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

Saturday, September 22, 2012

week ending Sept 22

Fed's Balance Sheet Shrinks Slightly in Week--The U.S. Federal Reserve's balance sheet shrank modestly over the past week, despite an increase in mortgage-backed securities as the central bank embarked on a new round of asset purchases. The Fed's asset holdings in the week ended Sept. 19 were $2.823 trillion, down from $2.825 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities decreased to $1.646 trillion from $1.651 trillion in the previous week. But the central bank's holdings of mortgage-backed securities rose to $850.14 billion from $843.73 billion a week ago. Thursday's report showed total borrowing from the Fed's discount lending window was $1.82 billion on Wednesday, down from $1.87 billion a week earlier. Commercial banks borrowed $28 million from the discount window, a decrease from $70 million in the previous week. U.S. government securities held in custody on behalf of foreign official accounts totaled $3.592 trillion, compared with $3.575 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts rose to $2.895 trillion from $2.875 trillion a week earlier.

FRB: H.4.1 Release--Factors Affecting Reserve Balances - September 20, 2012

BofA Sees Fed Assets Surpassing $5 Trillion By End Of 2014 - Yesterday, when we first presented our calculation of what the Fed's balance sheet would look like through the end of 2013, some were confused why we assumed that the Fed would continue monetizing the long-end beyond the end of 2012. Simple: in its statement, the FOMC said that "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." Conservatively, we assumed that it would take at the lest until December 2014 for unemployment to cross the Fed's "all clear threshold." As it turns out we were optimistic. Bank of America's Priya Misra has just released an analysis which is identical to ours in all other respects, except for when the latest QE version would end. BofA's take: "We do not believe there will be “substantial” improvement in the labor market for the next 1.5-2 years and foresee the Fed buying Treasuries after the end of Operation Twist." In other words, Bank of America just predicted at least 2 years and change of constant monetization, which would send the Fed's balance sheet to grand total of just over $5,000,000,000,000 as the Fed adds another $2.2 trillion MBS and Treasury notional to the current total of $2.8 trillion.

Effects of QE3 - On Thursday the Federal Reserve announced a series of measures that will come to be referred to as a third round of "quantitative easing," or QE3. Here I review what effects this is intended to have and some of the developments so far. There are 3 components to the Fed's plan. The first (announced in June) is a commitment to continue through the end of the year the Fed's program to replace its short-term Treasuries with longer-term Treasuries. Second, the Fed plans to purchase an additional $40 B each month in agency mortgage-backed securities (MBS). Between these, this will end up taking $85 B in longer-term securities off the market each month through the end of the year. Moreover, the MBS purchases are open-ended, with the Fed saying they will continue unless the labor market improves: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. Third, the Fed signaled that it intends to keep interest rates at "exceptionally low levels" through 2015. The new measures thus combine large-scale asset purchases (LSAP) with a declaration of its future intentions, a combination that many of us feel is more likely to be effective than either LSAP or pure announcements of future intentions could be on their own.

Meet Feddie Mae - The QE3 has been officially launched by the Federal Reserve, which has promised to buy $40 billion of asset-backed securities from the market each month, on top of $35 billion per month of Treasury securities it is already buying as part of its program to reinvest proceeds from securities which are maturing in its existing portfolio.  Why is the Fed buying mortgage-backed securities and not Treasuries, which it bought under QE1 and QE2? In the past fiscal year for the US government, the Fed purchased 77% of all the new debt issued by the Treasury, and because the Fed focused its purchases in the 10 year and beyond maturities, the Fed is bumping up against its self-imposed limit of not owning more than 70% of the outstanding paper in any maturity. The Fed is already close to this limit for maturities clustered around the 10 year mark, and the Fed owns on average 50% of all the outstanding paper in the 10 year to 30 year maturities. At the same time, the Fed has ceased to be a presence in the 5 year and under element of the maturity spectrum. Traditionally this is where the Fed has parked all of its assets, but could it be that it doesn’t wish to hold paper that earns less than 1% p.a.? The only reason the market has rushed into this section of the yield curve is that the private sector is afraid of default risk in the private market, and is willing to accept virtually no return for the safety of owning US Treasuries. The Fed has no such concern – it is the government. This gives the Fed the advantage of concentrating in long term maturities that yield 2% or more. But by concentrating so heavily in these maturities, and demanding that banks pass these securities on to the Fed before anyone in the private sector has a chance at buying them, the Fed is crowding out the private sector, which is at the same time starved for safe interest income.

When the Fed Chair is an Academic - The big economic news of the week was, in fact, big economic news: the Fed's announcement of significant changes from past practice in the the quantity of its next round of large scale asset purchases ("unlimited"), and in the timing of any future reversal of this expansionary policy ("a considerable time after the economic recovery strengthens"). I view this as a pretty fundamental shift in how the Fed hopes to affect the economy.  Rather than trying to push economic activity one way or the other through its management of interest rates (which can alter economic activity through its portfolio-rebalancing and wealth effects, for example), the Fed is now quite explicitly trying to affect economic activity by altering interest rate and inflation expectations.  As Krugman has put it, the crux of the matter here is that this is pretty close to a "credible promise to be irresponsible". This is ground-breaking stuff for a central bank.  This type of expectations-management hasn't really been done before -- at least not as an expansionary policy in a zero-lower-bound environment.  And that is why I think that this could only have happened with an academic as Fed chair.  There's a vast academic literature on the channels of monetary policy transmission (important bits of it written by Ben Bernanke himself), and a growing body of academic evidence that suggests that monetary policy's biggest impacts may often be through changing expectations.  Woodford's already-famous August 2012 paper summarizes and crystalizes much of the current thinking on this subject, but the evidence and literature on the expectations channel has been steadily building for more than a decade.

Bernanke makes an historic choice - Ben Bernanke, chairman of the Federal Reserve, has persuaded his colleagues to make a bold decision. By a majority of 11 to one, they decided last week to undertake a monthly programme of asset purchases aimed at the labour market. Is this riskless? No. Does it make sense? Yes, because the results of doing nothing would be far worse.As the press release of the open market committee stated: “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 also “consistent with its statutory mandate”, to foster “maximum employment and price stability”.Mr Bernanke elaborated the argument for such action in the speech he delivered last month at the symposium at Jackson Hole, Wyoming, organised by the Federal Reserve Bank of Kansas City. This contained an extraordinary sentence: “The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last many years.” I congratulate Mr Bernanke for this ethical response. I applaud him for recognising that the Fed not only can but should do something about this dire situation.

Two Cheers for the Fed - Robert Reich - With deficit hawks circling overhead, the responsibility for creating jobs has fallen by default to Ben Bernanke and the Federal Reserve. Last week the Fed said it expected to keep interest rates near zero through mid 2015 in order to stimulate employment. Two cheers.  The problem is, low interest rates alone won’t do it. The Fed has held interest rates near zero for several years without that much to show for it. A smaller portion of American adults is now working than at any time in the last thirty years.  So far, the biggest beneficiaries of near-zero interest rates haven’t been average Americans. They’ve been too weighed down with debt to borrow more, and their wages keep dropping. And because they won’t and can’t borrow more, businesses haven’t had more customers. So there’s been no reason for businesses to borrow to expand and hire more people, even at low interest rates. The biggest winners from the Fed’s near-zero rates have been the big banks, which are now assured of two or more years of almost free money. The big banks haven’t used  the money to refinance mortgages – why should they when they can squeeze more money out of homeowners by keeping them at higher rates? Instead, they’ve used the almost free money to make big bets on derivatives. If the bets continue to go well, the bankers will continue to make a bundle. If the bets sour, well, you know what happens then. Watch your wallets.

QE3 will not fix America’s problems, warns Paul Volcker - Paul Volcker, the former Federal Reserve chairman credited with taming the inflationary threat of the 1970s, has warned that further quantitative easing will fail to repair economies in Europe and the US. Mr Volcker, addressing a conference at Gleneagles in Scotland, said the decision by the Fed to begin a third round of asset buying — nicknamed QE3 — amounted to the “most extreme easing of monetary policy” he could recall. Mr Volcker’s comments came as the World Trade Organisation intensified the economic gloom by slashing its global growth forecasts. The organisation said it expected the world economy to grow 2.5pc this year, from a previous 3.7pc forecast, while growth in 2013 would slow from a previous estimate of 5.6pc to 4.5pc. Although not explicitly directed at Fed chairman Ben Bernanke, Mr Volcker’s words will be seen as a veiled criticism of the limitations of the current strategy being employed by the Federal Reserve.

Fed’s Dudley Defends Central Bank’s Decision to Act - A key Federal Reserve official expressed strong support Tuesday for the stimulus program launched by the central bank last week, saying the Fed can do more if it decides the U.S. economy needs the help. “The decision to ease policy further is fully consistent” with the central bank’s legal mandate to promote maximum sustainable employment while maintaining price stability, Federal Reserve Bank of New York President William Dudley said. Without the new action, “growth would remain too subdued over the next several years to make big inroads into the spare capacity that remains from the Great Recession,” the official said. Mr. Dudley, who serves as vice chairman of the monetary-policy-setting Federal Open Market Committee, spoke in the wake of last week’s gathering that set in motion new Fed economic aid. The central bank launched a new, open-ended mortgage-buying program that will increase the central bank’s balance sheet, tying the program’s fate to how well the labor market performs. The Fed also pushed out its conditional guidance that interest rates will stay very low from late 2014 until the middle of 2015.

A few more QE3 thoughts - HAVING had a weekend to digest last week's big monetary policy news, I'd like to add a little more food for thought. First, Dylan Matthews has a very nice interview with Michael Woodford that I recommend reading in its entirety. As part of it, however, Mr Woodford disavows any influence from Scott Sumner in his choice to move toward a recommendation of a nominal GDP target. It is certainly correct to say that Mr Woodford has been focusing on these issues for a while and making important contributions to the literature. That, however, helps illustrate the importance of Mr Sumner and the market monetarist emergence. It seems very possible—probable even—that Mr Woodford and other prominent monetary economists would have been led by the events of the crisis and recovery to approximately the position in the debate they now occupy without Mr Sumner's influence. But despite the fact that many of the ideas in Mr Woodford's Jackson Hole paper were already circulating in 2009, most of the economists engaging in public debate and most of those writing about that public debate were then operating under the assumption that fiscal policy was the main if not the only game in town. Mr Sumner helped convince many of those of us with a familiarity with monetary economics to rethink the frame within which we were operating and to reconsider the conclusions we'd drawn. His work made us more receptive to research by people like Mr Woodford.

Fed’s Evans: Fed ‘Running Flat-Out’ With Accommodative - The head of the Federal Reserve Bank of Chicago said on Tuesday the central bank can continue buying assets to stimulate growth if the U.S. economy doesn’t respond immediately to the Fed’s recently announced program to buy mortgage securities. “We will continue to do this and continue doing this next year,” Chicago Fed President Charles Evans said in a speech here. He stopped short of suggesting new types of policies the Fed can take to jump-start economic growth. “We are running flat-out” with asset-purchasing efforts, he said. Mr. Evans added that better explaining the Fed’s policies could help boost confidence and facilitate economic expansion. “We need to go out and explain what we are doing…what we are hoping to accomplish,” he said. Summing up the Fed’s options if the economy doesn’t respond adequately to the new round of securities purchases, he said: “Continue asset purchases and better communication.” Mr. Evans said he’s optimistic about the effectiveness of the Fed’s current course.

Kansas City Fed’s George Opposes Bond Buying - Kansas City Federal Reserve Bank President Esther George Tuesday said she opposed the central bank’s latest bond-buying effort, saying it risks higher inflation and distortions in the market,  “I was not in favor of doing more. We have done a lot,” said Ms. George. She isn’t a voting member of the Fed’s policy-setting committee. “When I look at the economy and think what it is that’s holding back demand” and causing unemployment to remain high, “it does not seem like these are factors conducive to more easing.” Cheaper money, she said, might help with getting credit flowing, but “in today’s setting, I can’t see that that’s the issue. “So adding to it feels to me like compounding the risk.” Ms. George said she is concerned that the latest Fed effort might lead to market distortions. “Anytime you have the government this involved, you have to think something is not happening right. Right now, at zero interest rate,” she said, “the markets really aren’t pricing risk. “They’re not really functioning the way they normally would.”

Fed’s Fisher Decries Bond-Buying Plan - A veteran central banker attacked Wednesday the Federal Reserve‘s decision to provide new monetary policy stimulus, while blasting Congress for its own set of failures. In a speech in New York, Federal Reserve Bank of Dallas President Richard Fisher argued, as he has in a series of media interviews over recent days, that the Fed’s decision to launch opened-ended mortgage bond buying, in a bid to speed up growth, was a mistake. Mr. Fisher doesn’t have a voting role on the monetary policy setting Federal Open Market Committee. He has for some time been a very vocal and persistent opponent of giving the economy additional stimulus, believing the Fed has already done enough.

Fed Officials Highlight Benefits of Bond-Buying --Two regional Federal Reserve presidents defended the central bank’s new stimulus actions in separate speeches Thursday. New monetary policy stimulus undertaken is the forceful response that is needed to get the economy back to health, Federal Reserve Bank of Boston President Eric Rosengren said Thursday. Meanwhile, Federal Reserve Bank of Atlanta President Dennis Lockhart at an event in Kansas City focused on benefits for the housing sector, saying home builders and sellers could see traction in the long-struggling area of the economy. The actions put in place by the Fed offer “significant additional support to the economic recovery,” Mr. Rosengren said. The fresh stimulus “should result in stronger economic growth, and return us to full employment more quickly than would be the case absent the policies,” Mr. Rosengren said.

Fed’s Lockhart Backs QE3, Says More Action Could Come - A key Federal Reserve official offered his support for the central bank’s decision last week to provide additional stimulus to the U.S. economy, and noted more action could come if conditions don’t improve. “The rate guidance, asset purchase, and communications policy actions taken last week represented a forceful attempt to improve the outlook for the economy,” Federal Reserve Bank of Atlanta President Dennis Lockhart said Friday. The actions “will help,” Mr. Lockhart said, adding that “the necessary natural healing from the large disruption of the financial crisis will certainly be supported, and likely accelerated” with the new central-bank actions. Mr. Lockhart also deemed the steps taken by the Fed as “preventative,” saying the stimulus “has improved the country’s economic prospects by reducing the potential downside apparent in the incoming data.” The official added: “If do not see improvement, more action may be taken.”

Fed’s Kocherlakota Calls Bond-Buying Program ‘Good Step’ - Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said in a speech Thursday that the central bank should respond to high unemployment with an even more aggressive approach than the Fed announced last week. His proposal: Pledge to keep short-term interest rates very low until the unemployment rate — which was 8.1% in August — falls to 5.5%. He said it could take four or more years to reach that goal. His comments, to a group in Ironwood, Mich., were notable for several reasons. In his three years at the Minneapolis Fed, Mr. Kocherlakota has been seen as a “hawk” — a short-hand term used in central banking circles to refer to those who worry more about inflation and are generally reluctant to pursue easy money policies. In 2010, he drew attention for blaming high unemployment on structural problems — such as too many jobless construction workers who couldn’t fill available jobs — rather that a shortfall in demand; the Fed can’t do much about the former. Mr. Kocherlakota said he has been studying the issue of structural unemployment closely and sees less evidence that it is the root problem in the economy that he formerly espoused. “You have to learn from the data,” he said, and his analysis has led him to put less weight on the structural argument.

Counterparties: A hawk in dove’s clothing - Yesterday, the president of the Dallas Fed blasted the central bank’s decision. Today, in separate speeches, the presidents of the Atlanta, Boston and Minneapolis Feds defended the monetary stimulus decision and gave us some insight into how QEternity will play out. As part of QE3, the Fed promised to keep interest rates low till at least mid-2015. Minneapolis Fed President Narayana Kocherlakota argues that the FOMC should keeps rates “extraordinarily low until the unemployment rate has fallen below 5.5 percent”. For context, unemployment rates have not been below that level since April 2008. As Neil Irwin writes, Kocherlakota’s target is especially noteworthy because he is “generally viewed as one of the more hawkish, or inflation-phobic, members of the FOMC”. If he’s on board with QE3, Tim Duy’s conclusion that the hawks have been marginalized, or at least converted, appears true. The Atlanta Fed’s Dennis Lockhart struck a less polemic tone in stressing the “far from satisfactory” state of the US job market. But he made a clear defense of QE3 by drawing a distinction between training America’s workforce and helping its workers in the short term: “Economic development is about jobs for people. Workforce development is about people for the jobs”. The implication: BAs and vocational training, while helpful, won’t be enough get us out of an employment crisis.Eric Rosengren of the Boston Fed was far less subtle, delivering a speech entitled “Acting to Avoid a Great Stagnation”. In his view, the logic of QE3 is simple and emphatic: “improve economic conditions much more quickly – so the period of very slow recovery … does not persist”.

Fed’s Kocherlakota surprises with dovish stance — A senior Federal Reserve official thought to be in the hawkish camp surprised Fed watchers Thursday by suggesting the central bank can keep rates low until the unemployment rate falls below 5.5% as long as inflation stays stable. In a speech in Ironwood, Mich., Narayana Kocherlakota, president of the Minneapolis Federal Reserve, remarked that the Fed would be satisfying its stable-inflation mandate as long as its outlook for inflation over the next two years is between 1.75% and 2.25%, and longer-term inflation expectations are stable. He noted that the medium-term outlook for inflation has not risen above that level for 15 years. The new “liftoff plan,” Kocherlakota said, was an alternative to the proposal from Charles Evans, president of the Chicago Fed Bank, in which the central bank would commit to keeping rates exceptionally low until unemployment falls below 7%, only stopping if inflation rises to 3%. Kocherlakota also said he doubted that the Fed could stimulate the economy by tolerating higher inflation. Many households would only save more if inflation increased because of worries that their wages would not keep up with higher prices. Fed watchers noted that, only in April, Kocherlakota said the central bank might have to raise rates by the end of the year.

Fed will 'stay the course,' Dudley says - The Federal Reserve will "stay the course" of its easier monetary policy until the economy is clearly rolling, William Dudley, president of the New York Federal Reserve Bank, said Tuesday. "If you're trying to get a car moving that is stuck in the mud, you don't stop pushing the moment the wheels start turning - you keep pushing until the car is rolling and is clearly free," he remarked in a speech to the Morris County Chamber of Commerce in Florham Park, N.J. Dudley said the benefits of the Fed's third round of asset purchases, or QE3, "substantially" exceeded the costs. While headline inflation may edge higher for a few months on higher energy and grain prices, fundamentals are in line with the central bank's 2% inflation target, he added. Dudley also said that QE3 was designed to increase confidence in the recovery, and if successful, may lead to a rise in long-term Treasury yields, a jump in expected returns on private assets and a decline in risk premiums. "This matters because such shifts would provide support to the economic recovery," he commented.

The Case for More Monetary Accommodation - Charles Evans, president of the Chicago Fed, explains the Fed's recent decision to provide more accommodative monetary policy at the end of a speech he gave on Monday: Given the slow and fragile recovery, the large resource gaps that still exist, and the large risks we face, it remains clear that we needed a more resilient economy that can withstand the headwinds that might come its way. In many venues over the past couple years I have laid out my preferred way to provide additional accommodation.[8] Specifically, I believe we should adopt an explicit state-contingent policy rule that commits the Fed to providing accommodation at least as long as the unemployment rate remains above 7 percent and the outlook for inflation over the medium term is under 3 percent. If our progress toward this unemployment marker falters, then we should expand our balance sheet to increase the degree of monetary support. Indeed, we took such an action last week. Note the importance of the inflation trigger — it is a safeguard against unacceptable outcomes with regard to price stability. I also believe we should be more explicit about what it means for the inflation target to be symmetric... Namely, symmetry means that the costs of an inflation rate above our 2 percent goal are the same as the costs of equal-sized miss in inflation below 2 percent. Its implication is that we should not be resistant to policies that could move the unemployment rate closer its longer-run level, but run the risk of inflation running only a few tenths above our 2 percent goal. Such accommodative polices could further improve the employment picture, even beyond our recent highly beneficial actions.

Low rates until unemployment hits 5.5%? A Fed official gives his ‘plan for liftoff’.: Since the Federal Reserve announced its groundbreaking new strategy last week to try to get the U.S. economy on track there have been some big open questions. The biggest: Just what would qualify as “back on track”? BloombergNow, one Fed policymaker is offering some specific—and surprising—answers. Narayana Kocherlakota, president of the Federal Reserve Bank of Minnesota, laid out in a speech Thursday what he calls a “contingency plan for liftoff.” Here’s the most important part: He argues that “as long as the [Federal Open Market Committee] satisfies its price stability mandate, it should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5 percent.” He could hardly be clearer. As long as inflation isn’t a problem, Kocherlakota is saying, the Fed should keep its foot all the way on the gas pedal until unemployment drops from its current 8.1 percent down to 5.5 percent. What makes it particularly surprising is that Kocherlakota is generally viewed as one of the more hawkish, or inflation-phobic, members of the FOMC. He dissented from two moves by the Federal Reserve to ease policy in 2011. Yet this proposal goes further than that of arguably the biggest dove on the committee, Charles Evans of the Chicago Fed. Evans has proposed that the Fed pledge to keep easy monetary policy in place until either unemployment drops below 7 percent or inflation rises above 3 percent.

Fed Watch: Hawks Are Marginalized - There has been a lot of Fedspeak over the last few days as policymakers expand upon the shift to open-ended QE. See Cardiff Garcia at FT Alphaville for an overview of some of the dovish talk, and see Pedro Da Costa at Reuters for some thoughts on the hawkish talk, described as a "vocal minority." See also Reuters for an interview with St. Louis Federal Reserve President James Bullard, who claims that he would have voted against QE3: "I would have voted against it based on the timing. I didn't feel like we had a good enough case to make a major move at this juncture," said Bullard, who has been viewed as a centrist on the spectrum of Fed officials, though in recent months he has sounded opinions that have sounded more hawkish as he has expressed doubts about the need for further stimulus. Bullard does acknowledge his preference for open-ended QE, had he believed it was needed: Even so, Bullard said some of the contours of the plan, which has no set end date, were in keeping with how he thinks monetary policy should be conducted with interest rates already near zero. Leaving end dates off a bond buying program can make the policy "more effective," he said. Bullard is also reported to have expressed support for dropping the dual mandate, although I am not seeing a direct quote. He also voiced concern that QE3 could spill over into higher commodity prices, as happened with the previous rounds of Fed bond-buying, although he said the soft tone of the world economy would help curb price rises.

Fed Watch: Getting Lonely to be a Hawk -  Minneapolis Federal Reserve President Narayana Kocherlakota today gave a speech that was something of a shocker. But a little background first. Kocherlakota has generally be viewed as a hawk, more so than his colleague St. Louis Federal Reserve President James Bullard. See, for example, the Credit Suisse mapping of Fed policymakers. I referred to Kocherlakota as one of the "Three Stooges" among the voting members of the 2011 FOMC meetings in regards to his dissents. So it came as something of a surprise today when he said: The substance of this liftoff plan is that, as long as longer-term inflation expectations remain stable, the Committee will not raise the fed funds rate unless the medium-term outlook for the inflation rate exceeds a threshold value of 2 1/4 percent or the unemployment rate falls below a threshold value of 5.5 percent. Note that neither of these thresholds should be viewed as triggers—that is, once the relevant cutoffs are crossed, the Committee retains the option of either keeping the fed funds rate extraordinarily low or raising the fed funds rate. At first blush, this sounds like a light version of Chicago Federal Reserve President Charles Evans' policy approach in which Evans would explicitly allow for an inflation rate as high as 3% as long as unemployment was above 7%. With this sentence, Kocherlakota appears to have decisively moved from the hawkish column to the dovish. Mark Thoma, however, argues that there is less here than meets the eye, noting that Kocherlakota shows no willingness to accept that inflation greater than 2% may be helpful. Indeed, Kocherlakota seems focused on the Fed's 2% target, with the 2.25% simply allowing for some uncertainty of plus or minus 25bp around that target. A true dove, in the classic definition (as I explain here), is a policymaker that seeks relatively higher inflation than his/her colleagues. But by that definition, Evans is the only true dove. The rest of the FOMC worships at the altar of their newly enshrined 2% target.

Bullard Defends the Indefensible - James Bullard, the President of the St. Louis Federal Reserve Bank, is a very fine economist, having worked his way up the ranks at the St. Louis Fed after joining the research department at the St. Louis Fed in 1990. Bullard may just be the most centrist member of the FOMC (see here), and his pronouncements on monetary policy are usually measured and understated, eschewing the outspoken style of some of his colleagues (especially the three leading inflation hawks on the FOMC, Charles Plosser, Jeffrey Lacker, and Richard Fisher).But even though Bullard is a very sensible and knowledgeable guy, whose views I take seriously, I am having a lot of trouble figuring out what he was up to in the op-ed piece he published in today’s Financial Times (“Patience needed for Fed’s dual mandate”) in which he argued that the fact that the Fed has persistently undershot its inflation target while unemployment has been way over any reasonable the rate consistent with full employment, is no reason for the Fed to change its policy toward greater ease.  In other words, Bullard sees no reason why the Fed should now  seek, or at least tolerate, an inflation rate that temporarily meets or exceeds the Fed’s current 2% target. In a recent interview, Bullard stated that he would not have supported the decision to embark on QE3.To support his position, Bullard cites a 2007 paper in the American Economic Review by Smets and Wouters “Shocks and Frictions in US Business Cycles.” The paper estimates a DSGE model of the US economy and uses it to generate out-of-sample predictions that are comparable to those of a Bayesian vector autoregression model. Here’s how Bullard characterizes the rationale for QE3 and explains how that rationale is undercut by the results of the Smets and Wouters paper.

Calm down people. Kocherlakota is still a hawk. - A certain kind of nerd is excited about this recent speech by Narayana Kocherlakota, the president of the Minneapolis arm of the Federal Reserve.  Watching him speak, some people think they saw a leopard not only change its spots, but but paint stripes on as well.The reason?  Well, Kocherlakota is famously an inflation hawk (we do like our animal analogies, don’t we?), but in the speech he argued that the Fed should commit to keeping interest rates at “exceptionally low levels” until unemployment in America falls to 5.5% (it’s currently 8.3% and was last at 5.5% around May 2008) and, as a general rule, inflation hawks are not meant to care about unemployment.  They’re meant to focus, like a hawk, on inflation.  Here are Bloomberg, Joe Weisenthal, Neil Irwin, FT Alphaville, Felix Salmon, Tim Duy, Scott Sumner, Aki Ito and Brad DeLong (I don’t mean to suggest that these guys are all suggesting that Kocherlakota has become a dove — they’re just all worth reading).Let’s look at his speech: As long as longer-term inflation expectations are stable and that the Committee’s medium-term outlook for the annual inflation rate is within a quarter of a percentage point of its target of 2 percent, [the FMOC] should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5 percent. This is not the statement that a dove would make.  A dove would be speaking about giving weight to both unemployment and inflation in any decision rule.

Fed Action May Widen Wealth Gap - One unintended consequence of another round of quantitative easing by the Federal Reserve is that it will likely widen the gap in the consumer sector between the recovered-from-recession and the still-struggling. That’s because the plan to buy long-term mortgage securities will have the effect of making investors richer while penalizing small-time savers. The Fed also seems to be more tolerant of future inflation. That’s another negative for low-income earners who have already seem their paychecks lose buying power. This isn’t a criticism of the Fed, just an acknowledgement that monetary policy benefits those who have skin in the financial markets. Fiscal policy works better to target help toward specific income groups. The consumer sector is already split. The recovery has done more to restore the confidence of those who kept their jobs over the past five years and still have equity in their homes. Those households typically have higher incomes and wealth levels. No surprise then, that the Conference Board‘s consumer survey shows confidence among high-earning households has come back faster than those earnings less than $25,000. Equity prices have soared since the Fed announced QE3–and that was one of the Fed’s intents. Stronger stock prices will make consumers feel wealthier and more likely to spend. As Fed chairman Ben Bernanke mentioned in his press conference, consumers should feel happier when they open up their 401(k) statements and see bigger totals.

Central Banks Versus the People -- As you are surely aware by now, the US Federal Reserve has announced a new round of quantitative easing which like the ECB’s outright monetary transactions (OMT) is a new program of large scale asset purchases by a central bank. The reason these operations are referred to as money printing is because when a central bank makes purchases of financial assets it does so by adding amounts to the reserve accounts of banks that either 1) own the asset or 2 ) are the registered bank of the holder of that asset. In the case of 2 ) the bank will also create a deposit for the account holder. It should be noted, however, that the creation of new reserves is not unique to QE, in fact all reserve banks create, and destroy, reserves on a daily basis in order to maintain the interbank market rate. See here for more in this topic. The purchase and sale of securities adds or drains reserves available in the banking system which controls the short term interest rates banks charge each other to borrow funds. This is the basic process in which central banks set interest rates.Unorthodox monetary policy tends to be larger and sustained purchases of a particular types of financial asset in order to a) supply interbank liquidity to ensure monetary policy transmission, b) reduce systemic risk and/or c) reduce longer term interest rates. The ECB’s OMT probably covers the first two, QE3 the third.There are obviously side effects of these programs, these aren’t my major focus today so I’ll skip over them but it should be noted that these operations lower the respective currency relative to other currencies and tend to lift equity and commodity prices in the short term as the additional liquidity finds a new home.

How Quantitative Easing Helps the Rich and Soaks the Rest of Us - The decision is in: Unlimited quantitative easing. That was the announcement from the Federal Open Market Committee this afternoon, launching a third round of purchases of securities in a bid to boost the economy and reduce unemployment. This time, Federal Reserve Chairman Ben Bernanke and crew are pledging to buy $40 billion per month until the economy improves. The Fed's policy committee also extended its zero-interest rate policy until “at least mid-2015.” If QE3 lasts that long, the Feds will be printing at least another $800 billion to buy mortgage-backed securities. It won’t be a surprise to read conservatives lambasting this as unconventional monetary policy meant to help re-elect President Obama. And inflation hawks have already started screeching. But the loudest cry of “for shame” should be coming from the Occupy Wall Street movement. Quantitative easing—a fancy term for the Federal Reserve buying securities from predefined financial institutions, such as their investments in federal debt or mortgages—is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality formed by crony capitalism. And it is hurting prospects for economic growth down the road by promoting malinvestments in the economy.

How Could QE Work?  - Paul Krugman: One good question some of my readers have been asking is how the Fed’s new policy might actually boost the economy — that is, how could changes in expectations turn into a real increase in demand?I actually wrote about this about a year and a half ago, but I think it needs an update. I then argued that the transmission mechanism, such as it was, would have to operate through stocks and the dollar. Since then, several things have happened. First, when I wrote that I don’t think I fully grasped just how big the shortfall in home construction has been, and how long it has gone on; and at this point, of course, it has gone on for another year and a half. So at this point it’s not at all clear that we have an overhang of excess housing capacity; we might even have a shortfall.And we’re seeing a modest housing recovery starting ......This means that we actually can hope that the Fed’s new policy will boost housing as well as operating through other channels, and therefore that it can act more like conventional monetary policy in fostering recovery. That said, I’m still skeptical about whether monetary policy alone can come close to doing enough — a skepticism shared by Ben Bernanke: We still need fiscal policy. But it’s good to see the Fed doing more.

Is QE3 Yet Another Stealth Bank Bailout? - Yves Smith - It’s difficult to puzzle out what Bernanke thinks he is accomplishing with QE3. The level of bond buying, as various commentators have pointed out, is much lower than in the earlier QE programs. And pulling out bigger guns in the past was not terribly productive. As we wrote in April 2011 in a post titled “Mirabile Dictu! Economists Agree All the Fed Has Done is Goose Financial Markets!“: You heard it first in the blogopshere. From the New York Times: A study published in February found that interest rates decreased, but only for companies with top credit ratings. “Rates that are highly relevant for households and many corporations — mortgage rates and rates on lower-grade corporate bonds — were largely unaffected by the policy, Given that previous QEs amped up the stock market, weakened the dollar, lifted commodity prices, and made central bankers in emerging markets mighty unhappy (risk on trades boosted their currencies and sent hot money into their economies, developments they did not like), all on a temporary basis, it’s quite a stretch for Bernanke to depict it as a way to boost employment in the US, unless he has a very bad case of “if the only tool you have is a hammer, every problem looks like a nail” syndrome.  One interpretation is that Bernanke, despite his protests otherwise, is giving the stock market a short term sugar high to assure an Obama reelection. Another is that the central bank is quite cognizant of what it is doing and is deliberately boosting bank profits, perhaps also hoping that the banks will eventually feel robust enough to do more lending.  Even though mortgage backed securities prices rose (as in interest rates fell) sharply after QE3 was announced, mortgage rates remained unchanged: The average rate on a 30- year fixed mortgage held at 3.55 percent in the week ended Sept. 13, near a record-low of 3.49 reported July 26 in data dating to 1971, according to McLean, Virginia-based Freddie Mac.

Bernanke: A Reverse Robin Hood in Middle Class Clothing - If you’re wondering why the rich are getting richer, ask Mr. Bernanke. President Obama has accused Mitt Romney of being a “reverse Robin Hood” – taking from the poor and giving to the rich. Ironically, that’s exactly what Fed Chair Ben Bernanke is doing, with the blessing of the Obama White House. Mr. Bernanke has again opened the central bank spigots, promising another round of quantitative easing, or bond and asset purchases, aimed at keeping interest rates low for the foreseeable future. The upshot? Rising gasoline prices which will hurt low-income Americans, reduced income for retirees, and soaring stock prices. While seniors worried how they could cope with diminished incomes, the 40 wealthiest people in the world saw their net worth jump by $29 billion this past week. Since the first quantitative easing was initiated in 2008, stock prices have soared over 60 percent. More recently, on the day the Fed announced its new, open-ended purchase program, the Dow Jones gained 1.5 percent; more important, both the Dow and the Standard & Poor’s index hit their highest levels since the end of 2007.

Beware the costs and psychology of QE3 - Earlier this month, America’s Duke University asked the chief financial officers of 887 large companies how they might respond to falling interest rates. The results were noteworthy for economists, political pundits and investors alike. Some 91 per cent of firms said a one per cent fall in interest rates would have no impact on their business plans, while 84 per cent professed indifference towards even a two per cent fall. “CFOs believe that a monetary action would not be particularly effective,” the survey concluded; or not, that is, in terms of boosting investment and jobs. This is sobering stuff. When Ben Bernanke, Fed chairman, unveiled his “QE3” measures last week – a promise to buy more mortgage-backed securities as part of quantitative easing – he justified this by pointing to the continued high levels of unemployment and weak growth. Most notably, by providing an open-ended commitment to buy securities, the Fed hopes to bolster demand and thus create more jobs.

QED: QE3 - As the Fed announces a third round of quantitative easing, this column argues that it is unlikely to work. Investment and hiring are held back by huge uncertainty over the long-term outlook and the stimulus provides a monetary bridge over the election gap but little more.

Bernanke on the brink - We are reaching — or may already have passed — the practical limits of “economic stimulus.” Last week, the Federal Reserve adopted an open-ended bond-buying program of $40 billion a month to goad the economy into faster growth. But even before the announcement, there was skepticism that it would do much to lower the unemployment rate, which has exceeded 8 percent for 43 months. The average response of 47 economists surveyed by The Wall Street Journal was that a similar program might cut the jobless rate 0.1 percentage point over a year. At a news conference, Fed Chairman Ben Bernanke explained what the Fed hopes will happen. By buying mortgages, the Fed would push interest rates down. They’re already low (3.6 percent in August for a 30-year fixed-rate mortgage) and would fall further. Lower rates would stimulate more homebuying and construction. Greater housing demand would raise home prices. Fewer homeowners would be “underwater” (homes worth less than mortgages). Banks would refinance more existing mortgages at lower rates because the collateral — the homes — would be worth more. Feeling wealthier, homeowners would spend more and cause businesses to hire more. Good news would feed on itself. The brighter outlook would boost stock prices (the Dow jumped 206.5 points the day of the Fed’s announcement). This rebuilds Americans’ depleted wealth. Optimism, consumer spending and hiring would revive even more. It could happen. Why, then, so much doubt?

Mitt Romney's Bizarre Attack on the Fed - How much can you get wrong in just three sentences? A whole lot, it turns out.  Consider Mitt Romney's most recent fundraising email titled "Another Bailout?!?" -- See if you can spot anything that might correctly be called "correct". Barack Obama is at it again -- spending your tax dollars to bail out his failed economic plan. It's more of the same from an out-of-touch president with no plan to fix our economy and put Americans back to work.  This past week, the Federal Reserve announced it would print $40 billion every month to prop up this administration's jobless recovery -- that's money we can't afford for jobs we will never see. Okay, the Fed did announce that it would buy $40 billion of mortgage bonds a month until unemployment starts coming down -- which is, more or less, "printing" money -- but the rest is nonsense.  First, Barack Obama had nothing to do with the Fed's decision to do QE3. Only the Fed had anything to do with the Fed's decision to do QE3. It's independent.  Second, the Fed isn't spending tax dollars. As Team Romney acknowledges two sentences later, the Fed is printing money to buy bonds.

Hating on Ben Bernanke, by Paul Krugman- Last week Ben Bernanke, the Federal Reserve chairman, announced a change in his institution’s recession-fighting strategies. ... The Fed more or less promising that it won’t start raising interest rates as soon as the economy looks better, that it will hold off until the economy is actually booming and (perhaps) until inflation has gone significantly higher.  The idea here is that by indicating its willingness to let the economy rip for a while, the Fed can encourage more private-sector spending right away. Potential home buyers will be encouraged by the prospect of moderately higher inflation that will make their debt easier to repay; corporations will be encouraged by the prospect of higher future sales; stocks will rise, increasing wealth, and the dollar will fall, making U.S. exports more competitive.  And Republicans have gone wild, with Mr. Romney joining in the craziness. His campaign issued a news release denouncing the Fed’s move as giving the economy an “artificial” boost — he later described it as a “sugar high” Mr. Romney’s language echoed that of the “liquidationists” of the 1930s, who argued against doing anything to mitigate the Great Depression. Until recently, the verdict on liquidationism seemed clear: it has been rejected and ridiculed not just by liberals and Keynesians but by conservatives too, including none other than Milton Friedman.

Weird Republican Monetary Economics - Ron Paul's views on the role of the Federal Reserve System are well-known. Paul has found little support for actually ending the Fed, but he managed to get a bill through the House during the summer which would have established additional "auditing" of the Fed. Fortunately, the bill went nowhere in the Senate. The Fed is of course audited by the General Accounting Office. What Ron Paul has in mind is not auditing in the conventional sense, but an opening-up of FOMC deliberations, along with other elements of Fed decision-making. While transparency might seem like a good thing, there are elements of Fed secrecy that actually work to our advantage. A strong and independent Fed may be able to work more effectively in the public interest than a Fed that is constantly being "audited" by Congress. The view that the Fed is in need of reform has been written into the Republican Party's election platform. The key passage is this one: The first step to increasing transparency and accountability is through an annual audit of theFederal Reserve’s activities. Such an audit would need to be carefully implemented so that the Federal Reserve remains insulated from political pressures and so its decisions are based on sound economic principles and sound money rather than on political pressures for easy money and loose credit.

What the Heck is Quantitative Easing?: Last week, the Federal Reserve announced a third round of quantitative easing, or what is referred to as QE3. This is an open-ended purchase of $40 billion a month, along with a commitment to keep rates low until “a considerable time after the economic recovery strengthens.” Many economic commentators are saying that this is a serious change in economic policy. In order to understand why this is so important to our economy now, it might be helpful to go back to an academic debate about Japan in the 1990s. Japan was the second-largest economy in the world in the 1990s when it had a severe recession. Its central bank, the Bank of Japan, lowered interest rates to try to offset the recession, but even lowering rates to zero wasn’t enough. Monetary policy hit a “zero-lower bound.” If interest rates were to go negative, and banks were to offer a negative interest rate, people would just hold cash instead. Since the Federal Reserve can’t offer a negative interest rate, it has no other conventional options once rates hit zero to boost the economy. This is relevant because the United States also hit a similar zero-lower bound in the Great Recession. By 2009, with the economy in free fall, the Federal Reserve set interest rates to zero, which wasn’t enough to get us anywhere near full employment.

QE3 Not Getting a lot of ‘Likes’ on Facebook - It may not have been the response they were hoping for. One day after the Federal Reserve announced a new open-ended mortgage-bond buying program–a third round of what’s known as quantitative easing, or QE3–the Federal Reserve Bank of San Francisco posed a question on its Facebook page: “What effect do you think QE3 will have on the U.S. economy?” The results, posted Monday, were not enthusiastic. Though the U.S. stock market had rallied after the Fed’s decision, with the Dow Jones Industrial Average closing Friday at its highest level since December 2007, Facebook responders were decidedly less optimistic. “Long term, disastrous” was the top response, garnering 355 votes as of early afternoon Monday. The 12 next most popular answers were only slightly less morose, with responders rating the Fed’s move as “negative,” a sarcastic “thanks for $5 gas” and 26 votes to fire Fed Chairman Ben Bernanke.

Fed Watch: Now We Wait -  w/ 9 graphs - The Federal Reserve followed through largely as expected last week, adopting a very new policy regime: 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 delivered open-ended quantitative easing. The end of the program is to be a function of economic outcomes, not arbitrary dates. They did not specify macroeconomic targets, such as a 7% unemployment rate, but I think few expected the Fed to lock themselves into such a specific number.  There has already been much commentary on the decision, See, for example, Mark Thoma, FT Alphaville, Gavyn Davies, FT Money Supply, Scott Sumner, and Econbrowser. I would add that this policy shift indicates that Federal Reserve Chairman Ben Bernanke has repudiated at least two of his earlier views.  The first is his belief that the stock of bond purchases was more important than the flow. Obviously, the focus is now on the flow of purchases, reflecting the importance of managing expectations in the implementation of policy. The shift to a flow-based policy removes the unnecessary uncertainty surrounding the intent of policymakers that was associated with previous, stock-based policy.  Second, notice that with his new found focus on the importance of weak labor market conditions, Bernanke returns to his former self. It has long been something of a mystery of what happened to the Bernanke who offered advised to the Bank of Japan back when he was a Federal Reserve Governor.

QE3 hit by mortgage processing delays  - The Federal Reserve's attempt to push aid into the heart of the US economy is being blunted by banks struggling to process mortgage applications fast enough, keeping rates on home loans elevated, according to the largest lenders. The Fed announced last week that it would buy mortgage-backed securities in another round of quantitative easing -- nicknamed QE3. This was partly designed to ease further the cost of mortgages, but bankers say the impact will be limited by a dearth of loan officers with banks reluctant to cut mortgage rates without the staff to process any increase in business. "In the very near term [QE3] has virtually no transfer mechanism whatsoever to the customer," "Originators are massively backlogged in terms of origination volumes." An MBS analyst at Deutsche Bank noted that the yield on mortgage-backed securities fell more than 30 basis points after the Fed announcement. "Very little of that is likely to make it through immediately to consumers," he said. "There's nothing that will force mortgage originators themselves to lower the rates that they're offering to consumers. Right now they have their hands pretty full in terms of the pipeline and managing paperwork and making loans. These folks are busy.."

Stocks, more than housing, seen as initial QE3 winners - (Reuters) - The Federal Reserve's new economic stimulus plan involves printing vast sums of money to help people buy homes, but over the next year the program could do more to boost the economy by lifting stock prices. The Fed said last week it would buy $40 billion every month in mortgage backed securities until the labor market improves substantially. The program, known on Wall Street as "QE3", will likely lower interest rates for mortgages and also help some people refinance their home loans. Although the Fed's open-ended buying program represented an unprecedented bid to get the U.S. economy growing more quickly, many economists are skeptical it will have a big impact on housing market which is held back to a large degree by tight lending standards by banks. Mortgage rates are already near record lows, they point out. But it is also quite possible QE3 will help the economy in other, potentially more powerful ways. By giving an open-ended commitment to pour money into the market for mortgage-backed securities, the Fed will likely keep on supporting stocks and other asset classes by keeping returns low on MBS. Investors in search of yield will have more reason to buy equities and to lend money to companies.

What Does A $4 Trillion Fed Balance Sheet Mean For Gold And Oil -- Earlier we explained why Bernanke's actions mean that the Fed Balance Sheet will likely grow to over $4 trillion by the end of 2013. Critically this flood of liquidity will raise the nominal price of every asset (from whimsical pieces of stockholder paper to barbarous relics and black gold). Some of these assets, like stock prices and high-yield credit spreads do have point-in-time 'value limits' to their price - though at times it seems a dream that fundamentals would ever matter again; but some have less of a binding constraint - such as gold. Should the Fed proceed, as seems likely, and do its worst/best to blow its balance sheet wad then we estimate Gold will be priced at least $2250 per ounce by the end of 2013 (of course higher if the Fed sees no evidence of recovery). Meanwhile, deeper underground, the world's mainstay source of energy, WTI Crude oil, could jump to record highs over $150 per barrel (which just happens to coincide with the 'pegged' value of oil in gold). It will be interesting indeed to see how the world's socio-economic infrastructure hangs together should that occur - can't happen? Different this time? Indeed it is now that Ben hit the big red 'panic' button.

What Does It Mean? - In the word-cloud of current events, the phrase "parasitic financial system" billows up to a degree that suggests even so-called thinking persons begin to understand what's happening: that banking shenanigans are sucking the life out of advanced societies. Of course the pervasive accounting fraud and routine swindling that drive the banking "industry" are abetted by the phantom government "policy" of the Federal Reserve, an institution that 99.999 percent of the American public could not explain under threat of water-boarding. The bottom line is political and economic leadership that can only pretend the economy works, and the destiny of such pretense is the death of legitimacy - meaning the public's faith in the system. Sooner or later either the public will revolt against such a system, or the system will just implode and leave the public floundering in a period of dreadful chaos.  Nobody capable of thinking through these rather abstruse matters believes Fed Chairman Ben Bernanke anymore, and his demeanor in public is of a depressed person who has lost belief in himself and what he does. He announced last week's policy salvo - the long-awaited QE-3 - with absolutely no conviction. The Fed will spend $40 billion in money created out of thin air to buy non-performing mortgages from banks eager to dump them and interest rates on new mortgages will fall to record low levels. This will supposedly "stimulate" the housing market.   Virtually nobody else out there in blog-and-pundit land will tell you what this so-called "housing market" is, so I will. It basically refers to suburban sprawl, which I have previously defined in two ways: 1) the greatest misallocation of resources in the history of the world, and 2) a living arrangement with no future. The first proposition is obviously a function of the second. Interestingly, one of the first effects of Ben Bernanke's QE3 salvo was the inflation of oil prices to nearly $100-a-barrel, with a flow-through effect of gasoline above $4 at the pump, which only shortens the horizon of the suburban sprawl paradigm. Like the zombie banks choking on bad mortgages, sprawl is dead but doesn't know it.

QE3 – Pay Attention If You Are in the Real Estate Market - The challenge for Ben Bernanke and the Fed governors since the 2008 bailouts has been how to deal with the backlog of fraud – not just fraudulent mortgages and fraudulent mortgage securities but the derivatives piled on top and the politics of who owns them, such as sovereign nations with nuclear arsenals, and how they feel about taking massive losses on AAA paper purchased in good faith. On one hand, you could let them all default. The problem is the criminal liabilities would drive the global and national leadership into factionalism that could turn violent, not to mention what such defaults would do to liquidity in the financial system. Then there is the fact that a great deal of the fraudulent paper has been purchased by pension funds. So the mark down would hit the retirement savings of the people who have now also lost their homes or equity in their homes.  So, it looks like the Fed decision last week to buy $40 billion a month in mortgage paper is the ultimate plan to clear the market once and for all of fraudulent mortgages, mortgage backed securities and related derivatives. This means Fannie and Freddie will be bailed out and winding down through the back door. This means the big banks may be paid in full for your mortgage. It also means your pension fund assets will not be marked to market – at the price of debasing the purchasing power of your assets and benefits. The Fed is now where mortgages go to die. Thousands of mortgages on homes that do not exist or on homes that have more than one "first" mortgage are now going to the Fed to disappear. Thousands of multifamily and commercial mortgages will be bought up as well. As this happens, trillions of dollars that have been amassed offshore will be free to come back into the US to buy up and reposition land, farmland, residential and commercial real estate and other tangibles

US bank regulator warns of QE3 risks - A top US bank regulator has warned that the Federal Reserve’s aggressive new easing programme, known as QE3, may lead to banks taking on increased risk, raising concerns for supervisors charged with overseeing the soundness of the nation’s banking system. Tom Hoenig, a director at the Federal Deposit Insurance Corp, said on Wednesday that he is worried that the Fed’s open-ended third round of quantitative easing could lead to banks taking on longer-duration and higher-yielding assets as the central bank promises to buy $40bn of mortgage-backed securities a month in a bid to keep borrowing rates near record lows. The Fed’s programme is designed to spark what has been a lacklustre economic recovery. But as rates stay low, banks may “go out on the curve and take some risk”, said Mr Hoenig, a former Fed policy maker from the Federal Reserve Bank of Kansas City. He said he had “issues” with QE3 because banks may be tempted to take on undue risk in the low-interest rate environment. “It’s a concern of mine,” he said.

The Fed Is Worried That You Might Be Worried About Uncertainty - When you are in the business of buying and selling volatility you can get sort of cynical about whether volatility is a thing, and whether it is appropriate to buy and sell it. We talked earlier today about the fact that if you have a client who doesn’t care about something valuable, then you should buy as much of it from him as you can; you can guess where I learned that. It is superficially persuasive to tell a customer “you don’t get any benefit from the volatility of your stock so you should just sell it to us,” but ultimately you can’t eat volatility. You eat buying low and selling high, and so you rigorously translate the customer’s sale of volatility into buying low (from the customer) and selling high (to the customer). Science! So I started reading this San Francisco Fed note about “uncertainty” with a certain amount of skepticism. Reuters describes the finding as “Uncertainty over the economic outlook has added between one and two percentage points to the U.S. unemployment rate since 2008,” and you might reasonably say “shut up, uncertainty hasn’t increased the unemployment rate, expectations that things will be bad have increased the unemployment rate through perfectly unsurprising self-fulfillingness.” Managers don’t stop hiring just because they think things will be pretty good, but with a small chance of a delightful surprise. It’s the drift, not the variance.

Is It a Gamble to Inject a Junkie When He's High? -- Some might wonder if the economy/markets are becoming addicted to QE injections. QE1 & QE2 took place after the 500 index had declined at least 15%. Now an injection has taken place during a rally, at 2012 highs.  Is it "Gamble" to make an injection when the markets are at highs for the year?  From a portfolio construction standpoint, are their other barometers to watch that can tell us if the injections are working at this time?  Copper and the yield on the 10-year note both rallied prior to the announcement of QE3! The rally took both of these quality barometers up to falling resistance lines. Watch Copper, 10-Year Yields and Crude Oil to determine if the recent injection is going to push the economy higher!

Let's Keep Saying This Until It Doesn't Sound Crazy Anymore: If Fed could print money and give it to near-prime borrowers, undwater homeowners, and nervous businesses, then we'd have another story.  I don't think Bernanke can legally start mailing checks to us, though I think when hits the "emergency powers" button he can probably do just about anything, but it isn't said often enough by the right people that there are alternatives to giving free money to banks, such as giving free money to me. At this particular point in time, those alternatives are clearly superior. We have a problem that can be easily solved by giving free money to people, perhaps the most popular solution to a problem ever. And it isn't happening.

QE3 may have little impact on mortgage borrowers -   The Federal Reserve took aim at the nation’s wobbly housing market last week with its biggest stimulus action in two years, but that firepower is doing little to lower mortgage rates or make home loans more available for Americans. Instead, banks are set to see a windfall since the Fed’s actions will immediately lower the cost of issuing loans. It may take months or longer for benefits to trickle down to consumers, analysts say.  The emerging scenario highlights the limitations of the Fed’s ability to jump-start the housing market on demand: Rather than intervene directly with consumers, the Fed must rely on banks, brokers and other industry actors to offer borrowers better terms. Banks say they are keeping rates high right now because lowering them any further would overwhelm them with customers. They say that over time, as volume thins out, rates could come down to attract new borrowers. “Bank of America, Wells, Chase, whomever, have fixed capacity. You can’t take in more loans than you can handle,” said Matt Vernon, a senior mortgage executive at Bank of America. Critics argue that banks are simply maximizing profits at the expense of consumers. Mortgage bankers are recording higher gains from home loans as the gap widens between the interest rate they charge consumers and the rate they must pay investors who finance the loans by buying mortgage securities.

The Eroding Effect of QE3 on Mortgage Spreads - It has been a week now since the Fed’s QE3 announcement that it would be again buying mortgage backed securities (MBS). There was an initial decline in the mortgage spread on the announcement but, as often happens, that initial impact seems to have been eroding away day by day. Take a look at this Bloomberg chart of the option adjusted spread (OAS) for mortgage securities. Wednesday September 12 is marked so you can see the effect on Thursday September 13 when the Fed made the announcement. The spread moved down again on Friday, but this week it went back up. By Wednesday September 19 it had completely returned to the pre-announcement value. The effect on the spread has eroded away. Of course, the effect of the announcement could already have been discounted before September 13, in which case some of the earlier downward movements could be attributed to QE3. Nonetheless, this real time experience is a good illustration of why announcement day measures—which the Fed has relied on to assess its LSAP programs—can be misleading. This is why Johannes Stroebel and I used other techniques in our analysis of the earlier MBS program, in which we did not find significant effects.  One should also note that the effect on mortgage rates depends on what happens to other rates, such as Treasury yields, as well as the spread. But the yield on 10-year Treasuries has risen since QE3. So in effct, the overall effect on mortgage rates could even end up being counter to the Fed's intentions in the end.

So How’s That QE3 Working? -  Yves Smith - Obviously, it’s a little early to reach a verdict on QE3, but market pundit love reading the tea leaves early and often, so we figured we’d join the fun and look at early reactions.  First are the contradictory responses on the inflation expectations front. Even though TIPS and six year Treasury bond prices reflected higher inflation expectations, Monday saw a mini-crash in oil futures and an only partial recovery that day, with a further decline on Tuesday. The initial explanation, such as trader error to fears of releases from the Strategic Petroleum Reserves, omitted to mention that American oil use is still below 2007 levels and China is looking wobbly The GSCI was also down 2.2% on Monday (note oil is part of the GSCI, which tracks 24 raw materials; ). It fell a further 1.3% on Tuesday). Even Treasuries had regained over half of their initial QE3 losses.  Second, overnight, the Bank of Japan joined the central bank stimulus party, increasing its 45 trillion yen asset buying program by another 10 trillion.  Was this surprise move simply to keep the stratospherically high yen from going any higher in nosebleed terrain? Third, some analysts are already discussing, meaning asking for, more QE.  Now of course, there was some cheerier news, for instance, a Bloomberg story on how QE would help housing, and the wealth effect would help spending. It’s true that the wealth effect of home prices appreciation is stronger than that of stock price gains, and so in theory should do more for consumption. However, we’ve questioned how much this round of pushing secondary market bond prices lower will do for mortgage rates, since banks are choosing to increase their spreads over funding costs rather than lower interest rates and write more loans. There also may be a wee problem with a shortage of creditworthy borrowers. But even if you thought QE will help raise housing prices, it’s still an open question as to how that translates into consumer buying activity. Remember, in a balance sheet recession, businesses and individuals focus on shoring up their financial condition rather than exploiting opportunities (save maybe an iPhone splurge). So all the past norms on how housing price increases translate into a particular level of additional consumer spending are likely to be very much dimmed down.

Restoring the Legitimacy of the Fed – Simon Jonson - The Federal Reserve has a legitimacy problem. Fortunately, a potential policy shift is available that offers both the right thing for the Fed to do and a way to please sensible people on both sides of the political spectrum. Republican politicians are increasingly criticizing the monetary policy of Ben Bernanke and his colleagues on the grounds that they are exceeding their authority, particularly by buying assets and trying to lower interest rates in what is known as “quantitative easing.” There is growing concern in Republican circles that the Fed is tipping the election toward President Obama, and Mitt Romney repeated unambiguously in August that he would not reappoint Mr. Bernanke (a Republican originally appointed by President George W. Bush). At the same time, a significant number of people on the left of American politics are concerned about how the Fed acted in the period leading up to the crisis of 2008 — blaming it for a significant failure of regulation and supervision — and about how much support it currently provides to big banks. If the right and the left were ever to come together on this issue, they might enact legal changes that would reduce the independence of the Federal Reserve, making it more subject to Congressional pressures. At the very least, the implicit buffers that protect the Fed from political interference could easily weaken, depending on the outcome of the November election. Fortunately there is a way for the Fed to reaffirm its legitimacy: the Board of Governors should strengthen capital requirements for the largest United States banks and other systemically important financial institutions. Ideally it should move policy in a direction that is responsible and that would be welcomed on both sides of the political spectrum.

Woodford on Optimal Monetary Policy Rules -- I have supported more aggressive action from the Fed throughout the crisis, though perhaps with a bit less confidence that such action would have big effects than some others, and I have supported nominal GDP targeting. But I haven't jumped fully onto the NGDP bandwagon, The reason is simple. The theoretical underpinnings of this particular rule are not clear. I have asked supporters to answer a question, more than once, "in what class or classes of models is NGDP targeting the optimal policy rule?," but there was no response.  So where are the limits? When is this the best policy rule?  Fortunately, in an interview that anyone interested in monetary policy should read, Michael Woodford notes that he has looked at this question, and guess what? It turns out that NGDP has desirable properties, and sometimes it is the optimal policy, but not always. This is Woodford, in an interview with Dylan Mathews, describing some of his work in this area:... I didn’t specifically prefer to use that formalism of a nominal GDP target, which is why I’m not particularly associated with that specific proposal. What I’ve been writing about for quite a while, and there’s a lot of discussion of this in my 2003 book Interest and Prices and a lot of papers as well, is the desirability of committing to rules where there’s a nominal level variable rather than purely referring to the rate of growth of a nominal variable. The idea was that if the nominal growth in the economy undershoots or overshoots, either one, there should be a commitment to getting back to the target path, so we’ll target the rate of growth going forward. The idea that purely forward looking approaches are undesirable is something I’ve been emphasizing in various papers since the 1990s, and I’ve criticized various proposals that didn’t have that property.

The Deep Magic of Money, the Deeper Magic of Supply - Let me start by explaining why money is the Deep Magic of macroeconomics. There are many people in the world today who think it is hard making output go up, and that we need to resort to massive deficit spending by the government spending to stimulate the economy or from tax cuts meant to stimulate the economy. But as I explained in an earlier post, Balance Sheet Monetary Policy: A Primer, there are few limits to the power of money to make output go up in the short run.  When short-term safe interest rates such as the Treasury bill rate or the federal funds rate at which banks lend to each other overnight are positive, almost all economists agree that money is very powerful. Suppose the Federal Reserve (“the Fed”) or some other central bank prints money to buy assets. In this context, when I say “money” I mea currency or the electronic equivalent of currency—what economists sometimes call “high-powered money.”The Fed requires banks to hold a certain amount of high-powered money in reserve for every dollar of deposits they hold. Any high-powered money that a bank holds beyond that is not needed to meet the reserve requirement and is usually not a good deal because it earns an interest rate of zero (unless the Fed decides to pay more than that for the electronic equivalent of currency held in an account with the Fed). So inside the banking system, reserves beyond those that are required—called “excess reserves”—are usually a hot potato.  So if the Fed prints high-powered money to buy assets, that hot potato money stimulates spending until until people and firms wind up with enough deposits in bank accounts that most of the high-powered money is used up meeting banks’ requirements to hold reserves against deposits, while the rest is in people’s pockets or the equivalent for convenience. 

Fed Watch: Getting Off the Zero Bound - Weighing on my mind is the possibility that we do not lift off the zero bound - in other words, we don't normalize the economic environment - before the next recession hits. When I say normalize the environment, I am thinking in the terms David Beckworth describes here. Begin with the premise that interest rates are abnormally low. I can't see how anyone cannot come to that conclusion with ten year TIPS in negative territory: Rather than seeing the Federal Reserve's action as the cause of the low interest rate environment, I tend to think it was the Federal Reserve's inaction. If monetary policy was gaining traction, interest rates should rise, forcing the Fed to follow rates up. Instead, Fed policy continues to follow interest rates down. Looking at the Fed's extended guidance, they do not see the need to raise short term interest rates until mid-2015. June 2015 would mark 90 months since the peak of the last business cycle in December 2007. The average peak-to-peak cycle of the last three recessions 96 months, the average since 1945 is 66 months.... you can say that given past business cycle timing, it is perfectly reasonable to believe that the next recession will hit before we lift off the zero bound. Moreover, it would be relatively uncommon for the peak-to-peak cycle to last more than 90 months. Only 4 of the last 11 cycles have exceeded this length of time.  So I am getting a little nervous that we will not lift off from the zero bound before the next recession hits.

A case for ZLB denial - Nick Rowe - This post is in response to two posts by Simon Wren-Lewis on "Zero Lower Bound Denial". First post here and second post here. I'm just collecting my thoughts from my comments on Simon's posts and from my previous posts. This is what I think:

1. The ZLB is a real wall. Bad stuff happens if the economy wants to cross it but can't.
2. But the ZLB wall is not made of velcro. If we hit it, we don't have to stick to it.
3. An NGDP level path target would reduce the risk of ever hitting the ZLB wall.
4. If the economy is in recession, that does not mean the rate of interest is above the natural rate of interest.

QE3 and Inflation Expectations - Some interesting data here on the TIPS measure of expected inflation following the Fed's QE3 announcement The first chart shows that the announcement had a significant impact on inflation expectations at short and long horizons. Here's the same data, together with the 10-year inflation forecast, and for a longer sample period. The impact on real yields, especially at the short end, seems significant (but let's see how long this lasts). Here's the same data over an even longer sample period. And here's a truly remarkable graph... Notes: Inflation-Indexed Treasury Yield Spreads are a measure of inflation compensation at those horizons, and it is simply the nominal constant maturity yield less the real constant maturity yield. Daily data and descriptions are available at See also Statistical Supplement to the Federal Reserve Bulletin, table 1.35. The URL for MT is:

Fed’s Fisher Says U.S. Inflation Expectations Rising - Federal Reserve Bank of Dallas President Richard Fisher said the central bank’s third round of bond purchases will probably fail to create jobs while risking higher inflation.“I do not see an overall argument for letting inflation rise to levels where we might scare the market,” Fisher said yesterday on Bloomberg Radio. “We have seen a sharp rise in inflation expectations. If you let this get out of hand, then I think we will have a market reaction.” Fisher, who doesn’t vote on monetary policy this year, opposed the Federal Open Market Committee decision last week to expand its holdings of long-term bonds with open-ended purchases of $40 billion of mortgage debt every month in a new round of quantitative easing. The Fed, led by Chairman Ben S. Bernanke, is seeking to boost growth and reduce 8.1 percent unemployment. “A sustained increase” in inflation expectations “would suggest incipient doubts about our commitment to the Bernanke doctrine of sailing on a course consistent with 2 percent long- term inflation,” Fisher said in a speech in New York.

Fed Watch: Fisher Turns to Fear Mongering - Dallas Federal Reserve President Richard Fisher is quick to continue his fear mongering about inflation. Via Bloomberg: “I do not see an overall argument for letting inflation rise to levels where we might scare the market,” Fisher said. “We have seen a sharp rise in inflation expectations. If you let this get out of hand, then I think we will have a market reaction.” Let's go to the chart: You really can't say that inflation expectations are surging beyond anything we have seen in the past six years. Moreover, supporting inflation expectations was an expected outcome of Fed easing. And financial markets seem to like it.  Also, it is not clear that TIPS-derived expectations are the best measure (a point I don't make enough). The Cleveland Federal Reserve works on teasing out inflation expectations, and on September 14th reported: The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.32 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade. Yes, near term expectations have gained but from a too-low 1.2% to 1.8%. Moreover, this would be expected not just from anticipation of QE3, but from the rise in gas prices (and note that oil prices are now falling again). By this measure, the more important longer term expectations remain mired well below the Fed's 2% inflation target. Let's at least agree to stop worrying about inflation until we get expectations back up to the Fed's target.

US inflation fears rise after QE3 - Bond investors pushed a key measure of US inflation expectations on Monday to their highest level since 2006, in response to last week’s aggressive policy action by the Federal Reserve. Market expectations for US inflation over the next 10 years rose as high as 2.73 per cent on Monday, based on the difference or the so-called “break-even rate” between nominal and inflation-protected Treasury debt. That represents the highest intraday break-even rate since May 2006 and near the all-time closing peak of 2.78 per cent from March 2005. In volatile trading, the inflation measure had subsequently eased to around 2.59 per cent late on Monday. The break-even rate remains sharply up from last week’s low of 2.35 per cent, before US policy makers announced a third round of bond purchases, or quantitative easing. The surge in expectations of future inflation has been accompanied by a weaker dollar, higher gold and oil prices as investors view QE as heightening the risk of rising consumer prices in the future. Unlike prior episodes of QE in late 2008 and 2010 when inflation break-evens were much lower and suggesting the spectre of deflation, the Fed is deploying QE3 in order to boost employment. The central bank is also keeping bond purchases open-ended and has extended its guidance for maintaining low rates into 2015.

Inflation Expectations: A Feature, Not A Bug - Krugman - And now for something completely different: I’m a bit puzzled by the tone of this FT report on how QE3 is doing so far, US inflation fears rise after QE3, which seems to imply that a rise in breakeven rates — the difference between the interest rate on ordinary bonds and inflation-protected bonds — is a danger sign. (Breakeven rates are a simple gauge of expected inflation). On the contrary, it’s the whole point of the exercise. For almost fifteen years, some of us have argued that central banks can gain traction even in a liquidity trap if they can create expectations that money will remain loose after the economy recovers, generating modestly higher inflation. And that’s what the Fed’s new tack is supposed to achieve. The right headline on that FT article should have been “QE3 working so far”.

The Trouble With Fedspeak - Paul Krugman -- So Fed hawks are all upset that expected inflation has risen since Bernanke announced QE3 — as indeed it has. Here’s the TIPS spread, the difference between the interest rate on ordinary 10-year bonds and inflation-protected securities:Is this alarming? On the contrary, it’s the main purpose of the exercise. In simple models of expectations-based efforts to get out of a liquidity trap, the only way the Fed can get leverage is by promising higher inflation once the liquidity trap is over. You can complicate this story a bit — for example, a sluggish trigger finger also means that the expansion lasts longer and hence that firms will face higher real demand — but inflation expectations are the main target, and a rise in those expectations is a feature, not a bug.So what are the hawks talking about? The problem, at least in part, is that the indirectness of Bernanke’s language, the way an inflation target is implicit rather than explicit, feeds the confusion. I understand what he’s doing: a lot of people aren’t ready to face the realities here, so blurriness has its uses (and so do other targets, like nominal GDP, that are ultimately mainly about inflation but don’t make that point explicitly). But there are costs to this vagueness, and we’re seeing some of them already.

Two Measures of Inflation: New Update - The BLS's Consumer Price Index for July, released Friday, shows core inflation fractionally below the Federal Reserve's 2% target at 1.91. Core PCE, at the end of last month, is further below the target at 1.65%. The Fed is on record as preferring Core PCE as its inflation gauge: The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate.. [Source]  The October 2010 core CPI of 0.61% was the lowest ever recorded, and two months later the core PCE of 1.08% was an all-time low. However, we have seen a significant divergence between the headline and core numbers for both indicators, especially the CPI, at least until a few months ago, when energy prices began moderating. The latest headline CPI and PCE are both well off their respective interim highs set in September. This close-up comparison gives us a clue as to why the Federal Reserve prefers Core PCE over Core CPI as an indicator of its success in managing inflation: Core PCE is lower than Core CPI and less volatile. Given the Fed's twin mandates of price stability and maximizing employment, it's not surprising that the less volatile Core PCE is their metric of choice.The Bureau of Labor Statistic's Consumer Price Index and The Bureau of Economic Analysis's monthly Personal Income and Outlays report are the main indicators for price trends in the U.S. The chart below is an overlay of core CPI and core PCE since 2000.

If You Want to Help the Poor and the Middle Class, Encourage Deflation - We have been brainwashed into believing that inflation is good and deflation is bad. The truth is that inflation is good for banks and bad for households, while deflation is bad for banks and good for households.  Since ours is a bank credit system enforced by the Central State, what’s bad for the banks is presumed to be bad for everyone.  This is simply not true. Inflation is “good” for borrowers, but only if their income rises while their debts remain fixed. For everyone with stagnant income--and that's 90% of the nation's households--inflation is just officially sanctioned theft.

Does the August Inflation Spike Mean QE3 was a Mistake? - One day after the Fed announced a new program of quantitative easing (QE3), the BLS reported that headline inflation spiked to an annual rate of 7.44 percent in August. Does that mean that QE3 was a mistake? Superficially, it might seem so. After all, the announced justification for QE3 was that both parts of the Fed’s dual mandate—unemployment and inflation—have been running well below target. If one of them, inflation, is now above target, that could be taken as a sign for cautious watching and waiting, not a bold new program of monetary stimulus. But not so fast. A closer look at the data shows that almost all the uptick in the CPI came from a sharp increase in the price of gasoline, 9 percent in the month of August alone. There is nothing good about that. It is bad for families struggling to get by and bad for the economy because it cuts into the disposable income available for other expenditures. Still, the increase in gasoline prices has little relevance for monetary policy, which has no power over Middle East politics, refinery closings, and other factors that determine short-run movements in energy prices.The inflation numbers that are relevant to monetary policy showed much less movement in August. Core inflation, which excludes food and energy prices, ran at just a 0.6 percent annual rate, down from an already low 1.09 percent in July. The 16 percent trimmed mean inflation measure from the Cleveland Fed, another popular measure of underlying inflation, was up slightly from July, but still came in at just a 2 percent annual rate for August.

Fed Policy or the Weather? - Stephan Karlson cherry picks August's measure of inflation and writes the Fed stated that money supply rose 0.3% the latest week alone, causing the annualized 3 month gain to increase to 8.6% and the yearly gain to increase to 7%.  And then the U.S. consumer price index rose 0.6% (annualized 7.4%) in August. He didn't put the month's inflation numbers in longer-run context, or relative to other measures like the "core" inflation which removes food and energy.  He nevertheless concludes So, it is clear that unless the European debt crisis again worsens and again causes a surge in demand for dollar  assets, there will be a big increase in price inflation soon. So, here is a graph that does put August's inflation numbers in context. Blue is monthly percent change in the CPI and red is the monthly percent change "core" CPI, which removes food and energy (which are more volatile).Maybe, just maybe, the pattern can be explained by the drought and heat we experienced this summer, which caused some big crop losses.  I think it's safe to say monetary policy didn't have much to do with it.

The Fed Is Committed To Making Food And Gas Even More Expensive  - The most significant market adjustment since Bernanke used the “Unlimited” word is not in stocks, bonds or PMs. It’s in inflation expectations. Have a look at this chart. Focus on the incredible spike in the past 24-hours. The sick part of this is that if Bernanke saw this graph, he would cry with tears of happiness. This is exactly what he was praying for. Ben thinks that inflation is a good thing. That it will cause demand to be pulled forward as people realize that things are going to cost more tomorrow than they do today. I suspect Ben is right. Higher inflation expectations in the US will filter around the globe. Post the extraordinary steps Ben took yesterday, people will be stocking up on “stuff”. Things like rice, flour, cooking oil, soy, wheat and sugar. If you can eat it, buy it now. It will be more expensive in a month. While your at it, fill up the gas tank, the price is going up next week and every week for the next few months. Ben doesn’t care about that stuff. He ignores this altogether. Maybe he’s right, after all, food and energy are really not so important to the 7Bn folks who happen to be passing through this decade, right?

How much will lower mortgage rates help the US economy? -  As mortgage rates in the US hit new lows, the US consumer should benefit. The question is how much difference does the mortgage rate make in improving economic growth. We should see the impact on the economy from two sources: higher home sales due to improved "affordability" as well as more money in consumers' pockets due to refinancings at lower rates. We know that as mortgage rates declined, home affordability improved. It is important to note however that the rate is not the only component of affordability. Factors like home prices and disposable income must be included as well. Let's take a look the Housing Affordability Composite Index from the NAR. Here is how it is defined. When the index measures 100, a family earning the median income has exactly the amount needed to purchase a median-price resale home using conventional financing. An increase in the home affordability index means that a family is more likely to be able to afford the median priced house. As homes become more "affordable", we should see increased sales. What's particularly important is to see higher sales of new homes because that stimulates the construction sector and should create jobs. The chart below compares the affordability index, which indeed has been on the rise, with existing home sales. Except for the First-Time Homebuyer Credit spike and drop, sales have not been responsive to improvements in affordability.

Uncertainty, Unemployment, and Inflation - SF Fed Economic Letter - Heightened uncertainty acts like a decline in aggregate demand because it depresses economic activity and holds down inflation. Policymakers typically try to counter uncertainty's economic effects by easing the stance of monetary policy. But, in the recent recession and recovery, nominal interest rates have been near zero and couldn't be lowered further. Consequently, uncertainty has reduced economic activity more than in previous recessions. Higher uncertainty is estimated to have lifted the U.S. unemployment rate by at least one percentage point since early 2008.The U.S. economy has slowed substantially in recent months. Many commentators argue that uncertainty about future economic conditions has been an important factor behind the tepid recovery.In this Economic Letter, we examine the economic effects of uncertainty using a statistical approach. We provide evidence that uncertainty harms economic activity, with effects similar to a decline in aggregate demand. The private sector responds to rising uncertainty by cutting back spending, leading to a rise in unemployment and reductions in both output and inflation. We also show that monetary policymakers typically try to mitigate uncertainty’s adverse effects the same way they respond to a fall in aggregate demand, by lowering nominal short-term interest rates.

Housing Rebounds, but Forward Indicators Cause Concern - Dallas Fed - Data released since the August Federal Open Market Committee (FOMC) meeting indicate that economic growth may have firmed, but at the same time, forward-looking indicators may portend stalling growth. Real gross domestic product (GDP) grew at a 1.7 percent annual rate in second quarter 2012. Contributors to recent growth have been improvements in housing and slight improvements in the labor market. Although manufacturing production also had picked up, more timely survey data had foreshadowed a decline for a few months. The August manufacturing data exhibited this drop. Inflationary pressures remain subdued. Second-quarter real GDP growth was revised up to 1.7 percent from the advanced reading of 1.5 percent (Chart 1). The greatest contribution came from personal consumption expenditures (PCE), coming in at 1.2 percent, supported in part by progress in the housing market. Growth in business nonresidential fixed investment has slowed over the past four quarters, adding 0.4 percent, while an increase in residential investment was offset by a negative contribution from inventories. Net exports contributed 0.3 percent to GDP growth, an upward revision of 0.6 percent from the advanced reading. Government continues to be a drag on the economy, taking 0.2 percent off real GDP growth in the second quarter; yet, this drag has lessened. The upward revision of second-quarter GDP growth can be attributed primarily to the large, positive revision of the contribution of net exports; however, the largest contributor to overall growth, PCE, was largely driven by the noteworthy improvement in the housing market.

Policy euphoria makes way for humdrum data (Reuters) - The world's top two central banks have administered extra-strong monetary painkillers, but the global economy will still need a lot more time to recover from its thumping debt hangover. Financial markets were euphoric after the Federal Reserve surpassed expectations and promised on Thursday to keep the money taps fully open until the U.S. labor market makes a sustained recovery. The European Central Bank had already impressed investors a week earlier by pre-announcing unlimited, albeit conditional, secondary-market purchases to bring down sky-high yields on bonds issued by struggling euro zone members such as Spain. Now it's time to come down to earth. Surveys due this week are likely to show why, in the words of Stephen Cecchetti, the chief economist of the Bank for International Settlements, there are no grounds for complacency. Global financial reforms are not yet complete. Southern Europe has not solved its fiscal problems and lack of competitiveness. And the world economy is listless, he said.

The Potential GDP Perspective on Business Cycles - The Congressional Budget Office calculates "potential GDP," which is the amount that the economy would produce at full employment. During a recession, actual economic output is below potential GDP; during an extreme economic boom, like the dot-com boom of the late 1990s, the economy can for a time have output greater than potential GDP. Here's a graph showing potential GDP in blue and actual GDP in red, both in real dollars from 1960 up through the mid-2012,  generated by the ever-useful FRED website of the Federal Reserve Bank of St. Louis.  The graph does usefully show the depth of the current recession, and other recessions, as well as how actual GDP climbs above potential GDP in the dot-com boom of the late 1990s, as well as during the guns-and-butter period of the late 1960s and the housing boom of the mid-2000s. But you do have to squint a bit to make it all out! And your eye can be fooled in thinking about the depth of recessions, because the graph shows the gaps in absolute levels, not in percentage terms. Thus, when GDP is much lower back in the 1960s, the absolute gap may appear small, but the percentage gap could be larger. So here's a graph based on the same data that shows the percentage amount by which actual GDP was above or below potential GDP in the years from 1960 up through mid-2012.

Q3:2012 U.S. GDP Nowcast Update - Friday's update on industrial production and retail sales for August, along with the ongoing changes in the market indicators, provides an opportunity to run fresh numbers on the Capital Spectator's 10-factor GDP nowcast (see this post for an overview of the methodology)[1]. The current nowcast anticipates Q3:2012 GDP rising at nearly 2.0% in real annualized terms—down from the previous +2.3% nowcast. (The government's first estimate of Q3 GDP is scheduled for release on October 26.) For the moment, the current nowcast still represents improvement over the official 1.7% real annualized growth rate for the second quarter. The key question: Will the nowcast continue slipping between now and the scheduled release of the official Q3 estimate next month? The answer, of course, depends on the data updates in the weeks ahead. Meantime, cautious optimism prevails, but there's a lot of data to digest between today and the end of October. If the nowcast falls further in the updates to come, that would be a worrisome signal. Here's where we stand today: A nowcast for the third quarter that's above the previous published growth rate:

U.S. Economic Trend Update | 9.18.12 - Several analysts are warning (again) that we’re in a recession now, today, this minute. They may be right, or not. It’s hard to say for sure, of course, because we have minimal economic data about what’s happening now, today, this minute. Septermber's economic profile, in other words, remains a mystery for the most part for a few weeks longer. But we do have most of the data through August, and it’s always worthwhile to review a broad measure of the numbers as a benchmark for thinking about where we've been in the business cycle, and where we seem to be headed. Tallying up the stats so far suggests that recession risk was still low for August. That’s based on updates for 13 of the 17 indicators that comprise our Economic Trend Index, a collection of leading and coincident variables that have a reasonably good record overall for quantifying the ebb and flow of the business cycle. There are signs of weakening in the last two months, but it’s not yet clear if this is short-term noise or the start of something more ominous. We'll have a better read on what's happening in a few weeks. Meantime, for some perspective of what we know today, let’s turn to the numbers proper. As the table below shows, the warning signs are still in the minority. Several data points for August are still missing and so it’s possible that the incidence of red ink may rise on the ledger below. But for the moment, the case for arguing that August slipped over the cyclical edge still looks fairly weak.

Vital Signs Chart: Current Account Deficit - The U.S. current-account deficit narrowed during the spring. The deficit — or the difference in all trade and investment income between the U.S. and the rest of the world — fell to $117.4 billion, or 3% of U.S. economic output, during the second quarter. That reflects stronger U.S. exports, weaker imports and some Americans notching higher earnings on foreign assets.

Has U.S. Economy Bottomed Out? Census Suggests Yes - The U.S. economy is showing signs of finally bottoming out: Americans are on the move again after record numbers had stayed put, more young adults are leaving their parents’ homes to take a chance with college or the job market, once-sharp declines in births are leveling off and poverty is slowing.New 2011 census data being released Thursday offer glimmers of hope in an economic recovery that technically began in mid-2009. The annual survey, supplemented with unpublished government figures as of March 2012, covers a year in which unemployment fell modestly from 9.6 percent to 8.9 percent.  Not all is well. The jobless rate remains high at 8.1 percent. Home ownership dropped for a fifth straight year to 64.6 percent, the lowest in more than a decade, hurt by more stringent financing rules and a shift to renting. More Americans than ever are turning to food stamps, while residents in housing that is considered “crowded” held steady at 1 percent, tied for the highest since 2003.Taken as a whole, however, analysts say the latest census data provide wide-ranging evidence of a stabilizing U.S. economy. Coming five years after the housing bust, such a leveling off would mark an end to the longest and most pernicious economic decline since World War II.

FedEx Says Economy is Worsening, Cuts Outlook - FedEx Corp. says the global economy is worsening and it’s cutting its forecast for the fiscal year ending in May. The world’s second largest package delivery company also said Tuesday that net income for the current quarter ending in November should fall well below last year’s quarter. The stock lost about 2 percent in premarket trading. FedEx is seeing a drop in demand for more expensive priority services. As the global economy has slowed, FedEx customers have switched to cheaper deferred delivery services. FedEx hasn’t been able to cut costs fast enough to match the decline in demand.

No, we’re nowhere close to the limits of effective fiscal stimulus --Robert Samuelson’s op-ed in Sunday’s Washington Post argues that the United States has reached or passed “the practical limits of ‘economic stimulus.’” He’s wrong, and much of the evidence he points to on the fiscal side ranges between grossly misleading and simply inaccurate. Several points:

  • More fiscal expansion—particularly deficit-financed spending on infrastructure, aid to states, safety net spending, and well-targeted tax cuts—would accelerate economic growth and boost employment. This may be disputed on editorial pages, but it is not disputed by economists paid for their economic analysis. See analyses from Moody’s Analytics, Macroeconomic Advisers, or EPI’s own analysis of President Obama’s American Jobs Act, most of which Congress has not acted upon. Claims to the contrary are also belied by concern about the so-called “fiscal cliff” professed by both sides of the political aisle; politicians are worried that budget deficits closing too quickly will push the economy into a double-dip recession, as the Congressional Budget Office has forecast under its current law baseline.
  • It is misleading to equate cumulative deficits of $5.1 trillion over fiscal 2009–2012 to the sum cost of economic stimulus. Yes, deficits act as stimulative shock absorbers in recessions. But while deficits expand during recessions, it’s only the cyclical budget deficit that can be viewed as automatic stimulus, not the underlying structural budget deficit. Last year, CBO estimated cyclical budget deficits would total $1.3 trillion over fiscal 2009–2012, or approximately 25 percent of gross budget deficits. The Recovery Act accounted for $782 billion of the non-cyclical deficit over this period, and the sum total of all deliberate, legislative budget policies over this period has been $1.6 trillion. Further, not all spending is stimulative:

Can you Spare a Few Trillion? - Most governments in advanced economies have been unable to deliver on debt sustainability for the last decades. In some cases increasing spending is not matched by their ability to find additional sources of revenues, in other cases taxes have been reduced without the corresponding reduction in spending. And it will only get worse going forward as worsening demographics will put enormous pressure through the corresponding increase in spending.   As we can see in the US presidential race, solutions are not easy to find. Everyone talks about finding a sustainable path for the government debt but details on how this will be achieved are difficult to find.Societies ask governments to provide certain services that are considered to be necessary. Yes, we can make governments more efficient and eliminate some unnecessary bureaucrats but when you look at the numbers, this is not going to be enough - in some cases there is very little margin to reduce spending if you just follow that route.Here is a picture from the US that makes this point as clear as possible. Government spending on pensions and healthcare (medicare and medicaid) from 1972 until today and then extrapolated to 2030 (source: Congressional Budget Office).

The Fed Purchase Test - Krugman - Aha. It seems that many people don’t realize that the view that the Fed is the only thing holding down interest rates has been tested — and failed. So, a bit more.The big test came from QE2, a program of large-scale Fed purchases of long-term government debt that began in November 2010 and ended in June 2011. You can see the program in the Fed’s holdings of such debt: The burning question at the time was what would happen when the program ended and the Fed stopped buying more long-term debt. Many people, very much including Bill Gross, predicted a spike in rates; those of us holding the “stock view”, including both me and Ben Bernanke, disagreed. In the end, there was no spike — which constituted strong evidence against the whole notion that the Fed is what’s holding down rates. Yet the Fed story, which came into prominence in the first half of 2011, now continues to be an article of faith among many people, showing yet again that for such people evidence that runs contrary to their prejudices doesn’t matter.

Treasury International Capital Hit the Record High Since January - Yesterday, the U.S. Department of the Treasury released Treasury International Capital (TIC) data for July. The net TIC flows totaled at $73.7 billions, a significant leap from June’s at $16.7 billions. The result hit the highest level of foreign buying of U.S. Treasury bonds and notes since January. Behind July’s steep increase in foreign holdings of U.S. Treasury securities, there were two major situations. First, investors in the Euro-zone were seeking a safe haven amid the crisis. Secondly, Japan and Switzerland had been buying U.S. Treasury securities to protect their currencies against appreciation. Mr. Talley and Mr. Barkley wrote in The Wall Street Journal, “Meanwhile, Japan boosted its Treasury holdings by $7 billion to $1.117 trillion in July from $1.110 trillion in June. While China’s holdings have fallen by around $165 billion in the past 12 months, Japan has boosted its portfolio by roughly $232 billion in the same period. The buying of dollar-based assets has come as Japan defends the yen against appreciation that could damage its economy. Japan has indicated it may intervene again in currency markets after the Federal Reserve’s decision last week to take further monetary-easing measures put pressure on the yen.”

Treasury Yields: Quick Update - Here is a snapshot of selected yields and the 30-year fixed mortgage one day after the Fed announced its latest round of Quantitative Easing. The 30-year fixed mortgage at the current level no doubt suits the Fed just fine, and the low yields have certainly reduced the pain of Uncle Sam's interest payments on Treasuries (although the yields are up from their recent historic lows). But, as for loans to small businesses, the Fed strategy appears to be a solution to a non-problem. Here's a snippet from a recent NFIB Small Business Economic Trends report: There were no interesting developments in credit markets. Seven (7) percent of the owners reported that all their credit needs were not met (unchanged), 31% reported all credit needs met, and 53% explicitly said they did not want a loan (62% including those who did not answer the question, presumably uninterested in borrowing as well).  The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed's website for the FFR.

    Treasury Yields/Mortgage Update: 30-year Fixed Drops to 3.49% - Here is a snapshot of selected yields and the 30-year fixed mortgage one week after the Fed announced its latest round of Quantitative Easing. The 30-year fixed mortgage at the current level no doubt suits the Fed just fine, and the low yields have certainly reduced the pain of Uncle Sam's interest payments on Treasuries (although the yields are up from their recent historic lows). But, as for loans to small businesses, the Fed strategy appears to be a solution to a non-problem. The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed's website for the FFR. Now let's see the 10-year against the S&P 500 with some notes on Fed intervention.  For a long-term view of weekly Treasury yields, also focusing on the 10-year, see my Treasury Yields in Perspective.

    Goldman On The Fiscal Cliff: Worse Before It Gets Better - As we have explained recently, the US fiscal cliff is a far more important issue 'fundamentally' than the Fed's economic impotence. While most market participants believe some kind of compromise will be reached - in the lame-duck session but not before the election - the possibility of a 3.5% drag on GDP growth is dramatic to say the least in our new normal stagnation. As Goldman notes, the window to address the fiscal cliff ahead of the election has all but closed, the 40% chance of a short-term extension of most current policies is only marginally better than the probability they assign to 'falling off the cliff' at 35%. The base case assumptions and good, bad, and ugly charts of what is possible are concerning especially when a recent survey of asset managers assigned only a 17% chance of congress failing to compromise before year-end. Critically, and not helped by Bernanke's helping hand (in direct opposition to his hopes), resolution of the fiscal cliff will look harder, not easier, to address as we approach the end of the year - and its likely only the market can dictate that direction - as the "consequence is terrible, but bad enough to force a deal."

    Fiscal Cliff Not Leading to Layoffs — Yet - The looming fiscal cliff could be a disaster for the U.S. economy, but it hasn’t been so far — at least not when it comes to jobs. Under last year’s budget deal, billions of dollars in tax increases and spending cuts are set to take effect next year unless Congress acts to reverse course before then. Pretty much everyone — Ben Bernanke, the Congressional Budget Office, both presidential candidates — seems to agree that the policies are a recipe for a sure-fire recession, although there’s far less agreement about what to do to replace them. The shorter-term question, though, is when the economy will start to feel the effects of the fiscal cliff. Government spending has already been falling, but that’s mostly because the wars in Iraq and Afghanistan are winding down and stimulus funds are drying up. Private-sector manufacturers have said for months that uncertainty is already affecting their hiring and investment decisions. And military contractors, in particular, have warned that they’ll be forced to start laying off workers months before defense cuts actually take effect.

    Election Uncertainty Raises Odds Of Fiscal Cliff -- Resolving the fiscal cliff will have to wait until after the Nov. 6 elections. That’s the conventional wisdom. But what if the election results aren’t clear that night or the next day? Remember hanging chads. Bear in mind the U.S. voters aren’t just deciding the presidency. Thirty-three Senate spots are on the line as well. The more, the murkier. If court battles drag the election results through November, neither party will have an incentive to resolve the fiscal cliff–the combination of tax hikes and spending cuts scheduled for next year. While economists and budget wonks expect some type of deal to be reached, the risk of the cliff isn’t negligible. Economists at Goldman Sachs assign a 35% probability that Washington lawmakers fail to address budget issues by the end of 2012. On TuesdayMoody's said there is a 15% chance of falling off the cliff. A hung election would raise the odds. Here’s the nightmare scenario: The Presidential results can’t be certified in one or two states. Three of four Senate seats are also up in the air. Recounts or court challenges to voter-ID laws mean Congress returns for its lame-duck session uncertain which party will control the White House or Senate in 2013.

    As Expected, OMB Sequester Report Shows Little, Means Nothing - As I expected and warned everyone when legislation was enacted requiring it in early August, the report released by the Office of Management and Budget last Friday with the details of the spending cuts that will occur if the sequester actually happens on January 2 was a nonevent that provided little, if any, actual new information or guidance. It was barely a one-day story that may provide all sides in the debate, that is, those who want the across-the-board spending cuts to occur and those who think they're a tool of the devil, with some fodder for arguing their position but no real additional ammunition to make their case. If what I'm saying isn't plain enough...The OMB report that some thought could be a game-changer, actually changed nothing. For the record...The report projects that military appropriations will be cut by 9.4 percent and domestic appropriations by 8.2 percent. The difference in the percentages is the result of the difference in the amount of spending eligible to be cut in each category. The president opted to use one of the few choices given to him and exempted military uniformed personnel. That meant that the Pentagon reductions came from a smaller base and, therefore, had to be a higher percentage. A quick step back for the uninitiated among us.

    ThIs Is Why The Military Community Has So Little Credibility On The Budget - Take a look at this story by Jeremy Herb from The Hill yesterday and be prepared to stifle a huge scream. As Herb wrote, former Secretary of Defense Robert Gates and former Joint Chiefs Chairman Admiral Mike Mullen complained at a program hosted by the Center for Strategic and International Studies about "Washington's inability to grapple with the budget and debt problems facing the country." But shortly thereafter, Gates and Mullen make it clear that something that would do what they said they wanted by reducing the deficit and resulting in less federal debt -- the sequester -- is unacceptable because the sequestration Pentagon cuts "would be devastating (to the Pentagon) and lead to a hollow force." The logical next step for someone interested in reducing the deficit and debt but cutting military spending the right way should be to provide an outline, a guide path or even just a subtle indication of what that should look like. But like everyone else involved in the stop-the-military-sequester campaign, Gates and Mullen are completely silent on how it should be done if a sequester is the wrong way to do it. They want the deficit reduced but they don't want military spending to suffer in the process.

    How to cut the US deficit by fixing taxes, by Laura Tyson - One of the few issues on which Barack Obama and Mitt Romney agree is the need for tax reform. ... But tax reform should not come at the expense of progressivity. Income inequality is greater in the US than in the other developed countries of the OECD. Proponents of greater progressivity often call for an increase in corporate taxes but this would lead to slower growth and fewer jobs. The US ... effective marginal corporate tax rate is one of the highest in the world. ... Of all taxes, corporate income taxes do the most harm to economic growth.  Both Mr Obama and Mr Romney advocate corporate tax reform that lowers the rate and broadens the base. The economic benefits could be significant. A lower rate would stimulate investment, narrow the tax preference for debt over equity financing and weaken the incentives for international companies to move production to lower-tax locations. But lowering the corporate tax rate is expensive – each percentage point reduction would cut revenues by about $120bn over 10 years. A more efficient and progressive way to pay for a lower corporate tax rate would be to increase taxes on dividends and capital gains. This would shift more of the burden towards capital owners and away from labor, which bears the burden in the form of fewer jobs and lower wages.

    Senate Republicans Kill Veterans’ Jobs Bill - Senate Republicans prevented a veterans’ jobs bill from coming to a vote today by forcing a budget point of order vote. Democrats came up 2 votes short of the 60 needed to defeat the GOP’s budget measure. The Veterans Jobs Corps bill — which is part of President Obama’s push to secure jobs for veterans — would have provided $1 billion over five years to hire 20,000 young veterans for public lands jobs and prioritize vets for first responder jobs such as police, firefighter, or EMT. The measure would have also provided young vets access to the infrastructure with which to assist in job searches, such as access to computers, internet and career services advisers.  The Iraq and Afghanistan Veterans of America, a vets group that supported the legislation, called the GOP move “a huge disappointment,” adding, “Today, politics won over helping vets.” While only five Republicans voted with the Democrats to waive the GOP budget point of order measure, Sen. Tom Coburn (R-OK) led the GOP opposition. “When we find ourselves in $16 trillion of debt and we pay for a five-year bill over 10 years, we make the problem worse,” he said.

    Congress in Action: Republicans Set Up Immigration Bill to Fail, Point Fingers at Democrats - Here’s an update on that Republican effort to increase STEM graduate visas to foreign students at US colleges and universities. It was actually even more cynical than I thought. I knew that Republicans wrote the bill to take away one immigration visa from the Diversity Visa Program for every visa it added for STEM graduates (graduates in science, technology, engineering and math). I didn’t know that they put the bill on the suspension calendar. That means it required a two-thirds vote for passage. Democrats don’t support a zero-sum game on immigration visas; they just want more STEM graduate visas issued. So Democrats voted against the bill in large numbers, and instead of this just being opposition on passage, it killed the bill.Republican leaders called the vote under a fast-track procedure that limits debate but also requires a two-thirds majority to pass. The final tally was 257 to 158, with all but a few Republicans joined by 30 Democrats in voting yes, well short of passage [...] While Congressional Republicans have taken a hard line on illegal immigration, they said they wanted to show before the November elections that they were ready to pass a measure to fix a widely acknowledged flaw in the legal immigration system

    Farm Bill Set to Expire as Congress Leaves for Elections - Today is the last day of the legislative session before Election Day. Lawmakers will go home to campaign on September 21, which is the earliest date during an election cycle in decades. And they leave a lot of pending legislation on the table. As John Boehner announced in the above clip, the House plans to adjourn without dealing with the farm bill. A bipartisan farm bill has already passed the Senate, and the House Agriculture Committee cleared their version months ago. But Boehner has been unable to line up support on the floor for it, out of an insistence that most of his caucus support it. The belief is that he could cobble together enough bipartisan support to pass a farm bill, but he has chosen not to. Without an extension, this means that the current farm bill will expire on September 30. Sen. Debbie Stabenow (D-MI), chair of the Senate Agriculture Committee, said yesterday to reporters that she was “shocked” there hasn’t been action in the House, and that they would leave without taking up a farm bill. But she was determined to get something moving in the lame duck session quickly to make up for it. “I am absolutely committed to doing everything possible on behalf of farmers and ranchers to complete the farm bill in November and December,” Stabenow said on the conference call. “The Speaker said he would bring up the farm bill in the lame duck session, we have to hold him to that.” What does it mean that the farm bill will expire on September 30? It means that we revert back to the 1949 permanent legislation, for starters.

    Polar bear bill ties Senate in knots - On its last day in session before the election, the Senate tied itself in knots over 41 polar bear carcasses that hunters want to bring home from Canada as big game trophies. After punting tough decisions on far weightier issues like raising taxes and cutting spending, Majority Leader Harry Reid, D-Nev., insisted that the Senate address the wide-ranging sportsmen's bill before voting on must-pass legislation to prevent the government from shutting down at the end of next week.

    The Next President Will Step into Deficit Hell - To hear the two candidates tell it, the U.S. presidential election offers a dramatic choice on the economy: Vote for me, each says, if you want a robust recovery; pick my opponent, and we'll plunge back into recession. But regardless of who wins, important economic factors will remain facts of life. Millions of American homeowners are "underwater," owing more than their homes are worth and weakening the consumer demand that is key to the economy. Employers, even if they are flush with money, won't hire more workers until they need them – when demand rises or appears ready to. The debt crisis in Europe resists a quick solution, and deficits and overhanging debt in the U.S. are too big to be whittled down very fast. These deficits will compete for federal revenue that could stimulate the economy through more spending or cuts in taxes.   Three Wharton faculty members say that, either way, the future is likely to look much like the present, for several years at least. "The notion in the political debate is that if you just do something a little bit differently, things will get much better. But it doesn't work like that," says Wharton finance professor Franklin Allen.

    Tax Cuts and Economic Growth - My Capital Ideas column in this week’s Sunday Review mentions a new report from the Congressional Research Service — a nonpartisan government group that provides analysis to Congress — on the relationship between tax cuts and economic growth. We have posted the report. The conclusion is below:The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities.

    Romney’s theory of the “taker class,” and why it matters - “My job is not to worry about those people,” Mitt Romney said of the 47 percent of Americans who are likely to vote for Barack Obama. “I’ll never convince them they should take personal responsibility and care for their lives.” There will be plenty said about the politics of Romney’s remarks. But I want to take a moment and talk about the larger argument behind them, because this vision of a society divided between “makers” and “takers” is core to the Republican nominee’s policy agenda. In his comments, Romney says that “these are people who pay no income tax,” but they are people “who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it.” In other words, Romney is arguing that about 47 percent of the country is a “taker class” that pays little or nothing into the federal government but wants to tax the productive classes for free health care, food, housing, etc. Romney is not alone in this concern. For what it’s worth, this division of “makers” and “takers” isn’t true. Among the Americans who paid no federal income taxes in 2011, 61 percent paid payroll taxes — which means they have jobs and, when you account for both sides of the payroll tax, they paid 15.3 percent of their income in taxes, which is higher than the 13.9 percent that Romney paid. Another 22 percent were elderly.

    Mitt Romney Rejects His Natural Voters - Mitt Romney’s characterization of 47% of the American electorate as “victims” who are “dependent on government” and refuse to take “personal responsibility” for their lives appears to have categorized a large segment of his party’s own voters as supporters of President Barack Obama.\ The unspoken truth is that, compared to “blue-staters,” those who live in red states exhibit less responsibility, on average, in their personal behavior: they are less physically fit, less careful in their sexual behavior, more prone to inflict harm on themselves and others through smoking and drinking, and more likely to receive federal subsidies.Statistical analysis shows that states where more residents suffer from obesity, often because they get less physical exercise and eat more junk food, tend to vote Republican. To illustrate, a mere 1% decrease in a state’s obesity on average is estimated to raise the ratio of Democratic to Republican voters from 1.00 to 1.07, easily enough to swing an election. Similarly, states with high pregnancy rates among girls aged 15-17 tend to vote Republican. Again, the relationship is highly significant statistically. Evidently, people in New England, New York, and Hawaii, who more often vote Democratic, are not just slimmer, but are also less prone to engage in unprotected sex than those in the South and Republican-leaning Midwestern states. States with high rates of cigarette smoking also vote Republican, as do states with high rates of fatal accidents from drunk driving. The average score of the five “reddest” states (Wyoming, Oklahoma, Utah, Idaho, and Alaska) is worse on each of six measures of irresponsibility than the average score of the five “bluest” (New York, Massachusetts, Rhode Island, Vermont, and Hawaii): more obesity, smoking, chlamydia, teenage pregnancy, drunk-driving fatalities, and firearms assaults. In the latter three measures, the “reckless” share of the population is almost twice as high among the reddest states as it is among the bluest.

    Stop All Free-Riders -- Governor Romney said that 47% of the population believe they are victims who are entitled to government support and don't pay federal income taxes - in other words, Democrats. How many of the 47% are free-riders? I don't know, but it is a minority, and it is insulting to broadly paint almost half the population as government free-loaders. The government provides various forms of social insurance to its citizens in return for mandatory premiums. Those who claim the insurance benefits are not free-loaders, unless their claim is fraudulent (a free-rider). Provision of social insurance by the government is preferable to the private sector because it will have lower overhead expenses, will not have the expense of private profit, and virtually no credit/counterparty risk. The private sector is better at many services, but this is one where they aren't. I haven't seen Romney harp on how to identify or solve the problem of free-riders. I wish he would, because their presence many social safety net programs. But I think Romney prefers the broad brush, because that enables him to be a victim. After all, being a victim of wasteful government spending on deadbeats enables Romney and others to rationalize not paying their own fair share of taxes.

    Romney dooms his Candidacy by doing the full Murray - William K. Black - Charles Murray’s newest book:  Coming Apart: The State of White America proves two classic truths.  First, it is impossible to compete with self-parody.  Second, be careful what you ask for; for you may receive it.   Murray is a vigorous supporter and flatterer of Mitt Romney, claiming that the fact that he became wealthy at Bain should make him a “slam dunk” for the presidency.  Murray’s reasoning is so crude that he announces a new doctrine – the divine right of CEOs to govern America.  “Who better to be president of the greatest of all capitalist nations than a man who got rich by being a brilliant capitalist?” No need to hold elections; simply make whoever tops the Forbes list of wealthiest people the president.  Think of the competitive incentives that rule would create.Romney and Paul Ryan answered both aspects of Murray’s call of right wing plutocrats to arms.  They embraced Social Darwinism and the view that anyone who received governmental assistance was morally inferior and needed to be denounced.  They agreed with the need to remove the safety net to destroy a “culture of dependency” so that the working class and the poor would be forced to assume personal responsibility and stop being freeloaders. In adopting the full Murray, Romney has doomed his electoral chances.  His response to a question by a wealth donor as to how he would convince poorer Americans that they needed to adopt “personal responsibility” will become a classic.

    The “makers” are much more politically organized than the “takers” - The real question, writes Tyler Cowen, is “on a given policy issue what is the relevant political influence of — on that issue — the makers vs. the takers? Very often the takers are the classic better-mobilized concentrated interest groups.” Actually, I think this is backward, at least in terms of Mitt Romney’s actual comments. Cowen goes on to give examples of farm policy and patents, but Romney wasn’t talking about farm policy and patents. His “takers” weren’t corporations sucking at the public teat. His takers were individuals using food stamps and health-care subsidies and the Earned Income Tax Credit. Poorer people, in other words. And, in those issues, there’s little doubt that “the makers” are far better organized than “the takers.” For one thing, “the makers” vote more. Folks making less than $13,000 make up 13 percent of the population but only 6 percent of the electorate. Folks making more than $200,000 make up only 3.8 percent of the population but are 6 percent of the electorate. So though the over-$200,000 group is less than a third as large as the under-$13,000 group, they make up the same proportion of voters — and, it almost goes without saying, a much greater proportion of political donors.

    Four Histories of the Right's 47 Percent Theory - As you've likely heard, Mitt Romney was recorded at a fundraiser saying that "there are 47 percent who are with [President Obama], who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it [...] These are people who pay no income tax." The right is splitting over whether or not the 47 percent argument is worth defending. It's important to understand that, while it is true that 47 percent of households don't pay a federal income tax, the distribution of the tax burden isn't what the 47 percent theory is about. Mark Schmitt has one examination of where this theory comes from here, Brian Beutler also investigates the background of the 47 percent meme, and Kevin Drum does a history of the EITC here.Digging into different arguments, there are two distinct parts to a good 47 percent theory. The first is who creates and sustains the 47 percent as a political agent. This can't be the bipartisan set of policymakers who wanted to do income support through work requirements as well as expand certain credits, particularly the child credit; it needs to be agents with specific, outside political goals. Those who pay little or no income tax are a coherent group that acts like a special interest or a class. Instead of the young and the old, as well as the working poor moving into and out of the EITC, this group of people is stable enough that it can act as a coherent political class, but it needs to be created and sustained. Who does it?

    Who receives government benefits, in six charts - Below are a few facts — and charts — to consider. Mitt Romney is correct that about half of all Americans now live in a household that receives some sort of federal government benefit. And that number has risen during the Obama years. On the other hand, a large chunk of this money goes toward the elderly and disabled. And most entitlement benefits flow to the middle class—which, judging by polls, tends to split evenly between Obama and Romney. In 2011, about 49 percent of the population lived in a household where at least one member received a direct benefit from the federal government. A big chunk of these households are retirees. And about 27 percent households benefited from a means-tested poverty program. A quick breakdown:

      • –Last year, about 29 percent of households received Medicare benefits and 31.6 percent received Social Security. (Obviously there’s a lot of overlap between those two, since those programs mainly benefit retirees.)
      • –Meanwhile, about 32 million households, or 27.1 percent, benefited from at least one means-tested poverty program. The biggest benefits here were Medicaid (19.5 percent), food stamps (12.7 percent) and subsidized lunches (11.2 percent). Again, there’s some overlap.
      • –Smaller benefits include public housing (5 percent of households), unemployment (4 percent), and veterans’ compensation (2.6 percent). Only 7 percent of households receive some sort of direct cash assistance, such as the TANF welfare program.

    The number of households receiving government benefits has steadily risen over time, particularly after the financial crisis. The recent increase can partly be chalked up the recession, which threw a lot of people out of work, and partly due to President Obama’s stimulus programs, which expanded (among other things) unemployment insurance and Medicaid:

    Who Pays and Who Takes - Comments made by Mitt Romney at a private campaign fund-raiser about the nearly half of Americans who have no income tax liability have heated up a debate over who pays and who takes from the federal government. Budget experts argue that virtually all Americans – rich and poor – pay into the government revenue system. And most Americans – rich and poor – at some point in their lives receive a form of government benefit. Only about 8 percent of American households do not pay income or federal payroll taxes, once you discount older people. Most of those households are very poor, earning less than $20,000 a year, according to a study by the nonpartisan Tax Policy Center, which initially derived the 47 percent number Mr. Romney cited. (In 2011, it was actually 46 percent.) Moreover, almost no families fail to pay taxes of any kind, given the ubiquity of property taxes, sales taxes, sin taxes, state and local levies and other government revenue sources. A report by the Hamilton Project, a research group within the Brookings Institution, also notes that demographics matter when talking about who pays taxes. In any given year, millions of households will not be liable for federal income taxes. But many of those households are young or old – students or retirees. During their prime working years, the people in those households will almost certainly pay federal income taxes.

    Nontaxpayers are Overwhelmingly the Eldery and Students - When Romney talks about the people who don't pay taxes and tries to make you believe that 47 percent of us are moochers living off the system, it's important to recognize that the people who don't pay federal income taxes are mostly the elderly and students. And notice how narrow the category is -- it's only federal income taxes -- but there are lots of other types of taxes. When all things are considered, "nearly 100 percent of Americans pay taxes in some way, shape or form":Who Pays Taxes?, Hamilton Project: A popular myth swirling around Washington, DC, and throughout the media these days is that many Americans do not pay taxes, and are therefore free-riding off of our society without contributing themselves. ...  The origin of this misconception is the observation that only about 54 percent of American households paid federal income taxes during recession-affected 2011.  But that statistic is misleading because it provides an incomplete picture of the overall tax burden on American families, and because it incorporates individuals who naturally shouldn’t be paying taxes because of their age or economic circumstances due to the Recession. A closer look reveals that nearly all Americans do, in fact, pay taxes. ...

    About the 47 Percent Who Don’t Pay Federal Income Tax: Mitt, Meet Andrea -  Andrea was 22 and a single mom. Her daughter, Trinity, was 3. Andrea got up before 7 each morning, rode the city bus with Trinity to day care, then took another bus to her job—caring for a patient in his home.  After  a grueling seven-hour day, she’d take a bus to pick up Trinity, then another bus home, where she’d make dinner, help Trinity learn her letters, and work on her own GED. At $8.40-an-hour, Andrea could earn $420 for a 50-hour week. And if she worked 50 hours, 52 weeks a year, that’s $21,840—well below the income tax threshold for a single mother with one dependent child. I don’t know about her personal tax situation, but a typical head of household like her would owe no income tax thanks largely to the Earned Income Tax Credit and the Child Tax Credit, both subsidies passed by large majorities in Congress and intended to encourage people to work.

    Who are the 47%? Follow-up - Follow up to Afferent Input's post. Ten states that are the highest in income tax non-payers are highlighted in (of all things) RED. It just gets better and better.Via my former governor.

    Counterparties: Revenge of the lucky dukies - Mitt Romney is defending his comments in an anonymously sourced video, taken surreptitiously at a Florida fundraiser, that “there are 47 percent of the people who will vote for the president no matter what… These are people who pay no income tax”. Which is odd, because Romney’s take on “the 47%” was factually wrong and politically daft. It is true, according to the Tax Policy Center, that 46% of American taxpayers pay no federal income taxes — the so-called lucky duckies. They do, however, pay taxes like “federal payroll and excise taxes as well as state and local income, sales, and property taxes”. A combination of poverty and tax breaks for children, the elderly and the working poor account for 87.2% of cases where zero federal income taxes are paid, something Ronald Reagan bragged about. Awkwardly for Romney, there’s also a small slice of high-earning taxpayers who pay no federal income tax due to the treatment of capital gains and dividends. NPR’s Planet Money has a great graph that simplifies the breakdown. The reality is that America’s tax system is barely progressive and in effect approaches a flat tax.Politically, the Atlantic‘s David Graham shows the non-federal taxpayers live largely in Southern and Western states Romney must win. And Graham’s colleague Derek Thompson notes that Obama won a huge share of low-income voters in those states, the president was less successful with elderly Southerners. Romney will need their support in November.Dismissing nearly half of Americans as unreachable and unworthy struck Jonathan Chait as exactly what we’d been waiting to see: the real Mitt Romney. He turned out to be a “sneering plutocrat” who thinks of the “lowest-earning half of the population as implacably hostile parasites”. As the Huffington Post’s Ryan Grim and Matt Sledge put it in cataloging the wide-ranging negative reaction to Romney’s comments — which also disgusted David Brooks — that’s a stance that “offends liberals and conservatives alike”.

    Taxes Over The Life Cycle - Krugman - Mark Thoma has the best data post so far on the execrable Romney speech, linking to the Hamilton Project work on taxes. This work makes a crucial point: even aside from the fact that there are other taxes besides the income tax, even aside from the larger point that lower-income working Americans are hardly grifters, the fact is that the vast majority of Americans do pay income taxes at some point in their life: Thanks to the child tax credit and Earned Income Tax Credit, a fair number of working families with young children pay no income tax; thanks to the exemption on Social Security, many older Americans pay no income tax. But in middle age, close to 80 percent of the population pays income taxes, and even more, of course, pay federal taxes of some kind.

    The Great American Tax Debate - The great American tax debate may feel like a stale, perennial feature of our politics. But it is important. The controversy is not merely about how much we pay in taxes. An equally important question is about who pays them.  The liberal end of our political spectrum strongly believes that tax policy should aim to reduce inequities in pretax income. After all, a dollar taken from the rich to give to the poor should increase national welfare because the poor value that dollar more than the rich do. This would justify a progressive tax schedule — with tax rates rising sharply with income.  Conservatives, by contrast, scoff at the notion of income redistribution by the government. Many have long supported flat taxes — which take roughly the same share of the income, or the spending, of the rich and the poor. The public shares this polarization. A growing share of Americans believes the rich pay too little in taxes. Many say our country would be fairer if those earning more than $250,000 paid more. A CNN/ORC International poll in April found that seven in 10 Americans support the Obama administration’s proposal that people making $1 million a year or more pay at least 30 percent of their income in taxes. Still, many shrink from raising taxes on the wealthy. A McClatchy/Marist poll in July found that more than half of Americans want all the tax cuts passed in the Bush administration to be extended, including those for the richest Americans. What’s more, a quarter of Americans believe the poor don’t pay enough, the highest share since Gallup started asking the question a decade ago.

    US views on fairness of taxes - One side has no point. I have mentioned from time to time the repeated Gallup polls showing strong support for tax progressivity.  this is not a new phenomenon, Gallup started asking the questions in 1992. I tend to give an almost worthless link to but I have finally looked up a decent link. There is little support for RomneyRage at lower income lucky duckies who don't pay enough. In dramatic contrast, most US adults feel that upper income people are paying too little. No new information in this post, but the topic is uh topical and the graphs are nice.

    Romney's Taxes Compared With Everyone Else's - The Romney campaign revealed Friday afternoon that Mitt Romney and his wife, Ann, paid a 14.1 percent effective federal tax rate in 2011, paying $1.9 million in taxes on $13.7 million in income, much of it from investments. (That $13.7 million in income most likely puts him in the top 0.01 percent of earners, by the way.) Where does that effective tax rate put him in the universe of taxpayers? The Romneys paid a higher effective tax rate than the average middle-income American, though a significantly lower rate than the average rich, or very rich, American.According to the nonpartisan Tax Policy Center, the middle quintile of taxpayers – earning between $33,542 and $59,486 a year – had an effective direct federal tax rate of about 12 percent in 2011. The top 1 percent of earners, making more than $532,613 a year, paid a direct federal tax rate of about 22.7 percent. And the top 0.1 percent of earners, making more than $2,178,886 a year, paid a direct federal tax rate of about 21.4 percent. Still, the Romneys revealed that they paid more taxes than they really owed, pushing their effective federal rate higher. The couple made more than $4 million in charitable donations in 2011, but claimed a deduction for only $2.25 million of those donations “to conform to the governor’s statement” that he “paid at least 13 percent in income taxes in each of the last 10 years.”

    What Mitt Romney Really Represents - Robert Reich - It’s not just his giant income or the low tax rates he pays on it. And it’s not just the videotape of him berating almost half of America, or his endless gaffes, or his regressive budget policies.It’s something that unites all of this, and connects it to the biggest underlying problem America faces — the unprecedented concentration of wealth and power at the very top that’s undermining our economy and destroying our democracy.Romney just released his 2011 tax returns, showing he paid $1.9 million in taxes on more than $13 million of income last year — for an effective tax rate of 14.1 percent. (He released his 2010 return in January, showing he paid an effective tax rate of 13.9 percent.)American has had hugely wealthy presidents before — think of Teddy Roosevelt and his distant cousin, Franklin D. Roosevelt; or John F. Kennedy, beneficiary of father Joe’s fortune.But here’s the difference. These men were champions of the working class and the poor, and were considered traitors to their own class. Teddy Roosevelt railed against the “malefactors of great wealth,” and he busted up the oil and railroad trusts.

    ‘The Great American Tax Debate’ Misses the Point - Casting the tax debate as an argument in which liberals want to use the tax system to reduce income inequality after the fact by taxing the wealthy at higher rates than middle and lower income classes, while conservatives favor flat taxes that tax rich and poor at the same rate, misses the main point. Deregulation of the financial system over the last 35 years and tax preferences that benefit corporations and wealthy individuals have done much to increase the before-tax incomes of the top 1 percent. An army of tax accountants, many of them recruited from the IRS, has figured out how to push the envelope on tax avoidance for the big businesses and wealthy individuals that can afford their high-priced services. For these folks, tax accounting has been transformed from a service that makes sure that required taxes are paid to a profit center that manipulates the tax code to generate huge returns at the expense of the tax-paying public. Increasingly what we see in the United States is the growing importance of tax-payer financed capitalism. There is no economic reason that the debt taken on by corporations should be treated differently in the tax code from the equity invested by shareholders, but it is. Corporations get to deduct the interest paid on debt from their earnings, thus reducing the corporate income tax they have to pay. The tax code also provides an incentive for private equity firms, which plan to hold companies they acquire for their portfolios for just a few years, to load these companies with debt. In good times, this greatly increases the returns to investors. In poor economic conditions, this greatly increases the risk of financial distress and even bankruptcy, and imposes great costs on workers, creditors and communities. For investors with a time horizon measured in years and not decades, this is a risk worth taking for the promise of higher returns.

    To Match Walton Heirs' Fortune, You'd Need to Work at Walmart for 7 Million Years - According to the latest edition of the Forbes 400, released yesterday, the six wealthiest heirs to the Walmart empire are together worth a staggering $115 billion. This marks the first time in American history that one family has controlled a 12-figure fortune. While the nation's richest person is still Bill Gates, the sixth-, seventh-, eighth-, and ninth-richest Americans are all Waltons. In 2004, a year in which Wal-Mart reported $9.1 billion in profits, the retailer's California employees collected $86 million in public assistance, according to researchers at the University of California-Berkeley. Other studies have revealed widespread use of publicly funded health care by Wal-Mart employees in numerous states. In 2004, Democratic staffers of the House education and workforce committee calculated that each 200-employee Wal-Mart store costs taxpayers an average of more than $400,000 a year, based on entitlements ranging from energy-assistance grants to Medicaid to food stamps to WIC—the federal program that provides food to low-income women with children. The average Walmart worker earns just $8.81 an hour. At that wage, the union-backed Making Change at Walmart campaign calculates that a Walmart worker would need:
    7 million years to earn as much wealth as the Walton family has (presuming the worker doesn't spend anything)
    170,000 years to earn as much money as the Walton family receives annually in Walmart dividends
    1 year to earn as much money as the Walton family earns in Walmart dividends every three minutes

    New Study: No Evidence That High-End Tax Cuts Help the Economy - Many policymakers cite as fact that cuts in the top income and capital gains tax rates spur much greater economic growth and that increases in those tax rates significantly hurt growth.  A new Congressional Research Service (CRS) report suggests, however, that such easy assumptions are highly problematic. The report found no statistically significant correlation, all the way back to 1945, between the top capital gains or top marginal income tax rates and:  (1) economic growth (in real per capita GDP); (2) private saving; (3) investment; or (4) growth in labor productivity. CRS did, however, find a correlation between reductions in these tax rates and greater income inequality. That’s not surprising:  as tax policy expert Leonard Burman and my colleague Jared Bernstein have noted, there is no clear link between the top capital gains rate and investment or GDP growth.  As Burman has explained, “Many other things have changed at the same time as [capital] gains rates and many other factors affect economic growth.  But the [evidence] should dispel the silver bullet theory of capital gains taxes.  Cutting capital gains taxes will not turbocharge the economy and raising them would not usher in a depression.”

    7,000 Millionaires Paid No Income Tax - The chart below from the Tax Policy Center shows the distribution of federal income taxes paid by income level in 2011. It contains a number of interesting factoids, including the following:

    • 7,000 people made more than $1 million but paid no income tax.
    • 22,000 people made between $500,000 and $1 million but paid no income tax.
    • 81,000 people made between $200,000 and $500,000 but paid no income tax.
    • 381,000 people made between $100,000 and $200,000 but paid no income tax.

    So that's 491,000 Americans who made more than $100,000 a year who paid no income tax. (Clearly dependent victims who refuse to take responsibility for their lives!)

    Some Big Corporations Don't Pay Taxes, Either - Mr. Hamm said his company paid an effective tax rate of 38 percent. One often hears corporate executives make such assertions. Republicans always accept them at face value, because to them there is no public policy problem that isn’t caused by high taxes. Tax cuts are their solution to just about every problem. Cutting the corporate tax rate is among the key measures that all Republicans favor to stimulate growth. One problem with the Republican theory is that many big corporations actually pay little, if any, federal income tax. For example, The New York Times has reported that General Electric, the sixth-largest corporation in the United States, earned $14.2 billion in 2010, but disclosed in federal filings that it had no federal tax liability. This disparity between the high taxes that many people say they believe American corporations pay and the low rate they actually pay applies to Mr. Hamm’s business as well. Citizens for Tax Justice, a labor-backed group, looked at Continental Resources’ financial reports, where it must disclose tax payments, and found that in 2011 it paid a federal tax rate of 1.9 percent on profits of close to $700 million. When poor people pay no federal income taxes and get a government refund because of such programs as the earned-income tax credit, Republicans are incensed, implying that if only the poor paid their fair share that the deficit would disappear. They never suggest that corporations like G.E. pay their fair share, even though the G.E. example is far from unique, according to Citizens for Tax Justice.

    Tax Moochers: Banks - Thanks to a leaked video, we know that Mitt Romney divides the country into those who pay taxes and those who don't, the makers and the moochers. There is one perhaps surprising group you can put in the latter category: the nation's banks. Sure, banks pay taxes, but they pay a lot less thanks to a giant and underappreciated distortion in our nation's tax code. Moreover, this tax code distortion makes the financial system and the economy more fragile, prone to bankruptcies and runs. Banks profit, and the economy teeters. Great bargain, huh?It's the tax code's favoring of debt over equity. For businesses, debt interest payments are tax deductible; equity payments, like when a company pays out a dividend, are not. At the margin, this encourages entities to take on more debt than they otherwise would, as Steven M. Davidoff noted in a Deal Professor column earlier this year. More debt not only makes companies more vulnerable to bankruptcy but also makes investors more susceptible to panics, when they withdraw their capital en masse. More equity would make the world more stable.

    Simple Minded Economics in WSJ Op-Ed - In today's Wall Street Journal former hedge-fund manager Andy Kessler makes the age-old argument that redistribution from rich (job creators) to poor hurts the poor. Indeed, there is an element of truth to his line of reasoning. If the wealthy do more and better investing, the economy can grow and this would provide some benefit to low income families. But there are at least two enormous shortcomings of letting this view be the only guiding principle for economic policy.  First, Kessler is only talking about the speculative indirect effect (more capital formation grows the economy and economic growth benefits all income categories) and he is ignoring the certain direct effect of government moving money from poor to rich. There is more hope than hard evidence that his approach will help low-income families. Second, there is a demand side to the economy and the swings in aggregate demand are what make most recessions. The economics profession almost started believing that major recessions were a thing of the past until we had that little meltdown at the end of 2008. "Stimulus" has gotten very bad press because people are scared about rising deficits and because they think the Obama stimulus did not work because we still have 8 percent unemployment. But the cure for a demand-side job losses is demand side stimulus.

    Mirable Dictu! Has Someone Noticed the IRS isn’t Enforcing Tax Laws in the Mortgage-Industrial Complex? - Yves Smith - Reader Deontos highlighted a post on Reuters by two Brooklyn Law School professors, Bradley Borden and David Reiss, on a subject near and dear to our hearts, the abject failure of the IRS to take interest in widespread, probably pervasive, violations of REMIC, the part of the Federal tax code that governs mortgage securitizations.  The reason this matters is that this situation belies on of the Administration’s pet claims, that its hands were tied as far as addressing the foreclosure mess was concerned because it had no leverage over servicers. As we’ll discuss, in fact the Administration has a nuclear weapon in its hands that it is simply refusing to use.  The reason the Borden and Reiss piece is noteworthy is it’s the first time I’m aware of that experts have chosen to comment at length on the REMIC issue, suggest that there is likely a BIG problem here, and politely point out that the REMICs may have committed fraud, which would allow the statute of limitations to remain open indefinitely, giving the IRS plenty of time to investigate and litigate.  However, I suspect the professors have heard that the IRS is choosing to do nothing, as their quote of Lee Shepard at the top of their piece suggests: They take aggressive positions, and they figure that if enough of them take an aggressive position, and there’s billions of dollars at stake, then the IRS is kind of estopped from arguing with them because so much would blow up. And that is called the Wall Street Rule. That is literally the nickname for it. We suspect they know full well the Wall Street Rule is being applied here.

    Former Fed Regulation Chief to Advise Banks - The Federal Reserve’s most recent head of bank supervision and regulation will now be helping advise big banks how to adapt to the changing regulatory landscape he was once at the center of crafting. Patrick Parkinson, a 31-year Fed veteran, has joined Washington, D.C.-based financial services consulting firm Promontory Financial Group LLC. The firm was founded by former Comptroller of the Currency Eugene Ludwig. Parkinson, who was a longtime staff economist at the Fed before becoming its chief bank regulator in 2009, retired from the Fed at the end of 2011. He was replaced by Michael Gibson, who previously worked in the central bank’s research and statistics department. Parkinson likewise spent most of his Fed career in that department. Parkinson had a front row seat to the federal government’s response to the 2008 financial crisis. Parkinson helped create the lending facilities put in place to stabilize markets following the collapse of Lehman Brothers in September 2008. He spent the first half of 2009 on loan to Treasury from the Fed advising Treasury Secretary Timothy Geithner and helping draft the Obama administration’s draft of regulatory overhaul legislation. In his new job, Parkinson will advise industry clients on regulatory and risk management issues, according to a press release from the company.

    Feast of Fools: How American Democracy Became the Property of a Commercial Oligarchy - Here’s what the latest census data tell us: in 2011, the middle class shrank to “an all-time low” (as the Washington Post headline had it), while the income of the wealthiest Americans continued to climb.  The poverty rate leveled off at a still shuddering 15%, with more than one of every five Americans under eighteen living in poverty.  The Gini Index, a measure of income inequality, rose by 1.6%, the “biggest one-year increase in almost two decades.” In a way, of course, this should be no news at all.  Middle-class wealth has taken a staggering hit since the economic meltdown of 2007 (and African American and Hispanic wealth has gone through the floor). This disaster, linked to the Great Recession, has had a sideline effect.  On the theory that what goes up must come down, money flooding out of American households and into the coffers of the incredibly wealthy and their corporate cronies has also been flowing back down in tidal amounts.  It’s been pouring biblically into this season’s political campaign. The news out of the dog days of August, for example, was that the Obama and Romney campaigns had raised a total of more than $225 million dollars that month alone.  

    Killing Dodd-Frank Softly: On August 16, a group of 32 members of Congress sent a seemingly innocuous request to Richard Cordray, the director of the Consumer Financial Protection Bureau, regarding a new rule on international money transfers. "We urge you to delay the effective date of these rules and to undertake a comprehensive study of their impact before moving forward to avoid irreparable harm to consumers," they wrote. The regulation, set to go into effect in January, will force companies to disclose the full extent of the fees they charge when people send money overseas. While the letter raised concerns about the rule, the members of Congress didn’t ask the CFPB to scrap it; instead, they entreated Cordray to hold off on the rule until January 2015. Simple enough on the surface. But it is part of a broad, systematic effort by the banks and their allies to delay implementation of the Dodd–Frank Wall Street Reform and Consumer Protection Act, the law Democrats passed in 2010 to keep the banks in check following the crash of 2008. The banks have used seemingly earnest requests for further study to push any new regulation down the road. Many of the requests could be valid—the agency is regulating complex markets—but they hide a more nefarious purpose: buying time before the November election, after which a new Republican Senate majority could rewrite the rules or a Romney White House could stock the regulatory agencies with conservatives who are loath to put checks on their Wall Street friends.

    Behind the Scenes, Lawmakers Lobby to Curb Bank Rules - As regulators put the finishing touches on new rules for Wall Street, they remain entangled in a partisan fight over the overhaul. In public letters and closed-door meetings, more than 100 lawmakers have lobbied the Federal Reserve and other authorities over the Volcker Rule, records show. The rule, intended to restrict banks from placing risky trades and investing with hedge funds, has drawn an outcry from Republicans who want to mute its effect and some Democrats who want to strengthen it. The wrangling has been on display at public hearings and in letters posted on regulatory Web sites. Still, some lawmakers have applied pressure behind the scenes. Internal government documents provide a glimpse of one such lobbying effort last year, when an aide to Senator Scott Brown, Republican of Massachusetts, appealed to the Treasury Department and the Federal Reserve. The documents show a back-and-forth between the Fed’s top lawyer and Mr. Brown’s staff. “I have a very urgent request,” Nathaniel Hoopes, Mr. Brown’s aide, wrote in an April 2011 e-mail. Seeking to fine-tune an exemption, he argued that a broad range of bank customers should be allowed to invest with hedge funds under the Volcker Rule. “My boss has been hearing it from constituents,” he added, referring to the rule’s impact on Massachusetts-based financial firms.

    The GOP's Zombie Dodd-Frank Would Lose the Core Logic of Financial Reform It was just announced that Tim Pawlenty will become the head of the bank lobbying group Financial Services Roundtable. The powerful financial lobbying group, which represents groups like JP Morgan and Bank of America among other big financial sector players, appears to be aligning itself more closely with the Republican Party and betting on the idea that Republicans will control at least part of Congress. But what do they want? Earlier in the year, I argued in Washington Monthly that they'd like to repeal the core parts of financial reform. Recently, Phil Mattingly had an article at Bloomberg Businessweek about how the GOP and Mitt Romney would approach Dodd-Frank. This is with a hat-tip to Reihan Salam who notes that this article "has confirmed something I’ve heard from well-informed insiders" and makes additional arguments [1]. So it seems well-sourced.Mattingly's argument is that it is unlikely that the Republicans will outright repeal Dodd-Frank. So what would the Republicans try to dilute and remove? Mattingly:"Wall Street wants to loosen rules governing the swaps market, which generated $7 billion in revenue in the first quarter of 2012, according to government records. The banks would also get rid of restrictions on bank investment in private equity and hedge funds, pare back the power of the new federal consumer protection agency, and block the Volcker Rule, which bars banks from trading with money from their own accounts, a practice that can put customer deposits at risk. [...]Wall Street doesn’t oppose everything in the law. Banks support the “resolution authority” that spells out how and when the government can seize and wind down struggling banks before they catastrophically fail."

    Janet Tavakoli: Understanding Derivatives and Their Risks - Global financial markets are awash in hundreds of trillions of dollars worth of derivatives. By some estimates, the total amount exceeds one quadrillion. Derivatives played a central role in the 2008 credit crisis, as they had a brutal multiplying effect on the magnitude of the carnage. As a bad asset was written down, oftentimes there were derivative contracts written against it that resulted in total losses 10x greater than the initial write-down. But what exactly are derivatives? How do they work? And have we learned to treat these "weapons of mass financial destruction" (as Warren Buffet colorfully coined them) any more carefully in the aftermath of the global financial crisis? Not really, claims Janet Tavakoli, the danger behind derivatives doesn't lie in their existence, she stresses, but when abused, derivatives can create massive damages. So at the root of the "derivatives problem" is control fraud - the rampant unchecked criminal action by influential players on Wall Street.

    Libor-Like Manipulation Possible in Benchmarks Around the World - The same lack of oversight that enabled traders to manipulate the London interbank offered rate plagues other benchmarks around the globe, according to a group of international securities regulators. Fewer than half of the benchmark interest rates surveyed in the U.S., Europe and Asia were based on actual transactions, according to a confidential International Organization of Securities Commissions discussion paper obtained by Bloomberg News. Instead, the rates were calculated by methodologies that were unclear, not transparent and only rarely subject to specific regulatory standards or obligations, the group said. “Iosco, as the international organization of financial market regulators, is firmly committed to restoring confidence in benchmarking activities globally,” Masamichi Kono, chairman of the Iosco board, said in a Sept. 14 statement. Iosco spokeswoman Carlta Vitzthum declined to comment on the discussion paper.

    IMF chief Christine Lagarde says US needs to rein in its banks -  Speaking ahead of key meetings for the IMF and the World Bank early next month, Ms Lagarde called on political leaders to "get beyond the crisis in the eurozone" as "we have challenges everywhere".  Asked in an internal IMF interview what needs to be done to solve the current crisis, she replied: "It’s obvious it will take a lot of cooperative action between all players - and not just cooperative talk, but cooperative action by way of implementing some of the decisions that have been made and some of the decisions that need to be made.  "But if you were to ask me, it’s a question of really trying to get beyond the crisis in the eurozone, asserting a medium-term plan for countries like the US and Japan, and making sure that some of the issues that actually created the crisis back five years ago are really dealt with, not just half dealt with. And I’m particularly thinking about the financial sector."  The IMF has previously warned that the Japanese financial system is at a "critical crossroad", while banks in the US were pilloried for their role in the credit crunch and subsequent global economic meltdown, forcing many to seek bailouts from the government.

    Eugene Linden: In a World of Underpriced Risk, What Could Possibly Go Wrong? - Yves here. While I anticipate readers will enjoy Eugene Linden’s post, I do have a couple of quibbles. Linden comments in passing that the action of the Fed is understandable, if regrettable, given the options. I don’t believe in letting the officialdom off that easy. Japan warned the US early in the crisis not to repeat what was its biggest mistake: coddling the banks rather than forcing them to take losses. An IMF study of 124 banking crises concluded that regulatory forbearance, the term of art for letting impaired banks soldier on, found: The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred…  And we’ve discussed long form that Obama blew the opportunity to get tough with financial services firms at the beginning of his term and instead threw his lot in with them.  In addition, it isn’t “profligate” to deficit spend when both the business sector and the household sector are net saving. But that raises the question of why more isn’t being done to get capitalists to act like capitalists. Andrew Haldane and Richard Davies have demonstrated that corporations are seeking overly high returns on investment, which leads to widespread underinvestment and also argues for a greater role for government investment given private sector mispricing. Thus the central bank efforts to force investors out the risk curve is partly in response to persistent corporate short-termism and unduly high return targets. But as the saying “you can bring a horse to water but you can’t make it drink” warns us, central bank efforts to lower risk pricing is not guaranteed to produce the behavior they want. Recent history has shown its impact on financial assets is much greater than on the real economy.

    The importance of Occupy - On September 7, Occupy the SEC followed up its fantastic comment letter of last February with an equally perspicacious and detailed update. At 15 pages, the new letter is much shorter than the 325-page original, but it still packs a heavy punch, and it arrives at exactly the right time: just as the SEC and other regulatory agencies are trying to work out how the Volcker Rule should look, especially in the wake of the JP Morgan London Whale fiasco. (All of which was, embarrassingly, entirely Volcker-compliant.) Meanwhile, the Occupy Bank Working Group, which got a flurry of publicity back in March, is still going strong, working on something which has the potential to be much more far-reaching than any letter. It takes time to build a new kind of bank, which is their ultimate ambition, and they’re not there yet. But they’re moving in that direction, and if Andrew Ross Sorkin had talked to any of them before filing his column today, he might not have been so dismissive with respect to the legacy of Occupy. (“It will be an asterisk in the history books, if it gets a mention at all.”) In fact, Occupy was hugely important: it provided an overarching frame, and context, which could then be applied in a myriad of different situations and geographies.

    One year on, what has been achieved? - Economist - THE King of Hearts is Larry Summers and the Jokers are Tim Geithner and Alan Greenspan in the “52 Shades of Greed” deck of playing cards handed out to mark the first anniversary of the start of the Occupy Wall Street movement on September 17th. Also available in Zuccotti Park, where the distinctive discussion groups and drumming circle reformed, was the “Occupy Wall Street Songbook”, with old favourites such as “I’m Gonna Occupy” and “We’re Too Big To Fail”. The carnival mood did not extend to the New York Police Department, however, which arrested 185 protesters, mostly in the course of preventing them forming a “People’s Wall” around the New York Stock Exchange. All this, however, felt more like a reunion than a restart. Even the planned launch of the Occupy Co-operative was postponed, though the Occupy Bank Working Group still hopes to create an alternative provider of financial services for people disaffected with, or neglected by, the existing banking system. This working group, which includes some Wall Street insiders, is one of the more practical outcomes of the protests, along with the Alternative Banking Group and its offshoot, Occupy the SEC, whose contributions to the debate on regulatory reform (including a tome on the Volcker Rule) have been well-received even by some leading regulators.

    Nearing end of term, Obama’s snared no big Wall Street fish— Running for re-election, President Barack Obama frequently blames Wall Street and the deep financial crisis it caused for the underperforming economy. He doesn’t advertise that no major honcho of finance has been jailed under his watch for the mess, however. The lack of a high-profile arrest and trial is all the more surprising given that Obama has tried to stain his Republican rival, former Massachusetts Gov. Mitt Romney, as a creature of Wall Street. Past financial crises have always had antagonist. The savings and loan crisis of the late 1980s had banker Charles Keating. The CEO of collapsed energy trader Enron, Kenneth Lay, became the face behind a drive to revamp accounting laws in 2002. Both men were prosecuted for and convicted of financial crimes. In the aftermath of the financial crisis of 2007-08 and the subsequent Great Recession, there’ve been plenty of scapegoats but no important actor fitted for pinstripes. Why not? There’s no single compelling answer to that question.

    A Rare Look at Why The Government Won’t Fight Wall Street - Matt Taibbi - The great mystery story in American politics these days is why, over the course of two presidential administrations (one from each party), there’s been no serious federal criminal investigation of Wall Street during a period of what appears to be epic corruption. We get one of those rare inside accounts in The Payoff: Why Wall Street Always Wins, a new book by Jeff Connaughton, the former aide to Senators Ted Kaufman and Joe Biden.There are some damning revelations in this book, and overall it’s not a flattering portrait of key Obama administration officials like SEC enforcement chief Robert Khuzami, Department of Justice honchos Eric Holder (who once worked at the same law firm, Covington and Burling, as Connaughton) and Lanny Breuer, and Treasury Secretary Tim Geithner. Most damningly, Connaughton writes about something he calls "The Blob," a kind of catchall term describing an oozy pile of Hill insiders who are all incestuously interconnected, sometimes by financial or political ties, sometimes by marriage, sometimes by all three. And what Connaughton and Kaufman found is that taking on Wall Street even with the aim of imposing simple, logical fixes often inspired immediate hostile responses from The Blob; you’d never know where it was coming from.

    Black Report: Top Justice official tells Wall St. how to avoid prosecution - Bill Black is interviewed by Paul Jay of the Real News Network. The whole piece is rather a “That Was The Week That Was” for alternative finance/political economy geeks, with Lanny Breur, 47%, and QE3 all covered, but even though working out on Lanny Breuer is always good clean fun, this, further into the show, caught my eye: BLACK: And then the general theory [of QE3] is — interest rates act like sort of a hurdle when you’re investing as a business: you’ve got to be able to get a return that gets you over at least that hurdle of the interest rate. So if you lower the hurdle a lot, then more investment should get over it and you should get a stronger recovery. That’s their hope, at least.

    Was the U.S. Justice Department Sold to the Highest Bidder - When we read the lawsuits involving Wall Street – firms colluding with each other, document shredding, lawyers’ hiding evidence, decades of deceiving the American people, strong arm tactics, deceptive trade associations – it all has a familiar ring.  It should.  The law firm that fronted for Big Tobacco for four decades, Covington & Burling, has its former lawyers ensconced in three of the top slots at the U.S. Justice Department. Now Covington & Burling has become Wall Street’s go-to guys for legal counsel in a growing roster of alleged crimes.  The public, and Congress, have a pressing need to question how a law firm that was cited by a U.S. District Court, an Appellate Court and the U.S. Supreme Court as playing a central role in coordinating the illegal activity of Big Tobacco – activity that callously harmed the health and welfare of both children and adults, ended up sending three of its lawyers to the top slots at the Nation’s highest law enforcement office.  Both Eric Holder, the U.S. Attorney General, and Lanny Breuer, the Assistant Attorney General for the Criminal Division were Covington & Burling partners before they joined the Justice Department.  Dan Suleiman, who also worked at Covington and Burling, became the new deputy chief of staff and counselor to Lanny Breuer on July 16 of this year.  Since 2008, employees of Covington & Burling have contributed $347,951 to President Obama’s campaigns.

    Crony Capitalism, American Style - I loved the irony in the following headline from the NYTimes: Scandal Poses a Riddle: Will This Nation Ever Be Able to Tackle Corruption? The kicker was that they were referring to India (the headline actually had “India”, not “This Nation”)– not the king of crony capitalism, the USA. So far as corruption at the top goes, India is a piker. You cannot read a newspaper or serious blog without finding yet another example of US crony capitalism, aided and abetted by Washington. As we approach the first anniversary of the Occupy Wall Street movement’s origins, Washington remains steadfast in its refusal to do anything about Wall Street’s crimes. It’s a poster child for crony capitalism. Oh, sure, the Obama Administration has slapped the hands of the crooks a few times, by imposing inconsequential fines. Much ado was made of nothing last year when Washington forced state Attorney’s General to go along the $25 billion settlement that amounted to little more than a public relations move (here’s a sure bet: much of the pittance will not even be collected). As “the London Whale” proved, any good trader at the biggest banks can lose more money in a few hours than Washington will demand in fines for fraud that screwed the globe out of trillions of dollars of wealth and tens of millions of jobs. It’s as if we fined a bank robber ten bucks for stealing a thousand, then sent him on his merry way to hold up more banks.

    Money Talking: What Does High-Frequency Trading Mean For Your Average Investor? - WNYC audio: So-called "high-frequency traders" use algorithms to make tens of thousands of trades a day. They may only earn a fraction of a cent on each trade, but the high volume means they can earn millions. Recent snafus have raised concerns that this newfangled, computer-based trading is risky. In August, brokerage Knight Capital lost $440 million in 45 minutes when its new trading software malfunctioned shortly after the market opened, and just this week there was a brief plunge in oil prices pegged to high-frequency trading. Slip-ups like these prompted the Senate Banking Committee to hold a hearing Thursday into whether the practice is hurting investorsand whether it needs to be regulated. This week on WNYC's Money Talking, contributors Joe Nocera of The New York Times and Rana Foroohar of Time explain what this means for the average investor and what it says about the purpose of the market.

    NYSE Pays a Paltry $5 million Fine for Giving Private Customers a Trading Head Start - On Friday, the U.S. Securities and Exchange Commission (SEC) announced that it had administratively fined the New York Stock Exchange (NYSE) $5 million (pdf) for allowing its private customers access to stock market information ahead of when it was available to the general public. This occurred from June 2008 to about mid-May 2010. The fine amounts to about a morning’s worth of revenue for the exchange. The SEC stated in its settlement accord that the NYSE had violated SEC Rule 603(a) related to the regulation of national market systems (pdf), which “requires that exchanges distribute market data on terms that are ‘fair and reasonable’ and ‘not unreasonably discriminatory.’ This rule prohibits an exchange from releasing data relating to quotes and trades to its customers through proprietary feeds before it sends its quotes and trade reports for inclusion in the consolidated feeds.” However, during the period in question, the NYSE allowed customers of its proprietary feeds to receive information from milliseconds to sometimes several seconds ahead of the general public.  An article in the LA Times quoted a trader as saying that allowing this to happen was akin to letting those NYSE customer to see “who won a horse race and being able to bet before everyone else.”

    JPMorgan Power-Trading Business Faces Suspension, FERC Says - The Federal Energy Regulatory Commission has accused J.P. Morgan Ventures Energy Corp. of misleading regulators and said its authority to sell electricity might be suspended. FERC issued an order today that directs the unit of New York-based JPMorgan Chase & Co. (JPM) to show that it didn’t violate FERC regulations and explain why its authorization to sell electric energy and related services at market-based “That can be more serious than a penalty, that could be more serious than disgorging profits,” said Susan Court, principal at SJC Energy Consultants LLC in Arlington, Virginia, and a former FERC enforcement director. “That could entail a lot more money than just paying a penalty.” The order is part of FERC’s effort to increase transparency and eliminate manipulation of the electricity market. The agency is investigating JPMorgan’s power trading in California and the Midwest. That investigation came to light when FERC went to court seeking internal e-mails from JPMorgan, saying the bids from the company might have resulted in at least $73 million in improper payments to generators.

    CFPB Issues Second Semi-Annual Report; Nearly Mum on Enforcement - The Consumer Financial Protection Bureau has issued its 82-page second semi-annual report. It should be an interesting read. This article by Jenna Green notes that the report contains only "four sentences about the Office of Enforcement — even though the category "Supervision, Enforcement, Fair Lending" accounted for a hefty $63 million in agency spending through June 2012 — almost a quarter of all CFPB expenditures." The report says that '[t]he investigations currently underway span the full breadth of the Bureau's enforcement jurisdiction. Further detail about ongoing investigations will not generally be made public by the Bureau until a public enforcement action is filed." So, we should expect to hear a lot more about enforcement down the road.

     Ron Paul on Money Market Funds - Paul Krugman - Brad DeLong has a post on Paul Ryan’s hysterical reaction to QE3, in which he condemned fractional reserve banking, prodded me to ask a question I’ve been meaning to ask: How do the Austrians propose dealing with money market funds? I mean, it has always been a peculiarity of that school of thought that it praises markets and opposes government intervention — but that at the same time it demands that the government step in to prevent the free market from providing a certain kind of financial service. As I understand it, the intellectual trick here is to convince oneself that fractional reserve banking, in which banks don’t keep 100 percent of deposits in a vault, is somehow an artificial creation of the government. This is historically wrong, but maybe the actual history of banking is deep enough in the past for that wrongness to get missed. But consider a more recent innovation: money market funds. Such funds are just a particular type of mutual fund — and surely the Austrians don’t want to ban financial intermediation (or do they?). Yet shares in a MMF are very clearly a form of money — you can even write checks on them — created out of thin air by financial institutions, with very few pieces of green paper behind them. So are such funds illegitimate? What about repo, which has many of the same features?

    Sheila Bair and the bailout bank titans - As the financial system melted down in the fall of 2008, the Treasury Department gave the nation's biggest banks billions in new capital. Was it all necessary? No, says the former FDIC chief in her new book. (book excerpt)

    Sheila Bair: Former BofA CEO considered a "country bumpkin" -- From former FDIC Chairperson Sheila Bair writing at Fortune: Sheila Bair and the bailout bank titans (ht Soylent Green is People) I let my gaze drift toward Kenneth Lewis, who stood awkwardly at the end of the big conference table, away from the rest of the group. Lewis, the head of the North Carolina-based Bank of America (BAC) -- had never really fit in with this crowd. He was viewed somewhat as a country bumpkin by the CEOs of the big New York banks, and not completely without justification. He was a decent traditional banker, but as a dealmaker his skills were clearly wanting, as demonstrated by his recent, overpriced bids to buy Countrywide Financial, a leading originator of toxic mortgages, and Merrill Lynch, a leading packager of securities based on toxic mortgages originated by Countrywide and its ilk. His bank had been healthy going into the crisis but would now be burdened by those ill-timed, overly generous acquisitions of two of the sickest financial institutions in the country.

    Unofficial Problem Bank list declines to 886 Institutions - Here is the unofficial problem bank list for Sept 14, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  There were two removals and one addition to the Unofficial Problem Bank List, which leaves it standing at 886 institutions with assets of $330.5 billion. A year ago, the list held 984 institutions with assets of $402.4 billion. CR Note: The FDIC's official problem bank list is comprised of banks with a CAMELS rating of 4 or 5, and the list is not made public. (CAMELS is the FDIC rating system, and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest.) As a substitute for the CAMELS ratings, surferdude808 is using publicly announced formal enforcement actions, and also media reports and company announcements that suggest to us an enforcement action is likely, to compile a list of possible problem banks in the public interest.

    Mortgage Lending Declined in 2011, FHA share declined to 31% - From the Federal Financial Institutions Examination Council (FFIEC): Federal Financial Institutions Examination Council Announces Availability of 2011 Data on Mortgage LendingThe 2011 data include information on 11.7 million home loan applications (of which nearly 7.1 million resulted in loan originations) and 2.9 million loan purchases, for a total of nearly 14.7 million actions. The data also include information on 186,000 requests for preapprovals related to a home purchase that did not result in a loan. The total number of originated loans of all types and purposes reported fell by about 780,000, or 10 percent, from 2010, in part because of a 13 percent decline in refinancings. Home purchase lending also fell, but by a more modest 5 percent.  The 2011 HMDA data reflect a continued heavy reliance on loans backed by the Federal Housing Administration (FHA) insurance that began several years ago with the onset of problems in the mortgage market. For home purchase lending, the FHA’s share of first-lien loans showed a continued increase from 7 percent in 2007 to 26 percent in 2008, and then to 37 and 36 percent, respectively, in 2009 and 2010. In 2011, the FHA share fell to 31 percent. First-lien lending for home purchases backed by Veterans Administration (VA) guarantees also has increased in recent years, although VA-backed lending represents a smaller share of the market than FHA-backed lending. The VA market share of first-lien home purchase loans increased from nearly 3 percent in 2007 to about 7 percent in 2009 and 2010.

    Mortgage Market 2011 - Not a Pretty Picture - The annual Federal Reserve report on Home Mortgage Disclosure Act (HMDA) data for 2011 paints a bleak picture.  Despite interest rates at or below 4%, mortgage lending volume continued its four-year decline.  The drop in mortgage lending was particularly steep for minority home buyers, and in distressed neighborhoods.  More than 40% of home purchase loans that were made were backed by government (FHA or VA) insurance.  Overall mortgage denial rates were 31% for black applicants compared to 12% for non-Hispanic whites.  Some of the difference is explained by income and credit variables, some by lender choice (or steering) and some remains unexplained. Interestingly, the Fed staff also measured the extent to which homeowner income was overstated on 2005 and 2006 mortgage applications, by comparing HMDA and Census income information for those years.  They found that incomes were significantly inflated on applications for mortgages in Florida, California, Hawaii, Nevada and Rhode Island. If historically cheap mortgage credit is not increasing supply or stimulating demand, then there remains a fundamental misalignment between home prices and household incomes and balance sheets.  Deleveraging still has a ways to go.

    Agency MBS spreads collapse, durations shorten, swap spreads follow, and fundamental valuations go out the window - Fannie Mae and other agency MBS spread to treasuries declined sharply in the last couple of days - to the lowest levels in years in fact - all in reaction to the news from the Fed (see post). With spreads this low, the Fed will be buying paper at some of the richest valuations in recent history. The chart below shows the spread between current coupon FNMA 30y yield and the 10y treasury. Markets are still digesting this massive move. Bloomberg: - A measure of relative yields on mortgage securities dropped to the lowest on record after the Federal Reserve said it will expand its purchases... “A typical fundamental-value framework really isn’t applicable here” because the Fed’s goals differ from those of normal investors, said Todd Abraham, co-head of the government and mortgage-backed fixed-income group at Federated Investors Inc. “It makes it pretty challenging to determine at what point you need to change your allocations. It’s almost more of a case of needing to try to anticipate what others are going to do.”Adjusted for the prepayment option, the spread on these bonds (OAS) is close to zero - basically pricing no credit risk associated with agency debt (see discussion). With mortgage rates expected to decline further, the market is anticipating accelerating prepayments, shortening the effective duration of many MBS bonds. Part of the unprecedented decline in spread against the 10y treasuries (above) was driven by these falling durations, as the "on-the-run" agency paper started trading to shorter dated treasuries, which have lower yield.

    Spread between US mortgage rates and agency MBS yields hits a record as "transmission" remains an issue - The yield on the current 30y FNMA securities (3% coupon) has collapsed. As discussed earlier (see this post), fixed rate agency paper durations have shortened materially after the Fed's announcement because the markets are pricing in accelerated prepayments (mortgage refinancings). The 3% FNMA 30y bond (with pool average mortgage rate of 3.625%) now trades with the 5y treasury and the 3.5% paper trades with the 2y treasury (remember these are 30-year securities). Because of this sudden "roll" down the (relatively steep) curve and increased demand, the MBS yields have declined to record lows. The national average 30-year mortgage rate however has stalled just above 3.5%.The spread between the 30-year mortgage and the current coupon 30y FNMA security yield hit a new record high today. The previous record was set in 2008 when the so-called "transmission" first became an issue. Loan rates offered by banks remained significantly above where these loans could be financed via Fannie Mae for example. Low bond yields were not "transmitting" to the mortgage market. We are now faced with the same transmission problem once again.

    The WSJ Conflates Lending to Blacks with Imprudent Lending -- William K. Black - The Wall Street Journal has written a revealing editorial entitled:  A Fine for Doing Good: The Justice Department sues a bank for prudent lending. The WSJ appears to have forgotten the concept of a poll tax as a means to exclude most blacks from voting.  “Banks have been widely castigated for causing the housing bust by lending too much to borrowers who couldn’t repay, but now Eric Holder’s Department of Justice has taken its antidiscrimination campaign to new lengths by whacking a bank for having been too prudent. Justice claimed that California-based Luther Burbank Savings violated the 1968 Fair Housing Act and 1974 Equal Credit Opportunity Act by setting a policy that had a “disparate impact” on minorities. Between 2006 and mid-2011, 5.2% of Luther’s single-family residential mortgage loans went to African-Americans and Hispanics, compared to an average of 41.7% for other lenders in the area. The complaint doesn’t cite evidence of intentional discrimination because there wasn’t any.” But the Justice Department had compelling evidence of intentional discrimination by Luther Burbank Savings (LBS).  LBS had a lending line that required the homeowner to purchase a home with a minimum market value of $400,000.  That equivalent to a massive poll tax was understood by anyone in home lending as certain to exclude the overwhelming majority of blacks and Latinos.  The Justice Department alleged that LBS knew that its lending policy acted like a poll tax to exclude most blacks and Latinos and continued that policy for years despite knowing that the policy did in fact exclude the great bulk of blacks and Latinos.

    Mortgage cops taking tough stance - Strategic defaulters, beware. The feds are coming for you. And they are not happy. Not the FBI. The Office of the Inspector General at the Federal Housing Finance Agency. The OIG may not have the same fearsome "G-man" reputation as its better-known counterparts at the Federal Bureau of Investigation, but it is every bit as much a law enforcement agency, with the same powers to search, seize and arrest. Special OIG agents are even authorized to carry firearms. The OIG's mission is to seek administrative sanctions, civil recoveries and criminal prosecutions against anyone who abuses the FHFA's programs. And it is pursuing its calling with passion, if not vengeance. The FHFA is the supervisory agency of the two government-sponsored housing enterprises, Fannie Mae and Freddie Mac. Since Fannie and Freddie have been under federal conservatorship since 2008, the FHFA now regulates and all but operates the two companies.

    Yes, Really, Truly, No Joke, That Schneiderman Mortgage Task Force is Gonna Get Someone….Soon! - Yves Smith -- I’m sure the banksters are quaking in their boots. Eric Schneiderman, the New York state attorney general whose joining a heretofore moribund mortgage fraud task force and withdrawing from opposition to the horrid mortgage settlement allowed the Administration to push the bank-friendy deal across the line, is now making noises that really, truly, he and his Federal best buddies are gonna nail some baddies really soon. From ReutersThe mortgage task force formed by President Barack Obama to probe misconduct that contributed to the financial crisis will soon take legal action, New York Attorney General Eric Schneiderman said on Thursday.Schneiderman, a co-chair of the task force, would not say whether cases would be brought against individuals or financial institutions. He also would not comment on whether criminal charges would be filed.But he said his office would take action and that he expected his federal counterparts on the task force to do so as well.“We’ll see actions being taken sooner rather than later,” said Schneiderman,

    Real-Estate Firm Gets Citigroup Loan to Buy Properties to Turn Into Rentals -- Waypoint Real Estate Group, a major investor in U.S. foreclosed homes, has secured a $65 million loan from Citigroup to help add to its portfolio of properties, according to people familiar with the matter. Bankers and investors said the debt-financing deal is a milestone for the burgeoning business of renting out houses that were previously in foreclosure. Waypoint, an Oakland, Calif., investment firm, is working with Citigroup on a bigger, longer-term financing deal that is expected to close in the coming weeks, the people said. Investors have spent billions of dollars in recent months snapping up foreclosed homes, betting they will profit from the rental income the properties produce. The strategy gained momentum earlier this year, after the Federal Reserve expressed support for the strategy as a way to clear the backlog of foreclosures that has slowed the U.S. housing market's recovery.

    The Investor-Purchase Housing Bubble Inflates Some More - Analysts have tried to parcel out whether QE3 will really help the economy. I’ve done the same thing myself. The way almost everyone looks at this is about the impact on housing, specifically mortgage prices. But mortgage rates haven’t changed at all since the announcement of QE3, and if the Fed was trying to influence the expectations channel, the impact really should have been that immediate. Then again, rates didn’t rise, either. It could be that QE3 arrested a trend toward increasing mortgage financing costs. But more likely, banks are taking the profits out of the eased cost of mortgage financing for themselves: The banks are choosing not to reduce mortgage rates further. One reason: By keeping the rates elevated, they are able to earn much larger profits when they sell the mortgages into the bond market. If the level of profits on those sales stayed at recent average levels, borrowers might, for instance, pay $30,000 less in interest payments on a $300,000 mortgage, according to a recent New York Times analysis. The fact that banks haven’t prepped for a backlog of mortgage applications, meaning that the benefits of QE3 cannot possibly get to customers in a reasonable amount of time, leads us more toward this conclusion. Banks have no problem securing cheap backstopping of mortgages, but they don’t have to channel those savings into the mortgages they sell. This way, banks can benefit from lower rates for themselves on one side and higher rates for customers on the other. The arbitrage between those two prices equals massive profits.

    FHFA to States that Uphold the Rule of Law: Drop Dead -  Yves Smith - If you had any doubt that the ongoing coup by bankers and their allies was proceeding apace, the latest story from Shahien Nasiripour of the Financial Times should settle all doubts. The pink paper reports that Fannie and Freddie’s regulator, the FHFA, plans to punish impose surcharges on borrowers in states like New York because foreclosures take longer there. This is the excuse, erm, rationale: Lenders originating new loans in New York, New Jersey, Illinois, Florida and Connecticut will be forced to pay US-backed mortgage giants Fannie Mae and Freddie Mac up to 30 basis points extra for their credit guarantee, the Federal Housing Finance Agency said in its proposal. The fee would probably be passed on to borrowers. The agency said the surcharge would compensate for the increased cost of repossessing homes in the five states, costs ultimately borne by US taxpayers. And the FHFA was open in that its aim was to put state law on its Procrustean bed:“If those states were to adjust their laws and requirements sufficiently to move their foreclosure timelines and costs more in line with the national average . . . the fees imposed under the planned approach would be lowered or eliminated,” the FHFA said. Now the reality, of course, is more complicated. The two mortgage insurers have refused to crack down on foreclosure mills despite overwhelming evidence of their failure to comply with long-established state law requirements. When the robosigning scandal broke, many judges in judicial foreclosure states started taking borrower challenges to servicer standing more seriously. New York’s courts instituted a requirement that lawyers submitting documents in foreclosures certify that they had taken reasonable steps to certify their accuracy. This might sound like a belt-and-suspenders requirement, but from a procedural standpoint, it made it easier for borrower’s counsel to seek sanctions if he though the bank’s attorney was playing fast and loose. And indeed, as we’ve documented, foreclosures ground to a near halt after the certification requirement was instituted.

    FHFA Bullying States into Making Foreclosures Faster - The Federal Housing Finance Agency has decided to raise guarantee fees from Fannie Mae or Freddie Mac on mortgages in states that respect the rule of law. Really, that’s about the size of it. As Shahien Nasiripour points out today, the g-fees will go up in five states that have slowed the foreclosure process by either mandating mediation before eviction, or created laws that seek to ensure proper documentation in the foreclosure process. Lenders originating new loans in New York, New Jersey, Illinois, Florida and Connecticut will be forced to pay US-backed mortgage giants Fannie Mae and Freddie Mac up to 30 basis points extra for their credit guarantee, the Federal Housing Finance Agency said in its proposal. The fee would probably be passed on to borrowers. The agency said the surcharge would compensate for the increased cost of repossessing homes in the five states, costs ultimately borne by US taxpayers [...] “If those states were to adjust their laws and requirements sufficiently to move their foreclosure timelines and costs more in line with the national average… the fees imposed under the planned approach would be lowered or eliminated,” the FHFA said. So the federal conservator of Fannie and Freddie wants to put its thumbs on the scale in favor of faster foreclosures and diminished due process. That’s the only thing you have to extrapolate here. FHFA wants to be able to foreclose on lenders in Illinois, New York, New Jersey, Connecticut and Florida without concern for whether the documents are legitimate, without concern for whether the bank and the borrower can come to a resolution on a modification.

    Underwater mortgages drop by 1.3 million. How much could that boost the economy?: One of the big drags on the U.S. economy right now is the housing market. Among other problems, about 10.8 million Americans are “underwater” on their mortgages right now — these are homeowners who owe more than their houses are currently worth. Why is this a problem? For starters, underwater homeowners are more likely to fall into foreclosure, further depressing the housing market. Second, these homeowners can’t sell their homes and move without incurring a steep financial penalty. That’s a big impediment for young people who might want to seek jobs elsewhere  — the research firm Zillow has estimated that nearly half of homeowners under the age of 40 are underwater right now. What’s more, the high number of underwater homeowners are a potential obstacle in the way of the Federal Reserve’s efforts to stimulate the economy. The Fed has recently pledged to buy up $40 billion worth of mortgage-backed securities each month between now and the end of the year in order to reduce mortgage-lending rates. The hope is that many homeowners will refinance at the lower rates, putting more money into their pockets so that they can go spend and stimulate the economy. But underwater homeowners often have difficulties refinancing, which puts a damper on these efforts. That’s why it’s fairly positive news that, according to a new report (pdf) from CoreLogic, nearly 1.3 million Americans reached “positive equity” this year. On the downside, however, it still leaves 10.8 million Americans, or 22.3 percent of all homeowners, underwater. (In a healthy housing market, typically just 5 percent or so of homeowners are underwater.) Here’s where they’re located:

    The Mortgage Debt Forgiveness Tax Break - I expect this to get extended, but it is probably motivating some people to try to close their short sale before the end of the year. From the San Francisco Chronicle: Clock ticking on forgiven-debt tax break Before the housing downturn hit, "forgiven debt" on home mortgages could be taxed as income. For instance, if your lender lopped $50,000 off what you owed (a type of loan modification called principal reduction), if you short-sold the property for $50,000 less than your mortgage or if your lender foreclosed on a property worth $50,000 less than you owed, the $50,000 would be treated as income, adding up to a potential big bill for state and federal taxes. But with millions of struggling homeowners in such situations, both the Congress and the California Legislature passed bills to exempt forgiven home debt from taxes. But now the Mortgage Forgiveness Debt Relief Act of 2007 is due to expire on Dec. 31. The election-year Congress, already famously fractious, is not expected to act on it in 2012, although industry experts hope it could get extended next year. ...Even if the act eventually gets renewed, it doesn't cover all homeowners."It applies only to the mortgage you originally got to acquire the home or to a refi used to improve the home,"

    A Condo Was Sold, Until It Wasn't - HORROR stories abound across Foreclosure Nation. But once in a while, a new one comes along to remind us just how dysfunctional our mortgage market is. Chaos and conflict rein over many mortgage workouts. Until that changes, housing will struggle. The case at hand — and it’s a whopper — involves a short sale on a condominium in Deltona, Fla. Short sales are transactions in which a bank and a borrower agree to sell a property for less than the amount owed on the mortgage. While loan modification programs have received the greatest push from the government, short sales are crucial to cutting the inventory of foreclosed properties. And yet they are far less common than deals like loan modifications and forbearance plans that let people retain their homes. In the first quarter of 2012, for example, Fannie Mae and Freddie Mac, the mortgage finance behemoths, completed just 30,601 short sales versus some 112,000 home-retention actions. Since the government took over the companies in 2008, the totals are 315,000 versus 1.9 million. Last month, Fannie Mae announced new guidelines intended to prod the mortgage servicers into doing more short sales. “Our goal is to incentivize servicers to get to the solution that is appropriate for the borrower,”

     Andrew Oswald and I debate the merits of homeownership in The Economist -- Andrew Oswald defends discouraging ownership" Home-ownership has reached inefficiently high levels; it has become a distorting totem; modern generations have been brainwashed to believe there is something wrong with them if they rent. We do not want developing countries to mimic the West's post-war obsession with owner-occupation. There are five reasons to discourage home-ownership. Let's call them: look at the data; efficiency of the labour market; macroeconomic stabilisation; sensible lifetime budgeting; entrepreneurial supply; the common sense of diversity...I argue against discouraging homeownership:The motion "Should home-ownership be discouraged?" takes a novel formulation. Generally, the question policymakers ask is whether home-ownership should be encouraged, which suggests that there are social benefits to owning a home. In this case, the affirmative position is that home-ownership should be discouraged. This implies that having people own their homes is socially costly. Thus, my task is to show that home-owning is not socially costly. I can think of three potentially legitimate arguments for why home-owning might be socially costly; I do not think that any of them are straw men, but I also think that none of them is convincing.

    MBA: Mortgage Applications decrease, Mortgage Rates decline to Survey Lows -- From the MBA: Mortgage Rates Drop to New Survey Lows The Refinance Index increased 1 percent from the previous week. The HARP 2.0 share of refinance applications was 22 percent this past week. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.72 percent, the lowest rate in the history of the survey, from 3.75 percent, with points increasing to 0.45 from 0.44 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The effective rate decreased from last week.  This graph shows the MBA mortgage purchase index. The purchase index has been mostly moving sideways over the last two years. It looks like refinance activity is picking up again as mortgage rates decline.

    Mortgage Rates Back To Record Lows -- Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS), showing fixed mortgage rates at or near their all-time record lows helping to keep homebuyer affordability high. The average 30-year fixed rate mortgage matched its all-time record low at 3.49 percent, and the average 15-year fixed fell to a new all-time record low at 2.77 percent.

    • 30-year fixed-rate mortgage (FRM) averaged 3.49 percent with an average 0.6 point for the week ending September 20, 2012, down from last week when it averaged 3.55 percent. Last year at this time, the 30-year FRM averaged 4.09 percent. 
    • 15-year FRM this week averaged 2.77 percent with an average 0.6 point, down from last week when it averaged 2.85 percent. A year ago at this time, the 15-year FRM averaged 3.29 percent. 
    • 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.76 percent this week with an average 0.6 point, up from last week when it averaged 2.72 percent. A year ago, the 5-year ARM averaged 3.02 percent.
    • 1-year Treasury-indexed ARM averaged 2.61 percent this week with an average 0.4 point, the same as last week. At this time last year, the 1-year ARM averaged 2.82 percent.  

    U.S. Home Sales Jump to Highest Since May 2010 - U.S. sales of previously occupied homes jumped in August to the highest level in more than two years, adding momentum to the housing recovery. Sales rose 7.8 percent to a seasonally adjusted annual rate of 4.82 million, the National Association of Realtors said. That’s the most since May 2010, when sales were fueled by a federal home-buying tax credit. The figures were reported the same day the government said U.S. homebuilders broke ground on more new homes in August compared to July. Still, the recovery is from a depressed level. Sales of previously occupied homes remain below the more than 5.5 million that economists consider consistent with a healthy market. And the number of first-time homebuyers, who are critical to a housing rebound, slipped to 31 percent from 34 percent. More Americans appear to be taking advantage of near-record low mortgage rates and prices that are, on average, much lower than they were six years ago.

    Existing Home Sales in August: 4.82 million SAAR, 6.1 months of supply - The NAR reports: August Existing-Home Sales and Prices Rise: Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 7.8 percent to a seasonally adjusted annual rate of 4.82 million in August from 4.47 million in July, and are 9.3 percent higher than the 4.41 million-unit level in August 2011. ... Total housing inventory at the end August rose 2.9 percent to 2.47 million existing homes available for sale, which represents a 6.1-month supply at the current sales pace, down from a 6.4-month supply in July. Listed inventory is 18.2 percent below a year ago when there was an 8.2-month supply. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in August 2012 (4.82 million SAAR) were 7.8% higher than last month, and were 9.3% above the August 2011 rate. The second graph shows nationwide inventory for existing homes. The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

    Existing Home Sales Increase 7.8% for August 2012 -- The NAR released their August 2012 Existing Home Sales. Existing home sales increased 7.8% from last month and inventories are down to a now tight 6.1 months of supply. Existing homes sales have increased 9.3% from a year ago. Volume was 4.82 million, annualized against July's 4.47 million annualized existing home sales. Existing home sales haven't been this strong since May 2010. While inventory increased 2.9% or 2.47 million existing homes for sale, due to increased sales the monthly supply dropped 4.7% to just 6.1 months of supply. This is a 25.6% decrease from a year ago.  The national median existing home sales price, all types, is up, now at $187,400, a 9.5% increase from a year ago. It's clear foreclosures, REOs are being held off of the market. Below is the August breakdown by types of sales: Distressed homes - foreclosures and short sales sold at deep discounts - accounted for 22 percent of August sales (12 percent were foreclosures and 10 percent were short sales), down from 24 percent in July and 31 percent in August 2011. Foreclosures sold for an average discount of 19 percent below market value in August, while short sales were discounted 13 percent. According to NAR 32% of existing homes were on the market less than a month.  The median time on market was 70 days in August, consistent with 69 days in July but down 23.9 percent from 92 days in August 2011. Thirty-two percent of homes sold in August were on the market for less than a month, while 19 percent were on the market for six months or longer. Yet all cash sales, implying investors are still snatching up homes, are still high. First-time buyers accounted for 31 percent of purchasers in August, down from 34 percent in July; they were 32 percent in August 2011.

    Existing Home Sales: Inventory and NSA Sales Graph -- This was a decent report, not because sales increased, but because of the level of inventory. Based on historical turnover rates, I think "normal" sales would be in the 4.5 to 5.0 million range. So existing home sales at 4.82 million are in the normal range. However, a "normal" market would have very few distressed sales, so there is still a long ways to go. As I've noted before, no one should expect existing home sales to go back to 6 or 7 million per year. Instead the key to returning to "normal" is more conventional sales and fewer distressed sales. And it appears the shift from distressed to conventional is ongoing, from the NAR this morningDistressed homes - foreclosures and short sales sold at deep discounts - accounted for 22 percent of August sales (12 percent were foreclosures and 10 percent were short sales), down from 24 percent in July and 31 percent in August 2011. I'm not confident in the NAR measurement, but other sources suggest distressed sales have fallen in many areas. Of course what matters the most in the NAR's existing home sales report is inventory. It is active inventory that impacts prices (although the "shadow" inventory will keep prices from rising). For existing home sales, look at inventory first and then at the percent of conventional sales. The NAR reported inventory increased to 2.47 million units in August, up from 2.40 million in July. This is down 18.2% from August 2011, and down 13% from the inventory level in August 2005 (mid-2005 was when inventory started increasing sharply). This is about the same level for inventory as in August 2004.

    Report: Housing Inventory declines 18.7% year-over-year in August - From August 2012 Real Estate Data: The total US for-sale inventory of single family homes, condos, townhomes and co-ops (SFH/CTHCOPS) remained at historic lows, with 1.84 million units for sale in August, down -18.68% compared to a year ago and 40% below its peak of 3.10 million units in September 2007, when began monitoring these markets.  The median age of inventory of for sale listings was 91 days in August, up by 3.41% from July, but -11.65% below the median age one year ago (August 2011). While the median age of the inventory is highly seasonal, the year-over-year decline is consistent with other data showing a significant improvement in market conditions. For sale inventories of SFH/CTHCOPS in August declined on an annual basis in all but two of the 146 MSAs monitored by, with for-sale inventory dropping by -20% or more in 62 of the 146 markets covered. ... Eight out of [top] 10 of these markets are in California, with Seattle, WA, and Atlanta, GA, also registering declines of -41% and -37%, respectively.

    Investors raise $8 billion for REO - Larger Wall Street investors rushing into the REO market have raised between $6 billion and $8 billion for acquisitions, according to analysts at investment bank Keefe, Bruyette & Woods. They estimate the money raised could buy between 40,000 and 80,000 previously foreclosed homes. "The single-family rental market has historically been a fragmented market funded with capital from retail or smaller institutional investors," KBW analysts said. "Investor interest has increased meaningfully as the large foreclosure inventory combined with a secular shift toward renting has created the possibility of larger-scale investments in the space." Jim Previti, CEO of the private real estate investment firm Frontier Enterprises, said institutional investors buying properties in bulk are beginning to crowd out the smaller "mom and pop" firms. Previti, who previously founded a homebuilding company in 2002, said with these large REO-to-rental programs from the government-sponsored enterprises, speculators are driving up prices to catch up with rising rents. It even reminds him of the pre-crisis bubble frenzy. "The fury in the market is the same as before," Previti said. "There is no need for this. It is almost like the government is forcing us back into this situation again."

    Housing: Year over Year change in Asking Prices - According to housingtracker, median asking prices are up 2.1% year-over-year in early September. We can't read too much into this increase because these are just asking prices, and median prices can be distorted by the mix. As an example, the median asking price might have increased just because there are fewer low priced foreclosures listed for sale. Note: The Trulia asking price index is adjusted for both mix and seasonality, but the housingtracker data is just the median, the 25th percentile and 75th percentile - and is impacted by both changes in the mix and seasonality.But with those caveats, here is a graph of asking prices compared to the year-over-year change in the Case-Shiller composite 20 index. The Case-Shiller index is in red. The brief period in 2010 with a year-over-year increase in the repeat sales index was related to the housing tax credit. Also note that the 25th percentile took the biggest hit (that was probably the flood of low end foreclosures on the market). Now the year-over-year change in median asking prices has been positive for ten consecutive months. We have to be careful about the mix (fewer foreclosures on the market), but this suggests year-over-year selling prices will stay positive.

    FNC: Residential Property Values increased 0.8% in July - FNC released their July index data today. FNC reported that their Residential Price Index™ (RPI) indicates that U.S. residential property values increased 0.8% in July compared to June (Composite 100 index). The other RPIs (10-MSA, 20-MSA, 30-MSA) increased between 0.8% and 0.9% in July. These indexes are not seasonally adjusted (NSA), and are for non-distressed home sales (excluding foreclosure auction sales, REO sales, and short sales). Since this index is NSA, the month-to-month changes will probably turn negative later this year. However this is the first month-to-month increase for the month of July since 2006. The year-over-year trends continued to show improvement in July, with the 100-MSA composite up 0.6% compared to July 2011. This is the first year-over-year increase in the FNC index since year-over-year prices started declining in early 2007 (over five years ago). This graph is based on the FNC index (four composites) through July 2012. The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals. Some of the month-to-month gain is seasonal since this index is NSA. The key is the indexes are now showing a year-over-year increase in July.

    Home Prices Hit Two-Year High in August, Up 5% From 2011 -National home prices hit a two-year high in August, marking a 5% gain from August 2011 and holding steady month-over-month during a time of year that typically sees a seasonal decline in prices. Following is a summary of key metrics across 19 major metropolitan markets:

    • Home prices in August increased 4.9% year over year, and were flat month over month (+0.1%).
    • The number of homes for sale declined 28.5% from August 2011 to August 2012, and by 4.5% since July.
    • Home sales increased 1.4% over last year, but fell 2.5% since July, a typical decline for this time of year.
    • The percentage of listings that sold within 14 days of their debut increased slightly in August, from 26.7% in July to 27.6% last month.
    Home prices will no doubt decline a bit into the winter (as they do every year), but bearish market observers who predicted that price gains made earlier in 2012 would be entirely erased have been proven wrong so far in the second half of the year. All signs point to continued modest year-over-year price gains through the end of the year, more or less in line with inflation in most markets.

    Zillow forecasts Case-Shiller House Price index to show 1.6% Year-over-year increase for July - The Case-Shiller report to be released next Tuesday is for July (really an average of prices in May, June and July). Zillow Forecast: July Case-Shiller Composite-20 Expected to Show 1.6% Increase from One Year Ago On Tuesday, Sept. 25, the Case-Shiller Composite Home Price Indices for July will be released. Zillow predicts that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]) will be up by 1.6 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) will be up 1.1 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from June to July will be 1 percent for both the 20-City Composite and the 10-City Composite Home Price Index (SA). All forecasts are shown in the table below and are based on a model incorporating the previous data points of the Case-Shiller series and the July Zillow Home Value Index data, and national foreclosure re-sales.

    Chart of the day, housing bubble edition - This chart comes from a new paper by Karl Case and Robert Shiller, looking at the results of a survey they’ve been handing out to homebuyers annually since 2003. The idea is a very smart one: if you want to get an idea of the behavioral economics of homebuyers, the best way to understand what they’re thinking is to simply ask them. And this chart, in particular, is both very elegant and very informative. It’s elegant because you have a very close maturity match: the average duration of a US mortgage, before it’s refinanced or the house is sold, is about 7.5 years, which is close to the ten-year horizon in this question, which Case and Shiller ask every year:On average over the next 10 years, how much do you expect the value of your property to change each year? Now the number of homebuyers in America vastly exceeds the number of people who understand the mechanics of compound interest. If you asked instead “how much do you think your home will be worth in ten years”, and then presented that answer as an annualized percentage increase, I suspect that the answers — especially in the peak years of 2004 and 2005 — would be substantially lower. (Put it this way: if you bought a $260,000 home in 2004 and expected its value to rise at 12% a year for 10 years, then by 2014, you’re saying, it would be worth more than $1 million.)And what’s fascinating is that the big fall in expected long-term home-price appreciation happened before the financial crisis, and that the crisis is actually completely invisible in this chart: expectations continued to deteriorate long after it was over.

    U.S. Housing Starts Rose 2.3 Percent in August — U.S. builders started construction on more homes in August, driven by the fastest pace of single-family home construction in more than two years. The Commerce Department says construction of new homes and apartments rose 2.3 percent to a seasonally adjusted annual rate of 750,000 last month. Single-family housing starts rose 5.5 percent to an annual rate of 535,000 homes, the best pace since April 2010. Apartment construction fell 4.9 percent. Applications for building permits fell 1 percent to an annual rate of 803,000, down from a four-year high in July. Even with the gains, the rate of construction and level of permits still remain only about half the pace considered healthy.

    Housing Starts increased to 750 thousand in August -- From the Census Bureau: Permits, Starts and Completions Privately-owned housing starts in August were at a seasonally adjusted annual rate of 750,000. This is 2.3 percent above the revised July estimate of 733,000 and is 29.1 percent above the August 2011 rate of 581,000. Single-family housing starts in August were at a rate of 535,000; this is 5.5 percent above the revised July figure of 507,000. Privately-owned housing units authorized by building permits in August were at a seasonally adjusted annual rate of 803,000. This is 1.0 percent below the revised July rate of 811,000, but is 24.5 percent (±1.7%) above the August 2011 estimate of 645,000.The first graph shows single and multi-family housing starts for the last several years. Starts are slowing increasing. Total housing starts were at 750 thousand (SAAR) in August, up 2.3% from the revised July rate of 733 thousand (SAAR). Note that July was revised from 746 thousand.   The second graph shows total and single unit starts since 1968. Total starts are up 57% from the bottom start rate, and single family starts are up 51% from the low.

    Housing Starts Rise In August As New Building Permits Slip - The housing recovery was a bit sluggish in August, although perhaps today’s monthly update is more noise than signal. Nonetheless, the latest residential construction figures from the Census Bureau are a mixed bag: newly issued building permits for housing retreated modestly (-1.0%) in August vs. July while new housing starts in August rose 2.3% over the previous month. It’s not a terribly encouraging batch of numbers, but it doesn’t look especially troubling either. But if we strip away the short-term changes and focus on the annual trend, the numbers still suggest growth will prevail in the months ahead. For some perspective, let's start by looking at the monthly stats in recent history: The trend looks somewhat better with the year-over-year percentage changes: The housing recovery, which started to resonate back in December, still appears to have some legs, or so the annual pace implies. With starts and permits continuing to increase in excess of 20% vs. year-earlier levels, it’s hardly convincing to argue that the August numbers alone are a sign of trouble. If future updates show permits and starts flat-lining or worse, month after month, well, that's a different story.  Meantime, it’s no trivial factor that mortgage rates are at or near all-time lows. The combination of lower prices for houses and a high degree of financing affordability are “actually quite favorable right now,”

    August Housing Starts Less Than Expected, Rise From Downward Revised Print -The August housing starts number was a disappointment, printing at 750K on expectations of a rise to 767K from last month's 746K, now revised lower to 733K. This would have been a boost to a market trained to expect more QE on any economic weakness, if only all QE in perpetuity, and certainly at leat $85 billion in monthly flow, was not already priced in. As a result, we are slowly getting to the dreaded point where bad news is once again bad news, at which all faith in the Fed as a monetary policy vehicle is lost (since Fiscal policy is now perpetually deadlocked). If there was any good news, it was in the single family starts which printed at 535K in August, a rise of 28K from July, and the highest since April 2010 (when housing had again "bottomed") driven by a surge in new building in the Midwest to 134K, from 111K. Finally housing permits which are nothing but noise, declined but beat expectations modestly. Since permits are a completely meaningless category and are purely used by hedge funds to game the market (they cost a token amount of money to procure, involve no actual work, and are there merely to frame the "housing has bottomed" trope time after time, until disproven), just like Libor, there is no point to observe them.

    Starts and Completions: Multi-family and Single Family -Two-thirds of the way through 2012, single family starts are on pace for 515 thousand this year, and total starts are on pace for about 740 thousand. That is an increase of about 20% from 2011, and is above the forecasts for most analysts (however Lawler was very close).  Here is an update to the graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. Completions are important because that is new supply added to the market, and starts are important because that is future new supply (units under construction is also important for employment). These graphs use a 12 month rolling total for NSA starts and completions. The blue line is for multifamily starts and the red line is for multifamily completions.  The rolling 12 month total for starts (blue line) has been increasing steadily, and completions (red line) is lagging behind - but completions will follow starts up over the course of the year (completions lag starts by about 12 months). . The second graph shows single family starts and completions. It usually only takes about 6 months between starting a single family home and completion - so the lines are much closer. The blue line is for single family starts and the red line is for single family completions. Starts are moving up, but the increase in completions has just started (wait a few months!). For the seventh consecutive month, the rolling 12 month total for starts has been above completions - that usually only happens after housing has bottomed

    Home Sales, Prices Rise: Is Housing Finally Ready to Lead a Recovery? - During each of the previous three recessions, the American economy was powered back to full strength largely on the back of the housing market. There are many ways in which this recession and recovery are unique, but the lack of a housing comeback may be the most significant. Investment in housing currently accounts for just 2.4% of the country’s GDP, down from a high of 6.3% in 2005 and from an historical average of 4.5%. But since this spring, when many analysts were calling the official bottoming of the housing market, hopes have been high that the sector could throw its weight fully behind a recovery — one that would bring the country back to full employment and output.Two reports yesterday served to bolster these hopes. The first was from the Commerce Department, which announced that new housing construction rose 2.3% to a seasonally adjusted 750,000 in August. The other, from the National Association of Realtors, showed that existing home sales were up 7.8% to a seasonally adjusted rate of 4.82 million in August, compared with 4.47 million in July and 4.41 million in August of 2011. The NAR report also showed that the median price of an existing home rose 9.5% from last year, the strongest yearly increase in more than six years.

    Pent up demand for new homes is bringing home-builders back to life - One major survey in the US that is showing some promising signs is the National Association of Home Builders Market Index. Here is the definition:  Derived from a monthly survey that NAHB has been conducting for more than 20 years, the NAHB/Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as 'good,' 'fair' or 'poor.' The survey also asks builders to rate traffic of prospective buyers as 'high to very high,' 'average' or 'low to very low.' Scores from each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor. The index is clearly well below the pre-recession levels, but the trend is quite encouraging. What is making the US home-builders more optimistic all of a sudden? The Fed's new monetary expansion? Unlikely. It certainly didn't make them jump for joy in 2010/11 (as the chart above shows). The answer is quite simple actually. Home construction in the US has been stagnant for so long that the inventory is beginning to dwindle. Over the past four years housing starts in the US have been at the lowest levels in over half a century.

    Deutsche Bank claims housing correction complete: Recent indicators showed housing has largely corrected back to pre-bubble levels and affordability, according to a note from Deutsche Bank analysts. Nationally, home prices dropped roughly 40% from the overheated peak in 2006 to a low in 2009. But the analyst said in a note Thursday that prices are still 30% higher than the millennium average. Incomes, while similarly dented by the financial crisis actually recovered more quickly than prices. With the affordability of mortgages heading in the other direction to a level not seen since 2000 – led by rates still falling to historic lows – prices look manageable once put into this perspective (see the graph below). "The correction phase can be regarded as largely completed, and the outlook is improving," Deutsche analysts said. Housing starts and approvals are still at historically low levels but are up 50% from post-bubble lows. Foreclosure rates are down 30% from their highs.

    Counterparties: Your very tentative housing recovery - Here’s the most recent round of housing data — including housing starts, existing home sales, and homebuilder confidence — in three quotes:“Housing is clearly in recovery mode.”“The U.S. housing recovery is for real.”“The nascent housing recovery has deepened.”Which isn’t to say today’s numbers are going to make your house suddenly jump in value. The Capital Spectator says the housing recovery is “perhaps downshifting a bit” and notes that newly issued building permits fell by 1% over the previous month. Bill McBride at Calculated Risk calls the existing home sales number “decent”, not because of housing starts but because of the market’s inventory dynamic.Why should you care about the various measures of housing inventory? For one, they’re good ways of measuring how we’re recovering from the foreclosure crisis. Barclays recently estimated that the market’s “shadow inventory” — homes that are at or near foreclosure — includes some 3.25 million mortgages which are either in foreclosure or at least three months in default. McBride expects reluctant sellers to soon start returning to the market: “this new inventory will probably limit price increases.”

    NAHB Builder Confidence increases in September, Highest since June 2006 - The National Association of Home Builders (NAHB) reported the housing market index (HMI) increased 3 points in September to 40. Any number under 50 indicates that more builders view sales conditions as poor than good. From the NAHB: Builder Confidence Continues to Gain Momentum in September: Builder confidence in the market for newly built, single-family homes rose for a fifth consecutive month in September to a level of 40 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. This latest three-point gain brings the index to its highest reading since June of 2006. All three HMI components posted gains in September. While the component gauging current sales conditions increased four points to 42, the component gauging sales prospects in the next six months rose eight points to 51 and the component measuring traffic of prospective buyers edged up one point to 31. Builder confidence also rose across every region of the country in September. Looking at the three-month moving average for each region, the Midwest and West each registered five-point gains, to 40 and 43, respectively, while the South posted a four-point gain to 36 and the Northeast posted a two-point gain to 30. This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the September release for the HMI and the July data for starts (August housing starts will be released tomorrow). This was above the consensus estimate of a reading of 38.

    AIA: Architecture Billings Index shows slight expansion in August -- Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.  From AIA: Architecture Billings Index Inches Back into Positive Territory On the heels of a nearly three-point increase, the Architecture Billings Index (ABI) climbed into positive terrain for the first time in five months. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the August ABI score was 50.2, up from the mark of 48.7 in July. This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 57.2, up from mark of 56.3 the previous month.  This graph shows the Architecture Billings Index since 1996. The index was at 50.2 in August, up from 48.7 in July. Anything above 50 indicates expansion in demand for architects' services. Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

    Rising Tower Emerges as a Billionaires’ Haven - The buyers of the nine full-floor apartments near the top that have sold so far — among them two duplexes under contract for more than $90 million each — are all billionaires, Gary Barnett, the president of the Extell Development Company, the building’s developer, said this week. The other seven apartments ranged in price from $45 million to $50 million.  The billionaires’ club includes several Americans, at least two buyers from China, a Canadian, a Nigerian and a Briton, according to Mr. Barnett and brokers who have sold apartments in the building, at 157 West 57th Street. Mr. Barnett said that at least a few buyers were “significant Forbes billionaires.”  Since late last year, the “trophy” end of New York’s real estate market has been recording eye-popping sales that seem to have little basis in reality. The signed contract for the nearly-11,000-square-foot duplex on the 89th and 90th floors of One57 that sold for about $95 million topped the record sale in March of a penthouse at 15 Central Park West to a Russian billionaire’s daughter for $88 million. In June, Steve Wynn, the Las Vegas casino magnate, paid $70 million for a duplex penthouse apartment above the Ritz-Carlton.

    Some Surprising Results from the National Small Business Poll - George Washington University and Thumbtack have conducted a poll of 6,174 small business owners across the nation to gather opinions about the most important factors affecting their businesses.  They were also asked what they felt the most important issues were in th upcoming presidential election and how they felt about the two major party candidates on important issues. Easily the most important factor for these business people was jobs and the economy in virtually all parts of the country.  Even in North Dakota, where unemployment is down around 3%, that was just as highly ranked (40%) as the national average.  Of the three states with unemployment still above 10%, two ranked the economy and jobs less important than did fully employed North Dakota:  California (38%, probably not significantly different) and Nevada (29%).  The third state, Rhode Island, ranked the economy and jobs very high with 50% saying it was the most important economic factor.

    Fed's Q2 Flow of Funds: Household Mortgage Debt down $1 Trillion from Peak - The Federal Reserve released the Q2 2012 Flow of Funds report today: Flow of Funds. According to the Fed, household net worth declined slightly in Q2 compared to Q1 2011. Net worth peaked at $67.4 trillion in Q3 2007, and then net worth fell to $51.2 trillion in Q1 2009 (a loss of $16.2 trillion). Household net worth was at $62.7 trillion in Q2 2012 (up $11.5 trillion from the trough, but still down $4.7 trillion from the peak). The Fed estimated that the value of household real estate increased $353 billion to $16.9 trillion in Q2 2012. The value of household real estate is still $5.9 trillion below the peak.This is the Households and Nonprofit net worth as a percent of GDP.This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations.This graph shows homeowner percent equity since 1952. Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008.   In Q2 2012, household percent equity (of household real estate) was at 43.1% - up from Q1, and the highest since Q2 2008. This was because of a small increase in house prices in Q2 (the Fed uses CoreLogic) and a reduction in mortgage debt.

    Flow of Funds (pdf) Debt of the domestic nonfinancial sectors expanded at a seasonally adjusted annual rate of 5 percent in the second quarter of 2012, ½ percentage point more than in the first quarter. Household debt rose at an annual rate of 1¼ percent in the second quarter, the largest increase since the first quarter of 2008. Nonetheless, household debt has changed little, on net, since the third quarter of last year. Consumer credit rose at an annual rate of 6¼ percent in the second quarter, the seventh consecutive quarterly increase. Home mortgage debt declined a bit more than 2 percent in the second quarter, continuing the downtrend that commenced in early 2008. Nonfinancial business debt rose at an annual rate of almost 5 percent in the second quarter, after an increase of 3½ percent in the first quarter. Corporate bonds outstanding and business loans increased, while commercial mortgage debt continued to decline. State and local government debt rose at an annual rate of ¾ percent in the second quarter, after five consecutive quarterly declines. Federal government debt rose at an annual rate of almost 11 percent in the second quarter, about 1¾ percentage point less than the average pace during the previous four quarters. At the end of the second quarter of 2012, the level of domestic nonfinancial debt outstanding was $39.1 trillion, of which household debt was $13.0 trillion, nonfinancial business debt was $12.0 trillion, and total government debt was $14.1 trillion. Household net worth—the difference between the value of households’ assets and liabilities—was $62.7 trillion at the end of the second quarter of 2012, about $300 billion less than at the end of the first quarter. In the second quarter, the value of corporate equities and mutual funds owned by households declined close to $600 billion, more than offsetting a $355 billion increase in the value of real estate owned by households

    Household Net Worth: The ''Real'' Story -  A quick glance at the complete quarterly data series in linear chart suggests a bubble in net worth that peaked in Q4 2007 with a trough in Q2 2009, the quarter after the markets bottomed. The latest Fed balance sheet shows a total net worth that is 22.4% above the 2009 trough but still 7.0% below the 2007 peak. What comes as a bit of surprise in today's release is that total net worth has declined 0.5% from Q1 of 2012, and the year-over-year change is a fairly weak 2.5% for a supposedly recovering economy. But there are problems with this analysis. Over the six decades of this data series, total net worth has grown by over 5000%. A linear vertical scale on the chart above is misleading in its failure to provide an accurate visual illustration of growth over time. It also gives an exaggerated dimension to the bubble that began in 2002. But there is another more serious problem, one that has to do with the data itself rather than the method of display. Over the same time frame that net worth grew over 5000%, the value of the 1951 dollar shrank to about a dime. The Federal Reserve gives us the nominal value of total net worth, which is significantly skewed by money illusion. Here is my own log scale chart adjusted for inflation using the Consumer Price Index. Let's now zoom in for a closer look at the period since 2000. I've added some callouts to highlight where we are currently with regard to the all-time peak and 2009 trough. So now let's compare the nominal and real statistics for the peak-to-trough and recovery-to-date.

    $62.7 Trillion In Net Worth: Here Is The Latest US Household Balance Sheet - Moments ago, the Fed released its latest Z.1, aka the Flow of Funds, which is the primary source of information of that one component of modern finance which all modern economists continue resolutely to ignore because it blows all their anachronistic theories on monetary theory out of the water: shadow banking data. But more on that later. for now, here is the graphic summary of that most important of conventional data points updated every quarter: the US household balance sheet, and specifically the net worth of the US consumer, which in Q2 declined from a 4 year high of $63 trillion to $62.7 trillion, on a $900 billion drop in financial assets, offset by a $400 billion hike in real estate assets. Most importantly, and the reason why to the CTRL-P operator the only thing that matters is the stock market, of a total of $76.1 trillion in assets, only $24.2 trillion are tangible: i.e., real estate and durable goods. The remainder, $51.9 trillion or 68.2% of total, is Financial assets. It is this number that is the sole target of Bernanke's "monetary policy" and which must be inflated at any and all cost.

    Vital Signs Chart: Households Deleveraging - Americans are carrying lighter debt burdens. Debt held by households and nonprofits — including money owed on mortgages, student loans, auto loans and credit cards — was equivalent to 113.2% of after-tax income as of June, the lowest level since 2003. After peaking at 134.4% in summer 2007, household debt has fallen as consumers make payments and wipe out debt through foreclosure and bankruptcy.

    Bridges : Beyond Our Means: Why America Spends While the World Saves:  St. Louis Fed - If the recent financial crisis has taught us anything, it is that Americans save too little, spend too much and borrow excessively. Millions of people today lack the savings to protect themselves against foreclosures, unemployment, medical emergencies and uncomfortable retirements. How did Americans come to be such miserable savers? What might they learn from European and East Asian countries that boast higher household saving rates? Over the past two centuries, some nations have aggressively encouraged their citizens to save by means of special savings institutions and savings campaigns. The resulting cultures of thrift have proven remarkably enduring in several advanced economies and challenge mainstream economic analyses of saving. Economists generally believe that households save according to universally “rational” calculations. People supposedly save the most in their middle years as they plan for retirement, and save the least in welfare states. In reality, continental Europeans save at high rates despite generous welfare programs and aging populations. Surprisingly, Americans save little despite weaker social safety nets and a younger population.

    In Prosecutors, Debt Collectors Find a Partner - The letters are sent by the thousands to people across the country who have written bad checks, threatening them with jail if they do not pay up.  They bear the seal and signature of the local district attorney’s office. But there is a catch: the letters are from debt-collection companies, which the prosecutors allow to use their letterhead. In return, the companies try to collect not only the unpaid check, but also high fees from debtors for a class on budgeting and financial responsibility, some of which goes back to the district attorneys’ offices.  Debt collectors have come under fire for illegally menacing people behind on their bills with threats of jail. What makes this approach unusual is that the ultimatum comes with the imprimatur of law enforcement itself — though it is made before any prosecutor has determined a crime has been committed.  Prosecutors say that the partnerships allow them to focus on more serious crimes, and that the letters are sent only to check writers who ignore merchants’ demands for payment. The district attorneys receive a payment from the firms or a small part of the fees collected.

    Local DAs Allowing Debt Collectors to Use Their Letterhead, Split Fees from Shakedown - It’s one thing for the officialdom to sit back and allow financial services industry chicanery to go un or inadequately punished, quite another to get in bed with them to perpetrate a scam. The New York Times reports on how over 300 local district attorneys are participating in and profiting from what amounts to a shakedown operation. Let’s say you’ve bounced a check. The debt collectors send letters using the local district attorney’s letterhead, threatening jail time unless you not only pay what is allegedly owed but also an additional fee, typically $150 to $200, to take a “financial accountability” course.  Mind you, the DA has not prosecuted the case, nor even verified that the debt is valid. But the DA’s office winds up getting a cut of the fee from the class that the funds-impaired checkwriter was conned into taking. The debt collectors and the DA call these arrangements “partnerships,” presumably in the Ambrose Bierce sense: When two thieves have their hands so deeply plunged into each other’s pockets that they cannot separately plunder a third party.  The Times points out that the premise of this government-sponsored shakedown is that the people passing bum checks are shysters. But the focus of the course belies that: Ms. Yartz (who mistakenly wrote a check on an account she was closing) also questioned the need for a class on budgeting and financial accountability: “If I meant to bounce this check like a criminal, why do I need a class on budgeting?”

    The decline of credit cards - Remember when credit-card companies started cutting back on credit lines because delinquencies were going up and people weren’t paying off their debts? Well, pull out your hankies and prepare to dry your eyes: now they have the opposite problem. Harry Terris at American Banker has a classic headline today, “Card Payment Rates Stymie Lending”.  The problem for credit-card issuers, explains Terris, is that those of us with credit cards are doing a much better job of paying off our balances. Here’s the chart, showing the percentage of outstanding principal balance that cardholders are paying off every month: Well done, America! You’re paying off your credit-card debt at unprecedented rates! And the result is that the total amount of credit card debt in America is going nowhere. Here’s the chart:

    U.S. Trade Deficit Falls 12%, Aided by Cheaper Oil Imports — The United States’ current account trade deficit decreased 12.1 percent in the April through June quarter, pushed lower by an increase in American exports and cheaper oil imports. The Commerce Department said Tuesday that the current account deficit totaled $117.4 billion in the second quarter. That compares with a revised deficit of $133.6 billion in the first quarter, the largest in three years. The current account is the broadest measure of trade. It tracks the sale of merchandise and services between nations and investment flows. Economists watch the current account as a sign of how much the United States needs to borrow from foreigners. Many economists predict it will widen in coming quarters. A global slowdown has damped demand for American exports. And oil prices are rising again, in part because of increased tensions in the Middle East.

    LA area Port Traffic: Imports and Exports down YoY in August - The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for August. LA area ports handle about 40% of the nation's container port traffic. To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average. On a rolling 12 month basis, both inbound and outbound traffic are down slightly compared to the 12 months ending in July. In general, inbound and outbound traffic has been moving sideways recently. The 2nd graph is the monthly data (with a strong seasonal pattern for imports). For the month of August, loaded outbound traffic was down 4% compared to August 2011, and loaded inbound traffic was down 1% compared to August 2011. Usually imports peak in the July to October period as retailers import goods for the Christmas holiday - so imports might increase over the next couple of months, but probably not by much.

    Private Eyes: Are Retailers Watching Our Every Move? - Traditional brick-and-mortar retailers don’t have a lot going for them these days. On the one hand, high unemployment and stagnant wage growth is sapping the purchasing power of the average consumer, and on the other, the rise of e-commerce is giving those consumers more information and choices than they’ve ever had before, making competition all the more fierce. As I detailed in a recent article, store managers have been fighting back by trying to recreate — in physical stores — the sort of analytics available to e-commerce firms. Firms like RetailNext can use security camera systems to give retailers a tremendous amount of information about customer behavior in stores, allowing retailers to finely tune staffing levels and product placement. Other firms like Euclid Analytics provide the same information by identifying customer smartphone Wi-Fi signals. And while these analytics firms provide invaluable intelligence to retailers that is enabling them to improve their operations and boost profits, privacy advocates are worried about how far companies will take these technologies. After all, it’s one thing for a retailer to have a general idea of how many people are in the store, and how, in the aggregate, consumers are interacting with the store; but its another thing entirely for a retailer to be able to identify a customer individually and tailor pricing and service based on his in-store behavior and financial history.

    NY Fed Empire State Mfg Index declines in September - From MarketWatch: Empire State index hits nearly two-year low The Empire State index decreased to negative 10.4 in September from negative 5.9 in August, according to the manufacturing survey released by the New York Federal Reserve. It is the lowest reading since November 2010. The new-orders index worsened to negative 14.0 in September from negative 5.5 in August.  One bright spot in the report was an increase in a key barometer of future activity that asks manufacturers about expectations six months ahead. The forward-looking index rose to 27.2 in September from 15.2 in August.  The index of the number of employees fell sharply in September but remained slightly above negative territory at 4.3. The number of employees fell from 16.47 in August to 4.3 in September. This was significantly below expectations of a reading of minus 2.0.

    NY Fed Manufacturing Index Worsens - An index covering New York manufacturing activity unexpectedly fell further into contraction this month, according to the Federal Reserve Bank of New York‘s Empire State Manufacturing Survey released Monday. The Empire State’s business conditions index fell to -10.41 in September, after it plunged more than 13 points to -5.85 in August. The index has been deteriorating since May. Economists surveyed by Dow Jones Newswires had expected the index to come in at a much healthier 0.0. The New York Fed survey is the first of several regional Fed factory reports and Monday’s very weak report suggests the U.S. manufacturing sector isn’t contributing to overall economic growth this quarter. The Empire subindexes weakened this month. The new orders index fell to -14.03 from -5.50 in August. The shipments index slipped to 2.75 from 4.09 last month. Labor conditions deteriorated. The employment index plunged to 4.26 in September from 16.47 in August, and the workweek index turned negative, falling to -1.06 from 3.53.

    Regional Manufacturing Update: Empire State Looking a Bit Scary - Until the past few months I've not routinely reported on monthly manufacturing data, regional or otherwise. However, now that I'm tracking the Big Four economic indicators, which includes Industrial Production, I'm watching these indexes more closely. This morning we got the latest Empire State Manufacturing Survey. The diffusion index for General Business Conditions was not good. There are a variety of components to the diffusion index for those who wish to dig deeper. But at the top level, here is a snapshot of New York State's General Business Conditions. The -10.4 was substantially below the consensus of -3.0, which would have been an improvement over the previous month's -5.9.  Here is the opening paragraph from the report. The one positive note was the modest improvement in future business conditions. The September Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to weaken. The general business conditions index slipped another five points to -10.4, its second consecutive negative reading. The new orders index fell nine points to -14.0, its third straight negative reading. Both of these measures reached their lowest levels in almost two years. The shipments index was little changed at 2.8.

    Empire State index hits nearly two-year low - Economic Report - Manufacturing activity in the New York region weakened again in September, according to data released Monday, raising fresh concern over a loss of momentum in the U.S. factories sector. The Empire State index decreased to negative 10.4 in September from negative 5.9 in August, according to the manufacturing survey compiled by the Federal Reserve Bank of New York.It marked the lowest reading since November 2010 and came as a surprise to economists surveyed by MarketWatch, who had expected the index to improve to 0.0. The Empire State data are watched closely, because they are the first reading of the health of the nation’s manufacturing sector in September.

    Empire Manufacturing Index Prints At Lowest Since April 2009 - Today's horrible piece of news, which at least on the surface was supposed to send the market soaring, comes courtesy of the Empire Fed Manufacturing Index, which printed at -10.41, the lowest print since April 2009, down from -5.85, and well below expectations of -2.0. The Index print confirmed the biggest 6 month drop since records began. The components painted a dire picture for jobs, with the employment index sliding from 16.47 to 4.26, New Orders tumbling from -5.50 to -14.03, while, wait for it, prices rose, from 16.47 to 19.15. Re-stagflation here we come. Market for now seems confused - since QE is priced into infinity, it is unclear if this latest datapoint confirming a recessionary economy, QE can't be more-er infiniter. Best to not respond to this, or any other macro news at all, which is precisely what the market has done. For those who missed it, not only has Bernanke doomed the global economy to stagflation and imminent food riots, while making the richest 0.001% richer than ever, he has completely broken any linkage between the economy and the market.

    Philly Fed Notes Improved but Still Contracting Manufacturing Conditions - Mid-Atlantic manufacturers say business conditions improved but are contracting this month for the fifth consecutive month, according to a report released Thursday by the Federal Reserve Bank of Philadelphia. The Philadelphia Fed said its index of general business activity within the factory sector rose to -1.9 this month from -7.1 in August. Economists surveyed by Dow Jones Newswires expected the latest index to improve to -5.0. Readings under zero denote contraction, and above-zero readings denote expansion. Recent data show the factory sector is struggling. Earlier Thursday, data provider Markit reported its flash purchasing managers’ index in September was unchanged from a weak final reading of 51.5 in August. The report said output was the slowest in three years.

    Philly Fed "Region’s manufacturing sector has steadied" - The Philly Fed manufacturing index showed slight contraction in September. From the Philly Fed: September Manufacturing Survey The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased 5 points, to a reading of ‐1.9. Although this marks the fifth consecutive negative reading for the index, the index has been edging nearer to zero over the last three months. Labor market conditions at the reporting firms remained weak this month. The current employment index, at ‐7.3, was little changed from its reading in July and August. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through September. The ISM and total Fed surveys are through August. The average of the Empire State and Philly Fed surveys increased slightly in September, and has remained negative for four consecutive months. This suggests another weak reading for the ISM manufacturing index.

    Philly Fed Business Outlook Survey: Fifth Month of Contraction -- The Philly Fed's Business Outlook Survey is a monthly report for the Third Federal Reserve District, covers eastern Pennsylvania, southern New Jersey, and Delaware. Today's report shows the fifth consecutive negative reading in General Activity after seven months of positive data, although the latest reading at -1.9 is a continuation of a less negative trend. Since this is a diffusion index, negative readings indicate contraction, but the rate that has been slowing since the recent trough of -16.6 in June. Here is the introduction from the Business Outlook Survey released today: Firms responding to the September Business Outlook Survey reported nearly flat business activity this month. The survey's indicators for general activity and new orders both improved from last month but recorded levels near zero. Firms reported continuing declines in shipments, employment, and hours worked. Indicators for the firms' expectations over the next six months, however, improved notably this month, although the same firms forecast continued deceleration in production growth in the fourth quarter. (Full PDF ReportThe first chart below gives us a look at this diffusion index since 2000, which shows us how it has behaved in proximity to the two 21st century recessions. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average, which is more useful as a indicator of coincident economic activity.

    Philly Fed Posts Fifth Consecutive Negative Print, As Hopium Soars By Most Since 1991 - The Philly Fed's current September Business Indicators index, long ignored when bearish and cheered when bullish, came slightly above expectations of -4.5, printing higher from last week's -7.1 to -1.9. This was the fifth consecutive negative print. And while there were no major highlights in the index, whose New Orders rose from -5.5 to 1.0 at the expense of Shipments and Inventories, both of which imploded to worse then -20, the real story is the Six Months expectations index, which exploded from 12.5 to 41.2: this was the biggest spike may not ever, but certainly in the past 22 years! Is there any wonder why everyone is transfixed with hope that Q4 will be the deus ex that saves the US economy. And so we are back to being a hopium driven economy - when reality sucks, there may not be much change, but there is always hope that finally, the central planners will get it right, and the future will be so bright you've gotta wear Made in China shades. One word of caution: if the so very much anticipated and 100% priced in Q4 recovery does not materialize, and with the fiscal cliff and debt ceiling issues still unresolved, get the hell out of Dodge, as the spread between hope and reality comes crashing.

    Markit Flash PMI in September at 51.5, Unchanged From August - U.S factory sector is expanding modestly this month as output slows to the lowest in three years, according to an early reading of September activity released Thursday. The flash purchasing managers' index compiled by data provider Markit for this month was unchanged from the final reading of 51.5 in August, first reported as 51.9. A reading above 50 means expansion. The report characterized the sector as showing "modest improvement." The Markit report follows a very negative factory survey put out Monday by the Federal Reserve Bank of New York. Later Thursday, the Philadelphia Fed will release its results on its regional manufacturing. Economists expect the report to show activity still contracting in September. In September, the Markit flash readings of the subindexes were mixed. The new orders index improved to 52.4 from 51.9, but the exports index remains in contraction, slipping to 47.9 from 48.8. Factories are responding by holding down production. The output index fell to 51.2 from 51.9 in August. Markit said the reading was the lowest in three years. The employment index in September edged up to 52.7 in September from 52.4 last month.

    Debunking the “It’s China’s Fault That American Worker Real Wages are Falling” Myth - Yves Smith -- For some time, we’ve argued that outsourcing and offshoring were overdone. For manufactured goods, direct factory labor is typically only 10% to 15% of final product costs. Even if you get significant savings there, the offsets are increased shipping, inventory, and managerial/coordination costs (which serves as an excuse to transfer savings on factory workers to the top brass). In addition, extended supply chains also entail higher risks. I’ve had executives and senior managers in various industries tell me that there internal estimates of the savings from outsourcing weren’t compelling, but senior management went ahead on the (typically correct) assumption that investors would approve.  But even in the cases where the outsourcing cost savings were significant, the idea that American wages were way out of line with Chinese wages and the only future for American workers was grinding wages lower and lower to compete with China has been oversold. Various writers, including yours truly, pointed out that China’s wage advantage would not hold indefinitely even if it managed to keep its currency peg (which, separately, it hasn’t; the change to a currency basket has over time resulted in appreciation against the dollar).  The reason? China’s much higher inflation rate would over time reprice labor in nominal terms at home, which with a currency peg (or the current dirty float) would translate into real increases to foreign buyers. To put it more simply, double digit inflation over time would be tantamount to a currency revaluation.  Despite popular (and worse, pundit and media) perceptions otherwise, China no longer enjoys a labor cost advantage in many areas. In recent years, China has seen some manufacturers move to lower-cost countries like Vietnam and Bangladesh, but the smaller size of their workforces has limited the impact on Chinese wages.

    Examining the Recession’s Effects on Labor Markets -- Atlanta Fed's macroblog -- Four years after the onset of the Great Recession, labor market outcomes in the U.S. remain depressed. The fraction of 16- to 64-year-old individuals who are employed fell from above 72 percent in 2007 to less than 67 percent in 2009 and remains stuck there. The unemployment rate rose from 4.5 percent to 10 percent and still hovers above 8 percent. And the fraction of unemployed workers who have been looking for a job for more than six months has increased to a share not seen in the United States in at least 60 years. The Atlanta Fed's Center for Human Capital Studies hosted a conference last weekend, organized by Richard Rogerson (Princeton University), Robert Shimer (University of Chicago) and the Atlanta Fed's Melinda Pitts that explored why the employment losses were so large and why the labor market recovery has been so weak. Examining these questions is important because different hypotheses about the nature of the recession suggest that different policy interventions may help to accelerate the recovery.

    BLS Birth/Death Model Yet Again - The BLS Birth/Death model is an endless source of confusion. It's actually no wonder.  This is what we know about the Birth/Death Model.

      1. The BLS does not adequately disclose how they determine business births or deaths, nor does it disclose precisely how their seasonal adjustments work.
      2. The BLS does admit the Birth/Death model is wrong at economic turns.
      3. The BLS recently changed from annual model revisions to quarterly model revisions which makes historical comparisons of Birth/Death numbers invalid. For example, January and July used to be the only negative months, but in 2011, January, September, November, and December were all negative.
      4. The BLS applies non-seasonally adjusted Birth/Death numbers to non-seasonally adjusted nonfarm employment numbers, then seasonally adjusts the result and spits out seasonally adjusted numbers widely used in mainstream media reports on the first Friday of every month.
        For the purpose of this discussion, the key point is number 4. Failure to understand that point leads to huge mathematical errors.

        Weekly Initial Unemployment Claims at 382,000 - The DOL reports: In the week ending September 15, the advance figure for seasonally adjusted initial claims was 382,000, a decrease of 3,000 from the previous week's revised figure of 385,000. The 4-week moving average was 377,750, an increase of 2,000 from the previous week's revised average of 375,750.The previous week was revised up from 382,000. The following graph shows the 4-week moving average of weekly claims since January 2000.  The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 377,750.This was above the consensus forecast of 373,000.  And here is a long term graph of weekly claims

        Are Jobless Claims Treading Water Again? - New filings for jobless benefits slipped a bit last week, but the bigger story is that new claims appear to be stuck in neutral again. It’s hard to say for sure, however, since the weekly numbers are quite noisy. But if the last few months are an indication, progress in paring claims has slowed to a crawl if not ceased altogether. Even so, it’s too soon to assume the worst: the year-over-year change in unadjusted claims is still falling.  Let’s back up a minute and consider today’s news. New claims fell 3,000 to a seasonally adjusted 382,000 last week. That’s near the highest levels since May and quite a move up from the post-recession low mark of 352,000 in July 2012. The annual percentage change in unadjusted claims provides a clearer read on the trend, however, and by that measure there’s still a decent signal of progress in the data. New claims last week were a bit more than 7% below the year-earlier level. That’s leaning toward the upper range of the annual pace of decline lately, but it’s still a respectable fall… if we can keep it.

        A Sharply Increasing Trend in U.S. Layoffs - The BLS' report on the number of new jobless claims filed in the week ending 15 September 2012 indicates that the pace of layoffs in the United States is accelerating at the fastest pace since the 2007 recession began.  At present, the average rate of increase in the number of initial unemployment insurance benefit claims filed each week since the most recent trend began on 7 July 2012 has reached 2,800 per week. That figure is greater than the average rate of increase of 1,641 layoffs per week that was recorded as the U.S. entered into recession in December 2007. That figure held through 26 July 2008, when high oil and gasoline prices accelerated the recession into high gear, increasing the rate of new layoffs in the U.S. to 7,599 per week.  You can see how today's rate of increase in the rate of new jobless claims being filed compares with those observed in the 2007 recession in our chart showing the residual distribution of the major trends for layoffs since the beginning of 2006 (see here for a description of the primary trends indicated on our chart below):

        Vital Signs Chart: Workers Staying in Same Job Longer - Workers are staying longer in their jobs. Conventional wisdom says Americans are changing jobs more frequently, but the data show otherwise. The median worker age 25 or older has been with his or her current employer for 5.4 years, up from 5.2 in 2010. The recession discouraged workers from quitting but job tenures were trending upward even before then.

        Number of the Week: Government Workers Stay Put Longer - 7.8: Median number of years that public workers have been employed by the government as of January 2012. Americans in general are remaining with the same employers longer, but government workers stay in the same position nearly double the time of their private-sector counterparts. Public workers have been with the government for a median of 7.8 years as of January 2012, longer than any private industry tracked by the Labor Department. The median number of years with the same company is 4.2 for private employees. Tenure varied across different levels of government. Federal employees, which include jobs such as postal workers, have been on the job for a median of 9.5 years. State and local employees — fire fighters, teachers and police officers, for example — haven’t been with the government as long, but still surpass the tenure of private jobholders. The median is 6.4 years for state workers and 8.1 years for local employees. Government workers are often thought to have greater job security than private-sector counterparts, but in recent years public workers have faced a more difficult environment. Since the recovery began in June 2009, some 670,000 government jobs have been shed in the U.S., compared to a net addition of about 3.5 million positions among private industries.

        The Latest Economic Data Show A Sharply Bifurcated Economy -The big monthly news this week was that inflation took off, with sharp increases in both producer and consumer prices, while industrial production and capacity utilization fell just as sharply. Retail sales rose slightly more than gasoline prices, but June and July were revised down slightly. Consumer sentiment improved sharply, and in particular expectations, one of the 10 components of the LEI. The energy choke collar is solidly engaged, but gasoline usage is holding up: Gasoline prices rose yet again last week, up $.01 from $3.84 to $3.85. Gas prices have risen $0.49 since their early July bottom, and are now only $0.09 cheaper than at their highest point this spring.Oil prices per barrel rose from $96.42 to $99.00. Gasoline usage was slightly negative on a YoY basis. For one week, it was 8695 M gallons vs. 8848 M a year ago, down -1.7%. The 4 week average at 9004 M vs. 9011 M one year ago, was essentially unchanged. Employment related indicators were again mixed this week. The Department of Labor reported that Initial jobless claims rose 17,000 to 382,000 from the prior week's unrevised figure. The four week average rose 3,750 to 375,000, about 3.3% above its post-recession low. If higher oil prices are again acting as a governor preventing fast economic growth, then this number, unfortunately, should continue to rise in coming weeks, although there is no persuasive impact yet. The American Staffing Association Index fell by one to 92. This index was generally flat during the second quarter at 93 +/-1, and for it to be positive should have continued to rise from that level after its July 4 seasonal decline. That it has now actually declined again is a serious red flag, as it is still performing worse than it did in 2007 and 2011.

        Nation of Takers - Krugman - Do today’s Republicans really believe that 47 percent of Americans are “takers”, living off money confiscated from the “makers”? No: the evidence suggests that the GOP believes that the fraction of takers/moochers is much higher, in fact at least twice that high.  Ask yourself: when was the last time a Republican leader made a point of praising hard-working, ordinary families — as opposed to “job creators”? Think about what happened on Labor Day: on a day dedicated to celebrating workers, House majority leader Eric Cantor sent out a tweet praising … business owners:Today, we celebrate those who have taken a risk, worked hard, built a business and earned their own success. This all makes sense in the Ayn Rand intellectual universe, where a handful of heroically greedy entrepreneurs are responsible for all that is good. And if you live in that universe, your dividing line between makers and takers isn’t drawn at the point where people make enough to pay income taxes; everyone who isn’t John Galt should be grateful for what the Galts do, and we’re all takers by asking those heroes to pay any taxes at all.

        Disdain for Workers, by Paul Krugman - By now everyone knows how Mitt Romney, speaking to donors in Boca Raton, washed his hands of almost half the country — the 47 percent who don’t pay income taxes... By now, also, many people are aware that the great bulk of the 47 percent are hardly moochers; most are working families who pay payroll taxes, and elderly or disabled Americans make up a majority of the rest.  But here’s the question: Should we imagine that Mr. Romney and his party would think better of the 47 percent on learning that the great majority of them actually are or were hard workers, who very much have taken personal responsibility for their lives? And the answer is no. For the fact is that the modern Republican Party just doesn’t have much respect for people who work for other people, no matter how faithfully and well they do their jobs. All the party’s affection is reserved for “job creators,” a k a employers and investors. Leading figures in the party find it hard even to pretend to have any regard for ordinary working families — who, it goes without saying, make up the vast majority of Americans.

        S.C. working poor share anger over Romney’s 47% remarks - Romney said 47 percent of Americans believe they are entitled to health care and food and housing and more – but he does not worry about those people. Obama, the Democrat, has private meetings of his own with rich Democratic donors. Obama held the strenuous jobs of politician and law professor in the last 20 years before he was president. The poor have their own meetings. In the waiting room at Carolina Community Actions Tuesday were four white ladies and four black ladies – united by a lifetime of work and a time later in life when the money comes up short. The word “entitled” never came up Tuesday, but the word “work” did. One of the white ladies, May Bennett, 70, worked all her life in restaurants. That means her Social Security check is so small it should be seen through a microscope. Waitressing is mainly off the books and cash comes in tips.“I worked since I was 13 years old,” Brown said. “I worked in a mill. Then I worked at dry cleaners. I worked. I never got a welfare check in my life.”

        What is the Economic Middle Class? -- I define middle class household income as the middle quintile.  This range includes the median and a band around it wide enough to hold 20 percent of the population.  You might wish to concoct your own definition with a wider spread, but you'd better not be asymmetric around the median.  Feel free to use the middle three quintiles, if that is your preference.  But if your of concept of middle class gets very far beyond 50% of the population, you really ought to give more thought to what the word "middle" actually means. Thinking about all this prompted a look at the various income quintiles.  The data, through 2009, is available at the Census Bureau web site, table 694.  This table provides historical data from 1967 through 2009 on the top income limit for the bottom 4 quintiles, and the bottom income limit for the top 5%, expressed in constant 2009 dollars. Graph 1 presents this data.  The 3rd quintile - my definition of the middle class - is between the orange line and the yellow line. In 1967, the threshold for the middle quintile was $32, 848.  By 2009, it had increased by 17% to $38,550.  This is a compounded annual growth rate of 0.38% In 1967, the top limit for the middle (and threshold to the 4th) quintile was $46, 621.  By 2009, it had increased by 33% to $61,801. This is a compounded annual growth rate of 0.68%. To reach the top 5% required an income of 106,684 in 1967.  By 2009, this had increased by 69% to $180, 001.   This is a compounded annual growth rate of 1.25%.

        Who Makes It Into the Middle Class -- A new study by researchers at the Brookings Institution shows that about two in three Americans achieves a middle-class lifestyle by middle age — and delves deeply into who makes it there and how. Isabel V. Sawhill, Scott Winship and Kerry Searle Grannis tackled the question of why some children make it to the middle class and others do not, studying criteria that tend to be indicative of later economic success and examining how race, gender and family income come into play. The study breaks life down into stages (for instance, adolescence) and gives benchmarks for each of those stages (in that case, graduation from high school with a grade-point average above 2.5, no criminal convictions and no involvement in a teenage pregnancy).They then studied children over time, analyzing whether they met those benchmarks and projecting whether they would make it to the middle class — defined as the top three quintiles of income — by age 40. Unsurprisingly, the researchers found that success seems to beget success — meeting each benchmark makes one more likely to meet the next. Moreover, the effect accumulates. A child who meets all the criteria from birth to adulthood has an 81 percent chance of being middle class. A child who meets none has only a 24 percent chance. (Notably, at each stage of life, a person who failed to meet the given criteria had as high as a 59 percent chance of meeting them in the next round.) The researchers also found that a number of other factors significantly influenced a person’s likelihood of making it to the middle class.

        U.S. Household Incomes: A 44-Year Perspective - Last week the Census Bureau has released the household income data for 2011. It is posted on the Census Bureau website. What I'm featuring in this update is an analysis of the quintile breakdown of data from 1967 through 2011 (see Table H.3).  Most people think in nominal terms, so the first chart below illustrates the current dollar values across the 44-year period. What we see are the nominal quintile growth patterns over the complete data series. In addition to the quintiles, the Census Bureau publishes the income for the top five percent of households. The next chart adjusts for inflation in chained 2011 dollars based on a research variant of the Consumer Price Index, the CPI-U-RS. As for the cumulative household income growth by segment over the past 44 years, the adjacent table shows the real, inflation-adjusted, difference between 1967 and 2011.To give us a better idea of the underlying trends in household incomes, I've also prepared charts of the nominal and real percentage growth since 1967. Here is the real version with some annotations. Note in particular the growing spread between the top quintile (and especially the top 5%) and the other four quintiles. Here is a table showing decline in income for each household segment from its real peak.

        U.S. Income Inequality: It's Worse Today Than It Was in 1774 - Here's a finding that would have made for great occupy sign last year: American income inequality may be more severe today than it was way back in 1774 -- even if you factor in slavery. That stat's not actually as crazy (or demoralizing) as it sounds, but it might upend some of the old wisdom about our country's economic heritage. The conclusion comes to us from an newly updated study by professors Peter Lindert of the University of California - Davis and Jeffrey Williamson of Harvard. Scraping together data from an array of historical resources, the duo have written a fascinating exploration of early American incomes, arguing that, on the eve of the Revolutionary War, wealth was distributed more evenly across the 13 colonies than anywhere else in the world that we have record of. Suffice to say, times have changed.

        Look How Much Less Americans Can Afford Now Compared To Six Years Ago  - In oil markets guru Stephen Schork's latest report, he takes issue with the Federal Reserve's recent argument that inflation is going to remain subdued. It is true that core inflation — all prices excluding food and energy — has not spiked. But the "wealth effect" that Chairman Ben Bernanke is hoping to create by causing the value of assets like stocks to rise will be outweighed by everyone panicking about their grocery and electricity bills going up. By pouring more and more dollars (albeit, electronically) into the economy, investors will not only be encouraged to own paper assets like stocks and bonds, but they will also want to own dollar-denominated hard assets; be that gold, cocoa, coffee or, yes, oil. [But] the cost is far outpacing wealth for the average consumer. 2006 (Bernanke’s first year at the helm of the Fed) the average weekly earnings (pre-tax) of a worker in the U.S. could purchase 332 loafs of bread, 265 cartons of eggs, 109 gallons of milk, 141 gallons of gasoline and 3,170 KWhs of electricity. Since then, the cost of these staples has soared, while incomes have barely moved and the value of our homes has declined by one-fifth. Six years later and average weekly incomes can only buy 250 loafs of bread (-25%), 187 cartons of eggs (-30%), 101 gallons of milk (-7%), 94 gallons of gasoline (-34%) and 2,644 KWhs of electricity (-17%).

        The Sound Of One Hand Clapping - Last week the Census Bureau issued a report confirming what Americans already know (or sense) about our society—it's becoming what used to be called "a third world" country, or less formally, a Banana Republic. Such reports are becoming commonplace in 2012. The most interesting thing about these reports is that everybody knows what's going on in the United States, but nobody seems to be able to do anything about it. At the very least, we know that nobody who is in a position to do anything about it seems to have a sincere desire to do anything about it. It took about three decades to get to this sorry point, and undoubtedly it would take a few more decades to put things back the way they used to be, assuming we started right now.  Unfortunately, that's not going to happen because the wealthy elites who have a stranglehold on this Great Nation don't want things to go back to the way they used to be. Why would they? They've worked very hard over the last 30 years to create the Kleptocracy we all now currently enjoy. So what are we supposed to do then? Jam our heads up our asses and pretend the sun is shining? Because that's what most Americans seem to be doing. Well, I suppose we should look at the report. Why not? It can't hurt us more than we're hurting now.

        State Unemployment Rates increased in 26 States in August - From the BLS: Regional and State Employment and Unemployment Summary: Regional and state unemployment rates were generally little changed in August. Twenty-six states recorded unemployment rate increases, 12 states and the District of Columbia posted rate decreases, and 12 states had no change, Nevada continued to record the highest unemployment rate among the states, 12.1 percent in August. Rhode Island and California posted the next highest rates, 10.7 and 10.6 percent, respectively. North Dakota again registered the lowest jobless rate, 3.0 percent. This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). Two states - New Jersey and New York - are at the maximum unemployment rate for the recession, and New Jersey set a new cycle high in August at 9.9%. The states are ranked by the highest current unemployment rate. Only three states still have double digit unemployment rates: Nevada, Rhode Island, and California. This is the fewest since January 2009, although New Jersey is close. In early 2010, 18 states and D.C. had double digit unemployment rates.

        Unemployment Rates Rise in Half of U.S. States — Unemployment rates rose in more than half of U.S. states last month, the latest evidence that hiring remains tepid across the country. The Labor Department says rates increased in 26 states. They fell in 12 states and were unchanged in the other 12. Unemployment also rose in seven of the 11 key swing states in this year’s presidential election.Nationwide, hiring employers added only 96,000 jobs in August, below July’s gain of 141,000 and the average of 226,000 jobs a month added in January-March quarter.  The U.S. unemployment rate fell to 8.1 percent from 8.3 percent in July. But that was only because many people gave up looking for work. The government only counts people as unemployed if they are actively searching for jobs.

        Unemployment Rises In 26 States for August 2012 - The August 2012 state unemployment rates climbed in 26 states and 21 states plus the District of Columbia show a decrease in payrolls. Another month and another horrific set of state employment statistics.  Twelve States unemployment rate didn't change and 12 plus the District of Columbia saw their unemployment rates drop for the month.  The national average unemployment rate is 8.1%. Yet from the above map, we can see some states unemployment rates just don't really budge. Nevada still has the highest unemployment rate, at 12.1%. Rhode Island came in at 10.7%, California, 10.6%. States with unemployment rates above 9.0% are New Jersey at 9.9%, North Carolina at 9.7%, South Carolina 9.6%, Michigan at 9.4%, Georgia at 9.2% , Illinois at 9.1%, New York at 9.1% and Connecticut at 9.0%. Most states unemployment rate didn't change significantly from last month. Of the ones that did, most were increases. Below is the list of States whose unemployment rate showed any movement.Connecticut (+0.5 percentage point), Michigan (+0.4 point), New Hampshire and Vermont (+0.3 point each), and Iowa, Massachusetts, and Pennsylvania (+0.2 point each). Hawaii and Utah registered the only significant declines over the month (-0.2 percentage point each) Payrolls also barely budged by percentages.  In August 2012, nonfarm payroll employment increased in 28 states, decreased in 21 states and the District of Columbia, and was unchanged in Colorado. The largest over-the-month increase in employment occurred in Texas (+38,000), followed by Florida (+23,200) and Missouri (+17,900). The largest over-the-month decreases in employment occurred in Virginia (-12,400), the District of Columbia (-11,200), and Washington (-8,800).

        Battlegrounds Among States With Higher Jobless Rates - August marked yet another month of weak job growth for most U.S. states, according to Labor Department data out Friday. The jobless rate rose in 26 states, declined in a dozen states and the nation’s capital, and held steady in the remaining states, the data show. Among the states seeing unemployment rate increases: New Hampshire, Michigan, Iowa and Pennsylvania — all of which are considered “battleground” states in the presidential election, meaning the race between President Barack Obama and GOP nominee will likely be close. Nevada, also a battleground state, continued to lead all 50 U.S. states with a 12.1% unemployment rate.  The national jobless rate — released earlier this month — ticked down to 8.1% from 8.3% a month earlier, largely because the overall work force shrank as people gave up the job search. Twenty-eight states did add jobs last month, but the increases were mostly tepid save for a few states. The oil-producing state of Texas led the nation with 38,000 new jobs. Florida was next with 23,200 new jobs, followed by Missouri’s 17,900 new jobs. Payrolls fell the most in Virginia, Washington, D.C., and Washington state. See the full interactive graphic.

        2011 American Community Survey shows continuing hardship throughout the U.S. - The results of the 2011 American Community Survey (ACS), released today by the U.S. Census Bureau, show that households across the United States are still coping with the damage wrought by the Great Recession. Between 2010 and 2011, inflation-adjusted median household income either fell or stayed the same in every state except Vermont. Median household income significantly declined in 18 states, ranging from a 1.1 percent decline in Ohio to a 6 percent drop in Nevada. California (-3.8 percent), Georgia (-3.5 percent), Hawaii (-5.2 percent), Louisiana (-4.7 percent), New Jersey (-3.4 percent), and New Mexico (-3.1 percent) all experienced income declines of more than 3 percent. Thirty-one states showed no significant change in median household income. For the nation as a whole, median household income decreased by 1.3 percent.1 While overall household incomes declined, the distribution of income still became more inequitable. Twenty states saw a significant increase in income inequality as measured by the Gini index2: Arkansas, California, Florida, Georgia, Illinois, Louisiana, Maine, Michigan, Nebraska, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Tennessee, Texas, West Virginia, and Wisconsin. Income inequality did not decrease in any states nationwide. The survey’s poverty results show similar cause for alarm. At the state level, both the number and percentage of people in poverty rose significantly in 17 states, with the largest increases occurring in Louisiana (+1.7 percent), Oregon (+1.6 percent), and Arizona (+1.5 percent).

        New York State Leads in Income Inequality - Of all American states, New York again has the most unequal income distribution, according to a new report from the Census Bureau. Wyoming has the most equitably distributed income. A state abbreviation surrounded by a circle  denotes the value for the state is not statistically different from the overall country’s Gini index. Income inequality is measured by the Gini index, which runs from zero to one. A zero represents a society where income is distributed exactly proportionally among every household. A one indicates maximum inequality, where one household has all the income and all the others have none. The Gini index value for the United States in 2011 was 0.475, higher than it was in 2010 at 0.469. The index rose in 20 states last year (including New York); there was no statistically significant change in the rest of the states and the District of Columbia (which, at 0.534, has a higher index value than any state). The Gini index value for New York State was 0.503, which means the state’s household incomes are about as equally distributed as those in Costa Rica, at least according to the most recent international data available. The report also looked at median household incomes across the states, which showed great inequality among states as well as within them. The median household income ranged from a low of $36,919 in Mississippi to a high of $70,004 in Maryland.

        Highest income counties in 2011 - The Washington region dominates the latest list of highest income U.S. counties. New 2011 data from the Census Bureau show that Loudon and Fairfax counties held on in the top two spots, while Arlington moved into third place, up from fifth the year before. This list shows the new top 100. Read related article.

        Winning the war on poverty: New research says government anti-poverty programs are more effective than you realize. - “We declared war on poverty,” Ronald Reagan famously proclaimed, “and poverty won.” And indeed, as measured by the official poverty rate, the United States seems to have made very little progress in curbing poverty. But important new research released this week by Bruce D. Meyer of the University of Chicago and James X. Sullivan of the University of Notre Dame indicates that the official measure is giving us an extremely misleading view. In fact, poverty fell substantially over the past several decades before rising a bit during the Great Recession. Neither liberals nor conservatives have been eager to embrace this idea—the former to bolster support for new programs and the latter to dismiss the efficacy of what’s already been done. But as Meyer pointed out in a talk at the Brookings Institution on Thursday, the way the government measures poverty actually by definition excludes the possibility that public programs are lifting families out of poverty. The truth, when examined correctly, is that we’ve hit upon a very effective means of waging war on poverty—give money to poor people—and we could make even more progress by doing even more of it. The official poverty line was created in 1963 by food and nutrition economist Mollie Orshansky and hasn’t been updated since.

        'What Poverty Means: Beyond the Antiseptic Numbers' - Tim Taylor quotes Ralph Smith, senior vice-president of the Annie E. Casey Foundation commenting on recent data on poverty: There’s an antiseptic quality about the charts and graphs and the PowerPoint that feels to me as if it misses the issue and misses the reality of the lives of the people and the families about whom we speak. ...   And I will confess a discomfort as I think about the one million children who despite these not-quite-so-bad numbers will be born into poverty next year. One million new entrants into poverty, and what we can predict now. And what we can certify on the day they are born is that more than 50 percent of them will spend half their childhoods in poverty. Twenty-nine percent of them will live in high poverty communities. Ten percent of them will be born low birth weight, a key indicator of cognitive delays and problems in school. Only 60 percent of them will have access to health care that meets the criteria for having a medical home. By age three, fewer than 75 percent of them will be in good or excellent health, and they’ll be three times more likely than their more affluent peers to have elevated blood lead levels.  More than 50 percent of them will not be enrolled in pre-school programs and by the time they enter kindergarten, most of them will test 12 to 14 months below the national norms in language and pre-reading skills. Nearly 50 percent of them will start first grade already two years behind their peers. During the early grades, these children are more likely to miss more than 20 days of school every year starting with kindergarten, and that record of chronic absence will be three times that of their peers.

        CRS report: number of able-bodied adults on food stamps doubled after Obama suspended work requirement - Obama administration officials have insisted that their decision to grant states waivers to redefine work requirements for welfare recipients would not “gut” the landmark 1996 welfare reform law. But a new report from the Congressional Research Service obtained by the Washington Examiner suggests that the administration’s suspension of a separate welfare work requirement has already helped explode the number of able-bodied Americans on food stamps. In addition to the broader work requirement that has become a contentious issue in the presidential race, the 1996 welfare reform law included a separate rule encouraging able-bodied adults without dependents to work by limiting the amount of time they could receive food stamps. President Obama suspended that rule when he signed his economic stimulus legislation into law, and the number of these adults on food stamps doubled, from 1.9 million in 2008 to 3.9 million in 2010, according to the CRS report, issued in the form of a memo to House Majority Leader Eric Cantor, R-Va. “This report once again confirms that President Obama has severely gutted the welfare work requirements that Americans have overwhelmingly supported since President Clinton signed them into law,” Cantor said in an emailed statement. “It’s time to reinstate these common-sense measures, and focus on creating job growth for those in need.”

        Food Pantries Struggle To Feed Local Families - As more families struggle to make ends meet, local food pantries strain to feed those who need it the most. 800 meals are served each week at the Union County Community Shelter, but with more families filling up tables, food is running out. "Our soup kitchen is seeing an increase of over 35 percent in the last few months," said Kathy Bragg, executive director of the Union Country Community Shelter. The sheler's food pantry and soup kitchen has turned to Facebook and local churches for food donations. "Grocery bills are just over the top and they're running out of money before the end of the month," said Bragg.

        Being Poor is Killing Off White Americans--Really - For those of you who think that the population "die off" that is expected to occur as the long era of fossil-fueled economic growth gives way to scarcity and permanent economic contraction lies many years in the future, I've got a surprise for you. It's already happening: For generations of Americans, it was a given that children would live longer than their parents. But there is now mounting evidence that this enduring trend has reversed itself for the country’s least-educated whites, an increasingly troubled group whose life expectancy has fallen by four years since 1990. Researchers have long documented that the most educated Americans were making the biggest gains in life expectancy, but now they say mortality data show that life spans for some of the least educated Americans are actually contracting. Four studies in recent years identified modest declines, but a new one that looks separately at Americans lacking a high school diploma found disturbingly sharp drops in life expectancy for whites in this group. Experts not involved in the new research said its findings were persuasive.

        Makers, Takers, and YOYOs -  Well, it took a while, and an awfully circuitous route, but we’re finally getting back to the national debate we need to have, the one about the role of government.Unfortunately, it’s taken a terribly misguided, albeit revealing turn towards “makers versus takers.” What’s misguided about it?  It misses the dynamics of real lives in America and instead, creates a false and divisive framework.  Were we to accept this framework and try to embed it in our economic policy, our nation would be the worse for it. The implication is that one group—the makers—is supporting the well-being of another—the takers.  Moreover, since the takers don’t pay taxes—they just take government benefits—they are endlessly incentivized to support politicians who keep their Ponzi scheme going.  But, in reality, for the vast majority, both here and in every other democratic economy, it doesn’t work that way.  The distinction is meaningless.  We almost all “take” at some point and “make” at others.  Medicare and Social Security programs are social insurance programs to which we contribute during our working lives and receive benefits from in retirement.   Are the beneficiaries of these programs makers or takers?  About 60% of those who don’t pay federal income tax pay payroll taxes, meaning they’re working.  Slightly over a fifth are low-income elderly families.   Are they takers who should leave retirement and get the hell back to work?

        California August Sales Tax Collection Down 20% From Year Ago, Total Revenues Down 5.5%, Income Tax Up 11.6%; Spending Out Of Control By $3 Billion - A summary of California State Finances for August 2012 looks like this: Except for corporate income taxes (down a whopping 71.5% vs. projections), the state is doing better in August than budgeted.However, compared to a year ago, revenues are down, sales taxes are down, and corporate taxes are down, all by significant amounts. Moreover, the two-month totals for July and August are much worse as the following table shows.For July and August, sales Tax Collections are $108 million under budget. August sales tax collection is down 20% from a year ago, a huge decline of $633 million. This clearly shows people in California have cut back spending. I suggest people have cut back in other states as well, regardless of reported increases in retail sales, typically based on the flawed methodology of "same store sales".

        California May See More Bankruptcies, Chiang Says -California may see more municipal bankruptcies than the three that have been filed since June, state Controller John Chiang said. Municipal budgets already strained by surging pension costs and declining real-estate tax revenue were stripped of more than $1 billion in local redevelopment funds and vehicle-license fees to cut California’s deficit. Stockton, San Bernardino and Mammoth Lakes have filed for bankruptcy protection in the past three months. Chiang said he expects further bankruptcies in Jurupa Valley, Wildomar, Eastvale and Menifee in Riverside County. “We will start to see more bankruptcies, not necessarily because of pension issues,” Chiang said yesterday at a conference in San Francisco. “We need the state to participate in trying to prevent these bankruptcies.”

        Patriarchal Norms Still Shape Family Care - It’s easy to find references to patriarchs, patriarchy or patriarchal attitudes in reporting on other countries. Yet these terms seem largely absent from discussions of current economic and political debates in the United States. Here are some examples of recent usage in The New York Times: Osama Bin Laden was a patriarch. Patriarchal values are discouraging educated women’s labor-force participation in Dubai. Egypt’s Muslim Brotherhood is “committed to upholding traditional and patriarchal values around a woman’s place in society, and many Egyptian women need no convincing.” Considerable evidence suggests that a significant percentage of Americans are also committed to upholding traditional and patriarchal values around a woman’s place in society and that many American women need no convincing. In 1998, the Southern Baptist Convention, the largest Protestant denomination in the United States, declared that a wife should “graciously submit” to her husband’s leadership. The Mormon Church, officially known as the Church of Jesus Christ of Latter-day Saints, holds similar views on wifely submission and imposes even stricter curbs on women’s access to positions of spiritual leadership. The church actively campaigned against the Equal Rights Amendment and excommunicated its most visible Mormon spokeswoman.

        $2 a day - I’m trying to find information on the effects of the 1990s welfare reform (surprisingly difficult, suggestions welcome) I came across this NYT article by Jason de Parle which included the following striking result (link added.1 ) Luke Shaefer of the University of Michigan and Kathryn Edin of Harvard examined the share of households with children in a given month living on less than $2 per person per day. It has nearly doubled since 1996, to almost 4 percent. Even when counting food stamps as cash, they found one of every 50 children live in such a household The result is striking because of the $2 figure, which is derived, not from a US poverty line, but from the World Bank Poverty line for developing countries. These children aren’t just poor by American standards - they would be considered poor in sub-Saharan Africa.

        Income Inequality and Educational Opportunity - Laura D'Andrea Tyson - Education has been the traditional American pathway to opportunity and upward mobility, but this pathway is closing for a growing number of Americans in low- and middle-income families. And the failure to provide all Americans with the educational opportunities to realize their potential not only harms them; it harms the nation. Educational attainment levels rose rapidly throughout much of the 20th century, with the college completion rate quadrupling for those born between 1915 and 1975. But it has been largely stagnant since. The slowdown in college attainment levels has been most pronounced for individuals from low-income families. At the same time, the economic benefits of higher education have risen. In 1979, the average college graduate made 38 percent more than the average high school graduate. The comparable figure today is more than 75 percent. During the last three decades the gap between the educational attainments of children raised in rich and poor families has widened dramatically, and it reveals itself remarkably early in children’s lives. According to the most recent census report, about one-quarter of children under the age of 6 live in poverty. Recent research shows that early childhood poverty has negative effects on brain development. At the age of 3, children in poverty have smaller vocabularies than their peers and a harder time sorting and organizing information and planning ahead.

        Shocking Report Explodes 5 Myths About American Education- A new international report demolishes several deeply held myths about our educational system. The Organization for Economic Cooperation and Development (OECD) report, which compares the educational systems of over 30 developed nations, provides data that, when it comes to education, proves we’re so far from being number one, that the entire idea of American exceptionalism should be called into question. Rather than thumping our chests, we should be going to school on how other developed nations, especially those in Europe, invest in education. However, we have little chance of learning until we break through the mythology that blinds us to our decline.

        • Myth #1: Our educational system provides more upward mobility than any other in the world.  Just how low is our ranking? Of the 28 countries listed, we’re third from the bottom.
        • Myth #2: Our teachers (protected by their greedy unions) work less and get paid more.  Wrong! says the OECD report, especially when it comes to hours worked: “Teachers in the U.S. spend between 1050 and 1100 hours a year teaching – much more than in almost every country.”  “Despite high overall levels of spending on education, teacher salaries in the U.S. compare poorly; in the U.S. the difference is large, especially for teachers with minimum qualifications.”
        • Myth #3: Big government (via our tax dollars) funds higher education.
        • Myth #4: We provide excellent early childhood education.  So where are we ranked?
        • 3-year-olds (in early childhood education): 25th of 36 countries
        • 4-year-olds (in early childhood education and primary education): 28th of 38 countries
        • 5- to 14-year-olds (all levels): 29th of 39 countries
        • Myth #5: We have the highest percentage of college grads in the world. “The U.S. ranks 14th in the world in the percentage of 25-34 year-olds with higher education (42 percent).”

        Teachers’ strike: Chicago’s just the beginning - Seven days in, Chicago teachers are still on strike. Yesterday, elected delegates of the Chicago Teachers Union voted not to end the strike, opting instead to reconvene Tuesday after discussing a proposed contract deal with CTU’s broader membership. Soon after their meeting, Mayor Rahm Emanuel announced that he’ll seek a legal injunction declaring the strike illegal and forcing the teachers back to work. “A lot of us look at the school that Mayor Emanuel sends his children to as an example,” said striking history and social studies teacher Xian Barrett. He was referring to a unionized private school, tied to the University of Chicago, which boasts a broad curriculum, smaller classes and ample resources. By law, the teachers could only strike over compensation. But the strike has been about much more. It’s a clash between competing visions for how to improve schools, which in Chicago have come into unusually sharp relief. Among the bones of contention: The role of testing in evaluations, the strength of job security for teachers and the number of kids in a class. In a Sunday morning press release, CTU described a proposed settlement with major improvements over what the city was offering a week ago. But in interviews last night, CTU activists said it’s not clear whether it will be good enough for members to accept. “If we were only fighting for money, then we certainly came out more on the positive than the negative,” social studies teacher Rivanna Jihan said last night. “But in terms of the other stuff, it’s a mixed bag.”

        Students, Their Neighborhoods, Their Schools, and the Unions - I’ve done just one post on the Chicago teachers’ strike, pointing out that ratcheting up the weight on teachers’ evaluations based on value-added modeling (VAM)—one of Mayor Emmanuel’s conditions—is a really bad idea.  Now, according to Reuters, the framework agreement they’ve reached out there scales back on that weighting.  Here’s a useful piece by Richard Rothstein with more background on how and why these tests fail to accurately and reliably identify effective teachers. But this morning, I’d like to take a bit broader look at the issues in play here.  I open my WaPo this AM to read this: Two days after a student was gunned down while walking to Anninna Sigmon’s high school in Prince George’s County, she still wasn’t sure when she would feel safe enough to return to class. “I just feel like I could be next,” said Sigmon, 17, a. “People shouldn’t be afraid to go to school.” I am then reminded by this Rebecca Mead post that 80% of Chicago public school students qualify for free and reduced lunch, a proxy for poverty status.  And it just reminds me how ridiculous it is for us to expect teachers to solve these problems for us while we’re busy beating up on their unions, cutting school budgets, laying off education personnel, and sharply reducing that part of the federal budget that could help make a difference in urban poverty. Just how talented does she have to be to offset the impact that must have on the ability of students to absorb her teachings?

        Chicago Teachers Union Votes to Suspend Strike - The Chicago Teachers Union has agreed to suspend its seven-day strike and return to work. Classes will resume for more than 350,000 students on Wednesday. This does not mean they have agreed to the contract submitted by the Chicago Public Schools, only that they will complete the strike action, while reserving the right to walk out again if the final resolution doesn’t meet with their satisfaction. The decision was made by the 700-odd members of the House of Delegates, a proxy for the 26,000-member teachers union. The voice vote was taken after some 800 delegates convened at a union meeting hall near Chinatown to discuss and debate a tentative contract. Union leaders had already signed off on the agreement with Chicago Public Schools. “We said we couldn’t solve all the problems. . .and it was time to suspend the strike,”

        Why Do People Hate Teachers Unions? Because They Hate Teachers -- Like Doug Henwood, I’ve spent the last few days trying to figure out why people—particularly liberals and pseudo-liberals in the chattering classes—hate teachers unions. One could of course take these people at their word—they care about the kids, they worry that strikes hurt the kids, and so on—but since we never hear a peep out of them about the fact that students have to swelter through 98-degree weather in jam-packed classes without air conditioning, I’m not so inclined. Forgive me then if I essay an admittedly more impressionistic analysis drawn from my own experience.Teachers were not figures of respect or gratitude; they were incompetents and buffoons. Don’t get me wrong: like most people, I had some terrible teachers. Incompetents and worse. But like most people I’ve also had some terrible friends, some terrible co-workers, some terrible neighbors, some terrible doctors, some terrible editors, and some terrible professors. Mediocrity, I’d venture, is a more or less universal feature of the human condition. But among the upper classes it’s treated as the exclusive preserve of teachers.

        New York Public Library Dials Back Plan to Move Books - The New York Public Library Wednesday stepped back from its plan to ship millions of books from its landmark 42nd Street building to New Jersey, announcing an $8 million gift that will allow the library to expand storage space under Bryant Park and keep more material on site after the building is transformed in a sweeping renovation. Library officials last spring came under an onslaught of criticism from scholars and writers opposed to the idea of shifting nearly 3 million books from the Stephen A. Schwarzman building to a storage facility in Princeton, N.J. The books’ relocation was part of a $300 million plan to consolidate three libraries into one. The redesign by British architect Norman Foster would create a vast new circulating library inside the Schwarzman building, replacing seven stories of stacks that overlook Bryant Park and are closed to the public. Library trustee Abby Milstein and her husband, Howard Milstein, long-time supporters of the library, will fund the expansion of an existing storage area under the park by 30,000 square-feet–enough to accommodate 1.5 million more volumes.

        Textbooks – Predatory Business Practices, by the Book - Textbooks are the latest abuse in predatory consumer business. As the economy remains mired, both young people and middle-aged workers have returned to school in record numbers. What they find, in the form of textbook pricing, is enough to shock a subprime mortgage broker. Let’s start with utilitarian textbooks: basic workplace skill training. Microsoft Office 2010 Introductory, a “textbook” by Cengage Learning, costs $132.06 at Amazon. In contrast, Microsoft Office 2010, Plain & Simple, by Microsoft Press – the same Microsoft that created the software – costs $16.73 on Amazon. Students can buy the book published by the creator of the software, plus a Kindle to read it on, paying $94.07 total. They’d end up with a backpack that is 4.9 pounds lighter, $37.99 fewer crippling dollars of student loan debt, and no need to purchase another Kindle for future textbooks. Cengage or Pearson may argue that their books include interactive study software but their argument is nonsense because Microsoft offers free high-quality interactive training for all versions of Office online.  Let’s look at another example, from a textbook author writing in a field where he knows the pernicious effect of overinflated book prices. Microeconomics, by Krugman and Wells, 3rd Ed., is used for introductory microeconomics classes. This 595 page paperback, published by Worth Publishers, lists for $191.25 though is discounted at Amazon to $162.18. There are older editions of Krugman’s first edition Microeconomics textbook, published eight years ago, on sale at Amazon for $.50 plus $3.99 shipping. Students who rely on private student loans, at 6.43% interest, an average rate, will owe $208.09 after they graduate for Krugman’s book. If they pay back the loan over a ten-year period, at the same interest rate, Prof. Krugman’s book will cost $282.65, total, if purchased from Amazon or $333.32 if purchased at list price from the college bookstore.

        Cal State board to consider raising tuition and other fees - Facing an uncertain budget outlook, the governing board of California State University on Tuesday is scheduled to consider a slate of fee changes, including a midyear tuition increase and an extra per-unit fee for students who repeat a class. The fee hikes -- to be presented to the Board of Trustees at its meeting in Long Beach -- are part of a package of contingency measures that are dependent on the fate of a tax measure on the November ballot supported by Gov. Jerry Brown. Failure of Proposition 30 would trigger a $250-million funding cut to Cal State; and officials are proposing to raise overall tuition by 5%, or $150 per semester, beginning in January. That would bring the annual undergraduate rate to $6,270, not including campus-based fees, books and other costs. The tuition hike would raise an estimated $58 million in revenue for 2012-13, officials said. Officials are also proposing to increase per-semester-unit supplemental fees for nonresident students by 7% from $372 to $399.

        Soaring Tuitions: Are Public Funding Cuts to Blame? - NY Fed - Public colleges and universities play a vital role in training a state’s workforce, yet state support for higher education has been declining for years. As a share of total revenues for America’s public institutions of higher education, state and local appropriations have fallen every year over the past decade, dropping from 70.7 percent in 2000 to 57.1 percent in 2011. At the same time, college enrollment numbers have swelled across the country—public institutions’ rolls grew from 8.6 million full-time students in 2000 to 11.8 million in 2011. Faced with dwindling funding from the states, public institutions of higher education have been forced to find ways to shift their costs or raise revenue on their own. In this post, we analyze the relationship between changes in state and local funding for higher education and changes in public institution tuition.

        Broke college students turn to fertility clinics, sugar daddies -- What do sugar daddies, medical studies and pawnshops have in common? They help some students pay for a college education. With the average family reporting that they are only on track to meet 30% of their college savings goals, every extra dollar counts -- and nothing is off limits. John McKinley-Campbell had no job, $135,000 in student loan debt and he wanted to go back to school to get his Ph.D. at Florida International University. In order to afford to make it all happen he became a lab rat. He has been participating in medical studies for pharmaceutical companies ever since his aunt saw an advertisement for one on TV. He lived in a medical facility for 14 days to test an arthritis medication and then signed up to receive injections of a breast cancer drug through an IV over the course of 8 days. Those two studies alone will earn him about $8,500, which he plans to put toward an $1,800 GRE preparation course, the GRE test fee of $175 and the university's $100 application fee. The rest will go toward housing and tuition if he gets accepted. "If I can't find work [while in school], there's always a headache medicine I could test," he said.

        College, Still Worth It - Adam Looney and Michael Greenstone at the Hamilton Project have put together a beautiful chart illustrating once again why college is worth it, despite the current fad of claiming otherwise. It shows the share of people at each income level who had various levels of educational attainment: As you can see, the more income you earn, the more likely you are to have gone to college.  Of the Americans who earn over $150,000, 82 percent had a bachelor’s degree. Just 6.5 percent had no more than a high school diploma. And while there are lots of stories about broke college grads, people with higher education are much less likely to have low incomes than those without degrees. Sure, you say, but people graduate from college with a lot of debt, which must surely wipe out their higher earnings! Even factoring in the debt, though, college is still a great investment. Here’s another chart worth a million words, also from Mr. Looney and Mr. Greenstone, that shows the return on investment for going back to school compared to investing that same tuition money in the stock market, long-term Treasury bills, housing, corporate bonds or gold:

        What makes universities better? - Universities are large, complex organizations that have multiple goals -- educating undergraduates, training graduate students, facilitating and expanding research activities, serving various communities. Each of these activities depends on complex contributions by very smart faculty and administrators, often in a highly decentralized way, and each can be more or less successful. The individuals involved are generally motivated to do the best work they can do. But the organization and its leaders have a responsibility to take steps to improve the quality and effectiveness of the results. So the question here is this: what kinds of actions and strategies can university leaders take to help their universities to improve in performance with respect to the fundamental components of academic quality that they value? We might ask, to begin, what the dimensions of quality are for a university. I would highlight at least three:

        • providing successful and effective education to undergraduate and graduate students (which means that on average, students who study at the university improve their intellectual and moral abilities over time); 
        • successful cultivation of high-quality research by faculty (which means increasing the flow of published and funded research results with measurable impact in both academic and non-academic spheres); 
        • contributing to the improvement of quality of life for the communities served by the university (region, state, city, nation). 

        Student Loans: Debt for Life - Some day, low-cost online education that requires zero student borrowing may displace a big chunk of today’s entrenched establishment. The fact that it hasn’t yet says a lot about the durability of colleges and universities, several of which predate the country’s founding. Rather than places of learning, colleges have become expensive screening mechanisms. It’s not what you learn in four years at Harvard University that impresses potential employers; it’s the fact that you got into Harvard in the first place. So maybe the real problem is that credentialism has trumped learning. That drives people to get degrees simply to displace others who don’t have degrees, says Richard Vedder, who directs the Center for College Affordability and Productivity. He notes that the U.S. has more than 100,000 janitors with college degrees and 16,000 degree-holding parking lot attendants. Political scientist Charles Murray would get rid of the bachelor’s degree altogether. In an Intelligence Squared U.S. debate last October in Chicago, he said education is or at least ought to be a lifelong process for everyone, diploma holders or not. “We are all engaged in the same process,” Murray argued. “We are not divided into professionals and service workers or blue-collar workers. We all start out as apprentices. We become journeymen, and we all strive to become master craftsmen.”

        Next School Crisis for Chicago - Pension Fund Is Running Dry - One of the most vexing problems for Chicago and its teachers went virtually unmentioned during the strike: The pension fund is about to hit a wall. The Chicago Teachers’ Pension Fund has about $10 billion in assets, but is paying out more than $1 billion in benefits a year — much more than it has been taking in. That has forced it to sell investments, worth hundreds of millions of dollars a year, to pay retired teachers. Experts say the fund could collapse within a few years unless something is done.  “There’s a huge crisis,” “The problem does not get easier by waiting. The problem gets bigger, and starts to become an insurmountable obstacle.” Teachers in Chicago, as in many cities, do not earn Social Security credit for their years in the classroom.  Having skipped its pension contributions for many years, Chicago is supposed to start tripling them in another year under state law. But the school district has drained its reserves. And it cannot easily turn to the local taxpayers because of a cap on property taxes. Borrowing the money would be difficult and expensive as well, because of a credit downgrade this summer. One of the few remaining choices would be to make deep cuts in other services.

        8,786,049: Yet Another Record for Americans Collecting Disability - The Social Security Administration has released new data revealing that 8,786,049 American workers are collecting federal disability insurance payments in September. That sets yet another record for the number of Americans on disability. The 8,786,049 workers taking federal disability in September is a net increase of 18,108 from the 8,767,941 workers who took federal disability in August. Over the past 45 years, the number of American workers taking federal disability payments has increased four-fold relative to the number actually working. In August 2012, 142,101,000 Americans were working and 8,767,941 were on disability--meaning there were only 16.2 people working for each person collecting disability. According to the Bureau of Labor Statistics (BLS), a record 88,921,000 Americans were “not in the labor force” in August. These were Americans who were at least 16 years old, who were not in the military or in an institution such as a prison or a nursing home, and who did not have a job and had not actively sought one in the last four weeks. Also in August, according to the BLS, only 63.5 percent of the civilian population (those over 16, who were not in the military or in an institution) participated in the labor force. That was the lowest level of labor force participation in 31 years. To participate in the labor force a person must either have a job or at least be actively trying to find one.

        Majority of elderly households fall into category maligned by Romney - As our blog noted Tuesday, the 47 percent of Americans that Republican presidential nominee Mitt Romney dismisses as “dependent” on government because they don’t pay income taxes includes many elderly households. Romney concludes his remarks on the 47 percent by saying, “My job is not to worry about those people. … I’ll never convince them that they should take personal responsibility and care for their lives.” Romney may not realize this, but a majority of the elderly fall into this category. The nonpartisan Tax Policy Center found that in 2011, 55.9 percent of elderly households paid no federal income taxes, compared to 43.9 percent of nonelderly households. In fact, as the graph below shows, at nearly every income level, the elderly are more likely to pay no federal income tax. Furthermore, nearly two-thirds of elderly units have cash incomes under $50,000, where the difference between the two groups is the greatest. This largely reflects intentional features of the tax code to reduce elderly tax burdens. For example, the elderly are granted an expanded standard deduction and a special tax credit, and Social Security benefits are excluded from taxation. As the chart below shows, elderly tax units derive nearly 60 percent of their income from Social Security benefits, while earnings only make up 16 percent.

        Boomer Demographics: The Shift Ahead - The chart above is a snapshot of the U.S. population 30 years ago in 1982. I've highlighted the top of the Boomer cohort, generally defined as those born during the inclusive 19-year period from 1946 to 1964. By selecting 1982 as our start date, the oldest Boomers have completely filled the age 30-34 bar in our chart and occupy the three bars below, with Generation X slipping into the bottom of the age 15-19 cohort. Actually in 1982 the oldest Boomers, those born in 1946, were beginning to creep into the 35-39 cohort.If you click on the chart, you will see a set of links to seven pyramids at decade intervals: 1982, 1992, 2002, 2012, 2022, 2032 and 2042.  The movement of the Boomer bulge up the pyramid is obvious, as is the fact that it diminishes in size as mortality rates increase. The pyramid goes from a significantly lateral shape in 1982 to an increasingly vertical arch six decades later. At present and for the next decade, our pyramid is more of a "house" shape. The greater female longevity is readily apparent. Less immediately conspicuous is the growth in height of the pyramid as the increasing longevity of both sexes is factored into the estimates. But enough of the vague shape metaphors. Let's look at some comparative numbers for these seven snapshots. I've calculated the Elderly Dependency Ratios for each using the standard formula: The percentage of the population age 65 and over divided by the percentage age 15-64 multiplied by 100 (see note at bottom).

        Health Care and Romney's Taxes - Most Americans pay more in payroll taxes – which finance Social Security and Medicare – than they do in income taxes. The rich are different. Mitt and Ann Romney paid virtually no payroll taxes in 2011, because nearly all their income came from investments on which payroll tax was not owed. For most taxpayers, the 2.9 percent Medicare tax levied on wage income will be the same next year as it was in 2011. But starting in 2013, high-income taxpayers will pay more – and in the Romneys’ case – much more. Married taxpayers with income over $250,000 will pay a 3.8 percent Medicare tax rate on income over that amount, and all income will be covered, including the capital gains that make up most of the Romneys’ income. If their 2013 income were unchanged from this year, their Medicare tax bill would exceed $500,000. That tax was passed as part of the health care bill enacted by Congress and signed by President Obama in 2010 – a law known as “Obamacare.” Mr. Romney has pledged to seek repeal of that law.

        Why Competition Will Not Reduce The Price Of Medicare - Mitt Romney and Paul Ryan have proposed a plan to allow private firms to compete with Medicare to provide healthcare to retirees. Beginning in 2023, all retirees would get a payment from the federal government to choose either Medicare or a private plan. The contribution would be set at the second lowest bid made by any approved plan. Competition has brought us cheap high definition TVs, personal computers and other electronic goods but it won’t give us cheap healthcare. The healthcare market is complex because some individuals are more likely to require healthcare than others. The first point is that as firms target their plans to the healthy, competition is more likely to increase costs than lower them. David Cutler and Peter Orzag have made this argument. But there is a second point: the same factors that lead to higher healthcare costs also work against competition between Medicare and private plans. Unlike producers of HDTVs, private plans will not cut prices to attract more consumers so competition will not reduce the price of Medicare. A simple example exposes the logic of these two arguments. ...[gives example]...But there is an additional effect. Traditional competitive analysis would predict that one private plan or another will undercut the other plans to get more sales and make more profits. This is the process that gives us cheap HDTVs. The hope is that similar price competition should reduce the costs of healthcare. Unfortunately, competition will not work in this way in the healthcare market because of adverse selection

        Life expectancy isn’t always going up - Tyler Cowen notes that some life expectancies are shrinking: The steepest declines were for white women without a high school diploma, who lost five years of life between 1990 and 2008, said S. Jay Olshansky, a public health professor at the University of Illinois at Chicago and the lead investigator on the study, published last month in Health Affairs. By 2008, life expectancy for black women without a high school diploma had surpassed that of white women of the same education level, the study found. Regular readers will note that we discussed this trend a few months ago: Moreover, did you see my emphasis? Some counties in the US saw life expectancy drop over the last twenty years. Look at this map: The red areas are where life expectancy fell over twenty years for women. I’m willing to bet those also happen to be some of the poorest areas of the country. Think about that whenever someone talks about increasing the eligibility age for Medicare or Social Security. The people who lose the most benefits are also likely those who need the programs the most.

        Tax penalty to hit nearly 6M uninsured people: Nearly 6 million Americans — significantly more than first estimated— will face a tax penalty under President Barack Obama's health overhaul for not getting insurance, congressional analysts said Wednesday. Most would be in the middle class. The new estimate amounts to an inconvenient fact for the administration, a reminder of what critics see as broken promises. The numbers from the nonpartisan Congressional Budget Office are 50 percent higher than a previous projection by the same office in 2010, shortly after the law passed. The earlier estimate found 4 million people would be affected in 2016, when the penalty is fully in effect. That's still only a sliver of the population, given that more than 150 million people currently are covered by employer plans. Nonetheless, in his first campaign for the White House, Obama pledged not to raise taxes on individuals making less than $200,000 a year and couples making less than $250,000. And the budget office analysis found that nearly 80 percent of those who'll face the penalty would be making up to or less than five times the federal poverty level. Currently that would work out to $55,850 or less for an individual and $115,250 or less for a family of four. Average penalty: about $1,200 in 2016.

        Six million will pay health law penalty: study — Six million Americans, or roughly 2% of the current population, will end up paying a penalty for failing to have health insurance when the full effect of the 2010 health-care overhaul law is felt in 2016, according to the Congressional Budget Office. The CBO on Wednesday said the penalty of $695 or 2.5% of household income under the law formally known as the Affordable Care Act increases the number of those facing the penalty than originally was projected in April 2010, shortly after the law’s passage. The law contains an individual mandate requiring all Americans to have insurance or pay a penalty. Now, 2 million more people will be penalized and pay an additional $3 billion in fines than originally projected, according to the report, conducted by the CBO along with the Joint Committee on Taxation. “Most of the increase — about 85% — in the number of people who are expected to pay the penalty tax stems from changes in CBO and JCT’s baseline projections since April 2010, including the effects of legislation enacted since that time, changes in the economic outlook (primarily a higher unemployment rate and lower wages and salaries), and other technical updates,” the report says. The CBO goes on to say that roughly 15% of the increase is expected because of the recent Supreme Court decision that upholds the law but tells states they won’t be required to beef up their Medicaid programs.

        Health Care Thoughts: PPACA Penalty/Tax - The Congressional Budget Office predicts in 2016 up to 6 million largely middle income workers will pay the PPACA "tax" or "penalty" or whatever we decide to call it, averaging about $1200. This is about 50% higher than previous estimates of impacted taxpayers. A weak economy plays into the increased estimate. According to the CBO, most of the payers will be in the middle income workers. Does this constitute a middle class tax increase? In this political season hot rhetoric is flying from both sides. Expect the charges and counter charges to continue.

        Health Care Reform Beyond Obamacare - WE need death panels. Well, maybe not death panels, exactly, but unless we start allocating health care resources more prudently — rationing, by its proper name — the exploding cost of Medicare will swamp the federal budget. But in the pantheon of toxic issues — the famous “third rails” of American politics — none stands taller than overtly acknowledging that elderly Americans are not entitled to every conceivable medical procedure or pharmaceutical. Most notably, President Obama’s estimable Affordable Care Act regrettably includes severe restrictions on any reduction in Medicare services or increase in fees to beneficiaries. In 2009, Sarah Palin’s rant about death panels even forced elimination from the bill of a provision to offer end-of-life consultations. Now, three years on, the Republican vice-presidential nominee, Paul D. Ryan, has offered his latest ambitious plan for addressing the Medicare problem. But like Mr. Obama’s, it holds limited promise for containing the program’s escalating costs within sensible boundaries. The Obama and Ryan plans are not without common ground; both propose an identical formula for capping the growth in Medicare spending per beneficiary. And both dip into the same toolbox (particularly lower payments to providers) to achieve a reduction of nearly $1 trillion in Medicare expenditures over the next decade from projected levels. That’s where the agreement ends. Mr. Ryan believes that meeting the goal over the long term requires introducing more competition into Medicare through vouchers to purchase private insurance. 

        Fat and getting fatter: U.S. obesity rates to soar by 2030 (Reuters) - If Americans stick to their eating and exercise habits, future historians will look back on the early 21st century as a golden age of svelte. Using a model of population and other trends, a new report released on Tuesday by the Trust for America's Health and the Robert Wood Johnson Foundation projects that half of U.S. adults will be obese by 2030 unless Americans change their ways. The "F as in Fat" report also highlights the current glum picture of the U.S. obesity epidemic, in which 35.7 percent of adults and 16.9 percent of children age 2 to 19 are obese, as the Centers for Disease Control and Prevention (CDC) reported earlier this year. But in its first forecast, the report builds on state-by-state data from the CDC to project obesity rates. In every state, that rate will reach at least 44 percent by 2030. In 13, that number would exceed 60 percent. Obesity raises the risk of numerous diseases, from type 2 diabetes to endometrial cancer, meaning more sick people and higher medical costs in the future, the report said. It projects as many as 7.9 million new cases of diabetes a year, compared with 1.9 million new cases in recent years. There could also be 6.8 million new cases of chronic heart disease and stroke every year, compared with 1.3 million new cases a year now. The increasing burden of illness will go right to the bottom line, adding $66 billion in annual obesity-related medical costs over and above today's $147 billion to $210 billion. Total U.S. healthcare spending is estimated at $2.7 trillion.

        Higher levels of BPA in children and teens significantly associated with obesity: Researchers at NYU School of Medicine have revealed a significant association between obesity and children and adolescents with higher concentrations of urinary bisphenol A (BPA), a synthetic chemical recently banned by the U.S. Food and Drug Administration (FDA) from sippy cups and baby bottles. Still, the chemical continues to be used in aluminum cans, such as those containing soda. “This is the first association of an environmental chemical in childhood obesity in a large, nationally representative sample,” “Our findings further demonstrate the need for a broader paradigm in the way we think about the obesity epidemic. Unhealthy diet and lack of physical activity certainly contribute to increased fat mass, but the story clearly doesn’t end there.” “In the U.S. population, exposure [to BPA] is nearly ubiquitous, with 92.6 percent of persons 6 years or older identified in the 2003-2004 National Health and Nutrition Examination Survey (NHANES) as having detectable BPA levels in their urine. A comprehensive, cross-sectional study of dust, indoor and outdoor air, and solid and liquid food in preschool-aged children suggested that dietary sources constitute 99 percent of BPA exposure,” the investigators wrote. BPA, a low-grade estrogen, was until recently found in plastic bottles labeled with the number 7 recycling symbol, and is still used as an internal coating for aluminum cans. Manufacturers say it provides an antiseptic function, but studies have shown the chemical disrupts multiple mechanisms of human metabolism that may increase body mass. BPA exposure has also been associated with cardiovascular disease, breast cancer, prostate cancer, neurological disorders, diabetes and infertility.

        Is the Can Worse Than the Soda? Study Finds Correlation Between BPA and Obesity - Since the 1960s, manufacturers have widely used the chemical bisphenol-A (BPA) in plastics and food packaging. Only recently, though, have scientists begun thoroughly looking into how the compound might affect human health—and what they’ve found has been a cause for concern.  Starting in 2006, a series of studies, mostly in mice, indicated that the chemical might act as an endocrine disruptor (by mimicking the hormone estrogen), cause problems during development and potentially affect the reproductive system, reducing fertility. After a 2010 Food and Drug Administration report warned that the compound could pose an especially hazardous risk for fetuses, infants and young children, BPA-free water bottles and food containers started flying off the shelves. In July, the FDA banned the use of BPA in baby bottles and sippy cups, but the chemical is still present in aluminum cans, containers of baby formula and other packaging materials. Now comes another piece of data on a potential risk from BPA but in an area of health in which it has largely been overlooked: obesity. A study by researchers from New York University, published today in the Journal of the American Medical Association, looked at a sample of nearly 3,000 children and teens across the country and found a “significant” link between the amount of BPA in their urine and the prevalence of obesity.

        Reversing Trend, Life Span Shrinks for Some Whites - For generations of Americans, it was a given that children would live longer than their parents. But there is now mounting evidence that this enduring trend has reversed itself for the country’s least-educated whites, an increasingly troubled group whose life expectancy has fallen by four years since 1990. Researchers have long documented that the most educated Americans were making the biggest gains in life expectancy, but now they say mortality data show that life spans for some of the least educated Americans are actually contracting. Four studies in recent years identified modest declines, but a new one that looks separately at Americans lacking a high school diploma found disturbingly sharp drops in life expectancy for whites in this group. Experts not involved in the new research said its findings were persuasive. The reasons for the decline remain unclear, but researchers offered possible explanations, including a spike in prescription drug overdoses among young whites, higher rates of smoking among less educated white women, rising obesity, and a steady increase in the number of the least educated Americans who lack health insurance. The steepest declines were for white women without a high school diploma, who lost five years of life between 1990 and 2008,  By 2008, life expectancy for black women without a high school diploma had surpassed that of white women of the same education level, the study found.

        Flesh-Eating Bacteria: Researchers Challenge Doctors To Diagnosis Necrotizing Fasciitis Early -- With 2,000 to 3,000 patients killed by necrotizing fasciitis each year, early diagnosis of the flesh-eating bacteria is of the utmost importance. That's what Russell Russo, an orthopedic surgeon at LSU Health Sciences Center New Orleans, and his team are stressing in the September 2012 issue of Orthopedics Today. While the flesh-eating bacteria is relatively rare in comparison to the incidence rates of other diseases and disorders, the ratio of deaths -- at best, 2,000 out of the 10,000 to 15,000 cases diagnosed each year -- is high enough to warrant the call for earlier diagnosis. "The infection can rapidly spread at a rate of one centimeter per hour," Russo told Orthopedics Today. "People who have their surgery and debridement within 10 to 24 hours once they hit the door, do much better than the patients for whom the diagnosis is not made for days." Russo recommends that doctors maintain a high suspicion of the flesh-eating bacteria when treating patients with symptoms that fall in line with the infection. A physical examination is also necessary, since imaging scans such as X-rays may not detect the infection and can be quite time-consuming.

        Scientists Make Progress in Tailor-Made Organs - Two and a half years ago doctors in Iceland, where Mr. Beyene was studying to be an engineer, discovered a golf-ball-size tumor growing into his windpipe. Despite surgery and radiation, it kept growing. In the spring of 2011, when Mr. Beyene came to Sweden to see another doctor, he was practically out of options. “I was almost dead,” he said. “There was suffering. A lot of suffering.”  But the doctor, Paolo Macchiarini, at the Karolinska Institute here, had a radical idea. He wanted to make Mr. Beyene a new windpipe, out of plastic and his own cells.  Implanting such a “bioartificial” organ would be a first-of-its-kind procedure for the field of regenerative medicine, which for decades has been promising a future of ready-made replacement organs — livers, kidneys, even hearts — built in the laboratory.  For the most part that future has remained a science-fiction fantasy. Now, however, researchers like Dr. Macchiarini are building organs with a different approach, using the body’s cells and letting the body itself do most of the work.

        Mother-To-Daughter Uterus Transplants Conducted By Swedish Doctors: Two Swedish women are hoping to get pregnant after undergoing what doctors are calling the world's first mother-to-daughter uterus transplants. Specialists at the University of Goteborg said they performed the surgery over the weekend without complications but added that they won't consider it successful unless the women give birth to healthy children. One of the unidentified women had her uterus removed many years ago because of cervical cancer, while the other was born without a womb. Both are in their 30s. They will undergo a year of observation before doctors attempt to help them get pregnant via in vitro fertilization, in which embryos created with eggs from their own ovaries will be implanted in their wombs.

        'Three-parent baby' fertility technique could be made legal -- Members of the public are being asked whether families with a genetic risk of incurable conditions like muscular dystrophy should be allowed to use the DNA of a third party to create healthy children. Although the resulting babies would inherit a small fraction of their DNA from the donor and not their mother or father, the procedure would spare all future generations from a host of rare and debilitating conditions. The technique is currently forbidden as a treatment, but a public consultation launched today will help inform a decision by Jeremy Hunt, the health secretary, on whether the clinical benefits outweigh any ethical concerns. Experts accept the technique, which involves genetically modifying a human egg or embryo, enters "unchartered territory" and raises serious ethical questions. As well as the moral implications of engineering embryos, there are questions over how the procedure would impact on a child's sense of identity and whether they should be allowed to contact the donor later in life.

        Monsanto weedkiller and GM maize in 'shocking' cancer study- The world’s best-selling weedkiller, and a genetically modified maize resistant to it, can cause tumours, multiple organ damage and lead to premature death, new research published today reveals. In the first ever study to examine the long-term effects of Monsanto’s Roundup weedkiller, or the NK603 Roundup-resistant GM maize also developed by Monsanto, scientists found that rats exposed to even the smallest amounts, developed mammary tumours and severe liver and kidney damage as early as four months in males, and seven months for females, compared with 23 and 14 months respectively for a control group. “This research shows an extraordinary number of tumours developing earlier and more aggressively - particularly in female animals. I am shocked by the extreme negative health impacts,” said Dr Michael Antoniou, molecular biologist at King’s College London, and a member of CRIIGEN, the independent scientific council which supported the research. GM crops have been approved for human consumption on the basis of 90-day animal feeding trials. But three months is the equivalent of late adolescence in rats, who can live for almost two years (700 days), and there have long been calls to study the effects over the course of a lifetime.

        New Study Finds “Severe Toxic Effects” of Pervasively Used Monsanto Herbicide Roundup and Roundup Ready GM Corn (Updated) -- Yves Smith - I have a special interest in Monsanto. Last year, I had wanted to devise a list or ranking of top predatory companies, but could not find a way to make the tally sufficiently objective to be as useful in calling them out as it ought to be. Nevertheless, no matter how many ways I looked at the issue, it was clear that any ranking would put Monsanto as number 1. Monsanto has (among other things) genetically engineered seeds so that they can’t reproduce, denying farmers the ability to save seeds and have a measure of financial independence. In 2009, Vandana Shiva estimated that 200,000 farmers in India had committed suicide since 1997, and Monsanto was a major culprit: In 1998, the World Bank’s structural adjustment policies forced India to open up its seed sector to global corporations like Cargill, Monsanto and Syngenta. The global corporations changed the input economy overnight. Farm saved seeds were replaced by corporate seeds, which need fertilizers and pesticides and cannot be saved. Corporations prevent seed savings through patents and by engineering seeds with non-renewable traits. As a result, poor peasants have to buy new seeds for every planting season and what was traditionally a free resource, available by putting aside a small portion of the crop, becomes a commodity. This new expense increases poverty and leads to indebtness. Monsanto’s seeds can also sterilize wild crops via contamination. And Monsanto routinely sues farmers who wind up having some Monsanto seeds by virtue of seeds from neighboring farms blowing onto their property. Monsanto managed to extend the life of its patent both legally and far more important, practically, via the genetic engineering described above. The result is that Roundup has been far and away the most widely used herbicide in the US for over 30 years. And that little fact makes a newly-released study particularly troubling. The study, by Dr. Joel Spiroux and Professor Gilles-Eric Seralini, was published in Food and Chemical Toxicology as “Long term toxicity of a herbicide Roundup and Roundup-tolerant genetically has modified maize.” Below is the published article. Be sure to look at the photos. Long Term Toxicity of Roundup Herbicide

        Study on Monsanto GM corn concerns draws skepticism - In a study that prompted sharp criticism from other experts, French scientists said on Wednesday that rats fed on Monsanto's genetically modified corn or exposed to its top-selling weedkiller suffered tumors and multiple organ damage. The French government asked the country's health watchdog to investigate the findings further, although a number of scientists questioned the study's basic methods and Monsanto said it felt confident its products had been proven safe. Gilles-Eric Seralini of the University of Caen and colleagues said rats fed on a diet containing NK603 - a seed variety made tolerant to dousings of Monsanto's Roundup weedkiller - or given water with Roundup at levels permitted in the United States, died earlier than those on a standard diet. Experts not involved in the study were skeptical, with one accusing the French scientists of going on a "statistical fishing trip" and others describing its methods as well below standard. The animals on the genetically modified (GM) diet suffered mammary tumors, as well as severe liver and kidney damage, according to the peer-reviewed study which was published in the journal Food and Chemical Toxicology and presented at a news conference in London. The researchers said 50 percent of male and 70 percent of female rats died prematurely, compared with only 30 percent and 20 percent in the control group.

        BBC News - Superweeds pose GM-resistant challenge for farmers: US farmers are facing a growing challenge from weeds resistant to chemical sprays, and enduring millions of dollars in losses as a result. The so-called "superweeds" have arisen because of the success of genetically modified crops, which now account for the vast majority of US corn, soya and cotton. GM essentially means that crops are protected from one type of chemical weedkiller. But because farmers have become over-reliant on this one product, weeds with natural resistance have spread rapidly and have strangled production on millions of acres. Scientists say the solution to the widespread resistance problem is a new type of GM that uses a powerful weedkiller that was once part of Agent Orange, the defoliant widely used during the Vietnam war. Warmer Temperatures Make New USDA Plant Zone Map Obsolete - Gardeners and landscapers may want to rethink their fall tree plantings. Warming temperatures have already made the U.S. Department of Agriculture’s new cold-weather planting guidelines obsolete, according to Dr. Nir Krakauer, assistant professor of civil engineering in The City College of New York’s Grove School of Engineering.Professor Krakauer developed a new method to map cold-weather zones in the United States that takes rapidly rising temperatures into account. Analyzing recent weather data, he overhauled the Department of Agriculture’s latest plant zone map released in January.   The new USDA Plant Hardiness Zone Map, which predicts which trees and perennials can survive the winter in a given region, was a long time coming. Temperature boundaries shown in the latest version have shifted northward since the last one appeared in 1990. But the true zones have moved even further, according to Professor Krakauer’s calculations. “Over one-third of the country has already shifted half-zones compared to the current release, and over one-fifth has shifted full zones,” Professor Krakauer wrote this summer in the journal “Advances in Meteorology.”

        Mystery of the disappearing bees: Solved! - If it were a novel, people would criticize the plot for being too far-fetched – thriving colonies disappear overnight without leaving a trace, the bodies of the victims are never found. Only in this case, it’s not fiction: It’s what’s happening to fully a third of commercial beehives, over a million colonies every year. Seemingly healthy communities fly off never to return. The queen bee and mother of the hive is abandoned to starve and die. Thousands of scientific sleuths have been on this case for the last 15 years trying to determine why our honey bees are disappearing in such alarming numbers. “This is the biggest general threat to our food supply,” according to Kevin Hackett, the national program leader for the U.S. Department of Agriculture’s bee and pollination program. Until recently, the evidence was inconclusive on the cause of the mysterious “colony collapse disorder” (CCD) that threatens the future of beekeeping worldwide. But three new studies point an accusing finger at a culprit that many have suspected all along, a class of pesticides known as neonicotinoids. In the U.S. alone, these pesticides, produced primarily by the German chemical giant Bayer and known as “neonics” for short, coat a massive 142 million acres of corn, wheat, soy and cotton seeds. They are also a common ingredient in home gardening products. Research published last month in the prestigious journal Science shows that neonics are absorbed by the plants’ vascular system and contaminate the pollen and nectar that bees encounter on their rounds. They are a nerve poison that disorient their insect victims and appear to damage the homing ability of bees, which may help to account for their mysterious failure to make it back to the hive.

        Bitter Harvest: U.S. Farmers Blame Billion-Dollar Losses on Immigration Laws - Ralph and Cheryl Broetje rely on roughly 1,000 seasonal workers every year to grow and pack over 6 million boxes of apples on their farm along the Snake River in eastern Washington. It’s a custom they’ve maintained for over two decades. Recently, though, their efforts to recruit skilled labor, mostly undocumented immigrants, have come woefully short, despite intensive recruitment efforts in an area with high rates of unemployment. The Broetjes, and an increasing number of farmers across the country, say that a complex web of local and state anti-immigration laws account for acute labor shortages. With the harvest season in full bloom, stringent immigration laws have forced waves of undocumented immigrants to flee certain states for more hospitable areas. In their wake, thousands of acres of crops have been left to rot in the fields, as farmers have struggled to compensate for labor shortages with domestic help. “The enforcement of immigration policy has devastated the skilled labor source that we’ve depended on for 20 or 30 years,” said Ralph Broetje during a recent teleconference organized by the National Immigration Forum, adding that last year Washington farmers—part of an $8 billion agricultural industry—were forced to leave 10% of their crops rotting on vines and trees. “It’s getting worse each year,” says Broetje, “and it’s going to end up putting some growers out of business if Congress doesn’t step up and do immigration reform.”

        3rd warmest summer on record for world –  While the USA sweated through one of its warmest summers on record, so, too, did the rest of the globe, federal scientists from the National Climatic Data Center announced Monday. The average summer temperature over global land and ocean surfaces tied with 2005 as the third-highest on record at 61.25 degrees F, or 1.15 degree F above the 20th century average of 60.1 degrees F. Only the summers of 1998 and 2010 were warmer. Records go back to 1880. Climatologists define summer in the Northern Hemisphere as the months of June, July and August. The climate center is a branch of the National Oceanic and Atmospheric Administration (NOAA). "Considering global land surfaces only, June - Aug. 2012 was record warm, at 1.85 degrees above average," the center's online report stated. The most unusual warmth occurred across parts of the Northern Hemisphere, including most of the United States and Canada, southern and eastern Europe, Kazakhstan and eastern Siberia. Droughts in the USA, eastern Russia and India all contributed to the high heat, says Jessica Blunden, climate scientist with the data center. If you have drought, the atmosphere doesn't have the moisture available to lessen the heat, she says. Also, Blunden says the change from La Nina, a cooling of Pacific Ocean water, to El Nino, a warming of that water, was another main factor in driving the global heat.

        June Through August Was Warmest Period For Global Land Temperature Ever Recorded - The average global land surface temperature between June and August of 2012 was the warmest ever recorded, according to data from the National Climatic Data Center. The three month period saw an average land temperature that was 1.03°C (1.85°F) above the 20th century average. When factored with ocean surface temperature, the average global temperature between June and August was the third warmest in recorded history, coming in at 0.64°C (1.15°F) above the 20th century average.  This follows a report from the National Oceanic and Atmospheric Administration showing that the period between January and August was the warmest on record for the lower 48 states and featured the most extreme weather ever recorded.

        State of the Climate: National Oceanic and Atmospheric Administration - National Climatic Data Center - August 2012

        World Hunger: The Problem Left Behind, by Tyler Cowen - The drought-induced run-up in corn prices is a reminder that we’re nowhere near solving the problem of feeding the world. The price surge, the third major international food price spike in the last five years, casts more doubt on the assumption that widespread economic development leads to corresponding gains in agriculture.  The green revolution has slowed since the early 1990s, and it has become harder to bolster crop yields... And recent research by Dani Rodrik, a professor of international political economy at Harvard, indicates that agricultural productivity improvements are among the hardest to transmit from one nation to another.  For all its importance to human well-being, agriculture seems to be one of the lagging economic sectors of the last two decades. That means the problem of hunger is flaring up again, as the World Bank and several United Nations agencies have recently warned.  Consider Africa, which is often considered to have turned a corner and to be headed toward steady growth. The expansion of the African middle class and the decline in child mortality rates are both quite real, but the advances have not been balanced — and agriculture lags behind.

        Extreme Weather, Extreme Prices: The costs of feeding a warming world - Climate change is making extreme weather much more likely. As the 2012 drought in the USA shows, extreme weather means extreme food prices. Our failure to slash greenhouse gas emissions presents a future of greater food price volatility, with severe consequences for the precarious lives and livelihoods of people living in poverty. This briefing draws on new research commissioned by Oxfam which models the impact of extreme weather – like droughts, floods and heat waves – on the prices of key international staple crops in 2030. It suggests that existing research, which considers the gradual effects of climate change but does not take account of extreme weather, is significantly underestimating the potential implications of climate change for food prices. This research shows how extreme weather events in a single year could bring about price spikes of comparable magnitude to two decades of long-run price rises. It signals the urgent need for a full stress-testing of the global food system in a warming world.

        Drought hurts rural economy in 10 states - CBS News: — The economy in rural parts of 10 Midwest and Western states continued to look weak in September as the drought weighed down agricultural businesses. A new survey of bankers in the region released Thursday showed that the overall economic index remained in negative territory at 48.3 in September. That was slightly better than August's 47.1 and July's 47.9, but any score below 50 on the 1-to-100 index suggests that the economy will contract in months ahead. Creighton University economist Ernie Goss says the drought is already hurting businesses linked to agriculture like ethanol and farm equipment dealers. The survey covers rural areas of Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming. The confidence index was also weak at 43 in September, up from August's 39.6.

        Drought Grows, Forecast to Persist Through Early Winter - The massive and widespread 2012 drought that has gripped the nation since the spring refuses to die, according to the latest report from the U.S. Drought Monitor — and in fact, it’s expanded a little: as of September 18, 64.82 percent of the contiguous U.S. was suffering from at least moderate drought, slightly more than the 64.16 percent reported a week earlier, enough of a gain to set a new record for this drought category. At the same time, NOAA released its seasonal drought outlook for the period ending December 31, and it offers little prospect for significant improvement. Drought is projected to persist in a huge swath of the country, especially in the West from Southern California to West Texas, north to Wisconsin, and back west to Montana, Idaho, southeastern Oregon and back down to Nevada — and everywhere in between. In addition, drought conditions are projected to develop during the period in the rest of the Pacific Northwest and Upper Midwest. A small swath from south Texas up through Indiana and parts of Ohio may see “some improvement” in drought conditions, as might parts of Alabama, Georgia and South Carolina. The rest of the East and Southeast are mostly unaffected by drought at this time, and that is projected to continue.

        Musical Chairs in the Corn and Ethanol Markets - Argentina, Brazil, the Ukraine and South Africa have responded to global high corn prices by producing more corn and their competitiveness on the export market has now surpassed ours.

        • The U.S. share of world corn exports averaged 60 percent from 2003/04 through 2007/08.
        • The U.S. export market share for 2012/13 is expected to be 37 percent.
        • While the United States has dominated world corn trade, exports accounted for only a relatively small portion of demand for U.S. corn—about 15 percent. Whereas the corn ethanol program is consuming 40 percent of the crop.
        • Because Argentina, Brazil, and South Africa are in the Southern Hemisphere, these corn exporters can quickly respond to weather and high corn prices resulting from the U.S. season.
        • U.S. corn exports for the October-September trade year 2012/13 are expected to be 33.5 million metric tons. This is the lowest level of U.S. corn exports since 1993/94, when global corn trade was 47 percent less than projected for 2012/13.

        Sorghum in spotlight due to drought, pending EPA action : For years, National Sorghum Producers have advocated for increasing the use of grain sorghum, or milo, as an ethanol feedstock. Lately, the idea seems to be gaining steam. “There’s been increased interest over the past few months,” said John Duff, renewables program director for the United Sorghum Checkoff Program. The first driver is drought, which has prompted some ethanol producers to search for alternate feedstocks, Duff said. While sorghum does have its limits, it’s more drought tolerant than corn, said Steve McNinch, CEO of Western Plains Energy LLC. “Corn is like a quarter horse, it will eventually run out of water and die. Grain sorghum is kind of like a donkey, it will wait for a while. You will eventually have to water it but it’s stubborn enough to wait. It’s a tropical plant so it likes the heat a lot better.”

        EPA increases biodiesel requirement for trucks - Iowa’s renewable energy industry picked up a big win Friday when the U.S. Environmental Protection Agency approved a 28 percent increase in the amount of biodiesel required for use in the nation’s trucks in 2013. The decision by the EPA to boost the blend total for biodiesel to 1.28 billion gallons is a boon for Iowa, the country’s largest producer with 13 facilities and the capacity to produce 320 million gallons annually. The Iowa Renewable Fuels Association said the increase will provide much-needed marketplace certainty and promote the continued growth of domestic advanced biofuels production and green jobs.

        What's Behind the EPA's New 4-Gallon Mandate? - So what's this all about? Well, the ethanol industry has been lobbying for a quite a while to sell E15 — a blend of 85% gasoline and 15% ethanol. As it turns out, though, the anti-E15 crowd has some intriguing arguments. The primary one is that E15 only works in cars manufactured after 2001. It doesn't work in older cars, it doesn't work in boats, and, as the Outdoor Power Equipment Institute will tell you, it doesn't work in devices like chain saws, utility vehicles, and lawn mowers. In fact, it can destroy those things if you use it accidentally. But it gets worse. Most gas stations don't want to install new tanks just for E15. Instead, they're installing blender pumps, which mix the ethanol and gasoline together in the right proportion depending on which one you want. But there's a problem: if you pump E15 into your car, about a third of a gallon remains in the fueling hose when you're done. If someone comes along, switches to E10, and buys a single gallon for their lawnmower, they'll get a third of a gallon of E15 and two-thirds of a gallon of E10. That comes to about 11.7% ethanol, and that might be enough to set your lawnmower on fire. So the EPA produced a new rule: if you sell E15, you have to require your customers to buy at least four gallons of gas regardless of what blend they're buying. That's a big enough purchase that the residual fuel in the hose is too small to matter.

        Environmental Protection Up in Smoke - When the wildfires that are burning millions of acres in the West are finally smothered by winter snows, environmentalists undoubtedly will blame climate change. They might look in the mirror instead.  Environmental laws since the 1970s require public input into federal land-use decisions including logging on national forests. This has led to lawsuits challenging efforts by the U.S. Forest Service to prevent forest fires by thinning out trees (most of which are dead or diseased) and brush by machines and carefully controlled burns. This dead wood is the fuel that feeds catastrophic wildfires. Removing the fuel reduces the likelihood of fires, and if fires do break out, makes them easier to fight. Meanwhile, the suppression of fires costs the federal government nearly $2.5 billion annually. A fuels-management project to log and thin 4,800 acres in the Bozeman, Mont., watershed exemplifies the problem. This project has been held up since 2010 on grounds that the environmental-impact assessment did not adequately protect the habitat of the Canadian lynx and the grizzly bear, both listed as threatened species. Now a wildfire threatens the watershed, burning over 10,000 acres and costing more than $2 million to fight. As one firefighter put it, "fire is the environmentalist's way of thinning the forests."

        It's the food prices, stupid - Once again the world is shocked to see how quickly unrest can erupt across the Muslim world, spreading almost overnight into numerous nations: Tunisia, Egypt, Sudan, Yemen, Pakistan, etc. The trigger this time happened to be an idiotic YouTube post called Innocence of Muslims which pokes fun at Prophet Muhammad and the origins of Islam. Time: - In a saner world, the trailer for Innocence of Muslims would get no response other than as an example of terrible filmmaking. The 14-minute video, purporting to be excerpted from a larger movie propagandizing present-day Muslims and the life of Muhammad, is confoundingly bad, filled with incongruous accents, haphazard cuts, ludicrous dialogue and green-screen so bad that the actors appear to be floating in the air. But how is it that this fringe video could suddenly generate this much hatred and violence - taking numerous lives in the process? The answer is that just as Arab Spring had little to do with zeal for democratic freedom (discussed here), these new violent protests have little to do with a new surge in anti-American sentiment (which has been strong for generations). The unfortunate reality is that this unrest in numerous Muslim nations (as predicted here) is driven, far more than anything else, by the rise in food prices across the region. This is the same phenomena that toppled brutal dictators who were able to cling to power for decades. The Economist: - “The food-price spike was the final nail in the coffin for regimes that were failing to deliver on their side of the social contract,”

        Just 100 cod left in North Sea - Overfishing has left fewer than 100 adult cod in the North Sea, it was reported.  A survey of catches at European ports has found that fishermen did not catch a single cod over the age of 13 last year.  The findings raise concerns for future stocks of cod, which become more fertile as they age. The fish can live as long as 25 years and grow to 6ft.  Researchers warned a lower life expectancy meant a lower birth rate and a faster decline.  Callum Roberts, professor of marine biology at York University, told the Sunday Times that intense industrial fishing meant that few fish survived beyond the age of four, when they reach sexual maturity. “This means that there are fewer eggs and larvae to perpetuate future generations,” he said.

        Baltic Sea Dead Zones Show No Improvement - Based on data collected by its research ships this past summer, the Finnish Environment Institute (SYKE) reported Friday that the overall situation now is just as critical as in the summer of 2011. The seabed of the Baltic Sea's main basin still suffers from major 'dead zones' without oxygen or any form of life. Conditions have remained extremely poor in recent years. However there has been some improvement in the deep seabed of the Gulf of Finland. And the oxygen situation in the northern parts of the Baltic, known as Bay of Bothnia and the Sea of Bothnia, remains good. The level of toxic blue-green algae in the Gulf of Finland remains about the same as a year ago. Again conditions in the Bay of Bothnia and the Sea of Bothnia are clearly better than elsewhere. SYKE's research vessels Aranda and Muikku spent most of the summer monitoring changes in zoobenthos (communities of seabed organisms), eutrophication and oxygen levels in the Baltic Sea. The shallow Baltic is the world's second-largest body of brackish water, and considered one of the planet's most fragile and polluted seas.

        Study: Deeper CO2 Cuts Needed to Save World's Dying Corals - Limiting climate change to two degrees C won’t save most coral reefs, according to new, state-of-the-art research.About 70 percent of corals are projected to suffer from long-term degradation by 2030 with two degrees C of warming, the first comprehensive global survey reported Sunday in the journal Nature Climate Change. The planet will get far hotter than two degrees C based on current commitments by countries to reduce their greenhouse gas emissions, mainly from burning oil, gas and coal. Humanity is on course to heat up the atmosphere an average of three and even four degrees C, according to the Climate Action Tracker, an international scientific monitor. Those temperature levels are what most scientists consider “catastrophic”.

        Hottest Ever Water Temperatures Off East Coast All the Way Down to the Bottom of the Ocean |-Sea surface temperatures (SSTs) off the East Coast from North Carolina to the Gulf of Maine were the hottest ever recorded for the first six months of 2012, according to NOAA's latest Ecosystem Advisory.  Above-average temperatures were found everywhere: from the sea surface to the ocean bottom and out beyond the Gulf Stream. The area is known as the Northeast Shelf Large Marine Ecosystem. Parts of it were declared a fisheries disaster last week (I posted about that here: Fisheries Declared Disasters on Four Coasts). This was due to the fact that stocks of cod, yellowtail flounder, and other groundfish are not rebuilding even though most fishers have adhered to tough quotas. The problem lies in the warming waters. The super warm SSTs of 2012 jumpstarted an early and intense spring plankton bloom—which began in some places as early as February—and lasted longer than average. This ricocheted through the marine foodweb from the smallest creatures to the largest marine mammals like whales.  It forced the ongoing trend whereby Atlantic cod are shifting northeastward from their historic distribution center. That's consistent with a response to ecosystem warming—as you can see that in the two maps above. The top map shows cod distribution between 1968-1972. The bottom map shows cod distribution between 2008-2012. (All other four-year distribution maps for the interim here.)

        Mysterious changes in ocean salt spur NASA expedition - CBS News: Over the past 50 years, the salty parts of the oceans have become saltier and the fresh regions have become fresher, and the degree of change is greater than scientists can explain. Researchers are heading out into one particularly salty ocean region, in the middle of the North Atlantic Ocean, in the hopes of better understanding what drives variation in salinity in the upper ocean. Ultimately, they hope, research like this will offer insight on the dynamics behind the dramatic changes in the ocean's salt content. Many oceanographers have a hunch about what is going on: Climate change, Ray Schmitt, a senior scientist at the Woods Hole Oceanographic Institution, told journalists during a news conference Wednesday (Sept. 5). "Climate is changing all the time, and some of that change is due to natural variation," Schmitt said. "The 50-year trend we are talking about, most of us believe is really due to the general trend of global warming."

        MIT Study: For Every 1 Degree C Rise In Temperature, Tropical Regions Will See 10 Percent Heavier Rainfall Extremes - Extreme precipitation in the tropics comes in many forms: thunderstorm complexes, flood-inducing monsoons and wide-sweeping cyclones like the recent Hurricane Isaac. Global warming is expected to intensify extreme precipitation, but the rate at which it does so in the tropics has remained unclear. Now an MIT study has given an estimate based on model simulations and observations: With every 1 degree Celsius rise in temperature, the study finds, tropical regions will see 10 percent heavier rainfall extremes, with possible impacts for flooding in populous regions. “The study includes some populous countries that are vulnerable to climate change,” says Paul O’Gorman, the Victor P. Starr Career Development Assistant Professor of Atmospheric Science at MIT, “and impacts of changes in rainfall could be important there.” O’Gorman found that, compared to other regions of the world, extreme rainfall in the tropics responds differently to climate change. “It seems rainfall extremes in tropical regions are more sensitive to global warming,” O’Gorman says. “We have yet to understand the mechanism for this higher sensitivity.”

        Thawing permafrost speeding up global warming - Permafrost soils in Canada's Arctic are melting at a rate that will significantly speed up global warming, according to new research from the University of Victoria. The study, published this week in Nature Geoscience, predicts that the thawing permafrost will release between 68 billion and 508 billion tonnes of carbon into the atmosphere by the year 2100. As a result of those carbon emissions, researchers say the Earth's temperature will rise by more than 0.5 C by the end of the century. Although seemingly insignificant, that amount is in addition to the two degrees the Earth's temperature is expected to rise because of global warming from industrial sources. Andrew Weaver, a climate scientist at the University of Victoria and one of the study's authors, warns that once the planet warms by more than two degrees, the impact could be dire. "Warming much beyond that puts an unacceptably high probability that we're committed to Greenland melting," Weaver said in an interview. "Rather large percentages of existing species become committed to extinction." Experts estimate that permafrost soils contain 1,700 billion tonnes of carbon, about four times the amount emitted since the industrial revolution.

        Northern Hemisphere Sea Ice Area - Interactive Chart: hover over the timeseries or the legend

        The Early Summer Arctic Dipole - The two papers introduced in the previous post offer some ideas as to what may be causing this change in atmospheric circulation. I've no doubt we'll see a number of interesting papers getting to the root cause of the shift to repeated early summer Arctic Dipole (AD) pattern since 2007. But what is known at present and what ideas are there about the cause? First, key to understanding the cause is to understand the process, as far as it is understood at present. It's been suggested by several people that this change is because the centre of atmospheric circulation has shifted to Greenland. I've been dismissive of one explanation, that the centre of high pressure has moved to the Greenland ice sheet as the nearest available patch of cold air over ice. But the idea of the centre of action shifting to Greenland is one I'm starting to have sympathy with. Here is an NCEP/NCAR plot (source) of the baseline mean geopotential height (GPH) for 500mb pressure (1981 to 2010).

        Jakobshavn Glacier's calving front continues to retreat - In terms of ice flow discharge, one of Greenland’s most productive outlets from the inland ice sheet, if not the most productive glacier in the Northern Hemisphere, the Ilulissat glacier (also known as the Jakobshavn glacier) continues to retreat. The net area change at this glacier since late summer 2000 is a loss of 122 sq. km, equivalent with 1.4 x Manhattan Is., retreating effectively 18 km (11.2 miles) in 12 years. In 2012, this glacier front lost an an area of 13 sq. km, measured from August 2011 to August 2012. This year’s area loss is the largest since the 2007-2008 interval. A concern is that this and other major marine terminating glaciers, as they retreat, they accelerate, increasing their global sea level contribution. Indeed, once the ice shelf in front of this glacier disintegrated, by the end of summer 2003, its speed had doubled (Joughin et al., 2004).Flying over Ilulissat glacier this July, it was stunning to notice how retreat has proceeded upstream into a northern tributary, producing effectively two main calving fronts to this ice sheet outlet. The faster stream from the west off the right side of the photo also remains in retreat. The glacier is based below sea level more than 75 km inland

        Greenland’s ‘ice quakes’ on track to break record set in 2005 - One of the more amazing facts about the ongoing destruction of the Greenland ice sheet is that it is producing earthquakes that can be detected worldwide. Now, fresh evidence is at hand to show that these “ice quakes” are spreading to previously quiescent parts of Greenland. We’re only in September, but it seems increasingly likely that 2012 will set a record for such quakes. Some readers may remember my article from 2010 about the acceleration of Greenland’s outlet glaciers, which carry ice from the middle of the great ice sheet and dump it into the sea. Their speedup, in fits and starts over the past decade, has coincided with a lot of other evidence that the ice sheet is deteriorating at an accelerating clip. And it is the calving of huge icebergs from these sped-up glaciers that is producing the earthquakes. They are many times weaker than, say, the earthquake off the coast of Japan last year, but they are strong enough to be detected by the worldwide network of seismometers.

        The staggering decline of sea ice at the frontline of climate change - The vast polar ice cap, which regulates the Earth's temperature and has been a permanent fixture in our understanding of how the world works, has this year retreated further and faster than anyone expected. The previous record, set in 2007, was officially broken on 27 August when satellite images averaged over five days showed the ice then extended 4.11 million sq km, a reduction of nearly 50% compared to just 40 years ago. But since 27 August, the ice just kept melting – at nearly 40,000 sq km a day until a few days ago. Satellite pictures this weekend showed the cap covering only 3.49 million sq km. This year, 11.7 m sq km of ice melted, 22% more than the long-term average of 9.18 m sq km. The record minimum extent is now likely to be formally called on Monday by the US National Snow and Ice Data Centre (NSIDC) in Colorado The record hasn't just been broken, it's been smashed to smithereens, adding weight to predictions that the Arctic may be ice-free in summer months within 20 years, say British, Italian and American-based scientists on board the Arctic Sunrise. They are shocked at the speed and extent of the ice loss.

        NSIDC Arctic Sea Ice Report of September 17, 2012: Arctic sea ice extent near the minimum - Sea ice extent for September 17 was 3.41 million square kilometers (1.32 million square miles). Weather conditions near the ice edge heavily influence the timing of the minimum, which has occurred as late as September 23. We are now five days past the 1979-2000 average minimum date of September 13. The decline has slowed in recent days and the minimum will likely be confirmed any day now. The current extent is 760,000 square kilometers (293,000 square miles) below the previous record minimum extent in the satellite record (4.17 million square kilometers or 1.61 million square miles) which occurred on September 18, 2007. This difference is larger than the size of the state of Texas. The ice extent currently tracks nearly 50% below the 1979-2000 average minimum extent.Since September 1, extent declined 316,000 square kilometers (122,000 square miles), or 19,800 square kilometers (7,600 square miles) per day. Freeze up has begun over the high latitude Arctic areas, such as the North Pole, and extent has started to increase in the Beaufort Sea region. However, extent is still decreasing on the Atlantic side of the Arctic, leading to the continued overall decline in recent days. The Northern Sea Route along the coast of Siberia has been largely free of ice since mid August. This is in contrast with 2007, when a persistent tongue of ice reaching the coast of the Laptev Sea clogged the Northern Sea Route.

        NASA | Arctic Cyclone Breaks Up Sea Ice – time lapse video

        Video: Watch An Area Of Arctic Sea Ice The Size Of Alaska And Canada Combined Melt Away - When Arctic sea ice fell to its lowest level ever recorded this August, the ice covered an area 45 percent smaller than it did in the 1990′s. The amount of ice that melted in the Arctic this year is roughly the size of Canada and Alaska combined. The National Oceanic and Atmospheric Administration has just released a video illustrating the record melt: NOAA’s National Climatic Data Center also released its latest data on Arctic ice on Monday. The previous record for Arctic ice melt was in 2007; however, as the data show, this year brought an additional loss of ice equivalent to the size of Texas. During August of 2012, Arctic ice disappeared at a rate of 35,400 miles per day. Researchers are calling the melt “astonishing” and  “urgent.” One prominent scientist, Cambridge University’s Peter Wadhams, is now projecting that summer sea ice in the Arctic may entirely disappear in the next four years — calling the implications “terrible.” “As the sea ice retreats in summer the ocean warms up (to 7C in 2011) and this warms the seabed too. The continental shelves of the Arctic are composed of offshore permafrost, frozen sediment left over from the last ice age. As the water warms the permafrost melts and releases huge quantities of trapped methane, a very powerful greenhouse gas so this will give a big boost to global warming,” he told the Guardian newspaper.

        NSIDC Arctic Sea Ice Report, September 19, 2012: Arctic sea ice extent settles at record seasonal minimum - On September 16, 2012, Arctic sea ice appeared to have reached its minimum extent for the year of 3.41 million square kilometers (1.32 million square miles). This is the lowest seasonal minimum extent in the satellite record since 1979 and reinforces the long-term downward trend in Arctic ice extent. The sea ice extent will now begin its seasonal increase through autumn and winter. NSIDC scientists will release a full analysis of the melt season in early October, once monthly data are available for September.On September 16, 2012, sea ice extent dropped to 3.41 million square kilometers (1.32 million square miles). This appears to have been the lowest extent of the year. In response to the setting sun and falling temperatures, ice extent will now climb through autumn and winter. However, a shift in wind patterns or a period of late season melt could still push the ice extent lower. The minimum extent was reached three days later than the 1979 to 2000 average minimum date of September 13. This year’s minimum was 760,000 square kilometers (293,000 square miles) below the previous record minimum extent in the satellite record, which occurred on September 18, 2007. This is an area about the size of the state of Texas. The September 2012 minimum was in turn 3.29 million square kilometers (1.27 million square miles) below the 1979 to 2000 average minimum, representing an area nearly twice the size of the state of Alaska. This year’s minimum is 18% below 2007 and 49% below the 1979 to 2000 average.

        Arctic Sea Ice Stops Melting, but Record Low Is Set - The drastic melting of Arctic sea ice has finally ended for the year, scientists announced Wednesday, but not before demolishing the previous record — and setting off new warnings about the rapid pace of change in the region.  The apparent low point for 2012 was reached Sunday, according to the National Snow and Ice Data Center, which said that sea ice that day covered about 1.32 million square miles, or 24 percent, of the surface of the Arctic Ocean. The previous low, set in 2007, was 29 percent. When satellite tracking began in the late 1970s, sea ice at its lowest point in the summer typically covered about half the Arctic Ocean, but it has been declining in fits and starts over the decades. “The Arctic is the earth’s air-conditioner,” “We’re losing that. It’s not just that polar bears might go extinct, or that native communities might have to adapt, which we’re already seeing — there are larger climate effects.” His agency waited a few days before announcing the low to be sure sea ice had started to refreeze, as it usually does at this time of year, when winter closes in rapidly in the high Arctic. A shell of ice will cover much of the Arctic Ocean in coming months, but it is likely to be thin and prone to melting when summer returns.

        Earth’s Attic Is On Fire: Arctic Sea Ice Bottoms Out At New Record Low - The extraordinary decline in Arctic sea ice during 2012 is finally over. Sea ice extent bottomed out on September 16, announced scientists at the National Snow and Ice Data Center (NSIDC) on Wednesday. The sea ice extent fell to 3.41 million square kilometers, breaking the previous all-time low set in 2007 by 18%–despite the fact that this year’s weather was cloudier and cooler than in 2007. Nearly half (49%) of the icecap was gone during this year’s minimum, compared to the average minimum for the years 1979 – 2000. This is an area approximately 43% of the size of the Contiguous United States. And, for the fifth consecutive year–and fifth time in recorded history — ice-free navigation was possible in the Arctic along the coast of Canada (the Northwest Passage), and along the coast of Russia (the Northeast Passage or Northern Sea Route.) “We are now in uncharted territory,” said NSIDC Director Mark Serreze. “While we’ve long known that as the planet warms up, changes would be seen first and be most pronounced in the Arctic, few of us were prepared for how rapidly the changes would actually occur. While lots of people talk about opening of the Northwest Passage through the Canadian Arctic islands and the Northern Sea Route along the Russian coast, twenty years from now from now in August you might be able to take a ship right across the Arctic Ocean.”

        Arctic ice shrinks 18% against record, sounding climate change alarm bells - Sea ice in the Arctic shrank a dramatic 18% this year on the previous record set in 2007 to a record low of 3.41 million sq. km, according to the official US monitoring organisation the National Snow and Ice Data Centre in Boulder, Colorado. Scientists and environment groups last night said the fall was unprecedented and the clearest signal yet of climate change. The data released showed the arctic sea beginning to refreeze again in the last few days after the most dramatic melt observed since satellite observations started in 1979.This year's sea ice extent was 700,000 sq. km below the previous minimum of 4.17 million sq. km set in 2007. "We are now in uncharted territory," said NSIDC director Mark Serreze. "While we've long known that as the planet warms up, changes would be seen first and be most pronounced in the Arctic, few of us were prepared for how rapidly the changes would actually occur." Julienne Stroeve, an NSIDC ice research scientist who has been monitoring ice conditions aboard the Greenpeace vessel Arctic Sunrise, said the data suggested the Arctic sea ice cover was fundamentally changing and predicted more extreme weather.

        BBC: VIDEO: Record minimum for Arctic sea ice - Arctic sea ice has reached its minimum extent for the year, setting a record for the lowest summer cover since satellite data collection began. The 2012 extent has fallen to 3.41 million sq km (1.32 million sq mi) - 50% lower than the 1979-2000 average. Arctic sea ice has long been regarded as a sensitive indicator of changes in the climate.

        Arctic ice shrinks to all-time low; half 1980 size - In a critical climate indicator showing an ever warming world, the amount of ice in the Arctic Ocean shrank to an all-time low this year, obliterating old records. The ice cap at the North Pole measured 1.32 million square miles on Sunday. That's 18 percent smaller than the previous record of 1.61 million square miles set in 2007, according to the National Snow and Ice Data Center in Boulder, Colo. Records go back to 1979 based on satellite tracking. "On top of that, we're smashing a record that smashed a record," said data center scientist Walt Meier. Sea ice shrank in 2007 to levels 22 percent below the previous record of 2005. Ice in the Arctic melts in summer and grows in winter, and it started growing again on Monday. In the 1980s, Meier said, summer sea ice would cover an area slightly smaller than the Lower 48 states. Now it is about half that. Man-made global warming has melted more sea ice and made it thinner over the last couple decades with it getting much more extreme this year, surprisingly so, said snow and ice data center director Mark Serreze.

        Arctic Sea Ice Levels Hit Record Low, Scientists Say We're 'Running Out Of Time' - As Arctic sea ice levels hit a new record low this month, scientists and activists gathered to discuss how to bridge the gap between scientific facts and the public's limited understanding that we are, in their words, "really running out of time. The National Snow and Ice Data Center (NSIDC) released preliminary findings Wednesday suggesting that on Sept. 16, Arctic ice covered just 1.32 million square miles -- the lowest extent ever recorded. This minimum is 49 percent below the 1979 average, when satellite records began. “The loss of summer sea ice has led to unusual warming of the Arctic atmosphere, that in turn impacts weather patterns in the Northern Hemisphere, that can result in persistent extreme weather such as droughts, heat waves and flooding,” NSIDC scientist Dr. Julienne Stroeve told Greenpeace in a press release. Wednesday morning, a group of climate scientists and activists met at a Greenpeace International panel in New York to strategize on potential responses to the changing Arctic climate. "There's a huge gap between what is understood by the scientific community and what is known by the public," NASA scientist James Hansen said, adding that he believed, "unfortunately, that gap is not being closed."

        Arctic Death Spiral: New Local Shipping And Drilling Pollution May Speed Up Polar Warming And Ice Melting - We’ve known for a long time about basic polar amplification. Warming melts highly reflective white ice and snow, which is replaced by the dark blue sea or dark land, both of which absorb far more sunlight and hence far more solar energy. More recently another insidious feedback has become obvious — as the Arctic ice retreats, big oil companies can drill for more fossil fuels whose combustion will accelerate warming and ice retreat. You might call this the “brainless frog” feedback. Now Reuters reports on yet another feedback: Local pollution in the Arctic from shipping and oil and gas industries, which have expanded in the region due to a thawing of sea ice caused by global warming, could further accelerate that thaw, experts say. The United Nations Environment Program (UNEP) said there was an urgent need to calculate risks of local pollutants such as soot, or “black carbon”, in the Arctic. Soot darkens ice, making it soak up more of the sun’s heat and quickening a melt…. “There is a grim irony here that as the ice melts … humanity is going for more of the natural resources fuelling this meltdown,” he said. Large amounts of soot in the Arctic come from more distant sources such as forest fires or industry.

        Last refuge for multi-year Arctic sea ice breaking up -- Axel Heiberg Island is now freeze of ice shelves - A commenter at neven's reminded me that the Canadian Met Office has regional photos of the Canadian Arctic:   See the white dot? It sits on Ellesmere Island. To the south is Axel Heiberg Island. Note the strait between them. Ice at the mouth of the strait is all broken up. To the north, along the west coast of Ellesmere, the land-fast ice shelves are disappearing. Directly to the north of the northern tip of Ellesmere was where the "ice arches" used to be at the head of the Nares Strait. It's all broken up there too. Axel Heiberg Island is in the Canadian archipelago and lies directly to the west of Ellesmere. Yesterday, to my great astonishment, on MODIS images one could clearly see that all of the ice shelves and ice in the straits along this island had broken up. This particular region was supposed to be part of the last stand of multi-year ice for the next decades. Further, the sea ice north of Greenland at the head of the Nares Strait is completely broken up and travelling south through the Nares, i.e., the "ice arches" are gone. So, that area is also not going to be a refuge for multi-year sea ice. This leaves only the land-fast ice shelves along the west coast of Ellesmere as a representation of multi-year ice. This can be seen very easily in this MODIS image from yesterday:

        Arctic "death spiral" leaves climate scientists shocked and worried - A "radical shift" is plunging the Arctic Ocean towards an ice-free state for the first time in millions of years. One of the world's foremost ice experts, Professor Peter Wadhams of Cambridge University, calls it a "global disaster" that will cause such a big boost in global temperatures that even such extreme measures as geo-engineering need to be considered urgently. Climate science has long understood that disappearance of summer sea ice in the Arctic would be a "tipping point" in the Earth's climate system, accelerating global temperatures and causing extreme weather and other climate changes far beyond the Arctic. Yet nearly every expert has been shocked by just how rapidly this "continent of ice" has been vanishing, and how dramatic the impacts have been already. Climate scientists and ice experts are now using phrases like "unprecedented," "amazing," "extreme," "hard to exaggerate," "incredibly fast," "death spiral" and "heading for oblivion."  Arctic sea ice has been a permanent, year-round fixture of our planet since long beforeHomo sapiens first appeared on the savannas of Africa as a new species. Despite being robust enough to survive every change Mother Nature threw at it for millions of years, Arctic sea ice has proven to be shockingly vulnerable to a few decades of humanity's unrestrained fossil fuel pollution.

        Arctic expert predicts final collapse of sea ice within four years. As sea ice shrinks to record lows, Prof Peter Wadhams warns a 'global disaster' is now unfolding in northern latitudes - One of the world's leading ice experts has predicted the final collapse of Arctic sea ice in summer months within four years. In what he calls a "global disaster" now unfolding in northern latitudes as the sea area that freezes and melts each year shrinks to its lowest extent ever recorded, Prof Peter Wadhams of Cambridge University calls for "urgent" consideration of new ideas to reduce global temperatures. In an email to the Guardian he says: "Climate change is no longer something we can aim to do something about in a few decades' time, and that we must not only urgently reduce CO2 emissions but must urgently examine other ways of slowing global warming, such as the various geoengineering ideas that have been put forward." These include reflecting the sun's rays back into space, making clouds whiter and seeding the ocean with minerals to absorb more CO2

        Arctic sea ice melt 'may bring harsh winter to Europe' - The record loss of Arctic sea ice this summer may mean a cold winter for the UK and northern Europe. The region has been prone to bad winters after summers with very low sea ice, such as 2011 and 2007, said Jennifer Francis, a researcher at Rutgers University.Polar ice experts "thought that it would be many years until we again saw anything like we saw in 2007", said Mark Serreze, director of the National Snow and Ice Data Centre in Colorado. The unprecedented expanse of ice-free Arctic Ocean has been absorbing the 24-hour sun over the short polar summer. The heat in the water must be released into the atmosphere if the ice is to re-form this autumn. "This is like a new energy source for the atmosphere," said Francis. This heat and water vapour will affect the all-important jet stream – the west-to-east winds that are the boundary between cold Arctic and the warm mid-latitudes. Others researchers have already shown that the jet stream has been shifting northwards in recent years. Francis and colleagues have recently documented that the jet stream is also slowing down. "The jet stream is clearly weaker," said Francis. That means weather systems, be it rain or dry conditions, are slow to move on and last longer. Ultimately this can result in "blocking" events, such as the conditions that produced the terrible heatwave in western Russia during the summer of 2010, she said.

        Shakhova & Semiletov have discovered spots in the Arctic Ocean where mass emissions of methane can be observed  - According to the press-service of the expedition aboard The Viktor Buinitsky research vessel, the diameter of some of the ‘methane fields’ found in the northern part of the Laptev Sea exceeds 1 kilometre. The new discoveries will help to understand the mechanism of global warming on Earth, experts believe. In their opinion, emissions of methane could have catastrophic consequences for the climate of our planet.

        Poles Apart | Open Mind: They want to compare Antarctic sea ice to Arctic sea ice? Okay. Here’s that “daily record high” in Antarctic sea ice (using daily extent data from NSIDC): The data from 2012 is shown in red. If you’re color-blind, you’ll have a damn hard time telling which line is for 2012. It might look like 2012 just barely broke the all-time record, but actually it did not. It just barely missed. Here’s a close-up view of the recent maximum: This year’s peak is certainly above average. But it’s nowhere near “astounding.” In fact, if it weren’t in red color, or if you’re color-blind, you could have trouble picking out which line is 2012 even in this expanded view. Here’s the all-time record low in Arctic sea ice: Even if you’re color-blind, you’ll still have absolutely no trouble picking out the 2012 line. It’s the one at the bottom. To be unable to see it, you’d have to be actually blind.I’m fond of emphasizing trends rather than individual events (climate over weather and all that). For that purpose, one strategy is to study sea ice anomaly. Doing so removes the annual, seasonal cycle from the data. Here’s the sea ice extent anomaly data, for the Antarctic (in blue) and the Arctic (in red), which reveals that both have shown an overall trend, in opposite directions:

        Avian Malaria in Alaska: The Climate Change Connection - A team of biologists has just announced the first documented case of bird-to-bird malaria transmission in Alaska. Writing in the journal PLOS ONE, they’ve shown that this frequently fatal avian illness, which is normally associated with the tropics and temperate areas, may be expanding its range. Fortunately, avian malaria doesn’t affect humans, co-author Ravinder Sehgal of San Francisco State University said, but the findings are particularly significant from a bird conservation as well as a climate change standpoint. “It also has implications for the spread of vector-borne human diseases as the climate changes,” Sehgal said. Those implications are straightforward enough: insects that transmit diseases from one human to another are often limited in their geographic ranges, and the limits usually have to do with how cold it gets. As the climate warms up, the insects can expand into new ranges — generally northward in the Northern Hemisphere, and also to higher altitudes — bringing their viral or bacterial passengers along for the ride.

        Happy Socialist Money Grab Day, Alaska! - It’s $878, if you’ve been wondering. Alaska’s Permanent Fund Dividend check has been more, but it’s also been less. Established in 1976, after oil was discovered on Alaska’s North Slope, the permanent fund dividend gives every Alaskan cash back from oil wealth. Alaska is unique in that the residents, not private land owners or the government, own the oil. Hence, every year investments made pay residents back. Some years are better than others, but every man, woman and child gets a check – this year on October 4. The first dividend check was $1000. Last year’s check was $1174. We really had a banner year when ex-half-term super-dooper socialist governor Sarah Pain was in office. We got the biggest pfd check ever, at $2069 – PLUS another $1200 check from the gov to subsidize the high cost of energy. Do the math. It was a pretty awesome year. All that is required to receive the check is to live in Alaska for a full calendar year, and fill out the appropriate paperwork which was due last March 

        Ozone layer recovery to take 40 years: Experts -: The ozone layer outside the Polar regions will take 40 years to recover to its pre-1980 levels, the World Meteorological Organization (WMO) said Friday. Over the past decade, stratospheric ozone in the Arctic and Antarctic regions as well as globally is no longer decreasing, but it has not yet started to recover either, Xinhua quoted senior scientific officer of WMO, Geir Braathen as saying. The ozone layer over the Antarctic is expected to recover much later. The amount of ozone depleting gases in the Antarctic stratosphere reached a maximum around year 2000 and is now decreasing at a rate of about 1 percent every year. According to the WMO's Antarctic Ozone Bulletin released Friday, as of mid September, the ozone hole is smaller than at the same time in 2011, but larger than in 2010.

        The Very Real Threat of Sea-level Rise to the United States -  Uncontrolled, human-caused climate change is a real threat to the United States economy, hundreds of millions of Americans, and their local communities. The increasingly extreme weather of the past few years is a sign of things to come: rising temperatures, changing rainfall patterns, increasing storm and drought frequency and intensity, changing vegetation, and rapidly disappearing Arctic ice. There are plenty of remaining uncertainties -- such as the speed of the changes, their extent and severity, the costs of suffering impacts versus the costs of adapting to or preventing them -- and the scientific community continues to work hard to understand and reduce these uncertainties. But one of the most certain and devastating consequences for the United States is going to be the very climate impact that Romney chose to mock: rising seas. Sea levels are rising for two reasons: thermal expansion and an increase in the volume of the ocean. As the planet warms, so do the oceans, and warmer water takes up more space than colder water. As ice in glaciers and the ice caps on Antarctica and Greenland melt, the volume of the oceans grows. And we already see rising sea levels. Between 1993 and the present, sea levels have been increasing an average of over 3 mm per year -- more than 50 percent faster than over the past century. Indeed, sea levels are actually rising at the upper range of model projections, and there is growing concern that scientists have conservatively underestimated the speed at which some of the massive ice volumes in Greenland may deteriorate and melt. There is so much ice on Greenland alone, that were it to melt into the oceans, sea levels would rise nearly 24 feet.A global increase in sea level of a meter (more than three feet) by the year 2100 is now "widely accepted as a serious possibility" and even the U.S. Army Corps of Engineers recommends planning for as much as 1.5 meters (nearly five feet).

        The Waning of the Modern Ages - The last time a change of this magnitude occurred was during the fourteenth and fifteenth centuries, during which time the medieval world began to come apart and be replaced by the modern one. In his classic study of the period, The Waning of the Middle Ages, the Dutch historian Johan Huizinga depicted the time as one of depression and cultural exhaustion—like our own age, not much fun to live through.  One reason for this is that the world is literally perched over an abyss. What lies ahead is largely unknown, and to have to hover over an abyss for a long time is, to put it colloquially, a bit of a drag. The same thing was true at the time of the collapse of the Roman Empire as well, on the ruins of which the feudal system slowly arose. I was musing on these issues some time ago when I happened to run across a remarkable essay by Naomi Klein, the author of The Shock Doctrine. It was called “Capitalism vs. the Climate,” and was published last November in The Nation.  In what appears to be something of a radical shift for her, she chastises the Left for not understanding what the Right does correctly perceive: that the whole climate change debate is a serious threat to capitalism. The Left, she says, wants to soft-pedal the implications; it wants to say that environmental protection is compatible with economic growth, that it is not a threat to capital or labor. It wants to get everyone to buy a hybrid car, for example (which I have personally compared to diet cheesecake), or use more efficient light bulbs, or recycle, as if these things were adequate to the crisis at hand. But the Right is not fooled: it sees Green as a Trojan horse for Red, the attempt “to abolish capitalism and replace it with some kind of eco-socialism.” It believes—correctly—that the politics of global warming is inevitably an attack on the American Dream, on the whole capitalist structure. Thus Larry Bell, in Climate of Corruption, argues that environmental politics is essentially about “transforming the American way of life in the interests of global wealth distribution”; and British writer James Delinpole notes that “Modern environmentalism successfully advances many of the causes dear to the left: redistribution of wealth, higher taxes, greater government intervention, [and] regulation.”

        Power East Coast via wind? Doable with 144,000 offshore turbines, study says - Placing wind turbines off the East Coast could meet the entire demand for electricity from Florida to Maine, according to engineering experts at Stanford University.  It would require 144,000 offshore turbines standing 270 feet tall — not one of which exists since proposals have stalled due to controversy and costs. But the analysis shows it's doable and where the best locations are, says study co-author Mark Jacobson, a Stanford professor of civil and environmental engineering. The first large-scale offshore wind farm was proposed in 2001 off Massachusetts' Nantucket Island. But vocal opposition, including from political heavyweights like the Kennedy family, are seeking to block the $2.6 billion Cape Wind project, arguing the 130 massive turbines would mar views and endanger boat and air traffic.

        How The Federal Government Greatly Underestimates The True Cost Of Carbon Pollution - The U.S. government is significantly underestimating the negative impacts climate change will impose on our children and grandchildren, according to a new study published this week in the Journal of Environmental Studies and Sciences. In the article, my coauthor Chris Hope (Judge Business School, University of Cambridge) and I show how regulatory agencies are using a faulty model to estimate carbon pollution damages that all but ignores the economic damages climate change will inflict on future generations. After valuing these costs more completely, our study finds that carbon pollution will impose damages between 2.6 to more than 12 times higher than the government’s main estimate. The government put the value of the damage caused by carbon pollution at $21 per ton of CO2, whereas our revised estimates place the cost at between $55 and $266 per ton. Importantly, even these revised estimates may be too low: They correspond to what might happen if future temperature increases are in the middle of scientists’ projections—not any of the worse-case scenarios they warn us about. Additionally, the model left out many damages that couldn’t be quantified.

        Without nuclear, the battle against global warming is as good as lost - A madness is taking hold. In the same week as Arctic ice cover is recorded at its lowest ever extent, two major countries decide to reduce or eliminate their use of the only proven source of low-carbon power that can be deployed at sufficient scale to tackle our climate crisis. Japan plans to phase out nuclear entirely by 2030, its prime minister announced today. The French president has just revealed a plan to dramatically reduce the country's reliance on nuclear, which currently gives France some of the cleanest electricity in the world. Let me be very clear. Without nuclear, the battle against global warming is as good as lost. Even many greens now admit this in private moments. We are already witnessing the first signs of the collapse in the biosphere this entails – with the Arctic in full-scale meltdown, more solar radiation is being captured by the dark ocean surface, and the weather systems of the entire northern hemisphere are being thrown into chaos. With nuclear, there is a chance that global warming this century can be limited to 2C; without nuclear, I would guess we are heading for 4C or above. That will devastate ecosystems and societies worldwide on a scale which is unimaginable.

        Using a Fusion Fission Hybrid Reactor to Burn Nuclear Waste -- In the aftermath of the Fukushima meltdown, widespread superstition and primal fear regarding nuclear energy has gripped the hearts and minds of politicians, pundits, and faux environmentalists across the planet. But while tens of thousands were killed by the massive earthquakes and tsunamis in Northern Japan, no one was killed or seriously hurt by radiation from the Fukushima reactors. Of course, no one ever said that human beings were rational. Nuclear power is actually the safest form of power generation in existence, including all forms of renewables and hydrocarbons. Scientists and engineers, meanwhile, are working hard to make nuclear energy even safer than it already is.The innovation, which will not be tested for at least a couple more years, could lead to the efficient incineration of [nuclear] waste and a safer way to generate nuclear-powered electricity.

        Nuclear Regulatory Commission Engineers Charge Government Coverup: Reactor Meltdown “Absolute Certainty” If Dam Fails … 100s of Times More Likely than Tsunami that Hit Fukushima  - Numerous American nuclear reactors are built within flood zones on the Mississippi and Missouri rivers (indicated in red): Reactors in Nebraska and elsewhere were flooded by swollen rivers and almost melted down.  See this, this, this and this. No wonder, nuclear expert Arnie Gundersen said: Sandbags and nuclear power shouldn’t be put in the same sentence. And the Huntsville Times wrote in an editorial last year: A tornado or a ravaging flood could just as easily be like the tsunami that unleashed the final blow [at Fukushima as an earthquake].The Hill notes today:An engineer with the Nuclear Regulatory Commission (NRC) says the agency has withheld documents showing reactor sites downstream of dams are vulnerable to flooding, and an elevated risk to the public’s safety.Richard Perkins, an NRC reliability and risk engineer, was the lead author on a July 2011 NRC report detailing flood preparedness. He said the NRC blocked information from the public regarding the potential for upstream dam failures to damage nuclear sites.

        Coal, climate at center of House battle - The House is slated to vote this week on the latest GOP bill to thwart White House environmental policies that Republicans call economically burdensome. The “stop the war on coal” package provides Republicans a final chance before November’s election to use the House floor as a platform to slam President Obama’s green agenda. House Majority Leader Eric Cantor (R-Va.) said Friday that this week will be the last Capitol Hill work session before the voters go to the polls. The GOP bill combines a number of measures that have already passed the House to curtail policies that Republicans contend will thwart coal-mining and coal-fired power generation. It would nix the Environmental Protection Agency’s power to regulate greenhouse gas emissions and take aim at other air pollution rules; restrict planned EPA rules governing management and disposal of coal ash, a waste product from coal plants; and restrict potential Interior Department rules on coal-mining wastes; among other provisions.

        Coal Era Beckons for Europe as Carbon Giveaway Finishes - European utilities are poised to add more coal-fired power capacity than natural gas in the next four years, boosting emissions just as the era of free carbon permits ends. Power producers from EON AG to RWE AG (RWE) will open six times more coal-burning plants than gas-fed units by 2015, UBS AG said in a Sept. 5 research note. Profits at coal-fired power stations may more than double by then, according to a Goldman Sachs report published on Sept. 13.The new stations, replacing atomic and aging fossil fuel- based plants, will boost demand for emission permits because coal-fired generators need twice as many credits as gas users under climate protection rules. The price of UN credits may rebound 73 percent by the end of next year from an all-time low on Sept. 18, according to the Euro Carbon Macro Fund in Luxembourg, which manages about $32 million. “The economics for coal are near the best we’ve seen in five years,”

        In The ‘Crazy’ World Of Carbon Finance, Coal Now Qualifies For Emission Reduction Credits - In a decision criticized as “unfortunate” and even “insane” by onlookers, the United Nations has decided that new coal plants are eligible for carbon credits under the Clean Development Mechanism (CDM). The CDM is a trading platform set up by the UN that allows developed countries to obtain verified emissions reduction credits through renewable energy, energy efficiency, power plant fuel switching, and sustainable transportation projects in developing countries in order to meet Kyoto Protocol targets. Now the UN has added coal to the list of eligible projects. Again. At a CDM Executive Board meeting last week, the organization approved new rules that allow more efficient supercritical coal plants built in developing countries to obtain carbon credits. So theoretically, a coal-fired power plant in Europe could be “offset” by carbon credits not through renewable energy, but through another carbon-burning coal power plant in India.

        Australian 'mega mine' plan threatens global emissions target - Plans to open up a new Australian "coal export rush" would turn a single Queensland region into the seventh largest contributor of carbon dioxide emissions on the planet, undermining international efforts to keep global warming below 2C, a new report has warned. Nine proposed "mega mines" in the Galilee Basin would, at full capacity, result in 705m tonnes of CO2 released into the atmosphere, according to a Greenpeace Australia analysis. This level of emissions would surpass those of all but six nations in the world. By comparison, the UK emitted 549.3 million tonnes of CO2 from all sources in 2011. Greenpeace said that the nine mines' production capacity of 330m tonnes of coal a year for export would represent an "unprecedented" increase in the scale of coal mining in Australia. The mines' maximum output, primarily aimed at servicing the burgeoning Chinese and Indian markets, would nearly double Australia's total 2010/11 coal production of 352m tonnes and eclipse its export total of 283m tonnes.

        Video: In Creepy Coal World, Billionaires Use The Great Barrier Reef As Their Own Private Ride - And with 90 percent of the world’s coral reefs under threat due to a steep rise in carbon dioxide emissions, what is our response? Build more coal mines, export terminals and coal-fired power plants to emit more carbon. Heck, Australia is so bold, it’s looking to build export terminals that would go straight over the Great Barrier Reef — a natural gem already under threat from climate change and increasing industrial activity. Welcome to the bizarro world of energy policy. Step right up and take a ride:

        The Social Cost of Carbon: How to Do the Math? - In 2010, 12 government agencies working in conjunction with economists, lawyers and scientists, agreed to work out what they considered a coherent standard for establishing the social cost of carbon. The idea was that, in calculating the costs and benefits of pending policies and regulations, the Department of Transportation could not assume that a ton of emitted carbon dioxide imposed a $2 cost on society while the Environmental Protection Agency plugged 10 times that amount into its equations. Instead, they decided, all of the agencies would use the same baseline of $21 per ton as the standard in monetizing the social costs of the seven-plus billion tons of carbon generated by American power plants, vehicles and factories each year. But a new paper published in the Journal of Environmental Studies and Sciences concludes that the costs of carbon pollution and related climate change are vastly greater — possibly two to 12 times as much. The problem, the authors argue, is that the federal government is not adequately taking into account the impacts of climate change on future generations. At the heart of this debate is a disagreement about how to apply an economic concept known as the discount rate to the impacts of climate change. Simply put, the rate is based on how much it is worth to us now to prevent that future damage. Given that people are more concerned about having money now, economists posit that we are willing to spend less than a dollar today to prevent a dollar’s worth of damage in a year, or two years, or a generation.

        Thanks to fracking, U.S. carbon emissions are at the lowest levels in 20 years. - Slate Magazine: Weather conditions around the world this summer have provided ample fodder for the global warming debate. Droughts and heat waves are a harbinger of our future, carbon cuts are needed now more than ever, and yet meaningful policies have not been enacted. But, beyond this well-trodden battlefield, something amazing has happened: Carbon-dioxide emissions in the United States have dropped to their lowest level in 20 years. Estimating on the basis of data from the US Energy Information Agency from the first five months of 2012, this year’s expected CO2 emissions have declined by more than 800 million tons, or 14 percent from their peak in 2007. The cause is an unprecedented switch to natural gas, which emits 45 percent less carbon per energy unit. The U.S. used to generate about half its electricity from coal, and roughly 20 percent from gas. Over the past five years, those numbers have changed, first slowly and now dramatically: In April of this year, coal’s share in power generation plummeted to just 32 percent, on par with gas.

        Shipping gas to Asia a race against time, B.C.’s Clark says - Canadian liquefied natural gas could begin shipments to Asia in as little as three years, B.C. premier Christy Clark said in China this week, in what she warned is a race against time to capture a highly competitive market. “These companies have to lock up their long-term contracts with their Asian customers now. If they are thrown off by five years, it will be too late,” Ms. Clark said in a telephone interview from near the Great Wall just before returning to Canada this week. She has said one terminal, most likely the Apache-led consortium for which ground is now being cleared at Kitimat, will be operational by late 2015 or early 2016, with at least two more and possibly up to five running by 2020. “My number one economic priority is to enable the construction of these lateral gas pipelines,” she said. “It’s a $1.5-trillion economic benefit for us.” In competition with Canada to fill China’s oil and gas needs are not only nations like Australia and Russia, but the country’s own domestic reserves. China is accelerating efforts to extract its own shale gas reserves, despite conventional wisdom that holds most of its reserves are too deep in the ground to extract cost-effectively.

        Shell building world’s biggest ship that will sail on ever-higher seas | Grist: Shell will forge the hull of a floating [liquefied natural gas] plant in South Korea by year-end that will be the world’s largest vessel, weighing six times the biggest aircraft carrier, a Nimitz-class warship. Some 5,000 workers will build the factory to produce LNG off Australia’s northwest coast in a $13 billion project that also will shield Shell from escalating costs it would have to pay at the country’s onshore plants.Rivals from Malaysia’s Petroliam Nasional Bhd. to GDF Suez SA of France likewise want to turn gas into liquid at sea, where many of the largest finds were made in the last decade. It’s a generational change for a land-based industry that started about 50 years ago in Algeria, where Shell provided technology for Camel, the first commercial LNG plant. Today those facilities typically cost at least $20 billion to build.“We remove the need for the pipeline and use about 50 percent of the raw materials for an equivalent onshore plant,” said Neil Gilmour, Shell’s FLNG general manager. He’s overseeing construction of the world’s first floating LNG vessel, which will be as long as the Empire State Building, for use by the Prelude venture partners. 

        Gazprom Tilting Eastward -- Russian energy company Gazprom signed a recent deal with Japan to develop a liquefied natural gas project for the Far East. Japan, already a world leader in LNG consumption, was forced to take on more natural gas as a result of the March 2011 nuclear disaster. Gazprom, for its part, may be looking to eastern, and possibly North American, markets as its relationship with Europe takes on a more negative tone. With Gazprom already established firmly in the European market by way of its vast pipeline networks, the move may be in the best interest of all parties involved. Russia and Japan signed a $7 billion deal to develop a LNG plant on the Pacific coast. Gazprom described the project as a vital part of its development plans for the eastern section of its unified gas supply system. For Japan, the deal puts it closer to a premier natural gas supplier in Russia. Last year, the country took on more than 83 million tons of LNG, making it the world leader in terms of imports of the super-cooled gas. With nuclear power becoming more controversial in the wake of last year's meltdown at the Fukushima Daiichi plant, and with few resources of its own, Japan's future may exist in securing a reliable source of natural gas.

        Oil-Vs.-Gas Price Disparity Presents Major Challenges: Global energy markets are grappling with changing demand and supply forces, particularly a shift in focus from the long-term price direction of crude to price relationships between different sources of fuel, especially natural gas and oil, CME Group Chief Economist Blu Putnam said. The “poster child” for this shift is the historically wide gap between relatively expensive oil and cheaper coal and gas. Currently, a U.S. dollar spent on natural gas buys more than six times as much energy, in terms of British thermal units, compared with crude. For coal, the bang-for-the-buck is over seven times that of oil. “How markets resolve this large energy content disparity between natural gas and crude oil will be one of the major challenges of the coming five to 10 years,” Putnam said in the report. Oil’s price premium may narrow somewhat over the next five years amid ramped-up efforts to use natural gas for electrical power and transit fleets. Still, longer-term futures market prices underscore the difficultly and risk of infrastructure investments aimed at taking advantage of the energy price discrepancy.

        Tar sands, oil shale, and heavy oil: Why the conventional wisdom about unconventional oil is likely to be wrong - When we think of conventional oil, we can picture gushers which are evidence of highly pressurized underground reservoirs that send oil to the surface without any pumping. Nowadays, blowout preventers have eliminated gushers except in the case of an accident such as the BP Gulf of Mexico oil spill. As oil is produced from a well, the pressure declines and eventually the remaining oil must be pumped to the surface. The general category for this type of oil is light sweet crude. "Light" means it flows and flows quite readily. "Sweet" means it contains little sulfur, and this makes it compatible with conventional refineries which are designed to process low-sulfur oils. (Sulfur, you may recall, is routinely removed from motor fuels to help prevent acid rain which occurs when sulfur from vehicle exhaust and other sources mixes with moisture in the atmosphere to form sulfuric acid.) Now, unconventional oil can be entirely different. Signal qualities of unconventional oil are that it is expensive and difficult to extract and refine. Tar sands, for example, are a mixture of sand and bitumen, a thick, gooey hydrocarbon that is often used to make asphalt. The bitumen is separated from the sand using hot water. Essentially, the bitumen moves to the top and is skimmed off. This is obviously water-intensive; but it is also energy-intensive since the sands must first be mined and transported to a separation facility. Then, enormous separators filled with water heated using natural gas start the separation process. That process is repeated to get up to 90 percent of the bitumen out of the sand.

        U.S. oil boom comes with tradeoffs and an ugly underbelly - Politicians are quick to extol the virtues of domestic oil drilling while ignoring the tradeoffs. Here in this fast-developing Western oil patch, the gritty side of America’s new oil boom is on display with rising crime, a slain schoolteacher, rents that have tripled and public resources stretched thin.  That’s just the half of it. Some area high schools are at historic low attendance levels, students dropping out to work the oilfields. Menial service jobs go unfilled despite high wages, and most everyone worries that the boom is transforming small-town values into something new and unpredictable. “It’s just happened so fast, and many small communities just didn’t have time to plan,” said Mike Coryell of Miles City, a town just south of the oil boom that struggles with spillover effects. “The impacts hit but you don’t have the resources to attack it.” “We’re glad we have an area that’s booming . . . but it has totally ruined the quality of life around here,”

        MPs demand moratorium on Arctic oil drilling - British MPs are calling on Shell and others to halt "reckless" oil and gas drilling in the Arctic until stronger safety measures are put in place. Politicians also want to impose "unlimited" financial liability on operators and the creation of a "no-drill zone" in a new environmental sanctuary. The uncompromising demands have angered the energy industry but come just days after alarming new evidence has emerged about Arctic sea ice melting at record levels. They also come on the day that an environment committee of MEPs in Brussels called for tougher financial guarantees from oil companies to ensure they could pay for spills in European waters. The British initiatives are contained in a report published on Thursday from the cross-party environmental audit committee (EAC) of the House of Commons, which warns that the vulnerable Arctic region is being endangered by a misguided search for hydrocarbons.

        Email From Lead Analyst, Weekly Petroleum Supply Team on Possibility of Recession - In response to Petroleum And Gasoline Usage Charts for June, July, August; Unemployment vs. Gasoline Usage Analysis, a post based on weekly petroleum stats from reader Tim Wallace, I received a very nice email including a superb set of charts from James Beck, Lead Analyst,  for the Energy Information Administration. James gave me permission to use his name and his charts as long as I mentioned that his email reflects his personal opinions, not necessarily that of the EIA.  James writes ...I have updated my charts that I sent to you a few months ago. I have included Total Petroleum "Product Supplied" (a proxy for demand), Gasoline Product Supplied, Total Distillate (Diesel and Heating Oil) Product Supplied, and Kerosene Jet Fuel Product Supplied charts for you to review. These charts (with all of their data included) are based on the EIA's Petroleum Supply Monthly (PSM) data. The reason to look at the monthly numbers is that they are more reliable than the weekly as the survey is of the entire industry and there is a great deal of extra time used to verify the data. Many people believe that the monthly numbers are a revision of the weekly numbers. This is not true. These are separate surveys.

        Thresholds in the economic effects of oil prices - The graph below plots average U.S. gasoline prices, adjusted for inflation, over the last decade. This is now the fourth time we've been near the $4 threshold. It first happened in June 2008, again in May 2011, and again in April of this year. In fact, on each of those previous 3 occasions the average U.S. retail price of gasoline was higher than it is today. The first time something like this happened in 2008, it was quite a jolt to consumers and to the economy. In fact, the U.S. is still in the process of adjusting to that shock 4 years ago. The vehicles that many Americans were driving at the time just don't make sense if you have to pay $60 or more every time you visit the gasoline station. Even so, you don't get rid of the old gas-guzzler right away, but make sure you change when you buy a new one. The average fuel economy of new U.S. cars purchased has been steadily increasing since 2008.

        Saudis offer extra oil to control prices - Saudi Arabia has offered its main customers in the US, Europe and Asia extra oil supplies through the end of the year, a sign the world’s largest exporter is worried about the impact of rising prices on the global economy. The Group of Seven finance ministers last month called on oil exporters to expand production. Saudi Arabia initially reacted coolly to the request, saying that global supply and demand were balanced. But the kingdom has recently taken steps to bring down prices, consulting with large refiners and offering them extra oil. “The current price is too high,” a senior Gulf-based oil official told the Financial Times. “We would like to see oil prices back to $100 a barrel.” The price of Brent, the global oil benchmark, has risen 33 per cent from mid-June to a peak of $117.95 a barrel on Friday. On Monday it plunged almost $4 in just four minutes, but later recovered. Saudi Arabia last launched a similar round of consultations with major oil refiners in March, weeks before it boosted its production to a 30-year high of 10m barrels a day. Riyadh is now evaluating the response from refiners. The nation last month produced 9.9m b/d, but the senior official said that Riyadh was now again pumping around 10m b/d. “We are consulting our clients about their oil needs and telling them we are ready to supply more,” the senior official said.

        Report: Saudi offers more oil, Gasoline prices still near highs -  From the Financial Times: Saudis offer extra oil to control prices. Saudi Arabia has offered ... extra oil supplies through the end of the year, a sign the world’s largest exporter is worried about the impact of rising prices on the global economy. This might just be talk ... oil prices are down sharply over the last two days, however Brent futures are still at $112.52 per barrel according to Bloomberg. Meanwhile, gasoline prices are still very high. From the Oregonian: Oregon, Washington gas prices moving in reverse, but still at historic highs In the past week, the average price of a gallon of regular unleaded in Oregon dropped three centers to $4.01, the nation’s 10th most expensive. Washington has the nation’s sixth most-expensive gasoline for the second week in a row at $4.05, down a penny from last week. The national average -- at $3.86 -- actually added a cent-and-a-half. For the first time since early April, Dodds said, 10 states, including California, Washington and Oregon, have averages at or above $4 a gallon, up from nine a week ago. The following graph shows the recent increase in gasoline prices. Gasoline prices peaked in early April, then fell sharply in May and June - and have increased sharply since early July.

        Latest Saudi Oil Production - Saudi oil production is in the news again: The Group of Seven finance ministers last month called on oil exporters to expand production.  The nation last month produced 9.9m b/d, but the senior official said that Riyadh was now again pumping around 10m b/d. “We are consulting our clients about their oil needs and telling them we are ready to supply more,” the senior official said.  There's more at the FT article linked above, but I wanted to add the chart above for context (which shows all available data from publicly available sources through August).  The highest demonstrated production was in March and April of this year when they briefly touched 10mbd, before dropping very slightly in recent months.  Apparently the news now is that they will go back to 10mbd. Interesting that production increases of 100-150kbd are news.  100kbd represents about 0.1% of global production.  If you accept a low figure for short term elasticity of -0.02, then that could, in theory, lead to a 5% decline in the price of oil.  However, it's significantly smaller than the normal month-to-month fluctuations in global oil production, so it's just as likely to be lost in the noise.

        Saudi July Crude Output, Exports Inch Down Oil production in Saudi Arabia, the world's largest crude exporter, fell to 9.801 million barrels a day in July, compared with 10.103 million barrels a day the previous month, official data showed Wednesday The kingdom exported 7.286 million barrels a day of crude oil and condensate in July, down from 7.843 million barrels a day in June, according to figures posted on the Joint Organization Data Initiative, or JODI, website. JODI is supervised by the Riyadh-based International Energy Forum and shows data supplied directly by governments dating back to 2002. Saudi Arabia burnt 709,000 barrels a day in power stations and water-desalination plants in July, up from the 706,000 barrels a day used during the corresponding period in 2011, and lower than the 778,000 barrels a day burnt a month earlier, signaling a rise in demand for energy, which is needed to fuel electricity stations and industrial complexes in the rapidly growing economy.

        Hint of Stabilization in Iranian Oil Production - The above shows Iranian oil production which has been dropping steadily through 2012 - until August.  At this point, the evidence for that August stabilization is based solely on the "OPEC secondary sources" figures - I now largely discount Iranian self-reports.  We will have to see what other sources say and what the next month or two brings. It's pretty important, since the Iranians' ability to resist sanctions will be a very different matter if their oil production can be forced steadily lower, versus being able to stabilize it (and then have their society slowly acclimate to the reduced revenues). My reading on recent events between Israel and Iran is as follows: I take the recent Netanyahu campaign  of public pressure on the Obama administration as a sign of weakness.  Private discussions must have broken down, and Netanyahu should realize there is no hope whatever of persuading Obama to support an attack on Iran before the election.  So the fact that he's engaged in this kind of pressure either reflects poor judgement or an attempt to influence the election.  Either way, it does not suggest an Israel that feels able to mount an effective bombing campaign on its own.

        Total sees long-term supply shortages -- Global energy prices are stoking geopolitical and economic concerns that spill into the supply side for the energy industry, an executive said from Dubai. Jean-Luc Guiziou, president of the Emirati division of French supermajor Total, told investors in Dubai that global markets face a shortfall of about 40 million barrels of oil per day by 2020, the Platts new service reports. He said there's good news, however, coming out of North America as U.S. and Canadian energy markets experience significant gains on the supply side. "At the same time, we see geopolitical issues and events which provide a constant threat to the ability of our industry to supply the markets in a smooth way,"

        Coal Scandal Exposes Ugly Underside of Indian Politics - Mr. Jayaswal is embroiled in a $34 billion coal mining scandal that has exposed the ugly underside of Indian politics and economic life: a brazen style of crony capitalism that has enabled politicians and their friends to reap huge profits by gaining control of vast swaths of the country’s natural resources, often for nothing. “Today in India, politicians are so powerful,” “All together, they are looting the country.” Coalgate, as the scandal is now known here, is centered on the opaque government allotment process that enabled well-connected businessmen and politicians to obtain rights to undeveloped coal fields. Investigators are now looking at whether Mr. Jayaswal and Vijay Darda, a member of Parliament, conspired to fraudulently obtain five lucrative coal allocations. Naveen Jindal, another lawmaker and one of India’s richest industrialists, is also reportedly under investigation. Even as the scandal has renewed public anger about rising official graft and the state of the economy, Coalgate has provided fresh ammunition for those who say India’s politicians have become so venal and feckless that they are no longer able or willing to address the country’s entrenched problems.

        South African Violence Returns As All Miners Demand Pay Hike - Rumors about the death of the South African miner strike seem to have been greatly exaggerated following the agreement by Lonmin to hike miner pay by 22%. The reason: the precedent has now been set and everyone else demands equitable treatment: i.e., the same pay hike as Lonmin agreed to. From Al Jazeera: "South African police have fired tear gas and rubber bullets to disperse protesters near a mine run by the world's biggest platinum producer Anglo American Platinum, as unrest spreads after strikers at rival Lonmin won big pay rises. Within hours of Lonmin agreeing pay rises of up to 22 per cent, workers at nearby mines called for similar pay increases on Wednesday, spelling more trouble after six weeks of industrial action that claimed more than 40 lives and rocked South Africa's economy." For those curious what it means when the precedent has been set and one corporation has caved on the issue of pay here it is: "Police clashed with a crowd of men carrying traditional weapons such as spears and machetes in a township at a nearby Anglo American Platinum (Amplats) mine outside the city of Rustenburg. Officers fired tear gas, stun grenades and rubber bullets to disperse an "illegal gathering", police spokesman Dennis Adriao said. He had no information on any injuries." So much for the strikes being over: thanks to Lonmin's caving, they have only just started.

        Australia’s Ferguson Says Commodity Price Boom Has Ended - The global boom in commodity prices is over and Australia must improve productivity in order to remain competitive, Resources Minister Martin Ferguson said. “The easy earnings we get out of high prices are now gone,” Ferguson told Bloomberg Television in an interview from Canberra today. While Australia’s economy grew about 4 percent in the first half from the previous year on the strength of resource-industry investment and consumer spending, a plunge in the price of iron ore and a high currency prompted mining companies including BHP Billiton Ltd. and Fortescue Metals Group Ltd. (FMG) to put off projects and cut employees in the past month. BHP, the world’s biggest mining company, last month decided to delay approval of an estimated $33 billion expansion of the Olympic Dam copper, uranium and gold mine in South Australia. Fortescue, Australia’s biggest iron ore producer after Rio Tinto Group and BHP (BHP), said this month it’s cutting its full-year capital spending forecast by 26 percent to $4.6 billion. “We have to accept that here on in it’s going to be a lot of hard work to actually expand capacity rather than rely on increases in prices,”

        By 2015 hard commodity prices will have collapsed - There are four reasons why I expect prices to drop a lot more. First, during the last decade commodity producers were caught by surprise by the surge in demand. Their belated response was to ramp up production dramatically, but since there is a long lead-time between intention and supply, for the next several years we will continue to experience rapid growth in supply. As an aside, in my many talks to different groups of investors and boards of directors it has been my impression that commodity producers have been the slowest at understanding the full implications of a Chinese rebalancing, and I would suggest that in many cases they still have not caught on.Second, almost all the increase in demand in the past twenty years, which in practice occurred mostly in the past decade, can be explained as the consequence of the incredibly unbalanced growth process in China. But as even the most exuberant of China bulls now recognize, China’s economic growth is slowing and I expect it to decline a lot more in the next few years. Third, and more importantly, as China’s economy rebalances towards a much more sustainable form of growth, this will automatically make Chinese growth much less commodity intensive. It doesn’t matter whether you agree or disagree with my expectations of further economic slowing. Even if China is miraculously able to regain growth rates of 10-11% annually, a rebalancing economy will demand much less in the way of hard commodities. And fourth, surging Chinese hard commodity purchases in the past few years supplied not just growing domestic needs but also rapidly growing inventory. The result is that inventory levels in China are much too high to support what growth in demand there will be over the next few years, and I expect Chinese in some cases to be net sellers, not net buyers, of a number of commodities.

        Multibillion-dollar iron mine approved for Baffin Island - The Nunavut Impact Review Board issued its final report Friday night allowing Baffinland's Mary River iron project to proceed, with conditions. The board’s decision is the culmination of a four-year assessment of the project, in which Baffinland Iron Mines Corporation plans to build a massive open-pit mine at its Mary River site about 160 kilometres south of Pond Inlet, Nunavut, along with a railway and port that would allow icebreakers to ship the ore through Arctic waters year-round. The 17,000-hectare mine will cost about $4 billion to build. "Obviously NIRB recommended in the direction we were hoping they would,” . “Now we have to spend a number of days looking at the document and looking at the terms and conditions." The decision comes with close to 200 terms and conditions, most of them focused on monitoring and minimizing some of the possible negative environmental and social effects of the development. A wide range of concerns on the project were raised during the final public hearings this summer. They included the mine's potential impact on the North Baffin caribou herd and on archeological sites, the possibility of oil spills in the shipping lane and disruptions to marine wildlife, the availability of training and jobs for Inuit, and the possible social problems that could result from an influx of money into nearby communities.

        China’s thermal power output is shrinking -- For those wondering why thermal coal prices have been under pressure for the past quarter, look no further than China’s electricity ouput. China’s electricity output increased by 2.7% yoy in August.  We knew that figure from earlier release of industrial production output. Breaking it down, thermal power output continued to contract.  Thermal power output decreased by 6.3% yoy in August, worse than –4.5% yoy in July. The continued contraction in thermal power output was offset by hydroelectric power output, which increased by 48% in August.

        China flooding globe with cheap steel - China is ramping up its global exports of cheap steel, sometimes at a loss, as bulging stocks of the alloy give way to a worsening domestic demand picture for the commodity consuming giant. Slowing construction and industrial activity has hit Chinese steel demand and prices hard in the past few weeks, prompting market participants to export more aggressively than ever, even to markets such as the Middle East and North Africa where it doesn’t usually sell.Major steel products in China are being sold below cost following a market slump that has lasted more than four months, the country’s steel industry association said. “The Chinese have been offering everywhere in the last three to four weeks, in whatever market they can reach and they can reach almost everywhere because their steel price has dropped dramatically,” said a Russian steel trader. “They are offering to Latin America, they are offering to Africa, they are offering to the Middle East, they are offering to Iran, even to a part of Russia. Everywhere.” Chinese steel exports to North Africa and the Middle East, were at a discount of $40 to $50 (U.S.) per tonne against Turkish and Russian steel, up from a discount of $20 to $30 about two weeks ago, traders said.

        Exclusive: Ghost warehouse stocks haunt China's steel sector (Reuters) - Chinese banks and companies looking to seize steel pledged as collateral by firms that have defaulted on loans are making an uncomfortable discovery: the metal was never in the warehouses in the first place. China's demand has faltered with the slowing economy, pushing steel prices to a three-year low and making it tough for mills and traders to keep up with payments on the $400 billion of debt they racked up during years of double-digit growth. As defaults have risen in the world's largest steel consumer, lenders have found that warehouse receipts for metal pledged as collateral do not always lead them to stacks of stored metal. Chinese authorities are investigating a number of cases in which steel documented in receipts was either not there, belonged to another company or had been pledged as collateral to multiple lenders, industry sources said. Ghost inventories are exacerbating the wider ailments of the sector in China, which produces around 45 percent of the world's steel and has over 200 million metric tons (220.5 million tons) of excess production capacity. Steel is another drag on a financial system struggling with bad loans from the property sector and local governments. "What we have seen so far is just the tip of the iceberg," said a trader from a steel firm in Shanghai who declined to be identified as he was not authorized to speak to the media. "The situation will get worse as poor demand, slumping prices and tight credit from banks create a domino effect on the industry."

        How China's Rehypothecated "Ghost" Steel Just Vaporized, And What This Means For The World Economy - One of the key stories of 2011 was the revelation, courtesy of MF Global, that no asset in the financial system is "as is", and instead is merely a copy of a copy of a copy- rehypothecated up to an infinite number of times (if domiciled in the UK) for one simple reason: there are not enough money-good, credible assets in existence, even if there are more than enough 'secured' liabilities that claim said assets as collateral. Naturally, among such assets are not only paper representations of securities, mostly stock and bond certificates held by the DTC's Cede & Co., but physical assets, such as bars of gold held by paper ETFs such as GLD and SLV. In fact, the speculation that the physical precious metals in circulation have been massively diluted has been a major topic of debate among the precious metal communities, and is the reason for the success of such physical-based gold and silver investment vehicles as those of Eric Sprott. Of course, the "other side" has been quite adamant that this is in no way realistic and every ounce of precious metals is accounted for. While that remains to be disproven in the next, and final, central-planner driven market crash, we now know that it is not only precious metals that are on the vaporization chopping block: when it comes to China, such simple assets as simple steel held in inventories, apparently do not exist.

        China's rural transition - Roughly half of China's population is still rural, living in villages and towns and dependent primarily on farming. In 1985 that percentage was about 76%, so there has already been a massive transformation of China's economy and society towards greater urbanization. (Albert Nyberg and Scott Rozelle treated this process in an important World Bank publication, Accelerating China's Rural Transformation.) There are two basic processes through which urbanization can occur. Rural people can migrate to cities, or cities can grow up around rural people. Both processes have been underway for thirty years in China. Estimates vary, but approximately 210 million migrants work in Chinese manufacturing and construction industries, and the vast majority of these men and women are from rural origins. The percentage of migrant workers in urban industries is staggering; W. K. Chan reports in Wuhan, for example, that 43% of manufacturing workers and 56% of construction workers are non-Hukou migrants (link).  But almost all of China's cities have also sprawled out into their peripheries, into what was previously farm land and villages. This is true in Shanghai and Suzhou, Wuhan, and hundreds of other major cities.

        China's shifting demographics and their impact - China's changing demographics now pose risks to global economic output for the simple reason that the nation is currently responsible for about 40% of world's GDP growth.It is therefore important to understand what is driving China's population dynamics. Here are some facts (also discussed in some detail here):
        1. China's population is ageing. BBC: - Chinese women are having fewer children, but having a smaller generation follow a boom generation - and longer life expectancies - means that by 2050, it is expected that for every 100 people aged 20-64, there will be 45 people aged over 65, compared with about 15 today.

        2. Ageing population is expected to have a negative impact on China's labor force growth.
        3. Declining labor force will limit economic growth. DB: - Over the medium term the country will be faced with a more hostile demographic outlook, as labour force growth turns negative [above]. Alongside weaker western world growth, this will help to explain why Chinese growth will moderate from 10-12% to between 7-9% over the next few years.

        The End of China’s Easy Growth“ - Caixin magazine reports - with disbelief - that the wish-list for industrial parks and mega-projects unveiled by all echelons of the Chinese system has reached 15 trillion yuan by some estimates.  This is over $2.3 trillion or nearly four times the blitz of extra spending after the Lehman crisis in 2008, a policy that pushed investment to a world record 49pc of GDP and is now deemed to have been a mistake.  But as Caixin also reports, the authorities are running out of easy money. Land transfer fees for the 300 largest cities have fallen 38pc over the last year.  China may have to muddle through the downturn after all with less extra juice than hoped. This will be sobering. The country’s cost advantage over America - and others - has vanished.  A new report by PricewaterhouseCoopers entitled “A Homecoming for US Manufacturing” claims it is now cheaper for whole clusters of US industry to produce at home, close to their markets. Firms are “re-shoring” — to use the vogue term — to cut transport and inventory costs and take advantage of cheap shale gas. The weaker dollar has iced the cake. PwC said the US has clawed back a cost advantage of 2pc in steel output against China, at least for the North American market. Its “heat map” gives the US the edge in chemicals, primary metals, electrical products, machinery, paper, transport equipment, and wood, in that order…

        The Coming Global Savings Famine? -  Global markets will increasingly start to feel the effects of China’s slowdown. But maybe not quite in the obvious ways or for the obvious reasons. China’s manufacturing sector continued to contract in September, according to the latest HSBC survey of purchasing managers, and has now weakened for 11 months running. The Chinese economy’s weakness has weighed heavily on Chinese equities: the Shanghai Composite Index is now at its lowest level since February 2009, when the world was firmly in the grip of the financial crisis. It has also affected global markets, contributing to a weaker tone in Europe this morning as well as softness in the markets for commodities, particularly oil. China is widely considered to have been instrumental in shoring up the global economy in the wake of the financial crisis, thanks to the huge volumes of central bank-driven lending and fiscal stimulus. So a Chinese slowdown is expected to work in reverse. This bad news might not be so bad, however, if it also represented a Chinese rebalancing away from investment-driven growth, which has been running at an historically unprecedented 50% of GDP. Private consumption is at an equal extreme, albeit in the opposite direction, running at around 36% of GDP.

        Asia’s millionaires outgrow those in N America - Asia has overtaken North America for the first time as the region with the most super-wealthy individuals as the number of people with $1m or more in easily investable assets hit 3.4m last year. The finding, in an annual survey by Royal Bank of Canada and consulting firm Capgemini, highlights how the shift in economic power to a region dominated by high-growth economies is spurring a new class of entrepreneurs who derive much of their wealth from owning businesses. It comes a year after a similar survey found that Asia had overtaken Europe in the same category, defined as those with $1m or more immediately available for investing, excluding property and collectable items. People in North America with $1m or more still accounted for the largest share of wealth by value, however, with $11.4tn, compared with $10.7tn in Asia and down 2.3 per cent from the 2010 figure. The latest survey also found that such growth in Asia was contributing to the expansion of Singapore and Hong Kong as centres of offshore wealth, giving them an edge over Switzerland and Luxembourg, which faced tighter European regulation on bank secrecy.

        Money still leaving China - China continued to experience money outflow in August. The change of position of forex purchases in PBOC’s statistics and trade data implies that RMB187 billion left the country, showing no sign of slowing. Note that the PBOC do not distinguish the destination of where the money has gone, which could be hot money outflow, outbound investment, and others. As I’ve noted before, continued money outflow does not bode well for China’s monetary conditions as the existing mechanism of base money creation is broken. However, I believe that as the ECB and the Fed are stepping in to support the economy and remove some tail risks, and there is a possibility that capital flow could become more favourable to China in the short-term. Whether this is going to be enough and how long this positive impact might have is not yet clear.

        Western expats saying goodbye to China does not bode well for economic growth - Anecdotal evidence suggests that increasing numbers of western expats are beginning to leave China. A recent article that has gone viral in the expat community in China called "Why I’m leaving the country I loved" describes some of the reasons. Mark Kitto provides a blistering critique of the Chinese Communist Party and China's treatment of foreigners.Prospect: - ... Nor is the Chinese Communist Party entirely averse to condoning slavery. It has encouraged its own people to work like slaves to produce goods for western companies, to earn the foreign currency that has fed its economic boom. (How ironic that the Party manifesto promised to kick the slave-driving foreigners out of China.) And the Party wouldn’t know a legal system if you swung the scales of justice under its metaphorical nose. (I was once a plaintiff in the Beijing High Court. I was told, off the record, that I had won my case. While my lawyer was on his way to collect the decision the judge received a telephone call. The decision was reversed.) Besides some of the reasons specific to China, expats leaving a nation can be a leading indicator of weaker economic growth. For example the number of expats in Japan apparently also declined in the 90s, although exact numbers are difficult to pinpoint. What is clear however is that a bubble economy often creates unrealistic expectations about future growth, attracting capital and talent. And when the bubble bursts, years of sub-par growth ensue.

        Anti-Japan protests spread across China, turn violent — More than 70,000 Chinese staged rallies Saturday in at least 28 cities to protest Japan's nationalization of a group of disputed islets, with Japanese businesses in some areas broken into, ransacked and torched. The sheer scale of the protests was the largest since China and Japan normalized diplomatic ties in 1972, and surpassed the outcry in 2005 triggered by Prime Minister Junichiro Koizumi's visits to war symbol Yasukuni Shrine, according to a diplomatic source in Beijing. This round of protests were triggered by Japan's announcement Tuesday that it bought privately owned land in the disputed Senkaku Islands, which China calls Diaoyu and Taiwan calls Tiaoyutai, to bring them under state control. The largest demonstration, in Qingdao, Shandong Province, attracted as many as 30,000 people and evolved into rioting as protestors torched as many as 10 Japanese enterprises, including a Panasonic factory that suffered damage to a production line, Japanese sources said. Protestors also encroached on a Panasonic factory in Suzhou, Jiangsu Province, breaking glass at the entrance and overturning a car.

        Japan brandname firms shut China plants after protest violence (Reuters) - Some major Japanese brandname firms announced factory shutdowns in China on Monday and urged expatriates to stay indoors ahead of what could be more angry protests over a territorial dispute between Asia's two biggest economies. China's worst outbreak of anti-Japan sentiment in decades led to weekend demonstrations and violent attacks on well-known Japanese businesses such as car makers Toyota and Honda, forcing frightened Japanese into hiding and prompting Chinese state media to warn that trade relations could now be in jeopardy. Another outbreak of anti-Japan sentiment is expected across China on Tuesday, the anniversary of Japan's 1931 occupation of parts of mainland China.

        China protests: Fears rise over Japan-China trade ties -- There are fears over the economic impact of the dispute between China and Japan if the row over islands in the East China Sea is not resolved soon. Several major Japanese companies have suspended operations in China after attacks on shops and car dealerships. Shares in some of those firms fell in Tokyo on Tuesday. The Japanese government has asked Beijing to do more to protect Japanese businesses. Trade between China and Japan is worth about $345bn (£212bn). "This is a major concern. The worry is that if it is not dealt with properly and fast enough, the situation may get out of hand," "And any such development will hurt Japanese firms even further." Japan's Chief Cabinet Secretary Osamu Fujimura said Tokyo had asked Beijing via diplomatic channels to take necessary steps to protect Japanese nationals and prevent further damage to Japanese companies in China. "Japanese companies play an important role in the Chinese economy and employment. We believe we should be calm and make rational judgements from a broad perspective," he told reporters.

        More Japanese firms suspend China operations - Major Japanese companies ranging from auto makers to retailers temporarily suspended operations in China on Tuesday as a wave of anti-Japan demonstrations continued across the country. Toyota Motor Co. said Tuesday it temporarily suspended some of its manufacturing operations in China. The Japanese auto giant makes vehicles in China through joint ventures in Tianjin and other cities. A Toyota spokesman declined to give further details regarding the suspended operations. Sony Corp. said it suspended two of its seven plants in China the same day, but declined to give details of which plants are subject to the suspension. The anti-Japan protests have been sparked by a recent move by the Japanese government to buy disputed islands in the East China Sea from their private owners, who are Japanese. The islands are known as the Senkaku in Japan and the Diaoyu in China. Tuesday also marks the anniversary of an incident in 1931 in which the Japanese army blew up a railway in China and, by insisting that it was done by the Chinese military, used it as an excuse for invading. Some Japanese facilities and inventory have been damaged in the protests, but the impact on Japanese firms could go even further.

        Beijing hints at bond attack on Japan - A senior advisor to the Chinese government has called for an attack on the Japanese bond market to precipitate a funding crisis and bring the country to its knees, unless Tokyo reverses its decision to nationalise the disputed Senkaku/Diaoyu islands in the East China Sea. Jin Baisong from the Chinese Academy of International Trade – a branch of the commerce ministry – said China should use its power as Japan’s biggest creditor with $230bn (£141bn) of bonds to “impose sanctions on Japan in the most effective manner” and bring Tokyo’s festering fiscal crisis to a head. Writing in the Communist Party newspaper China Daily, Mr Jin called on China to invoke the “security exception” rule under the World Trade Organisation to punish Japan, rejecting arguments that a trade war between the two Pacific giants would be mutually destructive. Separately, the Hong Kong Economic Journal reported that China is drawing up plans to cut off Japan’s supplies of rare earth metals needed for hi-tech industry. The warnings came as anti-Japanese protests spread to 85 cities across China, forcing Japanese companies to shutter factories and suspend operations. Fitch Ratings threatened to downgrade a clutch of Japanese exporters if the clash drags on. It warned that Nissan is heavily at risk with 26pc of its global car sales in China, followed by Honda with 20pc. Sharp and Panasonic both have major exposure. Japan’s exports to China were $74bn in the first half of this year. Bilateral trade reached $345bn last year.

        Chinese cyber attacks hit Japan over islands dispute -- At least 19 Japanese websites, including those of a government ministry, courts and a hospital, have come under cyber attack, apparently from China, police said Wednesday. Many of the websites were altered to show messages proclaiming Chinese sovereignty over the Diaoyu islands, a Japanese-administered chain Tokyo calls Senkaku, the National Police Agency (NPA) said in a statement. The NPA has confirmed that about 300 Japanese organisations were listed as potential targets for cyber attack on the message board of Honker Union, a Chinese “hacktivism” group, it said. The police also confirmed around 4,000 people had posted messages about planned attacks and schemes on China’s leading chat site “YY Chat”, it said. The targeted sites include those of the Internal Affairs and Communications Ministry and Tohoku University Hospital, police said.

        China Versus Japan: Shooting War, Economic War or War of Words? - The conflict between China and Japan over a small chain of disputed islands – called “Senkaku” by Japan and “Diaoyu” by China  – is fluid. Here are some of the key recent events in this dispute:

        Japanese Exports Sink 3rd Month; Flash China Manufacturing PMI Shows Output down at Sharpest Rate in Ten Months - As the global recession deepens, bad news in Asia continues to mount. China and Japan are leading the Asia-Pacific decline. The HSBC Flash China Manufacturing PMI™ is negative once again with Output down at Sharpest rate in Ten Months. Key Points:

        • Flash China Manufacturing PMI™ at 47.8 (47.6 in August). 2-month high.
        • Flash China Manufacturing Output Index at 47.0 (48.2 in August). 10-month low.

        Japan has been in a trade deficit position, seasonally adjusted, for 18 months. Territorial disputes with China are likely to cause further economic damage. Should China withhold rare earth elements from Japan, the result could be crippling. Rare earths are used in cell phones, computers, bombs, DVD, batteries,  catalytic converters, and numerous other devices.For now, Japan still has a current account surplus in spite of an ongoing trade deficit, but that situation will not last forever. When it ends, Japan will need external financing of its mountain of debt, or it will end up turning to the printing presses.

        Japan suffers steep fall in exports Japan recorded another steep fall in exports in August, highlighting the vulnerability of the nation’s finances amid persistently high imports of fuel. Thursday’s government data showed that shipments slipped almost 6 per cent from a year earlier to Y5tn ($64bn), the third monthly fall in a row, while imports were 5.4 per cent lower at Y5.8tn. The resulting trade deficit of Y754bn was among the widest since last March, when the Fukushima crisis led to the staggered closure of the country’s nuclear reactors. Adjusted for seasonal variations, Japan has recorded trade deficits in each of the 18 months since the earthquake and tsunami, after decades of more or less uninterrupted surpluses. Now, as the government edges towards a gradual phasing-out of nuclear power, increasing its reliance on imported fossil fuels, many expect these deficits to linger.Provisional data from the ministry of finance showed that in August shipments to western Europe fell by 28 per cent from a year earlier, thanks to big falls in exports to Germany (18 per cent) and the UK (42 per cent). Exports to China, meanwhile, posted their third successive decline. August’s 10 per cent fall was only slightly better than a 12 per cent slump in July.

        Bank of Japan adds to stimulus — The Bank of Japan Wednesday said it will provide more monetary stimulus in response to a slowing in domestic economic activity, increasing the size of its asset purchases by 10 trillion yen ($126.7 billion) to about ¥80 trillion. The central bank also left its policy-interest-rate target unchanged, in a range of zero to 0.1%. The decisions, which come on the heels of the U.S. Federal Reserve’s own quantitative-easing announcement last week, were taken unanimously by the Japanese central bank’s monetary-policy board. “There had been some debate about whether the BOJ would follow in the Fed’s and ECB’s footsteps. With this decision, it appears the BOJ’s main message is that it will take ... action in concert with global accommodative policies,” Wednesday’s action by the BOJ may also increase the chance of foreign-exchange intervention by the ministry of finance to weaken the yen from elevated levels and “maximize the impact of the BOJ’s monetary policy,” In a statement announcing its decisions, the Bank of Japan said that the pickup in economic activity has “come to a pause” as overseas economies moved deeper into slowdown, and that the activity was “expected to level off, more or less.”

        Japan launches QE8 as 20-year slump drags on - Japan has launched an eighth round of quantitative easing to weaken the yen and cushion a slide back into recession.  The Bank of Japan (BoJ) is to buy a further 10 trillion yen (£79bn) of bonds, bringing the total accumulated so far in its battle against deflation to 80 trillion yen, or 20pc of Japanese GDP.  Jun Azumi, Japan’s finance minister, praised the bank’s “bold” efforts to hold down the yen, lending credence to suspicions that the real motive is to counter “beggar-thy-neighbour” currency devaluations by other powers and prevent the strong yen choking Japan’s export industry.  Mr Shirakawa stated on Wednesday – almost with regret – that Japan now has the “easiest monetary conditions” in the rich world. “I do not think that you could argue that the BoJ is less bold than the Fed,” he said.

        QE3 and The Fed's Shaping of Global Monetary Policy - One overlooked consequence of QE3 is that it has the ability to restore robust nominal spending both in the United States and in the world.  This is because the Fed is a monetary superpower: The Fed has this power because it manages the world's main reserve currency and many emerging markets are formally or informally pegged to dollar. As a result, its monetary policy gets exported to much of the emerging world. The ECB and Bank of Japan are also influenced by the Fed's decisions because they are careful not to let their currencies becomes too expensive relative to these dollar-pegged currencies and the dollar itself.  U.S. monetary policy, consequently, gets exported to the Eurozone and Japan as well.    It also implies that the Fed could now do a lot of good for both the U.S. and Eurozone economies if were to adopt something like a NGDP level target.  Based on this view, the global economy sorely needs the Fed to wake up from its slumber. Well, it seems that QE3 is already beginning to shape global monetary conditions as the WSJ now reports: Massive injections of stimulus into financial markets by the world's largest central banks are creating a domino effect around the globe, prompting governments from Brazil to Turkey to take steps to keep easy money from flooding in and driving up their currencies. The Bank of Japan Wednesday became the latest central bank to ease monetary policy. That follows bold pledges by the world's two biggest central banks to launch open-ended programs to bolster their economies.

        China Files Trade Case Against Washington - China filed a World Trade Organization case Monday challenging U.S. anti-dumping measures on billions of dollars of kitchen appliances, paper and other goods, adding to worsening trade strains as global demand weakens. Beijing’s move came after American officials said the Obama administration plans to file its own WTO case this week accusing China of improperly subsidizing exports of automobiles and auto parts. China and the U.S. have clashed over complaints about market barriers and subsidies for goods including autos, solar panels, tires, steel and chicken. Political pressures on both sides are worsening as demand for their goods cools, raising the threat of job losses in export industries.

        Obama to tell WTO that China illegally subsidizes auto exports -- The Obama administration is set to launch a new enforcement action with the World Trade Organization against China on Monday, alleging that the Asian economic giant is putting U.S. manufacturers at a competitive disadvantage by illegally subsidizing exports of autos and auto parts. The president, blending his roles as candidate and incumbent officeholder, will announce the move at the first of two campaign stops scheduled Monday in Ohio, a state where 1 in 8 jobs is tied directly or indirectly to auto manufacturing. According to administration officials, who provided details about the case on the condition of anonymity before the formal announcement is made, China has provided at least $1 billion in export-contingent subsidies between 2009 and 2011 in violation of WTO rules and the nation's agreement upon joining the organization in 2001. The subsidies contribute to the outsourcing of U.S. auto-parts production to China, the officials said.

        Dollar no longer primary oil currency as China begins to sell oil using Yuan - Since China is not a natural oil producing nation, the question most people will ask is how will the Asian economic power get enough oil to affect dollar hegemony? That question was also answered by Lindsey Williams when he pointed out a new trade agreement that was signed on Sept. 7 between China and Russia, in which the Russian Federation agreed to sell oil to China in any and all amounts they desired. Lindsey Williams: "This has never happened in the history of crude oil. Since crude oil became the motivating force behind our (U.S.) entire economy, and everything in our lives revolves around crude oil. And since crude oil became the motivating factor behind our economy... never, ever has crude oil been sold, bought, traded, in any country in the world, without using the American dollar.""Crude oil is the standard currency of the world. Not the Yen, not the Pound, not the Dollar. More money is transferred around the world in crude oil than in any other product."

        Vladimir Putin Tells USAID to Beat It (Just Beat It)  - I believe that I have been fair in criticizing the US development agency USAID on two main grounds. First and foremost, they remain one of the most egregious offenders in the "tied aid" sweepstakes. That is, they only allow aid monies to be spent on American products and services in several categories until now. This practice is most offensive when it comes to food aid. Instead of helping build up the capacity of aid recipient countries to provide food for their populations, self-interested Americans dump their (heavily subsidized) agricultural surplus, adding insult to injury by unjustly undercutting domestic producers. Second, it is somewhat of a misnomer that this agency is "aiding" other countries. Given that the United States borrows somewhere between 41 to 43 cents for every dollar it spends, the honest truth is that it merely reycles other peoples' money in "aiding" poor countries. Given that China is the United States' largest creditor, for instance, it would not be inaccurate to say that all the Americans are doing is attaching all sorts of strings to money the Chinese give while claiming to aid other developing countries. What a deal. We are so touched by your wealthy American farmers, Sammy. [Someone, get me a handkerchief quick...sniff]

        Shipping Industry Confidence Falls - Overall confidence levels in all sectors of the shipping industry fell in the three months ended August 2012 to their lowest level for a year, according to the latest Shipping Confidence Survey from international accountant and shipping adviser Moore Stephens. The decline to the lowest figure recorded since the survey was launched in May 2008 comes after three successive quarters of improved confidence. Chief among the concerns raised by respondents to the survey were the glut of new ship orders coming onto the market and continuing uncertainty about the global economy. In August 2012, the average confidence level expressed by respondents in the markets in which they operate was 5.3 on a scale of 1 (low) to 10 (high), compared with the figure of 5.7 recorded in the previous survey in May 2012, and identical to the figure posted one year previously, in August 2011. The survey was launched in May 2008 with a confidence rating of 6.8. In the container ship market, there was a 2 percentage point fall overall to 32 percent in the numbers expecting rates to go up. In the previous survey, the number of respondents anticipating higher rates over the coming year was up in all categories of respondent. This time, it was down in all categories, with the exception of owners and charterers.

        Global Imbalances - Some observations on the difficult tasks of identifying and explaining such imbalances I've just attended a conference on the subject of imbalances, both global and intra-Europe, where I discussed the roles of China and the US; the agenda for "Intra-European Imbalances, Global Imbalances, International Banking, and International Financial Stability" (organized by Gunther Schnabl and Ansgar Belke of the University of Leipzig, and University of Duisberg/Essen, respectively) is here.The Peterson Institute yesterday held a session focusing in on imbalances and spillovers, with special reference to the IMF's new approach, EBA, to identifying imbalances (see this post). The program is here. Joe Gagnon's presentation critiques the lack of emphasis on the accumulation of forex reserves and other official flows.

        Latest Global Trade Data - Above is the latest data on global trade: the monthly data come from the WTO and I seasonally adjust them myself.  The last data point above is August, but it is very preliminary with only eight of about seventy countries reporting, representing a fifth of global trade.  Still, since the imports and exports of those eight countries represent essentially independent samples, it's likely that at least the direction in August is robust.  August thus seems to represent some degree of offset for the sharp fall in June. This doesn't change the big picture though - after the 2008 financial crisis, global trade collapsed and then recovered strongly till early 2011.  For the last eighteen months, however, it's been basically stagnant.  This likely reflects a combination of a sluggish US recovery, a double-dip recession in Europe, and the slowdown in China. The global economy continues to act like an engine firing on only three cylinders.

        A parable of one-way free trade - The basic idea behind free trade is the idea behind all free-market policies: Trade is voluntary. If private parties did not benefit from a trade, they would simply not engage in it. Using the government to prevent voluntary exchange is stopping people from doing things they want to do, and this is always bad. However, note that in the case of international trade, there are, by definition, at least two governments involved, not just one. Either one of these governments can take actions that affect trade. Suppose that Government A takes actions that interfere with its trade with Country B. The "free trade" position is that Government B should never take any steps in response to the policy interventions of Government A. In other words, advocates of "free trade" insist that there is no strategic component to trade; that it is always undesirable to use government policy to "cancel out" or counteract the market interventions of another government. Note that this is a stronger claim than in the one-government case.  As an admittedly muddy and imperfect example of this sort of situation, which I call "one-way free trade", take the recent case of solar subsidies. Starting in 2009, the Obama administration began dishing out loans and grants for solar power companies, since solar power was predicted to be the industry of the future. But starting in 2010, China unveiled subsidies for solar manufacturers and exporters that dwarfed those offered by the U.S. With their profit margins fattened by the subsidies, Chinese companies cut prices drastically in order to grab market share. The price of solar power plunged, dipping below the 7% "Moore's Law" rate at which it had been steadily declining for three decades.

        Global Trade Slowdown -- Data gathered by the CPB Netherlands Bureau for Economic Policy Analysis show that global trade volumes grew an unusually low 2.6% in the second quarter compared with a year earlier; the average pace over the past 20 years has been 6.1%. The two major West Coast ports, the ports of Los Angeles and of Long Beach, Calif., reported that outbound container volumes fell by 4.1% in August from a year earlier. That was the steepest drop since September 2009. In and of itself, the drop in trade seems unlikely to derail the U.S. economy. Housing is doing better, after all, and consumer spending has lately been perking up. But for companies that are exposed to global trade — either because they make the goods that get traded around the world or move those goods — it means that the bad news is far from over.

        The doomsday cycle turns: Who’s next? - - Johnson and Boone - There is a common problem underlying the economic troubles of Europe, Japan, and the US: the symbiotic relationship between politicians who heed narrow interests and the growth of a financial sector that has become increasingly opaque.  Bailouts have encouraged reckless behaviour in the financial sector, which builds up further risks – and will lead to another round of shocks, collapses, and bailouts.This is what we have called the ‘doomsday cycle’ The cycle turned in 2007-8 and was most dramatically manifest in the weeks and months that followed the fall of Lehman Brothers, the collapse of Iceland’s banks and the botched ‘rescue’ of the big three Irish financial institutions.The consequences have included sovereign debt restructuring by Greece, as well as continuing problems – and lending programmes by the IMF and the EU – for Greece, Ireland, and Portugal. Italy, Spain and other parts of the Eurozone remain under intense pressure. Yet in some circles, there is a sense that the countries of the Eurozone have put the worst of their problems behind them. The doomsday cycle is indeed turning – and problems are undoubtedly heading towards Japan and the US: the current level of complacency among policymakers in those countries is alarming. But the next turn of the global cycle looks likely to hit Europe again and probably harder than before. The continental European financial system is in big trouble: budgets are unsustainable and growth is nowhere on the horizon. The costs of bailouts are rising – and the coming scale of the problem is likely to undermine political support for the Eurozone itself.

        The Next Panic -- This summer, many government officials and private investors finally seemed to realize that the crisis in the euro zone was not some passing aberration, but rather a result of deep-­seated political, economic, and financial problems that will take many years to resolve. The on-again, off-again euro turmoil has already proved immensely damaging to nearly all Europeans, and its negative impact is now being felt around the world. Most likely there is worse to come—and soon. But the economic disasters of our time—which involve big banks in rich countries, call into question the viability of government debt, and seriously threaten the reach of even the most self-confident nations—will not end with the euro debacle. The euro zone is well down the path to severe crisis, but other industrialized democracies are hot on its heels. Do not let the euro zone’s troubles distract you from the bigger picture: we are all in a mess. Who could be next in line for a gut-wrenching loss of confidence in its growth prospects, its sovereign debt, and its banking system? Think about Japan.

        The Narrative Structure of Global Weakening - Robert J. Shiller --Recent indications of a weakening global economy have led many people to wonder how pervasive poor economic performance will be in the coming years. Are we facing a long global slump, or possibly even a depression? A fundamental problem in forecasting nowadays is that the ultimate causes of the slowdown are really psychological and sociological, and relate to fluctuating confidence and changing “animal spirits,” about which George Akerlof and I have written1. We argue that such shifts reflect changing stories, epidemics of new narratives, and associated views of the world, which are difficult to quantify.In fact, most professional economists do not seem overly glum about the global economy’s prospects. For example, on September 6, the OECD issued an interim assessment on the near-term global outlook that blandly reports “significant risks” on the horizon – the language of uncertainty itself. The problem is that the statistical models that comprise economists’ toolkit are best applied in normal times, so economists naturally like to describe the situation as normal. If the current slowdown is typical of other slowdowns in recent decades, then we can predict the same kind of recovery.

        Inflation: The global output gap | The Economist - THE image at right is a graphic taken from Bloomberg's markets page, which shows four indexes of commodity prices. There are obviously a lot of things influencing commodity prices, from drought in America to China's growth prospects, but what pops out in this image is the overwhelming influence of perceptions of the euro-area crisis. A sustained rise begins in late 2011 on the heels of the European Central Bank's announcement of a plan to prevent a banking system meltdown, via €1 trillion in short-term bank loans. Prices reverse beginning in March, as peripheral yields begin rising again, then plummet in May as Greece's election raises the possibility of an imminent break-up. As the Greek crisis stabilises so do prices, which then commence rising once more when Mario Draghi goes on the offensive again. It's hard to see evidence of Fed moves in the chart, but Mr Draghi's "it will be enough" moment sticks out like a sore thumb. Why should the euro crisis matter so much? The best guess is probably that no single other dynamic is responsible for as much downside risk. If the euro area hangs together and returns to growth, America's markets will cease pricing in the possibility of disaster and lending conditions might ease considerably. China's exporters can exhale a sigh of relief. Global growth would pick up a little, and the possibility of a substantial global contraction would shrink considerably. The euro crisis matters because it, more than anything else, is setting expectations for the pace of global growth.

        Those pesky inflation surprises - Inflationary pressures, particularly food inflation, continue to percolate across some emerging markets nations. Central bankers don't like openly discussing the problem, fearing just talking about it could raise inflation expectations. But that does not make the problem any less real. India: Even though the wholesale inflation (WPI) remains under 8%, it has not declined further in spite of India's economic slowdown (see post), and actually rose last month. At the same time food prices remain elevated. Bloomberg: - The Reserve Bank of India may focus on inflation as it meets today, especially after the U.S. Federal Reserve’s decision to embark on a third round of quantitative easing. Previous rounds of easing have stoked foreign capital inflows and increases in commodity prices, especially oil. Russia: The central bank actually had to raise rates due to concerns about inflationary pressure. WSJ: - The Bank of Russia unexpectedly raised interest rates across the board on Thursday for the first time in nine months, as it struggles to contain increases in food prices and inflation while the economy slows. The central bank said its decision to raise rates by a quarter of a percentage point was driven by a sharp rise in the rate of inflation in August and early September that had exceeded the bank's "medium-term targets." Bloomberg/BW: - Indonesia’s inflation unexpectedly accelerated in August on rising food costs, limiting scope for the central bank to cut interest rates even as exports slumped for a fourth month.

        Lies, damned lies, and Argentina's inflation statistics - Argentina's authorities continue to blatantly lie about the nation's inflation rate. The official numbers coming out of Cristina Fernández de Kirchner's government have been constantly printed at around 10% per year - with vary little variation. It's quite ridiculous actually.Stories persist about independent economists being threatened by the government not to publish the real numbers domestically. But the government can't do much about foreign economists. JPMorgan's latest estimate is 25.5% 3m/3m saar (seasonally adjusted) and rising (similar to other non-government estimates). It is one thing to cook the numbers "gently", the way China does for example, but being off by some 15% makes the government lose all credibility. Even the IMF decided enough is enough. Its latest action could lead to Argentina losing its IMF membership. Bloomberg: - Argentina is on track to be the first country ever censured by the International Monetary Fund for not sharing accurate data about inflation and the economy. The IMF’s board of directors, meeting yesterday in Washington, gave the country until Dec. 17 to respond to concerns about the quality of its official data, it said today in an e-mailed statement. If the deadline is missed, the board can issue a declaration of censure, a warning that has never been used and which means sanctions may be applied if the concerns aren’t addressed.

        Brazil Real Drops on Central Bank Intervention; Swap Rates Rise - Brazil’s real dropped the most since July after the central bank intervened to help exporters maintain competitive prices. The real was the biggest loser among the dollar’s 16 most- traded counterparts tracked by Bloomberg after the central bank sold reverse currency swaps for the fourth time in four days. Finance Minister Guido Mantega reiterated in a newspaper interview that the government won’t let the real strengthen. “The exchange rate still has the Mantega question,” Luciano Rostagno, the chief strategist at Banco West LB do Brasil, said in a phone interview from Sao Paulo. The real depreciated 1 percent to 2.0320 per dollar at the close of trading in Sao Paulo, the biggest drop on a closing basis since July 3. Swap rates on contracts due in January 2013 increased two basis points, or 0.02 percentage point, to 7.31 percent. Shorter-term swap rates rose after the central bank lowered reserve requirements for financial institutions, damping speculation further cuts in borrowing costs will be needed to sustain the economic recovery.

        Mexico fact(s) of the day -  Today, Mexico exports more manufactured products than the rest of Latin America put together. And this: Partly as a result, the sum of Mexico’s imports and exports as a percentage of its gross domestic product, a strong indicator of openness, rose to 58.6 per cent in 2010. In the case of China, it was 47.9 per cent, and just 18.5 per cent in the case of Brazil. HSBC in Mexico City estimated recently that the figure for Mexico could increase to as much as 69 per cent this year. And this: In 2009, Mexico overtook South Korea and China to became the world’s leading producer of flatscreen television sets. The bulkier the item, the more Mexico makes sense. According to Global Trade Atlas, the country is also the leading manufacturer of two-door refrigerators. Cars made in Mexico are now being exported to China.  Here is more (FT).

        How the Entry of Walmart and Big Retail Chains Will Change India - States with big urban centers and enough middle-class consumers to actually shop at foreign retail outlets are likely to move forward on retail reform. Poorer, less urbanized states and those where India’s traders and merchant castes are politically powerful can opt out. So far, the two most vocal critics of the new measure are ideological opposites — Mamata Banerjee, a left-leaning populist, and Narendra Modi, a right-wing Hindu nationalist who styles himself as a business-friendly reformer. The rest of India’s ambitious chief ministers will end up competing with one another for a limited pool of big-ticket investment, creating an incentive to implement the reforms quickly. Once the reforms take hold, India could see some profound changes. India lacks the infrastructure like refrigeration and warehousing that most big retailers are used to, so Walmart, Carrefour, Tesco, et al. would have to build it themselves. That would benefit the entire retail-supply chain in India, decreasing spoilage and reducing time to market. To take advantage of economies of scale, those retailers will also — as Walmart does now on a limited scale — deal directly with farmers.

        Australia’s record quarterly job losses - Last week’s ANZ Australian Economic Update provided some interesting analysis of the quarterly labour force statistics, released last week by the ABS. The ANZ Update showed a labour market that is deteriorating, with job losses starting to mount, especially in the construction and public sectors. After examining the data myself, which is presented on a non-seasonally adjusted basis, I was surprised to discover that Australia recorded a record number of job losses in the August quarter, with total employment contracting by -135,500 over the quarter (see red bar below). In raw number terms, job losses were particularly high in construction, agriculture and the public service: Whereas in raw percentage terms, losses were highest in agriculture, real estate and utilities: Interestingly, the mining sector, which has led job creation over the past year (click to see chart), actually lost -4,600 jobs in the August quarter, with job losses concentrated in the coal industry. On a capital city basis, actual job losses were highest in Melbourne, Sydney and Adelaide, whereas Perth, Darwin and Canberra bucked the trend:

        Why a U.S.-style housing nightmare could hit Canada - Our biggest real estate markets — Toronto and Vancouver — seem to have decided they're really London and Manhattan. Several of our smaller cities are wildly optimistic, too, with year after year after year of six-, seven-, even 10-per-cent increases in property values.  Friends and colleagues who own homes in Canada are the very pictures of smug. They seem convinced the markets in which they happily reside will keep rising forever. Or at the very least, never drop. And any discussion of the subject usually involves condescending lectures about how Americans, who are only beginning to recover from a six-year nightmare of foreclosures, could have used a dose of Canadian common sense and prudence. Well, I watched America's nightmare unfold, and it appears pretty evident to me that a sequel of some sort is coming to Canada. So I ran that thesis past Robert Shiller, of Yale University, probably the foremost authority on real estate in America. He co-founded the Case-Shiller Home Price Index and predicted the American collapse in 2005, a year before it happened. "I worry," he told me, "that what is happening in Canada is kind of a slow-motion version of what happened in the U.S."

        American Real Estate Investors Seek Opportunities in Europe’s Debt Crisis - While the world is anxiously watching to see how the European debt crisis will unfold, many real estate investors in the United States are eagerly seeking opportunities to reap profits from the Continent’s distress.Private equity firms, whose investors include pension funds, university endowments and foundations, have been vying to buy portfolios of European bank debt consisting of troubled commercial real estate mortgages. By acquiring these loans at deep discounts, they hope eventually to earn generous returns of 12 to 18 percent, investors and advisers say. The asset sales in Europe could dwarf the work of the United States Resolution Trust Corporation, which was charged with disposing of the troubled mortgages resulting from the savings and loan crisis of the 1980s, “Most of the firms looking at this came of age during the R.T.C.,” Mr. Platt said. “You can see why a lot of folks are rubbing their hands and saying: ‘This could be very interesting.’ ” Commercial mortgage-backed securities, real estate loans that are packaged together and sold to investors, are not as common in Europe as in the United States. Instead, most European mortgages remained on the banks’ books, which has been a drag on profits. 

        Is Europe’s Financial Crisis Over? - The European Central Bank’s recently announced policy of bond buying, what it calls “outright monetary transactions1” (OMTs) marks a convergence of European central banks with their Anglo-Saxon counterparts. While the ECB’s actions represent the best chance yet to put an end to a crisis that has been playing out since 2010, the Bank has markedly raised the stakes for governments.The ECB’s policy framework is well suited to fighting systemic blazes, but poorly suited to local fires, which thus can spread uncontrollably. The OMT program, which allows the ECB to buy sovereign bonds of countries that have agreed to reform their economies, significantly levels the playing field between the Bank and its advanced-economy peers. Spain has the same fiscal and structural problems that it had prior to the OMT program’s launch, but now it has an external lender of last resort. That is a game-changer.Under the pre-OMT regime, a capital outflow from Spain, whether through the sale of government bonds or the liquidation of private claims, resulted in tighter monetary conditions. The sale of sovereign bonds under the fixed exchange-rate regime put direct upward pressure on their yields2, while sales of private securities by foreigners had a similar effect, but through indirect channels. Monetary tightening was forestalled only to the extent that another source of foreign capital (either private or ECB) could replace the outflow.

        EU Bank Plan Hits Roadblock - Europe's plan for a new single bank supervisor hit its first major roadblock Saturday, with a number of countries saying that a proposed Jan. 1, 2013, launch date left too little time to resolve key issues thrown up by the plan. On the second day of a meeting of European Union finance ministers in Cyprus, at least four ministers voiced opposition to the supervisor's start date—including the German, Swedish, Dutch and Danish ministers—according to two people familiar with the discussion. The proposal to put the European Central Bank in charge of policing the more than 6,000 banks in the euro zone is the beginning of an effort to replace the euro zone's patchwork of national banking systems and regulators with the uniform rules of a "banking union," which officials say is necessary to repair Europe's crisis-hit common currency. But only days after the proposal was published, disagreements over the pace at which this should happen and over the scope of the ECB's role threatened the plan.  Regional leaders agreed in June that the region's bailout fund can start directly recapitalizing banks only once a single supervisor is established. Delaying the supervisor's launch would mean putting off the time when euro-zone banks can receive assistance without that aid increasing the national government's debt load.

        QE would be right for Europe, too - When I heard the news of another round of quantitative easing in the US last week, my first thought was that Mario Draghi should have done the same. Instead, the president of the European Central Bank opted for a conditional bond purchasing programme with an uncertain start date. In the meantime, the eurozone’s faltering economy needs a much more determined monetary stimulus, and it needs it right now. For the moment, the eurozone crisis resolution process feels good because none of this month’s potential accidents happened. The German constitutional court has taken itself out of the equation. Good riddance. Dutch voters re-elected their government and rejected the lure of populist propaganda. Mr Draghi did what was expected. While the economic situation in the member states gets worse, policy makers seem punch-drunkenly optimistic. They have not had so much luck in some time. The ECB’s Outright Monetary Transaction programme gave them a break.  But trouble is already building that may soon destroy the OMT’s credibility. Mariano Rajoy is still sending confusing and conflicting messages about whether Madrid will apply for the programme. The ECB made it easy for the Spanish prime minister. To qualify for the OMT, all the Spanish government needs to do is to apply for the so-called Enhanced Conditions Credit Line – a minimalist programme with limited conditionality. Mario Monti, Italy’s prime minister, has said Rome will not apply for the programme before its election. I have heard the first EU official admitting openly that maybe nobody will apply and the ECB may never have to buy a single bond. If market sentiment is sufficiently positive, that argument goes, things might resolve themselves.

        Quantitative Easing and Lender of Last Resort: Lots of Confusion under the Sky - I have read an interesting article by Wolfgang Münchau, on the Financial Times. To summarize, Münchau argues that because of politician’s complacency, there is a chance that the new OMTs program launched by the ECB will never be used, and hence prove ineffective in boosting the economy. He therefore argues that the ECB should have done like the Fed, and announce an unconditional bond purchase program (private and public alike). The piece is interesting because Münchau is at the same time right, and off the target. It is worth trying to clarify. Münchau is perfectly right in his main point: the OMTs is not anywhere near a real quantitative easing program, and its conditionality does not make sense. A central bank wanting to support growth should provide liquidity to the system through open market operations and aggressive rate cuts (as long as there is a margin to do so). Münchau misses the target, nevertheless, when he complains that OMTs will be ineffective because governments will not apply for it. He confuses the role of lender of last resort and the role of macroeconomic stabilization of monetary policy. The two roles can be linked, but remain distinct.

        Euro Ruling Not as Simple as It Seems - In its press release on Wednesday, Germany's Federal Constitutional Court said that the petitions for the issue of temporary injunctions that would block the ratification of the European Stability Mechanism (ESM) had been "unsuccessful for the most part." But "for the most part" does not mean "entirely". Indeed, in the aftermath of the ruling, the roles of winners and losers are not as clear as they may have seemed at first glance. It would, of course, be going too far to say that the verbal lapse of court President Andreas Vosskuhle was a Freudian slip. Right in the first sentence of the text of the ruling, Vosskuhle involuntarily caused a wave of laughter when he said that the petitions were "for the most part well-founded" -- which would have meant that the plaintiffs had won. Vosskuhle corrected himself with a laugh, saying that the petitions were actually "unfounded." But the slip of the tongue reflects a deeper truth. Nobody seriously believed that the plaintiffs, led by the stubborn conservative Bavarian politician Peter Gauweiler, would win an outright victory. But the court's ruling contains a number of details that could cast a shadow over the winning side's victory, and possibly grant a not insignificant triumph to the other side -- which is why Gauweiler himself spoke of a "huge success."

        German Parties Offer Rival Interpretations of Euro Ruling - For some time now, the path out of the euro crisis has been a clear one for Angela Merkel. Of course, the German chancellor believes that her policies are the right way out. Last Wednesday, when the German Federal Constitutional Court approved the ratification of the treaty implementing the permanent euro bailout fund, the European Stability Mechanism (ESM), with a few conditions, the chancellor once again felt affirmed. "Germany is sending a strong message today -- to Europe and beyond," she said, cheering the decision. The Karlsruhe-based court, she said, had "freed the path that had always guided us and me very personally." But the celebration may be premature. Some of the conditions set by the court could prove prickly for the government and its final ruling on the case could come with unpleasant surprises.

        Doubts about Draghi: ECB Head Offers to Defend Himself in Bundestag - Der Spiegel -- In a surprise move, European Central Bank President Mario Draghi has opened himself up to making an unusual appearance -- defending his controversial monetary policies to the German parliament, the Bundestag. "If the Bundestag were to invite me, I would gladly come," Draghi told German daily Süddeutsche Zeitung on Friday. "It would be a good opportunity to clarify what we are doing." According to opinion polls, nearly half of Germans mistrust the ECB leader, a reality that hinders his work, Draghi told the paper. "I must do more to explain our measures," he added. Draghi has encountered resistance from the Bundesbank, Germany's central bank, but also from leading politicians in the country, some of whom have criticized his recent decision to purchase sovereign bonds in unlimited quantities from crisis-plagued euro-zone countries to reduce yields. Critics argue that the purchases amount to state financing, which the ECB is prohibited from doing.

        Further Steps Needed Before Banks Tap ESM - Handing bank oversight to the European Central Bank is not in itself sufficient to allow the euro zone's rescue fund to directly assist banks, Germany's Finance Minister said, warning he expected no such deal on supervision in 2012. Wolfgang Schaeuble made the comments after talks between EU finance ministers on Saturday exposed deep divisions about a proposed banking union. That may disappoint investors who had been pinning hopes on a pledge by euro zone leaders to agree sweeping new powers for the ECB in 2012. This in turn had been expected to unlock the possibility of direct aid to banks from the euro zone's rescue fund, the European Stability Mechanism (ESM), for countries such as Spain or Ireland. "We have the declaration of the heads of governments of the euro zone that European banking supervision is a necessary but not sufficient prerequisite," Schaeuble told reporters after the ministers' meeting in Cyprus. "The rules of the ESM remain." He said any country that is home to troubled banks would still need to apply for an adjustment program through the ESM.

        Spain must seek help before ECB buys bonds - Spain would have to apply for a rescue package before qualifying for inclusion in the European Central Bank's plan to buy debt of struggling euro zone members, ECB policymaker Ewald Nowotny said. Nowotny told Austria's Profil weekly that it was up to individual countries to ensure the ECB's bond-buying plan helps to overcome the euro zone's sovereign debt crisis. Nowotny also questioned the wisdom of awarding equal voting rights to all national central bank governors in the ECB Governing Council, suggesting big countries should have more say. His comments to Profil at the weekend were published after the head of Germany's influential Bundesbank was outvoted when the ECB agreed this month to buy bonds of debt-laden euro zone members that sought an international rescue. "We always seek consensus. There are few cases where that is not the case, and then it can come to a vote. You cannot see as unproblematic that every governor has the same vote," Nowotny was quoted as saying in the magazine.

        Battle Between Germany and France Over Spain Bailout Application; Numerous EU Ministers At Odds Over Banking Union- France has encouraged Spain to apply for aid as soon as possible. In Germany, Wolfgang Schäuble wants anything but a timely application.Note that unless a country requests a bailout, and agrees to terms set by the IMF (something Spain does not want to do), the entire OMT plan of Draghi is useless. On September 12, José Manuel Barroso, European Commission president unveiled his European banking union proposal with a goal of having it approved by December.  All 27 EU member states have a veto on Barroso's plan, not just the eurozone countries.The odds of approval by December are zero percent given battles between eurozone and non-eurozone countries erupted over the banking union erupted in Cyprus at an EU meeting on Saturday.  Germany, Sweden, Poland and the Netherlands called for a more “realistic” negotiating timetable to resolve the problems, suggesting talks will run into 2013. Anders Borg, Sweden’s finance minister, said it was “undecidable and not acceptable” to aim for a deal by the end of the year. Germany is in favour of the ECB having some responsibility for monitoring big financial institutions, but is resisting the broad scope and high degree of centralisation proposed by the European Commission. Germany also objects to what it says is hasty implementation, with the ECB taking over supervision for all banks by 2014.

        Counterparties: Can Mariano Be A Closer? -- Eleven days ago, Mario Draghi announced that the European Central Bank was ready to do what he’d been hinting at for months: buy unlimited amounts of sovereign debt to hold down borrowing costs in countries like Spain. Assuming, that is, that national leaders request aid and agree to the central bank’s conditions. As a result, since Draghi’s announcement, the burden has been on Spanish Prime Minister Mariano Rajoy to formally apply for the aid. But his immediate reaction, like that of Italian PM Mario Monti, was noncommittal. As of last week, Rajoy was still recalcitrant, saying he didn’t “know if Spain needs to ask for” help beyond the €100 billion bank bailout it received in July, which was less than a sterling success. Economic reality appears to be limiting the amount of time Rajoy has for consideration. Spanish 10-year debt is now yielding right around 6%, which means it has now essentially risen right back to where it was just before the ECB made its announcement. Spanish banks, meanwhile, are losing deposits at an alarming rate, with a record €26 billion withdrawn in July alone. That leaves the country’s already shaky financial institutions with worsening loan-to-deposit ratios and a clear deficit of public trust. That said, Spain does appear to be tiptoeing towards asking for aid. Reuters reports that Spain “will set clear deadlines for structural reforms by the end of the month,” which would precede an official request for assistance. Still, the final decision has to be taken by Rajoy.

        Come on Mr Rajoy, make that call... The markets are reminding the Spanish Prime Minister that he needs to actually request economic assistance — and accept all that that entails — before the ECB will physically buy Spanish paper. Here’s the 10 year Spanish note on Monday, just as it travelled back up through 6 per cent… And here’s 2 year paper, which has widened 68bp since Draghi confirmed 10 days ago that the ECB would buy short maturities.  If asked.

        Spanish Debt, Bank Borrowings Soar To Highest In Decades As Home Prices Fall By Most Ever While GDP Shrinks - If only the Fed or ECB could print another Spain with the same facility that they engage in currency destruction, now might be the time. Because things in Spain, no matter what one is told, are getting progressively worse. The reason: on one hand the continuing surge in regions and total debt, both of which jumped in Q2, on the other hand Spanish bank borrowings from the ECB soared to €389 billion in August, a new record, and up from €376 billion, just as TARGET2 liabilities rose to a new record of €429 billion as well, explaining where that surge in German TARGET2 claims went, on the third hand housing prices collapsed by 14.4% in Q2, the most ever, and tying all the hands together was that the Spanish economy contracted. But please ignore the details. Focus on the important things, such as the surge in the Ibex, the S&P, consumer confidence, gold, crude, etc, however long these continue. Because unless there is such a thing as a free lunch, with every incremental injection, all Bernanke proves is that the underlying reality is far worse than what is telegraphed to the people.

        Spain's Bad Bank Debt Hits New High - Bad debts held by Spanish banks hit a record high in July and deposit outflows gained pace as the Spanish banking system suffers a deepening economic and financial crisis. Data published Tuesday by the Spanish central bank showed that non-performing loans rose to 169.33 billion euros ($222.13 billion) in July, or 9.9% of outstanding credit, from EUR168.37 billion in June. The data also showed that July deposits stood at EUR1.287 trillion, down 7.8% from a year earlier. Deepening fiscal problems have thrust Spain to the forefront of the euro-zone debt crisis. The government of Prime Minister Mariano Rajoy in June asked the European Union for up to EUR100 billion in aid to help clean up its ailing banks, and the government' spiraling borrowing costs have fueled speculation it too will need a bailout.

        Spanish Banks Bleeding Cash Cloud Bailout Debate: - Spanish banks, already hooked on cheap European Central Bank loans, are hemorrhaging deposits as the government debates whether to seek a bailout. Households and companies drained 26 billion euros ($34 billion) from Spanish bank accounts in July, driving the ratio of loans to deposits among lenders to 187 percent from 183 percent in December and 182 percent a year earlier, according to data compiled by the Bank of Spain. Shrinking deposits undermine the ability of banks to support economic growth by lending to companies and consumers. “There are significant outflows of deposits now in Spain and they won’t start coming back until people are sure they’re safe and that Spain is secure,”

        No Easy Answers on How to Fix the Banks in Europe - Beleaguered countries like Spain have been counting on a quick and neat way to fix their banks without taking on more crippling debt.  But a weekend meeting here of European Union finance ministers that was intended to lay the groundwork for that plan revealed the continued difficulty of reaching consensus among the 27 member states — even on measures to which they have already agreed in principle. The disagreements also left a pressing question: How long can Spain afford to go it alone without outside financial help? Spanish banks need tens of billions of euros that the government cannot afford to lend. And many economists and analysts say it is only a matter of time before Spain’s debt-plagued central government itself may need a helping hand. It was on the banking front that the euro zone’s discord was most evident over the weekend. The Spanish finance minister, with French and Italian backing, called for a quick timetable on measures that would allow a bank rescue program for Spain to proceed under terms favored by the government in Madrid. But ministers from Germany and elsewhere essentially said, “Not so fast.”

        Spain VAT hike sends car sales down 28 pct so far in Sept (Reuters) - Car sales in Spain fell dramatically in the first two weeks of September following a hike in value-added tax, car retailers association Ganvam said on Monday, the first sign the tax rise is further dampening consumer spending in a weakened economy. The number of cars sold tumbled 27.6 percent year-on-year to 12,300 units in the first fortnight of the month after the price of the average car rose by 650 euros on Sept. 1, according to Ganvam. Spain's cash-strapped government increased VAT on most items to 21 percent as of September as part of a drive to slash 65 billion euros ($82 billion) from the public deficit by the end of 2014. "These figures confirm our fears that the crisis in the sector is becoming more severe,"

        Spaniards stage massive anti-austerity rally - Tens of thousands of people from all over Spain rallied in the capital Saturday against punishing austerity measures enacted by the government, which is trying to save the country from financial collapse. Large anti-austerity protests also took place in neighboring Portugal. Demonstrators in Lisbon threw tomatoes and fireworks at the Portuguese headquarters of the International Monetary Fund. Two protesters were arrested, but otherwise the rally was peaceful. Spain is stuck in a double-dip recession with unemployment close to 25 percent. The conservative government of Prime Minister Mariano Rajoy has introduced stinging cuts and raised taxes in a bid to reduce the deficit and to reassure investors and officials from the 17-nation eurozone. “This government’s policies are causing too much pain,” union chief Ignacio Fernandez Toxo said. “It’s a lie that there isn’t another way to restore the economy.” The situation looks set to get worse in coming weeks. At a meeting of eurozone finance ministers in Cyprus on Friday, Spain revealed it would present a new set of economic reforms by the end of the month. It’s a move that raises expectations that Spain might soon ask for financial help.

        Spain and Portugal see big anti-austerity rallies - Tens of thousands of people have rallied in Spain and Portugal in protest at spending cuts and tax rises in the debt-hit countries. In Madrid, public sector workers from all over Spain blocked the capital's Plaza de Colon square and nearby roads. Protests were held in Lisbon and across Portugal, with one person reportedly attempting to set himself on fire. The Spanish and Portuguese governments say the austerity measures will lead to economic recovery. 'Drastic reduction' Many of the protesters - including teachers, nurses and firefighters - were ferried to Madrid in buses by trade unions and other workers' rights groups who organised the rally.

        Thousands Protest Austerity Measures in Spain and Portugal — Tens of thousands of people from all over Spain rallied in the capital on Saturday against punishing austerity measures enacted by the government, which is trying to save the country from financial collapse. Large protests against austerity measures also took place in neighboring Portugal. Demonstrators in Lisbon threw tomatoes and fireworks at the Portuguese headquarters of the International Monetary Fund. Two protesters were arrested, but otherwise the rally was peaceful. Spain is stuck in a double-dip recession with unemployment close to 25 percent. The conservative government of the Spanish prime minister, Mariano Rajoy, has introduced sharp cuts and raised taxes in a move to reduce the deficit and to reassure investors and officials from the 17-nation euro zone. The marchers in Madrid unfurled banners with slogans like “Let’s go! They are ruining the country and we have to stop them.” “This government’s policies are causing too much pain,” said a union leader, Ignacio Fernández Toxo. “It’s a lie that there isn’t another way to restore the economy.” The situation looks to get worse. At a meeting of euro zone finance ministers in Cyprus, Spain announced that it would present a new set of economic reforms by the end of the month. The move raised expectations that Spain might soon ask for financial help. 

        German lawmaker: no majority for 3rd Greek bailout -- A senior lawmaker in Angela Merkel's governing coalition says Germany's parliament is unlikely to approve a third financial rescue package for Greece. Rainer Bruederle says Greece might be given "several more weeks" to make up for delays caused by two elections. But the parliamentary leader of Merkel's Free Democrats coalition partners says Greece can't expect more money from other members of the 17-nation eurozone if it doesn't deliver on promised reforms. The Greek government is under pressure from voters not to make further painful budget cuts demanded by its creditors. Bruederle told RBB Inforadio on Saturday that if Greece doesn't receive further funds the country's only option is to leave the common currency.

        Yanis Varoufakis on the Crisis in Greece - In this interview with Max Keiser, Yanis Varoufakis gives a vivid account of conditions on the ground in Greece and why he is still pessimistic for the prospects for the eurozone.

        Greek austerity fuels illegal logging, ministry says (Reuters) - Illegal logging has surged in Greece, as households suffering five years of recession hoard wood to burn during the cold winter days in the place of expensive heating oil, authorities said on Tuesday. The environment ministry has ordered regional authorities to step up checks in forested areas to crack down on unauthorised loggers. "This phenomenon has soared recently because of the crisis," it said in a statement. Once a symbol of poverty, the lowly wood burning stove is making a comeback among cash-strapped Greeks horrified by the soaring costs of central heating as winter begins. The price of heating fuel will rise 40 percent next month as part of austerity measures to boost government revenue under Greece's international bailout. The government is mulling a heating fuel subsidy to residents of cold, mountainous regions. Steeper heating oil prices come on top of other harsh austerity measures, eroding further households' disposable income. Use of wooden stoves, already much in demand last year, is expected to rise even more.

        Europe’s Modern Titanomachy: How Europe’s future is being shaped by large battles on seemingly small matters (Part C) - In this three part series (click here for Part A and here for Part B), I have cast a critical gaze upon recent developments which have caused a degree of jubilation in a continent that has not had any ‘good news’, regarding its integrity and future direction, for a while. Part A offered an overview of developments leading to Mr Draghi’s recent intervention, that coincided with moves toward a banking and fiscal union. Part B outlined the views of optimists, whom I called Euro-loyalists courtesy of their tendency to believe that, in the end, Europe’s elites will ”come through”. In this part I explain the reasons why today’s Great Expectations (regarding the ECB’s intervention, banking union, Brussel’s federal moves etc.) are more likely to prive Dickensian than literal.

        Calls for more time as Greece faces deficit squeeze (Reuters) - Greece will meet its nominal 2012 deficit reduction targets but faces growing strain because of the deepening recession, Finance Minister Yiannis Stournaras said on Tuesday as pressure grew on international creditors to give Athens more time to catch up. Forecasting that by 2014, the Greek economy would have shrunk by 25 percent since the start of the crisis, Stournaras said Athens would broadly meet a target of cutting the 2012 primary deficit, excluding debt servicing costs, to 2 billion euros in nominal terms. But he said the primary deficit figure would reach 1.5 percent of gross domestic product, compared with a previous estimate of 1 percent, as the recession bit and he repeated a plea for more time from the European Union and International Monetary Fund troika. "Otherwise, there is a great risk of prolonging the negative consequences for the economy and society," he told a conference in Athens.

        Popularity Of Greek Neo-Nazi Party Continues Surging - There is a reason why we called the graph of youth unemployment in Europe 'the scariest chart' as quite simply, it is the leading indicator for what most call 'social unrest' - but some would call 'uprising'. In somewhat stunning news today, not only do a majority (54%) of Greeks no longer trust any political party, but the popularity of the ultra-nationalist Golden Dawn has risen dramatically since May. According to Ekathimerini, the popularity of Golden Dawn's leader Nikos Mihalolioakos has risen ten points since May to an incredible 22%. More than 1 in 5 Greeks now support the neo-nazi party as the general disillusionment with mainstream political parties - who are seen as lying to get votes - grows stronger. 85% believe that the new measures planned by the government to take affect them personally or another member of their family and 68% are against the terms of the EU's bailout.

        Greece: recession will have shrunk economy 25 pct - Greece's economy will have contracted by 25 percent by the time the recession ends, the finance minister said Tuesday, as the government remained locked in talks with rescue lenders for its next major austerity program. Yannis Stournaras made the remarks at a Greek-Chinese business forum, before senior officials from his ministry resumed negotiations with inspectors from the European Union, European Central Bank and International Monetary Fund, known as the "troika." "The cumulative reduction (of gross domestic product) since 2008 is just under 20 percent and is expected to reach 25 percent by 2014," Stournaras said. Unpaid government bills and other debts to the private sector have reached €6.5 billion ($8.51 billion), he said. The troika is demanding the government reduce its budget deficit by more than €11.5 billion ($15.1 billion) over two years as a condition for continued emergency loan payments.

        Greek economy to shrink 25 percent by 2014 The ailing Greek economy is on the verge of a 1930s-style Great Depression, as the Athens government predicted a 25% fall in GDP by 2014, putting intense pressure on the EU to relax the terms on the country’s €130bn (£105bn) bailout package The finance minister, Yannis Stournaras, said a decline in tax revenues and spiralling unemployment will deepen the country’s four-year recession, which critics of the EU’s stance said could lead to a recession as long and deep as America’s pre-war decline. Stournaras, who is locked in negotiations over the terms of a second bailout, fears that efforts to revive the Greek economy will be undermined by a draconian austerity programme, early debt repayments and high interest rates on its loans. “The cumulative reduction (of gross domestic product) since 2008 is just under 20% and is expected to reach 25% by 2014,” he told a Greek–Chinese business forum in Athens. “The time frame for the adjustment, the conditions of the real economy should be taken into consideration,” he said. “Otherwise there is a great risk of prolonging the negative consequences for the economy and society.”

        Spain is Greece… Only Bigger and Worse - As I’ve outlined in earlier articles, Spain will be the straw that breaks the EU’s back. The country’s private Debt to GDP is above 300%. Spanish banks are loaded with toxic debts courtesy of a housing bubble that makes the US’s look like a small bump in comparison. And the Spanish government is bankrupt as well. Indeed, in the last month alone we’ve seen:

        • Spain’s banking system saw a bank run to the tune of €70 billion in August. The market cap for all of Spain’s banks is just €114 billion. So Spanish banks need to raise at least €20+ billion or so per month in the coming months to stay afloat. This is without depositors pulling additional funds in September onwards. That’s really bad news.
        • Spain’s now nationalized Bankia just took another €5.4 billion from Spain’s in-country rescue fund. This indicates that once nationalized, problem banks DO NOT cease to be problems.
        • The region of Andalusia is requesting a bailout from the Spanish Federal Government. This comes on the heels of bailout requests from the regions of Valencia, Murcia and Catalonia (none of which want any “conditions” on the funds).
        • Spain has set aside €18 billion to bailout its regions. The current bailout requests already amount to €10.8 billion. That’s just from this year alone.

        Spain under pressure to seek aid as bad debt soars - The amount of bad debt in Spain's banks rose to a record in July, according to data released Tuesday, as the country came under further pressure to take up the European Central Bank's offer to help governments struggling with too much debt by buying unlimited amounts of bonds. The Bank of Spain bank reported that the country's banks in July had €170 billion ($221 billion) in loans that are at risk of not being paid, representing 9.86 percent of their total loans. The bank said that the proportion of non-performing loans in July was up from 9.42 percent in June. Many of Spain's banks are loaded with soured real estate investments following the collapse of the country's property market in 2008. The 16 other countries that use the euro last month agreed to provide Spain with up to €100 billion to help support these banks. Results of a complete stress test of the sector are due to be made known Sept. 28. Spain has been under pressure to seek further help as it attempts to contain problems in the financial sector. The fortunes of the country and its banks are perilously linked -the country's financial sector is the main buyer of government debt and money from the sale of these bonds are used to prop up the banking industry.

        Jawboning Spain - The ECB’s OMT is beginning to have an interesting effect on the what is happening in Europe, particularly Spain. Spain has already requested a €100bn line of credit for its banking system, but a I have mentioned previously this is nowhere near the end of it. It is now expected that the country will need to seek a full bailout with one of the European stability programs which will also trigger the support from the ECB. The stability program will, however, come with strict conditionality and there certainly appears to be resistance on behalf of the Spanish government to make the request. So now we are in a policy limbo. The ECB’s program is approved and ready to go (to the increasing shrills of Jens Wiedmann), so in terms of the markets it is “in play”, yet the Spanish government doesn’t appear to be in any rush to use it. This has created a rather interesting dynamic because just by existing the OMT is bringing down Spanish yields which in turn is making the Spanish government’s insistence that it doesn’t yet need a bailout stronger. On Tuesday ECB member Luc Coene warned the Spanish PM, Mariano Rajoy, against delaying the use of the assistance program claiming that it wouldn’t take long for Spanish yields to once again rise.

        Mariano Rajoy waiting for markets to force his hand -Once again Mariano Rajoy is playing a dangerous game by not officially requesting assistance. The lull in the European markets is temporary since the fundamental issues of Spain's weakening economy and distressed banking sector have not been resolved. The Eurozone and the ECB have handed Rajoy a lifeboat and Spain needs to get on fast. Waiting for yields to rise - which is what the Spanish government seems to be doing - will only cause more uncertainty and worsen an already dire situation.Spain's labor market and housing are continuing to deteriorate, putting further pressure on the banking system. The banks are now borrowing close to €400bn from the central bank - with little hope of finding alternate sources of financing since depositors have fled the country. With things moving at "Eurozone speed", Spain's banks are yet to see any of the €100bn bailout package promised to them earlier this year.

        Spanish Bad Loans Soar By Most Ever In Past Quarter To All-Time Highs - A month ago we warned that loan delinquencies in Spain were bad and getting worse at a concerning rate. The most recent data update, which revised that 'bad' print to absolutely dismal, has broken records for just how ugly things are for Rajoy and his fellow countrymen. Spanish bank loan delinquencies rose to an all-time (50-year) record 9.86% with the last four months seeing simply unprecedented acceleration in the rate of bad loans. Numerically, this means that an absolutely whopping €172 billion of the €1.7 trillion in Spanish financial assets is now money bad, and will no longer generate cash flows. This amounts to about 17% of total Spanish GDP. In GDP-equivalent terms, this would be equivalent to $2.5 trillion in US bank loans being "bad." Which, when one cuts all the prevarication and lies, is probably what the true status of the US financial system is. Add to this the now relentless deposit flight which is depleting Spanish bank coffers and one can see why the European credit death spiral is very aptly named.

        EU in talks over Spanish rescue plan -- EU authorities are working behind the scenes to pave the way for a new Spanish rescue programme and unlimited bond buying by the European Central Bank, by helping Madrid craft an economic reform programme that will be unveiled next week. According to officials involved in the discussions, talks between the Spanish government and the European Commission are focusing on measures that would be demanded by international lenders as part of a new rescue programme, ensuring they are in place before a bailout is formally requested. One senior European official said negotiations have been conducted directly with Luis de Guindos, the Spanish finance minister. The plan, due to be unveiled next Thursday, will focus on structural reforms to the Spanish economy long requested by Brussels, rather than new taxes and spending cuts. "It is a kind of 'proto-programme,' if such were needed," the official said. The commission could, however, still request more austerity measures next month to meet existing EU budget targets, which Madrid is expected to miss. Pre-approval by Brussels for Thursday's announcement is intended to ease the political quandary facing Mariano Rajoy, the Spanish prime minister. Mr Rajoy is reluctant to ask the eurozone's €500bn rescue fund, the European Stability Mechanism, to begin purchases of Spanish sovereign bonds because he fears that EU monitors would demand tough conditions in return. Pressure on Mr Rajoy mounted after Mario Draghi, European Central Bank president, announced this month that the central bank's new bond-buying programme would only be triggered after governments request help from the ESM and agree to reform plans with eurozone lenders. Bond buying by both the ESM and ECB would lower Spanish borrowing costs, easing Madrid's debt burden.

        Spain's Fiscal Deficit 8.56% of GDP in First Half; Impossible Second Half Targets - Spain's original deficit target for 2012 was 4.4%, then revised to 5% then 5.3%. The last revision brought the target all the way up to 6.3%. So how is Spain doing? Via Google Translate Libre Mercado says Spain recorded a fiscal deficit of 8.56% of GDP in the first half The government set the offset recorded 45.233 million euros to June, equivalent to 8.56% of GDP semester. Now Available budget execution data of all public sector until the second quarter of the year, and the first assessment of the Government of Mariano Rajoy on the deficit is not exactly favorable. According to data from the State Comptroller (IGAE), Public Administration (AAPP) reported a gap between revenues and expenditures (deficit) 45,233,000 euros through June in terms of the excessive deficit procedure (EDP, the methodology valid for Eurostat). This corresponds to 8.56% of GDP until the second quarter cumulative -528 161 000 euros, according to the National Statistics Institute (INE) -. Thus, Spain moves away from deficit target committed to Brussels for the full year, set at 6.3% of GDP. Rajoy is sticking to the 6.3% deficit target for the year.  Let's see how ridiculous that idea is with a calculation to figure out what the second half deficit must be to hit that target.

        Catalonia Cries for Independence While the Spanish Military Threatens To “Crush” The “Vultures” - Spain has enough problems: a debt crisis, a hangover from a housing bubble, unemployment of over 25%, youth unemployment of over 50%, massive demonstrations against “structural reforms” that the government is trying to implement in its desperate effort to keep its chin above water…. And now it has a new one: the possible breakup of the country. The military has already chosen sides. It started last week in Barcelona, capital of the Autonomous Region of Catalonia, the richest region in Spain. Of the 7.5 million Catalans, between 600,000 and 1.5 million—an astounding 8% to 20% of the population!—protested in the streets, demanding independence. Antagonism between Catalonia and Spain has simmered for a long time. But the financial fiasco that Spain is mired in deepened the fissures. Out-of-money Catalonia had to ask the central government for a bailout. Catalans are frustrated. They claim that under the current fiscal setup, Catalonia transfers €16 billion annually to the central government, and that these transfers bankrupted the region. Now, in exchange for the bailout, the central government has imposed austerity measures that cut into health care, education, and other services. On Thursday, Catalan President Artur Mas met with Prime Minister Mariano Rajoy, originally to beg him for a new tax deal. But the massive demonstration in Barcelona had added independence to the agenda. Rajoy brushed him off, with references to the constitution that didn’t allow regions to secede.

        What Euro at $1.31 Says About Western Economies - Not to my particular surprise--I too believe that the world should worry about the dollar and not the euro--the common currency went back up to $1.31 after the Federal Reserve announced QE3. Oh, the irony. Here we were supposing that old Europe had been left for dead, yet even this currency used by various troubled peripheral nations alike Greece, Ireland, Italy, Portugal and Spain has managed to bounce back despite everything. To cut a long story short concerning the battle of the moribund Western economies, consider:

        1. If subprime growth [U-S-A!] combined with unlimited deficit spending is preferable to fiscal retrenchment resulting in (a hopefully short-lived and transitional) recession [E-U!], then why is the currency of the latter preferred to the former?
        2. As per point (1), does the market prefer policies that involve tackling fiscal problems head-on despite the immediate costs over delaying any meaningful effort to address deficits?
        3. Considering that the bond yields of the aforementioned PIIGS range from 5.01% to 20.90%, then what would the market-determined yield of US treasuries be without such heavy Fed buying distorting the market?

        Both Europe and the US happen to be in sorry shape, but the latter is the biggest loser hands down--together with those poor sods dumb enough to hold its currency.

        Europe Banks Fail to Cut as Draghi Loans Defer Deleverage. - Lenders in the euro area increased assets by 7 percent to 34.4 trillion euros ($45 trillion) in the year ended July 31, according to data compiled by the European Central Bank. BNP Paribas SA (BNP), Banco Santander (SAN) SA, and UniCredit (UCG) SpA, the biggest banks in France, Spain and Italy, all expanded their balance sheets in the 12 months through the end of June. They have Mario Draghi to thank. The ECB president’s decision nine months ago to provide more than 1 trillion euros of three-year loans to banks eased the pressure to sell assets at depressed prices. The infusion, designed to encourage firms to lend, succeeded in averting a short-term credit crunch by reducing their reliance on markets for funding. It also may be making European lenders dependent on more central-bank aid. “Deleveraging isn’t taking place, especially in Spain and Italy,” said Simon Maughan, a bank analyst at Olivetree Securities Ltd. in London. “The fact that we haven’t got on with it, or very slowly, suggests that when the time comes we’ll need another ECB injection to roll over the first one, just to keep the balance sheets of Italian banks in business.”

        What really caused Eurozone banks' balance sheets to grow? Bloomberg's explanation is wrong. A Bloomberg article this morning discussed an increase in balance sheets of Eurozone's banks. It basically made is sound as though the ECB had been encouraging banks to take on more risk via the LTRO program.  Bloomberg: - European banks pledged last year to cut more than $1.2 trillion of assets to help them weather the sovereign-debt crisis. Since then they’ve grown only fatter. Lenders in the euro area increased assets by 7 percent to 34.4 trillion euros ($45 trillion) in the year ended July 31, according to data compiled by the European Central Bank. BNP Paribas SA (BNP), Banco Santander (SAN) SA, and UniCredit (UCG) SpA, the biggest banks in France, Spain and Italy, all expanded their balance sheets in the 12 months through the end of June.  They have Mario Draghi to thank. The ECB president’s decision nine months ago to provide more than 1 trillion euros of three-year loans [3y LTRO]  to banks eased the pressure to sell assets at depressed prices. Draghi is making the Eurozone banks grow "fatter". Please just stick to reporting the news. This is misleading and portions of this article are just wrong. The LTRO program provided financing relief to a heavily strained banking system and created a near permanent dependence on central bank funding. But it had little to do with risk taking by euro area lenders. Let's take a look at some of the key components of the Eurozone banking system's assets.The largest portion of the balance sheets are corporate loans, particularly loans to non-financial corporations. As the chart below shows, growth in corporate loans came to a grinding halt after the financial crisis.

        Deposit Flight From Europe Banks Eroding Common Currency - An accelerating flight of deposits from banks in four European countries is jeopardizing the renewal of economic growth and undermining a main tenet of the common currency: an integrated financial system.  A total of 326 billion euros ($425 billion) was pulled from banks in Spain, Portugal, Ireland and Greece in the 12 months ended July 31, according to data compiled by Bloomberg. The plight of Irish and Greek lenders, which were bleeding cash in 2010, spread to Spain and Portugal last year.  The flight of deposits from the four countries coincides with an increase of about 300 billion euros at lenders in seven nations considered the core of the euro zone, including Germany and France, almost matching the outflow. That’s leading to a fragmentation of credit and a two-tiered banking system blocking economic recovery and blunting European Central Bank policy in the third year of a sovereign-debt crisis.  “Capital flight is leading to the disintegration of the euro zone and divergence between the periphery and the core,”

        Mirabile Dictu! Bloomberg Finally Notices Deposit Flight, a Major Threat to the Eurozone - Yves Smith -  On the one hand, given that the Eurozone remains a major economic and financial flashpoint, it is good to see a major news service like Bloomberg provide a lengthy report on a continuing existential threat, that of deposit flight, or as we have described it, a slow motion bank run. But it’s a bit surprising it has taken them this long to take notice. If you are a cross border investor or a wealthy national, consider what the exit from the Eurozone of, say, Greece, would mean to you. Deposits will be redenominated in the national currency and will fall in value. Now if you live in Greece, you’ll see costs of imported goods rise. And if you either liked to or had reason to spend money outside Greece, you have a lot less spending power. So as periphery countries have been looking wobbly, deposits have been exiting the periphery countries and going to the core, particularly Germany. And that means the mechanism for recycling savings within the Eurozone had broken down, forcing the ECB to step in.  This problem has been visible for some time. For instance, Marshall Auerback has been telling your humble blogger and others about it since early in the spring. As we have discussed, this remains a point of failure for the Eurozone, and in the last few weeks, German leadership appears to have gotten religion. Followers of the Euro-related press may recall that German leaders in July and August were telling Greece it had to adhere to the widely-recognized-as-impossible bailout requirements, and that they were indifferent to a Greek departure from the Eurozone. The big concern was not of a Greek exit per se, but that if Greece were to leave, it would demonstrate that a periphery country departure could be one part of the endgame, and that means it would be possible for other countries to leave as well. Spanish deposits have been leaving the country at an accelerating rate over the summer.

        Fight Looms on Greek Bailout  - A confrontation is brewing among Greece's international creditors over who will provide the financing needed to keep the country afloat.  A report by international inspectors, due in October, will state how big the funding shortfall is in Greece's bailout program, but European officials say the deficit is far too big for Greece to close on its own. That means the International Monetary Fund, the European Central Bank, and euro-zone governments such as Germany will have to negotiate over which of them will make painful concessions to ease Greece's debt-service burden. The trio must agree to a plan by November at the latest, when the government in Athens—already in financial arrears—could run out of money altogether. The €173 billion ($226 billion) bailout plan agreed with Athens in March this year—Greece's second bailout since 2010—is already badly off track, euro-zone officials admit.

        Greek Leaders Struggle With Spending Reductions - Greek Prime Minister Antonis Samaras struggled to clinch agreement with his coalition partners on an 11.5 billion-euro ($14.9 billion) budget-cut package that’s key to receiving international aid funds. Samaras was handed the third refusal in less than two weeks yesterday from Democratic Left leader Fotis Kouvelis and Pasok leader Evangelos Venizelos, the junior partners in the coalition who met to discuss proposed cuts to wages, pensions and benefits. Finance Minister Yannis Stournaras and the “troika” of inspectors from the European Commission, the European Central Bank and the International Monetary Fund have been locked in talks for two weeks on carving out savings.“The troika must stop attacking Greek society,” said Kouvelis after conferring with Venizelos. “The troika must understand there are limits.” The troika, representing the international lenders in Greece’s bailout package, have already said some of the reductions don’t go far enough, forcing all parties back to the negotiating table repeatedly over the past two weeks.

        Lenders Reportedly Consider New Greek Haircut - In order to restore the country's debt sustainability, Greece's lenders are reportedly considering further relief in the form of a partial debt haircut for the crisis-wracked country, the Financial Times Deutschland reported on Friday. Citing unnamed "euro-zone sources," the paper said the focus was on bilateral loans from the currency union's first bailout program for the country, the nearly €53-billion ($69 billion) Greek Loan Facility, which ran from May 2010 to the end of 2011. "There is a discussion," a high-level official told the paper. Martin Blessing, chairman of Germany's second-largest bank, Commerzbank, has also said a second debt haircut is likely. "In the end we will see another debt haircut for Greece, in which all creditors will take part," he said on Thursday in Frankfurt. This could be part of a new solution being arranged behind closed doors, according to the Financial Times Deutschland. Currently, new economization efforts are being discussed by Athens and the troika, comprised of representatives of the European Commission, the ECB and the International Monetary Fund and charged with monitoring reform programs agreed to by the country in exchange for its bailouts. The group is expected to present its next report on the country's financial situation in early October.

        Car sales in Europe drop to 22-year low - Research shows number of new car sales in August was the lowest since records began. US carmaker Ford was hardest hit, with sales plunging 29% compared with a year ago, as consumers in Italy, Greece and France shunned new cars, recording double digit falls. In the first eight months of the year, only the UK saw an increase in sales compared with those in 2011. Analysts are warning that sales will continue to fall as economic uncertainty remains. Just 688,168 new cars were registered last month across the EU, down 8.9% year-on-year, an 11th consecutive monthly fall, indicating a dire year for car sales in continental Europe. By comparison, car sales in the US are increasing, highlighted by General Motors showing record profits last year, although sales are down on pre-recession highs. One in three car sales across Europe are in Germany, but even the EU stalwart saw a slide in sales, down nearly 5%. Sales in France dropped 11%, Italy down 20% and Greece fell 47%, according to industry analyst ACEA, which compiled the data.

        Italy slashes growth outlook, hikes deficit, debt goals (Reuters) - Italy said on Thursday that recession this year would be far steeper than previously expected and sharply hiked its target for the budget deficit, showing Mario Monti's attempts to rein in the debt are falling short despite his austerity measures. The government forecast that gross domestic product would fall this year by 2.4 percent, twice as much as the previous projection of a 1.2 percent drop, made in April. The economy is now also forecast to contract next year, by 0.2 percent, compared with positive growth of 0.5 percent seen previously, according to the Treasury's update to its Economic and Financial Document (DEF), which was approved by the cabinet after a three-hour meeting. The weakening economy is badly hurting fiscal consolidation efforts. The government hiked its forecast for the 2012 budget deficit to 2.6 percent from 1.7 percent, and raised the 2013 target to 1.8 percent from 0.5 percent.

        German economy to barely grow until 2013: BdB - Yahoo! News: - The German economy will hardly grow until next year and the euro zone will be slow to recover from its sovereign debt crisis, a German private banking body said on Wednesday. Germany had until recently avoided much of the economic slowdown which has dogged the euro zone, helping the bloc dodge a recession. But the fall in demand from its European neighbors has finally taken a toll on German growth. "The economists of the private banks expect that in the second half (of 2012) the German economy will barely move anywhere," the Association of German Banks (BdB) said. The BdB said the economy will expand by 1.1 percent in 2013, up from 0.9 percent in 2012, citing chief economists from leading financial institutions. The latest figures almost mirror those of Germany's IfW think tank which last week trimmed its 2012 growth forecast for the German economy by 0.1 percentage point to 0.8 percent. The IfW expects 2013 growth of 1.1 percent.

        France's economic conditions dim; Eurozone core growth in trouble - We are seeing further evidence of the Eurozone-wide recession that is more entrenched than numerous economists have been projecting. The slowdown in Germany (discussed here) demonstrates that the core states are not immune. Today's MarkIt flash PMI numbers, particularly from France also show ongoing economic weakness. French composite PMI hit a new post-09 low, and as the chart below shows, the GDP (which is reported on a lag) is sure to follow. MarkIt: - September, falling at the steepest rate in nearly three-and-a-half years. All the more concerning was the fact that new business and employment also showed accelerated declines, while service providers’ future expectations slipped into negativity for the first time since early 2009. GDP may have stagnated for three successive quarters up to Q2, but yet more weak PMI data points firmly towards a contraction in Q3. Employment PMI out of France is pointing to weakening labor markets across the board (both manufacturing and services).

        Euro-zone Sept. composite PMI hits 39-month low -- Private-sector activity across the 17-nation euro zone contracted at its fastest pace since June 2009, despite a softening of the downturn in Germany, the region's largest economy, according to the preliminary September Markit composite purchasing managers index released Thursday. The index fell to 45.9 from 46.3 in August, defying forecasts for a rise to 46.7. The contraction was driven by services, with the PMI for the sector falling to a 38-month low of 46.0 from 47.2 in August, Markit said. The manufacturing PMI rose to 46.0, its highest level in six months, from 45.1 in August. The downturn "gathered further momentum in September, suggesting that the region suffered the worst quarter for three years," said Chris Williamson, chief economist at Markit. The reading is consistent with a 0.6% third-quarter contraction in gross domestic product, which would put the region back into a technical recession, Williamson said.

        Eurozone Steepest Contraction Since June 2009; Unwarranted Hope and Reflections on Panic! - The global recession which started in Europe, is strengthening led by further declines in the eurozone. Markit reports Eurozone sees steepest contraction since June 2009 despite downturn easing in Germany. Key Points:

        • Flash Eurozone PMI Composite Output Index at 45.9 (46.3 in August). 39-month low.
        • Flash Eurozone Services PMI Activity Index at 46.0 (47.2 in August). 38-month low.
        • Flash Eurozone Manufacturing PMI at 46.0 45.1 in August). Six-month high.
        • Flash Eurozone Manufacturing PMI Output Index at 45.5 (44.4 in August). Five-month high.

        The Markit Eurozone PMI® Composite Output Index fell from 46.3 in August to 45.9 in September, according to the preliminary ‘flash’ reading, based on around 85% of usual monthly replies. The index therefore signalled that the private sector economy contracted for the twelfth time in the past 13 months, with the rate of decline accelerating slightly to reach the fastest since June 2009. The September reading rounds of the weakest quarter since the second quarter of 2009, with the average PMI reading for the third quarter at 46.2, down from an average of 46.4 in the second quarter.

        Europe’s Economy Sinks from Sight -  Another night of Flash PMI data from the Eurozone, and as expected it isn’t getting any better over there. This from Chris Williamson, Chief Economist at Markit Economics. The Eurozone downturn gathered further momentum in September, suggesting that the region suffered the worst quarter for three years. The flash PMI is consistent with GDP contracting by 0.6% in the third quarter and sending the region back into a technical recession. ”We had hoped that the news regarding the ECB’s intervention to alleviate the debt crisis would have lifted business confidence, but instead sentiment appears to have taken a turn for the worse, “At the same time, input costs have risen markedly, linked largely to higher oil prices. Weak demand has meant companies have been unable to pass these costs on to customers, meaning output prices fell again in September. The combination of higher costs and lower selling prices will inevitably hit profit margins.“Some good news came from an easing in the rate of contraction in Germany, though the rate of decline accelerated markedly in France and a deepening downturn was also evident in the periphery. It remains too early to say, however, whether Germany will continue to buck the trend, especially as it continued to see a strong rate of loss of new orders in both manufacturing and services.” So Germany and France have swapped positions from August, but the summary statement about Germany doesn’t give me much optimism that this is going to be a sustained reversal.

        UK Bank Regulator, FSA, Protects Powerful Cronies and Undermines Proper Bank Reform - The UK’s failed regulator, the Financial Services Authority, is up to its old tricks again. Last week, it sought to scapegoat just one of the 16 directors who drove the awesomely badly managed British bank Halifax Bank of Scotland into the ground. And all he received was a £500,000 fine and a lifetime ban from working in the financial sector.  Here’s what the former Financial Times journalist and author Ray Perman had to say about it in today’s Scotsman:- It is inconceivable that [Cummings] caused the collapse of the bank on his own. The FSA’s own investigation showed that his own profit targets were constantly being pushed upwards by the bank’s top management in their quest for relentless growth. Yet none of his superiors is even named by the FSA, let alone criticised or fined … It wasn’t only corporate loans that brought down HBOS. Billions were lost in mortgages which could not be repaid, in American securities which turned out to be worthless, in Irish property deals, and in compensation … paid to people mis-sold Payment Protection Insurance. Cummings was not responsible for any of them, yet the people who were have not been held to account. The Canary Wharf-based regulator attempted something similar with its December 2011 report into the failure of the much bigger Royal Bank of Scotland (see my Huffington Post article).

        U.K. Posts Record August Deficit as Tax Revenue Falls - Britain posted its biggest August budget deficit on record, heaping pressure on Chancellor of the Exchequer George Osborne as the recession hits tax revenue and pushes up spending on welfare. The shortfall excluding government support for banks was 14.4 billion pounds ($23.5 billion), the Office for National Statistics said in London today. The median of 21 forecasts in a Bloomberg News survey was for a deficit of 15 billion pounds. Tax revenue rose 1.8 percent in August from a year earlier and government spending climbed 2.5 percent. Enlarge image U.K. Posts Record August Deficit as Tax Revenue Falls: Economy Chris Ratcliffe/Bloomberg Economists say Chancellor of the Exchequer George Osborne may miss his 120 billion-pound full-year target by as much as 10 billion pounds, according to the average of independent forecasts compiled by the Treasury. Economists say Chancellor of the Exchequer George Osborne may miss his 120 billion-pound full-year target by as much as 10 billion pounds, according to the average of independent forecasts compiled by the Treasury. The figures highlight the damage being wrought by weaker- than-expected economic output this year. Economists say Osborne is set to miss his self-imposed deadline to start bringing down debt in three years, leaving him to choose between abandoning the goal or announcing fresh austerity measures. Bank of England Governor Mervyn King said yesterday it may be “acceptable” to miss the target if it was because of the weak economy. “If you extrapolate from today’s figures, we will be somewhere between 10 billion and 35 billion higher than expected for the year,”

        Britain risks a lost decade unless it changes course, by Lawrence Summers, - It is fair to ask economists a fundamental question: what could happen that would cause you to revise your views of how the economy operates and acknowledge that the model you had been using was flawed? As a vigorous advocate of fiscal expansion as an appropriate response to a major economic slump in an economy with zero or near-zero interest rates, I have for the past several years suggested that if the British economy – with its major attempts at fiscal consolidation – were to enjoy a rapid recovery, it would force me to substantially revise my views about fiscal policy and the macroeconomy.Unfortunately for the British economy, nothing in the past several years compels me revise my views. Britain must change the pace of fiscal consolidation to stand a chance of avoiding a lost decade. Rather than starving public investment, now is the time to add to confidence by making plans for structural reforms to contain the growth of public consumption spending over time. It is also time to take overdue measures to promote exports and, after years of appropriately low investment, to restart housing investment. But when demand is needed for growth and the private sector is hanging back, the first priority must be for the public sector to stop exacerbating the contraction.

        Puzzle of falling UK labour productivity - Since the start of the recession, the output per worker in the UK has fallen by 3 per cent. This is extraordinary. In a recent speech, Ben Broadbent, a member of the Bank of England’s Monetary Policy Committee, noted that if the pre-crisis relationship between output and employment still held, the number of jobs would have fallen by 8 per cent since mid-2007. Yet employment has risen since then. It has also apparently risen since early 2010, despite stagnant output and falling public sector employment. Is productivity falling, instead of rising, as one would expect? One explanation could be a big shift to part-time work. Joe Grice, chief economist of the Office for National Statistics, showed that the number of hours worked had fallen more than the number in employment since early 2008 – but only by 2 per cent. Thus, even output per hour has fallen. Another possibility could be that output is increasingly under-recorded or the number of workers increasingly over-recorded. On this Mr Grice stated that “nothing has come to light that would lead to major concern about the reliability of either the GDP or labour market statistics”. Indeed, it is quite hard to imagine what could produce such a growing under-recording of GDP or over-recording of employment. A further reason for believing that the collapse in productivity growth is real is that much the same has happened to Germany, France and Italy. Indeed, after a surge in 2009 and 2010, productivity growth has collapsed in the US, too. If it is true, why has it happened? I can imagine three plausible explanations: cyclical labour hoarding; substitution of labour for capital; and huge obstacles to the efficient deployment of capital.

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