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

Saturday, October 27, 2012

week ending Oct 27

Fed balance sheet shrinks in latest week (Reuters) - The Federal Reserve's balance sheet contracted in the latest week as a result of a decline in holdings of Treasuries securities, Fed data released on Thursday showed. The Fed's balance sheet stood at $2.823 trillion on October 24, down from $2.829 trillion on October 17. The Fed's holdings of Treasuries totaled $1.647 trillion as of Wednesday, below the $1.659 trillion seen the previous week. But its ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) totaled $868.07 billion, up from $862.30 billion the previous week. Under the Fed's latest stimulus program, announced last month and dubbed QE3, the central bank has pledged to buy $40 billion per month of agency mortgage-backed securities. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $82.75 billion, unchanged from the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $4 million a day during the week, slower than the $12 million a day average rate the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--October 25, 2012

QE3 begins - MBS on Fed's balance sheet - 2 year graph

Vital Signs Chart: Fed Holding More on Its Balance Sheet - The Federal Reserve’s balance sheet is expanding again as it takes more steps to stimulate the economy. As of last week, the central bank held nearly $2.82 trillion in assets, up from $2.79 trillion in October’s first week. Last month, the Fed began a new round of bond purchases designed to bring down interest rates and stir job growth.

Fed May Calm Bond Traders by Adding Treasuries to QE3 - The world’s biggest bond traders say the Federal Reserve will decide before year-end to buy Treasuries in addition to purchasing $40 billion of mortgage bonds a month as gains in U.S. employment and consumer confidence prove unsustainable. All 21 primary dealers that trade with the central bank expect its latest quantitative-easing measures to be expanded to include government securities, according to a survey last week by Bloomberg News. Rather than increasing on speculation the central bank’s latest measures would spur the economy, volatility in the bond market has held at about the lowest since 1988, a sign of continued demand for the safety of Treasuries. Expectations for more stimulus come with the Fed’s Operation Twist, an exchange of $667 billion in short-term debt for longer-maturity securities to help contain borrowing costs, scheduled to end Dec. 31. When they announced the mortgage buying plan on Sept. 13, policy makers said they would keep pumping money into the economy until there was “ongoing, sustained improvement” in the labor market.

Fed Statement Following October Meeting - The following is the full text of the statement following the Federal Reserve’s October policy-setting meeting

FOMC Statement: "Economic activity has continued to expand at a moderate pace" - Not much changed ... FOMC Statement:  Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has advanced a bit more quickly, but growth in business fixed investment has slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation recently picked up somewhat, reflecting higher energy prices. Longer-term inflation expectations have remained stable.   The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

Parsing the Fed: How the Statement Changed - The Fed releases a statement at the conclusion of each of its policy-setting meetings, outlining the central bank's economic outlook and the actions it plans to take. This is the October statement compared with September. Analysis of changes are at the bottom.

Ho-Hum October Points to an Eventful December for Fed -- No one was expecting anything dramatic from the Federal Reserve meeting that ended Wednesday. The December gathering is likely to be an altogether different affair. Why? Central bankers face at least one significant policy choice–the fate of what markets call Operation Twist. Officials will also have had more time to weigh the successes of the mortgage-buying program markets call QE3, and they’ll need to decide if the effort should be modified or left alone. Also on the table: communications changes that might better explain how the Fed can conditionally pledge to keep short-term interest rates effectively near zero until the middle of 2015.

FOMC Behavior and the Dual Mandate - In the most recent FOMC statement, we are told the following: Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective. The argument is that we need more accommodative policy because: (i) the FOMC expects that, without such policy, there would be insufficient improvement in the state of the labor market and (ii) inflation is expected to continue below the FOMC's target of 2%. Thus, the FOMC anticipates that it will be missing on both sides of its dual mandate in the immediate future unless it does something about it. Does the FOMC have it right? I have no idea whether the Fed is confident in its forecasts, whether we would think those forecasts are any good if we knew how they were done, etc., so all I can do is look at actual data. With respect to the "price stability" part of the dual mandate, the Fed has decided that the rate of increase in the PCE deflator is the appropriate measure of inflation. The first chart shows the twelve-month percentage increase in the PCE deflator.

Top Client Question: Can Central Banks Just Cancel Sovereign Debt - On Saturday, we wrote that more and more people are starting to wonder if central banks like the Bank of England and The Fed can just "rip up" the debt that they've bought via Quantitative Easing, and reduce the national debt of these countries with the stroke of a key. Asking this question, and thinking about the implications of it, is the equivalent of taking the 'Red Pill' of economics. The Red Pill, of course, is what Neo took in the Matrix, and it exposed his mind to an entirely different view of the world that was far less comfortable than the one he inhabited. If you start thinking about the possibility that the central bank could just rip up a government's debt, with few negative ramifications, then you might start thinking about government finances in a totally new way that makes you uncomfortable. You might start to realize that this whole construct of a broke government, deeply in hock to the Chinese (and everyone else) is an illusion, that complete distorts the realities of sovereign finance. But it's too late. More and more people are taking the red pill, and thinking about this question.

The rumble in the monetary jungle, with Karl Denninger and Mike Norman! (Capital Account video) The Federal Open Market Committee announced nothing new in a statement following its two-day meeting: The Federal Reserve will maintain QE3, and it will keep interest rates at record lows until at least mid-2015. We ask guests Mike Norman and Karl Denninger if the Fed is trying to inflate its way out of debt without addressing the US’ fiscal imbalances. Plus, Tuesday’s third party presidential debate featured candidates from the Green, Justice, Constitution and Libertarian parties, highlighting issues that haven’t been touched in the Romney-Obama debates: Money in politics, cutting defense spending and the government's role in the student loan debt crisis. Guests Mike Norman, Chief Economist of John Thomas Financial, and Karl Denninger, author and trader, debate whether a significant reduction in federal spending is necessary to solve America’s economic troubles. Can the US just print whatever money it needs to meet its financial obligations, or will it eventually have to pay the price?

Worst Carry Trades Show Central Banks Reaching Stimulus Limits - The $4 trillion-a-day foreign- exchange market is losing confidence in central banks’ abilities to boost a struggling world economy.  Rather than sparking bets on growth, the JPMorgan Chase & Co. G7 Volatility Index, which more than doubled in 2007 to 2008 before policy makers employed extraordinary measures to address faltering global expansion, has dropped to a five-year low. While small foreign-exchange swings historically favor the strategy of borrowing in low-yielding currencies to buy those with higher returns, a UBS AG index that tracks profits from the so-called carry trade has fallen to the lowest level since 2011.  Foreign-exchange speculation is declining as mandated spending cuts and tax increases in the U.S. next year, concern that European government leaders aren’t moving fast enough to fix the region’s debt crisis, and slowing growth in emerging economies from China to Brazil weigh on sentiment. The world economy will expand 3.3 percent this year, the least since the 2009 recession, the International Monetary Fund said on Oct. 9.

Presidential Election Weighs on the Federal Reserve - The next significant event for monetary policy is not the Federal Reserve’s meeting Tuesday and Wednesday, which is likely to pass quietly, but the presidential election two weeks later.Mitt Romney, the Republican nominee, has said that he opposes the Fed’s efforts to stimulate the economy as ineffective and inflationary. And as president, he has promised to appoint a new Fed chairman. The term of the current chairman, Ben S. Bernanke, runs through early 2014. But the impact could be immediate as investors revise their assumptions about the future. “I certainly would expect the markets to respond, that they will take this as the Fed being more hawkish and that will be reflected in rates,” said Laurence H. Meyer, senior adviser at Macroeconomic Advisers and a former Fed governor. Such a reversal would be welcomed by critics who argue that the Fed’s efforts are undermining economic stability, and mourned by supporters who say more must be done to revive economic growth. But Mr. Meyer and others cautioned that the impact would not be fully felt until it becomes clear whom Mr. Romney intends to nominate as a successor to Mr. Bernanke.

Bernanke complicates Wall Street’s view of Romney - Chatter about whether Ben Bernanke will stay as the Federal Reserve’s chief has complicated Wall Street’s view on a possible Mitt Romney administration. Speculation about Bernanke’s future heightened after the New York Times reported on Tuesday Bernanke told close friends he probably will not seek another term even if U.S. President Barack Obama wins a second term. While Wall Street generally supports Romney, the Republican candidate has stated publicly he will not reappoint Bernanke for a third term as the Fed Chairman. Bernanke’s current tenure expires in January 2014. “He did say he was going to neuter the Fed,” Robbert Van Batenburg, head of global research at Louis Capital said.

Casting Dual Roles, at Treasury and the Fed - For the last couple of months, there has been a parlor game on Wall Street and in Washington about who will become the next Treasury secretary. After all, Timothy F. Geithner has made it clear he plans to be out of that office at the end of the year whether President Obama is re-elected or not. But there is another wrinkle in the parlor game calculus: Ben Bernanke, the Federal Reserve chairman, is likely to need a successor, too. If Mitt Romney wins the presidency, he has already pledged he will replace Mr. Bernanke, whose term as chairman ends in January 2014, in just over 15 months. However, Mr. Bernanke has told close friends that even if Mr. Obama wins, he probably will not stand for re-election. That would be a one-two punch, with two of the most important jobs in the nation up for grabs. And over the last couple of years, especially at the depth of the financial crisis, the relationship between the two people in those roles has been increasingly important. They are the equivalent of roles in a buddy movie.Lots of names are regularly bandied about for both positions. But they are not always thought about in tandem. So here is a field guide to handicapping the next Treasury secretary and Federal Reserve chairman:

Inflation and Unemployment - This is a graph of PCE core year-over-year inflation versus unemployment since 2007 (the scatterplot with headline rather than core PCE is a noisier version of this, but the basic pattern remains): The same graph since 2008 eliminates many of the observations in the upper left part of the graph: And, since 2009:

Things That Aren't Bubbles - Paul Krugman -- Noah Smith, who is a better human being than I am, wades through an anti-Krugman rant to find an interesting nugget: the claim that money is a bubble. It isn’t, of course; but my explanation of why it isn’t is a bit different from his, and has wider implications. I’d start by asking, what do we mean when we talk about bubbles? Basically, I’d argue, we mean that people are basing their decisions on beliefs about the future that are based on recent experience but can’t be fulfilled. E.g., people buy houses because they expect home prices to keep rising at a pace that would eventually leave nobody able to buy a first home. Bubbles don’t have to involve prices. You can have a local construction boom driven by rapid growth in an area’s population and employment, when the main thing driving that rapid growth is … the local construction boom, which will eventually collapse when enough houses are completed. The point, whether prices are involved or not, is that the expectations of individuals add up to an aggregate impossibility. This sounds a lot like what happens in a Ponzi scheme, where people are relying on an ever-growing number of new subscribers, and are doomed to disaster when the pool of potential suckers runs dry. And as Robert Schiller taught us long ago, bubbles are in fact “natural Ponzi schemes”, in which Bernie Madoff’s place is taken by the invisible hand of confusion. Is fiat money a bubble in this sense? Not at all. It’s true that green pieces of paper have no intrinsic value (except that they can be used to pay taxes, which is actually important), so that my willingness to accept green paper from you is based only on my belief that I can in turn hand that green paper over to someone else. But there’s nothing to prevent that process of monetary circulation from going on forever.

The Money Bubble - Neither, Noah Smith, nor Paul Krugman are found of Steven Williamson’s suggestion that money is a “pure bubble.”Noah writes Can this be true? Is money fundamentally worth nothing more than the paper it’s printed on (or the bytes that keep track of it in a hard drive)? It’s an interesting and deep question. But my answer is: No.  First, consider the following: If money is a pure bubble, than nearly every financial asset is a pure bubble. Why? Simple: because most financial assets entitle you only to a stream of money. A bond entitles you to coupons and/or a redemption value, both of which are paid in money. Equity entitles you to dividends (money), and a share of the (money) proceeds from a sale of the company’s assets. If money has a fundamental value of zero, and a bond or a share of stock does nothing but spit out money, the fundamental value of every bond or stock in existence is precisely zero. I think the issue here is that Noah has unwittingly succumb to intrinsic thinking. Money is in a bubble because it trades well above its fundamental value. However, stocks and bonds are not necessarily in a bubble precisely because they trade against money.

No more bubble talk (please!) - I guess it all started with Paul Krugman (who else?), who goes off here in his usual assertive style: Bubble, Bubble, Conceptual Trouble. Steve Williamson takes issue with some of the claims that Krugman makes here: The State of the World. And then Noah Smith steps in to attack one part of Williamson's post here: Money Is Just Little Green Bits of Paper! Noah gets it all wrong, but that doesn't stop both Krugman and DeLong in congratulating him for an argument that even they apparently do not understand. And so it goes.  Let me now explain why I think Noah gets the "bubble" issue wrong. Here is how Noah starts off.  Have you ever heard people say that "money is just little green pieces of paper"? Well, that is exactly what Steve Williamson claims in this post.Um, no...Steve never said that "money is just little green pieces of paper." So right away, we're off to a bad start.To understand what Steve meant, we have to start with Krugman's own "definition" of a bubble: Over and over again one hears that we can’t expect to return to 2007 levels of employment, because there was a bubble back then. But what is a bubble? It’s a situation in which some people are spending too much.

How “Different” is the Recovery from the Financial Crisis? - The slow recovery from the financial crisis and recession of 2007 – 2009 has become a centerpiece of the Presidential election. In last Tuesday’s debate, Mitt Romney, picking up on a theme that has been emphasized by John Taylor, contrasted the current slow recovery with the much faster recovery from the 1981 – 1982 recession. During the past two weeks, there has been an intense focus on a comparison of the current recovery with recoveries from other financial crises. On October 11, Taylor, using historical data from a paper by Michael Bordo and Joseph Haubrich, argued that the current recovery is much slower than the average of previous American recessions associated with financial crises. This was followed by an October 14 paper by Carmen Reinhart and Ken Rogoff who argue that the aftermath of the U.S. financial crisis has been typical of the recoveries from other severe financial crises, an October 15 reply by Taylor, an October 16 rejoinder by Reinhart and Rogoff, an October 17 piece by Paul Krugman, and an October 17 reply by Taylor.  Last October, we presented a paper, “The Statistical Behavior of GDP after Financial Crises and Severe Recessions,” at the Federal Reserve Bank of Boston Conference on the “Long-Term Effects of the Great Recession,” and summarized the results in an Econbrowser post. The focus of the paper was to show that, while severe recessions associated with financial crises generally do not cause permanent reductions in potential GDP, the return takes much longer than the return following recessions not associated with financial crises. We focus on five slumps, extended periods of slow growth and high unemployment, following financial crises identified by Reinhart and Rogoff in their book, “This Time is Different,” that are of sufficient magnitude and duration to qualify as comparable to the current Great Slump for the U.S.

The Financial Industry and Financial Crises - Paul Krugman -- Dean Baker agrees with me about a lot, but wants to have an argument about the nature of our crisis. Unfortunately, I can’t quite oblige. Dean argues that we’re not having a financial crisis in the sense that the problem lies in the financial system. Actually, I agree with him about that. I’m using the words “financial crisis” loosely to mean “after the bursting of a housing/credit bubble”, not to imply that a disrupted financial system is (still) an important drag on the economy. By most measures finance proper has indeed returned more or less to normal: Yet the economy remains depressed, with recovery far from complete. My current modeling approach stresses the overhang of household debt as an explanation; it’s not about the financial system any more. So Dean and I agree; maybe I shouldn’t use the term “financial crisis” at all, but it’s the terminology people know. Now, there is, I suppose, a hint of disagreement about what would have happened if we hadn’t bailed out the banks at all. Dean thinks we’d be in the same place; I think we would have had a second major round of damage, which we’d still be feeling. In other words, I think that something like the TARP was necessary — just not sufficient. Anyway, just to be clear: we may have had a banking problem in 2008-2009, but now we have a burst bubble problem, I’d say in the form of a household balance sheet problem. And a bank-centered view is indeed misleading.

Misunderstanding financial crises - Gary Gorton’s 2009 book, “Slapped by the Invisible Hand”, argued that although these factors were all present, they were also somewhat beside the point. The financial crisis started the way all systemic financial crises start: as a bank run. The only difference was that this bank run took place in the shadow banking system, and the creditors who started the run weren’t depositors of retail banks, but the counterparties of investment banks in repo and commercial paper markets. More to the point, he has long argued that market economies are inherently vulnerable to such runs. And to begin thinking of why the recent crisis happened at all and how to prevent another, it is at least as important to address the question of why the US didn’t have a crisis between 1934 and 2007. And to answer that, you need to know something about how the country’s banking system evolved in the century leading up to 1934. In his new book, “Misunderstanding Financial Crises: Why We Don’t See Them Coming”, Gorton frames the recent crisis in the context of this longer history. And he also tackles some of the more complicated epistemological problems of modern-day economics (and in particular, macroeconomic models). Along the way, he arrives at some provocative conclusions — including a few that would probably make a lot of regulators, economists, and especially the more severe critics of the banks and bankers a little uncomfortable. Gorton agreed to have an email back-and-forth with FT Alphaville about the book, and beneath we reproduce the transcript.

The Secret of Our Non-Success, by Paul Krugman - The U.S. economy finally seems to be recovering in earnest... But the news is good, not great — it will still take years to restore full employment. Why is recovery from a financial crisis slow? Financial crises are preceded by credit bubbles; when those bubbles burst, many families and/or companies are left with high levels of debt, which force them to slash their spending. This slashed spending, in turn, depresses the economy...  And the usual response to recession, cutting interest rates to encourage spending, isn’t adequate. Many families simply can’t spend more, and interest rates can be cut only so far — namely, to zero but not below.  Does this mean that nothing can be done to avoid a protracted slump after a financial crisis? No, it just means that you have to do more than just cut interest rates. In particular, what the economy really needs ... is a temporary increase in government spending, to sustain employment while the private sector repairs its balance sheet. And the Obama administration did some of that, blunting the severity of the financial crisis. Unfortunately, the stimulus was both too small and too short-lived, partly because of administration errors but mainly because of scorched-earth Republican obstruction.

Consumer Spending Probably Lifted Growth: U.S. Economy Preview - Spending by American consumers probably picked up in the third quarter, helping the world’s largest economy overcome a slump in business investment that is holding back the expansion.  Gross domestic product rose at a 1.8 percent annual rate after expanding at a 1.3 percent pace the prior quarter, according to the median forecast of 66 economists surveyed by Bloomberg ahead of Commerce Department data Oct. 26. It would be the first back-to-back readings lower than 2 percent since the U.S. was emerging from the recession in 2009.  Consumer spending is projected to have increased at a 2.1 percent annual rate last quarter following a 1.5 percent gain from April through June, according to the survey median.

WSJ Economists' GDP Forecasts: 1.7 in Q3 and 1.8 in Q4 - The big economic announcement this week will be the Friday Advance Estimate for Q3 GDP from the Bureau of Economic Analysis. The final number for Q2 GDP was 1.3%. The general consensus is that Q3 will show an improvement in this broad measure of the economy. Forexpros weighs in at 1.8%. According to, the consensus for Q3 is 1.9%.'s own estimate, I should point out, is considerably lower at 0.9%. Thus, we might well ask the question: How wide is the range of opinions among economists on this benchmark metric?

Fed Watch: Still The Scariest Data -  I tend to view the data as being modestly optimistic in that it has generally surprised on the upside of late, enough to drive away fears that the slow patch this summer would evolve into a recession in the near future. Still, the data has not been sufficiently optimistic to sway me from my general view that underlying growth continues to be slow and steady.  For example, I would like to see initial unemployment claims make another push lower to cement a stronger outlook:That said, I remain unsettled by the core manufacturing data, which I would say is clearly in recession territory: I think this is the scariest near-term indicator at the moment. Of course, one piece of data in no way makes a recession. I attribute the decline to three factors. First, expiring tax credits pulled some investment into 2011. Second, the drag from international weakness. Third, uncertainty about the extent of fiscal tightening in 2013. At least the second, and probably the third, of these three factors is weighing on earnings growth, which in turn has brought the bull market in equities to at least a pause. From Neil Irwin at the Washington Post: The CEO mindset on the fiscal cliff has been evident in a spate of third-quarter earnings announcements in the past two weeks. Almost uniformly, company executives discuss the looming threat to the economy, usually offering only vague comments that it has been a drag on their confidence and that they don’t know exactly what a resolution would look like....

Housing Was a Huge Headwind; Now It’s a Small Tailwind - From the GS research group, a handy chart showing the impact of housing on real GDP growth, broken down into three parts:

  • –investment in homes, a component of GDP, so this impact is direct;
    –the impact of housing wealth on consumer spending;
    –the impact of mortgage equity withdrawal on consumer spending.
  • A few observations:
  • –housing’s subtractions from GDP during the bust were really large; in ’09 each component was sucking almost of point from GDP growth;
  • –don’t expect the kind of growth effects from the sector we had in the boom–it was a bubble, and who’d want to go through that again?
  • –it does sort of look like we lost more in the bust than we gained in the boom, but that’s at least in part because the busts are more concentrated in terms of time relative to the bubble;
  • –these estimates do not include spillover effects, like the impact on the construction boom on the job market or the impact on bank balance sheets–the latter has, of course, been a big factor in the length of the downturn and the difficulty in pulling out of it; housing busts are particularly pernicious in that regard as banks can “extend and pretend” regarding their valuation of non-performing loans.

Chicago Fed: Economic Activity Improved in September - The Chicago Fed released the national activity index (a composite index of other indicators): Economic Activity improved in September Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to 0.00 in September from –1.17 in August. All four broad categories of indicators that make up the index increased from August, and each one except the consumption and housing category made a positive contribution to the index in September. The index’s three-month moving average, CFNAI-MA3, increased from –0.53 in August to –0.37 in September—its seventh consecutive reading below zero. September’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.  This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.  This suggests economic activity improved, but growth was still below trend in September. According to the Chicago Fed: A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

Chicago Fed: Economic Activity Improved in September, But ... According to the Chicago Fed's National Activity Index, September economic activity improved from the previous month, now at 0.00. However the indicator has been negative (meaning below-trend growth) for five of the past seven months, and the all-important 3-month moving average has been negative for all seven of those months and 20 of the last 26 months. Here are the opening paragraphs from the report: Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to 0.00 in September from –1.17 in August. All four broad categories of indicators that make up the index increased from August, and each one except the consumption and housing category made a positive contribution to the index in September.  The index's three-month moving average, CFNAI-MA3, increased from –0.53 in August to –0.37 in September -- its seventh consecutive reading below zero. September's CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.  The CFNAI Diffusion Index also moved up in September, increasing to –0.18 from –0.27 in August. Thirty-nine of the 85 individual indicators made positive contributions to the CFNAI in September, while 46 made negative contributions. Sixty-one indicators improved from August to September, while 23 indicators deteriorated and one was unchanged. Of the indi- cators that improved, 29 made negative contributions. [Download PDF News Release]

Chicago Fed: September Economic Conditions Improve Slightly - Yesterday's update of the Chicago Fed National Activity Index (CFNAI) strengthened the case for what's become obvious in recent weeks: economic conditions overall improved modestly in September. Last week's review of the numbers published to date certainly looked encouraging, as tracked by The Capital Spectator Economic Trend Index (CS-ETI). Not surprisingly, the September read on the economy via CFNAI tells a similar story. The three-month moving average of CFNAI, a weighted average of 85 indicators, increased to -0.37 last month from -0.53 in August. A reading of -0.70 or below for the CFNAI’s three-month moving average is considered a signal that a recession has begun. By that standard, we have yet another data point that tells us that the economy wasn't contracting last month and so the NBER is unlikely to label September as the start of a new downturn. To be sure, September's economic profile is relatively weak, but not weak enough to argue that the economy was shrinking.

U.S. Economic Growth Improves to 2 Percent Rate in Q3 - The U.S. economy expanded at a slightly faster 2 percent annual rate from July through September, buoyed by an uptick in consumer spending and a burst of government spending. The Commerce Department says growth improved from the 1.3 percent rate in the April-June quarter. The pickup in growth may help President Barack Obama’s message that the economy is improving. Still, growth remains too weak to rapidly boost hiring. And the 1.74 percent rate for 2012 trails last year’s 1.8 percent growth, a point GOP nominee Mitt Romney will emphasize. The report is the last snapshot of economic growth before Americans choose a president in 11 days. Growth was held back by the first drop in exports in more than three years and flat business investment in equipment and software.

Real GDP increased 2.0% annual rate in Q3 - From the BEA: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.0 percent in the third quarter of 2012 (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent.  The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), federal government spending, and residential fixed investment that were partly offset by negative contributions from exports, nonresidential fixed investment, and private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased. This graph shows the quarterly real GDP growth (at an annual rate) for the last 30 years. The Red column (and dashed line) is the advance estimate for Q3 GDP. A few comments:
• Consumer spending picked up a little. Real personal consumption expenditures increased 2.0 percent in the third quarter, compared with an increase of 1.5 percent in the second.
• Residential investment increased. Real residential fixed investment increased 14.4 percent, compared with an increase of 8.5 percent.
• State and local government made a negative contribution to GDP for the twelfth straight quarter, but the negative contribution was very minor.

GDP Q3 Advance Estimate at 2.0%, A Bit Above Expectations - The Advance Estimate for Q3 GDP came in at 2.0%, slightly better than the consensus estimates, which ranged from 1.7% to 1.9% depending on the source. The consensus I generally feature was for 1.9%. Here is an excerpt from the Bureau of Economic Analysis news release: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.0 percent in the third quarter of 2012 (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent.  The Bureau emphasized that the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see box below). The "second" estimate for the third quarter, based on more complete data, will be released on November 29, 2012.  The acceleration in real GDP in the third quarter primarily reflected an upturn in federal government spending, a downturn in imports, an acceleration in PCE, a smaller decrease in private inventory investment, an acceleration in residential fixed investment, and a smaller decrease in state and local government spending that were partly offset by downturns in exports and in nonresidential fixed investment. [Full Release] Here is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. The start date is when the BEA began reporting GDP on a quarterly basis. Prior to 1947, GDP was reported annually. To be more precise, what the lower half of the chart shows is the percent change from the preceding period in Real (inflation-adjusted) Gross Domestic Product. I've also included recessions, which are determined by the National Bureau of Economic Research (NBER).

GDP 2.0% for Q3 2012 - Q3 2012 real GDP shows 2.0% annualized growth in the advance report, reflecting a very sluggish economy. Q2 GDP was 1.25%. A quarterly GDP of 2.01%, unrounded, is not robust growth. Consumer spending did pick up from Q2, but exports declined. Government spending alone attributed for 0.71 percentage points of Q3's 2.01% GDP. The drought negatively impacted economic growth as farm inventories reduced GDP by –0.42 percentage points. As a reminder, GDP is made up of: Y=C+I+G+(X-M) where Y=GDP, C=Consumption, I=Investment, G=Government Spending, (X-M)=Net Exports, X=Exports, M=Imports*. The below table shows the percentage point spread breakdown from Q1 to Q2 GDP major components. GDP percentage point component contributions are calculated individually and why Q2 GDP is off by 0.01 percentage point from the actual annualized percentage change.Consumer spending, C in our GDP equation, improved from the 2nd quarter with durable goods contributing 0.63 percentage points to personal consumption expenditures. Motor vehicles & parts alone had a 0.18 percentage point contribution to durable goods spending whereas Q2 showed a -0.26 percentage point contribution. Graphed below is PCE with the quarterly annualized percentage change breakdown of durable goods (red or bright red), nondurable goods (blue) versus services (maroon). Imports and exports, M & X are greatly impacted by real values and adjustments for prices from overseas and they are usually revised. The below graph shows real imports vs. exports in billions. The break down of the GDP percentage change to point contributions gives a clear picture on how much the trade deficit stunts U.S. economic growth. We see a slowing of global trade generally with exports' decline negatively impacting GDP by -0.23 percentage points while the slow down in imports only giving a 0.04 percentage point boost to Q3 GDP. Government spending, G was 0.71 percentage points or 35.3% of Q3's GDP growth. This was all federal spending, and of that Federal 0.72 percentage point GDP contribution, 0.64 of it was national defense. State and local governments subtracted -0.01 percentage points from Q3 GDP. Below is the percentage quarterly change of government spending, adjusted for prices, annualized. Investment, I is made up of fixed investment and changes to private inventories. The change in private inventories alone gave a –0.12 percentage point contribution to Q3 GDP. Below are the change in real private inventories and the next graph is the change in that value from the previous quarter.

Third Quarter GDP Report: Economy Picks up a Bit, But Just a Bit - The nation’s economy expanded at an annual rate of 2% last quarter, according to this morning’s GDP report.  That’s faster than last quarter’s 1.3% and a bit above what most analysts were expecting, so that’s good.  But it’s also just trend growth—2% is about what it takes to keep the job market pretty much where it is. A few observations about the report:

  • –The positive factors boosting the economy’s growth last quarter were consumer spending and government.  Investment and net exports were both drags on growth.  The latter likely reflects slower growth in China and recessionary conditions in much of Europe.
  • –If you dig a bit into the investment accounts, there’s a bit of good news consistent with a theme I’ve been stressing of late: improvement in the housing market.  Investment in housing added a third of a point to growth last quarter and has been a plus factor for the last six quarters (see figure below).
  • –On a year-over-year basis—a less volatile gauge of the underlying growth pace—GDP growth has done a little better, up 2.3%.
  • –Unlike home investment, business investment in capital goods and structures was down last quarter.  I suspect this in part reflects a “wait-and-see” attitude by businesses right now.  Questions like “who’s going to win the election?”…and “how will the fiscal cliff get resolved?”…may be weighing on businesses’ “animal spirits.”

US Economic Growth Strengthened In Third Quarter - The U.S. economy grew at an annualized 2.0% rate in the third-quarter, the Bureau of Economic Analysis reports in its initial GDP estimate for the July-to-September period. That's an improvement over Q2's sluggish 1.3% pace, and another sign that recession risk in recent months was considerably lower than the dire warnings issued by some analysts. No one should mistake today's GDP update as a sign that the economy has broken free of the slow-growth gravity that's prevailed of late. But once again we have another data point that supports what's been fairly clear all along: the economy continues to grow, albeit modestly.  Is the improvement in Q3 GDP a surprise? No, not really. As I've been discussing over the past month, the incoming data has been telling a fairly consistent story of moderately stronger growth. From the ongoing rebound in housing to continued strength in industrial production to the persistence of slow but steady jobs growth, the overall picture for the economy has been strong enough to keep us out of a recession so far. This relatively encouraging profile was also showing up in last week's final GDP nowcast before the release of today's report—a nowcast that pointed to a decent improvement in the growth rate of the economy in Q3 over Q2. It was a similar story earlier in the month, as this October 8 GDP nowcast reminds.

Q3 GDP Estimate Beats Expectations As Government "Consumption" Soars - The preliminary look at Q3 GDP just came out and "beat" expectations of a 1.8% print, with a 2.0% reading (or just in line with stall speed, a number which previously has been indicative of recessions). So far so good, but as with every other pre-election economic data point out of the government, one has to look behind the headline to get the true picture. And the details are, as expected, ugly. Because of the 2.02% annualized increase in GDP, over one third, or 0.71% (compared to a deduction of -0.14% in Q2), was contributed by "Government Consumption." This was the biggest rise in government spending in 3 years, and only the first contribution by Uncle Sam to its own GDP print since Q2 2010. So in much the same way as the September jobs print soared courtesy of government employee hiring, this same government is now juicing its own numbers to make itself look better. The real question is what the second and third Q3 GDP revisions will show, which both come, luckily, after the election. Recall that Q2 GDP initially came out at 1.5%, then was revised to 1.7%, until finally coming to rest at 1.25%.

Third Quarter GDP Growth Clocks In At 2.0% - After second quarter GDP growth finally settled in at an incredibly anemic 1.3% growth, there wasn’t a whole lot of hope among analysts that the numbers for the third quarter would be any better. After all, the months of June through September had seen generally slow job growth, reports indicating that the manufacturing sector was slowing down from its previous levels of growth. At most, analysts were expecting that this first report on the third quarter would come in around 1.8%, and as it turned out it ended up just a little bit ahead of that: The United States economy grew at an annual rate of 2 percent in the third quarter, slightly better than expected, with help from a healthier housing sector and a pickup in defense spending. But economists warn that growth could slow in the final quarter of the year if weakness in exports persists and businesses remain cautious because of fiscal uncertainty in Washington. The new figure, released by the Commerce Department on Friday, is the government’s first estimate of growth in the third quarter. It compares with the 1.3 percent pace of growth in the second quarter. In the first quarter of 2012, the economy also grew by 2 percent.

U.S. GDP Growth: Slam Dunk on a 3-Foot Hoop - Even when beating expectations, the U.S. economy looks underwhelming. Real gross domestic product grew at a 2% annual rate in the third quarter, a bit better than the 1.8% advance projected. But investors and economists were unimpressed, and fundamentals suggest growth won’t pick up in the near term. A major plus to the outlook was that last quarter’s growth was lifted by demand, not inventory accumulation. In fact, overall stockpiles shrunk as the drought cut into farm harvests, which more than offset a gain in nonfarm inventories.  As expected, housing added to GDP and consumers did their part by increasing spending by 2%.

Better faster than slower - IT ISN'T difficult to be the least dirty shirt in the hamper these days. America's economy seems to relish the role, continuing to post growth performances that would be utterly disappointing were they not so much better than those managed by other rich countries. Real output rose at a 2% annual pace in the third quarter, reported the Bureau of Economic Analysis this morning. That's miles better than Europe, which remains stuck in recession. It also marks an acceleration from a second quarter in which growth clocked in at just 1.3%. Yet it's still far too little given the gap between actual output and what the economy should be capable of producing—nearly $900 billion, a 6% shortfall. Unquestionably, there is good news in the report. The acceleration itself is encouraging. So too are some of the sources of that acceleration. Consumers continue to pull their weight, and an 8.5% rate of growth of durable goods consumption in the third quarter suggests that the appetite for big purchases is holding up. Residential investment boomed, rising at a 14.4% annual pace for the quarter. Despite that the sector managed just a 0.33 percentage-point contribution to total growth. The relatively low contribution reflects just how far residential output tumbled during the recession and recovery. Construction should chip in ever more in coming quarters, however, as inventory levels have been plummeting and rents and prices rising.

Consumers Push Economic Output to a Gain of 2% - The pickup in spending by consumers, along with a burst of defense orders and a stronger housing market, helped the economy expand at an annual rate of 2 percent in the third quarter, a slightly better pace than had been anticipated, according to government data released Friday. In the previous quarter, economic growth had dipped to a rate of just 1.3 percent. While growing more confident that the housing market has stabilized, households have been buoyed by lower energy prices, until recently a rising stock market and a slight improvement in employment. After years of shedding debt, there are also signs that consumers are starting to borrow again. Still, the pace of economic activity is short of what’s needed to substantially reduce the unemployment rate, now at 7.8 percent and also well below the level of growth typical in this stage of a recovery after a sharp downturn. What’s more, fears are growing that the economy could slow again in the fourth quarter. Companies are preparing for the possibility of steep tax increases and sharp spending cuts if Congress cannot agree on a deal to reduce the deficit after the election, a combination of factors frequently referred to as the fiscal cliff. In fact, a series of disappointing earnings reports from the nation’s biggest companies this week, along with a handful of layoff announcements from corporate bellwethers, suggest businesses have already begun to retrench.

Housing Goes From Drag to Lift in GDP - Friday’s report on U.S. economic growth confirms two emerging trends about the long-ailing housing sector: It is finally delivering a lift to the economy, but it is not delivering anywhere near the kind of boost that it traditionally has during a period of economic expansion. Housing has now contributed positively to the nation’s gross domestic product in six straight quarters, which hasn’t happened since the housing bubble burst in 2006. Residential fixed investment accounted for 0.33 percentage point growth in GDP during the third quarter, up from 0.19 percentage point in the second quarter and 0.03 percentage point in the year-ago quarter, the Commerce Department said on Friday. Housing contributes to the economy in two key ways: the direct contribution to growth through home construction and improvements, and real-estate broker commissions, which is captured in the “residential investment” figures reported by Commerce.

US Q3 GDP: Good News in the Headlines, Not So Good in the Details - We all breathed a sigh of relief when yesterday’s advance estimate of U.S. Q3 GDP showed the economy growing at an annual rate of 2 percent. In normal times, 2 percent would be a disappointment; it is a sign of how far we are from normal that we can only think how much worse it could have been. In fact, it could yet be worse. The advance estimate of real GDP is notoriously subject to revision. The BEA tells us that the average revision, without regard to sign, is 1.3 percentage points from the advance to the latest estimate. A downward revision of no more than average size would put us at 0.7 percent growth, well below the anemic 1.3 percent reported in the third estimate for Q2. Even as we accept 2 percent growth with relief, there are some discouraging details deeper in the tables that the BEA attaches to its press release.Consider exports. The recovery, such as it has been, has benefitted from solid growth of this key GDP component. Now, though, the BEA tells us that exports decreased at a 1.6 percent annual rate in Q3. As the following chart shows, that breaks 13 consecutive quarters in which exports made a positive contribution to the growth of real GDP. The drop in exports during Q3 occurred despite a 3-percent depreciation of the real effective exchange rate of the dollar from June to September.  The data for the government sector also showed a break in trend, this one of a different kind. For eight consecutive quarters, government consumption expenditures and gross investment (GCEGI) had been pulling GDP downward—the so-call “fiscal drag.” That trend appears to have broken in Q3 2012, as the next chart shows.  At first glance, we might expect conservatives to treat the renewed growth of government as bad news and liberals to see it as a hopeful sign. On closer examination, though, the 0.71 percentage point contribution of GCEGI to Q3 GDP growth turns out to be almost entirely due to a big jump in federal national defense consumption expenditures.

CHART OF THE DAY: A Complete Breakdown Of US GDP Growth In One Beautiful Chart - The Bureau of Economic Analysis reported today that Q3 GDP ticked upward to 2.0 percent, after clocking in at 1.3 percent in Q2.  But that headline number gives only limited amount of information.  Here's a more detailed breakdown from today's BEA report. It could have been worse:

  • Personal consumption improved to 2.0 percent in the third quarter, compared with 1.5 percent in Q2
  • Investment fell to 0.5 percent, compared with 0.7 percent in Q2
  • Net exports declined to -1.7 percent in the third quarter, compared with 2.5 percent in Q2
  • Federal spending jumped to 3.7 percent, compared with -0.7 percent in Q2.

Doug Short regularly updates this awesome chart, which delivers the same information:

Comments on Q3 GDP and Investment - The Q3 GDP report was weak, with 2.0% annualized real GDP growth, but slightly better than expected. Final demand increased in Q3 as personal consumption expenditures increased at a 2.0% annual rate (up from 1.5% in Q2), and residential investment increased at a 14.4% annual rate (up from 8.5% in Q2). Investment in equipment and software was flat in Q3, and investment in non-residential structures was negative.   However, it appears the drag from state and local governments will end soon (after declining for 3 years).  Overall this was another weak report indicating sluggish growth. The following graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter centered average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.  For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue. The dashed gray line is the contribution from the change in private inventories.The second graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005.The blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years. Now RI has added to GDP growth for the last 6 quarters (through Q3 2012).However the drag from state and local governments is ongoing, although the drag in Q3 was very small. State and local governments have been a drag on GDP for twelve consecutive quarters. Although not as large a negative as the worst of the housing bust (and much smaller spillover effects), this decline has been relentless and unprecedented. The good news is the drag appears to be ending.

Visualizing GDP: The Consumer and Uncle Sam to the Rescue - The chart below is my way to visualize real GDP change since 2007. I've used a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself. As the analysis clearly shows, personal consumption is key factor in GDP mathematics. The improvement in today's 2.0% Advance Estimate over Q2's 1.3% is largely attributable to a stronger consumer and the federal government's increase in spending. My data source for this chart is the Excel file accompanying the BEA's latest GDP news release (see the links in the right column). Specifically, I used Table 2: Contributions to Percent Change in Real Gross Domestic Product. Click for a larger image Over the time frame of this chart, the Personal Consumption Expenditures (PCE) component has shown the most consistent correlation with real GDP itself. When PCE has been positive, GDP has been positive, and vice versa. In the latest GDP data, the contribution of PCE came at 1.42 of the real GDP). This is an increase from the 1.06 PCE of the 1.25 GDP in the final estimate for Q1.

Don’t believe the GDP report! - The U.S. economy grew at a 2 percent annual rate in the third quarter of 2012, according to figures from the Bureau of Economic Analysis. That’s certainly better than the data from the second quarter, when the economy expanded at a mere 1.3 percent rate. Politically, that’s good news for the president’s reelection campaign–at least according to most election forecasting models. Given President Obama’s pre-summer approval rating of 46.4 percent (which the model uses to allow predictions months ahead of time), and the average growth rate of 1.766 percent for 2012 to date, the Wonkblog election model puts the odds of Obama winning at about 81.3 percent. But it’s worth remembering just how subject to error these early GDP estimates are. For example, the second quarter GDP numbers were revised down from an initial estimate of 1.7 percent to 1.3 percent. According to the BEA, the average revision in either direction is 0.5 points between the first and second estimate, 0.6 between the first and third, and 1.3 between the first and last. That’s a huge amount of error. Here’s how revisions have looked from 2008 to the first quarter of 2012:

Are the Green Shoots for Real? - Joe Weisenthal has a number of post arguing that data are showing the green shoots of a robust recovery.  I hope he is right, but am leery of jumping the gun in believing a real recovery is underway.  There is still a shortage of safe assets and liquidity demand remains elevated. What would really convince me that a strong recovery were underway would be a marked improvement in two forward-looking indicators. The first one is a question on the Thompson Reuters/University of Michigan Survey of Consumer Sentiment where households are asked how much their nominal family income is expected to change over the next 12 months.  The figure below average response for this question up through February, 2012. This figure shows that during the Great Moderation period (1983-2007) households expected their dollar incomes to grow about 5.3% a year. This relative stability of expected nominal income growth  is a testament to the success of monetary policy during this time. However, since 2008 households have expected 1.6% dollar income growth on average.  Until this changes, there is no way a recovery will take hold.  And yes, this speaks poorly of Fed policy since 2008.  The second indicator is simply the 10-year treasury yield.  As I noted many times before, this interest rate is currently at historic lows largely because of the weak economy, not the Fed (i.e. the short-run natural interest rate is depressed due to an increase in desired savings and/or a decrease in desired investment).  If the economic outlook were to improve, then the 10-year yield would go up because of higher expected real growth as well as some higher expected inflation. 

The U.S. Economy’s Split Personality - Is the U.S. economy becoming bipolar? That’s what it seems like if you contrast the behavior of consumers versus corporations lately. Individual shoppers have been as bullish as they have been in years. With stocks relatively high, personal finances in better shape, and the housing market in recovery, American consumers have finally opened their wallets, shelling out for everything from new cars to electronics, and helping to boost GDP a bit in the process. But oddly, flush American corporations, which have some $2 trillion on their balance sheets thanks to a couple of years of record profits, are hunkering down. Business spending has dropped, hiring at many firms is at a standstill and many firms are lowering their forecasts for the year. Indeed, the stock market took a serious dip on Wednesday off the back of a series of disappointing earnings results from companies ranging from 3M to DuPont.

Modern American Economic History in a Few Charts - The big economic strategy for the next term of whoever is President is essentially, “turn those machines back on”. It’s fracking to replace cheap oil and a new real estate bubble in housing. Essentially, the idea is to turn America into more and more of a resource extraction economy, or a petro-state. If American politics seems more and more oligarchical, that’s because the American political system is beginning to reflect the Middle Eastern oil states its economic investment implies it should. Here are a series of charts explaining what is going on. First, this is data showing investment in various investment sectors. American politics looks increasingly like a petro-state, and this chart shows why. In the 1990s, particularly the late 1990s, the Clinton economy showed parity between manufacturing of computers/electronic products and mining (mostly oil and gas extraction). The Bush economy, starting in 2003 when the invasion of Iraq went sour, saw enormous hockey stick like investment in fracking, tar sands, and other types of extractive mining. Technology investment showed a slight decline. Obama by and large has sustained these trends.Renewables are that small purple line in the bottom right-hand corner. It’s all about a giant real estate bubble, stretching all the way back to the mid-1970s Carter era, but really picking up steam during the Clinton era and supercharging into the Bush period. You’ll notice three downturns in real estate investment since the 1970s, and all of them coincide with the loss of the incumbent party’s Presidential candidate (Carter, Bush I, McCain). The political lesson is, sustain property values and real estate investment or you are out on your ass. With Obama, the cycle is broken – real estate is just not reinflating. And that $450 billion a year of lost investment isn’t being replaced with anything close to what would be necessary to employ all those people again. That massive hole in investment represents unemployment, idle resources, but most of all, a lost opportunity to restructure our economy.

A cost of inequality: growth, by Claude Fischer: A recent story in The New York Times, back in its business section, had important news about inequality: “Income Inequality May Take Toll on Growth.” A couple of economists at the IMF reported research (here) showing that, across many countries, periods of greater income inequality tend to be followed by slow-downs in economic growth.  This is, actually, old news. About twenty years ago the research literature already showed that inequality probably damped the economy (see pp. 126ff here). But this remains important to repeat – not just because reporting the baleful effects of inequality now has the imprimatur of the IMF, but also because so many people still resist the news; they insist instead on believing the opposite, that inequality stimulates the economy, to the benefit of everyone. And, of course, this insistence has political implications right now. To the extent that facts matter in such a politicized debate, it is becoming increasingly clear that equality rather than inequality is a better policy for economic growth.

The US Economy Will Need A Miracle To Get Back To Normal - If we take a look at the output gap in the USA we can obtain a far better understanding of the hole that the Great Recession put us in.  Here are some of the ugly facts about the US economy:

  • The output gap peaked in 2009 putting us in a $1.1 trillion hole or about 8% of GDP.
  • The current output gap of $1.06T is roughly 6.82% of GDP.
  • The US economy has averaged 4.6% nominal GDP growth since 1990.
  • The US economy has averaged 3.8% nominal GDP growth since 2000.
  • In the last 3 years the US economy has averaged just 3.7% nominal growth.
  • In order to eliminate the output gap entirely the US economy would need to grow at 5% for the next 5 years.

That might not sound as horrible as you might have presumed. All we need to do is grow at the average nominal rate of the last 20 years and we’ll slowly, but surely get back to “normal”.   There’s just one problem.  The average post-war recovery lasts about 60 months or 5 years.  We’re now in year three of the recovery. That means we’re nearing our “due date”.  Either that or we’re dependent on 8 years of straight recovery without a recession.  History doesn’t like the odds of that occurrence.  The above math assumes no hiccups along the way.  And history says we’re likely to see a bump in the road in the coming few years.  Either that or we’d need to experience one of the longest post-war recovery periods ever.  I’d call that a minor miracle given the circumstances and continuing fragility of the US economy….

Carmen M Reinhart, Kenneth Rogoff: This Time is Different, Again? The US Five Years After The Onset of Subprime - The strength of the US recovery has become a political issue in the presidential election. The US is doing better than other advanced economies, but famous economists associated with the Romney campaign claim this is not good enough. The US, they argue, is different. Here, the masters of the ‘this time is different’ research genre – Carmen Reinhart and Ken Rogoff – argue that US historical performance is not different when it is properly measured, so the economy’s performance is better than expected

Fork in the road as U.S. outstrips Europe (Reuters) - Slowly but surely, the global economy is witnessing a modest parting of the ways as the United States pulls ahead of a euro zone still shell-shocked by its debt and banking crisis. To be sure, a slew of reports this week will show neither America nor Europe in great shape. But while advance October surveys of purchasing managers are likely to confirm the euro zone stuck in recession, U.S. economic growth probably picked up to a 1.8 percent rate in the third quarter from 1.3 percent between April and June, according to a Reuters poll. The euro zone polls were due on Wednesday with the U.S. gross domestic product release scheduled for Friday. "My impression is that there is more of a divergence re-emerging between the U.S. and Europe," said Andrew Kenningham with Capital Economics, a London consultancy. Retail sales, auto purchases and the housing market have all perked up in the United States as the Federal Reserve's ultra-loose monetary policy shows signs of gaining traction. "If there is one area where there is a possibility of an upside surprise, it is the U.S. economy," said John Lipsky, a former deputy managing director of the International Monetary Fund.

The US bright spot -- It seems odd — and it may well be short-lived — but the US is beginning to shape up as a rare bright spot in the world economy.* Or indeed almost the only bright spot in the world’s economy, except for the Gulf petro-states. That is, if you were to base such an assessment solely on Japan’s September export data, released on Monday. Japan’s preliminary September trade data tell a story not dissimilar to China’s — exports to Europe are slowing (unsurprisingly) by a lot, down 26 per cent for the month, year-on-year. Asian exports also fell, by 8.3 per cent. But US exports rose 0.9 per cent. The six months between April and September show a more striking contrast: exports to North America rose 16.6 per cent; while for Asia they fell 4.7 per cent and for Western Europe, there was a 20.8 per cent decline.Of course a month or even a few months’ data on one particular bilateral trade flow is not huge proof of anything, and there is likely at least some kind of seasonal effect for September, as Standard Chartered pointed out with regard to China’s September exports to the US. Plus there are the considerable effects of last year’s tsunami and the strong yen — although these would apply to every export destination. However, the fact is that the US is growing, albeit very slowly, while Europe in aggregate isn’t, and China is in the throes of a somewhat confusing growth deceleration.

Deep and Long: Private Debt and Financial Recessions - While he (uncharacteristically) doesn’t explain or deploy it terribly well, Paul Krugman points to some very excellent research on the relationship between private debt levels and the depth and duration of (especially financial-crisis-driven) recessions. The Schularick/Taylor Vox EU article is here. The Jorda/Schularick/Taylor paper is here (PDF). I think the work is excellent in large part because JS&T address one of my pet peeves: sample size and selection. Unlike Reinhardt and Rogoff, who make wild claims about government debt/GDP levels above 90% based on a mere handful of sample points (examples that mostly aren’t representative of our current or recent situation), and unlike the kind of single-country and short/single-period analyses that you see all the time, and totally unlike shameless cherry pickers such as John Taylor (who dares to call 1981 — unequivocally a Fed- and interest-rate-driven recession — a financial crisis) JS&T look at a long-term, representative, multi-country data set culled from:

  • o Fourteen advanced economies that at least in that sense are representative of the economies that at least I am interested in understanding (i.e., ours). “The share of global GDP accounted for by these countries was around 50% in the year 2000.”
  • o Over 140 years
  • o Using a very clear definition of “financial recession” (below).

Would Inflation Help Cut Government Debt? - When teaching about the effects of an unexpected surge of inflation, I always point out that those who borrowed at a fixed rate of interest benefit from the inflation, because they can repay their borrowing in inflated (and less valuable) dollars. And sometimes I toss in the mock-cheerful reminder that the U.S. government is the single biggest borrower--and thus presumably has a vested interest in a higher rate of inflation. But presuming an easy connection from higher inflation to reduced government debt burdens is actually a more problematic policy than it may at first appear. Menzie Chinn and Jeffry Frieden make a lucid case for how higher inflation could ease the way to a lower real debt burden in an essay in the Milken Institute Review (available on-line with free registration). They point out that after World War II the U.S. government had accumulated a total debt of more than 100% of GDP, but that it cut that debt/GDP burden in half in about 10 years with a combination of economic growth and about 4% inflation. They are at pains to point out that they aren't suggesting a lot of inflation. But as they see it, given the fact that debt/GDP ratios are extremely high by historical standards in the U.S. and in a number of other high-income countries, a quiet process of slowing inflating away some of the real value of the debt is far preferable to the messy process of governments threatening to default. They write: "Creditors, of course, receive less in real terms than they had contracted for – and probably less than they expected when they agreed to the contract. That may seem unfair. But the outcome is little different than what happens to creditors when they are forced to accept the restructuring of their claims through one form of bankruptcy or another. ...It’s important to remember, though, that we are not suggesting a lot of inflation – certainly nothing like the double-digit rates that followed the second oil shock in 1979 to 1981. Rather, we believe the goal should be to target moderate inflation, only enough to reduce the debt burden to more manageable levels, and adjust monetary policy accordingly. This probably means something in the 4 to 6 percent range for several years.

Is Debt Free Money an Option? - An intriguing proposal about how to rethink the global financial system is the notion of debt free money. This idea is typically raised in relation to the fact that the US Federal Reserve is not a central bank, it is a privately owned institution. The documentary “Secrets of Oz” details a long history of battles between American bankers and US presidents, with the bankers winning in 1913. The greenbacks issued by Abraham Lincoln were debt free money, for example. The documentary is worth watching, not necessarily for what it proposes as a solution, but for its history of wars between bankers and politicians, the latest of which we have just witnessed in the GFC. The idea of debt free money is a questionable proposal for change. It is not going to happen any time soon and in America the contest was resolved in favour of bankers almost exactly a century ago. Moreover, this argument looks at the monetary system as a national phenomenon, when it has clearly become a global phenomenon with a life of its own. Still, it is worth considering for what it reveals about the situation in which we are now enmeshed and perhaps how the next crisis will be resolved when governments no longer have the financial fire power to produce another bailout. It also sheds light on the question of governance of the financial system. As previously suggested, governments have in this era of “financial de-regulation” handed over governance to the banks and traders, with predictable results. First, I will list what I see as the flaws in the argument put forward by Bill Still in the “Secrets of Oz”:

NPR Sets Straight All Those Silly People Who Thought Unemployment Was the Country’s Biggest Problem - Dean Baker - Almost five years after the start of the recession we still have close to 25 million people who are unemployed, underemployed, or who have given up work altogether. Given that this is ruining the lives of millions of workers and their children we might think that this is the country's most important problem. Fortunately, we have National Public Radio (NPR) to set us straight. NPR presented a segment this morning that is largely based on the views of Nariman Behravesh, the chief economist of the forecasting firm IHS Global Insight. The last part of the segment told listeners: "But going forward, America's role in the world will be largely shaped by how well Congress handles the budget deficit problems in coming months, he [Behravesh] said. As other countries, especially in Europe, grapple with the problem of too much government debt, people around the world are looking to the United States for moral leadership, he said. If the United States shows that it's possible for democracies to discipline themselves and control their debts, then its economic and soft power may surge ..." Wow, isn't that impressive. So Europe, China and the rest of the world will be really impressed if the United States throws even more people out of work as long as it reduces its budget deficit! That's interesting, had it not been for NPR I never would have known people in the rest of the world thought this way.

Video: Krugman and Stiglitz - [Note: The video starts at the 16:15 mark, and the Krugman and Stiglitz discussion begins at 25:30]

An Elite Obsession - Krugman - David Dayen makes a very good point, which I missed: during the Hofstra debate, in which questions were posed by members of the public rather than the Beltway elite, there wasn’t a single question about the deficit. Not one. The public really doesn’t care.  And you know what? Neither do financial markets, which continue to lend to the U.S. government at incredibly low rates. Meanwhile, the results from austerity are in — and it’s now clear that the adverse economic impacts of austerity in a depressed economy are much worse than the elite imagined (although Keynesian economists knew better), and are in fact so severe that austerity is largely self-defeating, having little impact on the budget deficit even in the short run because reduced revenue takes away much of the initial savings. Once you take long-run effects into account, austerity is almost surely self-defeating. Yet deficit fever, with demands for spending cuts right away, has dominated policy discussion for almost three years, with all the Very Serious People believing that by pounding on this issue they were demonstrating their Very Seriousness.

Pete Peterson Has Won - Stephanie Kelton - The US is broke. Government deficits are de facto evidence of a government gone wild. We’re careening toward Greece. Entitlements are the root cause of our fiscal woes, and the Chinese are coming for our grandchildren.  How many Americans believe this garbage? My guess? Most of them. Pete Peterson has won and the American people have lost.  There is no effective counter narrative, not even from the left.  Nearly all “progressives” have accepted the fundamental premise that the federal government is like a great big household. That it faces the same kinds of constraints that you and I face.  That it should spend only what it takes in and that deficits are morally and/or fiscally irresponsible.  President Obama told the nation, “We’re out of money.”  All of this is utter nonsense, as readers of this blog know, and it leave progressives in the weak position of pointing at the 1% and yelling, “Get ‘em!  They’ve got all the money!”  Want to care for seniors?  Tax the 1%. Want safe roads, good schools, investment in alternative energy?  Tax the 1%.  The problem, of course, is that the 1% tend to fight back …. and win! The truth is, we’re not broke.  The US dollar comes from the US government (not from China, as we’re led to believe).  The US government is not revenue constrained.  It is the Issuer of the currency, not the User of the currency like you and I.  It plays by a completely different set of rules, yet it behaves as if it is still bound by the shackles of a gold standard.  It behaves irresponsibly  when it proposes policies to reduce the deficit when unemployment is high and inflation is low. We’re letting millions of Americans suffer because Pete Peterson and his ilk have convinced virtually everyone that we face a fiscal crisis in this country.  We live in fear of the Chinese, the Ratings Agencies, the Bond Vigilantes, Indentured Grandchildren, and so on.  And this fear is used by politicians on both sides of the political aisle to sell “sacrifice” to the rest of us.  And we keep buying. And here’s the really sad part.  It will never be enough.

Money & Public Purpose: Government is Not a Household - This second entry in the Money & Public Purpose series features Stephanie Kelton and Randy Wray debunking widely held misperceptions on the relationship of governments to the economy (for instance, that running surpluses is a good idea). In order to have government play the role they suggest, that of accommodating the actions of the other major sectors (households, businesses, export/import), the best approach is heavy reliance on automatic stabilizers such as their job guarantee. For instance, the English language media was hectoring Germany immediately after the financial crisis for not implementing much in the way of stimulus programs, as China and the US did. Germans were at first puzzled, then annoyed, since their employment related programs would lead to higher spending as the economy soured. And indeed, Germany’s performance shortly after the implosion was better than the critics forecast for this very reason. They’ve aslo made a short slide deck available that includes the visuals used in the talk. MMT Basics: You Cannot Consider the Deficit in Isolation from Mitch Green

The Fiscal Stimulus, Flawed but Valuable, by Christina Romer - As a former member of President Obama's economic team, I have a soft spot for the fiscal stimulus legislation... But I'm also an empirical economist who's spent a career trying to estimate the effects of monetary and fiscal policy. So let me put on my empiricist's hat and evaluate what we know about the legislation's effects. ... Though the Recovery Act appears to have had many benefits, it could have been more effective. Most obviously, it was too small. When we were designing it, most forecasters estimated that the United States would lose around six million jobs... Compared with this baseline, creating three million jobs would have filled roughly half of the employment hole. As it turned out,... the correct no-stimulus baseline was a total employment fall of nearly 12 million. With a loss that big, creating three million jobs was helpful, but not nearly enough.  A different mix of spending increases and tax cuts might also have been desirable.  And I desperately wish we'd been able to design a public employment program that could have directly hired many unemployed workers, especially young people.  Finally, there's little question that policy makers — myself included — should have worked harder to earn the public's support... One frustrating anomaly is that many of its individual components routinely received favorable reactions in polls, while the overall act was viewed negatively.

Gauging the multiplier: Lessons from history -The size of the fiscal policy multiplier – and thus the impact of austerity on GDP – has been a contentious issue since the crisis started. The IMF recently revived the debate by suggesting that the multiplier is much higher than previously thought in the current policy environment. This column discusses independent empirical research that confirms the IMF’s view – the authors’ estimate of the multiplier is in the range of 1.6.

Wall Street CEOs Hoping We Don't Get The Fiscal Cliff Joke - Have you heard the one about the big-name financial services CEOs who last week released a letter to Congress and the president demanding they do whatever it takes to avoid the fiscal cliff? I have no doubt the CEOs were sincere: The fiscal cliff is terrible policy and a ridiculous situation that should be avoided. But the CEOs’ letter attempts to have it both ways. It demands that the cliff be prevented without the bank and insurance company leaders ever admitting that what they’re really lobbying for is a higher federal budget deficit next year. We have Federal Reserve Chairman Ben Bernanke to thank for this. I am not a Bernanke hater. To the contrary: I’m a big fan who applauds the job he’s done and thinks most of the criticism he and the Federal Reserve have received in recent years has been either overwrought hand-wringing or politically motivated tripe.

Financial Lobby: Stupid or Disingenuous? You Decide - Courtesy of Matt Yglesias, from the Financial Services Forum: “We write today to urge you to work together to reach a bipartisan agreement to avoid the approaching ‘fiscal cliff,’ and take concrete steps to restore the United States’ long-term fiscal footing.” And later:“But merely avoiding the fiscal cliff is not enough. We further urge you and your colleagues to enact legislation that truly restores the nation’s long-term fiscal soundness.” It’s too obvious to waste more than a sentence spelling out what’s wrong here, so here it is: “Going over” the “fiscal cliff” is the single best thing we could do to “restore the United States’ long-term fiscal footing.” The CEOs of every big bank (who signed the letter) must know that. Right? There are valid arguments against going over the fiscal cliff, but the national debt is not one of them. Going over the cliff would do more to address the long-term debt than anything any politician has proposed. And, as Yglesias points out, “If you care about inequality, jumping off the cliff offers by far the best chance for addressing it,” since it is the only plausible way to significantly increase taxes on the wealthy.

CEOs’ self-serving deficit manifesto -- The WSJ has what it calls “CEOs Deficit Manifesto ” — a copy of the letter, signed by 80-something US CEOs, urging action on the debt and deficit. It’s not a particularly impressive document. It starts like this: Policy makers should acknowledge that our growing debt is a serious threat to the economic well-being and security of the United States. It is urgent and essential that we put in place a plan to fix America’s debt. This is ridiculous. There are lots of serious threats out there to the economic well-being and security of the United States, and the national debt is simply not one of them. Nor is it growing. The chart on the right, from Rex Nutting, shows what’s actually going on: total US debt to GDP was rising alarmingly until the crisis, but it has been falling impressively since then. In fact, this is the first time in over half a century that US debt to GDP has been going down rather than up. So when the CEOs talk about “our growing debt”, what they mean is just the debt owed by the Federal government. And when the Federal government borrows money, that doesn’t even come close to making up for the fact that the CEOs themselves are not borrowing money. Money is cheaper now than it has been in living memory: the markets are telling corporate America that they are more than willing to fund investments at unbelievably low rates. And yet the CEOs are saying no. That’s a serious threat to the economic well-being of the United States: it’s companies are refusing to invest for the future, even when the markets are begging them to.

Collender Podcast: "The Fiscal Cliff Joke Is On Us" - My latest podcast -- the third in my new weekly series -- is the stage and screen version of my latest reading of the fiscal cliff tea leaves. You can find the podcast here.

Rentier CEOs Advocate Austerity for America - Yves Smith - Felix Salmon did an admirable takedown of a “CEOs [sic] Deficit Manifesto” in the Wall Street Journal. It’s yet another entry in the long-running, dishonest campaign funded by billionaire Pete Peterson to pretend that all right thinking people (and of course CEOs believe they have the right to think for everybody else) should be all in favor of trashing the middle class and the economy through misguided deficit cutting. Salmon could have gone further in his critique, but the letter was so lame he didn’t need to, and the issues he raised would be plenty persuasive to most Americans.  Felix correctly styled the letter as “self serving” and described the idea of deficit cutting now as “ridiculous”. Debt to GDP is falling and the economy would tank if we were to reduce the Federal deficit while the economy is deleveraging. But these corporate leaders tried overegging the pudding by depicting the current federal debt levels as a security threat. One aspect of this debate that doesn’t get the attention that it deserves is that the deficit hawks keep claiming that the US is about to hit a 90% federal debt to GDP ratio, which Carmen Reinhart and Ken Rogoff claim is correlated with lower economic growth. Aside from the fact that this study is questionable (it mixes gold standard countries with fiat currency countries, plus correlation is not causation; in many cases, a major financial crisis produced both the low growth and an increase in debt levels, meaning its spurious to treat debt as a driver of lower growth), the US is actually not at any imminent risk of breaching this level. The CBO, astonishingly, has kept publishing reports that project gross debt levels, not net debt. This 2010 analysis by Rob Johnson and Tom Ferguson shows what a large adjustment netting out the government’s financial assets makes (click to enlarge):

Beware Of CEOs Bearing Budget Gifts - The mainstream media and blogosphere lit up like Christmas trees yesterday when 80 CEOs came together to call on Congress and the president to agree on a comprehensive deficit reduction plan that includes revenue increases and spending cuts. Here's David Wessel's story from the Wall Street Journal. As I told Janet Novak of Forbes yesterday, while it's great to see the CEOs engaged on the issue there's much, much less here than meets the eye. The ultimate value in the CEO statement is that it lends credence and provides some political cover for members of Congress who vote for a deficit reduction plan that includes tax increases and Medicare and Medicaid cuts. But the statement fails to move the needle as much as the hype wants you to believe because its way too general to demonstrate that any of the CEOs are willing to give up spending or tax provisions that are important to their companies. Yes, as wealthy individuals they are likely to pay more if income tax rates rise. But it's not at all clear that they can or will recommend changes in federal tax and spending laws that will hurt their corporate bottom lines. Indeed, their boards and stockholders would likely see support for those types of changes as a violation of their fiduciary responsibilities as CEO and several of them would be facing the corporate equivalent of a recall.

The Dirty Secret of Debt-Hating CEOs: They Need Big Deficits to Live - Derek Thompson - The Atlantic: America's most powerful CEOs are in absolute agreement: The debt stinks. And we need to fix it. That's the impression you get if you believe their words, at least. An open letter signed by 80-some chief executives -- including the heads of AT&T, Bank of America, and Microsoft -- begins this way: Policy makers should acknowledge that our growing debt is a serious threat to the economic well-being and security of the United States. It is urgent and essential that we put in place a plan to fix America's debt. The tone of these opening bromides might cause you to think that the U.S. doesn't have a plan to fix the debt. In fact, we do. It's a three-step plan. Step One: Do nothing. Step Two: Repeat. Step Three: Watch the deficit plummet by hundreds of billions of dollars in 2013.It's called the "fiscal cliff" and here's how it would reduce the deficit, category by category. Automatic cuts scheduled back in the summer of 2011 (a.k.a.: "sequestration") would reduce the deficit by about $80 billion. Failing to renew benefits for the unemployed would cut another $40 billion in spending. And letting tax law run its course would increase government revenues by more than $400 billion, bringing us even closer to a balanced budget. All of this will come to pass if Congress sits on its hands for two months.

Military Spending Increase Could Be Defensive Move - A jump in defense spending caused economic growth to accelerate in the third-quarter, but some analysts say it’s as a tactical move to guard against plans to slash military budgets next year. Defense spending, which rose 13% during the third quarter, contributed to gross domestic product gains for the first time in a year and posted its largest three-month increase since 2009. GDP grew at a 2.0% annualized rate from July through June, the Commerce Department said Friday. “One plausible explanation is that the Pentagon took the precaution of accelerating spending this summer in advance of the growing threat of sequestration, which if implemented will amputate much of the defense budget next year,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. The breakdown of military spending adds credence to that theory, said Nayantara Hensel, an economist at the National Defense University. Her analysis of Defense Department spending showed that nearly half of outlays last quarter went to operations and maintenance costs, with the Army, taking the largest share.

 Obama: Sequester Cuts to Defense “Will Not Happen” - My understanding of the word “debate” is that it refers to a situation where opposing individuals who disagreed with one another took up contrary positions and argued their side against the other. So maybe the better phrase for what happened last night would be something like “mutual admiration society.” But the key phrase comes before President Obama taught Mitt Romney about how technology reduced the need for a larger head count of ships in the modern Navy. Obama originally responded to the defense sequester, the mandatory $492 billion in cuts to the military budget (alongside a similar cut to the discretionary budget) that will trigger in January if Congress fails to act. Here’s how the President responded. First of all, the sequester is not something that I’ve proposed. It is something that Congress has proposed. It will not happen. OK, “it will not happen” is new. And this comes on the heels of the White House digging in and saying that the President would sign nothing related to the fiscal cliff unless the top two marginal tax rates increase back to Clinton-era levels. That would contradict the sureness of “it will not happen.” The President has never embraced the sequester, particularly on the defense side. When he talks about the defense budget, and how Mitt Romney wants to increase it by $2 trillion (and this is about the only substantial point of difference between the candidates, they have the same foreign policy but Mitt Romney just wants to spend $2 trillion more on it), Obama says that from a baseline that does not include the sequester. He talks about $450 billion in “cuts” – last night he acknowledged that this would merely be reductions in the rate of growth of the military budget – without taking into account the $492 billion in sequester cuts. As far as Obama is concerned, the sequester doesn’t exist.

Romney wants to increase defense spending by $2 trillion. But what will he use it for?: For all the apology tour nonsense and despite the bitter squabbling over the attacks in Libya, it’s actually been a bit hard to figure out where Mitt Romney actually disagrees with President Obama on foreign policy. So far, he’s said he agrees with the 2014 withdrawal in Afghanistan. He agrees with the sanctions in Iran. He doesn’t want to restart the Iraq War. It’s not clear what he’d do in Libya or Syria. He wants to call China a currency manipulator, but after that, who knows? He has not criticized Obama’s use of drones, or his incursions into Pakistan to kill high-value targets like Osama bin Laden. There’s one exception though. Defense spending. Here Romney’s been pretty specific. It’s right there on his Web site. He wants, he says, to give defense spending “a floor of 4 percent of GDP.” Compared to Obama’s proposals, and the military’s current requests, that’s an increase of $2 trillion over the next decade. That’s a huge amount of money.Romney’s not said exactly what he wants to do with it. He wants to add 100,000 soldiers and accelerate shipbuilding, but that doesn’t come to $2 trillion. So aside from more money on defense, it’s a bit hard to say what his vision for the military is. “The plan proceeds from a strategic worldview that more is better,” says Heather Hurlburt, director of the National Security Network. “But if you want to get more detailed about what they’d do with those troops, they just haven’t really said.”

On Bayonets vs. Big Bird -- The question was posed to Romney on how he would pay for his proposed $2 trillion increase in military spending, and he flat out didn’t answer it. He was busy finishing his previous answer. So by the time it was the president’s turn, Obama actually said, “You should have answered the question.” Obama then asserted that the United States spends more on its military than the next 10 countries combined. That’s a great attention grabber. By the time Romney finally answered, he simply said we needed a stronger military, and the Navy needs more ships because it has fewer ships than it did in 1916. But Obama countered with the most memorable line of the night.We also have fewer horses and bayonets.” Obama’s debating point was that the nature of our military has changed. He continued by saying that the U.S. has things like submarines and aircraft carriers that should suffice, and reminded viewers that the nation needed to study what its threats are and put money into things like cybersecurity and space. Obama said that the military neither wants nor has asked for this extra $2 trillion.

The Myth of the Exploding Safety Net - A new Congressional Research Service (CRS) report shows that federal spending on low-income programs has risen significantly in recent years.  Does this mean that safety net programs are growing out of control and are a major cause of the nation’s long-term budget problems, as some have suggested?  No.As we explained in May, virtually all of the recent growth in spending for means-tested programs is due to the recession and rising costs throughout the U.S. health care system, which affect costs for private-sector care at least as much as for Medicaid and other government health programs.The Congressional Budget Office (CBO) projects that federal spending on means-tested programs other than health care will fall substantially as a percent of gross domestic product (GDP) as the economy recovers (see graph) — and fall below its 1972-2011 average. Here are the specifics:

  • Federal spending for mandatory programs outside health care, including refundable tax credits such as the Earned Income Tax Credit, averaged 1.3 percent of GDP over the past 40 years.  This spending reached 2.0 percent of GDP in fiscal year 2011, a substantial increase.  But CBO projects that it will return to 1.3 percent by 2020 and then remain there.
  • Federal spending for low-income discretionary programs is virtually certain to fall as a percent of GDP in the coming decade as well.  Under the 2011 Budget Control Act’s funding caps, non-defense discretionary spending will fall over the decade to its lowest level as a percent of GDP since 1962 (and probably earlier).
  • As a result, total spending for low-income programs outside health care — both mandatory and discretionary — is expected to fall below its prior 40-year average.

Since these programs aren’t rising as a percent of GDP, they do not contribute to our long-term fiscal problems.

Fiscal Cliff: Connection Between Corporate Profits And Deficits -  Yesterday  we wrote about Jonathan Chait's assertion that the Fiscal Cliff is an event that moves policy far to the left, and that that explains why conservatives and corporations are freaking out so much about it, even though it reduces the deficit significantly. Chait's analysis focused on the tax implications of the Cliff, the fact that all taxes would revert to their Clinton-era levels on January 1, 2013, an outcome that makes conservatives queasy. But there's another reason the Fiscal Cliff matters to corporations that goes beyond taxes... You've probably seen this famous chart of Corporate Profits as a share of GDP. It's a pretty rough approximation of corporate profit margins, and it shows that margins are very close to an all-time high. Not only are they at an all-time high, but they're way out of line with recent decades.

How do governments cut their payrolls? - THIS week’s print edition features an article on how fiscal austerity has been leading to declining government employment throughout the rich world. In most countries, this is not because the state is firing its workers, but because it is failing to hire replacements for those who leave. This is easiest to see in America, where the Bureau of Labour Statistics has been collecting detailed data on labour flows since December, 2000 through its Job Openings and Labor Turnover Survey (JOLTS). The JOLTS was created in large part thanks largely to the efforts of Christopher Pissarides and Dale Mortensen, particularly their 1991 paper on Job Creation and Job Destruction in the Theory of Unemployment. (They later won the Nobel for their work, along with Peter Diamond.) Monthly changes captured by the existing establishment and household surveys did not include the underlying reasons why the total number of people working went up or down. Now, thanks to JOLTS, we can attribute changes in employment to things like increases or decreases in the rate of firing, the changes in the number of people getting job offers, and more. For example, during the downturn, it is easy to see that the surge in unemployment was due to a collapse in hiring more than an increase in layoffs. Similarly, the brightest spot in today’s labour market is the fact that the number of people voluntarily quitting their jobs has been steadily increasing since the end of 2009.

Obama says he’ll renew pursuit of ‘grand bargain,’ offering specifics on agenda -  President Obama, criticized as failing to offer a vision for a potential second term, has begun sketching out his agenda with greater specificity in recent days, including a pledge to solve the nation’s in­trac­table budget problems within “the first six months.” In an interview made public Wednesday, Obama said he would pursue a “grand bargain” with Republicans to tame the national debt and would quickly follow that with a push to overhaul the nation’s immigration laws.

The Fiscal Cliff and Demographic Drag - We know two things about the future:

  • 1. Borrowing 35% of Federal expenditures every year is unsustainable. (2012 Federal budget = $3.8 trillion, Federal deficit = $1.3 trillion, 34.2% of every Federal dollar spent is borrowed)
  • 2. The Baby Boom generation of 75+ million may be working longer, but they are also retiring en masse, joining the ranks of Social Security and Medicare beneficiaries at the rate of 10,000 per day, a flood that will not ebb until the late 2020s. (The Baby Boom is generally defines as those born between 1946 and 1964, though many quibble with the 1964 date. The choice of parameter doesn't change anything about the consequences.)  The first Boomers qualified for early Social Security retirement (age 62) in 2008 and for Medicare (age 65) in 2011. The biggest cohort years (almost 4 million a year) will start reaching early retirement (62) in 2014 and Medicare (65) in 2017. The number of people entering these programs will rise every year from 2014 to 2020, and then remain constant at 4+ million a year until 2025.

The Entitlement Crisis That Isn’t - An article by author and economist Jeff Madrick in the November 2012 issue of Harper’s Magazine offers an antidote to the view that social spending—not anemic tax revenues—is the cause of America’s deficit problem.“Contrary to warnings by politicians of both parties and by almost all of the mainstream press,” Madrick writes, “America’s biggest fiscal problem is not spending on Social Security, Medicare, and Medicaid; it is our almost complete unwillingness to tax ourselves sufficiently to maintain a modern state.”America fostered a $1.1 trillion budget deficit amid the Iraq War, the 2001 and 2003 Bush tax cuts and the ongoing 2008 recession. That number, flashed on the nightly news and shouted from the mouths, blogs and Twitter accounts of conservative and some liberal pundits, has convinced much of the public that smaller government is the quickest, most sensible solution to the problem. But that opinion has nothing to do with “serious economic research,” Madrick says. “[I]deologically biased economists” have generated studies “ ‘proving’ that higher taxes and bigger government reduce growth,” he writes. But “the best, most objective analysis of tax rates, by Joel B. Slemrod of The University of Michigan, and Jon Bakija of Williams College, finds no relationship between high taxes and reduced rates of economic growth.”

Payroll Taxes Going Up In 2013 For 163 Million Workers, Obama, Mitt Romney Stay Mum: President Barack Obama isn't talking about it and neither is Mitt Romney. But come January, 163 million workers can expect to feel the pinch of a big tax increase regardless of who wins the election. A temporary reduction in Social Security payroll taxes is due to expire at the end of the year and hardly anyone in Washington is pushing to extend it. Neither Obama nor Romney has proposed an extension, and it probably wouldn't get through Congress anyway, with lawmakers in both parties down on the idea. Even Republicans who have sworn off tax increases have little appetite to prevent one that will cost a typical worker about $1,000 a year, and two-earner family with six-figure incomes as much as $4,500. Why are so many politicians sour on continuing the payroll tax break? Republicans question whether reducing the tax two years ago has done much to stimulate the sluggish economy. Politicians from both parties say they are concerned that it threatens the independent revenue stream that funds Social Security.

JPMorgan: If the payroll tax cut falls, so does growth - A few months ago, JPMorgan thought there was a chance that the payroll tax holiday would be extended as part of a fiscal cliff deal. Now it doesn’t think the tax cut stands a chance of surviving—to the serious detriment of the economy next year. "We are no longer of the belief that the payroll tax holiday will be extended. That change alone is worth over half a percent on GDP growth next year,” JPMorgan’s economic research team writes in a new research note. It’s downgraded its GDP growth forecast for the first quarter from 1.5 percent to just 1 percent and revised its second quarter forecast from 2.25 percent to 1.5 percent. Why? JPMorgan estimates that the payroll tax hike “will reduce U.S. disposable income by $125 billion,” depressing consumer spending and causing a significant contraction in the economy. Opponents of another payroll tax extension have stressed the need to shore up the finances of the Social Security Trust Fund, which the tax supports, and cite economic literature suggesting that consumers wouldn’t be likely to spent very much of a temporary tax break, instead saving it or using it to pay down their debt. But JPMorgan believes that another payroll tax extension in 2013 would actually have a bigger immediate impact on the economy that will be lost if it’s allowed to expire:

Democrats Threaten Payroll Tax Cut Consensus - Some Democrats in Congress are seeking to include an extension of the $120 billion payroll tax cut in negotiations over the looming “fiscal cliff,” shaking what had appeared to be a bipartisan consensus to allow the measure to expire as planned at the end of the year. The move could complicate the budget talks due to begin after the November presidential election and alarm rating agencies — since the sunset of the payroll tax measure is the only big provision that both parties seem comfortable directing towards deficit reduction. But it could ease worries among some economists of the hit to growth and consumption that would occur if the payroll tax cut lapsed, reducing disposable income for many middle-class working families across the country. The payroll tax cut — reducing the taxes on wages used to fund the social security pension scheme from 6.2 percent to 4.2 percent — was introduced in December 2010 to be in place for just one year. But it was extended for an additional year after a series of fraught negotiations between Congress and the White House. In February, Tim Geithner, Treasury secretary, told the Senate budget committee it would be the last time. “This has to be a temporary tax cut,” Mr. Geithner said. “I don’t see any reason to consider supporting its extension.”

Chart Of The Day: Where Do Your Tax Dollars Go - The Presidential debate on foreign policy recently discussed much about the tax dollars spent on defense.  Exactly where do all of our tax dollars go? The chart below is the 2011 Budget year of expenditures as a percentage of the total budget. It is clear that more than 50% of current budget expenditures go to Social Security, Medicare and Defense expenditures. However, before those that believe in "Peace Through Diplomacy" start pointing out that we spend too much on defense it is important to put the current levels spending into context. The next chart shows the historical percentages of the budget that each of the four main components make up.  We have continuously reduced defense spending at every turn to try and find "cuts" in the budget. You can see where defense spending increased during the Vietnam War, the Reagan Administration spending was done to bring the economy back online, and the current conflict in Iraq and Afghanistan. Yet following each period of increased spending - the defense budget was cut and now stands at the lowest level of spending in history as a percentage of the total budget. However, Medicare and Social Security have continued to consume greater portions of every tax dollar raised.

Does Taxing the Wealthy Hurt Growth? - What is the impact of taxation on growth? In theory, a country without taxation will have difficulty providing basic public goods such as roads and research that are fundamental for economic growth. However, many politicians and some economists argue that once basic public goods are provided for, increases in taxation have a negative impact on growth. According to this argument, this is especially true for taxes on the very wealthy, who are likely to save their income and channel that savings into entrepreneurship or other investment. Much of the argument over tax policy in the United States is focused on whether the rich should be taxed at a higher or lower rate than they are today. The argument in favor of higher rates is that income inequality is at extremely high levels and the government should focus more on redistribution and also that the rising national debt is also potentially harmful to growth. The argument against higher rates is that raising taxes on wealthy would disincentivize the people most likely to create economic growth and thus jobs. In a climate where jobs are scarce, the argument goes, this is a particularly bad economic idea.

Enter the Asterisk -The magic asterisk, that is (With apologies to Bruce Lee [0] and David Stockman). How the circle can be squared, in the Romney tax plan: assume a massive supply side response! [1] Figure 1 shows exactly how Govenor Romney’s math can add up. Even allowing for a dynamic response due to lower taxes, somehow there is a $3 trillion missing, in order to achieve revenue neutrality in the tax plan. Thus, the magic asterisk in this case must involve praying for divine intervention, and a growth spurt that yields additional tax revenue equal to the size of the blue bar(!).If the Governor were to eliminate all deductions, then the degree of “magic-ness” of the asterisk is reduced, by about $700 billion, to a mere $2.3 trillion.

Tax Policy Center in Spotlight for Its Romney Study - — A small nonpartisan research center operated by professed “geeks” has found itself at the center of a rancorous $5 trillion debate between President Obama and Mitt Romney. No white paper or policy manifesto put out during the presidential campaign has proved more controversial than an August study by the Washington-based Tax Policy Center, a respected nonprofit that issues studiously detailed tax analyses. That study found, in short, that Mr. Romney could not keep all of the promises he had made on individual tax reform: including cutting marginal tax rates by 20 percent, keeping protections for investment income, not widening the deficit and not increasing the tax burden on the poor or middle class. It concluded that Mr. Romney’s plan, on its face, would cut taxes for rich families and raise them for everyone else. The detailed paper proved kindling for a political firestorm. Mr. Romney criticized the center as performing a “garbage-in, garbage-out” analysis and his campaign accused it of partisan bias. The Obama campaign used the center’s numbers to argue that Mr. Romney had proposed a $5 trillion tax cut. Economists jumped on the bandwagon too, flinging analyses back and forth and picking apart the projections and assumptions in the report. At the Tax Policy Center itself, responses ranged from irritation at the partisan nature of some attacks to incredulity over the political hysteria. “There was this résumé-hunting, White-House-visitor-log” searching feel to the response, said the center’s director, Donald Marron, a former Bush administration economist. “That was unanticipated,”

Romney Tax Plan Not Equal to Simpson-Bowles - In a debate we had earlier today, leading Romney economist Glenn Hubbard pushed back on my TPC/arithmetic inspired critique of their tax plan by pointing that the Simpson-Bowles (S-B) plan proved that rate-lowering, base-broadening tax reform is possible.  As I responded, OK, but that’s not what you guys are proposing. First, unlike S-B, Romney takes an important part of the base off the table before we start: he has assured us that the preferential treatment of capital gains and dividends is off the table.  S-B, in their illustrative proposal, treat them as ordinary income (something I’ve advocated for a long time, FWIW).  The cost to the Treasury of these exemptions is almost $100 billion in 2012 alone, so we’re talking real money here. Second, as one can see right there in Table 8 of the S-B report, the base-broadeners in their plan raise the middle-class tax bill by $722.  Now, you might be OK with that…S-B is clearly OK with that…and many in this debate reasonably argue that at some point, taxes on households below $250K will need to rise. But that is decidedly not the argument of Romney and Ryan who claim that their plan will not lead to higher taxes for the middle class (the above result is for the middle fifth; for the next higher fifth, the tax bill goes up $1,193).

What Is Barack Obama’s Tax Plan? After all the promises and finger-pointing, the presidential campaign is nearly over. But since the race has shed more heat than light on how each of the candidates would govern, I thought it would be useful to describe exactly what Barack Obama and Mitt Romney have pledged to do on tax policy if elected on Nov. 6.  I’ll describe Romney’s agenda next week but to start, here is Obama’s:

  • The elevator speech: Obama would retain the current individual income tax system, but raise taxes on high-income households to help reduce the budget deficit.  He’d lower corporate tax rates but make it harder for multinationals to avoid U.S. tax on their foreign income.
  • 2001-2010 Tax Cuts: Obama would make nearly all of them permanent, except for individuals making $200,000 or more, or couples making $250,000+.
  • Taxing the Rich: Obama would let the two top tax rates revert to their 2000 levels—36  and 39.6 percent. He’d raise rates on capital gains from 15 percent to 20 percent for high-income households, and hike the rate on dividends to 39.6 percent. This would be on top of the scheduled 3.8 percent tax increase on investment income due to take effect next year. He also says no household making more than $1 million should pay a smaller share of their income in taxes than a middle-class family (aka the Buffett rule). However, he has not said how he’d achieve this. 
  • The payroll tax: Obama would allow the 2010 payroll tax cut to expire as scheduled in January.
  • Tax preferences: Obama would limit the value of all itemized deductions and some exclusions to 28 percent. Besides the deductions, the cap would apply to preferences such as municipal bond interest and health insurance premiums paid by both employers and the self-employed.  He’d maintain current rules for refundable credits such as the Earned Income Tax Credit and the Child Tax Credit.

Some Are More Unequal Than Others - Joseph Stiglitz -This election has rightly been characterized as one that will deeply affect the future direction of the country: Americans are being given a choice with potentially large consequences. One arena in which there are profound differences that has not been adequately debated is the future course of inequality. Mitt Romney has been explicit: inequality should be talked about only in quiet voices behind closed doors. But with the normally conservative magazine The Economist publishing a special series showing the extremes to which American inequality has grown — joining a growing chorus (of which my book “The Price of Inequality” is an example) arguing that the extremes of American inequality, its nature and origins, are adversely affecting our economy — it is an issue that not even the Republicans can ignore. It is no longer just a moral issue, a question of social justice. This perhaps provides part of the explanation for why inequality and poverty should suddenly appear as part of the Romney-Ryan makeover, as they attempt to portray themselves (to use a phrase of some 12 years ago) as compassionate conservatives. In Cleveland on Wednesday, Paul Ryan gave a speech that might lead one to conclude that the two Republican candidates were really concerned about poverty. But more revealing than oratory are budget numbers — like those actually contained in the Ryan budget. His budget proposal guts programs that serve those at the bottom, and little could have done more to enrich those at the top than his original tax proposals (like the elimination of capital gains taxes, a position from which he understandably has tried to distance himself).

Five startling facts about Mitt’s investments - Mitt Romney is not only one of the wealthiest presidential candidates in history, his finances are by far the most opaque. In April, the Washington Post reported that Romney “has taken advantage of an obscure exception in federal ethics laws to avoid disclosing the nature and extent of his holdings.” By offering a limited description of his assets, Romney has made it difficult to know precisely where his money is invested, whether it is offshore or in controversial companies, or whether those holdings could affect his policies or present any conflicts of interest. This is no accident. From what we do know, Romney has – or has recently had – some highly controversial investments in his extensive portfolio. The New York Times reported that Romney was invested in China’s state-owned gas company and a Chinese bank, even as he was calling out China’s “unfair” trading practices on the campaign trail. His trust “also invested in derivative securities linked to the Japanese stock market and to an index that includes stocks in every major country except the United States. It invested in a derivative that would profit if the dollar fell against a group of foreign currencies,” according to the Times. While he calls Russia our “number one geostrategic foe,” he also invested in the politically influential Russian state oil company, Gazprom. Gazprom is one of Russia’s “national champion” companies, which are expected not only to turn a profit but also to advance the country’s national interests. It has long been seen as Vladimir Putin’s “premier instrument of power,” according to Foreign Affairs.

Robert Waldmann: Romney Suffers from CEO Disease - Why do so many ex-CEOs flop in their next jobs? I forget who I first heard the phrase "CEO disease" from--that after 5 years of everybody you come in contact with telling you you are brilliant and that your every thought is the best thought ever, you come to believe it and are thereafter useless for any purpose. From his eyrie in the heart of the Eternal City, Robert Waldmann thinks this now applies to Mitt Romney: Robert's Stochastic Thoughts: I have always assumed that Romney must be smart, because of the way in which he acquired great wealth.  Yes he was ruthless and dishonest (the real scandal is what is legal).  But there are lots of greedy ruthless dishonest people and the vast majority are no where near as good at it. But he's campaigning like an idiot. Being sole shareholder chairman of the board of directors CEO and President of a company can put people in a too comfortable position -- surrounded by flatterers and able to settle all debates by authority.  I suspect that this can lead to an erosion of the ability to think critically.  Romney seems to think that he still has the power to settle debates just by saying they are settled.  If so he can't campaign or govern.   How many CEOs have ever gone on to be successful at anything else?  Unless you define being a CEO as success by definition (as we do) how many have been successful CEOs? The only standard of comparison is other CEOs -- if they are generally incompetent because of vanity and lazy brain syndrome how would we know. Is there any evidence against the wildly speculative hypothesis that  the vast majority have lost their ability to think straight, because of years of flattery?

Funny How Governments Aren’t Much More Like Businesses Than They Are Like Households… People must really be attached to their analogies, since they seem to be pretty desperate to make a government seem like basically anything that’s not a government. First there were the conversations about how the government needs to think like a household (obviously, since the average household is doing so well nowadays and never makes poor choices), and now, presumably because of Mitt Romney and some of the other contenders for the Republican presidential nomination, we have talk about how private-sector management experience is so helpful because the principles that lead to success in business will also lead to success in government. (Personally, I am still waiting for someone to explain to me how government is like a pizza or a leaky balloon or something.)  Unfortunately, the government as business analogy breaks down pretty quickly, if for no other reason than, if government were to operate primarily using for-profit business principles, there would be little reason for government to exist as a separate entity. (We have plenty of “one dollar, one vote” in shareholder meetings, so a “one person, one vote” system is a nice counterbalance.) You can read more on the issue here:

Is The U.S. Becoming An Extractive State? - Following up on her piece in the New Yorker on how hedge fund billionaires have become disillusioned with President Obama, Chrystia Freeland says that the 1% are repeating a mistake made many times throughout history of moving from an inclusive economic system to an extractive one. Extractive states are controlled by ruling elites whose objective is to extract as much wealth as they can from the rest of society. Inclusive states give everyone access to economic opportunity; often, greater inclusiveness creates more prosperity, which creates an incentive for ever greater inclusiveness. Freeland is riffing on an argument forwarded by Daron Acemoglu and James Robinson in Why Nations Fail. Their chief example cited by Freeland is that of Venice: In the early 14th century, Venice was one of the richest cities in Europe. Venice's elites were the chief beneficiaries. Like all open economies, theirs was turbulent. Today, we think of social mobility as a good thing. But if you are on top, mobility also means competition. In 1315, when the Venetian city-state was at the height of its economic powers, the upper class acted to lock in its privileges, putting a formal stop to social mobility with the publication of the Libro d'Oro, or Book of Gold, an official register of the nobility. If you weren't on it, you couldn't join the ruling oligarchy.

How to Crash an Economy and Escape the Scene - Is it time to put the Great Recession behind us? Not in terms of the economy -- which remains bogged down with high unemployment, low growth and other aftershocks -- but rather when it comes to demanding a rigorous effort to hold Wall Street bankers, traders and executives accountable for their role in causing the financial crisis. At the moment, the message we are broadcasting far and wide is: There will be no justice; there will be no accountability; let’s return to the status quo as quickly as possible.No one — no one — on Wall Street has paid a serious price. The one criminal prosecution — of the Bear Stearns hedge-fund managers Ralph Cioffi and Matthew Tannin — failed miserably. Every bank has received its slap on the wrist, has had its insurance carrier or its shareholders cough up a few hundred million dollars — the cost of doing business, don’t you know — and moved on. And governments, most recently New York State, have decided to milk the banks for badly needed cash rather than charge the miscreants themselves. Once upon a time, prosecutors were vigilant about prosecuting bad financial behavior on Wall Street. According to the Financial Times, during the savings-and-loan crisis of the mid 1980s, some 3,500 bankers were jailed for their transgressions. I still haven’t heard a good reason why the number of successful prosecutions in the wake of our most recent financial crisis remains at zero

Viewpoint: How Wall Street Rigs the Game - If you had watched the recent presidential debates or the Republican and Democratic conventions, you might have gotten the impression that the practices of Wall Street that led to the worst financial crisis since the Great Depression have been fixed. None of the candidates are talking about it. Aside from Massachusetts Senate candidate Elizabeth Warren, politicians are noticeably silent on an issue that still poses a real risk to peoples’ economic futures: a financial system that is rigged against the ordinary citizen in favor of the banks — and one that allows the gains to be privatized to an elite few, even as the losses are socialized to everyone in America. The truth is that the problem has not been fixed. Did you know that four years after the crisis, and more than two years after the passage of “landmark financial reform,” that less than one third of the new laws have been implemented, and more than three quarters of the required deadlines have been missed by the regulators? Did you know that the Wall Street lobby has spent more than $300 million trying to kill — or insert loopholes into — key rules that would ensure greater transparency in derivatives and that would forbid banks from betting against their own customers? Did you know that the nation’s five largest banks are even bigger than they were before the financial meltdown? Unfortunately, the politicians and regulators are buckling. There is a leaking dam; and so far what lawmakers and regulators have done is put a Band-Aid over it.

Revolving Doors Matter - It is common fare for people like me to point disapprovingly to the revolving door between business and government, which ensures that every Treasury Department is well stocked with representatives of Goldman Sachs. In 13 Bankers, the revolving door was one of the three major channels through which the financial sector influenced government policy, alongside campaign contributions and the ideology of finance. The counterargument comes in various forms: people like Robert Rubin and Henry Paulson are dedicated civil servants who wouldn’t favor their firms or their industries, the government needs people with appropriate industry experience, etc. It is certainly possible that industry experts provide valuable skills and experience to the government. But that value comes with a cost; put another way, it’s not just the public good that benefits. Using data on Defense Department appointments, Simon Luechinger and Christoph Moser (paper; Vox summary) measured the impact of political appointments on the stock market valuation of appointees’ former firms; they also measured the impact on firms’ stock market valuations of hiring a former government official. In both cases, the stock market reacted positively to new turns of the revolving door. Here’s the chart for political appointments:

US rejects calls to scrap Libor - The US Treasury and the Federal Reserve have rejected calls to stop using the London interbank offered rate – a lending gauge at the centre of a manipulation scandal – in their bailout programmes. The rate, known as Libor, is based on self-reported borrowing costs for unsecured loans between banks and is used to price hundreds of trillions of dollars’ worth of financial instruments including home mortgages and derivatives. Prosecutors and regulators in North America, Europe and Asia are investigating more than a dozen financial institutions that may have been involved in alleged attempts to manipulate Libor from 2005 to 2009, officials have said. Last month, Gary Gensler, Commodity Futures Trading Commission chairman, questioned the accuracy of Libor and told the European parliament that data collected by his agency suggested that the rate continued to be flawed and needed either radical reform or abolition. But earlier this month, following a request by the special inspector general for Tarp (Sigtarp), the Treasury and the Fed declined to amend the contracts of two bailout initiatives that use Libor to set interest rates.

Nine more banks added to Libor probe - Nine of the world’s biggest banks are facing increased scrutiny from US state prosecutors probing alleged attempts to manipulate the lending gauge known as Libor. Eric Schneiderman, New York attorney-general, and George Jepsen, Connecticut attorney-general, have sent subpoenas to Bank of America, Bank of Tokyo Mitsubishi, Credit Suisse, Lloyds Banking Group, Rabobank, Royal Bank of Canada, Société Générale, Norinchukin Bank and West LB as they investigate whether the banks participated in any schemes to rig the London Interbank Offered Rate, a person familiar with the matter said. The financial groups join Deutsche Bank, Citigroup, JPMorgan Chase, Royal Bank of Scotland, Barclays, HSBC and UBS to increase the number of banks under examination by the two state prosecutors to 16. The banks have either declined to comment, could not be reached for comment or have not responded to requests for comment. Several have disclosed various Libor-related investigations to investors and have said they are co-operating with government probes. The civil investigative demands for documents and records of communications started this summer. The state legal officers want to examine whether the banks colluded to fix interest rates determined by Libor, damaging the states’ borrowers and investors as a result.

Neil Barofsky on Pandit and Obama Administration Bankster Friendliness on Bill Moyers - from naked capitalism - Bill Moyers was taken enough with his chat with former SIGTARP chief Neil Barofsky that he’s having two segments with him. This is the first, which focuses on the Vikram Pandit sudden exit and Citigroup generally as well as the Obama Administration’s finance friendly policies.

Neil Barofsky Discusses “Incestuous Orgy” Between Washington and Wall Street on Bill Moyers - It was Bill Moyers who used the expression “incestuous orgy” in this interview with former head of SIGTARP Neil Barofsky to describe the relationship between major financial firms and the Federal government. That beats the anodyne “revolving door” all day and I hope becomes part of the lexicon for describing the capture of Washington by Wall Street.  Barofsky describes not only his experience at SIGTARP in fighting with the Paulson and Geithner Treasuries to oversee the bailout program, but also his reasons for thinking a financial crisis is inevitable.

Citi’s Torch Has Passed. Now Find a Knife - THE defenestration of Vikram S. Pandit from the corner office at Citigroup might just be a turning point for shareholders of this great big beleaguered bank. What remains to be seen, however, is whether the change will also protect American taxpayers from future bailouts. There are many positives in Mr. Pandit’s exit, beginning with the indication that Citi’s directors have finally woken up. No more snoring in this sumptuous boardroom, perhaps. By appointing Michael L. Corbat to take over as chief executive, the board seems to have recognized that this bank should be overseen by, yes, a banker. Not a lawyer (Charles O. Prince III) and not a hedge fund manager (Mr. Pandit). Given Citi’s close ties to Washington, we can only hope that the change of command also reflects a regulatory prodding to overhaul the company. And if that involves cutting this behemoth down to a manageable size, then taxpayers should definitely cheer.

Citigroup sets a dangerous precedent over Vikram Pandit’s departure - Four years after the financial crisis began in earnest, the public has struck something of a devil's deal with the financial system: the only thing we demand of banks is that they make an effort to orderly and stable. As long as our six too-big-to-fail banks don't send massive signals of distress, most people seem content to put off complaints about the financial system to next year. Citigroup failed that test last week. After four years of relative stability and unglamorous work in reducing Citigroup's toxic balance sheet, the bank's CEO, Vikram Pandit, announced suddenly that he was leaving. The whole thing was done in a baffling manner. On Wall Street, as in Hollywood, timing is everything, and Citigroup fumbled badly. The announcement came after Citigroup had actually handed in a good quarter of earnings, so there was little chance that Pandit was being punished for financial underperformance. The purpose of earnings announcements, as well, is to inform investors of everything big happening at a company – when Pandit's departure, the biggest news, came the day after earnings, it raised the question of whether something terrible had happened to convince Pandit to leave one of the biggest jobs on Wall Street so suddenly. The exit statement also suggested that Pandit was leaving immediately, with no transition – a sure sign to the public that Citigroup and Pandit had been caught on their back foot, that the departure was not planned carefully. It was all so mystifying that reportedly, the Securities and Exchange Commission started to investigate the bank.

Goldman Sachs Found No Evidence To Support the Charge They Suck, But In Case You Meet Someone Who Thinks They Do Here's What To Say - With former Goldman Sachs executive Greg Smith releasing his book Monday  detailing the toxic culture of bullying and greed he found there, the company has sent employees a (formerly internal) two-page "Briefing Toolkit" full of talking points they can offer at cocktail parties to rebut all the terrible things Smith is saying "to drive higher sales" - a profit motive entirely unfamiliar to Goldman Sach leaders. Let the slimy games begin.

What Ex-Goldmanite Greg Smith Didn’t Say, and Some Guesses as to Why - Yves Smith - Greg Smith’s book on his time at Goldman has generated a hailstorm of criticism, aptly summed up by Jesse: But the absolute trashing and personal attacks on Greg Smith in the past week that were orchestrated by Goldman and supported, heavily, by the US financial networks got my attention. Generally ad hominem attacks are used by those who consider the facts of the case to be dangerous ground, and wish to do anything that they can to avoid discussing them. So instead they seek to discuss the person bringing them to light… The rationales in favor of Goldman quickly take on the character of the schoolyard. Everyone does it on Wall Street, and singling out Goldman isn’t fair. And what was Greg Smith expecting? Everyone knows Wall Street is predatory and will do whatever it takes, even abuse their customers and make millions out of it. And if the customers are dumb enough to fall for it, they deserve it. Don’t be a fool like him, be a sophisticate and move along. What people do not realize is that the fraud cuts so deep and wide that it hard to escape it, even if one has no dealings personally with any of these firms. These Wall Street financiers have their hands in everyone’s pocket through the manipulation of the financial system, the price discovery mechanisms, and the money supply. And if you do not understand this by now, you understand nothing. Smith’s sin seems to be that he’s an insider from an uber prestigious, connected firm who dared say something bad about his former employer. The “don’t rock the boat” attitude is so deeply ingrained in America that it’s considered reckless to be candid about why you are quitting a job in an exit interview. And it’s not a stretch to call the reaction totalitarian when it’s Wall Street that is on the receiving end of criticism.

Occupy Goldman Sachs — Bring Pitch Fork (And Property Tax Bills) -The peaceful stirrings of Occupy Wall Street began with a poster of a lithe ballerina poised gracefully on a bull with the reminder – “Bring tent.”  After a year of arrests, evictions, police brutality, and no prosecutions of Wall Street titans, the mood is less sunny.   An offshoot of Occupy Wall Street called Occupy Goldman Sachs has now set up a camp outside the ultra luxurious home of Goldman CEO Lloyd Blankfein at 15 Central Park West in Manhattan.  The group is calling for a big protest there on November 10 at 12 noon with the reminder to bring pitch forks and torches (fake ones, of course.)  By this time next year, the reminder that the armaments should be fake may be shelved.  Explaining the protest on its web site,, the group says “this is a reminder that, as we close in to the 2012 elections, all roads lead to Wall Street. Heads they win, tails we lose; whoever wins the presidency there will be a victory party at Goldman Sachs.”  The heads they win, tails we lose ethos is fully functional inside the marble corridors of 15 Central Park West.  Earlier this year, Sandy Weill sold his terraced, 6,700 square foot apartment there for $88 million.  He paid $43.7 million for the penthouse pad in 2007.  So the market value he was paying property taxes on should have been somewhere between those two figures, right? I mean that’s how the rest of America pays property taxes, right? Sorry, but it’s tails we lose, even on property taxes.  According to records at the New York City tax assessor’s web site, Weill’s apartment had an estimated market value last year of $2,842,957. 

Corzine Tells Judge That Due To Purchase Of 50,000 MF Global Shares Before Bankruptcy, He Must Acquit - That former Goldman, New Jersey and MF Global head Jon Corzine is absolutely convinced he is innocent of any client money vaporization or wrongdoing, and that the definition of the phrase "to Corzine (verb- to trust your money to a prominent individual and to find it has mysteriously disappeared)" is absolutely arbitrary, is not news to anyone. And if not convinced then at least at a complete loss to what actually happened. One just had to recall all the "I don't recalls" the Honorable Corzine told congress during the makeshift kangaroo court hearing on MF Global's collapse (even if the final outcome was less than desired).   So it's only logical that the Honorable Corzine asked a federal judge to "toss a civil fraud lawsuit accusing him of misleading investors about the risky bets the futures firm was taking before its collapse a year ago." The WSJ reports that "Corzine's lawyers blasted the investors' suit as a "jumble of assertions and accusations" that makes "no sense" that should be dismissed in a filing Friday in U.S. District Court in New York." But here is the kicker: MF Global may have mismanaged trades, Corzine's lawyers admit, but he sure didn't hide the risks or mislead investors about the firm's risk appetite or liquidity. Why? Because he was so convinced in the profitability of MFG he bought a whopping 50,000 MF Global shares in the open market two months before the firm collapsed. So let's get this straight: Corzine invested a whopping $225,000 (as a reminder, Corzine was CEO of Goldman Sachs for years) because he believed in the firm and not to give the impression that the firm was "safe" in order to avoid a full blown panic once the realization its was insolvent could no longer be hidden, and be wiped out on all of his stock, option and other MFG holdings? And this is what sophisticated lawyers use as evidence of his innocence? Seriously?

Gupta Sentenced to Two Years in Prison for Insider Trading; $5 Million Fine  - Former Goldman Sachs director Rajat Gupta was sentenced to two years in federal prison for leaking corporate secrets about the bank to a hedge fund at the height of the financial crisis. The prison term imposed by U.S. District Judge Jed Rakoff in Manhattan marks a nadir for Mr. Gupta, who became the most prominent figure caught in the push against insider trading by criminal authorities. He was implicated in 2010 in the investigation of former Galleon Group chief Raj Rajaratnam, his friend and business associate. His tip about Berkshire Hathaway Inc.'simpending investment to shore up Goldman during the crisis was "disgusting in its implications" and "a terrible breach of trust," said Judge Rakoff before he handed down the sentence. He added: "Others similarly situated to the defendant must…be made to understand that when you get caught, you will go to jail."

Can charitable donations offset despicable behavior? -- It was quite surprising when Jed Rakoff, scourge of Wall Street, sent Rajat Gupta down for only two years on Wednesday. After all, federal sentencing guidelines suggested that Gupta should get a sentence four times longer than that. And Gupta wasn’t some small-time crook grubbing for dollars with inside information, either: he did enormous damage to the reputations of central icons of our capitalist system, like McKinsey and Goldman Sachs. But for all that, said Rakoff, he is at heart a good man:“The court can say without exaggeration that it has never encountered a defendant whose prior history suggests such an extraordinary devotion, not only to humanity writ large, but also to individual human beings in their times of need,” Judge Rakoff said. This kind of reasoning is found outside the courthouse, too. For instance, Gary Belsky defends Lance Armstrong in New York magazine this week, on the grounds that the ends (raising lots of money for charity) justify the blood-doping means. “If you’re an obsessed sports fan”, says Belsky, then Armstrong’s actions can’t be excused. But for the rest of us, isn’t it great that he managed to use that activity to raise so much money for cancer research?

Will CDO Managers Be Held Accountable For Their Role in the Financial Crisis? - In the wake of the financial crisis of 2008, the public became acutely aware of the existence of collateralized debt obligations (CDOs), bonds backed by pools of financial assets. While, these transactions had been around for over a decade, between 2004 and 2007 the volume of highly complex CDOs that repackaged or referenced mortgage-backed securities grew exponentially.1 These deals arguably amplified the severity of the financial crisis, and as early as March 2008, lawyers and market participants expected billions of dollars in write-downs, as well as significant investor losses.2 Investors in these complex, privately sold, and illiquid securities filed several lawsuits against the underwriters and other deal participants, but so far, their success has been limited. The Securities and Exchange Commission (SEC) also has initiated numerous investigations, and has filed and settled a number of prominent lawsuits accusing financial institutions, including Goldman Sachs and Citigroup, of securities violations.3

We Discuss Wall Street Ethics (More Accurately, the Lack Thereof) on Aljazeera - Yves Smith - This is more of a mainstream presentation than most NC readers are accustomed to seeing. But this was also my first time on Aljazeera, so it’s good to be exposed to a new audience.

JPMorgan and the Volcker Rule's Hedging Exemption - In the wake of JPMorgan’s $2 billion trading loss, there’s been lots of talk about whether “portfolio hedging” is allowed under the Volcker Rule, and whether that should be changed. As I wrote in my previous post, the statutory language of the Volcker Rule very clearly allows portfolio hedging, and anyone who claims otherwise is lying to you. But the focus on portfolio hedging in the wake of JPMorgan’s trading loss is entirely misplaced. Portfolio hedging is only one of the seven criteria that a bank must meet in order to rely on the hedging exemption in the proposed Volcker Rule, and far from the most important. Commentators and certain politicians seem to believe that if JPMorgan’s trades met the definition of a “portfolio hedge,” then they would necessarily be allowed under the proposed Volcker Rule. That’s simply not true. What are the other criteria that a bank must meet in order to qualify for the proposed Volcker Rule’s hedging exemption? The first two have to do with the “programmatic compliance regime” that banks are required to establish under the Volcker Rule, so we can skip those for now. The third criterion deals with portfolio hedging — the trade has to mitigate specific risks, which can be done on a portfolio basis. The fourth criterion is the most important, and it requires that the hedge “be reasonably correlated, based upon the facts and circumstances of the underlying and hedging positions ... to the risk or risks the transaction is intended to hedge or otherwise mitigate.”

Too Big To Handle - Simon Johnson - Two years ago, during the debate about the Dodd-Frank financial-reform legislation, few people thought that global megabanks represented a pressing problem. Some prominent senators even suggested that very large European banks represented something of a role model for the United States. In any case, the government, according to the largest banks’ CEOs, could not possibly impose a cap on their assets’ size, because to do so would undermine the productivity and competitiveness of the US economy. Such arguments are still heard – but, increasingly, only from those employed by global megabanks, including their lawyers, consultants, and docile economists. Everyone else has shifted to the view that these financial behemoths have become too large and too complex to manage – with massive adverse consequences for the wider economy. And every time the CEO of such a bank is forced to resign, the evidence mounts that these organizations have become impossible to manage in a responsible way that generates sustainable value for shareholders and keeps taxpayers out of harm’s way.

The Dark Side of Bipartisanship - Simon Johnson  - In Washington today, “bipartisan” is a loaded term. The traditional usage of bipartisan refers to an agreement across the usual political divide — sometimes a good idea and in many cases the only way to get things done. But a darker meaning applies all too frequently — to a group in which the members, irrespective of party affiliation, are very close to special interests and work to advance an agenda that helps a few powerful people while hurting the rest of us. Financial deregulation in the 1980s and 1990s was pushed by both Democrats and Republicans. It reached its apogee when Alan Greenspan, a Republican, was chairman of the Federal Reserve and Robert Rubin, a Democrat, was Treasury secretary. Bill Clinton was president; Newt Gingrich was speaker of the House.Both political parties share culpability for allowing parts of the financial sector to take excessive risk while financing themselves with a great deal of debt and relatively little equity.In this context, the new Financial Regulatory Reform Initiative of the Bipartisan Policy Center seems eerily familiar. The introductory white paper published last week reads like a sophisticated manifesto preparing us for another round of deregulation.

Banking’s ‘golden age’ is a myth - In times of crisis, there is a well-known tendency to seek solutions in the past because things seemed to be better then. This is now happening in banking. People talk of the need to make banking boring, to simplify bank structures, to rebuild professional standards, to restore the personal contact that once bound bankers and their customers. This is not just hankering after a “golden age”; it is the driving force behind a whole raft of plans for regulatory reform and professional discipline. But hold on a minute: what golden age are we talking about? Is it one where waistcoated bank managers welcomed you into their mahogany-lined offices for a friendly chat about your overdraft? If so, forget it. You were lucky in those days to have a bank account at all, let alone an overdraft. And if you could not get to your manager by 3pm, he had shut for the day. Or maybe it is a golden age when the understanding manager held off calling in your vital business loan because he knew that better times lay just around the corner? Very unlikely. In those upright days, the manager was rated by head office for his success in getting the bank’s money back, not for keeping businesses going. Even then, British bankers were attacked for being less helpful than their German counterparts.

We Speak About High Frequency Trading and Goldman’s Greg Smith on BNN - Yves Smith - I always enjoy speaking on BNN because the interviewers are well informed and, mirabile dictu, allow guests to answer questions. And they like getting into the weeds. BNN doen’t provide embed code, so you need to follow this link to view the segment on their site.

GE acts to counteract ‘fiscal cliff’ fears - General Electric, the US industrial group, said it had refinanced $5bn of bonds reaching maturity early next year to avoid any market turbulence ahead of a possible looming “fiscal cliff” of tax rises and spending cuts. Keith Sherin, GE’s chief financial officer, said the company had been strengthening its balance sheet to prepare for the risk of “choppy” conditions early next year if automatic tax increases and sharply lower spending come into effect as a result of the failure of Congress to agree on a budget deal. Unless Congress can agree on a deal to prevent them, the prospect known as the “fiscal cliff” will take effect in January, threatening to tip the US back into recession. This month GE sold $7bn of bonds, in the parent company’s first such sale for almost five years, refinancing $5bn of debt maturing next February. Mr Sherin said: “We issued it in October so we don’t have to worry about what happens if the fiscal cliff is not resolved. If it’s choppy, we are prepared.”

Ritholtz Sees “Major Cyclical Correction” - Ritholtz talks with Bloomberg’s Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.” Click for Audio

More corporate First Amendment Rights? - Via Truthout comes this report from PR Watch: In a new lawsuit against the Securities and Exchange Commission (SEC), big energy extractors are pushing for carte blanche in their interactions with foreign governments, making it harder to track whether their deals are padding the coffers of dictators, warlords, or crony capitalists. The United States Chamber of Commerce, American Petroleum Institute, the Independent Petroleum Association of America, and the National Foreign Trade Council filed a lawsuit on October 10, 2012 against a new SEC rule, which requires U.S. oil, mining and gas companies to formally disclose payments made to foreign governments as part of their annual SEC reportingChamber of Commerce National Chamber Litigation Center quote says: On October 10, 2012, the Chamber and its association partners filed a complaint with the U.S. District Court for the District of Columbia and a petition for review with the U.S. Court of Appeals for the D.C. Circuit, charging that the rule violates the First Amendment, the Administrative Procedure Act (APA), and the Exchange Act of 1934. The lawsuits allege that the SEC failed to conduct an adequate cost-benefit analysis as required by law, that the SEC grossly misinterpreted its statutory mandate to make a “compilation” of information available to the public, and that the regulation is incompatible with the First Amendment.

Hedge Fund Havens Weigh Taxes as Caribbean’s Debt Rivals Greece- From the Cayman Islands to the Bahamas, hedge fund havens are considering a surprising remedy for widening deficits -- higher taxes.  The Bahamas is planning a town hall to debate a tax overhaul that may include the nation’s first income and sales tax. In the Cayman Islands, which has the highest number of hedge funds in the Caribbean, Premier McKeeva Bush vowed to increase registration fees for the industry after foreign workers balked at a tax on their earnings. Antigua & Barbuda is targeting self-employed workers for tax evasion, with the Finance Ministry calling it “high time” to go after cheats. Hedge funds and other financial companies such as Bain Capital LLC, co-founded by U.S. presidential candidate Mitt Romney, have invested in the region to help themselves and their clients lower their taxes. Yet widening deficits and debt burdens that rival Greece are causing some Caribbean governments to reconsider the strategy they used to lure investors in the first place.

For Whom Golden Parachutes Shine - Golden parachutes, those packages that reward top executives if their company is acquired, have attracted much attention from investors and public officials for more than two decades. Defenders of golden parachutes believe that they provide executives with incentives to facilitate a sale of their companies. While the evidence confirms this, it indicates that golden parachutes have significant costs as well and might fail to serve the interests of shareholders over all. Shareholder resolutions opposing golden parachutes have often received substantial support over time. Congress adopted tax rules aimed at discouraging large golden parachutes, and the rules created during the financial crisis precluded companies receiving government support from providing golden parachute payments to top executives. Subsequently, the Dodd-Frank Act mandated advisory shareholder votes on all future adoptions of golden parachutes. Many companies and financial economists, however, continue to believe that golden parachutes are an important and beneficial element of executive pay. Because top executives typically give up independence and control when their companies are acquired, executives that do not have a golden parachute might be excessively reluctant to sell – and often can impede or even derail an acquisition they dislike. Golden parachutes make acquisitions more attractive to executives, and may prompt to them to support a beneficial sale of their company that they would otherwise oppose. It is worthwhile for shareholders to bear the costs of golden parachutes, so the argument goes, for the sake of facilitating such sales. In an empirical study of golden parachutes that Alma Cohen, Charles Wang and I have carried out, we confirm that golden parachutes do indeed have a beneficial effect on acquisitions. We find that companies that offer such packages have a higher likelihood of both receiving an acquisition offer and being acquired. 

The Effects of Golden Parachutes - The indefatigable Lucian Bebchuk has written another empirical paper (Dealbook summary), this time with Alma Cohen and Charles Wang, on the impact of golden parachutes (agreements that pay off CEOs generously in case of acquisition by another company) on shareholder value.Looking just at the question of whether a company is acquired and for how much, they find out that golden parachutes work about how you would expect. Companies whose CEOs have golden parachutes are more likely to get acquisition offers and are more likely to be acquired, presumably because their CEOs are les likely to contest takeovers. On the other hand, these companies tend to sell for lower acquisition premiums, again because their CEOs are more likely to be happy to be bought out. But the problem is that when you take a longer view, golden parachutes appear to be bad for shareholder value. Companies that adopt golden parachutes have lower risk-adjusted stock returns than their peers—despite the fact that they are more likely to be acquired. Some other factor is outweighing the positive effect (for the stock price) of more frequent takeovers.

“The Fine Print: How Big Companies Use ‘Plain English’ To Rob You Blind By David Cay Johnston - David Cay Johnston is one of the few journalists who understand and write about the inner workings of the U.S. tax code. He’s made a fine career of chronicling how large companies and the wealthy have plundered the government’s coffers, often with help from the politicians who write our tax laws. His accolades include a Pulitzer Prize for exposing outrageous loopholes used to shelter vast amounts of income. His latest book, “The Fine Print,” expands on that theme, showing a gamut of ways in which big corporations, especially regulated utilities, cheat ordinary people (as well as each other) out of their money. Some of the examples could leave you feeling so disgusted and powerless that you might wonder if you were better off not knowing. But if you enjoy learning about the dirty little secrets behind the ways powerful businesses make their profits, you probably will like this book.

Banks Mark Up Costs For Bounced Checks By As Much As 470,000 Percent - Hardly anyone pays with a check these days, but that hasn't stopped big banks from gouging people who bounce them. Banks may mark up processing charges by as much as 470,000 percent, according to author David Cay Johnson, who discusses various forms of price gouging in his new book, The Fine Print: How Big Companies Use "Plain English" To Rob You Blind: "Back in the late 1970s, when checks were still processed by a person and a machine rather than digitally, Crocker Bank (now part of Wells Fargo) was forced to reveal in a California court case that its cost was thirty cents. At that time, the bank was charging customers $6 for bounced checks, a markup of 2,000 percent. The California Supreme Court held that charging twenty times the cost was not necessarily unconscionable. Adjusted for inflation, that $6 fee would now be $21, less than half was BofA charges. "What are today's costs for processing a bounced check? BofA won't tell customers, but research papers on costs in the digital era suggest it could be less than a penny, making the markup by BofA in the neighborhood of 470,000 percent." You can thank the government for bank-friendly legislation that lets this happen. As Bankrate's reported, the trend will only continue as other bank fees shoot up.

Low Rates Pummel Bank Profits - Superlow U.S. interest rates are squeezing bank profits, complicating the industry's nascent recovery from the financial crisis. An important gauge of lending profitability, known as net interest margin, has dropped to its lowest level in three years. The measure tracks how much banks earn when they borrow from depositors and then lend or invest those funds. The squeeze is the flip side of the Federal Reserve Board's four-year effort to revive the sluggish U.S. economy, with near-zero short-term interest rates and repeated rounds of bond purchases that aim to reduce long-term rates as well. Ten-year U.S. Treasury yields hit 1.43% in July, their lowest level since World War II. Banks will be forced to consider new ways to make money by changing the services they offer, industry observers said. At the same time, higher costs for banking services could push more Americans out of the financial system altogether, adding to the millions of customers viewed by regulators as under-banked, or lacking access to affordable financial services.

Your Fees, Their Bank -- Financial regulation is a never-ending saga. Restrict banks’ opportunities to turn a profit in one area, and, not surprisingly, they redouble their efforts in another. New credit card rules that went into effect in 2010, as well as legal tussles over “swipe fees,” have created pressure to find other sources of revenue. Fees for late payments and overdrafts are making a big contribution to bank balance sheets these days, partly because consumers don’t pay as much attention to fees as to interest rates. Efforts to regulate such fees may prove less effective in the long run than a consumer-driven shift toward nonprofit banks. Credit unions typically charge much lower fees than banks and offer more attractive interest rates. In rankings of customer satisfaction, they beat for-profit banks hands down. Last year Bloomberg News published an article, “Bank Fees Are a Credit Union’s Best Friend,” and the trend continues. As one reporter for Forbes put it, “The fee environment worsened for bank customers in virtually every way possible in the first half of 2012.”

Banks Pushing Into Small Loans Compete With Payday Shops - Banks facing lower revenue from debit-card and overdraft fees are ramping up marketing of small short-term loans, prompting regulators to question if they carry the same risks to borrowers as other forms of payday lending. The high-cost loans offered by firms including Wells Fargo & Co. (WFC) and U.S. Bancorp (USB) are meant for people who can’t access other forms of bank credit, similar to the clients of storefront or online payday lenders. Scrutiny of the loans increased on Sept. 21, when North Carolina Attorney General Roy Cooper asked Regions Financial Corp. (RF) to provide data showing its loans don’t violate the state’s interest-rate cap. That followed a decision in May by the Federal Deposit Insurance Corp. to investigate payday-like products offered by banks, joining an inquiry by the Consumer Financial Protection Bureau. “They lend money at a high interest rate and get it paid back at the next paycheck,” Cooper said in an interview. “We want to come at this from all angles to prevent these kinds of loans in North Carolina.”

Big Banks Offer Payday Loans - Yes, we know they do, but a Bloomberg story this morning caught my eye. I’ve known for quite a while that Wells Fargo and First Third Bank offered these payday-style loans, called direct deposit advances or ready advances, and also that certain bank customers get these prompts for this “service” EVERY time they go to an ATM. In fact, I know a woman who has one of these loans out from Wells Fargo pretty much at all times, except when once a year they ask her to clear it, at which point she goes to another payday lender to pay it off.  Still, Carter Dougherty’s story today added something I didn’t know, namely that so many people are finally interested in this.  The attorney general of North Carolina has asked the lenders to explain why the loans do not violate North Carolina’s famously successful state interest rate cap. A private lawsuit filed in U.S. District Court in Ohio claims that Fifth Third Bank deceived customers about the true costs of the loans.  Both the FDIC and the CFPB have taken notice of the loans and are investigating the practices. Enjoy the full story here.

C.F.P.B. Will Begin Oversight of Debt Collectors - Debt collection agencies, whose sometimes aggressive tactics have earned them scrutiny from consumer protection groups and state regulators, will come under federal supervision for the first time beginning Jan. 2, when the Consumer Financial Protection Bureau begins oversight. In addition to companies that specialize in collecting money from consumers for personal, family or household debt, the consumer bureau will begin monitoring debt collectors that contract with the Education Department to collect overdue student loans. The department has more than $850 billion in student loans outstanding, officials said. “Millions of consumers are affected by debt collection, and we want to make sure they are treated fairly,” Richard Cordray, the director of the consumer bureau, said in a statement issued before the public release of the bureau’s rules on Wednesday. “We want all companies to realize that the better business choice is to follow the law — not break it.” The authority to oversee debt collection agencies comes under the portion of the Dodd-Frank regulatory law that deals with so-called nonbank financial companies. The consumer agency will examine companies to ensure that they properly identify themselves to consumers and properly disclose the amount of debt owed. In addition, collectors must have a process to resolve disputes and communicate “civilly and honestly” with consumers.

Debt as power - A debtors' strike is about using the power that debt gives to people to demand concessions.There are, however, obvious difficulties. To begin with, the stigma that debt holds must be overcome. The idea of refusing to repay a loan seems offensive. If you sign a contract, it's your moral - not to mention legal - duty to pay it back. However, this misses the fact that debt is a political, and not a personal, issue. Climbing private indebtedness is the outcome of a deliberate strategy on the part of banks and a wilful impotence on the part of government. Banks developed, sold, and lobbied against the regulation of corrosive debt instruments. They cannot, then, demand that the rest of the population bleed so they can maintain their practises. When the creditor-debtor relation is seen properly, as a socio-economic arrangement, negotiation becomes a fact, as well as an economic necessity. The next problem is building a movement big enough. A one-man debt strike is as useless as a one-man labour strike, but the quest for a mass debt strike may actually be more plausible. Britain's service economy has fragmented the workforce as powerfully as the manufacturing economy once harnessed it; it's only across public sector unions where there is any coherence. Debtors, however, are much more concentrated. Personal finance is dominated by the five big high-street banks, and student loans even belong to a single company.

The Revolving Door Spins, the “Consumer” Bureau’s Mortgage Servicing Rules Stink - The latest example of bankers running our country is the weak mortgage servicing standards proposed by the Consumer Bureau. Hmmm… how come the rules are so bad, given mortgage servicers’ rampant fraud, predatory servicing and gross incompetence, all of which has been well documented by law enforcement (albeit not effectively prosecuted)? I have no inside scoop. But here’s someone who does: Leonard Chanin. He supervised all of the Consumer Bureau’s rule makings as its “Assistant Director for Regulations.” Guess what? Last month he left the Consumer Bureau to join Morrison & Forrester. MoFo describes itself on its website as “one of the leading banking and financial services law firms in the world, advising domestic and foreign banks, insurance companies, credit card companies, mortgage bankers, investment banks, investment management companies and investment advisers, and other financial institutions on regulatory and litigation, as well as transactional, matters.” Mofo further explains: “It is fair to say that we have played an important role in shaping the evolution of financial services law in the United States.  We have been involved in every federal legislative and regulatory initiative involving or affecting banking over the past 30 years, including proposals addressing bank powers, the regulation of consumer lending, fair lending, mortgage lending reform, privacy and information sharing, electronic fund transfers and other payment systems, capital requirements, and other matters affecting the banking industry.”

U.S. Sues Bank of America for $1Billion in Mortgage Fraud — The top federal prosecutor in Manhattan sued Bank of America for more than $1 billion on Wednesday for mortgage fraud against Fannie Mae and Freddie Mac during the years around the financial crisis.U.S. Attorney Preet Bharara said Countrywide Financial, which was later bought by Bank of America, churned out mortgage loans from 2007 to 2009 without making sure that borrowers could afford them. “The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope,” Bharara said in a statement. He said the suit was partly to recover money that Fannie and Freddie lost from defaulted loans.  Bank of America had no immediate comment.

U.S. Files $1 Billion Suit Against Bank of America for Fraud — The latest federal lawsuit over alleged mortgage fraud paints an unflattering picture of a doomed lender: Executives at Countrywide Financial urged workers to churn out loans, accepted fudged applications and tried to hide ballooning defaults. The suit, filed Wednesday by the top federal prosecutor in Manhattan, also underscored how Bank of America's purchase of Countrywide in July 2008, just before the financial crisis, backfired severely. The prosecutor, Preet Bharara, said he was seeking more than $1 billion, but the suit could ultimately recover much more in damages. "This lawsuit should send another clear message that reckless lending practices will not be tolerated," Bharara said in a statement. He described Countrywide's practices as "spectacularly brazen in scope." He also charged that Bank of America has resisted buying back soured mortgages from Fannie Mae and Freddie Mac, which bought loans from Countrywide.

U.S. sues Bank of America over Hustle mortgage fraud (Reuters) - The United States filed a fraud lawsuit against Bank of America Corp, accusing it of causing taxpayers more than $1 billion of losses by selling thousands of toxic mortgage loans to Fannie Mae and Freddie Mac. Wednesday's case, originally brought by a whistleblower, is the U.S. Department of Justice's first civil fraud lawsuit over mortgage loans sold to the big mortgage financiers, which were bailed out in 2008. It also compounds the legal problems that Bank of America Chief Executive Brian Moynihan faces over the second-largest U.S. bank's disastrous July 2008 purchase of Countrywide Financial Corp, once the nation's largest mortgage lender. According to a complaint filed in Manhattan federal court, Countrywide in 2007 invented and Bank of America continued a scheme known as the "Hustle" to speed up processing of residential home loans. Operating under the motto "Loans Move Forward, Never Backward," mortgage executives tried to eliminate "toll gates" designed to ensure that loans were sound and not tainted by fraud, the government said. This led to "defect rates" that approached 40 percent, roughly nine times the industry norm, but Countrywide concealed this from Fannie Mae and Freddie Mac, and even awarded bonuses to staff to "rebut" the problems being found, it added.

Counterparties: A billion more reasons for Bank of America to regret acquiring Countrywide - The DOJ has filed a $1 billion civil lawsuit alleging that Countrywide committed fraud “spectacularly brazen in scope” by selling defective mortgages to Fannie Mae and Freddie Mac between 2007-2009. (Full PDF here). Once the nation’s leading subprime lender, Countrywide was acquired Bank of America in 2008, and it has proven to be an epic money pit. Last month, David Benoit wrote that the acquisition had cost Bank of America at least $29 billion in settlement costs in the last 3 years. The WSJ says the bank has dished out something like $42 billion since 2010, if you include reserves and expenses. Interestingly, the  DOJ’s lawsuit doesn’t focus on subprime. After the subprime market began to collapse in 2007, the suit contends, Countrywide’s strategy shifted to originating the kind of high-quality mortgages that could be sold to Fannie and Freddie. Countrywide allegedly used a program called the “hustle” to pretend it was originating those kind of mortgages: The aim of the Hustle (or “HSSL,” for “High Speed Swim Lane”) was to have loans “move forward, never backward” and to remove unnecessary “toll gates” slowing down the loan origination process. In furtherance of these aims, Countrywide’s new origination model removed the processes responsible for safeguarding loan quality and preventing fraud. Instead of adhering to Fannie and Freddie’s mortgage standards, Countrywide allegedly “assigned critical underwriting tasks to loan processors who were previously considered unqualified to even answer borrower questions.” Employees got a one-time bonus for “rebutting” concerns from the company’s internal quality control department. “Even when detected, loan processors manipulating data typically faced no consequences”,

Fed Releases 2013 Reserve Requirements - Banks won’t need to stash away reserves with the Federal Reserve on the first $12.4 million of their net transaction accounts in 2013, the central bank said Thursday in its annual re-calculation of reserve requirements. That’s up from 2012, when depository institutions were exempt from reserve requirements on their first $11.5 million of net transaction accounts, which are mostly checking accounts.

Unofficial Problem Bank list declines to 865 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Oct 19, 2012. (table is sortable by assets, state, etc.)  Changes and comments from surferdude808:  The OCC released its enforcement actions through mid-September 2012 and the FDIC got back to closing a few banks, which led to many changes to the Unofficial Problem Bank List. For the week, there were nine removals and two additions leaving the list at 865 institutions with assets of $333.2 billion. A year ago, the list held 976 institutions with assets of $401.9 billion. They were six action terminations and three failures this week.

Latest Obama Headfake: Threat to Replace Favorite Housing Scapegoat, FHFA’s Ed DeMarco -  Yves Smith - The October surprises are now coming fast and furious as Obama’s lead is slipping in most polls and on Intrade. So empty gestures to boost turnout in his heretofore spurned Democratic party base are the order of the day.  . A new effort to rally the troops, per Shahien Nasirpour at the Financial Times, is that the Administration has started messaging to pet activist groups that it will replace Ed DeMacro, the Administration’s favorite scapegoat for its negligence on the housing beat. Team Obama has backed the banks every step of the way, from its failure to use chain of title abuses and obvious tax code (REMIC) violations to pressure banks to do mortgage mods, to its unwillingness to prosecute senior bankers (Charles Ferguson, this blog, and others have set forth legal theories and evidence; the issue clearly is lack of political will), its refusal to undertake anything other than cursory “see no evil” investigations, and its bank friendly measures, from borrower-damaging, “foam the runway” HAMP to a fraud-institutionalizing mortgage “settlement”. But DeMarco, by refusing to endorse principal mods for Fannie and Freddie borrowers (which is a peculiarly short-sighted posture) serves an a convenient distraction for the Administration’s repeated refusal to take any serious pro-borrower measures. From the Financial Times: But if Mr Obama wins re-election, Mr DeMarco’s days may be numbered, with senior White House officials quietly telling housing industry activists in recent weeks that he will be replaced..

Why Freddie Mac Resisted Refis - Freddie Mac, the taxpayer-owned mortgage giant, made it harder for millions of Americans to refinance their high-interest-rate mortgages for fear it would cut into company profits, present and former Freddie Mac officials disclosed in recent interviews. In closed door meetings, two Republican-leaning board members and at least one executive resisted a mass refi policy for an additional reason, according to the interviews: They regarded it as a backdoor economic stimulus. Freddie's policy was financially brutal: During the worst years of the Great Recession, when homeowners most needed the savings they could have gotten from refinancing to lower interest rates, Freddie helped keep millions of borrowers locked in high-interest-rate mortgages. A more aggressive refi program by both Freddie and its sister company Fannie Mae would have helped an additional nine million homeowners to refinance, saving them nearly $75 billion in interest payments to date, Columbia University housing economist Christopher Mayer estimates. In addition, it would have prevented hundreds of thousands of delinquencies and foreclosures, he says. Freddie's resistance to refis highlights a central conflict of interest [1] that plagues both Freddie and Fannie. That conflict is even more pronounced now that they are owned by taxpayers. The companies, which own or back about 60 percent of U.S. home mortgages, have a mandate to help expand homeownership and also to generate profits. These goals can work at cross purposes. 

Counterparties: Fannie and Freddie’s slow metamorphosis - Today, FHFA announced that Fannie Mae and Freddie Mac are expected to cost taxpayers $76 billion through 2014, instead of the previous projection of $142 billion. But that may not be enough to save their regulator’s job. Shahien Nasiripour reports that the Obama administration is pondering a recess appointment to replace Ed DeMarco, who was named the acting director of FHFA in 2009. DeMarco may be the most reviled bureaucrat in Washington, thanks to his repeated opposition to principal reduction for struggling homeowners. In January, the Treasury Department tripled the incentives for mortgage companies to offer homeowners such reductions; DeMarco promptly refused to consider them, even when internal company reports suggested principal reductions would actually save Fannie and Freddie money. As Felix wrote in July, DeMarco’s argument against principal reductions was “less financial than moral”, and DeMarco put his government agency in the strange position of vetoing the same government’s economic policy. That wasn’t the first time the agencies have held back efforts to help homeowners. Jesse Eisinger has a fantastic story about how Freddie made it harder for millions of Americans to refinance their mortgages, fearing that it would hurt its profits. Freddie execs worried that the Obama administration’s mass refinancing program — named HARP — would hurt the company’s mortgage portfolio, even as it could help the larger economy: Freddie Mac produced a memo in the fall of 2011, which was described to ProPublica, estimating that HARP would cause hundreds of millions of dollars in losses. The memo estimated big losses on the portfolio as well as from giving up the rights to return the loans. It minimized the benefits to Freddie’s insurance business from an improved housing market and improved economy. It also minimized the costs to the company of trapping homeowners in mortgages with interest rates so high they would eventually default.

Report: Bailout Costs for Fannie and Freddie expected to decline - From the WSJ: Cost of Bailing Out Fannie and Freddie Expected to Fall Sharply - Fannie Mae and Freddie Mac are expected to begin repaying taxpayers for their bailout faster than initially projected, in part because of an improving housing market. The Federal Housing Finance Agency, the companies' federal regulator, released a report on Friday that estimated they will pay between $32 billion and $78 billion to the U.S. Treasury through 2015. The baseline forecast assumes that the companies would end up costing taxpayers $76 billion by the end of 2015, down from the current tab of $142 billion... The regulator's latest forecasts show that Freddie Mac won't require additional government support, even under a "worst case" scenario that envisions further home-price declines. Fannie might need government aid this year to pay the 10% dividend but would only need additional aid in subsequent years if home prices were to fall sharply. Here is the report from the FHFA: FHFA Updates Projections of Potential Draws for Fannie Mae and Freddie Mac.

The Central Fact that Folks Don’t Get about Fannie and Freddie’s Role in the Crisis - William K. Black - Here’s the central thesis of the far right about Fannie Mae and Freddie Mac.  It is taken from the web site: The Neville Awards (as in Neville Chamberlain), which gives “awards” to Democrats for their cowardice and other mortal and venal sins.  This particular article claims that the damnably clever Democrats, while the Republicans controlled the Presidency, House, Senate, Supreme Court, and all the regulatory agencies, pulled off a deliberate plan to destroy the economy in order to elect Obama. “Obama, Fannie Mae & Freddie Mac – How the Democrats Brought Down the Economy in Time to Elect Obama.”The author summarized his thesis in two sentences.  “Fan and Fred and the Problem of Narrative-The GSEs don’t fit the left’s story about how greedy bankers caused the financial crisis. That’s why they haven’t been reformed.”Actually, Fannie and Freddie are perfect fits for the accurate narrative of what caused this financial crisis (and the Enron-era crisis and the S&L debacle) – epidemics of “accounting control fraud.”  The right has simply forgotten that Fannie and Freddie were controlled by “greedy bankers.”  Fannie and Freddie were privately owned and privately managed.  George Akerlof and Paul Romer explained their fraud scheme in their famous 1993 article (“Looting, the Economic Underworld of Bankruptcy for Profit”).   Crucially, they explained that accounting control fraud is a “sure thing.”  It will make the controlling officers wealthy and it will do so promptly.

Analysis: Mortgage demand too much for banks, who respond slowly (Reuters) - Big banks are hiring mortgage bankers to meet a surge in demand for home loans and refinancings, but they are still struggling to process applications, which could undermine the Federal Reserve's attempts to stimulate the economy. Since the Fed announced its plan in September to buy up to $40 billion of mortgages a month, consumer mortgage rates have fallen more slowly and by less than they would have done in more normal times. On average, 30-year home loan rates are down just 0.18 of a percentage point this week from September 13, when the Fed announced its latest stimulus program. Some analysts estimate that in more normal markets, rates would have fallen by roughly 0.31 of a percentage point or more. That could save a home buyer thousands of dollars over the lifetime of a mortgage. The dysfunction in the mortgage market, which has yet to fully recover after its battering in the U.S. housing bust and subsequent financial crisis, means most benefits from the Fed's new stimulus plan may be accruing to banks instead of consumers. Banks still committed to the home loan business are hiring to meet increased demand, but fewer banks are committed to the business after the 2007-2009 mortgage crisis pulverized some of the biggest lenders in the United States and wounded many others. Capacity constraints work in the banks' favor. Profit margins for home lending are more than double their usual level, JPMorgan Chief Executive Jamie Dimon told investors last Friday.

Wells Fargo sends refunds to some FHA mortgage customers -Thousands of Wells Fargo & Co. home loan customers recently received a surprise in the mail: refund checks from the big bank, along with letters saying they had paid unnecessary fees for their mortgages. The unsolicited offers of thousands of dollars arrived with a catch — if the borrowers cash the checks, they can't later sue the No. 1 U.S. home lender. The San Francisco bank said in the letters that borrowers were put into more expensive loans when they could have qualified for cheaper ones. Analysts said the letters sent to potentially 10,000 Wells Fargo borrowers were a way for the bank to sidestep further litigation over "steering" customers into unfavorable loans — allegations that the government has made about certain Wells Fargo operations in the past. It's one in a long series of legal troubles for major mortgage lenders, the five largest of which agreed in February to a $25-billion settlement of accusations that they "robo-signed" foreclosure affidavits and otherwise abused distressed borrowers. Mortgage investors have barraged them with lawsuits over defaulted loans, and the government also recently filed separate complaints against banks including Wells Fargo, JPMorgan Chase & Co. and Bank of America Corp.

A Post-Debate Interview with Hubbard on Housing Policy - There were no serious housing questions at any of the presidental debates. Given how important the housing market is for both voters and the economy, this is surprising and disappointing. As Zachary Goldfarb noted, "here are a few words that surprisingly have not shown up through much of this debate: housing, mortgage, refinance, underwater."  I attended last Tuesday's presidential debate at Hofstra University as press for Al-Jazeera English, providing TV commentary on economic issues. It was my first debate, so I took some time to wander around. While exploring after the debate was over, I found the Spin Alley area, which is the area where politicians and campaign people stand by to give quick media responses. Handlers held large signs advertising the people in question. I saw a "Hubbard, Glenn" sign in the air, and the Columbia economist and Romney economic advisor standing by to give spin on the debate. I decided to get some housing questions on the table. When some people, notably Josh Barro, argue Romney has a secret economic plan, and in particular a secret housing plan, they cite Hubbard, who has been very vocal on boosting demand through interventions in the housing market. I've noted that his plans might not be that different from what Obama is currently doing. Below is a transcript of what I got a chance to ask him:

Project S.H.A.M.E.: Recovered History: How Wall Street-Funded Self Help Propaganda Greased the Real Estate Bubble - I spotted a book that I just had to own. At $0.50, it was priced to sell. And as you can tell from the title above, the book’s a classic. It’s bound to remain fresh and relevant through the ages—not as a useful guide to homeownership, but as a fossil record of the biggest real estate scam in the history of the United States. A lot of people still wonder how and why so many millions of people bought such ridiculously overpriced homes and took out mortgages and loans they clearly could not afford? Well, this book provides a part of the answer: people were explicitly instructed to do so. The Automatic Millionaire Homeowner hit the front bookcase displays at Barnes and Noble in March 2006, at the very top of the real estate market and just a few months before the whole thing crashed and burned. Its main message was simple: If you take out a mortgage to buy a home, you will always make money. There is no way you can lose—no matter when you buy, how much you pay or what type of loan you get. And the kicker is: both the book and finance expert who wrote it were bankrolled by Wells Fargo and Bank of America. This book is just one of dozens—if not hundreds—of similar self-help snake oil guides promising a sure bet system to get rich in real estate. But it’s a good example of the massive propaganda effort financed by Wall Street that was designed to funnel as many people as possible into the mortgage meat grinder. The book was packed with blatant lies that seem so obvious and even comic in retrospect. The book was not put out by some shady fly by night operation, but by a supposedly credible financial expert who had the backing of the most well-known and respected banks, TV networks and newspapers.

131 of 212 Largest Cities See Foreclosures Decline -- RealtyTrac reported on October 25th,  third quarter foreclosure activity decreased from a year ago in 131 out of the nation’s 212 (62 percent) metropolitan areas with a population of 200,000 or more. Third quarter foreclosure activity decreased from the previous quarter in 134 of the metro areas tracked in the report (63 percent).   Foreclosure activity decreased annually in 12 out of the nation’s 20 largest metro areas, led by San Francisco (36 percent), Detroit (31 percent), Los Angeles (29 percent), Phoenix (27 percent) and San Diego (26 percent).  The biggest annual increases in foreclosure activity among the nation’s 20 largest metro areas were in New York (69 percent), Tampa (43 percent), Philadelphia (34 percent), Chicago (34 percent), and Seattle (20 percent).“Two-thirds of the nation’s largest metros posted decreases in foreclosure activity in the third quarter, indicating that most of the nation’s housing markets are past the worst of the foreclosure problem” . “In fact foreclosure activity in September 2012 was below September 2007 levels in 58 percent of the metro markets we track.“Still, rebounding foreclosure activity in some markets remains a threat to home price stability and growth in those markets,” Blomquist continued. “The rebounding foreclosure activity tends to be in markets where the foreclosure process slowed down most dramatically in the last two years, resulting in a buildup of foreclosures in limbo that lenders are finally working through this year.

LPS: Mortgage delinquencies increased sharply in September, Percent in foreclosure process lowest in 2 years - LPS released their First Look report for September today. LPS reported that the percent of loans delinquent increased in September compared to August, but declined about 4% year-over-year. On the other hand, the percent of loans in the foreclosure process declined sharply in September to the lowest level in almost 2 years. LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) increased to 7.40% from 6.87% in August. The percent of loans in the foreclosure process declined to 3.87% from 4.04% in August. Note: the normal rate for delinquencies is around 4.5% to 5%. LPS is looking into the reasons for the increase in the delinquency rate, and will probably provide a discussion in the Mortgage Monitor that will be released in early November. Looking at the table below - that shows the LPS numbers for September 2012, and also for last month (August 2012) and one year ago (September 2011) - most of the increase in delinquencies was in the short term category. The number of serious delinquent properties (90+ days and in-foreclosure) declined 70 thousand from August. The number of delinquent properties, but not in foreclosure, is down about 7% year-over-year (280,000 fewer properties delinquent), and the number of properties in the foreclosure process is down 9% or 190,000 year-over-year.

Homeowners Lost $2 Trillion in Housing Wealth By Living Near Foreclosures - "Why should we bail out the loser’s mortgages,” Rick Santelli yelled in his proto-Tea Party rant. And ever since, practically everyone in Washington has taken care to say that homeowner relief should only be available for “responsible” homeowners, as if there’s a formula to decide whether someone ripped off by a predatory lender is “responsible” or not. But there’s actually a good answer for why you want to bail out “the loser’s mortgages,” and it’s rooted in basic economics. Your neighbor’s home value affects yours. And because we’ve had nothing approaching a full response to the foreclosure crisis for the last six years, the resulting wreckage has taken everybody down. The economic impact of the housing bust on homeowners who live near a foreclosed property comes to about $2 trillion, according to a new accounting by a consumer advocacy group. In a report released Wednesday, the Center for Responsible Lending estimates that more than half of that “spillover loss” occurred in communities of color, which the study’s authors define as census tracts where more than 50 percent of the residents are Hispanic, African-American or otherwise non-white. Those losses, the authors note, reflect the high concentrations of foreclosures in those neighborhoods

Freddie Mac Says QE3 Is Boosting Housing Activity -The expansion of the Federal Reserve’s “maturity extension program,” is giving a boost to housing activity, said mortgage-finance company Freddie Mac. According to the company’s U.S. Economic and Housing Market Outlook report for October, housing contributed 0.3 percentage point to the first half of 2012′s real gross domestic product growth of 1.7% and will likely add a similar boost during the second half of the year after being a net drag on GDP from 2006 to 2010. See related video. Last month, the Fed unveiled the third round of Quantitative Easing and said it would increase its purchases of agency mortgage-backed securities by $40 billion per month and continue the term extension of its portfolio. The Fed is looking to encourage lower long-term interest rates, especially on fixed-rate mortgages, and spark a further pick-up in housing activity, Freddie Mac noted.

Lawler: Estimated REO Inventories by State - CR Note: This is a very useful website. The estimate of lender Real Estate Owned (REO) in June was very close to the bottom up estimate using data from the FHA, Fannie, Freddie, the FDIC and more. From economist Tom Lawler:  Folks interested in REO inventories by state might want to take at look at the website below from the FRB of New York. According to the FRBoNY, the data were “provided by CoreLogic under contract.” An Assessment of the Distressed Residential Real Estate Situation  The site shows a map and you have to click on each state to get data, and I couldn’t get DC (I don’t think it was available!), but here’s the data for June 30, 2012

Update: REO by State and Owner Occupied Units by State - To help put the previous post in perspective, I've added the number of owner occupied units as of April 1, 2010 (from the decennial Census), and the percent of units that are REO. REOs are only part of the puzzle. This just shows how many lender Real Estate Owned (REO) units for each state. But look at New Jersey. There are very few REOs in New Jersey, but there are many properties in the foreclosure process. If you look at the NY Fed site, they mark the judicial foreclosure states with a black square. Many of the judicial states are backlogged. See Serious Mortgage Delinquencies and In-Foreclosure by State for graphs of the percent of loans in foreclosure and serious delinquent by state (as of the end of Q2). Here are a repeat of Tom Lawler's comments: Folks interested in REO inventories by state might want to take at look at the website below from the FRB of New York. According to the FRBoNY, the data were “provided by CoreLogic under contract.”An Assessment of the Distressed Residential Real Estate Situation

LPS: House Price Index increased 0.2% in August - The timing of different house prices indexes can be a little confusing. LPS uses August closings only (not a three month average like Case-Shiller or a weighted average like CoreLogic), excludes short sales and REOs, and is seasonally adjusted. From LPS: U.S. Home Prices Up 0.2 Percent for the Month; Up 2.6 Percent Year-Over-Year Lender Processing Services ... today released its latest LPS Home Price Index (HPI) report, based on August 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 HPI is off 23.0% from the peak in June 2006. In May, the LPS HPI was up 0.4% year-over-year, in June, the index was up 0.9% year-over-year, and 1.8% in July, and now 2.6% in August. This is steady improvement on a year-over-year basis..

Zillow forecasts Case-Shiller House Price index to show 1.7% Year-over-year increase for August Note: The Case-Shiller report to be released next Tuesday is for August (really an average of prices in June, July and August). Zillow Forecast: August Case-Shiller Composite-20 Expected to Show 1.7% Increase from One Year Ago On Tuesday Oct. 30, the Case-Shiller Composite Home Price Indices for August will be released. Zillow predicts that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]) will be up by 1.7 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) will be up 1.2 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from July to August will be 0.2 percent for the 20-City Composite and 0.3 percent for the 10-City Composite Home Price Index (SA). All forecasts are shown in the table below and are based on a model incorporating the previous data points of the Case-Shiller series, the August Zillow Home Value Index data and national foreclosure re-sales.

Existing Home Sales Data Reinforces Artificial Supply Constraint - Existing home sales fell last month, but prices continued to rise year-over-year regardless (prices actually fell month-to-month by 0.5%). And this data point reinforces the story of the housing market, which is “recovering” based on constrained supply, in some cases artificially constrained supply. Total housing inventory fell 20% year-over-year, and now stands at 5.9 months of supply, around 2.32 million homes, according to the data from the National Association of Realtors (which, like practically everyone that compiles housing data, exists to sell more and more homes. We have no independent data on the number of mortgages or foreclosures, a huge failure of public policy). That supply dropped 3.3% month-to-month. What accounts for this? The charitable case is that foreclosures have slowed, and this constricts supply. Distressed sales actually increased in September, so let’s set that aside. And there are other factors. Underwater borrowers cannot put their homes on the market without a short sale agreement, and this incorporates at least 11 million homeowners. And most important, banks just keep the supply down by refusing to put large stocks of the homes they own on the market.This constraint of supply is positive for home prices: the less the supply, the higher the price. Whether it’s positive for “housing” writ large is an entirely different question.

New Home Sales at 389,000 SAAR in September - The Census Bureau reports New Home Sales in September were at a seasonally adjusted annual rate (SAAR) of 389 thousand. This was up from a revised 368 thousand SAAR in August (revised down from 373 thousand). This is the highest level since April 2010 (tax credit related bounce). The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. Sales of new single-family houses in September 2012 were at a seasonally adjusted annual rate of 389,000 ... This is 5.7 percent above the revised August rate of 368,000 and is 27.1 percent above the September 2011 estimate of 306,000. The second graph shows New Home Months of Supply. The months of supply declined in September to 4.5 months. August was revised up to 4.6 months. This is now in the normal range (less than 6 months supply is normal).The seasonally adjusted estimate of new houses for sale at the end of September was 145,000. Starting in 1973 the Census Bureau broke inventory down into three categories: Not Started, Under Construction, and Completed. This graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale was at a record low 38,000 units in eptember. The combined total of completed and under construction is just above the record low since "under construction" is starting to increase.

US New-Home Sales Rise to Highest in 2½ Years — U.S. sales of new homes jumped last month to the highest level in more than two years, further evidence of a sustained housing recovery that could help lift the lackluster economy. The Commerce Department said Wednesday that new home sales rose 5.7 percent in September to a seasonally adjusted annual rate of 389,000. That’s up from a rate of 368,000 in August and the highest rate since April 2010, when a federal homebuyer tax credit inflated sales. Sales have risen 27.1 percent in the past year. That’s the strongest yearly gain since February, although sales are still well below healthy levels.The figures suggest the housing recovery is strengthening. The increase follows other reports that show home prices are rising more consistently, builders are starting to build more homes and sales of previously occupied homes are up in the past year.

New Home Sales Rise In September, But...The pace of new home sales in September rose nearly 6% vs. August and is up 27% vs. a year ago, the Census Bureau reports, offering more evidence that the housing market continues to improve. The volume of new sales is still far below the pre-Great Recession levels, but in the here and now it’s no trivial matter that residential real estate is on the mend. Housing, after all, is said to cast a long shadow on the economy through a variety of channels, and so every month of improvement brings a bit more confidence for thinking that the economy can continue to muddle forward. The news that newly minted homes sold at a faster pace last month isn’t all that surprising after last week’s bullish update on housing starts and permits for September. Today’s report on sales is more or less confirming what was already conspicuous: real estate made another solid step forward last month, strengthening a sector that suffered its worst collapse on record.

New Home Sales Highest Since April 2010... Until One Reads The Fine Print - On the surface, today's New Home Sales number was great (as always tends to happen just before a presidential election): a print of 389K seasonally adjusted annualized units sold in the US (ignoring the 37.3% collapse in the Midwest), which was a 5.7% increase from August's downward (unlike initial jobless claims, when one is attempting to report an increase, the last number is always revised downward) revised 368K (was 373K). This number was the highest adjusted print since April 2010, which makes for great headlines. So far so good, until one looks beneath the headline and finds that the 389K number (to be revised lower next month), is based on a September unadjusted number of 31K in actual sales, consistting of 3K sales in the Northeast and MidWest each, 16K in the South and 9K in the West. This is the unadjusted number, which as last week's BLS fiasco with Initial Claims showed, applying seasonal adjustments is the easiest and best way to manipulate any data set (for more see X-12 Arima's FAQ). This was the lowest print since February's 30K, the same as August's 31K, and well below the 35K from May 2012.

New Home Sales and Distressing Gap - New home sales have averaged 364,000 on an annual rate basis through September. That means sales are on pace to increase 19% from last year (and based on the last few months, sales will probably increase more than 20% this year).Here is a table showing sales and the change from the previous year since the peak in 2005:  But even with a 20%+ increase this year, 2012 will be the 3rd or 4th lowest year since the Census Bureau started tracking new home sales in 1963. This year will be above 2010 and 2011, and it is possible - with a fairly strong last three months - that sales will be close to, or even above, the 375,000 sales in 2009.This graph shows new home sales over the last few years. Although sales have increased this year, total sales are still very low. The two tax credit related "peaks" were at 418 thousand and 422 thousand, and sales are still below those levels. Given the current low level of sales, and current market conditions (supply and demand), sales will probably continue to increase over the next few years. I don't expect sales to increase to 2005 levels, but something close to 800,000 is possible once the number of distressed sales declines to more normal levels. Here is an update to the distressing gap graph.  This "distressing gap" graph that shows existing home sales (left axis) and new home sales (right axis) through September. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales. The flood of distressed sales has kept existing home sales elevated, and depressed new home sales since builders haven't been able to compete with the low prices of all the foreclosed properties.

Vital Signs Chart: New Home Sales - Sales of new homes accelerated in September. New single-family homes were sold at an annual rate of 389,000 last month, a 5.7% rise from August and a 27.1% increase from a year ago. Sales are at their highest level since April 2010 and home prices are rising. But sales are still far below the 800,000-plus pace that was seen in early 2007.

September Pending Home Sales Show Slight Improvement - Pending home sales were little changed in September but remain well above a year ago, according to the National Association of Realtors®.The Pending Home Sales Index,* a forward-looking indicator based on contract signings, edged up 0.3 percent to 99.5 in September from 99.2 in August and is 14.5 percent above September 2011 when it was 86.9. The data reflect contracts but not closings. Lawrence Yun , NAR chief economist, said pending home sales continue to hold a higher ground. "Home contract activity remains at an elevated level in contrast with recent years, but currently appears to be bouncing around in a narrow range," Yun said. "This means only minor movement is likely in near-term existing-home sales, but with positive underlying market fundamentals they should continue on an uptrend in 2013." Pending home sales have risen for 17 consecutive months on a year-over-year basis, leading to the solid recovery seen in closed existing-home sales this year. In September all regions were showing double-digit increases in contract activity from a year ago with the exception of the West, which is constrained by limited inventory.

Great Recession creates 4.8 million renters - The United States added 4.8 million renters in the past six years while losing 1.7 million owner households as the dynamics of the real estate space changed in the wake of the 2008 financial meltdown, according to the Mortgage Bankers Association.  The market experienced additional changes in the first nine months of 2012, creating unexpected outcomes in the housing finance sector, prompting the MBA to alter its forecast for 2012.  In brief, the MBA revised its estimate for 2012 mortgage originations to $1.7 trillion, up from $1.4 trillion a year earlier. Still, the trade group predicts total originations will taper off to $1.3 trillion in 2013, eventually hitting $1.1 trillion in 2014. However, mortgage rates are expected to hover below 4% through the mid-part of next year. The MBA expects gross domestic product will inch up from 1.6% in 2012 to 2% in 2013. Meanwhile, the forecast suggests existing home sales will increase from 4.6 million in 2012 to approximately 4.78 million next year. Still, economic growth is contingent on government tax policies and at least a temporary avoidance of the fiscal cliff in early 2013.

How Millennials Leaving Their Parents' Basements Could Save the Economy - Young people are the lazy, smelly scapegoat of the recession. They're not working, they're living at home, they're constantly complaining about their debt, they're not buying cars or houses, and they're not even having babies. But there is an outside chance that The Twentysomething, the media's favorite economic whipping boy, is poised to become the hero of the recovery, and it all comes down to two words. Household formation. In the last four years, millions of young people who otherwise would be starting families and independent lives have waited out the recession in the cozy bunker of their parents' basement. One in three twentysomethings reported moving back in with their parents for an extended period of time, according to a 2011 Pew report. Some went back to school. Some worked. Some did nothing. Whatever they were doing, they weren't moving out or starting new "households." Technically speaking, a "household" is any group of people living together: six roommates, a young couple, a family with kids, anything. By delaying their adulthood, these basement-dwellers were -- through no fault of their own -- holding back the economy by holding back household formation. But economists are increasingly confident that this generation is ready to migrate into the real economy.

Moody's: Echo boomers to reverse declining homeownership - It is a well known fact that homeownership in the US has been on a decline, a trend that started even before the financial crisis. Now Moody's predicts this trend will begin reversing next year.Their explanation has to do with demographics. Baby boomers are moving into the highest homeownership group by age, while "echo boomers" (children of baby boomers) are getting to the age at which they are significantly more likely to own a home than the younger age group. Moodys: - Demographics will also generate much of the gain in homeownership over the next decade, with a growing share of households aging into the highest homeownership groups. Baby-boomers are aging into the 65 and older cohort, the age group with the highest homeownership rate, while echo boomers have entered the 30- to 45-year-old cohort, which traditionally makes the largest gains in homeownership. Historical data tends to support this assumption. The jump in ownership from the 25-29 cohort to the 30-34 is the sharpest - which is where echo boomers are now transitioning.

Highly Educated Have Biggest Debt Problems - It’s widely accepted that unscrupulous bankers tricked unknowing consumers into loans they could not afford, leading to the financial crisis. No doubt, plenty of that occurred—underscored Wednesday with a $1 billion federal suit against Bank of America’s mortgage arm Countrywide Financial.  But it turns out the “victims” were not, by and large, unsophisticated rubes. A new study finds that highly educated Americans were most likely to take on unmanageable debt in the pre-crisis years. What’s more, gross personal financial mismanagement occurred across the population and not just in the mortgage market and not just among the unsophisticated.The study draws a line at the point where monthly payment on household debt equals 40% of income. That’s where default or bankruptcy becomes most likely should the household experience a decline in income, say researchers led by Sherman Hanna, professor of consumer sciences at Ohio State University. Overall, the percentage of Americans exceeding this 40% threshold jumped to 27% in 2008, from 17% in 1992. College graduates were more likely to be in this group than those without a degree, according to the study. Those describing themselves as optimistic about the future also were among the most likely to have unmanageable debts, the study found.

Are US households about to re-lever? That's the implication of CBO's latest forecast - The latest Congressional Budget Office (CBO) projection for the US economy and the agency's forecast for the trajectory of US budget deficit seem inconsistent with one another. The CBO projects the US federal budget deficit to go from 7.3% in 2012 to 1.2% in 2015. That's an incredible rate of fiscal consolidation in just 3 years.How is that possible? Surely such contraction in government spending and tax increases (a form of "fiscal cliff") should do some serious damage to the GDP growth. The CBO indeed projects that the US will undergo a recession in 2013 as a result of these cuts, but according to the agency, growth will accelerate from that point on. One year of pain and the problem is "solved". The projected average real growth for the 2014-2017 period is 4.3%! In fact the CBO's base case scenario forecasts the US rapidly closing the so-called output gap (after 2013), with the "Potential GDP" based on the aggressive extrapolation from the bubble years (see discussion).According to the latest analysis by the Levy Economics Institute (h/t Kostas Kalevras), the only way this is possible is if the US private sector, particularly the consumer, goes on a massive borrowing spree - re-leveraging to levels not seen even during the bubble years. Levy Economics Institute: - Given net exports and fiscal policy, if the economy has to reach the growth rates projected by the CBO, the gap in demand can only be filled by an increase in domestic investment and consumption fuelled by borrowing.

Are You Better Off Than You Were (1 or 4) Years Ago? -Recall the circumstances of what was going on 4 years ago: A freefall caused by frozen credit markets, and a stock market mid-crash. Perhaps the better question — and what polling indicates Americans care about — refers to the more recent trend of the economy. We can explore that in many ways, via employment, income, inflation, etc. For our purposes — and with all due respect to Jack Welch — let’s have a look at state-by-state Unemployment Rates. We saw the final Regional & State Unemployment Report from BLS last week that we’ll get to see before November 6 elections. As noted in the report: “Forty-one states and the District of Columbia recorded unemployment rate decreases, six states posted rate increases, and three states had no change, the U.S. Bureau of Labor Statistics reported today. Forty-four states and the District of Columbia registered unemployment rate decreases from a year earlier, while six states experienced increases. The national jobless rate decreased to 7.8 percent from August and was 1.2 percentage points lower than in September 2011.”Let’s take a look at how state-by-state unemployment has fared on both fronts:

Survey: 40 Percent Of Americans Have $500 Or Less In Savings - A survey of about 1,100 Americans finds that more than 4-in-10 respondents admit they don’t have more than $500 in readily accessible savings. The survey is a kind of departure for, a website that compares credit card deals. Not respondents all were poor. Some had big houses, big mortgages or 401(k)s, but still no more than five Benjamins to rub together right now. Jill Michal, president and CEO of the United Way of Greater Philadelphia and Southern New Jersey, reacts to the lack of liquid assets. “It doesn’t shock me, but it does scare me. You know, we often say that the reason so many people fall off the edge in a tough economy is that they’re standing way too close to it, and I think this is a perfect demonstration of that.”

Amid Falling Profit, McDonald's to Revisit 'Dollar Menu' - McDonald's Corp. reported a 3.5% decline in third-quarter earnings as sales slowed more dramatically than expected because of a sluggish economy and a disappointing marketing campaign.  "We face softening demand, heightened competition and rising costs in many of our markets," Chief Financial Officer Pete Bensen said. In a weaker economy, customers tend to stop getting extras like drinks and desserts and premium items like Angus burgers, which all offer higher profits to McDonald's. Plus, they may not go out to eat as frequently.  "We're going back to talk of the Dollar Menu," Mr. Thompson said

Consumer Sentiment Pulls Back a Bit, Still up From September - U.S. consumers gave back a little confidence but still maintain a relatively upbeat view in the economy through the end of October, according to data released Friday. The Thomson-Reuters/University of Michigan consumer sentiment index’s final reading for October came in at 82.6, according to an economist who has seen the report. The index had jumped to 83.1 in early October–the highest reading since September 2007–from a final September reading of 78.3. Economists surveyed by Dow Jones Newswires had expected the final October reading to remain at 83.1.

Michigan Consumer Sentiment: Slightly Below Consensus But Highest Monthly Final Since September 2007 - The University of Michigan Consumer Sentiment final number for October came in at 82.6, slightly off the October preliminary of 83.1, but well above last month's final level of 78.3. The consensus matched the 83.1 preliminary sentiment report, although's own forecast for the October final was closer to the mark at 82.5. Despite the slight miss from the forecast, today's report is the highest monthly final since September 2007. See the chart below for a long-term perspective on this widely watched index. Because the sentiment index has trended upward since its inception in 1978, I've added a linear regression to help understand the pattern of reversion to the trend. I've also highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy. To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is only 3% below the average reading (arithmetic mean), 2% below the geometric mean, and 2% below the regression line on the chart above. The current index level is at the 38th percentile of the 418 monthly data points in this series.

AIA: Architecture Billings Index increases in September - Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.  From AIA: Increase for Architecture Billings Index :The American Institute of Architects (AIA) reported the September ABI score was 51.6, up from the mark of 50.2 in August. This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 57.3, compared to a mark of 57.2 the previous month. Sector index breakdown: multi-family residential (57.3), institutional (51.0), commercial / industrial (48.4), mixed practice (47.8)  This graph shows the Architecture Billings Index since 1996. The index was at 51.6 in September, up from 50.2 in August. Anything above 50 indicates expansion in demand for architects' services. According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. This suggests increase in CRE investment next year (it will be some time before investment in offices and malls increases).

DOT: Vehicle Miles Driven increased 1.2% in August - The Department of Transportation (DOT) reported Friday: Travel on all roads and streets changed by 1.2% (3.0 billion vehicle miles) for August 2012 as compared with August 2011. Travel for the month is estimated to be 262.4 billion vehicle miles. Cumulative Travel for 2012 changed by 0.9% (17.8 billion vehicle miles). The following graph shows the rolling 12 month total vehicle miles driven.  The rolling 12 month total is still mostly moving sideways. In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.  Currently miles driven has been below the previous peak for 57 months - and still counting.  The second graph shows the year-over-year change from the same month in the previous year. Gasoline prices were up in August compared to August 2011. In August 2012, gasoline averaged of $3.78 per gallon according to the EIA. Last year, prices in August averaged $3.70 per gallon - but even with the increase in gasoline prices, miles driven increased year-over-year in August.Just looking at gasoline prices suggest miles driven will be down in September - especially with the very high prices in California. Nationally gasoline prices averaged $3.91 in September, up sharply from $3.67 a year ago

Vehicle Miles Driven: Population-Adjusted Remains Near Post-Crisis Low - The Department of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through August. Travel on all roads and streets changed by 1.2% (3.0 billion vehicle miles) for August 2012 as compared with August 2011. The 12-month moving average of miles driven increased a tiny 0.2% from August a year ago (PDF report). And the civilian population-adjusted data (age 16-and-over) continues to hover at its post-crisis trough. Here is a chart that illustrates this data series from its inception in 1970. I'm plotting the "Moving 12-Month Total on ALL Roads," as the DOT terms it. See Figure 1 in the PDF report, which charts the data from 1987. My start date is 1971 because I'm incorporating all the available data from the DOT spreadsheets.

U.S. Energy Trade Group Says Economy Sucks – Survey Proves It - The American Petroleum Institute said poor economic performance was pushing demand for petroleum products downward in the United States. Meanwhile, a survey published Monday by the Pew Research Center finds that a growing number of younger Americans are concerned about their long-term economic welfare despite emerging signs of recovery. API, in its latest market assessment, found those fears spilled over to the U.S. petroleum sector, where demand was down nearly 4 percent compared to last year. A national survey of more than 2,500 adults by the Pew Research Center found a three-year stock rally and steady signs of economic improvement did little to allay concerns about long-term economic prospects for adults between the ages of 36 and 40. More than 50 percent of those interviewed said they had little confidence their income will keep them going into retirement. That represents a "major shift" in demographics, as about 34 percent of those respondents moving closer to retirement age expressed similar concerns.For its part, API said that, for September, petroleum deliveries, a key indicator of market demand, fell to 18.2 million barrels per day, a 3.8 percent decline compared to last year and the second-lowest level for the month since 1996."The September demand numbers indicate there’s still substantial weakness in the economy," said API chief economist John Felmy.  "While manufacturing and employment have improved some, we’ve yet to see strong momentum developing."

Gasoline Prices down 8 cents over last 2 weeks --From Reuters: Average U.S. retail gas prices drop 8 cents in two weeks: survey Gasoline prices averaged $3.7529 per gallon on October 19, down from $3.8375 on October 5, Trilby Lundberg, editor of the Lundberg Survey, said....Lundberg said further declines in retail gas prices are expected if the cost of crude oil does not rise substantially. She added that in California, gasoline prices could have a "dramatic crash" after refinery problems caused a spike two weeks ago. Those of us in California are still waiting for the "dramatic crash"! We are still paying well over $4 per gallon because of the recent refinery issues (I filled up Friday and paid $4.50 per gallon, but it looks like prices have fallen further over the last 2 days). Using the calculator from Professor Hamilton, and the current price of Brent crude oil, the national average should be around $3.60 per gallon. That is about 8 cents below the current level according to, and I expect prices to fall further. Note: Brent crude spot prices is at $110.76 per barrel (WTI is down to $90.05)

Weekly Gasoline Update: Major Price Declines - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data. Gasoline prices at the pump eased dramatically last week. Rounded to the penny, the average for Regular dropped 13 cents and Premium 12 cents. Regular is up 46 and Premium 49 cents from their interim weekly lows in the December 19, 2011 EIA report. This is the biggest weekly decline for Regular since the 18-cent drop the week before Thanksgiving in 2008. As I write this, shows only three states (Hawaii, California and Alaska) with the average price of gasoline above $4. That's down from seven last week. Another 4 states have prices above $3.90.

Relief at the Pump Is Here: Biggest Drop in Gas Prices in Years - Around the country over the past week, gas prices have been dropping nearly 2¢ per day, on average. At this pace, by next summer, gas will be free!  OK, so that’s not likely to happen. But the latest Energy Information Administration report indicates that the long-awaited decline in gas prices is finally upon us. For the week ending on October 22, the national average for a gallon of regular was down 13.2¢. That, according to, is the largest decline in well over a year. Some states that had seen prices soar in early October are now the beneficiaries of sharp declines: Michigan prices are down 26¢, while a gallon costs 19¢ less in California than it did a week ago. All of this must be kept in perspective, though. According to the AAA Fuel Gauge Report, fuel still remains exceptionally expensive even after last week’s price plummet. The current national average, $3.648 per gallon as of Tuesday, is nearly 19¢ more than the average at this time last year ($3.456). In California, according to the Los Angeles Times, drivers are paying all-time highs for this time of year, even after prices dipped around 25¢ over a two-week span.

Vital Signs Chart: Gas Prices Are Falling - Gasoline prices are falling along with the price of crude oil. The average retail price of a gallon of regular gas in the U.S. stood at $3.687, down just over 16 cents from two weeks ago. Concerns about weaker global demand are pushing down the price of oil, the biggest determinant of retail gasoline costs. Also, gasoline supplies are starting to recover from refinery disruptions.

Central Atlantic Manufacturing Activity Contracts - Manufacturers in the central Atlantic region say activity is contracting this month, the Federal Reserve Bank of Richmond reported Tuesday. The service sector also experienced deteriorating conditions, but is still expanding. The Richmond Fed’s manufacturing current business conditions index fell to -7 down from 4 in September but a bit better than -9 in August. Numbers above zero indicate expanding activity. Two other regional Fed surveys released last week gave mixed reports on factory activity. The New York Fed said manufacturers in its district are still contracting this month. The Philadelphia Fed reported an expansion in its area factory sector in October after five months of contraction.

Richmod Fed Mfg Survey indicates contraction in October - From the Richmond Fed: Manufacturing Activity Pulled Back in October; Optimism Wanes; Manufacturing activity in the central Atlantic region pulled back in October after improving somewhat last month, according to the Richmond Fed's latest survey. The seasonally adjusted index of overall activity was pushed lower as all broad indicators of activity — shipments, new orders and employment — were in negative territory....Looking forward, assessments of business prospects for the next six months were less optimistic in October. Contacts at more firms anticipated that new orders, backlogs, capacity utilization, and vendor lead-times will grow more slowly than anticipated a month ago....In October, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — lost eleven points to −7 from September's reading of 4. Among the index's components, shipments fell eighteen points to −9, new orders moved down thirteen points to finish at −6, and the jobs index held steady at −5. This suggests contraction in manufacturing activity in the central Atlantic region. It appears some of this contraction may be due to the European recession and reduced exports to Europe.

Richmond Fed Manufacturing Composite: A Turn for the Worse - This particular Fed region represents Virginia, Maryland, the Carolinas, the District of Columbia and most of West Virginia.  The complete data series behind today's Richmond Fed manufacturing report (available here), which dates from November 1993. The chart below illustrates the 21st century behavior of the diffusion index that summarizes the individual components. Because of its highly volatile nature of this index, I like to include a 3-month moving average to facilitate the identification of trends (now at -4). Today the manufacturing composite took a turn for the worse, dropping to -7 from last month's sortie into expansion territory at 4 following three months of contraction, including a post-recession low of -17 in July. The trend since July had been of a month of less contraction followed by a last month's return to expansion. Today's number reverses the latest trend. Here is a key excerpt from the Richmond Fed's overview. Manufacturing activity in the central Atlantic region pulled back in October after improving somewhat last month, according to the Richmond Fed's latest survey. The seasonally adjusted index of overall activity was pushed lower as all broad indicators of activity — shipments, new orders and employment — were in negative territory. Other indicators also suggested additional softness. Capacity utilization turned negative, while backlogs remained negative but improved from its September reading. Moreover, the gauge for delivery times changed little, while raw materials inventories grew at a slightly quicker pace, and growth in finished goods edged lower.

Plains States’ Manufacturing Contracts - Manufacturing activity in the Plains states contracted for the first time this year and expectations tumbled, according to a report released Thursday by the Federal Reserve Bank of Kansas City in Missouri.The Kansas City Fed’s manufacturing composite index–an average of the indexes covering production, new orders, employment, delivery times and raw-materials inventories–dropped to -4 this month from 2 in September.  October’s is the first negative reading since a -2 in December 2011. The index reached as high as 13 in February. On a year-over-year comparison, the composite index remained at 11. Readings above zero denote expansion.

Kansas City Fed October Manufacturing Composite Index Drops to -4  - Manufacturing activity in the Plains states contracted for the first time this year and expectations tumbled, according to a report released Thursday by the Federal Reserve Bank of Kansas City in Missouri. The Kansas City Fed's manufacturing composite index--an average of the indexes covering production, new orders, employment, delivery times and raw-materials inventories--dropped to -4 this month from 2 in September. October's is the first negative reading since a -2 in December 2011. The index reached as high as 13 in February. On a year-over-year comparison, the composite index remained at 11. Readings above zero denote expansion. "We saw factories pull back this month for the first time in quite a while, which many firms attributed to the impact of the uncertain political and fiscal situation on customers' willingness to order," said Chad Wilkerson, an economist at the bank. The Kansas City report joins other regional Fed surveys that show the U.S. manufacturing sector is barely expanding or showing outright contraction this month. The problem is weak demand. Earlier Thursday, the Commerce Department reported total U.S. durable goods orders jumped 9.9% in September, but that did not offset the 13.1% drop posted in August and was caused by swings in aircraft demand.

Without Demand, Manufacturing Can’t Pump Up Output or Jobs - No matter the state, one consistency in the regional Federal Reserve factory surveys is the falloff in orders this month. With four of the five Fed reports already released (the Dallas Fed’s report is due next Monday), the readings on new orders are all negative. Surveys done by the Fed banks of New York, Philadelphia, Richmond and Kansas City found more respondents say orders are falling than the share reporting increased demand. October demand problems follow weak reports about third-quarter ordering. The Commerce Department reported Thursday that new durable goods orders jumped 9.9% in September, but the gain didn’t offset totally the 13.1% plunge posted in August.

Durable Goods Orders Partially Recover From Last Month's Major Dip -  The October Advance Report on September Durable Goods was released this morning by the Census Bureau. Here is the summary on new orders:  New orders for manufactured durable goods in September increased $19.6 billion or 9.9 percent to $218.2 billion, the U.S. Census Bureau announced today. This increase, up four of the last five months, followed a 13.1 percent August decrease. Excluding transportation, new orders increased 2.0 percent. Excluding defense, new orders increased 9.1 percent.  Transportation equipment, up five of the last six months, had the largest increase, $16.8 billion or 31.7 percent to $69.6 billion. Download full PDF  New orders at 9.9 percent was between the consensus of 8.0 percent and's more optimistic 12.0 percent. Essentially the September bounce is a partial recovery from the 13.1 percent major dip in August. If we exclude both transportation and defense, "core" durable goods orders rose 0.4 percent, up from the previous month's 0.2 percent. The first chart is an overlay of durable goods new orders and the S&P 500. An overlay with unemployment (inverted) also shows some correlation. An overlay with GDP shows some disconnect in recent quarters between the recovery in new orders and the slowdown in GDP — another comparison we'll want to watch closely.

Durable-Goods Orders Rise as Aircraft Demand Rebounds - Orders for long-lasting manufactured goods posted their largest gain in more than two-and-half years last month, but underlying figures suggest slow economic growth as businesses remain cautious before the presidential election.Manufacturers' orders for durable goods, such as televisions and cars, increased by 9.9% last month to a seasonally adjusted $218.24 billion, the Commerce Department said Thursday. The big gain was driven by a surge in volatile airplane orders and wasn't enough to make up for an abysmal August, when orders dropped by 13.1%. Civilian aircraft orders climbed to $14.66 billion in September from $535 million the previous month, driving the overall gain. Boeing received orders for 143 planes last month, up from only one in August. Excluding transportation, September orders were up a solid 2.0%. Demand rose for machinery and metals, and fell for computers and communications equipment. But a key barometer of business investment—nondefense capital goods orders excluding aircraft—was flat in September and barely grew in August, a sign that companies remain cautious and a potential drag on third-quarter economic growth figures due Friday. J.P. Morgan Chase lowered its forecast for third-quarter gross domestic product growth to 1.6% from 1.8% due to the weak investment numbers. "The September durables report was a big disappointment. In particular, the weakness in the capital goods figures leaves intact our concerns regarding the capex outlook,"

The "Real" Goods on the Durable Goods Report - Earlier today I posted an update on the October Advance Report on September Durable Goods Orders. This Census Bureau series dates from 1992 and is not adjusted for either population growth or inflation. Let's now review the same data with two adjustments. In the charts below the red line shows the goods orders divided by the Census Bureau's monthly population data, giving us durable goods orders per capita. The blue line goes a step further and adjusts for inflation based on the Producer Price Index, chained in today's dollar value. This gives us the "real" durable goods orders per capita. The snapshots below offer an objective historical context in which to evaluate the standard reports on the nominal monthly data.Economists frequently study this indicator excluding Transportation or Defense or both. Just how big are these two subcomponents? Here is a stacked area chart to illustrate the relative sizes over time. Here is the first chart, repeated this time ex Transportation. Now we'll exclude Defense orders. And now we'll exclude both Transportation and Defense for a better look at "core" durable goods orders.

Today's Economic Reports Bring A Sigh Of Relief - Today's updates on jobless claims and durable goods orders bring good news, or at least good relative to the worst fears inspired by recent data points in these series. Let's start with durable goods orders, which rebounded in September, reversing the steep decline posted in August, the Census Bureau reports. Last month's 9.9% rise is the highest monthly increase since January 2010, although most of the surge was due to the volatile transport sector. Still, durable goods orders ex-transport rose 2.0% last, suggesting that demand generally improved in September. One exception is the market for capital goods, which continues to show signs of stagnating. New orders for durable goods ex aircraft and defense—business investment—was flat last month, which implies that corporate America remains skittish on the outlook for the economy. The good news is that durable goods orders generally perked up last month on a year-over-year basis. It may be noise, but new orders rose 2.5% in September vs. the same time a year ago. That's encouraging after August's 6.7% drop on an annual basis—the first red ink by this benchmark in more than two years.

Vital Signs Chart: Companies Holding Back - Companies are holding off on big-ticket purchases. Orders for nondefense capital goods excluding aircraft — a proxy for business spending on equipment and software — were flat in September, after a small rise in August and a sizable drop in July. Businesses say they are skittish about weaker economies abroad as well as looming tax increases and government spending cuts in the U.S.

China’s Doldrums Put Pressure on U.S. Exporters - As China’s economy cools, American exporters are increasingly feeling the chill. Cummins, the big Indiana engine maker, lowered its revenue forecast earlier this month and said it would eliminate 1,000 to 1,500 jobs by the end of the year, citing weak demand from China as a major reason. Schnitzer Steel Industries, a Portland, Ore., company that is one of the nation’s biggest metal recyclers, is cutting 300 jobs, or 7 percent of its work force, as scrap exports to China plunge. And on Monday, Caterpillar reported lower sales in China and cut its global outlook for 2012. Job reductions are hitting industries like mining, heavy machinery and scrap metal that prospered as China boomed, illustrating some of the risks to the broader American economy if growth continues to slow in what is now the world’s second-largest economy. Last week the Chinese government announced that gross domestic product grew at an annual rate of 7.4 percent in the third quarter, the slowest pace in more than three years. Even as the presidential candidates try to outdo each other in promising to get tough on Chinese exports to protect American jobs, experts say the more immediate threat to American workers may actually be the slowing of sales to China, which has bid up the price of much of what the United States sent overseas in recent years.

We Should Stop Blaming China for our Economic Problems: The second presidential debate featured Mitt Romney and Barack Obama going nose to nose over who would be tougher on China and other countries over their unfair trade practices. But by adopting a narrative that places the blame for our problems on other countries, President Obama is playing into the hands of those who’d like to make significant cuts to social insurance programs that protect working class households. ...Blaming our troubles on external causes and implying that all will be well once these causes are eliminated allows the wealthy winners from globalization to escape the taxes that are needed to provide the social protections workers need in the global economy, and to ensure that the gains from globalization are shared equitably. President Obama needs to make it clear that helping the working class will take a lot more than just forcing China to change its ways... [It] will require us to look inward at our own character as a nation instead of blaming others. Pointing fingers at other countries and demanding change may be politically effective, but the real change begins at home. 

Romney’s Whooper About China  - He's kidding, right? Did I just hear Mitt Romney say, "I would do nothing to hurt the US auto industry" Really? REALLY? Here's the facts, ma'am: As I reported in this week's Nation magazine cover story "Mitt Romney's Bail-out Bonanza", the Romneys are in a special partnership with the vulture fund that bought Delphi, the former GM auto parts division. The Romney vulture fund investment syndicate shipped every single UAW production job – EVERY job – to China. Just after Nation broke the story, Washington newsletter The Hill received the Romneys admission of profiteering: "Romney's campaign did not deny that he profited from the auto bailout in an email to The Hill, but it said the the report showed the Detroit intervention was 'misguided.'" The truth? On June 1, 2009, the Obama Administration announced that Detroit Piston's owner Tom Gores, GM and the US Treasury would buy back Delphi. The plan called for saving 15 of 29 Delphi factories in the US. Then the vulture funds pounced.   [Watch our Democracy Now! report on the Romney group's auto plant closures.]

US results raise fresh fears for economy - US companies have warned of weaker global demand and are cutting jobs, raising fresh fears about the health of the world economy and sending shares tumbling. DuPont, Xerox, UPS and 3M were among the companies that warned of difficult trading conditions, including faltering demand in some Asian markets and Europe’s continuing crisis. Ursula Burns, chief executive of Xerox, said the printing and business services company had been hit by “widespread economic uncertainty, especially in the United States”, and warned: “Economic challenges will continue putting additional pressure on the business.” Scott Davis, chief executive of UPS, said the freight company was operating in “an environment of slowing global trade”. Dow Chemical, the US chemicals group, said after the market close it was cutting 2,400 jobs, 5 per cent of its global workforce, and shutting 20 plants to save $500m per year, and cutting capital spending by a further $500m. It identified seven larger plants being closed: four in Europe, two in the US and one in Japan.

ATA Trucking Index increases in September - Note: ATA Chief Economist Bob Costello says, for trucking, the pickup in housing is offsetting the "flattening in manufacturing output". From ATA: ATA Truck Tonnage Index Rose 0.4% in September: The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 0.4% in September after falling 0.9% in August. In September, the SA index equaled 118.7 (2000=100). The level in September was the same as in January 2012, so the index has been on a flat trend-line over the past 9 months. Compared with September 2011, the SA index was 2.4% higher, the smallest year-over-year increase since December 2009. ...“The year-over-year deceleration in tonnage continued during September, although I was encouraged that the seasonally adjusted index edged higher from August,” ATA Chief Economist Bob Costello said. Costello noted again this month that the acceleration in housing starts, which is helping truck tonnage, is being countered by a flattening in manufacturing output and elevated inventories throughout the supply chain."

Vital Signs Chart: Truck Shipments Inch Up - The amount of goods being shipped by truck inched up in September. The American Trucking Associations’ index of truck shipments, by weight, climbed a seasonally adjusted 0.4% from the previous month, as consumers stepped up their shopping. However, shipments are at the same level as they were in January, reflecting an economy that hasn’t gained momentum this year.

Fed: State Coincident Indexes in September show improvement - From the Philly Fed: The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for September 2012. In the past month, the indexes increased in 39 states, decreased in five states, and remained stable in six states, for a one-month diffusion index of 68. Over the past three months, the indexes increased in 37 states, decreased in 11 states, and remained stable in two states, for a three-month diffusion index of 52. For comparison purposes, the Philadelphia Fed has also developed a similar coincident index for the entire United States. The Philadelphia Fed’s U.S. index rose 0.2 percent in September and 0.6 percent over the past three months. This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged). In September, 41 states had increasing activity, up from 33 in August (including minor increases). This is the second consecutive year with a weak spot during the summer, and improvement towards the end of the year. Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession. The map was all green earlier this year and is starting to turn mostly green again.

ADP overhauls U.S. private payrolls report - A monthly reading of U.S. private sector employment will undergo changes to put it more in line with the more closely watched government non-farm payrolls report. Automatic Data Processing (ADP.O) said on Wednesday it had made the changes to its private job market report as part of a new partnership with Moody's Analytics. While economists use the report to fine-tune their labor market forecasts, ADP has had a spotty track record of predicting the initial reading for non-farm payrolls. The report will include an increased number of industry categories and business sizes, ADP said. It will use a larger sample size and new methodology to further align it with the final revised readings from the Bureau of Labor Statistics. ADP's monthly figures are typically released a couple days ahead of the government's report.

Dogged By Accuracy Questions, ADP Will Revamp Jobs Report - Payroll giant ADP will expand and change the formulation of its monthly employment data after several months of questions about the figures’ accuracy. The report, which includes a new partnership with credit-rating provider Moody’s Analytics, will give a more detailed breakdown of the data as well as a new methodology to better align “with the final, revised U.S. Bureau of Labor Statistics (BLS) numbers.” The first new report will come next month and estimate October’s employment growth. While ADP estimates that its jobs data almost always matches the finalized government numbers—a 96% correlation since 2006, according to ADP—this year’s volatile jobs data has cast some doubts on whether ADP is a useful indicator. ADP’s report on hiring by private businesses is typically released two days before the official data. This release alone often causes a shift in the markets, and is later used to make last-minute tweaks to unemployment and job-growth estimates.

ADP making changes to monthly employment report, will now team on it with Moody’s Analytics - Automatic Data Processing Inc. is making some changes to its monthly U.S. employment report, including adding more industry categories. The report will now increase to five industries from three industries. The five industries — construction, financial activities, manufacturing, professional and business services and trade, transportation and utilities — make up more than 50 percent of all U.S. private sector employment, according to ADP. The company said Wednesday that the number of business sizes on the ADP National Employment Report will also be expanded to five company-size classes from three company-size classes. A new methodology that will better align with the final, revised U.S. Bureau of Labor Statistics numbers will be implemented as well, ADP said. In addition, the sample size used to create the report is being increased.

The Myth Of Job Creation - The exchange began with a question about the offshoring of American jobs. Part of Mr. Obama’s answer was that federal investments in education, science and research would help to ensure that companies invest and hire in the United States. Mr. Romney interrupted. “Government does not create jobs,” he said. “Government does not create jobs.”  It was a decidedly crabbed response to a seemingly uncontroversial observation, and yet Mr. Obama took the bait. He said his political opponents had long harped on “this notion that I think government creates jobs, that that somehow is the answer. That’s not what I believe.” He went on to praise free enterprise and to say that government’s role is to create the conditions for everyone to have a fair shot at success. So, they agree. Government does not create jobs. Except that it does, millions of them — including teachers, police officers, firefighters, soldiers, sailors, astronauts, epidemiologists, antiterrorism agents, park rangers, diplomats, governors (Mr. Romney’s old job) and congressmen. Public-sector job loss means trouble for everyone. Government jobs are crucial to education, public health and safety, environmental protection, defense, homeland security and myriad other functions that the private sector cannot fulfill. They are also critical for private-sector job growth in two fundamental ways. First, the government gets its supplies from private-sector companies, which is why Republican senators like John McCain have been frantically warning about the dire effects on job creation if Congress moves ahead with planned military spending cuts. (Republicans insisted upon the cuts as part of their ill-advised showdown over the debt ceiling.) Second, government spending on supplies and salaries reverberates strongly through the economy, increasing demand and with it, employment.

The Government Creates Jobs - There are a few things politicians of all stripes say that should drive you as nuts as they drive me.  One I’ve been inveighing against since OTE was born is the bass akwards formulation: “just like families, the federal government must tighten its belt in hard times” (the subject of one of my first posts).  This one’s particularly invidious both because it makes folksy sense and because it’s precisely because families are tightening that the public sector, specifically to federal gov’t, needs to loosen. But challenging that damaging aphorism for first place is this common point of agreement between politicians as diverse as Obama and Romney: the government doesn’t create jobs. That’s not just patent nonsense.  It’s economically damaging in lots of ways. Every month the jobs report prints the numbers showing that this assertion is off by, at last count, 22 million or 16% of total payrolls:

  • Government Jobs in Sept 2012:
  • Federal: 3 million
    State: 5 million
    Local: 14 million - Local Education: 8 million

Yet, as this spot-on editorial from the NYT reports this morning, in the last debate, both candidates tripped over each other to deny that government created jobs.

Robert Samuelson on government jobs: They exist, but people who recognize them are like flat-earthers - It’s hard to improve upon Dean Baker’s response to Robert Samuelson’s deeply confused column about government jobs, but I’ll just add briefly here. It’s entirely clear that the whole discussion over “government creating jobs” sparked by President Obama’s closing statement in the second presidential debate is really about the role of public-sector hiring or cutbacks as something that either cushions or exacerbates the current problem of chronically high unemployment rates.  And it surely can’t really be about what Samuelson spends most of his column doing: wondering whether or not government jobs are really jobs. Government jobs are jobs, period. Nothing about the fact that they require “money to support [them]” or that public hiring can lead to “substituting public-sector workers for private-sector workers” changes this. As Baker notes, private-sector jobs “require money” to support them, and, there are plenty of times when rising private employment in one sector drives declining private employment in another. This all just seems too obvious to need pointing out. No, the issue is whether or not cutbacks to public-sector employment when the economy has lots of productive slack lead to net economy-wide job loss, and just how much. The answers to this are “they do,” and, “a lot.” Around 2.3 million is our estimate, cited by the New York Times.

The New Physiocrats - Krugman - Both  Dean Baker and Josh Bivens weigh in Robert Samuelson’s outburst at the New York Times for saying that the government can too create jobs. (He went so far as to call it “flat-earth” thinking). Sadly, Samuelson’s attitude is widely shared — even, at least rhetorically, by Barack Obama.What can it possibly mean to say that only the private sector can create jobs? It could mean that government jobs aren’t “real” jobs — presumably that they don’t supply something of value to society. Samuelson disavows that position, I think — and rightly so. After all, the bulk of government workers are in education, protective services, and health. Do you really want to say that schoolteachers, firefighters, and nurses provide nothing of value?What then? Well, Samuelson argues that when the government adds jobs, these come at the expense of jobs elsewhere. This is manifestly not true when the economy is depressed; all the evidence on big multipliers amounts to saying that under current conditions government jobs create additional jobs in the private sector, rather than crowding them out. Under near-full-employment conditions, however, it’s true that expanding government employment displaces other employment. But this is equally true of any expansion in private employment! Suppose a successful business expands, and adds worjers. How does it do that? By attracting customers away from rivals, or from other kinds of products; by attracting capital; by bidding away workers who might have found employment somewhere else. Unless your business expansion somehow leads to an increase in the labor force, simple arithmetic says that it didn’t add jobs. It may have created better jobs; it may have raised productivity; but more jobs, no.

Weekly U.S. Unemployment Aid Applications Fall to 369,000 - Weekly U.S. unemployment aid applications fall to 369,000, a level that points to modest hiring.  The Labor Department says unemployment benefit applications dropped by 23,000, from a revised 392,000 the previous week. The four-week average, a less volatile measure, rose to 368,000.The figures appear to have stabilized after being distorted in the previous two weeks by seasonal adjustment problems.Applications are a proxy for layoffs. Applications have fluctuated between 360,000 and 390,000 since January. At the same time, employers have added an average of nearly 150,000 jobs a month. That’s barely enough to lower the unemployment rate, which has declined from 8.3 percent to 7.8 percent this year.

Weekly Initial Unemployment Claims decline to 368,000 - The DOL reports: In the week ending October 20, the advance figure for seasonally adjusted initial claims was 369,000, a decrease of 23,000 from the previous week's revised figure of 392,000. The 4-week moving average was 368,000, an increase of 1,500 from the previous week's revised average of 366,500. The previous week was revised up from 388,000. The following graph shows the 4-week moving average of weekly claims since January 2000.The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 368,000. This is 5,000 above the cycle low for the 4-week average of 363,000 in March. Weekly claims were lower than the consensus forecast of 372,000. And here is a long term graph of weekly claims:

Weekly Unemployment Claims at 369K Back to Where We Were Three Weeks Ago - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 369,000 new claims number was a 23,000 decrease from the previous week's upward revision of 3,000. Today's number essentially gets us back into the realm of reality after a two-week anomaly -- underreported claims for the week of October 6th (342K), which were counted in the week of October 13th (392K). In fact, today's 369K is identical to the number reported three weeks ago before the reporting glitch. The less volatile and closely watched four-week moving average, which is a better indicator of the recent trend, is at 368,000, up 1,500 from last week. Here is the official statement from the Department of Labor:  In the week ending October 20, the advance figure for seasonally adjusted initial claims was 369,000, a decrease of 23,000 from the previous week's revised figure of 392,000. The 4-week moving average was 368,000, an increase of 1,500 from the previous week's revised average of 366,500.  The advance seasonally adjusted insured unemployment rate was 2.5 percent for the week ending October 13, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending October 13 was 3,254,000, a decrease of 2,000 from the preceding week's revised level of 3,256,000. The 4-week moving average was 3,269,750, a decrease of 6,750 from the preceding week's revised average of 3,276,500. Here is a close look at the data over the past few years (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.

Firings Highest Since 2010 as Ford to Dow Face Slump - North American companies have announced plans to eliminate more than 62,600 positions at home and abroad since Sept. 1, the biggest two-month drop since the start of 2010, according to data compiled by Bloomberg. Firings total 158,100 so far this year, more than the 129,000 job cuts in the same period in 2011. Ford is closing its first European car-assembly factories in 10 years and Colgate-Palmolive Co. (CL) said today it will cut 2,300 jobs, adding to more than 5,500 cuts announced by Dow Chemical, DuPont Co. and Advanced Micro Devices Inc. (AMD) in the past week. The reductions coincide with a majority of U.S. companies missing analysts’ third-quarter revenue estimates and a focus on jobs in the final weeks of the U.S. presidential campaign. “Companies are saying, ‘Let’s not build up inventories, let’s be lean and mean until we know until we have a better idea of what 2013 is going to look like,’” said Janna Sampson, who helps manage more than $3 billion for Oakbrook Investments in Lisle, Illinois. “There is a fear now as companies see that the economic recovery is not picking up.” So far, out of 235 S&P 500 companies that have released third-quarter earnings, 137 have reported sales that trailed analysts’ estimates, according to data compiled by Bloomberg.

Chart Of The Day: 55 And Under? No Job For You - Nearly two years ago, and progressing to this day, we first observed (and subsequently even the mainstream media caught on) that America's labor force is slowly but surely converting itself from a full-time to part-time worker society. The reasons for this are obvious: to corporations, the benefits associated with employing part-time workers are countless: avoiding substantial benefits-related costs, evading long-term job contracts, hourly basis wages, and many others. In fact, as long as there is slack in the economy, and there will be for a long, long time as the shift in labor demand is now secular, regardless of what the Fed wants to admit, employers will have ever more leverage, while workers have less and less (and are forced to agree to any employment terms, as long as they get some paycheck at all). This much has been known. What has gotten far less prominence is that of the much trumpeted 4+ million jobs added since the trough in late 2009, virtually all the job additions have gone to (part-time) workers 55 years and over. Indeed, as the chart below shows, starting since the official NBER end of the recession in June 2009, the US has cumulatively added 2.9 million jobs. However, when broken down by age cohort, 3.5 million of these jobs have gone to US workers aged between 55 and 69. Another 729K have gone to recent college grads aged 20-24. What about those workers in their prime years: between 25 and 54 years of age? They have lost a total of 729,000 jobs since June 30, 2009!

The talent supply chain - I had an interesting discussion with a senior executive of Kelly Services that provided some very striking new perspectives on the world of work. Kelly Services is a global workforce solutions company, providing temporary and medium-term workers with a very wide range of specialized skills (link). One thing that was particularly striking is the fact that Kelly provides advanced technical and scientific expertise to corporations and government agencies as independent contractors. In fact, according to their website they have over 11,000 scientists and engineers available for placement. On any given day they have placed roughly 150,000 workers around the world, and are administering another 100,000 or so who are provided by independent contractors. The most striking part of our conversation is this. Our traditional thinking about a job and a career is badly out of date. We think of the normal work situation as fulltime longterm employment in a specific location and with a salary and benefits. But this situation isn't even the majority situation anymore. We know that a lot of employers don't offer benefits, but that isn't the big news. According to this executive, almost half of workers in the US economy are self employed or part-time or temporary. These workers don't have benefits usually, and they don't have job security. What they have is a specific set of talents to sell in a national or global market, and their standard of living depends entirely on the value of this set of talents.

How to think about work - Work defines a large portion of life in any society, traditional or modern.  How should we think about the social and economic forces that create "work"? What are the institutions and practices through which individuals use their bodies, brains, skills, and talents to create value within a given set of economic relationships? These questions are just as relevant in consideration of the medieval economy -- serfs and freemen, artisans, highwaymen, retainers, soldiers, the odd banker -- as they are for the contemporary economy.  So what does the division of labor look like in the contemporary economy? And how is it changing? The Bureau of Labor Statistics maintains a "Standard Occupational Classification System" encompassing tens of thousands of job types, organized into 23 major groups (link). (My own profession, philosophy professor, falls in category 25-1120 "Arts, Communications, and Humanities Teachers, Postsecondary".) Here is the table of major groups of occupations:The International Labour Organisation maintains a different classification system of occupations (link).  This system includes managers, professions, technicians and associate professionals, clerical support workers, service and sales workers, skilled agricultural, forestry, and fishery workers, craft and related trades workers, plant and machine operators and assemblers, elementary occupations, and military workers.

Work More, Make More? - Sometime this past summer, the average net worth of Canadians surpassed that of Americans. Adding insult to injury, Canadians have universal health care and a lower unemployment rate too.  But you know what really makes it sting? They barely even worked for it. The average employed Canadian works 85 hours fewer each year than the average American -- more than two full workweeks. And that may be the lesson that Canada has for the United States: Working 24/7 isn't the road to prosperity, much less happiness, and there are numbers to prove it. In fact, across rich countries, it turns out there's no close link between the average hours people put in at the office and how much they make. So go ahead: Take that vacation.  According to the OECD, the rich world's think tank, the average number of hours worked each year by someone employed in the United States is 1,787. In Britain, it's 1,625 hours -- or about 20 fewer working days. In Germany, the engine of Europe's economy, the average employee works just 1,413 hours a year -- that's more than 12 workweeks off. Nobody ever accuses Germans of being lazy; a lot of that is because the European Union mandates four weeks of paid vacation a year. But if you live in the United States, the government guarantees exactly zero paid vacation time. Thanks to the lack of any legal holiday requirement, nearly a quarter of workers get no paid vacation or holidays at all. Japan, the next stingiest among industrial countries, mandates 10 paid days off, with more the longer you have worked.

Federal Employees Paid Well Below Private Sector Counterparts - You often hear that union workers, particularly federal workers, are “overpaid.” You can produce a study making this case. But it will ultimately be an apples-to-oranges study.If you compare organized federal employees, many of whom have college degrees, to unorganized service-sector and retail workers, then yes, you will find higher wages in the public sector. But if you do an apples-to-apples comparison between public employees and their private-sector counterparts in related fields, you will find that the public sector is significantly undervalued.And because federal employees, at least, have suffered under a wage freeze that’s going on three years, that wage gap has increased.White-collar federal employees are underpaid on average by about 35 percent compared with the private sector, a widening of the “pay gap,” which stood at about 26 percent last year, an advisory group said Friday.The Federal Salary Council based that number on data from the Bureau of Labor Statistics that by law are supposed to be used in setting annual General Schedule pay raises [...]“This clearly shows that there is a pay gap and that federal employees are underpaid,” said J. David Cox, president of the American Federation of Government Employees and a council member. “Hopefully, we can get back to reasonable cost-of-living adjustments and work on the pay gap.”

Race for President Leaves Income Slump in Shadows - Taxes and government spending. Health care. Immigration. Financial regulation.They are the issues that have dominated the political debate in recent years and have played a prominent role in this presidential campaign. But in many ways they have obscured what is arguably the nation’s biggest challenge: breaking out of a decade of income stagnation that has afflicted the middle class and the poor and exacerbated inequality. Many of the bedrock assumptions of American culture — about work, progress, fairness and optimism — are being shaken as successive generations worry about the prospect of declining living standards. No question, perhaps, is more central to the country’s global standing than whether the economy will perform better on that score in the future than it has in the recent past. The question has helped create a volatile period in American politics, with Democrats gaining large victories in 2006 and 2008, only to have Republicans return the favor in 2010. This year, economic anxiety, especially in industrial battlegrounds like Ohio, is driving the campaign strategies of both President Obama and Mitt Romney. The causes of income stagnation are varied and lack the political simplicity of calls to bring down the deficit or avert another Wall Street meltdown. They cannot be quickly remedied through legislation from Washington. The biggest causes, according to interviews with economists over the last several months, are not the issues that dominate the political debate. At the top of the list are the digital revolution, which has allowed machines to replace many forms of human labor, and the modern wave of globalization, which has allowed millions of low-wage workers around the world to begin competing with Americans.

The Uncomfortable Truth About American Wages - Job creation has rightly been the central economic issue of the last three years as the United States continues its recovery. But the problems with the job market are not entirely recent. The downturn also exacerbated longer-term challenges in the labor market that are driven by a variety of factors, including technological change, international trade and the decline of unions. Many of these forces have been around since the 19th century, but today, for what may be the first time in American history, we are failing to invest enough in our skills and productivity to stay ahead of these trends, and the impacts of this failure are reflected in the declining wages of many American workers. Because the role of women in the labor force has changed strikingly over the last 40 years, the problem is most evident in trends in male earnings. And, in fact, there has been a lot of talk about the stagnating wages of American male workers. Using conventional methods of analysis, the data show that the median earnings for prime-age (25-64) working men have declined slightly from 1970 to 2010, falling by 4 percent after adjusting for inflation.

Median Household Incomes: The "Real" Story - The traditional source of household income data is the Census Bureau, which publishes annual household income data each September for the previous year.Sentier Research, an organization that focuses on income and demographics, offers a more up-to-date glimpse of household incomes by accessing the Census Bureau data and publishing monthly updates. Sentier Research has now released its most recent update, data through September (available here as a PDF file). The data in their report differs from the Census Bureau's data in three key respects:

  1. It is a monthly rather than annual series, which gives a more granular view of trends.
  2. Their numbers are more current, the latest through September 2012. In September the Census Bureau released the 2011 annual numbers (going on nine months into the next year).
  3. Sentier Research uses the more familiar Consumer Price Index (CPI) for the inflation adjustment. The Census Bureau uses the little-known CPI-U-RS (RS stands for "research series") as the deflator for their annual data. For more on that topic, see this commentary.

Sentier makes the data available in Excel format for a small fee (here). I have used the latest data to create a pair of charts illustrating the nominal and real income trends during the 21st century.The first chart below chains the nominal values and real monthly values in September 2012 dollars. The red line illustrates the history of nominal median household income in today's dollars (as of the designated month). I've added callouts to show the latest value and the real monthly values for the January 2000 and the peak and post-peak trough in between.

Income stagnation: Stagnation by way of the Midwest | The Economist: THE New York Times' David Leonhardt wrote a nice piece a few days ago on the puzzling problem of stagnant median incomes in America. The real income of the median household peaked in 1999 at $54,932 and has since fallen back to a level first attained in about 1996—over a decade and a half without a real income gain. I thought it would be interesting to take a look at some of the geographic disparities in real income growth over that time period. At right you can see a look at the top and bottom ten states for real median household income growth for 1999-2007 and 1999-2011 (to illustrate the impact of the crisis). A few things stand out. Places that enjoyed strong real income growth over the past decade tend to either be large, sparsely populated plains states or states with a thriving energy industry (or both). Greater Boston seems to show up here quite strongly, and government appears to have buoyed Washington and Virginia. A bad real income performance seems to be strongly related to share of manufacturing in the economy. Summing over regions, however, it becomes clear just how much of the country's recent poor income performance can be chalked up to trends in the Midwest. From 1999 to 2011, the real median income dropped almost 9% for the country as a whole. In the Midwest, the decline was 16%. American households have had a rough decade or so, but the national statistics often obscure how much of that pain was focused on just one region of the country.

Putting It Into Perspective: One Week Of QE 3 In Minimum Wage Job Terms - For perspective purposes, below is a crate supporting $100MM in cash. The graphic below then shows how many minimum wage jobs this $100 million could fund (labor supply and demand and other "practical" stuff aside). In short, it takes 3500 minimum wage American workers one year to make $100 million. So how many minimum wage jobs could one week, forget one month, of the current $40 billion in QE 3, prefund? This much. And this is just one WEEK of QE 3. To visualize how many jobs the Fed could fund in one year starting with its outright monetization of $85 billion/month in January, in one full year, take all the groups of people shown above, and multiply by 100! And this is why America is not enamored with the Fed or with its bankers...

Incentive Effects of Higher Wages - My Atlantic column this week is on a familiar theme: why don’t Barack Obama and Democrats provide an clear alternative vision to the Romney-Ryan state of nature, instead of slowly stumbling along in the Republicans’ wake? But it also brings up a question that I haven’t seen before. The theoretical argument against higher tax rates is that it reduces the incentive to work because it changes the terms of the tradeoff between labor and leisure. That is, higher taxes reduce your effective returns from labor, while your returns from leisure remain constant, so you will substitute leisure for labor. In the long term, however, real wages tend to go up; even in the past three decades, which have generally been bad for labor (and good for capital), they’ve gone up by about 11 percent. If tax rates remain constant, that should increase the effective returns to labor, causing people to substitute labor for leisure (i.e., work more). Put another way, you could increase tax rates and keep the tradeoff between labor and leisure constant. I generally don’t buy these pure theoretical arguments, but my point is that if you believe that higher taxes reduce labor supply through the substitution effect, then you should acknowledge that the effect of higher taxes could be swamped by growth in real wages.

The Myth that Growing Consumption Inequality is a Myth -- Kevin Hassett and Aparna Mathur argue that consumption inequality has not increased along with income inequality. That's not what recent research says, but before getting to that, here's their argument: Consumption and the Myths of Inequality, by Kevin Hassett and Aparna Mathur, Commentary, WSJ: In multiple campaign speeches over the past week, President Obama has emphasized a theme central to Democratic campaigns across the country this year: inequality. ... To be sure, there are studies of income inequality—most prominently by Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California at Berkeley—that report that the share of income of the wealthiest Americans has grown over the past few decades while the share of income at the bottom has not. The studies have problems. Some omit worker compensation in the form of benefits. And economist Alan Reynolds has noted that changes to U.S. tax rules cause more income to be reported at the top and less at the bottom. But even if the studies are accepted at face value, as a read on the evolution of inequality, they leave out too much. Let me break in here. Here's what Piketty and Saez say about Reynold's work: In his December 14 article, “The Top 1% … of What?”, Alan Reynolds casts doubts on the interpretation of our results showing that the share of income going to the top 1% families has doubled from 8% in 1980 to 16% in 2004. In this response, we want to outline why his critiques do not invalidate our findings and contain serious misunderstandings on our academic work. ...

Walmart supply chain: warehouse staff agencies accused of wage theft - Phillip Bailey knows there are people worse off than him working inside the gigantic Walmart warehouse that dominates the small town of Elwood in rural Illinois. He sleeps at a Catholic hostel in nearby Joliet and so has a solid roof over his head after a day of helping the endless flow of consumer goods supplying Walmart stores across America. Not all his colleagues can say that. One squatted in abandoned houses. Another lived rough in the woods in between work shifts. "He just set up a tent in there for a few weeks," Bailey said. Bailey is a warehouse worker in the outsourced Walmart supply chain that criss-crosses America, part of one of the most vulnerable workforces in the US. Bailey and his colleagues work for low pay and minimal benefits. Their recruitment is subcontracted out to myriad staffing agencies, and working conditions can involve tough, repetitive manual labour. Critics say it is a labour market reminiscent of countries like China, yet it exists here in the American heartland of the Midwest. But Bailey and many other Walmart warehouse workers say they have to endure an especially shocking hardship: wage theft. Already very low-paid, they allege their pay packets are sometimes skimmed and squeezed by the staffing agencies subcontracted to employ them. "They prey on people living in precarious marginal circumstances. People living on the edge. If that was not the case, they could not do what they do," Bailey said.

Labor board to evaluate dog-tracking system used on Hyatt housekeepers - The National Labor Relations Board said recently that it would stage a hearing on a complaint filed by a union representing Hyatt housekeepers who claim the hotel bypassed the union and forced them to use an electronic tracking system that features a cartoon dog wagging its tail as workers toil to complete micromanaged tasks. A union representing a group of housekeepers at the Hyatt Andaz in West Hollywood said this week that they’re delighted by the National Labor Relations Board’s (NLRB) decision to hold a hearing next month on their complaint, which accuses the hotel of forcing workers to carry tracking devices that micromanage their workload. The tracking system, which the union only called “Rex,” allegedly keeps an eye on each housekeeper’s location and assigns individual rooms one at a time, forcing workers to check in and check out as they finish each task. It’s not clear who made the software, but images provided by  Unite Here Local 11 show a simplified interface in Spanish and the visage of a cartoon dog displayed on an Apple iPod Touch.

More People Eschew Jobless Benefits Than Scam System -- Some people scam the system to get jobless benefits they don’t deserve. But far more don’t claim the benefits for which they are eligible, according to research by economists working with the Federal Reserve Bank of St. Louis.In 2009, for example, the federal and state governments paid almost $121 billion in unemployment insurance, including $11 billion in overpayments. If everyone eligible for jobless benefits that year had claimed them, the program would’ve had to shell out an additional $108 billion, according to an article by Concordia University economist David Fuller, St. Louis Fed economist B. Ravikumar and Texas A&M University economics professor Yuzhe Zhang. Their research was posted in the St. Louis Fed’s Regional Economist, a quarterly publication.“On average, the unclaimed benefits are much larger than the more frequently discussed overpayments,” the authors note.

The 46 Million Foodstamp Man March - An Infographic - America has over 44 million people on Food Stamps. The food stamps program's real name is Supplemental Nutrition Assistance Program (SNAP). The Food Stamp program is "hidden" from view through Electronic Benefit Transfer (EBT) Cards that work just as credit cards. This article visualizes the size of the program and the vast amounts of people participating.

Growing inequality calls for both "predistribution" and (rightly directed) redistribution - Linda Beale - In putting forward my theme of democratic egalitarianism, I have often noted that there is no such thing as an economically egalitarian society--there will always be differentials among people, those differences often relate to social class and the education, privileged upbringing, and networking connections that ensure success for some and deny success to others as well as to innate abilities, so that those differences inevitably translate into some being better off economically than others.    Because of those differences, the "powers that be"--i.e., existing concentrations of financial assets, prestige and associated political power among the privileged class at the very top of the income and wealth distribution-- result in redistribution upwards from poor and middle class to the upper crust.  And most in that privileged upper-crust think they've acquired it all on the basis of their own merit and that the reason others don't have it is because they are irresponsible, don't work hard enough, don't have a good business sense or are just incompetent.

The Mysterious Economic Collapse in the Northeast, Cont’d -- Brad Plumer picked up my story from last Friday about unemployment soaring in the Northeast. After pointing out the facts of the matter, he attempts to arrive at a conclusion. Politicians in New York and New Jersey simply question the data, which is kind of the last refuge of a scoundrel. Here are some of Plumer’s other theories:Another theory is that the Northeast has been hit harder by the slowdown and debt crisis in Europe than anywhere else. As Steve Cochrane of Moody’s Analytics has noted, the Northeastern U.S. exports more to Europe than any other region. Manufacturing has shrunk more rapidly here than anywhere else in the country this year. And the already-shrinking financial sector in New York and Connecticut has been battered by the euro zone’s debt crisis. One thing Cochrane pointed out in his “U.S. Regional Outlook” report last year was that the Northeast had greater “downside risks” and was more susceptible to a global slowdown than any other region in the country. The South has benefited greatly from oil and gas production. The West is buoyed by growth in technology firms. The Midwest has “the most diversified export markets.” But, he noted, the Northeast is still getting crunched by the slowdown in the financial sector.

Number of the Week: States’ Broader Unemployment Rates - 15.3%: The rate of underemployment in Idaho, under the Labor Department’s broader definition. At 7.1%, Idaho’s September unemployment rate is significantly better than the national mark of 7.8%. But by another measure, Idaho’s job market is actually worse than the national average, according to new Labor Department data that paints a more detailed picture of joblessness in all 50 states. The official unemployment rate uses a fairly narrow definition of “unemployed,” looking only at people who are actively looking for work. But the Labor Department also publishes a range of other rates using different definitions. The broadest and best known alternate rate, known by its Labor Department designation, U-6, includes people who want to work but aren’t actively looking and also people who are working part-time because they can’t find full-time jobs. As of September, the national U-6 rate stands at 14.7%. Click on any state for its headline unemployment rate and broader rate

Illinois Debt Takes Toll, Study Finds - For years, Illinois has racked up billions in public debt to plug budget holes, pay overdue bills, and put money into its mismanaged pension funds. And for the people who live there, this has resulted in decrepit commuter trains and buses, thousands of unsound bridges, 200 hazardous dams and one of the most inequitable public school systems in America. . Those are the conclusions of a new examination of Illinois’ finances by the State Budget Crisis Task Force, which was released Wednesday. The group, led by the former Federal Reserve chairman, Paul A. Volcker, and the former New York lieutenant governor, Richard Ravitch, recommended an overhaul of Illinois’ budgeting practices, to make it harder to kite money from year to year and raid special-purpose funds. It also warned that tax increases may be in store. “It would be better for Illinois to start on a long-run path to a sustainable budget than to live beyond its means for several more years and then face a sudden, painful reckoning,” the task force said. Illinois has the lowest credit rating of the 50 states and has America’s second-biggest public debt per capita, $9,624, including state and local borrowing. Only New York State’s debt is bigger, at $13,840 per capita. But Illinois has not been able to use much of the borrowed money to keep its roads, bridges and schools in good working order, because years of shoddy fiscal practices have taken a heavy toll, the report said. “Illinois has been doing back flips on a high wire, without a net,” the task force said in the report, which was issued in Chicago.

Pennsylvania may force workers to pay taxes to their employers - A bill that landed on Pennsylvania Gov. Tom Corbett’s (R) desk this week would give companies that hire more than 250 new workers a gobsmacking tax incentive: 95 percent of those workers’ state income taxes would be paid to the employer, and not the state. It’s a bizarre strategy meant to attract companies from other states, specifically designed to lure California-based software maker Oracle into Pennsylvania. It’s also, as Philadelphia City Paper put it, “lavish corporate welfare” writ large across state government. The bill, HB 2626, passed on October 17 with bipartisan support. Just 80 members of Pennsylvania’s House of Representatives, most of the Democrats, voted in opposition. Employers that hope to take advantage of the incentive program must hire 250 or more new full time employees and provide health insurance for them, in addition to paying a wage that’s above the county average wherever they’re located. Once those conditions are met, the proposed law would allow companies to absorb as much as $5 million of their employees’ income taxes every year.

Murder, Rape, Robbery and Assault Skyrocket In Bankrupt Stockton, California As more towns and municipalities across the country are forced into bankruptcy due to reckless spending and lowered tax revenues, residents of once quiet neighborhoods are waking up to the reality that life as they know it is changing drastically. In Stockton, California, which declared bankruptcy earlier this year, your chances of becoming a victim of a violent crime such as murder, rape, robbery or assault are 1 in 70, which is nearly four times higher than the national average. Your chances of being the victim of a property crime are even more likely, with 1 in every 17 residents of the city facing the prospect of having their house broken into or car stolen this year. This is what happens when a city, county, state or federal government can no longer pay its bills and is forced to lay off workers. In the case of Stockton, the city has cut tens of millions of dollars from their budget, mostly targeting law enforcement and other essential services.The result? A bizarre shooting spree has broken records in Stockton, making this the most violent year in that city’s history.…the City of Stockton has seen its most violent year ever – Stockton police tonight are investigating their 56th, 57th, 58th, and 59thhomicides.“This past weekend was obviously one of the most violent weekends we’ve had in Stockton in years,” Stockton police spokesman Officer Joe Silva said

Taxman Strips Exotic Dancers' Write-Down-  In what will likely cause riots on the streets of New York City, the Court of Appeals has upheld that strip clubs could not longer claim a tax exemption as its stage and couch dances did not merit a 'musical arts performance' exemption. As Bloomberg BusinessWeek reports: "It is not irrational for the tax tribunal to decline to extend a tax exemption to every act that declares itself a ‘dance performance,’" the Court of Appeals said in a 4-3 decision. The sticking point, apparently, was the fact that the 'private dances' were the same as those supposedly 'choreographed' on stage (which doesn't seem such a bad thing to us?) but like the Tax Tribunal we haven't observed them or have personal knowledge of such VIP-room activity entertainment. The majority said qualifying the dances as artistic performances would “allow the exemption to swallow the general tax" and one judge added "I find this particular form of dance unedifying -- indeed, I am stuffy enough to find it distasteful; I would rather read the New Yorker," noting that Hustler was insufficiently 'cultural and artistic'."

U.S. Birth Rates - Birth rates are one of those apparently dry statistics that have profound implications both for public policy and for how we live our day-to-day lives. Here are two figures from the Centers for Disease Control "National Vital Statistics Reports--Births: Preliminary Data for 2011."  Overall, U.S. birth rates are in decline (as shown by the light blue line) have fallen below the levels seen in the Great Depression, which up until recent years had been the lowest fertility level in U.S. history. The 2011 fertility rate of 63.2 per 1,000 women aged 15-44 is the lowest in U.S. history. The number of actual births is actually near a high, but that is because of the overall expansion of population. This decline in birthrates is not evenly distributed across age groups. The figure below shows only data back to 1990. However, it illustrates that for women age 15-19 (red line), 20-24 (light blue line) and 25-29 (yellow line), birth rates have dropped noticeablyl. Although birth rates have dropped substantially for younger women, they have held steady for women ages and up. For mothers int he three age groups above 30 years, birth rates have been holding steady or rising. These shifts in birthrates have powerful implications for our lives. Politically, the number of households with a direct personal interest in supporting programs that benefit children--because they have children under age 18 living at home--has declined. Here's a figure illustrating the long-term trend up through 2008 from Census Bureau report.  Back in the late 1950s and early 1960s, about 57% of U.S. family households included children under the age of 18. The share has been dropping since then, and is now approaching 45%. When it comes to decisions about everything from school funding and public parks up to pensions, health care, and other payments to those who are retired, it makes a real difference in a majority-rule political system if the share of families with children at home is more than 50% of the population or less.

Philadelphia Schools Lure Buyers as Budget Erodes - Philadelphia’s school district, the nation’s eighth-largest, is in such desperate shape that it plans to sell $300 million of bonds this week to plug a deficit. Yet investors hungry for yield have fueled a rally in its debt. The district of about 203,000 students faces a $1.35 billion shortfall over the next five years and may close a quarter of its schools. It is resorting to deficit financing for the first time since 2002. And as in most of the U.S., public schools in the nation’s fifth-largest city are receiving less state funding per student than in 2008, according to the Center on Budget & Policy Priorities in Washington. Even with the fiscal stress, Philadelphia school debt is drawing investors facing interest rates near 45-year lows. The extra yield buyers demand to own district securities has dropped by about a quarter since January, data compiled by Bloomberg show. One lure is that state aid pays the bonds directly through a so-called intercept program.

Pennsylvania Slows ALEC Juggernaut - The drive to diminish local control in Pennsylvania was halted when Republicans backed away from Governor Corbett’s charter “reform” legislation. The bill would have allowed the Governor and the State Education Department to override local school boards and open charters where the local board rejected them. This is a priority for Governor Tom Corbett and for ALEC, which values privatization over local control. Apparently, some Republicans had trouble following the attack on public schools and local school boards, which are important and traditional institutions in the communities they represent. The bill would have also allowed charter operators to escape accountability and transparency in their expenditure of public funds. I received this note from an ally in Pennsylvania, with links: Governor Corbett of Pennsylvania had a major setback in his attempt to follow an ALEC goal of taking management of charter schools out of local control and put it in the hands of the Pennsylvania Education Department. Wednesday night the Pa. House of Representatives failed to pass what Corbett said had been his major goal of this legislative session.

Popular Kids in High School Earn More Later in Life --- A study released Monday argues those in the top fifth of the high school popularity pyramid garnered a 10% wage premium nearly 40 years after graduation, compared to those in the bottom fifth.The study was published by the National Bureau of Economic Research. Its authors say they don’t view popularity as an “innate personality trait.” Instead, popularity pays because those who learn to play the game in high school are figuring out what they need to know to succeed when they enter the workplace. The report suggests schools may want to join their academic mission with one that helps students build their social skills. Quantifying something that is as ephemeral as popularity is a tricky proposition for the researchers. Their findings rests on a model that relies on a survey of student connections called the Wisconsin Longitudinal Study, which has been running for more than 50 years. The Wisconsin data is important because it allows the researchers to understand the direction of friendship. The researchers are able to see the web of relationships and determine who is actually popular, rather than who perceives themselves to be so.The paper said the ability to form friendships rests on a series of expected factors. The authors find a “positive association between a warm early family environment” and one who is well liked among students. They also find the students they studied tended to associate with those similar to themselves.

The Cost of Higher Education - Suppose you wanted to go live at a luxury resort for four years. You’d expect that to cost, wouldn’t you? So why are people surprised that it costs a lot – really a lot – to send a kid to college for four years? College is the sort of thing that seems like it should cost a lot: beautiful buildings on nice land, nice gym, nice green spaces, expensive equipment, large staff that have to be well-paid because they provide expert services. But this thought that colleges and universities are like luxury resorts, so of course it costs, is not very comforting to apologists for the cost of higher ed. Four years of resort living does not sound like a model that can, in fact, be available to everyone. If the democratic dream is that every kid can go to college, and if the dream of college is that every college kid can live for four years in the equivalent of an expensive resort, then the dream dies. It has often been pointed out that universities and colleges are all trying to be Rolls Royce; no one is trying to be Kia. Existing institutions don’t compete on bottom line cost to students because cutting costs would undercut prestige and these institutions are competing to be prestigious; and, anyway, most students get some financial aid, so cost isn’t really transparent and you have a third-party payer problem, price-sensitivity-wise. Suffice it to say that a number of factors conspire to make it the case that the market for higher ed doesn’t look like the market for, say, cars, with luxury vehicles for a few and basically functional, affordable options for the masses. (No one wants to be the Crazy Eddie of Higher Ed: We’ve slashed tuition so much we must be insaaane! Nor do students or parents want Crazy Eddie, exactly. But no one wants to be crushed by debt either.)

Higher Education and Theory of the Second Best - Some people think that the rate at which college costs have gone up means that there must be some way to pop the cost bubble and dramatically lower costs back down without sacrificing quality. There’s some conspiracy of incompetence or venality by the administrators/teachers. We need to break the back of that, whatever it is, then things would get better. I don’t really think that’s plausible, but if you think it’s plausible, go ahead and work out your own solution to the problem along those lines. College is a premium product. A costly good. But a valuable one we want people to have. If the state isn’t going to subsidize its provision, making it available to all, then how will it go?

  • Option 1: everyone who isn’t rich goes into serious debt to pay for this costly but valuable good.
  • Option 2: we devise a less premium product. It won’t be as good, but it will cost less.

I distrust Option 1. In fact, I’m paranoid about it, for reasons outlined in this article. I don’t quite drink the full jug of kool-aid. For example, I don’t buy that tuition has skyrocketed ‘because it can’. That is, there’s just a speculative bubble, in effect. I don’t think the growth in administration is quite as sinister as they suggest. It’s largely a function of universities wanting to do so much for students – so many programs and options and choices – which is a good thing. But it creates overhead costs.

Tuition by Major - A task force convened by Florida Governor Rick Scott has recommended changes in tuition subsidies according to job market demand: Tuition would be lower for students pursuing degrees most needed for Florida’s job market, including ones in science, technology, engineering and math, collectively known as the STEM fields. The committee is recommending no tuition increases for them in the next three years. But to pay for that, students in fields such as psychology, political science, anthropology, and performing arts could pay more because they have fewer job prospects in the state. “The purpose would not be to exterminate programs or keep students from pursuing them. There will always be a need for them,” said Dale Brill, who chairs the task force. “But you better really want to do it, because you may have to pay more.”

No Country for Young Children - I admire Gillian Tett, I really do. She is a fine, perceptive, and aggressive financial reporter and writer who has contributed a great deal to our understanding of the origins of the recent financial crisis, as well as many other things. But apparently she needs to stick to her knitting, because this recent piece on the influence of legacy on college admissions in the United States is rubbish. Reading between the lines, Ms Tett recently returned from a clutch of cocktail parties and dinners with American friends whose children were admitted to elite U.S. universities this Fall. From her remarks she seems to have heard the sort of alternately smug, self-serving, paranoid, and neurotic bullshit and misinformation that I have been subjected to for the past several years as the parent of a high schooler recently off to college and one in the chute. In my experience, middle and upper class parents with children of college-bound age in Manhattan and other socioeconomic pressure cookers are the worst sort of frantic, hypercompetitive cynics you can encounter, and they will grasp at the flimsiest and most ridiculous of straws to support their desperate hope little Susy or Billy will get into a top university. Hence you get nonsense—unsupported in Ms Tett’s piece by any citation or reference (and no doubt made up by some bug-eyed X-ray socialite over Cosmopolitans in a Park Avenue co-op)— that “educational researchers estimate that... having a family link [to the school she is applying to] increases a mid-level student’s chance of entry by about 60 per cent.” Since when? Says who? And how the fuck did they figure out that differential admission statistic?

From Master Plan to No Plan: The Slow Death of Public Higher Education -The California student movement has a slogan that goes, “Behind every fee hike, a line of riot cops.” And no one embodies that connection more than the Ronald Reagan of the 1960s. Elected governor of California in 1966 after running a scorched-earth campaign against the University of California, Reagan vowed to “clean up that mess in Berkeley,” warned audiences of “sexual orgies so vile that I cannot describe them to you,” complained that outside agitators were bringing left-wing subversion into the university, and railed against spoiled children of privilege skipping their classes to go to protests. He also ran on an anti-tax platform and promised to put the state’s finances in order by “throw[ing] the bums off welfare.” But it was the University of California at Berkeley that provided the most useful political foil, crystallizing all of his ideological themes into a single figure for disorder, a subversive menace of sexual, social, generational, and even communist deviance.It’s important to remember this chapter in California history because it may, in retrospect, have signaled the beginning of the end of public higher education in the United States as we’d known it. It’s true that when the Great Recession began in 2008, state budgets crumbled under a crippling new fiscal reality and tuition and debt levels began to skyrocket. It was also in the context of the California student movement that the slogan “Occupy Everything, Demand Nothing” first emerged, in 2009, when students occupied campus buildings in protest against budget cuts, tuition hikes, and staff cutbacks, and were crushed by the same kind of overwhelming police force that was later mobilized against Occupy encampments across the country. But while university administrators have blamed budgetary problems on state legislatures—and scapegoated individual police officers, like the now-notorious (and former) UC-Davis “pepper spray cop,” for “overreactions”—these scenarios are déjà vu all over again for those with long memories.

Live at Dissent Magazine with "From Master Plan To No Plan" - I have an article in the latest Dissent Magazine, co-written with Aaron Bady, titled "From Master Plan to No Plan: The Slow Death of Public Higher Education." It's now live and kicking off their newly redesigned webpage. It starts with Ronald Reagan in California in the 1960s, does a history of the creation and strengths of the University of California's Master Plan system and its dissembly, and ends with what John Aubrey Douglass calls the the Brazilian Effect. It's full of riot cops, occupations, moderate Republicans, thoughts on elasticities of supply, for-profit schools and more. I hope this starts to move the conversation forward on higher education outside a specific focus on student debt, because that is likely to reach its limits outside a broader vision of what needs to be accomplished. Andy Kroll wrote a similar piece that went live earlier this month, so I think there's a lot of interest in this topic. In March, Catherine Rampell wrote about the Brazilian Effect in economix. Andrew Ross wrote a fantastic piece for Dissent's series on education on the aggressive expansion of NYU and other universities as part of a conscious urban planning framework, combining growth models based on the FIRE industires with those in the ICE (intellectual, cultural and educational) industries, which is an important part of the puzzle.

Parents drowning in debt from sending their children to college - What parent doesn't want to be able to send their child to college? It used to be parents would scrimp and save to do so. Instead parents are now drowning in debt to make it happen. A new study shows one in five households are deep in college debt. Jean Andes and her husband Mark Hilliard had the best of intentions when it came to their kids' college. "It's hard to save when you're paying the mortgage and your utilities," said Andes. And when their daughter, Kayla, and son, Ian, went off to school, scholarships didn't cover it. So they took out loans-- lots of loans. Two four-year degrees later, the couple is $120,000 dollars in debt. “It cost us about as much to borrow to put our two children through college as it did to buy our house," said Hillard.There's an increasing trend with people who are age 40-50 having the fastest growing amount of student loan debt outstanding,"

Elderly Americans Burdened by Student Debt Too - Yves Smith - The Wall Street Journal has an important story on a phenomenon that’s likely to get more attention by virtue of growth: that of middle aged and elderly Americans saddled by significant amounts of student debt. Past reporting has focused mainly on the older Americans who have loans outstanding by virtue of borrowing to fund education as part of a mid-life career change, and then being unable to meet the payments as a result of finding it difficult to get established on the targeted employment path. But the culprit overwhelmingly appears to be parents co-signing on private student loans, since federal loans generally don’t require a guarantor (note that, as with mortgages, there is no granular data here).The indicator is the rapid increase in student debt owed by older Americans. According to the New York Fed, 2.2 million Americans over 60 owe $43 billion in student debt as of March 31, 2012, up from $15 billion at the end of 2007. Similarly, student debt as a percentage of all installment debt of those 65 to 74 as of year end 2007 was so small that the Fed didn’t report it; as of 2010 (the latest information available) it had risen to 13%. And remember, because student debt can’t be discharged in bankruptcy, Social Security payments can be garnished. Per the Treasury’s Financial Management Service, only 6 people had their Social Security payments garnished to pay student loans. For January to August of this year, it was 115,000 people and that level was nearly double the number last year. The Journal presents several anecdotes, and the subtext is that the inability of young borrowers to meet their loan payments is producing generational warfare right at home. The first is of Cyndee Marcoux, 53, who already had $80,000 of student debt by virtue of going to school after a divorce. She co-signed both of her children’s loans. Her daughter, though employed, has developed an autoimmune disease and is swamped by medical bills and child care costs.

College Students Defaulting On Student Federal Loans - College graduates are heading into a world where student debt exceeds credit card debt. New numbers out today paint a tough picture for students. An education may be priceless. But getting one costs a pretty penny.  Junior Matt Arford says he takes out on average $6,000 each semester in loans. Arford says, "Hopefully I can start paying off my loans before I even graduate. According to the U.S. Department of Education more than 9,500 Minnesota students defaulted on their federal student loans over the past 3 years. Minnesota's default rate may be at nine percent, but that's still significantly lower than the national average at 13.2 percent. Ward says, "My plan is to get a job hopefully using my experience and my degree I plan to have everything paid off in 5 years." Minnesota State students graduate with an average of $22,600 in debt, but Ward says it's worth it. Ward says, "I see that as one more pickup truck that I could have had big deal, what's a pickup truck compared to an education."

More Americans delaying retirement until age 80 - As they struggle to save for retirement, a growing number of middle-class Americans plan to postpone their golden years until they are in their 80's. Nearly one-third, or 30%, now plan to work until they are 80 or older -- up from 25% a year ago, according to a Wells Fargo survey of 1,000 adults with income less than $100,000."It is so tough for Americans to save for retirement that the answer seems to be to work longer," said Joe Ready, director of Wells Fargo Institutional Retirement and Trust. Overall, 70% of respondents plan to work during retirement, many of whom plan to do so because they simply won't be able to afford to retire full time. But working well into your 70's, 80's or even 90's, isn't always realistic, said Ready. Nearly three-quarters of those who plan to work into their 80's say their employer won't want them working when they're that old, for example. Other roadblocks, like health issues, could arise as well.

Can We Handle the Truth? Public Pensions Are Short on Cash - The good news is they are telling the truth. The bad news is that the truth really hurts.That pretty much sums up actuarial firm Milliman’s view of the U.S. public pension system. In a recent report, Milliman found that public pensions have 67.8% of the funds they need to meet future obligations. In the arcane world of actuarial accounting, that is strikingly close to the 75.1% level that pension managers report.So it seems that pension managers are not trying to hide the shortfall, as future beneficiaries and others have worried. Their fear was that through unrealistic assumptions about future returns on investment and other accounting gimmicks, pension managers might be papering over just how bad the books look. Evidently they aren’t. But that doesn’t change the fact that public pensions are still woefully underfunded—and it could get a lot worse under new reporting guidelines set for 2015. Milliman looked at the 100 largest public pension funds and determined that they have $1.2 trillion worth of unfunded liabilities—some $300 billion more than the industry reports. While that sounds like a lot of money, “it really didn’t move the needle,” Rebecca Sielman, the report’s author, told Reuters. That difference could result from extremely minor changes in certain assumptions about the future. The pension funds that Milliman examined assumed a future median rate of return on investment of 8%. That is far higher than the actual median rate of return of just 3.2% during the past five years. Yet it is not far from what Milliman believes is the appropriate assumption—7.65%.

3 states with sinking pension funds - Several years after from the financial crisis of 2008, state pension funds continue to languish. According to data released this week by Milliman, Inc. and by the Pew Center on the States, there was a $859 billion gap between the obligations of the country’s 100 largest public pension plans and the funding of these pensions. Most of these are state funds, and state legislatures have attempted to respond to this growing crisis by making numerous reforms to try to combat this growing deficit. In 2010, only Wisconsin’s pension funds were fully funded. Nine states, meanwhile, were 60 percent funded or less -- this would mean that at least 40 percent of the amount the state owes current and future retirees is not in the state’s coffers. In Illinois, just 45 percent of the state’s pension liabilities were funded. In some of these states, the gap between the outstanding liability and the amount funded was in the tens of billions of dollars. California alone had $113 billion in unfunded liability. Based on Pew’s report, “The Widening Gap Update,” 24/7 Wall St. identified the nine states with sinking pensions.

U.S. companies take aim at pension risk with lump-sum offers - Corporate America is finally ready to deal with a monkey on its back: massive pension obligations. AT&T Inc on Friday said it plans to contribute a $9.5 billion stake in its wireless business to its underfunded pension plan. Earlier this week, Verizon Communications Inc moved to unload $7.5 billion in pension obligations to insurer Prudential Financial Inc. But by far the most common trend in corporate America is to offer lump-sum payouts to thousands of retirees now - these voluntary buyouts could cost companies millions of dollars upfront, but they eliminate the risk of obligations soaring out of control in the future. General Motors Inc and Ford Motor Co kicked off the trend earlier this year, and they have been joined this earnings season by companies ranging from Taco Bell and KFC owner Yum Brands Inc to tissue maker Kimberly-Clark Corp . Companies "have been de-risking to manage the volatility of their (pension) assets," For years, plan sponsors have been squeezed by lower investment returns and higher costs for retiree benefits, which have forced companies to top up pension plans.

Romney’s Social Security Plan Hides a Tax Hike - Obama hasn't made Social Security much of an issue in the campaign, but Romney has gone on offense, providing more specifics about how he would adjust Social Security benefits than possibly any other candidate in history. So it's worth understanding what Romney has proposed. A close look reveals just how difficult it will be to close Social Security’s ballooning trust fund shortfall without new taxes, which he promises to avoid. It also shows that Romney’s approach will hit middle-income workers harder than the wealthiest, which may come as a surprise given his oft-repeated comment that he'll slow the growth rate of Social Security benefits for those with "higher incomes." As outlined, Romney’s plan closely resembles one proposed in 2006 by another Republican, former Utah Senator Robert Bennett. Both exempt people 55 and up, raise the retirement age to keep up with longevity gains (about one month every two years) and adopt some form of progressive price indexing that has benefits for the top grow only with inflation, while benefits for the lowest earners continue to reflect real wage gains.

Social Security a Far Better Deal for Workers Than Modern Retirement Plans -- This brief set of calculations from the Wall Street Journal’s Ellen Schultz shows simply how much of a raw deal American workers have been getting from defined-contribution retirement plans. It is impossible for them to generate the rate of return of a defined benefit plan, just completely impossible. Schultz shows this in the context of Social Security: Despite widespread gloom over the health of the system, it will be still be able to pay at least 70% of benefits in coming decades, even if no action is taken. That means you need to take the benefits into account when estimating your retirement income, how much you’ll need to save and how to allocate your investments to achieve your goals. A 50-year-old man, for example, might have accrued a Social Security benefit worth $1,750 a month at full retirement age. Assuming annual cost-of-living adjustments of 2% a year and a life expectancy of 90, the present value of his Social Security benefits would be $588,551 if he starts taking them at age 62, and $802,039 if he begins at 70, says William Meyer, founder of Social Security Solutions, a Leawood, Kan., financial-planning firm. To generate the same amount of income they would be receiving from Social Security taken at age 70, the individual would have to pay $436,517 today into an immediate annuity, says Mr. Meyer. This says more about the futility of 401(k)-style plans than the adequacy of Social Security as a social insurance program. Social Security doesn’t provide the best benefit in the world. But the universality of the program, the lifetime of payments and the simple reality of defined benefit retirement programs make it a far better deal for workers than providing a sum of money to play with in the stock market.

Why even President Obama won't champion social security | Dean Baker - Although millions of middle-class Americans strongly support social security, big bucks campaign donors hate it. That's why. President Obama has consistently refused to rise to the defense of social security. In fact, in the first debate, he explicitly took the issue off the table, telling the American people that there is not much difference between his position on social security and Romney's. On its face, this is difficult to understand. In addition to being good politics, there are also solid policy grounds for defending social security. The social security system is perhaps the greatest success story of any program in US history. By providing a core retirement income, it has lifted tens of millions of retirees and their families out of poverty. It also provides disability insurance to almost the entire workforce. The amount of fraud in the system is minimal, and the administrative costs are less than one 20th as large as the costs of private-sector insurers.

Obama's Waning Leverage With the Democratic Party Left - The Democratic Party contains much larger ideological fissures than the Republican Party, and one of those fissures is that the Obama administration favors cuts in Social Security and Medicare spending that liberal Democrats don't like. Part of Obama's strategy for maintaining Democratic Party unity as he pursues his fiscal policy agenda has been to take advantage of the fact that these same liberal Democrats generally believe that taxes—especially on the wealthy—are too low.  So part of the hypothetical "grand bargain" is that Obama gives Congressional Republicans spending cuts that they want in exchange for giving him revenue increases that he wants. But another part of the hypothetical grand bargain is that liberals give Obama spending cuts that he wants as part of a package deal that includes tax hikes that liberals want. And even as Obama muses about fiscal cliff dynamics giving him leverage over the GOP to get a grand bargain his objective leverage over liberals is waning. As I wrote in my piece making the case for leaping off the fiscal cliff, once the New Year begins the idea of a taxes-for-cuts bargain becomes irrelevant. With the Bush tax cuts fully expired, taxes will be higher than Obama wants as well as (much) higher than Republicans want. The relevant tax bargain will then be between Obama and the GOP over how much to cut taxes. Whatever the outcome of that agreement, it leaves you with nothing to take to liberals in exchange for spending cuts.

Paul Ryan Budget Would Cut Medicaid Coverage In Half: Study: Republican vice presidential nominee Paul Ryan's plan to replace the Medicaid entitlement program with a system controlled by states would cut federal funding by $1.7 trillion and reduce enrollment by 50 percent, according to a new report released Tuesday. Under the Ryan plan to cap federal spending on Medicaid and repeal President Barack Obama's health care reform law, 37.5 million fewer people would receive benefits, the Tuesday Urban Institute report concludes. Wisconsin Rep. Ryan, chairman of the House Budget Committee, shepherded his plan to passage in the Republican-led House in 2011 and 2012. Republican presidential nominee Mitt Romney also supports cutting federal Medicaid spending. "The proposed changes and reductions in federal financing for Medicaid under the House Budget Plan would almost certainly worsen the problem of the uninsured and strain the nation’s safety net," the Urban Institute report says. "Medicaid's ability to continue these many roles in the health care system would be significantly compromised under this proposal, with no obvious alternative to take its place." Romney and Ryan, with the support of the Republican Governors Association, tout Medicaid block-grant proposals as a way to reduce the federal budget deficit and to let states devise new ways of providing health care to needy people. "We’ll take that health care program for the poor and we give it to the states to run because states run these programs more efficiently," Romney said during a debate with Obama Monday.

Health care’s huge contribution to current debt, in one, nay two, charts - A nice, short post by Robert Dittmar makes a great point in a few charts. Here’s his chart, using Bureau of Economic Analysis data, of the total U.S. federal deficit, by year and cumulatively (aka, federal debt): Yow! Here’s what that chart looks like without health care’s contribution:

Medicare cost control in action - Tens of thousands of people with chronic conditions and disabilities may find it easier to qualify for Medicare coverage of potentially costly home health care, skilled nursing home stays and outpatient therapy under policy changes planned by the Obama administration. In a proposed settlement of a nationwide class-action lawsuit, the administration has agreed to scrap a decades-old practice that required many beneficiaries to show a likelihood of medical or functional improvement before Medicare would pay for skilled nursing and therapy services. …Neither she nor Medicare officials could say how much the settlement might cost the government, but the price of expanding such coverage could be substantial.The story is here.  Without knowing the cost, it is difficult to say whether this coverage expansion is a good idea.  But that is exactly my point.  I see a good deal of cognitive dissonance when I read discussions of plans for Medicare cost control.

Are healthcare costs really skyrocketing? - Yesterday we had a one-year anniversary meeting of the Alternative Banking group of Occupy Wall Street. Along with it we had excellent discussions of social security, Medicare, and ISDA, including details descriptions of how ISDA changes the rules to suit themselves and the CDS market, acting as a kind of independent system of law, which in particular means it’s not accountable to other rules of law.Going back to our discussion on Medicare, I have a few comments and a questions for my dear readers: I’ve been told by someone who should know that the projected “skyrocketing medical costs” which we hear so much about from politicians are based on a “cost per day in the hospital” number, i.e. as that index goes up, we assume medical costs will go up in tandem.There’s a very good reason to consider this a biased proxy for medical costs, however. Namely, lots of things that used to be in-patient procedures (think gallbladder operations, which used to require a huge operation and many days of ICU care) are now out-patient procedures, so they don’t require a full day in the hospital.This is increasingly true for various procedures – what used to take many days in the hospital recovering now takes fewer (or they kick you out sooner anyway). The result is that, on average, you only get to stay a whole day in the hospital if something’s majorly wrong with you, so yes the costs there are much higher. Thus the biased proxy. A better index of cost would be: the cost of the average person’s medical expenses per year.

The Real Stakes in the Medicare Debate - As a public trustee for Medicare I am often asked how the program’s future may be affected by the current political debate. In my opinion, the most salient Medicare policy choice before us has been badly under-reported. This campaign season is somewhat unusual in that the two sides agree that future Medicare cost growth needs to be constrained relative to its growth rates in recent years. The two sides even roughly agree on what the future growth rate needs to be, though they disagree on the best means of achieving it. This is atypical; more often historically one side is proposing to decelerate Medicare spending growth and the other side is attacking them for doing so. The more fundamental choice this year has to do with the purpose of constraining Medicare spending: that is, what we should do with any savings achieved by slowing Medicare cost growth. Our choice pertains to whether we use the savings to either:

  1. Extend our ability to meet our commitments to seniors on Medicare, or;
  2. Fund an expansion of Medicaid/CHIP and a new system of federally-subsidized health insurance exchanges

Obama Slashes Four Hours Off Definition of "Full-Time" Employment - The BLS Glossary defines full-time workers as "Persons who work 35 hours or more per week". For monthly reporting, the BLS defines part-time as "those who worked 1 to 34 hours during the survey reference week". With that wording, I am not precisely sure where 34.1 or 34.5 hours fit. Interestingly, the Obamacare mandate says Anyone Who Works 30-Hour Week Is Now 'Full-Time' A little-known section in the Obamacare health reform law defines “full-time” work as averaging only 30 hours per week, a definition that will affect some employers who utilize part-time workers to trim the cost of complying with the Obamacare rule that says businesses with 50 or more workers must provide health insurance or pay a fine. “The term ‘full-time employee’ means, with respect to any month, an employee who is employed on average at least 30 hours of service per week,” section 1513 of the law reads. (Scroll down to section 4, paragraph A.)  If an employer has 50 or more "full-time employees" and does not offer health insurance, it must pay a penalty per employee for each month it does not offer coverage.

The Health Mandate Romney Still Supports - Republicans have a dilemma on health policy. They are adamantly opposed to government paying for health care or a mandate requiring people to buy health insurance. At the same time, they recognize that they cannot say to the world that if a dying person shows up at an emergency room without insurance, that person will be left to die in the street. Thus they support a little-known mandate requiring hospitals to treat the uninsured, the Emergency Medical Treatment and Active Labor Act. Often referred to as Emtala, the bill passed a Republican Senate and was signed into law by Ronald Reagan on April 7, 1986. It was enacted because, previously, people had in fact been left to die in the street when hospital emergency rooms would not admit them without insurance. This problem was highlighted in a “60 Minutes” broadcast on March 17, 1985 that spurred Congressional action. Since then, Republicans have routinely cited Emtala as a key reason that the United States already has de facto national health insurance and does not need further government involvement in health care. As George W. Bush put it in a July 10, 2007, speech: “People have access to health care in America. After all, you just go to an emergency room.”

Neoliberalism Kills: Part One - During the run-up to passage of the Affordable Care Act (ACA), I wrote a number of posts (here, here, and here) assessing the ACA very negatively, and pointing out the shortcomings of the various versions of this bill, preceding its final passage. My focus was on contrasting varying versions with HR 676, the Conyers-Kucinich Medicare for All bill, in relation to its likely impact on fatalities, bankruptcies and divorces attributed to lack of health insurance coverage in the US. At that time, about 47 million people were uninsured, and based on the rate of 1,000 fatalities per million established by the Wolper-Woolhandler-Himmelstein et al study of 2007-2009, I anticipated 47 thousand fatalities in 2010. In addition, I predicted that

  • – In the “band-aid” period before the health insurance exchanges became operational in 2014 we were still looking at an average of 31,000 fatalities per year due to lack of insurance, or a total of about 140,000 expected fatalities before the exchanges would be effective sometime in 2014.
  • – After that we were still looking at 23,000 annual deaths per year through 2019.
  • – A grand total of expected fatalities of 267,000 by the end of 2019
  • – The bill will not cover 30 million additional people, as claimed by its advocates, but more like 15 million due to rising insurance costs and un-indexed subsidies in the ACA.
  • – In addition, due to population growth, we would still be looking at 35 million uncovered and 35,000 fatalities due to lack of coverage.

Now 2.6 years have passed since I made those predictions, and the Commonwealth Fund has just released a new study of the ACA. The study projects what we can expect from ACA coverage compared to what we can expect from a baseline do nothing scenario and from Mitt Romney’s latest pronouncements about his health care plan, which, in all likelihood will be obsolete before election day.

Beware of Romneycare - Mitt Romney can be a hard man to pin down. But there is one thing that he’s been clear about: if he becomes President, he will repeal Obamacare. That simple promise, more than any other that Romney has made, illuminates what is most at stake in this year’s election. The campaigns may spend most of their time talking about taxes and jobs. But health care is where the election’s outcome will have the most immediate and powerful impact on how Americans live. Abolishing Obamacare would eliminate subsidies for people buying insurance and rescind regulations requiring insurance companies to guarantee coverage and benefits (for instance, to people with preëxisting conditions). Romney’s proposed alternative is to give individuals a tax break when they buy insurance and to push them toward high-deductible insurance plans, which he believes will make them more rigorous and price-conscious in choosing doctors and treatments. Romney also wants to reform Medicare by encouraging more competition among private insurers. The details are skimpy, but the core principle is that unleashing the power of the free market will bring down costs and raise quality. This is an appealing vision. In most areas of the economy, free-market principles insure that products and services keep improving, and that consumers get better and better deals. But the free market, though it may be the best way of allocating new TVs and cars, falters when it comes to paying for bypass surgery or chemotherapy. Because people don’t have the expertise to evaluate doctors, hospitals, or treatments, it’s hard for them to comparison-shop. Because they can’t pay for major care out of pocket, they must rely on insurance, thereby often losing the final say in what to buy or how much to spend. More fundamentally, markets work only when consumers have the power to say no if the price isn’t right. Yet it’s very hard for people to say no in the case of things like end-of-life care or brain surgery.

If Primary-Care Doctors Were Taxed Like Hedge-Fund Managers - To entice a higher than the current fraction of medical-school graduates into primary-care practice requires a solid understanding what factors influence the choice of a medical specialty as a career. Among the nonpecuniary factors that have been identified are the medical students’ personal characteristics, their socioeconomic background, whether they grew up in rural or urban settings, the professional prestige that faculty advisers and society at large appear to accord different specialties and, of increasing importance in recent years, the life styles that different specialties imply – that is, the leisure time available for family and personal control over work hours. It is difficult, perhaps even impossible, to manipulate these nonpecuniary factors significantly through public policy. Much easier to manipulate are the purely economic prospects implied by the choice of a specialty – that is, the rate of return on their investment in medical education that medical students can expect from practice in different specialties. Along with prospective life style, that economic dimension of specialty choice has been found to be influential. In an earlier post, I described the “human capital” approach to occupational choice, replete with graphic illustrations of the model. In that model both a student’s investment in the choice of a particular profession and the financial returns from that choice are calculated as differential flows against a baseline net-income stream that could be expected by the student from an alternative career that began with only a bachelor’s degree.

Are general physicals pretty much useless?: Physical exams are one of the most common and familiar medical procedures in the world. A sweeping new study suggests they might also be the most worthless. Researchers at the Cochrane Review looked at more than 16 studies with 182,880 patients – all of whom were offered a general check up, but only some of whom who accepted. Those patients were followed between four and 22 years, depending on the study, to look at death rates for each group. The big takeaway: “There was no effect on the risk of death, or on the risk of death due to cardiovascular diseases or cancer.” What the researchers did find, however, was an increase in diagnoses among those who went to their general exam, compared to those who did not. Those additional diagnoses, however, did not appear to have any impact on health outcomes. “Increased diagnostic and therapeutic activity would be expected if general health checks led to improved health,” the study notes. “However, more diagnoses in the absence of health improvement would indicate overdiagnosis and overtreatment.” There are a few caveats to consider here. The researchers note the possibility that doctors may perform some of the tests administered at a general check-up — measuring blood pressure, for example, might happen in a different care setting if a physician notices some risk signs.

Where Will The Next Pandemic Come From? And How Can We Stop It? = A horse dies mysteriously in Australia, and people around it fall sick. A chimpanzee carcass in Central Africa passes Ebola to the villagers who scavenge and eat it. A palm civet, served at a Wild Flavors restaurant in southern China, infects one diner with a new ailment, which spreads to Hong Kong, Toronto, Hanoi, and Singapore, eventually to be known as SARS. These cases and others, equally spooky, represent not isolated events but a pattern, a trend: the emergence of new human diseases from wildlife. The experts call such diseases zoonoses, meaning animal infections that spill into people. About 60 percent of human infectious diseases are zoonoses. For the most part, they result from infection by one of six types of pathogen: viruses, bacteria, fungi, protists, prions, and worms. The most troublesome are viruses. They are abundant, adaptable, not subject to antibiotics, and only sometimes deterred by antiviral drugs. Within the viral category is one particularly worrisome subgroup, RNA viruses. AIDS is caused by a zoonotic RNA virus. So was the 1918 influenza, which killed 50 million people. Ebola is an RNA virus, which emerged in Uganda this summer after four years of relative quiescence. Marburg, Lassa, West Nile, Nipah, dengue, rabies, yellow fever virus, and the SARS bug are too.

Mobile phones can cause brain tumours, court rules - A landmark court case has ruled there is a link between using a mobile phone and brain tumours, paving the way for a flood of legal actions. Innocente Marcolini, 60, an Italian businessman, fell ill after using a handset at work for up to six hours every day for 12 years. Now Italy's Supreme Court in Rome has blamed his phone saying there is a "causal link" between his illness and phone use, the Sun has reported. Mr Marcolini said: "This is significant for very many people. I wanted this problem to become public because many people still do not know the risks. "I was on the phone, usually the mobile, for at least five or six hours every day at work. "I wanted it recognised that there was a link between my illness and the use of mobile and cordless phones.

Pesticide Threat Looms Large Over Farmworker Families - No matter how good your next meal tastes, it's likely it made society ill. A new analysis by the Pesticide Action Network North America (PAN) draws a disturbing connection between pesticides in our food system and serious health problems among women and children. The report reviews empirical research linking agricultural chemicals to birth defects, neurological disorders, childhood cancers and reproductive problems. Some of these chemicals make their way into the foods we eat, but they are more acutely concentrated in the environments surrounding farmlands. Children in or near farming areas can be exposed through myriad channels, from contaminated soil to the air in playgrounds. But children in farmworker communities are especially at risk. While the report confirms the growing public concerns about health risks permeating our food chain, it also shows how socioeconomic inequalities can shovel many of the worst effects onto exploited, impoverished workers.

GMOs and pesticide use (an email from Greg Conko) Here is a further Mark Bittman column on GMOs, arguing against GMOs on the grounds that they lead to greater use of chemicals and pesticides.  I would start with quite a simple point, namely to the extent there is a problem with chemicals and pesticides (as there may be with or without GMOs), let’s regulate that problem directly.  Somehow that option is not put on the table as an alternative to what is widely recognized as a rather dubious referendum.  In any case, I posed the question about GMOs and pesticides to Gregory Conko, who has written a book on GMOs, and he responded to me (Greg’s email goes under the fold)… GC: Note that “pesticide” is a broad term that includes both insecticides and herbicides, as well as fungicides, nematocides, rodenticides, etc. Use of GE crops has had a measurable impact on insecticide and herbicide use, with insecticide use incontrovertibly down and a mixed record on herbicide use. And because there is much more acreage planted with GE herbicide tolerant varieties than with GE insect resistant varieties, herbicide use trends tend to drown out insecticide use trends. When measuring raw quantities of active ingredient, you find herbicide use on herbicide-tolerant GE crops to vary widely with crop species and region. In corn, for example, where atrazine is used extensively on non-GE varieties, a switch to Roundup Ready varieties tends to reduce slightly the quantity of active ingredient used, but mainly results in a switch from one to the other chemical. In soy, on the other hand, where herbicides of any kind are used much less frequently in non-GE varieties, a switch to RR soy almost invariably increases active ingredient use significantly.  And because RR soy is by far the most widely grown GE crop (amounting to well over 60 percent of all the soy grown anywhere in the world), on net across all species, this tends to result in an increase in quantity of active ingredient for GE crops generally.

Judge bans GMOs in national wildlife refuges - U.S. District Judge James Boasberg made what couldn’t have been a very tough call yesterday. Until an environmental analysis is done, no one can plant genetically modified crops in National Wildlife Refuges.From the Associated Press: A U.S. judge sided on Tuesday with environmental groups that challenged the planting of genetically-modified crops on National Wildlife Refuges in the South. …“Plaintiffs allege harms that are currently occurring and will continue throughout 2012,” wrote Boasberg, an appointee of President Barack Obama. “Waiting for 2013 is not good enough.” He set a hearing for Nov. 5 to determine appropriate relief, but also encouraged both sides to meet to see if they could agree on at least some remedies. In their lawsuit last year, the Center for Food Safety and two other groups argued that the Fish and Wildlife Service violated environmental laws in allowing genetically modified crops in the agency’s Southeast Region, which encompasses 10 states. The groups claimed the practice has harmful environmental impacts. The most common genetically-modified crops planted were corn and soybeans resistant to the herbicide Roundup. …

Across Corn Belt, Farmland Prices Keep Soaring - After initially trickling in slower than the auctioneer’s babble, the bids began picking up. After about 15 minutes and a starting bid of $6,000 per acre, Mr. Huntrods, an agent with Hertz Farm Management, ended up with more than he had expected. A former John Deere dealer bought the 80-acre farm plot at a stunning price of $10,600 per acre. Mr. Huntrods had thought it would fetch less than $9,500 per acre. Across the nation’s Corn Belt, even as the worst drought in more than 50 years has destroyed what was expected to be a record corn crop and reduced yields to their lowest level in 17 years, farmland prices have continued to rise. From Nebraska to Illinois, farmers seeking more land to plant and outside investors looking for a better long-term investment than stocks and bonds continue to buy farmland, taking advantage of low interest rates. And despite a few warnings from bankers, the farmland boom shows no signs of slowing. Almost every year since 2005, except during the start of the recession in 2008, agriculture land prices have posted double-digit gains. In the same period, the Standard & Poor’s 500-stock index has had double-digit gains in only three of those years.

Drought Holds Its Grip As Growers Pivot To Wheat - The worst U.S. drought in decades showed little sign of easing last week as farmers closed out their corn and soybean harvests and turned their attention to winter wheat, which has been struggling to break through the moisture-starved soil in some states, according to a weekly report. The latest U.S. Drought Monitor update Thursday showed that just over 62 percent of the lower 48 states still was in some form of drought as of Tuesday, which was about the same as in the previous seven-day period. Nineteen percent of that land remained in extreme or exceptional drought, the two worst categories. Recent thunderstorms helped slightly relax the drought’s grip in portions of the nation’s midsection, where the U.S. Department of Agriculture said 87 percent of the corn and 80 percent of the soybean crops now have been brought in from the fields, weeks ahead of scheduled because of an earlier planting season. In Iowa, the nation’s biggest corn producer, 93 percent of the corn had been reaped as nearly 63 percent of the state still was mired in extreme or exceptional drought, an improvement in severity of only less than 1 percentage point from a week earlier. The drought’s stubbornness has become the latest headache for growers now turning their attention to winter wheat, which typically germinates this time of year and grows several inches before going dormant for the winter and resuming its growth next spring.

The Cost and Consequences of the U.S. Drought - The 2012 farming season may be in its waning days, but the consequences of this year’s drought, the worst of its kind in 25 years, are yet to be known. The U.S. Department of Agriculture estimates that the drought will push retail food prices up by between 3% and 4% in 2013. That’s a higher-than-average number, but only barely: over the last 20 years, average annual increases have been between 2.5% and 3%. Next year, most of the cost increases will be centered on animal products, like eggs, beef and dairy, which were particularly affected by not only this year’s drought but a similar dry spell across cattle farm-heavy stretches of the southwestern United States in 2011. The life cycle of American agriculture means that most drought-spurred food price increases won’t be seen until the first quarter of 2013. But the drought is already pushing up food prices globally: An August report from the World Bank recorded a 10% increase in global food prices in July compared to a month earlier.  Other effects of the drought are yet to be determined. Consumers will take a hit in the wallet, but that should be relatively short-lived — and short-term food price spikes can easily be absorbed by small changes in consumer behavior. But just how bad the farm industry was hit and how long it will take to shake off the drought’s effects are subjects of much concern in agribusiness circles.

Uncertainties about South American harvests are keeping global grain prices elevated - In spite of promises of record wheat and corn harvests in South America (discussed here), grain prices continue to stay elevated.  All eyes are on the soy, corn, and wheat sowing in the Southern Hemisphere, as buyers of agricultural commodities expect these spring crops to replenish the supplies lost to the summer's drought. But is it possible that the South American harvests will be worse than expected? That certainly seems to be the case with respect to Argentina. Reuters: - Argentina's upcoming wheat harvest is expected to shrink 17 percent from last season, the Agriculture Ministry said on Thursday, as farmers skirt government export curbs by shifting to other crops. The forecast drop to 11.5 million tonnes is bad news for consumer nations looking to Argentina to help make up for thin supplies caused by droughts in bread basket producers such as the United States, Russia and Australia Furthermore, at least so far, the weather in many parts of South America has not cooperated - one uncertainty that all harvest forecasts can not fully incorporate. Agrimoney: - Prospects of South America replenishing world corn supplies are taking a dent from excessive rains which are delaying plantings, and mean that the crop has got off to a "below average start". The Buenos Aires grains exchange on Thursday said that the pace of corn sowings in Argentina, the second-ranked exporter, had slowed to 6.9% of area in the last week, leaving 32% of corn planted. That is 11 points, equivalent to some 370,000 hectares, behind the average pace. As discussed before (see post), elevated food prices over a prolonged period of time will generate more uncertainty and even civil unrest in emerging markets nations. The risks of food inflation (which can have a strong impact on inflation expectations) in some countries will also prevent central banks from shifting to a more accommodative policy during periods of slow growth (see post).

Dominance of U.S. corn in Asia shaken by drought, price - - The worst drought in half a century has led long-time importers of U.S. corn to forge ties with alternative suppliers, casting a shadow over the United States' continued dominance in the export markets, said foreign grain buyers at a conference here. Major importers in Asia, including South Korea, Taiwan and top buyer Japan, have turned away from the United States as U.S. corn prices soared to record highs this summer, buying feed from South America and producers in the Black Sea region. China has not bought any U.S. corn since mid-summer and may not make additional purchases before the spring of 2013, and even then only if prices drop to more competitive levels closer to $6 per bushel, said the grain buyers who attended the Export Exchange industry conference on Wednesday. Corn futures at the Chicago Board of Trade closed at $7.54-1/2 a bushel on Wednesday, off the record high $8.43-3/4 set on Aug. 10 at the height of the drought rally.

Worldwide Food Production: still no collapse - Three months ago I posted an blog article about how there is not currently a collapse in food production. Since then, the FAO has updated their figures, including figures going back to 1981. The updated historical figures haven't changed the graph much, but there is a noticeable dip in the last two years:Note here that the measurement I'm using is the total amount of grains produced per capita. The reason for taking world population into account is to see whether supply (of food) is matching demand (the amount of people who need food). The FAO have pointed out a few times that more grain than ever was produced in 2011, and that is true. However, in terms of grain produced per capita, nothing has yet exceeded the 1984-1986 period. We came close in recent years (as the graph shows), but it has not been sustained. As I pointed out in the previous post, the most obvious part of the graph is the 1963-1985 period, which was when food production consistently outstripped population growth. This was known as the Green Revolution. Since the mid 1980s, however, there was a downward trend, which picked up again in 2003 and has just recently peaked.There's no doubt that per capita production has dropped in the last few years - I use a three year average that evens out the effects of good and bad years - but grain production is still quite high, per capita.

Thailand's Giant Pile Of Rice Threatens To Flood Global Markets - Thailand's status as the world's top rice exporter is under threat from a controversial scheme to boost farmer incomes that has resulted in a growing mountain of unsold stocks, experts warn. Prime Minister Yingluck Shinawatra's year-old policy to buy rice from farmers for 50 percent more than the market price has hit the competitiveness of Thai exports, which are expected to almost halve in 2012. "It's the worst year we have ever faced," said Chookiat Ophaswongse, honorary president of the Thai Rice Exporters Association. "We are already losing our market share in the world to our competitors, especially the newcomers like Cambodia and Myanmar which are producing more and more rice for export," he told AFP. Rice is the staple food for more than three billion people -- nearly half the world's population. Last year Thailand had nearly a third of the global export market. But its worldwide share is forecast to drop to less than one-fifth in 2012, according to the US Department of Agriculture (USDA), which expects the Southeast Asian nation to fall behind rival exporters Vietnam and India.

In a world hungry for biofuels, food security must come first - Does a U-turn in Brussels spell the end for biofuels? There is no doubting that plans to revise EU biofuel targets downwards mark a major turning point. While failing to go far enough, the EU executive has nonetheless realised it is imprudent to support, let alone mandate, extra biofuel production. Food prices are volatile and pressures on land are increasing in all regions of the world, causing local communities to fear evictions and many small food producers to be priced out of land markets. The EU has joined a growing consensus, and similar moves from the US would now be welcome: the latest calculations show that US ethanol policies have increased the food bills of poor food-importing countries by more than $9bn (£5.6bn) since 2006. But where to next? Should we disavow biofuels altogether? The new starting point should be to put food security first. Globally, 25% of land is already degraded, and the remaining productive areas are subject to ever-greater competition from industrial and urban uses. This is exacerbated by the growth of international trade and investment – and the emergence of a truly global market in land rights. Governments should therefore manage scant resources in a way that puts food production first – both domestically and where imported fuels are concerned. But if we are to measure biofuel developments against new sustainability criteria with a "food security first" logic, what exactly would this entail?

Invasive Grasses as Biofuel? Scientists Protest - More than 200 scientists from across the country have sent a letter to the Obama administration urging the Environmental Protection Agency to reconsider a rule, in the final approval stages, that would allow two invasive grasses, Arundo donax and Pennisetum purpureum, to qualify as advanced biofuel feedstock under the nation’s renewable fuel standard. “As scientists in the fields of ecology, wildlife biology, forestry and natural resources, we are writing to bring your attention to the importance of working proactively to prevent potential ecological and economic damages associated with the potential spread of invasive bioenergy feedstocks,” the scientists write. “While we appreciate the steps that federal agencies have made to identify and promote renewable energy sources and to invest in second- and third-generation sources of bioenergy, we strongly encourage you to consider the invasive potential of all novel feedstock species, cultivars, and hybrids before providing incentives leading to their cultivation.” Invasive species currently cost the nation $120 billion each year. Many of these invasive species were intentionally introduced by government-financed programs. Kudzu, or “the vine that ate the South,” for example, spread uncontrollably in the 1930s after farmers were paid to cultivate it in an attempt to curb erosion. The scientists signing the letter fear that the kudzu story will be repeated if the E.P.A. rule goes into effect.

Climate: Difference Engine: Cloudy with a chance of... | The Economist: Early in 2011, computer models were predicting a Niño, albeit a weak one. In the end, the Pacific decided to give La Niña another turn at influencing global weather. No-one is sure what is in store for this winter. Most models say that, after two Niñas, sea temperatures imply a Niño is on the cards. A few suggest a third Niña is still a possibility. Others say it could be neither (La Nada). For the record, the United States National Weather Service has officially declared last year’s Niña to have dissipated. Whatever, the cycle seems to be getting out of whack. For several decades, Niños have been coming more frequently, Niñas less so. Fingers point to global warming. But scientists caution that more research needs to be done before any direct correlation can be established. Satellite data go back only so far. Circumstantial evidence, though, suggests that something new is underway. A variation of El Niño has been detected in the central Pacific, well away from the ocean's eastern edge where it is normally born. This phenomenon, known as El Niño Modoki (Japanese for “looks like, but slightly different from”), causes unusual effects—including a lowering of tide heights, a strengthening of waves, and a tendency to make storms move south.

University of Tennessee collaborates in study: Dire drought ahead, may lead to massive tree death: Evidence uncovered by a University of Tennessee, Knoxville, geography professor suggests recent droughts could be the new normal. This is especially bad news for our nation's forests. For most, to find evidence that recent years' droughts have been record-breaking, they need not look past the withering garden or lawn. For Henri Grissino-Mayer he looks at the rings of trees over the past one thousand years. He can tell you that this drought is one of the worst in the last 600 years in America's Southwest and predicts worst are still to come. Grissino-Mayer collaborated with a team of scientists led by Park Williams of Los Alamos National Laboratory and others from the U.S. Geological Survey, University of Arizona and Columbia University to evaluate how drought affects productivity and survival in conifer trees in the Southwestern U.S. Their findings are published this month in "Nature Climate Change." Tree rings act as time capsules for analyzing climate conditions because they grow more slowly in periods of drought and the size of rings they produce vary accordingly. Widely spaced rings indicate wetter seasons and narrow rings indicate drier seasons. "Using a comprehensive tree-ring data set from A.D. 1000 to 2007, we found that the U.S. has suffered several 'mega-droughts' in the last 1,000 years in the Southwest," said Grissino-Mayer. "But the most recent drought that began in the late 1990s lasted through the following decade and could become one of the worst, if not the worst, in history."

Rising Ocean Temps Threaten the Ocean Food Chain - Of all the plants and animals facing a potentially dire future because of climate change, a study released Thursday in Science paints a potentially grim picture for one of the most important and underappreciated groups of living things on Earth. The study reports that phytoplankton — water-dwelling, single-celled micro-organisms including algae and other species — may have trouble adjusting to rising ocean temperatures. “Phytoplankton have evolved to do really well at current temperatures,” said lead author Mrudil Thomas, of Michigan State University, “but if they don’t evolve further, the warming this century is going to lead them to move their ranges, and their diversity in tropical oceans may drop considerably.”That could be a very big deal. Phytoplankton are not only the very foundation of the marine food chain, but they also consume about half of the carbon dioxide that enters the atmosphere, and take it to the bottom of the sea with them when they die. Significant disruptions to the world’s phytoplankton could therefore have major repercussions for the world’s food supply, and at the same time allow more CO2 to remain in the air to trap heat, accelerating climate change.

State Of The Species - THE PROBLEM WITH environmentalists, Lynn Margulis used to say, is that they think conservation has something to do with biological reality. A researcher who specialized in cells and microorganisms, Margulis was one of the most important biologists in the last half century—she literally helped to reorder the tree of life, convincing her colleagues that it did not consist of two kingdoms (plants and animals), but five or even six (plants, animals, fungi, protists, and two types of bacteria).  Margulis was no apologist for unthinking destruction. Still, she couldn’t help regarding conservationists’ preoccupation with the fate of birds, mammals, and plants as evidence of their ignorance about the greatest source of evolutionary creativity: the microworld of bacteria, fungi, and protists. More than 90 percent of the living matter on earth consists of microorganisms and viruses, she liked to point out. Heck, the number of bacterial cells in our body is ten times more than the number of human cells!   I once asked her, feeling like someone whining to Copernicus about why he couldn’t move the earth a little closer to the center of the universe. Aren’t we special at all? This was just chitchat on the street, so I didn’t write anything down. But as I recall it, she answered that Homo sapiens actually might be interesting—for a mammal, anyway. For one thing, she said, we’re unusually successful.  Seeing my face brighten, she added: Of course, the fate of every successful species is to wipe itself out.

Global Surface Temperature: Going Down the Up Escalator, Part 1 - One of the most common misunderstandings amongst climate "skeptics" is the difference between short-term noise and long-term signal.  In fact, "it hasn't warmed since 1998" is ninth on the list of most-used climate myths, and "it's cooling" is fifth.This myth stems from a lack of understanding of exactly what global warming is.  The term refers to the long-term warming of the global climate, usually measured over a timescale of about 30 years, as defined by the World Meteorological Organization.  This is because global warming is caused by a global energy imbalance - something causing the Earth to retain more heat, such as an increase in solar radiation reaching the surface, or an increased greenhouse effect.There are also a number of effects which can have a large impact on short-term temperatures, such as oceanic cycles like the El Niño Southern Oscillation or the 11-year solar cycle.  Sometimes these dampen global warming, and sometimes they amplify it.  However, they're called "oscillations" and "cycles" for a reason - they alternate between positive and negative states and don't have long-term effects on the Earth's temperature. Right now we're in the  midst of a period where most short-term effects are acting in the cooling direction, dampening global warming.  Many climate "skeptics" are trying to capitalize on this dampening, trying to argue that this time global warming has stopped, even though it didn't stop after the global warming "pauses" in 1973 to 1980, 1980 to 1988, 1988 to 1995, 1995 to 2001, or 1998 to 2005 (Figure 1).

Munich Re: North America most affected by increases in weather-related natural catastrophes -A new study by Munich Re shows that North America has been most affected by weather-related extreme events in recent decades. The publication "Severe weather in North America" analyzes all kinds of weather perils and their trends. It reports and shows that the continent has experienced the largest increases in weather-related loss events. For the period concerned – 1980 to 2011 – the overall loss burden from weather catastrophes was US$ 1,060bn (in 2011 values).The insured losses amounted to US$ 510bn, and some 30,000 people lost their lives due to weather catastrophes in North America during this time frame. With US$ 62.2bn insured losses and overall losses of US$ 125bn (in original values) Hurricane Katrina in 2005 was the costliest event ever recorded in the US. Katrina was also the deadliest single storm event, claiming 1,322 lives. Munich Re analyzes the frequency and loss trends of different perils from an insurance perspective. The North American continent is exposed to every type of hazardous weather peril – tropical cyclone, thunderstorm, winter storm, tornado, wildfire, drought and flood. One reason for this is that there is no mountain range running east to west that separates hot from cold air. Nowhere in the world is the rising number of natural catastrophes more evident than in North America. The study shows a nearly quintupled number of weather-related loss events in North America for the past three decades, compared with an increase factor of 4 in Asia, 2.5 in Africa, 2 in Europe and 1.5 in South America. Anthropogenic climate change is believed to contribute to this trend, though it influences various perils in different ways. Climate change particularly affects formation of heat-waves, droughts, intense precipitation events, and in the long run most probably also tropical cyclone intensity.

Winter Cooling? - It was mentioned in recent discussion that Cohen et al. (2012) found recent winter cooling in much of the boreal (northern but not necessarily Arctic) northern hemisphere. In fact, here’s their key graph for that particular question:Colors show the wintertime temperature trend from 1988 through 2010, with red indicating warming while blue indicates cooling, based on the HadCRUT3 gridded temperature data set. They note cooling in northern Europe, Russia, and eastern North America. I decided to take a look at another data set for part of the area they studied, the data from NCDC (National Climate Data Center) for the 344 climate divisions covering the contiguous U.S. If we estimate the trend (by linear regression) for the winter season (Dec-Jan-Feb) only, for all U.S. climate divisions since 1988 (which is a little bit longer than the time studied in Cohen et al., since these data go through Sep.2012 while they ended with Dec.2010), it looks like this (red is warming, blue is cooling, larger dots mean faster rates): Sure enough, the broad swath of blue in the eastern U.S. shows cooling just as reported by Cohen et al.

Cato Institute Crafts Fake ‘Addendum’ To Federal Climate Report: ‘It’s Not An Addendum, It’s A Counterfeit’ - A new “addendum” to be released as soon as this week purports to update with the latest science a 2009 federal assessment on the impacts to the United States of climate change. The addendum matches the layout and design of the original, published by the U.S. Global Change Research Program: Cover art, “key message” sections, table of contents are all virtually identical, down to the chapter heads, fonts and footnotes. But the new report comes from the libertarian Washington, D.C.-based Cato Institute. And its findings – that science is questionable, the impacts negligible and the potential policy solutions ineffective – are more a rebuke than a revision of the original report and of accepted science both then and today. “It’s not an addendum. It’s a counterfeit,” said John Abraham, an associate professor at the University of Saint Thomas. “It’s a continued effort to kick the can down the road: A steady drip, drip, drip of fake reports by false scientists to create a false sense of debate.”

Greedy Lying Bastards -- the trailer -- Merchants of Doubt on Climate Change

A political economy argument for economic policy delegation - In a previous post I talked about an example of the pernicious impact that politics can have on academic economists, and promised to write something on how this might be avoided. (For a more recent example, see here.) Now one response to this is to shrug ones shoulders and say it is inevitable given the nature of the discipline. It would certainly be naive to imagine economics could ever be free of ideological influence.  However I do not think it is unreasonable to try and discourage situations where evidence is distorted, and in particular to try and avoid occasions where minority views are turned into policy because they happen to fit certain political prejudices. As I have argued before, you cannot rely on the media to do this. Much of the media actually encourages this problem, by giving minority views equal airtime. One of the really depressing developments over the last decade has been how, when the issue of climate change is in the news, the media often tries to ‘balance’ the views of some climate change scientist with someone from the climate change denial community.  In the case of climate change, one way that scientists have tried to overcome this problem is by ‘learned societies’ issuing reports. In the US we have the National Academies, and in the UK the Royal Society. Now it is interesting to wonder whether economics could ever do something similar, but you also have to ask how much that would achieve. As I have noted before, no amount of expert opinion stopped certain newspapers in the UK hyping the imagined link between the MMR vaccination and autism, and many politicians worry more about what is in newspapers than what academic opinion says. Some may even encourage erroneous fears for political ends.

"The recent shift in early summer Arctic atmospheric circulation," - The last six years (2007–2012) show a persistent change in early summer Arctic wind patterns relative to previous decades. The persistent pattern, which has been previously recognized as the Arctic Dipole (AD), is characterized by relatively low sea-level pressure over the Siberian Arctic with high pressure over the Beaufort Sea, extending across northern North America and over Greenland. Pressure differences peak in June. In a search for a proximate cause for the newly persistent AD pattern, we note that the composite 700-hPa geopotential height field during June 2007–2012 exhibits a positive anomaly only on the North American side of the Arctic, thus creating the enhanced mean meridional flow across the Arctic. Coupled impacts of the new persistent pattern are increased sea ice loss in summer, long-lived positive temperature anomalies, and ice sheet loss in west Greenland, and a possible increase in Arctic–subarctic weather linkages through higher-amplitude upper-level flow. The North American location of increased 700-hPa positive anomalies suggests that a regional atmospheric blocking mechanism is responsible for the presence of the AD pattern, consistent with observations of unprecedented high-pressure anomalies over Greenland since 2007.

"Recent changes to the Gulf Stream causing widespread gas hydrate destabilization," -The Gulf Stream is an ocean current that modulates climate in the Northern Hemisphere by transporting warm waters from the Gulf of Mexico into the North Atlantic and Arctic oceans1, 2. A changing Gulf Stream has the potential to thaw and convert hundreds of gigatonnes of frozen methane hydrate trapped below the sea floor into methane gas, increasing the risk of slope failure and methane release3, 4, 5, 6, 7, 8, 9. How the Gulf Stream changes with time and what effect these changes have on methane hydrate stability is unclear. Here, using seismic data combined with thermal models, we show that recent changes in intermediate-depth ocean temperature associated with the Gulf Stream are rapidly destabilizing methane hydrate along a broad swathe of the North American margin. The area of active hydrate destabilization covers at least 10,000 square kilometres of the United States eastern margin, and occurs in a region prone to kilometre-scale slope failures. Previous Our analysis suggests that changes in Gulf Stream flow or temperature within the past 5,000 years or so are warming the western North Atlantic margin by up to eight degrees Celsius and are now triggering the destabilization of 2.5 gigatonnes of methane hydrate (about 0.2 per cent of that required to cause the PETM). This destabilization extends along hundreds of kilometres of the margin and may continue for centuries. It is unlikely that the western North Atlantic margin is the only area experiencing changing ocean currents10, 11, 12; our estimate of 2.5 gigatonnes of destabilizing methane hydrate may therefore represent only a fraction of the methane hydrate currently destabilizing globally. The transport from ocean to atmosphere of any methane released—and thus its impact on climate—remains uncertain.

Climate-changing methane 'rapidly destabilizing' off East Coast, study finds A changing Gulf Stream off the East Coast has destabilized frozen methane deposits trapped under nearly 4,000 square miles of seafloor, scientists reported Wednesday. And since methane is even more potent than carbon dioxide as a global warming gas, the researchers said, any large-scale release could have significant climate impacts. Temperature changes in the Gulf Stream are "rapidly destabilizing methane hydrate along a broad swathe of the North American margin," the experts said in a study published Wednesday in the peer-reviewed journal Nature.. Using seismic records and ocean models, the team estimated that 2.5 gigatonnes of frozen methane hydrate are being destabilized and could separate into methane gas and water. It is not clear if that is happening yet, but that methane gas would have the potential to rise up through the ocean and into the atmosphere, where it would add to the greenhouse gases warming Earth. The 2.5 gigatonnes isn't enough to trigger a sudden climate shift, but the team worries that other areas around the globe might be seeing a similar destabilization.

UK faces fine on EU water breach -The UK faces fines for breaching EU law on water treatment after plants in northern England and in London dumped raw sewage into waterways. That is the outcome of a ruling by the European Court of Justice, which has yet to decide what the penalty will be. Under an EU directive introduced in 1991, Britain was obliged to meet new standards for treating waste water. The UK said that it had already taken steps to fix the problem and that it was complying with EU regulations. However, the court in Luxembourg rejected its argument. "The United Kingdom has failed to fulfil its obligations under (the) directive," the court said. It said that plants in Whitburn in northern England and in London had dumped sewage in local waterways. London's sewer system, much of which dates back to Victorian times, discharges raw waste into the River Thames when rainfall overwhelms the 19th Century tunnels. "So far as concerns the treatment plants of the collecting system for London... their capacity is sufficient in dry weather, but not sufficient in the slightest in the case of rainfall," the court added.

Deadly Spain Earthquake Triggered By Groundwater Removal: Groundwater removal triggered the unusually shallow and deadly earthquake that hit Lorca, Spain, in 2011, according to a new study. Scientists have known for decades that pumping water into the Earth can set off small earthquakes. But this is the first time that removing water has been identified as an earthquake trigger, researchers said. Both the size and the location of the quake were influenced by groundwater pumping, the study found. "The fact that the very tiny stress changes due to normal processes, such as the extraction of groundwater, could have an effect on very large systems such as faults, that's very surprising," said Pablo González, lead study author and a postdoctoral scholar at the University of Western Ontario in Canada.

Spain Earthquake, Drilling Wells Linked In New Study Of Lorca Tragedy: (AP) — Farmers drilling ever deeper wells over decades to water their crops likely contributed to a deadly earthquake in southern Spain last year, a new study suggests. The findings may add to concerns about the effects of new energy extraction and waste disposal technologies. Nine people died and nearly 300 were injured when an unusually shallow magnitude-5.1 quake hit the town of Lorca on May 11, 2011. It was the country's worst quake in more than 50 years, causing millions of euros in damage to a region with an already fragile economy. Using satellite images, scientists from Canada, Italy and Spain found the quake ruptured a fault running near a basin that had been weakened by 50 years of groundwater extraction in the area. During this period, the water table dropped by 250 meters (274 yards) as farmers bored ever deeper wells to help produce the fruit, vegetables and meat that are exported from Lorca to the rest of Europe. In other words, the industry that propped up the local economy in southern Spain may have undermined the very ground on which Lorca is built.

Nightmare on Electric Vehicle Street - Halloween starts earlier and earlier every year. Cobwebs on restaurant doorways, skulls on bank counters, when it’s still weeks away.  How’s this for a new horror movie concept?  Young, good-looking couple driving down a deserted country road in their brand new electric vehicle. It’s a dark and stormy night. The car battery has just run out of juice. They get out and push the vehicle up to the driveway of a broken down old house. The young good-looking couple trundle up to the door with their extension cord to ask if they could plug in and use just enough electricity to get them to the next town. They are willing to pay - more than they would for gas. Little do they know what the true cost will be. They ring the doorbell. Someone creepy answers the door. . . . It has not been a complete horror show yet in the electric car business, but there has been a bit of a letdown.  Chevy Volt sales through the end of September were 16,348 units. Chevy had originally hoped to sell 40,000 Volts this year. The Nissan Leaf, the other early big entry in the electric car market, has only sold 5,200 units in the US this year through September.Car companies that have invested $billions in new electric models will have to wait longer to recoup those funds.

Obama's alternative energy bankruptcies - President Obama is getting hammered for funding renewable energy companies that have since gone belly up. During the first presidential debate, Mitt Romney said "about half" of the companies funded by Obama's administration went bankrupt. That is true -- for just the first two years of the program that supported Solyndra, which the campaign later clarified. (See correction below).But a spokesman for the Energy Department said that agency has dozens of programs that funded over 1,300 companies in the renewable energy space, and that less than 1% have gone bankrupt -- also true. So just how many federally-funded energy companies have failed? A total of five have gone bankrupt, according to the House Committee on Energy and Commerce. All of the failed companies that the Committee identified came from just two programs that received significant dollar amounts from the Department of Energy. Those two programs funded 63 firms. The other 58 are still in business. That's a failure rate of about 8%.

Want a more substantive Obama-Romney debate on energy and climate? Read this.: As every green group in D.C. has now pointed out twenty times apiece, President Obama and Mitt Romney didn’t wade too deeply into energy and environmental issues during the debates. They skipped over climate change entirely. And there were all sorts of minor topics that never got mentioned. Bad news for energy wonks. Fortunately, there’s a second-best solution for those who still want to hear more from the campaigns about this issue. In early October, E&E News and the MIT Energy Initiative held a wide-reaching energy and climate debate between surrogates from the two campaigns. Joseph Aldy, a former administration official now at Harvard’s Kennedy School, stood in for Obama. On the other side was Oren Cass, Romney’s policy director. The debate between Aldy and Cass was fascinating and substantive. You can read the full transcript here, but I wanted to highlight a few bits.

Saudi Arabia's Ambitious Renewable Energy Plans - Prince Turki Al Faisal Al Saud, one of Saudi Arabia’s top spokesmen, has confirmed that Saudi Arabia has plans to generate 100% of its power from renewable sources, and low carbon forms of energy. Currently Saudi Arabia produces nearly all of its energy from fossil fuels, with two-thirds coming from oil and the rest from natural gas. The kingdom is exploring its renewable energy options, of which solar energy is expected to play a large part. They have also signed a memorandum of understanding with Argentina to develop nuclear power. Prince Turki said that the nation’s vast oil reserves, one fifth of global reserves according to the IEA, will be used to create other goods such as plastics and polymers, rather than be burned in power plants.

Australia’s Climate Policies to Spur A$100 Billion in Spending - Australia’s policies to mitigate climate change and promote the use of clean energy will likely drive investment of A$100 billion ($103 billion) during the next four decades, Minister for Climate Change and Energy Efficiency Greg Combet said. To extend its action on climate change, the government intends linking with emissions trading schemes in New Zealand and throughout the Asia-Pacific region, Combet said in a speech delivered today in Sydney. The Australian government has set a price of A$23 a metric ton on carbon emissions for about 300 of its largest polluters for the year that started on July 1, with a market-based price scheduled to begin in 2015. Opposition leader Tony Abbott has pledged to repeal what he calls a “toxic” carbon tax should his Liberal-National coalition win power in the next election.

Windmills Overload East Europe’s Grid Risking Blackout: Energy - Germany is dumping electricity on its unwilling neighbors and by wintertime the feud should come to a head. Germany is dumping electricity on its unwilling neighbors and by wintertime the feud should come to a head. Central and Eastern European countries are moving to disconnect their power lines from Germany’s during the windiest days. That’s when they get flooded with energy, echoing struggles seen from China to Texas over accommodating the world’s 200,000 windmills. Renewable energy around the world is causing problems because unlike oil it can’t be stored, so when generated it must be consumed or risk causing a grid collapse. At times, the glut can be so great that utilities pay consumers to take the power and get rid of it. “Germany is aware of the problem, but there is not enough political will to solve the problem because it’s very costly,” Pavel Solc, Czech deputy minister of industry and trade, said in an interview. “So we’re forced to make one-sided defensive steps to prevent accidents and destruction.”

Ocean Power: The Ignored Alternative - Since the beginning of time man has dreamed of the challenge of harnessing the power of the oceans, with their currents, tides and waves. It was talked about seriously during the energy crisis of the 1970s, and then largely forgotten. In the early years of the alternative energy industry, engineers enthused about the tidal rise of Canada’s Bay of Fundy and France’s Bay of Biscay as sources of power. Ocean power is more energy dense than wind power. But when it was apparent that no single machine could be developed to generate ocean power, enthusiasm waned. Wind turbines can be standardized, but currents, tides and waves are a site-specific energy source. As a result wind, solar, geothermal and biomass got the alternative energy development attention and the bulk of the funding. Ocean energy stayed in the speeches, a gleam in the eye of a small group of developers scattered around seafront nations. Now there is an ocean energy movement. In more than 20 countries, private companies are developing first-generation water turbines.

Cap-and-Trade, Carbon Taxes, and My Neighbor’s Lovely Lawn - ...In 2007, the Project’s leadership asked me to write a paper proposing a U.S. CO2 cap-and-trade system. ... The Hamilton Project leaders said ... they wanted me to make the best case I could for cap-and-trade, not a balanced investigation of the two policy instruments. Someone else would be commissioned to write a proposal for a carbon tax. (That turned out to be Professor Gilbert Metcalf of Tufts University ... who did a splendid job!) Thus, I was made into an advocate for cap-and-trade. It’s as simple as that. ...In principle, both carbon taxes and cap-and-trade can achieve cost-effective reductions, and – depending upon design — the distributional consequences of the two approaches can be the same. But the key difference is that political pressures on a carbon tax system will most likely lead to exemptions of sectors and firms, which reduces environmental effectiveness and drives up costs, as some low-cost emission reduction opportunities are left off the table. But political pressures on a cap-and-trade system lead to different allocations of the free allowances, which affect distribution, but not environmental effectiveness, and not cost-effectiveness. I concluded that proponents of carbon taxes worried about the propensity of political processes under a cap-and-trade system to compensate sectors through free allowance allocations, but a carbon tax would be sensitive to the same political pressures, and should be expected to succumb in ways that are ultimately more harmful: reducing environmental achievement and driving up costs.

Climate policy: It's important enough for second-best policies or it isn't - I'D LIKE to add a quick post-script to Friday's post on David Brooks and climate policy. Last week, Mr Brooks wrote a column in which he said: Global warming is still real. Green technology is still important. Personally, I’d support a carbon tax to give it a boost. But he who lives by the subsidy dies by the subsidy. Government planners should not be betting on what technologies will develop fastest. They should certainly not be betting on individual companies. Just a couple of days later Robert Stavins, the Director of the Harvard University Environmental Economics Programme, wrote a very nice post discussing various carbon policies and how our thinking about them should be shaped by their implementability. He quips: National policy instruments that appear impeccable from the vantage point of Cambridge, Massachusetts, Berkeley, California, or Madison, Wisconsin, but consistently prove infeasible in Washington, D.C., can hardly be considered “optimal.” This is just the right response to the common pundit wheeze whereby the author states a desire to do something about x, but only if Washington can implement an ideal, technocratic solution rather than the usual political sausage. But politics is how things get done in Washington! After more than two centuries of legislative history, one would think pundits would have become accustomed to the notion that it takes a bit of horse-trading to do anything important. As Mr Stavins points out, it makes no sense to judge policies strictly on their performance in an idealised world. A "second-best" policy might well be optimal if it proves relatively robust to the political process.

Clinton Cites Energy in Diplomacy From Oil to Climate -  U.S. Secretary of State Hillary Clinton today promoted energy as a foreign-policy priority, citing Iran and the South China Sea as oil-rich expanses where diplomacy and economics converge. “Today, energy cuts across the entirety of U.S. foreign policy,” she said in a  speech  at Georgetown University in Washington. The top U.S. diplomat cited the U.S. role in helping boost Iraq’s oil production and brokering an oil-sharing agreement between South Sudan and Sudan as examples of “energy diplomacy.” Her comments come in the final week of a tight presidential election campaign where candidates are sparring over domestic oil and gas production, crude prices and coal even as the topic of global climate change has been largely left out of the debate. Under Clinton’s watch, the State Department created a bureau dedicated to energy. The department also has an in-house economist, part of Clinton’s efforts to expand her toolbox. Looking ahead, Clinton, who has said she will step down even if President Barack Obama wins re-election, cited energy challenges that will face her successor. She described a turning point in history when for the first time developing countries are set to consume more of the world’s energy than the industrialized nations.

Snake Garden - I mean what we are going to do when the major systems we depend on for everyday life begin to wobble and fail.  There is zero cognizance even among the paid kibitzers that we are near that point. Rather, a rapture of techno-narcissism holds in thrall even people who ought to know better, and a chatter-stream of infotainment propaganda spreads an hallucinatory fog of national self-esteem-boosting figments ranging from "energy independence" to "green jobs."    The truth of our situation is an implacable contraction of the turbo-corporate economy due to remorseless looming energy scarcity. That is, strange to relate, not altogether bad news (if we were psychologically disposed to process it, which we are not). It doesn't have to mean that everything in American life goes straight to shit -- though it might. It could well mean that some of the most destructive corporate actors go to shit (quickly and unexpectedly), making room for some really beneficial transformation. For instance, the tensions of excessive scale and lack of resilience could put WalMart and everything like it out of business. It wouldn't take much to fatally compromise the 12,000-mile supply lines and the 'warehouse-on-wheels' that the behemoth retailers depends on. $6 diesel fuel and a few more currency war provocations against China could put the schnitz on the operating system of national chain retail. It would be the end of the unacknowledged "entitlement" called "bargain shopping," but it would also provide the opportunity to rebuild the very local and regional economies that these predatory outfits put to death thirty years ago - and, more importantly, open up a vast range of careers, positions, and roles for Americans to play in truly running their own commercial economies in their own home-towns, in particular young Americans otherwise demoralized by an economy that has left so many of them stranded.

Fish Caught in Fukushima as Tainted as a Year Ago, Study Says - Fish caught in waters off the coast of northern Japan, where an earthquake triggered a radiation leak at the Fukushima power plant, are still as contaminated today as a year ago, a study found. Contamination levels were particularly high among species dwelling at the bottom of the ocean, as sinking radioactive materials tainted the seafood, the research showed. The findings, published today in the journal Science, suggest there is a continued source of radiation from the seafloor that will have a lasting impact, said Ken Buesseler, the study’s author. “This means that even if these sources were to be shut off completely, the sediments would remain contaminated for decades to come,” said Buesseler, a senior scientist at Woods Hold Oceanographic Institution in Woods Hole, Massachusetts. In waters off Fukushima, where there is a ban on fishing for bottom-dwelling species, 40 percent of fish are above the limit for human consumption based on Japanese regulatory limits, Buesseler said.

Fukushima fish 'may be inedible for a decade' - Fish from the waters around the Fukushima nuclear plant in Japan could be too radioactive to eat for a decade to come, as samples show that radioactivity levels remain elevated and show little sign of coming down, a marine scientist has warned. According to a paper published in the journal Science on Thursday, large and bottom-dwelling species carry most risk, which means cod, flounder, halibut, pollock, skate and sole from the waters in question could be off limits for years, . Sample fish caught in waters near the stricken reactors suggest there is still a source of caesium either on the seafloor or still being discharged into the sea, perhaps from what is left of the cooling waters. As the levels of radioactive isotopes in the fish are not declining as fast as they should have, the outlook for fishing in the area is likely to be poor for the next 10 years, the paper's author told the Guardian. "These fish could have to be banned for a long time. The most surprising thing for me was that the levels [of radioactivity] in the fish were not going down. There should have been much lower numbers," said Ken Buesseler, senior scientist at the Woods Hole Oceanographic Institution in the US, who wrote the paper titled Fishing For Answers Off Fukushima.

Gundersen Confirms: Fukushima Unit 4 is sinking unevenly — Building “may begin to be tilting” (AUDIO)

Japan confirms explosion, leakage at nuke plant - Japanese Chief Cabinet Secretary Yukio Edano confirmed on Saturday there has been an explosion and radiation leakage at Tokyo Electric Power Co's (TEPCO) (9501.T) Fukushima Daiichi nuclear power plant.  "We are looking into the cause and the situation and we'll make that public when we have further information," Edano said. "At present, we think 10 km evacuation is appropriate." Japan earlier in the day warned of a meltdown at a reactor at the plant, damaged when a massive earthquake and tsunami struck the northeast coast, but said the risk of radiation contamination was small. Edano also said that Japan has expanded the evacuation area around the Fukushima Daini nuclear plant

Activists Spend 28 Hours at Swedish Nuclear Plants Undetected…- In an effort to expose nuclear plant security flaws, 70 Greenpeace activists descended on two nuclear plants in Sweden and broke in. The state-owned plant operator Vattenfall says security measures worked as they were intended and all were detained. But, oops, six people managed to spend 28 hours inside the plants, just hanging out on the roof until they called the media and exposed themselves.

UK public favours wind turbines over shale gas wells, poll finds - More than two-thirds of people would rather have a wind turbine than a shale gas well near their home, according to a new opinion poll published on Tuesday. Asked to choose between having the two energy sources within two miles of their home, 67% of respondents favoured a turbine, compared to just 11% who would support the gas development. The findings of the UK-wide ICM survey shows that only nuclear power and coal are less popular than shale gas developments. The ICM poll, together with a second new poll from YouGov, show public opinion is against George Osborne's push for a new "dash for gas" as the central plank of the government's energy policy. The polls come at a critical time for the government's energy bill, which aims to deliver the £200bn required to replace and develop the nation's ageing energy infrastructure, due to be published on 5 November. The investment required will be added to household energy bills that are already rising and proving a political headache for David Cameron.

Chinese protesters clash with police over power plant - People protesting against the building of a coal-fired power plant in a southern Chinese town threw bricks at police who fired volleys of teargas and detained dozens in the country's latest environmental dispute, residents say. At least 1,000 people in Yinggehai, on China's Hainan island, began several days of protests last week after construction resumed on the plant, which had been halted by earlier demonstrations. Dozens had been injured and many were detained by police, who have put the town under strict surveillance, residents said on Monday. Police and local officials declined to comment. "They fired teargas to disperse the crowds in the past few days," said a resident who gave only his surname, Xian, because he did not want to be identified by authorities. "We don't want a power plant here that will cause serious pollution," he said. Three decades of rapid economic expansion in China have come at an environmental price, and residents have become increasingly outspoken about pollution in their backyards. In July, a southern town in Sichuan province scrapped plans for a copper plant after thousands clashed with police, and another community in eastern Jiangsu province dropped plans for a waste water plant after similar demonstrations.

U.S. Coal Exports On Pace To Hit All-Time High: Coal exports are booming, fueling a surge in global warming pollution — and American taxpayers are picking up a good portion of the tab. The latest figures from the Energy Information Administration shows just how strongly coal exports have risen. Boosted by growing demand in Asia, the U.S. is on track to ship record amounts of coal overseas this year, surpassing the previous all-time high set in 1981. If coal exports — mostly steam coal for power generation — continue on pace through the rest of the year, it’s possible they could surge past previous projections for a record year. However, EIA says exports have fallen slightly in the second half of the year due to the global economic malaise and a slowdown in China. But that still won’t stop it from breaking the previous record:So why should the U.S. taxpayer care? As journalists and analysts have pointed out time and time and time again, companies sending coal to be burned in other countries are getting access to taxpayer-owned lands for very cheap. Much of the nation’s coal comes from the Powder River Basin, which is located on lands in Montana and Wyoming managed by the Bureau of Land Management. Over the last 30 years, the Bureau of Land Management has held “auctions” with one bidder and handed over the resource for next to nothing, keeping coal prices artificially low. (In the latest “auction,” Peabody Energy — the largest private coal company in the world — secured taxpayer-owned coal for $1.11 per ton. The company will likely be able to sell it in China for around $100 per ton).

Cheap Natural Gas Gives New Hope to the Rust Belt - Three decades after being devastated by the closing of steel mills, this gritty river valley is hoping its revival will come from cheap natural gas. The hope doesn't rest on drilling rigs, but on a multibillion-dollar chemical plant that Royal Dutch Shell  is considering building here because of a flood of domestically produced natural gas. Community leaders are touting the plant as the first step toward reviving a manufacturing industry many thought was gone for good.It isn't just Beaver County reaping the benefits of cheap gas. Plunging prices have turned the U.S. into one of the most profitable places in the world to make chemicals and fertilizer, industries that use gas as both a feedstock and an energy source. And they have slashed costs for makers of energy-intensive products such as aluminum, steel and glass. "The U.S. is now going to be the low-cost industrialized country for energy," the energy economist Philip Verleger says. "This creates a base for stronger economic growth in the United States than the rest of the industrialized world." Natural gas is only part of the story. The same hydraulic-fracturing revolution that is freeing gas from shale formations is being used to extract oil. U.S. oil production is up 20% since 2008, and the U.S. government expects it to rise another 12.6% in the next five years.

Pennsylvania towns savor drilling impact-fee checks - William Groves, chairman of the Cumberland Township board of supervisors, was poring over the municipal budget last week, confronting a challenge that most local officials would envy. Groves was trying to figure out what this Greene County community in Southwestern Pennsylvania would do with a $1 million windfall from the Marcellus Shale impact fee. Of all the towns affected by natural-gas production, Cumberland Township got the largest share from the state's new drilling assessment. "It is certainly a pleasant challenge," he said. The $1,039,586.78 check that the township received represents a 45 percent boost to its $2.3 million annual budget. There is no shortage of need in this rural township of 6,600 residents, where Marcellus producers have drilled 83 wells since the shale boom began in 2008. The hilly township bordered by the Monongahela River has only 20 municipal employees, half of them police officers. It maintains 68 miles of roads, and funds three volunteer fire companies.

Video: Natural-Gas Boom Creates Jobs - A natural-gas drilling boom in the Marcellus Shale is pushing down manufacturing prices and creating jobs. For the first time in a generation this is giving companies a reason to stay in the U.S. WSJ’s Ben Casselman reports from Beaver County, PA.

Why Natural Gas Won’t Save the World - We keep hearing about the many benefits of natural gas–how burning it releases less CO2 than oil or coal, and how it burns with few impurities, so does not have the pollution problems of coal. We also hear about the possibilities of releasing huge amounts of new natural gas supplies, through the fracking of shale gas. Reported reserves for natural gas also seem to be quite high, especially in the Middle East and the Former Soviet Union. But I think that people who are counting on natural gas to solve the world’s energy problems are “counting their chickens before they are hatched”. Natural gas is a fuel that requires a lot of infrastructure in order for anything to “happen”. As a result, it needs a lot of up-front investment, and several years time delay. It also needs changes on the consumption side (requiring further investment) that will allow this natural gas to be used. If the cost is higher than competing fuels, this becomes a problem as well. In many ways, natural gas consumption is captive to other things that are happening in the economy: an economy that is industrializing rapidly will easily be able to consume more natural gas, but an economy in decline will find it hard to scrape together funds for new ways of doing what was done previously, now with natural gas. Increased use of renewables seems to call for additional use of natural gas for balancing, but even this is not certain, because in many parts of the world, natural gas is a high-priced imported fuel.  Political instability, often linked to high oil and food prices, creates a poor atmosphere for new Liquefied Natural Gas (LNG) facilities, no matter how attractive the pricing may seem to be. In the US, we have already “hit the wall” on how much natural gas can be absorbed into the system or used to offset imports. US natural gas production has been flat since November 2011, based on EIA data (Figure 1, below).

In a Natural Gas Glut, Big Winners and Losers -  At its peak, Chesapeake ran 38 rigs in the region. All told, it has sunk more than 1,200 wells into the Haynesville, a gas-rich vein of dense rock that straddles Louisiana and Texas. Fed by a gold-rush mentality and easy money from Wall Street, Chesapeake and its competitors have done the same in other shale fields from Oklahoma to Pennsylvania. For most of the country, the result has been cheaper energy. The nation is awash in so much natural gas that electric utilities, which burn the fuel in many generating plants, have curbed rate increases and switched more capacity to gas from coal, a dirtier fossil fuel. Companies and municipalities are deploying thousands of new gas-powered trucks and buses, curbing noxious diesel fumes and reducing the nation’s reliance on imported oil. And companies like fertilizer and chemical makers, which use gas as a raw material, are suddenly finding that the United States is an attractive place to put new factories, compared with, say, Asia, where gas is four times the price.But while the gas rush has benefited most Americans, it’s been a money loser so far for many of the gas exploration companies and their tens of thousands of investors. The drillers punched so many holes and extracted so much gas through hydraulic fracturing that they have driven the price of natural gas to near-record lows. And because of the intricate financial deals and leasing arrangements that many of them struck during the boom, they were unable to pull their foot off the accelerator fast enough to avoid a crash in the price of natural gas, which is down more than 60 percent since the summer of 2008. Although the bankers made a lot of money from the deal making and a handful of energy companies made fortunes by exiting at the market’s peak, most of the industry has been bloodied — forced to sell assets, take huge write-offs and shift as many drill rigs as possible from gas exploration to oil, whose price has held up much better.

US Shale Gas Bubble is Set to Burst - For the past three or four years media sources in the U.S. trumpeted the “game-changing” new stream of natural gas coming from tight shale deposits produced with the technologies of horizontal drilling and hydrofracturing. So much gas surged from wells in Texas, Oklahoma, Louisiana, Arkansas, and Pennsylvania that the U.S. Department of Energy, presidential candidates, and the companies working in these plays all agreed: America can look forward to a hundred years of cheap, abundant gas! Early on in the fracking boom, oil and gas geologist Art Berman began sounding an alarm (see example). Soon geologist David Hughes joined him, authoring an extensive critical report for Post Carbon Institute (“Will Natural Gas Fuel America in the 21stCentury?”), The glut of recent gas production was initially driven not by new technologies or discoveries, but by high prices. In the years from 2005 through 2008, as conventional gas supplies dried up due to depletion, prices for natural gas soared to $13 per million BTU (prices had been in $2 range during the 1990s). It was these high prices that provided an incentive for using expensive technology to drill problematic reservoirs. Companies flocked to the Haynesville shale formation in Texas, bought up mineral rights, and drilled thousands of wells in short order. High per-well decline rates and high production costs were hidden behind a torrent of production—and hype. With new supplies coming on line quickly, gas prices fell below $3 MBTU, less than the actual cost of production in most cases. From this point on, gas producers had to attract ever more investment capital in order to maintain their cash flow. It was, in effect, a Ponzi scheme.

Gazprom Launches Production at New Gas Field in Russia -- Russia’s energy giant Gazprom launched production at a major natural gas field in northern Russia while President Vladimir Putin asked the company to look into a growing role of shale gas producers. Gazprom inaugurated the Bovanenkovskoye gas field on the Yamal peninsula that is expected to yield 46 billion cubic meters of gas next year, and 115 billion cubic meters a year in 2017. Reserves at Bovanenkovskoye, which is situated in the permafrost zone, are estimated at 4.9 trillion cubic meters. The field is key to Gazprom’s plans to expand Europe-bound exports. The state-owned gas monopolist has already built a pipeline leading to the field that would allow shipping the gas directly to Europe. In Moscow, President Putin ordered Gazprom, which is controlled by the government, to prepare an in-depth report on its export policies and look into the prospects of competition from liquid natural gas, as well as shale gas producers. Gazprom has for years played down the threat of shale gas producers taking up some of its market share in Europe.

US downplayed effect of Deepwater oil spill on whales, emails reveal - Documents obtained by Greenpeace show officials controlling information about wildlife affected by the disaster. The images from the summer of 2010 were undoubtedly gruesome: the carcass of a young sperm whale, decayed and partially eaten by sharks, sighted at sea south of the Deepwater Horizon oil well. It was the first confirmed sighting of a dead whale since the BP oil spill in the Gulf of Mexico in April that year – a time of huge public interest in the fate of whales, dolphins, sea turtles and other threatened animals – and yet US government officials supressed the first reports of the discovery and blocked all images until now. The photographs, along with a cache of emails obtained by the campaign group Greenpeace under freedom of information provisions and made available to the Guardian, offer a rare glimpse into how many whales came into close contact with the gushing BP well during the oil spill. They also show Obama administration officials tightly controlling information about whales and other wildlife caught up in the disaster.

BP Plugs Leaky Dome at the Bottom of the Gulf | NOLA DEFENDER: The dome that was leaking oil at the bottom of the Gulf has a new lid. BP capped and plugged the latest oil seepage coming from the site of the 2010 Deepwater Horizon disaster this week. The leak was emanating from the discarded, 40-foot-tall containment dome, which was used in a failed attempt to stanch the Big Oozy. The dome discharge created a sheen at the surface of the Gulf. Underwater robots, or ROVs, descended to the deep on Tuesday to cap the dome's "stove pipe" opening at the top, and plug connection ports on the side of the structure.  After the fixes, no new oil was observed, according to the U.S. Coast Guard. The Coast Guard will continue to collect satellite data and conduct an overflight to montior the sheen. The Coast Guard never released an estimation of the size of the sheen.

Federal Regulators Issue Most Deepwater Drilling Permits In The Gulf Of Mexico Since 2007 - Federal regulators have issued the most permits for deepwater drilling in the Gulf of Mexico this year since 2007. That’s according to data from the Bureau of Safety and Environmental Enforcement, as reported by the New Orleans Times-Picayune. So far this year, the government has issued 90 new drilling permits for wells deeper than 500 feet — more than the last two years combined and more than each of the two years before the Deepwater Horizon oil spill in 2010. The news comes on the heels of President Obama and Governor Romney’s heated exchange about energy development during the second presidential debate last week. It further refutes Romney’s claims that new licenses and permits for drilling are down under the Obama administration, and backs up a report from Representative Edward Markey, which finds oil and gas companies have 3,684 idle leases in the Gulf of Mexico. Oil production from existing federal leases in the Gulf of Mexico is also increasing, according the Times-Picayune: Nearly 1.3 million gallons of oil were produced per day in July, up from 1.2 million gallons the year before, according to the U.S. Energy Information Administration. That’s still down from 1.7 million gallons in 2009, the year before the spill. That number is projected to grow to 1.4 million gallons per day by the end of 2013, according to federal estimates.

Meet the Treehouse-Dwelling Protesters of the Keystone Pipeline - Earlier this week, 50 environmental activists of the Tar Sands Blockade gathered in Winnsboro, Texas. They crossed an easement owned by TransCanada, the owner and builder of the controversial Keystone pipeline, in an effort to get supplies to a handful of their colleagues. These protesters have been living in the trees above one of the work sites in an attempt to stop construction. Two activists fastened themselves to heavy machinery, halting work at the site closest, while over a dozen others stood along the roadside holding protest signs. The activists are not alone in their fight against the Keystone pipeline, which will transport tar sands from Canada to the Gulf of Mexico. East Texas landowners are also fighting the pipeline. On October 4, 78-year-old Eleanor Fairchild and actress/environmental activist Daryl Hannah stood in the path of heavy machinery on Fairchild's property. They were arrested. Since then, 21 people, including Ms. Fairchild, have been served papers labeling then eco-terrorists, as part of a civil suit against them for work stoppages. Reporters, too, have been detained covering the tree sitters' protest, though the local police have not pressed charges against any of them. Access to the activists in the trees is now blocked off to all media.

Getting around the Keystone pipeline restrictions: pumping oil through gas lines - Early in the year Greg Merrill discussed the current administration's decision to shut down the Keystone pipeline project and the issues surrounding that policy. That was obviously not the end of the story. If there is a need, the energy industry will find a way. In recent years the various natural gas shale projects have changed the configuration of natural gas delivery in the US. That means some of the traditional routes used to transport natural gas to a number of areas - some over long distances - are no longer economical. And now a number of these gas lines could be modified to transport crude, sometimes in the opposite direction.  JPMorgan: - Given the regulatory challenges facing the construction of some new oil pipelines in North America, many companies are turning to converting existing assets to oil service. With natural gas supplies growing in numerous regions from shale plays such as the Marcellus, gas pipelines delivering along historical routes into these regions are becoming underutilized, providing options for conversion to transport crude oil. At least four gas lines are under discussion for conversion into oil service that could move oil out of Canada, the US Gulf Coast, and upper Midwest areas. One of the pipes making up TransCanada’s Mainline gas network that runs from western Canada to the eastern border is under consideration for conversion to crude oil, which could reportedly deliver 0.5 to 1.0 mb into Padd 1 and eastern Canadian refineries. Additionally, Energy Transfer Partners has petitioned the US Federal Energy Regulatory Commission to repurpose the Trunkline natural gas line into crude service and reverse the direction to run south from the upper US Midwest into the Gulf Coast.

Canada’s New Pipeline Woes - Rebuffed by Washington on bringing the Keystone XL pipeline down through the western United States, Canada now finds that its Plan B — to build a pipeline to its west coast for shipping to Asia — has become mired in domestic politics thick enough to rival the tarlike oil it hopes to sell.Getting the oil to the Far East first requires building a $5.5 billion, 730-mile pipeline from landlocked Alberta over a series of mountains to the coast of northern British Columbia. About 220 tankers a year would then navigate some of Canada’s most scenic yet treacherous waters to complete the trip. While opposition from environmentalists and some native groups was always expected, the Enbridge Northern Gateway Project has unexpectedly united British Columbians who normally are on opposite sides. Mistakes by Enbridge, which is based in Canada, have further fueled the resistance. They included missteps at regulatory hearings and the handling of a recent pipeline spill in Michigan, which was sharply criticized by the American authorities. To illustrate the depth of opposition in British Columbia, Christy Clark, the province’s premier, said that she was at a meeting over the summer in the affluent section of Vancouver. “Someone got up and asked some very pointed questions about moving this very dangerous commodity up our coast,” she said. “The kid was going into grade six.” Although Ms. Clark leads a pro-business, right-of-center party, she has not endorsed the pipeline. “British Columbians are not happy with the idea that we’ll bear 100 percent of the risk without getting any of the benefits,” Ms. Clark said.

Investor group says oil sands industry must cut environmental risks - An international group of ethical funds with investments in Alberta’s oil sands is concerned the industry’s environmental performance could be creating financial risk. “We recognize the economic significance of the resource,” the group says in a statement to be released Monday. “But (we) are concerned that the current approach to development, particularly the management of the environmental and social impacts, threatens the long-term viability of the oil sands as an investment. The statement is signed by 49 funds. Some are controlled by labour and church groups, such as the United Church of Canada and the Canadian Labour Congress. There are also public-sector pension funds from both sides of the border and private funds from Canada, the U.S. and Europe.

Once this landscape was a pristine wilderness roamed by deer now it's 'the most destructive industrial project on earth': These incredible pictures show the bleak landscape of bitumen, sand and clay created by the frantic pursuit of 173billion barrels of untouched oil. The Tar Sands in Alberta, Canada, are the world's third largest oil reserve - but lush green forests once blanketed an area there larger than England. The region where the blackened earth now stands has been dubbed as the most destructive industrial project on earth by shocked environmentalists

Photo gallery: Aerial view of deforestation at the Tar Sands mine in Alberta, Canada - Photographer Ashley Cooper said: ‘I knew a lot about the tar sands before I went there but nothing prepared me for the impact of actually seeing it. ‘The sheer scale of devastation is almost beyond comprehension. Oily, stained ground stretches for hundreds of miles where there used to be forest. ‘The constant stench of oil and chemicals is sickening. From the air, it's even worse - you see endless miles of stacks of what look like matchsticks but are actually felled trees. ‘The forest is just gone, for as far as the eye can see. Dotted amongst the wasteland are the glistening, bizarrely beautiful tailing ponds, a toxic death-trap for wildlife.’ The tar sands cover 141,000 sq km of Alberta. Twenty per cent of this has 174billion recoverable barrels close enough to the surface to be strip-mined. This is done by removing the forest and the peaty soil beneath, before gas-heated water is then forced through the tar sand to melt and separate bitumen from the sand and clay.

Canadians could free themselves from oil imports, but will they? You are not alone if you think it's odd that Canada--the world's ninth largest exporter of crude oil and petroleum products and the main supplier of oil imports to the United States--is itself a longtime oil importer, importing more than 40 percent of its oil needs this year. The situation results from historical pipeline development which has left Canada without a major east-west pipeline to bring the huge surplus of oil produced in the western provinces--now primarily from tar sands--to the eastern part of the country. The country's provinces from Ontario eastward currently import a little more than 60 percent of their oil needs from overseas. That may be set to change. Now, yet another route is being considered, one that would allow TransCanada to live up to its name. The company's latest proposal would take an east-west natural gas pipeline which is now being underused and convert it into an oil pipeline to bring western Canadian crude to currently import-dependent eastern Canada. The plan, which will require regulatory approval, may not face the stiff opposition that the other two projects faced since this pipeline is largely complete. It would require only some additional work to convert it and link it to refineries and storage depots.

Oil And Defense Spending - Last spring I was interviewed on our local NPR outlet about energy economics.  Among other things I pointed out the well-established costs of pollution from fossil fuels relating to global warming and health issues from SOX and NOX.  I urged the standard well-known green technologies along with thorium nuclear reactors, noting the irony that the US did not pursue this technology after carrying out the first thorium fission experiments in the 1950s because this could not be used to make nuclear weapons, along with other now desirable features (safer, more thorium around than uranium, etc.).  The show was rebroadcast recently without anybody telling me, and many more apparently heard it and I was bombarded by various comments and inquiries.  One friend asked why I did not note the defense spending costs associated with oil as part of the issue.  I responded to my friend's inquiry (which came through facebook) by noting that in contrast to global warming or health costs of SOX and NOX, it is much harder to determine how much of defense spending is for "protecting our sources of oil."  Indeed, this is a very difficult matter, although thinking about carefully suggests to me that not much really is, which also suggests to me that the position I agreed with and helped support of McGovern's that we did not need nearly as large of a DOD establishment as we had and have remains correct.  Its budget is often justified to the public on precisely these grounds, but the reality is quite another story.

Turning the oceans into jetfuel: The US Navy has a problem. Its ships often stay at sea for months on end far away from home. To keep its fleet of ships, boats and aircraft running, a fleet of 15 oil tankers roams the globe acting like floating gas stations. According to the Naval Research Laboratory (NRL) nearly 600 million gallons (2,700 million litres) of fuel were delivered to Navy vessels in 2011. Moving those tanks of oil is an expensive business and that is even before the cost of the oil itself is factored in. Over recent years, the price of oil has fluctuated wildly, but has generally been on an upward trend. Throw in the fact that many of the large oil-producing nations are generally situated in volatile regions of the world, and you begin to understand why the Navy is interested in cutting its dependence on oil. One of the most interesting lines it is pursuing is a plan to generate jet fuel from a source that is abundance wherever the fleet is: seawater. Jet fuel, along with all other common fuels, is a hydrocarbon. As the name suggests, these are chains of hydrogen and carbon atoms. In theory if you can combine those two elements in the correct way you can produce a fuel. It turns out that seawater is a good source of both ingredients – it contains hydrogen in the H20, and a lot of dissolved carbon dioxide (CO2). It also has the advantage of occurring in abundance - and for the Navy - close to the action. “The ocean contains about 100mg per litre of CO2,” explains the NRL’s Dr Heather Willauer. “It’s about 140 times more concentrated in sea water than it is in the air.”

Reducing oil imports - On Wednesday I noted that encouraging more U.S. oil production was unlikely to result in a significant drop in U.S. retail gasoline prices. Nevertheless, I believe that there would be some important economic benefits from lowering the U.S. oil import bill, as I discuss here. In 2011, the U.S. imported $462 billion of petroleum and petroleum products, or more than a billion dollars every day (see BEA Table 4.2.5). The fact that we import goods from other countries is not a problem per se. Standard economic theory teaches that if the U.S. imports some goods and exports others, the country overall will be richer than in the absence of trade, because the value of what we gain in imports is higher to us than the value of what we sell as exports. But in the current U.S. situation, our oil imports aren't balanced by other exports. Last year the U.S. spent $568 billion more on imported goods and services than we sold to other countries, with petroleum imports accounting for more than 80% of the total current account deficitWhen we import more than we export, we have to pay for the difference either by selling off some of our assets or by borrowing more from foreigners. Notwithstanding, running a current account deficit could still be a way to make the country richer. If we use the imported goods and borrowed funds to invest in productive capital and useful infrastructure, we should have plenty of future resources to pay back all that we borrowed, with more left over for ourselves. In such a case, a big current account deficit could still be a win-win situation. But what if we're not investing, and are just using the imports and foreign borrowing to enjoy a temporarily higher standard of living, leaving it to the future to pay the bills?  I'm not convinced that's the future that most Americans want.

Study: 20 million acres of federal oil, gas leases in Gulf of Mexico idle -Oil and natural gas companies are not exploring, developing or producing on more than 20 million acres of federal leases in the Gulf of Mexico, 40 percent of them owned by the five biggest private oil giants, according to a study by the office of Rep. Edward J. Markey (D-Mass.), the ranking member of the House Natural Resources Committee. The study is the latest salvo in a politicized election year battle over whether the Obama administration should be blamed for what Republican presidential nominee Mitt Romney has called a slow pace of leasing or whether the oil industry owns more drilling leases than it can handle.The study found that 131 oil and gas companies hold about 3,700 leases in the Gulf of Mexico that are not undergoing exploration, development or production. BP has 2.5 million acres of idle leases in the Gulf of Mexico, the report said. BP is followed by Chevron, Exxon Mobil and Shell, each of which own 1.4 million to 1.5 million acres of idle leases. Markey’s study added that about half of the leases have been idle for at least five years and that 80 percent of the idle leases were purchased for less than $300 an acre.

Goldman Sachs Predicts End to High Oil Prices - In an abrupt break from its earlier peak oil-esque predictions of near-future astronomical oil prices, giant Wall Street investment bank Goldman Sachs now predicts an end to the bullish oil price super-cycle. Goldman was a lead forecaster during the 2003-2008 oil price boom when unexpectedly robust demand in Asia outpaced global supply and prices soared as spare capacity in the Organization of the Petroleum Exporting Countries fell close to zero and the refining industry struggled to meet demand. But just after the bank predicted a "super spike" to $200 a barrel in 2008, financial crisis hit the global economy. Oil prices collapsed from a peak of $147 in July 2008 to below $40. This year, Goldman was slow to acknowledge bearish trends in U.S. light crude, closing its trading recommendation to buy September 2012 U.S. light sweet crude futures at loss on paper of 10.8 percent. "Goldman was a little out of kilter with their $130 (Brent) call. We have nudged up to that level on occasion but that's when you see U.S. gasoline go above $4 a gallon and that has a behavioural response,"

US Oil and Gas Rig Split - I discussed the US oil rig count the other day.  It seems helpful to place this in the context also of gas drilling, so the above graph shows US oil and gas rigs together.  You can see that much of the oil rig boom of the last two years is really a transition of pre-existing gas rigs to oil.  Gas drilling has collapsed after the gas companies overdid it and tanked the price of natural gas. It seems to have been this rapid wholesale transition of gas rigs to oil that led to the WTI-Brent price spread of the last few years as the additional oil could not easily be brought to market through an infrastructure that had not yet been optimized for it.  Landlocked oil instead had to be discounted to persuade reachable consumers to use more of it. The total US rig count appears to have been declining in 2012.  Gas rigs continue to decline and oil rigs have stopped growing, at least for the time being:  I wonder if this presages the beginning of the end for the WTI-Brent spread?

Renaissance in U.S. Oil Production - Booming natural-gas production is reshaping U.S. industries — including downtrodden rust-belt communities in Beaver County, Penn., the setting for a front-page article in today’s Wall Street Journal. But it isn’t just natural gas. U.S. oil production, too, is undergoing a renaissance, driven by the same technologies — hydraulic fracturing chief among them — that upended the gas industry. Domestic production is up some 20% since 2008. To put that into perspective, production had fallen by more than a third in the prior 20 years, and most experts figured the downward plunge was irreversible. The impact on imports is even more dramatic. Five years ago, the U.S. was importing 60% of its oil, a figure that had been rising since the early 1980s. Today, the U.S. imports just over 40% of its oil, the smallest share in 20 years.

US may soon become world's top oil producer: U.S. oil output is surging so fast that the United States could soon overtake Saudi Arabia as the world's biggest producer. Driven by high prices and new drilling methods, U.S. production of crude and other liquid hydrocarbons is on track to rise 7 percent this year to an average of 10.9 million barrels per day. This will be the fourth straight year of crude increases and the biggest single-year gain since 1951. The boom has surprised even the experts. "Five years ago, if I or anyone had predicted today's production growth, people would have thought we were crazy," says Jim Burkhard, head of oil markets research at IHS CERA, an energy consulting firm. The Energy Department forecasts that U.S. production of crude and other liquid hydrocarbons, which includes biofuels, will average 11.4 million barrels per day next year. That would be a record for the U.S. and just below Saudi Arabia's output of 11.6 million barrels. Citibank forecasts U.S. production could reach 13 million to 15 million barrels per day by 2020, helping to make North America "the new Middle East."

The US: The Saudi Arabia of Oil - I recall hearing quite a bit from various governors that the US is the “Saudi Arabia of coal” or the “Saudi Arabia of wind,” or whatever natural resource they had in abundance. Now, according to AP energy writer Jonathan Fahey, the US verges on becoming the Saudi Arabia… of oil. U.S. oil output is surging so fast that the United States could soon overtake Saudi Arabia as the world’s biggest producer.[...]The Energy Department forecasts that U.S. production of crude and other liquid hydrocarbons, which includes biofuels, will average 11.4 million barrels per day next year. That would be a record for the U.S. and just below Saudi Arabia’s output of 11.6 million barrels. Citibank forecasts U.S. production could reach 13 million to 15 million barrels per day by 2020, helping to make North America “the new Middle East.”A few things here. First, drill baby drill happened. These numbers don’t lie. All this talk of the Obama Administration being hostile to drilling is ridiculous. But drill baby drill did nothing to 1) change our posture toward intervention in the Middle East, which was one primary goal, or 2) actually lower gas prices, which was another. Global demand rose with this increase in supply, which isn’t all that much from a global standpoint. And prices have responded accordingly, i.e. not very much. In fact, the high price of oil has made the horizontal drilling technologies that increased US production possible, and therefore those prices will have to stay where they are, at least above $75 a barrel. One way the Saudis and other OPEC nations could regain market share is to flood the world with oil, but it’s unclear they have the reserves to make that work long-term.

U.S. Poised To Be World’s Top Oil Producer, Part Of ‘The New Middle East’. The Bad News: We’ll Also Have Their Climate. This is a good news, bad news story, which the media, characteristically, gets half right. The AP reports today: U.S. oil output is surging so fast that the United States could soon overtake Saudi Arabia as the world’s biggest producer. Driven by high prices and new drilling methods, U.S. production of crude and other liquid hydrocarbons is on track to rise 7 percent this year to an average of 10.9 million barrels per day. This will be the fourth straight year of crude increases and the biggest single-year gain since 1951…. The increase in production hasn’t translated to cheaper gasoline at the pump, and prices are expected to stay relatively high for the next few years because of growing demand for oil in developing nations and political instability in the Middle East and North Africa. The Energy Department forecasts that U.S. production of crude and other liquid hydrocarbons, which includes biofuels, will average 11.4 million barrels per day next year. That would be a record for the U.S. and just below Saudi Arabia’s output of 11.6 million barrels. Citibank forecasts U.S. production could reach 13 million to 15 million barrels per day by 2020, helping to make North America “the new Middle East.” Here is the ironic cover of that recent 92-page Citibank  report (which, it must be noted, never mentions either “climate change” or “global warming” as potential risks to this scenario):See, when your farmland turns into the Sahara thanks to unrestricted emissions from burning coal, oil, and gas, you’ll have a bunch of coo oil derricks to show for it.

Gulf Oil: Keeping It To Themselves - EVERYONE knows why oil prices, at around $125 for a barrel of Brent crude, are so high. The long-term trends are meagre supply growth and soaring demand from China and other emerging economies. And in the short term, the market is tight, supplies have been disrupted and Iran is making everyone nervous. Saudi Arabia, the only OPEC member with enough spare capacity to make up supply shortfalls, is the best hope of keeping the market stable. The Saudis recently reiterated their pledge to keep the market well supplied as American and European Union sanctions hit Iran. Over time, other producers in the Persian Gulf may be able to pump more. Iraq—and Iran itself—have vast oilfields that could eventually provide markets with millions more barrels a day (b/d). All this is conventional wisdom.Yet these calculations do not take account of the region's growing thirst for its own oil. Between 2000 and 2010 China increased its consumption of oil more than any other country, by 4.3m b/d, a 90% jump. It now gets through more than 10% of the world's oil. More surprising is the country that increased its consumption by the second-largest increment: Saudi Arabia, which upped its oil-guzzling by 1.2m b/d. At some 2.8m b/d, it is now the world's sixth-largest consumer, getting through more than a quarter of its 10m b/d output. Saudi Arabia is not the only oil-producer that chugs its own wares. The Middle East, home to six OPEC members, saw consumption grow by 56% in the first decade of the century, four times the global growth rate and nearly double the rate in Asia (see map).

Peak Oil And The Challenging Years Ahead - We seem to hear two versions of the story of limited oil supply:

  • 1. The economists’ view, saying that the issue is a simple problem of supply and demand. Substitution, higher prices, demand destruction, greater efficiency, and increased production of oil at higher prices will save the day.
  • 2. A version of Hubbert’s peak oil theory, saying that world oil production will rise and at some point reach a plateau and begin to decline, because of geological depletion. The common belief is that the rate of decline will be determined by geological considerations, and will roughly match the rate at which production increased.
  • In my view, neither of these views is correct. My view is a third view:
  • 3. An adequate supply of cheap ($20 or $30 barrel) oil is no longer available, because most of the “easy to extract” oil is gone. The cost of extracting oil keeps rising, but the ability of oil-importing economies to pay for this oil does not. There are no good low-cost substitutes for oil, so substitution is very limited and will continue to be very limited. The big oil-importing economies are already finding themselves in poor financial condition, as higher oil prices lead to cutbacks in discretionary spending and layoffs in discretionary industries.

Iran Says It May Stop Oil Sales if Sanctions Tighten - Iran said on Tuesday it would stop oil exports if pressure from Western sanctions got any tighter and that it had a "Plan B" contingency strategy to survive without oil revenues. Western nations led by the United States have imposed tough sanctions on the Islamic Republic this year in an attempt to curb its nuclear program that they say is designed to produce atomic weapons. Tehran says its nuclear plans are peaceful. "If sanctions intensify we will stop exporting oil," Iranian Oil Minister Rostam Qasemi told reporters in Dubai. Qasemi's statement is the latest in a series of threats of retaliation by Tehran in response to the sanctions, which have heightened political tensions across the Middle East and, analysts say, led to a sharp drop in Iranian oil exports. "We have prepared a plan to run the country without any oil revenues," Qasemi said, adding, "So far to date we haven't had any serious problems, but if the sanctions were to be renewed we would go for 'Plan B'. "If you continue to add to the sanctions we (will) cut our oil exports to the world... We are hopeful that this doesn't happen, because citizens will suffer. We don't want to see European and U.S. citizens suffer," he said, adding that the loss of Iranian oil on the market would drive up oil prices.

As crude prices decline hurting revenues, Iran threatens to cut off supply - Crude oil prices have been on a steady decline in the past couple of weeks as global demand remains weak. These declines have been pressuring Iran, who is already selling oil below market prices. That's why it was no surprise today when Iran tried to prop up prices by threatening to cut off oil sales altogether. Reuters: - Iran said on Tuesday it would stop oil exports if pressure from Western sanctions got any tighter and that it had a "Plan B" contingency strategy to survive without oil revenues. If sanctions intensify we will stop exporting oil," Iranian Oil Minister Rostam Qasemi told reporters in Dubai.  Qasemi's statement is the latest in a series of threats of retaliation by Tehran in response to the sanctions, which have heightened political tensions across the Middle East and, analysts say, led to a sharp drop in Iranian oil exports.  "We have prepared a plan to run the country without any oil revenues," Qasemi said, adding, "So far to date we haven't had any serious problems, but if the sanctions were to be renewed we would go for 'Plan B'. Market participants don't believe Iran would cut off its only major source of funds to "punish" the West. This simply shows an increasing desperation of the government as it tries to cling to power. Internal rift within the government is escalating (see NYTimes story), and it looks increasingly likely that Ahmadinejad is on his way out.

GOP Rep Says Strike On Iran's Nuclear Facilities Would Not Be An Act Of War - Rep. Mike Rogers (R-MI), chairman of the House Intelligence Committee, said on CNN last night that neither he, nor the Iranians, would consider an attack on Iran’s nuclear facilities an act of war.Rogers said that he believed there are options “short of war” that could prevent Iran from obtaining a nuclear weapon and, strangely, CNN host Erin Burnett wondered if bombing suspected nuclear weapons facilities would be an option that is “short of war.” While Rogers at first appeared taken aback by Burnett’s odd question, he then went a bit further, saying definitively that such an attack would indeed be “short of war” and the Iranians would see it that way too:

In Historic First China Begins Oil Extraction In Afghanistan -- In a surprising (if not quite shocking) move, late on Friday Canada blocked Petroliam Nasional Bhd.’s C$5.2 billion takeover of Progress Energy Resources Corp. saying the bid by the Malaysian state-owned company "wasn’t in Canada’s national interests." As BusinessWeek explains, "in what investors say is a test case for the $15.1 billion bid by CNOOC Ltd. of China for Calgary-based Nexen Inc., the Canadian government said it “was not satisfied that the proposed investment is likely to be of net benefit to Canada,” according to an Oct. 19 statement from Industry Minister Christian Paradis." While it is unclear precisely what would be of "net benefit to Canada" what is certain is that the Progress Energy move will crush investor spirits who in recent months have expected a flurry of foreign bids coming for local energy names, only to be left at the altar courtesy of government intervention. And while the outlook for foreign driven M&A in Canada has just been Ice-9'ed to a degree not seen since the BHP Billiton government-denied acquisition of Potash Corp (watch the arbs scurry out of Nexen at first trading opportunity), China is wasting no time, and is rapidly reorineting itself away from increasingly energy-protectionist governments and to "greenfield" national interest expansion opportunities. Such as Afghanistan. As Reuters reports, in a historic development, and in a key staking of regional energy claims, a Chinese oil firm, China National Petroleum Corp, has just started oil production in the country which still has thousands of US troops on the ground. Expect this issue also to suddenly be of paramount importance in next week's final presidential debate.

Chinese Rare Earths Producer Suspends Output - China’s biggest rare earths producer has suspended output in an effort to shore up slumping prices of the materials used by makers of mobile phones and other high-tech products. Baotou Steel Rare-earth (Group) Hi-tech Co. said in a statement released through the Shanghai Stock Exchange that it suspended production Tuesday to promote “healthy development” of the rare earths market. It gave no indication when production would resume and phone calls to Baogang were not answered. The suspension comes amid efforts by China’s government to tighten control over rare earths mining and exports to capture more of the profits that flow to Western makers of lightweight batteries and other products made of rare earths.

China can't break dependence on the US, as America once again becomes China's largest export market - The recent spike in China's exports took many by surprise. According to the official sources, China's exports in September grew by some 10% from a year earlier - about 2% higher than expected. A great deal of that increase came from iPhones, iPads, Android phones, and other popular electronics orders. Scroll to see expors by month (Source: One fact that some analysts have overlooked however is that the key driver of China's export growth (and ultimately the GDP growth) continues to be the US. Xinhua: - During [the Jan.-Sept (YTD)] period, trade with the European Union, China's largest trade partner, fell 2.7 percent year on year to 410.99 billion U.S. dollars, the figures showed. .. China's trade with Japan dipped 1.8 percent to 248.76 billion U.S. dollars, faster than the 1.4 percent decline recorded in the first eight months. Trade with the United States, the country's second largest trade partner, increased 9.1 percent to 355.42 billion U.S. dollars. In fact in Q3 (for the first time in years) the US has once again become China's largest export market - now larger than exports to the EU.

Wholesale Price Deflation Hits China's Factories - Bloomberg reports China’s Factories Losing Pricing Power in Earnings Threat - Chinese factories are losing pricing power in the worst wholesale-cost deflation since 2009, signaling corporate earnings may deteriorate further and putting a damper on global inflation pressures.  Steelmaker China Oriental Group Co. (581) says falling prices are wiping out profits, while Yunnan Copper Industry Co. (000878) cited the declines for a third-quarter loss. The producer-price index (SHCOMP) fell 3.6 percent in September from a year earlier and may stay negative until the second half of 2013 without large stimulus, according to Mizuho Securities Asia Ltd.  With the U.S. reporting the longest stretch in three years that Chinese imports have gone without a price increase, the trend also gives policy makers around the world more room for easing to support faltering global growth. Sluggish earnings growth may prompt the government to reduce corporate taxes to aid earnings and help boost spending after China’s expansion slowed for a seventh quarter.  “Reduced inflation pressure should expand the space for policy makers to take pro-growth actions in their countries,” said Shen Jianguang, chief Asia economist at Mizuho in Hong Kong. Chinese officials are likely to reduce banks’ reserve requirements ahead of a Communist Party congress next month, said Shen, who formerly worked at the International Monetary Fund and European Central Bank.

The good, the bad and the ugly in Chinese data - China has reported the 3rd quarter GDP at 7.4% year on year. The slowest in years, but given the consistently disappointing data throughout the year, this has surprised nobody. The reality, of course, is that Chinese statistics are odd and sometimes unreliable, so unreliable that even the vice premier pointed this out. While China’s GDP growth for the third quarter was 7.4% in real and year-on-year terms, on a quarterly basis, growth was 2.2%. At an annualised rate, that means 9.1%. And perhaps more bizarrely, while everyone thinks that Chinese growth has been slowing month by month, the latest heavily revised data quarterly growth data points to a pick up in growth since 2011 of Q4. Sequential growth rates since Q1 through Q3 were 1.5%, 2.0% and 2.2% respectively, or in annualised annual rate, 6.16%, 8.24%, and 9.09% respectively. Compared that with the year-on-year growth of 8.1%, 7.6% and 7.4%. Of course, it is entirely possible to have divergence between year-on-year basis vs. sequential basis for a while, but the arithmetic is getting impossible at this point with two trends diverging so much for so long. And perhaps more importantly, it simply does not match the reality (or most people’s perception of the reality). For instance, in the purchasing manager’s index, the survey asked the panel how things were doing compared to last month. This measure, particularly the HSBC/Markit manufacturing PMI, does not point to any sequential improvement since the first quarter.

Has China's Q3 GDP been grossly overstated? - Here is an interesting interview with Gordon Chang, who believes that China's GDP growth in Q3 has been grossly overstated. In his opinion the number should be closer to zero.His view is based on slow growth in electricity production across China as well as consistently weak PMI numbers. The HSBC PMI has been showing a mild contraction every month throughout 2012.  He also points to an increasing risk of social unrest in China - which hasn't been covered by the media. This stems directly from the slowdown and the wealth inequalities that have developed in the country in recent years.  YF: - Another area of concern for Chang is the potential for unrest. While the saga surrounding workers at the Foxconn factories where Apple gadgets are made has been well covered, Chang says it barely touches on what is happening on a broader scale. "Across Chinese society, the one factor that people always talk about is the anger," he says. But the reality is that the central government in Beijing no longer produces statistics on uprisings and protests, which by his estimates are now probably occurring at a rate that is ''north of 200,000 per year."

Charting China’s Labor Market - Unemployment is arguably the most important, but least well measured, factor in China’s economy. Low unemployment and rising wages signal economic health, making it less likely that the government will rush to pump up growth. The reverse – mass layoffs and stagnant income – have China’s decision makers lunging for the stimulus button. The official unemployment rate, which stays suspiciously close to 4% in the deepest downturns and the wildest booms, is no reliable guide. Following last week’s gross domestic product data download, the focus is on the outlook for China’s economy in the fourth quarter and beyond. China Real Time mines the best alternative sources of data on China’s labor market as a guide: The best overall measure comes from China’s Ministry of Human Resources and Social Security. They publish a quarterly report on job opportunities and job seekers at local employment bureaus in 100 cities up and down the country. The latest reading shows that in the third quarter demand for labor continued to outstrip supply. The ratio of job opportunities to job seekers stayed steady at 1.05, unchanged from the second quarter.

China Flash Manufacturing PMI Posts Modest Improvement Even As It Contracts For 12 Months In A Row - Those holding their breath that the PBOC will finally relent and join its "developed world" central planning colleagues in easing - something the tech companies of the world, not to mention everyone else, desperately needs - will have to do so for quite a bit longer (and today's earlier latest reverse repo was merely confirmation of this). The reason is that the just released HSBC Flash PMI for October, the first preliminary snapshot of Chinese data, posted a material rise from 47.9 to 49.1. Yes, this was the 12th consecutive print in sub-50 contraction territory in a row, but the direction is one which may give the economy and the people hope that things are getting better. They most certainly are not, but remember: in China every data point is massaged, manipulated, and then massaged some more before it is finally telegraphed to represent only what the Politburo wants it to say. And as a reminder, China, like the US, has elections (in quotes of course) in two weeks. As such neither the economy will tip the boat, nor the PBOC will drive more inflation at a time when everyone else is already easing. In other words: goldilocks goalseeked data... which for the monetarists was the worst possible outcome, as it means no new and free money.

China Industry Gauge Rises as Easing Prospects Abate - A Chinese manufacturing index (MXAP) rose and economists have pared forecasts for cuts in interest rates and bank reserve requirements as confidence grows that the world’s second-biggest economy is stabilizing.  The preliminary, or flash, reading was 49.1 for a purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics, after a final level of 47.9 for September. China will probably keep the benchmark one-year lending rate at 6 percent through the end of 2012, based on median estimates in a survey conducted Oct. 18-22, instead of prior forecasts for a quarter percentage-point reduction.  A rebound in China would help bolster confidence as Europe struggles to contain the effects of its debt turmoil and a global slowdown hits corporate earnings. Strength in the Chinese economy may encourage investors to keep paring bets for an Australian interest-rate cut after a report today showed that that nation’s consumer prices exceeded forecasts last quarter. “The flash PMI reading confirmed that China’s recovery is on track and no further monetary policy easing is warranted,”

More on China’s PMI - The HSBC/Markit China manufacturing PMI flash estimate for October improved from 47.9 to 49.1, the highest reading in three months. The headline PMI has been in contractionary territory (i.e. sub-50) for a whole year. There are noticeable improvements in various components, although some key sub-indices remain below 50. Both new orders and new export orders are improving, albeit remain below 50. Meanwhile, finished goods inventory has fallen below 50 for the first time in 6 months, brining the new orders minus inventory measure back in positive for the first time in 6 months. Employment remains unchanged and below 50, while input and output prices rises above 50 for the first time in 6 months. Improvements can be seen across sub-indices in October. Since most readings remain below 50, however, the improvements merely reflect a slowing pace of contraction in manufacturing, although the new orders minus inventory measure portrays a somewhat more positive picture. However, this time of the year is normally the season for Christmas orders, the fact that new export orders index remains well below 50 is not particularly confidence inspiring, suggests that export outlook for the remainder of the year will remain difficult.

China’s capital drain eases - The latest statistics from the People’s Bank of China suggest that while outflow continued into September, the size of the outflow has decreased compared with previous months. The change of the position for forex purchases of the PBOC detailed monetary statistics has swung back into positive territory after decreasing for two straight months. Excluding trade surplus, the implied outflow has shrunk from RMB187 billion in August to RMB44 billion in September, a very sizeable improvement as far as capital flow is concerned. Note that the outflow figures implied here do not distinguish the destination of the outflow. As noted for many times, sizeable outflow is not going to be supportive for the economy as it limits base money creation by the central bank, which has been happening for almost a year now. The improvement in money flow (at the very least, a reduction of outflow) will be supportive for central bank’s balance sheet expansion and foreign reserve accumulation, which will in turn be supportive for liquidity condition as long as the improvement continues. Since the announcement of QE-Infinity, we have speculated that if QE-Infinity is enough to encourage inflow into China, it will be positive for the Chinese economy. Although the improvement in flows in September has not been enough to ease liquidity condition ahead of the seasonal cash crunch, the recent strength of the Chinese Yuan suggests that the improvement in capital flow may well have continue into October, which has (finally) helped lower interbank rates despite PBOC withdrawing liquidity through open market operation. In the short-run, as I have stressed a number of times, as long as inflows continue, it will be supportive for the economy.

Analysis: Defying doomsayers, China to avoid Japan-style bubble (Reuters) - China has defied doomsayers who have warned for years that Asia's biggest economy would soon suffer a Japan-style boom and bust. It will continue to defy them for years to come. At first glance, some major similarities between their economies stack up. Just like Japan three decades ago, China is under pressure to let its currency rise, boost domestic consumption and grow its services industry to cut reliance on exports and investment. A slide in economic activity for seven straight quarters and a view among analysts that growth could be closer to 5 percent by the end of the decade than the near-10 percent it has averaged for the last 30 years, has revived concerns that Beijing faces a Japan-style battle with stagnation. But analysts say China is hardly a Japan in the making. Abundant room for greater consumption and wealth, a slow-rising currency, and steps to cool property markets will leave it in good stead to avoid Japan's fate. "I know as a matter of fact that policymakers in Beijing have looked a lot at Japan," said Louis Kuijs, a former World Bank economist now at the Royal Bank of Scotland. "Japan often comes up in discussions." Whether China succeeds in avoiding an economic crash depends on how far it can turn its maturing, export-driven economy into one more geared to services and domestic consumption, a transition the World Bank says must happen well before 2030.

S&P Sees Big Hit to Chinese Banks' Balance Sheets --China's economic slowdown is expected to reveal significant damage to the balance sheets of Chinese banks resulting from a massive lending spree that dates back to the 2008 global financial crisis, ratings agency Standard & Poor's said Wednesday. Credit risks such as falling net interest margins and a rise in bad loans are likely to beset Chinese banks, which have faced a margins squeeze since China's interest rate regime was loosened in June, S&P said in a report. "While cheap loans associated with the lending spree have helped the banks contain their credit losses in the past few years, the damage to their balance sheets is about to surface," the report said. The rating company said the trigger for banks' credit woes is the slowdown in Chinese economy, which grew 7.4% in the third quarter, the slowest pace in three years. Chinese banks are set to see a rise in non-performing loans in coming quarters, hit by increasing credit costs and slowing economic growth, Liao Qiang, director of financial institutions ratings at S&P, told reporters in a briefing.

Many Urge Next Leader of China to Liberalize - After it was leaked that Xi Jinping, the man anointed to be the next Communist Party chief of China, had met in private with a well-known supporter of political liberalization, the capital’s elite began to buzz about the import of the encounter. Hu Deping, the son of a former leader, who went to Mr. Xi’s home in July, has organized salons where the scions of powerful families have discussed how to keep the party from becoming mired in corruption and losing the trust of ordinary Chinese. People briefed on the meeting said Mr. Xi had declared his support for steady reform. “Hu Deping through certain channels sent out the message that he had been meeting with Xi Jinping,” said Zhang Lifan, a historian who knows Mr. Hu. “I think the two are trying to send a signal.” As China’s critical once-a-decade leadership transition approaches in November, Chinese officials, policy advisers and intellectuals are again pushing for what they broadly call “reform” — a further opening up of the economic and political system that the party has constructed through 63 years of authoritarian rule. With China’s economy slowing, the disconnect between haves and have-nots building, and state-owned businesses exerting even greater influence on policy, advocates for change say the status quo appears increasingly sclerotic.

China’s currency rises in the US backyard - The Republican presidential candidate Mitt Romney last week repeated his promise to declare China a currency manipulator on his first day in office. Even discounting the “get tough on China” bluster of the campaign season, this remark encapsulates American distance from, and denial about, changing economic realities. Would-be US leaders would do well to note that for probably the first time since the second world war the dollar bloc in east Asia has been displaced. In its wake a currency bloc based on China’s renminbi is emerging. In new research, we find that since the global financial crisis, as the US and Europe have struggled economically, the renminbi has increasingly become a reference currency (meaning emerging market exchange rates move closely with it). In fact, since June 2010 when the renminbi resumed floating, the number of currencies tracking it has increased compared with the earlier period of flexibility between July 2005 and 2008. Over the same period, the number tracking the euro and the dollar declined. East Asia is now a renminbi bloc because the currencies of seven out of 10 countries in the region – including South Korea, Indonesia, Taiwan, Malaysia, Singapore and Thailand – track the renminbi more closely than the US dollar. For example, since the middle of 2010, the Korean won and the renminbi have appreciated by similar amounts against the dollar. Only three economies in the group – Hong Kong, Vietnam and Mongolia – still have currencies following the dollar more closely than the renminbi.

Is China Still a “Currency Manipulator”?  - “On day one, I will label them a currency manipulator.” So spoke Mitt Romney during Tuesday’s Presidential debate, threatening, as he has innumerable times, to hit China with new tariffs if it doesn’t stop using a cheap yuan to steal U.S. jobs. But does the label still fit? We all know the story by heart. Without intervention by China’s central bank, market forces would push the value of the yuan higher, making it easier for U.S. producers to compete with Chinese goods. Instead, the People’s Bank of China (PBoC) manipulates the exchange rate by making massive purchases of U.S. dollars for its foreign exchange reserves. The result: huge current account surpluses that enrich China’s politically powerful exporters at the expense of American workers. If we just had a president with the courage to tell them to stop, we could get America moving again. Unfortunately, although it still sounds great in a stump speech, the story may be out of date. Let’s look at it piece by piece

The End of China Bashing: Toward a Serious Discussion of the Trade Deficit -- Paul Krugman and Ezra Klein both say, following Joe Gagnon, that the time for criticizing China for "currency manipulation" has passed. This is partly true in the sense that China's currency has risen substantially in real terms against the dollar over the last few years. However this does not mean either that the relative value of the dollar and the yuan is now at a sustainable level or that China is not continuing as a matter of policy to prop up the dollar against its currency. To see the former point, it is important to remember that China is a fast growing developing country. Ordinarily such countries are expected to run large trade deficits. The idea is that capital can be better used in fast growing countries like China than in slow growing wealthy countries. Since capital will get a higher return in developing countries, we expect capital to flow from rich countries to poor countries. The flow of capital would imply a trade deficit for developing countries. Effectively this trade deficit would allow developing countries to sustain consumption levels even as they build up their capital stock.  China, along with many other fast developing countries, is running a large trade surplus. This is not sustainable. To see this point imagine we have a developing country that is growing at the rate of 7 percent annually, the slower rate of growth that China is now seeing. Suppose it sustains a trade surplus of 3.5 percent of GDP, roughly the amount projected by the IMF for the next five years. For simplicity we'll make the United States the only other country in the world and have it grow at a 2.5 percent annual rate. If China and the U.S. start at the same size, after 20 years China's annual trade surplus will be equal to 8.3 percent of U.S. GDP. To have sustained this surplus it will have bought an amount of assets that exceeds 100 percent of U.S. GDP in 2032. If we carry this out another twenty years then the annual deficit in the U.S. will be 19.5 percent of GDP and China's holdings of U.S. assets will exceed 300 percent of 2052 GDP. Clearly this does not make sense and we will not see these sorts of deficits running in the wrong direction indefinitely.

More reasons why China’s currency should remain a live issue -- Paul Krugman and others have recently claimed that Chinese currency manipulation is “an issue whose time has passed.” There are two fundamental problems with these arguments. First, China’s global trade surplus appears to be perhaps three to four times larger than has previously been reported. Second, productivity in China is growing much faster than in the United States and other developed countries and therefore, China’s exchange rate likely needs to appreciate at least 3 to 5 percent per year just to keep its trade surplus from growing. On the first issue—what the size of the Chinese current account surplus and its recent movement tell us about the need for currency realignment—it’s worth noting that most of the decline in China’s global trade surplus since 2008 is explained by the great recession and the sluggish recovery, especially in Europe. However, the U.S. bilateral deficit with China has increased by a third since it bottomed-out in 2009, which has slowed the U.S. recovery. Further, China’s trade data likely understates its global trade surplus by a significant amount, a problem that has been ignored by officials in the United States, the International Monetary Fund and other international agencies. The IMF relies on self-reported data from each member country. Analysis of trade data from the United Nations shows that China is massively under-reporting its exports. In 2010, China reported global exports of $1.6 trillion and imports of $1,3 trillion, and a resulting trade surplus of $250 billion. 

Better Ways to Deal With China -China’s economy is slowing sharply. Political turmoil is swirling just weeks before only the second peaceful transition of power in the history of the Chinese Communist Party. Loud, unilateral American toughness at this stage is unlikely to help. It may prompt a reaction against the more outward-looking, reform-minded constituencies, strengthening conservative forces that are unwilling to cede any political control.  And for all this risk, getting tough is unlikely to deliver much.  The Chinese currency is the wrong target. Of course China has been manipulating its currency for years, buying mountains of dollars to keep the renminbi cheap and give its exporters a leg up. But Beijing appears ready to correct course.  Factoring in China’s fast inflation, which makes its exports more expensive, the real value of the renminbi has risen at least 15 percent against the dollar since mid-2010. Beijing has curbed its dollar hoarding. And its broad trade surplus is falling fast: down to 2.3 percent of its economic output this year from more than 10 percent in 2007.  China’s trade surplus with the United States is in part an illusion, because exports assembled in China from imported components are counted as 100 percent Chinese. Yuqing Xing, an economist at the National Graduate Institute for Policy Studies in Tokyo, estimates that China contributed only 3 percent to the value of its exports of iPhones and laptops in 2009.

China and Protectionism: It Ain't Quite as Simple as They Tell Us - Dean Baker - Eduardo Porter has an interesting column on Governor Romney's threat to declare China a "currency manipulator" on day 1 of his administration. He makes the point that the real value of China's currency has risen substantially against the dollar in the last two years. He also notes that China is not the only country that deliberately props up the dollar relative to its own currency. Most importantly, he points out (as I have frequently noted) that declaring China a currency manipulator does nothing by itself. Inevitably the outcome of the currency issue would depend on a process of negotiation with China. This is all true. However in the process of making his case, Porter takes advantage of a study by Gary Hufbauer on the cost of U.S. tariffs on imports of tires from China, which is more than a little suspect. Hufabauer, who is famous for predicting that NAFTA would create 250,000 jobs by increasing the U.S. trade surplus with Mexico, calculated the country paid over $900,000 for each job it saved in the tire industry as a result of the traiff. Most of this money was paid to other countries, since most tires are imported. He concluded that the net effect of higher tire prices was a modest loss of jobs, since consumers had less monney to spend on other items. In addition, China retaliated by imposing barriers on imports of chicken parts that Hufbauer calculates reduced exports by $1 billion. There are several aspects to Hufbauer's analysis that are very questionable. The most important is that he ignored the timing of the tariff. It was imposed in September of 2009, just as the car industry was recovering from its recession lows. Hufbauer attributes all the rise in tire prices in the fall of 2009 to the tariff. However, car prices more generally also rose in the fall of 2009 in response to the pick-up in demand.

Why Governor Romney’s Threat on the Chinese Currency Matters - Maybe. Governor Romney has stated that he will declare China a currency manipulator on Day One, should he be elected President. In contrast to his other policy positions – from tax rates on the upper incomes, defense spending, coverage of pre-existing health conditions, the Blunt Amendment, Afghanistan timetable, first strike on Iran – he has exhibited remarkable (and pretty unique) constancy in his desire to call China a currency manipulator. In fact, one can find news reports from 2007 onward attesting to this long-standing stance [1], [2], [3]; so if there is any promise we should believe he will follow through on, it’s this one. And from Believe In America: Mitt Romney's Plan for Jobs and Economic Growth (under "Day One"), it is: An Order to Sanction China for Unfair Trade Practices Directs the Department of the Treasury to list China as a currency manipulator in its biannual report and directs the Department of Commerce to assess countervailing duties on Chinese imports if China does not quickly move to float its currency. In a recent post, I asserted that this is an odd time to undertake this type of action. That is because (1) the Chinese currency has appreciated considerably since 2005 to arguably near equilibrium levels, and (2) Chinese reserve accumulation has tailed off; in particular accumulation of USD has stabilized. (I leave aside the logistical constraints on implementing the declaration on January 21, 2012 [4]. Unless Congress confirms the Treasury Secretary on Day One, this will not literally occur.) I know facts are of little consequence to some, but I thought it useful nonetheless to document these assertions.

Asian economies turn to yuan - A "renminbi bloc" has been formed in East Asia, as nations in the region abandon the US dollar and peg their currency to the Chinese yuan — a major signal of China's successful bid to internationalize its currency, a research report has said. The Peterson Institute for International Economics, or PIIE, said in its latest research that China has moved closer to its long-term goal for the renminbi to become a global reserve currency. Since the global financial crisis, the report said, more and more nations, especially emerging economies, see the yuan as the main reference currency when setting their exchange rate. And now seven out of 10 economies in the region — including South Korea, Indonesia, Malaysia, Singapore and Thailand — track the renminbi more closely than they do the US dollar. Only three economies in the group — Hong Kong, Vietnam, and Mongolia — still have currencies following the dollar more closely than the renminbi, said the report, posted on the institute's website. The South Korean won, for example, has appreciated in sync with the renminbi against the dollar since mid-2010.

Laos: Southeast Asia’s Newest Boom Economy - Which country is likely to have the fastest-growing economy in Southeast Asia this year? Indonesia, the region’s emerging powerhouse? Myanmar, investors’ flavor of the month as it opens to the Western world? Or maybe Thailand, which is rebounding nicely from last year’s epic floods? Wrong on all the above. The correct answer is Laos, which for years has been overlooked as too small, too complicated, and in many cases just too weird to merit serious attention from mainstream investors. Yet no economy in Southeast Asia appears to be more immune to this year’s global economic slowdown. Laos is on track to post an impressive 8.3% growth rate in 2012, according to the International Monetary Fund, which would almost certainly put it at the top of the table for Southeast Asia given what’s happening elsewhere in the region. Cambodia is on track to come in second with 6.5% growth, the IMF says, followed by Myanmar at 6.2%. Indonesia and Thailand are roughly in the same ballpark. To be sure, 8.3% growth isn’t exactly going to set investors’ hearts aflutter given that landlocked Laos has Southeast Asia’s smallest economy, and the opportunities for making money there are limited. Road and rail links are limited and the lack of a skilled labor makes Laos a tough bet for large manufacturing operations.

Currency Wars Part II - There is a currency war underway. The international trade clearing mechanisms are tottering. Countries are using their economic power, their banks and currencies, as a part of overall foreign as well as domestic policy. This is a huge source of the tensions and problems which are are seeing both economically and militarily in the world today. The current trade system based on the US dollar reserve currency is not sustainable. It has had a good long run, but like the euro it has reached the end of its rope. The US cannot continue to print enough money and increase its debt balance through trade any further. See Triffin Dilemma. Yes I am familiar with Eichengreen's counter argument. And I am also aware of the already written and vetted proposals for a 'single world currency' with independent local governments, an arrangement which is even more fallacious and ill founded than the euro. Yes I know that there could be a series of agreements that could kick this down the road five or ten years. But something has got to give. The charade is getting a bit thin but the deception must go on.

Japan logs record-high trade deficit in September - Japan logged the biggest-ever trade deficit in September on tumbled exports as sales to China and Europe sagged. In the first half of Japan’s fiscal year 2012 to the end of September, the country logged 3,219.0 billion yen (about 40.6 billion U.S. dollars) in goods trade deficit, up 90.1 percent from a year earlier and the biggest since the Finance Ministry began recording in 1979. In September alone, Japan recorded a trade deficit of 558.6 billion yen (7 billion U.S. dollars) for the third straight month, raising fears that the tension between Japan and its biggest trading partner China over territorial dispute have started deteriorating their economic ties. Exports in September fell 10.3 percent from a year earlier to 5, 359.8 billion yen, against a 9.6 percent drop expected by economists, down for four months in a row, Ministry of Finance data showed on Monday, while exports to China, Japan’s top market, fell 14.1 percent in September from a year earlier, marking the biggest decline since January. Imports rose 4.1 percent to 5,918.3 billion yen in September. Imports in the first half of the fiscal year grew 2.6 percent to 35,379.3 billion yen on increases in mineral fuels from the Middle East, as domestic utilities have boosted their heat power generation in substitution of the loss of nearly all atomic power in the country.

Japanese exports to China fall amid territorial dispute - Japanese exports to China tumbled in September compared to the previous year, as a territorial dispute between the two countries weighed on the economy. Exports from Japan declined at their sharpest pace since the aftermath of last year's earthquake and tsunami. Overseas shipments fell 10.3%, compared to last year, the Finance Ministry said. Relations between China and Japan have soured in recent weeks. Shipments to China fell 14.1% in September compared to the previous year. The month was marred by widespread protests in China against Japan over ownership of the islands known as Senkaku in Japan and Diaoyu in China. Both countries, as well as Taiwan, lay claim to the territory.

Japan Exports Fall at Fastest Pace Since Post-Earthquake Slump - Japan’s exports fell the most since the aftermath of last year’s earthquake as a global slowdown, the yen’s strength and a dispute with China increase the odds of a contraction in the world’s third-largest economy. Shipments slid 10.3 percent in September from a year earlier, leaving a trade deficit of 558.6 billion yen ($7 billion), the Finance Ministry said in Tokyo today. Economists expected a 9.9 percent export decline and a 547.9 billion yen trade shortfall, according to median forecasts in surveys by Bloomberg News. Imports rose 4.1 percent.

Japan Exports Tumble 10%, BOJ to Conduct "Seamless" Easing - Japan’s exports fell the most since the aftermath of last year’s earthquake as a global slowdown, the yen’s strength and a dispute with China increase the odds of a contraction in the world’s third-largest economy.  Shipments slid 10.3 percent in September from a year earlier, leaving a trade deficit of 558.6 billion yen ($7 billion), the Finance Ministry said in Tokyo today. Economy Minister Seiji Maehara pressed the Bank of Japan for more action yesterday, saying the nation is “falling behind” in monetary stimulus and is at risk of another credit-rating downgrade. “There’s a high chance that Japan’s economy will have two consecutive quarters of contraction through December,” said Yoshimasa Maruyama, chief economist at Itochu Corp. in Tokyo. “The slump in advanced nations is spreading to emerging economies.”  The decline in shipments, exacerbated by a spat with China over islands in the East China Sea, was the biggest since May last year, when the country was rebuilding supply chains wrecked in the March earthquake and tsunami. Shipments to China, the nation’s largest export market, slid 14.1 percent from a year earlier. Exports to the European Union fell 21.1 percent, while those to the U.S. rose 0.9 percent. Auto shipments to all markets dropped 14.6 percent.

Japanese Government Demands BOJ Do QE 9 One Month After Failed QE 8 - Almost exactly a month ago, the BOJ surprised most analysts with an unexpected increase in its asset purchase agreement by JPY10 trillion bringing the total to JPY80 trillion. There was one small problem though: the entire impact of the additional easing fizzled in under half a day, or 9 hours to be precise. This was, as Art Cashin summarized the following day, Japan's failed QE 8. It is now a month later, and with nothing changed in the global race to debase status quo, the time has come for the BOJ to attempt QE 9. Or that's the case at least according to the toothless Japanese government, which has formally demanded that Shirakawa do a nine-peat of what has been a flawed policy response for over 30 years now, this time with another JPY 20 trillion, or double the last month's intervention. Because according to Japanese Senkei, it is now Japan's turn to pull a Chuck Schumer and demand even mor-er eternity-er QE out of monetary authority of the endlessly deflating country. In reverting to the Moore's law of failed monetarism, we expect that a QE 9 out of Japan will have the same halflife as QE 8, if indeed the program size is double the last. At which point it will again fizzle.

Japan Plans $5 Billion Stimulus Package - The Japanese government plans to approve an economic package worth more than 400 billion yen ($5.06 billion) Friday as it seeks to prop up a rapidly weakening economic recovery, a government official told Dow Jones Newswires on Thursday. The first extra stimulus package in the current Japanese fiscal year ending in March will tap into existing rainy-day funds in the central government's budget and require no issuance of fresh public debt, the official familiar with economic policy debates said. But such a relatively small amount of money is unlikely to comprehensively rescue the world's third-largest economy, which economists suspect has already entered a technical recession in the face of a global slowdown and the export- stunting strength of the yen. "The best it could do is to add 0.1 percentage point" to the annual growth rates of Japan's gross domestic product, said Toshihiro Nagahama, chief economist, Dai-ichi Life Research Institute. "If you are asking whether it could help turn an anticipated contraction into an expansion, that's not going to happen." However, the move could put additional pressure on the Bank of Japan to act in concert to minimize the extent of the export-reliant economy's downturn. The government is also expected to put together a separate, bigger stimulus package possibly next month.

Japan approves $5.3 billion stimulus to fend off recession as economy stays mired in deflation - Japan’s Cabinet approved a 423 billion yen ($5.3 billion) economic stimulus package on Friday, moving to fend off recession as the recovery in the world’s third biggest economy falters. The emergency spending package, which is double the size originally expected, is also meant to help make up for lost momentum from reconstruction in the region devastated by the March 2011 earthquake and tsunami.But officials said the boost to the economy would be modest, in the range of 0.1 percent of gross domestic product. The new stimulus will be paid for from government reserves. Prime Minister Yoshihiko Noda’s leeway to boost spending is limited by a legislative standoff preventing issuance of deficit-covering bonds as the country faces a “fiscal cliff” of some 38.3 trillion yen ($479 billion). Noda has ordered the government to draft further measures to boost growth by next month, and the legislature is due to convene an extraordinary session on Monday

Japan grapples with its fiscal cliff -  The Japanese finance ministry will hold crisis talks with bond dealers in the world’s largest government debt market on Friday, amid growing fears about the impact of a political stand-off on the nation’s finances. In an echo of worries in the US over the fiscal cliff – the $600bn of spending cuts and tax increases due to take effect in January – Japanese politicians are at loggerheads over a bill that would allow the government to borrow the Y38.3tn ($479bn) needed to finance the budget deficit this year. As a condition for supporting the bill, opposition parties are demanding that Yoshihiko Noda, prime minister, fulfil a pledge to call a general election. Mr Noda has so far refused to set a date out of fears that his ruling Democratic Party of Japan, which is adrift in the polls, will be voted out of office. Bond dealers said they had requested the special meeting with the Ministry of Finance to express their concerns about the stand-off and discuss possible contingency plans. “Political developments are becoming a real fear for the markets,” said Chotaro Morita, chief rates strategist at Barclays in Tokyo.

Can Japan Change? - One of the more frustrating tasks I regularly face in my job as an economics correspondent in Asia is explaining (or attempting to explain) what goes on in the Japanese economy. In many ways, the place seems to simply defy logic, or the basic laws of human nature. How can a society watch its economic fortunes deteriorate for two decades and do almost nothing about it? I’ve explored this subject before and have tossed out a few possible explanations. The bureaucrats who shape economic policy are insular and self-interested and won’t reform Japan since that would undercut their own power. Corporate managers who rose to the top in a bureaucratic, consensus-based system have no interest in changing it to make their firms more entrepreneurial. Politicians cater to the narrow demands of their constituents, not the greater needs of the nation. Political and business leaders fear globalization and have limited the degree of integration Japan has forged with high-growth developing Asia.There is another reason, though, that might explain the situation best, which I hear from my friends in South Korea. I covered the Asian financial crisis in 1997 from Seoul, and I can tell you that the Koreans know something about crisis management. At the time, the economy seemed to plunge off a cliff. Koreans truly worried that their three-decade economic miracle had come to a sudden, devastating end. Yet in the aftermath, a stronger, healthier, more innovative economy emerged.

Japan Is Not A Good Example Of How Deflation Typically Plays Out - Japan is not a good example of how deflation typically plays out. As Ilargi points out, they were an exporting powerhouse exporting into the biggest consumption boom the world has ever seen. They also had a very large pile of money to burn through building their four lane highways from nowhere to nowhere, since they were the world's largest creditor when their bubble burst in 1989. This is clearly not our situation. No one will be exporting their way out of a global economic depression. In contrast, exporters are going to feel the pain big time as their markets dry up. We can expect trade wars and protectionism to abound. Take note Germany, Scandinavia, Australia, New Zealand etc etc. We have had the inflation, only instead of a currency hyperinflation, we experienced a 30 year credit hyper-expansion. Either one amounts to an expansion of money plus credit compared to available goods and services, and is therefore inflation. Credit is equivalent to money on the way up, but not on the way down. Credit loses 'moneyness' and credit instruments are massively devalued in a great deleveraging. This is deflation by definition and it is already underway. Debt monetization is nothing in comparison with the scale of the excess claims to underlying real wealth that stand to be eliminated. I agree that the currency of a deflating nation strengthens. This is exactly why we have been writing about the value of the US dollar increasing, which it has done. The bottom came in a long time ago, and despite the set backs that are an integral part of a fractal market, the trend is up, and will be for some time.

What is replacing the yen as a "safe-haven" currency? - Last week the yen did not act as a safe-haven currency. Typically in a "risk-on" market the yen rallies, with investors moving funds out of riskier assets. That hasn't happened recently. Investors are a bit more nervous about Japan these days. The spat with China (see discussion) continues to be a concern and Japan's economic indicators look quite weak. Industrial production and capacity utilization are down and the country could potentially face another round of negative GDP growth - which has become commonplace in recent years.But that's not the only reason traders have turned away from the yen. They are concerned about BOJ ramping up its quantitative easing program - which is a negative for the yen. The central bank has slowed its balance sheet expansion recently, but it could be just a matter of time. Businessweek: - “The risk-on move throughout markets for the better part of the week was a negative for the yen,” “We’ve also had increasing speculation that the BOJ is going to ease monetary policy further as early as next month, which is a key negative.”   There is also talk that Japan could interfere in the currency markets directly as a response to the Fed's recent action. US quantitative easing will likely weaken the dollar, putting pressure on Japanese exporters - and Japan would need to weaken the yen in response.Given these trends are making the yen potentially an unpleasant place to be, where is the capital flowing these days? It looks like the new destination is Hong Kong. Reuters: - The Hong Kong Monetary Authority (HKMA) stepped in to the currency market on Saturday for the first time since December 2009 as capital inflows strengthened the Hong Kong dollar, causing it to hit the top end of its trading range. 

HK acts twice to protect local currency - HONG Kong's de facto central bank has intervened twice in the currency market for a total of three times in a week as the local dollar hit its upper trading limit against the greenback. The Hong Kong Monetary Authority (HKMA) on Tuesday sold $HK6.63 billion ($A832.08 million) in the two interventions in the forex markets, saying the move was necessary to "maintain stability" of the city's unit. The actions, on a public holiday, followed a similar move on Friday in New York. The authority is obliged to act by buying or selling the local dollar whenever it touches either side of the $HK7.75-$HK7.85 trading band against the US dollar, to which it has been pegged for 29 years. The HKMA told AFP it "will remain closely vigilant of the market developments and act in accordance with the currency board mechanism to maintain the exchange rate stability of the Hong Kong dollar".

Hunger Stalks My Father’s India Long After Starvation Banished - It was 1958, my father was still a child, and India was running out of food. That year’s wheat crop had slumped by 15 percent, the rice harvest by 12 percent, and prices in the markets were soaring. Far from his village in eastern India, ships laden with wheat were steaming toward the country, part of U.S. President Dwight Eisenhower’s plan to sell surplus grains, tobacco and dairy products to friendly countries. All India Radio gave daily updates on the convoys, and the army barricaded ports in Mumbai and Kolkata against the hungry crowds. “It was this very coarse, red wheat,” said Narsingh Deo Mishra, a childhood friend of my father’s and now a local politician in their home village. “We were told it was meant for American pigs,” said Mishra, who, like my father, grew up listening to stories about the food shipments. “Back then, we weren’t any better than American pigs. So we ate it. We ate it all and we begged for more.” That year, and the hungry ones that followed, took their toll. At 18, my father, Dinesh, weighed about 40 kilograms -- just under 90 pounds -- and in a photograph taken at the time, his cheeks are sunken, his Adam’s apple prominent and his eyes bulge from a gaunt skull. India is now a generation removed from those “ship-to- mouth” days, even though those words today still bring back memories of national humiliation. Less than 2 percent of Indians now go without two square meals a day, and far fewer still die of starvation.

West should pay attention to India’s woes -  Mohamed El-Erian and Michael Spence - Mention China at almost any meeting and you will trigger lively reactions, both optimistic and pessimistic. Shift the conversation to India, however, and enthusiasm visibly declines, especially recently. This matters: the Indian economy, perhaps more so than other emerging markets, will determine political and economic developments in its region and around the world. India ranks high among nations where restoring a high rate of economic growth can make a big difference to reducing poverty. According to data from the World Bank, a third of India’s population live on less than $1.25 a day, the internationally recognised poverty line. More than two-thirds live on less than $2 a day. India is estimated to have a third of the world’s poor. India is also an important country for anyone worried about the detrimental role of money in politics. There has been a sharp increase in the number of millionaires that serve as parliamentarians. And if you care about the orderly rebalancing of the global economy, India’s middle classes will probably play a vital role in the shift of emerging economies to more of a consumption model. Then there are the regional dimensions. India is essential to the stability of a neighbourhood that includes other nuclear powers (China and Pakistan) and a failed state trying to recover (Afghanistan). Despite all this, the west seems to be paying too little attention to what has been going on in the Indian economy. Growth has slowed significantly. The fiscal deficit is sizeable. Internal political conflicts are increasing. India has all but stopped climbing the World Bank’s rankings of countries by ease of doing business – despite being far down the list to begin with.

South African gold mine sacks 8,500 strikers: More than 8,000 striking South African gold miners have been sacked after refusing to return to work, mine owners say. Gold Fields said workers at the KDC East mine had ignored a final deadline set for 16:00 (14:00 GMT). Last week, some 11,000 miners at Gold Fields' KDC West mine heeded a company ultimatum and returned to work. South Africa's mining sector has been hit by a wave of recent unrest which has left almost 50 people dead. Most strikes have been over pay, although the stoppage at KDC East - at Carletonville west of Johannesburg - relates to a local trade union dispute not wages. "All 8,500 people who were on strike did not come back," spokesman Sven Lunsche told AFP news agency. "They did not return to work, so we have issued dismissal letters to all of them."

Connecting Wagons: Why and How to Help Lagging Regions Catch Up: If it weren't for the economic performance of China, Brazil and other emerging markets, the global economic slump following the 2008 financial crisis would have been much worse. Not by chance, prospects for the global economy became gloomier this year when those economies showed signs of decreasing resilience against the downward pull from advanced countries. The emergence of those new engines of growth and their income convergence toward more advanced countries has definitely been healthy to the global economy. Trade and productive integration into global markets have been fundamental for that emergence. Nonetheless, as pointed out by Thomas Farole in the latest edition of the World Bank's Economic Premise -- "Competitiveness and Connectivity: Integrating Lagging Regions in Global Markets"  -- that process has not been spatially uniform, as integration and growth have particularly concentrated in well-located, metropolitan regions, while more peripheral regions lagged behind. Mexico is a case in point. While its northern border regions grew faster than the rest of the country following the North American Free Trade Agreement (NAFTA), much of the south remained isolated.

Happiness is Equality - The king of Bhutan wants to make us all happier. Governments, he says, should aim to maximize their people’s Gross National Happiness rather than their Gross National Product. Does this new emphasis on happiness represent a shift or just a passing fad? It is easy to see why governments should de-emphasize economic growth when it is proving so elusive. The eurozone is not expected to grow at all this year. The British economy is contracting. Greece’s economy has been shrinking for years. Even China is expected to slow down. Why not give up growth and enjoy what we have? No doubt this mood will pass when growth revives, as it is bound to. Nevertheless, a deeper shift in attitude toward growth has occurred, which is likely to make it a less important lodestar in the future – especially in rich countries. The first factor to undermine the pursuit of growth was concern about its sustainability. Can we continue growing at the old rate without endangering our future?

Thousands of Victorians have their cash frozen after collapse of Banksia Financial Group - QUESTIONS are being asked of government regulator the Australian Security and Investment Commission over what actions it took prior to the $660 million collapse of the Banksia Financial Group. Thousands of investors are facing hundreds of millions of dollars in losses after the shock collapse. Julie and Les Bailey, former dairy farmers from Numurkah, say they have potentially lost several hundred thousand dollars invested in Banksia superannuation. "We have lost all our super," Mrs Bailey said from her Queensland home. She said it was not only Victorians who were suffering. Others interstate, including the couple's son, stood to lose significant investments, Mrs Bailey said. ASIC was allegedly informed about the precarious position of Banksia, and a subsidiary Statewide Secured Investments 18 months ago, according to NSW property developer David Hawkins who was involved in litigation with the firm. "The regulator has been on to them for about 18 months ... (but) ASIC have sat on their hands," Mr Hawkins claimed.

Capital Economics Canada Housing Forecast - Canada's sub-prime mortgage industry is said to be growing and there are supposed to be $500 billion in high-risk mortgages in the Canadian housing market. But some like Robert Shiller have argued that if Canada's bubble were to burst, Canada's experience would be very different from the U.S. because banks aren't as burdened by sub-prime loans and because the mortgages are insured by the Canadian Mortgage Housing Corp. (CMHC). A new report by Capital Economics however says Canada is "not immune to potential sub-prime problems". While they argue that there isn't a sharp distinction between prime and sub-prime lending and that non-prime mortgages account for 20 percent of total residential, unlike the 50 percent touted by many, they do think there is too much optimism about Canada's housing market: "In Canada's case, the evidence also points to errors of optimism. The run-up in household debt-to-GDP (adjusted for methodology differences) looks very similar to what occurred in the US. This suggests that Canadian households might be equally vulnerable to a housing correction. The Bank of Canada recently commented that the revised Canadian debt figures 'imply a more vulnerable household sector than previously thought'. We couldn't agree more."

Bank Of Canada Fires Shot Across Bow, Says "Withdrawal Of Stimulus Will Likely Be Required" - With the entire world engaged in global coordinated easing, slashing, burning, and overall lowering rates and printing money by the wheelbarrow, the Bank of Canada just fired a shot across the bow. Here is the kicker: "Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. Over time, some modest withdrawal of monetary policy stimulus will likely be required." Surely they must be punished for this blasphemy in the holy church of Saint John Maynard and the apostles of collapsing fiat. The Loonie is happy: Goldman is not. From GS' Andrew Tilton.In contrast to Governor Carney’s speech last week, where the tightening bias was omitted, the language of the tightening bias has been strengthened in two ways. First, language that conditioned tightening on the pace of the recovery has been dropped. Second, tightening is now called “likely,” where as before it was termed “may become appropriate.” The tightening bias language now reads: “Over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2 per cent inflation target.” The statement now explicitly also mentions the evolution of imbalances in the household sector, which suggests that concerns over household leverage have moved up the list of priorities for the Bank of Canada.

Ottawa's Long-Term Debt Plans Shelved -- The Conservative government no longer has targets for erasing Canada’s federal debt, which grew by $125-billion since the recession. Finance Minister Jim Flaherty confirmed Wednesday that the recession has derailed Ottawa’s long-term debt plans and new targets won’t be set until the government starts posting yearly surpluses again – which is not forecast to happen for three more years. The minister said rating agencies look favourably at Ottawa’s finances but do raise concerns with him about provincial debt loads. He said it’s up to provincial governments to balance their books. The federal debt stood at $582.2-billion for 2011-12, which is up from $457.6-billion in 2007-08. It was just five years ago that the government was promoting an ambitious plan called Advantage Canada that promised to erase the country’s net public debt “by 2021 at the latest,” according to Mr. Flaherty’s 2007 budget.

High fiscal multipliers undermine austerity programmes - Nothing in economics is more potent than a simple idea whose time has come. Illustrating this maxim, a 3-page article in the IMF’s latest World Economic Outlook promises to have a greater effect on global economic policy than all of the interminable meetings held at the Annual Meetings of the IMF and the World Bank in Tokyo a week ago. That article, written by IMF Chief Economist Olivier Blanchard and Daniel Leigh, presented evidence that the fiscal multiplier [1] in the advanced economies is considerably larger than had been assumed when fiscal austerity plans were set in train in most economies in 2010. The implication, if they are right, is that austerity is much more damging to output in the near term than was anticipated. As a result, the planned fiscal retrenchment could be hard to sustain in the next few years, not only in the eurozone but in the US and UK as well. In fact, we are already seeing signs of this in peripheral Europe and the UK. It is no wonder that many Keynesians (see for example this blog by Paul Krugman) have welcomed the IMF article as a vindication of their earlier warnings about the dangers of austerity. The Blanchard/Leigh paper shows that there is a cross-country relationship between GDP performance in 2010/11 and the relative size of the fiscal tightening which was announced in 2010: those countries with the largest tightening tended to have the worst outcome for GDP growth, relative to 2010 expectations.

Different approaches to austerity - This is a really interesting chart from the IMF’s October 2012 Fiscal Monitor.  It shows the extent of austerity (the red dots). Look how ludicrous is the idea that Greece is not trying hard enough – their current and planned fiscal contraction is literally off the scale! (Here are similar numbers from the OECD.) But what I want to focus on, which this chart clearly shows, is the tax and spend composition of austerity.  In many countries (Ireland, Spain and the UK) austerity is concentrated on the expenditure side. In some (e.g. US) it is more evenly balanced, while in a few (France in particular) it mainly takes the form of rising taxes rather than lower spending. Now how you regard this depends crucially on whether these measures are permanent or temporary (where by temporary, I mean lasting around ten years or less).  If they are permanent, then this is largely a political issue about the size of the state. Raising taxes protects the existing size of the state (taking on board any distortionary costs that permanently higher taxes may bring), while cutting spending aims to reduce the size of the state. In terms of short run demand impact - which is obviously important given the current state of demand deficiency in most countries - permanent tax and spending changes will have similar effects

The IMF and the End of Austerity -- At their annual meeting in Tokyo this year, IMF economists destroyed the case for austerity. While their analysis constituted a small part of a routine report - the World Economic Outlook - and was technical in form, the devastating impact of their conclusions could not be ignored by the media. These IMF conclusions are of the greatest possible importance and must not be allowed to be lost with the passage of time. We are concerned that they should be fully understood by the public at large.  IMF economists have finally acknowledged what politicians have long denied. They have shown that austerity policies implemented by politicians and demanded by financial markets are severely damaging to what economists define as 'growth'. Ultimately, argues the IMF, these policies are self-defeating. As most thinking people now recognise, rather than repairing the broken and bankrupt economies of the world, austerity is making matters worse.

  • The IMF's analysis goes further: it shows that plan B is not only feasible, it is essential.
  • Assuming (wrongly) that the government's budget is like a household budget, many conclude that the right policy for a debtor government might to be to cut expenditure and increase taxation.
  • Governments have always understood that in a slump, cuts would have damaging effects on the wider economy. Nevertheless they consider these effects to be small relative to the greater good of restoring the public finances to order. So they called on us to accept austerity and 'tough choices', and argued that 'we are all in this together'. Indeed previously the IMF themselves supported this course of action as necessary and effective.

Theory and the Thirties - Paul Krugman - Barry Eichengreen and Kevin O’Rourke take a well-deserved victory lap, pointing out that the new, higher IMF estimates of the multiplier — the change in GDP from a $1 change in government spending — are close to their own estimates using data from the 1930s. Indeed: their paper with Almunia, Benetrix and Rua has not gotten the attention it deserves (but I’ve cited it!). And once again, Eichengreen and O’Rourke have demonstrated the uses of history. But they’ve also demonstrated the uses of theory; these are actually complementary. To realize that we really needed to look at the 1930s, not just postwar economies, you had to start with a theoretical understanding — based on the Hicksian IS-LM model or something related — that the effects of fiscal policy were likely to be very different in economies at or near the zero lower bound — which basically means either the 1930s or Japan. Now the IMF and policy makers in general are, as E&R say, shocked, shocked to discover that policy based on the assumption that the ZLB makes no difference has been all wrong.

The Lost Generations - Jeffrey D. Sachs – A country’s economic success depends on the education, skills, and health of its population. When its young people are healthy and well educated, they can find gainful employment, achieve dignity, and succeed in adjusting to the fluctuations of the global labor market. Businesses invest more, knowing that their workers will be productive. Yet many societies around the world do not meet the challenge of ensuring basic health and a decent education for each generation of children. Why is the challenge of education unmet in so many countries? Some are simply too poor to provide decent schools. Parents themselves may lack adequate education, leaving them unable to help their own children beyond the first year or two of school, so that illiteracy and innumeracy are transmitted from one generation to the next. The situation is most difficult in large families (say, six or seven children), because parents invest little in the health, nutrition, and education of each child. Yet rich countries also fail. The United States, for example, cruelly allows its poorest children to suffer. Poor people live in poor neighborhoods with poor schools. Parents are often unemployed, ill, divorced, or even incarcerated. Children become trapped in a persistent generational cycle of poverty, despite the society’s general affluence. Too often, children growing up in poverty end up as poor adults.

Greek Society Unravels Under Austerity Measures - Costas Lapavitsas is a professor in economics at the University of London School of Oriental and African Studies. He teaches the political economy of finance, and he’s a regular columnist for The Guardian. Here he’s interviewed by Paul Jay of the Real News Network.This passage caught my eye: JAY: [In] an interview I once did with Noam Chomsky a couple of years ago, he made a point which I thought was interesting, which—just how quickly German society accepted a Hitler and how quickly you go from kind of an avant-garde, libertarian Berlin to a fascist Berlin. I mean, what’s the danger of that in Greece? LAPAVITSAS: Oh, the danger is very real. The danger is very real. I mean, the center of politics, the political organizations that have run Greece for four decades, have been hollowed out.You see, people misunderstand. They think that the Greek state has always been very weak, inefficient, the Greek politicians are incapable, and so on. That is nonsense. The Greek state has been a very capable state and it has been able to deliver all kinds of things. You know, it’s a middle-income country. Its political system has been uniquely stable in Europe. Two parties have alternated in power and nothing has been changing for three to four decades. Now that’s finished. That’s come to an end. These two parties are completely discredited. The center is hollowed out. And what has happened is that parties on the left and parties on the extreme right have been strengthened.

Greece Austerity Diet Risks 1930s-Style Depression:  - Greece is spiraling into the kind of decline the U.S. and Germany endured during the Great Depression, showing the scale of the challenge involved in attempting to regain competitiveness through austerity. The economy shrank 18.4 percent in the past four years and the International Monetary Fund forecasts it will contract another 4 percent in 2013 as Greece struggles to reduce debt in exchange for its $300 billion rescue programs. That’s the biggest cumulative loss of output of a developed-country economy in at least three decades, coming within spitting distance of the 27 percent drop in the U.S. economy between 1929 and 1933, according to the Bureau of Economic Analysis in Washington. “Austerity has been destroying tax revenue and therefore thwarting the intended effect,” said Charles Dumas, chairman of Lombard Street Research, a London-based consulting firm. “There’s no avoiding austerity, though, because these people have no borrowing power. The deficits are there.” Greece’s restructured bonds have benefitted amid speculation that creditors are poised to release more bailout funds. Greek bonds maturing in 2023, which yielded more than 30 percent at the end of May, now yield about 16.4 percent. The next block of aid is slated to total 31 billion euros ($40.5 billion), mostly to recapitalize the nation’s banks.

Amid the Echoes of an Economic Crash, the Sounds of Greek Society Being Torn -The cafes are full, the night life vibrant and the tourists still visiting in droves, but beneath the veneer of normalcy here Greece is unraveling. In good times, money papered over some of the problems. As the economic crisis grinds along, austerity is fraying the bonds of civility, forcing long-submerged divisions to the surface. Members of the neo-Nazi Golden Dawn party, who are widely seen to have the support of the police, clash violently with leftists and immigrants, raising fears of the precariousness of the rule of law. But the discord is not confined to them.  Lawmakers, increasingly mired in corruption scandals that alienate the public, curse one another in Parliament. Friends fall out, disagreeing over how deep the country’s troubles run and who is to blame. The divisions are not only political. With unemployment at 25 percent, and exceeding 50 percent for young people, tensions are rising between generations, public- and private-sector workers, haves and have-nots.   The government just passed a law allowing supermarkets to sell expired food at discounted prices. The price of home heating oil has tripled since 2009, and many apartment blocks are voting not to buy any since too many tenants can’t afford it.

Anti-immigrant Golden Dawn rises in Greece -  At first glance, the shop on a nondescript street in this chaotic capital looks standard-issue military. Fatigues. Camouflage. Hunting gear. Deeper inside, the political message emerges. Black T-shirts emblazoned with modified swastikas — the symbol of the far-right Golden Dawn party — are on sale. A proudly displayed sticker carries a favorite party slogan: “Get the Stench out of Greece.” By “stench,” the Golden Dawn — which won its first-ever seats in the Greek Parliament this spring and whose popularity has soared ever since — means immigrants, broadly defined as anyone not of Greek ancestry. In the country at the epicenter of Europe’s debt crisis, and where poverty and unemployment are spiking, the surplus shop doubles as one of the party’s dozens of new “help bureaus.” Hundreds of calls a day come in from desperate families seeking food, clothing and jobs, all of which the Golden Dawn is endeavoring to provide, with one major caveat: for Greeks only.To fulfill its promise of a Greece for Greeks alone, the party appears willing to go to great lengths. Its supporters — in some instances with the alleged cooperation of police — stand accused of unleashing a rash of violence since the party rose to national office, including the stabbings and beatings of immigrants, ransacking an immigrant community center, smashing market stalls and breaking the windows of immigrant-owned shops. Attacks have not stopped at foreigners. One Golden Dawn legislator slapped a left-wing female politician on national television. Party supporters have attempted to shut down performances of progressive theater. Activists see the party’s hand behind three recent beatings of gay men. The Golden Dawn has also begun engaging left-wing anarchy groups in street battles — more evidence, observers say, of a societal breakdown that some here fear could slide into a civil war if Greece is forced out of the euro and into an even deeper crisis.

Poll Shows Golden Dawn Rising, PASOK Vanishing - The three parties in Greece’s uneasy coalition government are paying a high price for their unremitting support of more austerity measures, with polls showing the ruling New Democracy Conservatives have fallen behind the major opposition Coalition of the Radical Left (SYRIZA) and that the neo-Nazi Golden Dawn party is surging fast while the once-dominant PASOK Leftists have fallen to last place among the six parties in Parliament. On the same day that 70,000 Greeks were demonstrating in Athens against more pay cuts, tax hikes and slashed pensions being planned by the government of Prime Minister Antonis Samaras, a poll by the survey company VPRC put SYRIZA first with 30.5 percent, compared to 27 percent for New Democracy. Golden Dawn, which got only 0.29 percent of the vote in 2009 when it was considered an extremist fringe party, is now in third with 14 percent, double what it received in June when it won 18 seats in the Parliament. As Golden Dawn presses its anti-immigrant, anti-gay, anti-Semitic, anti-bailout, ultra-religious platform it is gaining with each extreme move, the poll indicated. The party is also benefiting from its fierce opposition to austerity measures that are attached to $325 billion in rescue loans from the Troika of the European Union-International Monetary Fund-European Central Bank. The biggest surprise, however, was the 5.5 percent given to PASOK, less than half the 12.3 percent it won in June. The party had 44 percent of the vote in the 2009 elections which it won, but is disappearing after former premier George Papandreou’s regime imposed austerity, which is still being backed by its new leader, Evangelos Venizelos.

The Terrifying Rise Of Greece’s Nazi Party - As he crossed a bridge on his way to a friend’s home, a group of four men called out to him. They had two dogs at their feet, and they were dressed in black t-shirts. To Hussein, black clothes meant one word: fear. He ran. The dogs chased him. One caught him by the neck, the other by the leg, and knocked him down. The men beat Hussein around the head, hitting him with sticks, kicking him with their boots. Lying on the pavement, his skull streaming blood, he screamed for help. He remembers seeing people peering at him from their balconies, doing nothing. Then he blacked out. On the streets of Greece, it’s now common knowledge among immigrants like Hussein that black clothes are the unofficial uniform of Golden Dawn, or Chrysi Avgi—a kind of cross between Hezbollah and the Tea Party. Since 2008, Golden Dawn supporters have assaulted immigrants with brass knuckles, knives, and batons. There have been nearly 500 attacks this year alone, according to the Migrant Workers Association, some of which have been captured on video and proudly posted on Golden Dawn’s YouTube channel. But Golden Dawn is not just a gang of radical right-wing thugs. It is now the fourth-largest party in Greek politics. In elections this year, it won 18 of 300 seats in parliament on an explicitly anti-immigrant platform. Its growing constituency includes many ordinary Greeks who fear that waves of impoverished foreigners are draining the state’s dwindling resources and taking their jobs in a country where nearly a quarter of the population is unemployed. And as the country’s economy continues to collapse, Golden Dawn is becoming increasingly entrenched in the mainstream of Greek political life.

Malaria returns to crisis-torn Greece - Malaria has returned to Greece as financial cuts contribute to the re-emergence of a once extinct disease. Global health bodies have issued warnings to travellers to the worst hit region in the south of the country, with fears that Athens could soon be affected. Austerity budgets have resulted in drastic cutbacks in municipal spraying schemes to combat mosquito borne diseases. In what is believed to be a first for Western Europe, Greece has experienced the first domestic cases of malaria since 1974. Other mosquito-borne diseases that have slipped back into Greece include West Nile virus. Statistics show that there were 70 instances of mosquito borne diseases in Greece in the first nine months of the year.

Samaras: Certainty of next loan tranche by mid-November - Prime Minister Antonis Samaras on Friday expressed certainty that a 31.5-billion-euro tranche of the EC-ECB-IMF bailout package will be disbursed by mid-November, preferably in its entirety, as soon as a report by the troika is adopted. Speaking in Brussels at the end of a two-day EU summit, Samaras explained that a new summit will not be required to approve the disbursement, adding that the country's current cash reserves would run out on November 16. He said the summit underlined the need to expedite the disbursement of the loan tranche, stressing that the Greek "economy and society are at their limits, the bloodline of the economy that is liquidity is at point zero; unemployment has reached nightmarish levels and every Greek is facing a personal tragedy". "I was met with understanding on the part of the (EU) leaders, they asked with interest about Greece," the premier said, adding that the climate concerning the country has changed and the immense sacrifices of the Greek people are now being publicly praised.

Troika Demands All Greek Tax Collectors Be Fired - Usually the Troika is held responsible for all things evil in Europe, but as Die Welt notes, the latest demand that all senior officials at the Ministry of Finance (including all current Greek tax inspectors) be fired by Friday (over corruption and incompetence concerns) has been greeted more positively by many. "The Troika is the only hope to purge this country of the gangs that plunder it - the ONLY hope!" is how one Skai TV commentator summed up the move, adding that "it would be nice if we could read one day that all presiding judges are dismissed." The plan to "collect record amounts of money in record time" involves the interviewing of 2235 new tax investigators (with no written exam!) who will be judged on how much money they bring in (with minimum quotas) and maximum tenure of one year before re-applying. The new plan is likened to 'medieval tax collectors' and the tax-collectors union, unsurprisingly upset at this new plan, added that the Troika never had to face "a destitute pensioner who cannot pay his tax bill." With rumors of government resignation and re-election, the external pressure and internal strife are coming to a head rapidly.

Greece Earns A Laurel From The World Bank - Greece has won plenty of unpleasant distinctions while struggling to right itself over the course of its three-year debt crisis. Now it has a modest achievement: It’s among the world’s most improved economies in easing the path for businesses in the country, according to a new World Bank report.The annual Doing Business report by the World Bank and International Finance Corp. measures 185 nations by their regulatory burdens in 10 areas — such as starting a business, getting electricity and enforcing contracts — affecting small- and medium-sized businesses. Despite frequent complaints in the U.S. about regulation, the world’s largest economy remains near the top of the list this year — at No. 4, just behind Singapore, Hong Kong and New Zealand. (The world’s second-largest economy, China, remains No. 91 — also right where it was last year.)Greece ranks No. 78 on the overall list (up from No. 100 last year), earning it the distinction of being among the 10 “most improved globally” in the rankings. The World Bank cited Greece’s improvement as a sign of progress by fiscally distressed European economies working to improve their business climates.  Greece showed progress in three key areas: reducing the time required to get construction permits, requiring more transparency and other protections for investors, and improving its process for resolving insolvent firms.

Germany Considering Greek Debt Buyback - Germany's Finance Ministry is considering a debt buy-back as a possible way of reducing Greece's huge debt pile which threatens to rise well above a target level of 120 percent of GDP by 2020, according to German news magazine Spiegel. The Greek government could borrow money from the euro zone's permanent bailout fund and use this to buy back its own debt, which at present trades at around 25 percent of its face value. Buying just 10 million euros worth of Greek bonds could reduce the debt mountain by 40 million, Spiegel said. Talks would have to take place with debt-holders to see if they would accept such a price for their Greek paper. A spokesman for the Finance Ministry declined to comment directly on the report on Sunday, saying Germany was waiting for a report into Greece's progress in meeting bail-out conditions by the country's "troika" of international lenders.

Spain PM set for win in home region vote - Mariano Rajoy, Spain's prime minister, appears to have won the vote in his home region of Galicia, but a clear win for nationalist parties in the Basque Country could soon prove a headache for the central government. According to exit polls on Sunday, the ruling centre-right People's Party was set to retain its absolute majority and government in Galicia with 39 to 42 seats in the regional parliament compared with 18 to 20 seats for the Socialist Party and 15 to 18 seats for two nationalist parties. Opinion polls before the vote had indicated the PP would win 39 or fewer seats. In the Basque Country, the Basque nationalist PNV (Partido Nacionalista Vasco) was set to win with 24 to 27 seats, compared with 23 to 26 seats for Bildu, a pro-independence party, 13 to 15 seats for the Socialist Party and 9 to 11 seats for the PP.

Spain’s main labor unions approve general strike for November 14 -The top committees of Spain’s main unions, CCOO and UGT, on Friday formally approved a general strike for November 14 to protest the government’s austerity drive. Union representatives will convey the decision to the so-called Social Summit, a platform that groups together more than 150 labor organizations and pressure groups. “There are more than enough reasons for the stoppage,” said Toni Ferrer, UGT spokesman. Government policies would deepen the recession, he continued, criticizing the avalanche of legislation passed by the government of Prime Minister Mariano Rajoy since taking power in December of last year. “They have beaten all records,” he said. “Since Rajoy has been in power 22 decrees have been passed.” If the strike goes ahead, it will be the first time that Spain has seen two such stoppages in the space of the year. It will also be the first time that the same government has faced two general strikes. The industrial action will coincide with a general strike in Portugal and with demonstrations and protests called by the European Trade Union Confederation against the austerity drive in Europe. General strikes may also be called for the same day in Cyprus, Malta and Greece.

Spain Output Shrinks Fifth Quarter Amid Bailout Talk: Economy - Spain’s economy contracted for a fifth quarter, adding pressure on Premier Mariano Rajoy to seek more European aid even as the euro area’s fourth-largest economy met a bill-sales target. Gross domestic product fell 0.4 percent in the three months through September from the previous quarter, matching the contraction of the second quarter, the Bank of Spain said in an estimate in its monthly bulletin released in Madrid today. That compares with a median forecast for a 0.7 percent contraction in a Bloomberg News survey of 10 economists.Spain’s bonds have declined since European Union leaders last week failed to discuss further aid for the nation at a Brussels summit. Rajoy has struggled to trim a 2011 budget deficit that was more than three times the EU limit, after the country’s deepening recession pushed the jobless rate over 25 percent, sapping demand and tax revenue.

Bank of Spain Warns on Deficit Targets - Spain's central bank said Tuesday the country's economy contracted slightly less than expected in the third quarter but repeated a warning that tax-revenue shortfalls could cause the government to miss its 2012 budget-deficit target. The euro zone's fourth-largest economy contracted by 0.4%, the same as in the second quarter, the Bank of Spain said in a quarterly report. On an annual basis, the contraction was 1.7% ... The government has said its deficit will rise to 7.4% of GDP this year ..."The efforts to lower spending at the public sector have had a net contracting effect (on the economy) in the central months of the year," the central bank said. "We see drops in consumption and investment by all levels of government above those seen in previous quarters."

Brussels Revises Spain’s Deficit Upward to 9.4% of GDP  - The European Union’s statistics office, Eurostat, on Monday said it had revised Spain’s public deficit for last year upward from 8.5 percent of GDP to 9.4 percent to reflect state injections of capital into nationalized banks. That put Spain on a par with Greece and only behind Ireland, whose shortfall was 13.4 percent of GDP, in the EU. In contrast the average deficit in the EU fell to 4.4 percent of GDP, down from 6.5 percent in 2010, while the shortfall in the euro zone declined to 4.1 percent from 6.2 percent. Seven countries in the EU had deficits above the bloc’s ceiling of 3 percent of GDP. Eurostat also revised the deficit for Spain for 2010 upward from 9.3 percent to 9.7 percent to reflect unpaid bills by the public administrations. “The increase in the deficit for 2010 is mainly due to the previously unrecorded unpaid bills in the state and local government sub-sectors,” Eurostat said. “The increase in the deficit for 2011 is mainly due to the reclassification of capital injections by the central government in Catalunya Caixa Bank, NCG Bank and Unnim Bank.”

Moody's downgrade of Spanish regions should be a signal for Rajoy to request aid - Spanish regional downgrades should not have been a surprise. After all, regional credits are generally tied to the national rating in most rating agencies' methodologies. As the central government bonds got downgraded, regional debt was sure to follow - this was discussed in some detail here. Moody's: - The ratings of the following five regions have been downgraded:
- Junta de Extremadura: long-term issuer rating downgraded by one notch to Ba1 from Baa3; negative outlook;
- Junta de Andalucia: long-term issuer and debt ratings downgraded by two notches to Ba2 from Baa3; negative outlook;
- Comunidad Autonoma de Murcia: long-term issuer and debt ratings downgraded by two notches to Ba3 from Ba1; negative outlook;
- Castilla-La Mancha: long-term issuer and debt ratings downgraded by one notch to Ba3 from Ba2; negative outlook;
- Catalunya: long-term issuer and debt ratings downgraded by two notches to Ba3 from Ba1; negative outlook

Note that none of these bonds are now investment grade which impacts their eligibility for the ECB collateral. What's troubling is that Moody's is basically looking beyond the internal rescue fund (called the FLA) set up by Spain to bail out the regions (see discussion).

Spain's 2012 Social Security to Register Deficit of EUR10.5 Billion - The Spanish public social-security system will register a deficit of 10.5 billion euros ($13.7 billion), or 0.9% of the gross domestic product, in 2012, report Cinco Dias and El Pais in their Tuesday Internet editions, citing a notification from Spain sent to European Union statistics agency Eurostat. The government presented its 2012 budget in March and said the public social-security system would end the year in balance, the newspapers add. Spain's 2012 deficit target is 6.3% of GDP, but the country may end the year with a deficit of 7.2%-7.4% of GDP, according to the newspapers.

Portugal’s public debt close to 200 bln euros in Q2 - Data revealed Monday by the Bank of Portugal shows that the Portuguese public debt worsened in August and now accounts for 117.6 percent of Gross Domestic Product (GDP). According to the statistical bulletin of the Bank of Portugal, the government debt amounted to 198.1 billion euros in the second quarter of 2012, which corresponds to 117.6 percent of the country’s GDP. This figure represents an increase from 111.5 percent at the end of the first quarter. The data released by the Bank of Portugal shows that in two months the Portuguese public debt grew by 700 million euros to 198.8 billion euros. The government estimates that the debt will be 119.1 percent of GDP for this year, but at the current rate the 120-percent barrier will be overtaken. Eurostat also revealed Monday that Portugal ended 2011 with a public debt of 108.1 percent of GDP, a figure that puts Portugal’s debt at the third highest in the EU after Greece and Italy.

Cash-strapped Cyprus plots Russian exit from austerity - This island, once a magnet for money, is perilously close to running out of cash. Standard & Poor's, the ratings agency, has downgraded Cyprus twice since the beginning of August, citing "deteriorating domestic credit conditions and eroding consumer and investor confidence". Cyprus is in the eurozone but barely in Europe. Israel and Syria are about 300 miles from Nicosia; Brussels and Paris are 1,800 miles away. Turkey is an ever menacing presence, with its unrecognized regime in the north of the island. Hostility looms large. Then there is Russia, with which Cyprus shares an orthodox church. While Paphos's feline vagrants were being rounded up for extermination, big bears moved in to fill their places on the sunbeds. The newcomers are easy to spot, thanks largely to a sartorial style originated by Englebert Humperdinck's costumier and watches the size of grapefruits. The number of Russians visiting Cyprus has tripled in three years to more than 400,000 and many do not intend to go back. The official estimate of Russian residents here is about 50,000 but double that seems nearer the mark. Aside from the appeal of an agreeable climate and a low tax rate, the Russians' penchant for cash transactions prompts widespread suspicion that the island is becoming a giant laundromat for red-hot rubles. Cypriot authorities deny this.

Italy 2013 Countdown: Rescue Me - There is an interesting article in El Mundo by Fabrizio Goria regarding the escalation of problems in Europe. Via Google Translate please consider a few snips from Italy 2013 Countdown. After Spain, Italy. Let us not deceive risk premiums are going down these days. The country is torn by taxes. In one year, VAT rose two percentage points, from 20 to 22%. And the contraction of consumption has been very strong. In a recent IPSOS poll, 68% of Italians admitted spending less on food. And, according to the latest government budget, local politicians have been "invited" to turn off the lights of cities from 2200 hours to spare. A measure that had seen only during the Second World War and during the oil crisis of the 70s. The biggest risk for Italy lies in the elections next year. Berlusconi's party, the People of Freedom, dissolved like sugar because of factional power struggles. The Democratic Party, the center-left is still no clear leader.  It is, then, Beppe Grillo, founder of the Movement comedian 5 Stars, which continues to garner consensus. In fact, his movement is second in Italy, behind the Democratic Party and ahead of the People of Freedom. Antieuro, vulgar populist, the modus operandi of Grillo is considered by political pundits as the antithesis of Monti. In any case, more and more Italians who want to Grillo in Parliament.

The INSEE survey shows more jitters within the French business community - The National Institute of Statistics and Economic Studies (Institut national de la statistique et des etudes economiques or INSEE) of France conducts a monthly survey of French business conditions. The October results show a continuing deterioration. In fact the indicator hasn't been this low since 2009. It is entirely possible that survey indicators ("soft" data) do not fully represent the reality on the ground, but it certainly speaks to the lack of confidence within the French business community. INSEE: - According to the business leaders of the main economic sectors, the French business climate loses one point again in October to reach 85 points, still under its long term average (100). Business climate indicator in manufacturing industry decreases by 5 points in October and the indicator in services loses 1 point. The indicator in the building sector remains stable whereas that of retail trade gains 2 points.

France to Back Peugeot With 7 Billion Euros in Credit Guarantees - The French government is preparing to announce that it will provide PSA Peugeot Citroën with credit guarantees worth as much as €7 billion in exchange for sparing some of the 8,000 jobs it was planning to cut, a person with direct knowledge of the matter said Tuesday. President François Hollande’s government will also seek changes in the company’s governance, including the addition of a government representative to the board, according to the person, who asked not to be identified because the matter is not yet official and some details remain to be arranged. Peugeot’s cost for the funds it uses to help consumers finance car purchases has risen since Moody’s cut its credit rating on Oct. 12. Fitch Ratings downgraded the company in September. That makes it harder to compete with carmakers that can offer better terms.

Europe’s Summit That Wasn’t - It’s taken me the entire weekend to digest just how underwhelming the latest EU summit was. I spent much of Saturday searching for an important announcement that I must have missed, but alas I couldn’t find one. As ever the major issues going into the summit were those of the nations that are currently under  economic stress, yet this appears to have been barely touched upon over the two days of chin-wagging. All that has come out of the summit is an agreement on a calendar to deliver a legal framework on a single supervisory mechanism for the EU-wide banking system: We need to move towards an integrated financial framework, open to the extent possible to all Member States wishing to participate. In this context, the European Council invites the legislators to proceed with work on the legislative proposals on the Single Supervisory Mechanism (SSM) as a matter of priority, with the objective of agreeing on the legislative framework by 1 January 2013. Work on the operational implementation will take place in the course of 2013. In this respect, fully respecting the integrity of the Single Market is crucial.But again, this lacks any real substance and leaves the door open for further slippages, and let’s not forget the outright detractors such as Britain. Mario Draghi has previously stated it would take 12 months to set up the supervisor given the negotiations with national regulators that would be required in the interim. That schedule already pushes the timetable very close to the German election of September 2013, and it is unrealistic to believe such key decisions could be implemented at that time.

Saving the Euro-Zone, One Bank at a Time - Its very name makes eyes glaze over, and its details are so technical that only the wonkiest of financial wonks really grasp them in full. But efforts to forge a European banking union are, in fact, critically important. If European Union countries get it right, it’ll potentially correct what some economists are calling a “birth defect” of the euro zone and perhaps put an end to the recent years of lurching from crisis to crisis. But politically it’s a minefield, and forging compromises between the sharply diverging interests of the various E.U. governments could take time and a lot more patience. Indeed, the E.U. summit in Brussels that ended on Friday exposed deep divisions over what a banking union actually involves and how and when it should be put into effect. Most notably, there was a clash between French President François Hollande and German Chancellor Angela Merkel before and at the conclusion of the meeting, when both briefed their national press and contradicted each other. Hollande declared that a legal framework would be in place for a new pan-European banking supervisor to be operational at the start of 2013; Merkel, who faces strong domestic opposition to the prospect of German money bailing out reckless banks in other European countries, poured cold water on that interpretation, saying it’s more important to get the details right than to rush ahead.

Update on the banking union initiative in the Eurozone -Here is the latest on the Eurozone-wide bank regulation initiatives. The area leadership seems to have agreed on some key principles of bank supervision:

  1. The ECB will be the ultimate supervisor for all 6,000+ Eurozone banks.
  2. National regulators will run day-to-day supervision for all banks, except...
  3. The ECB will directly oversee the 25 largest "systemic" banks.
  4. Bank bailouts via the ESM will not take place until the EMU-wide supervision is put in place (supposedly by 2014, though looks unlikely).
  5. The ECB will have the ability to intervene in any of the Eurozone banks.
  6. The ECB would not object if some EU banks outside of the Eurozone were supervised separately.

Reuters: - While he fully expects the ECB to have authority over all the euro zone's 6,000 banks, the Frankurt-based institution would concentrate on the systemically important lenders and delegate routine supervision of the rest to local watchdogs.  "The main division is the centre will directly supervise the 25 odd banking groups and all the rest will be done by national supervisors under the guidance, umbrella, monitoring and definition of practices by the centre," Constancio [ECB VP] said.  The top banks would include Deutsche Bank, BNP Paribas, Santander UniCredit.

TARGET losses in case of a euro breakup -- On one side, Sinn and Wollmershäuser (2012) argue that Finland, the Netherlands, Luxembourg, and Germany face the risk of losing the TARGET claims of their national central banks should the euro break up. On the other, De Grauwe and Ji (2012) deny that such a risk exists1. They base this on the grounds that:

  • The risk stems only from these countries' self-chosen net foreign asset position;
  • Fiat money has a value independent of the corresponding national central bank's assets; and
  • Foreign speculators could be excluded from a currency conversion if necessary;

Given that the Eurozone's gross TARGET claims or liabilities today amount to about €1 trillion and constitute the largest single item in the balance sheets of most central banks of Eurozone members, this would be good news for the four countries mentioned. If De Grauwe and Ji are right, however, one wonders why Moody's recently announced that it is considering a downgrade of the credit ratings of Germany, the Netherlands, and Luxembourg in view of the riskiness, among other factors, of their huge TARGET claims2. Can it be that the analysts of Moody's have overlooked something? I will show that they didn't and that, in fact, all three points of De Grauwe and Ji are erroneous or do not apply to the assessment of TARGET losses in the case of Eurozone breakup. To this end, let me consider the issue in more detail. I will start by reviewing the nature of the TARGET imbalances according to Sinn and Wollmershäuser (2012) and then proceed, in turn, to each of the De Grauwe and Ji (2012) counterarguments. Some of my comments also apply to a new paper by Buiter and Rahbari (2012b) that came out after this note was written. I briefly refer to what I perceive as their error in the section on fiat money.

Ten EU nations get go-ahead on financial transactions tax - The European Commission on Tuesday agreed a formal first step enabling 10 European Union nations to launch a hotly contested Financial Transactions Tax (FTT) slated to raise billions for the public purse. After plans to launch the tax across the European Union were scuttled during months of raucous talks by Britain and others, the EU executive proposed that 10 countries in favour, including France, Germany, Italy and Spain, go ahead on their own. The Commission said all the legal conditions to impose such an FTT had been met and that it believed the tax would not undermine the workings of the European single market which seeks to ensure a level playing field for all. "This tax can raise billions of euros of much-needed revenue for member states in these difficult times," Commission president Jose Manuel Barroso said.

Financial transaction tax will 'raise billions', says EU Commission - The European Commission has backed plans for 10 countries to impose a financial transaction tax (FTT), claiming the controversial levy will “raise billions of euros of much-needed revenue”. Jose Manuel Barroso, president of the commission, rebuffed complaints made by other member states – most vocally Britain – and said he was “delighted” that the group was pushing ahead with the plan. Mr Barroso said the legal requirements and conditions had been met and he did not believe the tax would undermine the single market if it were imposed across limited parts of the European Union. “I am delighted to see that 10 member states have indicated their willingness to participate in a common financial transaction tax,” he said. “This tax can raise billions of euros of much-needed revenue for member states in these difficult times.” Mr Barroso added: “This is about fairness – we need to ensure the costs of the crisis are shared by the financial sector instead of shouldered by ordinary citizens.”

October PMIs suggest euro zone downturn deepening (Reuters) - Euro zone businesses in October suffered their worst month since the bloc emerged from its last recession more than three years ago, forcing them to cut more jobs to reduce costs, surveys showed on Wednesday. The downturn that began in smaller periphery countries is now gripping Germany and France, dragging the euro zone as a whole deeper into the quagmire. Markit's Composite Purchasing Managers' Index (PMI), which polls around 5,000 businesses across the 17-nation bloc and is viewed as a reliable growth indicator, fell to 45.8 this month from a September reading of 46.1. It is the lowest reading since June 2009 and confounded consensus expectations in a Reuters poll for a rise to 46.4. The index has now been below the 50 mark that separates growth from contraction since February. "It's very disappointing, it's a depressing scenario as things are getting worse," said Chris Williamson, chief economist at data collator Markit.

Eurozone Downturn Deepens, PMI at 40-Month Low; Manufacturing Weakness in Germany; Considerable Service and Manufacturing Contraction in France - This morning Markit released Eurozone, France, and Germany preliminary PMI reports. All show further deterioration.  Markit Flash Germany PMI® shows Manufacturing weakness behind moderate drop in German private sector output during October. At 48.1 in October, the seasonally adjusted Markit Flash Germany Composite Output Index was down from 49.2 during September and signalled a further moderate reduction in overall private sector business activity. The index has now posted below the neutral 50.0 value for six consecutive months. With the latest reading close to the average for Q3 2012 (47.9), the latest survey suggests an ongoing lack of momentum across the German private sector economy. Lower levels of output were recorded in both the manufacturing and service sectors during October, with the former indicating the sharper decline over the month. Markit Flash France PMI® shows further marked contraction of French private sector output at start of Q4. The performance of the French private sector economy remained weak in October. The latest Flash PMI® data signalled only a slight easing in the rate of decline of output from September’s three-and-a-half year record. The Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, registered 44.8, showing only a small rise from the previous figure of 43.2.Although moderating since the previous month, rates of contraction remained considerable for both services and manufacturing output.Markit Flash Eurozone PMI® shows the Eurozone downturn deepens at start of fourth quarter as PMI hits 40-month low.

  • Flash Eurozone PMI Composite Output Index at 45.8 (46.1 in September). 40-month low.
  • Flash Eurozone Services PMI Activity Index at 46.2 (46.1 in September). Two-month high.
  • Flash Eurozone Manufacturing PMI at 45.3 (46.1 in September). Two-month low.
  • Flash Eurozone Manufacturing PMI Output Index at 44.8 (45.9 in September). Two-month low.

Eurozone business activity hits fresh low - Business activity in the eurozone contracted at its fastest pace in almost three-and-a-half years in October, a survey suggests. The Markit Flash Eurozone Purchasing Managers' (PMI) Composite Output Index fell to 45.8, from 46.1 in September. A figure below 50 indicates contraction. The reading is consistent with a quarterly rate of economic contraction in the bloc of 0.5%, Markit said. Firms also continued to cut employment, but at a slightly slower rate. The figures represent an initial estimate based on 85% of the normal number of monthly responses, and so are likely to be revised slightly. Earlier, PMI figures collected by HSBC bank showed that manufacturing activity in China in October slowed at a slower pace than in previous months. The country's PMI hit 49.1, up from 47.9 in September and the highest level in three months. Separately, a survey by the UK's CBI business group found that manufacturing orders in the three months to October fell in the UK, while output from the sector was flat. The balance between those companies that saw output rise and those that saw it fall hit its lowest level in three years.

Italy's public debt hits record high of 126.1% of GDP - Italy's public debt reached a record high of 126.1% in relation to the country's gross domestic product (GDP), Eurostat said on Wednesday. The European Union's statistics office said the figure was up from 123.7% in the first quarter, which at the time was Italy's highest debt-to-GDP ration since it reached 120.9% in 1995. Italy's debt level was the second-highest in the EU in the second quarter after default-threatened Greece, which had a 150.3% ratio of government debt to GDP. At the end of the second quarter of 2012, the government-debt-to-GDP ratio of 17-state eurozone stood at 90.0%, compared to 88.2% for the first quarter of 2012.

Euro zone debt jumps to 90 pct/GDP in Q2 -Eurostat (Reuters) - Euro zone government debt rose to 90 percent of the single currency area's gross domestic product in the second quarter of 2012 from 88.2 percent in the first three months, data from the European Union's Statistics Office showed on Wednesday. The most indebted euro zone country, relative to its economic output, was Greece, which in the second quarter had a public debt of 300.807 billion euros, or 150.3 percent of its GDP. That was down from 158.8 percent of GDP or 340.906 billion euros a year earlier. Greek debt fell to 136.9 percent of GDP, or 280.423 billion euros in the first quarter, after a restructuring of privately held debt, but then grew again as a result of new loans from the euro zone to keep Athens from bankruptcy. Eurostat said loans from euro zone governments to Greece, extended under the first bailout programme, totalled 1.6 percent of euro zone GDP in the second quarter.

‘Black day’ for Belgium as Ford closes factory, putting 4,300 out of work (photos) More than 4,000 workers learned Wednesday they will be out of a job as Ford Motor Co closes its Belgian factory and shifts production to Spain to cut costs. Ford said it would shut its Genk plant in eastern Belgium, with the loss of about 4,300 jobs by the end of 2014, transferring the work to a plant in Valencia.

Spain's Unemployment Reaches Record as Bailout Looms - Spanish unemployment climbed to a fresh record in the third quarter as a deepening recession left one in four workers jobless, adding pressure on Prime Minister Mariano Rajoy to seek a second European bailout. Unemployment, the second highest in the European Union after Greece, rose to 25.02 percent from 24.6 percent in the previous quarter, the National Statistics Institute said in Madrid today. That is the highest since at least 1976, the year after dictator Francisco Franco’s death led Spain to democracy. Nearly three months after the European Central Bank offered bond buys to lower its borrowing costs, Spain is still playing for time. Rajoy is ignoring pressure to seek more European aid even as the country’s recession worsens and banks report decreasing third-quarter earnings following an increase in provisions for souring real-estate assets. Spain’s Ibex 35 stock index has dropped 10 percent this year, the only decline among major European equity markets.

Budget cuts push Spain jobless to 25 percent (Reuters) - Spain's unemployment rate hit a record high in the third quarter, with one in four out of work and more expected to lose their jobs in 2013 as the next phase of government cutbacks kicks in. At exactly 25 percent, Friday's official number was the highest since the Franco dictatorship ended in the mid-1970s, and gives fresh impetus to calls by labor unions for a general strike next month. That action is part of an increasingly vocal protest campaign against successive waves of spending cuts and tax hikes that, critics argue, has only served to put more people out of work rather than getting to grips with Spain's economic crisis. "Weaker growth than expected, coupled with austerity, could easily see unemployment hit 26 percent next year,"

Spanish unemployment reaches 25% - Unemployment in Spain continued its steady march higher in the third quarter, as the euro zone’s fourth-largest economy remained in recession, to hit a fresh high at just over 25%. The jobless rate in the quarter rose to 25.02% from 24.63% in the second quarter, the national statistics bureau said Friday. Spain is suffering from the collapse of a decade-long housing bubble and from deep spending cuts as the government tries to narrow its budget deficit to 6.3% of gross domestic product from well above 9% of GDP last year. Its unemployment rate is the highest in the euro zone.

One Quarter Of All Spanish Workers Without A Job: Female Unemployment In Ceuta Region Hits 57% - One in four Spaniards are now officially out of work - well over double the euro-area's average 11.4% rate. This is the highest rate of unemployment since the Franco dictatorship ended in the mid-1970s as 5.8 million now stand idle. Perhaps more stunning is the fact that eight of the bailout-nation's regions have higher unemployment rates than the national average with Cueta at a stunning 41.03% (with women's unemployment rate in that region an almost incomprehensible 56.92%)!! The YoY increase of almost 800,000 people unemployed leaves 1.74 million households with no members employed. As one would expect, loan delinquencies are also surging as Caixabank just almost doubled its pool of bad loans in the third quarter.

UBS To Terminate 10,000, Or One Sixth Of Its Employees - There is down-sizing; there is trimming-the-fat; and then there is UBS. The once-giant Swiss Bank just announced it will cut up to 10,000 jobs. This comes on top of the 3,500 from last year - which makes a rather dramatic weight-loss strategy for the 63,500 employee firm. As the FT reports, they will not happen all at once (so just after the election then?) but will lead to the closure of a sizable part of UBS' fixed-income trading operations (and other capital intensive areas of the investment bank). Perhaps in the understatement of the day: "There were several options on the table but UBS has decided on the most radical one," a person familiar commented as the plan is hoped to reduce complexity and costs - so no more Bloomberg Terminals? One thing surely gone is a source of fixed income axes: "The new strategy, hammered out in several executive board meetings in New York this week and set to be announced next Tuesday, will lead to the closure of a sizeable part of UBS’s fixed-income trading operations and other capital-intensive areas of the investment bank."

Competitiveness Cacophony – Attack On France’s Sacred Cow - References to the financial crisis are piling up in France’s economic data. Earlier this week, the manufacturing and service indices hit levels last visited in early to mid-2009. Then the business climate index dropped to a level of pessimism not seen since mid-2009. On Wednesday, the unemployment office announced the largest month-to-month jump in people registered on its rolls since April 2009. Over 3 million people were on those rolls for the second month in a row, the worst since 1999. The long-term unemployed rose to 38.7% of the total. Unemployment, which started ticking up in May 2011, will likely end the year well above 10%. On Thursday, it was housing. The total amount that banks granted for mortgages plummeted by 30.5% so far this year from the same period in 2011—despite the low rates. For all of 2012, an estimated €115 billion in mortgages will be granted, versus €162 billion in 2011. “We have never before seen a drop of this magnitude at this speed,” said Michel Mouillart, author of the study. What took two years during the crisis of 2008-2009, he said, is now happening in one year. The government has been flailing about to counter economic trends that started while Nicolas Sarkozy was still president. And one of the most bandied-about catchwords these days is “competitiveness”—entailing among others the cherished and untouchable 35-hour workweek, equally untouchable wages, and sky-high employer-paid payroll taxes and social security charges. An explosive mix.

French banks get blow from S&P, as Eurozone crisis weighs - S&P downgraded three French banks, including the 3rd biggest lender in the world BNP Paribas, saying the outlook for another 10 lenders was negative. The agency said European turmoil was increasingly pressing, with economic data backing the gloom. Banque Solfea and Cofidis were the other 2 French lenders that came into the S&P firing line. The agency cut the outlook on another 10 banks including such market giants as Societe Generale, and Credit Agricole to negative from stable. In its decision, S&P lowered its long-term rating on BNP Paribas to “A+” from “AA-", while cuttingsmaller players Banque Solfea to “A-” from “A” and Cofidis to “BBB+” from “A-". The forecast on both short – and long – term ratings was negative.

Eurozone nears Japan-style trap as money and credit contract again - All key measures of the eurozone money supply contracted in September and private credit fell at an accelerating pace, dashing hopes of a quick recovery from recession. Data from the European Central Bank show that the tentative rebound in the money supply over the summer may have stalled again in September. The broad M3 gauge -- watched by experts as an early warning signal for the economy a year or so ahead -- shrank by €30bn and is now down by €143bn since April. This is highly unusual. The narrow M1 gauge watched for signals of activity six months head has held up better but also contracted in September, falling by €16bn. "The message is clear," said Lars Christensen from Danske Bank. "The ECB needs to stop obsessing about fiscal issues and do real quantitative easing (QE) if it wants to stop the eurozone going the way of Japan." Loans to firms and households fell 1.3pc as banks continue to shrink their balance sheet to meet tougher rules. Private bank lending has been falling almost continuously since April.

Austerity continues to kill European credit - Mario Draghi, the ECB president,  visited the Bundestag in an attempt to allay fears that the ECB’s outright monetary transactions (OMT) program would have the detrimental long term outcome that many Germans are concerned about, namely hyper-inflation: The European Central Bank President Mario Draghi made a robust defence of his bond-buying plan to ease the eurozone’s debt crisis, telling German lawmakers their fears of illegal funding of governments or stoking inflation are misplaced. Rebutting the main objections point by point, Draghi said, according to an opening statement released by the ECB: “First, OMTs will not lead to disguised financing of governments. “Second, OMTs will not compromise the independence of the ECB… Third, OMTs will not create excessive risks for euro area taxpayers… Fourth, OMTs will not lead to inflation. German politicians appear to have taken Mr Draghi’s words in their stride but I’m unsure if he swayed anyone with his speech. I personally disagree outright with his first point. The fact that he is standing in a nation parliament delivering a speech to explain himself negates most of point two, game theory will do the rest. So these operations are likely to have inflationary outcomes on particular financial assets and commodities, some of which may have a flow-on inflationary effects on consumer pricing. Does that mean I think the OMT program will lead to broad-based inflation across the Eurozone? No. But that is because the pre-requisite for implementation is the enactment of deflationary fiscal policy which, in broad terms will counter these effects. The latest report on monetary developments from the ECB  highlights this point

Weakness the Eurozone credit growth persists; stark contrast with the US: Tight credit conditions continue to persist in the Eurozone, inhibiting growth and dampening plans for fiscal consolidation. AP via Yahoo: - Another drop in lending to companies in the 17-country eurozone showed the economic downturn is deepening, as a brighter mood on financial markets fails to catch on with businesses. The European Central Bank said Thursday that loans to non-bank businesses shrank 1.4 percent year on year in September, double the 0.7 percent contraction reported the month before. In fact loan growth to households trajectory shows an ongoing decline, while ... ... loan growth to companies is declining sharply as well. The stagnation in lending is in part due to banks deleveraging in order to improve capital ratios for Basel III. But a big part of the issue is simply lack of demand from borrowers. AP via Yahoo: - The numbers show the economy is struggling despite efforts by the central bank to stimulate credit and calm financial markets fearful that the eurozone might break up. The ECB has cut its main interest rate to a record low 0.75 percent and made €1 trillion ($1.3 trillion) in cheap loans to banks that don't have to be paid back for three years.Even so, that easy money is not making it from banks to businesses and consumers, largely because demand for credit remains weak. Businesses see no reason to borrow to invest in expanding production. Meanwhile, banks in some countries have less to lend because they are struggling to recover from losses on real estate loans that didn't get paid back and on government bonds that have fallen in value due to fears about those governments' finances. Liquidity is trapped in the Eurozone core where businesses are borrowing less, while periphery banks have limited liquidity even if there was demand. Either way, liquidity provided by the ECB is not making it into the private sector, as the growth in money supply diverges materially from growth in lending to the private sector.

Credit Crunch in Europe; Eurozone Lending Sinking Fast; Money Supply Contracts - A collapse in demand for credit is underway in Europe. Bank lending is down sharply and the decline has "surprised the experts". I wasn't surprised in the least, but nonetheless, please consider Lending in the euro zone is declining fast, courtesy of Google translate (slightly modified by Mish) from Die Welt. In the crisis-hit euro zone, fears rise of a credit crunch. The sharp decline in bank loans to companies surprised even the experts. The sum of bank loans to companies and households in the euro zone shrank more than expected in September. Bank lending in comparison to the same month last year shrank by 0.8 percent, said the European Central Bank (ECB). Analysts had expected a decline of only 0.6 percent. The lending to companies fell month on month by 20 billion euros after it was dropped in August only to six billion euros. In many countries recessionary demand for loans is naturally low. "At least in some euro area countries, the capital constraints affect the supply of credit from the banks to the real economy,"

Austerity Grinch steals Europe’s Xmas - Another night of poor economic data from the Eurozone, not that this should come as any surprise. My base case under the current policy framework has long been a continually slowing Eurozone that would eventually reach even the strongest nations. I’ve stated that meme many times over the last 18 months: Periphery nations weakening, France in the middle, Germany outperforming, but the whole ship slowly sinking. And once again, unfortunately, the Markit PMI data follows along. These comments from Markit’s chief economist about last night’s release: The Eurozone has slid further into decline at the start of the fourth quarter. The survey is running at a level which is historically consistent with the region’s economy contracting at a quarterly rate of over 0.5%. Official data have shown surprising resilience over the summer compared to the survey data, but the underlying business climate has clearly deteriorated markedly in recent months. While GDP may decline only modestly in the third quarter, a steeper fall looks to be on the cards for the fourth quarter. The financial markets may have cheered the positive developments from policymakers in seeking to resolve the region’s debt crisis, notably the promise of bond market intervention by the ECB, but business appears to have been less impressed. Sentiment about prospects for the year ahead are now the gloomiest since early-2009, when the post-Lehman Brothers crisis was in full swing. In addition to worries about the health of domestic markets, companies are also seeing demand weaken further afield, notably in Asia and, to a lesser extent, the US.

Greek Unemployed Cut Off From Medical Treatment - As the head of Greece’s largest oncology department, Dr. Kostas Syrigos thought he had seen everything. But nothing prepared him for Elena, an unemployed woman whose breast cancer had been diagnosed a year before she came to him.By that time, her cancer had grown to the size of an orange and broken through the skin, leaving a wound that she was draining with paper napkins. “When we saw her we were speechless,” said Dr. Syrigos, the chief of oncology at Sotiria General Hospital in central Athens. “Everyone was crying. Things like that are described in textbooks, but you never see them because until now, anybody who got sick in this country could always get help.” Life in Greece has been turned on its head since the debt crisis took hold. But in few areas has the change been more striking than in health care. Until recently, Greece had a typical European health system, with employers and individuals contributing to a fund that with government assistance financed universal care. People who lost their jobs received health care and unemployment benefits for a year, but were still treated by hospitals even after the benefits expired. Things changed in July 2011, when Greece signed a supplemental loan agreement with international lenders to ward off financial collapse. Now, as stipulated in the deal, if people are unable to foot the bill after their benefits expire, they are on their own, paying all costs out of pocket.

Desperate to keep the police on side, is the Greek government overlooking violent abuses? - On Monday night, Nikos Dendias, the Greek Minister of Public Order, was a guest on New Folders, a well known Greek TV show, presented by journalist Alexis Papachelas. A relaxed and slightly ironic Dendias, seemed to be having a good time deflecting all the serious questions D Tsoukalas, the SYRIZA MP who was also a guest on the show, threw at him. By carefully avoiding  answering  any and all questions, Dendias only looked anxious for two things: To not allow Tsoukalas to sidetrack him from his  immigrant-bashing  agenda , and to not displease the very same police force that stood by while a man was attacked outside a theatre, and , according to the Guardian, allegedly tortured 15 detainees after an anti-fascist demonstration a few weeks ago. Dendias defended the police in every turn, going as far as to say that the detainees were lying and the truth would shine once the coroner’s report was out. Little did he know:  on  Friday  afternoon, the coroner’s report was made available to the lawyers of the victims according to Avgi newspaper. Heavy bodily harm, extensive abuse, injury by pointed object (allegedly one of the detainees was “stubbed” with a taser, electrocuted to submission and then brutally beaten while still on the ground). The 15 people arrested two weeks ago stated that they were simply waiting for these reports, and of course they will file a lawsuit against the Greek Police.

How Profligate was the Greek Government?  - Breezily blaming the eurozone crisis on government profligacy is a widely-used journalistic shortcut, but by now it should be clear that it’s a shortcut that doesn’t help us understand what went wrong with the euro project.  It has been repeated often, though evidently not often enough, that Spain, one of the hardest hit countries, had a public debt-to-GDP ratio that was a mere 27 percent before the crisis hit.  And there is reason to believe that even in the case of Greece, the bogeyman of government profligacy, the popular narrative should be treated with a little more skepticism. In a new report, Dimitri Papadimitriou, Gennaro Zezza, and Vincent Duwicquet use the “financial balances” approach pioneered by Wynne Godley to look at the recent history and future prospects of growth for the Greek economy.  Their analysis of the government accounts includes this graph:  As the authors observe, Greece’s government expenditures were basically stable through the ’90s and most of the 2000s, increasing rapidly only as a result of the 2008 recession (until the austerity programs began to take effect in 2010).  Moreover, Greece was not a massive outlier in terms of government spending levels.  Prior to the crisis, Greek public spending as a percentage of GDP was on the lower end compared to France, Italy, and Germany:

Greece: We got an extension; EU: No you haven't (AP) — Greece's Finance Minister said the country has been granted a long-sought extension to meet the terms of its bailout program — but the claim was swiftly shot down as "speculation" by the European Central Bank and lead lender Germany. Finance Minister Yannis Stournaras said the deal was struck as part of weeks-long negotiations with its international creditors over a €13.5 billion ($17.56 billion) package of new austerity measures for the next two years, required for continued emergency loan payments. "What have we achieved today? We have achieved the extension," the minister told parliament. "If we had not been granted that extension, today we not only have needed to take measures worth €13.5 billion euros, but €18.5 billion ($24 billion)." He added: "We have not gone bankrupt because we still have funds remaining from the previous installment." One of the conditions of Greece's current €240 billion bailout program is that it reforms the economy so the country can eventually return to the bond markets to raise money.

Greek junior gov't partner blocks reforms deal -A junior partner in Greece's governing coalition has refused to lift its opposition to a new package of austerity measures, which bailout creditors have been demanding for months in exchange for more rescue loans. Fotis Kouvelis, who heads the center-left Democratic Left party, said Tuesday that labor reforms to be included in the austerity package would encourage layoffs and further fuel unemployment, already at a record 25 percent as the country faces a sixth year of recession. Debt-crippled Greece depends on international rescue loans, issued in return for harsh spending cuts and reforms. It must soon agree with creditors on a new austerity package worth 13.5 billion euro ($17.6 billion) over the next two years. Otherwise, it won't receive a desperately-needed new rescue loan payment next month. That could force the country to default on its debt mountain and possibly abandon the 17-country eurozone. "Neither I nor the Democratic Left lawmakers will accept or vote for the changes in labor rights that (creditors) insist on," Kouvelis said after a meeting of the three coalition leaders under Prime Minister Antonis Samaras, a conservative.

Confusion Reigns Over Greece Bailout Extension - Confusion reigned on Thursday, a day after Greece’s finance minister told the parliament that Greece had received an extension on its bailout, with the European Central Bank and Germany denying a deal had been done. Greece is locked in discussions with its international Troika of lenders – the International Monetary Fund (IMF), European Commission and the ECB – to extend the deadline it has been given to implement a range of austerity measures as part of its 130 billion euro ($169 billion) bailout. A two-year extension that Greece is seeking would cost around 13 to 15 billion euros, according to a number of reports. The country is running out of money and needs the next tranche of aid without which much of the country would cease to function. Top officials have denied that an extension has been formally granted. In Berlin, ECB President Mario Draghi insisted that there had been no agreement and negotiations were on-going with “progress being made.” The denial was a rebuttal of Greek Finance Minister Yannis Stournaras’ claim in parliament that the country had won an extension.

Greece debt extension could cost up to 30 bn euros: source - The eurozone is looking at how a request by Greece for a two-year extension to its EU-IMF debt rescue can be met, at a possible extra cost of 30 billion euros in additional aid, European sources said on Friday. "On the extension, things are moving but we must establish the cost involved and how it would be financed," one source told AFP as officials from the EU, International Monetary Fund and the European Central Bank continue discussions with Athens on its next aid payment. The source said that an extension for Greece -- meaning it would have until 2016 instead of 2014 to meet the economic targets set in its bailout -- would cost "between 20 and 30 billion euros." That would be "a new cost and a new political problem but 20 billion euros, when put in context, it is not catastrophic but it is politically difficult," the source said as eurozone officials prepared for a meeting on Greece. Athens wants to have more time to meet its bailout targets so as to ease and spread out the pain of the stinging austerity measures it has taken so as to stabilise the public finances.

German-Led Troika Austerity Reform Plan Has Greece Furious - There's been an uproar in Greece over labor reforms requested of the country by international troika lenders as part of a package of spending cuts in order to secure more bailout aid. The FT's Peter Spiegel reports this morning based on a copy of a draft memorandum obtained by the newspaper that one part of the plan is particularly controversial – a proposal to delegate more control of implementation of the measures to the European Commission's Task Force for Greece, led by a German named Horst Reichenbach.  The document presenting the plan reads, "The trust account adopted at the Eurogroup Feb. 20 is strengthened to ensure that programme funds are used for debt service only."  In other words, the troika wants to make sure that all of the additional bailout money going to Greece is only being used to repay the troika its previous bailout loans. And the troika wants to facilitate the payment itself. Here is Spiegel's description of the provisions: Most intriguingly, however, it significantly ramps up an idea first broached in February: strengthening an escrow account to be used to service Greece’s outstanding debt. In February, that was termed a “segregated account”; in the new German proposal, it becomes a “trust account” run by “international management”, possibly the European Central BankUnder the new German plan, bailout aid would go directly into this account instead of to the Greek government, essentially stripping Athens of budgetary control over its own funding. But the German proposal goes even further, suggesting that when Greece finally reaches primary budget surplus (taking in more money than it spends, not counting interest payments on sovereign debt), a chunk of that surplus should automatically go into the account, too.  The FT also posted the full document on their website, a brief one-page executive summary with bullet points outlining the proposal.

German Hypocrisy on “Strengthening Europe” - Thanks to John Weeks, I see this quote from Merkel speaking before the Bundestag last week: We have made good progress on strengthening fiscal discipline with the fiscal pact but we are of the opinion, and I speak for the whole German government on this, that we could go a step further by giving Europe “real rights of intervention in national budgets”. The idea is that fiscal orthodoxy is soooo important, and individual countries shouldn’t be allowed to tinker with it.  If they try to run deficits outside the (narrow) boundaries of the Fiscal Pact, officials from Brussels should step in and overrule them. Germany, as is well known, is (or tries to be) a paragon of orthodoxy in macroeconomic affairs.  Of course, Germany also has a social market economy which violates almost every principle of orthodox microeconomics.  And what happens when proposals are put forward to regulate any of that stuff from Brussels? You can see the answer in the stalemate over banking regulation.  As part of a quid pro quo for centralizing the lender of last resort function at the European level, an attempt is being made to assert European control over the oversight of financial institutions—and Germany is fighting it tooth and nail.

Euro-Area Bailout Fund Faces Challenge at Highest Court - The euro area’s 500 billion-euro ($652 billion) bailout fund faces another test as the European Union’s highest court weighs claims that the firewall violates EU law and should be banned in its current form. A complaint by Thomas Pringle, an independent member of the Irish parliament, today reached the EU Court of Justice, which has the power to topple the European Stability Mechanism, or ESM. A ruling is possible as soon as the end of the year under a fast-track procedure. “Developed in haste, the ESM treaty is at odds with and undermines the EU legal order,” John Rogers, a lawyer for Pringle, told the court in Luxembourg today. “In trying to defend the compatibility of the ESM with the EU treaties, the intervening member states and institutions have had to engage in mischaracterization and distortion in the confusion of form and substance and in legal and conceptual contradictions.” The EU court case follows a separate decision last month by Germany’s Federal Constitutional Court in Karlsruhe not to block the ESM. The German ruling handed a victory to Chancellor Angela Merkel, who championed the bailout facility as vital to save the euro area from a fiscal meltdown as it lurches between crises.

A Modest Proposal from Berlin: End Democracy in the European Union — A general principle of the Age of Enlightenment is that people shall chose those who govern them through a democratic process. As appealing as this principle may appear to most of us, the Chancellor of Germany proposes what she considers to be far better: granting unelected officials in the European Commission the power to veto the economic policies of democratically elected national legislatures. This is no more than a generalization of her policy towards Greece, Spain, Italy and Portugal. In my last column (“Pact of Folly”) I treated the economics of the so-called Fiscal Pact, but only after the Chancellor’s proposal for cancelling democratic decision making has the “penny dropped” (as the British would say). Now, the implications of the “Treaty on Stability, Coordination and Governance in the Economic and Monetary Union” strike me with full force. The Fiscal Pact mandates that all national governments in the European Union should achieve a “structural deficit” of no more than 0.5 percent of gross domestic product. I shall not again demonstrate that this concept is nonsense and, even were it not, 0.5 percent would be absurd, implying continuously deflationary fiscal policy. If the Pact is foolish, combining it with a “fiscal czar” (Merkel’s term, not mine) is authoritarian madness. It would abandon the pretense of electoral democracy within the European Union. According to Yahoo! News, “German Chancellor Angela Merkel… demanded stronger authority for the executive European Commission to veto national budgets”

Nigel Farage On The Total Subjugation Of Europe - Forget black swans, Nigel Farage is rapidly turning himself into the black sheep of the EU Parliament with his constant stream of truthiness and honest pragmatism. It seems the broadly nodding-donkeys that fill the chamber remain cognitively dissonant to any and everything in the real world - hanging instead on the next soundbite from Van Rompuy or Barroso on how well things are going, or how the crisis is 'almost' over. If only the Germans would bless them all with their money. In one his plainest-speaking rants, Farage provides clarity to his 'peers' on just exactly what the bailouts of Greece, Portugal, Ireland, and soon to be Spain and Italy are actually about - the "total subjugation of the states to a completely undemocratic structure in Brussels." Is it any wonder Samaras and crew - while happy to accept cash and make promises - are pulling away from yet another (this time is the last time) Troika-driven austerity push? "The euro-zone is in a very dark place; economically, socially, and politically."

Deposit Insurance – Who is it for really? - A friend of mine did a little digging for me in Greece recently. What he found is that at least one major UK bank is deeply involved in capital flight from Greece and quite possibly from other European nations as well. This bank which I won’t name if you don’t mind has been advertising to Greeks-with-savings that they should switch their savings from their Greek bank to this UK bank. So far so ordinary. Unsavoury, predatory perhaps, but not illegal. What piqued my friend’s interest was that the bank was telling prospective clients that this was not the Greek registered part of the bank family but a branch of that bank’s UK operation. For the sake of clarity let’s call the bank RBHS. No such bank exists, I’m sure you’ll agree. RBHS was telling clients it was a branch not of RBHS Greece but RBHS UK. The money would be available to the client in Greece but on deposit in either the UK or they also offered Cyprus. Why, you might wonder? Why go to the bother of opening a branch of (or at least something connected directly to) RBHS UK when you already had a Greek operation? My friend asked. The answer he was given was that the money would then be guaranteed under the UK deposit guarantee scheme run by the FSA/FSCS (Financial Services Compensation Scheme). So what was being sold to prospective Greek clients was that they should move their money from their Greek bank to UK registered and run RBHS because if the Greek bank went down as part of a Greek exit from the EU and euro then the Greek state might not fully cover the deposit. It might, but then again, it might not. Would the client really want to take such a risk when by simply switching banks to RBHS UK their money would be guaranteed by the British government and British tax payer?

The UK: Statistics and Economy - Some time ago, I was complaining about the increasing opacity/difficulty in obtaining information about the UK economy, for example with the previously wonderful National Statistics now completely hopeless. As such, I have to offer a big word of thanks to Dr. Tim Morgan of Tullett Prebon, who has made an excellent database of statistics available here, and would also recommend the database to those who are likewise frustrated with finding basic data from the official sites. In practical terms, it means less time looking for information, and more time looking at what the data might mean. As a celebration of so much easily accessible information, I will today overload on statistics, and use the statistics as a foundation for a review of the UK economy. First of all the government finances, commencing with a breakdown of revenues (billions): There are a couple of points of note here; the first is that after the drop that took place when the economic crisis became visible, revenue has been steadily increasing with VAT revenue growth particularly pronounced. A commentator recently suggested that the deficit growth was due to a collapse in revenue, but we can see that this only explains a small element of the deficit. With regards to collecting revenues, I propose a more open, efficient and transparent system, and a system that will also reduce costs and distortions in behaviour. For example, I propose the abolition of all corporation tax, and a flat income tax. Since writing the post on reform, I have identified some problems with the proposal, but still hold with the principles (I may update the post if I have some time). Below, we have spending (£billions):

Which market failure? - Liam Halligan says: "The UK remains in grave danger of a sovereign bond market meltdown." This puzzles me. I don't disagree that there's a good chance of bond yields rising over the long-term. But a return to normalish interest rates that is anticipated by the market - an upward sloping yield curve implies that investors expect yields to rise - is not a "meltdown." Instead, Mr Halligan is, I guess, making a stronger claim - that government bonds are now mispriced; long-term real yields of around zero are not pricing in any "grave dangers." But if there's one market you'd expect to be efficient it is, surely, the sovereign bond market. It's a large, liquid market in which there is little private information and countless intelligent buyers none of whom have pricing power. But Mr Halligan seems to be saying that even this market is inefficient, that it is misallocating trillions of pounds of capital; the world sovereign bond market is worth some £26.6 trillion (pdf). If you think sovereign bond markets can misallocate resources on a massive scale, you got to believe that ordinary markets for goods, labour and services are even more prone to huge misallocations. 

Roll up your sleeves and find jobs, minister tells unemployed - Jobless people who do not make enough of an effort to find work face a “rude awakening” from tomorrow under new rules which could see them stripped of their benefits for three years. Mark Hoban, the Employment Minister, uses an article for the Telegraph to deliver a warning to unemployed people who fail to “roll up their sleeves” and who think they can “play the system” to obtain a lifetime on welfare. “I’ve got news for them – they can’t,” Mr Hoban writes. He adds that the new “three strikes and you’re out” approach – likely to be hailed by the Tory Right – provides a “tougher regime”. A series of escalating penalties comes into force from tomorrow which will see the maximum period for which Jobseekers’ Allowance (JSA) can be withdrawn rise from the current 26 weeks to three years. Last year, according to figures from the Department for Work and Pensions (DWP), jobcentre advisers took action against 495,000 claimants for not doing enough to find work – including 72,000 who had refused an offer of employment.

Britain’s Unions Bring London to a Standstill = This weekend saw massive, coordinated union marches in the UK. In London: “thousands” (FT); tens of thousands (AFP); 100,000 (SWLondoner); 150,000 (Evening Standard). Similar protests took place in Glasgow and Belfast. Impressive. Here’s a video from Real News Network: Lots of terrific quotes in the video — including the loathely David Cameron and the lesser evil Ed Milliband, who gets booed — but this caught my eye from RNN’s Hassan Ghani: [J]ust to show they mean business, the Unions, with six million members have threatened a general strike across the United Kingdom – the first since 1926. “When the time is right, and all the practicalities have been considered, we need to strike together, because we need to oppose welfare cuts, and health cuts, and education cuts.” …For now, the unions are considering their options over a general strike, and preparing for a Europe-wide day of action on November 14th.

Austerity, debt burdens and hypocrisy - After the weekend march against UK austerity, I saw a government minister on the TV justifying their fiscal plans. One of the arguments he used was that it was necessary for the sake of our children. In these circumstances I can quite understand the urge to dismiss such arguments as invalid. Part of this urge comes from knowing that, in many cases, the argument about debt being a burden on future generations represents simple hypocrisy. How do I know this? Because often exactly the same people championing austerity also argue that we cannot take action to reduce future climate change because the current costs will be too great. The UK government’s spin was that it would be the greenest government ever, but its policy is quite the opposite. The Republican Party in the US also resists any action to reduce climate change because of the current costs of doing so (at least when they are not denying climate change exists). The connection? Both issues involve trading off costs to the current generation (austerity, measures to reduce climate change) with costs to future generations (higher taxes, climate change itself). If you really believe that we must reduce debt right now (rather than after the economy has recovered) because of the impact debt will have on future generations, then you should also be doing everything you can right now to reduce carbon emissions.

Quantitative easing 'experimental', says top civil servant - The Treasury's most senior civil servant has told a committee of MPs that pumping hundreds of billions of pounds worth of cash into the economy as an emergency measure was an "experiment" and the results may not be known for years. Permanent secretary Sir Nicholas Macpherson told the public accounts committee there was "uncertainty" in Whitehall over whether increasing quantitative easing by £50bn next month to £425bn was the right move. Richard Bacon, a Conservative member of the committee, said he was "horrified" by Macpherson's assessment of the policy. The permanent secretary insisted QE had stopped the UK's economy spiralling further down. "There is uncertainty around it," he told MPs. "We are very clear it has had a positive on the economy as far as economic activity is concerned. "We don't really know because even when the economy is working perfectly the precise relationship between a change in interest rates and the economy is very uncertain.

BoE’s Andrew Haldane: ‘Curb King Kong banks further’ - Banks are too big and should be broken up or shrunk to curb the risks that “King Kong” lenders still pose to the economy, a senior Bank of England policymaker said. Andrew Haldane, the Bank’s executive director for financial stability, claimed that current bank reforms – including the Government’s plans to ringfence retail banks – do not go far enough and further measures should be considered. To address properly the “too-big-to-fail” problem, he said regulators should consider doubling banks’ loss-absorbing capital buffers to around 20pc, “placing limits on bank size”, or imposing a “full separation of investment and commercial banking” rather than a ring-fence. He added that the evidence pointed to the optimal size for a bank to be as small as $100bn (£62bn). However, the “big banks are even bigger” than before the crisis, he noted. Barclays’ balance sheet is £1.5 trillion, Royal Bank of Scotland’s £1.37 trillion, and Lloyds Banking Group’s £930bn.

1% GDP bounce beats expectations - Whatever the distortions and special factors, the 1% rise in GDP in the third quarter was welcome. It suggested that there has been underlying growth in the economy, not just in the third quarter but in the second as well, so that "longest double-dip recession in 50 years" should be put to bed.  The best way to look at the figures, according to the statisticians, is to take the second and third quarters together. GDP fell by 0.4% in the jubilee-affected second quarter and rose by 1% in the third, making for a 0.6% rise over the two. 0.2% of this was Olympic ticket sales, leaving 0.4% underlying growth, 0.2% in each quarter. Not strong by any measure, but the right side of zero. The 1% GDP rise compared with expectations of a rise of between 0.4% and 0.8%. Is it a little toppy? The Office for National Statistics has pencilled in a small 0.5% fall in service sector output in September, though it doesn't yet have the data. The 2.5% quarterly fall in construction sector output looks a bit too pessimistic. It makes a change, however, for the ONS to produce figures that surprise on the upside. More here.

U.K. Recession Over as Economy Grows 1 Percent in Q3 -- Britain’s economy grew by a bigger than expected 1 percent between July and September, ending a shallow nine-month recession. The figure announced Thursday by the Office for National Statistics beat the market consensus forecast of 0.6 percent growth. The ONS says the result brought economic output back to the same level of a year ago. The statistics agency says the Olympic Games probably gave the economy a boost but it gave no estimate of that effect.