 percent week-on-week and 15.4 percent cumulatively over the past four weeks, according to the MOC. Signs of food inflation seen across emerging markets are now visible in China. And anecdotal evidence (see these interviews by Radio Free Asia) suggests that official inflation gauges in China may be understating true consumer price increases. Wholesale food prices have definitely risen lately. A Bloomberg article this week even suggested that China may postpone some policy easing due to renewed inflationary concerns. Bloomberg: - China’s slower-than-forecast cuts in banks’ reserve requirements show authorities are reluctant to shake their concern inflation will quicken, three months after Premier Wen Jiabao shifted priorities to boosting growth. The ISI Group had this to say on the topic of rising food prices, particularly in Emerging markets (discussed here a month ago) : "This is an unexpected, supply-related problem for both consumers and policymakers around the world."
Global Food Crisis May Hit Us ‘Very Soon,’ IFPRI’s Fan Says - A global food crisis may “hit us very soon” as a drought ravages corn crops in the U.S., the world’s largest grower, the International Food Policy Research Institute said. Governments must act to prevent the crisis, Shenggen Fan, director-general of the institute, said today. The U.S. should end its biofuel program that uses 40 percent of its corn output, to boost supplies to meat producers, Fan said. The Washington- based institute, supported by governments and international organizations, is part of the Agricultural Market Information System formed by the United Nations to monitor food costs. “The major problem is policy,” Fan said today in an interview with Susan Li on Bloomberg Television’s “First Up”. “Biofuel production has to be stopped. That actually pushed global food prices higher and many poor people, particularly women and children, have suffered.” The price of corn, used in everything from food to livestock feed to sweeteners, surged to a record $8.49 a bushel on Aug. 10 and is up 57 percent since June 15. That helped drive up global food inflation tracked by the UN’s Food & Agriculture Organization 6.2 percent in July from a month earlier, the biggest monthly jump since November 2009.
World powers eye emergency food meeting - Leading members of the Group of 20 (G-20) nations are prepared to trigger an emergency meeting to address soaring grain prices caused by the worst U.S. drought in more than half a century and poor crops from the Black Sea bread basket. France, the United States and G-20 president Mexico will hold a conference call at the end of August to consider whether an emergency international meeting is required, aiming to avoid a repetition of the food price spike that triggered riots in poorer countries in 2008. Yet even as the third grain surge in four years stirs new fears about food supply and inflation, many say the world's powers are no better prepared to rein in runaway prices. Apart from a global grain database, which has yet to be launched, and the Rapid Response Forum that authorities are considering convening for the first time, the G-20 has few tools. Instead, it must intervene through influence, perhaps urging the United States to relax its ethanol policy in response to the crisis — difficult only months before a presidential election that may be won or lost in Midwest farm states — or urging Russia not to impose an export ban, as it did two years ago. “Beyond words, expect little from the G-20 on rising food prices,” said Simon Evenett, a former World Bank official who is now professor of international trade and economic development, University of St. Gallen, Switzerland. He described the G-20's record on trade as “feeble.”
Gulf Nations Aim to Secure Water, Food Supply - Iran's threat to close the Strait of Hormuz has triggered alarm about the flow of oil from the Persian Gulf, but for the arid, oil-rich countries in the region it poses another uncomfortable question: For how long can they feed their people if the strategic waterway is blocked? Saudi Arabia, Kuwait, Qatar, and the United Arab Emirates are among the world's richest countries, but as much as 90% of food needs for these mostly desert nations is brought in from abroad, according to the Royal United Services Institute, a British think tank. Much of those imports come to the Persian Gulf via the narrow Strait of Hormuz. Iran has threatened to block the strategic waterway—through which about 35% of the world's ship-borne oil is exported, in the opposite direction—in response to sanctions over its nuclear program. It remains uncertain whether Iran could succeed in closing off the shipping lanes, and the U.S. and its allies are taking measures to make sure that doesn't happen, including preparations to de-mine the strait. But any prolonged closure of the strait could lead to food shortages in the Persian Gulf and force countries to find alternate channels.
On the 40th Anniversary of the "Limits to Growth" - It's the 40th anniversary this year of the 1972 release of the book "The Limits to Growth" from the Club of Rome, which used computer models to predict that world population growth and economic expansion would cause the Earth to "overshoot" its carrying capacity of finite resources, and eventually lead to overpopulation, mass starvation, smog disasters, pesticide-induced cancers, oceans devoid of fish, massive species extinction, and significant reductions in life expectancy among other inevitable calamities, disasters, and catastrophes. As George Will explains in his latest column ("Why Doom Has Not Materialized"), "We were supposed to be pretty much extinct by now, or at least miserable. We are neither." He then asks, "So, what went wrong?" And responds (in the tradition of resource economist Julian Simon), "The modelers missed something — human ingenuity in discovering, extracting and innovating. Which did not just appear after 1972."
Jeremy Grantham on ‘Welcome to Dystopia’: We Are ‘Entering A Long-Term And Politically Dangerous Food Crisis’ - Summary of the Summary: We are five years into a severe global food crisis that is very unlikely to go away. It will threaten poor countries with increased malnutrition and starvation and even collapse. Resource squabbles and waves of food-induced migration will threaten global stability and global growth. This threat is badly underestimated by almost everybody and all institutions with the possible exception of some military establishments. Uber-hedge fund manager Jeremy Grantham has released another important discussion. Grantham, a self-described “die hard contrarian,” is one of the few leading financial figures who gets both global warming and growing food insecurity, two cornerstones of Climate Progress analysis. I’m going to excerpt his analysis, which comprises the entire quarterly newsletter from the former Chairman and now Chief Investment Strategist of GMO Capital, which has more than $100 billion in assets under management. Grantham’s work makes very clear that the global economy is a Ponzi scheme. In Grantham’s blunt 2Q 2010 letter (see “Grantham: Everything You Need to Know About Global Warming in 5 Minutes“), he wrote “Global warming will be the most important investment issue for the foreseeable future.” Then in his January 2011 newsletter he wrote about “Things that Really Matter in 2011 and Beyond”: “Global warming causing destabilized weather patterns, adding to agricultural price pressures.” Later that year, he wrote another blunt analysis “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever.”
Must the Poor Go Hungry Just So the Rich Can Drive? - You should by now have heard about the famine developing in the Sahel region of west Africa. Poor harvests and high food prices threaten the lives of some 18 million people. The global price of food is likely to rise still further, as a result of low crop yields in the United States, caused by the worst drought in 50 years. World cereal prices, in response to this disaster, climbed 17% last month. Biofuels are the means by which governments in the rich world avoid hard choices. Rather than raise fuel economy standards as far as technology allows, rather than promoting a shift from driving to public transport, walking and cycling, rather than insisting on better town planning to reduce the need to travel, they have chosen to exchange our wild overconsumption of petroleum for the wild overconsumption of fuel made from crops. No one has to drive less or make a better car: everything remains the same except the source of fuel. The result is a competition between the world's richest and poorest consumers, a contest between overconsumption and survival.
Take Care, Water Is Not A Limitless Resource - Cheap light crude oil production has already peaked and the resource will be all but gone within a decade. It is a matter of ebullient debate exactly to what extent that gap might be filled by unconventional sources of hydrocarbons, e.g. from tar-sands, ultra-heavy oil, oil shale, shale oil (they are not the same thing) and fracking in general. This spectral shadow looms, of the intermediary era that straddles then from now - dearth from plenty - a highly uncertain transitional period within which, either by design or default, we must gear-down our use of transportation, since there is no alternative technology that could be brought on-stream in time (if ever) to match the gargantuan 30 billion barrels of oil that are used by the world each year to quench its thirst for liquid fuel and essential chemical raw materials for industry. Water too, is a resource that given its careless usage will begin to run-short within a few decades, as is espoused in the book entitled "Mirage", written by Cynthia Barnett, which focusses on water-use in the United States and in Florida particularly.
Don’t Waste the Drought - Though the drought has devastated corn crops and disrupted commerce on the Mississippi River, it also represents an opportunity to tackle long-ignored water problems and to reimagine how we manage, use and even think about water. For decades, Americans have typically handled drought the same way. We are asked to limit lawn-watering and car-washing, to fully load dishwashers and washing machines before running them, to turn off the tap while brushing our teeth. When the rain comes, we all go back to our old water habits. But just as the oil crisis of the 1970s spurred advances in fuel efficiency, so should the Drought of 2012 inspire efforts to reduce water consumption. Our nation’s water system is a mess, from cities to rural communities, for farmers and for factories. To take just one example: Water utilities go to the trouble to find water, clean it and pump it into water mains for delivery, but before it gets to any home or business, leaky pipes send 16 percent — about one in six gallons — back into the ground. So even in the midst of the drought, our utilities lose enough water every six days to supply the nation for a day. You can take a shorter shower, but it won’t make up for that.
Drought sends Mississippi into 'uncharted territory' – The drought of 2012 has humbled the mighty Mississippi River. A year after near-historic flooding, the river’s water levels are at near-historic lows from Cairo, Ill., where the Ohio River empties into it, to New Orleans, just north of its endpoint at the Gulf of Mexico. In July, water levels in Cairo, Memphis, Tenn., and Vicksburg, Miss., dipped below those of the historic drought of 1988. That’s affecting everything from commerce on the maritime superhighway to recreation to the drinking water in Louisiana. The biggest impact may be on shipping. “It’s getting near critical,” “Without more rain, we’re heading into uncharted territory.” About $180 billion worth of goods move up and down the river on barges, 500 million tons of the basic ingredients for much of the U.S. economy, according to the American Waterways Operators, a trade group. It carries 60 percent of the nation’s grain, 22 percent of the oil and gas and 20 percent of the coal, according to American Waterways Operators. It would take 60 trailer trucks to carry the cargo in just one barge, 144 18-wheeler tankers to carry the oil and gas in one petroleum barge.
Mississippi River Reaches Historic Lows: ‘We Have 50-Year Guys Who’ve Never Seen Anything Like This Before’ - The Mississippi River has gone from one extreme to another. Last year it was historic floods that forced evacuations and caused up to $4 billion in economic damage. This year it’s severe drought causing commercial barges to run aground and reducing the flow of trade. Water levels are 50 feet below last year’s levels along some areas of the Mississippi River. In some cases, water levels barely reach 5 feet, making it difficult for some barges to reach their destinations. As the severe drought in the South gets worse, barge operators are calling the crisis “near critical.” MSNBC reports on the drought: In July, water levels in Cairo, Memphis, Tenn., and Vicksburg, Miss., dipped below those of the historic drought of 1988. That’s affecting everything from commerce on the maritime superhighway to recreation to the drinking water in Louisiana. The biggest impact may be on shipping. “It’s getting near critical,” . “Without more rain, we’re heading into uncharted territory.” Last year’s flooding moved a large amount of soil and silt into the river, making the problem worse by elevating the riverbed: Because of that sediment in a flood, “as the ceiling rises, so does the floor,” said Golding. “We’ve just dealt with a historic flood, then the water drops.…
Salt creeping up the Mississippi River - A drought in Louisiana has lowered the Mississippi River, leaving its southern tip awash in saline from the Gulf of Mexico and prompting health officials in Plaquemines Parish to issue a drinking water advisory. "The water's perfectly safe to drink," said Guy Laigast, director of the parish's Office of Homeland Security and Emergency Preparedness. "It's just got the elevated salt." With the mighty Mississippi near its all-time low, the salty water has crept in as a wedge, he said. Because salty water is denser than fresh, it tends to collect at lower depths, he said. But pipes that pull drinking water from the river tend to draw from those same depths, Laigast said. The logical fix would be simply to raise the pipes, but that would be tough to do. "You're talking about large pipes that have been down there for years and years and years," he said. The wedge has been moving up the Mississippi since early this month, reaching mile marker 89 -- signifying that many miles from the river mouth -- by Wednesday, Laigast said.
Saltwater in Mississippi Taints Drinking Supply - The latest fallout from the historic U.S. drought: salty tap water in southern Louisiana. Saltwater from the Gulf of Mexico is creeping up the Mississippi River, affecting drinking water in communities near the river's mouth and triggering a scramble to ferry in emergency supplies. The U.S. Army Corps of Engineers also is building a barrier on the riverbed to halt the saline flow. Salt-filled water had traveled about 90 miles upriver as of Friday, much farther than the 12 to 15 miles in a typical summer. That is causing headaches for the 24,000 residents of Plaquemines Parish, which stretches along 80 miles of the Mississippi from just south of New Orleans to the Gulf.The Mississippi's powerful flow normally flushes out saltwater, but a severe national drought has weakened it. Saltwater—which is heavier than freshwater—is crawling upriver along the bottom, where pipes for drinking water are located. Plaquemines, with the help of state and federal authorities, is tapping alternative supplies farther upstream to meet the parish's daily water consumption of nine million gallons. On Friday, it was preparing to unload six barges—some holding as much as 900,000 gallons of fresh water—that had been filled upriver near New Orleans.
The Drought Is Killing The Mississippi River - Ship traffic on the Mississippi River was briefly shut down yesterday and salt from the Gulf of Mexico is threatening the drinking water upriver as the severe drought has pushed water levels far below their usual depths. According to The Associated Press, the Army Corps of Engineers built an underwater barrier in Louisiana yesterday—temporarily stopping ships from moving past New Orleans—to try and halt the encroaching salt water, which is no longer being held back by the force of the mighty Mississippi. (Which might actually be good for the Gulf, but that's another story.) Further upstream in Vicksburg and Memphis and into Illinois, water levels have dipped to all-time lows. One year ago the river was hit with record flooding, which raised water levels to new heights, but also deposited tons of soil on the river bed, actually making the river shallower. NBC's John Yang says that in Tunica, Mississippi, the river is currently 10-12 feet below "normal" water levels and 57 feet below last year's flood peak. This year, which has been one of the hottest and driest in the history of the nation, has pushed the water back down exposing sand bars, rocks, other debris and closing shallow ports. There have already been several instances of river barges running aground, leading other shipping companies to lighten their loads and travel at slower speeds to avoid similar accidents. Near St. Louis, the Corps has been continually dredging a nine-foot-deep channel in order to keep waters deep enough for ships to pass through on their way south.
Climate change sees tropical fish arrive in Tasmania - ABC News (Australian Broadcasting Corporation): The CSIRO is warning climate change is having a big impact on the country's oceans, with tropical fish turning up as far south as Tasmania. A major report on oceans and climate change, released today, says the damage under the sea is much clearer than when it released its last report on the subject three years ago. As well as causing a southern migration, climate change is causing a decline in some temperate fish stocks and ocean acidification is beginning to affect shellfish. The water at Hobart's Taroona Beach is chillier than what most Australians are used to, but increasingly it is home to northern visitors of the finned variety.
Tibetan glaciers shrinking rapidly. Comprehensive survey reveals influence of prevailing winds - The majority of glaciers on the Tibetan plateau and in the surrounding region are retreating rapidly, according to a study based on 30 years of satellite and field measurements. The research by Yao Tandong, a glaciologist at the Chinese Academy of Sciences' Institute of Tibetan Research in Beijing, and his colleagues is published today in Nature Climate Change1. It “is the most comprehensive survey to date in the region,” says Tobias Bolch, a glaciologist in the University of Zurich, Switzerland. In the Himalayan mountains, glaciers are retreating more and more rapidly. S. FRASER/SPLThe Tibetan plateau and the bordering mountain ranges, including the Himalayas, the Karakoram, the Pamir and the Qilian make up a vast region known as the Third Pole, home to 100,000 square kilometres of glaciers that supply water to about 1.4 billion people in Asia.
Getting the picture -- Sea ice volume in September trends to zero by 2015, according to PIOMAS curve - Have a look at the picture below. It shows a graph based on data calculated by the Pan-Arctic Ice Ocean Modeling and Assimilation System (PIOMAS) developed at the Applied Physics Laboratory/Polar Science Center at the University of Washington.The PIOMAS data for the annual minimum values are the black dots. The trend (in red) is added by Wipneus and points at 2015 as the year when ice volume will reach zero. Note that the red line points at the start of the year 2015. The minimum in September 2014 will be already be close to zero, with perhaps a few hundred cubic km remaining just north of Greenland and Canada.Above image, again based on PIOMAS data, shows trends added by Wipneus for each month of the year. The black line shows that the average for the month September looks set to reach zero a few months from into the year 2015, while the average for October (purple line) will reach zero before the start of the year 2016. Similarly, the average for August (red line) looks set to reach zero before the start of the year 2016. In conclusion, it looks like there will be no sea ice from August 2015 through to October 2015, while a further three months look set to reach zero in 2017, 2018 and 2019 (respectively July, November and June). Before the start of the year 2020, in other words, there will be zero sea ice for the six months from June through to October.
Rate of arctic summer sea ice loss is 50% higher than predicted -- Sea ice in the Arctic is disappearing at a far greater rate than previously expected, according to data from the first purpose-built satellite launched to study the thickness of the Earth's polar caps. Preliminary results from the European Space Agency's CryoSat-2 probe indicate that 900 cubic kilometres of summer sea ice has disappeared from the Arctic ocean over the past year. This rate of loss is 50% higher than most scenarios outlined by polar scientists and suggests that global warming, triggered by rising greenhouse gas emissions, is beginning to have a major impact on the region. In a few years the Arctic ocean could be free of ice in summer, triggering a rush to exploit its fish stocks, oil, minerals and sea routes. Using instruments on earlier satellites, scientists could see that the area covered by summer sea ice in the Arctic has been dwindling rapidly. But the new measurements indicate that this ice has been thinning dramatically at the same time. For example, in regions north of Canada and Greenland, where ice thickness regularly stayed at around five to six metres in summer a decade ago, levels have dropped to one to three metres. "Preliminary analysis of our data indicates that the rate of loss of sea ice volume in summer in the Arctic may be far larger than we had previously suspected,"
Sea ice in the Arctic and new data from Cryo-Sat-2 - From the Guardian comes this note on the preliminary data of the new Cryo-Sat-2 probe on Arctic ice volumes: Sea ice in the Arctic is disappearing at a far greater rate than previously expected, according to data from the first purpose-built satellite launched to study the thickness of the Earth's polar caps. Preliminary results from the European Space Agency's CryoSat-2 probe indicate that 900 cubic kilometres of summer sea ice has disappeared from the Arctic ocean over the past year.…CryoSat-2 is the world's first satellite to be built specifically to study sea-ice thickness and was launched on a Dniepr rocket from Baikonur cosmodrome, Kazakhstan, on 8 April, 2010. Previous Earth monitoring satellites had mapped the extent of sea-ice coverage in the Arctic. However, the thickness of that ice proved more difficult to measure. The US probe ICESat made some important measurements of ice thickness but operated intermittently in only a few regions before it stopped working completely in 2009. CryoSat was designed specifically to tackle the issue of ice thickness, both in the Arctic and the Antarctic. It was fitted with radar that can see through clouds. (ICESat's lasers could not penetrate clouds.) CryoSat's orbit was also designed to give better coverage of the Arctic sea."Before CryoSat, we could see summer ice coverage was dropping markedly in the Arctic," said Rapley. "But we only had glimpses of what was happening to ice thickness. Obviously if it was dropping as well, the loss of summer ice was even more significant. "
Greenland enters melt mode: Island-wide thaw is one for the record books -- Marco Tedesco - Greenland’s ice is on the hot seat again. A heat wave, possibly the biggest in a century, washed over the frozen island in mid-July. Around 97% of the surface ice melted temporarily. Slush even appeared at Greenland’s highest, coldest spot. The massive ice cap also darkened a lot this year, so it absorbs more of the sun’s energy and melts still faster. Overall, more of Greenland’s ice melted in June and July than in any previous year during the satellite era, says Marco Tedesco of the City University of New York. Tedesco and other ice experts predicted just before the July melt that an island-wide thaw could happen within the decade. “We could kind of see it coming,” says team leader Jason Box, a glaciologist at Ohio State University. “It’s not hard to make these predictions, because the odds are stacked in favor of warming.” Weather and climate patterns conspired this year to produce what Box calls a “one-two-three-four-five punch.” Among other things, a strong warming trend shifted much of the upper snowpack closer to the melting point. When a dome of particularly warm air began moving over Greenland on July 8, things were primed for nearly all of the snow on top to thaw. At the Summit Camp research station more than 3,200 meters above sea level, the thermometer soared above freezing for several days straight. It was the first significant melt at the site since 1889.
Greenland albedo lowest since 1150 A.D - After a weeklong delay in data availability from a 61st satellite maneuver in 13 years to makeup low earth orbit drag, we find Greenland ice reflectivity (a.k.a. albedo) returning toward higher values, evidence of fresh snowfall accumulation and accompanying lower temperatures now as the melt season approaches its end. The latest average Greenland ice reflectivity (69.2%) from 13 August is at a level still below 1 standard deviation from the 2000-2009 10-year ‘climatology.’ 2012 values are right on track with the previous record low year 2011. Apparently distinct from previous years in number and intensity of low albedo (evidence of melt) episodes, the 2012 melt season is characterized by 4 anomalous lows, centered on: 2 June (71.4%); 27 June (67.4%); 16 July (64.0%); and 1 August (65.2%). The albedo lows are punctuated by the brightening effect of snowfall events. There could be a late season melt episode as in 2004 or 2003.
2012 -- The "Goliath" melting year [for Greenland's ice sheet] - Melting in Greenland set a new record before the end of the melting season. Over the past days, the cumulative melting index over the entire Greenland ice sheet (defined as the number of days when melting occurs times the area subject to melting) on August 8th exceeded the record value recently set in 2010 for the whole melting season (which usually ends around the beginning of or middle of September).The melting index is computed from passive microwave satellite measurements, and it can be viewed as a measure of the ‘strength’ of the melting season: the higher the index the more melting occurred. With more melting yet to come during August, 2012 will position itself way above the old records, likely becoming the 'Goliath' of the melting years during the satellite record (1979 - to date). From the map below, we see that the cumulative melting index record is due to extensive increased melting occurring all over Greenland, especially at high elevations where melting lasted up to 50-60 days longer than the average. This means that some of the areas at high elevations in south Greenland are generally subject to a few days of melting (if it occurs at all), and this year they underwent melting for more than 2 months (so far). Melting was extreme also in the west, northwest and northeast regions. Along the southwest coast melting does not appear to have been extreme. However, care must be taken in interpreting the passive microwave results over this area. Indeed, the exposure of bare ice might 'blind' the microwave data and preclude them from detecting melting
Teach Your Children (Probability Theory) Well - So here we are, in the waning weeks of summer 2012, facing a remarkable paradox: on the one hand, we have a record-shattering drought, crop failures and a threat to global food security, and on the other not a whisper of climate change or its challenges in a political contest on track to suck as much as $2 billion into advertising. A part of our paralysis, however, can be chalked up to the fact that the twentieth century’s most important cognitive revolution, the shift from deterministic to probabilistic thinking, is still confined to a tiny sliver of the population. . Whether the topic is food additives, air pollution, or the effect of propaganda campaigns of various intensities and expense on voter behavior, intelligent discussion is impossible without a familiarity with the nature of stochastic processes. Yet most people think in much simpler terms. A either causes B or it doesn’t. If you can point to an A without a corresponding B, there’s no cause—end of story. Poverty doesn’t hold back promising students; just look at all the kids who succeed despite their background. Don’t worry about the warning label on the package: smoking can’t cause cancer because I know someone who is almost 90, in great health and still smokes a pack a day. The deniers point to individual exceptions like periods of cooler weather and say, see, you can’t prove causation—it’s all a hoax.
329 months of global warming - If we could pick the month when global warming officially started, it would be March of 1985. The previous month, February of 1985, was the last time the temperature of the Earth was below the average for the 20th century. Over twenty-seven years ago. Every month since then -- 329 months in a row -- has been above the 20th century average. Imagine a die where 1, 2 and 3 represent below average temperatures and 4, 5 and 6 represent above average temperatures. If it was a normal die, the odds of rolling any particular number would be equal. If, however, you rolled only high numbers (4, 5 or 6) for 329 consecutive rolls, you would have to conclude you did not have a normal die. You would correctly deduce that something or someone had altered the die to make it consistently come up high. Our odd-thinking friends, who claim the world is not warming, need to explain how that could be true when we have had 329 consecutive months with above average temperatures. And not just that. Every July since 1977 has been hotter than average. That is 36 Julys in a row. The last time we had a cooler than average July, our nation celebrated its bicentennial, Gerald Ford was President of the United States and Barack Obama was 14 years old. And this last July was not just hotter than average. It was the hottest month ever recorded in the United States.
Poll: Most Canadians believe climate change is happening | CTVNews: Only two per cent of Canadians who responded to a new opinion poll believe climate change is not occurring. The findings are in a survey conducted by Insightrix Research, Inc. for IPAC-CO2 Research Inc., a Regina-based centre that studies carbon capture and storage. The online poll of 1,550 people was done between May 29 and June 11. The results were to be released on Wednesday. "Our survey indicates that Canadians from coast to coast overwhelmingly believe climate change is real and is occurring, at least in part due to human activity,"
In a surprise, CO2 emissions fall to 20-year low in U.S. - Mainly because power plants have switched from coal to natural gas, climate-changing carbon dioxide emissions hit an unexpected 20-year low earlier this year, the Associated Press reports. AP cites a "little-noticed technical report" released earlier this month by the U.S. Energy Department. It stated that CO2 emissions from January through April hit 1992 levels, a "surprising turnaround," AP writes. AP says it contacted environmental experts, scientists and utility companies "and learned that virtually everyone believes the shift could have major long-term implications for U.S. energy policy." Although conservation, the sluggish economy and wider use of renewable energy contributed to the decline, low-priced natural gas was the prime factor, the Energy Information Agency found. The speed of the electric-power industry's switch from coal to gas surprised just about everyone. Despite the good news here, coal use and CO2 emissions are rising worldwide. And natural gas still emits carbon dioxide, though CO2 emissions from natural gas in the United States were down in the first quarter.
The Population Boom: 10 Billion by the End of the Century - There has been a highly successful run at the Royal Court Theatre, in London, not of a play in the usual form, but of a lecture by Professor Stephen Emmott, who leads Microsoft's Computational Science Laboratory in Cambridge and is Professor of Computational Science at Oxford University. The title, "10 Billion" refers to the human population which it is thought may rise to this number by the end of the present century, with back-breaking pressure on the available resources of the Earth: principally those of food, freshwater, and energy. I attended its final performance last Saturday. Since the inevitable outcome of consumption is excretion, by that time, we will be drowning in our own waste, particularly carbon, such that many lands including Bangladesh will be inundated. The global temperature rise, too, is thought not to be a mere 2 degrees C. by the end of the century but 6 degrees, making life on earth, as Emmott desrcribes it "a living hell." Emmott describes himself as a "rational pessimist" and while his delivery is tinged with ironic humour, it is mostly deadpan, rendering the sheer facts and figures both compelling and convincing. I was at one time skeptical about global warming and its consequences, but now there seems to me little room for doubt that humanity is in a severe predicament, both from the aspect of resource depletion and treating the planet like a giant landfill tip.
City Temps May Soar From Urbanization, Global Warming -- For scientists who worry about climate change, cities are just plain annoying. The acres of asphalt that cover roads and parking lots and roofs absorb enormous amounts of heat. In the summer, whirring air conditioners channel even more heat out of buildings and into the air. Climate scientists have to subtract this so-called urban heat island effect from their calculations if they want to get a true picture of how greenhouse gas emissions are warming the planet. For people who actually live in cities, however the urban heat island effect is more than just a mathematical annoyance. If you’re sweltering on a hot summer day, your body doesn’t much care where the heat is coming from. And according to a paper just published in Nature Climate Change, the combination of global warming and urbanization could drive local temperatures up by a whopping 7°F by 2050 in some parts of the U.S. — some two or three times higher than the effects of global warming alone.
- 15.7 percent of the annual budget of the U.S. Environmental Protection Agency
- 95.7 percent of U.S. investment in energy-efficiency programs and renewable energy research
- 110 percent of the operating expenses of the U.S. Agency for International Development
- 60 times as much as we spend on National Public Radio.
Yet multi-family public housing projects, on average,use 38 percent more energy than the typical U.S. home. To put it simply, our public housing buildings are leaking our money. If we made affordable housing 30 percent more efficient, we could use the dividends to double the current federal budget for building energy-efficiency research and generate greater future energy savings. But we can go even further.There are case studies showing that some of our oldest buildings can be 50 percent more efficient. This energy efficiency comes none too soon, because energy conservation codes are demanding more energy efficiency more quickly than ever beforein American history.
Think Globally, Act Selfishly: How Utilitarian Environmentalism Can Backfire Earnest, well-meaning environmental messages are supposed to be ineffective relics of a bygone age, when bumper stickers still worked and treehuggers hadn’t realized that self-interest speaks louder than Mother Earth ever could. But don’t put that Save the Whales t-shirt on eBay just yet. In experiments published August 12 in Nature Climate Change, psychologists found that telling people about carpooling’s money-saving benefits seemingly makes them less likely to recycle. In short, appeals to self-interest backfired, accidentally encouraging people to behave selfishly in other areas.
Ocean Health Study Raises Concerns, Offers Some Hope - A comprehensive study of global oceanic health gave the world’s oceans a score of 60 out of 100. The Ocean Health Index, produced by an international team of scientists, policymakers, and conservationists, assessed the vitality of 171 coastal countries and territorial regions in ten categories, including ecological characteristics such as “Coastal Protection,” “Biodiversity,” and sustainable seafood harvests, and economic qualities like “Coastal Livelihoods and Economies” and “Tourism and Recreation.” The study is “the first comprehensive global measurement of ocean health that includes people as part of the ocean ecosystem,” and is designed to help strengthen national and regional efforts to preserve our coastal environments and evaluate marine health. Dr. Mike Fogarty of NOAA’s Northeast division said “the index will complement the agency’s efforts” to manage ocean ecosystems under the 2010 National Ocean Policy. National scores ranged from an 86 for the uninhabited Jarvis Island to a 36 for Sierra Leone, whose seas have received little protection due to prolonged civil war. The worldwide average of 60 “gives us a lot of concern, but also a lot of hope,” said Ben Halpern, one of the leaders of the project. The study found that industrialized countries with greater resources to protect their coasts tended to score better than developing countries.
While Calling Stimulus ‘Wasteful,’ Paul Ryan Secured Millions Of Dollars In Grants For Clean Energy - The Globe reports: “This trillion dollar spending bill misses the mark on all counts,” said Ryan in a statement from his office. “This is not a crisis we can spend and borrow our way out of – that is how we got here in the first place.” But later that year, once the bill was passed and signed into law, Ryan sought to make sure his constituents benefited. On October 5, 2009, he wrote a letter to Chu on behalf of the nonprofit Energy Center of Wisconsin, which was applying for a grant under the Recovery Act’s Geothermal Technologies Program. Under the grant program the center received a total of $240,000, according to its president, Frank Greb. The same day Ryan sent another letter advocating for a grant application, in which the Energy Center partnered with Milwaukee Area Technical College, for training building technicians and operators in energy-saving techniques. For that program, the government provided $740,364, according to federal records. But the biggest payoff came for the Wisconsin Energy Conservation Corporation. Ryan predicted the $20 million grant would be able to “create or retain approximately 7,600 new jobs over the three-year grant period and the subsequent three years.”
The rise–and possible fall–of U.S. wind power - It’s getting harder and harder to call wind power a niche source of electricity in the United States. Last year, wind turbines represented one-third of all new generation capacity built in the country, behind only natural gas. At this point, wind provides 3 percent of the country’s electricity. In a few states, such as South Dakota, Minnesota and Iowa, wind provides more than 10 percent of all electricity. Those stats come from a new report from the Department of Energy and Lawrence Berkeley National Laboratory looking at the state of the U.S. wind-power market in 2011. The report argues that “Wind is a credible source of new generation in the United States,” having grown dramatically in recent years. Costs are tumbling. But, the report concludes, the industry is at risk of shrinking dramatically in 2013 as key tax credits disappear. Let’s take a look at some of their graphs:
Grid Instability Has Industry Scrambling for Solutions - Sudden fluctuations in Germany's power grid are causing major damage to a number of industrial companies. While many of them have responded by getting their own power generators and regulators to help minimize the risks, they warn that companies might be forced to leave if the government doesn't deal with the issues fast. Behind this worry stands the transition to renewable energy laid out by Chancellor Angela Merkel last year in the wake of the Fukushima nuclear disaster. Though the transition has been sluggish so far, Merkel set the ambitious goals of boosting renewable energy to 35 percent of total power consumption by 2020 and 80 percent by 2050 while phasing out all of Germany's nuclear power reactors by 2022.
The Search for Energy Takes a Turn Underwater - The fearsome tides that sweep out from the easternmost shores of the United States have for more than 80 years teased engineers and presidents like Franklin D. Roosevelt, who have dreamed of harnessing their force to make electricity. And next week, a device that looks a bit like an eggbeater turned sideways will be lowered into the water here to catch the energy of the rushing water, spinning a generator that, come September, is scheduled to begin sending power to the grid. It is an experimental, expensive and promising project, fueled by the knowledge that the tides here are both powerful and predictable. “When the wind blows, you get electricity, but you don’t know when that’s going to be,” The Bay of Fundy has some of the world’s highest tides, causing extreme currents that are pushed even faster by the inlets and islands that speckle this rocky coast. They will propel the turbine’s blades, which twist around like the helix shape of DNA. “Another advantage is, you don’t see a thing,” Mr. Sauer added, speaking to a criticism that has dogged many wind farms.
Sign of Warmer Times: Shutdown at Conn. Nuclear Plant Due to High Cooling Water Temperature - Balmy temperatures of cooling waters forced a nuclear power plant in Connecticut to shut down for the first time on Sunday. The Millstone Nuclear Power Station in Waterford, Conn. uses water from Long Island Sound to cool “key safety components,” says Millstone Spokesman Ken Holt. The temperatures for the unit were averaging 1.7 degrees above the 75 degree limit, forcing Unit 2 of the power station to shut down. “It’s not that it’s been hitting 100 every day, but it’s been steady heat,” Holt said, commenting on the heatwave. “We haven’t been getting any breaks. Also we had a very mild winter, so (the sound temperatures) started from a higher point than we traditionally have.” The Associated Press cites Dave Lochbaum, director of the Union of Concerned Scientists' nuclear safety project, who said that unlike other incidents involving too-warm waters from inland sources, the Millstone stoppage, he believes, was the first time it happened due to excessive temperatures from an open body of water. The current temperature for central Long Island Sound is at 79 degrees.
Nuclear power plants: A hidden world of untruths, unethical behavior - Nuclear power plants probably would not operate properly in Japan if workers were not willing to sacrifice their health, and possibly their lives. It emerges that workers at nuclear plants routinely resorted to ingenious ways to conceal the true levels of radiation to which they were exposed--simply to go on earning a living. That is the disturbing picture that emerges from accounts given by more than 10 people, either working at nuclear power plants or now retired. They came out of the woodwork after The Asahi Shimbun reported in late July that a senior executive of a subcontractor to Tokyo Electric Power Co. ordered workers to cover dosimeters with lead plates to keep measured radiation doses at low levels.
Meet the 82-year-old nun who just committed the worst nuclear security breach in U.S. history - Turns out nuns have more up their habit sleeves than knuckle-rapping rulers and twee songs for Austrian children. Sister Megan Rice, 82, is an anti-nuclear activist who just broke into the Oak Ridge nuclear reservation, site of the country’s main supply of enriched uranium — an operation which experts call “the biggest security breach in the history of the nation’s atomic complex,” according to The New York Times. This New York City-born nun, who taught school in Africa for years, has already been arrested more than 40 times for civil disobedience. But this latest operation required her to complete tasks worthy of James Bond: Rice and her two partners made their way through the wooded Oak Ridge compound in Tennessee, using bolt cutters to get past fences and dodging armed guards and motion sensors. Once they reached the new Highly Enriched Uranium Materials Facility, they doused it with blood and hung banners outside with messages like “Swords into plowshares,” the Times reports. The three activists, set for trial Oct. 10, now face up to 16 years in prison and up to $600,000 in fines.
Fukushima Chief Yoshida on Video: We must bring foreign experts in to help — Spoke like reactors not stabilized - Yoshida did use the opportunity, though, to call for foreign expertise to be brought in to help stabilize the reactors, something experts claim TEPCO and Japanese authorities have been reluctant to do on a meaningful level. “People won’t come back to Fukushima until the plant isstabilised and we still need to find a way to do that,” he said. “We have to bring people in from around the world. It will require people, technology and wisdom from all corners.” [...] While the government of Japan has declared the cold shutdown and is anxious to talk up progress at the site, Mr Yoshida spoke in his interview as if he didn’t consider the reactors stabilised. He said he had remained silent until now because he felt it was not right to speak while the four investigations into the tragedy – now concluded – were still under way. Mr Yoshida said he and the other workers told everything to investigators and the findings reflected this, but their human stories didn’t come through in the investigatory reports.
More Mutations in Fukushima Butterflies - Butterflies collected from sites near Fukushima 2 months after the power plant leaked radiation into the environment showed more than double the mutation rates of butterflies collected from other sites in Japan. The researchers, who hail from University of the Ryukyus, Okinawa, reported their findings last week (August 9) in Scientific Reports. Indeed, each subsequent generation arising from the first radiation-affected butterflies had more severe physical abnormalities than its parent generation. Part of this can be explained by the passing down of damaged genes, but an additional factor, the researchers say, was that butterflies ate contaminated food in the area, which can be more damaging than external exposure. “It has been believed that insects are very resistant to radiation,” lead researcher Joji Otaki from the University of the Ryukyus, Okinawa, told BBC News. “In that sense, our results were unexpected.”
Kentucky coal producers to supply 9 million tons annually to India in 25-year, $7 billion deal - Kentucky coal producers have reached an agreement to export 9 million tons of coal annually to India for the next 25 years in a $7 billion deal that is a boost to the region’s sagging mining industry. The deal, which would equate to about 8 percent of Kentucky’s annual coal production, could help India avert power outages like the one last week that left more than 600 million people without electricity, India officials said. .“International exports present a promising opportunity for Kentucky coal producers, as is demonstrated by this deal, and consequently for our communities whose economic vitality depends on coal,” governor Beshear said at a press conference in Frankfort.But environmental groups say the deal will only worsen the earth’s pollution problems."Strip mining Kentucky to cause pollution in India, and worsen global warming everywhere, is a big mistake,” said Jamie Henn, spokeswoman for 350.org, a group focused on curbing emissions. “The real solution to America's economic challenges and India's power shortages is a serious investment in clean energy infrastructure, not keeping up this dangerous addiction to fossil fuels.”
Can we bear the legacy costs of industrial society's toxic pollution? - The U.S. Nuclear Regulatory Commission (NRC) stunned the nuclear industry last week by putting power plant licensing decisions on hold while it reconsiders rules on nuclear waste storage struck down by a federal appeals court in June. The issue is part of the much larger and troubling question about the legacy costs--economic, social and environmental--of toxic industrial pollution that are mounting with each day. We'd like to think that we can simply take our industrial wastes and throw them away somewhere. But increasingly, in what economist Herman Daly calls our "full world," (PDF) there is no "away." Hazardous wastes that we thought we could safely sequester deep in the Earth via injection wells are already coming back to haunt us. If wells drilled to date for hazardous waste disposal are already poisoning drinking water, what will be the consequences of drilling hundreds of thousands of additional oil and natural gas wells around the world into newly accessible shale deposits--a process that involves injecting millions of gallons of toxic, chemically-laced water into each well to fracture the shale and thereby gain access to the hydrocarbons? The evidence is not reassuring. And, in any case, the well casings, which are meant to protect seepage into groundwater, will in the long run (hundreds of years) simply deteriorate. Those of us alive today will be long gone when our descendents must deal with widespread groundwater pollution that may render many places around the world uninhabitable.
Oil companies desperately seek water amid Kansas drought - Oil companies drilling in the drought-ridden fields of southern Kansas are taking desperate measures to get the water they need to tap into the state's oil reserves. Huge amounts of water are required to extract oil, especially when companies use hydraulic fracturing, or fracking, which requires millions of gallons of water to crack the shale rock and bring oil to the surface. But now that the entire state is in emergency drought status, with only 1.19 inches of rainfall last month -- the 10th driest July on record -- unprecedented water shortages are making it difficult for drillers to get the water they need. Some companies are paying farmers for any remaining water they have left in their ponds, drilling their own water wells, digging ponds next to streams or trucking in water from as far away as Pennsylvania -- all of which is costing them a handsome sum of money and time.
Report: Volume of water used for fracking in Colorado could serve 79,000 households a year - The volume of water required annually to develop new oil and gas wells in the state could supply up to 79,000 Colorado households for a year based on average residential use, according to a report issued Wednesday by Boulder-based Western Resource Advocates. The report goes on to say that when re-use of water is factored in at the residential level, the amount of water used by the oil and gas industry could actually serve up to 118,400 homes in Colorado. "Governments -- local, state and national -- really need to take a look at this and plan out drilling and make sure they do it right," said Jason Bane, spokesman for Western Resource Advocates. "We don't want to look around 10 years from now and say we shouldn't have used so much water." But Tisha Schuller, president of the Colorado Oil and Gas Association, said the industry's water use is miniscule compared to all water consumption in the state. The Colorado Oil and Gas Association estimates the industry will use 6.5 trillion gallons this year -- just over one-tenth of a percent of total water use in the state.
Drought, Fracking, Coal and Nukes Wreak Havoc on Fresh Water Supplies - For the last few months EcoWatch has been covering what’s become the worst drought in the U.S. in more than half a century. Besides the discomfort of relentless heat and unmitigated sunshine, the drought has forced us to rethink several issues commonly taken for granted—namely, abundant and affordable food, secure livelihoods for farmers, safety from natural disasters, practical public policy regarding the delegation of crops for food and biofuels, and most importantly, the value of water. The drought of 2012 has more to teach us about the value of water as it lurches on, including the issues surrounding water as an integral component of conventional energy generation. The undisputed champion of the current U.S. energy debate is hydraulic fracturing or fracking. As conventional oil and gas resources become more difficult to come by, energy companies now have to dig deeper than ever to unearth the rich deposits of fossil fuels still available. In order to fracture shale formations that often exist thousands of feet below the surface, drillers use anywhere from 1 to 8 million gallons of water per frack. A well may be fracked up to 18 times. The water, usually drawn from natural resources such as lakes and rivers, is unrecoverable once it’s blasted into the earth, and out of the water cycle for good. Even if there wasn’t a problem with water contamination, deforestation, and noise and air pollution from fracking, the pro-drilling agenda would still be hit hard with an insurmountable roadblock—access to abundant water.
Drought And The Climate Change Freeloaders - By now our news media has probably made you aware of the historic drought that is gripping the country. Almost 80 percent of the nation’s agricultural land is experiencing drought conditions not seen since the 1950′s. In mid-July, the U.S. Department of Agriculture (USDA) estimated this year’s corn harvest will drop by 12% and food prices for all of us will start to rise. But hardly anyone is connecting the dots to the fossil fuel producers who pollute our atmosphere, bank record profits, and pay none of the costs of climate change. The drought is the latest manifestation of the extreme weather that is gripping the U.S. and placing a striking economic toll on our country. And as pre-eminent NASA climate scientist James Hansen has recently stated (and backed up with peer-reviewed science): Our analysis shows that it is no longer enough to say that global warming will increase the likelihood of extreme weather and to repeat the caveat that no individual weather event can be directly linked to climate change. To the contrary, our analysis shows that, for the extreme hot weather of the recent past, there is virtually no explanation other than climate change. What should strike all of us is how these rapidly escalating costs are shining a spotlighting on our country’s major free rider problem. In economics, a free rider is someone who enjoys the benefits of an activity without paying for it. When it comes to the extreme weather costs of climate change, fossil fuel producers are the poster children for the free ride.
New Groundwater Study Exposes Deep Folly of Fracking - Nothing shows the dangerous connection between drought and fracking more than the study released by the journal Nature this week, which shows groundwater demand is exceeding supply, particularly in agricultural zones. Not only is the oil and gas industry turning our rural areas into sacrifice zones, it is also diverting water that is needed to grow food. Drilling and fracking is not only a threat to water quality — it also uses massive amounts of water, removing much of the water used from the water cycle altogether. Unbelievably, even during horrendous drought conditions, oil and gas companies are able to continue using our freshwater resources while communities pay for pricy technologies like water reclamation plants, as we see in Big Spring, Texas. And in Colorado, farmers are competing with the oil and gas industry, who are driving up prices at water auctions. Fracking is not only a problem for consumers and farmers in the United States. France and Bulgaria have banned fracking thanks to the risks to water and agricultural areas. More communities, from South Africa to Australia, are fighting it as well. We can’t sacrifice our public health, our environment and communities, and there is no replacement for our diminishing water resources.
Methane's profile on the rise as gas raises global warming worries - Scientists have known for years that methane, emitted by cows and landfills alike, is a potent ingredient in global warming — unless the gas is collected and used for fuel. Yet methane hasn’t gotten anywhere near the same attention as carbon dioxide from governments and businesses aiming to stop climate change without hindering economies. That is changing now as methane makes headlines because of new numbers showing more leakage than previously thought from natural gas wells and pipelines. Some critics say natural gas is a worse climate-change polluter than coal. That’s hotly disputed by energy companies. "Methane, especially from the natural gas industry, has come much more to the fore very recently, since early 2011," One reason for the sudden attention: Last year, the EPA revised years of data to show that the leading source of methane emissions nationally wasn’t livestock flatulence — it was natural gas production.
The Coming Oil Boom - Forget America’s fiscal cliff, Europe’s currency troubles or the emerging-markets slowdown. The most important story in the global economy today may well be some good news that isn’t yet making as many headlines — the coming surge in oil production around the world. Until very recently, our collective assumption was that oil was running out. That was partly a matter of what seemed like geological common sense. It took millions of years for the earth to crush plankton into fossil fuels; it is logical to think that it would take millions of years to create more. The rise of the emerging markets, with their energy-hungry billions, was a further reason it seemed obvious we would have less oil and gas in 2020 than we do today. Obvious — but wrong. Thanks in part to technologies like horizontal drilling and hydraulic fracking, we are entering a new age of abundant oil. As the energy expert Leonardo Maugeri contends in a recent report published by the Belfer Center at the John F. Kennedy School of Government at Harvard, “contrary to what most people believe, oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption.” Much of the “new” oil is coming on-stream thanks to a technology revolution that has put hard-to-extract deposits within reach: Canada’s oil sands, the United States’ shale oil, Brazil’s presalt oil.
Canada mulls China's massive oil takeover bid - Backed by a massive trade surplus and bulging overseas currency reserves, and fuelled by a voracious appetite for commodities, China has launched one of its largest foreign takeover bids to date, aiming to control a Canadian oil giant. China National Offshore Oil Corporation (CNOOC) wants to buy Calgary-based Nexen for $15.1bn, a premium 60 per cent above the company's listed value, in a deal analysts say Canadian regulators are likely to approve, despite opposition from some US politicians. James Inhofe, a Republican from Oklahoma, has "serious national security concerns" over the bid, while Charles Schumer, a Democrat from New York, said China's "blatant disregard for US intellectual property rights makes this transaction even more concerning". Canada is the largest foreign supplier of oil to the US and Nexen has operations in the Alberta tar sands, one of the world's largest petroleum deposits, along with international investments in Africa, the Gulf of Mexico, the North Sea and the Middle East.
Oil sands producers could feel squeeze in crowded market - Alberta’s oil sands producers have some very ambitious output forecasts that could see them producing about a sixth of what OPEC now pumps out on a daily basis by the end of the decade. But there are some potentially nasty roadblocks that could force the Canadian producers to slash millions of barrels per day from those targets, not the least of which is transportation. “Oil sands companies that are making big capital allocation decisions have to be that much more confident in the macro environment to hit the button,” But confidence is in short supply as events appear to have conspired against Canadian producers. The higher-cost oil sands have to compete with U.S. and Canadian tight oil for pipeline access. In addition, the dreaded double discount on Canadian crude compared to oil produced elsewhere has restrained profits and new pipeline plans are being put in question by environmentalist opposition and warring provinces.
Oil theft in Mexico: Black gold on the black market - DRUGS, extortion, kidnapping, people-smuggling: Mexico’s organised-crime multinationals have a keen eye for diversification. A growing sideline is stolen oil. In 2011 outlaws made off with 3.35m barrels of fuel belonging to Pemex, the state-run oil monopoly, up from 2.16m in 2010. The thefts are reckoned to deprive the company of more than $1 billion per year. Pemex’s profits pay for a third of the federal government’s budget. Stealing the fuel, which includes gas condensate and refined oil as well as crude, is not hard. Some goes missing from lorries that are held up in lonely stretches of desert. More is siphoned out of lengthy exposed pipelines. Tapping the high-pressure pipes is dangerous: in 2010 a suspected attempt to puncture one produced an explosion that caused 28 deaths. Despite such accidents, ever more people are taking the risk. Last year Pemex detected 1,324 taps, over twice as many as in 2010. The increase was partly down to better detection, the firm says. But robbers are getting more sophisticated, sometimes pumping water back into the pipes to fool pressure sensors. Pemex concedes that some sites have been “taken over, practically, by bands of organised criminals”.
Recent developments in oil markets - The price of Brent crude oil fell $35/barrel between April and June. But increases this summer have taken about $25 of that back. The increase in crude oil prices also wiped out most of the gains realized by American gasoline consumers this spring. Here in California, the gasoline price spike back up has been significantly bigger than the national average due to a fire at a major San Francisco Bay refinery. In coming months, these developments may offset some of the recent softness in U.S. inflation. Another contributing factor to that could come from the big drop in corn production resulting from drought in much of the U.S., which will matter for both food and fuel prices. Hopefully those problems will at least provide new momentum for repeal of the ethanol mandate. What's behind the rise in the price of Brent? Some financial reports have stressed rising tensions with Iran. However, one objective, if imperfect, quantitative measure of that comes from the market price of Intrade's contract for an imminent attack on Iran. This has moved relatively little since April. Another reason may be that total world oil production (including natural gas liquids and biofuels) has been stagnant since January, though at a level 3-1/2 million barrels/day higher than during the Libyan cutbacks in 2011, and 2 mb/d above the pre-Libyan peak in January 2011.
Brent-WTI spread blows out again -- As discussed back in June, the projections of Brent and WTI crude oil convergence did not materialize. Goldman's prediction that we will see $5 spread between the two crude oil markets by the end of this year was wrong. The expectations that the Seaway pipeline will deliver sufficient amounts of US crude to the Gulf to force convergence just didn't materialize. The spread touched $20 a couple of days ago. Bloomberg: - Lost crude production from the North Sea to Iran has driven the disparity between the world’s two most-traded oil grades to the widest in more than nine months, threatening to undermine Goldman Sachs Group Inc.’s forecast that they will become more aligned. North Sea Brent remained at least $20 a barrel more expensive than West Texas Intermediate in the five days through yesterday after the gap almost doubled since June 20, according to data compiled by Bloomberg. Goldman Sachs has predicted since April that the spread will drop to $5 a barrel in three months.The growing difference underscores how falling output from the North Sea’s aging oilfields and U.S.-led sanctions on Iranian crude sales are stoking Brent while a production boom that’s deepening a glut of landlocked U.S. supplies limits WTI’s gains. BNP Paribas SA, Citigroup Inc. and Commerzbank AG say the spread is unlikely to narrow any time soon. At least a portion of this spread increase is driven by escalating rhetoric coming out of Israel. And it is no longer just speculation or media hype. It seems that Israel's officials are seriously considering a military strike (also discussed here).
White House weighing release of oil reserves: source - The White House is “dusting off old plans” for a potential release of oil reserves to dampen rising U.S. gasoline prices and prevent high energy costs from undermining the success of Iran sanctions, a source with knowledge of the situation said on Thursday. U.S. officials will monitor market conditions over the coming weeks, watching whether gasoline prices fall after the Sept. 3 Labour Day holiday, as they historically do, the source said. It was too early to say how big a drawdown would be from the U.S. Strategic Petroleum Reserve and, potentially, other international reserves if a decision to proceed was taken, the source said. Oil prices have surged in recent weeks, with Brent crude prices closing in on $120 (U.S.) a barrel, up sharply from around $90 a barrel in July. The United States and other Group of Eight countries studied a potential oil release in the spring but shelved the plans when prices dropped.
Is the era of oil nearing its end? -After nearly a decade of warnings that the world’s oil supply was running out, Americans now are hearing about technology breakthroughs that can unlock vast U.S. deposits of natural gas, help reverse a 40-year slide in domestic oil production and perhaps transform America into the next Middle East. But despite the euphoria, there’s a major problem: The looming American oil glut may simply not be enough to sate the United States and the rest of motorized humanity. Experts say soaring demand from China and India is sure to send oil prices back above $100 a barrel. A supply disruption in the coming years, they say, could trigger panic, gasoline hoarding and perhaps lead to lines at the pumps akin to the 1973 Arab oil embargo and the 1979 Iranian revolution. Global shortfalls of other fuels also could develop sooner than many people think, as a planet of nearly 7 billion people and more than 1 billion gasoline-gulping vehicles strains the limits of combustible energy resources that are the underpinning of modern civilization. While oil industry officials take strong issue with these dim views, critics charge that governments here and abroad have been less than candid about future oil supplies and the ramifications of failing to shift to alternative fuels.
Will high oil costs permanently ruin world’s economy? - But to some experts, spikes in oil prices over the last several years have signaled an ominous turn that could make it nigh on impossible for any president to expand the economy as it has in the past. Unlike previous oil price jumps stemming from turmoil affecting Middle East oil producers, prices surged over the last eight years because tightening supplies couldn’t keep pace with Third World demand, researchers have concluded. “The question is how much can we keep growing without a growing supply of energy?” said James Hamilton, a University of California-San Diego economics professor who has been on the leading edge of research into the impact of high energy costs. “We’ve had temporary experiments with (oil supply) disruptions in the Middle East,” he said in an interview. “We don’t really have experience, if worldwide, we produce less oil year after year and have to deal with that on a longer-term basis. Certainly, the transition to dealing with that could be very disruptive.” Many experts now believe that, absent the discoveries of numerous new giant oilfields or breakthroughs in development of alternative fuels, oil demand will persistently push global prices to unaffordable levels, shackling economic growth indefinitely. Even if discoveries somehow keep pace with demand, extracting oil from increasingly harsh conditions, such as beneath the Arctic Ocean or other deep ocean waters, will put upward pressure on prices.
U.S. Reliance on Saudi Oil Heads Back Up - The United States is increasing its dependence on oil from Saudi Arabia, raising its imports from the kingdom by more than 20 percent this year, even as fears of military conflict in the tinderbox Persian Gulf region grow. The increase in Saudi oil exports to the United States began slowly last summer and has picked up pace this year. Until then, the United States had decreased its dependence on foreign oil and from the Gulf in particular. This reversal is driven in part by the battle over Iran’s nuclear program. The United States tightened sanctions that hampered Iran’s ability to sell crude, the lifeline of its troubled economy, and Saudi Arabia agreed to increase production to help guarantee that the price did not skyrocket. While prices have remained relatively stable, and Tehran’s treasury has been squeezed, the United States is left increasingly vulnerable to a region in turmoil. The jump in Saudi oil production has been welcomed by Washington and European governments, but Saudi society faces its own challenges, with the recent deaths of senior members of the royal family and sectarian strife in the eastern part of the country, making the stability of Saudi energy and political policies uncertain.
Saudi Aramco Network Hit With Cyber-Attack - Apparently they shut down the network: Saudi Aramco, Saudi Arabia’s national oil company and the largest in the world, has confirmed that is has been hit by a cyber attack that resulted in malware infecting user workstations, but did not affect other parts of its network. “On Wednesday, Aug. 15, 2012, an official at Saudi Aramco confirmed that the company has isolated all its electronic systems from outside access as an early precautionary measure that was taken following a sudden disruption that affected some of the sectors of its electronic network,” the company wrote in a statement. “The disruption was suspected to be the result of a virus that had infected personal workstations without affecting the primary components of the network.” Word is that this was due to the Disttrack malware that was only discovered yesterday: Malware being used in a new series of targeted attacks has bucked the trend, choosing to destroy the computers it infects rather than just stealing sensitive information, security researchers said. Called "Disttrack", the malware corrupts files, overwrites the infected machine's master boot record, and destroys the data so that it can't be recovered, according to reports from Symantec Security Response, Kaspersky Lab's Global Research and Analysis Team, and McAfee on Thursday. Disttrack has been observed in the Shamoon attacks, which has already affected at least one organization in the energy sector, Symantec said, but the company declined to provide any other details about the affected organization(s). Given the unusual destructiveness of the malware, one can't help suspecting an Iranian or Syrian revenge operation - but no evidence one way or another at present.
Want The Highest Crude Oil Price? Presenting The OPEC Cost Curve - With the presidential elections fast approaching, the last thing the incumbent wants is for the one thing that can spoil the party - a surge in oil, and thus gas prices - to happen. Which is why despite a sharp return in Iran/Syria war rhetoric, we doubt that the trade off between a "wag the dog"-type transitory war euphoria and $5 gas will be an accretive one for the administration at least in the short-term. Others who certainly would prefer to avoid the record $140 WTI prices seen just before the Lehman collapse are the majors, where margin contraction can only be offset by very finite end-demand destruction. Yet there are those who not only would like to see a surge in oil prices, but in fact need it, to preserve their viability. Chief among them: Iran. Because according to a just released analysis by the Arab Petroleum Investments Corporation, the price at which oil (read Brent) must trade for Iran's budget to balance has soared to $127/barrel, the highest among all OPEC members, $20 higher than 2 years ago, and about $17 higher than the Friday closing price. And far more dangerously, the APIC study has also found that the cartel (which after last year's fiasco in Vienna is anything but) breakeven price has soared from just $77 two years ago to a whopping $99/barrel. Which means that any and every deflationary plunge in oil prices will inevitably be met with a supply collapse or else OPEC members are in danger of pricing themselves right into fiscal insolvency, and economic collapse. Visually, the breakeven price for every OPEC member country.
Crude oil denominated in euros hits record - Brent crude oil priced in euros hit a new high today of €94.83/barrel, exceeding the highs reached in 08 as well as early this year. This rally has been driven by four factors:
1. The euro is down close to 15% over the past year.
2. Draghi's "Believe me, it will be enough" statement increased demand for "risk assets". Bets on additional central bank stimulus are pushing up crude prices.
3. An unexpected decline in US crude and gasoline inventories added to the upward pressure on crude.
4. The rhetoric out of Israel toward Iran is not helping matters either. With tighter US supplies, it doesn't take much to spook jittery oil traders. The "Iran premium" currently priced in is not insignificant. Bloomberg/BW: - Israel would be willing to strike Iran’s nuclear facilities, even if doing so only delayed its ability to produce nuclear weapons for a few years, Israeli Ambassador to the U.S. Michael Oren said. “One, two, three, four years are a long time in the Middle East -- look what’s happened in the last year” in terms of political change, “Diplomacy hasn’t succeeded,” Oren, 57, said today. “We’ve come to a very critical juncture where important decisions do have to be made.”As discussed before, these elevated fuel prices (based in EUR) will inflict serious damage to growth prospects for Eurozone nations - particularly for Italy who is already struggling with a year-long economic contraction.
Iraq's Kurdish Region Pulling Away from Baghdad Control: Iraq’s Kurdistan Regional Government's (KRG) is increasingly signing unilateral oil deals with international oil giants, bypassing Baghdad. Iraq’s central government is insisting that all such regional deals first be cleared by the Iraqi government, but the oil majors have apparently concluded that such diplomatic niceties are largely irrelevant in their search for profits, and are now cutting deals directly with the KRG in Iraqi Kurdistan’s capital Erbil. The latest Western oil major to bypass the government of Iraqi president is the French energy giant Total, which in 31 July issued a press statement noting, “Total has completed an acquisition of 35 percent interest in two blocs, Harir and Safen, held by (U.S. company) Marathon Oil... The blocs respectively have a surface of 705 square kilometers (272 square miles) and 424 square kilometers (163 square miles).” Almost as an afterthought, the company added, “Total confirms its commitment to help develop the Iraqi oil sector and to invest in new projects.” What Total’s decision has done is throw into sharp relief the disparity between Western oil companies’ desire for profits at any cost and Baghdad’s weakened negotiating position with same.
Double Dealing in Iraq and Syria: The Kurdish Independence Gamble: Adding Syria to the Baghdad-Irbil equation makes for a rather interesting geopolitical sum, but there is no clear winner emerging just yet as everyone from international oil companies, Western governments, Turkey and the Syrian regime attempts to buy Kurdish patronage with promises of independence. Syrian President Bashar Assad has handed over control of six Kurdish-dominated towns in Syria’s north to the Kurds. This is Assad’s answer to Turkish and Western machinations to get the Syrian Kurds to support the opposition in their efforts to overthrow Assad. KRG head Massoud Barzani has been the henchman behind rallying the various Kurdish groups behind the scheme. They are being promised an independent Kurdistan in northern Iraq and northern Syria. Assad is now promising them the same thing essentially. By doing so he is hoping to thwart Western/Turkish plans. The question then becomes, whose offer of an independent Kurdish nation will they accept? The answer is whichever is most likely to come to fruition.
Saudi Arabia plans new city for women workers only - A women-only industrial city dedicated to female workers is to be constructed in Saudi Arabia to provide a working environment that is in line with the kingdom's strict customs. The city, to be built in the Eastern Province city of Hofuf, is set to be the first of several planned for the Gulf kingdom. The aim is to allow more women to work and achieve greater financial independence, but to maintain the gender segregation, according to reports. Proposals have also been submitted for four similar industrial cities exclusively for women entrepreneurs, employers and employees in Riyadh. Segregation of the sexes is applied in Saudi Arabia, where Wahabi sharia law and tribal customs combine to create an ultra-conservative society that still does not allow women to drive. Saudi women are said to make up about 15% of the workforce, with most in female-only work places. Although the number of mixed gender workplaces has increased these are still few. The proposals follow government instructions to create more job openings for women to enable them to have a more important role in the country's development.
Wacky Ways of Middle East Youth Unemployment - Over a year ago I penned a much-visited post depicting the world's worst levels of youth unemployment in the Middle East / North Africa (MENA) region that continue to contribute to pressures for regime change in any number of MENA countries. Today, I have an update on certain peculiarities of the MENA situation that make it unique from the rest of the world. While there are any number of regions with a problem with youth unemployment--North America and Western Europe are certainly not exempted--remedies for the MENA region must take its contextual specificities into account. The IMF's Masood Ahmed recently enumerated a number of.these challenges. Of particular interest for being atypical are the following:
(1) In contrast to much of the rest of the world, the better educated are more likely to be unemployed since they are holding out for better employment opportunities. Think of the implications here: Were scores of the young Arab Springers in reality a bunch of brats who lived lives of leisure out of choice and blamed others for their predicaments? It's certainly a researchable proposition...
(2) Government jobs are not only more common than elsewhere but also more remunerative. In effect, the relative cushiness of civil service makes working in the private sector unattractive with less pay and job security:
(3) Once more, these comparatively cushy government sector jobs only makes private sector work look like the pits--especially to the hordes of unemployed youth who would prefer to remain so:
China’s July lending adds to the gloom - Late last week, the People’s Bank of China published the latest monetary statistics for July 2012, which are dismal. M2 money supply increased by 13.9% compared with a year ago, up from 13.64% yoy, slightly higher than estimate of 13.8% yoy. M1 money supply increased by 4.6% compared with a year ago, almost unchanged from June, but below estimate of 5.2% yoy. Currency in circulation increased by 10.0% compared to a year ago, slightly below 10.81% yoy in June. Note that, however, M2 money supply was actually down on the month. Net new loans figures, however, were disappointing. Total net new loans amounted to RMB540.1 billion, well below the consensus estimate of RMB700 billion, and down from RMB919.8 billion in June. Breaking down the new loans figures, new loans to households were RMB184 billion, down from RMB917 billion in June. New loans to non-financial corporations were RMB358.8 billion, down from RMB644 billion in June. Of which, only RMB92 billion of new loans to non-financial corporations were in forms of medium- and long-term loans, while RMB152.6 billion of new loans came from bills financing. Meanwhile, deposits are also falling. Total Chinese Yuan deposits fell by RMB500.6 billion compared to the end of June.
Chinese non-performing loans start rising - The China Banking Regulatory Commission’s data released yesterday show that non-performing loans increased to RMB456.4 billion by the end of second quarter, while non-performing loans ratio remains unchanged at 0.9%. The total amount of NPLs has been falling over the past few years and hit the lowest point in the third quarter of 2011. Since then, total NPLs have been increasingly slowly but steadily. We will not be surprised to see both NPLs and NPL ratio trend higher in the future as the slowing economy negatively impacts loan quality, although we believe (and will believe) that the amount of NPLs and NPL ratio have been (and will be) understated.
Chinese Banks’ Weapons of Mass Ponzi - We wrote last week that China’s shadow banking system was reflecting and, to an extent, contributing to a growing liquidity risk which in turn is being exacerbated by net capital outflows. Since then, there have been some interesting revelations on the domestic liquidity management, especially in shadow banking, and especially especially in wealth management products. To recap, wealth management products or WMPs are a little like a term deposit, only they offer Chinese investors a more appealing rate of return than a normal bank deposit (which will deliver a negative real return) and it can be backed by assets — effectively, an informal securitisation. If you’re wondering what sort of assets that includes, Reuters wrote up an excellent investigation of the WMP scene, beginning with the case study of “Golden Elephant no. 38″ which promises a 7.5 per cent return. It shows just how illiquid some of these things are. At the same time as the risks around WMP issuance are gaining attention, something else is going on in Chinese financial system: interbank assets are surging, as Also Sprach Analyst points out.
More Bad News For China as FDI Falls. -Foreign direct investment in China fell to the lowest level in two years in July, fueling concern that waning confidence in the nation’s growth prospects may restrain any economic rebound. Investment declined 8.7 percent from a year earlier to $7.58 billion, the eighth drop in nine months and the smallest inflow since July 2010. The Ministry of Commerce released the data at a briefing in Beijing today. Chinese financial institutions sold a net 3.8 billion yuan ($600 million) of foreign currency last month, indicating capital is flowing out as property curbs and weakness in exports slow growth and the yuan weakens. China’s slowdown may extend into a seventh quarter after export growth collapsed in July and industrial production and lending missed economists’ forecasts. The nation reported a $71.4 billion capital account deficit in April-through-June, the biggest quarterly shortfall in data going back to 1998.
Pettis on Debt, Currency Wars, Commodity Prices and Capital Flight; - Via email, Michael Pettis at China Financial Markets has a few comments on debt, commodity prices, and capital flight in China. Any sustained increase in the growth rate of Chinese consumption – if indeed this occurs, which in my opinion is very doubtful – will not only have to compensate for a reduction in the growth rate of Chinese investment, but might also have to compensate for a reduction in China’s current account surplus. What is more, the crisis in Europe will only make the global trade environment tenser and nastier. Notice already what is happening in commodity-exporting countries like Indonesia. According to an article in Thursday’s Wall Street Journal: Indonesia's Trade Gap Signals Tougher Times Indonesia’s trade deficit hit an all-time high in June as exports from Southeast Asia’s largest economy fell sharply, a sign that weaker demand from China and the West is affecting some of the few countries still growing at a considerable clip. Countries whose growth depends either on growth in Chinese investment or growth in European demand are going to see significant deterioration in their trade accounts. This will almost certainly lead to even more trade intervention, currency wars, and all the other beggar-thy-neighbor polices typical of a global demand contraction. I think we should expect to see a lot more articles like this.
Unlivable Cities - Boxlike structures, so gray as to appear colorless, line the road. If the city is poor, the Bank of China tower will be made with hideous blue glass; if it's wealthy, our traveler will marvel at monstrous prestige projects of glass and copper. The station bisects Shanghai Road or Peace Avenue, which then leads to Yat-sen Street, named for the Republic of China's first president, eventually intersecting with Ancient Building Avenue. Our traveler does not know whether he is in Changsha, Xiamen, or Hefei -- he is in the city Calvino describes as so unremarkable that "only the name of the airport changes." Or, as China's vice minister of construction, Qiu Baoxing, lamented in 2007, "It's like a thousand cities having the same appearance." Why are Chinese cities so monolithic? The answer lies in the country's fractured history. In the 1930s, China was a failed state: Warlords controlled large swaths of territory, and the Japanese had colonized the northeast. Shanghai was a foreign pleasure den, but life expectancy hovered around 30. Tibetans, Uighurs, and other minorities largely governed themselves. When Mao Zedong unified China in 1949, much of the country was in ruins, and his Communist Party rebuilt it under a unifying theme. Besides promulgating a single language and national laws, they subscribed to the Soviet idea of what a city should be like: wide boulevards, oppressively squat, functional buildings, dormitory-style housing. Cities weren't conceived of as places to live, but as building blocks needed to build a strong and prosperous nation; in other words, they were constructed for the benefit of the party and the country, not the people.
Australia’s sub prime mortgage scandal grows - Claims that Australia’s banking sector is conservative, safe and secure have taken a bath in recent days as evidence has emerged of Australia’s own sub-prime lending scandal. In April, we learned via the Australian newspaper how Australia’s largest banks are being forced to forgive mortgage debts of borrowers granted loans based on falsified or fraudulent information supplied by mortgage brokers. Then in June, the Australian followed-up with further reports (here and here) of Australian sub-prime lending, and the battle playing-out between unscrupulous lenders and borrowers. Now the Senate Inquiry into the post-GFC banking sector has revealed several instances of banks providing home loans to people who can’t afford them, and doctoring the paperwork so the loans looked okay. As well as allegations of widespread boosting in loan approvals. Perhaps the most shocking of the revelations are instances where the banks have been enticing elderly Australians into Ponzi-like mortgages that they had no way of repaying.
Great Graphic: Nominal Effective Exchange Rates -- This Great Graphic comes from an email I received from Thomson Reuters. It charts the nominal effective exchange rates (NEER)of the dollar, euro, Swiss franc and Australian dollar. It is weighted by trade partner, but is not adjusted for inflation. Some economists take the NEER measure and adjust for inflation. This generates a real effective exchange rate (REER). Both capture a dimension of general competitiveness. The strength of the Australian dollar and to a lesser extent, the Japanese yen is underscored here. The fact that the euro is weaker is not surprising. What is noteworthy is the softness of the US dollar. There have been some reports suggesting that the rise in the dollar will curb US exports. Yet, US exports are at record highs and the latest data (June) puts them up 7% from a year ago. As we noted yesterday, Obama's goal of achieving a 50% rise in US exports during his term has been nearly reached. US exports have risen 48% since early 2009. At the same time, when ever one thinks about US exports, keep in mind that US companies service foreign demand primarily by building locally and selling locally. Sales by majority owned affiliates of US multinationals sell 4-5 times more goods abroad than the US exports. The US has pursued primarily a foreign direct investment strategy rather than the more traditionally export strategy.
Five years on, the Great Recession is turning into a life sentence - China is sufficiently alarmed by the flint hardness of its "soft-landing" to talk up trillions of fresh stimulus. The European Central Bank is preparing to print “whatever it takes” to save Spain and Italy. Markets are pricing in an 80pc chance of yet more printing by the US Federal Reserve in September or soon after. There is no doubt that the three superpowers acting in concert can launch a mini-cycle of growth early next year - assuming they deliver on their rhetoric - but the twin headwinds of debt-leveraging and excess manufacturing plant across the globe cannot easily be conjured away. The world remains in barely contained slump. Industrial output is still below earlier peaks in Germany (-2), US (-3), Canada (-8) France (-9), Sweden (-10), Britain (-11), Belgium (-12), Japan (-15), Hungary (-15) Italy (-17), Spain (-22), Greece (-27), according to St Louis Fed data. By that gauge this is proving more intractable than the Great Depression.
The Only 'Un-Manipulated' Chart Of The Real Un-Recovery You'll Ever Need -- Probably no other commodity is tied to global growth, especially EM and China growth, than the key steel-making ingredient - Iron Ore. The iron ore price continues to plunge and it would appear that very few are focused on it. Critically, this is the one commodity that is not a futures contract, cannot be manipulated by trading desks or by levered hedge funds. Despite all the euphoria about risk assets and commodities - and the central bank front-running - Iron Ore prices continue to sink lower and lower...
Brazil to Invest $66 Billion in Roads, Railways — Brazilian President Dilma Rousseff announced a nearly $66 billion investment package on Wednesday to beef up the nation's ailing road and rail systems, part of efforts to solve serious transportation bottlenecks and spur a sputtering economy. The investment includes laying 10,000 kilometers (6,200 miles) of train tracks and building or widening 7,500 kilometers (4,660 miles) of federal highways. Rousseff said the government would soon announce other packages aimed at airports, ports and transportation on waterways, other areas where serious deficiencies are seen as hobbling the South American giant's growth. "We're starting an initial stage from which Brazil will emerge richer and stronger," "Brazil will finally have an infrastructure that's compatible with its size." Brazil's economy has performed well during the last decade, but that strong growth dropped off last year and the government forecasts growth this year at 2.5 percent. Private economists surveyed weekly by the Central Bank now expect growth around 1.8 percent this. Despite that, the nation has yet to widely feel the brunt of the crises that have hit Europe and the U.S. since 2008 — Brazil's unemployment remains at record lows. But experts say that transportation bottlenecks must be solved to assure long-term growth.
Japan’s G.D.P. Slows to 1.4% Rate for Second Quarter - Japan’s economic growth slowed to an annual rate of just 1.4 percent in the second quarter, the government said Monday, as cooling global demand weighed on the nation’s exports, while domestic demand, which had helped Japan outperform other Group of 7 industrialized countries this year, appeared to lose steam. The 1.4 percent annual growth in Japan’s gross domestic product in the three months through June is sharply less than the revised 5.5 percent rate in the first quarter, Japan’s Cabinet Office announced. The figure fell short of a median forecast of 2.3 percent from 24 economists surveyed by Bloomberg News, and it signaled that the recovery after the earthquake and tsunami last year may be stalling. The slowdown has also highlighted economic worries just days after Prime Minister Yoshihiko Noda won his bid to double Japan’s consumption tax to tackle the country’s swelling public debt, pushing a tax increase through Parliament. Japan’s last sales tax increase, in 1997, snuffed out any hope of a strong recovery from its banking crisis of the 1990s, and opponents of Mr. Noda have warned that a tax increase could lead to a similar slowdown.
How long can Japanese bond prices defy gravity? - That's the question posed in an interesting new paper by UCSD Professor Takeo Hoshi and University of Tokyo Professor Takatoshi Ito. Although there has been much discussion recently of debt levels of some European governments, Japan is in a class by itself. Hoshi and Ito (2012) note the consensus among academic researchers that Japan's current fiscal path is unsustainable: Doi (2009), Doi, Hoshi, and Okimoto (2011), Doi and Ihori (2009), Sakuragawa and Hosono (2011), Ito (2011), Ito, Watanabe, and Yabu (2011), and Ostry et al. (2010) all find that without a drastic change in fiscal policy, the Japanese government debt to GDP ratio cannot be stabilized. Nevertheless, lenders to the Japanese government seem to have no concerns, as yields on the government's debt remain extremely low. Hoshi and Ito (2012) argue that the key feature that has kept this process going has been that 95% of the Japanese government debt is domestically owned. Japanese residents put their savings into banks and insurance companies who along with pension funds lend to the government at very low rates. But as more Japanese retire from the workforce, that is likely to change dramatically.
Japan's catch-22 - The Japanese government has made some progress in its efforts to generate additional tax revenue. The increase in the national consumption tax was finally passed. Japan urgently needs to begin addressing its runaway fiscal problem. WSJ: - Japanese Prime Minister Yoshihiko Noda won a major victory in finally securing the passage of a hard-fought tax-increase package last week, but analysts argue that a provision in the law to consider economic conditions before implementation means the battle to achieve the tax increase isn't yet over. The law to raise the national consumption tax to 10% from the current 5% in two stages by 2015 was passed Friday after a dramatic week of political brinkmanship that forced Mr. Noda to promise general elections "in the near term" in return for opposition support for the legislation. ... Once at the full 10% rate, the tax is expected to generate an extra ¥13.5 trillion ($172 billion) annually, which could help stem the country's mounting debt pile, now at nearly ¥1 quadrillion and equal to more than 200% of annual gross domestic product. Outside analysts and ratings agencies have stressed that a tax increase is a vital first step in repairing Japan's finances, but insist that more is necessary, including measures to boost GDP.This tax increase however is by no means a done deal. The law requires the government to consider economic growth conditions before implementing the tax.
Japan’s Social Security Reform — A History of Inaction -- The passage of the bill to hike the consumption tax may reduce government borrowing for the next few years, but it is far from providing a fundamental fix to Japan’s fiscal problem. Its biggest cause — the soaring costs of caring for its ballooning elderly population — was left untouched. Prime Minister Yoshihiko Noda, like many of his predecessors trying to navigate a “silver democracy”, could not bring up painful but much-needed steps such as cuts in pension benefits and increases in premiums. The Japanese economists have long identified the fiscal-demographic iceberg up ahead, and tried, in vain, to steer around it. As part of Prime Minister Junichiro Koizumi’s fiscal reforms, his government in 2004 crafted a plan to make the pension system “secure for 100 years,” by adopting a complex formula that would gradually phase in small benefit cuts. Because of loopholes in the formula, none have yet been made. Meantime, deflation was supposed to trigger benefit cuts under the longstanding annual cost-of-living-adjustment formula. But since 2006, politicians have regularly blocked those ostensibly automatic cuts, hoping to curry favor with the increasingly influential elderly bloc.
Labour productivity versus demographics - To what extent has Japan’s soft growth over the past 20 years been due to its population ageing? And to what extent unfavourable demographics can be offset by increases in labour market participation (especially by old people) and/or labour productivity gains? Citi’s Nathan Sheets and Robert Sockin have put together a very useful comparison of (mostly supply-side) measures for the US, Japan and eurozone that examine these questions. They’ve “decomposed” real GDP-per capita down into labour productivity, employment rate, labour force participation, and the share of the working-age population. Their conclusion: in all three areas/countries, productivity growth has been fairly solid and looks likely to more than offset the increasingly unfavourable demographic changes.
Asia’s Role in the Post-Crisis Global Economy - SF Fed Economic Letter - In the wake of the global financial crisis of 2007–08, Asia has emerged as a pillar of financial stability and economic growth. A recent San Francisco Federal Reserve Bank conference focused on Asia’s changing role in the global economy. Asia’s relative strength is allowing it to play an expanded part in multilateral responses to the European sovereign debt crisis. And the reforms put in place following the 1997 Asian financial crisis offer models for countries currently trying to stabilize their economies.
Currency Flows Reversing China to Colombia as Trade Slows - Just three months after the biggest developing economies sold dollars to support their currencies, policy makers from Colombia to China are moving to weaken exchange rates and revive exports as the International Monetary Fund forecasts the slowest trade growth in three years. Colombian Finance Minister Juan Carlos Echeverry urged the central bank on Aug. 3 to boost minimum dollar purchases from $20 million a day, saying the country needs “more ammunition” to drive down the peso in the global “currency war.” The Philippines banned foreign funds from deposit accounts and unexpectedly cut interest rates in July as the peso hit a four- year high. In China, authorities lowered the yuan reference rate to the weakest since November, which according to Citigroup Inc. will create “headwinds” for other Asian currencies. After spending more than $59 billion in foreign reserves in May and June to stem currency depreciation, developing nations are reversing policies as the European debt crisis outweighs the risk of faster inflation. South Korea and Chile may weaken exchange rates to make their exports cheaper, according to UBS AG. The IMF estimates global trade will expand at the slowest pace since 2009.
Lenders hold fire on ailing shipping firms - Sanko Line, Korea Line and subsidiaries of Berlian Laju Tanker are among a steady stream of Asian and Western shipping companies that have sought bankruptcy protection in recent months, victims of weak freight rates and haemorrhaging cash reserves. But the expected surge in corporate shipping failures has yet to occur, despite mounting losses and the prospect of lower freight and charter rates this year. Part of the reason, according to finance and restructuring experts, is an unwillingness by banks to seize ships or force firms into bankruptcy, especially with the current market conditions and ship values falling to pre-boom 2004 levels. "From everything we see, banks have been reticent to take [action] against any shipping companies as long as they have cash.""Banks are better off rescheduling debt with existing operators rather than [taking] over and [selling] the ships," he said. "A lot of banks can't afford to take a hit," especially with the ongoing European debt crisis and new liquidity rules impacting on banks.
Global Trade and U.S. Exports Are at Record Highs -- According to perma-bear Gary Shilling this week, "We're already in a global recession," and ECRI's Lakshman Achuthan said in July that "the [U.S.] economy is in a recession already." But if the U.S. and world economies are in recession, why are merchandise world trade and U.S. merchandise exports at all-time record high levels, see chart above? The CPB Netherlands Bureau for Economic Policy Analysis is reporting that world trade increased by 2.5% in May to the highest level on record (see blue line in chart). May's increase in world trade volume was the highest monthly gain since December 2009. The slight decreases in Europe's exports (-0.1%) and imports (-0.3%) in May were more than offset by strong gains in Asia's exports (5.1%) and imports (7.8%). Of course, the CPB reports comes out with almost a 2-month lag, so world trade might have declined in June and July. Separately, the IMF's latest World Economic Outlook points to downside risks in Europe and the U.S. that could stall the global economic recovery, but the IMF is still predicting world GDP growth of 3.5% this year and 3.9% next year. Both of those growth rates would be above the 3.2% average annual growth in global GDP since 1980, and far from the negative growth rates in 2008 Q4 of -7% and -6% in 2009 Q1 during the worst of the global slowdown.
The NY Times is misleading. And who is correct? Eurostat or China Customs? - Rebecca Wilder - The NY Times reports quite a dire situation as regards the slump in the value of Chinese exports to the European Union in July: Data published this month showed that China’s exports to the European Union had sunk 16.2 percent in July to $29.4 billion, compared with July 2011. This statistic (bolded by yours truly) is misleading. First, China Customs measures exports in nominal dollars. If you look at Chinese exports measured in, let’s say euros, it doesn’t look quite as bad. In July, exports to the European Union (EU 27) dropped -3.6% over the year measured in euros versus a -16.2% annual decline measured in dollars. The dollar appreciated against the euro over the measurement period so the drop in China’s exports to the EU 27 is much lower in euros.. Eurostat publishes import data by partner and in euros. Using the average exchange rate over the month, I calculate the value of EU 27 imports from China reported in dollars for comparison to the China Customs data. Eurostat data is available only through June.In June, Eurostat reports that EU 27 imports from China dropped -11.1% measured in dollars compared to the reported -1.1% annual reduction in exports from China to the EU 27 by China Customs. Clearly the trend is downward; but the Eurostat data only loosely matches the China Customs data. Balance of payments statistics are subject to large ”errors and omissions”.
World shipping crisis threatens German dominance as Greeks win long game - Germany’s shipping industry faces a wave of bankruptcies over coming months as funding dries up and deepening economic woes across the world cause a sharp contraction in container trade. Over 100 German ship funds have already shut down as the long-simmering crisis in global container shipping finally comes to a head. A further 800 funds are threatened with insolvency, according to consultants TPW in Hamburg. They are not alone. Britain’s oldest shipowner, Stephenson Clark, dating back to 1730, went into liquidation last week, closing the final chapter of Britain’s coal trade and the industrial revolution. It cited “incredibly depressed” vessel rates. The firm over-invested in the boom four years ago, betting too much on the China syndrome. Germany is the superpower of container shipping, controlling almost 40pc of the world market. The Germans also misread the cycle and have been struggling to cope ever since with a legacy of debt and a glut of ships. Now everything is going wrong at once. Container volumes arriving at European ports plunged in June, dashing expectations of a summer rebound. Imports fell 7.5pc from North America and 9pc from Asia. Flows into the Mediterranean region crashed by 16pc, reflecting the violence of the recession in Greece, Italy, Spain, and Portugal.
It’s the exchange rate stupid - Rebecca Wilder - Eurostat released trade figures today, where the trade balance (exports less imports) surged €3.7 bn in the month of June (link to the .pdf release). The current figures imply a 2012 annualized trade balance of €66.9 bn, which is a meaningful boost to the -€7.4 bn deficit in 2011. Eurostat breaks down the regional figures further into intra-Euro area (intra-EA) trade and extra-Euro area (extra-EA) trade. Out of the EA 16, June intra-EA figures are available for just a few countries. Of those countries, the intra-EA trade balance improved in Portugal only, increasing by 0.26 ppt as a share of GDP on the month. From June 2011 to June 2012, where available, otherwise June 2011 to May 2012 (see Table above), the intra-EA rebalancing – i.e., roughly raising the balance of the net-importers and reducing the surplus of the net-exporters – has occurred to a certain degree. Net trade as a share of country GDP fell in Germany, and rose in Italy, Spain, Greece, and Portugal. France and Ireland worsened their positions, while the Netherlands increased its large trade surplus of 25.1% of GDP over the year. June extra-EA figures are available for all countries. With the help of the real depreciation of the trade-weighted euro over the month, the extra-EA trade balance improved in June across all EA 16 countries except for Ireland, where it fell by 0.2 ppt of GDP. Over the year through June, all countries except the Netherlands saw an improvement in the trade balance as a share of GDP (see Table above).
IMF Says Bailouts Iceland-Style Hold Lessons For Crisis Nations - Iceland holds some key lessons for nations trying to survive bailouts after the island’s approach to its rescue led to a “surprisingly” strong recovery, the International Monetary Fund’s mission chief to the country said. Iceland’s commitment to its program, a decision to push losses on to bondholders instead of taxpayers and the safeguarding of a welfare system that shielded the unemployed from penury helped propel the nation from collapse toward recovery, according to the Washington-based fund. “Iceland has made significant achievements since the crisis,” Daria V. Zakharova, IMF mission chief to the island, said in an interview. “We have a very positive outlook on growth, especially for this year and next year because it appears to us that the growth is broad based.” Iceland refused to protect creditors in its banks, which failed in 2008 after their debts bloated to 10 times the size of the economy. The island’s subsequent decision to shield itself from a capital outflow by restricting currency movements allowed the government to ward off a speculative attack, cauterizing the economy’s hemorrhaging. That helped the authorities focus on supporting households and businesses.
Location, location, location - the Economist - Our interactive overview of global house prices and rents since 1975
Europe's Most Dangerous Politicians: Angela Merkel, Francois Hollande, David Cameron, Jean-Claude Juncker, Jose Barroso, Mario Monti, Herman Van Rompuy - Der Spiegel has published an inane article about Europe's 10 Most Dangerous Politicians.
ECB conditionality exceeds mandate - We can think of the governments of Ireland or Spain facing a multiple equilibria problem when trying to sell their debt. There is a good equilibrium, where interest rates on this debt are low and fiscal policy is sustainable. There is a bad equilibrium, where interest rates are high, and because of this default is possible at some stage. Because default is possible, a high interest rate makes sense – hence the term equilibrium. Countries with their own central bank and sustainable fiscal policy can avoid the bad equilibria, because the central bank would buy sufficient government debt to move from the bad to the good. (See this pdf by Paul De Grauwe.) The threat that they would do this means they may not need to buy anything. Anyone who speculates that interest rates will rise will lose money, so the interest rate immediately drops to the low equilibrium. How do markets know the central bank will do this, if that central bank is independent? They might reason that independence would be taken away by the government if the central bank refused. But suppose independence was somehow guaranteed. Well, they might look at what the central bank is doing. If it is already buying government debt as part of a Quantitative Easing (QE) programme, then as long as the same conditions remain the high interest outcome would not be an equilibrium.
ECB's Greek Fudge: Nutty and Stale? - There was a 31.5 bln euro aid tranche that was due in June that the Troika delayed disbursement of pending commitments from the new government. This included 25 bln euros to recapitalize Greek banks. Without have the aid assured, the ECB seemed to have little choice and last month decided to no longer accept Greek bonds (or Greek government guaranteed bonds) as collateral for refi operations. Facing a 3.2 bln euro bond redemption (held incidentally by the ECB), Greece reportedly asked for a bridge loan to cover until the aid tranche is paid. The ECB refused. Greece sought to trigger a clause giving it a month grace period for its payment. The ECB refused. This could force Greece to issue its own currency. However, the ECB threw Greece a life line of sorts. As we noted previously, the ECB approved lifting the cap amount of Greek T-bills the Bank of Greece can accept from Greek banks as collateral for lending under the ELA (Emergency Liquidity Assistance). This, in turn, will allow the Greek government to service its near-term debt obligations by issuing T-bills, which its banks will be the dominant buyers. The Greek banks will likely use those bills as collateral for new borrowing under the ELA. The ECB regulates the amount of ELA that a member central bank can offer. In the middle of Q2, the ECB raised the Bank of Greece's ELA cap to 100 bln euros. This gives the central bank scope to lend another 30-35 bln euros. Some reports suggest that as early as tomorrow the Greek government can announce an increase in its T-bill offerings.
GDP sinks 6.2% in second quarter -- The country’s economy contracted 6.2 percent in the second quarter as belt-tightening to slash deficits continued to take a toll, hampering efforts to meet targets set by the troika for continued bailout funding. Currently in its fifth consecutive year, the economic downturn has driven unemployment to record highs, with nearly one in four unemployed and more pain expected ahead. "It's not a major surprise, we knew the economy was continuing to struggle but hopefully it's some sign that the rate of decline is starting to bottom out," said Chris Williamson, chief economist at London-based research firm Markit. "Hopefully the first half of the year was as bad as it gets and we'll see some improvement now," he said. The second quarter preliminary GDP estimate was based on seasonally unadjusted data and follows a 6.5 percent GDP decline in the previous quarter. Scrambling to nail down 11.5bn euros of savings and bring the bailout programme back on track, the government plans to revive a labour reserve measure targeting 40,000 public servants for eventual dismissal.
Greek economy shrinks 6.2% in second quarter -- The economy contracted 6.5 percent in the first quarter, worse than the initially given 6.2 percent, according to revised figures issued in June. The Bank of Greece expects the economy to shrink 4.5 percent for 2012 as a whole, following a 6.9 percent drop last year. The country is relying on two financial rescue packages backed by the EU, the International Monetary Fund and the European Central Bank worth around 240 billion euros ($295 billion) for its economic survival. Last year, private creditors agreed to write-off more than 100 billion euros in debt, roughly half the amount they were owed, as part of a second bailout programme. Harsh austerity measures and economic reforms linked to the aid agreements have taken their toll on the economy, with unemployment hitting record highs. The latest official data, made public last week, showed a record 23.1 percent jobless rate for May, with almost 1.15 million people registered as unemployed.
Greek Recession Making Bailout Targets Harder to Meet: Economy -- Greece’s economy contracted for a ninth straight quarter, making it harder for the government to meet the budget-reduction targets required under the country’s international bailouts. Gross domestic product declined 6.2 percent in the second quarter from the same period last year after dropping 6.5 percent in the first, the Athens-based Hellenic Statistical Authority said in an e-mailed statement today. The median estimate of three economists in a Bloomberg News survey was for a contraction of 7 percent. The authority doesn’t publish seasonally adjusted data or quarter-on-quarter rates. Greece’s economic slump, now in its fifth year, has been exacerbated by austerity measures imposed by creditors to reduce the nation’s budget deficit. Without further rescue loans, Greece may default on its debts, which could precipitate its departure from Europe’s monetary union.
We haven't forgotten how to make depressions - GREECE is in a depression. A real deal, no kidding, bad-as-the-1930s depression. In the second quarter, Greek output contracted again, as it has in every quarter since the last three months of 2008. Real output is now about 17% below the pre-crisis level, and unemployment is above 23%. That's not quite as awful as America's great contraction, from 1929 to 1933, when output shrank nearly 27% and unemployment rose to an estimated 25%. But it's in the ballpark. The details of this particular depression are obviously a bit different from those of the 1930s contraction. But the themes are the same. The Greek economy clearly suffers from all sorts of real problems—labour market rigidities, overregulation, corruption, etc—but such problems afflict lots of countries without sparking a massive economic implosion. No one has bombed Greece and blown up a fifth of its economic infrastructure. No one has erased the memories of a quarter of the Greek workforce, leaving people unable to speak or type or tend machinery. The Greek economy is imploding for no other reason than that the prices are wrong.
Greece: Hospitals are running out of medicines, wildfires rage" but the "danger" is Alexis Tsipras: As the economic situation in Greece continues to worsen, reports indicate that hospitals and care centersthroughout the nation are running completely out of medicines, and many healthcare workers are now voluntarily providing care services without pay. On Tuesday morning, the mainstream media was on location at a central hospital in Athens to report on how the crisis is affecting the country's hospitals.Doctors, nursing staff, and administrative personnel stated that the lack of medical personnel at the nation's hospitals has made it impossible to function properly. The hospital staff who remain at their jobs have gone unpaid by the state for months.
Germany Has "Reached Its Limit" On Greek Aid - While Frau Merkel remains beach-bound somewhere, hence the lack of 'Neins' recently, her deputy chancellor Michael Fuchs made it unequivocally clear this morning in a Handelsblatt interview that Germany had "reached the limit of its capacity" over additional EFSF payments to Greece and reiterated the double-whammy that the ESM should NOT receive a banking license and that the ECB should NOT act as "money printing press in disguise" by extending emergency loans and bypassing EFSF/ESM. A decision about whether Greece should be given the second tranche of its loan will not be made until October, after the Troika finalizes its first review of the second rescue program in September. However, BNP Paribas notes that there have been a couple of developments worth noting over the past week and more are likely in the coming weeks.
Germany warns it could veto Greek aid - GERMANY will block any new aid to ailing Greece if Athens does not fully comply with the terms of previous rescue packages, even if other countries support unlocking funds, a senior lawmaker has said. The deputy head of Chancellor Angela Merkel's conservative parliamentary bloc, Michael Fuchs, told business daily Handelsblatt that Berlin was ready to use its veto if it is unhappy with findings from the Greece creditors "troika". "You can quote me: even if the glass is half-full, that is not enough for a new aid package," he said in an interview to appear in the paper's Monday issue. "Germany cannot and will not agree to that." Germany, Europe's biggest economy, is waiting with eurozone partners for the report on Greece from a so-called troika of inspectors from the European Union, International Monetary Fund and European Central Bank.
Merkel Returns to Crisis as Bond Buying Remains in Focus - German Chancellor Angela Merkel returns to the front line of the European debt crisis this week as the bloc’s leaders squabble over measures including bond purchases to relieve concerns the single currency may fragment. Merkel ends her summer vacation to oversee a Cabinet meeting Aug. 15 before departing for Canada and talks with Prime Minister Stephen Harper as the spiraling crisis threatens the global economy. With policy makers awaiting a German high court decision on bailout funding next month, they’re struggling to smooth divisions over a European Central Bank plan to buy the bonds of indebted nations. “It makes no sense for the ECB to start financing” Spain and Italy, ECB Governing Council member Luc Coene said in an interview with Belgian newspapers De Tijd and L’Echo published on Aug. 11. “It would only lead to the ECB taking on the whole public debt of Spain and Italy onto its balance sheet.”
Italy's Public Debt Hits Record High in June -- Italy's public debt reached a new record high in June, hitting 1.973 trillion euros ($2.429 trillion), the Bank of Italy said Monday. In June, the debt increased by EUR6.6 billion compared with the previous month, Italy's central bank said in a statement. In the first six months of the year, public expenditure rose by EUR1.1 billion to EUR47.7 billion, compared with the corresponding period in the previous year, as more funds went to other euro-zone countries, the bank said. In total, EUR16.6 billion went to foreign countries, compared with EUR6.1 billion during the first six months of 2011.
Italy Public Debt Hits Record High, Deficit Also up -- Italy's public debt hit an all-time high in June of almost 2 trillion euros and the annual budget deficit was also bigger than a year before, due largely to Italy's share of bailouts for other euro zone states, the central bank said on Monday. Public debt at the end of June rose 6.6 billion euros to 1.973 billion euros, the Bank of Italy said, as the Treasury's cash reserves increased by 10.3 billion euros. Italy's benchmark bond yields remain close to 6 percent despite tough austerity measures introduced by Mario Monti's technocrat government. With the country mired in a deep recession, markets are sceptical of Italy's ability to bring down a debt pile equivalent to around 123 percent of output, the second highest debt in the euro zone after Greece's. The economy contracted 0.7 percent in the second quarter and gross domestic product was down 2.5 percent from a year earlier.
Find the equilbrium -- REUTERS reports: Italy's public debt hit an all-time high in June of almost 2 trillion euros and the annual budget deficit was also bigger than a year before, due largely to Italy's share of bailouts for other euro zone states, the central bank said on Monday. The story continues: In another worrying sign for public finances, the Bank of Italy reported that in the first half of the year the annual budget deficit, at 47.7 billion euros, was 1.1 billion euros higher than in the same period of 2011. This was due to an increase in spending to help other euro zone countries, which rose to 16.6 billion euros from 6.1 billion in January-June 2011. Italy itself is under pressure to request help from Europe's bailout funds, a move now widely seen as the only way to bring down borrowing costs that have soared in recent months, but which the government has so far resisted. This is why the monetary side is so critical. If both Spain and Italy move from the ranks of the bailing out to the bailed out, the fiscal burden on the rest of the euro area rises, pushing other members toward crisis.
Italy's Latest Record Debt Load: Bigger, Faster, More - Italy just announced its all-time record high general government debt load at EUR 1.973 trillion. What is perhaps most stunning, given all the talk of austerity, cutting back, reforms, and change is that the size of this debt is growing at an ever-increasing pace that is simply stunning. Pre-Euro (1999), Italy's debt was growing at a rate of just less than EUR 2 billion per month; in the eight years from then until the crisis in 2008, Italy's pace of debt growth (fostered we are sure by the convergent cheapness of funding and their immutable belief in invincibility) almost perfectly doubled to EUR 3.8bn per month. Since 2008, and the onset of excess Keynesian ridicule we assume, Italy's debt load has grown at a stunning pace of EUR 6.4 billion per month and perhaps most incredible; however, the last nine-months (since the peak 'peak' of the crisis in September of last year) has seen the pace of debt-load growth surge to EUR 9.5 billion per month. Sustainable levels of exponential debt growth - sure!
Italians Say Goodbye to Ferraris as La Dolce Vita Expires - The 204,000-euro Ferrari 458 Italia has never been a particularly common sight, even on the autostrade of its native Italy. Today it’s becoming even rarer as austerity measures spur Ferrari owners to export supercars by the truckload.A crackdown on luxury goods combined with budget cuts that have pushed Italy deeper into its fourth recession since 2001 are souring demand for sporty cars and other symbols of the country’s carefree lifestyle. The number of secondhand high- performance cars exported from Italy nearly tripled to 13,633 vehicles in the first five months of 2012, from 4,923 a year earlier, according to auto industry group Unrae. “Italy is one of the strongholds of supercars, and those vehicles are now disappearing from the streets,” “This has a huge symbolic value and shows how deep the crisis is.” Sales of super-luxury cars in Italy are forecast to plunge 47 percent to 593 vehicles this year from 1,116 in 2008, according to IHS Automotive, which predicts that sales won’t return to pre-crisis levels before 2016.
Italy's prolonged recession could harm fiscal balances -- Italy's deep recession is now a year old and the economy shows no signs of improvement. But it's important to point out that unlike Spain, Italy's main problem for now is growth (exacerbated by poor competitiveness), not fiscal balance. Growth: Fiscal Balance (better than the Eurozone and the US): Of course if the recession deepens even further and lasts considerably longer, the fiscal situation could worsen. There are signs this may already be taking place.Reuters: - Finance Minister Vittorio Grilli said Italy's government would overshoot its 2012 deficit goal because of worse-than-expected growth but planned no extra budget cuts because Italy was on target to meet its EU obligations, a newspaper reported. "Nonetheless, our compass remains the structural deficit, and on that we are and we will be perfectly in line." "When this recession is over, (the debt reduction plan) would permit a lowering in the debt-to-GDP ratio of 20 percentage points in five years," he said.This is particularly dangerous because of the size of Italy's debt (some €2 trillion). If bond yields spike again, interest expenses alone could worsen the fiscal situation considerably. As discussed earlier, time is not on Monti's side.
Is the Italian elephant about to break loose again? - Market nervousness about Italy has been growing in recent weeks, with the Moody’s credit downgrade of the country being only one of the reasons. A bailout is clearly in the offing, with the only real questions being how and when. While the situation inside his country appears to be deteriorating, Mario Monti has been doing the rounds of European capitals in an attempt to drum up support. While in Helsinki he raised an eyebrow or two when he warned that without a serious plan to bring down interest rates disaffection with the euro in his country could easily grow to dangerous proportions. Crying wolf, or a piece of insider information? Probably a bit of both. Italy is in a deepening recession which has now lasted for over a year. Monti himself has ruled out the possibility that he could continue in office after next spring’s general elections, while at the same time Silvio Berlusconi is constantly hinting that he would not be averse to accepting prime ministerial office again, should his country need him. All of which makes me ask myself just over a year after my “Is Italy, Not Spain, the Real Elephant in the Euro Room?” post, whether in fact the currently chained beast is not about to break its tethers and go for a crockery breaking rumble round the Euro living room. What follows is a summary of a revised version of a presentation I gave in Cortona last autumn. I have put the presentation online here.
Political Trouble Bubbles in Italy and Spain - As you may have noticed the news is a bit slow out of Europe recently. It is the holiday season in which the Euro-elite pack-up and head to the beaches for some R&R. Angela Merkel returned from her break yesterday so over the next week or so we should start to see some clarity around exactly what her government has to say about Mario Draghi’s master plan. As you may be aware, the plan hinges on Spain and Italy requesting bailouts to ensure that they are legally bound to implement fiscal reforms while the ECB provides a backstop in the secondary sovereign bond market. Obviously none of this has occurred yet, and much of it can’t until the German constutional court decides on the legaility of the ESM in September, so it was no surprise that for the 22nd week in a row the ECB has reported that its total Securities Market Program purchases were €0.In the meantime the focus is back on Greece where the Troika has been visiting once again. The country still appears to be having troubles determining exactly where the additional €10bn requested by the Trokia is going to come from. There is also another marked change in rhetoric from the German camp with a number of politicians stating it is time for the country to leave the Euro and that Germany will veto any new aid unless there has been 100% compliance with previous programs.
Spanish commercial property on the brink - The Spanish and Italian commercial property markets have all but collapsed with the number of transactions in both countries falling more than 90 per cent in the three months to July as investors worry about the future of the eurozone. Only three property transactions were registered in Spain during the second quarter, down from 58 deals in the previous quarter. In Italy the slide was even more pronounced, with just two buildings being traded during the period, down from 56, according to data from Real Capital Analytics. The severity of the decline highlights investors’ concerns about the risk of owning fixed assets in the two countries given the uncertain direction of the eurozone economy., The total value of transactions for offices, shops and industrial property in Spain was €67m for the second quarter, down 74 per cent from €260m in the first quarter. The inactivity meant Spanish property transactions were below those of neighbouring Portugal for the first time. “Heightened risk aversion, particularly among cross-border institutional investors, has led to an almost complete collapse in southern European acquisitions,”
Spanish Bank Borrowings From ECB Continue Parabolic Rise - Even as the Spanish (and Italian) sovereign bond market foundered in July, hitting record yields following stark realizations just how insolvent Spain is, a more sinister development was taking place: Spanish banks, completely disconnected from the funding needs of the sovereign were receiving a daily bailout from the ECB to the tune of over €1 billion. As the Bank of Spain released hours ago, in July Spanish banks borrowed a record €375.5 billion from the ECB, a new record, and a €38 billion increase from June. Sadly, as the red line in the chart below demonstrates, the parabolic increase in Spanish bank borrowings from what is effectively Germany, continues unabated. Indicatively this is comparable to the US banking system obtaining a roughly $500 billion rescue in one month for the 8th month running. Year to date, Spain has received €257 billion in ECB "borrowings" which we put in quotes as this money will obviously never be repaid, which means simply that Europe continues to be entrenched in the most diabolical version of Stockholm syndrome, where the hostages and the kidnappers have now realized they can only exist as long as the other is alive. If there was any good news, it is out of Italy, whose ECB bank borrowings rose by "only" €2 billion in July to €283 billion, and leaving Spain far ahead in the direct borrowing insolvency race.
Spain may request first tranche of bank bailout this week - Spain’s Ministry of Economy and the Bank of Spain may be preparing the petition for the first 30bn euro-tranche of the Spanish bank bailout agreed with the European Union, La Vanguardia reported on Tuesday. The Spanish daily suggested that the request may be made as early as Thursday or Friday, citing sources from the Ministry of Economy as saying that the request would be sent soon. The funds from this first tranche would be destined to recapitalise the four banks that have been intervened by the country’s Fund for Orderly Bank Restructuring (FROB). On Monday, the European Commission (EC) considered it ‘good news’ that Spain had not yet requested the funds and that ‘the plan has always been’ to disburse aid in October, ‘if all goes as planned.’ ‘We have not received any request to activate the emergency banking assistance, although the possibility obviously exists. Using emergency funds depends upon our receiving a request in the first place,’ said European Commission spokesman Ryan Heath.
Hollande's Honeymoon is Over; 54% of Voters Unhappy; Unions Promise "War" in September -- As France slides deeper into recession, Public confidence in Hollande slides.
- 54% are unhappy with president François Hollande's overall performance.
- Only 33% trust government to cut debt
- Only 40% think Hollande can find a solution to the eurozone crisis.
However, people are happy with free money. They approve Hollande's reducing the retirement age to 60, from 62, for some workers. Lowering retirement age may make the affected workers happy, but the policy is economic folly in the face of increasing lifespans. Moreover, those poll numbers are 100% guaranteed to get worse as Hollande is doing all the wrong things economically such as raising income taxes and supporting financial transaction taxes. Hollande's job proposals are even worse.
Breaking up the euro: Irreversible? - The Economist - (video) AS THE euro crisis intensifies, our correspondents discuss how a break-up might work and why Angela Merkel should consider the unthinkable.
Eurozone edges back towards recession - The eurozone edged closer towards its second recession in three years after a resilient economic performance from Germany and France failed to prevent the single currency bloc from contracting in the second quarter. Gross domestic product in the euro area shrank 0.2 per cent in the three months to June, compared with the previous three months when there was no growth, as the economies of Greece, Italy, Spain and Finland contracted sharply. Robust investment and domestic consumption helped the German economy expand 0.3 per cent in the second quarter, beating expectations of just 0.1 per cent growth, while French GDP remained unchanged avoiding a highly anticipated contraction. The Netherlands also outperformed forecasts, growing 0.2 per cent. But a 1 per cent fall in economic output in Finland, a close ally of Germany in the battle for greater austerity in Europe, illustrated how the sovereign debt crisis that has been troubling southern Europe is spreading to the bloc’s economically stronger core northern states.
European Economy Sinks into Decline - The emerging recession continues in the Eurozone, as GDP contracted by 0.2%. The loss was slightly smaller than expected, but that’s something of a double-edged sword. The economy grew in Germany but dropped in more struggling areas like Italy, Portugal, Spain and Greece. This means that one governing authority must apply a unified monetary policy on a widely divergent region. In addition, Germany has less incentive to change their insistence on fiscal tightening in the struggling countries. If all the countries in the Eurozone fell, the idea of a wrong path on the economy could more easily take hold.But we’re actually on that path. The slowdown in Q2 does herald a coming Euro-wide recession; because Q1 growth in the zone was flat at 0.0%, technically speaking the recession isn’t already underway, though it’s happening and serious in several of the Euro countries already. And Germany, while still improving (up 0.3% in Q2), is slowing down as their trading partners sink. Most of Germany’s growth came from exports, and economic analysts predicted, based on indicators like a reduction in factory production, that growth would slow in the balance of the year. Meanwhile, France remained flat at 0.0% for the third straight quarter. European GDP statistics are not annualized, so they look smaller than US figures, which annualize them
Europe returns to recession - For those who have been following my European post for any length of time you may remember my basic macro theme for Europe is that the enactment of the fiscal compact across the zone will create the following dynamic: Periphery nations weakening, France in the middle, Germany outperforming, but the whole ship slowly sinking. This assessment is based on the analysis that attempts to internally devaluate interdependent nations with an aim to become export competitive is nothing more than a race to the bottom which will eventually slow the entire region including the stronger economies. As I have noted previously the only economy that appears to be bucking this downward trend is Ireland due to the fact that is has always been export competitive under the Euro and its major export partner is not European. Overnight we saw European Q2 GDP numbers and as you can see from the chart the trend continues.
Eurozone headed towards lengthy recession - The eurozone veered towards a prolonged recession with new growth figures out on Tuesday showing its economy shrinking again and analysts warning of falling output right through 2013. Germany posted better-than-expected growth of 0.3 percent between April and June, while No. 2 economy France just about scraped zero growth -- but the experts saw precious little good news ahead, with the eurozone as a whole contracting by 0.2 percent. "The big picture is that the economic growth required to bring the region's debt crisis to an end is still nowhere in sight," said London-based Jonathan Loynes of Capital Economics. "The slowdown has spread from the periphery into the core," said Tom Rogers, an analyst with Ernst & Young in London, one of many to highlight a systemic "north-south divide." "Positive readings in Germany and the Netherlands (0.2 percent) are to be welcomed, but with conditions in the rest of Europe deteriorating further, and export markets farther afield also cooling, it is looking increasingly likely that output in the core economies will contract during the second half of the year," Rogers added.
The ECB's end of the bargain - THERE is a lot of new euro area economic data to consider today, the most important of which is a first estimate of the euro zone's second quarter output. According to eurostat, output in the single-currency area fell 0.2% from the first quarter to the second and was down 0.4% from a year earlier. GDP dropped sharply in Italy, Portugal, and Spain, as well as in Belgium. The French economy posted zero growth for a third consecutive quarter. And Austria, Germany, and the Netherlands all managed growth in the second quarter, albeit at a generally slower pace than in the first. New June industrial production numbers reveal that the quarter ended on a sour note across the entire euro area, including in Germany, where production was down for a second month in three. Meanwhile, a measure of German economic sentiment unexpectedly sank for a fourth consecutive month in August. On Friday I joked that the euro-zone periphery ought to begin tying all its reforms and austerity programmes to the level of euro-zone nominal output, the idea being that if the ECB can't maintain adequate growth across the euro zone as a whole, it is unreasonable to expect a struggling periphery to address its fiscal troubles and eliminate its imbalances with the core.
Portugal unemployment hits record 15% - The unemployment rate increased marginally from 14.9 percent in the first quarter, according to the labour force survey, but the 826,900 jobless is a 22.5 percent increase over the year. The Portuguese government, which is struggling to stabilise strained public finances with the help of a 78-billion-euro EU-IMF debt bailout, has removed job protection rules which took effect at the start of August that could drive unemployment up further but should eventually improve competitiveness. The government forecasts unemployment will average 15.5 percent this year before hitting a peak of 16 percent next year. Youths and young adults have been particularly hard hit, with 35.5 percent of those age 15 to 24 without jobs. Rising joblessness is one of the government's top concerns as payouts of unemployment benefits make it more difficult to meet its deficit cutting target.
The Mirage of Youth Unemployment - Unemployment estimates also are surprisingly misleading – a serious problem, considering that, together with GDP indicators, unemployment drives so much economic-policy debate. Outrageously high youth unemployment – supposedly near 50% in Spain and Greece, and more than 20% in the eurozone as a whole – makes headlines daily. But these numbers result from flawed methodology, making the situation appear far worse than it is. The problem stems from how unemployment is measured: The adult unemployment rate is calculated by dividing the number of unemployed individuals by all individuals in the labor force. So if the labor force comprises 200 workers, and 20 are unemployed, the unemployment rate is 10%. But the millions of young people who attend university or vocational training programs are not considered part of the labor force, because they are neither working nor looking for a job. In calculating youth unemployment, therefore, the same number of unemployed individuals is divided by a much smaller number, to reflect the smaller labor force, which makes the unemployment rate look a lot higher.
‘Economic suicides’ shake Europe as financial crisis takes toll on mental health - The double suicide, in a working-class neighborhood in the Greek capital in late May, is just one incident among thousands of suicides this year that have shaken European societies as mounting job losses, cutbacks in public services and shrinking government pensions due to the continent’s financial upheaval take a toll on mental health. In Greece, which is in its fifth year of recession, such suicides have sparked violent clashes between police and those opposing austerity who have held the victims up as martyrs. In Italy, widows of businessmen who have committed suicide — such as builder Giuseppe Campaniello, who set himself on fire outside a government tax office in Bologna on March 28 after his company collapsed — have held demonstrations. And in Ireland, where citizens are jumping off quays in Dublin, Cork and Limerick in alarming numbers, the mobile telephone company Vodaphone volunteered to give up the stadium advertising space it bought at soccer and hurling games for a suicide prevention campaign. So many people have been killing themselves and leaving behind notes citing financial hardship that European media outlets have a special name for them: “economic suicides.” Surveys are also showing increasing signs of mental stress: a jump in the use of antidepressants and illicit drugs, a rise in depression and anxiety among workers worried about salary cuts or being laid off, and an increase in the use of sick leave due to psychological problems.
Greece asks for more time for budget cuts: report - Greece wants two more years to implement its latest austerity program, and will formally ask European leaders for the extra time next week, according to the Financial Times on Tuesday. The extra time would allow Greece to spread out budget cuts over a longer period as it tries to spur economic growth in order to be able to pay its debts, the report said, citing a document in its position or obtained by the newspaper.
Greek Banking System At 'Knife's Edge' - The spread of bad loans because of Greece's long-running recession threatens the viability of the country's financial system and jeopardizes the already slim chances of success for the country's second bailout deal, senior Greek bankers warned. Senior banking officials in the euro zone's most troubled country say that they are now labelling as bad 20% of their loans to the domestic economy, as the recession and successive waves of budget cuts deprive companies and households of the means to repay their loans. At the end of the first quarter, the ratio of non-performing loans, or NPLs, had stood at 18.5%, more than double the 9% that Spanish banks were reporting at the end of May. "The rate of increase in NPLs is horrifying," one banker said. "We have also been forced to extend the repayment period of more than half a million loans. People just don't have the money to repay." That figure doesn't even include substantial exposure to the government, even after a 200 billion euro ($246.66 billion) debt restructuring earlier this year. Greek banks have EUR16 billion in loans to the government and around EUR24 billion in holdings of government bonds and bills that would almost certainly be defaulted on if Greece's official creditors refused to extend any more aid.
Merkel’s Ministers Want to End Greek Bailouts - German Chancellor Angela Merkel, facing a tumultuous political year, has returned from holidays, only to face a deepening Eurozone crisis and threats from her senior ministers that Germany should veto the next aid package for Greece. Merkel’s Christian Democratic Union (CDU) Deputy Parliamentary leader, Michael Fuchs, stated that his country would veto the next Greek aid package if Greece fails to make $14.16 billion in cuts demanded by international lenders. Germany is the biggest contributor to bailouts from the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB.) Fuchs said that, “Germany has the right to veto. If we’re convinced that Greece is not meeting its obligations, we’ll make use of that veto.” He suggested though that Greece could, remain within the EU even if it left the euro and said that the EU could set up a “sort of Marshall Plan” to help Athens cope with the crisis and reintroduction of the drachma. The mounting hostility toward Greece came as new data showed the country’s economy had contracted by 13% over the last two years, although due largely in part to the pay cuts, tax hikes and slashed pensions insisted upon by the Troika, and championed by Merkel, who has not backed off demands for more austerity despite evidence showing that it has backfired.
Merkel still opposes relaxation of Greek austerity programme - German Chancellor Angela Merkel on Wednesday rejected Greek requests that terms of that country‘s financial bailout agreement be relaxed. The statement came following an announcement that Greek Prime Minister Antonis Samaras would meet with Merkel next week in Berlin. Government spokesman Steffen Seibert said Merkel remains opposed to giving Greece more time to meet the fiscal targets demanded of the country under the terms of the present bailout deal. Samaras is expected to make a case for easing Greece‘s austerity programme when he meets with Merkel on August 24. The Financial Times reported Wednesday that Samaras is seeking a two-year extension of the austerity programme. The existing agreements asks Athens to slash its budget by 11.5 billion euros (14.1 billion dollars) by 2014.
Greece Before the Abyss Only Bankruptcy Can Help Now - Officially, at least, everything is going according to plan. In September, officials with the troika -- made up of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) -- are planning to travel to Athens to check on the progress that Greece has made with its cost-cutting program. Then, according to the plan, they could disburse billions more in aid out of the second bailout package for Greece, which the euro-zone countries and the IMF agreed on in February. But, in reality, it is rather unlikely that all of the €130 billion ($160 billion) in the bailout package will ever be paid out. And what is even more unlikely is that the money would keep Greece from going bankrupt. Greece has disappointed its creditors yet again. Now its government plans to ask for more time -- and needs billions more in aid. But Greece's euro-zone partners are unwilling to provide any more help, meaning that the only hope now is to admit defeat and let the country make a fresh start.
'Staggering jump in service fees over past decade' in Italy - Italians have faced staggering increases as great as 70% in the price of many services over the past decade, a study said Tuesday. And much of this has occurred since the Italian government opened up several sectors of the economy to competition, the Mestre-based association of artisans and small businessmen CGIA said in a report. Water bills soared by an average of 69.8% in Italy between 2002 and this year, it said. At the same time, the cost of natural gas rose by 56.7%; waste-collection fees jumped by 54.5%; train tickets jumped by 49.8%; electricity by 38.2%; and postal services increased by 28.7%. The only decrease was reported in the price of telephone services, which dropped by 7.7% in the past decade. Over the same period, the national inflation rate rose by 24%. Although the common euro currency was introduced during this period, it played a relatively small role in the price jumps, according to Giuseppe Bortolussi, CGIA secretary. Instead, he blames the ever-increasing cost of raw materials, particularly energy costs, and the opening up to competition of sectors that were previously government controlled - such as the railways and natural-gas delivery. For example, since 2000 when railways were opened to competition, ticket prices have jumped by 53.2%. And since the gas market was opened in 2003, average bills have increased by 33.5%.
Is Italy Following the Footsteps of Greece? Does Italy or Germany Exit the Eurozone First? -- As I watch the implosion of Greece, with shops closing everywhere and GDP plunging like a rock, I cannot help but wonder if we are witnessing the start of a similar trend in Italy. To be sure, Italy has a manufacturing base that Greece does not have, but retail aspects and shop closings in Rome as compared to Athens seems rather similar. If that sounds far-fetched, please consider Summer of gloom for crisis-hit Rome shops It is not just stifling summer heat that is keeping shoppers at bay on Rome's Via del Corso: as the economic crisis hits locals and tourists alike, many shops have little choice but to close for good. "The crisis has hit everyone," sighed one empty-handed customer, while shopkeepers up and down the street whiled away their time folding and re-folding piles of brightly coloured T-shirts and stylish outfits.
Spanish Robin Hoods: Stealing From Supermarkets To Feed The Poor - On Tuesday, hundreds of members of the Spanish SAT workers’ union walked out of two supermarkets without paying for the shopping carts they had filled with food. The supermarket raids took place in Andalusia, in southern Spain. “Is this a theft? A symbolic act? An atrocity? An act of violence ?” asks El Pais referring to the way this incident has been described in the Spanish press. The Socialist party called it “barbaric.” According to the Spanish newspaper, a first group of union members raided a Mercadona supermarket in Ecija, near Sevilla and filled 10 shopping carts with food. The food was distributed to non-profit organizations in the city of Seville after food banks refused to accept it. At the same time, a second group took on a Carrefour supermarket in Arcos de la Frontera, near Cadiz. The instructions were clear: no destruction, no chocolates, no yogurts or desserts, just basic necessities and essential items - sugar, oil, vegetables, plain biscuits and milk.
Spain's 'Robin Hood' mayor begins 3-week march - A Spanish mayor who became a cult hero for staging supermarket robberies and giving stolen groceries to the poor on Thursday began a three-week march that looks set to embarrass the government and energize anti-austerity campaigners. Juan Manuel Sanchez Gordillo, regional lawmaker and mayor of the town of Marinaleda -- population 2,645 -- in the southern region of Andalusia, said food stolen last week in the robberies went to families hit hardest by Spain's economic crisis. About 1,000 marchers set out from the town of Jodar - the town with Andalusia's highest unemployment rate - intending to walk across the region in blistering summer heat to persuade other local leaders to refuse to comply with government reforms, deputy mayor Esperanze Saavedra told NBC News. "We want the government to be sensitive to us and think more about those who are suffering than about the banks," Saavedra said. He plans to tell mayors to skip debt payments, stop layoffs, cease home evictions and ignore central government demands for budget cuts, a message that infuriates Prime Minister Mariano Rajoy's government as it tries to convince investors in Spanish bonds that he can fix the battered economy.
Spanish house prices drop 11.2% - House prices in Spain fell by 11.2% in July, the biggest monthly fall since March last year. Overall prices have fallen by 31% since the financial crisis hit in 2008. Spain has an estimated 2 million unsold homes. Prices have slumped across the board and even in the big cities they are down 11.8% and 11% on the Mediterranean coast. The biggest falls have been in the Balearics and Canary Islands where prices declined in July by 14%. The government's decision to raise VAT from 4% to 10% on house purchases as of next year is expected to depress the market still further. Estate agents are reluctant to reveal the sort of discounts they are offering but it is a buyer's market. The huge surplus on the costa has rendered many developments effectively worthless and flats near the sea that might have cost upwards of €300,000 (£235,000) can be had for half that.
Spanish PM says no decision yet on bailout request - Spain's Prime Minister remains tight-lipped on whether he has decided to ask for more financial aid for his country, repeating instead Tuesday that he would wait until the European Central Bank outlines its plans and conditions for buying government bonds before making a move. "As long as we don't know what decision the ECB is going to make, we won't be making one either," Mariano Rajoy told reporters Tuesday after meeting with King Juan Carlos at the monarch's summer residence in Palma de Mallorca. Spain is in a double-dip recession with nearly 25 percent unemployment and is struggling to manage its finances as it tackles problems in its banking sector and among its indebted regional governments. Its borrowing costs have soared to levels deemed unsustainable in the long-run and many feel it's is only a matter of time before it formally asks for a bailout, following in the footsteps of Greece, Ireland, Portugal and Cyprus. Two weeks ago the ECB's president, Mario Draghi, said the bank would intervene to help lower a country's borrowing costs if its government applies for rescue aid from the bailout funds set up by the 17 euro countries. But such a request would come with conditions, such as extra savings cuts.
Spain Has ‘Open Mind’ on Sovereign-Aid Effort, Rehn Says - Spain’s government is considering a request for a sovereign bailout, European Economic and Monetary Affairs Commissioner Olli Rehn signaled. “The Spanish government has an open mind on this issue, but no decision has been made,” Rehn said in a Bloomberg Television interview in New York yesterday. “We stand ready to act if there is a request.” Rehn’s remarks came after Prime Minister Mariano Rajoy said he would ask the European Central Bank to buy Spanish bonds “if it seems reasonable,” as he moved to extend unemployment subsidies for some of the nation’s 5.7 million jobless.
EU ready for "further action" on Spain if requested, Rehn says - The European Union is ready to further bolster Spain if it asks for help, the bloc‘s economy commissioner said Tuesday, amid speculation that the country will need more financial aid. "The European Commission and the Eurogroup stand ready to take action if needed," Olli Rehn told broadcaster CNBC during a visit to the United States. "Concerning Spain, we have already started the implementation of the banking sector programme," he said, referring to its bank bailout of up to 100 billion euros (123 billion dollars). "We will in parallel ... be prepared for any further action if that is needed." Some have called for the eurozone‘s bailout fund and the European Central Bank (ECB) to buy Spanish bonds in a bid to reassure jittery financial markets and lower the country‘s high borrowing costs. "To my mind, it is clear that both the EU - and I dare to say the ECB - are ready to take action once certain conditions are met and if there is a request by some member state to go into a primary market purchase programme," Rehn said.
Spanish banks June bad loans surge to record - Bad debts held by Spanish banks surged in June to its highest level on record and there were further outflow of deposits as the economy sank deeper into recession and worries about the health of the banking industry mounted. Data from the Bank of Spain published Friday showed that non-performing loans grew by 8.39 billion euros ($10.36 billion) in the month of June, to €164.36 billion, or 9.42% of total outstanding loans compared to 8.95% in May. The previous high for bad loans was recorded in February 1994, when they peaked at 9.2% of total loans. The data also showed that deposits shrunk by 6.59% compared to a year earlier, the steepest annual decline on record. Deepening fiscal problems have thrust Spain to the forefront of the euro-zone debt crisis. The government of Prime Minister Mariano Rajoy in June asked the European Union for up to €100 billion in aid to help clean up its ailing banks, and the government's spiraling borrowing costs have fueled speculation it too will need a bailout
Spain Out of Options - Yves here. We’ve flagged in earlier posts how the Spanish banking crisis has the potential to become destabilizing politically, as if Spain wasn’t already at considerable risk of upheaval. Spanish depositors were pushed to convert their deposits into preference shares, which they were told were just as safe. This was a simple desperation move by the banks to save their own skins, customers be damned, by raising equity from the most unsophisticated source to which they had access. And now that that gambit failed, these shareholders are due to have those investments wiped out unless the Spanish authorities can cut a deal to spare them. Don’t hold your breath.
Bloomberg: Spain to receive first bank bailout tranche imminently - Speculation on the possibility of Spain receiving the first, 30 billion euro tranche of the EU banking bailout as soon as this week, is increasing on Thursday. Bloomberg published an article in which it quotes a source familiar with the matter who suggests that the troubled lender Bankia Group should "get the first portion of the country's European Union cash imminently." The payment might be advanced due to the fact that the ECB has recently established collateral limits which prevented Spain from asking the central bank for a loan for Bankia. Nevertheless, the first tranche of the bailout can be considered as an emergency one and can be "mobilized in any contingency," according to the bailout agreement.
Mariano Rajoy walking a fine line - In order to avoid the wrath of his nation's labor unions, Spain's prime minister agreed to extend the unemployment benefits for another six months. Bloomberg: - Rajoy said yesterday his government will continue to make payments to the long-term unemployed, extending for six months a benefit adopted by his Socialist predecessor three years ago that was due to expire today.This may further strain the nation's budget deficit and potentially irritate Germany, who reluctantly agreed to allow the ECB to provide direct support to the Spanish government. And Spain is fully expected to ask for that support. BNP Paribas: - Both Spain and the European Commission seem to be moving closer to a Spanish bailout. This Tuesday, after a meeting with the King of Spain who had interrupted his holiday, the Spanish prime minister, Mariano Rajoy, reiterated that the Spanish government might be willing to request support as long as the conditions of the ECB’s bond buying are known. And, on the same day, the European commissioner, Oli Rehn, said that Spain has an open mind on the issue of a possible request for a bailout and that if that request comes, the European Commission stands “ready to act”. Spain's near-term financing needs are not insurmountable (chart below), but the market could shut down rapidly if the ECB does not begin its bond purchase program soon. At this stage the markets will be unforgiving should the bailout fall short of expectations.
France is Stuck in the Mud - Rebecca Wilder - According to the Eurostat flash estimate, Euro area GDP fell by 0.2% in both the euro area and the EU27 in the second quarter of 2012. In the first quarter of 2012, growth rates were 0.0% in both zones. On balance, the Euro area is very likely in recession despite the fact that the region successfully skirted the “two negative quarters of growth” rule of recession dating having stagnated in Q1 2012 following a 0.3% contraction in Q4 2011. The underlying country GDP estimates for Q2, released by the various statistical agencies, do illustrate a deep divide among the growth prospects across the 17-country Euro area in Q2 2012. Here is a select list of reported growth results (all for Q2 2012 in % Q/Q not annualized):
France , +0.0%
The French flash release, in particular, caught my eye: “No growth for the third consecutive quarter” is what INSEE titled its publication. The French economy has effectively stalled. Using Eurostat data, the economy has grown just 0.09% (the unrevised numbers) since July 2011. And since Q2 2011, the economy grew just 0.3%. In all, the economy is not technically in recession but it certainly isn’t expanding. To me, the question is, will it go up or down from here? Compared to history, the current expansion in France has been nothing short of pathetic. Stuck in the mud.
Slowdown in Second Quarter German Economy Is Running Out of Steam - The German economy continued to defy the euro crisis and grew 0.3 percent in the second quarter, buoyed by exports and consumer spending, but economists warned that GDP could contract in the third quarter. The growth rate, released by the Federal Statistics Office on Tuesday, marked a slowdown from 0.5 percent in the first quarter. "Positive impetus came from consumption as well as from the net exports," the office said in a statement. That offset a decline in investments, particularly in industrial equipment. Compared with other euro-zone countries, German is doing well. The second-quarter growth compares with declines of 0.7 percent in Italy, 0.6 percent in Belgium and 0.4 percent in Spain. The French economy stagnated and the entire 17-nation euro zone is expected to show a GDP contraction of 0.2 percent in the same period. Economists say the German economy may shrink in the third quarter to end-September. Leading indicators such as the Ifo business climate index point to a slowdown in economic activity due to falling demand for German exports in Europe, the US and emerging markets, especially China, which has been a major source of German export growth.
More pharmacies decide to join boycott over EOPYY debt - Pharmacies in 14 prefectures of Greece are refusing to provide medicines on credit to customers insured with the National Organization for Healthcare Provision (EOPYY) due to the fund’s debts. EOPYY owes 117 million euros for prescriptions in May and another 145 million for drugs provided in June. Pharmacists from Thessaloniki, Imathia, Pieria, Halkidiki and Kilkis joined the boycott on Thursday, saying that they will be forced to close if EOPYY fails to settle its bills. Customers in these areas will have to pay for the drugs themselves until the matter is settled. The Panhellenic Pharmaceutical Association is due to meet on August 25 to decide whether to take nationwide action.
Greece asks for more time for budget cuts: report - Greece wants two more years to implement its latest austerity program, and will formally ask European leaders for the extra time next week, according to the Financial Times on Tuesday. The extra time would allow Greece to spread out budget cuts over a longer period as it tries to spur economic growth in order to be able to pay its debts, the report said, citing a document in its position or obtained by the newspaper.
Greek Banking System At 'Knife's Edge' - The spread of bad loans because of Greece's long-running recession threatens the viability of the country's financial system and jeopardizes the already slim chances of success for the country's second bailout deal, senior Greek bankers warned. Senior banking officials in the euro zone's most troubled country say that they are now labelling as bad 20% of their loans to the domestic economy, as the recession and successive waves of budget cuts deprive companies and households of the means to repay their loans. At the end of the first quarter, the ratio of non-performing loans, or NPLs, had stood at 18.5%, more than double the 9% that Spanish banks were reporting at the end of May. "The rate of increase in NPLs is horrifying," one banker said. "We have also been forced to extend the repayment period of more than half a million loans. People just don't have the money to repay." That figure doesn't even include substantial exposure to the government, even after a 200 billion euro ($246.66 billion) debt restructuring earlier this year. Greek banks have EUR16 billion in loans to the government and around EUR24 billion in holdings of government bonds and bills that would almost certainly be defaulted on if Greece's official creditors refused to extend any more aid.
Merkel’s Ministers Want to End Greek Bailouts - German Chancellor Angela Merkel, facing a tumultuous political year, has returned from holidays, only to face a deepening Eurozone crisis and threats from her senior ministers that Germany should veto the next aid package for Greece. Merkel’s Christian Democratic Union (CDU) Deputy Parliamentary leader, Michael Fuchs, stated that his country would veto the next Greek aid package if Greece fails to make $14.16 billion in cuts demanded by international lenders. Germany is the biggest contributor to bailouts from the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB.) Fuchs said that, “Germany has the right to veto. If we’re convinced that Greece is not meeting its obligations, we’ll make use of that veto.” He suggested though that Greece could, remain within the EU even if it left the euro and said that the EU could set up a “sort of Marshall Plan” to help Athens cope with the crisis and reintroduction of the drachma. The mounting hostility toward Greece came as new data showed the country’s economy had contracted by 13% over the last two years, although due largely in part to the pay cuts, tax hikes and slashed pensions insisted upon by the Troika, and championed by Merkel, who has not backed off demands for more austerity despite evidence showing that it has backfired.
Merkel still opposes relaxation of Greek austerity programme - German Chancellor Angela Merkel on Wednesday rejected Greek requests that terms of that country‘s financial bailout agreement be relaxed. The statement came following an announcement that Greek Prime Minister Antonis Samaras would meet with Merkel next week in Berlin. Government spokesman Steffen Seibert said Merkel remains opposed to giving Greece more time to meet the fiscal targets demanded of the country under the terms of the present bailout deal. Samaras is expected to make a case for easing Greece‘s austerity programme when he meets with Merkel on August 24. The Financial Times reported Wednesday that Samaras is seeking a two-year extension of the austerity programme. The existing agreements asks Athens to slash its budget by 11.5 billion euros (14.1 billion dollars) by 2014.
Canada rejects help for European bailout as German chancellor Angela Merkel visits - German Chancellor Angela Merkel has arrived in Ottawa for two days of meetings with Prime Minister Stephen Harper largely focused on the global economy, but she’ll be leaving without a Canadian commitment to contribute to a Eurozone bailout fund. Moreover, the Harper government maintained Wednesday that Eurozone countries still haven’t done enough to contain the economic crisis, with Finance Minister Jim Flaherty saying that “they need to do much more.” Instead, Merkel may have to settle for moral support from Canada for Germany’s position that financially troubled Eurozone countries must also take aggressive austerity measures to tackle their large deficits and debt. Harper and Flaherty have repeatedly rejected entreaties from Germany and the broader Eurozone to contribute to a $450-billion bailout pot — managed by the International Monetary Fund — for financially troubled European economies. Canada and the U.S. are the only two G20 countries not to contribute to the bailout fund, and it doesn’t appear that will change anytime soon.
When You Only Have a Hammer, by Tim Duy: Soon after we learn that economists are pulling their support for Britain's Chancellor George Osborne, German Chancellor Angela Merkel is back in the news, pounding the table for more austerity. Via Bloomberg: Merkel, facing European pressure to ease bailout terms and allow shared debt, and from global partners to do more to stop contagion, used a visit to Canada as the stage for her first public comments in a month on the crisis. She hailed Canada’s budget discipline, promotion of economic growth and “not living on borrowed money” as models for the 17-nation euro region. “This is also the right solution for Europe,” Merkel said at a reception in Ottawa . “I will report on our political will to overcome the euro crisis and on our determination in Europe to band together for a common currency. The problem is, of course, that Canada is the wrong model. Peter Coy of Bloomberg noted this earlier this year when he commented on why Canada was the wrong example for the United States. The basic rational applies to Europe as well: I suspect the European policymakers are hoping that lower interest rates will solve all their problems. To be sure, lower rates will help finance government debt. But lower rates haven't sparked the much-anticipated rebound in the UK, and given the damage done to the European financial system, I would expect the same for Europe. Merkel doesn't want to believe that currency depreciation has anything to do with a standard IMF rescue program. But you can't just wish that problem away.
Yanis Varoufakis: How the ECB is Complicit in a Macro-Financial Debacle - Ponzi growth happens when unsustainable capital flows, wilfully predicated upon funding schemes that Reason knows to be fraudulent, give rise to large spurts of economic activity. Ponzi austerity, in contrast, is what happens when unsustainable spending cuts, wilfully predicated upon funding schemes that Reason knows to be fraudulent, cause significant drops in economic activity. (Click here for my original piece on Ponzi Growth and how it led to Ponzi Austerity.) It is an incontestable fact that Europe’s Periphery shifted from Ponzi growth to Ponzi austerity some time after the Crash of 2008. Before the Crash, tsunamis of toxic money, minted and multiplied by US, UK and German banks, flooded the Periphery, causing bubbles in the real estate and public sectors. When that toxic money fizzled out, and capital receded from the Periphery like a vicious tide going out on a grim shore, the Periphery’s states and banks sunk deeply in the mud of irreversible insolvency. So as to delay the inevitable defaults that would strike huge blows on the tittering northern banks, so-called bailouts were arranged on condition of austerity policies that were as unsustainable as the growth whose collapse led to them.The European Central Bank (ECB) is the only serious institution that the Eurozone has. It was meant to be the guardian of the euro’s credibility but, alas, during both periods (Ponzi growth and Ponzi austerity), the ECB proved incapable of playing this role.
Greece: central gov't debt at $372 billion - Greece's Finance Ministry says the country's total central government debt stood at (EURO)303.5 billion ($372.67 billion) at the end of July 2012, up from (EURO)280.2 billion at the end of the first three months of this year. The country has been struggling with a severe financial crisis since late 2009, and is dependent on international rescue loans from the International Monetary Fund and other European countries that use the euro. In return for billions of euros in loans, Greece has imposed stringent austerity measures in an effort to make its debt sustainable and allow it to return to borrowing on the market, from which it has been barred by sky-high interest rates.
Greece Before the Abyss Only Bankruptcy Can Help Now - Officially, at least, everything is going according to plan. In September, officials with the troika -- made up of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) -- are planning to travel to Athens to check on the progress that Greece has made with its cost-cutting program. Then, according to the plan, they could disburse billions more in aid out of the second bailout package for Greece, which the euro-zone countries and the IMF agreed on in February. But, in reality, it is rather unlikely that all of the €130 billion ($160 billion) in the bailout package will ever be paid out. And what is even more unlikely is that the money would keep Greece from going bankrupt. Greece has disappointed its creditors yet again. Now its government plans to ask for more time -- and needs billions more in aid. But Greece's euro-zone partners are unwilling to provide any more help, meaning that the only hope now is to admit defeat and let the country make a fresh start.
Face-to-Face Showdown With Merkel; Wicked Irony of Greece Bankruptcy - Greece is bankrupt. It cannot pay the bills. A Spending Moratorium proves just that. Greece will only pay salaries and pensions. If the state owes anyone else money, they can forget about it unless the Troika sends more money. If that causes more corporate and personal bankruptcies (and it will), then tough luck. Even Der Spiegel admits the obvious: Only Bankruptcy Can Help Now. But, in reality, it is rather unlikely that all of the €130 billion ($160 billion) in the bailout package will ever be paid out. And what is even more unlikely is that the money would keep Greece from going bankrupt. The assumptions on which the current program was based in February are no longer valid. At that time, it was thought that the Greek economy would only contract by 4.5 percent this year, but now it appears that this figure will be closer to 7 percent. This would mean even fewer tax receipts and even more social expenditures. What's more, given these circumstances, it's almost irrelevant that the Greek government is expected to ask for a two-year extension, to 2016, of the agreed austerity plan.
Early Retirement for the Eurozone? - Nouriel Roubini - Whether the eurozone is viable or not remains an open question. But what if a breakup can only be postponed, not avoided? If so, delaying the inevitable would merely make the endgame worse – much worse. Germany increasingly recognizes that if the adjustment needed to restore growth, competitiveness, and debt sustainability in the eurozone’s periphery comes through austerity and internal devaluation rather than debt restructuring and exit (leading to the reintroduction of sharply depreciated national currencies), the cost will most likely be trillions of euros. Indeed, sufficient official financing will be needed to allow cross-border and even domestic investors to exit. The adjustment process will take many years, and, until policy credibility is fully restored, capital flight will continue, requiring massive amounts of official finance. Until recently, such official finance came from fiscal authorities (the European Financial Stability Facility, soon to be the European Stability Mechanism) and the International Monetary Fund. But, increasingly, official financing is coming from the European Central Bank – first with bond purchases, and then with liquidity support to banks and the resulting buildup of balances within the eurozone’s Target2 payment system. With political constraints in Germany and elsewhere preventing further strengthening of fiscally-based firewalls, the ECB now plans to provide another round of large-scale financing to Spain and Italy (with more bond purchases).Thus, Germany and the eurozone core have increasingly outsourced official financing of the eurozone’s distressed members to the ECB.
Angela Merkel warns 'time is of essence' on euro crisis - Angela Merkel warned that "time is of the essence" in tackling the eurozone crisis and voiced her support for ECB President Mario Draghi's crisis-fighting strategy. German Chancellor Angela Merkel voiced support for ECB President Mario Draghi's crisis-fighting strategy on Thursday and pressed her European partners to move swiftly towards a closer integration of fiscal policies, saying time was running short. On a visit to the Canadian capital Ottawa, where she held talks with Prime Minister Stephen Harper on the euro crisis, an EU-Canada free trade agreement and the situation in Syria, Merkel sent a message to her fellow European leaders ahead of a series of top-level meetings next week. "I made clear once again that we need a long-term, sustainable solution," Merkel said at a joint news conference with Harper in the Canadian parliament building.
A Waiting Game - Governments, so they tell us, want the banks to lend into the real economy to get people working, earning, buying and paying both their taxes and their debts. Problem is, I do not think the financial industry shares this desire. They say they are doing their bit. But they are not. The abject failure of the UK’s 2011 ‘Project Merlin’ is a good example. Project Merlin was the voluntary agreement between UK banks and government to set and meet targets for lending to small and medium businesses. The big five UK banks all agreed to lend. The data showed, however, that they all lent less in every quarter. I talked to the CEO of a UK bank which specializes in raising capital for medium sized businesses and he told me there was less and less funding around. He said the big banks and the big funds simply didn’t want to know. They had other plans. Of course if the banks had no money to lend then the mystery would evaporate. The story would be they’re not lending because they can’t, because they have no money. But the banks do have money. Lots of it. We are so mesmerized by those banks which are close to the edge – like the Spain’s moribund Bankia and the rest of Spain’s Cajas that we forget others have lots of cash. I’m not saying the headlines aren’t correct. They are. Spain’s banks are now totally dependant on massive loans from the ECB. The amount they have to borrow from the ECB has gone up every month for the last ten. Last month they borrowed €402.19 Billion. Nearly half a trillion. The rest of Europe’s fine banking system borrows another €600 billion or so.
Stop Fooling Yourself... NO Entity On Earth Can Stop This - The markets are going bananas over the same tired assumption that Central Bankers have some magic solution up their sleeve. Over the last five years, market participants have largely operated based on the “Bernanke Put” (the belief that no matter what happens Bernanke will somehow save us). I explained how this was a bluff in last issue of Private Wealth Advisory. However, the ECB’s Mario Draghi may have surpassed the Bernanke Put as the biggest bluff in financial history with his claim that the ECB will take action and that the action will “be enough” to solve the EU Crisis. Let’s consider what the ECB has done so far and whether or not it has worked. To date, the ECB has:
- Intervened in the sovereign bond markets throughout 2011.
- Launched its LTRO 1 and LTRO 2 schemes which provided over €1 trillion in funds to EU banks.
- Opened up various liquidity windows to EU banks.
- Facilitated bailouts of Greece (2) Portugal (1) Spain (1) Ireland (1) and soon to be Cyprus and Slovenia. REAL w
- Ballooned its balance sheet to over €3 trillion?Euros (roughly 30% bigger than the German?economy, which is the largest single economy in Europe).
Has the EU Crisis been solved by any of these measures? The obvious answer is no.
Finland prepares for break-up of eurozone - Telegraph: The Nordic state is battening down the hatches for a full-blown currency crisis as tensions in the eurozone mount and has said it will not tolerate further bail-out creep or fiscal union by stealth. “We have to face openly the possibility of a euro-break up,” said Erkki Tuomioja, the country’s veteran foreign minister and a member of the Social Democratic Party, one of six that make up the country’s coalition government. “It is not something that anybody — even the True Finns [eurosceptic party] — are advocating in Finland, let alone the government. But we have to be prepared,” he told The Daily Telegraph.“Our officials, like everybody else and like every general staff, have some sort of operational plan for any eventuality. Mr Tuomioja’s intervention is the bluntest warning to date by a senior eurozone minister. As he discussed the crisis, the minister had a copy of the Economist on his desk. It had a picture of Angela Merkel, the German Chancellor, reading a fictitious report entitled “How to break up the euro”, with a caption: “Tempted, Angela?” “This is what people are thinking about everywhere,” said Mr Tuomioja. “But there is a consensus that a eurozone break-up would cost more in the short-run or medium-run than managing the crisis.
Currency’s Days Feared Numbered: Investors Prepare for Euro Collapse - Otmar Issing is looking a bit tired. The former chief economist at the European Central Bank (ECB) is sitting on a barstool in a room adjoining the Frankfurt Stock Exchange. He resembles a father whose troubled teenager has fallen in with the wrong crowd. Issing is just about to explain again all the things that have gone wrong with the euro, and why the current, as yet unsuccessful efforts to save the European common currency are cause for grave concern. He begins with an anecdote. "Dear Otmar, congratulations on an impossible job." That's what the late Nobel Prize-winning American economist Milton Friedman wrote to him when Issing became a member of the ECB Executive Board. Right from the start, Friedman didn't believe that the new currency would survive. Issing at the time saw the euro as an "experiment" that was nevertheless worth fighting for. Fourteen years later, Issing is still fighting long after he's gone into retirement. But just next door on the stock exchange floor, and in other financial centers around the world, apparently a great many people believe that Friedman's prophecy will soon be fulfilled. Banks, companies and investors are preparing themselves for a collapse of the euro. Cross-border bank lending is falling, asset managers are shunning Europe and money is flowing into German real estate and bonds. The euro remains stable against the dollar because America has debt problems too. But unlike the euro, the dollar's structure isn't in doubt.
King Says European Debt Crisis Has ‘No Obvious End in Sight’ -- Bank of England Governor Mervyn King said the U.K. must press on with reforms to the banking industry and repeated his gloomy outlook for the euro-area debt crisis, which is impeding Britain’s economy. “If the rest of the world were growing normally, the rebalancing and recovery of our economy would be much easier,” King wrote in an article in the Mail on Sunday newspaper. “But it isn’t. Even the rapidly expanding emerging-market economies are slowing, and the problems of the euro area continue with no obvious end in sight.” King’s comments came days after the Bank of England cut its growth forecasts and said the outlook is “unusually uncertain.” A sports fan who attends the Wimbledon tennis tournament every year, he pointed to London’s Olympic Games and said achievements such as winning a gold medal take “years of hard work.” The same applies to the economy, he said.
More than £100bn could be wiped off the UK economy if crisis in Greece shatters eurozone --More than £100billion would be wiped off the value of the British economy if the crisis in Greece led to the breakup of the eurozone. Senior government sources say secret Treasury estimates have calculated that the UK’s output would drop by 7 per cent if the single currency plunged into fresh chaos as a result of a Greek exit from the euro. That would see £105billion slashed from the British GDP, which came in at £1.5trillion last year. A Whitehall source revealed the potential cost to Britain amid fears that Greece is due to run out of money next week. It is far higher than estimates made by City observers, who have claimed that Britain might experience a drop in output of just 2 per cent. Internal documents, shown to members of the Cabinet, indicate that a disorderly breakup of the euro would lead to a dramatic decline in trade with Britain’s eurozone partners, who receive 40 per cent of the UK’s exports. It would also cause a collapse of some banks, which would have a knock-on effect on the UK banking sector and wipe billions off the value of some of Britain’s biggest companies.
The sun rises in the west -- LISA POLLACK quips: It feels increasingly weird to include Ireland in “the periphery”. It’s obviously not in “the core” or even “the soft core” because we’re pretty sure a country can’t belong to either of those clubs if it’s been on the receiving end of a bailout just two years ago and has had to take extreme evasive action to prevent almost its entire financial sector from imploding. And yet, Ireland looks impressive for a peripheral by some measures... And indeed it is. Irish manufacturing activity is growing while the rest of the periphery is stuck in a depressionish contraction. If it isn't careful, it might post positive output growth over the rest of the year, a strict no-no for members of the periphery. Unfortunately, Ireland's performance will be incredibly difficult to imitate. Recent Irish economic success can be summed up in two numbers: 67% and 22%. The first is the share of exports in Irish output. And the second is the share of Irish exports that go to America, an economy that is growing. Spanish exports, by contrast, are just 23% of GDP, and its largest export market is France, which hasn't managed quarterly growth since the third quarter of 2011.
Slump And Circumstance - Paul Krugman The New Statesman had a good idea — it went to 20 British economists who signed a letter back in early 2010 calling for immediate austerity and asked them whether they still supported the Osborne policies now that Britain is in double-dip recession. Only one of those who replied said yes, while nine urged Osborne to reconsider his opposition to stimulus. Good on them. I was, however, disappointed to see so many of the prodigal economists asserting that they were responding to changed circumstances rather than admitting that they simply got it wrong. For circumstances really haven’t changed; the UK had a depressed economy then, and it still does now. Fiscal austerity while the economy is depressed, and in particular when conventional monetary policy has reached its limits, was an obviously bad idea from day one. Not to put too fine a point on it, what I was writing about austerity back in 2010 looks just fine a couple of years later.The fact of the matter is that the austerians chose to throw basic macroeconomics out the window. And that, not failure to anticipate negative surprises, is where they went wrong.
Austerity in theory and in practice - PROLONGED stagnation in British economic performance is giving ground to the “pro-growth” camp over the austerity advocates within its government. Should policymakers change course, and how? Britain's economy has suffered a protracted period of unimpressive growth. Since 2010, the year its coalition government came to power, annual percentage GDP growth slowed from 2.1% to 0.7% in 2011. Official estimates for 2012 show a contraction in GDP of 0.7% in the second quarter, a third consecutive quarterly decline. Its government blames external shocks, such as America's growth slowdown, the ongoing crisis in the euro zone, and signs of deceleration in China. In spite of those external pressures, many politicians, economists, and other interest groups within Britain are unconvinced that domestic economic weakness is distinct from the domestic policy agenda. Business lobby groups that backed the government’s initial austerity drive, at the time packaged up with corporate tax reform, feel increasingly impatient. They want to see more measures to support growth. They tend to maintain support for reducing the deficit, but argue this should be done at a less aggressive pace. They argue for investment in infrastructure to ease capacity pressures, create jobs, and improve Britain’s long-term competitiveness vis-à-vis other economies.
Banking reform: Running with a rough crowd | The Economist - THE Barclays LIBOR scandal has shifted the nature of the debate over whether retail and investment banks should be split up. Within British political circles, there is an increasing belief that poor culture at investment houses can infect the retail arm of a universal bank. One of the greatest advocates of this view is Governor of the Bank of England Mervyn King, under whom responsibility for regulation of Britain's financial services will fall once the bill to bring the Financial Services Authority within the central bank passes through both Houses of Parliament. "We don't build nuclear power stations in densely populated areas, nor should we allow essential banking services and risky investment banking activities to be carried out in the same 'too important to fail' bank," King said at a BBC Radio 4 “Today Programme” lecture two months ago. He finds support among several members of the recently established parliamentary commission on banking standards, headed by Treasury select committee chairman Andrew Tyrie. Of its 10 members, three are already of the view separation should go ahead. Nigel Lawson, Chancellor of the Exchequer under Margaret Thatcher, is a renowned advocate; John Thurso and John McFall feel similarly.