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

Saturday, September 8, 2012

week ending Sept 8

Fed's Balance Sheet Grows Slightly in Past Week - The Fed's asset holdings in the week ended Sept. 5 were $2.824 trillion, up from $2.815 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities increased to $1.649 trillion from $1.639 trillion in the previous week. The central bank's holdings of mortgage-backed securities rose to $843.71 billion from $843.60 billion a week ago. In June, Fed officials decided to extend a program to adjust the central bank's securities portfolio to hold more long-term government debt and mortgage bonds, a move intended to spur spending and investment by making borrowing cheaper. Thursday's report showed total borrowing from the Fed's discount lending window was $2.50 billion on Wednesday, up from $2.42 billion a week earlier. Commercial banks borrowed $255 million from the discount window, an increase from $51 million in the previous week. U.S. government securities held in custody on behalf of foreign official accounts totaled $3.574 trillion, compared with $3.567 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts rose to $2.873 trillion from $2.866 trillion a week earlier. Holdings of federal agency securities fell to $700.40 billion from $700.98 billion in the prior week.

H.4.1 Release--Factors Affecting Reserve Balances - September 6, 2012 - Federal Reserve 

Fed Official Says More Stimulus a 'Close Call'  "It's a close call" when it comes answering the question of whether the Fed should provide more aid to the economy, Federal Reserve Bank of Atlanta President Dennis Lockhart said. ..."I'm increasingly of the view that we are on a track that you would, to simplify it, would say is about a 2% growth track with fluctuating job growth. But overall, not a strong enough pace to bring down unemployment to anything close to a notion of full employment in a reasonable time," Mr. Lockhart said. I am not highly confident in the ability of simply monetary action to jump-shift the economy onto a different track," ... "There really is a lot to be solved on the fiscal side to create the conditions, arguably, in which further monetary action could really boost the economy,"...If the Fed were to act, Mr. Lockhart said half-measures would not get the job done. While he didn't state what the steps could be, he said stimulus, if chosen, should be "a package. When I say package that means two or three things done at the same time to create maximum possible gains."

Jackson Hole Conference - Ben Bernanke's job is not easy, though that's partly his fault. By speaking extensively to the "maximum employment" part of the dual mandate, he has defined success in a way that dooms him to failure. By embarking on unprecedented and aggressive policy programs - quantitative easing (QE) and forward guidance of various sorts - he has taken on some big risks. In his Jackson Hole speech, Bernanke's job was to do the best he could in defending past decisions, and in arguing that the Fed is prepared to face whatever the future holds. Bernanke wants you to think of the people running the Fed as mechanics with a large box of tools. If the economy is to run the way we want it to, all we need to do is find the right tool, and fix it. The more tools, the better. In his speech, Bernanke wants to tell us about "balance sheet tools" and "communication" tools - QE and forward guidance, respectively. QE and forward guidance are "unconventional" central banking tools. Why do we need these unconventional tools? According to Bernanke, the economy needs fixing, and we can't use conventional tools - open market purchases of short-term government debt - as the overnight nominal interest rate is as low as the Fed is willing to push it. How do we know that the unconventional tools work?

Monetary Policy Lower Bounds - There is quite a lot of discussion of forward guidance, that is public statements about monetary policy in the medium distant future.  Many pages of it are in this paper by Michael Woodford.  I will use the phrase as he does to refer to guidance regarding future safe overnight rates (the federal funds rate for the USA). He treats the direct effects of massive asset purchases separately.   Here I will pretend that the only thing the FOMC does is target the federal funds rate, so forward guidance means statements about what the target will be a few years from now.  I will assume that the Fed surely can't precommit beyond Bernanke's current term that is roughly beyond the next 5 years.  The guidance can be conditional.  It could be that the target rate will be below 0.25% until nominal GDP is within 1% of the pre-2007 trend (with a published estimate of the trend for precision). The point of forward guidance is that even if the monetary authority can't drive current short term nominal rates significantly lower (since they are already essentially zero) it can cause lower expected future short term rates.  The aim could be to cause increased mid term expected inflation. The problem is that there is a zero lower bound for expected future interest rates.  I note that bond traders pay obsessive attention to everything FOMC members say and it is very possible that the guidance will influence their beliefs, but not those of home builders, potential home buyers or even mortgage loan officers.

After Jackson Hole, Clear Road Ahead - In terms of forward guidance I think the Fed Chairman's speech provided little direction, but Friday's precious metal price action into the close and the various sell side notes that I have seen suggest that this, at least initially, is too bearish a conclusion. The following excerpt from the speech, in particular, was taken as clear evidence of more and aggressive easing in the pipeline.  As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years. Great emphasis has been attached to the chairman's use of the word "grave" as a clear tell-tell sign of more easing to come. I find this quite interesting since it is one of the first instances of such "new speak" interpretation of the Fed's statements akin to the good old days of Trichet and the utterance of (strong) vigilance. Needless to say, next week's jobs market report has suddenly been propelled to a key market event and every single US data point will now be watched with caution. On that note, the next ISM reading as well as consumption figures will be equally important to watch. 

WSJ ANALYSIS: Fed Still Lukewarm About Cutting Reserve Rate - There was much ado in Jackson Hole, Wyo., this weekend about a 0.25% interest rate that the Federal Reserve pays to banks on money they deposit with the central bank. A number of people want the Fed to cut this rate on bank reserves as a way to spur lending and economic growth. The Fed, however, appears to be lukewarm to the idea. The subject of interest on reserves popped up again and again at the Fed’s annual retreat in Jackson Hole. In an interview with Dow Jones Newswires, St. Louis Fed President James Bullard raised the idea of pushing this interest rate into negative territory, meaning charging banks for the reserves they keep on deposit with the Fed rather than paying them the small 0.25% rate on their deposits. In theory, this might stir banks to lend the reserves out elsewhere so they would make money on the loans. Alan Blinder, a Princeton University professor and former Fed vice chairman, paused in the middle of a speech on central bank independence Saturday to urge the Fed to cut this rate.

The Good News and the (Very) Bad News about Bernanke’s Speech -  Ben Bernanke gave his commentary about US monetary policy at the annual late summer monetary conference at Jackson Hole, Wyoming sponsored by the Federal Reserve Bank of Kansas City. At the 2010 meeting, just after the stock market had fallen by nearly in the month of August as fears of potential deflation were rapidly gathering strength, Bernanke signaled that the FOMC would undertake its second round of quantitative easing, prompting a quick turnaround in both inflation expectations and the stock market. A similar downward drift of inflation expectations this spring led to a substantial drop in stock prices from their early 2012 highs, prompting Bernanke and the FOMC to emit faint signals that a third round of quantitative easing just might be in the offing at some future time if it seemed warranted. Those signals were enough to reverse a months long downward trend in inflation expectations producing a rebound in stock prices back close to their highs for 2012. So the good news from Bernanke’s speech is that he argued that, contrary to those who deny that monetary policy can be effective at the zero lower bound, there is empirical evidence showing that the previous rounds of quantitative easing had a modest stimulative effect.  That’s the good news.

Fed Moves Toward Open-Ended Bond Purchases To Satisfy Bernanke - Federal Reserve Chairman Ben S. Bernanke says the U.S. economy is “far from satisfactory.” His colleagues are moving to embrace policies that will stay in place until he’s satisfied.  Four Fed presidents have come out in favor of an open-ended strategy for bond buying, with three calling for the program to begin now. Rather than specify a fixed amount of bonds to purchase by a certain date, such a strategy would leave the Fed able to announce a pace of purchases that it could adjust as the economy gets closer to Bernanke’s goals. "You would be able to react to the incoming data in an incremental way and not be in a situation where you have to either drop the bomb or do nothing,” St. Louis Fed President James Bullard said in an interview last week during the Fed’s annual monetary policy symposium in Jackson Hole, Wyoming.  Bernanke used the forum to defend unorthodox policies such as bond purchases and made the case for further action to reduce an unemployment rate that he called a “grave concern.”

Bernanke Faces Skepticism Over Fed Policy - Ben Bernanke encountered a heavy dose of skepticism and doubt here this weekend. In a highly anticipated speech on monetary policy Friday, the Federal Reserve chairman argued that the Fed's easy-money policies were helping the weak economy and laid the groundwork for more action. But economists and central bankers wondered more openly than usual if the Fed had the tools to fix the problems of the day and expressed frustration that four years of super low interest rates and extraordinary money-pumping by the Fed hadn't done more to spur the slow-moving economy. "Why is it that we've had such incredibly accommodative monetary policy for so long and we've had so little growth?" Donald Kohn, a Brookings Institution scholar, asked from the audience after a panel discussion here Saturday. It was a striking question because Mr. Kohn is a former vice chairman of the Fed and was Mr. Bernanke's right-hand man during the financial crisis. The headwinds that the Fed often cites—Europe, household debt-reduction, the housing bust—he said were unsatisfying answers. "There is a lot we don't understand," he said. "We're in a world where monetary policy has much less traction," Charles Bean, deputy governor of the Bank of England, said from the audience.

Central banks debate limits of power at Jackson Hole (Reuters) - Central bankers who traveled to the wilds of Wyoming to figure out if more policy action was needed to curb stubbornly high unemployment heard powerful arguments on both sides of the debate, and leave with many questions unanswered. Policymakers in Europe and the United States facing weak growth and painfully high unemployment are struggling with the issue of whether additional monetary stimulus could do more harm than good. As the annual Jackson Hole gathering came to a close on Saturday and some of the world's most important central bankers headed back home, a former vice chairman of the U.S. Federal Reserve summed up the key issue confronting the prestigious policy retreat. "What is holding the economy back? Why is it that we've had such incredibly accommodative monetary policy for so long (but) we've had so little growth? I think it remains a puzzle," said Donald Kohn, who is now a senior fellow at the Brookings Institution think tank in Washington. Fed Chairman Ben Bernanke, citing "grave" concerns about stagnation in the labor market in remarks that were seen as advancing the case for another round of bond purchases by the U.S. central bank, talked about headwinds obstructing a recovery that included the debt crisis in Europe and U.S. fiscal policy.Adam Posen, who finished his final day as a member of the Bank of England's monetary policy on Friday and is a powerful advocate for more forceful central bank action, asked the same question as Kohn: "Why has all this lower short-term interest rates failed to make the economy go go go?"

'Blind Faith' In Bernanke Is Big Mistake, Kass Says - Not everyone is a fan of Ben Bernanke’s latest rhetoric. Put hedge-fund manager Doug Kass in this crowd of doubters who think the Fed chairman is heading down a dangerous path by continually trying to prop up the economy. The skeptics claim unintended consequences will manifest at some point due to the Fed’s moves, which would create even more problems for the economy to grapple with down the road. “I find it hysterical and almost ludicrous that market commentators, investment strategists and investors continue to voice blind faith in the Fed chairman,” Kass, of Seabreeze Partners, said in an email. He points out Bernanke got the housing bubble wrong, didn’t properly anticipate the Great Panic in 2008 and has failed to properly address stubbornly high unemployment. “And he is now wrong on the benefits of further quantitative easing,” Kass says.

'Why Berate Bernanke?' - Via email, Arin Dube dissents: Why Berate Bernanke?: As months go by and the Fed refuses to "do" anything, some have become upset. I have a different reaction, and one that I think calls into question why people actually do get upset at Ben Bernanke and the Fed.  Let me begin with a simple question: is there any evidence that Ben Bernanke can do much to cure our ailments? I do not think that he can. But more importantly, I am particularly surprised that some self-avowed Keynesians seem to disagree (here and here). I would like to see one example -- one -- that anything like Quantitative Easing (QE) has ever worked. I would like to hear of one example -- one -- that trying to stimulate private demand by convincing folks that a future inflation is right around the corner has ever worked. Yes, I would like to see evidence -- ANY evidence -- that these strategies work, because I certainly cannot find any such evidence. Frankly, if old John Maynard were alive, I'd wager that he would find the idea that a central bank can get capitalists to invest in purchases of durable goods because inflation will be high some years from now to be as foolhardy as the idea that capitalists can be made to invest heavily by summoning the confidence fairy … for example by destroying the public sector.

The Remarkably Small Costs of Quantitative Easing - Joe Gagnon - At Jackson Hole last week, Federal Reserve Chairman Ben Bernanke provided more detail on the “costs and risks” he had cited in his June Federal Open Market Committee (FOMC) press conference as the main reasons why the Fed has been slow to use more quantitative easing to fix the economy. But the details make it clear that these costs are very small indeed, even if Bernanke was not inclined to admit it.  The first cost of quantitative easing cited by Bernanke is that the Fed could become the dominant buyer and holder of long-term Treasury and agency securities. According to Bernanke at Jackson Hole, “trading among private agents could dry up, degrading liquidity and price discovery … [and] impede the transmission of monetary policy. For example, market disruptions could lead to higher liquidity premiums on Treasury securities, which would run counter to the policy goal of reducing Treasury yields.” But the Fed could address this problem by announcing adjustable daily targets for the yields of the securities it is buying. To hit these targets it would accelerate or decelerate its rate of purchase within the day. That would give market participants some assurance about the price for which they could buy and sell Treasury securities at any time, which is the operational definition of a liquid market. More broadly, one of the main purposes of quantitative easing is to force investors out of the market being targeted and into other markets, which would become more liquid. The Treasury yield curve can still provide a market benchmark even if private investors have most of their portfolios in other markets.

Will August job report propel the Fed into action? - - The unemployment rate fell to 8.1 percent in August and there were 96,000 nonfarm jobs created, according to a report from the Bureau of Labor Statistics. The number of jobs created, 103,000 in the private sector and a loss of 7,000 in government, was less than many analysts expected, and it reflects an economy that is growing fast enough to keep up with population growth -- the number of new jobs last month is roughly equal to new entrants to the labor force -- but it is not enough to make headway on our unemployment problem. There were other signs of a stagnating labor market as well. The numbers from earlier months were revised down, average hourly earnings fell slightly, and the number of part-time workers, which often signals future labor market developments, declinedI. How will the Federal Reserve react to this news? Ben Bernanke has indicated that the Fed will be watching the employment numbers closely, and if the labor market continues to struggle more action from the Fed is likely. . Thus, it also seems clear that the likelihood of the Fed doing more to stimulate the economy has increased, and is certainly entered the more likely than not range. Fear of inflation among some members of the Fed's monetary policy committee has been standing in the way of more action, but with both headline and core inflation numbers running near or below the Fed's target rate, those objections will be hard to sustain.

The August Employment Report - Policy action is needed, with all deliberate speed. Figure 1 provides a summary snapshot of the labor market. Clearly, all employment measures -- overall NFP and private -- are below their corresponding measures at the peak at 2007M12, while growth (which can be inferred from the slope of the curves, since the series are logged) remains at lackluster rates. It is interesting that the ADP series trended higher than the corresponding BLS measure of private employment in the last few months.  On the other hand, the alternative (experimental) BLS measure touted by conservatives in the early 2000’s is above levels recorded at 2009M01. (This experimental measure is now about 1.9 million above the establishment series). The experimental measure is discussed in this post.Hence, while the labor market continues to improve, it’s clear that much more needs to be done, particularly as we hurtle toward the fiscal cliff, and Europe sinks into de facto recession. A further easing, via QE3, is clearly on the table, and in my view, critically needed.

Jobs growth cools in August, seen forcing Fed's hand (Reuters) - Jobs growth slowed sharply in August, setting the stage for the Federal Reserve to pump additional money into the sluggish economy next week and dealing a blow to President Barack Obama as he seeks re-election. Nonfarm payrolls increased only 96,000 last month, the Labor Department said on Friday, below what would normally be needed to put a dent in the jobless rate. While the unemployment rate did drop to 8.1 percent from 8.3 percent in July, that was only because many Americans gave up the hunt for work. The survey of households from which the jobless rate is derived actually showed a drop in employment. "The economy is crawling up the down escalator and today's report can only give ammunition to the activist members of the Fed board to loosen monetary policy further next week,"

WSJ ANALYSIS: Jobs Report Raises Likelihood of Fed Action - The weak jobs report increases the likelihood that the Federal Reserve will launch an easing program at the conclusion of its policy meeting next week, including a new bond-buying program. Fed Chairman Ben Bernanke described the weak labor market as a grave problem in comments in Jackson Hole last week, a strong suggestion that he wanted to take new actions to strengthen economic growth. He also said the economic benefits of a bond-buying program exceeded the costs. Friday’s jobs report was the last hurdle standing in the way of the Fed proceeding. If the data were very strong, the Fed might have held off, or decided to introduce modest measures.

Economists Expect Fed to Deliver QE3 and More Next Week - A wide range of economists expect the Federal Reserve to restart balance-sheet-expanding bond buying in a bid to spark better growth rates, amid other, lesser stimulus options. For most forecasters, the release Friday morning of tepid-at-best August hiring data essentially seals the deal that when the central bank ends its two-day monetary-policy meeting next Thursday, it will in some fashion offer fresh stimulus to the economy. The way economists see it, comments by core central bank officials, most notably Chairman Ben Bernanke‘s speech a week ago, make some form of action very likely.

Gross Says Jobs Growth to Spur Fed on Quantitative Easing - Pacific Investment Management Co.’s Bill Gross said lower-than-forecast U.S. employment growth will move the Federal Reserve closer to more quantitative easing.  Policy makers will give “strong hints” or provide “positive action” at next week’s Federal Open Market Committee meeting, Gross, who runs the world’s biggest bond fund, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. The Fed will likely ease further through “open-ended” purchases of Treasuries and mortgages and extend its pledge to keep interest rates low into 2015, he said.

After Fed Action, Then What? - The Fed is on the verge of expanding its stimulus policies. We learned that much during the meetings in Jackson Hole, Wyo. But what may be more interesting is the undercurrent of discussion about what happens when those measures prove insufficient. There was broad agreement at the conference that the actions the Fed is considering, and may announce in two weeks, will not revive the economy. Indeed, given the magnitude of the looming “fiscal cliff,” they may not even be enough to prevent a recession. Some economists and policy makers – notably the Fed’s chairman, Ben S. Bernanke – say they believe that the new Fed policies would still have significant benefits. Some are dubious. But no one seems to think it will suffice.What more can be done? Well, pretty much everyone here is upset about the breakdown of fiscal policy, which is becoming a principal drag on growth. Indeed, quite a few attendees regard that as the entire issue. They do not agree on what fiscal policies are needed. (The grab bag includes tax cuts and spending increases, household debt reduction and government debt reduction.) But they do agree that monetary policy has basically done (almost) all that it can. Others, however, see opportunities to do more.

The Consequences of Easy Monetary Policy » No one really expected any fireworks in Bernanke’s speech, and he fully met expectations. We got the obligatory rationalization for what passes as current Fed policy. The part the markets wanted to hear is highlighted below for you. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” Did that last sentence ring any bells?  Standard-issue Fed speech. This has been his theme for the last four years, if memory serves. In every speech he gives a nod to the proposition that he and his colleagues are seriously analyzing the effects of Fed quantitative easing policies to make sure the benefits outweigh the costs. I have not heard a serious critique or exposition from Bernanke of those risks, as of yet. But we did get a victory lap from him this year, as he took credit for the economy and the stock market. Let’s go back to the speech..

Paper Criticizes Federal Reserve Approach, Suggests Radical Overhaul of Monetary Policy in the Crisis - The upshot of Ben Bernanke’s speech at the economic symposium at Jackson Hole, Wyoming, at least to most interested observers, is that the Federal Reserve will enact a new round of quantitative easing at their next policy meeting the week of September 10. This may be dependent on the jobs numbers that come out this coming Friday, but that’s the general consensus. One regional Fed President hinted that a “package” of measures could be enacted by the Fed, although this probably includes an extension of the communication on how long interest rates would remain close to zero (extending through to 2015) along with the new asset purchases. So this would suggest that the Fed will take some steps to ease monetary policy. The problem is that, at the same policy symposium, leading monetary policy theorist Michael Woodford argued in a paper that the steps under consideration would be the exact wrong ones to take. Mr Woodford’s 97-page paper is deeply sceptical about the efficacy of quantitative easing and endorses the idea of a central bank target path for nominal GDP. From his conclusion: “Central bankers confronting the problem of the interest-rate lower bound have tended to be especially attracted to proposals that offer the prospect of additional monetary stimulus while (i) not requiring the central bank to commit itself with regard to future policy decisions, and (ii) purporting to alter general financial conditions in a way that should affect all parts of the economy relatively uniformly, so that the central bank can avoid involving itself in decisions about the allocation of credit. Unfortunately, the belief that methods exist that can be effective while satisfying these two desiderata seems to depend to a great extent on wishful thinking.”

On Woodford in Wyoming -- I'm feeling lonely out on this limb, but I think I will defend Bernanke and criticize Woodford ((and admit I only read the concluding section and the first two sections on foreward guidance of his talk) *.pdf but no warning. Open it).  Medium and long term Treasury rates are extraordinarily low.  It seems to me that we can deduce three things from this. 

  • 1) Pessimism about real GDP
  • 2) Low expected inflation
  • 3) Bond traders are confident that the Fed will keep the target federal funds rate at essentially zero for a good long while (at least through 2015 see this)

Krugman and the league of reality based economists like to stress points 1 and 2, but point 3 is just as solid.  No possible forward guidance can get the 5 year rate under 0.   The Krugman/Woodford/Eggertsson/(apologies to those I missed) point always was that even if the monetary authority can't get the safe short term rate lower, it *might* be able to influence the safe short term rate expected to hold a few years in the future.   But how much lower can that expected rate go?  The 5 year rate was 0.66% the last time I checked.  It is hard to imagine that Bernanke can make credible promises about policy after the end of his current term.  A negative real federal funds rate is very very far from normal (I'd say normal is about 2 % real). There is every sign that the Fed has given about all the forward guidance to bond traders that can be given. 

Woodford at Jackson Hole - Mike Woodford's Jackson Hole paper is making a big buzz, and for good reasons. Readers of this blog may be surprised to learn that I agree with about 99% of it. (Right up to the "and hence this is what we should do" part, basically!) Mike lays out in clear if not always concise prose, and remarkably few equations, the central ideas of modern monetary economics, on all sides, along with important evidence. Mike's central question is this: how can the Fed "stimulate," now that interest rates are effectively zero, and given that (as Mike reviews), "quantiative easing" seems extremely weak if not completely powerless? He comes up with two answers: (Hint: starting with the conclusions on p. 82 is a good way to read this paper!) First, the Fed can make promises to keep interest rates low in the future, past the time when normally the Fed would start to raise rates. He hopes that such promises would lower long-term interest rates, through the usual expectations hypothesis mechanism that long rates are expected future short rates. He is sympathetic to "nominal GDP targeting" as a way to commit to those promises. Second, drop money from helicopters, i.e. "coordinated monetary-fiscal policy." Basically, the Treasury borrows money, writes checks to voters ("helicpoters"), and the Fed buys the debt. I certainly agree the latter policy can create inflation (I wrote as much in "Understanding Policy"), though both Mike and I  emphasize that policy needs some expectations and commitments asterisks too.

Goldpunk, strategy space, and Michael Woodford - Nick Rowe - On the one hand: it's very good news that Michael Woodford has endorsed NGDP level path targeting (pdf). (For non-economists, Michael Woodford is the most influential living academic monetary economist; he's the one who wrote the book that defines how graduate students think about monetary policy.) On the other hand: I'm going to rain on our victory parade. Nothing important has changed.  The fundamental problem is the strategy space. We think of monetary policy as a conditional path for a nominal interest rate. "Setting an interest rate is what central banks really really do". That way of thinking about monetary policy is what creates the problem. That strategy space fails when the nominal interest rate hits the Zero Lower Bound.  Michael Woodford's text reinforced that way of thinking about monetary policy. It helped to define that failed strategy space. His Jackson Hole paper re-endorses that failed strategy space.

Costs and intentions - MONETARY policy has become a tricky business. Since the traditional Fed policy tool, the Fed funds rate target, can’t go much lower, the Fed has turned to less conventional methods, such as buying long-term Treasuries. Mike Woodford’s latest paper casts doubt on how effective this has been in practice. And it even questions the theoretical justification.  There are two separate questions: what should the Fed do, and what can it do? John Cochrane and Mike Woodford each have interesting things to say about how limited Fed policy is right now. They advocate communicating clear and credible goals for both the short and medium term. Beyond that, they suggest, not much more can be done.  But even if the Fed could do more, should it do so? Suppose the Fed lowered rates further.  In simple Keynesian models lower interest rates decrease the cost of investment and the opportunity cost of consumption among other things, thereby boosting aggregate demand. But in reality things are more complicated. Historically, the Fed has not had much control over interest rates other than the Fed funds rate, so it may not have much impact on corporate borrowing.  Now the Fed is using less traditional tools. Will that impact interest rates that determine investment? Perhaps, but it’s hard to know for certain. Mike Woodford believes the different bond markets are segmented which suggests QE won't do much.

Zero Lower Bound Denial -- While I believe macroeconomists practicing demand denial represent a minority (albeit still a distressingly important minority), I think what I might call Zero Lower Bound (ZLB) denial is far more prevalent. What I mean by this is a belief that somehow monetary policy alone can overcome the problem of the ZLB. It is in many ways a perfectly understandable belief, reflecting what I have called the consensus assignment developed and implemented during the Great Moderation, which was (rightly) seen as an advance on the bad old days where fiscal policy was routinely used for demand stabilization. Nevertheless the belief is incorrect, and damaging. It is incorrect for two reasons. ... Monetary policy that involves temporarily creating money to buy financial assets is of an order less effective and reliable than conventional monetary policy, or fiscal policy. The second is ... just as important. Even if you follow the Krugman/Woodford idea of using commitments about future interest rate setting to mitigate the recession today (which is equivalent to permanently creating more money), this does not mean that you can forget about fiscal policy. To put it another way, fiscal policy would still be a vital stabilization tool at the ZLB even if the central bank targeted nominal GDP (NGDP). It is reluctance to accept this last point which is a particular characteristic of ZLB denial.

More on Gagnon - I have been trying to write a post on what could be achieved by Fed purchases of agency issued MBS.  My only new point is that the MBS price that matters is the price paid to Fannie/Freddie/Ginnie not the price on the secondary market.  That is, the price that matters is the price of new MBS -- the money sent in the direction of people who build houses now and of other people who refinance their mortgages now.  The price of outstanding MBS does not affect the housing market except through expectations. Recall Gagnon's proposal to drive the prime mortgage rate to 3% by unlimited purchases of agency issued MBS for at least a year.  Here the point is that the only MBS purchases that would matter are purchases of new MBS.  The flow of Fannie + Freddie purchases of mortgages is around $300 Billion a quarter (about the same as the flow of QEII purchases).  Sorry I don't know abou Ginnie Mae the inventor of the MBS.  Also the flow would increase (which is the whole point of the operation). If the Fed pays much more than anyone else is willing to pay for MBS, there is no way for private investors to undo the operation by speculating.   They can make side bets and the price of assets which pay the same as agency issued MBS on that side bet market would be lower than the price paid to the agencies.  It also wouldn't matter to the agencies or to home builders, home buyers, mortgage refinancers or mortgage initiators.

Jackson Hole Paper: True Cause of High Unemployment Is Basic Economic Weakness —Is the job market weak because of structural changes, or is a lack of demand the true factor keeping unemployment rates high? Answer that, and you resolve a grand mystery that’s bedeviled those who are trying to make sense of the persistently high levels of unemployment that have been afflicting the U.S. economy for several years now. The answer isn’t just academic: If a lack of demand is behind high unemployment, the Federal Reserve can help fix the situation via monetary policy stimulus. Structural problems, however, are beyond the reach of those remedies. A paper presented Saturday at the Kansas City Fed’s annual Jackson Hole, Wyo., research conference argues that what currently ails the economy is indeed a demand problem. That suggests the Fed has room to act if it chooses to do so. “An analysis of labor market data suggests that there are no structural changes that can explain movements in unemployment rates over recent years,” the authors write. “Neither industrial nor demographic shifts nor a mismatch of skills with job vacancies is behind the increased rates of unemployment.” The paper states “some industries, like construction, manufacturing, and retailing, experienced disproportionately large increases in unemployment.” But at the same time, “the patterns observed on the way up were mirrored on the way down,” and “those industries that contributed much to the increase in unemployment between 2007 and 2009 were the same that accounted for decreases in unemployment since 2009,”

Mishmash Not - Paul Krugman - Props to Eddie Lazear; his paper for Jackson Hole (pdf) is a professional, well-done piece that offers little aid and comfort to his political allies. Lazear’s question is whether a large part of the rise in unemployment is “structural”, that is, reflecting supply factors, or whether it’s mainly simple lack of demand. The Keynesian view is, of course, that it’s demand, and that fiscal and monetary policy should be acting to provide the missing demand. On the other side you have either supply-side views a la Mulligan claiming that taxes and benefits are discouraging people from working, or more or less Austrianish views that it’s about maladaption of the structure of production that left too many workers and too much capital stuck in the wrong industries. Lazear goes through the data, and finds overwhelming evidence of inadequate demand, little if any evidence of structural problems. I was especially struck by his data on “mismatch” (which everyone I know calls mishmash): the extent to which there appears to be a misalignment between where the workers are and where the jobs are. In the early stages of the Lesser Depression some data seemed to suggest a sharp rise in mismatch; it was left for us demand-siders to argue that this was actually a cyclical, not structural issue, and not fundamental to the employment problem. Now Lazear informs us that sure enough, mismatch was cyclical, and has in fact come way down even though unemployment remains high:

Mainstream economists do not understand how monetary policy is transmitted  - Barry Ritholtz called attention this morning to a Monetary Policy Transmission flow chart by Bloomberg’s Joe Bruesuelas this morning that purports to show the reason behind “ZIRP’s more modest impact on the broader economy than the outsized impact we see on risk assets.”  I don’t mean to single out Mr. Brusuelas here. He’s a great guy, and from the things I’ve seen of him, he’s usually right on target with his economic analyses. But like all other economists who are puzzled by the reason the Fed’s policies have not had much apparent impact on the economy as they have had on the markets, he misses the most important and critical access of the route through which Fed policy reaches the economy.  Here’s his flow chart.What this chart illustrates is not so much the blockages to monetary policy transmission as the failure of mainstream economists and pundits to grasp the simplest and most important fact of how monetary policy is transmitted.  Fed Monetary policy actions are transmitted to the economy via the trading accounts of the Primary Dealers and the markets. That’s how money begins its path to reaching bank reserves and economic activity. The dealers are the transmission mechanism. The markets are the transmission mechanism from the dealers to the economy. The Primary Dealers get the cash first. They are the only deciders of how to distribute it. The only exception to this rule is when the Fed uses unconventional policy actions to lend directly to the end users, as it did with its alphabet soup programs beginning with the TAF  in 2007 and 2008.

At Jackson Hole, a growing fear for Fed independence (Reuters) - Increasing political encroachment on the Federal Reserve, particularly from the Republican Party, could threaten the central bank's hard-won independence and undermine confidence in the nearly 100-year old institution. That was the pervasive sentiment among economists gathered at the Fed's annual monetary policy symposium in Jackson Hole, Wyoming. Against the dramatic backdrop of the Grand Teton mountain, many said a closely-contested presidential race has turned the monetary authority into a political football. "I do fear for it a bit if the election comes out that way, especially if some of the more radical voices, that happen to be Republican voices nowadays, get reelected," said Alan Blinder, Princeton economics professor and a former Fed vice chairman, adding that historically opposition to the U.S. central bank had come predominately from the left. "There's a lot of hostility," said Blinder, who was appointed to the Fed by former president Bill Clinton. The primary topic of conversation at the rustic mountainside resort was whether or not Fed Chairman Ben Bernanke and his colleagues would deliver another round of monetary stimulus soon. But, when probed on the issue on the sidelines of the meeting, many participants voiced concern about the heated political rhetoric aimed at the Fed, including a bill that would audit the conduct of monetary policy that is gaining increasing traction among Republicans.

Fed Watch: Did the Republicans Force Bernanke's Hand? - To what extent is the Fed responding to political pressures? Of course, Federal Reserve officials like to believe they are above the fray, and vehemently deny that political considerations play any role in their decision-making process. They must be above the fray, otherwise the cherished independence would be broken. I know this is what I am supposed to believe. Doesn't every Fed watcher? Yet I can't help but think that it would be naive to believe that any institution in Washington is above politics. It is simply not that kind of town. The degree that you have the illusion of independence depends upon your ability to have a substantial block of fiscal policymakers that believe you are doing your job. And not "your job" as you define it, but as they define it, whether or not their definition makes any sense. Such is Washington. Which brings me to Pedra da Costa's Reuters piece this morning: Increasing political encroachment on the Federal Reserve, particularly from the Republican Party, could threaten the central bank's hard-won independence and undermine confidence in the nearly 100-year old institution. That was the pervasive sentiment among economists gathered at the Fed's annual monetary policy symposium in Jackson Hole, Wyoming. Against the dramatic backdrop of the Grand Teton mountain, many said a closely-contested presidential race has turned the monetary authority into a political football. "I do fear for it a bit if the election comes out that way, especially if some of the more radical voices, that happen to be Republican voices nowadays, get reelected," said Alan Blinder, a former Fed vice chairman, adding that historically opposition to the U.S. central bank had come predominately from the left.

September Makes Sense for More Fed Action - If enough Federal Reserve policymakers believe the U.S. economy needs more central bank stimulus, there are advantages for the Fed to act at its meeting next week, rather than wait. Observers say jobs figures for August, to be released before the next meeting, will be a big factor for the Fed. But it’s hard to imagine how one, albeit important, piece of data could change the theme strongly implied on Aug. 31 by Fed Chairman Ben Bernanke (he of the “grave concern” about the labor market) that the economy still needs help and the Fed still has tools to be of help. Bottom line: if you think help is needed, help sooner via easing choices including additional bond buying is better than later.

Fed Watch: Quick Data Notes - First, based on dismal new orders for nondefense, nonaircraft capital goods, I am not expecting an upside surprise in tomorrow's ISM report: In the past, such weakness has been met with Fed easing. Also supporting Fed easing was the read on PCE inflation: Headed south, exactly the opposite of the expectations of the Fed hawks. Note that recent trends in core-inflation tend to confirm the decline in headline: In such a context, I am not particularly worried about the rise in gas prices, which has tended to weigh on spending rather than trigger runaway inflation: Overall, we look to be heading decisively below the FOMC's expected price path: Even if the Fed put no weight on the employment mandate, they should be easing on the basis of the price stability mandate alone. The employment mandate could really be viewed as simply icing on the cake to justify an expansion of the balance sheet. Initial claims continue to move sideways, much like we saw last summer: Last year, claims didn't turn south until the fall. Presumably, this is the kind of thing that prompts some policymakers to want to wait for more data before easing further. It is not clear that Federal Reserve Chairman Ben Bernanke is willing to wait much longer. Friday's employment report could be decisive in determining the outcome of the next FOMC meeting.

Fed's unemployment target is unrealistic - The Fed's goals for the US longer term unemployment levels are simply unrealistic and will force the central bank to prolong its easing programs beyond what is really needed for economic growth. This misguided approach will be damaging to the economic growth in years to come.  Here is what the FOMC is projecting for the "longer run" unemployment - a rate that is in the 5%-6% range.As discussed in this post, the Beveridge curve clearly shows that the US had a structural shift in employment dynamics after the financial crisis. What was considered the "equilibrium" unemployment (also called "natural" unemployment) rate needs to be adjusted upward. A more realistic unemployment goal should be in the 6%-7% range, a much more achievable target. Robert Gordon from Northwestern (via Market Watch): -  “I think more realistically that, gradually, [unemployment] equilibrium will move from 5% to 7%,” he said. He says that fits with anecdotes of businesses finding difficulty in hiring workers with the right skills, and with skills eroding from the long-term unemployed.

150,000 Jobs Per Month Is Not Robust Growth - Dean Baker - Okay, some cheap WAPO bashing this morning, an article on Bernanke's speech as Jackson Hole, described a rate of job growth of 150,000 a month or more as "robust." Sorry, that isn't close to right. The economy is down by more than 9.5 million jobs from its trend path. We need roughly 100,000 jobs per month to keep pace with the growth of the labor force. This means that at 150,000 jobs per month, we are making up the jobs shortfall at the rate of 50,000 a month. At this pace it will take us close to 16 years to get back to the economy's trend job growth path. A rate of job creation that gets us to full employment in 2028 is not robust. For the young uns out there, or those with bad memories we created 250,000 jobs per month over the last four years of the Clinton administration, and that was starting with an unemployment rate below 6.0 percent. We should not subject our economic policymakers to the soft bigotry of low expectations.

Bernanke Uncertainty - I'm suspicious that the market's uncertainty and hope on QE3 is harming the economy. Speculation in what the Fed will or won't do is messing with already pretty messy commodity and currency values. Uncertainty is almost always bad. I wish Bernanke would settle it by saying something short, direct, and then stop. Such as, "We've done all we can to help the economy with the purchase of Treasuries and Agency MBS. Buying more won't help, so don't expect more. If we have a future emergency, maybe we'll find a way to buy non-traditional assets, but I'm not sure what those assets would be or how it would work at this time - it is all hpothetical right now and would be dictated by the type of emergency and market reaction at the time - so don't ask.  We commit to keeping interest rates low for the forseeable future, in other words for years. Hopefully this statement makes the market feel good, but the reality of US de-leveraging, and increasingly global de-leveraging, has created an excess of savings versus the demand for debt. The market equilibrium is already dictating very low interest rates for years. This means that the US and most developed nation governments are looking at incredibly low borrowing rates for many years, often these rates are negative in real terms. So I advise them to borrow that cheap money and put it to work by investing in infrastructure, education, and research in ways that will not only stimulate current demand, but also increase future productivity. Surely governments can find public investments that will yield more than a 2% marginal return in national production. If they can't or won't, then citizens should vote in politicians who will.

Natural Born Recovery Killers - Paul Krugman  -- Hmm. Brad DeLong finds Niall Ferguson touting a paper by William White (pdf) that I read as a desperate attempt to find some reason why we should be raising interest rates despite a deeply depressed economy and an absence of obvious inflationary pressure. Why the desperation? There’s a certain kind of central banker who just hates the idea of easy money; plus the desire to raise rates is closely identified with the political right. No surprise, then, that Ferguson likes the paper.  But it doesn’t hang together — and Brad is right to get especially exercised over the attempted invocation of Knut Wicksell to support the call for higher rates. Wicksell was a pre-Keynesian macro theorist who offered a way to think about booms and slumps in terms of the difference between the market rate of interest and the “natural” rate, defined as the rate that would match desired saving and desired investment at full employment; there’s a boom when the market rate is below the natural rate, a slum when the reverse is true.

Human Action Under Ultra-Low Interest Rates -- Over the past months (and particularly in the last weeks), we have increasingly read negative comments on the ongoing zero-interest rate policy (ZIRP) and in some instances, negative-interest rate policy (NIRP). Today, we want to examine the origins of the idea that ultra-low rates of interest can exist, how this idea came about, why it was flawed and how it leads to an informal economic system. It was a fallacy based on misunderstanding of the rate of interest and human action. Another way of examining this is the following: The zero interest rate indicates that time is free. And as anything that is free is wasted, time will also be wasted. It should be clear that there is an inconsistency in simultaneously believing that investment demand and savings are mainly driven by income but that it is necessary to lower the interest rate to boost investment, as the Fed does... and the Fed is Keynesian! Finally, we note one last thing: As productivity, employment and production decrease, even a steady and low rate of inflation has the potential to morph into hyperinflation.

Why Isn’t There More Inflation? - On a very simple level, inflation occurs when there is more money in circulation than there are things to buy. A big Federal deficit can increase the money supply, because it means either that the government is spending more or that tax cuts are boosting individuals’ disposable income. Low interest rates can also expand the money in circulation because they signal that the Federal Reserve is making it easier and cheaper for banks to lend. And an even more potent way for the Fed to intervene is through so-called quantitative easing – i.e., buying government bonds and effectively creating additional money out of nothing.What’s most striking today is that all three of these factors are now at extremes that should be fanning the flames of inflation. Deficits of more than a trillion dollars a year are the highest in history. At close to zero, short-term interest rates are at their lowest level in more than 30 years. And the Fed’s monetary base has been expanding at an unprecedented rate. The remarkable thing is that none of this is translating into serious inflation. Over the past three years, some volatile prices, such as those for food and gasoline, have indeed gone up. But there still haven’t been sustained widespread price increases throughout the economy.

Evil is the root of all money - A basic question in the theory of money is "why does money exist?"  Or, put another way: where does the demand for money come from?  The phenomenon of monetary exchange is so familiar to us that many may view the question ridiculous and/or the answer obvious. But if we stop and think about it, we'll discover that a surprising number of our everyday transactions are made without any reference to money at all. In particular, we regularly trade favors with family members, friends, and associates via implicit credit arrangements known as gift-giving economies. Indeed, the phenomenon seems quite prevalent in smaller (and more "primitive") communities throughout history. So if money is not necessary in transactions--even credit transactions--then why is it used? Monetary theorists have been asking this question for a long time. The standard answer to be found in virtually every undergraduate macro textbook is that "money solves the double coincidence problem."  That is, without money, trade is restricted to barter transactions. And because it is difficult to find a trading partner who happens to want precisely what you have to sell and vice versa (a double coincidence), barter exchange is inefficient. I want to argue here that this familiar story is all wrong. (John Quiggin offers a related critique here.) Up until recently, I used to think that a lack of double coincidence was necessary--but not sufficient--to rationalize the use of money. I now question whether a lack of double coincidence is necessary at all.

Return to the gold standard - Several sources reported that the 2012 Republican Platform would call for a commission to explore the possibility of the U.S. returning to a gold standard. However, the final document makes no mention of gold, and instead seems to have settled on a proposal that is unlikely to do any harm: I thought it would be worthwhile to review some of the reasons why we should be thankful that saner heads seem to have prevailed. Here's the core concern. In January of 2000, an average U.S. worker earned $13.75 an hour, and the price of gold was $283 an ounce. If you put in 100 hours of work at that wage, you would earn $1375, which would have been enough to buy a little less than 5 ounces of gold at the time:  Last month, the average U.S. wage was up to $19.77 an hour, but the price of gold had skyrocketed to $1623 an ounce. That means that for 100 hours of labor, the average worker today would only receive 1.2 ounces of gold. Here's what average U.S. wages would look like if they were reported in units of ounces of gold earned per 100 hours instead of in the usual units of dollars earned.

Republicans Are Wrong on Call for Gold Standard - Today, the usual gold bugs – The Wall Street Journal opinion pages, Forbes magazine and conservative Web sites – are all very excited about the Republican endorsement of yellow metal in place of that paper junk we carry in our wallets. During the Republican primaries, both Newt Gingrich and Herman Cain endorsed a return to the gold standard.  Economists today generally believe that the gold standard exacerbated the Great Depression. They note that those countries that went off it first in the 1930s were the first to recover. A survey of a panel of 41 prominent economists earlier this year by the University of Chicago business school found no support for a gold standard, including by those who had served in Republican administrations, including Edward P. Lazear of Stanford and Richard Schmalensee of the Massachusetts Institute of Technology. To be fair, the idea of returning to a gold standard in 1980 or 1981 was not absurd. The Consumer Price Index rose 13.3 percent in 1979 and 12.5 percent in 1980, before falling to a still-high 8.9 percent in 1981. Under extreme circumstances, radical solutions have to be considered.But today, there is no inflation to speak of and what little there is is heading downward toward deflation, as James D. Hamilton of the University of California, San Diego, noted in a Sept. 1 blog post. Like me, he is puzzled that there is any support for the gold standard under current economic conditions

The gold standard and economic growth - Tyler Cowen acknowledges that the gold standard as implemented in 1929-1932 was a disaster, But in the interests of promoting a balanced discussion, he asks: Dare anyone critical of the gold standard bring themselves to utter these (roughly true) words?: "For the Western world, the gold standard era, defined say as 1815-1913, was arguably the greatest period of human advance ever, at least in matters of economics, culture, and technology."  There was indeed spectacular real economic growth in the nineteenth and early twentieth centuries. But it is unnatural to me to suggest that the monetary standard was the key cause of this. Instead I would point to real developments. For example, U.S. production of crude petroleum quadrupled between 1868 and 1878 and doubled every decade after that up through 1915, thanks primarily to discovery of huge new fields as the industry expanded geographically (see Hamilton (2012)). By 1890, the U.S. had laid 200,000 miles of rail track, and that too was to double again by 1917 Discovery of the steam engine, electricity, and machine tools were surely more important than monetary policy in determining the real growth rate for over a century. The question should not be whether long-term growth occurred under the nineteenth-century gold standard, but instead whether the monetary system contributed to cyclical instability over that period. It is hard to make the case that it was helpful.

GDP and Employment drag from State and Local Governments -- Two of the key U.S. economic trends I expected this year were 1) a recovery in residential investment, and 2) that most of the drag from state and local governments would be over by mid-year 2012. Just eliminating the drag from state and local governments would help GDP and employment growth. I've written extensively about the housing recovery, and it is time to take another look at state and local government spending. In early August, the Rockefeller Institute of Government put out a report on state and local government revenue through Q1. From the press releaseOverall state tax revenues are now above pre-recession levels, as well as above peak levels that came several months into the Great Recession. In the first quarter of 2012, total state tax revenues were 4.8 percent higher than during the same quarter of 2008. Starting at the end of 2008 and extending through 2009, states suffered five straight quarters of decline in tax revenues. They now have enjoyed nine consecutive periods of growth, and the second quarter of 2012 will likely extend the string to 10. Overall collections in 45 early-reporting states showed growth of 5.8 percent in the months of April and May of 2012 compared to the same months of 2011. After adjusting for inflation, however, state tax revenues are still 1.6 percent lower compared to the same quarter four years ago, in 2008.

Chart of the day - Chart showing the decline of an obscure indicator known as core capex orders —  the year-on-year trend in the three-month moving average of business capital spending is the non-defense capital goods ex-aircraft — which David Rosenberg warns could foreshadow a double-dip recession. “Housing may be reviving, but it is only 2% of GDP whereas business capex represents a 7% share of the economy. Paul McCulley, the former legendary economist and fund manager at PIMCO, who was once being touted to join the Fed as a policymaker, told me last year…the YoY trend in the three-month moving average of core capex orders had for a long time been his preferred indicator of how the broader economy was going to fare a few quarters into the future… Only once in the past did this NOT tip the overall economy into recession and that was back in September 1998 when the Asian crisis was at its peak, LTCM had to be wound up and Russia defaulted … not exactly a pretty sign even if the recession was delayed for another two years.”

Some horrible/interesting graphs  -- Sources: FYGFDPUN / GDP Sources: FDHBFIN / GDP Sources: FYGFDPUN, / POP Sources: FDHBFIN / POP Sources: FGRECPT / FYGFDPUN Sources: FGRECPT / FGEXPND / GDP Sources: GDPC96 / POP

Two Big Reports This Week for Fed: One Already Bad - For Federal Reserve policy makers, data is in the driver’s seat. As noted in the statement after the Fed’s last policy meeting, central bankers “will closely monitor incoming information on economic and financial developments” before deciding about a third round of quantitative easing. The timing for policy and data couldn’t be better because two influential reports are out this week while the Federal Open Market Committee is on tap to meet next week, on Sept. 12-13. Academic research shows the employment report and the Institute for Supply Management‘s factory survey have two of the biggest market-moving impacts among the myriad reports out each month. The two reports are also important for the Fed. The central bank is tasked with keeping the economy at full employment. And manufacturing is one of the sectors most influenced by the Fed since big-ticket manufactured goods are usually financed. Because of that, Tuesday’s ISM survey falls into the “pro” argument for QE3 because the ISM reported August factory activity contracted for the third consecutive month. What certainly got the Fed’s attention was the sharp slowdown in new demand this summer. The new orders index basically fell out of bed in June (when the index plunged to 47.8 from 60.1 in May) and has stayed on the floor since then, held down in part by contracting export orders.Not surprising, output also slowed over the summer. The ISM production index fell into contractionary territory in August for the first time since May 2009.

Is U.S. Economic Growth a Thing of the Past? - The development of the United States has coincided with the most technologically impressive period in human history. The U.S. Constitution was ratified in the midst of an industrial revolution in England that would soon spread throughout world, and since that time the human race has witnessed such revolutionary inventions as electric light, indoor plumbing, the automobile, air travel, modern medicine, mass telecommunications, the computer, and the Internet. But is there reason to think that kind of technological advancement — and the resultant economic growth — will continue indefinitely? That’s a question that Robert J. Gordon, an economist at Northwestern University, posed in a recent working paper. Gordon argues that most of the economic growth in America has been prompted by three separate industrial revolutions: The first occurred between 1750 and 1830 and brought us steam engines, cotton spinning and railroads; the second, between 1870 and 1900, brought electricity, running water, and the internal combustion engine; and the third, between 1960 and the end of the 20th century, brought computerization and the Internet.

Why not to expect recovery anytime soon - Signs of weakness in advanced economies seem to have taken some by surprise. In America, GDP growth slipped in the second quarter of 2012 to a revised figure of 1.7% after growing at a rate of 2% in the first. In Britain, the economy is contracting at 0.5% a year based on latest data, adding to an increasing sense of frustration felt towards the government for failing to ensure a faster recovery. But perhaps we are suffering from memory lapse. To understand the effects of an economic crisis, you have to go back to its roots. A new study by Alan Taylor draws attention back to the causes of the 2008 financial crisis. Through a series of tests run on a sample of 14 advanced economies between 1870 and 2008, Mr Taylor establishes a link between the growth of private sector credit and the likelihood of financial crisis. The link between crisis and credit is stronger than between crises and growth in the broad money supply, the current account deficit, or an increase in public debt. Over the 138-year timeframe Mr Taylor finds crisis preceded by the development of excess credit, as in Ireland and Spain today, are more common than crisis underpinned by excessive government borrowing, like in Greece. Fiscal strains in themselves do not tend to result in financial crisis.

Is The Economy On The Mend? - Paul Krugman - Advance excerpts from Bill Clinton’s big speech tonight have him making the obvious argument: In Tampa the Republican argument against the President’s re-election was pretty simple: We left him a total mess, he hasn’t finished cleaning it up yet, so fire him and put us back in. But is the economy being cleaned up?The best case for that proposition, I think, comes if you believe that excessive household debt was at the core of the issue. Obviously this is a view I like; Gauti Eggertsson and I have done some formal modeling (pdf), and Atif Mian and Amir Sufi (pdf) have provided strong empirical evidence. And if that’s what you think the problem is, we have in fact made significant progress. Here’s the ratio of household liabilities to GDP: Between debt repayment, defaults, and — since recovery began in mid-2009 — rising income, the US has made a lot of progress in deleveraging. Add in the fact that we’ve worked off the excess construction from the Bush years, and there’s a pretty good case that the stage has been set for a much stronger recovery over the next few years. Even if that’s true, by the way, inadequate stimulus and debt relief have inflicted huge, gratuitous suffering. But the case that we have been healing all the same is pretty good.

Economic Surprise Index has turned positive - The Citi Economic Surprise index was fairly accurate in pointing to a US slowdown in the first half of 2012. One therefore should not dismiss the recent reversal in the indicator's trend. The index just went into the positive territory in spite of today's poor employment report. Washington Post: - While today’s jobs data trailed forecasts, better-than- projected reports over the past three months have pushed the Citigroup Economic Surprise Index for the U.S. to an almost five-month high. The index, which measures how much data is beating or missing the median estimates in Bloomberg surveys, climbed to 15 today after yesterday rising above zero for the first time since April.The contributors to the recent uptick include positive surprises from ISM Non-manufacturing Composite, Initial Jobless Claims, US Factory Orders, various housing indices (15% YoY in pending home sales for example), chain store sales, and auto sales. Growth in the US is clearly subpar, but the economy is not headed for a "double-dip" as many had predicted. People also need to come to terms that slow growth, driven by weak global demand, is the "new normal".

Long term real rates in the US hit record lows - The long term US real rates have touched a new low. The difference between the 10y zero coupon treasury yield and the 10y zero coupon inflation swap rate is now around -88bp. That's roughly how much you'd lose in real terms per year holding long term treasuries.The American savers and retirees all want to thank Bernanke for making their cash savings dwindle even as they lock them up in long-term treasuries to get a "better" nominal rate (see this post on impact of low rates on the economy).

US debt eclipses economy, reaching $16 trillion this week - The US government is about to announce its $16 trillion debt, a landmark number that has more than tripled during the last two presidencies. At 104 per cent of the nation’s gross domestic product, the debt is now larger than the US economy itself. The federal government closed Thursday with $15.99 trillion in debt – but some budget analysts think it most likely reached $16 trillion by the end of the day, the Washington Examiner reported. The news comes as Republicans and Democrats formally nominate their presidential candidates, and the official announcement will likely come on the first day of the Democratic National Convention on Tuesday. “This is a grim landmark for the United States. Yet the president seems strangely unconcerned,” said Sen. Jeff Sessions of the Senate Budget Committee. Each day, the debt grows by roughly $3.5 billion, or about $2 million per minute. Twelve years ago, before the election of George Bush, the debt stood at $5.6 trillion. In the months before President Obama took office, the debt was $9.6 trillion. During the last presidency, it has increased by $6.4 trillion – two-thirds of its 2008 amount. The current president has overseen the largest debt explosion in US history. This year marks the fourth consecutive year with a $1 trillion budget shortfall.

U.S. Debt Now Exceeds $16 Trillion -- Total U.S. government debt eclipsed $16 trillion for the first time Friday, new government data show, as total federal borrowing continues marching toward the $16.394 trillion borrowing limit. The Treasury Department said total government debt hit $16,015,769,788,215.80 on Friday, up $25 billion from the day before. The amount of federal debt subject to the borrowing limit is actually slightly less, as it doesn’t include several types of borrowing, and it stood at $15.977 trillion on Friday. The government is projected to run a deficit of between $1.1 trillion and $1.2 trillion in the fiscal year that ends Sept. 30, meaning that spending will outpace tax revenue by that amount over 12 months.

Treasury Yields: Quick Update -- Freddie Mac's weekly survey results, posted today, puts the average 30-year fixed rate mortgage at 3.55%, down 11 basis points over the past two weeks and just six basis points off the historic average low set in late July. As for the Fed's, Operation Twist, here is a snapshot of selected yields and the 30-year fixed mortgage since the inception of program. The 30-year fixed mortgage at current levels no doubt suits the Fed just fine, and the current low yields have certainly reduced the pain of Uncle Sam's interest payments on Treasuries. But, as for loans to small businesses, the Fed strategy is a solution to a non-problem.  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.

US Debt Again Nears Debt Ceiling - Republicans are trying to make political hay of the fact that the federal gross debt this week crossed the $16 trillion mark. But reaching that milestone was expected. And while notable, it overshadows the number that is of more immediate concern to Congress: the amount of debt subject to the legal borrowing limit. The debt ceiling is currently set at $16.394 trillion. At the end of August, the amount of debt subject to that limit -- which excludes certain types of debt -- was $15.977 trillion, roughly $417 billion below the cap. Since the government typically borrows between $100 billion and $125 billion a month, that means it's on track to hit the ceiling sometime in December. But the Treasury Department will likely be able to use "extraordinary measures" to keep the debt just below the legal limit for a couple of months. Bottom line: Congress will likely need to raise the ceiling in early 2013 or Treasury will risk defaulting on the country's legal obligations by failing to pay all of its bills in full and on time.

Wicksell Goes To China, by Paul Krugman: The idea that we are at the mercy of the Chinese — that terrible things would happen if they stopped buying our bonds — is very influential. Yet it’s just wrong. Think of it this way: the argument that interest rates would soar if the Chinese bought fewer bonds is the same as the argument that interest rates would soar when the U.S. government sold more bonds — which, as you may recall, was the subject of fierce debate more than three years ago — and you know how that turned out. Again, you can think of this in terms of Wicksell: we’re in a situation in which the incipient supply of savings — the amount that people would save at full employment — is greater than the incipient demand for investment. And this excess supply of savings leads to a depressed economy. What China does by buying bonds is add to the excess savings — which makes our situation worse. (This is just another way of saying that the artificial trade surplus hurts our economy — just another way of stating the same thing). And we want them to do less of it; far from fearing that they will stop, we should welcome the prospect.

Out of money? No way—America can never run out of money. - Matt Welch at Reason makes the good point that none of the downballot mayors and governors who spoke last night at the Democratic convention grappled with the reality that a lot of them have been dealing with the thorny-but-necessary work of closing budget shortfalls, rolling back pension promises, and trying to wrestle with the limitations imposed by public sector labor agreements. He then concludes on a terribly wrongheaded note: This might be a great way to rally the Democratic base, but it's thin gruel for the majority of Americans who think, correctly, that the nation's finances have spun out of control. As Mark Schmitt wrote last year, this assertion that America is "out of money" has become an all-purpose crutch through which Reason can push an ideological agenda of skepticism about programs without actually making the case in its particulars. But it's simply not true that we're out of money. Many states and municipalities are up against hard budget constraints, but the US government has the ability to create US currency in unlimited quantities. It hasn't run out of money and won't ever run out of money. It would be nice for people to understand this point separately from controversies over whether public sector programs are wise or just. In principle, the US government could print up or borrow a ton of money, hand it to state governments, and then have all the money used to cut taxes rather than to finance programs. This would not be possible in a world where the US government faced a hard budget constraint but, fortunately, we don't face any such constraint.

We’re Not Broke and the Clinton Surpluses Destroyed the US Economy - Two of our nation’s most influential progressive journalists — Slate’s Matt Yglesias and Business Insider’s Joe Weisenthal —  just took on two powerful economic myths.

It’s hard to imagine a more empowering message.  As word spreads, elected officials in both parties will lose their primary excuse for inaction on on a whole range of neglected and underfunded programs.  ”I’d love to help, but I’m all tapped out,” simply won’t sell. Nor will the desperate calls for “shared sacrifice” and “entitlement reform” in the name of fiscal responsibility. A very big thank you to these men, who will undoubtedly suffer the slings and arrows of many of their progressive followers, who have long considered the Clinton surpluses the crowning achievement of modern Democratic governance.

Did Clinton's Budgets Reaaly Destroy the American Economy? - That’s the claim made today by influential commentator Joe Weisenthal of Business Insider. Weisenthal’s claim is based on the basic macroeconomic identity that income equals spending.  As advocates of the Modern Monetary Theory (MMT) school of thought (such as Stephanie Kelton of University of Missouri Kansas City) have emphasized, this simple identity has profound implications. It means that if one sector of the economy is saving (spending less than it’s earning) then the other sectors of the economy must be accumulating debt or running down savings (spending more than they are earning).  For a closed economy, this identity means that government deficits must imply private sector saving (with the private sector buying government bonds) while governments can only save (run budget surpluses) if the private sector runs up debts or runs down its savings.  Conversely, in an open economy, a budget surplus doesn’t have to mean the private sector is reducing its stock of assets or running up debt but that the rest of the world is reducing its stock of assets that it is owed by the surplus-running country. Weisenthal’s argument is that Bill Clinton brought about the financial crisis by running surpluses. Based on the income-spending identity, he concludes it was Clinton’s surpluses that lead to the accumulation of private debts that subsequently triggered the financial crisis.  I think the “sectoral balances” viewpoint is extremely important for understanding macroeconomics and MMT contributors such as Kelton are doing a great job of promoting its implications.  But I think Weisenthal’s interpretation of the data is off base.

Bill Clinton: Not a “Blood Bath”–Just Good Math - There’s no one quite like Bill Clinton to talk about how to achieve fiscal responsibility. He’s the master in terms of both the politics and the substance–or “mathematics” as he calls it. From the transcript of his speech: Now, let’s talk about the debt. Today, interest rates are low, lower than the rate of inflation. People are practically paying us to borrow money, to hold their money for them. But it will become a big problem when the economy grows and interest rates start to rise. We’ve got to deal with this big long- term debt problem or it will deal with us. It will gobble up a bigger and bigger percentage of the federal budget we’d rather spend on education and health care and science and technology. It — we’ve got to deal with it. Now, what has the president done? He has offered a reasonable plan of $4 trillion in debt reduction over a decade… for every $2 1/2 trillion in spending cuts, he raises a dollar in new revenues — 2 1/2-to-1. And he has tight controls on future spending. That’s the kind of balanced approach proposed by the Simpson-Bowles Commission, a bipartisan commission.

A Quick Look at Federal Spending - Over at Plain Blog, an anonymous wing nut made this off-topic comment. Now, yes, Bill Clinton and his 2000 federal spending level of 18% of GDP doesn't put him on the fringe, which makes it surprising that you lefties are celebrating him, even as you hysterically condemn anybody who resists the Left's current massive spending levels, which are nearly 50% greater than Clinton's and are spending the nation into debt obvlivion.  This once again raises the regressive canard that Obama has been a profligate and fiscally irresponsible spender. Let's have a look. Here is a graph of current expenditures that took place in the years of the current century. First observation is that anon's math isn't very good.  Current expenditures are roughly 100% greater than when Clinton left office, not a mere 50%. Second observation is that the vast majority of that increase - from about $1900 billion to about $3200 billion - took place under the previous administration.

Who Is The Smallest Government Spender Since Eisenhower? Would You Believe It's Barack Obama? It’s enough to make even the most ardent Obama cynic scratch his head in confusion.  Amidst all the cries of Barack Obama being the most prolific big government spender the nation has ever suffered, Marketwatch is reporting that our president has actually been tighter with a buck than any United States president since Dwight D. Eisenhower.  Who knew? Check out the chart:

Modern Money and Public Purpose - The global economy has recently experienced a series of catastrophic and destabilizing events, including the Global Financial Crisis, the Eurozone Crisis, the Debt-Ceiling Crisis and the ongoing Great Recession. Today, nations around the world continue to suffer from stagnant growth and historically high unemployment rates, despite healthy profit growth in the financial sector and wealthiest echelons of society. The failure of orthodox economics to adequately predict and explain these crises, as well as the inadequacy of existing policy responses across the political spectrum, from traditional Keynesian "pump-priming" to harsh fiscal austerity, underscores the need for a new economic paradigm grounded in the operational realities and human needs of a 21st-century economy.  Over the upcoming academic year, Modern Money and Public Purpose will outline a vision of an alternative economic future, in which democratic societies effectively use their legal and monetary systems to achieve full employment and promote public purpose. Individual seminars are intended to serve as catalysts for further engagement and dialogue on our Forum and Blog, with additional materials provided in the Resources section.   Please see the About section for more information on the series, and the Schedule and Speakers sections for more information on events and participants.

Obama gives up on demand: In his convention speech, the president gives no hint the country suffers from a demand problem. - On content, what I think is interesting here is that in Obama's story about the national economy there's not a single hint of the (accurate) liberal conventional wisdom that persistent mass unemployment is primarily an issue of inadequate aggregate demand. There's nothing about monetary policy, of course, but also nothing about housing finance. There's nothing about fiscal stimulus even as a hypothetical. There's an eagerness to raise taxes on the richest Americans as soon as possible and a willingness to pare back spending prudently to achieve long-term budget balance. Democrats are eager to re-embrace their Bush-era posture as the fiscal scold party. There's a forward-looking economic vision here, but it's entirely a vision of structural transformation. A better health care system. Better schools. More domestic energy production, both renewable and natural gas. Better schools. Immigration reform. That's all good stuff, though I continue to find Obama's obsession with manufacturing to be a bit daft. But it's simply not responsive to the short-term jobs problem. If you're an unemployed adult, then reforming high schools or creating quality early childhood education isn't going to help you. Building a foundation for long-term prosperity is important, but part of the way you build the foundation for long term unemployment is to not let millions of people waste months and years in idleness and unemployment.

Not The Time To Be Demanding - Paul Krugman - I’ve been pounding the drum for Keynesian policies ever since the financial crisis struck; I was one of the few people to talk negatively about Obama’s inaugural address, because it seemed to miss the point that we were suffering from inadequate demand; and I was frantic about the inadequate size of the stimulus. So, am I upset over the virtual absence of demand-side rhetoric in Obama’s speech yesterday?  Let’s be realistic: the public doesn’t get Keynesian economics. The president could use the bully pulpit to try and change that, and I’ve been urging him to do that. But not two months before an election. And we know that the administration has demand-boosting on its mind; the American Jobs Act was very much a Keynesian-type plan, and everything I know says that it’s a good view of the kind of thing the inner circle supports. It’s reasonably certain that there will be attempts to provide more demand if Obama wins, and that’s all you can ask for at the moment.It’s too bad we’re at this place, but we are, and it would be unrealistic and counterproductive to demand that Obama try to shift the national discussion that far right now.

 ‘Framing’ Prevents Needed Stimulus - Robert Shiller - From July 2008 to July 2012, the number of state and local employees nationwide fell by 715,000, according to the Bureau of Labor Statistics. The reality is actually worse than that figure suggests. The total ended up 1.31 million people below where it would have been had public sector employment simply kept pace with population growth.  The situation did not improve as the financial crisis eased and the economy picked up. From March 2009 to March 2012, the nation’s total nonfarm employment increased 0.6 percent. State and local government employment, by contrast, fell 2.9 percent.  It is not as if many Americans say they want this to happen. A CBS News-New York Times poll in July asked: “Looking at your local public schools, would you be willing or not willing to have shorter school days or more crowded classrooms if it meant you would pay significantly less in taxes?” Seventy-four percent of respondents replied that they were “not willing” (21 percent were willing and 5 percent were unsure). When similar questions were posed about firefighters or police officers, the percent “willing” was even lower (12 percent and 15 percent).  Why, then, did governments do what they did? One answer comes from the field of behavioral public finance, which applies psychology to the world of taxes. What actually happens with tax policy in the political marketplace may be entirely different from what we would choose if, as a community, we focused on salient questions..

Are We Already Falling Off the Fiscal Cliff? - Is it possible to be injured falling off a cliff before you even get to the edge? In the real world, no. But in the economy, yes. There is increasing evidence that businesses are already turning cautious out of fear over the fiscal cliff—that the $600 billion of tax hikes and spending cuts scheduled to take effect in early 2013 will chill growth in the new year. That caution is slowing the economy today—so the fiscal cliff is doing genuine damage before it’s even been reached. The latest evidence comes from the Federal Reserve’s Beige Book, released on Aug. 29. According to a count by economist Paul Dales of Capital Economics, the Fed report has 12 mentions of the fiscal cliff. There was just one in April, but the number has steadily risen in the months since. The Beige Book is an anecdotal summary of businesses’ views on economic conditions collected by the staff of the 12 regional Federal Reserve banks. The Philadelphia Fed, for example, said: “Many customers are delaying purchases due to uncertainty stemming from … fiscal policy. There are concerns about the impact of the fiscal decisions that will follow the election.” The fiscal cliff was a prominent topic at the monetary policy conference in Jackson Hole, Wyo. Federal Reserve Chairman Ben Bernanke said it was one of the “two main sources of risk” to the economy, the other being the European financial crisis.

Paul Ryan's Blatant Lies About The B-S Commission - I've posted so many times before (here, here, here and here, for example) about the utter failure of the Bowles-Simpson commission -- or as I prefer to call it, the B-S commission -- that I had vowed not to do so again no matter how many times some misinformed or misguided politician, columnist, reporter, deficit-reduction-at-any-cost advocate, one of the commission's many apologists or one of its own members referred to it as a success. But as far as I'm concerned I was given permission to abandon that vow by Paul Ryan when, during his acceptance speech for the GOP vice presidential nomination this past week, he didn't just misrepresent what the commission did but stated or implied total lies about it. That calls for...or actually requires...a direct response to correct the record from a federal budget process wonk who's not a johnny-come-lately to the topic. I accept. Let's start with the most basic fact of all: B-S did not succeed, it utterly failed. The required 14 members of the commission absolutely did not -- repeat, DID NOT -- agree to the deficit reduction plan proposed by the co-chairs. In fact, the commission didn't even vote on the plan. An informal poll plus the public statements of the members showed the co-chairs that they were 3 votes short. Rather than have their proposal formally voted down, Bowles and Simpson decided not to take a vote at all.

Drill, Baby, Drill as Fiscal Stimulus - Digby quotes the part of Romney’s Thursday speech where he laid out his five point plan to create 12 million new jobs and provides this summary:  So, they are going to create jobs by opening up drilling, privatizing schools, off-shoring business, slashing government, cutting taxes and cutting regulations. In other words, the same exact agenda they always have. Well except for the war-as-stimulus he might have to start. The traditional fiscal part might be confusing to those who think standard arithmetic applies to the Republican promise to balance the budget as Romney want to cut taxes – and as Paul Krugman notes increase defense spendingOK, so deficit spending hurts the economy — unless it’s spending on the military (or on the medical-industrial complex), in which case cutting spending destroys jobs. Leave on one side the fact that those possible defense cuts are the result of a Republican ultimatum, not Obama policy. And where exactly is deficit reduction supposed to come from? The GOP wants massive tax cuts; but spending on defense must rise, as must health care spending.

We’re all dependent on government, and it has long been thus - Nicholas Eberstadt’s “A Nation of Takers” argues that too many Americans have become dependent on government benefits. Over the past half-century, he notes, the share who receive a government cash transfer and/or public health insurance — Social Security, Medicare, Medicaid, unemployment compensation, and so on — has grown steadily. The United States, according to Eberstadt, is now “on the verge of a symbolic threshold: the point at which more than half of all American households receive, and accept, transfer benefits from the government.”Eberstadt doesn’t contend that this has weakened our economy. His concern is moral. He believes reliance on government for help is undermining Americans’ “fierce and principled independence,” our “proud self-reliance.” In Eberstadt’s way of seeing things, we are either givers or takers — taxpayers or benefit recipients. This is mistaken. Every American who doesn’t live entirely off the grid pays some taxes. Anyone who is an employee pays payroll taxes, and anyone who purchases things at a store pays sales taxes. Likewise, every American receives benefits from government. If you or your kids attended a public school, if you’ve driven on a road, if you’ve had a drink of tap water or taken a shower in your dwelling, if you’ve deducted mortgage interest payments or a business expense from your federal income taxes, if you haven’t been stricken by polio, if you’ve never had a band of thugs remove you from your home at gunpoint, if you’ve visited a park or lounged on a beach or hiked a mountain trail, if you’ve used the internet….

Yes, the Rich Are Different | Pew -- Nearly six-in-ten survey respondents (58%) also say the rich pay too little in taxes, while 26% say they pay their fair share, and just 8% say they pay too much. Even among those who describe themselves as upper or upper-middle class1, 52% say upper-income Americans don’t pay enough in taxes. In spite of these views, overwhelming majorities of self-described middle- and lower-class Americans say they admire people who get rich by working hard (92% and 84%, respectively).2The new survey, which was conducted July 16-26, 2012, among 2,508 adults nationwide, finds that a majority of the public (65%) thinks the nation’s income gap between rich and poor has grown in the past decade—and most say that’s a bad thing for the country.

Mitt Romney’s Fair Share, by Joseph Stiglitz - Mitt Romney’s income taxes have become a major issue... Is this just petty politics, or does it really matter? In fact, it does matter... Economies in which government provides ... public goods perform far better than those in which it does not. But public goods must be paid for, and ... those at the top of the income distribution who pay 15% ... clearly are not paying their fair share. Democracies rely on a spirit of trust and cooperation in paying taxes. If every individual devoted as much energy and resources as the rich do to avoiding their fair share of taxes, the tax system either would collapse, or would have to be replaced by a far more intrusive and coercive scheme. Both alternatives are unacceptable. More broadly, a market economy could not work if every contract had to be enforced through legal action. But trust and cooperation can survive only if there is a belief that the system is fair. ... Yet, increasingly, Americans are coming to believe that their economic system is unfair; and the tax system is emblematic of that sense of injustice. ...  Romney may not be a tax evader; only a thorough investigation by the US Internal Revenue Service could reach that conclusion. But, given that the top US marginal income-tax rate is 35%, he certainly is a tax avoider on a grand scale. And, of course, the problem is not just Romney; writ large, his level of tax avoidance makes it difficult to finance the public goods without which a modern economy cannot flourish

Romney and Ryan’s dangerous tax roadmap - Together Mitt Romney and Paul Ryan have put human faces on how the super-rich game the tax system to pay less, pay later and sometimes not pay at all. Both want to expand tax favors for the already rich, like themselves.Their approach favors dynastic wealth with largely tax-free (Romney) or completely tax-free (Ryan) lifestyles, encouraging future generations of shiftless inheritors. What we need instead is a tax system that encourages strivers in competitive markets, not a perpetual oligarchy.Romney and Ryan say that lowering tax rates and reducing or eliminating taxes on capital gains and dividends, while letting huge fortunes pass untaxed to heirs, will boost economic growth and mean prosperity for all.We already tried parts of that, starting with Ronald Reagan in 1981 and doubling down with George W. Bush in 2001. Empirical result: Flat to falling incomes for the vast majority, weak job growth, but skyrocketing incomes for the top one percent of the top one percent, including Romney.Romney, shifting the Republican focus away from red ink budgets, wants to slash income tax rates by 20 percent. Ryan has called for a 10 percent rate for married couples on the first $100,000, 25 percent above that. The details of both plans show they primarily benefit the highest paid and already rich, as multiple independent examinations have documented.

Who pays the top income tax rate? - President Obama wants to raise the top marginal income tax rate on salaries and other ordinary income from 35 percent to 39.6 percent by letting the extended temporary Bush tax cuts expire at year-end.  Mitt Romney wants to drop the top rate by a fifth to 28 percent (and running mate Paul Ryan has called for a top rate of 25 percent). So who pays the 35 percent rate? How much do they pay? And how much more would they pay if the Clinton-era rate of 39.6 percent were restored?As this graphic shows, had the 39.6 percent rate been in effect in 2009, a few people making as little as $100,000 to $200,000 would have been affected. The total increase per taxpayer in that large group would be less than a penny each. The tiny group of 8,274 taxpayers who made more than $10 million in 2009, and collectively reported 3.1 percent of all the adjusted gross income that year, would pay on average $687,500 more if the permanent Clinton rates return.That is 2.4 percent of their average $29 million adjusted gross income. The reason the increase is not 4.6 percentage points (the difference between 35 and 39.6) is that only about half of their money is ordinary income, while much of it is long-term capital gains and qualified dividends taxed at 15 percent.

Black Report: Majority of Wall St. Money Now Goes to Romney - Bill Black is interviewed by Paul Jay of the Real News Network. - BLACK: Well, today I looked at what you would learn, if you read The Wall Street Journal, about finance, our premiere business reportage. And what you’d learn is something really quite extraordinary. You would learn that money had shifted dramatically in this election. Whereas in the first time the then-senator Obama ran for the presidency, he received 57 percent, or the Democrats received 57 percent of the funding, now the Republicans received 63 percent. And in this news report, mind you, not an op-ed, not an editorial, the reporters said that this was due to the fact that President Obama had demonized the industry. So, again, this is supposedly a straight news report that President Obama had demonized banking in the United States, and as a result, the banking industry had turned on him. So this is just an extraordinary invention, because President Obama has actually bailed out the financial industry and indeed has protected the financial industry from criticism and from meaningful transition.

Private Equity: The Mechanics of Intellectual Capture - I thought I would make a brief digression into how private equity GP*s are able to use a web platform called IntraLinks as a vehicle to intellectually capture and, in a sense, hold prisoner their LP investors.  Private equity funds generate a lot of written communications from the GP *s to the LPs. During the dot-com boom, somebody at a PE firm got the idea to use a nascent web business called “IntraLinks” to send all of these communications to their LPs. To some extent, IntraLinks has similar appeal to the GP*s. It gives them a means to centralize communications with their investors. All the GP*s have to do is upload a document to IntraLinks, and from there the site takes responsibility for ensuring that the appropriate individuals among the LPs get to see it.  But there are darker powers inherent in IntraLinks too, one that the GP*s have used ruthlessly to their advantage. Most significant of these, IntraLinks allows the GP*s to see in real-time which of their investors have opened a document. As a result, when an LP comes in for a one-on-one meeting with a GP*, the GP can know beforehand whether the LP is aware of the current portfolio company valuations or not. Anyone who has ever been involved in selling can appreciate what an incredible advantage this information provides to the GP*. It allows the GP* to be more aggressive in spinning what euphemistically might be called “narrative” when the GP* knows that the LP hasn’t done his homework and is in no position to call him on it.

Amid Public Backlash, Bankers Maintain Influence in Washington - A poll conducted last fall by the Washington Post and ABC News found that 70% of the country viewed financial institutions on Wall Street unfavorably. It is perhaps a function of this ignominy, and the knowledge that an elected official could score easy political points by tightening the screws on the industry, that financial institutions spend so much money electing and influencing politicians in Washington. According to, the financial services, insurance, and real estate industries have spent more than $5 billion lobbying Washington so far in 2012, the third most of any sector. But the industry goes well beyond hiring high-priced lobbyists in its efforts to exert control over the American political process. As two recent reports in Bloomberg Businessweek show, the financial services industry has been pulling out all the stops over the past three years to affect financial reform. The first report grew out of a Freedom of Information Act Request for email exchanges between SEC officials and one Annette Nazareth, a former SEC commissioner who is now a securities lawyer at the firm of Davis Polk. The article documents how Davis Polk –with the help of Nazareth and her deep connections at the nation’s most important financial regulator — secured  the position of outside counsel for America’s largest banks and SIFMA, a Wall Street trade group. In a separate Bloomberg report published yesterday, it was revealed that the Amerian Bankers Association board will vote today on a plan to create a non-profit that would donate to various Super-PACs, or unregulated organizations that can spend unlimited amounts of money advocating for political candidates.

Inquiry on Tax Strategy Adds to Scrutiny of Finance Firms - The New York attorney general is investigating whether some of the nation’s biggest private equity firms have abused a tax strategy in order to slice hundreds of millions of dollars from their tax bills, according to executives with direct knowledge of the inquiry. The attorney general, Eric T. Schneiderman, has in recent weeks subpoenaed more than a dozen firms seeking documents that would reveal whether they converted certain management fees collected from their investors into fund investments, which are taxed at a far lower rate than ordinary income.  Among the firms to receive subpoenas are Kohlberg Kravis Roberts & Company, TPG Capital, Sun Capital Partners, Apollo Global Management, Silver Lake Partners and Bain Capital, which was founded by Mitt Romney, the Republican nominee for president. Representatives for the firms declined to comment on the inquiry.  Mr. Schneiderman’s investigation will intensify scrutiny of an industry already bruised by the campaign season, as President Obama and the Democrats have sought to depict Mr. Romney through his long career in private equity as a businessman who dismantled companies and laid off workers while amassing a personal fortune estimated at $250 million.  Some executives at the firms said they feared that Mr. Schneiderman, a first-term Democrat with ties to the Obama administration, was seeking to embarrass the industry because of Mr. Romney’s roots at Bain. A spokesman for Mr. Schneiderman declined to comment.

N.Y. attorney general opens probe into private equity firms, including Bain - The New York attorney general has opened an investigation into numerous private equity firms, including Bain Capital, according to an official familiar with the inquiry, CBS News has confirmed.  Attorney General Eric T. Schneiderman is examining whether the firms used a tax strategy to avoid paying hundreds of millions of dollars in taxes. The practice involved converting some fees collected for managing accounts into fund investments, resulting in a tax rate of 15 percent instead of 35 percent.  Republican presidential candidate Mitt Romney co-founded the private equity firm in 1984. He ran the organization until 1999, although documents show that he remained the sole owner, president and chief operating officer until 2002.  The New York Times first reported the investigation of more than a dozen firms. The report indicates that some observers think it is a political motivated investigation by a Democratic attorney general with relations with President Obama, while others say Schneiderman is seeking additional tax revenue for New York.

Financial Fraud Prosecutions Sacrificed In Favor of Hit Jobs on Political Enemies -- Talking Points Memo picks up on Eric Schneiderman’s investigation of Bain Capital’s tax avoidance strategies, and asks a couple questions about why the New York Attorney General is probing something clearly within the purview of the IRS.“[W]hat the hell is the Attorney General doing here?” asked Ed Kleinbard, a tax expert at USC’s Gould School of Law who has explained Romney’s controversial tax strategies to reporters on behalf of the Obama campaign. “I’m glad he’s shining light on this tax practice. But it’s not clear what his role is. These are tax issues. These are tax issues that should have been aggressively audited and litigated by the IRS.” A source familiar with the New York probe explains that the Attorney General’s authority in this case stems jointly from the state’s False Claims Act and a more recent enhancement to that law called the Fraud Enforcement and Recovery Act, which together empower the attorney general to bring actions against anyone who defrauds the government, and force them to pay triple damages and civil penalties back to the treasury. TPM is appropriately skeptical, but they fail to add the political context for this move, which clears up all the confusion. Eric Schneiderman is essentially acting as a political hitman for his backers in the Obama Administration. The goal is not necessarily to prosecute anything – the streets of Manhattan and Albany are littered with AG subpoenas that never get a follow-up. The goal is to get free media profiles of Bain’s tax avoidance strategies, to embarrass Mitt Romney. That’s really it.

The race to the bottom produces regulators who are invertebrates and fraud epidemics - William K. Black - I examine how highly conservative newspapers are covering the interplay of widespread “control frauds” by the world’s most elite banks, the carefully structured de-evolution of financial regulators through descent from the subphylum Vertebrata into the phyla of the invertebrates, and the global failure to prosecute the elite frauds that drove the ongoing financial crisis.  The three factors are interrelated.  Vigilant financial regulators serving as the vital “regulatory cops on the beat” are essential to the successful prosecution of large numbers of elite financial frauds.  By ensuring that the top regulators are anti-regulators who believe that it is essential to “win” the regulatory race to the bottom, the finance industry creates a dynamic that acts internationally and nationally to maximize the three “de’s” (deregulation, desupervision, and de facto deregulation).

Banks Face Suits as States Weigh Libor Losses - The scandal over global interest rates has state officials like Janet Cowell of North Carolina working intensely behind the scenes to build a case for suing the nation’s largest banks. Ms. Cowell, the state’s elected treasurer, and several of her staff members have spent the summer combing through the state’s investments trying to determine how much the state may have lost because of suspected manipulation of the London interbank offered rate, or Libor, which is used as a benchmark for trillions of dollars of financial contracts around the world. The activity provides a glimpse at how widely the Libor scandal has spread through the financial world, and how much damage may still be in store for the banks accused of manipulating Libor. Her work also suggests just how difficult it is, and how long it may take, to get to the bottom of the losses. The attorneys general in Maryland, Massachusetts, New York and Connecticut have all been examining how much their states may have lost as a result of a lowered Libor. A spokeswoman for Connecticut’s attorney general, George C. Jepsen, said that the state’s work with New York’s attorney general, Eric T. Schneiderman, “has broadened significantly over the last few weeks and we are now coordinating with a much larger group of attorneys general.”

Ending the Financial Arms Race - Kenneth Rogoff – People often ask if regulators and legislators have fixed the flaws in the financial system that took the world to the brink of a second Great Depression. The short answer is no. Yes, the chances of an immediate repeat of the acute financial meltdown of 2008 are much reduced by the fact that most investors, regulators, consumers, and even politicians will remember their financial near-death experience for quite some time. As a result, it could take a while for recklessness to hit full throttle again. But, otherwise, little has fundamentally changed. Legislation and regulation produced in the wake of the crisis have mostly served as a patch to preserve the status quo. Politicians and regulators have neither the political courage nor the intellectual conviction needed to return to a much clearer and more straightforward system. In the United States, the Glass-Steagall Act1 of 1933 was just 37 pages and helped to produce financial stability for the greater part of seven decades. The recent Dodd-Frank Wall Street Reform and Consumer Protection Act2 is 848 pages, and requires regulatory agencies to produce several hundred additional documents giving even more detailed rules. Combined, the legislation appears on track to run 30,000 pages.

Pandora's Black Box - Today, my neighbor complains that he doesn’t understand new cars. Being that he’s a mechanic, that’s a problem. Unlike my ‘65 Malibu, many cars on the road today are more electronic than they are mechanical. My neighbor doesn’t understand the modern vehicle because, like 99% of us, he can’t take it apart and put it back together again without destroying the thing. Why is that? The reason, of course, is that technology has evolved from separate mechanical subsystems—like our muscles and limbs—to highly integrated electronic networks—like the human brain. Thus, when he or I open up the hood of my new car today what do we see? Nothing but a nicely shaped black box. Last Friday I posted a video titled, “Money, Power, and Wall Street,” where Cathy O’Neil, a data scientist, PhD math wonk, and once successful “quant” for D.E. Shaw commented, Nobody knows how the system works. Even the people within finance don’t understand the system. They understand their little corner of the system, but very few people would come forward and say, “I am an expert on the financial system. I know how everything works.” ...The system is a huge black box.

52 Shades of Greed: Occupy Wall Street Playing Card Deck - video - Yves here. You too can get your own set of Occupy Wall Street Alternative Banking limited edition playing cards prominently featuring many of the people you’ve learned to love to hate, like Timothy Geithner, Jamie Dimon, Angelo Mozilo, and Dick Fuld. This is the overview: We need your help to raise the funds to print up a thousand decks of cards to give out on the street for free on September 17, the one year anniversary of the first U.S. occupy gathering in New York City, and in the weeks following. While occupiers are no longer in the park, they are hard at work figuring out how to use people-power to hold big time finance guys and institutions accountable for the total mess they have caused. We think the cards will be a great way to bring people – including you! – into the issues. (Do you know what a CDO is, or how the banks are using it to continue their subprime lending? Well, you should, and the information in this deck, and on our site, will help). Especially as we come up to the election, these issues are very salient. The money we raise will also go to paying production costs on the project, including a stipend for each of the 28 freelance artists for their time and talent. That way you aren’t just paying for stuff; you are paying to support a community of hard-working artists who tell great stories and want to be able to afford to keep telling them. You can get more information here.

Did Citigroup defraud billions from Abu Dhabi? - Abu Dhabi has likely figured out that in the U.S., gangsters have guns but banksters are far more dangerous – they have ivy league educated lawyers. One group of lawyers writes the prospectuses that defraud investors; another group writes the contracts that bar these cases from ever seeing sunshine in a public courtroom; and the third group provides skillful white color criminal defense, including a speed dial to their pals in Washington, ensuring that justice will be as elusive as a Wall Street CEO clad in orange. A three month search of records, that have not yet been sealed or redacted, show that Abu Dhabi landed in the same plundered status as public pension funds and small time investors in Citigroup, while a very special Group of Six reaped a windfall. It all started with a handshake from a former U.S. Treasury Secretary. On Monday, November 26, 2007, four days after Thanksgiving, Robert Rubin was standing in one of the most spectacular waterfront buildings in the Middle East – the headquarters of the Abu Dhabi Investment Authority. With two finger-like wings, the gleaming building showcases an atrium soaring 40 stories into the sky. Rubin, a former Co-Chairman of Goldman Sachs, whose lavish pay at Citigroup since leaving Treasury in 1999 had reached $120 million for eight years of non-management work, had more than architecture on his mind that day.  Rubin was on a critical mission to secure a $7.5 billion lifeline for Citigroup.

Big Banks Are Hazardous to U.S. Financial Health - Simon Johnson - The debate over whether the U.S.’s largest banks are too big is heating up. Since the 2008 financial crisis, the perception has taken hold among some analysts and economists that certain U.S. institutions are too big to fail, meaning they would have to be bailed out to protect the financial system in the event of another calamity. The recent trading losses at JPMorgan Chase & Co. and scandals over money laundering at HSBC Holdings Plc and Standard Chartered Plc have prompted even financial-industry insiders to ask whether these complex global organizations are too big to manage. About Simon Johnson The continued downward spiral in Europe raises a similar question: Are some banks too big to save, meaning their collapse could dramatically worsen the euro crisis (as happened in Ireland in the fall of 2008 and is happening now in Spain and Greece)? The critics must be gaining converts because, in recent weeks, the defenders of large banks have started to push back. William B. Harrison Jr., the former chairman of JPMorgan, and Wayne Abernathy, the executive vice president of the American Bankers Association, both wrote op-eds that argue against breaking up banks. The Financial Services Roundtable, a large- bank lobby group, has circulated two e-mails insisting that the critics’ arguments are based entirely on myths.

Bank Living Wills Are Bunk - Reuters is reporting that regulators are instructing our TBTF banks to go beyond their Living Wills in terms of preparing for their orderly winding-down next time they get into serious trouble.But bank executives know that banks never have to die. No matter how badly they are managed, no matter how much fraud they commit, no matter how often they are fined by the SEC, money-infusion and increased opacity is all that is needed to keep an insolvent institution from the graveyard of failed corporations. The real tragedy is that everyone knows that bank living wills are useless, and yet, we are continuing to build on this fantasy. Our leaders are choosing to gloss over structural weaknesses in every possible way so that actual constructive reform can be avoided. What would it take to create a system worthy of our trust, instead of attempting to convince the world to entrust their money to a financial system riddled with fraud, opacity, and accounting tricks? It would take shrinking TBTF banks down to a size where they are not perceived to threaten the world's economy, investigating the fraud leading up to the financial crisis, introducing hyper-transparency to the industry, and infusing personal accountability for executives in publicly-traded financial sector corporations.

The Banks Are Bluffing – They Aren’t Moving Anywhere -- Yves here. This is a subject near and dear to my heart. Banks occasionally harrumph that if regulators are too mean, they’ll just pack up and go somewhere else. That’s complete bluster as far as TBTF banks are concerned. Any major bank needs to be backstopped by a real central bank. The Caymans don’t begin to cut it. And central banks are actually not all that welcoming of world scale players trying to take advantage of the slack they give to banks they’ve been in bed with a long time. UBS considered splitting in two and relocating its investment banking operations when the Swiss National Bank announced it would impost 20% equity requirements. It has concluded it has to stay put. Andrew Norton debunks another sort of threat made by large banks: that they will move significant activities out of particular financial centers like London.  Cross posted from Huffington Post In August, Chicago-based CME Group Inc announced it was applying to open a new derivatives exchange in London’s already competitive financial center in order to offer traders “regulatory choice”. Back in June, in US congressional hearings on JPMorgan’s $6bn trading loss, Congressman Gregory Meeks of New York reported that many banks in his jurisdiction were threatening to leave the US for Britain to profit from the “London loophole” alleged to underlie the “London Whale”. Even French bankers want to leave Paris for London. But wait. Banks noting the British regulator’s “overreaction” to a string of London-based scandals are talking about leaving London.

Bankers: Who Needs Them? - Would the world be a happier place if we just got rid of all the bankers? Well, no. The financial sector, for all of its foibles, is as necessary for the economy as blood is for our bodies: it facilitates trade, allocates capital, and takes care of all sorts of nuts-and-bolts economic activities that make it possible for economies to not only survive but grow and flourish. The more interesting questions are: do we really need to have so many bankers, and pay them as much as we do? Do we really need to have such a massive amount of money sloshing around in our financial system? The answer to these questions is also, most likely, no. Back in the 1950s, an era of economic growth and prosperity, the financial sector accounted for only 3 percent of our Gross Domestic Product; these days, it eats up more than 8 percent of our GDP, and as you may have noticed our economy is a mess.

Obama campaign brags about its whistleblower persecutions - For several decades, protection of whistleblowers has been a core political value for Democrats, at least for progressives. Daniel Ellsberg has long been viewed by liberals as an American hero for his disclosure of the top secret Pentagon Papers. In 2008, candidate Obama hailed whistleblowing as "acts of courage and patriotism", which "should be encouraged rather than stifled as they have been during the Bush administration". President Obama, however, has waged the most aggressive and vindictive assault on whistleblowers of any president in American history, as even political magazines generally supportive of him have recognized and condemned. One might think that, as the party's faithful gather to celebrate the greatness of this leader, this fact would be a minor problem, a source of some tension between Obama and his hardest-core supporters, perhaps even some embarrassment. One would be wrong. Far from shying away from this record of persecuting whistleblowers, the Obama campaign is proudly boasting of it. A so-called "Truth Team" of the Obama/Biden 2012 campaign issued a document responding to allegations that the Obama White House has leaked classified information in order to glorify the president:

Risky and Getting Riskier -Just what grandpa needed. Soon retirees and other investors will be barraged with advertisements for private stock offerings — via mail, cold calling, television, radio, billboards, the Internet and so on. Connect With Us on Twitter For Op-Ed, follow @nytopinion and to hear from the editorial page editor, Andrew Rosenthal, follow @andyrNYT. Such advertising, which used to be banned under federal securities law, will make it easier for hedge funds, venture capitalists, start-ups and other nonpublic companies to find investors. It will also make it easier for hucksters and rip-off artists to lure people into unsuitable investments and outright frauds because private offerings are not subject to disclosure requirements and other investor protections that apply to publicly held companies. Bipartisan majorities in Congress and President Obama are to thank for this development. Bowing to the financial industry, they joined forces last April to pass a law that requires the Securities and Exchange Commission to lift the ban on mass advertising of private offerings. The S.E.C., for its part, made matters worse this week when it proposed a rule to implement the law that utterly fails to address the fact that ending the ban will make everyday investors more vulnerable to fraud. While the commission has no choice but to lift the ban, it does have leeway to write the rules to decrease the threat to investors. It has not used that flexibility.

When hedge funds advertise - Jesse Eisinger, today, joins Matt Levine in worrying about the effects of allowing hedge funds to advertise. The all-but-certain consequence is that while the handful of excellent hedge funds will remain highly secretive, a bunch of much less savory characters will start hitting the airwaves with gusto. You get no prizes for guessing who counts as the Jacoby & Meyers of the hedge-fund world: “I am hellbent on creating a global brand and the only way to do that is through advertising,” said Anthony Scaramucci of fund of hedge funds SkyBridge Capital, which manages $3 billion in assets and hosts a star-studded industry conference in Las Vegas. Earlier this year, Mr. Scaramucci had lunch with a midsize New York ad firm he says he could hire if the ban is lifted, adding he was waiting to learn what rules the SEC would issue and for his lawyers to approve any plans he might hatch. The big problem here is that we seem to be going from one extreme to the other: while the restrictions on what hedge funds can say in public have historically been too strict, they’re now going to be far too loose. As Levine notes, hedge funds will be able to basically say anything they like about their funds, while omitting anything they want to omit at the same time. It’s very hard to see how any good can come of this. Picking a hedge fund (or, in Scaramucci’s case, a fund-of-funds) is hard — much harder, actually, than picking a mutual fund, and that’s difficult enough. It’s almost impossible that advertising from individual funds will be helpful rather than unhelpful in this respect

Who is speaking for the poor? - After shocking you this morning with the news that people like to go out at weekends, I hope you’re sitting down for this one: people who aren’t good at numbers tend to be bad at looking after their money. My professional life is largely spent in a world of highly-numerate and highly-intelligent people, many of whom blow up spectacularly in the financial markets. And looking at hedge funds in particular, it’s very easy to find genius-level investors who have lost astonishing amounts of money: there’s clearly more to getting and holding on to vast sums than simply being off-the-charts smart. But the fact is that if you zoom out from the tiny group at the top, there’s a very strong correlation between numeracy, or intelligence, or financial literacy, on the one hand, and having a solid financial footing, on the other. Bear with me here, for a minute, because it’s worth reviewing the literature. Financially literate people are more likely to plan for retirement. And if you plan for retirement, you have more wealth: a 2006 paper showed the median person who was planning for retirement as being worth between $307,750 and $410,000, while the median person who isn’t planning for retirement was worth just $122,000. IQ also helps. Check out this chart, for instance, from a very long and detailed paper about the likelihood that a person of given intelligence will be invested in the stock market.

Breaking the Buck from Interest Rate Movements - I was talking with two new friends of mine today regarding money market funds.  Surprising me, on asked whether the proposal that I made to the SEC covered only credit events, or whether it covered interest rate risk as well. I all too easily commented that movements of short rates don’t happen fast enough to affect a money market fund, causing the shadow NAV to break the buck (i.e. drop below $0.995) — that we would need a banana republic scenario for that to happen. But it bugged me that I did not know that for sure, so I pondered on how I could answer the question.  Then it hit me.  Use commercial paper rates to estimate a net asset value for a hypothetical money market fund with an average maturity of 45 days.  Using data from FRED, it took me roughly one hour to complete the analysis, and what I learned surprised me.  From 1971 to the present, money market funds without defaulted securities would have a shadow NAV below 0.995 15.4% of the time.  Here’s a histogram that details the shadow NAV versus par.

The Twilight of the Public Corporation - Public corporations that ordinary people can invest in and get rich from represent one of the great selling points of American capitalism – at least according to the salesmen. Yet public corporations, which rose to dominance in the United States economy in the second half of the 20th century, are now waning in significance. As Gerald Davis points out, the number of public corporations in the United States in 2009 was only half what it was in 1997. The share of employment represented by the largest 25 corporations has also declined over time. Professor Davis asserts these trends result from increased reliance on overseas contractors for manufacturing, discussed in my last post. Public corporations have also become less public. Professor Davis contends that share ownership has become heavily concentrated through mutual funds, such as Fidelity, which he says now holds significant blocks of 10 percent to 15 percent in many large companies. Even Fidelity’s role is overshadowed by BlackRock, proprietor of iShares Exchange Traded Funds, which, Professor Davis estimates, was the single largest shareholder in one out of five corporations in the United States in 2011.

U.S. Companies Conduct Fire Drills in Case Greece Exits Euro - Even as Greece desperately tries to avoid defaulting on its debt, American companies are preparing for what was once unthinkable: that Greece could soon be forced to leave the euro zone.Bank of America Merrill Lynch has looked into filling trucks with cash and sending them over the Greek border so clients can continue to pay local employees and suppliers in the event money is unavailable. Ford has configured its computer systems so they will be able to immediately handle a new Greek currency. No one knows just how broad the shock waves from a Greek exit would be, but big American banks and consulting firms have also been doing a brisk business advising their corporate clients on how to prepare for a splintering of the euro zone. That is a striking contrast to the assurances from European politicians that the crisis is manageable and that the currency union can be held together. JPMorgan Chase, though, is taking no chances. It has already created new accounts for a handful of American giants that are reserved for a new drachma in Greece or whatever currency might succeed the euro in other countries.

Mortgage Settlement Monitor Hires Firm that Has Worked on Countrywide Matters - Sadly, there is a reason that the Obama Administration believes that any problem can be solved by better propaganda. It often plays out that way. Consider the horrorshow of the mortgage settlement. Even media outlets generally friendly to the Administration, like the New York Times, have found it impossible not to ‘fess up to the fact that Team Obama failed to implement serious measures on the housing front, and the resulting economic damage has put Obama’s reelection at risk. Yet these accounts, in keeping with Democrat efforts to put the best face possible on failed policies, omit how the Administration made saving bank balance sheets a top priority, and airbrush out the biggest sop to the banks, namely, the “get out of liability for close to free” card of the mortgage settlement. But even with the settlement designed to favor banks, its monitor, Joseph Smith, looks to be failing to make sure even these weak terms are adhered to. It appears that Smith is either unable interpret conflict of interest properly or is simply unwilling to implement the settlement’s clear requirements.  Curiously, most commentators skipped over the part of the first report of The Office of Mortgage Settlement Oversight that was highlighted at the front of the report, that of the selection of a consultant that will serve as their primary oversight firm, BDO. Yet the choice of this firm and the partner managing this engagement, Anthony M. Lendez, appear to in violation of the conflict of interest provisions of the settlement. According to his resume, Lendez worked for “outside counsel for Countrywide and its officers and directors related to various accounting issues, including allowances for loan losses, residual interests, mortgage servicing rights, and repurchase reserves” from 2008-2010.

Fraud Continues to Pervade Mortgage Industry, Helped Along By MERS - While housing analysts revel in numbers about home prices and construction starts, I have been trying to focus on the realities of an unhealthy market, with hedge fund house-flippers and shadow inventory driving the so-called “recovery” more than anything fundamental. Gretchen Morgenson takes up the other aspect of this, the fact that the legal wrangling over faulty foreclosures and broken processes never actually ended: Take the problem of questionable legal fees levied on troubled borrowers [...] A foreclosure from Ohio highlights this problem. The facts from this matter are central to a prospective class action filed by a borrower, who contends he was charged improper court costs and legal-related fees in his foreclosure. The case involved legal moves taken against a bank in 2007 that did not even have an interest in either of the two mortgage liens associated with the foreclosed property. Even though the bank should never have been dragged into the matter, it was — generating $775 in court costs and legal fees paid by the borrower, documents show. Only two years later, during the discovery process, did it emerge that the bank had no ownership in the underlying property

Foreclosure Stats From You Walk Away Here are some interesting stats courtesy of Jon Maddux, CEO of You Walk Away. (table) Says Maddux: In Florida, 45% of our clients are in pre-foreclosure status. On average, these Florida homeowners are 17 months delinquent and have yet to receive even their first formal foreclosure notice. 59% of our California clients are in pre-foreclosure status. These California borrowers are an average of 15 months delinquent and also have yet to receive their first formal foreclosure notice. Eighty-five percent of the homeowners we’re working with are in pre-foreclosure and have not made a mortgage payment for an average of 14 months. Structural Issues:

  • Kids graduating from college are deep in debt and holding off home buying, getting married, and starting families.
  • Boomers looking to retire and downsize have few candidates able and willing to buy larger homes, even with deep discounts
  • Shadow inventory and the pent-up foreclosure list are huge forces in play.

Maddux believes the data points to significant backlog, eventual foreclosure activity and a drop in value for home prices.

Baby Boomers and Strategic Defaults - a Demographic Study: Why Did People Walk Away? Did They Struggle With Morality? Would they Recommend Walking Away to Others? - Jon Maddux, CEO of You Walk Away, sent me a slide show of their recent Baby Boomer Strategic Default Survey.   Here is an excerpt of the study. Baby boomers, generally considered those born between 1946 and 1964, face a myriad of issues as the larger-than-average generation ages. The cohort that demanded an increase in the production of consumer goods – homes included – is now hitting retirement age. This means fixed incomes and reduction in living space requirements. While this is to be expected for anyone hitting the retirement milestone, this has been an especially difficult transition for the boomers due to the reduction in value of dream homes purchased at the peak of the market to house their entire families. Facing high mortgage payments, increased maintenance, and a reduction in income, many of the boomers are choosing to walk away. Many others claim to have no choice. Compared with their younger counterparts, baby boomers are generally more likely to have depleted their savings, retirement and other accounts prior to making a decision to strategically default, leaving them with little to no safety net keeping them above the poverty line during what should be their golden years. Many of the clients that You Walk Away works with on a daily basis are in their late 50s or 60s and during a time when they should be planning for a retirement of leisure and relaxation, they are instead consumed with debt, continued unemployment, and a looming fixed income.

For sale: The American dream - The US' housing bubble burst nearly six years ago, but the worst may be yet to come. After a landmark settlement, the major banks have lifted a freeze on foreclosures and government relief has been too small to make a difference. Public housing budgets have been slashed, leaving larger numbers of people with no place to call home. The line between home ownership and homelessness is growing ever more blurry, but neither President Barack Obama nor Governor Mitt Romney have made housing a major campaign issue. Meanwhile, popular anger is rising over the perceived impunity of the banks and some have found innovative ways of fighting back in an age of austerity. Fault Lines travels to Chicago and California to see how people at the frontlines of the crisis are confronting the collapse of the American dream

Mortgage Registry Muddles Foreclosures - MORE good news from the housing front last week. Pending home sales rose 2.4 percent in July, to their highest level since April 2010. Mortgage delinquency rates are down: the Federal Reserve Bank of New York reported a decline of 6.3 percent at the end of June from the March quarter.  Granted, new foreclosures continued to be filed — 256,000 people had a foreclosure added to their credit reports in the June quarter — but that figure was the lowest since mid-2007, the Fed said.  In stark contrast to this improving backdrop are the legal battles still being waged over wrongful foreclosure practices. The glacial progress in these cases is not surprising, given the crowded courts and combatants’ usual stalling tactics.  What is surprising is the fresh evidence these cases are turning up of cockeyed mortgage practices, during both the boom and the bust. As these matters are adjudicated, perhaps we will finally learn whether these practices were intended or accidental.  Take the problem of questionable legal fees levied on troubled borrowers. Although these costs may seem small in the scheme of things, they certainly add to the burdens of many hard-pressed Americans.

Romney’s new housing plan is not very new, and it’s not much of a plan - Housing policy has always gotten short shrift from the Mitt Romney campaign. It was, for instance, notably absent from its 59-point economic plan. To make matters worse, the candidate himself seemed to be having trouble choosing a direction. First he said: “Don’t try to stop the foreclosure process. Let it run its course and hit the bottom.” Then he argued that “the idea that somehow this is going to cure itself by itself is probably not real.” Now Romney has released some details. But not many. His campaign’s new housing policy consists largely of generalities that are in line with the Obama administration’s policies to fix the housing market. Romney’s housing plan has four parts: 1) To “responsibly sell 200,000, government-owned vacant foreclosed homes owned by the government 2) To use “foreclosure alternatives” for those unable to pay their mortgages themselves; 3) To swap out complex financial rules with “smart regulation”; and 4) to reform Fannie Mae and Freddie Mac to “protect taxpayers from additional risk.” At the same time, Romney has also launched a new attack against Obama’s handling of the housing crisis. But aside from the call to roll back and repeal financial regulations, the ideas that Romney has proposed aren’t terribly different from what the Obama administration has done and said on housing so far.

Obama’s Secret Plan to Prop Up Housing Prices - Private Equity firms are piling in to the housing market to take advantage of bargain basement prices on distressed inventory. The Obama administration is stealthily selling homes to big investors who are required to sign non-disclosure agreements to ensure that the public remains in the dark as to the magnitude of the giveaway. Aside from the steep discounts on the homes themselves, the government is also providing “synthetic financing to reduce the up-front capital required if they agree to form a joint venture with Fannie Mae and share proceeds from the rental or sale of properties.” (Businessweek) In other words, US-taxpayers are providing extravagant financing for deep-pocket speculators who want to reduce their risk while maximizing their profits via additional leverage. The plan resembles Treasury Secretary Timothy Geithner’s Public-Private Partnership Investment Program, (PPIP) which Columbia University professor Joseph Stiglitz denounced in an op-ed in the New York Times. Here’s what he said: “The Obama administration’s $500 billion or more proposal to deal with America’s ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win — and taxpayers lose.” The same rule applies here. Speculators are getting lavish incentives (gov financing, low rates, and severe discounts) in secret deals to buy distressed inventory which should be available to the public at market prices. If that’s not a ripoff, then what is?

The Democratic Platform’s Dishonest Nonsense on Housing - I gave a qualified decent review to the Democratic Party platform on the deficit and social insurance programs. I cannot come close to doing the same on housing. In fact, the platform plank on this issue is so disingenuous, it makes Paul Ryan’s convention speech look scrupulously honest. I have to go through this 285-word section line by line. The housing plank starts off promising and then immediately undermines itself: For more than a decade, irresponsible lenders tricked buyers into signing subprime loans while too many homeowners got in over their heads by buying homes they couldn’t afford. Remember, you can’t talk about the largest consumer fraud in history without also blaming homeowners for buying “too much home.” When you’re talking about a systemic fraud perpetrated by lenders, trustees, financiers, appraisers, brokers, middlemen, lawyers, robo-signers and all the way up to executives at the highest levels, “irresponsible” homeowners slot in very low on my list. As I understand it, you need two sides to make a loan deal. Under normal underwriting conditions, it should be impossible for anyone “irresponsible” to try to buy a home they couldn’t afford.

Housing: Inventory down 23% year-over-year in early September - Here is another update using inventory numbers from HousingTracker / DeptofNumbers to track changes in listed inventory. Tom Lawler mentioned this last year. According to the for (54 metro areas), inventory is off 22.6% compared to the same week last year. Unfortunately the deptofnumbers only started tracking inventory in April 2006. This graph shows the NAR estimate of existing home inventory through July (left axis) and the HousingTracker data for the 54 metro areas through early September.  Since the NAR released their revisions for sales and inventory last year, the NAR and HousingTracker inventory numbers have tracked pretty well.  On a seasonal basis, housing inventory usually bottoms in December and January and then increases through the summer. Inventory only increased a little this spring and has been declining for the last four months by this measure. It looks like inventory has peaked for this year. The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker. HousingTracker reported that the early September listings, for the 54 metro areas, declined 22.6% from the same period last year.

CoreLogic: House Price Index increases in July, Up 3.8% Year-over-year - This CoreLogic House Price Index report is for July. The Case-Shiller index released last week was for June. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic® July Home Price Index Rises 3.8 Percent Year-Over-Year—Biggest Increase Since 2006 Home prices nationwide, including distressed sales, increased on a year-over-year basis by 3.8 percent in July 2012 compared to July 2011. This was the biggest year-over-year increase since August 2006. On a month-over-month basis, including distressed sales, home prices increased by 1.3 percent in July 2012 compared to June 2012. The July 2012 figures mark the fifth consecutive increase in home prices nationally on both a year-over-year and month-over-month basis. Excluding distressed sales, home prices nationwide increased on a year-over-year basis by 4.3 percent in July 2012 compared to July 2011. On a month-over-month basis excluding distressed sales, home prices increased 1.7 percent in July 2012 compared to June 2012, also the fifth consecutive month-over-month increase. Distressed sales include short sales and real estate owned (REO) transactions. This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index was up 1.3% in July, and is up 3.8% over the last year.  The index is off 27% from the peak - and is up 9.7% from the post-bubble low set in February (the index is NSA, so some of the increase is seasonal). The second graph is from CoreLogic. The year-over-year comparison has been positive for five consecutive months.

U.S. Home Prices Rise By Most in 6 Years - U.S. home prices jumped 3.8 percent in the 12 months ending in July, according to a private real estate data provider. The year-over-year increase was the biggest in six years, further evidence that the housing market is steadily recovering. CoreLogic says home prices also rose 1.3 percent in July from June. That’s the fifth straight increase in both the monthly and year-over-year price indexes. CoreLogic’s price index is the third national index to show steady increases. The Standard & Poor’s/Case-Shiller index posted its first annual increase in nearly two years last week. And a federal government housing agency has also reported annual increases. Still, the housing market’s recovery is just beginning. Prices are still 27 percent below their peak in April 2006, CoreLogic says.

LPS: House Price Index increased 0.7% in June -- The timing of different house prices indexes can be a little confusing. LPS uses June closings only (not a three month average like Case-Shiller or a weighted average like CoreLogic) and the LPS index is seasonally adjusted. From LPS: U.S. Home Prices Up 0.7 Percent for the Month; Up 0.9 Percent for the Past Year Lender Processing Services ... today released its latest LPS Home Price Index (HPI) report, based on June 2012 residential real estate transactions. The LPS HPI combines the company’s extensive property and loan-level databases to produce a repeat sales analysis of home prices as of their transaction dates every month for each of more than 15,500 U.S. ZIP codes. The LPS HPI represents the price of non-distressed sales by taking into account price discounts for REO and short sales. The LPS index increased 0.7% in June (seasonally adjusted) and is up 4.0% this year, and up 0.9% year-over-year. The LPS HPI is off 23.5% from the peak in June 2006.

Trulia Reports Asking Home Prices up 2.3 Percent, Biggest Year Over Year Increase Since Recession Trulia today released the latest findings from the Trulia Price Monitor and the Trulia Rent Monitor, the earliest leading indicators available of trends in home prices and rents. Based on the for-sale homes and rentals listed on Trulia, these monitors take into account changes in the mix of listed homes and reflect trends in prices and rents for similar homes in similar neighborhoods through August 31, 2012. Asking prices on for-sale homes–which lead sales prices by approximately two or more months – increased 2.3 percent in August year over year (Y-o-Y) and rose in 68 of the 100 largest metros. Excluding foreclosures, prices rose 3.8 percent Y-o-Y. These are the largest Y-o-Y gains since the recession. Meanwhile, asking prices rose nationally 1.8 percent quarter over quarter (Q-o-Q), seasonally adjusted. Month-over-month (M-o-M) asking prices rose by 0.8 percent, the seventh consecutive month of increases....Nationally, rents rose 4.7 percent Y-o-Y in August, compared to 5.8 percent Y-o-Y in May – making it the slowest rise since March. At the regional level, rents jumped more than 10 percent Y-o-Y in Houston and Seattle, but slowed in Denver, San Francisco, Miami, Oakland and Boston.

Lawler: Single Family Rental Market: Surging, But by How Much? -  Tom Lawler estimates that there are about 2.1 million more single family home rented now than in 2006. This is a key reason for the decline in inventory. From housing economist Tom Lawler: Recently there have been a sizable number of media stories on the SF rental market, with the focus on its tremendous growth over the past few years. One reason for the jump in the number of articles is related to the significant increase in the number of entities who have entered this space. It seems almost as if everyone and their mother has either entered the SF rental market or is looking to enter it. Another is that investor demand for SF properties has been very strong while the supply of homes for sale, especially the supply of foreclosed homes, is down significantly, and as a result prices of “distressed” (and other) homes have increased significantly faster than many had expected. And finally, of course, there are stories that a “REO-to-Rental” securitization deal is in the works (if it comes it’ll probably be unrated, as (1) rating agencies don’t really have sufficient data to assign a rating; and (2) unlike in the past, currently rating agencies care about such things!)  Of course, the explosion in the size of the SF rental market is not new: it was evident several years back. It is, unfortunately, not easy to get a good handle on just how rapidly the SF rental market has grown, given the lack of good, timely information on the US housing market. Data from the American Community Survey, e.g., are only available for 2010, and there are some “issues” with that data (as evidenced by the ACS/decennial Census differences currently being explored by Census analysts). There are even bigger issues with data from the Housing Vacancy Survey, which deviated incredibly from the decennial Census (and ACS) on a wide range of “metrics,” and whose estimates appear to systematically understate the number of renter-occupied households.

US Construction Spending Fell 0.9 Percent - U.S. construction spending fell in July from June by the largest amount in a year, weighed down by a big drop in spending on home improvement projects. The Commerce Department says construction spending declined 0.9 percent in July. It followed three months of gains driven by increases in home and apartment construction. New home construction rose again in July, but spending on home renovation projects fell by 5.5 percent. Spending was also down for non-residential projects and government construction projects as well. The June decline left spending at a seasonally adjusted annual rate of $834.4 billion, up 11.8 percent from a 12-year low hit in February 2011. Construction activity is roughly half of what economists consider to be healthy.

Construction Spending decreased in July - This morning the Census Bureau reported that overall construction spending decreased in July:  The U.S. Census Bureau of the Department of Commerce announced today that construction spending during July 2012 was estimated at a seasonally adjusted annual rate of $834.4 billion, 0.9 percent below the revised June estimate of $842.2 billion. The July figure is 9.3 percent above the July 2011 estimate of $763.5 billion. Both private construction spending and public spending declined:  This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted. Private residential spending is 61% below the peak in early 2006, and up 19% from the recent low. Non-residential spending is 29% below the peak in January 2008, and up about 30% from the recent low. Public construction spending is now 15% below the peak in March 2009 and near the post-bubble low.  The second graph shows the year-over-year change in construction spending. On a year-over-year basis, private residential construction spending is now up 19%. Non-residential spending is also up year-over-year mostly due to energy spending (power and electric). Public spending is still down year-over-year, although it now appears public construction spending is moving sideways.

Decline in Home Improvements Pushes Down Construction - Do-it-yourselfers apparently took a summer vacation. The July construction report, released Tuesday, showed total private residential outlays fell by 1.6%, even though new single- and multi-family home building posted increases of 1.5% and 2.8%, respectively. That’s because spending to fix up existing structures fell 5.5% in July, said Daniel Silver, an economist with J.P. Morgan Chase. Meanwhile, construction spending in all other categories declined just 0.2%. Silver said the government figures on home improvement aren’t used in gross domestic product calculations and have proven to be unreliable. Still, the residential decline contributed to an overall 0.9% decrease in construction spending, the largest drop in a year. The “details of the report were soft, but not as bad as the headline figure,” Silver said. “Spending on new residential construction continued to increase in July which is consistent with other signals that the housing market is improving.”

Home Builders Don't Have Enough Workers to Meet New Demand - After losing 70 percent of their business in the housing crash, the nation's home builders are breaking ground again. New orders for homes are rebounding strongly, and housing starts have shown sustained growth over the past year. The demand is there; unfortunately, in some areas, the workers to build these homes are not. Many former construction workers moved on to facilities maintenance work or remodeling, or whatever jobs they could find. Replacing them is difficult because today's market demands highly skilled workers, and there is simply no available base. In the past, builders would hire workers and train them on the job. "They want workers that are available to them, that come out trained with a skill, and ready to hit the ground working. They don’t want the expense of on the job training.” The shortage is across the spectrum, but especially in need are framers, concrete workers, plumbers, roofers and painters. The shortage is also felt most in areas where housing is coming back strongest, and permitting is easiest, like Texas and much of the West. The situation is not nearly as dire in the Northeast, where home building volume is smaller, and it can take years to get a project off zoned and ready to build. Still, as construction across the nation pulls itself off life support, the bitter irony persists. After years of nobody knocking on the door, suddenly this industry is struggling to meet demand.

The Household Debt Picture: Better, But Still a Drag - A report from the New York Fed last week showed that debt held by U.S. households has fallen to its lowest level since mid-2008. The report also showed that delinquency rates on most types of household loans have retraced a significant portion of their run-ups (see Figure 1).While it is encouraging that Americans are continuing to chip away at the enormous debt overhang that has weighed on the economic recovery, digging into the data more deeply shows that the picture is more complicated and less cheering than it initially appears.First, much of the paring back of household debt reflects loan defaults. Of the eleven states for which the New York Fed releases data, those with the largest declines in per capita household debt are also those that have seen the highest rates of late payments and foreclosure filings (see Figure 2). While being relieved of unmanageable debt payments frees up income to spend in other ways, a household that defaults can bear high personal costs such as loss of a home and reduced future access to credit. Analysis using credit bureau data suggests that credit scores decline sharply after a foreclosure and take several years to recover, if recovery comes at all.A second complication is that another part of the decline in household debt occurred because many people cannot get loans. Surveys of bankers and other indicators suggest that lenders remain very cautious, having eased terms and standard only modestly from the stringent levels seen during the credit crunch, particularly for mortgages.

Hotel Occupancy Rate above pre-recession levels - From STR: US results for week ending 25 August In year-over-year comparisons, occupancy ended the week with a 4.9-percent increase to 65.7 percent, average daily rate was up 5.3 percent to US$105.43 and revenue per available room ended the week with an increase of 10.5 percent to US$69.30. The 4-week average is above the pre-recession levels (the occupancy rate for the same week in 2007 was 64.2 percent). Note: ADR: Average Daily Rate, RevPAR: Revenue per Available Room. The following graph shows the seasonal pattern for the hotel occupancy rate using a four week average. The red line is for 2012, yellow is for 2011, blue is "normal" and black is for 2009 - the worst year since the Great Depression for hotels. The occupancy rate will decline over the next month as the summer travel season ends. The next key period is for fall business travel.

Restaurant Performance Index declines in July - From the National Restaurant Association: Uncertainty Over Future Business Conditions Dampens Restaurant Performance Index The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 100.2 in July, down 1.1 percent from June and the lowest mark since a reading of 100.0 in October. However, July still represented the ninth consecutive month that the RPI stood above 100, which signifies continued expansion in the index of key industry indicators. “Although restaurant operators reported positive same-store sales for the 14th consecutive month in July, their economic outlook for the months ahead continued to soften,”  'Only 22 percent of restaurant operators expect economic conditions to improve in the next six months, the lowest level in 10 months.”

Weekly Gasoline Update: Ninth Week of Price Increases - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data. Gasoline prices at the pump, rounded to the penny, rose for the ninth week after 13 weeks of decline: the average for Regular rose seven cents and premium six cents over the past week. They are both up 61 cents from their interim weekly lows in the December 19th EIA report. As I write this, shows seven states, Hawaii, California, Illinois, Washington, Connecticut, Michigan, Oregon, plus DC, with the average price of gasoline above $4. Another four states are close behind -- above $3.90 (New York, Alaska, Wisconsin and Indiana).

The hurricane is gone, why aren't gasoline prices going lower? -  It's amazing how some highly educated people refuse to see the facts in front of them. We continue to get comments that the reason for the recent rise in gasoline prices had to do with the hurricane Isaac threatening US refining facilities in Louisiana. OK, the hurricane is gone and there has been no material damage. Why aren't gasoline prices beginning to decline? The answer is simple. Market participants, in anticipation of US monetary expansion, are bullish energy commodities -  irrespective of supply/demand fundamentals (discussed here).  MarketWatch: - Fund managers beefed up their exposure to bets oil will go higher, or long positions, on the week to Aug. 28, data from the Commodity Futures Trading Commission showed late Friday. That has made oil the most overbought since May 1, said in a note to clients Tim Evans, an analyst with Citigroup's Citi Futures Perspective. Money also flowed to gasoline long positions, the most since May as well and "unusually overbought for this late stage of the U.S. driving season," Evans said. Oil futures rallied Friday, up 2% to $96.47 a barrel and notching gains of nearly 10% for the month.

US consumer spending has been surprisingly brisk - US consumer confidence (discussed here) may end up being somewhat better than initially thought. The sentiment figures from the University of Michigan (as opposed to the Conference Board measure) actually improved in August, though remain below the pre-recession average. Bloomberg/BW: - Consumer confidence improved more than projected in August as merchant discounts and record-low interest rates help U.S. households bolster finances. The Thomson Reuters/University of Michigan final sentiment index climbed to 74.3, a three-month high, from 72.3 in July. The gauge averaged 89 in the five years leading up to the recession.  If consumer spending is any indication of confidence, the U Michigan numbers may be closer to reality (see this discussion comparing the two sentiment indicators). US chain store sales figures for August have been surprisingly robust. ICSC: - The preliminary tally of major chain store sales for August (fiscal month ending August 25) is up 6.0% (less drug stores) and appreciably above the 4.6% comp-store pace for July. Comments about back-to-school sales are generally favorable. The August growth rate is the strongest reading since March 2012 (+6.8%). The broader gauge of consumer spending from the Commerce Department looks to be reasonably strong as well. Reuters: - U.S. consumer spending got off to a fairly firm start in the third quarter, rising by the most in five months and offering hope economic growth would pick up this quarter. ...

Vital Signs Chart: Income From the Government - The nation’s aging population and the fallout from the recession have increased the share of personal income that comes from the government. Government payments — such as unemployment insurance, Medicare and Social Security — were 17.3% of personal income in July. That’s lower than the recession peak of 18.6% but well above the 14.2% in December 2007, when the recession started.

U.S. Light Vehicle Sales at 14.5 million annual rate in August -- Based on an estimate from Autodata Corp, light vehicle sales were at a 14.52 million SAAR in August. That is up 17% from August 2011, and up 3% from the sales rate last month. This was above the consensus forecast of 14.3 million SAAR (seasonally adjusted annual rate).  This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for August (red, light vehicle sales of 14.52 million SAAR from Autodata Corp). The year-over-year increase was fairly large because the auto industry was still recovering from the impact of the tsunami and related supply chain issues in 2011 (the issues were mostly over in September of 2011). Sales have averaged a 14.17 million annual sales rate through the first seven months of 2012, up from 12.4 million rate for the same period of 2011. The second graph shows light vehicle sales since the BEA started keeping data in 1967.

 More Bad News Imminent: August US Auto Production Set To Plunge By Most In 16 Months - Over the past several months, many pundits were scratching their heads at the peculiar patterns in summer hiring and layoff trends, which threw all NFP, claims, and JOLTs forecasts in a loop making a mockery of even the best forecasters. The reality is that there was a very specific reason for this abnormal seasonal pattern: numerous car plants worked throughout the summer, avoiding traditional temporary shutdowns and furloughs, in an attempt to provide an optical boost to the Union-endorsed administration. And as always happens (see Cash for Clunkers), every attempt to pull demand or supply from the future to the present results in an eventual collapse in either of these two. Sure enough, with June and July reaping the benefits of advance demand, August is set be an absolutely abysmal month for US auto assemblies and for Industrial Production. Because as Stone McCarthy calculates, based on projections provided by Wards Autos, the U.S. motor vehicle assembly rate for August is projected to decline by 8% to a 10.1 million annualized rate after rising by 4.4% in July. This would be the biggest monthly percentage decline in the assembly rate in about a year and a half, since April 2011's 9.5% drop.

Will We Never Learn? Subprime Auto Loans Accelerating (Again) It is remarkable that we greedy ignorant short-term-focused human beings never seem to learn that driving forward and looking in the rear-view mirror can only end in disaster. Forget 'dancing while the music plays' or other such 'defenses' of herd ignorance, the most recent data regarding Auto Loans is simply mind-blowing:

  • Subprime borrowers received 56.46 percent of loans on used cars in the quarter, up from 52.70 percent a year earlier.
  • The average loan-to-value on new cars was 109.55%
  • The average used car loan-to-value ratio rose to 126.62%
  • 77% of Subprime Auto Loans are for a period greater than five years

As Yahoo notes, citing some monkey, "Despite the rise in subprime loans overall, there is still a strong sense of managing risk. Because the overall lending environment has improved, lenders are making loans available to a wider range of customers."

Subprime auto nation - Have you heard the news? Auto sales are booming. Total sales for the month of August were 1,285,202 vehicles, according to Autodata Corp, the highest monthly sales figure for any August since 2007, when 1.47 million autos were sold in the United States. Year to date auto sales have totaled 9.7 million and are on track to reach 14.5 million. Between 2006 and 2007, auto sales ranged between 16 million and 18 million. They crashed below 10 million in 2009. The Keynesians running our government have pulled out all the stops to restart this engine of consumer spending. First they wasted $3 billion of taxpayer funds on the Cash for Clunkers debacle. Almost 700,000 perfectly good cars were destroyed in order to keep union workers happy. This Keynesian brain fart distorted the used car market for two years, raising prices for cars needed by the working poor. After that miserable failure, they realized the true secret to selling vehicles is to give them away to anyone that can scratch an X on a loan document, with 0% interest for 60 months, financed by Federal government controlled banking interests. Add in some massive channel stuffing and presto!!! – You’ve got an auto sales boom.General Motors sales are up 3.7% over 2011. Ford Motors sales are up 6% over 2011. The Obama administration continues to tout their saving of the U.S. auto industry with their bailout in 2009 that saved unions and screwed bondholders. If this strong auto recovery is not an illusion, how do you explain the two charts below?

AAR: Rail Traffic "mixed" in August, Building related commodities were up - Once again rail traffic was "mixed". However building related commodities were up such as lumber and crushed stone, gravel, sand. Lumber was up 21% from August 2011. From the Association of American Railroads (AAR): AAR Reports Mixed Weekly Rail Traffic for August The Association of American Railroads (AAR) today reported U.S. rail carloads originated in August 2012 totaled 1,461,680, down 1.4 percent compared with August 2011. Intermodal traffic in August 2012 totaled 1,230,992 containers and trailers, up 51,145 units or 4.3 percent compared with August 2011. The August 2012 average weekly intermodal volume of 246,198 units is the second highest average for any August on record.   “Weakness in coal carloadings was largely but not entirely offset by increases in carloads of petroleum and petroleum products, autos, lumber, and several other commodities, with intermodal showing continued strength.”  This graph shows U.S. average weekly rail carloads (NSA).  Commodities with carload gains on U.S. railroads in August 2012 included petroleum and petroleum products (up 18,007 carloads, or 49.0%); motor vehicle and parts (up 8,966 carloads, or 13.0%); and crushed stone, sand, and gravel (up 6,905 carloads, or 7.3%). Carloads of lumber and wood products were up 21.3% (2,877 carloads) in August 2012; carloads of grain were up 1.7%.  The second graph is for intermodal traffic (using intermodal or shipping containers): Intermodal traffic is now near peak levels.

Wage growth in the Seventh District’s manufacturing occupations - Chicago Fed - A strong surge in manufacturing output has been one of the hallmarks of the U.S. economic recovery since the 2008–09 recession. Along with this resurgence in production, manufacturers have also expanded their hiring following years of net job declines. Even before the recession, manufacturing employers and their trade associations voiced disappointment and concern about the “poor” availability of higher-skilled workers, who were needed to replace retirees. And as the recent manufacturing recovery has unfolded, employers have once again voiced these same complaints.[1] Additionally, as some industry observers have noted, during the recession and recovery, manufacturers have advanced their production technologies more rapidly to survive and to stay profitable. Accordingly, workers of ever-higher skills are needed to operate, monitor, maintain, and program advanced equipment, such as computer numerically controlled machines and robotic tools.  In this blog entry, we examine these trends in terms of wage and job growth within the states of the Seventh Federal Reserve District,[2] as well as across the nation. In doing so, we draw on data reported for hourly wages across individual occupations in the manufacturing sector. Further, these occupations have been classified and grouped according to the levels of skills and background preparation needed to carry out the attendant work—i.e., both formal schooling/training and on-the-job experience. Because of the recent claims that the demand for higher-skilled manufacturing labor has heightened, we compare experiences of the recent recession and recovery periods with those that took place earlier in the 2000s.

ISM Manufacturing index decreases slightly in August to 49.6 - This is the third consecutive month of contraction (below 50) in the ISM index since the recession ended in 2009. PMI was at 49.6% in August, down slightly from 49.8% in July. The employment index was at 51.6%, down from 52.0%, and the new orders index was at 47.1%, down from 48.0%. From the Institute for Supply Management: August 2012 Manufacturing ISM Report On Business®  "The PMI™ registered 49.6 percent, a decrease of 0.2 percentage point from July's reading of 49.8 percent, indicating contraction in the manufacturing sector for the third consecutive month. This is also the lowest reading for the PMI™ since July 2009. The New Orders Index registered 47.1 percent, a decrease of 0.9 percentage point from July, indicating contraction in new orders for the third consecutive month. The Production Index registered 47.2 percent, a decrease of 4.1 percentage points and indicating contraction in production for the first time since May 2009. The Employment Index remained in growth territory at 51.6 percent, but registered its lowest reading since November 2009 when the Employment Index registered 51 percent. The Prices Index increased 14.5 percentage points from its July reading to 54 percent. Here is a long term graph of the ISM manufacturing index. This was below expectations of 50.0%. This suggests manufacturing contracted in August for the third consecutive month.

ISM Manufacturing Business Activity Index: Third Month of Contraction - Today the Institute for Supply Management published its August Manufacturing Report. Today's headline PMI at 49.6 percent is showing the third month of contraction after 34 months of expansion. The consensus was for 50.0 percent. Here is the report summary:The PMI™ registered 49.6 percent, a decrease of 0.2 percentage point from July's reading of 49.8 percent, indicating contraction in the manufacturing sector for the third consecutive month. This is also the lowest reading for the PMI™ since July 2009. The New Orders Index registered 47.1 percent, a decrease of 0.9 percentage point from July, indicating contraction in new orders for the third consecutive month. The Production Index registered 47.2 percent, a decrease of 4.1 percentage points and indicating contraction in production for the first time since May 2009. The Employment Index remained in growth territory at 51.6 percent, but registered its lowest reading since November 2009 when the Employment Index registered 51 percent. The Prices Index increased 14.5 percentage points from its July reading to 54 percent. Comments from the panel generally reflect a slowdown in orders and demand, with continuing concern over the uncertain state of global economies.

ISM Index: Manufacturing Is Sluggish For 3rd Straight Month - Manufacturing activity in the U.S. contracted for the third month in a row in August, the Institute for Supply Management reports. That’s a sign that economic growth has been sluggish and is likely to remain so. The ISM Manufacturing Index dipped ever so slightly to 49.6 last month vs. 49.8 in July. Any reading under 50 implies that manufacturing, a key sector of the economy, is contracting. But the below-50 reading is shallow, which suggests that manufacturing is closer to treading water rather than shrinking per se. That’s hardly an encouraging reading. But given the ongoing growth elsewhere in the economy (assuming it holds up), it’s not yet clear if the moderately weak readings for this indicator are the last word on what happens next for the broader economy. What is obvious is that manufacturing has been on the defensive since June, according to the ISM index. But it’s also true that this so-far subtle slump has yet to spill over into the broader economy, based on the numbers published to date.

Manufacturing ISM Misses, Third Month In Contraction Territory; Biggest Miss In Construction Spending In One Year -- So much for the transitory bounce in positive economic reports from August. While hopes were high that maybe, just maybe, the virtuous cycle has once again been restored and the Fed's intervention would be unneeded, the August Manufacturing ISM just printed at 49.6, down from July's 49.8, and well below expectations of 50. This was the third contraction in a row and joins the global PMI which as we reported yesterday now has 80% of the world in contractionary territory. The kicker was the Prices Paid category which soared to 54.0 from 39.5, a whopping 14.5 surge, which together with the always hollow Inventories category which rose from 49.0 to 53.0, and Employment, which dipped from 52.0 to 51.6, were the only categories in the 50+ region. Everything else is now contracting. And in other news, Construction spending (remember "housing has bottomed") plunged from 0.4% to -0.9%, on expectations of an unchanged print, which was the biggest miss in a year, and the biggest drop in also a year.

ISM Manufacturing Contracts for 3rd Month in a Row - PMI 49.6% for August 2012 - The August 2012 ISM Manufacturing Survey PMI decreased, -0.2 percentage points, to 49.6% and is in contraction for the 3rd month in a row. In July 2009 the PMI registered 49%. Shrinkage is the theme of August's ISM manufacturing survey as the shadows of 2009 infiltrate this report.  New Orders decreased -0.9 percentage points, to 47.1%. New Orders inflection point, where expansion turns into contraction, is not 50, it is 52.3%.  A New Orders Index above 52.3 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders. The ISM manufacturing index is in stark contrast to the Census report which showed manufacturing new orders increased 2.8% for July, even though the ISM claims the two statistics are consistent with each other. To wit, below is a graph of manufacturing new orders percent change from one year ago (blue, scale on right), against ISM's manufacturing new orders index (maroon, scale on left). Here we do see a consistent pattern between the two. PMI is a composite index on manufacturing. Here's how the ISM defines PMI: The PMI is a composite index based on the seasonally adjusted diffusion indexes for five of the indicators with equal weights: New Orders, Production, Employment, Supplier Deliveries and Inventories.  Below is the ISM table data, reprinted, for a quick view.

Manufacturing ISM Contracts 3rd Month Led by Declining New Orders; Recession-Type Numbers? You Bet! -- Those looking for evidence the US is already in recession (and has been since June) need look no further than the August Manufacturing ISM Numbers released today. Key Points:

  • The PMI™ registered 49.6 percent, a decrease of 0.2 percentage point from July's reading of 49.8 percent, indicating contraction in the manufacturing sector for the third consecutive month. This is also the lowest reading for the PMI™ since July 2009. 
  • The New Orders Index registered 47.1 percent, a decrease of 0.9 percentage point from July, indicating contraction in new orders for the third consecutive month. 
  • The Production Index registered 47.2 percent, a decrease of 4.1 percentage points and indicating contraction in production for the first time since May 2009. 
  • The Employment Index remained in growth territory at 51.6 percent, but registered its lowest reading since November 2009 when the Employment Index registered 51 percent. 
  • The Prices Index increased 14.5 percentage points from its July reading to 54 percent. 
  • Comments from the panel generally reflect a slowdown in orders and demand, with continuing concern over the

Another Indicator in the Danger Zone: Aside from the fact that the Institute for Supply Management's manufacturing index remained below 50% for the third straight month, indicating that the U.S. factory sector is in trouble, the ratio of the ISM new orders sub-index to the headline index has slid towards levels that have often coincided with broad economic downturns. Admittedly, there have been a few false signals over the past three decades, but given other reports we've seen lately, today's data lends further weight to the notion that the U.S. economy is heading south.

Analysis: Shrinking New Orders in ISM Report Worrying - Wells Fargo Senior Economist Mark Vitner talks with Jim Chesko about reports showing that U.S. manufacturing activity contracted for the third-straight month in August, according to the Institute for Supply Management’s latest survey, and construction spending surprisingly declined 0.9% in July to a seasonally adjusted annual rate of $834.38 billion.

Vital Signs Chart: Shrinking U.S. Output -- U.S. manufacturers are cutting production amid weak demand.  A gauge of manufacturing production slipped 4.1 points to 47.2 in August, the weakest level since May 2009. A reading below 50 indicates that activity is shrinking. Meanwhile, an index of inventories — which isn’t seasonally adjusted — surpassed 50 last month for the first time in nearly a year. Together, this suggests that businesses are accumulating stock due to poor sales.

Non-Manufacturing ISM Comes Diametrically Opposite To Manufacturing Indicator - Remember rule #1 of central planning: when in doubt, baffle with BS.  Sure enough, after a very ugly Manufacturing ISM hit the tape two days ago, today we get a big beat out its sister tracker, the Non-manufacturing ISM, which printed at 53.7 on expectations of a decline from last month's 52.6 to 52.5, in the process topping the highest Wall Street forecast for the August number. Compounding the 'confounding' is that while the mfg Employment indicator dropped, the non-manfucaturing employment rose from 49.3 to 53.7. Perfectly logical? Exactly. At least there was some symmetry in the Prices Paid indicator, which jumped both here as it did two days ago, from 54.9 to 64.3: the largest component bounce of the August series. And finally, whereas the manufacturing respondents were uniformly bearish, those who rely on services are still full of hopium.

ISM Non-Manufacturing Index increases in August - The August ISM Non-manufacturing index was at 53.7%, up from 52.6% in July. The employment index increased in August to 53.8%, up from 49.3% in July. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: August 2012 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in August for the 32nd consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®. The NMI™ registered 53.7 percent in August, 1.1 percentage points higher than the 52.6 percent registered in July. This indicates continued growth this month at a slighter faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 55.6 percent, which is 1.6 percentage points lower than the 57.2 percent reported in July, reflecting growth for the 37th consecutive month. The New Orders Index decreased by 0.6 percentage point to 53.7 percent. The Employment Index increased by 4.5 percentage points to 53.8 percent, indicating growth in employment after one month of contraction. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index. This was above the consensus forecast of 53.0% and indicates faster expansion in August than in July. The internals were mixed with the employment index up sharply, but new order down slightly.

ISM Non-Manufacturing Business Report: Second Month of Faster Growth - Today the Institute for Supply Management published its August Non-Manufacturing Report. Today's headline NMI Composite Index is at 53.7 percent has registered its second month of faster growth, returning to the May level. The consensus was for 52.4 percent. Here is the report summary: The NMI™ registered 53.7 percent in August, 1.1 percentage points higher than the 52.6 percent registered in July. This indicates continued growth this month at a slighter faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 55.6 percent, which is 1.6 percentage points lower than the 57.2 percent reported in July, reflecting growth for the 37th consecutive month. The New Orders Index decreased by 0.6 percentage point to 53.7 percent. The Employment Index increased by 4.5 percentage points to 53.8 percent, indicating growth in employment after one month of contraction. The Prices Index increased 9.4 percentage points to 64.3 percent, indicating substantially higher month-over-month prices when compared to July. Like its much older kin, the ISM Manufacturing Series, I have been reluctant to put very much focus on this collection of diffusion indexes. For one thing, there is relatively little history for ISM's Non-Manufacturing data, especially for the headline Composite Index, which dates from 2008.

Vital Signs Chart: Strength in Service Sector - The service sector is growing as manufacturing shrinks. A gauge of service businesses by the Institute for Supply Management showed activity rising to 53.7 in August from 52.6. Readings over 50 indicate expansion. A services employment index rose to 53.8 from 49.3, the highest level in four months. ISM’s factories report has contracted for three straight months.

U.S. Productivity Revised Higher - U.S. workers increased their productivity more than initially thought in April through June, even though the overall economy continued to grow at a sluggish pace. Nonfarm business productivity, the output per hour of all workers, rose at a 2.2% annual rate in the second quarter of 2012 compared to a reading last month of up 1.6%, the Labor Department said Wednesday. Unit labor cost, or the ratio of hourly compensation to productivity, increased 1.5% during the period versus an initial report of up 1.7%.

US Productivity Grew at 2.2 Pct. Rate in Spring - U.S. companies got more output from their workers this spring than initially thought. The modest gain in productivity may mean that hiring could stay sluggish this year. The Labor Department said Wednesday that productivity increased at an annual rate of 2.2 percent in the April-June quarter, up from an initial estimate of a 1.6 percent gain. Labor costs rose at an annual rate of 1.5 percent, slightly lower than the 1.7 percent initially estimated. The government said the economy grew at an annual rate of 1.7 percent in the April-June quarter, up slightly from an initial estimate of 1.5 percent. The increase led to higher productivity gains. Productivity is the amount of output per hour worked. Rising productivity can boost corporate profits. It can also slow job creation if it means companies are getting more from their current staff and don’t need to add workers.

Weak Productivity Is Another Bane of Recovery - An upward revision in second-quarter productivity can’t mask a disturbing trend in this recovery: Output per hour worked is growing below its potential and creating a drag on profits, incomes, living standards, and tax receipts. On Wednesday the Labor Department said output per hour worked in the nonfarm business sector grew at an annual rate of 2.2% from the 1.6% reported a month ago. But when compared with year-ago levels, second-quarter growth was just 1.2% — the same muddling-along pace of the previous six quarters. That’s a far cry from the 3%-plus rate of the 1990s and early 2000s when businesses were reaping the benefits of the Internet and technology innovation. Strong productivity growth provides the cash that allows wages and profits to grow, enables workers to live better and governments to collect more revenues without raising tax rates. Output per hour often slows after an initial burst right after a recession, but like so many other trends, productivity has been unusually weak in this recovery. Economists aren’t sure when productivity may return to its long-run average of about 2%, but it’s likely to be a long while.

Vital Signs Chart: Quarterly Increase in Productivity - Worker productivity has rebounded amid slower hiring. Productivity, or output per hour worked, rose at a 2.2% annual rate in the second quarter, after a 0.5% fall between January and March. Rising productivity is a good thing for the economy, but also suggests companies are ensuring profits by delaying new hires—a trend economists say can’t continue indefinitely.

There Is No 'Structural' Unemployment Problem - The unemployment rate has exceeded 8% for more than three years. This has led some commentators and policy makers to speculate that there has been a fundamental change in the labor market. It lowers expectations and provides a rationale for the dismal labor market. Excuses aside, this issue is also important for central banks. The Federal Reserve and other central banks have some policy choices to make if the high rates of unemployment reflect cyclic phenomena. But if the problem is structural—perhaps reflecting a mismatch between skills needed by business and skills possessed by the unemployed—there is little the Fed can do. Research I've done with James Spletzer of the U.S. Census Bureau shows that the problems in the labor market are not structural. They reflect slow economic growth, and the cure is a decent recovery. In 2007, the unemployment rate was 4.4%. Two years later, it reached 10%. The structure of a modern economy does not change that quickly. The demographic composition of the labor force, its educational breakdown and even the industrial mix did not differ much between 2007 and 2009.  But the changes were similar to those experienced in prior recessions. As unemployment rates declined somewhat after 2009, the pattern played out in reverse. Industries that saw the largest increases in unemployment were the ones with the largest decreases as overall unemployment fell.

Bill Clinton And Structural Unemployment - Paul Krugman - I’m pretty annoyed with Bill Clinton right now; he’s just spoiled one of my standard joke lines. You see, when giving talks about the economy, I’ve often said that I have a different take from other pundits, because I know some stuff most political reporters don’t, like … arithmetic. I’ll never be able to use that line again without being accused of stealing it from the Big Dog. Seriously, that was an awesome speech. Clinton isn’t just an amazing political talent; he has the ability to make wonkery accessible and compelling. Of course, he had one major advantage over the supposed wonks on the other side (still shaking my head over the Ryan implosion), namely, the well-known liberal bias of the facts. But — you knew there was going to be a but — Clinton did get one thing wrong, which he has persistently gotten wrong for years. He’s stuck on the notion that we have a big structural unemployment problem: Of course, we need a lot more new jobs. But there are already more than 3 million jobs open and unfilled in America, mostly because the people who apply for them don’t yet have the required skills to do them. He’s been saying this for years. But it’s not true — even Republican economists agree.

If unemployment isn’t structural, what causes it? - One popular theory for why joblessness has stayed so high — currently at 8.3 percent, with a large portion of people unemployed for more than six months — is a rising amount of what economists call structural unemployment. That’s the belief that a large number of the people looking for jobs are struggling not because there are not enough jobs available, but rather because they’re the wrong age or don’t have the right education or skills. Some argue that if these fundamental factors are behind the nation’s weak labor market, there’s little that government can do, at least in the short term, to boost employment. The thinking is that even if a company has enough business, it won’t hire a new worker who’s the wrong age or doesn’t have the appropriate skills. But a new paper by Edward Lazear, a Stanford professor and former top economic adviser to George W. Bush, and James Spletzer, a top economist at the Census Bureau, concludes that structural unemployment isn’t a problem. The authors looked at employment levels across industries, age groups, levels of education achievement and other indicators. And in all cases, they found that just as employment declined during the recession, it bounced back with vigor afterward.

Bad News For NFP Bulls: Help Wanted Ads Plunge By Most Since Lehman Collapse - There is one major problem, for the administration at least, when it comes to presenting labor data that is not "compiled" by the Bureau of beLabored Statistics and its Bank of Spain-endorsed Arima-X-13 seasonal data fudging program: it reflects realty, not statistical or seasonal adjustments, and certainly can not be skewed this way or that depending on what best suits the incumbent presidential candidate two months ahead of the election. Which is why one won't read anywhere that one of the most reliable indicators when it comes to real time hiring data as reported by the actual job market and not by some conflicted, data challenged organization which on top of everything has data leak issues, namely Help Wanted ads just plunged by the most since the Lehman collapse.

Weekly Initial Unemployment Claims decline to 365,000 - The DOL reports: In the week ending September 1, the advance figure for seasonally adjusted initial claims was 365,000, a decrease of 12,000 from the previous week's revised figure of 377,000. The 4-week moving average was 371,250, an increase of 250 from the previous week's revised average of 371,000. The previous week was revised up from 374,000, so this was an increase from the reported level a week ago. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 371,250. This was below the consensus forecast of 370,000. And here is a long term graph of weekly claims:

Weekly Unemployment Claims at 365K, Better Than Expectations - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 365,000 new claims number was a 12,000 drop from the previous week's upward revision of 3,000. The less volatile and closely watched four-week moving average rose to 371,250. Here is the official statement from the Department of Labor:  In the week ending September 1, the advance figure for seasonally adjusted initial claims was 365,000, a decrease of 12,000 from the previous week's revised figure of 377,000. The 4-week moving average was 371,250, an increase of 250 from the previous week's revised average of 371,000.  The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending August 25, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending August 25 was 3,322,000, a decrease of 6,000 from the preceding week's revised level of 3,328,000. The 4-week moving average was 3,320,750, a decrease of 3,500 from the preceding week's revised average of 3,324,250.  Today's seasonally adjusted number was below the consensus estimate of 373K. Here is a close look at the data since 2006 (with a callout for 2012), which gives a clearer sense of the overall trend in relation to the last recession and the trend in recent weeks.

Survey: US Businesses Added 201K Jobs in August - A private survey shows U.S. businesses stepped up hiring in August, an encouraging sign ahead of Friday’s government employment report. Payroll provider ADP says businesses added 201,000 jobs last month, the most reported by the survey since March. ADP also said July job growth was stronger than first thought: Employers created 173,000 jobs — 10,000 more jobs than the group reported last month. The report only covers hiring in the private sector and excludes government job growth. The Labor Department will offer a more complete picture of August hiring on Friday. The two surveys reported roughly the same private-sector job creation in July. But the two surveys have diverged sharply in previous months.

ADP: Private Employment increased 201,000 in August - ADP reportsEmployment in the U.S. nonfarm private business sector increased by 201,000 from July to August, on a seasonally adjusted basis. The estimated gain from June to July was revised up from the initial estimate of 163,000 to 173,000.   Employment in the private, service-providing sector expanded 185,000 in August, up from 156,000 in July. Employment in the private, goods-producing sector added 16,000 jobs in August. Manufacturing employment rose 3,000, following an increase of 6,000 in July. This was above the consensus forecast of an increase of 149,000 private sector jobs in August. The BLS reports on Friday, and the consensus is for an increase of 125,000 payroll jobs in August, on a seasonally adjusted (SA) basis.

Two Encouraging Updates For The Labor Market - We have two new updates on the labor market today and both sets of numbers are encouraging. The ADP Employment Report advises that nonfarm private payrolls rose a respectable 201,000 in August, up from July's 173,000 increase and the highest since March. Meanwhile, initial jobless claims dropped last week, falling by a seasonally adjusted 12,000—the biggest weekly decline since July. You still can't assume much in economic analysis these days, but for the moment we're batting a thousand when it comes to the data points du jour. Let's take a closer look at today's employment numbers, starting with the ADP estimate. As the chart below shows, the latest figures suggest that tomorrow's official payrolls report for August from the Labor Department will also bring news of stronger job growth. Running a regression analysis on the past 10 years of monthly changes for both series spits out a handsome forecast: a 200,000-plus increase (excluding government jobs) in private-sector employment for August. If so, that would represent a substantial upside surprise. Indeed, the consensus forecast among economists via is looking for a slowdown in the pace of growth in the Labor Department's numbers: 144,000 for August private payrolls, down from July's reported 172,000.

Jobs Gain of 200,000 Still Isn’t Enough - Curb your enthusiasm, you payroll-watching economic bulls. True, Thursday’s ADP report showed private businesses added 201,000 jobs in August, blowing the doors off the 145,000 projected by economists. But that hiring pace isn’t strong enough to cut the 8.3% jobless rate significantly any time soon. The ADP overshoot was just one in a series of good labor-related numbers. Jobless claims fell a larger-than-expected 12,000 in the Sept. 1 week. Layoff announcements in August fell to their lowest number since December 2010, said Challenger Gray & Christmas. And TrimTabs Investment Research, usually a Sad Sack when it comes to job estimates, said its calculations of tax-withholding data show August payrolls increased by a hefty 185,000. Of course, any payroll change with a plus sign in front of it is good news for the economy and job-seekers. But progress on unemployment will remain slow. It’s simply a matter of math. The U.S. has nearly 12.8 million unemployed as of July. Although that number is derived from a survey different from the polling that creates the nonfarm payroll data, a monthly pace of 200,000 new jobs coupled with the typical number of entrants into the labor force means a more normal 6% jobless rate won’t be hit until late 2015 or early 2016.

When Good Employment News Is Really Bad News - The recent releases of the Challenger Job-Cut and ADP Employment reports provided good news. The job cut report showed a decline in the planned number of layoffs from 36,855 last month to 32,239 this month. This puts layoffs at the second lowest level since the end of the last recession. Furthermore, planned job cuts have plummeted from almost twice that level in May when planned layoffs had surged to 61,887 from 40,559 in the prior month. The chart below shows the relationship between the 3-month average of planned job cuts, which fell to 35,548 this month from 45,431 in July, and the 4-week average of initial jobless claims. The recent decline in planned layoffs bodes positively for improvement in jobless claims in the weeks ahead. The ADP Employment report also came in much stronger than expectations, showing an increase of 201,000 jobs. Last month's report was also revised higher by 10,000 jobs to 173,000. There were modest advances in manufacturing, finance and construction, with the primary job gains focused in the retail/service space. The problem with that, of course, is that many of these are low paying and temporary jobs. Government sector jobs decreased more modestly than they did in the prior month, and we may be getting close to the end of the bloodletting from state and local governments. The average work week held steady at 34.5 hours, but average hourly earnings growth slipped to 0.1% from 0.3% in July. Working longer hours for less money has been the post-recession recovery mantra.

August Employment Report: 96,000 Jobs, 8.1% Unemployment Rate - From the BLSTotal nonfarm payroll employment rose by 96,000 in August, and the unemployment rate edged down to 8.1 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in food services and drinking places, in professional and technical services, and in health care.  ...Both the civilian labor force (154.6 million) and the labor force participation rate (63.5 percent) declined in August. The employment-population ratio, at 58.3 percent, was little changed. The change in total nonfarm payroll employment for June was revised from +64,000 to +45,000, and the change for July was revised from +163,000 to +141,000. This was another weak month, especially with the downward revisions to the June and July reports. The second graph shows the employment population ratio, the participation rate, and the unemployment rate. The unemployment rate decreased to 8.1% (red line).  The Labor Force Participation Rate declined to 63.5% in August (blue line)- another new cycle low. This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although most of the recent decline is due to demographics. The Employment-Population ratio declined to 58.3% in August (black line). This is a new low for the year, and just above the cycle low.  The third graph shows the job losses from the start of the employment recession, in percentage terms. The dotted line is ex-Census hiring.

Jobs Report, First Impressions - Employers expanded their payrolls by 96,000 last month as the nation’s unemployment rate declined to 8.1%, according to this morning’s report from the Bureau of Labor Statistics.  The jobs number is weaker than was expected, and the tick down in unemployment was not due to stronger job growth, but to fewer folks in the labor force looking for work. All told, not a strong report.  The economy is consistently adding jobs–this is month 30 of private sector job growth.  But job growth is not fast enough to provide workers the earnings opportunities they need, and the pace of growth has slowed in recent months. Two questions answered by today’s report are 1) would last month’s stronger-than-expected payroll number survive the monthly revision, and 2) did it signal a more lasting improvement in the lagging trend in payrolls earlier this year? On the first point, July’s revised payroll gain went down from 163,000 to 141,000, about the trend so far this year (job growth this year so far has averaged 139,000/month).  On the second point, the 96,000 payroll gain in August is closer to the lower trend that’s prevailed this year relative to last year’s average monthly gains of around 150,000. A few details but more to come shortly:

  • –Factory employment fell slightly in August, down 15,000, the first decline in that sector since September of last year. 
  • –Average weekly hours and wages: Persistently high unemployment continues to dampen wage growth. 
  • –Underemployment: This broader measure of folks “underutilized” in the job market—there’s an antiseptic way of putting it—incorporates not just the unemployed, but the 8 million people unable to find jobs with the desired hours of work, i.e., involuntary part-timers.  That rate stood at 14.7% last month, compared to 16.2% a year ago. 

Only 96K New Jobs, But the Unemployment Rate Drops to 8.1% -- Here is the lead paragraph from the Employment Situation Summary released this morning by the Bureau of Labor Statistics, with the bracketed text added by me: Total nonfarm payroll employment rose by 96,000 in August, and the unemployment rate edged down to 8.1 percent [from 8.3 percent last month], the U.S. Bureau of Labor Statistics reported today. Employment increased in food services and drinking places, in professional and technical services, and in health care.  Today's nonfarm number is below the consensus, which was for 130K new nonfarm jobs. However, the prior month's number for new jobs was revised downward to 141K from the original 163K, and despite the lower-than-expected increase in new jobs, the unemployment rate declined, a hint of the ongoing boomer retirement demographics and others who have given up the search for suitable employment. For statistical support for this view, see the employment-population ratio chart (third below). The unemployment peak for the current cycle was 10.0% in October 2009. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948. The second chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. The latest number is 3.3% — unchanged from last month. This measure gives an alternative perspective on the relative severity of economic conditions. As we readily see, this metric still remains significantly higher than the peak in 1983, which came six months after the broader measure topped out at 10.8%.

Employment Situation - (6 graphs) The August employment report shows the economy continuing with its very sluggish pace. Although the unemployment rate fell it was due more to a contracting labor force rather than expanding employment. The household survey showed a drop of some 119,000 while the payroll or headline data increased only 96,000 --- private rose 103,000 while government employment fell 7,000.Moreover,  the workweek was unchanged so the index of aggregate hours worked only rose 0.1%. Average hourly earnings was unchanged and the year over year change remained at last months record low.    Average weekly earnings for nonsupervisory workers only rose 1.6% over the last years while for all private workers the gain was 2%

US Added Just 96,000 Jobs In August, Far Less Than Expected; Unemployment Rate Slides To 8.1% - In August, two months ahead of the presidential election ahead of which this number will be one of the most critical and talked about, the US generated just 96,000 non-farm payroll jobs, on expectations of 130K additions, and compared to the July number of 163,000, now revised to 143,000K. Private payrolls rose by a modest 103,000, much lower than the expected number of 142K, and down from July's revised 162K. -15,000 manufacturing jobs were lost, compared to the expected +10K, and sadly just a little bit short of Obama's recent promise to add 1 million manufacturing jobs by 2016. Finally, while the unemployment rate came lower (surprise, surprise: this is what appears in newspapers) at 8.1%, far lower than expectations of 8.3%, and below last month's 8.3%, the broad total underemployment rate (U-6) continues to be sticky at 14.7%. Birth Death added 87,000, up from July's 52,000. The reason for the drop in the unemployment rate: labor force participation dropped to 63.5%, down from 63.7%. Oddly enough, this report leaves the NEW QE door open, even as Obama can take the accolade for a declining unemployment rate.

August Jobs Report Shows Continued Weakening Of Labor Market - Ahead of today’s report on the August employment situation from the Bureau of Labor Statistics, many analysts had raised their estimates of what we’d see based upon the report issued by ADP which showed more than 200,000 jobs created last month. Where the pre-ADP consensus was for somewhere around 125,000 net jobs created, by the end of the day yesterday, the consensus started to drift closer to a better, though still not very good, 150,000 net jobs created. Of course, as I’ve explained before, the correlation between the ADP report and the official statistics released by the BLS have been more of a coincidence in recent years than anything else, some months the two numbers are close to each other but most months they are not. This is largely because it does not measure the same groups of employers as the BLS and does not seasonally adjust its figures in the same manner that the BLS does. Additionally, ADP depends in large part on self reporting from clients that can often be months behind schedule for one reason or another.  It makes one wonder why analysts pay so much attention to the ADP report to begin with because, as it turns out, the official figures from the BLS could not have been more different: Total nonfarm payroll employment rose by 96,000 in August, and the unemployment rate edged down to 8.1 percent, the U.S. Bureau of Labor Statistics reported today. The number of unemployed persons, at 12.5 million, was little changed in August. (See table A-1.) Among the major worker groups, the unemployment rates for adult men (7.6 percent), adult women (7.3 percent), teenagers (24.6 percent), whites (7.2 percent), blacks (14.1 percent), and Hispanics (10.2 percent) showed little or no change in August. The jobless rate for Asians was 5.9 percent (not seasonally adjusted), little changed from a year earlier.

In Defense of ADP - On Thursday, ADP, the payroll processing firm, said that its proprietary measure of U.S. private sector employment rose 201,000 in August, which helped to set off a broad stock market rally. On Friday, the Labor Department said its measure of private sector employment rose 103,000. This looks like a black eye for the precision of ADP’s report, but it’s really a black eye for investors who got so excited about the ADP number in the first place. There are 111 million Americans employed on private sector payrolls. The 100,000 difference between the ADP number and the Labor Department number amounts to 0.09% of all of those people employed on private payrolls. It is silly to think that the ADP report can predict with much more precision the Labor Department report on a monthly basis. It’s a good measure of the broad trend. Investors shouldn’t get so excited about rounding errors.

A New Old Story For Jobs: Slow Growth - Today’s employment report for August from the Labor Department is a disappointment, but not enough to sink the case for expecting slow growth for the economy overall. Nonetheless, after yesterday’s 201,000 increase via ADP, this morning’s weak 103,000 gain for private nonfarm payrolls is a wet rag. Even so, August’s tepid increase is enough to keep the year-over-year percentage change for payrolls at 1.8%. That's basically unchanged from July’s annual pace. It's also a sign that the labor market isn’t caving, even if looking at the latest monthly numbers suggests otherwise.Then again, given the current climate, arguing that the glass is still half full tends to fall on deaf ears. “This is definitely a setback for the labor market and the economy,” Michael Feroli, chief U.S. economist at JPMorgan Chase, tells Bloomberg. “This clearly validates Bernanke’s concern. We have Europe, the fiscal cliff, and it is a generally cautious business environment.” Fair enough. But if you’re looking for clear signs that the economy is tanking, today’s jobs report still falls short of a smoking gun. Private employment continues to rise at roughly 1.8% a year, today’s report advises. That’s down a bit from the 2.0% rate in this year’s first quarter, but the annual pace is still in line with the trend over the last several years. That implies that more of the same is on tap for the immediate future, namely: slow growth, perhaps spiked with some upside surprises along the way.

More of the same, unfortunately - Otherwise ordinary news feels like bad news in the face of high expectations. So it is with America's economy. The August employment report was subdued, but not disastrous. Non-farm jobs rose 96,000 from July, or 0.1%, and the unemployment rate dropped to 8.1%, from 8.3%. Both figures show a job market on the same pace it has been since the winter: expanding just about quickly enough to keep the unemployment rate from rising, but no faster. The economy remains balanced between slowdown and recovery. But the report was a disappointment relative to the buildup. A private payroll survey suggested more than twice as many new jobs, claims for unemployment insurance have edged lower, and stock markets were on a roll thanks to actual or expected new action from the European Central Bank and the Federal Reserve.  The details of the report were worse than the headline. Revisions reduced employment in June and July by 41,000 in total. The unemployment rate fell for the wrong reasons: 368,000 people left the labour force and the participation rate, the share of the working-age population either working or looking for work, slumped to 63.5%, a three-decade low, from 63.7%. The household survey, which often diverges from the larger survey of employers, found that the number of employed people actually fell in August by 119,000 from July.

Payroll Day Blues: Economy Adds Just 96,000 Jobs in August - The Democratic party spent all week (and millions of dollars) trying to convince voters to return President Obama to office in November. But perhaps the most important set piece — the August employment situation report — was completely out of their hands. Unfortunately for President Obama and his supporters, the U.S. economy did not oblige, adding only 96,000 new jobs in August, missing economists expectations of 125,000 jobs gained. That number, combined with downward revisions of the previous two months’ figures, takes some of the wind out of the argument the President made last night that the economy is slowly but surely recovering, and that the recent spring swoon — the three months between April and June when there were no more than 87,000 new jobs added — was just a blip on the radar.

Analysis: Overall Jobs Momentum Slows -- Wells Fargo Chief Economist John Silvia talks with Jim Chesko about this morning’s report showing that the U.S. economy added 96,000 jobs in August – a weaker-than-expected report that could spur the Federal Reserve toward another round of stimulus.

Household Survey: Number of Employed Declines by 119,000 as Those Not in Labor Force Rises by Spectacular 581,000; Yes, Virginia, It's a Recession - Yesterday I was asked if the services ISM changed my view about the US being in recession. I responded that I wanted to see today's job report first. Well I have seen it and the report is nothing short of a certified disaster. Yes, Virginia, based on the household survey, and manufacturing reports, the regional Fed surveys the US is in recession. At turns, the household survey leads. I strongly suggest the economy has turned. Here is an overview of today's release.

  • US Payrolls +96,000 - Establishment Survey
  • June revised lower from +64,000 to +45,000.
  • July revised lower from +163,000 to +145,000.
  • Three-month average is a weak +95,000 - Establishment Survey
  • US Employment -119,000  - Household Survey
  • US Unemployment Rate -.02 at 8.1% - Household Survey
  • The Civilian Labor Force fell by 368,000. Otherwise the unemployment rate would have risen.
  • Average workweek for all employees on private nonfarm payrolls steady at 34.4 hours
  • The average workweek for production and nonsupervisory employees on private nonfarm payrolls steady at 33.7 hours.
  • Average hourly earnings for all employees in the private nonfarm workers sector fell by 1 cent.

Employment: Another Weak Report (more graphs) - The economy has added 1.11 million jobs over the first eight months of the year (1.21 million private sector jobs). At this pace, the economy would add around 1.8 million private sector jobs in 2012; less than the 2.1 million added in 2011. Also, at this pace of payroll job growth, the unemployment rate will probably still be above 8% at the end of the year. Government payrolls declined another 7 thousand in August, bringing government job losses to 93,000 for 2012 through August (61,000 state and local jobs losses so far in 2012, and 32,000 fewer Federal jobs). U-6, an alternate measure of labor underutilization that includes part time workers and marginally attached workers, declined to 14.7%. This was another weak employment report, especially with the downward revisions and slight decline in hourly earnings. Here are a few more graph ...Since the participation rate has declined recently due to cyclical (recession) and demographic (aging population) reasons, an important graph is the employment-population ratio for the key working age group: 25 to 54 years old. This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at maximum job losses. The number of part time workers decrease in August to 8.03 millon from 8.25 million in August. These workers are included in the alternate measure of labor underutilization (U-6) that decreased in August to 14.7%, down from 15.0% in July.  This graph shows the number of workers unemployed for 27 weeks or more. This graph shows total state and government payroll employment since January 2007. State and local governments lost 129,000 jobs in 2009, 262,000 in 2010, and 230,000 in 2011.

BLS Employment Report Shows 96,000 Jobs and an Unemployment Rate of 8.1% for August 2012 - The August 2012 BLS unemployment report shows total nonfarm payroll jobs gained were 96,000. Even worse news, the last two months of job gains were revised down. July's gains are now 141,000, revised from 163,000 payroll jobs and June is a now a measly 45,000 jobs, also revised down from 64,000. The August unemployment rate dropped, from 8.3% to 8.1%, but not due to people getting a job, they literally dropped off of the statistical radar. The below graph shows the monthly change in nonfarm payrolls employment.  There were 103,000 private sector jobs gained while government payrolls shrank another -7,000. Manufacturing lost 15,000 jobs. The start of the great recession was declared by the NBER to be December 2007. The United States is now down -4.778 million jobs from December 2007, 4 years and 8 months ago.  The below graph is a running tally of how many official jobs are permanently lost, from the establishment survey, since the official start of this past recession. Increased population growth, implies the United States needs to create at least 10.6 million jobs or self-employment, using the population survey statistics. This estimate assume a 62.7% civilian non-institutional population to employment ratio, as it was in December 2007. This implies an additional 5.84 million jobs were needed over a 56 month time period beyond the ones already lost. This is just taking into account increased population against the payroll jobs gap, the actual number of jobs needed is much higher, in part because payrolls or CES, and population, i.e. CPS, are two separate employment surveys from the BLS.

The Employment Situation - Krugman - My current favorite gauge of the jobs picture is the employment-population ratio for prime-age adults (25-54). EP ratio instead of unemployment rate, because U may be distorted by workers dropping out. Prime-age not because the old and young don’t matter, but to take demographic change out of the picture. And here’s what it looks like:  A plunge and a stabilization at a depressed level, which has now gone on for almost three years. Everything else is just noise.

Another Jobs Disappointment - (graphs) The August employment report certainly reminded me that forecasting monthly changes in nonfarm payrolls is a dangerous game. I think there is little doubt that this report is not in the "substantial and sustainable" category, which thus points to additional Fed action next month. Nonfarm payrolls posted a 96k gain for the month, well below consensus expectations and the low-end of my 110k-290k range (198k midpoint). The numbers for the previous two months were revised downwards. And while the 12-month trend remained virtually unchanged, the 6-month trend is weaker than last summer: And while I am sure it will not dissuade fears that inflation is just around the corner, hourly wages actually slipped a penny for both all employees and production/non-supervisory workers. The latter category, for which we have a longer time series, continues to plumb the depths of wage growth: Also note that the index of aggregate weekly hours has largely leveled off this year, in contrast with steady growth in 2011: Roughly half the net job growth was attributable to health care and social services, manufacturing and government both dragged down the headline, while professional services gained 28k despite a disconcerting loss of 4.9k temp workers. The population survey was also hardly inspiring. The unemployment rate managed to edge down on the back of an exodus of 348k workers from the labor force. Consequently, the participation rate ticked back down:

August Job Numbers are a Disappointment for Democrats - The August job numbers released today by the BLS will come as a disappointment, especially to Democrats who were hoping for a strong headline number during their convention week. The U.S. economy created just 96,000 new payroll jobs last month. An increase of 103,000 private-sector jobs was partly offset by a loss of 7,000 government jobs. Private-sector goods-producing jobs actually fell by 16,000. To make matters worse, the June jobs number was revised downward by 19,000 to a very weak 45,000, and the July jobs gain was revised downward by 22,000 to a more modest 141,000. The unemployment rate decreased from 8.3 percent to 8.1 percent, but there was not as much good news in that number as it might seem. For one thing, the unemployment rate had already hit 8.1 percent once before, in April, so the August number did not break new ground. Also, much of the drop in the unemployment rate was due to a decrease in the size of the labor force. The number of employed persons, according to the household survey on which the unemployment rate is based, actually fell by 119,000 in August. The unemployment rate is based on a survey of household that is entirely separate from the establishment survey on which the payroll jobs report is based. The two surveys can produce numbers on job loss or gain that differ substantially, partly for methodological reasons and partly because the household survey, unlike the payroll survey, includes farm workers and self-employed persons.

The Unemployment Rate and Private Job Growth - Once again this morning, the BLS employment release tells conflicting stories depending on whether one looks at the unemployment rate or job growth.   The U.S. unemployment rate fell from 8.3% in July to 8.1% in August, continuing the gradual three-year downward trend (from its 2009 peak at 10 %).     “Are we better off than we were four years ago?”   Yes.   If the criterion is to be a narrow unemployment comparison, and one counts from the month following the day Obama took the oath of office rather than the month preceding it, then we are now at a lower unemployment rate.   But that is very simple-minded as a criterion.   (Look at GDP.  Better yet look at how the free-fall turned around and the recession ended within his first 5 months.) Employment growth is the more important statistic, if one is evaluating the real economy.   Here this morning’s BLS report was disappointing: only 96,000 jobs created.   But the number climbs into six digits if one looks at private sector employment growth.   More importantly, as always, one should look at a longer run trend. The fact is that private job growth has been running at an annual rate of 162,000 per month over the last two years.    This is far greater than the rate during the Bush Administration even if one looks only at the years in between the Bush recessions of 2001 and 2008  (83,000 per month, on average, from November 2001 to December 2007.)   It is not enough. 

The BLS Jobs Report Covering August 2012: Some Sound and Fury but Mostly Nothing - The big number is that unemployment dropped two-tenths of a percent from 8.3% to 8.1%. However, the illusory nature of this drop can be seen in the fact that the number of jobs increased only 96,000. Essentially, what happened is that the unemployment rate declined, not because people found jobs but because the BLS defined them out of the labor force. Both of these numbers are seasonally adjusted.  In revisions of jobs numbers from the previous two months, June was revised down 19,000 from 64,000 to 45,000. It had originally been reported at 80,000, already a weak number, in the July report. The good, not great, number of 163,000 for July was decreased by 22,000 to 141,000. So a downward adjustment of 41,000 overall.  I should note that I look at both seasonally adjusted and unadjusted data. The official numbers the most cited are seasonally adjusted. Seasonal adjustment is a smoothing of the data flattening out the hills and valleys of employment and jobs over the course of the year. However, employment and jobs (which are not the same thing and come from two different surveys) are seasonal. So if you want to know who actually is employed and what jobs are doing, you need to look at the unadjusted numbers. With that, the potential labor force as represented by the non-institutional population over 16 (which is never seasonally adjusted) or NIP increased 212,000 from 243.354 million to 243.566 million. Multiplying this by the employment-population ratio (58.3% seasonally adjusted) gives us 124,000 an estimate of the number of jobs needed to keep up with population growth in August. So you can see immediately that the 96,000 jobs reported created in August (seasonally adjusted) did not even keep up with population growth.

Why Did the Unemployment Rate Drop? - The U.S. unemployment rate dropped to 8.1% in August and a broader measure dropped even more to 14.7%, even as the economy added a meager 96,000 jobs. Why the drop? The decline in the unemployment rate wasn’t because more people had jobs. In fact, the number of people employed as measured by the household survey declined by 119,000. The fall came from fewer people looking for work in August and dropping out of the labor force. The number of jobs added to the economy and the unemployment rate come from separate reports. The number of jobs added — the 96,000 figure — comes from a survey of business, while the unemployment rate comes from a survey of U.S. households. The two reports often move in tandem, but can move in opposite directions from month to month. In August, the household survey might have recorded a drop in the jobless rate, but below the headline number were more worrying signs. The unemployment rate is calculated based on the number of unemployed — people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. That number declined by 250,000 in August, but it was overwhelmed by a 368,000 drop in the size of the labor force. That suggests that many of those 250,000 stopped looking for work not because they found a job, but because they dropped out of the labor force. The unemployment rate is calculated by dividing the number of unemployed by the total number of people in the labor force.

The Reason Why The Unemployment Rate Dropped: The Labor Participation Rate Is At Fresh 31 Year Lows - Curious why the unemployment rate dropped from 8.3% to 8.1%, even as just 96,000 jobs were added? The labor participation rate declined from 63.7% to 63.5%, the lowest since 1981. It means that somehow in August the labor force declined by 368,000 people, which is a paradox since according to the household survey 119,000 jobs were lost in August, yet at the same time the unemployment rate dropped. Remember: it is an election year.

Five Key Takeaways From Jobs Report - The economy added 96,000 jobs in August, well below expectations. The unemployment rate fell to 8.1% from 8.3%, but only because 368,000 Americans dropped out of the labor force, not because more people found work. Economists are still digesting the report, but five things jump out right away:

  • 1. Fewer jobs were created in June and July than previously thought. The Labor Department revised its estimate for June job creation to 45,000 from 64,000 and in July to 141,000 from 163,000, a combined reduction of 41,000 jobs. The economy has added an average of 97,000 jobs over the past six months, the first time the six-month average has dropped below 100,000 since January of 2011.
  • 2. The industry breakdown was uneven. Manufacturing, a key source of strength earlier in the recovery, lost 15,000 jobs, with payrolls falling even in the seemingly robust auto sector. Construction employment was basically flat, despite signs of a rebound in the housing market. Government payrolls fell yet again, and temporary hires — often seen as a bellwether of future hiring — fell for the first time since March.
  • 3. More job-seekers are giving up. The number of people in the labor force — those working or looking for work — fell by 368,000. Nearly 3 million people who were unemployed in July were out of the labor force in August, suggesting they quit looking for jobs. By comparison, just 2.3 million people went from being unemployed in July to working in August.
  • 4. The long-run trend still holds. As bad as today’s report is, it’s too soon to call a major shift in the labor market.
  • 5. Fewer people are working. Payrolls, which are based on a survey of businesses, rose slightly. But in the separate survey of households, the number of people reporting they were employed fell by 119,000 in July. The share of the population that’s working — the employment-to-population ratio — ticked down a tenth of a percentage point to 58.3%

U.S. Jobless Rate Drops for the Worst of All Reasons - The U.S. economy added just 96,000 jobs in August, falling short of expectations and showing that with a presidential election just two months away, the nation still has a long ways to go to heal from the deep 2007-09 recession. The unemployment rate fell to 8.1 percent from 8.3 percent, but that was only because 368,000 people left the labor force. The share of working-age people who are either working or looking for work—known as the labor-force participation rate—fell to its lowest level since September 1981. Stock and bond prices rose after the report came out, but it wasn’t because traders felt cheerful about the economy. Just the opposite: They concluded that the lousy report increased the likelihood that the Federal Reserve would further ease monetary conditions at its next meeting Sept. 12-13. Easy money is reliably good for the financial markets, even if it doesn’t quickly translate into stronger economic performance. “It’s just this new upside-down world of investing that we’re living in where bad news is good news for assets,” The unemployment rate has been above 8 percent since February 2009, a month after Obama’s inauguration—the longest period of such elevated joblessness since the Great Depression of the 1930s.

Number of the Week: Young People Lead Labor-Force Drop Outs - 209,000: The number of teenagers who dropped out of the labor force in August. One of the most worrisome signs in Friday’s jobs report was the 368,000-person drop in the labor force, which is defined as people who are working or looking for work. People can leave the labor force for lots of reasons — to go back to school, to raise children, or to retire, among others — but a big drop can be a sign that people are losing faith in their ability to find work. But among people of prime working age — which the Labor Department defines as those between 25 and 54 years old — the labor force declined by a more modest 66,000. The biggest workforce drops were among teenagers 16-19 years old (down 209,000) and 20-24 year-olds (down 218,000). The older workforce, those over 55, grew by 274,000, continuing a long-running trend. What happened? It’s hard to know for sure, but part of the issue may be problems in the Labor Department’s method for seasonally adjusting its data. Every year, tens of thousands of young people enter the workforce during the summer, then drop out when school starts back up in the fall. The Labor Department tries to account for those patterns in its seasonal adjustment formula. In 2009 through 2011, however, the lousy job market meant that far fewer teenagers than usual could find summer jobs.  This summer, the labor market was healthier, and more teenagers found jobs. 5.6 million teenagers had jobs in July, still far fewer than in 2006, but a marked improvement over the past couple years. As a result, however, the labor force declined by more in August than it has in the past couple years. It’s possible that threw off the Labor Department’s seasonal adjustment formula, making it look like the drop was a “real” decline in job prospects when it was actually the result of normal seasonal patterns.

Jobs Data Show U.S. Factories Bearing Brunt of Slowdown - The biggest decline in factory jobs in two years reported today by the U.S. Labor Department adds to signs that manufacturing is bearing the brunt of the slowdown in global growth. Factory payrolls declined by 15,000 workers last month, according to the figures issued today in Washington. The workweek shrank and the share of industries hiring plunged to the lowest level in almost three years. Combined with earlier data showing less demand for capital equipment and growing pessimism among purchasing managers, today’s figures show manufacturing, which helped lead the U.S. out of the worst recession in the post-World War II era, is pulling back. Companies such as Intel Corp. (INTC) are among those cutting forecasts as business investment cools and economies from Europe to Asia slow.

Where The Jobs Are: Low Wage Sectors Add Most Jobs In The Past Year - As we continue spreading today's NFP report, here are two chart summarizing which sectors are hot, and which are not. In another indication of just how weak the US jobs market truly is, as the second chart from Bloomberg Brief confirms, the bulk of the job additions have been in low-wage sectors. The one highest paying, and thus greatest tax-generating, sector - financial jobs - will continue to bleed more and more workers as the credibility of the broken casino formerly known as the capital markets continues plumbing negative territory.

Chart Of The Day: 25,792,000 Unemployed And Underemployed - Sadly for the US labor force, today's number of reported unemployed people according to the Household Survey, which came at 12,544,000, or a drop from 12,794,000 (even as the number of employed declined as well from 142.2MM to 142.1MM), tells only half the story. As the following chart of the day, a bigger problem comes from the fact that in August another 8 million Americans were working part time, double what it was at the start of the Depression. Additionally, 5.2 million, also double the number 4 years ago, are marginally attached to the labor force. Combined, this adds up to 25.8 million, which is the real number of interest, even ignoring the nearly 400,000 who mysteriously dropped out of the labor force. As Bloomberg concludes, "It is likely firms have altered their hiring behavior following the recession, which has resulted in a low-wage bias that favors part-time and temporary workers." Sadly, this means that the change in the labor market is now secular, and the Fed will have to reassess everything it knows, just as it had to reevaluate its flawed understanding of Stock vs Flow, and why more and more are now calling for endless QE.

Spot The Housing Recovery: Building Construction Workers At One Year Lows - This chart probably needs no explanation. Number of employees engaged in the construction of buildings just dropped to 1,217,000 down from July's 1,220,000, and the lowest number in a year. Just as telling is that the number was a mere 5,600 workers above the depression lows of 1,211,400 recorded in May of 2011.

Real Unemployment Rate Hits 11.7% As Spread Between Reported And Propaganda Data Hits Record - Today's reported unemployment rate: 8.1%. The reason: the labor "participation" dropped to a 31 year low 63.5% as reported earlier. Of course, this number is pure propaganda, and makes no sense for one simple reason: despite the economic collapse started in December 2007, the US civilian non-institutional population since then has grown by 186,000 people every month on average hitting an all time high of 243,566,000 in August. These people need a job, and the traditional shorthand is that at least 100,000 jobs have the be generated every month for the unemployment rate to merely stay flat, let along improve. So what does one get when one uses the long-term average of the past 30 or so years which happens to be 65.8%? One gets an unemployment number that is 45% higher than the reported 8.1%, or 11.7%. That is what the real unemployment rate is assuming the US labor participation rate was realistic and not manipulated by the BLS cronies and the Bank of Spain assisted Arima-X-13 seasonal adjustment models. It also means that, as the chart below shows, the spread between the real and propaganda data hit an all time record, which was to be expected two months ahead of America's banker muppet presidential election.

Chart of the day, employment-status edition - There are two ways in which the national employment situation influences the election. The first is, simply, the effect of unemployment and underemployment on America’s animal spirits. People who are unemployed, or who are so discouraged that they’re not even looking for work any more, don’t tend to be very happy with their lot, and as a result are more likely to vote against the current president. It may or may not be fair, but the president does get blamed for current economic conditions, and arguments about first derivatives (“it’s bad, but it’s getting better”) or counterfactuals (“it’s bad, but it’s better than it would have been under the other guys”) tend to be pretty unpersuasive to voters. On this level, today’s employment report is pretty gruesome. According to the establishment survey, employers added just 96,000 jobs this month — less than the amount needed just to keep up with population growth. According to the household survey, the size of the civilian labor force shrank by 368,000 people last month. And the number of people not in the labor force grew by an absolutely massive 581,000. Right now, the proportion of Americans with a job is lower than it has been in over 30 years. America’s getting older, and you’d expect the number to be falling — but it shouldn’t be falling nearly as fast as this. We’re well below trend, when it comes to the employment-to-population ratio, and that’s really bad for the economy as a whole: it means we have fewer productive workers, and as a result the country is creating much less wealth than it could be creating if more people had jobs. At the margin, of course, anything that depresses the amount of wealth in the country is bad for the incumbent president.

Men See Lowest Participation Rate on Record - The monthly U.S. jobs report generated its usual plethora of data, much of it discouraging. Fewer jobs than expected were created in August, and the welcome decline in the unemployment rate has to be significantly tempered by its link to the 368,000 people who departed the counted work force. Leading the pack of the woeful were the numbers on the labor force participation rate. There are a couple of reasons for this view. One, you should pay attention when data are either at the lowest or the highest level in years. In this case, the lowest. More important, a declining percentage of people in the work force means long-term problems. Too many people discouraged, with atrophying skills. Bad news for them and their families, economically and psychologically. Bad news for the overall economy that loses productive capacity and willing and able consumers. Bad news for the overall spirit and optimism of pretty much everyone.

Jobs Report: Taking a Step Back to View the Big Picture - Here’s the big picture: The U.S. economy has been adding jobs at a rate of about 150,000 per month for close to two years now. The month-to-month numbers have been volatile — as high as 275,000 in January, and as low as 54,000 in May of 2011 — but the 12-month average has been remarkably consistent, staying between 140,000 and 190,000 since early 2011. The private-sector numbers have been even steadier. Taken on its own, 150,000 isn’t a bad number. It’s a bit better than the U.S. managed from 1995 to 2005 (albeit with a smaller population), and a bit worse than it did from 1985 to 1995. But as recoveries go, it’s lousy. The U.S. lost 8.8 million jobs from 2008 to 2010, and it’s gained back barely 4 million of them. At 150,000 jobs per month, it would take more than two and a half years to close that gap, not accounting for population growth. To dig out of the hole in a more reasonable time frame would require hiring on the order of 300,000 or 400,000 new jobs per month over a period of several months. That happened during the recoveries of the 1970s and 1980s, but the economy hasn’t been able to find that extra gear this time around. “150,000 is clearly inadequate to repair the damage which was done,”

Bad Jobs on the Rise - The decline in the economy’s ability to create good jobs is related to deterioration in the bargaining power of workers, especially those at the middle and the bottom of the pay scale. The restructuring of the U.S. labor market – including the decline in the inflation-adjusted value of the minimum wage, the fall in unionization, privatization, deregulation, pro-corporate trade agreements, a dysfunctional immigration system, and macroeconomic policy that has with few exceptions kept unemployment well above the full employment level – has substantially reduced the bargaining power of U.S. workers, effectively pulling the bottom out of the labor market and increasing the share of bad jobs in the economy. In this paper, we define a bad job as one that pays less than $37,000 per year (in inflation-adjusted 2010 dollars); lacks employer-provided health insurance; and has no employer-sponsored retirement plan. By our calculations, about 24 percent of U.S. workers were in a bad job in 2010 (the most recently available data). The share of bad jobs in the economy is substantially higher than it was in 1979, when 18 percent of workers were in a bad job by the same definition. The problems we identify here are long-term and largely unrelated to the Great Recession. Most of the increase in bad jobs – to 22 percent in 2007 – occurred before the recession and subsequent weak recovery.

Why Is Labor Force Participation Shrinking? - The percentage of people over age 16 who are working or actively seeking work has slipped fairly steadily for the past few years.  CBO says a big reason is “the economic downturn [and] weak growth in output during the recovery.”  In other words, the recession and lack of job opportunities have driven many people from the labor force. But, in a finding that has attracted little attention, CBO says that roughly half of the recent drop in labor force participation has occurred simply because more and more baby boomers are hitting retirement age. Labor market participation traditionally peaks between ages 25 and 54.  At those ages, roughly 80 percent or more of people are working or looking for work.  At younger or older ages, though, the percentage drops — tapering off to fewer than 10 percent of people 75 or older, as the graph shows. The graph also shows changes in labor force participation since 2006 within narrow age groups.  While participation has dropped among young adults, it has held pretty steady for those aged 25 and up and has actually increased at the oldest ages.  But the sheer number of baby boomers (the generation born between 1946 and 1964) moving into their retirement years has dampened the overall rate, as CBO confirms.  Researchers at the Chicago Fed and the Kansas City Fed bear out CBO’s analysis.

Quit rates – Still Low and Are Unlikely to Rise Much - Conference Board - For human capital executives, labor turnover and retention rates are among the most important measures to follow. Given the high cost of replacing existing workers, companies should hope for high retention (i.e. low quit rates) in their payroll. Naturally, quit rates vary a great deal across companies. Company-specific factors, such as competitiveness of salary and benefits, work environment, type of occupation and required education, and company values, all play significant roles in whether an employee decides to remain in the company or leave their job. However, quit rates also heavily depend on overall labor market conditions. The chart below illustrates the strong mirror relationship between quit and unemployment rates.  This relationship makes a great deal of sense, as periods of low unemployment reflect tighter labor markets, in which employees are provided with more external opportunities and incentives to leave their existing employers.

Our Labor Sovereignty and Birthright  - Work is our human birthright. Productive work is necessary for hominid existence, but productive and fulfilling work is also necessary for human existence. It’s our right as humans and our responsibility as citizens. No institution can legitimately block us from our rights and prevent us from exercising (or, if you like, absolve us of) our responsibilities. Under the fraud of economic and political hierarchy, we’re supposed to substitute an increasingly fraudulent “opportunity” for work, property, hierarchical position, and an empty view of “rights” to these things, for the universal reality of them. The universal practice of humanity performing its natural work, rather than struggling against artificial barriers to gain access to it. Our universal natural presence on the land, fruitfully stewarding its resources, rather than struggling against artificial barriers to gain access to it and then, for a select few who are most talented at crime (or at being born out of the correct womb), dominion over it. Our universal position as full human beings in real natural communities, rather than struggling as desolate atoms to enter and ascend artificial hierarchies.

Who’s Fighting for Workers? - An economy like ours is an amalgam of markets, all of which aggregate into “the market.”  That is, there’s a housing market, a stock market, a market for pork belly futures, the auto market, etc.  And then there’s one of my personal favorites, the one we’re celebrating today: the labor market. It’s ideally the place in the economy where working-age people, having received the education and training needed to maximize their inherent skills and intelligence, produce the goods and services that the members of the society need and want.  The output they create adds to the nation’s wealth, and they are—theoretically—remunerated commensurately.  That is, they receive their share of what they added to our economic firmament. That’s what I was taught.  But it is not what happens. Too often, the problems start with inadequate access to the education kids need, and I’m starting with pre-school here, to realize their potential.  And, of course, this is a problem that’s strongly correlated with income.Then there’s the demand problem.  The basic labor economics I described above reduces to a key precept: demand for labor is derived demand.  It is derived from the demand for goods and services.  If that demand lags, then the beneficent chain of events I described breaks down.

Democrats give labor the cold shoulder - At first glance, the past week was a good one for the relationship between Democrats and the labor movement. In advance of Labor Day, the president and vice president issued proclamations supporting labor rights, and Tuesday saw three union heads speak to the Democratic National Convention, including United Auto Workers President Bob King in a prime-time speaking slot. But scratch the surface even a bit, and it’s clear that such gestures obscure a fraught relationship between a working-class movement on hard times and a party all too happy to abandon it at the drop of a hat. There are few better symbols of this breakdown than the choice of Charlotte to host the Democratic convention. As my Post colleague Amy Gardner writes, North Carolina is “considered inhospitable to unions,” and Charlotte’s selection led several unions to refuse to donate to the convention. Not only is North Carolina a right-to-work state, with the lowest rate of union membership in the country, but it also is one of only two states where state and local governments are forbidden from negotiating with public-sector unions. Democrats could have used Charlotte to back up their pro-union rhetoric..

The Political Empowerment of the Working Class is the Key to Better Employment Policy - Why doesn’t the unemployment problem get more attention? Why have other worries such as inflation and debt reduction dominated the conversation instead? As I noted at the end of my last column, the increased concentration of political power at the top of the income distribution provides much of the explanation.  Again and again we hear Federal Reserve officials say that an outbreak of inflation could undermine the Fed’s hard-earned credibility and threaten its independence from Congress. But why is the Fed only worried about inflation? Why aren’t officials at the Fed just as worried about Congress reducing the Fed’s independence because of high and persistent unemployment?  Similar questions can be asked about fiscal policy. Why is most of the discussion in Congress focused on the national debt rather than the unemployed? Is it because the wealthy fear that they will be the ones asked to pay for monetary and fiscal policies that mostly benefit others, and since they have the most political power their interests – keeping inflation low, cutting spending, and lowering tax burdens – dominate policy discussions? There was, of course, a stimulus program at the beginning of Obama’s presidency, but it was much too small and relied far more on tax cuts than most people realize.

U.S. Steel, USW union reach tentative labor deal - The United Steelworkers said late Sunday that the union has reached a tentative agreement on a three-year contract with United States Steel covering more than 16,000 workers at its U.S. facilities, according to a press release published on the union's website.  The tentative agreement covers workers at U. S. Steel's domestic flat-rolled steel operations and iron-ore-mining facilities as well as tubular operations in Lorain, Ohio, and Fairfield, Ala., according to U.S. Steel. Union members have the next few weeks to review the details of the proposed agreement before it comes to a vote. 

Was the decline of American unions inevitable? Ask Canada. -  Since the 1960s, organized labor in the United States has been steadily withering. A half-century ago, 30 percent of all American workers were members of a union. By last year, that number had shriveled to 11.8 percent. Economists have proposed all sorts of explanations for the drop, from the shrinking of the U.S. manufacturing workforce to foreign competition that has made U.S. companies more hostile toward unions. But a new paper (pdf) from Kris Warner of the Center on Economic and Policy Research suggests that the decline in U.S. labor unions wasn’t simply due to inexorable economic forces. Government policies likely played a big role too. And the easiest way to see this, Warner argues, is by comparing unionization rates in the United States to rates in nearby Canada, “the country that is probably more like the U.S. than any other – economically, socially, and politically.” Here’s the key graph from the paper: Between the 1920s and 1960s, both countries saw a similar surge in union membership, thanks to changes in labor law and the growth of sectors ripe for organizing, such as automobile manufacturing. But around 1965, something changed. The two countries diverged. Union membership held steady in Canada, but plummeted in the United States. Canada’s rules simply made it much easier for workers in the private sector to form a union. ...

The Emancipation of the Unemployed - Slavery offends enlightened moral sensibility in two ways: as a transgression of decent boundaries in the realm of property and as an assault on human dignity and justice in the realm of labor and exchange.  The first offense concerns what people should and should not be permitted to own.  The relation of human beings to their property is a relation between persons and things, between acting moral subjects with aims or goals, and the mere instruments that those persons are permitted by law to control and wield freely to satisfy their wants.  It seems almost unbelievable to us today that people in America should once have been permitted to own and possess other human beings, to reduce thinking and feeling women and men to the condition of property.

"Are Americans Better Off Today Than They Were Four Years Ago?" The Question That Exposes Incompetent Reporters - While the source is not clear, someone developed a simple way to identify incompetent news reporters. If you hear a reporter ask people in President Obama's administration, ideally in a belligerent tone, "are the American people better off than they were four years ago?,"the reporter is trying to tell you that they are not qualified to do their job. The reason we know that the questioners are incompetent reporters is that this is a pointless question. Suppose your house is on fire and the firefighters race to the scene. They set up their hoses and start spraying water on the blaze as quickly as possible. After the fire is put out, the courageous news reporter on the scene asks the chief firefighter, "is the house in better shape than when you got here?" [...] A serious reporter asks the fire chief if he had brought a large enough crew, if they enough hoses, if the water pressure was sufficient. That might require some minimal knowledge of how to put out fires.

Are You Better Off Than You Were at the End of the Bush Administration? A Data-Based Assessment - I've heard a lot about the "four years ago" comparison. Four years ago, we were on the cusp of Don Luskin’s famous prediction (“... we're on the brink not of recession, but of accelerating prosperity.”), and Phill Gramm had two months earlier decried the ongoing “mental recession”. [0] It seems to me the more appropriate marker is the last election, in 2008Q4. We can then assess what the data tells us about 2012Q2 vis a vis 2008Q4. First, I look to several measures in addition to the standard real GDP indicator. Note that I divide by population, in order to express the variables in per capita terms (thereby controlling for population growth). In the graph below, when the series lie above the horizontal line at zero, then the indicator exceeds its level at 2008Q4. The numerical value can be interpreted as the percentage deviation from 2008Q4 levels, in log terms.

'The Decline of the Middle Class' - Barry Ritholtz presents several graphs showing "critical evidence on the decline of the middle class" in recent years, and then remarks: One final note: Despite the overwhelming data, some people dispute that the middle class has been struggling or that they have suffered any sort of set back in income or purchasing power. The Brookings Institution’s Scott Winship maintains that “conventional accounts of how the broad middle is doing systematically overstate economic insecurity.” If one wants to argue exactly how far the Middle Class has fallen behind, and make the claim that the MSM has overstated it, well, that is a legitimate debate. I think its a losing argument, but, hey, its hardly incredible to say conventional wisdom overstates something.On the other hand, the American Enterprise Institute fallaciously makes the less than credible or honest claim that there has been “considerable improvement in material well-being for both the middle class and the poor … over the past three decades.” This is the sort of statement that you expect from a group that has given up any pretense towards reality. The AEI has moved from intellectually bankrupt to utterly dishonest, and I assume anything I read from them, on any subject, are willful lies, misinformation and propaganda.

How We Can Bring Millions of Americans to the Middle Class: The United States needs to be reimagined. A recent study from the Pew Research Center tells us that in economic terms the middle class "has suffered its worst decade in modern history." It's shrinking. With jobs scarce, wages declining and the nation's wealth concentrating ever more intensely at the top, the middle class has shrunk in size for the first time since World War II.  We've known for many years that despite hard work ordinary Americans have had trouble making ends meet, paying their monthly bills for food, shelter and clothing. It has become ever more difficult for families to find the funds necessary for decent childcare, and to send their children to college, and to prepare for a comfortable retirement. According to Pew, a mere 11 percent of Americans now describe themselves as very optimistic about the country's long-term economic future. What we're experiencing is nothing less than an historic generational decline in living standards. We've obviously been doing something very wrong. My colleagues at Demos have come up with a compelling blueprint for turning this disastrous situation around.  Try to imagine a nation in which there are good jobs for all who want and need to work; a nation in which all students who want a college education would be able to afford it; a nation in which predatory lending is prohibited and banks and other financial institutions are not permitted to charge usurious interest rates; a nation in which the middle class is once again expanding at a rapid rate and the ranks of the poor are vanishing.

First Black President Can’t Help Blacks Stem Wealth Drop - The nation’s first African-American president hasn’t done much for African-Americans. Richard Brown, 40, a U.S. Army veteran and college graduate, lost his job amid the 2008 credit crunch. The employment roller coaster punched a hole in his bank balance and left his net worth “sitting at zero,” says the married father of two. “We’re easily three years behind where we would have been,” Brown says.  So are millions of other African-Americans whose tenuous hold on prosperity has slipped since President Barack Obama reached the White House. The recession and anemic recovery, while painful for most Americans, have been especially punishing for blacks, stripping jobs, homes and wealth from people who have historically lagged.  “These groups have been very, very hard hit, not only in the recession, but in the recovery that followed,” says economist Gary Burtless of the Brookings Institution. “Things have been very grim.”  Today’s 14.1 percent black unemployment rate is almost twice the 7.4 percent white rate, and the racial gap -- after narrowing from 2005 to 2009 -- has widened since the recession’s June 2009 end. At Obama’s inauguration, 7.1 percent of whites were jobless compared with 12.7 percent of blacks.

It’s time for a Debt Holiday, America - Do you remember the buzz around Washington this time last year when a bunch of corporations were pleading – with high-priced lobbyists – to Obama and Congress to pweeeease give them a tax holiday? They claimed that allowing them to go tax-free on trillions of dollars in profits would “regenerate the economy”, “create jobs” and all of those other carrots the 1% loves to dangle in front of us. You did it in 2004, they exclaimed, now just do it again one more time and we promise we’ll pay our fair share and not stuff our money in Cayman or Swiss accounts or any of those naughty things. In 2004 it failed. After slashing taxes to nearly nothing for them, companies returned the favor by slashing thousands of jobs. In 2011, Congress was smarter and finally played tough dad for a minute. No holiday for you. Now it’s 2012. We (the 99%, I mean) are gasping for breath as we just-barely stay afloat on our sea of personal debt: college, car, house, credit card, you-name-it-we’ve-got-it debt. Our government sent the lifeboat, but to the wrong sinking ship. So let’s just say it, people: It’s not time for a corporate tax holiday. It’s time for a debt holiday. Let’s stop paying our student loans. We’ll start with 3 months. See how the banks like that. Call it a National Debt Holiday. Watch consumer spending rise. Watch jobs created. Watch rents get paid. In some markets they call that a “correction”. Our demands cut off their supply.

Why the Minimum Wage Doesn't Explain Stagnant Wages - Until the mid-1980s, only a single state – and one of the smallest in population, Alaska – had set a minimum wage higher than the federal minimum. But with the federal minimum remaining unchanged at $3.35 an hour for most of the 1980s, more states began to set higher floors for wages. By the end of the 1980s, a dozen states had their own, higher minimum wage. By 2008, 32 states did. The number has fallen to 18 today, because the federal minimum has risen since 2008 – it’s now $7.25 an hour – and overtaken some state minimums, but the 18 include several large states. In Illinois, the minimum wage is $8.25. In California, it is $8. In Florida, it is $7.67. As a result of these state minimum wages, the federal minimum is not as important as it once was. It applies to less than 60 percent of the population. In this space, we have been examining the causes of the American income slowdown – over both the last decade and the last generation – and our recent list of 14 possible causes included the stagnation of the federal minimum wage. That stagnation certainly matters: in 1968, the minimum wage was 45 percent higher than it is today, adjusting for inflation. But I think it’s fair to say that the minimum wage is not one of the most important causes of the income slowdown. The minimum wage instead belongs on a list of secondary causes. It probably did play a substantial role holding down the pay of low-income workers in the 1980s and in increasing inequality, as research by David S. Lee and others has found. But its role seems to have been much smaller in the last two decades.

Clinton Touts Welfare Reform. Here's How It Failed. - In the midst of his defense of Obama, not one to miss a chance to give himself a little back-pat, Clinton said of the ’90s reforms: “This is personal to me. We moved millions of people off welfare. It was one of the reasons that in the eight years I was president, we had a hundred times as many people move out of poverty into the middle class than happened under the previous twelve years, a hundred times as many. It’s a big deal.” But while welfare reform may have initially reduced poverty, it left those still living at that income level worse off than they were before, reaching fewer of them and giving those it did reach less. And our poverty rates didn’t stay low. When they began to rise again, the program couldn’t offer them the support it used to. The recession has been a crystal clear, and incredibly painful, demonstration of this fact. Dylan Matthews has already taken a look at the claim that millions moved off of welfare’s rolls and poverty was reduced. As he writes, the program’s numbers have steadily fallen since 1996: “Since reform, the rolls have shrunk from 12.6 million to 4.6 million.” The number of people in poverty “fell by 6.4 million people under Clinton, whereas the number of people in poverty increased by 7.4 million between 1981 and 1993 (and the rate went from 14 percent to 15.1 percent).” There is a catch, though. “But it’s worth noting that welfare reform led to a huge spike in extreme poverty, as defined as the number of households making under $2 a day,” Matthews adds.

Could You Raise Your Kids on Less Than $15,000 a Year? Millions of Parents Are Forced to Learn How -In this country of unsurpassed wealth, it's an abomination that the power elites are casually tolerating poverty pay as our wage floor. How deplorable that they can actually juxtapose the words "working" and "poor" without blinking, much less blushing... or barfing! Nearly four million Americans are being paid at or below the desiccated federal minimum wage of $7.25 an hour. For a single mother with two kids, that's $4,000 a year beneath the poverty level. Upwards of 20 million additional Americans are laboring for just a dollar or so above the minimum--still a sub-poverty wage. Where are the ethics in a "work ethic" that rewards so many with paychecks that deliberately hold them in poverty? Today's minimum was passed in 2007, and the meager purchasing value it had even then has since been devoured by inflation. Consider the kind of life $7.25 buys. At that rate a full-time worker is taking in only $1,250 a month, before payroll taxes. In most places--even if you're single with no children--try stretching that over the basics of rent, utilities, groceries, and gas. Need car repair? Lose your job? What if you get sick? Good luck. To hide the ugliness, corporate politicos and front groups have draped a thick tapestry of myths, lies, and excuses over the miserly wage--in fact, only 6.4 percent of these low-wage employees are teen part-timers. Contrary to the stereotype, the typical minimum-wage worker is an adult, white woman (including many single moms) whose family relies on her paycheck.

Food-Stamp Use Climbed to Record 46.7 Million in June, U.S. Says - Food-stamp use reached a record 46.7 million people in June, the government said, as Democrats prepare to nominate President Barack Obama for a second term with the economy as a chief issue in the campaign. Participation was up 0.4 percent from May and 3.3 percent higher than a year earlier and has remained greater than 46 million all year as the unemployment rate stayed higher than 8 percent. “Too many middle-class families who have fallen on hard times are still struggling,” Agriculture Secretary Tom Vilsack said. “Our goal is to get these families the temporary assistance they need so they are able to get through these tough times and back on their feet as soon as possible.” Food-stamp spending, which more than doubled in four years to a record $75.7 billion in the fiscal year ended Sept. 30, 2011, is the U.S. Department of Agriulture’s biggest annual expense. Republicans in Congress have criticized the cost of the program, and the House budget plan approved in April sponsored by Representative Paul Ryan of Wisconsin, the party’s vice- presidential nominee, would cut expenses by $33 billion over 10 years.

June Foodstamp Recipients Hit All Time High As Three Times As Many Americans Enter Poverty As Find Jobs -- Following a brief period in which it seemed that US foodstamp recipients may have peaked, with those living in poverty maxing out at 46.514 million in December 2011, and then declining modestly for the next few months, June saw a new surge in those Americans living in poverty and thus eligible for foodstamps, with 173,600 new entrants into the system, bringing the total to a new all time high of 46.670 million and once again rising fast. Furthermore, with subsequent emergency events affecting the heartland due to the drought, the administration has made sure even more Americans will be eligible going forward. As a result expect the July and August numbers to promptly surpass 47 million on their way to the psychological resistance level of 50 million. Indicatively, the 173,600 increase in Foodstamps recipients in June was three times greater than Americans finding jobs (64,000, most of which part-time) according to the BLS. Finally, a new record was also breached for American households on foodstamps, which now hit 22.4 million, an increase of 106,298 households. The average benefit per household decline once more, this time to $276.5. Not an all time low, but just above it.

New report puts a harrowing face on the plight of N.J.'s working poor |- You stroll past them in the grocery store, sit behind them at the gas station, stand next to them at your kid’s soccer game. They look like you, talk like you, fuss over their children like you. They have skills and jobs like you, and they seem just fine. They are security guards, child care workers, bank tellers and cashiers. But they are not fine. They live one broken transmission, one layoff, one illness away from ruin. And they exist in numbers you probably never dreamed of. In an unprecedented new study, five years in the making, the United Way of Northern New Jersey presents a harrowing picture of the state’s working poor. The report, called ALICE (Asset Limited, Income Constrained, Employed), is a study of the true face of financial hardship in New Jersey, authored by Stephanie Hoopes Halpin, the director of the New Jersey DataBank at Rutgers University. This is no rehash of government poverty statistics. It is, instead, a disturbing look under the hood at exactly what it takes to survive in the Garden State, who can — and cannot — make ends meet. A look at those straining and scraping to get by while living on the edge of financial collapse.

N.J. food pantries are depleted - The shelves at area food banks are getting empty -- and summer is to blame. Kathleen DiChiara, president of the Community Food Bank of New Jersey, says many people on their summer vacations don't think about the poor and the hungry. She says food supplies are down now while the demand is increasing. "It's not letting up," DiChiara said. "If there's a recovery the people that we're seeing are not experiencing it." DiChiara says free and reduced-cost breakfast and lunch programs for students returning to school won't significantly ease the strain on food banks. "Yes the kids are getting fed in school, but these are families that are struggling. They're sill needing help with food," she said.

A federal lifeline shrinks as the Pinellas breadline grows - A year ago, the food bank at Religious Community Services got 2.3 million pounds of government food for needy people in the area stretching from St. Petersburg to Tarpon Springs. The allotment has plummeted this year, sending Pinellas County food banks, soup kitchens and food pantries scrambling to line up additional resources, dipping into reserves and, in at least one instance, closing until shelves can be refilled. There's more bad news. Recently RCS heard that the mid September food shipment from the U.S. Department of Agriculture will not be arriving. And Pinellas agencies have learned that they are out of the running for almost half a million dollars in federal emergency food and shelter assistance to help the needy. The USDA Emergency Food Assistance Program, which supplies staples like pasta, peanut butter and beans to those that assist the poor, benefited from stimulus funding in 2009 and 2010, but supplies have dropped in the last year or so.

Silver tsunami - Elder advocates and social service providers say elderly people across the nation are having a tougher time making ends meet. Nationally, food insecurity among elderly Americans increased by 78 percent between 2001 and 2010, according to the Meals on Wheels Association of America. In 2010, nearly 15 percent of all American seniors weren't sure from day to day if they'd have access to food. Missoula Aging Services, through the Meals on Wheels Program, serves homebound seniors and those who can't shop for or prepare food. Last year, the nonprofit provided 63,900 meals to people over the age of 60. Montana is positioned to be especially hard hit by a glut of graying Baby Boomers, also known as the Silver Tsunami. The U.S. Census projects that a quarter of the state's population will be composed of elderly people by 2030. That's up from about 15 percent in 2010. According to the AARP, 18 percent of Montanans 50 years and older now live below the poverty level.

Republicans Have Greater Access to Basic Necessities - Gallup - Republicans are more likely to have access to basic necessities than are Democrats or independents. Republicans' 85.5 Basic Access Index score -- which accounts for their access to 13 different items essential to good wellbeing -- surpasses the 82.0 for Democrats and 79.8 for independents. These findings are based on more than 400,000 interviews conducted from January 2011 through March 2012 with American adults as a part of the Gallup-Healthways Well-Being Index. The Basic Access Index is a 13-item measure of Americans' access to basic necessities, ranging from food and shelter to clean water and healthcare. To classify respondents by political party, Gallup asks: "In politics, as of today, do you consider yourself a Republican, a Democrat, or an independent?" Some of the differences among Republicans, Democrats, and independents reflect the varying demographic and socioeconomic makeup of these groups. For example, Democrats tend to be more likely to have lower incomes than Republicans. However, although the differences shrink after controlling for all major demographic characteristics, they are not entirely eliminated. Political party identification appears to have an independent effect on the access measures above and beyond the impact of standard demographics. 

New York State Employment Situation in Graph Form - With jobs data coming out tomorrow, let's take a look at the current situation in New York, the country's second most populous state. Here is a chart courtesy of Tim Wallace. The chart shows second quarter data from 2012 vs. prior years. In table form, New York employment looks like this. Wallace Writes ... Recently we have heard how great the city of New York is doing employment wise. Suffice it to say if the city of New York is doing so wonderfully, the rest of the state must be hurting for certain. The data you are going to see on these charts is the foundation for the quarterly covered report. As you are aware covered employees are those with unemployment benefits. A high percentage of workers without benefits are self-employed. In this chart you will clearly see the impact of both the 2001/2 recession and the more recent recession. The black line is the total unemployed, not just those covered by insurance. For the past four years, New York State unemployment has remained well above the numbers leading into the recession, and in fact 45.8% on average higher than the 2001/2 recession impact. Thus, I cannot see where the "recovery" is. In fact, 2012 is the worst year in history for New York.

Which U.S. Cities Are Most, Least Racially Diverse? - A new study released today by the US2010 Project at Brown University shows how the country has become much more diverse at the metropolitan level. The report scores the diversity of the nation’s metro areas by how evenly a place’s population is spread across the five racial groups: Non-Hispanic whites, Hispanics of any race, African-Americans, Asians and an “other” category that is largely made up of Native Americans, Alaska Natives and people of two or more races. A perfectly diverse place would have a population with exactly 20% of each category, and would get a diversity score of 100 on the diversity scale. In 2010, the most diverse metropolitan area in the country, Vallejo, Calif. had a score of 89.3 and the population was 41% white, 24% Hispanic, 15% Asian, 14% black, and 6% other. As the chart below shows, the big economic centers remain very diverse: The San Francisco, Washington, D.C., New York, Houston and Los Angeles metropolitan areas were all among the top 10 most diverse places in the U.S. But many smaller places are high up on the list. Vallejo, Calif., just north of San Francisco was the most diverse metropolitan area in the U.S. Meantime, some of the least diverse places are almost entirely Hispanic: The least diverse metropolitan area was Laredo, Texas, which is 95.7% Hispanic.

America’s Coming Infrastructure Disaster - The damage wrought by Hurricane Isaac, coming on the seventh anniversary of the flooding that decimated New Orleans and stunned a nation, serves as a not-so-subtle reminder of how much infrastructure matters to our safety and our economy.This time the levees held, thanks in part to the $14.5 billion a shamed federal government was forced to invest following the 2005 disaster. But for decades, America has scrimped on taking care of the public furniture, endangering people and weakening the economy as bridges rust, roads crumble, dams weaken, and water mains leak. The sudden collapse of an Interstate highway bridge in Minneapolis in 2007, killing 13, and the cracks that shut down the Sherman Minton Bridge connecting Indiana and Kentucky last year (it reopened in February) are warning signs of widespread, but hidden, dangers lurking all around us.Even greater threats can be found among the decrepit corporate-owned infrastructure, including high-pressure oil and natural-gas pipelines that can explode without warning, electric power poles long past their replacement dates, and a telecommunications system that is far less reliable today than it was two decades ago—despite customers paying more than a half-trillion dollars for upgrades.America’s infrastructure gets a grade of “D” from the American Society of Civil Engineers, which recommends that we spend $2.2 trillion on repairs and maintenance.

Why does mass transit in the U.S. cost so much more to build than in other countries? - In 1929, New York City decided to build a subway line along Second Avenue at a cost of $1.3 billion in 2012 dollars. It’s due to be completed in 2016 at a cost of some $17 billion. Why so expensive? Why so slow? Because it’s being built in America. (Not that they had much choice on that.) In a piece at Bloomberg, Stephen Smith explains why American mass transit is so much more expensive than elsewhere in the world. In short: the powerful and unaccountable private contractors, a trend toward extravagant station design, a failure to demand quick timelines, and a surfeit of consultants. This will not be news to the good folks working on the subway line. In February, the federal government announced that the first stretch of the subway line would indeed be going over budget, and would take a year longer than expected.

Harrisburg's eye-popping debt total is just one piece of city's bleak financial puzzle - It’s almost impossible to say exactly how much money the elected and appointed officials of Harrisburg have borrowed. Missing financial audits, complicated transactions and intertwining finances create a labyrinth of money that stretches decades into Harrisburg’s history.  At best estimates, based upon reviews of independent reports and audited financial statements, the amount of debt owed by the city and its affiliated entities — with interest — stands somewhere north of $1.5 billion. That’s roughly $30,285 for each of the 49,528 men, women and children living in the city and almost twice the income of the average city resident.  While the amount of debt is eye-popping, it is only one piece of the jigsaw puzzle that is the city’s bleak financial background. It does not account for past-due debt payments or unfunded pension and healthcare obligations. Nor does it include the estimated annual deficits in the city’s and school district’s budgets, which this year are so far estimated at $6.8 million for the city and at least $7 million for the school district, even with drastic cuts such as eliminating kindergarten.

    San Bernardino Considers Reducing Police And Fire Protection Due To Bankruptcy - The bankrupt city of San Bernardino is considering a plan to reduce police and fire protection in order to cut $18 million from its budget. At least 100 employees from the San Bernardino police and fire departments could lose their jobs if the controversial plan is approved Tuesday night. “Those departments are 75 percent of the budget,” said Councilman Rikke Van Johnson. “To get where we need to be, you have to go in there and make some dollar adjustments.” Last week, the police and fire departments made their budget proposals to the city council. A police proposal involved cutting a lot of “non-sworn positions.”

    Your Taxpayer Dollars At Work: The Police Get An Upgrade For Close "Restless Native" Encounters -- Just in case America's debt slaves, who as of today can congratulate themselves on a brand spanking new 16 handle in front of the 12 zeroes that frame their public debt obligation, did not have enough to celebrate, here is what happens when the local Police station also wants to celebrate something brand spanking new: in this case the new and improved SWAT-H vehicle. This is merely the latest and greatest entrant in the "gentrification"-vehicles that taxpayer dollars are buying in order to be more effectively suppressed as one after another pillar of this country's democracy is taken down. And, for your viewing pleasure, here are the highest crime rate regions that will likely get their 'fair' share of attention from this perriwinkle-blue camper-van of enforced docility. The Heat-Armor SWAT-H in all its glory...

    DOJ Accuses San Diego Public Library of Discrimination - The Sacramento Public Library Authority partnered with Barnes and Noble on a trial basis to provide a NOOK e-book reader at each of its 28 libraries, pre-loaded with 20 books in a variety of genres.  Sure seems like a sensible,  innovative, market-based, consumer-friendly option now that so many people do their reading using Kindles, NOOKs, and iPads instead of print copies.    So what's the problem? According to the Department of Justice (DOJ), the pilot e-reader program violates the Americans with Disabilities Act because it discriminates against blind patrons of the library, because NOOK e-readers are "inaccessible" to the blind.  The library reached a settlement that requires it to purchase iPod touch and iPad devices, which read e-books aloud with a computerized voice.  DOJ has also directed the library not to buy any additional e-readers that exclude blind and it requires the library to train its staff on ADA compliance. Read the whole story here (CNS News) or here (Sacramento Bee).  Here's the full text of the settlement and the DOJ press release.

    Bankrupt San Bernardino Closes Libraries to Close Deficit - San Bernardino, California, the second-largest U.S. city to enter bankruptcy, will close its branch libraries, dismiss school crossing guards and buy fewer bullets while under court protection. The reductions are part of a plan to reduce a budget deficit by two-thirds, to $16.4 million from $45.8 million, approved by the City Council yesterday. The council backed away from some cuts in the Fire Department, meaning that the city may not realize all of the savings outlined in the proposal until those cuts or alternatives are adopted. Three municipalities in the largest state by population, led by Stockton, have sought court protection from creditors since the end of June. California cities suffered steep declines in tax revenue after the recession depressed property values and reduced retail sales. At the same time, local governments are burdened with higher employee costs including pensions.

    Calif. Legislature Approves $55M Bailout Bill To Save Inglewood School District --The Calif. Legislature approved a $55 million emergency bailout bill Friday to keep the Inglewood School District afloat. The plan includes a $29 million emergency loan and another $26 million in lease funding through a state developmental bank. If the bill is signed into law by Gov. Jerry Brown, a state appointed administrator would run the mismanaged school district. The school board would then act as an advisory body. According to the bill’s author, the problem for Inglewood schools could be traced back to a 35 percent drop in enrollment. Many students left district schools for charter schools, among other issues.

    How the invisible hand points students to a job - First year university and college students look so terribly lost during the first few days of school because, in fact, they are. And quite understandably so: finding the right place to be at the right time is no small matter in a sea of thousands. But surely the really difficult thing to figure out is not where you should be, but rather what you should be? Engineer or electrician? Anthropologist or accountant? Lab technician or teacher? Make a wrong turn in these hallways and you will pay for years. But so will the rest of us. The economy needs only a certain number of actors and teachers, and right now probably a lot more electricians. If the post-secondary system gets this mix wrong, the consequences are unnecessarily high levels of structural unemployment, and lower economic growth. But ultimately it is students themselves who collectively decide how many stage-managers, human rights activists, and biochemists will appear on the labour market in four or five years time. Can we really trust eighteen years-olds to make these decisions?

    Liberal education - One of the most fundamental and distinctive aspects of the American approach to undergraduate education is the priority given to making sure that students receive a broad “liberal education.”  What this phrase means has nothing to do with “liberal politics”; instead, it is a theory of education that holds that the undergraduate student needs to be exposed to a wide range of ideas and perspectives from all the liberal arts: the humanities, history, mathematics, the natural sciences, and the social and behavioral sciences.  The student is required to take a broad range of courses that provide exposure in all of these areas.  He or she also has a major subject – an area of greater specialization; but the course work in the major discipline is usually only about twenty-five percent of all courses.  So the American system usually emphasizes breadth as an important academic value, and specialization in a discipline (biology, sociology, literature) receives somewhat lower priority.  Even engineering education – traditionally a fairly specialized curriculum – requires significant exposure to courses in the humanities and social sciences.  What are the reasons for this educational philosophy? What advantages does it offer in helping to develop the intellectual capabilities of the student?  Other national systems of higher education place the balance somewhat differently.  For example, in France and Germany it is expected that university students will have received a broad education in secondary schooling, and that the university is a place for specialized education in a discipline. 

    Your GPA on Facebook - Here, researcher Reynol Junco has published a study that indicates that too much time spent on Facebook lowers the Grade Point Average (GPA) of college students. Finding that the average college students spends an average of 106 minutes (1 hour, 46 minutes) on Facebook each day, Junco documented that each additional 93 minutes per day beyond that level lowers a college student's GPA by 0.12.  That may not seem like much, but when the maximum GPA that can be earned at most universities is just 4.00, tenths of a point matter. That's especially true for students with GPAs in the margins between major letter grades, where missing the mark might mean potential employers pass over their résumés.  The reason why that would be the case is that time spent on Facebook is stolen from time available for study. Or sleep. Or physical activities. Or time that if used for other productive purposes has been noted to provide a positive effect on student grades.

    Crazy Country: America Spends More on Prisons Than On Higher Education In 2011, Wisconsin state spending quietly hit a milestone: For the first time, the state budgeted more taxpayer dollars for prisons and correctional facilities than for the University of Wisconsin System. - Are we insane? How can we afford to spend more on prisons than on higher education in our increasingly competitive knowledge-based world? Is this just an isolated case where a few Ryan Republicans hijacked the Wisconsin state budget, or are we looking at a national trend? To check out the fluke theory, let’s look at California, which along with Wisconsin has (or had) a higher education system that was the envy of the world. Our answer comes from data requested by the Bay Citizen from the Department of Finance and it ain’t pretty. “The budget for the California Department of Corrections and Rehabilitation increased from about 3 percent of the state's general fund in 1980 to 11.2 percent for this fiscal year… Meanwhile, funding for [higher education] dropped from 10 percent of the state's general fund 30 years ago to about 6.6 percent this fiscal year. Or as Governor Arnold Schwarzenegger put it in 2010, "Spending 45 percent more on prisons than universities is no way to proceed into the future."  Indeed, what does it say about our country? Is this a national trend? State spending on corrections is growing six times faster than state spending on higher education, according to a 2011 report commissioned by the NAACP. Little wonder that state dollars on prisons will soon outpace state spending on higher education in every state of the union.

    The Ten Most Dangerous Things Business Schools Teach MBAs - Forbes: We’re constantly told by colleges and grad schools that the unemployment rate is 4% for those with college degrees and over 14% for those with only a high school education. We’re also told that, if some education is good, more is better. So, if you are smart enough to graduate with a college degree, you must be even smarter if you get a grad school degree. Of course, there are lots of grad school degrees you can take, but most of us would say that MBA is probably your best bet to maximize your future income stream. A whole industry of business schools and test preparation companies have been born to help you get that coveted Master of Business Administration But is it worth it?  Listen, I have a Master’s degree from Columbia Business School.  I love the school, the professors, and the friends I made there.  However, there’s a lot of dangerous stuff you can pick up along the way to getting your degree.  Here are the 10 most dangerous things your professors and fellow students might teach you while you study to get that MBA degree.

    Student loan delinquencies soar (right after OWS protests end) leaving the taxpayer on the hook - Take a look at the chart below. It represents the total consumer debt outstanding in the US. What stands out? That's right, student loans. Mortgage balances are moving lower, home equity and credit cards look stable or declining slightly, car loans have been constant for years. Yet student loan balances are rising. But that is just one side of the story. Not only do we have rapidly rising student loan balances but we are also looking at an unprecedented spike in delinquencies - the highest increase on record.This may be just a coincidence (although there is some anecdotal evidence out there), but around the time the Occupy Wall Street protests ended, numerous borrowers around the country chose to just stop paying - all to punish the "fat cats" of course. Given that it takes 30 days after a missed payment for loans to be called "delinquent" and 90 days for the "seriously delinquent" label, the chart above lines up quite well with the OWS movement. Whatever the case, this trend is quite troubling because the US taxpayers are on the hook. The Obamacare bill has a less well known component in it called the Student Aid and Fiscal Responsibility Act. It makes the US government the sole originator of student loans. That's why the loans owned directly by the federal government have spiked since 2009 (chart below).

    Debt is a 4-letter word as more students say no to college loans - Debt is scaring some South Florida students: More are saying "no thanks" to taking out college loans. Broward College, in fact, is seeing a 40 percent drop in federally subsidized loans taken out this fall – after students go through a mandatory debt management workshop and hear about what faces them once they start making payments.A new state poll is showing this new aversion to debt. Nearly two thirds of 524 recently polled Floridians, ages 18-29, said they prefer to have more full-time jobs available upon graduation than to have lower student loan interest rates, according to a survey by the nonprofit Generation Opportunity. In fact, 29 percent said they are delaying or – or not even getting -- more education because of the bad economy, according to the group that advocates for young people. Many fear they won't be able to find a job to pay off their student loans.

    Federal government push to collect on student loans amid bad economy fuels growth in filings - William Milner got an unwelcome memento from his college years: It was a lawsuit filed by the U.S. government, demanding that the 57-year-old Delray Beach resident repay decades-old student loans. And the government doesn’t just want back the $1,660 Milner borrowed. With interest and attorney fees, Milner’s debt now stands at $7,746. So far this year, the federal government has filed 139 suits in U.S. District Court in South Florida seeking to recover money from student loans that are years, often decades, old. At that pace, it is likely more than 200 lawsuits will be filed before the year’s out. By comparison, in 2008, 82 lawsuits were filed in the nine-county district that includes Palm Beach County. “What you’re seeing in South Florida is what’s happening on a broad scale nationally,” said Michelle Asha Cooper, president of the Institute for Higher Education Policy in Washington, D.C. In 2006, two years before the crippling recession began, the government filed 918 lawsuits against people across the nation who defaulted on student loans. Three years later, 2,596 lawsuits filed. Last year, the number more than doubled to 5,393, she said. “It’s a reflection of our broader economic woes,” Cooper said. People who are out of work can’t afford to repay their loans. And the government, strapped for cash, needs the money more than ever. If reforms aren’t enacted, she and others said, the unpaid debt will continue to grow. 

    Student Debt Malinvestment - Until 1976, all student loans could be discharged in bankruptcy. Until 1998, student loans could be discharged after a waiting period of five years.  In 1998, Congress made federal student loans nondischargeable in bankruptcy, and, in 2005, it similarly extended nodischargeability to private student loans.  Since 2000, student loan debt has exploded, and private student loans have grown even faster. This presents a bigger problem than simply sending people to college who end up unemployed or underemployed. It means that capital is being misallocated. If debt for education cannot simply be discharged through bankruptcy, as other debt can be, private lenders will tend toward offering much more of the nondischargeable debt, and less of dischargeable debt. This means that there is less capital available for other uses — like starting or expanding a business. If the government’s regulatory framework leans toward sending more people to college, more people will go (the number of Americans under the age of 25 with at least a bachelor’s degree has grown 38 percent since 2000) — but the money and resources that they are loaned to do so is money and resources made unavailable for other purposes.

    Students, Beware: Private Student-Loan Companies Are Not Your Friends -- This year, as these students prepare to sign away their futures, they would do well to consider a report released by the Consumer Financial Protection Bureau (CFPB). On July 20, the agency designed by Massachusetts Senate candidate Elizabeth Warren released “Private Student Loans,” a devastating expose of the $150 billion private student loan industry, one of the banking world’s Goliaths. The report is both an official account of private lenders’ underhanded “subprime-style” tactics as well as a sharp warning against taking out private loans that put students at risk of financial ruin. As described in the report, the student-loan industry is a villainous enterprise, set on scamming some of the country’s most eager and vulnerable citizens. Anchored by lending giants like Sallie Mae and bolstered by some for-profit colleges that lend to their own students, it bears all the hallmarks of some of the last decade’s other most predatory industries. Much like the mortgage industry, it used cheap-credit tactics to prey on low-information borrowers, typically students of color, effectively quadrupling in size between 2001 and 2008. And like the mortgage industry, it collapsed in the recession, leaving many students drowning in debt. Today, more than $8.1 billion worth of private student loans are in default.

    Most American College Students Don’t Borrow To Pay Tuition - Andrew Sullivan points to this Sallie Mae survey of how American undergraduates (which they define as students between the ages of 18 and 24) pay for their college tuition. The results are not what you’d expect given all the attention given to rising college tuition and student loans:

    • 83% of college students and parents strongly agreed that higher education is an investment in the future, college is needed now more than ever (70%), and the path to earning more money (69%).
    • Drawing from savings, income and loans, students paid 30% of the total bill, up from 24% four years ago, while parents covered 37% of the bill, down from 45% four years ago.
    • The percentage of families who eliminated college choices because of cost rose to the highest level (69%) in the five years since the study began. Virtually all families exercised cost-savings measures, including living at home (51%), adding a roommate (55%), and reducing spending by parents (50%) and students (66%).
    • In 2012, families continued the shift toward lower-cost community college, with 29 percent enrolled, compared to 23 percent two years ago.
    • 35% percent of students borrowed education loans to pay for college: 25% borrowing federal loans only, 9% using a mix of federal and private loans, and 1% tapping private loans only.

    How an aging population will kill the American Dream - The American dream is coming to an end and it’s the nice, grey-haired lady next door who is to blame, economist Laurence Kotlikoff told a banking conference in Zurich this week. That dream of prosperity – owning a home, building a business, perhaps even striking it rich – was a tantalizing prospect for generations of Americans. But it’s fading quickly thanks to a critical shift in demographics towards a much older population coupled with what Mr. Kotlikoff terms the “Ponzi” retirement scheme of recent decades. “The demographic change because of the level of benefits that the elderly are being told they’re going to receive, this demographic change is going to drive countries broke, particularly the U.S.,” warned Mr. Kotlikoff, a professor at economics at Boston University.The dramatic shift in demographics isn’t taking anyone by surprise. Birth rates have come down in developed countries like the U.S., while life expectancy has increased significantly over the past 50 years. The number of people over the age of 65 in the U.S. will rise to 20 per cent in 2050 from 13 per cent in 2009. Even the elderly will grow older: Mr. Kotlikoff highlighted projections that there will be 835,000 centenarians in the U.S. by 2050, enough to inhabit a city the size of Washington or San Francisco.

    Do Mandates or Tax Subsidies Do a Better Job of Boosting Savings? - Most policymakers and economists agree that Americans don’t save enough. But which government policy does a better job encouraging saving and investment: tax subsidies such as 401(k)s, or mandatory savings systems such as traditional defined benefit pensions or auto-enrollment defined contribution accounts? An important new study finds that if the goal is boosting total savings–as opposed to merely raising retirement savings—mandatory programs win hands down. Tax incentives do increase retirement savings, but largely by encouraging a limited number of sophisticated, high-income people to shift funds from taxable accounts to tax-subsidized retirement plans. This conclusion isn’t new. For instance, my Tax Policy Center colleague Eric Toder looked at these alternatives in a 2009 paper.  But the new research is especially important because it is based on a huge sample –45 million observations—and on a series of government policy changes that tested whether tax subsidies or mandates were more effective.The downside is that the study was not done on changes in U.S. policy—it measured reforms in Denmark. In addition, the nature of the changes themselves may complicate the results. Still, it is powerful evidence of how these incentives work.

    Social Security is not welfare - In general, I share some of the concerns of Nicholas Eberstadt, who writes in the Wall Street Journal lamenting the explosion of entitlement spending (though I also agree with this response by William Galston).BUT, I think Eberstadt makes a big mistake in lumping Social Security in with other entitlement spending. Social Security involves small transfers from rich to poor, but most of it is just a forced savings program, like a mandatory-enrollment defined-benefit pension.Eberstadt writes: As Americans opt to reward themselves ever more lavishly with entitlement benefits, the question of how to pay for these government transfers inescapably comes to the fore. Citizens have become ever more broad-minded about the propriety of tapping new sources of finance for supporting their appetite for more entitlements. The taker mentality has thus ineluctably gravitated toward taking from a pool of citizens who can offer no resistance to such schemes: the unborn descendants of today's entitlement-seeking population. But Social Security, which comprises over a quarter of entitlement spending, is not a "treasure chest of government-supplied benefits", nor does it represent a "taker mentality". The reason is that Social Security benefits are related to contributions - the more you pay in Social Security taxes, the more you get in Social Security benefits.

    The Greenspan Commission Didn't Save Social Security - The conventional wisdom about the Greenspan Commission is that it beavered away diligently for several months, produced a bipartisan plan to save Social Security from bankruptcy, and Congress passed it. Hooray! But Davis says this version of events is 180 degrees backward: Mr. Greenspan and his fellow commissioners had met for months and were secretly deadlocked, despite optimistic public statements. Members of Congress were uniformly terrified of raising payroll taxes or cutting benefits, both of which obviously had to be part of any real solution. Then, one late afternoon, Pat Moynihan (D-NY) walked across the floor to talk to Senate Finance Committee Chair Bob Dole (R-KS). I couldn't hear what they were saying, but it didn't take a rocket scientist to realize the topic was Social Security. They cut the deal in broad outline right there, fed it to Mr. Greenspan, and left the details to his Commission. So at the last minute, Republicans and Democrats locked arms around a plan "to save Social Security" by raising the payroll tax, to shave benefits, and to very gradually raise the retirement age on future retirees. President Reagan endorsed it, and the rest was history.

    Current Law Social Security: "Scheduled" vs "Payable" Benefits - Under current Social Security law future benefits are set by a formula. For a given individual this formula starts from income history but if we take total benefit payouts in the aggregate we have cost totals primarily driven by employment numbers, Real Wage, and CPI. And this aggregate number represents 99% or so of the category that the Report Tables label as "Cost". These projected future benefits are in turn offset by projected income deriving from one main and two minor sources, that is FICA payroll tax, tax on certain benefits, and interest on Trust Fund assets, with the totals being labeled in the Tables as "Income". In an ideal world the trend of projected Income would exceed projected Cost in just the amount needed to maintain a specific, relative level of reserves. This state of affairs for any given year or set of years is called "actuarial balance" and if projected to continue beyond the 75 year actuarial window, and with an upward trend is called "sustainable solvency". As it turns out current mid-range projections of future employment, Real Wage, CPI, payroll income, tax on benefits, and interest on Trust Fund assets do not project "sustainable solvency", instead there is a projected gap between total income and accumulated assets available to pay out future benefits and total projected costs. That is if we simply assume ALL mid-range projections, something that is labeled in the Reports "Intermediate Cost"  and follow current law that requires payment of full "scheduled benefits" as long as total income and assets allow those benefits to be "payable", at some point the latter level falls below the former. The state in which "scheduled benefits" exceeds "payable" can be called "insolvency", or working up the shrillness index "crisis" or even "bankruptcy".

    Reply to Charles Balhous on Social Security finances -- (Dan here...Dale Coberly replies to this article (Is it Becoming Too Late to Fix Social Security's Finances?) by Charles Blahous).  Blahous, You do not seem to grasp how small "4% of the tax base" is,  or how very reasonable it would be to pay that 4% for a longer, richer retirement, out of an income that will be more than twice what it is today. That might be a politically difficult concept where neither side is being honest.  The "right" want to cripple Social Security for essentially ideological reasons.  And the "left" wants "the rich" to pay for Social Security... for essentially ideological reasons.  But as you note, the essense of Social Security is that the workers pay for it themselves. Moreover, that 4% can be reached over a period of nearly eighty years.  To do it without ever reaching short term actuarial insolvency would require about a one tenth of one percent increase in the tax (combined) each year starting very soon,  or a one tenth of one percent increase in the tax (for each the worker and his boss) starting in about 2018 and running through abut 2033...  or some combination. Further increases of one tenth of one percent (each) would be needed at a decreasing frequency, such that by the end of the 75 year actuarial window, the rate increases would be about one tenth of one percent every ten years...  again, while wage are projected to be increasing over one full percent per year.

    President Obama Calls for Cutting Social Security by 3 Percent, Raising Normal Retirement Age in Acceptance Speech - The media and "fact checkers" seem to have missed it, but President Obama implicitly called for cutting Social Security by 3 percent and phasing in an increase in the normal retirement age to 69 when he again endorsed the deficit reduction plan put forward by Erskine Bowles and Alan Simpson, the co-chairs of his deficit commission. The reduction in benefits is the result of their proposal to reduce the size of the annual cost of living adjustment by 0.3 percentage points by using a different price index. After 10 years this would imply a reduction in benefits of 3 percent, after 20 years the reduction would be 6 percent, and after 30 years the reduction would be 9 percent. If the average beneficiary lives long enough to collect benefits for 20 years, the average reduction in benefits would be approximately 3 percent. Since Social Security is enormously important to retirees and near retirees, the media should have called attention to this part of President Obama's speech. It is likely that many of those listening did not realize that his deficit reduction plan called for these cuts.

    Report: N.Y. retiree health costs put at $250 billion - New York’s state and local governments are on the hook for an estimated $250 billion in health benefits for current and future retirees, a new report says. Most public-sector employees in New York are permitted to stay on their employer’s health-benefit plan after retiring, and an accounting standard implemented by the state in 2007 requires governments to total up the anticipated cost. Analysis from Empire Center for New York State Policy, a conservative think tank, found the state is faced with $73 billion in unfunded retiree-insurance costs. New York City’s bill is an estimated $84 billion, while the rest is split among municipal and county governments, school districts and public authorities.

    Focus Hocus Pocus, Redux - Paul Krugman  - Oh, dear. Dean Baker is on the case; we’re back to “Obama should have ditched health reform to focus on the economy”. Here’s what I wrote long ago: The whole focus on “focus” is, as I see it, an act of intellectual cowardice — a way to criticize President Obama’s record without explaining what you would have done differently. After all, are people who say that Mr. Obama should have focused on the economy saying that he should have pursued a bigger stimulus package? Are they saying that he should have taken a tougher line with the banks? If not, what are they saying? That he should have walked around with furrowed brow muttering, “I’m focused, I’m focused”?And pretty much without fail, the “focus” types are also people who opposed or dismiss the notion of stimulus. So what do they mean? As I said, it’s intellectual cowardice.

    Omigod - Ezra Klein made an incorrect claim of fact about health care financing.  He wrote: But I’m not going to make that argument. I’m on-record saying that trust-fund accounting is by and large a ridiculous way to look at the federal government’s finances, but both parties do it, and so Ryan isn’t committing any foul here. And within the trust-fund accounting rules, Obama is using his Medicare cuts to pay for the Affordable Care Act and Ryan is using his Medicare cuts to finance the Medicare program in the future. My amazed comment follows.  I agree that trust fund accounting is absurd, but your trust fund accounting is totally wrong.  The balance of the Medicare plan A trust fund would be identical under the ACA and the Ryan budget.  There is just no difference at all.  The ACA did not take any money out of the Medicare trust fund to pay for anything.  That's why it extended the forecast time till the fund is empty by 8 years.  The ACA spending increases are, by trust fund accounting (which I agree is nonsense) separate from the Medicare spending cuts (and the Medicare tax increases).  The effect on the deficit is the sum.  The Medicaid expansion and the subsidies for insurance bought on exchanges are not at all funded by any money which would otherwise be in the Medicare plan A trust fund.  Amazingly uber wonk Ezra Klein is just wrong on a health care financing fact (a meaningless one I agree but you are just wrong).

    Report: US health care system wastes $750B a year - -- A new report says the U.S. health care system squanders $750 billion a year - roughly 30 cents of every medical dollar. That's through unneeded care, byzantine paperwork, fraud, fragmentation and other wasteful practices. The report was released Thursday by the influential Institute of Medicine. It ties directly into the presidential election: President Barack Obama and Republican Mitt Romney are accusing each other of slashing Medicare and putting seniors at risk.But the counter-intuitive finding from the report is that deep cuts are possible without rationing, and a leaner system may even produce better quality. The 18-member panel of experts includes doctors, business people and public officials. They spent more than year working on the study.  

    Empowerment - Krugman - I’ve spent most of the day with a parent in the hospital; and my thoughts turned to the GOP platform, which boasts that Our reform of healthcare will empower millions of seniors to control their personal healthcare decisions. If you’ve ever been in this situation — and I assume that many readers have — you’ll understand what I mean by saying that empowering seniors to “control their personal healthcare decisions” is very definitely not what you want right then (or what they would want ex ante). It’s really amazing how this notion of patients as consumers, just like people buying furniture or gardening supplies, has taken hold; anyone with the least experience of actual medical situations, which means almost everyone, has to know how totally unrealistic it is.

    Universal Health Care Shouldn’t Be Reduced, Lancet Says - Expansion of government-subsidized medical care improves health and should be maintained in times of economic crisis, according to a survey of research.  Programs such as Medicare for senior citizens and Medicaid for the poor in the U.S. and similar programs in other countries led to increased use of preventive, inpatient and outpatient services and better health status for previously uninsured populations, Peter Smith and Rodrigo Moreno-Serra of Imperial College London wrote in The Lancet medical journal today.  Their paper comes as U.S. President Barack Obama’s 2010 health-care overhaul faces attacks by the Republican party in an election year. The Republican nominee, Mitt Romney, has vowed to repeal the law and last week adopted a platform that advocates Medicare changes in which senior citizens are given financial support to purchase private insurance to stem the increase in public debt.  “The available evidence has shown that when Medicaid and Medicare were expanded, the beneficiaries saw an improvement in health status and suffered less financially,” Moreno-Serra said in a phone interview. “If countries rely more and more on private spending, this will be detrimental to health outcomes and financial security.”

    The war against women - As the Republicans Take Tampa, Consider What a GOP Victory Would Mean for Women’s Health. For decades, Republicans have opposed abortion. This, we know, and so it comes as no surprise that Mitt Romney, the Party’s presidential candidate, has called “Roe vs. Wade“ one of the darkest moments in Supreme Court history.” But what some call the “war against women” is escalating. This year, the Republican platform calls for a constitutional amendment that would make abortion illegal. Just eight years ago, the preamble to the Republican platform declared: “we respect and accept that members of our party have deeply held and sometimes differing views.” But today, there is no such language in a platform that calls for “a human life amendment to the Constitution,” and declares that “abortion is detrimental to women’s health and well-being.” Meanwhile Alabama, Arizona, Idaho, Indiana, Kansas, Louisiana, Nebraska, North Carolina, Oklahoma, and Ohio all have passed legislation outlawing abortion after 20 weeks, even though, as the Center for American Progress’ Emillie Openchowski points out “complications are sometimes discovered after this point in a pregnancy that could cause serious harm to the woman. In those states, a woman would be forced to continue the pregnancy, no matter the risk to her health.” This is frightening.

    'Occupy' comes to DNA: A genome for the 99 percent - In the largest single batch of discoveries about human DNA since the completion of the human genome project in 2003, 442 scientists in labs across three continents released 30 studies jam-packed with finds on Wednesday. The discoveries, representing what the journal Nature calls the "guidebook to the human genome," range from the esoteric - what is a gene? - to the practical - that just 20 gene switches may underlie 17 seemingly unrelated cancers, giving companies a workable number of drug targets.The studies come from a $196 million project called the Encyclopedia of DNA Elements, or ENCODE, whose goal is to take the babel produced by the human genome project - the sequence of 3.2 billion chemical "bases" or "letters" that constitute the human genome - and make sense of it. "We understood the meaning of only a small percentage of the genome's letters," said Dr. Eric Green, director of the National Human Genome Research Institute, which paid for the bulk of the study.

    Hidden Treasures in Junk DNA - In the 1970s, when biologists first glimpsed the landscape of human genes, they saw that the small pieces of DNA that coded for proteins (known as exons) seemed to float like bits of wood in a sea of genetic gibberish. What on earth were those billions of other letters of DNA there for? No less a molecular luminary than Francis Crick, co-discoverer of DNA’s double-helical structure, suspected it was “little better than junk.” The phrase “junk DNA” has haunted human genetics ever since. In 2000, when scientists of the Human Genome Project presented the first rough draft of the sequence of bases, or code letters, in human DNA, the initial results appeared to confirm that the vast majority of the sequence—perhaps 97 percent of its 3.2 billion bases—had no apparent function. The “Book of Life,” in other words, looked like a heavily padded text. Now, in a series of papers published in September in Nature (Scientific American is part of Nature Publishing Group) and elsewhere, the ENCODE group has produced a stunning inventory of previously hidden switches, signals and sign posts embedded like runes throughout the entire length of human DNA. In the process, the ENCODE project is reinventing the vocabulary with which biologists study, discuss and understand human inheritance and disease.

    Links between Nutrients, Genes and Cancer –  More than 40 plant-based compounds can turn on genes that slow the spread of cancer, according to a first-of-its-kind study by a Washington State University researcher. Gary Meadows, WSU professor and associate dean for graduate education and scholarship in the College of Pharmacy, says he is encouraged by his findings because the spread of cancer is most often what makes the disease fatal. Moreover, says Meadows, diet, nutrients and plant-based chemicals appear to be opening many avenues of attack. "We're always looking for a magic bullet," he says. "Well, there are lots of magic bullets out there in what we eat and associated with our lifestyle. We just need to take advantage of those. And they can work together." In the end, he documented dozens of substances affecting the metastasis suppressor genes of numerous cancers. He saw substances like amino acids, vitamin D, ethanol, ginseng extract, the tomato carotenoid lycopene, the turmeric component curcumin, pomegranate juice, fish oil and others affecting gene expression in breast, colorectal, prostate, skin, lung and other cancers. Typically, the substances acted epigenetically, which is to say they turned metastasis suppressor genes on or off.

    Record West Nile Cases Make World Diseases a U.S. Problem - With increasing numbers of mosquitoes in the U.S. carrying the West Nile and dengue viruses, it’s getting a little scary to go outside. West Nile is poised to break records this year. Almost 1,600 cases have been reported to the Centers for Disease Control and Prevention so far, including 66 deaths. The virus has been in the U.S. since 1999, sickening 30,000 altogether; this year the worst outbreak has been centered around Dallas. West Nile’s cousin, dengue, also a sometimes fatal infection, has been in the U.S. since 1980, with outbreaks in Texas, Hawaii and Florida, most recently in 2010. These are growing public-health problems, but they can also serve as opportunities to pull the U.S. squarely into the global fight against these mosquito-borne viruses. Identified only in 1937, West Nile is a disease mainly of Africa, the Mideast and parts of Asia. Severe infections lead to brain diseases such as meningitis and encephalitis. Dengue, known as breakbone fever for the muscle and joint pain it causes, can lead to dengue hemorraghic fever and the sometimes fatal dengue shock syndrome. As many as 100 million people are infected worldwide every year. 

    This year's outbreak of West Nile disease is the worst since the disease was first spotted in the United States in 1999, the CDC says.- This year's outbreak of West Nile virus is the worst since the illness was first observed in the United States in 1999, officials from the U.S. Centers for Disease Control and Prevention said Wednesday. The number of confirmed cases rose by 25% last week to 1,993 -- although only an estimated 2% to 3% of cases are reported to the government. Those are generally the most serious infections: Most people who contract the virus do not develop severe symptoms, and many never even know they were infected. The most common symptoms are a fever and neck stiffness. Severe cases can lead to encephalitis or meningitis. The number of deaths rose to 87, up from 65 a week ago. The death total seems unlikely to break the record of 260 set in the 2002-03 season, however. Almost half of the reported cases (888) are in Texas, which has seen 35 deaths from the disease. Other states with high rates include Mississippi, South Dakota, Oklahoma and Louisiana. California has had 55 confirmed cases and two deaths.

    Spineless creatures under threat, from worms to bees: study -- The vital tasks carried out by tiny "engineers" like earthworms that recycle waste and bees that pollinate crops are under threat because one fifth of the world's spineless creatures may be at risk of extinction, a study showed on Friday. The rising human population is putting ever more pressure on the "spineless creatures that rule the world" including slugs, spiders, jellyfish, lobsters, corals, and bugs such as beetles and butterflies, it said. "One in five invertebrates (creatures without a backbone) look to be threatened with extinction," said Ben Collen at the Zoological Society of London (ZSL) of an 87-page report produced with the International Union for Conservation of Nature. "The invertebrates are the eco-system engineers," he told Reuters. "They produce a lot of the things that humans rely on and they produce them for free." The report said that invertebrates, creatures that have no internal skeleton, faced loss of habitat, pollution, over-exploitation and climate change. The 'services' they provide - helping humans whose growing numbers threaten their survival - include water purification, pollination, waste recycling, and keeping soils productive. The value of insect pollination of crops, for instance, has been valued at 153 billion euros ($191 billion) a year, it said. A 1997 study put the global economic value of soil biodiversity - thanks to often scorned creatures such as worms, woodlice and beetles - at $1.5 trillion a year. 

    Food is Dead - When Nietzsche wrote “God is dead”, he meant that in people’s regular lives, their day-to-day actions, their day-to-day, hour-to-hour, minute-to-minute thoughts, god and religion play no role.   We have the same decadent* phenomenon with food. Where does food comes from? Does it come from healthy soil and a stable farming culture, organic within a healthy ecology and socioeconomic environment? Or does it come from the supermarket? Most people, if specifically asked, would consciously agree that food comes from farms. But that’s not what people really think and do. In people’s regular lives, their day-to-day actions, their day-to-day, hour-to-hour, minute-to-minute thoughts, farms play no role. The possible existence (or extinction) of farms is no longer a significant part of the lives of people in general, as a guide to action or as a feature of their inner lives People think and act as if food comes from the supermarket. The imminent lifting of New York’s fracking moratorium is a perfect example. Forget the committed fascists like Cuomo and Bloomberg – for people in general to have any doubt about fracking’s evil is to demonstrate their disbelief in farms and their compensatory faith in supermarkets.

    Growing Crops With No Water, The Old-Fashioned Way - Farmers see the horizon, and there's not much water on it (The "global water shortage is now 'chronic'" according to a UN report). In the U.S., the federal government has added at least 218 more counties to the list of natural disaster areas, now more than half of the total counties in the U.S. are low on water. Dry land farming was a staple of agriculture for millennia in places like the Mediterranean.  Dry farming, while not designed to counter the worst droughts, "evokes the image of a wet sponge covered with cellophane," writes Brie Mazurek, the online education manager at the Center for Urban Education about Sustainable Agriculture (CUESA). By tapping the moisture stored in soil to grow crops, rather than using irrigation or rainfall during the wet season, dry-land farming was a staple of agriculture for millennia in places like the Mediterranean, and much of the American West, before the rise of dams and aquifer pumping. During the rainy season, farmers break up soil then saturated with water. Using a roller, the first few inches of the soil are compacted and later form a dry crust, or dust mulch, that seals in the moisture against evaporation. In places like California, where the expensive (and fast evaporating) irrigation systems of the Central Valley are seen to be running on borrowed time, dry farming has begun to spread among a small cadre of farmers along the coast where dry farming was once standard practice since the undeveloped coast line would support little else.

    Highest Cost of Drought Falls on Taxpayers - Thanks in part to highly subsidized federal crop insurance, many corn and soybean farmers will make more money in this catastrophic drought year than they would have if their crops had received normal rainfall. “You will find winners and losers as prices and yields sort themselves out,” . The winners will be the grain farmers and the insurance companies, and the losers will be the taxpayers, Much of the risk inherent in federal crop insurance, as the name implies, is borne by the federal government. Not only do taxpayers pay more than 60 percent of the cost of insurance premiums, they also pay about $1.3 billion a year to defray administrative and operating expenses of the approved insurance providers. The government also pays a substantial portion of the indemnity payments — a portion that increases dramatically as losses mount, as they surely will during the worst grain belt drought in at least 50 years. The total cost to the government of crop insurance was $11.3 billion last year, “and it will be substantially more than that this year,” said Cox. Responsibility for indemnity payments is apportioned on a complex sliding scale that puts an increasing burden on the federal government when payments escalate.

    Europe’s Grains Won’t Make Up for Losses of U.S., Russia Drought - The grain harvest in the European Union, the world’s third-largest grower, is unlikely to ease a global supply shortfall as dry weather hurts yields from Spain to Romania and British crops are delayed by rain.  France and Germany, Europe’s top growers, are set to boost grain output by 8.5 percent this year, not enough to offset declines in the U.K., Spain and Italy, according to Hamburg- based trader Alfred C. Toepfer International GmbH. Europe’s wheat harvest may be the smallest in five years, helping send stockpiles at the end of the 2012-13 season to 10.9 million metric tons, the lowest since at least 1999, U.S. Department of Agriculture data show.Fewer supplies may spur a 9.1 percent drop in global grain trade this season, the biggest decline since 1986, to 289.37 million tons, according to the USDA. Shipments include nine grains, ranging from wheat to rice to barley, tracked in the department’s monthly world supply and demand report. China is the world’s largest cereal producer, followed by the U.S. and the EU, according to the USDA. EU cereal production may be 279 million this season, about 2 percent smaller than the five-year average because of dry weather in some regions, the European Commission said Aug. 31. The soft wheat harvest may be 127 million tons, similar to the previous average, while corn output at 60 million tons is expected to be about 2 percent higher than normal.

    Drought in India Devastates Crops and Farmers - With the nourishing downpours of the annual monsoon season down an average of 12 percent across India and much more in some regions, farmers in this village about 250 miles east of Mumbai are on the brink of disaster. “If this situation continues, I’ll lose everything,” said Mr. Mukane, whose soybean, sugarcane and cotton crops were visibly stunted and wilting in his fields recently. “Nothing can happen without water.” Drought has devastated crops around the world this year, including corn and soybeans in the United States, wheat in Russia and Australia and soybeans in Brazil and Argentina. This has contributed to a 6 percent rise in global food prices from June to July, according to United Nations data. India is experiencing its fourth drought in a dozen years, raising concerns about the reliability of the country’s primary source of fresh water, the monsoon rains that typically fall from June to October. Some scientists warn that such calamities are part of a trend that is likely to intensify in the coming decades because of climate changes caused by the human release of greenhouse gases.

    Study: Extreme Weather Hammers Global Food System - A new report released Wednesday says that the full impact of climate change and extreme weather events on global food prices is being underestimated and warns that without a more acute understanding of how global warming threatens agricultural systems and economies, governments will be unable to prepare for future disasters. Extreme Weather, Extreme Prices, the report from Oxfam International, takes an innovative and focused look at how extreme weather events—such as widespread droughts and large floods—could drive up future food prices. Previous research on the economic impact of climate change on food systems has tended to consider more gradual impacts, such as incremental temperature increases and changing rainfall patterns. “As emissions continue to soar, extreme weather in the US and elsewhere provides a glimpse of our future food system in a warming world. Our planet is heading for average global warming of 2.5–5°C this century. It is time to face up to what this means for hunger and malnutrition for millions of people on our planet,” Oxfam released its report amid their ongoing GROW campaign, designed to highlight the injustice of the global food system and offer solutions to create one that is more equitable, efficient, sustainable and humane.

    For Farms in the West, Oil Wells Are Thirsty Rivals - A new race for water is rippling through the drought-scorched heartland, pitting farmers against oil and gas interests, driven by new drilling techniques that use powerful streams of water, sand and chemicals to crack the ground and release stores of oil and gas.  A single such well can require five million gallons of water, and energy companies are flocking to water auctions, farm ponds, irrigation ditches and municipal fire hydrants to get what they need.  That thirst is helping to drive an explosion of oil production here, but it is also complicating the long and emotional struggle over who drinks and who does not in the arid and fast-growing West. Farmers and environmental activists say they are worried that deep-pocketed energy companies will have purchase on increasingly scarce water supplies as they drill deep new wells that use the technique of hydraulic fracturing.  And this summer’s record-breaking drought, which dried up wells and ruined crops, has only amplified those concerns.   In average years, farmers and ranchers like Mr. Anderson say they pay about $30 for an acre foot of water — equal to about 326,000 gallons — a price that can rise to $100 when water is scarce. Right now, oil and gas companies in parts of Colorado are paying as much as $1,000 to $2,000 for an equal amount of treated water from city pipes.  That money can be a blessing for strained local utilities and water departments, but farmers say there is no way they can afford to match those bids.

    Food or fuel – that is the question -- Fears of another global food crisis have reignited a fierce debate over whether crops should be used for food or transport fuel. The food versus fuel controversy is most intense in the United States and Europe, where policies are in place to subsidise increasingly large-scale use of biofuels. The aim is to cut reliance on imported oil, improve energy security and reduce oil-derived air pollutants and global warming emissions of carbon dioxide from burning petrol and diesel in motor vehicle engines, and airliner jet fuel. In Europe's case, a substantial amount of the biofuel feedstock is palm oil imported from Indonesia and Malaysia, the world's two top producers and exporters of a crop that is widely used for cooking and food processing as well as biodiesel. Greenpeace and other environmental groups blame the palm oil industry for clearing tropical forests and draining peat swamps in south-east Asia to make way for extensive oil palm estates, releasing huge amounts of carbon locked in the forests and peat swamps while putting endangered species, including orang-utans, tigers, elephants and rhino, at further risk.

    Barclays makes £500m betting on food crisis - Barclays has made as much as half a billion pounds in two years from speculating on food staples such as wheat and soya, prompting allegations that banks are profiting handsomely from the global food crisis. Barclays is the UK bank with the greatest involvement in food commodity trading and is one of the three biggest global players, along with the US banking giants Goldman Sachs and Morgan Stanley, research from the World Development Movement points out. Last week the trading giant Glencore was attacked for describing the global food crisis and price rises as a "good" business opportunity. The extent of Barclays' involvement in food speculation comes to light as new figures from the World Bank show that global food prices hit an all-time high in July, with poor harvests in the US and Russia pushing up the average worldwide cost of staples by an unprecedented 10 per cent in a month. The extent of just one bank's involvement in agricultural markets will add to concerns that food speculation could help push basic prices so high that they trigger a wave of riots in the world's poorest countries, as staples drift out of their populations' reach.

    UN food agencies urge action to avoid food crisis - The three U.N. food agencies urged governments Tuesday to take quick action to curb rising prices of corn, wheat and soybeans and avoid a repeat of the 2007-2008 food crises. The sharp rise in food prices in recent months threatens to make life even more difficult for tens of millions of people, particularly in poor countries, the heads of the U.N. World Food Program, Food and Agriculture Organization and International Fund for Agriculture Development warned. A prolonged drought in the U.S. — the No. 1 exporter of corn, wheat and soybeans — has helped drive up commodity prices. The FAO's next global food price index is due Thursday; its last report found global prices had risen six percent in July after three months of decline, in part because of the U.S. drought and worsened crop prospects for Russia's wheat harvest because of dry weather. The three agencies urged countries to avoid panic buying and refrain from imposing export restrictions when production falls, saying that while it may temporarily help consumers at home it makes life difficult for others. In the past, Russia has imposed export bans to offset low domestic wheat production. They also said countries should adjust biofuel production requirements when food supplies become scarce. Livestock farmers in the U.S. have demanded the government relax biofuel production quotas because corn feed is becoming so expensive. Forty percent of the U.S. corn crop goes to ethanol production.

    Joint statement from FAO, IFAD and WFP on international food prices - Following is a joint statement on international food prices from the three Rome-based UN Agencies, the Food and Agriculture Organization of the United Nations (FAO), the International Fund for Agricultural Development (IFAD) and the World Food Programme.The current situation in world food markets, characterized by sharp increases in maize, wheat and soybean prices, has raised fears of a repeat of the 2007-2008 world food crisis. But swift, coordinated international action can stop that from happening. We need to act urgently to make sure that these price shocks do not turn into a catastrophe hurting tens of millions over the coming months. Two interconnected problems must be tackled: the immediate issue of some high food prices, which can impact heavily on food import-dependent countries and on the poorest people; and the long-term issue of how we produce, trade and consume food in an age of increasing population, demand and climate change.

    Price of essentials rises by 10 per cent - The G20 is under growing pressure to call an emergency food summit after the price of essentials jumped by ten per cent on average in July. New research shows prices are at a record high following "an unprecedented summer of droughts and high temperatures". Cereal prices were particularly hard hit, with maize and wheat rising by a quarter and soybeans by 17 per cent, as poor weather decimated harvests in the US, Russia, Ukraine and Kazakhstan, according to the World Bank. The average global food price in July stood six per cent higher than a year earlier. "Food prices rose again sharply threatening the health and well-being of millions of people," said World Bank Group President Jim Yong Kim. "Africa and the Middle East are particularly vulnerable, but so are people in other countries where the prices of grains have gone up abruptly," he added. The World Bank report also warned that prices could continue to rise this year. "Negative factors – such as exporters pursuing panic policies, a severe El Nino, disappointing Southern hemisphere crops or strong rises in energy prices – could cause significant further grain price hikes," the report said.

    The era of cheap food may be over - The last decade saw the end of cheap oil, the magic growth ingredient for the global economy after the second world war. This summer's increase in maize, wheat and soya bean prices – the third spike in the past five years – suggests the era of cheap food is also over. Price increases in both oil and food provide textbook examples of market forces. Rapid expansion in the big emerging markets, especially China, has led to an increase in demand at a time when there have been supply constraints. For crude, these have included the war in Iraq, the embargo imposed on Iran, and the fact that some of the older fields are starting to run dry before new sources of crude are opened up. The same demand dynamics affect food. It is not just that the world's population is rising by 1% a year. Nor is it simply that China has been growing at 9% a year on average; it is that consumers in the big developing countries have developed an appetite for higher protein western diets. Meat consumption is rising in China, India and Brazil, and since it takes 7kg of grain to produce 1kg of beef (and 4kg to produce 1kg of pork), this is adding to global demand. Farmers have been getting more efficient, increasing the yields of land under production, but this has been offset by two negative factors: policies in the US and the EU that divert large amounts of corn for biofuels and poor harvests caused by the weather. If the World Bank's projections are anything like accurate, further massive productivity gains from agriculture are going to be needed over the next two decades.

    Rains From Isaac Don't Put Much Dent in U.S. Drought - Despite locally drenching rains from the remnants of Hurricane Isaac, the worst drought in more than 50 years is still firmly entrenched across much of the U.S. According to the new U.S. Drought Monitor, released Thursday, the numbers didn’t change dramatically across the country, but the locations of the worst drought conditions did shift. The remnants of Isaac eased the dryness dramatically in Arkansas, Missouri, Illinois, and Louisiana, while rains also moistened states in the mid-Atlantic and Southeast. But to the west, 100-degree-plus temperatures and a continued lack of precipitation pushed Oklahoma, Texas, Nebraska, Kansas and the Dakotas deeper into drought. Wyoming and Montana also got drier, but rain in Colorado improved conditions slightly. What all of that means for the nations suffering farmers is that the drought remains dire.  According to the U.S. Department of Agriculture, only 22 percent of the U.S. corn crop in the 18 biggest-producing states was in good or excellent shape, while 52 percent was in poor or very poor shape. For soybeans, 37 percent of the crop in the 18 biggest-producing states was considered poor or very poor. The drought monitor showed that through Tuesday, 63.39 of the land area of the Lower 48 states was suffering under some level of drought, compared with 62.89 percent the week before. 

    Why 2012′s Drought Will Rumble 2013 - The crisis originates in this summer’s extreme weather. Almost 80% of the continental United States experienced drought conditions. Russia and Australia experienced drought as well. The drought has ruined key crops. The corn harvest is expected to drop to the lowest level since 1995. In just July, prices for corn and wheat jumped about 25% each, prices for soybeans about 17%. These higher grain prices will flow through to higher food prices. For consumers in developed countries, higher food prices are a burden — but in almost all cases, a manageable burden. Americans spend only about 10% of their after-tax incomes on food of all kinds, including restaurant meals and prepackaged foods. Surveys for Gallup find that the typical American family is spending one-third less on food today, adjusting for inflation, than in 1969. But step outside the developed world, and the price of food suddenly becomes the single most important fact of human economic life. In poor countries, people typically spend half their incomes on food — and by “food,” they mean first and foremost bread.

    Yes, Summers in the U.S. Really Are Getting Warmer - One of the surest signs that the planet is getting warmer is the fact that record high temperatures are outpacing record lows. As of early August, for example we were able to report that with the year a little more than half over, 2012 had already surpassed all of 2011 in terms of record highs in the U.S. It’s unfair to compare just two years, of course, since that could just be a weird anomaly — but if you look on a much grander scale, the disparity of record highs in the U.S. vs. record lows has grown wider every decade since the 1970s. Now NASA has come up with a new animation that makes this point far more vividly than any static bar chart could. It simply plots summer temperatures in the Northern Hemisphere, starting in the 1950s, showing the number of days that were unusually hot (red), unusually cold (blue) or pretty much normal (gray). Back in the ‘50s, the plot is a nearly perfect normal distribution (more commonly known as a bell curve), with just as many days falling on the cold side as the warm side. It’s what you’d expect if temperatures were going up and down randomly. But as the animation moves forward in time, the bell begins to slide to the right: unusually cold days diminish drastically, while unusually hot days become more and more common. By the time the animation ends, in 2011, there’s a whole lot more red than blue.

    The Distribution of Summer Temperatures,1950-2011 -  Here is an animation from NASA showing the distribution of summer temperatures in the Northern Hemisphere. The initial smooth distribution is based on data from 1950-1980. The video advances in yearly increments showing data for 10 year periods from 1950-1960 through to 2001-2011. As the data advances one can see a pronounced shift in the curve to the right and also, a little less clearly, the curve gets shorter and fatter. Thus, not only are we seeing an increase in the mean temperature but also a greater possibility for extremes in temperature around the increased mean. The visualization is an extension of ideas from a paper by Hansen et al. which includes additional, global data.

    Climate Change: How The Wet Will Get Wetter And The Dry Will Get Drier - How much extra energy are we putting in the atmosphere through emission of greenhouse gases? One Australian researcher put it into context: “The radiative forcing of the CO2 we have already put in the atmosphere in the last century is … the equivalent in energy terms to almost half a billion Hiroshima bombs each year.” With more energy radiating down on the planet rather than back up into space, the planet continues to heat up. As the atmosphere warms, it is able to hold more water vapor — thus strengthening the global hydrological cycle. With all that extra energy, more water is pulled out of the subtropic regions and moved toward higher-precipitation areas in the subpolar regions, resulting in stronger droughts and stronger storms. Or, as the video below explains, how the wet gets wetter and the dry gets drier. Through five decades of observations and future climate modeling, the National Oceanic and Atmospheric Administration has put together this educational piece on how a warming planet will make weather more extreme:

    Cuts to NOAA's greenhouse gas monitoring threaten research - Around the world, samples of air are regularly collected in flasks and shipped from such far-flung locations as Mongolia and Hawaii to the National Oceanic and Atmospheric Administration in Boulder, where they're analyzed for the presence and concentration of dozens of gases. The record that's been created over the decades from the air samples -- along with measurements taken at a handful of observatories, including ones in Alaska and at the South Pole, and from a "tall tower" network, which includes a site in Erie -- have been instrumental in helping scientists understand how the atmosphere is changing. The baseline data, which is publicly available, has allowed researchers to show that carbon dioxide concentrations are increasing and, in the 1980s, that a hole had formed in the ozone layer, among other discoveries. Now, that atmospheric record is in danger -- according to more than 50 researchers who signed a letter published last week in the journal Science -- due to cuts to the Boulder-based Global Monitoring Division of NOAA's Earth System Research Laboratory. "Despite the growing importance of greenhouse gas observations to humanity, substantial budget cuts at NOAA have resulted in curtailment of our ability to observe and understand changes to the global carbon cycle," the letter reads. "... As scientists, we believe that preserving the continuity of these vital time series must remain a priority for U.S. carbon cycle research."

    A Challenge for Climate Negotiators, and an Opportunity for Scholars - As I have written in many previous essays at this blog, the challenges standing in the way of an effective international climate change agreement are numerous and severe.  It is also true that the prospects for a truly meaningful deal may be better now than at any time in the past decade or more.  That is the theme of a new article I’ve co-authored with my Harvard Kennedy School colleague, Joseph Aldy.  The article, “Climate Negotiators Create an Opportunity for Scholars,” was published in the August 31st edition of Science. Changes emerged gradually from the Major Economies Forum on Energy and Climate in 2009, the Copenhagen Accord (2009), the Cancun Agreements (2010), and – most important – the Durban Platform for Enhanced Action (2011).  Together these have now increased the likelihood that the ongoing negotiations can move beyond the debilitating Annex I/non-Annex I dichotomy of the Berlin Mandate (1995), as codified in the Kyoto Protocol (1997); and instead develop a comprehensive legal regime for implementation in 2020 that includes all key countries, based upon a more nuanced and effective interpretation of the principle of “common but differentiated responsibilities and respective capabilities” from the original United Nations Framework Convention on Climate Change (UNFCCC, 1992).

    Coastline erosion due to rise in sea level greater than previously thought, new model finds A new model is allowing researchers at UNESCO-IHE, TU Delft and Deltares to predict coastline erosion due to rising sea levels much more accurately. It would appear that the effects of coastline erosion as a result of rising sea-level rise in the vicinity of inlets, such as river estuaries, have until now been dramatically underestimated. The anticipated rise in sea levels due to climate change will result in coastlines receding worldwide through erosion. This is a known phenomenon that can in principle be calculated and predicted based on a given sea-level rise, by means of the so-called Bruun effect. However, things are a little more complicated when it comes to coastlines in the vicinity of inlets, such as river mouths, lagoons and estuaries. These places are affected by other factors, such as changes in rainfall due to climate change, and certain compensating effects (basin infilling). Until now, science has lacked a model that takes all these effects into account in the calculations of a coastline's future development, even though a demand for this existed among engineers, coastal managers and planners. Scientist Rosh Ranasinghe has now succeeded in developing a new model that is able to produce much more accurate prognoses.  With the model, it is possible to make accurate predictions quickly -- within a few minutes -- of how the coastline will develop in the vicinity of inlets as a result of rising sea-levels.

    High, late August 2012 Greenland ice temperature maintains low ice sheet reflectivity and melting - Daily surface temperatures in June-August 2012 have peaked more than 5 C (~9 F) warmer for the whole ice sheet than the 2000-2009 daily averages according to my analysis of ice surface temperatures from  daily NASA MODIS MOD11 satellite derived Land Surface Temperature (LST) retrievals. Over the highest elevations, surface temperatures were nearly 10 C (~18 F) warmer than in the decade of the 2000s, leading to an area of ice sheet surface melting, unprecedented in the satellite observational record beginning in 1978.To a first approximation, when ice sheet temperature increases, its reflectivity decreases (Box et al. 2012). After a low temperatures on August 10-13, 2012, the surface reflectivity of sunlight (a.k.a. albedo) increased from the accumulation of fresh bright snow (Fig. 2). Then as surface temperatures rose again, above one standard deviation of the 2000-2009 average, the ice sheet albedo again dropped on August 18-23, 2012 below previous observations (since 2000), especially at the intermediate elevations of 1000-1500 m where melting in all likelihood remains active this year. As reported by Marco Tedesco, 2012 melting is already setting the record since the late 1950s, and with this late melt season albedo drop and high surface temperature anomaly, this “Goliath” melt has got to be growing.

    Continued retreat of Greenland’s most productive glacier - 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 mi) in 12 years. In 2012, this glacier front lost an an area of 13 sq km, measured from August 2011 to August 2012. Thi’s 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, it’s speed had doubled (Joughin et al. 2004).

    Arctic Sea Ice: Turning Points - Perhaps the most obvious “turning point” in Arctic sea ice is the stunning decline at the summer minimum of 2007. The annual minimum extent for every year since then has been less than for every year before then. To many, it marks a new era for the ice pack covering the Arctic ocean. The post-2007 era has been makedly different from what happened before.But if you look at the annual minimum of Arctic sea ice volume rather than extent, the decline has been more consistent. There was indeed a large decrease in 2007 with no year post-2007 as high as any year pre-2007 — but there was also a dramatic decline in 2010 with no year post-2010 reaching pre-2010 levels.Was there a qualitative change in the ice pack in 2010, one which might rival the qualitative change in 2007?

    Collapse in Minimum Arctic Sea Ice Area - In response to my extrapolations of sea ice volume last week, commenter Lars-Eric Bjerke noted that extrapolating trends in minimum sea ice area does not agree with extrapolating the minimum volume trends.  It seems to me that if we have a scenario where the area of the ice has been shrinking steadily due to a warmer Arctic, but the ice has also been getting thinner even faster, what we would expect is that near the end, the area change would accelerate greatly as the now very thin ice breaks up. The figure above is prepared from the minimum sea ice area according to Cryosphere today (there are various areal measures in use for  Arctic sea ice but this is one of the widely used and respectable ones).  The 2012 point is my estimate of where the minimum will end up from looking at this data.  Prior to 2007 (blue data), the area was shrinking at a steady and fairly linear pace.  However, since 2006 (red data) the curve has fallen dramatically and consistently below the prior trend.  Clearly, some new process with different dynamics has set in. It appears to me this is consistent with the idea that the ice has now gotten thin enough in late summer to start breaking up rapidly, and that we are thus in the final phase of developing an ice free Arctic in that season.  If you extrapolate the trend of the last six years, you get to zero about 2025.  However, I'd set more store in the volume extrapolations (which come to zero somewhere in the 2015-2020 range), given that the area extrapolation here is based on a very short interval.

    NSIDC Report of September 5, 2012: Arctic sea ice extent falls below 4 million square kilometers - Following the new record low recorded on August 26, Arctic sea ice extent continued to drop and is now below 4.00 million square kilometers (1.54 million square miles). Compared to September conditions in the 1980s and 1990s, this represents a 45% reduction in the area of the Arctic covered by sea ice. At least one more week likely remains in the melt season. Throughout the month of August, Arctic sea ice extent tracked below levels observed in 2007, leading to a new record low for the month of 4.72 million square kilometers (1.82 million square miles), as assessed over the period of satellite observations, 1979 to present. Extent was unusually low for all sectors of the Arctic, except the East Greenland Sea where the ice edge remained near its normal position. On August 26, the 5-day running average for ice extent dropped below the previous record low daily extent, observed on September 18, 2007, of 4.17 million square kilometers (1.61 million square miles). By the end of the month, daily extent had dropped below 4.00 million square kilometers (1.54 million square miles). Typically, the melt season ends around the second week in September.

    Northern Hemisphere Sea Ice Area - interactive

    Death Spiral Watch: Experts Warn ‘Near Ice-Free Arctic In Summer’ In A Decade If Volume Trends Continue -- The sharp drop in Arctic sea ice area has been matched by a harder-to-see — but equally sharp — drop in sea ice thickness. The combined result has been a collapse in total sea ice volume. Many experts now say that if recent volume trends continue we will see virtually ice-free conditions sometime in the next ten years. And that may well usher in a permanent change toward extreme, prolonged weather events “Such As Drought, Flooding, Cold Spells And Heat Waves.” It will also accelerate global warming in the region, which in turn will likely accelerate both the disintegration of the Greenland ice sheet and the release of the vast amounts of carbon currently locked in the permafrost.The European Space Agency’s CryoSat-2 probe confirms what the Pan-Arctic Ice Ocean Modeling and Assimilation System (PIOMAS) at the Polar Science Center has been saying for years: Arctic sea ice volume has been collapsing faster than sea ice area (or extent) because the ice has been getting thinner and thinner. In fact, the latest satellite CryoSat-2 data shows the rate of loss of Arctic sea ice is “50% higher than most scenarios outlined by polar scientists and suggests that global warming, triggered by rising greenhouse gas emissions, is beginning to have a major impact on the region,” as the UK Guardian reported last month:

    Wetter Arctic could influence climate change, study finds: — Increased precipitation and river discharge in the Arctic has the potential to speed climate change, according to the results of a study led by Xiangdong Zhang, a scientist at the University of Alaska Fairbanks International Arctic Research Center."As the Earth's climate continues to change, the high-latitude North is becoming even wetter than before," Zhang says. "In particular, air moisture, precipitation and river discharge have increased, leading to a stronger water cycle. These recent changes may intensify climate system interactions and further advance climate change." Zhang and his co-authors looked at water cycles in the Ob, Lena and Yenesei River drainages in the Eurasian Arctic during the last six decades. They found that atmospheric moisture into the areas increased by an average of 2.6 percent per decade and, consequently, river discharge increased at a rate of nearly 2 percent per decade. That means the three rivers today are dumping almost 39 cubic miles more fresh water into the Arctic Ocean per year than they did in the 1940s. Their findings are important because studies have suggested that increased air moisture and precipitation, and the resulting increase in river discharge into the Arctic Ocean, can lower salinity and cause warmer surface temperatures, as well as create weaker water circulation in the Atlantic Ocean. Those things in turn can affect multiple biological and weather systems, as well as things like sea ice and coastal erosion.

    Arctic ice melting at 'amazing' speed, scientists find: Scientists in the Arctic are warning that this summer's record-breaking melt is part of an accelerating trend with profound implications. Norwegian researchers report that the sea ice is becoming significantly thinner and more vulnerable. Last month, the annual thaw of the region's floating ice reached the lowest level since satellite monitoring began, more than 30 years ago. It is thought the scale of the decline may even affect Europe's weather. The melt is set to continue for at least another week - the peak is usually reached in mid-September - while temperatures here remain above freezing. 'Unprecedented' The Norwegian Polar Institute (NPI) is at the forefront of Arctic research and its international director, Kim Holmen, told the BBC that the speed of the melting was faster than expected. "It is a greater change than we could even imagine 20 years ago, even 10 years ago," Dr Holmen said.

    Arctic ice melt 'like adding 20 years of CO2 emissions': The loss of Arctic ice is massively compounding the effects of greenhouse gas emissions, ice scientist Professor Peter Wadhams has told BBC Newsnight. White ice reflects more sunlight than open water, acting like a parasol. Melting of white Arctic ice, currently at its lowest level in recent history, is causing more absorption. Prof Wadhams calculates this absorption of the sun's rays is having an effect "the equivalent of about 20 years of additional CO2 being added by man". The Cambridge University expert says that the Arctic ice cap is "heading for oblivion". In 1980, the Arctic ice in summer made up some 2% of the Earth's surface. But since then the ice has roughly halved in area. "Thirty years ago there was typically about eight million square kilometres of ice left in the Arctic in the summer, and by 2007 that had halved, it had gone down to about four million, and this year it has gone down below that," Prof Wadhams said. And the volume of ice has dropped, with the ice getting thinner: "The volume of ice in the summer is only a quarter of what it was 30 years ago and that's really the prelude to this final collapse," Prof Wadhams said. Parts of the Arctic Ocean are now as warm in summer as the North Sea is in winter, Prof Wadhams said.

    Arctic cyclone warning for September 7 - Paul Beckwith warns that another cyclone is forecast to develop in the Arctic by September 7th, 2012, pointing at the image below, from the Naval Research Laboratory. “This will cause lots of sea ice breakup in the Arctic if it develops and persists”, Paul says.  “The sea ice now is thinner than in August, so the potential for severe damage to ice exists. On the other hand, however, the August cyclone lasted for a week, while this one looks like a 2 to 3 day event.” Paul also points at the image further below, from, showing a 9 day GFSx model for Arctic region; on the website you can select single day panels. “Most scientists think that the massacre of Arctic sea ice will stop on/or around September 15th which is the 'normal' date at which ice formation is due, as the decrease of solar insolation at the pole will cause the area of the sea ice to start increasing", Paul says, adding however that “a minority of us think that the melt will continue beyond this date by several weeks, due to the warmness of the sea water both beside and below the very thin sea ice.”

    The Greatest Energy Deposit in the World - Arctic Methane Hydrates -- A new study out of the University of California Santa Cruz demonstrates that old organic matter in sedimentary basins located beneath the Antarctic Ice Sheet may have been converted to methane by microorganisms living under oxygen-deprived conditions. The study was driven by methane release concerns from global warming with the idea that methane could be released to the atmosphere if the ice sheets shrink and expose the old sedimentary basins. There in lies the opportunity – The team of scientists estimated that 50% of the West Antarctic Ice Sheet (1 million square kilometers or 386 thousand square miles) and 25% of the East Antarctic Ice Sheet (2.5 million square kilometers or 965 thousand square miles) overlies pre-glacial sedimentary basins containing about 21,000 billion metric tons of organic carbon.

    Grow Your Own Energy -  Before we run out of fossil oil, we will thoroughly tap the sea floor, find and frack wells wherever they may be, and excavate and extract the most recalcitrant of oil shales. In so doing, we will fuel our lifestyle for a few more decades at the cost of releasing vast amounts of carbon dioxide, adding to global warming, melting ice caps, raising sea levels, acidifying oceans—and setting course for a future for which there are few optimistic scenarios. In the face of all this, scientists are racing to find alternatives.Microalgae have a low profile but they deserve a much higher one, since the fossil oil we mine mostly comes from microalgae that lived in shallow seas millions of years ago—and they may be key to developing sustainable alternative fuels. Algae are single-celled organisms that thrive globally in aqueous environments and convert CO2 into carbohydrates, protein, and natural oils. For some species, as much as 70 percent of their dry weight is made up of natural oils. Microalgae hold great promise because some species are among the fastest growing plants alive and are therefore one of the best sources of biomass, while other species have been estimated to produce between 18,700 and 46,750 liters of oil per hectare per year, nearly a hundred times more than soybeans' 468 liters per hectare per year.

    "Potential methane reservoirs beneath Antarctica," - Once thought to be devoid of life, the ice-covered parts of Antarctica are now known to be a reservoir of metabolically active microbial cells and organic carbon1. The potential for methanogenic archaea to support the degradation of organic carbon to methane beneath the ice, however, has not yet been evaluated. Large sedimentary basins containing marine sequences up to 14 kilometres thick2 and an estimated 21,000 petagrams (1 Pg equals 1015 g) of organic carbon are buried beneath the Antarctic Ice Sheet. No data exist for rates of methanogenesis in sub-Antarctic marine sediments. Here we present experimental data from other subglacial environments that demonstrate the potential for overridden organic matter beneath glacial systems to produce methane. We also numerically simulate the accumulation of methane in Antarctic sedimentary basins using an established one-dimensional hydrate model3 and show that pressure/temperature conditions favour methane hydrate formation down to sediment depths of about 300 metres in West Antarctica and 700 metres in East Antarctica. Our results demonstrate the potential for methane hydrate accumulation in Antarctic sedimentary basins, where the total inventory depends on rates of organic carbon degradation and conditions at the ice-sheet bed. We calculate that the sub-Antarctic hydrate inventory could be of the same order of magnitude as that of recent estimates made for Arctic permafrost. Our findings suggest that the Antarctic Ice Sheet may be a neglected but important component of the global methane budget, with the potential to act as a positive feedback on climate warming during ice-sheet wastage.

    Department of Interior to Shell Oil: Let’s Hope For The Best - The Bureau of Safety and Environmental Enforcement (BSEE) issued an interim permit that authorizes Shell Oil to begin initial drilling operations in the Chukchi Sea — part of the Arctic Ocean northwest of Alaska. The decision does not allow Shell to drill into known oil or gas-bearing layers. Even so, it is a significant step in the wrong direction. BSEE Director James Watson claimed that today’s permit decision is consistent with the agency’s commitment to use the “highest safety, environmental protection and emergency response standards.” It sure doesn’t seem that way. If BSEE were serious about holding Shell to the highest standards, the agency would insist that no drilling take place until all of Shell’s oil spill response tools are on site and ready to respond in the event of an emergency. Instead, BSEE’s decision will allow Shell to drill roughly 1,400 feet below the ocean floor without an oil spill response barge and containment system on site.

    Oklahoma's Wind Power Development Strategy - Once known for oil and gas production, Oklahoma has quickly established itself as a major player in the wind power generation industry. Today the state is taking advantage of its abundant natural resources with rapid development of wind. Oklahoma was not always a big source of wind power projects, but a leader in oil and gas, and that may be what helped the state to develop its wind resources. “Our history and experience with the oil and gas industry helped us to understand the energy industry, so adding wind to the generation mix made logical sense,” said Kylah McNabb, wind development specialist out of the state Energy Office at the Oklahoma Department of Commerce. McNabb said the state has 7,000 MW of wind energy in the queue and more that are reaching the development phase. The addition of transmission lines has also helped to expand the industry, including the proposed 800 mile (1280 km), 500 kV Clean Line Energy Plains and Eastern transmission line, which would be built from wind farms in Guymon in the Oklahoma panhandle to the Tennessee Valley Authority in Memphis. The line is expected to open up 3,500 MW of wind capacity for export. Construction is expected to begin in 2014, with service scheduled to begin in 2017.

    Coal’s Road to Nowhere - In the tranquil, misty mountains of southwest Virginia, the coal industry is trying to build its very own road to nowhere. King Coal’s latest scheme is to try and take $2 billion of federal funds—our tax dollars—to build the Coalfields Expressway through rural Southwest Virginia. Coal companies plan to use mountaintop removal mining to flatten the area to make way for the road, while they keep the profits from the coal they extract. While the coal companies call it a road, local residents are calling it a taxpayer financed strip mine. Virginians aren’t taking this news lying down, though. Last Friday, when an official comment period closed, more than 4,400 Virginians and 81,000 people beyond VA’s borders had submitted comments to the Federal Highway Administration in opposition to this project—more than 85,000 comments opposing this boondoggle. These tens of thousands of Americans know that the construction of this “Coalfields Expressway” won’t serve the public. The route was designed to help a coal company, Alpha Natural Resources, access coal reserves. The controversial highway project would cut through southwestern Virginia, using eminent domain to relocate dozens of property owners while bypassing local business areas and burying at least 12 miles of streams.

    From India to the US: 'Coal-Gate' is Everywhere - A $33 billion ‘Coal-Gate’ scandal is rocking the Indian government. This ‘mother of all scams’ created a windfall for private developers who secured public resources at rock bottom prices.  It’s important to understand just how big of a deal this scam is in India.   The report which broke the scandal essentially details how the government gave away public assets (coal deposits for less than $3/ton and lots and lots of excess land) to private companies through a ‘no-bid’ process. They basically gave away public resources to private companies under the guise of the ‘public interest’. The deposits also happen to lie under India’s remaining forests that are home to endangered species (including the nearly extinct tiger) and tribal communities. These forests must be razed to get at the coal beneath them – an unacceptable attack on species protection, inclusive growth, social justice and the climate. But you know where else this epic scandal occurs? The Western public lands in the Powder River Basin in the United States. Just a few months back environmental groups sent a letter to the US Bureau of Land Management requesting that they cease ‘auctioning’ public assets to a single bidder. The scale of this coal scam is ‘only’ $28.9 billion. So the US coal-gate is only a few billion dollars less corrupt than India’s. But who’s counting?

    Weapons Plant Security Issues Are Described in U.S. Audit -  The contractors in charge of guarding the national stockpile of bomb-grade uranium in Tennessee knew well before an 82-year-old nun and two other pacifists broke through three barriers this summer that a lot of the security equipment was broken, and government managers knew it too, according to an internal audit of Energy Department operations at the weapons facility. The inspector general’s investigation found “troubling displays of ineptitude.” The intruders used ordinary bolt cutters to penetrate as far as the uranium storage building before dawn on July 28, and then went undiscovered until they approached an officer in his vehicle and surrendered, according to the audit. The officer failed to draw his gun or even secure his gun from seizure, “and permitted the trespassers to roam about and retrieve various items from backpacks they had apparently brought into the area,” the report said.  Internal communications at the weapons plant, Y-12, near Oak Ridge, Tenn., were generally so poor that security officers told the auditors that it was not unusual for roofers or utility repair personnel to show up unannounced, and that when they heard the trespassers banging on the exterior wall of the storage building with hammers, they assumed it was maintenance workers.

    Air Force insists it has Albuquerque fuel issue under control - As environmental disaster sites go, it doesn't look like much. A scattering of rusting wellhead covers and a machine noisily sucking hydrocarbon vapors from the earth scarcely hint at what has grown into a $50-million headache. But nearly 500 feet beneath this spot, a plume of aviation gas and jet propellant that leaked undetected for decades from an Air Force fuel depot has sunk into the aquifer, drifting toward wells that help supply Albuquerque's drinking water. The problem dates to the late 1950s, when a fuel off-loading facility was built on the sprawling air base bordering Albuquerque's Southeast Heights neighborhood. Pumps moved fuel from trucks and train cars via an underground pipe to large holding tanks. At some point the buried pipe started leaking and the volatile fuel seeped deep into the sandy soil. Estimates range from 8 million to 24 million gallons. No one noticed until 1999, when fuel started pooling on the surface. The facility was shut down and a handful of monitoring wells were dug to gauge the extent of the problem.

    Gulf Oil Spill 2010: U.S. Department Of Justice Accuses BP Of 'Gross Negligence And Willful Misconduct'  (Reuters) - The U.S. Justice Department is ramping up its rhetoric against BP PLC for the massive 2010 oil spill in the Gulf of Mexico, describing in new court papers examples of what it calls "gross negligence and willful misconduct." The court filing is the sharpest position yet taken by the U.S. government as it seeks to hold the British oil giant largely responsible for the largest oil spill in U.S. history. Gross negligence is a central issue to the case, slated to go to trial in New Orleans in January 2013. A gross negligence finding could nearly quadruple the civil damages owed by BP under the Clean Water Act to $21 billion. The U.S. government and BP are engaged in talks to settle civil and potential criminal liability, though neither side will comment on the status of negotiations.

    US accuses BP of gross negligence in gulf - The US Department of Justice intends to prove at trial that gross negligence or wilful misconduct by BP caused the 2010 Deepwater Horizon disaster in the Gulf of Mexico, government lawyers have said, in the clearest statement yet that they are seeking the maximum possible penalties from the British oil group. In a ferociously worded memo, filed with the New Orleans court that is hearing the civil case over the spill, DoJ lawyers accused BP of a “culture of corporate recklessness,” as revealed by email exchanges among BP staff before the explosion on the rig. “The behaviour, words and actions of these BP executives would not be tolerated in a middling size company manufacturing dry goods for sale in a suburban mall,” the government lawyers wrote. “Yet they were condoned in a corporation engaged in an activity [deepwater drilling] that no less a witness than Tony Hayward [former BP chief executive] himself described as comparable to exploring outer space.”

    Tests show oil found on Louisiana shore came from BP spill - Preliminary lab results show two oil samples taken on the Louisiana coast are from BP's 2010 Gulf spill, state officials said Thursday. The oil was discovered on Elmer's Island, said spokeswoman Olivia Watkins of the state Coastal Protection and Restoration Authority. "There are additional samples in the testing pipeline. However, the proximity of these other oil mats is very close to those that tested positive for BP oil," she told CNN in an e-mail. Samples also are being taken at other locations on the coast, according to Watkins.In the wake of Hurricane Isaac, state officials reported tar balls and a large oil mat along the Gulf shore south of New Orleans. It's not clear whether the hurricane swept tar balls ashore or exposed them under the sand, U.S. Coast Guard Petty Officer Bill Colclough said. The U.S. Coast Guard reported finding three oiled birds in the area on Monday. BP said Wednesday it was heading to the coast to test whether tar balls and oil are from the 2010 spill.

    Mexico turns to Texas for relief during natural gas crisis - Mexico’s national oil monopoly has been issuing critical alerts seemingly every week, warning of natural gas shortages lasting hours or even days and crimping supplies to homes, power plants and factories. And yet, the country has some of the world’s largest natural gas reserves and easy access to a cheap and plentiful U.S. supply. “There hasn’t been enough energy planning in this country,”“Huge errors of omission have brought us a gas crisis.” The gas squeeze will only worsen as many of Mexico’s new and existing electricity plants abandon coal and other fuels in favor of natural gas, gobbling up much of the available supply. Petroleos Mexicanos, or Pemex, as the monopoly is called, will prove unable to get much more of the gas produced in its own fields to market. Amid renewed political pressure to further open Mexico’s energy industries to private interests, energy planners have launched a frenzied expansion of the country’s woeful pipeline system. As much as 3 billion additional cubic feet per day of U.S. natural gas, most of it from Texas, will feed the new grid.

    Ohio Department of Natural Resources: We’ll Let the Public Know What’s Happening After You Can No Longer Object - The fracking industry has dramatically increased its activity in Portage county recently. In some cases the activity is unmistakably tangible (more on that next week), but the real action at the moment seems to be preparing the ground for the deluge. The paperwork is coming in fast and furious, so much so that we are now one of the top ten counties in the state for fracking. Those of us concerned about that have found using the tools theoretically available to us can be a daunting task. The attempt to learn more about the Soinski Wells really brought the point home. For instance, permit applications are supposed to be submitted to the largest local paper in the effected area. Instead they were published in the Portage County Legal News. Let me tell you something about the Portage County Legal News: There is not even a print edition of the Portage County Legal News. The Portage County Legal News is the best kept secret in Portage county. Several citizens contacted ODNR Geologist Tom Tomastik with questions. One was procedural – did the fifteen day public comment period begin on the applications date from the Portage County Legal News announcement or from their announcement in a proper outlet? But there were also questions on the details in the applications. There appeared to be some information missing in the application – there seemed to be more there on the ground than the application described,

    Shale oil everywhere… for a while - The US is going to be free from the tyranny of imported crude oil soon, according to just about everyone. This is thanks to the wonders of shale gas extraction technologies being applied to sizeable and mostly untapped shale oil reserves. Previously marginal resources can now be economically extracted. Even the Europeans are getting excited about it. It’s a game changer. You can probably guess what’s coming next… Bernstein Research’s Bob Brackett (H/T Steve Levine) has an interesting note which examines the performance of shale oil wells in the Bakken formation. While the formation is in both Montana and North Dakota, Brackett narrowed his analysis to those in the former state. There are high hopes for future output of the Bakken shale, which is why a graph like the below is disconcerting: The decline cannot be explained simply by the number of wells being operated — because those have increased. A per-well average looks like this:Exhibit 7 shows the same type curve in logarithmic scale. This allows us to identify the time at which a Bakken well becomes a stripper well – 6 years into production.

    The Shale Revolution: What Could Go Wrong? - A funny thing happened on the way to Barack Obama and Mitt Romney's goal of greater U.S. energy independence: American industry got there first, on paper at least. Now the question is: What can go wrong? Thanks to the hustle of innovative U.S. energy companies, the discovery of vast shale gas and oil fields, and stronger national conservation, some forecasts peg energy independence for North America at just a few years off. A Citigroup report calls the region "the new Middle East." Pimco says the trend is a "game changer." Bain & Co. declares it a "new paradigm."The knock-on effect, some believe, could be historic: millions of new jobs and the "reindustrialization of America" as companies hitch new manufacturing to cheap energy,  already planning new chemical plants fueled by rocketing shale output. Driven by new fields such as the Bakken in North Dakota, U.S. oil production has hit levels not seen since 1998. So why is John Hofmeister, the former chief of U.S. operations for Shell, sounding an alarm? "Unless something seriously changes in the next five years," he said in an interview, "we'll be standing in gas lines because there won't be enough oil to go around." The reason is that there's still disagreement over the factors governing the growth of production from the new fields. Among those factors: the direction of global supply and demand, how price will help or hinder exploration, whether new regulation will impede development, and how long it will take to build the infrastructure needed to get more oil to market.

    It's Official - China Embraces Oil Shale and Fracking - The Achilles Heel of China’s dramatic economic growth has been its reliance on imported energy, everything from oil to natural gas to coal.  Developing indigenous energy resources has accordingly become a high priority for Beijing, and this is most evident in the country’s decision to exploit its vast shale oil reserves. The International Energy Agency reported that China, which consumed about 4.7 million barrels a day in 2000, will consume about 9.7 million barrels a day in 2012. That growth has been among the factors pushing world oil prices from near $30/barrel in 2000 to 2012 prices ranging between $80 and $110.A partial solution? Oil shale - China has roughly 240 billion tons of accessible oil shale reserves. According to data developed by China's National Energy Administration, about 10 million tons of oil can be produced from these reserves annually. Ding is in no doubt of the necessity to produce petroleum from oil shale, saying, "The oil shale industry is essential to safeguarding China's energy security."And China intends to exploit its shale natural gas as well. Its technique of choice is hydraulic fracturing, or “fracking,” an increasingly controversial process in the United States, which currently leads the world in developing the technology.

    Fracking caused many low-level earthquakes in B.C., probe finds - The controversial drilling practice known as fracking has caused scores of low-level earthquakes in British Columbia's Horn River Basin, the region rich in shale gas, a new report finds. These caused no damage or injuries, and only one was felt on the surface near pre-existing faults. Still, a recent probe into the quakes could well provide ammunition to those opposed to this method of drilling for natural gas. Fracking is hydraulic fracturing, using water, sand and chemicals or gases to burst underground rock formations, pushing natural gas to the surface. The practice has been a boon to the energy sector. It is highly controversial, and was linked to two minor earthquakes in Britain last year. Now, a report released recently by the B.C. Oil and Gas Commission sheds light on the huge shale gas deposits in northeastern B.C. Quakes recorded by Natural Resources Canada ranged from 2.2 to 3.8 on the Richter scale, below the 4 mark and thus deemed minor. "The investigation has concluded that the events observed within remote and isolated areas of the Horn River Basin between 2009 and 2011 were caused by fluid injection during hydraulic fracturing in proximity to pre-existing faults," the commission said in its report.

    Natural Gas Wars: A Look at Gazprom's Underhand Tactics - Why would France suddenly prohibit shale gas exploration? Sure, there are environmental issues with horizontal drilling and hydraulic fracturing, the methods used to extract gas from porous shale deep underground: flammable drinking water, earth quakes, cows that die, radioactive sludge in sewage treatment plants.... But French governments have had, let’s say, an uneasy relationship with environmentalists.  No, there must have been another reason why the government of Nicholas Sarkozy prohibited shale gas exploration in 2011, after having already issued permits in 2010. A mini hullabaloo had broken out, stirred up by the European Ecologists and The Greens (EELV), the fringe on the French left. And Sarkozy caved! Without a fight! Enthusiastically. The government of François Hollande just confirmed the prohibition when Environment Minister Delphine Batho declared: “Hydraulic fracturing remains and will remain prohibited.” The clue: Sarkozy suddenly visited Japan on March 31, 2011, a couple of weeks after the horrific earthquake and tsunami, and the subsequent nuclear accident at Fukushima, to declare in front of shell-shocked Japanese that there was “no alternative” to nuclear power.

    Moving Crude Relies on Aging Pipeline System - "In 2010, several systems that remain in service today already exceeded fifty years in age, with no major plans to retire existing infrastructure based on … age alone,” said a panel of pipeline executives in “Crude Oil Infrastructure”, a report to the National Petroleum Council. The panel warned that while age doesn’t always matter, “integrity issues,” including corrosion and failure of welded seams, “will become more common due to a number of age related issues.” The age issue has come up as the pipeline industry undergoes a major shift in the direction of crude oil piped through Texas. Imported oil once arrived along the Gulf Coast and was then piped northward. Now, with domestic production increasing in states including Texas, Oklahoma, North Dakota and also in Canada, the flow is reversing.

    Railroads Are on a Fast Track, Thanks to Bakken Oil — Among the biggest beneficiaries of the demand for transport of crude oil out of North Dakota’s Bakken shale region are the owners of the two main rail links to the region, Canadian Pacific Railway and Burlington Northern Santa Fe, which is owned by Warren Buffett’s Berkshire Hathaway. The companies are exploiting the lack of pipeline capacity needed to ship the region’s rapidly growing production of crude to refineries thousands of miles away, and that demand is serving to more than offset expected weakness from their shipment of agricultural products due to the drought and lower coal shipments as utilities shift to burning the cheaper natural gas. Oil production from the 200,000-square-mile Bakken basin, which extends into Montana and southern Canada, is skyrocketing, thanks in part to the use of hydraulic fracturing, or hydro-fracking, a process where a mixture of water, sand and chemicals is blasted deep underground to release oil and natural gas trapped within shale rock.

    Tankers too risky for coast environment, independent engineering report says - The Enbridge Northern Gate-way proposal to ship oilsands bitumen from Kitimat along the B.C. coast carries an unacceptable risk of a significant spill, according to an independent analysis by three professional engineers. The engineers, who include two emeritus professors from the University of B.C., find that the risks of an eventual spill are too high through the expected 50-year lifetime of the project, "and the unrefined bitumen too toxic and hard to clean up to be acceptable for a pristine coastline."The independent analysis generally agrees with Enbridge's estimate that a spill of a volume greater than 5,000 cubic metres will occur, on average, every 200 years. "In fact, consistent with a 200-year return period, there is a probability of 22 per cent that there will be at least one spill during the 50-year operational lifetime for the project," the engineers explain in a summary of the technical document supplied to The Vancouver Sun.

    Flood of Pacific oil exports leaves West Coast refinery thirsty for crude - A wave of Alberta crude oil is washing up on British Columbia shores, destined for export. But the sole refinery on Canada’s West Coast is finding it so difficult to secure domestic oil that it is considering, instead, buying it from as far away as Saudi Arabia. Chevron Canada operates a refinery in British Columbia, just a couple of kilometres away from a pipeline that carries crude from Alberta’s surging oil sands to Pacific waters. But as Canada’s energy industry pushes for massive expansion of that pipeline to take more Alberta crude to the West Coast in the chase for higher oil prices abroad, Chevron is scrambling to obtain enough domestic oil to fill its refinery.It’s a startling illustration of the upheaval sweeping the oil patch – a refinery finds itself competing with global customers for oil that is literally pumped past its back door. Chevron says it has scoured the world for potential sources of new supply, and has been forced to build new facilities to import oil on trains and trucks to feed its Burnaby refinery. Importing crude from Saudi Arabia – or other places such as Oman, Iraq and Russia – has proven a difficult proposition since it would require major new dock facilities. But by next year, 15 per cent of its oil will come by rail and highway.

    Why the oil industry doesn't want you to remember the last 14 years -- What were the prices of oil and gasoline in 1998? I've been taking an informal poll to find out what people remember about oil and gasoline prices in that year. So far, only one person has correctly characterized prices back then. Most guesses have clustered around $2.50 to $3 a gallon for gasoline (in the United States). Only one person could come up with a crude oil price which she guessed was around $55 a barrel. The answers show a vague recollection that oil and gasoline were cheaper than they are today. But just how much cheaper has been lost down the memory hole. Okay, I know the suspense is killing you. Here's how gasoline and oil fared in 1998. The nationwide average price of a gallon of gasoline in the United States in December of that year was 95 cents. The closing price for a barrel of crude oil sold on the New York Mercantile Exchange on December 31 was $12.05. Just three weeks earlier the price of oil had hit its nadir for the year at $10.72. Oil had started the year above $17 and steadily slid as the Asian financial crisis slowed the world economy and reduced oil demand. Gasoline prices dropped only a little during the year starting from the January average of $1.09 a gallon. Why does the oil industry want you to forget this? Because after a 10-fold increase in the price of crude oil and a fourfold increase in the price of gasoline, the industry is once again trying to sell the same story of continued abundance that they were selling back in the late 1990s.

    Don't Worry, There's Plenty of Oil (video) - In recent months we've seen a spate of articles, reports, and op-eds claiming that peak oil is a worry of the past thanks to so-called "new technologies" that can tap massive amounts of previously inaccessible stores of "unconventional" oil. "Don't worry, drive on," we're told. But as Post Carbon Institute Senior Fellow Richard Heinberg asks in this short video, what's really new here? "What's new is high oil prices and … the economy hates high oil prices."

    Where the Peak Oil Community Got it Wrong - So, here we are roughly four years after the first huge peak oil-related spike in oil prices helped trigger a major market meltdown and nearly caused the world's banking system to seize up. Flash forward four years later, and not only are corporate profits soaring, but the stock market is back to pre crash levels. There are still many ominous economic storm clouds on the horizon and much of the damage from the crash has been merely papered over, but each time it looks like another crisis is about to unfold our economic overlords pull another rabbit out of their hat and "save" the day. Just how is it that more than four years after after world oil prices spiked to $147 dollars a barrel our industrial civilization has thus far managed to weather the storm as well as it has?  Quite obviously, many of the predictions made by members of the peak oil community back in the wake of the 2008 price spike and crash were wrong, even if peak oil theory itself remains valid. It is only by analyzing what we got wrong that we may strive to try and avoid making such erroneous predictions in the future. This list below is by no means intended to be comprehensive, but merely represents some of the predictions made by peak oil analysts four years ago that have turned out to be incorrect.

    Alberta deficit set to triple on slumping oil prices - Alberta is veering toward a deficit as high as $3-billion this year, more than three times larger than expected, as a slump in oil prices forces the government to find ways to slash spending. Finance Minister Doug Horner, who delivered the first-quarter fiscal update Thursday, blamed a shaky global economy and said Alberta’s bottom line for 2012-13 has been hammered by weak royalties from bitumen and conventional oil, and low land lease sales to energy producers.Unless commodity prices improve, it could mean a provincial deficit of $2.3-billion to $3-billion, Mr. Horner said. He pledged to keep the province on track to reach a surplus position, as previously promised, by 2013-14. The surprising deficit forecast shows Alberta has been too optimistic about resource revenue as the province fails to capture the full benefit of strong global oil demand. Though prices for Brent and West Texas Intermediate crude are firm, Canadian producers have been suffering through a prolonged period of discounted domestic prices because of oil export bottlenecks that often cause an oversupply.

    Saudi Oil Well Dries Up - If Citigroup is right, Saudi Arabia will cease to be an oil exporter by 2030, far sooner than previously thought. A 150-page report by Heidy Rehman on the Saudi petrochemical industry should be sober reading for those who think that shale oil and gas have solved our global energy crunch. I don't wish to knock shale. It is a Godsend and should be encouraged with utmost vigour and dispatch in Britain. But it is for now plugging holes in global supply rather than covering the future shortfall as the industrial revolutions of Asia mature. The basic point – common to other Gulf oil producers – is that Saudi local consumption is rocketing. Residential use makes up 50pc of demand, and over two thirds of that is air-conditioning. The Saudis also consume 250 litres per head per day of water – the world's third highest (which blows the mind), growing at 9pc a year – and most of this is provided from energy-guzzling desalination plants. All this is made far worse across the Gulf by fuel subsidies to placate restive populations.

    Has OPEC misled us about the size of its oil reserves? Does it matter? - Has OPEC misled us about the size of its oil reserves? The short answer is probably. The long answer is that currently, there is no way to know for sure. The next question we should ask is: Does it matter? The answer is most definitely yes. OPEC, short for the Organization of Petroleum Exporting Countries, currently claims that its 12 members hold 81.3 percent of the world's oil reserves. And, with few exceptions the world believes them. Trouble is these reserves "are not verified by independent auditors," according to a study (PDF) done by the U.S. Government Accountability Office, the nonpartisan investigative arm of the U.S. Congress. OPEC reserves are simply self-reported by each country. Essentially, OPEC's members are asking us to take their word for it. But should we? It ought to give us pause that the reserve numbers OPEC countries release are used in major reports produced by the U.S. Energy Information Administration (EIA); the Paris-based International Energy Agency (IEA), a consortium of 28 of the world's oil importing nations; oil giant BP which annually publishes the widely cited BP Statistical Review of World Energy; and myriad other organizations. Reports from the two agencies cited above and BP are frequently consulted by governments, industry, banks and investors around the world for policy formulation, long-term planning, and lending and investment decisions. Yet these groups seem blissfully unaware of the caveats surrounding the numbers in those reports and by extension surrounding more than 80 percent of the world's oil reserves.

    Iraq oil exports highest in more than 30 years - Iraq's oil exports reached their highest level in more than three decades last month as the country's output has continued to increase, oil ministry officials said on Saturday. Overall exports averaged 2.565 million barrels per day (bpd), bringing in $8.442 billion in revenues on the back of average oil prices of $106 per barrel, Falah al-Amiri, head of the State Oil Marketing Organisation, said. Exports averaged 2.516 million bpd in July. "The level of exports was the highest in more than 30 years," said ministry spokesman Assem Jihad. Amiri said oil production currently averaged around 3.2 million bpd. Iraq has proven reserves of 143.1 billion barrels of oil and 3.2 trillion cubic metres (111.9 trillion cubic feet) of gas, both of which are among the largest in the world.

    IPS – IAEA Report Shows Iran Reduced Its Breakout Capacity The International Atomic Energy Agency (IAEA) report made public Thursday reveals that Iran has actually reduced the amount of 20-percent enriched uranium available for any possible “breakout” to weapons grade enrichment over the last three months rather than increasing it.Contrary to the impression conveyed by most news media coverage, the report provides new evidence that Iran’s enrichment strategy is aimed at enhancing its bargaining position in negotiations with the United States rather than amassing such a breakout capability. The reduction in the amount of 20-percent enriched uranium in the Iranian stockpile that could be used to enrich to weapons grade is the result of a major acceleration in the fabrication of fuel plates for the Tehran Research Reactor, which needs 20-percent enriched uranium to produce medical isotopes. That higher level enriched uranium has been the main focus of U.S. diplomatic demands on Iran ever since 2009, on the ground that it represents the greatest threat of an Iranian move to obtain a nuclear weapon capability.When 20-percent uranium is used to make fuel plates, however, it is very difficult to convert it back to a form that can enriched to weapons grade levels.

    Iran has "some problems" in selling Crude Oil: Ahmadinejad -- Iran is having some problems in exporting its oil, admitted Mahmoud Ahmadinejad, the Iranian President in an interview on state television. The President said, his govt was determined to surmount that and other challenges. He accused the enemy of using psychological warfare by imposing sanctions. The country has been denying reports that it has been experiencing a lull in exports. On Tuesday, Iran’s envoy to the Organisation of the Petroleum Exporting Countries (OPEC), Mohammad Ali Khatibi, said ISNA news agency crude exports were “almost normal”. Meanwhile, OPEC in its latest report noted Iranian oil production dipping to the lowest in 20 years. That figures add to 2.8 million barrels per day. “We have oil and the world needs it,” President said, adding that his Government was also running a “very rigid budget.” reported Business Line. The country would weather the sanctions, he expressed confidence.

    Iran may be successfully smuggling oil, avoiding customs - Iran's oil output hit a new low recently as sanctions, particularly those from the EU took hold. The chart below points to an unprecedented collapse in production. And it is estimated that Iran's oil exports are now down some 66% YoY.But are the official export numbers right or is Iran finding ways to get around the sanctions? According to Bloomberg, Iran's tanker fleet is now on the move. Since February Iran's tankers have been used for storage of excess oil that could not be sold into the market because of the sanctions. These ships were kept stationary. But now Iranian crude carriers seem to be on the move. Bloomberg: - Iran’s tanker fleet is the busiest since February as fewer vessels store unsold oil at sea and more switch to transporting cargoes that most crude carriers are barred from hauling, said EA Gibson Shipbrokers Ltd. The number of very large crude carriers operated by Tehran- based NITC in use for floating storage fell to 10 by the end of August, That was a six-month low, he said. “More of these ships are being used to move crude sales into the international market, rather than to store unsold cargoes in the Middle East region, which is what was happening in 2010,” 

    India joins deep sea mining race - India has joined the race to explore and develop deep-sea mining for rare earth elements — further complicating the geopolitics surrounding untapped sources of valuable minerals beneath the oceans. The country is building a rare-earth mineral processing plant in the east coast state of Orissa and it is spending around US$135 million to buy a new exploration ship and to retool another for sophisticated deep-water exploration off its coast. The Central Indian Basin, for example, is rich in nickel, copper, cobalt and potentially rare-earth minerals, which are highly lucrative and used widely in manufacturing electronics such as mobile phone batteries. They are found in potato-shaped nodules on the deep-sea floor. "These nodules offer a good solution to meeting the nation's demand for metals," The Indian government also plans to bring together its marine science experts and engineers in nuclear energy, space research and defence, using the their expertise to help accelerate mineral extraction, according to a July press statement.

    By 2015 Hard Commodity Prices Will Collapse; Australia's Mining Boom Dies (and the Official Denials Start) -  Pettis now believes commodity prices will collapse by as much as 50% over the next few years. His rationale is solid.  Here are a few snips from a recent Michael Pettis email in which he outlines the case. For the past two years, as regular readers know, I have been bearish on hard commodities. Prices may have dropped substantially from their peaks during this time, but I don’t think the bear market is over. I think we still have a very long way to go. 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.

    As The Iron Anvil Falls, Will Australia Be Stuck Below It? -  Iron ore prices, which have fallen by 24% in the past month, have been front and center in our views on the China debacle recently. Following the RBA's decision not to cut rates last night we thought Macquarie's recent insight into just how bad an impact a sustained weakness in demand could have on the Australian economy was worthwhile, as hope seems to remain that the destocking among Chinese steel mills will end at some point and demand will re-emerge phoenix-like (though we strongly suspect not).  Sharp falls in commodity prices undermine mining company cash flow, which could prompt firms to divest assets and cut capex budgets - borne out by estimates of a 50% cut in capex for Rio and BHP if pressures remain.

    Australia Department Store Sales Slump 10.2 Percent; Retail, Food Store Bankruptcies; Reflections on Housing and Commodities Bust - Interest rates cuts that helped boost retail sales in Australia over the past two months have already worn off. Economists expected a further rise in sales this month only to see a seasonally adjusted .8% decline. Now Retailers want RBA action as sales dive Retailers hope the biggest monthly drop in consumer spending in nearly two years will trigger alarm bells at the central bank when its board meets to discuss interest rates. Retail trade fell by a seasonally adjusted 0.8 per cent in July to $21.4 billion, after being bolstered in the previous two months by government handouts and earlier interest rate cuts by the Reserve Bank of Australia (RBA). Economists had expected an overall spending rise of 0.2 per cent in the data collected by the Australian Bureau of Statistics. But department stores' sales slumped 10.2 per cent, the largest fall since April 2005.

    Gina Rinehart calls for Australian wage cut (BBC video) Australian mining magnate Gina Rinehart has criticised her country's economic performance and said Africans willing to work for $2 a day should be an inspiration.

    Links with China bring 'long-term pain': study - Bribery, corruption and state interest trumping business logic remain common in China, and Canada must remain keenly aware of those trends as it mulls closer economic ties with the Asian superpower, says a report published Thursday. The University of Calgary paper, titled Dancing With The Dragon, was released the same day two other reports urged Canada to take steps toward fostering more business relationships between the two countries. As the federal government reviews China's $15-billion bid for Canada's Nexen Inc. — the largest foreign takeover attempt to date by the Communist country — the three publications together serve as a warning for Ottawa not to trade long-term prosperity for short-term gains. "Those short-term gains very often create long-term pain in such a terrible way that I [have seen] the suffering of those people [who] were raking in new opportunities and then all of a sudden they dry out,"

    Huge Shiploads Of Iron Ore Continue To Come Into China And Sit Idly At Ports - Despite weakening demand for iron ore from steel makers on slowing economy and construction works, and very week demand for cotton as the textile industry suffer, China continues to import massive amount of iron ore and cotton. At a port in Qingdao, China Securities Journal reports that despite imported iron ore sitting at the port idle for extended period of time, new imported iron ore never stops coming into the port of Qingdao, with two carriers of iron ore arriving at the port almost on a daily basis despite that there is clearly very few orders from steelmakers. The very weak demand for iron ore is manifested by the very weak iron ore prices, which are almost crashing. The chart below shows the iron ore total ports inventory. Since the second half of last year, inventory has reached elevated level and is now remaining so.

    Iron ore, an alternative view - The following comes from Icap’s shipping team on Friday: The carefully engineered economic slowdown in China is a fact clearly expressed in the recent readings of some key economic indicators. However, we fail to see any affirmative sign of a weakness in the structural demand for iron ore and other raw materials key for industrial output. Let’s allow Icap to explain their thinking: The imports of iron ore into China in H1 2012 are 9.3 per cent above the same period last year and domestic crude steel production is up 1.5 per cent y-o-u. Additionally coal imports, both thermal and metallurgical, for Jan-July period are up 51.3% y-0-y… All this is perfectly in line with our own projections for trade in 2012, which have changed much since Dec 2011. In  other words, if there is any slowdown in China, it is certainly not negatively affecting the major bulk trade flows into the country and therefore the related shipping market. In fact, it is quite the opposite. If we also compare the y-o-y result of iron ore imports into South Korea and Japan, the picture becomes even more confusing for some — Japanese iron ore imports in H1 2012 as up 4.4% and South Korea imports are up 4.7% compared to H1 2011.. No surprise global steel production is up nearly 1% y-o-y then! Which means if anything we’re seeing a supply side shock, which most importantly is not impacting consumption.

    Chinese manufacturing hits 9-month low - China’s economy weakened further in August, according to a survey of the manufacturing sector that fell well short of expectations. The purchasing managers’ index, an important gauge of industrial activity, slouched to 49.2 in August, a nine-month low. It had been forecast to stay roughly level with July’s 50.1 reading. Analysts had long predicted that China’s economy, slowing since early last year, would enjoy a rebound by about now, but the sluggish PMI points instead to a more serious downturn. That will be unwelcome news for the world economy as Europe slides towards another recession and the US struggles to gain momentum. “China’s manufacturing sector continues to struggle, weighed down by a significant domestic slowdown, a wholly unsupportive external climate and a completely insufficient policy response,” economists with IHS Global Insight wrote in a note. “The government has underestimated the pace of the slowdown and is behind the curve.”

    China Manufacturing Unexpectedly Contracts as Orders Drop -  China’s manufacturing unexpectedly shrank for the first time in nine months as new orders contracted and output rose at a slower pace, signaling the slowdown in the world’s second-biggest economy is deepening. The Purchasing Managers Index fell to 49.2 in August from 50.1 in July, the National Bureau of Statistics and China Federation of Logistics and Purchasing said yesterday in Beijing. Australia & New Zealand Banking Group Ltd. cut its estimate for China’s full-year growth after the report. The data increase pressure on Premier Wen Jiabao to reverse the slowdown ahead of the transfer of power to a new Communist Party leadership that begins later this year. Record unemployment in the euro area and a jobless rate stuck at more than 8 percent in the U.S. may crimp an export rebound while slumping corporate earnings, bad debts at banks and property curbs are restraining investment in China. “The government won’t want to hand over an economy in a hard landing to the next administration, so authorities are likely to become bolder with policy easing,

    China factory index slumps to 41-month low: HSBC - Chinese manufacturing activity deteriorated in August, new data showed, with some analysts wondering whether Beijing was dropping the ball in delaying the rollout of policies to counter the slump. HSBC’s China manufacturing Purchasing Mangers’ Index (PMI), released Monday, offering up its bleakest reading since March 2009, following on the heels of an official PMI Saturday which also showed conditions worsening. HSBC’s PMI fell to 47.6 in August on a 100-point scale, down from July’s 49.3, marking the 10th straight month-on-month deterioration. The final result also marked a downward revision from an initial 47.8 reading, and was down sharply from July’s 49.3 level. Details of the HSBC survey signalled a renewed decline in factory output, with new export orders and input costs subindexes also at their weakest readings since March 2009.

    China Manufacturing PMI At Lowest Since March 2009; Market Response 'Bad Is Good' So Far - AUDJPY is getting smacked hard in this evening's admittedly thin trading given the US holiday. China's double-whammies of PMI data (both official and HSBC versions - with the latter revised lower from Flash to its lowest level since March 2009) and some weak Aussie retail sales data is weighing very heavily on the critical carry trade pair. S&P 500 futures traded down in line with AUDJPY from Friday's close but once the China PMI came as weak as it was so the 'Good is Bad', the PBoC have to do something crowd started buying and dragged ES up a few points. Juxtaposing these dismal macro data was a better than expected China Services PMI and Aussie manufacturing index - as the Schrodinger 'economy is good and bad' headlines continue to confound. For the 'bad-is-good' crowd who see stimulus as the solution, we offer two words 'Steel over-capacity'. The last time HSBC and Official Manufacturing PMIs were sub-50 was in Nov 11 - right before the last coordinated central bank intervention (but energy and food prices were dramatically different then). This is the lowest HSBC PMI since March 2009...

    China New Export Orders Drop Most Since March 2009, Operating Conditions Down 10th Consecutive Month; China's Export Machine Grind to a Halt - The HSBC China Manufacturing PMI™ shows Manufacturing sector operating conditions worsened at the sharpest rate in 41 months.  Summary: August data signalled a renewed decline in Chinese manufacturing output, as new business decreased at the sharpest rate in nine months. Consequently, backlogs of work fell modestly, and job shedding was recorded for the sixth month in succession. On the price front, average input costs declined at the sharpest rate in 41 months, while the rate of output price discounting remained sharp. The pace of reduction in new orders was solid, and the most marked in nine months. Meanwhile, new export orders also decreased during August, and at the sharpest rate since March 2009. With new business decreasing further, companies depleted their volumes of work-in-hand (but not yet completed) over the month. Although only modest, the rate of decline in outstanding business was the sharpest since January 2009.

    China’s inventories pile up as demand flat-lines - You know it’s going to be a bad year for China’s exporters when all manner of goods – including the kitchen sinks – are gathering dust in storerooms. As the country’s economic growth slows and its exports to North America and Europe drop off, inventories of everything from iron ore and copper to cars, liquor and designer goods are growing. Chinese exports grew just 1 per cent in July. Now, makers of home appliances are warring with each other on discounts, trying to drum up business, and manufacturers are looking desperately to emerging nations to try to fill the gap. The overcapacity stretches from the start of the production cycle to finished goods. The glut in commodities, fed in part by steel mills continuing production this summer despite low prices, is bad news for exporting countries like Canada. Though mills are now thought to be slowing down, the depressed prices are expected to continue along with de-stocking until at least the end of 2012, analysts say.

    China Auto Sales Slow, Will Still Pass U.S.-Japan-Germany - Three years ago, China passed the U.S. as the world’s biggest car market. By 2015, it will likely exceed the U.S., Japan and Germany combined -- and that takes into account the current economic slowdown. While sales growth has stalled the past two years, high savings rates and pent-up demand mean Chinese consumers are expected to buy 25.5 million vehicles three years from now, according to the average forecast of IHS Automotive, Macquarie Equities Research and the Economist Intelligence Unit. Most of the new growth will come from less-developed central and western areas, such as the city of Chengdu, where global auto executives are gathering for an industry forum tomorrow. The top 10 automakers have announced at least $38.4 billion of investments in the past two years to expand in China, banking on the world’s biggest pool of first-time buyers to counter slowing markets in Europe and Japan. General Motors Co. (GM), Ford Motor Co. (F), and Volkswagen AG are adding capacity and introducing a wider range of models in the country, tailored to cater to the next wave of consumers.

    Guangzhou Moves to Limit New Cars - The municipal government of Guangzhou, a sprawling metropolis that is one of China’s biggest auto manufacturing centers, introduced license plate auctions and lotteries last week that will roughly halve the number of new cars on the streets. The crackdown by China’s third-largest city is the most restrictive in a series of moves by big Chinese cities that are putting quality-of-life issues ahead of short-term economic growth, something the central government has struggled to do on a national scale. The measures have the potential to help clean up China’s notoriously dirty air and water, reduce long-term health care costs and improve the long-term quality of Chinese growth. But they are also imposing short-term costs, economists say, at a time when policy makers in Beijing and around the world are already concerned about a sharp economic slowdown in China.

    China’s Service Industries Increase at Slower Pace, HSBC Says - China’s non-manufacturing industries expanded at a weaker pace in August as new orders slowed, a private survey indicated. The purchasing managers’ index fell to 52 from 53.1 in July, HSBC Holdings Plc and Markit Economics said today. A reading above 50 indicates expansion. China’s government faces mounting pressure for additional measures to support growth as the economy risks slowing for a seventh straight quarter on weakness in exports and output. The HSBC gauge contrasts with a services index released Sept. 3 by the government, which showed a faster expansion in August. “The main risk confronting China’s economy is still to the downside,”

    Allegations Chinese Students Forced to Work on iPhone 5s - In what may be the most compulsory internship experience you’ve ever heard of, the Shanghai Daily is reporting that thousands of Chinese students from schools neighboring a Foxconn factory in the city of Huai'an were forced to help fulfill iPhone 5 orders.  According to the paper, students were taken by bus to the plant, and started working on the production line last Thursday after the Taiwanese-owned company was badly in need of extra hands to keep up with assembly of the hotly anticipated new version of Apple’s iPhone line.  Teachers from nearby schools confirmed via a radio report that classes had been interrupted, as these internships would fulfill their pupils' need to "experience working conditions." The student workers received the equivalent of $243.97 per month as compensation for working six days a week, and clocking in 12 hours per day.

    China Economy’s Deterioration Raises Risk of Wen's First Miss -- China’s economy is showing mounting signs of deterioration from manufacturers to banks, raising the risk that outgoing Premier Wen Jiabao will miss his growth target for the first time since taking office in 2003.  Manufacturing unexpectedly contracted for the first time in nine months in August as orders shrank, a government survey showed Sept. 1. The reading adds to evidence of weakness after a surfeit of unsold goods left near-record rubber stocks at China’s main shipment port and deepening financial strains saw a 27 percent jump in overdue loans at the five biggest banks in the first half. China hasn’t failed to exceed the Communist Party’s annual growth target since the throes of the Asian financial crisis in 1998, and a miss of this year’s 7.5 percent goal may complicate a once-a-decade leadership handover. The outgoing generation of policy makers has held back on stimulus this year as it seeks to rein in a property-market boom and avoid a jump in bad loans.

    Bad loan risk looms over banking sector - China's commercial banks are facing a high risk of increased bad loans, partly due to a lending spree to support massive economic stimulus three years ago. That risk might worsen as local governments have attempted to unleash a new round of stimulus packages amid the current economic downturn, market analysts have warned. Seven out of the 16 Chinese listed banks reported a rise in their Non-Performing Loan ratios in the first half of 2012, according to their interim reports. Though many managed to keep the ratio below 1 percent, bad loans in some particular sectors and regions were more significant. China Everbright Bank, for example, said the NPL ratio for its loans extended to small and medium-sized businesses reached 1.63 percent.

    How do we measure debt? - Pettis - I have found it interesting that two of my favorite financial periodicals, both British, have such opposing views on China.  While the Financial Times has been mostly in the skeptic’s camp for many years, the Economist has been noticeably bullish – although generally the most reasonable and intelligent of the bulls.  For example the current issue of the Economist sees the recent retreat from the difficult rebalancing process as a good thing: The only economic anxiety to rival property is local-government debt. Estimated at 10.7 trillion yuan at the end of 2010 by official auditors (and a lot higher by unofficial ones), much of it was held at one remove by so-called local-government financing vehicles. When one such, Yunnan Highway Development and Investment, told creditors in 2011 that it would not repay the principal on their loans, it was described (with equal hyperbole) as the “default heard around the world” by Business Insider, a news website. Both worries have roots in the stimulus spree on which China embarked in November 2008. State-owned enterprises began bidding enthusiastically in land auctions, and local governments let their pet projects run wild. Ever since, the two problems have preoccupied China’s central government.

    The renminbi won’t replace the dollar any time soon - The latest stop on the renminbi’s whistle-stop tour to international stardom is Taiwan. From now on, Taiwanese banks will be able to clear transactions in the “redback”, making Taipei another offshore renminbi centre alongside Hong Kong. With Singapore and London jostling to be next and China now firmly established as the world’s second-largest economy, surely it can only be a matter of time before much of the world’s trade is settled in renminbi and central banks are holding a substantial part of their reserves in the Chinese currency? Not so fast. The “internationalisation of the renminbi” – and never was something so vital for sophisticated dinner-party chatter so hard to pronounce – is as much hype as reality. A look at history is useful. By the time the dollar supplanted sterling as the go-to international currency around 1925, the US had been the world’s biggest economy for more than 40 years. Even then, it took the first world war and massive disruption of European trade to cement its place. True, China’s industrialisation is happening at warp-speed. It is possible that the internationalisation of its currency will move at a similar pace. But there are reasons to doubt that the renminbi is yet ready to join the dollar, or even the euro, as a global currency. 

    China’s fears grow over eurozone crisis - China has expressed deep alarm at the escalating crisis in Europe and warned against austerity overkill as Europe's crumbling demand sends shock waves through Asia. Premier Wen Jiabao told German Chancellor Angela Merkel that Europe must "strike a balance" between fiscal tightening and measures to promote growth. "Europe's debt crisis has continued to worsen, giving rise to serious concerns in the international community. Frankly, I am also worried," he said. His comments mark a shift in Chinese policy. Beijing has until now backed austerity across Euroland, but the severity of China's own downturn has begun to rattle policymakers. Exports of electronic goods to Italy crashed 43pc in July from a year earlier, and sales to Germany fell 11pc. Caixin reported that processing trade to Europe fell 21pc. The country's two largest shipping groups COSCO and China Shipping both reported a drastic losses. Mr Wen asked for clarification over whether Italy and Spain would adopt "comprehensive rescue measures" needed to unlock the EU bail-out machinery - and open the door to bond purchases by the European Central Bank.

    China approves Rmb1tn infrastructure spend - China has approved plans for Rmb1tn ($158bn) in infrastructure spending, an investment push that analysts say will help support growth in the stuttering economy. The money will be rolled out over several years and the government has not described the investments as a stimulus package, but the announcements nevertheless fuelled renewed optimism about China’s prospects.  “With clear signs of a worsening slowdown of economic growth, China’s central government finally took real actions,” said Lu Ting, an economist with Bank of America Merrill Lynch. China’s growth fell to 7.6 per cent in the second quarter, its lowest in three years, and data in recent months has pointed to an even steeper slowdown this quarter. Economic indicators for August, to be published at the weekend, are expected to show sluggish industrial output. Analysts had long predicted that the government would intervene with more fiscal spending and monetary easing to cushion the slowdown, but the nation’s top leaders have been very cautious and have only made mild moves so far.

    China to Build New Roads, Subways to Boost Economy - China approved plans to build 2,018 kilometers (1,254 miles) of roads, spurring the biggest stock- market rally in almost eight months on signs the government is stepping up stimulus efforts to revive economic growth.  The government also backed nine sewage-treatment plants, five port and warehouse projects, and two waterway upgrades, according to statements on the website of the National Development and Reform Commission yesterday. No investment amounts were given.  The announcements came a day after approvals for subway projects in 18 cities, an earlier rise in the railway- building budget and increases in land supplies in cities including Guangzhou, Hangzhou, Beijing and Shanghai. The government may boost infrastructure-spending growth to an annual pace of more than 20 percent in the coming months from 15 percent to stimulate the economy,

    Time for a fightback in the currency wars - The most overlooked cause of the economic weakness in the US and Europe is what we call the “global currency wars”. If all currency intervention were to cease, we estimate that the US trade deficit would fall by $150bn-$300bn, or 1-2 per cent of gross domestic product. Between 1m and 2m jobs would be created. The eurozone would gain by a lesser but still substantial amount. Countries that were engaged in intervention could offset the impact on their economies by expanding domestic demand. China is by far the largest currency aggressor but has not been the major perpetrator of late. Three distinct groups are now involved. First are other Asian countries, including Japan, Singapore, Taiwan, Korea, Hong Kong, Thailand and Malaysia. Second are major oil exporters including the United Arab Emirates, Russia, Norway, Saudi Arabia, Kuwait and Algeria. Third are rich countries near to the eurozone, most notably Switzerland but also Denmark and Israel. If Mitt Romney is elected US president, he will be able to label many countries as currency manipulators on his first day in the Oval Office, not just China, as he has promised. These countries all exhibit rapidly growing levels of foreign currency reserves as well as significant current-account surpluses. They buy US dollars and euros to suppress the value of their own currencies, keeping the price of their exports down and the cost of their imports up. Thus they subsidise exports and tax imports, enabling them to maintain or increase trade surpluses and pile up foreign exchange reserves. These tactics, in effect, export unemployment to the rest of the world.  

    The Future’s So Bright… Africa is no longer the "lost continent" of popular imagination. The region has been growing rapidly for over a decade, the private sector is expanding, and a new class of consumers is wielding considerable spending power. And because of its young and growing population, the sky is the limit for future growth: Between 2010 and 2020, the continent is set to add 122 million people to its labor force. An expansion of this magnitude should set the stage for dynamic growth, but capturing this potential will require a change in economic development strategy. At its current pace, Africa is not generating wage-paying jobs rapidly enough to absorb its massive labor force, which will be the largest in the world by 2035.Across Africa's diverse mosaic of countries, the challenge is the same: to create the kind of jobs that will ensure continued prosperity and stability for its citizens and enable Africa to become a major player in the world economy. If current trends continue, it will take the continent half a century to reach the same share of its labor force in stable, paying jobs as we see in East Asia today. Africa's most developed economies have a better record in producing wage-based employment, but shortfalls persist even in countries like South Africa, Egypt, and Morocco. Without wage-paying jobs, millions will be forced to turn to subsistence activities to survive, squandering vast potential.

    Sexual Violence in the DRC: What Good is the Dodd-Frank Act? - The pervasive militarism, prevalent sexual violence and vast mineral wealth in the Democratic Republic of the Congo (DRC) are linked. It was with this in mind that, on August 22, the Securities and Exchange Commission (SEC) – the body which regulates the securities industry and markets in the United States – adopted the Dodd-Frank Wall Street reform act. The act requires public companies to disclose whether minerals used in their products originate from the DRC or any adjoining country. Expanding on the original law passed in 2010 and known in the DRC as the ‘Loi Obama’, companies must now take greater measures of due diligence and monitor every step of transactions to ensure transparency and accountability. But while these measures are a step in the right direction, progress is slow, gaping loopholes remain, and the nexus between violence (in particular sexual violence) and the global economy remains insufficiently explored.

    Brazil to boost import taxes again to help local industry (Reuters) - Brazil will raise import tariffs on 100 foreign products to help struggling local industries, Finance Minister Guido Mantega said on Tuesday, in a move that could amplify concerns over growing protectionism in the world's No. 6 economy. This is the latest in a string of steps taken by President Dilma Rousseff to fend off competition from foreign producers, which has hit local industries and dragged down an economy that until recently was the star among emerging market nations. The temporary increase - initially for a year - in levies will apply to products ranging from iron pipes to glass and bus tires. The rate will reach 25 percent for most of those products, an increase from the low teens. "We live in a time when the world market is shrinking and exporters flood Brazil, which is one of the few growing markets, and our industry is being harmed by this," Mantega told reporters in Brasilia. Brazil has unapologetically raised barriers on foreign goods it considers a threat to its local industry, angering trade partners already struggling to sell their products amid the global slowdown.

    Why you won’t find hyperinflation in democracies -- About the new paper — short and absolutely first-rate — from Steve Hanke and Nicholas Krus, entitled “World Hyperinflations“. It’s technically 19 pages long, but the first 12 are basically just throat-clearing, and the last two are references. The meat is the five pages in the middle: three pages of tables, and another two of footnotes, detailing every instance of hyperinflation that the world has ever seen. Hyperinflation, here, has a clear quantitative definition: prices rising by at least 50% per month. (Remember that, the next time some scaremonger starts talking about how US monetary policy risks causing hyperinflation.) And after some three years’ work, Hanke and Krus have managed to come up with an exhaustive list of every hyperinflationary episode in history — 56 in all, or 57 if you include North Korea in early 2010, where the data aren’t solid enough to merit inclusion in the list.

    A Sane Globalization (video, start=13:20) - Dani Rodrik

    A Look Behind the U.S. Decline in Global Competitiveness - For the fourth consecutive year, Switzerland is the most competitive economy in the world, according to a ranking from the World Economic Forum. And, for the fourth consecutive year, the United States fell in the rankings — largely because of worsening criticism of the American government — and is now in seventh place. The interactive map below shows how each of the 144 countries analyzed ranked. Click on any country to see how it stacks up on different dimensions of competitiveness. The World Economic Forum defines competitiveness as “the set of institutions, policies, and factors that determine the level of productivity of a country” and thereby lead to sustainable growth. The report graded economies based on an index of categories like over-regulation, property rights, tax burdens, transparency and trustworthiness of both the government and the financial sector, infrastructure, inflation conditions, the health and educational attainment of the population, access to technology, and research and development. The main reasons the United States has been slipping in the rankings appear related to distrust of and lack of confidence in government leadership.

    Weak Indian Monsoon Dries Up Centrally-Planned Liquidity Expectations - Drought has devastated crops around the world this year. While most have focused on the extreme issues in the US, we noted two weeks ago that the Monsoon season was shaping up to add fuel to the fire of illiquidity. As the NY Times reports, there is simply not enough rain in India as the annual monsoon season is down 12%. "If this situation continues, I'll lose everything" is how one soybean farmer highlighted his plight (and no government insurance or subsidies there). Famine is not an immediate threat though as India has stockpiles of food (though we know the issue there) but critically this, as we noted here before, places inordinate pressure on central bankers (specifically the PBoC) where its citizens are already facing record high prices for staples like soybeans as the world's markets (devoid of contemplation of the plight of the average citizen - so long as my AAPL stock goes up) anticipate the free-lunch of central bank liquidity while its that non-metaphorical liquidity that could ease pressures on millions.

    India exports post steepest fall in three years -India on Monday reported exports slid by nearly 15 per cent in July, the steepest dive in three years -- hit by the long-running debt crisis gripping Europe and the stumbling US recovery. India's merchandise exports fell by 14.8 per cent to $22.4 billion in July from a year ago -- the latest in a string of grim numbers to be announced by Asia's third-largest economy. Reflecting a slowdown in domestic demand, imports declined too, slipping by 7.61 per cent to $37.9 billion in July, leaving a monthly trade deficit of $15.4 billion, the trade ministry said in a statement. India's economy has cooled rapidly with data last week showing growth in the financial quarter to June stuck at three-year lows of 5.5 per cent -- far below the nearly 10 per cent expansion it logged during much of the last decade. "The sharp cooling in imports through the middle of 2012 reflects an economy that continues to grow well below potential,"

    India Likely to Overshoot Fiscal Deficit Target -- India is likely to overshoot its target for this fiscal year's budget deficit, a senior finance ministry official said Thursday, admitting to what economists have been fearing for a long time as economic growth floundered. The final deficit may, however, remain close to the target -- 5.1% of gross domestic product -- in the year through March because of a number of steps the government is working on to improve its financial health, the official said. The fiscal-consolidation measures will be announced by the first week of October, said the official who didn't want to be named.

    Finance, Oil Ministries Push for Fuel Price Increase - The finance and oil ministries are lobbying for an increase in prices of diesel, kerosene and LPG, warning cabinet colleagues that time is running out to avert a fiscal disaster and a sovereign credit downgrade to junk by global ratings agencies.The situation is very, very serious," a finance ministry official involved in the fuel price discussions told Reuters. "We may need up to 50,000 crore (500 billion Indian rupees or $8.99 billion) if there is no diesel price hike, leaving the fiscal deficit near 6 percent," he said. He declined to be identified due to the sensitivity of the issue. The cabinet committee on political affairs, headed by Prime Minister Manmohan Singh, will make the final call on the hikes as early as next week after the oil ministry recommended the changes in a note this week, sources in the two ministries said. The ministries have long advocated slashing subsidies on fuels like diesel that eat into the budget and affect the financial health of state-run oil companies. But fears of a popular backlash has stopped the government raising prices for more than a year.

    Global crisis moves East as China suffers rapid downturn - China’s industrial output is contracting at the fastest pace since the depths of the global financial crisis, with knock-on effects spreading across the Far East. The HSBC/Markit manufacturing index for China fell to 47.6 in August, the lowest since the onset of Great Recession in late 2008. Inventories are rising. The index for new export orders fell to the lowest since March 2009. “Beijing must step up policy easing to stabilise growth,” said Hongbin Qu from HSBC. China’s official PMI manufacturing index – weighted to big companies – also fell through the contraction line of 50, though services are holding up better. Evidence of a hard landing over the summer is becoming clearer. Rail volumes fell 8.2pc in July from a year before. The Japanese group Komatsu said its exports of hydraulic excavators to China – a proxy gauge for Chinese construction – fell 48pc in August from a year before. The twin effect of China’s downturn and Europe’s double-dip recession has turned into a full-blown shock for much of Asia. Hong Kong and Singapore both contracted in the second quarter and are probably in technical recession.

    Vietnam Risks Biggest East Asia IMF Rescue Since 1990s: Vietnam risks becoming the biggest East Asian economy to seek an International Monetary Fund rescue loan since the region’s financial crisis more than a decade ago as it moves to support a faltering banking system.  The nation may need IMF aid to recapitalize banks and must act quickly to clean up bad debt or risk “prolonged stagnation,” the National Assembly’s economic committee said in a Sept. 4 report published on its website yesterday. The financial system needs an injection of 250 trillion dong ($12 billion) to 300 trillion dong, according to the 298-page report that included recommendations to address economic risks.

    Japan plans to cut state spending, could run out of money in a month - Japan's government is planning to suspend some state spending as it could run out of cash by October, with a deficit financing bill blocked by opposition parties trying to force Prime Minister Yoshihiko Noda into an early election. The impasse in Japan's parliament has raised fears among investors that the world's third largest economy is being driven towards a "fiscal cliff", Reuters reported. "The government running out of money is not a story made up. It's a real threat," Finance Minister Jun Azumi told a news conference, making a last-ditch appeal for cooperation by opposition parties to pass the bill. "Failing to pass the bill will give markets the impression that Japan's fiscal management rests on shaky ground," he said. Unless the bill clears the current parliamentary session that ends next week, the government will start suspending or reducing some state spending to avoid running out of money for as long as possible, the finance ministry said.

    Japan cuts $78b in spending, warns reserves may dry up by November - Japan said on Friday it would suspend 5.0 trillion yen (S$78 billion) in spending as a political row has left the government facing a severe cash crunch that could see it run out of money within months. Officials warned there would not be enough in its coffers to cover expenses as political gridlock ties up the passage of a bond-issuance bill needed to help pay for some 40 per cent of Tokyo's spending in the fiscal year to March. Finance Minister Jun Azumi warned that public reserves would "mostly dry up at the end of November" if the opposition-led stalemate continued, with the current parliament due to end on Saturday. They are expected to restart in October. "There is a high possibility that we will have to make further delays in November," Mr Azumi told a regular news conference on Friday, as he called on lawmakers to approve the bill.

    Asian exports crumble - From Nomura's Rob Subbaraman this morning on Asia's export dive. It speaks for itself: Exports from Asia, the world's manufacturing hub, are often regarded as a bellwether for the health of the global economy. We estimate that the year-on-year growth rate of Asia's aggregate exports turned negative in July for the first time since the global financial crisis (it was negative in January 2012 but was distorted by the Lunar New Year holiday). In examining Asian exports by destination, there is little doubt that a synchronized global economic downturn is in train. It also shows that demand from the EU is weakening more than elsewhere. Asia's export growth to the EU fell from -5.0% y-o-y in June to -15.6% in July, and the trajectory is becoming as steep as during the global financial crisis. Korea is the only country that has released export data for August, which indicated that the global economic downturn is becoming even more synchronized: exports fell to the EU (-9.3% y-o-y), the US (-2.1%), China (-5.6%), Japan (-9.6%), ASEAN (-1.3%) and LATAM (-16.5%), with only the Middle East (+8.4%) bucking the trend. Without stepping up policy easing, particularly fiscal stimulus, risks are building that Asia's deepening export downturn will start to have serious multiplier effects on domestic demand. The great question is whether China, Japan, India and the rest of Asia are at last bottoming out or whether this is the start of a more menacing Phase III of the global crisis.

    Asia Export Machine Cracks Wide Open: South Korea Production Falls at Fastest Rate in Eight Months; Taiwan Exports Deteriorate Sharply; Global Recession Call Revisited - It's not just Chinese manufacturers that are struggling. It is also Japan, South Korea, and Taiwan. In other words, the Asian export machine has cracked wide open. The Markit South Korea Manufacturing PMI® shows Production Falls at Fastest Rate in Eight Months. Key points:

    • New orders contract at sharp rate
    • New export orders decrease for third month running
    • Falling output prices signalled

    The Markit Taiwan Manufacturing PMI™ shows Output contracts at steepest pace in the year-to-date. Key points

    • New orders and new export orders fall for third month running
    • Workforces contract slightly
    • Input and output prices fall in line with weaker demand

    Asia, Europe Slowdowns Deepen - Manufacturing downturns gripped Asia and the euro zone in August, surveys of purchasing executives showed, in the latest sign of weakness in the global economy. New orders dwindled in the euro zone, suggesting the outlook for the 17-nation economy remains poor, while activity in China's manufacturing sector—the engine for much of Asia's economy—shrank at the fastest pace since the depth of the global financial crisis. The HSBC manufacturing Purchasing Managers' Index for China fell to 47.6 from July's 49.3, the lowest since March 2009, figures released Monday show. A number below 50 indicates contraction, while above 50 indicates expansion. The figure followed an official manufacturing PMI on Saturday that signaled a contraction for the first time since November. In the 17-nation euro zone, the manufacturing Purchasing Managers' Index remained below 50 for a 13th month, though the contraction was less deep than in July, data company Markit reported Monday. The August index was 45.1, compared with 44 in July. That and other economic indicators could persuade the European Central Bank as soon as this week to take action, such as cutting its benchmark interest rate, already at a record low, or setting out plans to buy the government bonds of weaker member states, including Spain. "We expect the ECB to cut interest rates from 0.75% to 0.50% by October, with a move very possible as soon as its September meeting this Thursday,"

    Youth unemployment rate to rise globally - ILO -- Unemployment among young people is likely to rise globally as the euro crisis hits emerging economies and more discouraged jobless youth drop out of the labour force altogether, the International Labour Organisation says. The ILO said jobless rates among people under 25 worldwide are expected to inch up to 12.9% by 2017, up some 0.2% points from forecasts for this year, but youth in developing countries will be worst affected. "The impact of the euro crisis is expected to expand well beyond Europe, affecting economies in East Asia and Latin America as exports to advanced economies have faltered," the ILO said in a new report. Unemployment among young people in developed economies is likely to decline from a record high of 17.5% of the potential work force under the age of 25 to 15.6% in 2017 but principally because so many discouraged young people would leave the labour market.

    The global economy: Summertime blues | The Economist - The living has been easy on American and European stock exchanges this summer, despite plenty of gloomy data.. The global economy expanded by just 2.8% in the year to the second quarter, according to The Economist’s measure of world GDP (see chart). That is the slowest rate since the end of 2009, when recovery from savage recession in the wake of the financial crisis was getting under way. The most perturbing aspect of the current slowdown is that the weakness is so widespread, affecting emerging economies as well as rich countries. The most fragile economy in the rich world is that of the troubled euro area, where GDP shrank by 0.2% (an annualised decline of 0.7%) in the second quarter, leaving it 0.4% smaller than a year earlier. Beset by fears about a possible Greek exit and a bigger bail-out for Spain (which this week received a rescue request of its own, from Catalonia’s regional government), the euro zone is sliding ever deeper into the mire. A composite index of output in manufacturing and services from Markit, a research firm, based on purchasing-manager reports in July and August, is pointing to a further fall in GDP in the third quarter.

    The Ugliest 29 Charts In The World: Economic Slowdown - There's something about an Excel doc and a crisp chart that gets our attention here at Business Insider. We see hundreds each morning in Wall Street reports and get dozens more while watching Bloomberg and CNBC. But recently we've seen a few charts that have been disconcerting, particularly as growth in a number of the world's largest economies gyrate. Business Insider compiled 29 of the worst charts that got our attention. Many prelude further difficulty in Asia and Africa, while others document just how bad the European crisis is.

    Global Manufacturing Update Indicates 80% Of The World Is Now In Contraction - With the US closed today, the rest of the world is enjoying a moderate rise in risk for the same old irrational reason we have all grown to loathe in the New Normal: expectations of more easing, or "bad news if great news", this time from China, which over the weekend reported the first official sub-50 PMI print declining from the magical 50.1 to 49.2, as now even the official RAND() Chinese data has joined the HSBC PMI indicator in the contraction space for the first time since November. Sadly, following today's manufacturing PMI update, we find that the rest of the world is not doing any better, and in fact of the 22 countries we track, 80% are now in contraction territory. True, Europe did experience a modest bounce from multi-month lows of 44 in July to 45.1 in August (below expectations of 45.3), but this is merely a dead cat bounce, not the first, and certainly not the last, just like the US housing, and now that China is officially in the red, expect the next shoe to drop in Europe. Also expect global GDP to eventually succumb to the manufacturing challenges faced by virtually every country in the world, and to post a negative print in the coming months.

    World-Wide Factory Activity, by Country - Manufacturing in much of the world remained in contractionary territory in August, as concerns about a crisis in Europe and a Chinese slowdown continued. In the U.S., the Institute for Supply Management‘s purchasing managers’ index was essentially flat in July at 49.6, compared to 49.8 a month earlier. Reading below 50 indicate contraction. Though a subindex for employment offered an expansionary reading, growth slowed, which suggests subdued hiring. Meanwhile, the reading for new orders showed accelerated shrinking, raising concerns about the future. Meanwhile, according to an official measure released earlier this week China dropped into contractionary territory. Europe continues to struggle, with the euro zone continuing to shrink, though at a slower pace than last month. Individual members France, Germany, Greece, Italy and Spain were all contracting. The following chart lists PMIs from a variety of countries. Readings above 50 indicate expansion. Click any column head to re-sort.

    Euro zone factories faltering as core crumbles (Reuters) - The euro zone manufacturing sector contracted faster than previously thought last month, despite factories cutting prices, as core countries failed to provide any support, a survey showed on Monday. The downturn that began in the smaller periphery members of the 17-nation bloc is now sweeping through Germany and France and the situation remained dire in the region's third and fourth biggest economies of Italy and Spain. "Larger nations like France and Germany remain in reverse gear... the (manufacturing) sector is on course to act as a drag on gross domestic product in the third quarter," said Rob Dobson, senior economist at data collator Markit. Markit's final Purchasing Managers' Index (PMI) for the manufacturing sector fell from an earlier flash reading of 45.3 to 45.1, above July's three-year low of 44.0, but notching its 13th month below the 50 mark separating growth from contraction.

    The European Zombie Slouches On - Another night of Eurozone Production Management Index (PMI) data and the downward trend in activity continues as expected. This summary from Markit Economic’s head economist: The final reading of the August PMI confirms that the Eurozone manufacturing sector remains firmly in contraction territory. The rate of decline was a little slower than in July, providing some heart that the manufacturing downturn may be easing, but the sector is on course to act as a drag on gross domestic product in the third quarter. “The national picture remains one of widespread contraction. Only Ireland saw manufacturing output rise, while larger nations like France and Germany remain in reverse gear. The situation in Italy is also becoming more of a cause for concern, as it falls further down the PMI league table. “The broader long-run issue is that the Eurozone product and labour markets are unlikely to show any real sustained improvement until regional structural issues are addressed and the broader global backdrop brightens. It’s an optimistic person who can find positives in the data with only Ireland managing expansion and the currently stressed economies continuing to be in deep contraction. Italy is looking particularly troubled. If we take a step back and look at some of the global PMI trends you can see why Ireland is still managing some expansion as its major trading partner is the US.

    German Manufacturing Declines Again, New Export Orders Fall at Fastest Pace Since April 2009 - The Markit Germany Manufacturing PMI® – Final Data shows the German export downturn gathers momentum.  Key points: Manufacturing PMI rises from July’s 37-month low. Output, new orders and employment all drop at slower rates......but export downturn continues to gather pace  August data pointed to a fall in production levels for the fifth month running, and the rate of expansion remained relatively steep in the latest survey period. August data highlighted a sharp fall in new order levels, although the rate of contraction eased slightly from July’s low. The slower pace of decline largely reflected a less marked drop in domestic demand, as new export work fell at the steepest rate since April 2009. Survey respondents commented on a general slowdown in global demand and particular weakness in new business inflows from Southern Europe. Investment and intermediate goods producers recorded the steepest reductions in new export orders. Meanwhile, August data signalled a rapid fall in outstanding business at manufacturing firms, which extended the current period of contraction to 12 months.

    Italy's PMI Unexpectedly Falls - Italy's manufacturing PMI fell to 43.6 in August.  Economists expect the number to climb to 45.0 from 44.3 in July. Any reading below 50 signals contraction. Here are the key points from Markit:

    • Headline index down as output, new orders and employment fall faster
    • International demand decreases, though domestic market remains key weakness
    • Input prices continue to fall, but at slower rate

    From Markit economist Paul Smith: Latest data showed the Italian manufacturing sector slipping deeper in to recession in August, with the PMI at its second-lowest in over three years. Output levels again dropped sharply on an accelerated contraction in new orders, which suggested that the sector will weigh heavily on GDP in the third quarter.

    Spain's Manufacturing Output Falls For 16th Straight Month - Spain's manufacturing PMI climbed to 44.0 in August.  This was higher than economists' expectation for 42.8.  It was also an improvement from 42.3 in July.  Nevertheless, it reflected the 16th straight month of contraction in the sector.  Any reading below 50 signals contraction.From Markit's Andrew Harker: The Spanish manufacturing PMI data for August again make grim reading as business conditions in the sector continued to deteriorate at a marked rate. As the current downturn drags on into a sixteenth month, there seems little prospect of any improvement before the end of the year.

    French jobless tops three million, minister says - The number of job seekers in France has surpassed the symbolic level of three million and will continue to rise, Labour Minister Michel Sapin said Sunday. France has struggled to tackle rising unemployment amid the European debt crisis. By News Wires (text) AP - The number of French unemployed has broken through the 3-million barrier for the first time since 1999, the country’s leaders say. The latest total adds pressure on President Francois Hollande, whose administration is under attack for doing not doing enough to fix the economy. France’s unemployment rate is currently 10 percent. Breaking the 3 million mark carries more symbolic importance than economic but it was covered extensively in the French media over the weekend. The Ministry of Employment says the 3-million threshold was crossed in 1996 and again in 1999.

    French Politics: A Return To Normality - AFTER nearly a month of slumber, Paris is stirring again as tanned ministers return to work from the summer break. For the newish Socialist government, the shock has been double. Not only is it confronting a cascade of bad news, but the popularity of François Hollande, the president, and Jean-Marc Ayrault, his prime minister, has taken a tumble, falling below 50% for the first time. In one poll, Mr Hollande’s rating is down 11 points from last month. In another it dropped to 49%, way below the 61% that his predecessor, Nicolas Sarkozy, enjoyed at the same point in 2007. The economic news has been glum. French GDP was flat in the second quarter, the third one without growth. Unemployment has increased to nearly 3m, its highest for 13 years. Many more firms, some of which kept plans on hold during the spring poll, have announced factory closures or job losses, including a chicken-processor in Brittany. Among the biggest blows was the news that Air France is cutting over 5,000 jobs and Peugeot, a carmaker, is closing its plant in Aulnay-sous-Bois with the loss of 3,000 jobs.

    European Unemployment - In what has to pass for excellent news these days, it didn't get worse in July!  Data from Eurostat.

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

    Merkel Says Bailouts Here to Stay as Schaeuble Warns on ECB - German Chancellor Angela Merkel told her domestic critics that bailouts are here to stay, even as her finance minister warned against placing too much faith in the European Central Bank’s ability to stop the crisis. Merkel made a foray away from crisis fighting today as she traveled to a traditional political gathering in a packed beer tent in southern Germany to confront anti-bailout critics in her government coalition. Countries such as Greece “deserve our solidarity” as long as they meet commitments for overhauling their economies, she said. “We need Europe, but we need a strong Europe,” Merkel told members of her Bavarian Christian Social Union sister party in the town of Abensberg, northeast of Munich. “We can’t take up so much debt that tomorrow we won’t have anything left and we’ll be at the mercy of the financial markets.” 

    Schaeuble Warns Against Expecting too Much of Draghi’s Plans - German Finance Minister Wolfgang Schaeuble warned against placing too much faith in the European Central Bank’s bond-buying plans as pressure grows on Spain and Italy to decide whether to seek help to lower borrowing costs. Whatever proposals ECB President Mario Draghi announces on Sept. 6 must fall within the central bank’s mandate, Schaeuble said in an interview today on Deutschlandfunk radio. Germany won’t accept ECB financing of state budgets, he said. “We have to be very careful that we don’t raise false expectations,” Schaeuble told the broadcaster in Berlin. “It has to remain very clear, state debt can’t be financed through monetary policy. Therefore we can’t have a decision -- we would think it very wrong -- that’s not covered by the ECB mandate.” 

    Israel’s Fischer Calls for Euro-Zone Discipline - More attention needs to be focused on how to impose discipline on countries in the euro zone, Bank of Israel Gov. Stanley Fischer said Saturday. Many nations in the euro zone are still in denial about the extent of their fiscal problems, Mr. Fischer said Saturday, speaking at the Federal Reserve Bank of Kansas City’s annual economic symposium. Tensions are sure to rise if stronger countries try to impose discipline on their weaker counterparts, he said. “I’m very skeptical about ability of members of the club to discipline their weaker brethren in a way that doesn’t create the sort of tensions that the existence of the European Union was specifically intended to prevent,” he said. He dismissed a potential joint euro-zone bond as a solution to the problem. “The idea of euro bonds is one that’s antithetical to that possibility,” Mr. Fischer said. Germany has also criticized the idea of joint European bonds, arguing that they would take the pressure off politicians in the euro zone to overhaul their economies. Mr. Fischer noted that while European policy makers and officials seem to be moving toward finding a responsible solution, “the public in Europe appears to be moving in the opposite direction,” pointing to upcoming key decisions in Germany and the Netherlands.

    "Moral hazard 101" with professor Draghi - The ECB has been quite clear about focusing their bond buying on the short end of the curve (see this discussion). There has been some speculation that Draghi will only buy short-term bills, but we got some clarification today. The ECB will target the short end of the curve of up to 3 years. Bloomberg: - European Central Bank President Mario Draghi told lawmakers he’d be comfortable buying bonds with maturities of up to about three years, said Jean-Paul Gauzes, a member of the European Parliament.  Purchasing short-dated bonds doesn't constitute state financing, Draghi said during a closed-door parliamentary session in Brussels today, Gauzes told reporters afterwards. “He thinks it’s not a violation of the treaty and you can do it under the current legal framework,” Gauzes said. “He said for example three years is ok, 15 years no.” Of course it's not "state financing" because that would be outside of ECB's mandate. Right. The market is reflecting just such a policy with the Spanish sovereign curve staying quite steep at the short end. This policy is basically the reverse of what the Fed has been trying to do via Operation Twist.

    ECB Meeting on Thursday: Expectations are for a Rate Cut, no Bond buying yet - The ECB Governing Council meets on Thursday in Frankfurt with a press conference to follow. Analysts at Nomura are expecting a rate cut, but no bond buying yet for Spain and Italy. From Nomura:

    • Having failed to cut in August, we now expect the ECB to cut the refi rate 25bp in September and leave the deposit rate at zero.
    • We also expect the ECB to announce on 6 September that it is ready to intervene but only when help has been requested.
    • We expect Spain and Italy to resist calling for help, prompting renewed market deterioration.

    In Pivotal Week for Euro Zone, a Test for the Central Bank’s Leader - Thursday, when the central bank meets again, Mr. Draghi, the bank’s president, could have a far harder time reconciling the expectations of twitchy financial markets with the limitations of his power. Although investors are counting on bold action, analysts say the bank probably needs more time to resolve internal differences and deliver on a promise to use its financial clout to tame runaway borrowing costs for the most troubled euro zone countries. Some analysts do expect the central bank to cut the benchmark interest rate to 0.5 percent on Thursday, from its already record low level of 0.75 percent. In any case, actual bond buying by the central bank is probably at least several weeks away. Mr. Draghi said in August that the bank would intervene in bond markets only in concert with the new European Union rescue fund, the European Stability Mechanism, or E.S.M. Countries would need to ask the rescue fund for help, Mr. Draghi said, and the fund would take the lead in bond buying, with the central bank providing backup financial support. But the fund, meant to replace a temporary bailout fund, is in legal limbo at least until the German constitutional court rules Sept. 12 on a challenge to the country’s participation.

    ECB Prepares to Reveal Its Decision on Eurozone Rescue - The European Central Bank meets this week amid high expectations that they will take action to finally arrest the unusually large bond price spikes from troubled Eurozone sovereigns like Spain and Italy. Shares in European stock markets drifted higher in anticipation of the announcement of a program to purchase bond debt from those countries and push the yields lower. However, that may not be part of the initial announcement this week: Europe’s markets have oscillated recently as speculation over whether or not the ECB will go ahead with a bond-buying plan to help struggling economies such as Spain and Italy with their borrowing costs. Despite ECB president Mario Draghi’s willingness to do “whatever it takes” to save the euro, a growing number of critics have been voicing opposition to bond-buying plans. Over the weekend, Germany’s Economics Minister threw his weight behind Jens Weidmann, the head of the Bundesbank, who has likened bond buying to a drug. ECB interest rates remain above the zero lower bound, so as a compromise policy, we could merely see a rate cut, with some musing about a bond purchase program down the road. This would likely disappoint financial markets and lead to mass sell-offs. The problem appears to be the need for ECB President Mario Draghi, seen as committed to the bond purchase, persuading his colleagues at other Eurozone central banks to go along with the idea. Anything that shows wavering on the commitment to keep those bond prices low, any indication that the northern central bankers have the upper hand on Draghi, will send markets in Europe into a tailspin.

    Why The ECB Got To Do What It’s Got To Do - We have long held the belief that unlike other parts of the world, quantitative easing (QE) could actually accomplish a lot in the eurozone. QE is central banks purchasing long dated assets like public bonds. Buying shorter assets is considered part of normal open market operations to establish target interest rates and liquidity to the banking system. When short-term interest rates are effectively zero and the economy is still producing way below capacity, QE can be considered as an additional tool. This is what the Bank of England (BOE) and the Fed have done in the wake of the financial crisis, and it is what the Bank of Japan has done for six years in the last decade.  The evidence suggests that there might be a mild reduction in long-term interest rates, but these are already at or near decades lows. So lowering them a little bit further cannot be expected to have a dramatic impact on the economy. Additional mild effects might be produced in the form of rising other asset prices, like stocks but we haven't seen any studies pointing to convincing effects In the eurozone, QE would work. Indeed, the recent rally in stocks and bonds from peripheral eurozone countries is premised on the ECB embarking on QE. In the eurozone, bond yields of peripheral countries are at anything but decades lows.

    ECB Chief Hints at Bond Purchases - The president of the European Central Bank dropped more hints about how the bank could support struggling countries, suggesting the bank was free to buy government bonds maturing in three years or less. The comments by Mario Draghi in a closed hearing at the European Parliament on Monday came ahead of the ECB's monthly policy meeting Thursday. ...Mr. Draghi indicated Monday that the ECB would be open to buying bonds with a maturity of two to three years, stressing that such purchases wouldn't break European Union treaties, according to several lawmakers present at the hearing.

    All eyes on Draghi over bond proposal - The only sure thing about the outcome of Thursday’s monthly meeting of the European Central Bank is that every word uttered by Mario Draghi, its president, will be scrutinised for meaning even more forensically than usual. Economists are divided on whether the ECB’s 22-member governing council will cut its main refinancing rate from 0.75 per cent, but the focus of attention is squarely on what Mr Draghi will say – and omit to say – about the bank’s proposed new sovereign bond-buying programme. As strains between eurozone economies with vastly different market interest rates have become ever clearer, the ECB has come under growing pressure from countries such as Spain and Italy to intervene, while facing competing calls from the German Bundesbank and others to stick firmly to its primary objective of guaranteeing price stability.

    Moody's warns on European Union debt rating - Moody's Investors Service on Monday warned of a possible cut to the European Union's Aaa debt rating, changing its outlook to negative in line with concerns about the core members of the bloc. Moody's said the negative outlook was due to similar action against the four largest contributors to the EU's budget: Germany, France, the U.K. and the Netherlands. Moody's warned on the ratings of Germany and the Netherlands in July, having also put the U.K. and France on negative outlook. In its statement Monday, the ratings agency said it needed to adjust the outlook on the broader EU due to "the likelihood that the large Aaa-rated member states would likely not prioritize their commitment to backstop the EU debt obligations over servicing their own debt obligations." The move comes ahead of a much anticipated European Central Bank meeting, due Thursday, which may include more details on plans to address the region's debt crisis.

    Moody's Downgrades European Union To Outlook Negative - Not entirely surprising following the outlook changes for Germany, France, UK, and Holland but still an intriguing move right before Draghi's big unveiling: Moodys maintains AAA rating but shifts to outlook negative. Moody's believes that it is reasonable to assume that the EU's creditworthiness should move in line with the creditworthiness of its strongest key member states considering  the significant linkages between member states and the EU, and the likelihood that the large Aaa-rated member states would likely not  prioritize their commitment to backstop the EU debt obligations over servicing their own debt obligations. Interestingly they also note that a further cut could occur due to: changes to the EU's  fiscal framework that led to less conservative budget management...

    Loan rates point to eurozone fractures - Interest rates paid by companies in the eurozone’s weaker economies have surged, highlighting the bloc’s fragmentation as the European Central Bank loses control of borrowing costs. ECB data on Monday showed Spanish small businesses face the highest bank borrowing costs in almost four years – while interest rates paid by German rivals are at record lows. The sharply diverging interest rates have put southern European companies increasingly at a competitive disadvantage to their northern European rivals. They provide a gloomy backdrop to this week’s ECB governing council meeting, which will discuss plans for intervening in eurozone government debt markets, as investors price in the chance of a break-up of the 14-year old monetary union. “The fragmentation is getting worse. If this trend gains even greater momentum we’ll face a fundamental reordering of the eurozone. It undercuts the whole rationale of the euro, and could eventually make it easier for it to break up.”With economies such as Spain’s already hit by severe fiscal austerity measures, the divergence in businesses’ borrowing costs “will make the pill even more bitter to swallow”, 

    Policy transmission mechanism: Broken in Italy, better in Spain -- Rebecca Wilder - Yesterday, the Financial Times reported that borrowing costs for small businesses in the periphery were rising relative to the core using the ECB’s release of July MFI interest rate data. I highlighted this point exactly on August 1 following Draghi’s now famous London speech, where he cautioned that monetary transmission mechanism is ‘hampered’. As opposed to the FT, though, I would argue that the transmission mechanism is at least not getting worse in Spain and Portugal, and worsening in Italy. Italy is the only periphery economy (where data is made available) where the corporate borrowing costs are higher since the peak of corporate lending rates in the Euro area in July 2011. The FT is wrong. It takes Spain as the case study and uses the incorrect corporate lending rate information. Specifically, according to the FT (bolded by RW): The interest rate charged by banks on a corporate loan of up to €1m lasting between one and five years – which would typically be taken out by a small business – was 6.5 per cent in July in Spain, according to the ECB figures. True, the rate on new business loans up to and including €1 mn with maturity of 1-5 years did see an average borrowing rate of 6.5% in July. However, corporate loans up to and including €1 mn with maturity of greater than 5 years saw a drop in borrowing costs of 1.4% in July to 5.17% . The 5.17% rate is the rate that should be quoted, rather than the 6.5% rate.

    Negative rates as a precursor to the death of banking - FT Alphaville has presented its case on negative rates and zero deposit rates here and here (amongst other places). What we believe is that rather than stimulating the lending market — and the economy along with it — such a rate policy could have a disastrous impact on collateral markets and money market funds, not to mention the net interest income of lending institutions. All of which could unleash a protracted deflationary spiral. The move could also presage the death of banks and lending institutions completely. Now, if the plan is to use negative rates as a means to manage the bank extinction process  — in favour of decentralised public or national money creation and distribution — then that’s an entirely different story, as well as a completely different argument for negative rates altogether. But if that were the real justification for negative rates, the policy would have to be communicated clearly and effectively, so that interim negative side-effects and misunderstandings were avoided. This, of course, has not happened. (Unless that’s what Draghi’s been trying to hint at?) We’re just not at that point, not yet anyway. Nor are we at the stage where central banks have given up on the banking system entirely, at least outside Europe. Which is why, whichever way you look at it, negative interest rates are currently not and likely never will be in the interests of the banking industry.

    Danish Central Banker: Negative Deposit Rate Successful So Far - The Danish central bank’s decision to drop its deposit rate below zero for the first time appears successful so far, one of its officials said Saturday. “It seems to work,” Per Callesen, a governor of Denmark’s Nationalbank, said in an interview Saturday on the sidelines of the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole, Wyo. The negative rate seems to have generated no “adverse effects, but still it’s only a two-month experiment,” so far, he said. Denmark cut its deposit rate to minus-0.2%, from 0.05% in early July, when the European Central Bank lowered its overnight deposit rate to zero.  Denmark’s currency, the krone, is pegged to the euro and allowed to trade in a fixed range around a central exchange rate. The deposit rate cut was designed to help maintain the fixed exchange-rate policy, Mr. Callesen said. So far, the Danish policymakers have not seen any major evidence that the negative interest rate is disturbing money markets, he said.

    Germany’s Debt Rose 390 Billion Euros on Crisis, Passauer Says - Germany’s debt grew by 390 billion euros ($490 billion) on costs related to banking bailouts and payouts to indebted euro-area countries, Passauer Neue Presse reported, Costs related to bank bailouts increased debt by 322.5 billion euros and funding to help Greece, Portugal and Ireland added 67.5 billion euros, Passauer said, citing a German government response to a request in parliament by the Left Party. The rescue package for Spain wasn’t included in the estimate because terms of the bailout haven’t been completed, the newspaper reported, citing Hartmut Koschyk, state secretary at the Finance Ministry.

    Portugal's biggest risk is Spain  -- Portugal has been trying to export its way out of the economic mess that it has been in for some time. And it has been doing an amazing job, particularly given its poor export track record and deteriorating economic conditions in the Eurozone. Portugal's exports now make up close to 40% of its GDP vs. 25%  3 years ago. The nation's trade deficit has nearly disappeared in part due to falling domestic demand but also to improved exports. Unfortunately for Portugal, its main trading partner continues to be Spain. And that presents the greatest risk to Portugal's recovery. Should Spain's recession deepen (for example similar to that of Italy or even worse), Portugal could be in serious trouble. Credit Suisse: - ... the performance of Portugal is all the more impressive considering its strong economic linkages with its neighbour, Spain. This is really the key risk for Portugal going forward. Indeed, the success of its adjustment relies on the speed at which it adjusts its growth model toward a more export-driven one. The weaker its trade partners, the slower the adjustment.

    Rajoy Says Spain Can’t Finance Itself in Call For ‘Sacrifices’ - Spanish Prime Minister Mariano Rajoy said the country is unable to fund itself at the current cost of borrowing and needs sacrifices such as higher taxes to restore its national standing. “If we do this we will start to recover confidence as a serious country that does what it says,” Rajoy said today in a speech to members of his People’s Party at Soutomaior Castle in Galicia. “At the moment we can’t finance ourselves at the prices of the market.” Rajoy was addressing supporters in his home region on the same day that increases to value-added tax take effect. Spanish households already are squeezed by unemployment at close to 25 percent and austerity measures that will be equal to 15 percent of gross domestic product by 2014. “This is a sacrifice that comes at a very difficult time for very many Spaniards,” said Rajoy, referring to the sales tax. “If there had been any other alternative, does anyone think that I would not have been the first one to adopt it?”

    Is Spain Running Out Of Cash? - Some hours ago Spain finally bit the bullet, and after months of waffling had no choice but to hand over €4.5 billion (the first of many such cash rescues) in the form of a bridge loan to insolvent Bankia, which last week reported staggering losses (translation: huge deposit outflows which have made the fudging of its balance sheet impossible). As a reminder, in June Spain formally announced it would request up to €100 billion in bailout cash for its insolvent banking system, which subsequently was determined would come from the bank rescue fund, the Frob, which in turn would be funded with ESM debt which subordinates regular Spanish bonds, promises to the contrary by all politicians (whose job is to lie when it becomes serious) notwithstanding. And while Rajoy has promised that the whole €100 billion will not be used, the truth is that considering the soaring level of nonperforming loans in Spain - the biggest drain of both bank capital and liquidity - it is guaranteed that the final funding need for Spain's banks will be far greater. As a further reminder, Deutsche Bank calculated that when (not if) the recap amount hits €120 billion, Spanish total debt/GDP would soar to 97% in 2014 from an official number of 68.5% in 2011 (luckily the endspiel will come far sooner than that). But all of that is well-known, and what we wanted to focus on instead was the fact that bank bailout notwithstanding, Spain will have no choice but to demand a full blown rescue within a few short month for one simple reason: its cash will run out.

    Bank of Spain providing emergency loans to Spanish banks; pressure mounts on the ECB -- Despite the ECB's rhetoric on defending the euro that pushed up global risk asset valuations, the underlying issues of the Eurozone have not been resolved. Signs of the run on Spain's banks are once again in the press. Previously we had Der Spiegel describe the enormous euro deposit outflows from the Spanish banking system (see post). The problem has not gone away and here is an update with some explanations (in italic). WSJ: -The banks appear to be exhausting their capacities to wring cash out of the European Central Bank, the lender of last resort for much of Southern Europe's battered financial system [see this discussion on how the National Central Banks fund this lending].  The problems have been building since last fall. But the recent intensification has sent Spanish officials scrambling to prevent their banking system's liquidity problems from escalating into an acute financial crisis. Many experts expect the ECB to ride to the rescue on Thursday by making it easier for euro-zone banks to borrow money from it. [the only way it can make it easier is by loosening the collateral requirements]  In one sign of the mounting pressures, the Bank of Spain appears to have started providing emergency loans to some of the country's banks, according to central-bank data and industry officials [this is alarming because it means that some Spanish banks have run out of eligible collateral].

    Spain to inject bonds, not cash, into Bankia - Spain's bank rescue fund, known as FROB, will inject government bonds, not cash, into troubled Bankia to recapitalize the nationalized lender as it awaits European bailout funds. Last week, FROB announced it would inject capital immediately which was described an "advance on European aid" although the agency declined to divulge the amount. Spain is bolstering Bankia group after it reported a €4.44 billion net loss in first half of 2012. Bankia requested in May €19 billion in state aid following a €4.5 billion bailout in 2010.

    Madrid plans to inject Bankia with debt - Madrid is planning to provide €4.5bn of stopgap rescue money to Bankia, the nationalised bank, by injecting it with Spanish government debt, in a move likely to reignite debate over how states can use the European Central Bank to recapitalise troubled lenders. The Frob, Spain’s state bank bailout fund, will issue BFA, Bankia’s parent company, with €4.5bn of government bonds, said a spokeswoman for the economy ministry.  This gives the bank the possibility of depositing the bonds with the ECB as collateral in return for cash. The bonds will later be returned by Bankia to the Frob after the arrival of €100bn in European aid for Spanish banks in late October or November. The ECB declined to comment on Bankia or the Spanish government’s plans. But any attempt to help Bankia create collateral in this way could well founder on rules designed to prevent so-called monetary financing.

    Nomura: "Spain Will Need Full-Blown Bailout" | ZeroHedge: While hardly saying anything new, more and more pundits are waking up to the reality that faced with an environment of epic capital outflows predicated by a complete loss in the system (see Greece), Spain simply can not survive. We wrote about the record outflow in Spanish deposits last week (here and here) and the fact that with banks urgently seeking to plug liquidity holes, coupled with soaring NPL levels, in the absence of actual profits they are forced to sell all those SPG bonds they had been purchasing during the open ponzi phase, where ECB funding would be recycled by local banks to meet primary market demand. Overnight even the New York Times has finally understood this simple identity: record outflows = the end. And now, the banks begin to chime in, pointing out what is patently obvious: from Nomura - "Spain will need full-blown bailout which will include more active role of ECB in Spanish bond markets." More from Bloomberg:

    • Capital flight from Spain is in a "category of its own," with extreme, broad-based outflows raising “serious concerns about the implications for banking sector stability and economic growth,”
    • Capital outflows on 3-month rolling basis at 50% of GDP vs Italy 15%; for comparison, Indonesia outflow during Asian crisis peaked at 23%
    • Foreign selling of Spanish securities in 2Q equal to 19.4% of GDP; also liquidate Spanish bank claims at 15.3% of GDP in 2Q
    • Spanish residents shift funds to foreign banks at rate of 16.7% of GDP in 2Q
    • Spain fills capital gap through Target 2 borrowing, currently at €408 bln or 39% of GDP;

    Spain VAT Hike Largest In History; Stunning Ineptitude Will Make History Books -- Fiscal deficits continue to mount in Spain in spite of austerity measures and tax hikes. Spain desperately needs work reforms, but on that score there has been little progress. Instead, the government keeps hiking taxes to combat ballooning deficits, only to see further declining revenues in which the government hikes taxes again and again in an absurd attempt to make up for those shortfalls.  Via Google translate from Libre Mercardo please consider The VAT increase is the largest tax increase democracy. Each Spanish pay an average of 20.8% VAT, 369 per year, six days of extra work to comply with the Treasury. The VAT increase, which took effect on Saturday, raising the general rate of 18% to 21%, reduced from 8% to 10%, while the super-reduced-duty on-staples remains 4%. In addition, hundreds of products previously taxed at 4%, as school supplies, and 8%, such as film and hairdressers, pass it to 21%, nearly three multiplying its previous taxation. But beyond these percentage increases, the increase in VAT means that a worker will pay on average 369 euros per year ditional this concept, a 20.79%, according to a study by the think tank Civics. Thus, the taxpayer will have to work six days a year just to meet its commitments to the Treasury.In retrospect, it is "the largest tax increase in democracy", as it will reduce the disposable income of citizens even more than the increase of VAT by the previous government of Rodriguez Zapatero (192 per year) and the recent income tax hike approved last December Mariano Rajoy (137 euros) "together", the report warns.

    Spanish shoppers sick as VAT hike hits pockets -Spanish shoppers face a sharp increase in the cost of living after the government slapped a three per cent rise on VAT. Madrid is desperate to raise cash to slash 65 billion euros off the public deficit by 2014 and save the country from a full blown bail out. The move will further squeeze consumers and small businesses. The price hike has infuriated shoppers in Madrid: “It’s very bad, awful, awful. Prices will go up even more. They take it from our pockets. It hurts all of us. So it is very bad, very bad, awful.” Spain is trapped as the government cuts spending to please investors tax revenues fall as joblessness increases. So Madrid raises taxes, which in turn hits consumer spending fuelling further recession.

    Spanish jobless queue grows in August - Spain's jobless queue grew to 4.63 million people in August, the government said yesterday, grim news for an economy suffering nearly 25 per cent unemployment. Snapping a run of four monthly declines, the number of job seekers in August climbed by 38,179, or 0.83 per cent, from July, the Labour Ministry said in a statement. "Although it's true that an increase in unemployment is bad news it should be stressed that it is the weakest increase for August, traditionally a bad month for employment, since 2006," Labour Minister Engracia Hidalgo said in a statement. The ministry's monthly tally is based on the number of people registering as unemployed. A broader, quarterly household survey by the National Statistics Institute provides the official unemployment rate, which hit 24.63 percent in the second quarter of 2012, the highest in the industrialised world.

    Spain: Rising jobless rate offsets VAT tax increase - The rise in unemployment costs in Spain has offset income from the newly increased VAT tax, from 18% to 21% as of September 1, according to data published by El Mundo newspaper on Wednesday. The cost of unemployment benefits is rising by 2.6 billion euros a month, against the 2.3 billion euros projected in the state budget. Unemployment benefit payments through July cost 1 billion euros more than in the previous year. They equaled 18.456 billion euros in seven months, almost two thirds of the 28.503 slated in the budget for the entire year. The government went 2 billion euros over budget, equal to the income from the new VAT tax increase, El Mundo wrote. New unemployment benefit requests totaled 200,000 as of July, and the government paid out 174,000, according to national statistical institute data published on Tuesday. There were 137,000 jobs lost in August, and an additional 38,179 unemployed joined the line, bringing the total to 4,625,634 people out of work. There were 604,541 jobs lost in the past 12 months, against the 215,947 lost in the previous year, and the number of people paying into the social security fund dropped to 16,895,977. In July, the cash-strapped government dipped into a business workplace compensation fund to pay 15 billion euros in pensions.

    Fears Rising, Spaniards Pull Out Their Cash and Get Out of Spain -After working six years as a senior executive for a multinational payroll-processing company in Barcelona, Spain, Mr. Vildosola is cutting his professional and financial ties with his troubled homeland. He has moved his family to a village near Cambridge, England, where he will take the reins at a small software company, and he has transferred his savings from Spanish banks to British banks. Mr. Vildosola is among many who worry that Spain’s economic tailspin could eventually force the country’s withdrawal from the euro and a return to its former currency, the peseta. That dire outcome is still considered a long shot, even if Spain might eventually require a Greek-style bailout. But there is no doubt that many of those in a position to do so are taking their money — and in some cases themselves — out of Spain. In July, Spaniards withdrew a record 75 billion euros, or $94 billion, from their banks — an amount equal to 7 percent of the country’s overall economic output — as doubts grew about the durability of Spain’s financial system. The withdrawals accelerated a trend that began in the middle of last year, and came despite a European commitment to pump up to 100 billion euros into the Spanish banking system. Analysts will be watching to see whether the August data, when available, shows an even faster rate of capital flight. More disturbing for Spain is that the flight is starting to include members of its educated and entrepreneurial elite who are fed up with the lack of job opportunities in a country where the unemployment rate touches 25 percent. 

    Depression, Suicides Rise as Euro Debt Crisis Intensifies -- Europe is approaching a crisis as the region’s debt crisis and austerity measures increase the rates of depression, suicide and psychological problems – just as governments cut healthcare spending by up to 50 percent, according to campaigners, policy makers and health organizations.  A growing number of global and European health bodies are warning that the introduction and intensification of austerity measures has led to a sharp rise in mental health problems with suicide rates, alcohol abuse and requests for anti-depressants increasing as people struggle with the psychological cost of living through a European-wide recession. “No one should be surprised that factors such as unemployment, debt and relationship breakdowns can cause bouts of mental illness and may push people who are already vulnerable to take their own lives,” Richard Colwill, of the British mental health charity Sane, told CNBC.  “There does appear to be a connection between unemployment rates and suicide for example,” he said, referring to a recent study in the British Medical Journal that stated that more than 1,000 people in the U.K. may have killed themselves because of the impacts of the recession. “This research reflects other work showing similar rises in suicides across Europe.”

    Brinkmanship as Spain warns over bail-out terms - Spain has issued a veiled warning that it will not accept a full bail-out from Europe if the terms are too harsh, a move that would paralyse the European Central Bank and call the euro’s survival into question.  In an escalating game of brinkmanship, Spanish finance minister Luis de Guindos said his country is not yet willing to sign a Memorandum giving up fiscal sovereignty to EU inspectors. “First of all, one must clarify the conditions,” he told German newspaper Handelsblatt. Mr de Guindos said the crisis engulfing the region is larger than any one country and warned north Europe not to scapegoat Spain.The warning comes as German Chancellor Angela Merkel leaves for Madrid for talks with premier Mariano Rajoy to thrash out the conditions of a full sovereign rescue of up €300bn (£238bn), beyond the €100bn bank rescue already agreed.   It emerged today that Spain’s social security system has raided a rainy-day fund to cover state pensions for the first time as deepening recession erodes contributions.

    Eurozone is running out of options and time to solve debt crisis - Two years after the eurozone began its downward financial spiral, the European Central Bank is about to unveil a widely anticipated plan to pump more money into the system to stem a wider collapse. But the plan, similar to the massive bond-buying undertaken by U.S. central bankers four years ago, may be too little, too late. “It’s going to take a lot more than a few rate cuts here and there to give us a lift,” said Peter Dixon, a senior economist at Commerzbank Securities. “Monetary policy is effectively running out of options.” Europe is also running out of time. Manufacturing across the continent contracted faster than previously thought last month, according to the latest data released Monday. The recession sparked by a crushing debt hangover in a few smaller members of the 17-nation bloc is now sweeping through Germany and France. The financial turmoil that sank Greece as investors and depositors fled now threatens the much larger economies of Spain and Italy.

    QEurope -- I am generally skeptical about the importance of further QE in the USA, but I am definitely not skeptical about the effectiveness of the the leaked European Central Bank plan to purchase unlimited amounts of European Government debt.  The reason is that there are government bonds over here which terrify investors.  That means that the amount which private investors must hold should have a fairly large effect on the price (different European government bonds are not at all close substitutes). The leaked plan is a compromise between the sane and the German (two of my best friends are German) .  Importantly the ECB will not place an upper limit on yields on bonds, that is promise to buy any amount if the price falls below some level.   The purchased bonds must be fairly short term bonds (the aim seems to be to make the intervention as ineffective as possible). Jana Randow and Jeff Black  at Bloomberg report that up to three year bonds will be bought.  Again this is based on leaks.  Alarmingly Il Corriere della Sera reports both this claim and the dramatically contrasting claim (from a source identified only as "German speaking") that the bonds will be of duration only up to 1 year.  That would be almost pointless.    I can't get the corriere link (I read the article in the dead tree version and search ilcorriere is horrible).  The key passage is "Draghi ha citato l'esempio di titoli circolante sul mercato secondario con scadenze 'fino a tre anni' secondo alcune fonti, o 'al di sotto di un anno', secondo altre che parlano Tedesco." that is "Draghi gave an example of bonds on the secondary market with maturity "up to three years" according to some source, or 'less than one year" according to other sources who speak German."

    Financial fragmentation across the Eurozone can not be ended by extending ECB credit to periphery governments -- Resolving the issue of broken monetary transmission (discussed here) in the Eurozone will take more than buying periphery government bonds. David Powell from Bloomberg used the Taylor Rule to determine policy rates that would be appropriate for the various nations as well as the Eurozone as a whole. The concept was first described by the San Francisco Fed: FRBSF: - According to one version of this rule, policy interest rates should respond to deviations of inflation from its target and unemployment from its natural rate (Rudebusch 2010). The target rate recommended by the rule is a function of the inflation rate and the unemployment gap. That gap is defined as the difference between the measured unemployment rate and the natural rate, that is, the unemployment rate that would cause inflation neither to decelerate nor accelerate.  The current ECB policy rate turns out to be right on target (in agreement with the Taylor rule) for the Eurozone as a whole, but the policy rates diverge wildly across the euro area countries. Bloomberg: - A Taylor Rule demonstrates the drastically different monetary policies required in those countries as a result of their domestic economic conditions. The model, based on coefficients estimated by the Federal Reserve Bank of San Francisco, signals the main policy rate should be minus 7.75 percent for Spain. It should be minus 3.75 percent for Portugal, minus 3.5 percent for Ireland and minus 10 percent for Greece. Germany is at the other end of the spectrum. It requires a main policy rate of 4.25 percent.

    The Euro Is Not Unassailable, Even With The ECB’s Bond Buying -- There appears to be an emerging consensus that the euro will survive, especially now that Mario Draghi has apparently grasped the nettle and persuaded his colleagues that the ECB is prepared to initiate unlimited purchases of national government bonds in order to underwrite their solvency.  Of course, as usual with the ECB, there’s a sting in the tail, the sting being additional “conditionality” (for which one can read more fiscal austerity) as a quid pro quo.  It’s like dealing with Hannibal Lecter. Greece is the implied fate of anybody who dares to flout the rules.   Maybe the country isn’t washed down with a Chianti and some fava beans, but it’s getting pretty close.  And whilst nobody wants to appear to be the triggerman who finally kills off Greek membership in the currency union, the country is increasingly being placed in an untenable position, which will almost certainly set it up for future failure.The problem is that the currency union is only as strong as its weakest link. Lopping off the weakest part of the Eurozone is not akin to removing a cancerous lesion from an otherwise healthy body, but more like the puncturing of an important blood vessel, which could well destroy the patient.

    Euro-zone debt: A modest proposal | The Economist - PEER STEINBRÜCK, strongman of Germany’s opposition social democrat party (pictured), would like the European Investment Bank (EIB) to take over from the European Central Bank (ECB) as the chief source of emergency funding for the euro-zone periphery. The ECB, he argues, is heading down the slippery slope of lending to states, by the thinly-disguised ruse of lending to their banks. The ECB cannot force reform programmes on peripheral countries as a lending condition, he told a gathering of bankers in Frankfurt on September 4th, so why is it going behind their backs and lending to their banks? “I’m sceptical that the ECB can go on doing this,” he said. The advantage of using the EIB as a conduit instead is that it can impose risk-adjusted interest rates on borrowing countries as an incentive for them to reform, he argued. The EIB also has a banking licence, which allows it access to ECB liquidity when necessary. The proposed €700 billion European Stability Mechanism, which is still waiting for approvals which may never come, is not designed to have a banking licence.

    Two of three Austrians oppose more help to Greece: poll (Reuters) - Two out of three Austrians oppose more European Union aid to debt-strapped Greece, a poll published on Monday showed. The Karmasin poll of 500 people for the Heute newspaper found 39 percent were entirely against more aid while 26 percent tended to oppose the idea. Only 12 percent were absolutely in favor and 19 percent tended to support more EU help. The survey reflects mounting skepticism in relatively strong northern countries in the euro zone over continuing to spend taxpayers' money to prop up struggling southern members of the currency union. A separate poll showed only a quarter of Germans think Greece should stay in the euro zone or get more help from other countries. In Austria, billionaire auto parts magnate Frank Stronach has burst into politics with a call to abandon the euro, turning parliamentary elections due next year into a de facto referendum on the country's role in Europe. 

    Germans write off Greece, says poll - Only a quarter of Germans think Greece should stay in the eurozone or get more help from other countries in the currency union, a Financial Times/Harris poll has found. The overwhelming verdict highlights Angela Merkel’s domestic dilemma as she comes under pressure in Europe to agree more time or money for Greece to get its €174bn second bailout back on track. Negative German sentiment, detailed in the poll conducted in August, stands in marked contrast to that in Italy and Spain, where respondents were far more reluctant to cut Athens loose.  The diverging views pose a big challenge to EU leaders who this month must again grapple with how to deal with a new Greek government poised to ask for two more years to implement painful economic and government reforms demanded by international lenders as part of their three-year bailout programme. Senior officials estimate that the Greek programme has already slipped by up to €20bn since it was agreed in February because of a worsening economic climate and official stasis in Athens through two rounds of divisive national elections. A decision on how to fill that gap must be made before an already-overdue €31bn aid payment is distributed next month.

    Leaked Troika Letter Demands Greek Workweek Be Expanded To Six Days - If true, and we don't see a reason to doubt it veracity, the just leaked Troika letter sent to the Greek Labor Ministry, courtesy of The Telegraph's Bruno Waterfield, which sees the Troika demanding a 6 day work week, to wit: "Measure: Increase flexibility of work schedules: Increase the number of maximum workdays to 6 days per week for all sectors." This means that Greece is effectively out of the Eurozone, as there is no way the Greeks, no matter how much they want to be a vassal state of Brussels, will agree to this kind of treatment. Although one may expect the Syntagma square riot cam will be up and running well before the Grexit is a done deal.

    Eurozone demands six-day week for Greece - Greece's eurozone creditors are demanding that the government in Athens introduce a six-day working week as part of the stiff terms for the country's second bailout. The demand is contained in a leaked letter from the "troika" of the country's lenders, the European commission, European Central Bank, and International Monetary Fund. In the letter, the officials policing Greece's compliance with the austerity package imposed in return for the bailout insist on radical labour market reforms, from minimum wages to overtime limits to flexible working hours, that are likely to worsen the standoff between the government and organised labour in Greece. After a long delay caused by months of political paralysis in Greece, the troika inspectors return to Athens this week to scrutinise Greek observance of its bailout terms. They are expected to deliver a verdict next month that will determine whether Greece is ultimately allowed to remain in the single currency. The letter, sent last week to the Greek finance and labour ministries, orders the government to extend the working week into the weekend.

    Greek unions predict jobless rate will hit 29pc in 2013 -- GREECE'S largest labour union has warned that the country's unemployment will reach 29 per cent in 2013 if the government carries out more planned austerity measures, expected to exceed 11.5 billion euros ($A14.14 billion) for 2012-13. "The course of the Greek economy is one of decline. In 2012, we are expecting a drop in gross domestic product of seven per cent. This will create unemployment of 24 per cent level - 1.2 million people," Savvas Rombolis, head of research at the GSEE labour union, told the Associated Press in an interview on Monday. "Our estimate is that in 2013, unemployment will be between 28 and 29 per cent - more than 1.4 million people. That's because we expect the economy to remain in decline." The predictions are to be included in a report that will be published on Thursday. Unemployment in May reached 23.1 per cent, with the under-25 jobless rate hitting 54.9 per cent.

    Greek judges, police take to streets over cuts - Judges, public prosecutors and court workers gathered Wednesday in a rare demonstration at Greece's Supreme Court to protest pay cuts that have also drawn the ire of police, fire brigade, coast guard and university staff unions. Organizers of the protest threatened to cut operating hours at the country's severely backlogged courts if salaries are slashed as part of the government's €11.5 billion ($14.4 billion) austerity measures for 2013-14. Greece's shaky governing coalition is scrambling to finalize the new package ahead of a new inspection Friday by bailout creditors. Without the cutbacks — which follow more than two years of harsh income cuts and tax hikes — the debt-crippled country will not get the next €31 billion rescue loan installment. That would force Greece to default on its loans and probably to leave the 17-member eurozone. "Of course it's not common to see judges protesting but we were obliged to gather today to express our opposition to the planned new cuts," Vassiliki Thanou-Christofilou, head of the Association of Judges and Public Prosecutors, told the AP as about 200 people — including senior judges — took part in the protest.

    Greece faces longer recession if cuts not delayed: study - Greece faces a longer recession if the country is forced by EU peers to apply cuts worth 11.6 billion euros ($14.4 billion) over two years instead of four, a state-sponsored study said on Tuesday. "In the case where the 11.6 billion euros in agreed government spending cuts are implemented (over) a two-year period, we adopt the hypothesis that the 2012 recession will continue in 2013 and 2014," the Center of Planning and Economic Research (KEPE) said in a bulletin. Greece has been seeking additional time to make the cuts, agreed to in return for loans from the EU, the IMF and the European Central Bank. "In an alternative set-up where fiscal consolidation expands over a four-year horizon...recession is estimated at 1.8 percent in 2013 and nil in 2014," the center said. KEPE noted that in order to maintain an IMF target of debt-to-output ratio of 120 percent by 2020, Greece also needs lower the interest paid on its outstanding debt.

    Greece’s Debt Not Sustainable Without Interventions, KEPE Says - Greece’s public debt is on a non- sustainable path even after a restructuring earlier this year, the nation’s Center of Planning and Economic Research said. The country will not be able to cut its debt to 120 percent of gross domestic product by 2020, as required under a bailout from the European Union and International Monetary Fund, without “targeted policy interventions,” the state-run researcher, known as KEPE, said in a report today. Such interventions include spreading out an 11.6 billion- euro ($14.6 billion) package of spending cuts, currently being finalized by the government, over four years instead of two, a reduction in the country’s interest rates and a “realistic” state asset-sales program, KEPE said. Without these changes the debt in 2020 could be as high as 151 percent of GDP, the center said.

    Greek Pension Funds Lost More Than 10 Billion Euros in Debt Swap -Greece’s state-controlled pension funds saw the nominal value of their government bond holdings drop 10.7 billion euros ($13.4 billion) after the country’s debt swap earlier this year, Finance Minister Yannis Stournaras said. It fell to 13 billion euros from 23.7 billion euros, Stournaras, citing Bank of Greece data, said in a written response to a lawmaker’s question distributed to reporters yesterday. Greece reduced its debt by about 100 billion euros when bondholders agreed to the biggest sovereign restructuring in history in March. The debt swap and bailouts from the European Union and the International Monetary Fund aim to reduce Greek debt to 120 percent of gross domestic product by 2020 from 165 percent last year.

    One in three shops have shut in Thessaloniki - With just a few hours left before the opening of this year's Thessaloniki International Fair, the decline of the city’s commercial center is more than apparent as three in 10 enterprises have shut down.Popular streets such as Aghias Sofias (photo) have seen a succession of closures, at a rate, on this particular stretch, of 34.2 percent, according to data released on Thursday by the National Confederation of Greek Commerce (ESEE). Even on the city’s most popular shopping strip, Tsimiski Street, the closure rate has increased by 33 percent in the last six months, to 20.4 percent. Commercial property owners have resorted to reducing lease rates dramatically or to splitting their properties in two or even three so as to secure tenants.

    European Retail Trade - The latest data show that consumers in Europe as a whole seemed to have reached the steady state economy.  However, inside the Eurozone, retail spending continues to slide slowly.  Combined with the unemployment data, we can see that Europe continues to stagnate - it has not solved its fundamental problems, but nor has it slid into acute crisis.

    Swiss Economy Plunges Due to Pressure from European Crisis - Quite unexpectedly the Swiss economy plunged in 2nd quarter as the European crisis caught up with a nation that had relatively become immune to the woes faced by its neighbours, which further justifies the cap of central bank on the stronger franc. The 0.1% shrink duplicates the emerging evidence seen in a nation like Sweden, one of the euro outsiders whose currency attracted unwelcome strength in recent times that the problems in Europe are now even hurting the nations that were resilient for all these time. All this while, the country’s National Bank managed to ward off any risks of deflation and recession by capping franc’s value of last September, which was recorded at 1.20 per euro, which in turn helped the country to keep its industries of high value export competitive. Up until now, the solid performance of the country’s economy had ignited questions about if there was a need for SNB’s cap on franc, which it has been defending by selling out franc in billions for euros, pushing the reserves of its foreign exchange to around 70% of its yearly profit in the month of July; but the proof that decline in economic confidence in euro zone is deteriorating other economies surfaced up last Monday, when buying managers’ indexes showed widespread shrink in activities of manufacturing.

    Recession could force Italy to seek EU aid - Italy’s worsening economic crisis and high debt costs have led senior officials in Rome to warn that the country may be forced by the end of the year to apply for an EU bond-buying programme in exchange for implementing further tough economic reforms. Rome’s public position is that it does not need to request purchases of its sovereign bonds by the eurozone’s bailout fund – for the moment – but that if it did, only “light” conditions should be attached, given the measures already adopted by Mario Monti since he became prime minister last November. But Mr Monti’s hand could be forced within months, according to officials involved in internal discussions, who say Germany, among others, is likely to insist on tough conditions – in part to lock in whatever government replaces the prime minister’s technocrats after elections expected early next year. Official economic forecasts for 2012 are being revised down. Italy’s economy is seen contracting by more than 2 per cent, against the last forecast of a 1.2 per cent shortfall, while the budget deficit is likely to be revised from 1.7 per cent of gross domestic product to about 2.2 per cent, officials said. Unemployment is set to continue rising sharply. Tax increases have hit consumer spending, while high rates on Italy’s sovereign bonds have also driven up borrowing costs for the private sector.

    Debt-hit Italy sells off castles - Palaces on the Grand Canal in Venice and in the historic centre of Rome, medieval castles and even lighthouses are on the market as Italy plans to “sell the family silver” in an attempt to balance its books. The government of Mario Monti, the prime minister, is drawing up a list of 800 state-owned properties for an unprecedented pounds £2.8 billion sell-off next year, officials said last week. Many local authorities are also marketing publicly owned properties to raise funds. In Venice, the properties on offer include the 18th-century Palazzo Diedo on the Grand Canal. Built by a noble family, it served as law courts until earlier this year and is now on sale for £15 million. In Rome, historic palaces that were formerly home to government ministries will be sold, including the vast former communications ministry near the Trevi fountain. Officials said the opulent 17th-century Palazzo Barberini, which houses the national gallery of ancient art, could also be sold.

    Euro Region’s Contraction Led by Consumers, Investment - Europe’s economy was pushed into a contraction in the second quarter as consumers cut spending and corporate investment slumped. Gross domestic product in the 17-member euro area fell 0.2 percent from the first quarter, the European Union’s statistics office said, confirming an initial estimate published on Aug. 14. Gross fixed capital formation dropped 0.8 percent from the previous three months, when it fell 1.3 percent, while consumer spending was down 0.2 percent. Government-spending growth slowed to 0.1 percent from 0.2 percent. The Organization for Economic Cooperation and Development called today on officials to do more to tackle the region’s debt crisis, which will continue to weigh on growth and confidence. European Central Bank President Mario Draghi may unveil details of a plan later today to purchase government bonds to lower borrowing costs of Italy and Spain and prevent a euro breakup. “The slowdown will persist if leaders fail to address the main cause of this deterioration, which is the continuing crisis in the euro area,” said OECD Chief Economist Pier Carlo Padoan. “Resolving the euro area’s banking, fiscal and competitiveness problems is still the key to recovery.”

    German Industrial Output Unexpectedly Increased in July - German industrial production unexpectedly rose in July, adding to signs that Europe’s largest economy is weathering the region’s debt crisis.  Production rose 1.3 percent from June, when it fell a revised 0.4 percent, the Economy Ministry in Berlin said today. Economists forecast unchanged production, the median of 39 estimates in a Bloomberg News survey showed. Output fell 1.4 percent from a year earlier when adjusted for working days.  Today’s report is the third to suggest the economy made a good start to the third quarter, with factory orders and exports also rising in July. Still, growth slowed in the second quarter and business confidence has dropped for four straight months as the debt crisis dents demand for German goods in other euro-area countries.

    Germany Trifecta: Steep Drop in Construction New Business, Services New Business, Manufacturing New Business - Eurozone activity is crumbling at a steep pace. A close look at Germany provides all the information you need to see that it's not just the club-med states are in deep trouble.  The Markit Germany Services PMI® shows Sharpest drop in German services activity since July 2009.  Key points:

    • Final Germany Services Business Activity Index at 48.3 in August, down from 50.3 in July.
    • Final Germany Composite Output Index at 47.0 in August, down from 47.5 in July.

    Summary: August data pointed to a renewed contraction in German service sector business activity, following a slight expansion during the previous month. This was highlighted by a fall in the final seasonally adjusted Markit Germany Services Business Activity Index from 50.3 in July to 48.3, its lowest since July 2009. Service providers widely linked the downturn in business activity to weaker spending by businesses and consumers. This contributed to a drop in new business intakes for the fifth consecutive month during August. Latest data pointed to a steep fall in volumes of new work, and the rate of contraction accelerated to the fastest since June 2009.

    George Soros’s Three Month Window on Eurozone Crisis Management Is Up - Three months ago, on June 2, 2012, George Soros gave a widely circulated speech about the Eurozone crisis. He mentioned “three months” four times in the speech. In my judgment the authorities have a three months’ window during which they could still correct their mistakes and reverse the current trends. By the authorities I mean mainly the German government and the Bundesbank because in a crisis the creditors are in the driver’s seat and nothing can be done without German support. I expect that the Greek public will be sufficiently frightened by the prospect of expulsion from the European Union that it will give a narrow majority of seats to a coalition that is ready to abide by the current agreement. But no government can meet the conditions so that the Greek crisis is liable to come to a climax in the fall. By that time the German economy will also be weakening so that Chancellor Merkel will find it even more difficult than today to persuade the German public to accept any additional European responsibilities. That is what creates a three months’ window. Correcting the mistakes and reversing the trend would require some extraordinary policy measures to bring conditions back closer to normal, and bring relief to the financial markets and the banking system. These measures must, however, conform to the existing treaties. The . It is difficult but not impossible to design some extraordinary measures that would meet these tough requirements.

    Money market funds look to pass on losses - Investors in the €1.1tn European money market fund industry are facing losses as big managers prepare to pass on the impact of negative short-term interest rates. Four of the biggest money market fund managers have told the Financial Times that along with the rest of the industry they are looking at ways of passing on negative returns to investors. The funds are investment vehicles that are marketed as a way to keep cash safe, investing in “ultra-safe” short-term debt and bank deposits. They are used by investors who look to large asset managers such as Goldman Sachs and JPMorgan to invest excess cash safely.  But with interest rates on short-term French and German government debt in negative territory as investors scurry for safety, most money market funds now offer no yield to new investors. The European Central Bank last month said it could start charging banks to hold their cash overnight, which means bank deposit rates may also turn negative. “We are looking at various options, some of which may require changes to the fund prospectus and articles of association, that would allow us to continue operating during periods of negative yields,” said Jonathan Curry, global chief investment officer for HSBC Global Asset Management’s liquidity funds, which includes a €7bn European money market fund.

    Counterparties: Europe’s shrinking money funds - The sovereign debt crisis has put European money market funds in an intolerable position. Many European MMFs promise not to “break the buck” — or let the net asset values of their holdings fall below 1 euro per share. At the same time, these funds are following their US counterparts by avoiding an ever-growing pool of risky (and high-yielding) continental assets. Unfortunately for funds obliged to invest inside the euro zone, short-term assets are increasingly moving toward negative yields. This, of course, is bad news for fund managers and investors alike. Fund managers, the FT’s Ajay Makan writes, are now becoming a lot less willing to swallow their losses:Four of the biggest money market fund managers have told the Financial Times that along with the rest of the industry they are looking at ways of passing on negative returns to investors. But with interest rates on short-term French and German government debt in negative territory as investors scurry for safety, most money market funds now offer no yield to new investors. The European Central Bank last month said it could start charging banks to hold their cash overnight, which means bank deposit rates may also turn negative. European MMFs are looking for clever ways to break the euro without actually letting NAV drop: To people like Mary Schapiro, Daniel Tarullo and John Gapper, the long-delayed reform in MMFs is a matter of systemic risk. The problems faced by euro MMFs show that there are risks, even without Lehman-style defaults.

    The Battle Begins -  If the leaks from the European Parliament are to be believed then the lines are being drawn in the sand for quite a fight. The rumor is that Mr. Draghi is going to propose a plan to buy short sovereign debt (0-3 years) without limit if a nation fills out the requisite form and officially asks for aid with conditionality. The rumor further states that this short term-buying, which involves lending money directly to various governments and not just buying bonds in the secondary market, does not violate the mandate of the ECB which specifically forbids the ECB from doing exactly what he may be proposing. I find his argument spurious as defined by maturity and it will be quite interesting to see what reaction Germany and her allies may have to this scheme. The dog fight will begin later today as he releases his actual plan to the various central banks in Europe. The constant speculation will end and the reactions of the various governments will be front and center upon the world’s stage.

    ECB Unveils Bond-buying Program to Fight Crisis - European Central Bank President Mario Draghi has unveiled a long-awaited program to buy up bonds and help bring down the borrowing costs of Europe’s struggling governments. The plan envisions no set limit on the amount of bonds the ECB could buy, making the program “a fully effective backstop” against a further worsening of the debt crisis in the 17 countries that use the euro. The initiative — dubbed Outright Market Transactions or OMT— goes beyond an earlier, limited bond purchase program that was not big enough to decisively lower borrowing costs. Draghi emphasized that the new, unlimited program by contrast was open-ended and had “no quantitative limits.” He said it would work because it was “very very different from any program we have had in the past. ” The new program would continue until its goal of lower borrowing costs is achieved, or a government violates the conditions attached to getting the help.

    Draghi Remarks on ECB Bond Buying at Press Conference - The following is the full text of European Central Bank President Mario Draghi's introductory statement to his regular press conference.

    ECB to launch 'outright monetary transaction' plan  European Central Bank President Mario Draghi on Thursday said the central bank would launch an "outright monetary transaction," or OMT, program in the secondary market, under strict conditionality. This would allow the ECB to decide when to start, continue or suspend bond buys. Draghi said OMTs "enable [the ECB] to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro." Annalisa Piazza, an analyst at Newedge Strategy, said the program was "aimed at restor[ing] the monetary-transmission mechanism. Most of the distortions [are] due to fears not based on fundamentals." Earlier Thursday, the ECB left unchanged its benchmark interest rate at 0.75%, while the Bank of England also made no changes to interest rates or assets purchases. Today's announcement is viewed as a crucial moment for global markets and Europe's financial system.

    Draghi delivers (never mind the economy) -- The SMP is dead! Long live the SMP! Overnight Mario Draghi announced the new emergency program designed to support the ailing Eurozone. Most of the package was leaked out prior to the meeting so it wasn’t too much of a surprise when it was announced.  The “unlimited” scale was, however, certainly an upside surprise. The new program will be called OMT which means “Outright Monetary Transactions” and is a replacement of the Securities Markets Program (SMP) which the ECB previously used to purchase €209bn of EZ sovereign bonds. The SMP had been dormant for 5 months. The OMT will have a pre-condition that any country receiving its benefits must already be under a EFSF, ESM,ECCL, or similar  with a binding fiscal adjustment program in place preferably under the guidance of the IMF. The OMT will concentrate on purchasing sovereign bonds with a >3 year maturity in the secondary market and will have an unlimited capacity to do so. There will be no pre-announcement of the scale of any purchases or of any target yields. Importantly the ECB has also removed seniority on the program so that private sector actors in the primary and secondary markets will be on-par with the official sector in the case of default.

    Central Bank to Snap Up Debt, Saying, ‘Euro Is Irreversible’ - Mario Draghi, the E.C.B. president, overcame objections by Germany and won nearly unanimous support from the bank’s board for a program of buying government bonds that would effectively spread responsibility for repaying national debts to the euro zone countries as a group. The E.C.B. will buy bonds on open markets, without setting any limits, of countries that ask for help, which Spain is expected to do. The E.C.B. said it would act only after countries agreed on conditions with the euro zone rescue fund, which will be known as the European Stability Mechanism. The E.S.M. would buy bonds directly from governments, taking responsibility for imposing the conditions, while the E.C.B. would intervene in secondary markets. The bank and its president, Mr. Draghi, have had the quiet support of all European leaders in taking this latest bold action ... Crucially, support for Mr. Draghi includes Berlin and the German chancellor, Angela Merkel.

    ‘Super Mario’ Rides to the Euro’s Rescue - Over the summer, Mario Draghi, the governor of the European Central Bank, told the world that he would do “whatever it takes” to save the euro. On Thursday, what that actually means in practice finally became clear: The ECB’s governing council agreed on a plan to buy the sovereign bonds of troubled eurozone nations that are under attack in financial markets. The new policy, agreed to after intensive behind-the-scenes negotiations by Draghi with European policymakers and central bankers, comes with some significant caveats. The biggest is that any national government that wants the ECB’s active help to fight off financial speculators must first agree to embark on a program of tough macroeconomic policy measures, and then must follow through. Those terms may be difficult politically for governments to accept, especially Spain, whose bonds have been a major focus of market attacks over the past few months. The decision nonetheless amounts to a significant shift in tactics, and marks a political triumph for Draghi, who overrode strong German objections to such a plan. The head of Germany’s central bank, Jens Weidmann, has been outspoken in his opposition to the ECB essentially bailing out national governments; he has argued that such a move would go far beyond the mandate of the central bank, and may make heavily indebted countries less likely to take the tough measures they need to bring their economies back to health.

    Counterparties: Draghi makes his move -  Mario Draghi has made his leaked proposal official: the European Central Bank will buy unlimited amounts of troubled euro zone debt on the open markets in an effort to push down sovereign borrowing costs. The NYT’s Jack Ewing and Steven Erlanger ">">write that the plan puts the ECB’s “unlimited financial clout behind an effort to protect Spain and Italy from financial collapse” and “effectively spreads responsibility for repaying national debts to the euro zone countries”. The plan, called “Outright Monetary Transactions” (OMT), will purchase bonds maturing in the next three years, after countries have made a request to the euro zone’s bailout fund and fully agreed to its conditions. If countries renege on their promises in areas like banking reform or fiscal policy overhauls, the ECB will terminate the bond purchases. Importantly, the ECB will not have seniority over private bondholders. Draghi was coy in his press conference when asked who dissented, but Germany’s central bank later ">">confirmed its dissenting vote and denounced the plan as “tantamount to financing governments by printing banknotes”. The reaction from the German press, as surveyed by Joe Weisenthal, ranges from nonplussed (“Alas, if that goes wrong”) to apoplectic  (“Black day for democracy”, “death of Bundesbank”). Half the German populace doesn’t trust Draghi, according to a recent poll.

    Draghi - Krugman - I’d better weigh in on what would, if it weren’t for the DNC, be the story of the day: the latest announcement from the European Central Bank. What I’ve been arguing for a while is that saving the euro requires two things: (a) large ECB purchases of peripheral bonds (or at least a declared willingness to do so, to cap yields), and (b) an indication that the ECB will be willing to allow higher inflation to make adjustment possible. It looks as if we sorta kinda got (a), although the details are hard to interpret. Nothing on (b) yet, and market indicators of inflation expectations are still too low. So, a step in the right direction, probably enough to buy a significant amount of time, but not enough unless more follows.

    Markets Applaud Draghi’s New, Improved Kick the Can Down the Road Strategy - Yves Smith - On Thursday, ECB chief Mario Draghi announced a bond-buying program that had been largely leaked the day prior, namely that of a new bond buying program, the Outright Monetary Transactions, or OMT. Bond yields in Italy and Spain had already come down on the rumor, and stock markets around the world rallied on the news. The enthusiasm appears overdone when you look at the sketchy details. Draghi is implementing an improved version of the Securities Market Program, which only temporarily suppressed periphery country bond yields. “Conditionality” is Eurocrat-speak for “debtor countries must agree to wear the particular austerity hair shirt we have designed for them before they get any dough.” Per the ECB’s press release, the new program will be more bloody minded about compliance than the old SMP (which is being terminated). Now of course, there were other differences, at least in the mind of Mr. Market. The belief is that the ECB, which is the only actor positioned to buy the eurozone enough time to create a fiscal union and unified bank regulation, has gotten control of the game board.  Of course, the Germans central bank was in opposition, and the German media took up the cry: “Financial markets cheer the death of the Bundesbank.” But what does this mean in practice? Well, first, neither Italy nor Spain have yet formally asked for help (the first step in the dreaded “conditionality” process. Italy does not want to ask before Spain, and Spain has and presumably is continuing to try to get some waivers from the sort of conditions that have been imposed on other borrowers before it requests assistance (the press is now reporting that Spain will submit its petition on September 14). The second part that is striking is that even though Draghi has used the bold word “unlimited,” he finessed the question of what the rate targets would be.

    Bundesbank confirms Weidmann opposed bond buys - Germany's Bundesbank confirmed that its president, Jens Weidmann, voted against the bond-buying proposal unveiled Thursday by European Central Bank President Mario Draghi. A spokesman said Weidmann opposed the measures, which he viewed as "too close" to central-bank financing of government deficits "with a printing press." Draghi, in a news conference, said there was one dissenting vote on the program, but didn't identify who cast it. Weidmann's opposition to the plan, however, was no secret. The Bundesbank chief last month made a similar complaint to a German news magazine and warned that central-bank bond purchases could prove to be "addictive."

    Not too little, possibly too late - SINCE the euro crisis erupted, the European Central Bank has been torn between its legal and philosophical aversion to financing governments and its duty as lender of last resort. Today, it appears to have reconciled the two, erring on the side of the latter. At the end of its governing council meeting today, the ECB announced the much-anticipated details of how it would resume intervening in the region’s government bond markets. Using its newly-christened Outright Monetary Transactions (OMT), it will buy sovereign bonds of one to three year maturity, provided the issuing country has agreed to a fiscal adjustment programme with either the European Financial Stability Facility, or its successor, the European Stability Mechanism. Mario Draghi, the ECB president  justified the programme as a necessary adjunct to monetary policy, because the ECB’s ability to set interest rates for the euro zone as a whole has broken down over fears that some countries may leave the single currency. He never used the words "lender of last resort", a role the ECB readily accepts for banks but not for governments. Nonetheless, that is the de facto purpose. The purchases will act as “an effective back stop to remove tail risks from the euro area,” Mr Draghi told reporters.

    “Misery”: A Postscript To “The Euro Is Not Unassailable” - This memorable scene in Misery is a perfect metaphor for the ECB’s much vaunted bond buying program. In essence you have two distinct, but related problems: the solvency issue and the problem of deficient aggregate demand. The bond buying deals with the first, but at the expense of the latter. They should be doing unconditional bond buying, but the Germans would never stand for that politically. So they’ll still have the same “problem” of fiscal profligacy because as they deflate these economies further into the ground (as a condition of the bond buying), tax revenues will fall further, the automatic stabilizers will go up and the deficits will become larger. It’s a bit like a patient in the hospital being fed on a drip until he recovers, and then breaking his legs as he emerges from the hospital bed, a la Kathy Bates to James Caan in “Misery”: The patient, like James Caan, is perpetually “hobbled”, even though he remains alive.

    The One Chart To Explain Why Draghi's Blunt Tool Can't Fix Europe -- The monetary policy transmission mechanism is broken in Europe; we all know it and even ECB head Draghi has admitted it (and is trying to solve it). As Bloomberg economist David Powell noted though, Draghi may have to address the economic fragmentation of the euro area before undoing the financial fragmentation of the region. The latter may just be a symptom of the former. The Taylor Rule, a policy guideline that models a monetary authority’s interest rate response to the paths of inflation and economic activity, highlights the drastically different monetary policies required across the various EU nations as a result of their variegated domestic economic conditions. This variation creates concerns over sustainability and the rational (not irrational as Draghi would have us believe) act of transferring deposits to 'safer' nations for fear of redenomination. As Powell notes: Draghi will probably have to convince market participants of the economic sustainability of the monetary union before the financial fragmentation of the region is ended. The large-scale extension of central bank credit to potentially insolvent countries is unlikely to accomplish that - as economies remain hugely divergent.

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