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

Saturday, September 1, 2012

week ending Sept 1

Fed balance sheet shrinks on the week - (Reuters) - The Federal Reserve's balance sheet shrank on the week with reduced holdings of agency mortgage-backed securities, Fed data released on Thursday showed. The Fed's balance sheet stood at $2.795 trillion on August 29, down from $2.808 trillion on August 22. The Fed's holdings of Treasuries totaled $1.639 trillion as of Wednesday versus $1.637 trillion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $32 million a day during the week compared with a $10 million a day average rate the prior week. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) totaled $843.60 billion versus $859.31 billion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $87.21 billion, which was unchanged on the week.

H.4.1 Release--Factors Affecting Reserve Balances - August 30, 2012

If QE3 is so close, why is the Fed’s balance sheet shrinking? - As the markets wait to see if Helicopter Ben is maybe about to treat them to a third round of QE, it’s interesting to note that the Fed’s balance sheet has been shrinking of late. This morning’s The King Report raises the obvious question: If QE 3.0 is imminent, why isn’t it expanding? On August 29 the Fed’s balance sheet was $42.76bn lower than a year ago, according to the latest figures. And $12.94bn lower than the previous week. Looking at total factors supplying reserve funds, these are down $31.52bn from a year ago and $6.99bn from the previous week. From Andy Lees at AML Macro, who points out that the balance sheet is $115bn smaller than it was on December 28 last year (emphasis ours): Over that period it is down 4% which annualises at nearly a 6% contraction. Even since the end of June the balance sheet has contracted by USD51.06bn so the decline was not front loaded or anything like that.

Fed’s Evans Calls for Stronger Steps - Federal Reserve Bank of Chicago President Charles Evans said Monday that the Federal Reserve should take immediate easing action, including buying more mortgage-backed securities, to bolster the U.S. economy. “I don’t think we should be in a mode where we are waiting to see what the next few data releases bring. We are well past the threshold for additional action; we should take that action now,” Mr. Evans said in a seminar in Hong Kong.

Fed's Evans supports Open-Ended QE - From Chicago Fed President Charles Evans: Some Thoughts on Global Risks and Monetary Policy Evans concludes with an impassioned plea to do more to help reduce unemployment:  Finding a way to deliver more accommodation — whether it is monetary or fiscal — is particularly important now because delays in reducing unemployment are costly. An unusually large percentage of the unemployed have been without work for quite an extended period of time; their skills can become less current or even deteriorate, leaving affected workers with permanent scars on their lifetime earnings. And any resulting lower aggregate productivity also weighs on potential output, wages and profits for the economy as a whole. The damage intensifies the longer that unemployment remains high. Failure to act aggressively now could lower the capacity of the economy for many years to come. I have outlined some policy actions that I think can take us in the direction of a more vibrant and resilient economy. Given the risks we face, I think it is vital that we make such moves today. I don’t think we should be in a mode where we are waiting to see what the next few data releases bring. We are well past the threshold for additional action; we should take that action now.  Evans once again proposes keeping the Fed funds rate low until unemployment falls below some target (he suggests 7%), unless inflation rises above 3%.

Fed’s Pianalto Backs More Action - A top Federal Reserve official said Monday that she backs providing the economy more support as long as the costs associated with further easing efforts are manageable. “New tools come with benefits and with risks,” said Cleveland Fed President Sandra Pianalto at an event in Newark, Ohio, “and we must constantly weigh both in our efforts to meet our dual mandate of maximum employment and stable prices.”

Fed's Pianalto discusses Benefits and Costs of QE3 - From Cleveland Fed President Sandra Pianalto: The Federal Reserve and Monetary Policy - I am expecting the U.S. economy to continue to grow, but at a moderate pace. I expect economic growth of about 2 percent this year. And with this moderate GDP growth forecast, my outlook is for very slow improvement in the jobless rate. I expect the pace of GDP growth to pick up gradually through 2014, and for the unemployment rate to remain above 7 percent through 2014. Given my outlook for slow economic growth, I also expect slow wage growth, and I anticipate that core inflation will remain near the FOMC's 2 percent long-term objective over the next few years. While inflation remains close to our objective, unemployment is still well above the FOMC's estimate of the longer-term normal rate. The monetary policy debate is whether the FOMC should take further actions to stimulate today's slow-growth economy to bring down unemployment. Monetary policy should do what it can to support the recovery, but there are limits to what monetary policy can accomplish. Monetary policy cannot directly control the unemployment rate. It can only foster conditions in financial markets that are conducive to growth and a lower unemployment rate. At times, significant obstacles can get in the way.

Peek Into a Fed Hawk’s Case Against QE3 - The Federal Reserve’s policy committee includes several officials strongly opposed to another round of easing from the central bank, and they’ve been increasingly vocal in recent months as the Fed weighs new action. One of those hawks, Dallas Fed President Richard Fisher, offered an unusual peek today into how he’ll be making the case against new action at the central bank’s Sept. 12-13 meeting. In a note to reporters, Fisher said he solicited a paper about “the possible consequences of the current path of monetary policy” from William White, a former top official at the Bank for International Settlements and Bank of Canada. (White now chairs a committee at the OECD and serves as an advisory board member at the Dallas Fed’s Globalization and Monetary Policy Institute.) Fisher said he asked White to write the paper “to inform me in my capacity as a member of the Federal Open Market Committee.” The title of the paper is no surprise: “Ultra Easy Monetary Policy and the Law of Unintended Consequences.” We’re sure officials gathered around the FOMC table in a couple of weeks will hear some of these points from Fisher and others. “I have found it to be most illuminating and have authorized the Institute to release it today as part of its working paper series,” Fisher writes to us. “It is a thoughtful paper and worth a thorough read.”

Fed’s Lockhart: Further Monetary Easing a ‘Close Call’ -- The Federal Reserve has the ability to lower interest rates further, but the need for additional monetary stimulus is “a close call” given current economic conditions, a top official at the central bank said Thursday. Federal Reserve Bank of Atlanta President Dennis Lockhart offered a fairly balanced outlook on monetary policy in an interview with CNBC from Jackson Hole, Wyo. That’s the site of the coming economic symposium, where Fed Chairman Ben Bernanke is scheduled to speak Friday. Mr. Lockhart said now is the time to take stock of the U.S. economy’s long-term picture, and to weigh the costs and benefits more monetary easing would have on growth. “I’m not overly concerned with the longer term costs of more action, but at the same time, I see limited benefits from more action,” the official said, but added that if conditions deteriorated and signs of disinflation emerged, “there wouldn’t be much of a question about policy.” He said if the Fed were to deliver more stimulus, it would have “some positive effects.”

Fed’s Plosser Opposes Further Bond Buying -- The Federal Reserve doesn’t need to support the economy through further bond-buying, a key official said Thursday. “I don’t think more easing is needed right now,” said Federal Reserve Bank of Philadelphia President Charles Plosser in an interview with CNBC from Jackson Hole, Wyo. That’s where Fed Chairman Ben Bernanke is scheduled to speak at a symposium Friday.

Fed's Plosser Says Cost of More Bond Buying Outweighs Benefits - Federal Reserve Bank of Philadelphia President Charles Plosser said the potential risks involved with another round of large-scale bond buying outweigh the benefits. “I don’t think it really meets the cost-benefit test right now,” Plosser, who doesn’t have a vote on policy this year, said today in a CNBC interview. “It’s possible they could bring down interest rates somewhat, but we have to remember it’s not that simple given the headwinds that the economy faces.” The Fed has expanded its balance sheet with two rounds of bond purchases, known as quantitative easing. In the first, starting in 2008, the Fed bought $1.25 trillion of mortgage- backed securities, $175 billion of federal agency debt and $300 billion of Treasuries. In the second round, announced in November 2010, the Fed bought $600 billion of Treasuries. “Increasing accommodation creates risks, and we need to balance those,” Plosser said. “We have to take into account the size of the risk we are taking, and the size of the balance sheet is a risk.”

Fed’s Bullard: Negative Interest on Reserves Is a Stimulus Option - A key Federal Reserve official said Friday he sees potential value in charging banks to park reserves on the central bank’s balance sheet. In an interview with Dow Jones Newswires on the sidelines of the Federal Reserve Bank of Kansas City’s research conference in Jackson Hole, Wyo., St. Louis Fed President James Bullard says he sees potential benefit from imposing negative interest rates on the excess reserves banks currently park at the Fed. Banks are now currently paid 25 basis points to keep money at the Fed. Even at such a negligible level, banks have parked massive amounts of cash at the central bank that could be put to work in the economy. “I’m becoming more sympathetic” to the idea a new avenue of monetary policy stimulus could involve the Fed moving into “negative territory,” Mr. Bullard said. From the current level, “you could go to minus 25 or minus 50 (basis points). That gives it more punch” than simply cutting the level to zero, he said. If negative rates were put in place, “it would definitely change the calculus for the banks,” Mr. Bullard said. The official noted “support has waxed and waned” inside the Fed for this action, but “now that other countries have tried negative rates, I think we could do that as well.”

QE3 Mechanism Is Broken - When Ben Bernanke launched QE 2 in 2010, he outlined a third mandate for the Federal Reserve - the boosting of consumer confidence. He stated that the goal of QE 2 was to boost asset prices in order to spur consumer confidence through the "wealth effect", which should translate into economic growth. In 2010 he was right, and QE 2 not only boosted asset prices sharply, but also kept the economy from slipping into a recessionary spat. As Friday's speech from the economic summit in "Jackson Hole" draws near, Bernanke should be taking a clue from today's release of consumer confidence in considering his next move. The Conference Board released today a report on consumer confidence that was more than just disappointing. Not only did the consumer confidence index come in at the lowest level since 2011, when the government was last struggling with debt crisis and U.S. ratings downgrade, but the future expectations of the economy plunged 8 full points from 78.4 in July to 70.5. The three components on future business conditions, employment, and income all deteriorated sharply, showing a consumer struggling to make ends meet. This pessimism, particularly in incomes, poses a risk for retailers going forward and suggests weaker GDP data ahead.  It is not just the Conference Board's consumer confidence index that is showing deterioration as of late. In a recent post we showed the Rasmussen and Bloomberg polls as well. The story is the same, with confidence sliding markedly in recent months.

The unintended consequences of QE - By now, everyone is familiar with the mantra that QE is [arghh!] money-printing and that a major unintended consequence could be a chronic and uncontrollable inflation. (One could call this the goldbug, Austrian, Republican case). Less well known, perhaps, is the theory that QE could be just as unexpectedly deflationary — because long-term micro yields come to threaten a number of financial sectors outright, as well as general expectations of risk-free returns which lead to capital destructive feedback loops. FT Alphaville readers will be more familiar with this second point, since it’s something we’ve been arguing for a while… (see examples from our compendium on the matter here, here and here, including Cardiff Garcia’s epic case against lowering the IOER ). Case in hand, the latest Federal Reserve Bank of Dallas working paper from William (Bill) White entitled “Ultra Easy Monetary Policy and the Law of Unintended Consequences. In many ways it’s a radical shift in mindset from the central banking arena, not least because of the statement on central bank independence that’s made right from the offset (our emphasis): It is also the case that ultra easy monetary policies can eventually threaten the health of financial institutions and the functioning of financial markets, threaten the “independence” of central banks, and can encourage imprudent behavior on the part of governments. None of these unintended consequences is desirable. Since monetary policy is not “a free lunch”, governments must therefore use much more vigorously the policy levers they still control to support strong, sustainable and balanced growth at the global level.

Investors and economists agree: No QE3 -- More stimulus from the Federal Reserve would probably boost the stock market, but regardless, both investors and economists agree: They don't want QE3. In a CNNMoney survey of investment strategists, 93% said they don't think the Federal Reserve should announce more stimulus at its next meeting. And 77% of economists surveyed agreed. The majority of both groups said further stimulus would boost the stock market, but would have little to no impact on the broader economy. "Nobody likes it when the punch bowl is taken away, but the party has gone on too long," said Doug Cote, chief market strategist at ING Investment Management. "It's time to get back to a normal economic recovery." Plus, with each additional shot of stimulus, experts say the impact lessens. "They're just not getting as big a bang for their buck as they have in the past,"

Damage from possible QE3 has already started - Those (including some of the dovish members of the FOMC) who still think that the policy of a new round of asset purchases is a low risk proposition should only take a look at US gasoline futures. They hit a multi-year high within the past couple of hours (Sunday night). Some are blaming this on the Tropical Storm Isaac, others on the Amuay plant explosion in Venezuela. The reality however is that these price increases are for the most part in anticipation of QE3:  Bloomberg: - Bernanke Boosts Oil Bulls to Highest Since May: Energy Markets  -- Hedge funds raised bullish bets on oil to a three-month high on signs that Federal Reserve Chairman Ben S. Bernanke will take measures to bolster U.S. economic growth and spur a rally in commodities. Money managers increased net-long positions, or wagers on rising prices, by 18 percent in the seven days ended Aug. 21, Let's not pretend that central bank asset purchases and commodity prices are unrelated as some have suggested. QE3 carries with it risks of a spike in headline inflation that will end up damaging an already fragile consumer sentiment and completely negating any positive effects from additional liquidity. In fact the damage to the economy from elevated fuel prices has already started.

What To Expect From Bernanke At Jackson Hole - With the world's suckers investors (CEOs, politicians, and peons alike) all hanging on every word the man-behind-the-curtain has to say on Friday, Stone & McCarthy has crafted an excellent 'what-if' of key takeaways and interpretations ahead of Friday's Jackson Hole Symposium speech by Bernanke. Will Draghi toe the line? Will China be pissed? and what rhymes with J-Hole? On balance, we think Bernanke will save the policy directives for the FOMC meeting (potentially disappointing the market) while highlighting that the Committee is vigilant and flexible, and ready to act.

Draghi Skips Jackson Hole Ahead of Pivotal ECB Meeting - European Central Bank President Mario Draghi will not attend the annual Jackson Hole meeting of central bankers at the end of this week due to a heavy workload, the ECB said on Tuesday as its policymakers gear up for a critical meeting on Sept. 6. Draghi had been expected to speak at the Jackson Hole gathering, but the retreat in the U.S. state of Wyoming falls just as ECB policymakers are hammering out the details of a new bond-buying plan aimed at tackling the euro zone debt crisis. When asked whether Draghi was no longer planning to attend the Jackson Hole meeting, an ECB spokesman said: "That's correct ... He has a very heavy workload in the coming days."

Lagarde Never Planned to Attend Jackson Hole This Year - European Central Bank President Mario Draghi drew world-wide attention, and inevitable speculation, on Tuesday by bowing out of the Federal Reserve Bank of Kansas City’s annual Jackson Hole symposium due to “a heavy workload.” This sparked chatter on Twitter Tuesday about whether International Monetary Fund Managing Director Christine Lagarde would also drop out. But she was never listed on the program. Representing the IMF at this year at Jackson Hole will be David Lipton, the fund’s No. 2 official, though he isn’t scheduled to deliver a speech at the conference. Ms. Lagarde made waves at the conference a year ago by delivering a major speech, less than two months into her tenure, calling for “urgent recapitalization” of European banks. The Europeans didn’t like the message very much. And they’ve spent the past year avoided other bits of advice she offered from that speech.

Who’s In and Who’s Not at Fed Jackson Hole Meeting - One of the more notable dignitaries scheduled to attend the Federal Reserve’s annual meeting in Jackson Hole this year is Hu Xiaolian, vice governor of the People’s Bank of China. The Jackson Hole meeting always attracts central bankers from around the world, but top Chinese officials have tended not to attend. The attendance of Ms. Hu — who is also the administrator of China’s massive foreign exchange holdings — is a sign of China’s continuing efforts to work more closely with global financial policy makers. It is also a reminder that the Fed’s monetary policy decisions have important consequences for Chinese policy makers, who tie their currency to the dollar. Because of that link, the Fed’s easy money policies have in the past caused inflation problems in China. The big no-show on the Jackson Hole guest list is Mario Draghi, president of the European Central Bank, who pulled out earlier this week. Mr. Draghi is wrestling with tough decisions back home ahead of a Sept. 6 policy meeting and likely figured he could live without the attention heaped on central bankers in Jackson Hole. Bank of Israel governor Stanley Fischer will take the place of Mr. Draghi on a panel on which Mr. Draghi was scheduled to participate Saturday.

At pivotal moment, Bernanke low on economic ammo - When he took the stage for his annual address in Jackson Hole, Wyo., four years ago, the Federal Reserve chairman had a broad arsenal of weapons that he would soon use to rescue the U.S. financial system from collapse. On Friday, he returns to the yearly economic conference still facing huge economic challenges, but now he’s far more constrained by both politics and limitations on what the Fed can do to help the economy. With his speech sandwiched between the national political conventions, there is more political pressure on Bernanke than perhaps ever before. Republicans are insisting that he refrain from doing anything more to try to pump up economic growth. Democrats, who tend to be more reserved on the matter, are demanding that he take new action.The truth, Bernanke has said repeatedly, is that the Fed’s ability to change the direction of the economy is limited, and it’s not clear the benefits of new measures outweigh the potential costs.

Come on Bernanke, fire up the helicopter engines - Some practical men do not like the idea of a thought experiment. Yet Friday’s address by Ben Bernanke at the meeting of central bankers in Jackson Hole, Wyoming makes it appropriate for one such experiment: to ask what would happen if, in the main industrial countries, currency notes were to drop from helicopters as a deliberate act of policy?No one has explicitly argued for this as a deliberate act. But Milton Friedman raised the possibility in an essay he wrote on the “optimum quantity of money”. He mentioned the helicopter as a device to avoid discussing the intricacies of the banking system, which he had done sufficiently on other occasions. Years later, Mr Bernanke described various expedients, including quantitative easing, as being the nearest equivalent to such a drop. This led to some on Wall Street naming him “Helicopter Ben”. However, there is an important difference. QE will work through the banking system. Helicopter money is available for those fit enough to pick it up.John Maynard Keynes raised a similar possibility during the 1930s when he said that if there was no better way of getting out of a depression, pound notes should be buried in the ground, leaving it to the well-tried forces of self interest to dig them up again.  Let us assume that, impatient with the endless stagnation of the world economy, countries fire up their helicopter engines. What if some countries stay out? If China abstains it will lead to the appreciation of the renminbi, which much of the world is hoping for. If the eurozone abstains, this will lead to an appreciation of the euro and will probably put paid to the membership of the peripheral countries.

2012 Jackson Hole Economic Policy Symposium - FRB Kansas City

Bernanke: QE has and can work more — Federal Reserve Board Chairman Ben Bernanke called the stagnation in the U.S. labor market a grave concern and said he was open to using more quantitative easing as needed to help the economic recovery. In a speech at the Fed’s Jackson Hole retreat on Friday, Bernanke did not pre-commit to taking action, but he did reinforce the case for more asset purchases.  Read full text of comments. . He downplayed the costs of quantitative easing and said the program has worked to “provide meaningful support” to the recovery. Bernanke called current growth “tepid” and said the economy was “far from satisfactory.” “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor-market conditions in a context of price stability,” Bernanke said.

Bernanke: Monetary Policy since the Onset of the Crisis - From Fed Chairman Ben Bernanke at the Jackson Hole Economic Symposium: Monetary Policy since the Onset of the Crisis In sum, both the benefits and costs of nontraditional monetary policies are uncertain; in all likelihood, they will also vary over time, depending on factors such as the state of the economy and financial markets and the extent of prior Federal Reserve asset purchases. Moreover, nontraditional policies have potential costs that may be less relevant for traditional policies. For these reasons, the hurdle for using nontraditional policies should be higher than for traditional policies. At the same time, the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant....the economic situation is obviously far from satisfactory.... policy could still be effective near the lower bound. Now, with several years of experience with nontraditional policies both in the United States and in other advanced economies, we know more about how such policies work. It seems clear, based on this experience, that such policies can be effective, and that, in their absence, the 2007-09 recession would have been deeper and the current recovery would have been slower than has actually occurred.

Bernanke Says He Wouldn’t Rule Out Further Bond Buying - Federal Reserve Chairman Ben S. Bernanke said he would not rule out further bond purchases to boost growth and reduce unemployment, which he called a “grave concern.”  “The costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant,” Bernanke said today in a speech to central bankers and economists at an annual forum in Jackson Hole, Wyoming.  Bernanke’s speech comes two weeks before he leads a meeting of the Federal Open Market Committee to decide whether an expansion of the Fed’s record stimulus is needed to spur growth. Two rounds of large-scale asset purchases totaling $2.3 trillion have so far failed to reduce the jobless rate below 8 percent more than three years into the recovery.

Bernanke Highlights: Will the Fed Do More? -- Federal Reserve Chairman Ben Bernanke delivered a closely watched speech on monetary policy today at Jackson Hole. The following excerpts provide answers to some pressing questions. Will the Fed do more? Sounds like it. “The unemployment rate remains more than 2 percentage points above what most FOMC participants see as its longer-run normal value… The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years… Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

Bernanke signals more stimulus, steps into election battle — A strong signal Friday from Chairman Ben Bernanke that more economic stimulus is on the way puts the Federal Reserve squarely in the middle of the fight for the White House in November’s presidential election.  Speaking at the Fed’s annual retreat in the Wyoming resort city of Jackson Hole, Bernanke offered a spirited defense of his unconventional efforts over the past three years to stimulate economic activity through the purchase of government and mortgage bonds. And he seemed to signal that more steps would be taken soon. “As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation,” Bernanke said. “The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.”  Financial markets took those words as a sign of new action, probably as early as the Fed’s next meeting of the rate-setting Federal Open Market Committee on Sept. 12-13.

Analysis: Bernanke Clears the way for QE3 in September - First from Jon Hilsenrath and Kristina Peterson at the WSJ: Bernanke Signals Readiness to Do More Federal Reserve Chairman Ben Bernanke offered a robust defense of the effectiveness of the central bank's easy-money policies in his speech Friday at the Fed conference here, and left little doubt that he is looking toward doing more to give the economy a lift at the Fed's next policy meeting in September.As Hilsenrath notes, Bernanke argued: 1) QE has been effective, 2) Additional QE would be helpful, 3) the costs of additional QE "appear manageable", and 4) the economy is "far from satisfactory.Bernanke's comments suggest QE3 will be launched very soon, perhaps on September 13th following the next FOMC meeting.

The Road to QE3 - If the Federal Reserve eases monetary policy again at its Sept. 13 meeting, as I expect, it will be its most meticulously debated, planned and scrutinized move in recent memory. The case for actionhas been apparent at least since the spring when it became clear the economy would underperform the Fed's repeatedly lowered economic forecasts. Yet Ben Bernanke spent much of the press conference following the June meeting, when the Fed extended Operation Twist (the purchase of long-term bonds financed by selling short term bonds) on the defensive over why the Fed hadn't done more.  In August, it again chose not to pull the trigger. But it did release a statement that hinted the point was drawing near. The minutes to that meeting released three few weeks later suggested it would take an immediate and powerful improvement in the economy to stay the Fed's hand. When Mr Bernanke made his annual appearance at the Kansas City Fed's economic symposium in Jackson Hole, Wyoming, today, the world was wondering whether he would send a definitive sign that action was coming. He did not, merely repeating the key sentence from the August statement, that the Fed "will provide additional policy accommodation as needed to promote a stronger economic recovery." This should not have been surprising; Fed chairmen don't like to front run the Federal Open Market Committee.

Fed Watch: Bernanke at Jackson Hole -- A current acute awareness of forecast bias leaves me almost hesitant to comment on today's speech by Federal Reserve Chairman Ben Bernanke. What is forecast bias? Here I am thinking of the bias of Fed watchers struggling to interpret every bit of data and ever comment from policymakers in the context of their own views of the economy. One version of such bias is thinking the Federal Reserve will do what you think they should do. Because you view the economy as weak, you assume the Fed will do so as well, and react appropriately. Such a bias, of course, will lead to an erroneous interpretation of the data and Fedspeak as it relates to monetary policy. I fear falling into a variation of this bias. For months, the flow of data and the Federal Reserve's own forecasts indicate the Fed will continue to fall short of both its employment and price stability mandates. This has been confirmed by numerous Fed speakers including Bernanke himself. Indeed, Bernanke has often stated disappointment with the pace of the recovery and, in particular, the costs of high levels of long-term unemployment. He has also said that nontraditional policy tools continue to be effective, indicating that the Fed could do more to boost the recovery. Yet such action has been fairly limited. I tend to see the extension of Operation Twist as simply maintaining the status quo, not additional easing. Expectations for another round of quantitative easing have been disappointed for the last three meetings. The bar to additional action has simply been higher than many believed. Am I picking out what I want to hear, and ignoring what I don't?

Two more reviews of Bernanke's Speech: Weak Labor Market "a grave concern" -- From a research note today by Andrew Tilton at Goldman Sachs:  In the most striking line of the speech, Bernanke professed “grave concern” about the weak labor market and the potential human and economic cost of persistently high unemployment. Although consistent with prior comments about long-term unemployment and the risk of hysteresis, these are very strong words from a Fed chairman. When one has a “grave concern”, action—quite possibly aggressive action─is appropriate. And from Tim Duy at Economists View: Bernanke at Jackson Hole On net, Bernanke's speech leads me to believe the odds of additional easing at the next FOMC meeting are somewhat higher (and above 50%) than I had previously believed. His defense of nontraditional action to date and focus on unemployment point in that direction. This is the bandwagon the financial press will jump on. Still, the backward looking nature of the speech and the obvious concern that the Fed has limited ability to offset the factors currently holding back more rapid improvement in labor markets, however, leave me wary that Bernanke remains hesitant to take additional action at this juncture. This suggests to me that additional easing is not a no-brainer, but perhaps that is just my internal bias talking.

Bernanke in the Hole - Krugman - Jackson Hole, that is. My quick summary:

  • 1. Things are really, really bad.
  • 2. The damage is cumulative; the longer this goes on, the worse the prospects for the future.
  • 3. The Fed has the power to do a lot to help the economy.
  • 4. While you can argue that there are costs to action, the case for major costs is quite weak, and in particular much weaker than the case for major benefits.
  • 5. Therefore, what we at the Fed will do is, um, sit on our hands some more, and think very seriously about maybe, someday, doing something.

Bernanke on the defensive - In his keynote speech at Jackson Hole, Bernanke reviewed the Fed’s actions since 2007, concluded that they have done a lot of good, and ended on a note suggesting that more of the same is in order. Bernanke is fighting critics on three fronts: those who say that he has over-reached, those who say that zero interest rates have rendered the Fed powerless, and those who say that he hasn’t gone nearly far enough. He has something for all of his critics in this speech. First, he addresses the most politically powerful faction, especially now that Paul Ryan has been added to the Republican ticket. And so when defending quantitative easing and other non-traditional tools of monetary policy, Bernanke is at pains to paint them as being fully in line with “the ideas of a number of well-known monetary economists, including James Tobin, Milton Friedman, Franco Modigliani, Karl Brunner, and Allan Meltzer”. Translation: this is mainstream economics, even on the right, and if Republicans don’t trust me, they should at least trust Milton Friedman.

Jackson Hole Paper Strongly Critiques Fed - Columbia University professor Michael Woodford launched a stinging critique of the policies of the Federal Reserve and other central banks in the wake of the financial crisis, accusing them of “wishful thinking” and saying that some of the steps the Fed has taken have backfired. Mr. Woodford is delivering one of the more closely watched — and lengthy — papers at the Kansas City Fed’s Jackson Hole conference today. Outside of the comments by Fed Chairman Ben Bernanke himself, few presentations here are likely to generate as much buzz among the academics and central bankers gathering here. (Read the whole paper here.) Mr. Woodford has argued for years that central banks should make firm commitments to keep interest rates low when rates are near zero and the economy is still floundering. Such commitments, he argues, can jolt households and businesses to bring forward future spending and thus enliven the economy. The Fed has tried to apply some of the academic’s thinking in its own approach to monetary policy, but it hasn’t applied all of his ideas. For instance, it has signaled it expects to keep rates low through 2014, but it hasn’t committed to do so.

A Critique of Fed Policy - Many economists regard asset purchases as the most powerful tool the Federal Reserve could use to stimulate the economy. But Michael Woodford, an economics professor at Columbia University, argued Friday that a second option would actually be much more effective – both because it would have significant economic benefits, and because the benefits of asset purchases are significantly overstated. The option favored by Professor Woodford is a modified version of the Fed’s statement that it intends to keep interest rates near zero until late 2014. In a paper presented at the annual monetary policy conference in Jackson Hole, Wyo., he said that the Fed should instead declare its intention to hold down interest rates until the economy meets certain benchmarks, like a specified increase in economic output. In other words, to increase growth now, the Fed must promise to tolerate higher inflation later. The Fed’s chairman, Ben S. Bernanke, has repeatedly resisted similar ideas, but in a separate speech at the conference earlier on Friday, he appeared to suggest a greater receptivity. The core of Professor Woodford’s argument is that changes in Fed policy can happen for two reasons: either its economic outlook changes, or the Fed decides to change the way that it responds to a given economic outlook – in other words, a change in strategy, or in circumstances. The Fed has described its forecasts as reflecting a change in circumstances, not strategy. It has said that it is simply describing the way that it is most likely to act if the economy slogs along at the pace it presently predicts.

Jackson Hole Paper: Monetary Policy Redistributes Wealth - Central banks can help redistribute wealth after an economic shock, but must be careful in choosing when to do so, two Princeton University economics professors argue in a new paper. Economic jolts, such as the recession following the 2008 financial crisis, can hit some sectors harder than others. For example, the banking sector can lose a large chunk of its wealth following a financial shock, write Markus Brunnermeier and Yuliy Sannikov in a paper released Saturday at the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole, Wyo. In the recent recession, households also dramatically scaled back their spending to build back their savings. In addition to their traditional role controlling short-term interest rates to influence overall economic growth, central banks can help influence how different corners of the economy recover and rebuild their wealth after a downturn, the paper argues. Cutting interest rates, for example, can reduce banks’ funding costs. Changes in interest rates can also affect asset prices, as can programs in which the central bank buys assets directly, like the Federal Reserve’s bond-buying programs. Since different groups hold different amounts and types of assets, changes in monetary policy can help specific sectors harmed by a downturn.

The Jackson Hole Speech People Should Long Remember - Federal Reserve Chairman Ben Bernanke spoke at today’s Jackson Hole conference, and sent markets surging on his nuanced hints that the central bank is likely to find ways to pump more money into the economy. Another speaker from another central bank delivered a message that the markets paid little attention to, but should long remember: Andy Haldane, executive director for financial stability at the Bank of England. Intense, thin as a whippet and sharp as a razor, Haldane is one of the world’s smartest financial regulators. In his speech, “The Dog and the Frisbee,” Haldane warned that the growing complexity of markets and banks can’t be controlled with increasingly complex regulations. Tapping deep into behavioral economics, Haldane argued that regulators need to bear in mind five fundamental limitations of the human mind:

  • 1) since even computers can’t track all the necessary variables in the massively interlinked financial world, there is little hope that humans can;
  • 2) intense information feedback from markets makes signals almost impossible to detect in the noise, so that “the more complex the environment, the greater the perils of complex control”;
  • 3) even when the variables that decisively affect outcomes are known, it’s hard to know which ones will matter the most in a given situation, and it is hard for regulators to resist the temptation to pay more attention to the most vivid factors;
  • 4) regardless of the massive amounts of data available, the sample of financial crises remains relatively small, making it hard to form reliable conclusions about what works best to prevent or cure them; and
  • 5) complex and detailed rules lead regulators and financial institutions alike to “manage to the rules,” tiptoeing right up to the hot red line at which a crisis can be triggered.

Michael Woodford Endorses Nominal GDP Level Targeting -- Michael Woodford, arguably the top monetary economist in the world, endorsed nominal GDP level targeting today at the Jackson Hole Economic Symposium.  He did so as part of a broader critique of the Fed's monetary policy over the past four years.  Among other things, he makes the following points in his critique:

  • (1)  Quantitative Easing has not been very effective because the increase in monetary base it created is not expected to be permanent.  If it were expected to permanent, then the future price level and nominal income level would also be expected to permanently increase.  Households and firms would respond to this development by increasing nominal spending today.
  • (2)  The forward guidance provided by the Fed on the expected path of the target federal funds rate is doing little-to-nothing to restore robust economic growth.  When the Fed lowers the expected path of the policy interest rate in its forecast is it because the Fed is truly adding monetary stimulus or is it because the Fed now expects a weaker economy?  In the latter case, the Fed would be seen as simply maintaining the status quo of weak, anemic growth.  See here for more on this point.
  • (3)  Large scale asset purchases have not been effective in driving down long-term interest rates.  If anything, it is the weak economy that explains most of the decline in yields. .

BOE’s Posen: Fed Should Act to Help Housing Market - The Federal Reserve should consider acting to help the troubled housing market, Bank of England official Adam Posen said Friday. Mr. Posen, an external member of the Bank of England’s monetary-policy committee, urged central banks not to shy away from taking steps to target specific sectors of the economy that need the most help at the Federal Reserve Bank of Kansas City’s economic symposium Friday. That type of action “gives you bigger bang for your buck,” Mr. Posen said, commenting on a paper by Columbia University professor Michael Woodford. Mr. Posen encouraged the Fed to buy mortgage-backed securities as part of a future asset-buying program. “They have the luck they’re allowed to buy MBS,” he said in a brief interview with Dow Jones Newswires. That is the part of the economy that most needs help, and “they should take advantage of that,” he said.

The Fed and Fiscal Responsibility --  If the US goes off the fiscal cliff – that is, if tax increases and spending cuts go into effect in 2013 as currently scheduled – can monetary policy actions offset the macroeconomic impact?  Ben Bernanke doesn’t think so – indeed he’s certain they can’t – and he has said as much. But on some level he must be wrong.  True, it’s hard to think of any feasible monetary policy action that would both be strong enough and have a sufficiently quick impact to offset the fiscal cliff directly.  But what matters more for monetary policy is not the direct effect but the effect on expectations.  Surely the Fed could alter expectations of future monetary policy in such a way that the resulting increase in private spending would be enough to offset the decreased spending due to fiscal tightening.  Just think, for example, if the Fed were to increase its long-run inflation target.  If nothing else, a sufficiently large increase in long-run US inflation expectations would make the dollar sufficiently unattractive to result in an export boom that would offset the fiscal tightening.  More important, perhaps, it would make currency and Treasury securities less attractive to Americans and encourage them to do other things with their wealth, such as buying houses and durable goods and investing in productive capacity.

Deposits at US commercial banks approaching $9 trillion - Here is another reason QE3 will do little to change bank behavior or encourage lending. US commercial banks are awash with liquidity these days as deposits hit a new high (approaching $9 trillion). Banks are already struggling to put cash to work. The rate of deposit growth exceeds that of new loan demand and credit approvals. The bottleneck is not the availability of liquidity - there is $1.77 trillion of available lending capacity waiting on the sidelines. If the Fed were to implement a new asset purchase program, the level of liquidity in the banking system would increase even further without any material change in the rate of credit expansion.

Interest on Excess Reserves and Cash Parked at the Fed -- NY Fed - The European Central Bank recently lowered from 0.25 percent to zero the interest rate it pays on funds that Eurozone banks hold on deposit with it. On the same day, Denmark’s central bank began charging banks 0.20 percent (that is, paying a negative interest rate) on certain deposits. These events have led commentators to ask what would happen if the Federal Reserve were to reduce the interest rate that banks in the United States earn on funds in their reserve accounts from its current level of 0.25 percent. In particular, some people wonder if lowering this rate would lead banks to hold smaller deposits at the Fed and instead lend out some of these “idle” balances. In this post, we use the structure of the Fed’s balance sheet to illustrate why lowering the interest rate paid on reserve balances to zero would have no meaningful effect on the quantity of balances that banks hold on deposit at the Fed.

Fed Economists Play Down Effect of Cutting Interest on Excess Reserves - Lowering the interest rate the Federal Reserve pays on excess reserves wouldn’t have a meaningful effect on the overall money supply, two economists argued in a Federal Reserve Bank of New York blog post Monday.Central-bank policy makers are weighing whether to cut this interest rate from its current 0.25% level, according to minutes of the Fed’s last policy meeting, released last week. Such a move would be meant to spur lending by giving banks less incentive to hold money with the Fed. But Gaetano Antinolfi, a senior economist with the Fed’s Board of Governors, and Todd Keister, assistant vice president in the New York Fed’s research and statistics group, played down the effects of such a move.Most notably, they said, it wouldn’t change the amount of bank reserves held with the Fed, so it wouldn’t shift basic measures of the money supply. That is because the amount of bank reserves held at the Fed beyond the required level is largely tied to the size of the Fed’s securities holdings, loans and other assets. Unless the Fed shifted the size of those holdings, the authors argued, bank reserves wouldn’t change.

U.S. monetary policy since the financial crisis - The Federal Reserve Bank of New York announced on Thursday that it had sold the last remaining securities from its Maiden Lane III portfolio, successfully closing the chapter on its assistance to insurance giant AIG. I thought this would be a good occasion to review the various measures that the Fed implemented over the last 5 years-- what they were attended to accomplish, what they did accomplish, and the significance of Thursday's announcement. In 2008, the Fed implemented a series of emergency lending measures which are represented by the orange region in the graph below of the total assets held by the Federal Reserve. The graph below displays the individual components within that lending category. The most important among these were currency swaps, the Commercial Paper Funding Facility, and the Term Auction Facility. Most of this lending had ended (with all loans repaid with interest) by March of 2010. There was a brief resumption of currency swaps (lending to foreign central banks) as concerns about the European financial situation heightened at the start of this year, though at the moment these are back down to $26 billion, compared to $570 B in November 2008. The Term Asset-Backed Securities Loan Facility (magenta in the graph below) lasted a little longer than most of the other lending, though today it is below $3 B.

Fed steps up release of results, says first-half income up  - The Federal Reserve said on Monday it was releasing quarterly unaudited results of its operations, stepping up efforts to enhance transparency amid criticism from Republicans who are demanding more accountability from the U.S. central bank. The Fed Board in Washington had previously published annual financial statements, which also showed how much money it distributed to the U.S. Treasury. Its release of first and second quarter results detailed a sharp rise to $46.447 billion in its payments to the Treasury, from $40.456 billion in the first six months of 2011, reminding U.S. taxpayers the Fed has been a significant source of income.

Steve Keen on the Minsky Singularity and the Debt Black Hole's Event Horizon (video) Welcome to Capital Account. Have we reached the event horizon of a Minsky singularity, which is sucking us into a black hole of all consuming debt? Is this the point of no return? There have been many efforts to paper over the debt, but it hasn't gone away. Economist Steve Keen, author of "Debunking Economics: The Naked Emperor Dethroned," will explain. He agrees that ZIRP is resulting in increased risk taking by banks. Yet the bad practices of banks, including the manipulation of markets and profiting from ponzi schemes, are ignored in the economic models of academics who influence policy. Professor and economist Steve Keen will tell us how this is possible.

Romney Pledges a Fed That Will Screw Workers - Last week, Mitt Romney committed himself to picking a Federal Reserve Board chairman that will try to keep workers' wages down, likely costing them tens of thousands of dollars over the next decade. You remember reading the front page news stories on this pronouncement? Of course you didn't read them, because the media largely ignored President Romney's statement about his choice of Fed chairs. And all of them ignored its implications for people's wages and living standards. The much more important policy decisions that allow people like Mitt Romney to be incredibly wealthy and the rest of the country to be struggling are totally off the media's radar screen.Romney's statement about the Fed fits in the latter category because he said that he would pick a chair who supports a "strong dollar." The implication is that he wants the Fed to run policies that keep the dollar overvalued relative to other currencies, making US goods uncompetitive in international markets.

More Jabs at Fed, Not All Land - In just the past few days, we’ve had Republican presidential nominee Mitt Romney state definitively that if he is elected he will replace Fed Chairman Ben Bernanke once his current term ends. We’ve had a Republican Party platform, for what it’s worth, that supports audits of monetary policy decisions, a notion this column has argued threatens needed Fed independence on rate-setting. Now we have Sen. Bob Corker (R., Tenn.) taking to the pages of The Financial Times to say, among other things, that Bernanke lacks professional humility. We’ll concentrate on Sen. Corker, whose “op-ed,” which went online Tuesday and is in FT print today, makes a variety of charges. On the humility issue, the relevant Corker quote is this: “It would be helpful to have a Fed chairman who acted with a greater sense of humility about what monetary policy can achieve… his [Bernanke's] unwillingness to stand up and say that there are limits to what monetary policy can accomplish is disturbing…” Curious, because as reporter Kristina Peterson noted Tuesday on Dow Jones Newswires and, there are plenty of public comments from Bernanke about the limits of monetary actions and how he hoped others (Congress) would help out with the less-than-stellar recovery via some fiscal handicraft.

The Young Turks Interviews Matt Stoller on the Audit of the Federal Reserve - In this interview, Cenk Uygur of the Young Turks and Matt Stoller discuss how Congress worked in 2009-2010, and why an audit of the Federal Reserve was able to get through a dysfunctional political system. It’s a long interview, with some echoing at the beginning, but it’s the most comprehensive discussion of how the fight actually happened on the House side.

If Interest Rates Go Negative . . . Or, Be Careful What You Wish For - NY Fed - The United States has slid into eight recessions in the last fifty years. Each time, the Federal Reserve sought to revive economic activity by reducing interest rates (see chart below). However, since the end of the last recession in June 2009, the economy has continued to sputter even though short-term rates have remained near zero. The weak recovery has led some commentators to suggest that the Fed should push short-term rates even lower—below zero—so that borrowers receive, and creditors pay, interest. One way to push short-term rates negative would be to charge interest on excess bank reserves. The interest rate paid by the Fed on excess reserves, the so-called IOER, is a benchmark for a wide variety of short-term rates, including rates on Treasury bills, commercial paper, and interbank loans. If the Fed pushes the IOER below zero, other rates are likely to follow.   Without taking a position on either the merits of negative interest rates or the Fed's statutory authority to fix the IOER below zero, this post examines some of the possible consequences. We suggest that significantly negative rates—that is, rates below -50 basis points—may spawn a variety of financial innovations, such as special-purpose banks and the use of certified bank checks in large-value transactions, and novel preferences, such as a preference for making early and/or excess payments to creditworthy counterparties and a preference for receiving payments in forms that facilitate deferred collection. Such responses should be expected in a market-based economy but may nevertheless present new problems for financial service providers (when their products and services are used in ways not previously anticipated) and for regulators (if novel private sector behavior leads to new types of systemic risk). This post supplements an earlier post in Liberty Street Economics that reviewed possible disruptions that could result from zero interest rates.

Richmond Fed president on keeping inflation stable -This Friday central bankers from around the world will gather in Jackson Hole, Wyoming to hear Fed Chairman Ben Bernanke talk about what the Fed can and might do to help the economy. And there are differing views about whether the Fed should do something. A couple weeks back, I spoke with one of the Fed's so-called doves...who told us there should be more monetary stimulus. Today, we're joined by one of the Fed's hawks. Jeffrey Lacker, who heads the Federal Reserve Bank of Richmond. Good morning. Well first of all, how would you describe the U.S. economy right now? LACKER: The economy is expanding but it's been expanding at a disappointingly slow pace. It's something that has been a matter of frustration for a lot of us. There are several reasons for this. I think we built too many homes before the recession so we’re lacking the usual rebound in home construction we usually see. Consumers have been quite cautious of late. Uncertainty about how the fiscal situation is going to be resolved in Washington I think is making it hard to plan and hard to figure out the rate of return on potential projects and I think it's keeping a lot of people on the sideline and finally there seems to be a problem in the labor market. It doesn't seem to be as effective as it usually is at matching unemployed workers with vacant jobs.

Monetary expansion, the dollar, and commodity prices - Economists continue to insist that there is no connection between Fed's monetary expansion and increases in commodity prices, particularly agricultural products globally (discussed here). Here is a typical comment:  If it is commonly believed that the FOMC can cause a worldwide food shortage then we are truly in a dark age of macro. The FOMC has no ability to raise the price of commodities relative to national income, and I can't even imagine the rationale that monetary expansion could somehow increased prices internationally (that is, denominated in foreign currencies). The only way they could raise food prices in real terms is if they could spur increased food consumption domestically, which would be much more likely if they strengthened the dollar than if they weakened it. The FOMC can cause a lot of trouble, but this is just not on the list of problems they can cause, and certainly not via monetary expansion. Unfortunately macroeconomic theory here diverges from market experience. Monetary expansion in the recent past corresponded with significant dollar weakness. The chart below shows the dollar weakening during both QE1 and QE2. "Twist" on the other hand did not involve monetary expansion and only focused on reducing the average duration of treasuries.

Reader Questions On Hyperinflation; Would Printing $50 Trillion Tomorrow Do Anything? - Hyperinflation is a complete loss of faith in currency. In other words, currency becomes worthless in a short period of time.  Is there a risk of high interest rates? Yes. But I do not think that risk is high in the near future. Even assuming I am wrong, high rates are not the same as hyperinflation.  The Fed has tried to revive the credit markets but has essentially failed, except for student loans. Making debt slaves out of students is actually a hugely deflationary force. Moreover and as I have stated many times, the Fed cannot give money away, spend it, or force anyone to spend it. That is a very tough battle for the Fed with attitudes where they are (and as I have mentioned, attitudes are very important). Banks do not want to lend, credit-worthy businesses do not want to borrow, and consumers are still deleveraging. Those are extremely deflationary forces.Ignoring interest on excess reserves (a proviso I mentioned), printing $50 trillion dollars tomorrow might not do anything. Indeed, if $50 trillion printed tomorrow sat as excess reserves (the most likely event), it would have the same effect as if it was buried in the ground, or not printed at all. Such is the nature of a credit-based economy, and a point that has caused hugely inaccurate inflation forecasts from many Austrian economists.

Golden Instability - Paul Krugman - Say this for the GOP: by resurrecting the very bad, no good, truly awful idea of a gold standard, they’ve given us something to talk about. Matthew O’Brien makes one obvious point: anyone who believes that the gold standard era was marked by price stability, or for that matter any kind of stability, just hasn’t looked at the evidence. The fact is that prices have been far more stable under that dangerous inflationist Ben Bernanke than they ever were when gold ruled. I’d like to offer a different take. There is a remarkably widespread view that at least gold has had stable purchasing power. But nothing could be further from the truth. Here’s the real price of gold — the price deflated by the consumer price index — since 1968: That’s a pretty huge range of variation. What’s going on? Well, there may be bubble aspects, but there’s also a pretty clear (and economically understandable) relationship between the real price of gold and the real interest rate: when real rates are low, real gold prices are high. And when are real rates low? High inflation can do that, as it did in the late 1970s; but so can a severe economic slump due to a deleveraging shock, as in recent years.

Inflation Lessons - Paul Krugman - Demand-siders like me saw this as very much a slump caused by inadequate spending: thanks largely to the overhang of debt from the bubble years, aggregate demand fell, pushing us into a classic liquidity trap. But many people — some of them credentialed economists — insisted that it was actually some kind of supply shock instead. Either they had an Austrian story in which the economy’s productive capacity was undermined by bad investments in the boom, or they claimed that Obama’s high taxes and regulation had undermined the incentive to work (of course, Obama didn’t actually impose high taxes or onerous regulations, but leave that aside for now). How could you tell which story was right? One answer was to look at the behavior of ... inflation. For if you believed a demand-side story, you would also believe that even a large monetary expansion would have little inflationary effect; if you believed a supply-side story, you would expect lots of inflation from too much money chasing a reduced supply of goods. And indeed, people on the right have been forecasting runaway inflation for years now. Yet the predicted inflation keeps not coming. ... So what we’ve had is as good a test of rival views as one ever gets in macroeconomics — which makes it remarkable that the GOP is now firmly committed to the view that failed.

Another Alternative Inflation Measure - Krugman - A correspondent alerted me to an interesting alternative measure of inflation beyond the Billion Price Index. Those who claim that inflation is vastly understated often appeal to the authority of Shadowstats, a site that purports to provide true measures of many economic variables. Shadowstats doesn’t come cheap: currently, an annual subscription costs $175. Six years ago, an annual subscription cost … $175.

 Personal Consumption Expenditures: Price Index Update  - The monthly Personal Income and Outlays report for July was published today by the Bureau of Economic Analysis. The first chart shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. The latest Headline PCE price index year-over-year (YoY) rate of 1.30% is a decrease from last month's 1.52%. The Core PCE index of 1.65% is a decrease from the previous month's 1.79%.  I've calculated the index data to two decimal points to highlight the change more accurately. It may seem trivial to focus such detail on numbers that will be revised again next month (the three previous months are subject to revision and the annual revision reaches back three years). But PCE is a key measure of inflation for the Federal Reserve, and the price increase in oil and gasoline, although now well off their interim highs, puts consumer behavior in the spotlight.  In the past, a core PCE range of 1.75% to 2% is generally mentioned as the target for the Federal Reserve's price-stability mandate. However, the Fed has now explicitly identified 2% as the long-term target: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. (See the January 25, 2012 Press Release here.)  For a long-term perspective, here are the same two metrics spanning five decades.

Two Measures of Inflation: New Update - The BEA's Personal Consumption Expenditures Chain-type Price Index for July, released yesterday, shows core inflation below the Federal Reserve's 2% target at 1.65%. In contrast, the Core Consumer Price Index, also data through July, is above the target at 2.10%. The Fed, of course, is on record as using Core PCE as its inflation gauge:  [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.

Vital Signs Chart: Fed and Inflation - The inflation rate is below the Federal Reserve’s 2% goal. That gives central-bank officials room for more steps to spur the economy without sending prices surging. The core PCE price index — the Fed’s preferred inflation measure — was running just 1.6% higher than a year ago in July, the lowest rate since October. Officials have indicated they may do more unless the economy improves substantially.

Fed's Beige Book: Economic activity increased "gradually", Residential real estate shows "signs of improvement" -- Fed's Beige BookReports from the twelve Federal Reserve Districts suggest economic activity continued to expand gradually in July and early August across most regions and sectors. Six Districts indicated the local economy continued to expand at a modest pace and another three cited moderate growth; among the latter, Chicago noted that the pace of growth had slowed from the prior period.  This is a downgrade from the previous beige book that reported "modest to moderate" growth. And on real estate:  Housing markets across most Districts exhibited signs of improvement, with sales and construction continuing to increase. Dallas reported significant levels of buyer traffic, Richmond noted strong pending sales, and Minneapolis and St. Louis mentioned increases in building permits. New York, Philadelphia, and Chicago indicated improvements as well, but characterized the progress as slow and modest. Declines in inventory levels were reported in Boston, New York, Philadelphia, Atlanta, Dallas, and San Francisco; these declining inventories put some upward pressure on prices according to Boston, Atlanta, and Dallas. A reduction in the stock of distressed properties was mentioned in New York, Richmond, and San Francisco. In Philadelphia and Kansas City, the possibility of shadow inventory entering the market remains a concern. Commercial real estate market conditions held steady or improved in nearly all Districts in recent weeks.  Another downgrade ... from "moderate growth" two reports ago, to "modest to moderate" in the last report ... and now "expand gradually". On the positive side, there were more positive comments about residential real estate.

Fed Beige Book: District-By-District Summary - The Federal Reserve’s latest “beige book” report states that the economy continued to expand, but the pace of growth slowed in several regions. The following is a district-by-district summary of economic conditions in the 12 Fed districts in July and early August:

U.S. Economy Grows at 1.7% Rate in Second Quarter — The U.S. economy grew at a 1.7 percent annual rate in the April-June quarter, boosted by slightly stronger consumer spending and greater exports. The Commerce Department said Wednesday that growth was marginally better than its initial estimate of 1.5 percent. Economists expect some improvement in growth in the second half of the year after seeing more positive data in July. But most believe the economy will keep growing at a subpar rate of around 2 percent. Growth at or below 2 percent is not enough to lower the unemployment rate, which was 8.3 percent in July. Most expect the unemployment rate to stay above 8 percent for the rest of this year. The report on economic growth measures the gross domestic output, the country’s total output of goods and services. It measures everything from the purchase of restaurant meals to construction of highways and bridges. The report Wednesday was the government’s second look at GDP for the spring quarter. There will be a third and final estimate of second quarter GDP released next month.

Second-Quarter Growth Revised Up to 1.7 Percent Rate - The economy grew at a slightly faster pace in the second quarter than initially estimated, according to Commerce Department data released Wednesday, increasing at an annual rate of 1.7 percent. The revision was driven by stronger export growth, along with fewer imports than originally estimated and a slight uptick in personal consumer spending. Inventory growth cooled, underscoring continued caution by businesses about the economic outlook.  Meanwhile, in another sign of tepid economic conditions, a Federal Reserve report issued Wednesday afternoon found that the economy continued to expand gradually across the country in July and early August, with slow growth in some parts of the East Coast. The Fed survey of 12 regional bank districts, known as the beige book, also found that employment held steady or grew only slightly nationwide, with weaker-than-expected results in the Boston, New York, Philadelphia and Richmond districts.  Indeed, while analysts had been expecting the small upward revision for economic growth in the second quarter, from the initial estimate of 1.5 percent, the latest figures still represent a deceleration in gross domestic product growth from the first quarter, when the economy grew at a 2 percent rate. The anemic pace of the recovery is a critical issue in the presidential race, and few economists expect the economy to speed up any time soon. In fact, despite the upward revision on Wednesday, many economists see the economy actually slowing in the second half of the year.

Q2 GDP Growth Revised up to 1.7% Annualized  - From the BEAReal gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.7 percent in the second quarter of 2012 (that is, from the first quarter to the second quarter), according to the "second" estimate released by the Bureau of Economic Analysis. The main revisions were: PCE was revised up from 1.5% to 1.7% (services were revised up). Investment was revised down (the contribution to GDP from Change in private inventories was revised from +0.32 percentage points to -0.23 in the second release). Imports are revised down. PCE prices increased at only 0.7% annualized (same as advance release), and core PCE prices increased at a 1.7% annual rate. Overall these changes are minor and were at expectations. This is still sluggish growth.

Goldilocks Q2 GDP Revision Leaves Algos Confused - After sliding from a stall speed-esque 2% in Q1 to sub stall speed 1.5% in the Q1 preliminary print, today's first revision was expected to be a solid bounce to the horrible preliminary economic data, with whisper numbers heard as high as 2.0% on the back of the recent plunge in the deficit (driven purely by a collapse in Chinese exports and a brief drop in crude prices in June, long since retraced). Instead the number came precisely in line with the consensus estimate of a 1.7% annualized growth, with the all important Personal Consumption Expenditures adding a modestly higher 1.20% (was 1.05% last). As expected, net exports shifted from a decline of -0.3% to an increase of 0.3%, which meant that the fudge factor was inventories, which also flip flopped, declining from the previously positive 0.32% to a negative -0.23%. In summary, the GDP number was the worst possible for a market in which good news, relative to an expectations benchmark, is good news, and bad news is great news. The only thing the algos don't know what to do is when numbers come "just right" - which is what just happened. And now- back to Congress doing nothing to resolve the Fiscal Cliff which would detract up to 4% from GDP in 2013 if nothing is done, which is assured as long as the S&P continues trading near 2012 highs.

GDP Q2 Second Estimate at 1.7%, Better Than the 1.5% Advance Estimate -The Second Estimate for Q2 GDP came in at 1.7%, an upward adjustment from the 1.5% Advance Estimate and slightly topping the consensus forecast of 1.6%. Here is an excerpt from the Bureau of Economic Analysis news release: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.7 percent in the second quarter of 2012 (that is, from the first quarter to the second quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent. .. The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, and residential fixed investment that were partly offset by negative contributions from private inventory investment and from state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.  The deceleration in real GDP in the second quarter primarily reflected decelerations in PCE, in nonresidential fixed investment, and in residential fixed investment that were partly offset by a smaller decrease in federal government spending, an acceleration in exports, and a smaller decrease in private inventory investment. [Full ReleaseHere is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. Here is a close-up of GDP alone with a line to illustrate the 3.2 average (arithmetic mean) for the quarterly series since the 1947, with the latest GDP revisions, this number had been at 3.3 for 14 quarters, but slipped to 3.2 as of the current quarter. I've also plotted the 10-year moving average, currently at 1.7.

Second-quarter growth revised up, Fed still seen in play (Reuters) - The economy fared slightly better than initially thought in the second quarter, but the pace of growth remained too slow to shut the door on further monetary easing from the Federal Reserve. Gross domestic product expanded at a 1.7 percent annual rate, the Commerce Department said on Wednesday, as stronger export growth offset a pull-back in restocking by businesses wary of sluggish domestic demand. While that was an improvement on the government's first estimate of 1.5 percent published last month and the composition of growth was fairly favorable, it was insufficient to cut into an unemployment rate that ticked up to 8.3 percent in July. The lack of stronger job growth, along with the uncertainty stemming from Europe's debt crisis and fears of big U.S. government spending cuts and tax hikes in 2013, could compel the U.S. central bank to offer additional stimulus by year end. "I don't think this really changes the dovish sentiment of the Fed," said Michael Hanson, a senior economist at Bank of America Merrill Lynch in New York. "They are going to look at this and say 1.7 percent is below trend, that's not where we want to be and the risks going forward are still material." A growth pace of between 2 percent and 2.5 percent is generally seen as needed just to hold the jobless rate steady

US GDP revision is nothing to celebrate, say economists - Telegraph: America's economy expanded at a faster pace in the second quarter than first estimated, according to a government report that offered few signs it will be built on. Here's what economists said about the data. The upward revision to US annualised GDP growth in the second quarter, to 1.7% from the preliminary estimate of 1.5%, offers little comfort as it is old news. We are already two months through the third quarter and more up-to-date figures show that the economy is still struggling. The revision was due to the combination of stronger consumption growth (1.7% vs. 1.5%) and a smaller contraction in government spending (-0.9% vs. -1.4%) more than offsetting weaker investment growth (3.0% vs. 8.5%). The swing in net trade from a negative contribution to a positive one was broadly offset by the contribution from inventories moving in the other direction. Perhaps the most worrying aspect is that new data show that the alternative gross domestic income (GDI) measure of output rose by just 0.6% in the second quarter (down from 3.8% in the first). It is possible, then, that growth is even weaker than the main GDP figures suggest.  The second cut of GDP really offers no significant new information to alter the conversation at this point. We still think there is a solid shot of the Fed launching QE3, perhaps in September, but the upcoming payrolls report could push that expectation out if it comes in stronger than forecasted.

Q2 GDP - Nothing Good Happening Here - Yesterday we received the 2nd estimate of the 2nd Quarter 2012 GDP. The good news is that the original 1.5% estimate was revised up to 1.7%, which is only slightly lower than the Federal Reserve's estimated 2% growth rate for 2012. The bad news is that the increase in the GDP report puts the final nail into the QE3 coffin for the time being. While the media quickly glossed over the surface of the report, there were very important underlying variables that tell us much about the economy ahead. The first chart below shows the differences between the 1st and 2nd estimate of the 2nd quarter GDP. I have put the basic formula of the GDP calculation at the top of the chart and labeled the relevant green bars. The revisions to the first estimate of GDP showed that personal consumption expenditures were $4.9 billion stronger than originally thought, with the revision primarily driven by a surge in spending on services, which was increased by $7.7 billion. Exports also continue to save corporate profit margins (exports have made up roughly 40% of corporate profits since the end of the last recession), with exports being revised up by $3.1 billion. However, big negative revisions came to the Private Investment segment, which was revised lower by a whopping $24.8 billion dollars. Furthermore, equipment and software spending, in a sign that businesses are pulling back on capital investment, was revised down $6.6 billion, tacking on additional declines to the 1st quarter report.  These are not small details. The next chart shows a clear trend change for the consumer as measured by Personal Consumption Expenditures (PCE). When the recovery began in 2009 it was led primarily by consumption and production (inventory restocking). Given that consumption is currently making up more than 70% of GDP, understanding where consumption is occurring is relevant to future direction of economic growth.

Visualizing GDP: Eye on the Consumer  - The chart below is my way to visualize real GDP change since 2007. I've used a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself. As the analysis clearly shows, personal consumption is key factor in GDP mathematics. My data source for this chart is the Excel file accompanying the BEA's latest GDP news release (see the links in the right column). Specifically, I used Table 2: Contributions to Percent Change in Real Gross Domestic Product. Over the time frame of this chart, the Personal Consumption Expenditures (PCE) component has shown the most consistent correlation with real GDP itself. When PCE has been positive, GDP has been positive, and vice versa. In the Q2 Second Estimate of GDP, the contribution of PCE came at 1.20 of the 1.73 real GDP, an increase from 1.05 of the 1.54 real GDP in the Advance Estimate last month. But even with this revision, GDP at 1.73 percent indicates slower growth than the Q1 GDP of 1.96 percent. For a better sense of the revisions in the 2nd Estimate, here is a side-by-side look at the Advance and Second Estimate. Check out the right most bars in this two-pack. Consumption was revised fractionally higher, Private Investment was revised down significantly, and Net Exports data was revised from a drag to a positive.

Real GDP Per Capita: Another Perspective on the Economy - Earlier today we learned that the Second Estimate for Q2 real GDP came in at 1.7%, an increase from the Q2 Advance Estimate of 1.5%. Let's now review the numbers on a per-capita basis. For an alternate historical view of the economy, here is a chart of real GDP per-capita growth since 1960. For this analysis I've chained in current dollars for the inflation adjustment. The per-capita calculation is based on quarterly aggregates of mid-month population estimates by the Bureau of Economic Analysis, which date from 1959 (hence my 1960 starting date for this chart, even though quarterly GDP has is available since 1947). The population data is available in the FRED series POPTHM. The logarithmic vertical axis ensures that the highlighted contractions have the same relative scale. I've drawn an exponential regression through the data using the Excel -GROWTH() function to give us a sense of the historical trend. The regression all illustrates the fact that the trend since the Great Recession has a visibly lower slope than long-term trend. In fact, the current GDP per-capita is 10.2% below the regression trend. The real per-capita series gives us a better understanding of the depth and duration of GDP contractions. In fact, at this point, 17 quarters beyond the 2007 GDP peak, real GDP per capita is still 1.82% off the all-time high following the deepest trough in the series.

The Big Four Economic Indicators: Updated Real Income -- 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)
    • Employment
    • Real Retail Sales

The weight of these four in the decision process is sufficient rationale for the St. Louis FRED repository to feature a chart four-pack of these indicators along with the statement that "the charts plot four main economic indicators tracked by the NBER dating committee."The latest update to the Big Four was today's release of the July Real Income Less Transfer Payments data (the red line in the chart below), which rose 0.3 percent over last month, which matched the consensus expectations.

The Flatline Economy: (graphs) If you take inflation (however understated the official statistics might be) and population growth into account (i.e., the red lines on the following graphs), the U.S. economy has essentially been flatlining for a decade (and probably longer).Then again, maybe I'm just using the wrong data. Or not.

GDP Per Capita Unlikely to Get Back to Pre-Recession Level Until 2013 - What has happened to the economy over the past five years is grim enough. When you look at it in the context of a growing population, it is even grimmer. After the recession started in late 2007, it took gross domestic product until the third quarter of last year to reach its old peak – the longest it has taken for that to happen since the U.S. was coming off its war footing in the late 1940s and early 1950s. In the second quarter, GDP was just 1.7% higher than it was in the fourth quarter of 2007. Over that same stretch, the U.S. population grew 3.7%. As a result, GDP per capita is still 1.9% below its 2007 high mark. Assume that Wall Street economists’ GDP forecasts and Census Bureau population projections are in the right ballpark, and GDP per capita doesn’t look like it will surpass its old peak until the third quarter of 2013.

Government Spending as Percentage of GDP -- Here are a couple of charts from Doug Short at Advisor Perspectives regarding government spending. Federal Government Spending as Percent of GDP. Total Government Spending as Percent of GDP.  I asked Doug for those charts because Paul Krugman said he would be concerned if government spending hit 50% of GDP. The trend does not look good, but by Krugman's measure there is a ways to go. Nonetheless, I think we should be concerned now. The numbers ignore exploding national debt and interest on national debt. Interest on national debt will skyrocket if rates go up or growth estimates penciled in do not occur. Both of those are likely, although Japan proves that amazingly low interest rates can last longer than anyone thinks.  The figures also ignore ever-escalating costs of Medicare, Social Security, and pension promises, all of which are guaranteed to soar in the not so distant future. Romney says Unfunded liabilities amoint to $520,000 per household.  I will point out that those liabilities are not debt yet. So might Krugman. However, I am comfortable in reducing benefits and slashing spending while Krugman is not.  Clearly there are many ways to spin this data but please note that government spending in France exceeds 50% of GDP. Also note that French unemployment is 10.2% and Hollande is poised to hike the top marginal tax rate to 75%.

Is the U.S. Headed for a Double-Dip Recession? - In addition to a host of warnings, last Wednesday’s Congressional Budget Office report did contain a little bit of good news. The economy will grow slightly faster in the second half of 2012 than in the first half, and inflation will stay extremely low, according to projections in the CBO’s Update to the Budget and Economic Outlook. The bad news is that unemployment will probably remain above 8%. The worse news is that next year the U.S. faces continued high unemployment, below-average growth and the risk of a double-dip recession. The U.S. economy never built up much of a head of steam coming out of the 2007-09 recession, which saw the biggest drop in real GDP since the 1940s and the highest unemployment since the early 1980s. Historically, after such a major downturn ends, there’s typically a powerful rebound in which real GDP growth averages more than 4.5% annually over a period of two or three years and briefly hits annualized rates above 9%. By contrast, during the recovery that began in 2009, the economy has never grown faster than 4.5% and has averaged about 2.2% a year. And next year, the global economic situation figures to be even less hospitable to growth, which will make it harder for the U.S. economy to speed up from its current disappointing pace.

A Dismal Outlook for Growth - They don’t call it the dismal science for nothing. In a new paper, the Northwestern economist Robert J. Gordon argues that the United States should get ready for an extended period of slowing growth, with economic expansion getting ever more sluggish and the bottom 99 percent getting the short end of the (ever-slower-growing) stick. “A provocative ‘exercise in subtraction’ suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades,” he writes. To put that in context, American households’ real consumption expanded by about 3 percent a year before the recession hit and has been growing about 2 percent a year during the recovery, according to statistics from the Organization for Economic Cooperation and Development. Mr. Gordon’s paper joins a growing economic literature that seeks and fails to find new sources of bang-up growth. (See Tyler Cowen’s wonderful “The Great Stagnation” for more on that.)  In the past, the United States economy grew quickly and its citizens got richer, in no small part because of advances made in three consecutive industrial revolutions: steam engines and railroads first; electricity, indoor plumbing and the combustion engine second; and the computing revolution third. But the productivity and income gains begot by that third revolution have not been as impressive as the productivity and income gains from the first and second, he writes.

The U.S. Economy And The Future Of Growth: Now This Is Depressing - The United States has produced one of the most successful economic stories in human history. We've had a lot of inherent advantages: abundant natural resources, favorable demographic trends, relative political stability supported by the protective benefit of two oceans, to name a few. But from colonial times to the present, our happy economy has also been powered by three separate industrial revolutions: 1) the introduction of steam engines and railroads, 2) the inception and widespread use of electricity and the combustion engine, and 3) the invention of computers, the web and mobile communications. As Northwestern economist Robert Gordon points out in a new paper, these three interlocking events gave rise to a widespread assumption that "economic growth is a continuous process that will persist forever." That's because each of these industrial revolutions produced a virtuous economic circle. Each advance built upon the innovations of the previous ones, along the way boosting productivity and revving the American economy, which in turn made American consumers richer and more able to buy stuff. Well, guess what? Gordon writes that future growth in consumption per capita — the main engine of the consumer-based US economy — could fall below 0.5 percent a year for what he calls "an extended period of decades." Yes, that would be a big deal. For some context, between 1860 and 2007 that annual growth rate was 1.9 percent.

Is Economic Growth Going Down The Drain? - Paul Krugman - FT Alphaville has an ungated version of Robert Gordon’s latest pessimistic paper on prospects for long-run economic growth (pdf). It’s not the first time Gordon has written on this subject, although I believe this is his first definitive statement that the IT revolution has been a big disappointment. I have mixed feelings on that one; I see his point, but wonder whether there may be a lot more yet to come. But really, the point of such papers is to make you think differently. And I was very struck by Gordon’s big example: the relative importance of fancy electronics (which he considers part of the Third Industrial Revolution) as compared with indoor plumbing (part of the second): Option B is that you get everything invented in the past decade right up to Facebook, Twitter, and the iPad, but you have to give up running water and indoor toilets. You have to haul the water into your dwelling and carry out the waste. Even at 3am on a rainy night, your only toilet option is a wet and perhaps muddy walk to the outhouse. Which option do you choose?

American growth could be higher than the pessimists think! - Robert J. Gordon has a new NBER working paper essay that really should cite Tyler Cowen, since it's all about a Great Stagnation in U.S. growth. Unlike Cowen, however, Gordon believes that the Stagnation will persist into the indefinite future. The paper is really two essays in one - the first part speculates that most of the big discoveries and inventions have already been made, and the second part identifies social and institutional constraints on U.S. growth. (Here are thoughts on the paper by FT Alphaville and Paul Krugman). Although there are some parts of the paper with which I agree, overall I think Gordon overstates the case for pessimism. First, the technology part. Gordon claims that there have been three big "industrial revolutions" that have driven growth over the past two centuries, but that these bursts of innovation have diminishing returns: . Invention since 2000 has centered on entertainment and communication devices that are smaller, smarter, and more capable, but do not fundamentally change labor productivity or the standard of living in the way that electric light, motor cars, or indoor plumbing changed it...The article suggests that it is useful to think of the innovative process as a series of discrete inventions followed by incremental improvements which ultimately tap the full potential of the initial invention. As I always say, we economists don't really know where technology is going. No one really does, and we probably know less than most. I agree with most of Gordon's claims about the three industrial revolutions. But what does that tell us about future revolutions?

Can America Compete? - The view of shareholder value as corporations’ primary objective has dominated since the 1980s. That motivation—to get short-term shareholder returns—then pushes to lower priority all the other things we used to think about as a social contract: that wages and productivity should go together, that there should be an alignment between the interest of American business and the overall American economy and society. That creates a market failure: it’s not in the interest of an individual firm to address all of the consequences of unemployment and loss of high-quality jobs, but the business community overall depends on high-quality jobs to produce the purchasing power needed to sell their goods and services to the American market. Sixty percent of U.S.-based multinational corporations’ revenue still comes from the U.S. market. We’ve got to solve this market failure. But I think there is also a deep institutional failure in the United States. We have allowed the labor movement and the government and our educational institutions—the coordinating glue that brought these different interests together and provided some assistance in coordinating economic activity—all to decline in effectiveness. Government is completely polarized and almost impotent at the moment. Unions have declined to the point where they are no longer able to discipline management or serve as a powerful and valued partner with business to solve problems. And I’m concerned that our business schools particularly have receded into the same myopic view of the economic system where finance rules everything, so we aren’t training the next generation of leaders to manage businesses in ways that work for both investors and shareholders and for employees in the community.

Is Our Aging Population Partly to Blame for the Slow Recovery? As the unusually weak economic recovery continues, you've at least got to wonder if future studies of what ails us will include our aging population as a material cause. Simply stated, older people tend to liquidate assets to fund their retirements. Younger people tend to acquire financial assets as their personal wealth rises and they build their own nest eggs. The United States has enjoyed nearly 40 years where the number of people acquiring assets was greater than the number of people disposing of them. This condition is being turned on its head. We now face roughly 40 years where there will be more people in this country wanting to sell financial assets than buy them. This supply-demand shift could put a lid on asset values and depress overall economic growth. Further, recent reports show U.S. fertility rates have declined under the so-called replacement levels needed to maintain population levels. The recession appears to have discouraged families from having children. This hurts the formation of households and the strong boost to consumer spending that usually occurs when couples begin or expand their families. It also removes a source of future consumer demand. With immigration inflows to the United States being similarly curbed by the perceived lack of economic opportunity, we've lost, at least temporarily, yet another traditional demographic driver of economic activity. For people in retirement or getting ready to retire, the demographic message is clear. It would be unwise to assume a return to prior growth patterns for housing and investments.

Thinking About The Big Finale For Interest Rates - How about the benchmark 10-year Treasury Note yield? Not only does this history tell us quite a lot about where we’ve been in macro and markets, the 10-year yield’s track record also provides perspective on where we may be going and what we should expect. A picture’s worth a thousand words, as they say—especially in this case. Here’s the monthly average yields on the 10-year Note from the early 1960s through July 2012. By the way, the 10-year yield as of yesterday: 1.63%, according to the Treasury Department. As you can see in the chart below, that's just about the lowest in modern financial history, and we may go lower still!  It’s clear that interest rates over the past half century or so have had two distinct regimes: rising and falling. The rising regime rolled out from the 1960s to the early 1980s, when the Volcker Fed crushed inflation, at which point rates embarked on a multi-decade fade. It’s hard to overestimate the significance of this upside-down V history for economics and finance over the decades. Granted, there are multiple factors that come into play for assessing the path of economies and markets. But if we’re ranking the top 10, the V history above would have to be included as a key variable.

Fitch's says US AAA Rating still at Risk -  David Riley, managing director of Fitch΄s Sovereign Ratings Group, said that fiscal and spending issues in the U.S. could put the country΄s triple-A credit rating at risk if they are not addressed by the end of the first half of 2013. Speaking in an interview on Bloomberg TV, Riley said the U.S. needs to address its tax and spending issues in a "sensible way," and not with a "slash and burn" approach. The so-called "fiscal cliff" that the U.S. faces at the end of the year is a real concern, he said.. Standard & Poor΄s was the first major credit rating company to downgrade the U.S. a year ago to AA+. Moody΄s Investors Service Inc. and Fitch both rate the country at AAA.

Goldman: US faces $8 trillion budget shortfall through 2022 - Goldman's latest analysis of the US budget shows a staggering gap of $8 trillion in the next 10 years. This materially diverges from the latest White House projection as well as from the CBO's "baseline". GS: - Through 2022, we forecast a cumulative deficit of roughly $8 trillion (3.9%) under a "business as usual" assumption that envisions extension of most current policies but no further deficit reduction measures.  CBO's key assumptions are discussed in this slide presentation (for more on this topic, including the discussion of CBO's "Alternative Scenario" see this update): The question of course is whether Goldman's nightmare scenario could be altered by the "changing of the guard" in Washington. The answer isn't entirely obvious. The US government clearly needs to shrink. But according to Goldman's model, increased "austerity" - which would presumably be a policy of the Romney Administration - is likely to slow economic growth and reduce tax revenue. The lower tax revenue would offset lower government spending. This is something we may unfortunately be already witnessing in Europe (Italy for example).

Deficit Hawk Hypocrites - Bernie Sanders - Mitt Romney, Paul Ryan and the Republican Party are now mounting a massive attack against Social Security and other programs. Using "deficit reduction" as their rationale, they are attempting to dismantle every major piece of legislation passed since the 1930s that provides support and security to working families.They are being aided by at least 23 billionaire families, led by the Koch brothers and Sheldon Adelson, who are spending hundreds of millions of dollars in this campaign as a result of the disastrous Citizens United Supreme Court decision. Despite paying the lowest effective tax rate in decades, the billionaires want more tax breaks for the very rich. Despite the fact that the elimination of strong regulations caused the Wall Street meltdown and a terrible recession, the billionaires want more deregulation. Despite outsourcing of millions of good-paying American jobs to China and other low-wage countries, the billionaires want more unfettered free trade. At this pivotal moment in American history, it's important to note how we got into this deficit crisis, who was responsible and what is the fairest way to address it. Let us never forget that when Bill Clinton left office in 2001, this country enjoyed a healthy $236 billion SURPLUS. 

A common macroeconomic confusion -- Under the DomeKoch said that he was very concerned that the deficit would cause runaway inflation and “this country will see a terrible collapse. I don't want to see this country to collapse like what Greece is doing.'' Actually, a deficit could cause interest rates to rise as the government borrows money. Higher interest rates are likely to decrease investment spending which is likely to lead to lower inflation as aggregate demand falls. While "crowding out" is a concern, current deficits have not yet raised interest rates.  Mr. Koch is probably thinking that the U.S. government might start printing money to pay its bills. While this has a non-zero probability it is not likely. Countries don't start printing money until they are no longer able to borrow it by selling bonds and are unable to raise taxes (because people don't have incomes to tax).

Tax cuts, wars account for nearly half of U.S. public debt by 2019 - You can see it kind of looks like a layer cake. The top layer, the orange one, that’s the Bush tax cuts. There is no single policy we have passed that has added as much to the debt, or that is projected to add as much to the debt in the future, as the Bush tax cuts, which Republicans passed in 2001 and 2003 and Obama and the Republicans extended in 2010.   In second place is the economic crisis. That’s the medium blue. Recessions drive tax revenue down because people lose their jobs, and when you lose your job, you lose your income, and when you lose your income, you can’t pay taxes. Tax revenues in recent years have been 15.4 percent of GDP — the lowest level since the 1950s. Meanwhile, they drive social spending up, because programs like unemployment insurance and Medicaid automatically begin spending more to help the people who have been laid off.  Then comes the wars in Iraq and Afghanistan. That’s the red. And then recovery measures like the stimulus. That’s the light blue, and the part for which you can really blame Obama and the Democrats– though it’s worth remembering that the stimulus had to happen because of a recession that began before Obama entered office, and that the Senate Republicans proposed and voted for a $3 trillion tax cut stimulus that would have added almost four times what Obama’s stimulus added to the debt. Then there’s the financial rescue measures like TARP, which is the dark blue line. That’s almost nothing, as much of that money has been paid back.

Republicans: We Won't Build That - Once the Republica Convention ends, all eyes will turn to this year’s Federal Reserve conference in Jackson Hole, Wyoming. At the 2010 conference, Chairman Ben Bernanke gave a speech that paved the way for a second round of quantitative easing, and this year’s speech will be closely watched for hints that the Fed is about to ease policy further in an attempt to help the economy recover. . Given the slow pace of the recovery, it’s puzzling why the Fed hasn’t done more to help already. But I also worry that monetary policy has been oversold. It cannot, by itself, cure the economy’s problems when the downturn is as large as the one we have experienced. In severe recessions, fiscal policy is also needed. Presently, there are two ways that fiscal policy could be used to promote a faster recovery. The first is infrastructure spending. We cannot afford to fall behind the rest of the world in terms of our infrastructure development, but that’s exactly what we are doing. At a time when interest rates are as low as we are likely to see, when labor and other costs are minimal due to lack of demand during the downturn, and when the need is so high, why aren’t we making a massive investment in infrastructure, which is ultimately an investment in our future? The second thing that is needed is debt relief for households.  As households attempt to rebuild what has been lost, they save more and consume less and the loss of consumption is a drag on the recovery.

"We Won't Build That" - Mark Thoma on the GOP's self-defeating, ideological hostility to government investment: If there’s any policy Republicans ought to be able to support, it’s infrastructure spending. It’s inherently a supply-side policy, it helps to promote future economic growth, and it’s an investment with large, positive net benefits. But Republicans see a “we won’t build that” approach to infrastructure spending, an approach that is harmful to our prospects for recovery and to our prospects for future economic growth, as a way to reclaim the presidency.

Romney’s First 100 Days Could Bring Significant Change - If they win the White House, Republicans are also more likely than not to hold on to the House of Representatives and win a narrow majority in the Senate. The party could then embark on the kind of aggressive legislative push that President Obama and the Democrats did in 2009.  Only four years after Democrats seemed on the verge of historic policy gains, Republicans could reverse many of those gains and then some. They could cut the top tax rate to its lowest level in 80 years (as Mr. Romney proposes) and make major changes to federal programs.  Above all, a sweep of Washington could make possible the sort of change Republicans have been talking about for three decades without having yet done: a significant shrinking of government. Ronald Reagan cut domestic programs somewhat but expanded the military, while George W. Bush talked about small government but actually made it bigger. Next year, though, really could be different.

Why do Keynesians Think More Spending will Stimulate the Economy? - My Twitter followers are constantly asking me if I think more spending would really help the economy recover. I understand their skepticism. Many are probably struggling with high debt levels already, and the last thing they want is some economist urging them to rack up more debt for the good of the economy. (Bad advice, indeed.) Others have heard President Obama talk about putting Americans back to work by investing in our nation’s infrastructure, educational system, energy future, etc., but many aren’t sure if the “stimulus even worked“, so they, too, wonder if more spending is really the right way to grow the economy. Well, here’s the answer. Spending isn’t the just the right way to grow the economy, it’s the only way. After all, what is “the economy”? For most economists, it’s a simple number. We use a country’s Gross Domestic Product (GDP) to measure its “economy.” So where does this GDP come from? GDP basically measures the total amount of spending (at market prices) on newly-produced goods and services (by their end users). In other words, GDP measure how much money we spend.

Budget sequester will disastrously affect employment - Earlier this month, nearly 13 million Americans were unemployed — that is, actively seeking work but unable to find any, according to the Bureau of Labor Statistics. In addition, 8.2 million Americans were involuntarily working part-time because their hours had been cut back or because they were unable to find a full-time job. It’s undeniable that the unemployment statistics referred to above are the main reasons why our recovery from the “Great Recession” has been so prolonged and why our economy remains in a fragile state. And it looks like things are about to take a turn for the worse. Under the Budget Control Act, most federal programs face an across-the-board cut in January 2013 if Congress does not enact a plan before then to reduce the national debt by $1.2 trillion. Given this fact, one might expect President Obama and members of Congress to be doing everything in their power to pass legislation that would avoid the infamous budget sequester — approximately $109 billion in spending cuts set to take effect in January of next year would have a dramatically negative impact on employment and our economy in general. Unfortunately, this is not the case.

Paul Ryan: Romney administration would undo defense sequester 'retroactively' -  Paul Ryan said Thursday that if Congress fails to pass legislation averting $500 billion in automatic defense cuts set to take effect in January, a Romney-Ryan administration would work to undo those cuts “retroactively.” The statement by the presumptive Republican vice presidential nominee marks the first time that the GOP White House ticket has floated the idea of fast-tracking Republican-authored legislation that would replace the looming across-the-board defense cuts with trims elsewhere in the federal budget.“I don’t want to get too technical, but in January our intention is, if we don’t fix it in the lame duck, is to fix it retroactively once a new session of Congress takes place,” Ryan said in response to a question posed at a roundtable discussion at a defense-related nonprofit organization not far from Fort Bragg. “Now, we believe that we have a procedural way in the Senate to advance that legislation very quickly and get it to the next president of the United States — who I believe is going to be Mitt Romney — to pass it into law and retroactively prevent that sequester from taking place in January,” Ryan continued.

Remembering the Republicans’ stimulus: I see that the Republican convention will feature a debt clock ticking away behind the speakers. It will also, as I understand it, consist entirely of speakers who want to make all the Bush tax cuts permanent without paying for them, and who want to pass trillions of dollars more in tax cuts that they also haven’t said how they’ll pay for.Back during the stimulus debate, Republicans made two overarching arguments against the Democrats’ proposal. First, that it cost too much. Second, that it wasn’t, in Larry Summers’s words, sufficiently “timely, temporary and targeted,” which is to say, it wouldn’t spend fast enough, end soon enough or get enough bang for its buck. The Senate Republicans didn’t unite around a single stimulus plan of their own. But all but four of them voted for Sen. Jim DeMint’s “American Option: A Jobs Plan That Works.” DeMint’s plan would have extended all of the Bush tax cuts permanently, cut the top marginal rate from 35 percent to 25 percent, the corporate rate from 35 percent to 25 percent and the estate tax to almost nothing. The proposal would have cost about $3 trillion over the next decade — so a bit less than 400 percent what the stimulus cost — and not a dollar of it would’ve been paid for. There was no expiration date, and the tax cuts were largest for the richest Americans, making it neither temporary nor targeted. Yet most every Senate Republican voted for it. And now they’re standing on the stage underneath a debt clock arguing that the Obama administration spent too much. 

We’re Going to Tax Their Ass Off! - This past Sunday, I appeared on Up With Chris Hayes, where I spoke briefly about the rise of austerity politics in the Democratic Party (begin video at 2:13). My comments were sparked by Bruce Bartlett’s terrific piece “‘Starve the Beast’: Origins and Development of a Budgetary Metaphor” in the Summer 2007 issue of The Independent Review. Barlett is a longtime observer of the Republican Party, from without and within. He was a staffer for Ron Paul and Jack Kemp, as well as a policy adviser to Ronald Reagan and a Treasury official under George HW Bush.  Now he’s a critic of the GOP, writing sharp commentary at the New York Times and the Financial Times. He and I have argued about conservatism before. When it comes to fiscal policy, however, he’s one of the savviest analysts of the GOP out there. What follows is an extended summary/riff on Bartlett’s piece and what I said on Hayes’s show: to understand how austerity works in (and for) the Democratic Party, you have to understand how it once worked for the Republicans. Long story short: not so well.

Add It Up: Taxes Avoided by the Rich Could Pay Off the Deficit -- Conservatives force the deficit issue, ignoring job creation, and insisting that tax increases on the rich wouldn't generate enough revenue to balance the budget. They're way off. But it takes a little arithmetic to put it all together. In the following analysis, data has been taken from a variety of sources, some of which may overlap or slightly disagree, but all of which lead to the conclusion that withheld revenue, not excessive spending, is the problem.

  • 1. Individual and small business tax avoidance costs us $450 billion.
  • 2. Corporate tax avoidance is between $250 billion and $500 billion.
  • 3. Tax haven losses range from $337 billion to $500 billion.
  • 4. That's enough to pay off a trillion dollar deficit. Reasonable tax changes could pay it off a second time:

Who really pays taxes? - In my last post I noted that the percentage of Americans who believe that the poor don’t pay enough taxes has risen over the last 20 years. It’s possible that this change in opinion could be correlated to all those conservatives constantly complaining about the “50 percent” of Americans who supposedly pay no taxes at all. That claim has been exhaustively debunked: The vast majority of Americans pay federal payroll taxes and a variety of state and local taxes. The 14 percent of Americans who pay no taxes at all are the elderly, the extremely poor and the young, people whom we generally don’t expect to pay much in taxes under any circumstances. But there’s another angle to this story, fleshed out in an amazing piece in the American Conservative by Mike Lofgren, a former Republican staffer for both the House and Senate budget committees, on how the super-rich have taken over America. Andrew Sullivan calls attention to a key passage: [M]illions of Americans who do not pay federal income taxes do pay federal payroll taxes. These taxes are regressive, and the dirty little secret is that over the last several decades they have made up a greater and greater share of federal revenues. In 1950, payroll and other federal retirement contributions constituted 10.9 percent of all federal revenues. By 2007, the last “normal” economic year before federal revenues began falling, they made up 33.9 percent. By contrast, corporate income taxes were 26.4 percent of federal revenues in 1950. By 2007 they had fallen to 14.4 percent. So who has skin in the game?

Wealth, Taxes and Public Opinion - Last week I wrote about a new Pew Research Center report on the ailing middle class. Today, Pew has come out with a comparable report about the wealthy and how Americans feel about this upper-income class. When respondents were asked how much a family of four would need to earn to be considered wealthy “in your area,” the median response was $150,000. The responses varied by geographic region, though, with people in the Northeast (where the cost of living is higher) giving a median response of $200,000.The survey also included a pointed question about whether upper-income people pay their “fair share” in taxes. About 26 percent of respondents said they did, with another 8 percent saying the rich paid too much in taxes and 58 percent saying the rich paid too little.If that sounds like a lot of people complaining that the wealthy don’t contribute enough to Uncle Sam, note that Americans’ attitudes toward the tax obligation of the rich have become much less demanding over the last two decades. When this question was first asked by Gallup, in March 1992, 77 percent of respondents said upper-income Americans paid too little in taxes. Yet the average income tax burden of the wealthy was actually higher then.

Romney's Tax Plan Requires Inequality To Explode - Mitt Romney's tax plan is a logic puzzle. The details barely exist, but there are just enough of them to infer what the nonexistent details would be if they did exist. Think of it like the LSAT, just with more numbers. Pick up your number two pencils, and let's see what we can figure out. Here's what we know Romney wants to do with taxes based on statements from his campaign, his advisers, and his interviews

  • I. Cut marginal rates 20 percent for all brackets
  • II. Eliminate the Alternative Minimum Tax (AMT) and the estate tax
  • III. Close enough loopholes to make tax reform revenue neutral
  • IV. Maintain rates on savings and investment and eliminate them altogether for the middle class
  • V. Keep the mortgage-interest, healthcare, and charitable giving deductions for the middle class
  • VI. Have high-income earners will pay the same share of overall taxes that they do now
  • VII. Not raise taxes on middle-income taxpayers

Tax system is broken when firms pay CEOs more than Uncle Sam - Twenty-five of the 100 highest-paid U.S. chief executives pocketed more in pay last year than their companies paid in federal income taxes. I don't know about you, but that's the kind of stat that really gets my bacon sizzling — yet more evidence of how the 1% live in a bizarro parallel universe where the normal rules don't apply. A recent report from the left-leaning Institute for Policy Studies found that weak profits weren't to blame for the 25 companies' relatively low tax bills. All had more than $1 billion in pretax income, according to regulatory filings.Yet thanks to a variety of tax breaks and loopholes, each of these companies was able to lavish an average of $20.6 million on its CEO and pay less than that amount to Uncle Sam. And two of the companies — Citigroup and American International Group — have received billions of dollars in bailout cash from taxpayers. If these facts don't make a profound case for corporate tax reform, I don't know what does.

The problem with the capital gains tax - Tax policy can be frustrating.  A major reason that Mitt Romney pays a lower effective tax rate than many working stiffs is that most of his income comes in the form of capital gains, which is taxed at a preferential rate (the top marginal ordinary income tax rate is 35 percent, while the long term capital gains rate is 15 percent).  It may therefore seem that the easy way to implement a "Buffet rule" would be to match the capital gains rate to the ordinary income tax rate. There are three policy dilemmas here, along with a practical problem.  The first policy dilemma is that some capital gains are nominal--they don't reflect changes in purchasing power. The problem could be solved using indexing--we could tax real capital gains at the ordinary income tax rate. The second dilemma is perhaps more controversial.  In a Solow-Swan world of economic growth, more savings produce a larger and newer capital stock, both of which are key to growth (Barro and Sala-i-Martin have a lucid description).  If they are correct (and the consensus is that they are), then policies that encourage both savings and flexibility are good policies. Now for the practical problem--the statutory capital gains rate can be considerably different from the effective rate,

Revolt of the Rich - There have been numerous books about globalization and how it would eliminate borders. But I am unaware of a well-developed theory from that time about how the super-rich and the corporations they run would secede from the nation state. I do not mean secession by physical withdrawal from the territory of the state, although that happens from time to time—for example, Erik Prince, who was born into a fortune, is related to the even bigger Amway fortune, and made yet another fortune as CEO of the mercenary-for-hire firm Blackwater, moved his company (renamed Xe) to the United Arab Emirates in 2011. What I mean by secession is a withdrawal into enclaves, an internal immigration, whereby the rich disconnect themselves from the civic life of the nation and from any concern about its well being except as a place to extract loot. Our plutocracy now lives like the British in colonial India: in the place and ruling it, but not of it. If one can afford private security, public safety is of no concern; if one owns a Gulfstream jet, crumbling bridges cause less apprehension—and viable public transportation doesn’t even show up on the radar screen. With private doctors on call and a chartered plane to get to the Mayo Clinic, why worry about Medicare?

Romney: Not going to ‘manipulate my life’ by closing Swiss bank account - Presumptive Republican presidential nominee Mitt Romney insists that he didn’t shut down his tax shelters in the Cayman Islands, Bermuda and Switzerland because it would “avoid the truth” and he wasn’t going to “manipulate my life” just to become president. Fox News host Chris Wallace asked Romney in an interview that aired on Sunday why he didn’t close the Swiss bank accounts and get out of the investments in the Cayman Islands before he spent the last eight years running for president. “First of all, there was no reduction — not one dollar reduction — in taxes by virtue of having an account in Switzerland or a Cayman Islands investment,” Romney explained. “The dollars of taxes remained exactly the same. There was no tax savings at all. And the conduct of the trustee and making investments was entirely consistent with U.S. law and all the taxes paid were those legally owed and there was no tax saving by virtue of those entities.”

Feldstein’s Analysis Doesn’t Refute TPC Findings, It Confirms Them -- In a recent paper, we showed that any revenue-neutral tax reform that included Governor Romney’s specific tax cuts and that met his stated goal of not raising taxes on saving and investment would cut taxes for households with income above $200,000 and would therefore necessarily have to raise taxes on taxpayers below $200,000. This was true even when we considered an unrealistically progressive way of financing the specified tax reductions, and even when we accounted for economic growth and revenue feedback. Writing in Wednesday’s Wall Street Journal, Romney economic adviser Martin Feldstein attempts to contradict our finding. Instead, his analysis actually confirms our central result. Under the stated assumptions in Feldstein’s article, taxpayers with income between $100,000 and $200,000 would pay an average of at least $2,000 more. (Taxes would rise on families earning between $100,000 and $200,000 in Feldstein’s analysis because he considers a tax reform that would completely eliminate itemized deductions for taxpayers with income above $100,000. In 2009, taxpayers earning between $100,000 and $200,000 claimed more than half of these itemized deductions. Eliminating itemized deductions would raise more in taxes from people in this group than they would save from the rate reductions and other specified features of Governor Romney’s plan. While his results confirm our earlier finding, Feldstein employs several questionable assumptions that understate the revenue loss of Governor Romney’s tax cuts and overstate the revenue gains from reducing tax breaks and deductions. Under more reasonable assumptions, Feldstein’s version of the Romney proposals would not be revenue-neutral; instead it would result in large revenue losses

Paul Ryan's tax and other lies - Linda Beale - Corporate taxes used to constitute a significant portion of federal revenues, almost a third in 1950.  Payroll taxes from workers were considerably less--around 10% in 1950.  Andrew Leonard, Who Really Pays Taxes? (Aug. 28, 2012). The times have changed.  Corporate taxes have declined steeply in the 21st century as a percent of GDP, while payroll taxes paid by workers have become a significant part of tax revenues--more than a third in 2007. That is one cause of the inordinate inequality of income and wealth that this country now endures--an inequality that has dire consequences for the economy and for the well-being or the vast majority of ordinary Americans.

America's next prime minister? - Mr Ryan is regarded by both supporters and detractors as a man of substance (though they disagree vehemently on whether that substance is good or bad). You  wouldn't know it from his 13 years as a legislator, in which he hasn't done much legislating. He has sponsored 71 bills but only two have  become law: one renaming a post office in his district, the other reducing the tax on arrow shafts. This in itself is unremarkable; thousands of bills are introduced, few are passed. Barack Obama had an undistinguished record in the senate. But that had more to do with his short tenure and his aversion to acquiring a messy legislative record that could doom his presidential ambitions. Mr Ryan owes his lack of accomplishment  to just what his fans love most about him: a devotion to causes on which he is unwilling to compromise. Early in his career those causes were often quixotic; my personal favourite was  a bill to pay countries that adopted the dollar. In recent years, those positions have come to embrace core Republican positions: stripping the Fed of any responsibility for employment, converting Social Security to private accounts, and replacing traditional Medicare with vouchers. 

Remembering the Republicans’ stimulus: I see that the Republican convention will feature a debt clock ticking away behind the speakers. It will also, as I understand it, consist entirely of speakers who want to make all the Bush tax cuts permanent without paying for them, and who want to pass trillions of dollars more in tax cuts that they also haven’t said how they’ll pay for.Back during the stimulus debate, Republicans made two overarching arguments against the Democrats’ proposal. First, that it cost too much. Second, that it wasn’t, in Larry Summers’s words, sufficiently “timely, temporary and targeted,” which is to say, it wouldn’t spend fast enough, end soon enough or get enough bang for its buck. The Senate Republicans didn’t unite around a single stimulus plan of their own. But all but four of them voted for Sen. Jim DeMint’s “American Option: A Jobs Plan That Works.” DeMint’s plan would have extended all of the Bush tax cuts permanently, cut the top marginal rate from 35 percent to 25 percent, the corporate rate from 35 percent to 25 percent and the estate tax to almost nothing. The proposal would have cost about $3 trillion over the next decade — so a bit less than 400 percent what the stimulus cost — and not a dollar of it would’ve been paid for. There was no expiration date, and the tax cuts were largest for the richest Americans, making it neither temporary nor targeted. Yet most every Senate Republican voted for it. And now they’re standing on the stage underneath a debt clock arguing that the Obama administration spent too much. 

Follow That Money! How Global Banks Manage Liquidity Globally - NY Fed - Banks increasingly move money around the world. Over the last thirty years, gross international claims of banks from all countries have grown ten-fold, reaching a peak of about $25 trillion in 2007 (see chart below). Such global banking flows have been much in the news recently, sometimes depicted as a key culprit of the transmission around the globe of the shocks following the bankruptcy of Lehman Brothers, and more recently the European sovereign debt crisis. The discourse in the regulatory arena seems to share this sentiment, with a bias towards curbing some of the global banking activity (for example, Bank for International Settlements, CGFS 2010, and the United Kingdom Independent Commission on Banking 2011). We acknowledge that global banking has contributed to the international propagation of shocks during the 2007 to 2009 crisis, as shown in a range of recent studies (for example, Acharya and Schnabl 2010, Cetorelli and Goldberg 2011, and 2012). However, we argue that there still are many unknowns regarding the intensity and the direction of global banking flows, as well as the consequences of these flows. There is a pressing need to refine our understanding of these dynamics, not just from a positive angle, but also to inform policy analysis. We take steps in this direction in some of our research, discussed in this blog post. We show that global banks manage liquidity on a global scale and that internal funding reallocations are bank and business-model specific. This centralized liquidity management is a feature of normal times, as well as a feature of market stress periods.

The financial system rests on quicksand - If anything is calculated to cause despair about the prospects of making the financial system safer, it is the failure of the Securities and Exchange Commission to tame the $2.6tn US money market fund industry. Mary Schapiro, the SEC chairman, has tried her best but she was stymied last week. The stakes are so high that reform now needs to be taken out of the hands of the SEC’s commissioners, who have shown themselves to be fatally susceptible to industry lobbying, and led by the US Treasury and Federal Reserve. Failing that, international regulators should limit the dependence of banks on these shaky foundations.  What are the chances of the other US authorities succeeding where the SEC has failed? Sadly limited, given the poisonous climate in Washington, acrimony over the Dodd-Frank Act and the presidential election. These form dispiriting obstacles to reform of the shadow banking system, of which money market funds form one of the oldest parts.Reform of money market funds ought to be an open-and-shut case, given the events of 2008. The first evidence of the distress triggered by the Lehman Brothers collapse was when the Reserve Primary fund “broke the buck” because it held $785m of Lehman securities. That led to a rapid run on its deposits and official intervention to stop other funds toppling.As Ms Schapiro observed in June, “we do not know what the full consequences of an unchecked run on money market funds would have been”, but it is safe to say: not good. The funds, established in the 1970s as competitors to banks, have become one of the primary short-term funding mechanisms of both US and European banks.

Is the financial sector worth what we pay it? - OECD Insights - We are rapidly evolving a fast-moving, increasingly cybernetically interlinked capital marketplace that, as Lord May observes in the Santa Fe Institute Journal, has become intertwined in ever-more complex interdependent patterns. He goes on to ask how much are we, societally, paying the financial sector to allocate capital? More importantly, is the sector allocating capital to further societal goals, or merely enriching itself and a narrow segment of the world’s population? Human nature is powerful. John Stuart Mills said, in Social Freedom: “Men do not merely desire to be rich, but richer than other men”.  Benjamin Friedman holds, in The Moral Consequences of Economic Growth, that “greater opportunity, tolerance of diversity, social mobility, commitment to fairness and dedication to democracy” derive directly from economic growth. He shows that even during stagnation–let alone recession and depression–those values can vanish easily. Brad Delong observes, in reviewing Friedman, that if the majority of the people do not see an improving future, these values are at risk even in countries where absolute material prosperity remains high. Given rising political intransigence and loss of common social purpose in the U.S., and the rise of nationalistic political sentiments in Europe, the effects of increasing stagnation and inequality are becoming more evident, despite the financial sector’s phenomenal growth.  

Banks Want Another Account to Disguise Their Risky Trades - Whither the Volcker rule? After a flurry of discussion about it in the wake of JPMorgan Chase’s Fail Whale trades, we’ve heard significantly less of late. In fact, regulators blew through a July deadline on finalizing the Volcker rule. The last word we had was that the deadline was pushed back to the end of the year. More time means more opportunity for big banks to lobby over various exemptions. And that’s just what they’re doing, attempting to take a little loophole they found in the initial language and blow it wide open.Banks are urging U.S. authorities to broaden a little-noticed exemption in the Volcker rule’s trading curb that critics say could blind regulators to the next version of the JPMorgan Chase & Co Whale trade [...] The exemption covers a special type of account, designed to prevent the kind of cash crunches that took down Bear Stearns and Lehman Brothers in the heat of the 2007-2009 financial crisis. Banks want an even broader exemption. But critics say the proposed rule, as is, already excludes liquidity trades almost entirely from the Volcker rule, expected to be finalized later this year.. As is, the liquidity exemption “deeply undermines the applicability of the Volcker firewall,” Democratic Senator Jeff Merkley, one of the authors of the Dodd-Frank provision authorizing the rule, said in an interview.

Where the Mob Keeps Its Money - THE global financial crisis has been a blessing for organized crime. A series of recent scandals have exposed the connection between some of the biggest global banks and the seamy underworld of mobsters, smugglers, drug traffickers and arms dealers. American banks have profited from money laundering by Latin American drug cartels, while the European debt crisis has strengthened the grip of the loan sharks and speculators who control the vast underground economies in countries like Spain and Greece. Mutually beneficial relationships between bankers and gangsters aren’t new, but what’s remarkable is their reach at the highest levels of global finance. In 2010, Wachovia admitted that it had essentially helped finance the murderous drug war in Mexico by failing to identify and stop illicit transactions. Last month, Senate investigators found that HSBC had for a decade improperly facilitated transactions by Mexican drug traffickers, Saudi financiers with ties to Al Qaeda and Iranian bankers trying to circumvent United States sanctions. The bank set aside $700 million to cover fines, settlements and other expenses related to the inquiry, and its chief of compliance resigned. ABN Amro, Barclays, Credit Suisse, Lloyds and ING have reached expensive settlements with regulators after admitting to executing the transactions of clients in disreputable countries like Cuba, Iran, Libya, Myanmar and Sudan.

Why No Prosecutions - The NYTimes had a very good editorial today bemoaning, with resignation, that there will not be any serious prosecutions of senior bank executives or institutions for the financial crisis.  The biggest fish to be caught was Lee Farkas. Who? That's the point. There have been prosecutions of some truly small fry fringe players and some settlements that are insignificant from institutional points of view (even $500 million, the SEC's record settlement with Goldman over Abacus was a yawn for Goldman), but that's it.   The NYT editorial incorrectly states that the relevant statute of limitations have expired.  The usual statutes of limitations have or will shortly expire, but not those under FIRREA (for frauds that affect federally insured banks), which are 10-years long. So there is still theoretically the possibility of prosecutions (and remember that Mozilo's deal, for example, was with the SEC, not with the states...). But don't count on it happening.  My prediction is that when the history of the Obama Administration is written, there will be some positive things to say about it, but also two particular blots on its escutcheon.  First, the failure to act decisively to help homeowners avoid foreclosure, and second, the failure to hold anyone accountable for the financial crisis.

One Man Against The Wall Street Lobby - Simon Johnson - Two diametrically opposed views of Wall Street and the dangers posed by global megabanks came more clearly into focus last week.  On the one hand, William B. Harrison, Jr. – former chairman of JP Morgan Chase – argued in the New York Times that today’s massive banks are an essential part of a well-functioning market economy, and not at all helped by implicit government subsidies. On the other hand, there is a new powerful voice who knows how big banks really work and who is willing to tell the truth in great and convincing detail.  Jeff Connaughton – a former senior political adviser who has worked both for and against powerful Wall Street interests over the years – has just published a page-turning memoir that is also a damning critique of how Wall Street operates, the political capture of Washington, and our collective failure to reform finance in the past four years.  “The Payoff: Why Wall Street Always Wins,” is the perfect antidote to disinformation put about by global megabanks and their friends. Specifically, Mr. Harrison makes six related arguments regarding why we should not break up our largest banks.  Each of these is clearly and directly refuted by Mr. Connaughton’s experience and the evidence he presents.

Why Are the Big Banks Suddenly Afraid? - Simon Johnson- Top executives from global megabanks are usually very careful about how they defend both the continued existence, at current scale, of their organizations and the implicit subsidies they receive. They are willing to appear on television shows – and did so earlier this summer, pushing back against Sanford I. Weill, the former chief executive of Citigroup, after he said big banks should be broken up. Typically, however, since the financial crisis of 2008 the heavyweights of the banking industry have stayed relatively silent on the key issue of whether there should be a hard cap on bank size. This pattern has shifted in recent weeks, with moves on at least three fronts. William B. Harrison Jr., the former chairman of JPMorgan Chase, was the first to stick out his neck, with an Op-Ed published in The New York Times. The Financial Services Roundtable has circulated two related e-mails “Myth: Some U.S. banks are too big” and “Myth: Breaking up banks is the only way to deal with ‘Too Big To Fail’” (these links are to versions on the Web site of Partnership for a Secure Financial Future, a group that also includes the Consumer Bankers Association, the Mortgage Bankers Association and the Financial Services Institute). Now Wayne Abernathy, executive vice president of the American Bankers Association, is weighing in – with a commentary on the American Banker Web site.

Cash Moves by HSBC in Inquiry - Prosecutors investigating the movement of money by global banks suspect HSBC of laundering money for Mexican drug cartels and moving cash for Saudi Arabian banks with ties to terrorists, according to federal authorities with direct knowledge of the investigations. The federal and state prosecutors are also investigating whether HSBC flouted United States law by transferring money through its American subsidiary for sanctioned nations, including Iran, Sudan and North Korea. The weight of the accusations could force HSBC, which has already set aside $700 million to cover the cost of potential fines, to pay at least $1 billion to settle the inquiry, said the authorities with knowledge of the investigation, which would make it the largest such settlement in history. The money-laundering accusations against HSBC so far are more extensive than the potential violation of United States sanctions that is the focus of the investigations against other foreign banks, including Deutsche Bank and Commerzbank of Germany, BNP Paribas and Crédit Agricole of France and the Royal Bank of Scotland, said the law enforcement authorities, who requested anonymity because the investigations are continuing.

Guest Post: The Rot Runs Deep 2: Don't Call Out My Scam And I Won't Call Out Yours - Complicity reigns supreme as everyone benefiting from a scam keeps quiet about everyone else's skim lest their own share of the spoils fall under the harsh light of inquiry. The uncomfortable truth is that America has become a nation of skimmers and scammers. The rot runs deep not just in the upper reaches of the financial and political Elites, but in the bottom 99.5% as well. America can now be summarized by this phrase: "don't call out my scam and I won't call out yours." In other words, all the skimmers and scammers have become complicit, not just in protecting their own scam from the light of day, but in protecting everyone else's scams, too, lest those who lose their swag unmask someone else's scam in revenge. Examples of skimming and scamming abound in finance and government. It's almost tiresome to even list examples; fortunately for us, tireless truthseeker "George Washington" has amassed a list of bank fraud and malfeasance..

Suits Mount in Rate Scandal - Banks being probed for interest-rate manipulation face potentially tens of billions of dollars in claims from dozens of lawsuits in the U.S. from cities, insurers, investors and lenders who say they were hurt by the allegedly fudged rates.  The allegations come from parties as varied as individual investors and institutions like Charles Schwab that say they were cheated out of returns on bonds with artificially low rates, to cities and hedge funds with financial contracts squeezed by traders who allegedly colluded with each other. The exact number of cases isn't clear, but they have been piling up for months, a review of federal- and state-court filings by The Wall Street Journal shows. Barclays's settlement with U.S. and U.K. regulators in June for about $450 million triggered a burst of new lawsuits against the British bank and other financial institutions now under investigation, including Bank of America, Citigroup and J.P. Morgan Chase. It won't be easy for the plaintiffs to win in court even though financial institutions are likely to reach settlements with regulators in coming months totaling billions of dollars, according to people close to the Libor investigation. The plaintiffs must prove that banks successfully manipulated interest-rate benchmarks such as the London interbank offered rate, or Libor, and caused the plaintiffs to suffer a loss.

11 Percent Of Hedge Funds Are Beating The S&P - Business Insider: Eleven percent. According to Goldman's Hedge Fund Trend Monitor, put together by Amanda Sneider, that's the number of hedge funds who have outperformed the S&P so far this year. That's down from 26 percent last year ... and last year was considered rough. A few other facts about hedge funds from the report:

  • 20 percent of hedge funds have absolute losses year to date.
  • Hedge fund net long exposure fell to 42 percent in June 2012. That's down from 49 percent in Q1.
  • Hedge funds are most exposed to consumer discretionary stocks and information tech.
  • The most popular big hedge fund sock is Apple.
  • Next is Google.
  • Exxon Mobil is the biggest short of the hedge fund community.

SEC proposes that ban on advertising by hedge funds be eased - Don't look for them on bus benches or in the Yellow Pages, but hedge funds soon could be running ads. For more than 30 years, hedge funds and other private investment vehicles have been barred from marketing to the public. Regulators feared that breathless advertising campaigns would lure unsophisticated investors who didn't understand the risks. The Securities and Exchange Commission proposed Wednesday that the ban be eased. The commission voted to relax the restrictions to comply with this year's Jumpstart Our Business Startups Act, which sought to make it easier for investment firms to raise money from prospective clients.Under the SEC proposal, those who take part in such private offerings still would need to be so-called accredited investors. Such investors must meet certain income or net worth requirements.

Good News for Fraudsters, Financial Illiteracy Is Widespread - Good news for those intent on committing fraud. Bad news for most everyone else. American investors apparently don’t know much about anything financial. According to a review released Thursday of years of surveys of individual investors, they are presumably ripe for the picking by fraudsters because they don’t have much knowledge to counteract any outlandish offerings. Here’s the key and rather astonishing quote: “These studies have consistently found that American investors do not understand the most basic financial concepts, such as the time value of money, compound interest and inflation. Investors also lack essential knowledge about more sophisticated concepts, such as the meaning of stocks and bonds; the role of interest rates in the pricing of securities; the function of the stock market; and the value of portfolio diversification…” That is from the Library of Congress, which conducted the review on behalf of the Securities and Exchange Commission. The SEC, for its part, needed to study Americans’ financial literacy and assess what investors wanted to know about investments and advisers and how they wanted to receive the information. The SEC had a mandate for all that from the 2010 Dodd-Frank Act. This generalized lack of knowledge (there certainly are plenty of exceptions) is particularly worrisome since more and more people are responsible for their own investment decisions as part of defined-contribution retirement plans, usually 401(k)s.

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 establishing a postal banking system.  The resolution noted that expanding postal services and developing new sources of revenue are important to the effort to save the public Post Office and preserve living-wage jobs; that many countries have a successful history of postal banking, including Germany, France, Italy, Japan, and the United States itself; and that postal banks could serve the 9 million people who don’t have bank accounts and the 21 million who use usurious check cashers, giving low-income people access to a safe banking system.  “A USPS bank would offer a ‘public option’ for banking,” concluded the resolution, “providing basic checking and savings – and no complex financial wheeling and dealing.” Follow up: The USPS has been declared insolvent, but it is not because it is inefficient (it has been self-funded throughout its history).  It is because 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 also on the privatization chopping block, and its postal workers have also vowed to fight.  Adding banking services is an internationally proven way to maintain post office solvency and profitability.

Small Business Loans and Small Bank Health - FRBSF - Total business loans under $1 million held by small U.S. banks are shrinking. Although dollar volumes fell at a slower pace in the four quarters that ended in June 2012 than over the previous year, the persistent decrease remains a concern. A previous Economic Letter (Laderman and Gillan 2011) presented data suggesting that trends in aggregate nonperforming asset ratios for business loans under $1 million held by small banks may be related to trends in the growth of those loans. This Letter shows the relationship between growth in business loans of this size and the lender’s overall financial condition. Financially weak small banks, though they are in the minority, have accounted for most of this loan shrinkage. In fact, business loans under $1 million at strong small banks actually grew in 2011.The finding supports the view that supply conditions, not just tepid demand for credit, have affected bank lending to small businesses.

Microlenders a lifeline to online business.  - The explosion of online sellers through sites such as eBay, Fab, Etsy and Pinterest has been a boon for entrepreneurs looking to sell a broad assortment of items, including used CDs and handmade scarves. But finding a traditional bank to make small-business loans to virtual stores has been a tough sell -- and has opened the door to niche players. Growth in online purchases is expected to continue, according to a report by eMarketer. The report states that consumers have shown confidence in online commerce, with 58 percent saying they will spend more money online in 2012. And 70 percent of all Internet users ages 14 and older made at least one online purchase last year. E-commerce grew 16.1 percent in 2011, and sales are expected to grow to $361.9 billion in 2016 from $194.3 billion in 2011, according to the report. Investment firms Robert W. Baird and JPMorgan expect e-commerce to grow more than 12 percent this year. Small businesses are hungry to latch on to the e-commerce momentum, and microlenders are casting a wide net to reel in as many customers as possible. Lenders such as On Deck Capital and Kabbage attract these small businesses because getting a loan from them is quick and easy. But the interest rates can be high.On Deck's rates run 18 to 36 percent, but Chief Executive Noah Breslow said they are able to remain competitive with banks because the loans are typically up in three to eight months.

Unofficial Problem Bank list declines to 891 Institutions -- Here is the unofficial problem bank list for Aug 31, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808: The FDIC released its actions for July 2012 as anticipated. This week there were 10 removals and three additions leaving the Unofficial Problem Bank List with 891 institutions with assets of $331.5 billion, down from 898 institutions with assets of $346.7 billion. About two-thirds or $10.0 billion of the $15.2 billion decline in assets came from updating assets with figures from the second quarter. For the month of August 2012, the list declined by a net of nine institutions after 11 additions, 16 actions terminations, three unassisted mergers, and one failure. The singular failure is the lowest monthly total since the list was first published on August 7, 2009. A year ago, the list held 988 institutions with assets of $403.0 billion. This week the FDIC released the Official Problem Bank List for the second quarter that included 732 institutions with assets of $282 billion.

FDIC reports Fewer Problem banks, REO Declines; Total REO Declines in Q2  - The FDIC released the Quarterly Banking Profile for Q2 today.  The FDIC reported the number of problem banks declined:  The number of "problem" institutions fell for the fifth quarter in a row. The number of "problem" institutions declined from 772 to 732. This is the smallest number of "problem" banks since year-end 2009. Total assets of "problem" institutions declined from $292 billion to $282 billion. Fifteen insured institutions failed during the second quarter. This is the smallest number of failures in a quarter since the fourth quarter of 2008, when there were 12. Another nine banks have failed so far in the third quarter, bringing the total for the year to date to 40. At this point last year, there had been 68 failures. And the dollar value of Real Estate Owned (REOs, foreclosure houses) declined from $11.1 billion in Q1 to $9.5 billion in Q2. This is the lowest level of REOs since Q1 2008. This graph shows the dollar value of Residential REO for FDIC insured institutions. Note: The FDIC reports the dollar value and not the total number of REOs. The next graph is from Tom Lawler and shows the total REO for Fannie, Freddie, FHA, Private Label (PLS) and FDIC insured institutions. This isn't all the REO, as Lawler noted before, it "excludes non-FHA government REO (VA, USDA, etc.), credit unions, finance companies, non-FDIC-insured banks and thrifts", but it is probably over 90%.

How Treasury Secretary Geithner Foamed the Runways With Children’s Shattered Lives -  There really are two kinds of Americans.  One type is of the Ayn Randian persuasion, believing that rapacious capitalism without safety nets is an ideal model for our country.  The other kind believes that our Nation’s children represent the future and each and every one of them – regardless of class, race or social circumstances – deserves a chance at a productive life.  The second kind of American is frequently derided as a soft-hearted liberal sop; but that’s a shallow analysis.  We fail as a country when we fail our children – both morally and in terms of global competitiveness.  This is why the revelations in Neil Barofsky’s new book — Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street – are so disturbing.  Barofsky was the Special Inspector General of the Troubled Asset Relief  Program (TARP), put in charge to monitor how the hundreds of billions of taxpayer dollars were spent.  According to Barofsky, the Home Affordable Modification Program (HAMP) did not have a goal of keeping struggling families and children in their homes.  It’s real goal, according to U.S. Treasury Secretary Tim Geithner, was to “foam the runway” for the banks. 

Mortgage Industry's Need for Speed Played Big Role in Crisis - The roots of the crisis stretch back to 1996 with the introduction of Freddie's Loan Prospector automated underwriting system followed shortly by Fannie Mae's Desktop Underwriter. (Disclosure: I worked for Freddie Mac during this period and Fannie Mae a little earlier). This new technology in the hands of both government-sponsored enterprises ushered in a remarkable evolution of the traditional mortgage business, which up to that point had relied on humans to underwrite the borrower, verify her income and assets and fully appraise the property. Innovation in the form of statistical modeling enabled the GSEs to construct an algorithm that could distill the 3 C's of underwriting (creditworthiness, collateral, and capacity) into a single score reflecting the borrower's probability of default, allowing an originator to communicate an almost instant loan decision to the applicant. Such tools were designed in part to control credit risk upfront and also to provide significant efficiency in the mortgage process. As more AUS scores passed the GSE-designated threshold of acceptable quality, fewer loans had to be reviewed by the more time-consuming human underwriting process.  It may seem surprising now, but a major consumer issue back then was the time and effort it took a borrower to secure a mortgage. Paperwork requirements were onerous and costly in addition to the delay in processing all of this information. The game was now afoot.

New Real Estate Train Wreck Coming: Securitized Rentals - Yves Smith - No matter how bad things get, it turns out they can always get worse. Wall Street is about to foist a new “innovation” on investors that even the ratings agencies won’t touch.  Greedy, reckless, and just plain lazy mortgage originators, servicers, and trustee took what was actually a not unreasonable idea, that of mortgage securitizations, and turned it into a loss-bomb. Remember, that movie did not have to end badly. First, participants in the private label mortgage securitization market did for the most part comply with the requirements of their contracts for the first decade plus of that product’s existence. It was their wanton disregard for their own products which have led to the chain of title mess and difficulties in foreclosing that still plagues that market. Second, securitization markets that developed later than the US market (most notably, in of all places Russia and Eastern Europe) and featured some improvements on the US template have not seen the abuses of borrowers and investors suffered here and got through the global downturn reasonably well. However, the sell side has completely refused to implement the sort of reforms necessary to make the product safe for investors. So the US mortgage is and is likely to remain on government life support for the next decade. So what have the “innovators” decided to do? Foist an even worse product on hapless investors. Remember, mortgage securitizations in concept are a decent idea and with proper protections, fees, and incentives, can be a useful and attractive product. Securitizing rental income streams for a large number of single family homes is a completely different proposition. The concept is clearly still being fleshed out, since a story on it in Reuters was unclear as to whether the “bonds” would also be entitled to the proceeds of the eventual sale of the house. I imagine that the private equity investors who are targeting this market are pushing for that, since fobbing off the problem of the home sale to the securitized vehicle is tantamount to a full cashout. They’d get initial tenants in, no matter how good or bad, and effectively flip the house to the securitization.

CoreLogic® Reports 58,000 Completed Foreclosures in July - According to the report, there were 58,000 completed foreclosures in the U.S. in July 2012 down from 69,000 in July 2011 and 62,000* in June 2012. Since the financial crisis began in September 2008, there have been approximately 3.8 million completed foreclosures across the country. Completed foreclosures are an indication of the total number of homes actually lost to foreclosure.“Completed foreclosures were down again in July, this time by 16 percent versus a year ago, as servicers increasingly rely on alternatives to the foreclosure process, such as short sales and modifications,” said Mark Fleming, chief economist for CoreLogic. “Completed foreclosures remain concentrated in five states, California, Florida, Michigan, Texas and Georgia, accounting for 48 percent of all completed foreclosures nationwide in July.”

Fannie Mae and Freddie Mac Serious Delinquency rates declined in July - Fannie Mae reported that the Single-Family Serious Delinquency rate declined in July to 3.50% from 3.53% June. The serious delinquency rate is down from 4.08% in July last year, and this is the lowest level since April 2009. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Freddie Mac reported that the Single-Family serious delinquency rate declined in July to 3.42%, from 3.45% in June. Freddie's rate is only down slightly from 3.51% in July 2011. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. This is the lowest level for Freddie since August 2009. These are loans that are "three monthly payments or more past due or in foreclosure". In 2009, Fannie's serious delinquency rate increased faster than Freddie's rate. Since then, Fannie's rate has been falling faster - and now the rates are at about the same level.

LPS: Mortgage delinquencies decreased in July - LPS released their First Look report for July this week. LPS reported that the percent of loans delinquent decreased in July from June. LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) decreased in July to 7.03% from 7.14% in June. The percent of delinquent loans is still significantly above the normal rate of around 4.5% to 5%. The percent of delinquent loans peaked at 10.57%, so delinquencies have fallen over half way back to normal. The following table shows the LPS numbers for July 2012, and also for last month (June 2012) and one year ago (July 2011). The total number of delinquent loans, and in foreclosure, dropped about 100 thousand in July from June. The percent of loans less than 90 days delinquent is close to normal, but the percent (and number) of loans 90+ days delinquent and in the foreclosure process are still very high.

Report: Foreclosure Sales Fell Sharply in 2Q — Sales of bank-owned homes and those already on the foreclosure path fell sharply in the second quarter, reflecting a thinner slate of properties for sale in many cities as banks take a measured approach to placing homes on the market. Even so, foreclosure sales’ share of all U.S. home purchases grew in the April-to-June period, foreclosure listing firm RealtyTrac Inc. said Thursday. The combination of fewer bank-owned homes for sale and stronger demand during the traditional spring home-buying season also pushed sale prices higher. Bank-owned homes and those in some stage of foreclosure posted the biggest annual increase in average sales price since 2006, before the housing bubble burst, the firm said. As of last month, there were 1.47 million U.S. homes in some stage of the foreclosure process or owned by banks. Of the 620,751 in lenders’ possession, only about 15 percent are listed for sale, according to RealtyTrac. The measured approach has triggered bidding wars and led to higher prices in markets like Las Vegas, where the inventory of bank-owned homes sank to a 6.2-month supply in June. The pool of foreclosed properties for sale also has declined because many pending foreclosure cases were put on hold last year while banks sorted through foreclosure abuse claims. A $25 billion settlement in February cleared the way for lenders to tackle that backlog of foreclosures, and the number of homes entering the foreclosure process has been rising. Still, those properties, should they end up foreclosed, are not likely to hit the market until next year.

MBA: Mortgage Refinance Activity declines  - From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey:The Refinance Index decreased 6 percent from the previous week to its lowest level since May 11, 2012. The seasonally adjusted Purchase Index increased more than 1 percent from one week earlier. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.80 percent from 3.86 percent, with points remaining unchanged at 0.42 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. This graph shows the MBA mortgage purchase index. The purchase index has been mostly moving sideways over the last two years. I'm still puzzling over why the MBA index is moving sideways but the recent Senior Loan Officer survey showed "moderately to stronger" demand for mortgages to purchase homes: Over half the banks surveyed reported moderately to substantially strong demand for mortgage to purchase homes. It isn't clear why the MBA index and the Fed survey results are different.

The Serial Refinancers  - Homeowners eager to lock in lower monthly mortgage payments have discovered serial refinancing, a practice last in vogue during the housing boom. To keep up with falling rates, almost 2.2 million homeowners have refinanced their mortgages at least twice since 2009, according to data compiled for The Wall Street Journal by SMR Research, a mortgage-research firm in Hackettstown, N.J. From 2006 through 2008, some 3.5 million homeowners refinanced at least twice. There is little incentive to stop refinancing. Rates are still hovering near record lows, and lenders increasingly are offering to waive some or all of the closing costs for the borrower, making refinancing effectively free—or at least very cheap. Dean Spalding, a financial-services executive in Louisville, Ky., has refinanced his 15-year mortgage—which now has a balance of roughly $350,000—four times since 2009, including twice in the past 12 months. Over this period, his rate has dropped from 4.25% to 2.875%. After his last refi, he says his monthly mortgage payment dropped by about $150. "It has been a no-brainer,"

The Geography of Underwater Homes - Nearly five years after the market came crashing down, America's housing market is beginning to show signs of recovery. Sales of previously-occupied homes have been tracking upward, as have prices.   And according to data released today by the by real-estate website Zillow, the share of homeowners who are "underwater" is also starting to slowly improve. The Zillow data tracks the percent of homeowners with negative equity — that is, those who owe more than their homes are worth — and the dollar amount of that negative equity for the United States as a whole and for its metro regions. While the amount of negative equity declined by $42 billion in the second quarter this year, it remained a whopping $1.15 trillion. Of all homeowners, 15.3 million (30.9 percent) remained underwater in the second quarter, though this was down from 15.7 million homeowners or 31.4 percent in the first quarter. But the trend remains incredibly uneven across the United States. In more than half of U.S. metros (179 in all), 25 percent or more or homeowners remain underwater. And, there are 22 metros, 6.5 percent of them, where more than half of all homeowners are underwater. Fernley, Nevada has the highest rate of underwater homeowners in the country with 69.7 percent, and Huntingdon, Pennsylvania has the lowest, 4.7 percent.

Mortgage customers of 5 large banks get big offers to lower their payments - Thousands of homeowners nationwide are getting jaw-dropping offers from five of the largest mortgage lenders. The unsolicited letters and phone calls from Chase, Ally/GMAC Mortgage, Citibank, Wells Fargo and Bank of America are the mortgage equivalent of winning the lottery even when you weren't playing.  The banks are offering customers no-strings-attached deals to drastically reduce their interest rates and, in some cases, slice tens of thousands from their principal. Customers don't have to apply, sign tons of paperwork or pay any closing costs or any fees.  "Someone who is getting something out of the blue could feel this is too good to be true," said Dan Tierney, spokesman for the Ohio Attorney General's Office.  However, the offers are part of the five banks' settlements with federal and state regulators earlier this year. In Ohio, the five companies agreed to commit $90 million in interest savings for borrowers who refinance and $102 million to reduce the principal and payments on homeowners' loans.

Principle reduction: A lifeline for underwater homeowners - Recent positive news on house prices, released by the Federal Housing Finance Administration, has many economists declaring the housing market has bottomed and that home prices appear to be on a healthy rebound. After being pummeled continuously for the past six years, any good news regarding the housing market is welcomed. But the foreclosure crisis that began in 2007 is not yet over and declaring “Mission Accomplished” prematurely could once again be a very bad idea. In the first half of this year, more than a million foreclosure filings have been issued with an additional one million likely by year's end. And in spite of the recent gains in home prices, they remain down by more than 30 percent and homeowners continue to hold $700 billion of mortgage debt that exceeds the value of their homes. As a result, it’s important for federal policy makers to continue to pursue foreclosure mitigation efforts including reducing the outstanding principal on homes for borrowers whose mortgages greatly exceeds the value of their homes.

Quelle Surprise! Banks Getting Credit for What They Would Have Done Anyhow in Mortgage Settlement -- Today, Joseph Smith, the official monitor for the Federal-state mortgage settlement entered into earlier this year with five major servicers, released a glossy initial report on program progress. Needless to say, my cynicism was piqued both by the glossy format of the document and the decision to release it well before the required date of second quarter 2013.  But the distressing part is the way the settlement is playing out according to script. We argued that rather than either remedy the abuses that occurred during the crisis or provide meaningful restitution to wronged borrowers and investors, the settlement was really yet another bailout. This one took place by giving the banks a release of very considerable liability for very little in the way of actual hard dollar costs. Most of it was in the form of credits for actions taken, and most of the actual costs would be borne not by the banks but investors.  Not surprisingly, the media is dutifully taking up Administration talking points and either burying or missing completely the significance of key bits of information in the report. For instance, the New York Times claims, “Mortgagees See Benefits in Bank Plan,” with this as its opening paragraph: More than 130,000 homeowners have received $10.5 billion in relief under the national settlement over foreclosure abuses, according to a preliminary report issued Wednesday by the settlement monitor. The Palm Beach Post was more emphatic:Between March 1 and June 30, a total of $1.7 billion in loan help was distributed in Florida through mortgage principal reductions, refinances, short sale approvals and other activities such as moving assistance for people who can’t stay in their homes. In fact, some of the things in the report are troubling. For instance, despite the claim, taken up by the media, that borrowers got “relief”, what we see instead is that they got overwhelmingly was short sales:

Bank of America hasn’t modified any mortgages so far under settlement - Bank of America Corp hasn't completed any first-mortgage modifications that reduce loan balances for borrowers so far under a $25 billion settlement reached this year, the official monitoring the agreement said Wednesday. Five financial institutions that are part of the settlement have provided $10.6 billion in consumer relief from March 1 to June 30, with $8.7 billion in the form of short sales in which customers sell their homes for less than the mortgage's value. Bank of America produced $4.8 billion in short sales, the most of the five banks, according to the first report by settlement monitor Joseph Smith. JPMorgan Chase & Co completed $367 million in first lien modifications in which borrowers had their loan balances reduced, about half of all modifications. The other institutions in the settlement are Wells Fargo & Co, Citigroup Inc and Ally Financial Inc. The five lenders reached the agreement in March with federal officials and state attorneys general to resolve allegations they mishandled foreclosures. The settlement requires them to provide around $20 billion in consumer relief by reducing loan balances for struggling borrowers and refinancing loans for customers whose homes are worth less than the value of their mortgages.

National Mortgage Servicing Settlement Progress Report: Little to Show (And Little Expected) - The official monitor for the mortgage servicing fraud settlement has put out a progress report on settlement implementation.  It's a preliminary report that is not required of the monitor, so I don't want to be too critical, but I hope future reports are more informative.  Most of the report consists of summarizing the settlement.  There is a lot of data, but almost no analysis.  Apparently the report from the first quarter of 2013 will evaluate performance under the settlement by 29 metrics.  We'll see how demanding that evaluation is.  Unfortunately, it will take at least two quarters to correct any problems that turn up, by which point we'll be heading into 2014.  But given what I've previously written about the settlement, I don't think delay isn't going to make it much worse.  The main point that stands out is the figure about how many borrowers have been helped:  137,000.  That's not a lot, even by HAMP's sad standard. Even if you add in refis and mods in progress, it's only 220,000 borrowers.  To put that in perspective, we have 11.4 million underwater mortgages in the US.  So we're looking at 1-2% of the underwater population getting help so far under the settlement.  But even that is being too generous.

First Foreclosure Fraud Settlement Report Shows Preponderance of Mortgage Relief from Already-Popular Short Sales  - The Office of Mortgage Settlement Oversight has released their initial assessment of the foreclosure fraud settlement. And what they’re finding is that banks are “paying off” their portion of the settlement by engaging in short sales with their borrowers. Which is something they were already doing in greater numbers prior to the settlement. The report covers the time period from March 1 to June 30, and looks at the settlement in terms of gross dollars. In other words, some of the formulas for “credits” that banks get for various mortgage relief and other activities give less than a dollar-for-dollar payout. So the figures in the report refer to just the amount of relief, not how much credit the banks will get for it. With that in mind, here is the breakdown of what the Office of Mortgage Settlement Oversight describes as $10.561 billion in consumer relief:

Completed First Lien Modification Forgiveness $749.36M
Completed Forgiveness of pre-3/1/12 Forbearance $348.94M
Completed Second Lien Modifications and Extinguishments $231.42M
Short Sales Completed $8.669B
Total Other Program Activity $458.75M
Refinance Consumer Relief $102.78M

The Short Sale Scam: Most Going to Non-Recourse States that Bar Deficiency Judgments - The more I look at this foreclosure fraud settlement report, and the reliance on short sales for the allegedly positive results, the angrier I get. Let’s first understand what the numbers refer to when the Office of Mortgage Settlement Oversight lists $8.67 billion in short sales. That number does not refer to the sale price of the home, but the difference between the sale price and the amount owed on the mortgage. This unpaid principal balance is then forgiven by the bank. According to the OMSO, 74,614 borrowers took advantage of a short sale that qualified under the settlement, with an average of around $116,200 per borrower. This includes first and second lien remaining balances, on both short sales or “deeds-in-lieu,” where the borrower deeds the residents to the servicer or investor instead of a foreclosure (basically the same thing, only the “buyer” is the servicer or investor, instead of an outside third party). This acts a lot like a waiver of a deficiency judgment. In the circumstance of a deficiency judgment, the bank can get a court ruling to go after a foreclosure victim post-foreclosure to get them to cough up the balance between what they ended up getting on a foreclosure sale and the amount owed on the mortgage. Banks rarely do this, for the simple reason that foreclosure victims typically don’t have a big pot of money to give them. It’s like drawing blood from a stone. So banks often waive deficiency judgments. We can see the same dynamic here, the difference being that the bank is waiving the deficiency judgment, or in other words forgiving the balance of the mortgage after the sale, without having the home go into foreclosure. This makes sense for the bank, since sale prices on a short sale are typically better than a sale price on a foreclosed property, or REO (real estate owned). But here’s the key point: 12 states are “non-recourse states.” In these states, the bank is prohibited from going after a foreclosure victim for the balance of the mortgage post-foreclosure sale. The non-recourse states include large ones hit particularly hard by the foreclosure crisis, like California and Arizona. (The others are Alaska, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah and Washington)

Media Falling for Short Sale Scam in Foreclosure Fraud Settlement -- A couple other outlets have picked up on my research of the first report from the Office of Mortgage Settlement Oversight, showing that banks have, to this point, paid off practically all of their “punishment” through short sales that they were already pursuing. Yves Smith provides additional context to this point, looking back at the short sale market and finding that it had already outpaced foreclosures late last year: Short sales began outpacing foreclosures in some states late last year. Six states saw more preforeclosure sales – typically, short sales – than foreclosures in the fourth quarter, according to RealtyTrac, an online marketplace for foreclosure properties based in Irvine, Calif. In preliminary first quarter data for 2012, that total jumped to 12 states, including traditionally big foreclosure states like California and Arizona, RealtyTrac reported Thursday. (California and Arizona, where have I heard them before… foreshadowing for later in this article!) Similarly, you can go back to summer 2011 and find banks figuring out that short sales made more financial sense for them. They started offering financial perks to homeowners to take the short sales. By the way, these cash payouts, known as “transitional assistance,” can be written off as “credit” for their punishment in the foreclosure fraud settlement. It makes lots of sense for banks to pursue short sales. Most important, they don’t have to go through the foreclosure process, which has proven too great a hurdle in many states, because of the new legal rules and the faulty paperwork the banks have tried to peddle. A short sale avoids all of that mess. What’s more, they get to write new paper on the home, free from the chain of title problems (not really, but for the purposes of this transaction, the paper looks correct). They don’t have to take custody of the home and maintain it while they find a buyer in a post-foreclosure sale. And a purchase in a short sale is likely to have a higher price than a purchase of an REO property after a foreclosure.

Revisiting Statements Around the Mortgage Settlement - A little over six months ago, negotiations over the mortgage settlement concluded with a 49 state agreement to address robosigning and other predatory mortgage servicing  and foreclosure practices. This was a pivotal moment, because it was possibly the last leverage point to look into problems with the securitization process that led to the financial crisis. One theory around the settlement negotiations is that it was a PR move designed to make politicians look good in an election year, without costing the banks anything. To this end, one of the core objectives was to have organized groups issue statements of praise, or at least not condemnation, upon signing of the settlement agreement. This put pressure on the organized liberal establishment, which had found it difficult to reconcile their desire for a solvent middle class and their support for bailout-friendly politicians like Barack Obama. As a result, most of the organized infrastructure decided to praise the settlement, sometimes with aggressive words like “monumental” and sometimes with faintness, with the use of terms like “first step” and “down payment”. There were some, however, who made arguments that the settlement was a bad deal, that it shouldn’t have been signed. I’ve compiled a series of statements issued upon the signing of the settlement, so you can see the extent of the media framing fight that took place upon its signing. It’s also useful to show who was right and who was wrong. By and large, there have been no acknowledgments of error from anyone.

Foreclosure Free-For-All - Earlier this month, the Consumer Financial Protection Bureau (CFPB)—a new arm of the federal regulatory apparatus created under Dodd-Frank—issued a string of proposed rules that would simplify borrowers' interactions with servicers. The newly drafted stipulations—open to comment until October, after which they will be finalized—would institute clearer billing statements (including advanced notifications of interest rate increases), force servicers to promptly apply payments on the day they are received (instead of applying payments late and racking up fees), and force servicers to re-evaluate delinquent borrowers’ loans. Servicers must at least consider modification possibilities before rushing straight to foreclosure. Consumer advocates see a handful of bright spots in these proposed rules. "What's important about these rules is that they will establish for the first time a set of uniform standards on how lenders should service loans, that will apply not just to banks but also nonbank financial services companies, some of whom are among the biggest players in mortgage servicing," says Barry Zigas, director of housing policy at Consumer Federation of America. "It's very, very important to get this baseline established and much of what they have proposed have been very consumer friendly provisions." But it's not all favorable. While many consumer advocates might not object to the rules that have been proposed, many seem them as only a half-step.

Zillow: House Prices increased 1.2% Year-over-year in July - On Friday I posted their estimate for the June Case-Shiller Composite 20 index showing a 0.3% year-over-year increase. Of course Zillow has their own house price index that excludes foreclosure resales - so here is their most recent release. From Zillow: U.S. Home Values Climb for Eighth Consecutive Month; Over 60% of Metros Show Increasing Values Zillow’s July Real Estate Market Reports ... show that home values increased 0.5 percent to $151,600 from June to July (Figure 1), marking another month of healthy monthly appreciation. Compared to July 2011, home values are up by 1.2 percent (Figure 2), supported in many places by low for-sale inventory. Inventory shortages are being fueled by negative equity and a slowed distribution of REOs. ... On an annual basis, rents across the nation are up by 5.4 percent This graph from Zillow shows the national Zillow HPI. The index was up 0.5% in July, and is up 1.2% over the last year.  The index is off 21.7% from the peak in April 2007. (This excludes foreclosures).

Case-Shiller: House Prices increased 0.5% year-over-year in June -- S&P/Case-Shiller released the monthly Home Price Indices for June (a 3 month average of April, May and June). This release includes prices for 20 individual cities, two composite indices (for 10 cities and 20 cities) and the quarterly national index. Note: Case-Shiller reports NSA, I use the SA data.  From S&P: Home Prices Rose in the Second Quarter of 2012 According to the S&P/Case-Shiller Home Price Indices Data through June 2012 showed that all three headline composites ended the second quarter of 2012 with positive annual growth rates for the first time since the summer of 2010. The national composite was up 1.2% in the second quarter of 2012 versus the second quarter of 2011, and was up 6.9% versus the first quarter of 2012. The 10- and 20-City Composites posted respective annual returns of +0.1% and +0.5% in June 2012. Month-over-month, average home prices in the 10-City Composite were up 2.2% and in the 20-City Composite were up 2.3% versus May. For the second consecutive month, all 20 cities and both Composites recorded positive monthly gains. Eighteen of the 20 MSAs and both Composites posted better annual returns in June as compared to May 2012 – only Charlotte and Dallas saw a deceleration in their annual rates.  The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The second graph shows the Year over year change in both indices. The Composite 20 SA is up 0.5% compared to June 2011. This was the first year-over-year since 2010 (when the tax credit boosted prices temporarily). The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Case Shiller Home Prices Beat Expectations, Rate Of Increase Slows - The tried strategy of "Baffle them with BS" continues today following the release of the June (two month delayed) Case Shiller data. Because whereas last week we showed that New Home Prices are plunging, and the average new home price just dropping to its 2012 lows, when it comes to the Case-Shiller index, things are looking up. In June, the Top 20 composite index rose by 0.94%, well above the expected increase of 0.45%. How much of this is due to the REO-to-Rental program in which we are now seeing actively securitization of rental properties, which in essence is converting more and more of the Residential market into commercial real estate, remains unclear. For now it is clear that those entities with access to cash are buying up properties in beaten down areas in hopes these will be filled by renters. On the other hand, the truth is that summer months always see the biggest pricing gains, and following the May data revision, which rose at a revised rate of 0.97%, one may observe that the pricing increase has now peaked even according to delayed CS data, and has begun its traditional rolling over pattern. And a pattern it is. As the second chart below shows very clearly, housing is now merely in the dead cat bounce phase of a broad housing quadruple dip, each one having been facilitated by either Fed or ECB intervention. We give this one a few more months before it too resumes the downward trendline so very well known to Japanese homeowners, and falls in line with the data reported by the Census department. 

Housing Price Index Shows First Year-Over-Year Increase in 21 Months - The housing recovery narrative got a boost today from the Case-Shiller price index, which went positive year-over-year for the first time since a first-time homebuyer’s tax credit goosed the numbers in 2010. So really, this is the first year-over-year increase since the housing bubble collapsed in 2007 2006. And the usual suspects are ecstatic. Brad DeLong inconveniently points out that home prices are still down 0.8% year-over-year if you look at real dollars. Spoilsport! I prefer to look at this a bit differently. Focusing on housing prices without the context of how housing prices are being pushed upward, and what that means for our housing architecture, is important to note. First of all, banks are keeping inventory deliberately off the market to restrict supply. Some may say that those distressed properties will never return to the market at all, but that’s not exactly a good thing. If you think that the positive of housing prices raising a bit outweighs the negative of hundreds of thousands of blighted homes dotting the US landscape, fine. But make that explicit. Point out that you don’t think shadow inventory will be a factor because you think a bunch of dilapidated homes will just sit their uninhabited. And let me know what people think about that circumstance, particularly local governments, who will inevitably have to pay the price.

Vital Signs Chart: Uneven Rebound in Home Prices - Home prices are rebounding unevenly. The S&P/Case-Shiller Home Price Index rose 0.5% in June from a year earlier, but markets are recovering at different rates. Phoenix and Las Vegas both saw home prices drop during the housing crisis. But Phoenix’s improving economy helped push prices up 13.9% from a year earlier. In Las Vegas, where unemployment is 12.1%, prices remain below year-ago levels.

Case-Shiller Index Shows Home Prices Increased 0.5% From a Year Ago for June 2012 - The June 2012 S&P Case Shiller home price index shows a 0.5% price increase from a year ago for over 20 metropolitan housing markets and a 0.1% change for the top 10 housing markets from June 2011. Not seasonally adjusted home prices are now comparable to July 2003 levels for the composite-20 and September 2003 for the composite-10. Below is the yearly percent change in the composite-10 and composite-20 Case-Shiller Indices, not seasonally adjusted. Below are all of the composite-20 index cities yearly price percentage change, using the seasonally adjusted data. We see Phoenix continue to rise, up 13.9% from a year ago and Atlanta is still burning, but the decline is less than last month, down -12.2% from a year ago. Using the seasonally adjusted data, the composite-20 yearly percentage change was 0.46% and the composite-10 yearly percentage change was 0.06%. S&P reports the not seasonally adjusted data for their headlines. Housing is highly cyclical. Spring and early Summer are when most sales occur. See the bottom of this article for their reasoning.  S&P also produces a third national index. S&P is using the not seasonally adjusted national index when they report Q2 home values are up 1.2% from Q2 2011. Below is the national index, not seasonally adjusted (blue), which are used as the headline numbers, against the seasonally adjusted one (maroon).

Case-Shiller: Home Prices Rose in June in all 20 Cities - Home prices rose in June from the same month last year, the first year-over-year increase since the summer of 2010. The increase is the latest evidence of a nascent recovery in the housing market. The Standard & Poor’s/Case-Shiller home price index released Tuesday showed a gain of 0.5% from June 2011. All 20 cities tracked by the index also rose in June from May, the second consecutive time in which every city posted month-over-month gains. And all but two cities posted stronger gains in June than May. Detroit, Minneapolis, Chicago and Atlanta recorded the biggest one-month gains. “The combined positive news coming from both monthly and annual rates of change in home prices bode well for the housing market,” said David Blitzer, chairman of the S&P’s index committee. The S&P/Case-Shiller monthly index covers roughly half of U.S. homes. It measures prices compared with those in January 2000 and creates a three-month moving average. The June figures are the latest available.

A Look at Case-Shiller, by Metro Area -Home prices posted their first year-over-year gains since 2010, according to the S&P/Case-Shiller indexes. The broad national index, which is published on a quarterly basis, rose 1.2% from the second quarter of 2011 and was up 6.9% compared to the first three months of the year. The composite 20-city home price index, a key gauge of U.S. home prices, was up 2.3% in June from the previous month and increased 0.5% from a year earlier. Thirteen of the 20 cities posted annual increases in June. Atlanta, Chicago, Las Vegas, Los Angeles, New York and San Diego notched annual declines and Boston was flat. Every city posted a monthly increase compared to May. “We seem to be witnessing exactly what we needed for a sustained recovery; monthly increases coupled with improving annual rates of change. The market may have finally turned around,” said David Blitzer, chairman of S&P’s index committee.

Rising House Prices: The Good Fortune Spreads -- Atlanta Fed's macroblog - On the heels of a rash of pretty good news related to residential real estate—including yesterday's pending home sales report—the June S&P/Case-Shiller report on housing prices checks in with positive monthly gains across all markets in its 20-city composite for the second month in a row. What's more, the index posted its first year-over-year gain since last summer.  The early reviews found little to dislike, from Calculated Risk...  This was better than the consensus forecast and the change to a year-over-year increase is significant. Carpe Diem...  More evidence that the U.S. housing market has passed the bottom and is now in a period of sustainable recovery. TimeBusiness...  [T]he housing market is steadily improving and is poised to contribute to economic growth this year. Modest economic growth and job gains are encouraging more Americans to buy homes.  The widespread nature of price firming evident in the Case-Shiller index is strikingly confirmed by looking at even more disaggregated data. The following chart shows June year-over-year price growth by zip code, before the crisis hit and since, based on data available from CoreLogic

House Price Comments, Real House Prices, Price-to-Rent Ratio - No one should expect the strong price increases to continue. The Case-Shiller Composite 20 index NSA was up 2.3% in June from May. However a large portion of that increase was seasonal. On a Seasonally Adjusted (SA) basis, the Composite 20 index was up 0.9%. That is a 11% annualized rate - and that will not continue. Here is another update to a few graphs: Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio. Real prices, and the price-to-rent ratio, are back to late 1999 to 2000 levels depending on the index. The first graph shows the quarterly Case-Shiller National Index SA (through Q2 2012), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through June) in nominal terms as reported. In nominal terms, the Case-Shiller National index (SA) is back to Q1 2003 levels (and also back up to Q4 2010), and the Case-Shiller Composite 20 Index (SA) is back to July 2003 levels, and the CoreLogic index (NSA) is back to November 2003. The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices. In real terms, the National index is back to mid-1999 levels, the Composite 20 index is back to June 2000, and the CoreLogic index back to October 2000. As we've discussed before, in real terms, all of the appreciation early in the last decade is still gone.On a price-to-rent basis, the Case-Shiller National index is back to Q3 1999 levels, the Composite 20 index is back to June 2000 levels, and the CoreLogic index is back to August 2000.

Why Home Prices Are Rising: The ‘Distressed Share’ - Prices have risen this summer for a simple reason: more buyers have chased fewer properties. But the drop in supply and the boost in demand isn’t the only reason that Case-Shiller is now turning positive. Another related factor is that the share of non-distressed home sales is rising and the share of distressed sales—foreclosures and short sales, mostly—is falling. (Case-Shiller reports prices using a three-month moving average with a two month lag. Several other home price indices have also shown bigger-than-usual price gains for the second quarter.) The decline in the distressed share is important for the housing market, and especially for home-price indexes like Case-Shiller. Because banks are faster to cut prices to unload inventory than are mom-and-pop sellers, home values can fall further as the share of distressed sales rises. This was the case throughout 2008, as home price declines were in virtual free fall amid a cycle of rising foreclosures. A report last week from economists at Goldman Sachs tries to quantify the share of the decline in home prices that can be attributed to the rise of distressed versus non-distressed homes. They conclude that this “mix shift” is responsible for around one third of the 34% decline in home prices since 2006.

What Housing Recovery? Distressed Sales Still High, Shadow Inventory Massive - Housing markets seemed to have turned a corner, with Tuesday’s Case-Shiller data adding to the optimism.  Home prices have risen for a second consecutive month for the first time since the summer of 2010, but much of this is a consequence of the falling percentage of distressed sales, while prices are still more than 31% of their peaks and may take years to recover.  With 11.4 million, or 23.7%, of all residential properties with a mortgage under water, and a shadow inventory worth $246 billion, according to CoreLogic, a true housing recovery is far away.Tuesday’s Case-Shiller release, with data through June 2012, showed home prices continuing to recover.  Both the 10- and 20-city composites finally recorded annual gains (0.1% and 0.5% respectively),  The report was met with optimism, as it came after improved existing and new home sales, which Wells Fargo3’s analysts suggest indicate markets may be “bottoming in July.”  There are several reasons to remain skeptical, though, that this recovery will both be swift and will fuel economic growth that will help pull the U.S. farther from the edge of a new recession.  Goldman’s economics research team understands that much of the improvement in housing markets can be attributed to a fall in the percentage of distressed transactions, which accounted for 50% of sales in 2009 and has now fallen to 25%. 

Lawler: On the relationship between pending home sales and closed sales  - Yesterday the National Association of Realtors reported that its “National” Pending Home Sales Index increased by 2.4% on a seasonally adjusted basis in July to its highest level since April 2010. The NAR’s PHSI did not signal the “dip” in June/July closed existing home sales, for reasons that are difficult to discern. It’s not easy to figure out “fallout” rates from the PHSI for several reasons: first, the PHSI is an index number with 2001 “activity” equal to 100, making numerical comparisons to the NAR’s existing home sales estimate difficult, especially since there is a “discontinuity” in the NAR’s existing home sales methodology in 2007; and second, the NAR’s PHSI is based on a sample size not much more than half that used to estimate existing home sales. To really delve into the relationship between pending sales and closed sales, one needs to get local data—which unfortunately isn’t available to the public in that many places.This graph from Tom Lawler shows Pending and Closed home sales since January 2008. For this graph, Tom Lawler set both series to 100 in 2008. More from Lawler: I looked at pending sales vs. closed sales data reported by MRIS for the mid-Atlantic region. While I have limited historical data, that data suggests that (1) contract fallout over the past two and a half years is up considerably from earlier periods; and (2) that increased fallout coincided with a significant increase in the share of pending sales that were “contingent. Other MRIS data/analyses suggests that a rise in the share of pending contracts that are short-sales, which (1) take much longer time to close; and (2) which have very high contract fall-out rates, has significantly impacted the relationship between pending sales and closed sales. Here is a chart showing closed home sales by MRIS for the mid-Atlantic region compared to lagged new pending contracts.

Housing: Two Bearish Views on House Prices and Foreclosures - First a couple of bearish views on house prices - clearly residential investment has bottomed, but some analysts think house prices will fall further.
• From RadarLogic: Apparent Strength in Home Price Metrics Driven by Decline in Distressed Sales  A decline in sales of homes in bank inventories, coupled with an increase in the rate of all other sales, helped drive the 25 metropolitan area RPX Composite price to a year-over-year gain in June, according to the June 2012 RPX Monthly Housing Market Report ..."The absence of real price appreciation when distressed sales are excluded from the analysis suggests that traditional home buyers remain hesitant to return to the market in strength,"  The gains of the first half of 2012 could be short lived. They were the result of seasonal factors and REO disposition strategies that could reverse in the fall. The unusually rapid price appreciation could give way to equally rapid declines in the second half of the year.

• From Mark Hanson posted at the Big Picture: Hanson On Case Shiller [T]oday’s CS is disappointing…a YoY 15% increase in purchasing power and 25% decrease in foreclosure resales and still the CS-20 NSA only managed a 0.5% gain over last year. To me, normalized, that means real house prices are still falling.

The US housing market is not "a chicken-and-egg problem" - An article appeared in the NY Times last week that describes the sad state of the US housing market as a closed system that is stuck in a "negative feedback loop":  NY Times: - The economy will not recover until the housing market recovers, and the housing market will not recover until the broader economy recovers — a chicken-and-egg problem reflected, once again, in national housing figures. And that may indeed be the case if it wasn't for the US demographics. It's hard for many to accept the fact that the US population did not stop growing after the financial crisis. At the same time new home construction has stalled, forcing inventories to shrink. The author of course argues that there is a massive number of homes yet to hit the market - people are just waiting until their equity values turn positive. NY Times: - High unemployment, poor jobs, stagnating wages and tight lending standards keep buyers away, while many sellers — especially the estimated 13 million homeowners who owe more on their mortgages than their homes are worth — are waiting for a price rebound. Of course there are millions waiting to sell their home. But once these homes are no longer "underwater" and the owners sell them, where are they going to move? The sellers will go out and buy another home - maybe somewhere else in the US.

NAR: Pending home sales index increased 2.4% in July - From the NAR: July Pending Home Sales Rebound: The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 2.4 percent to 101.7 in July from 99.3 in June and is 12.4 percent above July 2011 when it was 90.5. The data reflect contracts but not closings. The PHSI in the Northeast increased 0.5 percent to 77.0 in July and is 13.4 percent higher than a year ago. In the Midwest the index grew 3.4 percent to 97.4 in July and is 20.2 percent above July 2011. Pending home sales in the South rose 5.2 percent to an index of 111.7 in July and are 15.6 percent above a year ago. In the West the index slipped 1.7 percent in July to 109.9 but is 1.3 percent higher than July 2011. This was above the consensus forecast of a 1.0% increase for this index and is the highest level in two years (since the expiration of the housing tax credit).

U.S. Pending Home Sales Highest Since April 2010 - The number of U.S. home buyers who signed contracts to purchase previously owned homes rose last month to the highest level in more than two years, the latest sign of a strengthening housing market. The National Association of Realtors said Wednesday its seasonally adjusted index for pending sales of existing homes increased 2.4% in July from a month earlier to a reading of 101.7. The results were the highest since April 2010 when buyers were taking advantage of federal tax credits. The index for July was up 12.4% from the same month last year. The index was better than expected. Economists surveyed by Dow Jones Newswires had forecast pending home sales would increase 1.0% from June’s figures, which were unrevised.

Survey: ‘Homeowners just don’t want to sell’ - A recent survey by Redfin provides insight into why home ownership is at historic lows, the online hometracker says. Redfin’s poll drew responses from 816 owners from 20 markets around the country, including Orange County, who indicated they had intentions to sell their homes.  The survey, conducted earlier this month, shows:

  • 80 percent believe their home would fetch a higher price in one to two years
  • 46 percent would consider renting out their home instead of selling it
  • 32 percent intend to price their home higher than the comps
  • 35 percent would choose an all cash offer over a higher financed offer
  • 49 percent cited the economy as a major concern with selling their home
  • 61 percent believe it’s a good time to buy

'Owning Is a Pain in the ***': Testimonies from the Cheapest Generation - Why aren't young people buying cars and houses? Is it just the terrible economy, or are we seeing the beginning of a more fundamental shift toward public transit, car-sharing, and denser living, with longer-lasting consequences for businesses and families? That's the question Jordan Weissmann and I asked in our business column in this month's magazine.  Read the column here. Join the debate here: "Why Aren't Twentysomethings Buying Cars or Houses?" Read our most angry and articulate critics here. Read our most assenting commenters extoll "the freedom of not owning" here. And here are the best anecdotes and reflections across our hundreds of comments. The responses are all between lower-20s and mid-30s, skew upper-middle-class and coastal, but we do have some good reminders that in more sprawled urban layouts (especially throughout the South) having a car is practically a pre-req for getting to work.

The Middle Class Blames Everyone But the Middle Class for Our Economy - The Pew Research Center is out with a new report that chronicles the financial woes middle-income families have experienced over the past ten years while exploring their thoughts on politics and the economy. When asked how much they blamed various institutions for their difficulties, self-described middle classers were happy to point the finger at Congress (and really, who can blame them), the banks, corporations, and the last few presidencies. They were much less likely to take personal responsibility.  Now, this might be a reasonable interpretation of recent history. Forty-two percent of survey takers did lay at least a little bit of blame on their fellow middle classers. And yet, we are talking about a decade defined by an epic housing boom and bust fueled by reckless middle-class borrowing, not to mention some inept policy decisions made by politicians elected, in large part, by middle-class voters. By 2004, debt-to-income ratios for middle class families had more than doubled from twelve years earlier. Nobody forced them to break out their credit cards or to take out exotic mortgages. You don't have to minimize the role of banks and politicians  in order to acknowledge that families living on main street played a big role creating our present problems too.

Just Released: Has Household Deleveraging Continued? - NY Fed - Today’s release of the 2012Q2 Quarterly Report on Household Debt and Credit indicates a continuation of the downward trend in household debt, which followed a long period of substantial increases. As of June 30, 2012, total outstanding household debt was down nearly $1.3 trillion since its peak in the third quarter of 2008. In the Liberty Street Economics blog’s inaugural post, we used the FRBNY Consumer Credit Panel to decompose this change in household indebtedness. Leading up to the crisis, households increased their cash holdings available for consumption by extracting equity from their homes, using home equity lines of credit and cash-out refinances, and by increasing their nonmortgage balances, such as credit card and auto loan balances. When the Great Recession struck, consumers reversed this behavior and began reducing rather than increasing these obligations. We demonstrated that although some of the reduction in household debt was due to charge-offs (the removal of obligations from consumers’ credit reports because of defaults), much of the debt reduction seen at the overall level was attributable to deleveraging: households actively borrowing less and paying down existing liabilities. In this post and accompanying interactive charts, we update our analysis, using the newly available 2010 and 2011 FRBNY Consumer Credit Panel data to determine whether those trends have continued.

Fed: Consumer Deleveraging Continued in Q2 - From the NY Fed: Overall Delinquency Rates Down as Americans Paying More Debt on Time In its latest Quarterly Report on Household Debt and Credit, the Federal Reserve Bank of New York today announced that delinquency rates for mortgages (6.3 percent), credit cards (10.9 percent), and auto loans (4.2 percent) decreased from the previous quarter. However, rates for student loans (8.9 percent) and home equity lines of credit (HELOC) (4.9 percent) increased from March. Household indebtedness declined to $11.38 trillion, a $53 billion decline from the first quarter of 2012. Outstanding household debt has decreased $1.3 trillion since its peak in Q3 2008. The reduction was led by a decline in real estate-related debt like mortgages and HELOC. More information about how Americans are paying down their debt is available in our corresponding blog post. ... Mortgage originations, which we measure as the appearance of new mortgages on consumer credit reports, rose to $463 billion.Here is the Q2 report: Quarterly Report on Household Debt and Credit Mortgage balances shown on consumer credit reports continued to fall, and now stand at $8.15 trillion, a 0.5% decrease from the level in 2012Q1. Home equity lines of credit (HELOC) balances dropped by $23 billion (3.7%). About 256,000 individuals had a new foreclosure notation added to their credit reports between March 31 and June 30, a slowdown of 12% since the first quarter and the lowest number seen since mid-2007. ... Here are two graphs:

Fed Says Household Debt Fell 0.5% in Second Quarter -  Household debt in the U.S. declined 0.5 percent in the second quarter, led by a drop in debt tied to real estate, according to the Federal Reserve Bank of New York. Consumer indebtedness shrank by $53 billion from the first quarter to $11.38 trillion as of the end of June, according to the quarterly report on household debt and credit released today by the district bank. Delinquency rates for mortgages, credit cards and car loans declined, while rates for student loans and home equity lines of credit rose, the report said. “The continuing decrease in delinquency rates suggests that consumers are managing their debts better,”  “As they continue to pay down debt and take advantage of low interest rates, Americans are moving forward with rebalancing their household finances.” Americans have cut household debt by $1.3 trillion since the peak in the third quarter 2008 amid signs of a rebound in the housing market at the center of the 18-month recession that ended in June 2009, according to the report. The lowest mortgage rates on record helped boost the S&P/Case-Shiller gauge of home prices in 20 U.S. cities, which rose 0.5 percent in June from a year earlier for the first gain since September 2010. About 256,000 consumers showed new foreclosures on their credit reports in the second quarter, a decrease of 12 percent since the first quarter and the lowest level since 2007, the New York Fed’s survey showed. About 399,000 consumers had a bankruptcy notation added to their credit reports, down 16 percent from the same quarter a year earlier, the report said.

Personal Income increased 0.3% in July, Spending increased 0.4% - The BEA released the Personal Income and Outlays report for July:  Personal income increased $42.3 billion, or 0.3 percent, and disposable personal income (DPI) increased $39.9 billion, or 0.3 percent, in July, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $46.0 billion, or 0.4 percent. In June, personal income increased $46.1 billion, or 0.3 percent, DPI increased $37.4 billion, or 0.3 percent, and PCE increased $3.5 billion, or less than 0.1 percent, based on revised estimates. ... Real PCE -- PCE adjusted to remove price changes -- increased 0.4 percent in July, in contrast to a decrease of 0.1 percent in June. ... The PCE price index increased less than 0.1 percent in July, compared to an increase of 0.1 percent in June. The PCE price index, excluding food and energy, increased less than 0.1 percent, compared to an increase of 0.2 percent. ... Personal saving -- DPI less personal outlays -- was $506.3 billion in July, compared with $516.2 billion in June. The personal saving rate -- personal saving as a percentage of disposable personal income -- was 4.2 percent in July, compared with 4.3 percent in June. The following graph shows real Personal Consumption Expenditures (PCE) through July (2005 dollars).This graph shows real PCE by month for the last few years. The dashed red lines are the quarterly levels for real PCE.

Income & Spending Update Boosts July's Economic Profile - Today’s update on personal income and spending offers a fresh batch of data for thinking that recession risk remains low. Disposable personal income (DPI) continued to inch higher in July on a month-over-month basis. Meantime, personal consumption expenditures (PCE) staged a sharp revival in July, rising 0.42% vs. June—the best monthly improvement since February. As a result, the year-over-year trends for these indicators look considerably better—signs that income and spending may be stabilizing at moderate growth rates. Here’s how the monthly profile compares over the past year:The stronger July numbers clearly make a difference for the year-over-year profile. In particular, note that the annual percentage increase in income has been moving higher for five of the last six months. That’s a powerful clue for thinking that consumer spending isn’t poised to fall off a cliff, as some analysts have been predicting. Granted, spending’s annual rate of growth is still slipping, but given the improvement in income of late it’s reasonable to expect that PCE will stabilize at current levels if not turn moderately higher.

Consumer spending posts biggest rise in five months (Reuters) - Consumer spending got off to a fairly firm start in the third quarter, rising by the most in five months and offering hope economic growth would pick up this quarter. Other data on Thursday showed the number of Americans filing new claims for jobless benefits held steady last week. The reports were consistent with only moderate economic and job growth, and they kept alive the prospect of additional monetary stimulus from the Federal Reserve. The Commerce Department said consumer spending increased 0.4 percent in July after a flat reading in June. The rise was in line with economists' expectations. With a gauge of prices holding steady, spending was also up 0.4 percent on an inflation-adjusted basis, which was also the largest increase since February. While separate reports from U.S. retailers indicated some of the spending momentum carried into August, economists expect spending to cool a bit in the months ahead because of sluggish income growth and a recent rise in gasoline prices.

Real Disposable Income Per Capita: An Eight-Month Positive Trend - Earlier today I posted my monthly update of the year-over-year change in the Bureau of Economic Analysis (BEA) Personal Consumption Expenditures (PCE) price index since 2000. Now let's take a look at a major component of today's PCE report for an update on a key driver of the U.S. economy: "Real" Disposable Income Per Capita. Adjusted for inflation, per-capita disposable incomes had been struggling for the past two years and are currently at about the level first achieved in December of 2007, the month the Great Recession began. In recent months, however, we're seeing an encouraging reversal of the gradual decline during most of 2011. The interim trough was in November of 2011. Eight months later, real DPI per capita is up 2.02%. Month-over-month July real DPI per capita growth is up 0.26% and 1.30% year-over-year. The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000. The BEA uses the average dollar value in 2005 for inflation adjustment. But the 2005 peg is arbitrary and unintuitive. For a more natural comparison, let's compare the nominal and real growth in per capita disposable income since 2000.  Nominal disposable income is up 50.3% since then. But the real purchasing power of those dollars is up a mere 15.5%.

Savings Rate Drops For First Time In 5 Months Even As Spending Misses Expectations - Personal Spending rose 0.4% MoM, its first rise in three months, but this seems to have been 'funded' by consumers dipping into savings mode with the rate of growth of income rising at the same level as last month and as expected +0.3%. The Spending rate of increase missed expectations however and with the savings rate dropping for the first time in 5 months (to 4.2%) - it suggests a 'man on the street' who is perilously close to the edge to meet his needs.

The Drop in Personal Interest Income - Low interest rates are good for borrowers, but lousy for savers. Here's a graph showing personal interest income, which dropped by about $400 billion per year--a fall of more than one-fourth--as interest rates have plummeted.   The (Minneapolis) Star Tribune, offered a nice illustrative set of anecdotes in a story last Sunday 1about this consequences of this change for those who were depending on interest-bearing assets--often those who are near-retirement or in-retirement, and who want to hold safe assets, but who are receiving a much lower return than they might have expected.   Moreover, as the article points out, it's not just individual savers who are affected. Pension funds, life insurance companies, long-term care insurance companies, and others who keep a substantial proportion of their investments in safe interest-bearing assets are receiving much less in interest than they would have expected, too.  I'm someone who supported pretty much everything the Federal Reserve did through the depths of the recession and financial crisis that started in late 2007: cutting the federal funds rate down to near-zero percent; setting up a number of agencies to lend money to make short-term liquidity loans to number of firms in financial markets; and the "quantitative easing" policies that involved printing money to purchase federal debt and mortgage-backed securities. But the recession officially ended back in June 2009, more than three years ago. It's time to start recognizing that ultra-low interest rates pose some painful trade-offs, too.

Consumer Confidence Hits Lowest Since November 2011 - U.S. consumers soured on the economy in August as their outlook on business and job prospects declined, according to a report released Tuesday. The Conference Board, a private research group, said its index of consumer confidence fell to 60.6 in August–the lowest reading since November 2011–from a revised 65.4 in July, first reported as 65.9. The latest index falls short of the 66.0 expected by economists surveyed by Dow Jones Newswires. The decline contrasts with a mid-August Thomson Reuters-University of Michigan sentiment report that showed U.S. consumers feeling more optimistic. That study found sentiment improving, with its index rising to 73.6 early this month from 72.3 at the end of July.

August Consumer Confidence Surprises to the Downside - The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through August 16. The 60.6 reading was below the consensus estimate of 65.7 reported by This is a decline from last month's 65.4, which is a slight downward revision from the Conference Board's previously reported 65.9. Here is an excerpt from the Conference Board report. "The Consumer Confidence Index is now at its lowest level since late last year (Nov. 2011, 55.2). A. Consumers were more apprehensive about business and employment prospects, but more optimistic about their financial prospects despite rising inflation expectations. Consumers' assessment of current conditions was little changed in August. Those claiming business conditions are "good" improved to 15.2 percent from 13.7 percent, while those saying business conditions are "bad" was unchanged at 34.4 percent. Consumers' appraisal of the labor market varied. Those stating jobs are "plentiful" declined to 7.0 percent from 7.8 percent, while those claiming jobs are "hard to get" edged down to 40.7 percent from 41.0 percent.   [press release] The table here shows the average consumer confidence levels for each of the five recessions during the history of this monthly data series, which dates from June 1977. The latest number is well above the bottom of the unprecedented trough in 2008, but it is still below the 69.4 average confidence of recessionary months over three years after the end of the Great Recession

Consumers remain uncertain in spite of increased net worth - The weak consumer sentiment number today was a surprise. After all, the S&P500 index is up 13.7% year to date (including dividend). The recent equity market rally should have boosted the consumer net worth and improved consumer confidence. A quick empirical analysis (below) shows that a large portion (r^2 =84%, beta = .33) of the change in consumer net worth is explained by the moves in the stock market. This is a recent relationship, as the US consumer exposure to equities has been larger over the past 20 years than previously (the relationship was weaker during the previous 30 years: r^2 = 68%, beta = .18).In fact the US consumer wealth has increased considerably since the financial crisis, to a large extent driven by the stock market (particularly given that housing has been stagnant until very recently). But increased wealth does not seem to be improving how consumers feel. Actually over the past few months the divergence between consumer sentiment and the equity market (which reflects improved net worth) is quite striking.

Consumer Sentiment in U.S. Rose to Three-Month High - Confidence among U.S. consumers in August rose more than projected to the highest level in three months, reinforcing signs the world’s largest economy is improving.  The Thomson Reuters/University of Michigan final index of consumer sentiment climbed to 74.3 from 72.3 the prior month. The gauge was projected to rise to 73.6, according to the median forecast of 60 economists surveyed by Bloomberg. The preliminary reading for August was 73.6.  Recent reports showing the best job growth in five months and the first gain in home prices since 2010 may be helping lift moods, improving the odds household spending, which accounts for about 70 percent of the economy, will be sustained. At the same time, rising fuel costs and concerns about impending tax changes may be preventing bigger gains in sentiment.

Michigan Consumer Sentiment: A Bit Better than Consensus Forecast - The University of Michigan Consumer Sentiment Index final number for August came in at 74.3, a small increase over the 73.6 July preliminary reading. Today's number was above's consensus forecast of 73.6. 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 13% below the average reading (arithmetic mean), 12% below the geometric mean, and 12% below the regression line on the chart above. The current index level is at the 25 percentile of the 416 monthly data points in this series. The Michigan average since its inception is 85.4. During non-recessionary years the average is 87.9. The average during the five recessions is 69.3. So the latest sentiment number of 74.3 puts us below the midpoint (78.6) between recessionary and non-recessionary sentiment averages.

Retailers Report Strong Gains for August - Americans kept spending in August despite their escalating fears about the slow economic recovery and surging gas prices. A range of retailers from discounter Target to club-operator Costco on Thursday reported August sales that beat Wall Street estimates. The results seem to show that what Americans do and say are two different things: The strong sales reports come a day after a private research firm said consumer confidence in August fell to its lowest level since November 2011. “It shows some resilience among shoppers. Let’s face it. There are a whole series of economic headwinds that they are fighting against,” “The results show that the consumer isn’t dead.” A small group of merchants representing roughly 13 percent of the $2.4 trillion U.S. retail industry report monthly revenue at stores open at least a year, a key measure since it excludes results from locations that open and close during the year. The figures offer a snapshot of consumer spending, which accounts for more than 70 percent of economic activity.

Weekly Gasoline Update: Prices Nudge Higher and Isaac Could Accelerate the Trend -- 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 eighth week after 13 weeks of decline: the average for Regular rose three cent and premium four cents over the past week. They are both up 55 cents from their interim weekly lows in the December 19th EIA report. Of course, the impact of the Isaac on Gulf of Mexico oil production refinery processes will likely have near-term boost to gasoline prices. As I write this, shows four states, Hawaii, California, Illinois and Connecticut, plus DC, with the average price of gasoline above $4. Another four states are close behind -- above $3.90 (Oregon, New York, Washington and Michigan).

DOT: Vehicle Miles Driven increased 0.4% in June - The Department of Transportation (DOT) reported today: Travel on all roads and streets changed by 0.4% (1.1 billion vehicle miles) for June 2012 as compared with June 2011. Travel for the month is estimated to be 257.6 billion vehicle miles. Cumulative Travel for 2012 changed by 1.1% (15.6 billion vehicle miles). The following graph shows the rolling 12 month total vehicle miles driven.  The rolling 12 month total is still mostly moving sideways. In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.  Currently miles driven has been below the previous peak for 55 months - and still counting.  The second graph shows the year-over-year change from the same month in the previous year.  Gasoline prices peaked in April at close to $4.00 per gallon, and then started falling. Gasoline prices were down in June to an average of $3.60 per gallon according to the EIA. Last year, prices in June averaged $3.74 per gallon, so it makes sense that miles driven are up year-over-year in June.

Vehicle Miles Driven: Up in June, But Total Population-Adjusted Sets a New Post-Crisis Trough - The Department of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through June. Travel on all roads and streets changed by 0.4% (1.1 billion vehicle miles) for June 2012 as compared with June 2011. However, the 12-month moving average of miles driven declined by 0.2% from June a year ago (PDF report). And the total population-adjusted data likewise has set a new post-crisis trough. Here is a chart that illustrates this data series from its inception in 1970. I'm plotting the "Moving 12-Month Total on ALL Roads," as the DOT terms it. See Figure 1 in the PDF report, which charts the data from 1987. The rolling 12-month miles driven contracted from its all-time high for 39 months during the stagflation of the late 1970s to early 1980s, a double-dip recession era. The most recent dip has lasted for 54 months and counting — a new record, but the trough to date was in November 2011, 48 months from the all-time high. Total Miles Driven, however, is one of those metrics that must be adjusted for population growth to provide the most revealing analysis, especially if we're trying to understand the historical context. We can do a quick adjustment of the data using an appropriate population group as the deflator. I use the Bureau of Labor Statistics' Civilian Noninstitutional Population Age 16 and Over (FRED series CNP16OV). The next chart incorporates that adjustment with the growth shown on the vertical axis as the percent change from 1971.

ATA Trucking index unchanged in July - From ATA: ATA Truck Tonnage was Unchanged in July The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index was unchanged in July after increasing 1.1% in June. (June’s gain was slightly smaller than the 1.2% increase ATA reported on July 25.) In July, the SA index stayed at 118.8 (2000=100). Compared with July 2011, the SA index was 4.1% higher, which was the largest year-over-year gain since February 2012. Year-to-date, compared with the same period last year, tonnage was up 3.7%.  Note from ATA:  Trucking serves as a barometer of the U.S. economy, representing 67% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9.2 billion tons of freight in 2011. Motor carriers collected $603.9 billion, or 80.9% of total revenue earned by all transport modes.  Here is a long term graph that shows ATA's For-Hire Truck Tonnage index.

Dallas Fed: "Growth Slows" in August Regional Manufacturing Activity From the Dallas Fed: Texas Manufacturing Growth Slows but Six-Month Expectations Improve Texas factory activity increased but at a slower pace in August, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, fell from 12 to 6.4, suggesting softer output growth. The general business activity index remained negative but climbed nearly 12 points from -13.2 to -1.6.  Labor market indicators reflected stronger labor demand but unchanged workweeks. Employment growth picked up in August, with the index rising to 14.2, its highest reading in five months. Twenty-four percent of firms reported hiring new workers, while 10 percent reported layoffs. The hours worked index was near zero, suggesting little change in workweek length. This was above expectations of a -6.0 reading for the general business activity index.

Kansas City Fed: "Moderate" growth in Regional Manufacturing Activity in August - From the Kansas City Fed: Growth in Tenth District Manufacturing Activity Improved Moderately - Growth in Tenth District manufacturing activity improved moderately in August, and producers’ optimism continued to edge higher. Price indexes were relatively stable, although the share of producers planning to raise prices increased further. Several respondents said the ongoing drought has negatively affected their business, mainly through higher input costs and slower sales for agricultural-related products. The month-over-month composite index was 8 in August, up from 5 in July and 3 in June. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. ... The production index climbed from 2 to 7, and the shipments, new orders, and order backlog indexes all moved back into positive territory. The new orders for export index inched higher but remained below zero, while the employment index dipped slightly from 6 to 2.  This was below expectations of a 5 reading for the composite index. However the regional manufacturing surveys were mostly weak in August. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Seventh District Update -- Chicago Fed - A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

• Overall conditions: Economic activity in the Seventh District expanded at a moderate pace in July and early August, with the pace of growth once again slowing.
• Consumer spending: Growth in consumer spending increased slightly due in large part to heavy discounting by retailers to clear inventory space for back-to-school items. Auto sales were, however, little changed from the prior reporting period.
• Business Spending: Growth in business spending slowed. Capital expenditures were proceeding as planned, but contacts noted a greater degree of restraint in new spending and inventory accumulation.
• Construction and Real Estate: Construction activity continued to increase at a slow pace. Multi-family construction remained an area of strength and demand for nonresidential construction continued to gradually improve.
• Manufacturing: Growth in manufacturing production slowed further, with contacts expecting this slower rate of growth to persist throughout the second half of the year. Exporters noted weaker demand from Europe and Asia.

Chicago Purchasing Managers Index Decreased to 53.0 in AugustThe Institute for Supply Management- Chicago Inc. said today its business barometer fell to 53.0 this month from 53.7 in July. Figures greater than 50 signal expansion. Economists forecast the gauge would drop to 53.2, according to the median forecast in a Bloomberg survey.  Estimates from the 58 economists surveyed ranged from 51.0 to 55.0.  Economists watch the Chicago index and other regional manufacturing reports for an early reading on the national outlook. The Chicago group says its membership includes both manufacturers and service providers with operations in the U.S. and abroad, making the gauge a measure of overall growth.

Factory Orders Jumped in July - Factory orders registered the biggest jump in a year last month, the latest bright spot in the manufacturing sector amid an otherwise tepid economic recovery. Orders for manufactured goods rose 2.8% to $478.62 billion in July, the Commerce Department said Friday. The gain was the highest since July 2011 and above expectations. Economists surveyed by Dow Jones Newswires had forecast a 2.3% rise in factory goods. Factory orders have jumped around in the last five months, with June’s decrease of 0.5% unrevised from the initial estimate. Although factory orders have been growing since April 2009, the year-over-year growth rate has slowed “significantly” and is now growing fairly slowly, “It is unclear whether this is the beginning of a new trend or just part of the normal volatility within this series,” Wood said. “Regardless, it suggests that the recent softness in manufacturing activity and capital spending is likely to continue, at least for several more months.”

Factory orders post biggest rise in one year (Reuters) - New orders for U.S. factory goods rose more than expected in July, posting the biggest increase since July 2011 and rising for the second time in three months. The Commerce Department said on Friday new orders for manufactured goods rose 2.8 percent during July. Economists in a Reuters poll had forecast orders rising 1.9 percent during the month. U.S. factories have been a major part of the country's recovery from the 2007-2009 recession. But manufacturing has appeared to be one of the more vulnerable sectors to the ongoing debt crisis in Europe. New orders for manufactured goods fell 0.5 percent in June. Transportation equipment helped July orders beat expectations, with orders for motor vehicles and parts up 20.6 percent, the biggest jump in one year. Orders for civilian aircraft leapt 53.9 percent in July. Excluding transportation, new orders rose 0.7 percent during the month. Orders for non-defense capital goods excluding aircraft - seen as a measure of business confidence and spending plans - fell 4 percent in July.

Exports & A Strong Dollar: Not Necessarily Perfect Together - It’s become fashionable in this election cycle in some circles to promote the idea of a strong dollar as a key part of the solution to the economic ills that plague the U.S. But simple “solutions” in economics aren’t always what they seem. That's a caveat worth considering when it comes to America’s growing exports and how it relates to the value of the dollar. Arguing that America should have a strong dollar may sound good in a political speech, but the details can be messy. It’s well established that changes in export levels tend to be inversely related to currency value, and for a rather obvious reason: domestic goods and services are less expensive in foreign markets when the home currency’s value falls. When prices decline, consumption usually rises. But there’s no free lunch here. A weaker currency also translates into higher prices for imports. That’s a key issue for the U.S., which is dependent on crude oil imports in rather large quantities--nearly 11.4 million barrels a day in 2011.  Nonetheless, it’s narrow-minded to talk about a strong dollar and ignore the fact that U.S. exports have increased sharply in recent years, in part thanks to a weaker greenback. Four years after the Great Recession ended, American exports are up 44% through June 2012, according to Census Bureau data.Roughly 10 million full-time jobs are directly related to exports, based on 2008 data, the International Trade Administration advises, which equates with nearly 7% of total employment.  Exports, in short, are big business, and getting bigger.

High-speed Railways: Worth Their Hefty Price Tag? -- Imagine riding from Philadelphia to New York in only 37 minutes, or from Boston to Washington, D.C., in just three hours on a cutting-edge, high-speed transportation network linking every major city in the Northeast — essentially, a rail-centric economic “mega-region.” Those are just some of the promises behind Amtrak’s ambitious new high-speed rail proposal for the Northeast Corridor — the railway stretch between Boston and Washington D.C. Under the plan, the aging, crowded infrastructure of the region’s existing rail system would be replaced by a network on par with the most advanced systems in the world. According to Amtrak, the project — which would be completed by 2040 — would ensure the economic viability of the region for decades to come, cementing its status as one of the most important business districts in the United States. To many observers, that sounds wonderful in theory. But there’s just one problem: The cost. Amtrak — which for years has drawn criticism for its inability to turn a profit — has admitted that its newest vision would cost a staggering $151 billion, most of which would come from government funding. That’s a massive price to pay at a time when the federal government is struggling to find ways to deliver on such entitlement programs as Social Security and Medicare.

A Forecast That Sounds More Impressive Than It Is - I see where Rep Ryan is claiming that he and Mitt can create 12 million jobs.  Here’s some context for that. That’s about what you’d expect in terms of job creation in a normal American job market over four years.  It sounds great right now—and “normal” would be great—given the job losses in the Great Recession and the slow growth since.  But if you just run a typical macro model under the assumption that the economy is back to its normal growth path, regardless of who’s in the White House, that’s about what you’d get. The figure below, for example, is the Moody’ forecast, 2012-2016, which in fact predicts the growth of 12 million jobs over these years.   That’s about a 9% increase, about the same percentage gains as in each of the Clinton terms and over the second Reagan term. I’m not saying that’s what’s going to happen, and I’m certainly not suggesting that Rom/Ry’s agenda will blaze the path back to normal levels of job growth.  To the extent that their supply-side tax cuts and deregulation generate results similar to those of the GW Bush years, they won’t get anywhere close.   But from what I can tell, they’re just looking at a typical model’s predictions—with no reference to their employment policy agenda—and claiming that’s what’s gonna happen.

Our Dis-Integrated Economy - During Mitt Romney’s time at its helm, Bain Capital cleverly invested in, and made enormous profits from, companies that The Washington Post describes as “pioneers in the practice of shipping work from the United States to overseas call centers and factories making computer components.” Where pioneers have gone, settlers have followed. Today, outsourcing by the country’s largest multinational corporations has become routine. The consequences for American workers and taxpayers have become increasingly visible. President Obama’s television campaign ads now dramatize job loss resulting from relocation of investment to other countries. Regardless of whether these ads prove politically effective, they are likely to raise public awareness of an important economic trend. Globalization has been under way for centuries, in fits and starts. The process included the development of new trade routes and vast migratory flows to what Europeans termed a New World. For many years national policies shaped globalization’s impact by restricting immigration. Today, however, technological agility threatens to render national borders almost irrelevant. The result is a process of strategic investment that often yields high profits without generating employment or tax revenues in the United States.

Outsourcing Firm Sees Demand for U.S. Operations - After several decades of moving call centers and back-office functions across the globe, one outsourcing firm is seeing some companies looking to bring functions back to the U.S. Companies want more predictable results and lower workforce turnover than they are getting from their overseas centers, said George Schindler, president of U.S. operations for outsourcing firm CGI Group Inc.  The development is potentially good news for unemployed Americans, though while companies appear to be thinking hard about what should be done locally, there isn’t yet a groundswell of so-called reshoring of back-office jobs. “Companies are not satisfied with the quality overseas, and they can’t afford to have things reworked two or three times,” especially in technology development, Mr. Schindler said. After an overseas outsourcer stalled the upgrade of a bank’s software for two years, the bank hired CGI’s IT developers to finish the project at one of its U.S. locations. The job was done within weeks, he said.

Weekly Initial Unemployment Claims at 374,000 - The DOL reports: In the week ending August 25, the advance figure for seasonally adjusted initial claims was 374,000, unchanged from the previous week's revised figure of 374,000. The 4-week moving average was 370,250, an increase of 1,500 from the previous week's revised average of 368,750. The previous week was revised up from 372,000, so this was an increase from the reported level a week ago. 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 increased to 370,250. This was above the consensus forecast of 370,000. And here is a long term graph of weekly claims:

Weekly Unemployment Claims: 374K, Above Expectations - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 374,000 new claims number was unchanged from the previous week's upward revision of 2,000. The less volatile and closely watched four-week moving average rose to 370,250. Here is the official statement from the Department of Labor:  In the week ending August 25, the advance figure for seasonally adjusted initial claims was 374,000, unchanged from the previous week's revised figure of 374,000. The 4-week moving average was 370,250, an increase of 1,500 from the previous week's revised average of 368,750.  The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending August 18, unchanged from the prior week's unrevised rate. Today's seasonally adjusted number was above the the consensus estimate of 370K.'s own forecast was also for 370K. 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.

Unemployment woes hit hard for displaced workers, Labor Dept. study shows - Many workers are nervous about their livelihoods despite the economic recovery — and for good reason, it turns out. Among those workers who lost a good job because of the struggling economy over the past three years, roughly one in four found a job that pays as well, according to data released Friday by the Labor Department. The others remained unemployed, stopped looking for work or accepted jobs at lower wages. “This data is telling a story of unemployment inflicting long-term damage for a lot of people,” said Michael Mandel, an economist at the Progressive Policy Institute, a centrist think tank. “This won’t turn around until wages overall start rising — and so far, we haven’t seen any strong signs of that.” The biennial survey of “displaced workers” is one of the government’s most detailed reports of the unemployed. The report focuses primarily on steady workers who were economically displaced — that is, people who had held a job for at least three years and lost it because a plant closed, there was insufficient demand or the position was cut.

“They want to run us to death” - In two weeks, Democrats will gather in Charlotte, N.C., and pledge once more to strengthen the right of workers to join unions and negotiate with their bosses. But the convention’s success depends on the work of the city’s sanitation workers, who are banned by law from exercising that right. As the party readies its platform pronouncements, those workers are asking for more concrete help. Wednesday, leaders of a North Carolina union released a letter appealing to President Obama and the Democratic National Committee for support in their efforts to win union rights. “Despite the added work and dangers for Charlotte City workers in preparation for and in the aftermath of the DNC, and the fact that $50 million in federal funding has been allotted to the City of Charlotte to host the DNC,” the United Electrical, Radio and Machine Workers of America (UE) Local 150 wrote, “the City of Charlotte refuses to address the needs and rights of the City workers.” “The workers are working like dogs,” said garbage driver Al Locklear, the president of Local 150’s Charlotte chapter. “They want to run us to death.”

You Are Probably Worse Off Than You Were Four Years Ago - In March, the Berkeley economist Emmanuel Saez shocked a lot of people by calculating that during the first year of the recovery from the 2007-2009 recession, incomes for the top one percent grew by 11.6 percent while incomes for the bottom 99 percent grew a mere 0.2 percent. (All figures here are in “real dollars,” i.e., they discount for inflation.) Granted, the one percent had taken it on the chin during the recession; from 2007 to 2009, incomes had fallen twice as fast for the one percent (36.3 percent) as for the average family (17.4 percent). The rich always lose big in recessions, because so much of their income comes from capital gains. When I wrote about Saez’s findings in March, I said things had likely gotten better for the 99 percent in 2011, because unemployment was inching downward. And maybe they did. But they sure didn't get better for the average American household. Indeed, some very disturbing new data from Sentier Research, a private firm, by two former high-ranking Census statisticians, indicate that median household income has fallen significantly more during the recovery (4.8 percent) than it did during the recession (2.6 percent). Only at the end of 2011 and during 2012 did median household income start to creep up again, and it hasn't crept very far. Going back all the way to 2000, Sentier found that median household income has fallen by 8.1 percent. During these dozen years labor productivity—output per worker per hour—has increased by 2.4 percent, on average, per year. The more valuable American workers become to their bosses, the more income they lose.

Big story you missed - Household income has declined in the three years since the recession. According to a report by Sentier Research, a firm headed by two former Census Bureau executives, from June 2009 to June 2012 the inflation-adjusted median household income fell 4.8 percent to $50,964. The Washington Post reports that the study provides “another sign of the stubborn weakness of the economic recovery,” adding that incomes have dropped more since the beginning of the recovery than they did during the recession itself, when they declined 2.6 percent. Median income is now 7.2 percent below its December 2007 level and 8.1 percent below where it stood in January 2000. The Post spoke with Gary Burtless, a Brookings Institution economist, who said “the character of the recovery has been one that has benefited businesses more than it has workers.”

Majority of New Jobs Pay Low Wages, Study Finds - While a majority of jobs lost during the downturn were in the middle range of wages, a majority of those added during the recovery have been low paying, according to a new report from the National Employment Law Project.  The disappearance of midwage, midskill jobs is part of a longer-term trend that some refer to as a hollowing out of the work force, though it has probably been accelerated by government layoffs.  “The overarching message here is we don’t just have a jobs deficit; we have a ‘good jobs’ deficit,” The report looked at 366 occupations tracked by the Labor Department and clumped them into three equal groups by wage, with each representing a third of American employment in 2008. The middle third — occupations in fields like construction, manufacturing and information, with median hourly wages of $13.84 to $21.13 — accounted for 60 percent of job losses from the beginning of 2008 to early 2010.  The job market has turned around since then, but those fields have represented only 22 percent of total job growth. Higher-wage occupations — those with a median wage of $21.14 to $54.55 — represented 19 percent of job losses when employment was falling, and 20 percent of job gains when employment began growing again.

Obama, Romney and the Low-Wage Future of America - To the extent that there has been any attention paid to public policy issues amid all the mud-slinging in the 2012 presidential campaign, the most frequent subject has been jobs—and which candidate can create more of them over the next four years.  So far, that debate mostly involves attacking the other guy, rather than advancing any real solution. The Obama campaign has been trying to define Mitt Romney as an effete champion of outsourcing (with some justification) while the Romney camp has dwelled on Barack Obama’s failure to reignite the job market, Their descriptions of their own plans are no more edifying. As the incumbent, Obama has to run on his record—and despite his talk of bold solutions, that means either exaggerating his successes or making a lot of excuses.  Romney, meanwhile, offers little more than a collection of vague allusions to the wholly disproven theory that tax cuts lead to hiring. The fact is that there is no Democratic jobs plan, if Republicans are able to keep either their control of the House or their ability to paralyze the Senate, or both. And there is no Republican jobs plan at all.

Debt and Its Discontents: The Depressing World of Collections, Part One - This series is running because it’s important to understand the culture of debt collectors, who are increasingly a form of policing in our society. One in seven Americans is currently being pursued by a debt collector. Admittedly, my perspective on the Great Recession is especially negative.  My excuse is that I’m from Buffalo, the nation’s third poorest city, where I’ve set fire to my career in the miserable business of debt collections.  I have no future business plan in place other than avoiding the grim, dull and brutal world of third party debt collection.    The whole experience has given me a seemingly incurable case of existential paralysis, where the future appears bleaker than the past and the past was pretty bleak.   From this vantage point, while shopping for careers, it appears the entire economy has adopted the characteristics of the collection agency: rude, short-sighted, greedy, corrupt and pathetic. The clipped nature of customer relations, the constricting focus on short-term profits and the sarcastic vulturing of remaining wealth have long been features of the collections industry in good times and bad.  A little about collections for the unfamiliar.  The collection agency purchases or leases debt from banks, credit card companies, virtually any company that issues financing as well as debt purchasers, companies that act as debt wholesalers to collection agencies.   The agencies then load the individual account information into a software program linked to an automated dialer.  An army of phone drones in comfy cubicles then extract money from these delinquent accounts.

Debt and Its Discontents: The Depressing World of Collections Part Two  - Collection agencies are filled with a variety of people from different backgrounds like any other occupation.  Many are decent and hard-working.  Despite the popular conception that only the hateful and unpleasant seek employment as a debt collector, there are many in the industry who are honorable and kind.  They are capable of eking out a fair living under difficult circumstances in a local economy of dwindling opportunity. Unfortunately, losers are over-represented in the collections world.  Drug addicts, ex-cons, drop-outs, wash-outs and the mentally ill populate the lower ranks of the typical collection agency in great numbers.  They generally don’t last long, but they are always present because the high turnover at any agency assures a new crop of losers will be coming through the door each week.  Some of your savvier losers stick around because there really is little difference between a street hustle and a phone hustle.  Although lower management decries high turnover as a waste of time and money, it is actually saving them in the long-run and likely functions exactly as planned.   High turnover depresses wages in the middle and upper brackets of the workforce.  If you can find an army of $9.00 an hour employees every week to nip the heels of the middling $14 to $17 an hour employees it will keep the overall wage scale low. It also keeps your mid-level employees productive and fighting for viability in an ever-changing environment.   Who has time to talk unions when your survival is at stake daily?

Have You Ever Wondered How You Were Going To Make It To The Next Paycheck? - America is becoming a very cold place.  If you don’t have money, you don’t really matter much in our society.  The ads on television aren’t for you – they are directed at people that actually have good jobs and that can afford to buy the nice little “extras” in life.  The politicians aren’t really interested in you either – they figure that they can buy your vote with all of the money that they are getting from the wealthy people.  When you don’t have money, even friends and relatives start to distance themselves from you.  Perhaps they are afraid that you will ask them for money or perhaps they are afraid that your “failure” will start to rub off on them.  When people know that you are struggling for money, the barriers immediately go up.  In the United States today, there are tens of millions of people that have been forsaken and forgotten.  They mostly stay at home (if they still have a home), and for most of them quiet desperation has become a way of life.  You won’t ever read much about them or see them appear much on television because nobody really cares too much about them.  As far as society is concerned, there are just way too many of them and they are a problem that “the government” should be able to handle anyway.  Sadly, the truth is that many communities all across America want absolutely nothing to do with those that can’t take care of themselves.  All over the country cities are passing laws making it illegal to feed the homeless, and in other instances cities are actually making it illegal to be homeless.  Unfortunately, this problem is not going away.  In fact, the number of Americans living in poverty increases with each passing day.  So where do we go from here?

Dean Baker: Poverty: The New Growth Industry in America: Recent trends in poverty rates should have the country furious at its leaders. When we get the data for 2011 next month, we are likely to see yet another uptick in poverty rates, reversing almost 50 years of economic progress. Many will blame the welfare reform law in 1996 that passed with bipartisan support. That is appropriate. This bill involved a great deal of political grandstanding and removed guarantees that could have protected millions of families in a severe downturn like what we are now seeing. Advocates of this bill who now profess surprise at the result need to turn to a new line of work. There were plenty of people at the time who warned that the lack of federal guarantees could lead to severe hardship in an economic downturn. No one has a right to be surprised on this one.  The vast majority of the people in this country rely on work for the bulk of their income and that would also be true for the tens of millions of people in poverty, if work was available. These people cannot find jobs in today's economy, or at least not full-time jobs that pay anything close to a living wage. The reason why so many of these people cannot find jobs is the incredible economic mismanagement by people with names like Robert Rubin, Alan Greenspan, and Ben Bernanke. In Robert Rubin's case, he personally profited to the tune of more than $100 million from the housing bubble after he left his post as Treasury Secretary to take a top position at Citigroup.

America’s Descent into Poverty - The United States has collapsed economically, socially, politically, legally, constitutionally, and environmentally. The country that exists today is not even a shell of the country into which I was born. In this article I will deal with America’s economic collapse. In subsequent articles, I will deal with other aspects of American collapse. Economically, America has descended into poverty. As Peter Edelman says, “Low-wage work is pandemic.” Today in “freedom and democracy” America, “the world’s only superpower,” one fourth of the work force is employed in jobs that pay less than $22,000, the poverty line for a family of four. Some of these lowly-paid persons are young college graduates, burdened by education loans, who share housing with three or four others in the same desperate situation. Other of these persons are single parents only one medical problem or lost job away from homelessness. Others might be Ph.D.s teaching at universities as adjunct professors for $10,000 per year or less. Education is still touted as the way out of poverty, but increasingly is a path into poverty or into enlistments into the military services. Edelman, who studies these issues, reports that 20.5 million Americans have incomes less than $9,500 per year, which is half of the poverty definition for a family of three. There are six million Americans whose only income is food stamps. That means that there are six million Americans who live on the streets or under bridges or in the homes of relatives or friends. Hard-hearted Republicans continue to rail at welfare, but Edelman says, “basically welfare is gone.”

14.8% of America is on Food Stamps - Think things are getting better? Think again. Food stamp usage is actually up from the latest data. As of May 2012, 46,496,788 people are on food stamps in the United States. That's 14.8% or over 1 in 7. The United States population in May 2012 was 313,878,000 and this figure includes everyone, including people overseas. Food stamp usage increased 2.4% from May 2011 and 0.5% from April 2012.  Since October 2007, food stamp usage has increased 72.2%. Population has increased 3.7% during the same time period. That is how badly America is hurting. Below is the yearly percent change in food stamp usage per state. As we can see with the recession claimed to be over in July 2009, we still are seeing more people going on food stamps. Population increased only 0.7% from May 2011 to May 2012.  There are over 6 million whose only income is food stamps. That means they are living on the streets with absolutely nothing else.

Food Stamp Usage up 64% in Last Four Years, Cost up 114% in Same Period; SNAP Charts, Facts and Figures - Here are a couple of charts from Tim Wallace on the food stamp program, now called "SNAP" to remove the stigma. SNAP stands for Supplemental Nutrition Assistance Program. SNAP Facts and Figures:

  • In the last four years the number of participants increased by 64.7%
  • In the last four years the program cost is up by 114.4%
  • Since 2000, the number of participants is up 170%
  • Since 2000, the program cost is up by 395%

One in Four Mississippi Residents Struggle to Afford Food-- One in four Mississippi residents report there was at least one time in the past 12 months when they did not have enough money to buy the food they or their families needed -- more than in any other state in the first half of 2012. Residents in Alabama and Delaware are also among the most likely to struggle to afford food. Residents of North Dakota, South Dakota, and Vermont are among the least likely to have this problem.  These findings are from surveys conducted with 177,662 U.S. adults from January through June 2012 as part of the Gallup-Healthways Well-Being Index. Gallup asks 1,000 Americans each day if there have been times in the past 12 months when they did not have enough money to buy food that they or their families needed. In 15 states, at least one in five Americans say they struggled to afford the food they needed at least once during the past 12 months. Nationwide, 18.2% of Americans so far in 2012 say there have been times when they could not afford the food they needed, on par with the 18.6% who had trouble affording food in 2011.  Residents of states in the Southeast and Southwest regions are the most likely in the country to struggle to afford food. Those living in the Mountain Plains and Midwest regions are the least likely to experience food hardship.

U.S. states' debt tops $4 trillion-report - America's 50 state governments owe $4.19 trillion, including outstanding bonds, unfunded pension commitments and budget gaps, according to a new report. At $617.6 billion, California had by far the biggest total debt, more than twice the total of No. 2, New York, with $300.1 billion owed, according to State Budget Solutions, a research and non-partisan advocacy group. Texas, with $287 billion owed, New Jersey, with $282.4 billion, and Illinois, with $271.1 billion, ranked next among states with the biggest total debt, according to State Budget Solutions. Vermont had the smallest debt load at $5.85 billion. The annual study said state governments had benefited in the last year from smaller budget gaps and reductions in loans taken from the federal government during the worst of the Great Recession to pay unemployment claims. Those trends helped reduce total debt, which includes medical insurance due retired government workers, from last year's $4.24 trillion of total debts owed by the 50 states, according to State Budget Solutions.

Pennsylvania Turnpike is billions of dollars in debt — The Pennsylvania Turnpike may be on the road to the poorhouse. Required by a 2007 state law to provide billions of dollars for statewide road and bridge repairs and transit operations, the turnpike is spending more money each year than it makes, despite toll increases that have doubled the cost to travel the turnpike over the last 10 years. To meet the financial demands created by the law, Act 44, turnpike officials have borrowed aggressively, leaving the agency deeper in debt each year. The Turnpike Commission is now more than $7 billion in debt, up from $2 billion in 2002 and $4 billion in 2009. The burden continues to grow, with the turnpike required to make payments until 2057. "Because of insufficient sources of cash flows from current operations, the commission plans to issue debt for the foreseeable future to finance its required payments to (the Pennsylvania Department of Transportation)," the commission's auditors reported in the agency's current annual financial report. "There can be no assurance that the commission will be able to continue to issue debt on terms that are acceptable, or at all, to finance these obligations."

Wall Street’s War Against the Cities: Why Bondholders Can’t – and Shouldn’t – be Paid - The pace of Wall Street’s war against the 99% is quickening in preparation for the kill. Having demonized public employees for being scheduled to receive pensions on their lifetime employment service, bondholders are insisting on getting the money instead. It is the same austerity philosophy that has been forced on Greece and Spain – and the same that is prompting President Obama and Mitt Romney to urge scaling back Social Security and Medicare.Unlike the U.S. federal government, most states and cities have constitutions that prevent them from running budget deficits. This means that when they cut property taxes, they either must borrow from the wealthy, or cut back employment and public services.  This has become the main cause of America’s rising unemployment, helping drive down consumer demand in a Keynesian nightmare. Less obvious are the devastating cuts occurring in health care, job training and other services, while tuition rates for public colleges and “participation fees” at high schools are soaring. School systems are crumbling like our roads as teachers are jettisoned on a scale not seen since the Great Depression. Yet Wall Street strategists view this state and local budget squeeze as a godsend. As Rahm Emanuel has put matters, a crisis is too good an opportunity to waste – and the fiscal crisis gives creditors financial leverage to push through anti-labor policies and privatization grabs. The ground is being prepared for a neoliberal “cure”: cutting back pensions and health care, defaulting on pension promises to labor, and selling off the public sector, letting the new proprietors to put up tollbooths on everything from roads to schools. The new term of the moment is “rent extraction.”

Detroit Votes to Raise Taxes to Save Cash-Strapped Museum - Voters in three Michigan counties have defied conventional assumptions about politics and taxes, approving a new property tax — called a millage — that will raise an estimated $23 million dollars for the cash-starved Detroit Institute of Arts. One of the few museums in the United States to rely mostly on public funding, the DIA has been especially hard-hit by the downturn that has stricken the Motor City for the better part of 20 years. The nationwide recession that began in 2007, just as the building finished years of renovations, forced major cuts in spending. The DIA laid off 20 percent of its staff in 2009, executive vice president and chief operating officer Annmarie Erickson told ABC News. “It was awful,” she said, “but we were already building our case. This is a great museum that’s operating as leanly as possible. We had no hope of regaining of city or state funding. We needed the taxpayers to step and help.” And with the endowment yielding only enough to cover 16 percent of the museum’s operating costs, the DIA decided to take their appeal to voters.

Special Report: Homeless struggle to receive schooling - Crewe isn't alone in facing school from an ever-changing address. The state counted 8,742 homeless students last school year, an increase of more than 3,700 in just five years. The numbers could be deceptively low — and the challenges much larger — if what happens in central Virginia happens across the state. The Richmond school system counts nearly twice as many homeless students as show up in the state count because its in-house tally grows throughout the school year, and the numbers are larger in neighboring counties, too. "This is a systemic problem," said Mary Herrington, who's in charge of the social work program for Richmond Public Schools. "Our population is the same, but the numbers have grown because of the bad economy."

The coming disruption in education - From a new article about on-line educational start-ups: To drive home the point of just how cheap it is to be Quizlet, one of its executives asks me how much money the United States spends per year to educate a single student in K-12 education. About $15,000, I say. That’s more than what it costs us per month to host the entire site, serving millions, the executive responds. Quizlet has no sales force, a very small marketing department, and more than seven million monthly unique visitors. (There are about fifty million public school students in the United States.) Quizlet, in its busiest months, during the school year, is among the top 500 most visited sites on the entire Internet. Now they’ve expanded beyond flash cards. You can create study groups, convert your content into multiplayer games, and search for cards and games that other people have created. We think we can get to 40 million users, then 100 million, says the executive. The question that drives the company, he says, is this: How can we create amazing learning tools for one billion people? This is the way most of the people in the valley talk.Matt Yglesias adds useful comment.

Which Cities Have Biggest Education-Jobs Mismatch? - A recent Brookings Institution study measures the regional education mismatch between online job postings in a metro area and workers in that area. The education gap is the percentage difference between the average years of education in job postings and the average years of education in area. As the chart below shows, there is huge regional variation, with many hard hit areas in California’s inland with the biggest gaps, and brain hubs like Raleigh and Washington D.C. with the smallest gaps. For the nation as a whole, the average is about five percentage points. Interestingly, the education gap hasn’t changed much during the recession — though there are obviously fewer jobs for everyone. In 2007 there were 12 jobs for every job seeker with a bachelor’s degree or greater, versus 2.9 for workers with a high school diploma. In 2011, there were 5.6 openings for workers with a college degree or greater, versus 1.6 for workers with a high school diploma only.

Starving the Future - -- Emerging economic powers China and India are heavily investing in educating the world’s future workers while we squabble about punishing teachers and coddling children.  This week, the Center for American Progress and the Center for the Next Generation released a report entitled “The Race That Really Matters: Comparing U.S., Chinese and Indian Investments in the Next Generation Workforce.” The findings were breathtaking:

  • • Half of U.S. children get no early childhood education, and we have no national strategy to increase enrollment.
  • • More than a quarter of U.S. children have a chronic health condition, such as obesity or asthma, threatening their capacity to learn.
  • • More than 22 percent of U.S. children lived in poverty in 2010, up from about 17 percent in 2007.
  • • More than half of U.S. postsecondary students drop out without receiving a degree.

Now compare that with the report’s findings on China. It estimates that “by 2030, China will have 200 million college graduates — more than the entire U.S. work force,” and points out that by 2020 China plans to:

  • • Enroll 40 million children in preschool, a 50 percent increase from today.
  • • Provide 70 percent of children in China with three years of preschool.
  • • Graduate 95 percent of Chinese youths through nine years of compulsory education (that’s 165 million students, more than the U.S. labor force).
  • • Ensure that no child drops out of school for financial reasons.
  • • More than double enrollment in higher education.

Parents to college kids: Live at home, get a job -- Parents are doing whatever they can to send their kids to college without leaving them drowning in debt upon graduation. That includes asking their college-bound kids to live at home and commute to classes or major in areas of study that will lead to more lucrative careers. Many parents are even asking their children to start saving for college when they're as young as 13, a Fidelity survey of 2,000 families with children 18 or younger found. The study found that the average family hopes to pay for 57% of the total cost of college -- saying that the rest will come from loans, scholarships or gifts. But still many are coming up woefully short, with families reporting that they are only on track to meet 30% of their savings goals. And college tuition continues to rise, with the average annual cost of a private four-year college hovering around $28,500 for the 2011 school year -- up nearly 5% from the previous year. "[Parents] are trying to do their very best for their children and they want their children to go to college," said Keith Bernhardt, head of college planning at Fidelity. "[But] it does seem to have gotten tougher over the last few years, so we're seeing more parents considering shared sacrifices and taking steps to have their kids help pay for college or somehow reduce the cost of college."

Not From the Onion: Harvard Cheaters - The NYTimes reports that Harvard is investigating “what could be its largest cheating scandal in memory.” Attention is focused on about 125 students in one course but Harvard would not say which course. The Harvard Crimson, however, has revealed that the course is “Introduction to Congress”!

Student loan crisis and return on investment -- Maureen Tcacik wrote: In the years since the Bankruptcy Reform Act passed in 1978, the nominal price of college tuition has risen more than 900 percent. Over the same period the median male income - again, nominally - has risen 165 percent. And since the percentage of the workforce boasting a bachelor’s degree has expanded from less than 20 percent to nearly a third, I don’t have to convince you that the median de facto return on investment on those diplomas has diminished greatly over the same years.Via Kathleen Geier  I think I could maybe be convinced indeed that there are some serious calculations of the return on investment in which return on investment (on debt for college) has diminished.  But that claim isn't demonstrated by the numbers given in the article, because two key numbers are missing.  One is the effect of a college degree on salaries which has vastly, vastly increased since 1978. The other is the opportunity cost of lost labor income and labor market experience.   The increase in this cost is roughly along the lines of the increase in median wages (but is lower).  The issue is that if A increases proportionally less than B then A+B increases proportionally less than B.

Shedding Student Loans in Bankruptcy Is an Uphill Battle - Diabetes had rendered him legally blind and unemployed just a few years after graduating from Eastern Kentucky University. He filed for bankruptcy protection and quickly got rid of thousands of dollars of medical and other debt.  But his $89,000 in student loans were another story. Federal bankruptcy law requires those who wish to erase that debt to prove that repaying it will cause an “undue hardship.” And one component of that test is often convincing a federal judge that there is a “certainty of hopelessness” to their financial lives for much of the repayment period.  “It’s like you’re not worth much in society,” Mr. Wallace said.

NYT on Student Loans in Bankruptcy - At the New York Times, Ron Lieber has a story about the treatment of student loans in bankruptcy. The story does a good job of explaining the harshness and capriciousness of the current system, but it is a story that bankruptcy lawyers and judgres already know. We have been discussing these problems since the early days of Credit Slips, but it is great to see the facts get to a wider audience. Maybe that will help us get some change. The bankruptcy rules for dealing with student loans are broken. An easy fix would be to go back to the old rules where, after a certain amount of time has passed, student loans are treated like any other unsecured debt and subject to discharge. Back in 1976, the period was five years and then it became seven years in 1990. A time period like that sounds about right. Persons seeking to discharge their student loans before the expiration of the waiting period would still need to show undue hardship. The old system struck a balance between the problems that would ensue if recent graduates could too easily walk away from their loans immediately after graduating and the harshness of the current system.

Economic Pros and Cons of Longer Life Spans - Once upon a time, longer life spans paid a clear demographic dividend: More kids made it to adulthood where they could produce goods and services and more younger adults survived. That meant more working age folks, and that led to higher economic output per capita. But something different is happening now. “Instead of additional years of life being realized early in the life cycle, they are being realized late in life,” Stanford University economists Karen Eggleston and Victor Fuchs write in the current issue of the Journal of Economic Perspectives with the usual complement of charts and tables In the first half of the 20th century, the decline in death rates was more salient for infants and children; in the second half, it was more salient for those over age 70. At the beginning of the 20th century, they calculate, about 20% of the increase in life expectancy in the U.S. occurred after age 65. At the end of the 20th century, more than 75% occurred after age 65. That’s good in a lot of ways — especially to those who live longer and their families. But it does, turn out to have big economic implications. If it means people work later in life, that boosts economic output. If it means a growing fraction of the workforce lives longer and longer in retirement, it doesn’t.

Strapped LA battered by pension costs -- A staff chart given to Los Angeles city council labor negotiators this month shows that city retirement costs nearly doubled in the last seven years, soaring to 18.6 percent of general fund revenue this fiscal year, $848 million. In the next four years, the annual cost of the two city retirement systems for police and firefighters and for non-sworn employees is projected to increase by half to $1.285 billion, about 25.5 percent of general fund revenue. Retirement costs continue to climb as the deficit-ridden city, already hit by four years of deep cuts in the workforce and services, faces another major budget shortfall next fiscal year that could balloon to more than a quarter billion dollars.

California leaders strike public pension reform deal - California Governor Jerry Brown and lawmakers have reached a deal to raise public employees' retirement ages, have them pay more into their pension accounts, and cap retirement payments in a vast overhaul of the state's pension system that he says will save $30 billion. California faces a huge liability for funding the nation's largest public pension system, but other states and cities also have enormous pension funding gaps and will be watching the state closely. Brown did not get everything he wanted from lawmakers, such as a hybrid plan that would funnel some contributions into 401(k)-style accounts, and some of the deal's measures will not affect current employees. "We have lived beyond our means," he said. "The chickens are coming home to roost and this is just one in a series of countermeasures that will be required over the next decade."

Illinois Debt Cut by S&P After No Action on Pension Funding -- Illinois, the U.S. state with the worst-funded pension system, had the rating on its general- obligation debt cut one level by Standard & Poor’s and may face more downgrades. The change to an A rating followed state lawmakers’ failure to agree to reduce retirement costs during a special session Aug. 17. The outlook for the state’s debt, which now has S&P’s sixth-highest grade, is negative. California, with an A-ranking, one level below Illinois, remains S&P’s lowest-rated state. Illinois has an unfunded pension liability of at least $83 billion, according to state figures. It had 45 percent of what it needed to pay future retiree obligations as of 2010, the lowest among U.S. states, data compiled by Bloomberg show. “The downgrade reflects the state’s weak pension funding levels and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions,”

GM in Talks to Expand Credit Line - General Motors Co. is in preliminary talks with banks to potentially double its $5 billion line of credit as the auto maker looks to strengthen its balance sheet and shrink pension obligations, according to people with knowledge of the discussions. The world's largest auto maker by sales is in no danger of running short on cash. The Detroit company has very little debt and held about $33 billion in available cash at June 30. Analysts believe it needs roughly $20 billion to operate comfortably. It currently has an available line of credit of $5 billion.  But GM could have hefty cash needs ahead. Its European operations are racking up major losses, it is increasing capital spending on new vehicles, and it may want to repurchase shares held by the U.S. Treasury. GM also wants to reduce its U.S. pension obligations. Pensions for hourly, union workers and retirees are underfunded by about $10 billion and have been a major concern for investors.

Is it Becoming Too Late to Fix Social Security's Finances? -  One of my duties as a public Social Security trustee is to explain the program’s financial condition, both formally as a signer of the annual Board report, and less formally in published summaries, articles, interviews and Congressional testimony. This evaluation is written pursuant to that responsibility. Social Security’s future, at least in the form it has existed dating back to FDR, is now greatly imperiled. The last few years of legislative neglect -- due to a failure of national policy leadership coming just as the baby boomers have begun to retire -- have drastically harmed the program’s future financial prospects. Individuals now planning their financial futures, whether as taxpayers or as beneficiaries, should be pricing in a substantial risk that the federal government will not be able to maintain Social Security as a self-financing, stand-alone program over the long term. If Social Security financing corrections are not enacted in 2013, or at the very latest by 2015, it becomes fairly likely that they will not be enacted at all. Below I will first explain how the Social Security shortfall is usually described and approached. Then I will explain why Social Security’s financial prospects are much grimmer than is commonly understood. Finally I will explain why this matters, i.e. – the likely consequences if the President and Congress continue to fail to balance its books.

Voucherizing Medicare - Paul Krugman - So there it is: the draft Republican platform says of Medicare and Medicaid, The first step is to move the two programs away from their current unsustainable defined-benefit entitlement model to a fiscally sound defined-contribution model. That means that instead of Medicare as we know it, which pays your medical bills, you’d get a lump sum which you can apply to private insurance — they’ll yell when we call it a voucher, but that’s what it is. No doubt I and others will have much more to say about this, but let’s just ask the question: why is this “fiscally sound”? Bear in mind that health expenses will still have to be mainly paid for by some kind of insurance; that’s in the nature of medical care, with its high but unpredictable cost. So what we’re doing here is replacing government insurance with a program that gives people money to buy private insurance — that is, adding an extra layer of middlemen. Why would this save money? I guess the answer is supposed to be the magic of the marketplace — but we have the experience of Medicare Advantage, plus studies of Medicaid versus private insurance, plus the raw fact that America relies more on private insurance than any other nation and also has by far the highest costs. Nothing, absolutely nothing, in the record suggests that this will do anything other than make health care less efficient.

Medicare Cuts: What is the Fight About? - Most recently former NY Lt. Governor Betsy McGaughey in the WSJ (August 8th) commented on the ACA in “ObamaCares’s Phoney Deficit Reduction” choosing to carry water for the Republican candidates Romney and Ryan with the hope she can convince voters that President Obama's ACA will not reduce the cost of Medicare and instead will rob the Medicare TF. By her words alone, Ms. McGaughey cannot change the numeric of Medicare expected and occurring reduced growth and costs resulting from the passage of ACA. In her, Romney and Ryan's mines the logic of how the robbery of benefits and the Medicare is all too real even when the proof of the opposite is self-evident. The three will have to do double time if they are to provide enough water to conflate the ACA to the public if in fact they are to make them believe the illusion. Ms. McGaughey critiques CBO Director Elmendorf's and the JCT's analysis (letter to House Leader John Boehner) on the impact of repealing the ACA, what it means to the country in increased costs, and then conflates the cuts to the Advantage Program and other parts of Medicare as actual cuts in benefits to Medicare recipients. The ACA states Medicare benefits cannot be reduced for Medicare recipients.  As Betsy believes and everyone else imagines, private commercial insurance can provide similar benefits at a lower cost and more efficiently. Except the Advantage Program did not do so and has out spent Medicare by an average of $1000 or 7% to 18% (dependent on who you read) more and in total for similar Medicare benefits.

Medicare and Medicaid Costs - Paul Krugman - Partly for my own future reference: comparisons between conventional Medicare and Medicare Advantage, and between Medicaid and private insurance. The go-to source on Medicare Advantage is the official Medpac report (pdf), which currently finds MA plans costing on average 7 percent more than conventional Medicare. This is less than the premium a few years ago; apparently (pdf) because several changes in Medicare policy more or less incidentally put the squeeze on MA plans. So far those plans are still expanding, but time will tell. Studies by the Urban Institute and more recently by CBPP find that Medicaid is significantly cheaper than private insurance. This is partly because of lower administrative costs; also, Medicaid, more than Medicare, bargains hard, using things like a limited formulary that lets it drive a harder bargain over drug prices. And there is, of course, the international evidence: every other advanced country has a less privatized health insurance system than we do, and we have much higher costs than anyone else. So as I have often said, there’s not a shred of evidence supporting the view that voucherizing Medicare would make the system more efficient; on the contrary.

Obama and Ryan  spend the exact same amount on Medicare - In his speech at the Republican National Convention tonight, Rep. Paul Ryan (R-Wisc.) swiped at President Obama for his cuts to Medicare spending. “An obligation we have to our parents and grandparents is being sacrificed, all to pay for a new entitlement we didn’t even ask for,” the vice presidential candidate told the crowd in Tampa. “The greatest threat to Medicare is Obamacare, and we’re going to stop it.” There’s one fact you should keep in the back of your head when listening to Ryan or Obama talk about Medicare spending. And it’s a pretty simple one: Each politician has proposed spending the exact same amount on the entitlement program. Both the Ryan budget and Obama budget for 2013 propose growing the program at the pace of gross domestic product plus 0.5 percent.The Wall Street Journal’s David Wessel put that in chart form earlier today. He mapped what percent of the economy Obama and Ryan want to see go towards the Medicare program. Here, take a look:

The Elephants are Still Thirsty - In my earlier post on Carrying Water for Elephants I explained how the $716 billion in planned reductions to Medicare was calculated, who it impacted, and from where it originated. The $716 billion is far larger than the initial $449 billion first reported. In 2010, the CBO arrived at an estimate of savings of ~$449 billion starting from 2012 onwards and covered 6- 7 years from when the bill takes full effect in 2014 to 2019. The second estimate of savings was the result of John Boehner's request for a review of the costs and gains realized from the repeal the ACA in its entirety. The second review covered the period from 2014 to 2022 and resulted in the $716 billion. "Medicare Cuts: What is the Fight About?" Brookings Institute Above the explanation of how the $716 billion calculated; I presented Ezra Klein's pie chart explaining where the reductions were made. Not one of the reductions comes from reductions in Medicare benefits to recipients which as I also explained is denied the PPACA. In last night's Republican Convention Paul Ryan again claimed the reductions to providers are actually cuts in benefits to Medicare recipients and the reductions are being used to fund the PPACA. Neither statement is true; but then, Paul Ryan is a Republican VP candidate who hopes to confuse the voters with supposition and conjecture. Paul should be made to explain what he will do with the reductions achieved from similar reductions he has proposed for Medicare . . . maybe more tax breaks for the 1 percenters???

The Medicare Killers, by Paul Krugman -  Paul Ryan’s speech Wednesday night may have accomplished one good thing: It finally may have dispelled the myth that he is a Serious, Honest Conservative. Indeed, Mr. Ryan’s brazen dishonesty left even his critics breathless. Mr. Ryan’s big lie — and, yes, it deserves that designation — was his claim that “a Romney-Ryan administration will protect and strengthen Medicare.” Actually, it would kill the program. The Republican Party is now firmly committed to replacing Medicare with what we might call Vouchercare. The government would no longer pay your major medical bills; instead, it would give you a voucher that could be applied to the purchase of private insurance. And, if the voucher proved insufficient to buy decent coverage, hey, that would be your problem. Moreover, the vouchers almost certainly would be inadequate; their value would be set by a formula taking no account of likely increases in health care costs. Why would anyone think that this was a good idea? The G.O.P. platform says that it “will empower millions of seniors to control their personal health care decisions.” Indeed. Because those of us too young for Medicare just feel so personally empowered, you know, when dealing with insurance companies.

Health Systems and Health Costs - Krugman - Related to today’s column: Suppose that you were really, really concerned about the long-run federal budget, and understood correctly that rising health care costs are the biggest source of rising spending. What you might do in that case is look around the world to see what kinds of health care system appear to be best at containing costs. And you wouldn’t have to look far, because there’s a pretty dramatic contrast just north of the border: Data here. So, Canada has a single-payer insurance system — actually called Medicare. Four decades ago, Canada spent about the same share of GDP on health care as we did. Since then, however, Canadian spending has risen far more slowly than spending in the US, which relies much more on private insurance. Meanwhile, despite the scare stories opponents of reform like to tell, Canadian health care appears on average to be as good as or better than US care; polls indicate that Canadians are more satisfied with their health care than Americans. So, given this kind of evidence, the GOP insists that the way to control health costs is … to dismantle the single-payer part of our own system and turn the whole thing over to private insurers.

Health reform and the $716 billion lie --The Affordable Care Act (ACA), called “Obamacare” by opponents and supporters alike, has been maligned and misrepresented countless times over the last few years. The most recent claim—which has turned up in a recent Mitt Romney ad but has been a staple of GOP talking points since the Paul Ryan pick for vice president—is, “You paid into Medicare for years … but now when you need it, Obama has cut $716 billion from Medicare … to pay for Obamacare.” In other words, ACA took money out of the Medicare system for use elsewhere. This is a pretty big lie. To take money “out of the Medicare system,” one would have to actually divert revenues away from the program. But ACA doesn’t do this at all—instead, it reduces how much Medicare will have to spend over the next 10 years by $716 billion. It does this without actually cutting benefits, instead deriving savings from three areas:

  1. Reducing reimbursements Medicare currently makes to hospitals—but by less than the gain hospitals would receive from newly-insured patients  purchasing hospital services in coming decades.
  2. Reforming the separate Medicare Advantage program, which was supposed to save money, but ended up being more expensive.
  3. Reducing a variety of other payments to providers, such as those designed to offset the cost of providing uncompensated care for the uninsured (unnecessary because now more patients will have insurance and hence the amount of this uncompensated care will plummet).

Mitt Romney flip-flops on healthcare to woo back women - Robin Wells - In a sane Republican party, Romneycare, the healthcare overhaul Romney implemented as governor of Massachusetts and which Obamacare closely resembles, would be a major selling-point. It's overwhelmingly popular in Massachusetts, delivering to residents the highest percentage of insurance coverage in the country. But sanity long since quit the Republican party. Republicans just plain hate Obamacare and they've pledged to wipe it out, root and branch. Romney, ever compliant towards the radicals in his party, ran away from his own signature governing accomplishment during the primary season as fast as he could. Until now. In a Fox News interview on Sunday, Romney declared: "With regards to women's healthcare, look, I'm the guy that was able to get healthcare for all the women and men in my state." The host, Chris Wallace, parried, "So you're saying, look at Romneycare?" To which Romney replied, "Absolutely. I'm proud of what we did." In belatedly embracing Romneycare, Romney is trying to make up lost ground on a policy that women are significantly more likely to support than men. By a wide margin, women are more likely to support health insurance requirements than men. Yet Romney, as always, hopes to have it both ways. He hopes that the public won't notice that, in order to satisfy his party, what he is really promising is not only the repeal of Obamacare, but also the destruction of Medicare, to be replaced by the Ryan voucher plan.

More Maine parents skipping their kids’ vaccinations as whooping cough spreads — New federal data show more Maine parents are choosing not to vaccinate their children, a trend that worries health providers as an outbreak of whooping cough continues to worsen and students prepare to go back to school. Maine has recorded 411 cases of whooping cough this year, nearly five times the number of cases reported at this time in 2011. Most cases of the highly contagious disease have struck children ages 7-19. Within that group, two out of every 1,000 children ages 7-10 have been diagnosed with whooping cough in Maine this year.

Widespread vaccine exemptions are messing with herd immunity - Vaccines have been one of the most important public health interventions ever developed. As a new study notes, past analyses have estimated that the childhood immunization schedule prevents 42,000 deaths and 20 million cases of disease—and that's only for the kids born in a single year. The estimated savings is currently at $14 billion a year. But, despite the amazing benefits, immunization rates have been falling, driven by a fear that vaccines cause health problems such as autism. The autism risk has been both thoroughly debunked and the paper that originally suggested it turned out to be the product of an unethical, financially motivated individual. Despite this debunking, surveys show that a quarter of US parents think that vaccines can trigger autism, and rates of vaccination have continued to fall in many states. A new study looks at incoming kindergartners in California, and finds that the lack of vaccination is threatening herd immunity in some schools, and that some measures of risk have doubled in just three years.

Court rules controversial stem cell research is legal -- The federal government may continue to pay for controversial human embryonic stem cell research, a federal appeals court ruled Friday. The three-judge panel says the government has correctly interpreted a law that bans the use of federal funds to destroy human embryos for research. The ruling is unlikely to put the issue to rest and one of the judges pleaded for Congress to make clear what the government should and should not be able to do. The hard-to-understand case pits science against mostly religious arguments against using embryos in medical research. It's even more confusing because there are so many differenlt types of cells called stem cells. Dr. James Sherley of Boston Biomedical Research Institute and Theresa Deisher of AVM Biotechnology in Seattle, who both do research using adult stem cells and oppose the use of human embryonic stem cells, sued in 2009. They said federal guidelines violate the law and would harm their work by increasing competition for limited federal funding.

West Nile Virus, a Tropical Disease, Rages in Dallas -  Why has the summer of 2012 proved so hospitable to the West Nile virus and the mosquitoes that carry it? Like so much else that’s gone this season, blame the weather. An extremely mild winter throughout much of the country allowed more mosquitoes than usual to survive, while the unusually high temperatures this scorching summer further increased their numbers as well as speeding up their life cycle, causing more of the virus to build up in their salivary glands. (West Nile—which originated in Uganda—was first discovered in the U.S. during the very hot summer of 1999, in New York City.) Dallas in particular, ground zero of the outbreaks this year, had a rainy spring, which left more standing water — ideal nurseries for mosquito eggs. The housing crisis may play a role in the spread as well: many foreclosed homeowners have abandoned their properties, sometimes leaving behind swimming pools that make excellent mosquito breeding grounds. 

Court Rejects EPA Cross-State Air Pollution Rule. Where to Next? - Last week, the United States Court of Appeals for the District of Columbia rejected an EPA rule known as the Cross-State Air Pollution Rule (CSAPR). The rule was supposed to have gone into effect at the beginning of 2012, but the same court had previously stayed its implementation on procedural grounds. Last week’s ruling is the first to address CSAPR on its merits. CSAPR governed emissions of sulfur dioxide (SO2) from Midwestern coal-fired power plants and other sources. SO2, along with oxides of nitrogen (NOx) and others is a precursor of acid rain, which causes widespread environmental damage not only in the states where the sources are located, but also those downwind. As I discussed in detail in a post at the time of the court’s January stay of CSAPR, what is at stake is the future of the EPA’s emissions trading scheme for SO2. That scheme, which had been hailed as a success story for the cap-and-trade approach to pollution control, collapsed in 2008 when the court ruled against an earlier version of the EPA regulation known as the Clean Air Interstate Rule (CAIR). CSAPR had been intended to fix the legal defects of CAIR, but in the eyes of the court majority, it failed to do so.

New state laws make undercover probes of farm operations risky - Prompted by the agriculture industry, states are debating, and in some cases adopting, so-called “ag-gag” laws that add to the legal and ethical restraints inherent in undercover work “Undercover investigations are a very tricky business,” noted Jonathan Lovvorn, senior vice president of the Humane Society of the United States. “They are not something for amateurs to attempt. The rules are different in every jurisdiction.” The balancing act is particularly delicate because animal rights groups have a big incentive to try out undercover investigations that, when successful, can mobilize the press, the public and politicians alike.

The Secret the Food Industry Is Spending Millions to Keep - Big Agriculture and food companies are shelling out gobs of cash ahead of November's election to convince Californians to vote against a proposed law that would require businesses to label products that contain genetically modified organisms. Proponents of Proposition 37 applaud the strict labeling requirements and say it will help consumers make better purchasing decisions. Opponents say that the labels are misleading and overly burdensome to food producers. Not only that, they claim, but compliance would be costly -- an expense that would likely drive up the price of goods in the grocery store. The money is behind the opposition, literally. Prop 37's opponents include Monsanto (MON), PepsiCo (PEP), Coca-Cola (KO), Hershey (HSY), and Kellogg (K). Together these companies and other large agricultural concerns have already spent millions to fight the proposed labeling law. If Proposition 37 becomes law, raw GMO produce would be required to carry a label stating that it is "genetically engineered," and all processed foods containing GMOs would be required to be labeled as "partially produced with genetic engineering," or "may be partially produced with genetic engineering." It will also prohibit the use of labels such as "natural," "naturally made," "naturally grown," and "all natural" in foods with GMO ingredients.

Corn lobby outgrows US farm subsidies - As food prices skyrocket in light of a drought in the US, and a gaping budget deficit leaves politicians on the defensive, one of America's largest agricultural lobby groups is going against the grain by calling for an end to direct farm subsidies. It's a counter-intuitive policy for a lobby group to try and limit direct cash payments to its members, but Jon Doggett, spokesman for the National Corn Growers Association, said now is not the time for the US federal government to be spending $5bn per year directly subsiding corn farmers, regardless of prices or yields. "We are really the first commodity organisation to come out and oppose direct payments," Doggett told Al Jazeera of disbursements which are made annually regardless of whether the farmer has "a good or bad year". Direct farm subsidies in the US total about $10bn annually. This does not include price supports or other aid like crop insurance which the Congressional Budget Office estimates will cost nearly $10bn per year over the next decade.

Food basket prices jumped 9% in 2 years, report says - The Common Front for Social Justice is trying to come up with ways to help poor people handle rising food prices. The social justice group spent the past two years surveying prices at 31 grocery stores across the province. They tallied the prices on the 67 items that Health Canada says make up what it calls a National Nutritious Food Basket. Jean-Claude Basque, the group’s provincial co-ordinator, says the basket prices ranged from $257 at one store to $288 at another. They released their findings Monday. “This year they went up by 3.3 per cent; last year they were up by 5.7," Basque said. "So in the last two years, that's an increase of nine per cent on these 67 items. So that's quite an increase. Nobody has that kind of increase in their income in the last two years.”

What's the price of corn in your meat? Less than you think. -- In my OpEd last week I had a lot of back and fourth with the editor.  I probably had too many statistics and my first draft was just too long.  One thing that got dropped in the process was an explanation for why retail food prices will rise so little even though corn prices have increased 60 percent.  So much of our food is ultimately derived from corn, or from other commodities like wheat and soybeans whose prices track corn prices fairly closely.  But it still makes little difference. Take meat, for example.  There are only 3-5 pounds of corn used to make an additional pound of beef, and between 2 and 3 pounds of corn for a pound of chicken or pork.   The calculation isn't particularly straightforward, but these numbers are probably about right ``on the margin," as economists like to say. This can vary a bit from operation to operation or how it's measured, but feed use efficiency has risen a lot over the last couple decades with the growth of confined animal feeding operations, or CAFOs. Let's says 5 pounds of corn per pound of meat.  There are 56 pounds of corn in a bushel and since June prices have increased from about $5 to about $8 per bushel.  This means the amount corn in your quarter-pound burger have increased from about 11 cents to about 18 cents.  If there is market power by processing companies or retailers, retail prices would go up by less than this amount (this is basic microeconomics, but I'll save the details for another time).  So, you'll have to squint to see the effect of this year's drought on prices at grocery stores and restaurants.

Global Wheat Stocks and Price. Why Has the Wheat Price Skyrocketed? - As you see in the price chart above, the price of wheat rose more than 50 percent from mid-June until its peak in mid-July. By now everyone knows that the global corn and soybean market was greatly affected by our Midwestern drought. The spring wheat crop was good, however, and even though the U.S. produces only 10 percent of the world’s wheat, it is the largest wheat exporter. It was reassuring that throughout this drought season, we knew that global wheat and rice stocks were very ample and much above the levels of the food crisis year 2007/08. So, why did the price of wheat go up so much even though global wheat stocks were 42 percent higher than in 2007/08? In part, it looks like it over-reacted.  One reason was poor weather in some of the other wheat exporting nations. There was too much rain in some of Europe and a lack of rain in Russia, the Ukraine, and Kazakhstan. Russia is the world’s third largest wheat exporter and its yields fell 31 percent from last year, according to CME group. Some expect Russia’s available wheat for export will be gone by the end of the year, as producers there have been exporting rapidly in case export restrictions are instated. Spain’s production was down 30 percent due to drought. There is some worry about the next growing season, too.

UN food chief warns high and volatile prices here to stay - High and volatile food prices are here to stay and countries need to ensure they have sufficient stockpiles, the head of the U.N. food agency said in an interview on Monday. “Food prices will remain elevated and will be highly volatile in the next 10 years,” Food and Agricultural Organization (FAO) chief Jose Graziano da Silva said in an interview with the French daily Le Monde. “To ensure food security and face up to higher prices, each country should ensure they have stocks to cover their needs for between a week and a month,” he added. The FAO's Food Price Index, a monthly measure of changes in a basket of food commodities, shot up 6 percent in July, with drought sending prices of corn and wheat soaring. Graziano said the situation is not as threatening as in 2007-08 when soaring food prices triggered riots, as the price for rice, which is the largest staple, remains steady. He estimated that international coordination had improved thanks to an initiative to increase transparency on agricultural markets brought about by the Group of 20 (G-20) top economies.

2012 Drought Will Hit Your Wallet, But Not for the Reasons You May Think - As American farmers continue to battle one of the worst droughts in modern U.S. history, food commodity prices are on the rise, which will mean skyrocketing prices at the grocery store, right? Not necessarily. Any pain in the wallet for consumers won’t come directly from higher costs for raw commodities. It’ll be because of federal ethanol mandates — specifically the 2007 Energy Independence and Security Act, which, as The Washington Examiner’s Conn Carroll notes, requires that every gallon of gas contain 10 percent ethanol by 2022. Here’s the problem: Corn has increased in value because it has decreased in supply. This means ethanol, which is corn-based, will become more expensive to produce. But fuel providers need to have that ethanol mixed with their product. Therefore, the federal mandate leaves fuel providers with no choice but to increase their prices so that they can afford to stay compliant. You know what this means, right? It means the cost of bringing goods (i.e. food, clothes, TVs, radio, etc.) to market will increase exponentially and this is where U.S. consumers will get hit. Unless merchants charge a price that offsets what it costs them to bring their goods to consumers, they’ll post a loss. Therefore, they’ll have to increase the cost of product to make up the difference, which means consumers end up paying higher prices.

Drought Crop Update: From Harsh Expectations To Harsher Reality - Droughts tend to produce vast yield variations. This week's ProFramer crop tour reaffirmed this tendency and as UBS notes, conditions declined with the expectations of low yields compounded by the harsher reality of poor quality - likely to be a major issue for corn feeders. Interestingly, Soybeans looked good from the road but up close (pod formation and beans/pod) were well below normal; and UBS adds to forget the CME for the moment - the cash market is now the attention grabber as they expect it to lead this rally in Ags higher - especially the July 2013s, raising an interesting question of if (or when) the US will restrict exports? Especially with no let-up in the drought conditions. Lower yields AND lower quality...

Corn Ripples! - Every once in a while we see a piece of data which makes the hair on our heads stand on end. Such is the Census Foreign Trade graph of the month. Below are corn exports and their percent change a year from June 2012.  The more orange a state is, the more their exports declined. Texas corn exports declined a whopping -272.6%, Kansas dropped -160.9%. Arkansas is a real disaster, with a -445.2% drop in corn exports as of June 2012. What's worse is the June data only gives a 10% national drop in corn exports from a year ago. July gave much worse figures.  By July 2012, the United States corn export decline was the lowest in 19 years and had dropped 40% from a year ago according to the latest USDA statistics. The U.S. is the largest exporter of corn and corn is the largest export of course-grains. The below charts are from the USDA grain report.

U.S. Farm Income Seen Rising as Drought Spurs Higher Prices - The worst U.S. drought in more than five decades is forecast to raise farm profits to a record $122.2 billion this year as higher prices and insurance payments outweigh crop losses from the dry conditions. Income will rise 3.7 percent from a revised $117.9 billion in 2011, the U.S. Department of Agriculture said today in a report on its website. The forecast is up from $91.7 billion in February. The value of crops will rise 6.7 percent to $222.1 billion, an all-time high, while revenue from livestock sales will decrease 0.1 percent to $165.8 billion, the USDA said. Expenses such as diesel fuel and animal feed will increase 6 percent to $329.1 billion. Pressured by the prospect of higher prices, corn futures surged 58 percent since mid-June before today, soybeans were up 31 percent and wheat 41 percent. The drought may push food inflation as high as 4 percent in 2012, the USDA said last week. The department has declared natural disasters in more than 1,800 counties in 35 states, more than half of the country’s total, mostly because of the dry, hot weather.

Corn, soybean prices at all-time high worldwide, World Bank says - The cost of corn and soybeans soared to all-time heights in July, pushing global food prices up by 10% and stretching budgets to the breaking point in the Middle East and Africa, the World Bank said in a new analysis released this week. Punishing droughts and dry summers in the United States, Russia and India are the cause, the global organization said in its report. The weather has decimated summer crops, with ripple effects felt strongly across the globe. Corn has been selling for more than $300 per metric ton, twice the price as two years ago; soybeans have doubled to more than $600 in five years. The rising prices pose the biggest challenge in the Middle East and Africa, where imported food plays a big role and the poor spend a large chunk of their money on food. In the Southeast Africa nation of Malawi, for instance, the cost of corn has shot up 174% since July of last year. Such a huge increase in prices is even more severe in a country where food purchases account for nearly half of all household expenditures.

Drought's effect on corn may push EPA to waive ethanol fuel mandate - Higher corn costs, brought on by the most severe U.S. drought in 56 years, has renewed attention on the 5-year-old federal mandate to increase the amount of ethanol blended into gasoline. The standards call for 13 billion gallons of ethanol this year and almost 14 billion gallons next year. The U.S. Department of Agriculture earlier this month said the country's corn crop will be the worst in seven years. At the projected level, the ethanol-fuel requirement is expected to translate into more than 40 percent of the country's corn production this year. Not all corn used by the ethanol industry ends up in gas tanks. About a third of the corn is converted into livestock feed. Still, the high percentage in the midst of such a devastating drought has gained the attention of ranchers, chicken farmers and the United Nations director-general for food and agriculture, all of whom have called for the U.S. Environmental Protection Agency to waive the ethanol mandate this year.

"Can we finally get the ethanol mandate monkey off of our backs?" -  Lynne Kiesling:  This summer, corn prices are high. Drought, extreme weather, and other factors combine to increase corn prices, and one of those factors is the federal ethanol mandate/renewable fuels requirement implemented over 20 years ago (as an oxygenate requirement) and extended in 2005. Roger Pielke Jr. points to a Purdue research paper that suggests that a waiver or partial removal of the renewable fuel standard could reduce corn prices by 20% or more. ... This year’s drought has been painful and costly, but if in the process it leads to the demise of ethanol subsidies, boutique fuels, and the renewable fuels standard, that’s what I call a silver lining.

Analysis: U.S. government mandate or no, fuel ethanol is here to stay (Reuters) - For the past five years, the U.S. government has paid fuel companies billions of dollars in subsidies to buy home-grown, corn-based ethanol, making it a viable part of the nation's gasoline supply. Now you would have to pay them not to buy it. The worst drought in half a century revived a fierce food versus fuel debate. Livestock and food producers and others are calling on President Barack Obama to abandon -- at least temporarily -- a government mandate that requires converting more than a third of the U.S. corn crop to ethanol. The president has three months to decide. Experts say that even if he waives the Renewable Fuel Standard (RFS), that will not necessarily free up much corn for food and livestock feed. In fact, unless corn prices rise another $2 or oil prices fall sharply, it may not make a difference at all. Even without the standard, a third of the U.S. gasoline supply must contain ethanol to meet unrelated clean air rules, mostly in California and on the East Coast. No other available substance can oxygenate gasoline as effectively, helping it burn more cleanly. More importantly, ethanol is as much as $1 cheaper than other types of octane boosters like reformate, which refiners use to increase the efficiency of their fuel. "Even with a reduction in the waiver, there is still economic incentive for the fuel industry to use ethanol as an oxygenate,"

US ethanol output to drop 10 pct as price rises (Reuters) - U.S. ethanol production will fall by 10 percent in the coming year as rising prices from the drought cut exports in half, a University of Missouri think tank forecast on Tuesday. The Obama administration is weighing whether to relax a requirement to use corn-based ethanol in gasoline as meat and dairy farmers complain that demand for corn-based biofuels is driving up the cost of food. But the record-high corn prices caused by the worst drought in half a century will cause a 10 percent decline in ethanol production next year, according to the Food and Agricultural Policy Research Institute, or FAPRI. "Higher ethanol prices contribute to sharply reduced ethanol exports and increased imports, but domestic ethanol consumption declines by just 2 percent," said the newly updated FAPRI forecast. Ethanol output will fall to 12.4 billion gallons next year compared to 13.8 billion gallons this year, according to the forecast. Exports would drop to 505 million gallons from nearly 1.1 billion gallons this year.

Corn Exports Shrivel as U.S. Ethanol Demand Grows - As an increasing amount of U.S. corn is being used to meet rising ethanol demand, the United States—the world’s dominant producer and exporter of corn—is exporting less. The first chart shows how the use of U.S. domestic corn has changed over time. The portion of U.S.-grown corn used to make fuel reached 40 percent last year, and will be about the same this year, according to the U.S. Department of Agriculture. At the same time, the worst drought in half a century throughout the Midwest corn belt has led to severely shrunken forecasts for this year’s United States corn crop, raising concerns that exports will further decrease, intensifying the risk of an international food crisis. The second chart shows the annual U.S. corn exports since 2005. Though the number of U.S. acres planted with corn was the highest since the late 1930s, this year, U.S. exports have been on a steady decline, dropping from over 60 percent of the world’s corn exports in 2005 to less than 40 percent last year.

Farmer: 'It was the system that failed us' - Five generations of his family have milked dairy cows in this secluded stretch of Missouri's Ozark Mountains, but the inch or so of rain that fell on this recent Thursday was too little, too late. Argall -- a 54-year-old with a wiry, broomstick mustache -- had no choice but to sell nearly all of his cows at a livestock auction. The Obama administration earlier this month announced emergency drought assistance that included low-interest emergency loans; a federal buy-up of meat from livestock producers; and the opening up of some protected lands for livestock grazing. None of those efforts are targeted at dairy farmers, however, dairy advocates say. Missouri's governor, meanwhile, created a cost-share program to help farmers get access to water for their cattle, but McCallister said that's more of a Band-Aid than a real solution. Michael Scuse, under secretary of the U.S. Department of Agriculture, said dairy farmers have not been offered enough of a safety net because Congress has not finalized an omnibus piece of legislation called the Farm Bill. "Had we had a Farm Bill passed by now, there's a very good chance we could offer some additional assistance" to dairy farmers who are struggling because of the drought, he said.

Poor in India Starve as Politicians Steal $14.5 Billion of Food - Ram Kishen, 52, half-blind and half- starved, holds in his gnarled hands the reason for his hunger: a tattered card entitling him to subsidized rations that now serves as a symbol of India’s biggest food heist. Kishen has had nothing from the village shop for 15 months. Yet 20 minutes’ drive from Satnapur, past bone-dry fields and tiny hamlets where children with distended bellies play, a government storage facility five football fields long bulges with wheat and rice. By law, those 57,000 tons of food are meant for Kishen and the 105 other households in Satnapur with ration books. They’re meant for some of the 350 million families living below India’s poverty line of 50 cents a day. Instead, as much as $14.5 billion in food was looted by corrupt politicians and their criminal syndicates over the past decade in Kishen’s home state of Uttar Pradesh alone, according to data compiled by Bloomberg. The theft blunted the country’s only weapon against widespread starvation -- a five-decade-old public distribution system that has failed to deliver record harvests to the plates of India’s hungriest. “This is the most mean-spirited, ruthlessly executed corruption because it hits the poorest and most vulnerable in society,” said Naresh Saxena, who, as a commissioner to the nation’s Supreme Court, monitors hunger-based programs across the country. “What I find even more shocking is the lack of willingness in trying to stop it.”

The soy price shock in the US will reverberate across China -- The Chicago Board of Trade soy futures hit a new record Sunday evening as attention now shifts from corn to soy. Traders are coming to the realization that soy supply may not last long enough to be replenished by crops from South America.  Bloomberg: - “Corn was the story going into the crop tour and now soybeans are the story after leaving the fields this week,” Peter Meyer, a senior director of agriculture commodities at PIRA Energy Group in New York, said in an interview in Owatonna, Minnesota, after completing his sixth Pro Farmer tour. “Mother Nature shut down the soybean crop well before it reached its potential. The U.S. may run out of soybeans before the start of the South America harvests in February.” Again, a number of analysts continue to argue that the North American drought should not have a significant impact on Asia. That is just not true. Some economists simply don't appreciate just how global agricultural markets have become. Bloomberg: - China, the world’s largest buyer and consumer, purchased 165,000 metric tons of soybeans and 55,000 tons of soybean oil from the U.S., the USDA reported yesterday. China may import a record 59.5 million tons of soybeans in the year that begins Oct. 1, the agency said Aug. 10. World soybean supplies may shrink by 33 million to 35 million tons in September to February, compared with a year earlier, forcing China to reduce imports by 4 million tons, researcher Oil World said Aug. 21.

This Year's Drought Is So Severe, You Can See Its Toll on the Mississippi River From Space -- Last year, the Mississippi River flooded. Major storms combined with melting snow brought the waterway more than 56 feet above river stage in May. The Army Corps of Engineers lifted the floodgates of the Morganza Spillway, deliberately inundating some 3,000 square miles of rural Louisiana to spare worse damage in New Orleans and Baton Rouge. In August of last year, NASA's Landsat 5 satellite took a picture of the swollen river. Here's what it saw: This year it's an entirely different story. At the end of last month, more than 60 percent of the lower 48 states were in drought, and the might Mississippi was running low. An 11-mile stretch of river has been closed on and off since August 11, and earlier this week nearly 100 boats lined up near Greenville, Mississippi, waiting to pass. Water levels near Memphis are ranging from 2.4 to 8.3 below river stage, compared with 11.7 feet above at this time last year. To make matters worse, the floods of last year deposited huge amounts of sediment on the river bed, reconfiguring the existing channels. Again NASA was there to capture the view from space, this time with Landsat 7. Here's that image:

Why our groundwater aquifers are heading towards bankruptcy -- Groundwater aquifers, like personal bank accounts, become insolvent when withdrawals exceed deposits. Unlike bank accounts or water sources such as rivers, most of the world's aquifers don't fluctuate all that much from month to month, or even from year to year. You can think of them more like retirement savings accounts: steady, slow changes are usually the norm. That slow motion makes it easy to read trends. If you see a downward trend in either your retirement account or your local aquifer, you could be headed for serious trouble. More than 2 billion people depend on groundwater for drinking or growing food. Groundwater provides more than a quarter of all the water used in the world, with most of its use attributed to irrigated agriculture. Some countries are much more heavily dependent on groundwater than others. In India and the US, more than 60% of irrigated agriculture relies on it. The good news is that our ability to detect groundwater trends has increased remarkably in recent years. The bad news coming in from satellite observations and computer models is that the levels of many of the world's most important aquifers are dropping precipitously. Recently, studies have shown that 20% of irrigated agriculture, which produces 40% of our food, is reliant upon aquifers with falling water levels. We are increasingly living on borrowed water, with no repayment plan.

The U.S. Drought Is Hitting Harder Than Most Realize - This is an important update on the U.S. drought of 2012, the combined record-setting July land temperatures, and their impact on food prices, water availability, energy, and even U.S. GDP.  Even though the mainstream media seems to have lost some interest in the drought, we should keep it front and center in our minds, as it has already led to sharply higher grain prices, increased gasoline costs (via the pass-through of higher ethanol costs), impeded oil and gas drilling activity in some areas (due to a lack of water), caused the shutdown of a few operating electricity plants, temporarily reduced red meat prices (but will also make them climb sharply later) as cattle are dumped in response to feed- and pasture-management concerns, and blocked and/or reduced shipping on the Mississippi River. All this and there's also a strong chance that today's drought will negatively impact next year's Winter wheat harvest, unless a lot of rain starts falling soon.  The good news from Hurricane Isaac is that he's traveling on a perfect path to deliver relief to one of the most heavily drought-impacted areas:

World Bank issues hunger warning after droughts in US and Europe - The World Bank issued a global hunger warning last night after severe droughts in the US and eastern Europe sent food prices to a record high. Damage to crop harvests from exceptionally dry weather this year raised sharply the Bank's food price index taking it above its peak in early 2011. The Washington-based bank blamed the drought in the US for the 25% price rise of maize and 17% price rise in soya beans last month, adding that a dry summer in Russia, the Ukraine and Kazakhstan lay behind the 25% jump in the cost of wheat. "Food prices rose again sharply threatening the health and well-being of millions of people," said World Bank group president, Jim Yong Kim. "Africa and the Middle East are particularly vulnerable, but so are people in other countries where the prices of grains have gone up abruptly." The bank said food prices overall rose by 10% between June and July to leave them 6% up on a year earlier. "We cannot allow these historic price hikes to turn into a lifetime of perils as families take their children out of school and eat less nutritious food to compensate for the high prices," said Kim. "Countries must strengthen their targeted programs to ease the pressure on the most vulnerable population, and implement the right policies."

Drought drives world food prices up 10% in July from previous month - Global food prices jumped 10% in July from the month before, driven up by the severe Midwest drought which has pushed the price of grains to record levels, the World Bank reported Thursday. The price of maize and wheat rose by 25% from June to July, and soybeans rose by 17%, according to the Washington-based organization. Overall, the World Bank's Food Price Index, which tracks the price of traded food commodities, was 6% higher than July of last year. The sharp price jumps are attributed to the Midwest drought, which has destroyed more than half of the country's corn crop. The drought, the worst in decades, has pushed the price of corn to record prices. Corn futures have jumped about 60% since the drought started in late June. They are now trading above $8 a bushel. The U.S. is the world's largest exporter of corn and soybeans. And that rise rise in grain prices was starkly higher in Africa, the organization reported. In Mozambique, maize rose 113%. In South Sudan sorghum rose 220% and 180% in Sudan.

Drought to cost insurers billions in losses - The insurance industry faces its biggest ever loss in agriculture as the worst drought to hit the US in more than half a century devastates the country's multibillion-dollar corn and soyabean crops, triggering large claims. Insurance companies providing so-called crop protection will recoup part of their loss, nonetheless, as the US federal government reinsures some of their risk, on top of subsidising the premiums that farmers pay to private companies. Agricultural economists at the University of Illinois estimate the drought will trigger this year gross indemnities of roughly $30bn, with an underwriting loss of $18bn. Of that, the US government would shoulder around $14bn, while private sector insurers are likely to face a loss of $4bn, they said. Standard & Poor's, the rating agency, put the losses of the private sector a notch higher at $5bn. "The US drought is indeed a 'catastrophic' event," Gregory W Locraft, insurance analyst at Morgan Stanley in New York, wrote in a recent note to clients, adding that it "is likely the largest [insurance] crop loss in history."

Vital Signs Chart: U.S. Storm Damage - Tropical Storm Isaac’s projected path is similar to the one that Hurricane Katrina took in 2005. But the 2012 storm season is unlikely to rival 2005, when eight storms made landfall in the U.S. and caused an inflation-adjusted $129.5 billion in combined damage. That was the worst year since World War II, and more than 2.5 times as bad as the 2004 season, which was the second-worst.

Louisiana Plans for Gulf Dredged by Isaac’s Force - Tropical Storm Isaac, projected to become a hurricane with 100 mile-per-hour winds when it makes landfall, may dredge up as much as 1 million barrels of oil buried in sediment in the Gulf of Mexico since the BP Plc (BP/) spill two years ago, a Louisiana official said. The state is adding about 50 experts to its hurricane response teams to identify new oil damage from the surge of sea water expected from the storm, said Garret Graves, chairman of Louisiana’s Coastal Protection and Restoration Authority. Isaac is expected to batter almost three-quarters of the state’s coast with wave collisions that have the power to erode beaches and send sea water deep into coastal marshes, according to computer models from the U.S. Geological Survey. That may force debris from the Gulf, including oil, deep into Louisiana’s wetlands, according to Graves. “We should be able to focus all our resources on search and rescue, and helping people repopulate,” Graves said in a telephone interview. The oil removal plans are a “frustrating necessity that would have been largely preventable had BP been more aggressive about removal efforts.”

Hurricane Isaac May Stir Up Oil From BP Spill: As Hurricane Isaac batters the Gulf Coast, some experts are warning that the storm could threaten more than levees, power lines and gas prices. Isaac's high winds and rains, they speculate, could also stir up remnant crude oil from the BP's Deepwater Horizon spill -- exposing more residents and wildlife to its potentially toxic effects. "This is another disaster on top of the hurricane that we're going to have to deal with," Garret Graves, chairman of Louisiana's Coastal Protection and Restoration Authority, told The Huffington Post. "The threat is not insignificant." Up to 1 million barrels of oil are estimated to remain in the Gulf of Mexico. That oil remains, Graves said, because BP has failed to clean it all up in the more than two years since the tragedy. "That's four to five times the oil that was spilled with the Exxon Valdez," he added. In total, an estimated 4.9 million barrels of oil spewed into the Gulf of Mexico when the offshore rig exploded on April 20, 2010. As HuffPost reported on the spill's two year anniversary, some people, particularly children, may still be dealing with chronic coughs, headaches and other effects of exposure to contaminated air, water and seafood. Graves fears the hurricane could spawn another wave of similar health issues.

Jindal Criticizes Obama for Not Delivering More Government Spending on Disaster Relief - The President spoke about an hour ago about the preparations for Hurricane Isaac (it has now graduated to hurricane force), asking residents to listen to their local officials and follow calls for evacuation should they arise. President Obama also signed a state of emergency declaration for Louisiana, which makes federal funding available for emergency efforts to deal with the storm. This isn’t good enough for Louisiana Governor Bobby Jindal. Jindal, a Republican, shot back late Monday in a letter to the Obama administration that the declaration fell short of the help he was requesting. "We appreciate your response to our request and your approval,” Jindal wrote. “However, the state’s original request for federal assistance …. included a request for reimbursement for all emergency protective measures. The federal declaration of emergency only provides for direct federal assistance.” So Jindal wants immediate reimbursement from the federal government to support government-based efforts to protect the citizens of Louisiana. And he justifies this by saying that “A core responsibility of the federal government is to protect the lives and property of its citizens when threatened.” Pardon me for snickering...

GOP Budget Cuts Would Devastate Hurricane And Weather Forecasting - As uncomfortable as it may seem to spend one year to four years watching storms the size of Isaac race across the Atlantic Ocean and not have the capability to which we have become accustomed to project their path or predict their intensity, the problem may very well get much worse. Because the Tea Party faction of the Republican Party demanded deep guaranteed budget cuts as the cost for agreeing to 2011’s increase in the federal debt limit, we have a series of automatic spending cuts, otherwise known as “sequestration,” that are scheduled to go into effect on January 2, 2013. Those cuts would dramatically restrict the already dangerously slow schedule for deploying the new polar satellites, as well as the availability of aircraft and other equipment necessary to access hurricane direction and intensity. The cuts would also reduce the staff of the National Hurricane Center and the National Weather Service. The across-the-board cuts will eliminate about $182 million from the Polar Joint Satellite System and other NOAA satellite programs in the coming fiscal year, as well as $1.6 billion from the National Aeronautics and Space Administration budget, which provides NOAA with the satellite launch capability. That will, without question, greatly increase the gap in polar satellite coverage, causing us to forecast the strength and path of hurricanes with less than half the amount of information that we have today.

RNC Builds Levee Out Of Poor People To Protect Convention Site—With Tropical Storm Isaac’s torrential rains battering the Gulf Coast of Florida, Republican National Convention organizers raced to build a protective levee out of local poor people Monday in order to prevent the Tampa Bay Times Forum from flooding. “We brought in several truckloads of low-income residents and welfare recipients from the Tampa area, and we have dozens of volunteers laying them down flat and packing them real close together to create a watertight barrier,” said Republican National Committee chairman Reince Priebus, noting that there were “more than enough” impoverished families devastated by foreclosures to fashion a sufficient levee around the entire 20,000-seat structure. “We’re still looking forward to a very productive, successful three days of celebrating conservative values and laying out a bold new direction for our country. And in terms of the storm, the poor people are now stacked nearly 5 feet high and 4 feet deep, so we should be good.”

Graph of the Day: Average Size of Largest Annual Rain or Snow Storm in the U.S., 1948-2011: The biggest rainstorms and snowstorms are getting bigger. Not only are extreme downpours more frequent, but they are also more intense. The total amount of precipitation produced by the largest storm in each year at each station increased by 10 percent over the period of analysis, on average across the contiguous United States. This trend was most pronounced in New England and the Middle Atlantic. Connecticut, Delaware, Massachusetts, Maine, New Hampshire, New Jersey, New York, Pennsylvania, and Vermont all saw the intensity of the largest storm each year increase by 20 percent or more. The trend also occurred across the Midwest, the South and the West. In total, 43 states experienced a statistically significant increase in the amount of precipitation produced by the largest annual rain or snow storm. Only one, Oregon, recorded a significant decrease. 

Endangered Sharks On Your iPhone -  Suppose an alien planetary research team showed up at my front door and asked me to write up a series of reports on human life on Earth. Why me? Hey, why not? They want useful information, right? What would I tell them? Well, I would need to tell them that humans are clearly the top-predators on this planet, that they've developed what is called "culture" to an astonishing extent, that they fear the natural world, which had brutalized them in the past, and this fear, combined with their innate and thus insatiable urge to grow, is causing them to destroy their Earthly habitat, and thus themselves. I would tell these aliens that humans love technology, often for its own sake, and use it to dominate the perilous natural world. In short, I would tell these aliens that my fellow humans are exceedingly clever but equally clueless. And then, by way of example, I would show them Stanford Robot a Search Engine For the Ocean. I would have to give them the context, explaining that shark populations have been declining for a long time now, but especially lately, and all of the top-of-the-line predators in the oceans (like sharks, but also including tuna, swordfish, et. al.) are under threat of extinction in the not-so-distant future due to human hunting.

Carbon Tax Silence, Overtaken by Events - With distressing images of weather-related disasters saturating the news media, climate change no longer seems such a distant and abstract worry — except, perhaps, in Washington. In 2009, President Obama persuaded House Democrats, then in the majority, to pass a bill aimed at curbing greenhouse gas emissions. Facing a Republican filibuster in the Senate, however, the legislation died. Mitt Romney, for his part, has been equivocal about whether rising temperatures are caused by human action.“What I’m not willing to do,” he told an audience in New Hampshire last summer, “is spend trillions of dollars on something I don’t know the answer to.”  Climatologists are the first to acknowledge that theirs is a highly uncertain science. The future might be better than they think. Then again, it might be much worse. According to the respected M.I.T. global climate simulation model, there is a 10 percent chance that average surface temperatures will rise by more than 12 degrees Fahrenheit by 2100. Warming on that scale could end life as we know it. Smaller increases would be less catastrophic, but even the most optimistic projections imply enormous costs.  The good news is that we could insulate ourselves from catastrophic risk at relatively modest cost by enacting a steep carbon tax. Early studies by the Intergovernmental Panel on Climate Change estimated that a carbon tax of up to $80 per metric ton of emissions — a tax that might raise gasoline prices by 70 cents a gallon — would eventually result in climate stability. But because recent estimates about global warming have become more pessimistic, stabilization may require a much higher tax. How hard would it be to live with a tax of, say, $300 a ton?

Some Frank Talk About Carbon Taxes - Good that Robert Frank wants to put climate change back on the agenda and points to the necessity of pricing carbon.  No matter which way the political winds are blowing, this problem is too important to ignore. Nevertheless, it doesn’t help that mainstream economists keep getting this issue wrong.  They reinforce assumptions that dealing with carbon will dramatically lower the living standards of ordinary people, and they play into the kinds of political stereotypes that have stymied progress for two decades.Presenting the necessary policy as a carbon tax makes the job nearly impossible right from the start.  Why lead with the promise/threat to tax people?  Pricing carbon is only a means, not an end.  The logical way to begin is to call for a system of carbon permits, just like we have hunting and fishing permits so that elk and trout aren’t harvested to extinction.  Auction off the permits and you put a price on carbon, but the means-end distinction remains transparent.  For one thing, you discuss tightening or loosening a permit system in terms of how many permits you want to issue, not on cost.  Our carbon policy should be calibrated in terms of the atmospheric carbon concentration we are targeting, not on how much revenue should be collected from a carbon tax. Aside from its political virtues, a permit system has technical advantages that I discussed in a previous post.

Why doesn't more communication translate into greater consensus about the world's problems? - On the surface one would think that the revolutionary advances in worldwide communications--made possible first by the telegraph, then by the telephone, the radio, the television and now by the Internet--would lead to a broad consensus on such issues as climate change and resource depletion. Almost everyone now has nearly instant access to the latest scientific information on these issues. Yet, no consensus has emerged, at least not one strong enough to bring about definitive action. Some people point to the enormous sums spent by the fossil fuel industry to confuse the public about the causes and consequences of climate change and about the future availability of fossil fuels. This is certainly a very big factor. Polls show that the American public's acceptance of the scientific consensus on climate change has declined in recent years coincident with a very strong propaganda push by the industry. But I want to get at why people are susceptible to such manipulation in the first place. After all, the truth about climate change is now available practically worldwide to anyone who has a computer or even access to a library. And, the figures on oil production, which has been flat since 2005, are available from official government websites..

India Approves $4.1 Billion Investment in Electric Vehicles over Next 8 Years - CleanTechnica: The government of India has decided to approve a $4.13-billion plan to stimulate the production of electric and hybrid vehicles over the next eight years. The country is setting for itself the target of 6 million vehicles by the year 2020. There isn’t really an electric and hybrid vehicle industry in India currently. Most car manufacturers in India focus on low-emission cars, because of the “prohibitively high costs of new technologies and an almost non-existent support infrastructure.” The announced target of 6 million green vehicles by 2020 (most of which are expected to be two-wheelers) is arriving on the heels of China’s announcement that it aims to have 500,000 electric and hybrid cars in use by the year 2015.

U.S. Sets Much Higher Fuel Efficiency Standards - The Obama administration issued on Tuesday the final version of new rules that require automakers to nearly double the average fuel economy of new cars and trucks by 2025. The standards — which mandate an average fuel economy of 54.5 miles per gallon for the 2025 model year — will increase the pressure on auto manufacturers to step up development of electrified vehicles as well as sharply improve the mileage of their mass-market models through techniques like more efficient engines and lighter car bodies. Current rules for the Corporate Average Fuel Economy, or CAFE, program mandate an average of about 29 miles per gallon, with gradual increases to 35.5 m.p.g. by 2016. The new rules represent a victory for environmentalists and advocates of fuel conservation, but were attacked by opponents, including the Republican presidential nominee Mitt Romney, as too costly for consumers.

Republican Platform Opposes Agenda 21 - The G.O.P. platform approved Tuesday in Florida included tough language on many expected issues like abortion, but also takes a stand on an issue that has historically been out of the party’s mainstream: Agenda 21. “We strongly reject the U.N. Agenda 21 as erosive of American sovereignty, and we oppose any form of U.N. Global Tax,” the platform reads. Agenda 21 is a 1992 United Nations resolution that encourages sustainable development globally. Although it is nonbinding and has no force of law in the United States, it has increasingly become a point of passionate concern to a circle of Republican activists who argue that the resolution is part of a United Nations plot to deny Americans their property rights. In a New York Times article in February written with my colleague, Kate Zernike, we reported about activists aligned with the Tea Party disrupting local city and state land use planning meetings nationwide to denounce sustainable efforts to reduce energy use — including bike lanes on public streets and smart meters on home appliances. The activists see such community projects as the first steps in a plan to limit individual rights.

An update on the Arctic sea-ice - We noted earlier that the Artic sea-ice is approaching a record minimum. The record is now broken, almost a month before the annual sea-ice minima usually is observed, and there is probably more melting in store before it reaches the minimum for 2012 – before the autumn sea-ice starts to form.  The figure shows annual variations in the area of sea-ice extent, and the x-axis marks the time of the year, starting on January 1st and ending on December 31st (for the individual years). The grey curves show the Arctic sea-ice extent in all previous years, and the red curve shows the sea-ice area for 2012.  (The figure is plotted with an R-script that takes the data directly from NSIDC; the R-environment is available from CRAN)

Arctic sea ice melt record smashed - Climate change impacts are frequently happening more quickly and at lower levels of global warming than scientists expected, even a decade or two ago. And this week the Arctic has provided a dramatic and deeply disturbing example. According to IARC/JAXA satellite data at Arctic Sea Ice Monitor from the Japan Aerospace Exploration Agency, the sea-ice extent of 24 August 2012 of 4,189,375 square kilometres broke the previous record in the satellite era of 4,254,531 square kilometres set on 24 August 2007. Back then the were scientific gasps that the sea ice was melting “100 years ahead of schedule.”  [The 24 August figure is subject to revision the next day, but the point remains that record has been broken or will be broken in the next day or two.  The NSIDC chart using 5-day running averages, so it is a few days behind.]

Arctic Sea Ice Reaches Lowest Extent Ever Measured, Reports National Snow and Ice Data Center - The blanket of sea ice floating on the Arctic Ocean melted to its lowest extent ever recorded since satellites began measuring it in 1979, according to the University of Colorado Boulder’s National Snow and Ice Data Center. On Aug. 26, the Arctic sea ice extent fell to 1.58 million square miles, or 4.10 million square kilometers. The number is 27,000 square miles, or 70,000 square kilometers below the record low daily sea ice extent set Sept. 18, 2007.  Since the summer Arctic sea ice minimum normally does not occur until the melt season ends in mid- to late September, the CU-Boulder research team expects the sea ice extent to continue to dwindle for the next two or three weeks, said Walt Meier, an NSID scientist. “It’s a little surprising to see the 2012 Arctic sea ice extent in August dip below the record low 2007 sea ice extent in September,” he said.  “It’s likely we are going to surpass the record decline by a fair amount this year by the time all is said and done.”  Compared to the long-term minimum average from 1979 to 2000, the 2007 minimum extent was lower by about a million square miles — an area about the same as Alaska and Texas combined, or 10 United Kingdoms.

The Biggest Story You Aren’t Seeing on the News. Sea Ice in Free Fall -- Hurricane Isaac vs the Republicans is rising on the charts – but its really a footnote compared to the big story. How long before the major media turn cameras on the jaw-dropping drama that’s had scientists transfixed for the last 3 weeks?  Arctic Sea Ice Blog: I apologize for having provided so little analysis lately, but things are moving so fast that analysis can’t keep up. Basically, I’m at a loss for words, and not just because my jaw has dropped and won’t go back up as long as I’m looking at the graphs. I’m also at a loss – and I have already said it a couple of times this year – because I just don’t know what to expect any longer. I had a very steep learning curve in the past two years. We all did. But it feels as if everything I’ve learned has become obsolete. Will trend lines go even lower, or will the remaining ice pack with its edges so close to the North Pole start to freeze up?  ClimateCodeRed: Sunday’s data confirms that the previous sea-ice extent minimum of 24 September 2007 was broken last Friday, 24 August 2012. What is also stunning are sea-ice daily extent figures averaging ice loss of more than 100,000 square kilometres per day for the last four days. This suggest melt is accelerating very late in the melt season in a pattern that has never before been observed. The Arctic this year is heading into new territory and it looks like 2012 may in retrospect be seen as the year when a new melt regime took hold.

A New Arctic Sea Ice Record - The Canary Sings -- NASA's analysis of ice coverage shows that on August 26th, 2012, the areal extent of Arctic ice reached a new generational low, breaking the previous record set back on September 18th, 2007.  What is concerning about this is that melting is likely to continue for several weeks yet, suggesting that new records could still be set since the end of the melt season generally occurs between the middle and the end of September.   Here is a NASA image showing how this year's ice minimum is far smaller in area than the average minimum over the period from 1979 to 2010 as shown with the orange line: The areal extent of Arctic ice on August 26th, 2012 was 1.58 million square miles, nearly 2 percent smaller than the previous record low of 1.61 million square miles reached in September 2007.  Scientists have noted that, on average, over the last thirty years, each decade has seen a 13 percent decline in the minimum summertime extent of sea ice cover. NSICD data shows that over the last six years, the six lowest ice extents in the satellite record have occurred.  Here is a graph showing the average Arctic sea ice extent over the period from 1979 to 2000 (solid black line), the extent in 1980 in orange, the extent in 2007 (green dashed line) and the extent this year (solid blue line):

World Turning its Eyes to the Ice -- NYTimes:The amount of sea ice in the Arctic has fallen to the lowest level on record, a confirmation of the drastic warming in the region and a likely harbinger of larger changes to come. Satellites tracking the extent of the sea ice found over the weekend that it covered about 1.58 million square miles, or less than 30 percent of the Arctic Ocean’s surface, scientists said. That is only slightly below the previous record low, set in 2007, but with weeks still to go in the summer melting season, it is clear that the record will be beaten by a wide margin. Australian Broadcasting Company: According to research by the National Snow and Ice Data Center (NSIDC), based at the University of Colorado at Boulder, the decline in summer Arctic sea ice “is considered a strong signal of long-term climate warming”. The most recent analysis was partially supported by NASA. Arctic sea ice fell to 4.10 million square kilometres, some 70,000 square kilometres less than the earlier record charted on September 18, 2007, says the NSIDC. Scientists say the record was all the more striking as 2007 had near perfect climate patterns for melting ice, but that the weather this year was unremarkable other than a storm in early August.

Arctic sea ice extent breaks 2007 record low: NSIDC Report for August 27, 2012 - Arctic sea ice appears to have broken the 2007 record daily extent and is now the lowest in the satellite era. With two to three more weeks left in the melt season, sea ice continues to track below 2007 daily extents. Arctic sea ice extent fell to 4.10 million square kilometers (1.58 million square miles) on August 26, 2012. This was 70,000 square kilometers (27,000 square miles) below the September 18, 2007 daily extent of 4.17 million square kilometers (1.61 million square miles). Including this year, the six lowest ice extents in the satellite record have occurred in the last six years (2007 to 2012). Please note that this is not an announcement of the sea ice minimum extent for 2012. NSIDC will release numbers for the 2012 daily minimum extent when it occurs. A full analysis of the melt season will be published in early October, once monthly data are available for September.

George Monbiot: The Heat of the Moment - Climate breakdown is right here, right now. There are no comparisons to be made. This is not like war or plague or a stockmarket crash. We are ill-equipped, historically and psychologically, to understand it, which is one of the reasons why so many refuse to accept that it is happening. What we are seeing, here and now, is the transformation of the atmospheric physics of this planet. Three weeks before the likely minimum, the melting of Arctic sea ice has already broken the record set in 2007(1). The daily rate of loss is now 50% higher than it was that year(2). The daily sense of loss – of the world we loved and knew – cannot be quantified so easily. The Arctic has been warming roughly twice as quickly as the rest of the Northern Hemisphere. This is partly because climate breakdown there is self-perpetuating. As the ice melts, for example, exposing the darker sea beneath, heat which would previously have been reflected back into space is absorbed. This great dissolution, of ice and certainties, is happening so much faster than most climate scientists predicted that, one of them reports, “it feels as if everything I’ve learned has become obsolete.”(3) In its last assessment, published in 2007, the Intergovernmental Panel on Climate Change noted that “in some projections, Arctic late-summer sea ice disappears almost entirely by the latter part of the 21st century.”(4) These were the most extreme forecasts in the panel’s range. Some scientists now forecast that the disappearance of Arctic sea ice in late summer could occur in this decade or the next(5,6,7).

Arctic Becomes A Giant Slushee - This has been a year of climate-related records, so it comes as no surprise that the Arctic sea ice has shrunk to its lowest extent since satellites measurements began in 1979. The National Snow And Ice Data Center (NSIDC) announced the record melt yesterday, although scientists could see this one coming for weeks. NSIDC scientist Walt Meier was quoted in the New York Times. Parts of the Arctic have become like a giant Slushee this time of year. This text is from the NSIDC press release.Arctic sea ice cover melted to its lowest extent in the satellite record yesterday, breaking the previous record low observed in 2007. Sea ice extent fell to 4.10 million square kilometers (1.58 million square miles) on August 26, 2012. This was 70,000 square kilometers (27,000 square miles) below the September 18, 2007 daily extent of 4.17 million square kilometers (1.61 million square miles)... The melt season isn't over yet, so we're on course to shatter the 2007 all-time low in the Arctic. And though it got very little attention, we also set a new melt record in Greenland this summer, as reported in the Science Daily's Greenland Melting Breaks Record Four Weeks Before Season's End.

Arctic sea ice extent accelerates decline, just stunning! - graphic

The day the world went mad - Yesterday was August 28th 2012. Remember that date. It marks the day when the world went raving mad. Three things of note happened. The first is that a record Arctic ice melt had just been announced by the scientists studying the region. The 2012 figure has not only beaten the previous record, established in 2007. It has beaten it three weeks before the sea ice is likely to reach its minimum extent. It reveals that global climate breakdown is proceeding more rapidly than most climate scientists expected. But you could be forgiven for missing it, as it scarcely made the news at all. Instead, in the UK, the headlines concentrated on the call by Tim Yeo, chair of the parliamentary energy and climate change committee, for a third runway at Heathrow. This sparked a lively debate in and beyond the media about where Britain's new runways and airports should be built. The question of whether they should be built scarcely arose. Just as rare was any connection between the shocking news from the Arctic and this determination to increase our emissions of greenhouse gases. The third event was that the Republican party in the United States began its national convention in Tampa, Florida – a day late. Why? Because of the anticipated severity of hurricane Isaac, which reached the US last night.

Recent Warming Reverses Long-Term Arctic Cooling - The temperature history of the first millennium C.E. is sparsely documented, especially in the Arctic. We present a synthesis of decadally resolved proxy temperature records from poleward of 60° N covering the past 2,000 years, which indicates that a pervasive cooling in progress 2,000 years ago continued through the Middle Ages and into the Little Ice Age. A 2,000-year transient climate simulation with the Community Climate System Model shows the same temperature sensitivity to changes in insolation as does our proxy reconstruction, supporting the inference that this long-term trend was caused by the steady orbitally driven reduction in summer insolation. The cooling trend was reversed during the 20th century, with four of the five warmest decades of our 2,000-year-long reconstruction occurring between 1950 and 2000.

Arctic Sea Ice Volume - In response to this morning's links post, commenter Stephen B argued that: I don't think one needs to be any kind of climate scientist to understand what is about to happen to the remaining ice. In the next 3 years, at some point, the remaining ice is going to be so thin and so relatively fresh, that late one summer in say, August of 2014 to 17, scientists are going to look at their satellite data, and see essentially zero ice. Anybody that's watched a large lake or bay melt understands how they go. First, the edges fray. Some chunks break off, but the main slab grows thinner, wetter, darker, and more "rotten." Then one day in the spring the whole thing, say like 75% of the surface, just breaks up to slush in a matter of hours and it's gone. I grabbed the ice volume data from Piomas, computed the minimum volume each year, and plotted the result above.  Note that 2012 is not final as there's still several weeks of the normal melt season left. The purple line is a linear trend - explaining 82% of the variance.  It clearly has systematic problems - the ice collapse is accelerating, not just proceeding linearly. A quadratic (red) is a visibly much better fit and explains 92% of the variance.  The quadratic hits zero in 2017. It doesn't seem crazy to think that the Arctic will be ice free in September sometime this decade.

Peter Wadhams: Arctic sea ice gone in 3 years - ARCTIC sea ice has melted to a record low, confirming experts’ fears about the “devastating” impact of climate change on the planet. Figures published yesterday from the National Snow and Ice Data Centre (NSIDC), in the United States, reveal that sea ice in the Arctic has dropped to its lowest level since satellite recording started 30 years ago. It is the sixth year in a row that a new record low has been recorded, following consecutively worsening melts first identified in 2007. There is now 40% less sea ice in the polar region than the average levels recorded between 1979 and 2000. With melting season still not over, concerns are growing that in a few years there will be no summer sea ice at all – spelling disaster for wildlife such as polar bears, which rely on ice to hunt.  Peter Wadhams, professor of ocean physics at Cambridge University, who was branded “alarmist” after he first detected “substantial thinning” of sea ice in 1990, said: “The entire ice cover is now on the point of collapse. “The extra open water already created by the retreating ice allows bigger waves to be generated by storms, which are sweeping away the surviving ice. It is truly the case that it will be all gone by 2015. The consequences are enormous and represent a huge boost to global warming.”

More on Arctic Sea Ice Volume - Following up to yesterday's quick lunchtime ice volume post.  This morning I processed the data a bit differently by computing the average for each month in each year and then plotting the monthly series separately.  The results are above.  For the months July-December I fit a quadratic - which gives a decent fit in all cases. The extrapolations show the Arctic ice free for six months out of the year by 2025. A word about extrapolations, which are always dangerous.   In this case, we have no theoretical model - this is purely an empirical fit.  (The theoretical models of the Arctic are climate models, which uniformly failed to predict the rapid and early collapse in sea-ice volume that has actually been observed - so they are presumably missing something important about the dynamics).   We don't particularly have any reason to expect the dynamics to change soon.  The Arctic has long been expected to warm dramatically under climate change, and all indications are that it has indeed been warming and will continue to warm.  There is no historical evidence of climate fluctuations this large in Arctic ice.  However, it's possible that part of the recent move is a fluctuation that could revert and delay the inevitable.

Why The Arctic Sea Ice Death Spiral Matters - In the past week the Arctic sea ice cover reached an all-time low, several weeks before previous records, several weeks before the end of the melting season. The long-term decline of Arctic sea ice has been incredibly fast, and at this point a sudden reversal of events doesn’t seem likely. The question no longer seems to be “will we see an ice-free Arctic?” but “how soon will we see it?”. By running the Arctic Sea Ice blog for the past three years I’ve learned much about the importance of Arctic sea ice. With the help of Kevin McKinney I’ve written the piece below, which is a summary of all the potential consequences of disappearing Arctic sea ice. Arctic sea ice became a recurrent feature on planet Earth around 47 million years ago. Since the start of the current ice age, about 2.5 million years ago, the Arctic Ocean has been completely covered with sea ice. Only during interglacials, like the one we are in now, does some of the sea ice melt during summer, when the top of the planet is oriented a bit more towards the Sun and receives large amounts of sunlight for several summer months. What makes this event significant, is the role Arctic sea ice plays as a reflector of solar energy. Ice is white and therefore reflects a large part of incoming sunlight back out to space. But where there is no ice, dark ocean water absorbs most of the sunlight and thus heats up. The less ice there is, the more the water heats up, melting more ice. This feedback has all kinds of consequences for the Arctic region.

Fen Montaigne: Arctic Tipping Point: A North Pole Without Ice - As the northern summer draws to a close, two milestones have been reached in the Arctic Ocean — record-low sea ice extent, and an even more dramatic new low in Arctic sea ice volume. This extreme melting offers dramatic evidence, many scientists say, that the region’s sea ice has passed a tipping point and that sometime in the next decade or two the North Pole will be largely ice-free in summer. NASA and U.S. ice experts announced earlier this week that the extent of Arctic sea ice has dropped to 4.1 million square kilometers (1.58 million square miles) — breaking the previous record set in 2007 — and will likely continue to fall even farther until mid-September. As the summer melt season ends, the Arctic Ocean will be covered with 45 percent less ice than the average from 1979 to 2000.Even more striking is the precipitous decline in the volume of ice in the Arctic Ocean. An analysis conducted by the University of Washington’s Pan Arctic Ice Ocean Model Assimilation System (PIOMAS) estimates that sea ice volumes fell in late August to roughly 3,500 cubic kilometers — a 72-percent drop from the 1979-2010 mean.The dramatic ice loss is being driven by a several key factors, scientists say. Chief among them is that decades of warming have so extensively melted and thinned Arctic sea ice that rapidly expanding areas of dark, open water are absorbing ever-greater amounts of the sun’s radiation, further warming the region in a vicious cycle.

Arctic Sea Ice Death Spiral - With two weeks or so still to go before the annual minimum is reached, the record for lowest extent of Arctic sea ice has already been obliterated by a huge margin. The only question at this point is how much the ice cover will shrink.We’ve already dipped below 4 million square kilometers. The ice is disappearing so fast that it won’t be long until the Arctic ocean is essentially ice-free during summer, for the first time in history (and yes, I do mean “in history”).The shockingly fast disappearance of Arctic sea ice isn’t like anything we’ve witnessed before. Ever. It isn’t some “natural cycle.” it isn’t a natural anything. It should really be called a “death spiral.” This is global warming. It’s real. It’s so real it walked right up to us and slapped us in the face. If you believe we can do this to the planet without consequences, you’re a fool.

The Age Of Consequences - As we continue into the centuries-old, but only recently acknowledged era of destruction and extinction, it’s apparent the current model is not working. Largely too fearful of individual retribution to disrupt the industrial culture that’s making us sick, making us crazy, and killing us, we hang tightly to the only system we’ve ever known. Pathetically reluctant to consider what lies beyond the omnicidal industrial machine, we cling to a system that has failed to nurture the living planet, human individuals, and human communities. At some point, we simply lost track of the importance of communities, human and otherwise. Along the way to becoming a nation of multitasking, Twittering, Facebook “friends” we abandoned the ability to connect meaningfully, viscerally, individually. If we are to thrive during the post-carbon era, we’ll need to create groups of straight-talking, look-’em-in-the-eye, mean-what-you-say, say-what-you-mean, self-reliant, individuals who are not afraid to ask for help from the neighbors and who, when asked, readily offer assistance.

Siberian subsea permafrost emitting methane, also from coastal erosion - Parts of Arctic Siberia are releasing ten times more carbon into the atmosphere than previously thought, a University of Manchester scientist and an international team of researchers have found. Writing in Nature, the scientists discovered that much more greenhouse gas is being released into the atmosphere than previously calculated, from an ancient and large carbon pool held in permafrost along the 7,000-km-long desolate coast of northernmost Siberian Arctic – dramatically increasing global warming. As the temperature climbs, carbon – stored in vast ice walls along this Arctic coast called Yedoma, covering about one million km2 (four times the area of the U.K.) – is pouring into the Arctic Ocean in one of the world’s most remote and desolate regions. This region is experiencing twice the global average of climate warming. While satellite images reveal thousands of kilometers of milky-cloudy waters along the Arctic coast, suggesting a massive influx of material, the Yedoma has remained understudied largely due to the region’s inaccessibility. By studying the thaw-eroding slopes of a disappearing island, the team found that the tens-of-thousands of years old coastal Yedoma carbon is rapidly converted to CO2 and methane, even before being washed into the sea. Additional analyses of marine bottom sediments revealed that erosional input from ancient coastal Yedoma was the dominant source of carbon, much larger than inputs from marine sources and river-carried debris from soils.

Tons of methane lurk beneath Antarctic ice - Microbes possibly feeding on the remains of an ancient forest may be generating billions of tons of methane deep beneath Antarctic ice, a new study suggests. The amount of this greenhouse gas — which would exist in the form of a frozen latticelike substance called methane hydrate — lurking beneath the ice sheet rivals that stored in the world's oceans, the researchers said. If the ice sheet collapses, the greenhouse gas could be released into the atmosphere and dramatically worsen global warming, researchers warn in a study published in the Aug. 30 issue of the journal Nature. "There could be tons of methane hydrate beneath the Antarctic ice sheet," said "If you start to thin that ice cover, that hydrate starts to become unstable and turns into gas, and that gas can go into the atmosphere."Hundreds of billions of tons of carbon may lurk in methane reservoirs below the continent, the study found. That dwarfs the 600 million tons of carbon released through natural methane emissions like wetlands, livestock, burning of biomass and agriculture every year, she said. Methane is a potent global warming gas, capable of trapping 20 times more heat than carbon dioxide, though it lingers in the atmosphere for much shorter periods of time. The low temperature and high pressure from the ice sheet probably keeps the gas in a stable form called methane hydrate, or a methane molecule locked inside a cage of water molecules, But if the ice sheets crack and disappear, which may happen due to climate change, the methane could slip free from that watery cage and enter the atmosphere rapidly, she said.

'Vast reservoir' of methane locked beneath Antarctic ice sheet -  A vast reservoir of the potent greenhouse gas methane may be locked beneath the Antarctic ice sheet, a study suggests. Scientists say the gas could be released into the atmosphere if enough of the ice melts away, adding to global warming. Research indicates that ancient deposits of organic matter may have been converted to methane by microbes living in low-oxygen conditions. The organic material dates back to a period 35m years ago when the Antarctic was much warmer than it is today and teeming with life."Some of the organic material produced by this life became trapped in sediments, which then were cut off from the rest of the world when the ice sheet grew. Our modelling shows that over millions of years, microbes may have turned this old organic carbon into methane." Half the West Antarctic ice sheet and a quarter of the East Antarctic sheet lie on pre-glacial sedimentary basins containing around 21,000bn tonnes of carbon, said the scientists, writing in the journal Nature. "This is an immense amount of organic carbon, more than 10 times the size of carbon stocks in northern permafrost regions. The amount of frozen and free methane gas beneath the ice sheets could amount to 4bn tonnes, the researchers estimate.

Antarctic Methane: A New Factor in the Climate Equation - Climate scientists have long fretted about the hundreds of billions of tons of methane frozen under the floor of the Arctic Ocean. If the water warms enough, some of that methane could escape. Nobody knows how soon or how quickly such a release might happen, but since methane is a far more potent heat-trapping gas than the more familiar carbon dioxide, it could add to the temperature increase already under way thanks largely to human emissions from fossil fuel burning.  But frozen Arctic methane turns out to be just the tip of the iceberg, so to speak. According to a paper released Wednesday in Nature, there could be just as much methane trapped on the opposite side of the planet, under Antarctica’s vast ice sheets.

What Do Methane Deposits In The Antarctic And Arctic Mean For The Climate? - Two new research papers published today improve our understanding of the planet’s methane emissions, and might raise worries about the role of the gas in warming the planet. The first suggests that there may be extensive methane deposits under the Antarctic ice sheets. Meanwhile, the second concludes that emissions of the gas from Arctic permafrost have been underestimated. Methane is a potent greenhouse gas – accounting for around 14 per cent of the warming effect of current man made greenhouse gas emissions. Recent research has focused on measuring emissions from methane sources, both natural and manmade. Scientists have been particularly interested in methane emitted from the Arctic. This is because the region is warming particularly rapidly. In addition, methane released from melting permafrost and escaping methane hydrate deposits could exacerbate climate change. But research published today in the journal Nature suggests for the first time that there might also be large stores of methane at the other end of the planet, under the Antarctic ice sheet. Lab experiments show that microbes living beneath the ice are able to convert plant remains into methane, and scientists calculate that half of the West Antarctic Ice Sheet (1 million square kilometers) and a quarter of the East Antarctic Ice Sheet (2.5 million square kilometers) could cover carbon-rich sediments containing up to 4 billion metric tons of methane in the form of methane hydrates.

Greenpeace ramps up climate battle with big oil in the Arctic, aims to thwart rush to drill - The Washington Post: Global warming has ignited a rush to exploit Arctic resources — and Greenpeace is determined to thwart that stampede. Employing the same daredevil tactics it has used against nuclear testing or commercial whaling, the environmental group is now dead-set on preventing oil companies from profiting from global warming by drilling for oil near the Arctic’s shrinking ice cap.The campaign took off in May 2010, when oil was still gushing from a ruptured well in the Gulf of Mexico. At the time, Greenpeace was startled by reports that a small Scottish energy firm was proceeding with plans to drill for oil and gas in iceberg-laden waters off western Greenland. "After what happened in the Gulf of Mexico, how can anyone respond to that by going to drill in similar depths in a place called Iceberg Alley?”

Shell seeks extension of Alaska Chukchi drill season: Royal Dutch Shell is seeking permission to extend its Arctic drilling season as it struggles with the logistics of exploring untapped oil reserves beneath icy waters off Alaska. The oil giant, which so far has spent $4.5 billion on its Alaska exploration program, is seeking to drill the first wells in two decades in the remote Chukchi Sea, which sits between Alaska and Siberia. The effort is being closely watched by the energy industry. Shell has asked the U.S. Bureau of Ocean Energy Management to extend allowable drilling in hydrocarbon zones in the Chukchi for up to 18 days beyond the current deadline, said Shell spokesman Curtis Smith. Shell's BOEM-approved exploration plans require the company to cease drilling into known oil- or gas-bearing geologic depths in the Chukchi by September 24 due to dangers posed by ice. Shallower 'top-hole' drilling would be allowed after that date. Drilling into hydrocarbon zones in the neighboring Beaufort Sea would be allowed until October 31, but under the plans, all operations must cease by the end of October. Smith said the request for an extension in the Chukchi is based on scientists' expectations that open-water conditions will linger late into the fall. "We are looking at an ice-forecast scenario that indicates a mid-November freeze-up," he told Reuters.

U.S. to allow Shell to begin prep work for drilling in Arctic (Reuters) - Royal Dutch Shell will be allowed to begin some "limited" drilling in Alaska's Chukchi Sea, the U.S. government said on Thursday, a move the company hailed as a step forward in its long-delayed effort to tap Arctic oil. The U.S. Interior Department said Shell will be permitted to begin preparatory work in the Chukchi, but cannot drill to areas containing oil until the government certifies its oil spill containment system. Without that containment system, the department has said it will not allow Shell to drill for oil in the Arctic. "At this point we don't know what exactly is going to happen with Shell and whether they are going to be able to complete a well in the Arctic this year," Interior Secretary Ken Salazar told a conference call with reporters. Shell's Arctic drilling plans had appeared on track to begin this year but it has run into delays. The company has spent $4.5 billion so far in its effort to explore for oil and gas off Alaska's coast.

Russia Plays Game of Arctic Roulette in Oil Exploration - The shipyards in Severodvinsk, on the White Sea, where nuclear submarines were once built, have turned their attention to assembling drilling platforms. One was just recently assembled for use at the Prirazlomnoye oilfield in the Pechora Sea, also along Russia's northwestern coast. The enormous metal construction, operated by a subsidiary of Russian energy giant Gazprom, is expected to start drilling sometime in the coming months. Although these plans were made with no particular fanfare, unexpected resistance has sprung up around the drilling rig. Greenpeace Russia presented an alarming study last week. "If an accident were to occur at the platform in the Pechora Sea, it would contaminate an area twice the size of Ireland," warns Roman Dolgov, director of Greenpeace Russia's Arctic program. There are protected natural areas, home to endangered species such as walruses and beluga whales, just 50 to 60 kilometers (31 to 37 miles) from the platform. An accident could cover the entire 3,500-kilometer coastline in a toxic slick. But, owing to the particular conditions of the Arctic, it would only be possible to remove a small portion of that oil. The danger of environmental damage is growing elsewhere in the far north, as well, as the countries that border the Arctic race to exploit previously inaccessible resources. Sea ice here is disappearing and may even drop this year below its previous record low of 4.3 million square kilometers, reached in 2007.

Methane Showing Up in Water Contaminated By Fracking - The biggest reason for the decline in greenhouse gas emissions over the past couple years is the replacement of dirty coal with natural gas to generate electricity. But this will not last if the fracking that has unlocked so much natural gas leads to the release of underground methane, a powerful greenhouse gas. Among all the other pollutants we’re seeing in the water supply of areas with a high frequency of fracking, we’re starting to see lots of methane out there. Mike and Nancy Leighton’s problems began on May 19, just as Mike was settling in to watch the Preakness Stakes. A neighbor in Leroy Township, Pa., called Mike and told him to check the water well located just outside his front door. Down the road, Ted and Gale Franklin’s water well had gone dry. When water started coming out later that week, the liquid was “black as coal,” according to Gale. Since then, both families have been dealing with methane-contaminated water supplies, as well as dozens of mysterious, flammable gas puddles bubbling up on their properties. Pennsylvania’s Department of Environmental Protection blames a nearby hydraulic fracturing, or fracking, operation. It says methane gas has leaked out of the well, which is operated by Chesapeake Energy, and into the Leightons’ and Franklins’ water supplies. The danger goes beyond contaminated water. In a letter to both families detailing test results and preliminary findings, state regulators wrote that “there is a physical danger of fire or explosion due to the migration of natural gas water wells.”

Long fight over fracking still divides Pennsylvania town - More than three years after residents in this Susquehanna County town complained that Marcellus Shale natural gas development polluted their private water wells, the lawsuits are getting settled, the activists are going away, and gas drilling is set to resume. But the battle scars are unhealed in Dimock, whose name has become synonymous with hydraulic fracturing - fracking. The rush to drill struck a deep reservoir of hostility. Residents who support or oppose shale-gas development complain that their neighbors are looking for a quick payday, either from gas-drilling royalties or a legal settlement. They exchange snippy comments at the post office and glares at the grocery. They hold counterdemonstrations to each other's rallies, hoisting glasses of dirty water or clean water, depending upon their point of view.

U.S. denies reactor license — Only 2nd time in history - A three judge Nuclear Regulatory Commission Atomic Safety and Licensing Board (ASLB) today denied a license for the proposed Calvert Cliffs-3 nuclear reactor on the Chesapeake Bay in Maryland. In a 29-page decision, the ASLB agreed with intervenors that the Calvert Cliffs-3 project would be in violation of the Atomic Energy Act’s prohibition against foreign ownership, control or domination, and that the project’s owner, UniStar Nuclear, is eligible neither to receive a license nor to even apply for a license. UniStar is 100% owned by the French government’s Electricite de France. This is only the second time in history a reactor license has been denied by an Atomic Safety and Licensing Board. The first was the license application for the Byron reactor in Illinois in 1984, which was briefly denied because of quality assurance problems at the site. But that decision was quickly overturned on appeal as the utility already had initiated a program to correct the problems. In this case, the ASLB is giving UniStar 60 more days to find a U.S. partner that might enable it to meet the foreign ownership restrictions before the ASLB declares the proceeding concluded.

Merkel’s Other Crisis Spurs German Quest for Energy Holy Grail -  Specht is one of an army of researchers working to overcome the technological challenges posed by Chancellor Angela Merkel’s decision to abandon nuclear power and shift to renewables in the biggest energy-infrastructure overhaul since World War II. Their task is to fill the energy gap when atomic plants that accounted for about 20 percent of Germany’s power early last year go offline within a decade. 'The energy overhaul is an epic project that will span many decades,” said Claudia Kemfert, chief energy expert at the Berlin-based DIW economic institute. She estimates at least 200 billion euros ($250 billion) of public and private investment will be needed over 10 years to compensate for nuclear. If Merkel manages it smartly, it’ll bring “economic advantages, raise competiveness and create jobs,” Kemfert said.  The alternative is disruption to Europe’s biggest economy and higher power prices. With plans to fast-track construction of unpopular power lines and consumers being warned to expect steeper bills to pay for renewables in 2013, an election year, energy policy looks set to join the euro crisis as a campaign theme standing between Merkel and a third term.

A Few Insights Regarding Today's Nuclear Situation: The issue of nuclear electricity is a complex one. In this post, I offer a few insights into the nuclear electric situation based on recent reports and statistical data. According to BP’s Statistical Review of World Energy, the highest year of nuclear electric production was 2006. There are really two trends taking place, however.
1. The countries that adopted nuclear first, that is the United States, Europe, Japan, and Russia, have been experiencing flat to declining nuclear electricity production. The countries with actual declines in generation are Japan and some of the countries in Europe outside of France.
2. The countries that began adopting nuclear later, particularly the developing countries, are continuing to show growth. China and India in particular are adding nuclear production.
The long-term trend depends on how these two opposite trends balance out. There may also be new facilities built, and some “uprates” of old facilities, among existing large users of nuclear. Russia, in particular, has been mentioned as being interested in adding more nuclear.

Japanese government to consider nuclear-free option - In the face of strident anti-nuclear public sentiment, the government will consider abandoning nuclear power generation, sources said, a turnaround from its previous stance of continued reliance. In response to the Fukushima nuclear disaster last year, the government proposed three options for the ratio of nuclear energy in power generation in 2030—zero percent, 15 percent and 20-25 percent—as a basis for a new energy policy. To facilitate a "national debate" on the options, the government conducted deliberative polling, held public hearings and sought public opinion through the Internet and other means from July to August. Now, a government panel tasked with analyzing the results of that debate is set to conclude that many citizens favor a nuclear-free society, the sources said. The government had previously expected to choose the 15-percent option.

The Path Is Clearing For The First US Oil Sands Project — An administrative law judge is defending a Utah state agency's decision to issue a permit for a tar sands project — the first of its kind in the U.S. Judge Sandra Allen is turning back a challenge from the Moab-based environmental group Living Rivers in a decision issued Wednesday. Allen found Living Rivers couldn't prove the project would pollute any groundwater. Her recommendation goes to the Utah Water Quality Board for a formal ruling. U.S. Oil Sands Inc. says it will dig a 62-acre pit in Utah's Uinta basin that could yield 4 million barrels of crude over about six years. Executives hope to start producing oil next year. The Calgary, Alberta-based company holds leases on 50 square miles of state trust lands in eastern Utah.

Kuwait closes in on Athabasca deal - Kuwait’s state-owned petroleum company has signed a preliminary deal to invest as much as $4-billion in a joint venture with Athabasca Oil Corp. to develop some of its oil sands properties in northern Alberta. Kuwait’s Ambassador to Canada, Ali al-Sammak, confirmed in an interview that senior Kuwait Petroleum Corp. officials signed a memorandum of understanding earlier this month. A final agreement is expected in October. The proposed investment highlights the rising interest from state-controlled enterprises in the Middle East and Asia in capturing a piece of the oil sands boom – and the political challenge facing the Harper government in deciding how to deal with them. If the deal is completed, Kuwait Petroleum would join a growing list of state-owned oil companies targeting Canadian oil and natural gas assets. Two proposed takeovers are now before Investment Canada for review: CNOOC Ltd.’s $15-billion offer for Nexen Inc. and the $6-billion bid by Malaysia’s Petronas for Progress Energy Resources Corp., which was approved by shareholders this week.

The New Gold Rush - With changes to environmental review processes, I get the feeling that the Harper government is keen to speed up development of the Oilsands. That’s not particularly odd. Oil prices tripled and Canada is sitting on the second largest reserves in the world; the Canadian dollar now rises and falls with the price of oil. Development of this resource has the potential to have an important effect on Canadian GDP for many years. And the Oilsands are not alone; resource developments are in play all over. The Québec government has put out a long-term strategy («le Plan Nord») centered on resource development (esp. Mining and Hydro) in the province’s North.  Republicans in the US relentlessly continue to promote domestic oil production. Mining exploration and development is active all over all over the globe. All this looks like a logical response to the boom in natural resource prices that started before the last recession and, with growing demands from industrializing nations in Asia and elsewhere, is expected to continue.  So let me try to argue that speeding up resource production in response could be a very bad idea. Let me try to argue that we should think hard about doing exactly the opposite, even if it lowers GDP growth, because delay may make us wealthier.

"Green Bitumen?!": Nuclear reactors in the tar sands -—What do you get when you cross a nuclear reactor with a hydraulic shovel-full of tar sands? The answer, according to the Canadian Energy Research Institute, is "Green Bitumen." The brainchild of the nuclear industry, this novel concept of deploying small modular nuclear reactors (SMRs) to replace natural gas is being sold as a solution to the tar sands' reputation for producing the largest carbon footprint on the planet. Nuclear is being touted as an environmentally friendly, "clean" energy source for the extraction process. But in order to make that claim, one must overlook the substantial carbon emissions in the nuclear "fuel cycle," from mining to ultimate disposal; the risks of weapons proliferation; the toxic radioactive footprint; and the legacy of highly radioactive waste left behind for many generations to come. Several key players have expressed interest in deploying nuclear reactors in the tar sands, including: Atomic Energy of Canada Ltd. (AECL), a federal Crown corporation; SNC Lavalin Nuclear and its subsidiary Candu Energy Inc.; Bruce Power, one of Ontario's largest nuclear power generators and its parent company Cameco, the world's largest supplier of uranium; Toshiba, builder of the Fukushima Daiichi 3 power plant; Westinghouse; Aitel; Gen 4 (formerly Hyperion); and General Atomics. The governments of Canada, Alberta and Saskatchewan have at times all actively promoted this agenda. Also involved is the Idaho National Laboratory (INL), a major US Department of Energy nuclear research facility

Vital Signs Chart: Slowing U.S. Drilling Activity - Total U.S. drilling activity is slowing. A price gap in recent years between cheap natural gas and pricier oil has led companies to shift rigs from gas fields in Louisiana and Pennsylvania into oil-rich Texas and North Dakota. Now, however, the number of rigs drilling for oil has stabilized at about 1,400, even as the gas rig count has continued to tumble.

GOP platform: Block carbon regulations, expand offshore drilling - The Hill's E2-Wire: The Republican platform slated for approval at the party’s convention includes expanded offshore oil-and-gas development, opening Alaska’s Arctic National Wildlife Refuge (ANWR) to drilling rigs and thwarting Environmental Protection Agency climate change regulations. Early excerpts from the platform appear flush with Mitt Romney’s positions in calling for drilling in ANWR (which would require congressional approval), opening more coastal regions to oil-and-gas leasing, and other policies.The plan calls for approval of the Keystone XL oil sands pipeline. Romney has vowed to green-light TransCanada Corp.’s Alberta-to-Texas pipeline on “day one” if elected president, while the Obama administration is still reviewing whether to grant a cross-border permit. While the outlines became apparent in platform committee discussions, the formal approval by delegates to the party's convention in Tampa, Fla., expected Tuesday, will bring the election-year energy contrasts between the parties into relief. Republicans say White House energy policies place too many restrictions on domestic development.

Five National Parks That Could Be Threatened Under The Romney Energy Plan -- Mitt Romney recently released his energy plan, which focuses extensively on turning energy development on federal public lands over to the states.  If states are determined to aggressively push fossil energy development, giving oversight of mining and drilling to them could put some of our special places at risk. As the New York Times put it: The purposes [of federal public lands], under established law, are various: recreation, preservation, resource development. States, as a rule, tend to be interested mainly in resource development. In the energy future envisioned by Mr. Romney, that is precisely what would prevail. Here are five places that could be at risk under a Romney energy plan:

Grand Canyon National Park:  Even though Interior Secretary Ken Salazar protected one million acres around the Grand Canyon from mining last January, the decision applied only to new claims.  About 3,500 existing uranium claims may still be valid, which could result in up to 11 uranium mines on Bureau of Land Management and Forest Service lands near the canyon.  Under a Romney energy plan, the decision to permit these new mines would be made by the state of Arizona and under its rules and regulations.  Arizona Governor Jan Brewer would likely give the go-ahead to new mining, as she called Salazar’s decision in January “excessive and unnecessary regulation.”  Watch a short documentary about the issue:

Obama Administration Backs Shell in Supreme Court Case - The Obama administration is backing Shell Oil after abruptly changing sides in a landmark U.S. Supreme Court case that could make it even more difficult for survivors of human rights abuses overseas to sue multinational corporations in federal courts. The case will be heard on October 1. Lawyers at EarthRights International, a Washington-based human rights law nonprofit, say they suspect that a new legal submission  - which was signed only by the U.S. Justice Department - reflects tensions inside the government on how to deal with multinational corporations do business in the U.S. Significantly, neither the State nor the Commerce Department signed on to the brief, despite their key roles in the case.. "The brief was largely unexpected, based on what they had filed previously, and pretty breathtaking."  At issue is the Alien Torts Claim Act (ATCA) - an 18th century U.S. law originally designed to combat piracy on the high seas - that has been used during the last 30 years as a vehicle to bring international law violations cases to U.S. federal courts.

U.S. Energy Policy Debate too Myopic - Much of the politicking during the U.S. presidential campaign of 2012 has centered on energy independence and access to so-called tar sands oil from the Athabasca deposits in Canada. Incumbent President Barack Obama already suffered a setback with green initiatives in the wake of the bankruptcy of solar panel company Solyndra. That being said, oil production in the United States is at historic highs during an administration seen by its critics as shutting the door on domestic energy.  Republican challenger and former Massachusetts Gov. Mitt Romney, in an energy policy unveiled last week, said energy independence by 2020 would come in large part through access to potential reserves off the eastern U.S. coast and in the Gulf of Mexico. The Keystone XL oil pipeline under a Romney administration would shield the U.S. economy from potential oil shocks brought by Middle East conflict while at the same time providing a stimulus to a weak U.S. economy. With little fanfare in February, U.S. Interior Secretary Ken Salazar signed a transboundary agreement with the Mexican government of Felipe Calderon that would make more than 1 million acres of land available to explorers in the Gulf of Mexico. The agreement is likely stalled as both governments wait out the presidential campaign season. The U.S. Interior Department, however, estimates the western Gulf of Mexico could hold as much as 172 million barrels of oil and 300 billion cubic feet of natural gas. While modest, it could both address U.S. concerns about access to the gulf while supporting the Mexican energy sector and economy.

Energy Prosperity: Domestic Oil Production Hits a 23-yr. High in July, Oil/Gas Jobs Reach 24-yr. High - Buried in this week’s 213-page August Monthly Energy Review from the EIA (full report here) is the fact that U.S. crude oil production for the lower 48 states is estimated to have reached a 23-year high in July of 5.865 million barrels per day (see top chart above, data here).  If so, that would be the highest monthly production of crude oil in the lower 48 states in more than 23 years, since April of 1989 when 5.88 million daily barrels of oil were produced.  From January-July of this year, the EIA estimates that oil production in the non-Alaska states increased more than 14% compared to the same period last year, boosted by the strong, ongoing gains in North Dakota oil (+66% year-to-date through June 2012 vs. last year) and Texas oil (+35% year-to-date through June compared to 2011).   Over the last year, we’ve seen one of the largest annual increases (17%) in domestic oil production (for the lower 48 states) in the history of monthly EIA oil production data going back to 1973. Accompanying the boom in domestic oil and gas production has been a huge boom in “shovel-ready” jobs for that sector (see bottom chart above, data here).  Over just the last two years, employment in the oil and gas industry for drilling-related jobs has increased by more than 23% to 195,500 jobs in July, which is the highest level for those jobs since early 1988, more than 24 years ago.

U.S: 78 pct. of Gulf oil production shut by storm - The U.S. government says 78 percent of the oil production in the Gulf of Mexico has been halted in preparation for Tropical Storm Isaac.The Bureau of Safety and Environmental Enforcement reports about 1 million barrels per day of oil production has been stopped as companies have evacuated 346 offshore oil and gas production platforms. That's 17 percent of daily U.S. oil production and 6 percent of consumption. The agency says 2 billion cubic feet of natural gas production is also affected. That's about 3 percent of daily U.S. production and consumption.Production is expected to quickly resume after the storm passes. The price of U.S. benchmark crude oil fell 68 cents to $95.47 per barrel. Natural gas fell 5 cents to $2.65 per 1,000 cubic feet.

The Underlying Causes of Oil Price Fluctuations - After oil and gasoline prices continued their relentless march up earlier this year, it was nice to have some relief at the pump in May and June. However, since the end of June, prices of WTI crude oil is up over 15%, Brent crude oil is up about 25%, and retail gasoline is up over 7%. Oil and gasoline prices reached three-month highs last week and the Energy Information Administration (EIA) increased their 2012 forecasts of these prices. There is no doubt that these higher prices will grab the attention of news outlets, policy makers, and the public. With this increased attention, political rhetoric regarding fantasies of governmental regulations and market manipulations will likely reemerge as catalysts to lower these prices. One measure of aggregate money supply, M1—includes currency and demand deposits, increased by 4% since late June. In addition, petroleum prices increased (see above) and the price of gold is up by 2.7% over this period. If there was a direct relationship between the prices of gold and oil, commodity traders, entrepreneurs, and the Fed could benefit from knowing using this relationship to forecast the future spot price of oil. A recent article in the Washington Times outlines a direct relationship between these commodity prices and provides a simple calculation to forecast the price of oil with the price of gold.

Q&A on oil prices - I recently did an interview with on a range of issues related to oil prices. Here are some excerpts: Oil prices have always been very volatile. If you look at 12-month logarithmic changes in WTI going back to 1947, you come up with a standard deviation of 0.27. In other words, 25% moves up or down within a year are fairly common, and 50% moves or greater have also been seen on a number of occasions.  If you look at options prices at the moment, they imply the same level of uncertainty looking forward. For example, somebody today is willing to pay $2.90/barrel for a NYMEX option to buy oil in September 2013 at $120/barrel, consistent with a standard deviation of annual log changes of 0.26. The market is saying that prices that high or higher are not that remote a possibility.  And if you look at current fundamentals, it's not hard to imagine big moves in either direction coming fairly quickly. The price of oil would surely collapse if we saw a significant economic downturn in China (something nobody can rule out) or if Iraq succeeds in producing even half of its ambitious production targets (though I personally consider the latter unlikely). On the other hand, a military confrontation with Iran could produce a pretty spectacular price spike. If the Strait of Hormuz were to close, for example, it would represent a shock to world production that in percentage terms would be 3 times as big as the 1973-74 OPEC embargo.

Peak cheap oil is an incontrovertible fact -- If the looming global oil crunch has been postponed for another decade or two as widely alleged, this is far from obvious in today’s commodity markets.  Brent crude jumped to $115 a barrel last week. Petrol costs in Germany and across much of Europe are now at record levels in local currencies. Diesel is above the political pain threshold of $4 a gallon in the US, hence reports circulating last week that the International Energy Agency (IEA) is preparing to release strategic reserves. Barclays Capital expects a “monster” effect this quarter as the crude market tightens by 2.4m barrels a day (bpd), with little extra supply in sight. Goldman Sachs said the industry is chronically incapable of meeting global needs. “It is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand,” said its oil guru David Greely. This is a remarkable state of affairs given the world economy is close to a double-dip slump right now, the latest relapse in our contained global depression.

G-7 Countries Call for Increased Oil Output to Meet Demand - The Group of Seven nations called on oil-producing countries to increase output and is monitoring the threats to their economies posed by high oil prices, according to a joint statement issued today by the U.S. Treasury Department. “We remain vigilant of the risks to the global economy,” the G-7 said. “In this context and mindful of the substantial risks posed by elevated oil prices, we are monitoring the situation in oil markets closely.” The G-7 said it’s prepared to call upon the International Energy Agency, a 28-member group of oil consuming countries, “to take appropriate action to ensure that the market is fully and timely supplied.” The IEA’s countries made available 60 million barrels of crude and oil products in June 2011 after Libyan output was disrupted by an armed uprising against Muammar Qaddafi. Oil has advanced 24 percent since reaching a 2012 low in June as stockpiles fell and the U.S. and Europe tightened sanctions against Iran, limiting the country’s ability to sell its crude. Rising prices have raised speculation that President Barack Obama may release supplies from the Strategic Petroleum Reserve.

IEA may release oil reserves as soon as September: report (Reuters) - World oil consumers are poised to tap into emergency oil inventories as soon as early September after the International Energy Agency (IEA) dropped its resistance to a U.S.-led plan, a source and an oil journal said on Friday. Just one week after its chief said there was no discussion of possible emergency action, the IEA is now thought to have agreed to the idea, the industry journal Petroleum Economist reported on Friday, citing unnamed sources. The release could be as large or larger than last year's 60 million barrel injection. Responding to the report, IEA Executive Director Maria van der Hoeven said the agency remained in close communication with members and stood "prepared to act as necessary in response to a physical disruption", avoiding the question of whether active consideration of a reserve release was underway. "However, as I said as recently as last week, at this time the conditions that would warrant such a response by the IEA are not present," she said in a statement. But market fundamentals may not be the principal consideration. While the disruption to Iran's exports may be used as the excuse for action, U.S. officials are also keen to temper rising prices that risk diminishing the impact of financial sanctions on Tehran, Reuters reported last week, citing sources.

America's Real Strategic Petroleum Reserve - As oil prices ticked above $115 per barrel last week, a White House leak revealed that President Barack Obama may dip into the Strategic Petroleum Reserve (SPR), the United States' 695 million barrel stockpile of emergency fuel supplies. The one thing we can say for sure is that the announcement highlights two interrelated problems with U.S. energy policy: that every president since Ronald Reagan has used Saudi Arabia as his de facto SPR and that there exist no clear standards for when to dip onto the actual SPR. Both problems have the potential to bite us -- badly.  Over the years, the United States has been surprisingly reluctant to release SPR during times of crisis, preferring instead to let Saudi Arabia handle the problem by simply increasing its production. For decades, in fact, U.S. presidents have been able to count on the Middle Eastern petro giant to pre-release oil in anticipation of times of war.  But relying on Saudi Arabia, while politically convenient, is not without risks. The most obvious is that the Saudis have come under increased pressure -- both internal and external -- as a result of their longstanding oil-for-security alliance with Washington. Iran has warned its fellow Gulf producer not to make up the slack resulting from American and European sanctions, threatening direct retaliation if it does. Saudi Arabia isn't taking any chances. In recent months, it has arrested prominent Shiite dissidents -- always suspected of possible ties to Iran -- and doubled the number of Saudi National Guard forces in the Eastern Province, home to the vast majority its 2 million-plus Shiite citizens as well as the close to 90 percent of its oil production.

World’s largest oil producer falls victim to 30K workstation attack - It's nearly a plot line from the movies: World's largest oil producer gets hit by a cyber-attack that threatens to wipe away all data from its internal computers. But largely, this is the situation Saudi Aramco described today. The Saudi Arabia-based, industry leader released a statement confirming that roughly 30,000 workstations were affected via cyber attack in mid-August. Details beyond that were scarce—Saudi Aramco said the virus "originated from external sources" and that its investigation into the matter was ongoing. There was no mention of whether this was related to this month's Shamoon attacks. The company said it cleansed its workstations and resumed operations for its internal network today. They also added that oil exploration and production operations were unaffected because those networks were separate systems. Reuters attempted to reach out to the company further but saw its e-mails bounced back. The news outlet also noticed one of the company's sites taken down by attacks remained non-operational (

The Endless War: Saudi Arabia Goes On The Offensive Against Iran - Saudi Arabia has gone on the offensive against Iran to protect its interests.  Their involvement in Syria is the first battle in what is going to be a long bloody conflict that will know no frontiers or limits. Ongoing Disorders in the island kingdom of Bahrain since February of 2011 have set off alarm bells in Riyadh.  The Saudis are convinced that Iran is directing the protests and fear that the problems will spill over the twenty-five kilometer long COSWAY into  oil rich Al-Qatif, where The bulk of the two million Shia in the kingdom are concentrated. The territory is likely to adopt the more fundamentalist principals of the Salafists as it serves as a stepping stone to Iran Itself.  It promises to be a bloody protracted war that will recognize no frontier and will know no limits by all of the participants.

The Faulty Assumption Behind Bad Reporting on Iran -  The Washington Post (8/17/12) has a story on Iran and the threat of war that begins with this: Preparations in Israel for a possible war are focusing new attention on whether Israel will attack Iran's nuclear facilities and forcing an unwelcome debate in the thick of a presidential campaign about the U.S. role in stopping an Iranian bomb. The article, by Anne Gearan and Karin Brulliard, repeats the same assumption a number of times–Iran is after a nuclear weapon: Although Obama has declared flatly that the United States will not allow Iran to acquire a nuclear weapon, analysts suggest that Netanyahu is looking for a deadline on abandoning talks and resorting to military action…. Obama has already issued the strongest U.S. threat against Iran to date, declaring that the United States will not tolerate an Iranian nuclear weapon and ruling out a policy of containment.  The United States opposes a unilateral Israeli strike now, arguing that there is still time for sanctions and negotiations to persuade Iran not to build a nuclear weapon.  And then, in the very last paragraph of the story, readers are told: Since its nuclear program was exposed a decade ago, Iran has claimed that its objective is to produce electricity, not weapons. But the United States and its allies have maintained that the real goal is the capacity to build a nuclear weapon. This assumption–that Iran is pursuing a weapon–is what appears to be guiding the entire crisis, and is the apparent basis for the ever-tightening sanctions that the West has put into place against Iran.

Global Lithium Production 1950-2011 - The above shows lithium production globally.  The data come from this paper before 2009 and from the USGS after that.  Since the USGS excludes US production (to protect proprietary information of the sole US producer) I have added the 2008 US production to the 2009-2011 totals,  which are therefore approximate.  Since US production in 2008 was less than 3% of the total, the error is probably small. As you'd expect, lithium production grew fairly steadily for decades but has taken off in recent years due to the widespread adoption of lithium batteries for many purposes.  The average growth rate over the last decade was 8.1%.  The USGS estimates around 30 million tons of lithium resource globally, so we are currently only mining a little over 0.1% of it per year - there is no significant resource constraint here until the late 21st century at the earliest.

The ever-increasing hunger for steel: It used to be an accepted fact that China’s appetite for steel and steel’s main ingredients — primarily coking coal and iron ore — would continue to rise sharply, not just in absolute terms but at an accelerated pace. Annual steel consumption had been expected to rise from 2011′s 680m-plus metric tonnes to 1bn metric tonnes by 2020. This forecast has been a mainstay of many China-related predictions for some time, particularly in the mining sector. It was still being cited by BHP Billiton in March, even while the miner’s head of iron ore surprised many with a bearish tone. Since then, however, the world’s two biggest miners began to back away from it and this month Rio Tinto is talking about 1bn tonnes of steel by 2030 — a hazily far-off date. But the 1bn tonnes-by-2020 was so confidently proclaimed for so long that it warrants further examination, even as faith in this target dies away. How did this forecast evolve, and why is it flawed? The argument is that on a per capita-basis, China is way behind wealthier countries on its steel consumption. Just look here:Or here: The above graph is from HSBC, which recently added to the inevitable-growth oeuvre with a lengthy note this month arguing that high commodity prices are the new normal (supercycle be damned!) because so many emerging markets are now in the throes of the commodities-intense period of their development. 

Key voice urges China to gird for tough times: China should ready plans to respond to near term risks in an economy facing significant downward pressure, but keep the broad policy focus on longer term structural adjustments, the official People's Daily said in a front page editorial on Friday. The Communist Party's mouthpiece newspaper said the government had the flexibility to do both things as current growth levels were within the expected range. "For some uncertain factors that might bring new shocks to the economy we should be prepared in the short-term - but keep making long-term plans," the editorial said, without detailing the risks it envisaged. Evidence has mounted in recent weeks that China's economy is struggling to overcome strong global headwinds, with economists' expectations of a second half pick-up being pushed steadily further back, leading some to say that the government's full year growth target of 7.5 percent may be in jeopardy.

China: Broken Dreams - Many young Chinese are losing faith in China's economic miracle. Although the nation's economy has expanded to more than $7 trillion and is poised to overtake the US in the next decade as the world's largest, fewer Chinese feel they are sharing in the prosperity. A sense of disillusionment is spreading, particularly among the post-1980 generation, who are well-educated and mobile but still struggle to find profitable jobs. Signs that the economy is slowing only add to the malaise. The Chinese government predicts the economy will grow by 7.5 per cent in 2012, down from 9.2 per cent last year, which would be the slowest growth rate since 1990. Economists say this could mean the loss of two million jobs. At the same time a record number of new graduates are looking for work. Some 25 million Chinese will be on the job hunt this year. Even those who find work are frequently disappointed.

China, Dying for Growth, Is Paying a High Price - We are now witnessing the gradual exhaustion of an economic model that is past its sell-by date. You can take this as a short– or long-term observation. In the short term, China can go no further by way of investment in infrastructure and other such stimulus projects; the growth kick from these is declining, and it has plainly pushed too hard at any rate. Longer term, it has to advance on the promises of the five-year plan issued last year. That is, it has to reduce its dependence on exports and raise the share of the economy that is devoted to domestic consumption. This is a political question as much as an economic problem. I stand with Patrick Chovanec of Tsinghua University on this point. For one thing, China was never meant to be the world’s growth engine, pulling us all out of our miseries. It is too poor and has too many problems at home to play that role. For another, the West wants China to manage precisely the transition described in the five-year plan. Think of it: China, a nation of consumers.

Chinese Blame Failing Bridges On Corruption - When the Yangmingtan bridge opened in the northeastern Chinese city of Harbin in November, local officials hailed it as a grand achievement. The bridge stretched more than nine miles and cost nearly $300 million. Construction was supposed to take three years, but workers finished in half that time. "A lot of comrades didn't go home for more than a year, never took a holiday, never took off a weekend," But early one morning last week, an entrance ramp to the bridge collapsed. Four trucks on the ramp tumbled to the roadway below. Three people died and five were injured. The government initially blamed the trucks, saying they were overloaded. But infrastructure fails so often in China, most people assume the real culprit is government corruption.

China's Plans for Its Own Car Brands Stall - Three decades after China began requiring foreign automakers to form ventures with domestic manufacturers to build cars in the country, the strategy appears to be failing in one of its key goals. While the policy has attracted investment and created millions of jobs, it’s done little to help China build strong car brands of its own. “We’ve been trying to exchange market access for technology, but we’ve barely gotten hold of any key technologies in the past 30 years,” says Liao Xionghui, vice president of car and motorcycle maker Lifan Industry Group. Chinese auto brands have lost a quarter of their market share in the past two years as consumers choose vehicles made by foreigners such as General Motors (GM) and Volkswagen (VOW). As many as half of China’s 171 local carmakers may go out of business within three years, the state-backed auto association predicts, as foreign brands push into smaller cities.Foreign and joint-venture brands had 63 percent of the passenger-vehicle market in July, says the China Association of Automobile Manufacturers. Domestic brands saw their share decline to 37 percent from 49.2 percent in January 2010. “There is a belief … that international brands have more technology, in some cases better craftsmanship,”

China’s industrial profits slide - Profits at China’s industrial companies tumbled in July for a fourth straight month, a sign of enduring economic weakness that adds to pressure on Beijing to drive a sluggish recovery. Total industrial profits declined 5.4 percent compared with a year earlier, accelerating from June’s 1.3 percent fall, government data showed Monday. That might hurt investment, a key part of Beijing’s recovery plan for China’s deepest slump since the 2008 global crisis. The decline follows July’s collapse in export growth and weak consumer spending despite repeated stimulus measures. The slowdown has forced thousands of small companies to close and some foreign businesses to move to neighboring countries, raising the threat of job losses and unrest. Lower profits might force the government to ease credit policy or step up spending to offset private sector weakness.

China's industrial profits decline; market skeptical on stimulus - China's industrial firms reported continuing declines in revenues.  Xinhua: - Major Chinese industrial firms posted enlarged declines in their profits in July, official data showed Monday.  Profits for major industrial companies, or those with annual revenues of more than 20 million yuan (3.2 million U.S. dollars), slipped 5.4 percent year on year to 366.8 billion yuan in July, the National Bureau of Statistics (NBS) said in a statement. Foreign owned companies saw particularly strong declines due to a slowdown in export activity.  Xinhua: - During the period, foreign-funded enterprises and those invested by businesses from Hong Kong, Macao and Taiwan saw profits drop 12.6 percent year on year to 609 billion yuan. It is no wonder that Wen Jiabao said recently that China needs measures to promote export growth. But so far the domestic market remains skeptical that any meaningful measures will actually be implemented. The Shanghai Stock Exchange Composite Index hit a new post-financial crisis low this morning.

China’s Stimulus Headaches - To this date, there remains a lot of confusion about the ability of People’s Bank of China (PBOC) to ease monetary policy. It has been constrained by what it appears to be a money outflow, which tightens liquidity within China automatically. The PBOC used to create money mainly as a result of foreign exchange intervention. During the time when there was huge pressure for the Chinese Yuan to appreciate (in part due to trade surplus and persist foreign investment, and in part due to hot money), the PBOC intervened to prevent the Yuan from appreciating too quickly. It “printed money” to purchase foreign currencies. This was how the foreign reserve accumulation worked for China, and the balance sheet expansion of PBOC was mainly driven by the increase of foreign assets. To illustrate the point, the chart below shows the balance sheet (asset side) of the PBOC and its major components. As you can see, the bulk of PBOC assets are foreign, which is vastly difference from the balance sheet of the Federal Reserve, with its assets mostly in US Treasury securities. The pace of expansion of the PBOC balance sheet was so fast that it increased by more than 450% from early 2003 when total assets amounted to a little more than RMB5 trillion to about RMB28.6 trillion at the end of June 2012:

    China's 'Non-Performing Loan' Nightmare - China’s credit risk is rising, probably much more rapidly than the official non-performing loan (NPL) statistics indicate. SocGen is concerned as they think we are only seeing the beginning of the end of this NPL cycle. While they do not anticipate an outright banking crisis, as the government will certainly keep intervening at each turn on the way to avoid such an outcome, this is no reason to feel relieved. The reason being a major structural element in China's NPL cycle as many industries have massive excess capacity - after years of aggressive expansion that ran way ahead of demand growth - which eventually has to be eliminated. This process will take some time, during which faster depreciation in the form of deleveraging and consolidation will be unavoidable; and while expectations of an imminent hard landing may be overdone, the landing will nevertheless be multi-year and bumpy in their view.

    China's Difficult Choice - Over the weekend, we pointed out that the old mechanism for the People’s Bank of China to expand its balance sheet and create base money has been broken by new funds flow pattern, and it will sooner or later require some sort of large scale asset purchases programme a.k.a. quantitative easing to offset the impact of the broken mechanism (after other tools such as cutting RRR reach their limits). However, we also mentioned that as the private sector is currently quite overstretched and will start the deleveraging process (if they have not already started), and that would render traditional monetary tools useless, and quantitative easing ineffective. And that would necessitate deficit spending at both local and central government levels. If we have read the social mood correctly that China might be more pro-austerity than pro-Keynesian, and if policymakers indeed share that view, then the consequence in the near term could be rather grim. The delay in stimulus as well as the small size of it so far has already done damage, if you like. The economy is already on course to a hard landing.

    China Says Payment Delays, Defaults May Worsen: --Customers are taking longer to make payments and even defaulting on debt in a number of China's industries, particularly machinery, coal and steel, and there is a risk of this spreading to other sectors, the state-run Economic Information Daily reported Wednesday, citing results of a ministry inspection. At a closed-door meeting held by the Ministry of Industry and Information Technology, five associations representing the steel, nonferrous metals, coal, electric power and machinery industries, reported their overall debt levels, and data showed that accounts receivable in the machinery and coal industries were high, the newspaper said. The report said accounts receivable in the machinery industry in the first half of the year rose 17.3% on year to 2.49 trillion yuan ($392 billion). The report also said the net value of accounts receivable at 90 big and medium-sized coal companies surged 48.7% on year to CNY194.8 billion as of the end of July. The situation in other industries is not serious yet, but if the sluggish market environment continues for some time while financing costs remain high, payment delays and defaults are likely to emerge, the report cited market participants as saying.

    China rolling government and steel debt? - Chinese banks are selectively rolling over debts owed by local government financing vehicles (LGFVs), provided that these LGFVs have sustainable cash flow and good collateral, according to First Financial Daily.. One source from Industrial and Commercial Bank (ICBC) said that the bank is effectively rolling over and restructuring some of the debts owed by LGFVs so long as the value of the collateral remains above the loan value and that the project is 60% or more completed. Meanwhile, Bank of Shanghai said they have been rolling over LGFVs debts, and in some cases extending more credits, if the LGFVs in question have sustainable cash flow. One Shanghai’s LGFV, Shanghai Chengtou, for instance, has recently obtained a RMB20 billion credit line with Bank of Shanghai. Incidentally, this very LGFV bears the same name of another Shanghai’s LGFV which was reportedly asking banks to roll-over its debts last year (although last year, they emphatically denied that they have requested any roll-over or attempted default, whatever). However, the report suggests that as the China Banking Regulatory Commission (CBRC) ordered banks to manage the credit risks of LGFVs, banks are only helping LGFVs which are in good financial condition (such as thsat mentioned above).

    The Real Risk of the Chinese Economy -- In the past 5-8 years, and especially the past 3, China has built an enormous amount of stuff that nobody wants, needs, or uses.  Fueled by a lending boom that began in late 2008 and tripled total lending in 2009, Chinese government at all levels has been spending money like a drunken sailor on leave.  What should scare people however, is just how poorly this money has been spent.  To give you a few examples:

    Official: China’s Growth Stabilizing at Slow Pace - Government efforts to reverse China’s economic slump are taking effect and growth is “stabilizing at a slow pace,” the head of the country’s planning agency said Wednesday. The statement by the minister in charge of the National Development and Reform Commission came amid a flurry of mixed signals that show some activity picking up but export orders and corporate profits weakening. “The government’s policies and measures have been effective and the country’s economic growth is stabilizing at a slow pace,” the official Xinhua News Agency paraphrased Zhang Ping as saying in a meeting with legislators. The report gave no other details of Zhang’s report or a forecast of when economic growth that fell to a three-year low of 7.6 percent in the second quarter might rebound.

    Fear-of-China Syndrome - Krugman - Portman castigated the Obama administration for not taking a tougher line on China — which is actually something I’ve complained about too — then offered a completely wrong explanation. Obama won’t take on China, Portman said, because Obama could not run up his record trillion dollar deficits if the Chinese did not buy our bonds to finance them...OK, let’s ask the question: how much overseas financing does the United States as a whole need? The answer is that it’s determined by an accounting identity: capital inflows = the current account deficit, a broad measure of the trade balance including income on investments. (Trade can adjust to capital flows instead of the other way around, but that’s a longer story). So what has happened to the current account deficit as a share of GDP in the Obama era? Um, it’s way down:

    Ford to sell luxury Lincoln brand in China - Ford Motor Co., eager to grab a piece of China's growing luxury market, plans to start selling its Lincoln luxury brand here in 2014. It will be the first time that the nearly 100-year-old brand will be sold in China. At an event at a converted 600-year-old temple in Beijing, CEO Alan Mulally and other Ford executives said they believe Chinese customers will appreciate Lincoln's heritage as well as its new lineup of vehicles. Ford is introducing seven new Lincolns over the next three years. "Lincoln is well known in China. Our opportunity is to fill in the blanks of what the brand is now," Ford's global marketing chief Jim Farley said.

    What China Could Be Building - So let's answer Scott's fundamental question:So here’s my question for all of you China skeptics that insist they are building way too much housing, infrastructure, heavy industry, etc.  What precisely do you want them to build more of?  And what are the 100s of millions of Chinese living in tiny ramshackle homes to do?  Sit tight for a few more decades while resources pour into nice urban services for the pampered elite? I want them to start building leaf blowers, so we don’t have so many Chinese people in the low productivity position of sweeping streets. I want them to start building farm equipment, so we don’t have so many Chinese farmers tending the fields. I want them to build more laundry machines, to free the rural Chinese from scrubbing clothes on washboards. I want them to build electric stoves, so my Grandpa can put away the coal fired outside oven. I want them to build computers that can deliver cheaper education to the masses. Instead of just focusing on “building,” I want them to invest in human capital, so productivity can be at a level that we don’t need “make work” jobs. I want them to build more schools and hire better teachers, so classes aren’t as large and you’re not damned if you can’t make it in a top elementary school. I want productivity to be high enough that high end stores don’t need more clerks than actual customers.

    China is Okay - Stephen S. Roach - Concern is growing that China’s economy could be headed for a hard landing. These worries are overblown. Yes, China’s economy has slowed. But the slowdown has been contained, and will likely remain so for the foreseeable future. The case for a soft landing remains solid. The characteristics of a Chinese hard landing are well known from the Great Recession of 2008-2009. China’s annual GDP growth decelerated sharply from its 14.8% peak in the second quarter of 2007 to 6.6% in the first quarter of 2009. Hit by a monstrous external demand shock that sent world trade tumbling by a record 10.5% in 2009, China’s export-led growth quickly went from boom to bust. This time, the descent has been far milder. From a peak of 11.9% in the first quarter of 2010, China’s annual GDP growth slowed to 7.6% in the second quarter of 2012 – only about half the outsize 8.2-percentage-point deceleration experienced during the Great Recession. Barring a disorderly breakup of the eurozone, which seems unlikely, the International Monetary Fund’s baseline forecast of 4% annual growth in world trade for 2012 seems reasonable. That would be subpar relative to the 6.4% growth trend from 1994 to 2011, but nowhere near the collapse recorded during 2008-2009. With the Chinese economy far less threatened by export-led weakening than it was three and a half years ago, a hard landing is unlikely.

    The Pacific free trade deal that's anything but free - Dean Baker - "Free trade" is a sacred mantra in Washington. If anything is labeled as being "free trade", then everyone in the Washington establishment is required to bow down and support it. Otherwise, they are excommunicated from the list of respectable people and exiled to the land of protectionist Neanderthals. This is essential background to understanding what is going on with the Trans-Pacific Partnership Agreement (TPP), a pact that the United States is negotiating with Australia, Canada, Japan and eight other countries in the Pacific region. The agreement is packaged as a "free trade" agreement. In reality, the deal has almost nothing to do with trade: actual trade barriers between these countries are already very low. The TPP is an effort to use the holy grail of free trade to impose conditions and override domestic laws in a way that would be almost impossible if the proposed measures had to go through the normal legislative process. The expectation is that by lining up powerful corporate interests, the governments will be able to ram this new "free trade" pact through legislatures on a take-it-or-leave-it basis. As with all these multilateral agreements, the intention is to spread its reach through time. That means that anything the original parties to the TPP accept is likely to be imposed later on other countries in the region, and quite likely, on the rest of the world.

    Trans-Pacific Spot Container Rates Fall 8.6 Percent - Average spot rates in the eastbound trans-Pacific trade slumped 8.6 percent this week, the second weekly decline since carriers were able to lift rates to a record high after implementing the general rate increase recommended by the Transpacific Stabilization Agreement during the first two weeks of August. The Drewry Hong Kong-Los Angeles container spot rate benchmark fell to $2,496 per 40-foot-equivalent container unit, down $234 per FEU from last week’s $2,730 per FEU, when the rate remained unchanged from the week before.  The Drewry benchmark has declined by $384 per FEU from the record high it reached in the second week of August as weak demand and continuing overcapacity have made it difficult for carriers to sustain all five GRIs implemented since the first of the year.

    U.S. Arms Sales Make Up Most of Global Market — Weapons sales by the United States tripled in 2011 to a record high, driven by major arms sales to Persian Gulf allies concerned about Iran’s regional ambitions, according to a new study for Congress. Overseas weapons sales by the United States totaled $66.3 billion last year, or more than three-quarters of the global arms market, valued at $85.3 billion in 2011. Russia was a distant second, with $4.8 billion in deals. The American weapons sales total was an “extraordinary increase” over the $21.4 billion in deals for 2010, the study found, and was the largest single-year sales total in the history of United States arms exports. The previous high was in fiscal year 2009, when American weapons sales overseas totaled nearly $31 billion. A worldwide economic decline had suppressed arms sales over recent years. But increasing tensions with Iran drove a set of Persian Gulf nations — Saudi Arabia, the United Arab Emirates and Oman — to purchase American weapons at record levels. These Gulf states do not share a border with Iran, and their arms purchases focused on expensive warplanes and complex missile defense systems.  The agreements with Saudi Arabia included the purchase of 84 advanced F-15 fighters, a variety of ammunition, missiles and logistics support, and upgrades of 70 of the F-15 fighters in the current fleet.

    China, Germany Plan to Settle More Trade in Yuan, Euros - Germany and China plan to conduct an increasing amount of their trade in euros and yuan, the two nations said in a joint statement after talks between Chancellor Angela Merkel and Chinese Premier Wen Jiabao in Beijing on Thursday. "Both sides intend to support financial institutions and companies of both countries in the use of the renminbi and euro in bilateral trade and investments," said the text of the statement. It also said that both parties welcomed investments in China's interbank bond market by German banks and supported the settlement of business in the yuan by German and Chinese banks and the issuance of yuan-denominated financial products in Germany.

    China is one of the drivers behind Germany's stance on periphery bailouts -- China has been pressuring Germany to get the Eurozone crisis under control. Many in China blame their sharp economic slowdown (see discussion) on the Eurozone crisis - because if it wasn't for the Eurozone, the double digit growth that made so many of China's bureaucrats rich would last forever... And some of the same people believe that China's growth will re-accelerate once the crisis in Europe has been resolved. Wen Jiabao: - The European debt crisis has continued to worsen, giving rise to serious concerns in the international community. Frankly speaking, I am also worried.  The main worries are two-fold: first is whether Greece will leave the eurozone...The second is whether Italy and Spain will take comprehensive rescue measures. Resolving these two problems rests with whether Greece, Spain, Italy and other countries have the determination for reform. Angela Merkel on the other hand wants to comply with China's demands. There is a great deal at stake as German trade deficit with China has basically disappeared this year - for the first time since the 90s. Germany can not afford to jeopardize its sales to China which have been a key driver of Germany's export growth.

    Japan cuts economic assessment as global slowdown bites(Reuters) - Japan's government cut its assessment for the export-reliant economy for the first time in nearly a year as slowing global growth weighed on exports, clouding recovery prospects and adding pressure on the central bank for further stimulus. Deceleration in the United States and China, on top of Europe's debt crisis, caused the downgrade, the government said on Tuesday, warning that further global slowdown and sharp market swings posed risks to the world's third-largest economy. The first such downgrade since October 2011 matches the assessment of private-sector analysts, but is somewhat bleaker than the view of the Bank of Japan (BOJ), which has said the economy is starting to pick up moderately. "Looking at both domestic demand and overseas economies, I don't expect the economy to slide back into a recession but I cannot say it will stage a recovery either," said Yasuo Yamamoto, senior economist at Mizuo Research Institute in Tokyo, adding that Japan may enter a soft-patch in the third quarter. The government assessment underscores policymakers' concern that fresh stimulus measures could be needed, as exports may struggle to recover before the effect on the economy of spending on rebuilding from last year's earthquake begins to fade.

    Japan Manufacturing PMI Hits 16 Month Low, New Orders Plunge - Markit reports Japan Manufacturing PMI Hits 16 Month Low - Key Points:  Output and new orders down at accelerated rates
    Near-stagnation of employment
    Purchasing costs fall to greatest extent since November 2009
    After adjusting for seasonal factors, the headline Markit/JMMA Purchasing Managers’ Index™ (PMI™) posted 47.7 in August, down from 47.9 one month previously, signalling the sharpest worsening of Japanese manufacturing sector operating conditions since April 2011. Moreover, the latest deterioration in business conditions was broad-based across all three market groups.Japanese manufacturing production declined further in August, with the rate of contraction accelerating to the fastest in 16 months. The latest reduction in factory output was the third in as many months.Reflecting falling new orders and corresponding spare capacity, backlogs of work decreased further in August. The rate at which firms depleted work-in-hand (but not yet completed) was sharp, and the steepest since May 2009.

    Deflation Deepens as Japan Contraction Risk Intensifies - Japan’s consumer prices slid at a faster pace in July and industrial production unexpectedly slumped, raising the danger that the world’s third-largest economy has slipped back into a contraction. The benchmark price gauge, which excludes fresh food, fell 0.3 percent in July from a year before, putting the central bank’s 1 percent inflation goal further from reach, a government report showed in Tokyo. Industrial output fell 1.2 percent. A private measure of manufacturing for August was the lowest since the aftermath of the record March 2011 earthquake. Today’s releases reflect diminishing demand overseas for the nation’s exports amid the European crisis and exchange-rate appreciation, and the end of incentives for vehicle purchases. With Prime Minister Yoshihiko Noda’s government today predicting it will miss a deficit-reduction target, pressure may rise on the Bank of Japan (8301) to expand stimulus and sustain the recovery.

    India Growth Beats Estimates After Rate Cut to Aid Spending -India’s economy grew more than estimated last quarter after the central bank cut interest rates to support spending at home as Europe’s debt crisis crimped export growth. Bonds fell and the rupee pared losses.  Gross domestic product rose 5.5 percent in the three months through June from a year earlier, faster than the three-year low of 5.3 percent in the previous quarter, data from the Central Statistical Office in New Delhi showed today. The median of 39 estimates in a Bloomberg News survey was for a 5.2 percent gain.

    Australia faces growing risk of recession in 2013 - ONE of Europe's biggest banks today warned of the growing risk of recession in Australia in 2013, as prices for its key commodities such as iron ore and coal spiral lower. The warning by Deutsche Bank comes amid rising concern that Australia's mining investment boom, which has insulated the commodity-rich economy from a global slowdown, is waning, leading to mine expansions being scaled back and mounting job losses. Policy makers are "dangerously complacent" about the risk now arrayed against the $1.4 trillion economy, which relies heavily on prices paid for its biggest exports - iron ore, coal and gas - for its prosperity. The assessment stands in stark contrast to the upbeat appraisal by the RBA, which earlier this month upwardly revised its forecast for economic growth in 2012 to 3.5 per cent, from 3 per cent. The RBA today said it expected the mining investment boom to peak during 2013-14, but added the timing of the peak was uncertain. Also today, corporate insolvencies hit a record high in the year to June 30, according to the Australian Securities and Investment Commission. Mining states are among the worst hit, it said.

    Canada's consumer leverage growth is not going to end well - Canada continues to face rising consumer debt levels. Since the post on Canadian housing risks (here), we've gotten a number of comments that Canada's housing is not overpriced (for example if measured in terms of gold). And since there is no "subprime lending" in Canada, consumer debt is not a problem because delinquencies will stay low. The authorities have since taken some steps to curb potential housing speculation (see discussion). But it seems that Canadian consumers have caught the US debt bug as consumer leverage becomes an increasing concern - particularly for BoC (the central bank). And it's not just about mortgages. The Epoch Times: - The average non-mortgage total debt of Canadian consumers rose once again last quarter, continuing the trend of the highest debt levels seen to date. According to a report by credit analysis company TransUnion, the average consumer’s total debt (excluding mortgages) rose by $192 in the second quarter of 2012 to $26,221, a 0.74 percent increase compared to the previous quarter, and a 2.41 percent rise compared to the same quarter last year. Auto loan debts had the highest rate of increase compared to other credit products, with a rise of 13.25 percent compared to Q2 last year, and 3.67 percent compared to Q1 this year. The average credit card borrower debt declined by 0.93 compared to the same quarter last year, but increased by 2.7 percent compared to the previous quarter this year.  Canadian consumer leverage - debt as percentage of personal disposable income - has now far outpaced that in the US, as Americans continue the deleveraging trend (discussed here).

    Brazil’s Listless Growth Continues —Brazil's once-blazing economy has continued to slump despite government efforts to revive it, more evidence that the emerging market countries that jolted the globe back to growth after the 2008 financial crisis aren't set to provide the same remedy now. On Friday, Brazil said it grew at an annualized 1.6% rate in the second quarter, compared with the first, when it expanded 0.4%. Though the pace picked up, it was still slower than what many economists forecast.  Tax breaks, record interest-rate cuts and a campaign to weaken the currency were expected to ignite more activity. At this pace, however, Brazil may grow more slowly this year than the sluggish U.S. economy.

    Brazil set to cut interest rate to record low 7.5%: analysts - Brazil's central bank is set this week to announce its ninth interest rate cut to a record low of 7.5 percent, in a bid to revive sluggish economic growth, analysts said Monday. The bank's monetary policy committee (COPCOM) is expected to announce the half-percentage point reduction Wednesday after the market closes. The rate-cutting policy, which began exactly a year ago, aims to stimulate the economy at a time when it is suffering from China's economic slowdown and the dragging U.S. recovery. The government is banking on GDP growth of 3 percent this year while market analysts are forecasting a rise of only 1.7 percent. “We expect COPCOM to cut the basic rate by another 50 basis points to a new record low of 7.5 percent,” the investment bank Goldman Sachs said in a report released Monday. Dozens of financial analysts consulted weekly by the central bank concurred. “Today the central bank's major concern is not inflation but the level of economic activity,”

    Moodys Says Euro Crisis Crimping Global Outlook - The global economic recovery is at risk of faltering due to the euro-zone debt crisis, Moody's Investors Service Inc. said in its latest macro-economic risk report. The rating company said global economic growth in 2012 will be materially lower than in 2011 and 2010, as emerging market economies are now expected to grow less than previously expected. One of the main risks for global growth, Moody's said, stems from a deeper than expected recession in the euro area, caused, among other factors, by a deeper credit contraction. Also, the risk of a sudden and sharp fiscal tightening in the U.S. in 2013, the so-called "fiscal cliff," is adding to global growth risks. Other factors, Moody's said, are a possible "hard landing," an abrupt slowdown of major emerging market economies such as India, China, Brazil, coupled with a possible oil-price shock resulting from geopolitical risks. For advanced economies, Moody's said Europe is likely to experience a mild recession in 2012, while the U.S. will have a relatively robust growth.

    If U.S. enters depression, ‘world will follow’, former World Bank economist warns - In Richard Duncan’s pessimistic view, Canada gets points for its safe banking system and vast natural resource wealth, but in the end, just like the rest of the world, we will be sucked into the giant vortex when the U.S. finally implodes under the weight of trillions and trillions of debt that is no longer affordable.A former World Bank economist, Mr. Duncan doesn’t fit easily into standard categories. Like many conservatives, he argues that things went wrong when the U.S. government abandoned the gold standard in the late 1960s, paving the way for an explosion in credit creation and inflation. But he’s not calling for a return to a gold-based currency any time soon, as that would put an end to the economy and civilization as we know it, he believes. Such sentiments won’t likely win support from the Tea Party.Mr. Duncan’s solution calls for massive government investment in new technology — he’s talking in the trillions of dollars — as a way to generate profit that would ultimately revive the battered economy. But the way he sees it, the next few decades will almost certainly be particularly bleak for everyone.

    Expectations, Uncovered Interest Parity, and the Zero Interest Bound: New Results - One of the most robust findings in international finance is that interest differentials do not point in the right direction for subsequent exchange rate changes. This means that dollar returns on say one year certificates of deposit in the US and in the UK are not on average equalized. In Chinn and Meredith (2004), we show that this anomaly -- if it is one -- disappears as one goes to longer horizons. This finding was discussed previously here.  In this post, I discuss new results regarding this finding, basing the discussion on Chinn and Quayyum (2012). The sample examined in Chinn and Meredith ends in 2000. Since then, the global financial crisis has introduced a tremendous amount of volatility and default risk into international financial markets. In addition, short and long term interest rates have descended toward previously unplumbed levels. (In addition, several of the exchange rates previously examined, such as the Deutsche mark, the French franc and the Italian lira). It therefore makes sense to re-examine the question of whether at long horizons, the previous results prove durable when a new decade’s worth of data is included.

    The crash of the Dutch housing market reminds us of a much older market bubble -- From the country that brought us the tulip mania - roughly on the 375th anniversary of the tulip bubble crash - comes the latest property market correction in the Eurozone. WSJ: - The slump in the Dutch housing market deepened in July as prices posted the steepest drop on record, highlighting the challenges facing the Netherlands ahead of next month's general elections.  With prices now plumbing levels last seen in 2004, the downturn is weighing heavily on household consumption and has raised concern about the country's huge mortgage debt pile, among the largest in Europe So far this is not nearly as bad as the property market corrections in Spain or Ireland, but this was certainly unexpected. And now just as in the US, there is no shortage of blame to go around. WSJ: - Regulators blame loose lending practices in the late 1990s and early 2000s and a tax relief program for home buyers that distorted the Dutch housing market. As a result, they say, the country's banks have become too reliant on wholesale funding to finance their large mortgage books. At around €640 billion ($790 billion), Dutch mortgage debt is roughly the size of the country's entire economic output last year.

    Unilever Says 'Poverty Is Returning To Europe' -Unilever, the third-largest consumer goods company in the world, is switching up its marketing plan in Europe to adjust to rising poverty in the eurozone as recession deepens. In an interview with FT Deutschland (in German), Jan Zijderveld, who runs Unilever's European unit, said that "poverty is returning to Europe," and the company is reacting accordingly. Here is more from the interview, via The Telegraph: "If a consumer spends in Spain only € 17 when they go shopping, then I'm not going to be able to sell them for washing powder half of their budget." Unilever has already started to change the way it sells some of its products. In Spain, the company sells Surf detergent in packages for as few as five washes, while in Greece, it now offers mashed potatoes and mayonnaise in small packages, and has created a low-cost brand for basic goods examined as tea and olive oil. "In Indonesia, we sell individual packs of shampoo 2 to 3 cents and still make decent money," said Mr Zijderveld. "We know how to do that but, in Europe we have forgotten in the years before the crisis."

    Time is Money and other Fetishes - Doesn't the idea that "time is money" capture the spirit of modernity? Yet the Greek Prime Minister is suggesting that all Greece needs is some breathing room, given the depth of the economic contraction. It does not need any more money, he tries to reassure.  The Troika will not find this believable. Press reports suggest the IMF projects that even without the 2-year extension that Samaras is pleading for, Greece will need another 13-14 bln euros to cover the 2015-2016 period. If a 2-year extension is granted, the IMF reportedly projects Greece needs to be twice this.  Samaras may be better served by being more direct. The excesses took many years to build and they cannot be unwound in a day. It is unreasonable for the creditors to make a fetish of arbitrary time frames and targets. If it takes Greece another couple of years and another 30 bln euros to set its house right, isn't this preferable to the hundreds of billions of euros that are at stake in any exit scenario?  Despite the whining by some, Germany has hardly paid a penny to Greece. That it is fatigued by bailing out its weaker neighbors is more crass politics than real economicsThe ECB's Greek bonds were purchased with newly printed euros that the ECB continues to drain from the banking system. Germany does participate in the IMF's aid, but then so does the US and China, for example, as do all IMF members.

    Greek Pharmacists to End Prescriptions on Credit - The Pan-Hellenic Pharmaceutical Association, which represents Greece’s 12,000 pharmacies, said its members will no longer supply drugs prescribed by the country’s National Organization for Health Care Provision without immediate payment in cash starting Sept. 1.  Pharmacists called on the organization, Greece’s largest state-run health care provider known as Eopyy, to pay outstanding debts of more than 85 days. They also want the government to immediately start financing Eopyy with an amount equal to 0.6 percent of gross domestic product as well as to guarantee bank loans taken by pharmacists, the association said late yesterday in a statement on its website.  Eopyy has only made part payment to pharmacists for providing medicines in May and hasn’t paid for any prescription drugs since June, the association said Aug. 8. Eopyy still owes money from 2011 at a time when international drug companies no longer offer credit to Greek pharmacists, the association said at the time. It didn’t give a figure for the total debt.

    EU and NATO Look on at Greece’s Pampered Armed Forces - One would have imagined that the Greek government would have taken a sledgehammer to the defense budget back in 2009 when the debt crisis first took hold of this small country in the south east of Europe. But no. One would have thought too that the European Union and NATO might have used the euro crisis as an ideal opportunity to encourage countries to share defense equipment and cut back on wasteless duplication. But no. Greece went on a buying spree, purchasing submarines, fighter jets, and tanks from Germany and France. Not that they needed them. The region was stable. In 2009, almost 28 percent of its then €10 billion budget was spent on military equipment—higher than in the United States or any other NATO country.

    French Leader Hails Greeks’ ‘Painful Efforts' - President François Hollande of France gave the new Greek prime minister some reassurance in a meeting here on Saturday, expressing his commitment to keeping Greece in the euro zone. “For me, the question should no longer be asked,” Mr. Hollande said after meeting Prime Minister Antonis Samaras, who took over in mid-June. “Greece is in the euro zone and should stay in the euro zone.” Like Chancellor Angela Merkel of Germany, whom Mr. Samaras met on Friday, Mr. Hollande said that the new Greek government “must demonstrate the credibility of its program and the willingness of its leaders to go all out.” But Mr. Hollande added a key phrase demonstrating his unhappiness with some of the austerity measures the Greeks had to enact. The Greek government must press forward with economic reforms, he said, “while making sure that it is tolerable for the population.” Mr. Hollande made a point of “saluting the Greek people” for their “painful efforts of the last two and a half years.” He used a softer and more conciliatory tone than had Ms. Merkel, who has been a champion of austerity and financial discipline. She leads a coalition opposed to another bailout for Greece, which has already received nearly $200 billion in loans from Europe and the International Monetary Fund and must meet stringent deficit targets to qualify for the next tranche of loans.

    France refuses to back Greece’s call for more time to enact reforms - The French president, François Hollande, has put more pressure on Greece to push ahead with painful reforms after a meeting with the Greek prime minister, Antonis Samaras. While Hollande praised Greek citizens for making necessary budget cuts, which EU leaders hope will pull Greece back from crisis and secure the next round of bailout funds, the French leader offered no concessions to Samaras during their meeting in Paris on Saturday. Samaras has been seeking more time to pass reforms, arguing that an extension of up to two years would allow Greece time to improve growth and therefore its public finances. But Hollande said no decision could be taken on the issue until European ministers have considered a financial report on Greece, which is due to be published by the International Monetary Fund, the European commission and the European Central Bank in September.

    Hollande Tells Samaras to Show Greek Commitment to Get Support - French President Francois Hollande told Greek Prime Minister Antonis Samaras that his government must demonstrate commitment to overhauling its economy so Europe can do its part and move on from the debt crisis. “Greece needs once again to demonstrate the credibility of its program and the determination of its leaders to go all the way,” Hollande said at a joint press conference with Samaras after talks in Paris today. “Once these commitments, which are not only financial but about structural reforms that the Greeks want, have been ratified by parliament and confirmed, Europe must do its part.” While Hollande repeated his view that he wants Greece to stay in the euro, his remarks underline the hardening of France’s position since Greece’s budget troubles were first made public in late 2009. Samaras, for his part, said that he’s determined to keep his country in the 17-nation single currency. 

    Hollande Says Greece Must Stay in Euro Zone - French President François Hollande said Greece "must remain part of the euro zone" as the economically troubled country struggles to get its finances back in order, but said Greece must demonstrate that its recovery program is "credible." Mr. Hollande was briefing reporters Saturday after a one-hour meeting with Greek Prime Minister Antonis Samaras. Mr. Samaras on Friday met with German Chancellor Angela Merkel in Berlin. Mr. Hollande urged Greece's political leaders to have the political will to go through with the overhaul program, while ensuring that it is bearable for the Greek people. Mr. Samaras pledged that Greece will remain part of the euro zone, although he criticized people "who continue to speculate against Greece." "We will succeed and we will remain in the euro zone," he said. Mr. Hollande said European Union leaders will decide on the way forward for Greece at their next meeting in October when they will review the findings of the so-called troika, the European Union, the European Central Bank and the International Monetary Fund, on how successful Greece is in implementing the structural reforms required under the terms of a €173 billion euro ($216.5 billion) bailout.

     Greece not lost, say Merkel and Hollande -- Chancellor Angela Merkel said Germans were ready to help Greece “as much as we can” on Friday, but declined to support a Greek plea for more time to implement austerity measures and pay back eurozone loans. Ushering in weeks of tense talks about the future of the southern European country, Ms Merkel was at pains to stress Berlin had not written off Athens’ membership in the single currency, despite a summer of frustration over a lack of progress in Greece, and the resulting fiscal slippage in its adjustment programme. “I want Greece to remain part of the eurozone,” she said, promising that Germany would “remain as helpful as possible” provided Athens stuck to its pledge to implement sweeping political reforms. “We need a bit more breathing space,” Antonis Samaras, Greek prime minister said during a visit to Berlin. “We are a proud nation and do not like having to rely on other people’s money.” Mr Samaras stressed his determination to fulfil the reform pledges made at the start of the year and said any speculation about Greece’s exit from the eurozone was “toxic”. 

    The ECB must still do its bit to help solve the crisis - Can the European Central Bank solve the eurozone crisis on its own? The answer is clearly No. But without ECB intervention, the crisis is insoluble. So what should the goals of such an operation be? And how should this be accomplished? I would consider three goals, subject to two constraints. The first and most important is to get rid of market expectations of a eurozone break-up. Whatever the ECB’s governing council decides on September 6, it must be big enough to squash expectations that Spain or Italy will leave the eurozone. A Greek departure is different. This programme is not about Greece. Second, it must be part of an overall resolution strategy. Mario Draghi is right to say that ECB support should depend on an official application for support. But this is when it gets tricky. How will the president of the ECB adjust his programme if a country fails to meet the criteria? And who decides? Third, he has to address the issue of investor subordination. If the ECB’s holdings are considered senior to those of other investors, it may never be possible to get private investors back into those countries. But would an announcement that the ECB accepts equal rank, also known as pari passu, be credible? The ECB rejected participating in the Greek debt restructuring because it constituted a monetary financing of debt. This is illegal under European law. It is easy for the ECB to state that it ranks pari passu, but is it really prepared to take a hit in the event of a debt restructuring?

    Bundesbank chief: ECB bond buys could be addictive — Germany’s top central banker remained at odds with plans being weighed by the European Central Bank for a new round of government bond purchases, warning in a magazine interview published Sunday that such measures could prove “addictive like a drug.” A new program to buy government bonds of individual countries would cut too close to financing of government budgets by printing money, Bundesbank President Jens Weidmann was quoted as telling the weekly news magazine Der Spiegel, in an interview. In democracies, “such a pooling of risk should be decided by parliaments, not central banks,” he said. Moreover, such a program would do little to address the fundamental causes of the euro zone’s debt crisis, Weidmann said, but could foster dependence on the ECB. “We should not underestimate the risk that central-bank financing can be addictive like a drug,” Weidmann said.

    Weidmann Says ECB Purchases Could Become ‘Addictive Like a Drug’ - Bundesbank President Jens Weidmann said a proposed new wave of sovereign bond purchases by the European Central Bank may increase governments’ reliance on such funding and won’t help solve the euro-area debt crisis. “We shouldn’t underestimate the danger that central bank financing can become addictive like a drug,” Weidmann said in an interview with Der Spiegel. “Such policy is too close to state financing via the money press for me.” ECB President Mario Draghi said earlier this month that the central bank may intervene in the secondary market to lower yields in countries that ask Europe’s bailout fund to buy its bonds in the primary market. While such a move would ensure conditionality, the Bundesbank has been critical of the plan. “In democracies, parliaments rather than central banks should decide on such an encompassing mutualization of risks,” Spiegel cited Weidmann as saying in an e-mailed summary of the interview today. The plans are becoming “concerted actions by the state rescue mechanisms and the central bank. That causes a link between fiscal and monetary policy.” 

    Merkel tries to calm storm over Greece, ECB policy (Reuters) - Angela Merkel tried to calm a growing storm over euro zone crisis strategy on Sunday after the Bundesbank likened ECB bond-buying plans to a dangerous drug and a conservative ally of the German leader said Greece should leave the currency bloc by next year. The comments, from central bank chief Jens Weidmann and a senior figure in the Bavarian Christian Social Union (CSU), Alexander Dobrindt, point to mounting unease in Germany with the policies being used to combat the three-year old debt crisis. Domestic criticism has narrowed Merkel's room for maneuver at a time when Greece is in dire need of more aid and policymakers are scrambling to prevent contagion from enveloping big countries like Spain and Italy. Two days after Greek Prime Minister Antonis Samaras visited Berlin and made an impassioned plea for politicians there not to talk up the possibility of a Greek euro exit, Merkel herself sent a warning to allies who have said the euro zone would be better off without its weakest link."We are in a very decisive phase in combating the euro debt crisis," Merkel told public broadcaster ARD in an interview. "My plea is that everyone weigh their words very carefully."

    Merkel Reins-in Greek Exit Talk as Euro Enters ‘Decisive Phase’Chancellor Angela Merkel told officials in her coalition calling for a Greek exit from the euro to “weigh their words,” as she signaled a renewed determination to keep the single currency intact.  Asked about comments by a party leader calling for Greece to leave the 17-nation single currency, Merkel told ARD television that such comments were damaging as crisis fighting reaches a “decisive phase.” Alexander Dobrindt, general secretary of the governing Bavarian Christian Social Union, told Bild newspaper that Greece wouldn’t be part of the euro in 2013.  “Everybody should weigh their words very carefully,” Merkel told ARD yesterday in Berlin. The Greek government under Prime Minister Antonis Samaras is undertaking “serious efforts” to reduce its debt, she said, and reiterated Germany’s desire to stand by the country where the crisis originated.

    “Nonsense Economics” and the Deepening Greek Crisis - Real News Network has a sobering interview with Costas Lapavitsas,a professor at the University of London School of Oriental and African Studies, who gives an update on the political and economic situation in Greece. The country is already prostrate yet the European creditor nations seem to believe they can extract more by demanding further, draconian budget cuts, when all that will do is shrink the Greek economy further, increasing social dislocation and rebellion. Lapavitsas gives some ideas as to how this ugly scenario might play out.

    New Euro Bailout Fund Could Fall Short - The new fund set up to bail out struggling euro zone economies may face a 150 billion euro ($189 billion) shortfall if Spain and Italy need a full bailout program before the end of 2014, according to analysts at Credit Suisse. However, its firepower could be significantly improved if the European Central Bank (ECB) intervenes in secondary bond markets – an outcome which has been rumored in recent weeks. The European Stability Mechanism (ESM) is one of the key pillars of euro zone leaders’ attempts to deal with the debt crisis which threatens to spread its tentacles ever further. It’s expected to come into force later this year, as a replacement for the European Financial Stability Facility (EFSF), if the German Constitutional Court rules positively on it on September 12th. When it was first announced earlier this year, the ESM sparked a rally in markets, as traders hoped it would help break the cycle of hopes rising, then being dashed, for a solution to the euro zone debt crisis. However, as Spain and Italy have looked more likely to be in need of a full bailout, worries have grown about its size. The ESM is dependent on contributions from euro zone member states, with Germany its biggest contributor. Growing dissatisfaction in Germany about the cost of saving peripheral euro zone economies could threaten its firepower – and limit the potential to increase its size which is written into the treaty.

    Judgment Day for the Eurozone - Europe and the world are eagerly awaiting the decision of Germany’s Constitutional Court on September 12 regarding the European Stability Mechanism (ESM), the proposed permanent successor to the eurozone’s current emergency lender, the European Financial Stability Mechanism. The Court must rule on German plaintiffs’ claim that legislation to establish the ESM would violate Germany’s Grundgesetz (Basic Law). If the Court rules in the plaintiffs’ favor, it will ask Germany’s president not to sign the ESM treaty, which has already been ratified by Germany’s Bundestag (parliament). There are serious concerns on all sides about the pending decision. Investors are worried that the Court could oppose the ESM such that they would have to bear the losses from their bad investments. Taxpayers and pensioners in European countries that still have solid economies are worried that the Court could pave the way for socialization of eurozone debt, saddling them with the burden of these same investors’ losses.. The plaintiffs have raised several objections to the ESM. First, they claim that it breaches the Maastricht Treaty’s “no bail-out” clause (Article 125). Germany agreed to relinquish the Deutsche Mark on the condition that the new currency area would not lead to direct or indirect socialization of its members’ debt, thus precluding any financial assistance from EU funds for states facing bankruptcy. Indeed, the new currency was conceived as a unit of account for economic exchange that would not have any wealth implications at all. The plaintiffs argue that, in the case of Greece, breaching Article 125 required proof that its insolvency would pose a greater danger than anticipated when the Maastricht Treaty was drafted. However, no such proof was provided.

    Eurozone needs a German sovereign wealth fund - With the advent of the euro, exchange rate risk within the Economic and Monetary Union disappeared, and Germans were able to invest their excess savings in the common currency. As a result, German surpluses grew to become ingrained at 6 per cent of gross domestic product, more than a quarter of national savings. However, German investors’ appetite for eurozone public and private debt has diminished sharply. Investment outside the eurozone is not an alternative, since a large part of German savings are intermediated by banks, which cannot take exchange rate risk. To avoid a breakdown of the financial system, the public sector has had to step in, with the Eurosystem – the network of eurozone central banks – becoming the main intermediary of savings from surplus to deficit countries. Its role is reflected in the imbalances within Target 2, the interbank payment system, which broadly correspond to eurozone countries’ accumulated current account positions since the introduction of the single currency. The Eurosystem’s intermediation of large private sector savings surpluses is not necessarily abnormal. On the contrary, there are few countries in which large external surpluses are intermediated for long periods exclusively by the private sector. In most countries running persistent current account surpluses, the government or the central bank has accumulated foreign assets through either a sovereign wealth fund or foreign exchange intervention. Saudi Arabia and Norway are classic examples of surpluses based on natural resources intermediated by the public sector through a sovereign wealth fund. Switzerland and Japan illustrate the tendency of nations with structural private sector surpluses to rely on central banks. The question is whether the public sector intermediates large surplus savings efficiently. From a German perspective, intermediation by the Eurosystem is inefficient.

    German economy converging with the Eurozone's - So much for the hopes and dreams of German decoupling from the Eurozone's economic troubles. How things have changed in just six months (see this discussion)! Germany's growth trajectory is now converging with the rest of the euro area's weakened economic conditions. JPMorgan: - At the country level, the PMIs continue to point to a convergence in economic performance. Once again this month, the PMI improved in France and also in the periphery, whereas it slid further in Germany. At 47.0, the German composite PMI is now barely above the Euro area average and is pointing to a 0.5%q/q saar decline in GDP this quarter, pending the arrival of official activity data (e.g., IP) to help us fine-tune our estimate (+0.3%). This week’s 2Q GDP report confirmed that German domestic demand has now been stagnant for almost a year. The modest upward trend in consumer spending remains in place, with higher wages feeding through to gradually rising incomes. But, the uncertainties of the sovereign crisis and weaker external demand are manifested in reduced business capital spending, which is offsetting the modest increases in consumer spending. Notably, the German manufacturing PMI export orders index slid to a strikingly low level of 39.5 this month. At this stage it's only a matter of time before Germany's GDP (which is a lagging indicator) turns negative

    Merkel Pushes for Convention to Draft New EU Treaty  - Chancellor Angela Merkel's plans for a new treaty governing the European Union are becoming more concrete. SPIEGEL has learned that the German leader wants the EU to begin working on a draft this year, with the aim of providing Brussels with greater power to monitor budgets. But many countries are deeply opposed to the idea.  A date for the beginning of the convention is expected to be fixed at an EU summit in December. Merkel has been pushing for some time now to complement the recently approved fiscal pact, which harmonizes budget policies within 25 of the EU's 27 countries, with a political union. Germany would like to see, for example, a legal basis that would give the European Court of Justice the jurisdiction to monitor the budgets of member states and to punish deficit offenders.  So far, though, the German proposal has found few supporters in the other EU member states. During a meeting of the so-called Future Group, an informal gathering of 10 foreign ministers from EU countries, the majority opposed a call by German Foreign Minister Guido Westerwelle for a new treaty convention. Other countries, including Ireland, do not want to take the risk of a national referendum, which a new EU treaty would entail in some member states

    Dutch Discontent, Socialists Ride Wave of Anti-EU Sentiment- The economy is in trouble and unemployment is rising -- in the Netherlands as in much of the rest of Europe. Ahead of upcoming elections, the Socialists are riding a wave of euro-skepticism and may emerge as the strongest political force in the country. According to the polls, [Emile Roeme] the former elementary school teacher could become the next prime minister of the Netherlands. Roemer owes this popularity to his skepticism about Europe. "Having even more Brussels is not the solution to Europe's crisis," he says. The Socialist rails against the European Commission's austerity targets, under which the Netherlands is supposed to reduce its budget deficit to below the Maastricht Treaty ceiling of 3 percent of GDP by next year."Over my dead body," says Roemer, referring to the possibility of penalties being imposed by the European Commission. It is also a jibe at the German chancellor, who used similar language to express her views on introducing euro bonds. Too much power has been placed into the hands of uncontrollable technocrats, Roemer claims. "The economic policy Brussels wants to dictate to us is downright antisocial."

    PIIGS Unemployment Chart - Every picture tells a story, they say.  This one tells a story of unrelenting misery and hardship, dreams crushed and hopes fading, year after year after year.  Still no sign of any relief for the real economy in these countries.  The data run through June 2012, except for the Greeks who are only up to May.

    Spain Deficit Pain Bites Consumers in Prelude to Rajoy Austerity - Spanish Prime Minister Mariano Rajoy’s austerity drive will intensify this week as a sales-tax increase tightens the squeeze on consumers whose spending is already plummeting.  The move to raise the value-added tax Sept. 1 will follow a flurry of data showing the pressure building on household finances in the euro area’s fourth-biggest economy, home to a third of its unemployed. Reports due include mortgage lending today, a breakdown of second-quarter gross domestic product tomorrow, inflation on Aug. 30 and retail and current-account data on Aug. 31.  Spain’s government will also release public finance figures illustrating the extent of Rajoy’s challenge as he tries to curb the euro region’s third-largest budget deficit and considers whether to seek further international aid. Consumers have already endured a recession lasting three quarters as a prelude to his tax increase due this week and an annual cut in public wages for the month of December.  “I expect a fairly dramatic weakening of GDP in the third and fourth quarters and further ahead as all components of domestic demand fall,”

    Spain’s Crisis Reignites an Old Social Conflict - Outmaneuvering the police, hundreds of jobless farmworkers charged through a hole in a fence and turned the manicured gardens of a vacant estate here in Spain’s agricultural heartland into a lively fairground of protest this week. Men more accustomed to working in the fields lounged in the shade beside a pink palace, picnicked on paella and spent a night relaxing. Some even took a dip in the pool. “We’re here to denounce a social class who leaves such places to waste,” said Diego Cañamero, the leader of the Andalusian Union of Workers, addressing the demonstrators who had occupied the property, the Palacio de Moratalla. For all of the estate’s grandeur, the owner, the Duke of Segorbe, lives in Andalusia’s capital, Seville, about 60 miles away. The occupation was a demonstration of the class conflicts that simmer amid complaints about austerity and joblessness in Spain. Such protests have gathered pace in this farm region in Spain’s south in recent weeks, adding a volatile dimension to the country’s economic downturn. They have also pointed to a deeper anger about the shape of Spain’s economy and democracy. The resentment here over land that has been left uncultivated at a time of deepening recession and record joblessness reaches beyond local politicians and landowners to European Union bureaucrats. Agricultural subsidies are criticized by many here as favoring landed interests, paying them not to grow crops when nearly a third of the work force in Andalusia is unemployed.

    Spain revises down growth for 2010, 2011 - Spanish gross domestic product grew by less than originally estimated for 2011 and 2010, the national statistics office reported Monday. According to fresh data, the economy grew just 0.4% in 2011, versus a prior estimate of 0.7%. The economy contrated 0.3% in 2010, deeper than the prior estimated contraction of 0.1%. Gross domestic product data for 2009 was unchanged at a contraction of 3.7%, while 2008 also remained the same, showing growth of 0.9%.

    Budget Hole Undermines Spain’s Plans - Economists have uncovered a hole in Spain’s budget that threatens to allow the country’s regional governments to overspend this year, calling into question the credibility of Madrid’s deficit reduction plan agreed with Brussels. The discrepancy in this year’s spending plans for Spain’s 17 autonomous regions—which have become one of the main battle grounds for prime minister Mariano Rajoy’s austerity program—could allow the regions to exceed their agreed budget deficit for 2012 by almost 10 percent. Under the regional spending plan signed off in May by Cristobal Montoro, Spain’s budget minister, the regions have been approved to claim back 9.7 billion euros ($12.1 billion) in bills generated last year but left unpaid. Yet this sum exceeds the total of 8.5 billion euros of 2011 unpaid spending declared by the regions last year. The resulting 1.2 billion euros hole amounts to about 8 percent of the 15 billion euros deficit the regions are allowed to run this year, based on an agreed total regional deficit of 1.5 percent of Spanish gross domestic product (GDP) for 2012.

    Catalonia to ask for bailout aid from Spain -- Catalonia, Spain's most indebted region, said Tuesday it will ask for 5.02 billion euros ($6.28 billion) in financial assistance from the Spanish government's liquidity program, as it struggles to pay for basic services such as hospitals, schools and care homes. Catalan government spokesman Francesc Homs said at a press conference that the government will ask for the funding to "face debts maturing in the coming months." The central government this summer set up a fund of up to 18 billion euros to help regional governments in difficulty. Two other cash-strapped regions, Valencia and Murcia, have already said they will ask for aid from the fund. The Catalan government has already cut public-sector wages, introduced a €1 charge for each medical prescription and frozen infrastructure investments as it seeks to bring its public deficit under control. Catalonia has €42 billion in debt, equivalent to 21% of the region's gross domestic product.

    Spanish recession darkens as country mulls bailout, Catalonia seeks cash - The Spanish economy is falling deeper into recession and depositors are pulling their money out of the banks, figures published on Tuesday showed, while the country’s most economically important region, Catalonia, said it needed a major rescue from Madrid. Spain’s recession grew stronger in the second quarter of the year and is expected to get worse as austerity measures introduced in response to the euro zone debt crisis cut into demand for goods and services.A rush by consumers and firms to withdraw their money from Spanish banks intensified in July, with private sector deposits falling almost 5 per cent, to €1.509-trillion ($1.9-trillion U.S.) at end-July from €1.583-trillion a month earlier. Analysts believe it is inevitable that Spain will soon have to call for a European rescue package to help bring its debt costs down as austerity measures designed to slash the public deficit push the economy deeper into recession. Adding to Spain’s bleak outlook, the north-eastern region of Catalonia, which represents around a fifth of the country’s economy, said it needed a €5-billion rescue from the central government to meet its financing needs and debt costs this year.

    Spain's regional rescue fund is quickly put to use - As expected, more of Spain's regions are asking for a bailout. The program to help the regions was set up in July (see discussion) to create Spain's internal version of the "Stability Bond". With the regional fiscal problems escalating (see this discussion from March), the urgency of the situation could not be overstated. Boston Globe: - Spain’s northeastern region of Catalonia, a hub of industry and business, said Tuesday it will seek €5.02 billion ($6.29 billion) in aid from the central government, adding to the country’s financial troubles as it struggles to avoid needing a sovereign bailout. Catalonia, which has Barcelona as its capital, became the third region after Valencia and Murcia to officially solicit aid. Valencia said it will seek €3.5 billion and Murcia is to ask for up to €300 million. Many of the 17 semi-autonomous regions are struggling with the recession, the country’s second in three years, following a real estate crash in 2008 that has pushed the unemployment rate to near 25 percent.

    Spain bank deposits fall in July, despite bailout -- Spanish depositors took no comfort in the looming bailout of the country's banking sector, deposit data for July from the European Central Bank showed Tuesday. Deposits in Spanish banking institutes dropped a whopping 4.7% on the month in July, data from the ECB revealed. A look at data from other countries shows how stark the fall in Spain was. Deposits in Italian banks were practically unchanged, booking only a 0.02% drop, while Greek deposits actually increased by nearly 2%, the first increase in Greek deposits since March. The numbers, however, may not be as alarming when one considers that in Spain companies typically pay taxes in July, meaning that a certain withdrawal of funds is to be expected, a Bank of Spain official told Dow Jones Newswires. Moreover, households also tend to spend more in the summer months as they go on holiday. The official also said that roughly two-thirds of the withdrawal was from investment and securitization funds that were not renewed, meaning that fund managers had to repay owners with deposits

    Deposit flight from Spanish banks smashes record in July - Spain has suffered the worst haemorrhaging of bank deposits since the launch of the euro, losing funds equal to 7pc of GDP in a single month. Data from the European Central Bank shows that outflows from Spanish commercial banks reached €74bn (£59bn) in July, twice the previous monthly record. This brings the total deposit loss over the past year to 10.9pc, replicating the pattern seen in Greece as the crisis spread. It is unclear how much of the deposit loss is capital flight, either to German banks or other safe-haven assets such as London property. The Bank of Spain said the fall is distorted by the July effect of tax payments and by the expiry of securitised funds. Julian Callow from Barclays Capital said the deposit loss is €65bn even when adjusted for the season: “This is highly significant. Deposit outflows are clearly picking up and the balance sheet of the Spanish banking system is contracting.” Economy secretary Fernando Jimenez Latorre said Spain is in the eye of the storm right now with the “worst falls” in economic output yet to come in the second half of the year. Meanwhile, the Spanish statistics office said the economic slump has been deeper than feared, with lower output through 2010 and 2011. The economy slid back into double-dip recession in the third quarter of last year, three months earlier than thought.

    Deposit flight from Spanish banks hits 15-year high as bailout rumours grow - Spanish banks lost €1 out of every €20 deposited with them in July, making it the worst month for deposit flight in 15 years as rumours grew that the country is edging closer to a full bailout. News that banks were losing deposits came as Spain's statistics institute revealed the current recession is worse than thought, with the economy shrinking at an annual rate of 1.3% in the second quarter. Tuesday's revised figures showed recession started three months earlier than previously indicated. "The data shows the recession started in the third quarter of last year," secretary for state for the economy, Fernando Jiménez admitted. A collapse in internal consumption in a country squeezed by government austerity and massive unemployment is largely to blame for the recession, as this fell at an annual rate of 3.9% in the second quarter. Unemployment is already at 25% but the speed at which jobs are being destroyed quickened to an average rate of 800,000 jobs a year in the second quarter, according to the statistics institute. That helps explain why Spaniards, and their companies, are both reducing spending and putting less money in the bank.

    Spain's Bankia seen losing 4 bln euros in first half (Reuters) - Nationalised lender Bankia is expected to post first-half losses of more than 4 billion euros on Friday, highlighting the need for capital from a European rescue of Spanish banks that is unlikely to arrive before the end of September. Bankia was taken over by the government in May when it asked for 19 billion euros of state aid after anticipating the steep losses from real estate investments which soured after the property market crashed four years ago. Spain has asked Europe for money to keep its banks afloat after a surge in bad debts as the economy sank into recession and is considering asking for a broader economic bailout. It will also set up a bad bank to take on troubled assets from the rescued banks to clean up the sector. Three analysts and a banking source with knowledge of the matter said they expected Bankia to report more than 4 billion euros in losses for the first half, worse than the total for the whole of 2011.

    Spain's bailed-out Bankia 'loses €4.3bn in six months' - Bankia, Spain's fourth largest bank by assets, recorded a net loss of €4.3bn in the first half of the year, topping the loss it suffered in all of 2011, according to reports. Bankia's request in May for a historic bailout of €23.5bn (£18.6bn) prompted the eurozone to prepare a loan of up to €100bn for all Spanish banks. Spain itself might nontheless have to seek a state bailout in the coming weeks. The bank, which was nationalised as it received the aid, had announced a net loss of €2.979bn in 2011. The loss for the first half of 2012 is much higher at around €4.3bn euros, according to economic daily Expansion, which added that Bankia's accounts were due to be approved by the board of directors on Friday.

    Spain Said to Consider Bankia Re-Capitalization Without EU Money -- Spain is considering pumping its own money into Bankia group to re-capitalize the country’s biggest nationalized lender rather than use the emergency portion of a 100 billion-euro ($125 billion) bailout from the European Union, two people with direct knowledge of the matter said. This would allow Spain to put off forcing Bankia group’s junior debt holders to bear part of the rescue cost, said the people, who asked not to be identified because the negotiations are private. European officials backed burden sharing in the talks because it would limit the need for public money, the people said. “The EU is telling the Spanish government that if they don’t produce this haircut, the money will have to put up by” Spain, said Alejandro Ruyra, an analyst at Kepler Capital Markets in Madrid, speaking on Bloomberg TV’s The Pulse. “The question is, does the Spanish government have that much money?”

    Spain Worse - As I wrote early last week Antonis Samaras was to spend much of the weekend in talks with Angela Merkel and Francois Hollande about the future of his nation. As the Telegraph pointed out yesterday the results were, as expected, unconvincing: Angela Merkel and Francois Hollande pledged to keep Greece in the Eurozone, but offered Greece no immediate relief from its current regime of painful austerity measures. We still haven’t heard of any bailout requests from Spain, but overnight the National statistics office provided some new data that will probably speed up the process: It seems Spain’s economy was in a worse state than we knew. GDP contracted by more than previously estimated in 2010 – by 0.3 percent – more than the 0.1 percent contraction originally reported. It also grew by just 0.4 percent last year, which was less than the 0.7 percent figures first published. The just released revised figures from the National Statistics Institute in Madrid play into fears about Spain’s ability to rein in its public deficit. The downwards revision to the 2011 growth figures was a result of a change to external demand figures, which showed exports were slightly weaker than first thought.

    Rajoy Seeks Support for Spain Debt as Regions Line Up for Aid - Prime Minister Mariano Rajoy delayed seeking a second rescue for Spain while pledging to continue bailing out its regions as Valencia requested more money to settle bills and cover debt. Rajoy spoke today following a meeting in Madrid with French President Francois Hollande. Catalonia, Valencia and Murcia this week claimed more than half of an 18 billion-euro ($23 billion) fund announced by Rajoy last month to help the regions face bond redemptions and finance their deficits in the second half. A Valencia official who declined to be identified in line with government policy said the region will seek another 1 billion euros from the central government mostly to pay education and health bills. The country’s regions risk overwhelming a plan to tackle the euro area’s third-biggest budget deficit. They were responsible last year for most of Spain’s overspending, which remained nearly unchanged from 2010 at 8.9 percent of gross domestic product.

    Spain prepares for economic 'black September'- As the holiday season comes to a close, many Spaniards are bracing themselves for what could be described as a "black September." Apart from having to return to work after the summer holidays, this September is set to be tougher than ever for Spaniards for several reasons. To begin, Spaniards will face an increase in sales tax from 18 percent to 21 percent on goods such as electricity, petrol and water bills from September 1. This will affect many other services with the price of cinema tickets, vet bills and even the cost of funerals rising by three percent. The price rises will hit already struggling sectors such as the car industry, which has seen sales drop consistently for the last two years, while bars, restaurants, cinemas and even attendance at football grounds are also likely to be hit. The sales tax increase is part of the Spanish government's efforts to reduce the country's deficit to 6.3 percent of its economic output by the end of the year.

    Spain capital outflows rise nearly 40 percent in June (Reuters) - Spain saw close to a 40 percent rise in capital outflow in June, Bank of Spain data showed on Friday, as investor confidence in a country struggling to balance its public accounts eroded further. The central bank reported that net capital outflow, not including central bank operations, was 56.6 billion euros ($71 billion) in June, after an outflow of 41.3 billion euros in May. A total of 315.6 billion euros of capital has left the country in the year to end-June, equivalent to nearly one-third of the country's economic output. In the first half of 2012 capital outflow was 220 billion euros. Spain's economy entered a recession at the end of last year, and falling output and tax revenues will test the country's ability to cut its public deficit to meet European Union demands.

    France, Spain urge action to curb market rates - As President Francois Hollande flew to Madrid, bond markets sent Spain's 10-year interest rates soaring to levels that could topple the eurozone's fourth biggest economy. France's leader backed Prime Minister Mariano Rajoy's deficit-slashing government, which is also battling to salvage its banks with a eurozone loan of up to 100 billion euros ($125 billion). Hollande prodded European Central Bank chief Mario Draghi to act, as the central bank fine tuned plans for a mechanism to help the most fragile eurozone nations by purchasing their sovereign bonds. European Union leaders had agreed June 29 on measures that would allow the ECB to intervene in "exceptional circumstances," the French leader said after lunching with Rajoy.

    BOE’s Posen: ECB Should ‘Absolutely’ Cap Bond Yields - A top Bank of England official argued strongly in favor the European Central Bank acting to cap bond yields to help restore order in the region’s troubled government bond markets. The ECB “should be intervening in the long bond markets” of fundamentally strong nations like Italy and Spain to arrest a slow-moving market panic that has been driving up borrowing levels, said Adam Posen, a member of the Bank of England’s Monetary Policy Committee. Pursing an action like this “isn’t buying time shares in Las Vegas,” Mr. Posen said, and in implementing such a policy, the ECB would be acting just as a central bank should in a time of market trouble. Mr. Posen’s comments were made to reporters before the start of the Federal Reserve Bank of Kansas City’s annual conference in Jackson Hole, Wyo. Mr. Posen declined to comment on the outlook for monetary policy in the U.K. He instead devoted his comments to issues in the U.S. and European economies.

    Euro-Area Confidence Drops More Than Forecast to 3-Year Low -- Economic confidence in the euro area fell more than economists forecast to a three-year low in August as leaders struggled to rein in the debt crisis and the economy’s slump deepened. An index of executive and consumer sentiment in the 17- nation euro area dropped to 86.1 from 87.9 in July, the European Commission in Brussels said today. That’s the lowest since August 2009. Economists had forecast a decrease to 87.5, the median of 26 estimates in a Bloomberg News survey showed. European consumers and executives are growing more pessimistic about the outlook as the economy edges closer toward a recession. While euro-area officials are seeking ways to contain the fiscal crisis, now in its third year, rising borrowing costs from Italy to Spain reflect investor concern about a breakup of the euro area as Greece struggles to plug its budget gap and reduce its debt burden. “The euro-region economy will continue to show negative growth rates, with a moderate contraction in the second half,”

    Portugal hopes for leeway on budget from bailout team (Reuters) - Inspectors kicked off a review of Portugal's bailout on Tuesday, facing rising expectations they will grant the country some relief on tough fiscal goals it looks set to miss despite sticking rigidly to a tough austerity program. The fifth review by the Troika of lenders from the European Union, ECB and IMF will focus on the country's budget. Tax revenues have fallen far short of target as domestic consumption has slumped along with the economy, mired in its deepest recession since the 1970s, and employment levels. Although that means it is likely this year's fiscal deficit goals will be missed, markets seem relatively unconcerned. Portugal's 10-year bond yields are around their lowest levels since April 2011, before the lenders signed off on the debt-laden country's 78-billion-euro bailout. "The markets have not reacted badly to the news that Portugal is likely to miss the target,"

    Portugal 2012 deficit to exceed target-report (Reuters) - Portugal's government has told visiting EU and IMF inspectors this year's budget deficit would exceed its target of 4.5 percent of GDP as agreed under a bailout deal, reaching 5.3 percent instead, a newspaper said on Thursday. Diario Economico said that although some leeway was likely to be permitted, the European Commission would still not rule out possible new austerity measures to compensate for at least part of the slippage. The business newspaper did not name its sources.

    German Retail Sales Unexpectedly Fell in July as Economy Weakens - German retail sales unexpectedly declined in July as the sovereign debt crisis curbed growth in Europe’s largest economy.  Sales, adjusted for inflation and seasonal swings, slipped 0.9 percent from June, when they rose a revised 0.5 percent, the Federal Statistics Office in Wiesbaden said today. That’s the strongest increase since March. Economists forecast a gain of 0.2 percent, according to the median of 15 estimates in a Bloomberg News survey. Sales fell 1 percent from a year earlier. While the jobless rate in Germany remained at 6.8 percent in August, unemployment edged higher for a fifth month as Europe’s debt crisis weighs on growth and corporate earnings. Still, Europe’s largest economy is outperforming most of its euro-region peers as rising wages bolster purchasing power and consumption.

    Eurozone Retail Sales Decline 15th Month, Plunge Led by Italy, France; German Sales Contract Slightly - Once again there is grim data from Europe. The safe thing to do is expect grim data every time European data is reported. Except for an occasional outlier, you will not be too far off.Eurozone Retail Sales Decline 15th Month: Markit Reports Eurozone retail downturn deepens in August .Key points:

    • Revenue contraction extends to tenth month
    • German sales flat; sharper falls in France and Italy
    • Inflationary pressures build up

    Retail sales in the Eurozone continued to fall sharply on an annual basis in August. The rate of contraction accelerated to the fastest since May, and extended the current sequence of continuous decline to 15 months. This was despite a further year-on-year increase in Germany, and reflected substantial declines in both France and Italy.

    France to Hire 150,000 Subsidized Workers With Zero Qualifications -- Via Google Translate from El Economista, France will create 150,000 jobs for young people without qualifications:The French Government has today adopted a draft law providing for the creation of 150,000 subsidized jobs for young people with little or no qualifications, which are most affected by unemployment and employability harder. The beneficiaries of these so called "jobs of tomorrow" will work for municipalities, hospitals, schools, social organizations, associations or, exceptionally, in private companies, and will receive a grant of up to 75% of their compensation. The estimated cost is 500 million euros in 2013 and "more than 1,500 million" next year by the state budget, said Labor Minister Michel Sapin, at a press conference.

    Eurozone unemployment at new high - Unemployment across the 17-nation eurozone hit a record 18 million in July, the EU statistics agency says. Some 88,000 more people were added to the jobless total, but upwardly-revised data for June meant the unemployment rate remained at 11.3%. Eurostat said the 18,002,000 jobless total was the highest since records began in 1995. The highest unemployment rate in the eurozone was in Spain, at 25.1%. The lowest was in Austria, at 4.5%. Compared with a year ago, the unemployment rate fell in 10 eurozone countries, increased in 16 and remained stable in Slovenia. The largest falls were observed in Estonia (13.2% to 10.1%), Lithuania (15.2% to 13.0%) and Latvia (17.0% to 15.9%) Meanwhile, the highest increases were registered in Greece (16.8% to 23.1%), Spain (21.7% to 25.1%) and Cyprus (7.7% to 10.9%).

    Eurozone Jobless Rate Stuck at Record High in July - The unemployment rate across the 17 countries that use the euro remained at a record high of 11.3 percent in July, official figures showed Friday, underscoring the huge task leaders face to restore confidence in the continent’s economy. The European Union‘s statistical agency, Eurostat, said 88,000 more people were without a job in July — for a total of 18 million — as governments and companies continued to trim payrolls to deal with problems of high debt and weak consumer spending.The 11.3 percent unemployment rate, which is up 1.2 points from a year earlier, is the highest level since the euro was formed in 1999. Joblessness increased in Spain and bailed-out Greece, both countries at the center of the European sovereign debt crisis which has thrown a cloud of doubt over the future of the single euro currency. In Spain, the jobless figure rose by another 0.2 points to reach 25.1 percent, the highest in the eurozone. For Greece, the latest data available was for May, which saw a 0.5-point increase to 23.1 percent. A year earlier, it was 16.8 percent. Youth unemployment was even worse. In Spain it stood at 52.9 percent for people under 25 and at 53.8 percent in Greece.

    Euro-Area Unemployment at Record, Inflation Quickens - Euro-area unemployment rose to a record and inflation quickened more than economists forecast as rising energy costs threaten to deepen the economic slump.  The jobless rate in the economy of the 17 nations using the euro was 11.3 percent in July, the same as in June after that month’s figure was revised higher, the European Union’s statistics office in Luxembourg said today. That’s the highest since the data series started in 1995. Inflation accelerated to 2.6 percent in August from 2.4 percent in the prior month, an initial estimate showed in a separate report. That’s faster than the 2.5 percent median forecast of 31 economists in a Bloomberg survey. A 12.4 percent surge in crude-oil prices over the past two months is leaving consumers and companies with less money to spend just as governments seek ways to contain the debt crisis. European economic confidence dropped more than economists forecast to a three-year low in August and German unemployment increased for a fifth month, adding to signs the euro-area economy continued to shrink in the third quarter.

    Italian Unemployment Rate Held at 10.7% in July on RecessionItaly’s jobless rate held at a seasonally-adjusted 10.7 percent in July as employers remain reluctant to hire amid a deepening recession.  June’s reading was revised to 10.7 percent from 10.8 percent, Rome-based national statistics office Istat said in a preliminary report today. Economists forecast an increase to 10.9 percent in July, the median of eight estimates in a Bloomberg News survey showed.  Italy’s economy contracted for a fourth straight quarter in the three months through June as Prime Minister Mario Monti’s policies contributed to deepening the fourth recession since 2001.  The young have been particularly hard hit, with joblessness among people aged 15 to 24 at 35.3 percent in July, Istat said.

    Greece pleads for debt extension - Antonis Samaras, Greece's prime minister, has embarked on a diplomatic push to earn his nation more time to complete reforms and retain access to bailout loans, but a top European official said that any decision will depend on a report by international debt inspectors next month. Jean-Claude Juncker, who chairs meetings of eurozone finance ministers and is also Luxembourg's prime minister, insisted on Wednesday that Greece must remain within the euro. Its exit from the currency used by 17 European Union countries would hurt both the country and the wider continent. "I'm totally opposed to the exit of Greece from the eurozone," he said after a meeting in Athens with Samaras and Finance Minister Yannis Stournaras. The meeting is the first of several Samaras will hold this week with European leaders to press the case for granting Athens more time to complete its reforms.

    Spain creates bad bank, injects funds in Bankia (Reuters) - Spain overhauled its banks for the fifth time in three years on Friday in order to secure up to 100 billion euros ($125 billion) in European aid, and injected emergency funds into its biggest problem bank, Bankia. Spain's banks are saddled with 184 billion euros in bad loans and repossessed buildings four years into a property market crash and are in urgent need of rescue because most are cut off from funding other than from the European Central Bank. The government created a so-called bad bank to take over tens of billions of euros in defaulted loans and unsaleable property to meet the conditions of the European rescue of the financial sector, Economy Minister Luis de Guindos said. Spanish banks' difficulties are at the heart of the euro zone debt crisis, but the rescue has not cleared up doubts about the sector and Spain is under pressure to ask for a full sovereign bailout like Greece or Portugal. The bad bank will begin operating in late November or early December and will exist for between 10 and 15 years, during which time it is intended to be profitable so that Spanish taxpayers do not bear the burden of the bank rescue operation.

    Spain's Budget Deficit Already Exceeds Maximum for Entire Year; Path of Convergence - Spanish unemployment rate is 25% and rising. Youth unemployment is 52.9% and rising. Meanwhile Spanish budget deficits are such that Spain will need more austerity. I keep wondering what it will take for this setup to blow sky high in riots. Via Google Translate from Libre Mercado central government deficit already exceeds the maximum provided for the year The central government posted a deficit of EUR 48,517,000 through July in terms of national accounts, the 4.62% of GDP, representing an increase of 25.8% compared to last year, according to data provided by the Secretary of State Budgets, Marta Fernandez Currás. The deficit figure exceeds the new limit has assumed the state, which has risen to a point, to 4.5%, for the extra year he gave Brussels to Spain to reduce the deficit to 3%. The deficit through July was a result of payments stood at 100.694 million euros, up 9.8%, while revenues totaled 52.177 million euros, representing a fall of 1.8%. On a comparable basis, net of transfers to regional governments and social security, among other authorities, the deficit stood at 4.12% of GDP.

    How to Prevent Euro Zone Contagion - Preventing the financial turmoil in one country from spreading to others — a process called contagion — requires different measures in the euro zone than in other regions, finds Kristin Forbes, an economics professor at Massachusetts Institute of Technology‘s Sloan School of Management, in a paper to be presented at the conference on Friday. Because the 17 countries in the euro zone share a currency and a central bank, they can’t individually adjust to shocks outside their borders through currency devaluation or monetary policy. That makes it more important for euro-zone countries to maintain flexible economies that can adjust quickly, she writes. That also may provide a little more justification for taking policy actions to help stop a chain of bad events that could unleash widespread damage, she writes. European leaders have been arguing for many years over what to do to stop the spread of rising government bond yields, capital flight, bank losses and other financial problems through the region.  The international ties of euro-zone banks backed by national governments that can’t act as lenders of last resort create the risk of bank runs. The best way to reduce this risk is likely a system of bank deposit insurance, combined with appropriate regulations and supervision, according to the paper.

    Germany Is Cornered - Several recent releases of data bring the problem into focus; a sharp focus. With Ms. Merkel in China trying to buoy the European position China announced that exports to the European Union declined 16.2% in July with sales to Italy falling off the cliff; down 35.8%. These are not small variations or figures just slightly off the consensus opinion but disastrous numbers that clearly indicate the deepening recession that is taking place on the Continent and there will be quite serious consequences that come from a fall-off of this magnitude. This morning the Consumer Sentiment numbers were released for Europe and the number was 86.1 down from 87.9 in July and far worse than the median forecast of 87.5 and the worst number, in fact, since August 2009. In Germany, once thought to be almost invincible and somehow outside the recession that is raging in Europe, the crisis is just beginning but it has commenced and it is clearly indicated by the newest data which shows that Germany has begun the descent down the rabbit hole with the rest of its brethren.

    Merkel asks Italy to delay bailout request: report -- German Chancellor Angela Merkel has asked Italian Prime Minister Mario Monti to hold off on a request for a bailout, according to a report in Spanish daily El Mundo on Friday. Merkel reportedly made the request to Monti at their meeting in Berlin on Wednesday, and the newspaper said she would make the same request of Spanish Prime Minister Mariano Rajoy when they meet next Thursday. The efforts by Merkel are reportedly aimed at calming an internal crisis at the Bundesbank, whose central bank chief, Jens Weidmann, is strongly opposed to any action by the European Central Bank to buy Spanish or Italian government bonds. German newspaper Bild reported in its online edition on Friday that Weidmann has been considering his resignation in recent weeks.

    Policy of targeting "monetary transmission" by the ECB looks good in theory, but questions about independence remain - Here is a quick look at the concept of "monetary transmission" that has basically become the catch phrase to justify periphery bond buying by the ECB. MNI: - Joerg Asmussen [member of the ECB's Executive Board] said the ECB's new bond-buying plan will aim to improve monetary policy transmission that is severely hampered. Currently "monetary signals, like we for example set with the July interest rate cut, filter through to the real economy either unevenly or not at all."  The lack of rate transmission is clear. Portugal's rates for consumer loans for example have remained stubbornly high (discussed here). But the transmission issue is really driven by liquidity conditions that are not balanced across the Eurozone. Ambrose Evans-Pritchard discussed it back in December of last year (see discussion) as Italy's M3 showed alarming declines, while Germany's money stock increased (see discussion). And since a great deal of the lending across the Eurozone (except to some of the larger firms) is done by domestic institutions (Spanish citizens and companies tend to borrow from Spanish banks), liquidity issues of the domestic banking system translate into fewer loans and higher rates in that nation. Here is an example. Deposits at Italian banks (surprisingly) have been quite stable recently. Spain on the other hand had a run on its banks.

    Brussels pushes for wide ECB powers- The European Central Bank would be given sweeping authority over all 6,000 eurozone banks under a plan being drawn up by the European Commission, putting Brussels on a collision course with Germany and the ECB itself, which have urged a more decentralised first step towards “banking union”.The plan, agreed at a meeting this week between top aides to José Manuel Barroso, commission president, and Michel Barnier, the EU’s senior financial regulator, would strip existing national supervisors of almost all authority to shut down or restructure their countries’ failing banks, giving those powers to Frankfurt. Under the proposal, ultimate authority would pass to a new ECB “supervisory board” separate from the ECB’s existing governing council. Although its make-up is still being debated, the leading plan would create a 23-member board: a national representative from each eurozone country plus six independent members, including its chair and vice-chair. A separate board was deemed necessary to establish a firewall between the ECB’s existing monetary activities, which includes providing cheap loans to struggling banks, and its new supervisory role. Officials cautioned that the legislation was still being drafted and would not be formally unveiled by Mr Barroso until his state of the union address on September 12. To become law, it must be approved by all 27 EU heads of government; commission officials hope they will agree at an EU summit before the end of the year.

    Brussels Pushes for Another "All Powerful" Banking Committee, Headed by ECB, In Spite of Objections by ECB and Germany -  Once nannycrats grab on to an idea, they never relinquish it. Eurobonds are the perfect example.  Many other idea float around despite numerous objections in key places. Some of these ideas involve creation of more commissions and more working groups. Here is a sampling of commissions and groups that I am aware of.

    • The European Commission is headed by president José Manuel Barroso
    • The European Council is headed by president Herman Van Rompuy
    • The Euro Group is headed by president Jean-Claude Juncker
    • The European parliament president is Martin Schulz
    • Numerous other committees set policy on trade, energy, and nearly everything else under the sun.

    Barroso now wants another new commission, this one under the ECB with the task of being the "all powerful" banking supervisor.  As envisioned, Barroso's plan would would create a 23-member board: a national representative from each eurozone country plus six independent members, including its chair and vice-chair.  No doubt there will be dozens if not hundreds of staff members all intent on expanding their own power.

    Weidmann resignation report turns up heat on ECB's Draghi -(Reuters) - German central bank chief Jens Weidmann's reported threat to resign has piled pressure on European Central Bank President Mario Draghi to mollify opposition to a new bond-buying plan without tying it up in so many knots it is rendered ineffective. Weidmann, at a central bank symposium in Jackson Hole, Wyoming, refused to comment on a report in the mass circulation Bild newspaper that he had considered quitting several times in recent weeks but had been dissuaded by the German government. He has made no secret of his displeasure with the strategy to lower Italian and Spanish borrowing costs by buying bonds. Stepping up the pressure to attach conditions to the plan, fellow German ECB policymaker Joerg Asmussen said late on Thursday the ECB should only purchase sovereign bonds if the International Monetary Fund was involved in setting the economic reform programmes demanded in return.

    Socialists Ride Wave of Anti-EU Sentiment - Emile Roemer, 50, is standing in front of the large banner of his Socialist Party.  According to the polls, the former elementary school teacher could become the next prime minister of the Netherlands. If the election were a reflection of how much people trust public figures, the Socialist leader would already have won. His popularity ratings place him in third place, just behind Queen Beatrix and a pop singer, and ahead of all other politicians. The polls show that the Socialists will likely double their seats and defeat Prime Minister Mark Rutte's conservative-liberal People's Party for Freedom and Democracy (VVD). Roemer owes this popularity to his skepticism about Europe. "Having even more Brussels is not the solution to Europe's crisis," he says. The Socialist rails against the European Commission's austerity targets, under which the Netherlands is supposed to reduce its budget deficit to below the Maastricht Treaty ceiling of 3 percent of GDP by next year. "Over my dead body," says Roemer, referring to the possibility of penalties being imposed by the European Commission.Too much power has been placed into the hands of uncontrollable technocrats, Roemer claims. "The economic policy Brussels wants to dictate to us is downright antisocial."

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