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

Saturday, September 15, 2012

week ending Sept 15

Fed balance sheet grows in latest week (Reuters) - The U.S. Federal Reserve's balance sheet grew marginally on the week with increased Treasury securities holdings, Fed data released on Thursday showed. The Fed's balance sheet stood at $2.806 trillion on September 12, up from $2.804 trillion on September 5.The Fed's holdings of Treasuries totaled $1.651 trillion as of Wednesday versus $1.649 trillion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $135 million a day during the week compared with a $151 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 $843.73 billion versus $843.71 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.

FRB: H.4.1 Release--Factors Affecting Reserve Balances ... Release Date: September 13, 2012

UBS: Bernanke Will Unleash QE3 This Week - QE3? You bet. More and more market prognosticators are calling for the Fed to unveil a third round of quantitative easing this week UBS is the latest to join the fray, predicting the Fed will announce something big on Thursday following its policy meeting. “We now anticipate an announcement of another round of quantitative easing at the FOMC meeting on Sept. 13,” UBS economists wrote in a note to clients. The QE3 parameters will likely entail a six-month program of at least $500 billion, primarily focused on buying Treasurys, UBS predicts, while also anticipating the Fed will extend its ultra-low rate guidance into 2015. UBS joins a growing chorus of investors who are anticipating less talk and more action from the Fed after its two-day meeting this week, which ends on Thursday with a statement and press conference from Fed Chairman Ben Bernanke. J.P. Morgan economists have said the debate surrounding more Fed action ended on Friday following the weak jobs report. They expect a new round of asset purchases will be announced. Economists at Goldman Sachs GS -1.26%predict the probability is “now above 50%” that the Fed will unveil QE3 Barclays said the chances of QE have increased, although they stopped short of saying it was a done deal, saying it remains “a close call.”

Bernanke Options to Boost Growth Include Open-Ended QE - Federal Reserve Chairman Ben S. Bernanke, who last month defended his unorthodox monetary policies, has a new tool at hand should he seek one to a revive a flagging economy and labor market: open-ended bond buying. Barclays Plc forecasts the Federal Open Market Committee this week will announce monthly purchases of $50 billion to cut the jobless rate while holding inflation at 2 percent. Economists at Goldman Sachs Group Inc. (GS) and BNP Paribas, responding to last week’s report of slowing job growth, also say they expect an announcement of an open-ended plan on Sept. 13 after a two-day FOMC meeting. The Fed’s practice of specifying an amount and an end-date for purchases has resulted in abrupt withdrawals of stimulus that later was renewed after the central bank failed to reach its goals. By contrast, an open-ended program would tie purchases to a sustained improvement in the economy, said Michael Gapen, senior U.S. economist at Barclays and a former member of the Fed Board’s Division of Monetary Affairs.

Fed Stuck at Zero Into 2015 Seen in Swaps, QE Odds Reach 99% - Just six months ago, money market traders expected the Federal Reserve to raise interest rates by the end of 2013. Now, they see borrowing costs staying at record lows for about three more years as the economic outlook worsens.  Bond market measures from overnight index swaps, which indicate no increase in the federal funds rate until mid-2015, to a 62 percent decline in a measure of volatility in government bonds signal that rates will stay near zero for longer. The gap between two- and five-year Treasury yields, which decreases when traders expect benchmark rates to remain subdued, is more than 50 percent narrower than its average since 2008.  Investor expectations for sluggish growth and low inflation remain intact even though the collapse of Lehman Brothers Holdings Inc., which triggered the worst financial crisis since the Great Depression, happened four years ago. While the economy expanded in the second quarter, the unemployment rate remained above 8 percent for the 43rd-straight month in August.  “The problems have been bigger than anticipated and it will take a while to work our way through these issues,”

    Two Days Ahead Of More QE, JPM Finds That World Is Already "Drowning In Liquidity" - A few days ago, the BOE's Andy Haldane, rightfully, lamented that the apparent "solution" to the exponentially growing level of complexity in the financial system is more complexity. Alas, there was little discussion on the far more relevant central planning concept of fixing debt with even more debt, especially as the US just crossed $16 trillion in public debt last week, right on schedule, and as we pointed out over the weekend, there has been precisely zero global deleveraging during the so-called austerity phase. But perhaps most troubling is that with 2 days to go to what JPM says 77% of investors expect with be a NEW QE round (mostly MBS) between $200 and $500 billion in QE, the world is, also in the words of JP Morgan, drowning in liquidity. In other words, according to the central planners, not only is debt the fix to record debt, but liquidity is about to be unleashed on a world that is, you guessed it, already drowning in liquidity. The bad news: everything being tried now will fail, as it did before, because nothing has changed, except for the scale, meaning the blow up will be all that more spectacular.

    Global economy: Not so different this time - These are uneasy times in central banking. The big beasts of the profession who met this month in Jackson Hole, Wyoming, were once the ultimate masters of the universe. Now they are nagged by self-doubt. Four years on from the worst moment in the financial crisis, unemployment remains high across the developed world and the global economy is losing momentum. Risks from the eurozone and US fiscal policy loom large. After the European Central Bank’s decision to counter speculation of a euro break-up by proposing to buy short-dated government bonds in peripheral European countries, the US Federal Reserve must this week decide how best to help an economy its chairman described as “far from satisfactory”. Yet the deeper central bankers delve to solve the developed economies’ woes, the more some in the profession fret. “I am a little – maybe more than a little bit – worried about the future of central banking,” said James Bullard, president of the Federal Reserve Bank of St Louis. “We’ve constantly felt that there would be light at the end of the tunnel and there’d be an opportunity to normalise but it’s not really happening so far.”The biggest worry on display at Jackson Hole was whether these bureaucrats, sitting at the heart of every mature economy, still have the power to influence demand now that interest rates cannot fall much further. Lurking behind many debates was this question: if central bank policies are so effective, why is the global economy not growing faster?

    Central bank money machines fail to spur global economy - Economics 101 says a massive dose of easy money is supposed to be a reliable cure for a sluggish economy. For the first time in decades, the prescription isn’t working, to the rising frustration of central bankers in the U.S. and Europe. Four years and more than $2 trillion after the Federal Reserve opened the money spigots following the financial collapse of 2008, the U.S. economy remains stuck in the mud. Fed Chairman Ben Bernanke, in a widely-watched speech last month in Jackson Hole, Wyo., defended the central bank’s past decisions to churn out record-breaking volumes of cash -- a process known as “quantitative easing” -- saying the policy had prevented a much more painful recession. Bernanke also left little doubt that more money may be coming, as early as this week’s regular Fed policy meeting.   Maintaining steady job growth is half of the Fed’s so-called “dual mandate,” the other being inflation control. Based on Friday's monthly jobs report, showing fewer than 100,000 new hires in August, the Fed has a lot more work to do.

    Another Ex-Fed Governor Admits "Only So Much Fed Can Do" -- It seems the ability to admit defeat a lack of omnipotence comes with retirement from the Fed. The volume of truthiness from ex-Fed governors is growing and Mark Olson just provided a very succinct summary of why he believes not only is the most recent jobs number not a surprise to the Fed, but the market has already priced in what the Fed could do. Olson sees the odds of QE3 as 50-50 at best, believes changes in the employment picture are rounding errors and not driving Fed decisions on a tick by tick basis, and most critically he notes that "the Fed doesn't want to get into a position of is having to react because of the market anticipation." No matter how much political pressure, the need to keep that QE powder dry for when the stuff really hits the fan seems more prescient and Olson provides color on the limits of Central Bankers as he notes the effect of Fed actions as "the only possible impact it would have would be psychological," and that "they've provided all the stimulus you can do with monetary policy in the absence of anything happening with a better fiscal policy."

    Is QE3 justified? Comparing current conditions with 2010  - As the financial markets widely anticipate an aggressive easing action from the Fed (to be announced on 9/13), it is once again worth making a comparison between the conditions that lead to QE2 in 2010 and the current financial/economic conditions. The goal is to focus on the factors that central bank asset purchases can actually impact as opposed to those that the FOMC wishes to influence. Here they are:
    1. Central bank balance sheet expansion can reduce financial stress in the system (similar to what happened in 2008). Here we compare the Westpac US Financial Stress Index as well as the VIX index for the the past couple of months with the same period in 2010. The current period basically has no financial stress at all (the more negative number for the stress index indicates lower stress).
    2. Quantitative easing can also lower rates (both consumer and corporate) via fixed income asset purchases. The long-term treasury rates are already negative when adjusted for inflation expectations (see post) which wasn't the case in 2010. Both mortgage rates and corporate HY bond yields are near their historic lows. It's not clear if the Fed can push these rates much lower, and even if it could, we may be at the point of diminishing returns.

    3. By increasing bank reserves the Fed could encourage more bank lending. Here is an updated chart on US bank lending now and in 2010 during the same period. Many US banks are already near their limit with respect to how fast they can execute due diligence and close on loans. Adding reserves is not going to make them move any faster (unless credit officers are asked to take on more risk than banks are comfortable with - and we all know how that movie ends.)
    4. Quantitative easing will also increase prices of "risk" assets, particularly if valuations are near distressed levels. Both equity and commodity prices are already appreciably higher than in 2010. That has increased consumer net worth, yet has had little impact on consumer sentiment (see discussion).

    Fed to launch QE3 of $40 billion MBS each month -- By an 11-to-1 vote, the Federal Reserve on Thursday decided to launch a new program of open-ended bond purchases -- so-called QE3 -- saying it will buy $40 billion of agency mortgage-backed securities each month, starting Friday. It's also keeping in place so-called Operation Twist, which consists of swapping short-dated securities for longer-term securities, as well as reinvesting the proceeds of maturing securities, so the central bank will be adding $85 billion of long-term securities each month through the end of the year. The Fed also extended its pledge to keep interest rates exceptionally low -- Fed funds rates are currently targeted at a rate between 0% and 0.25% -- from late 2014 to "at least through mid-2015." The Fed said it's acting "to support a stronger economic recovery" and expects the new program to put downward pressure on longer-term interest rates, support mortgage markets and help make financial conditions more accommodative. Richmond Fed President Jeffrey Lacker, the only dissent, opposed both the asset purchases and the description of the time period will remain exceptionally low.

    Fed Statement Following September Meeting - The following is the full text of the statement following the Federal Reserve's September policy-setting meeting.

    FOMC Statement: QE3 $40 Billion per Month, Extend Guidance to mid-2015 -- FOMC Statement: To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

    Fed to Purchase $40 Billion Per Month in Bonds Until Job Market Improves - The Federal Reserve says it will spend $40 billion a month to buy mortgage-backed securities for long as necessary to stimulate the still-weak economy and reduce high unemployment. It also extended a plan to keep short-term interest rates at record lows through mid-2015. And it said it’s ready to take other steps to boost the economy even after it strengthens. The Fed announced the series of bold steps after its two-day policy meeting ended Thursday. Its actions pointed to how sluggish the economy remains more than three years after the Great Recession ended. “We’re not sure what the economic effects of this program will be – it should help growth and employment on the margin,” The dollar dropped against major currencies, and the price of gold shot up about $16 an ounce, roughly 1 percent, to $1,750. “If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability,” the Fed said in a statement released after the meeting. The statement was approved on an 11-1 vote. The lone dissenter was Richmond Fed President Jeffrey Lacker, who worries about igniting inflation.

    The Fed Announces Additional Easing - The Federal Reserve's announcement today of an additional round of quantitative easing of $40 billion per month along with an extension of its guidance on interest rates - it now says rates will stay low through mid 2015 instead of the end of 2014 - validated widely held expectations that the Fed would provide more monetary stimulus in an effort to hasten the recovery.  The additional Fed easing, along with its intention to continue reinvesting the proceeds from principal payments from its holdings of financial assets, will increase the Fed's inventory of securities by approximately "$85 billion each month through the end of the year." These actions, which are more aggressive than many analysts expected, "should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative." The Fed's decision to provide further accommodation breaks the gridlock within the Fed's monetary policy committee resulting from disagreement about the costs and benefits of further action. One faction has argued that structural impediments in the economy limit the ability of the Fed to stimulate employment. This group believes the main consequence of further easing will be inflation, and hence the costs of further easing are larger than the benefits. In fact, some within this group would prefer to reverse existing policy. The other faction believes the inflation fears are overblown, and there is plenty the Fed can and should do to help with the unemployment problem.

    Something new - THE Federal Open Market Committee just released its latest policy statement after concluding a two-day meeting. We will have detailed coverage of the new steps after Chairman Bernanke's press conference this afternoon. For now, however, it is enough to say that for once the Fed seems to have surprised to the more aggressive side. It announced a new programme of ongoing asset purchases of $40 billion per month, targeted, notably, at mortgage-backed securities. It also extended its guidance on when rates are likely to rise to mid-2015. I think this bit may be the most important part of the statement, however: If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. That is striking new piece of language that would seem to elevate the importance of employment growth in the Fed's calculations. It also looks like a step toward the framework Chicago Fed President Charles Evans has advocated, in which the Fed would continue easing until unemployment fell below 7% or inflation rose to 3%. Markets are left to wonder just how far north of the target counts as "a context of price stability". It could be something more modest than 3%. Presumably, Mr Bernanke will provide hints on this in the months to come so as to prepare markets for when to expect an end to the new purchases. For now, this looks like enough to push the economy back toward the pace it managed early this year, and it potentially provides a framework through which the trajectory of the recovery could shift up.

    Fed Pledges Action Until Economy Shows Gains - The Federal Reserve opened a new chapter on Thursday in its efforts to stimulate the economy, announcing simply that it plans to buy mortgage bonds, and potentially other assets, until unemployment declines substantially.The Fed said that it would expand its holdings of mortgage-backed securities and potentially take other steps to encourage borrowing and financial risk-taking. But perhaps more significant was the basic change in its approach: For the first time, the Fed pledged to act until the economy improved, rather than creating another program with a fixed endpoint. In announcing the new policy, the Fed sought to make clear that its decision reflected not only an increased concern about the health of the economy, but an increased determination to respond – in effect, an acknowledgment that its approach until now had been flawed.The Fed also acknowledged its limits. “Monetary policy, particularly in the current circumstances, cannot cure all economic ills,” the Fed chairman, Ben S. Bernanke, said at a news conference. The Fed’s policy-making committee said in a statement that its efforts would continue for “a considerable time after the economic recovery strengthens.” Specifically, it said it would act until the outlook for the labor market improved “substantially,” although it did not offer a numerical target.

    The power of positive thinking - Earlier this year, the Federal Reserve reached a crossroads. It had lowered short-term interest rates to zero and promised to keep them there until 2013, and then 2014. It had undertaken multiple rounds of bond purchases to lower long-term interest rates. Yet the recovery was actually losing steam; unemployment had stopped falling. Was there anything left to try? The answer, it turns out, is yes. The Fed made one of its most consequential announcements yet today. The detailed actions were, in themselves, similar to previous steps: it will buy $40 billion of mortgage backed securities per month, and extend the period of short-term rates near zero until at least mid-2015. But the game changer was what it said: it will keep buying bonds until, and beyond, when the recovery is firmly established. Specifically, the Federal Open Market Committee said in its statement: If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability… [A] highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.

    A Look Inside the Fed’s Balance Sheet - The Federal Reserve‘s declaration of a new bond-buying program will begin bulking back of a balance sheet that has been basically flat for more than a year. Assets on the Fed’s balance sheet sit at around $2.8 trillion as of Wednesday. The level has held pretty stable since June 2011, when the central bank ended its previous bond-buying program, commonly known as QE2. The central bank has been engaged in a program known as Operation Twist since September of last year. The action shifts the Fed’s holdings into longer-dated government bonds without substantially increasing the size of the balance sheet. But the new program will send the size of the balance sheet climbing again. The balance sheet is up from less than $1 trillion prior to the recession. During the downturn the Fed expanded its balance sheet through several programs aimed at keeping markets functioning. As markets stabilized the Fed shifted out of emergency programs and into purchases of U.S. Treasurys, mortgage-backed securities and agency debt securities to drive down interest rates and encourage more borrowing and growth in two separate rounds of what is known as quantitative easing. The new program announced Thursday will start bulking up the holdings of MBS. Click for full-size interactive graphic.

    Fed Pushes Out Rate-Hike Expectations, Lowers 2012 Growth View - Federal Reserve policy makers pushed out expectations of the first hike in short-term rates, and lowered their expectations for growth this year in quarterly forecasts released Thursday. Most central bankers predict that the first interest-rate hike for the Fed will occur in 2015, with 12 of 19 officials preferring 2015 as the time to start tightening policy. One central banker expected the Fed to first raise rates in 2016, and one saw the first rate hike happening this year. When rates do rise, most central bankers don’t see much in the way of substantial increases, with 10 of the 19 expecting what is now a 0% overnight target rate to be at 1% or lower in 2015.

    Fed All In for as Long as It Takes - Children will have been born, grown old enough to shuffle off to school and likely learned to read, all the while probably knowing nothing but an extraordinarily accommodative monetary policy authored by the Federal Reserve. Okay, those children are more likely to start their reading with Dr. Seuss than the statements of the regular meetings of the policy setting Federal Open Market Committee, but when they get around to the Fed minutes they will find something remarkable. In the midst of a financial crisis, the Fed lowered the federal funds rate, which anchors other short-term rates, to a range of zero to 25 basis points. That was December 2008. Today, the Fed said “exceptionally low levels” of the federal funds rate will likely be warranted until at least mid-2015. Prior to today, the Fed was citing late 2014. If it comes to that, it will mean six-and-one-half years.

    FOMC Projections and Bernanke Press Conference - Here are the updated projections from the FOMC meeting. Below are the updated projections starting with when participants project the initial increase in the target federal funds rate should occur, and the participants view of the appropriate path of the federal funds rate. I've included the chart from the June meeting to show the change. "The shaded bars represent the number of FOMC participants who project that the initial increase in the target federal funds rate (from its current range of 0 to ¼ percent) would appropriately occur in the specified calendar year."  Here is the June chart for comparison. There was a clear shift to 2015. Another key is very few participants think the FOMC should raise rates before 2015. "The dots represent individual policymakers’ projections of the appropriate federal funds rate target at the end of each of the next several years and in the longer run. Each dot in that chart represents one policymaker’s projection." Most participants still think the Fed Funds rate will be in the current range through 2014. The four tables below show the FOMC Sept meeting projections, and the June projections to show the change.

    Bernanke's Press Conference, The FOMC's Press Release and Forecasts (video, transcript)

    QE3 arrives -- It’s basically the same thing that we’re used to at this point, but it’s got enough in the way of new bells and whistles to get people excited anyway — and boost economic growth. So, it’s a good thing, even if it’s not in any way revolutionary. I’m talking about QE3, of course, although I could equally well be talking about the iPhone 5. You’ve heard more than enough already about the iPhone’s larger screen and new connector and so on and so forth, so let’s talk about monetary policy instead. The main news isn’t the fact that the Fed is back in the market, buying bonds. Indeed, as Binyamin Appelbaum points out, QE3 in volume terms, at $40 billion per month, is significantly smaller than QE1 and QE2. The innovation comes rather in the messaging. For instance, we haven’t seen anything like this before: If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. What this means is that QE3, unlike QE1 and QE2, has no set expiry date. The Fed’s not trying to kick-start the economy any more: instead, it’s promising a steady extra flow of monetary fuel for the foreseeable future — or at least until the labor market improves “substantially”. Which is likely to be a pretty long time. That would be a big enough deal on its own, but the Fed went even further in the following paragraph, where they all but promised zero interest rates until mid-2015:

    Analysis: Bernanke Delivered - The FOMC delivered everything I expected - and more. This was a very strong move and I suspect many analysts are underestimating the potential positive impact on the economy. However, as Fed Chairman said, monetary policy is "not a panacea". I do think this will help, but this will not solve the unemployment problem. Here are a few key points:
    • Forward guidance is a critical part of Fed policy (see Michael Woodford's paper presented at Jackson Hole). The FOMC didn't go as far as targeting nominal GDP, but they took two key steps today: 1) they extended the forward guidance until mid-2015, and 2) the FOMC made it clear that "a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens". "AFTER the economic recovery strengthens" is key.
    • This easing was not based on new economic weakness. From the FOMC statement: "economic activity has continued to expand at a moderate pace in recent months". This easing was intended to help increase the pace of recovery.
    • Another key change was the FOMC tied this easing directly to the labor market: "If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability."
    • I think this will be more effective than most analysts expect. As I noted last weekend, housing is usually a key transmission channel for monetary policy, and now that residential investment has started to recover - and house price have stabilized, or even started to increase, this channel will probably become more effective.

    A Step in the Right Direction - The FOMC adopted open-ended QE today: To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.... If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. This is long-overdue and much needed. The efficacy, however, of this open-ended QE would be far more effective in shaping expectations had it been tied to an explicit target.  Doing so would also make the Fed more accountable for its actions.   Still, conditioning QE explicitly on the state of the economy is a vast improvement over past QEs. It also opens the door for eventually tying monetary policy to a NGDP level target.  One step closer to the goal Market Monetarists have been calling for since 2009.   Michael Woodford and Scott Sumner reach a similar conclusion about the FOMC's decisions today.  See Joe Weisenthal for a good summary of the days events, including coverage of Chairman Bernanke's press conference.

    QE3: The Fed's New Stimulus Is a Monster, but How Will It Help the Economy? - To be fair, it's been his turn for a long time. The Federal Reserve has a dual mandate to keep both inflation and unemployment low. But unemployment hasn't fallen under 8% in Obama's term and inflation is nowhere to be seen. And so, two years after announcing a second round of quantitative easing, or QE, to help the economy, the Fed chair did something really, truly big. He announced stimulus without limit. The best way to understand the move is to think of QE as medicine. In 2010, Bernanke handed the economy a short-term order of pills. In 2012, he offered an unlimited prescription. Two years ago, he pledged quantitative easing with the hope that unemployment would improve. In 2012, he promised to buy bonds "until such time" as unemployment and the economy improve "substantially." "Even when the unemployment rate begins to come down decisively, we're not going to rush to remove policy," Bernanke said at a press conference later today. "We're going to give it time."

    A New Round Of Fed Stimulus & The New Abnormal - Yesterday's announcement by the Federal Reserve that it will embark on a new and open-ended bond-buying program until job growth is stronger has many implications for the markets and the economy. One is deciding what the latest chapter in monetary stimulus means for the new abnormal. That's my phrase for the unusually high positive correlation between changes in the stock market and inflation expectations, as defined by the 10-year Treasury’s yield less its inflation-indexed counterpart. Higher inflation doesn’t normally correlate tightly with equity buying, but the standard relationship was turned on its head after the financial crisis in late-2008 and the Great Recession. The positive link between the market’s inflation outlook and the stock market is abnormal in the grand scheme of history, but it rolls until the economy returns to something approximating a “normal” state. At some point, the new abnormal will die an ignominious death, but there's no sign in the latest numbers that mortality is near. As the chart below shows, the stock market (S&P 500) and inflation expectations have taken wing lately, moving in virtual lockstep once more. The S&P has again risen above 1400 in recent weeks and the market's outlook for inflation has climbed to 2.47% as of yesterday, based on the yield spread between the nominal and inflation-indexed 10-year Treasury notes.

    The Fed’s QE3: No Exit - Yves Smith - The Fed’s launch of QE3 looks more than a tad desperate. If you believe the central premise of the Fed’s action, that propping up asset price gains would have enough effect on consumptions to lift the economy out of stall speed, it would seem logical to sit back a bit and let the recent stock market rally and the (supposed) housing market recovery do their trick. But the Fed has finally taken note of the worsening state of the job creation in an already lousy employment market and has decided it needed to Do Something More.  So the Fed is going to push the housing button harder, with $40 billion a month of mortgage backed securities purchases, along with a continuation of Operation Twist. This is less aggressive than past turns on the QE spigot; Ambrose Evans-Pritchard called it “calibrated”. The central bank depicted the commitment as open ended, but since it also promised to keep rates super low “at least through mid-2015,” Mr. Market expects the QE tap to remain on at least that long. But the elephant in the room is what, if anything, these measures will achieve in terms of real economy impact. “Let them eat stocks and housing” has not been terribly successful. Even with super low rates, it has also taken massive sequestering of inventories for the housing market to have the appearance of stabilizing. We have low household formation due to young adults facing high unemployment, low paying jobs with generally short job tenures, and heavy student debt burdens. On top of that, we have generational headwinds as boomers hit retirement age and want or need to downsize. Keeping money on sale is not going to induce banks to lend more if they can’t find enough qualified borrowers. And the consumer deleveraging story is not as positive as the statistics would lead you to believe. A lot of it is involuntary, meaning driven by foreclosures. In addition, retirees also curtail their spending thanks to the fall in interest income they’ve suffered under ZIRP.  But another big issue is that the Fed looks to have painted itself in a corner. Is the US going to have 3.5% mortgage interest rates forever? If the central banks does manage to create a bit more inflation, how does it think it will exit?

    Counterparties: The Fed’s bottomless punch bowl - The Federal Reserve today announced a third round of monetary stimulus, aka QE3, aimed rather directly at the housing market: the Fed will buy $40 billion of mortgage-backed securities a month indefinitely. The Fed wants to lower yields on mortgage-backed securities and thereby lower mortgage rates for consumers. This is pretty darn close to “Uncle Ben’s Crazy Housing Sale” that Ezra Klein called for back in July. As the NYT’s Binyamin Appelbaum notes, QE3 has an open-ended timeline and variable targets: the Fed will buy mortgage-backed securities “until the outlook for the labor market improves”. For a close look at exactly what changed since the last Fed statement, the WSJ’s Phil Izzo has the tracked changes, which are significant. The Fed says that its “highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens”. This, as Felix notes, is a big departure: The job of monetary policy, in the famous words of Fed chairman William McChesney Martin, is “to take away the punch bowl just as the party gets going”. The Fed, here, is essentially disowning Martin, and saying that they’ll keep refilling that punch bowl with high-grade hooch even after the party is getting going.

    Michael Woodford On The Federal Reserve - Michael Woodford, the world's top monetary policy economist, who presented an influential paper at Jackson Hole two weeks ago on how the Fed should target nominal GDP, gives us his take on the Fed's move towards unlimited QEThe FOMC's statement marks a step beyond recent approaches to providing policy stimulus, in two important respects. First, the Committee more clearly links the duration of its accommodative policies --- both continued lower overnight interest rates, and continuing asset purchases --- to the degree of improvement in the economy, and not just to a calendar date. They are still not as explicit about the conditions that will justify policy normalization as I would have recommended, but this is nonetheless an important and useful step, which should be more effective in increasing confidence that the economy will recover. Second, the additional asset purchases announced today consist entirely of agency MBS purchases, rather than long-term Treasury securities as under the Fed's last two programs. This type of purchases is more likely to be controversial on political grounds, but is also more likely to influence the costs of private borrowing, and so likely to have a more direct effect on the economy.

    Federal Reserve announces steps to jolt economy - Citing concerns about a moribund labor market, the Federal Reserve announced new steps on Thursday to jolt the sluggish economy, hoping that it can spark new hiring by expanding a controversial effort to purchase mortgage bonds.  In a statement ahead of a planned news conference by Federal Reserve Chairman Ben Bernanke, the Fed said it would expand the ongoing programs to purchase mortgage bonds, a process called quantitative easing, by $40 billion a month through year’s end.  The Fed also will continue through at least year’s end its previously announced efforts to extend the average maturity of the securities it holds, swapping out short-term debt for longer-term debt in hopes of pushing down the lending rates for consumers looking to purchase homes, condos or automobiles. It also will reinvest proceeds from debt that matures, meaning that the combined efforts will add about $85 billion a month for the rest of the year to the Fed’s balance sheet.  Importantly, the Fed left these efforts open-ended, leaving open the possibility that they would continue well into next year or beyond. “The

    Shamanistic Economics - The Fed announced a new program of open-ended quantitative easing, and it announced that it likely won’t pull back on the new round of monthly asset purchases once the economy begins to recover more strongly, but will keep the purchases going for some indefinite period of time afterward.  After what exactly was left unsaid.  The Fed apparently has a target it intends to overshoot, but hasn’t said exactly what the target is.   This announcement has greatly pleased all of those people who have been calling for the Fed to do something.  Critics of Ben Bernanke have been deeply frustrated by the terrible lack of somethings emanating from the Fed.   If only something would be done, the economy would grow and jobs would come back.  The economy has been suffering from a something deficit!  Where is the doing that needs to be done? Well something has now been done.  Hallelujah.  And many of Bernanke’s critics appear to have undergone a religious experience as a result.  Bernanke has been transfigured in their eyes from diffident nebbish into brave something-doer: an explorer of uncharted monetary territory boldly doing where no Fed has done before.  So the doing has been done – and it’s really something, isn’t it?  Yet when one reads accounts of how these asset purchases are supposed to accomplish their aim of generating a stronger recovery, one gets a lot of conflicting theories.  It’s almost as though the mere doing of something – anything – is thought to be more important than the actual nature of the something that is done. 

    Fed Responds to a Grim Reality - When the Federal Reserve’s vice chairman said in a 1994 speech that the central bank “had a role in reducing unemployment,” colleagues were publicly dismissive. The very word “employment” did not appear in a policy statement until 2008. The Fed was focused on inflation, officials said time and again.  That era is over. The signs have been there for some time, but they are now unmistakable. Ben S. Bernanke, the Fed’s chairman, made clear on Thursday that job creation is its primary concern for the foreseeable future.  The remarkable transformation of the Fed’s priorities is partly a response to the grim reality that more than 20 million Americans cannot find full-time jobs. It is made easier by the fact that the Fed has been so successful in stabilizing inflation right around the 2 percent annual pace that officials consider most healthy.  But as circumstances have changed, so has the Fed itself. Under the leadership of Mr. Bernanke — with considerable prodding and support from a board almost entirely appointed by President Obama — the central bank has gradually concluded that it has a responsibility to act more forcefully, and, equally important, that it has the ability to spur job creation directly.  These conclusions remain deeply controversial. Many monetary economists take the view that central banks should focus exclusively on controlling inflation, which creates an environment conducive to economic growth and job creation. Some argue that the Fed’s efforts to spur job growth by decreasing long-term borrowing costs will inevitably result in higher inflation, eventually reducing growth and employment.  And it is clear that many economic problems are beyond the reach of monetary policy.

    The Fed Moves…But Will It Help?  - That’s the question I tackle here at MSNBC’s blog.  And I’ll be on the Ed Schultz show later to discuss with the great Ez Klein. The piece elaborates on my view that while the new moves announced by the Fed–more forward guidance (we’ll keep rates really low for really long) and more bonds buys (QE3)–will help a little bit, we need more than a little bit of help.  IE, we need fiscal policy to stimulate the missing demand that will in turn give more traction to the Fed’s low interest rate agenda. Greg Ip goes into some useful details here, including this interesting graph…obviously, a lot going on in this picture, but I think it’s suggestive of the diagnosis above: the missing ingredient is more demand.

    Ben Bernanke’s Heavy Artillery: Will Open-Ended Bond Buying Drive Down Unemployment? - But it’s not like the Federal Reserve has been sitting on its hands for the past four years. In fact, this is arguably the most activist central bank regime the country has ever seen. It has kept short-term interest rates at basically zero since 2008. It has purchased trillions of dollars in U.S. government debt and mortgage-backed securities in an effort to reduce interest rates further and stimulate the housing market, the collapse of which precipitated the financial crisis. And it has even made announcements regarding its expectations of interest rates in the future, more or less promising that short-term rates would stay near zero for years to come. So what makes this program different than the previous asset purchases, which have seemingly decreased in efficacy each time around? It’s the open-ended nature of the program that supporters believe will make all the difference. The Federal Reserve derives its power from its ability to set interest rates, but that tool has been stretched to its limits in recent years. Beyond that, the Fed can affect expectations about where short- and long-term rates will be in the future. Open-ended purchases of mortgages will have the effect of lowering interest rates, helping more people qualify for mortgages or refinance. But more importantly it will — in theory — have the effect of creating an expectation of generally higher asset prices in the future, which will motivate people to get off their duffs and spend money now. If companies and individuals are indeed convinced that prices will rise in the future, that would encourage them to spend, hire, and jump-start the economy out of its chronic underperformance.

    How Quantitative Easing Works -  The Fed launched a major new bond-buying program Thursday. The following graphic outlines how the central bank expects its quantitative easing to boost the economy.

    Making Sense of QE3 - Still trying to make sense of QE3?  Michael Darda provides some great perspective on it in this Bloomberg interview:  Cardiff Garcia of the Financial Times and Greg Ip of the Economists also weigh in on the meaning of this new program.  Finally, for insights on why this program pushes U.S. monetary policy in the right direction for the long run, see piece my piece with Ramesh Ponnuru in the National Review and Scott Sumner's  article in National Affairs.  Here is why conservatives should be happy about QE3. And yes, Milton Friedman would also view QE3 as a step in the right direction.

    Ben Bernanke, Unemployment, And Self-Fulfilling Prophecies - What people think is going to happen to the economy has a huge influence over what actually happens. If you can change peoples' expectations, you can change the world. The Federal Reserve knows this. And, as Robert Smith pointed out this morning, Ben Bernanke and the Fed have been using the power of expectations more and more in recent years. This afternoon, the Fed took another huge step in this direction. The Fed just released a policy statement that is a very big deal not so much because of the specific actions the Fed announced, but because of the language the Fed used, and the expectations that language will create.The Fed announced a new plan to buy $40 billion of mortgage bonds every month. It's the third round of quantitative easing — buying long-term bonds to drive down interest rates, which is supposed to encourage people to spend money and get businesses to invest and hire workers. (Here's more on quantitative easing.) But the purchases themselves aren't what makes today's announcement so important. In fact, $40 billion a month is smaller than previous rounds of quantitative easing. In earlier rounds, though, the Fed announced at the outset how long the program would last. This time, the Fed says it will keep buying bonds until the job market gets a lot better — and that if that doesn't happen soon, the Fed will take even more action.

    Monetary and Fiscal Policy Must Work Hand in Hand - I don’t want to get too far out in front of today’s Fed announcement. It’s a marginally better change because it adds that level of commitment to purchases until the recovery bears fruit, and promises to keep rates low even afterward. These theories haven’t been tested, but it’s better than another half-hearted round of QE. But in his press conference announcing the changes, Fed Chair Ben Bernanke said that he wouldn’t engage in nominal GDP targeting, Michael Woodford’s key recommendation, because it would require credibly promising to tolerate higher inflation. This appears to defeat the purpose of the commitment actions and call into question the reality of “open-ended” purchases. More important than that, you have to question the role of monetary actions by themselves to generate an economic boost, especially at this time. Lower mortgage rates may or may not prove helpful; right now the rates aren’t leading to higher home prices as much as the constrained supply. It’s unclear whether this will promote lending or move purchases forward. What Bernanke does make clear is that fiscal policy must move in the same direction as monetary policy in order to create conditions for a sustained recovery. Discussing the fiscal cliff, which without Congressional action would raise taxes and cut spending enough to throw the US back into recession, Bernanke said “If the fiscal cliff is not addressed I don’t think our tools are enough to offset the fiscal shock.” The implication is that fiscal policy must stay accommodating in order to promote a recovery. A sharp pullback on the deficit would damage the economy.

    A Quick Note on the Fed - Paul Krugman -- So just a few points:

    • 1. It’s good to see the Fed moving, finally.
    • 2. It certainly sounds as if Bernanke is reacting to the Woodford critique, which argues that quantitative easing is mainly effective through its effect on expectations. While the policy does take the form of purchases of unconventional assets — mortgage-backed securities — Bernanke is not relying on portfolio balance effects alone; instead, he’s trying to move expectations by declaring that the Fed will continue to ease for some time after the economy has begun to recover: In effect, the Fed seems to be trying to “credibly promise to be irresponsible”, which is what I advocated way back when in this kind of situation.
    • 3. That’s all good. However, it’s kind of vague. No clear target, whether nominal GDP or some kind of inflation/unemployment mix. Put it this way: you could imagine a future Fed chairman tightening policy and still being able to claim that he had not violated any promise Bernanke made. In other words, it’s not totally clear that we really do have a shift in future policy. And since the whole point is to move expectations, leaving this kind of wiggle room is not a good thing.To paraphrase an old joke: what do you get when you cross a Godfather with a central banker? Someone who makes you an offer you can’t understand.

    Bernanke rescues the economy from the nihilism of the right - Robin Wells - Before last week, Fed watchers had predicted that Bernanke would wait until December or early 2013 to launch a new round. Some had charged that to act earlier placed the Fed's reputation at risk, appearing as if it had intervened in a partisan fashion to help a struggling incumbent president during the last two months of a brutal presidential campaign. And, indeed, stocks soared after the Fed's announcement. Yet, last week's jobs numbers were so awful – far fewer jobs created than expected in August, with many more people dropping out of the labor force, and the lowest labor force participation rate in 30 years – that Bernanke was forced to act regardless of purported appearances. More significant is the fact that in Thursday's bold move of open-ended asset purchases and a firm commitment to loose monetary policy until the economy is clearly self-sustaining, Bernanke has finally acted to satisfy his critics who have complained for over a year that he has allowed himself to be bullied into inaction by withering criticism from Republicans. The open secret of the present, post-crisis monetary state of affairs is that QE3 will have very little direct effect on the economy, just as the previous rounds of quantitative easing had very little direct effect. While the Fed needs to ensure that longer-term borrowing costs for households and businesses stay low, its billions of dollars of monetary intervention is too small to directly affect debt markets that are trillions upon trillions of dollars deep.  Out of tangible ammunition, all that Bernanke has left in his arsenal is his ability to manage expectations about the future.

    More on the Fedding - Paul Krugman - I thought I would offer a bit of clarification on my Bernanke post from last night.Here’s what I was trying to say. The Fed declared thatTo support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.This sounds like a policy change. But past policy is described pretty well by a Taylor rule relating the Fed funds rate to inflation and unemployment, like the simplified rule I estimated here. This particular estimate suggests that the Fed won’t begin tightening until “x” — the inflation rate minus the unemployment rate — rises above about -5. So if we have 2 percent inflation, this says that the Fed wouldn’t start to tighten until unemployment falls below 7 percent. Couldn’t this be described as waiting “for a considerable time after the economic recovery strengthens”? And doesn’t this mean that the Fed statement arguably said nothing?  Now, I don’t actually believe the Fed was trying to weasel its way through here; in fact, as Robin Wells says, it feels as if Bernanke has finally taken a stand. But the ambiguity of the statement really isn’t helpful here.

    How Much Does the Fed’s Plan Really Help Main Street? - One way to gauge the extent to which Main Street might benefit is to look at the interest rates ordinary people pay on their mortgages, credit cards and car loans. By some measures, the Fed’s policies have worked. Mortgage rates have fallen to multidecade lows, large corporations have had no trouble issuing bonds, the economy is growing and the private sector has been adding jobs for months now. The Fed’s largess has even helped borrowers much lower down the credit scale. Lenders are making lots of subprime auto loans right now. Some $14 billion of such loans have been packaged up into bonds and sold to investors so far this year, according to Fitch Ratings. At the rate companies are lending, the 2012 total for subprime car loans could exceed $20 billion, which would put this year on par with 2005, a boom year. But in many cases borrowers could be getting an even bigger benefit. As the Fed’s actions have pushed down some key rates, the ones that consumers borrowed at haven’t fallen anywhere near as much.The federal funds effective rate, one short-term rate that banks use to lend to each other, is at 0.14 percent. That compares with a rate of 3.62 percent in September 2005. The 10-year Treasury note has a yield of 1.87 percent, down from 4.2 percent in 2005. These are huge declines. Yet the cost of credit card loans has hardly budged. The Fed’s own data shows that average credit card interest rate was 12.06 percent earlier this year; in 2005, it was 12.45 percent.

    Nobody F**ks With The Jesus - Today "Helicopter Ben" Bernanke announced QE3, which is yet another round of quantitative easing. For you ordinary Americans, just in case you are interested, more easing means the Federal Reserve is going to buy more mortgage-backed securities. Interest rates will also be kept near zero until 2015, which guarantees that savers will be screwed punished for not spending their money until then, if not longer. In short, those in the Money World are moving your debt around. You might not care about this because your mortgage debt is otherwise unaffected. The idea is to encourage more mortgage debt by keeping interest rates artificially low. In fact, no good case can be made that QE3 will affect ordinary Americans in any significant way outside of higher food and energy prices in the short-term. Energy prices are already rising on the news. Big Bank stocks are also rising on the news. The Big Banks are the ones holding much of your mortgage debt, and some of your debt (mortgage-backed securities) will be sold to the Federal Reserve at inflated prices.

    The Punchline In His Own Words: Bernanke Advocates Blowing Asset Bubbles As The Antidote To Depression - If there was one absolutely must see moment exposing everything that is broken with the Fed's brand new policy of QE-nfinity, it was this exchange between Reuters' Pedro da Costa and the Chairman. It explains, beyond a reasonable doubt, that the only goal the Fed now has is to reflate the stock market bubble to previously unseen levels, to focus on generating jobs although not for everyone but only for Wall Street, consequences be damned, because by the time the consequences arrive, and they will (just recall that subprime is contained) they will be some other Fed chairman's problem. Bernake's term mercifully runs out in January 2014.  From the official transcript:

    Panic! - In my previous post Desperation Bazooka Tactics; Gold Soars Following Huge Headfake, I mentioned "This seems like desperation bazooka tactics. Specifically, the Fed is in a panic state over jobs." I am not the only one to come to that conclusion. Saxo Bank economist Steen Jakobsen sent out a post moments ago, FED Did Panic...... They are now doing 'open ended' bond buying - no finite time or amount...hence this will go down as QE Extreme. I remain of the view this is final phase... tonight could be the day where FED did too much. Low yield and monetary policy stopped having an impact two years ago, tonight could be the night where after the rally low rates no longer impact stock and risky asset - the only cheap asset right now is: money ...every time this has been the case in history it has ended in bubble and tears.Congratulations to Steen for predicting this outcome today. On a podcast with Chris Martenson yesterday, both of us stated the Fed would not do much this month but would at some point panic. Well, panic the Fed did, and sooner rather than later.

    QE3 And Bernanke's Folly - Part I -- Much to my surprise, and against all of what seemed logical, Bernanke launched an open-ended mortgage backed securities bond-buying program for $40 billion a month "until employment begins to show recovery." That key statement is what this entire program hinges on. The focus of the Fed has now shifted away from a concern on inflation to an all-out war on employment and ultimately the economy. However, the big question is: Will buying mortgage backed bonds promote real employment, and ultimately economic, growth? And will this program continue to support the nascent housing recovery? During the Fed's announcement today Bernanke repeated several times that the primary concern of the Fed is now employment. One of the Federal Reserves primary legal mandates is to foster full employment in the economy. However, after two previous Large Scale Asset Purchase programs (QE), and a Maturity Extension Program (Operation Twist - OT), has employment meaningfully recovered.  The chart below shows the net gains in employment since the beginning of 2009 as compared to the number of individuals that have moved into the "No Longer In Labor Force" category where they are no longer counted. There has been an increase of 3.4 million jobs since the lows of mass firings and layoffs post the last recession. That increase is far lower than would have been expected in any normal economic recovery. At the same time, however, more that 8.4 million individuals have just "given up looking for work" or "retired." during the same period. There is NO evidence that bond buying programs have any effect on fostering employment. 

    Fed's selling volatility into the market will force mispricing of risk -- Credit Suisse has made an important point with respect to the Fed's purchases of MBS. As we know, a mortgage borrower is long an option to prepay. That means a mortgage lender is short this same prepayment option. Therefore a buyer of MBS is an options seller and the Fed is in effect selling vol into the market. CS: - It is important, in our view, that the Fed continue to sell volatility – explicitly or implicitly – into the markets. This is at the heart of its quest to reduce term premiums and hence term interest rates. Buying mortgages results in a direct sale of volatility (prepayment risk) to the public. Extending the rate guidance to “mid 2015” represents an implicit sale of volatility – the Fed is giving up the option to hike (arguments about the Fed’s ability to renege notwithstanding).Of course this is quite similar to the ECB's implicit put option on periphery debt (discussed here). As we've learned the hard way from the so-called "Greenspan's put", artificially suppressing volatility creates a "moral hazard" by forcing markets (including individuals and businesses) to misprice (and learn to ignore) risk.

    Romney Calls Fed Move ‘Sugar High’ - Republican presidential candidate Mitt Romney, in his most explicit criticism of the Federal Reserve’s recent moves, on Friday said the central bank was offering the economy nothing more than a “sugar high” that would cause pain for everyone from savers to the U.S. dollar down the road. The criticisms came less than 24 hours after the central bank announced open-ended plans to buy mortgage-backed securities to try and help the jobs market. Democrats have cheered the move, though many Republicans have been highly critical. The White House, as is customary on Fed decisions, has not weighed in. Mr. Romney didn’t hold back on Friday though. “Recognize that as the Federal Reserve keeps on trying to stimulate the economy by printing more money that there’s a cost to that,” Mr. Romney said. “The value of your savings goes down. People who are living on fixed incomes don’t see much interest income any more. And the value of the dollar goes down and the risk for long-term inflation goes up. There’s real cost to these stimulative print-more-money policies. The real course ahead for America is to encourage the growth of our economy not just to go out there and print more money.”

    Did Bernanke Forget That Buying Houses For “Return” Is What Got Us Into This Mess In The First Place?  - What kills me is Bernanke’s statements in the Q&A from the press conference following the FOMC announcement today.  Now, we all know that the Fed’s mission with QE is to re-flate asset prices and generate trickle-down wealth effects and attempted real economic effects from quantitative easing – which has little/no economic impact on its own – but these housing comments are especially disturbing: “For example, the prices of homes.  To the extent that the prices of homes begin to rise, consumers will feel wealthier, they’ll begin to feel more disposed to spend.  If home prices are rising they may feel more may be more willing to buy home because they think they’ll make a better return on that purchase.  So house prices is one vehicle.” Ummm, yeah.  Wait – didn’t we JUST go through the biggest financial crisis of several generations, driven by reckless greed in the housing market and the desire for any and all parties to profit from “return” on housing?    Don’t answer that – it’s a rhetorical question – the answer is YES.   We had a massive housing bubble because people were buying homes (or leveraging their homes) for “return,” or “profit” instead of “to live in.” For now the market has a massive QErection™ , but we’re really just blowing another bubble.  Awwww f*ck it – we’ll deal with that later, right?  As former Citibank CEO Chuck Prince famously said before the housing market imploded: “As long as the music is playing you’ve got to get up and dance.” We’ll worry about reality later.  In the future… for now?  Bernanke wants you to dance.

    The One Big Problem With QE To Infinity - There is one big problem with the Fed's announcement of Open-Ended QE moments ago: it effectively removes all future suspense from FOMC announcements. Why? Because the Fed has as of this moment exposed its cards for all to see from here until the moment it has to start tightening the money supply (which may or may not happen; frankly we don't think the Fed tightens until hyperinflation sets in at which point what the Fed does is meaningless). It means easing is now effectively priced into infinity. Now rewind back to that one certain paper by the New York Fed, which laid it out clear for all to see, that if it wasn't for the expectation of easing in the 24 hour period ahead of the FOMC meeting, the market would be 50% or lower than where it is now, and would have been effectively in negative territory in the aftermath of the Lehman collapse. What Bernanke did is take away this key drive to stock upside over the past 18 years, because going forward there is no surprise factor to any and all future FOMC decisions, as easing the default assumption. It also means that Bernanke may have well fired his last bullet, and it, sadly, is all downhill from here, as soaring input costs crush margins, regardless of what revenues do, and send corporate cash flow to zero. Unfortunately, not even in the New Normal can companies operate without cash flow.

    Daddy, Where Do Jobs Come From? - In discussions about the Fed actions yesterday, it occurred to me that many of the explanations that link the Fed’s moves to stronger job growth leave out a number of steps in the middle.  It’s of course not the case that the Fed buys MBS or announces they’ll keep rates low and jobs that weren’t there before suddenly appear.  There’s a chain of events that needs to occur and there’s plenty of slip twixt the cup and the lip. With the Fed, it works through lower interest rates.  The Fed has a number of tools to lower the cost of borrowing, the idea being that this leads people to take out loans and make new investments that they wouldn’t have undertaken at higher interest rates.  And those new investments are associated with new jobs. So, a homebuyer takes advantage of a low mortgage rate, leading to jobs for homebuilders and real estate agents and furniture suppliers.  A factory owner takes advantage of low rates to replace old equipment, creating jobs for machine manufacturers.  An auto dealer invests in a redesigned show room, a buyer takes advantage of that dealer’s low rates and buys a new car there, employing designers, salespeople, and auto suppliers.And those are just the direct jobs.   The newly employed construction worker goes out for lunch near the job site, and the diner needs to add another worker (the jobs multiplier effect). Those are the links in the chain between monetary policy and jobs, but there are weak links.  Low mortgage rates won’t do much if the recession itself was a function of a housing bubble that left us with excess housing stock and deleveraging households (relatedly, with millions of homeowners underwater, the opportunity to refi into lower rates–another source of new demand–is also blocked). 

    For true stimulus, Fed should drop QE3 - Unsatisfied by the pace of the US recovery, the Federal Reserve seems set to launch a new round of quantitative easing. Well, the Fed can print all the money it wants – but it cannot dictate where it will go.  The first two rounds of quantitative easing fuelled a commodity bubble, increased income inequality and set a bad example for the rest of the world. During the 16 months of round one, up to March 2010, the CRB commodity price index rose 36 per cent, while food prices rose 20 per cent and oil prices surged 59 per cent. During round two, in the eight months up to June last year, the CRB rose 10 per cent, with food up 15 per cent, while oil prices rose a further 30 per cent. It used to be the case that easy money reliably drove up the price of stocks, but not of commodities. However, since the Fed started to ease monetary policy aggressively in late 2007, hundreds of billions of dollars have flowed into new financial products (such as exchange traded funds) that allow investors to trade commodities the way they trade stocks. Now, there is a tight link between stocks and commodities, with prices rising and falling in lockstep.  This link neuters monetary policy makers, because rising commodity prices negate the stimulative impact of looser credit. When the price of oil hits $120 a barrel, consumer spending on energy reaches 6 per cent of total worldwide income and starts to cut into spending on other goods. Oil prices breached $120 a barrel in mid-2008, mid-2010 and mid-2011, and the global economy lost momentum each time. In effect, oil prices act as interest rates used to, discouraging consumption even when the Fed is trying to encourage spending. Estimates suggest that in the US, every $10 increase in the price of oil shaves 0.3 per cent from gross domestic product and instead adds 0.3 per cent to inflation. The Fed is keen to avoid deflation and to keep inflation at 2 per cent, but if it reaches that goal by means of commodity price inflation it will be something of a pyrrhic victory.

    The Fed’s Synthetic QE Program Has Been Working Great - I was listening to Bloomberg Radio yesterday and the pros interviewed seemed to be unanimous in asserting that the Fed would do “something” because it “had to.” There have even been many cases of pundits and seers who were quoted in the mainstream media quantifying the probability of Fed action, which is absurd. This isn’t dice or coin flips. I know the FOMC as a group is delusional, but they are not stupid. With stocks at new highs, and with the Fed having seen the negative effects of the last round of QE in terms of energy, materials, and food prices, I have been of the opinion that the Fed will not do anything other than what it is already doing. It will probably continue the MBS purchases, and extend the tilted Twist by buying slightly more from the Primary Dealers than it is selling to them. That can only go on for so long however, as they are running out of short term paper to sell.The Fed will continue to talk the talk, but not walk the walk. If the players are convinced that more QE is coming they will front run it and buy stocks, which is the Fed’s desired effect. There are plenty of excess reserves that the banks and can use as a base to extend the margin to fund these speculative buys. This is called “synthetic QE,” which is when the Fed gets the effects of QE by jawboning, without actually conducting operations.At some point, it is possible that they will opt for an outright purchase program that is extremely limited in terms of size. I think that will have to wait until after the election.  But I think it’s more likely that that will not be necessary, thanks to the Fed’s jawboning and the synthetic QE effect.

    Cui Bono Fed: Who Benefits from the Federal Reserve? - Cui bono--to whose benefit?--is a skeptic's scalpel that cuts through the fat of propaganda and political expediency to the hard truth. Since the world has been trained (in Pavlovian fashion) to hang on every word issued by America's privately owned central bank, the Federal Reserve, it's appropriate to ask a simple but profound question: Who benefits from the Fed's existence and its policies of loaning "free money" to banks at 0% and ZIRP (zero interest rate policy)? The Status Quo's answer is "the American people," of course, a deliciously juicy layer of "Big Lie" propaganda and obfuscation. Any healthy political and financial system would have broken the fraud-based system and dismantled the failed banks en masse in an orderly fashion. One institution stopped this from happening: the Federal Reserve. The Fed exists to serve the banks. Everything else is propaganda. Ever-expanding debt leaves America a nation of wealthy banks and increasingly impoverished debt-serfs. Cui bono, baby.

    Woodford and QE3 - Columbia University Professor Michael Woodford's paper at the Fed's Jackson Hole conference last week made the case that more large-scale asset purchases by the Fed would by themselves do nothing, and suggested that instead what really matters is the Fed's communication of its future intentions. There's a fair bit in Woodford's analysis that I agree with. But unlike Woodford, I think that asset purchases can be an important part of what the Fed could do in the here and now. Here I explain why. Let me begin with Woodford's theoretical analysis of why large-scale asset purchases by the Fed wouldn't be expected to have any effects. The foundation of modern finance theory is the belief in what is called a pricing kernel, which one can think of as the value that the market places on getting $1 if some specified relevant future event were to occur. If investors were risk-neutral, that value would just be the probability of the event times a risk-free discount rate. With risk aversion, the value might be higher or lower than that based on how important it is to investors to have funds in that particular state of the world. Standard theory further teaches that this value ultimately is determined by the real resources that investors end up having available in that state of the world. Hence Woodford's conclusion:

    John Cochrane, Michael Woodford, and the Efficacy of Monetary Policy - Michael Woodford's speech last week has generated much discussion.1  That should not come as surprise since the speech was given at an important conference and was delivered by one of the top monetary economist in the world. While most commentators recognized the speech for what it was--a rebuke of Fed policies that have failed to reverse the shortfall in aggregate nominal expenditures and a call for a NGDP level target that would directly address it--some have misconstrued Woodford's main points.   John Cochrane, with whom I often agree on issues, is the probably the most notable one.   His recent post on the speech highlighted much of Woodford's critique of Fed policy, but failed to properly characterize the deeper reasons for his critique and endorsement of a NGDP level target. Cochrane has already received pushback on his post from Scott Sumner, Bill Woolsey, and David Glasner.  Here, I wanted to provide my own response to two of Cochrane's statements that highlight the divergence between his and Woodford's actual views on the efficacy of monetary policy at the lower bond and its ability to keep long-run inflation expectations anchored. 

    Michael Woodford’s Unjustified Skepticism on Portfolio Balance (A Seriously Wonky Rebuttal), by Joseph E. Gagnon: In his recent speech at the Federal Reserve’s annual Jackson Hole conference, Professor Michael Woodford of Columbia University attempted to pour cold water on the idea that the Fed’s purchases of long-term bonds (also known as quantitative easing) could lower bond yields.1 His contention was that the portfolio balance effect of such purchases would be minimal at best. I disagree, as do the bulk of central bankers. This debate matters because, if Woodford is right, the Fed’s only tool for delivering more stimulus now is to commit to future policy actions that may be viewed as undesirable when they occur—such as promising not to raise interest rates when inflation returns. If the market were to doubt such a commitment from the Fed, the Fed would lose its ability to steer the economy. In reality, the portfolio balance channel gives the Fed a tool to guide the economy without unduly restricting future policy choices. This is not to deny, however, that Fed statements about future policy intentions may have important effects.Woodford devotes several pages in his Jackson Hole remarks to discussing a paper I wrote two years ago with former Fed colleagues Matthew Raskin, Julie Remache, and Brian Sack. We showed that Fed purchases of long-term agency and government bonds in 2008 and 2009 lowered a range of long-term interest rates. We argued that most of those declines appeared to reflect a reduction in term premiums rather than a reduction in expected future short-term interest rates. We posited that those reductions in term premiums were required to induce investors to accept the shift in their portfolios engendered by the Fed’s purchases; this is what Nobel Laureate James Tobin and others have long referred to as the portfolio balance effect. Woodford asserts instead that most or perhaps all of the declines in bond yields might have been caused by the market’s interpretation of the Fed’s statements and actions as indicating that the path of future short-term interest rates would be lower than previously expected.

    Why This Cute Animated .Gif Is Totally Wrong About Economics - While the picture might be cute and lolzy, it's false. And by false we mean, it's a terrible metaphor for Quantitative Easing. Quantitative Easing is the Fed's approach to easing monetary policy ever since interest rates got to zero, and it couldn't lower rates anymore. Essentially the Fed goes out and purchases US Treasuries and Mortgage Backed Securities. As such, the Fed's Balance Sheet (the assets it now owns has ballooned). It looks like this. Its assets have gone from under $1 trillion to nearly $3 trillion, and for the first time, it owns lots of long term government debt and agency securities (meaning mortgage debt backed by Fannie and Freddie). But immediately you should see the problem. In the .Gif, the kid is just throwing money out the window. Nothing is coming back. On the other hand, The Fed goes out and buys securities, meaning it puts money in banks accounts, but it's also taking something back. And what it's taking back are the most liquid, cash-like securities there out there. So if the Fed buys $500 billion worth of Treasuries, it's almost a perfect swap of $500 billion in cash (kind of) for $500 billion in assets that are basically cash. This is a big deal, because if you're swapping cash for cash-like-instruments, no new money is really entering the system.

    An idea better kept in reserve - Yichuan Wang had a spectacular, wonky post trying to adjudicate a debate about interest on excess reserves that I’ve been having with David Beckworth and Dan Carrol. – I first argued that there are risks to lowering IOER that weren’t being considered by some economists who were recommending it. Specifically, such a move could create havoc in money markets that aren’t built to handle negative nominal rates, which would be a possible if not likely consequence. An unlinking of policy from effective rates, a run on money market funds, or chaos in Treasury auctions are some of the possibilities I mentioned – potential consequences of removing what is essentially a safe asset substitute from heavily collateralised short-term lending markets. Be sure to also read the incomparable Bond Girl on the role of the GSEs, the FDIC’s deposit insurance assessment, and how this would affect federal funds trading; and of course Izzy’s excellent post on delivery fails in Treasury repo markets. (I’m further worried, like Izzy, that negative nominal short-term rates in a world with a shortage of safe assets would have an unexpectedly deflationary influence.  But this suggestion might get me laughed out of some parts of the econo-blogosphere, so here let’s just stick to the problems specific to financial markets.)

    Everything You Wanted To Know About IOER -- In one epic post by Cardiff Garcia of FT Alphaville.   Let me clarify one point from Garcia's post.  He mentions my argument that the lowering of the IOER would send a signal that the Fed is committed to a permanent expansion of the monetary base.  This should not be construed to mean that lowering the IOER would create more monetary base, since that is not the case.  Rather, my argument is that it would send a signal that  some of the existing increase in the monetary base would become permanent.  Currently, long-run inflation forecasts suggest that most observers do not expect the large increase in the monetary base to be permanent. 

    Carry Trade Loss 2.8% as Dollar Fails to Weaken on Fed - Central bankers will get a lot less bang for their buck, pound, euro and yen as they struggle to stimulate flagging economies, trading strategies in the $4 trillion a day foreign-exchange market suggest.  The UBS AG V24 Carry Index, which measures returns from borrowing in lower-rate currencies to buy higher-yielding ones for so-called carry trades, has fallen 2.8 percent from a four- month high on Aug. 9. Bloomberg Correlation-Weighted Indexes show the worst-performing major currency in the past month was the Australian dollar, typically a beneficiary when investors are bullish on the economy because the nation has the highest interest rates among developed economies.  From the $2.3 trillion pumped into the U.S. by the Fed since 2008 to record-low interest rates in the euro zone, U.K. and Japan, nothing has prevented the world’s economy from slowing this year. Foreign-exchange traders are signaling they expect little improvement any time soon, and that’s a change from the past. After Chairman Ben S. Bernanke flagged $600 billion of quantitative easing, or QE, in August 2010, the carry trade gained 3.1 percent in 30 days.

    Longer dated treasuries real yields touch another record low -  Markets continue to behave as expected. Commodities are rallying while the dollar weakens. Inflation expectations continue to rise and longer dated treasuries are selling off, with the treasury curve steepening. However the longer dated treasuries have touched the lowest real yield level on record because the rising yield is not keeping up with the rising inflation expectations. Those holding US government debt are now expected to be losing nearly a percent per year when inflation is taken into account. It's difficult to comprehend how a money manager (including institutional investors) with any sort of a fiduciary responsibility be long treasuries at this point. Yet many still are.

    Is the Fed Really Causing the Sustained Drop in Interest Rates? -- Many observers claim the Fed, through its large scale asset purchases (LSAPs) and its forward interest rate guidance, has pushed down interest rates and compressed the yield curve spread.  Consequently, savers, investors, and financial intermediaries who need positive interest spreads have been harmed.  It's all the Fed's fault they say.  As I have pointed out before, this story falls apart because it ignores the fact that the term structure of the natural interest rate--the interest rate driven by the fundamentals of the economy--is being compressed too.  That is, given the weakened state of the economy the demand for credit is down, desired savings is up, and interest rates are falling as a result.  This explanation is a far better one for what we see in the following figure:  To believe the Fed is directly responsible for the low interest rates, one must believe it is capable of pushing the yield on the 10-year treasury from just above 5% to about 1.5% over a 5-year period.  That gives the Fed way too much credit.  This development is far easier to explain by talking about a depressed natural interest rate caused by the spate of bad economics news over this time (i.e. the 2008-2009 meltdown, the 2011 budget crisis, the ongoing Eurozone crisis).  One can say, however, the Fed has failed to sufficiently respond to the heightened money demand created by these shocks and therefore has failed to stabilize aggregate nominal spending.  This failure to act has allowed an economic slump to materialize which in turn has temporarily pulled down the natural interest rate.  So, indirectly the Fed has been harming savers, investors, and financial intermediaries, just not in the way most observers believe.

    Calling the Dollar the Loser From Fed Action May Be Premature - The Federal Reserve has announced quantitative easing as we have never seen it before. And the U.S. currency’s reaction to it could be just as unpredictable. The dollar’s immediate response was as expected. The dollar fell — sharply — as the plans for unlimited intervention by the U.S. central bank in the mortgage-backed securities market raised the prospect of lower U.S. yields and reduced the attraction of traditional safe-haven currencies. Elsewhere, as would be expected when another heavy dose of liquidity has been provided for the financial markets, equities rallied and commodity prices rose on the assumption that global demand will improve.

    Economists: QE3 Shouldn’t Trigger Wall of U.S. Money Into Emerging Markets - Amid renewed threats of currency wars, top international economists say the Federal Reserve‘s latest round of monetary easing isn’t likely to trigger a tsunami of capital into emerging market economies and subsequent exchange-rate inflation. “The data don’t seem to support a large affect of quantitative easing on the size of asset booms and inflow booms experienced by emerging market countries,” says Jonathan Ostry, deputy director of the International Monetary Fund‘s research department. Just hours after the Fed announced a third round of quantitative easing, QE3 complaints started to surface from around the globe. As officials in China, Indonesia and Brazil voiced concerns that the Fed’s policy risked spilling over into their economies, there were reports of planned or actual currency interventions in Taiwan, Brazil, the Philippines.

    Is $4 Gas Capping Bernanke's Dow-20k Dreams? - A funny thing happened on the way to Bernanke's wealth-creation strategy program. The unintended consequence of flooding the world with USDs, as we have pounded the table again and again on, has been 'spillover' into hard assets (or assets with relatively fixed supplies). To wit, oil prices are surging once again. Critically, as the chart below shows, each time this energy price hangover has trickled down to the consumer via $4 gas prices, it has marked a turning point in the US equity market. Of course, this time is different, but nevertheless one has to wonder how stock prices rise by any measurable amount with stagnant wage growth and price inflation in everything we buy and use (and now even the hedonically-tamped PPI is starting to show signs of instability).

    Fed risks political fallout from QE3 - Mitt Romney, the Republican candidate, duly opened fire on Friday after the Fed began an open-ended third round of quantitative easing (QE3), under which it will buy $40bn of mortgage-backed securities a month. In some of the most aggressive comments he has made on the Fed, Mr Romney said QE3 was nothing but a “sugar high”, and would fail to get the economy moving. “Recognise that, as the Federal Reserve keeps on trying to stimulate the economy by printing more money, that there’s a cost to that,” “The value of your savings goes down. People who are living on fixed incomes don’t see much interest income any more. And the value of the dollar goes down, and the risk for long-term inflation goes up.” The most visible effort to clip the Fed’s wings is a bill introduced in the House of Representatives by Kevin Brady, a Republican from Texas, who is vice-chair of the Joint Economic Committee of Congress. His bill would limit the central bank’s mandate to inflation, not employment, and restrict its monetary policy operations to short-term Treasury securities. Were his bill now law, Mr Brady told the Financial Times, “the Fed would not be able to embark on this third round of quantitative easing”. He said the bill had taken off faster than he had hoped and already had 48 co-sponsors in Congress. “Everyone, whether they agree or not, believes it is the right time to have this discussion.”

    Audit the Fed?, by Barry Eichengreen – The party platform adopted at the Republican National Convention includes a number of remarkable planks. To a monetary economist, for example, the party’s proposal to restore some kind of metallic monetary standard is so outlandish as to be an almost irresistible target. More serious is the Republicans’ proposal for an annual audit of the United States Federal Reserve. This, like the gold-standard plank, is partly designed to appeal to the libertarian followers of Ron Paul, the Texas congressman and perennial presidential candidate who is hugely popular with the Republicans’ “Tea Party” wing. The Republicans’ embrace of the audit idea taps into libertarians’ general distrust of government. But there is also distrust of the Fed on more specific grounds – distrust that extends well beyond the ranks of the Tea Party. The Fed, its critics complain, has used its expansive powers to engage in a range of unprecedented interventions that have propped up large financial institutions. So the monetary authorities, they argue, must be in the pockets of powerful bankers. To be sure, central bankers should be democratically accountable for their actions. But accountability by audit would carry significant risks. While monetary policy conducted by independent bureaucrats is imperfect, handing over effective control to congressmen with one eye on the next election would be infinitely worse.

    The anticipation of aggressive monetary expansion by the Fed woke up inflation expectations - Friday's poor employment report has given us a good window into how financial markets react to prospects of a monetary expansion. The weakness in the US labor conditions has significantly increased the probability that the FOMC will lean toward an outright asset purchase program. Friday's market reaction to this possible move by the Fed is shown in the table below.Typically weak labor markets are an indication of decreased demand and should not result in price increases in industrial commodities or energy. Yet Friday's moves in copper and oil are clearly the result of QE expectations (see this discussion). Some analysts continue to argue that Friday's gasoline price increase is due to the Hurricane Isaac hampering the refining capacity in Louisiana. That is a difficult argument to make in the face of the CRB commodity index as a whole rising 90bp for the day. In a classic response to a potential monetary expansion, the dollar had a sharp decline of nearly a percent (see this discussion). And as expected treasuries rallied after the jobs report increased the probability of the Fed's incremental buying. But later in the day a more troubling trend was established. The treasury curve steepened, with the 30y bond and other longer dated treasuries steadily selling off for the rest of the day.

    Longer-term inflation expectations spike in reaction to the Fed - Last Friday's action (discussed here) indeed turned out to be a good indicator of how markets in the current environment would react to Fed's balance sheet expansion. Markets performed as expected: commodities and equities spiked, the dollar weakened, and the treasury curve steepened. The MBS purchases the Fed has promised today (discussed here) will result in taking out medium to shorter duration paper out of the market. Even your average FNMA 30y 3% coupon bond has a duration of 6-10-years - depending on treasury yields. That means QE3 purchases will not directly impact longer duration bonds (at least not as much as the 5yr notes). The longer term part of the curve will therefore be driven by inflation expectations. And longer term inflation expectations, as implied by the TIPS yields, rose sharply today. The combination of the Fed's expected shorter duration purchases and longer term inflation expectations forced the treasury yield curve to steepen. The market is beginning to price in rising inflation and there is only so much negative real yield investors will tolerate.

    Key Measures show slowing inflation in August - The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning: According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.8% annualized rate) in August. The 16% trimmed-mean Consumer Price Index increased 0.2% (2.0% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.  Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.6% (7.5% annualized rate) in August. The CPI less food and energy increased 0.1% (0.6% annualized rate) on a seasonally adjusted basis.Note: The Cleveland Fed has the median CPI details for August here. This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.3%, the trimmed-mean CPI rose 1.9%, and core CPI rose 1.9%. Core PCE is for July and increased 1.6% year-over-year.  On a monthly basis (annualized), two of these measure were at or below the Fed's target; trimmed-mean CPI was at 2.0%, Core CPI at 0.6% - although median CPI was at 2.8%. Core PCE for July was at 0.3%.

    Inflation Expectations Suggest 5% Inflation Is In The Cards - While the world and their pet cat Roger are not worrying about inflation because Bernanke says CPI/PPI are still well-anchored and everything else is "transitory"; it turns out the market has a 'different' opinion. We have discussed inflation expectations before (whether 5Y5Y forward views or 10Y inflation swap breakevens) as a trigger for Fed action (or inaction) but this time, the market front-ran Bernanke's Bazooka and in the last two days of QEternity has exploded higher with 5Y forward expectations now near 6 year highs. CPI remains below 2% but there is a clear lag between the rise in market-implied inflation and it showing up in the unicorn-laden CPI prints - what this means is that given the hubris of the Fed yesterday, market expectations of inflation are inferring CPI could rise to over 5% within the next 3 to 6 months. It will surely be difficult for Ben to keep-on-buying ('Finding Nemo'-like) in the face of that kind of 'transitory' rise in real data - though for now, real money remains bid as risk comes off a little (even as the long-bond yield blows 26bps higher this week) - oh and CPI and PPI jump their most in 3 years.

    Guest Post: How Draghi Opened The Door To Hyperinflation And Denied The Fed An Exit Strategy - We will mince no words: Mr. Draghi has opened the door to hyperinflation. There will probably not be hyperinflation because Germany would leave the Euro zone first, but the door is open and we will explain why. To avoid this outcome, assuming that in this context the Eurozone will continue to show fiscal deficits, we will also show that it is critical that the Fed does not raise interest rates. This can only be extremely bullish of precious metals and commodities in the long run. In the short-run, we will have to face the usual manipulations in the precious metals markets and everyone will seek to front run the European Central Bank, playing the sovereign yield curve and being long banks’ stocks. If in the short-run, the ECB is the lender of last resort, in the long run, it may become the borrower of first resort!

    MA Analysis: Drought to shave 0.6 pct pts from 2nd half GDP growth  - Macroadvisers -The U.S. is experiencing one of the worst droughts in recent history.  While the farm sector directly accounts for only about 1% of the U.S. economy, the hit to farm output is likely to be large enough to have a noticeable impact on U.S. GDP.  We estimate that a sharp drop in farm inventories as a direct result of the drought will shave just over ½ percentage point from GDP growth in the second half of this year.  This effect will be quickly reversed early next year.  Furthermore, a rise in the price of food late this year and into next year will lower real income and wealth enough to shave an additional one-tenth from GDP growth in the fourth quarter of this year and the first quarter of next year, with this effect gradually reversing as prices return to baseline.  In this Macro Musing, we discuss how we arrived at these estimates. .  The U.S. Department of Agriculture (USDA) prepares detailed projections of several measures related to farm income.  Included in the details are receipts from sales of crops and livestock, purchases of inputs, interest expenses, spending on contract and hired labor, etc.  BEA uses these data to estimate value added in the farm sector.  While it’s not possible to reproduce BEA figures with precision — some of the data are unpublished, and BEA makes some adjustments — we can arrive at reasonable estimates. USDA’s August 28 detailed projection of 2012 farm income and related measures suggests nominal value added in the farm sector of $133.5 billion for 2012, down 3.7% from 2011.

    Apple's iPhone 5 Could Add Half A Percent to US GDP - JP Morgan has released a report arguing that Apple‘s iPhone 5 (or whatever they’re going to call it, we find out tomorrow) could add 0.5% to US GDP on an annualised basis. The full report is here: It’s not a bad calculation, it includes most of the caveats that should be added. Except for one. If new iPhone sales are additional to whatever the level of consumer spending would have been without the new iPhone then it’s fine. However, if people divert what they would have spent on something else into the purchase of an iPhone then the effect on GDP will be zero. My best guess would be that their calculation gives us an upper bound and the actual effect will be above zero but lower than their number. For I can well imagine that some people have been saving up for the new iPhone: it’s mentioned often enough in discussions of the seasonal swings in Apple’s sales that people do hold off when a new model is imminent. I can also well imagine that there are some very sad types who will cut out the unnecessaries like food in order to have the new phone. So there will be some diversion and also some additional consumer spending.

    Broken Windows and the iPhone 5 - Paul Krugman - There’s been some buzz about a report suggesting that the iPhone 5 could, all by itself, give a significant boost to the US economy. I can’t judge how plausible the sales estimates are; but it’s worth pointing out how the economic logic of this suggestion relates to the larger picture.The key point is that the optimism about the iPhone’s effects has nothing (or at any rate not much) to do with the presumed quality of the phone, and the ways in which it might make us happier or more productive. Instead, the immediate gains would come from the way the new phone would get people to junk their old phones and replace them. In other words, if you believe that the iPhone really might give the economy a big boost, you have — whether you realize it or not — bought into a version of the “broken windows” theory, in which destroying some capital can actually be a good thing under depression conditions.Of course, it’s nice that the reason we’re junking old capital is to make room for something better, not just for the hell of it. But you know what would also be nice? Building useful stuff like infrastructure employing labor and cash that would otherwise sit idle.

    The iPhone Stimulus, by Paul Krugman - Are you, or is someone you know, a gadget freak? If so, you doubtless know that Wednesday was iPhone 5 day. What I’m interested in are suggestions that the unveiling of the iPhone 5 might provide a significant boost to the U.S. economy, adding measurably to economic growth over the next quarter or two.  Do you find this plausible? If so, I have news for you: you are, whether you know it or not, a Keynesian — and you have implicitly accepted the case that the government should spend more, not less, in a depressed economy.  Before I get there, let’s talk about where the buzz is coming from.  A recent research note from JPMorgan argued that the new iPhone might add between a quarter- and a half-percentage point to G.D.P. growth in the last quarter of 2012. How so? First, the report argued that Apple was likely to sell a lot of phones in a short period of time. Second, it noted that although iPhones are manufactured overseas, most of the price you pay when you buy one is domestic value-added — retailing and wholesaling, advertising and profits — all of which counts as part of G.D.P. It’s all pretty straightforward. But the implications are wider than most people realize.  The crucial thing to understand here is that these likely short-run benefits from the new phone have almost nothing to do with how good it is — with how much it improves the quality of buyers’ lives or their productivity.  Instead, the reason JPMorgan believes that the iPhone 5 will boost the economy right away is simply that it will induce people to spend more.

    With no rebound in sight, there’s never been a slump like this - A trillion dollars has gone missing in the United States. That enormous sum is the difference between the Bank of Canada’s current estimate of how big U.S. gross domestic product will be in 2015 and what the central bank projected four years ago, before the collapse of Lehman Brothers Holdings Inc. brought the world economy to its knees in September, 2008. The U.S. recession technically ended in June, 2009. But the prosperity of the previous decade and a half has not returned, as anemic growth fails to achieve what economists call “escape velocity.” After economies plunge into a downturn, they generally snap back relatively quickly. That’s what happened after the tech bust in 2000 and the shock from the Sept. 11 attacks in 2001. But this time has been different. The reason: debt. Americans amassed so much of it before the crisis that it’s taking years to pay it off. The situation is made worse by the deterioration of the housing market, which typically leads economies out of recession. Governments can do little more to help because their debts now exceed those of their citizens. Faced with this grim picture, businesses are piling up cash, unwilling to invest and hire significantly until they see surer signs that conditions are returning to normal. Normal – if that means the 15-year boom that preceded the financial crisis of 2008 – may never return. “The most likely scenario is that we are stuck in low gear,”

    Why Not To Expect A Recovery Any Time Soon - Signs of weakness in advanced economies seem to have taken some by surprise. In America, GDP growth slipped in the second quarter of 2012 to a revised figure of 1.7% after growing at a rate of 2% in the first. In Britain, the economy is contracting at 0.5% a year based on latest data, adding to an increasing sense of frustration felt towards the government for failing to ensure a faster recovery. But perhaps we are suffering from memory lapse. To understand the effects of an economic crisis, you have to go back to its roots. A new study by Alan Taylor draws attention back to the causes of the 2008 financial crisis. Through a series of tests run on a sample of 14 advanced economies between 1870 and 2008, Mr Taylor establishes a link between the growth of private sector credit and the likelihood of financial crisis. The link between crisis and credit is stronger than between crises and growth in the broad money supply, the current account deficit, or an increase in public debt. Over the 138-year timeframe Mr Taylor finds crisis preceded by the development of excess credit, as in Ireland and Spain today, are more common than crisis underpinned by excessive government borrowing, like in Greece. Fiscal strains in themselves do not tend to result in financial crisis. When the boom period of credit expansion is coupled with growth in public-sector borrowing, however, the subsequent negative impact on the economy will be worse. Why? When a crash occurs, governments will not have the fiscal capacity to buffer the crisis due to their already stretched borrowing levels. Instead, they become forced to retrench and adopt austerity measures—which tend to drag on growth further, prolonging recession.

    The Big Four Economic Indicators: Industrial Production and Real Retail Sales - Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method.There is, however, a general belief 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." In his July 10th Bloomberg TV interview, ECRI's Lakshman Achuthan cites these four at about the 2:05 minute point in his remarks. He says, and I quote "When you look at those four measures, they are rolling over." Yesterday (September 13) Achuthan reappeared on Bloomberg TV and reasserted the ECRI recession call, stating again that the US is already in recession and that future revisions to the data will support their call.  Are they really rolling over? First, here are the four as identified in the Federal Reserve Economic Data repository.  The latest updates to the Big Four were today's release of the August Industrial Production data (the purple line in the chart below), which dropped 1.2 percent over the previous month, and Real Retail Sales (the green line), which rose 0.3%. As the average of the Big Four indicates (the gray line), economic expansion since the last recession is hovering at stall speed.

    Financial Crisis Cost U.S. $12.8 Trillion Or More: Study: The 2008 financial crisis cost the U.S. economy at least $12.8 trillion, a new study found -- and that's a "very conservative number," according to the authors. The study, timed to coincide with the fourth anniversary of the Lehman Brothers bankruptcy, is a direct counter to the banking industry's relentless warnings of the potential costs of new financial regulations. The cost of letting the banks wreck the global economy again is far, far higher. The crisis-cost estimate, generated by Better Markets, a non-profit group lobbying for financial reform, is only a measure of actual and potential lost economic growth due to the crisis. It does not include many other costs, including the costs of extraordinary government steps taken to avoid "a second Great Depression." It does not include unquantifiable costs like the "human suffering that accompanies unemployment, foreclosure, homelessness and related damage," the authors noted. The study also does not include figures related to any damage done to American productivity by long-lasting, widespread unemployment, which is eroding the ability of Americans to earn money and posing a threat to future economic growth.

    China’s U.S. Debt Holdings Aren’t Threat, Pentagon Says - China’s holdings of more than $1 trillion in U.S. debt and the prospect that it might “suddenly and significantly” withdraw funds don’t pose a national security threat, according to a first-ever Pentagon assessment. “China has few attractive options for investing the bulk of its large foreign exchange holdings out of U.S. Treasury securities,” given their extent, according to the report dated July 20 and obtained by Bloomberg News. China is the second-largest holder of U.S. government debt after the Federal Reserve. Acting at the direction of Congress, the Defense Department studied the rationale behind the investments and whether “the aggressive option of a large sell- off” would give China leverage in a political or military crisis. China’s debt holdings have been cited as a sign of U.S. vulnerability by Republicans in this year’s election campaign. Chinese commentators have occasionally suggested using the debt holdings to pressure the U.S. on its pro-Taiwan policies. A senior People’s Daily editor wrote in an August 2011 editorial that “now is the time for China to use its ‘financial weapon’ to teach the U.S. a lesson if it moves forward” with additional arms sales to the island democracy, according to the Pentagon report. “Attempting to use U.S. Treasury securities as a coercive tool would have limited effect and likely would do more harm to China than to the United States,” according to the report, which was sent to congressional committees by Defense Secretary Leon Panetta. “As the threat is not credible and the effect would be limited even if carried out, it does not offer China deterrence options” in a diplomatic, economic or military situation, the Pentagon found.

    Pimco’s Gross Slashed Treasury Holdings in August -- Bill Gross made a notable cut on his stocks of Treasury bonds in August while questions arose about the market's value amid historically low yields.  Mr. Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., reduced holdings of Treasury bonds to 21% at the end of last month from 33% at the end of July, according to data available from the company's web site Wednesday afternoon.  The holdings at the $272.5 billion Total Return Fund fell from this year's peak of 35% in May and June. It is also much lower than 36% on the benchmark Barclays U.S. Aggregate Bond Index, suggesting Mr. Gross held an underweight stance on Treasury bonds.  The reduction came as debate increased among investors about the fortune of Treasury bonds.  Bond bulls believe Treasury yields, which move inversely to their prices, could still go lower on the prospects that the Federal Reserve may buy more Treasury bonds to stimulate the economy. Yet bears argue that Treasury yields would rise as central banks' monetary stimulus would sap demand for safe assets. Besides, Treasury yields are unattractive at these low levels.

    Moody’s threat to strip US of top rating -- Moody's has threatened to downgrade America's prized triple A credit rating if Congress fails to reach a deficit reduction deal, raising the stakes in the fiscal debate that lies at the heart of the November election. The rating agency said on Tuesday it is considering joining its rival Standard & Poor's, which stripped the US of its top rating last year, if a deal is not reached by the end of 2013. The threat is likely to feed into election campaign concerns over the state of the economy and lift Republican hopes of a boost for Barack Obama's challenger, Mitt Romney, by focusing attention on the size of the national debt.It also adds pressure on lawmakers in Congress to lay the groundwork for critical negotiations on fiscal policy that will begin almost immediately after the election on November 6.The comments made clear that a deal to avert the so-called "fiscal cliff" -- a series of tax increases and automatic spending cuts due in early January -- may not be enough to prevent a downgrade, and that a broader agreement to shrink America's debt pile over the medium term would need to be crafted.Budget negotiations next year "will likely determine the direction of the US government's Aaa rating", Moody's said, adding that it may cut the country's rating to Aa1 if the results were not satisfactory. "What we're looking for is a downward trajectory of the debt over the medium term," said Steven Hess, lead analyst for the US sovereign rating at Moody's in New York.A Moody's downgrade, on top of S&P's controversial move in August 2011, would further taint the standing of US Treasury securities as the world's purest risk-free asset.

    Moody’s Warns Of Debt Downgrade If Congress Fails To Act - Moody’s warned the United States today that the nation could face a debt downgrade if lawmakers fail to reach a deal to avert the upcoming so-called “fiscal cliff”: Moody’s Investors Service warned Tuesday that Congress will need to strike a deal on the “fiscal cliff” to avoid a second downgrade to the nation’s credit rating. The rating agency said that budget negotiations in 2013 will likely determine the fate of the nation’s credit rating, adding that an inability to strike a deal with “specific policies” to change the nation’s debt trajectory would likely mean a downgrade. Moody’s still rates the nation as a top-shelf AAA credit, but with a negative outlook as it has warned policymakers they must adjust the nation’s fiscal course to retain its financial reputation. The good news for lawmakers is that if they can somehow strike a broad fiscal deal in the next 12 months, it will likely mean the nation can protect its AAA rating from Moody’s, and the agency would revoke its negative outlook in favor of a stable one.(…) All three major rating agencies — Moody’s, FitchRatings and Standard & Poor’s — have warned that fiscal changes are needed to prevent future downgrades. Standard & Poor’s made history following the debt-limit fight by issuing the first-ever downgrade to the nation’s credit rating, citing the political brinksmanship that threatened the ability of the government to meet its obligations.

    Moody's Text: To Downgrade US If No Deal To Cut Debt/GDP Ratio - The following is the text of a statement Tuesday by rating agency Moody's: Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the US government's Aaa rating and negative outlook, says Moody's Investors Service in the report "Update of the Outlook for the US Government Debt Rating." If those negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable, says Moody's. If those negotiations fail to produce such policies, however, Moody's would expect to lower the rating, probably to Aa1. Moody's views the maintenance of the Aaa with a negative outlook into 2014 as unlikely. The only scenario that would likely lead to its temporary maintenance would be if the method adopted to achieve debt stabilization involved a large, immediate fiscal shocksuch as would occur if the so-called "fiscal cliff" actually materializedwhich could lead to instability. Moody's would then need evidence that the economy could rebound from the shock before it would consider returning to a stable outlook. Moody's notes that it is difficult to predict when during 2013 Congress will conclude negotiations that result in a budget package. The Aaa rating, with its negative outlook, is likely to be maintained until the outcome of those negotiations becomes clear.

    Moody’s New Warning: No Secrets, No Surprise - On Tuesday of this week, the credit rating agency Moody’s issued this warning: Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the US government’s Aaa rating and negative outlook, If those negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable, says Moody’s. If those negotiations fail to produce such policies, however, Moody’s would expect to lower the rating, probably to Aa1.  What does Moody’s know that the rest of us don’t?  Nothing.  Should this shock us?  Not if the fiscal news thus far hasn’t already shocked us. As Ezra Klein explainsMoody’s doesn’t have access to secret documents about the budget of the United States of America. They don’t know hidden facts about the country’s finances, or the willingness of the two political parties to come to a deficit-reduction deal. Moreover, the finances of the United States are better known and more widely discussed than the finances of any country or corporation in the entire world. Moody’s has no particular comparative advantage here. Its assessment of the federal government’s solvency is no more credible than the assessments made every day by think tanks, pundits, academics, reporters, politicians, and dozens of others. But that doesn’t mean it’s wrong.Moody’s warning is simple… If those [budget] negotiations fail [to produce policies that stabilize the debt, the U.S. credit rating] will probably be knocked down by one notch.

    Moody’s Follows Other Rating Agencies Into Incoherence About Fiscal Cliff - Good to know that the credit rating agencies have learned approximately nothing since last year. Then, they initiated a downgrade of the United States, determining that their debt would be a riskier instrument after the debacle of the debt limit deal. Investors responded by pouring money into US Treasuries and dropping the yields at one point to under 1.5% (it’s at around 1.676% today). The markets, then, thoroughly ignored the warnings of the rating agencies, and by extension discredited them. They saw US treasuries as a safe instrument rather than a downgraded one. So what does Moody’s come out and say today? That the US credit rating depends on fiscal cliff talks: The U.S. government’s debt rating could be heading for the “fiscal cliff” along with the federal budget.Moody’s Investors Service said Tuesday it would likely cut its “Aaa” rating on U.S. government debt, probably by one notch, if budget negotiations fail. If Congress does not reach a budget deal, more than $600 billion in spending cuts and tax increases will automatically kick in starting Jan. 1, a scenario that’s been dubbed the “fiscal cliff,” because it is likely to send the economy back into recession and drive up unemployment.

    Moody's threat to downgrade US debt is political, not fiscal - - Moody's threat this week to downgrade the US government's credit rating says a whole lot more about the credit rating agency than it does about the US debt situation. It is really a way of telling the world that Moody's is making a political statement, rather than an assessment of risk for investors who want actual information about US Treasury securities. If you had to pick any sovereign bond in the world that has the least risk of default, it would have to be a US Treasury bond. Anyone who is holding bonds issued by the US government can be pretty sure that they will get their full interest payments and principal, if they hold it to maturity, unless there is some calamity as gigantic as a nuclear war. One reason is that the US has its own central bank and can simply create the money to pay bondholders, if necessary. That is the main reason why, for example, the UK government is paying just 1.8% interest on its ten-year bonds right now, while Spain is paying 5.6% – even though the UK has a larger net government debt than Spain has. The United States also has an advantage that no other country has, which is that its currency is the world's main reserve currency. More than 60% of the world's central bank reserves are held in dollars, and most of the world's foreign currency transactions involve dollars. The dollar may lose its status as a reserve currency some day, but not any time soon. So this is another reason why nobody holding US debt has to worry about default.

    Moody's in a Mood - Robert Reich : The rating agencies are at it again. Moody’s Investors Services says it’s likely to downgrade U.S. government bonds if Congress and the White House don’t reach a budget deal before we go over the so-called “fiscal cliff” on January 2, when $1.2 trillion in spending cuts and tax increases automatically go into effect. Apparently the credit rating agencies can’t decide which is more dangerous to the U.S. economy – cutting the U.S. budget deficit too quickly, or not having a plan to cut it at all. Last year’s worry was the latter. In the midst of partisan wrangling over raising the nation’s debt limit, Standard & Poor’s downgraded U.S. debt – warning that Republicans and Democrats didn’t have a credible plan to tame the deficit. Now Moody’s is worried about the opposite: The spending cuts and tax increases in the Budget Control Act that will automatically kick in at the start of 2013 – unless Congress decides on a better and presumably more gradual approach — are so draconian they’ll push the economy into a recession.

    What Does Moody's Mean If It Downgrades U.S. Debt? – Dean Baker - The NYT tells us that Moody's, the bond-rating agency that thought all those subprime mortgage backed securities were Aaa, is threatening to downgrade U.S. government debt if Congress doesn't meet its conditions. While the markets will probably ignore a downgrade from Moody's, just as they did the downgrade from Standard and Poor's last year (the price of U.S. Treasury bonds soared in the period immediately following the downgrade), it still would be worth asking what Moody's might mean by a downgrade. In principle, Moody's is rating the risk of default. U.S. government debt is issued in dollars. The U.S. government prints dollars. Does Moody's believe that there is a growing probability that the United States will forget how to print dollars? There is the issue that the Fed has control of the money supply and the Fed is distinct from the Treasury. As an anti-inflation policy, the Fed may limit its issuance of money even as interest rates on U.S. government debt soared. However in a crisis can anyone believe that the Fed would actually let the country default rather than buy up government debt? Furthermore, at the end of the day the Fed is answerable to Congress. If a particular group of Fed governors and bank presidents was prepared to let the government default rather than buy up bonds, does anyone think Congress would just let this happen rather than replace the individuals or restructure the Fed altogether? That seems highly unlikely, but is this what Moody's now thinks could happen?

    U.S. credit warning? Who cares? - Moody's Investors Service on Tuesday warned it could downgrade the U.S. government's credit rating next year if steps aren't taken to deal with the rising debt. The warning would ordinarily rattle markets, as investors worry that the nation's borrowing costs could soar. But the news is essentially not news at all. Investors responded by pushing the Dow up a half a percentage point to a 5-year high. And even if a downgrade actually happens, many economists predict the markets will likely snooze through it. In its report, Moody's says the U.S. could lose its top notch Aaa rating if Congress repeals a slew of spending cuts and tax increases slated to kick in next year and fails to replace them with large-scale deficit-reduction measures. This comes as talks of a bipartisan deal to reduce the deficit have mostly stalled before the November elections. Indeed, there are reasons to doubt that lawmakers will be able to avert the so-called 'fiscal cliff.' Last August, Congress raised the government's borrowing limit without agreeing to a significant deficit reduction package. Which, in turn, prompted Standard & Poor's to strip the U.S. of its stellar triple A rating, which fell one notch to AA+.

    Germany says U.S. debt levels "much too high" (Reuters) - German Finance Minister Wolfgang Schaeuble questioned on Tuesday how the United States could deal with its high levels of government debt after November's presidential election. In a speech to the Bundestag lower house of parliament to open a debate on the 2013 German budget, Schaeuble said worries about U.S. debt were a burden for the global economy, hitting back at Washington which has criticized Europe for failing to get a grip on its own debt crisis. In private, German officials often express concern about U.S. debt levels and the inability of politicians there to reach a consensus on how to reduce it, but Schaeuble's public remarks underscore the extent of the worries in Germany. "Ahead of the election in the United States there is great uncertainty about the course American politics will take in dealing the U.S. government's debts, which are much too high," Schaeuble said. "We need to remind ourselves of that sometimes and the global economy knows that and is burdened by it."

    It is IMPOSSIBLE for the US to default!!! -- With so many economic, political, and social problems facing us today, there is little point in focusing attention on something that is not one. The false fear of which I speak is the chance of US debt default. There is no need to speculate on what that likelihood is, I can give you the exact number: there is 0% chance that the US will be forced to default on the debt. We could choose to do so, just as a person trapped in a warehouse full of food could choose to starve, but we could never be forced to. This is not a theory or conjecture, it is cold, hard fact. The reason the US could never be forced to default is that every single bit of the debt is owed in the currency that we and only we can issue: dollars. Unlike Greece, we don’t have to try to earn foreign exchange via exports or beg for better terms. There is simply no level of debt we could not repay with a keystroke. Don’t take my word for it. Here are just a few folks from across the political spectrum and in different walks of life saying the same thing: “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.” Alan Greenspan

    CBO says 2012 deficit has reached $1.17T - The nonpartisan Congressional Budget Office reported Monday that the 2012 budget deficit through August stands at $1.17 trillion. It estimated that $192 billion was added to the deficit in August, crossing the symbolically important trillion-dollar threshold. This is the fourth straight year that the deficit will exceed one trillion dollars, all under President Obama. The deficit in 2008 was $459 billion.Eleven months into the fiscal year ending on Oct. 1, the deficit is about $70 billion less than at this point in fiscal 2011. Revenue increases account for the difference, with incoming revenue increasing 6 percent and spending increasing 2 percent despite the efforts of Congress to reduce it. So far this year, revenues have increased $126 billion, the CBO estimated, while spending has increased by $57 billion. The report comes as the GOP has made the budget deficit a central issue in the 2012 election campaign.

    “We” Don’t Owe $16 Trillion; and You Don’t Owe $50,000 - Just saw John Sununu, one of Republicans favorite Bushie junk yard attack dogs all up in arms about the debt subject to the limit (the so-called national debt) reaching $16 Trillion dollars, and going on to tell people that every man, woman, and child in the United States now owes $50,000 to pay that debt off. Now, I’m here to tell you that all that is bull sh*t.  The debt subject to the limit is a debt incurred by the Congress and the Treasury Department because when the Government spends more than it taxes, the Treasury Department issues debt instruments in the name of the US Government even though it doesn’t have to do that in order to deficit spend. These instruments make the Government a debtor. But they don’t make any individual man, woman, or child in the United States a debtor. So, the idea that YOU owe $50,000 or even a single dollar is BS. You’ve signed no such note. You’ve not charged a single dollar on your credit card for this purpose. And you’ve not made a single promise that any portion of the national debt will be paid by YOU. Well, you might ask: “Doesn’t the US have to pay the $16 T debt sooner or later by taxing, and won’t we then be responsible for our portion in the form of a tax obligation?” The best way, because it ends unnecessary welfare for the rich and foreign nations is to stop issuing debt instruments, continue with enough deficit spending to create full employment and an economy operating at its full potential, and make up the gap between spending and revenue by using the legal power of the Government to issue 1 oz. Proof Platinum coins with arbitrary face values, and using the coin seigniorage profits gained by depositing the coins at the Federal Reserve. Here’s the process, along with the political speech explaining it to everybody.

    Cutting the Deficit, With Compassion, by Christina Romer - Aside from the empty chair that Clint Eastwood debated, the main prop at the Republican convention was a debt clock, highlighting the federal deficit and the growing national debt. The importance of dealing with the deficit will clearly be a major Republican theme this fall. So far, Democrats have mostly been playing defense on this issue by criticizing the Romney-Ryan approach. It’s time for them to go on offense by putting their own plan front and center.  Thanks to former President George W. Bush — remember the compassionate conservative? — I have a good name for the fundamental principle that should guide the Democratic alternative: compassionate deficit reduction. The essence is to cut the deficit in a way that does as little harm as possible to people, jobs and economic opportunity. ... Why is this the compassionate approach? Because immediate, extreme austerity would plunge us back into recession. ... [gives details of "compassionate" plan] Honest talk about the deficit is risky. Voters are more enthusiastic about the abstract notion of deficit reduction than about the painful details of accomplishing it. But deficit reduction is coming, and this election will most likely determine how it’s done. Democrats owe it to the American people to detail their more compassionate approach so that voters can make an informed choice.

    Congress Close to Passing Budget Stopgap as Fiscal Cliff Looms - Congress comes back for what promises to be a quick mop-up session before the election. The main items of business include two expiring authorizations, one for farm programs and the other for the federal budget. The former is up in the air; on the latter, the House and Senate are closing in on a deal that would extend the budgetary authority through a continuing resolution for six months. That would push the deadline out to March 31, giving the new Congress and possibly the new President space to make their own mark on the budget. The continuing resolution would meet the annualized $1.047 trillion for discretionary spending agreed to in the spending cap attached to last year’s debt limit deal. This actually increases the budget nominally year-over-year, but overseas contingency operations would drop, in what could be fairly described as a “peace dividend.” The clearest savings is in the area of overseas contingency funds including military operations in Afghanistan. For the six month life of the bill, these war accounts are expected to be capped at a rate of spending equivalent to President Barack Obama’s 2013 reduced request of $96.7 billion. This is a 24 percent or almost $30 billion drop from fiscal 2012. And much as Republicans have criticized Obama’s handling of the Afghanistan conflict, this peace dividend allows them to show their conservatives that that total spending is still falling—even with the extra $8 billion allowed. There are some ominous winds blowing in the form of Maine’s Senate delegation opposing a stopgap, but with the alternative being a government shutdown, it’s likely that an agreement with get honored with passage in both houses.

    House passes six-month stopgap budget - The House of Representatives on Thursday approved a budget to keep government operations funded for six months, acting to head off a potential shutdown. The stopgap measure, $1.047 trillion in total, now goes to the Senate for a vote. Without the so-called continuing resolution, the government faces a threat of shutdown when the fiscal year ends on Sept. 30. The temporary measure is needed because lawmakers didn’t finish a full budget in time for the new fiscal year. House lawmakers voted 329 to 91 to approve it. The bill, which is expected to be approved in the Senate, spends more than a separate measure passed by the House this spring. That bill, written by Republican vice-presidential candidate Rep. Paul Ryan, would have spent $1.028 trillion. The government has endured shutdowns and the threat of shutdowns in years past, but Thursday’s vote marked an end to partisan rancor — if only temporarily. Click to Play Bernanke: QE3 is not spendingFed Chairman Ben Bernanke addresses three main concerns people have about monetary policy: Fed purchases, low returns and inflation of the economy. (Photo: Getty Images) With the debate over the continuing resolution over, lawmakers can now focus more on the looming “fiscal cliff” of tax hikes and spending cuts.

    Fiscal cliff: All talk, no deal-making - President Barack Obama wants to fix the debt problem and stop the nation from falling off a fiscal cliff. So does Mitt Romney. And John Boehner. And Paul Ryan. And Joe Biden, too. They all said as much at the Republican and Democratic national conventions and accused their opponents of lacking the guts to pick a plan and make it stick. So it would make sense that while they were talking, their aides and allies were meeting behind the scenes to steer away from that fast-approaching cliff, right? Wrong. The truth is that none of the top leaders or their aides are in serious negotiations. This leaves the key players simply pointing fingers and praying that voters clarify Washington’s power structure in November in a way that favors Republican entitlement cuts or Democratic tax hikes. The winners at the ballot box will get to set the terms, the thinking goes. Until then, don’t give an inch.  Obama, House Speaker Boehner (R-Ohio) and Senate Majority Leader Harry Reid (D-Nev.) — aren’t engaged, and neither are the staffers who do the heavy lifting on legislative deals. Boehner and Reid haven’t had any recent talks about the fiscal cliff. The last time they spoke in person was in June, when they negotiated a deal on the highway bill, according to an aide. The pending budget cuts, known as “sequestration,” weren’t on the agenda, and neither were the expiring tax cuts. Likewise, Obama and Boehner haven’t huddled since May 16, when congressional leadership snacked on Taylor Gourmet sandwiches at the White House.

    Congress has little motivation for compromise before election -- After a five-week summer recess, Congress returns to a long list of unfinished business, but with 57 left days before Election Day, it's likely it will tackle only the bare minimum in its short fall session. The one must-pass measure -- a short-term continuing resolution to fund federal agencies -- will avoid any pre-election talk of a government shutdown, with which neither party wants to be tagged. Republican and Democratic leaders struck a deal this summer on a six-month bill, but both chambers still need to pass the legislation before government funding expires at the end of this month. The House is expected vote on the bill Thursday, and two GOP leadership aides predict it will get a sizable bipartisan majority. A senior Senate Democratic aide tells CNN the Senate is expected to approve the measure next week.-- It's possible that GOP and Democratic leaders could work out a deal on a farm bill to reform agriculture programs and provide some relief to drought-stricken states -- or at least agree to another short-term extension of the current law, according to multiple congressional aides. If they can't reconcile differences between the two varying approaches taken by the House and Senate, some money for drought assistance, plus some money for states affected by recent natural disasters, could be tacked onto the spending bill.

    Deal to Avert 'Fiscal Cliff' May Start With the Alternative Minimum Tax -  An expansion in the reach of the alternative minimum tax is the element of the U.S. fiscal cliff with the largest immediate effect on taxpayers and the most bipartisan appetite for a solution, creating the possibility that lawmakers could use it to propel Congress toward a deal.  If Congress doesn’t act to prevent the $92 billion tax increase, the number of households facing the alternative tax would increase to 32.9 million from 4.4 million, according to the Internal Revenue Service. That’s an average unanticipated tax increase of about $2,800.  The effect from the AMT, as the parallel tax is known, would be immediate in early 2013 because Congress hasn’t addressed the change for tax year 2012, and taxpayers start filing returns in January. A retroactive AMT change is much more cumbersome than retroactive changes in the 2013 income tax rates, which can be handled through paycheck-withholding adjustments, said Kenneth Kies, a Republican tax lobbyist in Washington.  “The IRS would be paralyzed, not to mention the fact that the taxpayers wouldn’t get the joke,” said Kies, a Republican tax lobbyist in Washington. “This just has to be done in December.”  The AMT isn’t indexed for inflation, meaning that Congress must routinely pass so-called patches to keep the tax from reaching deep into the middle class. Congress could pass the patch without any other items attached; this year, at least for now, it’s linked to the fight over fiscal policy at the center of the political campaign.

    Stop The Sequester Madness - I want to say this as directly as possible: The sequester - the Jan. 2 across-the-board spending cut that was triggered when the anything-but-super committee failed to agree on a deficit reduction plan last November - needs to be canceled. In case there's any doubt about what I mean, note that I said "canceled" rather than postponed, delayed, kicked down the road, modified, revised or anything else short of completely stopping the sequester from happening. And I mean both the military and domestic spending cuts, not just one or the other. I'm generally considered to be a deficit hawk who thinks spending reductions have to be part of a serious deficit reduction plan. But unlike some in the budget Falconiformes community, I am not a reduce-the-deficit-any-time-for-any-reason-no-matter-what-the-economic-effect hawk. That's why I have no trouble making what some of my feathered fiscal friends will say is the heretical statement that we will be better off if the sequester's spending cuts don't occur. The economic argument is quite simple. With corporations, consumers, trade and state and local governments still not adding as much as we need to economic growth, it makes no sense for the only remaining positive gross domestic product contributor - the federal government - to cut its spending significantly in January.

    US House Speaker Boehner says not confident about fiscal cliff (Reuters) - The top Republican in the U.S. Congress said on Tuesday he had no confidence a divided Washington could avoid a "fiscal cliff" that threatens to push the nation into a recession, but the top Democrat voiced optimism there would be a deal. "I'm not confident at all," House of Representatives Speaker John Boehner said, accusing President Barack Obama of failing to provide needed leadership. Senate Majority Leader Harry Reid fired back by expressing disappointment in Boehner's comments. "I'm confident that we will reach some kind of agreement" after the Nov. 6 presidential and congressional elections, the Democrat said. Boehner and Reid made their remarks to reporters at separate news conferences as Congress, back to work after a five-week recess, faces a major challenge and looming deadline. Obama and lawmakers have until the end of the year to resolve a number of fiscal issues, including whether to renew expiring income tax cuts for tens of millions of Americans. They must also come up with about $109 billion in deficit reduction or face automatic cuts of that level beginning in January, a process known as sequestration. Over a 10-year period, the automatic spending cuts are supposed to total $1.2 trillion.

    Have House Republicans forgotten the debt-ceiling fight?: John Boehner believes there is one person to blame for the defense cuts poised to take effect on Jan. 1. “Look at Mr. Woodward’s book that came out this morning, page 326. It makes it perfectly clear, where the sequester came from,” the House Speaker told reporters Tuesday morning. ”The president didn’t want his reelection inconvenienced over another $1.2 trillion increase in the debt-ceiling.”In that section of “The Price of Politics,” Post editor Bob Woodward explains how top White House officials had proposed the idea of having the automatic defense and domestic spending cuts if the supercommittee failed to find $1.2 trillion in deficit reduction.Of course, Republicans — Boehner included — had agreed to the deal as well. The defense cuts were part of those consequences. What’s more, House Republicans refused to agree to a debt-ceiling deal that didn’t include some kind of consequence if the supercommittee failed. The White House, conversely, would happily have signed a clean debt-ceiling increase. But the Republicans said there would be no deal if there wasn’t some kind of deficit-reducing backstop in the event the supercommittee failed. That’s where the sequester came from.

    Three ways that Democrats would avoid the sequester - This week, Congressional Republicans have been arguing that President Obama and his Democratic allies have no plan for dealing with the sequester. Yet Democrats actually have three possible strategies to avoid the sequester and tackle the deficit. Each of the plans treat entitlement spending differently. But all of them raise taxes, which is why Democrats have been slow in moving them forward. Republicans are right that Senate Democrats haven’t passed their own alternative to the sequester. In the spring, Sen. Kent Conrad introduced a deficit-reduction alternative modeled on Bowles-Simpson. The plan would have reformed Social Security, phased out the employer deduction for health care, and overhauled the entire tax code, among other major changes, while avoiding the sequester cuts. Republicans like Sen. Jeff Sessions the $2.6 trillion believed the revenue increases were too high, and some Democrats have been wary about its entitlement cuts.* The plan has gone nowhere since then, as Conrad didn’t hold his plan up for a vote. “Some Democrats will be disappointed that there’s not another plan to rally around, and some Republicans will be disappointed that there’s not another plan to attack,” Conrad said in April, according to Reuters. House Democrats have lined up behind a markedly different sequester alternative. Rep. Chris Van Hollen’s budget would bring revenue and spending levels to a similar level as the Conrad/Bowles-Simpson plan. But it does so through tax hikes on wealthy Americans and corporations, while declining to make substantive changes to entitlement programs.

    Voters, Clueless about Fiscal Cliff, In for a Shock - The nation may be barreling towards a fiscal cliff that has policymakers in Washington gnashing their teeth and wringing their hands, but lawmakers just returning from a five-week congressional recess say the crisis hasn’t quite penetrated the consciousness of many of their constituents. For sure, there’s a lot of fretting about the $16 trillion in federal debt, the prospects of rising taxes by the end of the year, and the persistent pain and fear about high unemployment. But even in this highly charged political season, the threat of a year-end perfect storm of expiring tax cuts and massive defense and domestic budget cuts that could push the economy back into a recession largely remains a preoccupation of congressional and administration officials, budget wonks and the news media, according to lawmakers. “I think your average person is just starting to learn about the implications of the fiscal cliff,” . “There is a real concern in general about [inaction] in Washington. There’s a feeling there is no resolution of our fiscal issues and there doesn’t seem to be people working together in terms of addressing the economy.”

    Gang of Eight Discusses Six-Month Punt for Fiscal Cliff - Yesterday, John Boehner appeared to wave a white flag on talks aimed at resolving the fiscal cliff. Harry Reid reacted to that with disappointment, saying that there’s still time for a deficit reduction deal. But the real endgame – at least for the lame duck session – is coming into focus. A bipartisan group of senators is negotiating a roughly $55 billion debt “down payment” that would temporarily turn off automatic spending cuts and buy Congress at least six months to work out a bigger deal.  The down payment would be linked to a deficit-reduction framework that would bind committees with jurisdiction over spending and taxes to an action plan, say sources familiar with the negotiations.  If a deal is reached and leaders sign off on it, Congress could approve the plan in a lame-duck session.  You can totally see this happening, right? The $55 billion would be enough to stop the sequester of defense and discretionary cuts for six months. That would give the breathing space needed for a longer discussion. The calculus may change depending on the outcome of the elections. But it’s clearly easier to get to $55 billion than $1.2 trillion, which is the ten-year cost of the sequester.More troubling is that we don’t know where those $55 billion in cuts will come from. Specifically, will they include any tax increases? So far, all of the deficit reduction agreed to, mainly from the spending cap and the sequester, which would drive down discretionary funding to levels so low that the federal court system would have to stop jury trials because they could not pay the jurors, has come on the spending side of the ledger.

    Fiscal Cliff: Goldman note and Merle Hazard - An excerpt from a Goldman Sachs research note by Alec Phillips today: The Fiscal Cliff Moves to Center Stage  While we are hopeful that lawmakers will manage to reach an agreement before year-end, we expect that the road to such an agreement will be a bumpy one. Ahead of the election, lawmakers seem unlikely to reach any sort of compromise on major tax or spending policies, particularly now that the window for a legislative agreement is essentially closed. Once the election results are known, lawmakers will work toward compromise, but members of both parties have an incentive to make the threat of “falling off the cliff” appear as credible as possible, so a resolution in November, or even early December, seems unlikely. Indeed, under a status quo election outcome, for example, a decision on even a short-term extension of expiring policies seems unlikely until late December, since political compromise would presumably come only after all other options have been exhausted.... we think there is at least a one in three likelihood that lawmakers fail to agree by December 31. ... if a deal is reached by the end of the year it may not provide much certainty in 2013. After all, the debt limit may still need to be raised, and the since the most likely scenario seems to be a short-term extension of fiscal cliff-related policies, the risks from fiscal policy seem likely to continue into 2013, regardless of how the fiscal cliff is dealt with at year end.

    Erskine Bowles: an object lesson in Wall Street influence on Washington | Dean Baker -- Erskine Bowles is widely known in Washington policy circles as a co-chair of President Obama's deficit commission, along with former Senator Alan Simpson. The report that he and Simpson co-authored is held up as the basis for a grand bargain on the deficit. This report has riled many people across the political spectrum, in part because of its cuts to social security, the most immediate of which is a reduction in the annual cost of living adjustment (Cola). Reduced Cola would amount to a benefit cut of close to 3% for a typical retired worker. Since the median income for households of people over age 65 is just $31,000, this would be a big hit to a segment of the population that is already struggling. By contrast, in their quest for every possible source of savings, Bowles and Simpson seem never seriously to have considered a financial speculation tax that would target the country's bloated financial sector. The United Kingdom has imposed taxes on its financial sector for centuries, and much of the European Union is considering a tax that could go into effect as early as next year. But the tax apparently didn't make it to the Simpson-Bowles list. While we may never know why, it is worth noting that Erskine Bowles sits on the board of directors at the huge Wall Street investment bank Morgan Stanley, where he is paid several hundred thousand dollars a year. Interestingly, Bowles also sits on many other corporate boards, also being paid millions for his services over the last decade.

    Mitt Romney and America’s Four Deficits - Laura Tyson -- The United States is beset by four deficits: a fiscal deficit, a jobs deficit, a deficit in public investment, and an opportunity deficit. The budget proposals put forward by presidential candidate Mitt Romney and his running mate, Paul Ryan, could reduce the fiscal deficit, but would exacerbate the other three. To be sure, Romney and Ryan have failed to provide specifics about how they would reduce the fiscal deficit, relying on “trust me” assertions. But the overarching direction of their proposals is clear: more tax cuts, disproportionately benefiting those at the top, coupled with significantly lower non-defense discretionary spending, disproportionately hurting everybody else – and weakening the economy’s growth prospects. Despite 30 months of private-sector job growth, the US still confronts a large jobs deficit. The unemployment rate remains more than two percentage points above the “normal” rate (when the economy is operating near capacity). Moreover, the labor-force participation rate remains near historic lows. More than 11 million additional jobs are needed to return the US to its pre-recession employment level. At the current pace of recovery, that is more than eight years away. In the meantime, persistent high unemployment reduces the economy’s growth potential by robbing today’s workers of skills and experience.

    Arms And The Mitt - Krugman - A week ago I noted that Mitt Romney’s convention speech included a sudden lurch into weaponized Keynesianism, the doctrine that government spending destroys jobs unless it’s spending on defense contractors, in which case it’s the lifeblood of the economy. Well, in case you thought that this was some random line inserted into his speech, this theme — government spending is great as long as it’s for destructive purposes! — is now the theme of a massive ad blitz.

    Who Built That? - Simon Johnson - Perhaps the biggest issue of this presidential election is the relationship between government and private business. President Obama recently offended some people by appearing to imply that private entrepreneurs did not build their companies without the help of others (although there is some debate about what he was really saying). For most of the last 200 years, national economic prosperity has been about creating and sustaining a symbiotic relationship between government and private business, including entrepreneurs who build businesses from scratch. This symbiosis was long a great strength of the United States, something it got right while other nations failed to do so, in various ways. Is the partnership between government and business now really on the rocks? What would be the implications for longer-run economic growth of any such traumatic divorce?

    ‘Everything people think they know about the stimulus is wrong’ - Everything people think they know about the stimulus is wrong. It was called the American Recovery and Reinvestment Act and it did produce a short-term recovery. We dropped 8.9 percent of GDP in Q4 2008. We lost 800,000 jobs in January 2009. We passed the stimulus. And then the next quarter we saw the biggest jobs improvement in 30 years. The long-term reinvestment part is working. It spent $90 billion for clean energy when we were spending just a few billion a year. It’s doubled renewable energy. It’s started an electric battery industry from scratch. It jump-started the smart grid. It’s bringing our pen-and-paper medical system into the digital age. It’s got Race to the Top which is the biggest education program in decades. It’s got the biggest middle-class tax cuts since the Reagan era. It prevented seven million people from falling behind the poverty line. EK: That gets to one of the central political problems the stimulus had, I think. It was called the Recovery and Reinvestment Act. The Reinvestment side was composed of long-term investments to jump-start tomorrow’s economy. But since it’s thought of entirely as a stimulus bill, those investments, which in another context would be huge accomplishments, are seen as a distraction from the central work of the law.

    The Ryan Sinkhole - What people have not been talking about enough is that the Ryan budget contains an $897 billion sinkhole: massive but unexplained cuts in such discretionary domestic programs as education, food and drug inspection, workplace safety, environmental protection and law enforcement. The scope of the cuts – stunning in their breadth — is hidden. To find the numbers, turn to page 16 of the Concurrent Resolution on the Budget – Fiscal Year 2013. In Table 2, Fiscal Year 2013 Budget Resolution Discretionary Spending, in the far right hand column, you’ll see the nearly $897 billion figure, which appears on the line marked “BA” for Budget Authority under Allowances (920) as $896,884 (because these figures are listed in millions of dollars). According to the House Budget Committee, of which Ryan is the chairman:The federal budget is divided into approximately 20 categories known as budget functions. These functions include all spending for a given topic, regardless of the federal agency that oversees the individual federal program. Both the president’s budget, submitted annually, and Congress’ budget resolution, passed annually, comprise these approximately 20 functions. Within the 20 “budget functions” lurks — at number 19 — “Function 920.” In a masterpiece of bureaucratic obscurantism, the explanation provided by budget committee reads as follows: Function 920 represents a category called “allowances” that captures the budgetary effects of cross-cutting proposals or contingencies that impact multiple functions rather than one specific area of the budget.

    Flabbergasted Rand Paul Learns Public Employment Decreased Under Obama - One of the least appreciated but easily-confirmed facts about the current state of the American economy is that the number of Americans employed by the government has gone down under President Obama. But apparently this is news to one the Republican Party’s most prominent tea party conservatives. During a roundtable discussion on ABC this morning over the size and adequacy of the 2009 stimulus, a flabbergasted Sen. Rand Paul (R-KY) asked economist Paul Krugman if he was actually arguing that government employment had gone down under Obama: Watch it:

      • PAUL:  Are you arguing that there are fewer government employees under Obama than there were under Bush?
      • KRUGMAN: Of course. That’s a fact.
      • PAUL: No, the size of growth of government is enormous under President Obama.
      • KRUGMAN: If government employment had grown as fast under Obama as it did under Bush, we’d have a million and a half more people employed right now — directly.

    Government Employment - Paul Krugman  - During today’s round table on ABC, Rand Paul seemed shocked at my claim that government employment is down under Obama. Of course, it is. But maybe he’s thinking of the fact that since govt employment rose under Bush, we’re still at higher absolute levels than we were a decade ago. That is, however, a strange comparison: other things equal, you’d expect government employment to grow with population (remember, the typical government employee is a schoolteacher). And here’s what has happened to government employment per capita:

    The Zombie That Ate Rand Paul's Brain- Krugman -  Aha. It seems that I was giving Rand Paul more credit than he deserved. Think Progress has the video, and it’s clear that Paul was completely shocked at the notion that government employment had fallen under Obama, rather than soaring. How did that happen? Almost surely it’s a case of a zombie lie that has gone unchallenged in the hermetic world of movement conservatism, so that people like Paul know, just know, something that ain’t so. I wrote about this way back: the usual suspects seized on the Census bulge in employment as evidence of a big-government surge; and because nobody in that business ever admits having been wrong, this became a “fact” that people like Rand Paul believe. He wouldn’t have made this mistake if he ever read or listened to an analysis from nonpartisan sources, but he evidently doesn’t.

    Exploding Government - Paul Krugman -- I gather that Rand Paul has made a lame effort to defend his claim that we’ve seen “exploding” government under Obama by claiming that he only meant the federal workforce, which has gone up slightly even as state and local employment has fallen. But as I’ve pointed out, the vast majority of government workers actually are at the state and local level. (And yes, the feds have an influence: the Recovery Act contained substantial aid to lower levels of government, which should have been continued). A number of people have asked for total and federal government employment per capita over time; here it is, with the top line total at all levels, the bottom federal only: Feel the explosion! Actually, you can see several points: federal employment is a small part of the picture and per capita is at a historic low; there are blips every 10 years for the census; and overall government employment has fallen in an unprecedented way under Obama.

    Getting Employment (And Other) Numbers - Krugman - Employment numbers ultimately come from the Bureau of Labor Statistics; by drilling down into the databases there you can get quite a lot of detail. However, the BLS site isn’t that user-friendly — not that it’s bad, but the graphics are pretty lame and even persuading it to provide data in a form that’s convenient for your spreadsheet takes a bit of work. So when I can, I usually go to FRED, which has much (not all) of the same data in a beautifully convenient form and produces nifty graphs on demand. FRED also has lots of other data. So if you think I’ve said something wrong, or alternatively if you want to explore some alternative, go to FRED before posting. It will make you a better person.: One thing you’ll learn immediately if you look at these numbers is that government workers are overwhelmingly employed by state and local governments; the federal government accounts for less than 3 million of a total of more than 20 million. That’s because the federal government is an insurance company with an army, delivering relatively few services directly; it’s lower-level governments that employ the schoolteachers, police officers, firefighters, and prison guards that make up the bulk of public employment.

    Absence of Asterisks - Krugman - Some readers ask why I’m not giving the Obama budget plan a grilling comparable to the one I’m giving to Romney. Well, I’m glad you asked that: it’s because the Obama plan, whether you like it or not, doesn’t have anything like Romney’s reliance on magic asterisks. What Obama proposes is for the most part a continuation of current tax and spending policy, except for a rise in taxes on the over-250K crowd and some relatively modest spending cuts relative to current policy. The CBO analysis of his proposals basically agrees with his numbers. You can quarrel with the Obama projection, arguing that some assumptions are too optimistic, or alternatively that it doesn’t bring down the deficit enough. But there’s no big mystery about what he intends.Romney, on the other hand, proposes $5 trillion in tax cuts compared to current policy, which he claims he will offset by closing loopholes — but won’t name a single example. He also claims that he’ll achieve huge cuts in discretionary spending, but refuses to specify what will be cut. Sorry, but these aren’t comparable stories. Obama has been as open and forthright as one can reasonably expect; Romney is hiding behind a smokescreen.

    Federal Spending Is VERY Popular. Episode 6: Rand Paul Agrees With Paul Krugman About GOP Hypocrisy - Take a close look at the snippet of the transcript below from yesterday's segment on ABC's This Week (hat tip to TPM). It's not often that you see or hear tea partier Senator Rand Paul (R-KY) and Paul Krugman agree on much, let alone on the hypocrisy of the GOP leadership about the value of federal spending to the economy.Here's the money quote:

    KRUGMAN:  Right now, Mitt Romney has an ad blitz where he's accusing Obama of cutting defense spending, which is actually, you know, that's not really true, but and then he says and the reason this is terrible is it because it will eliminate jobs.  So the Romney campaign's position is government spending can't create jobs unless it goes to defense contractors in which case it's the lifeblood of the economy...
    PAUL:  And that's an inconsistency.  That's an inconsistency.
    KRUGMAN:  It's pretty major.
    PAUL:  And it's wrong.  They are accepting Keynes with regard to military spending...
    KRUGMAN:  Weaponized Keynesianism.
    PAUL:  ... but not with regard to domestic spending.

    “The Price of Politics,” by Bob Woodward - The mystery of who blew the grand bargain — Obama says Boehner did it, by caving in to his caucus; Boehner blames Obama, for insisting on more tax revenue — matters less than what the whole abasing episode tells us about the state of self-government in the United States. To the extent that Woodward broaches this, he does it through the prism of personality. In the book’s final few pages, he places a pox on both houses, Obama’s and Boehner’s, for failing to “transcend their fixed partisan convictions and dogmas.” He chides Boehner for failing to win the loyalty or respect of House Republicans or even just to rein in his first lieutenant. “He could have called Eric Cantor in and had the conversation of a lifetime,” pressing the majority leader to fall in line, Woodward suggests. But Woodward reserves his most damning indictment for Obama, whom he sees as well meaning but often stumbling, and cocky and remote — a cold fish with a high hand who needlessly alienates potential “friends.” Woodward recounts that in early 2009, after every last House Republican voted against the administration’s stimulus package, Cantor told Emanuel that “you really could have gotten some of our support”— if it weren’t for the president’s “arrogance.”Woodward seems to take this claim at face value, along with similarly self-serving statements by Rep. Paul Ryan and others. They inform Woodward’s final, blistering judgment. Yes, he acknowledges, Obama inherited a “faltering economy and faced a recalcitrant Republican opposition. But presidents,” he says, “work their will — or should work their will — on the important matters of national business.” Ronald Reagan and Bill Clinton largely did, he concludes. “Obama has not.”

    Romney: GOP leaders made ‘big mistake’ agreeing to sequester - GOP presidential candidate Mitt Romney in an interview on NBC's “Meet the Press” airing Sunday criticizes GOP leaders, including his own running mate Rep. Paul Ryan (R-Wis.), for agreeing to the August 2011 debt-ceiling deal. Romney was asked about the $109 billion automatic spending cut known as the sequester that is due to hit in January. Some $55 billion comes from the defense budget.  The GOP candidate blasts President Obama for proposing the cuts, which were floated as a way to force the failed debt supercommittee to strike a deal last fall. “I want to maintain defense spending at the current level of the GDP. I don't want to keep bringing it down as the president's doing. This sequestration idea of the White House, which is cutting our defense, I think is an extraordinary miscalculation in the wrong direction,” Romney says.  Pressed on the votes of House leaders, including Speaker John Boehner (R-Ohio) and Ryan, in favor of the deal, Romney says that was a “big mistake.”

    Mitt Romney Calls Debt Ceiling Deal "Big Mistake" - Remember now, that debt ceiling deal exists because an otherwise routine act of Congress was turned into a political showboat by the likes of Paul Ryan and friends, who thought it would be a really great idea to allow the nation to default on its debt rather than pass a clean increase of the debt ceiling. So when Mitt Romney says "I thought it was a mistake on the part of the White House to propose it. I think it was a mistake for Republicans to go along with it," what he is really saying is that the deadline to raise the debt ceiling should have passed without any Congressional action. That lack of action would have blown up the US economy and the global economy right alongside it, since US debt instruments are viewed as the safest investment there is by those at home and abroad.  He also proves he doesn't understand what the deal was or who proposed it. Mitch McConnell was the architect of the sequester, and the whole idea behind it was to force Congress to act on a more reasonable set of cuts rather than allowing the sequester to happen at all.

    Romney’s Tax Plan Leaves Key Variables Blank - If any single question can be said to dominate the presidential campaign, it is whether the conservative policies advocated by Mitt Romney would help or hurt the middle class. And no issue hits the heart of that question more than taxes.Mr. Romney says no middle-income Americans will have their tax bill go up if he is president. President Obama says the average middle-class family would pay as much as $2,000 a year more under the Romney plan. It is a conflict that grew in prominence during the party conventions and that both sides intend to push from now until Election Day. And it has focused sharper attention on what many experts agree is one of the tax code’s biggest problems: an array of tax breaks totaling more than $1 trillion a year. The breaks cover activities as varied as cutting timber, providing health insurance to employees, selling stock and buying a home, making them popular with powerful constituencies and voters. But many economists say the tax breaks are inefficient and even distort the economy. Mr. Romney has pledged to cut individual income tax rates for everyone, and to do it without increasing the federal budget deficit or putting new tax burdens on middle-income people to make up for the lost revenues from the rate cuts. But he has provided no further specifics, confounding analysts and leaving himself open to attack from Democrats.

    Mitt Romney, Carried Interest and Capital Gains - A key reason for Mr. Romney’s low tax rate is that a very substantial amount of his income comes from capital gains – 51 percent in 2011 and 58 percent in 2010. Capital gains, no matter how large, are taxed at a maximum rate of 15 percent, whereas wage income can be taxed as much as 35 percent by the income tax plus taxes for Medicare and Social Security. The latter two are not assessed on capital gains. Significantly, much of Mr. Romney’s capital gains income achieved this treatment through a special tax loophole called carried interest. According to recently released documents, executives at Bain Capital, where Mr. Romney made the bulk of his estimated $250 million fortune, saved $200 million in federal income taxes and another $20 million in Medicare taxes because of the carried interest loophole. The way the loophole works relates to the peculiar method in which money managers are compensated. Typically, they receive a fee of 2 percent of the gross assets under management, much of which comes from employee pension funds, plus 20 percent of any increase in value. Thus, on $1 billion of assets the managers would automatically get $20 million that would be taxed as ordinary income. If the assets increased 10 percent to $1.1 billion, they would get another $20 million. For tax purposes, this additional $20 million would be treated as a capital gain and taxed at 15 percent.

    Report: Tax Cuts for Wealthy Linked to Income Inequality – Just in time for the year-end debate over extending the Bush tax cuts for high earners: a new report concludes that tax cuts for the rich don’t seem to be associated with economic growth. The report, from the Congressional Research Service, finds that tax cuts for high earners can be linked to a different outcome: income inequality. “The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced,” according to the CRS report, circulated on Friday. The report appears to give a lift to Democrats’ calls for the Bush-era tax cuts to lapse next year on incomes above $250,000. Democrats say that low taxes on the rich merely exacerbate income inequality. Republicans say that higher taxes on big incomes would hurt the economy by damping the after-tax income of small-business owners who pay taxes through their individual returns. The top individual tax rate for high earners has generally declined since World War II, and is at 35% currently, down from 94% in 1945, the report noted. Although capital gains tax rates have been more variable, the current 15% rate is the lowest in more than 65 years. The capital gains rate was 25% before 1965. The government researchers found that “the top tax rates do not necessarily have a demonstrably significant relationship with investment.” The researchers also said that the correlation between economic growth and the top tax rates “is not strong,” and that any links “could be coincidental or spurious because of changes to the U.S. economy over the past 65 years.”

    Which tax cuts stimulate the economy? - Studies examining the impact of cutting personal income tax rates on job growth or economic activity generally have been inconclusive, said Will McBride, chief economist for the Tax Foundation. Owen M. Zidar, a graduate economics student at the University of California at Berkeley, and a former staff economist on the White House Council of Economic Advisers for President Obama, has taken another crack at it, sifting through the data, using the National Bureau of Economic Research’s tax simulation model. Zidar looked at state level income and economic data.He reasoned that “if tax cuts for high income earners generate substantial economic activity, then states with a large share of high income taxpayers should grow faster following a tax cut for high income earners.” The data show that tax cuts at the top, though, do not result in faster growth in states with more high-earners.“Almost all of the stimulative effect of tax cuts,” Zidar found, “results from tax cuts for the bottom 90 percent. A one percent of GDP tax cut for the bottom 90 percent results in 2.7 percentage points of GDP growth over a two-year period. The corresponding estimate for the top 10 percent is 0.13 percentage points and is insignificant statistically.”

    Who Pays the Corporate Income Tax? - Corporations pay income taxes in an administrative sense: they write checks (or send electrons) to the IRS. But corporations can’t actually bear the burden – they are just legal entities, not living and breathing human beings. So who ultimately bears the burden of corporate income taxes? Shareholders? Employees? Customers?  Economists have struggled with this question for decades. When Mick Jagger dropped out of the London School of Economics in the 1960s, for example, he allegedly complained that “economists can’t even tell if corporations pay taxes or pass them on.” We’ve made some progress since then. Over at the Tax Policy Center, my colleague Jim Nunns summarizes what economists have learned over the past five decades and describes TPC’s new approach to distributing the corporate income tax. As Jim reports, our best estimate is that workers bear 20 percent of the corporate income tax,  shareholders bear 20 percent, and investors as a whole bear 60 percent.

    US government to cut AIG stake to below half of bailed-out insurer’s stock in $18 billion sale - The U.S. government is selling more of its shares in insurer American International Group Inc., in a move that should decrease its holdings below a majority stake for the first time since the $182 billion bailout in 2008. The sale is the latest step to recoup taxpayer money spent on the largest bailout of the financial crisis.   AIG said Sunday that the Treasury Department is selling $18 billion worth of its common shares to institutional investors. If there is more demand, the government will grant the underwriters a 30-day option to buy up to $2.7 billion more of its stake in the company. AIG said it will buy back $5 billion worth. The price is not yet determined. The move should reduce the government’s stake in AIG to less than 20 percent of the insurer’s total outstanding stock. Right now, Treasury holds about 53 percent of the company, or more than 871 billion shares of common stock, worth about $30 billion.

    Counterparties: Privatizing AIG - On August 23, the NY Fed successfully unloaded the last of its toxic AIG mortgage-backed securities. Now, the US Treasury is selling $18 billion of its AIG shares to the public, with an additional $2.7 billion available to cover investor demand. (Citi, Deutsche Bank, Goldman and JPMorgan are carrying Uncle Sam’s water as joint global coordinators.)The sale will bring the government’s stake down from 53% to as low as 15%, as Damian Paletta, Erik Holm and Serena Ng write in the WSJ:A near-exit by the government from one of the most controversial bailouts is both a significant accomplishment for the Obama administration. But the sale could also renew complaints that Treasury still hasn’t outlined a concrete strategy for exiting other large financial-crisis investments… The government remains in the red on its investments in Fannie and Freddie, which have received $188 billion in taxpayer support. The US continues to hold sizable stakes in General Motors and Ally that it spent $68 billion on and may not fully recover.As Jesse Eisinger noted last month, Treasury has been offloading shares in small banks by selling them back to the banks themselves, often at a discount. That trending is continuing, albeit in a different structure, with Treasury also announcing today it will sell shares in four small banks.

    AIG bailout success a two-sided coin: But despite the recent good news, not everyone is ready to uncork the champagne. “I think it’s a mixed story,” said Bill Black, an associate professor of economics and law at the University of Missouri at Kansas City and a former financial regulator.On one hand, Black said, “had they simply allowed an unconstrained collapse of AIG, I think it’s true that it likely would have been a terrible decision with really severe consequences.” But he and others insist that even a largely successful bailout comes with its own set of circumstances. “It creates perverse incentives,” Black said. “There’s an enormous danger to providing bailouts to systemically dangerous institutions and, in particular, bailing out their creditors 100 cents on the dollar. That danger is that you create crony capitalism.” In addition, Black said that while the government had done well in recouping taxpayer money, it had “missed an opportunity” to use its majority ownership of AIG to force the company to shrink even more than it did and to eliminate it as a systemic risk to the financial system.

    Andrew Ross Sorkin’s Bad Math on AIG – Yves Smith - His latest article, “Plot Twist in the A.I.G. Bailout: It Actually Worked” is a unabashed effort at a twofer: a recitation of pet Administration talking points (the piece starts with a quote from the White House) and an attack on a high profile critic. Sorkin (and one has to assume the Administration) is now trying a new angle on “the TARP made money” canard by arguing that the way to look at the investment is by treating the Fed/Treasury “investment” jointly, as opposed to looking at the TARP (Treasury program) in isolation. That is just another exercise in three card monte. If you are going to include Fed actions, you need to look at them in aggregate, and not cherry pick the ones that suit your case. The Fed’s apparent recouping of its “investment” in garbage barges like Maiden Lane 2 and 3 results from its extraordinary interventions to goose the prices of financial assets, including the alphabet soup of special facilities during the crisis, ZIRP, and QE and QE2. These represent a considerable transfer of wealth away from savers to financial institutions, by design. The most colorful account of how this worked comes from Steve Waldman: Suppose my kid’s meth habit got the best of him. He’s needs to come up with $100K quick or his dealer’s gonna whack him. But he’s a good kid, really! Coulda happened to anyone. So I “lend” him the money, even though he has no visible means of support.  I tell my son. “Son, you are going to pay me back every penny of that loan. You are going to work it off. I have arranged with one of my golf buddies, a guy who owes me a favor or three, a job that pays $200K a year. You’d better show up every day at 9 a.m. and sit behind that desk, and get me back my money!” And he does! After a year, he’s made me whole. What a good kid.

    Why A.I.G. May Not Be Able to Avoid the Volcker Rule - The American International Group, of all companies, wants to avoid a rule designed to stop risky trading. A.I.G.’s chief executive, Robert H. Benmosche, said on CNBC on Tuesday afternoon that the company was thinking of taking steps that could shield it from the Volcker Rule. Part of the Dodd-Frank financial overhaul legislation, the rule is intended to stop speculative trading at financial firms that enjoy federal support. Mr. Benmosche’s remarks came a day after the Treasury Department sold a large amount of shares to bring its stake in A.I.G. well below 50 percent. The sale was seen as an important milestone. The Treasury Department originally poured tens of billions of dollars into A.I.G. after its enormous speculative bets soured in 2008 and threatened the standing of the financial system. Mr. Benmosche has a reasonable sounding justification for not wanting A.I.G. to be subject to the rule. He says it does not really fit insurance companies, which take long-term positions in securities to match the long-term nature of their obligations to holders of their insurance policies. And Volcker may undermine A.I.G.’s ability to take such positions. . “Some of the investments they want to prohibit, an insurance company has to make because of long liabilities.” In theory, A.I.G. can get out of the Volcker Rule simply by selling a small bank it owns. On Tuesday, Mr. Benmosche said A.I.G. was planning to do just that.

    Taxpayers still owed more than $200 billion from bailouts-- The federal government is slowly closing the books on its bailouts of 2008, many of which have actually turned a profit. But taxpayers are still owed more than $200 billion from some of the highest-profile bailouts. On Tuesday, Treasury announced that it sold $20.7 billion worth of American International Group (AFF) stock. That brought payments to Treasury from the AIG bailout to $66.3 billion, plus another $930 million in dividends and interest. Treasury also cut its stake in the company to 15.9% from 53%. When it sells off its remaining stake, Treasury should turn a profit on the $69.8 billion portion of the AIG bailout. that came out of the Troubled Asset Relief Program. The New York Federal Reserve recently reported a $17.7 billion profit on its portion of the AIG rescue. Treasury's statement Tuesday pointed out that counting the TARP and Fed bailouts together, the AIG bailout has already turned a $15.1 billion profit for taxpayers. "Taking action to stabilize AIG during the financial crisis was something the government should never have had to do, but we had no better option at the time to protect the American economy from the damage that would have been caused by the company's collapse," said Treasury Secretary Tim Geithner, who was the head of the New York Fed when it started the AIG bailout. "To stabilize and then restructure the company with a very substantial positive gain for the American taxpayer is a significant accomplishment."

    Where The Bailouts Stand, In 1 Graphic : Planet Money : NPR: It's been four years since the U.S. launched a massive bailout of the financial system and the auto industry. While much of the bailout money has been paid back, the government still owns large shares in companies such as AIG and GM, and has yet to recoup some $200 billion in bailouts. Here's a breakdown by industry.

    Derivatives markets regulation: Unintended consequences - AFTER the crisis, policymakers agreed that the opacity of the over-the-counter (OTC) derivatives market was a source of financial instability. In response, they decided to push derivatives trading onto exchanges that would require firms to post safe collateral. If one trader blew up, the exchanges could use this collateral to help net out positions. This would be a huge improvement over the old approach, where everyone bet with each other bilaterally and every failure cascaded throughout the entire financial system (cf. AIG and Lehman). However, relatively tight fiscal policy, the private sector’s desire to rebuild its balance sheet, and central bank asset purchases are combining to deprive the system of enough safe collateral to support existing levels of trading. This in itself is not news; the ways that monetary “stimulus” can actually tighten financial conditions have been covered in many places, including here, while a wide variety of commentators have noted the need for the fiscal authorities to accommodate private deleveraging by creating more safe assets. What is new, according to a thorough piece from Bloomberg, is how banks are reacting to these developments by offering to “transform” risky assets into “safe” collateral—for a fee, of course. According to Bloomberg, “at least seven banks plan to let customers swap lower-rated securities that don’t meet standards in return for a loan of Treasuries.” This will undo whatever was accomplished by pushing derivatives trading onto exchanges.

    Quelle Surprise! Regulatory Measures to Reduce Systemic Risk Are Proving to Be Ineffective, Possibly Counterproductive - Yves Smith - In an perverse case of synchronicity, one headline last night touted regulatory efforts to address systemic risk as another highlighted bank efforts to increase it. And the ongoing efforts of banks to expand risk creation is no accident.  The way to increase the value of an option is to increase volatility. And the financial services industry has and continues to be in the position of generating endogenous risk via leverage, complexity, and opacity. One part of the telling juxtaposition was a Reuters article on how the Fed and the Office of the Comptroller of the Currency directed major banks to develop “recovery plans” to stave off collapse:They told banks to consider drastic efforts to prevent failure in times of distress, including selling off businesses, finding other funding sources if regular borrowing markets shut them out, and reducing risk. The plans must be feasible to execute within three to six months, and banks were to “make no assumption of extraordinary support from the public sector,” according to the documents. Frankly, this reads like a regulatory CYA exercise. Unless one bank suffers a major self inflicted wound, major financial players tend to run off the cliff tout ensemble. That means that there won’t be much of a market for business units, except at very crappy prices that won’t raise enough capital (most if not all of the logical buyers will by trying to shed risk and maybe businesses, and PE funds were battening down the hatches during the crisis as well, since acquisition finance dried up). Similarly, alternate funding sources are also scarce. Sovereign wealth funds were virtually the only game in town and they got leery after their early-in-the-crisis investments in bank paper promptly lost value. Moreover, even three months is far too leisurely a timetable. MF Global went down in mere days.More obviously troubling was a Bloomberg story on how major financial firms are going to undermine the effectiveness of clearinghouses by engaging in “collateral transformation”:

    A $4 Trillion Dodd-Frank Loophole - To improve the safety of the financial system, the Dodd-Frank reform law requires that most derivative deals be executed on a clearinghouse that will require traders to post collateral and will provide a central place for regulators to keep an eye on risk in the market. The idea was to increase transparency in a market that played a key role in the financial crisis and led to the federal $182.3 billion bailout of American International Group (AIG) in 2008. But for every new rule, there is a frantic search for new loopholes. And sure enough, banks have found a big one. Our colleague Bradley Keoun at Bloomberg News has a fascinating story about how some of the country’s largest banks are planning to help clients circumvent new requirements in the law. The move lets traders “transform” risky securities into the high-grade bonds that clearinghouses require traders to post as collateral. Traders and investors do this by temporarily swapping out their lower-grade securities for high-grade bonds such as Treasuries, which are in great demand these days as investors and banks shore up their books. The traders are happy because they have the quality collateral they need, and the banks are happy because they collect fees and interest for lending out their goods.

    Simple or Complex? - Ever since the financial crisis, there has been an on-again, off-again debate over the right model for financial regulation. On the one hand are those who favor simpler rules—such as a simple leverage limit based on total unweighted assets—on the grounds that they are easier to monitor and tougher to game. On the other hand are those who favor complex rules—such as the Dodd-Frank Act, which has so far generated over 8,000 pages of rules—on the grounds that the world is complicated so we need complicated rules. For the most part, this has been a shouting match over broad principles. A friend sent me Andrew Haldane’s paper from Jackson Hole a couple of weeks ago, “The Dog and the Frisbee.” (The title refers to the ability of a dog—or a child—to catch a frisbee by following a single visual heuristic, ignoring factors such as the rotational speed of the frisbee or wind currents.)  Haldane points out that since Basel II allowed banks to use internal risk management models for calculating their risk-weighted assets and capital, capital regulation is now performed by models that potentially include millions of parameters that must be estimated (p. 9). But these parameters must be estimated using relatively short historical samples—drawn from a historical period that may or may not be representative of the future. Here we collide with another fact of statistics: when you have a limited amount of sample data, simple models have greater predictive accuracy than complex models. Haldane cites examples from a number of fields.

    Why we can’t simplify bank regulation -  The front page of the new issue of Global Risk Regulator — the trade mag for central bankers around the world — features an excellent article by David Keefe about Sheila Bair, Andrew Haldane, and calls for a “return to simplicity”. Bair tells Keefe that “we’re drowning in complexity”: “The public is tired of rules they don’t understand,” she said, adding: “We should be simplifying the rules, we should be simplifying the institutions for which the rules are made, but it’s going in the opposite direction.” …Bair said she was in “wholehearted agreement” with Haldane’s attack on the complexity of regulation.  “Regulation”, in this context, means one very specific thing: Basel III, the new code governing the world’s banks. No one is advocating that it be abolished: it’s clearly much more robust than its predecessor, Basel II.But if Basel II was horribly complicated, Basel III is much more complex still — and, as I and others have been saying for the past couple of years, that’s a real problem. Ken Rogoff puts it well: As finance has become more complicated, regulators have tried to keep up by adopting ever more complicated rules. It is an arms race that underfunded government agencies have no chance to win.  More recently, bankers themselves have started saying the same thing: yesterday, for instance, Sallie Krawcheck said that the complexity of financial institutions “makes you weep blood out of your eyes”.

    The Long-term Price of Financial Reform - iMFdirect  - In response to the global crisis, policymakers around the world are instituting the broadest reform of financial regulation since the Great Depression. Some in the financial industry claim the long-run economic costs of these global reforms outweigh the benefits. But our new research strongly suggests the opposite—the reforms are well worth the money. Granted, just as adding fenders, safety belts, airbags, and crash avoidance features can make cars slower, we know that additional safety measures can slow down the economy in years when there is no crisis. The payoff comes from averting or minimizing a disaster. Five years after the onset of the current crisis, we sadly know all too well the cost in terms of economic growth, so the potential gains in avoiding future crises are very large.Our study finds that the likely long-term increase in credit costs for borrowers is about one quarter of a percentage point in the United States and lower elsewhere. This is roughly the size of one small move by the Federal Reserve or other central banks. A move of that size rarely has much effect on a national economy, suggesting relatively small economic costs from these reforms.

    Central bankers won’t fix Libor this weekend – (Reuters) - Central bankers will not reach any decisions on what to do about the scandal-hit Libor rate, a benchmark reference rate for global short-term interest rates, when they meet this weekend in Basel, Switzerland, Bank of Canada Governor Mark Carney said on Friday. "The discussions this weekend will be necessarily preliminary," Carney, who is also chairman of the Group of 20's Financial Stability Board, told reporters after a speech in Calgary. Bank of England Governor Mervyn King put the Libor issue on the agenda of the Sunday meeting of the Economic Consultative Committee of global central bankers because a rate-rigging scandal has called the integrity of Libor, the London Interbank Offered Rate, into question. Carney said the central bankers would look at "a broader range of reference rates across a range of jurisdictions" One of the important inputs into eventual decisions will be a report by Martin Wheatley, managing director of Britain's Financial Services Authority, and that's not due till late September. "We're not going to front-run the very important and good work that, for example, Martin Wheatley is doing in the UK," Carney said.

    MTA vows “full recovery” of funds lost in LIBOR scandal - New York City and the Metropolitan Transportation Authority likely lost millions of dollars tied to derivatives in the interest rate–fixing scandal currently under investigation by state Attorney General Eric Schneiderman — money that the MTA says it will aggressively try to recover. An MTA spokesman told the World last week that the Authority is communicating with Schneiderman’s office about the progress of the AG’s investigation into the suspected suppression of the interest rate known as LIBOR. “Either through these proceedings, or through separate legal action in the event that should prove most beneficial to [the] agency, the MTA will pursue full recovery from the banks involved for any financial injuries suffered as a result of suppression of LIBOR rates,” the spokesman, Aaron Donovan, wrote in an email. With the help of Peter Shapiro of Swap Financial Group, and Johan Rosenberg of Blue Rose Capital Advisors — two experts in the types of financial instruments hardest-hit by the interest rate manipulations — The New York World analyzed the LIBOR-related costs to the city, the Municipal Water Finance Authority, and the MTA, using information found in annual financial statements.  The World’s analysis suggests the MTA’s LIBOR-related losses on its derivatives are likely at least $5 million, and could amount to as much as $8 million. Donovan declined to comment on the World’s figures.

    JPMorgan Said to Face Escalating Senate Probe of CIO Loss - JPMorgan Chase & Co.’s (JPM) wrong-way bets on derivatives are the focus of an escalating investigation by a U.S. Senate panel led by Carl Levin that has grilled executives from banks including Goldman Sachs Group Inc. and HSBC Holdings Plc, three people briefed on the inquiry said. Levin’s Permanent Subcommittee on Investigations is seeking testimony from those who worked in or helped lead JPMorgan’s chief investment office, according to the people, who asked not to be identified because the inquiry isn’t public. The unit’s London staff lost at least $5.8 billion this year on the botched wagers, which were large enough to shift markets. Tara Andringa, a spokeswoman for Levin, didn’t respond to a message seeking comment, and Joe Evangelisti at JPMorgan declined to discuss the panel’s inquiry. “As always, the company has fully cooperated with all regulatory and governmental requests around this matter,” Evangelisti said. The bank, led by Chief Executive Officer Jamie Dimon, 56, faces a panel of lawmakers that in recent years brought executives from Goldman Sachs and London-based HSBC to Capitol Hill, barraging them with questions that challenged their version of events. JPMorgan said in July that its internal review found traders may have tried to obscure the full amount of losses they faced on their transactions.

    Will JPMorgan’s Jamie Dimon Get Swallowed by the Whale -- Last week the business media was buzzing about a newly ramped up investigation into the $5.8 billion in losses thus far reported by JPMorgan’s Chief Investment Office in what is now dubbed the London Whale trade.  The Senate’s Permanent Subcommittee on Investigations, Chaired by Carl Levin, is reportedly interviewing former personnel who worked in that division, based in London as well as New York.  Levin’s powerful subcommittee has jurisdiction to conduct investigations into a wide array of issues, including fraud and abuse, and corporate crime.  The real breaking news on this matter, however, occurred on May 13 of this year when Levin appeared on Meet the Press.  Host David Gregory asked Levin what should be the price for what occurred at JPMorgan.  Levin has this to say:  “In terms of past activities, that’s in the hands of people who are assessing whether there was any criminal wrongdoing.  That’s still in the hands, as far as I know, of the Justice Department and the New York prosecutors.”  The operative words in the above statement are “past activities” and “criminal.”   That strongly suggested that improprieties in the Chief Investment Office had been going on for quite some time – not the few months that the public had been led to believe.  That view was buttressed when JPMorgan later reported that there may have previously been mismarking of values in the Chief Investment Office.

    How banking culture transformed over the decades - "When I worked at Morgan, the place was so strait-laced I felt my pyjamas had to be pressed before I went to bed." That's how a former senior banker describes the beginning of his career at JP Morgan in the 1960s, before the financial industry transformed into a giant global money machine. It was a time when "protecting your bank's reputation was like protecting a woman's honour", he says, now retired. How different it seems from today then, when the industry has become synonymous with society's ills - greed, immorality, recklessness - that have seen executives resign, bonuses clawed back and even a knighthood stripped. "The general ethics at the banks are certainly not what it used to be," says another retired banker who worked at Citibank all his life, both requesting anonymity. Back then, he says, bankers "were well regarded. We were a prestigious industry having good principles." The recent attempted Libor-fixing scandal, for example, is "disgusting", the former JP Morgan banker says, who also worked as a trader and as a Bank of America manager. "There was no reason to do that. It was just cheap - it's like hitting somebody when they're not looking."

    Sheila Bair Visits Occupy Wall Street - Sheila Bair, the former FDIC chairman who heads the Systemic Risk Council, and Ricardo Delfina, a fellow Systemic Risk Council member, met on Sunday with members of several Occupy Wall Street working groups: Occupy Bank, Alternative Banking, and Occupy the SEC. I’ve watched presentations by Bair twice previously: once when she was at the FDIC, another not long after she had left government service. Even though she had been pretty direct in those discussions, she was surprisingly specific in this meeting about some of the impediments she faced during the crisis. Some of the topics:

    Citigroup. Bair wanted Citi resolved. However, she was not in a good position to do so, since the OCC was Citi’s primary regulator and it, along with the Treasury and Fed, were adamantly opposed.
    Improving regulation. Bair thinks banking regulation should be a career, like the foreign service, with bank regulators or at a minimum bank examiners barred for life from working for banks either directly or through advisory firms. She also believes in having regulations be simple to avoid bank gaming (former Treasury Secretary Nicholas Brady also took up this theme recently in a Financial Times comment).
    Specific proposals. Bair thought it was irresponsible not to require money market funds to use a floating NAV, and attributed the failure to get the reform through to aggressive, “vicious” lobbying by incumbents.
    Lack of prosecutions. “I don’t understand” why no one has been prosecuted at MF Global, such as Jon Corzine. She thinks it is important to hold individuals accountable.
    Effecting change. Bair argued that Occupy and the public more broadly needed to make it clear to Congressmen that they are unhappy with legislators kow-towing to banks. She felt more signs of public outrage were needed.

    Lanny Breuer Admits That Economists Have Convinced Him Not to Indict Corporations - Marcy Wheeler: I’ve become increasingly convinced that DOJ’s head of Criminal Division, Lanny Breuer is the rotting cancer at the heart of a thoroughly discredited DOJ. Which is why I’m not surprised to see this speech he gave at the NYC Bar Association selling the “benefits” of Deferred Prosecution Agreements. (h/t Main Justice) He spends a lot of his speech claiming DPAs result in accountability. And, over the last decade, DPAs have become a mainstay of white collar criminal law enforcement. The result has been, unequivocally, far greater accountability for corporate wrongdoing – and a sea change in corporate compliance efforts. Companies now know that avoiding the disaster scenario of an indictment does not mean an escape from accountability. They know that they will be answerable even for conduct that in years past would have resulted in a declination. Companies also realize that if they want to avoid pleading guilty, or to convince us to forego bringing a case altogether, they must prove to us that they are serious about compliance. Our prosecutors are sophisticated. They know the difference between a real compliance program and a make-believe one. They know the difference between actual cooperation with a government investigation and make-believe cooperation. And they know the difference between a rogue employee and a rotten corporation.

    Getting Economics to Acknowledge Rentier Finance - The economics discipline has for the most part managed to ignore the 800 pound gorilla in the room: that of the role that the financial services industry has come to play. Astonishingly, even though the reengineering of the world economy along the lines preferred by mainstream economists resulted in a prosperity-wrecking global financial crisis and a soft coup by financiers, the discipline carries on methodologically as if nothing much had happened. And one of its huge blind spots is its refusal to acknowledge the role of banking and finance in modern commerce. Interest rates are simply an input into the preferred form of macro models, DSGE (dynamic stochastic equilibrium models). Economies are assumed to be self correcting, and to automagically “correct” to full employment. All shocks to the system are exogenous. In other words, boom-bust credit cycles are simply omitted because they are ideologically inconvenient and instability is too hard to model. Various heterodox economists are making a concerted effort to represent the role of the finance in modern economies. A new paper by Michael Hudson makes an important contribution by looking at financial services from a Classical economics perspective. Classical economists took a decidedly dim view of what they saw as unproductive rent-seeking, with “rent” seen as the dead hand of the feudal aristocracy weighing on current production:

    Too Big To Jail: Wall Street Executives Unlikely To Face Criminal Charges, Source Says: A last-ditch effort by federal and state law enforcement authorities to hold Wall Street accountable for nearly bringing down the U.S. economy is unlikely to lead to any criminal charges against big bank executives, according to a source close to the investigation. Barring a "hail mary pass," said the source, who spoke on the condition of anonymity because the investigation is still ongoing, the members of a task force President Barack Obama formed in January to investigate fraud in the residential mortgage bond industry will instead most likely bring civil lawsuits against some of the banks involved, though it isn't clear when these cases might come. That means any penalties for those accused of fraud or other misconduct would be measured in dollars, not jail terms. A spokesman for New York Attorney General Eric Schneiderman, a co-head of the task force and the driving force behind its formation, declined to comment.

    Corporate Profits Just Hit An All-Time High, Wages Just Hit An All-Time Low - In case you need more confirmation that the US economy is out of balance, here are three charts for you.

    • 1) Corporate profit margins just hit an all-time high. Companies are making more per dollar of sales than they ever have before. (And some people are still saying that companies are suffering from "too much regulation" and "too many taxes." Maybe little companies are, but big ones certainly aren't).
    • 2) Fewer Americans are working than at any time in the past three decades. One reason corporations are so profitable is that they don't employ as many Americans as they used to.
    • 3) Wages as a percent of the economy are at an all-time low. This is both cause and effect. One reason companies are so profitable is that they're paying employees less than they ever have as a share of GDP. And that, in turn, is one reason the economy is so weak: Those "wages" are other companies' revenue.

    In short, our current system and philosophy is creating a country of a few million overlords and 300+ million serfs.

    Bargain bosses: American chief executives are not overpaid - Economist - THE idea that American bosses are obscenely overpaid is conventional wisdom, and not just among the true believers at the Democratic convention. The New York Times complains of “fat paychecks [awarded] to chief executives who, by many measures, don’t deserve them.” Forbes, hardly the in-house journal of Occupy Wall Street, frets that CEO pay is “gravity-defying”. An issue in April gave warning that “our report on executive compensation will only fuel the outrage over corporate greed.” Steven Kaplan of Chicago’s Booth School of Business has been poking holes in this orthodoxy for years. He has now gathered his research together in a new paper (“Executive Compensation and Corporate Governance in the US: Perceptions, Facts and Challenges”). His argument is well-grounded and intricate. He distinguishes, for example, between “estimated” and “realised” pay. Estimated pay is the estimated value of the CEO’s pay, including stock options, when the board does the hiring. Realised pay is what the CEO actually makes when he exercises his options. There is a big difference. It is now impossible to talk sensibly about this subject without first grappling with Mr Kaplan.

    Regulator Vows New Rules to Repair Mortgage Markets - In a move aimed at making it easier for consumers to get mortgages, the federal regulator for Fannie Mae and Freddie Mac said Monday the mortgage giants would address a big controversy of the housing bust: who gets stuck with bad loans. Fannie and Freddie have forced banks to repurchase billions of mortgages that have defaulted over the past few years. To protect themselves from facing similar demands, banks have raised their lending standards beyond what the two mortgage companies require, scrutinized appraisals, and demanded extensive documentation of a borrower's income and assets. To ease lenders' concerns, the Federal Housing Finance Agency said on Monday it would issue guidance that would detail steps that could limit their risk of having to buy back defaulted mortgages in costly loan "put-backs."  For example, banks will be released from having to buy back a loan under certain conditions if the mortgage has a record of on-time payments for the first 36 months, or for the first 12 months on loans that are part of an existing refinancing initiative. Those changes will take effect next year. It isn't clear how far the latest guidance will go toward making it easier for consumers to get a mortgage. While mortgage rates have fallen by a full percentage point over the last 18 months, demand for new loans remains nearly unchanged from one year ago.

    Freddie Mac to recover billions extra from loan reviews: regulator (Reuters) - Freddie Mac will recover up to $3.4 billion more from banks after closely scrutinizing soured loans it bought during the housing boom, a regulator's watchdog reported on Thursday. The report comes after Freddie Mac agreed last year to settle with Bank of America Corp over bad loans the bank sold to the housing finance company in the runup to the mortgage crisis. The watchdog, the inspector general for the Federal Housing Finance Agency, later raised concerns about how Freddie Mac reviewed loans for potential buybacks by the bank. After making changes, government-owned Freddie Mac will now collect more money back from banks, according to Thursday's report by the inspector general for the FHFA, which regulates Freddie Mac and Fannie Mae. Banks grant mortgages loans to customers and then sell them on to Fannie Mae and Freddie Mac, which packages them as securities for investors. If the loans go bad, the institutions can ask banks to buy them back if there were defects in the underwriting of the loans, such as missing financial statements or fudged appraisals. In January 2011, Bank of America reached a $1.35 billion settlement with Freddie Mac to resolve current and future loan repurchase requests. The pact covered loans sold by Countrywide Financial, which Bank of America bought in 2008. But in September 2011, the inspector general found Freddie Mac's review process for repurchase requests was lacking.

    Cost of housing meltdown rivals GDP: MBA conference -- The housing crisis cost the nation about $13 trillion when tallying all losses from lawsuits, mortgage-backed securities litigation and taxpayer bailouts, a representative with fraud analytics firm Interthinx said. Ann Fulmer, vice president of industry relations for Interthinx, made that revelation while speaking at the Mortgage Bankers Association's Risk Management and Quality Assurance Forum in Dallas. To put this $13 trillion into perspective, U.S. gross domestic product — the nation's entire output of goods and services — hit $15 trillion in 2011.  "We did not pay attention to data integrity on the way up, and so we have wiped out almost an entire year of gross domestic product in the United States," Fulmer said. When looking at just REOs, short sales, RMBS suits and crisis-related litigation, the meltdown cost the mortgage/housing industry roughly $2 trillion, Fulmer explained. In addition, U.S. taxpayers and the government lost $3 trillion, while losses tied to homeowner equity reached approximately $8 trillion.

    Over 1 Million Homeowners Bounced From HAMP Since Program Began - The August housing scorecard is out, and as Arthur Delaney notes it contains a dubious milestone. Over 1 million homeowners have now been kicked out of the HAMP program, either by being turned down for a permanent modification or going into a re-default on their modification once it became permanent. And all 1 million of those borrowers end up in a worse financial situation than when they started out with the program, trapped by their servicer into bad scenarios. The Treasury Department said Thursday that 825,478 homeowners remain in permanent modifications and 66,785 are in trials as of July. But 234,760 permanent modifications and 770,834 trial ones have been canceled since HAMP’s launch in 2009, for a total of 1,005,594 cancellations. The sadder part of this is that the Treasury Department routinely counts the 234,760 permanent modifications that were eventually canceled as “people helped” by the program. Sometimes they get really brazen and count those in the canceled trial mods as well. But if you asked a Treasury Department official with knowledge of HAMP today, they would tell you that over 1 million borrowers have received permanent modifications from the program. In fact, it says that on page one of the HUD Housing Scorecard for August: “more than one million homeowners have received a permanent modification.” They won’t mention the nearly quarter of a million who redefaulted. A modification program with a 23% redefault rate isn’t a very good modification program

    Four Years After Bailout, We’re No Closer to a Coherent Housing Policy -- Though the housing market appears to have found its footing in recent months, and Fannie and Freddie have recently returned to profitability, the future of these institutions –which backstop nine out out of every ten new mortgages in America  – remain as uncertain as they were the day the federal government took them over. The most recent change to the federal government’s stance on Fannie and Freddie came on August 19, when the Treasury Department announced that instead of paying 10% dividends for their government assistance, the two agencies would simply send all their profits to the feds. In addition, the Treasury is now requiring that the GSEs reduce their investment portfolios by an annual rate of 15%, up from a previously stipulated 10%. These reforms will shrink the GSE’s balance sheets at a faster pace and do away with the absurdity of the Fannie and Freddie borrowing from the Treasury to pay a dividend during quarters when profits aren’t large enough to cover the payment. But while this may mean that the total cost of the bailout to taxpayers is reduced, it belies the fact that the federal government — through its conservatorship of the GSEs — will for the foreseeable future remain the largest single player in the housing finance sector.

    State court ruling deals blow to U.S. bank mortgage system (Reuters) - The highest court in the state of Washington recently ruled that a company that has foreclosed on millions of mortgages nationwide can be sued for fraud, a decision that could cause a new round of trouble for the nation's banks. The ruling is one of the first to allow consumers to seek damages from Mortgage Electronic Registration Systems, a company set up by the nation's major banks, if they can prove they were harmed. Legal experts said last month's decision from the Washington Supreme Court could become a precedent for courts in other states. The case also endorsed the view of other state courts that MERS does not have the legal authority to foreclose on a home. "This is a body blow," said consumer law attorney Ira Rheingold. "Ultimately the MERS business model cannot work and should not work and needs to be changed." Banks set up MERS in the 1990s to help speed the process of packaging loans into mortgage-backed bonds by easing the process of transferring mortgages from one party to another. But ever since the housing crash, MERS has been besieged by litigation from state attorneys general, local government officials and homeowners who have challenged the company's authority to pursue foreclosure actions. The Washington Supreme Court held that MERS' business practices had the "capacity to deceive" a substantial portion of the public because MERS claimed it was the beneficiary of the mortgage when it was not.

    Effectiveness of Mortgage Fraud Task Force -- RT America discusses with William Black just how aggressive the investigation by the President’s Mortgage Fraud Task Force has actually been.

    Wells Fargo Mistakenly Cleans Out Retired Couple's Home Twice - Alvin and Pat Tjosaas, a retired couple in Woodland Hills, Calif., had the bad luck of having their home mistaken for a neighboring foreclosed home and being cleared by contractors hired by Wells Fargo -- not once but twice.Tom Goyda, vice president of corporate communications for Wells Fargo Home Mortgage, told ABC News the company had foreclosed appropriately on another property near the Tjosaas house and the error was made when a contractor mistakenly went to the Tjosaas house instead of the correct house. "Alvin was left to sit among the ruins of the house," Tjosaas said of her husband. She later learned the contractors had used a satellite photo and an address given to them by Wells Fargo. The Tjosaas home had actually never had a mortgage or lien on it because it was paid for in cash as it was being built about 50 years ago. "We are deeply sorry for the very personal losses the Tjosaas family suffered as a result of their home being mistakenly secured and entered by a contractor hired to address a different nearby property," the company said in a statement.

    Foreclosure Stuffing - Back in November 2010, the robosigning scandal hit in which it was made clear that when it comes to keeping track of mortgage titles, nobody really knows what belongs to whom, except maybe for Linda Green. The immediate result of this was a complete collapse in the foreclosure process as banks no longer had leverage to evict those who don't pay their monthly mortgage bills, since the banks couldn't confirm they actually had rights to the underlying mortgage, and the total monthly foreclosure total dropped from a ~330,000 average houses/month to roughly 250,000. Then in February, to much administration fanfare, the banks, and the attorneys general, signed what we dubbed the Robo-settlement: an event which was supposed to be the "resolution" to the robosigning scandal, and which should once again unclog the foreclosure pipeline. This did not happen. Instead, as RealtyTrac has been diligently reporting month after month, the monthly foreclosure total has continued to decline, and in August hit a level of 193,508 total foreclosures. The immediately spin is that this was a 1% improvement from July's 191,925. The reality is that it was a drop of 15.1% from a year earlier. As the chart below shows, ever since the advent of fraudclosure, the average monthly foreclosure total has dropped from a 330K/month average to just 219K. And declining. So why did the robosettlement not undo the robosigning foreclosure crunch? Simple - foreclosure stuffing.

    LPS: Mortgage Delinquencies decreased slightly in July - LPS released their Mortgage Monitor report for July today. According to LPS, 7.03% of mortgages were delinquent in July, down from 7.14% in June, and down from 7.80% in July 2011.  LPS reports that 4.08% of mortgages were in the foreclosure process, down slightly from 4.09% in June, and down slightly from 4.11% in July 2011.  This gives a total of 11.12% delinquent or in foreclosure. It breaks down as:
    • 1,960,000 loans less than 90 days delinquent.
    • 1,560,000 loans 90+ days delinquent.
    • 2,042,000 loans in foreclosure process.
    For a total of ​5,562,000 loans delinquent or in foreclosure in July. This is down from 5,663,000 last month. This following graph shows the total delinquent and in-foreclosure rates since 1995. The total delinquency rate has fallen to 7.03% from the peak in July 2010 of 10.57%. A normal rate is probably in the 4% to 5% range, so there is a long ways to go. The second graph shows new problem loans by equity position. From LPS:  “The July mortgage performance data shows a continuing correlation between negative equity and new problem loans,” The third graph shows percent negative equity by state.

    CoreLogic: Negative Equity Decreases in Q2 2012 -- From CoreLogic: CORELOGIC® Reports Number of Residential Properties in Negative Equity Decreases Again in Second Quarter of 2012 CoreLogic ... today released new analysis showing that 10.8 million, or 22.3 percent, of all residential properties with a mortgage were in negative equity at the end of the second quarter of 2012. This is down from 11.4 million properties, or 23.7 percent, at the end of the first quarter of 2012. An additional 2.3 million borrowers possessed less than 5 percent equity in their home, referred to as near-negative equity, at the end of the second quarter. Approximately 600,000 borrowers reached a state of positive equity at the end of the second quarter of 2012, adding to the more than 700,000 borrowers that moved into positive equity in the first quarter of this year.  Together, negative equity and near-negative equity mortgages accounted for 27.0 percent of all residential properties with a mortgage nationwide in the second quarter, down from 28.5 percent at the end of the first quarter in 2012.  This graph shows the break down of negative equity by state. Note: Data not available for some states. From CoreLogic:  "Nevada had the highest percentage of mortgaged properties in negative equity at 59 percent, followed by Florida (43 percent), Arizona (40 percent), Georgia (36 percent) and Michigan (33 percent). These top five states combined account for 34.1 percent of the total amount of negative equity in the U.S." The second graph shows the distribution of home equity. Close to 10% of residential properties have 25% or more negative equity - it will be long time before those borrowers have positive equity. But some borrowers are close.

    Lawler: Preliminary Table of Short Sales and Foreclosures for Selected Cities in August - Yesterday I posted some distressed sales data for Sacramento. I'm following the Sacramento market to see the change in mix over time (short sales, foreclosure, conventional). There has been a clear shift to fewer distressed sales in Sacramento. Economist Tom Lawler has been digging up similar data, and he sent me the following table today for several more distressed areas. For all of these areas the share of distressed sales is down from August 2011 - and for the areas that break out short sales, the share of short sales has increased (except Minneapolis) and the share of foreclosure sales are down - and down significantly in some areas. Previous comments from Lawler: Note that the distressed sales shares in the below table are based on MLS data, and often based on certain “fields” or comments in the MLS files, and some have questioned the accuracy of the data. Some MLS/associations only report on overall “distressed” sales.

    Who in Arizona has been helped by $25 billion lender settlement? - More than 7,700 Arizona borrowers have recently received aid from one of the nation's five biggest lenders, according to a preliminary federal report on the $25 million lender settlement with the nation's attorneys general. The lenders settled over accusations of abusive foreclosure practices. This week's report says that so far, the five lenders have spent more than $500 million in Arizona to help homeowners. But it's been hard to find many of those homeowners. So far, after working with several of Arizona's top housing non-profits and soliciting responses from readers, I have found two people who have received aid from the settlement. Both are good examples: One borrower had his principal reduced by $110,000, and another borrower had his loan modified with a $90,000 principal reduction.I have found far more examples of borrowers who were told they were ineligible for aid or eligible and then denied. But those borrowers and other people who think they are eligible but haven't heard from their lender still have options.

    Eminent Domain Furor Hits Capitol Hill - The battle over whether local governments should have the right to seize and restructure troubled mortgages is moving to Capitol Hill. Rep. John Campbell (R., Calif.) is set to introduce legislation on Thursday that would aim to put a stake in the heart of the movement to let cities take over severely underwater loans. Mr. Campbell’s bill, “Defending American Taxpayers from Abusive Government Takings Act,” would use government-controlled mortgage finance giants Fannie Mae and Freddie Mac, as well as the Federal Housing Administration and the Veterans Administration, to block the concept. The eminent domain proposal impacts “private label” loans that aren’t government-guaranteed and were mainly made before the housing bust. But the legislation aims to stop the practice by barring government-linked entities from buying or guaranteeing loans in counties where a local government has used eminent domain to seize a mortgage loan. Since the vast majority of home loans come through one of these entities, the legislation would essentially stop the eminent domain idea in its tracks, Mr. Campbell says.

    Foreclosure Fail: Study Pins Blame on Big Banks - Over the past several years, we've reported extensively on the big banks' foreclosure failings [1]. As a result of banks' disorganization and understaffing — particularly at the peak of the crisis in 2009 and 2010 — homeowners were often forced to run a gauntlet of confusion, delays, and errors when seeking a mortgage modification.  But while evidence of these problems was pervasive, it was always hard to quantify the damage. Just how many more people could have qualified under the administration's mortgage modification program if the banks had done a better job? In other words, how many people have been pushed toward foreclosure unnecessarily? A thorough study [2] released last week provides one number, and it's a big one: about 800,000 homeowners.  The study's authors — from the Federal Reserve Bank of Chicago, the government's Office of the Comptroller of the Currency (OCC), Ohio State University, Columbia Business School, and the University of Chicago — arrived at this conclusion by analyzing a vast data set available to the OCC. They wanted to measure the impact of HAMP, the government's main foreclosure prevention program.  What they found was that certain banks were far better at modifying loans than others. The reasons for the difference, they established, were pretty predictable: The banks that were better at helping homeowners avoid foreclosure had staff who were both more numerous and better trained.

    Study Blames Banks for Poor HAMP Performance; Blame the Designers, Treasury, Instead - I’ve seen some buzz from, among other places, Pro Publica, about a new study blaming banks for the inadequacies of the Administration’s foreclosure mitigation program, HAMP. According to the study, if the banks were properly staffed and performed better under the program, HAMP would have produced 800,000 more modifications by the end of the year, putting the total at 2 million, instead of the 1.2 million expected under the current path (NOTE: this does not include the hundreds of thousands of redefaults after permanent modifications, which I would argue shouldn’t count among borrowers “helped” by the program; obviously the benefit didn’t do enough to stop a default event). The study’s authors — from the Federal Reserve Bank of Chicago, the government’s Office of the Comptroller of the Currency (OCC), Ohio State University, Columbia Business School, and the University of Chicago — arrived at this conclusion by analyzing a vast data set available to the OCC. They wanted to measure the impact of HAMP, the government’s main foreclosure prevention program. What they found was that certain banks were far better at modifying loans than others. The reasons for the difference, they established, were pretty predictable: The banks that were better at helping homeowners avoid foreclosure had staff who were both more numerous and better trained [...]

    Mortgage REITs' leverage poses significant risks to the overall mortgage market - With the GSEs (Fannie Mae and Freddie Mac) forced to shrink their balance sheets (see discussion), the private sector will need to step in. As demand for mortgages increases with the growth of the US population (see discussion), the federal government will simply lack the political will to allow the GSEs to accommodate this new demand - particularly after the spectacular taxpayer bailout of Fannie Mae and Freddie Mac in 2008 and numerous capital injections by the US Treasury since then. But the private sector mortgage providers will not always be banks. With capital requirements increasing under Basel-III and other regulatory pressures, the banking sector growth may also be limited. Bloomberg: - More than half of the top 25 U.S. banks aren’t earning enough to cover their cost of capital, leading to stock prices that are “significantly lagging previous global recoveries,” according to the note. “The vast majority of the reduction relative to pre-crisis levels is attributable to structural issues like deleveraging and regulatory reform.” One development in this space that some say may be poised to meet the rising mortgage demand has been the explosion (52% increase between 2010 and 2011) of Mortgage REITs (mREITs). They are publicly listed trusts that operate similarly to their cousins in commercial real estate but focus on residential mortgage securities or sometimes pools of mortgages.

    How to Find Weeds in a Mortgage Pool -- IT sounds like the Domesday Book of the housing bust. In fact, it is a computerized compendium of millions of housing transactions — a decade’s worth from across the country — that could finally help us get to the bottom of troubled mortgage investments.  The system is an outgrowth of work done by a New York investment manager, Thomas Priore. In the boom years, his investment firm, ICP Capital, navigated the dangerous waters of collateralized debt obligations via an investment vehicle called Triaxx. Buyers of Triaxx C.D.O.’s did better than most, but Triaxx still incurred losses when the bottom fell out.  Now Triaxx’s database could help its managers and other investors identify bad mortgages and, perhaps, learn who snookered whom when questionable home loans were bundled into investments that later went bad.  Triaxx’s technology came to light only last month, in court documents filed in connection with the bankruptcy of Residential Capital. ResCap was the mortgage lending unit of GMAC, now known as Ally Financial. As an investor in mortgage securities, Triaxx gained access to a lot of information about loans that were pooled, including when those loans were made, where the properties are and how big the mortgage was, relative to the property’s value. After Triaxx fed such details into its system, dubious loans popped out.

    Fewer U.S. homes underwater as prices rise - More than 1.3 million U.S. homeowners who owed more on their mortgages than their homes were worth have regained equity this year, Santa Ana-based data firm CoreLogic says. Increases in home values are giving homeowners not only more equity but the ability to refinance. Nationwide, home values saw the biggest annual gain in almost six years, according to a CoreLogic index released earlier this month. About 600,000 underwater borrowers hit positive equity in the second quarter, according to the report. That followed more than 700,000 in the first three months of the 2012. . Some 22.3 percent of homeowners with a mortgage had negative equity at the end of June, down from 23.7 percent three months earlier. “Prices are snapping back quickly and it’s having a material impact on reducing negative equity,” Sam Khater, CoreLogic’s senior economist, said in a telephone interview. “Equity comprises the largest component of homeowner wealth, and their wealth is finally rising.” Almost 2 million more borrowers with negative equity would be above water if home prices nationally increased by 5 percent, Anand Nallathambi, president and CEO of CoreLogic, said in today’s statement.

    Fannie Mae Survey Finds Americans Feeling Better About Housing - Americans’ attitudes towards the housing market are continuing to improve, despite stalling optimism about the economy and personal finances, according to a monthly survey by Fannie Mae “Consumer attitudes toward the housing market remain modestly positive, despite signs of increased concern over the direction of the economy,” Chief Economist Doug Duncan said. “While the latest results showed a pickup in the share of consumers expecting mortgage rates to rise, reflecting the uptrend of long-term interest rates since mid-July, that may soon change.” The mortgage-finance company’s survey of 1,002 Americans last month found that respondents expect home prices to increase 1.6% in the next year, on average, down slightly from the high of 2% seen in June. About 11% of respondents said home prices will decline, the lowest level since the survey began in June 2010. And 18% say now is a good time to sell, marking the highest level since the survey’s inception. About 40% expect mortgage rates to rise in the next 12 months, an increase of four percentage points over July.

    Vital Signs Chart: Mortgage Rates Steady - Home-mortgage rates held steady this week after climbing briefly during August. The rate on a 30-year fixed mortgage stands at 3.55%. That is near the record low of 3.49% hit in late July. Rates could head lower with the Federal Reserve’s announcement Thursday of a new round of bond purchases, to be targeted at the market for mortgage-backed securities.

    Shiller on House Prices -- An interview with Professor Robert Shiller on NPR: The Housing Market: Have We Finally Hit Bottom? Robert Shiller makes a few key points:
    • There is a seasonal pattern for house prices, and the seasonality has been much stronger in recent years. The reason is foreclosures and short sales happen all year, but there is a seasonal pattern for conventional sales.  So distressed sales push down prices more than normal in the winter. Some of the recent increase in house prices was due to seasonal factors, and - as I noted last month - we should expect the NSA indexes to show month-over-month declines later this year. But the key will be to watch the year-over-year change.
    • I've argued before that we will not really know if house prices have bottomed until at least a year after it happens (I think prices bottomed early this year). Robert Shiller makes the same argument: "once you have a year of solid price increases, you are probably off to the races for some years". I don't think prices will be "off to the races" because ...
    • As Shiller notes, there are probably quite a few people waiting for a better market and somewhat higher prices: "there's a lot of people who are thinking, you know, if the prices would just come up a little bit, I'd sell". That is one reason why prices will probably not be "off to the races". Also there are still quite a few distressed sales in the pipeline - and that will keep prices from rising quickly.

    Special Report: Well-to-do get mortgage help from Uncle Sam (Reuters) - Silicon Valley, the birthplace of the microprocessor, the personal computer and the iPhone, is a model of private enterprise at work. But not when it comes to getting a mortgage. In Santa Clara County, the center of the global tech industry and one of the wealthiest places in the United States, most home buyers get help from the government, an analysis of government lending data shows. The same is true in other wealthy enclaves such as Nassau County, outside New York, and Arlington County, outside Washington, the analysis of more than 50 million loans finds. It is no secret that the U.S. government propped up the housing market after the financial crisis. What the analysis by Reuters makes clear is the extent to which government programs have helped some of the nation's most well-to-do communities.  Wyss settled on a four-bedroom, three-bathroom house in Los Gatos, California, an enclave of young technology entrepreneurs. It has about 2,400 square feet of floor space, four sets of French doors and a price tag of $1.45 million. When she bought the house in June, her main financing was a $625,500 mortgage from Wells Fargo guaranteed by government-backed Fannie Mae. The benefit to Wyss was an interest rate, of 4.125 percent, that was lower than she could have gotten on a loan that was not guaranteed by the government. "It's a totally sweet deal," Wyss said.

    Lawler: Where has the increase in the number of renters of Single Family homes come from? -- From housing economist Tom Lawler:  One of the big changes in the structure of the US Single Family (SF) housing market has been the sharp increase in the share of SF housing units that are occupied by renters. Obviously, one reason is the substantial increase in the share of SF home purchases by investor attracted by the steep drop in home prices relative to rents, and who plan to rent the purchased properties for “several” years. But ... where has the increase in the number of renters of SF homes come from?  Well, a decent % of the increased number of renters of SF homes has probably come from … yup, folks who “lost” their previously-owned SF home either to foreclosure or through a short sale. In a Federal Reserve Staff Working Paper published last May entitled “The Post-Foreclosure Experience of U.S. Households,” Fed economists Raven Molloy and Hui Shan used data from the FRB of New York/Equifax “Consumer Credit Panel” dataset to try to identify where households experiencing foreclosure end up moving to, including the type of housing. While there are challenges with using the CCP dataset for this purpose (e.g., the dataset only identifies a foreclosure start, and not a completed foreclosure, and does not explicitly identify a mortgage as backing the borrower’s primary residence), the authors make certain assumptions (ya gotta read the paper) to attempt to identify where “owners” who experienced a foreclosure start and who moved two years later ended up living. They also compare the experience of these householders to a group of “similar” householders who did not experience a foreclosure but who also moved two years later.

    Manhattan Apartment Vacancies Climb as Rents Reach Record - Manhattan’s apartment vacancy rate rose in August to its highest level for the month in three years as record-setting rents pushed tenants out of the market in the busiest time for leasing, according to Citi Habitats.  The vacancy rate in August, when the greatest number of Manhattan leases are signed, was 1.19 percent, up from 1 percent a year earlier, the brokerage said in a report today. The rate was 0.88 percent in August 2010 and 1.62 percent in 2009.  The uptick signals that tenants are staying on the sidelines after average apartment rents reached a record in March and continued to climb each month. A rise in vacancies before the slowest months for rentals may limit the surge in rates and make landlords more flexible on lease terms, he said.  “As they head into the winter months, the last thing they want to do is rack up vacancies,” Malin said. “So if they have to modify their prices or if they have to offer incentives they’ll do so.”

    U.S. Consumer Credit Surprises With $3.28 Billion Drop in July - Consumer borrowing in the U.S. unexpectedly decreased in July for the first time in almost a year, restrained by a second straight decline in credit-card debt. The $3.28 billion drop followed a revised $11.8 billion jump the previous month that was bigger than first estimated, the Federal Reserve said today in Washington. Economists projected a $9.2 billion rise, according to the median forecast in a Bloomberg survey. Revolving credit, which includes credit card spending, decreased $4.82 billion, the most since April 2011.The drop in credit-card borrowing coincides with a slowdown in hiring this year and a rise in consumer pessimism that indicate households are wary of taking on debt. Employers added fewer workers to payrolls than forecast in August, while a gain in average hourly earnings from a year earlier matched the smallest increase since records began in 2007. “All the uncertainty next year with the fiscal cliff and what people’s tax situations are going to be like -- I don’t foresee a scenario where moods are lifted to the point where personal spending picks up a lot,”

    Consumer Debt Declines, Even as Student Loans Grow --U.S. consumer credit shrank in July for the first time in nearly a year. Consumer credit declined from June by a seasonally adjusted $3.28 billion to $2.705 trillion, a Federal Reserve report showed Monday. Consumer credit declined at a 1.45% annualized rate during July, its first contraction since a 3.95% decline in August 2011. Economists surveyed by Dow Jones Newswires had forecast a $7.0 billion expansion in credit during July. The decline was primarily due to a 6.8% decrease in revolving credit, which includes credit-card debt. That fell by $4.82 billion in July to $850.73 billion. Nonrevolving credit, which includes student loans and auto financing, rose by a seasonally adjusted $1.55 billion to $1.854 trillion in July. That is 1.0% higher than the previous month. The pullback of consumer credit could reflect growing uncertainty by shoppers about jobs and future earnings, making them less willing to finance big-ticket items.  Student lending rose slightly in July to $471.8 billion from $470.7 billion. That number is reported without seasonal adjustments. Loans held by the Department of Education have been rising since 2008 as student loans shifted to direct borrowing from the federal government.  In June, consumer credit grew a revised $11.82 billion, up from an initial estimate of a $6.46 billion gain.

    Consumer Credit Posts First Drop Since August 2011 Following Nonsensical Data Revision - On the surface, today's G.19 update, aka the monthly Consumer Credit Data, was a big disappointment due to a major miss in consumer credit, which in July dropped by $3.3 billion from $2.708 trillion to $2.705 trillion. The drop was, as always, on a slide in revolving credit, which dropped for a second consecutive month, this time by just under $5 billion, while non-revolving credit, aka student loans and GM subprime debt, rose by just $1.5 billion: the lowest monthly increase in this series since August 2011, when it declined by $9 billion. Expectations were for an increase of over $9 billion. There was a far bigger problem, however. The problem is the spike on the chart below which represents the November to December 2010 transition (source: Fed). What happened there is that 3 months after the Fed revised the consumer credit data last, it decided to re-revise it again. Frankly, at this point nothing the Fed releases has any credibility, as the central planners are literally making up data every three months as it suits them.

    Vital Signs Chart: Americans Cut Back on Credit Cards -- Consumer borrowing fell in July for the first time in nearly a year. Consumer credit, excluding mortgages, declined $3.3. billion from June to $2.7 trillion. The drop was due to falling credit-card balances, amid skittishness about spending as well as tight lending standards. “Nonrevolving” credit, which includes auto and student loans, grew at a slower pace than in past months.

    Poll Finds More Than Half Americans Take Out Loans To Buy iGadgets - Ahead of Wednesday's mega-launch of the all-singing, all-dancing, all-happy-ending-providing (rumor) iPhone 5, the stunning reality is that a recent poll (via CouponCodes4U) found that 81% of consumers admitted they could not keep up with the latest and greatest from Apple - and worse still that 51% used credit to buy one of the must-have iDevices. As The Street notes, the findings of the survey show "the crazy lengths people will go to be the first person to have the latest iPhone of iPad" and the pollster was "shocked and very surprised about how many Americans freely admit that they are willing to spend their way into debt by buying Apple gadgets that they simply cannot afford."

    Vital Signs Chart: More Auto Loans Going to Subprime Borrowers - More car loans are going to risky borrowers. Nearly 12% of new auto loans went to subprime borrowers — those with credit scores below 620 — in the second quarter, the most since the market for risky loans dried up in 2008. Somewhat safer “outside of prime” loans — those to borrowers with scores below 680 — rose to 25.4% in the second quarter, up from under 17% in 2009.

    Consumer Confidence Hits Four-Year High, RBC Reports - U.S. consumer economic confidence in September soared to its highest mark in four years, according to a survey released Thursday. The Royal Bank of Canada said its consumer outlook index climbed up to 50.4 this month from 46.4 in August. The four-point advance breaks the index out of the 45 to 47 range it has held through all of 2012, reflecting an unfamiliar burst in confidence. “The improvements this month are seen across multiple sectors, but perhaps nowhere more importantly than employment,” the report said. The RBC jobs index rose 5.2 points to 57.9, which RBC notes is the strongest score while President Barack Obama has been in office. That index fell to 52.7 last month, which was the weakest reading since February. Employment prospects improved as well, with only 14% of Americans saying they think someone they know will lose a job. That is down from 17% last month. About a quarter of respondents felt more confident about their own job security, marking the strongest reading in over two years. The RBC current conditions index rose to 41.3 from 37.3. The expectations index increased to 59.6 from 56.1 in August.

    August Retail Sales Rise 0.9% on Higher Gas Prices, Auto Sales — U.S. retail sales rose in August from July because consumers paid higher gas prices and bought more cars and trucks. They were more cautious elsewhere, suggesting the weak economy has made many selective about spending. The Commerce Department said Friday that retail sales increased a seasonally adjusted 0.9 percent. Gas station sales jumped 5.5 percent, the most in nearly three years and a reflection of sharp price increases. Demand for autos increased 1.7 percent. Outside those categories, sales rose only 0.1 percent. That’s below July’s 0.8 percent gain. Sales at general merchandise, clothing and electronic stores fell. Sales at grocery stores, sporting goods stores and online retailers were unchanged. Gasoline sales are heavily influenced by price, and auto sales represent major purchases. Excluding those categories offers more clarity on consumers’ willingness to spend. The government’s retail sales data contrasted with reports from the nation’s largest retail chains. Many said things picked up in August, driven partly by back-to-school purchases. Sales at 18 retail chains rose last month by the most since March. Sales at Target rose 4.2 percent and increased 5.1 percent at Macy’s. Gap Inc. posted a 9 percent jump in sales.

    Retail Sales increased 0.9% in August - On a monthly basis, retail sales were up 0.9% from July to August (seasonally adjusted), and sales were up 4.7% from August 2011. This increase was largely due to higher gasoline prices. From the Census Bureau report:The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for August, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $406.7 billion, an increase of 0.9 percent from the previous month and 4.7 percent (±0.7%) above August 2011. ... The June to July 2012 percent change was revised from 0.8 percent to 0.6 percent. Sales for July were revised down to a 0.6% increase (from 0.8% increase).  This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 22.7% from the bottom, and now 7.3% above the pre-recession peak (not inflation adjusted) The second graph shows the same data, but just since 2006 (to show the recent changes). This shows that much of the recent increase is due to gasoline. Excluding gasoline, retail sales are up 19.3% from the bottom, and now 7.2% above the pre-recession peak (not inflation adjusted). The third graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993.

    Retail Sales: Nominally Good, But the "Real" Story Shows Ongoing Weakness -- The Advance Retail Sales Report released this morning shows that sales in August came in at 0.9% month-over-month following a downward revision of 0.6% in August (originally 0.8%), and -0.7% in June. Today's number is above the consensus forecast of 0.7%. The year-over-year change is 4.9%. Today's report is the second consecutive monthly gains after three months of decline. Now let's dig a bit deeper into the "real" data, adjusted for inflation and against the backdrop of our growing population. The first chart shows the complete series from 1992, when the U.S. Census Bureau began tracking the data. I've highlighted recessions and the approximate range of two major economic episodes. Here is the same chart with two trendlines added. These are linear regressions computed with the Excel Growth function.  The green trendline is a regression through the entire data series. The latest sales figure is 5.8% below the green line end point. The blue line is a regression through the end of 2007 and extrapolated to the present. Thus, the blue line excludes the impact of the Financial Crisis. The latest sales figure is 17.4% below the blue line end point. We normally evaluate monthly data in nominal terms on a month-over-month or year-over-year basis. The next chart gives us a perspective on the extent to which this indicator is skewed by inflation and population growth

    Retail Sales Strengthen In August As Industrial Production Slumps - Retail sales continued to rebound in August, the Census Bureau reports. Industrial production, however, tumbled sharply last month—the most, in fact, since 2009. But Hurricane Isaac may be to blame for most of the weakness in industrial production, according to today’s update from the Federal Reserve. If so, the strong report for consumer spending in August offers a clearer profile of the general trend last month. Let’s take a closer look at both indicators. First up: retail sales. As the chart below shows, consumer spending rose 0.9% last month—the biggest monthly rise since February.  More importantly, the year-over-year percentage change in retail sales continues to rise. In the next chart, it’s clear that the trend is improving. For the second month in a row, the annual pace of spending increased, climbing to 4.7% vs. the year-earlier level. Fears that consumption is about to collapse look a bit more overbaked with today’s data in hand. Overall, the August retail sales report is encouraging. Industrial production, however, is another matter, thanks to the sharp 1.2% drop last month. But the Fed advises that “Hurricane Isaac restrained output in the Gulf Coast region at the end of August, reducing the rate of change in total industrial production by an estimated 0.3 percentage point.” Nonetheless, August’s decline is quite striking relative to recent history, as the next chart shows. It's also quite disturbing--if this weakness rolls on.

    Analysis: Gas Makes Prices, Retail Sales Look Higher -- LPL Financial economist Jon Canally talks with Jim Chesko about news that August consumer prices jumped 0.6% - the largest one-month increase in more than three years as gasoline costs soared. Separately, U.S. retail sales rose for the second-straight month.

    Poll: Is it Okay for Retailers to Track Customers’ Shopping Behavior While in Stores? - If you’ve done any shopping online, you probably know the feeling: You pick out, say, a pair of shoes online, put them in your virtual shopping cart, but then for some reason change your mind. Afterwards, it seems that every site you visit features an ad for that very pair of shoes. The reason? Online retailers can give you a virtual identification number and track you as you go from site to site, targeting you with ads for products they already know you want. Here’s the new twist: Feeling the pinch of online competition, many brick-and-mortar retailers are hoping to emulate these tactics. What’s more, technology already exists that can identify customers in a store — through their smart phones, and even through video cameras that use facial recognition software — and track their shopping behavior. Not surprisingly, these developing technologies have raised privacy concerns — even as industry experts insist that they can and will be used responsibly.

    Michigan Consumer Sentiment: A Significant Improvement - The University of Michigan Consumer Sentiment Index preliminary number for September came in at 79.2, which is the best reading since May's 79.3. For a higher number, we have to go back prior to the Great Recession to October 2007, the month the S&P 500 hit its all-time high. The consensus was for 73.5. 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 7% below the average reading (arithmetic mean), 6% below the geometric mean, and 7% below the regression line on the chart above. The current index level is at the 33rd percentile of the 417 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 79.2 puts us above the midpoint (78.6) between recessionary and non-recessionary sentiment averages.

    Consumer Sentiment Reaches Four-Month High -- U.S. consumers in early September felt better about the economy as their expectations brightened, according to data released Friday. The Thomson-Reuters/University of Michigan consumer sentiment index rose to 79.2 early this month from the 74.3 final reading for August and a preliminary August reading of 73.6, according to an economist who has seen the report. The preliminary September reading was the highest since May. Economists surveyed by Dow Jones Newswires had expected the preliminary September reading to come in at 74.0. The current conditions index’s early-September reading slipped to 88.3 from 88.7 at the end of August, while the expectations index jumped to 73.4, also the highest since May, from 65.1.

    Weekly Gasoline Update: Tenth Week of Price Increases - 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 tenth week after 13 weeks of decline. The average for Regular and Premium rose a penny over the past week -- a fractional increase, but one that keeps the trend in place. They are both up 62 cents from their interim weekly lows in the December 19th EIA report. As I write this, shows seven states (Hawaii, California, Illinois, Connecticut, New York, Washington, Michigan and Oregon) plus DC with the average price of gasoline above $4. Another five states are close behind -- above $3.90 (Maine, Alaska, Wisconsin, Rhode Island and West Virginia).

    Consumer Prices Soar By Most Since June 2009, Retail Sales Ex-Autos And Gas Expose Lethargic Consumer - Following yesterday's producer price shock, when PPI soared by the most since June 2009, today's CPI follows suit, with the largest jump in over 2 years, printing up 0.6%, in line with expectations, up from an unchanged print in July. In other words, the food inflation which is already spreading through the economy courtesy of the record drought, is about to be supported by some brand new Fed-generated inflation. Luckily, as yesterday, nobody uses gas or food. And in other news, retail sales posted yet another very disappointing print, when despite a better than expected headline print of 0.9% in August advance retail sales, a number which included gas and auto sales, retail sales excluding these very volatile components, rose by only 0.1%, on expectations of a 0.4% rise, and a downward revision from 0.9% to 0.8%. This was the 5th miss in 6 months, and ugly all around. In other words, the US consumer, revised consumer credit data notwithstanding, is levering up and not generating any real new sales. Expect yet another round of GDP revisions.

    Inflation Watch: Annualized Inflation Still Below 2% - The Bureau of Labor Statistics released the CPI data for August this morning. Year-over-year unadjusted Headline CPI came in at 1.69%, which the BLS rounds to 1.7%, up from 1.41% last month (1.4% in the BLS record). Year-over year-Core CPI (ex Food and Energy) came in at 1.91% (rounded to 1.9%), down fractionally from 2.10%% last month. Here is the introduction from the BLS summary, which leads with the seasonally adjusted data: The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in August on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment.  The seasonally adjusted increase in the all items index was the largest since June 2009. About 80 percent of the increase was accounted for by the gasoline index, which rose 9.0 percent and was the major factor in the energy index rising sharply in August after declining in each of the four previous months.  The food index increased 0.2 percent in August, with major grocery store food group indexes mixed. The index for all items less food and energy rose 0.1 percent for the second month in a row.  More... The first chart is an overlay of Headline CPI and Core CPI (the latter excludes Food and Energy) since 1957. The second chart gives a close-up of the two since 2000.

    Producer Price Index: Biggest Headline Inflation Jump Since June 2009 - Today's release of the August Producer Price Index (PPI) for finished goods shows a month-over-month increase of 1.7% in headline inflation, which is the biggest monthly jump since June of 2009. Core inflation rose a more modest 0.2%. had posted a MoM consensus forecast of 1.2% for Headline and 0.2% for Core PPI. The price of energy was the main culprit, up 6.4%, the largest increase in three years. Year-over-year Headline PPI is up 2.0% and Core PPI is up 2.6%. Here is a snippet from the news release: In August, over eighty percent of the broad-based rise in finished goods prices is attributable to the index for finished energy goods, which jumped 6.4 percent. Also contributing to the increase in finished goods prices, the index for finished consumer foods climbed 0.9 percent, and prices for finished goods less foods and energy advanced 0.2 percent. Finished energy: The index for finished energy goods moved up 6.4 percent in August, the largest advance since a 6.7-percent jump in August 2009. Most of the rise in August 2012 can be traced to a 13.6-percent surge in gasoline prices. The indexes for home heating oil and liquefied petroleum gas also were factors in the advance in prices for finished energy goods. (See table 2.) Finished foods: The index for finished consumer foods climbed 0.9 percent in August, the largest rise since a 1.0-percent increase in November 2011. About one-third of the August advance is attributable to prices for dairy products, which jumped 3.0 percent. More...Now let's visualize the numbers with an overlay of the Headline and Core (ex food and energy) PPI for finished goods since 2000, seasonally adjusted. As we can see, the YoY trend in Core PPI declined significantly during 2009 and increased modestly in 2010 and more rapidly in 2011. This year the YoY Core PPI trend had been one of gradual decline until the recent dramatic uptick.

    More Expensive Gas Pushes Up US Wholesale Prices - A sharp rise in gasoline costs drove up wholesale prices last month by the most in more than three years. But outside energy and food, price gains were mild. The producer price index, which measures price changes before they reach the consumer, jumped 1.7 percent in August, the Labor Department said Thursday. The increase was mostly because gas prices soared 13.6 percent, the biggest gain in three years. Food prices rose 0.9 percent, driven up by steep increases in the cost of eggs and dairy products. Excluding the volatile food and gas categories, core wholesale prices rose only 0.2 percent, below July’s increase. In the past 12 months, wholesale prices have increased 2 percent, a mild gain and far below the recent peak of 7.1 percent in July 2011. Core wholesale prices have risen 2.5 percent in the past year, the same annual pace as in July.

    Industrial Production declined 1.2% in August, Capacity Utilization decreased  -  From the Fed: Industrial production and Capacity Utilization Industrial production fell 1.2 percent in August after having risen 0.5 percent in July. Hurricane Isaac restrained output in the Gulf Coast region at the end of August, reducing the rate of change in total industrial production by an estimated 0.3 percentage point. Manufacturing output decreased 0.7 percent in August after having risen 0.4 percent in both June and July. Precautionary shutdowns of oil and gas rigs in the Gulf of Mexico in advance of the hurricane contributed to a drop of 1.8 percent in the output of mines for August. The output of utilities declined 3.6 percent.  Capacity utilization for total industry moved down 1.0 percentage point to 78.2 percent, a rate 2.1 percentage points below its long-run (1972--2011) average.  This graph shows Capacity Utilization. This series is up 11.3 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 78.2% is still 2.1 percentage points below its average from 1972 to 2010 and below the pre-recession level of 80.6% in December 2007.  The second graph shows industrial production since 1967. Industrial production decreased in August to 96.8. This is 16% above the recession low, but still 3.9% below the pre-recession peak. The consensus was for Industrial Production to decrease 0.1% in August, and for Capacity Utilization to decline to 79.2%. Both IP and Capacity Utilization were below expectations.

    Industrial Production Plunges Most Since March 2009 - In one more example of why we are going to need more-er and open-ended-er QE from the Fed, today's dismal data rolls on. Industrial Production dropped 1.2% MoM - its largest drop since March 2009 - and missed expectations by the most since December 2008. The market (expectedly) is unimpressed and stable - fully aware that the Fed's new infinite QE will simply be expanded to an infinte-er QE should things go from worse to worse-er. To add more salt to the wound, Capacity Utilization dropped to its lowest of the year and missed expectations by its most in 16 months. 15x P/E multiples here we come - all supported by moar hockey-stick growth trajectories, infinity +1 printing, and a status quo who needs moar commissions. So much for cleanest dirty shirt, eh? It seems 'they won't come' in our 'if we build it' economy - as factories go quiet from the over-exuberant mal-investment of channel-stuffers

    US Vehicle fuel economy up for the first time since March -- PhysOrg has an interesting graphic showing vehicle fuel efficiency in the US - Vehicle fuel economy up for the first time since MarchAverage fuel economy (window-sticker values) of cars, light trucks, minivans and SUVs purchased in August was 23.8 mpg, the fourth-best month on record and an 18 percent increase (3.7 mpg) from October 2007, the first month of monitoring by UMTRI researchers Michael Sivak and Brandon Schoettle. The improvement from July to August—0.2 mpg—most likely reflects the increased price of gasoline, they say.  In addition to average fuel economy, Sivak and Schoettle issued their monthly update of their national Eco-Driving Index, which estimates the average monthly emissions generated by an individual U.S. driver. The EDI takes into account both vehicle fuel economy and distance driven—the latter relying on data that are published with a two-month lag.

    Petroleum And Gasoline Usage Charts for June, July, August; Unemployment vs. Gasoline Usage Analysis - Another summer is gone. How much gasoline was used vs. the same months in prior years? These charts from Tim Wallace have the answer.  General Comments:

    • Gasoline usage is the same as it was in 2001 or 2002, depending on the month.
    • Petroleum usage is the same as it was in 1997 or 1998, depending on the month.
    • Gallons per mile did not suddenly improve in 2007. Thus declining gasoline usage cannot be attributed to improved gas mileage, cash for clunkers, etc.
    • There was a rebound in June and July of 2010 consistent with the economic recovery. For August alone there was rebound in 2010 and 2011.
    • Based on gasoline usage, the economy has stalled or there is some other force in play, not related to improved gas mileage.

    US Trade Deficit Grew Slightly to $42B in July - The U.S. trade deficit grew to $42 billion in July, widened by fewer exports to Europe, India and Brazil that offset a steep decline in oil imports. The Commerce Department said Tuesday that the trade deficit increased 0.2 percent from June’s deficit of $41.9 billion. U.S. exports fell 1 percent to $183.3 billion. Sales of autos, telecommunications equipment and heavy machinery all declined. Imports dropped 0.8 percent to $225.3 billion. Economists note that the deficit would have grown much faster had it not been for a 6.5 percent drop in oil imports, largely reflecting cheaper global prices. Prices have increased since then, while demand for exports has dampened. “It won’t be long before the deficit widens more significantly as the global slowdown takes a greater toll on U.S. exports,” A wider trade deficit acts as a drag on growth because the U.S. is typically spending more on imports while taking in less from the sales of American-made goods. U.S. growth slowed to a 1.7 percent annual rate in the April-June quarter, well below what is needed to accelerate a slackening job market.

    Trade Deficit at $42.0 Billion in July - The Department of Commerce reported: [T]otal July exports of $183.3 billion and imports of $225.3 billion resulted in a goods and services deficit of $42.0 billion, up from $41.9 billion in June, revised. July exports were $1.9 billion less than June exports of $185.2 billion. July imports were $1.8 billion less than June imports of $227.1 billion. June was revised down from $42.9 billion. The trade deficit was below the consensus forecast of $44.3 billion. The first graph shows the monthly U.S. exports and imports in dollars through July 2012. Both exports and imports decreased in July. Exports are 10% above the pre-recession peak and up 3% compared to July 2011; imports are just below the pre-recession peak, and up about 1% compared to July 2011. The second graph shows the U.S. trade deficit, with and without petroleum, through July. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. Oil averaged $93.83 in July, down from $100.13 per barrel in June, and the lowest level since early 2011. Import oil prices will probably start increasing again in August. The trade deficit with China increased to $29.4 billion in July, up from $27.0 billion in July 2011. Once again most of the trade deficit is due to oil and China. The trade deficit with the euro area was $10.2 billion in July, up from $7.7 billion in July 2011.

    July Trade Deficit Comes In Less Than Expected As Global Trade Slows Down - America's July trade deficit came in slightly better than expected, printing at $42 billion, compared to expectations of $44.4 billion, on exports of $183.3 billion and imports of $225.3 billion, which was to be expected in light of the ongoing drop in Chinese net trade surplus. After all global trade is a zero sum game. The better than expected number was an increase from the revised July deficit of -$41.9 billion, revised lower from $42.9 billion in June. And while GDP beancounter calculations will generate slightly higher Q3 GDP forecasts as a result of the number and revision, the reason for the "improvement" is an ongoing contraction in global trade, which is anything but favorable for the world's economies for which any diversion from a status quo M.O. means longer-term pain.

    August Import Prices Up 0.7% on Rising Oil Prices -- The price of goods imported into the U.S. rose less than expected last month, as higher oil prices were partially offset by lower food costs. Import prices increased 0.7% in August from the month before, the Labor Department said Wednesday. The pickup in the cost of imports, which was the first gain in five months, followed a revised 0.7% decrease the previous month. July import prices were originally estimated to have fallen 0.6%. Still, last month’s gain was more modest than anticipated, with economists in a Dow Jones Newswires survey forecasting a 1.5% jump.

    Small Business Confidence Rises In August - (Reuters) - U.S. small business sentiment rose in August for the first time in four months as more owners anticipated better business conditions after the Nov. 6 elections and increased sales. The National Federation of Independent Business said on Tuesday its optimism index rose 1.7 points to 92.9 last month. While owners expected an improvement in business conditions over the next six months, they still did not believe that this was a good time to expand operations. "But looking past the election and year end, owners became a bit more optimistic about improvements in real sales volumes and business conditions," the NFIB said in a statement. There were gains in spending and hiring measures last month, with job creation plans doubling. The number of owners reporting job openings were hard to fill increased modestly.

    Employment Index Points to Slow Improvement Overall - A compilation of U.S. labor indicators edged up in August, despite that month seeing extremely dismal hiring, according to a report released Monday by the Conference Board. The board said its August employment trends index increased 0.51% to 108.59, from a revised 108.04, first reported as 108.11. The latest index is up 6.2% from a year earlier. Despite the gain, the index is barely above its February level, leading the board to be cautious about future hiring. “Economic activity expanded by less than a 2% rate in recent months, and this pace is likely to continue through the end of the year,” . “In such an environment, it’s difficult to foresee the economy adding much more than 100,000 jobs per month.” On Friday, the U.S. Labor Department said only 96,000 new jobs were created in August. The weak job gain has led economists and investors to expect the Federal Reserve to roll out another round of easing after its meeting this week. In August, four of the eight components within the ETI improved. These indicators included percentage of firms with hard-to-fill positions, which rose, and the ratio of involuntary part-time to all part-time workers, which decreased.

    Employment Report Graphs: Participation Rate, Duration of Unemployment and Diffusion Indexes - The following graph shows the changes in the participation rates for men and women since 1960 (in the 25 to 54 age group - the prime working years). The participation rate for women increased significantly from the mid 30s to the mid 70s. This rate was at 75.5% prior to the recession, and declined to a post-recession low of 74.3%. There has been almost no recovery in the participation rate for prime working age women. This rate has mostly flattened out this year, and was still near the low in August at 74.5%.  The participation rate for men has decreased from the high 90s a few decades ago, to a low of 88.3% after the recession. This rate hasn't increased very much, and was at 88.5% in August.This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 weeks, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. All categories are generally moving down, but there was an increase in the 'less than 5 weeks' and '15 to 26 weeks' categories in August. Unfortunately the long term unemployed remains very high at 3.3% of the labor force in August, but this is the lowest percentage since 2009.   Diffusion indexes are a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS. :  The BLS diffusion index for total private employment was at 50.2 in August, down from 54.3 in July. For manufacturing, the diffusion index declined to 36.4 from 50.6 in July. This is the lowest level for manufacturing since 2009.

    Employment Graphs: Construction Employment, Unemployment by Education -- A couple more graphs based on the August employment report. The first graph below shows the number of total construction payroll jobs in the U.S. including both residential and non-residential since 1969. Construction employment appears to be moving sideways, although I expect this will change soon (and I'd expect some upward revisions to construction employment). The preliminary annual Benchmark Revision will be released on September 27, 2012.  Note: When housing was collapsing, one of the mysteries was why construction employment wasn't declining - and then finally employment started falling sharply. I think we are seeing a similar "mystery" now, and I expect BLS reported construction employment will start increasing soon. This graph shows the unemployment rate by four levels of education (all groups are 25 years and older). Clearly education matters with regards to the unemployment rate - and it appears all four groups are generally trending down - although the unemployment rate for 'high school grads, no college' has increased recently. Note: This says nothing about the quality of jobs - as an example, a college graduate working at minimum wage would be considered "employed".

    The Decline in Unemployment: Any Silver Lining? - Atlanta Fed's macroblog -- Among the somewhat dreary jobs reported released last Friday, there was one potential bright spot—the unemployment rate declined from 8.25 percent in July to 8.11 percent in August. Of course, determining whether this is a true bright spot requires delving further into the numbers, and the determination depends on what happened to those people once they were no longer counted among the jobless. Did they get jobs? Some did, but an unusually large number of them simply left the labor force—the labor force participation rate hit a new post-1980 low, leaving some doubt about whether the cloudy employment report had any silver lining at all.  To detail the situation, the unemployment rate dropped from 8.25 percent in July to 8.11 percent in August, driven by a 250,000-person drop in the number of unemployed between July and August (a 1.95 percent drop). This is the largest decline in the number of unemployed since January 2011 and almost 2.5 times larger than the average monthly decline seen from July 2011 to July 2012 (103,500).  Where did those formerly unemployed people go? To get at this issue, I went to the Current Population Survey (or CPS, from whence the unemployment statistics come) to examine the flows of people into and out of the labor force, and into and out of employment and unemployment. From July to August, the CPS data in the chart below reveal that approximately 60 percent of the unemployed remained in unemployment (blue line). Of the remaining 40 percent, over half (54 percent) of the unemployed flowed out of the labor force in August (red line) while the other 46 percent (green line) flowed into employment.

    It's The Government's Shrinking Payrolls, Stupid -- Mark Perry, an economics professor at the University of Michigan, writes that the weak labor market "can be traced to the biggest loss of government jobs since WWII." The evidence is certainly damning if we compare government payrolls with private payrolls, which have been rising at nearly 2% a year over the past two years. Perry crunches the numbers and finds that the contraction of government jobs starting in 2009 (almost 700,000 through August) is the largest contraction in public sector jobs since the 1945-1947 period following WWII when government jobs contracted by 770,000 jobs, and almost twice the 392,000 government jobs lost in 1981-1982.  Comparing the numbers for the past five years on the basis of the annual percentage change clearly shows that government payrolls are indeed shrinking these days. Once we add private payrolls to the chart, the difference becomes obvious. In the next chart below, private employment (the yellow line using the left scale) has been consistently advancing by ~2% a year over the past 24 months. By contrast, federal, state and local government jobs have been shrinking recently. (The spike in Federal employment in 2010, by the way, was due to the temporary hiring of workers linked to the decennial census.)

    Is The Decline In Positive Payrolls Revisions A Warning Sign? - Most economic reports should come with a warning: the data is subject to revision.  But if the world is always eager to move on to the next number du jour, and forget yesterday's news, informed analysts recognize that monitoring the initial estimates of a data series, and tracking its path through time, offers another layer of intelligence. For example, a recent study by the Philadelphia Fed found a "small positive (but statistically significant) association between the revision to job gains and the level of job gains." With that in mind, let's review the trend in revisions for private nonfarm payrolls through the decades, courtesy of the St. Louis Fed's archival database (ALFRED). Specifically, I'm looking at the monthly revision as defined by last reported number (the final data point in most cases other than for the last several months) less the initially reported estimate. The chart below tracks this monthly difference since the early 1970s. As you might expect, positive revisions tend to be associated with periods of economic growth. But it's not a hard-and-fast rule. Sometimes the changes are negative (revisions are lower than the initial estimates) and the economy is expanding, although this condition tends to prevail in the early stages after a recession has ended. The question these days is whether the recent fade in positive revisions is a sign of trouble for the business cycle? For a better view of what's been happening lately, the next chart summarizes the last 12 months.

    How Many Jobs Are Needed to Keep Up with Population Growth? - The press quotes all sorts of figures for the number of monthly job gains needed to keep up with population growth. We see numbers like 80,000, 100,000, 125,000 and 175,000 thrown around like statistical snow as the number of jobs needed each month just to keep up. What's the right one? How many jobs are needed each month just to keep up with population growth?  The actual monthly amount can be calculated and the Atlanta Fed even did us a huge favor by publishing an interactive monthly jobs calculator so you can go check for yourself. This month shows we need 104,116 payroll jobs to maintain the same unemployment rate of 8.1% with all of the other same terrible conditions the state of employment is in.  That's the key, the current terrible conditions the state of employment is in today. One of the reasons the number of jobs to keep up with population growth is so low is due to so many having dropped out of the labor force. If we had more people being counted as needing a job, the number of jobs to keep up with population growth would be much higher.  To explain this, we need to go to BLS school and learn some labor concepts. The employment universe comes from the civilian noninstitutional population. These are people in the United States, aged 16 and over, who aren't in the military, infirmed or locked up somewhere.  The above pie chart shows how the civilian nonstitutional population is divided up into two classifications, either you're in the civilian labor force, or you're not.

    There are better ways to measure unemployment - The state of the jobs market is best assessed by a number that is not given enough attention by Statistics Canada, and the many media reports based upon its monthly press release. The headline attention is all soaked up by the unemployment rate and the level of employment, when it really should be something Paul Krugman—the Princeton University economist and New York Times columnist—calls his “favorite gauge” of the employment situation. The unemployment rate can be an ambiguous indicator because it depends not simply on the number of people without a job, but also whether they are looking for work. Giving up on a job hunt excludes you from the count, so the amount of slack in the labour market can be understated.At the same time it is possible for the unemployment rate to shoot up when the economy starts producing jobs if a good many of the jobless expect their prospects to be better and begin looking for work. In this way the amount of slack in the market can also be overstated. This is one reason why Paul Krugman focuses on something called the Employment-Population ratio, or simply the “employment rate”. Using the number of employed is misleading because it takes no account of the size of the population. The employment rate makes this correction: it is the number of employed divided by the population, in other words the fraction of the population that has a job.

    Most Labor Force Dropouts in August Had Jobs -- Who dropped out of the labor force last month? People with jobs. Of the 7.4 million people who left the labor force in August, well over half — 4.1 million — had been employed in July. Fewer than three million were previously unemployed people who stopped looking for work. There are two things worth noting about those numbers. First, they’re really big. When the Labor Department released its monthly jobs report on Friday, much of the commentary focused on the 368,000-person decline in the labor force. But that’s a net number, reflecting the flows of millions of people into and out of the labor force. Over time, the monthly flows add up to important trends. But in any given month, the net change of a few tens or hundreds of thousands of people is dwarfed by the roughly 13 million people who join or leave the labor force.Second, a close look at the August decline in the labor force reveals that the oft-cited explanation of unemployed workers “giving up” is at best incomplete. Most people who leave the labor force do so for reasons unrelated to the broader economy. They’re going back to school, quitting work to raise children or, probably most often, retiring. Indeed, as the U.S. population has aged, there’s been a gradual, long-term rise in the number of employed workers retiring and leaving the labor force. The recession interrupted that pattern by leaving some older workers unemployed and forcing others to work longer than they’d planned in order to rebuild shattered retirement savings. But as both the job and stock markets have recovered, the trend has resumed.

    Not Looking, but Still Wanting to Work - The number of people not in the labor force — that is, neither working nor looking for work — rose by almost 600,000 in August. Most of the Americans who are “not in the labor force” are categorized as such because they are retired, stay-at-home parents or otherwise not interested in holding a job. But there are also a lot of people who really want to work but have decided not to bother looking for jobs because they think the job market is too discouraging or because they are too busy with training, family responsibilities and so forth. This group of people who want to work but aren’t looking are sometimes referred to as the shadow unemployed. Their share of the not-in-labor-force population has generally been rising since the recession began almost five years ago: In December 2007, when the recession officially started, 5.9 percent of people counted as “not in labor force” said they wished they were working. As of last month, that share was 7.8 percent. Surprisingly, the share of people who weren’t in the labor force but still wanted jobs was actually higher in the mid-1990s, when the Labor Department first started collecting these numbers. In January 1994, 10.3 percent of the people who were not actively looking for a job said they actually wished they were working.

    Labor Force Participation Rate: In or Out? - Judging from the media reaction to Friday's Employment Situation Report, one would suppose the end is near. Yes, 96,000 jobs created is mediocre, but, remember it is August after all. Even in the best of times, August is a slow month. Since 1952 the seasonally adjusted change in non-farm payrolls from July to August has averaged -0.2 percent — in other words, flat month-over-month. In picking over the report, the pundits have found a new subject of their jeremiads: it is the labor force participation rate (LFPR). In August the rate fell to a seasonally adjusted 63.5 percent — the lowest level in the new century. The hand wringers neglect to mention three facts. First the LFPR has been declining — gradually and then more rapidly since the Great Recession — for over fifteen years. So there is more to the trend than the current weak economy. Second, the labor force historically contracts in August. In the 58 of the last 61 years, the labor force declined (from July to August) on a non-seasonally adjusted basis. When seasonally adjustments are made a decline is observed in 26 of the previous 61 years. In any year it is almost a coin toss whether more workers will opt to absent themselves, than those who will elect to join the labor force, in August. True, the rate of contraction is at the higher end of the historical range; but it is not well above it.  Finally there is a demographic component. Participation rates may be lower simply because the population is aging. This trend is obscured by the way the labor force participation rate is computed.

    Share of Men in Labor Force at All-Time Low - Friday’s jobs report for August was chock full of all sorts of bad news. Among the most distressing: The share of men actively participating in the labor force — that is, working or looking for work — was at an all-time low. Just 69.8 percent of all men over age 16 were in the labor force in August, compared to a long-term average of 78.3 percent since the Labor Department began tracking these data in 1948. The share has been falling pretty steadily over the last six decades but has declined sharply in the last few years.  Some of this could be attributed to the fact that the country has been aging, so more people are of retirement age. But the participation rate has also fallen dramatically for men of prime working age, 25-54: There are many competing (or in some cases complementary) arguments for why the share of men in the labor force has been declining. For example, a lot of traditionally male jobs, in industries like manufacturing and construction, have disappeared, and many of the men who were displaced gave up looking for work when they couldn’t find similar jobs. The federal disability rolls have also skyrocketed, and when people go on disability, they rarely return to the labor force:

    Where Have All the Workers Gone?, by Jessie Romero, Richmond Fed: Since September of last year, the unemployment rate in the United States has declined nearly a full percentage point, from 9 percent to 8.3 percent. On its face, this is an encouraging signal about the health of the labor market. But some of the change is due to a potentially troubling trend: a dramatic decline in the number of Americans who are part of the labor force. Prior to the recession, 66 percent of the population (not counting active duty military or people in a nursing home or in prison) over the age of 16 was in the labor force. Just four years later, this rate — known as the “labor force participation rate,” or LFPR — has fallen to 63.7 percent. While this might not sound like a large decline, it is unprecedented in the postwar era. The dropoff is all the more striking because it does not include unemployed workers who are actively seeking work; such workers are still considered to be part of the labor force. It is only when the unemployed decide to stop looking for jobs, perhaps because they have given up on the possibility of finding one, that they are considered out of the labor force... Whatever the research eventually shows, the fact remains that millions of people who would like to be working have given up trying to find a job. According to the monthly Current Population Survey (CPS) conducted by the BLS, the share of workers not in the labor force who report that they want a job ... [is] 6.8 million workers. “There’s a large group of people who are counted as out of the labor force who we should be trying to find jobs for, and who would want jobs if they were available,”

    Labor participation for men in the US hit the lowest level on record; decline among younger men is particularly sharp - Friday's employment figures were terrible across the board, although some have naively interpreted the decline in the headline unemployment rate (from 8.3% to 8.1%) as positive news. Unfortunately there is nothing positive about this change. As before, the decline is simply an indication of people dropping out of the labor force. This is clearly visible in the labor force participation rate (discussed earlier this year), which has now declined to the lowest level in over 3 decades. In fact the only reason that labor participation in the late 70s was lower than today is that women were still in the process of entering the workforce. Labor force participation among men is now at the lowest level on record - going back to 1948. This includes men with a college education. What's particularly troubling is the relatively recent sharp drop off in the participation ratio for younger men (between the ages of 20 and 24), which is also at the lowest level on record (chart below).

    The young are leaving the labor force, the old are flocking to it - There’s been a lot of ink (or, I guess, pixels) spilled on the decline in the labor force. But the aggregate drop masks some interesting differences behind groups. Namely, the labor force participation rate among young people aged 16 to 24 has plummeted much faster than that of other age groups, even as the participation rate among the oldest Americans has risen to record levels. Labor force participation has been slowly declining for decades, in part because more young people are pursuing higher education. But there’s been a particularly sharp drop-off during the recession, as young workers have generally fared worse in the labor market than others: In 2011, their unemployment rate was 17.3 percent, while those aged 25 to 54 had an unemployment rate of 7.9 percent. And those who’ve stopped looking for work reported that they’ve done so because “that they were not able to find work, followed by the belief that no work was available,” according to the Congressional Research Service: Since January 2008, there has also been a growing number of discouraged workers of prime working age, between 25 and 65 years, but their labor force participation hasn’t fallen off quite as sharply, as Political Math showed in this post from May: By comparison, labor force participation has actually risen among those aged 65 and older. That’s partly due to the longer-term trend of people living longer and working past the traditional retirement age. But the participation rate for the 65+ cohort has jumped during the recession, hitting a 30-year high as more Americans have either decided to postpone retirement or have come out of retirement to work as their savings have been hit by the downturn

    Why Men Drop Out of the Labor Force - As I mentioned on Friday, the share of men who are actively in the labor force is at an all-time low (a trend David Brooks also explored in his column Tuesday). Now Steve Hipple, an economist at the Labor Department, points me to a related paper from the Federal Reserve Bank of Atlanta, which helps explain why. It finds that men typically leave the labor force for reasons systematically different from the reasons that women do. The trends basically boil down to disability versus homemaking.A plurality of men age 25 to 54 who left the labor force over the last 15 years said they did so because they were ill or disabled: As you can see from the top dashed line, the percentage of men dropping out because of disability rose during the recession and has been falling since then, although illness or disability is still the most commonly cited reason for leaving the labor force. The shares of men leaving to go back to school or to engage in household care have also been rising. Meanwhile, a vast majority of prime-working-age women dropping out of the labor force have been going into household care, which of course includes becoming a full-time parent.Take a look at the right-hand vertical axis to track this share, which as of March was a touch below 60 percent:

    Uncertainty Does Not Explain Lack of Hiring - The Washington Post's article on the August jobs report included an assertion by Bernard Bamouhl, the chief global economist at the Economic Outlook Group, that: "companies find it hard to justify hiring more people because the economic outlook is so unclear."  To use a technical economic term, this claim is wrong. We can see this by looking at average weekly hours. If companies would otherwise be hiring people, but are restrained by uncertainty, then they would be working their current workforce more hours.More hours and more workers are alternative ways to fill demand for labor. The former implies no real risk to a company. If they raise average hours worked by one or two hours a week this month, and then demand conditions change, there is little problem with lowering hours back to their prior level next month.  If Bamouhl's claim that uncertainty about the future is holding back hiring then average weekly hours would be increasing. That's not what the Bureau of Labor Statistics tells us.

    Many New Jobs Created in Low-Wage Industries - Since bottoming out in February 2010, the U.S. economy has added about 4.6 million private-sector jobs. That’s the good news. The bad news is that it’s not nearly enough to make up for the 8.9 million wiped out during the recession. And many of the new jobs are in industries that have less-than-stellar wages. Since hitting a trough in February 2010, most job gains have come in professional and business services (1.4 million), education and health services (961,000), and leisure and hospitality (735,000), according to the Labor Department. Wells Fargo senior economist Mark Vitner dives deeper into the numbers and finds that nearly 40% of the private sector jobs added since February 2010 have been in retail trade, leisure and hospitality, temporary staffing and home health care. “While these industries employ workers at a wide variety of pay grades, weighted average hourly earnings for these four industries total just $15 an hour. Moreover, many of these jobs are part-time and carry only limited benefits,” Mr. Vitner wrote in a research note. By comparison, average hourly earnings for all private-sector employees were $23.52 last month, Labor said.

    Where Have All The Good Jobs Gone? - The Economic Policy Institute today releases online the 12th edition of its invaluable survey text, The State of Working America. EPI is a liberal nonprofit, but its economic analysis is respected by mainstream academic economists who follow trends in employment, income, and income inequality, and the new volume, like previous editions, is full of interesting information and persuasive analysis. (My only quibble would be that it ought to include educational failure among the government-caused—or at least government-unsolved—problems contributing to income inequality. Like EPI, I consider the U.S.’s elevated income inequality relative to other nations to be largely the result of government policy.) One chart that in particular caught my eye is this one, showing the disappearance of good jobs as income inequality has risen over the past 33 years:What’s a good job? The EPI, borrowing criteria from John Schmitt and Janelle Jones of the Center For Economic and Policy Research, says it’s any job that pays at least $18.50 per hour (the median hourly wage in 1979, adjusted for inflation); offers health insurance (as 39 percent of all employers today do not; those that do make it available to most but not all employees); and offers some kind of retirement plan (in small companies, that’s half the workers; in medium-sized companies, 79 percent; and in large companies, 86 percent).

    A pattern of increasingly longer payrolls recoveries - Continuing with the recent theme of the US labor markets, consider the chart below. It's the total US employees on nonfarm payrolls going back to the mid 60s. We've heard numerous discussions about how the current payrolls correction is far deeper and will take much longer to recover than in previous recessions. But there is a pattern in this chart.Here is a simple exercise. Let's select all the troughs in the payroll chart and see how long it takes from that point to recover all the jobs lost from the previous peak (ignoring the 1980 blip for this analysis - the real correction took place the following year). For the 2008 trough, let's assume that we continue to create jobs at the average rate of the last six months (March - Aug). Yes, it could be wishful thinking, but 97K (which is roughly what we got for August) per month feels fairly realistic. And now we can see a pattern emerging.Why did each consecutive decline in payrolls take longer to recover (in a nearly exponential fashion)? The answer may have to do with the historic shift out of manufacturing jobs, increasing dependence on financing and bank lending in order to generate new jobs, inability of services industries to recover quickly, increasingly larger "bubbles" in the economy, etc. Whatever the case, the question remains: what will the next payrolls downturn look like?  Let's hope this pattern does not persist going forward.

    Economists have underestimated the severity of structural shift in US employment dynamics -Continuing on the topic of the US labor markets, it's worth taking another look at the concept called the Beveridge curve, a graphical representation of the relationship between unemployment and the job vacancy rate (the number of unfilled jobs expressed as a proportion of the labor force)". In the previous post on this topic we discussed the structural shift in the US employment dynamics that took place since the Great Recession. Unfortunately the analysis performed by Barclays (as well as most economists, including the Fed) compares job openings ratio to the official unemployment rate. But we know that this rate is not a good measure of the true state of unemployment in the US because it does not include those who have stopped seeking employment altogether. A more relevant measure of US unemployment dynamics is the so-called "Employment Population Ratio" (not to be confused with labor force participation rate). It is defined as (per Wikipedia) "a statistical ratio that measures the proportion of the country's working-age population that is employed" (see discussion). The chart below compares the two measures, showing a clear divergence as fewer people who are out of work are counted in the official unemployment statistics. Now we plot the Beveridge curve using the Bureau of Labor Statistics Employment Population Ratio on the x-axis (reverse order) and the JOLT Job Openings Ratio (% of jobs not filled as percentage of all jobs) on the y-axis. This tells us how the labor market in the US responds to job openings.

    Every Job We Created and Lost in the Last 5 Years—in 2 Graphs - The Great Recession hit rock bottom in February 2010. If you compare jobs lost two years before the trough with 30 months after the trough, you'll find only three large sectors have made up their losses:

    1. -- Mining (extractors, operators, engineers), which is up 90,000.
    2. -- Utilities (repairers, installers, more engineers), which is up 11,000.
    3. -- Leisure & Hospitality (fitness trainers, artists, plus everybody who works with food, hotels, or parks), which is up 102,000.

    Besides health care and education, which never stopped growing, every other major job sector is net negative compared to five years ago. These graphs from today's Bloomberg Brief by Scott Johnson.

    Jobless Claims Spike Is Fourth Largest In 2012 As Producer Prices Surge By Most Since June 2009 | ZeroHedge: While hardly a factor in the Fed's thinking which is due to present its announcement in 4 hours, today's Initial claims report came at 382K, the biggest miss to expectations (370K) in 2 months, and up from last week's naturally upward revised claims of 367K. The 15K jump is the biggest weekly spike in 2 months and 4th largest this year. Just as relevantly, as we warned months ago, those on extended claims continue to run out at a fast pace, with 41K people losing their extended benefits, down by nearly 1.8 million from a year ago, and are forced to seek disability benefits to keep the government dole running. More importantly, and just as Bernanke is doing his best to stoke inflation, producer prices soared by 1.7% in August, up from July's 0.3%, and well above expectations of 1.2%. This was the biggest M/M spike since the 1.9% surge in June of 2009, and was driven primarily by soaring food prices, which however as everyone knows, is not really a factor in the Fed's thinking. "On an unadjusted basis, prices for finished goods climbed 2.0 percent for the 12 months ended August 2012, the largest advance since a 2.8-percent increase for the 12 months ended March 2012." Then again, who out there needs food or energy - inflation is precisely what Bernanke wants, the FOMC will welcome this news with open arms.

    BLS: Job Openings "little changed" in July - From the BLS: Job Openings and Labor Turnover Summary There were 3.7 million job openings on the last business day of July, little changed from June, the U.S. Bureau of Labor Statistics reported today.  The level of total nonfarm job openings in July was up from 2.4 million at the end of the recession in June 2009.  The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS. Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for July, the most recent employment report was for August. Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.Jobs openings decreased in July to 3.664 million, down from 3.722 million in June. The number of job openings (yellow) has generally been trending up, and openings are up about 9% year-over-year compared to July 2011.

    Labor Market Stuck in Low Gear - The Labor Department on Tuesday released its monthly snapshot of job turnover in the economy. The data lag a month behind the main monthly jobs report, and therefore don’t get nearly as much attention. But they give a more detailed picture of hiring and firing in the economy, and can therefore be a good gauge of the underlying health of the labor market. Today’s report shows the job market losing momentum in July, with companies posting fewer openings and filling fewer jobs than in June. Hiring has now slowed in four of the past five months. Layoffs fell for the second consecutive month, a good sign, but the number of people quitting their jobs — a sign of confidence in the labor market — has barely budged since early this year. The longer-run trend of slow, grinding improvement remains intact. Private-sector layoffs hit their lowest level since before the recession began. Private job openings were up 8.2% in July from a year earlier, the 29th consecutive month of positive year-over-year growth. Hiring was up, too, but at a much more modest 1.5%, reflecting a long-running problem of job postings far outpacing actual hiring. For job seekers, the situation remains grim. There were 3.5 unemployed workers for every posted job opening in July.

    Vital Signs Chart: 3.5 Unemployed Per Job Opening - Job seekers continue to outnumber work vacancies in the U.S. In July, there were 3.5 unemployed workers for every posted job opening. That is an improvement from a year ago, when there were 4.1 job seekers for every job, and far better than the height of the recession, when the ratio was more than 6.5 to one. But progress has stalled in recent months.

    Weekly U.S. Jobless Aid Applications Jump to 382K - The number of Americans seeking unemployment benefits jumped to a seasonally adjusted 382,000 last week, the highest level in two months. The Labor Department says applications increased by 15,000 in part because of the impact of Hurricane Isaac, which disrupted work in nine states and boosted applications by 9,000. The four-week average, a less volatile measure, increased for the fourth straight week to 375,000.

    Jobless Claims Rose Last Week, But The Annual Trend Is Still Encouraging - Initial jobless claims rose 15,000 last week to a seasonally adjusted 382,000--the highest since July. But the Labor Department advises “that several states have reported increases in initial claims (approximately 9,000 in total) for the week ending September 8, 2012 , as a result of Tropical Storm Issac.” Does that mean that last week’s rise is temporarily skewed with storm-related noise? Possibly, although only time will tell. Meantime, one reason for thinking positively: the unadjusted claims data on a year-over-year basis is still falling by 10% as of last week, a rate that’s in line with recent history. That’s a sign that it’s premature to read too much into last week’s seasonally adjusted jump. Putting the potential for statistical mischief via Ivan aside for a moment, let’s review how the seasonally adjusted history stacks up with last week’s data point: Even if the latest pop reflects deeper trouble in the labor market beyond Issac’s nefarious influence, the worst you can say of the seasonally adjusted weekly numbers of late is that they're treading water.

    Can we have a TARP for jobs? - First, go and check out Mike Konczal’s wondrous gift to the internet today, a fabulous GIF-filled guide to QE3 and monetary policy, where I found the GIF above. It neatly encapsulates the greatest problem facing America today: people can’t find work. This is not an existential crisis on the order of the financial crisis of 2008-9: if we fail to solve it, the entire economy won’t grind to a halt. But it’s a crisis all the same, and it’s being tackled with much less urgency — and much less money — than was brought to bear on the financial crisis. And so Deborah Solomon’s idea is, at least in principle, a good one. She notes that no one expected Treasury to recoup much if any of the money it spent on the various bailouts, and that TARP, in particular, was considered a permanent government expenditure rather than some kind of temporary loan to the financial system. Now that hundreds of billions of dollars of TARP funds have found their way back to Treasury, couldn’t they be recycled to help, not Wall Street this time, but the unemployed?

    Obstruct and Exploit, by Paul Krugman- Does anyone remember the American Jobs Act? A year ago President Obama proposed boosting the economy with a combination of tax cuts and spending increases, aimed in particular at sustaining state and local government employment.Macroeconomic Advisers estimated that the act would add 1.3 million jobs by the end of 2012. The Jobs Act would have been just what the doctor ordered. But the bill went nowhere, of course, blocked by Republicans in Congress.Think of it as a two-part strategy. First, obstruct any and all efforts to strengthen the economy, then exploit the economy’s weakness for political gain. If this strategy sounds cynical, that’s because it is. Yet it’s the G.O.P.’s best chance for victory in November.  The most important consequence of that stonewalling has been the failure to extend much-needed aid to state and local governments. Lacking that aid, these governments have been forced to lay off hundreds of thousands of schoolteachers and other workers, and those layoffs are a major reason the job numbers have been disappointing. Since bottoming out a year after Mr. Obama took office, private-sector employment has risen by 4.6 million; but government employment, which normally rises more or less in line with population growth, has instead fallen by 571,000.

    If Labor Dies, What's Next?: Imagine America without unions. This shouldn’t be hard. In much of America unions have already disappeared. In the rest of America they’re battling for their lives. Unions have been declining for decades. In the early 1950s, one out of three American workers belonged to them, four out of ten in the private sector. Today, only 11.8 percent of American workers are union members; in the private sector, just 6.9 percent. The vanishing act varies by region—in the South, it’s almost total—but proceeds relentlessly everywhere. Since 1983, the number of states in which at least 10 percent of private-sector workers have union contracts has shrunk from 42 to 8.Following the 2010 elections, a number of newly elected Republican governors and legislatures in the industrial Midwest, long a union stronghold, moved to reduce labor’s numbers to the trace-element levels that exist in the South. A cold political logic spurred their attacks: Labor was the chief source of funding and volunteers for their Democratic opponents, and working-class whites, who still constitute a sizable share of the electorate in their states, were far more likely to vote Democratic if they belonged to a union. The fiscal crisis of the states provided the pretext for Republicans to try to take out their foremost adversaries, public-employee unions.

    Obama vs. Economic Reality » According to a study performed by the National Employment Law Project, 58 percent of all new post-recession jobs come with hourly wages between $7.69 to $13.83. A worker would need two of these jobs just to afford rent, food, and other basics. The New York Times commented on the “new normal” of low wage jobs:“The disappearance of midwage [living wage], 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.” This “hollowing out” of the workforce is — along with high unemployment — the most striking feature of the “new normal” of the American workforce. A new generation of youth entering the labor market is not finding secure jobs and decent wages but unemployment and wage slavery. Republicans and Democrats are completely silent on this all important subject because they agree that it is necessary. The Democrats’ attack on public employees confirms that this dynamic is being purposely done: over 600,000 public employees have lost their jobs since 2009. Most of these workers were paid a living wage and had health care and pension plans. Their private sector replacement jobs that Obama boasts about pay peanuts and more often than not have no additional health or retirement benefits. The Obama administration understands perfectly well that these public sector layoffs could have been prevented by government action, but undermining employment and the wages of public employees is one way to drive down wages for everyone else. Together these trends lower the need for taxes and raise corporate profits.

    Long-term unemployment easing, as many accept lower pay - A surge in long-term unemployment, which Federal Reserve Chairman Ben Bernanke has cited as evidence of a "far from normal" labor market, is abating. That's good news for American companies, which are taking advantage of a pool of 5.2 million people whose career hardships have made them eager to return to work. Most of the re-employed have had to settle for reduced pay, allowing businesses to keep labor costs low while boosting profits amid sluggish sales gains after the deepest recession since the 1930s. "The cost of labor is very cheap," said James Paulsen, who helps oversee about $325 billion as chief investment strategist at Wells Capital Management in Minneapolis. "Nominal wage gains are very anemic," so these costs "are down and will likely stay down for a while longer." The number of Americans out of work for 27 weeks or longer in July was 1.5 million fewer than the April 2010 peak, Labor Department data show. The total represented 41 percent of all jobless, the lowest share since 2009. The August figure dropped slightly to 40 percent, with about 5 million people unemployed long term. Fifty-four percent of the long-term unemployed have had to settle for lower wages to secure another job, according to a Labor Department report released Aug. 24. One in 3 said their compensation was at least 20 percent less than what they made previously.

    Average Hourly Earnings: Deciphering Historical Trends - Ted called my attention to a widely circulated FRED chart showing the year-over-year percent change in hourly earnings for the total private sector (first chart below). The chart looks grim, but the total private earnings data is only available from March 2006. Thus the first YoY data point is for March 2007. There is, however, another broad series that dates from 1964 -- one tracks the hourly earnings for Production and Nonsupervisory private employees. Before we look at that complete series, here is an overlay of the two (Total Private and Production/Nonsupervisory) for the overlapping timeframe. The objective is to see the relative correlation between the two. Now let's step back and view the complete Production/Nonsupervisory series, which dates from January 1964 (giving us a January 1965 start for the YoY data). At first glance the chart looks horrible. We are currently at a level below the start of all recessions. But the chart above is totally misleading. The single biggest force in hourly wages over the last half century has been inflation. So let's have a look at the same chart, but this time with the hourly wages adjusted for inflation using the Consumer Price Index as the deflator and chained to today's dollar.

    US wages trail 10 OECD countries, but with higher unemployment than 9 of them -- Contra Eric Cantor, Labor Day celebrates the importance of labor and the labor movement in American history. But the bluster of Cantor, where he celebrates the so-called job creators, does illustrate that organized labor has been in decline in this country for quite some time. One result of having a weak labor movement is that average wages in the United States have fallen behind those of 10 other industrialized democracies that are members of the Organization for Economic Cooperation and Development (OECD). What is most confounding, for Republicans at least, is that nine of these countries also have lower unemployment, which contradicts their view that high wages (and high minimum wages) harm employment.  The table below below is constructed from data at OECD StatExtracts, showing the average earnings of all wage and salary workers in each country, as well as its most recent unemployment rate (usually July 2012).  Source: OECD StatExtracts.

    America’s 1 Percent Have 288 Times As Much Wealth As The Median Household - According to a new report by the Economic Policy Institute, the wealthiest 1 percent of American households had a net worth 288 times as large as the median household wealth of $57,000 in 2010. This constitutes a huge increase from 1962, when the ratio was 125-1:Since 1983, nearly three-quarters of the growth in total household wealth went to the top 5 percent, while the bottom four-fifths of American households saw their wealth decrease: This is yet another indication of the explosion of income inequality that has occurred over the last few decades, as more and more of the country’s income and wealth traveled to the richest Americans. This is detrimental to America’s economic success because, as EPI explained, “wealth makes it easier for families to invest in education and training, start a small business, or fund retirement.” Wealth also makes it easier to cope in a financial emergency.

    State of Working America - EPI - The State of Working America, an ongoing analysis published since 1988 by the Economic Policy Institute, includes a wide variety of data on family incomes, wages, jobs, unemployment, wealth, and poverty that allow for a clear, unbiased understanding of the economy’s effect on the living standards of working Americans. Cornell University Press will publish the hard edition and e-book in late November.

    Want to understand today’s inaction in solving economic problems? Read The State of Working America - Everybody knows the most pressing economic problem facing the United States today is joblessness. And many also know that this problem is economically solvable, yet not being solved largely because of political gridlock. But, some might still find it hard to believe that policymakers could really be so indifferent to the economic struggles of most American families. This is where The State of Working America—released yesterday—comes in handy. Think of it as the Rosetta Stone of American economic policymaking over the past generation. Or just a book and accompanying website with lots and lots of charts and tables. Either way. The two important points that come through loud and clear from its tracking of trends in income, wages, jobs, wealth and poverty are:

    • The primary barrier to low– and middle-income families seeing decent rates of economic growth over most of the last generation was the simple fact that a very narrow slice at the very top claimed a vastly disproportionate share of the fruits of economic growth
    • This sharp rise in inequality was not just a sad accident. Instead, the fingerprints of intentional policy decisions are all over it, with the unifying theme being that since the late 1970s economic policy has too often tried to tilt the playing field to make sure income was redistributed upwards. And this policy shift worked—that’s exactly where the income flowed.

    And no, the policies that led to the rise in inequality did not lead to more rapid overall growth that benefited low– and middle-income Americans. In fact, overall growth rates declined significantly over most of the same period.

    More Americans Self Indentify as Lower Class - This week’s first communiqué on the hopelessness of the former middle class comes courtesy of the Pew Charitable Trusts, the organization which has been doing an estimable job of tracking the descent of the net worth and incomes of Americans over the past decade.  According to the folks at Pew, fully a third of Americans now admit they are either of lower middle class or flat out lower class economic status, an increase of 25% since 2008. Even more distressing, the numbers are worse for those between the ages of 18 and 29, where almost two fifths of those polled told surveyors they considered themselves to be in the lowest economic brackets. Of course, this might well involve a certain amount of realistic thinking. Earlier this year, it was reported that half of all recent college graduates were either unemployed or underemployed relative to their credentials.Traditionally, large majorities of us identify as middle class. Salaries are almost irrelevant. Those earning $20,000 annually are almost as likely as those bringing home more than $200,000 a year to consider themselves members of the same economic cohort. Delusional? Sure. This economic belief that all is just about to come up monetary daisies has led to numerous ridiculous spectacles over the years, most famously our nation’s widespread opposition to inheritance taxes, even though most of us have about as much chance of receiving a multi-million dollar bequest as the odds are of Kim Kardashian suddenly stepping forward to announce she’s developed an allergy to camera lighting and will be forever retiring from what passes for public life in 2012.

    Moving Down - Most people don’t like to identify themselves as low-income, even when they are.That’s changing, though, according to a report out yesterday from the Pew Research Center. The percentage of American adults who say they are lower-middle- or lower-class has risen to 32 percent, up from just 25 percent of adults in 2008. People younger than 30 are more likely to put themselves on the economic bottom rung, and the number of whites who identify as lower-middle or lower-class has grown faster than the number of blacks or Latinos who identify that way.  These people are also more likely to have struggled economically in the past year—from skipping rent to losing a job—and are less satisfied with their financial situations, family life, and housing than their counterparts in the middle and upper classes. More important, they have a sour outlook on the future. About three-quarters said it is harder to get ahead today than it was ten years ago. Roughly half said hard work brings success—compared with the 67 percent of the middle class and 71 percent of the upper classes who hold that view.

    Counterparties: The tasks of the proletariat in the present recession - The financial crisis and subsequent recession hasn’t just chipped away at Americans’ net worth. A new Pew poll shows it has affected their economic self-image as well — 32% of all adults now consider themselves lower class, up from 25% in 2008. Not only has the lower class grown, but its demographic profile also has shifted. People younger than 30 are disproportionately swelling the ranks of the self-defined lower classes. The shares of Hispanics and whites who place themselves in the lower class also are growing. Specifically, 39% of 18 to 29 year-olds and 40% of Hispanics consider themselves lower class, increases of 14 and 10 percentage points, respectively, since 2008. Three-quarters of the lower class think “it’s harder now to get ahead than it was 10 years ago”. In that gloomy sense, America’s burgeoning lower class has something in common with its shrinking middle class. An earlier Pew survey found “85% of self-described middle-class adults say it is more difficult now than it was a decade ago for middle-class people to maintain their standard of living”. They’re right. Census Bureau data released today show that “real median household income in the United States in 2011 was $50,054, a 1.5 percent decline from the 2010 median and the second consecutive annual drop”. Dig deeper into the data, and things look worse: real income in 2011 is basically unchanged from 1990.

    A year later, Occupy did little – and inequality only gets worse  - It flashed through our lives like a comet in the sky, illuminating the most insidious development of our time. Then just as suddenly it flamed out and died. Or at least disappeared. Having made headlines around the world, having made the phenomenon of unprecedented inequality a major issue, having popularized the concept of the 1 per cent versus the 99 per cent – after all these triumphs, the Occupy Movement is playing no perceptible role in any of the big events that now affect our lives. The movement has vanished. Yet the cause that drove it – the increasing chasm of wealth and power between the preposterously rich and the rest of us – grows steadily more central to the future of the planet. There even seems lately a perverse form of bragging rights about which country in the world is actually the most egregiously unequal. Many stake their claim. My Gini coefficient is bigger than your Gini coefficient. It seems not to matter whether the country is rich or poor, east or west, booming or stagnating – each is reported to be more unequal than the others. I suppose they can’t all be right. But they can all be suffering from ever more extreme manifestations of inequality.

    Cuts in US jobless pay, government layoffs throw 1.5 million more people into poverty - The CBPP study, based on data for the first 11 months of 2011, found that 900,000 people dropped below the official poverty line over that period due to cuts in the duration and level of unemployment benefits, and another 666,000 fell into poverty due to lost family earnings resulting from state and local government layoffs. The CBPP concluded that jobless pay cuts and government layoffs combined raised the average monthly poverty rate by 0.5 percent. In 2010, 9.8 million people received state or federal unemployment benefits. In 2011, this figure dropped to 7.7 million, a 21 percent decline. The total amount of benefits paid out fell by 25 percent, or $36 billion. This enormous drop in unemployment insurance payments took place as the number of unemployed people declined by only 569,000, a drop of 4.2 percent. These figures indicate that for every one person who became ineligible for unemployment benefits because he or she found a job, three more were cut off of benefits without finding work. A significant factor in the decline in the total amount paid out in unemployment benefits in 2011 was the expiration of a $25 monthly bonus in jobless benefits included in the stimulus bill passed in 2009, which the Obama administration made no attempt to extend. This year, the administration has gone further in attacking jobless benefits. It engineered a bill passed last February sharply reducing the duration of federally funded extended jobless benefits from a maximum of 99 weeks to a maximum of 66 weeks.

    This Week in Poverty: ‘Beating the Drum About Poverty’ In a recent column, Bill Moyers and Michael Winship wrote, “When it comes to our ‘out of sight, out of mind’ population of the poor, you have to think we can help reduce their number, ease the suffering, and speak out, with whatever means at hand, on their behalf and against those who would prefer they remain invisible. Speak out: that means you and me, and yes, Mr. President, you, too.” In the past year, it’s hard to imagine how anyone could have done more on the national stage to seek out and speak out on behalf of people living in poverty than broadcaster Tavis Smiley and Dr. Cornel West, professor of Philosophy and Christian Practice at Union Theological Seminary. Next week, September 12–15, they will go on the road for their second poverty tour in a year, which they have dubbed “Poverty Tour 2.0.”

    Census Statistics Show Continued Decline in Median Income - The US Census Bureau released median income, poverty and insurance stats today, all of which have a 90% confidence interval, meaning that there’s a fairly high margin for error. Still, the trends in median income are not encouraging, although the insurance stats bucked that trend. Here are the really bad median income statistics:Median family household income declined by 1.7 percent in real terms between 2010 and 2011 to $62,273. The change in the median income of nonfamily households was not statistically significant. In 2011, real median household income was 8.1 percent lower than in 2007, the year before the most recent recession, and was 8.9 percent lower than the median household income peak that occurred in 1999. The two percentages are not statistically different from one another. The long-term trend is the problem here. Median income has been falling for TWELVE YEARS. Throughout that time, Americans have been getting poorer in real terms. By contrast, the US gross domestic product for 1999 was $8.7 trillion, while in 2011 it rose to $14.4 trillion. Workers did not see any of the benefits of the nearly $6 trillion in gains; in fact, they lost ground. Median earnings for women remain 77 cents on every dollar of the median earnings for men, essentially unchanged from 2010. Income inequality also increased in 2011: Based on the Gini index, income inequality increased by 1.6 percent between 2010 and 2011; this represents the first time the Gini index has shown an annual increase since 1993, the earliest year available for comparable measures of income inequality. The Gini index was 0.477 in 2011. (The Gini index is a measure of household income inequality; zero represents perfect income equality and 1 perfect inequality.)

    Number of US poor holds steady but incomes fall - Census (Reuters) - The share of Americans living in poverty last year held steady after three years of hefty increases, according to government data released on Wednesday that could ease pressure on President Barack Obama as he seeks reelection in November. The Census Bureau said the 2011 poverty rate was 15 percent, statistically unchanged from 15.1 percent in 2010. About 46.2 million Americans were living in poverty, little changed from the prior year. Still, data from the Census Bureau also showed the 2011 median U.S. income declined 1.5 percent from 2010. Additionally, the share of Americans lacking health insurance - another key indicator economic of well-being - fell to 15 percent in 2011 from 16.3 percent in 2010.

    Highlights From Census Report on Income, Poverty and Health Insurance - The Census Bureau today released its annual report on income, poverty and health insurance, the most detailed look at Americans’ household income. A few early takeaways:

    • The lost decade continues. Median household income, adjusted for inflation, fell 1.5% in 2011, to $50,054. That’s 8.1% lower than before the recession and 8.9% lower than in 1999.
    • Inequality rose. Income inequality, as measured by the Gini index, rose 1.6% in 2011 from 2010, the first annual increase since 1993. Other measures of inequality also increased.
    • Urban residents took the biggest hit to income. Households in principal cities saw their inflation-adjusted income decline by 3.7% in 2011, versus a 2.2% decline for those living in metropolitan areas (including both cities and suburbs). Incomes for those living outside of metropolitan areas were broadly flat. But country dwellers have the lowest median incomes, at $40,527, while suburbanites had the highest, at $57,277.
    • Jobs are increasing, but pay is falling. The number of people with full-time, year-round jobs rose by more than 2 million in 2011, although it’s still well short of the pre-recession level. But the inflation-adjusted earnings of such workers fell by 2.5%
    • Poverty declined slightly. There were 46.2 million people living in poverty in 2011, for an official poverty rate of 15%. That’s down slightly—and statistically insignificantly—from 15.1% in 2011, after three straight years of increases. The poverty line for a family of four was $23,021 in 2011.
    • Two-fifths of the poor had jobs. Of the 26.5 million Americans living in poverty in 2011, 10.3 million had jobs, though only 2.7 million worked full-time, year-round. The other 16.1 million didn’t work in 2011.
    • Fewer people are living without health insurance. The ranks of the uninsured fell to 48.6 million in 2011 from 50 million in 2010. For the first time in the past decade, the percentage of people with private insurance didn’t fall, holding steady at 63.9%.

    By the numbers: New Census Bureau data on poverty, income, and health insurance coverage - This morning’s release by the U.S. Census Bureau of the 2011 data on income, poverty, and health insurance coverage is yet another reminder of the ongoing consequences of both the Great Recession and the weak business cycle that preceded it. A first take:

    • 15.0%: The share of the population in poverty in 2011
    • 21.9%: The percent of children under 18 in poverty
    • 46.2 million: The number of people in poverty in 2011
    • $22,811: The poverty threshold for a family of four with two children
    • 44.0%: The share of the poor population in “deep poverty,” or below half the poverty line
    • 2.3 million: The number of people unemployment insurance kept out of poverty in 2011
    • 21.4 million: The number of people Social Security kept out of poverty in 2011
    • 5.7 million: How many fewer people would be in poverty if the Federal Earned Income Tax Credit was included in the Census definition of money income
    • 3.9 million: How many fewer people would be in poverty if food stamps (SNAP) were added to money income
    • -1.7%, +5.1%: The change in average household income between 2010 and 2011 for the middle 20 percent, and the top 5 percent, respectively.
    • $7,887, -12.4%: The decline in median working-age household income from 2000 to 2011 in level terms and percentage terms, respectively
    • $50,622, $48,202:  Median earnings for a man working fulltime, full year in 1973 and 2011, respectively
    • $28,699, $37,118:  Median earnings for a female working fulltime, full year in 1973 and 2011, respectively
    • 47.9  million: The number of people under 65 without any health insurance in 2011, down from 49.2 million in 2010
    • 14.2 million: The decline in the number of people under 65 with employer-sponsored health insurance from 2000–2011
    • 10.8 percentage points: The decline in the share of the under 65 population with employer-sponsored health insurance from 2000–2011
    • 25 million: The increase in the number of people under 65 on government insurance (e.g., Medicare, Medicaid) from 2000 to 2011.

    Middle Class Shrinks to ALL-TIME LOW - The Washington Post notes in an article entitled “Census: Middle class shrinks to an all-time low“: The vise on the middle class tightened last year, driving down its share of the income pie as the number of Americans in poverty leveled off and the most affluent households saw their portion grow, new census data released Wednesday showed. For many economists, the most troubling statistics were those on income inequality underscoring the middle-class squeeze. The 60 percent of households earning between roughly $20,000 and $101,000 collectively earned 46.6 of all income, a 1.5 percent drop. In 1990, they shared over 50 percent of income. The Post also notes that inequality has actually risen post-recession: “What’s disconcerting is that inequality is going up post-recession, and it’s happening because the top is starting to pull away again,”  Bloomberg reports that income inequality has grown to the highest level since 1967: The U.S. Census Bureau figures released yesterday underscored the struggles of American families in a sputtering economic recovery. The report also showed the income gap between rich and poor people grew to the widest in more than 40 years in 2011 as the poverty rate remained at almost a two-decade high.

    US median income lowest since 1995 - The median income of American households dropped to its lowest level since 1995 last year, extending its decline during President Barack Obama’s tenure and highlighting the depth of the damage to the middle class inflicted by the recession and weak recovery. According to annual data from the Census Bureau, median income adjusted for inflation – a closely watched measure of the financial health of average Americans – fell to $50,054 in 2011, or 1.5 per cent below its 2010 level and 4.1 per cent below its score when Mr Obama took office in 2009. Although real median income had already started to slide beginning in 2008, before Mr Obama entered the White House, the fact that he was not able to reverse that downward trend could expose him to criticism from Mitt Romney, his rival, that his policies have not aided the middle class. In addition to the drop in overall median income, the data also showed a rise in income inequality last year. But while the data on income will have been discouraging for Mr Obama, other elements of the report were more upbeat. For instance, the poverty rate dropped slightly, from 15.1 per cent to 15 per cent, as fewer middle-class Americans struggled so much that they had slid under the poverty threshold of about $23,000 in annual income for a family of four. Also, the Census Bureau said that the number of people without health insurance cover declined from 50m in 2010 to 48.6m in 2011, along with the percentage of people lacking coverage, which fell from 16.3 per cent in 2010 to 15.7 per cent in 2011.

    U.S. Income Gap Rose, Sign of Uneven Recovery - The income gap between the wealthiest 20 percent of American households and the rest of the country grew sharply in 2011, the Census Bureau reported, as an overwhelming majority of Americans saw no gains from a weak economic recovery in its second full year. Income for the top fifth of American households rose by 1.6 percent last year, driven by even larger increases for the top 5 percent of households... All households in the middle of the scale saw declines, while those at the very bottom stagnated.  “You’re really struck by the unevenness of the recovery,” “The top end took a whack in the recession, but they’ve gotten back on their feet. Everyone else is still down for the count.” The numbers helped drive an overall decline in income for the typical American family. Median household income after inflation fell to $50,054, a level that was 8 percent lower than in 2007, the year before the recession took hold. ...The Census Bureau reported that a standard measure of income inequality, the Gini index, registered the first year-on-year increase since 1993, a surprise for economists who say the measure, which has been rising for some time, usually changes so slowly that a statistically significant rise over the course of one calendar year is rare.  Inflation-adjusted median household income fell by 1.5 percent in 2011. During the recovery, about 3 in 5 of the new jobs created have been low-skill and low-wage — taking people off the unemployment rolls and pulling some families out of poverty, but not providing a clear route to the middle class. ...

    Income Inequality at Historically High Levels, Census Data Show: The shares of the nation’s income going to each of the bottom three fifths of households were the lowest on record last year, in data that go back to 1967, today’s Census Bureau report shows. The share of income going to the top fifth was the highest on record (see graph). The bottom 20 percent of households received just 3.2 percent of all household income in 2011, and the middle fifth of households received only 14.3 percent of the income. But the top 20 percent of households got 51.1 percent of the income in the nation, and the top 5 percent of households garnered 22.3 percent. In short, as more of the gains of economic growth have accumulated at the top, the shares of the national income going to the bottom and middle have fallen. Although the economy grew last year, middle-income households continued to lose ground, and the losses were particularly large for working-age households. It’s a stark reminder that when it comes to the living standards of middle- and low-income families, overall economic growth is necessary but not sufficient.

    United States: How Inequality Affects Saving Behavior - iMFdirect - The incomes of U.S. households have become more unevenly distributed over the past three decades. For example, the Congressional Budget Office estimates that after-tax income almost tripled for the top 1 percent of households between 1980 and 2007, but grew only 22 percent for the bottom 20 percent. Recent research has focused on the link between income inequality and growth, but less attention has been paid to the link between inequality and savings. So together with a few colleagues we have looked at how income distribution is linked to saving behavior. Saving rates matter because they are an important factor for the U.S. economic outlook. The decline in the saving rate in the years leading up to the crisis (from 10 percent of after-tax income in 1980 to 1.5 percent in 2005) is the mirror image of the unsustainable boom in consumer spending during the bubble years.Following the crisis, sharp losses in the values of houses and financial assets, as well as difficulties in obtaining new credit, forced American families to save more and rebuild their wealth. The ensuing rise in the saving rate, which stood at 4 percent in the second quarter of 2012, has been an important reason why the recovery from the 2008–09 recession has been sluggish. Therefore, our study looked at which types of households drove the aggregate saving rate down before the crisis and those that drove it up afterwards, so as to improve our ability to assess the potential for future U.S. growth

    Counterparties: How to save, America - Saving money — everyone hates it. Americans spent the period between the early 1980s and the financial crisis failing miserably at saving. In 1982 Americans saved 10.9% of their income; by 2005 the savings rate had fallen to just 1.6%.Since the financial crisis, personal savings have rebounded, hovering between 3% and 5% ever since. But this relatively new boost in Americans’ savings, it turns out, is not equal opportunity. Nearly 30% of households don’t have access to a savings account, according to a FDIC report released this week. Another recent report suggests 28% of Americans have not saved anything at all. The IMF has a new paper which looks at the relationship between income inequality and savings in America. (The gap between America’s rich and poor hit a 40-year high in 2011). “Lower income growth,” the authors write, “was linked to the drop in saving rates and growing indebtedness of American families”. The authors argue that without higher home prices or growing incomes, Americans are still not saving enough to fix their post-crisis financial situations. Keyu Jin, who looks at the differences between Chinese and US savings patterns, finds big generational gaps in US savings: “the fall in savings in the US is largely due to higher borrowing by the young (rather than a fall in middle-aged Americans’ savings rate)”. Middle-aged Americans, Jin writes, actually increased their savings, relative to GDP, from 1992 to 2009. If you’re worried that you’re not saving enough to keep up, the bad news is that you’re probably right. The rule of thumb says that you need to save at least eight times your final annual income to pay for retirement.

    Behind the Decline in Incomes - The Census Bureau just released its sweeping annual report on income, poverty and health insurance coverage. As my colleague Sabrina Tavernise writes, median household income declined last year to $50,054, a level last seen in 1996 when adjusted for inflation. Here are a few quick graphical bullet points from other findings in the report:

    • 1. Median incomes fell from 2010 to 2011 for all races, although the change was not statistically significant for Asians and Hispanics.
    • 2. Inequality rose, and is at its highest level on record since 1967. The Gini Index is a standard measure of inequality, in which higher values represent more unequal distributions of money income. The “equivalence-adjusted income estimate” (blue line above) takes into consideration the number of people living in each household, and how these people share resources and take advantage of economies of scale.
    • 3. Men have gained more jobs in the recovery (dubbed the “he-covery”) but they also lost a lot more jobs in the recession (“man-cession”).
    • 4. There’s more evidence that the work force is “hollowing out,” as there was significant job growth in the first, second and fifth income quintiles, but not in the third and fourth ones.
    • 5. The share of people without health insurance fell. The biggest drop was among those 19 to 25 years old, who can now join their parents’ health insurance plans.

    Visualizing US Income Disparity, Or How The Rich Have Gotten Poorer For The Fifth Year In A Row -- There was little of note in the annual US Census Bureau update titled "Income, Poverty, and Health Insurance Coverage in the United States." The key number everyone hones in on in this report - the number of America living in poverty - is already well known courtesy of foodstamp data. Per the Census bureau this number was 46.2 million Americans in 2011 or "after 3 consecutive years of increases, neither the official poverty rate nor the number of people in poverty were statistically different from the 2010 estimates." Actually this statement is quite wrong as the foodstamp data speaks a very different story, but it is an election year, and most people are mathematically challenged. Either way of looking at it, 15% of the US population living in poverty is hardly a statistic to be proud of, regardless who is president. Which brings us to a second point: when looking at the wealth dispersion by percentile, Wharton economist Justin Wolfers commented that "The rich just keep getting richer." Actually, based on the Census data he was looking at this also is wrong, as the underlying series shows that both the household income of the uber-wealthiest 95th percentile, as well as the income spread between the 95th and 10th percentile, over the past 5 years has actually been going down. In fact, the average income of the richest disclosed percentile is $186,000, or the lowest since 1999. So yes, the rich may be getting richer, but it certainly is not based on Census data, which shows that the wealth of the top percentile has been not only flat but modestly declining for 12 years.

    Changes in Inequality the 21st Century - One measure of changing inequality in the labor market, commonly used by economists, is the annualized 90-10 change: the annualized growth rate of wages at the 90th percentile of the distribution of wages for men working full time minus the growth rate of wages at the 10th percentile of the same distribution. Because the 90th percentile wage is the wage below which 90 percent of working men earn, the annualized 90-10 change can be interpreted as the degree to which the wages of high-earning men grow more, or fall less, than the wages of low-earning men. The measure can in principle be negative, in which case the wages of less-skilled people would be partly catching up with the wages of skilled people. I measured these changes using the Census Bureau’s Current Population Survey Merged Outgoing Rotation Group sample. (Analysis of wage patterns is often performed with the Census Bureau surveys, although most of them lack information on employee fringe benefits over and above wages and salaries.) The left part of the chart below shows the annualized 90-10 change over three time periods.

    Income Inequality and the Death of Trickledown  - On September 12, 2012, the Census issued its report on Income, Poverty, and Healthcare Coverage in the United States: 2011. While the full report has some nice charts, one that was conspicuously missing was on income inequality. The data for such a chart was in the tables, and so I was able to construct the chart above from them. Mean household (not individual) income for each quintile (20%) is expressed in real (inflation-adjusted) dollars. One feature that jumps out at you are how relatively flat mean income has been for the bottom 80% over the last 45 years and how much it has grown for the top 20%, from an already high baseline. I thought this merited some further investigation. If you look at the far left, in 1967, the income difference between the quintiles of the bottom 80% was remarkably similar, less than $17,000 between each group ($16,679 between the 1st (lowest quintile) and 2nd; $15,572 between the 2nd and 3rd; and $16,631 between the 3rd and 4th). But even in 1967, we see significant income disparity ($46,619) between the 4th and 5th (top) quintile. The top 20% have an income difference nearly 3 times as great as the other quintiles. In the succeeding decades, difference between the 4 lower quintiles showed some moderate spreading. For 2011, they are $17,965 from 1st to 2nd; $20,638 from 2nd to 3rd; $30,238 from 3rd to 4th; and $97,940 from 4th to highest 5th). What we see in this is a movement of the top 20% from around 3 times the initial 1967 spreads between quintiles (~$17,000) to something over 5 times them ($97,940). What is interesting is that the mean income of the top 20% increased $73,100 from 1967 to 2011. About $20,000 of this increase occurred during the Reagan years, but what often gets overlooked is that about $43,000 of it happened during the Clinton years.

    Is Income Inequality Rising, and Are a Lot of Feathers Heavy?  - New data on income inequality in the United States were just released.  And they provide a useful teaching moment. The graph below, which comes from the Census Bureau, shows the evolution of the Gini coefficient since 1967.  It’s pretty clear that this measure of inequality has been rising pretty much through this whole period. But here’s how the Census Bureau chose to describe these data: Based on the Gini index, income inequality increased by 1.6 percent between 2010 and 2011; this represents the first time the Gini index has shown an annual increase since 1993, the earliest year available for comparable measures of income inequality. Say what?  It turns out that they’re looking only at year-to-year changes.  And they’re counting a year-to-year change as positive only if it measures inequality this year as being statistically significantly larger than it was last year.  And while inequality rose in most years, it may not have risen by enough over any one year to be called statistically significant.  Yet while the Census Bureau may be right that no individual year-to-year change was statistically significant, the accumulation of positive changes is.  That is, since 1993, the number of times inequality has risen, is itself statistically significant.  Alternatively, if you compare inequality today with that more than a year or two earlier, the rise both this year and in most years is statistically significant.

    More Evidence of Failure of Obama’s Policies: Census Data Shows Median Incomes Fall, Income Disparity Rises - Yves Smith - Matt Stoller pointed out that income disparity, which is associated strongly with negative social indicators (crime rates, poor health outcomes) as well as lower growth, rose faster under Obama than Bush.  Newly released Census data provides more evidence of the failure of Obama’s economic policies. A Bloomberg story summarizes how it shows that median incomes fell even as those at the top showed income gains. And why might Obama think he can be indifferent to the fate of ordinary Americans? Might it not be unrelated to the disproportionate role that the 1% and even more important, the 0.1%, play in campaign funding? From Bloomberg: The U.S. Census Bureau released figures today that showed median household income fell, underscoring a sputtering economic recovery and struggling middle-class that are at the center of the presidential campaign. The proportion of people living in poverty was 15 percent in 2011, little changed from 15.1 percent in 2010, while median household income dropped 1.5 percent. The 46.2 million people living in poverty remained at the highest level in the 53 years since the Census Bureau has been collecting that statistic. “The gains from economic growth in 2011 were quite unevenly shared as household income fell in the middle and rose at the top,” Average incomes fell for the bottom 80 percent of earners and rose for the top 20 percent, highlighting the need for “those at the top to share,” as the nation looks to reduce its budget deficit, Greenstein said.

    America By the Numbers — A National Disgrace - The U.S. Census Bureau reported yesterday that annual household income fell in 2011 for the fourth straight year to an inflation-adjusted $50,054.  That figure is 8 percent lower than in 2007 and 1.5 percent lower year over year.  The $50,054 figure represents the Nation as a whole.  The West and the Midwest showed even sharper declines year over year, losing 4.1 and 2.1 percent, respectively.  The U.S. poverty rate, which is defined as an annual income of $23,021 for a family of four, was 15.0 percent in 2011 versus 15.1 percent  in 2010.  That figure translates into 46.2 million of our fellow Americans living in poverty – a national disgrace by any interpretation.  On September 22, 2010,  Forbes magazine released its annual list of the 400 richest Americans.  Their combined net worth climbed 8% that year, to $1.37 trillion.  More recently, from 2010 to 2011, Charles and David Koch, owners of Koch Industries, each saw their net worth climb from $21.5 billion to $25 billion, an increase of 14 percent year over year. And yet, these two men lead the political money machine that is waging an all-out war against regulating corporations; regulations that are critically needed to stop the wholesale wealth stripping of the poor and middle class.

    More Than 46 Million Americans Still in Poverty - Today's census report also contained bad news on incomes. Median household income (adjusted for inflation) was down an additional 1.5 percent from the already-low levels of 2010. Median income is now 8.9 percent lower than it was in 1999.Income inequality, as measured by the Gini index - the degree of income inequality, with 0 representing total equality and 100 representing total inequality - reached a new record high of 47.7 percent. A Gini index of 50 would be equivalent to half of the population receiving all of the country's income, while the other half got nothing. All this bad news comes against a backdrop of extraordinarily low employment rates. According to the Bureau of Labor Statistics, just over 58 percent of the adult population has any kind of job at all (full or part time), the lowest figure in 30 years. Only 64 percent of adult men have a job of any kind, the lowest figure ever.Today's official poverty rate of 15 percent is among the highest of the past 40 years. When the poverty line was first adopted in 1969, the poverty rate was just 12.1 percent. The poverty line we use today was officially set on August 29, 1969. It represented a 1969 consensus of the basic minimum standard of living for American families in 1969. Other than adjusting for inflation, it has not been updated since. In the technical discussions that preceded the official determination of the poverty line, experts considered a methodology that "would have resulted in poverty thresholds that were 25 percent to 30 percent higher than the existing thresholds,"

    The official poverty rate last year was 15 percent. Here's what that misses - The Census Bureau released its income, poverty and health insurance numbers for 2011 on Wednesday and contrary to expectations, poverty was essentially unchanged, falling from 15.1 percent in 2010 to 15 percent in 2011. But more and more poverty experts are dismissing the official poverty figure. What gives? As Suzy explained when the 2010 report came out, the poverty measure has not changed much since the Johnson administration and, in many ways, it shows. Transfer payments, such as the Earned Income Tax Credit (EITC) or food stamps, don’t show up as income. Moreover, the income threshold used to determine if a person or household is in poverty has not changed, other than inflation adjustments, since 1963-64. It was originally calculated as the amount below which a family of three or more would have to spend more than a third of its income on food. Thus, it doesn’t take into account other expenses like housing, transportation, medical care and child care. To remedy this problem, the Census Bureau and the National Academy of Sciences have both developed alternative metrics taking these factors into account. What they show is that transfer payments are significantly reducing the poverty rate. Here’s the Census alternative metric:

    US census figures show more than one in five children are living in poverty -  New figures have been released by the US census bureau revealing a yearly decline in median household income for Americans, growing inequality and more than one in five children under 18 years old living in poverty. In a survey of data for 2011, the census discovered that real median household income in the US had dipped by 1.5% from its level in 2010 to sit at $50,054 a year. The fall is the second consecutive annual drop and comes in the middle of a bitterly contested election in which America's tepid economic performance has been a central theme. The figures released by the census also show that little dent has been made on America's high levels of poverty, with some 15% of the nation – representing around 46.2 million people – living in poverty in 2011. The figures are worse for the very young, where the poverty rate for those under the age of 18 is 21.9% – or some 16.1 million children. These latter figures are roughly unchanged in 2011 from 2010. However, income inequality in the US has grown. The Gini Index, which measures income inequality, increased by 1.6% to a score of 0.477 in 2011. Though few other countries have yet produced figures for 2011, that number for the US shows a more unequal economy for America than the 2010 figures for countries like Uruguay, Argentina and Bangladesh. Within the figures there was also an increase in the share of aggregate income for the top 20% of Americans of 1.6% and – within that group – the top 5% saw a jump of 4.9%.

    Children of Single Parents Much More Likely in Poverty - Children of single parents are much more likely to live in poverty than children raised by married couples, according to data from today’s Census Bureau report. The poverty rate for children in female-headed households was 40.9% last year, compared to 8.8% for children of married couples, according to a Brookings Institution report that used the data. Moreover, the rate remained unchanged for children of single parents from the prior year, while the rate ticked down for children in the second group. Kay Hymowitz of the Manhattan Institute, speaking at a Brookings Institution panel discussion on the report Wednesday in Washington, said that statistic is particularly troubling because single-parent homes are on the rise. Of the one million children projected to be born into poverty next year, three quarters of them will be born to single mothers, she said.

    Hispanic and single-black-father families see declines in poverty - Although Hispanic and black families have the highest poverty rates of the major racial and ethnic minorities, the latest poverty data holds some positive news. The poverty rate for Hispanic families with children under 18 years old declined 1.6 percentage points (Figure A). Black families showed a 1.1 percentage-point decline, but this decline was not statistically significant. Non-Hispanic white and Asian American families had small increases that were not statistically significant. By family type, for all families with children under 18 years old, only families headed by single1 fathers showed a real decline. This decline appears to be driven primarily by a large drop in the poverty rate for families headed by single black men. The poverty rate for black single-father families dropped 11.3 percentage points (Figure B). These families saw a large spike in their poverty rate from 2009 to 2010. The reversal from 2010 to 2011 returns them to their more typical poverty range.

    What the Official Poverty Rate is Missing - Yesterday the U.S. Bureau of the Census released its annual report on "Income, Poverty, and Health Insurance Coverage in the United States: 2011,"1One finding is that the official U.S. poverty rate barely budged from 2010 to 2011, which if not positive news, is at least non-negative news. Here's a figure showing the number of people in poverty and the poverty rate since 1959: But the theme I want to take up here is that the official U.S. measure of poverty is based on money income before taxes, not on consumption levels.  One set of problems is clear: some of the largest government programs to help those in poverty have zero effect on the officially measured poverty rate. For example, Food stamps are technically a noncash benefit (even if in many ways they are similar to receiving cash), so they are not counted in the definition of income used for calculating the poverty rate. The Earned Income Tax Credit operates through the tax system, it is not covered in the definition of "money income before taxes" used to measure poverty.  The fact that many anti-poverty programs have no effect on officially measured poverty is no secret. The Census report itself carefully notes: "The poverty estimates in this report compare the official poverty thresholds to money income before taxes, not including the value of noncash benefits.

    The Problem of the Definition of Poverty - Before you can start to measure poverty, you first have to decide what you actually want to measure. What is poverty? That’s not just a philosophical problem because depending on the definition of poverty you use, your measurements will be radically different (even with an identical definition, measurements will be different because of different measurement methods).Among people who measure poverty, roughly 6 different definitions of poverty are used:

    None of these definitions is ideal, although the first and second on the list are the most widely used. A few words about the advantages and disadvantages of each.

    Policy Matters! Today’s Income, Poverty, and Insurance Data - Poverty rates as officially measured did not rise as expected last year and more people were covered by health insurance.  Middle class incomes fell significantly, however, and inequality increased. Basically, the message here is policy matters.  Where policy addressed a market failure—rising shares of the uninsured; poor families with low wages and nutritional needs—the situation improved.  Where we didn’t—the weak labor market on which middle-income, working families depend—things got worse.

    • Health Insurance Coverage: As regards the improvement in health coverage, public policies associated with the Affordable Care Act helped to boost insurance rates of young adults.
    • Poverty: The extent to which the safety net helped the poor is complicated by the fact that some of their most important benefits are not counted as income in the official poverty rate, which was essentially unchanged last year, falling from 15.1% to 15%.  But as my colleague Arloc Sherman points out, these benefits actually lifted millions of households above the poverty thresholds:
    • Income: So what happened to middle incomes last year? Median household income, adjusted for inflation (as are all the figures I’ll cite here), fell by 1.5% in 2011, a loss of about $780 in 2011 dollars.  This is a continuation of a pattern that began with the deep recession that began in 2007.  In fact, since then, median HH income is down 8%, or about $4,400.

    How the government fights poverty, in one chart - The official poverty measure has a lot of problems, and we’ll have to wait until November for the better alternative measure from the census. For one thing, the official measure totally ignores the big impact of government programs on the poverty rate. But yesterday’s income, poverty and health insurance report also included a few adjusted measures that can be informative. In particular, the report estimated what the poverty rate would be if you adjusted peoples’ income to not count Social Security benefits and unemployment insurance (which are included in the official poverty measure), and to take into account the Earned Income Tax Credit and food stamps (which are not included in the official measure). Here’s how these programs have affected the poverty rate, from 1981 to 2011 (the gray dashed line is the official measure; SNAP is food stamps):

    Reforming Welfare and Gutting the Poor: A Bipartisan Platform - The Romney camp's new attack line on the Obama administration--that he “gutted” the work requirements imposed on families receiving public assistance--has been widely debunked as a distortion of a mundane policy memo. But the real scandal here isn’t what Obama did or didn’t do to “workfare”; it’s that both parties have gutted the welfare system as a whole to conduct a cruel social experiment on impoverished families. As many watchdogs have pointed out, the memo in question from the Department of Health and Human Services basically offers states more flexibility to meet mandatory targets for moving people off of Temporary Assistance for Needy Families (TANF) and into gainful employment. This program, administered jointly through federal and state agencies, is the central plank of Clinton-era welfare reform, and its principal political aim has always been to reduce the statistical presence of the poor, not alleviating their poverty. According to the Center on Budget and Policy Priorities (CBPP), as welfare reform approaches its Sweet Sixteen, TANF's track record contrasts bitterly with that of its predecessor, AFDC, which Reaganite conservatives had savaged as undeserved entitlement:

    International Poverty Comparisons: What Do They Tell Us about Causes?, by Jared Bernstein: I’m thinking about the causes of poverty for an upcoming debate and in that context I often reflect on this chart. The American debate on the causes of poverty places significant weight on the behavior of the poor, behavior that’s juiced up—in a bad way—by safety net programs. For example, the argument goes, anti-poverty programs that provide cash or nutritional (near-cash) benefits to poor peeps leads them to work less and thus leads to higher poverty rates than would otherwise prevail. I deal with the work disincentive claim in great detail here—not much to it (as usual, pure supply-side explanations don’t explain much). Relatedly, there’s the set of cultural critiques associated with Charles Murray, e.g., the poor aren’t industrious enough, they lack the middle-class aspirations, and so on. I think the international evidence is instructive in this regard. The figure shows pre-transfer and post-transfer poverty rates among OECD countries (mostly the advanced economies). The former (pre-transfer) are the market-driven poverty rates, before the tax and transfer systems kick in. Though there is variation across countries on the pre-transfer, or market poverty rates, they’re fairly close, and their average, excluding the US, happens to be the same as ours. After the tax and transfer system kicks in, however, the US has the highest poverty rate of all the countries in the sample. Our post-transfer poverty rate is 1.7 times that of the non-US average (17.1%/9.8%).

    Bloomberg Ranks Most and Least Miserable States - Yves Smith -- Bloomberg has developed a more detailed approach to looking at “misery” than the traditional “misery index,” which looked only at unemployment and inflation. They took their more granular method and used it to rank states in the US. This looks like a reasonable and useful metric, so I wish they had written a story detailing their approach and publishing the full ranking, but this TV clip gives the high points. Some of their findings are intuitive (the Deep South scores badly), while some might strike readers as news (Minnesota is number 1):

    Kraft warns on US food stamp cut plans - Proposals to impose deep cuts on the $75bn US food stamp programme could eat into profits at food companies that rely on low-income customers stocking up on snacks and drinks.  Tony Vernon, incoming chief executive of Kraft, the US food company, said that the high US poverty level is the biggest challenge he faces and that he opposes cutbacks to food stamp funding, known as the Supplemental Nutrition Assistance Programme. “The Snap programme is a programme we are supportive of,” Mr Vernon told the Financial Times. Food stamp users “are a big part of our audience”, he said.The fate of the food stamp programme is at the centre of a political debate over the US farm bill, which is set to expire at the end of the month. Critics of the cuts warn that they would diminish one of the most important safety nets for the poor, while health advocates argue that the existing food stamp laws subsidise companies that sell junk food.

    Local Food Pantries Almost Empty – There is a desperate need for food donations at Salvation Army centers across the Kansas City metro area. Major Butch Frost told FOX 4 News demand for food is up 62 percent from last year. More families are out of work or struggling to make ends meet, so they are turning to local food pantries to feed their families, he said. The problem is the Salvation Army right now only has enough food to give each needy family two to three meals. Some of the food items highest in demand are canned vegetables, peanut butter, macaroni and cheese, rice, diapers and cereal. He said those who want to donate can bring the food to any of the nine local Salvation Army centers. You can also donate money. All funds collected go to buying food at a reduced price from Harvesters and several local grocery stores.

    Some Bright Spots, But U.S. Cities Still Face Fiscal Strain-Survey - America’s cities are projecting a sixth straight year of revenue declines in 2012, but more financial officers feel their municipalities are better able to meet their fiscal needs, according to a survey released Thursday by the National League of Cities. The survey, which included responses from 324 cities, also found that reserves are expected to fall as cities use the extra cash to weather the economic downturn. If projections hold, cities would have drawn down their reserves by nearly 50% since 2007. Employee and retiree health-care costs and pensions were identified as having the largest negative impacts on city finances, and looking ahead, underfunded pension and health-care liabilities will persist as a challenge. Urban economies will also face declining or slow growth in future property taxes, given that the real estate market continues to sputter.

    A Tale of Two Cities -- From the NY Daily News comes a Tale of Two Cities (and does not include rural poverty): We have more poor people in Brooklyn than the entire population of Detroit; we have more people on food stamps than the entire population of Washington, D.C.,” Gelber said. “Yet there are more wealthy people than in Greenwich, Conn.” The Daily News scoured Brooklyn for telling statistics about the extremes of grimness and glamor gripping the split-personality borough, and found: Sixty-nine people have been shot this year in Brownsville. Four miles away, a mansion at 70 Willow St. in Brooklyn Heights sold for the borough’s highest-ever home price of $12.5 million. -Brooklyn sent five athletes to the Olympics but one in four borough residents is obese. -Brooklyn has 113 colleges and universities but only 29% of borough residents have college degrees. “It’s absolutely a tale of two Brooklyns, right out of Dickens,” said Joel Berg, executive director of the New York City Coalition Against Hunger. “The divide is getting wider every year.”.

    Homeless Children in New York City on Par With Great Depression as Wall Street Snubs Key Charity Helping Them -  Pam Martens - Will someone please wake up the Wall Street Scrooge crowd with the news that while they may still be munching on their Golden Osetra caviar and sipping Billinis, tens of thousands of fellow citizens of their city are experiencing the worst downturn since the Great Depression – and, for God’s sake, that includes innocent children who can’t be blamed by even the most Ayn Randian of cold hearts for their circumstances. According to New York City data and a report in the New York Daily News on Sunday, the number of homeless children sleeping in New York City shelters reached 19,000 last week.  That’s on a par with the data for the Great Depression. The numbers are rising dramatically year after year and yet Wall Street’s response last year to a core charity easing the suffering of homeless children in its own city was that of a cheapskate and skinflint. According to the annual report filed by Coalition for the Homeless for contributions received in 2011, help from major Wall Street firms was almost non-existent.  Companies not chipping in a dime included JPMorgan Chase, Morgan Stanley, and  Citigroup.  Goldman Sachs kicked in a miserly $5,000 to $9,999.  Bank of America’s Merrill Lynch contributed the skinflint sum of $2,000 to $4,999. Wall Street’s biggest firms gave less than they spend on limos for their summer interns and 3 percent of what four major Wall Street firms have contributed to the presidential campaign of multi-millionaire Mitt Romney.  Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Bank of America – through employee contributions, PACs and committee contributions – have donated over $2.2 million to Romney’s campaign while giving, at most, $15,000 to help the Coalition for the Homeless ease the suffering of children in their own city.

    America leads the world in incarcerating people. What a disgusting record to hold. – Dusty - We sadly lead even the Muslim countries in putting people in jail. Louisiana leads the nation with more than 5 times the number of incarcerations over even Iran for chrissakes. Melissa Harris-Perry is from LA and still resides there and devoted a large portion today on her show today about this horrible world record we hold. The numbers she gives us are staggering: 2.3 million people are in jails across our nation. Our rates of incarceration, as I said at the top, even beat countries led by dictators or even those like England and France.Recidivism rates in prisons nationwide absolutely suck in all states, according to this Pew Study. States, in many cases, spend more on prisons than they do helping people out of poverty. As my graphic states it costs over 30 grand, on average, to keep someone incarcerated PER YEAR. So that huge number shows us that yes, many states more than likely spend more on jailing people than they do lifting people up out of poverty..or help keep them from falling into poverty, especially during this recession we are still in. That is wrong on every level in my humble yet vocal opinion. It’s disgusting, horribly wrong. And remember, that number is two years old, so it’s probably even more than that now.

    DNC disses teachers - The week’s first slight to teachers’ unions came Monday, before the convention had even kicked off. Convention Chairman Antonio Villaraigosa spoke at a special screening of the upcoming Hollywood film “Won’t Back Down” for DNC delegates. He was joined by fellow Democratic mayors Cory Booker and Kevin Johnson, top union antagonist Michelle Rhee, and the director of Parent Revolution, a group pushing for “parent trigger.” The film is a sympathetic fictional portrayal of “trigger,” a policy which creates a mechanism for replacing union public schools with non-union charters, based on signatures from parents. American Federation of Teachers President Randi Weingarten recently wrote that the film has “egregiously misleading scenes” which depict a union preventing teachers from working past 3 PM and protecting a teacher who punishes kids by putting them in the closet. As I’ve previously reported, “parent trigger” has widespread support from Democratic mayors, none more vocal or prominent than Los Angeles’ Villaraigosa. While the screening was not listed as an official convention event, the Huffington Post’s Jon Ward reported that the Obama Administration was asked for permission to hold the event in Charlotte, and deferred the decision to the DNC’s political director, “who raised no objections.”

    With No Contract Deal by Deadline in Chicago, Teachers Will Strike - Union leaders for this city’s public schoolteachers said that they would strike on Monday morning after negotiations ended late Sunday with no contract agreement between the union and the nation’s third largest school system, which have been locked for months in a dispute over wages, job security and teacher evaluations.  Coming as the school year had barely begun for many, the impasse and looming strike were expected to affect hundreds of thousands of families here, some of whom had spent the weekend scrambling to rearrange work schedules, find alternative programs and hire baby sitters if school was out for some time.  Chicago Public Schools officials, visibly frustrated after talks broke off late Sunday night, expressed concern for the estimated 350,000 students the strike could affect.  “We do not want a strike,” David J. Vitale, president of the Chicago Board of Education, said late Sunday as he left the negotiations, which he described as extraordinarily difficult and “perhaps the most unbelievable process that I’ve ever been through.”  Union leaders said they had hoped not to walk away from their jobs, but they said they were left with little choice.

    Striking Teachers, Parents Join Forces to Oppose "Corporate" Education Model in Chicago -

    • PHIL CANTOR: We’re striking for a lot of reasons. If you just see what’s in the mainstream media, all they talk about is that teachers want more money. But that’s really far from the truth. We’re fighting for reasonable class sizes. We’re fighting for wraparound services for our students. I teach in a school with a thousand students; we don’t even have one social worker in that building for most of those kids. So we’re fighting for the education our students deserve in Chicago. We’re fighting against reforms that we see, from the classroom level, are not going to work.
    • AMY GOODMAN: Explain why the emphasis on salary then. Is that the legal issue of what allows you to strike?
    • PHIL CANTOR: That’s absolutely right. You know, Rahm Emanuel has pushed through laws in Illinois, basically designed for his political gain, in my opinion. We’re not allowed legally to strike over anything but compensation. But teachers are not most interested in compensation; we’re most interested in being able to do our jobs for the students we serve. So, you know, I think we’re trying to tie other issues that we feel are very important to compensation, so they’re part of the bargaining table agreement.

    Chicago strike: Parents support teachers, but for how long? - As Chicago teachers walked the picket lines for a second day, they were joined by many of the very people who are most inconvenienced by their strike: the parents who must now scramble to find a place for children to pass the time or for babysitters. Mothers and fathers — some with their kids in tow — are marching with the teachers. Other parents are honking their encouragement from cars or planting yard signs that announce their support in English and Spanish. Unions are still hallowed organizations in much of Chicago, and the teachers union holds a special place of honor in many households where children often grow up to join the same police, firefighter or trade unions as their parents and grandparents."I'm going to stay strong, behind the teachers," said the Rev. Michael Grant, who joined teachers on the picket line Tuesday. "My son says he's proud, 'You are supporting my teacher.'"

    Obama Caught Between Schools Reform, Striking Teachers - A strike by Chicago teachers creates a political hazard for President Barack Obama, as he counts on the support of organized labor while trying to appeal to independent voters who tend to favor some of the education policies central to the conflict.  The walkout, which is keeping more than 350,000 students out of classrooms for a second day today, also draws attention to the continuing debate over public-employee unions and the cost of their benefits to taxpayers. The Chicago school system has a deficit of about $700 million.  The strike puts Obama between the American Federation of Teachers, which endorsed his re-election in February, and his former chief of staff, Rahm Emanuel, who as mayor of Chicago oversees the school district. Obama Education Secretary Arne Duncan is the former chief executive officer of Chicago’s schools and has used federal funds to advocate tying teachers’ evaluations to student performance, measures opposed by the 30,000-member union.

    Why are the Chicago public school teachers on strike? - My friend and fellow HCSSiM 2012 staff member P.J. Karafiol explains some important issues in a Chicago Sun Times column entitled “Hard facts behind union, board dispute.” P.J. is a Chicago public school math teacher, he has two kids in the CPS system, and he’s a graduate from that system. So I think he is qualified to speak on the issues. He first explains that CPS teachers are paid less than those in the suburbs. This means, among other things, that it’s hard to keep good teachers. Next, he explains that, although it is difficult to argue against merit pay, the value-added models that Rahm Emanuel wants to account for half of teachers evaluation, is deeply flawed. He then points out that, even if you trust the models, the number of teachers the model purports to identify as bad is so high that taking action on that result by firing them all would cause a huge problem – there’s a certain natural rate of finding and hiring good replacement teachers in the best of times, and these are not the best of times.Ultimately this crappy model, and the power that it yields, creates a culture of text anxiety for teachers and principals as well as for students.

    In Chicago Teachers’ Strike, Signs of Unions Under Siege - The high-stakes strike by 26,000 public school teachers in Chicago is only the latest episode in which the nation’s teachers’ unions have been thrown on the defensive in the face of demands for far-reaching changes.In community after community — even in major cities with strong pro-union traditions, like Los Angeles and Philadelphia — teachers’ unions have faced a push for concessions, whether it is to scrap tenure protections or to rely heavily on student test results to determine who gets a raise and who gets fired. And now comes this high-profile showdown in President Obama’s own hometown, a labor stronghold. Rahm Emanuel, the Democratic mayor and Mr. Obama’s former chief of staff, is demanding a raft of concessions that are anathema to union leaders and their members. At the same time, with many teachers and their unions already viewed unfavorably by many Americans, the union is taking a gamble by engaging in a battle over changes that some education advocates believe are needed to improve the nation’s schools. The battle underlines just how much teachers’ unions, which have provided sizable donations and many grass-roots volunteers to countless Democratic campaigns, have been thrown back on their heels in recent years.

    The Chicago Teachers Union Fight Is a National Fight - Dylan Matthews published a post today about how teacher strikes harm student achievement, reaching all the way to suggest that the future earning potential of students off from school today at the Chicago Public Schools will be impacted by a protracted strike. The entire rationale for this boils down to lost instructional days for the students, and it’s simply unknowable how many days students will miss and whether or not they will get made up on the back end, as snow days are. This is how it worked when my mother, a teacher, went on strike multiple times in the 1980s. So it’s a speculative discussion. Of course, what doesn’t get factored into the discussion about future wages is the impact of a weakened national labor movement. I asked Matthews about this on Twitter, and he gave a very specific response about whether or not teacher wages impact the private labor market. I don’t really think that’s a useful way to look at this. Supposedly walled-off sectors which previously had strong labor power have been diminished, and despite the isolated nature of the industry, the parallels between a weaker labor market and national wage stagnation are very clear. Because that’s what this fight is about: the larger unified movement against workers. It also encompasses more than just wages, even though new rules in Chicago dictate that the contract negotiations are limited to that. This is about the education reform debate, and it represents the first time that a teachers union has really fought back against these largely untested and unproven ideas about how to turn around the so-called “failing” public school system. (Note: the public school system, and more broadly the US education system, isn’t failing). And so before we concern-troll that long strikes could hurt future economic opportunity for students, we have to address whether education policy that allows for looting by business interests through moving schools into the for-profit sector, or the end of collective bargaining as a meaningful check on management keeping all profits for themselves, hurts that economic opportunity to a much greater degree.

    Teacher accountability and the Chicago teachers strike - The strike represents the first open rebellion of teachers nationwide over efforts to evaluate, punish and reward them based on their students’ scores on standardized tests of low-level basic skills in math and reading. Teachers’ discontent has been simmering now for a decade, but it took a well-organized union to give that discontent practical expression. For those who have doubts about why teachers need unions, the Chicago strike is an important lesson. Nobody can say how widespread discontent might be. Reformers can certainly point to teachers who say that the pressure of standardized testing has been useful, has forced them to pay attention to students they previously ignored, and could rid their schools of lazy and incompetent teachers. But I frequently get letters from teachers, and speak with teachers across the country who claim to have been successful educators and who are now demoralized by the transformation of teaching from a craft employing skill and empathy into routinized drill instruction using scripted curriculum. They are also demoralized by the weeks and weeks of the school year now devoted to gamesmanship—test preparation designed not to teach literacy or mathematics but only to make it seem that students can perform in an artificial setting better than they actually do.

    Does It Pay to Become a Teacher? - Fortuitously, in the midst of the contentious Chicago teachers union strike, the Organization for Economic Cooperation and Development has released its annual report on the state of education and investment in education around the developed world. It might help provide some context for what Chicago teachers are fighting over. Here’s one particularly striking figure from the report, showing the ratio of teacher salaries to the earnings of other workers who went to college:The United States spends a lot of money on education; including both public and private spending, America spends 7.3 percent of its gross domestic product on all levels of education combined. That’s above the average for the O.E.C.D., where the share is 6.2 percent.The annual spending per student by educational institutions of all levels is also higher in the United States than it is in any other developed country.Despite the considerable amount of money channeled into education here, teaching jobs in the United States are not as well paid as they are abroad, at least when you consider the other opportunities available to teachers in each country.In most rich countries, teachers earn less, on average, than other workers who have college degrees. But the gap is much wider in the United States than in most of the rest of the developed world.The average primary-school teacher in the United States earns about 67 percent of the salary of a average college-educated worker in the United States.

    The Pay of Chicago School Teachers and Selected Others - Since the Chicago school teachers went out on strike Monday, many political figures have tried to convince the public that their $70,000 average annual pay is excessive. This is peculiar, since many of the same people had been arguing that the families earning over $250,000, who would be subject to higher tax rates under President Obama's tax proposal, are actually part of the struggling middle class.  Anyhow, if we want to assess whether someone is getting too much money, we always have to ask the follow-up question, compared to what? Here are a few comparisons that I have found useful. The first comparison number is the annualized pay that Chicago Mayor Rahm Emanuel got for a 14-month stint as a director at Freddie Mac. President Clinton appointed him as a director shortly after he left the administration. It's not clear exactly what Mr. Emanuel did as a director, he was not appointed to any board committees. While Emanuel's stint ended just as the housing bubble was building up steam, Freddie Mac was involved in an accounting scandal during this period for which it was forced to pay several million dollars in fines. The second comparison is the compensation that Emanuel received for his day job after leaving the White House, working for Wasserstein Perella, an investment bank. According to Wikopedia, he earned $16.5 million for two and a half years of work. The third comparison is the compensation that Erskine Bowles received as a director of Morgan Stanley, the huge Wall Street investment bank in 2008. Erskine Bowles has been mentioned in the news frequently as the co-chair of President Obama's deficit commission. The year 2008 is noteworthy because this was the year that the bank was saved from imminent bankruptcy by a bailout from the Federal Reserve Board,

    Corporate-Led Education Reform Movement Ignores Solvable Problems to Carry Out Its Agenda -One thing you never hear in the education debate, dominated by those persistently shrieking that schools “are in crisis,” is an appeal to the actual data surrounding school performance. The statistics are pretty clear that American students have exceeded their performance over a 30-year period, and that’s true if you control for various populations, both white, Hispanic and African-American. It also happens to be true for the city of Chicago. Chicago students in reading and math are performing a bit better. This fits with the 35-year trend of American students performing better. And it’s based on the best available data. None of this is to say that Chicago schools are a paragon of virtue. To the extent that there are problems, it appears clear that they have to do with resources. The schools in the lowest-income areas have no air conditioning. Roofs leak. The cafeteria is full of roaches. Mold sits in the ventilation systems. Kids don’t get textbooks for weeks. Administrators pack classrooms with 40 and 50 students at a time. These are pretty obvious and solvable problems. CPS schools across the district have been begging for basic repairs and fundamentally urgent repairs for decades while the city builds brand-new, state-of-the-art facilities elsewhere. While CPS claims to use a facility repair rating system to help it prioritize the facility needs of the nearly 700 buildings it owns, students, teachers, principals and parents know all too well that their needs — some involving dangerous health hazards — get ignored year after year.

    A Terrifying Way to Discipline Children - IN my public school 40 years ago, teachers didn’t lay their hands on students for bad behavior. They sent them to the principal’s office. But in today’s often overcrowded and underfunded schools, where one in eight students receive help for special learning needs, the use of physical restraints and seclusion rooms has become a common way to maintain order.  It’s a dangerous development, as I know from my daughter’s experience. At the age of 5, she was kept in a seclusion room for up to an hour at a time over the course of three months, until we discovered what was happening. The trauma was severe. According to national Department of Education data, most of the nearly 40,000 students who were restrained or isolated in seclusion rooms during the 2009-10 school year had learning, behavioral, physical or developmental needs, even though students with those issues represented just 12 percent of the student population. African-American and Hispanic students were also disproportionately isolated or restrained.

    Fairfax Schools Face Nearly $150M Deficit in 2014 - Fairfax County Public Schools will face a projected $147.9 million deficit in fiscal year 2014 — a gap that would require an 8.8 percent increase in the annual transfer it receives from the county. That amount does not include $90.8 million in identified program needs, such as restoring class size reductions, extended teacher contracts and textbooks — in all, the system would need $238.7 million to meet projected costs. The county's school board got an early look at the structural gap it faces over the next five years during a fiscal forecast presented during Monday's work session, created largely by the board's use of one-time money to meet ongoing needs, said FCPS Chief Financial Officer Susan Quinn, who gave the presentation, noting the numbers discussed were only projections and not final figures nor recommendations. "It's clear we need to change the way we do business here ... and also the way we educate students," said board member Patty Reed (Providence) as members began to piece together a budget strategy they hope brings more efficiencies, savings and community buy-in than in years past.

    Thousands of Virginia students aren’t required to get an education - Nearly 7,000 Virginia children whose families have opted to keep them out of public school for religious reasons are not required to get an education, the only children in the country who do not have to prove they are being home-schooled or otherwise educated, according to a study. Virginia is the only state that allows families to avoid government intrusion once they are given permission to opt out of public school, according to a report from the University of Virginia’s School of Law. It’s a law that is defended for promoting religious freedom and criticized for leaving open the possibility that some children will not be educated.While most states accommodate families with religious objections to public education through home-schooling laws — which require parents to report back on children’s academic progress with test scores and other benchmarks — or in three other cases, much more restrictive exemption laws, Virginia offers an additional option that gives families total control over their children’s education. And more and more families are choosing that exemption, with an increase of more than 50 percent from the 2000-01 school year to last year, according to figures from the Virginia Department of Education.

    Children of immigrants make more progress in Australia and Canada than in the UK or the US - Young children whose families immigrate to Australia, Canada, the United Kingdom and the United States are as prepared and capable of starting school as their native-born counterparts, with one exception: vocabulary and language development.But the resulting disadvantages in reading skills are overcome to a much greater degree as they progress through school in Australia and Canada than they are in the United Kingdom and the United States.  This is the major message of a study I wrote with my colleagues.The differences between immigrant families according to their home language are more striking than the differences across the four countries, with children of immigrants doing worse than their counterparts with native-born parents on vocabulary tests, particularly if a language other than the official language is spoken at home. But these second-generation immigrants are not generally disadvantaged in nonverbal cognitive domains, nor are there notable behavioural differences, which suggests that the cross-country differences in cognitive outcomes during the teen years documented in the existing literature are much less evident during the early years.

    College Dream Dashed for Children of the Less Schooled - The U.S. has long touted its record of sending disadvantaged children to college. That pride is now misplaced, a study found. The odds that a young person in the U.S. will go to college if their parents haven’t -- 29 percent -- are among the lowest of developed countries. That’s according to a report released today by the Paris-based Organization for Economic Cooperation & Development. The results indicated the challenge of one of President Barack Obama’s economic and educational goals: increasing college attainment in the U.S. relative to other countries. The U.S. ranks 14th among 37 countries in the percentage of 25- to 34-year-olds with higher education. A generation ago, the U.S. ranked among the top in the world. “The odds that a young person will be in higher education if his or her family has a low level of education are particularly small in the U.S.,” the report said. Declining economic mobility in the U.S. has been the subject of social science research that challenges one of the mainstays of the American dream -- children bettering their parents

    U.S. Students Struggle More Than Global Peers to Top Parents - Receiving a better education than one’s parents sounds like a tenet of the American Dream, but it’s a reality more commonly achieved in other developed nations. The U.S. ranked fourth-worst among 29 developed countries for children obtaining a higher level of education than their parents, according to a report released Tuesday by the Organization for Economic Cooperation and Development. In the U.S. only 21.6% of those 25 to 34 years old achieved a higher level of education than their parents. That compares to an OECD average of 36.8%. The study found that even Americans with the lowest level of education had a poor chance of seeing their children achieve higher levels. “The odds are low that young person in the U.S. will go on to higher education, if their parents didn’t,” said Andreas Schleicher, OECD deputy director for education.If a young American’s parents failed to finish high school, there is just a 29% chance that he or she will even attend college, the third worst odds among the countries OECD studied.

    Education's Value - Zach nails it in this comic, the paradox that in an era of an enormous, free, accessible information, it costs more than ever to get a college education. A determined person could be much better educated in a year of free Internet learning than an entire undergraduate degree. A college degree is a social rubric, a status symbol to show that you are willing to waste an enormous amount of time and money in order to fit into an organization, which shows that you will be willing to conform to whatever silliness awaits you in employment. We have confused education for knowledge and thinking, which is a shame, because knowledge and thinking are so vital to our own personal happiness and to society's prosperity. Education should have two goals:

    1. Convey basic knowledge and cognitive skills (i.e. reading, arithmetic).
    2. Teach students how to learn and think outside of school.

    In order to succeed, the student must enjoy learning. In families where children are not encouraged to learn, early childhood education is essential so that children will enjoy learning and not be at a discouraging disadvantage from which most never recover. We should also discourage competition and testing while the basics are being taught (beyond the evaluations that are needed to determine if the student is ready to be taught more advanced information).

    The necessity of a college education -- Megan McArdle is on the cover of the new Newsweek, with a story asking whether college is still worth it, after decades of massive price inflation, and in it she makes a few good points. Firstly, college is now insanely expensive: even if it made perfect financial sense for people of Megan’s generation (she’s 38), that doesn’t for a minute mean that it still makes sense today. Certainly at this point it’s pretty much impossible to (legally) work your way through college. If your parents can’t afford your tuition and you don’t get some kind of scholarship, you will graduate with a large amount of debt — as more than half of undergraduates now do. On top of that, the supply of new and bigger student loans has been growing at least as fast as the price of college. No matter how much a college charges, it seems, some bright financial innovator somewhere, in either the public or the private sector, is going to be able to find a way to lend prospective students the money. As a result, colleges, especially when they’re in the private sector, can charge pretty much whatever they like — and, unsurprisingly, they end up doing exactly that. At some point, by definition, college must become a bad deal, at least for some people. Even at a cost of $0, college is going to do you precious little good if you’re, say, illiterate: the opportunity cost alone is meaningful. And the more expensive that college gets, the less of a good deal it becomes. Especially for the large minority of students who end up dropping out: nearly all of them would have been better off never going to college in the first place.

    Jobless USA: Industry Training vs College Education  - Ho hum, another month, another jobs disaster Stateside as less than 100,000 jobs were created --a pace which only prolongs what is already the most protracted recovery from job losses suffered from a recession. While the unemployment rate "dipped," this artifactual occurrence is largely down to many leaving the labour force for one reason or another. Although many Americans--including largely self-serving academics--repeat the mantra that college is the solution to US job woes, I remain unconvinced. Not only are college graduate wages falling, but college expenses are rising at a rate far outstripping inflation. If college was the magic bullet to the employment situation Stateside, then the situation should not be so dire to begin with given that enrollment is at or near all-time highs. It does not compute. In addition to college's worsening cost-benefit proposition, another thing the "college fundamentalists" (education's equivalent of religious and market fundamentalists) haven't adequately explored is the the prevalence of job-skill mismatches. That is, colleges cannot answer the simple question of whether they are equipping their graduates with skills useful to modern employers. Hence my continuing support for the Geman apprenticeship system as opposed to what I call the US/UK uni-jobless system. While snooty Anglos may like their hoity-toity degrees as opposed to vocational qualifications, it ultimately boils down to employment outcomes. A recent FT article highlights how industrial employers' groups are copying elements of the German example in providing skills that are actually useful:

    Worthless Internships -- Many, many college students have internships at some point during their studies. Pair or unpaid, students often see such experiences as necessary, both because college courses often require internship experience, and because past internships are so important when applying for a job. But what are those internships actually like? According to a recent survey of interns conducted by Northwestern Mutual:  Results of the poll showed that 44 percent of college intern respondents found “adding the experience to their resume” was the most valuable part of their internship. However, the majority of respondents (68 percent) said that on most days they did not work on what they’d hope to do in a full-time career. Northwestern valiantly tried to put a positive spin on this one.: “It’s encouraging that students view internships as playing an important role in making themselves more attractive in the job market,” , Northwestern Mutual takes great pride in and places a strong emphasis and significant investment on building our industry leading internship program.” Well that’s one way to think of it.

    Tuition fees rising faster than incomes and inflation, report warns - A new report suggests tuition fees are becoming less affordable for many Canadians, forcing an increasing number of students to take on heavy debt loads. The report from the Canadian Centre for Policy Alternatives shows that since 1990, average tuition and compulsory fees for undergraduates have risen by 6.2 per cent annually — three times the rate of inflation. It now costs, on average, $6,186 a year to study at a Canadian university, and that doesn’t include the cost of books or food or lodging. The left-leaning think-tank adds that extrapolating from past growth and announced government intentions, that number will rise to $7,330 in four years. The report also shows there is wide divergence in the cost of post-secondary education across the country. It ranges from low-cost provinces such as Newfoundland and Labrador ($2,861) and Quebec ($3,278), to high-cost jurisdictions like Ontario ($7,513) and Alberta ($7,061).

    Student Loans: Debt for Life - This much we know: College pays. You can lose your house to foreclosure, but never your education. Four-year college graduates’ pay advantage over high school grads has doubled over the past 30 years. If money for tuition is tight, the advice goes, borrow what you need. Students have been listening. In 2010 student debt exceeded credit-card debt for the first time. In 2011 it surpassed auto loans. In March, the Consumer Financial Protection Bureau announced that student debt had passed $1 trillion. It grew by $300 billion from the third quarter of 2008 even as other forms of debt shrank by $1.6 trillion, according to a separate tabulation by the Federal Reserve Bank of New York. In a press briefing at the White House in April, Education Secretary Arne Duncan said, “Obviously if you have no debt that’s maybe the best situation, but this is not bad debt to have. In fact, it’s very good debt to have.” If student loans are good debt, how do you account for the reaction of Christina Mills, 30, of Minneapolis, when she found out her payment on college and law school loans would be $1,400 a month? “I just went into the car and started sobbing,” says Mills, who works for a nonprofit. “It was more than my paycheck at the time.” Medical student Thomas Smith, 25, of Hamilton, N.J., is $310,000 in debt and is struggling to make ends meet even before beginning to repay his loans. “I don’t even know what I eat,” he says. “I just go to the supermarket and buy the cheapest thing I can and buy as much of it as I can.”

    Inside The Student Loan Debt Bubble - We have long discussed the rapid rotation of credit growth from housing and credit card to auto loans and now student debt as the US is not deleveraging in reality at all. A recent report from the Kanasas City Fed notes that in the last 7 years, student loan debt has grown at a staggering 13.9% annual rate. This rise in debt has been accompanied by a notable rise in the percentage of delinquencies (over 10.5% and 8.8% over 120 days past due) as the complex web of the student loan market structure strangles hope for many willing learners. The clear message is that student loans present problems for some borrowers, though, at the same time, the analysis suggests that student loans do not yet impose a significant burden on society from their fiscal impact - even though rather stunningly the Federal government is now 93% of the market. We would add that high student loan debt and its associated payment burdens have left many wondering if the value of a college education outweighs the costs - especially as we note that less than 40% of borrowers are under 30 and more than a third still owe in their 40s.

    Debt Collectors Cashing In on Student Loan Roundup -- At a protest last year at New York University, students called attention to their mounting debt by wearing T-shirts with the amount they owed scribbled across the front — $90,000, $75,000, $20,000.  On the sidelines was a business consultant for the debt collection industry with a different take.  “I couldn’t believe the accumulated wealth they represent — for our industry,” the consultant, Jerry Ashton, wrote in a column for a trade publication, “It was lip-smacking.”  Though Mr. Ashton says his column was meant to be ironic, it nonetheless highlighted undeniable truths: many borrowers are struggling to pay off their student loans, and the debt collection industry is cashing in.  As the number of people taking out government-backed student loans has exploded, so has the number who have fallen at least 12 months behind in making payments — about 5.9 million people nationwide, up about a third in the last five years. In all, nearly one in every six borrowers with a loan balance is in default. The amount of defaulted loans — $76 billion — is greater than the yearly tuition bill for all students at public two- and four-year colleges and universities, according to a survey of state education officials.  In an attempt to recover money on the defaulted loans, the Education Department paid more than $1.4 billion last fiscal year to collection agencies and other groups to hunt down defaulters.

    University of Phoenix Tops Debt Slave Racket with 35,049 Student Loan Defaults (Top Public School has 786); Debt Slave Collection Business is Booming; Housing and Economic Implications -Congratulations to the University of Phoenix, a private for-profit school, which has the dubious distinction of having 4,359 percent more student loan defaults than Columbus State, the top public school.  A student loan is considered in default when it is 360 days delinquent.  Number of Loans in Default The above chart from the New York Times article Bad Student Debt Stubbornly High as Collection Efforts Surge. There is now over $1 trillion in student debt and $76 billion of that is in default reports the NY Times in Debt Collectors Cashing In on Student Loans: As the number of people taking out government-backed student loans has exploded, so has the number who have fallen at least 12 months behind in making payments — about 5.9 million people nationwide, up about a third in the last five years. In all, nearly one in every six borrowers with a loan balance is in default. The amount of defaulted loans — $76 billion — is greater than the yearly tuition bill for all students at public two- and four-year colleges and universities, according to a survey of state education officials.

    Occupy 2.0: Strike Debt | The Nation: When Occupy Wall Street sprang up a year ago, one of its most captivating features was that it was one big tent, an overarching idea linking together a long-fragmented left. Today, bereft of the encampments—all the little tents—there’s no denying that Occupy isn’t as powerful a connector as it once was. Given this knowledge, Occupy organizers have been searching for a next step: a way to marshal the political energy that still exists without starting from scratch or denying all that their movement has achieved. This process has recently given rise to an initiative called Strike Debt.Debt, a growing number of organizers believe, has the potential to serve as a kind of connective tissue for the Occupy movement, uniting increasingly dispersed organizing efforts around a common problem (debt) as opposed to a common tactic (occupation). Already, organizers on the East and West Coasts have taken up this idea. Activists from Occupy Boston are rallying around the city’s indebted public transit system, calling attention to the way state subsidies have been replaced with profit-hungry private capital by chanting, “Our trains, our tracks—get this debt off our backs!” Occupy activists in San Francisco are planning a debt burning for September 17, one that unites foreclosure fighters, student debtors and other drowning citizens under the motto “Hell no, we won’t pay!”

    Occupy Wall Street 2.0: The Debt Resistors’ Operations Manual - Yves Smith - The anniversary of Occupy Wall Street is September 17. While there will be public events in New York, it’s likely that number of people that will be involved will not be large enough to impress the punditocracy (multi-citi militarized crackdowns have a way of discouraging participation), leading them to declare OWS a flash in the pan. That conclusion may be premature.  The release of the The Debt Resistors’ Manual suggests something very different: that the movement is still alive, if much less visible, and is developing new avenues for having impact. This guide is designed not only to give individuals advice for how to be more effective in dealing with lenders but also sets forth some larger-scale ideas. This is a project of a new OWS group, Strike Debt. Fighting for debt renegotiation and restructuring, something that the bank-boosting legacy parties have refused to do, is becoming a new focus for OWS efforts.  Quite a few well qualified people who in Occupy fashion are going unnamed, participated in developing this manual. Having read most of the chapters in full and skimmed the rest, I find that this guide achieves the difficult feat of giving people in various types of debt an overview of their situation, including political issues, and practical suggestions in clear, layperson-friendly language. For instance, the chapter on credit ratings gives step-by-step directions as to how to find and challenge errors in your credit records, and what sort of timetable and process is realistic for getting results. The chapter on dealing with debt collectors is similarly specific and detailed.  You can download the manual here or from the link below. Strike Debt will also be handing out hard copies of the manual in Washington Square Park on Saturday from 10:30 AM till 7:30 PM and at Judson Church from 7:30 PM till 9:30 PM.  Occupy Wall Street/Strike Debt: The Debt Resistors’ Operations Manual

    Screwing working people - A friend of mine dropped out of high school in the mid-70s. She went to work cleaning at a college in her town. She worked at this college for about 30 years. Apparently, she didn't work for the college, though. She worked for three or four (it's hard to tell) different companies, companies contracted to do the cleaning. Now she is ready to get her pension. She went to human resources at the college. But they said she didn't work for them. They sent her to the company currently responsible for housekeeping. That company sent her to the company that manages the union's pension fund. . Apparently, some time (when?) the union's pension fund was in trouble so it merged into another pension fund. All the records from the early time were transferred to the new fund managers. The new fund managers seem to be saying that they have records for my friend's years of work and that they don't have records for her years of work. When I made the phone calls, people talked to me, answered my questions, tranferred me to others higher on the food chain, and began doing the research on the employers and union contracts. I'm a 50 year old white woman, a full professor with a Ph.D. I found it all extraordinarily difficult to understand and only began getting things sorted by asking a lot of questions. The bureaucrats only divulged information when asked and spoke as if all of their terms were clear and obvious. They were brusk and confident, off-putting if you aren't privileged enough or socialized to question and push back. After I hung up from the last call, my friend looked at my across the table, shaking her head in a combination of disgust, fury, and resignation, "they wouldn't tell me none of that." As it looks right now, she will get $70.70 a month. She worked as a cleaner for thirty years.

    Should the 401(k) Be Reformed or Replaced? - JOHN GREENE worked for 30 years at an Oscar Mayer plant in Madison, Wis., deboning hams and loading boxes of hot dogs. His 401(k) plan grew to $60,000, and soon after retiring he began withdrawing $3,600 a year from it, money that allowed him and his wife to take what he called a wondrous two-week trip to Scotland, his ancestral homeland. But when the financial markets plunged four years ago, his 401(k) dropped to less than $18,000. “We lost more than 70 percent,” he complained, even though a highly recommended investment firm was managing his 401(k). Like millions of Americans, Mr. Greene has suffered losses from his 401(k) even as such plans have largely supplanted traditional pensions and become the central pillar of America’s employer-sponsored retirement system, with 60 million workers participating in them. Now, although Social Security and Medicare generate far more political heat, a quieter, more nuanced debate of large consequence engulfs 401(k)’s, the voluntary, privately financed plans that some see as a savior of American retirement and others see as an impediment: Should 401(k)’s be fine-tuned and expanded or should they be replaced entirely? And for many looking to retirement after the Great Recession, there is this pressing question: What to do about woefully underfunded 401(k)’s now.

    August Update: Early Look at 2013 Cost-Of-Living Adjustments indicates 1.4% increase -- The BLS reported this morning: "The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 1.7 percent over the last 12 months to an index level of 227.056 (1982-84=100). For the month, the index increased 0.7 percent prior to seasonal adjustment." CPI-W is the index that is used to calculate the Cost-Of-Living Adjustments (COLA). Here is an explanation ... The calculation dates have changed over time (see Cost-of-Living Adjustments), but the current calculation uses the average CPI-W1 for the three months in Q3 (July, August, September) and compares to the average for the highest previous average of Q3 months. Note: this is not the headline CPI-U, and not seasonally adjusted. There has been some discussion of switching from CPI-W to CPI-chained for COLA. This will not happen this year, but could happen next year and impact future Cost-of-living adjustments, see: Cost of Living and CPI-Chained.  Since the highest Q3 average was last year (2011), at 223.233, we only have to compare to last year. Note: The last few years we needed to compare to Q3 2008 since that was the previous highest Q3 average.This graph shows CPI-W since January 2000. The red lines are the Q3 average of CPI-W for each year. Currently CPI-W is above the Q3 2011 average. If the current level holds, COLA would be around 1.4% for next year (the current 226.312 average divided by the Q3 2011 level of 223.233). With the recent increases in oil and gasoline prices, CPI COLA might be closer to 1.6% once the September data is released. This is early - we need the data for September - but COLA will be slightly positive next year.

    Attack on Social Security: Raising Retirement Age to 69 Will Lower Monthly Benefit by 13% - Yves Smith -- Nothing could sound more reasonable than one of the “reforms,” meaning attacks, on Social Security: raise the retirement age from 67 (the level for those born after 1960) to 69. People are living longer, right? That means they can work longer, right? Well, aside from a few inconvenient facts (the life expectancy of low income black women is actually falling, and middle aged people who lose their jobs often find it difficult to get any kind of paid work), on the surface, this seems not too bad. But this plan is actually a sneaky way to cut monthly benefits across the board, and for an age cohort where retirement is so far away that they won’t focus on details and subject this scheme to the criticism it deserves.  I’m taking the liberty of reproducing a discussion by Social Security Works (hat tip Columbia Journalism Review; click for larger image): The CJR story by Trudy Lieberman does a fine job of discussing the pervasive media misreporting of this issue. For additional background, an analysis by Representative Jan Schakowsky gives a high level, very readable treatment of the deficiencies in the Bowles Simpson proposal.

    Medicare ‘bankruptcy’: CNN gets it right - Hooray for, for fact checking the often-heard claim of Medicare’s “impending” bankruptcy. CNN’s contribution sets a high bar... The “bankruptcy” language comes up a lot. ... But is Medicare really going bankrupt? Definitely not, says CNN. The network is correct, and the point is crucial.  How did CNN pull away from the fact-checking pack on this one? ... First, CNN reported, as CJR has urged news outlets to do, that only one part of Medicare is in potential trouble—the Hospital Trust Fund, which is financed by payroll taxes. The other parts of Medicare, including Part B, which finances doctor visits, lab tests, and outpatient services, “are adequately financed for now,” Medicare trustees have said. ...  CNN pushed further and asked a logical question that most reporters writing about Medicare have missed. When the magic date for “bankruptcy” arrives—2024 according to the Dems, or 2016 if the ACA disappears in a Romney presidency—would Medicare really disappear? “Medicare is not going bankrupt. Medicare would still have most of the necessary funds to pay those expenses and other parts of the program would be unaffected. Medicare won’t go bankrupt in the literal sense in 2016 or 2024 or 2064—or ever.” The Centers for Medicare and Medicaid Services, which runs the Medicare program, said this year that even in 2024 the Medicare hospital trust fund could still pay 87 percent of its estimated expenditures, and noted that, “in practice, Congress has never allowed a Medicare trust fund to exhaust its assets.” ...

    Romney says he likes parts of 'Obamacare': Republican presidential hopeful Mitt Romney, who promised early in his campaign to repeal President Barack Obama's health care overhaul, says he would keep several important parts of the overhaul. "Of course there are a number of things that I like in health care reform that I'm going to put in place," he said in an interview broadcast Sunday on NBC's "Meet the Press." ''One is to make sure that those with pre-existing conditions can get coverage." Romney also said he would allow young adults to keep their coverage under their parents' health-insurance. Those provisions have been two of the more popular parts of Obama's Affordable Care Act. "I say we're going to replace Obamacare. And I'm replacing it with my own plan," Romney said. "And even in Massachusetts when I was governor, our plan there deals with pre-existing conditions and with young people." In the interview, Romney, a former Massachusetts governor, also said he would offset his proposed tax cuts by closing loopholes for high income taxpayers. "We're not going to have high-income people pay less of the tax burden than they pay today. That's not what's going to happen," he said.

    Revenge of the Three-Legged Stool - - Krugman - Another day, another Romney whopper. Now he says that he’ll keep the good parts of Obamacare, in particular coverage for people with pre-existing conditions, while scrapping the rest.You can’t do that – and Romney knows very well that you can’t do that, because the logic that went into Romneycare in Massachusetts is the same as the logic behind Obamacare. Suppose you want to guarantee that insurance is available to people with pre-existing conditions. Well, you can establish community rating, requiring that insurance companies make the same policies available to everyone. But if you stop there, you know what will happen: healthy people will opt out, leaving behind a high-risk, high-cost pool. So you have to also have a mandate, requiring that people buy insurance. And you can’t do that without subsidies, so that lower-income people can afford their policies. The inexorable logic of the situation, then, leads to a three-legged stool of community rating + mandate + subsidies = ObamaRomneycare. So, does Romney think we’re stupid? Hey, he also thinks we’ll buy into his promises to slash taxes by $5 trillion  – which turns out to be arithmetically impossible. So the answer is, yes, he thinks we’re stupid.

    We’re never going to get answers, are we? - This morning, Gov. Romney seemed to make the case that he was in favor of preventing people from being turned down for pre-existing conditions. While he was specifically referencing people who maintained continuous coverage, it was interesting to see him stake out a position. I won’t go into the fact that without the other two legs of the stool, this falls apart, because others have done it.  But then I saw this: In reference to how Romney would deal with those with preexisting conditions and young adults who want to remain on their parents’ plans, a Romney aide responded that there had been no change in Romney’s position and that “in a competitive environment, the marketplace will make available plans that include coverage for what there is demand for. He was not proposing a federal mandate to require insurance plans to offer those particular features.” Really? What this aide is describing is the current market for health insurance. It’s not that we don’t have a competitive environment. It’s that covering people with pre-exiting conditions is a money-loser for insurance companies unless they charge people exorbitant rates that no one can afford. Gov. Romney knows this. It’s why he wound up with Romneycare. It would be great if the media could pin him down on some of these things.

    A few points about Romney’s 'repeal and replace' - Sarah Kliff helpfully interprets Mitt Romney’s Meet the Press statements about health reform as meaning he is in favor of preventing individuals with pre-existing conditions from being turned down from a plan if they have continuous coverage. That is, if you remain enrolled in some insurance plan, you can switch from plan-to-plan without any barriers due to pre-existing conditions. Kliff then points to the 1996 Health Insurance Portability and Accountability Act (HIPAA), which already provides such protections. Families USA has a nice summary that explains how HIPAA works in the group and non-group markets. In light of this, it is not clear to me what new Romney is offering in terms of portability. Of course neither HIPPA nor Romney’s portability concept(s) address circumstances in which individuals do not have continuous coverage. That is, they don’t by themselves help the uninsured. Additionally, just because one has access to a plan, doesn’t mean one can find one that is affordable. I know Romney  has some ideas that he believes will reduce the cost of insurance (see his vision here). It’s not clear to me that they are intended to match the level of subsidization to low-income families that the Affordable Care Act (ACA) offers. In fact, I think that’s probably the point. That’s one reason why the proposal is likely less costly for the federal government. Next, Romney wants to level the playing field with respect to the tax treatment of health insurance. I’ve addressed that point already, explaining how current law will roughly and gradually achieve just that (the Cadillac tax).

    Obamacare Is Working - On a day dominated by all bad news on the foreign affairs front, the US Census Bureau delivered a spot of sunlight: New figures from 2011 show that the new health care reform law is actually working. The percentage of uninsured Americans actually went down, after steep jumps in the previous two years. Over 4 million more people had health care coverage in 2011 than in 2010. Despite predictions from opponents that Obamacare was going to take away your private health care and force everyone into government coverage, the numbers show definitively that's not happening. For the first time in a decade, the rate of private health insurance coverage didn't go down. The biggest beneficiaries of the new law are young people between 19 and 25, whose uninsured rate dropped 2.2 percent. Those figures should only get better as more provisions of the law start to kick in.

    Herding dual eligibles into low quality plans -- In his convention speech in Charlotte, President Obama vowed to block the Republican Medicare reform plan because “no American should ever have to spend their golden years at the mercy of insurance companies.” But back in Washington, his Health and Human Services Department is launching a pilot program that would shift up to 2 million of the poorest and most-vulnerable seniors out of the federal Medicare program and into private health insurance plans overseen by the states. The administration has accepted applications from 18 states to participate in the program, which would give states money to purchase managed-care plans for people who are either disabled or poor enough to qualify for both Medicare and Medicaid. Obama’s 2010 health reform law allows experimentation in delivering health care at lower cost through demonstration projects. Many states would like permission to shift their entire population of so-called dual-eligible beneficiaries into the new plans. HHS has indicated that it will enroll about 2 million beneficiaries, out of about 7 million who qualify for full benefits from both government health programs.

    New Report on Getting the Best Care - Both Matthew Yglesias at Slate and Sarah Kliff at WonkBlog and a host of other sites have posted some interesting results coming out of a recent study by the Institute of Medicine  Best Care at Lower Cost: The Path to Continuously Learning Health Care in America.  Unfortunately as a lowly and unpaid (99% of the time) blogger, I do not have access to the entire report. What I do have is a abstract of what the report is about and some of the charts placed on Wonkblog. We spend $750 billion on unnecessary health care. Two charts explain why. This report documents much of the whys to a much needed Healthcare Reform in the numeric of it.  Unfortunately, the best named hospitals and the best insurance does not guarantee the best care. Too much is spent inefficiently on the wrong type of care.The second series of chart is an accounting of how some of these expenditures are made within the system. Again, this is something which Phillip Longman touched upon with his book on the VA and how they overcame the inefficiencies. Sarah Kliff at Wonkblog calls it creating an environment in which it is easy to create waste. When healthcare and its associated industries were not the monsters in cost, no one paid attention to the cost, loss of efficiency, and the lack of quality outcome in treating patients. We spent for the services and not the outcome with the results being a higher cost.

    Health Premium Growth Slows to 4.5% in U.S., Kaiser Says - Growth in the health insurance premiums charged by companies including UnitedHealth Group and WellPoint has slowed to 4.5 percent this year, less than half of 2011’s rate, the Kaiser Family Foundation said. The average cost for a family plan obtained through an employer jumped this year to $15,745 from $15,073 in 2011, when premiums rose 9.5 percent, the Menlo Park, California-based research group said today after surveying more than 2,000 companies. Premiums, a cost typically shared by employers and employees, have doubled in the past decade, three times the gains in wages and inflation, according to Kaiser. “This year’s 4 percent increase qualifies as a good year, but it still takes a growing bite out of middle-class workers’ wages, which have been flat or falling in real terms,” Drew Altman, president and chief executive officer of the foundation, said in a statement. The lumbering recovery from the 18-month U.S. recession that ended in June 2009 is responsible for most of the slowdown in premium growth and health spending, Altman said. Increases in employee cost-sharing that companies have enacted in recent years may also be damping demand for health services, said Gary Claxton, a Kaiser vice president and lead author of the study.

    The Wrong Way to Save Money on Health Care - Robert Reich - Employer outlays for workers’ health insurance slowed from a 9 percent jump last year to less than half that — 4 percent — this year, according to a new survey from the Kaiser Foundation. Good news? Our political class believes it is. The Obama administration attributes the drop to the new Affordable Care Act, which, among other things, gives states funding to review insurance rate increases. Republicans agree it’s good news but blame Obamacare for the fact that employer health-care costs continue to rise faster than inflation. “The new mandates contained in the health care law are significantly increasing the cost of insurance” says Wyoming senator Mike Enzi, top Republican on the Senate health committee. But both sides ignore one big reason for the drop: Employers are shifting healthcare costs to their workers. (The survey shows workers contributing an average of $4,316 toward the cost of family health plans this year, up from $4,129 last year. Many are receiving little or no employer-provided coverage at all.) Score another win for American corporations — whose profits continue to be robust despite the anemic recovery — and another loss for American workers

    Premiums for family health plans hit $15,745 - It sounds like good news: Annual premiums for job-based family health plans went up only 4% this year But hang on to your wallets: Premiums averaged $15,745, with employees paying more than $4,300 of that, a glaring reminder that the problem of unaffordable medical care is anything but solved. The annual employer survey released Tuesday by two major research groups also highlighted another disturbing trend: Employees at companies with many low-wage workers pay more for skimpier insurance than their counterparts at upscale firms. Overall, "it's historically a very moderate increase in premiums," "But even a moderate increase feels really big to workers when their wages are flat or falling," he said. The rise in premiums easily outpaced workers' raises and inflation. Following a 9% hike in premiums last year, the 2012 increase quickly became fodder for the political debate. Republicans said President Barack Obama's promises to control health care costs ring hollow. But the most significant cost-control measures in the new law have yet to take effect, and the president's big push to cover the uninsured doesn't start until 2014. Those measures include a new tax on the most expensive insurance plans and a powerful board to keep Medicare spending manageable.

    Health insurance costs up 97% in 10 years: report  -- Annual premiums for employer-sponsored family health insurance rose 4% to $15,745 this year, according to a report released Tuesday by the Kaiser Family Foundation/Health Research & Educational Trust. While the percentage growth is relatively low, it was higher than the 1.7% increase in wages and a 2.3% inflation rate. And Kaiser noted that since 2002, premiums have soared 97%. "In terms of employee insurance costs, this year's 4% increase qualifies as a good year, but it still takes a growing bite out of middle-class workers' wages, which have been flat or falling in real terms," said Drew Altman, Kaiser's chief executive. The report also pointed up that workers at lower-wage firms typically shell out $1,000 more each year for family coverage than those at companies that pay better. On average, workers will pay $4,316 annually toward the cost of their coverage, Kaiser said.

    In Amenable Mortality–Deaths Avoidable Through Health Care–Progress In The US Lags That Of Three European Countries - We examined trends and patterns of amenable mortality—deaths that should not occur in the presence of timely and effective health care—in the United States compared to those in France, Germany, and the United Kingdom between 1999 and 2007. Americans under age sixty-five during this period had elevated rates of amenable mortality compared to their peers in Europe. For Americans over age sixty-five, declines in amenable mortality slowed relative to their peers in Europe. Overall, amenable mortality rates among men from 1999 to 2007 fell by only 18.5 percent in the United States compared to 36.9 percent in the United Kingdom. Among women, the rates fell by 17.5 percent and 31.9 percent, respectively. Although US men and women had the lowest mortality from treatable cancers among the four countries, deaths from circulatory conditions—chiefly cerebrovascular disease and hypertension—were the main reason amenable death rates remained relatively high in the United States. These findings strengthen the case for reforms that will enable all Americans to receive timely and effective health care.

    How the Clean Air Act Has Saved $22 Trillion in Health-Care Costs - As a part of the 1990 amendments to the Clean Air Act, Congress required the EPA to conduct "periodic, scientifically reviewed studies to assess the benefits and the costs of the Clean Air Act." In other words, Congress wanted to know whether the Act "was worth it." The initial report in what is now a series was released in October 1997. The evaluation provided a detailed retrospective analysis of costs and benefits from the years 1970 to 1990 and showed that the overwhelming benefits obtained from compliance with the Act far outweighed the costs of implementation.   Using the modeling strategies available at the time, the EPA estimated that the Act resulted in a 40 percent reduction in sulfur dioxide, a 30 percent reduction in oxides of nitrogen, a 50 percent reduction in carbon monoxide, and a 45 percent reduction in total suspended particles. The reductions in fine and larger particles were thought to be on the order of 45 percent, based on measurements of total suspended particles. Specific monitoring for particulate matter fractions had not been instituted at that time, so an extrapolation from total suspended particles was required.  The improvements in air quality were thought to be primarily due to reductions in particulate matter and ozone. In this retrospective analysis, the modeling predicted an annual reduction of 184,000 premature deaths, 674 cases of chronic bronchitis, over 22 million lost days at work, and other outcomes.

    West Nile virus outbreaks appear linked to heat and drought - West Nile virus has caused symptoms in at least 1,993 Americans and killed 87 so far this year. And it’s unlikely that this virus, which humans contract from infected mosquitoes, will be getting any less dangerous in the near future. Though the CDC believes that this year’s caseload has probably peaked, a group of public health officials writing in the new edition of Annals of Internal Medicine explains why West Nile has been so deadly this year. West Nile virus made its first appearance in the United States in 1999, when the virus, which had previously affected people in Uganda, Algeria and Romania, arrived in New York City. This year is shaping up to be the worst in a decade, particularly in Texas, which has reported nearly half of all cases. Things have gotten so bad that officials in Dallas had to blanket the city in anti-mosquito pesticide for the first time in 45 years. Why the sudden epidemic? Catherine M. Brown and Dr. Alfred Demaria Jr., of the Massachusetts Bureau of Infectious Disease argue in Annals that the most likely explanation is that the extreme weather patterns we have seen this year — in particular, abnormally high temperatures across the country — may have led to the outbreak. High temperatures increase the rate of mosquito breeding, as well as the rate of development of viruses within those mosquitoes. So this year’s weather may have not only increased the number of West Nile-carrying mosquitoes, but also raised the likelihood that a new strain would arise, which would cause the disease to spread more rapidly.

    The Most Toxic Pesticide You'll Soon Be Eating - So-called "superweeds" are taking over American farmland. Impervious to chemical herbicides, like Roundup (the most widely used herbicide in the U.S.), these weeds don't die when exposed to chemicals. Instead, they just grow taller and thicker and become so sturdy, they've been known to destroy farm equipment. As farmers struggle to cope with these monster weeds, they turn to stronger, more potent pesticides, but even those are starting to lose effectiveness. A new study in the journal Weed Science finds that weeds are becoming resistant to 2,4-D, just as the U.S. Department of Agriculture is poised to approve a new crop of genetically modified (GM) seeds that have been designed to resist 2,4-D. The toxic herbicide made up roughly 50 percent of the Vietnam-era defoliant Agent Orange, and in addition to potentially being contaminated with cancer-causing dioxin, it's been linked to non-Hodgkin's lymphoma. Farmers who are regularly exposed to the chemical are also more likely to have children with birth defects.

    Soybean Reserves Smallest in Four Decades After Drought - The smallest U.S. soybean harvest in nine years will leave inventories in the world’s largest exporting nation at the lowest in four decades. U.S. farmers will reap 13 percent less than a year earlier after the worst Midwest drought in 76 years, according to the average of 34 analyst estimates compiled by Bloomberg. Reserves will be the lowest since 1973 by March. Futures will advance 17 percent to an all-time high of $20 a bushel in three months, Goldman Sachs predicts. Crop prices surged to records this year as drought parched fields across the U.S., South America and Russia. The U.S. Department of Agriculture cut its forecasts the past two months and the Bloomberg survey indicates the agency will do so again tomorrow, leaving Brazil as the top soybean supplier for the first time. Feed costs are rising for meat producers including Tyson Foods Inc. (TSN), the largest in the U.S., and three United Nations agencies said Sept. 4 that swift action is needed to avert a food crisis.

    Russian Seen Importing at Least 100,000 Tons of Wheat by SovEcon - Russia, the world’s third-biggest wheat exporter last season, bought at least 100,000 metric tons of the grain in July and August, SovEcon said.  Wheat purchases this year will be “important” in balancing local supply and demand, the Moscow-based researcher said on its website today. That contrasts with prior periods, when “good crops” meant imports were “insignificant” for the domestic grain balance, according to SovEcon.  Russia imported 89,000 tons of wheat in the 2010-11 season, when the country’s worst drought in at least 50 years seared fields, and 100,000 tons in the following period, U.S. Department of Agriculture estimates show. Inbound shipments in the current 2012-13 season through June may come to 200,000 tons, according to the USDA, after more dry weather hurt crops. Wheat exports from Russia may drop to 8 million tons in 2012-13 from 21.6 million tons in the previous period because of the drought, USDA estimates show. That would rank the country fifth among shippers of the grain after the U.S., Australia, Canada and the European Union.

    Government Lowers Forecast of Crop Yields as Heat Lingers - The Agriculture Department on Wednesday slightly lowered its forecast of corn and soybean yields as record heat continued to batter crops in the Midwest, making it likely that farmers will bring in one of the lowest harvests in years. The estimates are published monthly, and this is the third report in a row in which the department has lowered its forecasts for this fall’s harvest of corn and soybeans. The new data suggested that customers would pay more at the grocery store next year as the prices of corn and soybeans — major ingredients in processed food, animal feed and biofuels — rise to record levels. The corn crop yield is expected to be 122.8 bushels an acre, the lowest in 17 years, and corn prices are projected to reach a record $7.20 to $8.60 a bushel, the report said. A month ago, the government said that the yield would be 123.4 bushels an acre. Jerry Norton, an analyst at the Agriculture Department, said the forecast for corn production was generally within the range of expectations. “It’s unlikely that we will see any big changes from here on,” he said. “A lot of the effects of the drought are reflected in what came out today.” The corn crop for this year had been projected to hit a record 15 billion bushels, as farmers had planted the most acreage in nearly 70 years.

    Sugar to Pile Up as Demand Stays Weak, Kingsman Says - Sugar, trading near a two-year low, is set to pile up in producing countries next season as a lack of demand amid a global surplus forces growers to hold back supplies, according to Kingsman SA.  “Sellers will struggle to get buyers for raw sugar in the season starting October,” Jonathan Kingsman, chief executive officer of the Lausanne, Switzerland-based researcher and broker, said in an interview in New Delhi. “Indonesia will be the biggest raw sugar importer in the absence of Russia and China. Prices will remain under pressure in the next six to 12 months on excessive supplies.”Futures dropped to a two-year low in New York last week after drier weather in Brazil, the world’s biggest producer of the sweetener, accelerated harvesting, while improvement in rains last month in India improved crop prospects, the second- largest grower. The sweetener has declined 31 percent in the past year on expectations that global supplies will top usage.

    Food Prices — "The Game Is Not Over" -- As I said in my recent post Extreme Food Price Volatility Is Here To Stay, I intend to write more about the cost of food in today's world. I am not a food price expert, but I'm working on that. The price of food is set by five factors which have interacted in recent years to produce unprecedented spikes in the cost of various basic foodstuffs. These are—

    • demand for food (driven by population and relative affluence)
    • natural disasters (e.g. droughts in a changing climate)
    • oil product prices (transportation costs)
    • biofuels (competing with food)
    • broken markets (speculation)

    There are other factors (distribution, fresh water availability, fertilizers, pesticides, blight) which I haven't included in the Big Five, but those factors will play a greater role in food costs as time goes by. I intend to write about all of these factors in the future. Where do we stand now? In July we saw a sharp rise in the FAO's Food Price Index, but prices stabilized in August. However, we're not out of the woods yet this year and next. I'll quote from the MercoPress story  FAO says global food prices remained steady in August, but “the game is not over”

    Global Stories of Spending More Personal Income on Food - The high percentage of income required by individuals to purchase food in poorer countries is caused by numerous factors and conditions including governing and leadership, national wealth and economic health, agricultural policies, infrastructure, currency valuations, population growth, and the strength of the agricultural production within that nation to feed itself.  Let’s not forget that embedded in today’s global food system are energy costs. Developing nations need more availability of fuel and equipment to increase their productivity and developed nation food producers are striving to use less through precision agriculture since their input costs are going up unsustainably. Food storage is also important. It seems there is not a lot of incentive for the leading food producer nations to increase storage of grains, but there should be a great deal of incentive for the food insecure nations to increase theirs. They also need affordable transportation infrastructure to distribute it, and the storage needs to be secure and clean. AlJazeera news has had an ongoing “feed the world” series, and these short two-minute videos give us a window into the world of some of the world’s poorer food consumers.  Hear their stories.

    Climate Change and the Food Supply - Perhaps the biggest single question about climate change is whether people will have enough to eat in coming decades. We have had two huge spikes in global food prices in five years that were driven largely by chaotic weather. And this year we may be in the early stages of a third big jump. Droughts and heat waves have damaged crops in many producing countries this year, including the United States and India. As my colleague Annie Lowrey reported this week, United Nations agencies are hitting the alarm button. Now come two reports that help to frame the problem of the future food supply — one of them offering a stark warning about what could be in store, the other offering a possible way out. As readers of an article I wrote last year may recall, growing scientific evidence suggests that climate change is already functioning as a drag on global food production. Rising temperatures during the growing season in many large producing countries are cutting yields below their potential, the research suggests. On top of that background factor, extreme events like droughts or torrential rains can destroy crops altogether. Extremes have always been part of the agricultural picture, of course, but they are expected to increase on a warming planet.

    2012 U.S. Drought Hits New Highs; Southwest Gets Relief - The severe drought across much of the U.S. proved stubborn once again during the past week as nearly four-fifths of the country was in some form of drought. And the area of the lower 48 states affected by moderate to exceptional drought expanded slightly, hitting a high for the year, according to data released Thursday morning. The new U.S. Drought Monitor map shows that drought conditions have stayed the same or intensified in much of the southern Plains, with extreme to exceptional drought conditions (the two worst categories) expanding in northern and central Oklahoma and southeastern Texas. Conditions also worsened in the Dakotas, Minnesota, and Wisconsin. There have been improvements in the Mid-Atlantic, Midwest, Northeast and Southwest, where recent rains helped to ease conditions. In the Southwest, in fact, there was too much rain, with flash flooding affecting Las Vegas, Nev., and other areas. Drought Monitor statistics showed that moderate to exceptional drought covered a new high of 64.16 percent of the lower 48 states as of September 11, which is a slight increase from 63.39 percent one week ago. The area affected by exceptional drought also increased slightly, as did the area affected by abnormally dry to exceptional drought conditions, which increased from 77.46 percent one week ago, to 78.53 percent on Sept. 11.

    Crop insurance losses begin to mount amid drought - Thousands of farmers are filing insurance claims this year after drought and triple-digit temperatures burned up crops across the nation's Corn Belt, and some experts are predicting record insurance losses - exacerbated by changes that reduced some growers' premiums. G.A. "Art" Barnaby, a Kansas State University Extension specialist in risk management, estimates underwriting losses on taxpayer-subsidized crop insurance will hit nearly $15 billion this year. He expects a staggering $25 billion in crop insurance claims to be filed by growers across the nation, driven primarily by one of the worst droughts in the U.S. decades. His loss estimate is based on a loss ratio of $2.50 for every dollar paid in premium. The U.S. Department of Agriculture's Risk Management Agency made changes to the insurance program in the past year which are expected to increase the underwriting losses from the drought. The changes meant farmers in some states paid smaller premiums this year for corn and soybeans. Not only that, the agency adjusted yields for those crops upwards to reflect recent trends, The rate reductions were based on the assumption that new technology, such as genetically modified, drought-resistant seeds, would eliminate or reduce big losses, Barnaby said. "So it is ironic they got hit the first year out."

    Future Challenges of Irrigation and Water Use in U.S. Agriculture -- This month the USDA came out with a report titled, “Water Conservation in Irrigated Agriculture: Trends and Challenges in the Face of Emerging Demands” What Did the Study Find?

      • • Based on the 2007 Census of Agriculture, irrigated farms accounted for roughly 40 percent ($118.5 billion) of the value of U.S. agricultural production; nationwide, the average value of production for an irrigated farm was more than three times the average value for a dryland farm.
      • • Irrigated farms accounted for 54.5 percent ($78.3 billion) of the value of all crop products sold and contributed to the farm value of livestock and poultry production through animal forage and feed production. Livestock/poultry products accounted for roughly a third of market sales for irrigated farms and 63 percent for nonirrigated (dryland) farms.
      • • Nearly 57 million acres were irrigated across the United States in 2007, or 7.5 percent of all cropland and pastureland. Roughly three quarters of U.S. irrigated agriculture occurred in the 17 Western States, although irrigation has been expanding in the more humid Eastern States.
      • • Irrigated agriculture across the Western States applied 74 million acre-feet (24 trillion gallons) of water for crop production, with 52 percent originating from surfacewater sources and 48 percent pumped from wells that draw from local and regional aquifers.

    The Salton Sea: Death and Politics in the Great American Water Wars -  This week, Los Angeles got a whiff of the future. A heinous rotten-egg smell settled into the metropolis, a stench more familiar to residents lining the Salton Sea, some 150 miles to the east. It was this 376-square-mile body of water, created by accident in the middle of the desert over a century ago, that belched up the fetid cloud. And such episodes will continue to plague Southern California as the collapse of the Salton Sea ecosystem accelerates over the coming years. Considered to be among the world’s most vital avian habitats and — until recently — one of its most productive fisheries, the Salton Sea is in a state of wild flux, the scene of fish and bird die-offs of unfathomable proportions. It was the resulting sea-bottom biomass that a storm churned earlier this week, releasing gases that drifted into Los Angeles. This is just the latest episode in the Salton Sea’s long, painful history of sickness and health and booms and busts — a stinky side effect of a great American experiment to civilize the western deserts. By economic measurements, this experiment has been an astounding success. By environmental measurements, it’s shaping up to be pure disaster. .

    Are the Water Wars Coming? - In March, a report from the office of the US Director of National Intelligence said the risk of conflict would grow as water demand is set to outstrip sustainable current supplies by 40 per cent by 2030.  "These threats are real and they do raise serious national security concerns," Hillary Clinton, the US secretary of state, said after the report's release.  Internationally, 780 million people lack access to safe drinking water, according to the United Nations. By 2030, 47 percent of the world’s population will be living in areas of high water stress, according to the Organisation for Economic Co-operation and Development's  Environmental Outlook to 2030 report .Some analysts worry that wars of the future will be fought over blue gold, as thirsty people, opportunistic politicians and powerful corporations battle for dwindling resources. 

    Exclusive: EU to limit use of crop-based biofuels - draft law (Reuters) - The European Union will impose a limit on the use of crop-based biofuels over fears they are less climate-friendly than initially thought and compete with food production, draft EU legislation seen by Reuters showed. The draft rules, which will need the approval of EU governments and lawmakers, represent a major shift in Europe's much-criticized biofuel policy and a tacit admission by policymakers that the EU's 2020 biofuel target was flawed from the outset. The plans also include a promise to end all public subsidies for crop-based biofuels after the current legislation expires in 2020, effectively ensuring the decline of a European sector now estimated to be worth 17 billion euros ($21.7 billion) a year. "The (European) Commission is of the view that in the period after 2020, biofuels should only be subsidized if they lead to substantial greenhouse gas savings... and are not produced from crops used for food and feed," the draft said. A Commission spokeswoman said the EU executive would not comment on the details of leaked proposals. The policy u-turn comes after EU scientific studies cast doubt on the emissions savings from by crop-based fuels, and following a poor harvest in key grain growing regions that pushed up prices and revived fears of food shortages. Under the proposals, the use of biofuels made from crops such as rapeseed and wheat would be limited to 5 percent of total energy consumption in the EU transport sector in 2020.

    Asia Risks Water Scarcity Amid Coal-Fired Power Embrace - Inner Mongolia’s rivers are feeding China’s coal industry, turning grasslands into desert. In India, thousands of farmers have protested diverting water to coal- fired power plants, some committing suicide. The struggle to control the world’s water is intensifying around energy supply. China and India alone plan to build $720 billion of coal-burning plants in two decades, more than twice today’s total power capacity in the U.S., International Energy Agency data show. Water will be boiled away in the new steam turbines to make electricity and flush coal residue at utilities from China Shenhua Energy to India’s Tata Power Co. that are favoring coal over nuclear because it’s cheaper. With China set to vaporize water equal to what flows over Niagara Falls each year, and India’s industrial water demand growing at twice the pace of agricultural or municipal use, Asia’s most populous nations will have to reconsider energy projects to avoid conflict between cities, farmers and industry. “You’re going to have a huge issue with the competition between water, energy and food,” . “Water is something everyone should be probing every chief executive about,” he said in an interview.

    Twenty more Nile rivers needed to feed growing world population – The world needs to find the equivalent of the flow of 20 Nile rivers by 2025 to grow enough food to feed a rising population and help avoid conflicts over water scarcity, a group of former leaders said on Monday. Factors such as climate change would strain freshwater supplies and nations including China and India were likely to face shortages within two decades, they said, calling on the U.N. Security Council to get more involved. "The future political impact of water scarcity may be devastating," former Canadian Prime Minister Jean Chretien said of a study issued by a group of 40 former leaders he co-chairs including former U.S. President Bill Clinton and Nelson Mandela."It will lead to some conflicts," Chretien told reporters on a telephone conference call, highlighting tensions such as in the Middle East over the Jordan River. The study, by the InterAction Council of former leaders, said the U.N. Security Council should make water the top concern. Until now, the Security Council has treated water as a factor in other crises, such as Sudan or the impact of global warming.

    Feds declare fishery disaster in New England — The U.S. Commerce Department on Thursday declared a national fishery disaster in New England, opening the door for tens of millions of dollars in relief funds for struggling fishermen and their ports. Acting Commerce Secretary Rebecca Blank said the declaration comes amid ‘‘unexpectedly slow rebuilding of stocks,’’ which is forcing huge fishing cuts for 2013 that are jeopardizing the New England industry. Blank said her agency also determined the troubles with fish stocks have come even though fishermen are following rules designed to prevent overfishing. ‘‘The future challenges facing the men and women in this industry and the shore-based businesses that support them are daunting, and we want to do everything we can to help them through these difficult times,’’ Blank said. The declaration doesn’t guarantee any money will actually be funneled toward fishermen, but U.S. Sen. John Kerry said it’s a big step forward. Senate Majority Leader Harry Reid has committed to include $100 million for fishermen and fishing communities in emergency assistance legislation that will be debated during the lame-duck session after the election, Kerry said Thursday. Lawmakers must now fight for the money in a potentially reluctant Congress, he said. Kerry compared fishermen to farmers — both are dependent on the vagaries of the ecosystem and both are deserving of assistance when unavoidable problems arise, like when farmers face a drought, he said.

    U.S. fishery disaster adds to drought woes -- With the declaration Thursday of a national fishery disaster, American food producers are now facing catastrophes on two fronts. Severely low stocks of key groundfish species such as cod and flounder spurred the declaration by the Commerce Department, after a two-year campaign by members of the region’s congressional delegation. The move clears the way for disaster aid to be allocated to coastal communities.Fishery disasters were also declared in Alaska, because of low returns of Chinook salmon in some key regions, and Mississippi, where flooding in the spring of 2011 damaged some of the state’s oyster and blue crab fisheries.At the same time, hot and dry conditions continue to plague large parts of the U.S. Plains and southern states as the worst U.S. drought in more than five decades expands its grip on some key farming states.

    Overfishing pushes tuna stocks to the brink: experts -  Global tuna stocks are fast reaching the limits of fishing sustainability, decimated by an absence of comprehensive, science-based catch limits, conservation experts warned Saturday. Five of the world’s eight tuna species are already classified as threatened or nearly threatened with extinction, according to the Red List of Threatened Species compiled by the International Union for Conservation of Nature (IUCN). At the IUCN’s World Conservation Congress currently underway in South Korea’s southern Jeju Island, experts said partial quotas currently in place were inadequate and uninformed.

    Caribbean coral reefs face collapse - Caribbean coral reefs – which make up one of the world's most colourful, vivid and productive ecosystems – are on the verge of collapse, with less than 10% of the reef area showing live coral cover. With so little growth left, the reefs are in danger of utter devastation unless urgent action is taken, conservationists warned. They said the drastic loss was the result of severe environmental problems, including over-exploitation, pollution from agricultural run-off and other sources, and climate change. The decline of the reefs has been rapid: in the 1970s, more than 50% showed live coral cover, compared with 8% in the newly completed survey. The scientists who carried it out warned there was no sign of the rate of coral death slowing. Coral reefs are a particularly valuable part of the marine ecosystem because they act as nurseries for younger fish, providing food sources and protection from predators until the fish have grown large enough to fend better for themselves. They are also a source of revenue from tourism and leisure.

    In the Caribbean Coral Die-Off, Myriad Wrinkles - At its ongoing conference in South Korea, the International Union for Conservation of Nature released a report on Friday indicating that live coral coverage on reefs in the Caribbean has plummeted from nearly 50 percent in the 1970s to less than 10 percent today. Yet describing the entire Caribbean as a region where reefs are in a state of general collapse tends to cloud the problem’s complexity, the study suggests. Michael Lesser, a program director for biological oceanography at the National Science Foundation, acknowledges that the region is the “poster child” for the global destruction of reefs. “The pronouncement that the Caribbean itself would be in dire straits is no surprise – we’ve been talking about this for a long time now,” he said. Overfishing has left its mark, as has the decline of species like the parrotfish and the spiny black urchin known as Diadema antillarum, which graze on algae and ideally keep it from stifling the reefs. Ocean warming and acidification add more pressure, bleaching and weakening coral networks. “It’s a sort of double whammy,” Dr. Lesser said. But the conservation group’s report shows that the destruction is not spread uniformly.There is also uncertainty about what causes coral decline in certain places, pointing up the need for varying strategies across the Caribbean instead of a one-size-fits-all approach.

    Goodbye carbon taxes, hello atmospheric user fees - Economists (at least those who believe in global warming) frequently argue that the best way to discourage overuse of fossil fuels is with a carbon tax. A carbon tax reflects unpriced, external or social costs; the environmental damage created by fuel consumption. With a carbon tax in place, people will only consume fuel if the benefits they receive from doing so are greater than the costs - both the private costs, reflected in the pre-tax price, and the environmental costs, reflected in the carbon tax.  Unfortunately, taxes have a negative image. For example, in the US, almost every Republican member of Congress has signed a pledge that they will never vote for a policy that increases tax rates.   I think it's time carbon taxes got a rebranding. It's not clear why carbon taxes should be called taxes in any event. What distinguishes taxes from user fees or social insurance premiums is the absence of a quid pro quo between the taxpayer and the government. Paying more taxes does not entitle a person to more government services. By this definition, carbon taxes are more like a user fee than a tax. There is a quid pro quo: pay the tax, burn the carbon; burn the carbon, pay the tax. Go ahead and contribute to global warming, as long as you pay your dues.

    Interactive Timeline Of 2012 Extreme Weather - Over the past several months, extreme weather and climate events in the form of heat waves, droughts, fires, and flooding have seemed to become the norm rather than the exception. In the past half-year alone, millions of people have been affected across the globe – from Europe suffering from the worst cold snap in a quarter century; to extreme flooding in Australia, Brazil, China, and the Philippines; to drought in the Sahel. Records have been broken monthly in the continental United States, with the warmest spring and 12-month period experienced this year and severe fires and drought affecting large swaths of the country. So how bad has it really been? Below we have put together a timeline of extreme climate and weather events in 2012. We have by no means attempted to be comprehensive in listing events, but have aimed to include some of the most significant occurrences this year. Please let us know through the comment section if we are missing some, as we plan to update the timeline periodically.

    In U.S., 2012 so far is hottest year on record (Reuters) - The first eight months of 2012 have been the warmest of any year on record in the contiguous United States, and this has been the third-hottest summer since record-keeping began in 1895, the U.S. National Climate Data Center said on Monday. Each of the last 15 months has seen above-average temperatures, something that has never happened before in the 117 years of the U.S. record, said Jake Crouch, a climate scientist at the data center. Winter, spring and summer 2012 have all been among the top-five hottest for their respective seasons, Crouch said by telephone, and that too is unique in the U.S. record. There has never been a warmer September-through-August period than in 2011-2012, he said. "We're now, in terms of statistics, in unprecedented territory for how long this warm spell has continued in the contiguous U.S.," Crouch said. He did not specify that human-spurred climate change was the cause of the record heat. However, this kind of warmth is typical of what other climate scientists, including those at the United Nations' Intergovernmental Panel on Climate Change, have suggested would be more likely in a world that is heating up due in part to human activities.

    Ageing population and climate change will cause 10,000 more heat-related deaths every year - Climate change could cause the number of people dying in Britain from unbearable heat to increase by more than 10,000 every year, the Health Protection Agency has warned.At the moment 2,000 people die every year as a result of heat waves, mostly the old and vulnerable who find it difficult to cool down. However by 2080 the temperature in towns and cities could rise by 10C, peaking at up to 40C (104F) in London, in the summer for several days. The HPA said old people restricted to their homes and patients in hospital will be unable to cope. In a new report on climate change, the Government Agency predict almost 12,000 “heat-related deaths” by the 2080s, an increase of more than 500 per cent. The problem is even worse if the ‘heat island effect’ that causes temperatures to rise in cities is included.

    USGS Repeat Photography Project Documents Retreating Glaciers in Glacier National Park -  Glacier National Park’s namesake glaciers have receded rapidly since the Park’s establishment in 1910, primarily due to long-term changes in regional and global climate. In the last century, the five warmest years have occurred in the last 8 years - in this order: 2005, 1998, 2002, 2003, 2004 (NASA). These changes include warming, particularly of daily minimum temperatures, and persistent droughts. This warming is ongoing and the loss of the Park’s glaciers continues, with the park’s glaciers predicted to disappear by 2030.  The Repeat Photography Project began in 1997 with a systematic search of the archives at Glacier National Park. We began searching for historic photographs of glaciers in the vast collection that spans over a century. Many high quality photographs exist from the parks’ early photographers who scoured the park to publicize it’s beauty and earn their livings. Copies of the historic photos were taken in the field to help determine the exact location of the original photograph. Photographing the glaciers cannot occur until the previous winter’s snow has melted on the glacial ice and when air quality conditions are considered at least good. This creates a narrow window in the northern clime of Glacier National Park where smoke from forest fires prevented photography on many occasions in the past few years.

    Glacial melt in the Himalayas has been increasing over the last 30 years, says a new study - Glacial melt in the Himalayas has been increasing over the last 30 years, a new study argues. The glaciers feed the Indus, Brahmaputra and Ganges rivers which supply water to around 1.4 billion people in Asia. Potential consequences of changes in the glaciers include unsustainable water supplies from major rivers and geo-hazards such as glacier-lake outbursts and flooding, all which could threaten the livelihoods and well-being of populations in the downstream regions, says the study, led by Yao Tandong, director of the Institute of Tibetan Research at the Chinese Academy of Sciences in Beijing and glaciologist and paleo-climatologist Lonnie Thompson of Ohio State University. "The majority of the glaciers have been shrinking rapidly across the studied area in the past 30 years," Yao told Nature Climate Change, the journal that published the study. A prolonged glacier retreat would increase the volume of water in rivers and also the sediments, which could choke water supply and disrupt agriculture, the study says. While previous studies of Himalayan glaciers had been based on data over seven years from the Gravity Recovery and Climate Experiment satellite mission known as GRACE, Thompson said it's also important to look at the longer-term picture because climate is generally considered a 30-year average of the weather.

    New contender for scariest graph you'll ever see: June-August 2012 sea level pressure (mb) composite anomaly - And when I say 'Arctic', I of course automatically imply 'Northern Hemisphere'. You know, the place where most of the world's agriculture is based. One thing I have noticed this melting season, is how high pressure areas persistently remained over Greenland (causing, for instance, the decrease in reflectivity all over the ice sheet):  But what I didn't know, is that this is something that apparently started in 2007, having all kinds of consequences for Northern Hemisphere weather patterns. This is again from the Dosbat blog, where Chris Reynolds is on a roll: Last year I posted "Summer Daze." In that post I detailed a new pattern of atmospheric behaviour centred on high pressure over Greenland, this pattern is new since 2007, and as I showed is a robust change since the 1950s in NCEP/NCAR data. Well, it's happened again this year...Chris goes on to explain what this means for UK summer weather and wonders if perhaps, possibly, maybe, this persistent blocking pattern could have something to do with disappearing Arctic sea ice. Read the whole article here.

    Sea Level Pressure Changes since 2007 - I wanted to cross-check for myself some of the work Chris Reynolds has done looking at changes in weather patterns since 2007 (the beginning of the recent sea ice collapse). Accordingly, I went to this page which allows you to make maps from the NCAR/ESRL weather reanalysis product (which basically uses meteorological weather forecasting models to integrate all available weather observations and then provide a consistent set of weather variables over time and space).  I started by producing the difference between summer sea level pressures in 2007-2012 and that in 1948-1978 (the first thirty years available in the dataset).  That gave the map above (I wanted to look at the whole globe for context).  You can see the pattern that Chris is talking about - the higher pressure over Greenland and the lower pressure in a track around the Arctic - particularly the UK, northern Siberia, and the eastern US and north Atlantic. However, there is an equally pronounced feature of higher pressure over northern China, and even an even more striking drop in pressure in Antarctica.  The first thought was to ask if these are also post 2007 developments or were already occurring?  Thus produce the map from 2000-2006 (also Jun-Aug)  versus the baseline climatology of 1948-1978:

    Arctic Crisis: Far From Sight, the Top of the World's Problems - As this year's sea ice extent bottoms out, it's high time that more people recognize we're in a global crisis -- the Arctic crisis. I'm sorry if this sounds "alarmist," but the Arctic, fundamental to the stability of our weather patterns, climate and agriculture, is rapidly coming apart. In the end, of course, this will just be a sub-plot to the bigger drama, the climate crisis, but by naming this the Arctic crisis, I am suggesting that it needs to be treated independently, right away. It is the heart of the near-term climate issue, and its outcome could greatly alter the outcome of the larger story, which will be the saga of the century no matter what we do. A crisis above all means this: a compression of time. Because the Arctic, which has received the brunt of warming, seems poised to pass a profound state shift in the very near future (in fact it's already underway), and because it offers such vital 'services' to the planet, one could say that the urgency of the larger climate crisis is for the time being mostly contained within this Arctic crisis. since no one else has really been referring to an Arctic crisis, what we'll be looking at are some prominent statements from 2012 concerning the two great interrelated features of Arctic stability: the state of its cryosphere, and the state of its carbon stocks. In particular, the sea ice and methane.

    Arctic Ice Melt Record Being Smashed - Above you can see the sea ice extent so far (chart via Angry Bear). We’ve already crushed the 2007 record, and still have a week or so to go before hitting the usual minimum time.  It’s hard to think of anything to say about this, aside from the usual creeping panic, but I did have one thought. According to Climate Central, shippers are already cruising through the open Arctic lanes. (Also, oil companies are getting set to start drilling there as well. If climate change is to be prevented, they must be stopped.) But below you can see a picture of sea ice extent in 2007, the previous record low (I couldn’t find a good picture of 2012.) You can see that the ice extent is anchored around northern Greenland and the big islands of northern Canada and Russia, and therefore the North Pole is not that far from the edge of the melt. Therefore it looks likely that the North Pole will become ice-free in the summer long before the entire Arctic does. A completely ice free North Pole could be the kind of climate Pearl Harbor-style event that shocks the system into action. Even though Republicans are now more committed to climate denial than ever, climate hawks should be ready to seize such a striking demonstration of the reality of what we’re facing.

    JAXA: A new record minimum of the Arctic sea ice extent - Melt season in the Arctic Ocean came in the summer of 2012. The Arctic sea ice is shrinking at an unprecedented rate this year and set a record minimum. A record minimum sea-ice coverage of 4.21 million sq km was observed by satellite on August 24, 2012, one month earlier than previous minimum record set on September 24, 2007. Shrinking rate of the Arctic sea ice is still kept high. Every year the sea ice shrinking continues until around the middle of September. The annual minimum of sea ice extent this year is possible to be less than 4 million sq. km. Figure 3 shows the daily rate of sea ice extent variation during May to August in 2003 to this year. Positive value indicates the extension of sea ice extent and negative value indicates the sea ice shrinkage. This summer sudden reduction of the sea ice extent occurred at the beginning of August. This event was coincident with the occurrence of the giant polar low over the Arctic Ocean which was captured by NASA’s MODIS sensor (Fig. 4).

    Arctic Death Spiral: The Video  - Last week, I reported that leading scientific experts were warning we could see a “near ice-free Arctic in summer” in a decade — if volume trends continue. Here’s a short video showing those ominous trends from 1979 through early September 2012: Since 1979, the volume of summer Arctic sea ice has declined by 75% and accelerating.…  This video by Andy Lee Robinson illustrates the dramatic decline from 1979 until September 2, 2012 (day 246). Sea ice volume is calculated using the Pan-Arctic Ice Ocean Modeling and Assimilation System [PIOMAS]. And that is why what’s happening in the Arctic deserves the label “death spiral.” The main conclusion of the PIOMAS modeling — thinner and thinner ice — has been verified by The European Space Agency’s CryoSat-2 probe.

    Arctic has lost enough sea ice to cover Canada and Alaska - The official end of the Arctic Ocean melt season could come any time now, but the sea ice that covers the North Polar region has already smashed the previous record low for end-of-summer ice area set in 2007. Back then, a combination of warm temperatures and ice-dispersing winds left just 1.61 million square miles of ice cover — but that meltback was surpassed in late August this year, and by now, the ice extent has dropped by more than 35 percent below the 2007 record, according to the National Snow and Ice Data Center. Since March, according to one calculation, the amount of ice that has disappeared is equal to the areas of Alaska and Canada, combined.  This unprecedented melting (unprecedented since we’ve been able to monitor the ice with high accuracy using satellites, anyway, which first became possible in 1979) is extremely worrisome for several of reasons. For one, as Climate Central reported on August 27, sea ice is a powerful reflector that bounces a lot of sunlight back into space rather than letting it warm the Earth.  When that ice melts, it exposes the darker ground or water underneath, turning the region into an energy absorber rather than a reflector. The result is a feedback loop that accelerates global warming, with melting ice leading to more warming of the water below leading to more melting.  For another, a warming Arctic threatens to release carbon dioxide from melting permafrost and methane both from permafrost and from under the seafloor, each of which could accelerate warming as well.

    Sea Ice Loss 2012: What Do The Records Mean?: Actually, the new record lows had begun to appear on August 17th, when the University of Bremen sea ice extent chart dipped below its previous all-time low. August 17th is shockingly early; the annual minimum typically falls somewhere in mid-September, and that is naturally when records are set. To see records fall a month earlier than that gave many observers serious pause. The shock has generated some headlines—probably less than merited, but still more than enough to puzzle many folks. After all, the Arctic Ocean is very far away from most of us; how can the exact amount of ice covering it matter? Put another way, do the new records really mean anything? It helps to know a bit of the history. The sea ice has been declining since 1979, when we began to use satellites to monitor it. The decline was relatively slow at first, but by 2005 had become more pronounced; in that year, the minimum reached a surprising low of about 5.3 million square kilometers. Compare that to the lowest extent in the first ten years—6.4 million, observed in 1984. Still, projections were that there would be Arctic sea ice year-round at least for the balance of the 21st century, if not longer. Then came the minimum of 2007. That year turned out to be a 'perfect storm' for ice melt—warm temperatures, frequent clear skies to allow in lots of solar energy, and wind patterns favorable for moving ice out into the North Atlantic, all combined to shatter the record low extent of 2005, with an unprecedented 4.25 million square kilometers.

    Arctic Sea Ice Volume, Area and Extent continue death spiral -- September 12, 2012  -- The PIOMAS Arctic Ice Volume graph shows continued decrease:The University of Illinois' Cryosphere Today's Arctic sea ice area interactive graph shows a new record of 2.26206 million square kilometers of sea ice area on day 254. In 2011, the record occurred on day 253 at 2.90474 million sq. km -- this graph shows day 254 of 2012: The National Snow and Ice Data Center's Arctic Sea Ice Extent graph shows a further decrease.  Extent now said to be below 3.5 million square kilometers -- graph shows 5-day trailing average as of September 12, 2012:

    'Astonishing' Ice Melt May Lead to More Extreme Winters -The record loss of Arctic sea ice this summer will echo throughout the weather patterns affecting the U.S. and Europe this winter, climate scientists said on Wednesday, since added heat in the Arctic influences the jet stream and may make extreme weather and climate events more likely. The “astounding” loss of sea ice this year is adding a huge amount of heat to the Arctic Ocean and the atmosphere, said Jennifer Francis, an atmospheric scientist at Rutgers University in New Jersey. “It’s like having a new energy source for the atmosphere.” Francis was one of three scientists on a conference call Wednesday to discuss the ramifications of sea ice loss for areas outside the Arctic. The call was hosted by Climate Nexus. On August 26, Arctic sea ice extent broke the record low set in 2007, and it has continued to decline since, dropping below 1.5 million square miles. That represents a 45 percent reduction in the area covered by sea ice compared to the 1980s and 1990s, according to the National Snow and Ice Data Center (NSIDC), and may be unprecedented in human history. The extent of sea ice that melted so far this year is equivalent to the size of Canada and Alaska combined. The loss of sea ice initiates a feedback loop known as Arctic amplification. As sea ice melts, it exposes darker ocean waters to incoming solar radiation. The ocean then absorbs far more energy than had been the case when the brightly colored sea ice was present, and this increases water and air temperatures, thereby melting even more sea ice.

    As the Arctic system changes, “we must adjust our science” says polar research director Kim Holmen - The Arctic sea-ice big melt of 2012 “has taken us by surprise and we must adjust our understanding of the system and we must adjust our science and we must adjust our feelings for the nature around us,” according to Kim Holmen, Norwegian Polar Institute (NPI) international director.    From Svalbard (halfway between mainland Norway and Greenland), the BBC’s David Shukman reported on 7 September that Holmen had described the current melt rate as “a greater change than we could even imagine 20 years ago, even 10 years ago.”  As detailed last week, the thin crust of sea ice which floats on the north polar sea is now only half of the average minimum summer extent of the 1980s, and just one-quarter of the volume 20 years ago.    Yet the 2007 IPCC report suggested sea ice would last all, if not most, of this century: “in some projections using SRES scenarios, Arctic late-summer sea ice disappears almost entirely by the latter part of the 21st century.” One modelling image in the IPCC report (below) shows sea ice still existent in the period 2080–2100. This has proven to be dramatically conservative

    Peter Wadhams warns on collapse of Arctic sea ice by 2015 - A leading British academic has called for accelerated research into futuristic geo-engineering and a worldwide nuclear power station "binge" to avoid runaway global warming. Peter Wadhams, professor of ocean physics at Cambridge University, said both potential solutions had inherent dangers but were now vital as time was running out. "It is very, very depressing that politicians and the public are attuned to the threat of climate change even less than they were 20 years ago when Margaret Thatcher sounded the alarm. CO2 levels are rising at a faster than exponential rate, and yet politicians only want to take utterly trivial steps such as banning plastic bags and building a few windfarms," he said. "I am very suspicious of using technology to solve problems created by technology, given that we have messed up so much in the past but having done almost nothing for two decades we need to adopt more desperate measures such as considering geo-engineering techniques as well as conducting a major nuclear programme." Geo-engineering techniques such as whitening clouds by adding fine sprays of water vapour, or adding aerosols to the upper atmosphere have been ridiculed in some quarters but welcomed elsewhere. Wadhams proposes the use of thorium-fuelled reactors, being tested in India, which are said to be safer because they do not result in a proliferation of weapons-grade plutonium, experts say.

    Key Congressmembers on Science Committees Refuse To Answer Science Questions - President Obama and Governor Mitt Romney have answered 14 of the nation's top science questions, but of the many committee leaders in Congress who deal with the nation's science policy, just two--Reps Henry Waxman and Chris Van Hollen--have responded to the ScienceDebate questions for Congress. And two of more--Senator Jeff Sessions and House Speaker John Boehner--have declined to answer the questions. This raises an important question: if the candidates for president will discuss the nation's top science issues, why won't the key members of Congress who lead the committees that deal with science policy? The nation's responses to dozens of critical questions--from climate change to water quality to protecting the Internet--originate not with the president, but in Congress. Understanding why members would be refusing is difficult in a time when jobs are top of mind. Science drives over half of US economic growth and lies at the center of several of our most critical national challenges and opportunities in areas as diverse as the economy, public health, and the environment. Many of the leading science organizations in the United States arrived at a consensus on the Top American Science Questions: Congressional Edition, and the effort is supported by nearly two hundred science organizations and universities, and tens of thousands of individuals, ranging from concerned citizens to Nobel laureates and corporate CEOs.

    New York Faces Rising Seas and Slow City Action - With a 520-mile-long coast lined largely by teeming roads and fragile infrastructure, New York City is gingerly facing up to the intertwined threats posed by rising seas and ever-more-severe storm flooding.So far, Mayor Michael R. Bloomberg has commissioned exhaustive research on the challenge of climate change. His administration is expanding wetlands to accommodate surging tides, installing green roofs to absorb rainwater and prodding property owners to move boilers out of flood-prone basements. But even as city officials earn high marks for environmental awareness, critics say New York is moving too slowly to address the potential for flooding that could paralyze transportation, cripple the low-lying financial district and temporarily drive hundreds of thousands of people from their homes. Only a year ago, they point out, the city shut down the subway system and ordered the evacuation of 370,000 people as Hurricane Irene barreled up the Atlantic coast. Ultimately, the hurricane weakened to a tropical storm and spared the city, but it exposed how New York is years away from — and billions of dollars short of — armoring itself.

    Smugglers Sell Coolant Tied to Global Warming - Under an international treaty, the gas, HCFC-22, has been phased out of new equipment in the industrialized world because it damages the earth’s ozone layer and contributes to global warming. There are strict limits on how much can be imported or sold in the United States by American manufacturers. But the gas is still produced in enormous volumes and sold cheaply in China, India and Mexico, among other places in the developing world, making it a profitable if unlikely commodity for international smugglers. Although it has been illegal to sell new air-conditioners containing HCFC-22 in the United States since 2010, vast quantities of the gas are still needed to service old machines. Importing HCFC-22 without the needed approvals, as Marcone did, violates international treaties and United States law and regulations.

    U.S. energy carbon emissions fell in three of last four years - The amount of carbon dioxide emitted from energy production declined in the U.S. in 2011 -- the third time in four years and the fourth time in the last six years that has happened, the Energy Department said Tuesday. As has been the case in previous years, there wasn't necessarily a lot of good economic news behind the positive result of reduced emissions. The Energy Department, for example, cited slower economic growth as one factor in the 2.4% drop in energy-related carbon dioxide emissions last year. During the global recession in 2008 and 2009, for example, carbon dioxide emissions from energy production in the U.S. fell by 10%. In 2011, high gasoline prices also resulted in Americans putting in fewer miles on the road. Still, the Energy Department found it noteworthy that the 2011 decline in carbon emissions came during a period of economic growth, with U.S. gross domestic product rising by 1.8% that year.

    Gas glut threatens climate battle-IEA (Reuters) - A new "golden age of gas" could derail global efforts to fight climate change as indebted governments mull a switch to the cheaper fuel, the International Energy Agency's chief economist said on Thursday. Government subsidies designed to promote renewable energy currently amount to around $70 billion globally, he said. But governments may be tempted to drop them as new shale gas and export facilities of liquefied natural gas (LNG) in east Africa and Australia pressure prices lower. "Governments are feeling more and more uncomfortable to put m oney in renewables especially in the days of austerity, and some governments are cutting their support," Fatih Birol from the West's energy watchdog said at an energy conference in Berne, Switzerland. "The availability of cheap or lower gas prices are putting additional pressure on renewable energies," he added.

    U.S. Energy Agency Projects A 2.8 Percent Increase In 2013 Carbon Emissions From Fossil Fuels  - Last month, the Energy Information Administration released data showing a strong drop in U.S. carbon dioxide emissions in the first quarter of 2012. With CO2 emissions falling to their lowest levels in 20 years, some expressed optimism that it was representative of a positive long-term shift. However, as we pointed out, it looks like this drop in America’s “carbon weight” is mostly based on a fad diet consisting of natural gas — a fuel considered the “crack cocaine” of the utility sector — not necessarily on a new, healthy energy diet of efficiency and renewables. (Going even deeper, the EIA figures don’t factor in methane from natural gas, so we still don’t know how much the boom in gas has impacted our overall greenhouse gas emissions). New data from the EIA backs up concerns that the 2012 drop in CO2 isn’t as big as it seems. According to the agency’s latest short-term outlook, CO2 emissions in the power sector are set to rise by 2.8 percent in 2013 after declining by 2.3 percent in 2011 and 2.4 percent in 2012. Why? Because natural gas prices are on the upswing, thus reducing gas consumption in the electric power sector and encouraging more consumption of coal

    Monthly Energy Review - Energy Information Administration: This publication includes total energy production, consumption, and trade; energy prices; overviews of petroleum, natural gas, coal, electricity, nuclear energy, renewable energy, and international petroleum; carbon dioxide emissions; and data unit conversions values.

    What does trade have to do with climate change? - As multilateral attempts for climate-change mitigation stall, the two-way relationship between trade and climate change is likely to come under further scrutiny. This column explains how liberalised trade has several climate-related consequences. It argues that trade policy could enforce mitigation policies but that multilateral conventions are crucial in preventing undesired protectionist consequences.

    Climate change challenges power plant operations - Drought and rising temperatures are forcing water managers across the country to scramble for ways to produce the same amount of power from the hydroelectric grid with less water, including from behemoths such as the Hoover Dam. Hydropower is not the only part of the nation’s energy system that appears increasingly vulnerable to the impact of climate change, as low water levels affect coal-fired and nuclear power plants’ operations and impede the passage of coal barges along the Mississippi River. “We’re trying to manage a changing climate, its impact on water supplies and our ability to generate power, all at once,” . Producing electricity accounts for at least 40 percent of water use in the United States. Warmer and drier summers mean less water is available to cool nuclear and fossil-fuel power plants. The Millstone nuclear plant in Waterford, Conn., had to shut down one of its reactors in mid-August because the water it drew from the Long Island Sound was too warm to cool critical equipment outside the core. A twin-unit nuclear plant in Braidwood, Ill., needed to get special permission to continue operating this summer because the temperature in its cooling-water pond rose to 102 degrees, four degrees above its normal limit; another Midwestern plant stopped operating temporarily because its water-intake pipes ended up on dry ground from the prolonged drought.

    Japan approves nuclear phase-out by 2040 - The ruling Japanese government party today approved a policy to phase out nuclear power by the 2030s, a dramatic shift expected to increase fossil fuel use and drive demand for efficiency and renewable energy. The plan formalizes Japan’s departure from nuclear power last year in the wake of the disaster at the Fukushima nuclear power station where all but two power stations were shut down for safety checks. As in Germany and Switzerland, public opinion in Japan has turned firmly against atomic energy, which led to today’s decision. Japan’s remaining 50 nuclear reactors will operate until their planned 40-year lifetime but then be shut down, with the latest projected for the mid-2030s. The country intends to keep fossil fuel use at roughly current levels while tripling renewable energy’s share and increasing energy efficiency, according to government documents. In 2010, Japan got 26 percent of its electricity generation from nuclear plants, 63 percent from fossil fuel plants, and ten percent from renewable energy. Before the Fukushima disaster, the country had a strategic plan to increase nuclear to 45 percent by 2030 and renewable energy to 20 percent, thus decreasing its reliance on fossil fuels.

    Even with strict new rules, U.S. still lags on fuel economy - Back in August, the Obama administration announced strict new fuel economy standards for cars and light trucks. By 2025, passenger vehicles sold in the United States are supposed to get, on average, 54.5 miles per gallon. So how does these rules stack up internationally? As always, there’s a chart. The Center for Climate and Energy Solutions has put together a handy graph comparing the new U.S. standards to those in other countries. On paper, at least the Obama administration’s new rules don’t look quite as ambitious. Japan and the European Union have higher targets in place. China, meanwhile, has also proposed stricter standards, although they haven’t been enacted yet:  What makes these comparisons tricky, however, is that the official targets don’t always do a good job telling us what sort of mileage cars are actually getting on the road. One large recent study, for instance, found that the average German passenger car is about 21 percent less fuel-efficient than the dealer’s brochure claims.

    The Gas Tax vs. Fuel Economy Debate - Eduardo Porter attempted to take the air out of one of the few carbon mitigation programs the Obama Administration has been able to approve, the increase in fuel economy standards. Porter’s perspective is basically that increased gas taxes make more sense than higher fuel economy, and that the latter carries unintended consequences. For the first point, Porter cites this evidence. Fuel-efficiency standards do not really change drivers’ behavior in a helpful way. Gas taxes do [...] In 2008, when the price of gas shot abruptly past $4 a gallon, Americans cut back sharply on their driving. Total miles driven on American highways declined for the first time since 1980 and gas use fell more than 4 percent. General Motors ditched the Hummer, and gas-guzzling pickups were briefly dislodged from the perch they had occupied since 1992 as the nation’s most popular light vehicle. Driving levels started creeping back up as soon as gas prices started receding, but a gas tax would be permanent and would lead to even bigger changes in habits.  By contrast, Porter says that fuel economy rules do not effect driver behavior. They also take longer to filter into the overall picture of gas usage, because they don’t make an impact until the fleet gets turned over and people buy more fuel-efficient cars. A gas tax, in his eyes, has a more immediate impact. Moreover, more fuel-efficient cars carry an incentive to drive more, which he says leads “to more congestion, accidents, pollution and gas consumption.

    Why fuel-economy standards make sense -- Eduardo Porter has a very good explanation, today, of why it makes much more sense, from an economic perspective, to simply start raising gasoline taxes than it does to implement ever-tougher fuel-efficiency standards. But before we get to the meat of his argument, it’s worth correcting his numbers. Here’s his conclusion: In Britain, where gas and diesel are taxed at $3.95 a gallon, the American automaker Ford sells a compact Fiesta model that will go nearly 86 miles on a gallon. In the United States, where gas taxes average 49 cents, Ford’s Fiestas will carry you only 33 miles on a gallon of gas. This is an apples-to-oranges comparison on not one but two different levels. I’m not sure about the gas taxes, I think they’re correct. But the mileage figures are misleading. Yes, UK Fiestas are more fuel-efficient than US Fiestas. But not by nearly as much as Porter suggests. For one thing, the mileage tests are different. The test you use makes a huge difference, to the point at which the 2025 fuel-economy standard of 54.5 mpg actually corresponds in the real world to cars bearing window stickers advertising 36 mpg. The US Fiesta is already there, or extremely close. On top of that, UK gallons, also known as Imperial gallons, are significantly larger than US gallons. ( As a result, 85.6 miles per Imperial gallon is 71.3 mpg in American. And only one expensive “ECOnetic” Fiesta model gets that mileage in the UK; the other ones go as low as 42.8 miles per Imperial gallon, which is 35.6 mpg in the US.

    Addressing Market Barriers to Energy Efficiency in Buildings: I argue that imperfections—relating to misperceived prices, imperfect information, and biased reasoning—in markets for energy-using products interfere with people’s ability to make privately optimal decisions. The result is an energy-efficiency gap, or an “energy paradox”: Energy-efficient technologies with lower lifetime costs diffuse more slowly through the economy than would be expected given their cost advantages. Because of energy’s social costs—not only regional pollutants (primarily particulates and oxides of sulfur and nitrogen) and global greenhouse gases (primarily carbon dioxide) from energy production and consumption, but also local pollution, traffic, and noise from resource extraction and transport—there are social benefits from policies that narrow the energy-efficiency gap. Growing concerns about global climate change have made it important to identify ways of reducing greenhouse-gas emissions at relatively low cost. Policies that address imperfections in markets for energy efficiency can reduce polluting emissions at a cost that is relatively low compared with the benefits. With buildings responsible for a substantial share of U.S. energy consumption, such policies make buildings an important potential source of lower-cost emissions reductions.

    U.S. Solar PV Installations Jump 116 Percent Over Q2 2011, Driven Partly By Loan Guarantees - Congress is back in session after a long summer break. And the first order of business in the House of Representatives is to pass the “No More Solyndras” Act, a bill designed to squash the Department of Energy’s embattled loan guarantee program for innovative clean energy projects. But here’s something you won’t likely hear from lawmakers: Experience on the ground shows that the loan guarantee program is working as designed. Partly boosted by the construction of large-scale solar projects supported by loan guarantees, the U.S. solar photovoltaic market is on track for a third consecutive year of triple-digit growth. U.S. solar developers installed 742 megawatts of solar PV in the second quarter of 2012. And if growth continues, the industry could install more than 3,000 megawatts of projects this year, according to a new market report from GTM Research and the Solar Energy Industries Association.

    Argument Over the Value of Solar Focuses on Spain - Oil producers are working harder than ever to replace their reserves and, increasingly, turning to nonconventional petroleum sources such as Canada's tarry bitumen and ultra-deepwater offshore wells. Similar trends are playing out for natural gas and coal, and a growing number of energy analysts are worried. They see these accelerating trends—what they call fossil fuels' declining energy return on investment, or EROI—as an ill portent for the global economy. The critical question for the future is whether renewable energy sources can fill the gap, sustaining the energy surplus that has supported explosive growth in human life span and population since the industrial revolution. A book due out later this year promises a hard-nosed look at solar energy—the fastest growing form of renewable energy—and is likely to raise plenty of eyebrows. Coauthored by ecologist Charles A.S. Hall and Spanish telecom and solar systems engineer Pedro A. Prieto, the book is a case study of Spain's utility-scale installations of photovoltaics. It will be, the authors claim, the first comprehensive analysis of large-scale PV based on data rather than models. Hall—a professor at the State University of New York College of Environmental Science and Forestry, in Syracuse—formalized the concept of EROI more than 40 years ago, as the energy yielded by an energy-gathering activity divided by the energy invested in that activity. Hall and Prieto say the book will demonstrate that building and operating PV requires considerably more energy than its promoters claim. And, they add, fossil fuels provide the bulk of the energy investment. "The conclusion is that solar PV systems are very much underpinned by a fossil fuel society," says Prieto.

    Europe Has Had Enough, But Can It Stand Up To Gazprom? - Gazprom has Europe’s natural gas market in a stranglehold and Europe is attempting to fight back, first with a raid last year on the Russian giant’s offices and then with a probe launched earlier this week against its allegedly illicit efforts to control the EU’s natural gas supplies. The bottom line is that the same natural gas revolution in the US, which was enabled by hydraulic fracturing (fracking), is now threatening to loosen Gazprom’s noose on the EU, and Gazprom simply won’t have it. Let’s not pretend that energy companies are clean and that governments aren’t using them to forward nefarious geopolitical objectives (US multinationals in Northern Iraq, for instance). The point is not to paint Gazprom as the ultimate evil in energy. This is about Europe, and the EU’s “Mommy Dearest” struggle with Gazprom, which is undoubtedly playing an underhanded energy-politics game worthy of the most sinister of accolades.

    China pushes wind power, but no quick payoff for producers (Reuters) - China will order its dominant electricity distributors to source up to 15 percent of their power from renewable energy including wind, but slow compliance means it may be years before the country's struggling wind power developers benefit, industry executives say. The quota system will apply to State Grid Corp of China and China Southern Power Grid Co Ltd by the end of this year, the executives say. China boasts the world's largest wind power capacity, but a third of it sits idle as renewable energy is a money-losing business for grid operators and network construction has lagged capacity expansion. As a result, China struggles to transmit electricity from generating zones in the northwest, north and northeast to population hubs in the south and east. "With the roll-out of the quota system and acceleration of grid construction, the problem of distributors holding back on wind power purchases will ease,"

    Wind could meet many times world's power demand by 2030 - In 2030, if all energy is converted to clean energy, humans will consume about eleven-and-a-half terawatts of power every year, all sources combined. If there is to be a clean-energy economy based on renewable energy, wind power will no doubt have to help meet much of that demand. In a new study, researchers at Stanford University's School of Engineering and the University of Delaware developed the most sophisticated weather model available to show that not only is there plenty of wind over land and near to shore to provide half the world's power, but there is enough to exceed total demand by several times if need be, even after accounting for reductions in wind speed caused by turbines. In their study, Jacobson and Archer adapted the three-dimensional, atmosphere-ocean-land computer model known as GATOR-GCMOM to calculate the theoretical maximum wind power potential on the planet taking into account wind reduction by turbines. Their model assumed wind turbines could be installed anywhere and everywhere, without regard to societal, environmental, climatic, or economic considerations.

    Is Biomass Syngas the Future for U.S. Refineries? - I caught an interesting report last week by John Licata, founder of Blue Phoenix Inc. via CME Group in a PDF titled “Biorefineries May be New Greenfield”. Licata starts out explaining that following three decades of refinery contraction in the U.S. (the last one built in 1976), American consumers are now feeling this lack of refinery capacity in the way of higher gasoline prices. We are down to 144 operable U.S. refineries, the fewest since 1949. He warns that because of more stringent govenment fuel requirements coming, and older refineries incapable of breaking down crude to more eco-friendly gasoline, we will continue to see pump prices head upwards. He goes on to speculate where-do-we-go-from-here. Since the golden years of refining margins seem to have disappeared, Licata expects that to meet new mandates to produce cleaner-burning fuels, refiners will be forced to add biogas “in a big way” to sustain revenue growth. The Northeast’s refinery sales and closures because of favored margins in the West Coast and MidAtlantic regions has led to a lack of distillate and gasoline production in this region. Licata thinks that opportunities for biogas development in the eastern U.S. are growing. Refiners would distill garbage, plastics and biomass such as wood chips, corn husks, wood residues, straw and switch grass into syngas which is rich with complex hydrocarbons.

    Dawson Creek and Shell elude water shortage crisis - In Dawson Creek, epicentre of one of British Columbia’s worst droughts in decades, water is saved every time a toilet is flushed. It wasn’t always that way. Until now, waste water in Dawson Creek was just that – wasted. But on Friday, Dawson Creek Mayor Mike Bernier cut the ribbon on a multimillion-dollar water treatment plant that is making sewage clean enough to sprinkle on park lawns.The plant is now helping alleviate the water shortage that has gripped Dawson Creek for months, and is also allowing Shell Canada to continue operating in a region where river levels are so low that some gas drilling projects are in jeopardy of shutting down. The treated water is being piped 50 kilometres from town to supply Shell’s booming Groundbirch natural gas venture, reducing a demand that in the past has been supplied largely by local drinking water.

    Oilsands to exceed Alberta's new pollution limits, say documents - Less than two weeks after Alberta enacted legally enforceable pollution limits for its oilsands region, industry figures already suggest they will soon be breached by emissions of two major gases causing acid rain. Regulatory documents for Shell's proposed Jackpine mine expansion say annual levels of sulphur dioxide and nitrogen dioxide will push past limits contained in the province's Lower Athabasca Regional Plan if all currently planned developments proceed. The documents, filed late last week, also provide what may be the clearest picture yet of what impact two decades of development have had on northeastern Alberta. "It validates the concern that many stakeholders have raised about the cumulative pace and scale of development," said Simon Dyer of the Pembina Institute. "It's the first real test of the [plan]."

    Louisiana: Oil Linked to BP - Tests performed on Thursday confirmed that the oil found on the Louisiana shoreline after Hurricane Isaac was in fact from the BP spill in 2010. While the oil led to the closing of some waters to commercial fishing, samples taken elsewhere in the Louisiana marsh also matched the oil from the spill, said Edward B. Overton, an environmental sciences professor at Louisiana State University. BP said that it was performing its own tests, but that the cleanup of oil was continuing.

    Utilities clamor for reactor restarts despite meeting summer demand - Electric power companies are becoming increasingly desperate to restart their nuclear plants to stay afloat, warning of rate hikes and blackouts if their reactors remain offline. But the utilities are ignoring the key question of whether nuclear energy is really needed to meet the nation’s power demand. “Unless more nuclear plants are brought back online, our balance sheet will worsen, threatening a stable power supply,” Makoto Yagi, president of Kansai Electric Power Co., told a news conference on Sept. 7. Yagi said the company will consider all possible options, suggesting a rate hike, if the shutdowns continue at nuclear plants. The utility posted a net loss of 99.5 billion yen ($1.26 billion) in the April-June period, compared with a net profit of 34.4 billion yen a year earlier.

    Potential for a Mining Boom Splits Factions in Afghanistan — If there is a road to a happy ending in Afghanistan, much of the path may run underground: in the trillion-dollar reservoir of natural resources — oil, gold, iron ore, copper, lithium and other minerals — that has brought hopes of a more self-sufficient country, if only the wealth can be wrested from blood-soaked soil. But the wealth has inspired darker dreams as well. Officials and industry experts say the potential resource boom seems increasingly imperiled by corruption, violence and intrigue, and has put the Afghan government’s vulnerabilities on display.  It all comes at what is already a critically uncertain time here, with the impending departure of NATO troops in 2014 and old regional and ethnic rivalries resurfacing, raising concerns that the mineral wealth could become the fuel for civil conflict.  Powerful regional warlords and militant leaders are jockeying to widen their turf to include areas with mineral wealth, and the Taliban have begun to make murderous incursions into territory where development is planned. In the capital, Kabul, factional maneuvering is in full swing, including disputes over lucrative side contracts awarded to relatives of President Hamid Karzai.

    How Population, Energy Supply, and the Economy Depend on Each Other - The tie between energy supply, population, and the economy goes back to the hunter-gatherer period. Hunter-gatherers managed to multiply their population at least 4-fold, and perhaps by as much as 25-fold, by using energy techniques which allowed them to expand their territory from central Africa to virtually the whole world, including the Americas and Australia. The agricultural revolution starting about 7,000 or 8,000 BCE was the next big change, multiplying the population more than 50-fold. The big breakthrough here was the domestication of grains, which allowed food to be stored for winter, and transported more easily. The next major breakthrough was the industrial revolution using coal. Even before this, there were major energy advances, particularly using peat in Netherlands and early use of coal in England. These advances allowed the world’s population to grow more than four-fold between the year 1 CE and 1820 CE. Between 1820 and the present, population has grown approximately seven-fold.Economists seem to be of the view that GDP growth gives rise to growth in energy products, and not the other way around. This is a rather strange view, in light of the long tie between energy and the economy, and in light of the apparent causal relationship. With a sufficiently narrow, short-term view, perhaps the view of economists can be supported, but over the longer run it is hard to see how this view can be maintained.

    The little green bean in big demand - Guar gum powder, made by crushing seeds of the guar crop, is used in a number of products in the food and cosmetics industries, including ice cream, breads, pastries, lipsticks and even diapers. In just one year the price of guar has surged tenfold, from about 30 rupees (about 50 U.S. cents) to around 300 rupees for each kilogram of the precious seed. Oil and gas companies in the United States have developed a massive appetite for guar gum powder -- a key ingredient in a process called fracking, which is used to extract natural and shale gas from beneath the Earth's surface. Guar gum powder has unique binding, thickening and emulsifying qualities which make it ideal for fracking, explains B.D. Agarwal, the founder and managing director of Vikas WSP, an Indian company that specializes in producing the product. So far, oil companies have not been able to find a suitable substitute, he says. Since 90% of the world's guar is grown in the desert belt of northwest India, local farmers in this poor area are enjoying the benefit of the guar rush.

    The US had 17 of 25 highest natural gas burn days this summer - It's no surprise that this summer resulted in the highest natural gas burn rate on record. Low natural gas prices allowed more substitution by power plants (gas instead of coal) and consistently high temperatures across the US (particularly in the Midwest) created the demand.  EIA: - According to Bentek Energy, estimated daily natural gas use to produce electric power (also called power burn) averaged 26.3 billion cubic feet per day (Bcf/d) so far in 2012 (Jan 1 - Aug 15), up 24% compared to the same period for 2011. Bentek Energy, which has been estimating power burn since January 2005, said that 17 of the 25 highest days of power burn since 2005 occurred this summer between June 28 and August 9. The two main drivers of the increased use of natural gas at power plants this year are weather and a structural shift toward generating more electricity from natural gas-fired power plants.  This brought the US natural gas inventories - which were unusually high due to the warm winter and high production levels - closer to normal levels for this time of the year.Here is the breakdown of where in the US the burn rate was the highest. Not surprisingly it roughly follows the drought pattern (the map shows usage relative to historical patterns).

    Hot Air About ‘Cheap’ Natural Gas - Would you build a buy-and-hold financial portfolio from only junk bonds and no Treasuries by considering only price, not also risk? Not for long. Yet those who say cheap natural gas is killing alternatives—solar, wind, nuclear—make the same error. In truth, they’re doing the math wrong: The gas isn’t really that cheap. “Cheap gas” reflects only the bare spot price of the commodity without adding the value of its price volatility. Yet such competitors as efficiency and renewables have no fuel and hence no fuel-price volatility: Once built, they’re as financially riskless as Treasuries. Of course, much gas is sold not at spot but on long-term contract, especially to its biggest user—electricity generators. But for other players, it’s vital not to become the patsy in the poker game: basic financial economics says asset comparisons must value and equalize risk. One way is to compare fuel-free competing technologies with constant-price gas. A broker will take the price-volatility risk for a fee based on the market’s risk valuation, discoverable from the “straddle”—the sum of the prices of simultaneously sold put and call options. A year ago, when the cheap-gas mania was taking hold, gas-price volatility five years out was worth more than recent spot gas prices. Even today, with lower price and volatility (whose value automatically falls with price), gas’s price volatility alone, over a time horizon appropriate for comparison with durable assets, is worth roughly what gas now sells for. Omitting price volatility thus understates gas’s true cost (excluding its fixed delivery costs) by about twofold—a very material error.

    Are Lower Gasoline Prices Worth More Pollution? - Apparently Paul Ryan1 thinks so: "This is not just something that squeezes family budgets, it squeezes businesses," Ryan answered. "It also gives us a bad foreign policy in that we are so dependent on other countries for our oil imports, it's the biggest part of our trade deficit and so what's frustrating about the Obama administration's policies are they've gone to great lengths to make oil and gas more expensive." ... The House Budget Chairman told the questioner not to "forget" that President Obama "tried to grant, jam through congress, a national energy tax designed to make energy more expensive." "Don't forget the fact that he has tried lots of things to try and prevent drilling for natural gas and oil on public lands," Ryan said. "Lets not forget the fact that the regulations coming out of the EPA are making it harder for us to harness home grown American energy." A national energy tax is another term for cap-and-trade legislation that is usually used by opponents of the measure. Supporters say the legislation forces companies that pollute to pay, but opponents like Ryan say it is simply another tax on businesses and makes energy pricier for the average American. Given that Romney economic advisor Greg Mankiw has often called for a Pigou Club tax on carbon emissions, I’m wondering if he will comment on this Ryan spin?

    International Drilling Trade Group Calls Romney’s plan to turn over federal lands to states ‘Populist raw meat’ - Mitt Romney’s energy plan is devoted almost exclusively to increasing consumption of fossil fuels — completely ignoring dire warnings from scientists and energy experts that the “door is closing” on our ability to avoid irreversible, catastrophic climate change. Along with the environmental limitations of continuing our reliance on carbon-based resources, the Romney energy plan falsely claims the U.S. can become energy independent and lower prices simply through increased production of fossil fuels, mostly oil — an impossible goal in a global market. And now, one of Romney’s big selling points from his energy plan — turning over federal lands to the states for fossil fuel production — is being challenged by an international trade group of drillers as unfeasible and possibly bad for business. Here’s what E&E News’ Greenwire reported on the industry group’s reaction: The International Association of Drilling Contractors, which includes rig owners and oil field service companies, said Romney’s plan is politically improbable and would be opposed by many operators concerned about the potential for a hodgepodge of state regulations. “You might find yourself — the operators — tearing their hair out,” said Brian Petty, the group’s executive vice president of government affairs, based in Washington, D.C. “I think it’s a little bit of populist raw meat thrown out.”

    How Drilling Could Threaten Our National Parks - America’s national parks are undoubtedly some of our “best ideas.” They are unique places across our country where public lands are preserved for their natural, cultural, or historic value, as well as for the unique contributions they provide to local and regional economies and our national economic strength. This is why we have set aside national parks, national seashores, national memorials, and other places managed by the National Park Service for future generations.Even though we have protected these national park units to allow them to achieve their full environmental, cultural, historical, and economic potential, threats to their preservation do arise. One of those threats today is the potential for future oil and gas development within national parks. We requested data from the National Park Service, which identified 42 park units where non-federal oil and gas drilling is or could be occurring in the future. Of these, 12 units currently have oil and gas operations within them, while 30 units may be threatened in the future with drilling. (see map above).

    Shell opens new oil frontier in Arctic with Chukchi Sea drilling-- A potential new energy frontier opened early Sunday in the U.S. Arctic, as Royal Dutch Shell plumbed a drill bit into the bed of the Chukchi Sea, 70 miles off the coast of northwest Alaska. The oil company that has spent six years and $4.5 billion trying to launch America’s first offshore oil production in the Arctic announced that its Noble Discoverer had anchored northwest of Alaska’s North Slope and begun drilling the “top hole” of an exploration well. The work was the first step toward drilling a pilot hole that will go about 1,300 feet deep. The company will not be allowed to plumb deeper into actual hydrocarbon deposits until its oil spill containment barge is completed and on site, a step that could come within the next few weeks, or perhaps not until next year. But Shell officials said that even the preliminary well preparation will put the project on a good course for completion during the 2013 drilling season. The work that began in the Arctic dawn is the first exploratory drilling in the Arctic since the early 1990s — when far less regulatory scrutiny was placed on the delicate ecosystem of the Far North. The project marks an important milestone for Alaska, where oil production has been declining steadily from the aging oil fields of Prudhoe Bay and Kuparuk on the North Slope. “This is a big deal. I think it really opens up a new chapter in the oil and gas story in Alaska, and it’s coming at a time when, let’s be honest with ourselves, people are really concerned about the health of the Trans-Alaska [oil] pipeline,”

    Ship Magnate Uses Gut in $11 Billion Bet Worst Since ’70s Ending - The flow of much of the world’s oil is controlled from a small suite of offices perched over a Tiffany & Co. store in the Chelsea section of London. That’s where John Fredriksen, a Norwegian shipping magnate worth $13.2 billion, manages the world’s largest fleet of supertankers, the most valuable deep-water drilling company and an armada of about 128 other vessels that carry minerals, grains and liquefied gases.  Every morning, he plows through a stack of reports on the operations of his maritime empire. Whenever he makes a bet-the- company move, which he does every few years, Fredriksen sets the data aside. “I still work on a gut feeling,” he says. As he navigates the worst shipping market since the 1970s, Fredriksen’s instincts are telling him to buy, Bloomberg Markets magazine reports in its October special issue on the 50 Most Influential people in global finance. He’s investing $7 billion in 18 rigs to pump oil from beneath the ocean floor and $4 billion in about four dozen new vessels to transport liquefied natural gas, gasoline, propane and other fuels. While Fredriksen loves tankers he’s now trying to increase his dominance over the global circulation of liquid energy in most of its forms.

    US watchdog: Records for $475M in Afghanistan fuel purchases vanish -- Investigators are probing reports of record-shredding by officials in the U.S.-led NATO command that trains the Afghan army after learning that records of fuel purchases for the Afghans totaling nearly $475 million are gone. The training command has also not been tracking whether the fuel it delivers to the Afghan army is actually used or stored, leaving officials unable to determine whether any of it was stolen, said an interim report by the Special Inspector General for Afghan Reconstruction, or SIGAR. John Sopko, appointed recently by President Barack Obama to the special inspector general's job, told Defense Secretary Leon Panetta in a letter on Monday that SIGAR was investigating the reported shredding by officials of the Combined Security Transition Command-Afghanistan, or CSTC-A.

    Five Ways Charles Koch Benefits From Practices He Criticizes In Absurd Wall Street Journal Op-Ed  - In today’s Wall Street Journal, Charles Koch laments “crony capitalism,” complaining about “partisan rhetoric,” corporations’ eagerness “to lobby for maintaining and increasing subsidies,” and rewards for “politically connected friends.” Hilariously, he is not writing about himself or his brother David. Drawing on just a small portion of their net worth, the Koch brothers bankroll a network of Tea Party groups and Republican political war chests. In return, they receive continued subsidies, government contracts, and pro-polluter policies that benefit their interests. So while David Koch hypocritically complains about “crony capitalism,” here are five ways his company, Koch Industries, is benefiting from policies it has specifically campaigned, donated, and lobbied for:

      • 1. Billions of dollars in oil subsidies:
      • 2. Koch Industries has had at least $85 million in federal government contracts:
      • 3. They’ve asked for bailouts: A Koch refinery located in Alaska, Flint Hills Refinery, repeatedly asked former Alaska Gov. Sarah Palin for a bailout. Sen. Lisa Murkowski also asked for reduced royalties on the company’s behalf, arguing it plays a “vital” part in the economy.
      • 4. After launching a campaign on behalf of the Keystone XL pipeline, they stand to benefit from taxpayer subsidies: Price of Oil calculates that refineries for the Keystone XL pipeline would receive over $1 billion in tax breaks for tar sands equipment.

    U.S. Crude Oil Production to Rise 74% by 2022: Latest Bentek Energy Forecast : Crude oil production in the United States is projected to grow by 74%, or more than 4.9 million barrels per day (MMb/d), during the next 10 years to an average of 11.6 MMb/d by 2022, according to Bentek Energy®, the energy data analytics unit of Platts, a leading global energy, petrochemicals and metals information provider. "Not only will the projected record growth in oil production affect North America, it will have dramatic implications for global crude oil markets," said Jodi Quinnell, Bentek oil analysis manager. "We foresee a massive displacement of traditional waterborne oil imports to the United States by 2022, taking them from 45% of U.S. total crude supply to no more than five percent." In the North American Perspective section of its Crude Awakening: Shale Boom Hits Oil ( special report, a series of regional and global long-term forecasts and analysis, Bentek says U.S. waterborne imports will likely plummet to less than one MMb/d by 2022, compared to 6.7 MMb/d in 2011. The section features Bentek's latest 10-year crude oil supply and demand forecasts for the U.S. and Canada, including projections for regional production, overseas imports, regional flows and refining demand. There is also an examination of crude oil transportation constraints. "As could be expected with such a forecast, we also see North American crude oil prices declining versus their global counterparts,"

    Geopolitical unrest and key oil producers - Yesterday a mob stormed the U.S. Consulate in Benghazi, Libya, killing the U.S. ambassador to Libya and three other Americans. Among other implications, this raises the possibility that the stability that seemed to have returned to that country may be short-lived. As of May, the EIA estimates that the world was producing 75.3 million barrels a day of crude oil (not including natural gas liquids, biofuels, or refinery processing gain). That's up a million barrels a day from where it had been last October.  The U.S. embassy in Algeria today issued warnings to Americans there. Last Friday, Canada closed its embassy in Tehran, Iran. In other news, while some have speculated that Venezuela's leader Huge Chavez may be terminally ill, on Monday he warned of a possible civil war if his policies are opposed. In Nigeria, Islamist groups are conducting open warfare on churches and police stations. In Iraq, 75 people were killed and 300 wounded in a wave of attacks on Sunday, and the fugitive vice president was sentenced to death by hanging. Below I provide data on the importance of the countries just mentioned for world oil production. The table leaves out Egypt, which by itself only produces a little over a half million barrels a day, though another 2 mb/d travel through the Suez Canal and SUMED pipeline.

    Libya: Doomed From Day One - People often ask me why the West doesn’t attempt a Libya-style intervention in Syria. After all, things are going so well in Libya. Oil production is up. But oil production is merely a mirage, as is security in Libya, which was doomed from the day one PG (post-Gaddafi) because of the way it was “liberated”.  On Wednesday, US envoy to Libya Christopher Stevens was killed along with three other American diplomats in a rocket attack on the US consulate in Benghazi.  Security was already dubious at best, and now international oil companies will be more reluctant than ever. Those that are already there—Germany’s Wintershall AG, Italy’s Eni and France’s Total—will be seeking to beef up security and have already started sending some of their workers home. If the picture was not clear from the onset of the post-Gaddafi atmosphere, it certainly came into focus earlier this summer when protests over parliamentary elections forced the temporary closure of the el-Sider oil terminal, the country’s biggest.    Anyone who thinks that Libya will be a secure oil frontier after the formation of a new government next summer is mistaken. The road to destruction runs from Afghanistan to Benghazi (incidentally, the oil-producing region), branching off to southern Iraq and Pakistan’s tribal regions.

    South Sudan Shakes Up Oil Sector -South Sudan Friday issued the biggest revision of its oil-exploration rights yet, seizing a giant license area long held by Total and slicing it into three as the newly independent nation attempts to hasten crude production and secure much-needed revenue. The move is South Sudan's latest attempt to remove itself from oil deals signed before its secession from Sudan. It comes amid renewed tensions with its northern neighbor over who should control the oil-rich regions that straddle their border. South Sudan said its decision was prompted in part by Total's failure to expedite exploration in the block, which it received more than 30 years ago. International tenders for two parts of the roughly 74,000-square-mile block, located in South Sudan's restive Jonglei state, are expected to be issued in the next few days as the country seeks to attract more investors to its oil sector, said Information Minister Barnaba Benjamin. Total will keep one of the three sections.

    Iran oil exports up, IEA says -- The International Energy Agency said crude oil imports from Iran have increased slightly despite Western sanctions imposed on the country. The IEA in its monthly market report stated that crude oil imports from Iran increased slightly in August to 1.1 million barrels per day, up from less than 1 million bpd mark in July. Press TV, Iran's state-funded broadcaster, outlines of list of countries that have increased crude oil imports from Iran. Among those listed, Turkey led the way with an August increase of 50,000 barrels to 200,000 bpd of Iranian crude. The U.S. and European governments targeted the Iranian energy sector with sanctions out of concern revenue generated from oil could help fund a nuclear weapons program. Tehran says the program is for peaceful purposes. Tehran this week announced that that private companies delivered oil to the foreign market for the first time Sunday. An agreement with unspecified entities allows private companies to export about 20 percent of the country's total oil deliveries designated for the international market.

    August Oil Supply Numbers - The IEA and OPEC have released their numbers for oil supply in August (well "total liquid fuels" anyway).  The above shows all available data from the three main public agencies supplying estimates of this.  Basically nothing exciting at all happened: oil supply continues to look completely flat throughout 2012.  Prices rebounded a bit though. In a (probably lame) effort to break the tedium I am bringing back this graph of total production versus price (in this case Brent spot prices): And it is slightly interesting, no?  We seem to get into these periods in which supply is somewhat constrained and we have a very flat response of production to price.  A few years later the same thing happens again but in the mean time a little more liquid fuel capacity has been squeezed from the planet and now the curve has moved up a bit.  In 2012 it's a little higher again than it was in 2010-2011 (around the time of the Arab Spring/Libya related price movements).  Still, prices remain very high - no sign of going back to the pre 2004 prices any time soon (absent another major financial crisis, at any rate).

    OPEC Oil Output Climbs to 31.54 Million Barrels per Day - Crude oil output from the Organization of Petroleum Exporting Countries (OPEC) climbed by 90,000 barrels per day (b/d) in August to 31.54 million b/d as increases from Angola, Iraq, Nigeria and the United Arab Emirates (UAE) outstripped decreases from Algeria and Iran, a Platts survey of OPEC and oil industry officials and analysts showed Tuesday. This follows July production of 31.45 million b/d and leaves OPEC overproducing its 30 million b/d ceiling by 1.54 million b/d. "It's been an impressive performance. And when you put this month's number up against OPEC's own prediction that it is going to need to produce about 30.5 million b/d in the fourth quarter, which is always the heaviest demand period of the year, it should ease fears of tight crude supplies." Iranian output fell by 150,000 b/d to 2.75 million b/d from 2.9 million b/d as U.S. and European sanctions targeting Tehran's oil revenues continued to bite, according to the survey. Algerian volumes were estimated to have dipped by 10,000 b/d to 1.21 million b/d. Angola accounted for 100,000 b/d of the 250,000 b/d of increases, boosting output to 1.75 million b/d from 1.65 million b/d in July. The increase was supported by higher exports of several grades of oil, including Kizomba, which was part of the export stream for the first time after its production began in July. Other smaller increases came from Iraq, Nigeria and the UAE. OPEC kingpin Saudi Arabia maintained output at 10 million b/d. Its Gulf neighbors Kuwait and Qatar also kept output steady.

    Saudi Arabia May Become Oil Importer by 2030, Citigroup Says - Saudi Arabia, the world’s biggest crude exporter, risks becoming an oil importer in the next 20 years, according to Citigroup Inc. Oil and its derivatives are used for about half of the kingdom’s electricity production, which at peak rates is growing at about 8 percent a year, the bank said today in a an e-mailed report. A quarter of the country’s fuel production is used domestically, more per capita than other industrialized nations, as the cost is subsidized, according to the note. “If Saudi Arabian oil consumption grows in line with peak power demand, the country could be a net oil importer by 2030,” Heidy Rehman, an analyst at the bank, wrote. The country already consumes all its natural-gas production and plans to develop nuclear power, which pose execution risk amid a lack of available experts, safety issues and cost overruns, Rehman said. Saudi Arabia, which depends on oil for 86 percent of its annual revenue, is accelerating exploration for gas and is planning to develop solar and nuclear power to preserve more of its valuable crude for export. The kingdom has refused to import gas, unlike neighboring producers such as Kuwait, and the United Arab Emirates that also lack fuel for power generation.

    China's August oil demand dips - Reuters reports that calculations based on government data showed that China's implied oil demand, the world's second largest oil user, fell to its lowest since October 2010. China consumed roughly 8.92 million barrels of oil per day, 0.8% lower than a year earlier and 3.7% below the July rate, according to figures. Implied demand is calculated by adding national crude oil throughput and net imports of refined oil products, ignoring stocks changes, which are rarely disclosed by the government. The International Energy Agency revised down the growth of Chinese demand to 240,000 bpd for 2012 in its August report, lower than its previous estimate of 363,000 bpd. Latest forecasts would suggest China will make up less than a third of incremental global demand this year.

    Construction and Real Estate Hinder China’s Growth - With more than 100 tall cranes on the skyline, this metropolis in western China looks vibrant at first glance despite the country’s sharp economic slowdown. But only a few cranes — those building national government projects like a high-speed rail line — are floodlit and busy far into the night. The more numerous cranes looming above the skeletons of future high-rises move much less often, even by day, and are dark and deserted by night. The pattern among Chengdu’s construction cranes is evident across the country. As summer fades into autumn, Beijing is stepping up investment in a bid to rescue the economy, but consumers, businesses and debt-burdened local governments in China are showing little interest in spending money again. Economic data released on Sunday by the National Bureau of Statistics showed the extent of the problems. Investment in new buildings and other fixed assets is in the doldrums. Manufacturers are retreating from ambitious production goals as they struggle with bloated inventories of unsold goods. Even the service sector, still underdeveloped and widely seen by economists as full of potential, is showing signs of distress.

    Sock City’s decline may reveal an unravelling in China’s economy - Thanks to Xu and hundreds more like him, "Sock City" – north-west of Tie Town, east of Sweater Town – epitomised China's economic success story. The obscure settlement in eastern Zhejiang province became an export-driven boomtown, producing as much as a third of the world's sock supply and thriving even through the financial crisis in 2008 and the subsequent global recession. Last year, Datang made roughly two pairs of socks for every person on earth. Long and short, Argyle or polka-dotted, they cram the stores of the nearby wholesale market. In Xu's spacious new factory, the shelves are stacked with huge reels of red, blue and orange thread. But ask Xu about the future and he grimaces. "I'm very worried. This year is much worse than 2008-9," he says. The biggest of his rivals to have gone under in May – the Anli Sock Group, which produced 60m pairs of socks annually – could prove to be "the Lehman Brothers of Datang", according to Fan Jianping, chief economist of the State Information Centre. Failures such as Anli's and a slew of disappointing data in recent weeks are raising fears far beyond China that a slowdown in the world's second largest economy is turning into a hard landing. In the face of Europe's woes and the weak US recovery, Chinese growth has become more important than ever: the ripples are already being felt globally, with commodities analysts blaming tumbling prices on falling demand from China.

    China’s imports shrink in sign downturn worsening - China’s imports shrank unexpectedly in August in a sign its economic slump is worsening and the Chinese president warned growth could slow further, prompting expectations of possible new stimulus spending. Imports declined 2.6 per cent from a year earlier, below analysts’ expectations of growth in low single digits, data showed Monday. That came on top of August’s decline in factory output to a three-year low and other signs growth is still decelerating despite repeated stimulus efforts. The weakness in China’s demand for imports is bad news for exporters in Southeast Asia, Australia, Brazil and elsewhere that are counting on its appetite for oil, iron ore, industrial components and other goods to offset anemic Western markets. Analysts expect Chinese growth that fell to a three-year low of 7.6 per cent in the latest quarter to rebound late this year or in early 2013. But they say it likely will be too weak to drive a global recovery without improvement in the United States, which is struggling with a sluggish recovery, and debt-crippled Europe.

    China’s Trade Surplus - The August numbers are in. From MarketWatchChina posted a wider-than-expected trade surplus in August as imports unexpectedly contracted from the year-ago period, suggesting anemic domestic demand, according to data released Monday.  Exports exceeded imports by $26.7 billion during the month, beating expectations for a $17.2 billion surplus in a Dow Jones Newswires survey of economists.  Monthly exports rose 2.7% from a year earlier, indicating relatively weak overseas demand, with the gain missing a 3% projection from a Reuters poll of economists.  But imports surprised by dropping 2.6% from August 2011, failing expectations for a 3.4% increase from the Dow Jones Newswires survey and a 3.5% forecast gain in the Reuters survey.  The evolution of the trade balance and the Chinese real exchange rate is shown in Figure 1. Note that as the exchange rate appreciates, quantities adjust – at least in the most recent episode. This is more apparent when trade balance is normalized by GDP, as in Figure 2.

    China Economic Watch | Urbanization and Economic Growth…It’s an article of faith amongst many analysts that China’s rapid urbanization will inevitably suck up any excess housing supply and boost consumption as new urbanites enter the middle class. For example, a new research report by the Reserve Bank of Australia begins with the following assertion: In 2011, 1.9 billion square meters of residential floor space was built in China. This volume is more floor space than the entire residential building stock in Australia. The scale of construction is necessary, in part, to house the 20 million annual increase in the urban population. Stephen Roach has a similar analysisIn 2011, the urban share of the Chinese population surpassed 50% for the first time, reaching 51.3%, compared to less than 20% in 1980. Moreover, according to OECD projections, China’s already burgeoning urban population should expand by more than 300 million by 2030 – an increment almost equal to the current population of the United States. With rural-to-urban migration averaging 15 to 20 million people per year, today’s so-called ghost cities quickly become tomorrow’s thriving metropolitan areas. China cannot afford to wait to build its new cities. Instead, investment and construction must be aligned with the future influx of urban dwellers. The “ghost city” critique misses this point entirely. According to this line of argument, the 20 million or so people joining the ranks of urban dwellers per year are a “floor” for housing demand.

    You only get the broad picture - We’ll start by quoting Stephen Green of Standard Chartered on the (possibly) unicorn-like big China stimulus: We know economists are paid to come up with meaningful numbers, but we just do not see how one can do so with China‟s current infrastructure policies, given the lack of any information being released. So the strategists look at other things and are particularly fond of bank loan data, as this is the main transmission mechanism for China’s fiscal stimulus. New PBoC data out today for August showed net new Rmb lending was much higher than July’s figure, and way above expectations — at Rmb703.9bn versus the median estimate of Rmb600bn. This is a reason to think stimulus is going through, says Nomura’s Zhiwei Zhang: While this does look better at least compared to July, the August loan data release from the PBoC doesn’t seem to have included the usual breakdown into terms [update -- they did -- see below]. We can see from this chart from Bernstein Research — via BeyondBrics – that short-term loans and bill financing have made up the bulk of recent new loan activity:

    Hu Jintao pledges boost for world economy despite China slowdown - President Hu Jintao yesterday warned of a further slowdown in the Chinese economy and pledged to boost domestic demand to help counter the obstacles hindering a global recovery. "Economic growth is facing notable downward pressure," Hu said at the Apec summit in Vladivostok. "Some small and medium-sized companies are having a hard time and exporters are facing more difficulties. "We have an arduous task of creating jobs for new entrants to the labour force." China is boosting spending on infrastructure, including 800 billion yuan (HK$979 billion) in new subway and rail projects, as economic growth slows. The economy expanded 7.6 per cent from a year earlier in the second quarter, the slowest pace in three years. Exports rose 7.8 per cent in the first seven months of the year, compared to a 23.4 per cent rise in the same period last year.  Hu said China's economy was characterised by a "lack of balance, co-ordination and sustainability" and that it would promote "inclusive growth to improve people's lives". "We will boost domestic demand and maintain steady and robust growth as well as basic price stability," he said.

    China hints at stimulus, but not too much — While Chinese Premier Wen Jiabao used a speech Tuesday to promise on-track growth and hint at fresh stimulus, several analysts say the remarks don’t necessarily imply massive moves to support the economy. Wen told the World Economic Forum’s meeting in the Chinese port of Tianjin that the nation will meet its official target for 7.5% growth for 2012 gross domestic product. That 7.5% target is in line with China’s long-term average growth forecast, set out in the latest five-year plan for the economy. Wen acknowledged in his speech that the Chinese economy is facing significant pressure but said that “[with] our efforts to shift our economic model, better allocate resources and implement more reform and opening up, we have the ability to keep the economy in good shape.”

    Shadow Bankers Vanished Leaving China Victims Seeing Scams  - China’s slowest economic growth in three years and a slumping property market, where many so-called shadow-banking investments are parked, are squeezing millions of Chinese who have invested the money of friends and acquaintances chasing higher yields to honor those payments. The slowdown also is putting pressure on the government to rein in private lending to avoid a spate of defaults that could increase the number of victims and lead to social unrest.  The shadow bankers are now disappearing, committing suicide or reneging on agreements, leaving thousands of victims in their wake. In the first half of the year, more than 58,000 lawsuits involving disputes over 28.4 billion yuan in private lending were filed in Zhejiang province, where Wenzhou is located, up 27 percent from the same period in 2011 and the most in five years, according to the provincial supreme court. One-fifth of the cases were in Wenzhou, where authorities have set up a special court to handle the surge. Private-lending victims nationwide filed more than 600,000 lawsuits valued at 110 billion yuan in 2011, an increase of 38 percent from the previous year. In the first half of 2012, the number of filings rose 25 percent to 376,000, according to People’s Court, a newspaper run by China’s Supreme Court.

    Is China’s productivity miracle over? - Below is a facinating presentation by UBS’ George Magnus, which examines whether the Asian Miracle is coming to an end. Magnus’ sections on China are particularly pertinent for Australia. First, Magnus discusses China’s falling rates of productivity:In China, the higher contribution of TFP to economic growth in the 2000s shows up clearly in Chart 4. Roughly half of China’s TFP growth has come from the transfer of labour from the rural sector to higher value-added, urban-based, jobs, mostly in industrial manufacturing for export.But in Chart 5, the sequential changes in growth contributions stand out more clearly. The labour contribution is just about drying up, while the investment and TFP contributions are clearly sliding. The slowdown in TFP growth, along with investment, testifies to the need for reforms to raise the growth and levels of efficiency, and as explained later, to change the contributions and functions of the State vis-a-vis the private sector – probably one of China’s biggest structural challenges in the next decade. For China and Asia generally, higher sustainable economic growth, based around greater efficiency and innovation, depends on political and institutional reforms. Without these, we believe the miracle could fade and slower long-term growth will result – not a cheery prospect, given high expectations.

    Pettis: China headed for 3-4% growth -  For many years, China bulls have made ecstatic and at times outlandish claims about the success and sustainability of the Chinese growth model, publishing excited books proclaiming and describing the new China Century. It seemed to me however that these claims often defied both historical precedent and common sense. This isn’t the first time, of course, that we have seen this. In the past 100 years we have had our sense of excitement stimulated by the unstoppable rise to global economic dominance of the United States in the 1920s, Germany in the 1930s, the USSR in the 1960s, the OPEC Arabs in the 1970s, Japan in the 1980s, and China ad perhaps even Europe until very recently, and I have little doubt that at some point within my lifetime the Indian Century too will be proclaimed. We know two things about these processes. First, it is always a lot more complicated than we ever expect it to be. Even the one prediction on my list that turned out to be correct – that of the rise to global dominance of the US – occurred over a much longer period than was recognized (by most measures the US was already the leading economic power by the 1870s), and turned out not to be nearly as smooth as expected. It took a horrible decade of steep economic decline in the 1930s and a devastating war that pretty much wiped out its competitors to create the US Century.

    Bears at the heart of the dragon - China’s official statistics are clear: There has been a steady slowdown in the Chinese economy with GDP growth dropping from an annual increase of more than 12 per cent in early 2010 to a 7.6 per cent expansion in the second quarter this year. Judging by the ongoing sluggishness in China’s trade, manufacturing, investment and consumption, that growth rate is likely to drop further in the coming months and what is now the world’s second-largest economy is likely to expand at its slowest annual pace this year since 1999. In contrast to the optimism of many international attendees in Tianjin this is what one highly respected Chinese economist told the FT: “I believe China is going to experience a very serious economic downturn and I think it has already started. The government is trying now to stabilize the economy but the instruments they have are very limited. If it can’t turn things around then I expect huge and widespread social unrest.” The striking views of this economist, who asked not to be named because he did not want to offend his superiors in the Communist party, are surprisingly common among Chinese academics and officials who just a couple of years ago were still very bullish on the country’s prospects. From the vantage point of crisis-hit Europe or from an America still flirting with recession this must seem like a very strange assessment for the omnipotent engineers of the Chinese economic miracle to make.

    China’s Solyndra Economy - On Aug. 3, the owner of Chengxing Solar Company leapt from the sixth floor of his office building in Jinhua, China. Li Fei killed himself after his company was unable to repay a $3 million bank loan it had guaranteed for another Chinese solar company that defaulted. One local financial newspaper called Li’s suicide “a sign of the imminent collapse facing the Chinese photovoltaic industry” due to overcapacity and mounting debts. President Barack Obama has held up China’s investments in green energy and high-speed rail as examples of the kind of state-led industrial policy that America should be emulating. The real lesson is precisely the opposite. State subsidies have spawned dozens of Chinese Solyndras that are now on the verge of collapse. Unveiled in 2010, Beijing’s 12th Five-Year Plan identified solar and wind power and electric automobiles as “strategic emerging industries” that would receive substantial state support. Investors piled into the favored sectors, confident the government’s backing would guarantee success. Barely two years later, all three industries are in dire straits. This summer, the NYSE-listed LDK Solar, the world’s second largest polysilicon solar wafer producer, defaulted on $95 million owed to over 20 suppliers. The company lost $589 million in the fourth quarter of 2011 and another $185 million in the first quarter of 2012, and has shed nearly 10,000 jobs. The government in LDK’s home province of Jiangxi scrambled to pledge $315 million in public bailout funds, terrified that any further defaults could pull down hundreds of local companies.

    China President-to-be Xi Jinping goes missing - Speculation intensified on Monday over the whereabouts of China’s presumptive new president, Xi Jinping, who has been missing from public view in recent days as the country prepares for a crucial leadership change. “There’s every sort of crazy rumor about Xi’s health,” said a senior Chinese journalist, who asked not to be identified because of sensitivity surrounding the case. “But no one is saying anything.”The speculation adds another wrinkle to the less-than-smooth transition from the departing president, Hu Jintao, to Xi. Earlier this year, a senior Communist leader, Bo Xilai, vanished from view after his wife was charged with murdering a British businessman. Then, earlier this month, another senior official was unexpectedly demoted after a scandal surrounding his son.And no date has been set for the 18th Party Congress, when the transition is supposed to take place. The consensus is that it will happen next month, but no announcement has been made. The last congress was also held in October, but its dates had been made public in August

    Chinese Leader’s Absence Stokes Rumor Mills - Over the past week, the new leader, Xi Jinping, has missed at least three scheduled meetings with foreign dignitaries, including Secretary of State Hillary Rodham Clinton last Wednesday and the prime minister of Denmark on Monday. So far officials have declined to provide an explanation for his absences. That set off furious speculation on the Internet that the 59-year-old Mr. Xi’s health, either physical or political, has taken a turn for the worse. Some diplomats say they have heard that Mr. Xi suffered a pulled muscle while swimming or playing soccer. One media report, since retracted, had it that Mr. Xi was hurt in an auto accident when a military official tried to injure or kill him in a revenge plot. A well-connected political analyst in Beijing said in an interview that Mr. Xi might have had a mild heart attack. Whatever the actual reason, Mr. Xi’s unexplained absences are conspicuous on the eve of what is supposed to be China’s once-in-a-decade transfer of power.

    Rumours swirl as China’s Xi vanishes - Where is Xi Jinping? The man anointed to run the world’s most populous nation and second-largest economy has disappeared from public view just weeks before his expected elevation to lead the Chinese Communist Party. An official account did not list him among the attendees at an unscheduled meeting held last Friday by the party’s powerful central military commission, of which Mr Xi is vice-chairman. Late last week the foreign ministry invited overseas media to cover a meeting between Mr Xi and Danish prime minister Helle Thorning-Schmidt scheduled for Monday afternoon. But on Monday the ministry denied that the meeting was ever supposed to take place.Mr Xi’s mysterious disappearance has sparked speculation about his whereabouts and renewed political infighting just months after the purge of senior Chinese leader Bo Xilai shook the ruling party. It also underscores the opacity and lack of a strong institutionalised mechanism for transferring power in China’s authoritarian one-party political system. “We know Xi Jinping is supposed to be the next leader [of China] but we have very little idea how he was chosen, which is quite amazing for such a significant position in world politics,” said David Zweig, a professor specialising in Chinese politics at Hong Kong University of Science and Technology. “Perhaps he’s got some health problems, but they don’t want to let the public know about it because they feel it’s important to present the image of a strong healthy leader taking China into the future.”

    China's next leader Xi Jinping 'suffered heart attack'  -- Xi Jinping is expected to be unveiled as the leader of the Communist party in the coming weeks, but his disappearance from the public eye has sparked increasing speculation. "Although people have said he suffered a back injury, he actually had a heart attack, a myocardial infarction," said Li Weidong, a political commentator in Beijing and the former editor of China Reform. The magazine is influential among Chinese policymakers and under the aegis of the National Development and Reform Commission. Other unnamed sources have also suggested that Mr Xi, 59, suffered a heart attack, while Willy Lam, the former editor of the South China Morning Post, believes China's president-in-waiting had a stroke and is currently unable to show his face in public.

    China sends ships in islands row - Two Chinese patrol ships have been sent to islands disputed with Japan, which has sealed a deal to purchase the territory, Chinese state media say. The ships had reached waters near the islands - known as Senkaku in Japan and Diaoyu in China - to "assert the country's sovereignty", Xinhua said. Japan confirmed on Tuesday it had signed a contract to buy three of the islands from their private owner. Tension has been rumbling between the two countries over the East China Sea. Japan controls the uninhabited but resource-rich islands, which are also claimed by Taiwan. Some had been in the hands of a private Japanese owner but the government says it has now signed a purchase contract. 

    Japan Halves Growth Estimate for Past Quarter to Annual 0.7% - Japan’s economy expanded in the second quarter at half the pace the government initially estimated, underscoring the risk of a contraction as Europe’s debt crisis caps exports. Gross domestic product grew an annualized 0.7 percent in the three months through June, the Cabinet Office said in Tokyo today, less than a preliminary calculation of 1.4 percent. The median forecast of 26 economists surveyed by Bloomberg News was for a revised 1 percent gain. In nominal terms, the economy shrank 1 percent. Gridlock in parliament may limit fiscal stimulus just as Japan’s expansion is restrained by weakness in global demand, strength in the yen, and the winding down of car-purchase subsidies. A slowdown in Asia may further curtail exports and add to pressure for monetary easing after Chinese data yesterday suggested the region’s biggest economy is losing steam. “The economy has been losing momentum this quarter, with exports likely to decrease while consumption and capital spending are deteriorating,” “The chance that the Japanese economy will slip into a contraction in the third quarter is increasing.”

    Japan Q2 GDP revised down, builds case for stimulus - In a sign of slackening foreign demand for Japanese goods caused by the euro zone debt crisis and China's slowdown, the July current account surplus came 40.6 percent below year-ago levels, reflecting a drop in exports. However, due to a slower rise in imports, the fall in the surplus to 625.4 billion yen ($8 billion) was less pronounced than the forecast 56.8 percent drop to 455.0 billion. Should the economy require more fiscal stimulus, the policy response could be delayed as policy making has ground to a halt due to a stand-off between the ruling and opposition parties.

    Japan Signals Yen Intervention Now On Table - Japan's finance minister strongly hinted Friday that market intervention to tackle the strong yen may be imminent and urged the Bank of Japan to act at the right time, as the currency's strength increasingly threatens to worsen the country's economic slowdown. Finance Minister Jun Azumi's intensifying efforts to talk down the yen come after the dollar hit a fresh seven-month low of Y77.13 in New York overnight, putting additional stress on Japan's struggling manufacturers. The U.S. Federal Reserve's announcement Thursday of a major new round of monetary easing to juice U.S. growth dealt a blow to the greenback. Mr. Azumi said he understood the Fed's "commitment to revitalizing growth," and noted that a U.S. economic rebound would be "desirable for the world economy." But he characterized the yen's recent climb as "one-sided," and "clearly" out of line with Japan's economic situation. "This sort of movement is something I can't overlook," Mr. Azumi said. "I will not rule out any measures and I will take decisive steps when it is deemed necessary. This is the stance I will continue to maintain."

    Japan Warns on Strong Yen as Growth Outlook Downgraded: Economy -- Japan lowered the assessment for its economy, the first consecutive downgrade since the waning of the global credit crunch in 2009, fueling concern the world’s third-largest economy will contract this quarter. Japan’s “recovery appears to be pausing due to deceleration of the world economy,” the Cabinet Office said in a monthly report released in Tokyo today. “Private consumption is almost flat,” while industrial production and exports are weakening, it said. With the nation’s rebound from last year’s tsunami-induced contraction waning, Finance Minister Jun Azumi today signaled Japan is prepared to counter gains in the yen that would further curtail exports, and is open to fiscal stimulus. The downgrade may also escalate pressure on the Bank of Japan next week to follow its U.S. counterpart and expand quantitative easing. “It’s highly likely that the Japanese economy will contract in the third quarter and its growth will probably stagnate in the fourth quarter,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management in Tokyo. “Policy stimulus, including an extra budget, will be the only engine to fuel Japan’s growth for the time being.”

    China, Russia sound alarm on world economy at APEC summit - (Reuters) - China and Russia sounded the alarm about the state of the global economy at a summit on Saturday and urged Asian-Pacific countries to protect themselves by forging deeper regional economic ties. Chinese President Hu Jintao said Beijing would do all it could to strengthen the 21-member Asia-Pacific Economic Cooperation (APEC) and boost prospects of a global recovery by rebalancing its economy, Asia's biggest. Russian President Vladimir Putin said trade barriers must be smashed down. He is hosting the event on a small island linked to the Pacific port of Vladivostok by a spectacular new bridge, a symbol of Moscow's pivotal turn to Asia away from debt-stricken Europe. "It's important to build bridges, not walls. We must continue striving for greater integration," Putin told APEC leaders seated at a round table in a room with a view of the $1 billion cable-stayed bridge, the largest of its kind. "The global economic recovery is faltering. We can overcome the negative trends only by increasing the volume of trade in goods and services and enhancing the flow of capital."

    Hard Truths About Global Growth - Michael Spence - The world’s high-income countries are in economic trouble, mostly related to growth and employment, and now their distress is spilling over to developing economies. What factors underlie today’s problems, and how appropriate are the likely policy responses?The first key factor is deleveraging and the resulting shortfall in aggregate demand. Since the financial crisis began in 2008, several developed countries, having sustained demand with excessive leverage and consumption, have had to repair both private and public balance sheets, which takes time – and has left them impaired in terms of growth and employment.The non-tradable side of any advanced economy is large (roughly two-thirds of total activity). For this large sector, there is no substitute for domestic demand. The tradable side could make up some of the deficit, but it is not large enough to compensate fully. In principal, governments could bridge the gap, but high (and rising) debt constrains their capacity to do so (though how constrained is a matter of heated debate).The bottom line is that deleveraging will ensure that growth will be modest at best in the short and medium term. If Europe deteriorates, or there is gridlock in dealing with America’s “fiscal cliff” at the beginning of 2013 (when tax cuts expire and automatic spending cuts kick in), a major downturn will become far more likely.

    Sharp trade slowdown set to wallop GDP The high dollar and the global slowdown are crushing Canada’s trade-dependent economy. The latest evidence: The country posted the largest trade deficit in July since Statistics Canada began keeping records in 1971. It wasn’t just the scale of the gap – $2.3-billion – that jolted analysts. It’s how the economy got there. Virtually all major exports fell sharply, including energy, autos, agriculture, forest products and machinery-and-equipment. The overall drop was 3.4 per cent, paced by an even larger 5 per cent decline in exports to the U.S. – Canada’s largest customer. At $2.3-billion, the trade deficit narrowly eclipsed the old mark, set in September 2010.Scotiabank’s Mr. Holt said the high dollar is most damaging to U.S.-bound exports, which accounted for 72 per cent of all exports in July.

    Meet the TPP: A Worldwide Corporate Power Grab of Enormous Proportions - As international trade negotiators gathered this week at a posh golf resort in rural Virginia to hammer out details of the proposed Trans Pacific Partnership (TPP), they sought to project an image of inclusion and receptivity to public input. In reality, this high-stakes global corporate pact, now in its 14th round of discussions, is heavily guarded by paramilitary teams with machine guns and helicopters as it is developed behind closed doors under a dangerous and unprecedented veil of secrecy. What the hell is the TPP, you may ask? While it is among the largest and potentially most important ‘free trade’ agreements the world has ever seen, one can hardly be blamed for not being familiar with it yet. The corporate cabal behind it, including names like Cargill, Pfizer, Nike and WalMart, has done an exceptional job of maintaining an almost total lack of transparency as they literally design the future we will all inhabit. While 600 corporate lobbyists have been granted access and input on the draft texts from the beginning, even high-ranking members of Congress have been denied access to the most basic content of what US negotiators are proposing in our names.

    After the Millennium Development Goals - Dani Rodrik - In 2000, 189 countries collectively adopted the United Nations Millennium Declaration1, which evolved into a set of concrete targets called the Millennium Development Goals (MDGs)2. These ambitious targets – ranging from halving extreme poverty and reducing maternal mortality by three-quarters to achieving universal primary schooling and halting (and beginning to reverse) the spread of HIV/AIDS – are supposed to be met by the end of 2015. As the deadline approaches, development experts are debating a new question: What comes next? It is virtually certain that many of the MDGs will not have been met by the end of 2015, but there have been striking successes in some areas. For example, the goal of halving extreme poverty (measured by the number of people living on less than $1.25 a day) will likely be achieved ahead of time, largely thanks to China’s phenomenal growth. At the same time, there is little evidence to suggest that those successes were the result of the MDGs themselves. China implemented the policies that engineered history’s greatest poverty eradication program prior to, and independently from, the Millennium Declaration and the MDGs.

    The Global 1% (excerpts from a fascinating article) - Below are excerpts from an article by Peter Phillips and Kimberly Soeiro available at Project Censored.  Abstract: This study asks Who are the the world’s 1 percent power elite? And to what extent do they operate in unison for their own private gains over benefits for the 99 percent? We examine a sample of the 1 percent: the extractor sector, whose companies are on the ground extracting material from the global commons, and using low-cost labor to amass wealth. These companies include oil, gas, and various mineral extraction organizations, whereby the value of the material removed far exceeds the actual cost of removal.We also examine the investment sector of the global 1 percent: companies whose primary activity is the amassing and reinvesting of capital. This sector includes global central banks, major investment money management firms, and other companies whose primary efforts are the concentration and expansion of money, such as insurance companies. Finally, we analyze how global networks of centralized power—the elite 1 percent, their companies, and various governments in their service—plan, manipulate, and enforce policies that benefit their continued concentration of wealth and power. We demonstrate how the US/NATO military-industrial-media empire operates in service to the transnational corporate class for the protection of international capital in the world.

    As Low Rates Depress Savers, Governments Reap Benefits - The fact that interest yields are so low in so many parts of the world is no coincidence. Rates are determined not only by markets, but also by government policy. And right now many governments say they have good reason to keep their own borrowing costs as low as they possibly can. Just last week, the government’s report on job growth in the United States showed continued weakness, and an international forecasting group warned that the European economic powerhouse, Germany, will fall into recession later this year.  Though bad for people trying to live off their savings, low interest rates happen to be quite good for anyone borrowing money, like governments themselves. Over time, interest rates below the inflation rate allow governments to refinance, erode or liquidate their debt, making it easier to live within their budgets without having to resort to more unpalatable spending cuts or tax increases.  Along with keeping rates low, governments are using a variety of tactics to encourage captive audiences, like pension funds and banks, to buy their debt. Consumers, in other words, are subtly subsidizing governments without even knowing it. Economists have compared this phenomenon to a hidden tax on people’s wealth.

    Key Eurozone CDS spreads hit 2012 lows - The Eurozone sovereign credit markets saw unprecedented declines in key CDS spreads last week. The spreads are now below the levels reached after the 3y LTRO programs were put in place. It seems that a number of hedge funds were long sovereign debt protection (short the credits) and have finally capitulated last week. As discussed, Draghi has accomplished his goal of punishing the shorts in the market. But once again, caution is needed here as we enter a potentially volatile week with most of the the "good news" already priced in. Reuters: - German judges, Dutch voters, IMF inspectors and Brussels regulators could all spring surprises that make it harder to resolve a sovereign debt crisis which is almost three years old and weighing on the world economy.

    Risk premium sees biggest weekly drop since the euro was created -- Spain’s risk premium continued to narrow on Friday a day after the European Central Bank approved a new unlimited bond-purchasing program to ease the pressure on financially-distressed euro-zone. The yield on the benchmark 10-year government bond fell below 6 percent for the first time since May and closed at 5.645 percent. That caused the spread with the German equivalent to fall by 37 basis points to 412. That came on top of a decrease of close to 50 basis points on Thursday. For the whole of this week, the fall was 141 basis points, the biggest weekly drop since the euro came into existence. “This is the first time the ECB seems to be gaining control of the situation,” “The initial market reaction suggests it has faith in Draghi.” 

    Now It’s Back to Europe’s Politicians -  Mario Draghi’s ECB action plan of last week has opened a new political semester in Europe as the mantle has been passed back to the politicians to sort out exactly what the next steps are for Europe under the umbrella of “unlimited” conditional support. My sense is that this is the limit of Mr Draghi’s mandate, possibly over it, but he has kicked the burning can far enough back into the politician’s court that it cannot be claimed that he did not do enough. Over the weekend Angela Merkel has come out in defence of the ECB, but there are rumblings from within Germany about Mr Draghi’s plan and over the weekend Mariano Rajoy demonstrated, once again, he wasn’t in any rush to push Spain towards a bailout. All along, while the politicians and bureaucrats politick and jawbone each other, the real economy of the Eurozone continues to deteriorate which is now where the risks lie. As fiscal austerity further bites into economic growth and Europe enters recession these risks are sure to grow. The taxpayers of the northern creditors are already questioning why they should continue to fund the zone, while the citizen’s of the southern debtors question just why they should suffer it. The on-going rise of Golden Dawn in Greece should be a reminder to all of the dangerous political fragmentation that is occurring and it is becoming increasingly apparent that southern Europe is struggling with its own ‘lost decade’. I am doubtful, however, they will take it as well as the Japanese.

    Stubborn politicians threaten ECB-inspired rally — Stubborn politicians could quickly undo the sharp fall in Spanish and Italian bond yields that has accompanied the formulation of the European Central Bank’s latest bond-buying plan, strategists said Friday. They warned that borrowing costs could quickly rise once again toward crisis levels unless Spanish Prime Minister Mariano Rajoy moves soon to request help from Europe’s rescue fund — a prerequisite for the launch of Outright Monetary Transactions, or OMTs, as the unlimited bond-buying plan is known. The sticking point is ECB President Mario Draghi’s insistence that governments agree to abide by ”strict and effective” conditions in return for aid. That could lead to the unpalatable prospect of national governments being forced to impose additional austerity measures or take other orders from their European partners. “The price of ‘strict and effective conditionality’ is surrender of fiscal sovereignty in return for aid, which neatly passes the baton” back to Rajoy,  “Any delay in doing so, or arguing about terms and conditions could well see the recent drop in Spanish yields quickly reverse,” he said in a note. “As we have seen at various stages of this crisis, doing the right thing doesn’t always equate to what politicians think is politically acceptable.”

    After High Note for Euro Plan, Discord Emerges - Greeted with initial fanfare by investors and economic officials, the unlimited bond-buying plan that the European Central Bank president, Mario Draghi, announced Thursday ran into immediate political problems in the crucial countries of Germany, Spain and Italy. In Germany, despite Chancellor Angela Merkel’s support for Mr. Draghi and the independence of the Central Bank, political and news media reaction was scathing, with accusations that the bank, in seeking to stabilize the euro currency union, was subverting its mandate to fight inflation and forcing debt upon euro zone members. “A Black Day for the Euro,” “Over the Red Line” and “Pandora’s Box Opened Forever” were some of the German headlines, with the normally sympathetic Süddeutsche Zeitung headlining an editorial: “The E.C.B. Rewards Mismanagement.” Even the German Bundesbank, officially part of the European Central Bank, put out a statement commenting acidly that the plan was “financing governments by printing bank notes.”  At the same time, the two intended beneficiaries of the Draghi plan — Spain and Italy — expressed reluctance to ask the bank for help, even if both might eventually have little choice but to seek aid. The governments in Madrid and Rome apparently fear the political impact at home of bowing to whatever demands for harsh economic policy changes might come with the aid.

    54% of Germans Want Constitutional Court to Kill the ESM; Merkel's Disingenuous Reservations - It appears a majority of German citizens have finally had enough of chancellor Angela Merkel saying one thing and doing another in regards to bailouts. They have also had enough of Mario Draghi and his policies.  According to Der Spiegel a Majority of Germans Want the Constitutional Court to Kill the ESM. Poll Results:

    • 54% want the court to reject the ESM outright. Only 25% want the court to ignore the Euroskeptics
    • 53% are against transfer of more powers to the EU. Only 27% are in favor.
    • 42% want Greece out of the Eurozone. Only 30% want Greece in the Eurozone.

    Another article in Der Spiegel claims Merkel has also expressed reservations on ECB decision. Merkel frequently says one thing and does another. If she has reservations, I suggest the reason is political expediency. Too many Germans are against the ESM for her not to express reservations.

    German Constitutional Court Approval of ESM Not a Done Deal; Draghi's Fatal Mistake? -- One puzzling aspect of ECB president Mario' Draghi's Outright Monetary Transactions (OMT) plan to save the eurozone is his doing so before the German constitutional court had approved the ESM.  In spite of Draghi's emphasis on conditionality, OMT puts Germany directly at risk in an unlimited way. This modification to the ESM makes the constitutional case against it is much stronger.  I am not the only one who feels that way. Even the pro-bailout Eurointelligence site sees it that way. Here are some snips from the Eurointelligence Daily Briefing report A new legal case against ESM – that links Draghi’s OMT to the current case:

    Merkel accused of being ‘female Don Corleone’ - Has Angela Merkel turned into a female equivalent of Don Corleone, the sinister Mafia boss portrayed in The Godfather? A prominent female member of the German Chancellor's ruling conservative party, the Christian Democratic Union, is convinced she has – and she's not joking. A withering attack on Germany's first female leader has been delivered in a new and savagely critical book that accuses Merkel of ruining the euro, being obsessed with her own political power and installing an autocratic regime which borders on the totalitarian. The Godmother: How Angela Merkel Is Reconstructing Germany is the work of the veteran Christian Democrat, Gertrud Höhler, 71, a prominent and outspoken conservative who was both an adviser to Chancellor Helmut Kohl, and on the boards of several major Swiss and German companies. Höhler argues that because Merkel was brought up in communist East Germany, she has no real understanding of democracy and is convinced that only remaining in power is paramount. As a result, Höhler claims, Merkel has muzzled all critics and dispensed with political rivals by ruthlessly sidelining or stabbing them in the back.

    Angela Merkel's Bad Medicine: On July 26, as traders were once again deserting Spain’s government bonds, setting up the risk of a default and a deeper crisis of the euro, Mario Draghi, president of the European Central Bank surprised and delighted financial markets. Speaking off the cuff in London, he vowed to do “whatever it takes” to save the European economy. Eric PalmaThe escalating crisis of speculative attacks on government bonds had spread from Greece to Portugal to Ireland to Spain and Italy, threatening to take down the euro and the European Union. It was a message that political leaders had been waiting for. The markets read Draghi’s statement as an audacious declaration that he would begin massive bond purchases, ending the threat of a slide into European depression. A week later, a chastened Draghi walked it all back. There would be no such purchases, he said, not until governments did their part by getting their budgets under control. Draghi made a rare disclosure of some of the infighting that led to his reversal. The president of Germany’s Bundesbank, Jens Weidmann, a powerful member of Draghi’s board, had strenuously objected. The policy of relentless austerity continued. The market for Spanish bonds crashed again. The lesson: Don’t cross Angela Merkel.

    German domino theory and book-cooking  - There are two fairly important bits to this story in Der Spiegel. One, that Merkel wants to avoid a Grexit for the time being and two, that the upcoming Troika report might be massaged to make that a reality. From Der Spiegel (with our emphasis): In reality, Merkel has already made up her mind. After long hesitation, she has sided with French President François Hollande and the European Commission. The report from the troika will undoubtedly conclude that Greece can remain in the euro zone. The change in mind-set is down to domino theory. Where once the chancellor saw Greece as the weakest link in a chain which would be stronger without it, now she sees it as a domino which, if toppled, would put the rest of the set in danger: Domino theorists argue that the impact on the economy, growth and employment would be catastrophic and incalculable. But one thing remains clear: If Greece falls, Germany will have to pay — and the bill will come to almost exactly €62 billion ($79 billion). This is the colossal sum that the Greeks and their central bank owe the Germans. The entire amount would all have to be written off. The domino theorists won out in the end. Everything that moves in the direction of a debt or liability union is a nightmare scenario for the chancellor. She knows that the majority of Germans reject euro bonds or the notion of assuming other country’s debts. It could jeopardize her re-election next year.

    Dominos : Every discussion of the European crisis includes the following domino theory (although no one calls it that anymore, for reasons I’ll get back to): If Greece leaves the Eurozone, that proves that it is possible to leave the Eurozone—or, put another way, that the powers that be cannot keep the Eurozone intact. If people realize that it is possible, then bond markets will bet even more heavily against Spain and Italy, which will force them to leave the Eurozone, which would be terrible. Hence Greece cannot leave the Eurozone. The reason no one calls this a domino theory anymore is that the original domino theory was thoroughly discredited. Remember the fall of Vietnam? Do you remember the ensuing communist takeover of the free world? No, because it didn’t happen. It seems to me that the current version of the domino theory, where Greece plays the role of Vietnam, rests on a logical flaw. The premise is that (a) if Greece leaves the Eurozone, that implies that the powers that be (Germany, the ECB, the IMF, etc.) are incapable of preventing any individual country from leaving the Eurozone. This ignores two other obvious logical possibilities. One is that (b) the powers that be might have the ability to protect any country they choose to protect, but might decide that Greece is not worth the trouble. The other is that (c) the powers that be might have the ability to protect some countries that are not in such bad shape as Greece (Spain and Italy come to mind).

    The Tragedy of the European Union and How to Resolve It -- George Soros -- I have been a fervent supporter of the European Union as the embodiment of an open society—a voluntary association of equal states that surrendered part of their sovereignty for the common good. The euro crisis is now turning the European Union into something fundamentally different. The member countries are divided into two classes—creditors and debtors—with the creditors in charge, Germany foremost among them. Under current policies debtor countries pay substantial risk premiums for financing their government debt, and this is reflected in the cost of financing in general. This has pushed the debtor countries into depression and put them at a substantial competitive disadvantage that threatens to become permanent. This is the result not of a deliberate plan but of a series of policy mistakes that started when the euro was introduced. It was general knowledge that the euro was an incomplete currency—it had a central bank but did not have a treasury. But member countries did not realize that by giving up the right to print their own money they exposed themselves to the risk of default. Financial markets realized it only at the onset of the Greek crisis. The financial authorities did not understand the problem, let alone see a solution. So they tried to buy time. But instead of improving, the situation deteriorated. This was entirely due to the lack of understanding and the lack of unity.

    The Euro as Idealist Project or: How I Learned to Stop Worrying and Love Pragmatic Elites - By Nathan Tankus,s a member of Occupy Wall Street Alternative Banking working group. In accounts of American economic history, the early days of banking are typically described as chaotic, contradictory and many decisions are depicted as awful, stupid mistakes. That period certainly included all these things, but looking at Europe now, one can’t help but feel that many back then (especially the elites) understood money better and were much better pragmatists. The point about pragmatism is especially important: you can only make realistic decisions if you know how things actually work. In this sense, the Euro is the ultimate idealist project. Its designers took a vision (some would say a religion), compared their vision to the functioning of an entire continent and attempted to chop off the parts of the continent and different societies that didn’t fit the template. I would call it a Procrustean bed, but to be fair to him, I bet he only mutilated a few dozen people, not an entire continent.What is the theory that justified the Eurozone? It is a geographic extension of these assertions by Adam Smith in the Wealth of Nations:  It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another. Later on he extends this point to an analysis of money: But when barter ceases, and money has become the common instrument of commerce, every particular commodity is more frequently exchanged for money than for any other commodity.

    Europe's Car Industry Faces Worst Crisis in 18 Years Car sales in Europe plummeted to an 18-year low in August, their lowest level since 1994, with no sign of an immediate revival as the recession continues to spread gloom across European markets. The crisis has forced major auto makers to lay off workers and shut down production lines in order to stay afloat. Compounding the woes of European car companies is the price war with low-cost imports from India, South Korea and Thailand. In major European markets such as France, Germany and Italy, new car registrations touched new lows in August. Sales were almost flat, with 0.1 percent growth in the UK translating to 59,433 new passenger car registrations in August, according to data released by the Society of Motor Manufacturers and Traders (SMMT).

    Soros: Germany going into depression in 6 months -- The recession in Europe will spread to Germany, the euro-zone's largest economy, within six months, said George Soros, chairman of Soros Fund Management. "The policy of fiscal retrenchment in the midst of rising unemployment is pro-cyclical and pushing Europe into a deeper and longer depression," Soros said in prepared remarks for a speech in Berlin Monday. "That is no longer a forecast; it is an observation. The German public doesn't yet feel it and doesn't quite believe it. But it is all too real in the periphery and it will reach Germany in the next six months or so." Germany needs to abandon its demands for austerity in other countries, and embrace the continued fiscal unification of the region, or leave the euro zone itself, he said. Soros also said it would be better for Germany stay in the euro zone and work to boost growth, activate a debt reduction fund and guarantee common bonds.

    EU banks face ring-fence on trading assets-FT (Reuters) - Europe's big banks could be forced to protect trading assets as the consensus recommendation of an European Union-wide review is due to be completed next month, the Financial Times reported on Monday. The Liikanen review was set up in November by Michel Barnier, the EU commissioner in charge of regulation, to review of the structure of Europe's banks. The newspaper cited people close to the project as saying a clear majority was in favour of a combination of a ban on so-called proprietary trading and a ring-fence on retail banking activities. Two people cited by the FT said the 11-member Liikanen committee had made particularly good headway towards a unanimous view at a meeting in Brussels last week. At least seven are thought to support a trading ring-fence. One member of the committee, chaired by Erkki Liikanen, the Finnish central bank chief, is firmly against any structural reform, the people cited said, with another two keen on some kind of middle ground. The report is also poised to endorse the direction of several global reform initiatives - including the move to Basel III capital and liquidity rules and the introduction of a leverage ratio to cap the size of balance sheets relative to capital.

    ECB Sees Bond Costs of Up to 100 Billion Euros, Spiegel Reports - The European Central Bank may spend between 70 and 100 billion euros ($90 to $128 billion) on bond purchases this year if interest rates on Spanish and Italian debt rise again “sharply”, Der Spiegel reported, citing internal information used at the central bank. The figures are based on a scenario under which the ECB buys 10 to 14 percent of bonds eligible under the new plan, Der Spiegel said. The European Commission sees a Spanish request for ESM aid as “probable”, the German magazine said, citing a member of the Commission it did not name.

    Moody's: ECB's bond-purchase plan will not solve the EU crisis - According to a report published by Moody's Investors Service on Monday, ECB's introduction of the bond-purchase plan at its September monetary policy meeting will only serve to buy time, but will not resolve the problems afflicting the Eurozone. Moody's analysts Alastair Wilson and Colin Ellis convince in their weekly CreditOutlook review that despite the fact that the plan might be beneficial for EU peripheral countries in distress, its possible impact should not be overestimated. Even though the rating agency acknowledges the Central Bank's willingness to guarantee the survival of the euro, it affirms that these measures will not solve the sovereign debt crisis and that eventually "the markets will test the ECB's resolve."

    Germany’s Schaeuble Said to Oppose Spanish Sovereign Bailout - German Finance Minister Wolfgang Schaeuble told lawmakers in Berlin today that Spain doesn’t need a full sovereign bailout, according to two party officials who participated in the briefing. Schaeuble praised the reform efforts of Spain and Italy, the officials said on condition of anonymity because the meeting was held in private. The finance minister said Spain doesn’t need to apply for a full program because economic and fiscal progress made since implementing reforms means that a full bailout isn’t necessary, the officials said. Spanish Prime Minister Mariano Rajoy has so far declined to say whether he will seek a full bailout, saying he needs time to study a proposal announced by European Central Bank President Mario Draghi to lower government borrowing costs. Rajoy has already sought a rescue for Spain’s banks of as much as 100 billion euros ($128 billion). “We will take a decision taking into account the interests of the Spanish people and the euro zone,” Spain’s European Affairs Minister Inigo Mendez de Vigo said

    Jobless to be drafted in to clear burnt land - Unemployed Spaniards will be drafted in to help clear up brush and replant forest land that has been destroyed by wildfires. And if they refuse, they may lose their state jobless payments. The new rule, approved on Friday by the Cabinet, is an emergency measure aimed at dealing with the fallout from the rash of forest fires this summer. Deputy Prime Minister Soraya Sáenz de Santamaría said that the only people who will be called up are those on the Plan Prepara program, the government’s safety net subsidy for long-term jobless whose benefits have run out. They will not be asked to help put out fires. Those who refuse may lose up to three months of benefit payments. This year has seen around 180,000 hectares of land in Spain destroyed by fires, which have also claimed nine lives.

    No Dead Cat Bounce In Spanish Home Price Which Collapse 12% In August - Despite the exuberance in Spanish equity and bond markets (which in the US managed to create a quadruple-dip bounce), home prices just can't get a break in the troubled bailout-less nation. According to TINSA, the general home price in Spain fell 11.6% YoY, and has recent reaccelerated with a 2.8% drop sequentially as hope for a third-time's-the-charm bounce now faded for the forelorn real estate market. The Mediterranean Coast suffered the most, -14.7% YoY (and are down a cumulative 39.5% from the highs). Overall, Spanish house prices are down a cumulative 32.4% from the December 2007 highs (back to 2003 levels). This re-acceleration of the downturn in home prices is hardly what the Dreme is made of as bank balance sheets come under further pressure; deposit outflows will simply not stop until there is underlying improvement in bank collateral, i.e. mortgages and housing values; and so in effect, all this news indicates is that bank balance sheets are even more impaired than previously believed (tourniquet or amputation?).

    Democracy loses in struggle to save euro - The European Central Bank has fired its magic bullet. By promising “unlimited” purchases of sovereign bonds, Mario Draghi, the ECB’s president, may have kept his pledge to do “whatever it takes” to save the euro. But in rescuing the currency, Mr Draghi’s magic bullet has badly wounded something even more important – democracy in Europe. As a result of the ECB’s actions, voters from Germany to Spain will increasingly find that crucial decisions about national economic policy can no longer be changed at the ballot box. In Germany, in particular, there is a growing realisation that the ECB, an unelected body that prides itself on its independence from government, has just taken a decision that has profound implications for German taxpayers – but one that they cannot challenge or change. Previous European bailouts had to be approved by the German parliament and were subject to review by the German courts. Indeed the German supreme court will rule on the constitutionality of the most recent bailout on Wednesday. But the ECB’s decision to accept unlimited bond purchases is immune to such democratic controls. The bank cannot be overruled by the German parliament. And because it is an EU institution, the ECB cannot be checked by the German courts – only by the European Court of Justice. 

    Carthaginian terms for Italy and Spain threaten Draghi bond plan - The cold douche begins. Markets will now learn that the European Central Bank's bond plan is a devout wish, not a done deal. Europe's political minefield lies ahead. Nothing can happen until Spain and then Italy request a rescue from the EU bail-out funds (EFSF/ESM), and sign away their sovereignty. Nothing further can happen until an angry Bundestag approves the terms and signs away its money. Germany has a 27pc voting weight and can veto any rescue. Even less can happen if the German constitutional court issues a preliminary ruling on Wednesday blocking activation of the €500bn ESM fund. Morgan Stanley's team – mostly Germans as in happens – put a 40pc likelihood on this happening. This is not to belittle the ECB plan for "unlimited" bond purchases. The Jesuit-trained Mario Draghi has pulled off a masterstroke, securing the assent of every northern ECB governor except the Bundesbank's Jens Weidmann, and crucially the assent of Germany's board member Jorg Asmussen, and indeed Chancellor Angela Merkel herself. Italy's premier Mario Monti – a fellow `Jesuit' – more or less confessed that this minor revolution could not have happened without the defeat of French leader Nicolas Sarkozy in May. The election upset broke the Franco-German axis and reordered the strategic landscape of Europe. 

    Lagarde Lying? --The boss of the IMF, Christine Lagarde, has been talking the past few days. She said some things that I thought were interesting. A few weeks ago, the ECB’s Mario Draghi laid out his plan to buy unlimited amounts of bonds of Spain and Italy in a desperate attempt to stabilize the European bond markets. In order to placate German criticism of the bailout, Draghi made it clear that there would be stiff “conditionality” that must be accepted by Spain and Italy before any bond buying is commenced. To give teeth to the promise of conditionality, Draghi was very specific that both Spain and Italy would have to accept an IMF involvement in the internal affairs of the countries involved. Mario said: “The involvement of the IMF shall be sought also for the design of country-specific conditionality and the monitoring of such programs.” Lagarde has responded to Draghi’s proposal with her full support(Link): According to Christine, the IMF is ready to roll up its sleeves and get down to work “fixing” Spain and Italy’s financial affairs:The IMF would be an active player in restoring the situation in the euro zone.”“We obviously have to do it under our normal framework, which implies conditionalities.”“The IMF is ready to get involved in designing and monitoring its implementation.”

    Draghi plan is more make-do-and-mend - With some considerable panache, Mario Draghi, president of the European Central Bank, has done it again.His new bond buying plan, with its implicit promise to bring unlimited firepower to bear on the sovereign debt crisis, has seemingly convinced the markets that he will indeed deliver on his July promise to do whatever it takes to save the euro. He has even wrapped it up in the language of monetary policy making to sidestep accusations of providing morally hazardous direct financing to governments. Undoubtedly this marks a watershed in the crisis. Whether it is quite the watershed that the markets perceive is another matter.  Of course there is logic in having the ECB act as a de facto lender of last resort in the eurozone sovereign debt market. Markets can thus push solvent countries into self-fulfilling default. In the case of the eurozone the problem has been compounded by investors’ fear of convertibility risk, especially in relation to Spain and Italy. Mr Draghi’s bond buying programme seeks to address this problem. It has the advantage of being cheaper than propping up banks, whose collective liabilities tend to be greater than their national governments’ outstanding debts. It also avoids the incest problem that arose from the ECB’s earlier long term refinancing operations, whereby rickety banks used the money to increase their exposure to fiscally flaky governments. The big question is whether this new Draghi fix means that everything is now different, or whether the warm afterglow will fade as it has with previous initiatives.  The case for scepticism rests on the fact that no one can be sure that Spain and Italy are solvent even after recent reductions in their cost of borrowing.

    Greeks Searching For Cheaper Heating Solutions - Greek consumers are seeking out alternative ways of heating their homes as, at 1.30 to 1.40 euros per liter, the price of heating oil has become prohibitive for many following the increase of the special consumption tax to 80 percent of that on diesel. In large cities, although most heating oil tanks have been filled since April, when the price stood at just 1.05 euros/l, more and more people are taking the decision not to turn on their central heating this winter unless the temperature drops to very low levels. In rural areas, and particularly in northern Greece, the majority of consumers made the switch last year, opting mostly for fireplaces and wood stoves, while demand for wood and pellets has soared. Demand for wood is showing a 100 percent increase compared with last year. Traders estimate there will be a serious shortage this winter while the average price of firewood has risen by some 10 percent from last year. High demand for wood has led to a massive increase in illegal logging in mountainous regions of the country, where forests and even orchards are being depleted, along with a rise in illegal sales. There has also been a considerable increase in wood imports from Bulgaria, which, according to traders, covers some 90 percent of demand in Macedonia.

    Greek Anger, Protests After Fresh Austerity Cuts - Thousands of Greeks took to the streets throughout the country today after Greek Prime Minister Antonis Samaras announced a final round of austerity measures containing deep cuts to the public budget.The new round of austerity measures in the country included large cuts to pension funds and public sector wages. According to Irish Times, "Of the spending cuts targeted in this latest round of belt-tightening, €4.6 billion is earmarked from reduced pensions, €1.4 billion from health, €1.3 billion from state salaries and €1.27 billion from public administration. However, the country, which spends the most on arms per capita in Europe, will only cut €517 million from its military budget under the proposals." Samaras stated that the cuts were made in a bid to gain another Euro based loan installment, worth 31.5 billion euro ($39.9 billion) from the so-called troika of the European Union, the International Monetary Fund and the European Central Bank. Conservative estimates say over 15,000 protesters marched Saturday against the fresh austerity measures including five separate marches in the northern city of Thessaloniki. Protesters were met with a large police presence of roughly 3,500 officers deployed in the streets.

    Greece Prepares to Lease 40 Uninhabited Islands to Reduce Debt (Bloomberg) -- Greece’s Hellenic Republic Asset Development Fund has identified 40 uninhabited islands and islets that could be leased for as long as 50 years to reduce debt as pressure grows on the country to revive an asset-sales plan key to receiving international aid. “We identified locations that have good terrain, are close to the mainland and have a well-developed infrastructure and, at the same time, pose no threat to national security,” Andreas Taprantzis, the fund’s executive director for real estate, said in a Sept 6. interview in Athens. “Current legislation doesn’t allow us to sell them outright and we don’t want to.” The fund is charged with raising 50 billion euros ($64 billion) from state assets by 2020 to meet conditions tied to pledges of 240 billion euros in foreign aid. As international inspectors in Athens scrutinize the country’s fitness to receive the latest aid payment, Prime Minister Antonis Samaras has said commercial exploitation of some islands could generate the revenue lenders need to see to continue funding the country. The shortlist includes islands ranging in size from 500,000 square meters (5.4 million square feet) to 3 million square meters, and which can be developed into high-end integrated tourist resorts under leases lasting 30 years to 50 years, Taprantzis said.

    Greece suffering "merciless lashing," – president - Greece's President Karolos Papoulias urged the country's creditors Tuesday to ease their demands for more austerity, claiming that the country has suffered a "merciless lashing" "I think we have paid enough for our mistakes, and Europe must realize that it needs to help Greece," Papoulias told a delegation of visiting Canadian officials. The debt-crippled country is struggling to come up with promised cuts worth (EURO)11.5 billion ($14.7 billion) for 2013-14, needed for continued rescue loan payments from eurozone countries and the International Monetary Fund. Greece has been surviving on emergency loans for more than two years, but the resulting economic austerity has triggered a dramatic rise in poverty and unemployment, with the jobless rate in June reaching 24.4 percent. Inspectors from the IMF, European Union and European Central Bank continued negotiations Tuesday at the Labor Ministry - a meeting delayed by more than an hour after members of a Communist-backed trade union blocked the building's entrance. A government spokesman refused to comment on reports by state television that the inspectors were pressing for a minimum wage freeze, and cuts in overtime and severance pay, describing the ongoing negotiations as "complex and multi-tiered."

    Ethnic Stereotyping and Class: Two Ways to Look at the Eurozone Crisis - Hats off to Darian Meacham who says what needs to be said: it is absurd to speak of countries as if they were single individuals (much less “representative agents”) and explain the problems of peripheral Europe on the failings of entire peoples or cultures.  In every instance, and not only Greece, the focus of Meacham’s post, the “national” crises of corruption and barriers to initiative can be traced to an elite class that benefits from them.  Taxes are automatically deducted from workers’ paychecks, while the rich pay nothing.  A tangle of red tape insulates business owners from competition and provides opportunities for insiders to harvest a never-ending flow of bribes. Meacham could have gone on to point out that, if any interest group is blamed in the media, it is labor.  The key to progress, we are told, is liberalizing labor markets—removing certifications, restrictions on firing, centralized wage bargaining and so on.  What this argument conveniently overlooks as that the most regulated labor markets can be found in the social democratic countries of the north, which nevertheless regularly enjoy trade surpluses.  It is not labor that has failed in the deficit countries, but capital.

    Greeks work the longest hours in the EU; and other facts about the Greek labor markets - There has some confusion about the labor market situation in Greece. To clarify, here are the latest statistics:
    1. Greek official unemployment rate is just under 24%.
    2. Greek youth unemployment is the highest in the Eurozone, just under 54%.
    3. Greeks work the longest hours in the EU (also longer than in the US).
    4. Greek productivity however is $35 an hour, compared with $49 in the EU and $58 in the U.S. (McKinsey via Bloomberg).
    5. Greece has the lowest labor participation rate (% of employable population that have jobs) in the EU: 66% vs. 73% average in the EU.
    6. Greek official retirement age is 65 (not some of the nonsense numbers people have been sending around) and is likely going up to 67 as part of the agreement (yet to be concluded) between the government and troika.

    IMF Official: Greece Will Need Third Bailout - Greece will need additional funding from its creditors to overcome its budget gap, the country's representative on the International Monetary Fund's board said Thursday. "Greece will require additional financing, which may take the form either of Official Sector Involvement or of additional loans, hopefully on more-favorable terms," Thanos Catsambas, an IMF alternate executive director, said in an interview. "Official Sector Involvement" is the official jargon for a restructuring of the debts held by Greece's official creditors, the European Union, the IMF and the European Central Bank, analogous to the "private-sector involvement" deal in March, which wrote down the debts held by private investors by more than €100 billion ($128.8 billion). For many, such a plan would be tantamount to a third bailout of the country in as many years, although Mr. Catsambas rejected that characterization. Mr. Catsambas doesn't represent the IMF's official position within the so-called troika of creditors, the Greek government also distanced itself from his comments, but his thinking is informed by his years as an IMF staff member between 1979 and 2010, and overlaps in many places with the official position and the charter of the Fund. He has experience of fund programs in Europe, Asia, Latin America and the Middle East.

    The French Government Gets Whacked, Even The Left Is Angry, And Hollande Gets Slapped In The Face - France is mired in a stagnating economy. The private sector is under pressure, auto manufacturing is heading into a depression. Unemployment hit a 13-year high of 10.2%, leaving over 3 million people out of work. Youth unemployment of 22.7%, bad as it is, belies the catastrophic jobs situation for young people in ghetto-like enclaves, such as the northern suburbs of Paris. The “solution”—fabricating 150,000 jobs for the young at taxpayers’ expense—has been tried before, with little success. Gasoline and diesel prices are hovering near record highs. So there are a lot of very unhappy campers. In a BVA poll, 55% of the respondents were dissatisfied with President François Hollande’s efforts to tackle the economic crisis. By comparison, only 31% were dissatisfied with Nicolas Sarkozy in 2007 at the end of his honeymoon. Devastatingly, for a socialist: 57% believed that he didn’t distribute the “efforts” equitably—same as Sarkozy, the president of the rich. The problem with voters is Hollande’s “inaction,” after some initial half-measures, such as the partial reinstatement of retirement at 60 and raising back-to-school aid for families. Now people “seriously doubt his ability to change things.” They believe that the government spends its time trying to “unravel Sarkozy’s legacy” and “sitting around in meetings,” rather than making decisions.

    Europe’s giants are sinking - I’ve mentioned France a couple of times over the last year. When I talked about it last I stated: High levels of public and private debt, a long running negative trade balance and current account deficit, stalling industrial production, GDP and employment along with significant banking sector exposure to the periphery all add up to a fairly risky predicament. This is certainly not a country that could take on a strict austerity regime without causing itself some significant short-to-medium term economic damage because it is obvious from the metrics that the private sector has been borrowing from both the external and government sectors for a long period of time. As I mentioned in the case Spain, once the economy begins to slow, government sector revenues fall. If deficit cutting is a priority over growth then this inevitably leads to calls for further cuts in government spending and increases in taxation which, in the absence expanding private sector credit or offsetting growth in the external sector, leads to a further deterioration in economic growth. It is far too early in the case of France to suggest such a dynamic has taken hold but growth has certainly become a problem: The French economy will shrink in the third quarter after stagnating for nine months, the country’s central bank said Monday, indicating the slowdown of the euro zone’s second-largest economy is intensifying.

    The Poster Child of Austerity is Lost --While we wait for tonight’s announcement from the German constitutional court, there are some interesting developments in the Troika’s latest review of Portugal: The program remains broadly on track. In 2012, despite headwinds from abroad, real GDP growth remains in line with projections, exports are performing better than expected, and the fast reduction in the external deficit is contributing to alleviating the external financing constraint.  Growth will remain weak into 2013. In 2012, economic activity is projected to decline by 3 percent. The fiscal deficit path has been adjusted, particularly for 2013. While spending in 2012 performs somewhat better than budgeted, revenues are lagging significantly behind budget plans. To allow partial operation of automatic fiscal stabilizers, the deficit targets were revised upward to 5 percent of GDP in 2012 and from 3 percent to 4.5 percent in 2013. The 2014 deficit target, at 2.5 per cent of GDP, remains below the threshold of the Stability and Growth Pact of 3 percent.  But reaching the new deficit targets will require additional consolidation efforts. . So even Portugal, the “poster child” of austerity, is failing in its attempts to meet budget goals imposed under a 78-billion-euro bailout deal. The country has been granted an extra year and targets have been revised down due to the recession that is now engulfing the Eurozone.

    EU, IMF give Portugal more time to meet deficit goals (Reuters) - The European Union and IMF agreed on Tuesday to ease budget goals imposed on Portugal under a 78-billion-euro bailout, giving Lisbon more time to meet the targets as its economy slides deeper into recession. A "troika" of inspectors from the EU, IMF and European Central Bank said Portugal's deficit targets had been revised to 5.0 percent of Gross Domestic Product for this year, and 4.5 percent for 2013. Previously, the bailout had envisaged deficits of 4.5 percent this year and 3 percent in 2013. Get educated on Ag futures and options with this 76-page study guide.Sign Up Today! The move marks a climbdown for the centre-right coalition government which has single-mindedly concentrated on meeting the goals as justification for harsh austerity measures which have sent the economy into its worst recession since the 1970s. The announcement that targets will slip, coupled with new austerity measures, could strain a political consensus in Portugal, which has so far been spared the street violence and popular unrest of other suffering euro countries such as Greece.

    Press Release: Statement by the EC, ECB and IMF on the Fifth Review Mission to Portugal: The program remains broadly on track. In 2012, despite headwinds from abroad, real GDP growth remains in line with projections, exports are performing better than expected, and the fast reduction in the external deficit is contributing to alleviating the external financing constraint. Nevertheless, higher unemployment, lower disposable incomes, and a shift in tax bases away from more highly-taxed activities are weighing on revenue collection. Against this backdrop, policy choices need to strike a balance between advancing the required fiscal adjustment and avoiding undue strains on the economy. Swift progress on structural reforms remains key to put the economy on a sustainable growth path. Maintaining broad political and social support for the revised adjustment program will also be important. Growth will remain weak into 2013. In 2012, economic activity is projected to decline by 3 percent. Reflecting weaker import growth in euro area trading partners and additional budget consolidation measures, GDP growth is now expected to turn positive only in the second quarter of next year, resulting in a projected GDP decline by 1 percent for the year as a whole. The fiscal deficit path has been adjusted, particularly for 2013. While spending in 2012 performs somewhat better than budgeted, revenues are lagging significantly behind budget plans. To allow partial operation of automatic fiscal stabilizers, the deficit targets were revised upward to 5 percent of GDP in 2012 and from 3 percent to 4.5 percent in 2013. The 2014 deficit target, at 2.5 per cent of GDP, remains below the threshold of the Stability and Growth Pact of 3 percent. This revised path will allow the government to design and implement structurally sound fiscal measures, while easing the short-term economic and social cost of fiscal adjustment.

    Draghi alone cannot save the euro - Last week’s decision by the European Central Bank to make unlimited purchases of government bonds in secondary markets was both necessary and bold. Mario Draghi, the ECB’s president, deserves credit for having obtained agreement for this controversial step, against the sole, albeit significant, opposition of Jens Weidmann, president of Germany’s redoubtable Bundesbank. It is a pity that the ECB did not do this before the crisis in sovereign debt reached Spain and Italy. Yet this delay is not surprising: eurozone policy makers have, perhaps inevitably, done too little, too late.It is not the ECB’s fault that this action is too little. Its aim is to eliminate the risk of a eurozone breakup forced by the markets. But it cannot achieve this on its own. Ensuring the survival of the eurozone is a political decision. The ECB can only influence, not determine, the outcome. The rationale offered for the program of “Outright Monetary Transactions” is ingenious. The ECB insists that it does not aim to finance governments in difficulty. That, it insists, is a mere byproduct. At last week’s press conference, Mr. Draghi stated that: “We aim to preserve the singleness of our monetary policy and to ensure the proper transmission of our policy stance to the real economy throughout the area. OMTs will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro.”

    The euro crisis: Don't buy assets; sell insurance - EARLIER today, a friend sent me a note from Louis-Vincent Gave of GaveKal Research (sorry, no link) on how the ECB could preserve the euro without doing anything to offend German sensibilities. Mr Gave suggests that the central bank should stop buying assets and start selling “currency insurance.” It is an intriguing idea, so I have copied some excerpts to provide a flavor of the analysis.Mr Gave begins by arguing that convertability risk is inhibiting investment in the troubled countries:By early 2003, very obvious value was starting to emerge in the Hong Kong real estate market…Like most investors, I was still worried that the Hong Kong dollar might break its peg to the US$. If that occurred, half of my savings (and the money I had borrowed from my dad) would be wiped out overnight. Fortunately, an easy solution existed: I turned to HSBC and sold HK$4mn forward against the US$. The cost? The difference between HK$ and US$ short term rates (plus a little something for HSBC), or less than 0.5% a year. In short, a simple, market hedge existed which allowed investors attracted by the value on offer amongst Hong Kong’s deeply discounted assets, but worried about the potential for a large currency devaluation, to deploy capital in Hong Kong’s equity, fixed income and real estate markets.This is what is lacking in Europe today…Private sector capital should normally start to be attracted by the cheaper real estate, cheaper labor, and easier regulations now prevalent across Spain, Portugal or Italy. Yet instead of rushing in, private sector capital continues to flee.

    Spain's Prime Minister Mariano Rajoy considers ECB bond programme - Spain is considering asking help from the European Central Bank's bond-buying programme but is not planning a full sovereign bailout, Prime Minister Mariano Rajoy was quoted as saying on Wednesday in Finnish newspapers. Last week the ECB agreed to launch a new bond-buying programme to lower struggling euro zone countries' borrowing costs. "In addition to growth, the only option I am considering is using the central bank's announced mechanism," Rajoy said, according to Helsingin Sanomat. "It is completely outruled that we would ask for a bailout for the whole country," he told business daily Kauppalehti.

    Spain digs in its heels over ECB's bailout conditions - The Spanish Prime Minister sparked concern across the eurozone yesterday after apparently ruling out a Greek-style bailout that would force Madrid to make specific budget cuts. Mariano Rajoy's resistance could stand in the way of a much-anticipated rescue of the country, which is struggling to bring its finances under control. After facing eye-watering borrowing costs over the summer, Spain is seen as a prime candidate for assistance under the European Central Bank's new bond-buying scheme, which is meant to bring down the punitive interest rates faced by debt-laden countries in southern Europe.But the scheme unveiled by the ECB President Mario Draghi would first force Spain to apply to one of Europe's bailout funds – something that could force Madrid to implement specific spending policies. "I will look at the conditions. I would not like and I could not accept being told which were the concrete policies where we had to cut," Mr Rajoy told Spanish television in his first interview since taking power in December. He said he had not yet decided if the ECB scheme to buy short-term bonds was "necessary or convenient".

    Spain house prices see record quarterly drop -The decline of Spanish housing prices accelerated in the second quarter, posting the steepest drop on record as a housing bust undermines the country's fragile banking industry amid weak domestic demand and rising unemployment. Spanish housing prices fell at a 14.4% annual rate in the second quarter, after declining 12.6% in the first three months of 2012 and 11.2% in the fourth quarter, the country's statistics agency INE said Friday. After over a decade of overbuilding and a rapid run-up in prices, Spain's housing boom ground to an abrupt halt in 2008, sending the economy into a tailspin. Spain is also struggling with a huge budget deficit and a local banking sector that is being strangled by the housing bust. In June, the government requested up to 100 billion euros ($130 billion) in aid from the euro zone to help recapitalize its ailing banks

    Spain's debt surges to record, compounds budget woes - Spain's public debt hit a new record in July, increasing concerns the country might not meet its budget deficit targets this year. However, a glimmer of hope comes from progress in Spain's debt-laden autonomous regions. In the second quarter of 2012, Spanish sovereign debt soared to 804 billion euros ($1.046 trillion), reaching 75.9 percent of the country's Gross Domestic Product (GDP), the Bank of Spain announced Friday. The figure is up from 774 billion euros in the first three months of this year, when the shortfall amounted to 72 percent of the Spanish GDP. According to the Spanish central bank data, the capital owed by the central administration increased by 4.4 percent in the months of April through June, while the debt of the country's semi-autonomous regions went up by a more moderate 2.8 percent. Debt reduction in the regions made "significant progress," Finance Minister Cristobal Montoro said, referring to the regions' efforts to rein in huge deficits, which they were able to cut to just 0.77 percent of their GDP. However, the high debt figure for the central government in Madrid is set to raise doubts about the country's ability to meet its budget deficit target of 6.3 percent for this year.

    Why OMT Cannot Possibly Solve Anything; Monti Warns Italian Unions; Over 200,000 Jobs at Risk; Italy's Insane Labor Rules - Amazing discrepancies in small business employment in Italy vs. the rest of the EU will go a long ways towards explaining why Mario Draghi's OMT plan to "save the euro" cannot possibly work. I pieced the following analysis together after reading some interesting comments on Eurointelligence in today's Daily Morning BriefingMario Monti warned Italian labour unions during a meeting in Rome that time was running out for action, government sources told ANSA. "Greece, Spain, Ireland and Portugal have boosted productivity and lowered labour costs, turning around a negative trend, while Italy has not improved productivity and has increased labour costs," Monti said. An effort for concrete results is urgently needed from talks between business leaders and unions, Monti told to the union leaders. But the biggest Italian union CGIL said "growth cannot come on backs of workers alone." Monti reminded unions that only a few weeks remained before the eurogroup and EU summits in October. The premier called for concrete signals within a month. Italy’s main small business association found that Italian SMEs may be cutting 172,000 jobs, the lionshare of all jobs at risk in Italy from the recession,  La Repubblica reports. Yesterday, the CGIA reiterated that idea. Italy risks having an additional 202,000 people unemployed in the second half of this year, relative to the same period in 2011, CGIA data shows. The association says the tax burden was the main problem - at over 60% for SMEs, and over 55% on average for Italian companies.

    Wage flexibility: No wriggling out of trouble - AT THE conference of the European Economic Association (EEA) in Malaga (see here for an earlier post on this) the president of the EEA, Jordi Gali, used his presidential address to discuss the merits of “wage flexibility” over the business cycle. The implications of his presentation for Europe are worrying, to say the least. In New Keynesian models, the dominant work horse of macro analysis in academia and central banks alike, more wage flexibility can neither magically fix an unemployment problem in a recession, as is often, if only implicitly, argued; nor does it lead to a downward spiral into an economic abyss. The crucial element, as Mr Gali showed, is the response of monetary policy. Under optimal monetary policy, the economy does gain from more wage flexibility.Critics of New Keynesian economics will argue that these models ignore important aspects of the economy, like a high demand for safe assets that downward adjusting wages cannot fix, and may even make worse. Or the belief of consumers about their future wealth, that dropping wages may worsen, too. But here is the worrying bit: you don't even need to go there in order to come to a worrying conclusion for Europe.

    A Voice from the Elderly Poor in Germany - Spiegel - As Germany's population ages, its birth rate declines and a smaller proportion of its citizens are paying into the state retirement fund, meager pensions for elderly citizens are becoming an increasingly troubling issue. German Minister of Labor and Social Affairs Ursula von der Leyen recently published alarming figures on the future level of German pensions that have sparked widespread concern over the looming danger of old-age poverty.  Likewise, figures from the German government's new report on provisions for old age, to be published in November, show that of the roughly 25 million employees in the country between the ages of 25 and 65 who make social security contributions, more than 4.2 million earn a gross monthly salary of less than €1,500. This only entitles these individuals to the legally guaranteed basic social security. The tax-funded payment was introduced in 2003 as a supplement to help elderly people who have low pensions and opt not to apply for welfare assistance eke out a subsistence-level existence.  German parties across the political spectrum are now scrambling to develop a new pension concept, but they have yet to make much headway. Meanwhile, pensioners like Renate Apel, 74, are struggling to make ends meet.

    Germany’s top court to decide rescue fund’s fate -- Mario Draghi’s bond-buying plan helped fuel a market rally last week, but a decision due Wednesday from Germany’s Federal Constitutional Court now poses the biggest tail risk to financial markets as judges prepare a ruling that could determine the fate of the euro zone’s permanent rescue fund. The decision centers on challenges to Germany’s participation in the 500 billion euro ($639.3 billion) European Stability Mechanism, or ESM. Critics charge that the treaty behind the ESM robs Germany’s parliament of its constitutional authority over the country’s budget and have asked for an injunction to prevent the country’s president from signing it into law. So Wednesday’s decision won’t mark the court’s final ruling, but experts say it should indicate whether the ESM will go ahead.

    Germany Can Ratify ESM Fund With Conditions, Court Rules - Germany’s top constitutional court rejected efforts to block a permanent euro-area rescue fund, handing a victory to Chancellor Angela Merkel, who championed the 500 billion-euro ($645 billion) bailout. The Federal Constitutional Court in Karlsruhe dismissed motions that sought to block the European Stability Mechanism, while ruling Germany’s 190 billion-euro contribution can’t be increased without legislative approval. The court said Germany can ratify the ESM if it includes binding caveats that it won’t be forced to assume higher liabilities without its consent. “We are an important step closer to our goal of stabilizing the euro,” German Economy Minister and Vice Chancellor Philipp Roesler told reporters in Berlin after the ruling today. “It has always been the goal of this government” to establish a “clear limit and to include parliament in all important decisions.” The legal challenge had delayed efforts by Merkel and other euro-area policy makers to stem the region’s debt crisis.

    Germany's highest court approves creation of euro rescue fund - Germany's highest court has paved the way for the creation of a €500bn(£400bn) rescue fund to tackle the eurozone's debt crisis after a huge popular petition to block it was rejected. The decision by the eight justices of the constitutional court in the south-western city of Karlsruhe allows Germany to ratify the treaty to establish the European stability mechanism (ESM) and will enable it to become effective next month. But an important condition attached to the ruling means that Germany's liabilities will be capped at €190bn, unless parliament rules otherwise. The limitation will go some way to assuage the concerns of German taxpayers whose frustration at the prospect of having to bail out indebted southern European countries indefinitely has been on the rise. A poll before the ruling showed that 54% of Germans wanted the court to block the ESM. Markets reacted positively to the decision with the euro reaching a four-month high, after the conditions imposed by the court, which had been widely expected to reject calls to block the fund, were less burdensome than German parliamentarians and other ESM supporters had feared. The German chancellor, Angela Merkel, for whom the ruling is a personal breakthrough, allowing the go-ahead of the two-pronged approach of both bailouts and budgetary discipline in the form of the fiscal pact that she has consistently advocated, said the decision sent a strong signal of Germany's commitment to Europe, and was positive news for the German taxpayer.

    German constitutional court declines to block ESM - Germany’s top court on Wednesday rejected calls to block ratification of the euro-zone rescue fund, triggering a modest sigh of relief from financial markets and clearing the way for implementation of an important tool in Europe’s effort to contain its three-year-old debt crisis. In a decision read from the bench of the Federal Constitutional Court in Karlsruhe, the red-robed judges rejected six requests for an injunction to prevent Germany’s president from signing the treaty establishing the 500 billion euro ($643.7 billion) European Stability Mechanism, or ESM. “The ruling simply removed a near-term item that was more speed bump than hurdle. More legislative and political challenges lay ahead,” “Today’s ruling simply does nothing to change that larger story. There’s just a larger piggy bank to now play with.” Chancellor Angela Merkel told the German parliament that the ruling sends “yet another strong signal to Europe and beyond: Germany is accepting its responsibility as the largest economy and reliable partner in Europe.”

    German court backs euro rescue fund with conditions (Reuters) - Germany's Constitutional Court gave a green light on Wednesday for the country to ratify the euro zone's new bailout fund and budget pact, but insisted the German parliament have veto powers over any future increases in the size of the fund. The eagerly awaited verdict boosted global stocks and the euro currency as investors breathed a sigh of relief that the euro zone's rescue fund for nations in crisis could soon take effect after months of delay. Germany is the only country in the 17-nation euro zone that has yet to ratify the European Stability Mechanism (ESM), which is meant to erect a 700 billion-euro firewall against the spread of the three-year-old sovereign debt crisis. "This is a good day for Germany and a good day for Europe," German Chancellor Angela Merkel said in a speech to parliament. Rejecting injunction requests from 37,000 plaintiffs seeking to block the ESM and a separate pact on new budget rules, the court set two main conditions for the treaties to go ahead. It said German liability in the rescue fund must be limited to 190 billion euros, the share set out in the current ESM treaty, and that any increase in that amount would require prior approval by the Bundestag lower house of parliament.

    German papers wary of Merkel's "costly victory" in euro ruling (Reuters) - Eurosceptical German media said on Thursday the country's top court had cast doubt on the legality of European Central Bank bond-buying in a ruling upholding the euro zone's bailout fund widely seen as political victory for Chancellor Angela Merkel. The Federal Constitutional Court gave the green light on Wednesday to the European Stability Mechanism (ESM) in a verdict that brought relief to anxious financial markets. The respected judges insisted the German parliament must have a veto right over any increase in Berlin's contribution to the 500 billion euro ($644 billion) ESM. But conservative newspapers opposed to bailouts of troubled euro zone member states highlighted a passage of the ruling which said that ECB bond-buying or leveraging the ESM at the central bank could be illegal. The judges said that for the ESM to deposit government bonds at the ECB as a security for loans would violate an EU treaty ban on direct financing of governments, effectively ruling out giving the rescue fund a bank licence as France has proposed. They also said ECB bond-buying on the secondary market "aiming at financing the members' budgets independently of the capital markets is prohibited as well, as it would circumvent the prohibition of monetary financing".

    Europe inches forward - So basically the German constitutional court, via president Voßkuhle, has stated that it us up to German politicians and not his court to determine how the ESM should be used, but no further liability over what is already specified under the existing ESM agreement can be created without further full ratification of the German parliament.  So pretty much as expected really, a “capped” YES which means the ESM has maximum working capital of €500bn. The paragraph that is also quite interesting as it grants the German parliament veto power over the use of any funds: the Senate held that the German Bundestagʼs overall budgetary responsibility was safeguarded with regard to the giving of guarantees in the context of the aid to Greece and of the European Financial Stability Facility because the amount of the Federal Republic of Germanyʼs overall financial commitment was limited, the German Bundestag had to individually approve every large-scale aid measure, the Bundestag was entitled to monitor the conditionality of the measures, and the aid measures were subject to a time- limit With a view to the Federal Republic of Germanyʼs overall financial commitment involved with the Treaty establishing the European Stability Mechanism (1), and with a view to the Bundestagʼs rights to be informed, which are necessary to safeguard the Bundestagʼs overall budgetary responsibility (2), the Treaty establishing the European Stability Mechanism only fulfils these requirements if it is interpreted in conformity with the constitution. This is only a preliminary ruling but it’s hard to see the final ruling changing significantly. Germany currently has a €190bn liability ceiling and , at present, I think it is unlikely that German lawmakers could find political will to approve more given existing obligations via the ECB/TARGET2 and other channels. The court also explicitly ruled out the ESM borrowing via the ECB which it claimed was ”incompatible with Article 123″.

    German Constitutional Court tightens the noose yet further.  - Just as it gave the go-ahead for Maastricht, Lisbon, the Greek rescue, and the EFSF bailout fund with a "Yes, but" with the 'but' mattering most in the end — Karlsruhe has now endorsed the European Stability Mechanism (ESM) with strings attached as well.  It has done so only under conditions that will greatly complicate EMU rescue politics in the future. Here are some instant thoughts. Germany's ESM share is capped at €190bn, so what happens if Spain and Italy are forced to step out of the rescue machinery because they themselves are in too much trouble to fund the mechanism? The Court made it clear that Germany will not automatically pick up the slack. "The Federal Republic of Germany must clearly express that it cannot be bound by the Treaty establishing the European Stability Mechanism in its entirety if the reservation made by it should prove to be ineffective." This matters. It may well be tested. The Court also killed off any idea of a banking licence for the ESM, viewed as crucial to give it adequate firepower.

    One-Size-Fits-All Monetary Policy - Dallas Fed - The ongoing euro-area crisis is seen by many as vindication of skeptics who said that a monetary union encompassing a disparate group of countries is doomed to fail because the countries do not constitute what economists call an optimum currency area. Thus, they argued, a one-size-fits-all monetary policy that goes with participation in an alliance such as the European Economic and Monetary Union (EMU) creates strains that ultimately prove insurmountable. In the eyes of the skeptics, each country is better off setting its own interest rates at levels appropriate for local economic conditions. Such a contention raises the question: How far apart were the interest rates the European Central Bank (ECB) set for the euro area as a whole from those that would have been more appropriate for individual member states given their local economic conditions?

    Power Grab: The Noose Tightens On National Sovereignty In Europe - When French and Dutch voters were given an opportunity to vote for the European constitution in 2005, which would have transferred considerable sovereignty from their countries to the European government and its unelected bureaucrats, they “unexpectedly” killed it. They wanted to hang on to their sovereignty. An unforgettable lesson for European politicians: don’t let the riffraff decide. Such matters are best handled by the elite—politicians, bankers, and unelected bureaucrats. And on Wednesday, they were busy handling such matters. In the morning, Andreas Voßkuhle, President of the German Constitutional Court, announced that two of the main Eurozone survival strategies, the ESM bailout fund and the Fiscal Union treaty, would “most likely” not violate the constitution (press release, flash analysis). By rejecting the plaintiffs’ efforts to block the laws, the Court allowed Federal President Joachim Gauck to sign them; and they’d become binding international treaties. Thus, the Court nodded with a stern smile on the transfer of sovereignty from parliament to unelected bureaucrats within the European Union government. For the fifth time—after waving through the EFSF bailout fund in 2011, the Lisbon Treaty in 2009, the introduction of the euro in 1998, and the Maastricht treaty in 1993. Each time, it added conditions that gave plaintiffs a pretext to proclaim victory and try again next time. True to form, Peter Gauweiler (CSU), one of the most vocal plaintiffs, called the decision a “giant success“ and “legal sensation”; the conditions would make it more difficult to turn “the ESM into a bottomless barrel,” he said.

    Has 'Super Mario' Really Saved the Euro? - The Daily Telegraph’s Ambrose Evans-Pritchard has the most relevant line out there … “Democracies will make or break the back of EMU.”Yes, if the populations continue to want to stay in the Euro and take any and all the pain that is implied by entering into the modern day equivalent of a Victorian debtor’s jail, then the blow-up risk is gone.That said, is there is a point that a population through a populist vote could well say “enough is enough” and just decides to default and/or leave the Euro? There is still a lot of tail risk out there, which is being ignored in the current euphoria.Like forcing the Greeks to take another 14 billion in austerity which will then lead to huge further lay-offs. At some point Greece could well break.Well, that’s just Greece, you might say, and in any case, haven’t the markets discounted a “Grexit”? It’s hard to envisage the markets discounting an event the likes of which have no historic precedent. There has never been a country which has ever left or been booted out of the Eurozone before and it is unclear as to why a Greek exit would do anything but unleash a further speculative dynamic, where traders seek to pick off the next likely country to leave. That could prove highly destabilising.And what happens when Spain finally capitulates and submits to yet another huge austerity program? How far are we then off from a Greek scenario?

    Germany Has Extracted Stealth Victory Over ECB -- Last week the European Central Bank (ECB) announced what many around the world had hoped it would: A plan that would allow the Bank to “do all it takes” to support the euro. The deal actually contains many concessions to the German point of view. First, any euro-zone member nation that seeks ECB support for its bonds in the secondary market will have to make a formal application. Naturally, such a public application will likely come with political costs, embarrassment and even stigma. Second, any applicant country will have to agree to Germanic-style deficit reduction and economic restructuring programs, which likely come with huge political costs and short term economic pain. Third, ECB secondary market support will be granted only if the somewhat underfunded European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) commit their funds in parallel. The Bundesbank has long held that the ECB should not be permitted to abuse its power to create synthetic money without spreading the cost to the rest of Europe and internationally, via the IMF. Fourth, the ECB’s support is limited to bonds with a maximum of three-year maturities. Eurozone members in trouble will never overcome their excessive debt problems by solely borrowing short-term. Finally, all ECB bond purchases will be executed exclusively in the secondary market, thereby achieving the German aim to preserve the ECB that forbids direct financing of any euro-zone member by other members.

    Election Report: 2012 Netherlands Parliamentary Elections – An Unexpected Outcome - Most pundits agreed that the Dutch parliamentary elections held on September 12th would strengthen the radical left Socialist party and thereby would signal a strong anti-Europe vote. Also, the political centre would be decimated and there was much speculation about which obscure combination of parties would form the next government. All these predictions turned out to be completely false. Unexpectedly, the two largest parties – the Liberals and Labour – received about a quarter of the seats and increased their seat share by respectively 6% and 5%. The Liberal party maintained its lead over the Labour party and therefore the prime minister – Mark Rutte – will probably stay on. Nine other parties made it to parliament, but none of them has more than 10% of the seats. As a consequence, the only likely coalition government seems to be a Liberal-Labour coalition, which was in power from 1994 to 2002 together with the smaller social liberal party (D66). The radical left Socialist Party remains stuck at 9.6% of the vote, despite the fact that for most of the summer the polls indicated they would receive almost 20% of the vote. The radical right Freedom Party, led by Geert Wilders, suffered a major defeat losing 9 of their 24 seats. Also the Christian Democratic Party that dominated Dutch politics until recently suffered a humiliating defeat, now receiving only 8.5% of the seats.

    The UK's poor labor productivity may be signaling more layoffs - The UK economy is in a "double dip" recession, with the longest recovery in recent history - and still nowhere close to the pre-recession GDP. The nation was impacted by the US financial crisis as hard as it was hit by the Eurozone contraction. Somewhat surprisingly however, the UK's overall workforce rebounded this year. More workers and low GDP means that the output per worker (productivity) has worsened dramatically. DB: - ... output per person or per hour worked – has been exceptionally weak in this recession. In fact, depending on exactly how we measure it, UK workers are 2-3% less productive than before the crisis five years ago. In the absence of a crisis, we would have expected to be well over 10% more productive than five years ago. In terms of the sectors that have been responsible for this weakness, it has been services rather than manufacturing, but also the extraction sector (North Sea oil/gas extraction and production) where we’ve seen productivity slide the most. DB proposes multiple explanations for the UK's relatively poor productivity, including declining wages (that allow companies to keep more workers), public jobs, and fewer bankruptcies than in previous recessions. None seem to provide the full answer. A more troubling explanation however is that the UK unemployment is simply lagging the GDP decline and we will see more layoffs going forward. The reduction in the number of employees in turn will improve labor productivity as it did in the US where companies were quick to let employees go.

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