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

Saturday, October 13, 2012

week ending Oct 13

Fed's Balance Sheet Expands in Latest Week - The Fed's asset holdings in the week ended Oct. 10 climbed to $2.813 trillion, up from $2.810 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities edged up to $1.654 trillion on Wednesday from $1.653 trillion. The central bank's holdings of mortgage-backed securities rose to $835.01 billion from $834.99 billion a week ago. Last month, the Fed began buying $40 billion a month of additional mortgage-backed securities on an open-ended basis. Fed officials said they plan to continue buying bonds until the labor market improves significantly. Thursday's report showed total borrowing from the Fed's discount lending window was $1.56 billion Wednesday, down slightly from $1.57 billion a week earlier. Borrowing by commercial banks rose to $29 million from $17 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts rose to $3.595 trillion, up from $ 3.585 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts increased to $2.891 trillion from $2.880 trillion in the previous week. Holdings of agency securities decreased to $703.52 billion, down from the prior week's $705.00 billion

FRB: H.4.1 Release--Factors Affecting Reserve Balances--October 11, 2012

Fed's "Other Assets" Hit All Time High Of $205 Billion - Those looking for info on the Fed's now weely non-sterilized MBS purchases in the weekly H.4.1 update will be disappointed. The reason why the MBS line in the Fed's balance sheet will not move higher for a while is because, unlike TSYs, the settlement period for mortgage debt is usually many weeks and will months for all purchases already completed to appear in the "stock" total. One number, however, which may be of interest is the Fed's "Other Assets" because in the week ended October 10, this number hit an all time high of $205 billion and rising at an exponential phase.

Kocherlakota: Plan Suggests Easy Fed Policy for Four or More Years - A key U.S. central bank official refined a plan that could keep monetary policy easy for years to come, in a speech that acknowledged “mixed reactions” to what he has been proposing.  Minneapolis Fed President Narayana Kocherlakota again argued in favor of a policy that would keep central bank policy very easy until the unemployment rate hit 5.5%, as long as inflation stayed under 2.25%. Under such a plan, rate increases “may not take place for four or more years,” he said in the text of a speech prepared for delivery before a local group. The official’s advocacy of such a strategy reprised comments made three weeks ago in Michigan. Then, Kocherlakota, currently a nonvoting member of the Federal Open Market Committee, caught many central bank observers by surprise with a major change in outlook. Earlier this year the central banker had been speculating about when the Fed might raise rates, so his shift toward a plan that would keep monetary policy easy longer than just about anyone else on the Fed predicts proved to be a head scratcher to many.

Forward guidance: Does Bernanke Talk Too Much about How Good his Exit Strategy is? - The first idea is that if QE works at all, it works mainly through the forward guidance channel. That is one of the central findings of Michael Woodford’s much discussed Jackson Hole paper. The point is that just expanding the Fed’s balance sheet when interest rates are already effectively at the zero bound has little direct expansionary effect. All we have to do is look at the following chart, which I have posted before. Notice how the nominal GDP (NGDP) line barely wiggles despite the huge leaps in the monetary base. The Fed, to use the well-worn expression, is pushing on a string. Instead of pushing, someone should be pulling, but the Fed itself does not have arms long enough to reach the far end of the string. The solution is to persuade private-sector market participants to pull it by raising their expectations of the future strength of the economy. The Fed does that not just by expanding its balance sheet, but by signaling that it will keep it expanded until the real economy gets moving again. The second idea is that the Fed should be targeting not inflation and unemployment separately, but NGDP, a variable that rolls the two parts of the dual mandate into one. NGDP level targeting, endorsed with caveats by Woodford and much more enthusiastically by others, would allow inflation to rise well above 2 percent during the recovery and then fall back to some such rate once the output gap closes. The whole point of NGDP level targeting is that by temporarily relaxing the inflation target, the output gap will close much faster. In practice, though, inflation expectations seem to have hit a sort of glass ceiling. Altig provides the following chart, which shows that expectations have risen with each round of QE, but then flattened out just below 3 percent. NGDP targeters would say 3 percent is still too tight a cap.

Key Oversight Tool Used by NY Fed May Be Broken - An important tool used by Federal Reserve Bank of New York to gather information about the critical fed funds market may be fundamentally broken.A new report from the Fed’s most important regional branch focuses on a tool the bank uses to gather data on what it believes to be fed funds market transactions, moving across a central bank operated electronic settlement system. The apparent failure of this tool calls into question how much is really known about this part of the financial market, the study warns. The overnight fed funds market is where banks go to lend one another reserves. Historically, the market has been the place where the central bank intervened directly to implement monetary policy and thus affect overall economic momentum.

Trickle-down central banking - HOW is bond-buying by the Federal Reserve supposed to help the real economy? Mr Bernanke’s response:The tools we have involve affecting financial asset prices, and ... those are the tools of monetary policy. There are a number of different channels—mortgage rates, I mentioned other interest rates, corporate bond rates, but also the prices of various assets, like, for example, the prices of homes. To the extent that home prices begin to rise, consumers will feel wealthier, they’ll feel more disposed to spend. If house prices are rising, people may be more willing to buy homes because they think that they’ll, you know, make a better return on that purchase. So house prices [are] one vehicle. Stock prices—many people own stocks directly or indirectly. The issue here is whether or not improving asset prices generally will make people more willing to spend. One of the main concerns that firms have is there is not enough demand, there’s not enough people coming and demanding their products. And if people feel that their financial situation is better because their 401(k) looks better or for whatever reason, their house is worth more, they are more willing to go out and spend, and that’s going to provide the demand that firms need in order to be willing to hire and to invest. Mr Bernanke is right to point out that businesses have no reason to expand their production capacity when consumer spending power is so weak. Similarly, he is right to focus on household balance sheets as the major headwind holding back the recovery. The question is whether Mr Bernanke’s stated approach—increasing financial asset prices—will actually work the way he hopes.

Hard to be Easing - Nouriel Roubini - The United States Federal Reserve’s decision to undertake a third round of quantitative easing, or QE3, has raised three important questions. Will QE3 jump-start America’s anemic economic growth? Will it lead to a persistent increase in risky assets, especially in US and other global equity markets? Finally, will its effects on GDP growth and equity markets be similar or different? Many now argue that QE3’s effect on risky assets should be as powerful, if not more so, than that of QE1, QE2, and “Operation Twist,” the Fed’s earlier bond-purchase program. After all, while the previous rounds of US monetary easing have been associated with a persistent increase in equity prices, the size and duration of QE3 are more substantial. But, despite the Fed’s impressive commitment to aggressive monetary easing, its effects on the real economy and on US equities could well be smaller and more fleeting than those of previous QE rounds. Consider, first, that the previous QE rounds came at times of much lower equity valuations and earnings. Even during QE2, in the summer of 2010, the S&P 500, P/E ratios, and EPS were much lower than they are today. If, as is likely, economic growth in the US remains anemic in spite of QE3, top-line revenues and bottom-line earnings will turn south, with negative effects on equity valuations.

The World's Largest Money-Laundering Machine: The Federal Reserve: Let's start with a few questions about the proper role of the Central State and Central Bank: why should they bail out private banks? The answer boils down to something like this: "If the private banks absorbed the losses that are rightly theirs in a capitalist system, they would implode. Since the State and Central Bank have enabled these private banks to infiltrate and dominate the nation's financial system, that system is now hostage to these private 'too big to fail' banks." In other words, "capitalism" in America now means socializing losses and privatizing profits generated by State and Central Bank intervention. Imagine for a moment the "beauty" of this system for owners of private banks: in a truly socialized banking system, the taxpayers would absorb any losses, but the State would also benefit from any future bank-sector profits. In the U.S. system, the losses are socialized but the people draw no benefit; the profits flow to the top 1/10th of 1% private financiers. This is the perfection of State-financier crony capitalism.But the socialization of losses and privatizing of profits is only the first-order effect of the banks' capture of the State. The second-order effect is even more destructive: the rule of law has been subverted by the world's largest money-laundering machine, the Federal Reserve.

From Zero Interest Rate To Zero Retirement: How The Fed Doomed Elderly Americans To Endless Work - Given the Fed's ZIRP impact on expected returns, PIMCO notes that those approaching retirement have three choices: a) save more, b) work longer, or c) tighten their belts in retirement. If everyone saves more, we consume less, and therefore GDP growth slows down. Anemic growth leads to a Fed on hold for a prolonged period - and even further lowered return expectations in an ugly paradox-of-thrift-like feedback loop. PIMCO has found a concerning empirical link between lower rates and longer periods in the workforce as a higher fraction of older Americans remain employed. This has the structurally dismal impact of reducing (implicitly) the level of 'prime working age' employment and has 'convexity' - in other words, the lower rates go, the greater the inertia of the elderly to stay in the workforce. Intuitively, low rates leading to longer work lives just makes sense – especially in an era where fewer retirees will draw defined benefit pensions. This is why some of us are wondering if the Fed is spinning its wheels by sticking to the old model of trying to stimulate growth. So expect lower-rates and longer working years or go all-in on HY CCC debt with 20% of your savings.

Active Central Banks Crush Currency Volatility - Currency options prices, a barometer of expected volatility, have plummeted to prefinancial-crisis levels, in response to heavy stimulus measures by central banks around the world. The potentially unlimited Federal Reserve quantitative easing and European Central Bank bond buying have created a one-way flow in key fixed-income markets, which in turn has made currency trends more predictable and eased volatility. Euro options, for example, are down 66% from their peak in December 2008, according to J.P. Morgan, as a tide of easy money from the world’s top central banks has calmed anxiety in the market. The new environment is a dramatic shift from the last four years, when fallout from the U.S. subprime crisis and Europe’s sovereign-debt problems prompted investors to keep options in high demand. With volatility now broadly held in check by central-bank policies, analysts say any jump in instability caused by economic and political events may be more short-lived.

Supporting Price Stability -- Atlanta Fed's macroblog -- All of the five questions that Chairman Ben Bernanke addressed in his October 1 speech to the Economic Club of Indiana rank high on the list of most frequently asked questions I encounter in my own travels about the Southeast. But if I had to choose a number one question, on the scale of intensity if not frequency, it would probably be this one: "What is the risk that the Fed's accommodative monetary policy will lead to inflation?" The Chairman gave a fine answer, of course, and I hope it is especially noted that Mr. Bernanke was not dismissive that risks do exist: "I'm confident that we have the necessary tools to withdraw policy accommodation when needed, and that we can do so in a way that allows us to shrink our balance sheet in a deliberate and orderly way. ... "Of course, having effective tools is one thing; using them in a timely way, neither too early nor too late, is another. Determining precisely the right time to 'take away the punch bowl' is always a challenge for central bankers, but that is true whether they are using traditional or nontraditional policy tools. I can assure you that my colleagues and I will carefully consider how best to foster both of our mandated objectives, maximum employment and price stability, when the time comes to make these decisions." While the world waits for "take away the punch bowl" time to arrive, here is another question that I think worthy of consideration: "Looking back over the past several years, what is the risk that the Fed's price stability mandate would have been compromised absent accommodative monetary policy?"

Trimmed-Mean Inflation Statistics: Just Hit the One in the Middle - This paper reinvestigates the performance of trimmed-mean inflation measures some 20 years since their inception, asking whether there is a particular trimmed-mean measure that dominates the median CPI. Unlike previous research, we evaluate the performance of symmetric and asymmetric trimmed-means using a well-known equality of prediction test. We find that there is a large swath of trimmed-means that have statistically indistinguishable performance. Also, while the swath of statistically similar trims changes slightly over different sample periods, it always includes the median CPI—an extreme trim that holds conceptual and computational advantages. We conclude with a simple forecasting exercise that highlights the advantage of the median CPI relative to other standard inflation measures. In general, we find aggressive trimming (close to the median) that is not too asymmetric appears to deliver the best forecasts over the time periods we examine. However, these “optimal” trims vary slightly across periods and are never statistically superior to the median CPI. Given that the median CPI is conceptually easy for the public to understand and is easier to reproduce, we conclude that it is arguably a more useful measure of underlying inflation for forecasters and policymakers alike.

Will QE3 Cause Serious Inflation? Not With Economic Prospects So Dismal - Central banks on both sides of the Atlantic took extraordinary monetary-policy measures in September: the long awaited “QE3” (the third dose of quantitative easing by the United States Federal Reserve), and the European Central Bank’s announcement that it will purchase unlimited volumes of troubled eurozone members’ government bonds. Markets responded euphorically, with stock prices in the United States, for example, reaching post-recession highs. Others, especially on the political right, worried that the latest monetary measures would fuel future inflation and encourage unbridled government spending. In fact, both the critics’ fears and the optimists’ euphoria are unwarranted. With so much underutilized productive capacity today, and with immediate economic prospects so dismal, the risk of serious inflation is minimal. Nonetheless, the Fed and ECB actions sent three messages that should have given the markets pause. First, they were saying that previous actions have not worked; indeed, the major central banks deserve much of the blame for the crisis. But their ability to undo their mistakes is limited. Second, the Fed’s announcement that it will keep interest rates at extraordinarily low levels through mid-2015 implied that it does not expect recovery anytime soon. That should be a warning for Europe, whose economy is now far weaker than America’s. Finally, the Fed and the ECB were saying that markets will not quickly restore full employment on their own. A stimulus is needed. That should serve as a rejoinder to those in Europe and America who are calling for just the opposite—further austerity.

Fed Beige Book: District Summaries - The Fed's latest "beige book" report noted that the economy expanded "modestly" across most of the U.S. The following is a district-by-district summary of economic conditions in the 12 Fed districts for late August and September: 

Turning Beige Book Anecdotes Into Numbers - Wall Street loves numbers — always has, always will. That makes the Federal Reserve’s periodic beige book report (a/k/a “Current Economic Conditions by Federal Reserve District”) a bit frustrating. It’s all words: “Economic activity generally expanded modestly since the last report,” the latest version said. So is that good or bad? More or less? A lot or a little? Enter the clever economists at Goldman Sachs: They have turned the Fed’s words into numbers. “Our approach is simple,” this said this week. “We compile a list of ‘good’ and ‘bad’ words frequently used in Beige Books to describe economic conditions and search historical reports for their relative occurrence over time. Although very simple, this word-counting exercise allows us to interpret the qualitative information in the Beige Book quantitatively.”

“What if the Global Financial Crisis is Permanent?” -  Yves Smith - Yves here. I’m featuring a MacroBusiness post, “What If the GFC is Permanent?” despite its being a bit meandering, because it asks some Big Questions, and therefore will give readers something to chew over. The headline doesn’t quite get at what the post is about. Its focus is a recent paper by Robert Gordon questioning whether growth is over. I’ve read the underlying paper; MacroBusiness’s relies on a comment by Martin Wolf that discusses it. Key sections of its abstract:There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history… The analysis links periods of slow and rapid growth to the timing of the three industrial revolutions (IR’s), that is, IR #1 (steam, railroads) from 1750 to 1830; IR #2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900; and IR #3 (computers, the web, mobile phones) from 1960 to present. It provides evidence that IR #2 was more important than the others and was largely responsible for 80 years of relatively rapid productivity growth between 1890 and 1972. A provocative “exercise in subtraction” suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades.I’m a bit dubious of tying the underlying problem of growth to getting out of the global financial crisis, although they certainly interact in nasty ways. If you look at our last big financial crisis, the Great Depression, it occurred in what Gordon would characterize as an underlying period of growth. Peter Temin has argued, and his analysis is persuasive, that the Depression came out of a breakdown of a paradigm that had performed well in terms of promoting trade and

Will Long-Term Growth Slow Down? - Sustained long-term economic growth beginning in the near future would help greatly toward overcoming two major problems confronting the United States (and Europe and Japan). One is the high ratio of government debt to GDP that resulted from budget deficits due to the rapid increase in government spending during the past several years. GDP that continues to grow faster than outstanding debt is the surest way to reduce the burden of the debt. Sustained long-term growth would also allay the fears of many parents that their children would not be any better off than they are. However, a recent study by Robert Gordon of Northwestern, one of the leading experts on productivity, puts a damper on these expectations (see his “ Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds”, NBER working paper 18315, August 2012). Gordon argues that advances in productivity were slowing even before the financial crisis hit because the innovations of the past several decades, including computers and the Internet, were less important than those at the end of the 19th century and beginning of the 20th century. He also argues that future growth in the U.S. is likely to be even slower than in recent decades because of six “headwinds” that he believes will reduce growth. If Gordon is right, Americans face an unprecedented and dismal future of basically stagnating incomes.

Will U.S. Economic Growth Slow? Posner - It is good to be reminded that the rate of economic growth is not constant, that it has varied a good deal in the past, and that it may decline over the indefinite future, as feared by Robert Gordon in the study discussed critically by Becker. I agree with the criticisms, of which the central one is that the future is unpredictable, including not only the technological future but also the political future and the future of personal tastes and preferences. Moreover, almost all prediction is extrapolation from current conditions, so pessimism is characteristic of economic predictions made during a period of economic depression, such as the United States remains in. The material standard of living of many Americans is very high; roughly 20 percent of American households have an annual income in excess of $100,000. At that level, desire for leisure (including early retirement), or for goods and services that are labor-intensive, making productivity gains (from capital substitution) difficult to achieve, may retard economic growth yet increase economic welfare. At the same time, growing inequality of income may reduce the demand for goods and services in lower household-income quintiles, with negative effects on economic growth. Although it seems unlikely, one can at least imagine a situation in which growing inequality of income produces a rich upper crust satiated with material possessions and a vast underclass unable to afford many such possessions, and this would be a pattern inimical to economic growth.

Economists See Slow 2013 Growth - The unemployment rate registered a dramatic 0.5 percentage-point drop over the past two months, but economists in the latest Wall Street Journal forecasting survey don't expect that pace of decline to continue. "The general trend in the unemployment rate is lower, and this should continue to be true as long as the economy grows along the profile we project," said Joseph LaVorgna at Deutsche Bank. "However, the cumulative five-tenths decline over the past two months appears to be overdone." On average, the 48 respondents, not all of whom answer every question, expect the jobless rate will still be at 7.8% in June of next year—matching the September figure released last week. The reason for the stagnation in the job market is expectations for lackluster economic growth during the rest of 2012 and into 2013. Through the first half of next year, the average forecast is for growth in gross domestic product below 2% at a seasonally adjusted annual rate.

Our Typical, Mediocre Post Credit Crisis Recovery…It is the silly political season, and while each side levels accusations at each other, neither wants to admit the simple truth: Both political parties helped to create the credit crisis (In Bailout Nation, I put it about 55/45). The Obama administration underestimated the depth of the recession, and failed to respond appropriately. Instead, he put two wholly unqualified people into senior positions: Tim Geithner, who failed upwards from the President of the NY Fed to become Treasury Secretary; And Lawrence Summers, who failed upwards, well, for most of his career. When he was Treasury Secretary, he helped pass the ruinous Commodity Futures Modernization Act of 2000, and helped to repeal Glass Steagall. Both were proteges of Robert Rubin. On the other side, of the political aisle, the Romney camp wants to blow up every negative data point into the world’s worst recovery. (Its not a typical recovery, and even by that standard its not the worst ever). What we have is a typical post-credit crisis recovery. Sub-par GDP, mediocre jobs recovery. As the monthly payroll chart at top shows, things have gotten better — just at a pace that is far less rapid than we prefer.

Fed’s Lacker: Economic Growth Should Begin to Firm Later Next Year -- Economic growth should begin to firm later in 2013 and continue to improve beyond that, Federal Reserve Bank of Richmond President Jeffrey Lacker said in prepared remarks Friday. While the turmoil in Europe currently poses a risk to stronger U.S. growth next year, that risk should recede “as leaders work through the adjustments necessary for creating a new fiscal regime,” Mr. Lacker said in a speech at the University of Virginia. The economy is currently on a “relatively sluggish path of recovery,” the Richmond Fed chief said. He noted that unemployment had recently dropped below 8% to reach 7.8% in the most recent government report, but that the pace of the jobless rate’s decline had been “disappointingly slow.”

Richard Alford: Monetary Policy, Household Balance Sheets, and Recoveries from Financial Crises - Five years after the financial crisis and halfway to a lost decade, economists, policymakers and the public are looking for answers that will restore economic health and vibrancy. Their concern has increased recently with the approaching “fiscal cliff” and the possibility of a double-dip recession. To find remedies, they’ve examined past financial crises that were followed by protracted economic downturns. In the US, the precedent studied and cited most frequently has been the Great Depression of the 1930s, including the double dip of 1938. Unfortunately, economists have produced a variety of inconsistent explanations for both the initial contraction and the prolonged period without a self-sustained recovery. In a relatively recent development, economists examining the Great Depression have explored the role of non-monetary financial factors, such as defaults, wealth effects and informational asymmetries, to explain why it took until 1944 for the economy to return to the level of real income seen in 1929. The research has been focused on the balance sheets of banks and businesses. With the advent of the lost decades in Japan, economists have paid even more attention to the balance sheets of financial institutions. The recession of 2007 in the US is widely viewed as a “balance sheet recession” with the focus again on the balance sheets of financial institutions and commercial enterprises. Non-conventional monetary policies have been adopted at least in part because of the belief that a balance sheet recession reflects capital market imperfections that have rendered the normal monetary policy transmission mechanism inoperative.

Mirable Dictu! The Media Notices the Sucking Sound of Growth (What Little There Was) Leaving the Economy and Underplays IMF Malpractice - Yves Smith -- Starting late last week, there’s been a marked shift in the mix of headlines in the major media outlets. While it may simply be post fall equinox moodiness or a confluence of downer reports leading to a rare moment of sobriety, suddenly the big venues are concerned about the economic outlook. It’s not like 2007, when a lot of people knew the good times were going to come to a nasty end, but the big money felt it had to stay in to the last possible moment, since getting out early might prove to be too early. This time, while comparatively few expect anything much better than a weak recovery that will hopefully gain strength, the quiet consensus was that any downside (at least in the US) was capped by housing “recovery,” less awful employment data, and above all, the Fed. Against that, even before the latest reports, you could pit the continuing slow motion train wreck in Europe, not so hot reports out of China, and our coming fiscal cliff, where even if the pols win (as in force their toxic Grand Bargain on the rest of us), we lose. Deficit cuts, even if they are attenuated and back loaded, will still be a dampener. And even though the ESM officially came into being today, the surplus countries still retrading elements of various agreements, raising the market-rattling possibility that the various bailout schemes could come unglued. Of course, as we’ve pointed out, with the best case scenario being grinding periphery Europe into penury and taking down the core, staving off a crisis does not mean the alternative is cause for great cheer.

Growth: the false god - If a team of interplanetary anthropologists (the phrase is an oxymoron, but we have none better) were to descend to earth in their spacecraft they would notice that, like some distant tribe who worships a panther’s claw, a voodoo mask or the gnarled roots of an ancient tree, the human race has a strange fetish for growth. Whereas past civilisations built their pyramids to gods who brought rain, or made the rivers flow, in ours we shop. The temple is the air-conditioned mall, where we occasionally have lunch on small rolls of tuna and rice – a tasty mix of the endangered and the engineered – before maxing out the credit card for clothes we don’t need to impress people we hate. Those extra-terrestrial anthropologists would think, wouldn’t they, that ours was a society headed for self-imposed destruction, like the stone head builders of Easter Island or the Vikings in medieval Greenland.

Why GDP Growth is Good - Most teachers of economics at some point have to address the existential question from students: Is more output always good? Nicholas Oulton does has a nice punchy essay called "Hooray for GDP!", written as an "Occasional paper" for the Centre for Economic Performance at the London School of Economics and Political Science. Oulton summarizes the main arguments against focusing on GDP in this way:

  1. GDP is hopelessly flawed as a measure of welfare. It ignores leisure and women’s work in the home. It takes no account of pollution and carbon emissions.
  2. GDP ignores distribution. In the richest country in the world, the United States, the typical person or family has seen little or no benefit from economic growth since the 1970s. But over the same period inequality has risen sharply.
  3. Happiness should be the grand aim of policy. But the evidence is that, above a certain level, a higher material standard of living does not make people any happier. ...
  4. Even if higher GDP were a good idea on other grounds, it’s not feasible because the environmental damage would be too great

Oulton then addresses each question, not attempting any kind of exhaustive review, but by providing a selective sampling of the arguments and evidence. Here are some of  his answers, mixed with my own.

Decline, Decay, Denial, Delusion, And Despair - The decline of the Great American Empire cannot be attributed to one factor or one bogeyman. There are a multitude of factors, villains, and choices made by the American people that have led to our moral, civil, social, and economic decline. The kabuki theater that passes for our electoral process is little more than a diversion from our imminent fate. Neither candidate for President has any intention of changing the course of the U.S. Titanic. Our rendezvous with destiny has been charted, and there aren’t nearly enough lifeboats. Those who built the ship and recklessly navigated it into a sea of icebergs will be the 1st into the few lifeboats. The leaders we’ve chosen, the choices we’ve made, and our unwillingness to deal with facts and reality have set in motion a disaster that cannot be averted. It’s a shame the majority of Americans have the math aptitude of a 6th grader, because the unsustainability of our empire can be calculated quite easily. Math is hard for Americans, but denial and delusion are easy.     

Deleveraging Shocks and the Multiplier (Sort of Wonkish) - Paul Krugman -- Jonathan Portes — who will be my teammate in a debate on fiscal policy in London next week — weighs in on the IMF’s multiplier mea culpa. He confirms that policy makers in many places were working with the assumption of a multiplier on fiscal contraction much less than 1, whereas experience now suggests that it’s actually more than 1. What I thought might be worth pointing out is that the logic for a biggish multiplier and the logic of the crisis itself are very closely linked: times like these, the aftermath of a credit bubble, are precisely when you expect fiscal multipliers to be large. And that in turn says, once again, that fatalism — or worse yet, demands for fiscal retrenchment — in the aftermath of such a bubble are deeply destructive.So, the simple but surely broadly correct story of the mess we’re in is that we had a period of excessive complacency about leverage, which came to a sudden end. Household debt in particular surged, then was suddenly perceived as excessive: The crucial thing from a macroeconomic point of view is that leveraging and deleveraging are not symmetric in their effects. Leveraging up, other things equal, leads to high aggregate demand — but this can be and is in practice offset by the central bank, which can always raise rates. Deleveraging, on the other hand, can’t be offset equally easily; the central bank can cut rates, but only to zero, So a large leveraging/deleveraging cycle is likely to be followed by a persistent shortfall in aggregate demand that can’t be cured using ordinary monetary policy; what I consider depression economics.Now, the same thing that makes deleveraging so hard to handle also makes the fiscal multiplier larger than it is in normal times. Normally, expansionary fiscal policy is offset by monetary tightening, contractionary policy by monetary loosening. Hence the lowish multiplier estimates based on recent history. But if deleveraging has pushed you into a liquidity trap, there are no offsets.So how big would you expect the multiplier to be under these conditions? Bigger than one.

The dollar’s days as reserve currency are numbered - As the International Monetary Fund and World Bank redouble their warnings on the prospects for global growth, central banks continue to flood the markets with liquidity. The US Federal Reserve began its third round of quantitative easing in September; the European Central Bank is offering unlimited purchases of bonds of troubled eurozone countries. The People’s Bank of China, responding to slowing growth, has cut interest rates repeatedly and trimmed reserve requirements. It may seem a strange time to worry about a shortage of global liquidity. But precisely this risk looms and, if nothing is done, it will threaten 21st-century globalisation. The global trading and financial systems require lubrication by an adequate supply of homogeneous assets that can be bought and sold at low cost and are expected to hold their value. For half a century, US Treasury bills and bonds played this role. Their unique combination of safety and liquidity has made them the dominant vehicle for bank funding globally: it explains why the bulk of foreign exchange reserves are held in dollar form, and why the role of dollar credit in financing and settling international trade far exceeds the US share of international merchandise transactions. But as emerging markets continue to rise, the US will unavoidably account for a declining fraction of global gross domestic product, limiting its ability to supply safe and liquid assets on the scale required. The US Treasury’s capacity to stand behind its obligations is limited by the revenues it can raise, which depend, in any scenario, on the relative size of the US economy. With emerging markets’ growth outstripping that of the US, the increase in the capacity of the US Treasury to supply safe and liquid assets will inevitably lag behind the increase in global transactions.

Treasury Yields/Mortgage Update: 30-year Fixed Mortgage Up Fractionally -  I've updated the charts through today's close.  The latest Freddie Mac update, released today, shows the 30-year fixed has risen three basis points to 3.39%, now fractionally above its historic low set last week. The general pattern in Treasury yields has been somewhat volatile since several of them hit historic closing lows in late July. The 10-year yield, now at 1.70 is somewhere in the upper middle of its 1.43 - 1.88 range since the July historic low. Here is a snapshot of selected yields and the 30-year fixed mortgage one week after the Fed announced its latest round of Quantitative Easing. The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed's website for the FFR.

Debt to put pressure on US ratings - The continuing slide in the US fiscal position, along with a lackluster economic performance, will likely impact its sovereign ratings in 2013, according to QNB group analysis. The US federal debt to GDP, fiscal deficit, and economic growth and outlook are factors that are impacting the ratings outlook. In a special comment earlier in September 2012, ratings agency Moody's, mentioned the possibility of lowering the US government bond rating to Aa1 in 2013, from the current Aaa. The ratio of US federal debt to GDP has increased from 40 percent in 2008 to 68 percent in 2011, and is estimated to reach 73 percent by year-end 2012, according to the US Congressional Budget Office (CBO). This will be the highest level since 1950. In absolute terms, under the CBO's baseline scenario (including spending cuts), that would translate into 14.5 trillion of federal debt by 2022, from 11.3 trillion as at year-end 2012. In addition to federal debt, overall government debt includes around 4.5 trillion of securities held by federal trust funds and other government accounts.

U.S. debt shrinks to a six-year low relative to the size of the economy - U.S. debt has shrunk to a six-year low relative to the size of the economy as homeowners, cities and companies cut borrowing, undermining rating companies’ downgrading of the nation’s credit rating.  Total indebtedness including that of federal and state governments and consumers has fallen to 3.29 times gross domestic product, the least since 2006, from a peak of 3.59 four years ago, according to data compiled by Bloomberg. Private- sector borrowing is down by $4 trillion to $40.2 trillion.

Cutbacks and the Fate of the Young - During the presidential debate last week, Mitt Romney reminded us that it is our children, and grandchildren, who will end up paying for our budget deficits. His comment about the immorality of passing on such a large bill is a welcome reminder that our generation bears responsibility for the well-being of the next. But the nation’s growing debt is not the only threat to our children’s future. We need a broader debate about how to ensure that the next generation — the children of today and the taxpaying adults of tomorrow — have a fair shot at prosperity.  Right now, the next generation is getting shortchanged all around, with children too often treated as an afterthought in policies meant to appeal to their elders. The United States tolerates the highest rate of child poverty in the developed world. Yet federal expenditures on children — including everything from their share of Medicaid and the earned-income tax credit to targeted efforts like child nutrition and education programs — fell 1 percent last year and will fall an additional 4 percent this year, to $428 billion, according to estimates by the Urban Institute based on the Congressional Budget Office’s projections.

Children and Grandchildren Do Not Pay for Budget Deficits, They Get Interest on the Bonds - Politicians, especially those who want to cut programs like Social Security and Medicare, are fond of telling people that our children and grandchildren will pay the national debt. That one may sell well with focus groups, but it is complete nonsense. Unfortunately, Eduardo Porter repeats this line in his column today. A moment's reflection shows why the debt is not a measure of inter-generational equity. At some point everyone alive today will be dead. At that point, the bonds that comprise the debt will be held entirely by our children or grandchildren. The debt will be an asset for the members of future generations that hold these bonds. There is the issue of foreign ownership of the debt, but this is an issue of the trade deficit, not the budget deficit. If the country continues to run large trade deficits, then foreigners will continue to accumulate large amounts of U.S. assets, including government debt, even if we had balanced budgets. As a generational matter, we pass a whole economy, society and environment to our children. Unless we have given them a really bad education, they would be crazy to opt for a government with a lower national debt in exchange for a weaker economy, a worse infrastructure or more damaged environment. As a practical matter, the sharp upturn in productivity growth in 1995 has virtually assured our children and grandchildren that they will enjoy far higher living standards than anything we could have done by way of lower deficits (and thereby boosting investment) had productivity growth remained at its much slower pre-1995 rate. (The fact that longstanding deficit hawks like Peter Peterson never acknowledge the impact of this uptick on productivity growth suggests that their agenda has little to do with the living standards of future generations.)

The burden of the (bad monetary policy) on future generations – Nick Rowe - You can try to kill zombie ideas. Or you can try to reframe them. I'm fed up with killing the "The national debt is not a burden on future generations because they will inherit (sic) the bonds as well as the debt so they will owe it to themselves" zombie. I already killed it a year ago, in six posts: one; two; three; four; five; six. Now Dean Baker (HT Mark Thoma) is again repeating this zombie idea. (Mark, don't you realise it's a zombie?) If you really do believe in (Barro-) Ricardian Equivalence, then when you say that the young generation "inherits" the bonds from the old generation, you mean that literally - they inherit the bonds as a freebie. And if so, then OK, the debt really isn't a burden on future generations, but only because the old generation makes sure it isn't a burden by giving the bonds to their kids as a freebie. But if you don't believe in Ricardian Equivalence, and you think the old generation sells the bonds to the next generation, and then consumes the proceeds from that sale, then don't say that the next generation "inherits" the bonds. They don't inherit the bonds, they damned well pay for them. And if they pay for them, and at the same time pay taxes to pay interest and/or principal on the bonds they have already paid for, then that next generation is paying twice.

On The Non-burden of Debt - Paul Krugman - Brad DeLong takes on Nick Rowe over this bizarrely confused issue; in a moment I’ll try to offer a new way of explaining why the conventional presentation is all wrong. First, however, let me suggest that the phrasing in terms of “future generations” can easily become a trap. It’s quite possible that debt can raise the consumption of one generation and reduce the consumption of the next generation during the period when members of both generations are still alive. Suppose that after the 2016 election President Santorum tries to buy senior support by giving every American over 65 a gift of newly printed government bonds; then the over-65 generation will be made richer, and everyone under 65 will be made poorer (duh). But that’s not what people mean when they speak about the burden of the debt on future generations; what they mean is that America as a whole will be poorer, just as a family that runs up debt is poorer thereafter. Does this make any sense? Well, let’s do a thought experiment that doesn’t, at least initially, seem to have anything to do with debt. Suppose that instead of gifting seniors with debt, President Santorum passes a constitutional amendment requiring that from now on, each American whose name begins with the letters A through K will receive $5,000 a year from the federal government, with the money to be raised through extra taxes. Does this make America as a whole poorer? The obvious answer is not, at least not in any direct sense. We’re just making a transfer from one group (the L through Zs) to another; total income isn’t changed. Now, you could argue that there are indirect costs because raising taxes distorts incentives. But that’s a very different story.

What's Driving Projected Deficits? - The CBPP has updated its chart (full report) showing the source of the budget deficit, "and they continue to find that these deficits stem overwhelmingly from the economic downturn, the tax cuts first enacted under President Bush, and the wars in Iraq and Afghanistan." But going forward, it's the Bush-era tax cuts that make the largest contribution:

Fed’s Fisher: Short-Term Fiscal Cliff Fixes Won’t Help Jobs Market - Short-term measures to avert the “fiscal cliff” won’t help the jobs market or revitalize the economy, Federal Reserve Bank of Dallas President Richard Fisher said in prepared remarks Wednesday. Businesses sitting on piles of cash won’t be spurred into hiring new employees unless Congress crafts sustainable, long-term tax and spending policies, Mr. Fisher said in a speech to be delivered at the Cato Institute, a libertarian Washington think tank. “Short-term fixes to our fiscal and regulatory pathology will not solve the problem of unemployment and economic sluggishness,” Mr. Fisher said.

Congress and the Fiscal Cliff - A big part of the dreaded “fiscal cliff” that we keep reading about is the direct result of Congress’s attempt to force itself to change its ways. Last summer, during the absurd imbroglio over the debt ceiling, House Republicans and the White House agreed to get serious about reducing the deficit. But, since they couldn’t agree on how to do so, they struck a deal. Congress set up a so-called super committee that was given the job of coming up with a long-term budget solution. It stipulated that, if the super committee failed, nearly a trillion dollars of automatic spending cuts, known technically as “sequestration,” would go into effect, on January 2nd. None of these cuts—half of which would come from the defense budget and half from domestic spending—would be things that most congressmen wanted. But that was precisely the point: like any good pre-commitment penalty, the cuts were supposed to be so intolerable that Congress would make a deal in order to avoid them. It didn’t work. The super committee quickly, and predictably, failed, and, in the months that followed, Congress did nothing. If things go on like this, the spending cuts will start going into effect with the new year, and that, in combination with the expiration of the Bush tax cuts, will send us off the fiscal cliff: government and personal spending will plummet, potentially throwing the economy back into recession. No one likes this prospect. The White House says that the cuts will have “a devastating impact,” and John Boehner, the House Speaker, says that the defense-budget cuts represent a “serious threat” to national security. Yet no deal seems imminent.

Goldman On The Not-So-Good, The Bad, And The Ugly Fiscal Cliff Scenarios That Remain - Even if both the Bush tax cuts and emergency unemployment insurance are extended, the 'sequester' is mostly postponed, and the fresh fiscal drag is confined to the expiration of the payroll tax cut and the new taxes to pay for Obamacare, Goldman estimates suggest that fiscal policy would shave nearly 1.5% from real GDP growth in early 2013. While it seems the 'market' believes that some compromise will be enough to lift the market to new stratospheric heights; we believe, as does Goldman, that the risks are almost exclusively on the downside of this 'not so good' fiscal scenario.

Turning the Cliff Into a Good Thing by Recycling the Fiscal Cans - Last week the Tax Policy Center (TPC) released an analysis and held an event (which I participated in) on the tax changes that comprise the so-called “fiscal cliff”–the combination of policies scheduled under current law that according to the Congressional Budget Office (CBO) in their latest budget outlook would reduce the federal budget deficit by around half a trillion dollars between fiscal years 2012 and 2013.  (CBO had also done this earlier analysis in May (based on their previous baseline forecasts) focused specifically on the economic effects of avoiding or reducing the 2013 fiscal cliff.) I’ve made the point before (here and here) that the scary part of the “cliff” that everyone is talking about and wants to avoid is just the first year of the current-law baseline; the drop from deficits in fiscal year 2012 to the baseline deficits in fiscal year 2013 that are represented by just the first two bars in the chart above (from the CBO outlook report).  CBO themselves referred to this one-year fiscal contraction as enough to send us back into recession: While it is thus understandable that everyone says we can’t “go over” (or “run into”) the cliff, that doesn’t tell us what we should do on the other side of the one-year cliff–the remainder of the chart above.  Are we going to reject the entire current-law baseline in favor of “business as usual” that continues to extend and deficit finance the type of spending and tax cuts we’ve enjoyed over the past dozen or so years?  Or are we going to try to get back on the current-law baseline path eventually, given that CBO says that not doing so–continuing to avoid the cliffs and kick the cans along the way–would be harmful to the economy later on?

By One Key Budget Indicator, the Structural Primary Balance, Even Greece is Doing Better than the United States. Why that should Worry us. We in the United States know that we have a deficit problem, but when we hear news of the ongoing crisis in Europe, we feel a little better. At least we’re in better shape than Greece, Italy, and the other Eurozone basket cases. Aren’t we?  Think again. By one key measure of fiscal health, the structural primary balance (SPB), we are in worse shape than any EU country. In fact, among the members of the OECD, only Japan is deeper in deficit as the following chart shows.Not just Greece and Italy, but even the Portugal, Ireland, and Spain, the other derisively styled “PIIGS,” score better better than the United States on this chart. That does not mean that their economies are in better shape overall. They have a lot of problems that we do not, which we will come back to later. What their structural primary balances do show is how far they have come in making the fiscal adjustments needed to make their budgets sustainable in the long run . The United States has barely started those adjustments, and Japan has not even thought about them. Let’s look more closely.

Q&A: Understanding the Fiscal Cliff - In the first two days of 2013, large tax cuts passed in 2001 and 2003 will expire and across-the-board cuts to defense and nondefense programs in the government will begin a drastic and sudden hit to the economy — a so-called fiscal cliff — that both parties say could be damaging to the unsteady recovery. Here is a primer on the tax increases and program cuts and their potential impact on the economy.

What the fiscal cliff means for the next dollar you earn - Everyone knows that the fiscal cliff means a big tax increase. The Tax Policy Center puts the number at $755 for a family in the middle-income quintile. But what’s arguably more important than the cliff’s effect on the average tax rates that families pay is what it does to their marginal tax rates. Think of it this way. If you’re a married couple making between $75,000 to $100,000 a year, you’re paying around 8.1 percent of that in federal income taxes. But you’re most likely in the 25 percent tax bracket. That means that for each additional dollar you earn, 25 cents goes to income taxes. Marginal tax rates thus tend to influence peoples’ economic choices a lot more than their average tax rates. Unsurprisingly, the expiration of the Bush tax cuts, the stimulus tax breaks, the Alternative Minimum Tax “fix” and the payroll tax holiday all combine to raise marginal tax rates across-the-board. But what’s perhaps surprising is that the hike is big for the very poor and very rich and less severe for those in the middle. The Tax Policy Center quietly released numbers last week estimating marginal tax rates in 2013 under both current policy (that is, if we avoid the cliff) and under current law (if we go over it). People in the middle actually aren’t hit much. Households making between $40,000 to $50,000 a year, which is pretty close to the median, see marginal rates on wage income go up from 32.4 percent to 33.1 percent, when you count both the income and payroll taxes. Millionaires, by contrast, see their marginal rates of wages go from 38 percent to 44.2 percent. And the poor see rates go way up as well. Households making between $10-20,000 a year see marginal rates on wages go from 16.4 percent to 20 percent. Indeed, the marginal tax rate hike for poor people, as a percent of their previous tax rate, is enormous:

Fiscal Cliff Debate Is "Surreal" (Yes...I'm Being Way Too Polite) - How ridiculous is the fiscal cliff debate? The answer is that it’s off-the-wall crazy. Consider the following. The tax increases and spending cuts that will go into effect as part of the fiscal cliff are the absolutely wrong fiscal policy for the start of 2013 unless you think that causing a recession is a good idea. Although he had to coin the phrase “fiscal cliff” to express himself, a recession is precisely what one of this country’s most important economic policymakers — the chairman of the Federal Reserve — has been talking about with increasing urgency since early this year to anyone who will listen. It’s also what Wall Street economists have now validated with their recent forecasts and what the Congressional Budget Office — Capitol Hill’s numbers-crunching priesthood — has said directly and unambiguously to Congress itself. In other words, why is the fiscal cliff even a possibility? There’s little discernible support on Capitol Hill for allowing the fiscal cliff to happen. But the main alternative to that, indeed, the only option that would be the right fiscal policy and ultimately the easiest solution — a 2013 budget deficit that will be much higher than it otherwise will be — is at least as politically toxic as the fiscal cliff itself. As a result, no one dares talk about it, and the discussions about how to avoid the cliff have been limited.

Money Talking: Wall Street CEOs and the Fiscal Cliff - The issue of the “fiscal cliff,” the impending tax-hike and automatic cuts to federal spending, has been put on the backburner by lawmakers trying to woo voters in the runup to the November election. Now Wall Street CEOs are throwing their weight around in a new ad campaign calling for legislation to avoid the cliff. What should be done? Time’s Rana Foroorhar and Politico’s Ben White weigh in on this week’s episode of WNYC’s Money Talking.

Fiscal Cliff May Be Felt Gradually, Analysts Say - Come January, if Congress fails to act, spending cuts and tax increases large enough to throw the country back into recession will hit.It is known in Washington as the “fiscal cliff.” But policy and economic analysts projecting its complicated and wide-ranging potential impact said the term “fiscal hill” or “fiscal slope” might be more apt: the effect would be powerful but gradual, and in some cases, reversible. “The slope would likely be relatively modest at first,” Chad Stone, the chief economist at the Center on Budget and Policy Priorities, a research group based in Washington, wrote in a recent analysis. “A relatively brief implementation of the tax and spending changes required by current law should cause little short-term damage to the economy as a whole.” The annual effect of the automatic tax increases and spending cuts would be enormous. The Congressional Budget Office has estimated that the budget deficit would shrink by more than half a trillion dollars from fiscal years 2012 to 2013 and that the economy would very likely enter another recession. Nearly all Americans would see their tax bills increase, with income and payroll taxes climbing, credits shrinking and levies on investment earnings soaring. The Tax Policy Center, a Washington research group, has estimated that the average family would see its tax bill go up $3,500 and its after-tax income drop 6.2 percent.

The fiscal…something - At the end of this year, two economic priorities are going to crash into each other. The first is stimulus — or, if you prefer a more poll-tested term, “protecting the recovery.” The second is deficit reduction. EPI puts this very clearly: Given perpetual (and often misplaced) concern that federal budget deficits are failing to decline rapidly enough, it is important to be clear about the precise danger the fiscal obstacle course presents: It is simply that the budget deficit would shrink too quickly—that is, public debt would stop rising fast enough—to maintain economic growth, let alone an adequate pace of growth to lower the unemployment rate The “fiscal cliff” is, at its heart, a collision between these two priorities. We can let the Bush tax cuts and the payroll tax cut expire, and we can let the automatic spending cuts hit, and the deficit problem is pretty much solved. Unfortunately, we will likely have thrown the economy back into recession.  Conversely, if we just kick everything down the road, that’s better for the recovery, but it means we’ve made no progress on the debt, and if you believe in the confidence fairy, she’s not coming because we haven’t given anyone any reason to be confident in our political system or the future shape of their tax burden.

“Grand Bargain” mania set to sweep Washington again - If Barack Obama wins reelection, the question for liberals is whether he’ll rejoin his unfortunate crusade for a Grand Bargain. We came dangerously close in 2011, and the coming “fiscal cliff” threatens to bring us to the brink yet again. And Pete Peterson will be there, the minute the election ends, to help push Washington to Fix The Deficit. Pete Peterson, as Ryan Grim reports, is at it again. He is throwing millions of dollars at yet another group — an impeccably bipartisan one, as always — devoted to selling both regular Americans and the political elite on the idea that our single most pressing national problem is the national debt. Democrat Ed Rendell and Republican Judd Gregg are the co-chairs of “The Campaign to Fix the Debt,” run by Peterson’s Committee for a Responsible Federal Budget, a nonprofit also co-chaired by various moderate former members of Congress from both parties. Peterson has donated $5 million to the new campaign. Peterson is a Wall Street billionaire and Nixon’s old commerce secretary, but his efforts are always carefully bipartisan. His money goes to everyone, and his influence is pervasive. In one sense, it’s a colossal waste of money: In terms of elite opinion, Peterson won years ago, and with the public as a whole, all the money in the world has of yet been unable to convince anyone that destroying Social Security and Medicare is a sensible idea. He’s been at this for years, and donated probably nearly a billion dollars all told (he spent half-a-billion dollars between 2007 and 2011), and still Americans don’t particularly want to fix the deficit by cutting services that keep old people alive.

This Is For Everyone Who Insists There Will Be A Big Budget Deal In The Lame Duck - Jake Sherman had an excellent story in Politico on Saturday (ht Mike Allen) about House Speaker John Boehner's (R-OH) latest thinking on what's doable and not doable on the budget during the lame duck session of Congress. The answer is...not much, and maybe nothing. Boehner basically told Sherman what I've been telling my clients for months: lame duck sessions of Congress in general and this lame duck session in particular are terrible times to be making major policy decisions. Not only isn't there much actual time (3-4 weeks of legislative work at most this year), but needing soon-to-be-retired and just-defeated House and Senate members to vote on big changes in taxing and spending is a dangerous thing for the leadership to do. Why? Because you can't be sure they will vote, and if they show up you can't be certain how they'll vote. Boehner didn't mention one additional factor that makes a big budget deal in the lame duck less likely. As I posted about several weeks ago, the only way he may be able to remain as speaker is if he adamantly refuses to compromise on the fiscal cliff. I can't imagine the White House agreeing to anything if Boehner won't agree to prevent the cliff from kicking in.

Everything You Need To Know About Resolving The Fiscal Cliff But Were Afraid To Ask -  With the market seemingly oblivious to the dismal reality of the fiscal-cliff (from a priced-in perspective) in the same way as equities trade at four-year highs while earnings are at three-year lows; it is perhaps useful to get a grasp of the maelstrom that awaits congress as they begin to tackle the fiscal-cliff on November 12. As we discussed here, the downside potential is considerable with complacency high and just as Goldman expects no real progress to be made until December (at the earliest), the market (i.e. a correction) may be the only lever to move our political elite from their respective higher ground. While talk will be of 'grand bargains', we, like Goldman, remain skeptical that any broad reform package will be completed and instead some short-term extension may be achieved. The following Q&A explains how that sausage could be made in all its gory detail.

Triumph of the Wrong?, by Paul Krugman - In these closing weeks of the campaign, each side wants you to believe that it has the right ideas to fix a still-ailing economy. So here’s what you need to know: If you look at the track record, the Obama administration has been wrong about some things, mainly because it was too optimistic about the prospects for a quick recovery. But Republicans have been wrong about everything.   In a now-notorious January 2009 forecast, economists working for the incoming administration predicted that by now most of the effects of the 2008 financial crisis would be behind us... It wasn’t exaggerated faith in the stimulus plan; the report predicted a fairly rapid recovery even without stimulus. Instead, President Obama’s people failed to appreciate something that is now common wisdom among economic analysts: severe financial crises inflict sustained economic damage, and it takes a long time to recover.  This same observation, of course, offers a partial excuse for the economy’s lingering weakness. And the question we should ask given this unpleasant reality is what policies would offer the best prospects for healing the damage. Mr. Obama’s camp argues for the American Jobs Act. Republicans, on the other hand, insist that the path to prosperity involves sharp cuts in government spending.

Summers Calls for Extending Payroll Tax Cut -- Former top White House economic adviser Lawrence Summers on Thursday called for an extension of the payroll tax cut, saying it has provided a boost to the jobs market and has given households more money to spend. “This is not the right moment to repeal the payroll tax cut,” Mr. Summers said in a speech to the liberal Center for American Progress. “$120 billion put in the hands of middle-income families is $120 billion injected into the economy.” The payroll tax cut has been in place for two years and expires in December. For the 2011 and 2012 calendar years, Congress cut the payroll tax to 4.2% from 6.2%. The tax, used primarily to fund Social Security, is paid by some 122 million people, and the reduction lowered the tax bill for average families by slightly less than $1,000 a year. Since the cut has been in place, Congress has covered the shortfall in Social Security funds by diverting money from the general Treasury fund. Mr. Summers’s comments are notable because neither the White House nor Congress has made much of a push for extending the payroll tax cut. Mr. Summers, who left the Obama administration in late 2010 after serving as director of the National Economic Council, still has influence within the administration and on Capitol Hill.

Schumer: Tax reform should cut deficits, not tax rates - The Washington Post: An issue that has taken center stage in the presidential campaign — how to rewrite the U.S. tax code — is rapidly moving back onto the front burner in Washington as policymakers brace for another epic battle over the budget days after the Nov. 6 election. On Tuesday, Sen. Charles E. Schumer (N.Y.), the No. 3 Democrat in the Senate, rejected the goal of cutting the top tax rate, an objective embraced by both parties and considered a key piece of any deal to avert major tax increases and spending cuts set to take effect in January.Meanwhile, a bipartisan group of senators gathered at Mount Vernon outside Washington for a three-day retreat aimed at producing an alternative debt-reduction strategy to replace the “fiscal cliff,” including a tax overhaul that reduces rates but raises more money. At stake is not only the size of the tax burden on ordinary Americans but also the size of the economic mess that the next administration will inherit. Unless Congress can reach an agreement, tax bills will automatically increase for nearly 90 percent of Americans next year, slowing government borrowing but potentially inviting a new recession.

Gar Alperovitz: Systemic Crisis, Politics as Usual - Gar Alperovitz presents at a Seattle Town Hall on Oct 3, 2012 immediately after a public screening of the presidential debate between Romney and Obama. The video is a little over an hour long; so listen to it with your Columbus day morning coffee, For the bumper sticker:“A systemic crisis is one that doesn’t get solved by politics as usual.” One quote: The top 400 people — individuals, 400 people, you could get them into this space if you squeezed them just a little bit — have more wealth now than the bottom 180 million Americans taken together. That’s a medieval number; I don’t mean that rhetorically. I mean that medieval society was structured with the ownership of wealth, in that case land, at that level of concentration, and giving it power relationships of that kind.

What Everybody Needs to Know About Romney' $5 Trillion Tax Cut Promises » Arithmetic is not just optimal. Arithmetic is prohibited:

  • Paul Ryan says that cutting tax rates by 1/5 is non-negotiable--that even if Congress does not eliminate a single deduction, the Ryan-Romney administration will cut tax rates by 1/5.
  • Cutting tax rates by 1/5 boosts the national debt in a decade by $5 trillion plus interest.
  • Mitt Romney has, by now, said pretty much everything it is possible to say about the place of the 1/5 tax rate cut--from claiming that he will not cut tax rates at all if Congress won't eliminate deductions, to claiming that the tax rate cut will pay for itself through faster economic growth without any cuts in deductions.
  • Paul Ryan has at least a consistent message.
  • Families making over $200,000/year will over the next decade receive $1.7 trillion in non-savings deductions: health insurance, home mortgages, charitable contributions, etc.
  • Families making over $200,000/year would over the next decade receive $2.7 trillion from Romney's 1/5 rate cut.
  • Even were Congress to eliminate all non-savings deductions, families making over $200,000/year would get a $1 trillion tax cut from Romney.

Five Things You Should Know about Mitt Romney’s “$5 Trillion Tax Cut” - You’ve probably heard claims that Mitt Romney wants to cut taxes by $5 trillion. Here are five things you should know about that figure:

  • 1. $5 trillion is the gross amount of tax cuts he has proposed, not the net impact of all his intended tax reforms.
  • 2. $5 trillion is a 10-year extrapolation from a TPC estimate for 2015.
  • 3. $5 trillion does not include the impact of permanently extending many expiring tax cuts, including those from 2001 and 2003.In budget parlance, the $5 trillion is measured against a current policy baseline, not a current law one. TPC’s current policy baseline assumes that many expiring tax cuts, including the 2001 and 2003 cuts, the AMT patch, the current version of the estate tax, and the tax credits enacted or expanded in 2009 will all be extended permanently. Romney proposes to extend all of these except the 2009 credits.
  • 4. $5 trillion includes more than $1 trillion in gross tax cuts for families earning $200,000 or less. Governor Romney’s specified tax cuts would go primarily to high-income taxpayers for a simple reason: they pay a large share of taxes and thus get a large benefit from a proportional reduction in tax rates.
  • 5. $5 trillion includes around $1 trillion in gross tax cuts for corporations. Cutting the corporate income tax rate from 35 percent to 25 percent would lower corporate tax revenues by roughly $1 trillion over the next decade. Little-discussed in the current debate is whether and how Governor Romney would offset this revenue loss.

Tax Facts Show Lower Personal Income Taxes Will Not Create Jobs - We've noticed a hell of a lot of political B.S. baffle going on, in particular on business taxes. What happens is politicians conflate small business taxes with the individual income tax and that is due in part to the actual tax code.  The GOP typical claim is a lower top personal income tax rate will allow businesses to hire more people. That is really a lie. Business profits can enable more hiring, tax refunds for hiring and retaining employees can incentivize new jobs, but the personal income tax rates for those who own businesses has negligible effect.  One thing that gets lost in the rancor are business tax deductions. An employee's salary and most benefits are a business deduction. The business owner would not pay taxes on the costs of hiring a new employee beyond the payroll taxes associated with hiring, about 6.2% of salary. The most important element to hiring is demand for goods and services provided by the business, not taxes.

Don't Count on Dynamic Scoring - In this morning's Wall Street Journal David Wessel gives a very nice summary of the issues surrounding dynamic scoring of tax bills. As Republicans have in so many prior episodes of tax controversy, and as they did during the August 2011 failed budget negotiations, Mitt Romney is invoking the growth effects of tax reform as a way to raise revenue.  Let me explain why that dog will not hunt. (1) Official scorekeepers at JCT, CBO, and Treasury do not take growth effects into account when scoring tax bills. (2) In January 1995 the first thing the new Republican majority in the House did was try to implement dynamic scoring. It did not happen. Why? (3) As practical matter it is almost impossible to implement for a variety of reasons, including (a) there are hundreds of estimates each year; (b) for consistency we would also have to dynamically score every bill that changed the deficit; and (c) Republicans hated the results of the first experiment that JCT tried showing that tax cuts that increase the deficit reduced economic growth. (4) There is legitimate controversy about whether reform produces significant growth. (Wessel quotes former Republican CBO Director Holtz-Eakin: "There are relatively few instances where we do something for which you get big impacts on growth.") (5) If Romney phases out deductions for the wealthy, he will negate much of any growth effects from lower rates.

Congress’s wealthiest mostly shielded in deep recession - The wealthiest one-third of lawmakers were largely immune from the Great Recession, taking the fewest financial hits and watching their investments quickly recover and rise to new heights. But more than 20 percent of the members of the current Congress — 121 lawmakers — appeared to be worse off in 2010 than they had been six years earlier, and 24 saw their reported wealth slide into negative territory. Those findings emerge from an ongoing examination of congressional finances by The Washington Post, which analyzed thousands of financial disclosure forms and public records for all members of Congress. Most members weathered the financial crisis better than the average American, who saw median household net worth drop 39 percent from 2007 to 2010. The median estimated wealth of members of the current Congress rose 5 percent during the same period, according to their reported assets and liabilities. The wealthiest one-third of Congress gained 14 percent.

The Ten Most Egregious Tax Loopholes in the U.S. - A year ago Citizens for Tax Justice, a Washington, D.C., nonprofit, studied the tax returns of 280 corporations. What it found was a Beltway version of a Mafia protection scheme.From 2008 to 2010 at least 30 Fortune 500 companies — including PepsiCo, Verizon, Wells Fargo and DuPont — paid more for lobbyists than they did in taxes. They collectively spent $476 million sucking up to Congress, buying protection for tax breaks, loopholes and special subsidies. It didn't matter that these same 30 firms brought home a staggering $164 billion in profit during that three-year period. They not only managed to avoid paying taxes. They actually received $10.6 billion in rebates. Defenders of the system argue that most federal tax breaks don't go to large corporations. That's true. By pure dollars, the lion's share goes for mortgage interest, employer-paid health insurance, retirement plans and Medicare benefits. The difference is these tend to benefit everyone. But there's another part of the tax code where 99 percent of America is barred from entry. It's where Congress sells loopholes and subsidies to those with the wallets to pay. They not only saddle the rest of the country to make up the difference, but they also turn the notion of a free market into a sitcom.

Mitt Romney's Trillion Dollar Tax Cut Nobody Talks About - Mitt Romney doesn't want to cut your taxes, but there is one group of people whose taxes he does want to cut. Corporations, my friend. Ask anyone in Washington, and they'll tell you our corporate tax code needs an overhaul. It's a loophole-ridden mess with a high headline rate that hardly anybody pays -- if they pay anything at all. President Obama has proposed cutting the rate from 35 to 28 percent while eliminating enough preferences -- you can read which ones here -- to actually increase revenue. That sounds similar to what Romney wants to do, but it's not. Yes, Romney also wants to streamline the system, but he wants to do so in a pricey, two-part process. Here's how his advisers told the nonpartisan Tax Policy Center it would work.

    • Step 1: Cut the corporate tax rate from 35 to 25 percent, make the research credit permanent, allow full expensing on capital expenditures for one more year, and enact a repatriation tax holiday.
    • Step 2: Cut the corporate tax rate again by an unspecified amount, cut corporate tax preferences, and move to a territorial tax system.

The Final Word on Mitt Romney's Tax Plan - Mitt Romney's campaign says I'm full of it.  I said Romney's tax plan is mathematically impossible: he can't simultaneously keep his pledges to cut tax rates 20 percent and repeal the estate tax and alternative minimum tax; broaden the tax base enough to avoid growing the deficit; and not raise taxes on the middle class. They say they have six independent studies  -- six! -- that "have confirmed the soundness of the Governor’s tax plan," and so I should stop whining. Let's take a tour of those studies and see how they measure up. The Romney campaign sent over a list of the studies, but they are perhaps more accurately described as "analyses," since four of them are blog posts or op-eds. I'm not hating -- I blog for a living -- but I don't generally describe my posts as "studies." None of the analyses do what Romney's campaign says: show that his tax plan is sound. I'm going to walk through them individually, but first I want to make a broad point. The Tax Policy Center paper that sparked this discussion found that Romney's plan couldn't work because his tax rate cuts would provide $86 billion more in tax relief to people making over $200,000 than Romney could recoup by eliminating tax expenditures for that group. That means his plan is necessarily a tax cut for the rich, so if Romney keeps his promise not to grow the deficit, he'll have to raise taxes on the middle class.

Obama and Wall Street, Sittin’ in a Tree, K.I.S.S.I.N.G – Obviously, back in 2008, when Wall Street was dumping millions into the campaign of Barack Obama, it didn’t ask for a prenup.  The honeymoon went smoothly for a while, with Wall Street quite content to have slap-on-the-wrist Mary Schapiro sitting atop the SEC and Tim Geithner, the former sugar-daddy of bailouts from the New York Fed, holding down the fort at the U.S. Treasury.   But then came Dodd-Frank, the Volcker Rule, regulation of derivatives, quips about fat-cats from the President and a big-money divorce.  Today, reports the Wall Street Journal, Wall Street and financial services firms have given a tepid $12 million to President Obama’s campaign versus the $43 million they gave in 2008.  Presidential candidate Mitt Romney has received over $24 million from the slimmed down fat-cats in this election cycle.  During the first presidential debate, Romney had this to say about the passage of Dodd-Frank: “It’s the biggest kiss that’s been given to New York banks I’ve ever seen.”  Romney obviously knows less about kisses than he does about the humane methods of transporting a dog from point A to point B.  The biggest smooch in history to Wall Street was the repeal of the Glass-Steagall Act under the Clinton administration, allowing the New York firms to get their hands on a huge chunk of the Nation’s insured deposits.  The trillions pumped into those very same banks in bailout loans of less than 1 percent interest by Tim Geithner’s New York Fed also hit a new high-water mark in the kiss category.

Geithner has phone friend at BlackRock - When Tim Geithner, U.S. Treasury Secretary, wants a first-hand account of how financial markets are interpreting government policies or reacting to the latest crisis, the man he turns to most often is Larry Fink of BlackRock. Mr. Fink, the group’s chief executive, featured more frequently in Mr. Geithner’s diary during an 18-month period than any other corporate executive, according to a Financial Times review. The two men spoke on at least 49 separate occasions, an average of about once every 11 days. Calls and meetings with Mr. Fink throughout 2011 and up to the end of June this year outnumber the combined calls and meetings with the heads of the six largest U.S. banks by assets. Mr. Geithner’s second most frequent interlocutor in the corporate world was his old boss, Robert Rubin, the former Treasury Secretary now at Centerview Partners, who spoke to him 33 times in the same period. Mr. Geithner’s calls with Mr. Fink far outnumber those with executives at other investment groups such as Pimco, Fidelity, and AllianceBernstein. Mr. Geithner’s diary, which is open for public inspection, records all official interactions, including with administration officials, bureaucratic advisers, and business executives.

Former FDIC Chief Sheila Bair Calls Romney “Misinformed” on Dodd Frank - This American Banker interview with Sheila Bair has the Republican former regulator describing how Romney isn’t up to speed on Dodd Frank. Not to worry, she also gets a dig in at Geithner too.

It’s Time to Redefine ‘Financial Regulation’ - Everyone in the financial regulatory world wants to ringfence something. They just can't agree on what. Some want to lock the wild animals in a cage to keep them away from us; others want to lock the tame animals in a cage to keep them safe from the dangerous world outside. Look at the solutions offered by Sir John Vickers, head of the U.K. government panel charged with recommending reforms in methods of establishing interest rates in the wake of the Libor scandal; Erkki Liikanen, the Finnish central banker who leads a committee of economic experts who are advising the European Commission on ways to avoid another financial crisis; and Paul Volcker, whose proposed "Volcker Rule" would restrict trading activities at banks that operate with federal guarantees. In each proposal, the idea is to have bank capital separately allocated for some risky activity and to prevent that capital from being exposed to any other risky activity. Vickers, for example, wants to ringfence retail banking with the idea of trying to protect Main Street from the more risky activities of investment banks. Liikanen wants to ringfence all Wall Street-type trading activities within existing European universal banks, apparently in the hope of keeping the rest of the banks' activities safe from them. And Volcker simply wants to ringfence the market-making aspect of trading in order to separate it from so-called proprietary trading, which exposes bank capital to price risk. All three proposals represent attempts to come to regulatory grips with the dramatic changes in the nature of banking over the last 30 years or so, changes laid bare to the world by the global financial crisis that began in August 2007 and continues to this day.

Fixing the Libor Rates – By Far the Greatest Financial Scandal Yet – We all have to pay interest on our loans, and we all hope to get interest on our deposits.   When we the banks have money lying around idly it means they’re losing money, as it could be gaining interest as a deposit with another bank that needs the money. Part of my job as a banker was to ‘count the money’ towards the end of a trading day and make sure that any un-needed surplus – say 500 million euros – would be to deposited by the dealers. They would typically place this money on overnight deposits with other banks. The benchmark for interest payment on this deposit would be the LIBOR (or Euribor).   The LIBOR was allegedly an un-biased ‘weather report’ of what conditions were in the market that day. Now we have learned that some of the biggest banks in the world have been heavily involved in distorting this ‘neutral’ reading of the market. I cannot overestimate the significance of this interest rate – every interest payment that each one of us makes on the mortgage that you pay, ever car loan – is determined by this rate.LIBOR  ( the London Inter Bank Offered Rate)  has been in the headlines far less that it should be.  The Libor fixing scandal is by far the biggest and most far reaching scandal to have occurred in the world of finance. Why is it not getting the attention it deserves in the name of public interest?!? simply because the companies involved in fixing this price are the most respectable and distinguished of the banking world – HSBC & Barclays of the UK, Deutsche Bank of Germany, UBS of Switzerland.

LIBOR-gate Comes To Crude: Total Exposes Price Fixing In The Energy Market - While the recent revelations of multi-year LIBOR manipulation (but, but how was that possible: it involved thousands of people, operating for years, manipulating numbers - all the traditional reasons presented against conspiracy theory crackpots alleging that manipulation may be going on here, or there, or at the BLS, or somewhere), which we had said had been happening for the past 3 years, confirmed that the entire rate-based derivative market was a giant scam, at least one market spared from cartel whistleblower, i.e., insider, humiliation, was the commodities market. No longer. As the FT first reported, a Swiss trading office of Total Oil Trading sent a response letter to IOSCO (the International Organization of Securities Commissions), alleging that the same kinds of market "pricing" shennanigans that have been now exposed to have taken place over bottles of Bollinger, may have been pervasive in the crude market as well. From the letter which may have set off the same avalanche in the energy markets as the Barclays "settlement" did for rates: TOTAL is a subscriber to the major PRA services for the energy markets (oil, gas, coal, power, CO2, and biofuels). The work done by the PRAs can generally be considered conscientious and professional. However, the published prices do not always represent those of the market with the same degree of accuracy. This heterogeneity exists both within individual PRAs and between PRAs. As well, the quality of the reporting is not always consistent over time. Finally, while certain PRAs have pricing processes that are reproducible using the underlying data, others do not (the principal difference being the use of “judgement” that may bias prices away rather than toward the market).

One High-Speed Trader Made 4 Percent Of The Stock Market's Trades Last Week - A single computer program placed and canceled orders that made up four percent of the stock market’s entire volume of trading last week, according to Nanex, a top tracker of high-frequency trading. The high-frequency computer trading system made and canceled orders every 25 milliseconds on about 500 different stocks, Nanex said, before stopping Friday morning. Though motive is still unclear, it is likely that the computer trading was testing the system — that is, gumming up the market to allow other computer traders to gain an advantage. Federal regulators are currently weighing how they can rein in the risky practice of high-frequency trading, which adds volatility to the market but has “absolutely no social value,” according to one of its pioneers. The Federal Reserve of Chicago warned the Securities and Exchange Commission about the dangers of the practice more than two years ago, but regulators have been slow to act.

SEC Using High Frequency Trading Firm to Monitor High Frequency Trading - The 2010 “flash crash” showed the potential dangers of this fast-growing industry. Consider that our financial system places a large emphasis on where super-computers are sited relative to the trading machines. As Felix Salmon points out, one of the consequences of the melting polar ice sheet is not just that companies want to drill for oil in the Arctic. They want to lay cable through the shorter Arctic route, to increase the speed of information between the US and Asia by a matter of 20-60 milliseconds. And that infinitesimal shaving off the time of a trade matters. It’s the difference between placing a trade too early and placing it too late. It means billions upon billions of dollars. And that’s a huge problem. This makes the normal function of the market as an efficient allocator of capital into a video game relying on split-second dexterity. And because no game of this sort comes without glitches, the inevitable breakdown of this system has the potential to cause a huge crisis. The problem is that the government has fallen woefully behind in trying to regulate these high-speed algorithmic trading systems. They have to hire the same firms just to understand what is happening in the market. And this reliance on the same tools pretty well assured that the tools will never get abolished or even downsized.

Dissolve the SEC - mathbabe - A few days ago I wrote about the $5 million fine the SEC gave to NYSE for allowing certain customers prices before other customers. I was baffled that the fine is so low- access like that allows the customers to make outrageous profits, and it seems like the resulting fine should be more along the lines of those profits, since kickbacks are probably in terms of percentages of take. The lawyer fees from this case on both sides is much higher than $5 million, for christ’s sakes. But now I’m even more outraged by the newest smallest fine, this time an $800,000 fine for a dark pool trading firm eBX. From the article: Federal securities regulators on Wednesday charged Boston-based eBX LLC, a “dark pool” securities exchange, with failing to protect confidential trading information of customers and for failing to disclose that it let an outside firm use their trading data. The Securities and Exchange Commission said eBX, which runs the alternative trading system LeveL ATS, agreed to settle the charges and to pay an $800,000 penalty. You know that if I can actually consider paying the fine myself, then the fine is too small. It’s along the lines of the cost of college for my kids.Look, I don’t care what it’s for: if the SEC finds you guilty of fraud, it should threaten to put you out of business. Otherwise why should they waste their time doing it?

Fed's Tarullo Says Money Funds Pose `Key' Systemic Risk - Federal Reserve Governor Daniel Tarullo joined a call for the Securities and Exchange Commission to tighten oversight of the $2.5 trillion money market fund industry, which he said puts financial market stability at risk. “Money market funds remain a major part of the shadow banking system and a key potential systemic risk even in the post-crisis financial environment,” Tarullo said in a speech today at the University of Pennsylvania Law School in Philadelphia. SEC Chairman Mary Schapiro in August gave up on a plan to tighten regulation of the funds, an alternative to bank accounts for individuals and companies, after three of the five commissioners told her they wouldn’t vote to issue it for public comment. Treasury Secretary Timothy F. Geithner urged “further reform” of money market funds in a letter last month to the Financial Stability Oversight Council, a group of regulators that includes the SEC and is headed by the Treasury. Alternatives to tighter money fund regulation by the SEC, such as having the FSOC designate the funds as systemically important, or having other regulatory agencies curb the institutions’ ability to borrow from or invest in money funds without structural protections, are “decidedly a second-best alternative” to SEC action, Tarullo said.

More JP Morgan Whitewash - Yves Smith - Via e-mail, some updates from Michael Crimmins, a bank compliance expert and member of Occupy the SEC, on the continuing failure of the media to portray the real significance of the JP Morgan London Whale losses: that it revealed glaring deficiencies in internal controls that warrant prosecution of Jamie Dimon under Sarbanes Oxley (SOX). This section of a July post by Crimmins explains why the London Whale control failures are serious. JP Morgan’s kid gloves treatment by the press shows it pays to be a major advertiser: Crimmins prediction, that JP Morgan would try to blame traders for the position marks, has proven to be correct. Tonight, the lead story in the New York Times business section is “At JPMorgan, an Inquiry Built on Tapes,” with this as the summary: Investigators examining a multibillion-dollar trading loss at JPMorgan Chase are focusing on calls in which employees openly discussed how to value troubled bets in a favorable way. So the press is taking the JP Morgan party line that that exculpates management, when it doesn’t, particularly when JP Morgan’s practice was so radically out of line with industry norms. As Crimmins writes:Sorkin’s team is doing their job managing JP Morgan’s PR hoping to minimize the threat to Dimon as the bank’s third quarter earnings announcement approaches Friday. I expect JP Morgan will have to disclose the progress of its own internal investigation, and summarize the civil and crimminal investigations underway. It will also be interesting to see what the external auditors have to say. The full court PR press beginning with the New York Times Ina Drew story last week, followed by the toss of chief risk officer Barry Zubrow under the bus is looking like a desperate media offensive. I’m expecting the Friday news will not fit that narrative.

E-Mails Cited to Back Lawsuit’s Claim That Equity Firms Colluded on Big Deals - The private equity giants Blackstone Group and Kohlberg Kravis Roberts are longtime rivals that compete for multibillion-dollar deals. But during the last decade’s buyout boom, according to newly released e-mails in a civil lawsuit accusing them of collusion, the two firms appeared to be on much cozier terms. In September 2006, for instance, Blackstone and K.K.R. were both circling the technology giant Freescale Semiconductor. After a Blackstone group outbid a K.K.R. consortium to buy Freescale for nearly $18 billion, Hamilton E. James, the president of Blackstone, e-mailed his colleagues about Henry Kravis, the billionaire co-founder of Blackstone’s rival. “Henry Kravis just called to say congratulations and that they were standing down because he had told me before they would not jump a signed deal of ours,” Mr. James wrote. Two days later, Mr. James sent an e-mail to Mr. Kravis’s cousin and co-founder, George R. Roberts. “We would much rather work with you guys than against you,” Mr. James wrote. “Together we can be unstoppable but in opposition we can cost each other a lot of money.” “Agreed,” responded Mr. Roberts.

Bill Black: Lanny Breuer has Set Out a Roadmap for Bankers to Avoid Prosecution, London is Ahead in the Regulatory Race to the Bottom - Max Keiser interviews Bill Black about Deferred Prosecution Agreements, the disastrous tenure of Lanny Breuer as head of the Justice Department's criminal division, and London's exemplary performance in the international regulatory race to the bottom.

  • Lanny Breuer's Roadmap for Executives to Avoid White Collar Prosecution: Lanny Breuer recommends hiring an economist, claiming that you are too big to fail, and claiming that innocent employees will lose their jobs if prosecution is pursued.
    What Deferred Prosecution Agreements really mean: Deferred Prosecution means non-prosecution and everyone knows that it means non-prosecution. The Justice Department does not prosecute large corporations anymore. This is all about removing deterrence and allowing bankers to commit crimes with impunity.
    Why Eric Holder and Lanny Breuer were chosen to head the Justice Department: Holder and Breuer were picked to be marshmallows and they have delivered.

Many Retailers Balk at Card-Fee Settlement - Retailers are mounting a last-ditch effort to block a proposed $6 billion deal that would be paid for by credit-card companies to settle their long-running feud with merchants over processing fees. More than half of the 19 retailers and trade groups that filed a class-action lawsuit against Visa Inc and MasterCard Inc. say they are planning to object to the settlement. A motion seeking preliminary approval of the deal is expected to be filed next week in U.S. District Court in Brooklyn, N.Y. Some have already hired separate counsel to try to block the deal.While Judge John Gleeson could approve the settlement despite the plaintiffs' objections, they put pressure on him not to do so, said Adam Levitin, a professor at Georgetown University Law Center. "This is a strong signal that this is a settlement that is in the interest of the attorneys but not the merchants," he said. MasterCard and Visa declined to comment. Trish Wexler, spokeswoman for the Electronic Payments Coalition, a trade group that represents Visa and MasterCard, said critics of the deal are hoping to build an argument that legislation is needed to limit credit-card swipe fees.

PayPal Joined the Party - Adam Levitin commented on the eBay's opt-out arbitration program on a few weeks ago, and there have been campaigns calling for consumers to opt out of eBay's program.  Public Citizen has provided instructions on its website for consumers "to protect their constitutional rights by opting out of a forced arbitration clause and ban on consumers joining together in class actions."  eBay is not alone in using this sort of opt-out arbitration program.  Many tech companies have joined, or plan to join, the "party" in requiring consumers to opt out or be subject to binding arbitration.  Opt-out programs also may be layered now that PayPal is joining the party.  It recently sent notices to its users of policy updates, effective November 1, 2012, stating: "You will, with limited exception, be required to submit claims you have against PayPal to binding and final arbitration, unless you opt out of the Agreement to Arbitrate (Section 14.3) by December 1, 2012. Unless you opt out: (1) you will only be permitted to pursue claims against PayPal on an individual basis, not as a plaintiff or class member in any class or representative action or proceeding and (2) you will only be permitted to seek relief (including monetary, injunctive, and declaratory relief) on an individual basis."

Even Schneiderman’s Staff Shows Doubts by Voting with Their Feet - Yves Smith -- Last week, we saw a host of commentators rush to defend the mini October surprise of a sign of life from the heretofore moribund Mortgage Task Force, in the form of a filing by Eric Schneiderman against JP Morgan for fraud charges under New York’s Martin Act, even though we and others took a dim view of the suit. And even though a bit more information has come out, it doesn’t change our view that this and parallel cases (which the Mortgage Task Force has said it will launch) will be settled quietly, well after the election, perhaps even after Schneiderman’s current term expires, for comparatively little. In the last few days, we have learned that the mortgage task force entered into tolling agreements with all the major banks, which means, contrary to our original assumption, they will be able to include actions back to 2005 (we had assumed they’d be subject to the Martin Act statute of limitation of 6 years, which would have limited the damages to late 2006 and onward conduct). A tolling agreement, as Dave Dayen pointed out, is not given to DAs out of the goodness of the defendants’ hearts; it come out of a negotiation, which means Schneiderman had to give a concession….so what did Schneiderman and the task force concede to preserve cases that could have been filed years ago? The real tell is in a tidbit Matt Stoller unearthed today, that Schneiderman is losing staff. From the Daily News: Attorney General Eric Schneiderman has seen a mass exodus from his office in recent months, particularly in his communications shop.

A Bigger Paycheck on Wall Street - It still pays to be on Wall Street. The financial industry in New York has slashed jobs by the thousands over the last two years. For those who remain, annual compensation in total is at near-record levels, according to a report released Tuesday by the New York State comptroller. Since the financial crisis, Wall Street firms have wrestled with two competing market forces. Faced with a heavier regulatory burden, a lethargic economic recovery and the loss of once-big moneymakers like complex derivatives tied to mortgages, the banks have instead tried to cut their biggest expense: people. Yet there persists a view on Wall Street that profits can’t come simply by holding the line on costs — big pay is still needed to lure talent from other firms. Toward that end, firms have sought to cut jobs and noncompensation expenses rather than compensation itself. Both Goldman Sachs and Bank of America have announced big noncompensation cost-cutting efforts over the past year, for example. The result is that compensation over all continues to rise even as some shareholders press firms to cut costs further amid weak profit growth.

Are Businesses Quietly Preparing For A Financial Apocalypse? US corporations are sitting on more cash than at any point since World War 2. That's without including banks. I'm only talking about nonfinancial corporations – the ones that sell goods and services and make the economy go. Those businesses hold $1.4 trillion. In absolute terms, that's the most ever. In relative terms, it's the most since World War II. As investors, we can infer quite a bit from corporations' inability (or unwillingness) to deploy their cash. For one, it indicates that business have assumed a very defensive stance. Cash, of course, is a buffer against uncertainty - the uncertainty that business slows for any reason. Management wants a healthy cash reserve with which to pay the bills and remain liquid should anything unexpected happen. I think we can all agree that this is prudent, and a good business practice. But $1.4 trillion? That tells me that businesses are not just a little jittery about the future. They're prepared for an apocalypse.

Political Perceptions: Big Banks Beware! - The conventional wisdom among Wall Street bankers is that Barack Obama was tough on them and Mitt Romney, who emphasizes the harm of “excessive regulation”  would be easier on them. Mr. Romney, however, sent up a flare in the recent debate: He called the Dodd-Frank financial-regulation law of which Mr. Obama is so proud : “the biggest kiss that’s being given to New York banks I have ever seen.” That suggests that the replacement he has in mind might end up be tougher, rather than easier, on big banks.  Now, this could be a just a meaningless debate one-liner. But  Romney adviser Glenn Hubbard, the Columbia Business School dean and a contender to be Mr. Romney’s Treasury secretary, has made a similar point: “The Dodd-Frank Act missed the mark on housing and ‘too-big-to-fail’ financial institutions but raised financing costs for households and small and mid-size businesses,” he wrote in The Wall Street Journal in August. Other economists in the Romney camp – N. Gregory Mankiw of Harvard, John Taylor of Stanford and Kevin Hassett of the American Enterprise Institute –  have sounded the same note.

Fed’s Tarullo Calls for Cap on Bank Sizes - A top Federal Reserve official Wednesday called on Congress to consider capping the size of the nation's financial firms, marking one of the most high-profile challenges to the way Wall Street does business. In a Philadelphia speech, Fed governor Daniel Tarullo recommended curbing banks' growth by putting a limit on their nondeposit liabilities, which are sources of funding for operations that go beyond consumer deposits. The idea takes direct aim at the biggest U.S. banks, including J.P. Morgan Chase & Co., Bank of America Corp., Goldman Sachs and Citigroup, all of which rely heavily on such funding. Firms outside of this tier make much greater use of regular deposits. Mr. Tarullo, who drives much of bank policy-making at the Fed, is the highest-ranking regulatory official to call for limiting the size of banks. Even though the chance of congressional action depends in part on the outcome of November's election, the concept also fits into a growing chorus from across the political spectrum. Critics have voiced concern that the U.S.'s largest financial institutions are too big to fail and pose too great a risk to the financial system. Federal Deposit Insurance Corp. board member Thomas Hoenig, a registered independent who was picked by Republicans for his current post, is pushing a plan to break up the largest banks, something many liberals as well as former Citigroup Chairman Sanford Weill would like to see. Most Republicans stop short of embracing such ideas, but some have called for big banks to face substantially higher capital requirements, which also would have the effect of curbing their size.

Federal Reserve Official Calls For Placing Limits On The Size Of Big Banks Federal Reserve Board Governor Daniel Tarullo called for placing limits on bank size in a speech yesterday, making him one of the highest ranking economic officials to propose a remedy to reduce big bank dominance of the economy. Tarullo said that, in order to keep big banks from growing so large that they threaten the entire financial system, they should be limited in size to a certain percentage of the overall economy: The idea along these lines that seems to have the most promise would limit the non-deposit liabilities of financial firms to a specified percentage of U.S. gross domestic product, as calculated on a lagged, averaged basis. In addition to the virtue of simplicity, this approach has the advantage of tying the limitation on growth of financial firms to the growth of the national economy and its capacity to absorb losses, as well as to the extent of a firm’s dependence on funding from sources other than the stable base of deposits. While Section 622 of [the Dodd-Frank financial reform law] contains a financial sector concentration limit, it is based on a somewhat awkward and potentially shifting metric of the aggregated consolidated liabilities of all “financial companies.”  Tarullo also said that “the Fed should block any merger or acquisition this group of big banks attempts to make,” which it is allowed to do under Dodd-Frank.

Counterparties: Small enough to fail? - Too big to fail is a problem that has ostensibly been solved, thanks in part to banks’ “living wills”. But, as Sheila Bair has argued, simply saying that you’re no longer too big too fail does little to remedy the market’s perception of an implicit government backstop. Daniel Tarullo, the Fed’s expert this thorny issue, has a simple proposal – he wants to limit the amount that banks can borrow from the markets. In addition to the virtue of simplicity, this approach has the advantage of tying the limitation on growth of financial firms to the growth of the national economy and its capacity to absorb losses, as well as to the extent of a firm’s dependence on funding from sources other than the stable base of deposits. Of course, the difficult question would be the applicable percentage of GDP. The answer would depend on a judgment as to how much of an impact the economy could absorb. It would also entail a judgment as to how large and complex a firm needs to be in order to achieve significant economies of scale and scope that carry social benefit. Depending on the answers to these questions, there may be a need to balance the relevant costs and benefits… Even good answers to all these questions would produce a policy instrument that could seem excessively blunt to some. But this is a debate well worth having. Simon Johnson made the same proposal in November 2009, and senators Sherrod Brown and Ted Kaufman even proposed legislation to that effect in 2010. But nothing came of it, and the WSJ’s Victoria McGrane has a great chart detailing where we are now, in terms of non-deposit liabilities as a percentage of GDP. JP Morgan leads the pack with 6.3%, closely trailed by BofA at 5.7%, and Goldman Sachs and Citgroup each at 5.2%.

Tracking the U.S. Banking Industry -- The New York Fed has recently published the first edition of a new quarterly report tracking the aggregate financial condition of consolidated U.S. banking organizations. In this post, we describe the methodology used to construct the statistics in the report as well as present and briefly discuss some of the findings.  The new report, “Quarterly Trends for Consolidated U.S. Banking Organizations,” is based on regulatory accounting data filed by U.S. commercial banks and bank holding companies (BHCs). This latter term may be unfamiliar to some readers—a BHC is simply a parent corporation that controls one or more banks. Importantly, BHCs also often control a range of other nonbank financial subsidiaries, such as broker-dealers, asset management firms, and insurance firms. Each of the largest U.S. banking organizations is organized according to a BHC structure.

Neil Barofsky on the Fed Stress Test « mathbabe -- It’s called “Banks Rule While the Rest of us Drool,”. It’s essentially a bloggy rant against a Wall Street Journal article which I had just read and was thinking of writing a ranty blog post against myself. But now I don’t have to write it! I’ll just tell you about the WSJ article, quote from it a bit (and complain about it a bit since I can’t help myself), and then quote Barofsky’s awesome disgust with it. Here goes. The Fed conducts stress tests on the banks, and they are making them secret, so the banks can’t game them, as well as requiring more frequent and better quality data. All good. From the WSJ article: The Fed asks the big banks to submit reams of data and then publishes each bank’s potential loan losses and how much capital each institution would need to absorb them. Banks also submit plans of how they would deploy capital, including any plans to raise dividends or buy back stock. After several institutions failed last year’s tests and had their capital plans denied, executives at many of the big banks began challenging the Fed to explain why there were such large gaps between their numbers and the Fed’s, according to people close to the banks. Fed officials say they have worked hard to help bankers better understand the math, convening the Boston symposium and multiple conference calls. But they don’t want to hand over their models to the banks, in part because they don’t want the banks to game the numbers, officials say. Just to be clear, when they say “large gaps”, I’m pretty sure the banks mean they are perfectly safe when the Fed thinks they’re undercapitalized. I am pretty sure the banks are arguing they should be giving huger bonuses to their C*O’s whereas the Fed thinks not. I’m just guessing on the direction, but I could be wrong, it’s not spelled out in the article.

Unofficial Problem Bank list declines to 873 Institutions - This is an unofficial list of Problem Banks compiled only from public sources.Here is the unofficial problem bank list for Oct 6, 2012. (table is sortable by assets, state, etc.)  Changes and comments from surferdude808:  Very quiet week for the Unofficial Problem Bank List with only removal. The list has 873 institutions with assets of $334.9 billion. A year ago, the list held 983 institutions with assets of $404.1 billion. This week, the Federal Reserve terminated the action against Farmers State Bank of West Concord, West Concord, MN ($46 million). Next week will likely be just as quiet.

CoStar: Commercial Real Estate prices increase in August - From CoStar: CoStar Commercial Repeat Sale Indices (CCRSI) Post Strongest Gains Since Downturn, But Uncertainty Looms as Market Fundamentals Soften The two broadest measures of aggregate pricing for commercial properties within the CCRSI — the U.S. Value-Weighted Composite Index and the U.S. Equal-Weighted Composite Index — each posted significant gains in August 2012. The U.S. Value-Weighted Composite Index, which weights each repeat-sale by transaction size or value and therefore is heavily influenced by larger transactions, reached its highest level since early 2009. It has now improved by a cumulative 34.1% since the start of 2010, reflecting strong investor demand for primary gateway metro areas and institutional-grade multifamily assets that have been at the forefront of the pricing recovery for commercial property. The rate of improvement in the U.S. Equal-Weighted Composite Index, which weights each repeat-sale equally and therefore reflects the influence of the more numerous smaller transactions, has accelerated. The 7.6% year-over–year increase of the Equal-Weighted Composite Index in August 2012 was the largest such gain since August 2006.This graph from CoStar shows the Value-Weighted and Equal-Weighted indexes. As CoStar noted, the Value-Weighted index is up 34.1% from the bottom (showing the demand for higher end properties), however the Equal-Weighted index is only up 8.2% from the bottom.

Housing Has “Turned the Corner” – For Banks - JPMorgan Chase, feeling little ill effects from the federal attempts at investigation of their business practices, announced a major earnings jump of 34%. Part of this comes from the fact that the previous earnings report included most of the losses from the Fail Whale trades (which have increased to $6.25 billion, as per this earnings report), so this comes off a low bottom. But in the earnings call, CEO Jamie Dimon attributed the strength to increased consumer lending, and he added that the housing market has “turned the corner.” Jamie Dimon, chief executive of JP Morgan Chase, has said the US housing market “has turned the corner”. He said that his bank, which is the biggest in the US by assets, would be reducing the amount it sets aside to cover losses from mortgages. But he warned that: “We also expect to see high default related-expense for a while longer.” My initial reaction is that he must not be too scared about this Bear Stearns-related MBS lawsuit, if the company is cutting its reserves on losses related to mortgages (actually they cut their overall reserves for losses, too, by $600 million). But let’s focus on this claim that housing “turned the corner.” When a banker says that, he’s very specifically talking about how housing works for banks, not how housing works for the public as a whole. JPMorgan Chase originated $47 billion in home loans and refinancing in the quarter, an increase of 29% year-over-year. Mortgage unit earnings climbed 57%. That’s about depressed interest rates for mortgages and funneling into refinancing, both of which generates large profits for banks. Refinancing creates pure profit in closing fees, and on underwater loans through HAMP 2.0, as the lack of competition means banks can charge artificially higher interest rates to borrowers with nowhere else to turn. On mortgage purchases, the spread between the cost banks charge to borrowers and the cost banks pay to sell to the secondary market is now so high, profits on the average mortgage has hit a record.

Fannie and Freddie's Huge Profits Raise Questions for Future of Mortgage Finance - Never have the government-sponsored enterprises (GSEs) dominated the U.S. mortgage market as they do today. Through June 2012, the GSEs (Fannie Mae and Freddie Mac – and also including Ginnie Mae) accounted for 100% of the mortgage market. (Note that this excludes mortgages originated by banks and retained on balance sheet.) It is remarkable to consider that the government’s 95% share of the mortgage market in 2008 has turned out to be the low-water mark of the past five years. Rather than a temporary phenomenon in the wake of the worst housing crisis since the Great Depression, GSE dominance of mortgage finance continues to grow in strength. The great irony is that this is occurring as officials in Congress and the Administration seem to agree that GSEs should be wound down. The problem is that winding them down requires a comprehensive plan for mortgage finance reform that allows for a seamless transition from the current regime so as to avoid any disruption to the nascent housing recovery. To date, the Administration has offered little more than brainstorming sessions, which makes it more likely that GSE dominance could continue well into the middle of this decade

Blaming Regulation, Again, for Restricting Mortgage Lending - It’s the government’s fault — or so the bankers say. Despite the multiyear federal stimulus that is still being thrown at the mortgage market, some banking executives are saying that Washington is acting in ways that are holding back a housing recovery. The latest person to pile on was Jamie Dimon, chief executive of JPMorgan Chase, who said Friday: “I would hope for America’s sake we start to fix the things that make the mortgage underwriting too tight.” The inference was that new regulation is getting in the way, especially the lack of clarity on proposed rules that aim to make mortgages fair and affordable for borrowers. Regulatory uncertainty does of course weigh on banks’ ability and desire to make loans. But here are some counterweights to such complaints. First, government support to the housing market far outweighs any negative impact for banks. The mortgage market is benefiting from three huge sources of stimulus and subsidy. The Federal Reserve has purchased hundreds of billions of dollars of mortgage-backed bonds since the crisis, an initiative that lowers interest rates and ignites demand for new loans among borrowers. Government-owned entities like Fannie Mae currently guarantee repayment on nearly all mortgages. And the Treasury Department’s homeowner relief programs have generated refinancing income for banks. All this aid has made it possible for banks like JPMorgan to carry out one of the most profitable, low-risk “trades” that has ever existed in modern capital markets. They simply make mortgages and flip them to bond investors, after attaching the federal guarantee.

Dire foreclosure estimate for NJ by New York Fed - The number of New Jersey homes repossessed by lenders may increase by 49 percent, and maybe by as much as 140 percent, by the end of 2013, depending on how fast foreclosures move through the courts, according to a new government study. Federal Reserve Bank of New York says repossessions in New Jersey may climb at least 49% through end of 2013.  The report released Friday by the Federal Reserve Bank of New York, made predictions about future trends in banks' repossessions of residential properties from defaulted borrowers, based in part on the average time it takes to foreclose, which varies from state to state, and is always in flux. If the average number of days it takes to foreclose on a property declines, for example, lenders' repossessions "would rise sharply in most states, tripling in New York and more than doubling in New Jersey," the study performed for the New York Fed by CoreLogic said. As of June, lenders in New Jersey had nearly 1,979 properties on their books, and New Jersey ranked 38th among 50 states, the New York Fed said. The top three states were California with 49,299 repossessed properties, or 11.1 percent of the nation's total; Florida with 44,677, a 10.1 percent share; and Michigan with 38,275, an 8.6 percent share.

RealtyTrac: Foreclosure Activity Drops to 5-Year Low in September - From RealtyTrac: Foreclosure Activity Drops to 5-Year Low in September: RealtyTrac® ... today released its U.S. Foreclosure Market Report™ for September and the third quarter of 2012, which shows foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 180,427 U.S. properties in September, a decrease of 7 percent from the previous month and down 16 percent from September 2011. September’s total was the lowest U.S. total since July 2007. This graph from RealtyTrac shows foreclosure activity for the last three years. Some of the decline in foreclosure activity this year is related to the increased emphasis on short sales and modifications.

U.S. Foreclosure Filings Hit 5-Year Low in September - U.S. foreclosure filings dropped to a five-year low in September as fewer homes were on track to be seized by lenders. It was the second-consecutive monthly decline in filings, although there remains a sharp divergence along state lines, according to a report Thursday by foreclosure listing firm RealtyTrac Inc. On a national level, overall foreclosure filings last month – including home repossessions – fell 7 percent from August and 16 percent from September 2011. There were 180,427 foreclosure filings reported for September, the fewest since July 2007 in the midst the housing market bust. The number of homes entering the foreclosure process, so-called foreclosure starts, fell to 87,066 in September, down 12 percent from August and 15 percent from a year earlier. It was the second-straight month of declines following three months of increases, Irvine, Calif.-based RealtyTrac reported. Foreclosure starts since peaked in April 2009 at around 203,000. But the current level is still well above the 34,000 starts recorded in May 2005, before the collapse of the housing market.

Charting The 'Housing Recovery' Subsidy: Foreclosures Slide To Five Year Lows - A month ago, when RealtyTrac posted their latest US foreclosure numbers for the month of August, we presented what we called was the "Foreclosure Stuffing" thesis, explaining the explicit subsidy by the banks for the housing market, whereby the entire foreclosure process has now ground to a halt, and in doing so removing millions in inventory flow from the distressed end market, forcing limited buyers to chase what supply there is, and in the process boosting prices of existing inventory higher. In other words a traditional inventory removal-based subsidy. It is therefore not surprising that today RealtyTrac reported the latest foreclosure data, and lo and behold, just as we expected, the great foreclosure collapse has taken another leg lower, with the total number of foreclosures for the month of September sliding to 180.4K, a decrease of 7 percent from the previous month and down 16 percent from September 2011, and the lowest in five years!

Canadian bank goes after homes to collect credit card debts - In a significant escalation by debt collectors who pursue consumers for payment, a major Canadian bank has threatened to foreclose on the homes of hundreds of Californians unless they pay back old credit card debts. California law generally makes foreclosure available only to lenders using residential properties as security, and collectors of unsecured debts, like credit card loans, normally are limited to attaching wages or bank accounts. But Credigy Receivables – a unit of the National Bank of Canada, which has more than $150 billion in assets – has taken advantage of California’s relatively lax debt collection laws. The bank has repeatedly bypassed a legal hurdle that normally prevents credit card companies from threatening to take away the homes of debtors who refuse or are unable to pay. Little-noticed except by debtors and consumer attorneys, Credigy’s unusual collection efforts begin with the purchase of judgment liens issued in California lawsuits filed by credit card lenders and other unsecured creditors. Credigy then names debtors who own residential properties as defendants in foreclosure lawsuits. A California Watch review of court records identified foreclosure lawsuits filed by Credigy since December 2009 in superior courts in Alameda, Fresno, Kern, Los Angeles, Marin, Orange, Sacramento, San Bernardino, San Francisco, San Mateo and Solano counties. A spokesman for Credigy’s owner, the National Bank of Canada, declined to comment, citing pending litigation.

Lawler: "Distressed" home sales shares in Reno, Vegas, and Phoenix - Economist Tom Lawler sent me the table below with a one word discussion: "Wow".  We've been tracking several distressed areas across the country, and a couple of clear patterns have developed:
1) There has been a shift from foreclosures to short sales. Foreclosures are down and short sales are up just about everywhere. For two of the cities below, short sales are three times foreclosures - and more than double in Phoenix. That is a huge change. A year ago, there were many more foreclosures than short sales.
2) The overall percent of distressed sales (combined foreclosures and short sales) are down year-over-year.
The three cities in the table below - Reno, Vegas, and Phoenix - were some of the hardest hit areas in the country. The decline in in distressed sales in Phoenix (from 64.1% in Sept 2011 to 39.9% in Sept 2012) is stunning. But we have to remember that 40% distressed is still extremely high.

CoreLogic: Existing Home Shadow Inventory declines 10% year-over-year -- From CoreLogic: CoreLogic® Reports Shadow Inventory Continues to Decline in July 2012: CoreLogic ... reported today that the current residential shadow inventory as of July 2012 fell to 2.3 million units, representing a supply of six months. This was a 10.2 percent drop from July 2011, when shadow inventory stood at 2.6 million units, which is approximately the same level the country was experiencing in March 2009. Currently, the flow of new seriously delinquent (90 days or more) loans into the shadow inventory has been roughly offset by the equal volume of distressed (short and real estate owned) sales....CoreLogic estimates the current stock of properties in the shadow inventory, also known as pending supply, by calculating the number of properties that are seriously delinquent, in foreclosure and held as real estate owned (REO) by mortgage servicers but not currently listed on multiple listing services (MLSs). Roll rates are the transition rates of loans from one state of performance to the next. Beginning with this report, cure rates are factored in as well to capture the rise in foreclosure timelines and further enhance the accuracy of the shadow inventory analysis. Transition rates of “delinquency to foreclosure” and “foreclosure to REO” are used to identify the currently distressed non-listed properties most likely to become REO properties. Properties that are not yet delinquent but may become delinquent in the future are not included in the estimate of the current shadow inventory. Shadow inventory is typically not included in the official metrics of unsold inventory. This graph from CoreLogic shows the breakdown of "shadow inventory" by category. Note: The "shadow inventory" could be higher or lower using other numbers and methods; the key is that their estimate of the shadow inventory is declining.

Fed's Beige Book: Economic activity "expanded modestly", Residential real estate showed "widespread improvement" -- Fed's Beige Book: Reports from the twelve Federal Reserve Districts indicated that economic activity generally expanded modestly since the last report. Consumer spending was generally reported to be flat to up slightly since the last report. A number of Districts characterized retail sales as expanding at a modest pace ... And on real estate: Residential real estate showed widespread improvement since the last report. All twelve Districts reported that existing home sales strengthened, in some cases substantially. Selling prices were steady or rising. Boston, Atlanta, Minneapolis, Dallas and San Francisco noted declining or tight inventories, which have put upward pressure on prices. Modest price increases were reported in the New York, Richmond, Chicago, and Kansas City Districts. New York and Richmond reported relatively strong demand at the high and low ends of the market, whereas Philadelphia and Kansas City noted relative strength for mid-range homes; Boston indicated a shift in the mix toward lower or medium priced homes. New home construction and sales were more mixed but still mostly improved: increased construction and/or new home sales were reported in the Atlanta, Chicago, St. Louis, Kansas City, Dallas and San Francisco Districts. Multi-family construction, in particular, was described as robust in the Boston, New York, Atlanta, Chicago, and Dallas Districts. 

MBA: Mortgage Purchase activity highest since June - From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey: The Refinance Index decreased 2 percent from the previous week. The seasonally adjusted Purchase Index increased 2 percent from one week earlier. “Refinance applications declined somewhat last week although volume is still near three-year highs, and purchase applications increased to the highest level since June, with both conventional and government volumes increasing,”  “Rates on 30-year fixed-rate loans remain historically low, benefitting both prospective homebuyers and those seeking to refinance.” The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.56 percent from 3.53 percent, with points increasing to 0.39 from 0.35 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The 30 year contract rate increased for the first time after declining for six consecutive weeks. This graph shows the MBA mortgage purchase index. The purchase index is up about 7% over the last three weeks and is at the highest level since June.

Refis! - A few weeks ago, I argued that there’s a potentially useful collision of a number of trends occurring in the housing market:

  • –mortgage rates are hitting historical lows;
  • –home prices are finally appreciating;
  • –refis are up.

These developments have a lot in common, of course.  First, they interact in positive ways for borrowers and for the economy.  As home prices appreciate, some underwater homeowners will break the surface (last I checked, there were 1.3 million such cases through the first half of this year).  That helps them refinance their home loans into lower rates.Even for underwater borrowers, an Obama administration housing program—the HARP—is finally gaining some real traction helping underwater borrowers to refi.  As Mark Zandi noted in the WaPo the other day: HARP makes it easier for homeowners with Fannie and Freddie mortgages to refinance their loans even if they are deeply underwater. HARP was stalled until the administration persuaded Fannie Mae and Freddie Mac to make some changes; now, with the help of record-low mortgage rates, HARP has gone into overdrive. Assuming mortgage rates stay low, nearly 3 million homeowners will eventually benefit from the program.That’s where the Federal Reserve comes in: their QE3 program is helping to push already low mortgage rates down even further (by adding liquidity to the mortgage backed securities market).  Last I checked, the average borrowing rate on a 30-year fixed rate mortgage was 3.36%, the lowest on record from this data series that goes back to the mid-1970s..

Redfin: House prices up 5% Year-over-year in September - From Redfin: Home Prices Dip Slightly from August to September, Still Up 5% from 2011 in Redfin Real-Time Home Price TrackerRedfin today released its Real-Time Home Price Tracker for September 2012, showing an annual price gain of 5 percent across 19 major U.S. markets. From August to September, prices declined just 0.8% percent, which is a smaller decline than is typical at this time of year: The number of homes for sale declined 29.3% from September 2011 to September 2012, and by 4.3% since August: The percentage of listings that sold within 14 days of their debut held steady in September at 27%. Home sales up year-over-year, down since August: Home sales increased 4% from last year, and fell 17% since August—a typical seasonal decline. "September is usually the month that real estate goes on sale, like Christmas toys in January," This September, we saw only a modest decline in prices, with inventory still dropping and demand fairly steady. This house price index is based on prices per sq ft. This is a reminder that prices will decline month-to-month in the fall and winter on the Case-Shiller and CoreLogic Not Seasonally Adjusted (NSA) indexes - and it will be important to watch the year-over-year change. Right now I'm guessing the CoreLogic index will report negative month-to-month price changes for August or September, and Case-Shiller for September or October.

Housing Fever Can Work Both Ways, by Robert Shiller -The boom and bust in the housing market was a dual social epidemic. First, there was an epidemic of positive thinking that led to high expectations for long-term home price appreciation — and for the economy, too. Then, after 2005, an epidemic of negative thinking discouraged many people from buying a house or from spending in general, and kept many employers from hiring.  Most people seem to know that social epidemics are occurring, at least at some level. In fact, the term “going viral” has been going viral itself. A Google Trends search confirms that the phrase has taken off in the last few years. It is possible to go deeper — to ask what people are thinking, and infer something about the social epidemics that drive the economy.  KARL CASE, of Wellesley College, and I have been trying to do that for over a decade. We have conducted an annual mail survey of home buyers for years, with a total now of nearly 5,000 completed questionnaires. The survey, supported by the Yale School of Management, has covered the years leading up to the 2006 peak in home prices, and the years of disappointment thereafter.  The mailed questionnaire survey posed multiple-choice questions and a number of open-ended essay questions, where respondents could fill in their answers in their own words. Anne Thompson of McGraw-Hill Construction joined us in analyzing the data we collected, and we presented our paper “What Have People Been Thinking?” last month at the Brookings Institution.

Why the Housing Crash is Far From Over -- Almost daily, the pundits are smugly proclaiming that the worst is over and housing markets around the country are bottoming.  I am really the only housing market analyst in the country who continues to assert emphatically that this is pure rubbish. What follows are ten very important charts, graphs and tables which show why the housing collapse which began in mid-2006 is far from over.  The explanation which follows each graphic explains its significance so you can begin to see the big picture.  I suggest that you review these graphics carefully and prepare to take action to protect your client’s assets as well as your own.

Fannie Mae: U.S. Housing-Market Attitudes Improved in September - Americans’ optimism about the housing market’s recovery and homeownership continued to climb in September, bolstered by mortgage-rate declines throughout the summer, according to a monthly survey by Fannie Mae. Consumer confidence about the economy also rose substantially last month, reversing a recent trend of waning confidence during much of the year. Expectations for changes in home prices have remained positive for 11 straight months, and the number of people expecting home-price declines has stabilized at a survey low, aided in part by the Federal Reserve‘s latest quantitative-easing effort, Fannie Mae said.

Housing: Plenty of Reasons to Be Pessimistic - There’s plenty of debate about—and money riding on—the question of whether we are in the midst of a sustainable recovery in the housing market. Nobody knows for sure, of course, but there are plenty of reasons to be pessimistic. For one thing, the supply of homes, in terms of what is currently on the market and what is potentially for sale whether or not prices rebound further—the so-called shadow inventory—remains significant relative to demand, even though data from the National Association of Realtors (NAR) shows that inventories of existing homes are back to where they were eight years ago.  Nowadays, a much greater share of transactions are in the “distressed” category than before the bubble burst. Given that more than 20 percent of sales are foreclosures and short sales makes the current ratio look healthier than it is in comparable terms. Needless to say, shadow inventory is far greater than it was during the go-go years, when people were happy to remain long despite a booming market. With prices having fallen sharply since then, we now have a situation akin to those seen in other post-collapse markets: Holders can turn seller on a heartbeat as prices move closer to what they paid or owe on their mortgages. Given that more than 20 percent of mortgagees are underwater, that represents a sizable overhang.

How Archaic Local Regulations Are Killing the Future and Homes Built Like Bunkers - In order to future proof our prosperity, we’re going to need to become productive locally.  Specifically, we need produce more food, energy, water, and products in our communities.  Of course, it’s your option, but if you don’t…. Unfortunately, making this production real is much more difficult to do that it should be. Why?  Antiquated regulations and building codes that prevent the innovation required to make that possible.  How bad is it? Take a look at this graphic (click to expand it).  It depicts all of the permits, inspections, and surveys required for building systems that capture, use, and dispose of water.

Q2 2012: Mortgage Equity Withdrawal strongly negative - The following data is calculated from the Fed's Flow of Funds data and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity - hence the name "MEW", but there is little MEW right now - and normal principal payments and debt cancellation. For Q2 2012, the Net Equity Extraction was minus $75 billion, or a negative 2.5% of Disposable Personal Income (DPI). This is not seasonally adjusted. This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.  There are smaller seasonal swings right now, perhaps because there is a little actual MEW (this is heavily impacted by debt cancellation right now). The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding declined sharply in Q2. Mortgage debt has declined by $1.05 trillion since the peak. This decline is mostly because of debt cancellation per foreclosures and short sales, and some from modifications. There has also been some reduction in mortgage debt as homeowners paid down their mortgages so they could refinance.

Potential debt problems more common among the educated - Before the financial crash of 2008, it was highly educated Americans who were most likely to pile on unmanageable levels of debt, a new study suggests. Overall, the percentage of Americans who were paying more than 40 percent of their income for debts like mortgages and credit card bills increased from about 17 percent in 1992 to 27 percent in 2008. But college-educated people were more likely than those with high school or less education to be above this 40 percent threshold - considered to be a risky amount of debt for most households.The association between more education and higher debt was true even after taking into account the fact that people with more education tend to have higher incomes.In addition, people who reported being more optimistic about the future of the economy for the next five years were more likely to have a heavy debt burden, the study found."People who piled on debt may have been too optimistic about their economic future, but you can't blame that on a lack of education,"

Vital Signs Chart: Americans Add to Credit-Card Debt - Revolving credit increased in August, suggesting consumers are feeling better about borrowing to spend on bigger purchases. Revolving credit, which includes credit-card debt, rose $4.2 billion, or 5.9%, to $854.91 billion in August from a month earlier. Previously released data showed that retail sales posted their biggest rise in six months in August, while consumer confidence strengthened in September.

Reports on US consumer credit missed the elephant in the room - Lee Adler has a nice post (here) on the latest employment data, pointing out that some of the seasonal adjustments in the government report are flawed.  It is therefore sensible to look at other government statistics without the seasonal adjustments. One such set of numbers is the latest report from the Fed on consumer credit which showed a spike in borrowing by US consumers. Reuters: - U.S. consumer credit rose $18.12 billion, the biggest gain since May, following July's revised $2.45 billion decline. Revolving credit, which mostly measures credit-card use, climbed $4.2 billion. Nonrevolving credit, which includes student and auto loans, rose $13.92 billion. This increase looks strong, but let's take a look at who the credit providers are and how their holdings changed over time - without the seasonal adjustments that add noise to the data. The chart below shows that 25% of the increase in August is coming from banks and 6% from credit unions. That's mostly due to an increase in credit card debt (remember this data does not include mortgages). The 9% increase in holdings by finance companies is from auto loans. And then there is the elephant in the room - 58% of the increase in consumer credit came from the federal government. That is all student loans. For some reason the media is refusing to zero in on this.

What makes this economic recovery so difficult for the US consumer - Why is it that this economic recovery feels so sluggish to US consumers relative to previous recessions? One answer is that growth in disposable income has been horrible (chart below). It explains the relatively weak consumer sentiment and anemic growth in consumer spending. That is why this sudden increase in food and fuel prices (chart below) is an unwelcome development. With low personal income growth, the US consumer is now far more sensitive to these shocks than during the previous recoveries.

Vital Signs Chart: Paychecks Losing Ground - Americans’ paychecks have lost ground in the recovery, one reason why consumption and consumer confidence are weak. Average hourly earnings were $19.80 in August, adjusted for inflation, the same as August 2011 and down slightly from the beginning of 2009. With unemployment falling but still high, employers can fill many jobs without raising salaries.

Thanksgiving turkey to be among first to show drought price hike - Grocery shoppers can expect to see drought-related price increases in the coming weeks on turkey, eggs, vegetable oils and dairy products. Poultry prices are 5.6 percent higher than prices last year, with chicken prices up 5.3 percent and other poultry prices, including turkey, up 6.9 percent, according to the latest Consumer Price Index figures. The poultry category has been expected to be among the first to reflect price increases caused by the drought. But the biggest pain won’t hit until next year, when the impact of the drought is expected to be felt on a wide range of foods from cereals to soups, the U.S. Department of Agriculture’s Energy Research Services forecasts. The worst drought to hit the Midwest in decades drove up the price of feed corn and soybeans, which will impact animal-based products the end of this year and throughout 2013, according to Ricky Volpe, research economist at the agency. “Consumers are going to see major impacts for beef and veal,” he said. “We’re looking at 4 percent to 5 percent in 2013, another 3 to 4 percent for poultry products, which is a huge category where up until recently consumers were actually seeing a little bit of price relief.”

Heating Costs to Rise This Winter as Cold Returns — Americans will pay more to heat their homes this winter as they feel something they didn’t feel much of last year: cold. Fuel prices will be relatively stable, but customers will have to use more energy to keep warm than they did a year ago, according to the annual Winter Fuels Outlook from the Energy Department’s Energy Information Administration. Last winter was the warmest on record. This year temperatures are expected to be close to normal. Heating bills will rise 20 percent for heating oil customers, 15 percent for natural gas customers, 13 percent for propane customers and 5 percent for electricity customers, the EIA announced Wednesday. Heating oil customers are expected to pay the highest heating oil prices ever. That will result in record heating bills, with an average of $2,494. That’s nearly $200 more than the previous high, set in the winter of 2010-2011. Customers who use natural gas, electricity or propane will see lower bills than they have in previous typical winters – even with the increase over last year – because prices are relatively low.

Consumer Sentiment Brightens Substantially - U.S. consumers’ feelings about the economy brightened to their highest level in five years in early October, according to data released Friday. The Thomson-Reuters/University of Michigan consumer sentiment index jumped to 83.1 in early October from a final September reading of 78.3 and a level of 79.2 earlier last month, according to an economist who has seen the report. The early October index is the highest reading since September 2007.

Michigan Consumer Sentiment: A Major Improvement - The University of Michigan Consumer Sentiment preliminary number for October came in at 83.1, up from last month's final level of 78.3. The consensus was for 78.5, although's own forecast was closer to the mark at 82.0. Today's report is the highest level 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.

Consumers See Blue Sky Amid Economic Clouds - Political intransigence could drag the U.S. back into recession, the euro-zone debt crisis drones on, and gasoline prices have topped $5 a gallon in California. Yet consumers are partying like it’s 2007. The Thomson-Reuters University of Michigan sentiment index unexpectedly jumped in early October to 83.1. The index blew past its final-September 78.3 reading to the highest level since September 2007, just as the last expansion was ending. What gives? Keep in mind the sentiment index often stayed above 100 during the last recovery, so consumers aren’t feeling euphoric. But the October bounce suggest households see patches of blue sky where economists see dark clouds.“It is probable that the recent dip below 8% on the unemployment rate, the performance of the equity market, and the uptick in the housing market are buoying confidence,” economists at Jefferies wrote after seeing the data.

Wholesale Inventories Increase -- Inventories at U.S. wholesalers rose in August, but the stockpiling didn’t keep pace with a sharp rebound in sales. U.S. wholesalers’ inventories increased by 0.5% from the prior month to a seasonally adjusted $487.53 billion, the Commerce Department said Wednesday. The figure matched what was forecast by economists surveyed by Dow Jones Newswires. Sales for wholesalers jumped by 0.9% in August to $405.43 billion, the highest gain since February. It was also the first rise in four months.

U.S. Wholesale Prices Jump 1.1 Percent in September - A second month of sharp gains in gasoline costs drove wholesale prices higher in September. But outside of the surge in energy, prices were well contained. Wholesale prices rose 1.1 percent in September following a 1.7 percent gain in August which had been the largest one-month increase in more than three years, the Labor Department said Friday. In both months, overall prices were pushed higher by gasoline, which rose 9.8 percent in September following an even larger 13.6 percent gain in August. (MORE: Are Public Corporations Passé?) Core prices, which exclude food and energy, were unchanged in September, the best showing since they held steady in October 2011. In August, core prices rose 0.2 percent. Food prices, which had jumped 0.9 percent in August, showed a smaller 0.2 percent rise in September. Wholesale inflation has been stable over the 12 months that ended in September. In that time, overall prices have increased just 2.1 percent. Core inflation is up 2.3 percent over the 12-month period. The government’s producer price index measures cost pressures before they reach consumers.

U.S. wholesale prices rise 1.1% in September — Producer prices climbed sharply in September for the second month as gasoline prices jumped, a government report said Friday. Producer prices rose 1.1% in September after an increase of 1.7% in August, the Labor Department said. The core wholesale price index, which excludes food and energy prices, was flat in September after a 0.2% gain in the prior month.  Economists surveyed by MarketWatch had expected a 1.0% rise in the headline PPI and a 0.2% increase in the core rate. The gain in producer prices, tracking the level of inflation at the wholesale level, was due to continued higher energy costs — particularly gasoline. Energy prices advanced 4.7% in September after having risen 6.4% in August. A 9.8% gain in gasoline prices accounted for more than 80% of the September gain, the Labor Department said. Food prices rose 0.2% in September, for the fourth consecutive increase. Analysts said the impact of the severe drought in the Midwest is slowly filtering up the production chain. Read the full government report.

Producer prices up on surging gasoline, core rate flat (Reuters) - Producer prices rose more than expected in September as the cost of energy surged, a government report showed on Friday, but underlying inflation pressures were muted. The Labor Department said its seasonally adjusted Producer Price Index increased 1.1 percent last month. Economists polled by Reuters had expected prices at farms, factories and refineries to rise 0.7 percent last month. Despite the rise in overall wholesale inflation last month, there is likely to be little pass-through to consumers given sluggish job growth, which puts a brake on inflation. Wholesale prices excluding volatile food and energy were flat last month. That was the lowest reading since October 2011 and fell short of analysts' forecasts. Consumer inflation is currently below the Federal Reserve's 2 percent target, and many economists think it will trend below that level for years to come. In a bid to boost economic activity, the Fed launched an aggressive new stimulus program last month, pledging to buy $40 billion of mortgage-backed debt a month until the outlook for jobs improves substantially. Overall producer prices last month were buoyed by a 4.7 percent increase in energy prices. Higher gasoline costs drove the increase. Wholesale diesel prices also contributed, rising 9.2 percent, the biggest one-month gain since December 2010.

PPI Jumps 1.1% Due to High Wholesale Gas Prices in September 2012 - In September, Producer Price Index, or wholesale inflation, increased 1.1% for finished goods and is the 2nd month in row for a jump. August PPI increased 1.7%. Gasoline again is the cause, with prices surging 9.8%. Gasoline was the culprit for 80% of the energy index ballooning by 4.7%. Food also increased by 0.2%. Core PPI, which are finished goods minus food and energy prices, had no change for the month. While PPI is wholesale inflation, retail shoppers beware, price increases are usually passed onto consumers.  PPI is reported by stages of processing of materials, finished, intermediate and crude. Finished are commodities ready for final sale, intermediate are partially finished, such as lumber and cotton and crude are products entering the market for the first time, such as raw grain and crude oil.  Unadjusted, finished goods have increased 2.1% for the last 12 months, the highest monthly increase since March 2012. Graphed below is wholesale finished goods PPI percent change for the year.  The increase in food prices was due to dairy, which increased 2.8% for the month. Fresh fruits and melons also caused the increase for they jumped 11.1%.  Core PPI, or finished goods minus food and energy, was unchanged from the previous month. Light trucks increased 0.3%, but computers dropped -2.4% and communications equipment declined -0.7%.

BLS: Producer Prices increased 1.1% in September -- From the BLSThe Producer Price Index for finished goods rose 1.1 percent in September, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Prices for finished goods advanced 1.7 percent in August and moved up 0.3 percent in July. At the earlier stages of processing, prices received by manufacturers of intermediate goods rose 1.5 percent in September, and the crude goods index advanced 2.8 percent. On an unadjusted basis, prices for finished goods climbed 2.1 percent for the 12 months ended September 2012, the largest rise since a 2.8-percent increase for the 12 months ended March 2012.Finished energy: Prices for finished energy goods advanced 4.7 percent in September after rising 6.4 percent in August. A 9.8-percent jump in the gasoline index accounted for over eighty percent of the September increase. Advances in the indexes for diesel fuel and residential natural gas also contributed to the rise in finished energy goods prices. Finished core: Prices for finished goods less foods and energy were unchanged in September after rising 0.2 percent a month earlier.The PPI is very volatile and is impacted by energy prices. Note the core PPI was unchanged. CPI will be released next Tuesday.

Producer Price Index: Core Inflation Continues to Moderate - Today's release of the September Producer Price Index (PPI) for finished goods shows a month-over-month increase of 1.1%, seasonally adjusted, in headline inflation. Core inflation was unchanged. had posted a MoM consensus forecast of 0.8% for Headline and 0.2% for Core PPI. Not surprisingly, the price of finished energy goods remains the primary contributor to the increase, up 4.7%. On the brighter side, energy is down from last month's 6.4% increase. Year-over-year Headline PPI is up 2.2% and Core PPI is up 2.3%. Here is a snippet from the news release: In September, the rise in finished goods prices was led by the index for finished energy goods, which advanced 4.7 percent. Also contributing to higher finished goods prices, the index for finished consumer foods moved up 0.2 percent. Prices for finished goods less foods and energy were unchanged in September. Finished energy: Prices for finished energy goods advanced 4.7 percent in September after rising 6.4 percent in August. A 9.8-percent jump in the gasoline index accounted for over eighty percent of the September increase. Advances in the indexes for diesel fuel and residential natural gas also contributed to the rise in finished energy goods prices. (See table 2.)   More... Now let's visualize the numbers with an overlay of the Headline and Core (ex food and energy) PPI for finished goods since 2000, seasonally adjusted. As we can see, the YoY trend in Core PPI declined significantly during 2009 and increased modestly in 2010 and more rapidly in 2011. This year the YoY Core PPI trend had been one of gradual decline until the recent dramatic uptick.

Producer Price Inflation Higher On Spiking Food And Energy; Those Who Don't Eat Or Drive See No Price Increase - In a country in which nobody eats or drives any more, the Fed construct as September core PPI came in 0.0%, on expectations of a 0.2% increase. Of course, for those lucky few who still eat, or drive, or in rare cases eat and drive, saw Producer Prices rise by 1.1% on expectations of a 0.8% increase, which despite dropping from August's 1.7%, this was still the second highest monthly increase in the past year. Also, for those few who actually care about such trivia as food and energy prices, this was the 4th month in a row of higher than expected headline PPI. Luckily, in America, eating has now been hedonically adjusted to the functional equivalent of playing Apple's bestselling $0.99 iFood app.

Trade Deficit increased in August to $44.2 Billion - The Department of Commerce reported:  [T]otal August exports of $181.3 billion and imports of $225.5 billion resulted in a goods and services deficit of $44.2 billion, up from $42.5 billion in July, revised. August exports were $1.9 billion less than July exports of $183.2 billion. August imports were $0.2 billion less than July imports of $225.7 billion. June was revised from $42.0 billion. The trade deficit was larger than the consensus forecast of $44.0 billion. The first graph shows the monthly U.S. exports and imports in dollars through July 2012. Both exports and imports decreased in August. It appears that the global economic weakness is impacting both exports and imports. Exports are 9% above the pre-recession peak and up 2% compared to August 2011; imports are 3% below the pre-recession peak, and up about 1% compared to August 2011. The second graph shows the U.S. trade deficit, with and without petroleum, through August. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. Oil averaged $94.36 in August, up slightly from $93.83 per barrel in July. Import oil prices will probably increase further in September. The trade deficit with China decreased slightly to $28.7 billion in August, down from $29.0 billion in August 2011. Still, most of the trade deficit is due to oil and China.

Trade Deficit - Recession Risks Increase - The chart below was presented recently by the Frederick Smith, the President and CEO of FedEx Corp., which shows the clearly negative trends in the year-over-year exports including the U.S.  Historically, when exports have turned down the economy was either in, or slipping into, a recession. The recent declines in durable goods orders and industrial production have been clear warnings that this could already be in the works.  Today's release of the trade data provides further recessionary warning signs. In August, the U.S. trade balance worsened as exports declined reflecting economic weakness in Europe and slower growth in Asia. Also, oil and petroleum product imports jumped on higher prices due to a weaker US Dollar. The trade deficit expanded to $44.2 billion from $42.5 billion in July (originally $42.0 billion). Exports fell 1.0 percent, following a 1.1 percent decrease in July. Imports slipped 0.1 percent after a 0.6 percent dip the prior month. The decline in exports was again was led by a decline in industrial supplies, foods, feeds & beverages with minor slippage in autos and consumer goods. None of this data is good for corporate earnings heading into the 4th quarter particularly as higher oil prices impact consumer demand.

Vital Signs Chart: Slowing Export Growth - Export growth is sliding as the lackluster global economy weakens demand for U.S.-made goods. America’s exports were up 1.6% in August compared with the same month a year ago. That compares with 2.7% year-over-year growth in July and below paces of just over 8% earlier in 2012. Slumping exports are likely to weigh on the economy’s already slow growth rate.

Small-Business Confidence Steady Amid Hopes for 2013 - Small-business owner confidence was little changed in September, but owners expect business conditions will improve in early 2013, according to data released Tuesday. The National Federation of Independent Business‘s small-business optimism index fell 0.1 point to 92.8 in September. The index has averaged 93.1 so far in 2012, a weak reading this far into a recovery. The NFIB said business decisions seem to be on hold until the election is over.

Survey: Small Business Owners Growing More Pessimistic - Small business owners are growing more pessimistic. A survey released Tuesday by the National Federation of Independent Business shows that owners became more pessimistic during September as employment and sales remained weak. The NFIB’s index of owner optimism fell 0.1 point to 92.8. The survey did have some bright spots. The number of owners who believe this is a good time to expand their companies rose 3 percentage points. And the number of owners who expect business conditions to improve in six months gained 4 points. But the number of owner who plan to create jobs fell 3 points, while the number who plan to reduce their payrolls rose 2 points. More than a fifth of the survey’s participants said weak sales are their biggest business problem. The survey is in line with other small business readings that show owners are cautious. The payroll service company ADP said last week that small businesses slowed their pace of hiring during September. There have been mixed readings on how much owners are willing to borrow, but the conflicting signals do point to small companies being very careful about spending for hiring or expansion.

The case against patents -- Over the past year, it has sometimes seemed like tech companies spend more time on battles over patents than on inventing new products. Apple sues Samsung. Samsung sues Apple. Google sues Apple. Microsoft sues Google. The endless frenzy has prompted a number of onlookers to argue that our patent system is broken. But now there’s an even more radical case making the rounds—maybe we should just… abolish patents altogether. That’s the conclusion of a eye-catching recent paper by Michele Boldrin and David K. Levine for the Federal Reserve Bank of St. Louis. It’s titled “The Case Against Patents” and argues that our patent laws now do more to hinder innovation than to promote it. And, since there’s no way to salvage the system, the United States would be better off scrapping patents entirely.  Their argument is complex and has a few moving parts, so let’s wade through step by step (and look at some counterarguments):

Flowing Through the Labor Market - The following charts examine how the patterns of flows have changed over the past 22 years. The unemployed are remaining so longer, while they are now more likely to drop out of the labor force than to find a job.

Full Employment Is the Best Social Program: The unemployment rate’s drop to 7.8 percent, reported last week, marked the first time since 2009 that the rate was below 8 percent. It’s fitting that this occurred shortly after someone who predicted the rate couldn’t get below 8 percent changed his mind. Until a year ago, president of the Minneapolis Federal Reserve Narayana Kocherlakota had argued that there may be a new normal unemployment rate of 8.7 percent, and that adjusting the rate at which banks borrow money would do little to help. Now he argues that the Fed should commit to keeping rates low until unemployment is declines—a position in line with those hawkish about our unemployment crisis.The Great Recession has compressed the differences among economists in the Democratic Party, focusing everyone on unemployment. From left-leaning centrists to very liberal economists, they've unified to call for more stimulus to address the jobs situation. But as unemployment gets lower, this united group may fracture. The idea that unemployment is now permanently higher, or couldn’t go to the low levels seen in the late 1990s, could split liberal economists, pulling the rug out from a united front demanding additional measures to boost the economy.

Compilation of Jobs Indicators Signal Weakness - In a sign of very weak job markets, a compilation of U.S. labor indicators weakened further in September, according to a report released Tuesday by the Conference Board. The board said its September employment trends index fell 0.34% to 107.86 from a revised 108.23, first reported as 108.59. It was the third decline in the last four months. The latest index is up 5.4% from a year ago. “The U.S. economy entered a soft patch in the spring and the result has been lackluster job growth, which is likely to continue through the first half of 2013,” Last Friday, the U.S. Labor Department‘s job report was mixed. Only 114,000 new jobs were created in September but the month’s unemployment rate unexpectedly dropped to 7.8% from 8.1% in August. Even so, 7.8% is a high jobless rate this far into a recovery. In September, five of the eight components within the employment trends index deteriorated. These indicators included the ratio of involuntary part-time to all part-time workers and the share of firms with hard-to-fill job openings. The Conference Board’s index is an aggregate of eight labor-market indicators, including jobless claims, job-openings data from the Bureau of Labor Statistics, and industrial-production figures from the Federal Reserve. It seeks to facilitate forecasts for employment, unemployment and wages by filtering out the noise and volatility of monthly labor-market indicators and showing underlying trends more clearly.

Exploring the Wild, Weird World of Employment Numbers From Statistical Space -- It's like someone pulled the unemployment rate out of a Star Trek transporter, as if America entered a time warp machine and we moved to another dimension through a worm hole. A 0.3 percentage point drop to 7.8% makes no sense when there were only 114,000 jobs added. Captain, can the unemployment rate be right and we really did defy the laws of statistics?  We want to point to something which might in part explain what happened this month with the household survey statistics. That is how long someone holds a job. We don't have monthly statistics on job tenure, yet it could very well be that finally, people are working longer at a job. The never ending Schindler's List attitude towards U.S. workers may have abated. The U.S. has disposable worker syndrome, where people are laid off and fired for no damn good reason at all. It's a fact of the American work life while one has a job one week, there is no guarantee one will have a job the next.  To wit, let's look at another obscure BLS statistic, labor force status flows. This is the number of people flowing from being in the labor force, out of the labor force, employed and unemployed on a monthly basis. Below is a graph of the monthly changes of people who moved into employment from already having a job, not being counted at all, or being part of the official unemployed since 2006. We can see from the above graph many more people who are currently employed are remaining so into the next month. We also see people who are unemployed are not getting jobs like they were before 2008 and those not in the labor force aren't getting as many jobs either.  A study with older statistics showed workers were not keeping their jobs for long, so the above trend maybe a more positive sign in terms of job duration. Another statistic from the September employment report is a huge uptick in part-time employed for economic reasons, 582,000.  Some people are in part-time jobs because they want to be, others because they cannot find anything else. There are 8.613 million people stuck in part-time jobs because that's all they can get. Below is a graph showing how much non-voluntary part-time workers has increased.

Divergent Jobs Reports: Will the Real State of the Labor Market Please Stand Up? -- Atlanta Fed's macroblog - The September employment report from the U.S. Bureau of Labor Statistics (BLS) was predestined to create a significant amount of buzz. But the confluence of headline jobs growth at a modest clip of 114,000 and a surprisingly large 0.3 percentage point reduction in the unemployment rate has made the report more buzz-worthy than we (here at macroblog) expected. Although some of the commentary has been more heat than light, there have been some particularly good reminders of the difference between the establishment survey data, from which the headline jobs figure is derived, and the household survey data, from which come the unemployment statistics. The discussions on Greg Mankiw's blog and by Catherine Rampell (at The New York Times's Economix blog) are especially useful. Or, perhaps even better, you can go to the source at the BLS. It's important to remember that both surveys are subject to error and, because of its much smaller sample size, the household survey can be subject to particularly sizeable swings. Specifically, the standard error of the household survey's monthly change in employment is 436,000(!). Based on the most extreme assumptions about flows in and out of unemployment and in and out of the labor force, understating or overstating actual employment by 436,000 would imply a measured unemployment rate ranging from 7.5 percent to 8.1 percent. (The BLS estimate of the standard error for unemployment puts a range on September's number of 7.6 percent to 8 percent.)

What Are the Jobs Figures Really Telling Us? - Has anything really changed in the labor market? That’s the question I’ve been asking myself since last Friday’s jobs figures, the most positive in three and a half years, came out. Unemployment is finally below 8%, and there was pick up in surprising areas, like public sector employment. No, that had nothing to do with the Obama administration manipulating BLS data, as Jack Welch would like us to believe. The improvements were at the state and local level, rather than the federal, in areas like education and healthcare, and they probably had a lot more to do with seasonal adjustments than anything else, at least according to the smart folks in JP Morgan’s economic research division. What’s more, if the President actually had the ability to tweak the figures, he probably would have focused on manufacturing, an area that was still shedding jobs thanks to the slowdown of Europe and many emerging markets, which is hitting U.S. exporters. It’s that last bit that worries me. The Obama administration and everyone has been counting on the nascent manufacturing resurgence in the U.S. to create some of those better paying middle class jobs that we’ve lost so many of over the last few decades. And indeed, the forces that have been fueling the manufacturing resurgence in this country aren’t gone – energy prices are high and may get higher if Iran tries any funny business in the Straight of Hormuz. Higher energy means more risk and higher shipping costs, which makes companies more inclined to source parts and jobs closer to home. What’s more, American workers are getting cheaper – the Boston Consulting Group estimates that by 2016, the labor/productivity gap between the U.S. and China will have narrowed to just 7 cents an hour. Yes, we’re getting more globally competitive. But that’s partly because a lot of us are not making any more money than we did in 1968.

The Payroll Data -  Krugman - Another quick note, this time on what the payroll data say. Again, you want to focus on somewhat longer-term trends, not monthly numbers. Over the past year the employer survey says that we’ve added 1.8 million jobs, or 150,000 a month: And this number is likely to be revised up. This is substantially more than the number of jobs we need to keep up with population growth, which is currently something like 90,000 a month. (The number used to be higher, but baby boomers are getting old — the same thing that affects the household survey.) So the two survey are saying the same thing: job growth fast enough to make gradual progress on the employment front. Not fast enough; it will take years to restore full employment, and we should, um, end this depression now. But the progress is real.

Truth About Jobs, by Paul Krugman - If anyone had doubts about the madness that has spread through a large part of the American political spectrum, the reaction to Friday’s better-than expected report from the Bureau of Labor Statistics should have settled the issue. For the immediate response of many on the right — and we’re not just talking fringe figures — was to cry conspiracy. It was nonsense, of course. Job numbers are prepared by professional civil servants, at an agency that currently has no political appointees. ... Furthermore, the methods the bureau uses are public...Some background: the monthly employment report is based on two surveys. One asks a random sample of employers how many people are on their payroll. The other asks a random sample of households whether their members are working or looking for work. And if you look at the trend over the past year or so, both surveys suggest a labor market that is gradually on the mend ... The eye-popping number from Friday’s report was a sudden drop in the unemployment rate to 7.8 percent from 8.1 percent, but you shouldn’t put too much emphasis on one month’s number. The more important point is that unemployment has been on a sustained downward trend. .. None of this should be taken to imply that the situation is good, or to deny that we should be doing better.  But the employment data do suggest an economy that is slowly healing

Unemployment Figures and the Uncertain Future -  I have not been very surprised at the gradual pace of progress in reducing the unemployment rate. In fact, we on the macro team have consistently called for more fiscal stimulus rather than less. The reason is that unemployment is a relatively slow-moving variable. As the chart at the top of this post shows, the unemployment rate (shown as a blue line) fell only rather gradually after each of the previous three recessions (shown as shaded areas in the figure). (Hence, since 2007, the team has advocated an easing of fiscal policy. Instead, especially after the 2009 ARRA, little action was taken by the government to stimulate the economy. Partly as a result of inaction on fiscal stimulus, government employment as a percentage of the civilian workforce (red line in the figure above) peters out after 2010. At this point, we hope for legislation to moderate January’s expected “fiscal cliff”—which will lead to perhaps a $500 billion in reductions in the federal deficit in 2013 unless laws are changed, by CBO estimates.  (In its current form, the cliff would probably have a serious impact on all economic and demographic groups. Lately, I’ve been working on a model that incorporates the larger effects of an additional dollar of income on spending at lower income levels—not a simple task.) In the figure, both lines are shown in the same units, namely percentages of the civilian labor force age 16 and above, though the two lines use different scales, one on each side of the figure.  A hypothetical jobs program or another spending measure that gradually increased government employment (red line) by, say, 1 percent of the total US workforce might easily have led to an unemployment rate (blue line) for last month of 1 to 3 percent less than the actual reported amount. But government does not seem to be expanding; in fact, the red line shows that government employment shrank at a time when more hiring from that sector would have been of great help to the economy.

Where’s the plan? - It is the half way point in the debate season and commentary on what was said, what should have been said and how much people care about what has been said is flowing thick and fast. Glaring by its absence in either the first presidential or the vice-presidential debate is a plan for jobs. Unemployment rates have been mentioned, the need for jobs ceded, though what this actually means in terms of policy is unclear. The middle class are the battleground for this election; a plan for work should be front and centre, if it’s lurking in the background it’s hard to spot. There is a clear difference in approaches to the problems of unemployment, instability in the labor market, skills and education. Yet questions about jobs at the debate last week led to answers about tax. Last night, neither vice presidential candidate put forward a plan. During the campaign questions about work end up with answers about teh veracity of statistics, partisanship and the size of government. Despite stalling social mobility, educational divides, the changing nature of the labor market, high unemployment and labor market inactivity, ways in which work can provide solutions are not being harnessed or explored by either side – at least not visibly. Recent research from Brookings has demonstrated the value of the safety net in reducing poverty – but real change comes when people are able to escape the vicious work/welfare/work cycle. This needs a coherent approach to public policy – one both sides are yet to clearly articulate. To paraphrase both candidates from last night – it’s no good saying there will be a job creator in the White House, show us the policies.

Timing and Phantom Data: A Second Look at the Controversial September Jobs Report - The BLS jobs report covering September sparked controversy because of the large three-tenths of a percent drop in the unemployment rate, down to 7.8%. This fall corresponded to a reduction of 456,000 in the number of unemployed. As dramatic as this decrease was, it was dwarfed by an increase of 873,000 in the number of employed. This figure represented not only the 456,000 unemployed who supposedly found jobs but a further 418,000 who entered into the labor force from outside it. These data were all from the Household survey were fundamentally at odds with an anemic increase in jobs of only 114,000 from the larger Establishment survey. The large increase in employment and decrease in unemployment were internally consistent within the Household survey, but, contradicted as they were by the jobs data from the Establishment survey, weren’t real. This raises the question of why they happened. In part, the two surveys have very different levels of statistical significance. The larger Establishment survey has a threshold of 100,000 while the Household survey with this month’s problematical data is 400,000. But the size of the discrepancy, especially with regard to employment, in the September report goes beyond a simple mismatch in the data’s significance.

Digging deeper into the BLS data: It was the ‘job creators’ and those in ‘real America’ that led to the job growth - I decided to dig a bit deeper into Bureau of Labor Statistics (BLS) data to gauge the divergence of employment growth in the household survey and the establishment survey in September and recent times. It is, after all, the divergence between these two series in September’s jobs report that generated outrageous charges of BLS economists manipulating the data (the household survey showed employment growth of 873,000 in September, which pushed the unemployment rate down to 7.8 percent from 8.1 percent in spite of a surge of new workers into the labor force). The BLS, being the highly professional agency that it is, provides documentation on how the two series differ and compares the trends obtained in each series on an apples-to-apples basis (or, as close as they can get it); this information is available when the numbers are released each month. That is impressive, by the way. BLS will also share, on request, a spreadsheet providing the actual adjustments made to reconcile the two series over the last 12-month period (using “not seasonally adjusted” data, which is why they show it for the same month a year apart). The bottom line is that the household survey has shown comparable employment growth as the payroll survey over the last year and less employment growth than in the payroll survey since the trough in June 2009. That’s pretty strong evidence that the trends in the household survey are not spectacular or implausible even though September’s employment growth was quite large.

The Real Deal on Jobs – The BLS Is Just Catching Up With Massive Undercounting in Seasonally Adjusted Estimates - The BLS today reported a gain of 114,00 in nonfarm payrolls. That compares with a gain of 574,000 in the actual, not seasonally adjusted number. In the actual (NSA) data September  is always an up month. Last year the September NSA gain was 697,000. In 2010, it was 496,000. The 10 year average gain for September for 2002 to 2011 was 533,000.  This year’s September gain came on the heels of very strong NSA gains in August.Unlike the August SA number, which had a big upward revision, note that the August NSA number was not revised. There’s a problem with the seasonally adjusted fictional number, not with the actual NSA data. The SA number for this month will subsequently be revised for the current month in each of the  next 5 years as the BLS attempts to fit the SA number to the actual change. It will also have a major benchmark revision in February, when the benchmarking process is finalized.So let’s get real, ok. The SA data is unreal. The actual NSA data is much closer to real. The withholding tax collections are really real, but from time to time may be skewed by IRA distributions, so we need to be alert for anomalies in that data. The numbers above come from the BLS the Current Employment Statistics Survey or CES, a survey of business establishments. The BLS also does a survey of households. To further complicate matters, the household survey or CPS — Current Population Survey– often tells a different story from the establishment survey. In the CPS, September is a month in which the actual NSA number usually decreases. This year the number of persons reported as employed in September rose by 775,000 from August, not seasonally manipulated. That compares with a gain of 167,000 in September 2011 and a drop of 204,000 in 2010. The average loss in September for the previous 10 years was -343,000. The 2% year over year gain is consistent with the gain shown by withholding taxes. By this standard this was a very good month. There was little discrepancy between what the withholding tax data suggested and the BLS actual NSA survey data. If anything, the withholding data suggested a stronger number, but it may have been skewed by non-payroll related factors

Enabling the jobs report conspiracy theory, by Brendan Nyhan: Media ethics pop quiz: When conspiracy theories started circulating on Twitter claiming that Friday’s jobs report had been politically manipulated, what should reporters have done?

    • (a) Avoid covering a baseless and unsubstantiated charge and focus instead on the mainstream debate over the meaning and significance of the jobs report.
    • (b) Carefully cover the conspiracy theory as news, making clear that no credible evidence exists to support the claim.
    • (c) Write up “he said,” “she said” news reports that treat the conspiracy theory as a matter of partisan dispute.
One can make a reasonable case for either (a) or (b), but several outlets chose (c) instead, writing up the charges in a format that is likely to help spread the myth and encourage more like it in the future. With incentives like these, should we be surprised that politicians and commentators keep making false claims? ...

Addressing the BLS Truther Controversy - Friday’s BLS truther controversy was, in a word, sad. That folks now nonchalantly float claims that government agencies fudge numbers is (or should be) beyond the pale (just as it was in 1970 when Nixon did it). But it’s not. While the truther discussion has made its way into every nook and cranny of the interwebs, maybe it would be instructive to take a look at some anecdotal information that supports Friday’s allegedly contrived unemployment number. Business Insider’s Joe Weisenthal suggested early Friday that the numbers we’d gotten earlier last week on auto sales foretold a decent jobs/unemployment number, which sent me scurrying to FRED to produce a chart: The pattern of auto sales leading the unemployment rate is crystal clear. Great call, Joe. So, the same folks who are skeptical of the BLS must necessarily also question the sales reports of GM, Ford, Toyota, Honda, BMW, and every other car manufacturer that reports monthly sales figures (i.e. all of them). Another piece of anecdotal information that I’ve used for years now is the NFIB’s “Poor Sales” (as Single Biggest Problem) vs. the Unemployment Rate:

How Much Trust Should We have in Economic Data? - Perhaps it’s not surprising that a political party unable to come to grips with the scientific evidence on global warming would extend its claim that the evidence is politically manipulated to other inconvenient truths. But the attack on the Bureau of Labor Statistics by some Republican supporters last Friday over its report of an improvement in the unemployment rate was still a bit of a shock. The charge that employees at the BLS manipulated the employment numbers to favor Obama is nonsense as anyone familiar with the calculation of these numbers can attest, but it does bring up a good question. What factors should be considered when assessing the reliability of economic data? The first thing to consider is how well a particular piece of data accords with what we are actually trying to measure. For example, the total output of goods and services in the economy is relatively easy to define in theory, but does our actual measure give us this information? In developing countries where there is substantial home production that does not get counted, GDP may be a highly misleading measure of total output. Similarly, going back to last Friday, does the unemployment rate adequately reflect the actual unemployment problem in the presence of factors such as discouraged workers and involuntary part-time employment? Even if a particular piece of data is imperfect, e.g. a measure of total output that excludes significant amounts of home production, it can still provide useful information. A thermometer that is off by a constant, but unknown amount won’t be very helpful if the question is, "Precisely how hot or cold is it today?"

Time to Replace the Unemployment Rate - This blog mentioned in mid-September that it was possible -- if unlikely, based on Gallup's survey data that include 30,000 interviews per month -- that September's seasonally adjusted unemployment rate could fall to 7.9%. Still, Friday's BLS report of a drop to 7.8% in the Household survey seemed to surprise everyone, as has been the case on many occasions this year. The problem is that even though the Household survey tends to be very volatile, this decline seems to lack face-validity, particularly after the prior month's numbers. The consensus estimate was that the government would report that the unemployment rate was unchanged at 8.1% in September. GDP growth was 1.3% in the second quarter and seems to be no better this quarter. The government's Establishment survey shows there were 114,000 new jobs created in September -- very close to the consensus of 113,000 -- and not sufficient to lower the unemployment rate. The obvious conclusion is that a new employment measure is needed. Gallup has proposed such a measure -- Payroll to Population (P2P) -- the number of Americans employed full-time for an employer as a percentage of the U.S. population. This is a much simpler measure that has none of the numerous adjustments made to the seasonally adjusted unemployment rate. The P2P deteriorated slightly to 45.1% in September from 45.3% in August, suggesting the real jobs situation was essentially unchanged last month.

Gallup Goes To Town On BLS Massagery - Whether it is a fringe-blog pointing out the statistical un-possibility (here and here), or a previously well-respected 'elite' pointing out the suspiciousness (here), most of the general public (or their media-based oracles) prefer not to swallow the red pill of reality with regard Friday's data SNAFU. However, given the political (and economic) consequence of a single-number, Gallup has decided to weigh in on reality as they note "even though the Household survey tends to be very volatile, this decline seems to lack face-validity, particularly after the prior month's numbers" as they analyse why the household results should be discounted heavily. Critically, they, like us, suggest the 'unemployment rate' needs to be replaced as a measure of joblessness, suggesting a far simpler (and more transparent) measure - Payroll-to-Population - would avoid the 'adjustments' and 'biases' that are inherent in the BLS's bafflement. The Gallup measure suggests, as one would perceive using common-sense, that the real jobs situation was essentially unchanged last month.

Unemployment 7.8% to 22% - Is There A Better Method? - Recently I wrote "Why The Real Unemployment Rate Is 16.9%", which sparked quite a few e-mails revolving around the issue of the way the Bureau of Labor Statistics measures unemployment. In that article we discussed the differences between the U-3 and the U-6 rates and showed what unemployment would look like if you included those that had been out of work longer than 52 weeks. In reality the problem is far worse - as I stated previously: "In reality this calculation is still not accurate, and on the low side, as there is currently no clear way to measure the millions of individuals who have disappeared into the abyss of the uncounted. Many of the 88 million individuals that are currently unemployed, and not counted by the BLS, would likely be more than happy to work given the opportunity. However, in the current economic environment, those options are not widely available which is why there is very much a silent "depression" running through the underbelly of this economy. In this depression we don't see the bread lines and soup kitchens simply because they arrive electronically and in the mail."  In 1994, under the Clinton Administration, the Bureau Of Labor Statistics (BLS) changed the methods in which it calculated the levels of unemployment in the U.S. While the changes appeared to be minor on the surface at the time - the impact today is likely far greater than originally imagined. (for more detail on the changes read here) According to the Bureau of Labor Statistics (BLS) the U3 measure is described as “total unemployed, as a percent of the civilian labor force (official unemployment rate)." That rate, as of the most recent release is 7.8%. However, if we look at the U6 measure which includes the total unemployed (U3), plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers - the unemployment rate now jumps to 14.7%. The chart below shows the trend of individuals that are considered "not in labor force (NILF)" both before and after the 1994 revisions by the BLS.

Mish on Capital Account: IMF Downgrades, Unemployment, Participation Rate, Conspiracies; What is the Best Way to Measure Unemployment? - Once again, on Tuesday, I had the pleasure of being on Capital Account, live television with Lauren Lyster. We discussed IMF downgrades, unemployment, conspiracy theories, and economic outliers. We also discussed my proposal in regards to the proper way to measure the unemployment rate. I come in at about the 3:40 mark, but the first few minutes of Lauren are entertaining as usual.

John Williams on Lies, Damned Lies and the 7.8% Unemployment Rate - I normally put out a commentary on the numbers, and, in this one, I raised the possibility of politics as a factor. The problem is very serious misreporting of the numbers and the result is what appears to be a bogus unemployment rate. The BLS reported a drop in the unemployment rate from 8.1% to 7.8%, three-tenths of a percentage point, which runs counter to what is being experienced in the marketplace. What few people realize is that the headline unemployment rate is calculated each month using a unique set of seasonal adjustments. The August unemployment rate, which was 8.1%, was calculated using what BLS calls a “concurrent seasonal factor adjustment.” Each month the agency recalculates the series to adjust for regular seasonal patterns tied to the school year or holiday shopping season or whatever is considered relevant. The next month, it does the same thing using another set of seasonal factors. Rather than publish a number that’s consistent with the prior month’s estimate, it recalculates everything, including the previous month, but it doesn’t publish the revised number from the previous month.

Chris Martenson on what job numbers, the Fed, and a drop in oil prices are hiding - We talk to Chris Martenson, author of "The Crash Course." Among other things, we ask how he thinks the issue of credit expansion is compounded by global energy resource depletion and population growth. Is the credit bubble is re-inflating or are we past the deflationary point of no return? And unemployment dipped to 7.8 per cent, with the largest gain in almost a decade. However most were involuntary, part-time positions. We talk about what the numbers really mean and how to factor in exponential population growth as an unaccounted for headwind to employment going forward.

Employment: A decline in the participation rate was expected due to the aging population - I've written extensively on the reasons for the decline in the participation rate. Unfortunately some people haven't been paying attention. Two key points:
• Some of the recent decline in the participation rate has been to due to cyclical issues (severe recession), but MOST of the decline in the overall participation rate over the last decade has been due to the aging of the population. There are also some long term trends toward lower participation for younger workers pushing down the overall participation rate.
• This decline in the participation rate has been expected for years. Here are three projections (two from before the recession started). The key to these projections is that the decline in the participation rates was expected:
1) From BLS economist Mitra Toossi in November 2006: A new look at long-term labor force projections to 2050
2) From Austin State University Professor Robert Szafran in September 2002: Age-adjusted labor force participation rates, 1960–2045
Here is a graph of the actual overall participation rate and a few projections through 2040. The participation rate might increase a little over the next year or two, but in the longer term, the overall participation rate will probably continue to decline until 2040.

About That "Expected" Drop In Participation Rate -  Mish - Calculated Risk had an interesting but misleading post A decline in the participation rate was expected due to the aging population.This decline in the participation rate has been expected for years. Here are three projections (two from before the recession started). The key to these projections is that the decline in the participation rates was expected:Yes, a decline in the participation rate was expected. My problem with his analysis regards the miss-portrayal of the rate at which the participation rate was scheduled to happen. Calculated Risk posted this chart. The above chart was created in 2012 and does not remotely match demographic projections made earlier. For example, Robert Szafran estimated in September of 2002 the participation rate pattern would look like this. {  } In September 2005 the participation rate was 66.1. In September of 2010, the participation rate was 64.6 which Szafran  did not expect until 2015. The current participation rate is 63.6, a number Szafran expected in 2019 perhaps. BLS analysis was much worse even though the BLS had more years of data to consider. Let's take a look at BLS projections made in 2006.

Understanding the Decline in the Participation Rate - I've been writing about the expected decline in the labor force participation rate for years. On Sunday, I posted another update: Employment: A decline in the participation rate was expected due to the aging population. I made a couple of key points on Sunday:
1) A decline in the participation rate was expected.
2) Although some of the recent decline in the participation rate has been to due to cyclical issues (severe recession), MOST of the decline in the overall participation rate has been due to changing demographics.
This morning Mish disagreed with me. His conclusion was: "While the Participation Rate trend is certainly down, and down was expected, most of the decline in participation rate since the start of the recession is due to economic weakness, not demographics." I consider this progress! It wasn't long ago that I was still arguing with people that we should expect a decline in the participation rate. Now the question has shifted to what portion of the decline is cyclical (due to the recession) and what portion is due to demographics. Mish looked at a paper I linked to on Sunday, written in 2002 by Austin State University Professor Robert Szafran, and Mish used Szafran's projection for the participation rate in 2015. However, as Szafran noted in his paper, for simplification purposes he assumed that the "age-specific participation rates do not change" after 2000.  However if we look at the 16-to-19 age group, the participation rate declined from 51% in 2000 to 42% in 2007 - before the recession started. Although Szafran's paper is very useful, the actual numbers (because of the simplifying assumptions) are clearly too high.

Further Discussion on Labor Force Participation Rate -  On a Monday I wrote Understanding the Decline in the Participation Rate. Here are a few definitions - and a couple of graphs - that might help understand the issues. Definitions from the BLS:
Civilian noninstitutional population: "consists of persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities and homes for the aged) and who are not on active duty in the Armed Forces". If you look at the first graph below, the total of the Blue, Red, and light brown areas is the Civilian noninstitutional population.
"The civilian labor force consists of all persons classified as employed or unemployed". This is Blue and Red combined on the first graph.
"The labor force participation rate represents the proportion of the civilian noninstitutional population that is in the labor force." So this is Blue and Red, divided by all areas combined.
"The employment-population ratio represents the proportion of the civilian noninstitutional population that is employed." This is Blue divided by the total area.
"The unemployment rate is the number of unemployed as a percent of the civilian labor force." This is Red divided by Red and Blue combined. This is the REAL unemployment rate (some claim U-6 is the "real rate", but that is nonsense - although U-6 is an alternative measure of underemployment, it includes many people working part time).

More People Over 65 Are Still Working - U.S. labor market participation rates have been running at 30-year lows, but for one group — 65 years old and over — participation in the labor force continues to ramp up. In September, the number of those 65 and over who were employed was up 21% from the same month in 2008, while broad workforce employment was down almost 1.4%. The size of the retirement-age labor force has also increased 23% during the past four years, while the broader labor force is up less than 0.4%. The group’s average labor participation rate this year is on track to increase 0.55 percentage point compared with 2011 and 1.35 percentage points from 2010 (unadjusted), while the broader participation rate is heading for 0.40 percentage point and one percentage point drops compared with those respective periods. A combination of not saving enough for retirement, getting hammered by two brutal stock-market declines within 10 years, a tough economy and little-to-no return now on the safest assets are all likely factors affecting folks’ decision to keep working after their normal retirement age.

Much Ado About Not Much -The allegedly shocking increase in September’s tally of household employment, and the fact that the lion’s share of that increase reflected gains in those self-identifying as part time employees for economic reasons is much ado about almost nothing. ...[T]he surge in part time employment is almost certainly a reflection of faulty seasonal adjustments. We witnessed three monthly spikes in the tally for part time for economic reasons. A spike in 2010 totaled 579,000. A spike in 2011 totaled 483,000. Most recently, we witnessed a spike of 582,000. All three occurred in September. Two Pictures Tell The Story:Glance at the two charts below. The spike in monthly part timers is visible three times. Three-month average data and it is hard to see.How do we get out from under seasonals? The second chart below looks at part time, not seasonally adjusted (NSA), 12-month moving average data. Grudging declines in part time employment is the unambiguous message.

Weekly Initial Unemployment Claims declined sharply to 339,000 - The DOL reports: In the week ending October 6, the advance figure for seasonally adjusted initial claims was 339,000, a decrease of 30,000 from the previous week's revised figure of 369,000. The 4-week moving average was 364,000, a decrease of 11,500 from the previous week's revised average of 375,500. The previous week was revised up from 367,000. 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 declined sharply to 364,000. This is just above the cycle low for the 4-week average of 363,000 in March. Weekly claims were lower than the consensus forecast of 370,000. And here is a long term graph of weekly claims: Mostly moving sideways this year, but starting to decline again recently.

Weekly Unemployment Claims at 339K, A Big Drop of 30K - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 339,000 new claims number was a 30,000 decrease from the previous week's upward revision of 2,000. This is the lowest weekly number since January 19, 2008. The less volatile and closely watched four-week moving average, which is a better indicator of the recent trend, is at 364,000, down 11,500 from the last week's 375,500. Here is the official statement from the Department of Labor:  In the week ending October 6, the advance figure for seasonally adjusted initial claims was 339,000, a decrease of 30,000 from the previous week's revised figure of 369,000. The 4-week moving average was 364,000, a decrease of 11,500 from the previous week's revised average of 375,500.  The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending September 29, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending September 29 was 3,273,000, a decrease of 15,000 from the preceding week's revised level of 3,288,000. The 4-week moving average was 3,279,250, a decrease of 7,750 from the preceding week's revised average of 3,287,000.  Today's seasonally adjusted number was well below the consensus estimate of 370K. Here is a close look at the data since 2006 (with a callout for 2012), which gives a clearer sense of the overall trend in relation to the last recession and the trend in recent weeks.

Jobless Claims Fell To New Post-Recession Low Last Week -Today’s update on weekly jobless claims delivers the best news for the labor market in recent memory. It certainly one of the strongest reports for this series since the Great Recession ended in June 2009. However you describe today’s news for this leading indicator, it’s unequivocally encouraging, and powerfully so. Yes, it may be misleading, as any one data point for this volatile series can be, and so we should be wary until we see more numbers in the weeks ahead. But at the very least today’s update strengthens the case for expecting continued healing in the labor market and slow economic growth, perhaps at a moderately faster pace. Analysts in the recession-is-here-now camp, in other words, have some explaining to do. New filings for unemployment benefits dropped 30,000 last week to a seasonally adjusted 339,000, the Labor Department reports. That's the biggest weekly drop in three months, which means that the total claims last week fell to a new post-recession low. In fact, it gets better: last week's claim tally is the lowest since January 2008.

Data Massaging Continues: Initial Claims Tumble To 339K Lowest Since 2008, Far Below Lowest Expectation - This is just getting stupid. After expectations of a rebound in initial claims from 367K last week (naturally revised higher to 369K), to 370K (with the lowest of all sellside expectations at 355K), the past week mysteriously, yet so very unsurprisingly in the aftermath of the fudged BLS unemployment number, saw claims tumble to a number that is so ridiculous not even CNBC's Steve Liesman bothered defending it, or 339K. Ironically, not even the Labor Department is defending it: it said that "one large state didn't report some quarterly figures." Great, but what was reported was a headline grabbing number that is just stunning for reelection purposes. This was the lowest number since 2008. The only point to have this print? For 2-3 bulletin talking points at the Vice Presidential debate tonight. Everything else is now noise.

Which State Distorted Jobless Claims Data? - An unexpected shift in seasonal reporting by one state sent jobless claims tumbling last week. Initial jobless claims–a measure of layoffs–were down by 30,000 to a seasonally adjusted 339,000 in the week ended Oct. 6, the Labor Department said Thursday. Raw figures show claims typically drop toward the end of the quarter and spike at the start of the next quarter. A worker may decide to wait to file until the end of the quarter in efforts of boosting the weekly check because the amount is based on a rolling average of income before the layoff. As a result, there can be a bulk of claims that are not processed until the turn of the quarter. The Labor Department factors this trend into its seasonally adjusted figures. But last week, a Labor economist said one “large” state didn’t report additional quarterly figures as expected, accounting for a substantial part of the decrease. The official wouldn’t disclose which state, but said it would be released with next week’s report as usual. “One omission by one state–you wouldn’t think it would be a big deal, but in this case it drove the number down by 10%,” Economists are speculating the state could be California, the most populous state in the nation.

So Much For Today's Surprising "Drop" In Weekly Jobless Claims; California Forgot to Report 30,000 Claims; What We Learned Today - For the second time in less than a week surprising jobs numbers came into play. This morning the Labor Department reported a four-year low of 339,000 first-time claims. Some claimed this validated last Friday's jobs report, a silly notion because the two are not that closely related and a single week of data is meaningless. I still think Friday's jobs report will be revised away, but I am positive today's "surprising" report will be (for the simple reason California forgot to report 30,000 claims). Please consider Jobless Claims Data Skewed DownwardInitial jobless claims, which are a measure of the number of people recently laid off, fell by 30,000 to a seasonally adjusted 339,000, the lowest level in more than four years. But the Labor Department spokesman said the numbers were skewed by one large state that underreported its data. The spokesman declined to identify the state, but economists believe California is the only state large enough to have such a significant impact on the overall numbers. According to the spokesman, the reason that state’s claims numbers fell short was because the state left out a pile of unprocessed claims related to seasonal factors around the beginning of the fourth quarter, which began Oct. 1.

BLS: Job Openings "essentially unchanged" in August, Up year-over-year - From the BLS: Job Openings and Labor Turnover Summary The number of job openings in August was 3.6 million, essentially unchanged from July. ..The level of total nonfarm job openings in August was up from 2.4 million at the end of the recession in June 2009. ... The number of job openings in August (not seasonally adjusted) increased over the year for total nonfarm and total private, and was little changed for government. .. In August, the quits rate was unchanged for total nonfarm, total private, and government. The number of quits was 2.1 million in August, up from 1.8 million at the end of the recession in June 2009. ... Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs.  The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.  Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for August, the most recent employment report was for September.Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. This is a measure of turnover.  When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs. Jobs openings decreased in August to 3.561 million, down slightly from 3.593 million in July. The number of job openings (yellow) has generally been trending up, and openings are up about 13% year-over-year compared to August 2011.

Are Quitters Overconfident? - U.S. labor markets are a mess. Yet a growing number of workers think their job prospects are pretty good. That’s one way to read the details of Wednesday’s job openings and labor turnover survey, or Jolts, report. According to the report, the weakness in the payrolls number — which is the net change between job gains and losses — isn’t because businesses became uninterested in hiring. The number of new hires each month has hovered around 4.3 million since February. Rather, job separations — layoffs, quits, and other discharges — have been on the rise for much of this year. It must be businesses are cutting staff in reaction to weak demand and uncertainty, right? Not really. Much of the increase in separations is from workers voluntarily leaving their old jobs. People quitting their jobs now account for just over half of all job separations. (In addition to quits, layoffs and firings, job separations include a much smaller number of retirements, deaths and disability.) To be sure, the turnover in the labor markets remains quite low compared to the activity before the Great Recession. For instance, current pace of quits is about half the rate seen in the mid-2000s. But the increase in resignation letters suggests workers see more reasons to be hopeful about job prospects than is indicated by the lackluster job reports.

Job JOLTS - There 3.5 People Looking for a Job for each Position Available in August 2012 - The BLS JOLTS report, or Job Openings and Labor Turnover Survey describes the pathetic job market. Once again, little has changed, the never ending drum beat and mantra of our dead in the water labor market never ceases. The August 2012 statistics show there were 3.52 official unemployed persons for every position available*. There were 3.561 million job openings for August, a -0.9% decrease from the previous month of 3,593,000. Openings are still way below pre-recession levels of 4.7 million. Job openings have increased 63% from their August 2009 Mariana Trench trough, yet real hiring is a distant memory. There were 1.8 persons per job opening at the start of the recession, December 2007. The job market is horrific and worse than last month. Below is the graph of official unemployed, 12.088 million, per job opening.  Job openings are all types of jobs, temporary, part-time, seasonal and full-time. Hires are U.S. citizens, permanent residents, illegals and foreign guest workers. If one takes the official broader definition of unemployment, or U-6, the ratio becomes 6.5 unemployed people per each job opening. The August U-6 unemployment rate was 14.7%. Below is the graph of number of unemployed, using the broader U-6 unemployment definition, per job opening. We have no idea the quality of these job openings as a whole, as reported by JOLTS, or the ratio of part-time openings to full-time.  The rates below mean the number of openings, hires, fires percentage of the total employment. Openings are added to the total employment for it's ratio. Openings rate dropped a 10th of a percentage point from the previous month, the hires rate, which is what is important here, ticked up a 10th of a percentage point. Separations increased 0.3 percentage points from July and even worse news, that's because fires and layoffs increased by 0.2 percentage points. The job market is stagnant and a dead pool.

  • openings rate - 2.6%
  • hires rate - 3.3%
  • separations rate - 3.3%
    • fires & layoffs rate - 1.4%
    • quits rate - 1.6%

Vital Signs Chart: 3.5 Unemployed for Every Job Opening - The competition for job openings has become less intense. The number of job seekers per opening was 3.52 in August, down from 3.56 in July and 4.42 in August of 2011. For almost three years now, the U.S. has added private-sector jobs. At the same time, many discouraged workers have left the workforce, meaning less competition for those still seeking jobs.

ROSENBERG: The New Job Opening And Labor Turnover Data Isn’t Consistent With Last Week’s Employment Report : David Rosenberg noted this morning that: "There are few reports that come out monthly with as much information on the employment situation than the JOLTS data (Job Opening Labor Turnover Survey) from the BLS. It shows the churning and turning that goes on beneath the surface of the headline payroll data. And what we saw transpire in August left much to be desired, that much is for sure. Job openings fell 32,000 (or -0.9% MoM) to 3.561 million and down for a second month after a 129,000 (-3.5%) drop the prior month. Job openings now stand at their lowest level in four months. Layoffs are accelerating too with the 266,000 surge in pink slips - the most in a decade and taking the level to a three-month high. It was encouraging to see new hires rise 112,000 (+2.6%) to 4.39 million, but in all honesty, this followed two months of sharp declines which left the level some 71,000 lower than they were in May. This survey also monitors how many people quit their job in the hopes of finding a better one - a proxy for worker confidence - and this metric sagged 23,000 in August and was negative for the second month running. This sheds some light on what seemed to be a bit of a confusing jobs report released last week - the employment picture is still, to be polite, quite muddled." The chart above shows employment, the four month average of "net hires" which is hires less separations, and the four month average of hires less job openings. There are two clearly evident trends developing. The first is that the hires less jobs openings is now at levels that have historically been consistent with peaks in employment. If this metric begins to rise sharply we should begin to see total employment begin to decline. Secondly, the average of net hires has likewise peaked. If this metric turns down from current levels of consolidation it will also confirm a peak in employment.

A Restrained Outlook on Jobs - Moody’s Analytics hasn’t changed its near-term forecasts this week in its latest update to our weekly pre-election jobs tracker. But its economists add a splash of cold water to some of the numbers that have emerged in recent days. “The latest employment data look a little better,” Mark Zandi and Ryan Sweet write in a commentary, “but not enough to suggest the U.S. economy will top 2 percent annualized growth in G.D.P. soon.” For starters, they say, “we don’t put much stock in the latest sharp drop in initial claims for unemployment insurance,” which fell by 30,000 in the weekly survey on Thursday. And looking ahead to the next monthly jobs report, due the Friday before the election, Moody’s sees the unemployment rate ticking back up to 7.9 percent in October from the 7.8 percent reported (and, by some, derided) for September, with net job growth totaling 145,000, up from September but only average for the year. “The chances of a better performance look small,” the Moody’s economists write. “Businesses are unlikely to accelerate hiring until Washington resolves the problem of the fiscal cliff. A net gain of 150,000 per month through the remainder of 2012 may be the best-case scenario.”

The jobs numbers: never mind the quantity, check the quality - It's heartening to see Friday's news that the unemployment rate edged down to 7.8% last month. But let's not get too caught up in celebrations. We need to look beyond the sheer quantity of jobs being created and into the quality of those jobs – something neither presidential candidate seems very interested in talking about.Buried in the Friday's jobs report is evidence that a disturbing trend continues: the creation of more part-time jobs, many of them low-wage, taking the place of solid middle-class careers. Positions in sectors like manufacturing continued to decline last month, replaced by new jobs in the healthcare, warehousing and retail industries. A lot of these jobs don't allow workers to rack up enough hours to earn healthcare benefits – let alone break out of poverty.The key data in the new report can be found in a table called "A-8". It shows that more workers are in stuck in part-time jobs because their hours were cut back or they're unable to find full-time positions. The number of workers in this category shot up to 8.5 million in September – an increase of 581,000 from last month. This month's figure is nearly double what it was in September 2007, the eve of the recession. It's distressing to think that after 20th-century labor struggles won the battle for the 40-hour work week, the 21st-century struggle is a fight for enough working hours to make a living wage. That's not what I'd call progress

Recent Part-time Job Increase Is Not a Good Sign - Many have noted the large September increase in “part-time employment for economic reasons” reported in the BLS household survey. The 582,000 increase in these part time jobs caused total employment to rise by 873,000—a major reason for the decrease of the overall unemployment rate, and the broader U-6 measure of labor underutilization—which adds in this part-time employment—did not decline at all. This increase in part time jobs is not a good sign for the economy. Joe LaVorgna, chief US economist at Deutsche Bank, argues that the part-time increase is likely due to the election. He offers two pieces of evidence. First, there was an unusually large gain in non-private employment, defined as total employment less “private industries” employment, which thus includes campaign workers who organize grass roots efforts, make phone calls, knock on doors, or help at political conventions. Second, there was an unusually large increase in employment in the 20 to 24 year age group—a typical age for campaign workers. The explanation is appealing because both Democrats and Republicans are increasing such grass roots campaigns. State data—especially from the swing states—is needed to confirm LaVorgna’s hypothesis. But if true the increase in part time employment is not a sign of an improving economy: it implies that the jobs gain in September is largely temporary. Another view is that the increase in part-time employment is directly due to the weak recovery, and a sign that it is getting weaker. Surges in part time employment frequently occur in times of economic stress. Consider, for example, all the months in which part time employment rose by 500,000 or more. There are 13 such monthly increases in the BLS data base—Jan 1958, Mar 1958, Jan 1975, May 1980, Oct 1981, Feb 1982, Feb 1991, Sep 2001, Nov 2008, Dec 2008, Feb 2009, Sep 2010, Sep 2012. With two exceptions, every one of these occurred during recessions when the economy was sharply contracting.

They Work Long Hours, but What About Results? - It’s an unfortunate reality that efficiency often goes unrewarded in the workplace. I had that feeling a lot when I was a partner in a Washington law firm. Because of my expertise, I could often answer a client’s questions quickly, saving both of us time. But because my firm billed by the hour, as most law firms do, my efficiency worked against me.  And for me, hourly billing was a raw deal. I ran the risk of being underpaid because I answered questions too quickly and billed a smaller number of hours.  Firms that bill by the hour are not alone in emphasizing hours over results. For a study published most recently in 2010, three researchers, led by Kimberly D. Elsbach, a professor at the University of California, Davis, interviewed 39 corporate managers about their perceptions of their employees. The managers viewed employees who were seen at the office during business hours as highly “dependable” and “reliable.” Employees who came in over the weekend or stayed late in the evening were seen as “committed” and “dedicated” to their work.  One manager said: “So this one guy, he’s in the room at every meeting. Lots of times he doesn’t say anything, but he’s there on time and people notice that. He definitely is seen as a hard-working and dependable guy.” Another said: “Working on the weekends makes a very good impression. It sends a signal that you’re contributing to your team and that you’re putting in that extra commitment to get the work done.”

Real hourly wage growth: The last generation - The last generation has been marked by a stark disconnect between productivity growth (up 80 percent between 1973 and 2011) and slow or stunted wage growth. The real hourly wages of the median worker grew only 4 percent over this span, and real hourly compensation (wages and benefits) grew only 10.7 percent. The graphic at the end of this post parses this dismal wage record by gender, by wage decile, and by business cycle.For all workers, the erosion of real wages was broad and uneven from 1973 through 1995. The upturn of 1995–2000, the latter part of the 1989–2000 business cycle, brought a brief respite of across-the-board wage growth, some of which spilled past 2000 (although the wage growth from 2000–2007 skews much more to higher earners). The current recession (2007–2011) brought with it wage losses for most workers. For men, the pattern is even starker. Real wages begin falling for low-wage men in the mid-1970s, and this spread across all but the highest percentiles through 1979–1989 and through the first half of the 1990s (1989–1995). The late 1990s brings some relief, but this is short-lived: wage growth grinds to a halt in 2000–2007 and then loses ground—for all but highest earners—from 2007–2011.

Temporary employment: The trade-off between efficiency and fairness - Over the last three decades, the use of flexible forms of employment such as fixed-term and temporary agency work contracts has increased substantially throughout much of Europe. This development has been driven by government efforts to ease restrictions on temporary employment, whereas the regulation of permanent contracts has been left essentially unaltered. The reforms of temporary employment have intended to increase overall employment by lowering dismissal and adjustment costs for flexible jobs and thereby providing firms with new opportunities. Generally, two-tier labour markets can increase labour market flexibility when it seems to be politically infeasible to reduce employment protection for workers with permanent contracts. Moreover, if a considerable share of flexible jobs is ultimately transformed into regular jobs, aggregate unemployment might decline. This column points to a possible trade-off between efficiency and equity when deregulating labour markets, suggesting that flexible forms of employment can be both a boon and a bane for labour markets and for society as a whole.

Staffing Companies: How to Profit from Obamacare’s Job Outsourcing. - Obamacare is so huge and transformative, its effects will be felt far beyond just the healthcare sector; its tentacles of government control and penal taxes will permeate and affect the entire U.S. economy. According to the Heritage Foundation – a Washington think tank – Obamacare’s employer mandate will increase the cost of employing a single minimum-wage employee by $3,588 per year. The employer burden is even greater for minimum-wage employees with a family; in that case, the extra cost will be $11,026 per year. You might think that one way around this problem would be for employers to offer unskilled workers cheaper health insurance with higher deductibles. Think again. Obamacare has a non-discrimination provision that says that if an employer offers health insurance, all full-time employees must be offered the same “minimum essential benefits” and at a cost that is no higher than 9.5% of the employee’s household income.  Bottom line: there is no escape for employers of full-time workers.  The only solution is for employers to eliminate full-time employment positions for unskilled workers earning near minimum wage. Since businesses need unskilled workers for certain functions, employers will only offer temporary and part-time positions to these poor workers because temporary and part-time jobs are exempted from Obamacare’s employer mandate provisions.

Health Changes Spur Test of More Part-Time Workers - The owner of Olive Garden and Red Lobster restaurants is putting more workers on part-time status in a test aimed at limiting costs from President Barack Obama‘s health care law. Darden Restaurants Inc. declined to give details but said the test is only in four markets across the country. The move entails boosting the number of workers on part-time status, meaning they work less than 30 hours a week.  Under the new health care law, companies with 50 or more workers could be hit with fines if they do not provide basic coverage for full-time workers and their dependents. Starting Jan. 1, 2014, those penalties and requirements could significantly boost labor costs for some companies, particularly in low-wage industries such as retail and hospitality, where most jobs don’t come with health benefits. Darden, which operates more than 2,000 restaurants in the U.S. and Canada, employs about 180,000 people. The company says about 75 percent of its employees are currently part-timers.</>

Teens Stuck in the Basement - The big news with the September 2012 employment situation report is that it added 873,000 people to the count of the number of employed individuals in the U.S. thanks to an unexpected adjustment in the BLS' monthly count. Here's how that breaks down in the month-over-month change in the number of employed Americans by age group:

  • Age 16-19: +80,000 (now totaling 4,425,000)
  • Age 20-24: +368,000 (now totaling 13,482,000)
  • Age 25+: +424,000 (now totaling 125,067,000)

Overall, some 142,974,000 Americans are now being counted as having jobs.  Approximately two-thirds of the month-over-month increase of 873,000 are accounted for by individuals working part time, as the BLS added some 582,000 part time workers to its count that it had previously been missing in its monthly totals.  Looking at the change in the number of employed by age group since total employment peaked in November 2007, just ahead of the recession, we find that teens are still in the basement, with their numbers in the U.S. work force reduced by just over 1.5 million. Meanwhile, we see that 519,000 fewer young adults in the age range from 20 to 24 years old are being counted as being employed today compared to that point nearly five years ago.

The Myth That Single Mothers Don’t Work - For several decades, policy debates about cash assistance for very low-income families have focused almost exclusively on work requirements:  what work activities should welfare recipients have to perform, and for how many hours, to remain eligible?  These work requirements, in turn, are rooted in a basic assumption:  that mothers who have never been married and who have a high school education or less — a high-poverty group that comprises the majority of cash assistance recipients — are much less likely to work than others with comparable levels of education. That assumption is wrong — and it’s been wrong for the last decade.  Among women with a high school education or less, never-married mothers are just as likely to work as single women without children and more likely to work than married women with children.  (See graph.) The share of never-married mothers who worked jumped from 51 percent in 1992 to 76 percent in 2000, eliminating a 25 percentage-point gap between their employment rate and that of single women without children.

Without Work, Work-Based Welfare Does Not Fare Well -This may seem only obliquely related to the political hurly-burly of the moment, but I think it’s connected. The figure below, from Danilo Trisi at CBPP, shows the employment rates (share of the population at work in the paid labor market) of three categories of women: married and never-married moms, and single women without kids.   All the women in the sample are between 20 and 49 and have no more than a high-school degree. Why these groups?  Because this is an analysis of work-based welfare reform and its interaction with the demand side of the job market.  More plainly, it asks how realistic it is to expect less-educated, never-married moms to work when the jobs are—and aren’t—there? The other women form a kind of control group.  Their employment rates are affected by the economy, but not by the work requirements that were at the core of the 1990s welfare reform, since they are either ineligible (no kids) or much less likely to be on TANF (i.e., welfare). In the 1990s, a number of factors explain the sharp increase in the employment rates of never-married moms.  The 1996 welfare reform bill, which predicated benefit receipt on paid work, is of course part of the explanation, but the trend began before the bill was passed so other factors must have also been in play.

US Black Middle Class Is Suffering -  For months, the presidential candidates have been trying to court the middle class, extending offers of tax cuts, lower gas prices and better schools. The message: America does well when the middle class does well. The corollary: We feel your pain. But much less attention has been given to the black middle class, which since the recession and slow recovery has suffered massive decreases in wealth and high rates of home foreclosures. Blacks overall are experiencing a 13.4 percent unemployment rate, according to figures released Friday, much higher than the national rate of 7.8 percent. The Pew Charitable Trusts' Economic Mobility Project recently released a report projecting that 68 percent of African-Americans reared in the middle of the wealth ladder will not do as well as the previous generation. In August, the National Urban League's State of Black America 2012 report found that nearly all the economic gains that the black middle class made during the last 30 years have been wiped out by the economic downturn.

Arkansas Republican: Slavery was ‘blessing in disguise’ that ‘rewarded’ blacks with U.S. citizenship - A Republican member of the Arkansas state senate’s self-published memoir claims that for black people in America, slavery was a “blessing in disguise,” that, if they were physically hardy enough to survive it, “someday be rewarded with citizenship in the greatest nation ever established upon the face of the Earth.” According to the Arkansas Times, Rep. Jon Hubbard, of Jonesboro, included these thought and others in his book, Letters to the Editor, Confessions of a Frustrated Conservative, which was initially written about and excerpted by writer Michael Cook at Talk Business.

Walmart strikes spread to more states - For the second time in five days – and also the second time in Walmart’s five decades – workers at multiple U.S. Walmart stores are on strike. This morning, workers walked off the job at stores in Dallas, Texas; Miami, Florida; Seattle, Washington; Laurel, Maryland; and Northern, Central, and Southern California. No end date has been announced; some plan to remain on strike at least through tomorrow, when they’ll join other Walmart workers for a demonstration outside the company’s annual investor meeting in Bentonville, Arkansas. Today’s is the latest in a wave of Walmart supply chain strikes without precedent in the United States: From shrimp workers in Louisiana, to warehouse workers in California and Illinois, to Walmart store employees in five states. “A lot of associates, we have to use somewhat of a buddy system,” Dallas worker Colby Harris said last night. “We loan each other money during non-paycheck weeks just to make it through to the next week when we get paid. Because we don’t have enough money after paying bills to even eat lunch.” Harris, who’s now on strike, said that after three years at Walmart, he makes $8.90 an hour in the produce department, and workers at his store have faced “constant retaliation” for speaking up.

Walmart worker strikes go viral, hitting 28 stores in 12 states - Walmart workers who recently went on strike in Illinois and California appear to have inspired some of their fellow big box employees, and now it looks like the movement is going viral. Labor leaders said Tuesday, just one day before Walmart’s annual shareholder meeting, that workers at 28 stores in 12 states walked out and went on strike to demand the anti-union employer raise wages, improve working conditions and end retaliations against employees who attempt to form unions. “It’s not a hard sell because these people are tired of being treated the way we are being treated by Walmart,” Evelin Cruz, a striking Walmart worker in the Los Angeles area, told Raw Story on Wednesday. “They disregard us as workers. They think that we are machines, we should have no emotions. We should not have families. We should not have the right to speak. So it’s pretty easy to convince people to get on-board. We need to have more voices around the country being heard with the same message, because it is the same situation in every store and throughout their supply chain.”

Walmart strikes dramatize third-world inequities - The series of small strikes at Walmart stores around the country reminds me of the first outbreak of what became the Arab Spring, in the sense that it’s so unexpected and requires so much courage that you can’t help being astonished.  Democratic protest at Walmart is rarer than in any Arab dictatorship. Walmart, after all, is far more powerful financially than Tunisia, where the first Arab Spring protest occurred. In fact, Walmart’s $400 billion-plus revenues are about 10 times larger than the entire GDP of Tunisia. But Walmart is very like Tunisia in two key ways: its workers tend to be impoverished while the benefits of its economic activity accrue to a tiny elite (principally, the Walton family). The World Bank reports that Tunisia is a highly unequal society:“Tunisia continues to be a low-wage, low-value added economy, unable to absorb an increase in skilled workers. Cronyism and anticompetitive practices allowed a privileged minority to enjoy the lion’s share of the benefits of growth and prosperity.”The striking Walmart workers’ complaints about poverty level wages contrast sharply with the Walton family’s shocking wealth, which is nearly $90 billion: “I make $8.90 an hour and I’ve worked at Walmart for three years,” said Colby Harris, 22, of Dallas. “Everyone at my store lives from check to check and borrows money from each other just to make it through the week.” The six heirs to Walmart founder Sam Walton, meanwhile, are worth $89.5 billion, or as much as the bottom 41.5 percent of Americans combined.

Walmart’s Black Friday ultimatum - One day after Walmart employees in twelve states launched a major strike, today workers issued an ultimatum to the retail giant: Stop retaliating against workers trying to organize, or the year’s most important shopping day, the Friday after Thanksgiving, will see the biggest disruptions yet. The announcement comes as 200 workers – some of them currently striking – have converged in the Walmart’s Bentonville, Arkansas hometown outside the company’s annual investors meeting. It offers a new potential challenge to Walmart, and a new test for OUR Walmart, the labor-backed organization that’s pulled off the first two multi-store U.S. strikes in Walmart history. If Walmart doesn’t address OUR Walmart’s demands, said striking worker Colby Harris, from Dallas, “We will make sure that Black Friday is memorable for them.” He said that would includes strikes, leafleting to customers, and “flash mobs.” Harris was joined on a press call announcing the deadline by leaders of the National Consumers League, the National Organization of Women, and the Labor Council for Latin American Advancement, three of the national organizations that have pledged support for the workers’ efforts. Absent a resolution, said NOW President Terri O’Neill, NOW members will join Walmart workers outside stores on Black Friday to ask customers “whether they really want to spend their dollars on a company that treats workers this way.”

Walmart, the Most Powerful Company in the World, Admits that Protests and Strikes Lead to Wage Increases - For the first time ever, a strike is taking place in America aimed at the most powerful company in the economy: Walmart. Workers at Walmart stores across the country, as Josh Eidelson reports, are threatening to walk out on Black Friday, the biggest shopping day of the year. These labor actions are coming on top of earlier labor actions at Walmart’s warehouse contractors linked to “non-payment of overtime, non-payment for all hours worked, and even pay less than the minimum wage.” The possible strike could be very significant, because the target of the strike is the most important driver of the race to the bottom economy. Walmart is massive – the company is the largest private employer in the US, with more than 2 million employees. The average American household spends $3500 at Walmart, and in 2006, the company alone represented 2.3% of the American GDP. The company is so powerful that when a Walmart Supercenter comes into your community, the entire community’s obesity rate increases.  Though known for suppressing wages, I found evidence that the company is willing to change working conditions with sufficient pressure. According to St. Louis Federal Reserve President William Poole, the last time there was significant labor unrest at Walmart, in 2006, the company raised wages at 700 stores.  On March 27-28, 2006, Poole said that his Walmart contact told him the company would not raise wages, and was planning on moving their work force increasingly towards part-time employment. “About 20 percent of their associates are part time and that they are going to be increasing that share to 40 percent so they can staff at peak times and get more productivity out of their workforce.”

Why Walmart, Why Now? - For years, the world’s retail behemoth, Walmart, has seemed impervious to organizing attempts. Unions, specifically the United Food and Commercial Workers (UFCW), have attempted to organize retail workers at the company—long known for both its low prices and poverty wages—but the company’s aggressive union-busting has always won the day. So it comes as a surprise to many to hear, seemingly out of the blue, that workers in both the retail and distribution arms of the company have walked off the job in Illinois, Maryland, Dallas, California, and elsewhere over the last month. Striking warehouse workers have organized with Warehouse Workers United in California and Warehouse Workers for Justice in Illinois; retail workers around the country with OUR Walmart—all organizations affiliated with unions, but which aren’t unions themselves.  In These Times asked labor historian Nelson Lichtenstein to shed some light on the recent wave of Walmart worker unrest. Lichtenstein, director of the Center for the Study of Work, Labor and Democracy and a professor of history at the University of California-Santa Barbara, has long observed both Walmart’s business practices and workers’ attempts to organize there. He is the author of The Retail Revolution: How Walmart Created a Brave New World of Business.

Why We Should All Care About the Walmart Strikers - As Josh Eidelson reported last week in Salon, retail workers at Walmart walked off the job in a strike for the first time in the company’s fifty-year existence. And he reports today that the strikes have spread: workers in Dallas, Texas, and Laurel, Maryland, have joined the original strikers in Southern California stores, and workers in other cities are expected to join in. Walmart is famous (or infamous) for successfully warding off unionization at its stores during its entire history, and these strikes were, as Eidelson reports, “in protest of alleged retaliation against their attempts to organize,” as well as a call for improved benefits and staffing. While not a union making formal demands, the group behind the strikes, OUR Walmart, presented a “Declaration of Respect” to the company in June. It called for, among other things, a minimum of $13 per hour, full-time jobs for those who want them, predictable work schedules, affordable healthcare and wages and benefits that don’t mean employees have to turn to government assistance to fill in the holes. Walmart says the average hourly wage for its full-time workers across the country is $12.40, but an IBISWorld report put that figure at $8.81, barely above the minimum wage. And studies have shown that Walmart workers are more likely than others in the industry to rely on government benefits.  It’s not just the workers who walked off the job that have something at stake in taking on Walmart. As these sorts of jobs increasingly dominate our workforce, we’ll be forced more and more to ask not just how many jobs the economy is adding, but what kind of jobs. If Walmart and its ilk supply most of them, families will have little money to rely on, few benefits and chaotic work schedules. All eyes should be on this historic strike and what gains Walmart’s workers are able to make in negotiating higher pay and better benefits.

Explaining Class Warfare - Last month one hundred and fourteen thousand unemployed moochers...suddenly yank the government teat out of their mouths, get off the couch for forty hours a week? Why? I say follow the money; cause I found out, that right around the time those people got those jobs...they started getting paid! And just where does that money come from? Right out of the pockets of the job creators. How's that for your socialist redistribution of wealth? Folks, it's called class warfare.  Mr Colbert has created a new party that will issue a certificate to sooth the hurt of the job creators. The Certificate of Richness issued by:  Protecting Industry Titans and Yachtsman party. The P.I.T.Y. party. And right on cue: If President Obama is re-elected and raises taxes, Westgate Resort's David Siegel says he will have to lay off workers and downsize his company -- or even shut it down.

No Safe Haven: Shrinking Pool of Affordable Housing Creates Additional Hardship for Survivors of Domestic Abuse - For survivors of domestic violence (DV), the need for affordable housing is dire. According to the 2011 Domestic Violence Counts National Census, lack of housing comprised 64 percent of reported unmet needs for DV survivors. DV has long been cited as a cause of homelessness. And in order to avoid homelessness, many DV survivors choose to stay with abusers because they cannot afford to live on their own. Against this backdrop, it is especially troubling that affordable housing options in the United States are dwindling overall. Last month, the Institute for Children, Poverty and Homelessness (ICPH) issued a policy brief about the shrinking pool of affordable rental housing options throughout the United States. Since the economy took a hit in 2008, rising rent costs and inadequate levels of subsidized housing have made it harder for many Americans to afford a place to live, ICPH found. These conclusions have been corroborated by other organizations including the National Low Income Housing Coalition (NLIHC). In its February 2012 Housing Spotlight, the NLIHC pointed out that low income renters have been competing for a smaller and smaller pool of affordable housing. (Low income is defined by the Department of Housing and Urban Development (HUD)’s median family income categories.)</ P>

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

• Overall conditions: Economic activity in the Seventh District continued to expand in late August and early September, but again at a slow pace.
• Consumer spending: Growth in consumer spending was little changed.
• Business Spending: Business spending continued to increase slowly. Capital expenditures were proceeding as planned and inventories were generally indicated to be at comfortable levels.
• Construction and Real Estate: Growth in construction moderated some. Single-family construction continued to rise at a slow but steady pace, while multi-family construction was stronger and nonresidential construction weaker by comparison.
• Manufacturing: Manufacturing production edged lower, with contacts reporting that new orders had slowed considerably.
• Banking and finance: Credit conditions continued to improve, with both credit spreads and market volatility decreasing. Banking contacts reported continued weak demand for business loans.
• Prices and Costs: Cost pressures increased some, primarily due to a rise in food and energy prices. Prices for construction materials also increased while most metal prices were steady. Wage pressures remained moderate.
• Agriculture: The corn and soybean harvest began a few weeks earlier than normal, as plants were dry due to the drought. In some areas, late rains helped produce higher-than anticipated yields, but these made only a small dent in the large drought-related losses.

Wall Street's Next Profit Scheme - So having caused the fiscal crisis, the legacy of decades of property tax cuts financed by going deeper into debt are now to be paid for by leasing or selling off public assets. Chicago has leased its Skyway for 99 years to toll-collectors, and its parking meters for 75 years. Mayor Emanuel has hired J.P.Morgan Asset Management to give "advice" on how to sell privatizers the right to charge user fees for previously free or subsidized public services. It is the modern American equivalent of England's Enclosure Movements of the 16th to 18th century. By depicting local employees as public enemy #1, the urban crisis is helping put the class war back in business. The financial sector argues that paying pensions (or even a living wage) absorbs tax revenue that otherwise can be used to pay bondholders. Scranton, Pennsylvania has reduced public-sector wages to the legal minimum "temporarily," while other cities are seeking to break pension plans and deferred-wage contracts - and going to the Wall Street casino and play losing games in a desperate attempt to cover their unfunded pension liabilities. These recently were estimated to total $3 trillion, plus another $1 trillion in unfunded health care benefits.

New Model Legislation Would be Great First Step Toward Subsidy Reform -  Yesterday, Good Jobs First released new model legislation to increase the transparency, accountability, and effectiveness of state and local subsidies, which I estimate to total $70 billion per year. If states were to adopt these laws, subsidy administration would improve dramatically, and if all states adopted them, it would put an end to job piracy as well.  The model legislation revolves around four principles. First, company-specific, web-based reporting of subsidies received and compliance with job quality and other performance requirements. Second, there would be standards for job creation and job quality (wages, percent full time, benefits, etc.) set that would be specific to the locality. Third, states would be required to claw back subsidies if companies did not reach and maintain their job creation and job quality commitments. The legislation gives specific language on how much should be recaptured under various scenarios (a bigger percentage for three years of failure than one year, for example). Fourth, under the Good Jobs First proposals, states would create Unified Economic Development Budgets, which would track both tax expenditures and on-budget subsidies in every state agency that provided them.

The latest pickup in state and local government jobs is not sustainable - As economists focus closely on the US jobs data from recent months to gauge the state of the labor markets, one unusual trend emerges. After years of declines, the number of government employees has increased steadily during the third quarter. This was a surprise. It turns out that most of these new hires were at the state and local level. It's difficult to see what's driving this trend, though signs point to increased hiring in education.  Washington Post (Suzy Khimm): - This month’s jobs report showed a few notable upticks in hiring, including for governments at the state level. State governments added 13,000 jobs in September, marking their third straight month of public gains. It’s been a slow recovery for state employees, but the numbers have generally been creeping upwards since December 2011, when state government employment was at its lowest level since the beginning of the recession. The gains were concentrated in education, which one would expect employment to increase as we head towards the beginning of the school year. But the numbers are seasonally adjusted, meaning they take that annual bump into account. Is this the beginning of a recovery in public employment? After all the WP article was entitled "Government jobs are finally starting to come back". Unlikely. According to BNP Paribas, state and local governments are still running near record deficits (chart below), which makes this recent hiring trend unsustainable. Furthermore we may be reading into these numbers too much because the employment data from municipalities may simply be flawed.

States Roll Back Support for Childcare as Parents Need it Most - Single mothers have had it rough during the recession. Their unemployment rate hit a 25-year high, just under 15 percent, in the midst of the recovery. That’s since come down, and last month’s jobs report even showed a continuing decline to 11.3 percent. But news out today darkens that picture. Just as these moms are trying to get back to work, states are backtracking on the childcare support so many of them depend on. A report released today from the National Women’s Law Center shows that childcare assistance policies worsened in 27 states as compared to last year, making it the second year in a row in which things got worse instead of better. Not only that, but the situation is even crappier compared to a decade ago. According to the new report, seven states lowered their income eligibility limits last year and 14 kept them the same, despite inflation, meaning that fewer families were able to qualify for help. Even worse, in 23 states the limits were lower than in 2001. Things weren’t necessarily better for those who still qualified, though. Twenty-three states had waiting lists or frozen intake for assistance, up from 22 last year and 21 in 2001, putting too many families in assistance limbo. And even those parents who qualified and made it off the wait lists may have had it bad: in nearly a fifth of all states, families had to pay a higher percentage of their income in co-payments than they did last year. What does this have to do with unemployment? It sure makes it hard to get a job, let alone get to multiple job interviews, if you can’t afford childcare. Parents are expected to shell out a hefty sum. The pricetag can balloon to as much as $11,700 a year for a four-year-old in full-time center care. In fact, the cost of such care exceeds the median cost of rent in every single state.

The Muni Bond Market, Mired in Its Past - THE $4 trillion market in municipal bonds, which finances American life where it gets lived, is stuck in the Dark Ages. It has been for decades.  In yet another attempt to pull this market into modern times, regulators put states, cities and municipal issuers on notice three years ago. No longer would they be allowed to stint on disclosing basic financial information — the kind that investors in, say, public corporations, have long relied on. With an expanded and accessible Web site designed by regulators, municipal bond investors could finally find out what was going on.  Or not.  Some issuers of municipal bonds don’t seem to have gotten the message. More disturbing, regulators don’t seem to care.

California Struggles With High Gas Prices - Drivers in Southern California awoke Friday to find that their gasoline prices had spiked by nearly 20 cents a gallon overnight as a result of fuel shortages caused by a series of refinery disruptions in recent weeks. Some gas stations around the Los Angeles area were forced to shut off their pumps because of rationing by suppliers, and they displayed makeshift signs explaining that the shortages were not their fault. Drivers formed long lines at stations that did have gas, with some stations raising prices to more than $5 a gallon for regular gasoline. Prices had been rising for several days, making California the most expensive state for gasoline. On Friday, Californians paid an average of $4.49 a gallon for regular — 70 cents above the national average. The immediate cause of the California price rise was a power failure at Exxon Mobil’s Torrance, Calif., refinery on Monday that shut down some production units at the 150,000-barrel-a-day facility. The company on Friday said the refinery had resumed normal operations. Supplies on the West Coast had already been tight because of an Aug. 6 fire at Chevron’s 245,000-barrel-a-day Richmond, Calif., refinery, which has still not been restored to full production. California typically has substantially higher gasoline prices than most of the country because of its tough environmental regulations and high taxes. Gasoline supplies are traditionally tight this time of year as refiners do maintenance work to switch from summer to fall gasoline blends mandated by the California pollution-reduction regulations. But this year, energy experts say, the local gasoline market is particularly chaotic because of the refinery shutdowns.

California gas price spike - Gasoline prices in California are usually 30-40 cents a gallon higher than the rest of the country. About 20 cents of that is due to higher gasoline taxes in California and much of the rest from the fact that we use a higher quality of gasoline in order to reduce air pollution. But the average retail price of gasoline in California jumped 50 cents a gallon last week, even as the price elsewhere in the country was heading down. The average price in the Golden State on Friday was $4.64 a gallon. That compares with a California high of $4.38 reached this spring and $4.59 in June of 2008. California has experienced a series of disruptions to gasoline supplies. The Chevron refinery in Richmond (across the bay from San Francisco) has a normal capacity of 243,000 barrels per day, or 8.5% of the total petroleum products supplied to Petroleum Administration for Defense District 5, of which California is a part. But a fire at the Richmond refinery in August has significantly reduced its production. The Kettleman-Los Medanos pipeline, which carries 85,000 barrels per day of crude oil to the San Francisco Bay Area, has been closed since mid-September due to organic chloride contamination. And on Monday, a power outage shut down ExxonMobil's 149,000-barrel-per-day Torrance refinery in L.A.Two factors allow the price in California to spike much higher than the rest of the country. First, a different blend is required to meet California air quality standards. Second, there is little pipeline capacity (blue lines on graph below) to bring in refined product from elsewhere.

Gas Prices Rise Again Overnight in California - Gasoline prices rose again in California on Sunday after a series of refinery disruptions caused fuel shortages that experts say could continue to burden motorists into next week. The average price of regular gasoline in the state jumped to about $4.65 a gallon on Sunday, 84 cents higher than the national average and by far the highest in the country, according to AAA’s Daily Fuel Gauge Report. Hawaii had the next highest average, at $4.41. Prices have been rising for about a week and jumped by nearly 20 cents a gallon, to $4.49, overnight Friday. Prices rose to $4.61 a gallon on Saturday before climbing again on Sunday.

Governor Brown solves California's gas price problem - Though the record gasoline prices paid by Californians last week received national attention, it was from the beginning strictly a California problem.  California has separate gasoline requirements from the rest of the nation, and also requires a different, more-expensive fuel for summer sales relative to winter. Because refiners don't want to be stuck holding the summer blend through the winter, inventories of summer blend are intentionally low this time of year. That creates a problem when two of the main refineries producing the California summer blend get knocked out, as we just observed.But two important developments have changed the picture. First, the Torrance refinery was back in operation by Friday. Second, on Sunday Governor Jerry Brown (D-CA) directed the California Air Resources Board to allow use right now of the winter blend instead of waiting as usual until the first of November, a move that the Board has implemented. This allows existing stocks of the winter fuel to be sold to add to the supply of the summer blend. Moreover, because a greater volume of the winter fuel can be created from a given barrel of oil, Brown's move allows more California gasoline to be produced each week.

Where People Walk to Work - The above map shows the 100 metro areas with the highest fraction of people who primarily walk to work (or at least make that claim to surveyors)  This comes from Governing's By The Numbers blog.  That big circle in upstate NY is Ithaca, where I live, and where just over 15% of people say they walk to work.  Ithaca is a pretty compact walkable place, so I can well believe this nine months out of the year.  Color me a bit skeptical as to how many are walking in January, however. The top sections of the list are dominated by small college towns.

Moody's reviews 32 California cities' ratings - Moody's Investors Service is reviewing its lease-backed obligation or general obligation ratings of 32 cities in California, mostly for potential downgrades, reflecting fundamental economic pressure in the state. The firm also downgraded the pension obligation bonds of eight cities and one pooled financing. Moody's said it identified these securities as part of a review launched in mid-August on the credit standing of 95 rated cities in California. Moody's has noted cities in California have been affected by recent economic and property market downturns, limitations on their ability to raise property taxes, rising fixed costs and precedents that make bankruptcy filings a potentially viable means to address economic pressures. The cities on review for a downgrade include Berkeley, Fresno, Sacramento, Santa Barbara and Santa Monica.

Cities hit by recession ask voters to approve more debt -- Houston-area schools want to borrow $1.9 billion to modernize most of the high schools, while Seattle says it needs $290 million to upgrade a seawall protecting the downtown waterfront so it can withstand an earthquake. San Francisco wants to sell $195 million of debt to repair and improve worn-out parks and playgrounds that it says have been "loved to death" Voters in these and a number of other big U.S. cities -- some with already-high debt loads -- will decide on Election Day whether to borrow even more or face prospects for reduced services or higher taxes. The United States needs $2 trillion of infrastructure upgrades, according to a 2011 report by the Urban Land Institute and Ernst & Young. Many of these roads, bridges, dams, water and sewer plants serve major metropolitan areas, but the recession left many cities struggling to pay for capital projects and services. Elected leaders are wary of asking voters to approve more borrowing.Some cities are reaching levels of borrowing that fiscal monitors call critical, a no-go zone where high debt service costs can crowd out education, police and fire protection, or other priorities. A look at 10 prominent cities reveals markedly different debt profiles, according to data Moody's Investors Service compiled for Reuters.

New York's boom in homelessness | Watch the video - New York City has seen a nearly 20% spike in homelessness over the past year. The city now deals with homeless numbers not seen since the great depression

Cities pass rules against homeless -- Army veteran Don Matyja said he was getting by all right until he got ticketed for smoking in the park. Matyja, who has been homeless since he was evicted nearly two years ago, had trouble paying the fine and getting to court — and now a $25 penalty has ballooned to $600. In Orange County, a number of cities have recently passed ordinances that ban everything from smoking in the park to sleeping in cars to leaning bikes against trees in a region better known for its beaches than its 30,000 homeless people. Cities have long struggled with how to deal with the homeless, but the new ordinances here echo what homeless advocates say is a rash of regulations nationwide as municipalities grapple with how to address those living on their streets within the constraints of ever-tightening budgets. The rules may go unnoticed by most, but the homeless say they are a thinly veiled attempt to push them out of one city and into another by criminalizing the daily activities they cannot avoid.

Arkansas Republican endorses death penalty for children - A man running as a Republican for State Representative in Arkansas published a book in which he endorses the death penalty for rebellious children and much, much more. In his book “God’s Law: The Only Political Solution,” published in April, former Arkansas Department of Human Services attorney Charlie Fuqua explains that he supports killing wayward kids because that’s what a Bronze Age tribe did in his favorite religious text. “The maintenance of civil order in society rests on the foundation of family discipline,” he wrote, according to an excerpt published by The Arkansas Times. “Therefore, a child who disrespects his parents must be permanently removed from society in a way that gives an example to all other children of the importance of respect for parents. The death penalty for rebellioius children is not something to be taken lightly. The guidelines for administering the death penalty to rebellious children are given in Deut 21:18-21.”

Study: Getting rid of lead does wonders for school performance - Over the past 50 years, after scientists realized that even minute doses of lead can have harmful effects, policymakers have been steadily pushing to eradicate the stuff from the environment. In the United States, no one uses lead-based paint or fills up their cars with leaded gasoline anymore—those were phased out back in the 1970s and 1980s. Lead levels in the air have dropped 92 percent since then. By most accounts, this was a savvy investment. There’s ample evidence that lead exposure is extremely damaging for young children. Kids with higher lead levels in their blood tend to act more aggressively and perform more poorly in school. Economists have pegged the value of the leaded gasoline phase-out in the billions or even trillions of dollars. Some criminologists have even argued that the crackdown on lead was a major reason why U.S. crime rates plunged so sharply during the 1990s.

In Pilot Program, Student IDs Track the Students — For Tira Starr, an eighth grader at Anson Jones Middle School, the plastic nametag hanging around her neck that she has decorated with a smiley face and a purple bat sticker offers a way to reflect her personal flair. For administrators, it is something else entirely: a device that lets them use radio frequency technology —  with scanners tucked behind walls and ceilings —  to track her whereabouts. Anson Jones is the first school in San Antonio’s Northside Independent School District to roll out the new nametags, which are part of a pilot program intended to ensure that the district receives all of the state dollars to which it is entitled. In Texas, school finance is a numbers game: schools receive money based on the number of students counted in their homeroom classes each morning. But the radio frequency identification nametags have prompted concerns from civil liberties groups and electronic privacy watchdogs, which fear a Big Brother atmosphere in Texas public schools.

Charter Schools Fail the Math Test in Battleground Chicago -  Yves Smith - Last year, the New York Times’ Nicholas Kristof highlighted a fundamental inconsistency in the increasingly heated discussion about public education in America. In other walks of life, no one would challenge the notion that you get what you pay for. Kristof pointed out that it only made sense that if you wanted better educational outcomes in the US, you need to pay teachers more. But the public wants a pony: higher quality education while demonizing teachers and cutting their pay. In the 1970, teacher starting pay in New York City was only $2000 below that of starting salaries at top law firms. But now, as the relative status and pay of public school teachers having declined, so too has educational achievement among teachers. A recent McKinsey study found that nearly half of the K-12 teachers in the US had graduated in the bottom third of their college classes. It recommended increasing starting teacher pay from an average of $39,000 to $65,000 in high needs classes in order to attract instructors who had graduated in the top third of their classes. So why should we be surprised that charter schools, which pay teachers less than public school teachers in the same geographic area, are having trouble delivering the educational goods? And remember, charter schools do have a serious advantage over public schools: they don’t have to accept all comers. Parents apply, and the charters screen both the parents (for level of involvement) as well as the students. So you’d expect charter schools to report better outcomes simply by virtue of self-selection, by skimming off students and parents who are more serious about education. So how are those charter schools actually doing? As Ben Jarovsky reports in Chicago Reader …the foes of the teachers’ union declare that we should pay close attention to the all-important standardized test scores. So let’s take a look. There are 541 elementary schools in Chicago. Based on the composite ISAT scores for 2011—the last full set available—none of the top ten are charters. None of the top 20, 30, or 40 either. In fact, you’ve got to go to 41 to find a charter. Take a bow, CICS Irving Park!

Visualizing America's Education - Education plays a fundamental role in American Society. This ultimate infographic from provides the ultimate visualization of what all you tax dollars ($602.6bn on elementary and secondary education) and student loan debt (57.6mm people over 25 have at least a Bachelor's degree) has created - for instance: only 7% of <34-year-olds had gone to college in 1970, as opposed to 18.9% currently!

Online education experiments at the margin - Psst, you want to know what academics talk about these days? Not research. Not annoying students. Not even exceptional students. No, they talk about online education. And for economists like myself, they talk about it a lot. The reason is that we economist academics know which side our bread is buttered on. While, like all other academics, we may extoll the virtues of fundamental research we do, what pays the bills is the education service. And we know that at Universities that service is pretty much the same as it always has been. Lectures are given to relatively large groups of students, professors pick a set of assessment and then they enforce the rules. And the comforting news is that the traditional way of doing things makes professors themselves the scarce resource. It is basic competitive strategy: if you know you are scarce you can afford to live more comfortably. If you teach a specific set of subjects, chances are you are the only one in your institution who can do so. Now take one look at online education and you can see the issue. Your students, previously beholden to you to learn a particular subject, potentially may be able to select the ‘best in breed’ from the world. To be sure, a professor can still point to the problem of how to assess performance. But cost-minded University administrators and, more worryingly, cost-minded students may wonder whether a professor’s salary is worth paying just for accreditation.

$1.4 trillion in pension fights foreshadowed in RI - Cities and states around the country are shoring up battered retirement plans by reducing promised benefits to public workers and retirees. All told, states need $1.4 trillion to fulfill their pension obligations. It's a yawning chasm that threatens to wreck government budgets and prompt tax hikes or deep cuts to education and other programs. The political and legal fights challenge the clout of public-sector unions and test the venerable idea that while state jobs pay less than private-sector employment, they come with the guarantee of early retirement and generous benefits. The actions taken by states vary. California limited its annual pension payouts, while Kentucky raised retirement ages and suspended pension increases. Illinois reduced benefits for new employees and cut back on automatic pension increases. New Jersey last year increased employee retirement contributions and suspended pension increases. Nowhere have the changes been as sweeping as in Rhode Island, where public sector unions are suing to block an overhaul passed last year. The law raised retirement ages, suspended pension increases for years and created a new benefit plan that combines traditional pensions with something like a 401(k) account.

Obama ready to deal on Social Security? - Lynn Parramore notes the part of Social /security in the debates: Watching Wednesday night’s presidential debate, you’d have to be a crack political code reader to know what Obama was really saying about Social Security. It was quick. It was subtle. But it was one of the most telling moments of the debate. First, let’s get a few things straight. Social Security is solvent. It’s America’s most successful retirement plan to date. It’s extremely popular across party lines . Social Security adds not a penny to the deficit. And, as Nancy Altman has argued , it's “the poster child for fiscal responsibility.” The program is prudently managed, cost-effective, and carefully monitored. “Lehrer: Do you see a major difference between the two of you on Social Security? Obama: You know, I suspect that, on Social Security, we've got a somewhat similar position. Social Security is structurally sound. It's going to have to be tweaked the way it was by Ronald Reagan and Speaker -- Democratic Speaker Tip O'Neill.” Ladies and gentleman, that was the sound of your president offering to screw you on your retirement. This revealing exchange was followed by some politically strategic talk by both candidates about how current retirees shouldn’t be worried, because, as we all know, their votes are needed in the short term. But the rest of us? Be very, very worried.

Obama: Giving Away Social Security: Here is Mitt Romney’s proposal to cut Social Security benefits, from the Romney campaign website: First, for future generations of seniors, Mitt believes that the retirement age should be slowly increased to account for increases in longevity. Second, for future generations of seniors, Mitt believes that benefits should continue to grow but that the growth rate should be lower for those with higher incomes. In other words, cuts in benefits. In the first debate, I was waiting for President Obama to go to town on this. Instead, Obama had this to say: LEHRER: "Mr. President. Do you see a major difference between the two of you on Social Security?" OBAMA: "You know, I suspect that, on Social Security, we’ve got a somewhat similar position. Social Security is structurally sound. It’s going to have to be tweaked the way it was by Ronald Reagan and Speaker — Democratic Speaker Tip O’Neill." He’s got a similar position to Mitt Romney’s? On Social Security? Does this man just want to hand the presidency to Romney on a platter?

Obama Campaign “Clarifies” Approach on Social Security - After being criticized for emphasizing points of agreement on Social Security during Wednesday night’s debate, President Barack Obama’s re-election campaign delivered an email to supporters clarifying their response, which left a number of key details unanswered and retained a degree of flexibility for the President over his choices for the program. The President said then that he believed he and Mitt Romney share a “somewhat similar position” on the topic. Cutter expanded on these remarks, pointing out areas of agreement and disagreement: President Obama and Romney agree that we need to make gradual changes to make sure Social Security stays solvent over the long term. The disagreement is over how to do it — and that’s where President Obama and Romney have fundamentally different ideas. President Obama will under no circumstances agree to put your retirement at risk by privatizing Social Security, and he will reject any plan that slashes Social Security benefits. Because Romney opposes any effort to raise a single penny in new revenue, his Social Security plan is forced to rely solely on big benefit cuts to maintain solvency — analysis of a similar plan showed current workers would see cuts of up to 40 percent that would badly hurt their financial security

The End of Social Security Self-Financing: What Next? - Today the Mercatus Center is releasing my study entitled, “The End of Social Security Self-Financing: What Does it Portend for Social Security’s Future?” The piece explores the implications of the Obama Administration and Congress having recently cut the Social Security payroll tax and financed benefit payments from the general government fund, thereby ending decades of bipartisan commitment to FDR’s original vision for Social Security -- that it be a self-financing program in which total benefits were limited by the amount of worker contributions. This financing change has the potential to fundamentally transform the future Social Security debate, possibly affecting important policy choices ranging from its rate of benefit growth, to whether a contribution-benefit link is maintained, to how eligibility ages are set, to whether formal means-testing is adopted. News reports indicate that the payroll tax cut will be allowed to expire at the end of this year. There are, however, no indications that lawmakers will reverse the substantial general revenue subsidies that were deposited in the Social Security Trust Funds to compensate for it. Approximately $217 billion in such subsidies have been provided to Social Security. These subsidies do not reflect any incoming tax collections and their costs are simply being added to the national debt. Moreover, because these transfers to the Trust Funds earn interest, by 2033 they will have compounded to require future taxpayers to subsidize roughly $600 billion in Social Security benefit payments beyond what beneficiaries paid for. It remains to be seen what effect this policy change will have on public perceptions that Social Security is an “earned benefit.

Mitt Romney's Social Security Plan -- This is nothing new, but a reader points out that Mitt Romney has explicitly endorsed raising the eligibility age for both Social Security and Medicare: When it comes to Social Security, we will slowly raise the retirement age....We will gradually increase the Medicare eligibility age by one month each year. The Social Security retirement age is already increasing by statute and will reach 67 in a few years. Apparently Romney wants it to go up to 69 or 70. The actual number he has in mind is unclear (surprise, surprise) but given that he plans to balance Social Security's books solely by raising the retirement age and slowing the growth of benefits for "those with higher incomes," I'd put my money on 70. Slowing benefit growth on high earners just doesn't do enough to let you get away with anything less. So there you have it. If you're in your 30s or 40s, Mitt Romney thinks you should work until you're 70. That might be OK for bloggers and politicians, but I'm not sure how all the dockworkers and haircutters and grocery clerks are going to feel about that. Especially when you consider that life expectancy for these folks has gone up a paltry 1.3 years in the past three decades. It's the well-off who are living longer, not the lower half of the middle class.

Voucher Denial - Krugman - So, I was airborne during the VP debate, which means no theater criticism. But I do have the transcript. And I thought it was interesting that Ryan was the first to use the word “voucher”, as a preemptive strike to try to stop Biden from using it to characterize his plan. Indeed, the official line seems to be that you’re a liar if you call a plan under which people receive a fixed sum to spend on insurance, as opposed to simply getting insurance, a voucher scheme. Among the lying liars, then, is the guy who, back in 2009, described the Ryan plan as “converting Medicare into defined contribution sort of voucher system”. Oh, wait: that was Paul Ryan. We’ve seen this movie before. For decades the right pushed for Social Security privatization — their own term for it. The Cato Institute even had a Project on Social Security Privatization. Then they found that the term polled badly, and tried to pretend that only evil liberals accused them of favoring such a terrible thing (Cato even tried, incompetently, to purge its web site of all references to the program’s previous name). So here we go again. Oh, and Ryan also, in the course of the debate, endorsed .. Social Security privatization.

Assessing the Value of Medicaid to Its Enrollees Medicaid is a huge government health-insurance program administered by the states within federal guidelines, with many of its costs paid for by the federal government. The program provides comprehensive, first-dollar coverage to 56 million Americans and supplemental (wrap-around) insurance to another six million poor, elderly Americans who are also covered by Medicare for most of their acute care (the “dual eligibles”). In 2009, the program spent $375 billion, of which close to $350 billion was spent directly on health care for these beneficiaries. The federal government covered 57 percent of total spending and state governments the rest. On average, this comes to about $5,500 per beneficiary, but that average is highly misleading. The chart below presents a clearer breakdown of spending by risk class.

CalPERS considers 85% rate hike for long-term care policies - CalPERS is preparing to impose a rate hike of up to 85 percent on most of its long-term care insurance policyholders. The rate hike would begin in 2015 and would be phased in over two years. It would affect three-fourths of the 150,000 CalPERS members who've bought long-term care policies, which pay for stays in nursing homes, convalescent homes and so on. The proposed increase is somewhat higher than the 75 percent rate hike contemplated by CalPERS officials the past several weeks. The earlier estimate "was a work in progress," CalPERS spokesman Bill Madison said Wednesday. As an alternative, CalPERS staff said the pension fund could raise rates 79 percent but do it in one year instead of two. Either way, CalPERS hopes the rate hike will "stabilize" the long-term care insurance program, which has been hit with higher-than-expected claims and lower-than- expected investment returns. The program, unlike CalPERS' pensions, gets no taxpayer funding.

‘Cost Disease’ Offers a Case for Health Care Calm - Mr. Baumol and a Princeton colleague coined the term “cost disease” in the early 1960s. Put simply, it refers to the concept that the costs of health care, education, the live performing arts and several other “personal services” depend largely on human evaluative skills — a “handicraft element” that is not easily replaced by machines. These costs consistently rise at a rate much greater than that of inflation because the quantity of labor required to produce these services is hard to reduce, while costs in other areas of the economy can be brought down via technology or other factors. What that means sounds pretty frightening: “If health care costs continue to increase by the rate they have averaged in the recent past, they will rise from 15 percent of the average person’s total income in 2005 to 62 percent by 2105.” In other words, our great-grandchildren will have less than 40 cents of every dollar to spend on everything besides their health.  “The critical point here is that because politicians do not understand the mechanism and nature of the cost disease, and because they face political pressures from a similarly uninformed electorate, they do not realize that we can indeed afford these services without forcing society to undergo unnecessary cuts, restrictions and other forms of deprivation,” says Professor Baumol, who shares research credit for the book with five other contributors. How can his point be true? Because productivity is on the rise.

Why Taxes Should Pay for Health Care - William Baumol and some co-authors recently published a new book on what is widely known as “Baumol’s cost disease.” Baumol’s argument, somewhat simplified, goes like this: Over time, average productivity in the economy rises. In some industries, automation and technology make productivity rise rapidly, producing higher real wages (because a single person can make a lot more stuff). But by definition, there most be some industries where productivity rises more slowly than the average. The classic example has been live classical music: it takes exactly as many person-hours to play a Mozart quartet today as it did two hundred years ago.  One widely cited example is education, where class sizes have stayed roughly constant for decades (and many educators think they should be smaller, not larger). Another is health care, where technology has vastly increased the number of possible treatments, but there is no getting around the need for in-person doctors and nurses. The problem is that in those industries with slow productivity growth, real wages also have to rise; otherwise you couldn’t attract people to become classical musicians, teachers, or nurses. Since costs are rising faster than productivity, prices have to rise in real terms. Note that university tuition and health care costs are both going up much faster than overall inflation. As a consequence, since GDP is measured in terms of prices paid, these sectors take up a growing share of GDP, just as health care is doing throughout the developed world.

How much would it matter if we deregulated health insurance across state lines? -- From Sarah Kliff: Allowing insurance sales across state lines comes up perennially as a way to drive down the cost of health care. Conservatives argue that allowing a plan from a state with relatively few benefit mandates – say, Wyoming – to sell its package in a mandate-heavy state (like New York) would give consumers access to options that are more affordable than what they get now. Liberals tend to argue this is a bad idea, contending that it would create a “race to the bottom,” where insurers compete to offer the skimpiest benefit packages. A new paper from Georgetown University researchers suggests a third possible outcome: Absolutely nothing at all will happen. They looked at the three states – Maine, Georgia and Wyoming – that have passed laws allowing insurers from other states to participate in their markets. All have done so within the past two years. So far, none of the three have seen out-of-state carriers come into their market or express interest in doing so. It seems to have nothing to do with state benefit mandates, and everything to do with the big challenge of setting up a network of providers that new subscribers could see.

Romney sticks to ridiculous emergency-room argument - Just three weeks ago, CBS's Scott Pelley asked Mitt Romney, "Does the government have a responsibility to provide health care to the 50 million Americans who don't have it today?" The Republican didn't answer the question directly, but instead suggested there's no cause for alarm -- the uninsured can rely on emergency rooms. The exchange was widely panned for being both callous and ignorant, and yet, as Rebecca Leber noted, Romney apparently can't help himself. "We don't have a setting across this country where if you don't have insurance, we just say to you, 'Tough luck, you're going to die when you have your heart attack,' " he said as he offered more hints as to what he would put in place of "Obamacare," which he has pledged to repeal. "No, you go to the hospital, you get treated, you get care, and it's paid for, either by charity, the government or by the hospital. We don't have people that become ill, who die in their apartment because they don't have insurance."

Yes, insurance status does matter for your health: Mitt Romney talked to the Columbus Post Dispatch Thursday morning about health care in the United States, making the case that those without coverage can still seek adequate care. The uninsured, he said, “go to the hospital, you get treated, you get care, and it’s paid for, either by charity, the government or by the hospital.” “We don’t have a setting across this country where if you don’t have insurance, we just say to you, ‘Tough luck, you’re going to die when you have your heart attack.’” Actually, we sort of do. Researchers at Johns Hopkins University published a study this summer looking at morality rates for heart attack victims. They separated out the patients who had insurance coverage and those who didn’t. They adjusted for the severity of the disease and also the patient’s neighborhood of residence, a proxy for socio-economic status. They found the uninsured had a risk of death 31 percent higher than those with private coverage after a heart attack. That’s not necessarily because the uninsured received worse care for their heart attack, the researchers point out. Instead, it likely has to do with all the preventive care that patients may have skipped out on:

In their own words (health and financial reform) - THIS week's print edition features an analysis of a survey we conducted of top American economists in advance of the presidential election. A few days ago, we shared some representative comments from survey participants on two subjects: the weakness of the recovery and the 2009 fiscal stimulus. Below, please find a range of baffling, entertaining, and even enlightening statements about the Affordable Care Act (Obamacare) and the Dodd-Frank financial reform bill.

The Dementia Plague -- Spirited and funny, her personality intact even as her memory deteriorates, Mrs. K is one of more than five million Americans with dementia. Far from the gleaming research centers where scientists parse the subtle biochemical changes associated with Alzheimer's disease and other forms of the condition, clinicians like Granieri, chief of the Division of Geriatric Medicine and Aging at Columbia University Medical Center, confront its devastating reality every day. And, often, they talk to relatives of patients. As Granieri and two interns probed Mrs. K's memory with small talk and measured her blood pressure, a niece called from Manhattan to see how her aunt was doing.  Almost every dementia patient has worried family members huddled in the background, and almost every story about dementia includes a moment when loved ones plead with the doctor for something—any medicine, any intervention, anything—to forestall a relentless process that strips away identity, personality, and ultimately the basic ability to think. Unfortunately, Evelyn Granieri is the wrong person to ask. In 2010 she served on a high-level panel of experts that assessed every possible dementia intervention, from expensive cholinesterase-­inhibiting drugs to cognitive exercises like crossword puzzles, for the National Institutes of Health; it found no evidence that any of the interventions could prevent the onslaught of Alzheimer's. She can—with immense compassion, but equally immense conviction—explain the reality for now and the immediate future: "There really is nothing." Dementia is a chronic, progressive, terminal disease, she says. "You don't get better, ever."

Controversies over economics and genetics - To critics, the economists’ paper seems to suggest that a country’s poverty could be the result of its citizens’ genetic make-up, and the paper is attracting charges of genetic determinism, and even racism. But the economists say that they have been misunderstood, and are merely using genetics as a proxy for other factors that can drive an economy, such as history and culture. The debate holds cautionary lessons for a nascent field that blends genetics with economics, sometimes called genoeconomics. The work could have real-world pay-offs, such as helping policy-makers to set the right level of immigration to boost the economy, says Enrico Spolaore, an economist at Tufts University near Boston, Massachusetts, who has also used global genetic-diversity data in his research. But the economists at the forefront of this field clearly need to be prepared for harsh scrutiny of their techniques and conclusions. At the centre of the storm is a 107-page paper by Oded Galor of Brown  and Quamrul Ashraf of Williams College. It has been peer-reviewed by economists and biologists, and will soon appear in American Economic Review, one of the most prestigious economics journals. The full story is here.  The previous MR post on the dispute, which includes a link to the paper, is here.

The Cancer Lobby - WHO knew that carcinogens had their own lobby in Washington?  Don’t believe me? Just consider formaldehyde, which is found in everything from nail polish to kitchen countertops, fabric softeners to carpets. Largely because of its use in building materials, we breathe formaldehyde fumes when we’re inside our homes.  Just one other fact you should know: According to government scientists, it causes cancer.  The chemical industry is working frantically to suppress that scientific consensus — because it fears “public confusion.” Big Chem apparently worries that you might be confused if you learned that formaldehyde caused cancer of the nose and throat, and perhaps leukemia as well.  The industry’s strategy is to lobby Congress to cut off money for the Report on Carcinogens, a 500-page consensus document published every two years by the National Institutes of Health, containing the best information about what agents cause cancer. If that sounds like shooting the messenger, well, it is.  “The way the free market is supposed to work is that you have information,” said Lynn Goldman, dean of the school of public health at George Washington University. “They’re trying to squelch that information.”

Thousands Exposed to Tainted Steroid, C.D.C. Says - About 13,000 people may have been exposed to the tainted steroid that has been linked to a growing outbreak of fungal meningitis, a spokesman for the Centers for Disease Control and Prevention said on Monday. The outbreak has killed 8 people and sickened 97 others in 23 states. More cases are expected. The figure, the first estimate of how many people were injected with any of the 17,676 doses shipped around the country, is based on reports from state health departments and clinics that used the drug, methylprednisolone acetate. It was injected near the spine to ease back and neck pain, a treatment that about five million people in the United States undergo every year. The company that made the drug, the New England Compounding Center in Framingham, Mass., has shut down, surrendered its license and recalled all its products, not just the steroid. The disease centers said that the company began shipping potentially contaminated lots of the drug on May 21, and that people who had the treatment for back pain — called a lumbar epidural steroid injection — after that date should seek medical attention if they develop symptoms like severe or worsening headache, fever, stiff neck, dizziness, weakness, sensitivity to light or loss of balance.

Fraud in the Scientific Literature  - Last year, Nature, a leading scientific journal, calculated that published retractions had increased tenfold over the past decade — to more than 300 a year — even though the number of papers published rose only 44 percent. It attributed half of the retractions to embarrassing mistakes and half to “scientific misconduct” such as plagiarism, faked data and altered images.  Now a new study, published in the Proceedings of the National Academy of Sciences, has concluded that the degree of misconduct was even worse than previously thought. The authors analyzed more than 2,000 retracted papers in the biomedical and life sciences and found that misconduct was the reason for three-quarters of the retractions for which they could determine the cause.

Traffic Air Pollution Exposure During Infancy Harms The Lungs For Many Years: Babies who are exposed to ambient air traffic pollution are likely to have poorer lung function up to the age of eight, especially those who are sensitized to common allergens, researchers from the Karolinska Institutet, Stockholm, Sweden, reported in the American Journal of Respiratory and Critical Care Medicine. Researchers have known for many years that air pollution harms health and kills. In 2006, the World Health Organization estimated that globally, two million people died prematurely every year because of air pollution. "Earlier studies have shown that children are highly susceptible to the adverse effects of air pollution and suggest that exposure early in life may be particularly harmful. In our prospective birth cohort study in a large population of Swedish children, exposure to traffic-related air pollution during infancy was associated with decreases in lung function at age eight, with stronger effects indicated in boys, children with asthma and particularly in children sensitized to allergens."

WVU: Air pollution at mountaintop mines may cause heart trouble - A published study by researchers at the West Virginia University School of Medicine and School of Public Health is the first of its kind to suggest that exposure to air pollution particles from mountaintop mining sites may impair blood vessels' ability to dilate, which may lead to cardiovascular disease. Air pollution particulate matter consisting largely of sulfur and silica was collected through a vacuum system within one mile of an active mountaintop mining site in southern West Virginia. Adult male rats were exposed to the air particles and, 24 hours following the exposure, their blood vessels' ability to dilate and function normally was significantly reduced. "This is the first study of this kind to directly associate mountaintop mining air pollution with a lack of vascular function. West Virginians who live near mountaintop mining sites are exposed to comparable levels of air pollution, and, with pre-existing health conditions in West Virginia, certain populations are pre-disposed to cardiac distress," Tim Nurkiewicz, associate professor in the WVU Department of Physiology and Pharmacology, said. "It is going to be foreseeably worse for those individuals who live near mountaintop mining sites," Nurkiewicz said.

Asian Seafood Raised on Pig Feces Approved for U.S. Consumers - At Ngoc Sinh Seafoods Trading & Processing Export Enterprise, a seafood exporter on Vietnam’s southern coast, workers stand on a dirty floor sorting shrimp one hot September day. There’s trash on the floor, and flies crawl over baskets of processed shrimp stacked in an unchilled room in Ca Mau.  Elsewhere in Ca Mau, Nguyen Van Hoang packs shrimp headed for the U.S. in dirty plastic tubs. He covers them in ice made with tap water that the Vietnamese Health Ministry says should be boiled before drinking because of the risk of contamination with bacteria. Vietnam ships 100 million pounds of shrimp a year to the U.S. That’s almost 8 percent of the shrimp Americans eat.

Food Sickens Millions as Company-Paid Checks Find It Safe - On Sept. 1, 2011, William Beach got out of bed in the middle of the night, put his clothes on and walked into the living room. His wife, Monette, found him collapsed on the floor in the morning. At the hospital, blood poured from his mouth and nose, splattering sheets, bed rails and physicians. He died that night, a victim of Listeria monocytogenes, a bacterium that can lead to a blood infection and damage to the brain and spinal cord, Bloomberg Markets magazine reports in its November issue. Beach was one of 33 people killed by listeria that was later traced by the U.S. Food and Drug Administration and state officials to contaminated cantaloupes from one Colorado farm. It was the deadliest outbreak of foodborne disease in the U.S. in almost 100 years. “He died in terror and pain,” says his daughter Debbie Frederick. About seven weeks after Beach started eating cantaloupes, a private, for-profit inspection company awarded a top safety rating to Jensen Farms, the Granada, Colorado, grower of his toxic fruit. The approval meant retailers such as Wal-Mart Stores Inc. (WMT) and Wegmans Food Markets Inc. could sell Jensen melons. The FDA, a federal agency nominally responsible for overseeing most food safety, had never inspected Jensen.

The Legacy of Pesticides: Superweeds and Superpests -  The rapid adoption of a single weed-killer for the vast majority of crops harvested in the United States has given rise to superweeds and greater pesticide use, a new study suggests. And while crops engineered to manufacture an insect-killing toxin have reduced the use of pesticides in those fields, the emergence of newly resistant insects now threatens to reverse that trend. Farmers spray the herbicide glyphosate, widely sold under the Monsanto brand Roundup, on fields planted with seeds that are genetically engineered to tolerate the chemical. Found in 1.37 billion acres of corn, soybeans, and cotton planted from 1996 through 2011, this “Roundup Ready” gene was supposed to reduce or eliminate the need to till fields or apply harsher chemicals, making weed control simple, flexible, cheap, and less environmentally taxing. In fact, this system has led farmers to use a greater number of herbicides in higher volumes, according to the study, published this week in the peer-reviewed journal Environmental Sciences Europe.  Indeed, in the first six years of commercial use, crops engineered to tolerate herbicides or resist insects reduced pesticide use by 31 million pounds, or about 2 percent, according to Dr. Benbrook’s analysis of data from the Department of Agriculture. Yet by 2011, herbicide-resistant crop technology had increased herbicide use in the United States by 527 million pounds, according to the paper. Corn and cotton crops engineered to fend off rootworm, European corn borer and other crop-destroying insects by manufacturing toxins from the soil bacterium Bacillus thuringiensis, or Bt, reduced insecticide applications by 123 million pounds, or about 28 percent, from 1996 to 2011. But over all, pesticide use last year on each acre planted with a genetically engineered crop was about 20 percent higher than on acres not planted with genetically engineered crops. And today, Dr. Benbrook writes, “a majority of American soybean, maize, and cotton farmers are either on, or perilously close to a costly herbicide and insecticide treadmill.”

An Evaluation of Benbrook’s Pesticide Use Study and Evolving Super Weeds | Big Picture Agriculture - The study, “Impacts of genetically engineered crops on pesticide use in the U.S. — the first sixteen years” by Charles M Benbrook of Washington State University was published September 28th in peer reviewed “Environmental Sciences Europe 2012″. Reuters covered the report in this article: “Pesticide use ramping up as GMO crop technology backfires”. “Yes on 37 For Your Right to Know” advocates followed by publishing a press release titled “Damning New Study: GMOs Cause Massive Overuse of Pesticides; Data Sheds Light on Why Pesticide Companies Lead Opposition to Prop 37″. The purpose of this post is to sort through the study’s strengths and weaknesses. For background, Roundup ready soybeans were introduced in 1996 as the first HR (herbicide-resistant) crop. In 2011, an estimated 94% of the soybean area planted, 72% of corn, and 96% of cotton were planted to HR varieties, while about 65% of corn and 75% of cotton in the U.S. were planted to Bt varieties. See charts (below).

UN warns of rising food costs after year's extreme weather - The UN has warned of increasing meat and dairy prices in the wake of extreme weather in the United States and across large parts of Europe and other centres of global food production. According to the Food and Agriculture Organisation (FAO) in Rome, global wheat production is expected to fall 5.2% in 2012 and yields from many other crops grown to feed animals could be 10% down on last year. "Populations are growing but production is not keeping up with consumption. Prices for wheat have already risen 25% in 2012, maize 13% and dairy prices rose 7% just last month. Food reserves, [held to provide a buffer against rising prices] are at a critical low level "It means that food supplies are tight across the board and there is very little room for unexpected events," said Abdolreza Abbassian, a senior economist with the FAO. "The decrease in cereal production this year will result in a significant reduction in world reserves by the close of seasons in 2013, even with world demand sliding as a result of high prices," he said. The warning of further food prices came as some British supermarkets said they were struggling to keep shelves stocked with fresh produce and the National Farmers Union (NFU) reported that UK wheat yields have been the lowest since the late 1980s as a result of abnormal rain fall.

The global impact of the ‘food supply crunch’ - Which countries will be worst affected by the sharp rise in global grains prices? The International Monetary Fund, which has an interest in the question because it is usually a source of loans for countries that have run out of money, has studied the vulnerability of different regions to the jump in food prices due to the US drought. In one section of its World Economic Outlook published on Monday, the fund analyses the effects of the “food supply crunch”. While commodities traders – who are awaiting the US Department of Agriculture’s monthly forecasts on Thursday – may have already moved on from the US drought, higher prices are still a reality for consumers of wheat, corn and soyabeans. Despite a recent correction, prices for the three staples are still up 20-40 per cent year on year. The IMF breaks down the issue into three sub-questions: which countries have low food inventories; which countries are most dependent on the global markets for their food supply; and which countries’ populations spend the largest proportion of their income on food. The countries and regions at the most vulnerable end of the range for each of the categories are the most likely to suffer problems, the fund explains. While China is a large importer of some foodstuffs (especially oilseeds), it would be able to withstand higher prices better than others because of its large stockpiles. At the other end of the scale, inventories of food commodities in the US have fallen well below historical norms, but food is a relatively small proportion of US consumer expenditure, therefore the country is less exposed. It may not come as a complete surprise to learn which countries are most at risk. They are: the Caribbean and Central America, which are heavily reliant on corn imports and whose stocks are lower than during the 2007-08 food crisis; the Middle East and sub-Saharan Africa, which have relatively high import reliance and low inventories of wheat; and north Africa, where food accounts for about 40 per cent of final consumption.

Milk-Cow Drought Culling Accelerates as Prices Jump - U.S. milk production is headed for the biggest contraction in 12 years as a drought-fueled surge in feed costs drives more cows to slaughter. Output will drop 0.5 percent to 198.9 billion pounds (90.2 million metric tons) in 2013 as the herd shrinks to an eight- year low, the U.S. Department of Agriculture estimates. Milk futures rose 45 percent since mid-April and may advance at least an additional 19 percent to a record $25 per 100 pounds by June, said Shawn Hackett, the president of Boynton Beach, Florida- based Hackett Financial Advisers Inc. He correctly predicted the rally in March. Dairies in California, the top milk-producing state, are filing for bankruptcy, and U.S. cows are being slaughtered at the fastest rate in more than a quarter century. Corn surged to a record in August as the USDA forecast the smallest crop in six years because of drought across the U.S. Global dairy prices tracked by the United Nations rose 6.9 percent last month, the most among the five food groups monitored, and that will probably mean record costs next year, Rabobank estimates.

Drought Cuts U.S. Crops Below Demand First Time in 38 Years - Drought damage to corn and soybean fields in the U.S., the world’s top grower and exporter, is eroding supplies of the nation’s two largest crops to below year-earlier consumption levels for the first time since 1974. The government probably will say tomorrow that the U.S. corn harvest and inventories on Sept. 1 will be a combined 11.604 billion bushels, less than the 12.33 billion consumed and exported last year, according to a Bloomberg survey of 31 analysts. Soybean supplies will be 2.932 billion bushels, below the 3.157 billion used in 2011. Supplies failed to top usage from the previous year only twice since 1960 for corn and five times for soybeans, U.S. Department of Agriculture data show. Record heat in June and July sparked the worst drought since 1956, sending corn and soybeans prices to record highs. Morgan Stanley predicted corn may rally 35 percent in a year, while Barclays Plc sees soybeans gaining 16 percent. Higher costs for dairies, grain processors and livestock producers helped send global food prices in September to the highest since March, United Nations data show. “Supplies of both corn and soybeans will be tight, and we expect prices to rebound after the report,”

More agricultural commodity price increases expected before the South American harvests - The drought of 2012 has pushed agricultural commodity prices to new highs. In spite if these price increases, demand has remained strong, putting pressure on inventories. Now the focus will be on the harvest progress in South America, as the planting season approaches. With prices remaining at lofty levels, Brazil, Argentina, and others are preparing to plant record harvests, which should ease the supply disruption in late spring of next year. Until then prices will stay elevated and could spike further, particularly if the weather does not cooperate. In fact according to Goldman, prices are going to rise on tight supplies alone, but the path will clearly depend on the weather. GS: - The current spike has come in response to the summer drought in the US Midwest, which was one of the worst in the past century. In addition, a wide set of agricultural commodity producing countries have experienced adverse weather conditions (such as Brazil and Argentina in the past winter, and Russia, Ukraine, Kazakhstan and India). Damien Courvalin from our Commodities Strategy Team points out that these disruptions have caused substantial losses in global food supply. ... Our Commodities Strategy team expect demand to remain resilient and supply to remain binding, leading soybean and corn prices to new highs in the coming months. Higher prices will eventually be followed by a supply response, and if weather returns to normal, we should expect a large crop in South America (harvested next spring) and in the US (harvested next autumn). In the interim, prices are likely to remain high.

Real Agricultural Prices Have Gone Down as Population Has Headed Up - K.M. - In inflation-adjusted dollars, agricultural prices fell by an average of 1 percent per year between 1900 and 2010, despite an increase in the world’s population from 1.7 billion to nearly 7.0 billion over the same period. Over the past 50 years, industrialized countries have consistently achieved the highest levels of agricultural output per worker and per acre of agricultural land. Currently, the developed countries of northeast Asia–Japan, South Korea, and Taiwan–have the world’s highest yields (gross output of crops and livestock per hectare of land) while North America (the United States and Canada) and Oceania (Australia and New Zealand) have the highest output per agricultural worker. Developing countries lag far behind these productivity measures but have narrowed the gap in recent decades. Southeast Asia, China, and Latin America are now approaching the land and labor productivity levels achieved by today’s industrialized nations in the 1960s.

September Bookends the Warmest 12 Months on Record - NOAA’s latest State of the Climate roundup shows that September marked the 16th month in a row with above-average temperatures for the lower 48 states of the U.S. Both the calendar year and the 12-month period from October 2011 through September 2012 were the warmest on record, and statistics show that it will require an unusually cold October through December period for 2012 to rank anything other than the warmest year. The U.S. has never before recorded 16 straight months of above-average temperatures, and although natural variability has also played a role, the warmth this year is consistent with long-term trends related to global warming. Over the month, the mercury averaged 67°F, which is 1.4°F higher than the long-term average. The April-September period, which is considered the “warm season” in the continental U.S., was the warmest on record, with an average of 68.2°F (the runner-up is the 1934 warm season, at 67.6°F).

Federal Government Consistently Runs out of Money to Fight Fires, Pays for It by Cutting Fire Prevention Programs - We have a fixed budget for federal wildfire interventions, and we now have run out of money to pay firefighters to battle new wildfires, or pay for the equipment needed. Every normal democracy would appropriate more funds to pay for the potential disasters down the road. But we’re in an age of austerity. So we steal from other parts of the Forest Service budget. Which will in turn INVITE MORE WILDFIRES. So officials did about the only thing they could: take money from other forest management programs. But many of the programs were aimed at preventing giant fires in the first place, and raiding their budgets meant putting off the removal of dried brush and dead wood over vast stretches of land — the things that fuel eye-popping blazes, threatening property and lives. Recently, Congress stepped in and reimbursed the Forest Service and the Interior Department, which plays a far lesser role in fighting fires, with $400 million from the 2013 Continuing Resolution, allowing fire prevention work to continue. Forestry experts at state agencies and environmental groups greeted it as good news. But they also faulted Congress for providing at the start of the fiscal year only about half of the $1 billion dollars it actually cost to fight this year’s fires. They argued that the traditional method that members of an appropriations conference committee use to fund wildfire suppression — averaging the cost of fighting wildfires over the previous 10 years — is inadequate at a time when climate change is causing longer periods of dryness and drought, giving fires more fuel to burn and resulting in longer wildfire seasons

UT Austin: Over 12 percent of all U.S. energy consumption is directly related to water - A new study by researchers at The University of Texas at Austin has estimated the energy embedded in the U.S. water system. Kelly Sanders, a PhD candidate in Mechanical Engineering at UT Austin, compiled and allocated energy consumption for various water-related activities in the residential, commercial, and industrial sectors. The study, “Evaluating the energy consumed for water use in the United States”, appears in the September issue of Environmental Research Letters. Based on Sanders’ analysis, a little over 46 quads of energy (one quad is a quadrillion BTUs) are related to water. This means energy is used in one way or another to create steam for power generation (or other processes like sterilization) or for heating, cooling, or pumping water directly. Of the 46 quads, a majority (34 quads) of water-related energy is consumed for power generation (burning fuel to create steam to turn turbines), while just over 12 quads is used directly to heat, chill, pump, treat water, or in direct steam processes. For perspective, the total primary energy consumption of the United States in 2010 was 98 quads. The studies results can be summarized in the following diagram:

By 2020, Indonesian Palm Oil Plantations Will Release More CO2 Than Canada - Palm oil plantation expansion in Indonesia is set to release more than 558 million metric tons of carbon dioxide by 2020, according to a report published Sunday in Nature Climate Change. That’s more than Canada’s yearly CO2 emissions. The study, conducted by researchers from Yale and Stanford, examined palm oil plantation development in the Kalimantan region of Indonesia from 1990 to 2010.  Using Landsat satellite images and carbon accounting, the researchers analyzed land cover changes over the 20-year period, estimated the carbon emissions from the plantations and projected the levels of carbon emitted between 2010 and 2020 under Business as Usual and protection scenarios. Here’s what they found:

  • In 1990, oil palm plantations covered 903 square kilometers of Kalimantan – by 2010 that number had grown to 31,640 km2.
  • Between 2000 and 2010, forest clearing for palm plantations contributed to about 57 percent of Indonesia’s total deforestation.
  • Palm growth occurs on government-awarded land leases, 79 percent of which remain undeveloped. The development of the remaining leases would convert 93,844 km2 of land to palm plantations, 90 percent of which is forested and 18 percent of which is peatland.

Oceans' rising acidity a threat to shellfish — and humans - As carbon dioxide continues to build up in the atmosphere as a result of burning fossil fuels, the seas absorb much of it. The full effects have yet to be felt.  Alan Barton thought the baby oysters looked normal, except for one thing: They were dead. Slide after slide, the results were the same. The entire batch of 100 million larvae at the Whiskey Creek Shellfish Hatchery had perished. It took several years for the Oregon oyster breeder and a team of scientists to find the culprit: a radical change in ocean acidity. The acid levels rose so high that the larvae could not form their protective shells, according to a study published this year. The free-swimming baby oysters would struggle for days, then fall exhausted to the floor of the tank. "There's no debating it," said Barton, who manages Whiskey Creek, which supplies three-quarters of the oyster seed to independent shellfish farms from Washington to California. "We're changing the chemistry of the oceans." Rising acidity doesn't just imperil the West Coast's $110-million oyster industry. It ultimately will threaten other marine animals, the seafood industry and even the health of humans who eat affected shellfish, scientists say. The world's oceans have become 30% more acidic since the Industrial Revolution began more than two centuries ago. In that time, the seas have absorbed 500 billion tons of carbon dioxide that has built up in the atmosphere, primarily from the burning of fossil fuels.

New York Times Story Bizarrely Downplays Impact of Ocean Acidification -  Yves Smith - The Grey Lady tonight, in true “newspaper of record” fashion, has an article that manages to acknowledge some of the effects of ocean acidification, and its links to global warming, while sidestepping how grim the implications are. The article, titled “Scientists Adopt Tiny Island as a Warming Bellwether,” does point out, via recounting how the number and health of various species on Tatoosh Island, Washington, have declined over time, and that the culprit is rising CO2 levels. But the story is written as if the intent is to anesthetize readers. Tellingly, it mentions “huge declines in Ph” first, and used the word “acidic” sparingly, a mere three times. 14 of its 24 paragraphs are travel narrative, with soothing images of crashing waves and rugged vistas.  And even when impact on marine life and the species that depend on them are mentioned, the story focuses on the impact on the island, rather than reverting to the typical journalistic device of using the anecdotes to leaven a serious, detailed discussion of the issues, which in this case would be the data and the science. But to the extent the article provides it, it’s in minimalist, dumbed down form: Among the declines the researchers are noticing: historically hardy populations of gulls and murres are only half what they were 10 years ago, and only a few chicks hatched this spring. Mussel shells are notably thinner, and recently the mussels seem to be detaching from rocks more easily and with greater frequency.

Putting Climate Change in the Budget Now Will Save Lives and Money - The failure of world leaders to act on the critical issue of global warming is often blamed on economic considerations. Over and over, we hear politicians say they can't spend our tax dollars on environmental protection when the economy is so fragile. Putting aside the absurdity of prioritizing a human-created and adaptable tool like the economy over caring for everything that allows us to survive and be healthy, let's take a look at the economic reality. A new scientific report concludes that climate change is already costing the world $1.2 trillion a year and is eating up 1.6 per cent of global GDP, and rising. It's also killing at least 400,000 people every year, mainly in developing countries. That's not counting the 4.5-million people a year who die from air pollution caused by burning fossil fuels.  As Michael Zammit Cutajar, former executive secretary of the UN Framework Convention on Climate Change, told the Guardian: "Climate change is not just a distant threat but a present danger -- its economic impact is already with us." But we're to believe that corporate profits, ever-increasing growth, consumer culture, disposable products and often meaningless jobs to keep it all going are more important than the health and survival of humans and other species, and true long-term economic prosperity.

Ideology trumps science and blocks regulation - William K. Black - This column was prompted by a story that ran Friday entitled “Congressman Calls Evolution Lie from ‘Pit of Hell.’”  Yes, unintentional self-parody continues to reign supreme. The NYT story illustrates the central point I wish to make.  The Congressman is Paul Broun (R. GA).  The story reports that “evolution, embryology and the Big Bang theory are ‘lies straight from the pit of hell.’”  Broun added that “the Earth is about 9,000 years old and that it was made in six days.”  Broun is also a climate change denier.  But the twin barreled punches to the story are that Broun sits on the House committee on Science, Space, and Technology (indeed he chairs the Subcommittee on Investigations and Oversight) – and he is an M.D. I will not attempt to convince any reader that Broun’s views are unscientific or incorrect.  Indeed, the exceptional difficulty of doing so is the central point of this column. The first preliminary point is that the Republican members of the House committee on Science, Space, and Technology typically deny climate change and evolution. The title of the article says it all:  “The Climate Zombie Caucus Of The 112th Congress.”

Norway to double carbon tax on oil industry - Norway is to double carbon tax on its North Sea oil industry and set up a £1bn fund to help combat the damaging impacts of climate change in the developing world. In one of the most radical climate programmes yet by an oil-producing nation, the Norwegian government has proposed increasing its carbon tax on offshore oil companies by £21 to £45 (Nkr410) per tonne of CO2 and a £5.50 (Nkr50) per tonne CO2 tax on its fishing industry. Norway will also plough an extra £1bn (Nkr10bn) into its funds for climate change mitigation, renewable energy, food security in developing countries and conversion to low-carbon energy sources, Environmental Finance reported. It will step up spending on new projects to combat deforestation in developing countries to £44m, taking up its spending overall on forestry programmes to £327m. Previous forestry projects have involved Brazil, Indonesia and Ethiopia. The Oslo government is also to spend £69m on buying carbon credits in 2013, to help offset its emissions, force through new building regulations to make all new homes carbon-neutral by 2015 and increase efforts to heavily cut emissions from cars, switching to electric vehicles.

When Tradeable Pollution Permits Fall Short - Like a lot of economists, I occasionally break into a semi-spontaneous song-and-dance about how tradeable pollution permits have all sorts of advantages. In an old-fashioned command-and-control system, every firm needs to reduce pollution emissions to a given standard, even though for some firms meeting that standard will be cheap and easy and for other firms it will be costly and difficult. In a system of tradeable pollution permits, firms that can reduce pollution less expensively can do so, and sell their extra pollution permits to other firms. As a result, the goal of limiting emissions can be reached more cheaply. Even better, firms can make money by seeking out innovative ways to cut emissions, because when pollution permits can be sold or need to be bought, there is a clear financial incentive to do so. Dallas Burtraw has preached this gospel of tradeable pollution permits many times himself, which is part of why I was intrigued by his recent paper "The Institutional Blind Spot in Environmental Economics"(Resources for the Future Discussion Paper 12-41, August 2012). He argues that systems of tradeable pollution permits have one severe flaw:  when they set the level of pollution that is allowed to be emitted in future years, they cannot foresee future development that may cause that level to be implausibly high.

Snow -- During the recent discussion of ice albedo and how strongly the warming influence of northern hemisphere sea ice loss outweighs the cooling influence of southern hemisphere sea ice gain, it was mentioned by several readers that snow loss in the northern hemisphere is also a major warming influence, a potent amplifying feedback of global warming. The Rutgers Univ. Global Snow Lab has data on snow cover during the satellite era. Like most climate-related variables, snow cover shows a strong seasonal cycle, with more snow in winter and less in summer. When looking for trends, it’s useful to compute anomaly, the difference between a given month’s value and the average for the same month throughout the data record. Here’s the anomaly data for northern hemisphere snow cover: There is a clear, and statistically significant, overall decline in snow cover. In spite of what we often hear from the fake skeptics — who love to bellow about any big snowfall (even when it hasn’t happened yet) as though it were disproof of global warming — the actual trend in snow cover is one of decline. More important, the declining trend is strongest when it really counts — when incoming sunlight is strongest during summer. Snow is very highly reflective, and when present tends to reflect much of the incoming solar energy back to space, which has a cooling influence on the climate. As snow cover declines, so does this cooling influence.In fact the downward trend in snow cover is strongest during the month of June, when solar input is also strongest: The trend accounts for a net loss of over 5 million km^2 June snow cover since 1979. That’s considerably larger than the loss of Arctic sea ice over the same time span.

NOAA Bombshell: Warming-Driven Arctic Ice Loss Is Boosting Chance of Extreme U.S. Weather  - Two new studies make a strong case that global warming is driving an intensification of high-pressure anomalies that in turn make North American weather more extreme. They add to a growing body of scientific observation and analysis on the connection between man-made climate change and extreme weather — and disasters. So I can say, not coincidentally, Munich Re, the world’s largest reinsurance company is releasing a report next week based on its natural catastrophe database — the most comprehensive of its kind in the world — that concludes:

  • Global warming is driving an increase in weather-related disasters
  • “North America is the continent with the largest increases in disasters.“

And so I can also say, not coincidentally, NOAA’s National Climatic Data Center (NCDC) reported Tuesday in its “State of the Climate” for September that the Climate Extremes Index for the period January-through-September was over the highest ever — and over twice the average value — since record-keeping began in 1910.

Report: Climate change behind rise in weather disasters: The number of natural disasters per year has been rising dramatically on all continents since 1980, but the trend is steepest for North America where countries have been battered by hurricanes, tornadoes, floods, searing heat and drought, a new report says. The study being released today by Munich Re, the world's largest reinsurance firm, sees climate change driving the increase and predicts those influences will continue in years ahead, though a number of experts question that conclusion. Whatever the causes, the report shows that if you thought the weather has been getting worse, you're right. The report finds that weather disasters in North America are among the worst and most volatile in the world: "North America is the continent with the largest increases in disasters," says Munich Re's Peter Hoppe. The report focuses on weather disasters since 1980 in the USA, Canada, Puerto Rico and the U.S. Virgin Islands. Hoppe says this report represents the first finding of a climate change "footprint" in the data from natural catastrophes. Some of the report's findings:

  • -- The intensities of certain weather events in North America are among the highest in the world, and the risks associated with them are changing faster than anywhere else.
  • -- The second costliest year of the study period, 2011, was dominated by strong storms. Insured losses in the U.S. due to thunderstorms alone was the highest on record at an estimated $26 billion, more than double the previous thunderstorm record set in 2010.
  • -- Insured losses from disasters averaged $9 billion a year in the 1980s. By the 2000s, the average soared to $36 billion per year.

Weathergirl Goes Rogue 2: Still Hot, Still Crazy - YouTube: It's still hot and that's crazy, but important people aren't talking about it. Your favourite weather presenter is back with more of the bad news you hate to love.

Carbon Feedback From Thawing Permafrost Will Likely Add 0.4°F – 1.5°F To Total Global Warming By 2100 -

  • Thawing permafrost will release carbon to the atmosphere that will have an appreciable additional effect on climate change, adding at least one quarter of a degree Celsius by the end of the century and perhaps nearly as much as one degree (about 1.5°F).
  • The permafrost feedback response to our historic emissions, even in the absence of future human emissions, is likely to be self-sustaining and will cancel out future natural carbon sinks in the oceans and biosphere over the next two centuries.
  • Unfortunately, there are several good reasons to consider the outlook in this study as rosy — as the authors themselves make clear. However, as bad and inevitable as they are, feedbacks from the permafrost are just the (de-)frosting on the fossil fuel cake that we are busy baking. It is still up to us to influence how severe climate change is going to be.

Permafrost Projections - There is about twice as much carbon frozen into permafrost than there is floating around in the entire atmosphere. As high CO2 levels cause the world to warm, some of the permafrost will thaw and release this carbon as more CO2 – causing more warming, and so on. Previous climate model simulations involving permafrost have measured the CO2 released during thaw, but haven’t actually applied it to the atmosphere and allowed it to change the climate. This UVic study is the first to close that feedback loop (in climate model speak we call this “fully coupled”).The permafrost part of the land component was already in place – it was developed for Chris’s PhD thesis, and implemented in a previous paper. It involves converting the existing single-layer soil model to a multi-layer model where some layers can be frozen year-round. Also, instead of the four RCP scenarios, the authors used DEPs (Diagnosed Emission Pathways): exactly the same as RCPs, except that CO2 emissions, rather than concentrations, are given to the model as input. This was necessary so that extra emissions from permafrost thaw would be taken into account by concentration values calculated at the time.As a result, permafrost added an extra 44, 104, 185, and 279 ppm of CO2 to the atmosphere for DEP 2.6, 4.5, 6.0, and 8.5 respectively. However, the extra warming by 2100 was about the same for each DEP, with central estimates around 0.25 °C. Interestingly, the logarithmic effect of CO2 on climate (adding 10 ppm to the atmosphere causes more warming when the background concentration is 300 ppm than when it is 400 ppm) managed to cancel out the increasing amounts of permafrost thaw. By 2300, the central estimates of extra warming were more variable, and ranged from 0.13 to 1.69 °C when full uncertainty ranges were taken into account. Altering climate sensitivity (by means of an artificial feedback), in particular, had a large effect.As a result of the thawing permafrost, the land switched from a carbon sink (net CO2 absorber) to a carbon source (net CO2 emitter) decades earlier than it would have otherwise – before 2100 for every DEP. The ocean kept absorbing carbon, but in some scenarios the carbon source of the land outweighed the carbon sink of the ocean. That is, even without human emissions, the land was emitting more CO2 than the ocean could soak up. Concentrations kept climbing indefinitely, even if human emissions suddenly dropped to zero. This is the part of the paper that made me want to hide under my desk.

Saving the Arctic Ice: Greenpeace, Greenwashing and Geoengineering. Part I - There was much media attention a couple of weeks ago when this year's sea ice extent minimum broke all records: it was down almost 50% from the 1979-2000 average. Little attention, though, accompanied a possibly even more significant figure, released a few days ago: those who run the PIOMAS sea ice volume model at the Polar Research Center showed the 2012 sea ice volume minimum was down almost 50% not from decades ago -- but from 2007! That's right: the volume of Arctic sea ice this September minimum was probably about half of what it was, just back in 2007. This figure should deeply trouble any reasonable human being, as it strongly suggests reaching an ice-free Arctic sea ice minimum within half a decade, and, since there is little dispute that some summer sea ice will persist to the north and west of Greenland for much longer, the first "near-ice-free" point will likely arrive in just the next few years, as sea ice expert Peter Wadhams has pointed out, and the London-based policy group and think tank AMEG has maintained. How should we respond? Greenpeace recently started a "Save the Arctic" campaign. That's great -- but you can only save the Arctic by saving its ice. And, unfortunately, it is now clear that this can no longer be achieved through emissions reductions alone. It's too late for that. Greenpeace held a meeting on the polar emergency in New York City, by chance on the same day the record extent minimum was called, and while on the surface it seemed pretty ordinary, it was at heart very odd. Nobody suggested any change of approach, any specific re-strategizing, to respond to the accelerating situation. The word emergency was a common currency passing all lips, but in fact it was unclear whether people were really speaking the same language, especially as concerns that most precious thing in emergencies -- time. And there seemed to be no translator in the room, saying "this is the timescale of this, that's the timescale of that."

As strange as it seems, scientists say increase in Antarctic ice may be sign of climate change - The ice goes on seemingly forever in a white pancake-flat landscape, stretching farther than ever before. And yet in this confounding region of the world, that spreading ice may be a cockeyed signal of man-made climate change, scientists say. This is Antarctica, the polar opposite of the Arctic.While the North Pole has been losing sea ice over the years, the water nearest the South Pole has been gaining it. Antarctic sea ice hit a record 7.51 million square miles in September. That happened just days after reports of the biggest loss of Arctic sea ice on record. Climate change skeptics have seized on the Antarctic ice to argue that the globe isn’t warming and that scientists are ignoring the southern continent because it’s not convenient. But scientists say the skeptics are misinterpreting what’s happening and why. Shifts in wind patterns and the giant ozone hole over the Antarctic this time of year — both related to human activity — are probably behind the increase in ice, experts say. This subtle growth in winter sea ice since scientists began measuring it in 1979 was initially surprising, they say, but makes sense the more it is studied. “A warming world can have complex and sometimes surprising consequences,” researcher Ted Maksym said this week from an Australian research vessel surrounded by Antarctic sea ice. Many experts agree. Ted Scambos of the National Snow and Ice Data Center in Colorado adds: “It sounds counterintuitive, but the Antarctic is part of the warming as well.”

How we misjudge the risks of oil depletion and climate change - Many people dismiss the risks associated with oil depletion and climate change--even many who accept the two issues as problems. They judge those risks to be small or at least manageable. Since no one can know the future, we cannot be sure whether they are right or wrong. But even if they are right, should we be so sanguine? As we examine this question, keep in mind that we are talking about probabilities and the level of risk, not absolute knowledge which none of us can have about the future. One reason that so many people discount the risks of oil depletion and climate change is that their experience tells them to do so. We've had high oil prices and tight oil supplies before, and always new supplies and declining prices followed. For many we are just in another market cycle, and there's nothing to be worried about. And, when it comes to climate change, well, we've had hot summers before and even if the climate is warming a bit, we'll adapt. Both these observations are subject to what's called the problem of induction. In a nutshell, we believe that because a certain event has reliably repeated itself in the past or because certain conditions have prevailed for a long time, we can always expect more of the same in the future. If that were true, there would come a point in our lives when we would never be surprised. But as it turns out, humans are continually surprised, which shows you that the problem of induction lives on.

Reference: NPC’s 2012 Biofuels Analysis Report - The following is an interesting table which I found when reviewing the National Petroleum Council’s report on Biofuels (August 1, 2012), a document rich as a reference of biofuels technologies. The table projects biomass resource availability, biofuels yields per feedstock, biofuels production costs, and biofuels production estimates for the years 2010 through 2050. For what it’s worth, lignocellulosic ethanol production ramps up nicely from 2040 – 2050 in their projections. And corn ethanol production remains the same at 15 billion gallons per year from 2015 through 2050. (The report expects corn yields to continue to increase.)

Why Your Car Isn't Electric - It will come as no surprise to hear that only a tiny fraction — less than 1 percent — of cars driving along American roads are fully electric. What might be more surprising is the fact that this wasn’t always the case. In 1900, 34 percent of cars in New York, Boston and Chicago were powered by electric motors. Nearly half had steam engines. What happened? Why do we end up embracing one technology while another, better one struggles or fails? There are plenty of reasons Americans should have adopted electric cars long ago. Early E.V.’s were easier to learn to drive than their gas cousins, and they were far cleaner and better smelling. Their battery range and speed were limited, but a vast majority of the trips we take in our cars are short ones. Most of the driving we do has been well within the range of electric-car batteries for decades, says David Kirsch, associate professor of management at the University of Maryland and the author of “The Electric Vehicle and the Burden of History.” We drive gas-powered cars today for a complex set of reasons, Kirsch says, but not because the internal-combustion engine is inherently better than the electric motor and battery.

China’s Emissions Trading May Spur Global Accord, Report Says - China, the world’s biggest emitter of greenhouse gases linked to climate change, may create the impetus for a global carbon market as it begins pilot trading programs, according to the Climate Institute. “China’s emerging schemes can dovetail with other global schemes as a stepping stone towards a global climate change agreement by 2015,” John Connor, chief executive officer of the Sydney-based institute that commissioned a report released today, said in an e-mailed statement. The world’s second-biggest economy is scheduled to start emissions trading in seven manufacturing regions next year, and it may introduce a national system by 2015. Shanghai and Guangdong plan to require producers of steel, petrochemicals and electricity and others with annual emissions of more than 20,000 metric tons to buy tradable permits. The other regions in China’s pilot program are Beijing, Tianjin, Chongqing, Shenzhen and Hubei.

China firm sues Obama over blocked US wind farm deal - A Chinese-owned firm in the US is suing President Barack Obama after he blocked a wind farm deal on national security grounds. Ralls Corp, a private firm, acquired four wind farm projects near a US naval facility in Oregon earlier this year. Mr Obama signed the order blocking the deal last week. The lawsuit alleges the US government overstepped its authority. It is the first foreign investment to be blocked in the US for 22 years. The block on the wind farms comes just weeks ahead of November's US presidential election. China's state-run news agency Xinhua said "China-bashing" in order "to woo some blue-collar voters" was the reason for the decision.

U.S. Will Place Tariffs on Chinese Solar Panels - The Commerce Department issued its final ruling Wednesday in a long-simmering trade dispute with China, imposing tariffs ranging from about 24 to nearly 36 percent on most solar panels imported from the country.The penalties are somewhat lower than those announced by the department earlier this year, when the government determined that Chinese companies were benefiting from unfair government subsidies and were selling their products in the United States below the cost of production, a practice known as dumping. For one of the biggest panel makers, Suntech, the duties are slightly higher, moving to almost 36 percent from about 34 percent. The trade case stemmed from a legal filing nearly a year ago by a coalition of manufacturers, led by SolarWorld, a German company with considerable manufacturing in the United States. The coalition contended that Chinese companies, which dominate global sales with a two-thirds market share, were competing unfairly in the American market.

Renewables Are Overrated, We Need Cheap Oil – Interview with Gail Tverberg - What does our world’s energy future look like? Does renewable energy feature as much in the energy production mix as many hope it will? Will natural gas and fracking help reduce our dependence upon oil and how will the world economy and trade fare as supplies of cheap oil continue to dwindle? To help us take a look at this future scenario we had a chance to chat with Gail Tverberg – a well-known commentator on energy issues and author of the popular blog, Our Finite World. In the interview Gail talks about:

•    Why natural gas is not the energy savior we were hoping for
•    Why renewable energy will not live up to the hype
•    Why we shouldn’t write off nuclear energy
•    Why oil prices could fall in the future
•    Why our energy future looks fairly bleak
•    Why the government should be investing less in renewable energy
•    Why constant economic growth is not a realistic goal

Japan Utility Says Crisis Avoidable - In a stunning reversal, the operator of Japan's Fukushima Daiichi power plant said it knowingly avoided implementing some safety measures for the nuclear plant out of fear of causing lawsuits, protests, or the need to close the plant. It was the first time that Tokyo Electric Power Co. has admitted that previous errors in judgment contributed to one of the world's worst nuclear accidents last year. "There was a worry that if the company were to implement a severe-accident response plan, it would spur anxiety throughout the country and in the community where the plant is sited, and lend momentum to the antinuclear movement,'' Tepco said in a report, explaining what it described as the "underlying reasons'' the company didn't have an adequate plan in case of such accidents. The 32-page report was prepared by a special in-house task force for an independent advisory committee to the company's board that was charged with figuring out how to reform Tepco's nuclear operations. Its purpose wasn't to uncover new facts about the accident, but rather to present a draft of a plan that lays out the steps Tepco needs to take to keep such an accident from happening again. Those steps include investigating what mistakes were made and why.

Mitt Romney champions coal – but Americans turned on by natural gas - Mitt Romney hit the campaign trail in Ohio and Virginia this week accusing Barack Obama of waging war on coal. But the real enemy of coal, it turns out, is free enterprise – and strong competition from another home-grown source of American energy: natural gas. Falling prices for natural gas made it far more economical to burn natural gas instead of coal in the country's power plants over the last few years. Environmental regulations – a favourite target of Romney – had little to do with the switch. "This is not rocket science," said Michael Levi, an energy analyst at the Council on Foreign Relations. "This is not any kind of conspiracy or heavy-handed action by the EPA (Environmental Protection Agency). All it requires is people with calculators making decisions about what to deploy."

Statoil's 2nd LNG liquefaction train not going ahead -- not enough new gas discovered - Norway's Statoil Tuesday said it will not go ahead with a its second LNG liquefaction train at the 4.3 million mt/year Hammerfest plant, which processes gas from the Snohvit field in the Barents Sea, saying not enough new gas had been discovered to date to justify it. Analysts said the second plant would have cost about $5 billion and doubled the Melkoya plant's design capacity. Statoil said in a statement: "Current gas discoveries do not provide a sufficient basis for further capacity expansion." The Hammerfest plant, on the far northern Norwegian island of Melkoya, is Europe's sole LNG processing facility.

Ottawa to consider penning oilsands caribou - Penning wild caribou in the oilsands region is a recovery option for the species that should be considered, says a federal document that echoes a recent industry-funded study. The federal caribou strategy released last week says “indirect predator management (e.g. penning of boreal caribou)” should be given high priority to prevent the highly endangered herds from vanishing. They decided an area of at least 1,500 square kilometres would be fenced off for at least 40 years and populated by about 120 to 150 caribou. Wolves and deer would be kept out of the area to minimize predation and competition.

Pipeline To Nowhere? - Last week the news headlines blazed on about the proposed natural gas project in Alaska between Exxon, Conoco and Trans-Canada to build a pipeline over 800 miles long to run from Alaska’s North Slope on to Asia.  Talk was of the 15,000 jobs to be created and the revenues to be rewarded for the 10-year endeavour. Richard Bass argues in Forbes that exporting LNG to Asia would be helpful to the North American gas market.  Maybe we should think this one through a little.  Here’s the punchline: spending $65 billion (probably much more) to send Alaskan natural gas to Asia will not do much for anybody south of Canada.  North Slope natural gas will probably rise in price to merge toward the Asian price of about $17/mmBTU (don’t worry about what that means), but Henry Hub may still linger in the $3.00-5.00 range for as long as oil stays over $80.  Also, at that price for the pipeline, and assuming a 27-year straight write-down, that’s going to cost about $8mm/day during production. That’s to accommodate production of about the equivalent of 350 NYMEX futures contracts per day (3.5 billion cu. feet). That works out to an added cost of about $2.20 per NYMEX equivalent, which seems expensive at current prices of $3.50.

Fracking Companies Using ‘Psychological Warfare’ Tactics To Silence Critics? - Roughly a year ago today in Houston, the shale gas industry was caught red-handed discussing its use of military tactics and personnel on U.S. soil to intimidate and divide communities in order to continue its fracking bonanza. In a gathering thought to be exclusively among friends, one industry public relations professional representing Range Resources, Matt Pitzarella, said his company utilizes psychological warfare (PSYOPs) tactics on citizens living in the Marcellus Shale basin. The Marcellus is one of the epicenters of the global hydraulic fracturing boom (“fracking”). Matt Carmichael, External Affairs Manager at Anadarko Petroleum Corporation, told attendees, “we are dealing with an insurgency,” referring to citizens concerned about the impacts of oil and gas development in their communities. He advised the PR pros in the room to use the U.S. Army/Marine Corps Counterinsurgency Manual, along with Donald Rumsfeld’s book, as guidebooks for suppressing dissent. A year later, we’re learning that the oil industry is taking its aggressive military-style approach global. According to a press release published by Food and Water Europe, the industry is spying on fracking critics in Poland.

Supreme Court refuses to block Chevron's $18.2 billion verdict for pollution in Ecuador - Chevron on Tuesday lost a U.S. Supreme Court bid to block an $18.2 billion judgment against it in Ecuador in a case over pollution in the Amazon jungle. The Supreme Court did not give any explanation for its decision, which rejected Chevron's appeal of a lower court ruling. The lower court in January had thrown out an injunction blocking enforcement of the Ecuadorean judgment. The decision is the latest in a nearly two-decade conflict between the San Ramon oil company and residents of Ecuador's Lago Agrio region over claims that Texaco, bought by Chevron in 2001, contaminated the area from 1964 to 1992. The battle has spawned litigation in numerous courts both inside and outside the United States. Oil companies are watching the case closely because it may affect other cases accusing companies of polluting the areas where they operate.

New Huge Oil Slick Traced to BP Disaster An oil slick three miles long and three football fields wide that was discovered in the Gulf of Mexico last month has been traced back to the BP Deepwater Horizon oil disaster of 2010, the Coast Guard said Wednesday night. The reason for the appearance of the new slick, which is currently about 50 miles off the Louisiana coast, was still unknown. BP and Coast Guard officials said the slick could be residual oil from the Deepwater Horizon wreckage; oil debris left on the seabed from the original spill; or oil emanating from bent piping still on the sea floor. However, Ian MacDonald, a professor of oceanography at Florida State University and a spill expert, said that the presence of the slick could mean that oil is till leaking from BP’s Macondo well, the site of the blowout. “The jury is out here,” he said, adding that it was too early “to rule out that this is oil freshly released from the reservoir. “No one’s 100 percent as to where it’s coming from,” said Frank Csulak, scientific support coordinator for the National Oceanic and Atmospheric Administration.

September Oil Supply -  OPEC has released their number for September monthly oil supply.  I have updated my summary graph above accordingly.  The IEA number will be out on Friday and if it shows any interesting divergence I may update the graph again.  At the moment it looks like September was up a few hundred kbd - enough to erase the very small fall in supply this summer, but not enough to erase the general impression of overall flat supply in 2012.

Shell Seeks to Export U.S. Oil - Royal Dutch Shell said late Thursday it has applied for a permit from the U.S. Department of Commerce to export crude oil in a sign of how a boom in U.S. oil production from shale rock is reshaping the country's role in the global energy marketplace. The U.S. currently exports less than less than one half of 1% of its total oil imports, according to data from the Energy Information Administration. However, the revolution in hydraulic fracturing technology that has coaxed large volumes of light sweet oil from shale rock previously thought unprofitable has generated an unprecedented boom that the EIA says will bring U.S. production to its highest level in nearly two decades next year. Oil production in the U.S. totaled 194 million barrels of crude oil in July, the most in 14 years according to the latest data from the EIA. Oil production in the Eagle Ford area of South Texas—where Shell has significant operations—and the Bakken region in North Dakota are producing more oil than pipelines are currently able to carry to market. This week, the glut of oil production in the center of the country pushed the U.S. benchmark oil price, West Texas Intermediate, to its lowest level in a year relative to international benchmark, Brent crude. A decades-old law bars the export of crude oil produced in the U.S., although special permits can be given in some cases, including shipping oil to Canada. The U.S. exports about 41,000 barrels a day of oil already, less than one half of 1% of its total oil imports, according to the EIA. Shell declined to say how much oil the company planned to export or to which destinations.

Iraq sends crucial fuel oil to Syria - Iraq is quietly shipping vital supplies of fuel oil to Syria in a deal that has triggered concern in Washington and exposes Damascus’s difficulties keeping its economy afloat in the face of a growing civil war and economic sanctions. Nouri al-Maliki’s Baghdad government agreed in June to supply 720,000 tons of fuel oil to Syria in monthly shipments as part of a one-year, renewable supply contract, according to commercial documents seen by the Financial Times. In June and July, Baghdad’s oil ministry delivered two shipments of fuel oil, which is used for power generation, worth US$14m in total, to President Bashar al-Assad’s regime. Syria paid in cash, the documents show. While the figures to date are relatively small, the deal highlights the ad hoc efforts Mr Assad’s embattled regime is having to make to keep shortages at bay as the war spreads. It also underlines the more active role Iraq is now playing in the region.

Iraq could become world's second biggest oil exporter - Iraq could become the world's second-largest oil exporter within two decades and double its output by 2020, a major study has found. The International Energy Agency said Iraq can overtake Russia for exports and be responsible for nearly half of all anticipated growth in global output. But the country's government must overcome internal disputes over oil rights with the autonomous Kurdish region in the north and increase current investment from $9bn (£5.6bn) in 2011 to $25bn a year on average for the rest of the decade, the authors warned. The IEA's chief economist, Fatih Birol, explained: "Developments in Iraq's energy sector are critical for the country's prospects and also for the health of the global economy. "But success is not assured, and failure to achieve the anticipated increase in Iraq's oil supply would put global oil markets on course for troubled waters."

Will Iraq’s energy boom postpone peak oil yet again? - Well, here is a shocker for the peak oil camp.Iraq’s oil output will more than double from 2.6 million to 6 million barrels a day (b/d) by the end of the decade. This is 45pc of world oil supply growth over these years.It will reach 8 million b/d by 2035. By then, Iraq will have overtaken Russia to become the world’s second biggest oil exporter – supplying China with 2 million b/d in a modern marine revival of the silk trade – and earning $200 billion a year in revenues.It will also be a major gas exporter. That is the conclusion of a special report by the International Energy Agency on Iraq released this morning.As a signed-up member of the cheap peak oil club – not quite the same as peak oil – I am watching this with great interests.As the IEA says, this will require $530 billion of new investment. "The obstacles are formidable: political, logistical, legal, regulatory, financial, lack of security and insufficient skilled labour," it said.Good luck to the Iraqis. Let us hope that they – with the help of BP, Shell, Exxon, et al – can pull it off.

Iraqi Oil Problems are Global Oil Problems - The Iraqi government said Wednesday it was pulling back from its plans to increase oil production dramatically within the next five years. Baghdad, beginning in 2008, has brought in international investors despite lingering violence and protracted political concerns.  A report from the International Energy Agency had said the Iraqi oil sector "holds the key" to the country's future. The obstacles to major developments in the energy sector, however, are "formidable." During a visit to Moscow, Iraqi Prime Minister Nouri al-Maliki helped secure a $100 million deal from Russian oil company Lukoil for work in southern Iraq. Lukoil is already working on developing the giant West Qurna-2 oil field in the Iraqi south and Wednesday, Russian President Vladimir Putin pushed for a deal for oil company Gazprom Neft to start work in the semiautonomous Kurdish north.  Iraq is producing, on average, about 3.4 million barrels of oil per day, roughly 40 percent more than it was in 2009. Iraqi officials had said the growing interest in its oil reserves gave it reason to expect production levels could reach 12 million bpd by 2017, a level considered ambitious by most analysts. Providing few specifics, Iraqi Deputy Prime Minister Hussein al-Shahristani, a former oil minister, said talks with independent consultants led him to believe a target of around 10 million bpd by 2020 was "feasible and desirable," however.

Who Moved My Peak Oil? - The buzz about peak oil has peaked, and for a good reason: the peak remains MIA. That doesn’t mean that the global supply of crude oil is a non-issue. Far from it. But for the moment, at least, statistical evidence in favor of arguing that the world’s output of crude has hit a ceiling, or is in imminent danger of doing so, looks thin. Global production of crude (defined as crude including lease condensate) hit an all-time high this past April: 75.872 million barrels per day, according to data from the U.S. Energy Information Administration. That wasn't supposed to happen, a number of peak-oil theorists warned over the past decade. In 2001, for example, geologist Ken Deffeyes wrote a widely cited book (Hubbert's Peak: The Impending World Oil Shortage) that predicted that “global oil production will probably reach a peak sometime during this decade.” Deffeyes wasn't alone in seeing trouble on the production horizon. But as the chart below reminds, higher peaks keep coming. The peak-oil theorists haven't given up. Instead, they keep revising their peak forecasts, pushing the dates for production crests further out in time. Two years ago, for instance, Charles Maxwell—the "dean of oil analysts"—predicted that the peak will come sometime between 2015 and 2020.

Iran on the brink - Iran's internal instability continues to pose significant risks to the region. As discussed earlier (see post), the currency collapse has triggered hyperinflation. Bloomberg/BW: - The run on the rial has exacerbated inflation that had already been pushed up by the removal of subsidies on energy and food. The official rate rose to 23.5 percent in August. The real rate, which adjusts for the currency depreciation, is three times that, according to Steve Hanke, a professor of applied economics at Johns Hopkins University in Baltimore.  “We’re getting into what is technically hyper-inflation,” with an “implied inflation rate” of about 70 percent a month, Hanke said. As a result Iranians with money are trying to preserve their wealth by buying gold.  Bloomberg/BW: - Wealthy Iranians in Turkey are collecting gold and exporting it to Iran, the Istanbul-based Zaman newspaper said July 11. Iranians in Dubai and India are also collecting gold and sending it to the central bank, These developments may be a precursor to a sharp increase in social unrest. As the well-off Iranians have the ability to preserve their wealth (at least in part), the gap between the rich and the poor widens. In the late 70s similar conditions (including high inflation and gold buying by the wealthy) preceded militant anti-Shah demonstrations and ultimately the 1979 Islamic revolution.Once again, the mass media doesn't seem to be focused on these developments - in part due to lack of understanding of history. One doesn't need to focus on the history of Iran to appreciate how dangerous the situation has become. Currency debasement and inflation were responsible for hostilities through the ages

Meat becomes a Luxury Good in Iran as Inflation continues - Economic sanctions against Iran are really beginning to bite now. Hyperinflation has struck its currency, causing the rial to lose more than half its value against the dollar in the past couple of months. The falling currency is putting severe pressure on Iranian civilians, which has led to street protests and riots. This week riot police had to fire tear gas at crowds of protestors, and now hundreds of security personnel roam the streets to try and deter any more campaigns. The inflation, estimated at 29 percent last week, is causing food prices to soar. Milk rose by 9 percent yesterday, and Behrouz Madani, a butcher from northwest Tehran, said that chicken, once a staple of Iranian meals, has doubled in price since last year. In fact meat has become so expensive that it is generally considered a luxury good now. “Most of my customers just look at products behind the window and pass,” he said. “I see them going to the next store, which is a bakery, to feed their families with bread.”

Latest developments in Iran: conditions becoming increasingly desperate -  More worrisome signs are emerging of deteriorating economic conditions in Iran. Here are some of the latest news quotes:1. Crude output is slowing. NYT: - Daily oil production in Iran, the most important component of its economy, fell in September to the weakest level in nearly a quarter-century, according to monthly data released on Friday by the International Energy Agency. The agency forecast declines in Iran’s ability to produce oil for years to come if Western sanctions were not lifted 2. Trade in general has come under severe pressure. This is likely having a terrible impact on the population, particularly the poor. Reuters: - Data from maritime intelligence publisher IHS Fairplay showed the overall number of vessels calling at Iranian ports in the year to early October was 980. That figure for more than three quarters of this year compares with 2,740 ships for the whole of 2011 and 3,407 for 2010.  Of that total, the number of visits by container ships - which carry consumer goods ranging from foodstuffs and household items to clothing and toys - was 86 so far this year, compared with 273 for the whole of 2011 and 378 in 2010.  Only eight refrigerated cargo vessels carrying fresh produce including bananas called at Iranian ports so far this year, down from 16 in 2011 and 36 in 2010, the IHS Fairplay data showed. Even fishing trawlers unloading their catch have slumped to five from 14 last year and 20 in 2010.

Aluminium: Shock and ore - Aluminium has delivered relative prosperity here – but it has made the smelter’s 44-year-old owner, Oleg Deripaska, one of Russia’s super-rich. It was here, as a 25-year-old, that he began building the aluminium empire that is now UC Rusal, the world’s largest producer. But the industry’s prosperity is fading. Aluminium is the world’s most widely used metal after steel, found in everything from aircraft to drinks cans. Yet while commodities such as copper and iron ore have brought riches to the mining industry, thanks to surging Chinese demand, aluminium has almost entirely missed the supercycle. At $2,100 a tonne, its price is little changed since 1980, making it the worst performing mined commodity tracked by the International Monetary Fund. Copper has nearly tripled in price over the same period, while iron ore has risen eightfold. Industry titans have been cut down to size. Rusal is in talks with its lenders to extend a covenant holiday, just three years after restructuring its $16.8bn debt. “We have some difficult times,” Mr Deripaska concedes. “Our industry is facing a lot of challenges.” The story is repeated across the sector. The valuations of the leading producers by output – Rusal, Alcoa of the US, London-listed Rio Tinto, Chinese state-owned metals and mining group Chalco and Norway’s Norsk Hydro – have collectively collapsed from almost $200bn five years ago to about $65bn today. The downturn in profitability will redraw the industry landscape, analysts and executives say, forcing traditional producers to retrench and consolidate, and accentuating the rise of China as an aluminium powerhouse. “Monotowns” such as Sayanogorsk could become increasingly vulnerable.

China's 'New Left' Grows Louder - —Supporters of ousted political leader Bo Xilai are turning up the note of political discord in China with increasingly loud criticism that the policies of current Communist Party leaders are widening inequality and breeding social unrest. The movement, known as the new left, remains relatively small and obscure, and is unlikely to have a major impact on the coming shuffle of party leadership positions. But criticism from Communist hard-liners in the era of online social media places China's leaders in a tricky position as a debate over the direction of the party and China's economic model is quickly spreading from universities and closed-door sessions into public view.The new left—a loose collection of academics, lower-ranking government officials, writers and overseas activists—advocates a stronger hand for the state in economic planning as well as a return to the values put forth by the late Chairman Mao Zedong. The new left argues that China's economic reforms over more than 30 years have led to wide income disparity, and the movement has criticized the takedown of Mr. Bo, once its most visible leader. Dealing with the new left requires some balancing for the party. Unlike the political activists who often oppose the party on democratic or human-rights grounds, the new leftists act as defenders of the vision Mao once laid out for China: Rejecting them outright would risk exposing party leaders to sensitive questions around the very foundation the party is built on.

World Bank cuts China growth forecast - The World Bank has cut its forecast for growth in China’s economy this year to 7.7 per cent, a sharp downgrade from the prediction of 8.2 per cent growth it made in May. In a report on economies in East Asia and the Pacific published on Monday the global lender said there were concerns that China could slow further although it said the risk of a “hard landing” collapse remained small. “China’s slowdown this year has been significant, and some fear it could still accelerate,” the report said. “The risk remains of a more pronounced slowdown in China than currently expected.” China’s gross domestic product grew 9.3 per cent in 2011 from a year earlier but thanks to weak exports and lower investment growth the pace slackened to 7.6 per cent in the second quarter from the same period a year earlier. The deceleration has been caused partly by government efforts to rein in inflation and take some air out of a nationwide property bubble and partly by slumping growth in exports to key markets such as Europe and the US. The rest of the region, which increasingly relies on China as its main engine of growth, has also been hit by falling exports and the World Bank predicts growth this year for developing East Asia and the Pacific will be 7.2 per cent, down from 8.2 per cent last year.

PBOC Injects $42.14 Billion —China's central bank pumped a load of cash into the country's banking system for a second time in two weeks, spurring stock-market rallies in Shanghai and Sydney, and signaling to some investors a stronger resolve by the government to stimulate the ailing economy. The liquidity injection, the second-biggest of its kind ever in China, is aimed at lowering domestic borrowing costs for companies grappling with the country's slowest economic growth since the financial crisis. Chinese authorities have refrained from using more-powerful fiscal and monetary weapons in recent months, such as cuts to benchmark interest rates, and analysts say uncertainties over the country's once-a-decade leadership handover have likely contributed to indecision. But with the transition now apparently set to kick off at a party meeting in early November, policy makers could become significantly more proactive in ramping up growth through the rest of the year, analysts say. The People's Bank of China used financial instruments known as reverse repurchase agreements, or reverse repos, a type of short-term loan to commercial banks, to inject 265 billion yuan ($42.14 billion) into the money market Tuesday, adding to the 2.418 trillion yuan injected since late June.

Yuan Loans Trail Estimates as Wen Struggles for Rebound - China’s new lending was below analysts’ estimates last month as the government struggles to reverse a slowdown in the world’s second-biggest economy. Banks extended 623.2 billion yuan ($99.5 billion) of local- currency loans, the People’s Bank of China said on its website today. That compares with the median estimate of 700 billion yuan in a Bloomberg News survey of economists.  China’s central bank has cut interest rates and lenders’ reserve requirements to spur lending, with economic growth sinking just as the Communist Party prepares for a once-a-decade leadership transition that starts next month. While local governments are rolling out plans for infrastructure spending, banks are wary of accumulating bad loans and have failed to make use of extra leeway for offering discounts to borrowers. Premier Wen Jiabao is “risking handing over a sharply slowing economy to the next administration, a blemish to his otherwise great performance over the last ten years,” said Liu Li-Gang, an economist in Hong Kong at Australia & New Zealand Banking Group Ltd. (ANZ), who previously worked at the World Bank. Liu said the central bank needs to cut lenders’ reserve requirements.

Bank of China executive warns of shadow banking risks  - A senior Chinese banking executive has warned against the proliferation of off-book wealth management products, comparing some to a Ponzi scheme in a rare official acknowledgement of the risks they pose to the Chinese banking system. China must "tackle" shadow banking, particularly the short term investment vehicles known as wealth management products, Xiao Gang, the chairman of the board of Bank of China, one of the top four state-owned banks, wrote in an op-ed in the English-language China Daily on Friday. He warned of a mismatch between short-term products and the longer underlying projects they fund, adding that in some cases the products are not tied to any specific project and that in others new products may be issued to pay off maturing products and avoid a liquidity squeeze. "To some extent, this is fundamentally a Ponzi scheme."

US Panel: China Tech Giants Pose Security Threat — American companies should avoid doing business with China‘s two leading technology firms because they pose a national security threat to the United States, the House Intelligence Committee is warning in a report to be issued Monday. The panel says U.S. regulators should block mergers and acquisitions in this country by Huawei Technologies Ltd. and ZTE Corp, among the world’s leading suppliers of telecommunications gear and mobile phones. Reflecting U.S. concern over cyber-attacks traced to China, the report also recommends that U.S. government computer systems not include any components from the two firms because that could pose an espionage risk. “China has the means, opportunity, and motive to use telecommunications companies for malicious purposes,” the report says.

Where Commerce and Politics Collide - Whatever happened to the reassuring view that expanding trade ties make for a safer and more prosperous world? This idea has been long present in U.S. strategies toward China, even before being concretized in Robert Zoellick’s notion of integrating China into the world financial and commercial systems as a way of promoting “responsible stakeholdership.” The Chinese had a parallel concept — that promoting economic interdependence with America would counter Washington’s natural tendency to block China’s rise as an alternative power. But as President Obama and Governor Mitt Romney argue over who can be tougher on China and its trade practices, and as a wave of anti-American nationalism surges across China, the commercial partnership meant to bring Washington and Beijing closer together appears to be pushing the world’s two largest economies further apart. Are we headed for some new form of Cold War-style confrontation?

The Renminbi Challenge - Barry Eichengreen  -- In carving out a global role for the renminbi, Chinese policymakers are proceeding deliberately. In the words of the venerable Chinese proverb, they are “feeling for the stones while crossing the river.” The authorities’ first step was to authorize Chinese companies to use the renminbi in cross-border trade settlements. As foreign firms exporting to China accepted payment in renminbi, the currency piled up in their bank accounts in Hong Kong. That led to the next step: Foreign firms wishing to invest in China were allowed to tap those deposits by issuing renminbi-denominated bonds, and eligible offshore financial institutions were permitted to invest renminbi funds in China’s interbank bond market. Then, last summer, China announced plans to allow banks in Hong Kong to lend renminbi to companies in Shenzhen, opening that city financially to the rest of the world. The expectation is that if financial opening works in Shenzhen, it will be implemented more widely. Finally, as a step toward making the renminbi a reserve currency, China signed currency-swap agreements with the Philippines, South Korea, Japan, and Australia. Meanwhile, Malaysia, Nigeria, and Chile have already acquired modest amounts of renminbi reserves. Other central banks are expected to follow.

Pettis: China is like Japan and not in a good way - Chiwoong Lee at Goldman Sachs has a new report out (“China vs. 1970s Japan”, September 25, 2012) in which he predicts that China’s long-term growth rate will drop to 7.5-8.5%. I disagree very strongly with his forecast, of course, and expect China’s growth rate over the next decade to average less than half that number, but the point of bringing up his report is not to disagree with the details of his analysis. I want instead to use his report to illustrate what I believe is a much more fundamental problem with these kinds of research pieces on China. The mistake I will argue he is making is one that is fairly common. It involves determining the past relationship between certain inputs and the outputs we want to forecast – say GDP growth. Once these are determined, the economist will carefully study the expected changes in the inputs, and then calculate the expected changes in the outputs, to arrive at his growth forecast. This is pretty much the standard analysis provided by the IMF, the World Bank, and both academic and sell-side research, but, as I will argue, this methodology implicitly assumes no real change in the underlying development model – no phase shift, to use a more fashionable term. If this assumption is correct, then the analysis is useful. If however we are on the verge of a shift in the development model – perhaps, and usually, because the existing model is unsustainable and must be reversed, the analysis has no value at all.

Toyota Sales in China Plunge 40%; Japan Carmakers to Cut China Production by Half - In the wake of rising anti-Japanese sentiment in China fueled by dispute over islands in the East China Sea, sales of Japanese cars in China have plunged. In response Japan carmakers to cut China production by halfSales have plunged at Japanese car makers since violent protests and calls for boycotts of Japanese products broke out across China in mid-September over the Japanese government's purchase of a group of disputed islands in the East China Sea from their private owner. Nissan will suspend the night shift at its passenger car factories in China and operate only during the day, the business daily said. Nissan has two passenger car factories in China, in Huadu and Zhengzhou, with two lines each. A Nissan spokesman declined to confirm the report. Toyota and Honda plan to cut China production to about half normal levels by shortening working hours and slowing down the speed of production lines, the Nikkei said without citing a source. Toyota's China sales fell about 40 percent in September from a year before to about 50,000 cars, a senior company executive told Reuters last week. The firm is set to officially release its September China sales figures on Tuesday.

China Bank Chief Pulls Out of IMF Meeting - China's central-bank governor has pulled out of the annual meeting of the International Monetary Fund, as Beijing ramps up its protest over a continuing territorial dispute with Japan, signaling that the diplomatic spat is spilling over into the realm of economics. Zhou Xiaochuan had been scheduled to play an important role at the IMF meeting, which has on its agenda a number of pressing global economic issues, including how best to deal with the continuing euro-zone crisis. China is a major participant in those discussions and its central bank is a large purchaser of euro-zone bonds. China will be represented at the IMF meeting by the No. 2 officials at the People's Bank of China and finance ministry, neither of whom has international contacts or the standing of Mr. Zhou.An IMF spokesman said Wednesday that Beijing had informed the fund two days ago that Mr. Zhou's schedule might cause him to cancel his attendance at the meeting and the cancellation of his lecture. Mr. Zhou's deputy, Yi Gang, will give the lecture in his place. China's state-owned news agency, Xinhua, reported earlier Wednesday that the deputies would represent China.

Japan Calls China PBOC Chief Skipping IMF Meeting ‘Regrettable’ - A decision by the Chinese central bank chief and finance minister not to attend International Monetary Fund meetings in Tokyo this week is “regrettable,” Japan’s finance minister said, as tensions lingered over an island dispute.  The Chinese move follows Japan’s decision last month to buy the islands from their private owner, a purchase that sparked protests in China and clouded a $340 billion trade relationship. The protests occurred as China, which begins a leadership transition next month, has been more forceful in making its territorial claims across the region. The Chinese decision is the latest sign that the tension from the territorial dispute between the two countries hasn’t been contained. Japan’s move to buy the islands sparked the worst crisis in bilateral relations since 2005. An NHK poll published today showed 44 percent of Japanese respondents think the government should prioritize improving relations with China, while 41 percent think it should take a tougher stance. The telephone survey, conducted Oct. 6-9, obtained 1,056 responses and didn’t give a margin of error.

Japan cuts economic assessment for third month - The Japanese government cut its assessment of the economy for the third straight month in October, as a slowdown in the global economy weighed on exports and production. In its monthly economic report released Friday, the government said the economic recovery "is in a weak tone recently due to deceleration of the world economy." A Cabinet Office official briefing reporters on the report said this was the first time the assessment was cut for three or more consecutive months since a five-month decline from October 2008 to February 2009. The government expects movement toward economic recovery to pause in the short term, but then resume as conditions improve overseas and with continued support from reconstruction-related spending after the March 2011 earthquake and tsunami. 

What happens when national income falls? - The main statistic we use to measure the size of the economy is Gross Domestic Product. The ABS defines GDP as: The total market value of goods and services produced in Australia after deducting the cost of goods and services used up (intermediate consumption) in the process of production, but before deducting allowances for the consumption of fixed capital (depreciation). It is equivalent to gross national expenditure plus exports of goods and services less imports of goods and services. But GDP is not the only indicator of the size of the national economy. Real Gross Domestic Income (GDI) is another. According to the ABS, the real purchasing power of income generated by domestic production is affected by changes in import and export prices. Real gross domestic income adjusts the chain volume measure of GDP for the terms of trade effect. Some argue that GDI is a more accurate measure of the size of our economy than GDP. Let’s look at some charts.

Singapore Q3 economic growth slows - Singapore's economy grew by 1.3 percent in the third quarter, slower than the 2.3 per cent growth in the previous quarter. "On a quarter-on-quarter seasonally-adjusted annualised basis, the economy contracted by 1.5 per cent, compared to the 0.2 per cent expansion in the second quarter", the Ministry of Trade and Industry (MTI) said while releasing the advance GDP figures. The Ministry also cautioned that growth could be weighed down by the subdued global economic conditions for the rest of the year.

Andy Xie and the End of the WTO's 'Golden Age' - Say what you will about Andy Xie, but he isn't one who refrains from speaking his mind.  While he has his fair share of detractors, others laud him as an economic clairvoyant, especially when predicting various financial crises. As always, the truth probably lies somewhere in between, and his latest missive will give ammunition to his fans and detractors alike. I was visiting the MarketWatch website where I encountered his latest call that the WTO's 'golden age' has ended. (He uses the 'WTO system' as shorthand for increases in world trade volume that have outstripped global GDP growth for several years.) This being Andy Xie, his fixation on tax havens becomes the basis for explaining why the backlash against these Romneyesque hidey-holes symbolizing inequality will ultimately spill over into the trade realm: While the WTO system provides a platform for globalization, multinational companies have led it. Their pursuit of profit maximization has caused trade to grow twice as fast as GDP. Their political influence in the West is the key to the success of the WTO system. The global financial crisis of 2008 soon became a global economic crisis and has become a political crisis. Redistribution through tax has become a focal point in recent elections in the West. But businesses resist rising taxes. They can redistribute profits around the world to low tax havens like Switzerland or Singapore. Their resistance is bound to have political repercussions.

The Economist Debates: Is Indian Growth in Jeopardy? - As India’s economy slows, is Indian growth losing its way? CGD senior fellow Arvind Subramanian thinks so. This week Arvind faces off against Shashi Tharoor, a member of the Indian parliament, in a debate on the Indian economy hosted by The Economist. Their opening remarks were posted today, and you can read them here (free registration required). Arvind is pessimistic about India’s prospects. He worries that an weakening state and deteriorating politics undermine the economy. “The Indian state is increasingly unable to provide a range of basic services: health, education, physical security, rule of law, water and sanitation. The writ of the Indian state, for example, covers only about 80% of India, with the tribal belt essentially contested by Maoist insurgents. The private sector can substitute for some of these deficiencies but never completely. – In the long run, growth is determined by effective state capacity: that is India’s weakness compared with China.”

The Best Way to Rob a Bank is still to Own One: a Postscript By William K. Black - The central questions for a theorist are whether his theory showed strong explanatory power and to what extent it proved useful in diverse settings.  A distinguished economist, Dr. Jayati Ghosh, has addressed those questions in an article in which she was explaining to Indian readers that a large fraud, Satyam, was not the product of unique defects in Indian regulation.  But the truth is that instances like Satyam are neither new nor unique to India. Similar — and even more extreme — cases of corporate malfeasance abounded in the past decade, across all the major capitalist economies, especially in the US. And these were not aberrations, rather typical features of deregulated capitalist markets. Furthermore, there is also quite detailed knowledge about the nature of such criminal tendencies within what are supposedly orderly capitalist markets. Four years ago, at a conference in New Delhi, the American academic William Black spoke of how financial crime is pervasive under capitalism. He knew what he was talking about: as an interesting combination of lawyer, criminologist and economist, he recently authored a best-selling book on the role of organised financial crime within big businesses.

‘Titanic’ Defaults Loom on Restructured India Bank Debt - India’s Kingfisher Airlines escaped collapse in 2010 by restructuring 77.2 billion rupees ($1.4 billion) of debt it had run up buying airlines and adding routes amid the nation’s economic boom. Less than two years later, the carrier controlled by billionaire Vijay Mallya was back in talks with creditors, while its net debt had increased by 9 billion rupees. The airline this month grounded its entire fleet after pilots went on strike to demand seven months of unpaid salaries, and was given time until the end of October by its creditors to submit a funding plan. Kingfisher is among Indian companies resorting to an out- of-court loan-restructuring process that bankers and regulators say is too lenient on borrowers, leading to restructured debt that has more than doubled since March 2009. A fifth of the credit may sour as the economy falters and crimp profits at government-controlled lenders such as State Bank of India that account for three-quarters of the nation’s loans and deposits. “No single lender can afford a large company going under, a la Titanic,” A.S.V. Krishnan, senior research analyst at Ambit Capital Pvt. in Mumbai, said in an interview last week. “Lenders have overdone restructuring, and it is coming to roost now on their balance sheets.”

World Bank warns of deepening India slowdown --The World Bank has lowered its economic growth forecast for India to 6.0% this fiscal year due to infrastructure problems and slow policy reform, and warned of a high risk that growth could slow further should economic conditions in Europe deteriorate. It had earlier forecast the economy would expand 6.9% in the current fiscal year through March. "The downside risks to growth in the Indian economy are high because of the risks to global growth from the precarious situation in Europe," it said in a report released late Wednesday. The World Bank said factors affecting Indian growth include power shortages, corruption scandals in the mining and telecommunications sectors and investor uncertainty due to pending legislative proposals. The bank's move comes after Standard & Poor's Ratings Services said there is a significant chance of lowering the sovereign's credit rating, which would relegate its debt to junk status. It also comes after the International Monetary Fund on Tuesday slashed India's growth forecast to 4.9%.

India faces rating downgrade despite reforms drive, warns S&P - Ratings agency Standard & Poor's warned that India still faced a one-in-three chance of a credit rating downgrade within the next 24 months despite a new drive for economic reform that was launched in September. "A downgrade is likely if the country's economic growth prospects dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow," it said in a report dated Tuesday and released on Wednesday. India's benchmark 10-year bond yield edged up 2 basis points to 8.17% after the S&P comments while the rupee extended losses to trade at 53.14 per dollar from 52.90, and stocks also fell further. India has a rating of BBB-, one notch above junk grade and the lowest investment rating in the so-called BRIC economies. S&P had downgraded India's rating outlook to negative from stable in April. India's outlook can be revised back to stable, the ratings agency said, if the government goes ahead with steps to reduce structural fiscal deficits, improve the investment climate, and increase growth prospects.

NWO:The Enemy of Humanity - This American street muralist recorded a stop-motion video of his London creation of a mural depicting world leaders playing Monopoly on the backs of the working class. Pretty remarkable

The Sufficiency Economy: a Thai Solution to Economic Sustainability - The economy is a major force driving our lives, from the purchasing decisions we make to the public and private institutions we support. It determines how wealthy nations and their people are, and consequently becomes a determining factor for assessing quality of life. On the other hand, when the economy collapses, it brings us enormous devastation and takes wealth and prosperity back from the people.  When an economy ceases to grow, it’s not easy –or maybe even impossible — to bring it back to the state where it used to be. Suppose that we are lucky enough to see economic growth and prosperity again, how can we know that a collapse is not going to happen in the future?  Maybe it’s time for us not to rely too heavily on conventional economic theories, but instead start to look for a more sustainable and effective economic strategy. The Sufficiency Economy might be a better solution for mankind to pursue and improve upon. The Sufficiency Economy is a philosophy developed by King Bhumibol Adulyadej of Thailand through his royal remarks over the past three decades. The Sufficiency Economy is a happiness development approach, which emphasizes the middle path as an overriding principle for appropriate conduct by people at all levels.  The middle path is a way of thinking in which no one lives too extravagantly or too thriftily. It encourages people to live in a way where they consume only what they really need, choose products carefully, and consider their impact on others and the planet. The sufficiency economy enhances the nation’s ability to modernize without defying globalization – it provides a means to respond to negative outcomes caused by rapid economic transitions.  This philosophy is a guide to making decisions that will generate outcomes that are beneficial to the development of the country

Fired miners vow to fight to the death - A leader for striking miners at Anglo American Platinum mines in South Africa on Saturday said they would make it difficult for the company to hire new miners after the company fired 12,000 striking workers this week. Evans Ramokga threatened that Amplats would only hire new employees “over our dead bodies.” “Nobody will come and operate these mines. If there any people we feel must go, it is them, not us,” he said, referring to the bosses of Amplats, a subsidiary of the London-listed Anglo Platinum. The world's top producer of platinum said it fired the workers for failing to attend disciplinary hearings in the aftermath of an unlawful strike that brought its Rustenburg operations to a halt. And Mpumi Sithole, a spokeswoman for Amplats, said Saturday that the decision to fire the workers is final. More 20,000 mineworkers at Amplats have been staging a wildcat strike since Sept. 12, demanding 12,500 rand (about $1,500) in take-home pay. Amplats managers said from the start that the strike is unlawful. On Friday, hours after renewed confrontations between armed police and striking miners on a hill near Amplats' Rustenburg mines, the company moved to dismiss the workers via text or email messages.

Rand slammed, hits 3-year low as strikes spread - The South African currency tumbled to its lowest level in more than three years Monday as union activity in the country spread from the mining sector to truckers and possibly state employees, with the strikes now posing a threat to Africa’s biggest economy. The U.S. dollar rose for a seventh day to buy almost 9 South African rand — touching its highest level since early 2009 — before edging back to 8.8592 rand. The greenback has shot up 8.7% against the rand this month, according to FactSet. “Until such time as industrial unrest abates and the underlying damage becomes a little clearer, then the [rand] will be susceptible to inevitable downward pressure,” Strikes over wages started in August at a platinum mine owned by Lonmin. The labor unrest led to dozens of deaths, in what was the bloodiest police action since apartheid. Close to 100,000 workers in South Africa have gone on strike in recent weeks, according to Reuters.

Will Brazil remain the country of the future? - THE question of whether the Mexican economy might one day regain the top spot in the Latin American league tables has once again become an interesting one. In 2010, many thought it had been settled. The Brazilian economy, more than double the size of Mexico’s, grew at a 7.5% annual rate while Mexico puttered forward at close to 2%. What a difference two years makes. While the Brazilian economy is shambling along at an annualised rate of 1.9% so far in 2012, the Mexican economy is set to grow at 3.9%. If this trend continues, some reckon the Mexican economy will overtake Brazil’s as soon as 2022. One believer is Benito Berber, Nomura’s Latin America strategist. In a recent report Mr Berber applies Solow growth accounting to a series of forecasts on Mexico and Brazil, with striking results:

MMT, Argentina, and Views on Inflation --On the surface, the data from Argentina look awfully good—among the top performers in the world over the past decade. And she’s apparently done it without a run-up of either private sector or government sector debt. In other words, Argentineans have bucked the trend among developed countries, that saw (mostly) tepid growth fueled almost entirely by debt. And that seems to be at least in part due to a policy choice. Argentina had been the poster child for Neoliberal policies all through the 1990s—they adopted virtually the whole Neolib agenda lock-stock-and-barrel. They even adopted a currency board. And unlike Euroland (which also adopted something like a currency board as each member adopted a foreign currency—the euro), Argentina would have consistently met the tight Maastricht criteria on budget deficits and debts over that period. The main purpose of the austere budgets and currency board constraints was to kill high inflation. It worked. But, over that period unemployment grew and GDP growth was moderate. I won’t go further into the problems encountered at the turn of the new decade but the whole thing collapsed into a severe economic, financial, and political crisis. In a last desperation move, the government abandoned the currency board (or, you could say the currency board abandoned the government!), defaulted on its debt, and created a Jobs Guarantee program called Jefes.(You can read more here and here; or if you want a first-hand account by Daniel Kostzer who played a major role in bringing Argentina out of crisis by helping to create and implement the Jefes program, read this.)

IMF cuts Canada's outlook, frets over housing, consumer debt - The International Monetary Fund is taking a dimmer view of Canada, cutting its economic forecasts and warning of the threats from the housing market and swollen consumer debt levels.“In Canada, the key priority is to ensure that risks from the housing sector and increases in household debt remain well contained and do not create financial sector vulnerabilities,” the IMF said today in updated global projections that, over all, paint a bleak picture of the world in the post-crisis era. “Thus far, mortgage credit growth has slightly decelerated in response to the measures taken by the authorities, including tighter mortgage insurance stands,” it said in its lengthy report. “If household leverage continues to rise, additional measures may need to be considered.” The Canadian government has already moved several times to tame the mortgage market and take the froth off house prices. The latest move by Finance Minister Jim Flaherty, in July, has helped cool the market, and most, though not all, observers, now see a soft landing.

Banks and cross-border capital flows: Policy challenges and regulatory - Many argue that the financial sector is in dire need of reform but there is always the danger of solving one problem by creating another. This column outlines the findings of the Committee for International Economic Policy and Reform. It takes stock of the traditional case for financial liberalisation and asks which principles have withstood the test of recent events and which ones now need re-thinking.

Do falling trade costs benefit all countries equally? -- Trade barriers such as transportation costs and tariffs reduce international trade. But when these trade barriers come down, do they increase international trade equally among countries? This column presents evidence from OECD countries that trade costs have a differential impact depending on the trade intensity of the countries involved. When they already trade a lot, country pairs hardly benefit. But bilateral trade grows faster when the initial trade relationship was thin.

Bringing Banking to the Masses, One Phone at a Time - Dallas Fed  - More than half of the world’s adult population lacks access to formal financial services. The proportion is greater in developing countries, where 64 percent on average do not have bank accounts, compared with 17 percent in developed nations (Chart 1).[1] Mobile communications technology is fast becoming a conduit of change. Cell phone subscriptions have mushroomed to cover 75 percent of the global population, enabling mobile banking networks to sprout and reach the unbanked, disproportionately in developing nations. Access to financial services is considered essential for wealth creation. A banking relationship, for example, can improve living standards and alleviate poverty by lifting consumers’ purchasing power. It can also benefit consumers through increased security and reduced costs for financial goods and services. Greater access to credit helps small businesses by providing a funding alternative to personal wealth or internal resources. In developing regions, formal financial institutions often rely on brick-and-mortar branches that are geographically concentrated in high-income areas such as urban centers. Distance to banks and their limited hours of operation discourage many in poor areas from opening accounts. Moreover, poor households may be unable to afford bank fees or meet minimum-balance requirements. They also may distrust financial institutions. A lack of appropriate products and services for enterprises that are small or in informal economic sectors further hinders inclusion. As a result, large population segments operate exclusively on a cash basis, outside the formal banking system.Mobile technology is making possible development of advanced financial systems capable of channeling funds to their most productive use.

Kremlin Struggling With Pension Time Bomb - A broad swathe of expert opinion maintains that the only way for Russia to defuse the ticking time-bomb of its pension system, which runs an annual deficit of 1.3 trillion rubles ($42 billion), is to raise the retirement age. But such a move would be deeply unpopular among the population as a whole and faces implacable political opposition from the Kremlin. "I am against raising the retirement age," then-Prime Minister Vladimir Putin wrote last year in an article published amid his campaign to be re-elected for a third presidential term. Pensions, which average 9,700 rubles a month, grew rapidly during Putin's first two terms as president and he has pledged that they will continue to rise. Caught between Putin's promises and the urgent need to staunch the money hemorrhaging from the budget to cover the State Pension Fund's spiraling deficit, Prime Minister Dmitry Medvedev's cabinet has been forced into a series of elaborate contortions.

World Bank lowers Russian GDP forecast for 2012 (Xinhua) — The World Bank Monday downgraded its forecast of Russia’s gross domestic product (GDP) for 2012 from 3.8 percent to 3.5 percent. In June, the World Bank upgraded its forecast of Russia’s growth from 3.5 percent to 3.8 percent. Now the bank returned to its previous prediction, which was the same with that made by the Russian Ministry of Economic Development in August. The World Bank cited Russia’s lower-than-expected harvest, weakening domestic demand and worsening global economic outlook as reasons for its downgrading. “In the second half of 2012 the growth of economy could slow due to negative base effect, hike of inflation rate, drought and low activity on the global markets,” the bank said in its regular report. Russia’s GDP grew 4.4 percent in the first half of 2012. The GDP growth in Russia this year will be the most rickety in 15 years, excluding two recessionary years of 1998 and 2009.

IMF Cuts Global Growth, Warns Central Banks, Whose Capital Is An "Arbitrary Number", Is Only Game In Town - "The recovery continues but it has weakened" is how the IMF sums up their 250-page compendium of rather sullen reading for most hope-and-dreamers. The esteemed establishment led by the tall, dark, and handsome know-nothing Lagarde (as evidenced by her stroppiness after being asked a question she didn't like in the Eurogroup PR) has cut global growth expectations for advanced economics from 2.0% to only 1.5%. Quite sadly, they see two forces pulling growth down in advanced economies: fiscal consolidation and a still-weak financial system; and only one main force pulling growth up is accommodative monetary policy. Central banks continue not only to maintain very low policy rates, but also to experiment with programs aimed at decreasing rates in particular markets, at helping particular categories of borrowers, or at helping financial intermediation in general. A general feeling of uncertainty weighs on global sentiment. Of note: the IMF finds that "Risks for a Serious Global Slowdown Are Alarmingly High...The probability of global growth falling below 2 percent in 2013––which would be consistent with recession in advanced economies and a serious slowdown in emerging market and developing economies––has risen to about 17 percent, up from about 4 percent in April 2012 and 10 percent (for the one-year-ahead forecast) during the very uncertain setting of the September 2011 WEO. For 2013, the GPM estimates suggest that recession probabilities are about 15 percent in the United States, above 25 percent in Japan, and above 80 percent in the euro area." And yet probably the most defining line of the entire report (that we have found so far) is the following: "Central bank capital is, in many ways, an arbitrary number."

IMF Offers Bleak Assessment of Stalled Recovery - Plagued by uncertainty and fresh setbacks, the world economy has weakened further and will grow more slowly over the next year, the International Monetary Fund says in its latest forecast. Advanced economies are risking recession, the international lending organization said in a quarterly update of its World Economic Outlook, and the malaise is spreading to more dynamic emerging economies such as China. The IMF forecasts that the world economy will expand 3.3 percent this year, down from the estimate of 3.5 percent growth it issued in July. Its forecast for growth in 2013 is 3.6 percent, down from 3.9 percent three months ago and 4.1 percent in April. Underpinning that bleaker scenario are the assumptions that Europe will continue to ease monetary policy and that the U.S. will avert a crushing blow to growth by fending off a so-called “fiscal cliff” that could result from a failure to reach a compromise on its budget law and tax cuts. Conditions could worsen if the United States doesn’t deal with its budget crisis soon, the IMF said. “Downside risks have increased and are considerable,” the fund said. It said its forecasts are based “on critical policy action in the euro area and the United States, and it is very difficult to estimate the probability that this action will materialize.” The IMF has urged the U.S. to raise the ceiling on the level of debt the government can issue, which is capped by law. In August 2011, a battle between the Obama administration and Congress over raising the limit wasn’t resolved until the U.S. almost defaulted on its debt.

IMF cuts global growth forecasts - The failure of US and eurozone policy makers to tackle their fiscal woes is threatening an already “slow and bumpy” global economic recovery, the International Monetary Fund has warned. In its World Economic Outlook, the IMF downgraded its forecasts for global growth next year and provided ammunition to critics of austerity, concluding that governments had systematically underestimated the damage done to growth by tax rises and spending cuts. The IMF now believes economic output will expand by 3.6 per cent in 2013, down from its July estimate of 3.9 per cent. But this assumes the US Congress will take action to avoid the “fiscal cliff” – the automatic expiry of tax cuts and introduction of spending reductions next year – and that eurozone governments will follow the European Central Bank’s plan to buy sovereign debt by committing to economic reform and closer integration. “A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component,” the IMF said. “The answer depends on whether European and US policy makers can deal proactively with their major short-term economic challenges.” Economic uncertainty would continue to weigh on output in both advanced and emerging markets, the fund added, though it remained comparatively upbeat on the outlook for China.

IMF cuts 2012, 2013 global growth forecasts - The International Monetary Fund on Tuesday revised down its projections for global growth for this year and next, citing lower growth prospects and higher risks. The IMF cut its 2012 global growth forecast to 3.3% from a 3.5% forecast made in July, and its 2013 forecast to 3.6% from 3.9%. "Low growth and uncertainty in advanced economies are affecting emerging-market and developing economies through both trade and financial channels, adding to homegrown weaknesses," according to the IMF's chief economist, Olivier Blanchard. Failure to act to control Europe's debt crisis or tackle the impending "fiscal cliff" in the United States will make growth prospects much worse, the IMF warned.

Current IMF Growth Forecasts The above is from the IMF's recent World Economic Outlook and shows their projection for global economic growth over the next few years.  They are currently projecting growth between 3 and 4% as the most likely case with some possibility of both higher and lower. About eighteen months ago I took a look at then IMF projections - which at the time called for growth closer to 5% a year than 4% - and argued that they were too optimistic.  I argued from the oil constraint - the projections implied a level of growth in oil supply that was unlikely to materialize.  What we have seen in the interim is somewhat slower growth (especially in Europe, but also in the US and China) with stagnant global trade.  Meanwhile oil supply has indeed been roughly flat, keeping prices persistently high, but the global economy is becoming steadily more oil efficient, allowing a certain amount of economic growth without a growing oil supply: The data here are the IMF's PPP GDP deflated with BEA estimates of GDP deflators and then BP oil production used to produce an estimate of gross world product per barrel of oil. I  think even the IMF's now reduced forecast of 3-4% economic growth is likely to place considerable pressure on oil prices, but 2-3% world growth can probably be sustained at current prices just out of efficiency gains.

Slower and slower - OUCH: The International Monetary Fund's new World Economic Outlook is out this week, and the latest global growth projections are dismal, if expected. A few things stand out. One is the steady downshift in global growth since 2010 (which, to be fair, was one of the best annual global growth performances ever). The IMF forecasts an acceleration in growth in 2013, but I'm not sure how many of us would bet on that. Another is the extremely ugly outlook for Spain and Italy—the IMF now forecasts another year of serious recession for Spain in 2013—which suggests that political and economic tensions within the euro zone will remain high. A third is the big downward revision to growth in emerging market economies and India especially. Not pictured in this chart is the forecast for a steady deceleration in world trade, including a large downward revision to forecasts for emerging-market imports and exports. The overarching view is a world in which troubles are propagated around the world, exacerbating local economic challenges. Europe's sinking economy is socking emerging markets, frustrating efforts at rebalancing and reform.

Global Economy: Some Bad News and Some Hope - Olivier Blanchard  - The world economic recovery continues, but it has weakened further.  In advanced countries, growth is now too low to make a substantial dent in unemployment.  And in major emerging countries, growth that had been strong earlier has also decreased. Let me give you a few numbers from our latest projections in the October World Economic Outlook released in Tokyo. Relative to the IMF’s forecasts last April, our growth forecasts for 2013 have been revised down from 1.8%  to 1.5% for advanced countries, and from 5.8% down to 5.6% for emerging and developing countries. The downward revisions are widespread.  They are however stronger for two sets of countries–for the members of the euro area, where we now expect growth close to zero in 2013, and for three of the large emerging market economies, ChinaIndia, and Brazil. The forces at work are for the most part familiar.  Let me start with the advanced economies. The main force pulling up growth is accommodative monetary policy.  Central banks continue not only to maintain very low policy rates, but also to experiment with programs aimed at decreasing rates in particular markets, at helping particular categories of borrowers, or at helping financial intermediation in general. But two forces continue to pull growth down—fiscal consolidation, and a still weak financial system

IMF Sees ‘Alarmingly High’ Risk of Deeper Global Slump - The International Monetary Fund cut its global growth forecasts as the euro area’s debt crisis intensifies and warned of even slower expansion unless officials in the U.S. and Europe address threats to their economies. The world economy will grow 3.3 percent this year, the slowest since the 2009 recession, and 3.6 percent next year, the IMF said today, compared with July predictions of 3.5 percent in 2012 and 3.9 percent in 2013. The Washington-based lender now sees “alarmingly high” risks of a steeper slowdown, with a one-in-six chance of growth slipping below 2 percent. “A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component,” the IMF said in its World Economic Outlook report. “The answer depends on whether European and U.S. policy makers deal proactively with their major short-term economic challenges.”

JPMorgan vs. the IMF on global growth forecast - JPMorgan's near-term global GDP growth projection is lower than the IMF's. The difference amounts to about 0.5% in growth a year from now. Source: JPMorgan Here is how they differ by country. These do not look like material variances, but they matter in forecasting global growth.

A Global 1937 - Paul Krugman  - Back in 2009, when there was (briefly) a policy consensus in favor of active fiscal policy to fight the slump, there were many warnings to the effect that we must not repeat the infamous mistake of 1937, in which FDR was persuaded to focus on balancing the budget while the economy was still weak, terminating the recovery from 1933 and sending America into the second leg of the Great Depression. And what policy makers proceeded to do was, of course, to repeat the mistake of 1937. The new IMF World Economic Outlook is, in effect, an extensively documented exercise in hand-wringing over the consequences of this repeat of bad history. Kudos to the Fund for having the courage to say this, which means bucking some powerful players as well as admitting that its own analysis was flawed. Let’s look at estimates of the cyclically adjusted budget deficit from the IMF’s Fiscal Monitor, measured as a percentage of potential GDP. I don’t think you want to take these numbers as gospel — for Britain, at least, there’s a very good case that the IMF is greatly understating potential output and hence overstating the structural deficit, and I suspect that this is true to a lesser extent for the US. But in any case the point is that even cheap-money countries facing no pressure either from the market or from external forces to engage in immediate austerity are nonetheless engaged in sharp fiscal contraction:

Jobs: A World Bank Perspective - The theme for the 2013 World Development Report from the World Bank1 is one word: "Jobs." The discussion reaches usefully beyond the issue of recovery from the Great Recession (although that topic is covered as well) and looks at issues of job creation in the long run. At least to me, much of the underlying message is not so much about the raw numbers of jobs that need to be created, but is the idea that stable relationships between employers and employees, with shared benefits for both, are part of a broader web of social institutions and interrelationships.  "As the world struggles to emerge from the global crisis, some 200 million people—including 75 million under the age of 25—are unemployed. Many millions more, most of them women, find themselves shut out of the labor force altogether. Looking forward, over the next 15 years an additional 600 million new jobs will be needed to absorb burgeoning working-age populations, mainly in Asia and Sub-Saharan Africa. Meanwhile, almost half of all workers in developing countries are engaged in small-scale farming or self-employment, jobs that typically do not come with a steady paycheck and benefits.  The problem for most poor people in these countries is not the lack of a job or too few hours of work; many hold more than one job and work long hours. Yet, too often, they are not earning enough to secure a better future for themselves and their children, and at times they are working in unsafe conditions and without the protection of their basic rights. Jobs are instrumental to achieving economic and social development. Beyond their critical importance for individual well-being, they lie at the heart of many broader societal objectives, such as poverty reduction, economy-wide productivity growth, and social cohesion. The development payoffs from jobs include acquiring skills, empowering women, and stabilizing post-conflict societies."

IMF: Eurozone unemployment to exceed that of Middle East and North Africa - The latest IMF report (here) projects next year's unemployment in the Eurozone to be the highest among all the major world regions - exceeding even the rising levels of unemployment in the Middle East and North Africa.These projections are driven by IMF's economic model which has the Eurozone recession probability at above 80%. IMF: - The IMF staff’s Global Projection Model (GPM) uses an entirely different methodology to gauge risk but confirms that risks for recession in advanced economies (entailing a serious slowdown in emerging market and developing economies) are alarmingly high. For 2013, the GPM estimates suggest that recession probabilities are about 15 percent in the United States, above 25 percent in Japan, and above 80 percent in the euro area.  Of course as discussed back in May (see post), the PMI numbers have been pointing to this for some time now. But the IMF is working with Q2-2012 numbers - so the report has a bit of lag in it.

Number of the Week: Developing Economies Become More Resilient - 80%: Percent of time emerging and developing economies spent in expansion in the 2000s. For the first time, emerging and developing economies spent more time in expansion in the past decade than advanced nations. Emerging and developing economies are proving more resilient to downturns, even as advanced economies are spending less time in expansions, the International Monetary Fund noted in their most recent Word Economic Outlook report. In the 1970s and 80s the developing world spent about 33% of their time in downturns, but by the 2000s it was in expansion 80% of the time. The opposite trend is apparent among advanced nations, which have spent more time in downturns in the past two decades. There are multiple reasons for the increasing resilience of emerging and developing economies. For one, while they remain vulnerable to shocks from abroad, negative domestic events have become less frequent. Even as much of the advanced world suffered through banking crises during 2008-09, the developing world managed to avoid such severe shocks in their local industries.

What’s the average adult worth? - The answer is $49,000, according to the Credit Suisse global wealth report, based on their estimate that global household wealth in mid-2012 totaled $223 trillion at current exchange rates (emphasis ours). Looking ahead, and assuming moderate and stable economic growth, we expect total household wealth to rise by almost 50% in the next five years from USD 223 trillion in 2012 to USD 330 trillion in 2017. The number of millionaires worldwide is expected to increase by about 18 million, reaching 46 million in 2017. We expect China to surpass Japan as the second wealthiest country in the world. However, the USA should remain on top of the wealth league, with USD 89 trillion by 2017. Between mid-2011 and mid-2012, only China and North America increased their net worth, and India and Europe saw the sharpest falls, according to the report. The world as a whole had a 5.2 per cent fall in household wealth.

IMF: key euro-zone nations to miss deficit targets--France, Spain and several other euro-zone governments won't hit budget deficit targets agreed with European authorities, the International Monetary Fund said Tuesday, setting the stage for a contentious debate over whether the governments should pursue more cuts or allow the targets to slip. Governments across the European Union have been slashing spending and raising taxes to bring their deficits back in line with the bloc's budget rules, which call for deficits to remain under 3% of gross domestic product. But anemic growth and recession, partly due to previous rounds of austerity, have made the deficit targets difficult to hit and sparked growing political discontent in many of the EU's 27 member states. The IMF said in its semi-annual economic outlook that it expects France's deficit to be 4.7% of GDP this year and 3.5% of GDP at the end of 2013. France has pledged to cut its deficit to 3% of GDP in 2013. The Socialist government of President François Hollande last month unveiled a package of austerity measures, including a 75% tax on incomes over €1 million, to hit the target. Spain's deficit is expected to hit 5.7% of GDP next year, the IMF said, well above the target of 4.5% of GDP. While Italy is seen complying with the 3% budget rule, it too is set to miss its deficit target next year of 0.5% of GDP. The IMF sees Italy's deficit next year at 1.8% of GDP.

Coordinated Fiscal Contraction - The new issue of the IMF fiscal policy monitor is out. As usual, a great reading to understand the state of fiscal policy in the world. There are many issues I could highlight from the report but here is one that caught my attention: below is a summary of what fiscal policy has been doing since 2009. The red dot in the chart represents the change in the cyclically-adjusted primary balance as a % of potential GDP in advanced economies during the period 2009-13. This variable is the best way to capture discretionary fiscal policy, as the balance is adjusted by the cycle and we use potential output (instead of output) to avoid the ratio to be influenced by cyclical variations in GDP (the blue and yellow columns just show how much of the action comes from expenditure cuts of increases in taxes).Not only we see a majority of countries reducing budget balances (a coordinated fiscal policy contraction) but the numbers are extremely large. Greece is an outlier (16.3%), but many others are large (Spain, Portugal and Ireland close to 10%), the UK around 7% and a significant number of countries around 4%. How this coordinated fiscal policy contraction is affecting the pace of the recovery (or the likelihood of another recession) depends on your views on the fiscal policy multipliers (see my previous post), but what remains a fact is that the amount of coordinated fiscal policy contraction during the current cycle is  very large and I doubt that we can find a similar experience in any of the previous recoveries.

Lessons from history on public debt - What happens if a large, high-income economy, burdened with high levels of debt and an overvalued, fixed exchange rate, attempts to lower the debt and regain competitiveness? This question is of current relevance, since this is the challenge confronting Italy and Spain. Yet, as a chapter in the International Monetary Fund’s latest World Economic Outlook demonstrates, a relevant historical experience exists: that of the UK between the two world wars. This proves that the interaction between attempts at “internal devaluations” and the dynamics of debt are potentially lethal. Moreover, the plight of Italy and Spain is, in many ways, worse than the UK’s was. The latter, after all, could go off the gold standard; exit from the eurozone is far harder. Again, the UK had a central bank able and willing to reduce interest rates. The European Central Bank may not be able and willing to do the same for Italy and Spain.

Fiscal policy: Let go of the brakes | The Economist - FISCAL policy could be a lot better, in a lot of countries. This is the unavoidable conclusion from reading the IMF’s updated Fiscal Monitor presented this morning in Toyko. Many countries' tax and spending decisions are contributing to rising inequality, and are insufficiently targeted at cutting unemployment. But the most immediate problem is that consolidation in advanced countries is excessively pro-cyclical. This is because spending cuts and tax hikes act as brakes, slowing the recovery. There is a nasty double whammy too because the IMF now reckons the fiscal brakes are most effective (multipliers are bigger) in a downturn. Is a change of course a good idea?In the chart above, the blue bits of the bars are baked in already. The others could be adjusted. The question is whether some countries—the IMF mentions Britain and France—should delay fiscal adjustment, pushing up-front consolidation (yellow) out into the future (red). Looking at bond yields (chart below) it is tempting to conclude that consolidation should be delayed in all G7 countries except Italy. This is because even countries with large deficits and debt stocks can afford to buy more time to adjust, since interest rates are so low.The problem with delaying consolidation is that it is risky. Yields can change quickly. Look at Italy: the price it had to pay to borrow in debt markets was comparable with other G7 countries in 2008, now it is much higher. The risk is that if America, Britain or France slowed their rates of fiscal consolidation, debt-market investors might start to worry about being paid back. If that happened, jittery bondholders would sell up, prices would drop and yields would spike.

Greek PM says can't manage beyond November without next aid tranche (Reuters) - Greek leader Antonis Samaras told a German paper in an interview published on Friday his country could not manage beyond November without the next tranche of international aid and suggested the ECB could help by easing the terms of its Greek debt holdings. "The key is liquidity. That is why the next credit tranche is so important for us," Samaras told the business daily Handelsblatt. Asked how long Greece could manage without it, he said: "Until the end of November. Then the cash box is empty." The European Central Bank could help by accepting lower interest rates on its existing Greek debt holdings "or it could approve a rollover when these bonds mature", he said. "I could also imagine the recapitalization of Greek banks as is being considered for Spain, which would be not accounted for on its state debts but carried out directly via the ESM. That would be a significant relief," said Samaras.

Relentless austerity will only deepen Greek woes - We have reached a point where the policies adopted to resolve the eurozone debt crisis are causing more damage than whatever may have caused the problems in the first place. This is painfully obvious in Greece and increasingly so in Spain. The troika of the International Monetary Fund, European Commission and European Central Bank is now demanding that Greece front-load austerity measures for 2013 on the grounds that the country is certain to miss the nominal deficit target for 2013. The Greek government had forecast a fall in gross domestic product of “only” 3.8 per cent, but the troika believes the fall in GDP is more likely to be of the order of 5 per cent, according to the Greek newspaper Kathimerini. That would imply that Greece will miss the overall goal of a primary surplus (the surplus before the payment of interest on debt) next year. Why is Greek GDP falling so fast contrary to what official forecasts have claimed? The global economic outlook might not help. But the Greek economy’s year-in, year-out annual shrinkage of a magnitude of 5 per cent is caused primarily by the relentless pursuit of nominal deficit targets. If the economy misses the targets, more austerity is applied, which causes a continued fall in GDP, followed by another failure to meet the target. In other words, the troika is demanding policy action whose effect will be a further deterioration in the Greek economy, and thus a further deterioration in the debt ratio, which in turn requires further policy action of the same self-defeating kind.

Merkel Protected by 6,000 Police; Expect Huge Anti-Austerity Protest; Greece Needs Time and Money (And Something Else) - German chancellor Angela Merkel is visiting Greece this week in an alleged show of solidarity. Reuters notes it will take 6,000 police to protect herGerman Chancellor Angela Merkel will tell Greeks she wants to keep their country in the euro when she visits Athens this week, but she faces a hostile reception from a people worn down by years of austerity and recession. Many Greeks blame Merkel, who has publicly chastised them for much of the past three years, for the nation's plight. Opponents, some of whom have caricatured her as a bullying Nazi, have promised protests on Tuesday during her first visit to Greece since the euro zone crisis erupted there in 2009. "She does not come to support Greece, which her policies have brought to the brink. She comes to save the corrupt, disgraced and servile political system," said Alexis Tsipras, who leads the opposition Syriza alliance. "We will give her the welcome she deserves." About 6,000 policemen will be deployed in the capital for her 6-hour visit, turning the city centre into a no-go zone for protest marches planned by labour unions and opposition parties.

Greece, Troika to Resume Talks This Week - Talks between Greece and a visiting troika of international inspectors made progress ... but no deal has yet been reached and the negotiations will resume next week. The inspectors, from the European Commission, the International Monetary Fund and the European Central Bank, will depart Athens ... to attend a meeting of euro-zone finance ministers in Luxembourg Monday, the officials said. "There has been progress on all fronts, fiscal and structural," one official, speaking to reporters after more than three hours of talks in the Greek capital, said. "The work will continue next week." ... [As the talks drag on, overshooting their early October deadline, hopes of securing that aid by an Oct. 18 European summit--when European leaders were expected to sign off on Greece's latest aid tranche--now look dim.

Greece’s Coalition Government, Troika Pause on Budget Talks - Greece and its European Union and International Monetary Fund creditors made progress on talks on a 13.5 billion-euro ($18 billion) package of austerity measures for the next two years and said negotiations would continue next week. Finance Minister Yannis Stournaras told reporters in Athens after briefing Prime Minister Antonis Samaras on the latest round of negotiations that he hoped the inspectors would give euro-area finance ministers meeting on Oct. 8 a good report. “Talks are continuing,” Stournaras said. “There are differences and we’re not there yet. We will continue next week. We just hope that we will get a positive presentation from the troika at the eurogroup meeting.”

Debt crisis: ECB board member shuts door on Greek pleas for leniency - Greece cannot have more time to repay its debt to the European Central Bank because it would be illegal and "illogical", board member Joerg Asmussen has said, as he shut the door on pleas for leniency from the bank. Mr Asmussen said that the ECB could not lengthen the time period for loans to Greece or lower interest rates as "both concessions would be a form of debt forgiveness and therefore a direct financial support for the Greek state. "That would not be allowed under the law governing the ECB," he said. He also said that it would be wrong for Greece to say it needed more time but not more money. "A temporary extension of fiscal targets automatically means that Greece needs more financial assistance from abroad." he told German newspaper Bild am Sonntag. "It is logically quite wrong to say: we need more time, but not more money."

Greek Creditors at Loggerheads—Greece's creditors are still at loggerheads over how to tackle the country's debt crisis, with the International Monetary Fund threatening to stop its financing unless the euro zone accepts restructuring worth tens of billions of euros to bring the country's debt to a sustainable level, people with direct knowledge of the matter said Tuesday. Greece is again expected to be among the top issues discussed at the IMF annual fall meetings in Tokyo, as Athens is fast running out of cash and euro-zone governments fear the political fallout from a write-off as much as €50 billion ($65 billion) they hold in Greek debt. "There is still no consensus among the creditors," one person said. "While it's becoming increasingly apparent that Greece's debt is widely off track, nobody wants to accept a write-down." Representatives of the so-called troika of creditors—the European Commission, the IMF and the European Central Bank—are in Athens negotiating a new series of austerity measures in return for a €31 billion loan payment to keep Athens above water. But for the money to be dispersed, the IMF must be convinced the country's debt is sustainable over the medium term. For Greece, the measure of debt sustainability has been set by the IMF at 120% of gross domestic product by 2020. But the IMF's Fiscal Monitor said Tuesday the country's debt is expected to climb to 170.7% of GDP for this year, and to a whopping 181.8% of GDP in 2013, suggesting the 120% target is out of reach

Yesterday My Daughter Emigrated - "Today I'm not going to talk about science or R&D policies; I'll get back to that in the next post. Today I'm going to talk about something happening in my house, something that surely reflects what's happening in many other homes, because the fact is that today I can't think about anything else. Yesterday I said goodbye to my daughter. She emigrated in search of a future she couldn't find in her country and that society, or her parents, didn't know how to give her. Like many young people her age, my daughter was caught by surprise upon completion of her professional training. In the spring she returned to Spain with the intention of looking for a job here -- it didn't really matter what, as long as she could "do her thing." She got a few interviews, but the conditions that were offered to her always seemed to be abusive: a mere salary, 400 € a month, for a person with a bachelor's and a master's degree, who speaks four languages, and who has worked abroad. Such salaries aren't enough to eat or rent a room in the cities where they're offered. She would have needed help from her parents -- something we were willing to do. But our daughter didn't want to keep being dependent on us -- as this support would in fact subsidize the same employers that are taking advantage of our young people

Europe Seeks to Contain Spanish Troubles as Finance Chiefs Meet - European officials will move to prevent Spain from dragging the single currency into a new round of convulsions this week as a series of high-level meetings aim to ease the three-year-old European debt crisis. European finance ministers meet in Luxembourg today to discuss Spain’s overhaul effort and closer banking cooperation, while on Oct. 10, Spanish Prime Minister Mariano Rajoy travels for talks with French President Francois Hollande in Paris. Germany’s Chancellor Angela Merkel tomorrow makes her first visit to Greece since the crisis began in 2009. “It feels as if we are in for a month or so of Spanish trouble,”  A month after European Central Bank President Mario Draghi unveiled a plan to gain the upper hand through central-bank bond purchases, handing the burden of crisis resolution over to European governments, leaders have yet to agree on a blueprint for rescue conditions and centralized bank supervision.

Thousands take to streets in protest over government cuts -- Thousands of people spilled onto the streets of 57 Spanish cities on Sunday to protest against the government’s spending cuts and anti-crisis policies, which were described by union representatives as “anti-economic and anti-social.” The simultaneous marches were organized by Spain’s two main labor unions, UGT and CCOO, and around 150 other organizations, who warned that “if the government does not significantly change its policies and attitude,” the next step will be a general strike. Today’s was the second mass protest sponsored by the unions, following a rally on September 15. But before this hypothetical general strike, whose likely date would be November 14, the unions are first demanding a referendum. “There is no question that we are dealing with electoral fraud,” said a statement read out at the end of Sunday’s march. The logic behind this statement is that the Popular Party (PP), which won last November’s elections with an absolute majority, did not include the present austerity measures in its campaign promises. What’s more, Prime Minister Mariano Rajoy has taken decisions he promised not to, such as raising taxes.

Anti-Austerity Protests Take 56 Cities in Spain - Anti-austerity protesters flooded the streets of 56 cities across Spain Sunday to express anger over continual cuts to the public budget that are reaching deep into the pockets of middle and working class citizens. Organizers claim 72,000 people showed up for the march in Madrid, which was organized by Spain's two major unions CCOO and UGT. Union leaders Ignacio Fernández Toxo of CCOO and Cándido Méndez of UGT criticized the government’s budget slated for next year, saying that “it will only bring more recession and more unemployment.” The projected jobless rate for 2013 is 25 percent. Youth unemployment has passed 50 percent. "How can there be peace without bread?" and "Their plunder, my crisis," signs read. "They want to ruin the country. We have to stop them," a banner read at the head of the rally in Madrid. The country has been torn by cuts to the public budget, as the Prime Minister Mariano Rajoy continues to maneuver to gain bailout loans for the banking sector from the Eurozone.

Punishment of the Spanish Political Class by the People -  Spanish Prime Minister Mariano Rajoy has a singular problem for a governing politician: 84% of all voters have “little” or “no” confidence in him. Even 62% of the supporters of his own conservative People’s Party (PP) distrust him. The fate of Alfredo Perez Rubalcaba, leader of the opposition Spanish Socialist Workers’ Party (PSOE), is even worse: 90% of all voters distrust him, as do 77% of the supporters of his own party! Those are the two top figures of the two major political parties, and the utterly frustrated and disillusioned Spaniards are defenestrating them both. It has been a short honeymoon for Rajoy, who came to power on December 21, 2011. During the campaign, he lambasted the governing socialists for their mismanagement of the economy and tarred them with the catastrophic unemployment situation. He, the moderate, would be able to do better, improve the image of Spain with its international creditors, slash expenditures, and wrestle the ballooning deficit down to 4.4% of GDP by the end of 2012, a smidgen below the number Spain had committed to in 2010, and way below the 6% that had been forecast for 2011. The cuts would continue into 2013 to force the deficit down to 3%—the upper limit imposed on the European Union, theoretically, by treaty. The world was in awe. He remained vague about the details, however. Not a word about the favorite social programs that would have to be gutted, or about the onerous tax increases that would have to be inflicted on the citizenry in order to get to these numbers. But tax collections kept diving, the economy kept getting worse, and unemployment kept rising, and even during the campaign, rumors surfaced that the deficit for 2011 wouldn’t be 6%, but 7%, and some evil tongues even said 8%. Nevertheless, to win the election, Rajoy remained vague about the spending cuts—instead of going for a mandate.

Euro zone launches bailout fund with Spain in focus- Euro zone finance ministers will launch their 500 billion euro (S$803 billion) permanent bailout fund on Monday, putting in place a major defence against the debt crisis that now threatens Spain. The fund, called the European Stability Mechanism (ESM), will be used to lend to distressed euro zone sovereigns in return for strict fiscal and structural reforms that aim to put economies that have lost investor trust back on track. It is part of the single currency area's drive for an overhaul of its economic structures and deeper integration, a discussion that will be taken forward on Monday with talks on an idea to create a single euro zone budget. Euro zone finance ministers, who form the ESM's board of governors, will hold their inaugural meeting in Luxembourg two years after EU leaders endorsed the idea of setting up such a permanent institution.

ESM officially launched, assigned AAA rating by Fitch - At a press conference following the official launching of the European Stability Mechanism (EU's permanent bailout fund replacing the temporary EFSF) during the Eurogroup summit, the head of the lending institution Klaus Regling affirmed that it had become fully operational, starting today. Regling also said that ESM's instruments were the same as those of the EFSF and assured that the matter of the direct recapitalization of distressed EU banks would be reassessed as soon as a single Eurozone banking supervisor was established. Meanwhile, Fitch ratings agency announced on Monday that ESM's bonds had been granted the top AAA rating, with a stable outlook. Possible downgrades of AAA-rated Eurozone countries should not affect the funds' rating, although "in the event that Greece were to exit from the eurozone, the ratings of all sovereign and sovereign-rated entities in the eurozone, including the ESM, would be placed on Rating Watch Negative."

Europe Still at Odds Over the Workings of Its Bailout Fund - It has been referred to as “the bazooka” — the 500 billion euro European bailout fund that after much dispute will have its first board meeting on Monday. Dreamed up two years ago by euro zone ministers and officials as a permanent weapon against any financial problems that might besiege the region, the $650 billion bazooka might eventually be aimed at Spain’s banking crisis. Or it could be wielded to scare off bond market speculators who might otherwise try to drive up the borrowing costs of beleaguered governments in Madrid or other euro zone capitals. But as with many of the other improvised solutions to the euro zone’s problems, the bailout fund’s reality is less elegant than the theory behind it. As euro zone finance ministers gather for their monthly meeting on Monday in Luxembourg, there is still considerable disagreement over how the fund — known officially as the European Stability Mechanism — will work and how effective it will be at raising money. There is no certainty, in other words, that the bazooka can be ready to fire in time to help countries like Spain that are already in the throes of crisis.

ECB: Further Major Labor Market Reforms Are Necessary - The European Central Bank urged euro-zone states on Monday to implement further “major” reforms of their labor markets in order to combat rising unemployment and bolster growth. “Major labor market reforms in euro area countries are essential to foster job creation, bring down unemployment and restore competitiveness, while also lowering the risks of a permanent decrease in potential output growth,” the ECB said in a regular report on structural issues in the currency bloc. The central bank said Germany’s “Hartz” reforms to its labor market, introduced in the early 2000s, “may provide a useful example” to other states, although it stressed that country specifics must be taken into account.

Rajoy’s Deepening Budget Black Hole Outpaces Spain’s Cuts - The black hole in Spain’s budget has grown faster than Prime Minister Mariano Rajoy’s attempt to cut it, portending the same dynamic that has squeezed Greece.  The harshest austerity since the return to democracy in 1978 has failed to contain the deficit as the economy sinks deeper into recession. The shortfall rose in the first half of the year, as it did in the previous 12 months. Even after a sales-tax increase and health-care cuts kick in this quarter, it may still approach last year’s 9.4 percent of gross domestic product, said Ignacio Conde-Ruiz, an economist at the independent Applied Economic Research Foundation in Madrid. The fiscal and political consequences of demanding austerity in a shrinking economy highlight the dilemma facing Rajoy. To trigger a European financial lifeline, he may have to impose yet more cuts, repeating the pattern seen in Greece, Portugal and Ireland. “There is no chance that Spain will hit its targets,” Megan Greene, director of European economics at Roubini Global Economics LLC, said in a telephone interview. “The deficit targets are economic suicide.’

Venetian protesters demand independence from Rome - Protesters have gathered in front of the central government in Veneto, Italy to demand an immediate referendum on the region’s independence from Rome. The reason is mainly economic, according to the rally’s organizer. Demonstrators are presenting the local government with a resolution which demands an immediate referendum for the region to become its own country. The new territory would include Venice, the surrounding region of Veneto, and parts of Lombardy, Trentino and Friuli-Venezia Giulia. The rally, which was organized by the separatist Indipendenza Veneta party, drew large numbers of energetic protesters. “The situation here is almost explosive, so today we have thousands of people who have gathered in front of the regional government and we’re going to present to them a resolution signed by thousands of participants to have a referendum for independence,” “The main reason is economic. We are in a situation worse than a colony because the tax rate in Italy is the highest the world and our services are extremely poor. We have 20 billion euros missing from our regional resources each year and that’s unbearable,” Pizzati said, And while some question the region’s ability to stand alone, Pizzati says the goal is completely attainable. “It can more than survive on its own. It will be the second richest country in Europe,”

The Truth About Sovereignty - Dani Rodrik - In the French parliament’s recent debate on Europe’s new fiscal treaty, the country’s Socialist government vehemently denied that ratification of the treaty would undermine French sovereignty. It places “not one constraint on the level of public spending,” Jean-Marc Ayrault, the prime minister, asserted. “Budget sovereignty remains in the parliament of the French Republic.” To succeed, he argued, Europe must prove wrong those who believe there is a conflict between globalization and sovereignty. Nobody likes to give up national sovereignty, least of all, it seems, politicians on the left. Yet, by denying the obvious fact that the eurozone’s viability depends on substantial restraints on sovereignty, Europe’s leaders are misleading their voters, delaying the Europeanization of democratic politics, and raising the political and economic costs of the ultimate reckoning. The eurozone aspires to full economic integration, which entails the elimination of transaction costs that impede cross-border commerce and finance. Obviously, it requires that governments renounce direct restrictions on trade and capital flows. But it also requires that they harmonize their domestic rules and regulations – such as product-safety standards and bank regulations – with those of other member states in order to ensure they do not act as indirect trade barriers. And governments must forswear changes in these policies, lest the uncertainty itself act as a transaction cost.

Recession forces Italy to up 2012 borrowing target (Reuters) - A deeper-than-expected recession will force Italy to sell more bonds and bills this year than planned, a senior Treasury official said, presenting an even steeper funding challenge for the world's fourth-biggest debtor. In an interview with Reuters on Tuesday, Treasury Debt Management Office head Maria Cannata said Italy has upped its gross funding target for 2012 to 460-465 billion euros from a previous forecast of 440-450 billion euros. The decision comes after the Italian government slashed its growth forecasts for this year and next in September and hiked its deficit and debt estimates. "We will issue roughly 20 billion euros more than previously targeted as state borrowing requirements for 2012 have been revised due to the weakening economy," Cannata told Reuters. Rome has forecast that gross domestic product will shrink this year by 2.4 percent, twice as much as the 1.2 percent drop it projected as recently as April. The recession is hurting Italy's fiscal consolidation efforts due to lower tax revenues and higher welfare expenses. The Treasury has managed to issue around 370 billion euros in debt so far this year despite a turbulent conditions in euro zone markets, Reuters calculations show. But it faces another busy quarter given its revised funding target and heavy redemptions at the end of 2012. Capital flight into Switzerland continues - Swiss foreign reserves rose to another record (CHF 429.3bn) at the end of September as depositors once again moved funds out of the Eurozone (discussed here). This increase in reserves corresponded to about a CHF20bn increase in Swiss deposits - as would be expected under the capital flight scenario. The ECB's latest actions certainly have reduced the pace of capital outflows (by lowering the risk of re-denomination due to Eurozone's breakup), but the central bank so far has failed to stem outflows altogether.

How Central Banks Are Threatening the Savings of Normal Germans - Germany's central bank, the Bundesbank, has established a museum devoted to money next to its headquarters in Frankfurt. It includes displays of Brutus coins from the Roman era to commemorate the murder of Julius Caesar, as well as a 14th-century Chinese kuan banknote. There is one central message that the country's monetary watchdogs seek to convey with the exhibit: Only stable money is good money. And confidence is needed in order to create that good money. The confidence of visitors, however, is seriously shaken in the museum shop, just before the exit, where, for €8.95 ($11.65) they can buy a quarter of a million euros, shredded into tiny pieces and sealed into plastic. It's meant as a gag gift, but the sight of this stack of colorful bits of currency could lead some to arrive at a simple and disturbing conclusion: A banknote is essentially nothing more than a piece of printed paper. It has been years since Germans harbored the kind of substantial doubts about the value of their currency that they have today in the midst of the debt crisis. A poll conducted in September by Faktenkontor, a consulting company, and the market research firm Toluna, found that one in four Germans is already trying to protect his or her assets from the threat of inflation by investing in material assets, for example.Central banks are currently flooding cash-strapped industrialized nations with money. This may help governments reduce their debt load, but it also erodes the value of people's savings. A massive redistribution of wealth is threatening to take place in Germany and Europe -- from the bottom to the top.

Dutch Housing Prices Tumble - The slump in the Dutch housing market deepened in July as prices posted the steepest drop on record, highlighting the challenges facing the Netherlands ahead of next month's general elections. With prices now plumbing levels last seen in 2004, the downturn is weighing heavily on household consumption and has raised concern about the country's huge mortgage debt pile, among the largest in Europe. House prices fell 8% from a year earlier, statistics bureau CBS said Tuesday, the largest decline in the 17-year history of the agency's house-price index. Prices fell 4.4% in June and 5.5% in May.

Netherlands House Prices Dropped the Most on Record Last Month - House prices in the Netherlands, the fifth-biggest economy in the euro area, dropped in July by the most since the index started in 1995. Prices declined 8 percent from the same month a year earlier, after falling 4.4 percent in June, national statistics agency CBS in The Hague said on its website today. Values have fallen 15 percent from a peak in 2008 and are back to about the same level as eight years ago, CBS said. Prices had already dropped 5.5 percent in May from a year earlier. The Dutch Central Bank forecast in March that house prices will continue to drop through 2014 because of stricter mortgage lending rules and a reduction of a homeowner tax break that spurred the lending boom. Values may fall another 5 percent next year, ING Groep NV economists said in a note Aug. 9

 Ireland Plans Bold Measures to Lift Housing - With its economy still reeling from the housing crash, Ireland is making a bold move to help tens of thousands of struggling homeowners. The Irish government expects to pass a law this year that could encourage banks to substantially cut the amount that borrowers owe on their mortgages, a step that no major country has been willing to take on a broad scale. The initiative, which would lower a borrower’s monthly payment, could prevent a tide of foreclosures, an uncertainty that has been hanging over the Irish housing market for years. If it works, the plan could provide a road map for other troubled countries. Most countries that have suffered housing busts, including the United States, have made limited use of so-called mortgage write-downs, the process of forgiving a portion of the principal on the loan. The worry has been that some borrowers who can afford their mortgages will stop making payments to take advantage of a bailout. Banks have also been reluctant since they could face unexpected losses.

Resetting the Market: Ireland’s Plan for Mass Mortgage Write-Downs - Ireland had one of the larger housing bubbles in the world. I remember visiting the country in 2006 and seeing these brand-new roads and buildings everywhere. The Celtic Tiger included a housing boom, and that went bust in a hurry. For years, the country has struggled under bailouts and austerity programs. The Irish housing market is in a painful state. Prices are 50% below the peak (not that a bubble peak should be the goal), and over half of all mortgages in the country are underwater. Over 1/4 of Irish mortgage debt stands in default. Now, years later, the Irish government has resigned themselves to do what every country with a housing collapse ought to do – reset the market. The Irish government expects to pass a law this year that could encourage banks to substantially cut the amount that borrowers owe on their mortgages, a step that no major country has been willing to take on a broad scale. The initiative, which would lower a borrower’s monthly payment, could prevent a tide of foreclosures, an uncertainty that has been hanging over the Irish housing market for years. If it works, the plan could provide a road map for other troubled countries. Unlike HAMP, this involves principal write-downs, long seen as the most effective loan modification strategy to keep people in their homes, with far less downside than banks claim. And the Irish government plans to use the large ownership stake they’ve retained in their banks and mortgage lenders to force the banks to engage in the write-downs. They have already slowed the foreclosure pipeline, as “Ireland’s leaders have considered it socially unacceptable for banks to seize large numbers of homes,” in addition to worries about the real cost of foreclosures.

Hostile reception for Merkel in Athens - Angela Merkel flew in to a hostile reception from angry Greeks on Tuesday as security forces took tough measures to restrict or eliminate protests in central Athens, firing tear gas at demonstrators who tried to break through a police barrier.  Ms Merkel was given the red carpet treatment and full military honours at Athens airport. But on the streets it was a different matter, with more than 7,000 police officers deployed to keep demonstrators away from the German leader. Sections of the capital were cordoned off and public gatherings in certain areas, including outside the German embassy, were banned. Thousands of Greeks gathered in Syntagma Square in central Athens as Ms Merkel arrived. The demonstration – while vocal – was mostly peaceful but the mood was angry. Giant banners declared: “Angela, you are not welcome,” and “Out with the Fourth Reich”. One caricature showed the chancellor in a swastika armband, being kicked from behind by Karagiozis, a Greek puppet representing the country’s impoverished past

Merkel Says Greece Covered ‘Much Ground’ — German chancellor Angela Merkel said Greece has covered “much of the ground” required for recovery, during her landmark visit to the financially stricken country. Merkel, who stopped in Athens on Tuesday for five hours, said she hoped Greece would remain in the 17-country group that uses the nation eurozone and stressed the government in Athens still had to push through more key cost-cutting reforms. “Much of the ground has been covered … There is daily progress,” Merkel said after talks with conservative Greek Prime Minister Antonis Samaras. “This is an effort that should be seen through because otherwise it would make the circumstances even more dramatic later on.” Paying her first visit to Greece in five years, Merkel’s arrival triggered protests attended by some 50,000 demonstrators in Athens. The rallies were mostly peaceful, but police briefly clashed with several dozen demonstrators and detained more than 50 people throughout the day. Although Merkel damped expectations in Athens of a strong public pledge to keep Greece in the eurozone, Samaras said Merkel’s visit had ended “the country’s international isolation.”

Athens Protests Direct Austerity-Driven Frustrations at Merkel - Athens ground to a halt today for German Chancellor Angela Merkel’s first visit since the financial crisis began, with 7,000 officers deployed in the Greek capital to prevent violence at planned protests. Authorities made entire sections of downtown off-limits, notably around Prime Minister Antonis Samaras’s office, where the two leaders will meet, and the German embassy. Merkel arrived shortly before 1:30 p.m., as three separate protest marches gathered in front of Parliament. “I call on all Greeks and whoever wants to protest to, firstly, safeguard the peace of the city and, above all, the country’s image abroad,” Public Order Minister Nikos Dendias said in a statement yesterday. Merkel has become the face of austerity in a country suffering a fifth year of recession, seen in Greece as mainly due to German-led conditions attached to emergency loans. While Samaras has called the chancellor’s visit a “very positive development,” opposition and union leaders are planning to use her presence to capture Greeks’ anger and frustration.

Tens of thousands protest in Greece as Angela Merkel says austerity will pay off - Tens of thousands of angry Greek protesters filled the streets of Athens on Tuesday to greet German Chancellor Angela Merkel, who offered sympathy but no promise of further aid on her first visit since the euro crisis erupted three years ago. As police fired tear gas and stun grenades to halt angry crowds chanting anti-austerity slogans and waving swastika flags, Merkel's host, Prime Minister Antonis Samaras, welcomed her as a "friend." Blamed by many Greeks for imposing draconian budget cuts in exchange for aid, Merkel reaffirmed Berlin's commitment to keep the debt-crippled Greek state inside Europe's single currency. "I have come here today in full knowledge that the period Greece is living through right now is an extremely difficult one for the Greeks and many people are suffering," Merkel said during a joint news conference with Samaras just a few hundred yards from the mayhem on Syntagma Square, outside parliament.

Merkel Hides Behind The Troika Report, The Greeks Seethe, And The Drachma Advances - The hoopla in the media about German Chancellor Angela Merkel’s 6-hour stay in Greece, and the Greeks’ visceral reaction to her, made it look as if her visit actually meant something—that it would change the world for the better, would tweak it in some manner, or at least would reveal a promise to keep Greece in the Eurozone. Every minute was examined at under the microscope. “The Germans,” it was noted, for example, as the plane landed at 1:20 p.m., “arrived ten minutes early.” So when an acquaintance of mine, who lives in Southern Greece, had dinner with a ranking official at the Bank of Greece, the discussion inevitably came around to the Troika—the bailout and austerity gang from the EU, the ECB, and the IMF—and how Greece should send them packing. “Of course,” the central banker said, “it would help considerably if we actually had a functioning government these past 182 years.” Athens was prepared for her. Both sides. Police had designated a “red zone” where demonstrating and loitering were prohibited. The Parliament, the prime minister’s mansion, and the presidential mansion were sealed off. Some metro stations were closed, some buses and trolleys were pulled out of service. Water cannons, 7,000 police in riot gear, crowd-control fences... it was all there. As were 80,000 protesters—or 60,000—who’d been seething for days. It wasn’t just Merkel’s presence on their soil, but also the restrictions on their constitutional right of assembly. “FRAU MERKEL GET OUT,” a poster read. A group of school kids were taken into custody. Tear gas was used. Protestors were trying to tear down crowd-control fences. A melee broke out. Rocks flew. A Nazi flag was burned. But... “Strange thing about Greek demos is that they are part political protest, part village fete, small of meat on the BBQ everywhere,”

Counterparties: Angela’s murky trip to Athens - During Angela Merkel’s six-hour visit to Athens today, her first in three years, she was officially given the “red carpet treatment”, Reuters’ Noah Barkin and Harry Papachristou write. The purpose of her trip was a symbolic show of support for Prime Minister Antonis Samaras and his government’s reforms aimed at turning around the country’s battered economy. Ordinary Greeks seemed intent on producing a different kind of symbolism:Tens of thousands of demonstrators defied a ban on protests, gathering in Syntagma square to voice their displeasure with the German leader, who many blame for forcing painful cuts on Greece in exchange for two EU-IMF bailout packages worth over 200 billion euros. Some pelted police with rocks, bottles and sticks, and tried to bust through a barricade set up to protect Merkel and her delegation.Some 7,000 police were needed to control an estimated 50,000 protesters, some of whom burned Nazi flags or clashed with police. (As usual, the Guardian’s excellent live-blog has full details on the day’s events.) Merkel attempted to convince Greeks that she understood there were “many people suffering in Greece” due to EU-mandated austerity measures, and said she hoped and wished that Greece would stay in the euro zone.

Greek anti-fascist protesters 'tortured by police' - Fifteen anti-fascist protesters arrested in Athens during a clash with supporters of the neo-Nazi party Golden Dawn have said they were tortured in the Attica General Police Directorate (GADA) – the Athens equivalent of Scotland Yard – and subjected to what their lawyer describes as an Abu Ghraib-style humiliation. Members of a second group of 25 who were arrested after demonstrating in support of their fellow anti-fascists the next day said they were beaten and made to strip naked and bend over in front of officers and other protesters inside the same police station. Some said they were burned on the arms with a cigarette lighter, and they said police officers videoed them on their mobile phones and threatened to post the pictures on the internet and give their home addresses to Golden Dawn, which has a track record of political violence. One man with a bleeding head wound and a broken arm that he said had been sustained during his arrest alleged the police continued to beat him in GADA and refused him medical treatment until the next morning. Another said the police forced his legs apart and kicked him in the testicles during the arrest.

Draghi says Greece must do more on reforms - Greece has made progress on reforming its economy but has more work to do, European Central Bank President Mario Draghi said on Tuesday. "It's quite clear that the progress at the level of undertaking the necessary policy reform has been perceptible and significant and it's also clear that more needs to be done," he told the European Parliament Committee. "We see progress, we see a need for further work," he added. The ECB, the European Commission, and the International Monetary Fund form the so-called troika of international lenders. The troika is working on a report on Greece's progress in tackling its debts.

Greece gets 10 days to act on reforms -- Greece must deliver on scores of broken promises by next week’s EU summit if it wants long-delayed loans, its creditors said as they eased the release of money for Portugal and launched a new “bazooka.” “Acting means acting,” International Monetary Fund Managing Director Christine Lagarde said after talks with eurozone finance ministers due to broaden out to include European Union partners on Tuesday. As German Chancellor Angela Merkel readied to brave Athens later the same day ― sealed off with thousands of police on high alert ― the ministerial focus switched away again from Spain despite the IMF announcing an inspection trip to monitor “financial sector reforms.” Months of uncertainty about a bailout request from Madrid had looked until recently like dominating the summit of EU leaders in Brussels on Oct. 18-19, but as so often over the past two-and-a-half years, the bloc has set its stall out to try and make a breakthrough on Greece.

Greek Creditors Can't Find Common Ground --Greece's creditors are still at loggerheads over how to tackle the country's debt crisis, with the International Monetary Fund threatening to stop its financing unless the euro zone accepts debt restructuring worth tens of billions of euros to bring the country's debt to a sustainable level, people with direct knowledge of the matter said Tuesday. Greece is again expected to be among the top issues discussed at the IMF annual fall meetings in Tokyo, as Athens is fast running out of cash and euro-zone governments fear the political fallout from writing off as much as 50 billion euros ($65 billion) they hold in Greek debt. "There is still no consensus among the creditors," one person said. "While it's becoming increasingly apparent that Greece's debt is widely off track, nobody wants to accept a write-down." Representatives of the so-called troika of creditors--the euro zone, the IMF and the European Central Bank--are currently in Athens negotiating a new series of austerity measures in return for a EUR31 billion loan payment to keep Athens above water. But for the money to be dispersed, the IMF must be convinced the country's debt is sustainable over the medium term.

Greece’s Unemployment Reaches More Than Quarter of Workforce - Greece’s unemployment rate climbed to more than a quarter of the workforce in July, extending its record high as the country’s five-year recession deepened. The jobless rate rose to 25.1 percent from a revised 24.8 percent in June, the Athens-based Hellenic Statistical Authority said in an e-mailed statement from today. That’s the highest since the agency began publishing monthly data in 2004. Greece’s recession and deepening labor slump has been exacerbated by austerity measures imposed to trim a budget deficit that was more than five times the euro-area limit in 2009. Prime Minister Antonis Samaras’s coalition government is hashing out a 13.5 billion-euro ($17.4 billion) package of budget cuts for 2013 and 2014 needed to keep rescue loans from the euro area and the International Monetary Fund flowing.

The Collapse Continues: Greek Unemployment Rises For 35th Consecutive Month, Passes 25% - When we reported on the 34th consecutive month of Greek unemployment increases, following the June number hitting a record high 24.4%, the only good news was that the May number had been revised higher from 23.1% to 23.5%, making the monthly jump seem just under 1%. Well, that revision was re-revised, with Greek Statistic Service ELSTAT reporting that the original 24.4% number has now been revised to 24.8%, meaning in June unemployment rose officially by 1.3%. That's in one month! ELSTAT also reported the July number, and at 25.1% (pre-revision higher next month), it just hit a new all time high, increasing for the 35th month in a row. More than one quarter of those eligible for work in Greece (not many), are working. THis means labor related taxes are now being levied on a record low percentage of the population. Indicatively, Greek unemployment at the end of 2011 was "only" 21.2%. It also means that in order to restore even a tiny iota of confidence, the Greek labor department needs to hire a BLS consultant or two, or least license an old version of the ARIMA goalseek software, to find a seasonally adjusted decimal comma in there somewhere, and report that the jobless rate is really only 2.5%, which would be on par in credibility with everything else out of Europe these days. Finally, our question is at what point does anyone finally admit the Greek situation is not only a depression but outright economic death and the merciful thing to do at this point is to just pull the plug?

Greek labour unions to hold anti-austerity strike 18 Oct - Greece's main public and private sector labour unions will hold a 24-hour strike on 18 October to protest new austerity measures sought by the near-bankrupt country's international lenders, a union official said on Wednesday. The GSEE and ADEDY unions decided to strike with the Greek government locked in talks with the European Union and International Monetary Fund on new austerity measures in exchange for the next tranche of a multi-billion-euro bailout. "We want the government to withdraw these horrible measures, which have brought us such misery," said Ilias Iliopoulos, general secretary of public sector union ADEDY. The Oct. 18 nationwide strike will coincide with a European Union summit.

Greece Still the Word; Time is Still Money; Battle of Bailouts; Coca Cola, Greece's Biggest Company, Leaves-  Germany and the IMF, which in recent past seemed ambivalent at best to keeping Greece in the eurozone, are suddenly acting as if Greece is a life-or-death matter.  First Merkel flew to Greece pledging solidarity, now the IMF chief Christine Lagarde seeks Two More Years For Greece. IMF chief Christine Lagarde’s declaration this morning that Greece should be given two more years to hit tough budget targets embedded in its €174bn bailout programme – coming fast on the heels of German chancellor Angela Merkel’s highly symbolic trip to Athens – are the clearest public signs yet of what EU officials have been acknowledging privately for weeks: Greece is going to get the extra time it wants. But what is equally clear after this week’s pre-Tokyo meeting of EU finance ministers in Luxembourg is there is no agreement on how to pay for those two additional years, and eurozone leaders are beginning to worry that the politics of the Greek bailout are once again about to get very ugly. The mantra from eurozone ministers has been that Greece will get more time but not more money.  Quite frankly it is impossible to give Greece more time but not more money. The time value of interest payments is proof enough.

A Grexit delayed if not denied -- Citi are pushing that fateful day back: We have held the view, since May 2012, that a Greek exit from the euro area (“Grexit”) in the next 12 to 18 months is a high-probability event (90%) which we assume, for the sake of argument, would happen on January 1 2013. We are now cutting the probability of Grexit over the next 12-18 months to 60% and judge that this event will probably happen later than we previously thought, most likely in 1H 2014. A cynic might suggest they were getting the jitters as deadline approached but lets hear them out (our emphasis). The change in our view reflects the change in the attitude of core euro countries towards Grexit, with the German elections getting closer, and the decent PR job done by the new Greek Prime Minister around European capitals. We still believe that increasing austerity fatigue in Greece, continuous missing of deficit targets and the ensuing stalemate in the negotiations between the Greek government and its official lenders will ultimately lead to a suspension of EFSF/IMF funding which, in our view, will eventually lead to Greek banks being cut off from Eurosystem funding. Without virtually any domestic resources available, we believe the only way out for Greece would be to leave EMU and start printing a new currency to fill its funding gaps.

Top German Economists Say Greece Is Lost - Chancellor Angela Merkel had been hoping that her trip to Athens earlier this week would help demonstrate Germany's solidarity with Greece as it struggles to overcome its debt crisis. Just two days later, however, leading economic institutes in Germany have darkened the mood considerably. The institutes presented their autumn economic forecast on Thursday, and cast doubt on whether Greece would be able to remain part of the euro. "We believe that Greece cannot be saved," said Joachim Scheide from the Kiel Institute for the World Economy, one of several top economic institutes tasked by the German government with examining the state of the country's economy twice a year.  Oliver Holtemöller, of the Halle Institute for Economic Research, was also pessimistic at the Thursday press conference called to present the evaluation. He said it is unlikely that Greece will ever be able to free itself from its debt burden -- and called for a new debt haircut for the country.

Youth unemployment in Europe: It’s actually worse in the US = Youth unemployment in the Eurozone looks like a social and economic disaster in the making – 30%, 40%, even 50% of young people sitting on their hands instead of building skills and experience. This column argues the headline numbers are misleading. While youth unemployment is a serious problem, a large share of EZ youth are not in the labour force, so the headline figures overstate the labour-market ‘scar tissue’ that will be left over from the crisis.

Madrid sparks Catalan language debate - Spain’s government risked inflaming tensions with Catalonia when it said school students from the north-eastern region should be “Hispanicised” by bringing the curriculum under greater central control. “Our interest is to Hispanicise Catalan students, so they feel as proud to be Spanish as they do to be Catalan,” Mr Wert said in response to a question in Spain’s parliament on Wednesday. Catalan, which was banned under Franco, has become the dominant language among Catalonia’s 7.6m people, and is deemed a vital underpinning of its sense of nationhood.The reopening of the debate over central control of language and curriculum in schools comes amid a surge in popular separatist sentiment in Catalonia, with the region’s politicians having declared their intentions to hold a referendum on independence if November elections provide a mandate for one. A recent poll taken by the Centre for Opinion Studies, an official institute of the Catalan government, indicated that 74 per cent of Catalans wanted a referendum to take place. Some conservative politicians in Spain have called for Madrid to respond by recentralising powers.

S&P downgrades Spain’s credit rating 2 notches to lowest investment-grade level - The Washington Post: Standard & Poor’s downgraded its rating on Spain’s debt Wednesday by two notches, leaving it on the cusp of junk status. A grinding recession, high unemployment and social unrest are limiting the government’s options for stemming the country’s financial crisis, S&P said.The credit-rating agency now rates debt issued by Spain BBB-, its lowest investment-grade status. It had been BBB+. S&P also assigned a negative outlook to the rating, saying it could be further downgraded if Spain’s economic conditions erode further. “Overall, against the backdrop of a deepening economic recession, we believe that the government’s resolve will be repeatedly tested by domestic constituencies that are being adversely affected by its policies,” S&P said. It also cited difficulty in predicting the extent to which other countries in the 17-nation eurozone would come to Spain’s aid. It had previously assumed a key European bailout fund would help recapitalize the country’s shaky banks without piling more debt on the central government in Madrid. But now any recapitalization plan will likely add more debt, S&P said. Investors are worried that Spanish banks could collapse under the weight of an imploding real-estate market. Tensions between Spain’s indebted regional governments and the central government were also cited by S&P for its downgrade.

Spanish Yields Retreat - Bond yields on Spanish government debt eased back from earlier highs Thursday, while Spain's benchmark equity index pared losses and the rest of the region's stock markets edged higher, as investors grew hopeful that Standard & Poor's Corp.'s downgrade of Spain's credit rating would force the country's hand in seeking a bailout.With Moody's Investors Service already assessing Spain's credit-worthiness at its lowest investment level, the country is a step closer to losing its membership in key bond indexes, which could in turn prompt selling of the nation's bonds, push yields even higher and force the government to seek a bailout. Late in the European morning, Spain's 10-year government bond yield came off highs, largely unchanged at 5.78%, having touched 5.90% earlier in the session. Yields on Spanish debt are still considerably lower than peaks of more than 7% earlier this year.

Tax rise drives Spanish inflation to 16-month high - Spanish consumer prices rose at their fastest pace in 16 months in September, data showed on Thursday, one more headache for Madrid after ratings agency S&P downgraded its sovereign debt to one notch above junk overnight. Prices rose 3.4 percent year-on-year in September, according to data from the National Statistics Institute on Thursday, after a 3-percentage-point rise in Value Added Tax on Sept. 1. Spain's Prime Minister Mariano Rajoy increased VAT to 21 percent from 18 percent in September, as well as abolishing special low rates on products ranging from cinema tickets to school supplies as part of an austerity drive. Spain must cut the public shortfall from 8.9 percent of gross domestic product to 4.5 percent in 2013, however economists fear inflation-indexed pension hikes could make that target impossible as prices rise.

 Did You Know? S&P PIIGS Ratings Edition - Rebecca Wilder - With the two-notch downgrade of Spain to BBB- by by S&P (link and link), I figured that this is as good a time as any to start a series called “Did You Know?”. Let’s start with the S&P’s ratings edition and a chart featuring the ratings migration across the periphery economies Greece, Ireland, Italy, Portugal, and Spain (GIIPS).

  • Did you know that Ireland and Spain were once rated AAA? For Ireland, Oct 2001 to March 2009; and for Spain, Dec 2004 to Jan 2009.
  • Did you know that Greece was at one time rated A+? June 2003 to Nov 2004.
  • Did you know that the average credit quality across the GIIPS is currently BB+? According to S&P rating definitions, that’s below investment grade quality (so-called junk).
  • Even without Greece, did you know that the average credit quality of the IIPs is BBB- and borders junk status?
  • Did you know that S&P never downgraded all 5 PIIGS credits in one month? In January 2012, S&P downgraded Italy, Portugal, and Spain by 2 notches each to BBB+, BB, and A, respectively.
  • Did you know that S&P downgraded Greece to SD, or selective default, for 3 months in Feb 2012? Greece is currently CCC and was upgraded from SD in May 2012.

ECB can buy Spanish bonds without ESM disbursements to Madrid: Coeure (Reuters) - The European Central Bank could start its bond-buying scheme to help Spain as soon as Madrid signs a deal with the euro zone's ESM bailout fund, without waiting for any ESM money actually being disbursed, ECB board member Benoit Coeure said on Friday. Coeure said the ECB stood ready to fire its "bazooka" of unlimited government bond purchases as soon as Madrid signed a memorandum of understanding with the European Stability Mechanism -- the 500 billion euro permanent bailout fund. "What the ECB will look for will be an assistance program by the EFSF or the ESM for precautionary assistance with a possibility of primary market purchases," Coeure told Reuters in an interview. "It can be a precautionary program and we we'll not wait until money is being disbursed to start the OMTs," Coeure said.

Portugal announces higher taxes as strike is called: Portugal has announced several new austerity measures, which were met with a call for a huge strike next month. These include reducing Portugal's income tax brackets from eight to five. This replaces a social security tax rise that was shelved due to its deep unpopularity. Portugal's largest trade union, the CGTP, called the strike for mid-November to oppose the latest moves. Portugal must get its deficit below the European Union's target of 3% of GDP. On Wednesday, Finance Minister Vitor Gaspar also unveiled a 4% "extraordinary" tax. With the tax bracket changes, the average tax rise should increase from 9.8% in 2012 to 13.2% in 2013. "The adjustment is harder than we anticipated," Mr Gaspar said, as he also raised the unemployment forecast for 2013 to 16.4% - up slightly from 16%. It was given one more year to reduce its deficit, after the latest quarterly review by international lenders of the EU, IMF and European Central Bank overseeing its 78bn-euro (£65bn) eurozone bailout. No extra finance is to be provided beyond the 78bn euros in loan guarantees already agreed for the three-year bailout period.

Portugal wraps up 2013 budget with sharp tax hikes - "The cabinet has finalised its draft 2013 budget, and will submit it to parliament by October 15," a short statement that released after an almost 20-hour meeting said. The average tax rate is to climb to 13.2 percent next year from 9.8 percent at present, Finance Minister Vitor Gaspar said last week. Those who benefit from the highest revenues, and who already pay capital gains and other wealth taxes, are to face "an additional solidarity tax" of 2.5 percent, he added. A financial transactions tax is foreseen as well, but details of that measure have not yet been worked out, while civil servants and pensioners were to lose their annual 14th month of pay. The finance ministry said the government would seek to minimise tax increases by also finding ways of cutting spending.

Weidmann Says ECB Has Duty to Preserve the Value of the Euro - European Central Bank Governing Council member Jens Weidmann said the ECB must make sure that the single currency retains its value. “The central banks of the Eurosystem have the responsibility to ensure that people continue to be able to hold good and stable money in their hands,” Weidmann, who heads Germany’s Bundesbank, said in a speech in Frankfurt today. “A currency can only be stable when citizens have trust in their central bank and recognize its will to keep prices stable.” The Bundesbank openly opposes ECB President Mario Draghi’s plan to buy bonds on the secondary market of countries that sign up to economic adjustment programs, saying it comes too close to financing governments and risks devaluing the euro through inflation. Weidmann didn’t explicitly mention the ECB’s bond- buying policy in his speech today. Central banks “can more or less create money out of nothing,” Weidmann said. “That possibility is always bound with the temptation to ease the financial restrictions of governments through the printing of money.”

Pimco’s El-Erian Warns of Central Bank Put Bubble - Yves Smith - Mohamed El-Erian, the CEO of Pimco, often acts as the saner and more analytical counter to the often hyperbolic Bill Gross. (Aside: Gross’s latest rant on how the US “pleasures itself on budgetary crystal meth” looks to be off in several respects. Gross’s salvo looked more to more about pumping for Simpson Bowles than investment advice). Earlier today, El-Erian in the Financial Times released a short and apt note on the limits of the central bank put. It’s richly ironic that an aggressive promoter of unbridled capitalism, Ayn Rand acolyte Alan Greenspan, spawned the innovation that is the biggest market intervention of all time: the Greenspan put, which gave way to the Bernanke puts of the crisis and its aftermath, and have been emulated by apt students at the ECB, in the form of its Securities Markets Program, which has been tweaked, rebranded, and relaunched as the Outright Monetary Transactions, or OMT. Yet as much as Rule Number One of investors is “don’t fight the Fed,” it’s hard not to notice that the effectiveness of central bank interventions is waning. Admittedly, the half life of pretty much any Eurocrat initiative seems to have collapsed, but even so, the initial celebration of the announcement of the OMT fizzled quickly. Similarly, after months of eager anticipation, the launch of QE3 produced a mere one day stock market rally, and key commodities and Treasuries gave up much of their initial move with surprising speed.

Europe Dispensing Wrong Fiscal Medicine, Economist Koo Warns - European policy makers are dispensing the wrong medicine by tackling the euro-area’s fiscal ills with austerity, according to Richard Koo, chief economist of Nomura Research Institute. The budget cuts and structural reforms prescribed to nations such as Spain by German Chancellor Angela Merkel and European Central Bank President Mario Draghi are in Koo’s eyes akin to the treatment of diabetes sufferers, who must eat carefully and exercise to improve their long-term health. The trouble is Europe’s cash-strapped peripheral countries have the economic equivalent of pneumonia, which is more deadly and is best beaten by ensuring ample nourishment, said Koo. To the 58-year-old former Federal Reserve economist that means greater fiscal stimulus if the euro crisis is to end soon. “The patient can have both, but doctor has to cure the pneumonia first even if the treatments contradict those required for the diabetes,” Koo said in an interview in Tokyo yesterday. “In Europe, austerity is the only game in town.” The advice goes to the heart of Koo’s theory that like their Japanese counterparts in the 1990s, policy makers in Europe are failing to see that their region is suffering from a “balance-sheet recession.”

Lagarde Signals IMF Role in Europe Rescues May Not Need Cash - The International Monetary Fund doesn’t need to lend money to Spain to help the country tackle its fiscal crisis, Managing Director Christine Lagarde indicated in an interview today. “Some people say unless you have skin in the game, meaning money, you are not really respected, you are not heard,” Lagarde said in a Bloomber Television interview with Sara Eisen in Sendai, Japan. “I am not so focused on that as I am on the monitoring. I think we would rather act in our framework, use one of the tools that is frequently used, but as I said we can be flexible.” The fund is helping monitor a 100 billion-euro ($128.8 billion) bailout of Spanish banks and is co-financing rescue packages for Greece, Ireland and Portugal. While the European Central Bank has said the IMF should be involved in overseeing the economic programs of countries asking the central bank to buy their bonds, the fund’s exact role has not yet been defined. Spain has been reluctant to ask for a bailout from Europe’s rescue mechanism, which comes with economic measures attached.

Lagarde calls for caution on austerity - The head of the International Monetary Fund said debt-stricken Greece should be given more time to implement its austerity programme and European countries should refrain from fresh budget cuts or tax rises if growth weakens. Christine Lagarde, IMF managing director, said Greece, which is stuck in its fifth year of recession and is struggling to find savings worth 5 per cent of national output from 2012-13, should be granted two more years to reduce its deficit. Her call for slower adjustment is a boost to Athens, which is trying to persuade its eurozone partners to give it more time. However, slower deficit reduction in Athens would mean Greece’s international creditors giving it extra help in a politically fraught overhaul of Greece’s €174bn bailout programme. Ms Lagarde also urged countries more generally to refrain from new austerity measures amid signs that the IMF is becoming increasingly concerned about the impact of government cutbacks on growth. She cautioned against countries front-loading spending cuts and tax increases. “It’s sometimes better to have a bit more time,” she said at the annual meetings of the IMF and the World Bank on Thursday. The fund warned earlier this week that governments around the world had systematically underestimated the damage done to growth by austerity. Ms Lagarde said that, given this reassessment of the impact of fiscal consolidation on output, it was no longer sensible for governments in Europe to stick to budget deficit targets, should growth disappoint.

IMF Suddenly Decides It Might be OK to Loosen Austerity Tourniquets Now that Gangrene is Setting In - Yves Smith - Christine Lagrade has taken too small a step in the right direction far too late to do much good. At the current IMF annual meeting in Tokyo, she’s made dramatic-sounding pronouncements consistent with the rather embarrassing admission in the Fund’s latest quarterly report that austerity is working less well than voodoo As we stressed, the IMF has admitted what observers have already reported on, at some length, by looking at economic outcomes in Latvia, Greece, Ireland, Portugal, and Spain: its tender ministrations are leaving its patient worse off. Cuts in fiscal deficits (ex in special circumstances, such as being able to trash your currency at a time when your trade partners have good levels of growth) lead to even greater falls in GDP levels, resulting in higher debt to GDP ratios, the exact opposite of what this exercise was intended to accomplish. The bureaucratese is “fiscal multipliers.” When fiscal multipliers are greater than 1 deficit cutting makes matters worse. The IMF’s ‘fessing up to a problem without releasing country by country data suggests it is showing fiscal multiplies greater than 1 in pretty much all of the countries now wearing the austerity hairshirt.While Lagarde’s willingness to buck her fellow Troika members a tad is a welcome development, it is too little, too late. It looks more like an effort to assuage guilt and burnish her record for posterity than do the right thing and seek to break with the IMF’s sorry history of breaking countries on the rack out of fealty to bankster-friendly but otherwise fundamentally wrongheaded policies

The IMF game changer - Christine Lagarde has urged countries to put a brake on austerity measures amid signs that the IMF is becoming increasingly concerned about the impact of government cutbacks on growth. Ms Lagarde, IMF managing director, cautioned against countries front-loading spending cuts and tax increases. “It’s sometimes better to have a bit more time,” she said at the annual meetings of the IMF and the World Bank on Thursday. The fund warned earlier this week that governments around the world had systematically underestimated the damage done to growth by austerity. That’s from Thursday’s front page story on To say it’s a big deal is possibly understating matters. Though, obviously, we had inklings that this sort of thing was to come as soon as the IMF released its latest World Economic Outlook this Tuesday, which highlighted the organisation’s disappointment with the fiscal multiplier effect being larger than previously anticipated. The fact of the matter is that the IMF has played bad cop to the global economy for generations now, enforcing austerity, conditionality and accountability wherever it goes. And, for the most part, it’s the emerging world that’s suffered most. Recanting on some of these closely held beliefs, especially now that the bitter medicine is predominantly being applied to the developed world, is awkward to say the least. Some might even say it’s as close to an admission of past wrongs as you will ever get.

The IMF and the GOP - Krugman - Econowonks are still buzzing about the new IMF World Economic Outlook, which offered grim warnings about the world economy, and also argued forcefully if discreetly that a big reason for the worsening outlook is that policy makers have gotten the basic economics wrong. Of particular interest is the discussion in Chapter 1 (pdf) on fiscal multipliers. I and others have been arguing for a while that the experience of austerity in the eurozone clearly suggests pretty big Keynesian effects. Here, for example, is what a scatterplot of fiscal consolidation (from the IMF Fiscal Monitor) and growth (including an estimate for next year, from the World Economic Outlook) looks like:  But, you might object, maybe the causation runs the other way; maybe countries in trouble are forced into fiscal consolidation, so it’s not the austerity what did it. But the IMF has an answer to that: it looks at forecast errors versus austerity. Part of the reason for doing this is to figure out why things are going so much worse than expected; but there’s also the fact that the forecasts already included the known problems of the economies in question, so that you’re more or less getting an estimate of the impact of austerity over and above the known problems (and the initially assumed effect of austerity, which was supposed to be small). It looks like this:

Schäuble and Lagarde clash over austerity - -- High-level splits over the handling of the eurozone crisis burst into the open on Thursday when Germany's finance minister rebuked the head of the International Monetary Fund after she warned that EU leaders should ease demands for tighter austerity in peripheral economies. Wolfgang Schäuble said Christine Lagarde had appeared to contradict the IMF's own stance in advocating an easing of austerity, noting that the fund had "time and again" warned that high debt levels threatened economic growth. "When there is a certain medium-term goal, it doesn't build confidence when one starts by going in a different direction," Mr Schäuble said. "When you want to climb a big mountain and you start climbing down the mountain, then the mountain will get even higher." Mr Schäuble spoke on the sidelines of a meeting of finance ministers and central bankers in Tokyo just after Ms Lagarde, the IMF managing director, backed a new study that found Brussels and the IMF had consistently underestimated the impact of austerity measures on economic growth during the eurozone crisis.Ms Lagarde said eurozone countries should not blindly stick to tough budget deficit targets if growth weakens more than expected. She argued that they should allow "automatic stabilisers" -- higher welfare spending and lower tax revenues -- to kick in if the economy deteriorated. "It is sometimes better to have more time," Ms Lagarde said, noting that if countries tried to cut their budgets simultaneously it could multiply austerity's impact on the economy.

IMF Sees European Banks Facing $4.5 Trillion Sell-Off - The International Monetary Fund said European banks may need to sell as much as $4.5 trillion in assets through 2013 if policy makers fall short of pledges to stem the fiscal crisis, up 18 percent from its April estimate. Failure to implement fiscal tightening or set up a single supervisory system in the timing agreed could force 58 European Union banks from UniCredit SpA (UCG) to Deutsche Bank AG (DBK) to shrink assets, the IMF wrote in its Global Financial Stability Report released today. That would hurt credit and crimp growth by 4 percentage points next year in Greece, Cyprus, Ireland, Italy, Portugal and Spain, Europe’s periphery. “There is definitely a need for deleveraging in Europe,” said Michael Seufert, an analyst at Norddeutsche Landesbank in Hanover, Germany, with a “negative” rating on the European banking sector. “The danger is that this produced a downward spiral as the regulation gets stricter and stricter and the global economy cools, potentially meaning more writedowns for banks. States in the periphery are hit hardest.”

European banks may have to sell S$5.5 trillion in assets: IMF - The International Monetary Fund (IMF) said European banks may need to sell as much as US$4.5 trillion (S$5.5 trillion) in assets through next year - up 18 per cent from its April estimate - if policy-makers fall short of pledges to stem the fiscal crisis. It said failure to implement fiscal tightening or set up a single supervisory system in the timing agreed could force 58 European Union banks, from UniCredit to Deutsche Bank, to shrink assets. That would hurt credit and crimp growth by 4 percentage points next year in Greece, Cyprus, Ireland, Italy, Portugal and Spain, Europe's periphery. "Intensification of the crisis has manifested itself in capital outflows from the periphery to the core at a pace typically associated with currency crises or sudden stops," the IMF wrote in its Global Financial Stability Report released yesterday. "Risks to financial stability have increased since April, as confidence in the global financial system has become very fragile.

Italy seen reaping 1 bln euro from transactions tax-body (Reuters) - Italy's government could raise 1 billion euros a year from a tax on financial transactions but the levy risks hurting small investors more than speculators, the head of an Italian brokers' association said. Italy and 10 other euro zone countries agreed this week to press ahead with the levy, which according to a European Commission proposal is set to be 0.1 percent on the trading of bonds and shares and 0.01 percent for derivatives deals. The European Commission has said the tax could raise up to 57 billion euros ($74 billion) a year if applied across all 27 EU countries from 2014. Details on how the tax would work are still sketchy and it may take two years before the necessary legislation is in place. The initiative has been pushed hard by Germany and France but strongly opposed by Britain, Sweden and others. Critics say it could distort the EU's single market by giving financial companies incentives to shift business to European centres where the tax is not levied - or away from Europe altogether.

Germany 'risks entering recession' say think tanks - A group of leading think tanks in Germany have cut growth forecasts for the country and warned of recession. The economic  institutes said Europe's biggest economy would only grow 1% next year instead of the 2% they had been expecting six months ago. But this assumes that the crisis in the eurozone does not worsen. They also criticised the European Central Bank's latest initiative to ward off the crisis, saying its debt purchases risked fuelling inflation. Last month the ECB unveiled plans to buy up the government debts of struggling eurozone members, but only if those governments first signed up to a rescue package, including strict conditions on cutting their overspending and reforming their economies. "This process could be triggered by the ECB effectively providing monetary financing for states," according to the semi-annual report by the four think tanks, Ifo in Munich, IFW in Kiel, IWH in Halle and RWI in Essen. "Europe's citizens and players in the markets may lose trust in the ECB's ability to ensure long-term price stability as a result.

ECB’s Nowotny Says Euro-Zone Price Outlook Balanced, No More Rate Cuts Needed - The euro zone faces neither inflation nor deflation risks, the head of Austria’s central bank said Friday, making a further reduction in official interest rates unnecessary. “I do not see a specific need for additional rate cuts at this time,” European Central Bank Governing Council member Ewald Nowotny said in an interview with The Wall Street Journal. The ECB last lowered its main lending rate in July, to 0.75%, a record low. Inflation in the euro zone now stands at 2.7%. Still, the ECB is one of the few major central banks with room to cut further. The Federal Reserve and Bank of Japan have rates close to zero.

Bini Smaghi: Euro Zone Faces Risks of Deflation, Not Inflation -- The euro zone is facing risks of deflation, or a prolonged period of falling consumer prices, and not inflation, Lorenzo Bini Smaghi, a former member of the European Central Bank‘s executive board, said Friday. That echoes comments by Benoit Coeure, who in early 2012 replaced Mr. Bini Smaghi on the ECB’s executive board. Mr. Coeure said in an interview with Germany’s Die Welt newspaper Friday that “the danger of deflation is greater than that of inflation” in the euro zone as the region is close to recession.

An Overlooked Currency War in Europe - Yves here. One of the not-suffiently-discussed topics in the financial media is the tug of war over currency values, with the need to do post crisis damage control as the cover. For instance, after the initial round of QE, Brazil and India complained vociferously about the dual impact of a weaker dollar and higher commodity prices (yes, Virginia, some economists do think financial speculation can influence commodity prices) on their economies. If Europe contracts while growth in the US and China are also decelerating, it isn’t hard to imagine that the currency front will heat up even more. This piece by Daniel Gros illustrates, surprisingly, that one currency manipulator has managed to operate under the radar so far. It will be interesting to see if his analysis gets traction in Europe. Switzerland has pegged its currency to the euro at a level that helps it sustain a 12% current-account surplus and one of the lowest unemployment rates in Europe. This column argues that the Swiss peg involves currency manipulation that is, as far as Europe is concerned, the same order of magnitude as China’s intervention. It has had a significant impact on the euro exchange rate and a non-negligible effect on the EZ economy.

Do The Swiss Know Something The Rest Of Us Dont? - Ueli Maurer, the Swiss defense minister, has been making coy statements about the European crisis getting ugly – as in really ugly, like needing armed troops to deal with it. This sounds more like Greece, where the rioting is regular and increasingly scary, than anything in Central Europe, but where the whole EU furball is headed does seem less than clear of late. The Swiss are famous for preparing for everything and having an absolutely huge army, relative to their population, to deal with any eventuality. They maintain their special military system, based on training for nearly the whole male population but a very small active duty cadre (plus a few, tiny UN peacekeeping-type missions abroad, since the Swiss have an actually defensive defense force): the Swiss can call up over 200,000 trained troops, which is but one-third of what was on-call twenty years ago – like everyone, they have downsized as the threat has receded since the fall of the Soviet bloc – but that’s still pretty huge in Swiss terms. In America, that would mean a mobilization strength of nearly 8,000,000 for the U.S. military (it’s a hair under three million, in case you were wondering).

How do we know New Zealand is a tax haven? The answer is on the web - New Zealand’s Finance Minister is telling the world his country is not a tax haven right now. The reason he says, in his own words, is that: “The key identifying characteristics of tax havens are secrecy and lack of transparency. Those are simply not factors here in New Zealand. Our legislation for taxing trusts is fully transparent.” What a load of nonsense. It took me seconds to find a web site selling such trusts, here. Now let me be clear: I’m not for a minute saying the firm I’m quoting are doing anything illegal. But note what they say about why NZ is not a tax haven: While New Zealand is NOT an offshore haven, it is nonetheless recognized among informed practitioners as a first rate jurisdiction for certain financial structures. It provides all the advantages of traditional “offshore” financial centres, but is regarded as a true “onshore” financial centre which is NOT blacklisted by any jurisdiction or authority in the world. It is not perceived by OECD as a harmful tax jurisdiction, and has no connotations as a tax haven.

Is the UK the next AAA nation to be downgraded? -- As George Osborne proudly talks about cutting £10bn from the welfare budget (see video), the reality is setting in that UK's £120bn deficit target is likely to be breached and debt to GDP ratio will reach well over 90% (from under 70% today) in the next few years. The double-dip recession (discussed here) that reduces tax receipts has been the key culprit. itch: - ... weaker than expected growth and fiscal outturns in 2012 have increased pressure on the UK's "AAA" rating, which has been on Negative Outlook since March 2012. With a structural budget deficit second in size within the "AAA" category only to the US ("AAA"/Negative), and general government gross debt (GGGD) approaching 100pc of GDP in 2015-16 under Fitch's revised baseline estimates - the upper limit of the level consistent with the UK retaining its "AAA" status - the likelihood of a downgrade has therefore increased. Fitch is clearly concerned and apparently so are the other rating agencies. One may ask, does it really matter? The issue of course is perception. After the US downgrade the equity markets saw some of the worst volatility in years.

The harmful myth of the balanced budget - So you think it only common sense that a government budget, like that of a family, should balance? But what do you mean by balance? In Britain, for example, the last estimate prepared for the Treasury by the Office for Budget Responsibility says the government’s current deficit in 2012-13 will be £95bn and its net borrowing £92bn. As percentages of gross domestic product these come to 5.8 per cent and 6 per cent respectively. But do not think this is the end of the matter. Another item entitled “cyclically adjusted current balance” is put at 4.2 per cent. Then there is, probably the most important, the primary deficit – roughly how far the government is from reducing its debt. This is put at 3.2 per cent and in its cyclically adjusted form at 1.3 per cent. And if you have not had enough numbers you will find a 5.9 per cent estimate for the deficit under Maastricht treaty definitions. These numbers are likely to be revised unfavourably owing to the disappointing behaviour of the national economy. But the discrepancy between the various versions will remain, as will the conundrum about which total the budget balancers should target. All that we can be sure of is that the aim of almost eliminating government borrowing by 2016-17 will be pushed out further in time.

What do people mean by helicopter money? -- Following a speech by one of the front runners to replace Mervyn King as Governor of the Bank of England, there has been renewed talk about helicopter money. Helicopter money involves the central bank printing money, but that in effect is what Quantitative Easing (QE) does, so what is different about helicopter money? There seem to be two rather different things that people might have in mind.  The first difference is where the money goes. QE, in the UK and to some extent in the US, involves the central bank printing money to buy government debt. Helicopter money is like the central bank sending a cheque to everyone in the economy. The second difference is whether the creation of new money is permanent or temporary. QE, if you ask central bankers, is temporary: when the economy picks up and there is the first sign of inflation, QE will be put into reverse (except, just maybe, in the US). Helicopter money is thought to be permanent: the central bank is sending out cheques, not loans.

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